CORRESP 1 filename1.txt IBB INTERNATIONAL (CANADA) LTD 1555 West 8th Avenue, [LOGO] Vancouver, B.C., Canada V6J 1T5 Telephone: (604) 683-5700 Ext. 315 Fax: (604) 683-5979 Email: etsen@ibbgold.com February 20, 2007 US Securities and Exchange Commission 100 F Street, NE CF / AD11 Washington, DC, 20549 - 3561 Attn: Michael Moran, Branch Chief Dear Mr. Moran: The following filing of Allura International (Canada) Inc.'s amended Form 20-F/A and has been attached for your review prior to refiling. The amended Form 20-F/A has been marked to show our amendments in response to your comment letter dated February 14, 2006. 1. We note in your response to comment three of our letter dated February 14, 2006. We do not see your proposed revision in the draft Form 20-F/A to reflect the marketing expendentures as a reduction of revenue. Please revise or tell us the amount reclassified and the specific line items revised. In this regard, the draft provided with your response was not marked as indicated in your letter. We have amended the disclosure under Item 3. A. Selected Financial Data to reflect the reclassification of marketing expenses paid to support customer's catalogues as a reduction of revenue. This amendment is included in the amended Form 20-F/A as is included here for your review.
2005 2004 2003 2002 2001 Net Sales reported 18,504,616(2) 16,322,923(2) 17,240,986(2) 14,854,454(2) 15,952,512 Reclass of Marketing Expenses (252,330) (208,585) (209,501) (202,345) (172,525) Reclass of Payment Discount (368,855) ---------- ---------- ---------- ---------- ---------- Net Sales as Restated 18,252,286 16,114,338 17,031,485 14,652,109 15,411,132 Gross profit reported 5,350,375 4,166,129 4,233,405 3,207,914 4,217,260 Reclass of Marketing Expenses (252,330) (208,585) (209,501) (202,345) (172,525) Reclass of Payment Discount (368,855) ---------- ---------- ---------- ---------- ---------- Gross profit as restated 5,098,045 3,957,544 4,023,904 3,005,569 3,675,880
2. Please refer to your comment 12 in our letter dated February 14, 2006. We have read your proposed revised disclosure and it appears that the changes in internal controls occurred subsequent to the fiscal year end and not during the fiscal year. Please revise to clearly disclose any change in your internal control over financial reporting that occurred during the fiscal year that has materially affected, or is reasonably likely to materially affect, your internal control over financial reporting. If there were no changes during the period covered by the report, state that fact. If changes were made subsequent to the period covered by the report, revise to clarify that fact. See Item 15 (d) of Form 20-F. The internal control weakness over financial reporting identified occurred on March 31, 2005, at year-end. This weakness resulted from the departure of the Company's Corporate Accountant. After the yearend, during May 2005, the Company made changes in its internal control to mitigate this weakness by retaining independent consultants to oversee its financial reporting process. Duing September 2005, the Company replaced the consultants with a junior accounting. We have amended our filing in Item 15 to clearly disclose the dates and impact of changes over internal controls. 3. We note your response to comment 17 of our letter dated February 17, 2006 that the capitalized software does not relate to Bygo. Since Bygo has devoted its efforts and resources to developing software and hardware necessary to execute its business plan, please tell us how you have accounted for the related expenditures. Also, please expand your disclosure to include your accounting policy for software development. The amount included in capital assets for capitalized software amounts to $20,000 and is not related to Bygo. As Bygo has not continued to execute its business plan and has not expanded its software development, there were not additional software development costs incurred. Current accounting policy notes accurately describe software amortization. No accounting policy is noted regarding software development as no significant development costs have been incurred by the Company. As Bygo's software development efforts were discontinued in fiscal 2001 and as such there were no expenditures relating development of software disclosed. Additional disclosure has been made in Item 4A of the document noting this fact. If you have any questions, please do not hesitate to give me call. Thank you. Yours truly, Emily Tsen, CA CFO/VP Operations UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F/A [ ] 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, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED): For the transition period from______ to ______. [ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring the shell company report: Commission File Number: 0-30228 ALLURA INTERNATIONAL INC. -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) N/A -------------------------------------------------------------------------------- (Translation of Registrant's name into English) Canada -------------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) 1555 West 8th Avenue, Vancouver, B.C., Canada, V6J 1T5 -------------------------------------------------------------------------------- (Address of Principal executive office) Securities registered or to be registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares, Without Par Value Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Number of outstanding shares of each of the issuer's classes of capital or common stock as of March 31, 2005: 15,240,302 Common Shares, Without Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 [X] Item 18 [ ] (APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court: Yes [ ] No [ ] Page 1 of 75 TABLE OF CONTENTS
Page ---- PART I Item 1. Identity of Directors, Senior Management and Advisers............................ 3 Item 2. Offer Statistics and Expected Timetable.......................................... 3 Item 3. Key Information.................................................................. 3 Item 4. Information on the Company....................................................... 10 Item 5. Operating and Financial Review and Prospects..................................... 20 Item 6. Directors, Senior Management and Employees....................................... 27 Item 7. Major Shareholders and Related Party Transactions................................ 30 Item 8. Financial Information............................................................ 33 Item 9. The Offer and Listing............................................................ 33 Item 10. Additional Information........................................................... 34 Item 11. Quantitative and Qualitative Disclosures about Market Risk....................... 39 Item 12. Description of Securities other than Equity Securities........................... 40 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies.................................. 40 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds..... 40 Item 15. Controls and Procedures.......................................................... 40 Item 16A. Audit Committee Financial Expert................................................. 42 Item 16B. Code of Ethics................................................................... 42 Item 16C. Principal Accountants Fees and Services.......................................... 43 Item 16D. Exemption from the Listing Standards for Audit Committees........................ 43 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers........... 43 Item 17. Financial Statements............................................................. 43 Item 18. Financial Statements............................................................. 67 Item 19. Exhibits......................................................................... 67 Signatures....................................................................... 68 Index to Exhibits Filed.......................................................... 69
Page 2 of 75 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS This Form 20-F is being filed as an annual report under the Securities Exchange Act of 1933, and accordingly, the information called for in Item 1 is not required. Please refer to "Item 6 - Directors, Senior Management and Employees -Directors and Senior Management". ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE This Form 20-F is being filed as an annual report under the Securities Exchange Act of 1933, and accordingly, the information called for in Item 2 is not applicable to this report. ITEM 3. KEY INFORMATION A. Selected Financial Data. The following table sets forth, for the periods and the dates indicated, selected financial and operating data for Allura International Inc. ("Company" or "Allura" or "Allura Group"), for the fiscal years ended March 31, 2005, 2004, 2003, 2002 and 2001. This information should be read in conjunction with the Company's Financial Statements and Notes thereto, and "Operating and Financial Review and Prospects" included elsewhere herein. The selected financial data provided below are not necessarily indicative of the future results of operations or financial performance of the Company. To date, the Company has not paid any dividends on its common shares. The Company's policy at the present time is to retain earnings for corporate purposes. The payment of dividends in the future will depend on the earnings and financial condition of the Company and such other factors as the Board of Directors of the Company may consider appropriate. Since the Company is currently in an expansion stage, it is unlikely that earnings will be available for payment of dividends in the near future. The Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). There are no material differences between Canadian GAAP and the accounting principles that are generally accepted in the United States ("U.S. GAAP") as applied to the Company, including disclosure items, excepting those disclosed in the financial statements under note 16. The following tables set forth information in Canadian dollars. Page 3 of 75
2005 2004 2003 2002 2001 ----------------------------------------------------------------------------------------------------- Net Sales $18,252,286 $16,114,338 $17,031,485 $14,652,109 $15,411,132 Gross profit $ 4,067,365 $ 5,098,045 $ 3,957,544 $ 4,023,904 $ 3,005,569 Net Income (Loss) $ 322,708 $ 327,681 $ 398,084 $(1,037,146) $ (583,992) Earnings (Loss) Per Common Share (a) $ 0.02 $ 0.02 $ 0.03 ($ 0.07) ($ 0.04) Outstanding shares (a) 15,240,302 15,240,302 15,240,302 15,355,055 15,355,055 Total Assets $16,824,370 $11,539,964 $12,285,925 $13,624,443 $12,644,535 Working Capital $ 2,936,292 $ 2,582,063 $ 2,250,619 $ 1,825,796 $ 1,763,449 Long Term Liabilities -- -- -- -- Total Liabilities $13,689,730 $ 8,728,032 $ 9,752,174 $11,327,737 $ 9,310,683 Non Controlling Interest -- - -- -- Shareholder's Equity $ 3,134,640 $ 2,811,932 $ 2,533,751 $ 2,296,706 $3,333,852 Dividends declared per share -- -- -- -- --
(a) Earnings per share are on basic and fully diluted basis. The company's consolidated financial statements for the years ended March 31, 2005, 2004 and 2003 have been restated to reflect the following adjustments as disclosed in Note 3 to the consolidated financial statements: (1) Due to a change in Canadian generally accepted accounting principles, the Company has recorded the fair value of a put option issued in 2000 as a liability rather than as equity as previously presented. (2) The Company has presented certain sales discounts as a reduction in net sales rather than as a selling cost as previously presented. CURRENCY EXCHANGE RATE INFORMATION The Company's accounts are maintained in Canadian dollars. In this Annual Report all dollar amounts are expressed in Canadian dollars except where otherwise indicated. The rate of exchange means the noon buying rate in New York City for cable transfer in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. The average rate means the average of the exchange rates on the last date of each month during a calendar year. We do not represent that the Canadian dollar or the US dollar amounts Page 4 of 75 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 August 31, 2005, the noon buying rate in New York City for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank was $1.00 US = $1.1893 Canadian. (b) The following table sets forth the high and low exchange rates for each month during the previous six months: Canadian Dollar/US Dollar Month Low High August 2005 $1.1888 $1.2185 July 2005 $1.2048 $1.2365 June 2005 $1.2256 $1.2578 May 2005 $1.2373 $1.2703 April 2005 $1.2146 $1.2568 March 2005 $1.2017 $1.2463 (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, 2005 $1.2735 March 31, 2004 $1.3491 March 31, 2003 $1.5447 March 31, 2002 $1.5638 March 31, 2001 $1.5360 B. Capitalization and Indebtedness. This Form 20-F is being filed as an annual report under the Securities Exchange Act of 1933, and accordingly, the information called for in this Item 3.B is not required C. Reasons for the Offer and Use of Proceeds. This Form 20-F is being filed as an annual report under the Securities Exchange Act of 1933, and accordingly, the information called for in Item 3.C is not applicable to this report. D. Risk Factors. Page 5 of 75 The Company's business is subject to a number of risk factors that are set forth below. Additional risks and uncertainties not now known to us or that we think are immaterial may also adversely impact or impair our business. If any of the following risks actually occur, our business, results of operations, or financial condition would likely suffer. Outside manufacturers manufacture all of the Company's products, in whole or in part. These outside manufacturers typically are small to medium-sized, privately owned companies. During fiscal 2005, the Company purchased gold and silver products from over 126 suppliers, with the five largest suppliers accounting for approximately 36% of the Company's total gold and silver purchases. In the diamond jewelry, loose stone and coloured stone area, the company purchased products from approximately 101 suppliers, while the five largest suppliers accounted for 50% of the Company's total purchases in this area. Although a substantial portion of the Company's purchases are concentrated within a small number of suppliers, the Company does not believe the loss of any one supplier would have a material adverse effect on its business. Alternative sources of supply for the finished goods purchased by the Company are available. The Company has no long-term contractual relationship with any of its suppliers. Risks generally inherent in the use of outside manufacturers include security at the manufacturer's facility, transport of materials to and from the manufacturer, theft by the manufacturer or its employees and bankruptcy or other financial problems of the manufacturer. Fluctuations in the price of gold and diamonds may affect the Company's profitability. Prices for the Company's products generally are determined by reference to the current market price of gold or diamonds. Consequently, the Company's sales could be affected by significant increases, decreases or volatility in the price of gold or diamonds. If the price of gold or diamonds were to move substantially above or substantially below current price levels and remain at such levels for a prolonged period of time, such increase or decrease could have an adverse effect on the Company's results of operations. In addition, the Company's results of operations may be adversely affected during the periods of extreme volatility in the price of gold or diamonds since many customers may elect to defer purchases until the price of gold or diamonds had become relatively stable. The Company's business is highly seasonal and accordingly, the Company's revenues may vary significantly from quarter to quarter. The Company's business is highly seasonal. The third and fourth calendar quarters, which include the Christmas shopping season, generally produce the strongest results, and the second calendar quarter generally produces the weakest results. The Company's sales and income also may vary from quarter to quarter as a consequence of general economic and industry conditions that affect consumer spending and purchases by retailers. The Company's business may be adversely affected if it were to lose the services of Mr. Jeremy Bowman and/or other key employees. The Company's business is substantially dependent on the efforts and abilities of Jeremy Bowman, its Chief Executive Officer. The loss of Mr. Bowman's services may have a material adverse effect on the Company's business. The Company is currently negotiating an employment agreement with Mr. Bowman; however, it has not yet been finalized. The Company does not maintain any key man life insurance on Mr. Bowman's life. There are no assurances that the agreement currently being negotiated will be finalized. Page 6 of 75 The Company's success will depend upon recruiting and maintaining other qualified personnel to staff its operations. The Company believes that such personnel currently are available at reasonable salaries and wages. There can be no assurance, however, that such personnel will always be available in the future. In addition, it cannot be predicted whether the Company's work force will be unionized. The success of the operations and activities of the Company is dependent to a significant extent on the efforts and abilities of its management. Although the Company has employment agreements with certain of its key employees, the loss of services of any of its management personnel could have a material adverse affect on the Company. See "Directors, Senior Management and Employees." The Company faces competition from a number of different companies some of which have greater financial and other resources than the Company. The Company's business is highly competitive, and the distribution channels in which the Company markets its products frequently involve different competitive factors. Some companies in the jewelry industry may have greater financial and other resources than the Company. See "Information on the Company- Business Overview - Competition." 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. As a gesture of good will the Company provides a stock balancing service, primarily to large retailers, in order to assist them with maintaining inventory levels in an efficient way. Stock balancing transactions involve taking back products for resorting and redistribution to other stores within the retailers group. 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 July 18, 2005, the Company's directors, executive officers, holders of more than 5% of our common stock, and their affiliates will, in the aggregate, beneficially own approximately 85% of our outstanding common shares. As a result, these stockholders, subject to any fiduciary duties owed to our other stockholders under Canadian law, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management policies. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom are directors or who have representatives sitting on the Company's board of directors, could use their voting influence to maintain the Company's existing management and directors in office, delay or prevent changes of control of our company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to the Company's employee stock plans and approvals of significant financing transactions. Stockholders may find it difficult to sell their shares since there is no market for the Company's Common Stock. Page 7 of 75 There is no current trading market for the shares of the Company's Common Stock and there can be no assurance that a trading market will develop, or, if such a trading market does develop that it will be sustained. The shares of the Company's Common Stock, to the extent that a market develops for the shares of the Company's Common Stock at all, of which there can be no assurance, will likely appear in what is customarily known as the "pink sheets" or on the NASDAQ Bulletin Board, which may limit the marketability and liquidity of the shares of the Company's Common Stock. Thus, stockholders may find it difficult to sell their shares. To date, neither the Company nor anyone acting on its behalf has taken any affirmative steps to request or encourage any broker/dealer to act as a market maker for the Company's Common Stock. Further, there have been no discussions or understandings, preliminary or otherwise, between the Company or anyone acting on its behalf and any market maker regarding the participation of any such market maker in the future trading market, if any, for the Company's Common Stock. Under Rule 15g-9 of the Exchange Act, a broker or dealer may not sell a "penny stock" to, or affect the purchase of a penny stock by, any person unless: (a) such sale or purchase is exempt from Rule 15g-9; (b) prior to the transaction the broker or dealer has (1) approved the person's account for transactions in penny stocks in accordance with Rule 15g-9, and (2) received from the person a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased; and (c) the purchaser has been provided an appropriate disclosure statement as to penny stock investment. The United States Securities and Exchange Commission (the "Commission") adopted regulations that generally define a penny stock to be any equity security other than a security excluded from such definition by Rule 3a51-1. Such exemptions include, but are not limited to (1) an equity security issued by an issuer that has (i) net tangible assets of at least US$2,000,000, if such issuer has been in continuous operations for at least three years, (ii) net tangible assets of at least US$5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least US$6,000,000 for the preceding three years; (2) except for purposes of Section 7(b) of the Exchange Act and Rule 419, any security that has a price of US$5.00 or more; and (3) a security that is authorized or approved for authorization upon notice of issuance for quotation on the NASDAQ Stock Market, Inc.'s Automated Quotation System. It is likely that shares of the Company's Common Stock, assuming a market were to develop therefore, will be subject to the regulations on penny stocks; consequently, the market liquidity for the Company's Common Stock may be adversely affected by such regulations limiting the ability of broker/dealers to sell the Company's Common Stock and the ability of stockholders to sell their securities in the secondary market. Moreover, the Company's shares may only be sold or transferred by its stockholders in those jurisdictions in which an exemption for such "secondary trading" exists or in which the shares may have been registered. Assuming a market for the Company's Common Stock was to develop, resales of issued and outstanding restricted stock pursuant to Rule 144 may adversely affect the price of the Company's common stock. There are presently issued and outstanding 15,240,302 shares and an additional 3,000,000 shares reserved for issuance upon the exercise of 352,500 options; all but 429,868 of which, are "restricted securities" as that term is defined under the Securities Act of 1933, as amended (the "Act"), and in the future may be sold in compliance with Rule 144 of the Act, pursuant to an a Registration Statement filed under the Act, or other applicable exemptions from registration thereunder. Rule 144 provides, in essence, that a person holding restricted securities for a period of one year may sell those securities in unsolicited brokerage transactions or in Page 8 of 75 transactions with a market maker, in an amount equal to one percent of the Company's outstanding Common Stock every three months. Additionally, Rule 144 requires that an issuer of securities make available adequate current public information with respect to the issuer. Such information