UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the Fiscal Year Ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED):
For the transition period from _________ to _________.
Commission File Number: 0-30228
ALLURA INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
Canada
(Jurisdiction of incorporation or organization)
1555 West 8th Avenue, Vancouver, B.C., Canada, V6J 1T5
(Address of Principal executive office)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, Without Par Value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Number of outstanding shares of each of the issuer's classes of capital or
common stock as of March 31, 2003: 15,240,302 Common Shares, Without Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant has elected
to follow: Item 17 |X| Item 18 |_|
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court: Yes |_| No|_|
Page 1 of 82
TABLE OF CONTENTS
Page
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PART I
Item 1. Identity of Directors, Senior Management and Advisers.....................................3
Item 2. Offer Statistics and Expected Timetable...................................................3
Item 3. Key Information...........................................................................3
Item 4. Information on the Company...............................................................10
Item 5. Operating and Financial Review and Prospects.............................................22
Item 6. Directors, Senior Management and Employees...............................................32
Item 7. Major Shareholders and Related Party Transactions........................................35
Item 8. Financial Information....................................................................39
Item 9. The Offer and Listing....................................................................40
Item 10. Additional Information...................................................................41
Item 11. Quantitative and Qualitative Disclosures about Market Risk...............................46
Item 12. Description of Securities other than Equity Securities...................................48
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies..........................................48
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.............48
Item 15. Controls and Procedures..................................................................48
Item 16A. Audit Committee Financial Expert.........................................................49
Item 16B. Code of Ethics...........................................................................49
Item 16C. Principal Accountants Fees and Services..................................................50
Item 17. Financial Statements.....................................................................50
Item 18. Financial Statements.....................................................................75
Item 19. Exhibits.................................................................................75
Signatures...............................................................................76
Index to Exhibits Filed..................................................................77
Page 2 of 82
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable to Form 20-F filed as an Annual Report.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable to Form 20-F filed as an Annual Report.
ITEM 3. KEY INFORMATION
A. Selected Financial data.
The following table sets forth, for the periods and the dates indicated,
selected financial and operating data for Allura International Inc. ("Company"
or "Allura" or "Allura Group"), for the fiscal years ended March 31, 2003, 2002,
2001, 2000 and 1999. This information should be read in conjunction with the
Company's Financial Statements and Notes thereto, and "Operating and Financial
Review and Prospects" included elsewhere herein. The selected financial data
provided below are not necessarily indicative of the future results of
operations or financial performance of the Company. To date, the Company has not
paid any dividends on its common shares. The Company's policy at the present
time is to retain earnings for corporate purposes. The payment of dividends in
the future will depend on the earnings and financial condition of the Company
and such other factors as the Board of Directors of the Company may consider
appropriate. Since the Company is currently in an expansion stage, it is
unlikely that earnings will be available for payment of dividends in the near
future.
The Financial Statements of the Company have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP"). There
are no material differences between Canadian GAAP and the accounting principles
that are generally accepted in the United States ("U.S. GAAP") as applied to the
Company, including disclosure items, excepting those disclosed in the financial
statements under note 17.
The following tables set forth information in Canadian dollars.
Page 3 of 82
- -----------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Net Sales $17,613,486 $ 15,220,387 $ 15,934,093 $ 15,716,965 $14,443,677
- -----------------------------------------------------------------------------------------------------------------------
Gross profit $ 4,605,905 $ 3,573,847 $ 4,198,841 $ 4,225,703 $ 3,979,077
- -----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 404,584 $ (1,037,146) $ (583,992) $ (222,769) $ 257,048
- -----------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per
Common Share(1) $ 0.03 $ (0.07) $ (0.04) $ (0.02) $ 0.02
- -----------------------------------------------------------------------------------------------------------------------
Outstanding shares(1) 15,240,302 15,355,055 15,355,055 13,429,868 12,500,000
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $12,285,925 $ 13,624,443 $ 12,644,535 $ 11,193,082 $ 9,005,552
- -----------------------------------------------------------------------------------------------------------------------
Working Capital $ 2,250,619 $ 1,825,796 $ 1,763,449 $ 906,377 $ 872,941
- -----------------------------------------------------------------------------------------------------------------------
Long Term Liabilities -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 9,752,174 $ 11,327,737 $ 9,310,683 $ 9,001,595 $ 7,898,715
- -----------------------------------------------------------------------------------------------------------------------
Non Controlling Interest -- -- -- -- $ 70,582
- -----------------------------------------------------------------------------------------------------------------------
Shareholder's Equity $ 2,533,751 $ 2,296,706 $ 3,333,852 $ 2,191,487 $ 1,106,837
- -----------------------------------------------------------------------------------------------------------------------
Dividends declared per share -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
(1) The information in this table has been retroactively restated to
reflect a 125 for 1 share split during 1999 and a 2 for 1 split
during 2000 of the Company's shares.
CURRENCY EXCHANGE RATE INFORMATION
The Company's accounts are maintained in Canadian dollars. In this Annual
Report all dollar amounts are expressed in Canadian dollars except where
otherwise indicated.
The rate of exchange means the noon buying rate in New York City for cable
transfer in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York. The average rate means the average of the exchange
rates on the last date of each month during a year. The following table sets
forth the exchange rates for the periods indicated.
Page 4 of 82
=====================================================================
2003(1) 2002 2001 2000 1999 1998
==========================---------------------------------------------------------------------
High 1.5994 1.6112 $1.5788 $1.5600 $1.5095 $1.5845
- -----------------------------------------------------------------------------------------------
Low 1.4656 1.5102 1.4933 $1.4417 $1.4440 $1.4577
- -----------------------------------------------------------------------------------------------
Average for 1.5499 1.5638 $1.5360 $1.4871 $1.4827 $1.4564
Period
- -----------------------------------------------------------------------------------------------
End of Period 1.4951 1.5940 1.5784 $1.4995 $1.4440 $1.5375
===============================================================================================
(1) Through March 31, 2003
The following table sets forth the high and low exchange rates for each
month during the previous six months.
- ----------------------------------------------------------------------------------------------
August July June May April March
- ----------------------------------------------------------------------------------------------
High 1.4100 1.4114 1.3768 1.4221 1.4843 1.4905
- ----------------------------------------------------------------------------------------------
Low 1.3835 1. 3368 1.3348 1.3446 1.4336 1.4659
- ----------------------------------------------------------------------------------------------
B. Capitalization and indebtedness.
Not applicable to Form 20-F filed as an annual report.
C. Reasons for the offer and use of proceeds.
Not applicable to Form 20-F filed as an annual report.
D. Risk Factors.
The Company's business is subject to a number of risk factors that are set
forth below:
Since most of the Company's products are manufactured by outside manufacturers,
the loss of one or more of these suppliers as well as any damages to materials
held by the suppliers to make the Company's products may adversely affect the
Company's business.
Page 5 of 82
Outside manufacturers manufacture all of the Company's products, in whole
or in part. These outside manufacturers typically are small to medium-sized,
privately owned companies. During fiscal 2003, the Company purchased products
from over 125 suppliers, with the five largest suppliers accounting for
approximately 43% of the Company's total purchases. Historically, a substantial
portion of the Company's purchases have been concentrated with a relatively
small number of suppliers, accordingly, the loss of any supplier would have a
material adverse effect on its business.
Risks generally inherent in the use of outside manufacturers include
security at the manufacturer's facility, transport of materials to and from the
manufacturer, theft by the manufacturer or its employees and bankruptcy or other
financial problems of the manufacturer.
Fluctuations in the price of gold and diamonds may affect the Company's
profitability.
Prices for the Company's products generally are determined by reference to
the current market price of gold or diamonds. Consequently, the Company's sales
could be affected by significant increases, decreases or volatility in the price
of gold or diamonds. If the price of gold or diamonds were to move substantially
above or substantially below current price levels and remain at such levels for
a prolonged period of time, such increase or decrease could have an adverse
effect on the Company's results of operations. In addition, the Company's
results of operations may be adversely affected during the periods of extreme
volatility in the price of gold or diamonds since many customers may elect to
defer purchases until the price of gold or diamonds had become relatively
stable.
The Company's business is highly seasonal and accordingly, the Company's
revenues may vary significantly from quarter to quarter.
The Company's business is highly seasonal. The third and fourth calendar
quarters, which include the Christmas shopping season, generally produce the
strongest results, and the second calendar quarter generally produces the
weakest results. The Company's sales and income also may vary from quarter to
quarter as a consequence of general economic and industry conditions that affect
consumer spending and purchases by retailers.
The Company's business may be adversely affected if it were to lose the services
of Mr. Jeremy Bowman and/or other key employees.
The Company's business is substantially dependent on the efforts and
abilities of Jeremy Bowman, its Chief Executive Officer. The loss of Mr.
Bowman's services may have a material adverse effect on the Company's business.
The Company has an employment agreement with Mr. Bowman; however, it does not
maintain any key man life insurance on Mr. Bowman's life. The Company also has
an employment agreement with Mr. Thomas Weckman, President of ADL. There are no
assurances that agreements in place will be renewed.
The Company's success will depend upon recruiting and maintaining other
qualified personnel to staff its operations. The Company believes that such
personnel currently are available at reasonable salaries and wages. There can be
no assurance, however, that such personnel will always be available in the
future. In addition, it cannot be predicted whether the Company's work force
will be unionized. The
Page 6 of 82
success of the operations and activities of the Company is dependent to a
significant extent on the efforts and abilities of its management. Although the
Company has employment agreements with certain of its key employees, the loss of
services of any of its management personnel could have a material adverse affect
on the Company.
The Company faces competition from a number of different companies some of which
have greater financial and other resources than the Company.
The Company's business is highly competitive, and the distribution
channels in which the Company markets its products frequently involve different
competitive factors. Some companies in the jewelry industry may have greater
financial and other resources than the Company. See "Information on the Company-
Business Overview - Competition."
The Company does not have any long-term contracts with its customers.
The Company has no long-term contractual relationships with any of its
customers nor is any of the Company's customers subject to any contractual
provisions or other restrictions, which preclude them from purchasing products
from the Company's competitors. The Company accepts returns of certain items,
primarily from large retailers, in order to maintain customer goodwill and as
part of promotional programs. Returns of products, which are not defective
generally, are made as part of stock balancing transactions in which the
returned products are replaced with products better suited to the customer's
needs.
The Company's operations are subject to significant influence by a stockholder.
Each of Jeremy Bowman, the Company's Chief Executive Officer, and Sheila
Bowman, a Company Director and Chairperson of the Audit Committee, owns 462,500
shares of the Company's common stock, which represents, in the aggregate, 6% of
the Company's issued and outstanding common stock. In addition, the Bowman
Family Trust, of which Mrs. Bowman and her children are beneficiaries and of
which Mr. Bowman is one of the three trustees owns 5,325,000 shares of the
Company's common stock, representing approximately 35% of the Company's issued
and outstanding common stock. Mr. Bowman directly owns approximately 3% of the
Common Stock. Accordingly, because of his stock ownership and positions with the
Company, Mr. Bowman will be able to significantly influence all matters
requiring approval of the Company's shareholders, including the election of
directors and the approval of mergers or other business combinations.
Stockholders may find it difficult to sell their shares since there is no market
for the Company's Common Stock.
There is no current trading market for the shares of the Company's Common
Stock and there can be no assurance that a trading market will develop, or, if
such a trading market does develop that it will be sustained. The shares of the
Company's Common Stock, to the extent that a market develops for the shares of
the Company's Common Stock at all, of which there can be no assurance, will
likely appear in what is customarily known as the "pink sheets" or on the NASD
Bulletin Board, which may limit the marketability and liquidity of the shares of
the Company's Common Stock. Thus, stockholders may find it
Page 7 of 82
difficult to sell their shares. To date, neither the Company nor anyone acting
on its behalf has taken any affirmative steps to request or encourage any
broker/dealer to act as a market maker for the Company's Common Stock. Further,
there have been no discussions or understandings, preliminary or otherwise,
between the Company or anyone acting on its behalf and any market maker
regarding the participation of any such market maker in the future trading
market, if any, for the Company's Common Stock.
Under Rule 15g-9 of the Exchange Act, a broker or dealer may not sell a
"penny stock" to, or affect the purchase of a penny stock by, any person unless:
(a) such sale or purchase is exempt from Rule 15g-9;
(b) prior to the transaction the broker or dealer has (1) approved the
person's account for transactions in penny stocks in accordance with
Rule 15g-9, and (2) received from the person a written agreement to
the transaction setting forth the identity and quantity of the penny
stock to be purchased; and
(c) the purchaser has been provided an appropriate disclosure statement
as to penny stock investment.
The United States Securities and Exchange Commission (the "Commission")
adopted regulations that generally define a penny stock to be any equity
security other than a security excluded from such definition by Rule 3a51-1.
Such exemptions include, but are not limited to (1) an equity security issued by
an issuer that has (i) net tangible assets of at least US$2,000,000, if such
issuer has been in continuous operations for at least three years, (ii) net
tangible assets of at least US$5,000,000, if such issuer has been in continuous
operation for less than three years, or (iii) average revenue of at least
US$6,000,000 for the preceding three years; (2) except for purposes of Section
7(b) of the Exchange Act and Rule 419, any security that has a price of US$5.00
or more; and (3) a security that is authorized or approved for authorization
upon notice of issuance for quotation on the NASDAQ Stock Market, Inc.'s
Automated Quotation System. It is likely that shares of the Company's Common
Stock, assuming a market were to develop therefore, will be subject to the
regulations on penny stocks; consequently, the market liquidity for the
Company's Common Stock may be adversely affected by such regulations limiting
the ability of broker/dealers to sell the Company's Common Stock and the ability
of stockholders to sell their securities in the secondary market.
Moreover, the Company's shares may only be sold or transferred by its
stockholders in those jurisdictions in which an exemption for such "secondary
trading" exists or in which the shares may have been registered.
Assuming a market for the Company's Common Stock was to develop, resales of
issued and outstanding restricted stock pursuant to Rule 144 may adversely
affect the price of the Company's common stock.
There are presently issued and outstanding 15,240,302 shares and an
additional 3,000,000 shares reserved for issuance upon the exercise of 2,366,000
options; all but 429,868 of which, are "restricted securities" as that term is
defined under the Securities Act of 1933, as amended (the "Act"), and in the
Page 8 of 82
future may be sold in compliance with Rule 144 of the Act, pursuant to an a
Registration Statement filed under the Act, or other applicable exemptions from
registration thereunder. Rule 144 provides, in essence, that a person holding
restricted securities for a period of one year may sell those securities in
unsolicited brokerage transactions or in transactions with a market maker, in an
amount equal to one percent of the Company's outstanding Common Stock every
three months. Additionally, Rule 144 requires that an issuer of securities make
available adequate current public information with respect to the issuer. Such
information is deemed available if the issuer satisfies the reporting
requirements of Sections 13 or 15(d) of the Exchange Act and of Rule 15c2-11
thereunder. Rule 144 also permits, under certain circumstances, the sale of
shares by a person who is not an affiliate of the Company and who has satisfied
a two-year holding period without any quantity limitation and whether or not
there is adequate current public information available. Investors should be
aware that sales under Rule 144, or pursuant to a Registration Statement filed
under the Act, might have a depressive effect on the market price of the
Company's Common Stock in any market that may develop for such shares.
Since the Company is a Canadian corporation it may be difficult for US
shareholders to effect service of process or to enforce judgments obtained in
the US.
The Company is a Canadian corporation. All of its directors and officers
are residents of jurisdictions other than the United States and a significant
part of its assets are, or will be, located outside of the United States. As a
result, it may be difficult for shareholders resident in the United States to
effect service within the United States upon the Company, and/or such directors
or officers who are not residents of the United States, or to realize in the
United States upon judgments of courts of the United States predicated upon
civil liability of any of the Company, or such directors or officers, under the
United States federal securities laws. The Company has been advised by its
Canadian counsel that there is substantial doubt as to whether Canadian courts
would (i) enforce judgments of the United States courts of competent
jurisdiction obtained against the Company, or such directors or officers,
predicated upon the civil liabilities provisions of such securities laws, or
(ii) impose liabilities in original actions against the Company or its directors
or officers predicated solely upon such securities laws. Accordingly, United
States shareholders may be forced to bring actions against the Company and its
directors and officers under Canadian law and in Canadian courts in order to
enforce any claims that they may have against the Company or its directors or
officers. Subject to necessary registration under applicable provincial
corporate statutes in the case of a corporate shareholder, Canadian courts do
not restrict the ability of non-resident persons to sue in their courts.
The Company's profitability may be affected by currency risk.
The Company is exposed to currency risk as some of its accounts payable
are denominated in currencies other than the Canadian dollar.
The Company earns revenue and incurs operating expenses predominantly in
Canadian dollars. Unfavorable changes in the applicable exchange rates may
result in a decrease or increase in foreign exchange gain or loss.
The Company does not use derivatives to reduce its exposure to foreign
currency risk.
The Company's profitability may be affected by interest rate risks.
Page 9 of 82
The Company's bank indebtedness bears floating interest rates. This
exposes the Company to the risk of changing interest rates that may have a
detrimental affect on its earnings in future periods.
The Company's profitability may be affected by credit risks.
Credit risk arises from the possibility that the entities to which the
Company sells products may experience financial difficulty and be unable to
fulfill their contractual obligations. This risk is mitigated by proactive
credit management policies that include regular monitoring of the debtor's
payment history and performance, credit insurance, geographic diversification,
obtaining security where appropriate, and credit insurance policy coverage.
The Company's profitability may be affected by commodity price sensitivity.
The future revenue and profitability of the Company will be dependent, to
a significant extent, upon prevailing spot market prices for gold and diamonds.
In the past, gold and diamond prices have been volatile. Prices are subject to
wide fluctuations in response to changes in supply and demand for gold and
diamonds, market uncertainty and a variety of additional factors that are beyond
the control of the Company. The Company does not engage in any hedging
activities.
