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: January 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 1-14244
GLAS-AIRE INDUSTRIES GROUP LTD.
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(Name of small business issuer in its charter)
Nevada 84-1072256
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(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
3137 Grandview Highway
Vancouver, B.C. V5M 2E9 Canada
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(Mailing Address of principal executive offices)
Registrant's telephone number, including area code (604) 435-8801
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer 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 issuer'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-K. Yes ____ No X
The issuer's revenue for its most recent fiscal year was: $6,639,219
<PAGE>
The aggregate market value of the issuer's voting stock held as of February 1,
1999, by nonaffiliates of the issuer was $1,384,658.
As of January 31, 1999, issuer had 1,593,469 shares of its $0.01 par value
common stock outstanding.
Transitional Small Business Disclosure Format. Yes X No ____
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data --Independent
Auditor's Report
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1 - Business
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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.
General
The Company designs, develops, manufactures and sells sunroof wind
deflectors, hood protectors and rear air deflectors for cars, light trucks and
vans. It uses plastics and thermoforming technology to produce these products.
During the fiscal year ended January 31, 1999, approximately 98% of the
Company's sales were to automobile manufacturers. The Company's clients/joint
product development partners include DaimlerChrysler Corp, GM. Service Parts
Operation, GM. of Canada Ltd., Honda Access America, Inc., Honda Access Corp.,
Mazda North America Operations, Nissan Canada Inc., Nissan North America, Inc.,
Subaru of America, Inc., Toyota Canada Inc., and Toyota Tsusho America, Inc. The
Company manufactures products according to specifications either developed
jointly with or provided by its 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 the Company offers its customers
high quality product design and development capabilities.
In 1989, the Company received the "British Columbia Export Award" and in
1992 and 1993, it was one of six companies out of approximately 500 to receive
the "Nissan Superior Performance Award" granted to outstanding parts and
accessories suppliers. In 1995, the Company was awarded the "Nissan First Team
Supplier Award" for 1994 in recognition of its performance as a supplier to
Nissan. In 1997, the Company received the Business Management Excellence award
in export category from the ETHNO Business Council of British Columbia in
conjunction with the Business Development Bank of Canada.
The Company sells its products in the United States, Canada, Japan, and the
United Kingdom. Net export sales to customers by geographic area consisted of
the following for each of the three years ended January 31, 1997, 1998 and 1999.
Year ended January 31
1997 1998 1999
thousands of United States dollars
United States $3,121 72% $4,915 77% $5,481 82%
Canada 620 14% 789 12% 874 13%
Japan 491 12% 586 9% 242 4%
Other 84 2% 120 2% 42 1%
<PAGE>
Industry Overview
Glas-Aire's products are used in the diverse and growing automotive
components market, comprised of all after-market accessories, dealer-installed
accessories, car care products and other products purchased by consumers for the
purpose of improving their vehicles (versus those purchased for routine
maintenance). The Specialty Equipment Market Association ("SEMA") estimates this
category at the manufacturers' level, has grown from $2.35 billion in 1985 to
over $6.85 billion in 1997. During this period, the retail sales increased from
$4.35 billion to $19.33 billion. The Company's products compete in the
accessory/appearance segment of this market, estimated to be approximately $3.59
billion at the manufacturers' level. These products are generally defined as
those that change the look of the vehicle, add creature comforts or add
aerodynamic styling that are not in the original vehicle design.
According to SEMA, during 1990-1997, the accessory/appearance segment has
grown by 94.1%, mostly due to the rise in light truck and sport utility vehicle
purchases. Of all vehicles sold in the US in 1996, 43.5% were light trucks and
sport utility vehicles. In 1997, this grew to almost 50%. SEMA estimates that
approximately 30% of all specialty accessory products are sold into the light
truck market, either directly through the manufacturers or through dealerships
and after-market distribution channels. Automotive Market Research Council
(AMRC) forecasts over 11% increase in light truck sales during the next 5 years.
Glas-Aire participates in the OEM segment of the appearance accessory
market, providing product to the automotive manufacturers which then distribute
the product to consumers through their dealer networks. The parts accessory
business has become an increasingly important profit center for the dealers.
With a strong interest in providing additional profit opportunities for their
dealer networks, the manufacturers are increasing their own involvement in
developing new and enhanced accessory products (often included in "special trim
packages").
While the Company has maintained its primary focus on the core OEM business
(genuine wind deflectors installed at the dealership level), management believes
the quality Glas-Aire product lines would have excellent potential in the
largely untapped after-market channels as well. These channels constitute the
majority of consumer purchases in the light truck accessory market and would
represent significant incremental growth potential for the Company. As
previously mentioned, the Company perceives the after-market as a potential
target, in partnership with a suitable industry participant. As well, the
Company intends to use its existing relationship with a Japanese automobile
manufacturer which is based on direct-to-factory sales to expand this mode of
operation in Japan and elsewhere.
Business Strategy
Management's strategies for future operations and expansion are as follows:
Increasing production capacity/efficiency. The Company will add 3,000 ft2
to the Vancouver facility by constructing a mezzanine. The Company will move the
offices that are currently located on the main floor to the mezzanine, allowing
expansion of operations into the vacated office space. The additional 3,000 ft2
factory work space created by the construction of the mezzanine will permit the
Company to redesign the flow of work within the factory for more efficient and
cost-effective "finishing operations," and will create needed space for
additional equipment that will increase the Company's manufacturing capabilities
and capacity. The construction is scheduled to be completed by June 30, 1999.
The Company constantly evaluates its production process for improvement.
Recently, the Company began evaluating several changes in its manufacturing
processes that could lead to increases in efficiency and cost savings in labor
and materials, if successfully implemented. Although there can be no assurance,
management is optimistic that the Company will be able to obtain the Canadian
Government's funding for further analysis and development of this new process.
<PAGE>
Management plans to streamline machining operations by diverting some work
from the existing three 5-axis CNC trimmers to a new 3-axis CNC trimmer that the
Company plans to acquire. This action is consistent with the Company's objective
of increasing production capacity and efficiency.
The capacity of the molding operation will be increased with the addition
of a third thermoforming machine. This addition will also minimize molding
down-time due to machine breakdowns.
Increasing sales to automobile manufacturers. Approximately 98% of the
Company's sales are to automobile manufacturers. Management of the Company
believes that increased sales to automobile manufacturers can be accomplished
through sales of existing and new products to existing customers in North
America. Marketing efforts in North America are supported by two well
established and respected automobile manufacturers' firms that have represented
the Company for a number of years.
The Company has been working with a manufacturers' representative firm
based in Japan to improve distribution, to strengthen its client interface and
intensify new business development efforts in Japan. In addition, the Company
has established a distribution office in Tokyo with one full-time Japanese
employee with automobile industry experience to enhance the Company's direct
marketing efforts in Japan.
Frequently, an increase in sales is accomplished through the development of
new clients as well as introduction of new products. During the last year, the
Company succeeded in introducing 2 part numbers into a Japanese automobile
manufacturer as production parts rather than accessories. Historically, the
Company's products have been sold principally as accessories and not as
production parts that are installed during the manufacturing process. Management
is optimistic that it will be able to expand sales of its products as production
parts rather than accessories with existing clients as well as new clients.
Management intends to direct its efforts toward further penetration of the
Japanese automotive market, and is hopeful that the success the Company has had
with exiting clients will assist in this effort.
The "After-Market" as a New distribution channel. Traditionally, almost all
of the Company's products are channeled to parts distribution centers of major
car manufacturers who, in turn, private labeled the parts via their dealer
networks as accessories/options for automobile buyers. Management believes that
sales of the Company's products in the "after-market" through auto parts and
supply houses, mail order supply houses, or possibly through electronic commerce
on the internet offers the Company significant potential. Management has
evaluated a number of different opportunities and has concluded that a strategic
partnership with a partner that is already actively involved in the
"after-market" sales of automotive products and accessories may provide the
optimum solution for the Company's expansion into this market. Management
intends to further evaluate this opportunity and to attempt to find a suitable
strategic partner. Investors are cautioned that there can be no assurance that
the Company will be successful in finding a suitable strategic partner or that
even if such a partner is found that an acceptable arrangement will be
negotiated, or even if negotiated that such a relationship will result in a
significant increase in the Company's sales or net income.
Development of New Products. Management believes that development of new
products to meet the demands and needs of its customers in the automotive
industry is a key factor in the Company's future success. The Company conducts
active research and development activities to enhance its existing products and
to develop new products. One such new product that management believes has
significant potential is "door visors." In 1996, the Company worked on a "door
visor project" for Isuzu Car Life Company Limited of Japan ("ICL"). This project
was successfully brought to prototype stage but canceled before it could be
carried into production due to manufacturing delays attributable to the
Company's subcontractor for injection molded products, and difficulties with
procurement of raw material acceptable to ICL. However, formal negotiations are
now in progress with several auto manufacturers for the production of door
visors. Although there can be no assurance, management is optimistic that these
negotiation will result in sales of door visors and the introduction of a new
product to the Company's product line.
<PAGE>
Products
The Company manufactures sunroof wind deflectors, hood protectors and rear
air deflectors for cars, light trucks and vans. The Company's major raw material
is continuous cast acrylic.
Sunroof wind deflectors. Sunroof wind deflectors reduce the noise and ear
discomfort resulting from air turbulence created by open sunroofs. The Company
manufactures sunroof wind deflectors for passenger cars, sport-utility vehicles
and mini-vans equipped with electric sliding sunroofs. The Company markets its
sunroof wind deflectors in the United States, Canada, Japan and the United
Kingdom.
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. The Company manufactures hood protectors for
sport-utility vehicles, light-duty pickup trucks and mini-vans. The Company
markets its 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. The Company manufactures rear wind deflectors for sport-utility
vehicles and mini-vans. The Company markets its rear air deflectors in the
United States and Canada.
The following table sets forth the percentage of net sales of each of the
Company's product lines for the years ended January 31, 1997, 1998 and 1999.
Product Line 1995 1996 1997 1998 1999
------------ ---- ---- ---- ---- ----
Sunroof Wind Deflectors 60% 66% 54% 52% 41%
Hood Protectors 24% 21% 31% 22% 37%
Rear Air Deflectors 16% 13% 15% 26% 22%
New Products. In order to build on its basic product groups (i.e. sunroof
wind deflectors, hood protectors and rear air deflectors), the Company plans to
upgrade the offerings in all three categories to address its clients'/prospects'
new, more stringent requirements in terms of surface finish, complex shapes,
alternate attachment mechanisms and dimensional accuracy. This strategy is
expected to increase the Company's competitiveness and help expand its target
markets.
Management's recent marketing efforts in Japan have resulted in the
identification of significant opportunities in the door visor category.
Management estimates the potential market in Japan to be in excess of $100
million dollars per year at the factory level. Door visors allow for open window
air circulation by keeping out rain and other elements, an important factor for
the significant number of Japanese consumers who smoke while they drive.
Recently, the Company has had formal inquiries from some of its Japanese clients
regarding the design and supply of door visors. Management does not believe that
injection molded door visors with quality acceptable to the Japanese auto
manufacturers are being manufactured in North America due to the lack of
technology related to molding of such large parts with exacting requirements.
The Company intends to develop 2 types of door visor products (injection
molded and vacuumformed). Management believes that the U.S. represents a
significant potential market for vacuumformed door visors. Although there can be
no assurance, management is optimistic that the company will be able to obtain
Canadian government funding for its marketing activities of door visors in the
United States.