is deemed available if the issuer satisfies the reporting requirements of Sections 13 or 15(d) of the Exchange Act and of Rule 15c2-11 thereunder. Rule 144 also permits, under certain circumstances, the sale of shares by a person who is not an affiliate of the Company and who has satisfied a two-year holding period without any quantity limitation and whether or not there is adequate current public information available. Investors should be aware that sales under Rule 144, or pursuant to a Registration Statement filed under the Act, might have a depressive effect on the market price of the Company's Common Stock in any market that may develop for such shares. Since the Company is a Canadian corporation it may be difficult for US shareholders to effect service of process or to enforce judgments obtained in the US. The Company is a Canadian corporation. All of its directors and officers are residents of jurisdictions other than the United States and a significant part of its assets are, or will be, located outside of the United States. As a result, it may be difficult for shareholders resident in the United States to effect service within the United States upon the Company, and/or such directors or officers who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liability of any of the Company, or such directors or officers, under the United States federal securities laws. The Company has been advised by its Canadian counsel that there is substantial doubt as to whether Canadian courts would (i) enforce judgments of the United States courts of competent jurisdiction obtained against the Company, or such directors or officers, predicated upon the civil liabilities provisions of such securities laws, or (ii) impose liabilities in original actions against the Company or its directors or officers predicated solely upon such securities laws. Accordingly, United States shareholders may be forced to bring actions against the Company and its directors and officers under Canadian law and in Canadian courts in order to enforce any claims that they may have against the Company or its directors or officers. Subject to necessary registration under applicable provincial corporate statutes in the case of a corporate shareholder, Canadian courts do not restrict the ability of non-resident persons to sue in their courts. The Company's profitability may be affected by currency risk. The Company is exposed to currency risk as some of its accounts payable are denominated in currencies other than the Canadian dollar. The Company earns revenue and incurs operating expenses predominantly in Canadian dollars. Unfavorable changes in the applicable exchange rates may result in a decrease or increase in foreign exchange gain or loss. The Company does not use derivatives to reduce its exposure to foreign currency risk. The Company's profitability may be affected by interest rate risks. The Company's bank indebtedness bears floating interest rates. This exposes the Company to the risk of changing interest rates that may have a detrimental affect on its earnings in future periods. The Company's profitability may be affected by credit risks. Page 9 of 75 Credit risk arises from the possibility that the entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. The Company's profitability may be affected by commodity price sensitivity. The future revenue and profitability of the Company will be dependent, to a significant extent, upon prevailing spot market prices for gold and diamonds. In the past, gold and diamond prices have been volatile. Prices are subject to wide fluctuations in response to changes in supply and demand for gold and diamonds, market uncertainty and a variety of additional factors that are beyond the control of the Company. The Company does not engage in any hedging activities. Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs. In July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 ("SOX"). The purpose of the SOX is to, among other things, protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. We expect these developments to increase the legal and financial compliance costs, and to make some activities more difficult. For example, we expect these developments to make it more difficult and more expensive for public companies to obtain director and officer liability insurance. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on an audit committee, and qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. Furthermore, proposed changes in the accounting rules could increase the expenses that we report under GAAP and adversely affect our operating results. While we will endeavor to establish the requisite procedures and structure our corporate governance in accordance with SOX and the rules and regulations thereunder, as issued by the SEC from time to time, we cannot assure you that we will be successful in this regard or that the costs we incur in doing so will not prove material and adversely affect our profitability. ITEM 4. INFORMATION ON THE COMPANY A. History, development and organizational structure of the Company. Corporate Structure Allura International Inc. (the "Company" or "Allura") was incorporated on April 13, 1988 under the laws of Canada under the name "IBB International Bullion and Metal Brokers (Canada) Limited." The Company changed its name to "Allura International Inc." on April 1, 1999 and simultaneously effected a corporate restructuring (the "Restructuring") by selling and transferring all of its assets, other than its 50% interest in Allura Diamonds Limited, a Canadian corporation ("ADL") to IBB International (Canada) Ltd., a Canadian corporation ("IBB") in exchange for shares of the capital stock of IBB. IBB was newly formed for the purpose of affecting the Restructuring and as a result of the Restructuring, became a wholly owned subsidiary of the Company. At the same time, the Company acquired the balance of the issued and outstanding shares of capital stock of ADL in exchange for 250,000 shares of the Company's common stock. During May 2000, the Company incorporated a new company, Bygo Inc. ("Bygo"). Collectively, IBB and ADL are referred to as the "Jewelry Division", and together with Bygo, as the "Subsidiaries," and together with the Company, as the "Allura Group." Page 10 of 75 The Company, through the Jewelry Division, is primarily in the business of wholesaling gold, sterling silver and diamond jewelry in Canada. Its customer base is comprised of large national chains as well as independent retailers. During 2000, the company incorporated a wholly owned subsidiary Bygo. Bygo currently has business-to-business and business-to-consumer Internet commerce sites. Since its inception, Bygo has earned minimal revenues as the Company had intended to primarily devote its efforts and resources to develop the software and hardware necessary to execute its business plan. However, Bygo's software development efforts were discontinued in fiscal 2001 and as such there have been no expenditures relating development of software. Bygo operates as an on-line e-commerce facilitator of jewelry, paper goods and giftware distribution. The Company's head-office is located at 1555 West 8th Avenue, Vancouver, B.C., V6J 1T5. Its telephone number is (604) 683-5700, and its fax number is (604) 683-5979. IBB and Bygo operate out of the Vancouver facility, however ADL has its principal office in Halifax at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6. The telephone number for ADL is (902) 457-7654 and the fax number is (902) 443-8414. Business History The Company was initially formed to import European jewelry into Canada. The objective of the Company has been to be a specialized supplier of gold, silver and diamond jewelry within the following principal sectors: Department stores Catalogue retailers Mass merchants Major discounters Major jewelry retailers Independent jewelry stores B. Business Overview Current Operations The Company conducts its jewelry wholesaling operations through the Jewelry Division, and conducts its e-commerce business through Bygo. The Company's mass marketing jewelry operations are conducted through IBB, while ADL's primary focus is the independent jewelry sector. The Activities of IBB As the "average" Canadian gold importer will normally only buy what is available from the manufacturers, IBB believes that it is different, in that it has most of its products manufactured distinctly to its own specifications. IBB has created a niche for its products through innovative selling and display techniques and through the use of trade marked names, such as Dreamcatchers(TM), 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 Page 11 of 75 and 18 karat gold. IBB also markets silver jewelry to major retailers and jewelry chains. IBB's sales are divided approximately 84% to major retail and jewelry store chains and 16% to independent jewelry stores. IBB has created a strong and resourceful management team and continues to invest more to develop and improve on management information systems and computer equipment. This strategy has built a strong management infrastructure, which is ready to handle possible expansion throughout the North American markets. The Activities of ADL ADL was established in 1994 as a premier diamond house to market finished diamond jewelry and loose diamonds. ADL currently specializes in finer diamond jewelry. ADL sales are divided approximately 27% to major retail and jewelry store chains and 73% to independent jewelry stores. ADL's lower priced diamond jewelry to major retailers is marketed through IBB. In 2002, ADL incorporated the "Canadian Diamond" into its range of products. Then in 2004 ADL introduced a new "Diamond Collection Certificate" certifying rings within this product category as a true Canadian made product. This certificate accompanies all products within the "Hearts and Arrows" and "Ideal Cut Diamond" collections. The Activities of Bygo Bygo was established in May 2000 to operate Allura's Internet Commerce business, which comprises of a business-to-business and business-to-consumer e-commerce service. Bygo's e-commerce business provides a catalog based web site for suppliers in the jewelry and giftware industry to facilitate online business transactions. Since its inception, Bygo has earned minimal revenues by primarily devoting its efforts and resources to develop the software and hardware necessary to execute its business plan. Bygo operates as an on-line e-commerce facilitator of jewelry, paper goods and giftware distribution. The Allura Group The Allura Group offers its customers a large selection of jewelry styles, consistent product quality, prompt delivery of product orders and provides a wide range of specialized services. The Company's retail customers include The 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 62% of the Company's net sales in fiscal 2005, 61% in fiscal 2004 and 58% in fiscal 2003. They are representative of the customers to which the Jewelry Division's marketing efforts are directed. The Company continues to expand its customer base. While the Allura Group focused its primary marketing efforts on a relatively small number of retailers, in fiscal 2005, sales were made to approximately 600 customers; with over 1400 retail locations, and with no single customer accounting for more than approximately 26% of net sales. The Company's six largest customers accounted for approximately 62% of sales in fiscal 2005, 61% in fiscal 2004 and 58% in fiscal 2003. 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 Page 12 of 75 In implementing its business strategy, the Company originally introduced the idea of "concept selling," whereby a group of products, effectively a collection of jewelry, could be offered to a customer as a complete concept, including a full merchandise package. With a master assortment in place, the Allura Group, through discussions with the customers regarding their respective market demographics and prior marketing successes and failures, is able to tailor a unique collection of merchandise to suit the individual needs of each customer. As the customer's individualized collection is assembled, the Company's professional team of experts develops innovative displays together with complementing marketing material that will assist the retailer to execute its sales plan. The Allura Group's staff follow up with telephonic and in persons conferences and discussions, fine tuning and refining the program on a continuing basis to ensure an ongoing positive relationship with customers. Industry Background We obtained statistical data and certain other industry forecasts used throughout this report from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical and industry data and forecasts and market research used herein are reliable, we have not independently verified such data. We have not sought the consent of the sources to refer to their reports or articles in this report. Gold Jewelry According to the World Gold Council, retail sales of karat jewelry in North America for 2003 were US$16.3 billion. Dollar sales in 2003 increased by 2.54% from the previous year (2002 US$ 15.9 billion), and by 1.99% from 2001 to 2002 (2001 US$15.6 billion). Unit volume grew by 3.92% to 214,389 million in 2003 from 206,306 million in 2002, and by 3.67% in 2002 from 199,004 million in 2001. Gold jewelry sales have achieved a three-year growth rate of 12.27% in number of unit terms (from 190,957 million to 214,389 million) and 6.72% in dollar terms (from 15.3 billion to 16.3 billion) between December 2000 and December 2003. In 2003, dollar value growth was up by 2.5% over the previous year with Non-Store retail leading the way in sales growth (+3.9%), followed by Mass Merchants (+3.6%), Jewelry Stores (+2.3%) and then Department Stores (+1.3%). For the year, Jewelry stores accounted for 49.3% of all retail dollar value sales (US$8,054,530), while Mass Merchandisers were 22.5% (US$3,688,152) and Department Stores were 19.1% (US$3,120,431). Diamonds According to the Diamond Promotion Services 2003 North American (US and Canada) retail sales of diamond jewelry (defined as jewelry containing at least one diamond; regardless of size, and including diamond watches) was 29.8 billion. This was a 6.2% increase over the 2002 retail sales number, and an 11.8% increase over the 2001 number. In volume terms, 44.1 million pieces of diamond jewelry were sold in the US in 2003, which is a 5.4% increase over 2002 and a 16.6% increase over 2001. (Note: no volume data is available for Canada) US sales by outlet. 75% by independent and small chain jewelry stores (under 30 stores) and by large chain Jewelers (30 plus stores). The remaining 25% is distributed among discounters, department stores (national and regional), other retail outlets, Internet and TV shopping. In terms of sales, independent and small chains accounted for almost half of the value in 2003, however they are loosing their market share to larger chains. Larger chains experienced an 18% increase in the value of Page 13 of 75 their market share in 2003 over 2002. The largest area of growth in terms of style was seen in three-stone diamond jewelry, with sales up 75% in 2003 over the same period in 2002. Diamond necklaces also experienced strong growth in 2003, up 14%. Internet Business to Business Bygo provides a turnkey service for wholesale suppliers and retailers of jewelry, giftware, and related product categories. Suppliers will outsource catalogue creation, order transmission, purchasing facilitation and associated services to Bygo. This centralization of services will enable suppliers and retailers, who may not otherwise have the capacity to do so, to participate in the Internet marketplace and take advantage of the potential benefits offered by e-commerce. Business Strategy The Company expects that its market share of the business generated by large jewelry retailers will continue to trend upwards as manufacturers and distributors with the size and sophistication to satisfy the specialized service needs of these large retailers become increasingly in demand. The specialized services required by these retailers include bar coding, individualized packaging, "drop-shipping" to individual locations and the ability to participate in electronic data interchange ("EDI") programs. The Company believes these services are not available from all suppliers within the industry. Currently, the Company has the capability and resources to provide such services and have done so for customers that have requested for such services. The Company believes that in the increasingly competitive environment in which it operates, the ability to provide specialized customer services, deliver product in a timely fashion and offer a broad line of moderately priced products with a perceived high value will become increasingly important marketing factors. The Company has formulated a business strategy that it believes will enable it to take advantage of these developing trends in the jewelry industry. Further, the Company believes that its business strategy will allow it to leverage the expertise and customer base it has established in the Canadian market to create future sales in the much larger markets of the United States. The Company believes that the most important elements of its business strategy are: Focused Customer Base. While the Company has developed a broad customer base, the Company targets its marketing efforts towards large retailers, such as mass merchandisers, department stores, jewelry retail chains, and other major discount stores. These customers typically require a high level of service, and the Company seeks to build long-term relationships by making it convenient and cost-effective for these customers to rely on the Company for essential services such as product design, inventory control and on time delivery. Customer Service. The Company offers prompt and reliable order fulfillment and a wide range of specialized services, including individualized packaging of jewelry products, price-tagging, bar coding, delivery to individual customer locations and computer generated reports which aid customers in inventory control, purchasing decisions and the identification of market trends. The Company has also participated in EDI programs with certain customers. The Company believes these specialized services, which are particularly important in marketing to large retailers, enhance the Company's ability to attract and retain customers and serve to differentiate the Company from many of its competitors. Successful Product Line Diversification. The Allura Group offers its customers a large selection of jewelry styles and range of products that include precious and semi precious stones, gold jewelry and silver jewelry. Product Diversity, Innovation and Value Pricing. The Company seeks to provide its customers with a Page 14 of 75 full line of high quality gold jewelry products that incorporate traditional styles and designs. While the Company regularly updates its product lines and offers new products, it seeks to avoid designs incorporating high fashion trends that are expected to have short life cycles. The Company currently offers approximately 1,400 styles of chains, earrings, bracelets and rings. The Company's products are moderately priced, with the majority of its products retailing at prices between $30 and $800, and the relatively more expensive product line offered by ADL are intended to appeal to consumers who are value-conscious as well as fashion-conscious. IBB has made inroads into the silver jewelry market by securing programs with various customers. The Company currently offers approximately 54 styles of silver product. A principal focus of the Company's design program is to maximize the perceived value of the Company's products through design and manufacturing innovations that enhance the appearance of its jewelry without corresponding increases in product costs. The Company also works closely with major customers to develop products, which are sold exclusively by those customers. Internet Operations. The Company currently has two Internet web domain names registered for its jewelry operations, AlluraJewelry.com and ibbgold.com. Both sites are currently set up for e-commerce order facilitation using the Bygo web site. The Company has established an e-commerce solution that covers products in the jewelry, home wares, paper goods and giftware industries, which operates under bygo.net and bygo.com. The Company has reserved a number of domain names for use in its Internet operations including, but not limited to: bygo.com, bygo.net, bygo.ca, bygo.org, buygo.com, and bygo.biz. Sales and Marketing The Company's sales and marketing operations are directed at retail stores of all types and sizes such as department stores, catalogue retailers, mass merchants, major discounters, major jewelry retailers and independent jewelry stores. The Company's retail customers include The 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 62% of the Company's net sales in fiscal 2005, 61% in fiscal 2004 and 58% in fiscal 2003. The company had two (2004: three) customers, sales to each of whom exceeded 10% of the total sales. They are representative of the customers to which the Jewelry Division's marketing efforts are directed. The Company continues to expand its customer base. The Company believes that providing exceptional customer services is a key element of its marketing program. The Company's marketing efforts emphasize its ability to fill orders in a prompt and reliable fashion. The Company maintains an extensive inventory of finished goods, which enable it to rapidly fill customer orders often within 24 hours of receipt. The Company believes many of its competitors manufacture products only upon the receipt of customer orders and generally has only a limited ability to fill orders from existing stock. The Company has worked hard to build its computer programs to help anticipate customers' needs. In addition to prompt and reliable order fulfillment, the Company offers a wide variety of customer support services designed to meet the individual needs of its customers. The Company targets large retailers who require a high level of service, and the Company seeks to build long-term relationships by making it convenient and cost-effective for customers to rely on the Company for essential services. For many of these customers, the Company prepackages, price-tags and bar codes individual pieces of jewelry and then ships an assortment of many prepackaged items to individual retail locations. Other services provided by the Company include advertising and merchandising support and, point of sale displays. The Company provides computer-generated reports analyzing the customers' sales and inventory levels by category, style and price point. These reports assist the Company and its customers to increase sales, 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. Page 15 of 75 Marketing of the Company's products is conducted through its offices in Vancouver and Halifax. The Company also has a National Sales Manager for major accounts in Toronto, a National Independent Sales Manager, and five regional independent customer service representatives who market to retail customers. In addition, the Company's products are promoted through the use of the Internet, brochures and trade show exhibitions. The Company does not advertise its products directly to consumers. Prices charged to individual customers vary based on the services required by the customer and the customer's sales volume. Most sales are made under terms that require payment to the Company of the full purchase price within 90 days of the date of invoice. During the Christmas holiday season, payment terms for certain customers may be extended. The Company also makes sales on a consignment basis (transactions in which products are delivered to customers for more than 90 days under terms which permit the customer to defer paying for the products