Company Quick10K Filing
Quick10K
Birks Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.85 18 $15
20-F 2019-03-30 Annual: 2019-03-30
20-F 2018-03-31 Annual: 2018-03-31
20-F 2017-03-25 Annual: 2017-03-25
20-F 2016-03-26 Annual: 2016-03-26
EXPE Expedia 19,003
TIF Tiffany & Co. 10,385
CENT Central Garden & Pet 1,540
SIG Signet Jewelers 640
FOSL Fossil Group 635
MOV Movado Group 498
NHTC Natural Health Trends 88
EDUC Educational Development 52
DGSE DGSE Companies 30
CTHR Charles & Colvard 29
BGI 2019-03-30
Item 17 ☐ Item 18 ☐
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Item 17. Financial Statements
Item 18. Financial Statements
Part III
Item 19. Exhibits
EX-8.1 d743026dex81.htm
EX-12.1 d743026dex121.htm
EX-12.2 d743026dex122.htm
EX-13.1 d743026dex131.htm
EX-13.2 d743026dex132.htm
EX-15.1 d743026dex151.htm

Birks Group Earnings 2019-03-30

BGI 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 d743026d20f.htm FORM 20-F Form 20-F
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

  [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

  ACT OF 1934

For the fiscal year ended March 30, 2019

OR

  [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

  EXCHANGE ACT OF 1934

OR

  [ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

  EXCHANGE ACT OF 1934

  Date of event requiring this shell company report _________________

  For the transition period from _________________ to _________________

Commission file number: 001-32635

BIRKS GROUP INC.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

Canada

(Jurisdiction of incorporation or organization)

2020 Robert-Bourassa Blvd.

Montreal Québec

Canada

H3A 2A5

(Address of principal executive offices)

Pat Di Lillo, 514-397-2592 (telephone), 514-397-2537 (facsimile)

2020 Robert-Bourassa Blvd.

Suite 200

Montreal Québec

Canada

H3A 2A5

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

  Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

  Trading
Symbol
 

Name of each exchange on which registered

  Class A Voting Shares, without nominal or par value   BGI     NYSE American LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None.

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report was:

 

10,242,911         Class A Voting Shares, without nominal or par value
7,717,970         Class B Multiple Voting Shares, without nominal or par value
0         Series A Preferred Shares, without nominal or par value, issuable in series

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

      Yes     No


Table of Contents

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

      Yes     No

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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     No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

      Yes     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    Accelerated filer   Non-accelerated filer
     Emerging Growth Company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP              International Financial Reporting Standards as issued by the International Accounting Standards Board ☐         Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

     Item 17     Item 18

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

      Yes     No


Table of Contents

TABLE OF CONTENTS

 

            Page  

Part I

       

Item 1.

     Identity of Directors, Senior Management and Advisers      2  

Item 2.

     Offer Statistics and Expected Timetable      2  

Item 3.

     Key Information      2  

Item 4.

     Information on the Company      12  

Item 4A.

     Unresolved Staff Comments      19  

Item 5.

     Operating and Financial Review and Prospects      20  

Item 6.

     Directors, Senior Management and Employees      38  

Item 7.

     Major Shareholders and Related Party Transactions      47  

Item 8.

     Financial Information      50  

Item 9.

     The Offer and Listing      50  

Item 10.

     Additional Information      50  

Item 11.

     Quantitative and Qualitative Disclosures About Market Risk      55  

Item 12.

     Description of Securities Other than Equity Securities      56  

Part II

       

Item 13.

     Defaults, Dividend Arrearages and Delinquencies      56  

Item 14.

     Material Modifications to the Rights of Security Holders and Use of Proceeds      56  

Item 15.

     Controls and Procedures      56  

Item 16A.

     Audit Committee Financial Expert      57  

Item 16B.

     Code of Ethics      57  

Item 16C.

     Principal Accountant Fees and Services      57  

Item 16D.

     Exemptions from the Listing Standards for Audit Committees      58  

Item 16E.

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers      58  

Item 16F.

     Change in Registrant’s Certifying Accountant      58  

Item 16G.

     Corporate Governance      58  

Item 16H.

     Mine Safety Disclosure      58  

Item 17.

     Financial Statements      58  

Item 18.

     Financial Statements      59  

Part III

       

Item 19.

     Exhibits      59  

 

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INTRODUCTION

References

Unless the context otherwise requires, the terms “Birks Group,” “the Company,” “we,” “us,” and “our” are used in this Annual Report to refer to Birks Group Inc., a Canadian corporation, and its subsidiaries on a consolidated basis. In addition, (i) the term “Mayors” refers to Mayor’s Jewelers, Inc., a Delaware corporation, and its wholly-owned subsidiary, Mayor’s Jewelers of Florida, Inc., a Florida corporation, until October 23, 2017, upon which date it was sold to a third party, and (ii) “the merger” refers to the merger of Mayors with a wholly-owned subsidiary of the Company, as approved by the stockholders on November 14, 2005. The term “Birks” refers to Henry Birks & Sons Inc., the legal name of Birks Group prior to the merger.

Presentation of Financial and Other Information

Throughout this Annual Report, we refer to our fiscal year ending March 30, 2019, as fiscal 2019, and our fiscal years ended March 31, 2018 and March 25, 2017, as fiscal 2018 and fiscal 2017, respectively. Our fiscal year ends on the last Saturday in March of each year. The fiscal year ended March 30, 2019 consisted of 52 weeks. The fiscal years ended March 31, 2018, and March 25, 2017 consisted of 53 and 52 weeks, respectively.

The Company has changed its reporting currency in fiscal 2019 from U.S. dollars (USD) to Canadian dollars (CAD) for the period commencing April 1, 2018 in order to better reflect the fact that subsequent to the Company’s divestiture of its former wholly-owned subsidiary, Mayors, on October 23, 2017, its business is primarily conducted in Canada, and a substantial portion of its revenues, expenses, assets and liabilities are denominated in CAD. The Company’s functional currency remains CAD. All figures presented in this Annual Report are in CAD unless otherwise specified and all prior periods’ comparative information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our consolidated financial statements included elsewhere in this Form 20-F).

Significant Transaction

On August 11, 2017, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Aurum Holdings Ltd., a company incorporated under the laws of England and Wales, which assigned its rights and obligations under the Stock Purchase Agreement to Aurum Group USA, Inc., a Delaware corporation (now known as Watches of Switzerland) (“Aurum”) to sell its wholly-owned subsidiary, Mayors, which operated in Florida and Georgia and was engaged primarily in luxury timepieces and jewelry retail activities. The sale was completed on October 23, 2017 for total consideration of $135.0 million (USD $106.8 million) (the “Aurum Transaction”).

As part of the Aurum Transaction, Birks entered into a 5 year distribution agreement with Aurum (the “Distribution Agreement”) to sell Birks fine jewelry in the U.K. at Mappin & Webb and Goldsmiths stores and on their respective e-commerce platforms. Furthermore, pursuant to the Distribution Agreement, the Birks collections continue to be sold in the United States through Mayors stores in Florida and Georgia. The Distribution Agreement is an achievement in the Company’s strategy to develop the Birks brand into a global luxury brand. The Aurum Transaction represents a step forward in the Company’s efforts to strengthen its balance sheet and to execute its strategic vision of investing in the Birks brand.

Proceeds from the Aurum Transaction were used to pay down outstanding debt under the Company’s previous senior secured credit facilities that included term debt and working capital debt associated with Mayors. The Company did not pay dividends as a result of the Aurum Transaction, but rather, the remaining transaction proceeds were used by Birks to continue its strategic growth initiatives, specifically to invest in its Canadian flagship stores and to support its high-growth Birks brand wholesaling activities and e-commerce, as part of the Company’s omni-channel strategy.

As a result of the Aurum Transaction, the Company has presented Mayors’ results as a discontinued operation in the consolidated statements of operations and cash flows for all periods presented. See “Significant Transaction” in Item 5 below for a reconciliation of the Company’s results from continuing operations and from discontinuing operations for the fiscal years 2019, 2018, and 2017, respectively.

 

1


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Forward-Looking Information

This Annual Report and other written reports and releases and oral statements made from time to time by the Company contain forward-looking statements which can be identified by their use of words like “plans,” “expects,” “believes,” “will,” “anticipates,” “intends,” “projects,” “estimates,” “could,” “would,” “may,” “planned,” “goal,” and other words of similar meaning. All statements that address expectations, possibilities or projections about the future, including, without limitation, statements about our strategies for growth, expansion plans, sources or adequacy of capital, expenditures and financial results are forward-looking statements.

One must carefully consider such statements and understand that many factors could cause actual results to differ from the forward-looking statements, such as inaccurate assumptions and other risks and uncertainties, some known and some unknown. No forward-looking statement is guaranteed and actual results may vary materially. Such statements are made as of the date provided, and we assume no obligation to update any forward-looking statements to reflect future developments or circumstances.

One should carefully evaluate such statements by referring to the factors described in our filings with the Securities and Exchange Commission (“SEC”), especially on this Form 20-F and our Forms 6-K. Particular review is to be made of Items 3, 4 and 5 of this Form 20-F where we discuss in more detail various important risks and uncertainties that could cause actual results to differ from expected or historical results. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Since it is not possible to predict or identify all such factors, the identified items are not a complete statement of all risks or uncertainties.

PART I

Item 1.  Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Financial Data

The following financial data as of March 30, 2019 and March 31, 2018 and for the years ended March 30, 2019, March 31, 2018, and March 25, 2017 have been derived from our audited consolidated financial statements, which are included elsewhere in this Annual Report. The following financial data as of March 25, 2017, March 26, 2016, and March 28, 2015 and for the years ended March 26, 2016, and March 28, 2015 have been derived starting with our audited consolidated financial statements not included in this Annual Report, recast to CAD (see footnote * below) and then adjusted to reflect the effects of the discontinued operations (see footnote 5 below), which adjustments are unaudited. All fiscal years, except for fiscal 2018, in the table below consisted of 52 weeks. Fiscal 2018 consisted of 53 weeks. The historical results included below and elsewhere in this Annual Report are not necessarily indicative of our future performance.

 

2


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The data presented below is only a summary and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, included elsewhere in this Annual Report. You should also read the following summary data in conjunction with Item 5, “Operating and Financial Review and Prospects” included elsewhere in this Annual Report.

 

Income Statement Data – from

continuing operations:

              
     Fiscal Year Ended
       March 30, 2019      March 31, 2018*        March 25, 2017*        March 25, 2016*        March 28, 2015*  
     (In thousands, except per share data)

Net sales

      $   151,049         $   146,608          $     152,992        $     168,713        $     163,071  

Cost of sales

     92,472        90,915        91,460        99,249        95,797  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Gross profit

     58,577        55,693        61,532        69,464        67,274  

Selling, general and administrative expenses

     67,106        66,754        61,599        63,384        60, 160  
Restructuring charges (1)      1,182        894        897        720        888  
Depreciation and amortization      3,859        3,264        3,428        3,660        3,466  
Gain on sale of assets (2)      -        -        -        (4,235)        -  
Impairment of long-lived assets (3)      46        2,788        -        -        271  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total operating expenses      72,193        73,700        65,924        63,529        64,785  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Operating (loss) income      (13,616)        (18,007)        (4,392)        5,935        2,489  
Interest and other financial costs      4,689        3,988        4,467        5,639        3,043  
Debt extinguishment charges (4)      -        -        -        -        3,006  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

(Loss) income from continuing operations before income taxes

     (18,305)        (21,995)        (8,859)        296        (3,560)  

Income tax (recovery) expense

     -        -        -        -        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net (loss) income from continuing operations      (18,305)        (21,995)        (8,859)        296        (3,560)  
Discontinued operations:               
(Loss) income from discontinued operations, net of tax      (381)        (1,592)        15,934        6,836        (6,256)  
Gain on disposal of discontinued operations, net of tax      -        37,682        -        -        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net (loss) income from discontinued operations

     (381)        36,090        15,934        6,836        (6,256)  

Net (loss) income attributable to common shareholders

      $ (18,686)         $         14,095          $       7,075        $       7,132        $       (9,816)  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net (loss) income per common share, basic

      $ (1.04)         $ 0.78          $ 0.39        $ 0.40        $ (0.55)  

Net (loss) income per common share, diluted

      $ (1.04)         $ 0.77          $ 0.38        $ 0.40        $ (0.55)  

Net (loss) income from continuing operations per common share – basic

      $ (1.02)         $ (1.22)          $ (0.49)        $ 0.02        $ (0.20)  

Net (loss) income from continuing operations per common share – diluted

      $ (1.02)         $ (1.20)          $ (0.48)        $ 0.02        $ (0.20)  

Weighted average common shares outstanding

     17,961        17,961        17,961        17,961        17,937  

Weighted average common shares outstanding – diluted

     17,961        18,393        18,418        17,961        17,937  

Dividends per share

     -        -        -        -        -  

 

3


Table of Contents

Balance Sheet Data:

              
         March 30, 2019            March 31, 2018*            March 25, 2017*(5)        March 25, 2016*(5)        March 28, 2015*(5)
                 (In thousands)

Working capital

       $ 7,464          $ 22,449          $ 1,530          $ 9,907          $ 13,734  

Total assets

       $ 133,795          $ 120,275          $ 115,163          $ 119,451          $ 117,017  

Bank indebtedness

       $ 47,021          $ 36,925          $ 59,965          $ 46,643          $ 45,484  

Long-term debt (including current portion)

       $ 17,104          $ 8,210          $ 8,626          $ 22,531          $ 26,597  

Stockholders’ equity

       $ 13,783          $ 32,477          $ 17,112          $ 10,223          $ 3,551  

Common Stock:

              

Value

       $ 93,348          $ 93,348          $ 93,348          $ 93,348          $ 93,348  

Shares

     17,961        17,961        17,961        17,961        17,961  

 

 

 

  (*)

The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

  (1)

In fiscal 2019 and fiscal 2018, restructuring charges relate primarily to severance as we eliminated certain head office positions to further increase efficiency and to align corporate functions with our strategic direction following the Aurum Transaction. In fiscal 2017, fiscal 2016 and fiscal 2015, restructuring charges related to consolidating most of our corporate administrative workforce to Montreal as well as outsourcing a portion of our jewelry manufacturing and other corporate staff reductions. Refer to note 12 to our consolidated financial statements which are included elsewhere in this Annual Report.

