SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2004. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from__________________ to ______________________ Commission File No.: 0-10235 GENTEX CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2030505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 N. CENTENNIAL STREET, ZEELAND, MICHIGAN 49464 (Address of principal executive offices) (Zip Code) (616) 772-1800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered NONE ______________________________________________ Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.06 PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No: [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes [X] No: [ ] As of June 30, 2004 (the last business day of the registrant's most recently completed second fiscal quarter), 77,454,000 shares of the registrant's common stock, par value $.06 per share, were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant (i.e., excluding shares held by executive officers, directors, and control persons as defined in Rule 405, 17 CFR 203.405) on that date was $2,937,580,554 computed at the closing price on that date. As of February 9, 2005, 77,880,036 shares of the registrant's common stock, par value $.06 per share, were outstanding. Portions of the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders are incorporated by reference into Part III. Exhibit Index located at Page 36 -1-
Statements in this Annual Report on Form 10-K which express "belief", "anticipation" or "expectation" as well as other statements which are not historical fact, such as availability and the impact of new products and technology (i.g., SmartBeam and LEDs) penetration of the automotive market, competition and foreign exchange rates, are forward-looking statements and involve risks and uncertainties described below under the headings "Business" and "Management's Discussion and Analysis of Results of Operations and Financial Condition" that could cause actual results to differ materially from those projected. All forward-looking statements in this Annual Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Gentex Corporation (the "Company") designs, develops, manufactures and markets proprietary products employing electro-optic technology: automatic- dimming rearview mirrors and fire protection products. The Company was organized in 1974 to manufacture residential smoke detectors, a product line that has since evolved into a more sophisticated group of fire protection products for commercial applications. In 1982, the Company introduced an automatic interior rearview mirror that was the first commercially successful glare-control product offered as an alternative to the conventional, manual day/night mirror. In 1987, the Company introduced its interior electrochromic (auto-dimming) mirror, providing the first successful commercial application of electrochromic (EC) technology in the automotive industry and world. Through the use of electrochromic technology, this mirror is continually variable and automatically darkens to the degree required to eliminate rearview headlight glare. In 1991, the Company introduced its exterior electrochromic sub-assembly, which works as a complete glare-control system with the interior auto-dimming mirror. In 1997, the Company began making volume shipments of three new exterior mirror sub-assembly products: thin glass flat, convex and aspheric. During 2001 and 2002, the Company began making shipments of its auto-dimming mirrors for a number of mid-sized, medium-priced vehicles. During 2003, the Company began making shipments of its auto-dimming mirrors to two new automotive OEM (original equipment manufacturer) customers, Honda and Volvo, and began volume shipments of its proprietary microphone as part of DaimlerChrysler's "U-Connect(R)" telematics system. During 2004, the Company began shipping auto-dimming mirrors with SmartBeam, its proprietary intelligent high-beam headlamp control feature, on the Cadillac STS and Jeep Grand Cherokee. Also during 2004, the Company began making shipments of its auto-dimming mirrors to Peugeot, the Company's first automotive OEM customer in France. The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, will be made available free of charge through the Investor Information section of the Company's Internet website (http://www.gentex.com) as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS See Note 8 to the Consolidated Financial Statements filed with this report. (c) NARRATIVE DESCRIPTION OF BUSINESS The Company currently manufactures electro-optic products, including automatic-dimming rearview mirrors for the automotive industry and fire protection products primarily for the commercial building industry. AUTOMATIC-DIMMING REARVIEW MIRRORS Interior Auto-Dimming Mirrors. In 1987, the Company achieved a significant technological breakthrough by applying electrochromic technology to the glare-sensing capabilities of its Motorized Mirror. Through the use of this technology, the mirror gradually darkens to the degree necessary to eliminate rearview glare from following vehicle headlights. The auto-dimming mirror offers all of the continuous reflectance levels between its approximate 85% full-reflectance state and its 7% least-reflectance state, taking just a few seconds to span the entire range. Special electro-optic sensors in the mirror detect glare and electronic circuitry supplies electricity to darken the mirror to only the precise level required to eliminate glare, allowing the driver to maintain maximum - 2 -
vision. This is accomplished by the utilization of two layers of precision glass with special conductive coatings that are separated by the Company's proprietary electrochromic materials. When the appropriate light differential is detected, an electric current causes the electrochromic material to darken, decreasing the mirror's reflectance, thereby eliminating glare. During 1991, the Company began shipping the first advanced-feature interior auto-dimming mirror, the auto-dimming headlamp control mirror, an automatic-dimming mirror that automatically turns car head- and taillamps "on" and "off" at dusk and dawn in response to the level of light observed. During 1993, the Company began shipping an auto-dimming compass mirror, with an electronic compass that automatically compensates for changes in the earth's magnetic field. During 1997, the Company began shipping a new interior auto-dimming mirror that digitally displays either a compass or outside temperature reading. During 1998, the Company began shipping new compass mirrors with its proprietary light-emitting diode (LED) map lamps, a major improvement over mirrors with standard incandescent map lamps, including extremely long life, low heat generation, lower current draw, more resistance to shock, and lower total cost of ownership. In 2000, the Company began shipping to General Motors interior auto-dimming mirrors that serve as the driver interface for the OnStar(R) System, an in-vehicle safety, security and information service using Global Positioning System (GPS) satellite technology. OnStar is a registered trademark of OnStar Corporation. The Company shipped approximately 6,305,000 interior auto-dimming mirrors in 2002, approximately 7,132,000 in 2003, and approximately 8,363,000 in 2004. During 2001 and 2002, the Company began making shipments of its auto-dimming mirrors for a number of mid-sized, medium-priced vehicles, including the Toyota Camry, Matrix and Corolla; Ford Taurus and Mercury Sable; Volkswagen Passat, Jetta, Golf GTI and Beetle; Nissan Altima; Opel cross car line; Chrysler Sebring Coupe; Hyundai Santa Fe and Sonata; and Kia Optima and Sorento. During 2003, the Company began making shipments of its auto-dimming mirrors to two new automotive OEM customers, Honda and Volvo, and began volume shipments of its microphone as part of DaimlerChrysler's "U-Connect(R)" telematics system. During 2004, the Company began shipping auto-dimming mirrors with SmartBeam, its proprietary intelligent high-beam headlamp control feature, on the Cadillac STS and Jeep Grand Cherokee. - 3 -
During 2004, the growth in total mirror unit shipments resulted from increased penetration of light vehicles manufactured worldwide including the Ford Five Hundred, Freestar and Freestyle; Mercury Montego and Monterey; Chrysler 300 and PT Cruiser; Dodge Magnum, Infiniti QX56; Toyota Tacoma; BMW 6 Series and X3; Volvo V50; Hyundai Trajet and Tucson; Kia Carnival and Cerato; Peugeot 407; Toyota Century and Mark II; and various SEAT and Skoda vehicles. The Company's interior auto-dimming mirrors are standard equipment or factory-installed options on certain trim levels of the following 2005 vehicle models: TABLE 1. INTERIOR AUTO-DIMMING MIRROR AVAILABILITY BY VEHICLE LINE (NORTH AMERICAN MANUFACTURERS) GM/Cadillac Deville / DTS DaimlerChrysler 300 STS / Chrysler Pacifica CTS PT Cruiser Escalade Sebring SRX Town & Country GM/Buick LeSabre DaimlerChrysler / Dakota GM/Hummer H2 Dodge Durango GM/Pontiac Bonneville Caravan GM/Chevrolet Blazer Magnum Malibu Ram Pickup SSR DaimlerChrysler / Grand Cherokee Express Jeep Liberty Silverado Wrangler Suburban DaimlerChrysler/ M Class Avalanche Mercedes-Benz Tahoe BMW X5 GM/GMC Savana Mazda 6 Sierra Mitsubishi / Chrysler Sebring Yukon Mitsubishi / Dodge Stratus Coupe Ford Crown Victoria Nissan Altima Expedition Armada Five Hundred Maxima Freestar Quest Freestyle Titan F Series Nissan / Infiniti QX56 Taurus Toyota Avalon Ford/Lincoln LS Camry Solara Aviator Camry Navigator Corolla Town Car Matrix Ford/Mercury Grand Marquis Sequoia Montego Sienna Monterey Tacoma Sable Toyota/Lexus RX330 Volkswagen Beetle Jetta - 4 -
TABLE 1. INTERIOR AUTO-DIMMING MIRROR AVAILABILITY BY VEHICLE LINE - CONTINUED (MANUFACTURERS OUTSIDE OF NORTH AMERICA) Bentley Arnage MG Rover 75 Continental GT Mazda RX-8 BMW 7 Series DaimlerChrysler / C Class 5 Series Mercedes-Benz CLK 6 Series CLS 3 Series E Class X3 G Wagen Daewoo/Ssangyong Chairman S Class Korando SL Class Musso SLK Musso Sports Mitsubishi Magna Verada Rodius NQZ Outlander Istana Nissan 350Z DaimlerChrysler / Chrysler Voyager Cima DaimlerChrysler / Jeep Grand Cherokee Gloria Fiat / Alfa Romeo 147 Maxima 156 Murano 166 Peugeot 407 Fiat / Lancia Thesis Porsche Cayenne Lybra Samsung SM5 Fiat (Brazil) Marea Toyota / Lexus IS300 Stilo ES330 Palio GS300 Ford Focus C-Max GS430 Mondeo LS430 Ford / Jaguar XK RX330 XJ SC300 S-Type SC430 Ford / Land Rover LR3 GX470 Range Rover LX470 Ford / Volvo S40 Toyota Land Cruiser V50 Camry GM / Opel Corsa Cygnus Meriva Celsior Astra Century Zafira Mark II Vectra Prius Signum RAV4 Honda / Acura TSX Windom Honda Inspire Highlander Hyundai Dynasty 4-Runner Grandeur Avensis Sonata Corolla Santa Fe Corolla Verso Starex Volkswagen Polo Avante Golf Equus Passat Tuscani Phaeton Terracan Jetta Trajet Touareg Tucson Touran Hyundai / Kia Motors Carnival Transporter Cerato Volkswagen / Audi A3 Sorento A4 Optima A6 Carens A8 Opirus Volkswagen / SEAT Altea Sportage Cordoba Nissan / Infiniti Q45 Ibiza FX35 / FX45 Leon G35 Toledo M45 Volkswagen / Skoda Octavia Superb Exterior Auto-Dimming Mirror Sub-Assemblies. The Company has devoted substantial research and development efforts to the development of its electrochromic technology to permit its use in exterior rearview mirrors. Exterior auto-dimming mirrors are controlled by the sensors and electronic circuitry in the interior auto-dimming mirror, and both the interior and exterior mirrors dim - 5 -
simultaneously. During 1991, the Company's efforts culminated in a design that is intended to provide acceptable long-term performance in all environments likely to be encountered. In 1994, the Company began shipments of its complete three-mirror system, including the convex (curved glass) wide-angle auto-dimming mirror to BMW. During 1997, the Company began making volume shipments of three new exterior mirror products - - thin glass flat, convex and aspheric. During 2001 and 2002, the Company began making shipments of the world's first exterior automatic-dimming mirrors with built-in turn-signal indicators to Southeast Toyota and General Motors. The Company currently sells its exterior auto-dimming mirror sub-assemblies to exterior mirror suppliers of General Motors, DaimlerChrysler, Ford, Audi, BMW, Bentley, Fiat, Jaguar, Land Rover, Opel, Rolls Royce, Volkswagen, Infiniti, Mitsubishi, Nissan, Toyota, and Ssangyong who assemble the exterior auto-dimming mirror sub-assemblies into full mirror units for subsequent resale to the automakers. The Company shipped approximately 2,500,000 exterior auto-dimming mirror sub-assemblies during 2002, approximately 3,128,000 in 2003, and approximately 3,277,000 in 2004. During 2004, unit shipment growth primarily resulted from the increased penetration of light vehicles in Europe. The exterior auto-dimming mirror is standard equipment or a factory-installed option on certain trim levels of the following 2005 vehicle models: TABLE 2. EXTERIOR AUTO-DIMMING MIRROR AVAILABILITY BY VEHICLE LINE GM/Cadillac Deville / DTS DaimlerChrysler / C Class Escalade Mercedes- Benz CLK SRX CLS XLR E Class GM / Buick LeSabre G Wagen GM / Chevrolet Avalanche M Class Blazer S Class Corvette SL Class Silverado SLK SSR Ford / Jaguar XJ Suburban XK Tahoe S-Type GM / GMC Sierra Ford / Land Rover Range Rover Yukon GM / Opel Vectra GM / Hummer H2 Maserati Quattroporte Ford/Lincoln Town Car Skoda Superb DaimlerChrysler/ Pacifica Volkswagen Golf Chrysler 300 Sharan Town & Country Nissan / Infiniti Q45 DaimlerChrysler/Dodge Caravan M45 Durango Toyota / Lexus RX330 DaimlerChrysler/Jeep Grand Cherokee Mitsubishi Magna / Verada Volkswagen / Audi A4 Nissan Cima A6 Maxima A8 Rolls Royce Phantom BMW 7 Series Daewoo / Ssangyong Chairman 6 Series Toyota Avalon 5 Series Camry Solara X5 Sienna Bentley Continental GT Product Development. The Company plans to continue introducing additional advanced-feature auto-dimming mirrors. Advanced-feature auto-dimming mirrors currently being offered by the Company include the auto-dimming headlamp control mirror, the auto-dimming lighted mirror with LED map lamps, the auto-dimming compass mirror, the auto-dimming mirror with remote keyless entry, the auto-dimming compass/temperature mirror, the auto-dimming dual display compass/temperature mirror, auto-dimming telematics mirrors and the auto-dimming HomeLink(R) mirror. During 2001, the Company announced a revolutionary new proprietary technology, called SmartBeam(TM), that uses a custom, active-pixel, CMOS (complementary metal oxide semiconductor) sensor, and maximizes a driver's forward vision by significantly improving utilization of the vehicle's highbeam headlamps during nighttime - 6 -