until they are sold to its customers and allows them to return any unsold product). The amount of consignment sales in the past three fiscal years was approximately $5.7 million per year. The Company accepts returns of products with defects in materials or workmanship. The Company also accepts returns of certain items, primarily from large retailers, in order to maintain customer goodwill and as part of promotional programs. Returns of products which are not defective, generally, are made as part of stock balancing transactions in which the returned products are replaced with products better suited to the customer's particular market needs. While the Company sold its products to approximately 600 customers in fiscal 2005, sales of the Company's six largest customers accounted for approximately 62% of sales in fiscal 2005 and 61% in fiscal 2004 and 58% in fiscal 2003. All of the Company's active customers are Canadian except Zales Corporation. Products The Company seeks to provide its customers with a full line of high quality 10, 14 and 18 karat gold, silver jewelry and diamond jewelry products that incorporate traditional styles and designs. While the Company regularly updates its product lines and offers new products, it seeks to avoid designs incorporating high fashion trends that are expected to have short life cycles. The Company currently offers approximately 1,400 styles of chains, earrings, bracelets and rings. The Company's products are moderately priced, with the majority of its gold products retailing at prices between $30 and $800 and are intended to appeal to consumers who are value-conscious as well as fashion-conscious. Through ADL, the Company sells items of relatively higher price points, which will extend to an average high of $2,500. The Company has an extensive selection of products to offer its customers. Some of these are available exclusively from the Company. These products include neckwear, chains, bracelets, bangles, earrings, rings, lockets, pendants and charms. At the same time, through ADL, the Company sells loose diamonds. The Company works closely with its manufacturers to put together some product ranges that are exclusive and often unique in design. The Company's marketing and merchandising staff work in partnership with major customers to develop products that are sold exclusively by the Company to those customers. The Company's product line includes approximately 840 karat gold, 350 diamond and colored stone and 54 sterling silver products that are a regular part of its product line. These products are traditionally designed diamond and colored stone set items, karat gold and sterling silver chains and other jewelry products for which there has been consistent demand. The Company continually strives to update the balance of its product line with innovative, new styles. New styles primarily are introduced at the beginning of each calendar year, and replace older styles whose performance has declined. The Company closely monitors sales of its new styles and promptly discontinues any style that fails to achieve desired sales levels. When major customers plan to discontinue items from their programs, including those that have been on consignment programs, the items agreed to be discontinued are sold down to minimize the Page 16 of 75 quantifies returned to the Company. When the items are returned, they are typically offered to other customers for regular margins. At times during the year, the Company may offer such discontinued items at discount values to generate cash flow and these are typically sold at reduced margins. Styles are discontinued when a supplier or manufacturer has discontinued an item from their offering and we are unable to replace the product or the customers' performance for the item has not met their targets. The Company's experience is that such discontinued products do not have to be significantly written down as its expected recovery from subsequent sales is above costs. Customers selling prices and the Company's price book are updated annually to ensure prices reflect market conditions and costs of doing business. Certain customer prices lists are priced to allow for adjustments to gold price fluctuations. Gold price is monitored on a daily basis to ensure such price lists are updated to reflect current gold levels. It is the Company's experience that some items significantly written down are later sold but these amounts are not material. The Company's estimates that during fiscal 2005, such sales accounted for $200,000 of the total revenues for the Company. During fiscal 2005, the Company has written down inventory by an additional $92,000 to reflect the estimated recovey of discontinued items. A principal goal of the Company's new product program is to optimize the perceived value of the Company's products through design and manufacturing innovations that enhance the appearance of the jewelry without incurring corresponding increases in product costs. Service Bygo provides a turnkey service for suppliers of jewelry, giftware, paper goods, housewares and related product categories. Suppliers and retailers will outsource catalogue creation, order transmission, purchasing facilitation and associated services to Bygo. This centralization of services will enable suppliers and retailers, who may not otherwise have the capacity to do so, to participate in the Internet marketplace and take advantage of the potential benefits offered by e-commerce. Bygo's all-inclusive e-commerce service will allow suppliers (manufacturers, wholesalers, or distributors) to place their entire product range online in a comprehensive, professional, integrated catalogue, and assist them in selling their goods to their bricks-and-mortar retail customers. Services will be provided to all members of the distribution channel: manufacturers, suppliers, sales reps, and retailers. Purchasing The Company purchases finished products from suppliers located principally in North America, the Middle East, the Far East and the European Economic Community ("EEC"). The principal items purchased by the Company through IBB are machine and handmade gold and silver chains; other gold and silver items purchased as finished goods include rings, bracelets, bangles, lockets, earrings, pendants and charms. The principal items purchased by the Company through ADL are loose diamond stones and finished goods, including rings, bracelets, pendants and earrings. The world's principal sourcing of rough diamonds is through De Beers Consolidated Mines, Limited ("De Beers"), a South African company. The continuing availability of diamonds to the jewelry industry is dependent, to some degree, on a continuous supply from De Beers. While several other countries are major suppliers of diamonds, in the event of an interruption of supply from South Africa, the jewelry industry, as a whole, could be adversely affected, which could impact the supply of diamonds to the Company. During fiscal 2005, the Company purchased gold and silver jewelry products from approximately 126 Page 17 of 75 suppliers. The largest supplier accounted for approximately 16% of the Company's total gold and silver purchases, and the five largest suppliers accounted for approximately 36%. In the diamond jewelry, loose stone and coloured stone area, the company purchased products from approximately 101 suppliers. The largest supplier accounted for approximately 20% of the Company's total purchases in this area, with the five largest suppliers accounting for 50%. Although a substantial portion of the Company's purchases are concentrated within a small number of suppliers, the Company does not believe the loss of any one supplier would have a material adverse effect on its business. Alternative sources of supply for the finished goods purchased by the Company are available. The Company has no long-term contractual relationship with any of its suppliers. In order to maintain consistent product quality, the Company carefully selects its suppliers and continually monitors the quality of their performance. The Company has strict internal control procedures of all jewelry from inspecting all materials sent and received from outside suppliers, monitoring the location and status of all inventory to ensuring government rules and regulations are followed through the entire purchasing and receiving process. A complete physical inventory of gold, silver and gemstones is taken at the Company's distribution and administrative facilities on an annual basis. The Company does not presently engage in hedging when purchasing gold, silver or diamonds. The Company believes the risk of price fluctuations can be mitigated by changes in the prices the Company charges its customers and in the nature of its contracts negotiated with its largest customers. Increases in the price of diamonds, silver or gold, however, could adversely affect the profit of the company. A decrease in the price of gold, silver or diamonds could also have an adverse affect in the valuation of the Company's inventories. Competition The jewelry industry in North America is highly fragmented and characterized by a large number of small to medium-sized manufacturers, wholesalers and distributors. The Company's business is highly competitive, and the Company's competitors include domestic and foreign jewelry manufacturers, wholesalers and importers who may operate on a national, regional or local scale. The Company believes that competition is based primarily on product availability, timeliness of shipment, customer service, product quality, design and price. The diverse distribution channels through which the Company markets its products frequently involve different competitive factors. The ability to provide specialized services is a particularly important competitive factor in sales to certain large retailers such as mass merchandisers, discount stores and catalogue retailers. Product availability and the ability to offer consistent product quality at competitive prices tend to be the key competitive factors to key customers that the Company serves. Some of the Company's competitors may specialize in sales to particular distribution channels and may have relationships with customers in those distribution channels that make competition by the Company more difficult. The Company believes that the trend towards consolidation at the retail level in the jewelry industry will increase the level of competition in the markets in which the Company competes. The Company believes its primary competitors for IBB to include PAJ Canada (Canada and USA), Bel-Oro (Canada and USA), Chateau D'Argent (Canada) and R & B Manufacturing (Canada and USA), and for ADL to include Corona (Canada and USA), Master Design (Canada and USA), A & A Jewel Star (Canada and USA), J.S.N (Canada and USA) and Libman (Canada and USA). Insurance The Company maintains primarily all-risk insurance, with limits normally in excess of the Company's current inventory levels, to cover loss and damage caused by fire and/or theft of inventory located at the Company's facilities and insurance on goods in transit. The Company also maintains insurance covering loss and damage caused by fire and/or theft of inventory located at the premises of suppliers and while in the Page 18 of 75 possession of its sales representatives. While the amount of available coverage generally is in excess of the value held by a particular supplier or sales representative, at times the amount of value held by a supplier may temporarily exceed the amount of available coverage. These temporary differences between the amount of available coverage and the value held have not been material to the Company's financial condition or results of operations. The Company has fidelity insurance, which provides a level of coverage against theft or embezzlement by employees of the Company. The Company has an insurance policy to cover liability against its directors and officers. Additionally, the Company carries credit insurance, which covers most of the independent and major customer receivables. Trademarks The Company maintains certain Canadian and US registered trademarks. The level of protection available to the Company for proprietary designs varies depending on a number of factors, including the degree of originality and the distinctiveness of the designs. No assurance can be given that the Company's patent, copyrights and other proprietary rights will preclude competitors from developing substantially equivalent products. IBB uses trademarks in the sale of some of its products to further create an exclusive identity for its customers. The following are some of the Canadian registered trademarks used: Dreamcatchers(TM), Little Loves Gold Jewellery(TM), Golden Moments(TM), Earresistables(TM), Tuscany Gold Collection(TM), and Tuscany Silver(TM). The Company has registered the trademark name bygo.com for its exclusive use in Canada: BYGO.COM. The Company is in the process of registering the following trademark name for its exclusive use in the USA: BYGO.COM. Additionally, the Company has registered the following trademark names for its exclusive use in the USA: BYGO and BYGO.NET. The Company does not have, nor does it rely on patents to establish or protect its market position. Employees At March 31, 2005, the Company employed thirty-three persons on a full time basis. As at September 15, 2005, there were thirty-two persons employed on a full time basis. As at September 15, 2005, there are twelve employees in finance and administration nine in sales and merchandising, and eleven in inventory warehouse. Five employees are employed in the Halifax office, one is employed in Toronto, and twenty-six are employed in the Vancouver office. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. Governmental Regulation The tax laws of the Federal Government of Canada and the Provinces of British Columbia and Nova Scotia govern the Company. Specifically, it is bound by income, custom and excise tax rules and regulations regarding customs, all of which are regulated by the federal government of Canada. In addition, the Company is subject to the sales tax and employment laws of the Provinces of British Columbia, Ontario and Nova Scotia. Changes in the tax rates governed by these authorities may have a significant impact on the cash flows of the Company. The Company is also required to comply with the reporting requirements under 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 Page 19 of 75 Please refer to "Item 4 - History of the Company - Corporate Structure" and "Business Overview." D. Property, plants and equipment. Real Property The Company operates from leased premises in Vancouver and Halifax. The Company's Vancouver office is located on 1555 West 8th Avenue, Vancouver, B.C., V6J 1T5, Canada and the Halifax office is located on Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6, Canada. The Vancouver premises cover 8,557 square feet and give the Company a self-contained headquarters building from which to operate. The premises have an underground parking garage. The premises are leased from a partnership of which Jeremy Bowman, the Company's President and a stockholder who has significant influence on operations, is a partner. The Company believes that the terms of the lease are as favorable as those that could be obtained from an unaffiliated third party. The Company leases the Vancouver premise for $9,400 per month plus expenses. On May 27th, 2002, the Company leased an office in Halifax on a five year fixed term starting July 1st, 2002 at $1,100 per month plus applicable taxes. The Halifax lease has a 90-day cancellation provision for the benefit of ADL only. The premises are leased on commercially agreed terms, from Torrington Bay Investments Limited, in which Tom Weckman, the President of ADL, has an interest. The Company believes the terms of this lease are as favorable as could have been obtained from unaffiliated third parties. The premises in Halifax are located at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6 and contain 1,136 square feet of office space. The Company believes that its current premises are adequate for the Company's current operating level and presently foreseeable growth. 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, not for Bygo Inc. These subsidiaries generate significant revenues and cash flow from the use of this software in their operations. The evaluation of impairment was conducted by evaluating these subsidiaries, not Bygo Inc., and the Company has concluded that there has been no impairment to the software carrying value. 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 2005 v. Fiscal 2004 Sales for the fiscal year ended March 31, 2005 ("Fiscal 2005") were $18,504,616 compared to $16,322,923 for the fiscal year ended March 31, 2004 ("Fiscal 2004"), an increase of $2,181,693 or 13.4%. The Fiscal 2005 sales increase was primarily a result of: Page 20 of 75 o a new program implemented with a major national retailer generated approximately $1,000,000 increase in sales from the customer o and increase of the return of business from a previous large customer resulted in an additional $1,300,000 in sales. The Company expects the continuance of these two new programs through the replenishment of sales of items from the program. However, it does not expect to see the same rate of increase. Cost of sales for Fiscal 2005 was $13,154,241 with a gross margin of 28.9% compared to $12,156,794 with a gross margin of 25.5% for Fiscal 2004. The increase in cost of sales of $997,447 or 8.20% was a result of increased sales in Fiscal 2005. Gross margin percentage for the current year has improved from the prior year. This percentage improved partly as a result of an increase in gold price, improvement in the level of the Canadian Dollar, and increase in return on inventory. The Company expects the gold price to continue to increase into its new fiscal year. However, it does not expect a significant benefit from customer price increases in relation to gold inventory costs. Cost of sales includes the cost of inventory sold, inbound freight, duties, taxes and brokerage, jewelry packaging sold with the product, and the gain/loss on settlement of inventory purchases as discuss above. The Company's cost of sales may not be comparable to others as the costs associated with purchasing and receiving and warehousing are included in our selling, general and administrative expenses as the amounts are not material. Purchasing and receiving costs approximate $48,000 (2004: $52,000) and warehousing costs approximate $16,000 (2004: $16,000). The Company's gross margin may not be comparable to others as the costs of freight and shipping are included in our selling, general, and administrative expenses. Freight and shipping totaled $254,267 compared to $169,806 in the prior year. General administrative costs increased by 27.9% or $710,249 from $2,537,947 in Fiscal 2004 to $3,248,196 in Fiscal 2005. The changes were primarily a result of: o Bad Debts - increased $45,539 (47.9%): The current year increase is result of management's decision to write off the accumulation of small outstanding balances with major customers as well as a general increase in the provision for future write downs to reflect increased sales volumes. o Insurance - increased $127,505 (69.4%): There was an overall increase in premium rates for the Company's various insurance policies. An increased sales volume also generated a higher premium for credit insurance, while higher premiums were paid to underwriters for business interruption and inventory insurance - during the year, inventory levels increased significantly which required the Company to increase its sums insured. o Office and Miscellaneous - increased $168,343 (126.0%): In the current year, the Company incurred hiring/recruiting agent fees to place additional personnel into its resource pool. In addition, the Company contracted out additional programming and consulting work to computer consultants to improve its computerized systems and also utilized an external consultant to provide training programs and coaching services to its employee group. o Salaries and Wages - increased $408,449 (25.2%): During Fiscal 2005, the Company increased its staffing resources with additional permanent employees and also increased its temporary staffing during the fall of 2005 to manage and roll out new programs. Included in salaries and wages are the labour costs of the purchasing and receiving staff which were approximately $48,000. Travel, Meals and Entertainment - increased $46,132 (122.8%): During the year, the Company's sales team members increased travel to their various sales territories in order to promote new product lines and meet with customers. The Company's new national sales manager also travels regularly to each sales territory to work Page 21 of 75 with the sales team members and meet with customers in an effort to generate more business. Selling and delivery expenses increased by $368,796 or 55.2% to $1,037,506 in Fiscal 2005 from $668,710 in the prior year, as a result of: o Marketing - increased $65,746 (27.5%): This year the Company paid additional marketing dollars to its major customers to assist with the promotion of new programs. Marketing dollars paid to major customers are contributions towards the customers' annual catalogues. Other forms of cash discounts and rebates are included as a reduction in sales revenue. o Freight and Shipping - increased $84,461 (49.7%): An increase in sales volume for the year resulted in additional shipping costs incurred - in addition some of the Company's new customers have multiple locations requiring drop shipments. The company does not charge back the costs of shipping except for small deliveries. The amount of such charges amount to less than $15,000 annually. o Selling Expenses - increased $196,871 (205.5%): The Company invested in new product displays during the year in order to roll out new programs and to also refresh the look of existing programsInterest and bank charges for Fiscal 2005 increased by 13.2% to $562,999 when compared to the Fiscal 2004 figure of $497,534. The Company increased its demand operating line significantly during the year to finance new consignment programs, new program roll outs and the general costs associated with an increase in overall business. Earnings before tax in Fiscal 2005 was $431,629 compared to $388,567 in Fiscal 2004. This increase was substantially due to increased sales for the year. Tax expense is determined by entity-based results and as such, the Company's tax consists of corporate income taxes resulting from profitable operations in IBB and ADL. Allura's and Bygo's e-commerce start-up costs have created losses that may be used in future periods to reduce taxable income. As disclosed in Note 9 to the Company's consolidated financial statements, the tax benefit of these losses has been offset by a valuation allowance of the same amount due to the uncertainty of their realization. Net earnings for the year of $322,708 reflect a decrease of $4,973 over last year's figure of $327,681. The Company does not expect Bygo to generate more than minimal revenues from the services it provides. Bygo incurred approximately $15,000 (2004: $47,000) of expenses in fiscal 2005. The Company expects to discontinue its operations in the fiscal 2007 and to wind up its operations into one of its operating subsidiaries. Fiscal 2004 v. Fiscal 2003 Sales for the fiscal year ended March 31, 2004 ("Fiscal 2004") were $16,322,923 compared to $17,240,986 for the fiscal year ended March 31, 2003 ("Fiscal 2003"), a decrease of $918,063 or 5.32%. The Fiscal 2004 sales decrease was primarily a result of: o The discontinuation of a Major customers program o Economic factors which has resulted in conservative purchasing by both independent and Major customers o Tightening of credit policies to mitigate exposure to potential losses, primarily in the area of independent sales Cost of