UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20F
|_| 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, 2006
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 ___________.
|_| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring the shell company report:
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, 2006: 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 48
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.............................................19
Item 6. Directors, Senior Management and Employees...............................................28
Item 7. Major Shareholders and Related Party Transactions........................................30
Item 8. Financial Information....................................................................33
Item 9. The Offer and Listing....................................................................34
Item 10. Additional Information...................................................................35
Item 11. Quantitative and Qualitative Disclosures about Market Risk...............................38
Item 12. Description of Securities other than Equity Securities...................................40
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies..........................................40
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.............41
Item 15. Controls and Procedures..................................................................41
Item 16A. Audit Committee Financial Expert.........................................................43
Item 16B. Code of Ethics...........................................................................43
Item 16C. Principal Accountants Fees and Services..................................................43
Item 16D. Exemption from the Listing Standards for Audit Committees................................44
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers...................44
Item 17. Financial Statements.....................................................................44
Item 18. Financial Statements.....................................................................45
Item 19. Exhibits.................................................................................46
Signatures...............................................................................47
Index to Exhibits Filed..................................................................48
Page 2 of 48
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
This Form 20-F is being filed as an annual report under the Securities
Exchange Act of 1933, and accordingly, the information called for in Item 1 is
not required. Please refer to "Item 6 - Directors, Senior Management and
Employees -Directors and Senior Management".
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
This Form 20-F is being filed as an annual report under the Securities
Exchange Act of 1933, and accordingly, the information called for in Item 2 is
not applicable to this 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, 2006, 2005,
2004, 2003 and 2002. 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.
During September 2005, the Company declared and paid a USD $0.01 per share
dividend to all shareholders on record as at September 6, 2005. Four of the
Company's largest shareholders waived their rights to receive this dividend. 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, as disclosed in the financial statements
under note 14.
The following tables set forth information in Canadian dollars.
Page 3 of 48
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2006 2005 2004 2003 2002
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Net Sales $ 17,719,672 $18,252,286 $16,114,338 $17,031,936 $ 14,652,109
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Gross Profit $ 4,067,365 $ 5,098,045 $ 3,957,544 $ 4,023,355 $ 3,005,569
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Net Income (Loss) $ (389,759) $ 322,708 $ 327,681 $ 398,084 $ (1,037,146)
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Earnings (Loss) Per Common Share (a) ($0.02) $ 0.02 $ 0.02 $ 0.03 ($0.07)
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Outstanding Shares (a) 15,240,302 (b) 15,240,302 15,240,302 15,240,302 15,355,055
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Total Assets $ 16,276,552 $16,824,370 $11,539,964 $12,285,925 $ 13,624,443
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Working Capital $ 2,513,418 $ 2,936,292 $ 2,582,063 $ 2,250,619 $ 1,825,796
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Long Term Liabilities -- -- -- -- --
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Total Liabilities $ 13,563,572 $13,689,730 $ 8,728,032 $ 9,752,174 $ 11,327,737
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Non Controlling Interest -- -- -- -- --
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Shareholder's Equity $ 2,712,980 $ 3,134,640 $ 2,811,932 $ 2,533,751 $ 2,296,706
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Dividends declared per share $ 0.01 (USD) -- -- -- --
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(a) Earnings per share are on basic and fully diluted basis.
(b) On September 30, 2005, the Company's shareholders approved a reverse stock
split of the Company's 15,240,302 outstanding common shares, on the basis
of 3 (old) for each 1 (new) common share. The new common shares have not
yet been issued and the stock split is not yet effective.
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. All exchange rates disclose in this statement is based on
rates published on Bank of Canada's website. We do not represent that the
Canadian dollar or the US dollar amounts could be converted into US dollars or
Canadian dollars, as the case may be at any particular rate, the rates set forth
below, or at all.
(a) On September 30, 2006 the month end closing rate per Bank of Canada was
$1.00 US = $1.1177 Canadian.
(b) The following table sets forth the high and low exchange rates for each
month during the previous six months per Bank of Canada:
Page 4 of 48
Canadian Dollar/US Dollar
Month Low High
August 2006 $1.1040 $1.1294
July 2006 $1.1052 $1.1392
June 2006 $1.0963 $1.1219
May 2006 $1.0948 $1.1197
April 2006 $1.1113 $1.1697
March 2006 $1.1299 $1.1706
(c) The following table sets forth the average rates for each period, calculated
by using the average of the exchange rates on the last day of each month during
the period:
Canadian Dollar/US Dollar
Fiscal Year Ended Average Rate
March 31, 2006 $1.1574
March 31, 2005 $1.2161
March 31, 2004 $1.3284
March 31, 2003 $1.4764
March 31, 2002 $1.5876
B. Capitalization and Indebtedness.
This Form 20-F is being filed as an annual report under the Securities
Exchange Act of 1933, and accordingly, the information called for in this Item
3.B is not required
C. Reasons for the Offer and Use of Proceeds.
This Form 20-F is being filed as an annual report under the Securities
Exchange Act of 1933, and accordingly, the information called for in Item 3.C is
not applicable to this report.
D. Risk Factors.
The Company's business is subject to a number of risk factors that are set
forth below. Additional risks and uncertainties not now known to us or that we
think are immaterial may also adversely impact or impair our business. If any of
the following risks actually occur, our business, results of operations, or
financial condition would likely suffer.
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 2006, the Company purchased gold and
silver products from over 100 suppliers, with the five largest suppliers
accounting for approximately 42% of the Company's total gold and silver
purchases. In the diamond jewelry, loose stone and coloured stone area, the
Company purchased products from approximately 65 suppliers, while the five
largest suppliers accounted for 48% of the Company's total purchases in this
area.
Page 5 of 48
Although a substantial portion of the Company's purchases are concentrated
within a small number of suppliers, the Company does not believe the loss of any
one supplier would have a material adverse effect on its business. The Company's
five largest suppliers account for 32% of the merchandise purchases during the
year. 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.
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 fiscal
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 is currently negotiating an employment agreement with Mr. Bowman;
however, it has not yet been finalized. The Company does not maintain any key
man life insurance on Mr. Bowman's life. There are no assurances that the
agreement currently being negotiated will be finalized.
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 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. See "Directors, Senior Management
and Employees."
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
Page 6 of 48
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. As a gesture of goodwill the Company provides a
stock balancing service, primarily to large retailers, in order to assist them
with maintaining inventory levels in an efficient way. Stock balancing
transactions involve taking back products for resorting and redistribution to
other stores within the retailers group. This is typically once a year after the
Christmas season has completed.
Concentration of ownership among our Directors, Executive Officers, and
Principal Stockholders may prevent new investors from influencing significant
corporate decisions.
Based upon beneficial ownership as of August 31, 2006, the Company's
directors, executive officers, holders of more than 5% of our common stock, and
their affiliates will, in the aggregate, beneficially own approximately 85% of
our outstanding common shares. As a result, these stockholders, subject to any
fiduciary duties owed to our other stockholders under Canadian law, will be able
to exercise a controlling influence over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, and will have significant control over our management policies.
Some of these persons or entities may have interests that are different from
yours. For example, these stockholders may support proposals and actions with
which you may disagree or which are not in your interests. The concentration of
ownership could delay or prevent a change in control of our company or otherwise
discourage a potential acquirer from attempting to obtain control of our
company, which in turn could reduce the price of our common stock. In addition,
these stockholders, some of whom are directors or who have representatives
sitting on the Company's board of directors, could use their voting influence to
maintain the Company's existing management and directors in office, delay or
prevent changes of control of our company, or support or reject other management
and board proposals that are subject to stockholder approval, such as amendments
to the Company's employee stock plans and approvals of significant financing
transactions.
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 NASDAQ
Bulletin Board, which may limit the marketability and liquidity of the shares of
the Company's Common Stock. Thus, stockholders may find it 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
Page 7 of 48
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 260,000
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
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
Page 8 of 48
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 most of its accounts payable
are denominated in currencies other than the Canadian dollar. Unfavorable
changes in the applicable exchange rates may result in a decrease or increase in
foreign exchange gain or loss.
The Company earns revenue and incurs operating expenses predominantly in
Canadian dollars.
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.
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.
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.
Recently enacted and proposed changes in securities laws and regulations are
likely to increase our costs.
In July 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 ("SOX"). The purpose of the SOX is to, among other things; protect
investors by improving the accuracy and reliability of corporate disclosures
made pursuant to the securities laws. We expect these developments to increase
the legal and financial compliance costs, and to make some activities more
difficult. For example, we expect these developments to make it more difficult
and more expensive for public companies to obtain director and officer liability
insurance. These developments could make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to serve on an
audit committee, and qualified executive officers. We are presently evaluating
and monitoring regulatory developments and cannot estimate the timing or
magnitude of additional costs we may incur as a result. Furthermore, proposed
changes in the accounting rules could increase the expenses that we report under
GAAP and adversely affect our operating results. While we will endeavor to
establish the requisite procedures and structure our corporate governance in
accordance with SOX and the rules and regulations thereunder, as issued by the
SEC from time to time, we cannot assure you
Page 9 of 48
that we will be successful in this regard or that the costs we incur in doing so
will not prove material and adversely affect our profitability.
Violations of Banking Terms and Covenants
The Company's demand overdraft loan agreement facility has terms and
covenants that it must meet to maintain this facility. If the Company is in
default of its terms and covenants, there can be no assurance that the bank and
management will be able to renegotiate its arrangements to bring the Company
into compliance. As at March 31, 2006, the Company was in default of its terms
and covenants on this overdraft loan facility; however, the terms and covenants
were renegotiated. At July 31, 2006 and as of the filing date, the Company
remains in default of one of these terms and the bank and management are in the
process of reviewing these matters
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"). During March 2006, the Company sold all its outstanding shares of Bygo
to its ADL. At the same time, Bygo was wound up into ADL. Collectively, IBB and
ADL are referred to as the "Jewelry Division", which is the Company's only
division, and together with the Company, as the "Allura Group."
The Company, through the Jewelry 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.
Bygo had business-to-business and business-to-consumer Internet commerce sites.
Since its 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 operated as an on-line e-commerce facilitator
of jewelry, paper goods and giftware distribution. During March 2006, the
Company sold all its outstanding shares of Bygo to its ADL. At the same time,
Bygo was wound up into ADL. The normal activities and assets of Bygo were
transferred to Allura Diamonds Limited.
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 operates 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. Subsequent to the fiscal 2006 year, the Company opened a new office in
Toronto to engage in sales functions of the Company. The primary focus of the
Toronto will be on the Company's majors customer group.
Business History
The Company was initially formed to import European jewelry into Canada.
The objective of the Company
Page 10 of 48
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
Subsequent to the fiscal 2006 year end, the Company acquired new business
solution software to integrate its operations and management systems. The
implementation of this software is expected to be completed by fiscal 2008. The
Company expects to achieve cost and operating efficiencies resulting from the
implementation of this software.
B. Business Overview
Current Operations
The Company conducts its jewelry wholesaling operations through the
Jewelry Division comprising of IBB and ADL. The Company's mass marketing jewelry
operations are conducted through IBB, while ADL's primary focus is the
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 Little Loves Gold
Jewellery(TM), Golden Moments(TM), Earresistables(TM), Tuscany Gold
Collection(TM), and Tuscany Silver(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. Subsequent to fiscal 2006 year
end, the Company developed a new diamond business focusing on lower value items
than it has done in the past and expects this new business will increase overall
sales for fiscal 2007. Initially, this product grouping will be offered to some
of its major retail customers.
Subsequent to the fiscal 2006 year end, IBB entered new markets with its
gemstone programs that is currently marketed to large retailers.
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. Subsequent to the
fiscal 2006 year end, the Company invested in new business solution software to
replace its existing legacy systems. 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 as a premier diamond house to market finished
diamond jewelry and loose diamonds. ADL currently specializes in finer diamond
jewelry.
