-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cfnl7nIT6CtMHeQ4dntt6vVxwjFwRmtDGNn7RVq9pNGT31b6TVHUw9x56V7jzYS9 IP0p77wpN1KY6p91zWR/ZQ== 0001065949-06-000087.txt : 20060817 0001065949-06-000087.hdr.sgml : 20060817 20060817130813 ACCESSION NUMBER: 0001065949-06-000087 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20060817 DATE AS OF CHANGE: 20060817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLAS-AIRE INDUSTRIES GROUP LTD CENTRAL INDEX KEY: 0000911441 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 841214736 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14244 FILM NUMBER: 061040178 BUSINESS ADDRESS: STREET 1: 3137 GRANDVIEW HIGHWAY CITY: VANCOUVER BC CANAD STATE: A6 BUSINESS PHONE: 6044358801 10KSB 1 ga10ksb2004vfinal.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 001-14244 --------- GLAS-AIRE INDUSTRIES GROUP LTD. ------------------------------ (Name of small business issuer in its charter) Nevada 84-1072256 - ----------------------------------- ------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 145 Tyee Drive, #1641, Point Roberts, WA 98281 ------------------------------------------ (Mailing address of principal executive offices) Registrant's telephone number: (360)-447-0210 ------------- Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value Pink Sheets - ----------------------------- ----------- Securities registered under Section 12(g) of the Exchange Act: Common Stock ---------------- (Title of class) Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 --- ---- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. / X / State registrant's revenues for its most recent fiscal year: $1,637,755 As of December 31, 2004, the aggregate market value for the 1,046,663 shares of the Common Stock, $0.01 par value per share, held by non-affiliates was approximately $10,467. The number of shares of Common Stock of the registrant outstanding as of December 31, 2004 were 2,711,213, not including 93,718 shares of treasury stock held by the Company. Transitional Small Business Disclosure Format: Yes /__/ No / X/ TABLE OF CONTENTS
PAGE PART I Item 1. Description of Business 1 Item 2. Description of Property 19 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 21 PART II Item 5. Market for Common Equity and Related Stockholder Matters 21 Item 6. Management's Discussion and Analysis or Plan of Operation 23 Item 7. Financial Statements 31 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 32 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act 32 Item 10. Executive Compensation 34 Item 11. Security Ownership of Certain Beneficial Owners and Management 38 Item 12. Certain Relationships and Related Transactions 39 PART IV Item 13. Exhibits and Reports on Form 8-K 40 Item 14. Controls and Procedures 40 SIGNATURES 41
Glas-Aire Industries Group Ltd. -ii- Form 10-KSB @ December 31, 2004 PART I ITEM 1. DESCRIPTION OF BUSINESS BUSINESS Except for historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include, but are not limited to, statements regarding future events and the Company's plans and expectations. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below under "Factors That May Affect Future Results," as well as those discussed elsewhere in this Form 10-KSB. We have based the Specialty Equipment Market Association ("SEMA") data and other statistical information in this Annual Report, on information supplied by SEMA and various public announcements and filings made by other industry associations. We have also relied on other sources that we believe are reliable. While we believe that the information is accurate, we have not independently verified any of this information or such announcements and filings, and it is possible they may not be accurate in all material respects. In addition, the Company's business is subject to continual changes, and because of these changes, our estimates of our expected industry position may become inaccurate at any time. As used in this Annual Report, the terms "our," "us" and "we" refer to Glas-Aire Industries Group Ltd. OVERVIEW Glas-Aire Industries Group Ltd. ("Glas-Aire" or the "Company") was incorporated on September 29, 1992, pursuant to the laws of the State of Nevada. Glas-Aire designs, develops, manufactures and markets sunroof wind deflectors, hood protectors, rear air deflectors and door visors for cars, light trucks and vans. The Company uses plastics (as the major raw material) and thermoforming technology to produce these products. We supply our products principally to automotive original equipment manufacturers ("OEMs"). The OEMs we supply include: Honda, Nissan, General Motors, Hyundai Motor America, Inc. and other North American/Japanese automotive manufacturers. Our principal executive offices are located at 145 Tyee Drive, #1641, Point Roberts, Washington 98281, and our telephone number is (360) 447-0210. On March 24, 2004, the wholly owned subsidiary of Glas-Aire Industries Ltd, the Canadian Operation, filed for bankruptcy and on July 31, 2004 the United States subsidiary of Glas-Aire Industries Inc. in Washington closed its warehouse operation. In December 2001, Glas-Aire acquired Wonder Tool, Inc. ("Wonder Tool"), a wholly-owned subsidiary of Cyclo Manufacturing Company ("Cyclo"). The Wonder Tool acquisition was accounted for as a reverse acquisition because the shareholders of Wonder Tool became controlling shareholders of the Company. Cyclo received 1,250,000 shares of Glas-Aire's common stock (which constituted approximately 50.7% of the Company's total outstanding voting stock) in exchange Glas-Aire Industries Group Ltd. -1- Form 10-KSB @ December 31, 2004 for 1,000 shares of Wonder Tool's common stock. As a consequence of the acquisition, Wonder Tool became a wholly-owned subsidiary of the Company. Immediately following the consummation of the acquisition, Cyclo transferred the Glas-Aire shares it received in the acquisition to Robert C. Johnson and Raymond J. Gherardini. Under these circumstances, United States Generally Accepted Accounting Principles ("GAAP") requires that Wonder Tool be identified as the accounting acquirer. On January 9, 2003, we completed the sale of substantially all of the assets and certain of the liabilities of Wonder Tool, pursuant to an Asset Purchase Agreement (the "WTI Asset Sale"). The transaction was effective as of January 1, 2003, although the Asset Purchase Agreement was executed and the closing occurred on January 9, 2003. The Company sold the assets associated with the Wonder Tool pneumatic polishers, electric polishers, double drum pole polishers, cleaning and polishing compounds, polishing bonnets, associated accessories, airline toilet deodorants, and wet/dry vacuum cleaning machines, including the intellectual property associated with these assets. The consideration for the WTI Asset Sale was $720,140 in cash, a $200,000 promissory note and up to $200,000 that may be earned pursuant to an earn out provision in the Asset Purchase Agreement. The Company's Consolidated Financial Statements included in this Annual Report on Form 10-KSB reflect the financial position, results of operations and cash flows of the Wonder Tool business as "discontinued operations." In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-lived Assets," the Company's Consolidated Financial Statements have been restated to reflect the financial position, results of operations and cash flows of the Wonder Tool business as "discontinued operations." BUSINESS SEGMENTS Prior to the WTI Asset Sale, Glas-Aire operated two business segments - Automotive Accessories and Orbital Polishing. The operations of each of these segments were conducted in separate subsidiary companies. AUTOMOTIVE ACCESSORIES PRINCIPAL PRODUCTS. We design, manufacture and market sunroof wind deflectors, hood protectors, rear air deflectors and door visors for cars, light trucks and vans. Management believes that we provide superior product quality to customers who are leaders within the OEM industry. BUSINESS STRATEGY. Management's strategies for future operations and expansion are as follows: INCREASING PRODUCTION CAPACITY/EFFICIENCY. We enhanced our production capacity by the use of additional capital equipment and leasing larger premises for operations. We are moving forward with our plan to incorporate the Cell method of manufacturing utilized by many large Japanese and American Glas-Aire Industries Group Ltd. -2- Form 10-KSB @ December 31, 2004 manufacturers. This concept involves conduct of the entire manufacturing process in units or cells on a flow basis in order to avoid delays related to staging. This concept provides for the layout of operating in a tight sequence to permit single piece flow and flexible deployment of human effort. A product proceeds from design to launch, order to delivery, and into the hands of customers with reduction of scrap, reduction of labor costs with little or no backflows or stoppages. INCREASING SALES TO AUTOMOBILE MANUFACTURERS. Virtually all of our sales are to automobile manufacturers. Management believes that increased sales to automobile manufacturers can be accomplished through sales of existing and new products to current as well as potential new clients in North America, Japan, South America and Europe. CONTINUE RESEARCH AND DEVELOPMENT ACTIVITIES. Management believes that a key to our future success is the continual development of new products and complimentary processes to meet the demands and needs of our clients. We continue to conduct research and development ("R&D") activities to enhance our existing products, design new products and develop associated manufacturing processes. Often, our clients participate in the development of the product as well as the process in which it is developed. INVESTMENT IN OR ACQUISITION OF COMPLIMENTARY BUSINESSES, TECHNOLOGIES OR PRODUCT LINES. We continue to evaluate opportunities for growth or expansion of our business through investment in or acquisition of complimentary businesses, current or emerging technologies or product lines. Management believes that opportunities to expand will be available to us and intends to investigate opportunities that are consistent with our goals and expertise. INFRASTRUCTURE STRENGTHENING. We are actively pursuing the strengthening of our infrastructure by evaluating integrated, computerized information technology systems to facilitate effective control functions that we believe are important to efficiently operate and manage our operations. Management believes that solid internal controls combined with an integrated information technology system will ensure a strong infrastructure to run our organization and operations. INDUSTRY OVERVIEW Our products are used in a diverse and growing market comprised of all automotive after market accessories, dealer installed accessories, car care products and other products purchased by consumers for the purpose of improving their vehicles' appearance and/or performance. SEMA is the automotive industry association involved in this particular market segment. The latest published data that the Company has from SEMA is presented below. Manufacturer's sales of specialty automotive products increased from $2.35 billion in 1985 to $8.6 billion in 2000. During this period, retail sales increased from $4.35 billion to $24.86 billion. Our products compete in the accessory/appearance segment of this market, estimated to be approximately $4.83 billion at the manufacturers' level in 2000. SEMA estimates that accessories/appearance products represent 55.6% of the total specialty equipment market. According to SEMA data, accessories/appearance is the only segment of products that has shown increased market share over the years increasing from 51.1% in 1996 to 55.6% in 2000. Glas-Aire Industries Group Ltd. -3- Form 10-KSB @ December 31, 2004 The following table shows the industry market share trend from 1990 to 2000 based upon the SEMA 2001 Market Study.
-------------------------------------------------------------------------------------------------------- Industry Segment Market Share Trend* -------------------------------------------------------------------------------------------------------- Segment 2000 1999 1998 1997 1996 1990 ------- ---- ---- ---- ---- ---- ---- -------------------------- ------------ ------------ ----------- ------------- ------------ ------------ Accessories and 55.6% 54.3% 53.2% 52.4% 51.1% 42.5% Appearance -------------------------- ------------ ------------ ----------- ------------- ------------ ------------ Racing and Performance 20.0% 21.2% 22.2% 22.9% 24.1% 30.6% -------------------------- ------------ ------------ ----------- ------------- ------------ ------------ Wheels, Tires and 24.4% 24.5% 24.6% 24.7% 24.4% 26.9% Suspension -------------------------------------------------------------------------------------------------------- * Source SEMA 2001 Market Study --------------------------------------------------------------------------------------------------------
According to SEMA, for the period from 1990 to 2000, the accessory/appearance segment grew by 99.8%. Sales increased from $4.35 billion in 1990 to $8.69 billion in 2000. We operate in the OEM portion of the SEMA market segment, providing products to the automotive manufacturers who distribute these products to consumers through their dealer networks. Management believes that the parts accessory business has become an increasingly important profit center for the automotive manufacturers at their dealer level and will continue to become important based upon current economic conditions and consumer spending trends. With a strong interest in providing additional profit opportunities for their vast dealer networks, the manufacturers are increasing their own involvement in developing new and enhanced accessory products. These products are often included in "special trim packages" and offered during the sale of the vehicle, taking advantage of a natural sales channel (i.e., dealers) as well as vehicle financing which covers the accessory products with only a negligible increase in monthly payments. Management's studies indicate that the vast number of strategically located dealers (e.g., GM has approximately 9,500 dealers in North America), their background in parts/accessories, installation expertise and ability to offer almost instant financing will increase their market share at the expense of aftermarket channels. PRODUCTS. The table set forth below shows our sales on a percentage basis by type of product sold during each of the periods indicated. - ----------------------------------------------- ------------------------------- Product Line Three Months Year Ended Ended March 31, December 31, 2004 2003 ---- ---- - ----------------------------------------------- ---------------- -------------- Sunroof Wind Deflectors 66% 60% - ----------------------------------------------- ---------------- -------------- Hood Protectors 25% 30% - ----------------------------------------------- ---------------- -------------- Rear Air Deflectors 6% 8% - ----------------------------------------------- ---------------- -------------- Door Visors 3% 2% - ----------------------------------------------- ---------------- -------------- SUNROOF WIND DEFLECTORS. Sunroof wind deflectors reduce the noise and ear discomfort resulting from air turbulence created by open sunroofs. We manufacture sunroof wind deflectors for passenger cars, sport utility vehicles and mini-vans equipped with electric sliding sunroofs. We market our sunroof wind deflectors in the United States, Canada, Japan and the United Kingdom. Glas-Aire Industries Group Ltd. -4- Form 10-KSB @ December 31, 2004 HOOD PROTECTORS. Hood protectors are designed both to enhance the appearance of a vehicle and to protect the windshield and hood from insects, stones and other road debris. We manufacture hood protectors for crossover vehicles (vehicles designed to blend the ride and handling of cars with the people and cargo carrying capacity of sport utility vehicles), sport utility vehicles, light duty pickup trucks and mini-vans. We market our hood protectors in the United States, Canada and Japan. REAR AIR DEFLECTORS. Rear air deflectors are mounted on the roof of a sport utility vehicle or mini-van over the rear hatchback door. This product is designed to reduce dust and grime buildup on the rear window and improve visibility. We manufacture rear air deflectors for sport utility vehicles and mini-vans. We market our rear air deflectors in the United States and Canada. DOOR VISORS. Door visors allow for air circulation, keep out the elements and reduce wind noise when windows are open. NEW PRODUCTS. With every new model of automobile brought to market by our customers, we must design, develop and deploy our products to meet the design specifications of the new models. Thus, we are continually engineering and developing new molds and products to meet these specifications for these new products. In order to build on our basic product groups (i.e., sunroof wind deflectors, hood protectors, rear air deflectors and door visors), we continue to development new products in order to address our clients' and prospective clients' demands. We intend to continue producing our products on a cost-effective basis with unique designs, superior finishes, alternate attachment mechanisms and dimensional accuracy. This strategy is expected to increase our competitiveness and help expand our target markets. OBSOLESCENCE/DESIGN CHANGES. Due to automobile design changes by automobile manufacturers, our automotive products will become obsolete and/or require modification. Continued utilization of our products by the OEMs is substantially dependent upon our ability to quickly and reliably adjust the design of our products to conform to design changes by the automobile manufacturers. We intend to continue improving our lead times by using more efficient design software and innovative prototype tools fabricated in house, and changes in the design process in keeping with the Cell manufacturing method. This process will further reduce lead times by facilitating remote fittings of prototypes anywhere in the world. MARKETING AND SALES. Sales are made directly by the Company. We promote the Company and our products primarily through personal contact, brochures, attendance at trade shows, press releases, etc. We provide access to information on our filings with the United States Securities and Exchange Commission and our products on our website www.glasaire.com. During the year ended December 31, 2004, prior to the cessation of operations and the bankruptcy filing of its Canadian operating subsidiary, approximately 100% of our sales were to OEMs. The Company's clients/joint product development partners include DaimlerChrysler Corporation, General Motors Glas-Aire Industries Group Ltd. -5- Form 10-KSB @ December 31, 2004 Corporation, Gulf States Toyota, Inc., Honda Access America, Inc., Hyundai Motor America, KIA Motors America, Inc., Mazda North America Corporations, Nissan Canada, Inc., Nissan North America, Inc., Saturn Corp., Southeast Toyota Distributors, LLC, Subaru of America, Inc., Toyota Canada, Inc. and others. We manufacture products according to specifications either developed jointly with, or provided by our clients, who in turn market the products, on a retail basis, under their own brand names through their dealership and distribution networks. Management believes that we offer our customers high quality product design and development capabilities. We received a number of awards from our customers and various business associations during the last ten years. The latest award was the "Valued Partner 2002" award from KIA Motors America, Inc. We sell our automotive accessories products in the United States, Canada and Japan. Net sales based upon total revenue to customers by geographic area consisted of the following for each of the years ended December 31, 2003 and three months ended March 31, 2004.