sales for Fiscal 2004 was $12,156,794 with a gross margin of 25.5% compared to $13,007,581 with a gross margin of 24.6% for Fiscal 2003. The decrease in cost of sales of $850,787 or 6.54% was a result of decreased sales in Fiscal 2004. Gross margin percentage for the current year has improved from the prior year. This percentage improved partly as a result of an increase in gold price and the improvement in the level of the Canadian Dollar. Page 22 of 75 Cost of sales includes the cost of inventory sold, inbound freight, duties, taxes and brokerage, jewelry packaging sold with the product, and the gain/loss on settlement of inventory purchases as discuss above. The Company's cost of sales may not be comparable to others as the costs associated with purchasing and receiving and warehousing are included in our selling, general and administrative expenses as the amounts are not material. Purchasing and receiving costs approximate $52,000 (2003: $52,000) and warehousing costs approximate $16,000 (2003: $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 $169,806 compared to $197,501 in the prior year. General administrative costs increased by 7.12% or $168,715 from $2,369,232 in Fiscal 2003 to $2,537,947 in Fiscal 2004. The changes were primarily a result of: o Salaries and Wages: The Company hired additional accounting, sales and administration staff to manage the workload. o Higher accounting and legal fees associated with working towards compliance with more stringent regulatory requirements, and consultation in connection with a unconsummated acquisition. Bad Debts: In the prior year there was a significant recovery of previously written off accounts receivables relating to bad debts. In the current year there were no similar recoveries. Selling and delivery expenses decreased by $122,178 or 15.4% to $668,710 in Fiscal 2004 from $790,888 in the prior year, as a result of: o A reduction in commissionable sales o The discontinuation of a major program that previously incurred substantial delivery costs o Display costs were lower than in previous years as a result of there being no significant content changes to major programs Interest and bank charges for Fiscal 2004 increased by 8.17% to $497,534 when compared to the Fiscal 2003 figure of $459,939.The change was primarily a result of: o The company paying a guarantee fee for a $1,000,000 standby letter of credit, which was used as a guarantee to our bank indebtedness. Earnings before tax in Fiscal 2004 was $388,567 compared to $539,820 in Fiscal 2003. This decrease was substantially due to higher administrative expenses coupled with a reduction in sales for the year. Tax expense is determined by entity-based results and as such, the Company's tax consists of corporate income taxes resulting from profitable operations in IBB and ADL. Allura's and Bygo's e-commerce start-up costs have created losses that may be used in future periods to reduce taxable income. As disclosed in Note 9 to the Company's consolidated financial statements, the tax benefit of these losses has been offset by a valuation allowance of the same amount due to the uncertainty of their realization. Net earnings for the year of $327,681 reflect a decrease of $70,403 over last year's figure of $398,084. Corporate Reorganization In April 1999, the Company undertook the following steps to complete a corporate re-organization: (i) it issued 250,000 shares to Thomas and Linda Weckman to acquire the non-controlling interest of Allura Diamonds Limited ("ADL"), effectively rendering ADL a wholly owned subsidiary of IBB, (ii) it transferred its net assets and operations to IBB; and (iii) it changed it's name from IBB International Bullion and Metal Page 23 of 75 Brokers (Canada) Limited to Allura International Inc. B. Liquidity and Capital Resources During fiscal 2001, the Company (i) completed a private offering of 1,070,298 common shares from which it realized net proceeds of $1,535,004, (ii) completed a second private offering of 400,000 shares from which it realized net proceeds of $588,000, (iii) issued 340,136 common shares pursuant to an investment agreement, ("Investment Agreement") to a venture capital group, Business Development Bank of Canada, ("BDC") on July 25, 2000, ("BDC Investment Date") for which it realized proceeds of $500,000 less issue costs of $23,867 and (iv) issued 114,753 common shares to MacDonald Dettwiler & Associates ("MDA") in exchange for contracted services in developing Bygo's web site for value of $167,539. During Fiscal 2003, the shares issued to MDA were returned to and cancelled by the Company as part of the Settlement Agreement discussed in ITEM 5 H. OPERATING AND FINANCIAL REVIEW AND PROSPECTS-Legal Proceedings. On September 30, 2005, the shareholders approved a 3 to 1 share consolidation for shareholders on record at September 30, 2005. 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 $64,000 at March 31, 2005 (2004: $55,600; 2003: $49,500)) and the original proceeds received under the unit offering ($500,000). The common share put options were outstanding as at September 15, 2005. As required under recently adopted Canadian generally accepted accounting principles, the Company has presented its obligation under this put as a current liability as disclosed in Note 3. 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 $6,500,000 with a $3,000,000 onetime bulge in effect June 1, 2005 to February 28, 2006, reducing to $2,500,000 in effect April 1, 2006 to July 31, 2006 (the "Onetime Bulge"), thereafter an annual $1,100,000 bulge in effect from July 1 to February 28 each year (the "Seasonal Bulge"). The credit facilities are subject to certain margin requirements as defined in the Overdraft Loan offer letter from HSBC dated July 14, 2000, amended on August 9, 2001, and subsequently amended on August 28, 2002, October 8, 2002, March 18, 2003, July 31, 2003, July 2, 2004, July 19, 2004, March 31, 2005 and July 13, 2005 collectively referred to as the Company's "Banking Agreement". The margin requirements as defined by the Banking Agreement are as follows: Page 24 of 75 The amount outstanding under the Loan will not, at any time, exceed the sum of: o 50% of the value of Acceptable Inventory, up to a maximum margin contribution of $2,500,000, including a onetime sub-limit increase to $1,350,000 in effect June 30, 2005 to March 31, 2006, thereafter a $1,000,000 sub-limit for Allura Diamonds Limited inventory at all times and a onetime increase to $3,725,000 in effect June 30, 2005 to March 31, 2006, reducing to $3,050,000 in effect April 1, 2005 to June 30, 2006, thereafter $3,050,000 for the months of July through October, plus 50% of consignment inventory limited to a maximum of $1,500,000 subject to the following sub limits; Bay/Zellers $1,500,000; Charms $100,000; Ben Moss $175,000; o 75% of the amount of Acceptable Accounts Receivable; plus 80% of the amount of Acceptable Accounts Receivable approved by the Bank as a "Major" account, and insured by Euler American Credit Indemnity Company ("Euler"), for 100% of the account receivable for a 60% pay out; plus 90% of the amount of Acceptable Accounts receivable insured by Euler for 100% of the account receivable for a 90% pay out; o 100% of the sum of Acceptable Credit Instruments; o An $800,000 allowance for the mortgage given in support of the guarantee. The Company's borrowings bear interest at a rate equal to Canadian prime plus 1/8% on the first $1,000,000 (Fiscal 2004: $1,000,000) and prime plus 1% on the balance. The prime interest rate on these loans at year-end was 4.25% (Fiscal 2004: 4.00%). The loans are collateralized by a general security agreement creating a first floating charge over all assets, a general assignment of book debts, an assignment of inventory under Section 427 of the Bank Act, a guarantee from a shareholder for $4,000,000 supported by a standby letter of credit for $1,000,000 (Fiscal 2004: $1,000,000), guarantees by certain other shareholders to a maximum of $800,000, supported by an assignment of certain shareholders' residential real estate to a maximum of $800,000. Under the terms of the demand overdraft loan agreement facility, the Company must maintain certain Debt to Tangible Net Worth ratios not exceeding 3.0 to 1 for its Jewelry Division and not exceeding 2.6 to 1 on the consolidated entity basis as defined by the bank at each year-end when the loan is outstanding. As at March 31, 2005, the Debt to Tangible Net worth ratios were 3.25 to 1 and 3.28 to 1 respectively. Notwithstanding the foregoing defaults, the bank has agreed not to demand repayment of the loan although they have not waived their ability to so and retain their ability to demand repayment due to the breached covenants. The Company expects to see cash flow improvement but will continue to rely on its bank financing to maintain operations and to finance potential increases in revenues and expansion of customer programs. The Company expects cash flow to be provided by operations in fiscal 2008. However, it will continue to depend on bank financing at its current level to expand its business into new areas. For the year ended March 31, 2005, the combined overdraft loan amounted to $7,849,332. The facility was renewed on July 13, 2005. The Company's account receivables net of allowances for doubtful accounts as at March 31, 2005 were $3,413,824 the balance in accounts receivable represented 18.4% of net sales for Fiscal 2005. The Company's inventory as at March 31, 2005 was $13,043,939 or 70.5 % of net sales for Fiscal 2005. Inventory increased significantly to such a large percentage of sales because it reflects (i) the Company's commitment to ensure customers orders can be turned around in a short period from the time the order is placed with the Company to the time it is delivered, (ii) the increases in replenishment programs with customers, which the Company must ensure sufficient inventory is available at all times to achieve maximum ship value on each order (iii) the customers' higher fulfillment targets for each purchase order delivered and (iv) an increase of $1 Page 25 of 75 million in consignment goods under consignment agreements resulting from customers store and program expansion. ADL continues to expand and develop its product line to increase selection and availability in the market place. Inventory has increased over the prior year as a result of two new programs with customers and a new program offered to Independent Groups. The Company does not anticipate its inventory levels to continue to increase significantly in future periods except to accommodate for new product lines and new business. The Company's accounts payable and accrued liabilities as at March 31, 2005 were $4,674,618 for Fiscal 2005. The Company does not anticipate any difficulties in settling these obligations. Except for anticipated aggregate lease payments for both IBB and ADL of approximately $594,120 over the next five years, the Company has no significant capital commitments as of September 15, 2005. The Company anticipates that cash flow from operations, as well as borrowings available under current Overdraft Loan Facilities will be sufficient to satisfy the operating needs for the next twelve months. U.S. Generally Accepted Accounting Principles There are no material differences between Canadian GAAP and U.S. GAAP as applicable to the Company's operations and financial statements, including disclosure items as disclosed in Note 16 to the Company's consolidated financial statements. C. Research and Development, Patents and Licenses, etc. The Company does not conduct research and development and holds no patents or licenses. D. Trend Information See "Item 4. - Information on the Company, - Part B., Business Overview" E. Off-Balance Sheet Arrangements There are no known significant off-balance sheet arrangements other than those disclosed in Item 10 Section 3 under "Investment Agreement" and as disclosed in Note 10 of our audited consolidated financial statements for the year ended March 31, 2005. F. Tabular Disclosure Of Contractual Obligations The following table summarizes all of the outstanding obligations of the Company's continuing operations by the year that they become due. We expect to fund these obligations from operating income and equity/debt financing: Page 26 of 75
--------------------------------------------------------------------------------------------------------------------- Payments due by period ---------------------------------------------------------- Contractual Obligations Less than 1-3 More than Total 1 year years 3-5 years 5 years --------------------------------------------------------------------------------------------------------------------- [Short-Term Debt Obligations] -- $8,911,408 -- -- -- [Long-Term Debt Obligations] -- -- -- -- -- [Capital (Finance) Lease Obligations] -- -- -- -- -- [Operating Lease Obligations] $612,934 -- $368,352 $225,768 $18,814 [Purchase Obligations] -- -- -- -- -- [Other Long-Term Liabilities Reflected on the Company's -- -- -- -- -- Balance Sheet under the GAAP of the primary financial statements] --------------------------------------------------------------------------------------------------------------------- Total $612,934 -- $368,352 $225,768 $18,814 ---------------------------------------------------------------------------------------------------------------------
G. Safe Harbor Some of the information in this report contains forward-looking statements. Forward-looking statements represent our current expectations or forecasts of future events and are based on our management's beliefs, as well as assumptions made by and information currently available to them. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include the words "anticipate," "believe," "budget," "estimate," "expect," "intend," "objective," "plan," "probable" "possible," "potential," "project" and other words and terms of similar meaning in connection with any discussion of future operating or financial performances. Any or all of our forward-looking statements in this Form 20-F may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many of these factors, including the risks outlined under "Risk Factors," will be important in determining our actual future results, which may differ materially from those contemplated in any forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this prospectus. Our forward-looking statements speak only as of the date made. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. H. Legal Proceedings As at September 30th, 2005, there are no legal proceedings to which the Company is a party or to which Page 27 of 75 its properties are subject. The Company does not know of any legal proceedings that are contemplated. In Fiscal 2003 the Company settled an outstanding dispute between MDA, Bygo and Allura, which culminated in the signing of a Settlement Agreement between all the parties dated May 1, 2002. The impact of the settlement was primarily accrued in Fiscal 2002 as the amounts related to the settlement were known at the financial statement date and were material. In the Financial Statements under Note 5, the return of 114,753 common shares of the Company by MDA as a component of the final settlement has been disclosed. Theses shares have been returned to Treasury and cancelled. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management The following table sets out the full name, age, and function in the Company of the directors, executive officers and key employees of the Company as of September 15, 2005. On September 28th, 2004, the Directors on the Board of Directors were re-nominated to stand for election to the Board. All nominated Directors were re-appointed effective September 28th, 2004. On July 15, 2005, Andrew Lugsdin resigned as a Director.
Position Held Name Age Positions Since --------------------------------------------------------------------------------------------- Jeremy Bowman 54 Director, President and CEO 1988 Sheila Bowman 47 Director, Secretary, and Treasurer 1988 Frank Kovacs 52 Director 1998 Thomas Weckman 51 Director and President of Allura Diamonds Limited 1994 Tina VanderHeyden 53 Director 1999 Dave Wall 56 Director 2003 Emily Tsen 39 Chief Financial Officer /V.P.Operations 1996
Jeremy Bowman has been the President, CEO and Director of the Company since 1988. He is also a 25% Owner/Director of The Black Bear Pub Limited in Nanaimo, B.C., Canada. A restaurant, bar and liquor store. Sheila Bowman has been the Secretary and Treasurer and a Director of the Company since 1988. She is also a 25% Owner/Director of The Black Bear Pub Limited in Nanaimo, B.C., Canada. A restaurant, bar and liquor store. Page 28 of 75 Frank Kovacs is the Managing Director of International Bullion & Metal Brokers Ltd., a company incorporated in the United Kingdom for the past six years. He has also been a Director of the Company since 1988. Thomas Weckman has been the President of ADL since 1994 and a Director of the Company since 1999. He has also served as President of Baird Weckman Sales Ltd., a private trading company incorporated under federal laws of Canada since 1997. Tina VanderHeyden has been the President of T. VanderHeyden Associates Inc., a company incorporated under the laws of the Province of British Columbia, for the past 27 years and has served on the Company's Board of Directors since 1999. She is also a director for The Canadian Film Centre. Dave Wall has been a Director since September 30th, 2003. Mr. Wall joined Norpac Controls Ltd. ("Norpac") in 1973 and became President of Norpac in June 2000. In addition, Mr. Wall serves on the Emerson Process Management Representative Presidents' Executive Committee and the Control Systems Division Advisory Committee. He also sits on two B.C.I.T. advisory Boards: the UBC Chemical Engineering Industry Advisory Board and the Association for Professional Engineers and Geo Scientists. He is a corporate campaign Executive for United Way and in prior years served as Board President for the North Shore Neighborhood House. Mr. Wall is a director of Norpac, Artemis Industrial Networks Ltd. and Norpac Employee Owners Ltd. Emily Tsen has served as the Chief Financial Officer of the Company since 1999 and previously as its Controller since 1996. In December 2003 she was further given the title of Vice President Operations. She received her chartered accountancy designation in British Columbia in 1993. Each director serves until the next annual meeting of shareholders and until his successor shall have been duly elected and qualified or until such earlier time as such director may resign or be removed. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There are no arrangements or understandings between the director and any other person regarding such director or officers election to serve in his or her official capacity on behalf of the Company. The Shareholders' Agreement entitles Business Development Bank of Canada ("BDC') to select a nominee for the Board of Directors as long as BDC holds at least 300,000 Common Shares in the Company. As at September 15, 2005, BDC has not selected a nominee for the Board of Directors. Except as noted in the following paragraph, the Company has employment agreements with all of its senior management. The Company's business is substantially dependent on the efforts and abilities of Jeremy Bowman, its Chief Executive Officer. The loss of Mr. Bowman's services may have a material adverse effect on the Company's business. The Company is currently negotiating an employment agreement with Mr. Bowman; however, it has not yet been finalized. The Company does not maintain any key man life insurance on Mr. Bowman's life. There are no assurances that the agreement currently being negotiated will be finalized. B. Compensation The Company paid aggregate compensation of $607,500, $620,000 and $616,700 to all directors and officers as a group during the fiscal years ended March 31, 2005, 2004, and 2003, for services in all capacities. There were no funds set aside by the Company during the fiscal year ended March 31, 2005 to provide pension, retirement or similar benefits for officers or directors. On October 30, 1999, the Company approved stock options to be issued to employees and consultants of the Company. Total options granted by the Company, as at March 31, 2005 were 352,500 of which, 140,000 were granted to officers and directors of the Company. Each option is convertible into a share of the Company's common stock. Of the options currently outstanding, 57,500 options have an exercise price of $1.50 and will Page 29 of 75 expire in approximately 0.32 years and 260,000 options have an exercise price of $1.58 and will expire in approximately 1.86 years. The balance of 35,000 options are unvested and vesting is at the discretion of the Board of Directors. The Company has a standard arrangement for the payment of fees to three directors of the Company for acting in such capacity. Directors are reimbursed for all expenses necessary for travel and attendance at meetings. Total payments of $21,000 during Fiscal 2005 to directors for acting in such capacity are included in the aggregate compensation disclosure discussed above. C. Board Practices Each director serves until the next annual meeting of shareholders and until his successor shall have been duly elected and qualified or until such earlier time as such director may resign or be removed. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Board of Directors holds meetings four times each year. There are no directors' service contracts with the Company or any of its subsidiaries that provide for benefits upon termination of employment. Although some directors are subject to employment contracts with the Company, such contracts are not applicable to their services in the capacity of directors. The Board of Directors has elected members to an Audit Committee and a Compensation and Human Resource Committee. The Audit Committee is comprised of the following members as at September 15, 2005: Sheila Bowman, Tina VanderHeyden, Dave Wall and Frank Kovacs. The Audit Committee chair is Sheila Bowman. The Audit Committee holds meetings four times a year and its primary mandate is to facilitate the Company's corporate governance and protect the interest of shareholders by overseeing the financial reporting process and monitoring the responsibilities of the Company's management team as well as its Board of Directors. The Compensation and Human Resource Committee is comprised of the following members as at September 15, 2005: 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, 2005, the Company employed thirty-three persons on a full time basis. As at September 15, 2005, there were thirty-two persons employed on a full time basis. As at September 15, 2005, there are twelve employees in finance and administration, nine in sales and merchandising, and eleven in inventory warehouse. Five employees are employed in the Halifax office, one is employed in Toronto, and twenty-six are employed in the Vancouver office. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. During Fiscal 2005, the Company employed approximately thirty-five temporary employees to cover off seasonal requirements. Page 30 of 75 E. Share Ownership The share ownership of the persons set forth in Item 6.B above is disclosed in "Item 7. Major Shareholders and Related Party Transactions - Major Shareholders" below. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders As far as is known to the Company, the Company is not directly or indirectly owned or controlled by another corporation or by any foreign government. The following table sets forth certain information, as at September 30, 2005, concerning (i) persons and companies that own of record or are known by the Company to own beneficially, directly or indirectly, more than 5% of the outstanding Common Shares and (ii) beneficial ownership of outstanding Common Shares by all directors and executive officers of the Company.