Page 11 of 48
ADL sales are divided approximately 61% to major retail and jewelry store
chains and 39% to independent jewelry stores. ADL's lower priced diamond jewelry
to major retailers is marketed through IBB and such sales comprise 8% of ADL's
total sales. In 2002, ADL incorporated the "Canadian Diamond" into its range of
products. Then in 2004 ADL introduced a new "Diamond Collection Certificate"
certifying rings within this product category as a true Canadian made product.
This certificate accompanies all products within the "Hearts and Arrows" and
"Ideal Cut Diamond" collections. The Company also markets a line of gemstone
products to the independent jewelry stores trademarked as Dreamcatchers(TM).
The Allura Group
The Allura Group offers its customers a large selection of jewelry styles,
consistent product quality, and prompt delivery of product orders and provides a
wide range of specialized services. The Company's retail customers include The
Bay, Wal-Mart Canada Corp., Zellers Inc., Sears Canada Ltd., Ben Moss Jewellers
and Charm Diamond Centres. These customers are among the Company's largest
customers, accounting for approximately 61% of the Company's sales in fiscal
2006, 62% in fiscal 2005 and 62% in fiscal 2004. They are representative of the
customers to which the Jewelry 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 2006, sales were made to
approximately 300 customers; with over 1400 retail locations, and with no single
customer accounting for more than approximately 26% of net sales. The Company's
six largest customers accounted for approximately 61%% of sales in fiscal 2006,
62% in fiscal 2005 and 62% in fiscal 2004.
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 strategy, 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.
Subsequent to fiscal 2006, the Company opened its third office in Canada
in the city of Toronto. The focus of the Toronto office is to improve our
customer service to our largest customers; most of these are headquartered in
Toronto.
Industry Background
We obtained statistical data and certain other industry forecasts used
throughout this report from market research, publicly available information and
industry publications. Industry publications generally state that they obtain
their information from sources that they believe to be reliable, but they do not
guarantee the accuracy and completeness of the information. Similarly, while we
believe that the statistical and industry data and forecasts and market research
used herein are reliable, we have not independently verified such data. We have
not sought the consent of the sources to refer to their reports or articles in
this report.
Gold Jewelry
According to the World Gold Council, retail sales of karat jewelry in
North America for 2003 were US$16.3
Page 12 of 48
billion. Dollar sales in 2003 increased by 2.54% from the previous year (2002
US$ 15.9 billion), and by 1.99% from 2001 to 2002 (2001 US$15.6 billion). Unit
volume grew by 3.92% to 214,389 million in 2003 from 206,306 million in 2002,
and by 3.67% in 2002 from 199,004 million in 2001. Gold jewelry sales have
achieved a three-year growth rate of 12.27% in number of unit terms (from
190,957 million to 214,389 million) and 6.72% in dollar terms (from 15.3 billion
to 16.3 billion) between December 2000 and December 2003.
In 2003, dollar value growth was up by 2.5% over the previous year with
Non-Store retail leading the way in sales growth (+3.9%), followed by Mass
Merchants (+3.6%), Jewelry Stores (+2.3%) and then Department Stores (+1.3%).
For the 2003 year, Jewelry stores accounted for 49.3% of all retail dollar value
sales (US$8,054,530), while Mass Merchandisers were 22.5% (US$3,688,152) and
Department Stores were 19.1% (US$3,120,431).
Diamonds
According to the Diamond Promotion Services 2003 North American (US and
Canada) retail sales of diamond jewelry (defined as jewelry containing at least
one diamond; regardless of size, and including diamond watches) was 29.8
billion. This was a 6.2% increase over the 2002 retail sales number, and an
11.8% increase over the 2001 number.
In volume terms, 44.1 million pieces of diamond jewelry were sold in the
US in 2003, which is a 5.4% increase over 2002 and a 16.6% increase over 2001.
(Note: no volume data is available for Canada)
US sales by outlet. 75% by independent and small chain jewelry stores
(under 30 stores) and by large chain Jewelers (30 plus stores). The remaining
25% is distributed among discounters, department stores (national and regional),
other retail outlets, Internet and TV shopping.
In terms of sales, independent and small chains accounted for almost half
of the value in 2003, however they are loosing their market share to larger
chains. Larger chains experienced an 18% increase in the value of their market
share in 2003 over 2002.
The largest area of growth in terms of style was seen in three-stone
diamond jewelry, with sales up 75% in 2003 over the same period in 2002. Diamond
necklaces also experienced strong growth in 2003, up 14%.
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
Page 13 of 48
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 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 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 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 54 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.
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 Bay, Wal-Mart Canada Corp.,
Zellers Inc., Sears Canada Ltd., Ben Moss Jewellers and Charm Diamond Centres.
These customers are among the Company's largest customers, accounting for
approximately 61% of the Company's net sales in fiscal 2006, 62% in fiscal 2005
and 61% in fiscal 2004. The company has one (2005: two; 2004: three) customer,
with sales that exceeded 10% of the total sales. They are representative of the
customers to which the Jewelry 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 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,
Page 14 of 48
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. Subsequent to the fiscal 2006 year, the Company opened a
new office in Toronto to engage in sales functions of the Company. The primary
focus of the Toronto office will be on the Company's largest customers; most of
these are headquartered in Toronto. The Company also has a National Sales
Manager for major accounts in Toronto, a National Independent Sales Manager, and
seven regional independent customer service representatives who market to
independent 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 amounts of consignment sales in the past three fiscal years have
exceed $6 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 300 customers in
fiscal 2006, sales of the Company's six largest customers accounted for
approximately 61% of sales in fiscal 2006 and 62% in fiscal 2005 and 61% in
fiscal 2004. All of the Company's active customers are Canadian except Zales
Corporation and Birks/Mayors Corporation.
Products
The Company seeks to provide its customers with a full line of high
quality 10, 14 and 18 karat 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, 350
diamond and colored stone and 54 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
Page 15 of 48
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.
When major customers plan to discontinue items from their programs,
including those that have been on consignment programs, the items agreed to be
discontinued are sold down to minimize the quantifies returned to the Company.
When the items are returned, they are typically offered to other customers for
regular margins. At times during the year, the Company may offer such
discontinued items at discount values to generate cash flow and these are
typically sold at reduced margins.
Styles are discontinued when a supplier or manufacturer has discontinued
an item from their offering and we are unable to replace the product or the
customers' performance for the item has not met their targets.
The Company's experience is that such discontinued products do not have to
be significantly written down as its expected recovery from subsequent sales is
above costs.
Customers' selling prices and the Company's price book are updated
annually to ensure prices reflect market conditions and costs of doing business.
Certain customer prices lists are priced to allow for adjustments to gold price
fluctuations. Gold price is monitored on a daily basis to ensure such price
lists are updated to reflect current gold levels.
It is the Company's experience that some items significantly written down
are later sold but these amounts are not material. The Company's estimates that
during fiscal 2006, such sales accounted for $200,000 of the total revenues for
the Company. Subsequent to year end, the Company sold approximately $500,000 of
items that were were written down; the sale was at the written down value. As at
year end, the Company has written down inventory $222,000 (2005: $92,000, 2004:
$100,000) to reflect the estimated recovery of discontinued items.
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.
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 2006, the Company purchased gold and silver products from over 100
suppliers, with the five largest suppliers accounting for approximately 42% of
the Company's total gold and silver purchases. In the diamond jewelry, loose
stone and coloured stone area, the company purchased products from approximately
65 suppliers, while the five largest suppliers accounted for 48% of the
Company's total purchases in this area.
Although a substantial portion of the Company's purchases are concentrated
within a small number of suppliers, the Company does not believe the loss of any
one supplier would have a material adverse effect on its business. The Company's
five largest suppliers account for 32% of the merchandise purchases during the
year. Alternative sources of supply for the finished goods purchased by the
Company are available. The Company has
Page 16 of 48
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,
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), Bel-Oro (Canada and USA), Chateau D'Argent (Canada) and R & B
Manufacturing (Canada and USA), and for ADL to include Corona (Canada and USA),
Master Design (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
Page 17 of 48
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: Dreamcatchers(TM), Little Loves Gold Jewellery(TM),
Golden Moments(TM), Earresistables(TM), Tuscany Gold Collection(TM), and Tuscany
Silver(TM).
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.
Employees
At March 31, 2006, the Company employed thirty-four persons on a full time
basis. As at September 15, 2006, there were thirty-four persons employed on a
full time basis and two permanent part-time basis. The full time employees
comprise of eleven employees in finance and administration, twelve in sales and
merchandising, and eleven in inventory warehouse. Five employees are employed in
the Halifax office, four employed in the Toronto office, and twenty-five are
employed in the Vancouver office. The two permanent part-time employees include
one in finance and administration and one in sales and merchandising. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
As at October 4, 2006, the Company employed a Corporate Accountant to
undertake responsibilities in the finance and accounting department.
Governmental Regulation
The tax laws of the Federal Government of Canada and the Provinces of
British Columbia. Ontario 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 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. Organizational Structure
Please refer to "Item 4 - History of the Company - Corporate Structure"
and "Business Overview."
D. Property, plants and equipment.
Real Property
The Company operates from leased premises in Vancouver and Halifax. The
Company's Vancouver
Page 18 of 48
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. Subsequent to fiscal 2006, the Company opened its third office
located on Unit 100, 1 Valleybrook Drive, North York, ON, M3B 2S7. The focus of
the Toronto office is to improve our customer service to our largest customers;
most of these are headquartered in Toronto.
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 Company leases the Vancouver premise for $9,400
per month plus expenses.
The Halifax premises cover 1,136 square feet of office space. The Company
leases the Halifax premises for $1,100 per month plus applicable taxes.
The North York ("Toronto") premises cover 2,282 square feet of office
space. The Company leases the Toronto premises for $4,421 per month plus
applicable taxes.
The Company believes that its current premises are adequate for the
Company's current operating level and presently foreseeable growth.
Property and Equipment
The Company also owns a variety of office equipment consisting of
computers, photocopiers and other office equipment.
The software costs included are for software development and acquisition
costs in the Company's subsidiaries of IBB International (Canada) Ltd. and
Allura Diamonds Limited These subsidiaries generate significant revenues and
cash flow from the use of this software in their operations. The evaluation of
impairment was conducted by evaluating these subsidiaries, and the Company has
concluded that there has been no impairment to the software carrying value.
Subsequent to year end, the Company has upgraded its computer
infrastructure with newer technology and acquired new software, Microsoft
Dynamics (Navision). The Company expects these improvements to increase the
effectiveness and efficiencies of its operations. The capital cost of this
software will be reflected as capital assets in its fiscal 2007 financial
statements.
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 2006 v. Fiscal 2005
Sales for the fiscal year ended March 31, 2006 ("Fiscal 2006") were
$17,719,672 compared to $18,252,286 for the fiscal year ended March 31, 2005
("Fiscal 2005"), a decrease of $532,614 or 3%. The Fiscal 2006 sales decrease is
not significant but is primarily a result of:
o uncertainty in the market due to volatility in the gold price which
significantly impacts the price of gold based jewelry and
o in fiscal 2005 there were two significant roll out of programs to two
major customers; in fiscal 2006,
Page 19 of 48
there were replenishment of sales of items from these programs but not at
the same rates as its initial year of roll out
The Company expects to see sales return to the fiscal 2005 levels in fiscal 2007
with new product lines introduced into its major customer group.
Cost of sales for Fiscal 2006 was $13,652,307 with a gross margin of 23%
compared to $13,154,241 with a gross margin of 28% for Fiscal 2005. The increase
in cost of sales of $498,066 or 4% in spite of a decrease in sales was a result
of the Company taking write downs on discontinued inventory to recovery value
from an expected melt of its product and a result of the increase cost of gold
price. Additionally, as the Company was selling down its gold inventory which
was acquired at higher costs partially due to foreign exchange conversion rates,
the resulting impact is a higher cost of sales for the fiscal year relative to
the selling price of the gold inventory. The Company expected the gold price to
continue to increase into fiscal 2007 and adjusted its selling price to reflect
the increased gold price.