<PAGE>
Product Obsolescence/Design Changes. Due to automobile design changes by
automobile manufacturers, the Company's products will become obsolete and/or
require modification. Continued utilization of the Company's products by the
original equipment manufacturers ("OEMs") is substantially dependent upon the
Company's ability to quickly and reliably adjust the design of its products to
conform to design changes by the automobile manufacturers. The Company will
attempt to counteract this with improved lead times, as a result of using more
efficient design software and milling its own prototype tools for thermoforming.
Design changes and product obsolescence could have a material adverse effect on
the Company's profitability.
Major Customers
The Company sells principally to automobile manufacturers in the United
States, Canada, Japan and the United Kingdom. For the fiscal 1999, sales in the
US accounted for 82% of the Company's revenues (including sales to US
subsidiaries of foreign automobile manufacturers), Canada 13% and others 5%.
For most of its customers, particularly the importer and Japanese auto
makers, Glas-Aire engages 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, the Company has four major customers who accounted for
10% or more of the Company's sales:
Percent of Company Sales
(FYE January 31)
Customer Products 1997 1998 1999
-------- -------- ---- ---- ----
Nissan Sunroof wind deflectors, 31% 34% 32%
North America, Inc. hood protectors and rear air
deflectors
Honda Access Sunroof wind deflectors 25% 21% 25%
America, Inc.
General Motors Hood protectors and rear 19% 14% 21%
(USA & CDN) air deflectors
Subaru of Sunroof wind deflectors 11% 9% 10%
America, Inc.
The Company believes that it has a stable relationship with its customers,
as evidenced by the fact that its four largest customers have dealt with the
Company for more than four years. If, however, the Company were to lose Nissan
Motor North America, Inc., General Motors (USA & CDN), Honda Access America,
Inc. or Subaru of America, Inc. or if these customers were to significantly
reduce their purchases from the Company, the Company's revenues, earnings and
financial position would be materially adversely affected.
<PAGE>
The Company manufactures accessories for the majority of its customers on a
purchase order/invoice basis. For General Motors in the U.S., the Company has a
virtual just-in-time drop shipment program utilizing its warehouse facilities in
Bellingham, WA. The Company warrants its 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. The Company is
obligated to reimburse its OEM customers for all legitimate quality related
warranty claims paid by them.
Manufacturing
The Company currently manufactures and assembles its products at its plant
in Vancouver, B.C., Canada. The Company's present line of products are produced
primarily from acrylic, using thermoforming. Thermoforming involves heating a
sheet of acrylic to soften it and then molding the softened acrylic into the
desired shape. The Company is able to meet the stringent Japanese surface
requirements by using an enhanced thermoforming process it has developed, using
milled aluminum tools, in a clean-air facility.
The Company's traditional manufacturing operation consists of four major
functions: (i) cutting; (ii) molding; (iii) machining; and (iv) finishing.
Cutting entails cutting the acrylic, which is purchased, in large sheets, to an
appropriate size for the product being manufactured. Molding is one of the most
critical operations demanding accurate control of many parameters - tooling,
timing, heating and cooling. The Company currently utilizes a slide-tray
thermoformer, plus a three-station rotary thermoformer which performs three
functions simultaneously loading/unloading, heating and forming. The three
stations rotate so that after the machine operator loads the acrylic it passes
automatically through the heating station followed by the forming station and
finally to the unloading station without further human intervention. Next, the
molded pieces of acrylic are machined to form the blades of the wind deflector.
This function is performed primarily with computer numeric control ("CNC")
routers. Finishing consists of (i) flame polishing whereby the edges of the
blades are polished by use of a flame; (ii) stamping identifying marks on the
product; (iii) application of gasket/extrusion; (iv) labeling; (v) cleaning; and
(vi) boxing.
The Company constantly evaluates its production process for improvement.
Recently, the Company began evaluating several changes in its manufacturing
processes that could lead to increases in efficiency and cost savings in labor
and materials, if successfully implemented. Although there can be no assurance,
management is optimistic that the Company will be able to obtain the Canadian
Government's funding for further analysis and development of this new process.
Raw Materials and Suppliers. Acrylic is the single most expensive raw
material used in manufacturing the Company's products. The Company currently
purchases its acrylic from Acrylco Manufacturing Ltd. (a Canadian distributor
for Mitsubishi Canada Limited) and Aristech Acrylics LLC. in Florence, Kentucky.
The Company does not have a long-term contract with either of these suppliers.
If the Company were to lose either of these suppliers of acrylic, management is
confident that an alternate supplier could be found, although the number of
acrylic suppliers is limited. The absence of an alternate supplier of acrylic
would have a serious adverse effect on the Company. Previously, the Company has
reported that it intended to investigate manufacturing acrylic for the Company's
own use, and to purchase acrylic manufacturing equipment if management
determined that it was in the best interests of the Company to do so. Management
believes that this strategy cannot be economically implemented, and has decided
not to pursue manufacturing its own acrylic at this time.
The principal components purchased by the Company are extrusions (long
plastic strips used in mounting the protectors to vehicles), gaskets for sealing
deflectors on to vehicles' roofs, and corrugated boxes. Supplies of these
components are readily available from various suppliers.
<PAGE>
Quality Assurance. Management maintains strict quality assurance procedures
for every product manufactured by the Company throughout the manufacturing
process. The Company's acrylic suppliers provide a certificate with each batch
of acrylic showing that it has been sampled for heat and other tests relative to
its production. Other incoming components are manufactured according to
specifications provided by the Company and are checked upon receipt against
these specifications by the Company's incoming inspection personnel. During the
production stage, the Company's quality assurance personnel monitor each
operation in the manufacturing process. All work in process is also checked
during the fabrication and assembly processes using operator statistical process
control procedures.
The Company's culture emphasizes that quality is the responsibility of
every employee; thus, every line worker is also encouraged to be a quality
assurance inspector. After packing and before shipment, the quality assurance
personnel randomly check goods according to product specifications.
Historically, the Company's level of defective products has been low,
representing approximately 1% of annual net sales.
Generally, the Company warrants its products to coincide with the
automobile warranty provided by the automobile manufacturer to the consumer, and
is obligated to reimburse the automobile manufacturer for all legitimate quality
related warranty claims paid by it. To date, the Company's warranty expenses
have been insignificant.
Management of the Company is in the process of registering for QS-9000
quality standard certification. These standards were developed by
Chrysler/Ford/General Motors Supplier Quality Requirements Task Force. Recently,
the North American automobile manufacturers shifted their supplier quality
requirements to QS-9000. Towards 1997, the Company was informed about this shift
by General Motors (Canada and the US) and responded by changing its focus from
ISO 9000 to QS-9000. Since then, the Company prepared and published its QS-9000
Quality Policy Manual and submitted it to General Motors (Canada) as the first
step towards certification. While substantial effort is required to formulate,
publish and implement all of the practices mandated by QS-9000, management
intends to continue pursuing the various steps necessary to attaining
certification. It must be noted that substantial effort/expense is required to
implement all of the practices mandated by QS-9000. Although management is
optimistic that the Company will receive certification, investors are cautioned
that there can be no assurance that the Company will, in fact, be granted
QS-9000 certification or that, once granted, it will retain such certification.
Marketing and Distribution
Marketing. The Company markets itself primarily through personal contact,
the distribution of written and computerized information about the Company and
its products, incentive programs and attendance at trade shows. These functions
are primarily performed by management of the Company; however, the Company has
contracts with three sales representatives - two in the United States and one in
Japan - who have established relationships with large automobile manufacturers.
The sales representatives handle the day-to-day customer contacts. In addition,
the Company has established a distribution office in Tokyo with one full-time
Japanese employee with automobile industry experience to enhance the Company's
direct marketing efforts in Japan. As the Company's sales increase, the Company
may hire additional personnel or may contract with additional sales
representatives if additional marketing personnel are needed.
Glas-Aire has recently been selected by General Motors for inclusion in its
accessory promotional program. As a result, the Company's products are
prominently displayed in marketing brochures provided to GM's network of 7,000
dealers.
Management believes that the Company should attempt to strengthen its
customer base by increasing both the number of customers and the number of
products sold to each customer, by expanding into additional geographic markets
and through establishing new channels of distribution. (See "Business--Business
Strategy.") In that regard, management intends to utilize the following
promotional strategies:
<PAGE>
- The Company's existing corporate brochure will be reviewed/updated to
include new products and processes, when necessary.
- A corporate and product profile is available on digital medium (i.e.,
computer disks). This will enable the Company to present itself and its products
more effectively using both digitized information available on disks, and on
digital networks for rapid information transfer over telephone lines anywhere on
the globe, as well as demonstrating the Company's innovative spirit. Management
provides access to information on the Company, including its filings with the
United States Securities and Exchange Commission, its press releases, and its
products through the INTERNET. The Company's web page may be accessed at
www.glasaire.com.
- Representatives of the Company will continue traveling to Japan, China,
Europe etc. to present the Company and its products to potential customers as
well as new distributors or other potential strategic partners for entering the
non-dealership after-market segment.
- The Company will continue increasing its participation in major trade
shows associated with its products.
Distribution. The majority of the Company's products are supplied to parts
distribution centers of major car manufacturers which, in turn, private label
the parts via their dealer networks as accessories/options for automobile buyers
The Company generally sells and ships its products "F.O.B. factory" and
most of its customers are responsible for the transportation of finished
products from the Company's factory or warehouse facility to their final
destination and bear the risk of loss during transportation.
With respect to most customers located in North America, the Company has
Electronic Data Interchange ("EDI") capability which facilitates receipt of
orders from customers and transmission of invoices to customers electronically.
After receipt of purchase orders from customers, wherever located, the Company
generally bulk-ships the ordered parts to the customers' parts distribution
centers within a mutually acceptable lead time, usually 30 days.
For most of the cars sold in North America, Glas-Aire ships its products to
customers' parts distribution centers and vehicle processing centers throughout
the U.S. and Canada. For the Japanese market, the OEMs generally have one
centralized distribution center. With General Motors, Glas-Aire drop ships the
ordered parts directly to its network of 7,000 dealers.
Last year, the Company completed a feasibility study regarding distribution
into the after-market . Management believes that sales of the Company's products
in the "after-market" through auto parts and supply houses, mail order supply
houses, or possibly through electronic commerce on the internet offers
significant potential. Management has evaluated a number of different
opportunities and has concluded that a strategic partnership with a partner that
is already actively involved in the "after-market" sales of automotive products
and accessories may provide the optimum solution for the Company's expansion
into this market. Management intends to further evaluate this opportunity and to
attempt to find a suitable strategic partner. Investors are cautioned that there
can be no assurance that the Company will be successful in finding a suitable
strategic partner or that even if such a partner is found that an acceptable
arrangement will be negotiated, or even if negotiated that such a relationship
will result in a significant increase in the Company's sales or net income.
<PAGE>
Research and Development and Product Design
Management believes that its product development capabilities are important
to the future success of the Company's business. The Company has four permanent
employees engaged in research and development at its Vancouver facility. In
addition, the Company contracts out the Company's research and development
function to a research and development company which employs four permanent
research and development professionals who work on the Company's projects.
During the fiscal years ended January 31, 1997, 1998 and 1999, the Company spent
approximately $395,099, $393,182 and $415,751, respectively, towards research
and development. The increase in research and development costs from 1997 to
1999 resulted from increased research and development activities associated with
development of new products and improvements to existing products. Management
expects that this trend of increased spending on research and development
activities will continue.