Number of Shares Beneficially or Directly Percentage of Name of Shareholder Owned Class ---------------------------------------------------------------------------------------- International Bullion & Metal Brokers Ltd.(1) 6,250,000 41.1% Bowman Family Trust ("Trust")(2) 5,325,000 34.2% Jeremy C. Bowman(3) 462,500 3.0% Sheila P. Bowman(4) 602,500 3.9% Thomas Weckman(7) 250,000 1.6% B.D.C (6) 340,136 2.2% Tina VanderHeyden (*) (*) Emily Tsen (*) (*) Officers and Directors as a group (7 people) 13,258,136 85.1%
(1) International Bullion & Metal Brokers Limited ("International Bullion") is a corporation formed under the laws of England of which Frank Kovacs is a Director. (2) Although not a beneficiary of the trust, Mr. Bowman, the Company's President and CEO, is one of the three Trustees of the Trust. Sheila Bowman, is a beneficiary of the Bowman Family Trust. The other beneficiaries are the children of Mr. Bowman. (3) Mr. Bowman is the Company's President, CEO and a Director. (4) Sheila Bowman is a Director of the Company. Ms. Bowman's shares include 140,000 options with an exercise price of US$1.00 per share. The 140,000 options expire July 13, 2007. Page 31 of 75 (5) Frank Kovacs is a Director of International Bullion and is a Director of the Company. (6) The Business Development Bank of Canada is a venture capital shareholder owning 340,136, or 2.2% of outstanding shares. (7) Tom Weckman is ADL's President and a Director. * Less than 1% of class. The Company's major shareholders do not have different voting rights. However, some of these shareholders are subject to a shareholders agreement as described below. There has been no significant change in the percentage ownership held by any major shareholders during the past three years. As at September 15, 2005 there was no trading market for the Common Shares in the United States or Canada. The following table indicates the approximate number of record holders of Common Shares, the number of record holders of Common Shares with United States addresses and the portion and percentage of Common Shares so held in the United States. Total Number Number of US Number of Registered Registered Holders Common Shares Percentage of Class ----------------------------------------------------------------------- 113 45 90,400 0.60% The computation of the number and percentage of Common Shares held in the United States is based upon the number of Common Shares held by record holders with United States addresses. United States residents may beneficially own Common Shares held of record by non-United States residents. Shareholders' Agreement The Company has entered into a shareholders' agreement ("Shareholders' Agreement") with shareholders holding at least 5% of the outstanding shares of the Company on July 25, 2000. The Shareholders' Agreement requires that board approval be obtained prior to: o issuance or redemption of the Company's shares, o changes to the authorized share capital, o declaration or payment of dividends, o distribution of shares to the public or listed for trading on a recognized securities exchange, o business combinations between the Company or any of its subsidiaries with any other persons, o disposition of any subsidiaries, o loaning of any money, providing guarantees or assuming liability for the debts or obligations of any other persons or paying any shareholder, and o changing the nature of the Company's business outside of the ordinary course of business of the Company. The Shareholders' Agreement had provided that as long as BDC hold at least 300,000 shares, the Page 32 of 75 Company was to proceed with any of the following matters only with prior written consent of BDC: o declare or pay dividends, redeem or repurchase any shares or make any distribution in respect of shares, o loan any money, provide guarantees or assume liability for the debts or obligations of any other persons or pay any shareholder, or o any initial public offering by the Company. The Shareholders' Agreement also provided that, subject to the satisfaction of certain conditions, until the earlier of the first anniversary of the date of the Shareholders' Agreement, being July 25, 2000 or the occurrence of an initial public offering by the Company, (the "initial preemptive date") and subject further to BDC holding at least 300,000 shares, if the Company proposed to effect an offer and sale of its securities, the Company was obliged to first offer BDC the opportunity to purchase, and BDC, in its sole discretion could purchase, all or a portion of such securities from the Company up to a maximum of $2,000,000 of the proposed aggregate offering price. BDC did not exercise this right within the specified time frame therefore the option expired. After the initial preemptive date and prior to the termination of the Shareholders' Agreement by virtue of the Company completing a qualified public offering, BDC has the right, except for certain excepted transactions, to participate pro-rata in any securities offerings affected by the Company. As far as is known to the Company, there are no arrangements the operations of which may at a subsequent date result in a change of control of the Company. B. Related Party Transactions The Company operates from leased premises in Vancouver and Halifax. The Vancouver premises cover 8,557 square feet and give the Company a self-contained headquarters building from which to operate. The premises have an underground parking garage. The premises are leased from a partnership of which Jeremy Bowman, the Company's President and a stockholder who has significant influence on operations, is a partner. The Company believes that the terms of the lease are as favorable as those that could have been obtained from an unaffiliated third party. The Company leases the Vancouver premise for $9,400 per month plus expenses. The lease was renewed under the same terms during June 2005. On May 27th, 2002, the Company leased an office in Halifax on a five year fixed term starting July 1st, 2002 at $1,100 per month plus applicable taxes. The Halifax lease has a 90-day cancellation provision for the benefit of ADL only. The premises are leased on commercially agreed terms, from Torrington Bay Investments Limited, in which Tom Weckman, the President of ADL, has an interest. The Company believes the terms of this lease are as favorable as could have been obtained from unaffiliated third parties. The premises in Halifax are located at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6 and contain 1,136 square feet of office space. The Company believes that its current premises are adequate for the Company's current operating level and presently foreseeable growth. Except as set forth above, no key management personnel of the Company or any shareholder holding of record or beneficially, directly or indirectly, more than 5 percent of the issued and outstanding Common Shares (including options) of the Company, or any of their respective associates or affiliates, had any material interest, directly or indirectly, in any transaction with the Company except for those in the normal course of the business and as disclosed in the Company's financial statements, or in any proposed transaction, since the beginning of the Company's last fiscal year up to the date of the Report. The Company believes that all payments made for services rendered were comparable to those that would be made to an unaffiliated provider of such services. Page 33 of 75 C. Interests of Experts and Counsel This form is being filed as an Annual Report under the Securities Exchange Act 0f 1934, accordingly the information called for by this Item 7.C. is not required. ITEM 8. FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information See Item 17 for the Company's Financial Statements. The Company knows of no contemplated or pending legal or arbitration proceedings including those relating to bankruptcy, governmental receivership or similar proceeding and those involving any third party against it, nor is the Company involved as a plaintiff in any material pending litigation. The Company knows of no pending proceedings to which any director, member of senior management, or affiliate is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries. The Company declared its first dividend on September 6, 2005 for all shareholders on record as at September 6, 2005. The dividend of USD $.01 per share was paid September 8, 2005. The Company's four largest shareholders have waived their dividends choosing to retain the funds in the Company to grow the business. B. Significant Changes No significant changes have occurred since the date of the annual financial statements included in the Report. ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details/Markets There is no trading market for the Company's Common Stock and there can be no assurance that a trading market will develop, or, if such a trading market does develop that it will be sustained. To the extent that a market develops for the Common Stock at all, of which there can be no assurance, it will likely appear in what is customarily known as the "pink sheets" or on the NASDAQ Bulletin Board, which may limit the marketability and liquidity of the Company's Common Stock. B. Plan of Distribution This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, and accordingly, the information called for by this Item 9.B. is not applicable to this report. C. Selling Shareholders Page 34 of 75 This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, and accordingly, the information called for by this Item 9.C. is not applicable to this report. D. Dilution This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, and accordingly, the information called for by this Item 9.D. is not applicable to this report. E. Expenses of the Issue This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, and accordingly, the information called for by this Item 9.E. is not applicable to this report. ITEM 10. ADDITIONAL INFORMATION A. Share Capital This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, and accordingly, the information called for by this Item 10.A. is not required. B. Memorandum and Articles of Association The Company's Certificate of Incorporation, Bylaws, Articles of Amendment, Certificate of Amendment and Certificate of Change of Name which were included as Exhibits 1.1, 1.2, 1.3, 1.4 and 1.5, respectively, to the Company's Registration Statement on Form 20-F, file number 030228, as amended, are hereby incorporated by reference. There is no limitation imposed by Canadian law or by the constituent documents of the Company on the right of a non-resident to hold or vote common Shares (the "Voting Shares"), other than are provided in the Investment Canada Act (Canada) (the "Investment Act"), as amended by the World Trade Organization Agreement Implementation Act (the "WTOA Act"). The Investment Act generally prohibits implementation of a reviewable investment by an individual, government, or agency thereof, corporation, partnership, trust or joint venture that is not a "Canadian", as defined in the Investment Act (a "non-Canadian"), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in the Voting Shares of the Company by a non-Canadian (other than a "WTO Investor", as defined below) would be reviewable under the Investment Act if it were an investment to acquire control of the Company and the Company was not, immediately prior to the implementation of the investment, controlled by a WTO Investor, and the value of the assets of the Company were $5.0 million or more. An investment in Voting Shares of the Company by a WTO Investor would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company equaled or exceeded $179 million (threshold amount for 1998). A non-Canadian, whether a WTO Investor or otherwise, would acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the Voting Shares of the Company. The acquisition of less than a majority, but at least one-third of the Voting Shares of the Company, would be presumed to be an acquisition of control of the Company, unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of the Voting Shares. In general, an individual is a WTO Investor if he or she is a "national" of a country (other than Canada) that is a member of the World Trade Organization ("WTO Member") or has a right of permanent residence in a Page 35 of 75 WTO Member other than Canada. A corporation or other entity will be a WTO Investor if it is a "WTO Investor-controlled entity" pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member. Certain transactions involving Voting Shares of the Company would be exempt from the Investment Act, including: (a) an acquisition of Voting Shares of the Company if the acquisition were made in connection with the person's business as a trader or dealer in securities: (b) an acquisition or control of the Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for the purpose related to the provisions of the Investment Act: and (c) an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of the Company, through the ownership of voting interests, remains unchanged. C. Material Contracts Shareholders' Agreement The Company has entered into a shareholders' agreement ("Shareholders' Agreement") with shareholders holding at least 5% of the outstanding shares of the Company on July 25, 2000. The Shareholders' Agreement requires that board approval be obtained prior to: o issuance or redemption of the Company's shares, o changes to the authorized share capital, o declaration or payment of dividends, o distribution of shares to the public or listed for trading on a recognized securities exchange, o business combinations between the Company or any of its subsidiaries with any other persons, o disposition of any subsidiaries, o loaning of any money, providing guarantees or assuming liability for the debts or obligations of any other persons or paying any shareholder, and o changing the nature of the Company's business outside of the ordinary course of business of the Company. The Shareholders' Agreement had provided that as long as BDC hold at least 300,000 shares, the Company was to proceed with any of the following matters only with prior written consent of BDC: o declare or pay dividends, redeem or repurchase any shares or make any distribution in respect of shares, o loan any money, provide guarantees or assume liability for the debts or obligations of any other persons or pay any shareholder, or o any initial public offering by the Company. After the initial preemptive date and prior to the termination of the Agreement by virtue of the Company completing a qualified public offering, BDC has the right, except for certain excepted transactions, to participate pro-rata in any securities offerings affected by the Company. Page 36 of 75 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 $64,000 at March 31, 2005 (2004: $55,600)) and the original proceeds received under the unit offering ($500,000). The common share put option was still outstanding as at September 15, 2005. Leases The Company entered into a lease on June 22, 1998, with a partnership of which Jeremy Bowman, the Company's President, CEO and director, is a partner. The lease is for premises at its Vancouver office on 1555 West 8th Avenue, Vancouver, B.C., V6J 1T5, Canada which it leases for $9,400 per month plus expenses. The Company moved to these premises in June 2000. The lease was renewed with the same terms during June 2005. On May 27th, 2002, the Company leased an office in Halifax on a five year fixed term starting July 1st, 2002 at $1,100 per month plus applicable taxes. The Halifax lease has a 90-day cancellation provision for the benefit of ADL only. The premises are leased on commercially agreed terms, from Torrington Bay Investments Limited, in which Tom Weckman, the President of ADL, has an interest. The Company believes the terms of this lease are as favorable as could have been obtained from unaffiliated third parties. The premises in Halifax are located at Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6 and contain 1,136 square feet of office space. Stock Option Plan The Company implemented the Allura International Inc. 2000 Stock Option Plan ("Plan") during January 2000. The Company's Board of Directors administers the Plan. The maximum aggregate number of shares, which may be optioned and sold or otherwise awarded under the Stock Option Plan, is 3,000,000 shares. Agreement between Bygo, the Company and MDA On May 9, 2000, the Company entered into an agreement with MacDonald Dettwiler and Associates Ltd. ("MDA") for software development services to be provided by MDA (the "MDA Agreement"). MDA and the Company entered into an amendment to the MDA Agreement dated July 28, 2000 (the " July Amendment") pursuant to which, among other things, Allura's interest therein was assigned to Bygo. A further amendment was entered into on December 12, 2000 (the "December Amendment'). The MDA Agreement as amended by the July Amendment, the December Amendment and certain other subsequent amendments, is herein referred to as the "Amended MDA Agreement." Disputes arose between MDA and Allura and Bygo (collectively, with all of the other parties to the Settlement Agreement, as defined below, the "Parties"). Proceedings were commenced in relation to the disputes between the parties, pursuant to the arbitration provisions of the Amended MDA Agreement, and in the Supreme Court of British Columbia and the British Columbia Court of Appeal (the "Proceedings"). The Parties agreed to Page 37 of 75 resolve their disputes, including those raised in the Proceedings, through binding arbitration and entered into a submission to arbitration dated May 17, 2001 (the "Arbitration"). Prior to the completion of the Arbitration, the Parties entered into a Mutual Release and Settlement Agreement dated May 1, 2002 (the "Settlement Agreement") to settle all the matters in dispute between them. Pursuant to the terms of the Settlement Agreement, among other things: 1. the Parties delivered mutual releases to and from, inter alia, claims, damages and liabilities arising out of the Amended MDA Agreement, the Arbitration and/or the Proceedings; 2. the forgiveness of payment by the Company and Bygo of amounts owing by the Company or Bygo or claimed by MDA under the terms of the Amended MDA Agreement; and, payment to Bygo in settlement of amounts claimed by it; 3. the transfer by MDA to the Company of all shares in the capital of the Company owned by MDA; and 4. the retention by Allura of all right, title and interest in and to the subject matter of certain Canadian patent applications as well as design and architecture of the Bygo System. D. Exchange Controls There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of Shares, other than withholding tax requirements. See "Taxation" below. E. Taxation A brief description of the provisions of the tax treaty between Canada and the United States is included below, together with a brief outline of the taxes, including withholding provisions to which United States security holders are subject under existing laws and regulations of Canada and the United States; the consequences, if any, of state and local taxes are not considered. Security holders are urged to seek the advice of their own tax advisors, tax counsel or accountants with respect to the applicability or effect of these provisions on their own taxes. The Company has not paid dividends on the Common Shares in any of its last five fiscal years, and has no plans to pay dividends in the immediate future. Canadian federal tax legislation would require a 25% withholding from any dividends paid or deemed to be paid to the Company's non-resident shareholders. However, a company resident in the United States that beneficially owns at least 10% of the voting stock of the Company would have this rate reduced to 5% through the tax treaty between Canada and the United States. The rate of Canadian non-resident withholding may not exceed 15% of the dividend in the case of United States shareholders other than as described above. The amount of stock dividends paid to non-residents of Canada would be subject to withholding tax at the same rate as cash dividends. The amount of a stock dividend (for tax purposes) would be equal to the amount by which the stated capital of the Company had increased by reason of the payment of such a dividend. Interest paid or deemed to be paid on the Company's debt securities held by non-Canadian residents may also be subject to Canadian withholding tax, depending upon the terms and provisions of such securities and any applicable tax treaty. Under the present legislation in the United States, the Company is not subject to United States back-up withholding rules, which would require withholding at a rate of 20% on dividends and interest paid to certain United States persons who have not provided the Company with a taxpayer identification number. Gains derived from a disposition of Common Shares by a non-resident shareholder will be subject to tax in Canada only if not less than 25% of any class of Common Shares was owned by the non-resident shareholder and/or persons with whom the non-resident did not deal at arm's length at any time during the five year period Page 38 of 75 immediately preceding the disposition. In such cases, gains derived by a U.S. shareholder from a disposition of Common Shares would likely be exempt from tax in Canada by virtue of the Canada-U.S. tax treaty, provided that the U.S. shareholder has not resided in Canada in the ten years immediately preceding the disposition. This discussion is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of Common Shares and no opinion or representation with respect to the United States federal income tax consequences to any such holder or prospective holder is made. Holders and prospective holders of Common Shares are urged therefore to consult their own tax advisors with respect to their particular circumstances. F. Dividends and Paying Agents This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, accordingly the information called for by this Item 10.F. is not required. G. Statement by Experts This Form 20F is being filed as an Annual Report under the Securities Exchange Act of 1934, accordingly the information called for by this Item 10.G. is not required. H. Documents on Display The documents concerning the Company which are referred to in this Report are either annexed hereto as exhibits (See "Item 19 Exhibits") or may be inspected at the principal executive offices of the Company. You may inspect and copy our registration statements, including their exhibits and schedules, and the reports and other information we file with the Securities and Exchange Commission in accordance with the Exchange Act at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549 You may obtain information regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the Internet at its website at http://www.sec.gov. I. Subsidiary Information This information is not applicable to this report. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A. Quantitative Information about Market Risk The Company does not invest in market risk sensitive instruments such as debt instruments, forwards and futures, options, SWAPs or other derivative financial and commodity instruments. Page 39 of 75 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, 2005 and 2004, the Company's accounts payable and accrued liabilities included the following foreign currency denominated amounts: 2005 2004 ---------- -------- U.S. $2,846,208 $921,269 Euro 377,647 45,125 ---------- -------- $3,223,855 $966,394 ========== ======== Interest Rate Sensitivity The Company's bank indebtedness bears floating interest rates. This exposes the Company to the risk of changing interest rates that may have a detrimental affect on its earnings in future periods. The Company has not entered into any agreement or purchased any instrument to hedge against possible interest rate risks at this time. The Company's interest earning investments are short term. Thus, any reductions in future income or carrying values due to future interest rate declines are believed to be immaterial. Credit risk Credit risk arises from the possibility that the entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. This risk is mitigated by proactive credit management policies that include regular monitoring of the debtor's payment history and performance, credit insurance, geographic diversification, obtaining security where appropriate, and credit insurance policy coverage. Fair value The Company has various financial instruments including receivables, bank indebtedness, payables and accruals, and bonus payables. The carrying value of all other financial instruments approximates their fair value due to their short-term nature. 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 Page 40 of 75 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. Under the terms of the Company's demand overdraft loan agreement facility with its bank as discussed in Item 5, the Company must maintain certain Debt to Tangible Net Worth ratios not exceeding 3.0 to 1 for its Jewelry Division and not exceeding 2.6 to 1 on the consolidated entity basis as defined by the bank at each year-end when the loan is outstanding. As at March 31, 2005, the Debt to Tangible Net worth ratios were 3.25 to 1 and 3.28 to 1 respectively. Notwithstanding the foregoing defaults, the bank has agreed not to demand repayment of the loan although they have not waived their ability to so and retain their ability to demand repayment due to the breached covenants. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. None. ITEM 15. CONTROLS AND PROCEDURES The Board of Directors has overall responsibility for reviewing the Company's disclosure to ensure the Company provides full and plain disclosure to shareholders and other stakeholders. The Board discharges its responsibilities through its committees, specifically, with respect to financial disclosure to the Audit Committee, which is responsible for reviewing the Company's financial reporting procedures and internal controls to ensure full and accurate disclosure of the Company's financial position. During the annual report period, we carried out an evaluation, under the supervision and with the participation of our senior management, including Chief Executive Officer, Jeremy Bowman, and Chief Financial Officer, Emily Tsen, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13(a)-14(c) of the Securities Exchange Act of 1934. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in this Form 20-F filed with the SEC is recorded, processed, summarized and reported timely. Based upon that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, are not effective in timely alerting them to material information relating to us required to be included in the our periodic SEC filings given the matters identified below. Page 41 of 75 During the audit of the 2005 financial statements the Company and the Company's independent registered public accountants identified five material weaknesses in internal controls over financial reporting as follows: a. Governance In the governance area, segregation of duties is not at an appropriate level and the company needs to improve its oversight controls. There are employees who have responsibilities and control access to the information and financial reporting systems and in the management of the information systems. The company does not have an anonymous reporting process to collect and act on allegations of improprieties and or errors pertaining to questionable practices. When employees perform incompatible duties and if compensating controls are not appropriate, then this situation could result in material errors and/or fraud. b. Revenues In the revenue process area, segregation of duties is not at an appropriate level. There are employees who have access to the processing of accounts receivable payment transactions and who also have access to maintaining and reconciling accounts receivable records. When employees perform incompatible duties, and if compensating controls are not appropriate, then this situation could result in material errors and/or fraud. c. Inventory In the area of expense/payables/inventory processes, enhanced segregation of duties procedures need to be put in place. Employees who are responsible for data input from source documents do not have their work independently reviewed for accuracy or appropriateness. As well, these same employees are also responsible for indicating that documents have been processed, a step that is performed without further verification. When employees perform incompatible duties, and if compensating controls are not appropriate, then this situation could result in material errors and/or fraud. d. Financial Reporting In the area of financial reporting, enhanced segregation of duties procedures need to be put in place. Employees who are responsible for providing and calculating estimates and evaluating disclosures do not have their work independently reviewed for accuracy or appropriateness. When employees perform incompatible duties, and if compensating controls are not appropriate, then this situation could result in material errors and/or fraud. e. Evidence of internal control documentation In the area of internal control documentation, performance of controls should be evidenced with documentation of the internal controls in the revenue process. When performance of controls is not properly evidenced, the internal control process may not be performed and this may lead to errors or inappropriateness. Page 42 of 75 The material weaknesses above were identified by the Company and the Company's independent registered accountants, Grant Thornton during the March 31, 2005 year end audit. The identified weaknesses are a result of a reduction and change in staff in the accounting department of the Company that occurred during the 2005 fiscal year when an accounting staff member departed. This staff departure was believed to be reasonably likely to have had a material impact on internal controls over financial reporting in fiscal 2005. Subsequent to the 2005 fiscal year, during fiscal 2006, additional changes were made that are reasonably likely to have had a material impact on internal controls over financial reporting. As there were only five people in the accounting department after the staff departure in fiscal 2005, it was difficult to assign duties using the segregation framework. The Company was committed to cross training and the re-evaluation of its needs and ways to improve systems to put in place stronger controls to compensate for the limitation of the size of the accounting department. As such, an outside independent resource was retained in fiscal 2006 (May 2005) to provide some level of oversight by reviewing and monitoring the significant transactional activities of the Company. This consultant was replaced with a full time staff junior accountant in fiscal 2006 (September 2005) As well, the audit committee chair meets regularly with the CFO of the Company to review the financial results. These reviews provided by the independent contractor, new staff member and audit committee provide some degree of compensating controls over the segregation of duties for future reporting periods, however; did not overcome the identified material weaknesses that continue to exist at the end of the 2006 fiscal reporting period. As part of the process to put into operations its program for complying with Section 404 of the Sarbanes Oxley Act of 2002 the Company will continue evaluate and enhance its procedures where the interpretation of GAAP is involved and will expand its external consultative process in advance of implementing new accounting procedures. The interpretation issues have been accounted for correctly in the preparation of the financial statements set out in Item 17. The Company will review the identified internal control weaknesses and consider implementing other compensating controls in future periods in an effort to mitigate the potential identified risks and is also looking into the hiring of additional staff members to allow for the appropriate segregation of duties ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The Audit Committee is responsible for reviewing the Company's financial reporting procedures, internal controls and the performance of the Company's auditors as detailed in the Mandate of the Audit Committee. The Audit Committee is also responsible for reviewing all disclosure with respect to financial matters prior to filing or release and quarterly and annual financial statements prior to their approval by the full Board. Currently the Company does not have a financial expert on its Audit Committee. No current Board member possesses the necessary qualifications of a financial expert as defined by the Sarbanes Oxley Act of 2002, however the Board is seeking a solution to fulfill this requirement. ITEM 16B. CODE OF ETHICS The Company has not adopted a formal "code of ethics", however, it does maintain standards that are reasonably designed to deter wrong-doing and to promote: 1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest Page 43 of 75 between personal and professional relationships; 2. Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, regulatory agencies and in other public communications made by the registrant; 3. Compliance with applicable governmental laws, rules and regulations; 4. The prompt internal reporting of violations of the standards to an appropriate person or persons identified in the standards; and 5. Accountability for adherence to the standards. In addition, the Company practices corporate governance in accordance with rules and regulations in Canada. Corporate Governance relates to the activities of the Board of Directors who are elected by and accountable to the Shareholders, and takes into account the role of management who are appointed by the Board of Directors and who are charged with the on-going management of the Company. The Board of Directors of the Company encourages sound corporate governance practices designed to promote the well being and on-going development of the Company, having always as its ultimate objective the best long-term interests of the Company and the enhancement of value for all Shareholders. Currently there is no formal document stating the Company's Corporate Governance policies, however, there are in existence, Board of Directors, Audit Committee and Compensation and Human Resource Committee Mandates. ITEM 16C. PRINCIPAL ACCOUNTANTS FEES AND SERVICES 2004 2005 Aggregate Fees Audit fees $52,900 77,500 130,400 Tax services and $14,100 7,280 21,380 Other services --------------------------------- $67,000 84,780 151,780 ================================= 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 financial statements. The report of independent registered public accountants, financial statements and notes thereto, Page 44 of 75 schedules thereto as required under Item 17 are found immediately below. The report of independent registered public accounting firm is included herein immediately preceding the respective financial statements, notes, schedules, etc. Page 45 of 75 Allura International Inc. Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 Page 46 of 75 Contents Page ----- Report of Independent Registered Public Accounting Firm 46 Consolidated Balance Sheets 47 Consolidated Statements of Operations 48 Consolidated Statements of Cash Flows 49 Consolidated Statements of Shareholders' Equity 50 Notes to the Consolidated Financial Statements 51-65 Consolidated Schedules of Administrative and Selling and Delivery Expenses 66 Page 47 of 75 Grant Thornton LLP Chartered Accountants Grant Thornton [LOGO] Management Consultants Report of Independent Registered Public Accounting Firm To the shareholders of Allura International Inc. We have audited the accompanying consolidated balance sheets of Allura International Inc. as at March 31, 2005 and 2004 and the consolidated statements of operations, cash flows, and shareholders' equity for each of the three years in the period ended March 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and auditing standards generally accepted in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance 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, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allura International Ltd. as at March 31, 2005 and 2004 and the results of its operations and its cash flows for each of three years ended March 31, 2005 in accordance with Canadian generally accepted accounting principles. Our previous report dated April 19, 2005 except as to Note 3(b) which is as of October 4, 2005 has been withdrawn and the financial statements have been revised as explained in Note 3(c). Vancouver, Canada August 19, 2005, except as to Note 3(b) /s/ "Grant Thornton LLP" which is as at October 4, 2005 and 2(e),(j),(k) and ------------------------ 3(c) which are as of September 13, 2006 Chartered Accountants Comment by Auditors for US Readers on Canada - US Reporting Differences The standards of the Public Company Accounting Oversight Board (United States) for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have been implemented in the financial statements such as those described in Note 3 to the consolidated financial statements of Allura International Inc. As described in Note 3, due to a change in Canadian generally accepted accounting principles, the Company has recorded the fair value of a put option issued in 2000 as a liability rather than as equity as previously presented. The Company also restated its financial statements related to its presentation of certain marketing costs related to vendor advertising paid to customers and payment discounts granted to customers. These discounts have been restated to be presented as a reduction of net sales rather than as a selling expense. Our report to the shareholders of Allura International Inc. dated August 19, 2005, except as to Note 3(b) which is at October 4, 2005 and 2(e),(j),(k) and 3(c) which are as of September 13, 2006 is expressed in accordance with Canadian reporting standards, which do not require a reference to such restatements in the report of the independent registered public accounting firm when the change is properly accounted for and adequately disclosed in the financial statements. Vancouver, Canada August 19, 2005, except as to Note 3(b) /s/ "Grant Thornton LLP" which is as at October 4, 2005 and 2(e),(j),(k) and ------------------------ 3(c) which are as of September 13, 2006 Chartered Accountants P.O. Box 11177, Royal Centre, Suite 2800 1055 West Georgia Street Vancouver, BC V6E 4N3 T (604) 687-2711 F (604) 685-6569 E Vancouver@GrantThornton.ca www.GrantThornton.ca Canadian Member of Grant Thornton International Page 48 of 75 Allura International Inc. Consolidated Balance Sheets (expressed in Canadian dollars) March 31 2005 2004 (Restated - Note 3) -------------------------------------------------------------------------------- Assets Current Cash and cash equivalents $ 37,990 $ 72,955 Receivables, net (Note 4) 3,413,824 3,509,367 Inventories 13,043,939 7,607,366 Income taxes receivable -- 59,990 Prepaids 130,269 60,417 ----------- ----------- Total current assets 16,626,022 11,310,095 Property and equipment, net (Note 6) 171,378 202,899 Goodwill 26,970 26,970 ----------- ----------- Total assets $16,824,370 $11,539,964 =========== =========== -------------------------------------------------------------------------------- Liabilities Current Bank indebtedness (Note 7) $ 8,911,408 $ 6,382,244 Accounts payable and accruals (Note 8) 4,674,618 2,290,188 Income taxes payable 39,704 -- Obligation under put option (Note 10) 64,000 55,600 ----------- ----------- Total current liabilities 13,689,730 8,728,032 ----------- ----------- Shareholders' Equity Capital stock (Note 10) 2,545,765 2,545,765 Retained earnings 588,875 266,167 ----------- ----------- Total shareholders' equity 3,134,640 2,811,932 ----------- ----------- Total liabilities and shareholders' equity $16,824,370 $11,539,964 =========== =========== -------------------------------------------------------------------------------- Commitments (Note 11) On behalf of The Board /s/ "Jeremy Bowman" ---------------------------- Jeremy Bowman See accompanying notes to the consolidated financial statements. Page 49 of 75 Allura International Inc. Consolidated Statements of Operations (expressed in Canadian dollars) Years Ended March 31
2005 2004 2003 (Restated (Restated (Restated - Note 3) - Note 3) - Note 3) ------------------------------------------------------------------------------------------------ Net sales $18,252,286 100% $16,114,338 100.0% $17,031,936 100.0% Cost of goods sold 13,154,241 71.1 12,156,794 74.5 13,007,581 75.4 ----------- ---- ----------- ----- ----------- ----- Gross profit 5,098,045 28.9 3,957,544 25.5 4,024,355 24.6 ----------- ---- ----------- ----- ----------- ----- Expenses Administrative (Appendix 1) 3,248,196 17.6 2,537,947 15.5 2,369,232 13.7 Depreciation and amortization 64,874 0.3 68,778 0.4 72,884 0.4 Selling and delivery (Appendix 1) 785,176 5.6 460,125 4.1 581,838 4.6 ----------- ---- ----------- ----- ----------- ----- 4,098,246 23.5 3,066,850 20.0 3,023,954 18.7 ----------- ---- ----------- ----- ----------- ----- Earnings before other income (expenses) 999,799 5.4 890,694 5.4 1,000,401 5.8 ----------- ---- ----------- ----- ----------- ----- Other income (expenses) Interest, bank charges, and guarantee fee (Note 13(a)) (562,999) (3.1) (497,534) (3.0) (459,939) (2.7) Other income 3,229 -- 1,507 -- 5,858 -- Change in put option obligation (Note 3) (8,400) -- (6,100) -- (6,500) -- ----------- ---- ----------- ----- ----------- ----- (568,170) (3.1) (502,127) (3.0) (460,581) (2.7) ----------- ---- ----------- ----- ----------- ----- Earnings before income taxes 431,629 2.3 388,567 2.4 539,820 3.1 Income taxes 108,921 0.6 60,886 0.4 141,736 0.8 ----------- ---- ----------- ----- ----------- ----- Net earnings $ 322,708 1.7% $ 327,681 2.0% $ 398,084 2.3% =========== ==== =========== ===== =========== ===== Earnings per share (basic and diluted) $ 0.02 $ 0.02 $ 0.03 =========== =========== =========== Weighted average common shares outstanding (basic and diluted) 15,240,302 15,240,302 15,249,734 =========== =========== ===========
