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, 2007
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.
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(Exact name of Registrant as specified in its charter)
N/A
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(Translation of Registrant's name into English)
CANADA
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(Jurisdiction of incorporation or organization)
1555 WEST 8TH AVENUE, VANCOUVER, B.C., CANADA, V6J 1T5
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(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, 2007: 5,080,100.69 COMMON SHARES, WITHOUT PAR VALUE
Indicate by check mark if the issuer is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act:
Yes [ ] No [X]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934:
Yes [X] No [ ]
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 whether filer is a large accelerated filer, an
accelerated filer or a non-accelerated filer:
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which financial statement item the Registrant has elected
to follow: Item 17 [X] Item 18 [ ]
Page 1 of 71
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b - 2 of the Exchange Act). Yes [ ] No [X]
(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 [ ]
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..........................................18
Item 6. Directors, Senior Management and Employees............................................26
Item 7. Major Shareholders and Related Party Transactions.....................................29
Item 8. Financial Information.................................................................31
Item 9. The Offer and Listing.................................................................32
Item 10. Additional Information................................................................31
Item 11. Quantitative and Qualitative Disclosures about Market Risk............................36
Item 12. Description of Securities other than Equity Securities................................37
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.......................................37
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds..........38
Item 15. Controls and Procedures...............................................................38
Item 16A. Audit Committee Financial Expert......................................................40
Item 16B. Code of Ethics........................................................................41
Item 16C. Principal Accountants Fees and Services...............................................41
Item 16D. Exemption from the Listing Standards for Audit Committees.............................41
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers................41
Item 17. Financial Statements..................................................................42
Item 18. Financial Statements..................................................................67
Item 19. Exhibits..............................................................................67
Signatures............................................................................68
Index to Exhibits Filed...............................................................69
Page 2 of 71
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 1934, 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 1934, 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 consolidated 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,
2007, 2006, 2005, 2004 and 2003. 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 US $0.01 per share
dividend (Equivalent to US $0.03 per share after consolidation) 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. The Company is still in an expansion stage therefore it
may be unlikely that it will pay a dividend 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 15.
The following tables set forth information in Canadian dollars.
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2007 2006 2005 2004 2003
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Net Sales $ 22,638,034 $ 17,719,672 $ 18,252,286 $ 16,114,338 $ 17,031,936
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Gross Profit $ 5,598,399 $ 4,067,365 $ 5,098,045 $ 3,957,544 $ 4,023,355
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Net Income (Loss) $ 200,272 $ (389,759) $ 322,708 $ 327,681 $ 398,084
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Earnings (Loss) Per
Common Share (a) $ 0.04 ($0.08) $ 0.06 $ 0.06 $ 0.08
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Outstanding Shares (a) (c) 5,080,100.69 (b) 5,080,100.69 5,080,100.69 5,080,100.69 5,080,100.69
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Total Assets $ 18,886,989 $ 16,276,552 $ 16,824,370 $ 11,539,964 $ 12,285,925
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Working Capital $ 2,708,789 $ 2,513,418 $ 2,936,292 $ 2,582,063 $ 2,250,619
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Long Term Liabilities $ 227,699 -- -- -- --
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Total Liabilities $ 15,973,737 $ 13,563,572 $ 13,689,730 $ 8,728,032 $ 9,752,174
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Non Controlling Interest -- -- -- -- --
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Shareholder's Equity $ 2,913,252 $ 2,712,980 $ 3,134,640 $ 2,811,932 $ 2,533,751
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Dividends declared per share -- $ 0.03 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 were
issued on March 26, 2007 to complete the reverse stock split.
(c) Subsequent to year-end, at the Annual General Meeting of the Company
("AGM"), which took place on September 26th 2007, Shareholders of record
voted to round all fractional shares held by individual Shareholders up to
one whole share. As at that date the Outstanding Shares of the Company
became a total of 5,080,150
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 disclosed 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, 2007 the month end closing rate per Bank of Canada was
$1.00 US = $0.9948 Canadian.
(b) The following table sets forth the intra-day high and low exchange rates for
each month during the previous six months per Bank of Canada:
Page 4 of 71
Canadian Dollar/US Dollar
Month Low High
August 2007 $1.0830 $1.0462
July 2007 $1.0701 $1.0341
June 2007 $1.0760 $1.0536
May 2007 $1.1163 $1.0666
April 2007 $1.1600 $1.1048
March 2007 $1.1817 $1.1500
(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, 2007 $1.1524**
March 31, 2006 $1.1574
March 31, 2005 $1.2161
March 31, 2004 $1.3284
March 31, 2003 $1.4764
**(Note: Bank of Canada site only specifies the High Low for the
day, not the average. This is the mid point rate for the day)
B. CAPITALIZATION AND INDEBTEDNESS.
This Form 20-F is being filed as an annual report under the Securities Exchange
Act of 1934, 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 1934, 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.
COMPANY IS DEPENDANT ON THIRD PARTY MANUFACTURERS AND SUPPLIERS
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 2007, the Company purchased gold and
silver products from over 100 suppliers, with the five largest suppliers
accounting for approximately 25% of the Company's total gold and silver
purchases. In the diamond jewellery, loose stone and coloured stone area, the
Company purchased products from approximately 100 suppliers, while the five
largest suppliers accounted for 55% of the Company's total purchases in this
area.
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A substantial portion of the Company's purchases are concentrated within a
small number of suppliers. One particular supplier's products accounted for 23%
of IBB purchases and 6% of ADL purchases during the year. The loss of this
particular supplier would have a material adverse effect on business. Aside from
this one supplier the Company does not believe the loss of any other supplier
would have a material adverse effect on its business. The Company's five largest
suppliers account for 38% 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 the commodities become relatively stable
again.
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. In past years the fourth quarter has been subject to stock
returns by customers due to products being discontinued by them or from
overstocking of running products, however, in recent years this has been
apparent in the first quarter as well as the early second quarter. 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.
An employment agreement with Mr. Bowman was finalized, signed and is in place.
The Company does not maintain any key man life insurance on Mr. Bowman's life.
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 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."
Page 6 of 71
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 are any of the Company's customers subject to any contractual
provisions or other restrictions, which preclude them from purchasing products
from the Company's competitors. The Company does have consignment agreements in
place with certain buying groups, which only clarify special terms and
conditions of how the consignment is managed. Additionally the Company has
similar consignment agreements with certain individual major customers. Such
agreements do not preclude customers from buying product from the Company's
competitors nor do they guarantee the sale of the Company's products to those
customers or groups. As a gesture of goodwill the Company also provides a stock
balancing service, primarily to large retailers, in order to assist them with
maintaining inventory levels in an efficient way. In most cases stock balancing
transactions involve taking back products for resorting and redistribution to
other stores within the retailers group, in other cases it involves taking back
product, which is replaced with different styles and not redistributed.
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 Sept 30, 2007, 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 86% 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
"FINRA" formally "NASD" Over the Counter Electronic 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 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
Page 7 of 71
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 "FINRA" formally "NASD", 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 5,080,150 shares and an additional
1,000,000 shares reserved for issuance upon the exercise of any incentive Stock
Options issued in the future; all but 143,290 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 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
Page 8 of 71
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 AND CASH FLOW 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 and cash flow 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 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 the Company must meet to maintain this facility. If the Company
is in default of its terms and covenants, there can
Page 9 of 71
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, 2007, the
Company was in default of its terms and covenants on this overdraft loan
facility; however, the terms and covenants were renegotiated. As at July 31,
2007, the Company was in compliance with these terms and covenants, however
there can be no assurance that it will be in the future.
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 "Jewellery Division", which is the Company's only
division; together with the Company, is the "Allura Group."
The Company, through the Jewellery Division, is primarily in the business of
wholesaling gold, sterling silver and diamond jewellery 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.
Prior to being wound up in March 2006, Bygo had earned minimal revenues since it
had 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 jewellery, paper goods and giftware distribution.
The Company's head-office is located at 1555 West 8th Avenue, Vancouver,
B.C., V6J 1T5. Its telephone number is (604) 683-5700, and its fax number is
(604) 683-5900. 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 office is on the Company's majors customer group, however, it also
covers all independent sales, marketing and order input. The office is located
at 1 Valleybrook Drive, Suite #100 & 101, Toronto, Ontario, M3B 2S7. The
telephone number for the Toronto office is (416) 422-5500 and the fax number is
(416) 422 - 5508.
BUSINESS HISTORY
The Company was initially formed to import European jewellery into Canada.
The objective of the Company has been to be a specialized supplier of gold,
silver and diamond jewelry within the following principal sectors:
Department stores
Catalogue retailers
Mass merchants
Major discounters
Major jewellery retailers
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Independent jewellery stores
Subsequent to the fiscal 2006 year end, the Company acquired new business
solution software to integrate its operations and management systems. The first
phase of implementation for ADL was completed in fiscal 2007. The final phase of
implementation of this software for the Jewellery Division 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 Jewellery
Division comprising of IBB and ADL. The Company's mass marketing jewellery
operations are conducted through IBB, while ADL's primary focus is the
independent jewellery 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 many 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 lower value
diamond and silver jewellery to major retailers and jewellery chains. Subsequent
to fiscal 2006 year end, the Company developed the new diamond business focusing
on lower value items than it has done in the past. This business increased
overall sales for fiscal 2007 and enabled IBB to enter into new markets beyond
the large retailers. IBB's sales are divided approximately 90% to major retail
and jewellery store chains and 10% 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.
During the current fiscal year, the Company invested in new business solution
software to replace its existing legacy systems, which is being integrated in
phases. This strategy continues to permit the company to build a strong
management infrastructure, 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
jewellery.
ADL sales are divided approximately 36% to major retail and jewelry store
chains and 64% to independent jewellery stores. ADL's lower priced diamond
jewellery to major retailers is marketed through IBB and such sales comprise 13%
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. Subsequent to year-end the Dreamcatchers TM line has been transferred to IBB
for sale and distribution through its Vancouver office.
THE ALLURA GROUP
The Allura Group offers its customers a large selection of jewellery styles,
consistent product quality, and prompt delivery of product orders and provides a
wide range of specialized services. The Company's retail
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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 69% of the
Company's sales in fiscal 2007, 61% in fiscal 2006 and 62% in fiscal 2005. They
are representative of the customers to which the Jewellery Division's marketing
efforts are directed. The Company continues to expand its customer base.
While the Allura Group focused its primary marketing efforts on a relatively
small number of retailers, in fiscal 2007, sales were made to approximately 400
customers, with over 1372 retail locations, and with no single customer
accounting for more than approximately 22% of net sales. The Company's six
largest customers accounted for approximately 69% of sales in fiscal 2007, 61%
in fiscal 2006 and 62% in fiscal 2005. 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 jewellery, 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.