  (2)

On August 4, 2015, the Company entered into an asset purchase agreement for the sale of the assets of the corporate sales division to Rideau Recognition Solutions Inc. (“Rideau”) for $5.6 million and executed a supply and licensing agreement for Birks products and Birks-branded products.

  (3)

For fiscal 2018, impairment of long-lived assets represents a non-cash impairment of leasehold improvements at a retail location due to its projected operating performance as well as a non-cash impairment of software associated with a decision to modify the scope of the implementation of the Company’s new enterprise resource planning system. For fiscal 2015, impairment of long-lived assets represents a non-cash impairment of a retail shop-in-shop location due to its projected operating performance.

  (4)

Debt extinguishment charges in fiscal 2015 arising from amendments to the then existing senior secured term loan and senior secured revolving credit facilities.

  (5)

Retrospectively revised. For working capital, total assets, bank indebtedness and long-term debt for the years ended March 28, 2015 to March 25, 2017 inclusively, the assets and liabilities of Mayors were retrospectively determined and excluded to reflect the remaining balances after the Aurum Transaction.

Dividends and Dividend Policy

We have not paid dividends since 1998 and do not currently intend to pay dividends on our Class A voting shares or Class B multiple voting shares in the foreseeable future. Our ability to pay dividends on our Class A voting shares and Class B multiple voting shares are restricted by our credit agreements. See Item 5, “Operating and Financial Review and Prospects — Liquidity and Capital Resources.” If dividends were declared by our Board of Directors, shareholders would receive a dividend equal to the per share dividend we would pay to holders of our Class A voting shares or holders of Class B multiple voting shares. Dividends we would pay to U.S. holders would generally be subject to withholding tax. See Item 10, “Additional Information —Taxation.”

 

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RISK FACTORS

Risks Related to the Company

The level of our indebtedness could adversely affect our operations, liquidity and financial condition.

Our debt levels fluctuate from time to time based on seasonal working capital needs. In fiscal 2019, the Company incurred debt primarily for the purpose of financing the renovations of its flagship stores, which is in line with its strategic plan. The following table sets forth our total indebtedness (including bank indebtedness and current and long-term portion of debt), total stockholders’ equity, total capitalization and ratio of total indebtedness to total capitalization as of:

 

     March 30, 2019      March 31, 2018*  
Total indebtedness (consisting of bank indebtedness and long-term debt, including current portion)      $64,125,000        $45,135,000  

Total stockholders’ equity

     13,783,000        32,477,000  

Total capitalization

     $77,908,000        $77,612,000  

Ratio of total indebtedness to total capitalization

     82.3%        58.2%  

Debt to equity ratio

     4.65        1.39  

 

(*)

The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report)

This level of leverage could adversely affect our results of operations, liquidity and financial condition. Some examples of how high levels of indebtedness could affect our results of operations, liquidity and financial condition may include the following:

 

   

make it difficult for us to satisfy our obligations with respect to our indebtedness;

 

   

increase our vulnerability to adverse economic and industry conditions;

 

   

increase our vulnerability to fluctuations in interest rates;

 

   

require us to dedicate a substantial portion of cash from operations to the payment of debt service, thereby reducing the availability of cash to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our ability to obtain additional financing for working capital, capital expenditures, general corporate purposes or acquisitions;

 

   

place us at a disadvantage compared to our competitors that have a lower degree of leverage; and

 

   

negatively affect the price of our stock.

Significant restrictions on our borrowing capacity could result in our inability to fund our cash flow requirements or maintain minimum excess availability requirements under the terms of our secured asset-based credit facility needed to support our day-to-day operations and our ability to continue as a going concern.

Our ability to fund our operations and meet our cash flow requirements is dependent upon our ability to maintain positive excess availability under our $85.0 million senior secured credit facility (the “Credit Facility”). Under the Credit Facility, our sole financial covenant is to maintain minimum excess availability of not less than $8.5 million at all times, except that we shall not be in breach of this covenant if excess availability falls below $8.5 million for not more than two consecutive business days once during any fiscal month. Our excess availability was above $8.5 million throughout fiscal 2019.

 

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Both our Credit Facility and Term Loan (defined below) are subject to cross default provisions with all other loans pursuant to which if we are in default of any other loan, we will immediately be in default of both the Credit Facility and the Term Loan. In the event that excess availability falls below $8.5 million for more than two consecutive business days once during any fiscal month, this would be considered an event of default under the Credit Facility and Term Loan agreements, that provides the lenders the right to require the outstanding balances borrowed under our Credit Facility and Term Loan to become due immediately, which would result in cross defaults on our other borrowings. We expect to have excess availability of at least $8.5 million for at least the next twelve months.

On June 29, 2018, we secured a $12.5 million senior secured term loan (the “Term Loan”) with Crystal Financial LLC (“Crystal”). The Term Loan, which matures in October 2022, is subordinated in lien priority to the Credit Facility and bears interest at a rate of Canadian Dollar Offered Rate (“CDOR”) plus 8.25%. Under the Term Loan, we are required to adhere to a similar financial covenant as under the Credit Facility (maintain minimum excess availability of not less than $8.5 million at all times, except that we shall not be in breach of this covenant if excess availability falls below $8.5 million for not more than two consecutive business days once during any fiscal month). In addition, the Term Loan includes seasonal availability blocks imposed from December 20th to January 20th of each year of $9.5 million and from January 21st to February 20th of each year of $4.5 million. The long term senior secured term loan is required to be repaid upon maturity. Our borrowing capacity under both the Credit Facility and Term Loan is based upon the value of our inventory and accounts receivable, which is periodically assessed by our lenders and based upon these reviews, our borrowing capacity could be significantly increased or decreased.

Our lenders under our Credit Facility and our Term Loan may impose, at any time, discretionary reserves, which would lower the level of borrowing availability under our credit facilities (customary for asset-based loans), at their reasonable discretion, to: i) ensure that we maintain adequate liquidity for the operation of our business, ii) cover any deterioration in the value of the collateral, and iii) reflect impediments to the lenders to realize upon the collateral. There is no limit to the amount of discretionary reserves that our lenders may impose at their reasonable discretion. No discretionary reserves were imposed during fiscal 2019, fiscal 2018, and fiscal 2017, by our current or former lenders.

For fiscal 2019, the Company reported a net loss from continuing operations of $18.3 million (consolidated net loss of $18.7 million). The Company reported a net loss from continuing operations of $22.0 million (consolidated net income of $14.1 million) and a net loss from continuing operations of $8.9 million (consolidated net income of $7.1 million) for fiscal 2018 and fiscal 2017, respectively. The Company used cash in operating activities from continuing operations of $4.3 million, $19.7 million and $4.4 million for fiscal 2019, 2018 and 2017, respectively. Maintenance of sufficient availability of funding through an adequate amount of committed financing is necessary for the Company to fund its day-to-day operations. The Company’s ability to make scheduled payments of principal, or to pay the interest or additional interest, if any, or to fund planned capital expenditures and store operations will depend on its ability to maintain adequate levels of available borrowing and its future performance, which to a certain extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other events that are beyond the Company’s control.

The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

Additional financing or capital that may be required may not be available on commercially reasonable terms, or may not be available at all. Capital raised through the sale or issuance of equity securities may result in dilution to our current shareholders. Failure to obtain such additional financing or capital could have an adverse impact on our liquidity and financial condition including our ability to continue as a going concern.

If we are unable to meet our financial projections, in order to invest in growth initiatives, we may need to raise additional funds through public or private equity or debt financing, including funding from governmental sources, which may not be possible as the success of raising additional funds is beyond our control. The sale of additional equity securities could result in significant dilution to our current shareholders, and the securities issued in future financings may have rights, preferences and privileges that are senior to those of our common stock. The terms of our Credit Facility and Term Loan expire in October 2022, as such, financing may be unavailable in amounts or on terms acceptable to us, or at all, which could have a material adverse impact on our business, including our ability to continue as a going concern. The Company continues to be actively engaged in identifying alternative sources of financing that include raising additional funds through public or private equity, the disposal of assets, and debt financing, including funding from governmental sources which may not be possible as the success of raising additional funds is beyond the Company’s control. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that could restrict the Company’s operations.

 

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Our business could be adversely affected if we are unable to continue to lease retail stores in prime locations and successfully negotiate favorable lease terms.

Historically, we have generally been successful in negotiating and improving leases for renewal as our current leases near expiration. As of May 31, 2019, we had 29 leased retail stores. The leases are generally in prime retail locations and generally have lease terms of ten years, with rent being a fixed minimum base plus, for certain stores, a percentage of the store’s sales volume (subject to some adjustments) over a specified threshold. Many uncontrollable factors can impact our ability to renew these leases, including but not limited to competition for key locations from other retailers. Only 1 of the Company’s store leases is renewable within the next two years and such store generated approximately 1% of our fiscal 2019 sales from continuing operations. The capital expenditures related to our retail stores are estimated to be approximately $1.0 million during fiscal 2020 to remodel, relocate or open new stores, in accordance with our strategic plan. These planned capital expenditures are at the discretion of management and not required by our landlords. We are able to finance these capital expenditures with internally generated funds and existing financing arrangements. However, in the future, if we are unsuccessful at negotiating favorable renewal terms, locations or if more capital is required to meet landlord requirements for remodeling or relocating retail stores and we are unable to secure the necessary funds to complete these projects, our business, financial condition, and operating results could be adversely affected. In addition, we may not be able to locate suitable alternative sites in a timely manner. Our sales, earnings and cash flows will decline if we fail to maintain existing store locations, renew leases or relocate to alternative sites, in each case on attractive terms.

Our business depends, in part, on factors affecting consumer spending that are out of our control.

Our business, like other retailers, depends on consumer demand for our products and, consequently, is sensitive to a number of factors that are beyond our control that influence consumer spending, including general economic conditions, consumer confidence in future economic conditions and domestic and international political conditions, tourism, recession and fears of recession, consumer debt, disposable consumer income, conditions in the housing market, consumer perceptions of personal well-being and security, fuel prices, inclement weather, interest rates, foreign exchange rates, sales tax rate increases, inflation, and war and fears of war. Jewelry purchases are discretionary for consumers and may be particularly and disproportionately affected by adverse trends in the general economy and the equity markets. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, resulting in a reduction in our sales and harming our business and operating results. A substantial portion of our customers use credit, either from our private label and proprietary credit cards or another consumer credit source, to purchase jewelry. When there is a downturn in the general economy, fewer people may use or be approved for credit, which could result in a reduction in net sales and/or an increase in bad debts, which in turn, could lead to an unfavorable impact on our overall profitability. Consequently, our belief that we currently have sufficient liquidity to fund our operations is based on certain assumptions about the future state of the economy, the future availability of borrowings to fund our operations and our future operating performance. To the extent that the economy and other conditions affecting our business are significantly worse than we anticipate, we may not achieve our projected level of financial performance and we may determine that we do not have sufficient capital to fund our operations.

Our business could be adversely affected if our relationships with any primary vendors are terminated or if the delivery of their products is delayed or interrupted.

We compete with other jewelry retailers for access to vendors that will provide us with the quality and quantity of merchandise necessary to operate our business, and our merchandising strategy depends upon our ability to maintain good relations with significant vendors. Certain brand name timepiece and jewelry manufacturers have distribution agreements with our Company that, among other things, provide for specific sales locations, yearly renewal terms and early termination provisions at the manufacturer’s discretion. In fiscal 2019, merchandise supplied by our largest luxury timepiece supplier and sold through our stores accounted for approximately 15% of our total net sales from continuing operations. Our relationships with primary suppliers are generally not pursuant to long-term agreements. We obtain materials and manufactured items from third-party suppliers. Any delay or interruption in our suppliers’ abilities to provide us with necessary materials and components may require us to seek alternative supply sources. Any delay or interruption in receiving supplies could impair our ability to supply products to our stores and, accordingly, could have a material adverse effect on our business, results of operations and financial condition. The abrupt loss of any of our significant third-party suppliers or a decline in the quality or quantity of materials supplied by any third-party suppliers could cause significant disruption in our business.

 

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We may not successfully manage our inventory, which could have an adverse effect on our net sales, profitability, cash flow and liquidity.

As a retail business, our results of operations are dependent on our ability to manage our inventory. To properly manage our inventory, we must be able to accurately estimate customer demand and supply requirements and purchase new inventory accordingly. If we fail to sell our inventory, we may be required to write-down our inventory or pay our vendors without new purchases, creating additional vendor financing, which would have an adverse impact on our earnings and cash flows. Additionally, a significant portion of the merchandise we sell is carried on a consignment basis prior to sale or is otherwise financed by vendors, which reduces our required capital investment in inventory. Any significant change in these consignment or vendor financing relationships could have a material adverse effect on our net sales, cash flows and liquidity.