- ----------------------------- ------------------------------------------------------------ March 31, December 31, (in 000's) ------------------------------- ---------------------------- 2004 2003 - ----------------------------- ---------------- -------------- -------------- ------------- United States $1,578 96.4% $9,856 90% - ----------------------------- ---------------- -------------- -------------- ------------- Canada $57 3.5% $1,090 8.4% - ----------------------------- ---------------- -------------- -------------- ------------- Japan $3 0.1% $34 1% - ----------------------------- ---------------- -------------- -------------- ------------- Other $ 0.% $115 0.6% - ----------------------------- ---------------- -------------- -------------- -------------
We have contracts with two sales representative companies in the United States who have established relationships with large automobile manufacturers in North America as well as Japan. As our sales increase, we may hire additional personnel or may contract with other sales representatives. Management plans to expand our product offerings by increasing the number and type of products offered for sale, to expand our customer base and to penetrate into new market segments. (See "Item 1. Description of Business--Business Strategy.") Management's strategy to achieve these objectives is described below: o Representatives of the Company will continue traveling to the United States, Japan, Europe, South America, China, etc. to present the Company and its products to prospects or other potential strategic partners. o We will continue increasing our presence (attendance or participation) in major trade shows in North America, Europe and Japan associated with our products. o We will continue to evaluate opportunities for growth or expansion of our business through investment in current or emerging technologies or product lines. We believe that opportunities to expand will be available to us and intend to investigate opportunities that are consistent with our goals and our expertise. Glas-Aire Industries Group Ltd. -6- Form 10-KSB @ December 31, 2004 DISTRIBUTION. We generally sell and ship our products "F.O.B. factory" and most of our customers are responsible for the transportation of finished products from our factory or warehouse facility to their final destination and bear the risk of loss during transportation. We commonly bulk ship ordered parts to the customers' parts distribution centers within a mutually acceptable lead-time, varying from 59 minutes to 30 days. In the United States and Canada, we ship our products to customer's parts distribution centers and vehicle processing centers. For the Japanese market, the OEMs generally have one centralized distribution center. With General Motors, we drop ship the ordered parts on behalf of our client, directly to the General Motors' network of 9,500 dealers. We have Electronic Data Interchange ("EDI") capability to facilitate receipt of orders from customers and transmission of invoices to customers electronically after shipment of parts. MAJOR CUSTOMERS. We sell principally to automobile manufacturers in the United States, Canada and Japan. For the three months ended March 31, 2004, sales based upon our revenue in the United States, accounted for 96.4% of the Company's revenues (including sales to United States subsidiaries of foreign automobile manufacturers), sales in Canada accounted for 3.5% of these revenues, and sales in other countries accounted for 0.1%. For most of our customers, particularly the importer and Japanese auto makers, we engage in a simultaneous design/sales process with the OEM's engineering and purchasing organizations that normally results in a series of purchase orders geared to coincide with the release of a particular car model. As reflected below, we have three major customers who, together, accounted for 72% or more of the Automotive Accessories Division's sales during the last fiscal year:
- --------------------------- ----------------------------------- ------------------------- ------------------------ Three months ended Year ended Customer Products March 31, 2004 December 31, 2003 -------- -------- --------------- ----------------- - --------------------------- ----------------------------------- ------------------------- ------------------------ General Motors Hood protectors and rear air %0 23% (USA & CDN) deflectors - --------------------------- ----------------------------------- ------------------------- ------------------------ Honda Access Sunroof wind deflectors and rear 31% 29% America, Inc. air deflectors - --------------------------- ----------------------------------- ------------------------- ------------------------ Nissan North America, Inc. Sunroof wind deflectors, hood 28% 26% protectors and rear air deflectors - --------------------------- ----------------------------------- ------------------------- ------------------------ Gulf State/Southeast Sunroof wind deflectors 13% N/A Toyota Inc. - --------------------------- ----------------------------------- ------------------------- ------------------------
We manufacture accessories for the majority of our customers on a purchase order/invoice basis. For General Motors Corporation in the United States, we have a virtual just-in-time drop shipment program utilizing our operating and warehousing facilities in Bellingham, Washington. Glas-Aire Industries Group Ltd. -7- Form 10-KSB @ December 31, 2004 COMPETITION. We have several competitors who have substantially greater technical, financial and marketing resources. For the sunroof wind deflector market, the primary competitor has been Plastic Form, a subsidiary under the umbrella of Masco Tech. In the hood protector and rear air deflector market, our major competitor is Autotron, a subsidiary of LUND International Holdings ("Lund"). EGR, an Australian based company and Auto Ventshade, an additional subsidiary of Lund, produce hood protectors and door visors in competition with us. We believe that the principal competitive factors we face in the automobile accessories industry, in order of importance, are quality, customer service and price. Management believes that we can effectively compete with our competitors because of the high quality of our products and our commitment to customer service and product innovation. MANUFACTURING. In June 2002 we moved our operations to a larger facility in Richmond, B.C., Canada. Prior to this move, we conducted operations at the Vancouver, B.C., Canada facility. See "Item 2. - Description of Property." Our automotive accessories manufacturing operation consists of three major functions: (i) thermoforming, (ii) machining, and (iii) finishing. Thermoforming involves heating a sheet of acrylic to soften it and then molding the softened acrylic into the desired shape. We are able to meet auto manufacturers' stringent surface requirements by using proprietary thermoforming processes (e.g., Matched Compression Molding) and production tooling (including milled aluminum tools), in a clean-air facility. We currently utilize slide-tray and state-of-the-art in-line thermoformers, plus a three-station rotary thermoformer that performs several functions simultaneously without operator intervention. Machining operations are performed with three-axis as well as five-axis Computer Numeric Control ("CNC") routers to shape the blades of the wind deflectors. Finishing includes: (i) polishing the edges of the blades; (ii) stamping identifying marks on the product; (iii) application of gasket/extrusion/brackets; (iv) labeling; (v)-cleaning; and (vi) boxing. RAW MATERIALS AND SUPPLIERS. Acrylic is the single most expensive raw material used in manufacturing our products. We currently purchase our acrylic from Acrylco Manufacturing Ltd. (a Canadian distributor for Mitsubishi Canada Limited), Aristech Acrylics LLC in Florence, Kentucky and Laird Plastics (a Canadian distributor for Atofina Chemicals, Inc. in Pennsylvania). We do not have a long-term contract with any of these suppliers. If these suppliers should become unavailable in the future, it is expected that other suppliers would be readily available. In additional to acrylic, the principal components in our products are extrusions (long plastic strips used in mounting the deflector blades to vehicles), gaskets for sealing deflector blades onto vehicles' roofs and corrugated boxes. Supplies of these components are readily available from various suppliers. We are exploring the possibility of acquiring supply sources for our major components, and are investigating development of our own manufacturing capability for certain of our major components. Glas-Aire Industries Group Ltd. -8- Form 10-KSB @ December 31, 2004 The price of acrylic is connected to the price of petroleum and other chemicals used in its construction. We are susceptible to the fluctuating price of acrylic and a significant increase in the price of petroleum and acrylic could have a material affect on of the price of acrylic. QUALITY ASSURANCE. We are ISO9001/QS9000 registered and these international quality standards control virtually all of our business practices as well as our operations. Our mission includes providing our clients with quality products on time and cost effectively based on innovative engineering solutions and manufacturing processes. The fitness-for-use of products/services is the vital principle that guides all of our activities. Further, the application of this principle is demanded from all suppliers. One of our primary objectives is to support the need of our employees as well as suppliers to foster this principle. We warrant our products to coincide with the automobile warranty provided by the automobile manufacturer to the consumer, or in the case of replacement parts and accessories, for the balance of the life of the new vehicle warranty or a minimum of 36 months or 36,000 miles after the date of installation on the vehicle, whichever is greater. We are obligated to reimburse our OEM customers for all legitimate quality related warranty claims paid by them. With the exception of the fiscal years ending December 31, 2003 and December 31, 2004, our level of defective products should be approximately 1% of annual net sales. For the three months ended March 31, 2004 it was approximately 0%. This change in the three months ended March 31, 2004 was deemed to be primarily the result of timing. In 2003 it was 7.64% was the result of a chemical reaction between a specific type of acrylic and the defective gaskets used on some sunroof wind deflectors, and included carryover of outstanding late claim from a major customer that was related to product defects from prior year. A significant amount of research has since been completed on the different types of gasket materials to determine compatibility and the problem has been eliminated. In response to such defects, we employed two outside consultants to evaluate our processes, procedures and supplies used in the manufacture of our products. Additionally, we employed a new quality control manager to manage the quality control process and we continuously test the processes, procedures and supplies used in the manufacture of our products to detect and correct any problems that may lead to defective products in the future. However, there can be no assurance that we will not incur increased defective products and increased warranty claims. See "Factors that May Affect Our Future Results - Increase in Warranty Claims." During the three months ended March 31, 2004, we expensed approximate $38,000 related to warranty claims as compared to $847,875 during the fiscal year ended December 31, 2003. RESEARCH AND DEVELOPMENT. We believe that our product development capabilities are important to the future success of our business. We have 14 permanent employees engaged in R&D at our Richmond facility. They conduct activities associated with development of new products, improvements to existing products and the development of new manufacturing processes. Management believes that spending on research and development activities will continue to support increased business. Glas-Aire Industries Group Ltd. -9- Form 10-KSB @ December 31, 2004 We expensed $71,857 on research and development activities during the three months ended March 31, 2004, and $560,796 during the year ended December 31, 2003. PRODUCT DESIGN. We have all the necessary soft and hard engineering tools to meet the exacting standards for product design imposed by our automobile manufacturer clients. Management is also optimistic that we will continue to shorten the product development cycle through more efficient design processes as well as enhanced tooling. We will continue improving our lead times by using more efficient design software and innovative prototype tools fabricated in house, and changes in the design process in keeping with the Cell manufacturing method. When the design of a vehicle model changes configuration, we must retool our products to insure proper fit to the new vehicle. Although frequent model or configuration changes would increase our costs, tooling costs are frequently passed on to the customer, often over a two-year period. Successful deployment of the new production process now under development is expected to result in improved quality, and less scrap/rework. SEASONALITY. Our products are not subject to significant seasonal variation. Our backlog as of any given date is not a meaningful measure of our future business because our customers generally require rapid shipment of orders. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS OR ROYALTY AGREEMENTS. Currently, we do not hold patents on any of our automotive accessory products, nor do we have any licenses, trademarks, franchises, concessions or royalty agreements. During the period ended December 31, 2000, we filed patent applications for a proprietary molding process known as Match Compression Molding ("MCM.") In March 2003, our patent counsel was informed that these applications would be denied by the United States Patent and Trademark Office because of conflicts with other patent and trademarks. We also filed a trademark application for MCM in Canada, which has been approved for publication in the Trademark Journal and will be allowed for registration in due course in the absence of any third party opposition. We rely on a combination of trade secret laws, employee and third party disclosure agreements and other intellectual property protection methods to protect our proprietary rights. Although our competitive position may be adversely affected by unauthorized use of our proprietary information, management believes that the ability to fully protect our intellectual property is less significant to our success than other factors, such as the knowledge, ability and experience of our employees and our ongoing product development and customer support activities. There can be no assurance that the protections in place by us will be adequate. There can be no assurance that third parties will not assert infringement or other claims against us with respect to any existing or future products, or that licenses would be available if any of our technology or products were successfully challenged by a third party, or if it became desirable to use any third party technology to enhance our products. Litigation Glas-Aire Industries Group Ltd. -10- Form 10-KSB @ December 31, 2004 to protect our proprietary information or to determine the validity of any third party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. While we do not believe we are infringing upon the proprietary rights of any third party, there can be no assurance that such claims will not be asserted in the future with respect to any of our existing or future products. Any such assertion by a third party could require us to pay royalties, to participate in costly litigation and defend licenses in any such suit pursuant to indemnification agreements, or to refrain from selling an alleged infringing product or service. GOVERNMENT/ENVIRONMENT REGULATION. We are subject to federal, provincial and local regulations concerning consumer products and occupational safety and health. We believe that our operations currently comply in all material respects with these laws and regulations. In general, we have not experienced any difficulty complying with such regulations and compliance has not had a material affect on our business. We are subject to various federal, provincial and local environmental laws and regulations. Management believes that our operations currently comply in all material respects with applicable laws and regulations. Management believes the trend in environmental litigation and regulation is toward stricter standards, and that these stricter standards may result in higher costs for us and our competitors. Such changes in the laws and regulations may require us to make additional capital expenditures which, while not presently estimable with certainty, are not presently expected to be material. Costs for environmental compliance and waste disposal have not been material in the past. ORBITAL POLISHING Pursuant to the decision to sell the Wonder Tool assets in 2002, in January 2003, the Company sold the Wonder Tool assets. For this reason, Wonder Tool has been reflected as discontinued operations in our consolidated financial statements. PRINCIPAL PRODUCTS. During 2002, Wonder Tool, the Orbital Polishing segment manufactured and distributed a twin-head aircraft and automobile orbital polisher as well as polishing and detailing compounds, pads and additional supplies. ORBITAL POLISHERS. The aircraft and automobile polishers were manufactured by Cyclo under the name "Wonder Tool" since 1953. Management believed that prior to the WTI Asset Sale, Wonder Tool was one of the leading manufacturers of orbital polishers sold into the aircraft maintenance and automobile detailing markets. The polisher features dual orbital action heads, a lightweight balanced design and 4" heads to manage large areas and hard to reach contours with equal efficiency. The polisher is versatile, allowing the quick change of bonnets, discs, pads, and brushes to perform a variety of finishing jobs. Wonder Tool produced a variety of polishers including electric and pneumatic versions. Glas-Aire Industries Group Ltd. -11- Form 10-KSB @ December 31, 2004 POLISHING SUPPLIES. Wonder Tool also manufactured polishing and detailing compounds, pads and additional supplies for use with its orbital polisher. The supplies included bonnets, Velcro disks, pads, brushes, and a complete line of deoxidizing and polishing compounds. INDUSTRY OVERVIEW. The random orbit polisher dates back to the mid 1950's when Cyclo Manufacturing Company invented and developed the dual head orbital polisher. The original patents for single, dual and the triple head orbital polishers came from Cyclo. The orbital polisher plays a key role in the aircraft and automotive polishing and detailing industry by offering an alternative to polishing by hand. For over 45 years major airlines and the military have utilized the aircraft polisher in the appearance and maintenance of aircraft, missiles and ground support equipment. The polishers are a reliable tool for car dealerships, service stations, car washes and detail shops. MARKETING AND SALES. Wonder Tool sales were made directly by the Company. A limited amount of resources was spent in this effort. DISTRIBUTION. We directly fulfilled all orders placed for orbital polishers and related suppliers to the auto detail industry via distributors and mail order catalogues. Shipments were made on either a prepayment basis or on a purchase order with terms for larger, more established customers. MAJOR CUSTOMERS. We had no contracts with any of its major customers for orbital polishers or products. We used multiple distributors of our orbital polisher products and a total of over 3,000 customers worldwide. COMPETITION. We faced several competitors in the orbital polishing industry. Prior to the WTI Asset Sale, management believed that the primary competitors to be Gem Industries, Inc. and Waxcoa/Chamberlain, who both market only a single head orbital polisher. MANUFACTURING. Wonder Tool orbital polishing products were manufactured in Denver, Colorado. The orbital polisher manufacturing process consisted of machining, polishing, installation, finishing, assembling and testing of the orbital polisher. Prior to the WTI Asset Sale, we also manufactured in house the majority of the chemical product line as well as its bonnets and other orbital polisher accessories. Glas-Aire Industries Group Ltd. -12- Form 10-KSB @ December 31, 2004 RAW MATERIALS AND SUPPLIERS. We purchased components including unfinished aluminum castings, gears, bearings, electrical cords and motors used in the manufacturing process of the orbital polisher and foam disks, wool pile and raw rubber used in the manufacturing of bonnets. We did not have any contracts with any of our suppliers. QUALITY CONTROL. The orbital polisher was manufactured for over 45 years and we internally set its specifications and high quality standards. Prior to the WTI Asset Sale, we performed a testing procedure to conduct individual inspections of each polisher to ensure proper functioning and compliance with its specifications. We did not experience any significant problems with the orbital polishing products. PRODUCT DESIGN. Tests were performed to determine if improvements could be made to either the orbital polisher or in the manufacturing and assembly process for the orbital polisher. Further, tests were performed on alternative components such as motors, bearings and pads in an attempt to improve upon the performance of the orbital polisher and related accessories. Adhesives were continuously tested to ensure orbital pads remain intact throughout their use with the orbital polisher. SEASONALITY. The orbital polishing products were not subject to significant seasonal variation. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS OR ROYALTY AGREEMENTS. In connection with the WTI Asset Sale, we sold our rights in one patent and three trademarks, including the Double Drum Polisher, Free-Flight, Soil-Zorb and Solv-it. EMPLOYEES As of December 31, 2004, the Company had no employees and two executive officers working without salary as a result of the bankruptcy filing of its Canadian operating subsidiary in March 2004, and the closing of the warehouse operation of its United States subsidiary in July 2004. On September 11, 2002, the Canadian Auto Workers Labor Union was certified by a vote that was monitored by the BC Labor Relations Board. We were successful in negotiating the first contract. We believe there is an adequate supply of suitable labor, as well as professionals, available. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS You should carefully consider the following risks, together with all other information included in this Annual Report. The realization of any of the risks described below could have a material adverse effect on our business, results of operations and future prospects. Glas-Aire Industries Group Ltd. -13- Form 10-KSB @ December 31, 2004 IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to our products and future economic performance. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that we will continue in business as a "going concern," that we will continue to develop, market and ship products on a timely basis, that competitive conditions within the automotive industry will not change materially or adversely, that demand for our products will remain strong, that we will retain existing customers and key management personnel, that our forecasts will accurately anticipate market demand, that our bank will continue to provide our various credit facilities and loans, and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking information will be realized. In addition, our business and operations are subject to substantial risks that increase the uncertainty inherent in such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. In addition, as disclosed elsewhere under other risk factors, our business and operations are subject to substantial risks, which increase the uncertainty inherent in such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which we rely in making such disclosures. In connection with this safe harbor we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on our behalf. Any such statement is qualified by reference to the cautionary statements included in this Annual Report. BANKRUPTCY FILING AND CESSATION OF OPERATIONS. In March 2004 the Company's Canadian operating subsidiary declared bankruptcy and in July 2004 the Company's United States subsidiary closed its warehouse facilities and also ceased operation. Management does not expect the Company to successfully reorganize and resume its prior business. It expects the Company and its subsidiary to liquidate the business and seek a new acquisition of another private operating company. There is no assurance that the Company will ever be successful in acquiring or operating another business, or that its Common Stock will ever have value. DEPENDENCE UPON MAJOR CUSTOMERS. Our Automotive Accessories division has three customers, which together, accounted for approximately 72% of our sales during the three months ended March 31, 2004. See "Item 1. Description of Business - Major Customers." There can be no assurance that these customers will Glas-Aire Industries Group Ltd. -14- Form 10-KSB @ December 31, 2004 continue to purchase our products at these levels in the future. The loss of any one of these major customers, or a significant reduction in their purchases, would have a material adverse effect upon the Company. DEPENDENCE UPON INDUSTRIES. Our current products consist exclusively of automobile accessories, specifically sunroof wind deflectors, hood protectors, rear air deflectors and door visors. Accordingly, the market for our products is tied to the success of the automobile industry, and our success is dependent upon this industry. Demand in the automotive industry is significantly dependent on the United States and global economies and our business and profitability are exposed to current and future uncertainties including a continuation of the current downturn in the economy. Our operations are dependent upon automotive production and consumer demand. The automotive market is highly cyclical and is dependent on consumer spending and is particularly sensitive to changes in interest rates, the level of consumer debt, and consumer confidence. The military conflict with Iraq and other recent political and economic developments have adversely affected consumer confidence throughout the United States and much of the world. Any sustained weakness in demand or continued downtown in the economy would have a material adverse effect upon our sales, profitability and cash flow. DEPENDENCE UPON AUTOMOBILE MANUFACTURERS IN JAPAN AND RELATED RISKS. A significant percentage of our sales are to Japanese automobile manufacturers in the United States or Canadian subsidiaries of Japanese automobile manufacturers. The passage of protectionist legislation, including increased import tariffs, or public sentiment against imports could result in a decrease in sales of Japanese automobiles which would have a direct negative impact on our sales. In addition, the economic problems experienced in Japan could have a material and adverse effect upon Japanese customers, which could have a material and adverse effect on us. Further, the devaluation of the Japanese yen could result in Japanese automobile manufacturers looking to Japanese suppliers of automobile accessories that also could have a material adverse effect upon sales. COMPETITION. Our sales and profitability should be considered in light of the competitive environments in which we operate. We operate in an industry that is highly competitive, and many of our competitors, both local and international, have substantially greater technical, financial and marketing resources than us. The principal factors that determine our competitive position include quality, customer care and price. Management believes that our research and development capabilities, concentration on increased production efficiencies and commitment to customer service and product innovation will enable the Company to continue to compete effectively. However, there can be no assurance that our products will be competitive in the face of advances in product technology developed by competitors or by automobile manufacturers themselves. In addition, there are no significant technological or manufacturing barriers to entry into the automobile accessories industry in which we operate. CURRENCY FLUCTUATION. Our sales are principally transacted in United States dollars, whereas our labor, overhead and most component costs are paid in Canadian dollars. Recent fluctuations in the value of the United States dollar versus other currencies (primarily the Canadian dollar), and fluctuations in the relative values of those currencies, have had a negative impact upon our financial performance. During 2003, we did not engage in hedging activities with respect to currency fluctuations. However, management intends to take corrective action in an effort to attempt to minimize any negative impact foreign currency Glas-Aire Industries Group Ltd. -15- Form 10-KSB @ December 31, 2004 fluctuations may have upon us. However, if we are unsuccessful in hedging against currency fluctuations, it may have a material adverse effect on us. DEPENDENCE ON COMPONENT AND RAW MATERIALS SUPPLIERS. We purchase raw materials, primarily acrylic from various suppliers. Although we have long term relationships with our key suppliers we do not have long term supply agreements. We do not anticipate significant delays or disruption in the manufacture and delivery of our raw materials or components, but there can be no assurance that delays or disruptions will not occur. The loss or breakdown of our relationships with our suppliers could subject us to delays in the delivery of our product to customers and even the loss of customers. In addition, increased prices for raw materials or component parts could have a material adverse effect on profitability. RAW MATERIALS PRICE INCREASE. We purchase acrylic for use in our products. The price of acrylic is connected to the price of petroleum and other chemicals used in its construction. Recently because of geo-political conditions, the price of petroleum has increased. We are susceptible to the fluctuating price of acrylic and a significant increase in the price of petroleum could significantly affect the price of acrylic. Any increase in the price of acrylic could have a material adverse effect upon us. MANUFACTURING RISKS. Our business is subject to many of the risks inherent in manufacturing, including risks associated with production equipment failure, fluctuating costs of raw materials and component parts, shortages of raw materials, changes in governmental regulations, labor shortages, work stoppages and other labor difficulties. Any significant interruption of manufacturing activities could have a material adverse effect on us. INCREASE IN WARRANTY CLAIMS. With the exception of the fiscal years ending December 31, 2002 and 2003, our level of defective products should be approximately 1% of annual net sales. For the last fiscal year 2003 it was approximately 7.64%. This increase was deemed to be primarily the result of a chemical reaction between a specific type of acrylic and the gasket used on some sunroof wind deflectors, and included carryover of outstanding late claim from a major customer that was related to product defects from prior year. There is no assurance that future warranty claims will be consistent with past history, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves are sufficient. This could have a material adverse effect on our business, financial condition and results of operations. DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS. We manufacture and sell sunroof wind deflectors, hood protectors, rear air deflectors and door visors for cars, light trucks and mini-vans. Our sales of each of these products are dependent on the popularity of the type of vehicle or the vehicle accessory to which the product relates. For example, a decline in popularity of sunroofs would result in decreased sales of sunroof wind deflectors, while a decline in popularity of light trucks (which includes sport utility vehicles as well as pickup trucks) and mini-vans would result in decreased sales of hood protectors and rear air deflectors. Although not anticipated in the foreseeable future, such events could have a material adverse effect on our business. AUTOMOTIVE OEMS HAVE HISTORICALLY HAD SIGNIFICANT LEVERAGE OVER THEIR OUTSIDE SUPPLIERS. The automotive industry is fragmented and serves a limited number of OEM's. As a result, OEMs have historically had and continue to have a significant amount of leverage over their outside suppliers. Our arrangements Glas-Aire Industries Group Ltd. -16- Form 10-KSB @ December 31, 2004 with our customers required us to supply our products at predetermined prices that may decline over time. The costs we incur to fulfill orders may vary from our initial estimates due to a number of factors, including changes in the costs of labor, components or raw materials. If we are unable to pass along these increased costs, our margins and profitability will be adversely affected. In April 2000 and April 2002, a major customer of the Company demanded price reductions on existing products from all its suppliers (worldwide) in three stages. These reductions became effective in April 2000 and the third stage started in April 2002. This customer has since required that its suppliers integrate this cost reduction program into all quotes for new products that are to be introduced over the next few years. In turn, we have been assured future business. Management has agreed to the reductions and is planning to compensate for them via value engineering activities expected from the development of the newly developed processes and the less expensive materials these processes will allow. However, since the Company has had limited commercial experience with these processes, at this time no assurance can be given that the price reductions can be counter balanced with the use of these new processes plus the less expensive materials. Further, there can be no assurance that the future business will actually result in firm orders from, or sales, to this customer. Our failure to realize sales from new and existing programs would have a material adverse effect on our net sales, income and cash flow. WE HAVE INDEBTEDNESS. At March 23, 2004, our total indebtedness consisted of $2,064,100 under our banking facilities and $3,163,349 of other trade payables and accrued liabilities. Additionally, our banking facilities agreement contains covenants that, among other things, require the maintenance of certain financial ratios (including compliance with certain working capital and debt to equity ratios), and failure to maintain these financial ratios could lead to the revocation of these banking facilities. On December 16, 2003 HSBC (the lender) called the loan into default as the Company was deemed to be in violation of certain covenants contained in the facilities agreement. On January 5, 2004 the Company entered into a forbearance agreement with HSBC to attempt to restructure its debt within the next three months. The forbearance agreement expired on March 23, 2004. On March 24, 2004 the Supreme Court of British Columbia (Case No. L040758) appointed KPMG. Inc. as receiver over all the right, title and interest of Glas-Aire Industries Ltd, the wholly owned subsidiary of Glas-Aire Industries Group Ltd (the "Corporation"), property assets, and undertaking. The Corporation was in default of certain financial ratios in its banking facilities agreement with HSBC and was indebted to HSBC Bank for approximately $2.7 million (Canadian). Our indebtedness may: o make us more vulnerable to unfavorable economic conditions; o make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes; o require us to dedicate or reserve a large portion of our cash flow from operations to make payments on our indebtedness, which would prevent us from using it for other purposes, such as capital expenditures for new product launches and other items which may be required in order for us to bid on or accept new business; Glas-Aire Industries Group Ltd. -17- Form 10-KSB @ December 31, 2004 o make us more susceptible to fluctuations in market interest rates that affect the cost of our borrowings; and o make it more difficult for us to pursue strategic acquisitions, alliances and partnerships. WE HAVE LIQUIDITY PROBLEMS WHICH MAY REQUIRE FURTHER FINANCING. There can be no assurance that, if required, any additional bank financing will be available upon terms and conditions acceptable to us, if at all. Although we believe that we have funds sufficient to meet our immediate needs, we may require further funds to finance the development of any business opportunity that we acquire. There can be no assurance that such funds will be available or available on terms satisfactory to us. Our inability to obtain additional financing in a sufficient amount when needed and upon terms and conditions acceptable to us could have a material adverse effect upon us. GOING CONCERN. The independent auditor's reports accompanying our December 31, 2002 and 2003 consolidated financial statements contain an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements have been prepared "assuming that the Company will continue as a going concern," which contemplates that the Company will realize its assets and satisfy its liabilities and commitments in the ordinary course of business. However, we have a significant working capital deficit and are in violation of certain loan covenants with our primary lender. Although we believe that we have reversed our operating losses and are currently operating at a profitable level, there can be no assurance that we will be able to generate sufficient positive cash flow from operations to address all of our cash flow needs. If our current lenders were to "call" our loans and we were not able to find alternative sources of cash, our shareholders