driving. During 2004, the Company began shipping auto-dimming mirrors with SmartBeam, its proprietary intelligent high-beam headlamp control feature, on the Cadillac STS and Jeep Grand Cherokee. The Company has also received a purchase order from a European automaker for the 2006 calendar year. The Company has also developed a new ALS (Active Light Sensor) technology as a cost-effective, improved-performance, intelligent CMOS light sensor to control the dimming of its rearview mirrors, and the Company began making volume shipments of mirrors incorporating ALS in 2002. Also during 2001, the Company developed a new microphone designed specifically for use in the automotive environment for telematics applications. The first volume Gentex microphone application was part of DaimlerChrysler's "U-Connect(R)" telematics system, beginning in 2003. Of particular importance to the Company has been the development of its electrochromic technology for use in complete three-mirror systems. In these systems, both the driver- and passenger-side exterior auto-dimming mirrors are controlled by the sensors and electronic circuitry in the interior rearview mirror, and the interior and both exterior mirrors dim simultaneously. In 1999, the Company announced the development of the second generation of its LED technology, which represents the first time that white light for illumination purposes can be achieved using high intensity Orca(R) power LEDs on a cost-effective basis. LEDs as illuminators could have significant automotive and non-automotive lighting applications as they have many advantages over incandescent lamps, including extremely long life, low heat generation, lower current draw, more resistance to shock, and lower total cost of ownership. In the fourth quarter of 2001, the Company installed a new prototype microelectronics line to produce pilot production LED samples, as well as limited production quantities of Orca LEDs, and SmartBeam sensors. During 2002, the Company announced a high-feature EC mirror including BCW (binary, complementary white) Orca LEDs for the Chrysler Sebring Coupe. The Company's success with electrochromic technology provides an opportunity for other potential commercial applications, which the Company expects to explore in the future as resources permit. Examples of possible applications of electrochromic technology include windows for both the automotive and architectural markets, sunroofs and sunglasses. Progress in adapting electrochromic technology to the specialized requirements of the window market continued in 2004. However, we believe that a commercial product will require several years of additional engineering and intellectual property development work. Markets and Marketing. In North America, the Company markets its products primarily through a direct sales force. The Company generally supplies auto-dimming mirrors to its customers worldwide under annual blanket purchase orders. The Company currently supplies auto-dimming mirrors to General Motors Corporation and DaimlerChrysler AG under long-term agreements. During 2003, the Company negotiated an agreement for inside mirrors with General Motors and an agreement with DaimlerChrysler AG that extend through the 2006 model year. The Company previously had long-term agreements with both General Motors and DaimlerChrysler. The Company's exterior auto-dimming mirror sub-assemblies are supplied by means of sales to exterior mirror suppliers. Effective October 1, 2003, General Motors Corporation, the Company's largest customer, began including a 30-day escape clause into its contracts in the event its suppliers are not competitive on pricing. Effective January 1, 2004, Ford Motor Company began imposing new contract terms, including the right to terminate a supplier contract at any time for any or no reason, etc. The Company has taken written exception to these new contract clauses and terms by General Motors and Ford. During 1993, the Company established a sales and engineering office in Germany and the following year, the Company formed a German limited liability company, Gentex GmbH, to expand its sales and engineering support activities in Europe. During 1999, the Company established Gentex Mirrors, Ltd., as a sales and engineering office in the United Kingdom. During 2000, the Company established Gentex France, SAS, as a sales and engineering office in France. During 2003, the Company established a satellite office in Munich, Germany. The Company's marketing efforts in Europe are conducted through Gentex GmbH, Gentex Mirrors, Ltd., and Gentex France SAS, with limited assistance from independent manufacturers' representatives. The Company is currently supplying mirrors for Audi, Bavarian Motor Works, A.G. (BMW), Bentley, Fiat, Jaguar, Land Rover, MG Rover, Mercedes-Benz, Opel, Peugeot, Rolls Royce, SEAT, Skoda, Volkswagen and Volvo in Europe. - 7 -
In 1991, the Company began shipping electrochromic mirror assemblies for Nissan Motor Co., Ltd. under a reciprocal distribution agreement with Ichikoh Industries, Ltd. (Ichikoh), a major Japanese supplier of automotive products. Under this agreement, Ichikoh marketed the Company's automatic mirrors to certain Japanese automakers and their subsidiaries with manufacturing facilities in Asia. The arrangement involved very limited technology transfer by the Company and did not include the Company's proprietary electrochromic gel formulation. The agreement was terminated by mutual agreement in 2001. During 1993, the Company hired a sales agent to market auto-dimming mirrors to other Japanese automakers beyond Nissan. Subsequently in 1998, the Company established Gentex Japan, Inc., as a sales and engineering office in Nagoya, Japan to expand its sales and engineering support in Japan. In 2000, the Company signed an agreement with Murakami Corporation, a major Japanese mirror manufacturer, to cooperate in expanding sales of automatic-dimming mirrors using the Gentex electrochromic technology. During 2002, the Company established Gentex Technologies Korea Co., Ltd. as a sales and engineering office in Seoul, Korea. During 2004, the Company established a satellite office in Yokohama, Japan. The Company is currently supplying mirrors for Daewoo/Ssangyong, Ford, GM, Honda, Hyundai, Infiniti, Kia Motors, Lexus, Mazda, Mitsubishi, Nissan, Samsung and Toyota in Asia. Historically, new safety and comfort options have entered the original equipment automotive market at relatively low rates on "top of the line" or luxury model automobiles. As the selection rates for the options on the luxury models increase, they generally become available on more models throughout the product line and may become standard equipment. The recent trend of domestic and foreign automakers is to offer several options as a package. As consumer demand increases for a particular option, the mirror tends to be offered on more vehicles and in higher option rate packages. The Company anticipates that its auto-dimming mirrors will be offered as standard equipment, in higher option rate packages, and on more models as consumer awareness of the safety and comfort feature becomes more well-known and acceptance grows. Since 1998, Gentex Corporation has contracted with MITO Corporation to sell several of its most popular automatic-dimming mirrors directly to consumers in the automotive aftermarket; in addition, the Company currently sells some auto-dimming mirrors to automotive distributors. It is management's belief that these sales have limited potential until the Company achieves a significantly higher penetration of the original equipment manufacturing market. Competition. Gentex is the leading producer of auto-dimming rearview mirrors in the world and currently is the dominant supplier to the automotive industry with an approximate 78% market share worldwide in 2004, which represents approximately a 1% increase compared to 2003. While the Company believes it will retain a dominant position, one other U.S. manufacturer (Magna Donnelly Mirror Systems) is competing for sales to domestic and foreign vehicle manufacturers and is supplying a number of domestic and foreign vehicle models with its hybrid or solid polymer matrix versions of electrochromic mirrors. In addition, two Japanese manufacturers are currently supplying a few vehicle models in Japan with solid-state electrochromic mirrors. On October 1, 2002, Magna International acquired Donnelly Corporation, which was the Company's major competitor for sales of automatic-dimming rearview mirrors to domestic and foreign vehicle manufacturers and their mirror suppliers. The Company also sells certain automatic-dimming rearview mirror sub-assemblies to Magna Donnelly. The Company believes its electrochromic automatic mirrors offer significant performance advantages over competing products. However, Gentex recognizes that Magna Donnelly, a competitor and wholly-owned subsidiary of Magna International, is considerably larger than the Company and may present a more formidable competitive threat in the future. To date, the Company is not aware of any significant impact of Magna's acquisition of Donnelly upon the Company; however, any ultimate significant impact has not yet been determined. There are numerous other companies in the world conducting research on various technologies, including electrochromics, for controlling light transmission and reflection. Gentex believes that the electrochromic materials and manufacturing process it uses for automotive mirrors remains the most efficient and cost-effective way to produce such products. While automatic-dimming mirrors using other technologies may eliminate glare, each of these technologies have inherent cost or performance limitations. - 8 -