ITEM 4. INFORMATION ON THE COMPANY
A. History, development and organizational structure of the Company.
Corporate Structure
Allura International Inc. (the "Company" or "Allura") was incorporated on
April 13, 1988 under the laws of Canada under the name "IBB International
Bullion and Metal Brokers (Canada) Limited." The Company changed its name to
"Allura International Inc." on April 1, 1999 and simultaneously effected a
corporate restructuring (the "Restructuring") by selling and transferring all of
its assets, other than its 50% interest in Allura Diamonds Limited, a Canadian
corporation ("ADL") to IBB International (Canada) Ltd., a Canadian corporation
("IBB") in exchange for shares of the capital stock of IBB. IBB was newly formed
for the purpose of affecting the Restructuring and as a result of the
Restructuring, became a wholly owned subsidiary of the Company. At the same
time, the Company acquired the balance of the issued and outstanding shares of
capital stock of ADL in exchange for 250,000 shares of the Company's common
stock. During May 2000, the Company incorporated a new company, Bygo Inc.
("Bygo"). Collectively, IBB and ADL are referred to as the "Jewellery Division",
and together with Bygo, as the "Subsidiaries," and together with the Company, as
the "Allura Group."
The Company, through the Jewellery Division, is primarily in the business
of wholesaling gold, sterling silver and diamond jewelry in Canada. Its customer
base is comprised of large national chains as well as independent retailers.
During 2000, the company incorporated a wholly owned subsidiary Bygo. Bygo
currently has business-to-business and business-to-consumer Internet commerce
sites. Since its
Page 10 of 82
inception, Bygo has earned minimal revenues as it has primarily devoted its
efforts and resources to develop the software and hardware necessary to execute
its business plan. Bygo operates as an on-line e-commerce facilitator of
jewellery, paper goods and giftware distribution.
The Company's head-office is located at 1555 West 8th Avenue, Vancouver,
B.C., V6J 1T5. Its telephone number is (604) 683-5700, and its fax number is
(604) 683-5979. IBB and Bygo operate out of the Vancouver facility, however ADL
has its principal office in Halifax at Unit 104, 276 Bedford Highway, Halifax,
N.S., B3M 2K6. The telephone number for ADL is (902) 457-7654 and the fax number
is (902) 443-8414.
Business History
The Company was initially formed to import European jewelry into Canada.
The objective of the Company has been to be a specialized supplier of gold,
silver and diamond jewelry within the following principal sectors:
Department stores
Catalogue retailers
Mass merchants
Major discounters
Major jewelry retailers
Independent jewelry stores
B. Business Overview
Current Operations
The Company conducts its jewelry wholesaling operations through the
Jewelry Division, and conducts its e-commerce business through Bygo.
The Company's mass marketing jewelry operations are conducted through IBB,
while ADL's primary focus is the diamond and other precious and semi precious
independent jewelry sector.
The Activities of IBB
As the "average" Canadian gold importer will normally only buy what is
available from the manufacturers, IBB believes that it is different, in that it
has most of its products manufactured distinctly to its own specifications. IBB
has created a niche for its products through innovative selling and display
techniques and through the use of trade marked names, such as "Tuscany
Gold(TM)", "Tuscany Silver(TM)" and "Earresistables(TM)". The range of products
that IBB sells consists mainly of chains, bracelets, bangles, and earrings in
10, 14 and 18 karat gold. IBB also markets silver jewelry to major retailers and
jewelry chains.
Page 11 of 82
IBB's sales are divided approximately 87% to major retail and jewelry
store chains and 13% to independent jewelry stores. IBB has created a strong and
resourceful management team and continues to invest more to develop and improve
on management information systems and computer equipment. This strategy has
built a strong management infrastructure, which is ready to handle possible
expansion throughout the North American markets.
The Activities of ADL
ADL was established in 1994 to market finished diamond jewelry and loose
diamonds. ADL currently specializes in finer diamond jewelry.
ADL sales are divided approximately 22% to major retail and jewelry store
chains and 78% to independent jewelry stores. ADL's lower priced diamond jewelry
is marketed through IBB. In 2002, ADL incorporated the "Canadian Diamonds" into
its range of products.
The Activities of Bygo
Bygo was established in May 2000 to operate Allura's Internet Commerce
business which comprises of a business-to-business and business-to-consumer
e-commerce service. Bygo's e-commerce business provides a catalog based web site
for suppliers in the jewelry and giftware industry to facilitate online business
transactions.
Since its inception, Bygo has earned minimal revenues by primarily
devoting its efforts and resources to develop the software and hardware
necessary to execute its business plan. Bygo operates as an on-line e-commerce
facilitator of jewellery, paper goods and giftware distribution.
The Allura Group
The Allura Group offers its customers a large selection of jewelry styles,
consistent product quality, prompt delivery of product orders and provides a
wide range of specialized services. The Company's retail customers include The
Hudson Bay Company, Wal-Mart (Canada) Inc., Zellers Inc., Sears Canada Ltd., Ben
Moss Jewellers and Charm Diamond Centres. These customers are among the
Company's largest customers, accounting for approximately 58% of the Company's
net sales in fiscal 2003, 56% in fiscal 2002 and 56% in fiscal 2001. They are
representative of the customers to which the Jewellery Division's marketing
efforts are directed. The Company continues to expand its customer base.
While the Allura Group focused its primary marketing efforts on a
relatively small number of retailers, in fiscal 2003, sales were made to
approximately 500 customers, with no single customer accounting for more than
approximately 17% of net sales. The Company's five largest customers accounted
for approximately 53% of sales in fiscal 2003, 50% in fiscal 2002 and 52% in
fiscal 2001.
Page 12 of 82
The Company does not have any long-term contractual arrangements with any
of its customers; and any of its customers may purchase similar products from
the Company's competitors.
Marketing Philosophy
In implementing its business stratgy, the Company originally introduced
the idea of "concept selling," whereby a group of products, effectively a
collection of jewelry, could be offered to a customer as a complete concept,
including a full merchandise package. With a master assortment in place, the
Allura Group, through discussions with the customers regarding their respective
market demographics and prior marketing successes and failures, is able to
tailor a unique collection of merchandise to suit the individual needs of each
customer. As the customer's individualized collection is assembled, the
Company's professional team of experts develops innovative displays together
with complementing marketing material that will assist the retailer to execute
its sales plan. The Allura Group's staff follow up with telephonic and in
persons conferences and discussions, fine tuning and refining the program on a
continuing basis to ensure an ongoing positive relationship with customers.
Industry Background
Gold Jewelry
According to the World Gold Council, retail sales of karat gold jewelry in
North America for 2001 were US$ 15.6 billion. Dollar sales in 2001 increased by
2.0% from US$15.3 billion in 2000, while unit volume grew by 4.2% from 190.9
million in 2000 to 199.0 million in 2001. Gold jewelry sales have achieved a
five year growth rate of 27% in retail dollars and over 37% in unit volume.
In 2001, traditional retail stores led industry performance in both dollar
sales and unit volume for the year. During the same period, discount stores saw
stronger growth in unit volume when compared to 2000, up 5.4%, while department
stores posted a moderate decline in dollar sales down 0.8% in 2001. Non-store
retail such as direct mail catalogue and TV shopping posted healthy growth both
in dollar sales and unit volume, up 5.5% and 5.2% respectively.
There has been an overall reduction of 10% in the average retail price
paid for karat jewellery in the last eight years. This lower average price has
provided a competitive opportunity for gold versus other jewellery products,
making it more affordable to a broader base of consumers. One further noticeable
retail trend is the shift to higher karatage gold jewelry.
In the United States, retail dollar sales of gold jewelry through outlets
including non-store retail have seen a 45.7% growth in dollar terms between 1993
and 2001, from US$10.7 billion to US$15.6. In 2001, this growth was led by
earrings with increases of 4% in dollar sales and 10% in unit volume. Wedding
ring sales also showed strong growth, up 5.4% in dollar terms and 5.3% in unit
volume during 2001. While neck chains accounted for the highest total dollar
sales, the category actually trailed overall jewelry growth for the fourth
consecutive year. For the third year in a row, earrings posted double-digit
growth on a unit volume basis. Neck chains and earrings combined to generate 61%
of the unit volume sold in 2001.
Page 13 of 82
For the fourth year in a row the overall average retail price of gold
jewelry declined. In 2001 the drop was by 2.1% from US$80 to US$78. In terms of
price decline earrings posted the largest percentage reduction by an average of
5.3%, followed by other rings at 2.8% and neck chains at 2.4%.
In 2001 traditional jewelry stores maintained their dominant share of the
gold retail dollar sales in the U.S with a 49% share, followed by discount
stores with 22%. In terms of market share, non-retail stores posted the highest
growth rate while discount stores experienced a slowdown.
The gold jewelry industry in North America is highly fragmented and at the
manufacturing and wholesale distribution levels, is characterized by large
numbers of small to medium sized, privately owned companies. As seen above,
retail jewelry chains and small independent jewelers make the majority of retail
sales. In the past few years, alternative distribution channels such as mass
merchandisers, discount stores, warehouse clubs and home shopping networks have
captured increased market share by offering discounted prices. Other significant
distribution channels include catalogue showrooms and department stores. With
the emergence of increased consumer use of computer technology, there is a
further retail outlet sector, namely "the internet" which to date has not been
tracked by market audit but which shows increased potential for high sales
growth.
Diamonds
According to the Diamond Promotion Service (marketing section), U.S.
retail diamond jewelry sales in 2000 increased 6% to US$26.3 billion from
US$24.9 billion in 1999, while in 2001 sales declined by 1% to US$26.1 billion.
The average price paid for a diamond engagement ring in the U.S.A during
2001 was US$2,400.
Diamond jewelry sales in Canada reached CAD$1.132 billion in 2000,
reflecting six consecutive years of growth. Canada was the ninth largest market
by retail value in the world. The largest growth areas in terms of category were
the diamond line bracelet, which was up 39%, and the trinity diamond engagement
ring, which experienced a 28% rise.
In the diamond engagement ring category Canadian retail sales rose by 15%
in 1999, the millennium year and by 11% in 2000. The dollar value of diamond
engagement ring sales was up over 8%. The average size of stone bought was 47
points. The average price paid for a solitaire was CAD$3,300 while in the
non-solitaire category the figure was CAD$2,900. In the non-ring category, the
average total stone size purchased was 28 points.
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Internet Business to Business and Business to Consumer
Bygo provides a turnkey service for wholesale suppliers and retailers of
jewelry, giftware, and related product categories. Suppliers will outsource
catalogue creation, order transmission, purchasing facilitation and associated
services to Bygo. This centralization of services will enable suppliers and
retailers, who may not otherwise have the capacity to do so, to participate in
the Internet marketplace and take advantage of the potential benefits offered by
e-commerce.
Business Strategy
The Company expects that its market share of the business generated by
large jewelry retailers will continue to trend upwards as manufacturers and
distributors with the size and sophistication to satisfy the specialized service
needs of these large retailers become increasingly in demand. The specialized
services required by these retailers include bar coding, individualized
packaging, "drop-shipping" to individual locations and the ability to
participate in electronic data interchange ("EDI") programs. The Company
believes these services are not available from all suppliers within the
industry. Currently, the Company has the capability and resources to provide
such services and have done so for customers that have requested for such
services.
The Company believes that in the increasingly competitive environment in
which it operates, the ability to provide specialized customer services, deliver
product in a timely fashion and offer a broad line of moderately priced products
with a perceived high value will become increasingly important marketing
factors. The Company has formulated a business strategy that it believes will
enable it to take advantage of these developing trends in the jewelry industry.
Further, the Company believes that its business strategy will allow it to
leverage the expertise and customer base it has established in the Canadian
market to create future sales in the much larger markets of the United States.
The Company believes that the most important elements of its business
strategy are:
Focused Customer Base. While the Company has developed a broad customer
base, the Company targets its marketing efforts towards large retailers, such as
mass merchandisers, department stores, jewelry retail chains, and other major
discount stores. These customers typically require a high level of service, and
the Company seeks to build long-term relationships by making it convenient and
cost-effective for these customers to rely on the Company for essential services
such as product design, inventory control and on time delivery.
Customer Service. The Company offers prompt and reliable order fulfillment
and a wide range of specialized services, including individualized packaging of
jewelry products, price-tagging, bar coding, delivery to individual customer
locations and computer generated reports which aid customers in inventory
control, purchasing decisions and the identification of market trends. The
Company has also participated in EDI programs with certain customers. The
Company believes these specialized services, which are particularly important in
marketing to large retailers, enhance the Company's ability to attract and
retain customers and serve to differentiate the Company from many of its
competitors.
Successful Product Line Diversification. The Allura Group offers its
customers a large selection
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of jewelry styles and range of products that include precious and semi precious
stones, gold jewelry and silver jewelry.
Product Diversity, Innovation and Value Pricing. The Company seeks to
provide its customers with a full line of high quality gold jewelry products
that incorporate traditional styles and designs. While the Company regularly
updates its product lines and offers new products, it seeks to avoid designs
incorporating fashion trends that are expected to have short life cycles. The
Company currently offers approximately 1,400 styles of chains, earrings,
bracelets and rings. The Company's products are moderately priced, with the
majority of its products retailing at prices between $30 and $800, and the
relatively more expensive product line offered by ADL are intended to appeal to
consumers who are value-conscious as well as fashion-conscious. IBB has made
inroads into the silver jewelry market by securing programs with various
customers. The Company currently offers approximately 175 styles of silver
product. A principal focus of the Company's design program is to maximize the
perceived value of the Company's products through design and manufacturing
innovations that enhance the appearance of its jewelry without corresponding
increases in product costs. The Company also works closely with major customers
to develop products, which are sold exclusively by those customers.
Internet Operations. The Company currently has two Internet web domain
names registered for its jewelry operations, AlluraJewelry.com and ibbgold.com.
Both sites are currently set up for e-commerce order facilitation using the Bygo
web site. The Company has established an e-commerce solution that covers
products in the jewelry, home wares, paper goods and giftware industries, which
operates under bygo.net and bygo.com.
The Company has reserved a number of domain names for use in its Internet
operations including, but not limited to: bygo.com, bygo.net, bygo.ca, bygo.org,
buygo.com, and bygo.biz.
Sales and Marketing
The Company's sales and marketing operations are directed at retail stores
of all types and sizes such as department stores, catalogue retailers, mass
merchants, major discounters, major jewelry retailers and independent jewelry
stores. The Company's retail customers include The Hudson Bay Company, Wal-Mart
(Canada) Inc., Zellers Inc., Sears Canada Ltd., Ben Moss Jewellers and Charm
Diamond Centres. These customers are among the Company's largest customers,
accounting for approximately 58% of the Company's net sales in fiscal 2003, 56%
in fiscal 2002 and 56% in fiscal 2001. They are representative of the customers
to which the Jewellery Division's marketing efforts are directed. The Company
continues to expand its customer base.
The Company believes that providing exceptional customer services is a key
element of its marketing program. The Company's marketing efforts emphasize its
ability to fill orders in a prompt and reliable fashion. The Company maintains
an extensive inventory of finished goods, which enable it to rapidly fill
customer orders often within 24 hours of receipt. The Company believes many of
its competitors manufacture products only upon the receipt of customer orders
and generally has only a limited ability to fill orders from existing stock. The
Company has worked hard to build its computer programs to help anticipate
customers' needs.
In addition to prompt and reliable order fulfillment, the Company offers a
wide variety of
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customer support services designed to meet the individual needs of its
customers. The Company targets large retailers who require a high level of
service, and the Company seeks to build long-term relationships by making it
convenient and cost-effective for customers to rely on the Company for essential
services. For many of these customers, the Company prepackages, price-tags and
bar codes individual pieces of jewelry and then ships an assortment of many
prepackaged items to individual retail locations. Other services provided by the
Company include advertising and merchandising support and, point of sale
displays.
The Company provides computer-generated reports analyzing the customers'
sales and inventory levels by category, style and price point. These reports
assist the Company and its customers to increase sales, manage inventory and
project demand. The Company believes the reports are a valuable marketing tool,
and a substantial portion of the efforts of the Company's marketing staff is
devoted to the review and analysis of the reports with representatives of the
Company's major retail customers. These discussions provide a basis for
subsequent purchasing decisions by customers.
Marketing of the Company's products is conducted through its offices in
Vancouver and Halifax. The Company also has a staff in Toronto and five regional
independent customer service representatives who market to retail customers. In
addition, the Company's products are promoted through the use of the Internet,
brochures and trade show exhibitions. The Company does not advertise its
products directly to consumers.
Prices charged to individual customers vary based on the services required
by the customer and the customer's sales volume. Most sales are made under terms
that require payment to the Company of the full purchase price within 90 days of
the date of invoice. During the Christmas holiday season, payment terms for
certain customers may be extended. The Company also makes sales on a consignment
basis (transactions in which products are delivered to customers for more than
90 days under terms which permit the customer to defer paying for the products
until they are sold to its customers and allows them to return any unsold
product). The amount of consignment sales in the past three fiscal years was
approximately $3.5 million per year.
The Company accepts returns of products with defects in materials or
workmanship. The Company also accepts returns of certain items, primarily from
large retailers, in order to maintain customer goodwill and as part of
promotional programs. Returns of products which are not defective, generally,
are made as part of stock balancing transactions in which the returned products
are replaced with products better suited to the customer's particular market
needs.
While the Company sold its products to approximately 500 customers in
fiscal 2003, sales of the Company's five largest customers accounted for
approximately 53% of sales in fiscal 2003 and 50% in fiscal 2002 and 52% in
fiscal 2001. A specific breakdown of the Company's total revenues by segment of
activity for each of the last three fiscal years are included in Note 15 to the
Company's consolidated financial statements set forth herein in Item 17. All of
the Company's active customers are Canadian except Zales Corporation.
Products
The Company seeks to provide its customers with a full line of high
quality 10, 14 and 18 karat
Page 17 of 82
gold, silver jewelry and diamond jewelry products that incorporate traditional
styles and designs. While the Company regularly updates its product lines and
offers new products, it seeks to avoid designs incorporating high fashion trends
that are expected to have short life cycles. The Company currently offers
approximately 1,400 styles of chains, earrings, bracelets and rings. The
Company's products are moderately priced, with the majority of its gold products
retailing at prices between $30 and $800 and are intended to appeal to consumers
who are value-conscious as well as fashion-conscious. Through ADL, the Company
sells items of relatively higher price points, which will extend to an average
high of $2,500.