In July 2006, the Company opened its third office in Canada in the city of
Toronto. The primary focus of the Toronto office is to improve our customer
service to our largest customers; most of whom are headquartered in Toronto
however the office also markets to independent customers and processes sales
orders.
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 has 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 jewellery
industry. Further, the Company believes that its business strategy will allow it
to leverage the expertise and customer base it has established in the Canadian
market to create future sales in the much larger markets of the United States.
The Company believes that the most important elements of its business
strategy are:
FOCUSED CUSTOMER BASE. While the Company has developed a broad customer base,
the Company targets its marketing efforts towards large retailers, such as mass
merchandisers, department stores, jewelry retail chains, and other major
discount stores. These customers typically require a high level of service, and
the Company seeks to build long-term relationships by making it convenient and
cost-effective for these customers to rely on the Company for essential services
such as product design, inventory control and on time delivery.
CUSTOMER SERVICE. The Company offers prompt and reliable order fulfillment
and a wide range of specialized services, including individualized packaging of
jewellery products, price-tagging, bar coding, delivery to individual customer
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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 jewellery styles and range of products that include
precious and semi precious stones, gold jewellery and silver jewellery.
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 2,460 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. The
relatively more expensive product line offered by ADL is intended to appeal to
consumers who are value-conscious as well as fashion-conscious. IBB has
established a minimal amount of sales in silver jewelry and plans to try and
expand sales in this area. The Company currently offers approximately 55 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 jewellery 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 jewellery retailers and independent
jewellery 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 69% of the Company's net sales in fiscal 2007, 61%
in fiscal 2006 and 62% in fiscal 2005. The company has two customers (2006: one;
2005: two), with sales that exceeded 10% of the total sales. They are
representative of the customers to which the Jewellery Division's marketing
efforts are directed. The Company continues to expand its customer base.
The Company believes that providing exceptional customer services is a key
element of its marketing program. The Company's marketing efforts emphasize its
ability to fill orders in a prompt and reliable fashion. The Company maintains
an extensive inventory of finished goods, which enable it to rapidly fill
customer orders often within 24 hours of receipt. The Company 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 jewellery and then ships an assortment of many
prepackaged items to individual retail locations. Other services provided by the
Company include advertising and merchandising support and, point of sale
displays.
The Company provides computer-generated reports analyzing the customers'
sales and inventory levels by category, style and price point. These reports
assist the Company and its customers to increase sales, manage inventory and
project demand. The Company believes the reports are a valuable marketing tool,
and a substantial portion of the efforts of the Company's marketing staff is
devoted to the review and analysis of the reports with representatives of the
Company's major retail customers. These discussions provide a basis for
subsequent purchasing decisions by customers.
Marketing of the Company's products is conducted through its offices in
Vancouver, Toronto and Halifax. In July 2006, the Company opened a new office in
Toronto to engage in sales functions of the Company. The primary focus of the
Toronto office is on the Company's largest customers (such customers are
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defined as having thirty plus retail stores and are otherwise known as
"Majors"); most of these are headquartered in Toronto, however, it also markets
to Independent customers and does order processing. The Company also has a
Senior V.P stationed in Toronto, and eight regional independent customer service
representatives who market to independent retail customers and majors. In
addition, the Company's products are promoted through the use of printed
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). Such sales are subject to the
terms of a consignment agreement, which may be cancelled at any time upon return
of the product, or alternatively may be automatically renewed if required. Such
agreements do not preclude the customer from purchasing products from the
Company's competitors. 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 400 customers in fiscal
2007, sales of the Company's six largest customers accounted for approximately
69% of sales in fiscal 2007 and 61% in fiscal 2006 and 62% in fiscal 2005. 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 jewellery and diamond jewellery 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 2,460 styles of chains, earrings,
bracelets and rings. In addition the Company carries approximately 160 loose
diamonds and coloured stones of varying qualities and weights. 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, however with the introduction of the
Dreamcatchers and Golden Moments collections, which include mid point diamond
products, the average high price point for the company was $820. Loose stones
vary in price depending on market at a price reflective of quality and karat
weight. Such stones represent a relatively small portion of the ADL inventory
held, however these stones in isolation carry a higher average price point
relative to the balance of the inventory.
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 1,695 karat gold, 710
diamond and colored stone and 55 sterling silver products that are a regular
part of its product line. These products are traditionally designed diamond and
colored stone set items, karat gold and sterling silver chains and other jewelry
products for which there has been consistent demand. The Company continually
strives to update the balance of its product line with innovative, new styles.
New styles primarily are introduced at the
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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, these items are sold down to
minimize the quantities 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.
Additionally the Company may melt such product; in which case it will recover
the raw metal value at market price, and in the case of Import product; it may
apply for recovery of applicable duties and taxes paid thereon. Such product
will be written down to the estimated recovery value, which; depending on the
market price of the base metal, could be lower than cost. Typically melted
product would include, but is not limited to, samples and styles that have been
discontinued and which are not desired by other customers.
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. When on occasion the Company has done a melt of certain product,
the appropriate write down has been recorded in the accounts and would be more
significant.
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, at less reduced prices, however the equivalent dollar amounts are
not material. The Company's estimates that during fiscal 2007, sales for melt
accounted for approximately $500,000 of the total revenues of the Company and
were sold at book value. As at March 31, 2007 the Company had a total provision
for inventory obsolescence of $329,000 ($401,000: 2006, $213,000: 2005).
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 diamond and coloured stone jewelry, 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 2007, the Company purchased gold and silver products from over
100 suppliers, with the five largest suppliers accounting for approximately 25%
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
100 suppliers, while the five largest suppliers accounted for 55% of the
Company's total
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purchases in this area.
A substantial portion of the Company's purchases are concentrated within a
small number of suppliers. One particular supplier's products accounted for 23%
of IBB purchases and 6% of ADL purchases during the year. The loss of this
particular supplier would have a material adverse effect on business. Aside from
this one supplier, the Company does not believe the loss of any other supplier
would have a material adverse effect on its business. The Company's five largest
suppliers account for 38% 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.
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 jewellery 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 jewellery industry will
increase the level of competition in the markets in which the Company competes.
The Company believes its primary competitors 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
and a separate Business Interruption policy. Additionally, the Company carries
credit insurance, which covers most of the independent and a Board
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approved acceptable portion of major customer receivables.
TRADEMARKS
The Company maintains certain Canadian and US registered trademarks. The
level of protection available to the Company for proprietary designs varies
depending on a number of factors, including the degree of originality and the
distinctiveness of the designs. No assurance can be given that the Company's
patent, copyrights and other proprietary rights will preclude competitors from
developing substantially equivalent products.
IBB uses trademarks in the sale of some of its products to further create an
exclusive identity for its customers. The following are some of the Canadian
registered trademarks used: Dreamcatchers TM, Little Loves Gold Jewellery TM,
Golden Moments TM, Earresistables TM, Tuscany Gold Collection TM, and Tuscany
Silver TM.
Under Allura Inc. the Company has registered the trademark name bygo.com for
its exclusive use in Canada and the USA. 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, 2007, the Company employed thirty-eight persons on a full time
basis. As at September 15, 2007, there were forty-four persons employed on a
full time basis and one on a permanent part-time basis. The full time employees
comprise of ten employees in finance and administration, sixteen in sales and
merchandising, and eighteen in inventory warehouse. Four full time employees are
employed in the Halifax office, eight are employed in the Toronto office, and
thirty-two are employed in the Vancouver office. The permanent part-time
employee is in finance and administration. As at Sept 15, 2007 the Company
employed seven people on a temporary part time basis. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.
GOVERNMENTAL REGULATION
The tax laws of the Federal Government of Canada and the Provinces of British
Columbia, 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 AND EQUIPMENT.
REAL PROPERTY
The Company operates from leased premises in Vancouver, Halifax and Toronto.
The Company's Vancouver office is located on 1555 West 8th Avenue, Vancouver,
B.C., V6J 1T5, Canada, the Halifax office is located on Unit 104, 276 Bedford
Highway, Halifax, N.S., B3M 2K6, Canada and the Toronto
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office is located at Suite 100, 1 Valleybrook Drive, North York, ON, M3B 2S7.
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 3,430 square feet of office space.
Starting in July 2006 the Company leased an office in North York ("Toronto") on
a five year fixed term at $4,421 per month plus applicable taxes. In July 2007
the cost of the lease was reduced to $4,136 per month for the balance of the
term, and starting in August 2007 a further 1,148 square feet were leased for an
additional $1,148 per month, bringing the total cost of the lease to $5,284 per
month. In May 2008 the lease cost will go up by $813 per month for the balance
of the lease.
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. An 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.
During the year the Company has upgraded its computer infrastructure with newer
technology and acquired new software, Microsoft Dynamics (Navision). When fully
phased in the Company expects these improvements to increase the effectiveness
and efficiencies of its operations. The capital cost of this software has been
reflected as an obligation under Note 8 of the Company's 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 2007 V. FISCAL 2006
Sales for the fiscal year ended March 31, 2007 ("Fiscal 2007") were
$22,638,034 compared to $17,719,672 for the fiscal year ended March 31, 2006
("Fiscal 2006"), an increase of $4,918,362 or 28%. The significant increase is
primarily a result of:
o significant sales from the new diamond programs that we obtained during
the year with Wal-Mart and Sears; and
o enhanced sales efforts during the year which led to increased sales in
higher-end diamond products to our major customers.
The Company expects to see moderate growth in overall sales volumes in fiscal
2008, with an increase of 3% projected as compared to fiscal 2007.
Cost of sales for Fiscal 2007 was $17,039,635 with a gross margin of 24.7%
compared to $13,652,307 with a gross margin of 23% for Fiscal 2006. The increase
in cost of sales is largely consistent with the increased sales for the year.
Due to significant upward movements in gold prices
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during the year, product costs increased. However, the Company was able to
increase the selling prices to offset the increased costs. In addition, the
abolishment of the exercise tax during the year means the Company was able to
recognise some economies in purchasing. As a result, the gross profit margin
improved from that of fiscal 2006.
Cost of sales includes the cost of inventory sold, inbound freight, duties,
taxes and brokerage, jewellery packaging sold with the product, agency fees, and
the gain/loss on settlement of inventory purchases as discuss above.
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 $310,721compared to $315,966 in the prior
year.