FIRE PROTECTION PRODUCTS The Company manufactures approximately 60 different models of smoke alarms and smoke detectors, combined with over 160 different models of signaling appliances. All of the smoke detectors/alarms operate on a photoelectric principle to detect smoke. While the use of photoelectric technology entails greater manufacturing costs, the Company believes that these detectors/alarms are superior in performance to competitive devices that operate through an ionization process, and are preferred in most commercial residential occupancies. Photoelectric detectors/alarms feature low light-level detection, while ionization detectors utilize an ionized atmosphere, the electrical conductivity of which varies with changes in the composition of the atmosphere. Photoelectric detectors/alarms are widely recognized to respond more quickly to slow, smoldering fires, a common form of dwelling unit fire and a frequent cause of fire-related deaths. In addition, photoelectric detectors are less prone to nuisance alarms and do not require the use of radioactive materials necessary for ionization detectors. Photoelectric smoke detectors/alarms are now being required by over a dozen major cities, over a dozen states, as well as regional and national building and fire alarm codes. The Company's fire protection products provide the flexibility to be wired as part of multiple-function systems and consequently are generally used in fire detection systems common to large office buildings, hotels, motels, military bases, college dormitories and other commercial establishments. However, the Company also offers single-station alarms for both commercial and residential applications. While the Company does not emphasize the residential market, some of its fire protection products are used in single-family residences that utilize fire protection and security systems. The Company's detectors emit audible and/or visual signals in the immediate location of the device, and certain models are able to communicate with monitored remote stations. In recent years, the Company introduced seven new signaling products. These new product series contain over 68 variations of signals. In 2002, the Company introduced the new "selectable" candela audible/visual evacuation signal. This new signal is the only one in the fire alarm industry which will notify the control panel if its light intensity is being changed without authorization. Also in 2002, due to changes in government regulations, the Company introduced a new "selectable" ceiling horn/strobe and strobe product. This new product offering gives the Company both wall- and ceiling-mounted product offerings. In 2001, the Company introduced a new, high efficiency speaker and speaker/strobe series. Voice intelligibility is critical in life safety applications, and certain distributors throughout the United States prefer the quality of the Company's new speaker series. To meet new international requirements for visual signals, the Company developed a red-lens for the popular general evacuation signals. The new markets are all in Asia and the Company has actively pursued these new markets. Also, to meet the industry requirements for audible and visual synchronization in 2001, the Company introduced a new line of remote signals to be used in any occupancy that requires individual or supplemental notification. Markets and Marketing. The Company's fire protection products are sold directly to fire protection and security product distributors under the Company's brand name, electrical wholesale houses, and to original equipment manufacturers of fire protection systems under both the Company's brand name and private labels. The fire protection and security industries have experienced a significant number of mergers and consolidations during the past few years. The Company markets its fire protection products throughout the United States through regional sales managers and manufacturer representative organizations. Competition. The fire protection products industry is highly competitive in terms of both the smoke detectors and signaling appliance markets. The Company estimates that it competes principally with eleven manufacturers of smoke detection products for commercial use and approximately four manufacturers within the residential market, three of which produce photoelectric smoke detectors. In the signaling appliance markets, the Company estimates it competes with approximately eight manufacturers. While the Company faces significant competition in the sale of smoke detectors and signaling appliances, it believes that the recent introduction of new products, improvements to its existing products, its diversified product line, and the availability of special features will permit the Company to maintain its competitive position. - 9 -
TRADEMARKS AND PATENTS The Company owns 9 U.S. trademarks and 224 U.S. patents, 216 of which relate to electrochromic technology, automotive rearview mirrors and/or LED technology. These patents expire between 2007 and 2023. The Company believes that these patents provide the Company a significant competitive advantage in the automotive rearview mirror market; however, none of these patents is required for the success of any of the Company's products. The Company also owns 2 foreign trademarks and 56 foreign patents, 55 of which relate to automotive rearview mirrors. These patents expire at various times between 2005 and 2020. The Company believes that the competitive advantage derived in the relevant foreign markets for these patents is comparable to that experienced in the U.S. market. The Company's remaining 8 U.S. patents and 1 foreign patent relate to the Company's fire protection products, and the Company believes that the competitive advantage provided by these patents is relatively small. The Company also has in process 118 U.S. patent applications, 259 foreign patent applications, and 16 trademark applications. The Company continuously seeks to improve its core technologies and apply those technologies to new and existing products. As those efforts produce patentable inventions, the Company expects to file appropriate patent applications. MISCELLANEOUS The Company considers itself to be engaged in the manufacture and sale of automatic rearview mirrors for the automotive industry and fire protection products for the commercial building industry. The Company has several important customers within the automotive industry, three of which each account for 10% or more of the Company's annual sales: General Motors Corporation, DaimlerChrysler AG, and Toyota Motor Corporation. The loss of any of these customers could have a material adverse effect on the Company. The Company's backlog of unshipped orders was $132,966,000 and $126,980,000 at February 1, 2005, and 2004, respectively. At February 1, 2005, the Company had 2,047 full-time employees. None of the Company's employees are represented by a labor union or other collective bargaining representative. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES. The Company operates out of four office/manufacturing facilities in Zeeland, Michigan, approximately 25 miles southwest of Grand Rapids. The office and production facility for the Fire Protection Products Group is a 25,000-square-foot, one-story building leased by the Company since 1978 from related parties (see Part III, Item 13, of this report). The corporate office and production facility for the Company's Automotive Products Group is a modern, two-story, 150,000-square-foot building of steel and masonry construction situated on a 40-acre site in a well-kept industrial park. A second 128,000-square-foot office/manufacturing facility on this site was opened during 1996. The Company expanded its automotive production facilities by constructing a third 170,000 square-foot facility on its current site which opened in the second quarter of 2000. In November 2002, the Company announced plans to expand its manufacturing operations in Zeeland, Michigan, with the construction of a fourth automotive mirror manufacturing facility which is currently scheduled to be completed in spring 2006. During 2003, the Company also announced plans for a new technical office facility linking the fourth manufacturing facility with its existing corporate office and production facility. The Company plans to invest approximately $35 - 40 million for the new facilities, primarily during 2005 and 2006. The Company also constructed a 40,000 square-foot office, distribution and light manufacturing facility near Neckarsulm, Germany, at a cost of approximately $5 million, which was completed at the end of 2003. The Company's three automotive mirror manufacturing facilities currently have an estimated building capacity to manufacture approximately 12 million mirror units annually, based on the current product mix. The Company's fourth automotive mirror manufacturing facility under construction will have the potential to increase building manufacturing capacity by 7-8 million mirror units annually. -10-
ITEM 3. LEGAL PROCEEDINGS None that are significant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists the names, ages, and positions of all of the Company's executive officers. Officers are elected at the first meeting of the Board of Directors following the annual meeting of shareholders. NAME AGE POSITION POSITION HELD SINCE - --------------- --- --------------------------------------------------- ------------------- Fred Bauer 62 Chief Executive Officer May 1986 Garth Deur 48 Executive Vice President September 2002 Dennis Alexejun 53 Vice President, North American Automotive Marketing September 1998 John Carter 57 Vice President, Mechanical Engineering June 1997 Enoch Jen 53 Vice President, Finance February 1991 There are no family relationships among the officers listed in the preceding table. Except for the executive officer listed below, all other executive officers have held their current position with the Company for more than five years. Garth Deur has served as Executive Vice President of the Company since September 2002, as Senior Vice President of the Company since May 2001, and joined the Company as Vice President - Business Development and Planning in November 2000. Prior to joining the Company, Mr. Deur served as a Principal of Landmark Group, an investment management company, from March 1999 through November 2000. Prior to that time, Mr. Deur served as Vice President, Chrysler Business Operations, from March 1995 through March 1999, at the Automotive Interiors division of Johnson Controls, Inc. (formerly Prince Corporation, which was acquired by Johnson Controls in 1996). -11-
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock trades on The Nasdaq Stock Market(R). As of February 1, 2005, there were 2,421 record-holders of the Company's common stock. Ranges of high and low sale prices of the Company's common stock reported through The Nasdaq Stock Market for the past two fiscal years appear in the following table. YEAR QUARTER HIGH LOW - ---- ------- ------- ------- 2003 First $ 32.68 $ 23.90 Second 33.50 25.03 Third 39.44 29.83 Fourth 44.98 34.46 2004 First 47.08 39.36 Second 46.91 34.33 Third 39.80 32.00 Fourth 37.86 30.19 In August 2003, the Company announced a change in the Company's cash dividend policy and declared an initial cash dividend of $0.15 per share payable in October 2003. In August 2004, the Company's Board of Directors approved a continuing resolution to pay a quarterly dividend of $0.17 per share until the Board takes other action with respect to the payment of dividends. Based on current U.S. income tax laws, the Company intends to continue to pay a quarterly cash dividend at its current level. ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data) ------------------------------------------------------ 2004 2003 2002 2001 2000 -------- -------- ---------- -------- -------- Net Sales $505,666 $469,019 $ 395,258 $310,305 $297,421 Net Income 112,657 106,761 85,771 65,217 70,544 -------- -------- ---------- -------- -------- Earnings Per Share 1.44 1.37 1.12 0.86 0.93 -------- -------- ---------- -------- -------- Cash Dividends Declared per Common Share $ 0.64 $ 0.30 $ - $ - $ - -------- -------- ---------- -------- -------- Total Assets $856,859 $762,530 $ 609,173 $506,823 $428,129 -------- -------- ---------- -------- -------- Long-Term Debt Outstanding at Year End $ - $ - $ - $ - $ - -------- -------- ---------- -------- -------- -12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. RESULTS OF OPERATIONS. The following table sets forth for the periods indicated certain items from the Company's Consolidated Statements of Income expressed as a percentage of net sales and the percentage change in the dollar amount of each such item from that in the indicated previous year. Percentage of Net Sales Percentage Change ----------------------- ----------------- Year Ended December 31, 2003 2002 ----------------------- to to 2004 2003 2002 2004 2003 ----- ----- ----- ----- ---- Net Sales 100.0% 100.0% 100.0% 7.8% 18.7% Cost of Goods Sold 58.9 58.1 59.6 9.3 15.7 ----- ----- ----- ----- ---- Gross Profit 41.1 41.9 40.4 5.7 23.1 Operating Expenses: Engineering, Research and Development 6.1 5.7 5.8 15.9 15.8 Selling, General and Administrative 5.3 5.0 5.5 15.2 8.6 ----- ----- ----- ----- ---- Total Operating Expenses 11.4 10.7 11.3 15.5 12.3 ----- ----- ----- ----- ---- Operating Income 29.7 31.2 29.1 2.4 27.2 Other Income 3.1 2.5 3.0 35.2 (2.4) ----- ----- ----- ----- ---- Income Before Provision for Income Taxes 32.8 33.7 32.1 4.8 24.5 Provision for Income Taxes 10.5 10.9 10.4 3.3 24.5 ----- ----- ----- ----- ---- Net Income 22.3% 22.8% 21.7% 5.5% 24.5% ===== ===== ===== ===== ==== RESULTS OF OPERATIONS: 2004 TO 2003 Net Sales. Automotive net sales increased by 8% on a 13% increase in mirror shipments, from 10,260,000 to 11,640,000 units, primarily reflecting increased penetration on European vehicles for base interior auto-dimming mirrors. North American unit shipments increased by 3%, as growth in Asian transplant vehicle penetration was mostly offset by reduced shipments to General Motors, the Company's largest customer, as North American light vehicle production declined by 1% in 2004 compared to 2003. Overseas unit shipments increased by 26% during 2004 due to increased penetration, despite a 1% decline in Western Europe light vehicle production. During 2004, approximately 10% of the Company's net sales were invoiced and paid in European euros. Net sales of the Company's fire protection products decreased 1%, primarily due to the continuing weak commercial construction market in the United States. Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 58% to 59%, primarily reflecting annual automotive customer price reductions and product mix, partially offset by improved productivity. Each factor is estimated to have impacted cost of goods sold by approximately 1-2%. Operating Expenses. Engineering, research and development expenses increased approximately $4,220,000, but remained at 6% of net sales, primarily due to additional staffing for new electronic product development, including SmartBeam and telematics. Selling, general and administrative expenses increased approximately $3,534,000, but remained at 5% of net sales, primarily reflecting the continued expansion of the Company's overseas sales offices to support the Company's current and future overseas sales growth, as well as the stronger euro exchange rate. Other Income - Net. Investment income increased $401,000 in 2004, primarily due to increased mutual fund distribution income, partially offset by lower interest rates due to shorter average maturities. Other income increased $3,677,000 in 2004, primarily due to realized gains on the sale of equity investments and customer-reimbursable projects. Taxes. The provision for federal income taxes varied from the statutory rate in 2004 primarily due to Extra Territorial Income (ETI) Exclusion Act exempted taxable income from increased foreign sales. The effective income tax rate decreased from 32.5% in the first half of 2004 to 31.5% in the second half of 2004, primarily due to the ETI tax benefit from increased foreign sales. Net Income. Net income increased by 6%, primarily reflecting the increased gross margin due to higher sales as well as the increase in other income in 2004. -13-