The Company has an extensive selection of products to offer its customers.
Some of these are available exclusively from the Company. These products include
neckwear, chains, bracelets, bangles, earrings, rings, lockets, pendants and
charms. At the same time, through ADL, the Company sells loose diamonds.
The Company works closely with its manufacturers to put together some
product ranges that are exclusive and often unique in design. The Company's
marketing and merchandising staff work in partnership with major customers to
develop products that are sold exclusively by the Company to those customers.
The Company's product line includes approximately 840 karat gold, 250
diamond and colored stone and 175 sterling silver products that are a regular
part of its product line. These products are traditionally designed diamond and
colored stone set items, karat gold and sterling silver chains and other jewelry
products for which there has been consistent demand. The Company continually
strives to update the balance of its product line with innovative, new styles.
New styles primarily are introduced at the beginning of each calendar year, and
replace older styles whose performance has declined. The Company closely
monitors sales of its new styles and promptly discontinues any style that fails
to achieve desired sales levels.
A principal goal of the Company's new product program is to optimize the
perceived value of the Company's products through design and manufacturing
innovations that enhance the appearance of the jewelry without incurring
corresponding increases in product costs.
Service
Bygo provides a turnkey service for suppliers of jewelry, giftware, paper
goods, house wares and related product categories. Suppliers and retailers will
outsource catalogue creation, order transmission, purchasing facilitation and
associated services to Bygo. This centralization of services will enable
suppliers and retailers, who may not otherwise have the capacity to do so, to
participate in the Internet marketplace and take advantage of the potential
benefits offered by e-commerce.
Bygo's all-inclusive e-commerce service will allow suppliers
(manufacturers, wholesalers, or distributors) to place their entire product
range online in a comprehensive, professional, integrated catalogue, and assist
them in selling their goods to their bricks-and-mortar retail customers.
Services will be provided to all members of the distribution channel:
manufacturers, suppliers, sales reps, and retailers.
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Purchasing
The Company purchases finished products from suppliers located principally
in North America, the Middle East, the Far East and the European Economic
Community ("EEC"). The principal items purchased by the Company through IBB are
machine and handmade gold and silver chains; other gold and silver items
purchased as finished goods include rings, bracelets, bangles, lockets,
earrings, pendants and charms. The principal items purchased by the Company
through ADL are loose diamond stones and finished goods, including rings,
bracelets, pendants and earrings.
The world's principal sourcing of rough diamonds is through De Beers
Consolidated Mines, Limited ("De Beers"), a South African company. The
continuing availability of diamonds to the jewelry industry is dependent, to
some degree, on a continuous supply from De Beers. While several other countries
are major suppliers of diamonds, in the event of an interruption of supply from
South Africa, the jewelry industry, as a whole, could be adversely affected,
which could impact the supply of diamonds to the Company.
During fiscal 2003, the Company purchased jewellery products from
approximately 125 suppliers. The largest supplier accounted for approximately
16% of the Company's total purchases, and the five largest suppliers accounted
for approximately 43%.
Although a substantial portion of the Company's purchases are concentrated
within a relatively small number of suppliers, the Company does not believe the
loss of any one supplier would have a material adverse effect on its business.
Alternative sources of supply for the finished goods purchased by the Company
are available. The Company has no long-term contractual relationship with any of
its suppliers.
In order to maintain consistent product quality, the Company carefully
selects its suppliers and continually monitors the quality of their performance.
The Company has strict internal control procedures of all jewelry from
inspecting all materials sent and received from outside suppliers, monitoring
the location and status of all inventory to ensuring government rules and
regulations are followed through the entire purchasing and receiving process. A
complete physical inventory of gold, silver and gemstones is taken at the
Company's distribution and administrative facilities on an annual basis.
The Company does not presently engage in hedging when purchasing gold,
silver or diamonds. The Company believes the risk of price fluctuations can be
mitigated by changes in the prices the Company charges its customers and in the
nature of its contracts negotiated with its largest customers. Increases in the
price of diamonds, silver or gold, however, could adversely affect the profit of
the company. A decrease in the price of gold, silver or diamonds could also have
an adverse affect in the valuation of the Company's inventories.
Competition
The jewelry industry in North America is highly fragmented and
characterized by a large number of small to medium-sized manufacturers,
wholesalers and distributors. The Company's business is highly competitive, and
the Company's competitors include domestic and foreign jewelry manufacturers,
Page 19 of 82
wholesalers and importers who may operate on a national, regional or local
scale.
The Company believes that competition is based primarily on product
availability, timeliness of shipment, customer service, product quality, design
and price. The diverse distribution channels through which the Company markets
its products frequently involve different competitive factors. The ability to
provide specialized services is a particularly important competitive factor in
sales to certain large retailers such as mass merchandisers, discount stores and
catalogue retailers. Product availability and the ability to offer consistent
product quality at competitive prices tend to be the key competitive factors to
key customers that the Company serves. Some of the Company's competitors may
specialize in sales to particular distribution channels and may have
relationships with customers in those distribution channels that make
competition by the Company more difficult. The Company believes that the trend
towards consolidation at the retail level in the jewelry industry will increase
the level of competition in the markets in which the Company competes.
The Company believes its primary competitors for IBB to include PAJ Canada
(Canada and USA), Michael Anthony (Canada and USA), Chateau D'Argent (Canada), R
& B Manufacturing (Canada and USA) and Etruscan Jewelry (Canada and USA) and for
ADL to include Corona (Canada and USA), Master Design (Canada and USA), A & A
Jewel Star (Canada and USA), J.S.N (Canada and USA) and Libman (Canada and USA).
Insurance
The Company maintains primarily all-risk insurance, with limits normally
in excess of the Company's current inventory levels, to cover loss and damage
caused by fire and/or theft of inventory located at the Company's facilities and
insurance on goods in transit. The Company also maintains insurance covering
loss and damage caused by fire and/or theft of inventory located at the premises
of suppliers and while in the possession of its sales representatives. While the
amount of available coverage generally is in excess of the value held by a
particular supplier or sales representative, at times the amount of value held
by a supplier may temporarily exceed the amount of available coverage. These
temporary differences between the amount of available coverage and the value
held have not been material to the Company's financial condition or results of
operations. The Company has fidelity insurance, which provides a level of
coverage against theft or embezzlement by employees of the Company. The Company
has an insurance policy to cover liability against its directors and officers.
Additionally, the Company carries credit insurance, which covers most of the
independent and major customer receivables.
Trademarks
The Company maintains certain Canadian and US registered trademarks. The
level of protection available to the Company for proprietary designs varies
depending on a number of factors, including the degree of originality and the
distinctiveness of the designs. No assurance can be given that the Company's
patent, copyrights and other proprietary rights will preclude competitors from
developing substantially equivalent products.
IBB uses trademarks in the sale of some of its products to further create
an exclusive identity for its customers. The following are some of the Canadian
registered trademarks used: Little Loves Gold Jewellery(TM), Golden Moments(TM),
Earresistables(TM), Tuscany Gold Collection(TM), and Tuscany Silver(TM).
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The Company has registered the trademark name bygo.com for its exclusive
use in Canada: BYGO.COM. The Company is in the process of registering the
following trademark name for its exclusive use in the USA: BYGO.COM.
Additionally, the Company has registered the following trademark names for its
exclusive use in the USA: BYGO and BYGO.NET.
The Company does not have, nor does it rely on patents to establish or
protect its market position. However, the Company has filed for a patent on its
e-commerce web design.
Employees
At March 31, 2003, the Company employed twenty-six persons on a full time
basis. As at August 31, 2003, there were twenty-seven persons employed on a full
time basis. As at August 31, 2003, there are ten employees in finance and
administration, seven in sales and merchandising, and ten in inventory
warehouse. Four employees are employed in the Halifax office, one is employed in
Toronto, and twenty-two are employed in the Vancouver office. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
Governmental Regulation
The tax laws of the Federal Government of Canada and the Provinces of
British Columbia and Nova Scotia govern the Company. Specifically, it is bound
by income, custom and excise tax rules and regulations regarding customs, all of
which are regulated by the federal government of Canada. In addition, the
Company is subject to the sales tax and employment laws of the Provinces of
British Columbia, Ontario and Nova Scotia. Changes in the tax rates governed by
these authorities may have a significant impact on the cash flows of the
Company.
The Company is also required to comply with the reporting requirements
under the Canadian Securities Laws and the reporting requirements for foreign
issuers under the securities laws of the United States regulated by the
Securities and Exchange Commission.
C. Property, plants and equipment.
Real Property
The Company operates from leased premises in Vancouver and Halifax. The
Company's Vancouver office is located on 1555 West 8th Avenue, Vancouver, B.C.,
V6J 1T5, Canada and the Halifax office is located on Unit 104, 276 Bedford
Highway, Halifax, N.S., B3M 2K6, Canada.
The Vancouver premises cover 8,557 square feet and give the Company a
self-contained headquarters building from which to operate. The premises have an
underground parking garage. The premises are leased from a partnership of which
Jeremy Bowman, the Company's President and a
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stockholder who has significant influence on operations, is a partner. The
Company believes that the terms of the lease are as favorable as those that
could be obtained from an unaffiliated third party. The Company leases the
Vancouver premise for $9,400 per month plus expenses.
On May 27th, 2002, the Company leased an office in Halifax on a five year
fixed term starting July 1st, 2002 at $1,100 per month plus applicable taxes.
The Halifax lease has a 90-day cancellation provision for the benefit of ADL
only. The premises are leased on commercially agreed terms, from Torrington Bay
Investments Limited, in which Tom Weckman, the President of ADL, has an
interest. The Company believes the terms of this lease are as favorable as could
have been obtained from unaffiliated third parties. The premises in Halifax are
located at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6 and contain
1,136 square feet of office space.
The Company believes that its current premises are adequate for the
Company's current operating level and presently foreseeable growth.
Equipment
The Company also owns a variety of office equipment consisting of
computers, photocopiers and other office equipment.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
This discussion should be read in conjunction with the audited
consolidated financial statements of the Company and related notes thereto
included herein.
A. Operating Results
Fiscal 2003 v. Fiscal 2002
Sales for the fiscal year ended March 31, 2003 ("Fiscal 2003") were
$17,613,486 compared to $15,220,387 for the fiscal year ended March 31, 2002
("Fiscal 2002"), an increase of $2,393,099 or 15.72%. The Fiscal 2003 sales
increase was primarily a result of:
o addition of a few mid-size customers that generated large initial
buys,
o expansion of an existing major customers programs and introduction
of such programs into additional stores of the customer, and
o no large inventory balancing provided to customers as in the
previous year.
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Cost of sales for Fiscal 2003 was $13,007,581 with a gross margin of 26.2%
compared to $11,646,540 with a gross margin of 23.5% for Fiscal 2002. The
increase in cost of sales of $1,361,041 or 11.68% was a result of increased
sales in Fiscal 2003. Gross margin percentage for the current year has improved
from the prior year. In Fiscal 2002, certain inventories were written down to
net realizable value due to a major customer's stock balancing, as described
below in Fiscal 2002 v. Fiscal 2001; there were no similar write downs in
inventory in Fiscal 2003 as there were no significant customer stock balancing
transactions during the year. In addition, gross margin percentage improved as a
result of increase in gold price and the realization of currency gains. The
current year's gross margin is more consistent with gross margins enjoyed in
Fiscal 2001 and Fiscal 2000 as described in sections below.
General administrative costs decreased by 4.63% or $114,910 from
$2,484,142 in Fiscal 2002 to $2,369,232 in Fiscal 2003. The changes were
primarily a result of:
o Salaries and wages: The decrease of 6.13% or $99,608 in salaries and
wages was due to the normal attrition of staff. These positions were
either not replaced immediately or restructured to address the
changing needs of the Company. The restructure allowed the Company
to change the level of personnel required, along with a
corresponding decrease in the remuneration offered. In addition, a
salaried sales manager resigned and was replaced with an independent
sales representative who earned commission rather than a salary.
o Legal and accounting fees: The company spent $80,960 in accounting
and legal fees in Fiscal 2003 compared to $134,850 in the prior
year. This $53,890 or 39.9% savings was primarily due to the
settlement and finalization of the Bygo arbitration proceedings in
May 2003. The settlement avoided additional legal costs during the
year.
o Automobile: During the year, a salaried sales manager resigned from
the Company. His position required regular traveling for which the
Company paid mileage for kilometers traveled. The sales position was
replaced with an independent sales representative for which the
Company was not required to cover traveling expenses. Automobile
costs reduced $18,468 from prior year.
o Insurance fees: The increase in insurance fees by 38.9% or $54,362
from $139,567 to $193,929 reflects the cost of insuring greater
sales volumes and the elevated insurance premiums rates which are
reflective of general market changes during the year.
o Travel Expenses: In Fiscal 2003 $34,072 was paid out in travel
expenses compared to $63,261 in Fiscal 2002. This 46.1% decrease was
due to the departure of the sales manager referred to above. In
addition, another sales manager was not replaced when she was on
maternity leave during the year; the position was covered with
existing staff. This resulted in significant reductions in traveling
costs to visit customers and attending trade shows.
Selling and delivery expenses increased 4.89% to $1,163,388 in Fiscal 2003
from $1,109,066 in the prior year, as a result of:
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o Freight and Shipping: Freight and shipping costs increased by 14.02%
to $197,501 from $173,214 in the prior year primarily as a result of
the increase in shipments to fulfill increased sales orders during
the year.
o Sales Commission: Commission increased by 66.24% or $85,175 from
$128,580 in Fiscal 2002 to $213,755 in Fiscal 2003 primary as a
result of using an independent sales representative, who earned
commissions rather than salary, to replaced a sales manager who
resigned.
Interest and bank charges for Fiscal 2003 decreased by 7.45% to $459,939
when compared to the Fiscal 2002 figure of $496,989. The decrease in interest
charges is from the reduction in bank indebtedness and the benefit from
continuing low interest rates during the year; the average prime rate decreased
from 5.0% to 4.4% during the year. During Fiscal 2003 the average carrying
values of bank loans with HSBC Bank Canada ("HSBC") of $6,825,000 decreased
$104,000 from $6,929,000 in the corresponding period last year.
Earnings before tax in Fiscal 2003 made a turnaround from a loss of
$1,056,605 in Fiscal 2002 to a profit of $546,320. This 151.71% change was
substantially due to increase in operating income from sales and gross margin
increases, as described above and from the reduction in administrative costs as
described above. In addition, the settlement of the dispute related to the
e-Commerce business avoided additional costs during the year. These costs
previously incurred in Fiscal 2002, and as disclosed in the financial
statements, were not repeated in Fiscal 2003.
Tax expense is determined by entity-based results and as such, the
Company's tax consists of corporate income taxes resulting from profitable
operations in IBB and ADL. Allura's and Bygo's e-commerce start-up costs have
created losses that may be used in future periods to reduce taxable income. As
disclosed in note 10 to the Company's consolidated financial statements, the tax
benefit of these losses has been offset by a valuation allowance of the same
amount due to the uncertainty of their realization.
Net earnings for the year of $404,584 is an increase of $1,441,730 over
last year's net loss of $1,037,146.
Fiscal 2002 v. Fiscal 2001
Sales for the fiscal year ended March 31, 2002 ("Fiscal 2002") were
$15,220,387 compared to $15,934,093 for the fiscal year ended March 31, 2001
("Fiscal 2001"), a decrease of $713,706 or 4.5%. The Fiscal 2002 sales decrease
was primarily a result of:
o Inventory balancing provided to a major customer in order to
facilitate the future expansion of their current program and
o A general slowdown in independent customers business during the year
which reflects current economic conditions.
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Cost of sales for Fiscal 2002 was $11,646,540 with a gross margin of 23.5%
compared to $11,735,252 with a gross margin of 26.4% for Fiscal 2001. The
decrease in cost of sales of $88,712 or 0.8%, was due to decreased sales in
Fiscal 2002. The decrease in gross margin is primarily a result of the write
down of inventories from a customer stock balancing to net realizable value. The
value of inventory written down was approximately $482,000.
General and administrative costs decreased by 12.1% in Fiscal 2002 from
$2,827,489 to $2,484,142 primarily as a result of:
o Bad debt: The Company's bad debt expenses were significantly reduced
from $114,513 to $32,267, a reduction of $82,246 or 71.8%. During
Fiscal 2001, a few large independent customers defaulted on their
receivables. In Fiscal 2002, the Company has mitigated the risks of
further lost by insuring its receivables. The cost of the insurance
coverage is included in insurances expenses and approximates
$70,000.
o Legal and accounting fees: The Company spent $324,342 in accounting
and legal fees in Fiscal 2001 as compared to $134,850 in Fiscal
2002. This decrease of $189,492 or 58% is mainly due to a reduction
of costs associated with the Bygo arbitration proceedings started in
the prior year.
o Management fee: In fiscal 2001 $12,600 was paid in fees. In fiscal
2002 no fee was paid.
o Consulting fees: There was a reduction in consulting fees of $31,075
or 26% from $119,315 in fiscal 2001 to $88,240 in fiscal 2002 due to
a decrease in the requirement for consultation previously associated
with the startup of Bygo.
o Office and miscellaneous: There was a reduction in general office
expenses of $76,143 or 36% from $209,766 in fiscal 2001 to $133,623
in fiscal 2002. The decrease is mainly due to a staff reduction from
nine to three in the e-commerce division at the end of the prior
year and startup costs of Bygo not repeated during the year.
o Travel expenses: These expenses reduced 36% from $99,187 in 2001 to
$63,261 in 2002 due to the down sizing of the sales and marketing
division of Bygo.
Interest and other finance charges decreased by $171,753 or 25.7% in
Fiscal 2002 from $668,742 to $496,989 predominantly due to a reduction in
interest rates. Interest rates paid averaged 5.8% vs 8.2% in fiscal 2001. During
Fiscal 2002, the Company's average carrying value of bank loans with HSBC Bank
Canada ("HSBC") of approximately $6,929,000 increased by $463,000 from
$6,466,000. As at March 31, 2002, the carry value of bank loans was $7,459,704,
an increase of $852,239 or 13%.