General administrative costs increased by $337,128 or 11% from $2,950,967 in
Fiscal 2006 to $3,288,095 in Fiscal 2007. The changes were primarily a result of
o Salary and Wages: an increase of $419,899 or 23%. The increase is a
combination of a few factors. The main reason being, that during the
year the Company opened a new sales office in Toronto. With the
exception of one staff member, all the staff in the Toronto office
was newly hired during fiscal 2007. In addition, due to increased
sales, we employed more warehouse casual staff and more overtime was
also incurred. Lastly, there was a salary increase to the CFO/VP
Operations effective April 1, 2006.
o Rent: an increase of $55,672 or 31%. Again, the establishment of the
Sales Office in Toronto during the year contributed to the increase
in rent.
o Legal and accounting: an increase of $99,110 or 63%. The increase is
mainly due to audit fees for fiscal 2006 being much higher than what
was accrued in fiscal 2006. Thus, the under-accrued portion was
expensed in the current year. In addition, legal fees also increased
as a result of new consignment agreements with some of our major
customers.
o Bad debts: There was a credit balance of $108,546 as compared to a
debit balance of $127,180 in 2006. This significant decrease in bad
debt expense offset the above increases to a large extent. The
decrease in bad debts is a result of write back of previous years'
provisions as well as recovery of some accounts, which were provided
for in 2007.
Overall, as a percentage of sales, administrative expenses decreased to 14.5%
2007 from 16.7% in 2006.
Selling and delivery expenses increased by $149,461 or 18% to $970,720 in
Fiscal 2007 from $821,259 in fiscal 2006, as a result of:
o Sales Commission - increased by $118,788 or 49% in fiscal 2007
mainly due to an overall general increase in sales during the year
and a sum of commission paid to establish the Quebec sales
territory.
o Advertising - increased by $62,172 or 101%. The Company spent higher
costs in advertising costs, for example, high-end catalogues were
produced to promote the Golden Moments and Dream Catchers programs
during the year. In addition, tradeshow activities were also
expanded during the year.
Overall, as a percentage of sales, selling and delivery expenses decreased to
4.3% from 4.6% in 2006.
Interest and bank charges for Fiscal 2007 increased $212,115 or 28% to
$964,633 when compared to the Fiscal 2006 amount of $752,518. The Company
continued to rely on its increased banking facilities throughout fiscal 2007.
The average balance in its bank line increased during fiscal 2007 by
approximately $145,403. The higher banking facilities were required to finance
the increased inventory levels to support the increased sales volumes during the
year. The average interest rate paid by the Company for its banking facilities
increased from 5.69% in Fiscal 2006 to 6.98% in Fiscal 2007.
The Company had a net income before provision for income taxes of $294,741.
This represents a
Page 19 of 71
significant improvement from fiscal 2006, which recorded a loss before tax
recovery of $492,621. The improved gross profit margin coupled with a decrease
as a percentage of sales in both administrative expenses and selling and
delivery expenses resulted in the overall positive net income before tax.
Tax expense or recovery is determined by entity-based results. Tax expense
for the current year is comprised of two portions. During the year, Allura
Diamonds Limited was subject to a tax audit by Canada Revenue Agency ("CRA"). As
a result, the Company was reassessed for a total of $76,469 in additional income
tax payable relating to its fiscal years 2004, 2005 & 2006. Interest and
penalties totaling $14,882 were also levied by the CRA. Subsequent to the
year-end, the Company filed an objection notice on the reassessment and claimed
for a refund of the full amount assessed. Subsequent to the release of the
Audited Financial Statements the CRA advised that it has reviewed the Company's
claim and has confirmed that there will be a reversal in full for the disallowed
interest, accounting fees and audit fees. The final re-assessment has not yet
been received however at that time it is expected that installment interest and
penalties will also be reversed. The balance of $18,000 is the provision for
income tax expense arising from Allura International Inc. taxable income
estimated for the current year. As disclosed in Note 7 to the Company's
consolidated financial statements, the Company has substantial tax losses that
could be used to offset future taxable income. However, 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 income of $200,272 represents a significant improvement from
the net loss of $389,759 in fiscal 2006.
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 jewellery and
o in fiscal 2005 there were two significant roll out of programs to
two major customers; in fiscal 2006, 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, jewellery 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
Page 20 of 71
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 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.
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
Page 21 of 71
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.
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 $57,600 at March 31, 2007 (2006: $52,600; 2005: $64,000)) and the
original proceeds received under the unit offering ($500,000). The common share
put options were outstanding as at September 15, 2007.
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 (2006: $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").
In fiscal 2006, the Company also had available an additional $900,000 one
time bulge from July 15, 2004 to June 30, 2005 ("Additional Bulge"), plus a
secondary additional $1,600,000 one time bulge from March 31, 2005 to June 31,
2005 ("Secondary Additional Bulge")
Subsequent to year-end, the demand overdraft loan facilities totaling
$11,000,000 were retroactively renewed except that the Onetime Bulge was
extended to May 1, 2007 and the Annual Seasonal Bulge was provided on a one-time
basis from May 1, 2007 to December 31, 2007.
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, July 28, 2006, November 21, 2006, April 4, 2007 and
May 28, 2007 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 overdraft 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 for the period of January 1 - June 30
Annually, including a $1,500,000 sub-limit for Allura Diamonds
Limited and increased to $4,550,000 for July 1 - December 31
annually (amended on a one-time basis to $5,050,000 for the period
of May 1, 2007 to
Page 22 of 71
December 31, 2007); plus
o 50% of consignment inventory limited to a maximum of $1,700,000
subject to the following sub limits; Bay/Zellers $1,500,000; Sears
$1,000,000, Charm $100,000; Ben Moss $175,000; plus
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
o 100% of the sum of Acceptable Credit Instruments;
o An $800,000 allowance for the mortgages 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 2006: $1,000,000) and prime plus 1% on the
balance. The prime interest rate on these loans at year-end was 6.0% (Fiscal
2006: 5.5%) and 6.25% as at September 15, 2007. 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 2006: $1,000,000), guarantees by
certain other shareholders to a maximum of $800,000, collateralized by certain
of these shareholders' residential real estate and an assignment of insurance on
the life of the president in the amount of $800,000.
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.
During fiscal 2007, the Company was required to inject shareholders' equity
and/or debt subordinate to its bank indebtedness in the minimum amount of
$500,000 (decreased from an originally requested injection of $1,500,000) prior
to March 31, 2007. On April 4, 2007, a company controlled by one of the
Company's shareholders provided a standby letter of credit expiring October 10,
2007; subsequently amended to expire November 1,2007, in favour of the Company's
bank. This letter of credit satisfied the bank's requirement for additional
shareholders' equity and/or subordinated debt.
Under the terms of the demand overdraft loan facilities, the Company must
maintain a Debt to Tangible Net Worth ratio not exceeding 2.5 to 1 (amended to
3.0 to 1 subsequent to the year-end) and Ratio of Current Assets to Current
Liabilities not less than 1.3 to 1 on a consolidated entity basis as defined by
the bank at each year-end when the loan is outstanding. As at March 31, 2007,
the Debt to Tangible Net Worth Ratio and ratio of Current Assets to Current
Liabilities were 3.64 to 1 and 1.17 to 1 (2006: 3.58 to 1 and 1.19 to 1),
respectively. Notwithstanding this technical default, the Bank has currently
agreed not to take any steps with regard to this default, although this does not
constitute a waiver nor does it prejudice any of the bank's other rights and
remedies under the facilities.
There can be no assurance that the Company's bank will continue to forebear
rather than exercise the remedies available to it under these facilities.
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, 2007, the combined overdraft loan amounted to
$11,579,643.
ACCOUNTS RECEIVABLE
The Company's account receivables net of allowances for doubtful accounts as
at March 31, 2007 were $4,479,708. The balance in accounts receivable
represented 19.8% of net sales for Fiscal 2007.
Page 23 of 71
INVENTORY
The Company's inventory as at March 31, 2007 was $13,532,378 or 59.8% of net
sales for Fiscal 2007 compared to $12,087,351 or 68.2% of net sales for Fiscal
2006. 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 and 2007, 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 and 2007. 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 a new diamond program offered to some of the Company's
major customers and increased sales in high-end diamond products to its
major/mini major customers.
The Company expects its inventory levels to reduce significantly in future
periods as the Company works to liquidate some of the old inventory and towards
a just-in-time purchasing system. Subsequent to the fiscal year end, the Company
sold/melted for scrap approximately $517,000 of overstock inventory at book
value to reduce its inventory levels. 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, 2007
were $3,931,860 compared to $4,197,618 for Fiscal 2006. 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.
OBLIGATION UNDER CAPITAL LEASE
During the year, the Company sold certain equipment. There was no material
gain on the transaction. The Company then immediately leased back this equipment
by entering into a lease agreement. The capital lease has a four-year term,
expiring in 2011, with imputed interest rate of approximately 6.25% per annum.
The leased equipment is amortized on a straight-line basis over the lease term.
Details can be found under Tabular Disclosure of Contractual Obligations in F
below.
CAPITAL COMMITMENTS
Except for anticipated aggregate lease payments for both IBB and ADL of
approximately $709,000 over the next five years, the Company has no other
significant capital commitments as of September 30, 2007. 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 15 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.
Page 24 of 71
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 10 of our audited consolidated financial statements for the year ended
March 31, 2007.
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, 2007 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 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- ---------------------------------------------------------------------------------------------------------------------------
Short-Term Debt Obligations $11,579,643 $11,579,643 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations $ 342,384 $ 92,702 $ 171,142 $ 78,540 --
- ---------------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $ 708,525 $ 191,834 $ 387,746 $128,945 --
- ---------------------------------------------------------------------------------------------------------------------------
Purchase Obligations -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Company's
Balance Sheet under the GAAP of the primary financial
statements -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $12,630,552 $11,864,179 $ 558,888 $207,485 --
- ---------------------------------------------------------------------------------------------------------------------------
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
Page 25 of 71
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.
H. LEGAL PROCEEDINGS
As at September 30, 2007, 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, 2007.
On September 26th, 2007, 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 26th, 2007.
- ----------------------------------------------------------------------------------------------------
POSITION
NAME AGE POSITIONS HELD SINCE
- ----------------------------------------------------------------------------------------------------
Jeremy Bowman 56 Director, President, CEO and acting CFO (1) of Allura 1988
International Inc.
