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, 2008
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)
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1555 West 8th Avenue, Vancouver, B.C., Canada, V6J 1T5
Telephone number: (604) 683-5700
Facsimile number (604) 683-5900
Contact Person: Sheila Bowman, Corporate Secretary
sbowman@ibbgold.com or Tel 604-683-5700 ext 337
(Address of Principal executive office)
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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, 2008: 5,080,150 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 [ ] No [X]
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 [ ]
Page 1 of 77
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 basis of accounting the registrant has used to
prepare the financial statements included in this filing:
US GAAP [ ] International Financial Reporting Other [X]
Standards as issued by the International
Accounting Standards Board [ ]
If "Other" has been checked in response to the previous question, indicate
by check mark which financial statement item the registrant has elected to
follow:
Item 17 [X] Item 18 [ ]
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 [X] No[ ]
Page 2 of 77
TABLE OF CONTENTS
Page
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PART I
Item 1. Identity of Directors, Senior Management and Advisers.............................. 4
Item 2. Offer Statistics and Expected Timetable............................................ 4
Item 3. Key Information.................................................................... 4
Item 4. Information on the Company......................................................... 11
Item 4A Unresolved Staff Comments.......................................................... 20
Item 5. Operating and Financial Review and Prospects....................................... 20
Item 6. Directors, Senior Management and Employees......................................... 29
Item 7. Major Shareholders and Related Party Transactions................................. 33
Item 8. Financial Information.............................................................. 36
Item 9. The Offer and Listing.............................................................. 36
Item 10. Additional Information............................................................. 37
Item 11. Quantitative and Qualitative Disclosures about Market Risk......................... 41
Item 12. Description of Securities other than Equity Securities............................. 42
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.................................... 42
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds....... 42
Item 15. Controls and Procedures............................................................ 43
Item 16A. Audit Committee Financial Expert................................................... 44
Item 16B. Code of Ethics..................................................................... 44
Item 16C. Principal Accountants Fees and Services............................................ 45
Item 16D. Exemption from the Listing Standards for Audit Committees.......................... 45
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers............. 45
Item 17. Financial Statements............................................................... 45
Item 18. Financial Statements............................................................... 73
Item 19. Exhibits........................................................................... 73
Signatures......................................................................... 74
Index to Exhibits Filed............................................................ 75
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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,
2008, 2007, 2006, 2005, and 2004. 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.
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 16.
The following tables set forth information in Canadian dollars unless
otherwise noted.
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2008 2007 2006 2005 2004
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Net Sales $20,908,902 $22,638,034 $17,719,672 $18,252,286 $16,114,338
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Gross Profit $ 6,241,152 $ 5,598,399 $ 4,067,365 $ 5,098,045 $ 3,957,544
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Net Income (Loss) $ 469,392 $ 200,272 $ (389,759) $ 322,708 $ 327,681
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Earnings (Loss) Per Common Share (a) $ 0.09 $ 0.04 ($ 0.08) $ 0.06 $ 0.06
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Outstanding Shares (a)(b)(c) 5,080,150 5,080,150 5,080,150 5,080,150 5,080,150
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Total Assets $17,498,048 $18,886,989 $16,276,552 $16,824,370 $11,539,964
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Working Capital $ 3,226,588 $ 2,708,789 $ 2,513,418 $ 2,936,292 $ 2,582,063
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Long Term Liabilities 154,249 $ 227,699 -- -- --
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Total Liabilities $14,077,951 $15,973,737 $13,563,572 $13,689,730 $ 8,728,032
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Non Controlling Interest -- -- -- -- --
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Shareholder's Equity $ 3,420,097 $ 2,913,252 $ 2,712,980 $ 3,134,640 $ 2,811,932
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Dividends declared per share $ 0.03 USD $ 0.03 USD --
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(a) Earnings per share are on a 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) At the Annual General Meeting of the Company ("AGM"), which took place on
September 26, 2007, Shareholders on record voted to round all fractional
shares held by individual Shareholders up to one whole share. As a result,
the Outstanding Shares of the Company were rounded up to a total of
5,080,150.
Dividends
In 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.
On November 30, 2007 the Company declared and paid a dividend of USD$0.03
to shareholders on record as at November 15, 2007
Subsequent to the year end on July 29, 2008, the Company declared a
dividend of USD$0.05 to shareholders on record as at July 31, 2008. This
dividend was payable on September 3, 2008
On each occasion when dividends were declared and paid, the Company's four
largest shareholders waived their rights to receive the 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, there is no guarantee that it will pay a dividend in
the near future.
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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 are based on rates
published on the Bank of Canada's Website. The Company 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 15, 2008 the month end closing rate per Bank of Canada was
$1.00 US = $1.0679 CDN
(b) The following table sets forth the intra-day high and low exchange rates for
each month during the previous six months per the Bank of Canada. It sets out
the exchange rate for one US Dollar expressed in terms of Canadian dollars for
the period indicated.
Rates of exchange are obtained from the Bank of Canada and believed by the
Registrant to approximate closely the noon buying rates in New York City for
cable transfers as certified for customs purposes by the Federal Reserve Bank in
New York.
Canadian Dollar/US Dollar
Month Low (1) High(1)
August 2008 1.0716 1.0237
July 2008 1.0274 0.9975
June 2008 1.0320 0.9948
May 2008 1.0245 0.9824
April 2008 1.0328 0.9998
March 2008 1.0295 0.9765
Note (1) high /Low Expressed in Canadian $ terms
(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, 2008 $1.0247**
March 31, 2007 $1.1524
March 31, 2006 $1.1574
March 31, 2005 $1.2161
March 31, 2004 $1.3284
**(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
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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 the
Company considers immaterial may also adversely impact or impair the Company's
business. If any of the following risks actually occur, the Company's 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 2008, the Company purchased gold and
silver products from over 80 suppliers, with the five largest suppliers
accounting for approximately 38% 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 70 suppliers, while the five
largest suppliers accounted for 74% of the Company's total 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 1% 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. On a combined product
basis i.e. gold, silver, diamond jewellery, loose stones and coloured stones,
the Company's five largest suppliers account for 41% 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 first 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.
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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 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's business is substantially dependent on the efforts and
abilities of Jeremy Bowman and Cameron Gillies, respectively, its Chief
Executive Officer and its President of the trading Companies. The loss of the
services of either or both of Messrs. Bowman and Gillies may have a material
adverse effect on the Company's business.
Although the Company has employment agreements with each of Messrs. Mr. Bowman
and Gilles, the agreements, subject to applicable non-compete and disclosure
provisions thereof which survive termination for specified periods, may be
terminated on written notice by either the Employee or the Company for any
reason not constituting a fundamental breach of the terms and/or conditions of
the employment agreement and without notice in the event of a fundamental breach
of the terms and/or conditions of the Agreement by the other party.
The Company does not maintain any key man life insurance on Mr. Bowman or Mr.
Gillies.
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 jewellery industry may have greater
financial and other resources than the Company. See "Information on the Company-
Business Overview - Competition."
The Company does not have any long-term contracts with its customers.
The Company has no long-term contractual relationships with any of its
customers, nor 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.
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 September 15, 2008, 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
Page 8 of 77
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 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 143,330 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.
In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person deemed to be one of the Company's affiliates, who has
beneficially owned restricted shares of our common stock for at least one year
is permitted to sell in a brokerage transaction, within any three-month period,
a number of shares that
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does not exceed the greater of 1% of the total number of outstanding shares of
the same class, or, if our common stock is quoted on a stock exchange, the
average weekly trading volume during the four calendar weeks preceding the sale,
if greater.
Rule 144 also permits a person who presently is not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of common stock for at least six
months to sell such shares without regard to any of the volume limitations
described above.
The possibility that substantial amounts of the Company's common stock may be
sold under Rule 144 into the public market may adversely affect prevailing
market prices for the common stock and could impair our ability to raise capital
in the future through the sale of equity securities.
Investors should be aware that sales under Rule 144, or pursuant to a
Registration Statement filed under the Act, might have a depressive effect on
the market price of the Company's Common Stock in any market that may develop
for such shares.
Since the Company is a Canadian corporation, it may be difficult for US
shareholders to effect service of process or to enforce judgments obtained in
the US.
The Company is a Canadian corporation. All of its directors and officers
are residents of jurisdictions other than the United States and a significant
part of its assets are, or will be, located outside of the United States. As a
result, it may be difficult for shareholders resident in the United States to
effect service within the United States upon the Company, and/or such directors
or officers who are not residents of the United States, or to realize in the
United States upon judgments of courts of the United States predicated upon
civil liability of any of the Company, or such directors or officers, under the
United States federal securities laws. The Company has been advised by its
Canadian counsel that there is substantial doubt as to whether Canadian courts
would (i) enforce judgments of the United States courts of competent
jurisdiction obtained against the Company, or such directors or officers,
predicated upon the civil liabilities provisions of such securities laws, or
(ii) impose liabilities in original actions against the Company or its directors
or officers predicated solely upon such securities laws. Accordingly, United
States shareholders may be forced to bring actions against the Company and its
directors and officers under Canadian law and in Canadian courts in order to
enforce any claims that they may have against the Company or its directors or
officers. Subject to necessary registration under applicable provincial
corporate statutes in the case of a corporate shareholder, Canadian courts do
not restrict the ability of non-resident persons to sue in their courts.
The Company's profitability may be affected by currency risk.
The Company is exposed to currency risk as 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.
Page 10 of 77
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.
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 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, 2008, the Company was in compliance
with the terms and covenants on this overdraft loan facility. However, there can
be no assurance that it will continue to meet all the terms and covenants in the
future.
Risk of the Navision software project not completing
The Company is in the process of working with contracted software
consultants/designers to write certain software modules as an add-on to the
current 0.5 version of Navision acquired by the Company in 2007. These modules
relate to the company's proprietary pricing, quotation and product receiving
processes. Once completed these modules will form part of the new software
package intended to be implemented in place of the current Access and Encore
programs being used by IBB International on an everyday basis for business
solutions. Additionally the new version will be used to update and replace the
Navision 0.4 version currently being used by Allura Diamonds. Given that these
modules are being custom written by outside consultants there is a risk that
they may either not be completed on a timely basis or at all. Further there is a
risk that the cost of completion will exceed that budgeted by the Board.
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
Page 11 of 77
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; while 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. During fiscal 2007, the Company opened a new office in Toronto to
undertake sales and marketing 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) 442 - 5500 and the fax number
is (416) 442 - 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 jewellery within the following principal sectors:
Department stores
Catalogue retailers
Mass merchants
Major discounters
Major jewellery retailers
Independent jewellery stores
During fiscal 2007, the Company acquired new business solution software to
integrate its operations and management systems. The first phase of
implementation was completed in fiscal 2007. The final phase of implementation
of this software is expected to be completed by fiscal 2009. The Company expects
the implementation of this software to result in cost and operating
efficiencies.
B. Business Overview
Current Operations
The Company conducts its jewellery 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. IBB's
sales are divided approximately 89% to major retail and jewellery store chains
and 11% to independent jewellery 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.