During the last fiscal year, the Company purchased the Pro/E CAD/CAM system
and related hardware, which was a significant upgrade to the Company's computer
aided design capabilities. Management believes that this upgrade will facilitate
the electronic transfer of technical data and drawings between the Company and
engineering departments of the Company's OEM customers. Utilization of Pro/E is
expected to increase the efficiency of the Company's research and development
function and simplify the engineering process. As the Company's customers are
principally automobile manufacturers, the major responsibility of the product
design personnel is to produce designs to the satisfaction of and in accordance
with the specifications developed with or provided by the automobile
manufacturers. The Company's cycle time for product development is relatively
short, ranging from three to six months.
When the design of a vehicle model changes configuration, the Company must
retool its products to insure proper fit of its products. Although frequent
model or configuration changes would increase the Company's costs, tooling costs
generally are not substantial and frequently may be passed on to the customer,
often over a two year period. However, investors are cautioned that continued
utilization of the Company's products by the OEMs as well as the after-market is
substantially dependent upon the Company's ability to quickly and reliably
adjust the design of its products to conform with design changes by the
automobile manufacturers and that design changes and product obsolescence could
have a material adverse effect on the Company's profitability.
Competition
The Company has several competitors which have substantially greater
technical, financial and marketing resources than the Company. For the sunroof
wind deflector market, the primary competitor has been Plastic Form, a
subsidiary under the umbrella of MascoTech. In the hood protector and rear air
deflector market, its major competitor is Autotron, a subsidiary of LUND
International Holdings ("Lund"). Autoventshade, also a subsidiary of Lund,
produces hood protectors and door visors.
Management believes that the principal competitive factors in the
automobile accessories industry, in order of importance, are quality, customer
service and price. Management of the Company believes that the Company can
effectively compete with its competitors because of the high quality of the
Company's products and its commitment to customer service and product
innovation.
<PAGE>
Seasonality
The Company's products are not subject to significant seasonal variation.
The Company's backlog as of any given date is not a meaningful measure of the
Company's future business because the Company's customers generally require
rapid shipment of orders.
Employees
As of January 31, 1999, the Company employed 86 production workers, 8
research and development personnel, 2 clerical/administrative staff and 3
management staff members. In addition, the Company has a contract with a
research and development company with 4 engineers and technologists for the
Company's projects.
The Company attempts to maintain amiable and communicative relations with
its employees. The Company is not a party to any labor contracts or collective
bargaining agreements. The Company has experienced no labor stoppages in recent
years and management believes that relations with its employees are
satisfactory. The Company believes there is an adequate supply of suitable labor
available.
Factors That May Affect Future Results
Major Customers. The Company has four customers which, together, accounted
for 86% of its sales during the fiscal year ended January 31, 1999. There can be
no assurance that these customers will continue to purchase the Company's
products at these levels in the future. The loss of any one of these major
customers, or a significant reduction in their purchases from the Company, would
have a material adverse effect upon the Company and its operations.
Dependence Upon Automobile Industry. The Company's current products consist
exclusively of automobile accessories, specifically sunroof wind deflectors,
hood protectors and rear air deflectors, which are sold to OEMs. Accordingly,
the market for the Company's products is tied to the success of the automobile
industry, and the success of the Company is dependent upon that single industry.
A significant decline in the automobile industry, in general, over which the
Company would have no control, could have a serious adverse effect on the
Company and its business. In addition, economic factors adversely affecting
automobile production and discretionary consumer spending could have a material
adverse effect on the Company's results of operations.
Dependence Upon Automobile Manufacturers in Japan and Related Risks. A
significant percentage of the Company's sales were to Japanese automobile
manufacturers or 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
the Company's sales. In addition, the economic problems experienced in Japan
could have a material and adverse affect upon the Company's Japanese customers,
which could materially and adversely affect the Company. Further, the
devaluation of the Japanese Yen could result in Japanese automobile
manufacturers looking to Japanese suppliers of automobile accessories which also
could have a serious negative impact on the Company's sales.
Dependence Upon Key Personnel. The Company's future performance will depend
to a significant extent upon the efforts and abilities of certain members of
senior management as well as upon the Company's ability to attract and retain
qualified engineering, technical, design, marketing and production personnel. In
particular, the Company is dependent upon the experience and abilities of
William R. Ponsoldt; the Company's Chief Executive Officer and the Chairman of
its Board of Directors, Alex Ding, the President of the Company, and Omer Esen
the General Manager of the Company. Accordingly, the loss of the services of Mr.
William R. Ponsoldt, Mr. Ding, Mr. Esen or other key personnel could have a
material adverse effect on the Company and its future operations. If Mr. William
R. Ponsoldt, Mr. Ding, or Mr. Esen were to be unavailable for any reason, there
can be no assurance that the Company would be able to employ a qualified person
or persons on terms suitable to the Company.
<PAGE>
Competition. The Company's sales and profitability should be considered in
light of the competitive environment in which the Company operates. The
Company's business is in an industry which is highly competitive, and many of
its competitors, both local and international, have substantially greater
technical, financial and marketing resources than the Company. The principal
factors which determine the Company's competitive position include quality,
customer care and price. Management believes that its 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 the Company's
products will be competitive in the face of advances in product technology
developed by the Company's competitors or by automobile manufacturers
themselves. In addition, there are no significant technological or manufacturing
barriers to entry into the automobile accessories business in which the Company
operates.
Currency Fluctuation. The Company's sales are principally transacted in
United States dollars, whereas its labor, overhead and some component costs are
paid in Canadian dollars. Fluctuations in the value of the United States dollar
versus other currencies (primarily the Canadian dollar and the Japanese yen),
and fluctuations in the relative values of those currencies, may have an impact
on the Company's financial performance. The Company does not engage in hedging
activities with respect to currency fluctuations. Although, to date, the Company
has avoided significant losses from currency fluctuations, there can be no
assurance that the Company will be able to avoid such losses from currency
fluctuations in the future.
Dependence on Component and Raw Materials Suppliers. The Company purchases
raw materials, primarily acrylic and certain components used in the manufacture
of its products from various suppliers. Although the Company has long term
relationships with its key suppliers it does not have, long-term supply
agreements. Company does not anticipate significant delays or disruption in the
manufacture and delivery of its raw materials or components, but there can be no
assurance that delays or disruptions will not occur. The loss or breakdown of
the Company's relationships with its suppliers could subject the Company to
delays in the delivery of its product to customers and loss of customers. In
addition, increased prices for raw materials or component parts could have a
material adverse effect on the Company's profitability.
Manufacturing Risks. The Company's 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 the Company's
operations.
Product Obsolescence and Design Changes. Due to automobile design changes
by automobile manufacturers, the Company's products will become obsolete and/or
require modification. Continued utilization of the Company's products by the
OEMs is substantially dependent upon the Company's ability to quickly and
reliably adjust the design of its products to conform to design changes by the
automobile manufacturers. Design changes and product obsolescence could have a
material adverse effect on the Company's profitability.
<PAGE>
Dependence on a Limited Number of Products. The Company manufactures and
sells sunroof wind deflectors, hood protectors and rear air deflectors for cars,
light trucks and vans. The Company's 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 the Company's business.
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 and Section 21E of the
Securities Exchange Act of 1934, 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 the products and
future economic performance of the Company. 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 the Company 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 the Company's products will
remain strong, that the Company will retain existing customers and key
management personnel, that the Company's forecasts will accurately anticipate
market demand and that there will be no material adverse change in the Company's
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 the control of the
Company. Although the Company believes that 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, the
business and operation of the Company 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 the Company or any other person that the objectives or plans
of the Company will be achieved.
Item 2 - Properties
- -------------------
The Company leases 21,777 square feet of factory, warehouse and office
space located at 3137 Grandview Highway, Vancouver, B.C., Canada V5M 2E9 from
Rockmore Investments Ltd. The lease term is 5 years, due to expire in 2003 with
an option for a further 5-year term at that time. The current total rent is
CDN$9,779 (i.e., US $6,520 based upon current exchange rates) per month. The
lease is a triple net lease, and the Company is responsible for its share of
common area expenses and maintenance. The Company is adding approximately 3,000
ft2 to the Vancouver facility by constructing a mezzanine. Costs of construction
are being borne by the landlord. Upon completion of the mezzanine, the Company
will pay an additional CDN $3,000 (i.e., US $2,000 based upon current exchange
rates) per month for the term of the lease.
The Company also rents on a month-to-month basis 5,000 square feet of
warehouse space in Bellingham, Washington, at a rental of US$1,800 per month.
This facility is used primarily for warehousing products for distribution to
certain US customers.
These facilities are adequate for the Company's present level of business
and anticipated growth over the next two years; however, if sales grow
significantly greater than is anticipated then management will have to acquire
additional manufacturing space either by leasing additional space in the current
facilities or by moving to a larger facility.
<PAGE>
Patents, Trademarks, Licenses, Franchises, Concessions or Royalty Agreements
The Company does not hold any patents on any of its products, nor does it
have any licenses, trademarks, franchises, concessions or royalty agreements.
Government/Environmental Regulation
The Company is subject to various federal, provincial and local
environmental laws and regulations. Management believes that the company's
operations currently comply in all material respects with applicable laws and
regulations. Management of the Company believes that the trend in environmental
litigation and regulation is toward stricter standards, and that these stricter
standards may result in higher costs for the Company and its competitors. Such
changes in the law and regulations may require the company to make additional
capital expenditures which, while not presently estimable with certainty, are
not presently expected to be material to the Company. Costs for environmental
compliance and waste disposal have not been material to the Company in the past.
Item 3 - Legal Proceedings
- --------------------------
The Company is not aware of any material pending litigation to which the
Company is or may be a party, nor is it aware of any pending or contemplated
proceedings against it by governmental authorities. The Company knows of no
legal proceedings pending or threatened, or judgments entered against, any
director or officer of the Company, or legal proceeding to which any director,
officer or security holder of the Company is a party adverse to, or has a
material interest adverse to, the Company.
Item 4 - Submission of Matters To a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted by the Company to a vote of the Company's
shareholders through the substitution of proxies or otherwise, during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock is traded in the over-the-counter market on the
NASDAQ Small Cap Market under the symbol "GLAR" and on the Pacific Stock
Exchange under the Symbol GLA.
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 the National
Quotation Bureau, Inc.
Quarter Ended High Bid Low Bid
------------- -------- -------
Fiscal 1999
May 1 thru July 31, 1998 $3.00 $1.75
August 1 thru October 31, 1998 $2.00 $1.25
November 1 thru January 31, 1999 $2.25 $1.094
<PAGE>
The closing bid price of the Common Stock as of April 23, 1999, was $2.75
per share. As of January 31, 1999, the Company had approximately 30 shareholders
of record and estimates that its Common Stock was beneficially owned by in
excess of 500 shareholders based upon ownership in "street name."
Holders of common stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefore. In
April of 1999, the Board of Directors declared a $0.25 per share cash dividend
payable to shareholders of record on April 23, 1999. Subsequent to the date of
declaration of the cash dividend and before the record date, the Board of
Directors rescinded the cash dividend subject to receiving shareholder approval
of the rescission at the next annual meeting of the shareholders. The Board of
Directors has advised that they do not anticipate declaring and paying cash
dividends in the foreseeable future.