would be materially and adversely affected. OUR BUSINESS MAY BE SIGNIFICANTLY ADVERSELY AFFECTED BY WORK STOPPAGES AND OTHER LABOR MATTERS OUR EMPLOYEES. As of March 23, 2004, approximately 84.75% of our employees were unionized. We were successful in negotiating our first agreement. If we are unsuccessful in negotiating with our union, we may encounter a strike or binding contractual limitations, either of which could: o have an adverse effect on our ability to produce our products in accordance with customer contracts; o interfere with the launch of new product programs; o cause us to lose business to competitors; or o limit our flexibility in dealing with our workforce and promptly adjusting to changing economic conditions. Glas-Aire Industries Group Ltd. -18- Form 10-KSB @ December 31, 2004 Our inability to manufacture or deliver products as a result of strikes or binding contractual limitations could have a material adverse effect on our net sales, net income and cash flow. OEMS AND SUPPLIERS. Many OEMs and their suppliers have unionized work forces. Work stoppages or slow-downs experienced by OEMs or these suppliers could result in slow downs or closures of assembly plants where our products are included in assembled vehicles. For example, over the past four years, there have been labor strikes against General Motors that have resulted in work stoppages. Material work stoppages by one or more of our customers or these other suppliers could have a material adverse effect on our business. Furthermore, organizations responsible for shipping our customers' products may be impacted by occasional strikes staged by the unions representing transportation employees. Any interruption in the delivery of our customers' or their other suppliers' products would reduce demand for our products and could have a material adverse effect on our sales, profitability and cash flow. On September 11, 2003, the Company issued a press release announcing that ALC Holdings, LLC ("ALC") purchased a majority of the outstanding shares of common stock of Glas-Aire Industries Group, Ltd, from several shareholders. ALC is newly formed company controlled by several managers, including Craig Grossman, our Chief Executive Officer and President. In connection with the acquisition of the Glas-Aire shares, five directors of Glas-Aire resigned effective September 3, 2003. ITEM 2. DESCRIPTION OF PROPERTY Richmond, British Columbia. We lease 52,080 square feet of office and warehouse space located at 7791 Alderbridge Way, Richmond, B.C., Canada. The lease term is for seven years, and is renewable for a five year term. The total rent per month of CDN $22,785 (i.e., US $14,754) during the first two years of the lease term. The total rent per month during the third, fourth and fifth year is CDN $23,870 (US $15,500) and the remaining two years rent is CDN $24,955 (US $16,205) per month. Vancouver, British Columbia. We are also responsible for the lease of our prior facility located at 3137 Grandview Highway, Vancouver, and B.C., Canada V5M 2E9. This facility, leased from Rockmore Investments Ltd., consists of 27,777 square feet of factory, warehouse and office space. The lease term is five years and is due to expire in September 2004. On October 6, 2003 the Landlord agreed to accept the surrender of the Lease together with the sum of $125,000 in five installments as settlement for the release of the Company's obligation under the term of the lease agreement. Bellingham, Washington. We also lease 5,000 square feet of warehouse space in Bellingham, Washington, at a rental rate of US $1,800 per month on a month-to-month basis. This facility is used primarily for warehousing products for distribution to certain United States customers. We are in default on this lease as our United States subsidiary ceased all warehouse operations on July 31, 2004. Glas-Aire Industries Group Ltd. -19- Form 10-KSB @ December 31, 2004 ITEM 3. LEGAL PROCEEDINGS ALEX DING LITIGATION. Following his termination for cause from his position as President of the Company on September 12, 2001, Alex Ding, a former director of the Company and the Company's former President, filed a Writ of Summons on September 13, 2001, in the Supreme Court of British Columbia (Action No. S015104). Mr. Ding's claims were made against the Company, Multicorp Holdings Inc., Glas-Aire Industries Ltd., William R. Ponsoldt, Craig Grossman, Todd Garrett, Mark Baldinger, Regency Affiliates, Inc. and Speed.com, Inc. (collectively the "Defendants"). Mr. Ding asserted among other things that the redemption transaction involved a breach of agreements with HSBC Bank Canada ("Bank"), securities laws, corporate laws, and fiduciary duties owed by the Defendants to the Company's shareholders. Mr. Ding asserted that the court should enjoin various actions relating to the redemption and grant other relief. Mr. Ding has not served all of the Defendants personally, and has not filed a Statement of Claim. The Company discussed the redemption with its Canadian counsel prior to effecting the redemption, and determined that proceeding with the redemption would not be in violation of a court order or otherwise prohibited. Further, the Bank reviewed the proposed redemption transaction with both outside counsel and an outside accounting firm. After completion of these reviews, the Bank loaned the Company the funds necessary to effect the redemption. On January 14, 2003, Mr. Ding filed a notice of discontinuance against the Company, Multicorp Holdings Inc., Glas-Aire Industries Ltd., William R. Ponsoldt, Craig Grossman, Todd Garrett, Mark Baldinger, Regency Affiliates, Inc. and Speed.com, Inc. On November 14, 2001, the Company filed a Writ of Summons with a Statement of Claim against Mr. Ding in the Supreme Court of British Columbia alleging that Mr. Ding had breached his fiduciary duty of loyalty to the Company. The Statement of Claim alleges that Mr. Ding violated his fiduciary duty after he was terminated for cause by making false statements to HSBC Canada that the Company would be rendered insolvent by proceeding with the redemption and would be unable to repay the funds advanced by the Bank. Further, the Company alleges that as a result of Mr. Ding's actions the Company was forced to incur additional expense with the Bank for a separate accounting firm and the Bank's attorneys to review the proposed redemption transaction. Further, Mr. Ding after his dismissal retained a laptop computer that had been provided to him by the Company for approximately one week and during that time he improperly deleted communications to and from the Company's customers and other information that was on the laptop computer ("Data"). The Data deleted was important and sensitive information owned by the Company and critical to the ongoing operations of the Company. The Company alleges that it was temporarily deprived of the laptop computer, and permanently deprived of the Data since there are not other copies of the Data in the Company's files. The Company alleges that Mr. Ding's actions were in breach of his fiduciary duties to the Company and that the Company has suffered damages as a result of Mr. Ding's actions. The Company is seeking: (i) an order that Mr. Ding return all copies of the Data that he retained; (ii) damages and costs, and (iii) other relief. Mr. Ding has filed a counterclaim against the Company for wrongful dismissal. These matters are still pending. Glas-Aire Industries Group Ltd. -20- Form 10-KSB @ December 31, 2004 DRAGON CAPITAL On August 8, 2003, Dragon Capital, LLC ("dragon") filed suit against the Company in Denver District Court (Case No. 03CV6198). Dragon alleges that we have refused to pay a success fee in the amount of $59,000 in connection with the Company's merger with Wonder Tool, Inc. The Claimant alleges breach of contract claim, promissory estoppel and unjust enrichment against us. On September 25, 2003, we filed our answer to the Complaint. Management believes this claim is entirely without merit and intends to vigorously defend against this claim. CELCO PLASTICS, LTD. LITIGATION. On July 31, 2002, we filed suit against Celco Plastics Ltd. ("Celco") in the Supreme Court of British Columbia (Action No. SO24264). We allege that Celco, our supplier of extrusions in the form of gaskets, supplied defective gaskets to us commencing in 2000. We are alleging breach of contract and the negligent manufacture of gaskets against Celco. We are seeking general damages, special damages, interests and costs. Celco has commenced a counterclaim against us for payment of outstanding invoices in the amount of CDN $32,521.24 as well as general damages, special damages, interests and costs. UNIVERSAL DYNAMICS LIMITED LITIGATION. On February 14, 2003, Universal Dynamics Limited ("Universal") filed suit against us in the Supreme Court of British Columbia (Action No. S024878). The statement of claim alleges that we have refused or neglected to pay outstanding invoices to Universal for services provided in the design, preparation of drawings and consulting work with regard to our new facility in Richmond, B.C. Universal is seeking damages in the amount of approximately CDN $90,000, plus interest and costs. We have not yet filed a response to Universal's claims, however, we assert that Universal failed to perform pursuant to our agreement and we were forced to employ an additional consulting company to complete the tasks. We intend to vigorously defend against this claim. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted by us to a vote of our security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this Annual Report. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION. The Company's Common Stock is currently traded on the over-the-counter market on the NASDAQ Electronic Bulletin Board under the symbol GLAR.PK Glas-Aire Industries Group Ltd. -21- Form 10-KSB @ December 31, 2004 Our common stock was traded in the over-the-counter market on the NASDAQ Small Cap Market under the symbol "GLAR" until it was delisted in March 2002. Our common stock was delisted from the NASDAQ SmallCap Market for failure to comply with the requirement to hold an annual meeting of the Company's shareholders during the fiscal year ended December 31, 2001, and for failure to obtain the approval of our shareholders for the consummation of the acquisition of Wonder Tool. Our common stock was also listed on the Pacific Stock Exchange under the Symbol GLA until it was delisted on November 22, 2002. The Company's common stock was delisted from the Pacific Stock Exchange for failure to meet the minimum share bid price. The table set forth below presents the range, on a quarterly basis, of high and low bid prices per share of common stock, as reported by NASDAQ. The quotations reflect interdealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.
Year Ended December 31, 2004 High Low ------------------------------------------ ----- ----- January 1, 2004 through March 31, 2004 $0.20 $0.03 April 1, 2004 through June 30, 2004 $0.20 $0.03 July 1, 2004 through September 30, 2004 $0.06 $0.06 October 1, 2004 through December 31, 2004 $0.06 $0.05 Year Ended December 31, 2003 High Low ------------------------------------------ ----- ----- January 1, 2003 through March 31, 2003 $0.47 $0.15 April 1, 2003 through June 30, 2003 $0.47 $0.17 July 1, 2003 through September 30, 2003 $0.20 $0.03 October 1, 2003 through December 31, 2003 $0.03 $0.03
The closing price of the common stock on March 29, 2005 was $0.05 per share. As of March 29, 2005, the Company had approximately 33 shareholders of record and estimates that its common stock was beneficially owned by more than 500 shareholders based upon ownership in "street name." SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS. The table set forth below presents the securities authorized for issuance with respect to compensation plans under which equity securities are authorized for issuance: Glas-Aire Industries Group Ltd. -22- Form 10-KSB @ December 31, 2004
- ------------------------------------------------------------------------------------------------------------------- Equity Compensation Plan Information - ------------------------------ -------------------------- ----------------------- --------------------------------- Number of securities remaining Number of securities to Weighted-average available for future issuance Plan Category be issued upon exercise exercise price of under equity compensation plans of outstanding options, outstanding options, (excluding securities reflected warrants and rights warrants and rights in the 1st column) - ------------------------------ -------------------------- ----------------------- --------------------------------- Equity Compensation Plans 230,000 $ 2.25 N/A approved by security holders - ------------------------------ -------------------------- ----------------------- --------------------------------- Equity compensation plans 255,000 (1) $ 0.01 320,000 (2) not approved by security holders - ------------------------------ -------------------------- ----------------------- --------------------------------- 350,000 $ 2.76 320,000 Total - ------------------------------ -------------------------- ----------------------- ---------------------------------
(1) Includes 85,000 shares vested on April 12, 2002 pursuant to Mr. Grossman's employment agreement not issued pursuant to any equity compensation plan. Mr. Grossman has an addition 85,000 warrants which vest on April 12, 2003 and 85,000 warrants which vest on April 12, 2004. (2) Includes 160,000 options that may be issued pursuant to the Incentive Compensation Plan and 160,000 options that may be issued pursuant to the Non-Qualified Option Plan. SALES OF UNREGISTERED SECURITIES. On December 21, 2001, we consummated a reverse merger transaction whereby we acquired 100% of the issued and outstanding stock of Wonder Tool for 1,250,000 shares of our common stock. Prior to the merger, Wonder Tool's common stock was held by Cyclo, a private company owned by two shareholders each of whom management believes is an "accredited investor." Cyclo then distributed the Glas-Aire shares to its shareholders. As a result of this transaction, the owners of Cyclo acquired 50.7% of the Company's outstanding voting stock. The acquisition was a privately negotiated transaction, and management believes that this transaction was exempt from the registration provisions of the Securities Act of 1933, as amended (the "1933 Act") pursuant to Section 4(2) of the 1933 Act. DIVIDENDS. No dividends were declared or paid during the fiscal year ended December 31, 2004 and 2003. Although the board of directors may elect to declare stock dividends in the future, there are no present plans, arrangements, understandings or commitments to do so. The payment of cash dividends is within the discretion of the board of directors. The Board of Directors advised that they do not anticipate declaring and paying cash dividends in the foreseeable future. PROCEEDS OF OFFERING. The Company received net proceeds from a registered public offering amounting to approximately $2,773,000 in May 1996. The registration statement for that offering was declared effective on May 1, 1996, and the SEC File No. was 33-99258-LA. During 2002, we used the remaining $450,000 from this offering on moving expenses to our new facility in Richmond, B.C. Canada. Glas-Aire Industries Group Ltd. -23- Form 10-KSB @ December 31, 2004 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles and are stated in United States dollars. The selected consolidated financial data is qualified in its entirety by reference to, and should be read in conjunction with, the Consolidated Financial Statements, related Notes and the information set forth below under this Item 6. In January 2003, the Company sold the Wonder Tool assets, therefore, the assets, liabilities, results of operations and cash flows for Wonder Tool have been classified as Discontinued Operations in the consolidated financial statements. The independent auditors' reports appearing elsewhere in this document contain explanatory paragraphs that state that the Company's losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements and the selected financial data do not include any adjustments that might result from the outcome of that uncertainty. OVERVIEW. The Company's losses for the preceding year were substantial, and management believes that it is important to note that certain of the expenses incurred were one-time expenses that impacted the Company's financial performance during the 2003 fiscal year. The Company experienced several one-time charges associated with a relocation of its manufacturing plant and costs associated with warranty claims for defective products introduced in 2001. The Company retrofitted and moved into a new manufacturing facility in Richmond, B.C. Canada. In the course of this move, the Company spent approximately $82,885 on moving expenses and equipment and truck rental. Further, the Company wrote off leasehold improvements on the Vancouver property in the amount of $114,105. Additionally, pursuant to GAAP, the Company has accrued for its rental obligations for the Vancouver facility in the amount of $253,696. The Company experienced increased warranty claims related to defective products introduced to market in 2002 and 2001. In connection with these claims, the Company hired consultants and performed laboratory tests to identify and resolve the problems associated with the defective products. The Company recognized expenses for the consultants and laboratory tests in the amount of $145,847 BALANCE SHEET DATA.
- ------------------------------------------- ---------------------------------------------------------- Period From - ------------------------------------------- ----------------------------- ---------------------------- December 31, 2004 December 31, 2003 - ------------------------------------------- ----------------------------- ---------------------------- Working Capital (deficiency) $ (105,958) $(2,483,145) - ------------------------------------------- ----------------------------- ---------------------------- Total Current Assets $ 34,550 $ 2,676,957 - ------------------------------------------- ----------------------------- ---------------------------- Total Current Liabilities $ 140,508 $ 5,160,102 - ------------------------------------------- ----------------------------- ---------------------------- Total Assets $ 34,550 $ 4,935,394 - ------------------------------------------- ----------------------------- ---------------------------- Glas-Aire Industries Group Ltd. -24- Form 10-KSB @ December 31, 2004 Total Long Term Debt $ - $ - - ------------------------------------------- ----------------------------- ---------------------------- Capital Lease Obligations $ - $ 19,711 - ------------------------------------------- ----------------------------- ---------------------------- Deferred Income Taxes $ - $ 234,783 - ------------------------------------------- ----------------------------- ---------------------------- Stockholders' Equity $ (105,958) $ (479,202) - ------------------------------------------- ----------------------------- ----------------------------
INCOME STATEMENT DATA.