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The Activities of ADL
ADL was established in 1994 as a premier diamond house to market finished
diamond jewellery and loose diamonds. ADL currently specializes in finer diamond
jewellery.
ADL sales are divided approximately 53% to major retail and jewellery
store chains and 47% to independent jewellery stores. In 2002, ADL incorporated
the "Canadian Diamond" into its range of products. In 2004 ADL introduced 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 marketed a line of gemstone products to the independent jewellery stores
trademarked as Dreamcatchers(TM). During fiscal 2008, the Dreamcatchers(TM) line
was transferred to IBB for sale and distribution through its Vancouver office.
Subsequent to the year-end, ADL launched a new collection of diamond jewellery
featuring the Exquisite 81 by Allura. This special cut diamond has 24 more
facets than a traditional round brilliant cut diamond, which maximizes the fire
and brilliance of each stone. At present the Exquisite 81 by Allura is available
exclusively through independent jewellery retailers who are members of the
Canadian Jewellery Group Co-operative.
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 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 2008, 69% in fiscal 2007 and 61% in fiscal 2006. 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 2008, sales were made to
approximately 440 customers, with over 1700 retail locations, and with no single
customer accounting for more than approximately 25% of net sales. 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 Toronto, Canada. 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 jewellery 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
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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, jewellery 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
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 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 3,236 styles of chains, earrings,
bracelets and rings. The Company's products are moderately priced, with the
majority of its products retailing at prices between $25 and $600. 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 jewellery and plans to try and
expand sales in this area. The Company currently offers approximately 140 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 2008, 69%
in fiscal 2007 and 61% in fiscal 2006. The company has two customers in 2008
(2007: Two; 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.
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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 undertake sales and marketing functions of the Company. The primary
focus of the Toronto office is on the Company's largest customers (such
customers are 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's
President for the trading companies, namely IBB and ADL, is stationed in
Toronto, together with six 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. As a gesture of goodwill, the Company also provides a
stock balancing service from time to time, 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.
While the Company sold its products to approximately 440 customers in fiscal
2008, as mentioned previously, sales of the Company's six largest customers
accounted for approximately 69% of sales in fiscal 2008. 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 3,236 styles of chains,
earrings, bracelets and rings. In addition the Company carries approximately 385
loose diamonds and coloured stones of varying qualities and weights. The
Company's
Page 15 of 77
products are moderately priced, with the majority of its gold products retailing
at prices between $25 and $600 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 $990. 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 1,745 karat gold, 1,351
diamond and colored stone and 140 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
jewellery products for which there has been consistent demand. The Company
continually strives to update the balance of its product line with innovative,
new styles. New styles primarily are introduced at the beginning of each
calendar year, and replace older styles whose performance has declined. The
Company closely monitors sales of its new styles and promptly discontinues any
style that fails to achieve desired sales levels.
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 the Company is 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 reduced prices. Historically, the equivalent dollar amounts have
not been material. The Company estimates that during fiscal 2008, total melt
accounted for approximately $775,000 and were sold at the written down book
value. As at March 31, 2008 the Company had a total provision for inventory
obsolescence of $201,000 ($329,000:2007, $401,000: 2006).
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 jewellery without incurring
corresponding increases in product costs.
Page 16 of 77
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
jewellery, 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 jewellery 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 jewellery industry, as a whole, could be adversely affected,
which could impact the supply of diamonds to the Company.
During fiscal 2008, the Company purchased gold and silver products from over 80
suppliers, with the five largest suppliers accounting for approximately 38% 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
70 suppliers, while the five largest suppliers accounted for 74% of the
Company's total 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 1% 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. On a combined basis i.e.
in the gold, silver, diamond jewellery, loose stone and coloured stone areas,
the Company's five largest suppliers account for 41% 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 jewellery 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 jewellery 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
Page 17 of 77
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), 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 independents and an acceptable
portion of major customer receivables as determined and approved by the Board
with the exception of one major customer whom the Board has agreed that the
Company will self insure.
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, 2008, the Company employed forty three persons on a full time
basis. As at August 29, 2008, there were forty two persons employed on a full
time basis. The full time employees comprise of ten employees in finance and
administration, seventeen in sales and merchandising, and fifteen in inventory
warehouse. Four full time employees are employed in the Halifax office, seven
are employed in the Toronto office, and thirty one are employed in the Vancouver
office. As at August 29, 2008 the Company employed eleven 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.
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Governmental Regulation
The tax laws of the Federal Government of Canada and the Provinces of
British Columbia, Ontario and Nova Scotia are applicable to 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 at 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 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 $9,917 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, total monthly rent for the Toronto
premises increased by $813 to $6,097,
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.
In fiscal 2007, the Company upgraded its computer infrastructure with newer
technology and acquired new software, Microsoft Dynamics (Navision) for ADL. The
Company is in the process of upgrading its computer system to Navision for IBB.
When fully phased in, the Company expects these improvements to increase the
effectiveness and efficiencies of its operations. The capital cost of the
software purchased for ADL has been reflected as an obligation under capital
lease under Note 9 of the Company's financial statements.
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ITEM 4A. UNRESOLVED STAFF COMMENTS
The Company is a non accelerated filer as defined in Rule 12b-2 under the
Securities Exchange Act of 1934. There are no written comments which have been
provided by the staff of the Securities and Exchange Commission regarding the
Corporation's periodic reports under that Act during the fiscal year ended March
31, 2008 and there are no unresolved comments as of the date of the filing of
this Annual Report with the Commission.
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 2008 v. Fiscal 2007
Sales for the fiscal year ended March 31, 2008 ("Fiscal 2008") were $20,908,902
compared to $22,638,034 for the fiscal year ended March 31, 2007 ("Fiscal
2007"), a decrease of $1,729,132 or 7.6%. The decrease is mainly due to the
following factors:
o The volatility in the gold market in general has adversely affected
our sales, especially to our independent customers.
o In prior year, the Company obtained new diamond programs with two
major customers and significant sales were generated from the
initial roll-out of these programs.
o The Company has seen a higher level of sales returns, especially
from some of our Majors customers.
The Company expects to see moderate growth in overall sales volumes in fiscal
2009, with an increase of 5% projected as compared to fiscal 2008.
Cost of sales for Fiscal 2008 was $14,667,750 with a gross margin of 29.8%
compared to $17,039,635 with a gross margin of 24.7% for Fiscal 2007. A number
of factors contributed to the higher profit margin:
o Foreign exchange gain from inventory purchases due to the weakening
of the USD during the year ($153k);
o Recovery of vendor rebates overcharged by certain Majors in prior
years ($188k)
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 $265,616 compared to $310,721 in the
prior year.
General administrative costs increased by $381,194 or 12% from $3,157,284
in Fiscal 2007 to $3,538,478 in Fiscal 2008. The increase in administrative
expenses over prior year is primarily a result of:
o Significant higher salaries and wages ($202k), as a result of the
hiring of some senior executives; and the overall salary increment
to staff. Included in salaries and wages is also the stock-based
compensation expense amounting to $65k, relating to options issued
during the year
o Increase in consulting expenses ($111k), which mainly consist of
recruitment fees paid on the hiring of a few new staff; SOX
consulting fees; and higher directors' fees incurred in 2008
Page 20 of 77
o Bad debt expenses were $43k, compared to a credit balance of $109k
in prior year. There were significant bad debt
recoveries/write-backs in fiscal 2007.
o Lower legal and accounting expenses, and travel and telephone costs
partially offset the large increase
Overall, as a percentage of sales, administrative expenses increased to 16.9% in
2008 from 13.9% in 2007.
Selling and delivery expenses increased slightly by $20,679 or 1.9% to
$1,122,210 in Fiscal 2008 from $1,101,531 in fiscal 2007. Due to the lower sales
level, freight and shipping, sales commission and display costs decreased, by
approximately $45k, $35k and $118k, respectively. On the other hand, fines and
penalties charged by Majors, marketing and promotion expenses, gold overbilling
rebates, and salaries and wages all increased, by approximately $37k, $40k, $83k
and $79k, respectively.
Overall, as a percentage of sales, selling and delivery expenses increased to
5.4% from 4.9% in 2007.
Interest and bank charges for Fiscal 2008 increased $53,609 or 5.6% to
$1,018,242 when compared to the Fiscal 2007 amount of $964,633. The Company
continued to rely on its increased banking facilities throughout fiscal 2008.
The average balance in its bank line increased during fiscal 2008 by $729,000.
Although inventory levels were mostly lower than prior year throughout the
current fiscal, many suppliers have shortened their payment terms. In addition,
the Company also encountered several payment issues during the current year with
a few of our major customers, which had increased our reliance on the bank
overdraft. The average interest rate paid by the Company for its banking
facilities increased from 6.98% in Fiscal 2007 to 7.02% in Fiscal 2008.
The Company had a net income before recovery of income taxes of $441,154
for the current year, as compared to a net income before provision for tax of
$294,741 for fiscal 2007. The increase in net income is a result of higher gross
profit for the current year.
Tax expense or recovery is determined by entity-based results. Tax
recovery for the current year is comprised of two portions. In 2007, 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. During the current year,
the Company filed an objection notice on the reassessment and claimed for a
refund of the full amount assessed. The CRA accepted the appeal and reversed the
full amount assessed, including interest and penalties. The tax recovery is
partially offset by a tax expense of $48,231, which is the estimated provision
for income taxes for Allura International Inc. for the current year. As
disclosed in Note 8 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.
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 the Company 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.
Page 21 of 77
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 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 excise 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, the Company 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 $280,272 or 34% to $1,101,531
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 more
on advertising in 2007, 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.
o Opening of the sales office in Toronto - additional salaries and
wages of $130,811.
Overall, as a percentage of sales, selling and delivery expenses increased to
4.9% 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.
Page 22 of 77
The Company had a net income before provision for income taxes of
$294,741. This represents a 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
Page 23 of 77
expenses as the amounts are not material. Purchasing and receiving costs
approximate $48,000 (2005: $48,000) and warehousing costs approximate $16,000
(2005: $16,000).
The Company's gross margin may not be comparable to others as the costs of
freight and shipping are included in our selling, general, and administrative
expenses. Freight and shipping totaled $315,966 compared to $254,267 in the
prior year.
General administrative costs decreased by $297,229 or 9% from $3,248,196
in Fiscal 2005 to $2,950,967 in Fiscal 2006. The changes were primarily a result
of
o Salary and Wages: a decrease in salaries and wages by $221,579 or
11%. The decrease is result of two senior finance position being
eliminated and decrease in temporary staffing. Shortly after fiscal
2006 year end, the Company's corporate accountant and controller
resigned; their positions were not replaced as the work was
reallocated to junior accounting staff and the CFO and new junior
clerks. During Fiscal 2005, the Company had increased its temporary
staffing during the third and fourth quarter to manage and roll out
new programs and these additional staff was not recalled in fiscal
2006. Included in salaries and wages are the labour costs of the
purchasing and receiving staff which were approximately $48,000
(2005: $48,000).