Item 6 - Selected Financial Data
- --------------------------------
The selected financial information set forth below is derived from the
audited consolidated financial statements of the Company, which are prepared in
accordance with generally accepted accounting principles in the United States of
America and stated in United States dollars. The consolidated financial
statements at January 31, 1998 and 1999 and for the fiscal years ended January
31, 1997, 1998 and 1999 have been audited by BDO Dunwoody, Chartered
Accountants, and appear elsewhere herein. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of January 31,
----------------------
Balance Sheet Data 1998 1999
- ------------------ ---- ----
(In thousands of United States dollars,
except share data)
Working capital $ 3,086 $ 3,401
Total assets 5,047 5,885
Long-term debt -- --
Obligation under capital lease 68
Deferred income taxes 281 359
Shareholders' equity 4,213 4,581
Year ended January 31,
-----------------------------------------
Income Statement Data 1997 1998 1999
- --------------------- ---- ---- ----
Sales $ 4,316 $ 6,410 $ 6,639
Cost of sales 3,028 4,506 4,497
----------- ----------- -----------
Gross profit 1,288 1,904 2,142
----------- ----------- -----------
Research and development 395 393 416
Selling and distribution 282 386 403
General and administrative 414 528 513
Provision for profit sharing 23 68 89
Interest (61) (74) (79)
----------- ----------- -----------
Total expenses 1,053 1,301 1,342
----------- ----------- -----------
Income before income taxes 235 603 800
Income taxes 126 257 299
----------- ----------- -----------
Net income $ 110 $ 346 $ 501
=========== =========== ===========
Earnings per share basic & diluted $ 0.08 $ 0.23 $ 0.34
=========== =========== ===========
Weighted average number of
shares outstanding 1,426,038 1,519,405 1,470,129
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Overview
The Company derives its revenues from the sale of automotive accessories
manufactured by it. The Company's sales increased from $4,316,372 for the fiscal
year ended January 31, 1997, to $6,409,954 for the fiscal year ended January 31,
1998, and to $6,639,219 for the fiscal year ended January 31, 1999. The Company
had net income of $109,800 in net income for the fiscal year ended January 31,
1997, and an increase to $346,328 in net income for the fiscal year ended
January 31, 1998 and an increase to $500,768 in net income for the fiscal year
ended January 31, 1999. Gross profit margins decreased to 29.8% for the fiscal
year ended January 31, 1997, and to 29.7% for the fiscal year ended January 31,
1998, and an increase to 32.26% for the fiscal year ended January 31, 1999 due
to the addition of new customers plus volume increase in sales orders from
existing customer. However, management believes that it will be able to further
increase gross profit and net income in future periods by increasing the
Company's production capacity and production efficiency. Increased revenue in
future periods will depend on the Company's ability to strengthen its customer
base through the development of new products, increasing the number of customers
and expanding into additional geographic markets and distribution channels,
while maintaining or increasing sales of its existing products to current
customers. Management intends to increase production capacity and production
efficiency through the purchase of additional equipment and machinery. Further,
management also intends to focus its efforts upon improving the sales to
overhead ratio and increase the Company's gross margin by reorganization, the
use of more effective tools and better utilization of resources. Investors are
cautioned that there can be no assurance that gross profit and net income will,
in fact, increase in future periods. See "Business--Business Strategy."
Results of Operations
The following table sets forth selected income data as a percentage of net
sales for the periods indicated.
Year ended January 31,
-------------------------------
1997 1998 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 70.2 70.3 67.7
----- ----- -----
Gross profit 29.8 29.7 32.3
----- ----- -----
Research and development 9.2 6.1 6.3
Selling and distribution 6.5 6.0 6.1
General and administrative 9.6 8.2 7.7
Provision for profit sharing 0.5 1.1 1.3
Interest (1.4) (1.1) (1.2)
----- ----- -----
Income before income taxes 5.4 9.4 12.1
Income taxes 2.9 4.0 4.5
----- ----- -----
Net income 2.5 5.4 7.6
===== ===== =====
<PAGE>
Year Ended January 31, 1999 Compared to Year Ended January 31, 1998
Sales. The Company's sales increased by 3.58% from $6,409,954 for the year
ended January 31, 1998, to $6,639,219 for the year ended January 31, 1999. This
increase resulted primarily (1) from the addition of new customers, (2) sales of
new parts, and (3) additional orders from existing customers. Revenues from the
Company's four major customers accounted for approximately 88% of the Company's
sales during the year ended January 31, 1999.
Gross Profit. Gross profit margins, expressed as a percentage of sales,
increased slightly from 29.7% for the year ended January 31, 1998 to 32.26% for
the year ended January 31, 1999. This net increase of 2.56% was due primarily to
(i) an increase in the value of Canadian dollar which diminished the exchange
rate benefit reflected in the gross profit margin of the Company for the prior
fiscal year, (ii) decline in material cost due to the usage of raw materials
remaining from the previous year, (iii) an increase in depreciation due to the
placement of new equipment service, and (iv) an increase in direct labor and
overhead cost.
Research and Development. Expenses for research and development increased
by 5.74% from $393,182 for the year ended January 31, 1998, to $415,751 for the
year ended January 31, 1999. This increase was primarily due to (i) an increased
in the number of engineering personnel conducting in-house activities, (ii) an
increase in usage of outside contractors to accommodate an increase in research
and development activities, (iii) an increase in travel expenses to customers to
provide extra services related to new design.
Selling and Distribution. Selling and distribution expenses increased by
4.48%, from $386,098 for the year ended January 31, 1998, to $403,382 for the
year ended January 31, 1999. This increase was primarily due to (i) the increase
of $12,274 after-market research, (ii) the increase of $10,317 warranty claim
due to major design change requested by the Company's largest customer, (iii)
the increase of $11,303 commission expenses from volume increase in sales, (iv)
a decrease of $16,610 in travel & promotion expenses related to the Company's
marketing efforts deferred to February & March 1999.
General and administrative. General and administrative expenses decreased
by 2.69% from $527,552 for the year ended January 31, 1998, to $513,384 for the
year ended January 31, 1999, as a result of (i) an increase of $12,830 in
consulting fees and travel expenses related to the Company's evaluation, (ii) an
increase of $8,000 in director's fees, (iii) a decrease of $5,916 in consulting,
legal fees relating to the preparation of annual reports to investors. Excluding
these expenses the general and administrative expenses were actually lower by
$29,082 from the same period in 1998, a result of (i) an increase of $13,832 due
to additional maintenance support fees paid to the EDI program as required by
our major customers. (ii) a decrease in the number of persons employed in
administration of $22,285, (iii) a decrease in consulting fees of $11,980
relating to the QS9000 (Quality Control Certification) (iv) a gain on foreign
exchange of 4,380 (v) an increase in cash discount, and a decrease in other
administration cost of $4,269.
Provision for Profit Sharing. Provision for profit sharing increased by
30.64% from $68,504 for the year ended January 31, 1998 and to $89,496 for the
year ended January 31, 1999. This increase was a result of the higher
profitability of the Company.
Interest. Interest income (net of interest expense) increased from $74,256
for the year ended January 31, 1998, to $79,903 for the year ended January 31,
1999, primarily as a result of interest earned on cash deposits obtained from
the public offering.
Income before Income Taxes. Before income taxes, the Company's income
increased from $602,985 for the year ended January 31, 1998, to $799,829 for the
year ended January 31, 1999.
<PAGE>
Income Taxes. The Company provided for income taxes of $299,061 for the
year ended January 31, 1999. The Company's effective tax rate in 1999 was 37.4%
Net Income. Net income increased from $346,328 for the year ended January
31, 1998, to $500,768 for the year ended January 1999.
Year Ended January 31, 1998 Compared to Year Ended January 31, 1997
Sales. The Company's sales increased by 48.5% from $4,316,372 for the year
ended January 31, 1997, to $6,409,954 for the year ended January 31, 1998. This
increase resulted primarily (1) from the addition of new customers, (2) sales of
new parts, and (3) additional orders from existing customers. Revenues from the
Company's three major customers accounted for approximately 64% of the Company's
sales during the year ended January 31, 1998.
Gross Profit. Gross profit margins, expressed as a percentage of sales,
decreased slightly from 29.8% for the year ended January 31, 1997 to 29.7% for
the year ended January 31, 1998. This net decrease of 0.14% was due primarily to
(1) an increase in the value of Canadian dollar which diminished the exchange
rate benefit reflected in the gross profit margin of the Company for the prior
fiscal year, (2) an increase in depreciation due to the placement new equipment
service, and (3) an increase in direct labor and overhead cost.
Research and Development. Expenses for research and development decreased
slightly by 0.48% from $395,099 for the year ended January 31, 1997, to $393,182
for the year ended January 31, 1998. This decrease was primarily due to
increased utilization of the Company's Engineering department for R&D
activities.
Selling and Distribution. Selling and distribution expenses increased by
37%, from $281,669 for the year ended January 31, 1997, to $386,098 for the year
ended January 31, 1998. This increase was primarily due to (1) the increase of
$19,548 travel & promotion expenses relating to the Company's marketing efforts,
(2) the increase of $72,670 commission expenses from the addition of new
customers and volume increase in sales order from existing customers, and (3) an
increase of 1996 warranty claims of $12,202.
General and administrative. General and administrative expenses increased
by 27.4% from $414,174 for the year ended January 31, 1997, to $527,552 for the
year ended January 31, 1998, as a result of (1) increased administration cost of
$12,435 relating to the preparation of annual reports to all investors, (2)
additional consulting fees of $15,019 relating to the QS9000 (Quality Control
Certification) process and Project Teamwork Assessment, (3) an increase of
$22,800 in consulting, legal, and annual fees relating to the Company becoming a
fully reporting public company, (4) a loss of $18,415 on the sale of fixed
assets, (5) a loss on foreign exchange of $34,875, and (6) increase in cash
discount, bad debt and other administration cost of $9,834.
Provision for Profit Sharing. Provision for profit sharing increased by
191.5% from $23,498 for the year ended January 31, 1997 and to $68,504 for the
year ended January 31, 1998. This increase was a result of the higher
profitability of the Company.
Interest. Interest income (net of interest expense) increased from $61,354
for the year ended January 31, 1997, to $74,256 for the year ended January 31,
1998, primarily as a result of interest earned on cash deposits obtained from
the public offering.
<PAGE>
Income before Income Taxes. Before income taxes, the Company's income
increased from $235,318 for the year ended January 31, 1997, to $602,985 for the
year ended January 31, 1998.
Income Taxes. The Company provided for income taxes of $256,657 for the
year ended January 31, 1998. The Company's effective tax rate in 1998 was 42.5%.
Net Income. Net income increased from $109,800 for the year ended January
31, 1997, to $346,328 for the year ended January 1998.
Liquidity and Capital Resources
The Company has traditionally relied on internally generated funds and
short-term bank borrowings to finance its operations and expansion, although
capital expenditures have been partly financed by long-term debt. In May 1996
the Company received net proceeds from a public offering amounting to
$2,773,000.
The Company has in place a demand revolving credit facility in the
principal amount of CDN$1,000,000 with a financial institution. As of January
31, 1999, the Company had not utilized any of its credit facility. Interest on
this indebtedness equals the Canadian prime rate plus 1/2%. The credit facility
is secured by accounts receivable, inventories, certain equipment and other
assets of the Company and an unlimited guarantee by the Company and its
subsidiary, Glas-Aire Industries Ltd. The credit facility was renewed in
December 1998 for a one-year period. During the fiscal year ended January 31,
1999, the Company paid a total of $103 in interest. There was no amount of total
short-term borrowings outstanding in both years at January 31, 1999, and January
31, 1998.