RESULTS OF OPERATIONS: 2003 TO 2002 Net Sales. Automotive net sales increased by 19% on a 17% increase in mirror shipments, from 8,806,000 to 10,260,000 units, primarily reflecting increased penetration on 2003 and 2004 model year vehicles for auto-dimming mirrors plus additional electronic content. North American unit shipments increased by 11%, while overseas unit shipments increased by 24% during 2003. Net sales of the Company's fire protection products increased 8%, primarily due to higher sales of the Company's signaling products. Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased from 60% to 58%, primarily reflecting product mix, improved productivity, and purchasing cost reductions, partially offset by automotive customer price reductions. Each factor is estimated to have impacted cost of goods sold by approximately 1-2%. Operating Expenses. Engineering, research and development expenses increased approximately $3,641,000, but remained at 6% of net sales, primarily due to additional staffing for new electronic product development, including SmartBeam and telematics. Selling, general and administrative expenses increased approximately $1,838,000, but remained at 5% of net sales, primarily reflecting the continued expansion of the Company's overseas sales offices to support the Company's current and future overseas sales growth. Other Income - Net. Investment income decreased $1,516,000 in 2003, primarily due to lower interest rates and shorter average maturities. Other income increased $1,232,000 in 2003, primarily due to realized gains on the sale of investments and customer-reimbursable projects. Taxes. The provision for federal income taxes varied from the statutory rate in 2003 primarily due to Extra Territorial Income Exclusion Act exempted taxable income from increased foreign sales. Net Income. Net income increased by 24%, primarily reflecting the increased gross margin and increased sales volume spread over fixed operating expenses in 2003. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition throughout the periods presented has remained very strong. The Company's current ratio increased from 9.6 as of December 31, 2003, to 11.7 as of December 31, 2004, primarily as a result of the increase in cash and cash equivalents. Cash flow from operating activities for the year ended December 31, 2004, increased $14,785,000 to $131,368,000, compared to $116,583,000 for the same period last year, primarily due to increased net income. Capital expenditures for the year ended December 31, 2004, were $30,535,000, compared to $22,248,000 for the same period last year, primarily due to increased purchase of manufacturing equipment. The Company currently anticipates capital expenditures of approximately $45 - 50 million for new facilities and equipment during 2005, financed from existing cash reserves. Cash and cash equivalents as of December 31, 2004, increased approximately $72,875,748 compared to December 31, 2003. The increase was primarily due to cash flow from operations, partially offset by cash dividends paid. Inventories as of December 31, 2004, increased approximately $9,662,000 compared to December 31, 2003. The increase was primarily due to higher sales and production levels, increased purchase of overseas glass and electronic parts, and increased shipments through its distribution facility in Germany. The increase in deferred taxes as of December 31, 2004, compared to December 31, 2003, is primarily due to an increase in the unrealized gain on investments as of December 31, 2004 . Management considers the Company's working capital of approximately $541,753,000 and long-term investments of approximately $122,174,000 at December 31, 2004, together with internally generated cash flow and an unsecured $5,000,000 line of credit from a bank, to be sufficient to cover anticipated cash needs for the next year and for the foreseeable future. On October 8, 2002, the Company announced a share repurchase plan, under which the Company may purchase up to 4,000,000 shares based on a number of factors, including market conditions, the market price of the Company's common stock, anti- -14-
dilutive effect on earnings, available cash and other factors as the Company deems appropriate. During the first quarter of the year ended December 31, 2003, the Company repurchased 415,000 shares at a cost of approximately $10,247,000. There were no shares repurchased during 2004. INFLATION, CHANGING PRICES AND OTHER In addition to price reductions over the life of its long-term agreements, the Company continues to experience pricing pressures from its automotive customers, which have affected, and which will continue to affect, its margins to the extent that the Company is unable to offset the price reductions with productivity and yield improvements, engineering and purchasing cost reductions, and increases in sales volume. In addition, profit pressures at certain automakers are resulting in increased cost reduction efforts by them, including requests for additional price reductions, decontenting certain features from vehicles, and warranty cost-sharing programs, which could adversely impact the Company's sales growth and margins. Effective October 1, 2003, General Motors Corporation, the Company's largest customer, began including a 30-day escape clause into its contracts in the event its suppliers are not competitive on pricing. Effective January 1, 2004, Ford Motor Company began imposing new contract terms, including the right to terminate a supplier contract at any time for any or no reason, etc. The Company has taken written exception to these new contract clauses and terms by General Motors and Ford. The Company also continues to experience some pressure from raw material cost increases. The Company generally supplies auto-dimming mirrors to its customers worldwide under annual blanket purchase orders. The Company currently supplies auto-dimming mirrors to DaimlerChrysler AG and interior auto-dimming mirrors to General Motors Corporation under long-term agreements. The long-term supply agreements with DaimlerChrysler AG and General Motors run through the 2006 model year. Automakers have been experiencing increased volatility and uncertainty in executing planned new programs which have, in some cases, resulted in cancellations or delays of new vehicle platforms, package reconfigurations and inaccurate volume forecasts. This increased volatility and uncertainty has made it more difficult for the Company to forecast future sales and effectively utilize capital, engineering, research and development, and human resource investments. The Company currently expects that auto-dimming mirror unit shipments will be flat to five percent higher in the first quarter of 2005 compared with the first quarter of 2004, and that mirror unit shipments will increase approximately ten percent for calendar 2005 compared with calendar 2004. These estimates are based on light vehicle production forecasts in the regions to which the Company ships product, as well as the estimated option rates for its mirrors on prospective vehicle models. The Company has begun utilizing the light vehicle production forecasting services of CSM Worldwide, and CSM's current forecasts for light vehicle production for calendar 2005 are approximately 15.9 million units for North America, 20.5 million for Europe and 13.1 million for Japan and Korea. For the first quarter of 2005, CSM is forecasting light vehicle production of 4.0 million units in North America, 5.2 million units in Europe and 3.5 million units in Japan and Korea. There is no significant difference in the overall production numbers when comparing CSM's estimates to those of the Company's previous vendor for the service. The Company does not have any significant off-balance sheet arrangements or commitments that have not been recorded in its consolidated financial statements. MARKET RISK DISCLOSURE The Company is subject to market risk exposures of varying correlations and volatilities, including foreign exchange rate risk, interest rate risk and equity price risk. The Company has some assets, liabilities and operations outside the United States, which currently are not significant. Because the Company sells its automotive mirrors throughout the world, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products. Most of the Company's non-U.S. sales are invoiced and paid in U.S. dollars; during 2004, approximately 10% of the Company's net sales were invoiced and paid in European euros. The Company currently expects that approximately 13-14% of the -15-
Company's net sales in 2005 will be invoiced and paid in European euros. The Company does not currently engage in hedging activities. The Company manages interest rate risk and default risk in its fixed-income investment portfolio by investing in shorter-term maturities and investment grade issues. The Company's fixed-income investments' maturities at fair value (000,000), and average interest rates are as follows: Total Balance 2008- as of December 31, 2005 2006 2007 2009 2004 2003 ----- ---- ---- ----- ----- ----- U.S. Government Amount $65.2 - - - $65.2 $64.9 Average Interest Rate 2% - - 2% 2% Municipal Amount $ 4.0 - - - $ 4.0 $ 4.0 Average Interest Rate* 2% - - 2% 2% Certificates of Deposit Amount $25.8 $6.2 - - $32.0 $27.6 Average Interest Rate 3% 3% - - 3% 4% Corporate Amount $ 3.2 - - $0.3 $ 3.5 $21.1 Average Interest Rate 7% - 7% 7% 6% Other Amount $ 1.1 - - - $ 1.1 $ 1.5 Average Interest Rate 3% 3% 3% *After-tax Most of the Company's equity investments are managed by a number of outside equity fund managers who invest primarily in large capitalization companies trading on the U.S. stock markets. CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS The Company has the following contractual obligations and other commitments (000,000) as of December 31, 2004: Total Less than 1 Year 1-3 Years After 3 Years ----- ---------------- --------- ------------- Long-term debt $ - $ - $ - $ - Operating leases 1.4 0.7 0.5 0.2 Purchase obligations* 37.4 36.3 1.1 - Dividends payable 13.2 13.2 - - ----- ----- ----- ----- $52.0 $50.2 $ 1.6 $ 0.2 ===== ===== ===== ===== *Primarily for inventory parts and capital equipment. CRITICAL ACCOUNTING POLICIES. The Company's significant accounting policies are described in Note 1 to the consolidated financial statements. The policies described below represent those that are broadly applicable to its operations and involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related amounts. Revenue Recognition. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, as amended. Accordingly, revenue is recognized based on the terms of the customer purchase order that indicates title to the product and risk of ownership passes to the customer upon shipment. Sales are shown net of returns, which have not historically been significant. The Company does not generate sales from sale arrangements with multiple deliverables. Inventories. Estimated inventory allowances for slow-moving and obsolete inventories are based on current assessments of future demands, market conditions and related management initiatives. If market conditions or customer requirements change and are less favorable than those projected by management, inventory allowances are adjusted accordingly. -16-