Selling and delivery expenses increased by $36,083 or 5% to $821,259 in
Fiscal 2006 from $785,176 in fiscal 2005, as a result of:
o Freight and Shipping - in addition some of the Company's new
customers have multiple locations requiring drop shipments. The
company does not charge back the costs of shipping except for small
deliveries. The amount of such charges amount to less than $15,000
annually.
o Sales Commission - increased in fiscal 2006 due to additional sales
representative hired for one of its territory previously covered by
the National Sales manager.
Interest and bank charges for Fiscal 2006 increased $185,519 or 34% to
$752,518 when compared to the Fiscal 2005 figure of $562,999. The Company
continued to rely on its increased banking facilities from the 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 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.
Page 24 of 77
B. Liquidity and capital Resources
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 $72,600 at March 31, 2008 (2007: $57,600, 2006:
$52,600)) and the original proceeds received under the unit offering ($500,000).
The common share put options were outstanding as at September 15, 2008.
The Company has presented its obligation under this put as a current
liability as disclosed in Note 10.
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 (2007: $11,000,000). The
Company also has available an annual $1,100,000 (2007: $1,100,000) bulge (a
temporary increase in the credit facilities limit) from July 1 to December 31
each year (the "Annual Seasonal Bulge").
In fiscal 2007, the Company also had an additional $1,400,000 one time bulge in
effect March 31, 2006 to March 31, 2007 (the "OneTime Bulge").
During fiscal 2008, the demand overdraft loan facilities totaling $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. The Annual Seasonal Bulge was then further extended to
February 28, 2008 and increased to $1,750,000, both on a one-time basis.
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, May 28, 2007, October 30, 2007 and December 18, 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 $4,400,000 (2007: $4,000,000) for the
period of January 1 - June 30 Annually, including a $1,800,000
(2007: $1,500,000) sub-limit for Allura Diamonds Limited and
increased to $4,950,000 (2007: $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 December 31, 2007); plus
o 50% of consignment inventory limited to a maximum of $1,700,000
(2007: $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
Page 25 of 77
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 (2007: $1,000,000) and prime plus 1% on the
balance. The prime interest rate on these loans at year-end was 5.25% (Fiscal
2007: 6.0%) and 4.75% as at August 29, 2008. 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 (2007: $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 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.
Upon expiry, this letter of credit was allowed to lapse.
Under the terms of the demand overdraft loan facilities, the Company must
maintain a Debt to Tangible Net Worth ratio not exceeding 3.0 to 1 (2007: 2.5 to
1) and Ratio of Current Assets to Current Liabilities not less than 1.3 to 1
(2007: 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 it did not constitute a waiver nor did it
prejudice any of the bank's other rights and remedies under the facilities.
As at March 31, 2008, the Company was in compliance with these covenant ratio
requirements.
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. For the year ended March 31,
2008, the combined overdraft loan amounted to $10,408,813.
Accounts Receivable
The Company's account receivables net of allowances for doubtful accounts
as at March 31, 2008 were $3,193,640. The balance in accounts receivable
represented 15.3% of net sales for Fiscal 2008.
Inventory
The Company's inventory as at March 31, 2008 was $13,510,621 or 64.6% of
net sales for Fiscal 2008 compared to $13,532,378 or 59.8% of net sales for
Fiscal 2007. 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,
2007 and 2008, 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
Page 26 of 77
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, 2007 and 2008. ADL continues to expand and develop its product
line to increase selection and availability in the market place. The Company
made efforts during the current year to reduce its level of inventory by sending
old stock to gold melt, and reducing the consignment inventory through programs
buy-out (i.e., by discontinuing certain consignment programs and invoicing for
the on-hand units of the related inventory) and clearing of discontinued items.
As a result, inventory level was significantly lower than prior year throughout
most of the year. However, it increased significantly close to the year-end due
to large purchases made in March 2008. In addition, a larger provision for goods
returns was also made for the current year as compared to prior year.
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.
Accounts Payable and Accrued Liabilities
The Company's accounts payable and accrued liabilities as at March 31,
2008 were $3,349,012 compared to $3,931,860 for Fiscal 2007. 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 2007, 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.
Stock Options
On October 29, 2007, the Company authorized the issuance of 545,000 Stock
Options at an exercise price of USD $0.53 (with a Canadian Equivalent Exercise
price as at that date of $0.51). The vesting date for these Options was November
30, 2007, while the expiry date is November 30, 2012.
For the year ended March 31, 2008, the total compensation expense related to the
fair value of the stock options issued was $64,860 (2007: $Nil). This amount has
been credited to contributed surplus. The fair value of these stock options was
determined using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividends are to be paid; expected volatility
of 36%; risk-free rate of 4.1% and expected life of 2 years.
Capital Commitments
Except for anticipated aggregate lease payments for both IBB and ADL of
approximately $472,000 over the next four years, the Company has no other
significant capital commitments as of August 29, 2008. The second and final
phase of the Navision implementation project has a budgeted spending of
approximately $180,000, with the majority of the spending to occur during fiscal
2009. However, the Company has not entered into any formal contract in this
regard. 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 16 to the Company's consolidated financial
statements.
Page 27 of 77
C. Research and Development, Patents and Licenses, etc.
The Company does not conduct research and development and holds no patents
or licenses.
D. Trend Information
See "Item 4. - Information on the Company, - Part B., Business Overview"
E. Off-Balance Sheet Arrangements
There are no known significant off-balance sheet arrangements other than those
disclosed in Item 10 Section 3 under "Investment Agreement" and as disclosed in
Note 11 of the Company's audited consolidated financial statements for the year
ended March 31, 2008.
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, 2008 by the year that they
become due. The Company expects to fund these obligations from operating income
and equity/debt financing:
Payments due by period
------------------------------------------------------------------
Less than 1 1-3 More than 5
Contractual Obligations Total year years 3-5 years years
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Debt Obligations $10,408,813 $10,408,813 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations $ 249,652 $ 85,571 $164,081 --
- ---------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $ 471,584 $ 198,823 $260,353 $ 12,408 --
- ---------------------------------------------------------------------------------------------------------------------
Purchase Obligations -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under the GAAP of the
primary financial statements -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total $11,130,049 $10,693,207 $424,434 $ 12,408 --
- ---------------------------------------------------------------------------------------------------------------------
G. Safe Harbor
Some of the information in this report contains forward-looking statements.
Forward-looking statements represent the Company's current expectations or
forecasts of future events and are based on 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.
Page 28 of 77
Any or all of the Company's forward-looking statements in this Form 20-F
may turn out to be wrong. They can be affected by inaccurate assumptions or by
known or unknown risks and uncertainties. Many of these factors, including the
risks outlined under "Risk Factors," will be important in determining the
Company's 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. The
Company's forward-looking statements speak only as of the date made. Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. All forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
foregoing cautionary statement.
H. Legal Proceedings
As at September 15, 2008, 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 of the
directors, executive officers and key employees of the Company as of September
15, 2008.
On September 30th, 2008, the Directors on the Board of Directors will be
re-nominated to stand for election to the Board. Additionally Randolph Price
will stand for nomination to the Board as an additional member.
Position Held
Name Age Positions Since
- ---------------------------------------------------------------------------------------------
Jeremy Bowman 57 Director, CEO of Allura International Inc. 1988
- ---------------------------------------------------------------------------------------------
Sheila Bowman 50 Director, Secretary, and Treasurer of Allura
International Inc., and Corporate Secretary 1988
- ---------------------------------------------------------------------------------------------
Frank Kovacs 55 Director 1998
- ---------------------------------------------------------------------------------------------
Thomas Weckman 54 Director and V.P. of Allura Diamonds Limited 1994
- ---------------------------------------------------------------------------------------------
Tina
VanderHeyden 56 Director 1999
- ---------------------------------------------------------------------------------------------
Dave Wall 57 Director 2003
- ---------------------------------------------------------------------------------------------
Cameron Gillies 58 President of the Trading companies (1) 2006
- ---------------------------------------------------------------------------------------------
Lan Shangguan 38 CFO(2) 2007
- ---------------------------------------------------------------------------------------------
Randolph Price 61 (3)
- ---------------------------------------------------------------------------------------------
Page 29 of 77
Notes:
(1) Appointed President of Trading companies, namely IBB International
(Canada) Ltd and Allura Diamonds Limited, effective April 1 2008
(2) Appointed CFO effective May 8 2008
(3) Nominee for Director in the upcoming AGM of the company on Sept 30
2008.
Jeremy Bowman has been the 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. He was appointed acting CFO on June 30, 2007,
however the appointment was rescinded on April 21, 2008, pending the appointment
of Lan Shangguan as CFO.
Sheila Bowman has been the Secretary and Treasurer and a Director of the Company
since 1988. She was further appointed Corporate Secretary in December 2007. She
is the current Audit Chair In addition she is 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.
Randolph C Price Mr. Price is a Principal of RC Price and Associates and is a
tax consultant with PricewaterhouseCoopers LLP. He also serves as the
Commissioner with the First Nations Tax Commission and is a member of its audit
committee. Prior to his retirement, Mr. Price was the Vice President of
Corporate Tax with Duke Energy Corporation. He also served as the
Chairman/President of the Taxation Committee of the Canadian Energy Pipeline
Association, the Taxation Committee of the Canadian Gas Association and the Tax
Executives Institute, Vancouver Chapter. Mr. Price received his professional
designation as a Chartered Accountant in Manitoba in 1972.
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 is President of T. VanderHeyden Associates Inc, and has
served on the Company's Board of Directors since 1999. She is also a Director
for The Canadian Film Centre in Toronto and serves on several Boards including
S2C Global Systems Inc.
Dave Wall has been a Director since September 30, 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.
Cameron Gillies joined the Company in October 2006 as Senior Vice
President. Effective April 1, 2008 Cameron Gillies was appointed President of
the trading companies; namely IBB International (Canada) Ltd and Allura Diamonds
Limited. Together with his duties as President, he is currently responsible for
sales and marketing for the Company, and management of the Halifax and Toronto
offices.
Lan Shangguan joined the Company as VP Finance in March, 2007. She was
appointed CFO effective May 8, 2008. 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 CEO.
She received her Australian CPA designation in 1996 and her Chartered Accountant
designation in British Columbia in 2002.
Page 30 of 77
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. Directors are nominated
annually at the AGM by the Board of Directors to 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 (Equivalent to 100,000 in
accordance with consolidation) Common Shares in the Company. As at September 15,
2008, 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 and Cameron Gillies, respectively, its Chief Executive Officer
and President of the Trading Companies. The loss of the services of either or
both of Messrs. Bowman and Gillies may have a material adverse effect on the
Company's business.
Although the Company has employment agreements with each of Messrs. Mr. Bowman
and Gilles, the agreements, subject to applicable non-compete and disclosure
provisions thereof which survive termination for specified periods, may be
terminated on written notice by either the Employee or the Company for any
reason not constituting a fundamental breach of the terms and/or conditions of
the employment agreement and without notice in the event of a fundamental breach
of the terms and/or conditions of the Agreement by the other party.
B. Compensation outstanding
The Company paid aggregate compensation of $688,160, $514,000 and
$492,000, to all directors and officers as a group during the fiscal years ended
March 31, 2008, 2007, and 2006, for services in all capacities. There were no
funds set aside by the Company during the fiscal year ended March 31, 2008 to
provide pension, retirement or similar benefits for officers or directors.