Selling and delivery cost decreased by $122,212 from $1,231,278 to
$1,109,066 or 9.9%. The
Page 25 of 82
decrease in selling and delivery is primarily result of:
o Marketing and selling cost: In Fiscal 2002 there was a 19% or
$55,710 decrease in the marketing costs as compared to Fiscal 2001.
This is mainly due to reduced expenses in Bygo as a result of
delayed completion of the web site.
o Sales commission: Sales commission costs for Fiscal 2002 decreased
by $62,084 or 33% as a result of the Company changing one of its
sales representatives from a commissionable representative to a
independent sales consultant. It should be noted that this reduction
in cost is offset by an increase in consulting fees.
Operating results before tax for the Company changed from a net loss of
$598,221 in Fiscal 2001 to a net loss of $1,056,605 in Fiscal 2002. The
Company's increased loss of $458,384 in Fiscal 2002 is attributed to decrease in
sales, a write down of inventory to net realizable value, a write down of
software development costs to recoverable value and other reasons detailed
above.
Tax expense is determined by entity-based results and as such, the
Company's tax consists of corporate income taxes resulting from profitable
operations in ADL. Allura's e-commerce start-up costs have created losses that
may be used in future periods to reduce taxable income. As disclosed in note 11
to the Company's consolidated financial statements, the tax benefit of these
losses has been offset by a valuation allowance of the same amount due to the
uncertainty of their realization.
Net loss for the year is $1,037,146 compared to a net loss of $583,992 in
Fiscal 2001, an increase in losses of $453,154.
Fiscal 2001 v. Fiscal 2000
Sales for the fiscal year ended March 31, 2001 ("Fiscal 2001") were
$15,934,093 compared to $15,716,965 for the fiscal year ended March 31, 2000
("Fiscal 2000"), an increase of $217,128 or 1.4%. The Fiscal 2001 sales increase
was primarily a result of:
o Increase in marketing and promotion efforts targeted to increase
volume,
o Expansion of programs in certain major customers, and
o Focus on development and marketing of the Company's product lines.
Cost of sales for Fiscal 2001 were $11,735,252 with a gross margin of
26.4% compared to $11,491,262 with a gross margin of 26.9% for Fiscal 2000. The
increase in cost of sales of $243,990 or 2% was due to increased sales in Fiscal
2001.
Page 26 of 82
General and administrative costs increased by 34% in Fiscal 2001 from
$2,103,189 to $2,827,489 primarily as a result of:
o Bad debt: The Company's bad debt expenses of $114,513, increased by
$89,342 or 355% in Fiscal 2001. The increase in bad debt expense was
to provide an allowance for uncollectible accounts receivables from
customers. In addition, $27,773 was written off to reconcile
accounts with customers.
o Management fees: Management fees expenses decreased by 89% to
$12,600 in Fiscal 2001 from $111,344 in Fiscal 2000. The decrease in
management fees resulted from the decrease in services from a
company controlled by a shareholder of the Company and the
employment of Tom Weckman in ADL. Prior to Fiscal 2001, Tom Weckman
was providing management services to the Company as a consultant.
o Legal and accounting fees: The Company spent $324,342 in accounting
and legal fees in Fiscal 2001 as compared to $194,801 in Fiscal
2000. This increase of $129,541 or 66% is attributable to a general
increase in legal and accounting fees associated with expansion of
the Allura Group, the cost of arbitration and other legal matters
relating to the development of Bygo's web site, and outsourcing for
accounting assistance in completing the various projects of
re-organizing and corporate and other regulatory filings.
o Office and miscellaneous: The company spent $209,766 in office and
miscellaneous expenses compared to $120,715 in Fiscal 2000. This
increase of $89,051 or 74% is attributable to the increase in the
average number of employees during the fiscal year, increase in
computer supplies and general maintenance cost, and the move of
IBB's premises.
o Rent fees: The Company spent $171,846 in rent expenses compared to
$99,146 in Fiscal 2000. This increase of $72,700 or 73% is
attributable to the Company's move to new premises. The new premises
are larger than the Company's previous location to accommodate the
increase in staff of the Company and the addition of Bygo.
o Salaries and wages: The company spent $1,619,551 in salaries and
wages compared to $1,230,076 in Fiscal 2000. This increase of
$389,475 or 32% is attributable to increase in employees during the
year, the addition of Bygo and the increase in cost of benefits.
Interest and other finance charges increased by $147,355 or 28% in Fiscal
2001 from $521,387 to $668,742. During Fiscal 2001, the Company's average
carrying value of bank loans with HSBC Bank Canada ("HSBC") increased by
$1,098,103. As at March 31, 2001, the carry value of bank loans was $6,607,465,
an increase of $272,835 or 4%. Combined with an increase in average prime rate
from 6.4% to 7.3%, the Company's financing cost through HSBC increased.
Additionally, the Company paid $11,000 to International Bullion and Metal
Brokers (London) Limited, a company controlled by International Bullion and
Metal Brokers Ltd., a shareholder in Allura for bridge financing during the year
and also paid approximately $25,400 to various suppliers to finance extended
supply payment terms.
Page 27 of 82
Selling and delivery cost decreased by $419,150 from $1,650,428 to
$1,231,278 (restated from prior year to conform to current year's financial
statements) or 25%. The decrease in selling and delivery is primarily result of:
o Marketing and selling cost: In Fiscal 2001 there was a 54% decrease
in the marking costs as compared to Fiscal 2000. In Fiscal 2000, the
Company paid $230,000 to conduct a feasibility of providing a
web-based solution to the jewellery and giftware industry. The
Company did not incur a similar expense in Fiscal 2001. In addition,
the Company participated in fewer retail sales catalogues during
Fiscal 2001.
o Freight and shipping: Freight and shipping costs decreased by
$47,929 in Fiscal 2001 as a result of reduced regular deliveries to
large accounts and the decrease in sales to independent retailers.
o Sales commission: Sales commission costs for Fiscal 2001 decreased
by $93,126 or 33% as a result of the Company employing one of its
sales representatives as a full time staff member and the reduction
in sales earned by commission sales representatives.
Operating results before tax for the Company changed from a net loss of
$155,516 in Fiscal 2000 to a net loss of $598,221 in Fiscal 2001. The Company's
loss in Fiscal 2001 is attributed to the increase in expenses as discussed
above, particularly the additional costs associated with the Company's
e-commerce ventures.
Tax expense is determined by entity-based results and as such, the
Company's tax consists of corporate income taxes resulting from profitable
operations in IBB and ADL. Allura's e-commerce start-up costs have created
losses that may be used in future periods to reduce taxable income. As disclosed
in note 12 to the Company's consolidated financial statements, the tax benefit
of these losses has been offset by a valuation allowance of the same amount due
to the uncertainty of their realization.
Net loss for the year is $583,992 compared to a net loss of $222,769 in
Fiscal 2000, an increase in losses of $361,223.
Corporate Reorganization
In April 1999, the Company undertook the following steps to complete a
corporate re-organization: (i) it issued 250,000 shares to Thomas and Linda
Weckman to acquire the non-controlling interest of Allura Diamonds Limited
("ADL"), effectively rendering ADL a wholly owned subsidiary of IBB, (ii) it
transferred its net assets and operations to IBB; and (iii) it changed it's name
from IBB International Bullion and Metal Brokers (Canada) Limited to Allura
International Inc.
B. Liquidity and capital resources
During fiscal year 2000 the Company completed a private offering of
214,934 common shares
Page 28 of 82
from which it realized net proceeds of $128,960.
On January 11, 2000, the Company affected a stock two for one split of its
6,714,934 issued and outstanding common shares. This resulted in there being an
aggregate of 13,429,868 shares issued and outstanding.
During fiscal 2001, the Company (i) completed a private offering of
1,070,298 common shares from which it realized net proceeds of $1,535,004, (ii)
completed a second private offering of 400,000 shares from which it realized net
proceeds of $588,000, (iii) issued 340,136 common shares pursuant to an
investment agreement, ("Investment Agreement") to a venture capital group,
Business Development Bank of Canada, ("BDC") on July 25, 2000, ("BDC Investment
Date") for which it realized proceeds of $500,000 less issue costs of $23,867
and (iv) issued 114,753 common shares to MacDonald Dettwiler & Associates
("MDA") in exchange for contracted services in developing Bygo's web site for
value of $167,539.
During Fiscal 2003, the shares issued to MDA were returned to and
cancelled by the Company as part of the Settlement Agreement discussed in ITEM 5
D. OPERATING AND FINANCIAL REVIEW AND PROSPECTS-Trends.
Investment Agreement
The Company entered into an Investment Agreement on July 25, 2000 with
BDC. Pursuant to such Investment Agreement, BDC acquired 340,136 units
consisting of one common share, one common share call option and one common
share put option from the Company for an aggregate purchase price of $500,000
less issue costs of $23,867.
Each common share call option expired on July 25, 2001 unexercised.
The put options are exercisable after July 25, 2005 and will expire upon
the closing of certain qualified initial public offerings. The common share put
options were outstanding as at September 30, 2003.
Bank Financing
The Company's subsidiaries IBB and ADL (collectively the "Borrowers")
currently have "Revolving Demand Loan" credit facilities ("Overdraft Loan") with
HSBC to a combined maximum principal of $7,600,000. The credit facilities are
subject to certain margin requirements as defined in the Overdraft Loan offer
letter from HSBC dated July 14, 2000, amended on August 9, 2001, and
subsequently amended on August 28, 2002, October 8, 2002, March 18, 2003 and
July 31, 2003, collectively referred to as the Company's "Banking Agreement".
The margin requirements as defined by the Banking Agreement are as
follows:
Page 29 of 82
o 75% - 90% of eligible accounts receivable from IBB and ADL, margin
amounts allowable in excess of 75% are required to be supported by
the Company's credit insurance with Export Development Corporation
("EDC"),
o 50% of combined inventory of IBB and ADL to a maximum of $2,450,000,
including a $1,000,000 sub-limit for ADL,
o 50% of consignment inventory to a maximum of $750,000,
o 100% of the sum of Acceptable Credit instruments including
$1,000,000 presently on hand in support of a $4,000,000 guarantee
from International Bullion & Metal Brokers (London) Ltd. and
o shareholder guarantee limited to $800,000 supported by collateral
against real properties.
The Company's borrowings bear interest at a rate equal to Canadian prime
plus 1/8% on the first $1,000,000 and prime plus 1% on the balance of the
facility. Interest on any borrowings is payable monthly. The Company is required
to report to its bankers on a monthly basis.
The Company's obligations under the Overdraft Loan are secured by a
General Security Agreement creating a first security interest on all the assets
of the Company and its subsidiaries, guaranteed by International Bullion & Metal
Brokers (London) Ltd. limited to $4 million and supported by a Standby Letter of
Credit for a minimum of $1,000,000 and Joint and Severally Guarantee by personal
guarantors for the Borrowers, limited to $800,000. The personal guarantee is
supported by a mortgage on personal property.
For the year ended March 31, 2003, the combined overdraft loan amounted to
$6,360,910. The Company was not in full compliance with its banking covenants as
at March 31, 2003 as disclosed in Note 6 to the Financial Statements.
Notwithstanding this technical default, the bank has agreed not to demand
repayment of the loan. The facility was renewed on July 31, 2003.
The Company's account receivables net of allowances for doubtful accounts
as at March 31, 2003 were $3,862,650. The balance in accounts receivable
represented 21.93% of net sales for Fiscal 2003.
The Company's inventory as at March 31, 2003 was $7,896,550 or 44.84% of
net sales for Fiscal 2003. Inventory is such a large percentage of sales because
it reflects (i) the Company's commitment to ensure customers orders can be
turned around in a short period from the time the order is placed with the
Company to the time it is delivered, (ii) the increases in replenishment
programs with customers, which the Company must ensure sufficient inventory is
available at all times to achieve maximum ship value on each order and (iii)
increase in consignment goods under consignment agreements resulting from
customers store and program expansion. ADL continues to expand and
Page 30 of 82
develop its product line to increase selection and availability in the market
place.
The Company's accounts payable and accrued liabilities as at March 31,
2003 were $3,075,956 for Fiscal 2003. The Company does not anticipate any
difficulties in settling these obligations.
Except for anticipated aggregate lease payments for both IBB and ADL of
approximately $300,682 over the next five years, the Company has no significant
capital commitments as of August 31, 2003. The Company anticipates that cash
flow from operations, as well as borrowings available under current Overdraft
Loan facilities will be sufficient to satisfy the operating needs for the next
twelve months.
U.S. Generally Accepted Accounting Principles
There are no material differences between Canadian GAAP and U.S. GAAP as
applicable to the Company's operations and financial statements, including
disclosure items, except as disclosed in note 17 to the Company's consolidated
financial statements.
C. Research and development, patents and licenses, etc.
The Company does not conduct research and development.
In September 1999, the Company filed a patent application with the
Canadian Patent Office for an invention called "Computer system and method for
electronic commerce incorporating multiple wholesale supplier, multiple
fulfillment centers and retailer remuneration." In addition, on October 29,
1999, the Company submitted a provisional patent application to the United
States Patent and Trademark Office for an invention called "Computer system and
method for electronic commerce incorporating multiple wholesale suppliers, an
integrated product catalog and retailer participation." Both patent applications
are still pending. The Company has spent approximately $63,699 during the last
three financial years in connection with the development and protection of such
inventions.
D. Legal Proceedings
As at September 30th, 2003, there are no legal proceedings to which the
Company is a party or to which its properties are subject. The Company does not
know of any legal proceedings that are contemplated.
In Fiscal 2003 the Company settled an outstanding dispute between MDA,
Bygo and Allura, which culminated in the signing of a Settlement Agreement
between all the parties dated May 1, 2002. The impact of the settlement was
primarily accrued in Fiscal 2002 as the amounts related to the settlement were
known at the financial statement date and were material. In the Fiscal 2003
Financial Statements under note # 4 (under Item 17 of this disclosure), the
return of 114,753 common shares of the Company by MDA as a component of the
final settlement has been disclosed. Theses shares have been returned to
Treasury and cancelled.
Page 31 of 82
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets out the full name, age, and function in the
Company of the directors, executive officers and key employees of the Company as
of September 30, 2003.
Effective September 25th, 2003, Jonathan Birks resigned as Director,
Member of the Audit Committee, Member of the Compensation and Human Resource
Committee, and Chairman of the Board of Directors of the Company. On September
30th, 2003, the Directors on the Board of Directors were re-nominated to stand
for election to the Board, except for Jonathan Birks. All nominated Directors
were re-appointed effective September 30th, 2003. In addition, on September
30th, 2003, Dave Wall was nominated to stand for director on the Board of the
Company and he was subsequently appointed.
======================================================================================================
Position Held
Name Age Positions Since
---- --- --------- -----
- ------------------------------------------------------------------------------------------------------
Jeremy Bowman 52 Director, President and CEO 1988
- ------------------------------------------------------------------------------------------------------
Sheila Bowman 45 Director, Secretary, and Treasurer 1988
- ------------------------------------------------------------------------------------------------------
Frank Kovacs 50 Director 1998
- ------------------------------------------------------------------------------------------------------
Thomas Weckman 49 Director and President of Allura Diamonds Limited 1994
- ------------------------------------------------------------------------------------------------------
Andrew Lugsdin 34 Director 2001
- ------------------------------------------------------------------------------------------------------
Tina VanderHeyden 51 Director 1999
- ------------------------------------------------------------------------------------------------------
Dave Wall 54 Director 2003
- ------------------------------------------------------------------------------------------------------
Emily Tsen 37 Chief Financial Officer 1996
- ------------------------------------------------------------------------------------------------------
David Winmill 47 VP Sales and Merchandising of IBB 2001
International (Canada) Ltd.
======================================================================================================
Dave Wall was appointed a Director of Allura International Inc. on
September 30th, 2003. Mr. Wall joined Norpac Controls Ltd. ("Norpac") in 1973
and became President of Norpac in June 2000. In addition, Mr. Wall serves on the
Emerson Process Management Representative Presidents' Executive Committee and
the Control Systems Division Advisory Committee. He also sits on two B.C.I.T.
advisory Boards: the UBC Chemical Engineering Industry Advisory Board and the
Association for Professional Engineers and Geo Scientists. He is a corporate
campaign Executive for United Way and in prior years served as Board President
for the North Shore Neighborhood House. Mr. Wall is a director of Norpac,
Artemis Industrial Networks Ltd. and Norpac Employee Owners Ltd.
Page 32 of 82
Jeremy Bowman has been the President, CEO and Director of the Company
since 1988. He is also an Owner/Director of The Black Bear Pub Limited in
Nanaimo, B.C., Canada.
Sheila Bowman has been the Secretary and Treasurer and a Director of the
Company since 1988. She is also an Owner/Director of The Black Bear Pub Limited
in Nanaimo, B.C., Canada.
Frank Kovacs is the Managing Director of International Bullion & Metal
Brokers Ltd., a company incorporated in the United Kingdom for the past six
years. He has also been a Director of the Company since 1988.
Thomas Weckman has been the President of ADL since 1994 and a Director of
the Company since 1999. He has also served as President of Baird Weckman Sales
Ltd., a company incorporated under federal laws of Canada since 1997.
Andrew Lugsdin is an investment advisor with the Business Development Bank
of Canada and was appointed a Director of the Company in September 2001,
replacing Joe Timlin who formally held the position.
Tina VanderHeyden has been the President of T. VanderHeyden Associates
Inc., a company incorporated under the laws of the Province of British Columbia,
for the past 27 years and has served on the Company's Board of Directors since
1999. She is also a director for The Canadian Film Centre.
Emily Tsen has served as the Chief Financial Officer of the Company since
1999 and previously as its Controller since 1996. She received her chartered
accountancy designation in British Columbia in 1993.
David Winmill has been the VP Sales and Merchandising of the Company since
June 2001 and previously was the Company's General Sales Manager since 1997.
Prior to working with the Company, he was national accounts manager with
Etruscan Jewellery, a manufacturer of fine gold jewellery in Canada.