Investments. The Company's investment committee regularly reviews its fixed income and equity investment portfolio for any unrealized losses that would be deemed other-than-temporary and require the recognition of an impairment loss in income. Management uses criteria such as the period of time that securities have been in an unrealized loss position, types of securities and their related industries, as well as published investment ratings and analyst reports to evaluate their portfolio. Management considers the unrealized losses at December 31, 2004, to be temporary in nature. Self Insurance. The Company is self-insured for health and workers' compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (IBNR) claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. This estimation process is subjective, and to the extent that future actual results differ from original estimates, adjustments to recorded accruals may be necessary. ITEM 7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See "Market Risk Disclosure" in Management's Discussion and Analysis (Item 7). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements and reports of independent registered public accounting firm are filed with this report as pages 21 through 35 following the signature page: Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Shareholders' Investment for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements Selected quarterly financial data for the past two years appears in the following table: Quarterly Results of Operations (in thousands, except per share data) --------------------------------------------------------------------------------------------------- First Second Third Fourth 2004 2003 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- -------- -------- Net Sales $129,328 $115,309 $129,646 $116,917 $120,457 $112,879 $126,236 $123,915 Gross Profit 54,884 48,116 54,455 48,282 47,702 47,085 50,704 53,018 Operating Income 40,696 36,382 40,029 35,880 33,393 34,448 35,948 39,866 Net Income 29,815 25,909 28,985 26,090 25,225 25,681 28,631 29,081 Earnings Per Share* $ .38 $ .34 $ .37 $ .34 $ .32 $ .33 $ .37 $ .37 *Diluted -17-
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. DISCLOSURE CONTROLS AND PROCEDURES. As of December 31, 2004, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures [(as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)]. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were adequate and effective as of December 31, 2004, to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this Form 10-K was being prepared. During the period covered by this annual report, there have been no changes in the Company's internal controls over financial reporting that have materially affected or are likely to materially affect the Company's internal controls over financial reporting. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2004. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included herein. ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information relating to executive officers is included in this report in the last section of Part I under the caption "Executive Officers of the Registrant". Information relating to directors appearing under the caption "Election of Directors" in the definitive Proxy Statement for the 2005 Annual Meeting of Shareholders and filed with the Commission within 120 days after the Company's fiscal year end, December 31, 2004 (the "Proxy Statement"), is hereby incorporated herein by reference. Information concerning compliance with Section 16(a) of the Securities and Exchange Act of 1934 appearing under the caption "Section 16(A) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement is hereby incorporated herein by reference. Information relating to the Board of Directors determinations concerning whether at least one member of the Audit Committee is an "audit committee financial expert" as that term is defined under Item 401 (h) of Regulation S-K appearing under the caption "Corporate Governance - Audit Committee" in the definitive Proxy Statement is hereby incorporated by reference. The Company has adopted a code of ethics that applies to its principal executive officer and senior financial officers. A copy of the Code of Ethics for Certain Senior Officers is available without charge, upon written request, from the Corporate Secretary of the Company, 600 N. Centennial Street, Zeeland, Michigan 49464. The Company intends to satisfy the disclosure requirement under Item -18-
10 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethics by posting such information on its website. Information contained in the Company's website, whether currently posted or posted in the future, is not part of this document or the documents incorporated by reference in this document. ITEM 11. EXECUTIVE COMPENSATION. The information contained under the caption "Executive Compensation" contained in the definitive Proxy Statement is hereby incorporated herein by reference. Such incorporation by reference shall not be deemed to specifically incorporate by reference information referred to in Item 402(a)(8) of Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND EQUITY COMPENSATION PLAN INFORMATION. The information contained under the captions "Securities Ownership of Management" and "Equity Compensation Plan Information" contained in the definitive Proxy Statement is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained under the caption "Certain Transactions" contained in the definitive Proxy Statement is hereby incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Information regarding principal accounting fees and services is set forth under the caption "Ratification of Appointment of Independent Auditors - Principal Accounting Fees and Services" in the definitive Proxy Statement is hereby incorporated herein by reference. Information concerning the policy adopted by the Audit Committee regarding the pre-approval of audit and non-audit services provided by the Company's independent auditors set forth under the caption "Corporate Governance - Audit Committee" in the definitive Proxy Statement is hereby incorporated by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. See Item 8. 2. Financial Statements Schedules. None required or not applicable. 3. Exhibits. See Exhibit Index located on page 36. (b) During the three months ended December 31, 2004, one report on Form 8-K was filed on October 19, 2004, to disclose the Company's financial results for the third quarter ended September 30, 2004. -19-
SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 18, 2005 GENTEX CORPORATION By: /s/ Fred Bauer -------------------------------------------- Fred Bauer, Chairman and Principal Executive Officer and /s/ Enoch Jen -------------------------------------------- Enoch Jen, Vice President-Finance and Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 18th day of February, 2005, by the following persons on behalf of the Registrant and in the capacities indicated. Each Director of the Registrant whose signature appears below hereby appoints Enoch Jen and Garth Deur, each of them individually, as his attorney-in-fact to sign in his name and on his behalf, and to file with the Commission any and all amendments to this report on Form 10-K to the same extent and with the same effect as if done personally. /s/ Fred Bauer Director - -------------------------- Fred Bauer /s/ Gary Goode Director - -------------------------- Gary Goode /s/ Kenneth La Grand Director - -------------------------- Kenneth La Grand /s/ Arlyn Lanting Director - -------------------------- Arlyn Lanting /s/ John Mulder Director - -------------------------- John Mulder /s/ Fred Sotok Director - -------------------------- Fred Sotok Director Ted Thompson /s/ Wallace Tsuha Director - -------------------------- Wallace Tsuha /s/ Leo Weber Director - -------------------------- Leo Weber -20-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Gentex Corporation: We have audited the accompanying consolidated balance sheets of Gentex Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gentex Corporation and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Gentex Corporation's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 9, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Grand Rapids, Michigan February 9, 2005 -21-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Shareholders of Gentex Corporation: We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Gentex Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Gentex Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Gentex Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Gentex Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 consolidated financial statements of Gentex Corporation and subsidiaries and our report dated February 9, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Grand Rapids, Michigan February 9, 2005 -22-
GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003 2004 2003 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 395,538,719 $ 322,662,971 Short-term investments 99,341,541 70,943,685 Accounts receivable 56,092,330 58,955,823 Inventories 30,600,789 20,938,696 Prepaid expenses and other 11,035,715 11,848,156 --------------- --------------- Total current assets 592,609,094 485,349,331 PLANT AND EQUIPMENT: Land, buildings and improvements 56,434,237 49,232,072 Machinery and equipment 176,798,924 159,289,298 Construction-in-process 14,485,664 14,151,833 --------------- --------------- 247,718,825 222,673,203 Less-Accumulated depreciation and amortization (112,069,706) (95,866,321) --------------- --------------- 135,649,119 126,806,882 OTHER ASSETS: Long-term investments 122,174,030 145,615,934 Patents and other assets, net 6,427,185 4,757,619 --------------- --------------- 128,601,215 150,373,553 --------------- --------------- $ 856,859,428 $ 762,529,766 =============== =============== 2004 2003 ---- ---- LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 19,849,569 $ 18,259,111 Accrued liabilities: Salaries, wages and vacation 3,433,657 3,657,546 Income taxes 548,579 1,161,865 Royalties 6,689,723 6,651,645 Dividends declared 13,237,348 11,556,122 Other 7,097,382 9,194,191 --------------- --------------- Total current liabilities 50,856,258 50,480,480 DEFERRED INCOME TAXES 22,723,198 18,405,955 SHAREHOLDERS' INVESTMENT: Preferred stock, no par value, 5,000,000 shares authorized; none issued or outstanding - - Common stock, par value $.06 per share; 200,000,000 shares authorized 4,672,005 4,622,449 Additional paid-in capital 175,266,114 152,874,325 Retained earnings 591,546,326 528,358,825 Deferred compensation (5,407,851) (4,658,450) Accumulated other comprehensive income: Unrealized gain on investments 15,558,180 11,661,722 Cumulative translation adjustment 1,645,198 784,460 --------------- --------------- Total shareholders' investment 783,279,972 693,643,331 --------------- --------------- $ 856,859,428 $ 762,529,766 =============== =============== The accompanying notes are an integral part of these consolidated financial statements. -23-
GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 2004 2003 2002 ---- ---- ---- NET SALES $ 505,666,335 $ 469,019,365 $ 395,258,436 COST OF GOODS SOLD 297,920,747 272,518,466 235,611,182 --------------- --------------- --------------- Gross profit 207,745,588 196,500,899 159,647,254 OPERATING EXPENSES: Engineering, research and development 30,833,627 26,613,770 22,973,027 Selling, general and administrative 26,845,748 23,311,853 21,474,066 --------------- --------------- --------------- Total operating expenses 57,679,375 49,925,623 44,447,093 --------------- --------------- --------------- Income from operations 150,066,213 146,575,276 115,200,161 OTHER INCOME: Interest and dividend income 10,642,129 10,241,276 11,756,849 Other, net 5,024,176 1,347,643 115,781 --------------- --------------- --------------- Total other income 15,666,305 11,588,919 11,872,630 --------------- --------------- --------------- Income before provision for income taxes 165,732,518 158,164,195 127,072,791 PROVISION FOR INCOME TAXES 53,076,000 51,403,000 41,301,500 --------------- --------------- --------------- NET INCOME $ 112,656,518 $ 106,761,195 $ 85,771,291 =============== =============== =============== EARNINGS PER SHARE: Basic $ 1.46 $ 1.39 $ 1.14 =============== =============== =============== Diluted $ 1.44 $ 1.37 $ 1.12 =============== =============== =============== Cash Dividends Declared per Share $ 0.64 $ 0.30 $ 0.00 The accompanying notes are an integral part of these consolidated financial statements. -24-
GETEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002 Common Stock Common Stock Additional Paid-In Comprehensive Shares Amount Capital Income (Loss) ----------------- ------------- ------------------ ------------- BALANCE AS OF DECEMBER 31, 2001 75,171,951 $ 4,510,317 $ 105,327,971 Issuance of common stock and the tax benefit of stock plan transactions 1,049,419 62,965 18,595,420 Amortization of deferred compensation - - - Comprehensive income: Net income - - - $ 85,771,291 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax - - - 141,038 Unrealized loss on investments, net of tax - - - (9,923,526) ------------- Other comprehensive loss - - - (9,782,488) ------------- Comprehensive income - - - $ 75,988,803 ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2002 76,221,370 4,573,282 123,923,391 Issuance of common stock and the tax benefit of stock plan transactions 1,234,446 74,067 29,631,534 Repurchases of common stock (415,000) (24,900) (680,600) Dividends declared ($.30 per share) - - - Amortization of deferred compensation - - - Comprehensive income: Net income - - - $ 106,761,195 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax - - - 707,827 Unrealized gain on investments, net of tax - - - 17,753,174 ------------- Other comprehensive income - - - 18,461,001 ------------- Comprehensive income - - - $ 125,222,196 ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2003 77,040,816 4,622,449 152,874,325 Issuance of common stock and the tax benefit of stock plan transactions 825,935 49,556 22,391,789 Dividends declared ($.64 per share) - - - Amortization of deferred compensation - - - Comprehensive income: Net income - - - $ 112,656,518 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax - - - 860,738 Unrealized gain on investments, net of tax - - - 3,896,458 ------------- Other comprehensive income - - - 4,757,196 ------------- Comprehensive income - - - $ 117,413,714 ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2004 77,866,751 $ 4,672,005 $ 175,266,114 ================= ============= ================= ============= Accumulated Other Total Deferred Comprehensive Shareholders' Retained Earnings Compensation Income (Loss) Investment ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2001 $ 368,430,152 ($3,035,580) $ 3,767,669 $ 479,000,529 Issuance of common stock and the tax benefit of stock plan transactions - (1,090,222) - 17,568,163 Amortization of deferred compensation - 1,082,867 - 1,082,867 Comprehensive income: Net income 85,771,291 - - 85,771,291 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax - - - - Unrealized loss on investments, net of tax - - - - Other comprehensive loss - - (9,782,488) (9,782,488) Comprehensive income - - - - ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2002 454,201,443 (3,042,935) (6,014,819) 573,640,362 Issuance of common stock and the tax benefit of stock plan transactions - (2,733,723) - 26,971,878 Repurchases of common stock (9,541,310) - - (10,246,810) Dividends declared ($.30 per share) (23,062,503) - - (23,062,503) Amortization of deferred compensation 1,118,208 - 1,118,208 Comprehensive income: Net income 106,761,195 - - 106,761,195 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax - - - Unrealized gain on investments, net of tax - - - - Other comprehensive income - 18,461,001 18,461,001 Comprehensive income - - - - ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2003 528,358,825 (4,658,450) 12,446,182 693,643,331 Issuance of common stock and the tax benefit of stock plan transactions - (2,323,123) - 20,118,222 Dividends declared ($.64 per share) (49,469,017) - - (49,469,017) Amortization of deferred compensation - 1,573,722 - 1,573,722 Comprehensive income: Net income 112,656,518 - - 112,656,518 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax - - - - Unrealized gain on investments, net of tax - - - - Other comprehensive income - - 4,757,196 4,757,196 Comprehensive income - - - - ----------------- ------------- ----------------- ------------- BALANCE AS OF DECEMBER 31, 2004 $591,546,326 ($5,407,851) $ 17,203,378 $ 783,279,972 ================= ============= ================= ============= The accompanying notes are an integral part of these consolidated financial statements. -25-
GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 2004 2003 2002 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $112,656,518 $106,761,195 $ 85,771,291 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,740,832 20,426,207 18,631,600 Loss on disposal of assets 88,679 75,626 11,180 Gain on sale of investments (5,655,756) (5,181,804) (2,961,036) Loss on sale of investments 2,351,347 6,228,566 5,361,194 Deferred income taxes 2,403,593 1,951,787 3,701,475 Amortization of deferred compensation 1,573,722 1,118,208 1,082,867 Tax benefit of stock plan transactions 3,511,622 5,511,458 5,093,396 Change in operating assets and liabilities: Accounts receivable 2,863,493 (23,065,443) (3,895,441) Inventories (9,662,093) (3,196,687) (3,336,659) Prepaid expenses and other 627,997 (3,910,441) 1,576,617 Accounts payable 1,590,458 6,465,385 2,414,789 Accrued liabilities (2,721,956) 3,398,938 5,659,842 ------------ ------------ ------------ Net cash provided by operating activities 131,368,456 116,582,995 119,111,115 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Activity in held-to-maturity securities: Sales proceeds - - - Maturities and calls - 57,571,539 64,322,716 Purchases - (122,262,019) (93,072,612) Activity in available-for-sale securities: Sales proceeds 31,101,380 120,578,082 15,137,464 Maturities and calls 78,792,849 91,489,195 - Purchases (105,551,220) (87,494,979) (55,600,063) Plant and equipment additions (30,535,174) (22,248,009) (32,560,646) Proceeds from sale of plant and equipment 56,500 72,000 189,926 Increase in other assets (1,001,902) (167,174) (953,277) ------------ ------------ ------------ Net cash provided by (used for) investing activities (27,137,567) 37,538,635 (102,536,492) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock from stock plan transactions 16,606,601 21,460,422 12,474,767 Cash dividends paid (47,961,742) (11,506,382) - Repurchases of common stock 0 (10,246,810) - ------------ ------------ ------------ Net cash provided by (used for) financing activities (31,355,141) (292,770) 12,474,767 ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 72,875,748 153,828,860 29,049,390 CASH AND CASH EQUIVALENTS, Beginning of year 322,662,971 168,834,111 139,784,721 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, End of year $395,538,719 $322,662,971 $168,834,111 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. -26-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The Company Gentex Corporation designs, develops, manufactures and markets proprietary electro-optical products: automatic-dimming rearview mirrors for the automotive industry and fire protection products for the commercial building industry. A substantial portion of the Company's net sales and accounts receivable result from transactions with domestic and foreign automotive manufacturers and tier one suppliers. The Company's fire protection products are primarily sold to domestic distributors and original equipment manufacturers of fire and security systems. The Company does not require collateral or other security for trade accounts receivable. Significant accounting policies of the Company not described elsewhere are as follows: Consolidation The consolidated financial statements include the accounts of Gentex Corporation and all of its wholly-owned subsidiaries (together the "Company"). All significant intercompany accounts and transactions have been eliminated. Cash Equivalents Cash equivalents consist of funds invested in bank accounts that have daily liquidity. Investments At December 31, 2004, investment securities are available for sale and are stated at fair value based on quoted market prices. Adjustments to the fair value of investments are recorded as increases or decreases, net of income taxes, within accumulated other comprehensive income (loss) in shareholders' investment. During 2003, in order to avoid the registration requirements of the Investment Company Act of 1940, the Company changed its intent to hold certain of its held-to-maturity investments and therefore reclassified investments in debt securities with a net carrying value of approximately $202,000,000 to available-for-sale. The unrealized gain on these securities, net of income taxes, was approximately $1,000,000 at the time of the reclassification and was recorded in accumulated other comprehensive income within shareholders' investment. Prior to 2003, these debt securities were carried at amortized cost. The amortized cost, unrealized gains and losses, and market value of investment securities are shown as of December 31, 2004 and 2003: Unrealized --------------------------------- 2004 Cost Gains Losses Market Value - ----------------------- ------------- ------------- ------------- ------------- U.S. Government $ 65,426,060 $ - $ (188,580) $ 65,237,480 Municipal Bonds 4,039,922 65 (1,663) 4,038,324 Certificates of Deposit 32,034,061 - - 32,034,061 Corporate Bonds 3,403,497 80,466 - 3,483,963 Other Fixed Income 1,054,716 - - 1,054,716 Equity 91,621,653 24,934,095 (888,721) 115,667,027 ------------- ------------- ------------- ------------- $ 197,579,909 $ 25,014,626 $ (1,078,964) $ 221,515,571 ============= ============= ============= ============= 2003 Cost Gains Losses Market Value - ----------------------- ------------- ------------- ------------- ------------- U.S. Government $ 64,781,167 $ 110,504 $ (651) $ 64,891,020 Municipal Bonds 4,005,355 16,096 - 4,021,451 Certificates of Deposit 27,565,196 - - 27,565,196 Corporate Bonds 20,628,265 454,547 - 21,082,812 Other Fixed Income 1,509,322 - - 1,509,322 Equity 80,129,204 18,361,872 (1,001,258) 97,489,818 ------------- ------------- ------------- ------------- $ 198,618,509 $ 18,943,019 $ (1,001,909) $ 216,559,619 ============= ============= ============= ============= Unrealized losses on investments as of December 31, 2004, are as follows: Aggregate Unrealized Losses Aggregate Fair Value Less than one year $ 789,814 $75,270,467 Greater than one year 289,150 2,196,218 -27-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES, continued Management has reviewed the unrealized losses in the Company's fixed-income and equity securities as of December 31, 2004, and has determined that they are temporary in nature; accordingly, no losses have been recognized in income as of December 31, 2004. Fixedincome securities as of December 31, 2004, have contractual maturities as follows: Due within one year $ 99,463,300 Due between one and five years 6,494,956 Due over five years - ------------- $ 105,958,256 Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, investments, accounts receivable and accounts payable. The Company's estimate of the fair values of these financial instruments approximates their carrying amounts at December 31, 2004 and 2003. Inventories Inventories include material, direct labor and manufacturing overhead and are valued at the lower of first-in, first-out (FIFO) cost or market. Inventories consisted of the following as of December 31, 2004 and 2003: 2004 2003 ------------- ------------- Raw materials $ 18,102,873 $ 11,041,622 Work-in-process 3,894,864 2,401,500 Finished goods 8,603,052 7,495,574 ------------- ------------- $ 30,600,789 $ 20,938,696 ============= ============= Allowances for slow-moving and obsolete inventories were not significant as of December 31, 2004 and 2003. Plant and Equipment Plantand equipment are stated at cost. Depreciation and amortization are computed for financial reporting purposes using the straight-line method, with estimated useful lives of 7 to 40 years for buildings and improvements, and 3 to 10 years for machinery and equipment. Impairment or Disposal of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Patents The Company's policy is to capitalize costs incurred to obtain patents. The cost of patents is amortized over their useful lives. The cost of patents in process is not amortized until issuance. Accumulated amortization was approximately $3,069,000 and $2,876,000 at December 31, 2004 and 2003, respectively. At December 31, 2004, patents have a weighted average amortization life of 12 years. Patent amortization expense was approximately $193,000, $150,000 and $393,000, in 2004, 2003 and 2002, respectively. For each of the next five years, patent amortization expense will approximate $208,000 annually. -28-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES, continued Revenue Recognition The Company's revenue is generated from sales of its products. Sales are recognized when the product is shipped and legal title has passed to the customer. The Company does not generate sales from arrangements with multiple deliverables. Advertising and Promotional Materials All advertising and promotional costs are expensed as incurred and amounted to approximately $1,314,000, $886,000 and $904,000, in 2004, 2003 and 2002, respectively. Repairs and Maintenance Majorrenewals and improvements of property and equipment are capitalized, and repairs and maintenance are expensed as incurred. The Company incurred expenses relating to the repair and maintenance of plant and equipment of approximately $5,171,000, $4,169,000 and $3,761,000, in 2004, 2003 and 2002, respectively. Self-Insurance The Company is self-insured for a portion of its risk on workers' compensation and employee medical costs. The arrangements provide for stop loss insurance to manage the Company's risk. Operations are charged with the cost of claims reported and an estimate of claims incurred but not reported based upon historical claims lag information and other data. Product Warranty The Company periodically incurs product warranty costs. Any liabilities associated with product warranty are estimated based on known facts and circumstances and are not significant at December 31, 2004 and 2003. The Company does not offer extended warranties on its products. Earnings Per Share