In October, 1999, the Company approved the terms of the 2000 Employee Stock
Option Plan. On October 29, 2007, the Board granted a total of 545,000 Options
with a vesting date of November 30, 2007 and an expiration date of November 30,
2012. Out of the total 545,000 options granted, 395,000 were granted to
directors and officers as a group. As at March 31, 2008, none of the options
have been exercised. Each option is convertible into one share of the Company's
common stock. The options have an exercise price of CDN$0.51. As at March 31,
2008, the options had a weighted average fair value of $0.12 and a weighted
average remaining life of 4.67 years.
The Company has a standard arrangement for the payment of fees to three
directors of the Company for acting in such capacity. Directors are reimbursed
for all expenses necessary for travel and attendance at meetings. During fiscal
2008, a total payment of $17,790 was made to directors for acting in such
capacity, which amount has been included in the aggregate compensation disclosed
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. Directors are re-nominated and
elected annually by shareholders at the Annual General Meeting of the Company.
Officers are elected annually or as often as may be required, 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.
Page 31 of 77
The Board of Directors has elected members to an Audit Committee and a
Compensation and Human Resource Committee.
The Audit Committee is comprised of the following members as at September
15, 2008: Sheila Bowman, Frank Kovacs, Tina VanderHeyden and Dave Wall. The
Audit Committee chair is currently Sheila Bowman. However, should the nomination
and election of Randolph Price as a Director be successful during the AGM of the
company on Sept 30 2008, the intention is that as an independent member of the
committee, he will be appointed Audit Chair with immediate effect.
The Audit Committee holds meetings four times a year and its primary
mandate is to facilitate the Company's corporate governance and protect the
interest of shareholders by overseeing the financial reporting process and
monitoring the responsibilities of the Company's management team as well as its
Board of Directors.
The Compensation and Human Resource Committee is comprised of the
following members as at September 15, 2008: 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, 2008, the Company employed forty-three persons on a full time
basis. As at August 29, 2008, there were forty two persons employed on a full
time basis. The full time employees comprise of ten employees in finance and
administration, seventeen in sales and merchandising, and fifteen in inventory
warehouse. Four full time employees are employed in the Halifax office, seven
are employed in the Toronto office, and thirty one are employed in the Vancouver
office. As at August 29, 2008 the Company employed eleven 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 VP of Finance to provide oversight
and undertake management duties for the Finance and Accounting department.
Effective May 8, 2008, this executive employee was appointed to the position of
CFO.
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. Effective April1, 2008 this executive employee
was appointed President of the Trading Companies.
As at October 4, 2006, the Company employed a Corporate Accountant to
undertake responsibilities in the finance and accounting department. This
employee has since been appointed to the position of Finance Manager.
During Fiscal 2008, on average the Company employed 12 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.
Page 32 of 77
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
o 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
15, 2008, concerning (i) persons and companies that own of record or are known
by the Company to own beneficially, directly or indirectly, more than 5% of the
outstanding Common Shares and (ii) beneficial ownership of outstanding Common
Shares by all directors and executive officers of the Company.
Number of Shares
Beneficially or Directly Percentage of
Name of Shareholder Owned Class
- ---------------------------------------------------------------------------------------------
International Bullion & Metal Brokers Ltd.(1) 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%
- ---------------------------------------------------------------------------------------------
Executive Officers and Directors as a group (6) 4,363,381 85.89%
- ---------------------------------------------------------------------------------------------
(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 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 CEO and a Director.
(4) Sheila Bowman is the Corporate Secretary as well as Secretary and
Treasurer, a Director of the Company and the Chair of the Audit Committee.
(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 Capital Inc. 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.
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. However, on October 29, 2007,
the Company authorized the issuance of a total of 545,000 Stock Options at an
exercise price of USD $0.53 (with a Canadian Equivalent Exercise price as at
that date of $0.51) as detailed in Note 10 of the Audited Financial Statements
for the Year ended March 31, 2008, presented under Item 17 of this form. The
vesting date for these Options was November 30, 2007, while the expiry date is
November 30, 2012. Out of the 545,000 options issued, 395,000 were issued to
directors and officers as follows:
Page 33 of 77
Number of Total Shares Percentage of
Number of Shares Options held and Class (Includes
Name of Shareholder Beneficially or Beneficially or Options Shares and
Directly Owned Directly Owned Granted Options)
- -------------------------------------------------------------------------------------------------------
International Bullion & Metal 2,083,334 0 2,083,334 37.04%
Brokers Ltd.(1)
- -------------------------------------------------------------------------------------------------------
Bowman Family Trust ("Trust")(2) 1,775,000 0 1,775,000 31.55%
- -------------------------------------------------------------------------------------------------------
Jeremy C. Bowman(3) 154,167 175,000 329,167 5.85%
- -------------------------------------------------------------------------------------------------------
Sheila P. Bowman(4) 154,167 45,000 199,167 3.54%
- -------------------------------------------------------------------------------------------------------
Thomas Weckman(6) 83,334 70,000 153,334 2.73%
- -------------------------------------------------------------------------------------------------------
B.D.C Capital Inc(5) 113,379 0 113,379 2.02%
- -------------------------------------------------------------------------------------------------------
Lan Shangguan (7) 0 30,000 30,000 (**)
- -------------------------------------------------------------------------------------------------------
Cameron Gillies (8) 0 30,000 30,000 (**)
- -------------------------------------------------------------------------------------------------------
Dave Wall 0 15,000 15,000 (**)
- -------------------------------------------------------------------------------------------------------
Tina VanderHeyden 0 15,000 15,000 (**)
- -------------------------------------------------------------------------------------------------------
Frank Kovacs 0 15,000 15,000 (**)
- -------------------------------------------------------------------------------------------------------
Executive Officers and Directors 4,363,381 395,000 4,758,381 84.59%
as a group (11)
- -------------------------------------------------------------------------------------------------------
(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 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 CEO and a Director.
(4) Sheila Bowman is the Corporate Secretary as well as the Secretary and
Treasurer, a Director of the Company and the Chair of the Audit Committee.
(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) Lan Shangguan joined the Company as V.P Finance in March of 2007. She was
appointed CFO effective May 8, 2008.
(8) Cameron Gillies joined the Company in October 2006 as Senior Vice
President. Effective April 1, 2008 Cameron Gillies was appointed President
of the trading companies; namely IBB International (Canada) Ltd and Allura
Diamonds Limited.
(9) (**) Less than 1% of class
As at September 15, 2008, 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
Page 34 of 77
percentage of Common Shares so held in the United States.
Total Number Number of US Number of US Percentage of Class
Registered Registered Holders Common Shares
- --------------------------------------------------------------------------------
115 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 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,
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 (after consolidation equivalent to 100,000 shares), the Company
is 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.
Page 35 of 77
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.
o 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 Note 13 to the Company's
audited financial statements, or in any proposed transaction, since the
beginning of the Company's last fiscal year up to the date of the Report.
o 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.
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 paid its first dividend on September 8, 2005 to all
shareholders on record as at September 6, 2005. The dividend was for USD$.01 per
share (Equivalent to USD$.03 after consolidation). On November 30, 2007, the
Company paid a second dividend of USD$0.03 to shareholders on record as at
November 15, 2007. Subsequent to year end on July 29, 2008, the Company declared
a dividend of USD$0.05 to shareholders on record as at July 31, 2008. This
dividend was payable on September 3, 2008.
On each occasion that dividends were declared and paid the Company's four
largest shareholders waived the right to receive the 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
Page 36 of 77
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. Markets.
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. 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.D. is not applicable to this report.
E. 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.E. is not applicable to this report.
F. 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.F. is not applicable to this report.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
This Form 20F is being filed as an Annual Report under the Securities
Exchange Act of 1934, and accordingly, the information called for by this Item
10.A. is not required.
B. Memorandum and Articles of Association
The Company's Certificate of Incorporation, Bylaws, Articles of Amendment,
Certificate of Amendment and Certificate of Change of Name which were included
as Exhibits 1.1, 1.2, 1.3, 1.4 and 1.5, respectively, to the Company's
Registration Statement on Form 20-F, file number 030228, as amended, are hereby
incorporated by reference.
There is no limitation imposed by Canadian law or by the constituent
documents of the Company on the right of a non-resident to hold or vote common
Shares (the "Voting Shares"), other than are provided in the Investment Canada
Act (Canada) (the "Investment Act"), as amended by the World Trade Organization
Agreement Implementation Act (the "WTOA Act"). The Investment Act generally
prohibits implementation of a reviewable investment by an individual,
government, or agency thereof, corporation, partnership, trust or joint venture
that is not a "Canadian", as defined in the Investment Act (a "non-Canadian"),
unless, after review, the minister responsible for the Investment Act is
satisfied that the investment is likely to be of net benefit to Canada. An
investment in the Voting Shares of the Company by a non-Canadian (other than a
"WTO Investor", as defined below) would be reviewable under the Investment Act
if it were an investment to acquire control of the Company and the Company was
not, immediately prior to the implementation of the investment, controlled by a
WTO Investor, and the value of the assets of the Company were $5.0 million or
more. An investment in Voting Shares of the Company by a WTO Investor would be
reviewable under the Investment Act if it were an investment to acquire direct
control of the Company, and the value of the assets of the Company equaled or
exceeded $179 million (threshold amount for 1998). A non-Canadian, whether a WTO
Investor or otherwise, would acquire control of the Company for purposes of the
Investment Act if he or she
Page 37 of 77
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 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,
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 is 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.
Page 38 of 77
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 $72,600 as at March 31st 2008, 2007: $57,600, 2006:
$52,600, 2005: $64,000,) and the original proceeds received under the unit
offering ($500,000). The common share put option was still outstanding as at
September 15, 2008.
Capital Lease
Towards the end of fiscal 2007, 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 which approximates its estimated useful life. The Capital Lease Obligation
for the term to 2011 is $227,668 (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 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 27, 2002, the Company leased an office in Halifax on a five year
fixed term starting July 1, 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 went up by $813 per month
to $6,097 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.
Page 39 of 77
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 backup withholding rules, which would require
withholding at a rate of 20% on dividends and interest paid to certain United
States persons who have not provided the Company with a taxpayer identification
number.
Gains derived from a disposition of Common Shares by a non-resident
shareholder will be subject to tax in Canada only if not less than 25% of any
class of Common Shares was owned by the non-resident shareholder and/or persons
with whom the non-resident did not deal at arm's length at any time during the
five year period immediately preceding the disposition. In such cases, gains
derived by a U.S. shareholder from a disposition of Common Shares would likely
be exempt from tax in Canada by virtue of the Canada-U.S. tax treaty, provided
that the U.S. shareholder has not resided in Canada in the ten years immediately
preceding the disposition.
This discussion is not intended to be, nor should it be construed to be,
legal or tax advice to any holder or prospective holder of Common Shares and no
opinion or representation with respect to the United States federal income tax
consequences to any such holder or prospective holder is made. Holders and
prospective holders of Common Shares are urged therefore to consult their own
tax advisors with respect to their particular circumstances.