Cost of sales includes the cost of inventory sold, inbound freight,
duties, taxes and brokerage, jewelry packaging sold with the product, and the
gain/loss on settlement of inventory purchases as discuss above. The Company's
cost of sales may not be comparable to others as the costs associated with
purchasing and receiving and warehousing are included in our selling, general
and administrative expenses as the amounts are not material. Purchasing and
receiving costs approximate $48,000 (2005: $48,000) and warehousing costs
approximate $16,000 (2005: $16,000).
The Company's gross margin may not be comparable to others as the costs of
freight and shipping are included in our selling, general, and administrative
expenses. Freight and shipping totaled $315,966 compared to $254,267 in the
prior year.
General administrative costs decreased by $297,229 or 9% from $3,248,196
in Fiscal 2005 to $2,950,967 in Fiscal 2006. The changes were primarily a result
of
o Salary and Wages: a decrease in salaries and wages by $221,579 or 11%. The
decrease is result of two senior finance position being eliminated and
decrease in temporary staffing. Shortly after fiscal 2006 year end, the
Company's corporate accountant and controller resigned; their positions
were not replaced as the work was reallocated to junior accounting staff
and the CFO and new junior clerks. During Fiscal 2005, the Company had
increased its temporary staffing during the third and fourth quarter to
manage and roll out new programs and these additional staff was not
recalled in fiscal 2006. Included in salaries and wages are the labour
costs of the purchasing and receiving staff which were approximately
$48,000 (2005: $48,000).
Selling and delivery expenses increased by $36,083 or 5% to $821,259 in
Fiscal 2006 from $785,176 in fiscal 2005, as a result of:
o Freight and Shipping - in addition some of the Company's new customers
have multiple locations requiring drop shipments. The company does not
charge back the costs of shipping except for small deliveries. The amount
of such charges amount to less than $15,000 annually.
o Sales Commission - increased in fiscal 2006 due to additional sales
representative hired for one of its territory previously covered by the
National Sales manager.
Interest and bank charges for Fiscal 2006 increased $185,519 or 34% to
$752,518 when compared to the Fiscal 2005 figure of $562,999. The Company
continued to rely on its increased banking facilities from the
Page 20 of 48
later half of fiscal 2005 into fiscal 2006; the average balance in its bank line
increased during fiscal 2006 by approximately $1,500.000. The higher banking
facilities were required to finance the increased inventory levels to service
the replenishment of programs that were developed in the last few years. The
average interest rate paid by the Company for its banking facilities increased
from 4.02% in Fiscal 2005 to 4.69% in Fiscal 2006.
The Company had a loss before tax recovery of $492,621. The loss was
primarily attributed to a reduction in sales and increased price of gold which
the company did not benefit from as a large portion of its sales was based on
fixed prices. The Company's purchases were at current gold prices.
Tax expense or recovery is determined by entity-based results and as such,
the Company's tax recovery is result of the its loss carry back provisions in
IBB available under Canadian taxation laws. Allura's and ADL's (Bygo's losses
that transferred to ADL from its corporate reorganization as describe below)
e-commerce start-up costs have created losses that may be used in future periods
to reduce taxable income. As disclosed in Note 7 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.
The Company's net loss for the year of $389,579 reflects a significant
change over fiscal 2005's net earnings of $322,708.
Fiscal 2005 v. Fiscal 2004
Sales for the fiscal year ended March 31, 2005 ("Fiscal 2005") were
$18,252,286 compared to $16,114,338 for the fiscal year ended March 31, 2004
("Fiscal 2004"), an increase of $2,137,948 or 13.3%. The Fiscal 2005 sales
increase was primarily a result of:
o a new program implemented with a major national retailer generated
approximately $1,000,000 increase in sales from the customer
o and increase of the return of business from a previous large customer
resulted in an additional $1,300,000 in sales.
The Company expects the continuance of these two new programs through the
replenishment of sales of items from the program. However, it does not expect to
see the same rate of increase.
Cost of sales for Fiscal 2005 was $13,154,241 with a gross margin of 27.9%
compared to $12,156,794 with a gross margin of 24.6% for Fiscal 2004. The
increase in cost of sales of $997,447 or 8.20% was a result of increased sales
in Fiscal 2005. Gross margin percentage for the current year has improved from
the prior year. This percentage improved partly as a result of an increase in
gold price, improvement in the level of the Canadian Dollar, and increase in
return on inventory. The Company expects the gold price to continue to increase
into its new fiscal year. However, it does not expect a significant benefit from
customer price increases in relation to gold inventory costs.
Cost of sales includes the cost of inventory sold, inbound freight,
duties, taxes and brokerage, jewelry packaging sold with the product, and the
gain/loss on settlement of inventory purchases as discuss above. The Company's
cost of sales may not be comparable to others as the costs associated with
purchasing and receiving and warehousing are included in our selling, general
and administrative expenses as the amounts are not material. Purchasing and
receiving costs approximate $48,000 (2004: $52,000) and warehousing costs
approximate $16,000 (2004: $16,000).
Page 21 of 48
The Company's gross margin may not be comparable to others as the costs of
freight and shipping are included in our selling, general, and administrative
expenses. Freight and shipping totaled $254,267 compared to $169,806 in the
prior year.
General administrative costs increased by 27.9% or $710,249 from
$2,537,947 in Fiscal 2004 to $3,248,196 in Fiscal 2005. The changes were
primarily a result of:
o Bad Debts - increased $45,539 (47.9%): The current year increase is result
of management's decision to write off the accumulation of small
outstanding balances with major customers as well as a general increase in
the provision for future write downs to reflect increased sales volumes.
o Insurance - increased $127,505 (69.4%): There was an overall increase in
premium rates for the Company's various insurance policies. An increased
sales volume also generated a higher premium for credit insurance, while
higher premiums were paid to underwriters for business interruption and
inventory insurance - during the year, inventory levels increased
significantly which required the Company to increase its sums insured.
o Office and Miscellaneous - increased $168,343 (126.0%): In the current
year, the Company incurred hiring/recruiting agent fees to place
additional personnel into its resource pool. In addition, the Company
contracted out additional programming and consulting work to computer
consultants to improve its computerized systems and also utilized an
external consultant to provide training programs and coaching services to
its employee group.
o Salaries and Wages - increased $408,449 (25.2%): During Fiscal 2005, the
Company increased its staffing resources with additional permanent
employees and also increased its temporary staffing during the fall of
2005 to manage and roll out new programs. Included in salaries and wages
are the labour costs of the purchasing and receiving staff which were
approximately $48,000.
o Travel, Meals and Entertainment - increased $46,132 (122.8%): During the
year, the Company's sales team members increased travel to their various
sales territories in order to promote new product lines and meet with
customers. The Company's new national sales manager also travels regularly
to each sales territory to work with the sales team members and meet with
customers in an effort to generate more business.
Selling and delivery expenses increased by $325,051 or 70.6% to $785,176
in Fiscal 2005 from $460,125 in the prior year, as a result of:
o Marketing - increased $23,001 (71.2%): This year the Company paid
additional marketing dollars to assist with the promotion of new programs.
o Freight and Shipping - increased $84,461 (49.7%): An increase in sales
volume for the year resulted in additional shipping costs incurred - in
addition some of the Company's new customers have multiple locations
requiring drop shipments. The company does not charge back the costs of
shipping except for small deliveries. The amount of such charges amount to
less than $15,000 annually.
o Selling Expenses - increased $196,871 (205.5%): The Company invested in
new product displays during the year in order to roll out new programs and
to also refresh the look of existing programs.
Interest and bank charges for Fiscal 2005 increased by 13.2% to $562,999
when compared to the Fiscal 2004 figure of $497,534. The Company increased its
demand operating line significantly during the year to finance new consignment
programs, new program roll outs and the general costs associated with an
increase in overall business.
Page 22 of 48
Earnings before tax in Fiscal 2005 was $431,629 compared to $388,567 in
Fiscal 2004. This increase was substantially due to increased sales for the
year.
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 7 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 fiscal 2005 $322,708 reflect a decrease of $4,973 over
fiscal 2004 of $327,681.
The Company does not expect Bygo to generate more than minimal revenues
from the services it provides. Bygo incurred approximately $15,000 (2004:
$47,000) of expenses in fiscal 2005.
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.
In March 2006, the Company undertook the following steps to complete a
corporate re-organization: (i) it sold all its outstanding shares in Bygo Inc.
("Bygo"), a 100% owned subsidiary, to Allura Diamonds Limited ("ADL"), another
100% owned subsidiary, effectively rendering Bygo a wholly owned subsidiary of
ADL and (ii) wound up the assets and operations of Bygo into ADL.
B. Liquidity and Capital Resources
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 a Settlement Agreement.
On September 30, 2005, the shareholders approved a 3 to 1 share
consolidation for shareholders on record at September 30, 2005.
On March 31, 2006, Bygo was sold to ADL for book value and its assets and
operations were wound up into ADL.
Page 23 of 48
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 put options
entitle the holders to put the shares to the Company for the lesser of their
fair value (estimated at $52,600 at March 31, 2006 (2005: $64,000; 2004:
$55,600)) and the original proceeds received under the unit offering ($500,000).
The common share put options were outstanding as at September 15, 2006.
As required under recently adopted Canadian generally accepted accounting
principles, the Company has presented its obligation under this put as a current
liability as disclosed in Note 2.
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 $11,000,000 (2005: $6,500,000) with a
$1,400,000 onetime bulge ("Onetime Bulge") in effect March 31, 2006 to March 31,
2007 and with an annual $1,100,000 bulge in effect from July 1 to December 31
each year (the "Seasonal Bulge"). 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, July 31, 2003, July 2, 2004,
July 19, 2004, March 31, 2005, July 13, 2005, April 12, 2006, and July 28, 2006,
collectively referred to as the Company's "Banking Agreement".
The margin requirements as defined by the Banking Agreement are as
follows:
The amount outstanding under the Loan will not, at any time, exceed the
sum of:
o 50% of the value of Acceptable Inventory, up to a maximum margin
contribution of $4,000,000, with a onetime increase to $5,250,000 in
effect March 31, 2006 to March 31, 2007, including a $1,500,000
sub-limit for Allura Diamonds Limited inventory at all times and
$4,550,000 annually for the months of July through December, plus
50% of consignment inventory limited to a maximum of $1,500,000
subject to the following sub limits; Bay/Zellers $1,500,000; Charms
$100,000; Ben Moss $175,000;
o 75% of the amount of Acceptable Accounts Receivable; plus 80% of the
amount of Acceptable Accounts Receivable approved by the Bank as a
"Major" account, and insured by Euler American Credit Indemnity
Company ("Euler"), plus 90% of the amount of Acceptable Accounts
receivable insured by Euler for 100% of the account receivable for a
90% pay out, plus $600,000 margin free security value effective July
25, 2006 to September 25, 2006;
o 100% of the sum of Acceptable Credit Instruments;
o An $800,000 allowance for the mortgage given in support of the
guarantee.
The Company's borrowings bear interest at a rate equal to Canadian prime
plus 1/8% on the first $1,000,000 (Fiscal 2005: $1,000,000) and prime plus 1% on
the balance. The prime interest rate on these loans at year-end was 5.5% (Fiscal
2005: 4.25%) and 6% as at September 15, 2006. The loans are collateralized 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 (Fiscal 2005: $1,000,000), 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.
Page 24 of 48
The terms of the demand overdraft loan agreement facility requires the
Company to maintain certain covenants which include Debt to Tangible Net Worth
and Current Ratios. These covenants are amended from time to time by the bank.