Fluctuations in the availability and prices of our raw materials and finished goods may adversely affect our results of operations.

We offer a large selection of distinctive high quality merchandise, including diamond, gemstone and precious metal jewelry, rings, wedding bands, earrings, bracelets, necklaces, charms, timepieces and gifts. Accordingly, significant changes in the availability or prices of diamonds, gemstones, and precious metals we require for our products could adversely affect our earnings. We do not hedge a material portion of the price of raw materials. A significant increase in the price of these materials could adversely affect our net sales and gross margins.

Applicable laws and regulations related to consumer credit may adversely affect our business.

The operation of our credit business subjects us to substantial regulation relating to disclosure and other requirements upon origination, servicing, debt collection and particularly upon the amount of finance charges we can impose. Any adverse change in the regulation of consumer credit could adversely affect our earnings. For example, new laws or regulations could limit the amount of interest or fees we, or our banks, can charge on consumer loan accounts, or restrict our ability to collect on account balances, which could have a material adverse effect on our earnings. Compliance with existing and future laws or regulations could require material expenditures or otherwise adversely affect our business or financial results. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, and fines, either of which could have a material adverse effect on our results of operations.

We are exposed to currency exchange risks that could have a material adverse effect on our results of operations and financial condition.

A portion of the purchases we make from our suppliers are denominated in U.S. dollars. As a result, a depreciation of the Canadian dollar against the U.S. dollar would increase the cost of acquiring those goods in Canadian dollars, which would have a negative effect on our gross profit margin. In addition, material fluctuations in foreign currency exchange rates could reduce our borrowing availability under our Credit Facility which is denominated in Canadian dollars, and limit our ability to finance our operations. For purposes of financial reporting, the Company has changed its reporting currency in fiscal 2019 from USD to CAD in order to better reflect that its business is primarily conducted in Canada, and a substantial portion of its revenue, expenses, assets and liabilities are denominated in CAD. The consolidated financial statements for comparative periods have been recast to CAD by translating net sales and expenses into CAD using monthly average foreign currency rates prevailing during the period, while assets and liabilities are translated at year-end exchange rates, with the effect of such translation recorded in accumulated other comprehensive income.

We operate in a highly competitive and fragmented industry.

The retail jewelry and timepiece business is highly competitive and fragmented, and we compete with nationally-recognized jewelry chains as well as a large number of independent regional and local jewelry and timepiece retailers and other types of retailers who sell jewelry, timepieces, and gift items, such as department stores and mass merchandisers. We also compete with e-commerce sellers of jewelry and timepieces. Because of the breadth and depth of this competition, we are constantly under competitive pressure that both constrains pricing and requires extensive merchandising and marketing efforts in order for us to remain competitive.

 

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We are controlled by a single shareholder whose interests may be different from yours.

As of May 31, 2019, The Grande Rousse Trust (“Grande Rousse”) beneficially owns or controls 76.0% of all classes of our outstanding voting shares, which are directly owned by Mangrove Holdings S.A (“Mangrove”) and Montel Sarl (“Montel”), previously Montrovest B.V. Montel and Mangrove own 49.3% and 26.7% of our outstanding voting shares respectively. The trustee of Grande Rousse is Meritus Trust Company Limited (the “Trustee”). Confido Limited has the power to remove the Trustee and as a result may be deemed to have beneficial ownership of the Class A voting shares held by Montel and Mangrove. Under our restated articles, Montel and Mangrove, as holders of the Class B multiple voting shares, have the ability to control most actions requiring shareholder approval, including electing the members of our Board of Directors and the issuance of new equity.

Grande Rousse, Montel and Mangrove may have different interests than you have and may make decisions that do not correspond to your interests. In addition, the fact that we are controlled by one shareholder may have the effect of delaying or preventing a change in our management or voting control.

Terrorist acts or other catastrophic events could have a material adverse effect on our business and results of operations.

Terrorist acts, acts of war or hostility, natural disasters or other catastrophic events could have an immediate disproportionate impact on discretionary spending on luxury goods upon which our operations are dependent, and could have a material adverse impact on our business and results of operations.

We may not be able to adequately protect our intellectual property and may be required to engage in costly litigation as a protective measure.

To establish and protect our intellectual property rights, we rely upon a combination of trademark and trade secret laws, together with licenses, exclusivity agreements and other contractual covenants. In particular, the “Birks” trademarks are of significant value to our retail operations. The measures we take to protect our intellectual property rights may prove inadequate to prevent misappropriation of our intellectual property. Monitoring the unauthorized use of our intellectual property is difficult. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations.

A significant privacy breach of our information systems could disrupt or negatively affect our business.

The protection of customer, employee and company data is important to us, and our customers expect that their personal information will be adequately protected. The regulatory environment surrounding information security and data privacy is becoming increasingly demanding, as requirements in respect of personal data use and processing, including significant penalties for non-compliance, continues to evolve in the various jurisdictions in which the Company does business. Although we have developed and implemented systems and processes that are designed to protect our information and prevent data loss and other security breaches, such measures cannot provide absolute security. We rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including e-commerce sales, supply chain, merchandise distribution, customer invoicing and collection of payments. We use information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the proprietary business information of our customers and suppliers, as well as personally identifiable information of our customers and employees, in our information technology systems. The secure operation of these information technology networks, and the processing and maintenance of this information is critical to our business operations and strategy. To date, our business and operations have not been materially impacted by a cyber-attack or data breach, however a significant breach of customer, employee or company data could damage our reputation, our relationship with customers and the Birks brand and could result in lost sales, sizable fines, significant breach-notification costs and lawsuits as well as adversely affect results of operations. In addition, it could harm our ability to execute our business and adversely impact sales, costs and earnings. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate cost-effective preventative measures. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.

 

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Failure to successfully implement or make changes to information systems could disrupt or negatively impact our business.

In addition to regularly evaluating and making changes and upgrades to our information systems, we have begun to implement since fiscal 2016, a new enterprise resource planning (“ERP”) system with the Microsoft Dynamics D365 for Retail platform in order to update our retail systems including point of sale (POS), supply chain, warehouse management, wholesale, and finance. While we follow a disciplined methodology when evaluating and making such changes, there can be no assurances that we will successfully implement such changes, that such changes will occur without disruptions to our operations, that the new or upgraded systems will achieve the desired business objectives or that the internal controls will be effective in preventing misstatements in financial reporting. Any such disruptions, inadequate internal controls or the failure to successfully implement new or upgraded systems such as those referenced above, could have a material adverse effect on our results of operations and could also affect our reputation, our relationship with customers and our brands.

The Company conducts retail operations in Canada and conducts wholesale operations in North America and the United Kingdom. The Company sources its inventory from several suppliers within and outside North America, and has cross border financing arrangements. As a result, the Company is subject to the risks of doing business in jurisdictions within and outside North America.

The Company generates the majority of its net sales in Canada. The Company also relies on certain foreign third-party vendors and suppliers. As a result, the Company is subject to the risks of doing business in jurisdictions within and outside North America, including:

 

   

the laws, regulations and policies of governments relating to loans and operations, the costs or desirability of complying with local practices and customs and the impact of various anti-corruption, anti-money laundering and other laws affecting the activities of the Company;

   

potential negative consequences from changes in taxation policies or currency restructurings;

   

potential negative consequences from the application of taxation policies, including transfer pricing rules and sales tax matters;

   

import and export licensing requirements and regulations, as well as unforeseen changes in regulatory requirements;

   

economic instability in foreign countries;

   

uncertainties as to enforcement of certain contract and other rights;

   

the potential for rapid and unexpected changes in government, economic and political policies, political or civil unrest, acts of terrorism or the threat of boycotts; and

   

inventory risk exposures.

Changes in regulatory, political, economic, or monetary policies and other factors could require the Company to significantly modify its current business practices and may adversely affect its future financial results. For example, the Company could be adversely impacted by U.S. trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting China, the E.U., Canada and Mexico, as well as retaliatory tariffs by such countries. Such tariffs and, if enacted, any further legislation or actions taken by the U.S. government that restrict trade, such as additional tariffs or trade barriers, and other protectionist or retaliatory measures taken by governments in Europe, Asia and elsewhere, could have a negative effect on the Company’s ability to sell products in those markets.

While these factors and the effect of these factors are difficult to predict, any one or more of them could lower the Company’s revenues, impact its cash flow, increase its costs, reduce its earnings or disrupt its business.

Risks Related to Class A Voting Shares

Our share price could be adversely affected if a large number of Class A voting shares are offered for sale or sold.

Future issuances or sales of a substantial number of our Class A voting shares by us, Montel, Mangrove, or another significant shareholder in the public market could adversely affect the price of our Class A voting shares, which may impair our ability to raise capital through future issuances of equity securities. As of May 31, 2019, we had 10,242,911 Class A voting shares issued and outstanding. Sales of restricted securities in the public market, or the availability of these Class A voting shares for sale, could adversely affect the market price of Class A voting shares.

 

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As a retail jeweler with a limited public float, the price of our Class A voting shares may fluctuate substantially, which could negatively affect the value of our Class A voting shares and could result in securities class action claims against us.

The price of our Class A voting shares may fluctuate substantially due to, among other things, the following factors: (1) fluctuations in the price of the shares of a small number of public companies in the retail jewelry business; (2) additions or departures of key personnel; (3) announcements of legal proceedings or regulatory matters; and (4) general volatility in the stock market. The market price of our Class A voting shares could also fluctuate substantially if we fail to meet or exceed expectations for our financial results or if there is a change in financial estimates or securities analysts’ recommendations.

Significant price and value fluctuations have occurred in the past with respect to the securities of retail jewelry and related companies. In addition, because the public float of our Class A voting shares is relatively small, the market price of our Class A voting shares is likely to be volatile. There is limited trading volume in our Class A voting shares, rendering them subject to significant price volatility. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies, and that has often been unrelated to the operating performance of such companies. A number of other factors, many of which are beyond our control, could also cause the market price of our Class A voting shares to fluctuate substantially. In the past, following periods of downward volatility in the market price of a company’s securities, class action litigation has often been pursued. If our Class A voting shares were similarly volatile and litigation was pursued against us, it could result in substantial costs and a diversion of our management’s attention and resources.

We are governed by the laws of Canada, and, as a result, it may not be possible for shareholders to enforce civil liability provisions of the securities laws of the U.S.

We are governed by the laws of Canada. Our assets are located outside the U.S. and some of our directors and officers are residents outside of the U.S. As a result, it may be difficult for investors to effect service within the U.S. upon us or our directors and officers, or to realize in the U.S. upon judgments of courts of the U.S. predicated upon civil liability of Birks Group and such directors or officers under U.S. federal securities laws. There is doubt as to the enforceability in Canada by a court in original actions, or in actions to enforce judgments of U.S. courts, of the civil liabilities predicated upon U.S. federal securities laws.

We expect to maintain our status as a “foreign private issuer” under the rules and regulations of the SEC and, thus, are exempt from a number of rules under the Exchange Act of 1934 and are permitted to file less information with the SEC than a company incorporated in the U.S.

As a “foreign private issuer,” we are exempt from rules under the Exchange Act of 1934, as amended (“the Exchange Act”) that impose certain disclosure and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our Class A voting shares. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, nor are we required to comply with Regulation Fair Disclosure, which restricts the selective disclosure of material information. Accordingly, there may be less publicly available information concerning us than there is for other U.S. public companies.

If we were treated as a passive foreign investment company (“PFIC”) some holders of our Class A voting shares would be subject to additional taxation, which could cause the price of our Class A voting shares to decline.

We believe that our Class A voting shares should not be treated as stock of a PFIC for U.S. federal income tax purposes, and we expect to continue operations in such a manner that we will not be a PFIC. If, however, we are or become a PFIC, some holders of our Class A voting shares could be subject to additional U.S. federal income taxes on gains recognized with respect to our Class A voting shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules.

 

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Our assessment of our internal control over financial reporting may identify “material weaknesses” in the future which could reduce confidence in our financial statements and negatively affect the price of our securities.

We are subject to reporting obligations under U.S. securities laws. Beginning with our Annual Report on Form 20-F for fiscal 2008, Section 404 of the Sarbanes-Oxley Act requires us to prepare a management report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over our financial reporting is not effective. If at any time in the future, we are unable to assert that our internal control over financial reporting is effective, market perception of our financial condition and the trading price of our stock may be adversely affected and customer perception of our business may suffer, all of which could have a material adverse effect on our operations. Further, our auditors do not audit our internal controls over financial reporting due to our market capitalization, and therefore, there has been no independent attestation of our internal controls over financial reporting.

If the costs and burden of being a public company outweigh its benefits, we may in the future decide to discontinue our status as a publicly traded company.

As a public company, we currently incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NYSE American LLC (“NYSE American”), have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls as well as mandating certain corporate governance practices. Our management and other personnel devote a substantial amount of time and financial resources to these compliance initiatives. As such, if it is determined in the future that the costs and efforts of being a public company outweigh the benefits of being a public company, we may decide to discontinue our status as a publicly traded or registered company.

Item 4. Information on the Company

THE COMPANY

Corporate History and Overview

Birks Group is a leading designer of fine jewelry, timepieces and gifts and operator of luxury jewelry stores in Canada, with wholesale customers in North America and the U.K.. As of May 31, 2019, Birks Group operated 26 stores under the Birks brand in most major metropolitan markets in Canada, 1 retail location in Calgary operated under the Brinkhaus brand, 1 retail location in Vancouver operated under the Graff brand and 1 retail location in Vancouver operated under the Patek Philippe brand. Birks fine jewelry collections are also available through select Mappin & Webb and Goldsmiths locations in the United Kingdom, in Mayors stores in the United States as well as at certain jewelry retailers across North America. For fiscal 2019, we had net sales of $151.0 million from continuing operations.