F. Dividends and Paying Agents
This Form 20F is being filed as an Annual Report under the Securities Exchange
Act of 1934, accordingly the information called for by this Item 10.F. is not
required.
G. Statement by Experts
This Form 20F is being filed as an Annual Report under the Securities Exchange
Act of 1934, accordingly the information called for by this Item 10.G. is not
required.
Page 40 of 77
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 the Company files with the
Securities and Exchange Commission in accordance with the Securities Exchange
Act of 1934 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.
At March 31, 2008 and 2007, the Company's accounts payable and accrued
liabilities included the following foreign currency denominated amounts:
2008 2007
----------- -----------
U.S. $ 1,840,630 $ 2,512,552
Euro 210,774 185,757
GBP 493 9,499
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
$115,000 in interest cost in fiscal year 2008. 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.
Page 41 of 77
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.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
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 2009. For the year ended March 31, 2008, the
combined overdraft loan amounted to $10,408,813. The demand overdraft loan
agreement facility was renewed on April 4, 2007 May 28, 2007, October 30, 2007
and December 18, 2007.
The terms of the demand overdraft loan agreement facility requires the
Company to maintain certain covenants which include Debt to Tangible Net Worth
and Current Ratios. These covenants are amended from time to time by the bank.
As at March 31, 2008, the Company was in compliance with the terms and
covenants on this overdraft loan facility. However, there can be no assurance
that it will be in the future.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
Page 42 of 77
ITEM 15. CONTROLS AND PROCEDURES
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods are subject to the risk that controls may become inadequate because of
changes in conditions in the future.
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Act is
accumulated and communicated to the issuer's management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
The Company has evaluated, under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer,
the effectiveness of its disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act, as of March 31, 2008. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective
as of March 31, 2008.
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting and for the assessment of the
effectiveness of internal controls over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of,
the CEO and CFO, or persons performing similar functions, and effected by the
issuer's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
As of the end of the period covered by this report, the Company's management,
including the principal executive officer and principal financial officer,
completed our evaluation of the effectiveness of our internal control over
financial reporting, which the Company had been conducting based on the criteria
for effective internal control over financial reporting described in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treasury Commission ("COSO").
Management completed its assessment of internal control over financial reporting
("ICFR"), and has identified no material weaknesses that existed in the design
or operation of our internal control over financial reporting. The Public
Company Accounting Oversight Board has defined a material weakness as a
"deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis".
During the audit of the 2007 financial statements, the Company's management and
auditors identified several material weaknesses in internal controls over
financial reporting. Over the course of the current year, management took
measures to either eliminate these deficiencies or implemented compensating
controls to reduce their degree of severity. Below is a summary of the steps
taken:
Recording Journal Entries - It was noted that the recording of journal entries
was not restricted to appropriate people and journal entries were not always
reviewed prior to posting. During the year, hired an additional accounting staff
member which allowed better segregation of duties in this regard. The Company
also reassigned the system access rights so as to remove senior finance
personnel from being able to post journal entries.
Page 43 of 77
Inventory Costing - It was noted in the prior year that there was no
documented/consistent process to monitor inventory costs variances and further
that there was no regular review to ensure rates for certain standard costs
components remain appropriate. During the current year, the Company implemented
procedures to review and approve cost variances. The process of reviewing and
revising standard costs component rates remains an annual exercise due to its
labour intensive nature. However, the Company has initiated regular management
reporting on key performance indicators, which acts as a compensating control in
this area.
Bank Reconciliations - In the prior year, bank reconciliations were not
performed on a timely basis. Furthermore, due to staff constraints, this
function was not reviewed by an independent person. This issue has been fully
rectified during the year. The Company hired an additional accounting staff
member, which allowed proper segregation of duties in this area. All bank
accounts are reconciled on a monthly basis.
Accounts Receivable - It was noted in the prior year that customers' accounts
had not been regularly reviewed and thus issues had not been followed up and
resolved in a timely manner. Procedures have been implemented to ensure customer
accounts are reviewed and issues are followed up on a regular basis.
IT Observations - It was noted that an excessive number of users have been
granted with "System Admin" equivalent privilege. The Company carried out a
complete review of the user groups set up during the year and made modifications
to ensure proper segregation of duties, including removing a number of "System
Admin" users. In addition, an in-house IT technician has been hired which
allowed us to remove certain accounting personnel from IT functions.
In summary, management was effective in eliminating all the above material
weaknesses identified in the prior year. Management is aware that there remain a
number of deficiencies in the internal controls system of lesser severity and
will continue to seek measures to improve our overall internal controls.
This annual report does not include an attestation report of our
independent registered chartered accountants regarding the effectiveness of
internal control over financial reporting. The effectiveness of internal control
over financial reporting was not subject to attestation by the Company's
independent chartered accountants pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
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 Charter 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 Sheila Bowman is Chair of the Audit Committee. However, it is intended
that Randolph C. Price will be asked to assume the position, should his
appointment to the Board at the upcoming AGM on Sept 30, 2008 be successful. Mr.
Price possesses the qualifications necessary for a financial expert under the
definitions of the Sarbanes Oxley Act of 2002.
ITEM 16B. CODE OF ETHICS
The Company is currently adopting a formal "Code of Ethics" however it has
not yet been Board Approved The Company does however 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;
Page 44 of 77
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. Formal documents stating the
Company's Corporate Governance policies are in place, as are Charters for the
Board of Directors, the Audit Committee and the Compensation and Human Resource
Committee
ITEM 16C. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
2008 2007 Aggregate Fees
- --------------------------------------------------------------------------------
Audit fees $ 123,500 $ 131,500 $ 255,000
- --------------------------------------------------------------------------------
Audit related fees $ 8,000 $ 10,350 $ 18,350
- --------------------------------------------------------------------------------
Tax fees $ 13,200 $ 22,050 $ 35,250
- --------------------------------------------------------------------------------
Other fees $ 2,200 $ 0 $ 2,200
- --------------------------------------------------------------------------------
Total Fees $ 146,900 $ 163,900 $ 310,800
- --------------------------------------------------------------------------------
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 16 to the audited 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 45 of 77
Allura International Inc.
Consolidated
Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
Page 46 of 77
Contents
Page
-----
Report of Independent Registered Chartered Accounting Firm 48
Consolidated Balance Sheets 49
Consolidated Statements of Operations 50
Consolidated Statements of Cash Flows 51
Consolidated Statements of Shareholders' Equity 52
Notes to the Consolidated Financial Statements 53-72
Page 47 of 77
[GRANT THORNTON LOGO]
Report of Independent Registered
Chartered Accounting Firm
Grant Thornton LLP
Suite 1600, Grant Thornton Place
333 Seymour Street
Vancouver, BC
V6B 0A4
T (604) 687-2711
F (604) 685-6569
www.GrantThornton.ca
To the shareholders of Allura International Inc.
We have audited the accompanying consolidated balance sheets of Allura
International Inc. as of March 31, 2008, and 2007 and the related consolidated
statements of operations, cash flows, and shareholders' equity for each of the
years ended March 31, 2008, 2007 and 2006. 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, 2008 and 2007 and the results of its operations and its
cash flows for each of the three years ended March 31, 2008, 2007 and 2006 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 16 to the consolidated financial statements.
Vancouver, Canada /s/ Grant Thornton LLP
July 30, 2008 Chartered Accountants
Audit o Tax o Advisory
Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd
Page 48 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Consolidated Balance Sheets
(expressed in Canadian dollars)
March 31
2008 2007
- ---------------------------------------------------------------------------------------------
Assets
Current
Cash $ 303,752 $ 191,386
Receivables, net (Note 3) 3,193,640 4,479,708
Inventories (Note 4) 13,510,621 13,532,378
Prepaids 142,277 251,355
------------- -------------
Total current assets 17,150,290 18,454,827
Property and equipment, net (Note 5) 320,788 405,192
Goodwill 26,970 26,970
------------- -------------
Total assets $ 17,498,048 $ 18,886,989
============= =============
- --------------------------------------------------------------------------------------------
Liabilities
Current
Bank indebtedness (Note 6) $ 10,408,813 $ 11,579,643
Accounts payable and accrued liabilities (Note 7) 3,349,012 3,931,860
Income taxes payable 19,858 100,822
Obligation under capital lease - current portion (Note 9) 73,419 76,113
Obligation under put option (Note 10) 72,600 57,600
------------- -------------
Total current liabilities 13,923,702 15,746,038
Obligation under capital lease - Non-current (Note 9) 154,249 227,699
------------- -------------
Total liabilities 14,077,951 15,973,737
------------- -------------
Shareholders' Equity
Capital stock (Note 10) 2,545,765 2,545,765
Contributed surplus (Note 10) 64,860 --
Retained earnings 809,472 367,487
------------- -------------
Total shareholders' equity 3,420,097 2,913,252
------------- -------------
Total liabilities and shareholders' equity $ 17,498,048 $ 18,886,989
============= =============
- --------------------------------------------------------------------------------------------
Commitments (Note 11)
Subsequent event (Note 17)
See accompanying notes to the consolidated financial statements.