Each director serves until the next annual meeting of shareholders and
until his successor shall have been duly elected and qualified or until such
earlier time as such director may resign or be removed. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
There are no arrangements or understandings between the director and any
other person regarding such director or officers election to serve in his or her
official capacity on behalf of the Company except for Andrew Lugsdin whose
representation on behalf of Business Development Bank of Canada ("BDC"), is
pursuant to a shareholders' agreement ("Shareholders' Agreement"). The
Shareholders' Agreement entitles BDC to select a nominee for the Board of
Directors as long as BDC holds at least 300,000 Common Shares in the Company.
Page 33 of 82
B. Compensation
The Company paid aggregate compensation of $616,700, $609,600 and $559,000
to all directors and officers as a group during the fiscal years ended March 31,
2003, 2002, and 2001, for services in all capacities. There were no funds set
aside by the Company during the fiscal year ended March 31, 2003 to provide
pension, retirement or similar benefits for officers or directors.
On October 30, 1999, the Company approved stock options to be issued to
employees and consultants of the Company. Total options granted by the Company,
as at March 31, 2003 were 2,366,000 of which, 1,549,000 were granted to officers
and directors of the Company. Each option is convertible into a share of the
Company's common stock. Of the options currently outstanding, 2,005,000 options
have an exercise price of $0.60 and will expire in approximately 1.8 years,
95,000 options have an exercise price of $1.50 and will expire in approximately
2.32 years and 266,000 options have an exercise price of $1.58 and will expire
in approximately 3.84 years.
The Company has a standard arrangement for the payment of fees to two
directors of the Company for acting in such capacity. Directors are reimbursed
for all expenses necessary for travel and attendance at meetings. Total payments
of $19,100 during Fiscal 2003 to directors for acting in such capacity are
included in the aggregate compensation disclosure discussed above.
C. Board Practices
Each director serves until the next annual meeting of shareholders and
until his successor shall have been duly elected and qualified or until such
earlier time as such director may resign or be removed. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board. The
Board of Directors holds meetings four times each year.
There are no directors' service contracts with the Company or any of its
subsidiaries that provide for benefits upon termination of employment. Although
some directors are subject to employment contracts with the Company, such
contracts are not applicable to their services in the capacity of directors.
The Board of Directors has elected members to an Audit Committee and a
Compensation and Human Resource Committee.
The Audit Committee is comprised of the following members as at September
30th, 2003: Sheila Bowman, Tina VanderHeyden and Frank Kovacs. The Audit
Committee chair is Sheila Bowman.
The Audit Committee holds meetings four times a year and its primary
mandate is to facilitate the Company's corporate governance and protect the
interest of shareholders by overseeing the financial reporting process and
monitoring the responsibilities of the Company's management team as well as its
Board of Directors.
Page 34 of 82
The Compensation and Human Resource Committee is comprised of the
following members as at September 30th, 2003: Tina VanderHeyden, Frank Kovacs
and Andrew Lugsdin. The Compensation and Human Resource Committee chair is Tina
VanderHeyden.
The Compensation and Human Resource committee holds meetings four times a
year and its primary mandate is to monitor and review the Company's management
structure and their performance, to review the Company's philosophies and
compensation and human resource policies, to administer the Company's incentive
plans and stock option plan and to monitor and review the Board of Directors'
composition and performance.
D. Employees
At March 31, 2003, the Company employed twenty-six persons on a full time
basis. As at August 31, 2003, there were twenty-seven persons employed on a full
time basis. As at August 31, 2003, there are ten employees in finance and
administration, seven in sales and merchandising, and ten in inventory
warehouse.. Four employees are employed in the Halifax office, one is employed
in Toronto, and twenty-two are employed in the Vancouver office. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
During Fiscal 2003, the Company employed approximately twelve temporary
employees to cover off seasonal requirements.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
As far as is known to the Company, the Company is not directly or
indirectly owned or controlled by another corporation or by any foreign
government. The following table sets forth certain information, as at September
30, 2003, concerning (i) persons and companies that own of record or are known
by the Company to own beneficially, directly or indirectly, more than 5% of the
outstanding Common Shares and (ii) beneficial ownership of outstanding Common
Shares by all directors and executive officers of the Company.
Page 35 of 82
- ---------------------------------------------------------------------------------------------------------------
Number of Shares
Beneficially or Directly Percentage of
Name of Shareholder Owned Class
- ---------------------------------------------------------------------------------------------------------------
International Bullion & Metal Brokers Ltd.(1) 6,250,000 35.5%
- ---------------------------------------------------------------------------------------------------------------
Bowman Family Trust ("Trust")(2) 5,325,000 30.2%
- ---------------------------------------------------------------------------------------------------------------
Jeremy C. Bowman(3) 962,500 5.5%
- ---------------------------------------------------------------------------------------------------------------
Sheila P. Bowman(4) 682,500 3.9%
- ---------------------------------------------------------------------------------------------------------------
Frank Kovacs(5) 260,000 1.5%
- ---------------------------------------------------------------------------------------------------------------
Thomas Weckman(7) 550,000 3.1%
- ---------------------------------------------------------------------------------------------------------------
B.D.C (6) 340,136 1.9%
- ---------------------------------------------------------------------------------------------------------------
Tina VanderHeyden (*) (*)
- ---------------------------------------------------------------------------------------------------------------
Emily Tsen (*) (*)
- ---------------------------------------------------------------------------------------------------------------
David Winmill (*) (*)
- ---------------------------------------------------------------------------------------------------------------
Officers and Directors as a group (8 people) 14,592,136 82.9%
- ---------------------------------------------------------------------------------------------------------------
(1) International Bullion & Metal Brokers Limited ("International Bullion") is
a corporation formed under the laws of England of which Frank Kovacs is a
Director.
(2) Although not a beneficiary of the trust, Mr. Bowman, the Company's
President and CEO, is one of the three Trustees of the Trust. Sheila
Bowman, is a beneficiary of the Bowman Family Trust. The other
beneficiaries are the children of Mr. Bowman.
(3) Mr. Bowman is the Company's President, CEO and a Director. Mr. Bowman's
shares include 500,000 options with an exercise price of US$0.40 per share
that expire on January 31, 2005.
(4) Sheila Bowman is a Director of the Company. Ms. Bowman's shares include
80,000 and 140,000 options with an exercise price of US$0.40 and US$1.00
per share respectively. The 80,000 options expire on January 31, 2005 and
the 140,000 options expire July 13, 2007.
(5) Frank Kovacs is a Director of International Bullion and is a Director of
the Company. Mr. Kovac's shares include 260,000 options with an exercise
price of US$0.40 per share that expire on January 31, 2005.
(6) The Business Development Bank of Canada is a venture capital shareholder
owning 340,136, or 1.9% of outstanding shares. The BDC has a designee,
Andrew Lugsdin, appointed as a Director on the Company's Board of
Directors.
(7) Tom Weckman is ADL's President and a Director. Mr. Weckman's shares
include 300,000 options with an exercise price of US$0.40 per share that
expire on January 31, 2005.
* Less than 1% of class.
The Company's major shareholders do not have different voting rights.
However, some of these shareholders are subject to a shareholders agreement as
described below.
Page 36 of 82
There has been no significant change in the percentage ownership held by
any major shareholders during the past three years.
As at August 31, 2003 there was no trading market for the Common Shares in
the United States or Canada. The following table indicates the approximate
number of record holders of Common Shares, the number of record holders of
Common Shares with United States addresses and the portion and percentage of
Common Shares so held in the United States.
- --------------------------------------------------------------------------------
Total Number Number of US Number of
Registered Registered Holders Common Shares Percentage of Class
---------- ------------------ ------------- -------------------
- --------------------------------------------------------------------------------
113 45 90,400 0.60%
- --------------------------------------------------------------------------------
The computation of the number and percentage of Common Shares held in the
United States is based upon the number of Common Shares held by record holders
with United States addresses. United States residents may beneficially own
Common Shares held of record by non-United States residents.
Shareholders' Agreement
The Company has entered into a shareholders' agreement ("Shareholders'
Agreement") with shareholders holding at least 5% of the outstanding shares of
the Company on July 25, 2000. The Shareholders' Agreement requires that board
approval be obtained prior to:
o issuance or redemption of the Company's shares,
o changes to the authorized share capital,
o declaration or payment of dividends,
o distribution of shares to the public or listed for trading on a
recognized securities exchange,
o business combinations between the Company or any of its subsidiaries
with any other persons,
o disposition of any subsidiaries,
o loaning of any money, providing guarantees or assuming liability for
the debts or obligations of any other persons or paying any
shareholder, and
Page 37 of 82
o changing the nature of the Company's business outside of the
ordinary course of business of the Company.
The Shareholders' Agreement had provided that as long as BDC hold at least
300,000 shares, the Company was to proceed with any of the following matters
only with prior written consent of BDC:
o declare or pay dividends, redeem or repurchase any shares or make
any distribution in respect of shares,
o loan any money, provide guarantees or assume liability for the debts
or obligations of any other persons or pay any shareholder, or
o any initial public offering by the Company.
The Shareholders' Agreement also provided that, subject to the
satisfaction of certain conditions, until the earlier of the first anniversary
of the date of the Shareholders' Agreement, being July 25, 2000 or the
occurrence of an initial public offering by the Company, (the "initial
preemptive date") and subject further to BDC holding at least 300,000 shares, if
the Company proposed to effect an offer and sale of its securities, the Company
was obliged to first offer BDC the opportunity to purchase, and BDC, in its sole
discretion could purchase, all or a portion of such securities from the Company
up to a maximum of $2,000,000 of the proposed aggregate offering price. BDC did
not exercise this right within the specified time frame therefore the option
expired. After the initial preemptive date and prior to the termination of the
Shareholders' Agreement by virtue of the Company completing a qualified public
offering, BDC has the right, except for certain excepted transactions, to
participate pro-rata in any securities offerings affected by the Company.
As far as is known to the Company, there are no arrangements the
operations of which may at a subsequent date result in a change of control of
the Company.
Page 38 of 82
B. Related Party Transactions
The Company operates from leased premises in Vancouver and Halifax. The
Vancouver premises cover 8,557 square feet and give the Company a self-contained
headquarters building from which to operate. The premises have an underground
parking garage. The premises are leased from a partnership of which Jeremy
Bowman, the Company's President and a stockholder who has significant influence
on operations, is a partner. The Company believes that the terms of the lease
are as favorable as those that could have been obtained from an unaffiliated
third party. The Company leases the Vancouver premise for $9,400 per month plus
expenses.
On May 27th, 2002, the Company leased an office in Halifax on a five year
fixed term starting July 1st, 2002 at $1,100 per month plus applicable taxes.
The Halifax lease has a 90-day cancellation provision for the benefit of ADL
only. The premises are leased on commercially agreed terms, from Torrington Bay
Investments Limited, in which Tom Weckman, the President of ADL, has an
interest. The Company believes the terms of this lease are as favorable as could
have been obtained from unaffiliated third parties. The premises in Halifax are
located at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6 and contain
1,136 square feet of office space.
The Company believes that its current premises are adequate for the
Company's current operating level and presently foreseeable growth.
Except as set forth above, no key management personnel of the Company or
any shareholder holding of record or beneficially, directly or indirectly, more
than 5 percent of the issued and outstanding Common Shares (including options)
of the Company, or any of their respective associates or affiliates, had any
material interest, directly or indirectly, in any transaction with the Company
except for those in the normal course of the business and as disclosed in the
Company's financial statements, or in any proposed transaction, since the
beginning of the Company's last fiscal year up to the date of the Report.
The Company believes that all payments made for services rendered were
comparable to those that would be made to an unaffiliated provider of such
services.
C. Interests of experts and counsel.
Not applicable to Form 20-F filed as an Annual Report.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 17 for the Company's Financial Statements.
Page 39 of 82
The Company knows of no contemplated or pending legal or arbitration
proceedings including those relating to bankruptcy, governmental receivership or
similar proceeding and those involving any third party against it, nor is the
Company involved as a plaintiff in any material pending litigation.
The Company knows of no pending proceedings to which any director, member
of senior management, or affiliate is either a party adverse to the Company or
its subsidiaries or has a material interest adverse to the Company or its
subsidiaries.
To the best of the Company's Managements' knowledge, the Company has not
since the date of its incorporation, declared or paid any dividends, nor does it
intend to declare any dividends for the foreseeable future.
B. Significant Changes
No significant changes have occurred since the date of the annual
financial statements included in the Report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details/Markets
There is no trading market for the Company's Common Stock and there can be
no assurance that a trading market will develop, or, if such a trading market
does develop that it will be sustained. To the extent that a market develops for
the Common Stock at all, of which there can be no assurance, it will likely
appear in what is customarily known as the "pink sheets" or on the NASD Bulletin
Board, which may limit the marketability and liquidity of the Company's Common
Stock.
B. Plan of Distribution
Not applicable to Form 20-F filed as an Annual Report.
C. Selling Shareholders
Not applicable to Form 20-F filed as an Annual Report.
Page 40 of 82
D. Dilution
Not applicable to Form 20-F filed as an Annual Report.
E. Expenses of the Issue
Not applicable to Form 20-F filed as an Annual Report.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable to Form 20-F filed as an Annual Report.
B. Memorandum and Articles of Association.
The Company's Certificate of Incorporation, Bylaws, Articles of Amendment,
Certificate of Amendment and Certificate of Change of Name which were included
as Exhibits 1.1, 1.2, 1.3, 1.4 and 1.5, respectively, to the Company's
Registration Statement on Form 20-F, file number 030228, as amended, are hereby
incorporated by reference.
There is no limitation imposed by Canadian law or by the constituent
documents of the Company on the right of a non-resident to hold or vote common
Shares (the "Voting Shares"), other than are provided in the Investment Canada
Act (Canada) (the "Investment Act"), as amended by the World Trade Organization
Agreement Implementation Act (the "WTOA Act"). The Investment Act generally
prohibits implementation of a reviewable investment by an individual,
government, or agency thereof, corporation, partnership, trust or joint venture
that is not a "Canadian", as defined in the Investment Act (a "non-Canadian"),
unless, after review, the minister responsible for the Investment Act is
satisfied that the investment is likely to be of net benefit to Canada. An
investment in the Voting Shares of the Company by a non-Canadian (other than a
"WTO Investor", as defined below) would be reviewable under the Investment Act
if it were an investment to acquire control of the Company and the Company was
not, immediately prior to the implementation of the investment, controlled by a
WTO Investor, and the value of the assets of the Company were $5.0 million or
more. An investment in Voting Shares of the Company by a WTO Investor would be
reviewable under the Investment Act if it were an investment to acquire direct
control of the Company, and the value of the assets of the Company equaled or
exceeded $179 million (threshold amount for 1998). A non-Canadian, whether a WTO
Investor or otherwise, would acquire control of the Company for purposes of the
Investment Act if he or she acquired a majority of the Voting Shares of the
Company. The acquisition of less than a majority, but at least one-third of the
Voting Shares of the Company, would be presumed to be an acquisition of control
of the Company, unless it could be established that the Company was not
controlled in fact by the acquirer through the ownership of the Voting Shares.
In general, an individual is a WTO Investor if he or she is a "national" of a
country (other than Canada) that is a member of the
Page 41 of 82
World Trade Organization ("WTO Member") or has a right of permanent residence in
a WTO Member other than Canada. A corporation or other entity will be a WTO
Investor if it is a "WTO Investor-controlled entity" pursuant to detailed rules
set out in the Investment Act. The United States is a WTO Member.
Certain transactions involving Voting Shares of the Company would be
exempt from the Investment Act, including: (a) an acquisition of Voting Shares
of the Company if the acquisition were made in connection with the person's
business as a trader or dealer in securities: (b) an acquisition or control of
the Company in connection with the realization of a security interest granted
for a loan or other financial assistance and not for the purpose related to the
provisions of the Investment Act: and (c) an acquisition of control of the
Company by reason of an amalgamation, merger, consolidation or corporate
reorganization, following which the ultimate direct or indirect control in fact
of the Company, through the ownership of voting interests, remains unchanged.
C. Material Contracts.
Shareholders' Agreement
The Company has entered into a shareholders' agreement ("Shareholders'
Agreement") with shareholders holding at least 5% of the outstanding shares of
the Company on July 25, 2000. The Shareholders' Agreement requires that board
approval be obtained prior to:
o issuance or redemption of the Company's shares,
o changes to the authorized share capital,
o declaration or payment of dividends,
o distribution of shares to the public or listed for trading on a
recognized securities exchange,
o business combinations between the Company or any of its subsidiaries
with any other persons,
o disposition of any subsidiaries,
o loaning of any money, providing guarantees or assuming liability for
the debts or obligations of any other persons or paying any
shareholder, and
o changing the nature of the Company's business outside of the
ordinary course of business of the Company.
Page 42 of 82
The Shareholders' Agreement had provided that as long as BDC hold at least
300,000 shares, the Company was to proceed with any of the following matters
only with prior written consent of BDC:
o declare or pay dividends, redeem or repurchase any shares or make
any distribution in respect of shares,
o loan any money, provide guarantees or assume liability for the debts
or obligations of any other persons or pay any shareholder, or
o any initial public offering by the Company.
After the initial preemptive date and prior to the termination of the
Agreement by virtue of the Company completing a qualified public offering, BDC
has the right, except for certain excepted transactions, to participate pro-rata
in any securities offerings affected by the Company.
Investment Agreement
The Company entered into an Investment Agreement on July 25, 2000 with
BDC. Pursuant to such Investment Agreement, BDC acquired 340,136 units
consisting of one common share, one common share call option and one common
share put option from the Company for an aggregate purchase price of $500,000
less issue costs of $23,867, which price is subject to adjustment under certain
conditions, including the sale by the Company, during specified period of time,
of any shares at a lower price per share price.
Each common share call option expired July 25, 2001 unexercised.
The put options are exercisable after July 25, 2005 and will expire upon
the closing of certain qualified initial public offerings. The common share put
option were outstanding as at September 30, 2003.
Leases
The Company entered into a lease on June 22, 1998, with a partnership of
which Jeremy Bowman, the Company's President, CEO and director, is a partner.
The lease is for premises at its Vancouver office on 1555 West 8th Avenue,
Vancouver, B.C., V6J 1T5, Canada which it leases for $9,400 per month plus
expenses. The Company moved to these premises on June 2000.
On May 27th, 2002, the Company leased an office in Halifax on a five year
fixed term starting July 1st, 2002 at $1,100 per month plus applicable taxes.