- ----------------------------------------------------------------------------------------------------
Sheila Bowman 49 Director, Secretary, and Treasurer 1988
- ----------------------------------------------------------------------------------------------------
Frank Kovacs 54 Director 1998
- ----------------------------------------------------------------------------------------------------
Thomas Weckman 53 Director and V.P. of Allura Diamonds Limited 1994
- ----------------------------------------------------------------------------------------------------
Tina VanderHeyden 55 Director 1999
- ----------------------------------------------------------------------------------------------------
Dave Wall 56 Director 2003
- ----------------------------------------------------------------------------------------------------
Cameron Gillies 42 Senior V.P 2006
- ----------------------------------------------------------------------------------------------------
Lan Shangguan 37 V.P of Finance 2007
- ----------------------------------------------------------------------------------------------------
Emily Tsen 41 Chief Financial Officer /V.P. Operations 1996
- ----------------------------------------------------------------------------------------------------
Page 26 of 71
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. (1) Mr. Bowman was appointed
acting CFO effective June 30th 2007
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
jewellery 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 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
Accountant designation in British Columbia in 1993.
Cameron Gillies joined the Company in October 2006 as Senior Vice President.
He is currently responsible for sales and marketing for the Company, together
with management of the Halifax and Toronto offices.
Lan Shangguan joined the Company as V.P Finance in March of 2007. She is
responsible for undertaking all duties of the Company relating to Finance and
Accounting and for the overall running of the accounting department. Her
position currently reports to the CFO/VP Operations. She received her Australian
CPA designation in 1996 and her Chartered Accountant designation in British
Columbia in 2002.
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, 2007, BDC has not selected a nominee for the Board of
Directors.
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 has an
employment agreement currently in place with Mr. Bowman. The Company does not
maintain any key man life insurance on Mr. Bowman's life.
Page 27 of 71
B. COMPENSATION OUTSTANDING
The Company paid aggregate compensation of $514,000, $492,000, and $607,500
to all directors and officers as a group during the fiscal years ended March 31,
2007, 2006, and 2005, for services in all capacities. There were no funds set
aside by the Company during the fiscal year ended March 31, 2007 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
and still outstanding as at March 31, 2007 were, 140,000 and were granted to a
director of the Company. Each option is convertible into a share of the
Company's common stock. As at March 31st 2007 the options, which have a weighted
average exercise price of CDN$1.58 had a 0.28 weighted average remaining life.
As at Sept 30, 2007 the 140,000 options had expired.
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 $18,200 during Fiscal 2007 to directors for acting in such capacity are
included in the aggregate compensation disclosure discussed above.
C. BOARD PRACTICES
Each director serves until the next annual meeting of shareholders and until his
successor shall have been duly elected and qualified or until such earlier time
as such director may resign or be removed. Officers are elected annually by the
Board of Directors and serve at the discretion of the Board. The Board of
Directors holds meetings four times each year.
There are no directors' service contracts with the Company or any of its
subsidiaries that provide for benefits upon termination of employment. Although
some directors are subject to employment contracts with the Company, such
contracts are not applicable to their services in the capacity of directors.
The Board of Directors has elected members to an Audit Committee and a
Compensation and Human Resource Committee.
The Audit Committee is comprised of the following members as at September 30,
2007: 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 30, 2007: 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, 2007, the Company employed thirty-eight persons on a full time
basis. As at September 15, 2007, there were forty-four persons employed on a
full time basis and one on a permanent part-time basis. The full time employees
comprise of ten employees in finance and administration, sixteen in sales and
merchandising, and eighteen in inventory warehouse. Four full time employees are
employed in the
Page 28 of 71
Halifax office, eight are employed in the Toronto office, and thirty-two are
employed in the Vancouver office. The permanent part-time employee is in finance
and administration. As at Sept 15, 2007 the Company employed seven people on a
temporary part time basis.. 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 March 2007 the company employed a V.P of Finance to provide oversight
and undertake management duties for the Finance and Accounting departments.
In October 2006 the company employed a Senior Vice President to be
responsible for sales and marketing for the Company, together with management of
the Halifax and Toronto offices.
As at October 4, 2006, the Company employed a Corporate Accountant to
undertake responsibilities in the finance and accounting department.
During Fiscal 2007, on average the Company employed twelve temporary part
time 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
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, 2007,
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 Percentage of
Name of Shareholder Beneficially or Directly Class
Owned
- --------------------------------------------------------------------------------------------------
International Bullion & Metal Brokers Ltd.(1) 2,083,334 41.01%
- --------------------------------------------------------------------------------------------------
Bowman Family Trust ("Trust")(2) 1,775,000 34.94%
- --------------------------------------------------------------------------------------------------
Jeremy C. Bowman(3) 154,167 3.03%
- --------------------------------------------------------------------------------------------------
Sheila P. Bowman(4) 154,167 3.03%
- --------------------------------------------------------------------------------------------------
Thomas Weckman(6) 83,334 1.64%
- --------------------------------------------------------------------------------------------------
B.D.C Capital Inc(5) 113,379 2.23%
- --------------------------------------------------------------------------------------------------
Emily Tsen (7) 9,334 (*)
- --------------------------------------------------------------------------------------------------
Executive Officers and Directors as a group (7) 4,372,715 86.07%
- --------------------------------------------------------------------------------------------------
Page 29 of 71
(1) International Bullion & Metal Brokers Limited ("International Bullion") is
a corporation formed under the laws of England of which Frank Kovacs is a
Director. Frank Kovacs is also a Director of the Company.
(2) Although not a beneficiary of the trust, Jeremy 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) Jeremy Bowman is the Company's President, CEO and a Director.
(4) Sheila Bowman is the Secretary, Treasurer and a Director of the Company.
(5) The Business Development Bank of Canada through B.D.C Capital Inc is a
venture capital shareholder owning 113, 379, or 2.2% of outstanding
shares. B.D.C has the right to appoint a representative to the Board of
Directors of the Company. Currently it has not exercised the right to do
so.
(6) Thomas Weckman is Allura Diamonds Limited's Vice-President and a Director.
(7) Emily Tsen is the CFO, and VP Operations
* 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 the past three years.
As at September 30, 2007 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 REGISTERED NUMBER OF US COMMON
REGISTERED HOLDERS SHARES PERCENTAGE OF CLASS
- --------------------------------------------------------------------------------------
114 45 30,156 0.59%
- --------------------------------------------------------------------------------------
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 individually 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,
Page 30 of 71
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 (after consolidation equivalent to 100,000 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 (After consolidation equivalent
to 100,000 shares), if the Company proposed to effect an offer and sale of its
securities, the Company was obliged to first offer BDC the opportunity to
purchase, and BDC, in its sole discretion could purchase, all or a portion of
such securities from the Company up to a maximum of $2,000,000 of the proposed
aggregate offering price. BDC did not exercise this right within the specified
time frame therefore the option expired. After the initial preemptive date and
prior to the termination of the Shareholders' Agreement by virtue of the Company
completing a qualified public offering, BDC has the right, except for certain
excepted transactions, to participate pro-rata in any securities offerings
affected by the Company.
As far as is known to the Company, there are no arrangements the operations
of which may at a subsequent date result in a change of control of the Company.
B. RELATED PARTY TRANSACTIONS
No key management personnel of the Company or any shareholder of record owns
either 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.
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
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.
Page 31 of 71
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 (Equivalent to USD$.03 after consolidation) was paid September 8, 2005.
The Company's four largest shareholders 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 "FINRA" formally
know as "NASD" Over the Counter Electronic 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
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
Page 32 of 71
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
SHAREHOLDERS' AGREEMENT
The Company has entered into a shareholders' agreement ("Shareholders'
Agreement") with shareholders individually 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,
Page 33 of 71
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 provides that as long as BDC hold at least
300,000 shares, (Equivalent to 100,000 after consolidation) 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 effected 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 $57,600 at March 31st 2007, 2006: $52,600,2005: $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, 2007
CAPITAL LEASE
During the year, the Company sold certain equipment. There was no material gain
on the transaction. The Company then immediately leased back this equipment by
entering into a lease agreement. The capital lease has a four-year term,
expiring in 2011, with imputed interest rate of approximately 6.25% per annum.
The leased equipment is amortized on a straight-line basis over the lease term.
The Capital Lease Obligation for the term to 2011 is $303,812 (net of Interest).
LEASES FOR PREMISES
The Company entered into a lease on June 22, 1998, with a partnership of which
Jeremy Bowman, the Company's President, CEO and director, was a partner. The
lease was 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 at the reduced rate of $9,371 during June 2005. In
January 2006, 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,
Page 34 of 71
2002 at $1,100 per month plus applicable taxes. The lease was subsequently
renewed for a further term ending June 2009. The Halifax lease has a 90-day
cancellation provision for the benefit of ADL only. Previously 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 2006 ,
Torrington Bay Investments sold its interest in the building and the building
was then leased from the new owners on an arms length basis. 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.
Starting in July 2006 the Company leased an office in North York ("Toronto")
on a five year fixed term at $4,421 per month plus applicable taxes. In July
2007 the cost of the lease was reduced to $4,136 per month for the balance of
the term, and starting in August 2007 a further 1,148 square feet were leased
for an additional $1,148 per month, bringing the total cost of the lease to
$5,284 per month. In May 2008 the lease cost will go up by $813 per month for
the balance of the lease. The premises were leased on commercially agreed terms,
from an arms length party. The premises in Toronto are located at Suite #100 and
#101, 1 Valleybrook Drive, Toronto Ontario and contain a total of 3,430 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 1,000,000 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 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.
Page 35 of 71
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
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.
Page 36 of 71
At March 31, 2007 and 2006, the Company's accounts payable and accrued
liabilities included the following foreign currency denominated amounts:
2007 2006
----------- -----------
U.S. $ 2,512,552 $ 2,499,095
Euro 185,757 389,482
GBP 9,499 4,774
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 $97,800
in interest cost in fiscal year 2007. 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, capital lease obligations and bonus
payables.
The carrying value of the capital lease obligation approximates its fair
market value due to the fact that the obligation bears interest at a rate which
approximates current market rates. The carrying value of the other financial
instruments approximates their fair value due to their short-term nature.
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.
Page 37 of 71
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.
During fiscal 2007, the Company was required to inject shareholders' equity
and/or debt subordinate to its bank indebtedness in the minimum amount of
$500,000 (decreased from an originally requested injection of $1,500,000) prior
to March 31, 2007. On April 4, 2007, a company controlled by one of the
Company's shareholders provided a standby letter of credit expiring October 10,
2007, subsequently expiring November 1,2007, in favour of the Company's bank.
This letter of credit satisfied the bank's requirement for additional
shareholders' equity and/or subordinated debt.
Under the terms of the demand overdraft loan facilities, the Company must
maintain a Debt to Tangible Net Worth ratio not exceeding 2.5 to 1 (amended to
3.0 to 1 subsequent to the year-end) and Ratio of Current Assets to Current
Liabilities not less than 1.3 to 1 on a consolidated entity basis as defined by
the bank at each year-end when the loan is outstanding. As at March 31, 2007,
the Debt to Tangible Net Worth Ratio and ratio of Current Assets to Current
Liabilities were 3.64 to 1 and 1.17 to 1 (2006: 3.58 to 1 and 1.19 to 1),
respectively. Notwithstanding this technical default, the Bank agreed not to
take any steps with regard to this default, although this does not constitute a
waiver nor does it prejudice any of the bank's other rights and remedies under
the facilities.