Page 49 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Consolidated Statements of Operations
(expressed in Canadian dollars)
March 31
2008 2007 2006
- -----------------------------------------------------------------------------------------------------------------
Net sales $ 20,908,902 100% $ 22,638,034 100% $ 17,719,672 100%
Cost of goods sold (Note 2(c)) 14,667,750 70.2% 17,039,635 75.3% 13,652,307 77.0%
------------------------ ------------------------ -------------------------
Gross profit 6,241,152 29.8% 5,598,399 24.7% 4,067,365 23.0%
------------------------ ------------------------ -------------------------
Expenses
Administrative (Note 18) 3,538,478 16.9% 3,157,284 13.9% 2,950,967 16.7%
Depreciation and Amortization 107,782 0.5% 76,827 0.3% 46,680 0.3%
Selling and delivery (Note 18) 1,122,210 5.4% 1,101,531 4.9% 821,259 4.6%
------------------------ ------------------------ -------------------------
4,768,470 22.8% 4,335,642 19.1% 3,818,906 21.6%
------------------------ ------------------------ -------------------------
Earnings before other income
(expenses) 1,472,682 7.0% 1,262,757 5.6% 248,459 1.4%
------------------------ ------------------------ -------------------------
Other income (expenses)
Interest, bank charges,
and guarantee fee
(Note 13(b)) (1,018,242) (4.9%) (964,633) (4.3%) (752,518) (4.2%)
Other income 1,714 0.0% 1,617 0.0% 38 0.0%
Change in put option
obligation (Note 10) (15,000) (0.1%) (5,000) 0.0% 11,400 0.1%
------------------------ ------------------------ -------------------------
(1,031,528) (5.0%) (968,016) (4.3%) (741,080) (4.1%)
------------------------ ------------------------ -------------------------
Earnings (loss) before income
taxes 441,154 2.0% 294,741 1.3% (492,621) (2.7%)
(Recovery) provision for Income
taxes (Note 8) (28,238) -0.1% 94,469 0.4% (102,862) (0.6%)
------------------------ ------------------------ -------------------------
Net earnings (loss) $ 469,392 2.1% $ 200,272 0.9% $ (389,759) (2.1%)
======================== ======================== =========================
Earnings (loss) per share
(basic and diluted) $ 0.09 $ 0.04 $ (0.08)
============= ============= ==============
Weighted average common
shares outstanding (basic and
diluted) (Note 10) 5,080,150 5,080,150 5,080,150
============= ============= ==============
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 50 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Consolidated Statements of Cash Flows
(expressed in Canadian dollars)
March 31
2008 2007 2006
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents derived from (applied to)
Operating
Net earnings (loss) $ 469,392 $ 200,272 $ (389,759)
Depreciation and amortization 107,782 76,827 46,680
Stock-based compensation 64,860 -- --
Change in put option obligation 15,000 5,000 (11,400)
Change in non-cash operating working capital
(Note 12) 753,091 (2,386,197) 29,149
------------ ------------ ----------
1,410,125 (2,104,098) (325,330)
------------ ------------ ----------
Financing
Bank indebtedness (1,170,830) 2,266,289 401,946
Capital lease obligation (76,144) -- --
Dividend paid (27,407) -- (31,901)
------------ ------------ ----------
(1,274,381) 2,266,289 370,045
------------ ------------ ----------
Investing
Purchase of equipment (23,378) (309,427) (47,895)
Proceeds on disposal of equipment -- 303,812 --
------------ ------------ ----------
(23,378) (5,615) (47,895)
------------ ------------ ----------
Net increase (decrease) in cash 112,366 156,576 (3,180)
Cash
Beginning of year 191,386 34,810 37,990
------------ ------------ ----------
End of year $ 303,752 $ 191,386 $ 34,810
============ ============ ==========
- ----------------------------------------------------------------------------------------------
Non-cash financing and investing activities
Equipment purchased under capital lease $ -- $ 303,812 $ --
Supplementary cash flow information
Interest paid $ 964,204 $ 934,544 $ 723,959
Income taxed paid during the year $ 36,920 $ -- $ 60,000
- ----------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Page 51 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Consolidated Statements of Shareholders' Equity
(expressed in Canadian dollars)
Years Ended March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
Accumulated
Shares Issued Other Total
--------------------- Comprehensive Retained Total
Number of Contributed Total Retained Income Earnings Shareholders'
Shares Amount Surplus Capital Earnings ("AOCI") and AOCI Equity
---------------------------------------------- ----------------------------------- -------------
Balance, March 31, 2005 5,080,150 $2,545,765 $ -- $2,545,765 $ 588,875 $ -- $ 588,875 $ 3,134,640
Dividend paid (Note 10) -- -- -- -- (31,901) -- (31,901) (31,901)
Net loss and comprehensive loss -- -- -- -- (389,759) -- (389,759) (389,759)
---------------------------------------------- ----------------------------------- -------------
Balance, March 31, 2006 5,080,150 2,545,765 -- 2,545,765 167,215 -- 167,215 2,712,980
Net income and comprehensive
income -- -- -- -- 200,272 -- 200,272 200,272
---------------------------------------------- ----------------------------------- -------------
Balance, March 31, 2007 5,080,150 2,545,765 -- 2,545,765 367,487 -- 367,487 2,913,252
Dividend paid (Note 10) -- -- -- -- (27,407) -- (27,407) (27,407)
Stock-based compensation
(Note 10) -- -- 64,860 64,860 -- -- -- 64,860
Net income and comprehensive
income -- -- -- -- 469,392 -- 469,392 469,392
---------------------------------------------- ----------------------------------- -------------
Balance, March 31, 2008 5,080,150 $2,545,765 $ 64,860 $2,610,625 $ 809,472 $ -- $ 809,472 $ 3,420,097
============================================== =================================== =============
See accompanying notes to the consolidated financial statements.
Page 52 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
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 16.
(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 and such
differences could be material. Significant estimates used in the preparation of
these financial statements include but are not limited to allowances for
doubtful accounts receivable, inventory obsolescence, sales returns,
amortization, income taxes, stock-based compensation, put option obligation and
contingencies.
(c) Foreign currency
The functional currency of the Company is the Canadian dollar. 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 $153,403 (2007:
$75,983, 2006: $108,199).
(d) Cash and cash equivalents
For the purpose of the statement of cash flows, the Company considers cash on
hand, 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.
Page 53 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
(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 further costs to completion and disposal. 2008
inventories include goods held on consignment by the customers under consignment
agreements totalling $ 2,209,244 (2007: $2,525,146, 2006: $2,596,676).
The Company's provision for inventory obsolescence has been included in cost of
goods sold. Changes in the current balance are as follows:
2008 2007 2006
---------- ---------- ---------
Opening Balance $ 329,000 $ 401,000 $ 213,000
Add 48,000 155,000 222,000
Deduct (176,000) (227,000) (34,000)
---------- ---------- ---------
Closing Balance $ 201,000 $ 329,000 $ 401,000
========== ========== =========
(f) Property and equipment
Property and equipment are recorded at cost less accumulated 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 amortized on a 20% declining balance basis. Leasehold
improvements are amortized on a straight-line basis over the shorter of the life
of leasehold improvement or term of the lease. Equipment under capital lease is
amortized on a straight-line basis over the term of the lease.
(g) 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. In accordance with the recommendations of the Canadian Institute of
Chartered Accountants, goodwill is not amortized, but is tested for impairment
at least on an annual basis.
Page 54 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
(h) Revenue recognition
The Company recognizes revenue when the following conditions have been
fulfilled:
o Goods have been shipped;
o Title to the goods has passed to the customer; and
o 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.
(i) 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.
(j) 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.
(k) Stock-based compensation
The Company has a stock option plan as disclosed in Note 10. 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 55 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
(l) 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.
(m) Advertising cost
The Company expenses all advertising costs as incurred. For the year ended March
31, 2008, total advertising costs were $151,901 (2007: $123,476, 2006: $61,304).
(n) 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 year.
The effect of the exercise of the 545,000 (2007: 140,000, 2006: 260,000)
potentially dilutive options was not included in the diluted earnings per share
amount since the effect was not materially dilutive.
(o) Put option
The Company accounts for put options issued in connection with certain common
shares (Note 10) 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.
(p) Change in accounting policies
Effective April 1, 2007, the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 1530: Comprehensive Income, CICA Handbook
Section 3251, Equity, CICA Handbook Section 3855, Financial Instruments -
Recognition and Measurement, CICA Handbook Section 3861, Financial Instruments -
Disclosure and Presentation and CICA Handbook Section 3865, Hedges. These new
Handbook Sections, which apply to fiscal years beginning on or after October 1,
2006, provide standards for recognition, measurement, disclosure and
presentation of financial assets, financial liabilities, derivatives, and hedge
accounting.
Page 56 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
(p) Change in accounting policies (continued)
Handbook Section 1530, Comprehensive Income, establishes standards for reporting
and displaying Comprehensive Income, Comprehensive Income is defined as the
change in equity from transactions and other events from non-owner sources.
Other comprehensive income refers to items recognized in comprehensive income
but that are excluded from net income calculated in accordance with Canadian
generally accepted accounting principles.
Handbook Section 3251, Equity, establishes standards for the presentation of
equity in the reporting period.
Handbook Section 3855, Financial Instruments - Recognition and Measurement,
establishes standards for recognizing and measuring financial instruments,
namely financial assets, financial liabilities and derivatives. It requires that
financial instruments be classified into one of the following five categories:
held for trading, held-to-maturity investments, loans and receivables,
available-for-sale financial assets or other financial liabilities. Subsequent
measurement and recognition of changes in the fair value of financial
instruments depends on their initial classifications.
The Company has implemented the following classifications:
o Cash and cash equivalents are classified as held for trading and are
measured at fair value.
o Accounts receivable are classified as loans and receivables and are
measured at amortized costs.
o Accounts payable, accrued liabilities and bank indebtedness are classified
as other financial liabilities and are recorded at amortized costs.
o Obligation under put option is classified as held-for-trading derivatives
and measured at fair value.
Handbook Section 3861, Financial Instruments - Disclosures and Presentation,
establishes standards for presentation of financial instruments, namely
financial assets, financial liabilities and derivatives.
Handbook Section 3865, Hedges, specifies how to apply hedge accounting and the
needed disclosures when it is applied.
The adoption of the foregoing new standards had no impact on the Company's
financial position or results of operations.
Page 57 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
(q) Recent accounting pronouncements
Canadian GAAP
Recent accounting pronouncements affecting the Company's future financial
reporting under Canadian GAAP are summarized below:
1) Handbook Section 1400, General Standards of Financial Presentation, was
amended to include the requirements for assessing and disclosing an entity's
ability to continue as a going concern. The amendment is based upon
International Accounting Standard IAS1, Presentation of Financial Statements.
This section is applicable to interim and annual financial reporting statements
relating to fiscal years beginning on or after January 1, 2008 with earlier
adoption encouraged. The Company will adopt this section in fiscal 2009.
Management does not expect any impact on the financial statement disclosures
when this new policy is adopted.
2) Handbook Section 1535, Capital Disclosures, requires disclosures about
capital and is harmonized with recently amended International Accounting
Standard IAS1. The standard is applicable to all entities, regardless of whether
or not that they have financial instruments. Entities are required to disclose
information about their objectives, policies and processes for managing capital
as well as their compliance with any externally imposed capital requirements,
where they may exist.
This section is applicable to interim and annual financial statements relating
to fiscal years beginning on or after October 1, 2007 with earlier adoption
encouraged. The Company will adopt this section in fiscal 2009. The Company is
currently investigating the impact that this section will have on the Company's
disclosures. The impact is currently not known.
3) Handbook Section 3031, Inventories, replaces Handbook Section 3030,
Inventories and provides Canadian equivalent to International Accounting
Standard IAS2, Inventories.
This section provides guidance on the determination of cost and requires the
allocation of overheads and other costs to inventory, allocation of fixed
production overhead based on normal capacity levels, with unallocated overhead
expensed as incurred. The section requires the consistent use (by type of
inventory with similar nature and use) of either first-in, first-out (FIFO) or
weighted average cost formula to measure the cost of other inventories. The use
of the last-in, first-out (LIFO) formula to measure the cost of inventories is
no longer acceptable. Under this section, when the circumstances that previously
caused inventories to be written down below cost no longer exist or where there
is clear evidence of an increase in net realizable value because of changed
economic circumstances, the amount of the write-down is reversed, but the
reversal is limited to the amount of the original write-down. This section also
includes expanded disclosure requirements.
Page 58 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
(q) Recent accounting pronouncements (Continued)
This section is applicable to interim and annual financial reporting statements
relating to fiscal years beginning on or after January 1, 2008. When applying
the section for the first time, an entity can either apply this section to the
opening inventory for the period and adjusts opening retained earnings by the
difference in the measurement of opening inventory (prior periods are not
restated) or apply the section retrospectively and restates prior periods in
accordance with Handbook Section 1506, Accounting Changes. The Company will
adopt this section in fiscal 2009. The Company is currently investigating the
impact that this section will have on the Company's financial position and
results of operations. The impact is currently not known.