The Halifax lease has a 90-day cancellation provision for the benefit of ADL
only. The premises are leased on commercially agreed terms, from
Page 43 of 82
Torrington Bay Investments Limited, in which Tom Weckman, the President of ADL,
has an interest. The Company believes the terms of this lease are as favorable
as could have been obtained from unaffiliated third parties. The premises in
Halifax are located at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6 and
contain 1,136 square feet of office space.
Stock Option Plan
The Company implemented the Allura International Inc. 2000 Stock Option
Plan ("Plan") during January 2000. The Company's Board of Directors administers
the Plan. The maximum aggregate number of shares, which may be optioned and sold
or otherwise awarded under the Stock Option Plan, is 3,000,000 shares.
Agreement between Bygo, the Company and MDA
On May 9, 2000, the Company entered into an agreement with MacDonald
Dettwiler and Associates Ltd. ("MDA") for software development services to be
provided by MDA (the "MDA Agreement"). MDA and the Company entered into an
amendment to the MDA Agreement dated July 28, 2000 (the " July Amendment")
pursuant to which, among other things, Allura's interest therein was assigned to
Bygo. A further amendment was entered into on December 12, 2000 (the "December
Amendment'). The MDA Agreement as amended by the July Amendment, the December
Amendment and certain other subsequent amendments, is herein referred to as the
"Amended MDA Agreement."
Disputes arose between MDA and Allura and Bygo (collectively, with all of
the other parties to the Settlement Agreement, as defined below, the "Parties").
Proceedings were commenced in relation to the disputes between the parties,
pursuant to the arbitration provisions of the Amended MDA Agreement, and in the
Supreme Court of British Columbia and the British Columbia Court of Appeal (the
"Proceedings"). The Parties agreed to resolve their disputes, including those
raised in the Proceedings, through binding arbitration and entered into a
submission to arbitration dated May 17, 2001 (the "Arbitration"). Prior to the
completion of the Arbitration, the Parties entered into a Mutual Release and
Settlement Agreement dated May 1, 2002 (the "Settlement Agreement") to settle
all the matters in dispute between them.
Pursuant to the terms of the Settlement Agreement, among other things:
1. the Parties delivered mutual releases to and from, inter alia, claims,
damages and liabilities arising out of the Amended MDA Agreement, the
Arbitration and/or the Proceedings;
2. the forgiveness of payment by the Company and Bygo of amounts owing by the
Company or Bygo or claimed by MDA under the terms of the Amended MDA Agreement;
and, payment to Bygo in settlement of amounts claimed by it;
3. the transfer by MDA to the Company of all shares in the capital of the
Company owned by MDA; and
Page 44 of 82
4. the retention by Allura of all right, title and interest in and to the
subject matter of certain Canadian patent applications as well as design and
architecture of the Bygo System.
D. Exchange Controls
There is no law or governmental decree or regulation in Canada that
restricts the export or import of capital, or affects the remittance of
dividends, interest or other payments to a non-resident holder of Shares, other
than withholding tax requirements. See " Taxation" below.
E. Taxation
A brief description of the provisions of the tax treaty between Canada and
the United States is included below, together with a brief outline of the taxes,
including withholding provisions to which United States security holders are
subject under existing laws and regulations of Canada and the United States; the
consequences, if any, of state and local taxes are not considered. Security
holders are urged to seek the advice of their own tax advisors, tax counsel or
accountants with respect to the applicability or effect of these provisions on
their own taxes. The Company has not paid dividends on the Common Shares in any
of its last five fiscal years, and has no plans to pay dividends in the
immediate future.
Canadian federal tax legislation would require a 25% withholding from any
dividends paid or deemed to be paid to the Company's non-resident shareholders.
However, a company resident in the United States that beneficially owns at least
10% of the voting stock of the Company would have this rate reduced to 5%
through the tax treaty between Canada and the United States. The rate of
Canadian non-resident withholding may not exceed 15% of the dividend in the case
of United States shareholders other than as described above. The amount of stock
dividends paid to non-residents of Canada would be subject to withholding tax at
the same rate as cash dividends. The amount of a stock dividend (for tax
purposes) would be equal to the amount by which the stated capital of the
Company had increased by reason of the payment of such a dividend. Interest paid
or deemed to be paid on the Company's debt securities held by non-Canadian
residents may also be subject to Canadian withholding tax, depending upon the
terms and provisions of such securities and any applicable tax treaty.
Under the present legislation in the United States, the Company is not
subject to United States back-up withholding rules, which would require
withholding at a rate of 20% on dividends and interest paid to certain United
States persons who have not provided the Company with a taxpayer identification
number.
Gains derived from a disposition of Common Shares by a non-resident
shareholder will be subject to tax in Canada only if not less than 25% of any
class of Common Shares was owned by the non-resident shareholder and/or persons
with whom the non-resident did not deal at arm's length at any time during the
five year period immediately preceding the disposition. In such cases, gains
derived by a U.S. shareholder from a disposition of Common Shares would likely
be exempt from tax in Canada by virtue of the Canada-U.S. tax treaty, provided
that the U.S. shareholder has not resided in Canada in the ten years immediately
preceding the disposition.
This discussion is not intended to be, nor should it be construed to be,
legal or tax advice to
Page 45 of 82
any holder or prospective holder of Common Shares and no opinion or
representation with respect to the United States federal income tax consequences
to any such holder or prospective holder is made. Holders and prospective
holders of Common Shares are urged therefore to consult their own tax advisors
with respect to their particular circumstances.
F. Dividends and paying agents
Not applicable to Form 20-F used to file an Annual Report.
G. Statement by experts
Not applicable to Form 20-F used to file an Annual Report.
H. Documents on display
The documents concerning the Company which are referred to in this Report
are either annexed hereto as exhibits (See Item 19) or may be inspected at the
principal executive offices of the Company.
I. Subsidiary Information
Not applicable for reports filed in the United States.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A. Quantitative Information about Market Risk
The Company does not invest in market risk sensitive instruments such as
debt instruments, forwards and futures, options, SWAPs or other derivative
financial and commodity instruments.
B. Qualitative Information about Market Risk
Currency Exchange Rate Sensitivity
The Company is exposed to currency risk as some of its accounts payable
are denominated in currencies other than the Canadian dollar. The Company earns
revenue and incurs operating expenses predominantly in Canadian dollars.
Unfavorable changes in the applicable exchange rates may result
Page 46 of 82
in a decrease or increase in foreign exchange gain or loss.
At March 31, 2003 and 2002, the Company's accounts payable and accrued
liabilities included the following foreign currency denominated amounts:
2003 2002
---------- ----------
U.K $ 8,626 $ 19,727
U.S. 1,648,990 1,965,560
Italian 2,379 5,712
Euro 150,354 265,759
---------- ----------
$1,810,349 $2,256,758
---------- ----------
Interest Rate Sensitivity
The Company's bank indebtedness bears floating interest rates. This
exposes the Company to the risk of changing interest rates that may have a
detrimental affect on its earnings in future periods. The Company has not
entered into any agreement or purchased any instrument to hedge against possible
interest rate risks at this time. The Company's interest earning investments are
short term. Thus, any reductions in future income or carrying values due to
future interest rate declines are believed to be immaterial.
Credit risk
Credit risk arises from the possibility that the entities to which the
Company sells products may experience financial difficulty and be unable to
fulfill their contractual obligations. This risk is mitigated by proactive
credit management policies that include regular monitoring of the debtor's
payment history and performance, credit insurance, geographic diversification,
obtaining security where appropriate, and credit insurance policy coverage.
Fair value
The Company has various financial instruments including receivables, bank
indebtedness, payables and accruals, and bonus payables.
The carrying value of all other financial instruments approximates their
fair value due to their short-term nature.
Page 47 of 82
Commodity Price Sensitivity
The future revenue and profitability of the Company will be dependent, to
a significant extent, upon prevailing spot market prices for gold and diamonds.
In the past, gold and diamond prices have been volatile. Prices are subject to
wide fluctuations in response to changes in supply and demand for gold and
diamonds, market uncertainty and a variety of additional factors that are beyond
the control of the Company. The Company does not engage in any hedging
activities.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable to Form 20-F filed as an Annual Report.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. CONTROLS AND PROCEDURES
The Board of Directors has overall responsibility for reviewing the
Company's disclosure to ensure the Company provides full and plain disclosure to
shareholders and other stakeholders. The Board discharges its responsibilities
through its committees, specifically, with respect to financial disclosure to
the Audit Committee, which is responsible for reviewing the Company's financial
reporting procedures and internal controls to ensure full and accurate
disclosure of the Company's financial position.
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c))as of a date (the "Evaluation Date") within 90 days before filing
date of this report, have concluded that as of the Evaluation Date, our
disclosure controls and procedures were adequate and designed to ensure that
material information relating to us and our consolidated subsidiaries would be
made known to them by others within those entities.
Page 48 of 82
There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Audit Committee is responsible for reviewing the Company's financial
reporting procedures, internal controls and the performance of the Company's
auditors as detailed in the Mandate of the Audit Committee. The Audit Committee
is also responsible for reviewing all disclosure with respect to financial
matters prior to filing or release and quarterly and annual financial statements
prior to their approval by the full Board.
Currently the Company does not have a financial expert on its Audit
Committee.
ITEM 16B. CODE OF ETHICS
The Company has not adopted a formal "code of ethics", however, it does
maintain standards that are reasonably designed to deter wrong-doing and to
promote:
1. Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
2. Full, fair, accurate, timely, and understandable disclosure in reports and
documents that a registrant files with, or submits to, regulatory agencies
and in other public communications made by the registrant;
3. Compliance with applicable governmental laws, rules and regulations;
4. The prompt internal reporting of violations of the standards to an
appropriate person or persons identified in the standards; and
5. Accountability for adherence to the standards.
In addition, the Company practices corporate governance in accordance with
rules and regulations in Canada.
Corporate Governance relates to the activities of the Board of Directors
who are elected by and accountable to the Shareholders, and takes into account
the role of management who are appointed by the Board of Directors and who are
charged with the on-going management of the Company. The
Page 49 of 82
Board of Directors of the Company encourages sound corporate governance
practices designed to promote the well being and on-going development of the
Company, having always as its ultimate objective the best long-term interests of
the Company and the enhancement of value for all Shareholders. Currently there
is no formal document stating the Company's Corporate Governance policies,
however, there are in existence, Board of Directors, Audit Committee and
Compensation and Human Resource Committee Mandates.
ITEM 16C. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Audit fees $52,900
Tax services 7,009
Other services 6,200
-------
$66,109
=======
ITEM 17. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company have been prepared on
the basis of Canadian GAAP. Reconciliation to U.S. GAAP is included therein
under note 17 to the financial statements.
The auditors' report, financial statements and notes thereto, schedules
thereto as required under Item 17 are found immediately below. The Audit Report
of Grant Thornton, LLP, Chartered Accountants is included herein immediately
preceding the respective financial statements, notes, schedules, etc.
Index to Financial Statements Page
- ----------------------------- ----
Auditors' Report 51
Consolidated Balance Sheets 52
Consolidated Statements of Operations 53
Consolidated Statements of Cash Flows 54
Consolidated Statements of Shareholders' Equity 55
Notes to the Consolidated Financial Statements 56
Consolidated Schedules of Administrative and Selling
and Delivery Expenses 74
Page 50 of 82
Auditors' Report
To the Shareholders of
Allura International Inc.
We have audited the consolidated balance sheets of Allura International Inc. as
at March 31, 2003 and 2002 and the consolidated statements of operations, cash
flows, and shareholders' equity for the years ended March 31, 2003, 2002 and
2001. 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 audit.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and in the United States of America. 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, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at March 31, 2003
and 2002 and the results of its operations and its cash flows for the years
ended March 31, 2003, 2002 and 2001 in accordance with Canadian generally
accepted accounting principles.
/s/ Grant Thornton LLP
Vancouver, Canada
June 6, 2003 except as to Note 6 Chartered Accountants
which is at September 5, 2003
Page 51 of 82
Allura International Inc.
Consolidated Balance Sheets
(expressed in Canadian dollars)
March 31 2003 2002
- --------------------------------------------------------------------------------------------------------
Assets
Current
Cash and temporary investments $ 166,151 $ 777,825
Receivables (Note 3) 3,862,650 3,423,857
Income taxes recoverable -- 26,086
Inventories 7,896,550 8,227,506
Prepaids 77,442 51,439
Capital assets held for disposal (Note 4) -- 646,820
------------ ------------
12,002,793 13,153,533
Goodwill (net of accumulated amortization of $27,015 (2002: $27,015)) 26,970 26,970
Capital assets (Note 5) 256,162 443,940
------------ ------------
$ 12,285,925 $ 13,624,443
============ ============
- --------------------------------------------------------------------------------------------------------
Liabilities
Current
Bank indebtedness (Note 6) $ 6,542,350 $ 7,459,704
Accounts payable and accruals (Note 7) 3,075,956 3,868,033
Income taxes payable 133,868 --
------------ ------------
9,752,174 11,327,737
------------ ------------
Shareholders' Equity
Capital stock (Note 8) 2,916,237 3,083,776
Deficit (382,486) (787,070)
------------ ------------
2,533,751 2,296,706
------------ ------------
$ 12,285,925 $ 13,624,443
============ ============
- --------------------------------------------------------------------------------
Commitments (Note 9)
See accompanying notes to the consolidated financial statements.
Page 52 of 82
Allura International Inc.
Consolidated Statements of Operations
(expressed in Canadian dollars)
Years Ended March 31 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 17,613,486 100.0% $ 15,220,387 100.0% $ 15,934,093 100.0%
Cost of goods sold 13,007,581 73.8 11,646,540 76.5 11,735,252 73.6
------------ ----- ------------ ----- ------------ -----
Gross profit 4,605,905 26.2 3,573,847 23.5 4,198,841 26.4
------------ ----- ------------ ----- ------------ -----
Expenses
Administrative (Page 24) 2,369,232 13.5 2,484,142 16.3 2,827,489 17.7
Depreciation and
Amortization 72,884 0.4 87,270 0.6 82,616 0.5
Selling and delivery
(Page 24) 1,163,388 6.6 1,109,066 7.3 1,231,278 7.8
------------ ----- ------------ ----- ------------ -----
3,605,504 20.5 3,680,478 24.2 4,141,383 26.0
------------ ----- ------------ ----- ------------ -----
Earnings (loss) before undernoted
1,000,401 5.7 (106,631) (0.7) 57,458 (0.4)
------------ ----- ------------ ----- ------------ -----
Other income (expenses)
Interest and bank charges (459,939) (2.6) (496,989) (3.2) (668,742) (4.2)
Write down of assets held
for disposal (Note 4) -- -- (180,102) (1.2) -- --
Legal costs of software
abandoned (Note 4) -- -- (310,852) (2.0) -- --
Other income 5,858 -- 37,969 0.2 13,063 0.1
------------ ----- ------------ ----- ------------ -----
(454,081) (2.6) (949,974) (6.2) (655,679) (4.1)
------------ ----- ------------ ----- ------------ -----
Earnings (loss) before
income taxes 546,320 3.1 (1,056,605) (5.7) (598,221) (3.7)
Current income taxes
(recovery) (Note 10) 141,736 0.8 (19,459) (0.1) (14,229) --
------------ ----- ------------ ----- ------------ -----
Net earnings (loss) $ 404,584 2.3% $ (1,037,146) (5.6)% $ (583,992) (3.7)%
============ ===== ============ ===== ============ =====
Earnings (loss) per share
(basic and diluted)
(Note 8) $ 0.03 $ (0.07) $ (0.04)
============ ============ ============
Weighted average common
shares outstanding 15,249,734 15,355,055 15,007,394
============ ============ ============
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 53 of 82
Allura International Inc.
Consolidated Statements of Cash Flows
(expressed in Canadian dollars)
Years Ended March 31 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash derived from (applied to)
Operating
Net earnings (loss) $ 404,584 $(1,037,146) $ (583,992)
Depreciation and amortization 72,884 87,270 82,616
Gain on disposition of capital assets -- (25,596) --
Write down of assets held for disposal
(Note 4) -- 180,102 --
Change in non-cash operating working capital
(Note 11) (455,111) (412,182) (368,312)
----------- ----------- -----------
22,357 (1,207,552) (869,688)
----------- ----------- -----------
Financing
Bank indebtedness (917,354) 852,239 272,835
Shareholders' loans -- -- (186,679)
Issuance of common shares for cash received
in trust in 2002 1,040,319
Issuance of common shares -- -- 1,558,818
----------- ----------- -----------
(917,354) 852,239 2,685,293
----------- ----------- -----------
Investing
Purchase of capital assets (52,645) (38,437) (1,240,689)
Proceeds on disposition of capital assets (Note 4) 646,820 249,334 --
(Decrease) Increase in payables and accruals
related to investing activities (310,852) 310,852 --
----------- ----------- -----------
283,323 521,749 (1,240,689)
----------- ----------- -----------
Net (decrease) increase in cash (611,674) 166,436 574,916
Cash
Beginning of year 777,825 611,389 36,473
----------- ----------- -----------
End of year $ 166,151 $ 777,825 $ 611,389
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities not
included in cash flows
Capital assets transferred to capital assets held for
disposal (Note 4) $ -- $ 646,820 $ --
Shares issued in consideration of software
development services received $ -- $ -- $ 167,539
Shares cancelled in settlement of dispute (Note 4) $ 167,539 $ -- $ --
Supplementary cash flow information
Interest paid during the year $ 422,048 $ 471,412 $ 653,474
Income taxes paid during the year $ 13,796 $ 8,304 $ 148,949
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 54 of 82
Allura International Inc.