There can be no assurance that the Company's bank will continue to forebear
rather than exercise the remedies available to it under these facilities.
Subsequently, as at July 31, 2007 the company was in compliance with Covenants,
however, there can be no assurance that it will be in the future.
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. For the year ended March 31, 2007, the
combined overdraft loan amounted to $11,579,643. The demand overdraft loan
agreement facility was renewed on November 21, 2006, April 4, 2007 and
subsequently May 28, 2007
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 (Acting CFO as of June 30, 2007), and the V.P
Finance, Lan Shangguan 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 in a timely manner. Based upon that
evaluation, our management, including the Chief Executive Officer, the acting
Chief Financial Officer
Page 38 of 71
and the V.P Finance concluded that our disclosure controls and procedures, are
not effective in alerting them in a timely manner to material information
relating to the Company and required to be included in the our periodic SEC
filings, given the matters identified below. Since the audit the Company's
management has been making changes to the disclosure controls and procedures and
continues to do so.
During the audit of the 2007 financial statements the Company's management and
auditors identified the following MATERIAL WEAKNESSES in internal controls over
financial reporting:
(I) RECORDING JOURNAL ENTRIES
Recording of Journal entries was not restricted to appropriate
people and were not always reviewed prior to posting. Given that
senior financial personnel are responsible for recording journal
entries, adequate review of the entry is not done to ensure proper
posting.
Without restrictions to appropriate people, unauthorized postings
could arise due to fraud or error. Lack of a review and approval
process of Journal entries further increases the likelihood of
error.
Management has a plan in place to review user access rights and user
groups to ensure appropriate user restrictions are in place and
adequate segregation of duty is upheld. Going forward management
will implement a review process for all entries prior to posting and
will document and maintain records of approval.
(II) INVENTORY COSTING
IBB: Variances between the system cost price and the invoice total
price on fixed-cost items can arise. There is a lack of consistency
both in investigating these differences and in which individual is
responsible for doing the investigation.
Vendor master files are not reviewed on a consistent basis to ensure
current validity of additional costs such as loss, freight, duty and
labour. Given the total value of the inventory relative to net
income, small valuation errors could significantly impact period net
income.
ADL: Review of inventory costing noted inconsistencies between
standard cost and per unit cost of components when transferred out
of raw materials into finished goods. There is no effective
comparison between standard cost and unit cost, which could lead to
errors in period net income.
Accurate inventory valuation is a key component of monitoring
margins on product sales and could lead to materially misstated
financial statements.
IBB:The Accounts Payable clerk is responsible for investigating and
resolving all invoice variances. If the variance is greater than 3%
Purchasing is consulted and is responsible for verifying the
difference and taking appropriate action with the vendor. To be more
effective in reviewing individual costing variances between
fixed-cost items and vendor invoices, programming changes are
required to the current system. Management is looking into program
change possibilities and will consider the possibility of completing
a review of larger vendors and/or more significant product lines on
a more regular basis.
ADL standard and unit costing inconsistencies will be addressed by
instituting a protocol to standardize the composition of Standard
Cost. The possibility of programming changes to the method of
costing for valuation purposes and identification of variances will
be investigated. An Accounts Payable procedure for investigating and
resolving costing differences will be initiated.
Page 39 of 71
(III) BANK RECONCILIATIONS
Due to staffing constraints the booking of sub-ledger to general
ledger entries and reconciliations were being undertaken by the
corporate accountant without being reviewed by the CFO in a timely
manner. Additionally it was observed that bank reconciliations had
not been done adequately for several months prior to the year-end.
It appeared that the recording of manual cheques was not being done
until the cheque had cleared.
Incomplete bank reconciliations can lead to incorrect cut-off for
revenue and expenses at period end and may prevent identification of
inappropriate bank transactions. Timely recording of manual cheques
are essential.
Management immediately took steps to complete outstanding bank
reconciliations and instituted a policy to perform reconciliations
on a monthly basis. Manual cheques are subject to similar control
processes as computer generated cheques. The exceptions referred to
resulted from an oversight regarding postdated cheques and will be
monitored more closely.
(IV) ACCOUNTS RECEIVABLE
Timely investigation, follow up of outstanding unpaid invoices and
investigating discrepancies was not being done promptly at all
times. Unresolved discrepancies can be more difficult to reconcile
and collect and may result in the requirement for higher provision
for bad debt.
Plans are in place to implement more stringent controls in the area
of AR. In the new fiscal year Management instituted a procedure to
review customer's accounts more regularly to identify and resolve
issues in a more timely manner.
(V) IT OBSERVATIONS
A significant number of users had the equivalent of system
administration rights in the Encore application. Such privileges
make it impossible to implement adequate control of critical
functions, commands and menus and to enforce adequate control of
segregation of duties in accounting cycles.
Lack of segregation of duties may lead to possible fraud, incorrect
processing or corruption of data.
Management will carry out a review of users in Encore and limit
access and functionality to appropriate users to ensure adequate
segregation of duties.
The material weaknesses above were identified by the auditors Grant Thornton
during the March 31, 2007 year-end, and in some cases existed in the prior
year's audit. The identified weaknesses are a result of too few members of
accounting staff, changes in staff in the accounting department of the company
during the prior two years, together with a lack of qualified staff needed to
perform segregation of duties and high levels of oversight. In 2006 a Corporate
Accountant was hired and in March 2007 a V.P of Finance was brought in to
provide the higher level of skills required to remedy the situation. During
recent months the CFO has been on extended sick leave, creating a void that was
not anticipated. This has caused a setback to the improved oversight and
segregation of duties intended. As a result of the CFO's absence effective June
30, 2007 the CEO was appointed acting CFO. Additionally the Audit Chair has been
present daily to assist with governance and to perform an independent audit of
the new software system to evaluate its functionality and make recommendations
to improve its future efficiency and effectiveness in areas of financial
reporting and inventory management. The Audit Committee Chair meets regularly
with the V.P Finance to review financial results, and then provides consistent
reports of findings to the other members of the committee and to the CEO. 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 mentioned above, on March 5th 2007 the company employed a Chartered
Accountant as V.P of Finance to enhance its finance and accounting team. In
addition to performing the duties required of her position, together with the
acting CFO she has been substantially responsible for the annual audit and
oversight of the finance and accounting team in the CFO's absence. One of her
duties is to
Page 40 of 71
manage the internal control documentation project and provide enhanced
segregation of duties, which will form the basis of increased internal control
over financial reporting. It is the Company's expectation that with the addition
of this level of staffing, these material weaknesses can be addressed and will
allow the Company to re-evaluate ways to improve upon its systems and processes.
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
take steps to implement improved accounting processes.
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. The Company is also looking into the hiring of
additional staff members to allow for the appropriate segregation of duties and
oversight.
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 for reviewing 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.
Page 41 of 71
ITEM 16C. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
- --------------------------------------------------------------------------------
2007 2006 AGGREGATE FEES
- --------------------------------------------------------------------------------
AUDIT FEES $131,500 **$152,000 $283,500
- --------------------------------------------------------------------------------
AUDIT RELATED FEES $10,350 **$5,000 $15,350
- --------------------------------------------------------------------------------
TAX FEES $22,050 **$25,610 $47,660
- --------------------------------------------------------------------------------
OTHER FEES $0 $0 $0
- --------------------------------------------------------------------------------
TOTAL FEES $163,900 **$182,610 $346,510
- --------------------------------------------------------------------------------
** Subsequent to the filing date of the 2006 Form 20f final billing for
Audit Fees for 2006 were received and paid. Annual Audit Fees reported as a
total of $112,736 for the year to date were billed at a total of $152,000, while
other fees including the Tax compliance work, SEC specialist review of filing
documents and entity review engagements totaled $30,610, for a revised total of
$182,610 for 2006.
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 15 to the financial statements.
The report of independent registered chartered accounting firm, financial
statements and notes thereto, schedules thereto as required under Item 17 are
found immediately below. The report of independent registered chartered
accounting firm is included herein immediately preceding the respective
financial statements, notes, schedules, etc.
Page 42 of 71
ALLURA INTERNATIONAL INC.
CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
MARCH 31, 2007, 2006 AND 2005
CONTENTS
PAGE
----
Report of Independent Registered Chartered Accounting Firm 44
Consolidated Balance Sheets 45
Consolidated Statements of Operations 46
Consolidated Statements of Cash Flows 47
Consolidated Statements of Shareholders' Equity 48
Notes to the Consolidated Financial Statements 49-66
Page 43 of 71
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, 2007, and 2006 and the related
consolidated statements of operations, cash flows, and shareholders'
equity for each of the years ended March 31, 2007, 2006 and 2005. 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 the 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 Inc. as of March 31, 2007 and 2006 and the results of its
operations and its cash flows for each of the three years ended March 31,
2007, 2006 and 2005 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 15 to the consolidated financial statements.
Vancouver, Canada /s/ "GRANT THORNTON LLP"
October 5th 2007 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
Page 44 of 71
ALLURA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(expressed in Canadian dollars)
March 31 2007 2006
- -------------------------------------------------------------------------------------------------
ASSETS
Current
Cash $ 191,386 $ 34,810
Receivables, net (Note 3) 4,479,708 3,710,935
Inventories 13,532,378 12,087,351
Income taxes recoverable -- 121,872
Prepaids 251,355 122,022
------------- -------------
Total current assets 18,454,827 16,076,990
Property and equipment, net (Note 4) 405,192 172,592
Goodwill 26,970 26,970
------------- -------------
Total assets $ 18,886,989 $ 16,276,552
============= =============
- -------------------------------------------------------------------------------------------------
LIABILITIES
Current
Bank indebtedness (Note 5) $ 11,579,643 $ 9,313,354
Accounts payable and accrued liabilities (Note 6) 3,931,860 4,197,618
Income taxes payable 100,822 --
Obligation under capital lease - current portion (Note 8) 76,113 --
Obligation under put option (Note 9) 57,600 52,600
------------- -------------
Total current liabilities 15,746,038 13,563,572
Obligation under capital lease - Non-current (Note 8) 227,699 --
------------- -------------
Total liabilities 15,973,737 13,563,572
------------- -------------
SHAREHOLDERS' EQUITY
Capital stock (Note 9) 2,545,765 2,545,765
Retained earnings 367,487 167,215
------------- -------------
Total shareholders' equity 2,913,252 2,712,980
------------- -------------
Total liabilities and shareholders' equity $ 18,886,989 $ 16,276,552
============= =============
- -------------------------------------------------------------------------------------------------
Commitments (Note 10)
Subsequent event (Note 16)
See accompanying notes to the consolidated financial statements.