Working capital was $3,400,499 at January 31, 1999. For the year ended
January 31, 1999, net cash generated from operations was $1,367,586 including
net income of $500,768, depreciation of $186,664, deferred income taxes of
$77,177 and a net change in non-cash working capital of $606,969 occurred as
follows: (i) accounts receivable decreased by $247,162 primarily due to
increased collection efforts, (ii) inventories decreased by $99,092 as result of
the usage of raw materials remaining from the previous year, (iii) prepaid
expenses increased by $14,365 and accounts payable and accrued liabilities
increased by $272,832 as a result of the deferral of payment until February &
March 1999.
Net cash provided by financing activities amounted to $27,788 for the year
ended January 31, 1999, primarily due to increase in obligation under capital
lease of $156,108, the repayment of capital lease of $38,331, issuance of shares
of $13,421 and the repurchase of shares for $103,410.
Net cash used in investing activities amounted to $888,219 for the year
ended January 31, 1999, was primarily due to (I) the issuance of note receivable
of $506,806 (ii) the purchase of fixed assets. Net cash used in investing
activities amounted to $365,033 and $573,861 for the years ended January 31,
1998 and 1997, respectively. Capital expenditures during the year ended January
31, 1999 totaled $398,234 and were financed primarily by the funds received
during fiscal 1997 from the public offering. Capital expenditures during the
years ended January 31, 1998 and 1997 totaled $442,921 and $586,305,
respectively.
The Company expects that working capital requirements and capital additions
will continue to be funded through a combination of the Company's existing
funds, internally generated funds, and existing bank facilities and capital
leases. The Company's working capital requirements are expected to increase in
line with the growth of the Company's business, and it either has or will
generate sufficient working capital to meet the Company's requirements during
this fiscal year. During the current fiscal year, the Company anticipates making
total capital expenditures of approximately $650,000 as follows: (1) $100,000
for the purchase of a CNC Machine, (2) $350,000 for a MAAC Machine and upgrading
the Company's other MAAC machines for natural gas heating, (3) $70,000 for
software and related hardware, (4) $95,000 for leasehold improvements, and (5)
$35,000 for the QS9000 (Quality Control Certification) process.
<PAGE>
Impact of Inflation
The Company believes that inflation has not had a material effect on its
business. Although the cost to the Company of certain raw materials used in the
manufacture of its products, primarily acrylic, has increased over the past few
years, the Company has been able to increase the prices of its products
accordingly.
Exchange Rates
The Company sells most of its products to international customers. The
Company's principal markets are the United States and Japan. The Company sells
most of its products in United States dollars, but pays for its material
components and labor principally in Canadian dollars. The Company has never
engaged in exchange rate hedging activities and management does not believe that
such activities are necessary. Management will continue to evaluate this issue
and, if management deems it necessary in the future, it may implement some
hedging techniques to minimize the Company's foreign exchange exposure.
Exchange rates between the United States and Canadian dollar for the fiscal
years ended January 31, 1999, 1998 and 1997, including the average exchange rate
for the period, are as follows:
Fiscal year ended Average Exchange Rate
January 31, Exchange Rate for Period
----------- ------------- ----------
1999 1.U.S.$:1.5110 Cdn.$ 1 U.S.$:1.4861 Cdn.$
1998 1.U.S.$:1.4556 Cdn.$ 1 U.S.$:1.4267 Cdn.$
1997 1.U.S.$:1.3470 Cdn.$ 1 U.S.$:1.3625 Cdn.$
Year 2000 Compliance
The Year 2000 ("Y2K") computer problem refers to the potential for system
and processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has developed certain proprietary software products for use in
its business. The Company has retained a consultant who has revised the software
to be Y2K compliant and who has conducted preliminary tests of the software for
Y2K compliance. Preliminary tests indicate that the software is Y2K compliant.
However, the Company intends to conduct more rigorous tests in order to
establish Y2K compliance. Management believes that any necessary changes will be
completed by October 31, 1999.
The Company also may be affected by Y2K issues related to non-compliant
internal systems developed by the Company or by third-party vendors. The Company
has reviewed its internal systems, including its accounting system, and have
found them to be Y2K compliant. The Company is not currently aware of any Y2K
problem relating to any of its internal, material systems and does not believe
that it has any material systems that contain embedded chips that are not Y2K
compliant.
The Company's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. Management believes that absent a systemic failure outside
the control of the Company, such as a prolonged loss of electrical or telephone
service, Y2K problems at such third parties will not have a material impact on
the Company. The Company has no contingency plan for systemic failures such as
loss of electrical or telephone services. The Company's contingency plan in the
event of a non-systemic failure is to establish relationships with alternative
suppliers or vendors to replace failed suppliers or vendors. Other than the
previously described testing, and remedying problems identified by testing or
from external sources, the Company has no other contingency plans or intention
to create other contingency plans.
<PAGE>
Failures of the Company's internal systems could temporarily prevent it
from processing orders, issuing invoices, and could require it to devote
significant resources to correcting such problems. But to management's
knowledge, the internal accounting systems have been attested by the supplier as
Y2K compliant. Due to the general uncertainty inherent in the year 2000 computer
problem, resulting from the uncertainty of the year 2000 readiness of
third-party suppliers and vendors, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on its
business, results of operations, and financial condition.
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
Included at pages F-1.
Item 9 - Changes in and Disagreements with Accountants on Accounting and;
Financial Disclosure
- --------------------------------------------------------------------------------
The Company has not had any reported or material disagreement with its
accountants on any matter of accounting principles, practices or financial
statement disclosure.
PART III
Item 10 - Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The directors, executive officers, and one of the key employees of
Glas-Aire Industries Group Ltd. at January 31, 1999 were as follows:
Name Age Position
---- --- --------
Edward Ting 51 Chief Executive Officer and Chairman
of the Board of Directors
Alex Yie Wie Ding 39 President, Chief Operating Officer
and Treasurer and Director
Omer Esen 56 General Manager, Chief Financial Officer
Linda Kwan 53 Financial Controller
Chris G. Mendrop 47 Director
Clement Cheung 44 Director
<PAGE>
Edward Ting. Mr. Ting served as Chief Executive Officer and Chairman of the
Board of Directors of the Company from inception until April 16, 1999. From
September 1992 to February 1995, Mr. Ting also served as President of the
Company. Since March 1988, Mr. Ting also has served as President, Chief
Executive Officer and a director of Electrocon International Inc., a publicly
traded, Hong Kong-based holding company that conducts operations through its
subsidiaries in two separate business segments - the distribution of
semi-conductor products (primarily computer chips) to small and medium-sized
manufacturers located in Hong Kong and the People's Republic of China, and the
distribution of golf carts, irrigation products and systems, fertilizer and turf
equipment to golf clubs in Hong Kong, Macao and the People's Republic of China.
As President and Chief Executive Officer of Electrocon, Mr. Ting is responsible
for the overall management, strategy and direction of that company.
Alex Yie Wie Ding, age 39, has served as the general manager, chief
operating officer and a director of the Company since 1991 and has served as
president of the Company since February 1995. Mr. Ding's responsibilities
include managing and advising senior staff, as well as manufacturer
representative agencies, on a variety of important issues. He is also
responsible for new business development, analysis and evaluation of major
projects and maintaining high level contact with key customers. From September
1998 to June 1991, Mr. Ding was General Manager of Hing Wor Inc., a clothing
manufacturer based in Montreal. Mr. Ding serves on the board of the Better
Business Bureau of the Lower Mainland of British Columbia also he is the
President of Sunbrite Business Association. Mr. Ding has a bachelors degree
(1984) in civil engineering and a post-graduate diploma in management (MBA Level
1, 1986), both from McGill University.
Omer Esen, age 56, has served as Vice President of operations for the
Company since February 1995, assumed the additional position of Chief Financial
Officer in November of 1996, and in 1997 was appointed as the General Manager.
In that position, Mr. Esen plans, organizes, directs and controls all operations
including production, research and development, customer service,
purchasing/inventory control, quality assurance and management information
systems. From 1992 until 1995, Mr. Esen was employed as Vice President of
operation for West Bay Sonship Yachts ltd. (Vancouver), one of the world's
leading manufacturers of 58 - 100 foot yachts, where he managed manufacturing
operations as well as developed and installed various computerized business
control systems. During Esen's tenure, the company's revenues grew from $2
million to $15 million. From 1988 until 1992, Mr. Esen was director o operations
for DBA Communication Systems Inc. in Vancouver, a design and manufacturing firm
for small business telecommunications equipment and systems. Mr. Esen holds a
bachelors degree in electrical engineering from Faraday House Engineering
College in London, England and a diploma in business administration from the
University of British Columbia.
Linda Kwan, age 53, served as the Company's accounting manager from March
1995 until November 1996, at which time she was appointed as the controller. Ms.
Kwan is a member of the Certified Management Accountants of Canada. From 1992 to
1995, Ms. 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 Group, Ms. Kwan held a number of positions,
eventually rising to the position of Corporate Controller with responsibility
for all of the firm's accounting functions. Ms. Kwan graduated from Hong Kong
Technical College with a degree in commercial business and accounting.
Chris G. Mendrop. Mr. Mendrop has been a director of the Company since its
inception. He has been Chief Executive Officer of Corporate Development Capital,
Inc., an investment advisory and financial consulting firm located in Denver,
Colorado, since July 1992. From December 1990 until its sale in December 1992,
Mr. Mendrop was a principal of Asset Income Securities, Inc., a NASD member
broker-dealer which provided financial consulting and placement agent services
to alternate credit companies seeking asset securitization to access the capital
markets. From May 1990 to July 1992, he served as Corporate Secretary to Western
Acceptance Corporation, in which position he guided that company in financial
policy and assisted in capital raising, in the development of the first
insurance premium securitized financing in the country and other asset-backed
financing. Mr. Mendrop holds a Bachelor of Science degree in Economics from
Colorado State University and a Masters of Business Administration degree in
Finance from the University of Colorado.
<PAGE>
Clement Cheung served as a director of the Company from March 1998 to April
16, 1999. Mr. Cheung is an officer and director of Electron International, Inc.,
a publicly traded, Hong Kong-based holding company that conducts operations
through its subsidiaries in two separate business segments - the distribution of
semi-conductor products (primarily computer chips) to small and medium-sized
manufacturers located in Hong Kong and the People's Republic of China, and the
distribution of golf carts, irrigation products and systems, fertilizer and turf
equipment to golf clubs in Hong Kong, Macao and the People's Republic of China.
Mr. Cheung joined EPL in 1990 as an accounting and administrative manager. Prior
to joining EPL, Mr. Cheung was the controller for Econ Electronics Limited.
On April 16, 1999, Edward Ting and Clement Cheung resigned from the Board
of Directors of the Company in connection with Mr. Ting's sale of the Company's
stock held by Mr. Ting and his wife to Speed.com Inc., a wholly-owned subsidiary
of Regency Affiliates, Inc. ("Regency"). Mr. William Ponsoldt, the Chairman and
Chief Executive Officer of Regency, was elected to the Board of Directors to
fill the vacancy created by Mr. Ting's resignation. Mr. Cheung also resigned and
Marc Baldinger was elected to the Board of Directors to fill the vacancy created
by Mr. Cheung's resignation. Information concerning Mr. Ponsoldt and Mr.
Baldinger is set forth below:
William R. Ponsoldt (age 57). Mr. Ponsoldt has served as a director of the
Company since April 16, 1999. Mr. Ponsoldt is the Chairman of the Board, Chief
Executive Officer and President of Regency Affiliates, Inc. ("Regency"). Mr.
Ponsoldt has been a director of Regency since June 1996, and has been the
Chairman of the Board since August 1996, and President and Chief Executive
Officer since June 1997. During the past five years, Mr. Ponsoldt has served as
the portfolio manager for several hedge funds.