As at March 31, 2006, the terms require the Company to maintain Debt to
Tangible Net Worth ratios not exceeding 3.0 to for its Jewelry Division and not
exceeding 2.6 to 1 on a consolidated entity basis at the year end date. At March
31, 2006 the ratios for the Company's Jewelry Division and consolidated entity
basis were 3.52 to 1 and 3.65 to 1, respectively. The Company was not in
compliance with these ratios at year end.
Subsequent to year end on April 12, 2006 the terms of the Debt to Tangible
Net Worth ratios were amended as follows:
o For its Jewelry Division, not exceeding 4.0 to 1 at any time, amended to
3.0 to 1 effective July 31, 2006 and amended to 2.5 to 1 effective March
31, 2007 and
o on a consolidated entity basis, not exceeding 3.5 to 1 at any time,
amended to 3.0 to 1 effective July 31, 2006 and amended to 2.5 to 1
effective March 31, 2007.
At July 31, 2006 the ratios for the Company's Jewelry Division and
consolidated entity basis were 2.94 to 1 and 3.0 to 1, respectively. The Company
was in compliance of these ratios as at July 31, 2006.
The terms of the demand overdraft loan agreement facility as at March 31,
2006 required that the Company maintain a consolidated entity Current Ratio not
to be less than 1.1 to 1 at the year end date. As at March 31, 2006, the
Company's current ratio of 1.19 to 1 was in compliance.
Subsequent to year end on April 12, 2006, the terms of the Current ratio
were amended. The new terms require the Company not to be less than 1.1 to 1 at
any time, amended to 1.2 to 1 by July 31, 2006 and amended to 1.3 to 1 by March
31, 2007. As at July 31, 2006, the Company's Current ratio of 1.22 to 1 was in
compliance.
Also under this agreement, the Company is required to inject shareholder
equity and/or debt subordinate to its bank indebtedness in the minimum amount of
$1,500,000 prior to September 25, 2006 (extended from July 31, 2006). The
Company is not in compliance with this covenant however the bank is currently
reviewing the requirement for this covenant.
The Company expects to see cash flow improvement but will continue to rely
on its bank financing to maintain operations and to finance potential increases
in revenues and expansion of customer programs. The Company expects cash flow to
be provided by operations in fiscal 2008. However, it will continue to depend on
bank financing at its current level to expand its business into new areas. For
the year ended March 31, 2006, the combined overdraft loan amounted to
$9,313,354.
Accounts Receivable
The Company's account receivables net of allowances for doubtful accounts
as at March 31, 2006 were $3,710,935 the balance in accounts receivable
represented 20.9% of net sales for Fiscal 2006.
Inventory
The Company's inventory as at March 31, 2006 was $12,087,351 or 68.2% of
net sales for Fiscal 2006 compared to $13,043,939 or 71.5% of net sales for
Fiscal 2005. Inventory continues to reflect a high percentage of net 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 from Fiscal 2005 have continued through Fiscal 2006,
Page 25 of 48
and with these programs the Company must ensure sufficient inventory is
available at all times to achieve maximum ship value on each order (iii) the
customers' higher fulfillment targets for each purchase order delivered and (iv)
Fiscal 2005's increase of $1 million in consignment goods under consignment
agreements resulting from customers store and program expansion have continued
into Fiscal 2006. ADL continues to expand and develop its product line to
increase selection and availability in the market place. Inventory has increased
over the prior year as a result of two new programs with customers and a new
program offered to Independent Groups.
The Company does not anticipate its inventory levels to continue to
increase significantly in future periods except to accommodate for new product
lines and new business. Subsequent to the fiscal year end, the Company sold
approximately $500,000 of overstock inventory at book value to reduce its
inventory levels. Subsequent to year end, the Company also scrapped
approximately $1,000,000 in overstock inventory with a refiner also at book
value. The recovered gold was subsequently sold to the refiner for the then
market price.
Accounts Payable and Accrued Liabilities
The Company's accounts payable and accrued liabilities as at March 31,
2006 were $4,197,618 compared to $4,674,618 for Fiscal 2005. The Company made an
effort to keep supplier accounts up to date and to ensure it fulfils its
obligations in a timely manner. The Company does not anticipate any difficulties
in settling these obligations.
Capital Commitments
Except for anticipated aggregate lease payments for both IBB and ADL of
approximately $750,000 over the next five years, the Company has no significant
capital commitments as of September 15, 2005. 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 as disclosed in Note 14 to the Company's consolidated financial
statements.
C. Research and Development, Patents and Licenses, etc.
The Company does not conduct research and development and holds no patents
or licenses.
D. Trend Information
See "Item 4. - Information on the Company, - Part B., Business Overview"
E. Off-Balance Sheet Arrangements
There are no known significant off-balance sheet arrangements other than
those disclosed in Item 10 Section 3 under "Investment Agreement" and as
disclosed in Note 9 of our audited consolidated financial statements for the
year ended March 31, 2006.
Page 26 of 48
F. Tabular Disclosure Of Contractual Obligations
The following table summarizes all of the outstanding obligations of the
Company's continuing operations as of March 31, 2006 by the year that they
become due. We expect to fund these obligations from operating income and
equity/debt financing:
==========================================================================================================================
Payments due by period
Contractual Obligations ======================================================================
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
==========================================================================================================================
[Short-Term Debt Obligations] $ 9,313,354 $9,313,354 -- -- --
==========================================================================================================================
[Long-Term Debt Obligations] -- -- -- -- --
==========================================================================================================================
[Capital (Finance) Lease Obligations] -- -- -- -- --
==========================================================================================================================
[Operating Lease Obligations] $ 755,805 -- $499,761 $256,044 --
==========================================================================================================================
[Purchase Obligations] -- -- -- -- --
==========================================================================================================================
[Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under the GAAP of the
primary financial statements] -- -- -- -- --
==========================================================================================================================
Total $10,069,159 $9,313,354 $499,761 $256,044 --
==========================================================================================================================
G. Safe Harbor
Some of the information in this report contains forward-looking
statements. Forward-looking statements represent our current expectations or
forecasts of future events and are based on our management's beliefs, as well as
assumptions made by and information currently available to them. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts. These statements may include the words
"anticipate," "believe," "budget," "estimate," "expect," "intend," "objective,"
"plan," "probable" "possible," "potential," "project" and other words and terms
of similar meaning in connection with any discussion of future operating or
financial performances.
Any or all of our forward-looking statements in this Form 20-F may turn
out to be wrong. They can be affected by inaccurate assumptions or by known or
unknown risks and uncertainties. Many of these factors, including the risks
outlined under "Risk Factors," will be important in determining our actual
future results, which may differ materially from those contemplated in any
forward-looking statements.
When you consider these forward-looking statements, you should keep in
mind these risk factors and other cautionary statements in this prospectus. Our
forward-looking statements speak only as of the date made. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. All forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary statement.
Page 27 of 48
H. Legal Proceedings
As at September 30th, 2006, 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.
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 15, 2006.
On September 29th, 2006, the Directors on the Board of Directors were
re-nominated to stand for election to the Board. All nominated Directors were
re-appointed effective September 29th, 2006.
========================================================================================================================
Name Age Positions Position Held Since
---- --- --------- -------------------
- ------------------------------------------------------------------------------------------------------------------------
Jeremy Bowman 55 Director, President and CEO of Allura International Inc. 1988
- ------------------------------------------------------------------------------------------------------------------------
Sheila Bowman 48 Director, Secretary, and Treasurer 1988
- ------------------------------------------------------------------------------------------------------------------------
Frank Kovacs 53 Director 1998
- ------------------------------------------------------------------------------------------------------------------------
Thomas Weckman 52 Director and V.P. of Allura Diamonds Limited 1994
- ------------------------------------------------------------------------------------------------------------------------
Tina VanderHeyden 54 Director 1999
- ------------------------------------------------------------------------------------------------------------------------
Dave Wall 57 Director 2003
- ------------------------------------------------------------------------------------------------------------------------
Emily Tsen 40 Chief Financial Officer /V.P. Operations 1996
========================================================================================================================
Jeremy Bowman has been the President, CEO and Director of the Company
since 1988. He is also a 25% Owner/Director of The Black Bear Pub Limited in
Nanaimo, B.C., Canada, a restaurant, bar and liquor store.
Sheila Bowman has been the Secretary and Treasurer and a Director of the
Company since 1988. She is also a 25% Owner/Director of The Black Bear Pub
Limited in Nanaimo, B.C., Canada, a restaurant, bar and liquor store.
Frank Kovacs is the Managing Director of International Bullion & Metal
Brokers (London) Limited, incorporated in the United Kingdom, a leading jewelry
distribution company with over 30 years trading history. He has also been a
Director of the Company since 1988.
Thomas Weckman has been the Vice-President of ADL since 2005, (previously
its President) and a Director of the Company since 1999. He has also served as
President of Baird Weckman Sales Ltd., a private trading company incorporated
under federal laws of Canada since 1997.
Tina VanderHeyden has been the President of T. VanderHeyden Associates
Inc., a company
Page 28 of 48
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.
Dave Wall has been a Director since 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.
Emily Tsen has served as the Chief Financial Officer of the Company since
1999 and previously as its Controller since 1996. In December 2003 she was
further given the title of Vice President Operations. She received her chartered
accountancy designation in British Columbia in 1993.
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. The Shareholders' Agreement entitles
Business Development Bank of Canada ("BDC') to select a nominee for the Board of
Directors as long as BDC holds at least 300,000 Common Shares in the Company. As
at September 15, 2006, BDC has not selected a nominee for the Board of
Directors.
Except as noted in the following paragraph, the Company has employment
agreements with all of its senior management.
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 is currently negotiating an employment agreement with Mr. Bowman;
however, it has not yet been finalized. The Company does not maintain any key
man life insurance on Mr. Bowman's life. There are no assurances that the
agreement currently being negotiated will be finalized.
B. Compensation outstanding
The Company paid aggregate compensation of $ 492,000, $607,500, and
$620,000 to all directors and officers as a group during the fiscal years ended
March 31, 2006, 2005, and 2004, for services in all capacities. There were no
funds set aside by the Company during the fiscal year ended March 31, 2006 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, 2006 were 260,000 of which, 140,000 were granted to officers and
directors of the Company. Each option is convertible into a share of the
Company's common stock. The 260,000 options have an exercise price of $1.58 and
will expire in approximately 1.02 years.
The Company has a standard arrangement for the payment of fees to three
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 $17,800 during Fiscal 2006 to directors for acting in such capacity are
included in the aggregate compensation disclosure discussed above.
C. Board Practices
Page 29 of 48
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
15, 2006: Sheila Bowman, Tina VanderHeyden, Dave Wall 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.
The Compensation and Human Resource Committee is comprised of the
following members as at September 15, 2006: Tina VanderHeyden, Frank Kovacs, and
Dave Wall. 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, 2006, the Company employed thirty-four persons on a full time
basis. As at September 15, 2006, there were thirty-four persons employed on a
full time basis and two permanent part-time basis. The full time employees
comprise of eleven employees in finance and administration, twelve in sales and
merchandising, and eleven in inventory warehouse. Five employees are employed in
the Halifax office, four employed in the Toronto office, and twenty-five are
employed in the Vancouver office. The two permanent part-time employees include
one in finance and administration and one in sales and merchandising. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
As at October 4, 2006, the Company employed a Corporate Accountant to
undertake responsibilities in the finance and accounting department.
During Fiscal 2006, the Company employed approximately thirty temporary
employees to cover off seasonal requirements.
E. Share Ownership
The share ownership of the persons set forth in Item 6.B above is
disclosed in "Item 7. Major Shareholders and Related Party Transactions - Major
Shareholders" below.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Page 30 of 48
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, 2006, 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.