-------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Page 50 of 75 Allura International Inc. Consolidated Statements of Cash Flows (expressed in Canadian dollars) Years Ended March 31
2005 2004 2003 --------------------------------------------------------------------------------------- Cash and cash equivalents derived from (applied to) Operating Net earnings $ 322,708 $ 327,681 $ 398,084 Depreciation and amortization 64,874 68,778 72,884 Change in put option obligation (Note 3) 8,400 6,100 6,500 Change in non-cash operating working capital (Note 12) (2,926,758) (320,134) (455,111) ----------- --------- --------- (2,530,776) 82,425 22,357 ----------- --------- --------- Financing Bank indebtedness 2,529,164 (160,106) (917,354) ----------- --------- --------- Investing Purchase of equipment (33,353) (15,515) (52,645) Proceeds on disposition of equipment -- -- 646,820 Decrease in payables and accruals related to investing activities -- -- (310,852) ----------- --------- --------- (33,353) (15,515) 283,323 ----------- --------- --------- Net decrease in cash (34,965) (93,196) (611,674) Cash and cash equivalents Beginning of year 72,955 166,151 777,825 ----------- --------- --------- End of year $ 37,990 $ 72,955 $ 166,151 =========== ========= ========= --------------------------------------------------------------------------------------- Non-cash investing and financing activities not included in cash flows Shares cancelled in part settlement of dispute (Note 5) $ -- $ -- $ 167,539 Supplementary cash flow information Interest paid $ 560,558 $ 462,705 $ 422,137 Income taxes paid during the year $ 120,296 $ 288,980 $ 13,796
-------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Page 51 of 75 Allura International Inc. Consolidated Statements of Shareholders' Equity (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 --------------------------------------------------------------------------------
Shares Issued ----------------------- (Deficit) Number of Ascribed Retained Shares Value Earnings Total ---------- ---------- --------- ---------- Balance March 31, 2002 previously Reported 15,355,055 $3,083,776 $(787,070) $2,296,706 Put option obligation adjustment (Note 3) -- (370,472) 327,472 (43,000) ---------- ---------- --------- ---------- Balance March 31, 2002 restated 15,355,055 $2,713,304 $(459,598) $2,253,706 Shares cancelled (Note 5) (114,753) (167,539) -- (167,539) Net earnings, year ended March 31, 2003 -- -- 398,084 398,084 ---------- ---------- --------- ---------- Balance March 31, 2003, restated 15,240,302 $2,545,765 $ (61,514) 2,484,251 Net earnings, year ended March 31, 2004 -- -- 327,681 327,681 ---------- ---------- --------- ---------- Balance March 31, 2004, restated 15,240,302 2,545,765 266,167 2,811,932 Net earnings, year ended March 31, 2005 -- -- 322,708 322,708 ---------- ---------- --------- ---------- Balance March 31, 2005 15,240,302 $2,545,765 $ 588,875 $3,134,640 ========== ========== ========= ==========
-------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Page 52 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 1. Nature of operations The Company operates in one reportable business segment and is in the business of wholesaling gold and diamond jewelry in Canada. Its customer base comprises national chains and independent retailers. -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (a) Basis of presentation These financial statements are presented in accordance with Canadian generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries, IBB International (Canada) Ltd., Allura Diamonds Limited and Bygo Inc. The accounting principles used conform in all material respects to principles generally accepted in the United States of America except 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. (c) Foreign currency The Company considers the Canadian dollar its functional currency. Monetary assets and liabilities resulting from foreign currency transactions are translated into Canadian dollars using the year end conversion rates. Sales, purchases, receipts and payments are translated throughout the year at exchange rates prevailing at the date of the transaction. Exchange gains and losses are included in earnings for the year as part of cost of sales and amounted to a (gain) loss of $297,583 (2004: $380,273, 2003: $209,316). (d) Cash and cash equivalents For the purpose of the statement of cash flows, the Company considers cash on hand and balances with banks and highly liquid temporary money market instruments with original maturities of three months or less as cash or cash equivalents. Bank borrowings are considered to be financing activities. (e) Inventories Inventories are comprised of loose gemstones and finished products and are valued at the lower of cost and net realizable value. Cost is calculated using the average cost method. Cost consists of the invoiced price plus applicable duty, excise tax, and freight charges. Net realizable value is based upon estimated selling price less further costs to completion and disposal. 2005 inventories include goods held on consignment by customers under consignment agreements totaling $2,605,200 (2004: $1,603,000). The Company's provision for obsolescence reserve for inventory has been included in cost of goods sold and the current balance is as follows: 2005 2004 2003 Opening Balance $124,000 $ 72,000 $ 305,000 Add 92,000 100,000 24,000 Deduct (3,000) (48,000) (257,000) -------------------------------- Closing Balance $213,000 $124,000 $ 72,000 ================================ Page 53 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (Continued) (f) Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. The Company depreciates its property and equipment over their useful lives. All property and equipment other than leasehold improvements are depreciated on a 20% declining balance basis. Leasehold improvements are amortized over the term of the lease. (g) Goodwill Goodwill arises from the 1999 acquisition of the 50% of Allura Diamonds Limited that the Company did not previously own and consists of the excess of the purchase price over the estimated fair value of the net tangible assets acquired. Effective April 1, 2002, the Company adopted, on a prospective basis, the new recommendations of the Canadian Institute of Chartered Accountants with respect to the valuation of goodwill. Under the new recommendations, goodwill is no longer amortized, but is tested for impairment at least on an annual basis. For the years ended March 31, 2005, 2004 and 2003, application of the new recommendations resulted in net earnings that were $Nil, $13,462 and $13,508 higher, respectively, if goodwill were amortized as it was prior to April 1, 2002. This change would not affect earnings per share. Had the Company continued to amortize goodwill as it did prior to April 1, 2002, the Company's adjusted net earnings and adjusted net earnings per share (basic and diluted) would be as follows: 2005 2004 2003 (Restated (Restated - Note 3) - Note 3) Net earnings as presented $322,708 $327,681 398,084 Reduced amortization under new -- 13,462 13,508 accounting standard -------- -------- ------- Adjusted net earnings $322,708 $314,219 384,576 ======== ======== ======= Adjusted net earnings per share basic and diluted $ 0.02 $ 0.02 0.03 ======== ======== ======= (h) Revenue recognition The Company recognizes revenue when goods have been shipped, title to the goods are passed to the customer, and collection is reasonably assured. Sales of inventory held on consignment by customers are recognized when the consignment inventory is sold by these customers to third parties or purchased by these customers. The Company's e-commerce subsidiary earns fee revenue for services provided and also earns commission Page 54 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (Continued) (h) Revenue recognition (continued) revenue based on e-commerce transactions facilitated. Fee revenue is recorded when the services have been provided. Commission revenue is recorded on a net basis upon completion of the underlying transaction. (i) Allowance for doubtful accounts The Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowances amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their fair value due to their short-term nature. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the financial statements based on collection experience and actual returns and allowances. (j) Salary and wages The Company includes its costs of purchasing and receiving in salary and wages. The costs are approximately $48,000 (2004: $52,000, 2003: $52,000). (k) Warehousing Costs The Company includes its warehousing costs in rent. The costs are approximately $16,000 (2004: $16,000, 2003: $16,000). (l) Shipping and handling costs Shipping and handling fees charged to customers are reported as revenue and all shipping and handling costs incurred related to products sold are reported as a component of selling and delivery costs. (m) Stock based compensation Effective April 1, 2003, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants Handbook Section 3870, "Stock-based Compensation and other Stock-based Payments". The new recommendations have been applied prospectively to all stock-based payments to employees and non-employees granted on or after April 1, 2003. The change in accounting policy did not result in any adjustments to the Company's opening deficit balance. In accordance with the recommendations under Section 3870, the Company follows the fair value method for recording compensation for all rewards made to employees and non-employees including stock appreciation rights, direct awards of stock and awards that call for settlement in cash or other assets. The fair value of stock options is determined by the Black Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility factors of the expected market price of the Company's common shares and an expected life of the options. Prior to April 1, 2003, the Company elected not to follow the fair value based method of accounting for stock options granted to directors and employees. No compensation expense was recognized when stock options were granted if the exercise price of the stock options granted was at market value. Any consideration paid on the exercise of stock options or purchase of shares was credited to share capital. Page 55 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (Continued) (n) Income taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and loss carry forwards. Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the date of substantive enactment. When it is considered more likely than not that a future tax asset will not be realized, a valuation allowance is provided. (o) Earnings per share The Company uses the treasury stock method to calculate diluted earnings per share. Under this method, all options with an average exercise price less than or equal to the average share price for the year are assumed to be exercised at the average share price during the period. Diluted per share amounts are not presented as the effect of the assumed exercise of 352,500 (2004: 2,357,500, 2003: 2,366,000) unexercised options is antidilutive. (p) Capital stock issued for consideration other than cash Capital stock issued for consideration other than cash is recorded at an estimate of the fair value of the stock issued or issuable or at an estimate of the fair value of the goods or services received (whichever is more readily ascertainable). -------------------------------------------------------------------------------- 3. Restatements (a) During the year, the Company changed its accounting policy with regard to put options issued in 2001 and still outstanding (Note 10) to comply with EIC-149, Accounting for Retractable or Mandatorily Redeemable Shares. The effect of this change was a reclassification of the fair value of the Company's obligation under this put option from equity to liabilities. The change has been accounted for on a retroactive basis with restatement of the prior year figures. (b) Subsequent to year end, the Company changed its method of accounting for payment discounts granted to customers. These discounts were previously presented as selling expenses, a component of selling and delivery expenses. The Company has adjusted the 2005, 2004 and 2003 consolidated financial statements to present these discounts as a reduction in net sales. (c) The Company has historically accounted for marketing costs related to vendor advertising paid to customers incorrectly. These amounts were previously presented as selling expenses, a component of selling and delivery expenses. The Company has corrected this error and has adjusted the 2005, 2004, and 2003 consolidated financial statements to present these amounts as a reduction in net sales. The effect of those changes on current and prior periods presented is as follows: Page 56 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 3. Restatements (Continued) Increase (Decrease) 2005 2004 2003 --------- --------- --------- Obligation under put option $ 64,000 $ 55,600 $ 49,500 Capital stock $(370,472) $(370,472) $(370,472) Retained earnings (deficit) $ 306,472 $ 314,872 $ 320,972 Other expense $ 8,400 $ 6,100 $ 6,500 Net sales $(797,953) $(563,250) $(581,551) Selling expenses $(797,953) $(563,250) $(581,551) -------------------------------------------------------------------------------- 4. Receivables 2005 2004 ---------- ---------- Receivables $3,687,844 $3,703,420 Allowance for doubtful accounts (274,020) (194,053) ---------- ---------- $3,413,824 $3,509,367 ========== ========== -------------------------------------------------------------------------------- 5. Shares cancelled During 2003, the Company, a subsidiary, and a supplier of e-commerce applications and software development agreed to settle all disputes pertaining to a project to develop certain software for the Company's Bygo Internet commerce platform. A component of the settlement agreement reached with the supplier of e-commerce application and software development resulted in 114,753 common shares issued in 2001 being returned to the Company and cancelled during fiscal 2003. -------------------------------------------------------------------------------- 6. Property and equipment 2005 ---------- Accumulated Depreciation and Net Cost Amortization Book Value -------- ---------------- ---------- Computer equipment and Software $410,827 $305,517 $105,310 Furniture and equipment 186,277 140,370 45,907 Leasehold improvements 144,313 125,336 18,977 Trademark 11,840 10,656 1,184 -------- -------- -------- $753,257 $581,879 $171,378 ======== ======== ======== Page 57 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 6. Property and equipment (Continued) 2004 ---------- Accumulated Depreciation and Net Cost Amortization Book Value -------- ---------------- ---------- Computer equipment and Software $389,864 $281,806 $108,058 Furniture and equipment 181,630 138,187 43,443 Leasehold improvements 144,313 96,467 47,846 Trademark 11,840 8,288 3,552 -------- -------- -------- $727,647 $524,748 $202,899 ======== ======== ======== -------------------------------------------------------------------------------- 7. Bank indebtedness Bank indebtedness is comprised of demand overdraft loan facilities totaling $6,500,000 (2004: $6,500,000) except the loans available increase to $7,600,000 (2004: $7,600,000) from July 1st to February 28th (the "Seasonal Bulge"), plus an additional $900,000 one-time bulge in effect July 15, 2004 to June 30, 2005 (the "Additional Bulge"), plus a secondary additional $1,600,000 one time bulge in effect March 1, 2005 to June 30, 2005 (the "Secondary Additional Bulge"). Subsequent to year end, the demand overdraft loan facilities totaling $6,500,000 were renewed except the loan available increased to $9,500,000 from June 1, 2005 to February 28, 2006 (the "One Time Bulge"). The facility details are summarized as follows:
Demand Overdraft Annual Secondary Loan Seasonal Additional Additional Total Facility Bulge Bulge Bulge Facilities ---------- ----------- ---------- ---------- ----------- Balance March 31, 2003 $6,500,000 $ -- $ -- $ -- $ 6,500,000 Increase on July 1, 2003 -- 1,100,000 -- -- 1,100,000 Decrease on March 1, 2004 -- (1,100,000) -- -- (1,100,000) ---------- ----------- -------- ---------- ----------- Balance, March 31, 2004 6,500,000 -- -- -- 6,500,000 Increase on July 1, 2004 -- 1,100,000 900,000 2,000,000 Decrease on March 1, 2005 -- (1,100,000) -- -- (1,100,000) Increase on March 1, 2005 -- -- -- 1,600,000 1,600,000 ---------- ----------- -------- ---------- ----------- March 31, 2005 $6,500,000 $ -- $900,000 $1,600,000 $ 9,000,000 ========== =========== ======== ========== ===========
Page 58 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 7. Bank indebtedness (Continued) These loans bear interest at prime plus 1/8% on the first $1,000,000 (2004: $1,000,000) and prime plus 1% on the balance. The prime interest rate on these loans at year-end was 4.25% (2004: 4.00%). 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 (2004: $1,000,000), guarantees by certain other shareholders to a maximum of $800,000, supported by an assignment of certain shareholders' residential real estate to a maximum of $800,000. Under the terms of the demand overdraft loan agreement facility, the Company must maintain certain Debt to Tangible Net Worth ratios not exceeding 3.0 to 1 for its Jewelry Division and not exceeding 2.6 to 1 on the consolidated entity basis as defined by the bank at each year-end when the loan is outstanding. As at March 31, 2005, the Debt to Tangible Net worth ratios were 3.25 to 1 and 3.28 to 1 respectively. Notwithstanding the foregoing defaults, the bank has agreed not to demand repayment of the loan although they have not waived their ability to so and retain their ability to demand repayment due to the breached covenants. -------------------------------------------------------------------------------- 8. Accounts payable and accruals 2005 2004 ---------- ---------- Accounts payable $3,835,674 $1,260,732 Accruals 838,944 1,029,456 ---------- ---------- $4,674,618 $2,290,188 ========== ========== -------------------------------------------------------------------------------- 9. Income taxes (a) The provision for income taxes differs from the amount that would have been expected by applying Canadian corporate income tax to the loss before taxes. The principal reasons for this difference are as follows: 2005 2004 2003 -------- --------- --------- (Restated (Restated - Note 3) - Note 3) Earnings before income taxes $431,629 $388,567 $539,820 Statutory income tax rate 38% 38% 40% --------------------------------- Anticipated current income tax $164,019 $147,655 $215,928 provision (recovery ) Tax provision effect arising from: Small business deduction (52,466) (46,000) (68,580) Tax losses utilized (17,015) (21,607) (68,000) Non-deductible expenses and other 11,936 (28,468) 31,488 Potential benefit of losses not recognized 2,447 9,306 30,900 -------- -------- -------- Current income taxes $108,921 $ 60,886 $141,736 ======== ======== ======== Page 59 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 9. Income taxes (Continued) (b) Future income tax assets consist of the following: 2005 2004 ---------- ---------- Capital assets $ 58,500 $ 44,300 Non-capital loss carry forward 448,500 382,700 Other items 11,000 11,000 Valuation adjustment (518,000) (438,000) ---------- ---------- $ Nil $ Nil ========== ========== (c) The operating losses expire as follows: 2005 2004 ---------- ---------- 2008 $ 550,000 $ 608,000 2009 544,000 546,000 2010 102,000 102,000 2011 31,000 31,000 2015 32,000 -- ---------- ---------- $1,259,000 $1,287,000 ========== ========== -------------------------------------------------------------------------------- 10. Capital stock Authorized: Unlimited number of common shares without par value Issued: 2005 2004 ---------- ---------- 15,240,302 (2004: 15,240,302) common shares $2,545,765 $2,545,765 Stock options The Company established a stock option plan ("the Plan") that allows for the issuance of up to 3,000,000 common shares as incentive stock options to current and future key employees and consultants. The Board of Directors administers the Plan and has the authority to determine the terms and restrictions on all options, as Page 60 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 10. Capital stock (Continued) Stock options (continued) well as to interpret any provision of the Plan. Discretionary options, once granted, vest at the discretion of The Board of Directors. A summary of the status of the Company's options is presented below: Number of Shares Weighted ------------------------------------------ Average Unvested / Vested / Non- Exercise Discretionary Discretionary Total Price ------------- ------------- ---------- -------- Balance, March 31, 2003 283,500 2,082,500 2,366,000 $0.75 Year ended March 31, 2004 Cancelled (2,500) -- (2,500) $1.50 Expired -- (6,000) (6,000) $1.58 -------- ---------- ---------- Balance, March 31, 2004 281,000 2,076,500 2,357,500 $0.74 Year ended March 31, 2005 Expired (246,000) (1,759,000) (2,005,000) $0.60 -------- ---------- ---------- Balance, March 31, 2005 35,000 317,500 352,500 $1.56 ======== ========== ========== The weighted average fair value of the options granted during the year was $NIL (2004: $NIL; 2003: $0.19). The following table summarizes information concerning options outstanding at March 31, 2005: Total Outstanding Exercisable ------------------------- --------------------- Weighted Weighted Average Average Exercise Price Number of Remaining Number of Exercise -------------- Shares Life (Years) Shares Price --------- ------------ --------- -------- $1.50 92,500 0.32 57,500 $1.50 $1.58 260,000 1.86 260,000 $1.58 ------- ------- 352,500 0.81 317,500 $1.57 ======= ======= The following proforma financial information presents the net earnings and net earnings per common share had the Company recognized stock based compensation expense of $26,600 in the comparative year ended March 31, 2003 using a fair value based accounting method. Net Earnings As reported $398,084 Pro forma $371,484 Page 61 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 10. Capital stock (Continued) Basic and diluted earnings per share As reported $0.03 Pro forma $0.02 The pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. The Company used the Black-Scholes option pricing model to estimate the value of the options at each grant date using the following weighted average assumptions for the year ended March 31, 2005: dividend yield - nil; annualized volatility 0%; risk-free interest rate - 4.2%; expected life - 5 years. Call and put options During 2001, the Company issued 340,136 units consisting of one common share, one common share call option and one common share put option. All call options expired unexercised. The put options 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 $64,000 at March 31, 2005 (2004: $55,600; 2003: $49,500)) and the original proceeds received under the unit offering ($500,000). As required under recently adopted Canadian generally accepted accounting principles, the Company has presented its obligation under this put as a current liability as disclosed in Note 3. -------------------------------------------------------------------------------- 11. Commitments The Company has entered into two operating lease agreements for office premises which expire in the 2008 fiscal year. The future minimum lease payments under these lease agreements for the next five years and thereafter are: 2006 $126,084 2007 126,084 2008 116,184 2009 112,884 2010 and thereafter 131,698 The operating lease agreement for one office premise is with a partnership in which the Company's president has an interest and the other with a partnership in which the president of Allura Diamonds Limited has an interest. Page 62 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 12. Change in non-cash operating working capital