Page 45 of 71
ALLURA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in Canadian dollars)
Years Ended March 31 2007 2006 2005
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 22,638,034 100% $ 17,719,672 100% $ 18,252,286 100%
Cost of goods sold (Note 2(c)) 17,039,635 75.3 13,652,307 77.0 13,154,241 72.1
------------- -------- ------------- -------- ------------- --------
Gross profit 5,598,399 24.7 4,067,365 23.0 5,098,045 27.9
------------- -------- ------------- -------- ------------- --------
Expenses
Administrative (Note 17)) 3,288,095 14.5 2,950,967 16.7 3,248,196 17.8
Depreciation and
Amortization 76,827 0.3 46,680 0.3 64,874 0.3
Selling and delivery
(Note 17)) 970,720 4.3 821,259 4.6 785,176 4.3
------------- -------- ------------- -------- ------------- --------
4,335,642 19.1 3,818,906 21.6 4,098,246 22.4
------------- -------- ------------- -------- ------------- --------
Earnings before other income
(expenses) 1,262,757 5.6 248,459 1.4 999,799 5.5
------------- -------- ------------- -------- ------------- --------
Other income (expenses)
Interest, bank charges,
and guarantee fee
(Note 12(b)) (964,633) (4.3) (752,518) (4.3) (562,999) (3.1)
Other income 1,617 -- 38 -- 3,229 --
Change in put option
obligation (Note 9) (5,000) -- 11,400 .1 (8,400) --
------------- -------- ------------- -------- ------------- --------
(968,016) (4.3) (741,080) (4.2) (568,170) (3.1)
------------- -------- ------------- -------- ------------- --------
Earnings (loss) before 294,741 1.3 (492,621) (2.8) 431,629 2.4
income taxes
Provision for Income taxes
(recovery) (Note 7) 94,469 0.4 (102,862) (0.6) 108,921 0.6
------------- -------- ------------- -------- ------------- --------
Net (loss) earnings $ 200,272 0.9% $ (389,759) (2.2)% $ 322,708 1.8%
============= ======== ============= ======== ============= ========
Earnings (loss) per share
(basic and diluted) $ 0.04 $ (0.08) $ 0.06
============= ============= =============
Weighted average common
shares outstanding (basic and
diluted) (Note 9) 5,080,100.69 5,080,100.69 5,080,100.69
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 46 of 71
ALLURA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in Canadian dollars)
Years Ended March 31 2007 2006 2005
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents derived from (applied to)
Operating
Net earnings (loss) $ 200,272 $ (389,759) $ 322,708
Depreciation and amortization 76,827 46,680 64,874
Change in put option obligation 5,000 (11,400) 8,400
Change in non-cash operating working capital
(Note 11) (2,386,197) 29,149 (2,926,758)
----------- ---------- -----------
(2,104,098) (325,330) (2,530,776)
----------- ---------- -----------
Financing
Bank indebtedness 2,266,289 401,946 2,529,164
Dividend Paid -- (31,901) --
----------- ---------- -----------
2,266,289 370,045 2,529,164
----------- ---------- -----------
Investing
Purchase of equipment (309,427) (47,895) (33,353)
Proceeds on disposal of equipment 303,812 -- --
----------- ---------- -----------
(5,615) (47,895) (33,353)
----------- ---------- -----------
Net increase (decrease) in cash 156,576 (3,180) (34,965)
Cash
Beginning of year 34,810 37,990 72,955
----------- ---------- -----------
End of year $ 191,386 $ 34,810 $ 37,990
=========== ========== ===========
- ------------------------------------------------------------------------------------------------
NON-CASH FINANCING AND INVESTING ACTIVITIES
Equipment purchased under capital lease $ 303,812 $ -- $ --
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 934,544 $ 723,959 $ 560,558
Income taxes paid during the year $ -- $ 60,000 $ 120,296
- ------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 47 of 71
ALLURA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(expressed in Canadian dollars)
Years Ended March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
Shares Issued
--------------------------
Number of RETAINED
SHARES AMOUNT EARNINGS TOTAL
Balance March 31, 2004 5,080,100.69 $ 2,545,765 $ 266,167 2,811,932
Net earnings, year ended March 31, 2005 -- -- 322,708 322,708
------------ ----------- ---------- -----------
Balance March 31, 2005 5,080,100.69 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 5,080,100.69 2,545,765 167,215 $ 2,712,980
Net earnings, year ended March 31, 2007 -- -- 200,272 200,272
------------ ----------- ---------- -----------
Balance March 31, 2007 5,080,100.69 $ 2,545,765 $ 367,487 $ 2,913,252
============ =========== ========== ===========
See accompanying notes to the consolidated financial statements.
Page 48 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
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. and Allura Diamonds
Limited.
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 also conform in all material respects to
principles generally accepted in the United States of America as disclosed in
Note 15.
(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 of $75,983 (2006: $108,199, 2005: $297,583).
(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 at date of
acquisition 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
Page 49 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(E) INVENTORIES (CONTINUED)
further costs to completion and disposal. 2007 inventories include goods held on
consignment by the customers under consignment agreements totalling $ 2,525,146
(2006: $2,596,676, 2005: $2,605,200).
The Company's provision for inventory obsolescence has been included in cost of
goods sold. Changes in the current balance are as follows:
2007 2006 2005
Opening Balance $ 401,000 $ 213,000 $ 124,000
Add 155,000 222,000 92,000
Deduct (227,000) (34,000) (3,000)
--------------------------------------------
Closing Balance $ 329,000 $ 401,000 $ 213,000
============================================
(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 equipment under capital lease and leasehold
improvements are depreciated on a 20% declining balance basis. Leasehold
improvements are amortized over the shorter of the life of leasehold improvement
or term of the lease. Equipment under capital lease is depreciated on a
straight-line basis 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 represents 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.
Had the Company continued to amortize goodwill as it did prior to April 1, 2002,
the Company's net earnings and net earnings per share (basic and diluted) would
remain the same for all years presented.
Page 50 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(I) REVENUE RECOGNITION
The Company recognizes revenue when goods have been shipped, title to the goods
has passed to the customer, and collection is reasonably assured.
Revenue from sales of inventory placed on consignment with third parties is
recognized when the consignment inventory is sold to end users or purchased by
the third party.
(J) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for doubtful accounts through review of
open accounts, and historical collection and allowance 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) WAREHOUSE COSTS
The Company includes its warehousing costs in rent. The costs are approximately
$16,000 (2006: $16,000, 2005: $16,000).
(L) SHIPPING AND HANDLING COSTS
Shipping and handling costs incurred related to the sale of products sold are
reported as a component of selling and delivery costs.
(M) STOCK BASED COMPENSATION
The Company has a stock option plan as disclosed in Note 9. 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 using 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
the expected life of the options.
Page 51 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) 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.
(O) ADVERTISING COST
The Company expenses all advertising costs as incurred. For the year ended March
31, 2007, total advertising costs were $123,476 (2006: $61,304, 2005: $52,893).
(P) EARNINGS PER SHARE
The Company uses the treasury stock method to calculate diluted earnings per
share. Under this method, all options with an exercise price less than or equal
to the average share price for the year are assumed to have been exercised
during the period.
The effect of the exercise of the 140,000 (2006: 260,000, 2005: 352,500)
potentially dilutive options was not included in the dilutive earnings per share
amount since the effect would be anti-dilutive.
(Q) PUT OPTION
The Company accounts for put options issued in connection with certain common
shares (Note 9) in accordance with EIC-149, "ACCOUNTING FOR RETRACTABLE OR
MANDATORILY REDEEMABLE SHARES". Under EIC-149, 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.
(R) 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 2007 2006
-------------- --------------
Receivables $ 4,685,820 $ 3,977,980
Allowance for doubtful accounts (206,112) (267,045)
-------------- --------------
$ 4,479,708 $ 3,710,935
============== ==============
Page 52 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT 2007
------------
Accumulated
Depreciation and Net
Cost Amortization Book Value
----------- ---------------- ------------
Computer equipment and software $ 412,693 $ 339,054 $ 73,639
Equipment under capital lease (Note 8) 303,812 37,976 265,836
Furniture and equipment 222,087 160,263 61,824
Leasehold improvements 146,758 142,865 3,893
Trademarks 11,840 11,840 --
----------- ---------------- ------------
$ 1,097,190 $ 691,998 $ 405,192
=========== ================ ============
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
Trademarks 11,840 11,840 --
----------- ---------------- ------------
$ 801,161 $ 628,569 $ 172,592
=========== ================ ============
- --------------------------------------------------------------------------------
5. BANK INDEBTEDNESS
Bank indebtedness is comprised of demand overdraft loan facilities totalling
$11,000,000 (2006: $6,500,000) (subject to certain margining restrictions) with
an additional $1,400,000 one time bulge in effect March 31, 2006 to March 31,
2007 (the "OneTime Bulge"). The Company also has available an annual $1,100,000
(2006: $1,100,000) bulge from July 1 to December 31 each year (the "Annual
Seasonal Bulge").
In fiscal 2006, the Company also had available an additional $900,000 one time
bulge from July 15, 2004 to June 30, 2005 ("Additional Bulge"), plus a secondary
additional $1,600,000 one time bulge from March 31, 2005 to June 31, 2005
("Secondary Additional Bulge")
Subsequent to year end, the demand overdraft loan facilities totalling
$11,000,000 were retroactively renewed except the OneTime Bulge was extended to
May 1, 2007 and the Annual Seasonal Bulge was provided on a one-time basis from
May 1, 2007 to December 31, 2007.
Page 53 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
5. BANK INDEBTEDNESS (continued)
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, 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
Decrease on
April 1, 2006 -- -- -- -- (500,000) (500,000)
Increase,
April 12, 2006 4,500,000 1,100,000 -- -- -- 5,600,000
Decrease April
12, 2006 -- - -- -- (1,100,000) (1,100,000)
Expiry,
December 31,
2006 -- (1,100,000) -- -- -- (1,100,000)
-------------- ------------ ----------- ------------ ------------- ------------
Balance,
March 31, 2007 $ 11,000,000 $ -- $ -- $ -- $ 1,400,000 $ 12,400,000
============== ============ =========== ============ ============= ============
These loans bear interest at prime plus 1/8% on the first $1,000,000 (2006:
$1,000,000) and prime plus 1% on the balance. The prime interest rate on these
loans at year-end was 6.0% (2006: 5.5%). 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 (2006:
$1,000,000), guarantees by certain other shareholders of the Company to a
maximum of $800,000, collateralized by certain of these shareholders'
residential real estate and an assignment of insurance on the life of the
president in the amount of $800,000.