Birks’ predecessor company was founded in Montreal in 1879 and developed over the years into Canada’s premier designer, manufacturer and retailer of fine jewelry, timepieces, sterling and plated silverware and gifts. In addition to being a nationwide retailer with a strong brand identity, we are also highly regarded in Canada as a jewelry designer. We believe that operating our stores under the Birks brand and the fact that we sell Birks-branded jewelry distinguishes us from many competitors because of our longstanding reputation and heritage, our ability to offer distinctively designed, exclusive products, and by placing a strong emphasis on providing a superior shopping experience to our clients.

Birks was purchased by Borgosesia Acquisitions Corporation in 1993, a predecessor company of Regaluxe Investment S.á.r.l., which is referred to in this Annual Report as “Regaluxe”. Effective March 28, 2006, Regaluxe was acquired through a merger with Iniziativa S.A. (“Iniziativa”). As of May 31, 2007 and June 4, 2007, respectively, following a reorganization, Iniziativa and Montrolux S.A. transferred all of the shares they respectively held in the Company to their parent company, Montel (previously known as Montrovest B.V.). Following the 1993 acquisition of Birks, Birks’ operations were evaluated and a program of returning Birks to its historic core strength as the leading Canadian prestige jeweler was initiated.

In August 2002, Birks invested $23.6 million to acquire approximately 72% of the voting control in Mayors, which was experiencing an unsuccessful expansion beyond its core markets and was incurring significant losses.

 

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Between August 2002 and November 2005, it became apparent to both Mayors and Birks management that it was in the best interests of the shareholders to combine its operations. The Company believed that such combination would create a stronger capital base, improve operating efficiencies, reduce the impact of regional issues, simplify the corporate ownership of Mayors, eliminate management and board of directors’ inefficiencies with managing intercompany issues, and possibly increase shareholder liquidity. Upon the consummation of the merger on November 14, 2005, each outstanding share of Mayors common stock not then owned by Birks was converted into 0.08695 Class A voting shares of Birks. As a result of the merger, Mayors common stock ceased trading on the American Stock Exchange (“AMEX”) and Birks Group began trading on the AMEX, which is now known as the NYSE American, under the trading symbol “BGI.” Following the merger, Birks Group worked very diligently to fully integrate the Birks business with Mayors. As a result of the merger, we believe Birks Group improved operational efficiencies and diversity and depth of its products and distribution capabilities.

In December 2015, Montel transferred a portion of its Class A and Class B voting shares to Mangrove and as a result Montel owns 49.3% of the voting shares of the Company and Mangrove owns 26.7%.

In August 2017, Birks entered into the Stock Purchase Agreement with Aurum, the largest fine watch and jewelry retailer in the U.K., to sell its wholly-owned subsidiary Mayors. The Aurum Transaction closed on October 23, 2017 for total cash consideration of $135.0 million (USD $106.8 million). As part of the transaction, Birks entered into a 5 year distribution agreement with Aurum to sell Birks fine jewelry in the U.K. at Mappin & Webb, Goldsmiths stores and on their e-commerce websites.

In the last three fiscal years, we invested a total of approximately $30.7 million in capital expenditures primarily associated with the remodeling of our existing store network. This included the completion of major transformative renovations at our three flagship locations, in Montreal (completed in June 2018), Vancouver (completed in February 2019) and Toronto (completed in March 2019). We also opened our Graff and Patek Philippe boutiques in Vancouver (completed in December 2018), and invested in the implementation of a new enterprise resource planning (“ERP”) system.

The last three fiscal years were very capital-intensive for the Company as we implemented our growth-driven strategic objective which included the remodeling of our retail network including our flagship locations. This capital intensive spending period resulted in temporarily lower sales and contribution margin at the flagship locations under renovation, with a view to generate future long-term returns for the Company. We expect to invest a significantly lower amount in capital expenditures in fiscal 2020 and fiscal 2021 as we focus solely on operations and on delivering a return on our strategic investment spending during the period from fiscal 2017 to fiscal 2019. In fact, in fiscal 2020, approximately $1.0 million is expected to be spent in capital expenditures, primarily related to minor store remodels and store relocations. We expect to finance these capital expenditures from operating cash flows, and existing financing arrangements.

The Company regularly reviews the locations of its retail network that leads to decisions that impact the opening, relocation or closing of these locations. During fiscal 2019, we closed two Birks stores (one in Edmonton, Alberta and one in Toronto, Ontario) and closed one store operated under the Brinkhaus brand in Vancouver, British Colombia. During fiscal 2019, we also opened one store operated under the Graff brand and one store operated under the Patek Philippe brand in Vancouver, British Columbia. During fiscal 2019, we also relocated two Birks stores (one in Vancouver, British Columbia and one in Toronto, Ontario) during the remodeling of their respective malls. During fiscal 2018, we opened a new store in Oshawa, Ontario and a new store in Surrey, British Columbia and closed no stores. In fiscal 2017, we did not open or close any stores.

The Toronto flagship store re-opened in its original location in March 2019 after having been moved to a smaller temporary location in the mall (which itself was undergoing, and continues to undergo, significant construction activities) during fiscal 2017. The Company temporarily closed its Montreal flagship store in early 2018 to undertake a complete renovation of the store. The renovations were completed and the store re-opened in June 2018. Certain delays in the completion of these two major renovation projects significantly affected the sales of the Company during the fiscal year.

Our sales are divided into two principal product categories: jewelry and timepieces. Jewelry also includes sales of other product offerings we sell such as giftware, as well as repair and custom design services.

 

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The following table compares our sales from continuing operations of each product category for the last three fiscal years (dollars in thousands):

 

     Fiscal Year-Ended
     March 30, 2019   March 31, 2018*   March 25, 2017*

Jewelry and other

     $ 99,043           65.6%         $ 103,058           70.3%         $ 105,657           69.1%    

Timepieces

     52,006         34.4%       43,550         29.7%       47,335         30.9%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

     $     151,049         100%       $     146,608         100%       $ 152,992         100%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(*)

The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

The decline in sales from the jewelry and other product category in fiscal 2019 as compared to fiscal 2018 has been the result of direct competition in our major markets from corporate owned stores operated by certain third party jewelry brands which we carry. This has been partially offset by the continued sales growth of Birks branded jewelry, which is the Company’s strategic focus going forward. From fiscal 2017 to fiscal 2018, the decline in sales from this product category was driven primarily by the renovation of our Montreal and Toronto flagship stores during fiscal 2018, and the temporary closure of the Montreal flagship store for the last two months of fiscal 2018.

The increase in sales from the timepieces product category in fiscal 2019 as compared to fiscal 2018 was driven primarily by an improved assortment of third party timepiece inventory, including the addition of certain globally renowned and desirable brands in our newly renovated flagship locations. From fiscal 2017 to fiscal 2018, the decline in sales from this product category was driven primarily by the renovation of our Montreal and Toronto flagship stores during fiscal 2018, and the temporary closure of the Montreal flagship store for the last two months of fiscal 2018.

Birks Group is a Canadian corporation. Our corporate headquarters are located at 2020 Robert-Bourassa Boulevard, Suite 200, Montreal, Québec, Canada H3A 2A5. Our telephone number is (514) 397-2501. Our website is www.birksgroup.com.

The U.S. Securities and Exchange Commission (“SEC”) maintains a website that contains reports, proxy and information statements, and other information regarding issuers (including Birks Group) that file electronically with the SEC at http://www.sec.gov. The Company also maintains a public website at http://www.birks.com.

Products

We offer distinctively designed, exclusive products and a large selection of distinctive high quality merchandise at various price points. This merchandise includes our own designed jewelry and designer jewelry that includes diamonds, gemstones, and precious metals. We also offer a large selection of desirable timepieces at various price points and giftware. Part of our strategy is to increase our exclusive offering of internally-designed goods sold to our customers, consisting primarily of fine jewelry, bridal offerings, and timepieces, all of which leverage the Birks brand loyalty in their respective markets and in order to differentiate our products with unique and exclusive designs.

Our stores, operating under the Birks, Brinkhaus, Graff and Patek Phillippe brands, carry a large selection of prestigious brand name timepieces, including our own proprietary Birks watch line as well as timepieces made by Baume & Mercier, Breitling, Bvlgari, Cartier, Chaumet, Frédérique Constant, Graff, IWC, Jaeger Lecoultre, Montblanc, Panerai, Patek Phillippe, Richard Mille, Rolex, Tag Heuer, Tudor, and Van Cleef & Arpels. We also carry an exclusive collection of high quality jewelry and timepieces that we design. We emphasize Birks brand jewelry offerings but also include other designer jewelry made by Bvlgari, Chaumet, Graff, Marco Bicego, Messika, Roberto Coin, Van Cleef & Arpels and Vhernier. We also offer a variety of high quality giftware, including writing instruments made by Montblanc.

We have one primary channel of distribution, the retail division, which accounts for approximately 95% of net sales, as well as two other channels of distribution, namely e-commerce and wholesale, which combined account for approximately 5% of net sales.

 

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Product Design, Development, Sourcing and Manufacturing

We established a product development process that supports our strategy to further develop and enhance our product offering in support of the Birks brand development. During fiscal 2019, 2018, and fiscal 2017, approximately 45%, 52%, and 45%, respectively, of our jewelry products acquired for sale were internally designed and sourced. Products that are not designed and manufactured for us, are sourced from suppliers worldwide, enabling us to sell an assortment of fine quality merchandise often not available from other jewelers in our markets. Our staff of buyers procures distinctive high quality merchandise directly from manufacturers, diamond cutters, and other suppliers worldwide. Our loose stone acquisition team, product sourcing team and category managers specialize in sourcing merchandise in categories such as diamonds, precious gemstones, pearls, timepieces, gold jewelry, and giftware. Retail and merchandising personnel frequently visit our stores and those of competitors to compare value, selection, and service, as well as to observe client reaction to merchandise selection and determine future needs and trends.

Availability of Products

Although purchases of several critical raw materials, notably platinum, gold, silver, diamonds, pearls and gemstones, are made from a relatively limited number of sources, we believe that there are numerous alternative sources for all raw materials used in the manufacture of our finished jewelry, and that the failure of any principal supplier would not have a material adverse effect on our operations. Any material changes in foreign or domestic laws and policies affecting international trade may have a material adverse effect on the availability of the diamonds, other gemstones, precious metals and non-jewelry products we purchase. Significant changes in the availability or prices of diamonds, gemstones and precious metals we require for our products could adversely affect our earnings. We do not maintain long-term inventories or otherwise hedge a material portion of the price of raw materials. A significant increase in the price of these materials could adversely affect our net sales, gross margin and earnings. However, in the event of price increases, we will generally attempt to pass along any price increases to our customers.

In fiscal 2019, we purchased jewelry, timepieces and giftware for sale in our stores from several suppliers. Many of these suppliers have long-standing relationships with us. We compete with other jewelry and timepiece retailers for access to vendors that will provide us with the quality and quantity of merchandise necessary to operate our business. Our relationships with primary suppliers are generally not pursuant to long-term agreements. Although we believe that alternative sources of supply are available, the abrupt loss of any of our key vendors, or a decline in the quality or quantity of merchandise supplied by our vendors could cause significant disruption in our business. In fiscal 2019, merchandise supplied by our largest luxury timepiece supplier and sold through our stores accounted for approximately 15% of our total net sales. If our largest luxury timepiece supplier terminated its distribution agreements with us, such termination would have a material adverse effect on our business, financial condition and operating results. We believe that current relationships with our key vendors are strong.

Seasonality

Our sales are highly seasonal, with the third fiscal quarter (which includes the holiday shopping season) historically contributing significantly higher net sales than any other quarter during the year. Net sales from continuing operations in the first, second, third and fourth quarters in fiscal 2019 were 25%, 21%, 33% and 21%, respectively, in fiscal 2018 were 23%, 20%, 36% and 20% respectively, and in fiscal 2017 were 24%, 21%, 35% and 20%, respectively.

Retail Operations, Merchandising and Marketing

General

We believe we are differentiated from most of our competitors because we offer distinctively designed, exclusive products and a selection of distinctive high quality merchandise at a wide range of price points. We keep the majority of our inventory on display in our stores rather than at our distribution facility. Although each store stocks a representative selection of jewelry, timepieces, and giftware, certain inventory is tailored to meet local tastes and historical merchandise sales patterns of specific stores.

 

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We believe that our stores’ elegant surroundings and distinctive merchandise displays play an important role in providing an atmosphere that encourages sales. We pay careful attention to detail in the design and layout of each store, particularly lighting, colors, choice of materials, and placement of display cases. We also use window displays as a means of attracting walk-in traffic and reinforcing our distinctive image. Our Visual Display department designs and creates window and store merchandise case displays for all of our stores. Window displays are frequently changed to provide variety and to reflect seasonal events such as Christmas, Chinese New Year, Valentine’s Day, Mother’s Day and Father’s Day.

Personnel and Training

We place substantial emphasis on the professionalism of our sales force to maintain our position as a leading prestige jeweler. We strive to hire only highly motivated, professional and customer-oriented individuals. All new sales professionals attend an intensive training program where they are trained in technical areas of the jewelry and timepiece business, specific sales and service techniques and our commitment to client service. Management believes that attentive personal service and knowledgeable sales professionals are key components to our success.