Consolidated Statements of Shareholders' Equity
(expressed in Canadian dollars)
Years Ended March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Shares Issued
----------------------------
Share
Number of Ascribed Subscriptions Retained
Shares Value Received Earnings Total
Balance, March 31, 2000 13,429,868 317,100 1,040,319 834,068 2,191,487
Shares issued for subscriptions
received in 2000 729,353 1,040,319 (1,040,319) -- --
Shares issued for cash 740,945 1,082,685 -- -- 1,082,685
Units issued for cash (net of issue
costs of $23,867). Each unit
consists of a common share and a
call and put option (Note 8) 340,136 476,133 -- -- 476,133
Shares issued in consideration of
software development services
received (Note 4) 114,753 167,539 -- -- 167,539
Net loss, year ended March 31, 2001 -- -- -- (583,992) (583,992)
----------- ----------- ---------- ----------- -----------
Balance, March 31, 2001 15,355,055 3,083,776 -- 250,076 3,333,852
Net loss, year ended March 31, 2002 -- -- -- (1,037,146) (1,037,146)
----------- ----------- ---------- ----------- -----------
Balance March 31, 2002 15,355,055 $ 3,083,776 -- $ (787,070) $ 2,296,706
Shares cancelled (Note 4) (114,753) (167,539) -- -- (167,539)
Net income, year ended March 31, 2003 -- -- -- 404,584 404,584
----------- ----------- ---------- ----------- -----------
Balance March 31, 2003 15,240,302 2,916,237 -- (382,486) 2,533,751
=========== =========== ========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 55 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
1. Nature of operations
The company is primarily in the business of wholesaling gold and diamond
jewellery in Canada. Its customer base comprises large national chains as well
as independent retailers.
During 2000, the company incorporated a wholly-owned subsidiary, Bygo Inc. Bygo
Inc. has a internet commerce business. Since its inception, Bygo Inc. has earned
minimal revenues and devoted its efforts and resources to develop the software
and hardware necessary to execute its business plan. Bygo operates as an on-line
e-commerce facilitator of jewellery and giftware distribution.
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies
Basis of presentation
These financial statements are presented in accordance with Canadian generally
accepted accounting principles and include the accounts of the company and its
wholly-owned subsidiaries, IBB International (Canada) Ltd., Allura Diamonds
Limited and Bygo Inc.. The accounting principles used conform in all material
respects to principles generally accepted in the United States of America except
as disclosed in Note 17.
Use of estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from management's estimates.
Foreign currency
The company considers the Canadian dollar its functional currency. Monetary
assets and liabilities resulting from foreign currency transactions are
translated into Canadian dollars using the year end conversion rates. Sales,
purchases, receipts and payments are translated throughout the year at exchange
rates prevailing at the date of the transaction. Exchange gains and losses are
included in earnings for the year.
Inventories
Inventories are comprised of loose gemstones and finished products and are
valued at the lower of cost and net realizable value. Cost consists of the
invoiced price plus applicable duty, excise tax, and freight charges. Net
realizable value is based upon estimated selling price less further costs to
completion and disposal. 2003 inventories include goods held on consignment by
customers under consignment agreements totalling $1,285,100 (2002: $1,412,800).
Capital assets
Capital assets are recorded at cost less accumulated depreciation and
amortization.
The company depreciates its capital assets over their useful lives. All capital
assets other than leasehold improvements are depreciated on a 20% declining
balance basis. Leasehold improvements are amortized over the term of the lease.
Page 56 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
Application and software development costs
Software development costs incurred after the technological feasibility of the
developed software has been established are capitalized and amortized on a
declining balance basis at an annual rate of 20%.
Goodwill
Goodwill arises from the 1999 acquisition of the 50% of Allura Diamonds Limited
that the company did not previously own and consists of the excess of the
purchase price over the estimated fair value of the net tangible assets
acquired. Effective April 1, 2002, the company adopted, on a prospective basis,
the new recommendations of the Canadian Institute of Chartered Accountants with
respect to the valuation of goodwill. Under the new recommendations, goodwill is
no longer amortized, but will be tested for impairment at least on an annual
basis. For the year ended March 31, 2003, application of the new recommendations
resulted in net earnings that were $13,508 higher than they would be if goodwill
were amortized as in prior years. This change would not affectearnings per
share.
Application of the new recommendations would have had the following effects on
net loss and net loss per share, basic and diluted.
2002 2001
Net loss as presented $(1,037,146) $(583,992)
Reduced amortization under new
accounting standard 13,508 13,508
----------- ---------
Adjusted net loss $(1,023,638) $(570,484)
=========== =========
Adjusted net loss per share
basic and diluted $ (0.07) $ 0.04
=========== =========
Statement of cash flows
For the purpose of the statement of cash flows, the company considers cash on
hand and balances with banks and highly liquid temporary money market
instruments with original maturities of three months or less as cash or cash
equivalents. Bank borrowings are considered to be financing activities.
Page 57 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
Stock based compensation
The Company follows the recommendations of the Canadian Institute of Chartered
Accountants Handbook Section 3870 "Stock Based Compensation and Other Stock
Based Payments" which establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services. This Section also sets out a fair value based
method of accounting for stock options issued to employees and applies to awards
granted on or after April 1, 2002. These recommendations require that
compensation for all awards made to non-employees and certain awards made to
employees, including stock appreciation rights, direct awards of stock and
awards that call for settlement in cash for other assets, be measured and
recorded in the financial statements at fair value. For the purposes of this
Section, employees include directors who receive stock compensation for services
provided as a director since all directors are elected by the company's
shareholders.
Revenue recognition
The company's policy is to recognize revenue at the time when goods have been
shipped and invoices are rendered.
Sales of inventory held on consignment by customers are recognized at the time
when the consignment inventory is sold by these customers.
The company's e-commerce subsidiary earns fee revenue for services provided and
also earns commission revenue based on e-commerce transactions facilitated. Fee
revenue is recorded when the services have been provided. Commission revenue is
recorded on a net basis upon completion of the underlying transaction.
Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts through review of
open accounts, and historical collection and allowances amounts. The allowance
for doubtful accounts is intended to reduce trade accounts receivable to the
amount that reasonably approximates their fair value due to their short-term
nature. The amount ultimately realized from trade accounts receivable may differ
from the amount estimated in the financial statements based on collection
experience and actual returns and allowances.
Shipping and handling costs
Shipping and handling fees charged to customers are reported as revenue and all
shipping and handling costs incurred related to products sold are reported as a
component of selling and delivery costs.
Page 58 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
Income taxes
The company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, future tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and loss carry forwards. Future tax assets and
liabilities are measured using enacted or substantively enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the date of substantive enactment. When it is considered
more likely than not that a future tax asset will be realized, a valuation
allowance is provided.
Earnings (Loss) per share
The company uses the treasury stock method to calculate fully diluted earnings
per share. Under this method, all options with an average exercise price less
than or equal to the average share price for the year are assumed to be
exercised and all convertible securities are assumed to be converted at the
average share price during the period.
The effect of the exercise of the 2,366,000 (2002: 2,228,000, 2001: 2,206,000)
potentially dilutive options was not dilutive.
Capital stock issued for consideration other than cash
Capital stock issued for consideration other than cash is recorded at an
estimated of the fair value of the stock issued or issuable or at an estimated
of the fair value of the goods or services received (whichever is more readily
ascertainable).
- --------------------------------------------------------------------------------
3. Receivables
2003 2002
----------- -----------
Receivables $ 4,065,134 $ 3,639,596
Allowance for doubtful accounts (202,484) (215,739)
----------- -----------
$ 3,862,650 $ 3,423,857
=========== ===========
- --------------------------------------------------------------------------------
4. Capital assets held for disposal
During the year, the company, a subsidiary, and a supplier of e-commerce
applications and software development agreed to settle all disputes pertaining
to a project to develop certain software for the company's Bygo Internet
commerce platform.
The definitive agreement was finalized in fiscal 2003, but was accrued in fiscal
2002 and provided for the recovery of the costs of certain developed software
that had been capitalized. These capitalized costs were presented as capital
assets held for disposal at March 31, 2002 and were written down by $180,102 to
the net amount received in 2003.
Page 59 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
4. Capital assets held for disposal (continued)
Also, the company incurred legal costs totalling $310,852 related to this
abandoned software development, which was accrued at March 31, 2002.
A component of the final settlement reached with the supplier of e-commerce
application and software development resulted in 114,753 common shares issued in
2001 being returned to and cancelled during the year.
- --------------------------------------------------------------------------------
5. Capital assets
2003 2002
---- ----
Accumulated
Depreciation
and Net Net
Cost Amortization Book Value Book Value
Application and software
development costs $115,834 $ 79,964 $ 35,870 $208,387
Computer equipment 261,145 176,663 84,482 91,919
Furniture and equipment 179,004 125,828 53,176 65,523
Leasehold improvements 144,315 67,601 76,714 69,821
Trademark 11,840 5,920 5,920 8,290
-------- -------- -------- --------
$712,138 $455,976 $256,162 $443,940
======== ======== ======== ========
- --------------------------------------------------------------------------------
6. Bank indebtedness
Bank indebtedness is comprised of demand overdraft loan facilities totalling
$7,000,000 (2002: $7,000,000). The sum of all outstanding loans to be made
available by the bank is to be increased annually to the amount of $7,600,000
(2002: $8,050,000) from July 1st to February 28th.
These loans bear interest at prime plus 1/8% on the first $1,200,000 and prime
plus 1% on the balance. The loans are secured by a general security agreement
creating a first floating charge over all assets, a general assignment of book
debts, an assignment of inventory under Section 427 of the Bank Act, a guarantee
from a shareholder for $4,000,000 supported by a standby letter of credit for
$1,000,000 (2002: $1,200,000), guarantees by certain other shareholders to a
maximum of $800,000, supported by an assignment of certain shareholders'
residential real estate to a maximum of $800,000.
Under the terms of the demand overdraft loan agreement facility, the company
must maintain a Debt to Tangible Net Worth ratio not exceeding 3.0 to 1 for its
Jewellery Division and not exceeding 2.6 to 1 on the consolidated entity basis
as defined by the bank at each year-end when the loan is outstanding. As at
March 31, 2003, the Debt to Tangible Net Worth ratios were 2.81 to 1 and 2.78 to
1 respectively. Notwithstanding this technical default, the bank has agreed not
to demand repayment of the loan.
Page 60 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
7. Accounts payable and accruals
2003 2002
---------- ----------
Accounts payable $2,242,520 $3,181,358
Accruals 789,051 686,675
---------- ----------
$3,031,571 $3,868,033
---------- ----------
- --------------------------------------------------------------------------------
8. Capital stock
Authorized:
Unlimited number of common shares without par value
Issued:
15,240,302 (2002: 15,355,055) common shares
Stock options
The company established a stock option that allows for the issuance of up to
3,000,000 common shares as incentive stock options to current and future key
employees and consultants. The Board of Directors administers the Plan. The
Board of Directors has the authority to determine the terms and restrictions on
all options, as well as to interpret any provision of the Plan. Discretionary
options, once granted, vest at the discretion of The Board of Directors. A
summary of the status of the company's options is presented below:
Page 61 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
8. Capital stock (Continued)
Stock options (Continued)
Number of Shares Weighted
--------------------------------------------------- Average
Unvested / Vested / Non- Exercise
Discretionary Discretionary Total Price
------------- ------------- ----- -----
Balance, March 31, 2000 406,000 1,695,000 2,101,000 $0.60
Year ended March 31, 2001
Granted 70,000 115,000 185,000 $1.50
Options vested (130,000) 130,000 -- $0.60
Cancelled (62,500) (12,500) (75,000) $1.14
Expired -- (5,000) (5,000) $0.66
-------- --------- ---------
Balance, March 31, 2001 283,500 1,922,500 2,206,000 $0.66
Year ended March 31, 2002
- Granted 66,000 60,000 126,000 $1.58
Options vested (66,000) 66,000 -- $1.58
Cancelled -- (10,000) (10,000) $0.60
Expired -- (94,000) (94,000) $1.03
-------- --------- ---------
Balance, March 31, 2002 283,500 1,944,500 2,228,000 $0.69
Year ended March 31, 2003
Granted -- 140,000 140,000 $1.58
Expired -- (2,000) (2,000) $0.60
-------- --------- ---------
Balance, March 31, 2003 283,500 2,082,500 2,366,000 $0.75
======== ========= =========
The weighted average fair value of the options granted during the year was $0.19
(2002: $0.33; 2001: $0.30).
The following table summarizes information concerning options outstanding at
March 31, 2003:
Total Outstanding Exercisable
--------------------------- -------------------------
Weighted Weighted
Average Average
Number of Remaining Number of Exercise
Exercise Price Shares Life (Years) Shares Price
------ ------------ ------ -----
$0.60 2,005,000 1.80 1,759,000 $0.60
$1.50 95,000 2.32 57,500 $1.50
$1.58 266,000 3.84 266,000 $1.58
--------- ---------
2,366,000 2.05 2,082,500 $0.75
========= =========
Page 62 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
8. Capital stock (Continued)
Call and put options
During 2001, the company issued 340,136 units consisting of one common share,
one common share call option and one common share put option.
Each call option expired unexercised.
The put options are exercisable after July 25, 2005 and will expire upon the
closing of certain qualified initial public offerings. The put options are
outstanding as at year end and entitle the holders to put the shares to the
company for the lesser of their fair value (estimated at $49,500 at March 31,
2003) and the original proceeds received under the unit offering ( $500,000).
- --------------------------------------------------------------------------------
9. Commitments
The company has entered into two operating lease agreements for office premises.
The future minimum lease payments under these lease agreements for the next five
years are:
2004 $126,084
2005 126,084
2006 32,014
2007 13,200
2008 3,300
The operating lease agreement for one office premise is with a partnership in
which the company's president has an interest and the other with a partnership
in which the president of Allura Diamonds Limited has an interest.
- --------------------------------------------------------------------------------
10. Income taxes
(a) The provision for income taxes differs from the amount that would have been
expected by applying Canadian corporate income tax to the loss before taxes. The
principal reasons for this difference are as follows:
2003 2002 2001
--------- ----------- ---------
Income (Loss) before income taxes $ 546,320 $(1,056,605) $(598,221)
Statutory income tax rate 40.86% 44.6% 44.6%
========= =========== =========
Anticipated current income tax $ 223,226 $ (471,246) $(266,807)
provision (recovery )
Tax provision effect arising from:
Small business deduction (68,580) 281,057 159,128
Tax losses utilized (68,000) 25,453 --
Non-deductible expenses and other 24,190 (15,664) (142,280)
Potential benefit of losses not recognized 30,900 160,941 235,730
--------- ----------- ---------
Current income taxes (recovery) $ 141,736 $ (19,459) $ (14,229)
========= =========== =========
Page 63 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
10. Income taxes (continued)
(b) Future income tax assets consist of the following:
2003 2002
--------- ---------
Capital assets $ 39,300 $ 74,400
Non-capital loss carryforwards 395,000 432,200
Other items 14,800 4,300
Valuation adjustment (449,100) (510,900)
--------- ---------
$ Nil $ Nil
========= =========
The potential future tax benefit that may be derived from non-capital losses and
expenditures has been offset by a valuation allowance because it is uncertain
that sufficient taxable income will be earned to realize the benefits before
their expiration.
(c) The operating losses expire as follows:
2003 2002
---------- ----------
2007 $ -- $ 12,000
2008 668,000 711,000
2009 546,000 717,000
2010 102,000 --
---------- ----------
$1,316,000 $1,440,000
========== ==========
11. Change in non-cash operating working capital
2003 2002 2001
--------- ----------- ---------
Receivables $(438,793) $ 139,628 $(407,599)
Income taxes 159,954 137,083 (80,334)
Inventories 330,956 (1,534,040) (129,538)
Prepaids (26,003) (8,816) 26,227
Accounts payable and accruals (481,225) 853,963 222,932
--------- ----------- ---------
$(455,111) $ (412,182) $(368,312)
========= =========== =========
Page 64 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
12. Related party transactions
In addition to the related party transactions disclosed in Note 9, related party
transactions during the year and balances at year end are summarized as follows:
2003 2002 2001
------- ------- -------
International Bullion and Metal Brokers (London) Limited
Transactions
Inventory purchases $25,188 $10,423 $ --
Interest $11,649 $21,727 $10,659
Guarantee fee paid $ -- $ -- $20,887
Balances
Accounts payable and accrued liabilities $10,098 $12,691 $15,366
Other shareholder
Management fees paid to a company controlled by a
Shareholder $ -- $ -- $12,600
These transactions are in the normal course of operations and are measured at
the exchange amount, which is the amount of consideration established and agreed
to by the related parties.
International Bullion and Metal Brokers (London) Limited is a company controlled
by International Bullion and Metal Brokers Ltd., a shareholder in the company.
- --------------------------------------------------------------------------------
13. Financial instruments and risk management
The company is exposed to the following risks related to its financial assets
and liabilities:
Currency risk
The company is exposed to currency risk as some of its accounts payable are
denominated in currencies other than the Canadian dollar. The company earns
revenue and incurs operating expenses predominantly in Canadian dollars.
Unfavourable changes in the applicable exchange rates may result in a foreign
exchange loss. The company does not use derivative instruments to reduce its
exposure to foreign currency risk.
The company's accounts payable and accrued liabilities included the following
foreign currency denominated amounts:
2003 2002
---------- ----------
U.K $ 8,626 $ 19,727
U.S. 1,648,990 1,965,560
Italian 2,379 5,712
Euro 150,354 265,759
---------- ----------
$1,810,349 $2,256,758
========== ==========
Commodity Risk
Inventory consists of precious metals and gemstones. These items are susceptible
to change in valuation due to market conditions beyond the company's control.
Increase or decreases in the commodity prices of these assets can have positive
or negative effects on the company's future net earnings. The company does not
enter into derivative contracts to mitigate its exposure to commodity risk.
Page 65 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
13. Financial instruments and risk management (Continued)
Interest rate risk
Bank indebtedness bears floating interest rates which exposes the company to the
risk of changing interest rates that may have a detrimental effect on its
earnings in future periods.
Credit risk
Credit risk arises from the possibility that the entities to which the company
sells products may experience financial difficulty and be unable to fulfill
their contractual obligations. This risk is mitigated by proactive credit
management policies that include regular monitoring of the debtor's payment
history and performance, geographic diversification, credit insurance and
obtaining security when management considers it appropriate.
At March 31, 2003, 38% (2002: 29%) of the company's accounts receivable was owed
by 3 customers.
Fair value
The company has various financial instruments including receivables, bank
indebtedness and payables and accruals.
The carrying value of all financial instruments approximates their fair value
due to their short-term nature.