4) Handbook Section 3064, Goodwill and Intangible Assets, replaces Handbook
Sections 3062, Goodwill and Other Intangible Assets and 3450, Research and
Development costs.
This section establishes standards for the recognition, measurement,
presentation, and disclosure of goodwill and intangible assets. Certain items
are specifically excluded from the scope of the Section including the initial
recognition, measurement and disclosure of goodwill and intangible assets
acquired in a business combination, the establishment of a new cost basis for
intangible assets as part of a comprehensive revaluation, intangible assets held
by an entity for sale in the ordinary course of business, non-current intangible
assets classified as held for sale or included in a disposal group that is
classified as held for sale, etc.
This section is applied to interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2008. Earlier adoption is
encouraged. The Company will adopt this Section in fiscal 2010. The Company is
currently investigating the impact that this section will have on the Company's
financial position and results of operations. The impact is currently not known.
5) Handbook Section 3862, Financial Instruments - Disclosures
Section 3862 replaces the disclosure requirements of previous Section 3861
Financial Instruments - Disclosure and Presentation and converges with
International Financial Reporting Standard IFRS7, Financial Instruments -
Disclosures.
This Section applies to interim and annual financial reporting statements
relating to fiscal years beginning on or after October 1, 2007. The Company will
adopt this Section in fiscal 2009. The Company is currently investigating the
impact that this section will have on the Company's disclosures. The impact is
currently not known.
6) Handbook Section 3863, Financial Instruments - Presentation
Section 3863 is consistent with previous Section 3861, which was based on
International Financial Reporting Standard IFRS7.
This section applies to interim and annual financial reporting statements
relating to fiscal years beginning on or after October 1, 2007. The Company will
adopt this section in fiscal 2009. The Company is currently investigating the
impact that this section will have on the Company's financial position and
results of operations. The impact is currently not known.
Page 59 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
3. Receivables
2008 2007
------------ ------------
Receivables $ 3,433,752 $ 4,685,820
Allowance for doubtful accounts (240,112) (206,112)
------------ ------------
$ 3,193,640 $ 4,479,708
============ ============
4. Inventories
2008 2007
------------ ------------
Loose gemstones $ 713,380 $ 717,431
Castings 89,937 126,487
Finished products 12,707,304 12,688,460
------------ ------------
$ 13,510,621 $ 13,532,378
============ ============
5. Property and equipment
2008
------------
Accumulated Net
Cost Amortization Book Value
----------- ------------ ------------
Computer equipment and software $ 416,943 $ 355,777 $ 61,166
Equipment under capital lease (Note 9) 303,812 113,930 189,882
Furniture and equipment 237,845 172,897 64,948
Leasehold improvements 150,128 145,336 4,792
Trademark 11,840 11,840 --
----------- ------------ ------------
$ 1,120,568 $ 799,780 $ 320,788
=========== ============ ============
2007
------------
Accumulated Net
Cost Amortization Book Value
----------- ------------ ------------
Computer equipment and software $ 412,693 $ 339,054 $ 73,639
Equipment under capital lease (Note 9) 303,812 37,976 265,836
Furniture and equipment 222,087 160,263 61,824
Leasehold improvements 146,758 142,865 3,893
Trademark 11,840 11,840 --
----------- ------------ ------------
$ 1,097,190 $ 691,998 $ 405,192
=========== ============ ============
- -------------------------------------------------------------------------------------
Page 60 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
6. Bank indebtedness
Bank indebtedness is comprised of demand overdraft loan facilities totalling
$11,000,000 (2007: $11,000,000) (subject to certain margining restrictions). The
Company also has available an annual $1,100,000 (2007: $1,100,000) bulge from
July 1 to December 31 each year (the "Annual Seasonal Bulge").
In fiscal 2007, the Company also had an additional $1,400,000 one time bulge in
effect March 31, 2006 to March 31, 2007 (the "OneTime Bulge").
During fiscal 2008, 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. The Annual Seasonal Bulge was then further extended to
February 28, 2008 and increased to $1,750,000, both on a one-time basis.
The facility details are summarized in the table below:
Demand Annual
Overdraft Seasonal OneTime Total
Loan Facility Bulge Bulge Facilities
------------- ------------ ------------ ------------
Available facility
March 31, 2006 $ 6,500,000 $ -- $ 3,000,000 $ 9,500,000
Decrease,
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)
------------- ------------ ------------ ------------
Available facility
March 31, 2007 11,000,000 -- 1,400,000 12,400,000
Expiry,
May 1, 2007 -- -- (1,400,000) (1,400,000)
Increase,
May 1, 2007 -- 1,100,000 -- 1,100,000
Increase,
May 1, 2007 -- 650,000 650,000
Expiry,
December 31, 2008 -- (1,100,000) -- (1,100,000)
Extention,
January 1, 2008 -- 1,100,000 -- 1,100,000
Expiry,
February 28, 2008 -- (1,100,000) (650,000) (1,750,000)
------------- ------------ ------------ ------------
Available facility
March 31, 2008 $ 11,000,000 $ -- $ -- $ 11,000,000
============= ============ ============ ============
Page 61 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
6. Bank indebtedness (continued)
These loans bear interest at prime plus 1/8% on the first $1,000,000 (2007:
$1,000,000) and prime plus 1% on the balance. The prime interest rate on these
loans at year-end was 5.25% (2007: 6.0%). 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 (2007:
$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.
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 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. Upon
expiry, this letter of credit was allowed to lapse.
Under the terms of the demand overdraft loan facilities, the Company must
maintain a Debt to Tangible Net Worth ratio not exceeding 3.0 to 1 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, 2008, the Company is in compliance with these
covenant ratio requirements.
- --------------------------------------------------------------------------------
7. Accounts payable and accrued liabilities
2008 2007
----------- -----------
Accounts payable $ 2,197,310 $ 2,697,212
Accrued liabilities 1,151,702 1,234,648
----------- -----------
$ 3,349,012 $ 3,931,860
=========== ===========
- --------------------------------------------------------------------------------
Page 62 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
8. Income taxes
(a) The provision for income taxes differs from the amount that would be
obtained by applying the Canadian corporate income tax substantively enacted
statutory rate of tax to the earnings (loss) before taxes. The principal reasons
for this difference are as follows:
2008 2007 2006
---------- ---------- ----------
Earnings (loss) before income taxes $ 441,154 $ 294,741 $ (492,621)
Statutory income tax rate 32% 34% 34%
Anticipated income tax (recovery) provision 138,964 100,212 (167,491)
Tax provision effect arising from:
Small business deduction (5,109) (16,399) 48,954
Tax losses utilized (111,058) (109,181) (37,252)
Tax recovery from loss carried back -- -- 67,682
Additional tax (recovered) reassessed for prior years (76,469) 76,469 --
Non-deductible expenses and other 37,834 21,468 (9,755)
Change in valuation allowance (12,400) 21,900 (5,000)
---------- ---------- ----------
$ (28,238) $ 94,469 $ (102,862)
========== ========== ==========
In fiscal 2007, 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. In
fiscal 2008, the Company filed an objection notice on the reassessment and
claimed for a refund of the full amount assessed. The CRA accepted the appeal
and the Company has recovered the full amount assessed.
(b) Future income tax assets consist of the following:
2008 2007
---------- -----------
Property and equipment $ 35,800 $ 47,500
Non-capital loss carry forward 211,500 367,200
Other items 7,900 8,600
Valuation allowance (255,200) (423,300)
---------- -----------
$ -- $ --
========== ===========
Page 63 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
8. Income taxes (continued)
(c) The operating losses expire as follows:
2008 2007
--------- -----------
2008 $ -- $ 258,000
2009 412,000 412,000
2010 103,000 103,000
2014 31,000 31,000
2015 7,000 32,000
2026 119,000 244,000
--------- -----------
$ 672,000 $ 1,080,000
========= ===========
- --------------------------------------------------------------------------------
9. Obligation under capital lease
In fiscal 2007, 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 future minimum lease payments required under this capital lease consist of:
2009 $ 85,571
2010 85,571
2011 78,510
-----------
249,652
Less: Amount representing interest (21,984)
-----------
Capital lease obligation 227,668
Less: Current portion (73,419)
-----------
Balance of obligation - Non-current $ (154,249)
===========
- --------------------------------------------------------------------------------
10. Capital stock
Authorized:
Unlimited number of common shares without par value
2008 2007
---- ----
Issued:
5,080,150 (2007: 5,080,150) common shares $ 2,545,765 $ 2,545,765
=========== ===========
Page 64 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
10. Capital stock (Continued)
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. During the current year, the Company
rounded up all fractional shares as a result of this 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 and the rounding up of fractional shares.
During the current year, the Company declared and paid a dividend of US$0.03 per
share totalling $27,407 (2007: $Nil; 2006: $31,901). Four major shareholders
waived their right to receive the dividend declared (2007: N/A; 2006: four).
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. A summary of the
status of the Company's options is presented below:
Weighted
Average
Number Exercise
of Shares Price
--------------------------
Balance, March 31, 2006 260,000 $ 1.58
Expired (120,000) $ 1.58
----------
Balance, March 31, 2007 140,000 $ 1.58
Granted 545,000 $ 0.51
Expired (140,000) $ 1.58
---------
Balance, March 31, 2008 545,000 $ 0.51
=========
The weighted average fair value of the options granted during the year was $0.12
(2007: $NIL; 2006: $NIL).
The following table summarizes information concerning options outstanding at
March 31, 2008:
Total Oustanding and
Exercisable
--------------------------
Weighted
Average
Number of Remaining
Exercise Price Shares Life (Years)
-------------- --------- -------------
$0.51 545,000 $ 4.67
========= ============
Page 65 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
10. Capital stock (Continued)
For the year ended March 31, 2008, the total compensation expense related to the
fair value of stock options was $64,860 (2007: $Nil). This amount has been
credited to contributed surplus. The fair value of these stock options was
determined using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividends are to be paid; expected volatility
of 36%; risk-free rate of 4.1% and expected life of 2 years.
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 became 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 $72,600 at March 31, 2008 (2007: $57,600; 2006: $52,600)) and the
original proceeds received under the unit offering ($500,000).
The Company has presented its obligation under this put as a current liability.
- --------------------------------------------------------------------------------
11. 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 four years are:
2009 198,823
2010 173,234
2011 87,119
2012 12,408
The operating lease agreement for one office premise was with a partnership in
which the president of Allura Diamonds Limited had an interest prior to fiscal
2008.
- --------------------------------------------------------------------------------
12. Change in non-cash operating working capital
2008 2007 2006
----------- ------------ ----------
Receivables $ 1,286,068 $ (768,773) $ (297,111)
Income taxes (80,964) 222,694 (161,576)
Inventories 21,757 (1,445,027) 956,588
Prepaids 109,078 (129,333) 8,247
Accounts payable and accrued liabilities (582,848) (265,758) (476,999)
----------- ------------ ----------
$ 753,091 $ (2,386,197) $ 29,149
=========== ============ ==========
Page 66 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
13. Related party transactions
Related party transactions during the year and balances at year end are
summarized as follows:
2008 2007 2006
-------- --------- ---------
(a) International Bullion and Metal Brokers (London) Limited
Transactions
Interest and guarantee fee expenses $ 97,761 $ 116,147 $ 115,869
Balances
Accounts payable and accrued liabilities $ 31,833 $ 14,292 $ 66,914
b) Other
Rent paid to nil (2007: one; 2006: two)
related partnerships (Note 11) $ -- $ 9,900 $ 100,413
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.