As part of our commitment to continuous, on-the-job training, we have established “Birks University”, a formalized system of in-house training with a primary focus on client service, selling skills and product knowledge that involves extensive classroom training, the use of detailed operational manuals, in-store mentorship programs and a leading edge product knowledge program which includes on-line testing. In addition, we conduct in-house training seminars on a periodic basis and administer training modules with audits to (i) enhance the quality and professionalism of all sales professionals, (ii) measure the level of knowledge of each sales professional, (iii) update sales professionals on changes to our credit programs available to customers and changes to applicable laws, including anti-money laundering legislation, and (iv) identify needs for additional training. We also provide all management team members with more extensive training that emphasizes leadership skills, general management skills, “on-the-job” coaching and training instruction techniques.

Advertising and Promotion

One of our key marketing goals is to build on our reputation in our core markets as a leading luxury jewelry brand offering high quality merchandise in an elegant, sophisticated environment. For example, we frequently run advertisements that associate the “Birks” brand with internationally recognized brand names such as Cartier, Patek Philippe, Rolex, and Van Cleef & Arpels, among others. Advertising and promotions for all stores are developed by our personnel in conjunction with outside creative professionals.

Our advertising reinforces our role as a world-class luxury brand that aims to deliver a total shopping experience that is as memorable as our merchandise. Our marketing efforts consist of advertising campaigns on digital platforms (including on our website and on social media), billboards, print, direct mail, special events, media and public relations, distinctive store design, elegant displays, partnerships with key suppliers and associations with prestige institutions. The key goals of our marketing initiatives are to enhance customer awareness and appreciation of our retail brand, Birks, as well as the Birks product brand, and to increase customer traffic, client acquisition and retention and net sales.

Credit Operations

We have a private label credit card, which is administered by a third-party financial institution that owns the credit card receivable balances. We also have a Birks proprietary credit card, which we administer. Our credit programs are intended to complement our overall merchandising and sales strategy by encouraging larger and more frequent sales to a loyal customer base. Sales under the Birks private label credit cards accounted for approximately 18.0% of our net sales during fiscal 2019 and 14.6% during fiscal 2018. The increase in penetration of our net sales is substantially due to the introduction of more attractive term plans during fiscal 2019 as well as due to the launch of the Birks Prestige private label credit card program in April 2018. Sales under the Birks private label credit cards are generally made without credit recourse to us. However, we are permitted to ask the financial institution to approve credit purchases under these private label credit cards, for which the financial institution holds credit recourses against the Company if the customer does not pay.

 

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Distribution

Our retail locations receive the majority of their merchandise directly from our distribution warehouse located in Montreal, Québec. Merchandise is shipped from the distribution warehouse utilizing various air and ground carriers. We also transfer merchandise between retail locations to balance inventory levels and to fulfill client requests, and a small portion of merchandise is delivered directly to the retail locations from suppliers.

Competition

The North American retail jewelry industry is highly competitive and fragmented, with a few very large national and international competitors and many medium and small regional and local competitors. The market is also fragmented by price and quality. Our competitors include national and international jewelry chains as well as independent regional and local jewelry and timepiece retailers. We also compete with other types of retailers such as department stores and specialty stores and, to a lesser extent, catalog showrooms, discounters, direct mail suppliers, televised home shopping networks, and pure e-commerce players. Many of these competitors have greater financial resources than we do. We believe that competition in our markets is based primarily on the total brand experience including trust, quality craftsmanship, product design and exclusivity, product selection, marketing and branding elements (including web), service excellence, including after sales service, and, to a certain extent, price. With the on-going consolidation of the retail industry, we believe that competition with other general and specialty retailers and discounters will continue to increase. Our success will depend on various factors, including general economic and business conditions affecting consumer spending, the performance of national and international retail operations, the acceptance by consumers of our merchandising and marketing programs, store locations and our ability to properly staff and manage our stores.

Regulation

Our operations are affected by numerous federal and provincial laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. In addition to our private label and proprietary credit cards, credit to our clients is primarily available through third-party credit cards such as American Express®, Discover®, MasterCard®, Union Pay® and Visa®, without recourse to us in the case of a client’s failure to pay. Any change in the regulation of credit that would materially limit the availability of credit to our traditional customer base could adversely affect our results of operations and financial condition.

We generally utilize the services of independent customs agents to comply with U.S. and Canadian customs laws in connection with our purchases of gold, diamond and other jewelry merchandise from foreign sources.

Diamonds extracted from certain regions in Africa, including Zimbabwe, that are believed to be used to fund terrorist activities, are considered conflict diamonds. We have designed a conflict minerals compliance initiative to implement a consistent, company-wide compliance process which includes:

 

  -

Educating our employees and suppliers about conflict minerals;

  -

Establishing a cross-functional management team including members of senior management and subject matter experts from relevant functions such as supply chain, product development, merchandising, legal and finance responsible for implementing our conflict minerals compliance strategy; and

  -

Reporting mechanisms for questions and concerns, including a toll-free confidential and anonymous hotline.

Our compliance program has been designed to conform, in all material respects, with the framework in The Organization of Economic Co-operation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas Second Edition, and the related gold supplement for conflict minerals. In addition, we have adopted a conflict minerals policy which has been communicated to our suppliers and is included in our Merchandise Quality Manual and available on our website at www.birks.com. Our conflict mineral policy indicates that suppliers who do not comply with this policy will be reviewed and evaluated accordingly for future business and sourcing decisions.

We support the Kimberley Process, an international initiative intended to ensure diamonds are not illegally traded to fund conflict. As part of this initiative, we require our diamond suppliers to acknowledge compliance with the Kimberley Process and invoices received for diamonds purchased by us must include certification from the vendor that the diamonds and diamond containing jewelry are conflict free. Through this process and other efforts, we believe that the suppliers from whom we purchase diamonds exclude conflict diamonds from their inventories.

 

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In August 2012, the SEC issued rules that require companies that manufacture products using certain “conflict minerals”, including gold, to determine whether those minerals originated in the Democratic Republic of Congo or adjoining countries (“DRC”). If the minerals originate in the DRC, or if companies are not able to establish where they originated, extensive disclosure regarding the sources of those minerals, and in some instances an independent audit of the supply chain, is required. We filed our sixth disclosure report on June 4, 2019 for the calendar year ended December 31, 2018. We determined that we had no reason to believe that any conflict minerals necessary to the functionality or production of our products may have originated in the DRC.

Trademarks and Copyrights

The designations Birks, and the Birks logos, are our principal trademarks and are essential to our ability to maintain our competitive position in the prestige jewelry segment. We maintain a program to protect our trademarks and will institute legal action where necessary to prevent others from either registering or using marks that are considered to create a likelihood of confusion with our trademarks. We are also the owner of the original jewelry designs created by our in-house designers and have entered into agreements with several outside designers pursuant to which these designers have assigned to us the rights to use copyrights of designs and products created for us.

Organizational Structure

Not applicable.

Properties

In December 2000, we entered into a capital lease agreement for our Montreal head office and store pursuant to which we sold and leased back the building, including the Montreal flagship store, for a term of 20 years ending December 11, 2020. The net annual rental rate was $2.2 million for the period that ended on December 11, 2016. On November 1, 2016, we entered into an agreement with the new owner of the building to terminate the then existing lease agreement for the building in advance of its expiry date in December 2020 and to lease the premises for our flagship store at its current location, which is an operating lease. As a result, a capital lease asset of $8.7 million and a capital lease obligation of $11.6 million at November 1, 2016 were derecognized and a non-cash gain of $2.9 million (included as part of other long-term liabilities) is being deferred and amortized over the term of the new lease of the flagship store.

We lease all of our store locations. We believe that all of our facilities are well maintained and in good condition and are adequate for our current needs. We actively review all leases that expire within the next 12 months to determine whether to renew the leases.

 

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Following is a listing of all our properties as of March 30, 2019:

 

     Size
        (Square Feet)        
    

      Expiration of Lease      

  

Location

Operating Stores

        

Bayshore Centre

     1,099              September 2027    Ottawa, ON    

Bloor Flagship Store

     9,695              February 2034    Toronto, ON    

Brinkhaus

     1,946              March 2022    Calgary, AB    

Carrefour Laval

     2,545              April 2025    Laval, QC    

Chinook Shopping Centre

     3,661              September 2024    Calgary, AB    

Dix-30 Mall

     1,691              July 2023    Brossard, QC    

Fairview Pointe-Claire

     1,450              August 2030    Pointe-Claire, QC    

First Canadian Place

     2,243              August 2028    Toronto, ON    

Guildford Town Centre

     1,172              September 2027    Surrey, BC    

Graff Boutique

     850              October 2028    Vancouver, BC    

Mapleview Centre

     1,384              June 2023    Burlington, ON    

Montreal Flagship Store

     7,714              April 2032    Montreal, QC    

Oakridge Shopping Centre

     2,011              August 2023    Vancouver, BC    

Oshawa

     1,043              September 2027    Oshawa, ON    

Park Royal

     1,797              October 2024    West Vancouver, BC    

Patek Philippe Boutique

     850              October 2028    Vancouver, BC    

Place Ste-Foy

     1,472              September 2027    Ste-Foy, QC    

Rideau Centre

     2,745              May 2024    Ottawa, ON    

Saskatoon

     3,486              October 2020    Saskatoon, SK    

Sherway Gardens

     2,726              September 2025    Etobicoke, ON    

Southgate Shopping Centre

     1,300              April 2028    Edmonton, AB    

Square One

     1,825              May 2024    Mississauga, ON    

Toronto Dominion Square

     5,568              January 2022    Calgary, AB    

Vancouver Flasghip Store

     20,221              January 2026    Vancouver, BC    

Victoria

     1,561              March 2022    Victoria, BC    

West Edmonton Mall

     2,244              August 2024    Edmonton, AB    

Willowdale Fairview Mall

     1,563              August 2029    North York, ON    

Winnipeg

     3,187              February 2023    Winnipeg, MB    

Yorkdale

     2,930              October 2026    Toronto, ON    

Other Properties

        

Montreal corporate office

     26,423              May 2033    Montreal, QC    

Total annual base rent for the above locations for fiscal 2019 was approximately $15.4 million.

Item 4A. Unresolved Staff Comments

Not applicable

 

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Table of Contents

Item 5. Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business, actions of regulatory authorities and competitors and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see Item 3., “Key Information” under the heading “Risk Factors” and the discussion under the heading “Forward-Looking Information” at the beginning of this Annual Report.

Throughout this Annual Report we refer to our fiscal years ended March 30, 2019, March 31, 2018, and March 25, 2017, as fiscal 2019, fiscal 2018, and fiscal 2017, respectively. Our fiscal year ends on the last Saturday in March of each year. The financial reporting period referred to as fiscal 2019 consisted of 52 weeks, while fiscal 2018 and fiscal 2017 consisted of 53 and 52 weeks, respectively.

Overview

Birks Group is a leading designer of fine jewelry, timepieces and gifts and operator of luxury jewelry stores in Canada, with wholesale customers in North America and the U.K. As of March 30, 2019, we have two reportable segments, “Retail” and “Other.” Retail consists of our retail operations whereby we operate 26 stores in Canada, under the Birks brand, one store under the Brinkhaus brand, one store under the Graff brand, and one store under the Patek Phillippe brand. Other consists primarily of our wholesale business and our e-commerce business.

As of March 30, 2019, our retail operation’s total square footage was approximately 94,000. The average square footage of our three Birks flagship stores was approximately 12,500, while the average square footage for all other Birks retail stores was approximately 2,300. The average square footage of the Brinkhaus, Graff, and Patek Phillippe locations was approximately 1,200.

Significant Transaction

On August 11, 2017, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Aurum Holdings Ltd., a company incorporated under the laws of England and Wales, which assigned its rights and obligations under the Purchase Agreement to Aurum Group USA, Inc., a Delaware corporation (now known as Watches of Switzerland) (“Aurum”) to sell its wholly-owned subsidiary, Mayors, which operated in Florida and Georgia and was engaged primarily in luxury timepieces and jewelry retail activities. The sale was completed on October 23, 2017 for total consideration of $135.0 million (USD $106.8 million) (the “Aurum Transaction”).

As a condition of the Aurum Transaction, Birks entered into a 5 year distribution agreement with Aurum (the “Distribution Agreement”) to sell Birks fine jewelry in the U.K. at Mappin & Webb and Goldsmiths stores and on their respective e-commerce platforms. Furthermore, pursuant to the Distribution Agreement, the Birks collections will continue to be sold in the United States through Mayors stores in Florida and Georgia. The Distribution Agreement is an important achievement in the Company’s strategy to develop the Birks brand into a global luxury brand. The Aurum Transaction constitutes a significant step in the Company’s efforts to strengthen its balance sheet and to execute its strategic vision of investing in the Birks brand.

Proceeds from the Aurum Transaction were used to pay down outstanding debt under the Company’s previous senior secured credit facilities that included term debt and working capital debt associated with Mayors. The Company did not pay dividends as a result of the Aurum Transaction, but rather, the remaining transaction proceeds were used by Birks to continue its strategic growth initiatives, specifically to invest in its Canadian flagship stores and new store concepts, as well as in its high-growth Birks brand wholesaling activities and e-commerce, as part of the Company’s omni-channel strategy.

 

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Table of Contents

As a result of the Aurum Transaction, the Company has presented Mayors’ results as a discontinued operation in the consolidated statements of operations and cash flows for all periods presented. The tables below reconcile the Company’s results from continuing operations and from discontinuing operations for the fiscal years 2019, 2018, and 2017, respectively.