- --------------------------------------------------------------------------------
14. Significant customers
Four major customers account for 59% of total sales in 2003 (2002: 42%: 2001:
45%).
- --------------------------------------------------------------------------------
15. Segment disclosure
In 2002 and 2001, the company operated in two reportable business segments:
Jewellery Division, wholesales gold and diamond jewellery products primarily in
Canada and e-Commerce Division, an on-line e-commerce facilitator of jewellery
and giftware distribution. In 2003, the company operated in only one reportable
business segment, the Jewellery Division. The company's reportable segments are
business units that offer different services and are each managed separately.
The accounting policies used in each of these reportable segments are the same
as those described in the Summary of significant accounting policies (Note 2).
The management of the company evaluates performance of each reportable segment
based on net income.
Intersegment sales are recorded at the exchange value.
All operations are located in Canada.
Reconciliations with the financial statements of revenues and assets by
reportable segments are:
For the Years Ended March 31,
2003 2002 2001
----------- ----------- -----------
Revenue from external customers
Jewellery Division $17,613,486 $15,220,387 $15,906,947
e-commerce Division -- -- 27,146
----------- ----------- -----------
$17,613,486 $15,220,387 $15,934,093
=========== =========== ===========
Page 66 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
16. Segment disclosure (Continued) For the Years Ended March 31,
For the Years Ended March 31,
2003 2002 2001
----------- ----------- -----------
Earnings (loss) before income taxes
Jewellery Division $ 546,320 $ (320,181) $ 135,177
e-commerce Division -- (722,916) (719,890)
Amortization of goodwill -- (13,508) (13,508)
----------- ----------- -----------
$ 546,320 $(1,056,605) $ (598,221)
----------- ----------- -----------
Other income
Jewellery Division $ 5,858 $ 12,422 $ 3,403
e-commerce Division -- 25,547 9,660
----------- ----------- -----------
$ 5,858 $ 37,969 $ 13,063
=========== =========== ===========
Interest and bank charges
Jewellery Division $ 459,939 $ 496,392 $ 668,021
e-commerce Division -- 597 721
----------- ----------- -----------
$ 459,939 $ 496,989 $ 668,742
=========== =========== ===========
Income tax expenses (recovery)
Jewellery Division $ 141,736 $ (19,459) $ (14,229)
e-commerce Division -- -- --
----------- ----------- -----------
$ 141,736 $ (19,459) $ (14,229)
=========== =========== ===========
Depreciation and amortization
Jewellery Division $ 72,884 $ 54,255 $ 56,237
e-commerce Division -- 19,507 12,822
Amortization of goodwill -- 13,508 13,557
----------- ----------- -----------
$ 72,884 $ 87,270 $ 82,616
=========== =========== ===========
Additions to capital assets
Jewellery Division $ 52,645 $ 36,677 $ 128,958
e-commerce Division -- 1,760 1,279,270
----------- ----------- -----------
$ 52,645 $ 38,437 $ 1,408,228
=========== =========== ===========
As at March 31,
2003 2002
----------- -----------
Capital assets
Jewellery Division $ 256,162 $ 222,858
e-commerce Division -- 221,082
----------- -----------
$ 256,162 $ 443,940
=========== ===========
Page 67 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Differences between Canadian and U.S. generally accepted accounting
principles and practices
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ("Canadian basis") which differ from
those principles and practices that the company would have followed had its
financial statements been prepared in accordance with accounting principles and
practices generally required in the U.S. ("U.S. basis") as follows:
a) Under the Canadian basis in effect for fiscal years commencing before January
1, 2002, the issuance of certain stock options issued to outside consultants did
not require any reflection in the company's accounts. Under the U.S. basis
rules, the issuance of such options results in a current and/or deferred expense
that must be reflected in the company's financial statements. The expense
recorded is calculated based on the fair value of the options issued to these
outside consultants using the Black Scholes option pricing model. For fiscal
years commencing after January 1, 2002, the Canadian basis rules are
substantially conformed to U.S. basis rules pertaining to the recording of such
options.
b) For U.S. GAAP purposes, the put options disclosed in Note 8 have been
recorded as a liability in fiscal 2003 in accordance with EITF 84-5. Canadian
GAAP required no such reclassification.
Consolidated balance sheets
March 31, March 31,
2003 2002
----------- -----------
Long term liabilities under Canadian basis $ -- $ --
b) Put option adjustment 49,500 --
----------- -----------
Long term liabilities under U.S. basis $ 49,500 $ --
=========== ===========
Deferred compensation under Canadian basis $ -- $ --
a) Adjustment for deferred consulting expense related to stock options
issued to outside consultants 39,301 41,818
----------- -----------
Deferred compensation under U.S. basis $ 39,301 $ 41,818
=========== ===========
Capital stock under Canadian basis $ 2,916,237 $ 3,083,776
a) Adjustment for prior year consulting expense related to stock
options issued to outside consultants 97,583 104,295
a) Adjustment for deferred consulting expense related to stock
Options issued to outside consultants (2,517) (6,712)
b) Put option adjustment (49,500) --
----------- -----------
Capital stock under U.S. basis $ 2,961,803 $ 3,181,359
=========== ===========
Page 68 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
March 31, March 31,
2003 2002
--------- ---------
Deficit under Canadian basis $(382,486) $(787,070)
a) Adjustment for compensation and consulting expense related to
stock options issued to outside consultants (55,765) (55,765)
--------- ---------
Deficit under U.S. basis $(438,251) $(842,835)
========= =========
Additional paid in capital under Canadian basis $ -- $ --
a) Adjustment for prior year consulting expense related to stock options
issued to outside consultants 97,583 104,295
a) Adjustment for deferred consulting expense related
to stock options issued to outside consultants (2,517) (6,712)
--------- ---------
Additional paid in capital under U.S. basis $ 95,066 $ 97,583
========= =========
Consolidated statements of operations
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2003 2002 2001
-------- ----------- ---------
Net earnings (loss) under Canadian basis $404,584 $(1,037,146) $(583,992)
a) Adjustment for current year compensation and
consulting expense related to stock options
issued to outside consultants -- -- (31,854)
-------- ----------- ---------
Net earnings (loss) under U.S. basis $404,584 $(1,037,146) $(615,846)
======== =========== =========
Earnings (loss) per common share, basic and diluted
under U.S. basis $ 0.03 $ (0.07) $ (0.04)
======== =========== =========
Page 69 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
Consolidated statements of cash flows
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2003 2002 2001
--------- ----------- -----------
Cash derived from (applied to)
Operating
U.S. basis net earnings (loss) $ 404,584 $(1,037,146) $ (615,846)
Consulting expenses related to stock options -- -- 31,854
Depreciation and amortization 72,884 87,270 82,616
Gain on disposal of assets -- (25,596) --
Write-down of assets held for disposal -- 180,102 --
Change in non-cash operating working capital (455,111) (412,182) (368,312)
--------- ----------- -----------
Operating under Canadian and U.S. basis $ 22,357 $(1,207,552) $ (869,688)
========= =========== ===========
Financing under Canadian and U.S. basis $(917,354) $ 852,239 $ 2,685,293
========= =========== ===========
Investing under Canadian and U.S. basis $ 283,323 $ 521,749 $(1,240,689)
========= =========== ===========
Recent accounting pronouncements
Foreign currency and hedging
In November 2001, the CICA issued Accounting Guideline 13, "Hedging
Relationships" ("AcG 13") which establishes new criteria for hedge accounting
and will apply to all hedging relationships in effect for the Company's years
ending on or after August 1, 2003. Effective August 1, 2003, the Company will
reassess all hedging relationships to determine whether the criteria are met or
not and will apply the new guidance on a prospective basis. To qualify for hedge
accounting, the hedging relationship must be appropriately documented at the
inception of the hedge and there must be reasonable assurance, both at the
inception and throughout the term of the hedge, that the hedging relationship
will be effective. The Company does not currently have any hedging
relationships.
Disposal of Long-Lived Assets and Discontinued Operations
In December 2003, the CICA issued Handbook Section 3475 for Disposal of
Long-Lived Assets and Discontinued Operations with the purpose of harmonizing
Canadian GAAP with generally accepted accounting principles in the Unites States
of America ("US GAAP"). The section is effective for disposal activities
initiated by a commitment to a plan on or after May 1, 2003, with earlier
adoption encouraged. The key aspects of Handbook Section 3475 are as follows:
o a long-lived asset to be disposed of other than by sale should
continue to be classified as held and used until it is disposed of;
o a long-lived asset can only be classified as held for sale if
certain criteria are met;
Page 70 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
Recent accounting pronouncements (continued)
o an asset classified as held for sale should be measured at the lower
of its carrying amount or fair value less costs to sell;
o a loss recognized on classification of an asset as held for sale
does not include future operating losses;
o discontinued operations are defined more broadly than previously.
They comprise dispositions where the operations and cash flows can
be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the enterprise;
o the income statement presentation of discontinued operations is
unchanged; and
o various disclosures related to the disposal of long-lived assets is
required.
The Company is currently assessing the impact of Handbook Section 3475 on its
financial position and results of operations.
Accounting for Severance and Termination Benefits
In March 2003, the Emerging Issues Committee of the CICA ("EIC") issued EIC
Abstract 134 for Accounting for Severance and Termination Benefits, which
addresses the various types of severance and termination benefits related to the
termination of an employee's services prior to normal retirement. The accounting
treatment must be applied prospectively to exit or disposal activities initiated
after March 31, 2003. This Abstract harmonizes Canadian GAAP and US GAAP.
Costs associated with exit or disposal activities
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146 Accounting for Costs Associated with Exit or Disposal Activities ("FAS
146"). FAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities, and is effective for exit or disposal
activities initiated after December 31, 2002. FAS 146 nullifies Emerging Issues
Task Force Issue No. 94-3 ("EITF 94-3") Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain costs Incurred in Restructuring). The principal difference between FAS
146 and EITF 94-3 relates to the recognition of a liability for a cost
associated with an exit or disposal activity. FAS 146 requires that the cost
associated with an exit or disposal activity be recognized when the liability is
incurred, whereas under EITF 94-3 the liability was recognized at the date of an
entity's commitment to an exit plan. This is substantially consistent with the
CICA EIC Abstract 135, Accounting for Costs Associated with Exit and Disposal
Activities (Including Costs Incurred in a Restructuring). The Company is
currently assessing the impact of FAS 146 and EIC Abstract 135 on its financial
position and results of operations.
Page 71 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
Recent accounting pronouncements (continued)
Guarantees
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which requires certain disclosures to be
made by a guarantor in its interim and annual financial statements for periods
ending after December 15, 2002 about its obligations under guarantees. FIN 45
also requires the recognition of a liability by a guarantor at the inception of
certain guarantees entered into or modified after December 31, 2002. FIN 45
requires the guarantor to recognize a liability for a non-contingent component
of certain guarantees; that is, it requires the recognition of a liability for
the obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. This is substantially consistent with
the CICA Accounting Guideline AcG-14, Disclosure of Guarantees. The Company does
not have any guarantees under these standards.
Variable interest entities
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("VIE's") ("FIN 46") which requires that companies
that control another entity through interests other than voting interest should
consolidate the controlled entity. In the absence of clear control through a
voting equity interest, a company's exposure (variable interests) to the
economic risk and the potential rewards from a VIE's assets and activities are
the best evidence of a controlling financial interest. VIE's created after
January 31, 2003 must be consolidated immediately. VIE's existing prior to
February 1, 2003 must be consolidated by the Company commencing with its first
quarter 2004 financial statements. The Company has not yet determined whether it
has any VIE's which will require consolidation.
Derivatives and hedging activities
In April 2003, the FASB issued SFAS No, 149 "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
accounting for SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". In particular, it clarifies under what circumstances a contract
with an initial net investment meets the characteristics of a derivative as
discussed in SFAS No. 133; clarifies when a derivative contains a financing
component; amends the definition of an underlying hedge to conform it to the
language used in the FASB Interpretation No. 45; and amends certain other
existing pronouncements. This is substantially consistent with the CICA EIC
Abstract 128, Accounting for Trading, Speculative or Non-Hedging Derivative
Financial Instruments.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. CICA EIC
Abstract 128 is effective for fiscal years beginning on or after July 1, 2003.
The Company will adopt the provisions of SFAS No. 149 for U.S. GAAP purposes on
April 1, 2003 and will adopt the provisions of CICA EIC 128 on April 1, 2004 and
is currently assessing the impact, if any, that the adoption of SFAS No, 149
will have on its results of operations and financial position.
Page 72 of 82
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
Recent accounting pronouncements (continued)
Liabilities and equity
On May 15, 2003, the FASB issued Statement No, 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. The
Statement requires issuers to classify as liabilities (or assets in some
instances) three classes of freestanding financial instruments that embody
obligations for the issuer.
Generally, the Statement is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company will adopt the
provisions of the Statement on July 1, 2003. The Company is currently assessing
the impact of the new standard.
Asset Retirement Obligations
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002.
In March 2003, the CICA issued Handbook Section 3110, Asset Retirement
Obligations, with the intent of harmonizing Canadian GAAP with U.S. GAAP.
Effective for fiscal periods beginning on or after January 1, 2004, the Section
focuses on the recognition and measurement of liabilities for obligations
associated with the retirement of property, plant and equipment when those
obligations result from the acquisition, construction, development or normal
operations of the assets. For example, the Handbook Section applies to removal
of plant and equipment from leased property upon termination of the lease.
The Company is in the process of assessing the impact of Handbook Section 3110,
the impact of which will reflect obligations in existence at the time of
adoption.
Page 73 of 82
Allura International Inc.
Consolidated Schedules of Administrative and Selling and
Delivery Expenses
(expressed in Canadian dollars)
Years Ended March 31
2003 2002 2001
- --------------------------------------------------------------------------------
Administrative
Alarm and security $ 4,373 $ 4,907 $ 7,902
Automobile 2,420 20,888 12,151
Bad debts (recovery) 49,341 32,267 114,513
Capital tax 7,724 25,406 20,171
Charitable donations 10,100 100 200
Consulting 106,436 88,240 119,315
Insurance 193,929 139,567 73,529
Legal and accounting 80,960 134,850 324,342
Management fees (Note 12) -- -- 12,600
Office and miscellaneous 146,157 133,623 209,766
Rent 177,956 182,131 171,846
Salaries and wages 1,525,710 1,625,318 1,619,551
Telephone 30,054 33,584 42,416
Travel 34,072 63,261 99,187
---------- ---------- ----------
$2,369,232 $2,484,142 $2,827,489
========== ========== ==========
Selling and delivery
Marketing $ 239,864 $ 241,131 $ 296,841
Freight and shipping 197,501 173,214 164,095
Sales commission 213,755 128,580 190,664
Selling 512,268 566,141 579,678
---------- ---------- ----------
$1,163,388 $1,109,066 $1,231,278
========== ========== ==========
Page 74 of 82
ITEM 18. FINANCIAL STATEMENTS
The Company has elected to report under Item #17.
ITEM 19. EXHIBITS
1.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 1.1 to the Company's Registration Statement on Form 20-F,
File No. 0-30228 (the "Registration Statement"));
1.2 By-laws of the Company (incorporated by reference from Exhibit 1.2 to the
Registration Statement);
1.3 Articles of Amendment of the Company (incorporated by reference from
Exhibit 1.3 to the Registration Statement);
1.4 Certificate of Amendment of the Company (incorporated by reference from
Exhibit to the Registration Statement);
1.5 Certificate of Change of Name (incorporated by reference from Exhibit 1.5
to the Registration Statement);
4.1 Shareholders Agreement (incorporated by reference from Exhibit 4.1 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.2 Investment Agreement (incorporated by reference from Exhibit 4.2 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.4 Lease for 1555 West 8th Avenue (incorporated by reference from Exhibit 4.3
to the Annual Report on Form 20-F for the fiscal year ended March 31,
2000) and Lease for Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6,
(Attached);Stock Option Plan (incorporated by reference from Exhibit 4.4
to the Annual Report on Form 20-F for the fiscal year ended March 31,
2000);
4.5 Mutual Release and Settlement Agreement dated May 1,2002 by and among,
Allura International, Bygo, Inc. and MacDonald Dettwiler and Associates,
Ltd., and certain other parties thereto;
7.0 List of Subsidiaries (incorporated by reference from Exhibit 7.0 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000).
31.1 Section 302 Certification by C.E.O.
31.2 Section 302 Certification by C.F.O.
32.1 Section 906 Certification by C.F.O.
Page 75 of 82
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
Allura International, Inc.
/s/ "Jeremy Bowman"
Dated: October 14, 2003 Jeremy Bowman, President & CEO
Vancouver, British Columbia
Canada
Page 76 of 82
ALLURA INTERNATIONAL INC.
Index to Exhibits Filed
1.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 1.1 to the Company's Registration Statement on Form 20-F,
File No. 0-30228 (the "Registration Statement"));
1.2 By-laws of the Company (incorporated by reference from Exhibit 1.2 to the
Registration Statement);
1.3 Articles of Amendment of the Company (incorporated by reference from
Exhibit 1.3 to the Registration Statement);
1.4 Certificate of Amendment of the Company (incorporated by reference from
Exhibit 1.4 to the Registration Statement);
1.5 Certificate of Change of Name (incorporated by reference from Exhibit 1.5
to the Registration Statement);
4.1 Shareholders Agreement (incorporated by reference from Exhibit 4.1 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.2 Investment Agreement (incorporated by reference from Exhibit 4.2 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.3 Lease for 1555 West 8th Avenue (incorporated by reference from Exhibit 4.3
to the Annual Report on Form 20-F for the fiscal year ended March 31,
2000). Lease for Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6,
(Attached);
4.4 Stock Option Plan (incorporated by reference from Exhibit 4.4 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.5 Mutual Release and Settlement Agreement dated May 1, 2002, by and among
Allura International, Bygo Inc., MacDonald Dettwiler and Associates Ltd.
and certain other parties thereto.
7.0 List of Subsidiaries (incorporated by reference from Exhibit 7.0 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000).
31.1 Section 302 Certification by C.E.O.
31.2 Section 302 Certification by C.F.O.
32.1 Section 906 Certification by C.F.O.
Page 77 of 82