- ----------------------------------------------------------------------------------------------------------
Number of Shares
Beneficially or Directly Percentage of
Name of Shareholder Owned Class
------------------- ----- -----
- ----------------------------------------------------------------------------------------------------------
International Bullion & Metal Brokers Ltd.(1) 6,250,000 40.3%
- ----------------------------------------------------------------------------------------------------------
Bowman Family Trust ("Trust")(2) 5,325,000 34.4%
- ----------------------------------------------------------------------------------------------------------
Jeremy C. Bowman(3) 462,500 3.0%
- ----------------------------------------------------------------------------------------------------------
Sheila P. Bowman(4) 602,500 3.9%
- ----------------------------------------------------------------------------------------------------------
Thomas Weckman(7) 250,000 1.6%
- ----------------------------------------------------------------------------------------------------------
B.D.C (6) 340,136 2.2%
- ----------------------------------------------------------------------------------------------------------
Tina VanderHeyden (*) (*)
- ----------------------------------------------------------------------------------------------------------
Emily Tsen (*) (*)
- ----------------------------------------------------------------------------------------------------------
Officers and Directors as a group (7 people) 13,263.136 85.6%
- ----------------------------------------------------------------------------------------------------------
(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.
(4) Sheila Bowman is a Director of the Company. Ms. Bowman's shares include
140,000 options with an exercise price of US$1.00 per share. The 140,000
options expire July 13, 2007.
(5) Frank Kovacs is a Director of International Bullion and is a Director of
the Company.
(6) The Business Development Bank of Canada is a venture capital shareholder
owning 340,136, or 2.2% of outstanding shares.
(7) Tom Weckman is ADL's Vice-President and a Director.
* 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.
There has been no significant change in the percentage ownership held by
any major shareholders during
Page 31 of 48
the past three years.
As at September 30, 2006 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
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
Page 32 of 48
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.
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 were leased from a partnership of which Jeremy
Bowman, the Company's President and a stockholder who has significant influence
on operations, is a partner. During the year, Mr. Bowman, sold his interest in
the building and the building was then leased from the new owners on an arms
length basis. 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. The
lease was renewed under the same terms during June 2005.
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 were leased on commercially agreed terms, from Torrington Bay
Investments Limited, in which Tom Weckman, the President of ADL, has an
interest. During the year, Mr. Weckman, sold his interest in the building and
the building was then leased from the new owners on an arms length basis. 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.
Subsequent to year end, the Company leased an office in North York
("Toronto") on a five year fixed term at $4,421 per month plus applicable taxes.
The Toronto lease has a cancellation provision for the benefit of IBB only. The
premises were leased on commercially agreed terms, from an arms length party.
The premises in Toronto are located at 1 Valleybrook Way, North York, Ontario
and contain 2,282 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
This form is being filed as an Annual Report under the Securities Exchange
Act 0f 1934, accordingly the information called for by this Item 7.C. is not
required.
ITEM 8. FINANCIAL INFORMATION
Page 33 of 48
A. Consolidated Statements and Other Financial Information
See Item 17 for the Company's Financial Statements.
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.
The Company declared its first dividend on September 6, 2005 for all
shareholders on record as at September 6, 2005. The dividend of USD $.01 per
share was paid September 8, 2005. The Company's four largest shareholders have
waived their dividends choosing to retain the funds in the Company to grow the
business.
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 NASDAQ
Bulletin Board, which may limit the marketability and liquidity of the Company's
Common Stock.
B. Plan of Distribution
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, and accordingly, the information called for by this Item
9.B. is not applicable to this report.
C. Selling Shareholders
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, and accordingly, the information called for by this Item
9.C. is not applicable to this report.
D. Dilution
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, and accordingly, the information called for by this Item
9.D. is not applicable to this report.
E. Expenses of the Issue
Page 34 of 48
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, and accordingly, the information called for by this Item
9.E. is not applicable to this report.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, and accordingly, the information called for by this Item
10.A. is not required.
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 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
Page 35 of 48
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.
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 put options
entitle the holders to put the shares to the company for the lesser of their
fair value (estimated at $52,600 at March 31, 2006 (2005: $64,000, 2004:
$55,600)) and the original proceeds received under the unit offering ($500,000).
The common share put option was still outstanding as at September 30, 2006
Leases
The Company entered into a lease on June 22, 1998, with a partnership of
which Jeremy Bowman, the
Page 36 of 48
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 in June 2000. The lease was renewed with the same terms during
June 2005. During the year, Mr. Bowman, sold his interest in the building and
the building was then leased from the new owners on an arms length basis
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. During the year, Mr. Weckman, sold his
interest in the building and the building was then leased from the new owners on
an arms length basis.
Subsequent to year end, the Company leased an office in North York
("Toronto") on a five year fixed term at $4,421 per month plus applicable taxes.
The Toronto lease has a cancellation provision for the benefit of IBB only. The
premises were leased on commercially agreed terms, from an arms length party.
The premises in Toronto are located at 1 Valleybrook Way, North York, Ontario
and contain 2,282 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.
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
Page 37 of 48
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 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
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, accordingly the information called for by this Item 10.F.
is not required.
G. Statement by Experts
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, accordingly the information called for by this Item 10.G.
is not required.
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 Exhibits") or may be
inspected at the principal executive offices of the Company.
You may inspect and copy our registration statements, including their
exhibits and schedules, and the reports and other information we file with the
Securities and Exchange Commission in accordance with the Exchange Act at the
public reference facilities maintained by the Securities and Exchange Commission
at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549
You may obtain information regarding the Washington D.C. Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by
contacting the Securities and Exchange Commission over the Internet at its
website at http://www.sec.gov.
I. Subsidiary Information
This information is not applicable to this report.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A. Quantitative Information about Market Risk
Page 38 of 48
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 in a decrease or
increase in foreign exchange gain or loss.
At March 31, 2006 and 2005, the Company's accounts payable and accrued
liabilities included the following foreign currency denominated amounts:
2006 2005
---- ----
U.S. $ 2,499,095 $ 2,846,208
Euro 389,482 377,647
GBP 4,774 --
------------- -------------
$ 2,893,351 $ 3,223,855
------------- -------------
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 estimated
that if interest rates were to increase by 1%, it would have paid an additional
$94,800 in interest cost in fiscal year 2006. 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 the financial instruments approximates their fair
value due to their short-term nature.
Page 39 of 48
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
This Form 20F is being filed as an Annual Report pursuant to the
Securities Exchange Act of 1934, and accordingly, the information called for by
this Item 12 is not required.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
The terms of the demand overdraft loan agreement facility requires the
Company to maintain certain covenants which include Debt to Tangible Net Worth
and Current Ratios. These covenants are amended from time to time by the bank.
As at March 31, 2006, the terms require the Company to maintain Debt to
Tangible Net Worth ratios not exceeding 3.0 to for its Jewelry Division and not
exceeding 2.6 to 1 on a consolidated entity basis at the year end date. At March
31, 2006 the ratios for the Company's Jewelry Division and consolidated entity
basis were 3.52 to 1 and 3.65 to 1, respectively. The Company was not in
compliance of these ratios at year end.
Subsequent to year end on April 12, 2006 the terms of the Debt to Tangible
Net Worth ratios were amended as follows:
o For its Jewelry Division, not exceeding 4.0 to 1 at any time, amended to
3.0 to 1 effective July 31, 2006 and amended to 2.5 to 1 effective March
31, 2007 and
o on a consolidated entity basis, not exceeding 3.5 to 1 at any time,
amended to 3.0 to 1 effective July 31, 2006 and amended to 2.5 to 1
effective March 31, 2007.
At July 31, 2006 the ratios for the Company's Jewelry Division and
consolidated entity basis were 2.94 to 1 and 3.0 to 1, respectively. The Company
was in compliance of these ratios as at July 31, 2006.
The terms of the demand overdraft loan agreement facility as at March 31,
2006 required the Company must maintain a consolidated entity Current Ratio not
to be less than 1.1 to 1 at the year end date. As at March 31, 2006, the
Company's current ratio of 1.19 to 1 was in compliance.
Subsequent to year end on April 12, 2006, the terms of the Current ratio
were amended. The new terms require the Company not to be less than 1.1 to 1 at
any time, amended to 1.2 to 1 by July 31, 2006 and amended to 1.3 to 1 by March
31, 2007. As at July 31, 2006, the Company's Current ratio of 1.22 to 1 was in
compliance.
Also under this agreement, the Company is required to inject shareholder
equity and/or debt subordinate to its bank indebtedness in the minimum amount of
$1,500,000 prior to September 25, 2006 (extended from July 31, 2006). The
Company is not in compliance with this covenant however the bank is currently
reviewing the requirement for this covenant.
Page 40 of 48
The Company expects to see cash flow improvement but will continue to rely
on its bank financing to maintain operations and to finance potential increases
in revenues and expansion of customer programs. The Company expects cash flow to
be provided by operations in fiscal 2008. However, it will continue to depend on
bank financing at its current level to expand its business into new areas. For
the year ended March 31, 2006, the combined overdraft loan amounted to
$9,313,354. The facility was renewed on April 12, 2006 and subsequently amended
on July 28, 2006.
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.
During the annual report period, we carried out an evaluation, under the
supervision and with the participation of our senior management, including Chief
Executive Officer, Jeremy Bowman, and Chief Financial Officer, Emily Tsen, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934. Disclosure controls and procedures are designed to ensure that the
material financial and non-financial information required to be disclosed in
this Form 20-F filed with the SEC is recorded, processed, summarized and
reported timely. Based upon that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure
controls and procedures, are not effective in timely alerting them to material
information relating to us required to be included in the our periodic SEC
filings given the matters identified below.
During the audit of the 2006 and 2005 financial statements the Company's
management and auditors identified five material weaknesses in internal controls
over financial reporting as follows:
a. Governance
In the governance area, segregation of duties is not at an appropriate
level and the company needs to improve its oversight controls. There are
employees who have responsibilities and control access to the information and
financial reporting systems and in the management of the information systems.
The company does not have an anonymous reporting process to collect and act on
allegations of improprieties and or errors pertaining to questionable practices.
When employees perform incompatible duties and if compensating controls
are not appropriate, then this situation could result in material errors and/or
fraud.
b. Revenues
In the revenue process area, segregation of duties is not at an
appropriate level. There are employees who have access to the processing of
accounts receivable payment transactions and who also have access to maintaining
and reconciling accounts receivable records.
Page 41 of 48
When employees perform incompatible duties, and if compensating controls
are not appropriate, then this situation could result in material errors and/or
fraud.
c. Inventory
In the area of expense/payables/inventory processes, enhanced segregation
of duties procedures should be put in place. Employees who are responsible for
data input from source documents do not have their work independently reviewed
for accuracy or appropriateness. As well, these same employees are also
responsible for indicating that documents have been processed, a step that is
performed without further verification.
When employees perform incompatible duties, and if compensating controls
are not appropriate, then this situation could result in material errors and/or
fraud.
d. Financial Reporting
In the area of financial reporting, enhanced segregation of duties
procedures should be put in place. Employees who are responsible for providing
and calculating estimates and evaluating disclosures do not have their work
independently reviewed for accuracy or appropriateness.
When employees perform incompatible duties, and if compensating controls
are not appropriate, then this situation could result in material errors and/or
fraud.
e. Evidence of internal control documentation
In the area of internal control documentation, performance of controls
should be evidenced with documentation of the internal controls in the revenue
process.
When performance of controls is not properly evidenced, the internal
control process may not be performed and this may lead to errors or
inappropriateness.
The material weaknesses above were identified by the auditors Grant
Thornton during the March 31, 2005 year end audit and continued to exist during
fiscal 2006. The identified weaknesses are a result of a reduction and change in
staff in the accounting department of the company during the prior two years.