2005 2004 2003 ----------- --------- --------- Receivables $ 95,543 $ 353,283 $(438,793) Income taxes 99,694 (193,858) 159,954 Inventories (5,436,573) 289,184 330,956 Prepaids (69,852) 17,025 (26,003) Accounts payable and accruals 2,384,430 (785,768) (481,225) ----------- --------- --------- $(2,926,758) $(320,134) $(455,111) =========== ========= =========
-------------------------------------------------------------------------------- 13. Related party transactions Related party transactions during the year and balances at year end are summarized as follows:
2005 2004 2003 -------- -------- -------- (a) International Bullion and Metal Brokers (London) Limited Transactions Inventory purchases $ -- $ 7,759 $ 25,188 Interest and guarantee fee $113,896 $ 89,207 $ 11,649 Balances Accounts payable and accrued liabilities $ 26,960 $ 27,046 $ 10,098 (b) Other Rent paid to two related partnerships (Note 11) $126,084 $126,084 $122,784 Guarantee fee paid to two significant shareholders $ 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 included the following foreign currency denominated amounts: Page 63 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 14. Financial instruments and risk management (Continued) Currency risk (continued) 2005 2004 ---------- -------- U.S. dollar $2,846,208 $921,269 Euro 377,647 45,125 ---------- -------- $3,223,855 $966,394 ========== ======== The Company does not use derivative instruments to reduce its exposure to foreign currency risk. Commodity Risk Inventory consists of precious metals and gemstones. These items are susceptible to change in valuation due to market conditions beyond the Company's control. Increase or decreases in the commodity prices of these assets can have positive or negative effects on the Company's future net earnings. The Company does not enter into derivative contracts to mitigate its exposure to commodity risk. Interest rate risk Bank indebtedness bears floating interest rates which exposes the Company to the risk of changing interest rates that may have a detrimental effect on its earnings in future periods. 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, 2005, 66% (2004: 44%) of the Company's accounts receivable was owed by 3 customers as per table below. The Company had three (2004: two) customers individually whose balances exceeded 10% of the Company's total accounts receivable at March 31, 2005. 2005 Percent 2004 Percent ---------- ------- ---------- ------- Company A $1,380,717 40% $ 930,816 25% Company B 531,248 16% 324,403 10% Company C 351,714 10% -- -- Company D -- -- 288,873 9% ---------- ------- ---------- ------- $2,263,679 66% $1,544,092 44% ========== ======= ========== ======= Page 64 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 14. Financial instruments and risk management (Continued) Fair value The Company has various financial instruments including receivables, bank indebtedness and payables and accruals. The carrying value of all financial instruments approximates their fair value due to their short-term nature. -------------------------------------------------------------------------------- 15. Significant customers Four major customers account for 53% of total sales in 2005 (2004: 54%, 2003: 44%) as follows: 2005 Percent 2004 Percent 2003 Percent Company A $ 4,955,465 26% $3,403,950 21% $2,993,413 17% Company B 1,980,880 10% 2,546,936 16% 2,113,348 12% Company C 1,792,747 9% 1,746,882 11% 1,495,427 8% Company D 1,518,852 8% -- -- -- -- Company E -- -- 1,000,722 6% 1,396,282 7% ---------------------- --------------------- --------------------- $10,247,944 53% $8,698,490 54% $7,998,470 44% ====================== ===================== ===================== -------------------------------------------------------------------------------- 16. Differences between Canadian and U.S. generally accepted accounting principles and practices These financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian basis") which differ from those principles and practices that the Company would have followed had its financial statements been prepared in accordance with accounting principles and practices generally required in the U.S. ("U.S. basis") as follows: a) Under the Canadian basis in effect for fiscal years commencing before January 1, 2002, the issuance of certain stock options did not require any reflection in the Company's accounts. Under the U.S. basis rules, the issuance of certain stock options results in a current and/or deferred expense that must be reflected in the Company's financial statements. The expense recorded is calculated based on the fair value of the options issued using the Black Scholes option pricing model. For fiscal years commencing after January 1, 2002, the Canadian basis rules are substantially conformed to U.S. basis rules pertaining to the recording of stock options issued. As described in Note 2, effective April 1, 2003, the Company adopted the fair value based approach to Stock Based Compensation under the provisions of CICA Section 3870 and SFAS No. 148. The method of adoption applied by the Company is permissible under both Canadian and US standards. Page 65 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 16. Differences between Canadian and U.S. generally accepted accounting principles and practices (Continued) b) For U.S. GAAP purposes, the put options disclosed in Note 10 have been recorded as a liability in accordance with EITF 00-19. The Canadian GAAP treatment of these put options is disclosed in Note 3 thus Canadian and U.S. GAAP are now consistent. These differences between the U.S. and Canadian basis do not result in any differences to the Company's financial statements during the periods presented. Recent accounting pronouncements Consolidation of Variable Interest Entities In January 2003, the Financial Accounting Standards Board or "FASB" issued Interpretation No. 46, Consolidation of Variable Interest Entities, and an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 establishes accounting guidance for consolidation of variable interest entities by the primary beneficiary. FIN 46 applies to any business enterprise, public or private, that has a controlling interest, contractual relationship or other business relationship with a variable interest entity. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R") which supersedes FIN 46 and is effective for all Variable Interest Entities ("VIEs") created after February 1,2003 at the end of the first interim or annual reporting period ending December 15, 2003. "FIN 46R" is applicable to all VIEs created prior to February 1, 2003 by public entities at the end of the first interim or annual reporting period ending after March 15, 2004. The Company has determined that it has no VIEs. In June 2003, the CICA issued a new accounting guideline ACG-15, "Consolidation of Variable Interest Entities" which is effective for interim and annual periods beginning on or after November 1, 2004. ACG-15 harmonizes the accounting treatment for variable interest entities with the US GAAP treatment under "FIN 46R". Exchanges of Non-Monetary Assets In December 2004, the FASB issued Statement No. 153 ("SFAS 153") "Exchanges of Non-monetary Assets". SFAS 153 replaces guidance previously issued under APB Opinion No. 29, "Accounting for Non-monetary Transactions", which was based on; the principle that exchanges of non-monetary assets should be measured based on; the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of substance if the future cash flows of the entity are expected to change significantly as the June 15, 2005. The Company will comply with this guidance for any non-monetary transactions after the effective date for U.S. GAAP purposes. Financial Instruments On January 27, 2005, the CICA issued Section 3855 of the Handbook titled "Financial Instruments - Recognition and Measurement" It expands Handbook section 3860, "Financial Instruments - Disclosure and Presentation" by prescribing when a financial instrument is to be recognized on the balance sheet and at what Page 66 of 75 Allura International Inc. Notes to the Consolidated Financial Statements (expressed in Canadian dollars) March 31, 2005, 2004 and 2003 -------------------------------------------------------------------------------- 16. Differences between Canadian and U.S. generally accepted accounting principles and practices (Continued) amount. It also specifies how financial instrument gains and losses are to be presented. All financial instruments will be required to be classified into various categories. Held to maturity investments loans and receivables are measured at amortized cost with amortization of premium or discounts and losses and impairment included in current period interest income or expense. Held for trading financial assets and liabilities are measured at fair market value with all gains and losses included in net income in the period in which they arise. All available for sale financial assets are measured at fair market value with revaluation gains and losses included in other comprehensive income until the asset is removed from the balance sheet except that other than temporary losses due to impairment are included in net earnings. All other financial liabilities are to be carried at amortized cost. This new Handbook section will bring Canadian GAAP more in line with U.S. GAAP. The mandatory effective date is for fiscal years beginning on or after October 1, 2006, with optional early recognition for fiscal years beginning on or after December 31, 2004. At present, the Company's most significant financial instruments are cash, accounts receivable and accounts payable. This new section requires little difference in accounting for these financial instruments from current standards. Hedge Accounting New Handbook Section 3865, "Hedges" provides alternative treatments to Handbook Section 3855 for entities which choose to designate qualifying transactions as hedges for accounting purposes. The effective date of this section is for fiscal years beginning on or after October 1, 2006, with optional early recognition for fiscal years beginning on or after December 31, 2004. The Company does not currently have any hedging relationships. Page 67 of 75 Allura International Inc. Consolidated Schedules of Administrative and Selling and Delivery Expenses Appendix 1 (expressed in Canadian dollars) Years Ended
2005 2004 2003 (Restated - (Restated - (Restated - Note 3) Note 3) Note 3) ------------------------------------------------------------------------------------ Administrative Alarm and security $ 5,484 $ 5,408 $ 4,373 Automobile 6,165 3,486 2,420 Bad debts 140,692 95,153 49,341 Consulting 29,134 111,935 106,436 Insurance 311,145 183,640 193,929 Legal and accounting 122,203 143,871 80,960 Office and miscellaneous 301,915 133,572 163,981 Rent (Note 13(b)) 183,145 175,780 177,956 Salaries and wages 2,026,538 1,618,089 1,525,710 Telephone 38,082 29,452 30,054 Travel, meals and entertainment 83,693 37,561 34,072 ---------- ---------- ---------- $3,248,196 $2,537,947 $2,369,232 ========== ========== ========== Selling and delivery Marketing $ 52,893 $ 30,892 $ 30,814 Freight and shipping 254,267 169,806 197,501 Sales commission 185,374 163,656 213,755 Selling 292,642 95,771 139,768 ---------- ---------- ---------- $ 785,176 $ 460,125 $ 581,838 ========== ========== ==========
Page 68 of 75 ITEM 18. FINANCIAL STATEMENTS The Company has elected to report under Item #17. ITEM 19. EXHIBITS 1.1 Certificate of Incorporation of the Company (incorporated by reference from Exhibit 1.1 to the Company's Registration Statement on Form 20-F, File No. 0-30228 (the "Registration Statement")); 1.2 By-laws of the Company (incorporated by reference from Exhibit 1.2 to the Registration Statement); 1.3 Articles of Amendment of the Company (incorporated by reference from Exhibit 1.3 to the Registration Statement); 1.4 Certificate of Amendment of the Company (incorporated by reference from Exhibit to the Registration Statement); 1.5 Certificate of Change of Name (incorporated by reference from Exhibit 1.5 to the Registration Statement); 4.1 Shareholders Agreement (incorporated by reference from Exhibit 4.1 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000); 4.2 Investment Agreement (incorporated by reference from Exhibit 4.2 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000); 4.3 Lease for 1555 West 8th Avenue (incorporated by reference from Exhibit 4.3 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000) and Lease for Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6, (incorporated by reference from Exhibit 4.4 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2003) 4.4 Stock Option Plan (incorporated by reference from Exhibit 4.4 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000); 4.5 Mutual Release and Settlement Agreement dated May 1,2002 by and among, Allura International, Bygo, Inc. and MacDonald Dettwiler and Associates, Ltd., and certain other parties thereto; 7.0 List of Subsidiaries (incorporated by reference from Exhibit 7.0 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000). 12.1 Section 302 Certification by C.E.O. 12.2 Section 302 Certification by C.F.O. 13.1 Section 906 Certification by C.E.O. 13.2 Section 906 Certification by C.F.O. Page 69 of 75 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf. Allura International, Inc. DATED at Vancouver, British Columbia, Canada, as of October 14th, 2005. /s/ "Jeremy Bowman" ------------------------------ Jeremy Bowman, President, CEO and Director Page 70 of 75 ALLURA INTERNATIONAL INC. Index to Exhibits Filed 1.1 Certificate of Incorporation of the Company (incorporated by reference from Exhibit 1.1 to the Company's Registration Statement on Form 20-F, File No. 0-30228 (the "Registration Statement")); 1.2 By-laws of the Company (incorporated by reference from Exhibit 1.2 to the Registration Statement); 1.3 Articles of Amendment of the Company (incorporated by reference from Exhibit 1.3 to the Registration Statement); 1.4 Certificate of Amendment of the Company (incorporated by reference from Exhibit 1.4 to the Registration Statement); 1.5 Certificate of Change of Name (incorporated by reference from Exhibit 1.5 to the Registration Statement); 4.1 Shareholders Agreement (incorporated by reference from Exhibit 4.1 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000); 4.2 Investment Agreement (incorporated by reference from Exhibit 4.2 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000); 4.3 Lease for 1555 West 8th Avenue (incorporated by reference from Exhibit 4.3 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000). Lease for Unit 104, 276 Bedford Highway, Halifax, N.S., B3M 2K6, (incorporated by reference from Exhibit 4.4 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2003); 4.4 Stock Option Plan (incorporated by reference from Exhibit 4.4 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000); 4.5 Mutual Release and Settlement Agreement dated May 1, 2002, by and among Allura International, Bygo Inc., MacDonald Dettwiler and Associates Ltd. and certain other parties thereto. 7.0 List of Subsidiaries (incorporated by reference from Exhibit 7.0 to the Annual Report on Form 20-F for the fiscal year ended March 31, 2000). 12.1 Section 302 Certification by C.E.O. 12.2 Section 302 Certification by C.F.O. 13.1 Section 906 Certification by C.E.O. 13.2 Section 906 Certification by C.F.O. Page 71 of 75 EXHIBIT 12.1 Certification of Chief Executive Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 I, Jeremy Bowman, certify that: 1. I have reviewed this annual report on Form 20-F of Allura International Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report; 4. The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c. Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officers and I have disclosed, based on our most recent evaluation, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the company's ability to record, process, summarize and report financial data and have identified for the company's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls. DATED at Vancouver, British Columbia, Canada, as of October 14th, 2005 /s/ "Jeremy Bowman" ------------------- Jeremy Bowman, President, CEO and Director Page 72 of 75 EXHIBIT 12.2 Certification of Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 I, Emily Tsen, certify that: 1. I have reviewed this annual report on Form 20-F of Allura International Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report; 4. The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c. Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officers and I have disclosed, based on our most recent evaluation, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the company's ability to record, process, summarize and report financial data and have identified for the company's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls; and 6. The company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATED at Vancouver, BC, as of October 14th, 2005 /s/ "Emily Tsen" ---------------- Emily Tsen, Chief Financial Officer and Vice President-Operations Page 73 of 75 EXHIBIT 13.1 Certification of Chief Executive Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 I, Jeremy Bowman, President and Chief Executive Officer of Allura International Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge: 1. The Annual Report on Form 20-F of Allura International Inc., for the year ended March 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Allura International Inc. Vancouver, BC, Canada October 14th, 2005 by: /s/ "Jeremy Bowman" ------------------ Jeremy Bowman President and Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Page 74 of 75 EXHIBIT 13.2 Certification of Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 I, Emily Tsen, Chief Financial Officer of Allura International Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge: 1. The Annual Report on Form 20-F of Allura International Inc. for the year ended March 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Allura International Inc. Vancouver, British Columbia, Canada October 14th, 2005 by: /s/ "Emily Tsen" ---------------- Emily Tsen Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Page 75 of 75