Page 54 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
5. BANK INDEBTEDNESS (continued)
During fiscal 2007, the Company was required to inject shareholders' equity
and/or debt subordinate to its bank indebtedness in the minimum amount of
$500,000 (decreased from an originally requested injection of $1,500,000) prior
to March 31, 2007. On April 4, 2007, a company controlled by one of the
Company's shareholders provided a standby letter of credit expiring October 10,
2007 in favour of the Company's bank. This letter of credit satisfied the bank's
requirement for additional shareholders' equity and/or subordinated debt.
Under the terms of the demand overdraft loan facilities, the Company must
maintain a Debt to Tangible Net Worth ratio not exceeding 2.5 to 1 (amended to
3.0 to 1 subsequent to the year-end) and Ratio of Current Assets to Current
Liabilities not less than 1.3 to 1 on a consolidated entity basis as defined by
the bank at each year-end when the loan is outstanding. As at March 31, 2007,
the Debt to Tangible Net Worth Ratio and ratio of Current Assets to Current
Liabilities were 3.64 to 1 and 1.17 to 1 (2006: 3.58 to 1 and 1.19 to 1),
respectively. Notwithstanding this technical default, the Bank has currently
agreed not to take any steps with regard to this default, although this does not
constitute a waiver nor does it prejudice any of the bank's other rights and
remedies under the facilities.
There can be no assurance that the Company's bank will continue to forebear
rather than exercise the remedies available to it under these facilities.
- --------------------------------------------------------------------------------
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2007 2006
------------- -------------
Accounts payable $ 2,697,212 $ 3,149,609
Accrued liabilities 1,234,648 1,048,009
------------- -------------
$ 3,931,860 $ 4,197,618
============= =============
- --------------------------------------------------------------------------------
7. INCOME TAXES
(a) The provision for income taxes differs from the amount that would be
obtained by applying the Canadian corporate income tax substantially
enacted statutory rate of tax to the earnings (loss) before taxes.
The principal reasons for this difference are as follows:
2007 2006 2005
--------- ---------- ---------
Earnings (loss) before income taxes $ 294,741 $ (492,621) $ 431,629
Statutory income tax rate 34% 34% 38%
Anticipated income tax (recovery) provision 100,212 (167,491) 164,019
Tax provision effect arising from:
Small business deduction (16,399) 48,954 (52,466)
Tax losses utilized (109,181) (37,252) (17,015)
Tax recovery from loss carried back -- 67,682 --
Additional tax reassessed for prior years 76,469 -- --
Non-deductible expenses and other 21,468 (9,755) 11,936
Change in valuation allowance 21,900 (5,000) 2,447
--------- ---------- ---------
$ 94,469 $ (102,862) $ 108,921
========= ========== =========
Page 55 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
7. INCOME TAXES (continued)
During the year, Allura Diamonds Limited was subject to a tax audit by Canada
Revenue Agency ("CRA"). As a result, the Company was reassessed for a total of
$76,469 in additional income tax payable relating to its fiscal years 2004, 2005
& 2006. Interest and penalties totalling $14,882 were also levied by the CRA.
Subsequent to the year end, the Company filed an objection notice on the
reassessment and claimed for a refund of the full amount assessed. The CRA is in
the process of reviewing the Company's claim.
(b) Future income tax assets consist of the following:
2007 2006
---------- ----------
Property and equipment $ 47,500 $ 24,800
Non-capital loss carry forward 367,200 478,800
Other items 8,600 9,400
Valuation allowance (423,300) (513,000)
---------- ----------
$ Nil $ Nil
========== ==========
(b) The operating losses expire as follows:
2007 2006
---------- ----------
2008 $ 258,000 $ 550,000
2009 412,000 419,000
2010 103,000 102,000
2014 31,000 31,000
2015 32,000 32,000
2026 244,000 264,000
---------- ----------
$1,080,000 $1,398,000
========== ==========
- --------------------------------------------------------------------------------
8. OBLIGATION UNDER CAPITAL LEASE
During the year, the Company sold certain equipment. There was no material gain
on the transaction. The Company then immediately leased back this equipment by
entering into a lease agreement. The capital lease has a four-year term,
expiring in 2011, with imputed interest rate of approximately 6.25% per annum.
The leased equipment is amortized on a straight-line basis over the lease term.
Page 56 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
8. OBLIGATION UNDER CAPITAL LEASE (CONTINUED)
The future minimum lease payments required under this capital lease consist of:
2008 $ 92,702
2009 85,571
2010 85,571
2011 78,540
----------
342,384
Less: Amount representing interest (38,572)
----------
Capital lease obligation 303,812
Less : Current portion (76,113)
----------
Balance of obligation - Non-current $ 227,699
==========
- --------------------------------------------------------------------------------
9. CAPITAL STOCK
AUTHORIZED:
Unlimited number of common shares without par value
ISSUED: 2007 2006
----------- -----------
5,080,100.69 (2006: 5,080,100.69) 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 were issued on
March 26, 2007 to effect the reverse stock split. The weighted average number
of shares and the common shares outstanding have been retroactively adjusted
to all prior years presented to reflect the effect of this reverse stock
split.
- --------------------------------------------------------------------------------
STOCK OPTIONS
The Company established a stock option plan ("the Plan") that allows for the
issuance of up to 1,000,000 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:
Page 57 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
9. CAPITAL STOCK (Continued)
Number of Shares
--------------------------------------------- Weighted
Average
Unvested / Vested / Non- Exercise
DISCRETIONARY Discretionary TOTAL PRICE
-------------
Balance, March 31, 2005 35,000 317,500 352,500 $ 1.56
Expired (35,000) (57,500) (92,500) $ 1.50
------------- ------------- ---------
Balance, March 31, 2006 -- 260,000 260,000 $ 1.58
Expired -- (120,000) (120,000) $ 1.58
------------- ------------- ---------
Balance, March 31, 2007 -- 140,000 140,000 $ 1.58
============= ============= ========= ========
The weighted average fair value of the options granted during the year was $NIL
(2006: $NIL; 2005: $NIL).
The following table summarizes information concerning options outstanding at
March 31, 2007:
TOTAL OUTSTANDING AND EXERCISABLE
---------------------------------
WEIGHTED
AVERAGE
EXERCISE PRICE NUMBER OF REMAINING
SHARES LIFE (YEARS)
--------- ------------
$1.58 140,000 0.28
===============================
CALL AND PUT OPTIONS
During 2001, the Company issued 113,379 (340,136, prior to the reverse stock
split) 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 $57,600 at March 31, 2007 (2006: $52,600; 2005: $64,000)) and the
original proceeds received under the unit offering ($500,000).
The Company has presented its obligation under this put as a current liability.
- --------------------------------------------------------------------------------
Page 58 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
10. COMMITMENTS
The Company has entered into three operating lease agreements for office
premises which expire in the 2012 fiscal year. The future minimum lease payments
under these lease agreements for the next five years are:
2008 191,834
2009 198,823
2010 188,923
2011 110,653
2012 18,292
The operating lease agreement for one office premise was with a partnership in
which the president of Allura Diamonds Limited had an interest.
- --------------------------------------------------------------------------------
11. CHANGE IN NON-CASH OPERATING WORKING CAPITAL 2007 2006 2005
----------- ---------- ------------
Receivables $ (768,773) $ (297,111) $ 95,543
Income taxes 222,694 (161,576) 99,694
Inventories (1,445,027) 956,588 (5,436,573)
Prepaids (129,333) 8,247 (69,852)
Accounts payable and accrued liabilities (265,758) (476,999) 2,384,430
----------- ---------- ------------
$(2,386,197) $ 29,149 $ (2,926,758)
=========== ========== ============
12. RELATED PARTY TRANSACTIONS
Related party transactions during the year and balances at year end are
summarized as follows:
2007 2006 2005
----------- ---------- ------------
(A) INTERNATIONAL BULLION AND METAL BROKERS (LONDON) LIMITED
Transactions
Interest and guarantee fee expenses $ 116,147 $ 115,869 $ 113,896
Balances
Accounts payable and accrued liabilities $ -- $ 66,914 $ 26,960
B) OTHER
Rent paid to one (2006: two; 2005: two) related
partnerships (Note 10) $ 9,900 $ 100,413 $ 126,084
Guarantee fee paid to two significant shareholders $ 64,000 $ 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.
International Bullion and Metal Brokers (London) Limited is a company controlled
by International Bullion and Metal Brokers Ltd., a shareholder in the Company.
Page 59 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to the following risks related to its financial assets
and liabilities:
CURRENCY RISK
The Company is exposed to currency risk as some of its accounts payable are
denominated in currencies other than the Canadian dollar. The Company earns
revenue and incurs operating expenses predominantly in Canadian dollars.
Unfavourable changes in the applicable exchange rates may result in a foreign
exchange loss.
The Company's accounts payable and accrued liabilities are denominated in the
following currencies: :
2007 2006
------------- -------------
Canadian dollar $ 1,224,052 $ 1,304,267
U.S. dollar 2,512,552 2,499,095
Euro 185,757 389,482
GBP 9,499 4,774
------------- -------------
$ 3,931,860 $ 4,197,618
============= =============
The Company does not use derivative instruments to reduce its exposure to
foreign currency risk.
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.
Page 60 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
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, 2007, 53% (2006: 49%) of the Company's accounts receivable was owed
by 2 customers (2006: 3) as per the table below.
2007 PERCENT 2006 PERCENT
------------- ------- ------------ --------
Company A $ 1,661,388 33% $ 836,499 24%
Company B 979,927 20% 460,477 13%
Company C -- -- 428,815 12%
------------- ------- ------------ --------
$ 2,641,315 53% $ 1,725,791 49%
============= ======= ============ ========
FAIR VALUE
The Company's financial instruments, including cash, receivables, bank
indebtedness, accounts payable, accrued liabilities, and income taxes
payable/recoverable are carried at amounts which approximate their fair value
due to their short-term nature. Lease obligations have been recorded at their
fair value at inception and are being amortized using the effective interest
rate implicit in the lease.
- --------------------------------------------------------------------------------
14. SIGNIFICANT CUSTOMERS
Three major customers account for 50% of sales in 2007 (2006: 32%, 2005: 45%) as
follows:
2007 2006 2005
Company A 22% 7% 9%
Company B 19% 22% 26%
Company C 9% 3% 10%
-------- -------- ---------
50% 32% 45%
======== ======== =========
- --------------------------------------------------------------------------------
Page 61 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. 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 in
certain respects from those principles and practices that would have been
followed had its financial statements been prepared in accordance with
accounting principles and practices generally accepted in the U.S. ("U.S.
