Sounds like the transfer output on the generator is being energized when it is running. (K1 is being energized) K2 should be powered from the utility source, when it is de-energized, the contact closes, telling the generator to start, once the generator is up to speed, and any time delay built in expires, it energizes K1, transferring to generator power, once K2 is re-energized, the timer in the generator starts the countdown to re-transfer. Do the voltage check on 1 and 4 that I mentioned in a previous post.