The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share (EPS) for each of the last three years: 2004 2003 2002 ------------- ------------- ------------ Numerators: Numerator for both basic and diluted EPS, net income $ 112,656,518 $ 106,761,195 $ 85,771,291 Denominators: Denominator for basic EPS, weighted-average common shares outstanding 77,160,671 76,584,876 75,515,271 Potentially dilutive shares resulting from stock option plans 1,199,945 1,099,614 1,087,131 ------------- ------------- ------------ Denominator for diluted EPS 78,360,616 77,684,490 76,602,402 ============= ============= ============ For the years ended December 31, 2004, 2003 and 2002, 756,391, 268,994 and 645,859 shares, respectively, related to stock option plans were not included in diluted average common shares outstanding because their effect would be antidilutive. -29-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES, continued Other Comprehensive Income (Loss) Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income represents net income adjusted for unrealized gains and losses on certain investments and foreign currency translation adjustments. The changes in the components of other comprehensive income (loss) are as follows: Years Ended December 31, ------------------------------------------------------------------------------------------- 2004 2003 2002 -------------------------- --------------------------- ---------------------------- Pre-Tax Tax Exp. Pre-Tax Tax Exp. Pre-Tax Tax Exp. Amount (Credit) Amount (Credit) Amount (Credit) ----------- ----------- ------------ ----------- ------------- ------------ Unrealized Gain (Loss) on Securities $ 5,994,551 $ 2,098,093 $ 27,312,575 $ 9,559,401 $ (15,266,964) $ (5,343,438) Foreign Currency Translation Adjustments 1,324,212 463,474 1,088,965 381,138 216,982 75,944 ----------- ----------- ------------ ----------- ------------- ------------ Other Comprehensive Income (Loss) $ 7,318,763 $ 2,561,567 $ 28,401,540 $ 9,940,539 $ (15,049,982) $ (5,267,494) =========== =========== ============ =========== ============= ============ Foreign Currency Translation The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at year-end. Income statement accounts are translated at the average rate of exchange in effect during the year. The resulting translation adjustment is recorded as a separate component of shareholders' investment. Gains and losses arising from re-measuring foreign currency transactions into the appropriate currency are included in the determination of net income. Stock-Based Compensation Plans At December 31, 2004, the Company has two stock option plans and an employee stock purchase plan, which are described more fully in Note 6. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income for these plans, as all options granted under these plans have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. 2004 2003 2002 ------------- ------------- ------------ Net income, as reported $ 112,656,518 $ 106,761,195 $ 85,771,291 Deduct: total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax effects (14,541,115) (10,505,316) (8,084,607) ------------- ------------- ------------ Pro forma net income $ 98,115,403 $ 96,255,879 $77,686,684 ============= ============= ============ Earnings per share: Basic - as reported $ 1.46 $ 1.39 $ 1.14 Basic - pro forma 1.27 1.26 1.03 Diluted - as reported $ 1.44 $ 1.37 $ 1.12 Diluted - pro forma 1.25 1.25 1.01 -30-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES, continued Stock-Based Compensation Plans, continued The fair value of each option grant in the Employee Stock Option Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively: risk-free interest rates of 3.4, 2.9 and 2.9 percent; expected dividend yields, where applicable of 1.8, 1.6 and 0.0 percent; expected lives of 4, 4 and 4 years; expected volatility of 49, 52 and 53 percent. The fair value of each option grant in the Nonemployee Director Stock Option Plans was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively: risk-free interest rates of 4.9, 4.0 and 4.0 percent; expected dividend yields, where applicable of 1.7, 1.5 and 0.0 percent; expected lives of 9, 9 and 9 years; expected volatility of 49, 52 and 53 percent. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standards On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment," which would require all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, effective for public companies for interim or periods beginning after June 15, 2005. The Company intends to adopt FASB Statement No. 123(R) effective July 1, 2005. Statement 123(R) permits public companies to adopt its requirements using either the modified prospective or retrospective method. The Company is currently evaluating the alternative methods of adoption. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the pro forma impact of Statement 123 as disclosed above. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This standard clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and addresses consolidation by business enterprise of variable interest entities. Interpretation No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among the parties involved. Interpretation No. 46 also enhances the disclosure requirements related to variable interest entities. This interpretation was effective for any variable interest entered into by the Company as of the end of the first quarter of 2004. The adoption of Interpretation No. 46 did not have any significant effect on the Company's consolidated financial statements. (2) LINE OF CREDIT The Company has available an unsecured $5,000,000 line of credit from a bank at an interest rate equal to the lower of the bank's prime rate or 1.5% above the LIBOR rate. No borrowings were outstanding under this line in 2004 or 2003. No compensating balances are required under this line. (3) INCOME TAXES The provision for income taxes is based on the earnings reported in the accompanying consolidated financial statements. The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the cumulative temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Deferred income tax expense is measured by the net change in deferred income tax assets and liabilities during the year. -31-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) INCOME TAXES, continued The components of the provision for income taxes are as follows: 2004 2003 2002 ----------- ----------- ----------- Currently payable: Federal $50,497,000 $48,976,000 $37,188,500 State 167,000 501,000 321,000 Foreign 8,000 (26,000) 91,000 ----------- ----------- ----------- Total 50,672,000 49,451,000 37,600,500 ----------- ----------- ----------- Net deferred: Primarily federal 2,404,000 1,952,000 3,701,000 ----------- ----------- ----------- Provision for income taxes $53,076,000 $51,403,000 $41,301,500 =========== =========== =========== Thecurrently payable provision is further reduced by the tax benefits associated with the exercise, vesting or disposition of stock under the stock plans described in Note 6. These reductions totaled approximately $3,512,000, $5,511,000 and $5,093,000, in 2004, 2003 and 2002, respectively, and were recognized as an adjustment of additional paid-in capital. The effective income tax rates are different from the statutory federal income tax rates for the following reasons: 2004 2003 2002 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 0.1 0.3 0.2 Foreign source exempted income (2.8) (2.5) (2.4) Tax-exempt investment income (0.2) (0.2) (0.2) Other (0.1) (0.1) (0.1) ---- ---- ---- Effective income tax rate 32.0% 32.5% 32.5% ==== ==== ==== Thetax effect of temporary differences which give rise to deferred income tax assets and liabilities at December 31, 2004 and 2003, are as follows: 2004 2003 ------------------------- -------------------------- Current Non-Current Current Non-Current ---------- ------------ ---------- ------------- Assets: Accruals not currently deductible $2,669,471 $ 182,403 $2,276,831 $ 287,403 Deferred compensation - 1,268,652 - 908,863 Other 1,414,883 5,209 1,952,073 5,410 ---------- ------------ ---------- ------------- Total deferred income tax assets 4,084,354 1,456,264 4,228,904 1,201,676 Liabilities: Excess tax over book depreciation - (14,947,063) - (12,572,140) Patent costs - (854,916) - (756,102) Unrealized gain on investments - (8,377,483) - (6,279,389) Other (654,481) - (614,587) - ---------- ------------ ---------- ------------- Net deferred incomes taxes $3,429,873 $(22,723,198) $3,614,317 $ (18,405,955) ========== ============ ========== ============= Income taxes paid in cash were approximately $48,556,000, $46,243,000 and $30,828,000, in 2004, 2003 and 2002, respectively. (4) EMPLOYEE BENEFIT PLAN The Company has a 401(k) retirement savings plan in which substantially all of its employees may participate. The plan includes a provision for the Company to match a percentage of the employee's contributions at a rate determined by the Company's Board of Directors. In 2004, 2003 and 2002, the Company's contributions were approximately $1,306,000, $1,110,000 and $955,000, respectively. The Company does not provide health care benefits to retired employees. -32-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (5) SHAREHOLDER PROTECTION RIGHTS PLAN The Company has a Shareholder Protection Rights Plan (the Plan). The Plan is designed to protect shareholders against unsolicited attempts to acquire control of the Company in a manner that does not offer a fair price to all shareholders. Under the Plan, one purchase Right automatically trades with each share of the Company's common stock. Each Right entitles a shareholder to purchase 1/100 of a share of junior participating preferred stock at a price of $110, if any person or group attempts certain hostile takeover tactics toward the Company. Under certain hostile takeover circumstances, each Right may entitle the holder to purchase the Company's common stock at one-half its market value or to purchase the securities of any acquiring entity at one-half their market value. Rights are subject to redemption by the Company at $.005 per Right and, unless earlier redeemed, will expire on March 29, 2011. Rights beneficially owned by holders of 15 percent or more of the Company's common stock, or their transferees, automatically become void. (6) STOCK-BASED COMPENSATION PLANS In 2003, an Employee Stock Purchase Plan covering 1,600,000 shares expired, and a new Employee Stock Purchase Plan covering 600,000 shares was approved. The Company has sold to employees 55,904 shares, 47,905 shares and 44,009 shares under the plans in 2004, 2003 and 2002, respectively, and has sold a total of 87,421 shares under the new plan through December 31, 2004. The Company sells shares at 85% of the stock's market price at date of purchase. The weighted average fair value of shares sold in 2004, 2003 and 2002, was approximately $32.56, $27.92 and $24.86, respectively. In 2004, a new Employee Stock Option Plan was approved, replacing the prior plan. The Company may grant options for up to 9,000,000 shares under its new Employee Stock Option Plan. The Company has granted options on 1,373,267 shares (net of shares from canceled options) under the new Plan through December 31, 2004. Under the Plans, the option exercise price equals the stock's market price on date of grant. The options vest after one to five years, and expire after two to seven years. A summary of the status of the Company's employee stock option plan at December 31, 2004, 2003 and 2002, and changes during the years then ended is presented in the table and narrative below: 2004 2003 2002 ------------------ ----------------- ------------------ Shares Wtd. Avg. Shares Wtd. Avg. Shares Wtd. Avg. (000) Ex. Price (000) Ex. Price (000) Ex. Price ------ --------- ------ --------- ------ --------- Outstanding at Beginning of Year 4,551 $29 4,270 $25 4,144 $21 Granted 1,432 38 1,299 34 1,132 29 Exercised (629) 23 (982) 20 (914) 13 Forfeited (61) 33 (36) 28 (92) 26 ------ --- ----- ---- ----- ---- Outstanding at End of Year 5,293 32 4,551 29 4,270 25 ------ --- ----- ---- ----- ---- Exercisable at End of Year 1,994 $28 1,595 $25 1,682 $22 Weighted Avg. Fair Value of Options Granted $14 $14 $14 Options Outstanding and Exercisable by Price Range As of December 31, 2004: Options Exercisable ------------------------------ Options Outstanding - ----------------------------------------------------------------------- Shares Weighted Average Range of Shares Outstanding Remaining Weighted Average Exercisable Exercise Exercise Prices (000) Contractual Life Exercise Price (000) Price - --------------- ------------------ ---------------- ---------------- ----------- ----------------- $ 1 - $25 659 2 $22 519 $21 $26 - $30 1,800 3 27 963 27 $31 - $35 1,057 4 33 225 32 $36 - $43 1,777 4 39 287 38 ------ ----- --- ------ ---- Total 5,293 3 $32 1,994 $28 -33-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) STOCK-BASED COMPENSATION PLANS, continued In 2002, a Nonemployee Director Stock Option Plan covering 2,000,000 shares expired, and a new Director Plan covering 500,000 shares of common stock was approved. The Company