 

             

 

Year ended March 30, 2019

 

 
     
             Continuing      Discontinued      Combined  
          

operations

 

    

Operations

 

    

operations

 

 
     

 (in $ 000’s)

               
     

Net sales

        151,049        -        151,049  
     

Cost of sales

             

 

92,472

 

 

 

    

 

-

 

 

 

    

 

92,472

 

 

 

     

Gross profit

        58,577        -        58,577  
     

Selling, general, and administrative expenses

        67,106        381        67,487  
     

Restructuring charges

        1,182        -        1,182  
     

Depreciation and amortization

        3,859        -        3,859  
     

Impairment of long-lived assets

             

 

46

 

 

 

    

 

-

 

 

 

    

 

46

 

 

 

     

Operating (loss) income

        (13,616)        (381)        (13,997)  
     

Interest and other financial costs

        4,689        -        4,689  
     

Income tax expense

              -        -       

 

-

 

 

 

     

Net (loss) income

 

             

 

(18,305)

 

 

 

    

 

(381)

 

 

 

    

 

(18,686)

 

 

 

           
             

 

Year ended March 31, 2018*

 

 
       
              Continuing      Discontinued      Combined  
  

operations

 

    

Operations**

 

    

operations

 

 
     

 (in $ 000’s)

             
       

Net sales

        146,608        110,789        257,397  
       

Cost of sales

             

 

90,915

 

 

 

    

 

72,615

 

 

 

    

 

163,530

 

 

 

       

Gross profit

        55,693        38,174        93,867  
       

Selling, general, and administrative expenses

        66,754        30,902        97,656  
       

Restructuring charges

        894        -        894  
       

Depreciation and amortization

        3,264        1,674        4,938  
       

Impairment of long-lived assets

             

 

2,788

 

 

 

    

 

-

 

 

 

    

 

2,788

 

 

 

       

Operating (loss) income

        (18,007)        5,598        (12,409)  
       

Interest and other financial costs

        3,988        3,683        7,671  
       

Debt extinguishment charges

        -        3,415        3,415  
       

Income tax expense

        -        92        92  
       

Gain on disposal of discontinued operations

             

 

-

 

 

 

    

 

(37,682)

 

 

 

    

 

(37,682)

 

 

 

       

Net (loss) income

 

             

 

(21,995)

 

 

 

    

 

36,090

 

 

 

    

 

14,095

 

 

 

 

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Year ended March 25, 2017*

 
     
             Continuing      Discontinued      Combined  
           operations      operations      operations  
     

 (in $ 000’s)

               
     

Net sales

        152,992        224,319        377,311  
     

Cost of sales

              91,460        143,194        234,654  
     

Gross profit

        61,532        81,125        142,657  
     

Selling, general, and administrative expenses

        61,599        61,970        123,569  
     

Restructuring charges

        897        211        1,108  
     

Depreciation and amortization

        3,428        3,170        6,598  
     

Operating (loss) income

              (4,392)        15,774        11,382  
     

Interest and other financial costs

        4,467        6,905        11,372  
     

Income tax expense

        -        (7,065)        (7,065)  
     

Net (loss) income

              (8,859)        15,934        7,075  
     
                                     

(*) The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

(**) The results of Mayors are included in the Company’s consolidated results for the period up to and including October 23, 2017.

Description of operations – continuing operations

Our net sales are comprised of revenues, net of discounts, in each case, excluding sales tax. Sales are recognized at the point of sale when merchandise is taken or shipped. Sales of consignment merchandise are recognized on a full retail basis at such time that the merchandise is sold. Revenues for gift certificates and store credits are recognized upon redemption. Customers use cash, checks, debit cards, third-party credit cards, private label credit cards and proprietary credit cards to make purchases. The level of our sales is impacted by the number of transactions we generate and the size of our average sales transaction.

Our operating costs and expenses are primarily comprised of cost of sales and selling, general and administrative expenses (“SG&A”). Cost of sales includes cost of merchandise, direct inbound freight and duties, direct labor related to repair services, the costs of our design and creative departments, inventory shrink, damage and obsolescence, jewelry, watch and giftware boxes, as well as product development costs. SG&A includes, among other things, all non-production payroll and benefits (including non-cash compensation expense), store and head office occupancy costs, overhead, credit card fees, information systems, professional services, consulting fees, repairs and maintenance, travel and entertainment, insurance, legal, human resources and training expenses. Occupancy, overhead and depreciation are generally less variable relative to net sales than other components of SG&A, such as credit card fees and certain elements of payroll, such as commissions. Another significant item in SG&A is marketing expenses, which include marketing, public relations and advertising costs (net of amounts received from vendors for cooperative advertising) incurred to increase customer awareness of both the Birks product brand and our third party retail brands. Marketing has historically represented a significant portion of our SG&A. As a percentage of net sales, marketing expenses represented 5.8%, 6.5%, and 4.8% of sales for fiscal 2019, 2018, and 2017, respectively. Additionally, SG&A includes indirect costs such as freight, including inter-store transfers, receiving costs, distribution costs, and warehousing costs. Depreciation and amortization includes depreciation and amortization of our stores and head office, including leasehold improvements, furniture and fixtures, computer hardware and software and amortization of intangibles.

Over the short-term, we will focus our efforts on those strategies and key drivers of our performance that are necessary in the current business climate, which include our ability to:

 

   

grow sales, gross margin rate and gross profits;

 

   

manage expenses and assets efficiently in order to optimize profitability and cash flow with the objective of growing earnings before interest, tax, depreciation and amortization (“EBITDA”);

 

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streamline the operational overhead costs that were incurred to support the operations of the Company prior to the Aurum Transaction in order to reflect the needs of the continuing operations going forward;

 

   

align our operations to effectively and efficiently deliver benefits to our shareholders; and

 

   

maintain flexible and cost effective sources of borrowings to finance our operations and strategies.

Over the long-term, we believe that the key drivers of our performance will be our ability to:

 

   

continue to develop our Birks product brand through the expansion of all sales channels including international channels of distribution and e-commerce;

 

   

execute our merchandising strategy to increase net sales and maintain and expand gross margin by lowering discounts, developing and marketing higher margin exclusive and unique products, and further developing our internal capability to design, develop, and source products;

 

   

execute our marketing strategy to enhance customer awareness and appreciation of the Birks product brand as well as our third party retail brands with an objective of maintaining and eventually increasing customer traffic, client acquisition and retention and net sales through regional, national and international advertising campaigns using digital channels (including our website), billboards, print, direct mail, magazine, in-store events, community relations, media and public relations, partnerships with key suppliers, and associations with prestige institutions;

 

   

provide a superior omni-channel client experience through consistent outstanding customer service that will ensure customer satisfaction and promote frequent customer visits, customer loyalty, and strong customer relationships;

 

   

increase our retail stores’ average retail transaction, conversion rate, productivity of our store professionals, inventory and four-wall profitability; and

 

   

recruit and retain top talent whose values are aligned with our omni-channel strategic visions.

Fiscal 2019 Summary – results from continuing operations

 

   

Net sales were $151.0 million for fiscal 2019, an increase of $4.4 million compared to net sales of $146.6 million in fiscal 2018. The increase in sales in fiscal 2019 was primarily driven by the successful re-opening of the Company’s Montreal flagship store in June 2018 after undergoing major renovations in fiscal 2018 and the first quarter of fiscal 2019 and being closed for a 5 month period, yielding a 102% sales increase in this location over the comparable period of time. The Company also experienced sales growth throughout the majority of its retail network as well as through it e-commerce channel, partially offset by lower sales in the Vancouver region driven by a temporary decline in certain affluent tourists in the second half of the fiscal year;

   

Comparable store sales increased by 1.0% compared to the prior fiscal year ended March 31, 2018 driven by strong sales of Birks branded products and increased sales of third party branded timepieces;

   

Gross profit was $58.6 million, or 38.8% of net sales, for fiscal 2019 compared to $55.7 million, or 38.0% of net sales, for fiscal 2018. The increase of 80 basis points in gross margin percentage was mainly attributable to product sales mix as well as to a reduction in sales promotions in fiscal 2019 compared to fiscal 2018 during which the Company was engaged in more promotional activity as a result of the Montreal and Toronto flagship locations undergoing major renovations during the fiscal year;

   

SG&A expenses were $67.1 million, or 44.4% of net sales, in fiscal 2019 compared to $66.8 million, or 45.5% of net sales, in fiscal 2018. This nominal increase is driven in part by higher direct variable costs driven by increased sales, such as sales commissions and credit card transaction fees, as well as by higher occupancy costs resulting from new leases, notably at our Toronto flagship location. As a percentage of sales, SG&A expenses in fiscal 2019 have decreased by 110 basis points as compared to fiscal 2018;

 

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The Company’s fiscal 2019 reported operating loss from continuing operations was $13.6 million, a decrease of $4.4 million compared to a reported operating loss from continuing operations of $18.0 million for fiscal 2018. Adjusted operating loss from continuing operations (see “Non-GAAP measures”), which excludes restructuring costs and impairment charges was $12.4 million, a decrease of $1.9 million compared to an adjusted operating loss from continuing operations of $14.3 million in fiscal 2018 (excluding restructuring costs and impairment charges);

   

The Company recognized a net loss for fiscal 2019 of $18.7 million, or $1.04 per share, comprised of a net loss from continuing operations of $18.3 million or $1.02 per share, and a net loss from discontinued operations of $0.4 million, or $0.02 per share, compared to net income in fiscal 2018 of $14.1 million, or $0.78 per share comprised of a net loss from continuing operations of $22.0 million, or $1.22 per share, and a net income from discontinued operations of $36.1 million (including a one-time gain on disposal of discontinued operations of $37.7 million), or $2.00 per share.

Comparable Store Sales – from continuing operations

We use comparable store sales as a key performance measure for our business. Comparable store sales include stores open in the same period in both the current and prior year. We include our e-commerce sales in comparable store calculations. Stores enter the comparable store calculation in their thirteenth full month of operation under our ownership. Stores that have been resized and stores that are relocated are evaluated on a case-by-case basis to determine if they are functionally the same store or a new store and then are included or excluded from comparable store sales, accordingly. Comparable store sales measures the percentage change in net sales for comparable stores in a period compared to the corresponding period in the previous year. If a comparable store is not open for the entirety of both periods, comparable store sales measures the change in net sales for the portion of time that such store was open in both periods. We believe that this measure provides meaningful information on our performance and operating results. However, readers should know that this financial metric has no standardized meaning and may not be comparable to similar measures presented by other companies.

The percentage increase (decrease) in comparable store sales for the periods presented below is as follows:

 

     Fiscal Year Ended

 

 
           March 30, 2019                  March 31, 2018                  March 25, 2017        
    

 

    

 

    

 

 

Comparable store sales from continuing operations

     1%              (4)%              (8)%        
  

 

 

    

 

 

    

 

 

 

The increase in comparable store sales of 1% in fiscal 2019 is attributable in part by an increase in sales of Birks branded products across the retail and e-commerce channels, an increase in sales of third party branded watches driven by the Company’s improved portfolio of third party watch brands, as well as the successful execution of targeted marketing campaigns. In fiscal 2018, the decrease in comparable store sales in was primarily driven by a decrease in sales of third party branded fine jewelry and bridal offerings.

 

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Fiscal 2019 Compared to Fiscal 2018

The following table sets forth, for fiscal 2019 and fiscal 2018, the amounts in our consolidated statements of operations:

 

     Fiscal Year Ended  
     March 30, 2019        March 31, 2018*    
     (In thousands)  

Net sales

     $ 151,049           $ 146,608      

Cost of sales

     92,472           90,915      
  

 

 

    

 

 

 

Gross profit

     58,577           55,693      
  

 

 

    

 

 

 

Selling, general and administrative expenses

     67,106           66,754      

Restructuring charges

     1,182           894      

Depreciation and amortization

     3,859           3,264      

Impairment of long-lived assets

     46           2,788      
  

 

 

    

 

 

 

Total operating expenses

     72,193           73,700      
  

 

 

    

 

 

 

Operating loss

     (13,616)          (18,007)    

Interest and other financing costs

     4,689           3,988      

Income taxes

     -           -      
  

 

 

    

 

 

 

Net loss from continuing operations,

     (18,305)         (21,995)    

Discontinued operations:

     

Loss from discontinued operations, net of tax

     (381)          (1,592)    

Gain on disposal of discontinued operations, net of tax

     -           37,682      
  

 

 

    

 

 

 

Net (loss) income from discontinued operations

     (381)         36,090      
  

 

 

    

 

 

 

Net (loss) income

     $ (18,686)         $ 14,095      
  

 

 

    

 

 

 

(*) The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

Net Sales – from continuing operations

 

     Fiscal Year Ended  
     March 30, 2019        March 31, 2018*  
     (In thousands)  

Net sales – Retail

     $ 143,499          $ 141,607      

Net sales – Other

     7,550          5,001      
  

 

 

    

 

 

 

Total Net Sales

     $ 151,049          $ 146,608      
  

 

 

    

 

 

 

*The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

Net sales for fiscal 2019 were $151.0 million compared to $146.6 million for fiscal 2018, which is an increase of $4.4 million, or 3.0%, as compared to fiscal 2018. Net retail sales were $1.9 million greater than last year primarily driven by the re-opening of the Montreal flagship store in June 2018 as well as by a 1% increase in comparable store sales. The increase in Net Sales – Other of $2.5 million related primarily to an increase in e-commerce sales of $1.7 million driven by increased traffic to the Company’s updated website.