- --------------------------------------------------------------------------------
14. 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:
2008 2007
----------- -----------
Canadian dollar $ 1,297,106 $ 1,224,052
U.S. dollar 1,840,639 2,512,552
Euro 210,774 185,757
GBP 493 9,499
----------- -----------
$ 3,349,012 $ 3,931,860
=========== ===========
The Company does not use derivative instruments to reduce its exposure to
foreign currency risk.
Page 67 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
14. Financial instruments and risk management (continued)
Commodity Risk
Inventory consists of precious metals and gemstones. These items are susceptible
to change in valuation due to market conditions beyond the Company's control.
Increase or decreases in the commodity prices of these assets can have positive
or negative effects on the Company's future net earnings. The Company does not
enter into derivative contracts to mitigate its exposure to commodity risk.
Interest rate risk
Bank indebtedness bears floating interest rates which exposes the Company to the
risk of changing interest rates that may have a detrimental effect on its
earnings and cash flows in future periods.
Credit risk
Credit risk arises from the possibility that the entities to which the Company
sells products may experience financial difficulty and be unable to fulfill
their contractual obligations. This risk is mitigated by proactive credit
management policies that include regular monitoring of the debtor's payment
history and performance, geographic diversification, credit insurance and
obtaining security when management considers it appropriate.
At March 31, 2008, 41% (2007: 53%) of the Company's accounts receivable was owed
by 2 customers (2007: 2) as per the table below.
2008 Percent 2007 Percent
--------------------- ---------------------
Company A $ 1,019,377 22% $ 1,661,388 33%
Company B 883,813 19% 979,927 20%
--------------------- ---------------------
$ 1,903,190 41% $ 2,641,315 53%
===================== =====================
Fair value
The Company's financial instruments, including cash, receivables, bank
indebtedness, accounts payable, and accrued liabilities are carried at amounts
which approximate their fair value due to their short-term nature. Obligation
under put option is stated at its estimated fair value. Lease obligations have
been recorded at their fair value at inception and are being amortized using the
effective interest rate implicit in the lease.
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Page 68 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
15. Significant customers
Three major customers account for 52% of sales in 2008 (2007: 50%, 2006: 32%) as
follows:
2008 2007 2006
---- ---- ----
Company A 25% 22% 7%
Company B 18% 19% 22%
Company C 9% 9% 3%
---- ---- ----
52% 50% 32%
==== ==== ====
- --------------------------------------------------------------------------------
16. Differences between Canadian and U.S. generally accepted accounting
principles and practices
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.
Accounting for uncertainty in income taxes
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
addresses the determination of how tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, the Company may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate resolution. The impact of the
Company's reassessment of its tax positions in accordance with FIN 48 did not
have a material effect on the results of operations, financial condition or
liquidity.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109"
("FIN 48") effective April 1, 2007. The adoption of FIN 48 on April 1, 2007 did
not result in a cumulative effect adjustment to accumulated deficit. At April 1,
2007, the Company had $nil of unrecognized tax benefits which, if recognized,
would favorably affect the effective income tax rate in future periods.
Consistent with its historical financial reporting, the Company has elected to
classify interest expense related to income tax liabilities, when applicable, as
part of the interest expense in its Consolidated Statements of Operations rather
than income tax expense. The Company will continue to classify income tax
penalties as part of selling, general and administrative expense in its
Consolidated Statements of Operations. To date, the Company has not incurred
material interest expenses or penalties relating to assessed taxation years.
Page 69 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
16. Differences between Canadian and U.S. generally accepted accounting
principles and practices (continued)
Accounting for uncertainty in income taxes (continued)
The last year examined by the CRA is 2006. The Company's primary provincial tax
jurisdictions are British Columbia, Nova Scotia and Ontario and there is no
international jurisdiction. The following table summarizes the open tax years
for each major jurisdiction:
Jurisdiction Open Tax Years
---------------- --------------
Federal 2007 - 2008
British Columbia 2007 - 2008
Nova Scotia 2007 - 2008
Ontario 2007 - 2008
Recent accounting pronouncements
Recent accounting pronouncements affecting the Company's future financial
reporting under U.S. GAAP are summarized below.
a) FASB Statement No. 157, Fair Value Measurements -SFAS 157
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. In February 2008, the FASB staff issued
a staff position that delayed the effective date of SFAS No. 157 for all
non-financial assets and liabilities except for those recognized or disclosed
annually. The FASB also issued FAS-157-1, "application of FASB Statement No. 157
to FASB Statement No. 13 and other Accounting Pronouncements that address Fair
Value Measurements for Purposes of Lease Classifications or Measurements under
SFAS Statement No. 13". The Company is required to adopt the provision of SFAS
157, as applicable, beginning in fiscal year 2009, and is currently in the
process of evaluating the expected effect of SFAS 157 on its results of
operations and financial position.
b) FASB Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities -- Including an Amendment of FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities
Page 70 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
16. Differences between Canadian and U.S. generally accepted accounting
principles and practices (continued)
Recent accounting pronouncements (continued) In February 2007, the Financial
Accounting Standards Board ("FASB") issued FASB Statement No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities -- Including an
Amendment of FASB Statement No. 115, Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 159"). SFAS No. 159 permits an entity to
choose to measure many financial instruments and certain items at fair value.
The objective of this standard is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reporting earnings
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS No. 159 permits all entities to
choose to measure eligible items at fair value at specified election dates.
Entities will report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The
fair value option: (a) may be applied instrument by instrument, with a few
exceptions, such as investments accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to
entire instruments and not to portions of instruments. SFAS No. 159 is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007, which for us would be our fiscal year beginning April 1, 2008. The
Company is currently evaluating the impact that the adoption of SFAS No. 159
will have on its consolidated financial statements.
c) FASB Statement No. 141(R) Business Combinations - SFAS No. 141(R),
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"). SFAS141(R) replaces SFAS No. 141, "Business Combinations", but
retains the requirement that the purchase method of accounting for acquisitions
be used for all business combinations. SFAS 141(R) expands on the disclosures
previously required by SFAS 141, better defines the acquirer and the acquisition
date in a business combination, and establishes principles for recognizing and
measuring the assets acquired (including goodwill), the liabilities assumed and
any non-controlling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations with an
acquisition date in the first annual period following December 15, 2008; early
adoption is not permitted. The Company will adopt this statement as of April 1,
2009. The impact of SFAS 141(R) will have on the Company's consolidated
financial statements will depend on the nature and size of acquisitions it
completes after it adopts SFAS 141(R).
d) FASB Statement No. 160 Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51 SFAS No. 160
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51" (SFAS 160). SFAS
160 requires that non-controlling (or minority) interests in subsidiaries be
reported in the equity section of the company's balance sheet, rather than in a
mezzanine section of the balance sheet between liabilities and equity. SFAS 160
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company's income statement. SFAS 160 also
establishes guidelines for accounting for changes in ownership percentages and
for deconsolidation. SFAS 160 is effective for financial statements for fiscal
years beginning on or after December 1, 2008 and interim periods within those
years. The adoption of SFAS 160 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
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Page 71 of 77
- --------------------------------------------------------------------------------
Allura International Inc.
Notes to the Consolidated Financial Statements
(expressed in Canadian dollars)
March 31, 2008, 2007 and 2006
- --------------------------------------------------------------------------------
17. Subsequent event
On July 29, 2008, the Board of Directors of the Company declared a dividend of
US$0.05 per share to be paid to shareholders on record as of July 31, 2008. Four
major shareholders have waived their right to receive the dividend declared.
Total dividend payable is estimated to be approximately $46,587.
- --------------------------------------------------------------------------------
18. Administrative and selling and delivery expenses
2008 2007 2006
------------ ------------ ------------
Administrative
Alarm and security $ 8,667 $ 8,517 $ 7,043
Automobile 12,052 9,897 4,649
Bad debts 42,852 (108,546) 127,180
Consulting 182,380 70,896 190,197
Insurance 258,087 294,717 258,105
Legal and accounting 220,973 256,728 157,618
Office and miscellaneous 192,313 170,742 139,586
Rent (Note 13(b)) 236,140 233,067 177,395
Salaries and wages 2,296,187 2,094,047 1,804,959
Telephone 40,864 51,044 39,890
Travel, meals and entertainment 47,963 76,175 44,345
------------ ------------ ------------
$ 3,538,478 $ 3,157,284 $ 2,950,967
------------ ------------ ------------
Selling and delivery
Advertising 151,901 123,476 61,304
Freight and shipping 265,616 310,721 315,966
Sales commission 327,427 362,813 244,025
Salaries and wages 210,406 130,811 --
Selling 166,860 173,710 199,964
------------ ------------ ------------
$ 1,122,210 $ 1,101,531 $ 821,259
============ ============ ============
- --------------------------------------------------------------------------------
19. Comparative amounts
Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.
- --------------------------------------------------------------------------------
Page 72 of 77
ITEM 18. FINANCIAL STATEMENTS
The Company has elected to report under Item #17.
ITEM 19. EXHIBITS
1.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 1.1 to the Company's Registration Statement on Form 20-F,
File No. 0-30228 (the "Registration Statement"));
1.2 By-laws of the Company (incorporated by reference from Exhibit 1.2 to the
Registration Statement);
1.3 Articles of Amendment of the Company (incorporated by reference from
Exhibit 1.3 to the Registration Statement);
1.4 Certificate of Amendment of the Company (incorporated by reference from
Exhibit to the Registration Statement);
1.5 Certificate of Change of Name (incorporated by reference from Exhibit 1.5
to the Registration Statement);
4.1 Shareholders Agreement (incorporated by reference from Exhibit 4.1 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.2 Investment Agreement (incorporated by reference from Exhibit 4.2 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.3 Lease for 1555 West 8th Avenue (incorporated by reference from Exhibit 4.3
to the Annual Report on Form 20-F for the fiscal year ended March 31,
2000) and Lease for Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6,
(incorporated by reference from Exhibit 4.4 to the Annual Report on Form
20-F for the fiscal year ended March 31, 2003)
4.4 Stock Option Plan (incorporated by reference from Exhibit 4.4 to the
Annual Report on Form 20-F for the fiscal year ended March 31, 2000);
4.5 Mutual Release and Settlement Agreement dated May 1,2002 by and among,
Allura International, Bygo, Inc. and MacDonald Dettwiler and Associates,
Ltd., and certain other parties thereto;
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 Certifications by C.E.O and CFO.
13.1 Section 906 Certifications by C.E.O and CFO.
Page 73 of 77
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 September 25 2008
/s/ "Jeremy Bowman"
- -------------------------
Jeremy Bowman, CEO
Page 74 of 77
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;
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 Certifications by C.E.O and CFO
13.1 Section 906 Certifications by C.E.O and CFO
Page 75 of 77