has granted options on 136,620 shares under the new Director Plan through December 31, 2004. Under the director plans, the option exercise price equals the stock's market price on date of grant. The Director Plan options vest after six months, and all expire after ten years. A summary of the status of the Director Plans at December 31, 2004, 2003 and 2002, and changes during the years then ended is presented in the table and narrative below: 2004 2003 2002 ------------------- ------------------- ------------------- Shares Wtd. Avg. Shares Wtd. Avg. Shares Wtd. Avg. (000) Ex. Price (000) Ex. Price (000) Ex. Price ------ --------- ------ --------- ------ --------- Outstanding at Beginning of Year 313 $18 424 $13 469 $ 10 Granted 48 36 53 32 35 32 Exercised (106) 10 (164) 10 (80) 3 Expired - - - - - - ---- --- ---- --- --- ---- Outstanding at End of Year 255 25 313 18 424 13 ---- --- ---- --- --- ---- Exercisable at End of Year 255 25 310 18 424 13 Weighted Avg. Fair Value of Options Granted $18 $21 $21 Options Outstanding and Exercisable by Price Range As of December 31, 2004: Options Exercisable Options Outstanding ------------------------------- - ------------------------------------------------------------------------------- Shares Weighted Average Range of Shares Outstanding Remaining Weighted Average Exercisable Exercise Exercise Prices (000) Contractual Life Exercise Price (000) Price - --------------- ------------------ ---------------- ---------------- ------------ ---------------- $ 1 - $30 115 3 $16 115 $16 $31 - $41 140 8 33 140 33 --- -- --- --- --- 255 6 $25 255 $25 The Company has a Restricted Stock Plan covering 500,000 shares of common stock that was approved, the purpose of which is to permit grants of shares, subject to restrictions, to key employees of the Company as a means of retaining and rewarding them for long-term performance and to increase their ownership in the Company. Shares awarded under the plan entitle the shareholder to all rights of common stock ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period. The restriction period is determined by a committee, appointed by the Board of Directors, but may not exceed ten years. During 2004, 2003 and 2002, 61,260, 78,100 and 37,900, shares, respectively, were granted with a restriction period of five years at market prices ranging from $34.74 to $42.20 in 2004, $25.64 to $43.00 in 2003 and $27.47 to $32.30 in 2002. The related expense is reflected as a deferred compensation component of shareholders' investment in the accompanying consolidated financial statements and is being amortized over the applicable restriction periods. (7) CONTINGENCIES From time to time, the Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or future results of operations of the Company. - 34 -
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (8) SEGMENT REPORTING SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" requires that a public enterprise report financial and descriptive information about its reportable operating segments subject to certain aggregation criteria and quantitative thresholds. Operating segments are defined by SFAS No. 131 as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-makers in deciding how to allocate resources and in assessing performance. 2004 2003 2002 ------------ ------------ ------------ Revenue: Automotive Products United States $230,075,562 $238,608,596 $203,691,964 Germany 86,432,114 69,787,290 70,710,037 Japan 54,336,447 53,004,947 44,797,340 Other 112,306,599 84,913,322 55,050,622 Fire Protection Products 22,515,613 22,705,210 21,008,473 ------------ ------------ ------------ Total $505,666,335 $469,019,365 $395,258,436 ============ ============ ============ Income from Operations: Automotive Products $145,622,021 $142,001,646 $111,448,849 Fire Protection Products 4,444,192 4,573,630 3,751,312 ------------ ------------ ------------ Total $150,066,213 $146,575,276 $115,200,161 ============ ============ ============ Assets: Automotive Products $202,052,906 $184,208,278 $154,685,204 Fire Protection Products 4,252,818 4,768,620 4,035,944 Other 650,553,704 573,552,868 450,451,519 ------------ ------------ ------------ Total $856,859,428 $762,529,766 $609,172,667 ============ ============ ============ Depreciation & Amortization: Automotive Products $19,323,047 $18,275,655 $16,930,161 Fire Protection Products 228,844 255,301 260,823 Other 2,188,941 1,895,251 1,440,616 ------------ ------------ ------------ Total $21,740,832 $20,426,207 $18,631,600 ============ ============ ============ Capital Expenditures: Automotive Products $29,233,220 $22,126,904 $19,236,000 Fire Protection Products 251,492 98,705 442,593 Other 1,050,462 22,400 12,882,053 ------------ ------------ ------------ Total $30,535,174 $22,248,009 $32,560,646 ============ ============ ============ Other assets are principally cash, investments, deferred income taxes and corporate fixed assets. Substantially all long-lived assets are located in the U.S. Automotive Products revenues in the "Other" category are sales to U.S. automotive manufacturing plants in Canada and Mexico, as well as other foreign automotive customers. Nearly all non-U.S. sales are invoiced and paid in U.S. dollars. During 2004, approximately 10% of the Company's net sales were invoiced and paid in European euros. During the years presented, the Company had three automotive customers, which individually accounted for 10% or more of net sales as follows: Customer ---------------------------------- #1 #2 #3 -- -- -- 2004 31% 13% 13% 2003 38% 13% 12% 2002 39% 15% 10% - 35 -
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 3(a)(1) Registrant's Restated Articles of Incorporation, adopted on August 20, 2004, were filed as Exhibit 3(a) to Registrant's Report on Form 10-Q dated November 2, 2004, and the same is hereby incorporated herein by reference. 3(b)(1) Registrant's Bylaws as amended and restated February 27, 2003, was filed as Exhibit 3(b)(1) to Registrant's report on Form 10-Q dated May 5, 2003, and the same is hereby incorporated herein by reference. 4(a) A specimen form of certificate for the Registrant's common stock, par value $.06 per share, was filed as part of a Registration Statement (Registration Number 2-74226C) as Exhibit 3(a), as amended by Amendment No. 3 to such Registration Statement, and the same is hereby incorporated herein by reference. 4(b) Amended and Restated Shareholder Protection Rights Agreement, dated as of March 29, 2001, including as Exhibit A the form of Certificate of Adoption of Resolution Establishing Series of Shares of Junior Participating Preferred Stock of the Company, and as Exhibit B the form of Rights Certificate and of Election to Exercise, was filed as Exhibit 4(b) to Registrant's Report on Form 10-Q on April 27, 2001, and the same is hereby incorporated herein by reference. 10(a)(1) A Lease, dated August 15, 1981, was filed as part of a Registration Statement (Registration Number 2-74226C) as Exhibit 9(a)(1), and the same is hereby incorporated herein by reference. 10(a)(2) A First Amendment to Lease, dated June 28, 1985, was filed as Exhibit 10(m) to Registrant's Report on Form 10-K dated March 18, 1986, and the same is hereby incorporated herein by reference. *10(b)(1) Gentex Corporation Qualified Stock Option Plan (as amended and restated, effective February 26, 2004) was included in Registrant's Proxy Statement dated April 6, 2004, filed with the Commission on April 6, 2004, and the same is hereby incorporated herein by reference. *10(b)(2) Specimen form of Grant Agreement for the Gentex Corporation Qualified Stock Option Plan (as amended and restated, effective February 26, 2004), was filed as Exhibit 10(b)(2) to Registrant's Report on Form 10-Q dated November 2, 2004, and the same is hereby incorporated herein by reference. *10(b)(3) Gentex Corporation Second Restricted Stock Plan was filed as Exhibit 10(b)(3) to Registrant's Report on Form 10-Q dated April 27, 2001, and the same is hereby incorporated herein by reference. *10(b)(4) Specimen form of Grant Agreement for the Gentex Corporation Restricted Stock Plan (as amended and restated, effective February 26, 2004), was filed as Exhibit 10(b)(4) to Registrant's Report on Form 10-Q dated November 2, 2004, and the same is hereby incorporated herein by reference. *10(b)(5) Gentex Corporation 2002 Nonemployee Director Stock Option Plan (adopted March 6, 2002) was filed as Exhibit 10(b)(4) to Registrant's Report on Form 10-Q dated April 30, 2002, and the same is hereby incorporated herein by reference. *10(b)(6) Specimen form of Grant Agreement for the Gentex Corporation 2002 Non-Employee Director Stock Option Plan (as amended and restated, effective February 26, 2004), was filed as Exhibit 10(b)(6) to Registrant's Report on Form 10-Q dated November 2, 2004, and the same is hereby incorporated herein by reference. 10(e) The form of Indemnity Agreement between Registrant and each of the Registrant's directors and certain offices was filed as Exhibit 10(c) to Registrant's Report on Form 10-Q dated October 31, 2002, and the same is hereby incorporated herein by reference. 21 List of Company Subsidiaries 37 23(a) Consent of Independent Registered Public Accounting Firm 38 31.1 Certificate of the Chief Executive Officer of Gentex Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 39 31.2 Certificate of the Chief Financial Officer of Gentex Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 40 32 Certificate of the Chief Executive Officer and Chief Financial Officer of Gentex Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). 41 *Indicates a compensatory plan or arrangement. - 36 -
EXHIBIT 21 LIST OF GENTEX CORPORATION SUBSIDIARIES 1. E.C. Aviation Services, Inc., a Michigan corporation, is a wholly-owned subsidiary of Gentex Corporation. 2. Gentex International Corporation, a Foreign Sales Corporation incorporated in Barbados, is a wholly-owned subsidiary of Gentex Corporation. 3. Gentex Holdings, Inc., a Michigan corporation, is a wholly-owned subsidiary of Gentex Corporation. 4. Gentex GmbH, a German limited liability company, is a subsidiary 50% owned by Gentex Corporation and 50% owned by Gentex Holdings, Inc. 5. Gentex Japan, Inc., a Japanese corporation, is a wholly-owned subsidiary of Gentex Corporation. 6. Gentex Mirrors Ltd., a United Kingdom limited liability company, is a wholly-owned subsidiary of Gentex Corporation. 7. Gentex France, SAS, a French simplified liability corporation, is a wholly-owned subsidiary of Gentex Corporation. 8. Gentex Technologies Korea Co., Ltd., a Korean limited stock company, is a wholly-owned subsidiary of Gentex Corporation.
EXHIBIT 23(a) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-101642, 33-64504, 33-65321, 333-04661, 333-105858 and 333-118213) pertaining to various stock option and incentive plans of Gentex Corporation of our reports dated February 9, 2005, with respect to the consolidated financial statements of Gentex Corporation and subsidiaries, Gentex Corporation management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Gentex Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ Ernst & Young LLP Grand Rapids, Michigan February 23, 2005
EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF GENTEX COPORATION I, Fred T. Bauer, certify that: 1. I have reviewed this annual report on Form 10-K of Gentex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this annual report based on such evaluation; and d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; Date: February 18, 2005 /s/ Fred T. Bauer ----------------- Fred T. Bauer Chief Executive Officer
EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF GENTEX COPORATION I, Enoch C. Jen, certify that: 1. I have reviewed this annual report on Form 10-K of Gentex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this annual report based on such evaluation; and d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; Date: February 18, 2005 /s/ Enoch C. Jen ----------------------------------- Enoch C. Jen Vice President, Finance
EXHIBIT 32 CERTIFICATE PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18-U.S.C. Section 1350) Each, Fred T. Bauer, Chief Executive Officer of Gentex Corporation, and Enoch C. Jen, Chief Financial Officer of Gentex Corporation, certify to the best of their knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.Section 1350), that: (1) The annual report on Form 10-K for the year ended December 31, 2004, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in this annual report on Form 10-K of the year ended December 31, 2004, fairly presents, in all material respects, the financial condition and results of operations of Gentex Corporation. Dated: February 18, 2005 GENTEX CORPORATION By /s/ Fred T. Bauer ------------------------------- Fred T. Bauer Its Chief Executive Officer By /s/ Enoch C. Jen ------------------------------- Enoch C. Jen Its Vice President-Finance/Chief Financial Officer A signed original of this written statement has been provided to Gentex Corporation and will be retained by Gentex Corporation and furnished to the Securities and Exchange Commission or its staff upon request.