 

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Gross Profit – from continuing operations

 

     Fiscal Year Ended  
     March 30, 2019        March 31, 2018*    
     (In thousands)  

Gross Profit – Retail

     $ 57,310          $ 53,655  

Gross Profit – Other

     1,267          2,038  
  

 

 

    

 

 

 

Total Gross Profit

     $ 58,577          $ 55,693  
  

 

 

    

 

 

 

*The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

Total gross profit for fiscal 2019 was $58.6 million or 38.8% of net sales, as compared to $55.7 million or 38.0% of net sales, in fiscal 2018. The increase of 80 basis points in gross margin percentage was mainly attributable to product sales mix and a reduction in sales promotions in fiscal 2019 compared to fiscal 2018 during which the Company was engaged in more promotional activity as a result of the Montreal and Toronto flagship locations undergoing major renovations during the fiscal year. Gross Profit – Other for fiscal 2019 was $1.3 million compared to $2.0 million for fiscal 2018, which is a decrease of $0.7 million as compared to fiscal 2018 driven by an increase in sales promotional activity during the period.

SG&A Expenses – from continuing operations

In fiscal 2019, SG&A expenses were $67.1 million or 44.4% of net sales, compared to $66.8 million or 45.6% of net sales in fiscal 2018. This nominal increase is driven in part by higher direct variable costs driven by increased sales, such as sales commissions and credit card transaction fees, as well as by higher occupancy costs resulting from new leases, notably at our Toronto flagship location. As a percentage of sales, SG&A expenses in fiscal 2019 have decreased by 110 basis points as compared to fiscal 2018.

Restructuring Charges – from continuing operations

During fiscal 2019, we incurred $1.2 million of restructuring charges associated with the Company’s right-sizing initiative put in place subsequent to the Aurum Transaction, compared to $0.9 million in fiscal 2018 as part of the third phase of the Company’s previous restructuring plan originally put in place in July 2014. The $1.2 million of charges incurred in fiscal 2019 are primarily associated with severance costs as the Company eliminated certain head office positions to further increase efficiency and to align corporate functions with the Company’s strategic direction following the Aurum Transaction. In July 2014, the Company announced an operational restructuring plan to reduce corporate overhead costs, improve profitability and drive efficiency within the organization. The restructuring plan included consolidating most of the Company’s corporate administrative workforce from its former regional office in Tamarac, Florida to its Montreal corporate head office as well as the outsourcing of a portion of our jewelry manufacturing and other corporate head office staff reductions. The first and second phases of this previous restructuring plan were rolled out during fiscal years 2015, 2016 and 2017. In fiscal 2018, the Company implemented the third phase of the operational restructuring plan, incurring restructuring charges of approximately $0.9 million, primarily associated with severance.

Depreciation and Amortization – from continuing operations

Depreciation and amortization expense during fiscal 2019 was $3.9 million compared to $3.3 million during fiscal 2018, driven by amortization on additions to property, plant and equipment.

Interest and Other Financing Costs – from continuing operations

Interest and other financing costs in fiscal 2019 were $4.7 million compared to $4.0 million in fiscal 2018, an increase of $0.7 million driven primarily by the impact of the Company’s $12.5 million Term Loan signed in June 2018 and by an increase in the Company’s working capital debt of approximately $10.1 million from $36.9 million as of March 31, 2018 to $47.0 million as of March 30, 2019. The increase in working capital and term debt balances are driven primarily by the Company’s extensive investments in the renovation of its retail network, and particularly its Montreal, Vancouver and Toronto flagship locations during fiscal 2019.

 

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Income Tax Expense – from continuing operations

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 30, 2019, the Company had no accrued interest related to uncertain tax positions due to available tax loss carry forwards. The tax years 2012 through 2019 remain open to examination in the major tax jurisdictions in which the Company operates. We have continued to record a 100% valuation allowance on the full value of the deferred tax assets generated from our continuing operations during these periods as the criteria for recognition of these assets was not met at March 30, 2019.

Fiscal 2018 Compared to Fiscal 2017

The following table sets forth, for fiscal 2018 and fiscal 2017, the amounts in our consolidated statements of operations:

 

                                                 
                   Fiscal Year Ended                 
     March 31, 2018*    March 25, 2017*
     (In thousands)

Net sales

     $ 146,608        $ 152,992  

Cost of sales

     90,915        91,460  
  

 

 

 

  

 

 

 

Gross profit

     55,693        61,532  
  

 

 

 

  

 

 

 

Selling, general and administrative expenses

     66,754        61,599  

Restructuring charges

     894        897  

Depreciation and amortization

     3,264        3,428  

Impairment of long-lived assets

     2,788        -  
  

 

 

 

  

 

 

 

Total operating expenses

     73,700        65,924  
  

 

 

 

  

 

 

 

Operating loss

     (18,007      (4,392

Interest and other financing costs

     3,988        4,467  

Income taxes

     -        -  
  

 

 

 

  

 

 

 

Net loss from continuing operations

     (21,995      (8,859

Discontinued operations:

     

(Loss) income from discontinued operations, net of tax

     (1,592      15,934  

Gain on disposal of discontinued operations, net of tax

     37,682        -  
  

 

 

 

  

 

 

 

Net income from discontinued operations

     36,090                 15,934  
  

 

 

 

  

 

 

 

Net income

     $          14,095        $ 7,075  
  

 

 

 

  

 

 

 

* The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

Net Sales – from continuing operations

 

                                                 
     Fiscal Year Ended
     March 31, 2018*    March 25, 2017*
     (In thousands)

Net sales – Retail

     $ 141,607        $ 149,323  

Net sales – Other

     5,001        3,669  
  

 

 

 

  

 

 

 

Total Net Sales

     $ 146,608        $ 152,992  
  

 

 

 

  

 

 

 

* The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

 

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Net sales for fiscal 2018 were $146.6 million compared to $153.0 million for fiscal 2017, which is a decrease of $6.4 million, or 4.2%, as compared to fiscal 2017. Net retail sales in fiscal 2018 were $7.7 million lower than in fiscal 2017 primarily driven by the renovation of our Montreal and Toronto flagship stores during fiscal 2018, and the temporary closure of the Montreal flagship store for the last two months of the fiscal year, as well as a softer luxury retail environment in Canada throughout the fiscal year and particularly during the holiday season. The increase in Net Sales – Other of $1.3 million related primarily to an increase in wholesale sales of $1.6 million driven by the Company’s entrance into the U.K market through its exclusive distribution agreement for Birks branded jewelry with Aurum, as well as greater e-commerce sales of $0.2 million driven by increased traffic to the Company’s updated website, partially offset by lower corporate sales of $0.5 million.

Gross Profit – from continuing operations

 

                                                 
     Fiscal Year Ended
     March 31, 2018*    March 25, 2017*
     (In thousands)

Gross Profit – Retail

     $ 53,655        $ 60,219  

Gross Profit – Other

     2,038        1,313  
  

 

 

 

  

 

 

 

Total Gross Profit

     $ 55,693        $ 61,532  
  

 

 

 

  

 

 

 

* The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

Total gross profit for fiscal 2018 was $55.7 million or 38.0% of net sales, as compared to $61.5 million or 40.2% of net sales, in fiscal 2017, a decrease of $5.8 million compared to fiscal 2017. The reduction of 220 basis points in gross margin percentage was mainly attributable to product sales mix and increased sales promotions as a result of the Montreal and Toronto flagship locations undergoing major renovations during the fiscal year. Gross Profit – Other for fiscal 2018 was $2.0 million compared to $1.3 million for fiscal 2017, which is an increase of $0.7 million or 53.8% compared to fiscal 2017. This 53.8% increase was driven by increased wholesale and e-commerce activity during the fiscal year, as the Company continued its focus on growth in these high gross margin channels.

SG&A Expenses – from continuing operations

In fiscal 2018, SG&A expenses were $66.8 million or 45.5% of net sales, compared to $61.6 million or 40.3% of net sales in fiscal 2017. The increase was driven in part by higher marketing and operational costs related to the Company’s strategic focus on the promotion and development of the Birks brand as well as by higher professional fees incurred in relation to the Company’s strategic plan.

Restructuring Charges – from continuing operations

During fiscal 2018, we incurred $0.9 million of restructuring charges associated with the third phase of our operational restructuring plan launched in fiscal 2015, compared to $0.9 million in fiscal 2017 as part of the second phase of the restructuring plan. In July 2014, we provided to our senior secured lenders and announced an operational restructuring plan to reduce corporate overhead costs, improve profitability and drive efficiency within the organization. The restructuring plan included consolidating most of our corporate administrative workforce from our regional office in Tamarac, Florida to our Montreal corporate head office as well as the outsourcing of a portion of our jewelry manufacturing and other corporate head office staff reductions. In February 2018, we began the third phase of the operational restructuring plan, incurring restructuring charges of approximately $0.9 million, primarily associated with severance, as we eliminated certain head office positions to further increase efficiency and to align corporate functions with the Company’s strategic direction following the Aurum Transaction.

Depreciation and Amortization – from continuing operations

Depreciation and amortization expense during fiscal 2018 was $3.3 million compared to $3.4 million during fiscal 2017.

 

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Interest and Other Financing Costs – from continuing operations

Interest and financing costs in fiscal 2018 were $4.0 million compared to $4.5 million in fiscal 2017, a decrease of $0.5 million driven by lower average outstanding working capital debt during the period of $4.9 million as a result of the significant debt repayments made by the Company as a result of the Aurum Transaction.

NON-GAAP MEASURES

The Company reports financial information in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Company’s performance is monitored and evaluated using various sales and earnings measures that are adjusted to include or exclude amounts from the most directly comparable GAAP measure (“non-GAAP measures”). The Company presents such non-GAAP measures in reporting its financial results to investors and other external stakeholders to provide them with useful complimentary information which will allow them to evaluate the Company’s operating results using the same financial measures and metrics used by the Company in evaluating performance. The Company does not, nor does it suggest that investors and other external stakeholders should, consider non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. These non-GAAP measures may not be comparable to similarly-titled measures presented by other companies.

Adjusted operating expenses and adjusted operating loss

The Company evaluates its operating earnings performance using financial measures which exclude expenses associated with operational restructuring plans and impairment losses. The Company believes that such measures provide useful supplemental information with which to assess the Company’s results relative to the corresponding period in the prior year and can result in a more meaningful comparison of the Company’s performance between the periods presented. The table below provides a reconciliation of the non-GAAP measures presented to the most directly comparable financial measures calculated with GAAP.

 

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Reconciliation of non-GAAP

measures

   Fiscal year ended March 30, 2019
($’000)   

GAAP
Measure

 

  

Restructuring

costs (a)

 

  

Impairment
of long lived
assets (b)

 

  

Non-GAAP
Adjusted
Measure

 

Total operating expenses and total adjusted operating expenses – from continuing operations    72,193    (1,182)    (46)    70,965

as a % of net sales from continuing operations

   47.8%              47.0%
Operating loss and adjusted operating loss – from continuing operations    (13,616)    1,182    46    (12,388)

as a % of net sales from continuing operations

   (9.0)%              (8.2)%
                     

Reconciliation of non-GAAP

measures

   Fiscal year ended March 31, 2018*
($’000)   

GAAP
Measure

 

  

Restructuring

costs (a)

 

  

Impairment
of long lived
assets (b)

 

  

Non-GAAP
Adjusted
Measure

 

Total operating expenses and total adjusted operating expenses – from continuing operations    73,700    (894)    (2,788)    70,018

as a % of net sales from continuing operations

   50.3%              47.8%
Operating loss and adjusted operating loss – from continuing operations    (18,007)    894    2,788    (14,325)

as a % of net sales from continuing operations

   (12.3)%              (9.8)%
           

Reconciliation of non-GAAP

measures

   Fiscal year ended March 25, 2017*
($’000)   

GAAP
Measure

 

  

Restructuring

costs (a)

 

  

Impairment
of long lived
assets (b)

 

  

Non-GAAP
Adjusted
Measure

 

Total operating expenses and total adjusted operating expenses – from continuing operations        65,924    (897)    -    65,027

as a % of net sales from continuing operations

   43.1%              42.5%
Operating loss and adjusted operating loss– from continuing operations    (4,392)    897    -    (3,495)

as a % of net sales from continuing operations

   (2.9)%              (2.3)%

 

*

The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

 

(a)

Expenses associated with the Company’s operational restructuring plan.

 

(b)

Non-cash impairment associated with the impairment of long-lived assets at a retail location due to the projected operating performance of the location and software impairment associated with a decision to modify the scope of the implementation of the Company’s new ERP.

 

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Liquidity and Capital Resources

The Company’s ability to fund its operations and meet its cash flow requirements is dependent upon its ability to maintain positive excess availability under the Company’s Credit Facility (defined below). As of March 30, 2019, the Company had approximately $47.0 million outstanding on its $85.0 million credit facility, which is used to finance working capital and capital expenditures, provide liquidity to fund the Company’s day-to-day operations and for other general corporate purposes. The terms of the Credit Facility require the Company to maintain positive excess availability at all times.

On October 23, 2017, in connection with the closing of the Aurum Transaction, the Company entered into a senior secured credit facility with Wells Fargo Canada Corporation for a maximum amount of $85.0 million (the “Credit Facility”). The Credit Facility, which matures in October 2022, also provides the Company with an option to increase the total commitments thereunder by up to $13.0 million. The Company will only have the ability to exercise this accordion option if it has the required borrowing capacity at such time. The Credit Facility bears interest at a rate of CDOR plus a spread ranging from 1.5% - 3.0% depending on the Company’s excess availability levels. Under the Credit Facility, the sole financial covenant which the Company is required to adhere to is to maintain minimum excess availability of not less than $8.5 million at all times, except that the Company shall not be in breach of this covenant if excess availability falls below $8.5 million for not more than two consecutive business days once during any fiscal month. The Company’s excess availability was above $8.5 million throughout fiscal 2019.