There were only five people in the accounting department, which makes it
difficult to assign duties using the segregation framework. The Company has
committed to cross training and re-evaluation of its needs and ways to improve
systems to put in place stronger controls to compensate for the limitation of
the size of the accounting department. However, an outside independent resource
has been retained since May 2005 to provide some level of oversight by reviewing
and monitoring the significant transactional activities of the company and the
audit committee chair meets regularly with the CFO of the company to review the
financial results. These reviews provide some degree of compensating controls
over the segregation of duties however; do not fully overcome the identified
weaknesses that continue to exist at the end of the reporting period.
As part of the process to put into operations its program for complying
with Section 404 of the Sarbanes Oxley Act of 2002 the Company will evaluate and
enhance its procedures where the interpretation of GAAP is involved and will
expand its external consultative process in advance of implementing new
accounting procedures. The interpretation issues have been accounted for
correctly in the preparation of the financial statements set out in Item 17.
On October 4, 2006, the Company employed an experience financial manager
as its new Corporate Accountant to enhance its finance and accounting team. It
is the Company's expectation with the addition of this level of staffing, these
material weaknesses can be addressed and allow the Company to re-evaluate ways
to improve upon its systems.
Page 42 of 48
The Company will continue to review the identified internal control
weaknesses and consider implementing compensating controls in an effort to
mitigate the potential identified risks and is also looking into the hiring of
additional staff members to allow for the appropriate segregation of duties.
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. No current Board member possesses the necessary qualifications of a
financial expert as defined by the Sarbanes Oxley Act of 2002, however the Board
is seeking a solution to fulfill this requirement.
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 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
2006 2005 Aggregate Fees
Audit fees $ 112,736 77,373 190,109
Tax services and
Other services 5,500 -- 5,500
----------------------------------------------
$ 118,236 77,373 195,609
==============================================
Page 43 of 48
ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITEES
The information called for by this Item 16D is not applicable to the
Company.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFLILIATED
PURCHASERS
There have been no purchases of equity securities by the Company or
affiliated purchasers.
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 14 to the financial statements.
The report of independent registered public accountants, financial
statements and notes thereto, schedules thereto as required under Item 17 are
found immediately below. The report of independent registered public accounting
firm is included herein immediately preceding the respective financial
statements, notes, schedules, etc.
Page 44 of 48
Allura International Inc.
Consolidated
Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
Page 45 of 48
Contents
Page
----
Report of Independent Registered Chartered Accounting Firm 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders' Equity 5
Notes to the Consolidated Financial Statements 6-20
Consolidated Schedules of Administrative and Selling and Delivery Expenses 21
Grant Thornton LLP
Chartered Accountants
Management Consultants
Grant Thornton [LOGO]
Report of Independent Registered Chartered Accounting Firm
To the shareholders of
Allura International Inc.
We have audited the accompanying consolidated balance sheets of Allura
International Inc. as of March 31, 2006, and 2005 and the consolidated
statements of operations, cash flows, and shareholders' equity for the years
ended March 31, 2006, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Allura International
Ltd. as at March 31, 2006 and 2005 and the results of its operations and its
cash flows for the three years ended March 31, 2006, 2005 and 2004 in accordance
with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain respects from
accounting principles generally accepted in the United States of America.
Information related to the nature and effect of such differences is presented in
Note 14 to the consolidated financial statements.
Vancouver, Canada /s/ Grant Thornton LLP
August 25, 2006 Chartered Accountants
Grant Thornton Place
Suite 1600
333 Seymour Street
Vancouver, BC V6B 0A4
T (604) 687-2711
F (604) 685-6569
E Vancouver@GrantThornton.ca
W www.GrantThornton.ca
Canadian Member of Grant Thornton International
1
Allura International Inc.
Consolidated Balance Sheets
(expressed in Canadian dollars)
March 31 2006 2005
================================================================================
Assets
Current
Cash $ 34,810 $ 37,990
Receivables, net (Note 3) 3,710,935 3,413,824
Inventories 12,087,351 13,043,939
Income taxes recoverable 121,872 --
Prepaids 122,022 130,269
----------- -----------
Total current assets 16,076,990 16,626,022
Property and equipment, net (Note 4) 172,592 171,378
Goodwill 26,970 26,970
----------- -----------
Total assets $16,276,552 $16,824,370
=========== ===========
================================================================================
Liabilities
Current
Bank indebtedness (Note 5) $ 9,313,354 $ 8,911,408
Accounts payable and accruals (Note 6) 4,197,618 4,674,618
Income taxes payable -- 39,704
Obligation under put option (Note 8) 52,600 64,000
----------- -----------
Total current liabilities 13,563,572 13,689,730
----------- -----------
Shareholders' Equity
Capital stock (Note 8) 2,545,765 2,545,765
Retained earnings 167,215 588,875
----------- -----------
Total shareholders' equity 2,712,980 3,134,640
----------- -----------
Total liabilities and shareholders' equity $16,276,552 $16,824,370
=========== ===========
================================================================================
Commitments (Note 9)
Subsequent events (Note 15)
See accompanying notes to the consolidated financial statements.
2
Allura International Inc.
Consolidated Statements of Operations
(expressed in Canadian dollars)
Years Ended March 31 2006 2005 2004
================================================================================================================================
Net sales $ 17,719,672 100.00% $ 18,252,286 100% $ 16,114,338 100.0%
Cost of goods sold 13,652,307 77.0 13,154,241 72.1 12,156,794 75.4
------------ ------ ------------ ------ ------------ ------
Gross profit 4,067,365 23.0 5,098,045 27.9 3,957,544 24.6
------------ ------ ------------ ------ ------------ ------
Expenses
Administrative (Appendix 1) 2,950,967 16.7 3,248,196 17.8 2,537,947 15.8
Depreciation and
Amortization 46,680 0.3 64,874 0.3 68,778 0.4
Selling and delivery
(Appendix 1) 821,259 4.6 785,176 4.3 460,125 2.9
------------ ------ ------------ ------ ------------ ------
3,818,906 21.6 4,098,246 22.4 3,066,850 19.1
------------ ------ ------------ ------ ------------ ------
Earnings before other income
(expenses) 248,459 1.4 999,799 5.5 890,694 5.5
------------ ------ ------------ ------ ------------ ------
Other income (expenses)
Interest, bank charges,
and guarantee fee
Note 11(b)) (752,518) (4.3) (562,999) (3.1) (497,534) (3.1)
Other income 38 -- 3,229 -- 1,507 --
Change in put option
obligation (Note 8) 11,400 .1 (8,400) -- (6,100) --
------------ ------ ------------ ------ ------------ ------
(741,080) (4.2) (568,170) (3.1) (502,127) (3.1)
------------ ------ ------------ ------ ------------ ------
(Loss) earnings before
income taxes (492,621) (2.8) 431,629 2.4 388,567 2.4
Provision for Income taxes
(recovery) (Note 7) (102,862) (0.6) 108,921 0.6 60,886 0.4
------------ ------ ------------ ------ ------------ ------
Net (loss) earnings $ (389,759) (2.2)% $ 322,708 1.8% $ 327,681 2.0%
============ ====== ============ ====== ============ ======
(Loss) earnings per share
(basic and diluted) $ (0.02) $ 0.02 $ 0.02
============ ============ ============
Weighted average common
shares outstanding (basic and
diluted) 15,240,302 15,240,302 15,240,302
================================================================================================================================
See accompanying notes to the consolidated financial statements.
3
Allura International Inc.
Consolidated Statements of Cash Flows
(expressed in Canadian dollars)
Years Ended March 31 2006 2005 2004
======================================================================================================
Cash and cash equivalents derived from (applied to)
Operating
Net (loss) earnings $ (389,759) $ 322,708 $ 327,681
Depreciation and amortization 46,680 64,874 68,778
Change in put option obligation (11,400) 8,400 6,100
Change in non-cash operating working capital
(Note 10) 29,149 (2,926,758) (320,134)
----------- ----------- -----------
(325,330) (2,530,776) 82,425
----------- ----------- -----------
Financing
Bank indebtedness 401,946 2,529,164 (160,106)
Dividend Paid (31,901) -- --
----------- ----------- -----------
370,045 2,529,164 (160,106)
----------- ----------- -----------
Investing
Purchase of equipment (47,895) (33,353) (15,515)
----------- ----------- -----------
Net decrease in cash (3,180) (34,965) (93,196)
Cash
Beginning of year 37,990 72,955 166,151
----------- ----------- -----------
End of year $ 34,810 $ 37,990 $ 72,955
----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------
Supplementary cash flow information
Interest paid $ 723,959 $ 560,558 $ 462,705
Income taxes paid during the year $ 60,000 $ 120,296 $ 288,980
======================================================================================================
See accompanying notes to the consolidated financial statements.
4
Allura International Inc.
Consolidated Statements of Shareholders' Equity
(expressed in Canadian dollars)
Years Ended March 31, 2006, 2005 and 2004
================================================================================
Shares Issued
----------------------------
(Deficit)
Number of Retained
Shares Amount Earnings Total
Balance March 31, 2003 15,240,302 $ 2,545,765 $ (61,514) $ 2,484,251
Net earnings, year ended March 31, 2004 -- -- 327,681 327,681
----------- ----------- ----------- -----------
Balance March 31, 2004 15,240,302 2,545,765 266,167 2,811,932
Net earnings, year ended March 31, 2005 -- -- 322,708 322,708
----------- ----------- ----------- -----------
Balance March 31, 2005 15,240,302 2,545,765 588,875 3,134,640
Dividend Paid -- -- (31,901) (31,901)
Net loss, year ended March 31, 2006 -- -- (389,759) (389,759)
----------- ----------- ----------- -----------
Balance March 31, 2006 15,240,302 $ 2,545,765 $ 167,215 $ 2,712,980
=========== =========== =========== ===========
================================================================================
See accompanying notes to the consolidated financial statements.
5
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
1. Nature of operations
The Company operates in one reportable business segment and is in the business
of wholesaling gold and diamond jewellery in Canada. Its customer base comprises
national chains and independent retailers.
================================================================================
2. Summary of significant accounting policies
(a) 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.
With effect March 31, 2006, Bygo Inc. was wound up into Allura Diamonds Limited
and Bygo's nominal business activities and assets were transferred to Allura
Diamonds Limited.
The accounting principles used conform in all material respects to principles
generally accepted in the United States of America as disclosed in Note 14.
(b) 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.
(c) 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 as part of cost of sales and amounted to a
gain (loss) of $108,199 (2005: $297,583, 2004: ($380,273)).
(d) Cash and cash equivalents
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.
(e) Inventories
Inventories are comprised of loose gemstones and finished products and are
valued at the lower of cost and net realizable value. Cost is calculated using
the average cost method. Cost consists of the invoiced price plus applicable
duty, excise tax, and freight charges. Net realizable value is based upon
estimated selling price less
6
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
2. Summary of significant accounting policies (Continued)
(e) Inventories (continued)
further costs to completion and disposal. 2006 inventories include goods held on
consignment by the customers under consignment agreements totaling $2,596,676
(2005: $2,605,200 (2004: $1,603,000).
The Company's provision for obsolescence reserve for inventory has been included
in cost of goods sold and the current balance is as follows:
2006 2005 2004
Opening Balance $ 213,000 $ 124,000 $ 72,000
Add 222,000 92,000 100,000
Deduct (34,000) (3,000) (48,000)
-----------------------------------------------
Closing Balance $ 401,000 $ 213,000 $ 124,000
===============================================
(f) Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and
amortization.
The Company depreciates its property and equipment over their useful lives. All
property and equipment other than leasehold improvements are depreciated on a
20% declining balance basis. Leasehold improvements are amortized over the term
of the lease.
(g) Trademarks
The Company's trademarks have been recorded at cost less accumulated
amortization. Amortization is recorded on a straight-line basis over a five year
period.