Period from ---------------------------------------------- ------- -------------------- ----------------------- Year Ended Year Ended December December 31, 31, 2004 2003 ---------------------------------------------- ------- -------------------- ----------------------- Sales $ 1,637,755 $11,094,906 ---------------------------------------------- ------- -------------------- ----------------------- Cost of Sales 1,553,037 9,133,090 ---------------------------------------------- ------- -------------------- ----------------------- Gross Profit 84,718 1,961,816 ---------------------------------------------- ------- -------------------- ----------------------- Research and Development 71,857 560,796 ---------------------------------------------- ------- -------------------- ----------------------- Selling and Distribution 61,473 1,317,790 ---------------------------------------------- ------- -------------------- ----------------------- General and Admin. 398,747 1,715,199 ---------------------------------------------- ------- -------------------- ----------------------- (Loss) Income from Operations (447,359) (1,631,969) ---------------------------------------------- ------- -------------------- ----------------------- Loss from Continuing Operations (477,955) (1,610,796) ---------------------------------------------- ------- -------------------- ----------------------- Income from discontinued operations 458,442 ---------------------------------------------- ------- -------------------- ----------------------- Gain on disposition of operations 662,792 - ---------------------------------------------- ------- -------------------- ----------------------- Income taxes 37,860 - ---------------------------------------------- ------- -------------------- ----------------------- Net (loss) Income from the period 146,977 (1,152,354) ---------------------------------------------- ------- -------------------- ----------------------- (loss) earnings per share - basic and diluted - Continuing operations 0.05 (0.60) Discontinued Operations 0.00 0.17 ---- ---- Not (loss) income per share 0.05 (0.43) ---------------------------------------------- ------- -------------------- ----------------------- Weighted average number of shares outstanding 2,711,213 2,693,822 ---------------------------------------------- ------- -------------------- -----------------------
RESULTS OF OPERATIONS. The following table sets forth selected income data as a percentage of net sales for the periods indicated. Glas-Aire Industries Group Ltd. -25- Form 10-KSB @ December 31, 2004 - ------------------------------------- ----------------------------------------- Period From - ------------------------------------- -------------------- -------------------- Year Ended December Year Ended December 31, 2004 31, 2003 - ------------------------------------- -------------------- -------------------- Net Sales 100% 100% - ------------------------------------- -------------------- -------------------- Cost of Sales 94.8% 82.3% - ------------------------------------- -------------------- -------------------- Gross Profit 5.2% 17.7% - ------------------------------------- -------------------- -------------------- Research and Development 4.4% 5.1% - ------------------------------------- -------------------- -------------------- Selling and distribution 3.8% 11.9% - ------------------------------------- -------------------- -------------------- General and Administrative 24.3% 15.5% - ------------------------------------- -------------------- -------------------- Income (loss) from operations (29.2%) (14.5%) - ------------------------------------- -------------------- -------------------- YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 As a result of the sale of Wonder Tool net assets in January 2003, we now operate in one industry segment: the automotive accessories business. Results of operations of the orbital polishing business are segregated in our financial statements as discontinued operations. SALES. Sales decreased from $11,094,906 for the year ended December 31, 2003 to $1,637,755 for the period ended March 24, 2004. This sales decrease was the main result of the Canadian operation's filing for bankruptcy on March 24, 2004 and ceasing its operation after that date. GROSS PROFIT. Gross profit margins decreased from $1,961,816 for the year ended December 31, 2003 to $84,718 for the period ended March 24, 2004. This net decrease was due primarily to the Canadian operation's filing for bankruptcy on March 24, 2004 and ceasing its operation after that date. RESEARCH AND DEVELOPMENT. Expenses for R&D decreased from $560,796 for the year ended December 31, 2003 to $71,857 for the period ended March 24, 2004. This decrease was due primarily to the Canadian operation's filing for bankruptcy on March 24, 2004 and ceasing its operation after that date. SELLING AND DISTRIBUTION. Selling and distribution expenses decreased from $1,317,790 for the period ended December 31, 2003 to $61,473 for the period ended March 24, 2004. This decrease was primarily due to the Canadian operation's filing for bankruptcy on March 24, 2004 and ceasing its operation after that date. GENERAL AND ADMINISTRATIVE. General and administration expenses decreased from $1,715,199 for the year ended December 31, 2003 to $398,747 for the year ended December 31, 2004. This was the result of the Canadian operation's filing for bankruptcy on March 24, 2004 and ceasing its Canadian operation after that date. The General and Administrative expenses increased in legal fees related to the forbearance agreement with HSBC. Accounting fees Glas-Aire Industries Group Ltd. -26- Form 10-KSB @ December 31, 2004 related to the preparation of quarterly and annual reports, and consulting fees related to public relations were reduced due to the bankruptcy. INTEREST EXPENSE. Interest expense decreased from $170,073 for the year ended December 31, 2003 to $31,450 for the period ended March 24, 2004. This was the result of the Canadian operation's filing for bankruptcy on March 24, 2004 and ceasing its operation after that date. Interest expenses for the 3 months included interest resulting from the forbearance agreement. INCOME FROM OPERATIONS. The loss from operations decreased from $1,152,354 for the year ended December 31, 2003 to a gain of $184,834 for the year ended December 31, 2004. This was the result of the Canadian operation's filing for bankruptcy and ceasing its operation as of March 24, 2004. The gain of $662,792 was related to the elimination of the assets and liabilities INCOME TAXES. Recovery of income taxes was $190,980 for the year ended December 31, 2003 compared to $0 for the year ended March 24, 2004. DISCONTINUED OPERATION. On January 9, 2003, the Company sold the assets and liabilities of its Orbital Polishing Division for $920,140 comprised of cash of $792,140 and promissory note receivable of $200,000. The sale resulted in a gain of $458,442, which was recognized in 2003. The note receivable was subsequently sold on October 10, 2003 to a third party individual for $125,000. All rights and title have been transferred to the purchaser. CAPITAL RESOURCES AND LIQUIDITY. Cash provided by operating activities for the year ended December 31, 2003 was $829,294 compared to $2,050,510 for the period ended March 24, 2004. This can be attributed to (i) the Canadian operation's filing for bankruptcy and ceasing its operation on March 24, 2004, (ii) an inflow of cash of $662,792 due to the disposal of assets and liabilities of the Canadian operation, and (iii) an unrealized foreign exchange loss on translation of inter-company accounts of $224,056. Cash used in financing activities for the year ended December 31, 2003 was ($43,975) compared to cash used in financing activities of ($2,018,171) for the period ended March 24, 2004. This can be attributed to (i) the Canadian operation's filing for bankruptcy and ceasing its operation on March 24, 2004, (ii) the repayment of long-term debt, and (iii) the write off of all bank indebtedness, capital lease obligation and long-term debt. The investing activities included the purchase of fixed assets for the year ended December 31, 2003 of $848,124 compared to $0 for the year ended March 24, 2004. All operations ceased after March 24, 2004 as the Canadian operation's filed for bankruptcy on that date. During 2004, the Company was in violation of certain covenants contained in the banking facilities agreement. Pursuant to GAAP, and as a result of the covenant breach invoking the Bank's right to call the long-term debt on demand, the long-term debt has been reclassified as a current liability. Glas-Aire Industries Group Ltd. -27- Form 10-KSB @ December 31, 2004 We are dependent upon these existing banking facilities. Our banking facilities agreement contains covenants that, among other things, requires the maintenance of certain financial ratios (including compliance with certain working capital and debt to equity ratios), and failure to maintain these financial ratios could lead to the revocation of these banking facilities. On December 16, 2003 HSBC (the lender) called the loan into default as the Company was deemed to be in violation of certain of the covenants contained in the facilities agreement. On January 5, 2004 the Company entered into a forbearance agreement with HSBC to attempt to restructure its debt within the next 3 months. However the forbearance agreement expired on March 23, 2004. On March 24, 2004 the Supreme Court of British Columbia (Case No. L040758) appointed KPMG. Inc. as receiver over all the right, title and interest of Glas-Aire Industries Ltd, the wholly owned subsidiary of Glas-Aire Industries Group Ltd (the "Corporation"), property assets, and undertaking. The Corporation was in default of certain financial ratios in its banking facilities agreement with HSBC and was indebted to HSBC Bank for approximately $2.7 million (Canadian). Our ability to continue as a going concern is dependent upon our ability to generate profitable operations and, if we are unable to generate profitable operations, to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due. We will be unable to continue as a going concern if we are unable to earn sufficient revenues from our operations or to raise additional capital through debt or equity financings to meet our working capital and subsidiary capital requirements. IMPACT OF INFLATION. We believe that inflation has not had a material affect on our business. Although the cost to us of certain raw materials used in the manufacture of our products, primarily acrylic, has increased over the past few years, we have been able to increase the prices of our products accordingly. EXCHANGE RATES. We sell most of our products to international customers. Our principal markets are the United States and Japan. We sell most of our products in United States Dollars, but pay for material components and labor principally in Canadian Dollars. During 2004, we did not engage in hedging activities with respect to currency fluctuations. However, management intends to take corrective action in an effort to attempt to minimize any negative impact foreign currency fluctuations may have upon us. Exchange rates between the United States and Canadian Dollar for the year ended December 31, 2004, and the year ended December 31, 2003, including the average exchange rate for the year, are as follows: FISCAL YEAR ENDED EXCHANGE RATE AVERAGE FOR PERIOD December 31, 2004 1.U.S.$: 1.2176 Cdn.$ 1 U.S.$: 1.2988 Cdn.$ December 31, 2003 1.U.S.$: 1.2965 Cdn.$ 1 U.S.$: 1.4215 Cdn.$ Glas-Aire Industries Group Ltd. -28- Form 10-KSB @ December 31, 2004 RECENTLY ISSUED ACCOUNTING STANDARDS. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections" ("SFAS No. 145"). Among other things, SFAS No. 145 requires any gain or loss on early extinguishment of debt to be included in income from continuing operations instead of being classified as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We did not extinguish any debt during the year. Accordingly, adoption of the new standards did not have any effect on our financial statements. Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") provides guidance on the recognition and measurement of liabilities for costs associated with exit or disposal activities. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which addresses the accounting for and disclosure of guarantees. FIN 45 requires a guarantor to recognize a liability for the fair value of a guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002. FIN 46, "Consolidation of Variable Interest Entities," clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. The implementation of these new standards is not expected to have a material effect on our financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Glas-Aire Industries Group Ltd. -29- Form 10-KSB @ December 31, 2004 INVENTORIES. Inventories are recorded at the lower of cost, on a first-in, first-out basis, or market value. Market value for raw materials is defined as replacement cost and for work-in-process and finished goods as net realizable value. REVENUE RECOGNITION. We recognize revenue on the sale of products at the time the products are shipped to customers. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company records an allowance for doubtful accounts based on specifically identifiable amounts that we believe to be uncollectible. The criteria for the allowance provision included historical experience and the Company's assessment of the general financial conditions affecting its client base. If the Company's actual collections experience changes, revisions to the allowance may be required. RESEARCH AND DEVELOPMENT. Research and development costs are expensed as incurred. WARRANTY ACCRUAL. The Company records a liability for estimated costs that may be incurred under its warranties at the time that product revenue is recognized. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. CONTRACTUAL OBLIGATIONS. The Canadian operation filed bankruptcy on March 24, 2004. All lease obligations and capital leases on manufacturing equipment were cancelled. The following table sets forth information with respect to our contractual obligations and commercial commitments as of December 31, 2004. CONTRACTUAL OBLIGATIONS
Payments due by Period ----------------------------------- ------------------ ------------------ ------------------- ------------------- Total 2 to 3 years 4 to 5 years More than 5 years ----------------------------------- ------------------ ------------------ ------------------- ------------------- > Richmond Lease Payments (1) $ - $ - $- $- ----------------------------------- ------------------ ------------------ ------------------- ------------------- Vancouver Lease Payments (2) $ - $ - - - ----------------------------------- ------------------ ------------------ ------------------- ------------------- Craig Grossman Employment $ - $ - - - Contract (3) ----------------------------------- ------------------ ------------------ ------------------- ------------------- Principal Payments on Debt to $77,500 $77,500 - - HSBC (4) ----------------------------------- ------------------ ------------------ ------------------- ------------------- Capital Lease Manufacturing $ - $ - - - Equipment (5) ----------------------------------- ------------------ ------------------ ------------------- -------------------
Glas-Aire Industries Group Ltd. -30- Form 10-KSB @ December 31, 2004 (1) We have a seven-year lease agreement that began on October 1, 2002 for our facility located at 7791 Alderbridge Way, Richmond, B.C. Canada. See "Item 2--Description of Property." (2) The lease for the Vancouver facility located at 3137 Grandview Highway, Vancouver, B.C. Canada expires in September 2004. See "Item 2--Description of Property." On October 6, 2003 the Landlord agreed to accept the surrender of the Lease together with the sum of $125,000 as settlement for the release of the Company's obligation under the term of the Lease agreement. (3) Mr. Grossman's base salary calculated as of December 31, 2003. Mr. Grossman's Employment Agreement terminates on December 31, 2004. See "Item 10 - Executive Compensation." (4) For further explanation, see Note 6 to the Financial Statements. (5) For further explanation, see Note 7 to the Financial Statements. ITEM 7. FINANCIAL STATEMENTS Included beginning at page F-1. Glas-Aire Industries Group Ltd. -31- Form 10-KSB @ December 31, 2004 Glas-Aire Industries Group Ltd. Consolidated Financial Statements For the year ended December 31, 2004, (Stated in U.S. Dollars) Contents - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets F-2 Statements of Operations F-3 Statement of Stockholders' Equity F-4 Statements of Comprehensive Loss F-5 Statements of Cash Flows F-6 Summary of Significant Accounting Policies F-8 Notes to Financial Statements F-14 CHANG G. PARK, CPA, PH.D. 371 E Street * Chula Vista * California * 91910-26150 Telephone (858)722-5953* Fax (858)408-2695 * Fax (619)422-1465 E-MAIL changgpark@gmail.com Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Glas-Aire Industries Group, Ltd. We have audited the accompanying consolidated balance sheets of Glas-Aire Industries Group Ltd. (the "Company") as of December 31, 2005 and 2004 and the related statements of operations, changes in shareholders' equity and cash flows for the years then ended. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Glas-Aire Industries Group Ltd. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. The financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 6 to the financial statements, the Company's losses from operations, bankruptcy and closing its warehouse operation raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Chang G. Park, CPA ____________________________ Chang G. Park, CPA August 9, 2006 Chula Vista, CA 91910 Member of the California Society of Certified Public Accountants Registered with the Public Company Accounting Oversight Board F-1 Glas-Aire Industries Group Ltd. Consolidated Condensed Balance Sheets (Stated In U.S. Dollars) December 31, 2004 - -------------------------------------------------------------------------------- ASSETS Current Cash and equivalents $ 34,550 -------------------- 34,550 - -------------------- $ 34,550 - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Accrued Liabilities 105,008 Income tax payable 35,500 -------------------- 140,508 STOCKHOLDERS' EQUITY Common stock 27,112 Additional paid in capital 1,549,313 Accumulated deficit (2,335,161) Deferred compensation - Accumulated other comprehensive income - foreign currency translation adjustment 652,778 -------------------- (105,958) -------------------- $ 34,550 - -------------------------------------------------------------------------------- F-2 Glas-Aire Industries Group Ltd. Consolidated Statements of Operations (Stated In U.S. Dollars) - -------------------------------------------------------------------------------- Year ended December 31, 2004 - -------------------------------------------------------------------------------- SALES $ 1,637,755 COST OF GOODS SOLD 1,553,037 -------------------- GROSS PROFIT 84,718 -------------------- EXPENSES Research and development 71,857 Selling and distribution 61,473 General and administrative 398,747 -------------------- 532,077 LOSS FROM OPERATIONS 447,359 -------------------- OTHER INCOME (EXPENSE) Interest income 855 Interest expense (31,451) -------------------- (30,596) -------------------- LOSS FROM OPERATION 477,955 GAIN ON DISPOSITION OF OPERATIONS 662,792 -------------------- INCOME (LOSS) BEFORE INCOME TAXES 184,837 -------------------- INCOME TAXES (RECOVERY) Current - Deferred 37,860 -------------------- 37,860 -------------------- Net income (loss) $ 146,977 - -------------------------------------------------------------------------------- Income (loss) earnings per share - basic and diluted $ 0.05 - -------------------------------------------------------------------------------- Weighted average shares outstanding 2,711.213 - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements F-3 Glas-Aire Industries Group Ltd. Consolidated Statements of Stockholders' Equity (Stated In U.S. Dollars) - --------------------------------------------------------------------------------