GAAP"). Notwithstanding these differences, the Company's financial statements
presented under Canadian GAAP are not materially different than they would be if
presented in accordance with US GAAP.
CANADIAN GAAP
Recent accounting pronouncements affecting the Company's financial reporting
under Canadian GAAP are summarized below:
(i) Convergence with International Financial Reporting Standards. In 2006,
Canada's Accounting Standards Board ratified a strategic plan that will result
in Canadian GAAP, as used by public companies, being converged with
International Financial Reporting Standards over a transitional period currently
expected to be approximately five years. The precise timing of convergence will
depend on an Accounting Standards Board progress review to be undertaken by
early 2008. Canadian GAAP will be converged with International Financial
Reporting Standards through a combination of two methods: as current
joint-convergence projects of the United States' Financial Accounting Standards
Board and the International Accounting Standards Board are agreed upon, they
will be adopted by Canada's Accounting Standards Board and may be introduced in
Canada before the complete changeover to International Financial Reporting
Standards; and standards not subject to a joint-convergence project will be
exposed in an omnibus manner. As this convergence initiative is very much in its
infancy as of the date of these consolidated financial statements, it would be
premature to currently assess the impact of the initiative, if any, on the
Company.
(ii) Financial instruments and comprehensive income. Commencing with the
Company's 2008 fiscal year, the new recommendations of the CICA for accounting
for comprehensive income (CICA Handbook Section 1530), for the recognition and
measurement of financial instruments (CICA Handbook Section 3855) and for hedges
(CICA Handbook Section 3865) will apply to the Company. In the Company's
specific instance, the transitional rules for these sections require prospective
implementation at the beginning of a fiscal year. Currently, net income (loss)
for the Company is the same as comprehensive income.
Page 62 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND PRACTICES (Continued)
(iii) Accounting changes. Commencing with the Company's 2008 fiscal year, the
new recommendations of the CICA for accounting changes (CICA Handbook Section
1506) will apply to the Company. Most significantly, the new recommendations
stipulate that voluntary changes in accounting policy are made only if they
result in the financial statements providing reliable and more relevant
information and that new disclosures are required in respect of changes in
accounting policies, changes in accounting estimates and correction of errors.
The Company is not currently materially affected by the new recommendations.
(iv) Business combinations. Possibly commencing in the Company's 2008 fiscal
year, the proposed amended recommendations of the CICA for accounting for
business combinations will apply to the Company's business combinations, if any,
with an acquisition date subsequent to the amended recommendations coming into
force. Whether the Company would be materially affected by the proposed amended
recommendations would depend upon the specific facts of the business
combinations, if any, occurring subsequent to the amended recommendations coming
into force. Generally, the proposed recommendations will result in measuring
business acquisitions at the fair value of the acquired entities and a
prospectively applied shift from a parent company conceptual view of
consolidation theory (which results in the parent company recording the book
values attributable to non-controlling interests) to an entity conceptual view
(which results in the parent company recording the fair values attributable to
non-controlling interests).
(v) Financial instruments - disclosure and presentation. Commencing with the
Company's 2009 fiscal year, the new recommendations of the CICA for financial
instrument disclosures and presentation (CICA Handbook Section 3862 and 3863)
will apply to the Company. The new recommendations will result in incremental
disclosures, relative to those currently, with an emphasis on risks associated
with both recognized and unrecognized financial instruments to which an entity
is exposed during the period and at the balance sheet date, and how an entity
manages those risks. The Company is assessing how it will be affected by these
new recommendations.
U.S. GAAP.
Recent accounting pronouncements affecting the Company's financial reporting
under U.S. GAAP are summarized below.
(i) In June 2006, FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), effective for fiscal years
beginning after December 15, 2006. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," including the recognition threshold and measurement
attributes for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. The
Company plans to adopt FIN 48 on April 1, 2007, as required. The
Company is currently evaluating the impact, if any, the adoption of
FIN 48 will have on its consolidated financial statements.
Page 63 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND PRACTICES (continued)
(ii) In June 2006, FASB ratified the consensus reached by the Emerging Issues
Task Force in Issue No. 06-3, "How Taxes Collected from Customers and Remitted
to Governmental Authorities Should be Presented in the Income Statement (That
is, Gross Versus Net Presentation)." Issue No. 06-3 requires disclosure of an
entity's accounting policy regarding the presentation of taxes assessed by a
governmental authority that are directly imposed on a revenue-producing
transaction between a seller and a customer, including sales, use, value added
and some excise taxes. The adoption of Issue No. 06-3, which is effective for
interim and annual reporting periods beginning after December 15, 2006, did not
have an impact on the Company's consolidated financial statements.
(iii) In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 was
issued to provide consistency between how registrants quantify financial
statement misstatements. Historically, there have been two widely-used methods
for quantifying the effects of financial statement misstatements. These methods
are referred to as the "roll-over" and "iron curtain" method. The roll-over
method quantifies the amount by which the current year income statement is
misstated. Exclusive reliance on an income statement approach can result in the
accumulation of errors on the balance sheet that may not have been material to
any individual income statement, but which may misstate one or more balance
sheet accounts.
The iron curtain method quantifies the error as the cumulative amount by which
the current year balance sheet is misstated. Exclusive reliance on a balance
sheet approach can result in disregarding the effects of errors in the current
year income statement that results from the correction of an error existing in
previously issued financial statements.
The Company historically used the roll-over method for quantifying identified
financial statement misstatements. SAB 108 established an approach that requires
quantification of financial statement misstatements based on the effects of the
misstatement on each of the company's financial statements and the related
financial statement disclosures. This approach is commonly referred to as the
"dual approach" because it requires quantification of errors under both the
roll-over and iron curtain methods. SAB 108 allows registrants to initially
apply the dual approach either by (1) retroactively adjusting prior financial
statements as if the dual approach had always been used or by (2) recording the
cumulative effect of initially applying the dual approach as adjustments to the
carrying values of assets and liabilities as of April 1, 2006 for the Company
with an offsetting adjustment recorded to the opening balance of retained
earnings. Use of this "cumulative effect" transition method requires detailed
disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The Company applied
SAB 108 using the retroactive method in connection with the preparation of its
annual financial statements for the year ending March 31, 2007. The adoption of
SAB 108 did not result in any adjustment to the Company's consolidated financial
statements.
(iv) In September 2006, FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. SFAS No.
157 is effective for fiscal years beginning after December 15, 2007. The Company
plans to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. The
Company is currently assessing the potential impact that adoption of SFAS No.
157 will have on its consolidated financial statements.
Page 64 of 71
ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND PRACTICES (continued)
(v) In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No.
159 provides companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS No. 159 is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings. FASB has indicated it believes that SFAS No. 159 helps
to mitigate this type of accounting- induced volatility by enabling companies to
report related assets and liabilities at fair value, which would likely reduce
the need for companies to comply with detailed rules for hedge accounting. SFAS
No. 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. For example, SFAS No.
159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the
effect of the company's choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance sheet.
SFAS No. 159 does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in FASB Statement No. 157, "Fair Value Measurements" (SFAS
No. 157), and FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS No. 107). SFAS No. 159 is effective as of the beginning of a
company's first fiscal year beginning after November 15, 2007. Early adoption is
permitted as of the beginning of the previous fiscal year provided that the
company makes that choice in the first 120 days of that fiscal year and also
elects to apply the provisions of SFAS No. 157. The Company has not yet
completed its evaluation of the Interpretation, but does not currently believe
that adoption will have a material impact on its results of operations,
financial position or cash flows.
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16. SUBSEQUENT EVENT
Subsequent to the year end, the Board of Directors of the Company approved for
issuance a total of 575,000 stock options to various employees and directors.
These stock options have not yet been issued.
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ALLURA INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(expressed in Canadian dollars)
March 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
17. ADMINISTRATIVE AND SELLING AND DELIVERY EXPENSES
Years Ended March 31 2007 2006 2005
- ------------------------------------------------------------------------------
Administrative
Alarm and security $ 8,517 $ 7,043 $ 5,484
Automobile 9,897 4,649 6,165
Bad debts (108,546) 127,180 140,692
Consulting -- -- 29,134
Insurance 294,717 258,105 311,145
Legal and accounting 256,728 157,618 122,203
Office and miscellaneous 241,638 329,783 301,915
Rent (Note 12(b)) 233,067 177,395 183,145
Salaries and wages 2,224,858 1,804,959 2,026,538
Telephone 51,044 39,890 38,082
Travel, meals and entertainment 76,175 44,345 83,693
----------- ----------- -----------
$ 3,288,095 $ 2,950,967 $ 3,248,196
=========== =========== ===========
Selling and delivery
Advertising $ 123,476 $ 61,304 $ 52,893
Freight and shipping 310,721 315,966 254,267
Sales commission 362,813 244,025 185,374
Selling 173,710 199,964 292,642
----------- ----------- -----------
$ 970,720 $ 821,259 $ 785,176
=========== =========== ===========
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Page 66 of 71
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., MacDonald Dettwiler and Associates Ltd.
and certain other parties thereto; ("incorporated by reference from
Exhibit 4.5 to the Annual Report on Form 20F for the fiscal year ended
March 31st 2003
4.6 Lease for Suite #100, 1 Valleybrook Drive, Toronto, Ontario,M3B 2S7,
between Roanne Holdings Limited and IBB International (Canada) Ltd and
Amendment to Lease Agreement relating to Suite #101, 1 Valleybrook Drive,
Toronto, Ontario.
4.7 Master Equipment Lease between HSBC Bank Canada and IBB International
(Canada) Ltd # 231891BC
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 and acting CFO.
13.1 Section 906 Certification by C.E.O and acting CFO.
Page 67 of 71
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 12, 2007.
/s/ "JEREMY BOWMAN"
- ------------------------------
Jeremy Bowman, President, CEO and Director
Page 68 of 71
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; ("incorporated by reference from
Exhibit 4.5 to the Annual Report on Form 20F for the fiscal year ended
March 31st 2003
4.6 Lease for Suite #100, 1 Valleybrook Drive, Toronto, Ontario and Amendment
to Lease re Suite #101 dated June 19, 2007:
4.7 Master Equipment Lease between HSBC Bank Canada and IBB International
(Canada) Ltd # 231891BC
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 and acting CFO
13.1 Section 906 Certification by C.E.O and acting CFO
Page 69 of 71