(h) 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 recommendations of the Canadian Institute of Chartered Accountants with
respect to the valuation of goodwill. Under the recommendations, goodwill is no
longer amortized, but is tested for impairment at least on an annual basis. For
the years ended March 31, 2006, 2005 and 2004, application of the
recommendations resulted in net earnings that were $Nil, $Nil, and $13,462
higher, respectively, if goodwill were amortized as it was prior to April 1,
2002. This change would not affect per share amounts.
Had the Company continued to amortize goodwill as it did prior to April 1, 2002,
the Company's adjusted net earnings and adjusted net earnings per share (basic
and diluted) would be as follows:
7
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
2. Summary of significant accounting policies (Continued)
(h) Goodwill (continued)
2006 2005 2004
Net (loss) earnings as presented $ (389,759) $ 322,708 $ 327,681
Reduced amortization under new
Accounting standard -- -- 13,462
----------- ----------- -----------
Adjusted net (loss) earnings $ (389,759) $ 322,708 $ 341,143
Adjusted net (loss) earnings per share
basic and diluted $ (0.02) $ 0.02 $ 0.02
(i) Revenue recognition
The Company recognizes revenue when goods have been shipped, title to the goods
are passed to the customer, and collection is reasonably assured.
Sales of inventory held on consignment by customers are recognized when the
consignment inventory is sold by these customers to third parties or purchased
by these customers.
The Company's Bygo subsidiary earns e-commerce 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.
(j) 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.
(k) Salary and wages
The Company includes its costs of purchasing and receiving in salary and wages.
The costs are approximately $48,000 (2005: $48,000, 2004: $ 52,000).
(l) Warehouse Costs
The Company includes its warehousing costs in rent. The costs are approximately
$16,000 (2005: $16,000, 2004: $16,000).
8
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
2. Summary of significant accounting policies (Continued)
(m) Shipping and handling costs
Shipping and handling costs incurred related to products sold are reported as a
component of selling and delivery costs.
(n) Stock based compensation
The Company has a stock option plan as disclosed in Note 8. The Company follows
the Canadian Institute of Chartered Accountants Handbook Section 3870
"Stock-Based Compensation and Other Stock-Based Payments" to account for grants
under this plan. As recommended by Section 3870, the Company has adopted the
fair value method for stock-based compensation granted to employees and
non-employees and all direct awards of stock.
The fair value of stock options is determined by the Black-Scholes Option
Pricing Model with assumptions for risk-free interest rates, dividend yields,
volatility factors of the expected fair value of the Company's common shares and
an expected life of the options.
(o) 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 earnings in the
period that includes the date of substantive enactment. When it is considered
more likely than not that a future tax asset will not be realized, a valuation
allowance is provided.
(p) Advertising Cost
The Company expenses all advertising cost as incurred. The costs are $61,304
(2005: $52,893, 2004: $30,892).
(q) Earnings per share
The Company uses the treasury stock method to calculate 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 at
the average share price during the period.
The effect of the exercise of the 260,000 (2005: 352,500, 2004: 2,357,500)
potentially dilutive options was not dilutive.
9
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
2. Summary of significant accounting policies (Continued)
(r) Put option
The Company accounts for put options issued in connection with certain common
shares (Note 8) in accordance with EIC-149, "Accounting for Retractable or
Mandatorily Redeemable Shares". Under EIC-148, the fair value of the Company's
obligation under this put option is presented as a current liability. Any change
in the fair value of the put obligation is accounted for in the results of
operations.
(s) Capital stock issued for consideration other than cash
Capital stock issued for consideration other than cash is recorded at an
estimate of the fair value of the stock issued or issuable or at an estimate of
the fair value of the goods or services received (whichever is more readily
ascertainable).
================================================================================
3. Receivables 2006 2005
---- ----
Receivables $ 3,977,980 $ 3,687,844
Allowance for doubtful accounts (267,045) (274,020)
----------- -----------
$ 3,710,935 $ 3,413,824
=========== ===========
================================================================================
4. Property and equipment 2006
----
Accumulated
Depreciation and Net
Cost Amortization Book Value
---- ------------ ----------
Computer equipment and Software $ 458,729 $ 331,634 $ 127,095
Furniture and equipment 186,277 149,286 36,991
Leasehold improvements 144,315 135,809 8,506
----------- ----------- -----------
$ 789,321 $ 616,729 $ 172,592
=========== =========== ===========
2005
----
Accumulated
Depreciation and Net
Cost Amortization Book Value
---- ------------ ----------
Computer equipment and Software $ 410,827 $ 305,517 $ 105,310
Furniture and equipment 186,277 140,370 45,907
Leasehold improvements 144,313 125,336 18,977
Trademark 11,840 10,656 1,184
----------- ----------- -----------
$ 753,257 $ 581,879 $ 171,378
=========== =========== ===========
10
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
5. Bank indebtedness
Bank indebtedness is comprised of demand overdraft loan facilities totaling
$6,500,000 (2005: $6,500,000) with an additional $3,000,000 one time bulge in
effect June 30, 2005 to March 31, 2006, reducing to $2,500,000 from April 1,
2006 to July 31, 2006 (the "OneTime Bulge"). The Company also has available an
annual $1,100,000 (2005: $1,100,000) bulge from July 1 to February 28 each year
(the "Seasonal Bulge").
The Company also had available an additional $900,000 one time bulge from July
15, 2004 to June 30, 2005 (the "Additional Bulge"), plus a secondary additional
$1,600,000 one time bulge from March 1, 2005 to June 30, 2005 (the "Secondary
Additional Bulge")).
Subsequent to year end, the demand overdraft loan facilities totaling $6,500,000
were retroactively renewed except the loan available increased to $11,000,000
from April 1, 2006 to March 31, 2007 with the OneTime Bulge limit decrease from
$2,500,000 to $1,400,000 available from April 1, 2006 to March 31, 2007 and with
an annual Seasonal Bulge of $1,100,000 in from July 1 to December 31 each year.
The facility details are summarized in the table below:
Demand Annual Secondary
Overdraft Seasonal Additional Additional OneTime Total
Loan Facility Bulge Bulge Bulge Bulge Facilities
------------- ----- ----- ----- ----- ----------
Balance,
March 31, 2004 $6,500,000 $ -- $ -- $ -- $ -- $ 6,500,000
Increase on
July 1, 2004 -- 1,100,000 900,000 -- -- 2,000,000
Decrease on
March 1, 2005 -- (1,100,000) -- -- -- (1,100,000)
Increase on
March 1, 2005 -- -- -- 1,600,000 -- 1,600,000
---------- ----------- --------- ----------- ---------- -----------
Balance,
March 31, 2005 6,500,000 -- 900,000 1,600,000 -- 9,000,000
Decrease on
June 30, 2005 -- -- (900,000) -- -- (900,000)
Increase
July 1, 2005 1,100,000 -- -- -- 1,100,000
Increase on
June 30, 2005 -- -- -- -- 3,000,000 3,000,000
Decrease on
June 30, 2005 -- -- -- (1,600,000) -- (1,600,000)
Decrease
March 1, 2006 -- (1,100,000) -- -- -- (1,100,000)
---------- ----------- --------- ----------- ---------- -----------
Balance,
March 31,2006 $6,500,000 $ -- $ -- $ -- $3,000,000 $ 9,500,000
========== =========== ========= =========== ========== ===========
11
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
5. Bank indebtedness (Continued)
These loans bear interest at prime plus 1/8% on the first $1,000,000 (2005:
$1,000,000) and prime plus 1% on the balance. The prime interest rate on these
loans at year-end was 5.5% (2005: 4.25%). The loans are collateralized 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 of the Company's parent company
for $4,000,000 supported by a standby letter of credit for $1,000,000 (2005:
$1,000,000), guarantees by certain other shareholders of the Company's parent
company to a maximum of $800,000, supported by an assignment of certain of these
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, 2006, the Debt to Tangible Net Ratios were 3.52 to 1 and 3.65 to 1
(2005: 3.25 to 1 and 3.28 to 1) respectively. Also under this agreement, the
Company is also required to inject shareholder equity and/or debt subordinate to
its bank indebtedness in the minimum amount of $1,500,000 prior to September 25,
2006 (extended from July 31, 2006). Unless and until the Company complies with
the foregoing covenants, it is in default of the terms of this loan agreement.
It is management's intention to renegotiate certain terms of the banking
agreement and/or implement other measures to bring the Company into compliance
with its obligations under its banking agreement. There can be no assurance
however, that management will be able to be able to bring the Company into
compliance with the defaulted covenants.
================================================================================
6. Accounts payable and accruals 2006 2005
---- ----
Accounts payable $3,149,609 $3,835,674
Accruals 1,048,009 838,944
---------- ----------
$4,197,618 $4,674,618
========== ==========
================================================================================
7. 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) earnings before
taxes. The principal reasons for this difference are as follows:
2006 2005 2004
---- ---- ----
(Loss) earnings before income taxes $(492,621) $ 431,629 $ 388,567
Statutory income tax rate 34% 38% 38%
Anticipated income tax (recovery) provision (167,491) 164,019 147,655
Tax provision effect arising from:
Small business deduction 48,954 (52,466) (46,000)
Tax losses utilized (37,252) (17,015) (21,607)
Tax recovery from loss carried back 67,682 -- --
Non-deductible expenses and other (9,755) 11,936 (28,468)
Change in valuation allowance (5,000) 2,447 9,306
--------- --------- ---------
$(102,862) $ 108,921 $ 60,886
========= ========= =========
12
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
7. Income taxes (Continued)
(b) Future income tax assets consist of the following:
2006 2005
---- ----
Capital assets $ 24,800 $ 58,500
Non-capital loss carry forward 478,800 448,500
Other items 9,400 11,000
Valuation adjustment (513,000) (518,000)
--------- ---------
$ Nil $ Nil
========= =========
(c) The operating losses expire as follows:
2006 2005
---- ----
2008 $ 550,000 $ 550,000
2009 429,000 544,000
2010 102,000 102,000
2014 31,000 31,000
2015 32,000 32,000
2026 264,000 --
---------- ----------
$1,408,000 $1,259,000
========== ==========
================================================================================
8. Capital stock
Authorized:
Unlimited number of common shares without par value
Issued: 2006 2005
---- ----
15,240,302 (2005: 15,240,302) common shares $2,545,765 $2,545,765
========== ==========
On September 30, 2005, the Company's shareholders approved a reverse stock split
of the Company's 15,240,302 outstanding common shares, on the basis of 3 (old)
for each 1 (new) common share. The new common shares have not yet been issued to
effect the reverse stock split..
13
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
8. Capital stock (Continued)
Stock options
The Company established a stock option plan ("the Plan") 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 and 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:
Number of Shares
------------------------------------------------ Weighted
Average
Unvested / Vested / Non- Exercise
Discretionary Discretioary Total Price
------------
Balance, March 31, 2004 281,000 2,076,500 2,357,500 $0.74
Year ended March 31, 2005
Expired (246,000) (1,759,000) (2,005,000) $0.60
---------- ---------- ----------
Balance, March 31, 2005 35,000 317,500 352,500 $1.56
Year ended March 31, 2006
Expired (35,000) (57,500) (92,500) $1.50
---------- ---------- ----------
Balance, March 31, 2006 -- 260,000 260,000 $1.58
========== ========== ==========
The weighted average fair value of the options granted during the year was $NIL
(2005: $NIL; 2004: $NIL).
The following table summarizes information concerning options outstanding at
March 31, 2006:
Total Outstanding and Exercisable
--------------------------------------
Weighted
Average
Number of Remaining
Exercise Price Shares Life (Years)
------ ------------
$1.58 260,000 1.02
======================================
14
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
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. All call options
expired unexercised.
The put options were exercisable on July 25, 2005 and will expire upon the
closing of certain qualified initial public offerings. The put options entitle
the holders to put the shares to the Company for the lesser of their fair value
(estimated at $52,600 at March 31, 2006 (2005: $64,000; 2004: $55,600)) and the
original proceeds received under the unit offering ($500,000).
The Company has presented its obligation under this put as a current liability.