Marc Baldinger (age 43). Mr. Baldinger has served as a director of the
Company since April 16, 1999. Mr. Baldinger is a Senior Officer in Financial
Services for Riverside National Bank ("Riverside") located in Palm City,
Florida, and is responsible for portfolio management, asset allocation, and
investment selection for Riverside's Trust Department. He has been employed by
Riverside since November 1996. From January 1994 to November 1996 Mr. Baldinger
was employed as a Certified Financial Planner for American Express Financial
Advisors, Inc. and Linsco Private Ledger. Mr. Baldinger has a broad background
in financial management and planning. Prior to entering the financial planning
business, Mr. Baldinger was the President of Supreme Petroleum Company, which
was a petroleum trading company.
The directors of the Company 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.
Pursuant to the Underwriting Agreement between the Company and Global
Financial Group, Inc. ("Global"), Global may, in its discretion, 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 not yet designated such
person.
<PAGE>
Item 11 - Executive Compensation
- --------------------------------
The following table summarizes all compensation paid to the Chief Executive
Officer and the President of the Company for services rendered to the Company
during the last three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation
Name -------------------
and Fiscal year Other
principal ended annual
position January 31, Salary Bonus compensation
-------- ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
Edward Ting 1999 $ 0 $ 13,528 $ 48,000(1)
Chief Executive Officer, 1998 $ 0 $ 5,140 $ 48,000(1)
Chairman of the Board, 1997 $ 0 $ 6,801 $ 48,000(1)
Alex Y.W. Ding 1999 $ 57,575 $ 13,528 0
President, Chief Operating Officer 1998 $ 51,097 $ 5,140 0
1997 $ 49,357 $ 6,801 0
Chris G. Mendrop
Director 1999 $ $ 0 $ 12,000(2)
1998 $ 0 $ 0 $ 12,000(2)
1997 $ 0 $ 0 $ 12,000(2)
(1) Represents consulting fees paid by the Company to Mr. Ting. during the
fiscal years ended January 31, 1999.. Mr. Ting was paid a bonus of $13,528
during the fiscal year ended January 31, 1999, $5,140 and $6,801 1998, 1997
pursuant to the Company's profit sharing program described below.
(2) Represents consulting fees paid by the Company to Mr. Chris G. Mendrop
during the fiscal year ended January 31, 1999.
</TABLE>
Employment Agreements. Effective August 1, 1998, the Company entered into
amended and restated employment agreements with Edward Ting, Alex Ding, Omer
Esen and Linda Kwan. The agreements are for two year terms. Under those
employment agreements, Messrs. Ting, Ding, Esen and Ms. Kwan are entitled to
base annual compensation of $48,000(US), $72,000(US), $48,000(US) and
$37,800(US), respectively. Messrs. Ding, Esen and Ms. Kwan are paid in Canadian
dollars and the US dollar figures in the preceding sentence are based upon
conversion at the average exchange rate during the year. In addition to base
compensation and the minimum bonuses as provided in the agreements, Messrs.
Ting, Ding, Esen and Ms. Kwan will be entitled to participate in the profit
sharing program described below.
Directors. The Company paid $2,000 to each director (employee and
non-employee) during the fiscal year ended January 31, 1999 as compensation for
serving as directors.
Profit Sharing Program. Rather than paying its executives high salaries,
management believes it desirable to provide incentives through a profit sharing
program. Accordingly, in 1994, the Company adopted a profit sharing program
which provides that an amount equal to 10% of the Company's income before income
taxes and provision for profit sharing may be distributed to officers and
employees of the Company. The first distributions pursuant to the plan,
aggregating approximately $83,000, were made in April 1995, based on the net
income of the Company for the fiscal year ended January 31, 1995. The Board of
Directors of the Company has adopted an amendment to the profit sharing program
under which the maximum amount that can be distributed under the program in any
one fiscal year is $100,000. Distributions under the plan for the fiscal year
ended January 31, 1999, aggregated approximately $89,496
Option Plans. The Board of Directors of the Company has 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 the
Company's Common Stock. The purpose of the Qualified Plan is to make options
available to management and employees of the Company in order to provide them
with a more direct stake in the future of the Company and to encourage them to
remain with 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").
<PAGE>
The Board of Directors of the Company has 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 the Company's Common
Stock. The purpose of the Non-Qualified Plan is to provide certain key
employees, independent contractors, technical advisors and directors of the
Company 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 the Company's 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
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.
Compliance with Section 16(a) of the Exchange Act
The Company has received representations from each other person that served
during fiscal 1996 as an officer or director of the Company confirming that
there were no transactions that occurred during the Company's most recent fiscal
year end which required the filing of a Form 5.
<PAGE>
Item 12. - Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The following table sets forth as of January 31, 1999, 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(1)
---------------- -------------------- -------------------
Alex Ding
3137 Grandview Highway
Vancouver, B.C.,
Canada V5M 2E9 71,747(2)(5) 4.5%
Edward Ting
21045 Comer Drive
Saratoga, California 95070 513,915(3) 32.25%
Viola Ting
21045 Comer Drive
Saratoga, California 95070 513,915(4) 32.25%
Chris G. Mendrop Nil 0.0%
1860 Blake Street
Denver, Colorado 80202
Omer Esen
3137 Grandview Highway
Vancouver, B.C.
Canada V5M 2E9 1,860 0.0%(6)
Directors and executive officers
as a group (6 persons) 588,877(2)(3) 36.95%
- ------------------------------
(1) Excludes (i) 68,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants issued in conjunction with the public offering
completed in May 1996; and (ii) 320,000 shares of Common Stock reserved for
issuance under the Company's Stock Option Plans.
(2) Includes 70,777 shares sold by the numbered company controlled by Alex Ding
in September 1998 to his mother, Mr. Sik Chun Fei.
(3) Includes 138,729 shares owned of record by Viola Ting, the wife of Edward
Ting.
(4) Includes 375,186 shares owned of record by Edward Ting, the husband of
Viola Ting.
(5) In September 1998, Alex Ding sold his share to Ms. Sik Chun Fei, his
mother, at fair market value. Mr. Ding may be deemed to be the beneficial
owner, although not the record owner of those shares.
(6) Represents less than 1%
<PAGE>
Change in Control
On April 16, 1999, Edward Ting, the Chairman of the Board of Directors of
Glas-Aire Industries Group Ltd. ("Glas-Aire"), and Viola Ting, Mr. Ting's wife
and a Director of Glas-Aire, sold an aggregate of 513,915 shares of the $0.01
par value common stock of Glas-Aire to Speed.com, Inc. ("Speed.com"), a Delaware
corporation, in a private transaction. Speed.com is a wholly-owned subsidiary of
Regency Affiliates, Inc. ("Regency"), also a Delaware corporation.
The purchase price for the shares was One Million, Eight Hundred
Sixty-Three Thousand Dollars ($1,863,000). $1,213,000 of the purchase price for
the shares was paid in cash and the balance of $650,000 was paid in the form of
a promissory note due January 1, 2000 which bears interest at the rate of 7.5%.
The indebtedness evidenced by the promissory note is secured by a first priority
security interest in 200,000 of the shares purchased by Speed.com. In addition,
payment of the indebtedness evidenced by the promissory note is guaranteed by
Mr. William R. Ponsoldt, President and a Director of Speed.com and President,
Chief Executive Officer, and Chairman of the Board of Directors of Regency.
The cash in the amount of $1,213,000 was borrowed from National Trust
Company, an affiliate of Statesman Group, Inc. which is a controlling
shareholder of Regency. The loan is unsecured and is due on demand.
Subsequent to the transfer of the 513,915 shares, Speed.com owns,
beneficially and of record, approximately 32.25% of the issued and outstanding
shares of Glas-Aire, including 3,000 shares previously purchased on the
open-market.
Pursuant to the Contract for the Purchase and Sale of Securities, Messrs.
Edward Ting and Clement Cheung resigned as directors of Glas-Aire and, by
consent minutes dated April 16, 1999, Messrs. William R. Ponsoldt and Marc H.
Baldinger were elected to fill the vacancies created by their resignations.
Neither Mr. Ting nor Mr. Cheung resigned as a result of any disagreement with
Glas-Aire. In addition, it is anticipated that Speed.com will name three
additional directors to Glas-Aire's Board of Directors and that the Directors
will elect the three persons named by Speed.com to the Board effective ten days
after the mailing of a notice pursuant to Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 thereunder, to all shareholders of
Glas-Aire.
Management of Glas-Aire does not know of any arrangements, other than the
above-described pledge of 200,000 shares, the operation of which may at a
subsequent date result in a change in control of the company.
Item 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
Certain Transactions
In May 1991, a company owned by Alex Yie Wie Ding acquired 48.97% of the
outstanding shares of Multicorp from an unaffiliated party and incurred an
installment purchase obligation in the amount of CDN$375,000 with respect to the
purchase. Multicorp has made advances to Mr. Ding's company which correspond to
the company's payment obligations under the installment purchase. In December
1992, prior to the exchange of the Company's stock with the stockholders of
Multicorp under which the Company acquired 100% of the outstanding capital stock
of Multicorp, Multicorp declared a dividend on the shares owned by Mr. Ding's
company in the amount of CDN$375,000. Mr. Ding's company then repaid the
advances previously paid to it in the amount of CDN$75,000 and made a loan to
the Company in the amount of CDN$300,000. The repayment schedule under the loan
corresponds to the repayment schedule under the installment purchase obligation
incurred by Mr. Ding's company to the former stockholder of Multicorp. In
essence, the Company has assumed the payment obligation to the former
stockholder of Multicorp. The loan from Mr. Ding's company was repaid in full
(including $26,745 of principal) during the year ended January 31, 1997.
<PAGE>
In May 1994, the Company made a loan in the principal amount of $300,000 to
a company controlled by Edward Ting, the Chairman of the Board of Directors and
Chief Executive Officer of the Company. The loan was not evidenced by a written
agreement or promissory note, but bore interest at the rate of 9% per annum. The
loan was paid in full prior to January 31, 1995. In November 1994, the Board of
Directors adopted a policy resolution prohibiting the Company from making any
loan or advance of money or property to a director of the Company and limiting
the Company's ability to make such loans or advances to officers of the Company
or its subsidiaries unless a majority of independent disinterested outside
directors determine that such loan or advance may reasonably be expected to
benefit the Company. Further, all future loans and advances, if approved, will
be made on terms that are no less favorable to the Company than those that are
generally available from unaffiliated third parties. In March of 1998, the Board
of Directors rescinded these resolutions in connection with their approval of
the transaction described below in which the Company granted a bank a security
interest in a $500,000 deposit as collateral for the issuance of a standby
letter of credit (the "LC") to one of the suppliers to a wholly-owned subsidiary
of Electrocon International Inc. ("EII"). Mr. Edward Ting, the Chairman of the
Board, and Mr. Clement Cheung, a member of the Board of Directors, were officers
and directors of EII.
In November 1993, Mr. Alex Ding, the President of the Company, made a loan
to the Company in the principal amount of CDN$80,000. The loan was not evidenced
by a written agreement or promissory note, but bore interest at the rate of 10%
per annum. The loan was paid in full prior to January 31, 1995.
In late 1994, a company controlled by a former officer of the Company made
a loan to the Company in the principal amount of $100,000. The loan, which bore
interest at the rate of 10% per annum, was repaid in full prior to January 31,
1996.