Common Stock Additional Deferred Accumulated Accumulated Stockholders' Stock Amount Paid-in Compensation Deficit Other Equity Capital expense Comprehensive Income - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- --------------- Balance - December 31, 2003 2,711,213 $ 27,112 $ 1,549,313 $ - $ (2,482,138) $ 426,511 $ (479,202) - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- --------------- Net Income - - - - 146,977 - 146,977 - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- --------------- Deferred compensation - - - - - - - - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- --------------- Shares issued - - - - - - - - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- --------------- Foreign currency - - - - - 226,267 226,267 translation adjustment - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- --------------- Balance - December 31, 2004 2,711,213 $ 27,112 $ 1,549,313 $ - $ (2,335,161) $ 652,778 $ (105,958) - ---------------------------- ------------- ----------- ------------- ------------- --------------- ----------------- ---------------
See accompanying notes to financial statements. F-4 Glas-Aire Industries Group Ltd. Consolidated Condensed Statements of Comprehensive Loss (Stated in U.S. Dollars) - -------------------------------------------------------------------------------- Year ended December 31, 2004 ------------ Net income (loss) $146,977 Foreign currency translation adjustment 226,267 Comprehensive income (loss) $373,244 - -------------------------------------------------------------------------------- See accompanying notes to financial statements F-5 Glas-Aire Industries Group Ltd Consolidated Condensed Statements of Cash Flows (Stated in U.S. Dollars) - -------------------------------------------------------------------------------- Year ended December 31, 2004 -------------------- CASH FLOWS FROM: OPERATING ACTIVITIES Net (loss) for the period from continuing operations $ (477,955) Adjustments to reconcile net (loss) Income to net cash provided by (used in) operating: activities from continuing operations Deferred income taxes (114,492) Unrealized foreign exchange loss 224,056 Gain on disposal of operation 662,792 Disposal of fixed assets 2,258,437 (Increase) decrease in assets: Accounts receivable, net 1,087,660 Deferred income taxes 196,011 Inventories 1,264,126 Prepaid expenses 60,617 Increase (decrease) in liabilities: Accounts payable (2,330,440) Accrued liabilities (726,194) Deferred income taxes (158,151) Income taxes payable, net 104,043 -------------------- Net cash (used in) provided by operating activities 2,050,510 FINANCING ACTIVITIES Repayment of long-term debt (317,958) Repayment of capital lease obligation (54,792) Increase (decrease) in bank indebtedness (1,645,421) -------------------- Net cash (used in) provided by financing activities (2,018,171) -------------------- INVESTING ACTIVITIES Purchase of equipment - -------------------- Net cash provided by (used in) investing activities - -------------------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT EFFECT ON CASH BALANCES 2,211 -------------------- DECREASE IN CASH AND EQUIVALENTS DURING THE PERIOD 34,550 CASH AND EQUIVALENTS, BEGINNING OF PERIOD - -------------------- CASH AND EQUIVALENTS, END OF PERIOD $ 34,550 - -------------------------------------------------------------------------------- See accompanying notes to financial statements F-6 Glas-Aire Industries Group Ltd. Consolidated Statements of Cash Flows (continued) (Stated in U.S. Dollars) - -------------------------------------------------------------------------------- Year ended December 31, 2004 ------------ Supplemental Information: Interest received $ 855 Interest paid $31,451 Income taxes paid $ - - -------------------------------------------------------------------------------- See accompanying notes to financial statements F-7 Glas-Aire Industries Group Ltd. Summary of Significant Accounting Policies December 31, 2004 - -------------------------------------------------------------------------------- NATURE OF BUSINESS Glas-Aire Industries Group Ltd., a Nevada corporation (the "Company") was incorporated on September 29, 1992. The Company manufactures and distributes wind deflector products to automobile manufacturers in the United States, Canada and Japan. BANKRUPTCY On March 24, 2004 the Supreme Court of British Columbia (Case No. L040758) appointed KPMG Inc. as receiver over all the right, title and interest of Glas-Aire Industries Ltd, the wholly owned subsidiary of Glas-Aire Industries Group Ltd (the "Corporation"), property, assets, and undertakings. The Corporation was in default of certain financial ratios in its banking facilities agreement with HSBC as was indebted to HSBC Bank for approximately $2.7 million (Canadian). The Corporation entered into a forbearance agreement with HSBC to attempt to restructure its debt within the next 3 months. However the forbearance agreement expired on March 23, 2004 and HSBC called the loans into default. HSBC has security on the Corporation's assets, however, the assets are expected to yield significantly less than the Corporation's debt and it is expected that no recovery is likely for the Corporation's unsecured creditors. Craig Grossman, President and Chief Executive Officer of the Corporation resigned as the sole officer and director of Glas-Aire Industries Ltd. effective March 22, 2004. BASIS OF PRESENTATION These financial statements exclude the accounts of its wholly owned subsidiary Glas-Aire Industries Ltd. On March 24, 2004 the Canadian Operation filed Bankruptcy with the Supreme Court of British Columbia. On July 31, 2004 Glas-Aire Industries, Inc.'s warehouse operation was closed. Glas-Aire Industries Group, Ltd. and all inter-company transactions and accounts have been eliminated from the statements. These financial statements have been prepared in accordance with United States generally accepted accounting principles and are in pursuant to the rules and regulations of the United States Securities and Exchange Commission. These financial statements represent the financial position of the Company for the years ended December 31, 2004. F-8 Glas-Aire Industries Group Ltd. Summary of Significant Accounting Policies December 31, 2004 - -------------------------------------------------------------------------------- PER SHARE INFORMATION The Company has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Stands (`SFAS') No.128, Earnings Per Share (`EPS') requiring dual presentation of basic EPS and diluted EPS on the face of all income statements. Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts were exercised. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive. Basic and diluted loss per share are the same for the period presented. For the year ended December 31, 2004, stock options and warrants to purchases 230,000 shares of the Company's common stock were not included in the calculation of loss per share because their effect was anti-dilutive. CASH EQUIVALENTS Cash equivalents consist of short-term deposits were maturity of ninety days or less. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, which requires the liability method of accounting for income taxes. The liability method requires the recognition of deferred tax assets and liabilities for the future tax consequences of temporary differences between the financial statement basis and the tax basis of assets and liabilities. STOCK BASED COMPENSATION The Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock issued to Employees", and related interpretations in accounting for stock option plans. Under APB Opinion No. 25, compensation cost is recognized for stock options granted at prices below market price of the underlying common stock on date of grant. SFAS NO.123, "accounting for Stock-Based Compensation". Requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock options granted to employees had been determined in accordance with the fair value based method prescribed in SFAS No. 123. F-9 Glas-Aire Industries Group Ltd. Summary of Significant Accounting Policies December 31, 2004 - -------------------------------------------------------------------------------- Stock options granted to non-employees are accounted for in accordance with SFAS No. 123. There were no stock options granted to non-employee during the periods covered by these financial statements. The Company does not plan do adopt the fair value method of accounting for stock-based compensation to employees. Consequently, related pro-forma information as required under SFAS No. 123 has been disclosed below in accordance with SFAS No. 148. Year ended December 31, 2004 ---------------------- Net income (loss), as reported $ 146,977 Add: stock-based compensation expense included in reported net loss - Deduct: total stock-based compensation expense determined under fair-value based - ---------------------- $ 146,977 ---------------------- Income (loss) per share - basic and diluted - as reported $ 0.05 - basic and diluted - pro forma $ 0.05 COMPREHENSIVE INCOME The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The Company is disclosing this information on its Statements of Operations and Comprehensive Loss and Changes in Stockholders' Equity. Comprehensive income is comprised of net income (loss) and all charges to stockholders' equity except those resulting from investments by owners and distributions to owners. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Company conducts business in both Canada and the United States and uses the U.S. dollar as its reporting currency. The functional currency of the Canadian subsidiaries is the Canadian dollar. The financial statements of the Canadian subsidiaries have been translated under SFAS No. 52. Assets and liabilities are translated at the rate of exchange at the balance sheet date and revenues and expenses are translated at the average exchange rates during the year. The resulting exchange gains and losses are shown as a separated component of stockholders' equity. F-10 Glas-Aire Industries Group Ltd. Summary of Significant Accounting Policies December 31, 2004 - -------------------------------------------------------------------------------- Transactions conducted in foreign currencies are translated as follows: At the transaction date, each asset, liability, revenue and expense is translated by the use of the exchange rate in effect at that date. At the period end date, monetary assets and liabilities are translated by using the exchange rate in effect at that date. The resulting foreign exchange gains and losses are included in income in the current period. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles require 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. FINANCIAL INSTRUMENTS The Company's financial assets and liabilities consist of cash and equivalents, accrued liabilities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments, approximate their carrying values due to the short-term nature of these instruments. CONCENTRATION OF EXCHANGE RISK As a Canadian manufacturer, the Company has a significant volume of expense transactions denominated in Canadian currency. CONCENTRATION OF CREDIT RISK As a manufacturer of automotive accessories, the Company grants credit to customers exclusively within the automotive manufacturing industry. REVENUE RECOGNITION The Company recognizes revenue on the sale of products at the time the products are shipped. WARRANTY ACCRUAL The Company offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchases agreement. The Company's typical warranties require if to repair or replace defective products during the warranty period at no cost to the customer. At the time that revenue is recognized, the Company records a liability for estimated costs that may be F-11 Glas-Aire Industries Group Ltd. Summary of Significant Accounting Policies December 31, 2004 - -------------------------------------------------------------------------------- incurred under its warranties. The cost is estimated based on historical experience and expectation of future conditions. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. While the Company believes that its estimated liability for product warranties is adequate and that the judgment applied is appropriate, the estimated liability for product warranties could differ materially from future actual warranty costs. Changes in the Company's warranty liability during the years were as follows: 2004 ----------------------- Balance, beginning of period $ 229,940 Warranty expense 1,483 Settlements made (231,423) ----------------------- Balance, end period $ - ----------------------- VALUATION OF LONG-LIVED ASSETS The Company evaluates the future recoverability of its fixed assets when events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. An impairment loss would be recognized when the net book value of such assets exceeds the estimated undiscounted future cash flows attributable to such assets. Impairment, if any, is assessed using discounted cash flows. Long-lived assets to be disposed of by sale are to be measured at the lower of carrying amount or fair value less cost of sale. No impairment was required to be recognized during the periods presented in these consolidated financial statements. NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections ("SFAS No. 145"). Among other things, SFAS No. 145 requires any gain or loss on early extinguishments of debt to be included in income from continuing operation instead of being classified as an extraordinary item. SFAS No. 145 will be in effect for fiscal years beginning after May 15, 2002. The Company did not extinguish any debt during the year. Accordingly, adoption of the new standards did not have any effect on the Company's financial statements. Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" provides guidance on the recognition and measurement of liabilities for costs associated with exit or disposal activities. The provisions of this Statement are effective to exit or disposal activities that are initiated after December 31, 2002 F-12 Glas-Aire Industries Group Ltd. Summary of Significant Accounting Policies December 31, 2004 - -------------------------------------------------------------------------------- In November 2002, the FASB issued FASB interpretation {"FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which addresses the accounting for and disclosure of guarantees. FIN 45 requires a guarantor to recognize a liability for the fair value of a guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee. The disclosure requirement is effective for interim and annual financial statement ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002. FIN 46, "Consolidation of Variable Interest Entities", clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the balance sheet. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS No. 150 affects an entity's classification of the following freestanding instruments: a) Mandatory redeemable instruments b) Financial instruments to repurchase an entity's own equity instruments c) Financial instruments embodying obligations that the issuer must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on (i) a fixed monetary amount known at inception or (ii) something other than changes in its own equity instruments d) SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of this new standard did not have a material effect on our consolidated financial statements F-13 Glas-Aire Industries Group Ltd. Notes to Consolidated Financial Statements (Stated in U.S. Dollars) December 31, 2004 - -------------------------------------------------------------------------------- 1. COMMON STOCK (a) Authorized 30,000,000 Common shares with a par value of $0.01 each 1,000,000 Preferred shares with a par value of $0.01 each (b) Issued and outstanding 2,711,213 Common shares On April 12, 2003 and August 12, 2003, the company issued 85,000 shares of common stock respectively from the exercise of warrants, at a price of $0.01 each. On April 1, 2003 the Company granted 50,000 common stock options at the exercise price of $0.75 to the directors in accordance with the director's compensation program approved by the stockholders. The options vested on April 1, 2003 and are exercisable to March 31, 2008. On July 18, 2003, the Company issued 40,542 shares of common stock (valued at $30,000 based upon the trading price of the common stock around the dates of the respective agreement) to the directors as part of their compensation for the fiscal year ended December 31, 2002. At December 31, 2004 the Company had 230,000 options and 0 warrants outstanding. The options and warrants were excluded from the calculation of earnings per share due to their anti-dilutive effect. 2. STOCK BASED COMPENSATION Stock options granted to non-employees are accounted for in accordance with the fair value method prescribed in SFAS No. 123 using the Black-Scholes option pricing model. There were no stock options granted to non-employees during the period covered by these financial statements. The Company applies Accounting Principles Board ("APB') Opinion No. 25, "Accounting for Stock issued to Employees," and related interpretations in accounting for stock option plans. Under APB Opinion No. 25, compensation cost is recognized for stock options granted at prices below market price of the underlying common stock on date of grant. Stock options granted in tranche (graded vesting) are amortized over the respective vesting period of each tranche. F-14 Glas-Aire Industries Group Ltd. Notes to Consolidated Financial Statements (Stated in U.S. Dollars) December 31, 2004 - -------------------------------------------------------------------------------- The Company does not plan to adopt the fair value method of accounting for stock-based compensation to employees. Consequently, related pro-forma information as required under SFAS No. 123 has been disclosed below in accordance with SFAS No. 148. To provide the require pro-forma information, the Company estimates the fair value of each warrant and option granted at the grant date using the Black-Scholes option-pricing model. The pro-forma results set out below are based on the following assumptions for the warrants: No dividends, risk-free interest rate of 3.47%, volatility factor of the expected market price of the Company's common stock of 137% and an estimated weighted average expected life of the warrants of 24 months. The fair value of warrants granted on April 12, 2002 to the Company's Chief Executive Officer and President was $0.33 per warrant. The pro-forma results set out below are based on the following assumptions for the options: No dividends, risk-free interest rate of 1.65%, volatility factor of the expected market price of the Company's common stock of 137% and an estimated weighted average expected life of the options of 24 months. The fair value of stock options granted on April 1, 2003 to the directors was $0.07 per option. 3. STOCK OPTIONS INCENTIVE AND NON-QUALIFIED PLANS During the year ended January 31, 1997, the Company's Board of Directors approved an Incentive Stock Option Plan and a Non-Qualified Stock Option Plan. Each plan provides for granting options to purchase not more than 160,000 shares of the Company's common stock. The Incentive Stock Option Plan is to be available to management and employees of the Company. The Non-Qualified Stock Option Plan is to be available to certain key employees, independent contractors, technical advisors and directors of the Company. Vesting for both plans will be determined at the date of grant. Upon granting, the options will have a five year life. At December 31, 2004 no options had been granted under either plan. DIRECTOR COMPENSATION In previous periods the Company had granted options to directors in accordance with the director's compensation program approved by the stockholders. A summary of the status of the Company's stock options outstanding as of December 31, 2004 is as follows: F-15 Glas-Aire Industries Group Ltd. Notes to Consolidated Financial Statements (Stated in U.S. Dollars) December 31, 2004 - --------------------------------------------------------------------------------