================================================================================
9. Commitments
The Company has entered into two operating lease agreements for office premises
which expire in the 2011 fiscal year. The future minimum lease payments under
these lease agreements for the next five years are:
2007 $ 165,445
2008 168,808
2009 165,508
2010 165,508
2011 90,536
The operating lease agreement for one office premise is with a partnership in
which the president of Allura Diamonds Limited has an interest. The terms of the
lease are at amounts considered by management to be at fair value (Note 11).
================================================================================
10. Change in non-cash operating working capital 2006 2005 2004
---- ---- ----
Receivables $ (297,111) $ 95,543 $ 353,283
Income taxes (161,576) 99,694 (193,858)
Inventories 956,588 (5,436,573) 289,184
Prepaids 8,247 (69,852) 17,025
Accounts payable and accruals (476,999) 2,384,430 (785,768)
----------- ----------- ---------
$ 29,149 $(2,926,758) $(320,134)
=========== =========== =========
15
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
11. Related party transactions
Related party transactions during the year and balances at year end are
summarized as follows:
2006 2005 2004
---- ---- ----
(a) International Bullion and Metal Brokers (London) Limited
Transactions
Inventory purchases $ -- $ -- $ 7,759
Interest and guarantee fee $ 115,869 $ 113,896 $ 89,207
Balances
Accounts payable and accruals $ 66,914 $ 26,960 $ 27,046
(b) Other
Rent paid to two related partnerships (Note 9) $ 100,413 $ 126,084 $ 126,084
Guarantee fee paid to two significant shareholders $ 64,000 $ 64,000 $ --
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. The parties believe the amount of consideration is
established at fair value.
International Bullion and Metal Brokers (London) Limited is a Company controlled
by International Bullion and Metal Brokers Ltd., a shareholder in the Company.
================================================================================
12. 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's accounts payable and accrued liabilities included the following
foreign currency denominated amounts:
2006 2005
---- ----
U.S. dollar $ 2,499,095 $ 2,846,208
Euro 389,482 377,647
GBP 4,774 --
----------- -----------
$ 2,893,351 $ 3,223,855
=========== ===========
The Company does not use derivative instruments to reduce its exposure to
foreign currency risk.
16
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
12. Financial instruments and risk management (Continued)
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.
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, 2006, 49%, (2005: 66%) of the Company's accounts receivable was
owed by 3 customers (2005: 3) as per the table below.
2006 Percent 2005 Percent
---- ------- ---- -------
Company A $ 836,499 24% $ 1,380,717 40%
Company C 460,477 13% 531,248 16%
Company D 428,815 12% -- --
Company E -- -- 351,714 10%
------------ ----- ------------ -----
$ 1,725,791 49% $ 2,263,679 66%
============ ===== ============ =====
Fair value
The Company has various financial instruments including cash, receivables, bank
indebtedness, accounts payable, accruals, and income taxes payable/recoverable.
The carrying value of all financial instruments approximates their fair value
due to their short-term nature.
17
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
13. Significant customers
Four major customers account for 44% of total sales in 2006 (2005: 53%, 2004:
54%) as follows:
2006 Percent 2005 Percent 2004 Percent
Company A $ 5,950,900 22% $ 4,955,465 26% $ 3,403,950 21%
Company B -- -- 1,980,880 10% 2,546,936 16%
Company C 1,860,649 7% 1,792,747 9% 1,746,882 11%
Company D 2,367,078 9% 1,518,852 8% -- --
Company E 1,546,761 6% -- -- 1,000,722 6%
------------------------ ------------------------ ------------------------
$ 11,725,388 44% $ 10,247,944 53% $ 8,698,490 54%
======================== ======================== ========================
================================================================================
14. Differences between Canadian and U.S. generally accepted accounting
principles and practices
Recent accounting pronouncements
The Company prepares its financial statements in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP") which differ from
those principles and practices that the would have followed had its financial
statements been prepared in accordance with accounting principles and practices
generally required in the U.S. ("U.S. GAAP"). Notwithstanding these differences,
the Company's financial statements presented under Canadian GAAP are not
different than they would be if presented under US GAAP.
Canadian GAAP
Recent accounting pronouncements affecting the Company's financial reporting
under Canadian GAAP are summarized below:
(i) Financial Instruments. In January 2005, the CICA issued Handbook Section
3855, "Financial Instruments - Recognition and Measurement." It prescribes when
a financial asset, financial liability or non-financial derivative is to be
recognized on the balance sheet and at what amount, requiring fair value or
cost-based measures under different circumstances. It also specifies how
financial instrument gains and losses are to be presented. It applies to interim
and annual financial statements for fiscal periods beginning after October 1,
2006 and will be adopted by the Company on or before April 1, 2007. Transitional
provisions are complex and vary based on the type of financial instruments under
consideration. The effect on the Company's consolidated financial statements is
not expected to be material.
(ii) Comprehensive Income. CICA Handbook Section 1530, "Comprehensive Income,"
was issued in January 2005 to introduce new standards for reporting and
presenting comprehensive income. Comprehensive income is the change in equity
(net assets) of a company during a reporting period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except for changes resulting from investments by owners
and distributions to owners. It applies to interim and annual financial
statements for fiscal periods beginning after October 1, 2006 and will be
adopted by the Company on or before April 1, 2007. Financial statements for
prior periods will be required to be restated for certain comprehensive income
items. The effect on the Company's consolidated financial statements is not
expected to be material.
18
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
14. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
Canadian GAAP
iii) Equity. In January 2005, the CICA issued Handbook Section 3251, "Equity,"
which replaces Section 3250, "Surplus." It establishes standards for the
presentation of equity and changes in equity during reporting periods beginning
after October 1, 2006. Financial statements of prior periods are required to be
restated for certain specified adjustments. For other adjustments, the adjusted
amount must be presented in the opening balance of accumulated other
comprehensive income. The Company plans to adopt this Section on April 1, 2007.
The effect on the Company's consolidated financial statements is not expected to
be material.
iv) Hedges. CICA Handbook Section 3865, "Hedges," was issued in January 2005 to
clarify requirements for determining hedging relationships and applying hedge
accounting. The Company plans to adopt this Section on April 1, 2007 and does
not expect the adoption to have a material effect on its consolidated financial
statements.
(v) Non-monetary Transactions. In June 2005, the CICA issued Handbook Section
3831 "Non-monetary Transactions" ("Section 3831"). This section supersedes CICA
Handbook Section 3830 "Non-monetary Transactions" ("Section 3830"), establishes
standards for the measurement and disclosure of non-monetary transactions and
defines when an exchange of assets is measured at fair value and when an
exchange of assets is measured at carrying amount. Section 3831 applies to all
non-monetary transactions initiated in periods beginning on or after January 1,
2006. Earlier adoption is permitted for non-monetary transactions initiated in
periods beginning on or after July 1, 2005. The Company does not anticipate that
the application of Section 3831 will have an impact on the financial statements
of the Company.
U.S. GAAP.
Recent accounting pronouncements affecting the Company's financial reporting
under U.S. GAAP are summarized below.
(i) SFAS No. 123R. SFAS No. 123R, "Share Based Payment," was issued in December
2004 to require recognition of compensation expense for the fair value of stock
options and other equity-based compensation at the date of grant. It will also
require additional disclosure of stock-based compensation. In March 2005, the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No.
107, "Share-Based Payment," clarifying the interaction between SFAS No. 123R and
certain SEC reporting requirements. The Company adopted these requirements on
April 1, 2003 in accordance with CICA Handbook Section 3870.
(ii) SFAS No. 153. SFAS No. 153, "Exchanges of Non-monetary Assets," was issued
in December 2004 to amend APB Opinion No. 29, "Accounting for Non-monetary
Transactions," by eliminating the exception to fair value accounting for
non-monetary exchanges of similar productive assets and replacing it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if future
cash flows are expected to change significantly as a result of the exchange.
SFAS No. 153 applies to periods beginning after June 15, 2005 and is not
expected to have a material effect on the Company's consolidated financial
statements.
19
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2006, 2005 and 2004
================================================================================
14. Differences between Canadian and U.S. generally accepted accounting
principles and practices (Continued)
(iii) FIN No. 47. The Company follows SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is the equivalent of CICA Handbook Section 3110.
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement
Obligations," to clarify when sufficient information would be available to
reasonably estimate the timing and cost of performing a conditional asset
retirement obligation. FIN No. 47 applies to fiscal years ending after December
15, 2005 and has not had a material effect on the Company's consolidated
financial statements.
(iv) SFAS No. 154. SFAS No. 154, "Accounting Changes and Error Corrections," was
issued in June 2005 to replace SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements," and APB Opinion No. 20, "Accounting Changes."
SFAS No. 154 generally requires retrospective application for voluntary changes
in accounting principles as well as changes required by accounting
pronouncements. SFAS No. 154 is effective for accounting changes and correction
of errors made in fiscal years beginning after December 15, 2005. The Company
adopted SFAS No. 154 on April 1, 2005 and it has not had a material effect on
the Company's consolidated financial statements.
(v) EITF No. 04-10. In June 2005, the FASB ratified Emerging Issues Task Force
("EITF") Issue No. 04-10, "Determining Whether to Aggregate Operating Segments
That Do Not Meet the Quantitative Thresholds." The consensus is effective for
fiscal years ending after September 15, 2005 and has not had a material effect
on the Company's presentation of the reportable operating segments.
================================================================================
15. Subsequent Events
Subsequent to year end the Company entered into an agreement to acquire business
solution software. The cost of the investment is estimated at $150,000.
Subsequent to year end the Company entered into an operating lease agreement for
premises for a new office location. The lease expires in the 2012 fiscal year.
20
Allura International Inc.
Consolidated Schedules of Administrative and Selling and
Delivery Expenses
Appendix 1
(expressed in Canadian dollars)
Years Ended March 31 2006 2005 2004
================================================================================
Administrative
Alarm and security $ 7,043 $ 5,484 $ 5,408
Automobile 4,649 6,165 3,486
Bad debts 127,180 140,692 95,153
Consulting -- 29,134 111,935
Insurance 258,105 311,145 183,640
Legal and accounting 157,618 122,203 143,871
Office and miscellaneous 329,783 301,915 133,572
Rent (Note 11(b)) 177,395 183,145 175,780
Salaries and wages 1,804,959 2,026,538 1,618,089
Telephone 39,890 38,082 29,452
Travel, meals and entertainment 44,345 83,693 37,561
---------- ---------- ----------
$2,950,967 $3,248,196 $2,537,947
========== ========== ==========
Selling and delivery
Advertising $ 61,304 $ 52,893 $ 30,892
Freight and shipping 315,966 254,267 169,806
Sales commission 244,025 185,374 163,656
Selling 199,964 292,642 95,771
---------- ---------- ----------
$ 821,259 $ 785,176 $ 460,125
========== ========== ==========
21
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);
4.3 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) and Lease for Unit 104, 276 Bedford Highway, Halifax, N.S.,
B3M 2K6, (incorporated by reference from Exhibit 4.4 to the Annual
Report on Form 20-F for the fiscal year ended March 31, 2003)
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. 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).
12.1 Section 302 Certification by C.E.O.
12.2 Section 302 Certification by C.F.O.
13.1 Section 906 Certification by C.E.O.
13.2 Section 906 Certification by C.F.O.
Page 46 of 48
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.
DATED at Vancouver, British Columbia, Canada, as of October 13, 2006.
/s/ "Jeremy Bowman"
- ------------------------------
Jeremy Bowman, President, CEO and Director
Page 47 of 48
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, (incorporated by reference from Exhibit 4.4 to the Annual Report
on Form 20-F for the fiscal year ended March 31, 2003);
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).
12.1 Section 302 Certification by C.E.O.
12.2 Section 302 Certification by C.F.O.
13.1 Section 906 Certification by C.E.O.
13.2 Section 906 Certification by C.F.O.
Page 48 of 48