Effective February 1, 1996, the Company entered into a Consulting Agreement
with Corporate Development Capital, Inc. ("CDC"), a corporation owned and
controlled by Chris G. Mendrop, a director of the Company, pursuant to which CDC
has agreed to assist the Company in the development of a long-term strategic
plan, including but not limited to the areas of management, marketing and
finance, and to perform such other management consulting services for the
Company as shall be requested from time to time by the President of the Company.
As compensation for these services, CDC was paid $16,000 on or by the date of
closing of the public offering and $4,000 per month for the 12 months
thereafter. In addition, Mr. Mendrop was issued 12,800 shares of the Company's
Common Stock pursuant to the Consulting Agreement. All amounts due under this
agreement have been paid.
On March 31, 1998, the Company granted a bank a security interest in a
$500,000 deposit as collateral for the issuance of a standby letter of credit
(the "LC") to one of the suppliers to a wholly-owned subsidiary of Electrocon
International Inc. ("EII"). Mr. Edward Ting, the Chairman of the Board, and Mr.
Clement Cheung, a member of the Board of Directors, are officers and directors
of EII. As consideration for the Company agreeing to provide the security for
the LC, EII agreed as follows: (i) to issue the Company a warrant exercisable
for a period of five (5) years from March 25, 1998, to purchase 250,000 shares
of common stock of EII at an exercise price of $1.00 per share during the first
year, $1.10 per share during the second year, $1.20 per share during the third
year, $1.50 per share during the fourth year and $1.75 per share during the
fifth year; (ii) to pay the Company a fee in the amount of 1% of the collateral,
or $5,000, payable to the Corporation in advance for the six-month period
beginning on the date the LC is issued by the Bank, and an additional fee of 1%,
also payable in advance, for the six-month period immediately following the
initial six-month period, if the Company's collateral continues to be utilized
for the LC, with the understanding that the collateral shall be made available
by the Company to collateralize the LC for a period not to exceed one year; and
(iii) the pledge to the Company by Edward Ting of all shares of common stock of
the Company currently held by him, his wife, or under his control. Subsequently,
the Board of Directors approved a loan in the principal amount of $500,000 to
EII secured by 100% of Edward Ting's stock in the Company. EII used the proceeds
of the loan to among other things cause the bank to release the Company's
$500,000 security deposit that was being used as collateral for the LC. On April
16, 1999, the loan (including principal and interest) was paid in full by Edward
Ting and the Company assigned the promissory note from EII to Mr. Ting.
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
The financial statements listed by the Registrant on the accompanying Financial
Statements (see pages F-1 through F-16) are filed as part of this Annual Report.
2. Exhibit 10.1 Master Equipment Lease and attachments thereto.
Exhibit 10.2 Credit Facility with HSBC.
(b) Reports on Form 8-K: The Company has not filed a report on Form 8-K.
<PAGE>
Glas-Aire Industries Group Ltd.
Consolidated Financial Statements
For the year ended January 31, 1999
Contents
Auditors' Report F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Income F-4
Statements of Shareholders' Equity
and Comprehensive Income F-5
Statements of Cash Flows F-6
Summary of Significant Accounting Policies F-8
Notes to Consolidated Financial Statements F-12
<PAGE>
Auditors' Report
To the Shareholders of
Glas-Aire Industries Group Ltd.
We have audited the consolidated balance sheets of Glas-Aire Industries Group
Ltd. and subsidiaries as at January 31, 1999 and 1998 and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three year period ended
January 31, 1999. 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 generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as at January 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the years in the three year period ended
January 31, 1999, in conformity with generally accepted accounting principles in
the United States.
Chartered Accountants
Langley, British Columbia
March 18, 1999, except for note 1,
as to which the date is April 19, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
Glas-Aire Industries Group Ltd.
Consolidated Balance Sheets
(Stated in U.S. Dollars)
- ----------------------------------------------------------------------------------
January 31 1999 1998
- ----------------------------------------------------------------------------------
Assets
Current
<S> <C> <C>
Cash and equivalents $ 2,110,535 $ 1,645,953
Accounts receivable, net of allowance
for doubtful accounts 953,289 1,200,451
Note receivable from related party (Note 1) 506,806 --
Inventories (Note 2) 673,688 772,780
Prepaid expenses 33,460 19,095
----------- -----------
4,277,778 3,638,279
Fixed assets, net (Note 3) 1,607,557 1,408,816
----------- -----------
$ 5,885,335 $ 5,047,095
Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities $ 733,512 $ 460,680
Income taxes payable 94,712 92,464
Current portion of obligation under capital lease 49,055 --
----------- -----------
877,279 553,144
Obligation under capital lease (Note 4) 68,722 --
Deferred income taxes (Note 6) 358,504 281,327
1,304,505 834,471
----------- -----------
Shareholders' equity
Common stock (Note 5(a)) 15,935 15,875
Additional paid-in capital 3,475,695 3,462,334
Retained earnings 1,546,730 1,045,962
Accumulated other comprehensive income (117,957) (75,384)
Treasury stock (Note 5(b)) (339,573) (236,163)
----------- -----------
4,580,830 4,212,624
----------- -----------
$ 5,885,335 $ 5,047,095
On behalf of the Board:
- ----------------------------
Director
- ----------------------------
Director
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Glas-Aire Industries Group Ltd.
Consolidated Statements of Income
(Stated in U.S. Dollars)
- ----------------------------------------------------------------------------------
Years ended January 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales (Note 8) $ 6,639,219 $ 6,409,954 $ 4,316,372
Cost of sales 4,497,280 4,505,889 3,027,968
----------- ----------- -----------
Gross profit 2,141,939 1,904,065 1,288,404
----------- ----------- -----------
Expenses
Research and development 415,751 393,182 395,099
Selling and distribution 403,381 386,098 281,669
General and administrative 513,385 527,552 414,174
Provision for profit sharing 89,496 68,504 23,498
Interest income (79,903) (74,256) (61,354)
----------- ----------- -----------
1,342,110 1,301,080 1,053,086
----------- ----------- -----------
Income before income taxes 799,829 602,985 235,318
Income taxes (Note 6) 299,061 256,657 125,518
----------- ----------- -----------
Net income for the year $ 500,768 $ 346,328 $ 109,800
Earnings per share - basic and diluted $ 0.34 $ 0.23 $ 0.08
Weighted average number of
shares outstanding 1,470,129 1,519,405 1,426,038
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Glas-Aire Industries Group Ltd.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended January 31, 1999, 1998 and 1997
(Stated in U.S. Dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Stock Paid-in Retained Treasury Comprehensive Shareholders'
Shares Amount Capital Earnings Stock Income Equity
------ ------ ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 31, 1996 923,813 $ 9,238 $ 911,148 $ 589,834 $ (17,010) $ (29,052) $ 1,464,158
Net income 109,800 109,800
Shares issued 692,800 6,928 2,645,771 2,652,699
Shares repurchased (147,476) (147,476)
Shares retired (4,192) (42) (16,968) 17,010 --
Foreign currency
translation adjustment 13,203 13,203
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -
January 31, 1997 1,612,421 16,124 3,539,951 699,634 (147,476) (15,849) 4,092,384
Net income 346,328 346,328
Shares repurchased (Note 5(b)) (166,553) (166,553)
Shares retired (Note 5(b)) (24,917) (249) (77,617) 77,866 --
Foreign currency
translation adjustment (59,535) (59,535)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -
January 31, 1998 1,587,504 $ 15,875 $ 3,462,334 $ 1,045,962 $ (236,163) $ (75,384) $ 4,212,624
Net income 500,768 500,768
Shares issued (Note 5(c)) 5,965 60 13,361 13,421
Shares repurchased (Note 5(b)) (103,410) (103,410)
Foreign currency
translation adjustment (42,573) (42,573)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -
January 31, 1999 1,593,469 $ 15,935 $ 3,475,695 $ 1,546,730 $ (339,573) $ (117,957) $ 4,580,830
===================================================================================================================================
Comprehensive income and its components consist of the following:
1999 1998 1997
-----------------------------------
Net income $ 500,768 $ 346,328 $ 109,800
Foreign currency translation adjustment (42,573) (59,535) 13,203
-----------------------------------
Comprehensive income $ 458,195 $ 286,793 $ 123,003
===================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Glas-Aire Industries Group Ltd.
Consolidated Statements of Cash Flows
(Stated in U.S. Dollars)
- ---------------------------------------------------------------------------------------------
Years ended January 31,
1999 1998 1997
---- ---- ----
Increase (decrease) in cash
<S> <C> <C> <C>
Cash flows from:
Operating activities
Net income for the year $ 500,768 $ 346,328 $ 109,800
Depreciation 186,664 159,310 110,480
Deferred income taxes 77,177 93,829 56,927
Loss (gain) on sale of fixed assets (3,992) 17,438 1,017
Net change in non-cash working capital 606,969 610,337 (1,162,587)
----------- ----------- -----------
Net cash (used in) provided by
operating activities 1,367,586 1,227,242 (884,363)
----------- ----------- -----------
Financing activities
Increase in obligation under
capital lease 156,108 -- --
Repayment of obligation
under capital lease (38,331) -- (97,246)
Repayment of long-term debt -- -- (27,304)
Issuance of shares 13,421 -- 2,652,699
Repurchase of shares (103,410) (166,553) (147,476)
Decrease in bank indebtedness -- (110,100) (145,827)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 27,788 (276,653) 2,234,846
Investing activities
Issuance of note receivable (506,806) -- --
Proceeds from sale of fixed assets 16,821 77,888 12,444
Purchase of fixed assets (398,234) (442,921) (586,305)
----------- ----------- -----------
Net cash used in investing activities (888,219) (365,033) (573,861)
----------- ----------- -----------
Foreign currency translation adjustment (42,573) (59,535) 13,203
----------- ----------- -----------
Increase in cash and equivalents during the year 464,582 526,021 789,825
Cash and equivalents, beginning of year 1,645,953 1,119,932 330,107
----------- ----------- -----------
Cash and equivalents, end of year $ 2,110,535 $ 1,645,953 $ 1,119,932
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Glas-Aire Industries Group Ltd.
Consolidated Statements of Cash Flows (continued)
(Stated in U.S. Dollars)
- -----------------------------------------------------------------------------------------------------------
Years ended January 31,
1999 1998 1997
---- ---- ----
Changes in non-cash working capital
<S> <C> <C> <C>
Term deposit $ - $ 1,000,000 $ (1,000,000)
Accounts receivable, net 247,162 (462,864) (64,916)
Inventories 99,092 (144,357) 61,435
Prepaid expenses (14,365) 139,414 15,357
Accounts payable and accrued liabilities 272,832 942 (51,268)
Income taxes payable 2,248 77,202 (123,195)
------------ ------------ ---------------
$ 606,969 $ 610,337 $ (1,162,587)
============ ============ ===============
Supplemental disclosure of cash flow
relating to:
Interest income $ 54,956 $ 75,264 $ 74,591
Income taxes 206,701 69,453 194,936
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-7
</TABLE>
<PAGE>
Glas-Aire Industries Group Ltd.
Summary of Significant Accounting Policies
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
Nature of Business
- ------------------
The Company is a Nevada, USA corporation and was incorporated on September 29,
1992. The Company manufactures and distributes wind deflector products to
automobile manufacturers in the United States, Canada and Japan. The Company's
corporate office and manufacturing facility are located in Vancouver, Canada.
Basis of Consolidation
- ----------------------
These financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Multicorp Holdings Inc., Glas-Aire Industries Ltd.,
Glas-Aire Industries Inc., and 326362 B.C. Ltd. All inter-company transactions
and accounts are eliminated.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States.