Number of Exercise Options Price Granted - November 4, 1999; Expiring - November 3, 2004 60,000 $ 4.50 Granted - November 4, 2000; Expiring - November 3, 2005 60,000 $ 2.75 Granted - November 4, 2001; Expiring - November 3, 2006 60,000 $ 1.00 Granted - April 1, 2003: Expiring - March 31, 2008 50,000 $ 0.75 --------------------- 230,000
All 230,000 options are vested as of December 31, 2004. The options granted on December 4, 2001 vested in May 2002. No options were granted in WTI (or its predecessor, Orbital) prior to December 21, 2001. SFAS No. 123 requires the Company to provide pro-forma information regarding net loss as if the compensation costs for the Company's stock option grants had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro-forma information, the Company estimates the fair value of each stock option granted to directors at the grant date using the Black-Scholes option-pricing model. The pro-forma results are set out in the Summary of Significant Accounting Policies, base on the following weighted average assumptions: no dividends, risk-free interest rate of 3.03%, volatility of the trading price of the Company's common stock of 100% and a weighted average expected life of the stock options granted to directors of 24 months. The fair value of stock options granted on December 4, 2001 to directors was $0.53 per option. 4. SEGMENTED INFORMATION (a) Sales figures include sales to customers who are located in the following countries: Year ended December 31, 2004 ------------------------ United States $ 1,577,918 Canada 57,413 Japan and other 2,424 ------------------------ $ 1,637,755 ======================== F-16 Glas-Aire Industries Group Ltd. Notes to Consolidated Financial Statements (Stated in U.S. Dollars) December 31, 2004 - -------------------------------------------------------------------------------- (b) Sales to customers who each accounted for 10% or more of the Company's sales are as follows: Year ended December 31, 2004 ------------------------ Nissan North America, Inc. $ 449,744 Honda Access America, Inc. 504,449 Gulf State/Southeast Toyota Inc. 217,336 ------------------------ $ 1,171,529 ======================== (c) Sales figures are comprised of sales in the following products lines: Year ended December 31, 2004 ------------------------ Sunroof $ 1,086,525 Hood protectors 401,494 Rear air deflectors 93,754 Door Visors 55,983 ------------------------ $ 1,637,755 ======================== 5. COMMITMENTS (a) The Canadian operation filed Bankruptcy on March 24, 2004. There were no commitments for operating lease. (b) The Company is committed to minimum lease payments totaling $176,636 for the next two year with a five year renewal option, under an operating lease for its former premises. As the Company is no longer using these premises, the remaining future commitment was fully expensed in 2002 in the amount of $253,696 which includes an estimate of common area expenses and property tax of $77,060. The Company's monthly lease payment including its share of common area costs is approximately $12,000 per month until expiry in September 2004. On October 6, 2003 the Landlord agreed to accept the surrender of the Lease together with the sum of $125,000 in five installments as settlement for the release of the Company's obligation under the term of the Lease agreement. F-17 Glas-Aire Industries Group Ltd. Notes to Consolidated Financial Statements (Stated in U.S Dollars) December 31, 2004 - -------------------------------------------------------------------------------- (c) The Company entered into an operating lease agreement for its current premises commencing May 1, 2002 for a term of seven years with a five-year renewal option. The landlord has provided the first three months of the lease rent fee. The Company is committed to the minimum annual lease payments plus proportionate common area costs in respect of its new premises (d) The Company entered into an employment agreement with its Chief Executive Officer and President effective January 1, 2002 and to terminate December 31, 2005 unless terminated earlier by the Company or the Chief Executive Officer and President. The employment agreement is automatically renewable for three years. The employment agreement provides an annual salary of $213,000 plus an annual bonus of 10% of the increase in net shareholders' equity from the previous fiscal year excluding any increase resulting from the issue of shares. If the Chief Executive Office and President is terminated for other than just cause or is disabled and unable to perform has duties, he is entitled to a severance payment up to 18 months of his compensation. On September 3, 2003 ALC Holdings, LLC acquired 53.8% of the outstanding shares of Glas-Aire Industries Group Ltd's common stock. Mr. Grossman's employments agreements with the company and his outstanding 85,000 shares warrant were cancelled. Mr. Grossman is one of the owners of ALC Holdings, LLC. 6. GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company generated net losses of $2,335,161 during the period from September 29, 1992 (inception) through December 31, 2004. Also, on March 24, 2004 the Canadian Operation filed Bankruptcy with the Supreme Court of British Columbia. On July 31, 2004 Glas-Aire Industries, Inc.'s warehouse operation was closed. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management plans to raise additional funds through debt or equity offerings. Management has yet to decide what type of offering the Company will use or how much capital the Company will rise. There is no guarantee that the Company will be able to raise any capital through any type of offerings. F-18 Glas-Aire Industries Group Ltd. Notes to Consolidated Financial Statements (Stated in U.S Dollars) December 31, 2004 - -------------------------------------------------------------------------------- 7. SUBSEQUENT EVENT The Company's directors had held the meeting on April 24, 2006 and approved the following issuance of shares. The Company decided to issue 1,220,000 shares of the Company's common stock to Craig Grossman and1,220,000 shares of the Company's common stock to Linda Kwan in lieu of the payment of their services. The Company has accrued compensation to Craig Grossman and Linda Kwan in the amount of approximately $122,000 each. The Company decided to issue 44,800 shares of the Company's common stock to Craig Grossman and 191,972 shares of the Company's common stock to Linda Kwan in connection with the payment of their personal funds paid for legal fees is connection with the Bank Settlement. The Company decided to issue Schlueter & Associates, P.C. (S&A) or its assigns 400,000 shares of the Company's common stock to settle the incurred legal fees to S&A. The Company decided to issue Mark J. Richardson, Esq. 93,750 shares of the Company's common stock to consideration for legal and other services rendered for the Company. 8. CONTROLS AND PROCEDURES An evaluation was conducted under the supervision and with the participation of the Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2003. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Such officers also confirm that there was no change in the Company's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. On September 11, 2003, The Company issued a press release announcing that ALC Holdings, LLC ("ALC") purchased a majority of the outstanding shares of common stock of Glas-Aire Industries Group, Ltd. from several shareholders. ALC is a newly formed company controlled by several managers, including Craig Grossman, our Chief Executive Officer and President. In connection with the acquisition of the Glas-Aire shares, five directors of Glas-Aire resigned effective September 3, 2003. F-19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The directors, executive officers and one of the key employees of Glas-Aire Industries Group Ltd. are as follows: NAME AGE POSITION Craig Grossman 42 President, Chief Executive Officer and Director Linda Kwan 59 Chief Financial Officer Doug Preston 54 General Manager CRAIG GROSSMAN has served as a director of the Company since May 21, 1999. From September 12, 2001 until December 4, 2001, Mr. Grossman served as the acting President of the Company. On December 4, 2001, the board of directors appointed Mr. Grossman the Chief Executive Officer and President of the Company. From 1999 to the present Mr. Grossman has been the President of Allied Conservancy Group, Inc., a private hedge fund. Since 1999, Mr. Grossman has served as the managing partner of Tallman Gulch Development Group, LLC, an investment group funding a 500-acre residential land development in Douglas County, Colorado. From 1993 to 2001, he served as the Vice President of Saddleback Mountain Development, an investment group funding an 1800-acre residential development in Evergreen, Colorado. From 1998 to 1999, Mr. Grossman served as the Chief Executive Officer of On-line Mortgage Service, a licensed retail mortgage broker doing business in 11 states. From 1994 to 1995, Mr. Grossman also served as the President and a Director of Regency Affiliates, Inc. LINDA KWAN was appointed as the Chief Financial Officer of the Company in 2001. In 1996 she assumed the position of Controller. From 1995 until 1996 she had served as the Accounting Manager. Mrs. Kwan is a member of the Certified Management Accountants of Canada. From 1992 to 1995, Mrs. Kwan operated as a private consultant, providing accounting consulting services to small businesses and individuals. From 1983 to 1992, Ms. Kwan worked with York-Hanover Developments, Ltd., a large real estate developer located in Toronto. While with York-Hanover, Mrs. Kwan held a number of positions eventually rising to the position of Corporate Controller with responsibility for all of the firm's accounting functions. Mrs. Kwan graduated from Hong Kong Technical College with a degree in commercial business and accounting. Glas-Aire Industries Group Ltd. -32- Form 10-KSB @ December 31, 2004 DOUG PRESTON has been the General Manager of the Company since July 15, 2002. Prior to joining the Company, Mr. Preston was employed as the Plant Manager of Madill Equipment Canada, a major international manufacturer of forest industry machines. While at Madill, Mr. Preston was responsible for engineering, purchasing and manufacturing activities. From 1973 to 1996, Mr. Preston was employed by Freightliner of Canada (a wholly owned subsidiary of DaimlerChrysler), an international leader in the manufacture of heavy duty trucks. Mr. Preston holds a Business Management Certificate from the University of British Columbia and a Diploma in English Bible from Western Pentecostal Bible College. Pursuant to an underwriting agreement between the Company and Global Financial Group, Inc. ("Global") entered into on May 1, 1996, the Company granted Global the right to designate one person to either serve on the board of directors of the Company or to attend board of directors meetings as an observer. Global has never designated any such person, and no representative of Global has attended any of the meetings of the board of directors since 1999. At the present time no family relationship exists among any of the named directors and executive officers. No arrangement or understanding exists between any of our directors or officers and any other persons pursuant to which any director or executive officer was elected as a director or executive officer. Our directors are elected annually and serve until their successors take office or until their death, resignation or removal. The executive officers serve at the pleasure of the board of directors. Under Nevada General Corporation Law and our Articles of Incorporation, our directors will have no personal liability to us or our stockholders for monetary damages incurred as the result of the breach or alleged breach by a director of his "duty of care." This provision does not apply to the directors' (i) acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) approval of any transaction from which a director derives an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (v) acts or omissions that constituted an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, or (vi) approval of an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence. The effect of this provision in our Articles of Incorporation is to eliminate the rights of the Company and our stockholders (through stockholder's derivative suits on behalf of the Company) to recover monetary damages against a director for breach of his fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (vi) above. This provision does not limit nor eliminate the rights of the Company or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, our Articles of Incorporation provide that if Nevada law is amended to authorize the future elimination or limitation of the liability of a director, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the law, as amended. Glas-Aire Industries Group Ltd. -33- Form 10-KSB @ December 31, 2004 Nevada General Corporation Law grants corporations the right to indemnify their directors, officers, employees and agents in accordance with applicable law. Our Bylaws provide for indemnification of such persons to the full extent allowable under applicable law. These provisions will not alter the liability of the directors under federal securities laws. We intend to enter into agreements to indemnify our directors and officers, in addition to the indemnification provided for in our Bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. We believe that these provisions and agreements are necessary to attract and retain qualified directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. BOARD COMMITTEES As of December 31, 2004, the Company's Board of Directors had no Audit, Compensation or other committees. Management is not certain when such committees will be formed, but the formation of an Audit Committee in compliance with the Sarbones Oxley Act of 2002 is a prerequisite to being a current reporting company with the Securities and Exchange Commission and having our Common Stock accepted for trading on the OTC Bulletin Board or NASDAQ Market. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. We believe with respect to each person that served during fiscal 2004 as an officer or member of the board of directors of the Company that there were no transactions that occurred during our most recent fiscal year end requiring the filing of a Form 5. ITEM 10. EXECTIVE COMPENSATION The following table summarizes all compensation paid to the Chief Executive Officer, for services rendered during the last three fiscal years. No additional executive officers' compensation exceeded $100,000 during the year ended December 31, 2004. Glas-Aire Industries Group Ltd. -34- Form 10-KSB @ December 31, 2004
------------------------- --------------------------------------------------------------------------------------- Annual Compensation ------------------------- --------------------------------------------------------------------------------------- Fiscal Year Other Securities ended December Annual Annual Underlying 31, Salary Bonus Compensation Warrants ------------------------- ----------------- --------------- --------------- -------------------- ---------------- Craig Grossman, 2004 $ 74,458 -- $2,850 President and CEO ------------------------- ----------------- --------------- --------------- -------------------- ---------------- 2003 $213,000 $ 11,400(2) 6,250(7) ------------------------- ----------------- --------------- --------------- -------------------- ---------------- 2002 $213,000 $ 10,000(1) 255,000 11,400(2) 2001 $100,000(3) $ 6,000(4) 10,000(6) ------------------------- ----------------- --------------- --------------- -------------------- ---------------- 2000(5) ----- ----- $ 11,000(4) 10,000(6) ------------------------- ----------------- --------------- --------------- -------------------- ----------------
(1) Represents $5,000 paid to Mr. Grossman for services as a director in 2002 and 1,996 shares of common stock having a value of $5,000 based upon the trading value as fees were paid in connection with services as a director of the Company in 2000. (2) Represents vehicle allowance provided pursuant to Mr. Grossman's Employment Agreement. (3) Mr. Grossman was paid this bonus for management services he provided to the Company for the year ended December 31, 2001. (4) Represents fees paid in connection with services as a director of the Company. (5) The Company changed its fiscal year end from January 31 to December 31 effective December 31, 2000, so that the information presented is actually for the 11 months ended December 31, 2000. (6) Represents 10,000 options granted to Mr. Grossman for services as a director of the Company. (7) Represents $1,250 paid to Mr. Grossman for services as a director in 2003 and 8,108 shares of common stock having a value of $5,000 based upon the trading value as fees were paid in connection with services as a director of the Company in 2003 OPTION GRANTS IN THE LAST FISCAL YEAR. The following table sets forth information concerning options granted during fiscal year 2004 to the Named Executive Officers.
- ---------------------------- ---------------------- -------------------- ------------------ ----------------------- % of Total Options Number of Securities Granted to Underlying Options Employees in Granted Fiscal Year Name Exercise Price Expiration Date - ---------------------------- ---------------------- -------------------- ------------------ ----------------------- Craig Grossman 200,000 100% (1) (1) - ---------------------------- ---------------------- -------------------- ------------------ -----------------------
(1) Pursuant to Mr. Grossman's Employment Agreement 85,000 warrants vested on April 12, 2002, 85,000 warrants vested on April 12, 2003 and 85,000 warrants vest on April 12, 2004. All the warrants expire 10 years from the date of grant and are exercisable at $0.01. The trading price on the date of grant was $0.35. Glas-Aire Industries Group Ltd. -35- Form 10-KSB @ December 31, 2004 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION During the fiscal year ended December 31, 2004, there were no options exercised by any of our officers, directors or employees. Further, on December 31, 2004, the exercise prices of all existing options were in excess of the market value of those options. The following table sets forth information concerning the number of shares that may be acquired on the exercise of options and exercisable and unexercisable stock options at the end of fiscal year 2004 for the Named Executive Officers and members of the board of directors. - ------------------------------ ------------------------------------------------- Number of Securities Underlying NAME Unexercised Options at Year End - ------------------------------ ------------------------------------------------- Exercisable Unexercisable - ------------------------------ --------------------- --------------------------- Craig Grossman 200,000 (1) 0 - ------------------------------ --------------------- --------------------------- (1) Includes 30,000 options granted to Mr. Grossman for his services as a member of the board of directors during 1999, 2000 and 2001. EMPLOYMENT AGREEMENTS. We have entered into two Employment Agreements with Mr. Craig Grossman, our Chief Executive Officer and a member of the board of directors. One employment agreement is between Mr. Grossman and the Company and the other agreement is between Mr. Grossman and the Company's Canadian operating subsidiary Glas-Aire Industries Ltd. The principal terms of the employment agreements are summarized below. The employment agreements are to be retroactively effective as of January 1, 2002, and terminate on December 31, 2004, unless earlier terminated by the Company or Mr. Grossman. The Employment Agreements are automatically renewable for three-year terms. The Employment Agreements provide for aggregate annual salary of $213,000, a car allowance of $11,400 per year, medical insurance in both the United States and Canada for Mr. Grossman and his family, and an annual bonus. The annual bonus shall be equal to 10% of the increase in net shareholder's equity over the net shareholder's equity for the previous fiscal year with any incremental increase in shareholder's equity resulting from the issuance of any shares of preferred or common stock for cash or other property excluded in calculating the annual bonus. If a change of control occurs as defined in the agreement, Mr. Grossman may at his option elect to treat the change of control as termination for other than cause and be paid a severance payment equal to 18 months of his compensation. If Mr. Grossman is terminated for cause, Mr. Grossman is to be paid all salary and vacation-days accrued, but not entitled to severance compensation. Copies of Mr. Grossman's Employment Agreements were filed in our 10-KSB for the year ended December 31, 2001. In addition, Mr. Grossman was granted warrants to acquire 255,000 shares of the Company's common stock at an exercise price of $0.01 per share, which expire on April 12, 2012, and contain customary anti-dilution provisions. The warrants were granted on April 12, 2002, and vest as follows: 85,000 shares of the Company's common stock vested immediately upon signing of the agreement, with warrants to acquire an additional 85,000 shares vesting on the first anniversary of the date of the agreement provided that Mr. Grossman is employed by the Company, and warrants to acquire an additional 85,000 shares vesting on the second anniversary of the date of the agreement provided that Mr. Grossman is employed by the Company. On April 12, 2003 and August 12, 2003 the Company Glas-Aire Industries Group Ltd. -36- Form 10-KSB @ December 31, 2004 issued 85,000 shares of common stock respectively from the exercise of warrants, at a price of $0.01 each. On September 3, 2003 ALC Holdings, LLC acquired 53.8% of the outstanding shares of Glas-Aire Industries Group Ltd's common stock. Mr. Grossman's employments agreements with the company and his outstanding 85,000 shares warrant were cancelled. Mr. Grossman is one of the owners of ALC Holdings, LLC. DIRECTORS FEES. No amount was paid to the directors during fiscal year ended December 31, 2004 At the Annual Meeting on November 4, 1999, the shareholders approved a directors' compensation plan that provides for the following: o An annual retainer for directors of $10,000, payable one-half in cash and one-half in Glas-Aire common stock, such stock to be valued at the average bid price for the common stock for the 30 days preceding their election to the board. o A cash fee of $125 per hour for each board, committee or shareholders meeting attended; provided that multi-day meetings and specific consultations with Glas-Aire's executive management lasting at least eight hours are compensated on a flat per diem rate of $1,000. o An annual award of an option to purchase 10,000 shares of Glas-Aire's common stock, at fair market value on date of grant. Options granted under this provision expire five years from the date of grant, are exercisable in cash and contain anti-dilution provisions. PROFIT SHARING PROGRAM. We adopted a profit sharing program that provides that an amount equal to 10% of the Company's income before income taxes (subject to some adjustments) may be distributed to officers and employees of the Company. There were no distributions pursuant to the plan for the year ended December 31, 2003. EXECUTIVE INCENTIVE COMPENSATION PLAN. On August 1, 2000, the Compensation Committee of the Board of Directors approved and established an Executive Incentive Compensation Plan (the "Executive Compensation Plan"). The purpose of the Executive Compensation Plan is to help us employ and retain key executive officers. The Executive Compensation Plan has three components -- base salary, cash incentive, and an incentive stock option award. The cash incentive portion is based upon achieving annual earnings goals ("Incentive Goal") based upon earnings before income taxes including only the earnings derived from the Company and its consolidated subsidiaries. If 100% of the Incentive Goal is achieved then the eligible executives each will receive a cash bonus equal to 38.5% of their base salary. If 125% of the Incentive Goal is achieved then each will receive a cash bonus equal to 57.75% of their base salary, and if 150% of the Incentive Goal is achieved then each will receive a cash bonus equal to 77% of their base salary. Under no circumstances will actual bonuses for any fiscal year exceed 25% of the Company's Net Income (after taxes) or Earnings Applicable to Common Stock (as appropriate). The Incentive Stock Option Award portion of Glas-Aire Industries Group Ltd. -37- Form 10-KSB @ December 31, 2004 the Executive Compensation Plan provides for the award of incentive options to the eligible executive officers based upon the Company achieving 100% of the Incentive Goal. If the Incentive Goal is achieved, then the Compensation Committee shall cause to be set aside options equal to 5% of our outstanding shares for awards to employees, with 70% of those options being available to the eligible executive officers, 10% of the entire option pool is available for issuance to the Chairman of the Board of Directors, provided that the Chairman is not compensated by a salary. Any options granted will vest as follows: one-third (1/3) on the date of grant, one-third (1/3) on the first anniversary of the date of grant, and one-third (1/3) on the second anniversary of the date of grant. OPTION PLANS. The board of directors adopted an Incentive Stock Option Plan (the "Qualified Plan") which provides for the grant of options to purchase an aggregate of not more than 160,000 shares of our common stock. The purpose of the Qualified Plan is to make options available to management and employees in order to provide them with a more direct stake in the future of the Company and to encourage them to remain in the employ of the Company. The Qualified Plan provides for the granting to management and employees of "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"). The board of directors adopted a Non-Qualified Stock Option Plan (the "Non-Qualified Plan") which provides for the grant of options to purchase an aggregate of not more than 160,000 shares of our common stock. The purpose of the Non-Qualified Plan is to provide certain key employees, independent contractors, technical advisors and directors with options in order to provide additional rewards and incentives for contributing to the success of the Company. These options are not incentive stock options within the meaning of Section 422 of the Code. The Qualified Plan and the Non-Qualified Plan (the "Stock Option Plans") will be administered by a committee (the "Committee") appointed by the board of directors which determines the persons to be granted options under the Stock Option Plans and the number of shares subject to each option. No options granted under the Stock Option Plans will be transferable by the optionee other than by will or the laws of descent and distribution and each option will be exercisable, during the lifetime of the optionee, only by such optionee. Any options granted to an employee will terminate upon his ceasing to be an employee, except in limited circumstances, including death of the employee, and where the Committee deems it to be in our best interests not to terminate the options. The exercise price of all incentive stock options granted under the Qualified Plan must be equal to the fair market value of such shares on the date of grant as determined by the Committee, based on guidelines set forth in the Qualified Plan. The exercise price may be paid in cash or (if the Qualified Plan shall meet the requirements of rules adopted under the Securities Exchange Act of 1934) in common stock or a combination of cash and common stock. The term of each option and the manner in which it may be exercised will be determined by the Committee, subject to the requirement that no option may be exercisable more than 10 years after the date of grant. With respect to an incentive stock option granted to a participant who owns more than 10% of the voting rights of the Company's outstanding capital stock on the date of grant, the exercise price of the option must be at least equal to 110% of the fair market value on the date of grant and the option may not be exercisable more than five years after the date of grant. The exercise price of all stock options granted under the Glas-Aire Industries Group Ltd. -38- Form 10-KSB @ December 31, 2004 Non-Qualified Plan must be equal to at least 80% of the fair market value of such shares on the date of grant as determined by the Committee, based on guidelines set forth in the Non-Qualified Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 20, 2005, the beneficial ownership of the Company's common stock by each person known to the Company to own beneficially more than 5% of the Company's common stock and by the officers and directors of the Company, individually and as a group. Unless otherwise stated below, each such person has sole voting and investment power with respect to all such shares of common stock.
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent of Class - ----------------------------- -------------------- ----------------------- ALC Holdings LLC 1,457,328 (1) 53.8% 7791 Alderbridge Way Richmond, B.C. Canada V6X2A4 Craig Grossman 203,485(2)(3) 7.40% 7791 Alderbridge Way Richmond, B.C. Canada V6X 2A4 Linda Kwan 16,033 0.63% 7791 Alderbridge Way Richmond, B.C. Canada V6X 2A4 Doug Preston 0 0% 7791 Alderbridge Way Richmond, B.C. Canada V6X 2A4 Directors and executive officers as a group (3 persons) 1,676,846 61.8% - ------------------------------
(1) This limited liability company is owned and controlled by Craig Grossman and Linda Kwan. (2) Includes options to purchase 10,000 shares granted to directors on November 4, 1999, 10,000 shares granted to directors on December 4, 2000 and 10,000 shares granted to directors on December 4, 2001. (3) Includes 85,000 shares vested on April 12, 2002 pursuant to Mr. Grossman's employment agreement and an additional 85,000 shares that vested on April 12, 2003. CHANGES IN CONTROL. None. Glas-Aire Industries Group Ltd. -39- Form 10-KSB @ December 31, 2004 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Documents filed as part of this Form 10-KSB: (a) List of Exhibits. (i) Financial Statements: The financial statements listed by the Registrant on the accompanying Financial Statements (see pages F-1 through F-20) are filed as part of this Annual Report on Form 10-KSB. (b) Other Exhibits. 31.1 Craig Grossman Sarbanes Oxley 302 Certification. 31.2 Linda Kwan Sarbanes Oxley 302 Certification. 32.1 Certification Pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (c) Report on Form 8-K: A Report on form 8-K was filed on March 29, 2004 to disclose the March 24, 2004 appointment of KPMG by the Supreme Court of British Columbia (Case No. L040758) as receiver over all the right, title and interest of Glas-Aire Industries Ltd., the wholly owned subsidiary of Glas-Aire Industries Group, Ltd. (the "Corporation"), property, assets and undertakings. The Corporation was in default of certain financial ratios in its banking facilities agreement with HSBC and was indebted to HSBC Bank for approximately $2.7 million (Canadian). (d) A Report on form 8K filed on June 17, 2004 disclosed the change in Registrant's Certifying Accountant: (a) Dismissal of Previous Independent Accountants. Effective June 17, 2004, Glas-Aire Industries Group Ltd ("Company") dismissed BDO Dunwoody LLP ("BDO"), as its independent public accountants. The Company's sole Director approved this decision to dismiss BDO). (b) Engagement of New Independent Accountants. On June 17, 2004 the Company engaged Dale Matheson Carr-Hilton LaBonte Chartered Accounts as its new independent accounts. Glas-Aire Industries Group Ltd. -40- Form 10-KSB @ December 31, 2004 Item 14. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"). Based on this evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic SEC filings. Since the Evaluation Date, there have not been any significant changes in the internal controls of the Company, or in other factors that could significantly affect these controls subsequent to the Evaluation Date. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLAS-AIRE INDUSTRIES GROUP LTD. Date: March 30, 2005 By:/s/Craig Grossman -------------------------------------------- Craig Grossman, Chief Executive Officer, President, Secretary and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: \s\ Craig Grossman Dated: March 30, 2005 --------------------------------------------------- Craig Grossman, Chairman of the Board, Chief Executive Officer, President, and Secretary (Principal Executive Officer) By: \s\ Linda Kwan Dated: March 30, 2005 --------------------------------------------------- Linda Kwan, Chief Financial Officer (Principal Financial/Accounting Officer) Glas-Aire Industries Group Ltd. -41- Form 10-KSB @ December 31, 2004 EX-31.1 2 ex311.txt EXHIBIT 31.1 SECTION 302 CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Craig Grossman, certify that: 1. I have reviewed this Annual Report on Form 10-KSB of Glas-Aire Industries Group, Ltd.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) 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 report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the small business issuer'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. 5. The registrant's other certifying officer(s) 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 (of 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 small business issuer's internal control over financial reporting. Date: March 30, 2005 /s/ Craig Grossman -------------------------------------------------------- Craig Grossman, Chief Executive Officer, President, and Secretary (Principal Executive Officer) EX-31.2 3 ex312.txt EXHIBIT 31.2 SECTION 906 CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Linda Kwan, certify that: 1. I have reviewed this report on Form 10-KSB of Glas-Aire Industries Group, Ltd.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers 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 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting. Date: March 30, 2005 /s/ Linda Kwan --------------------------------------- Linda Kwan, Chief Financial Officer (Principal Financial Officer) EX-32.1 4 ex321.txt EXHIBIT 32.1 SECTION 906 CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Glas-Aire Industries Group, Ltd. (the "Company") on Form 10-KSB for the period ending December 31, 2004 (the "Report") I, Craig Grossman, Chairman, Chief Executive Officer, President, and Secretary of the Company, and Linda Kwan, Chief Financial Officer of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge and belief: (1) The Report 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 the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 30, 2005 \s\ Craig Grossman - --------------------------------------------------- Craig Grossman, Chairman, Chief Executive Officer, President, and Secretary /s/ Linda Kwan - --------------------------------------------------- Linda Kwan, Chief Financial Officer (Principal Financial Officer) This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----