Comparative Figures
- -------------------
Certain comparative figures from the prior year have been reclassified to
conform with the current year's presentation.
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-progress and finished goods as net realizable value.
Fixed Assets
- ------------
Fixed assets are recorded at cost less accumulated depreciation. Depreciation is
calculated using the declining-balance method, except for leasehold improvements
where the straight-line method is used, at the following annual rates:
Office equipment - 10%
Manufacturing equipment - 10%
Computer equipment - 15%
Dies and molds - 10%
Automotive - 30%
Leasehold improvements - 10%
Equipment under capital lease - 10%
F-8
<PAGE>
Glas-Aire Industries Group Ltd.
Summary of Significant Accounting Policies
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
Per Share Information
- ---------------------
The Company has adopted Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("EPS") which requires 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 potential dilution that could occur if securities
or other contracts, which, for the Company, consists of warrants to purchase
68,000 shares of the Company's common stock, are exercised. These warrants were
anti-dilutive in 1999, 1998 and 1997 and as such, dilutive EPS amounts are the
same as basic EPS for all periods presented. Treasury stock held by the Company
is not included in the number of shares outstanding.
Cash Equivalents
- ----------------
Cash equivalents consist of short term deposits with 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 asset and liability method of accounting for income taxes. The
asset and 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.
F-9
<PAGE>
Glas-Aire Industries Group Ltd.
Summary of Significant Accounting Policies
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
Foreign Currency Translation
- ----------------------------
The functional currency of the companies' operations is the Canadian dollar.
These financial statements have been translated into United States currency
using SFAS No. 52. Under this method assets and liabilities are translated at
the rate of exchange at the balance sheet date and revenues and expenses are
translated at the rate of exchange in effect when those items are recognized in
the financial statements. The resulting exchange gains and losses are deferred
and are shown as a separate component of shareholders' equity.
All figures are reported in U.S. dollars. Exchange rates between the U.S. and
Canadian dollar for each of the applicable years reported in these financial
statements, with bracketed figures reflecting the average exchange rate for the
year, are:
January 31, 1999 - 1 U.S. $:1.5110 Cdn. $ (1.4861 Cdn. $)
January 31, 1998 - 1 U.S. $:1.4556 Cdn. $ (1.4267 Cdn. $)
January 31, 1997 - 1 U.S. $:1.3470 Cdn. $ (1.3625 Cdn. $)
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.
Financial Instruments
- ---------------------
The Company's financial instruments consist of cash and equivalents, accounts
receivable, note receivable, accounts payable and obligation under capital
lease. 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, unless otherwise stated.
F-10
<PAGE>
Glas-Aire Industries Group Ltd.
Summary of Significant Accounting Policies
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
New Accounting Standards
- ------------------------
SFAS No. 130, "Reporting Comprehensive Income", issued by the FASB is effective
for financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and displaying of comprehensive
income and its components in a full set of general purpose financial statements.
Adoption of SFAS No. 130 did not have an impact on the Company's financial
position or results of operations. The other disclosures required by this
statement are presented.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS No. 131 requires that
public companies report certain information about operating segments, products,
services, and geographical areas in which they operate and their major
customers. The Company operates in only one business segment. The other
disclosures required by this statement are presented.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS No. 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of the
new standard to have any affect on its financial statements.
F-11
<PAGE>
Glas-Aire Industries Group Ltd.
Notes to Consolidated Financial Statements
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
1. Note Receivable
January 31, January 31,
1999 1998
---- ----
Promissory note, due on demand, interest
at 10.0%, matures March 25, 1999.
Secured by first priority in
513,915 common shares of Glas-Aire
Industries Group Ltd., owned by a
director (Note 9) $506,806 $ --
======== ========
The promissory note was repaid on
April 19, 1999.
- --------------------------------------------------------------------------------
2. Inventories
January 31, January 31,
1999 1998
---- ----
Raw materials $410,051 $568,444
Work-in-progress 88,956 65,166
Finished goods 153,811 120,217
Supplies 20,870 18,953
-------- --------
$673,688 $772,780
======== ========
- --------------------------------------------------------------------------------
3. Fixed Assets
January 31, 1999 January 31, 1998
--------------------------------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
Office equipment $ 111,646 $ 48,471 $ 110,475 $ 43,200
Manufacturing
equipment 1,126,788 464,823 1,134,426 414,376
Computer equipment 164,805 85,027 111,874 67,073
Dies and molds 777,576 234,959 635,756 182,278
Automotive 18,035 902 27,720 10,256
Leasehold improvements 147,171 43,481 133,828 28,080
Equipment under
capital lease 151,853 12,654 -- --
---------- ---------- ---------- ----------
$2,497,874 $ 890,317 $2,154,079 $ 745,263
========== ========== ========== ==========
Net book value $1,607,557 $1,408,816
========== ==========
F-12
<PAGE>
Glas-Aire Industries Group Ltd.
Notes to Consolidated Financial Statements
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
4. Obligation under Capital Lease
The minimum lease payments required under the capital lease of manufacturing
equipment expiring together with the balance of the obligation are as follows:
1999 $ 57,459
2000 57,459
2001 9,577
-----
Total minimum lease payments 124,495
Option to purchase 3,902
-----
128,397
Less amounts representing interest
at 6.5% per annum 10,620
------
117,777
Less current portion 49,055
------
$ 68,722
==========
- --------------------------------------------------------------------------------
5. Share Capital
(a) Authorized
3,000,000 Common stock with a par value
of $0.01 each
1,000,000 Preferred stock with a par value
of $0.01 each
January 31, January 31,
1999 1998
---- ----
Issued
1,593,469 Common stock
(1998 - 1,587,504) $ 15,935 $ 15,875
========= =========
In connection with a public offering in 1996, the Company issued
warrants to the underwriters to purchase shares as follows:
Shares Price Expiry Date
------ ----- -----------
68,000 $ 6.00 April 2001
F-13
<PAGE>
Glas-Aire Industries Group Ltd.
Notes to Consolidated Financial Statements
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
5. Share Capital (continued)
(b) During the year ended January 31, 1999, the Company repurchased 55,472
common stock, at share prices between $1.50 and $1.97 per share,
amounting to $103,410. In fiscal 1998, the Company repurchased 78,317
common stock at share prices between $1.56 and $3.12 per share
amounting to $166,553. These shares are accounted for as treasury
stock until reissued or retired. The purchase of the shares reduced
shareholders' equity. In fiscal 1998 the Company retired 24,917 common
stock amounting to $77,866.
(c) On May 29, 1998, the Company issued shares to certain employees as
part of their compensation. The total number of common stock issued
was 5,965. At May 29, 1998, the common stock was trading at $2.25 per
share.
- --------------------------------------------------------------------------------
6. Income Taxes
The provision for income taxes in the consolidated statements of income
consists of:
January 31, January 31, January 31,
1999 1998 1997
---- ---- ----
Current $210,103 $146,655 $ 71,741
Deferred 88,958 110,002 53,777
-------- -------- --------
$299,061 $256,657 $125,518
======== ======== ========
The effective income tax rate on earnings consists of the following:
January 31, January 31, January 31,
1999 1998 1997
% % %
------ ------ ------
General combined federal and
provincial rate 45.6 45.3 45.3
Manufacturing reduction (7.0) (7.0) (7.0)
Under (over) accrual of prior year taxes (1.2) 4.2 14.7
---- ---- ----
Effective rate 37.4 42.5 53.0
==== ==== ====
F-14
<PAGE>
Glas-Aire Industries Group Ltd.
Notes to Consolidated Financial Statements
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
6. Income Taxes (continued)
The components of deferred taxes are as follows:
January 31, January 31,
1999 1998
------------------------ ------------------------
Temporary Temporary
Difference Tax Effect Difference Tax Effect
Deferred tax
liabilities
Depreciation $943,643 $358,504 $734,615 $281,327
======== ======== ======== ========
- --------------------------------------------------------------------------------
7. Rent
The Company operates in its facilities on a month to month basis. Rent
expense was $106,312, $117,072 and $121,252 for the years ended January 31,
1999, 1998 and 1997 respectively.
- --------------------------------------------------------------------------------
8. Sales Information
(a) Sales figures include sales to the following countries:
January 31, January 31, January 31,
1999 1998 1997
-------------------------------------
United States $5,481,000 $4,915,000 $3,121,000
Japan 242,000 586,000 491,000
Canada and other 916,000 908,000 704,000
(b) Sales to customers who each accounted for more than 10% of the
Company's sales are as follows:
January 31, January 31, January 31,
1999 1998 1997
---- ---- ----
Customer 1 $2,094,000 $2,128,000 $1,341,000
Customer 2 1,404,000 1,334,000 828,000
Customer 3 1,637,000 912,000 839,000
Customer 4 -- -- 491,000
F-15
<PAGE>
Glas-Aire Industries Group Ltd.
Notes to Consolidated Financial Statements
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
9. Related Party Transactions
The Company had the following transactions with related parties:
January 31, January 31, January 31,
1999 1998 1997
---- ---- ----
Fees paid to
directors/shareholders for
ongoing consulting services $ 68,000 $ 60,000 $ 60,000
Promissory note receivable
from a company controlled
by a director (Note 1) 500,000 -- --
Interest earned on promissory note
(Note 1) 6,806 -- --
F-16
<PAGE>
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: April 29, 1999 By: /s/ Alex Yie Wie Ding
- -------------------- ----------------------
Alex Yie Wie Ding, President
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.
Date: April 29, 1999 /s/ William R. Ponsoldt
- -------------------- -----------------------
William R. Ponsoldt,
Chief Executive Officer and
Chairman of the Board
Date: April 29, 1999 /s/ Alex Yie Wie Ding
- -------------------- ---------------------
Alex Yie Wie Ding, President, Chief
Operating Officer, Treasurer
and Director
Date: April 29, 1999 /s/ Omer Esen
- -------------------- -------------
Omer Esen, General Manager and
Chief Financial Officer
Date: April 29, 1999 /s/ Chris G. Mendrop
- -------------------- --------------------
Chris G. Mendrop, Director
Date: April 29, 1999 /s/ Marc Baldinger
- -------------------- ------------------
Marc Baldinger, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS AT AND FOR THIS PERIOD ENDED 12/31/98 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998
<PERIOD-START> FEB-01-1998 FEB-01-1997
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 2,110,535 1,645,953
<SECURITIES> 0 0
<RECEIVABLES> 1,460,095 1,200,451
<ALLOWANCES> 0 0
<INVENTORY> 673,688 772,780
<CURRENT-ASSETS> 4,277,778 3,638,279
<PP&E> 1,607,557 1,408,816
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 5,885,335 5,047,095
<CURRENT-LIABILITIES> 877,279 553,144
<BONDS> 427,226 281,327
0 0
0 0
<COMMON> 3,491,630 3,478,209
<OTHER-SE> 1,089,200 734,415
<TOTAL-LIABILITY-AND-EQUITY> 5,885,335 5,047,095
<SALES> 6,639,219 6,409,954
<TOTAL-REVENUES> 6,639,219 6,409,954
<CGS> 4,497,280 4,505,889
<TOTAL-COSTS> 1,262,197 1,226,824
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (79,903) (74,256)
<INCOME-PRETAX> 799,329 602,985
<INCOME-TAX> 299,061 256,657
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 500,768 346,328
<EPS-PRIMARY> 0.34 0.23
<EPS-DILUTED> 0.34 0.23
</TABLE>