On June 29, 2018, the Company secured a $12.5 million senior secured term loan (the “Term Loan”) with Crystal Financial LLC (“Crystal”). The Term Loan, which matures in October 2022, is subordinated in lien priority to the Credit Facility and bears interest at a rate of CDOR plus 8.25%. Under the Term Loan, the Company is required to adhere to a similar financial covenant as under the Credit Facility (maintain minimum excess availability of not less than $8.5 million at all times, except that the Company shall not be in breach of this covenant if excess availability falls below $8.5 million for not more than two consecutive business days once during any fiscal month). In addition, the Term Loan includes seasonal availability blocks imposed from December 20th to January 20th of each year of $9.5 million and from January 21st to February 20th of each year of $4.5 million. The Term Loan is required to be repaid upon maturity.

The Company’s borrowing capacity under both the Credit Facility and the Term Loan is based upon the value of the Company’s inventory and accounts receivable, which is periodically assessed by its lenders, and based upon these reviews the Company’s borrowing capacity could be significantly increased or decreased.

Both the Company’s Credit Facility and Term Loan are subject to cross default provisions with all other loans pursuant to which if the Company is in default of any other loan, the Company will immediately be in default of both its Credit Facility and Term Loan. In the event that excess availability falls below $8.5 million for more than two consecutive business days once during any fiscal month, this would be considered an event of default under the Credit Facility and Term Loan, that provides the lenders the right to require the outstanding balances borrowed under the Company’s Credit Facility and Term Loan to become due immediately, which would result in cross defaults on the Company’s other borrowings. The Company expects to have excess availability of at least $8.5 million for at least the next twelve months.

The Credit Facility and Term Loan also contain limitations on the Company’s ability to pay dividends, more specifically, among other limitations, the Company can pay dividends only at certain excess borrowing capacity thresholds. The Company is required to either i) maintain excess availability of at least 40% of the borrowing base in the month preceding payment or ii) maintain excess availably of at least 25% of the borrowing base and maintain a fixed charge coverage ratio of at least 1.10 to 1.00. Other than these financial covenants related to paying dividends, the terms of the Credit Facility and Term Loan provide that no financial covenants are required to be met other than already described.

The Company’s lenders under its Credit Facility and Term Loan may impose, at any time, discretionary reserves, which would lower the level of borrowing availability under the Company’s credit facilities (customary for asset-based loans), at their reasonable discretion, to: i) ensure that the Company maintain adequate liquidity for the operation of its business, ii) cover any deterioration in the value of the collateral, and iii) reflect impediments to the lenders to realize upon the collateral. There is no limit to the amount of discretionary reserves that the Company’s lenders may impose at their reasonable discretion. No discretionary reserves have been imposed since the inception of the Credit Facility and the Term Loan on October 23, 2017 and June 29, 2018, respectively.

 

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Borrowings under our Credit Facility for the periods indicated in the table below were as follows:

 

     Fiscal Year Ended
     March 30, 2019    March 31, 2018*(1)
     (In thousands)

Credit facility availability

     $     61,449        $     56,860  

Amount borrowed at year end

     $ 47,021        $ 36,925  
  

 

 

 

  

 

 

 

Excess borrowing capacity at year end (before minimum threshold)

     $ 14,428        $ 19,935  
  

 

 

 

  

 

 

 

Average outstanding balance during the year – continuing operations

     $ 44,772        $ 45,588  

Average excess borrowing capacity during the year – continuing operations

     $ 15,816        $ 18,444  

Maximum borrowing outstanding during the year – continuing operations

     $ 55,596        $ 60,710  

Minimum excess borrowing capacity during the year – continuing operations (2)

     $ 9,716        $ 3,330  

Weighted average interest rate for year

     3.9%        3.3%  

(*) The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

 

(1)

Note that for fiscal 2018, credit facility availability, excess borrowing capacity and outstanding borrowings related to the period prior to the Aurum Transaction (up to and including October 22, 2017) are calculated based on the terms existing under the then existing senior secured credit facilities, while credit facility availability, excess borrowing capacity and outstanding borrowings related to the period subsequent to the Aurum Transaction (October 23, 2017 and thereafter) are calculated based on the terms existing under the Credit Facility.

 

(2)

The Company’s former lenders consented to the Company having an excess borrowing capacity lower than the then existing minimum threshold of $7.7 million (USD $6.0 million) under its then existing credit facilities for the 4 days leading up to the closing of the Aurum Transaction to allow the Company to hold excess cash on hand during the Company’s transition period towards the new lender’s banking operations.

Investissement Québec

As at March 30, 2019, the Company had term loans outstanding in the aggregate amount of $0.8 million at March 30, 2019 with Investissement Québec, which are outlined below:

 

  -

$2.0 million secured term loan of which $0.2 million remained outstanding, bearing interest at a rate of Canadian prime plus 10% per annum, which equated to 13.4% at March 30, 2019. $5.0 million secured term loan of which $0.6 million remained outstanding, bearing interest at a rate of Canadian prime plus 7.0% per annum, which equated to 10.4% at March 30, 2019. The term loans with Investissement Québec require the Company on an annual basis to have a working capital ratio of at least 1.15. On May 21, 2019, the Company obtained a waiver from Investissement Québec with respect to the requirement to meet the working capital ratio for fiscal 2019.

  -

On June 5, 2019, the Company repaid the outstanding balances on its terms loans from Investissement Quebec. As a result, the outstanding loan balances as at March 30, 2019 have been presented as short-term liabilities within current portion of long-term debt on the Company’s balance sheet.

Other Financing

As of March 30, 2019, we had a balance of $2.0 million (USD $1.5 million) outstanding from an original $6.7 million (USD $5.0 million) cash advance from one of our controlling shareholders, Montel Sarl (“Montel”, previously known as Montrovest B.V.). This advance is payable upon demand by Montel once conditions stipulated in our Credit Facility permit such a payment. The conditions that are required to be met are the same as those that are required to be met for the Company to pay dividends (outlined in above section).This advance bears an annual interest rate of 11%, net of any withholding taxes, representing an effective interest rate of approximately 12.2%.

As of March 30, 2019, we had a balance of $1.7 million (USD $1.25 million) outstanding from an original $3.4 million (USD $2.5 million) loan from Montrovest. The loan bears interest at an annual rate of 11%, net of withholding taxes, representing an effective interest rate of approximately 12.2%. In May 2019, Montel granted the Company a one year extension of the term of the outstanding balance of $1.7 million (USD $1.25 million) which was scheduled to be fully repaid in July 2019. Subsequent to the one year term extension, the principal balance of the loan will now come due in July 2020. As part of the one year term extension, Montel also granted the Company a one year moratorium on the monthly interest payments on the outstanding loan balance (approximately $16,800 in Canadian dollars). The accrued interest will become due with the remaining outstanding principal balance, in July 2020.

 

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Cash Flows from Operating, Investing and Financing Activities – from continuing operations

The following table summarizes cash flows from operating, investing and financing activities:

 

(in thousands)      Fiscal 2019        Fiscal 2018*        Fiscal 2017*  

Net cash provided by (used in):

        

Operating activities

         $ (4,340)            $ (19,748)            $ (4,373)  

Investing activities

       (13,611)        (8,707)            (5,761)  

Financing activities

     18,506            (22,104)        9,633  

Net cash provided by discontinued operations:

     (381)        49,529        (1)  

Effect of changes in exchange rate on cash and cash equivalents

     -        (565)        (8)  
  

 

 

 

  

 

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

         $ 174            $ (1,595)            $ (510)  
  

 

 

 

  

 

 

 

  

 

 

 

(*) The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

Net cash used in operating activities from continuing operations was $4.3 million in fiscal 2019 as compared to $19.7 million in fiscal 2018. The $15.4 million increase in cash flows related to operating activities from continuing operations was primarily the result of a $3.7 million decrease in net loss from continuing operations in fiscal 2019 versus fiscal 2018, a $5.9 million decrease in the level of prepaids and other current assets during fiscal 2019 compared to fiscal 2018, a $4.3 million decrease in the level of accounts receivable during fiscal 2019 compared to fiscal 2018, a $4.8 million increase in the level of accounts payable during fiscal 2019 compared to fiscal 2018, a $5.2 million increase in the level of other long-term liabilities and accrued liabilities during fiscal 2019 compared to fiscal 2018 and a $1.0 million increase in depreciation and amortization and other operating activities in fiscal 2019 compared to fiscal 2018, partially offset by a $2.7 million reduction in non-cash impairment on long-lived assets in fiscal 2019 compared to fiscal 2018 and by a $6.8 million increase in the level of inventories in fiscal 2019 compared to fiscal 2018.

Net cash used in operating activities from continuing operations was $19.7 million in fiscal 2018 as compared to $4.4 million in fiscal 2017. The approximate $15.4 million decrease in cash flows related to operating activities from continuing operations was primarily the result of a $13.1 million increase in operating loss from continuing operations in fiscal 2018 versus fiscal 2017, an increase in the level of accounts receivable growth of $2.2 million during fiscal 2018 versus fiscal 2017, as well as an increase in the level of prepaids and other current assets of $3.1 million during fiscal 2018 versus fiscal 2017, partially offset by a $2.8 million non-cash impairment on long-lived assets in fiscal 2018.

During fiscal 2019, net cash used in investing activities from continuing operations was $13.6 million compared to $8.7 million used during fiscal 2018. The $4.9 million increase in net cash used in investing activities from continuing operations was primarily attributable to an increase in capital expenditures in relation to the major renovations of our flagship stores over fiscal 2018.

During fiscal 2018, net cash used in investing activities from continuing operations was $8.7 million compared to $5.8 million used during fiscal 2017. The $2.9 million increase in net cash used in investing activities from continuing operations was primarily attributable to an increase in capital expenditures and additions to intangible assets related to our ERP project over fiscal 2017.

Net cash provided by financing activities from continuing operations was $18.5 million in fiscal 2019, as compared to $22.1 million of cash flows used in financing activities from continuing operations during fiscal 2018. The $40.6 million increase in cash flows related to financing activities from continuing operations was primarily due to an increase in bank indebtedness of $10.1 million in fiscal 2019 as compared to a decrease in bank indebtedness of $20.8 million in fiscal 2018, an increase of long-term debt levels of $8.7 million, as well as a net decrease of $4.3 million in repayment of long-term debt in fiscal 2019 versus fiscal 2018, partially offset by an advance from shareholder of $3.2 million in fiscal 2018 compared to nil in fiscal 2019, respectively.

Net cash used in financing activities from continuing operations was $22.1 million in fiscal 2018, as compared to $9.6 million provided by during fiscal 2017. The $31.7 million decrease in cash flows related to financing activities from continuing operations was primarily due a decrease in bank indebtedness in fiscal 2018 of $20.8 million as compared to an increase of $13.6 million in fiscal 2017, partially offset by an advance from shareholder of $3.2 million in fiscal 2018 as compared to nil in fiscal 2017, respectively.

 

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Net cash used in discontinued operations amounted to $0.4 million in fiscal 2019 as a result of transaction related costs, net of recovery of expenses received as part of the transition service agreement with Aurum, compared to $49.5 million in fiscal 2018 represented by the excess proceeds received as a result of the Aurum Transaction, net of the repayment of Mayors’ outstanding term and working capital debt and transaction related costs.

The following table details capital expenditures in fiscal 2019, 2018, and 2017:

 

     Fiscal Year Ended
       March 30, 2019        March 31, 2018*        March 25, 2017*  
     (In thousands)

Leasehold improvements

     $ 6,593        $ 4,848        $ 2,077  

Electronic equipment, computer hardware and software

     1,774        3,491        3,034  

Furniture and fixtures and equipment

     6,166        2,004        666  
  

 

 

 

  

 

 

 

  

 

 

 

Total capital expenditures (1)

     $       14,533        $       10,343        $       5,777  
  

 

 

 

  

 

 

 

  

 

 

 

 

(*)

The Company has changed its reporting currency from USD to CAD for the period commencing April 1, 2018. Prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency (refer to note 1 of our audited consolidated financial statements which are included elsewhere in this Annual Report).

 

(1)

Includes capital expenditures financed by capital leases of nil in fiscal 2019, $1.1 million in fiscal 2018, and $0.5 million in fiscal 2017 as well as capital expenditures included in accounts payable as of the end of the fiscal year.

In the last three fiscal years, we invested a total of approximately $30.7 million in capital expenditures primarily associated with the remodeling of our existing store network including the completion of major transformative renovations at our three flagship locations in Montreal (completed in June 2018), Vancouver (completed in February 2019) and Toronto (completed in March 2019) as well as the opening of our Graff and Patek Philippe boutiques in Vancouver (completed in December 2018), the opening of new stores and a new enterprise resource planning (“ERP”) implementation.

The last three fiscal years were very capital-intensive for the Company as we implemented our strategic objective of completing the remodeling of our retail network including our flagship locations. This capital intensive spending period resulted in temporarily lower sales and contribution margin at the flagship locations under renovation, with a view to generate future long-term returns for the Company. We expect to invest a significantly lower amount in capital expenditures in fiscal 2020 and fiscal 2021 as we focus solely on operations and on delivering a return on our heavy investment spending during the period from fiscal 2017 to fiscal 2019. In fact, in fiscal 2020, approximately $1.0 million is expected to be spent in capital expenditures, primarily related to minor store remodels and store relocations. We expect to finance these capital expenditures from operating cash flows, and existing financing arrangements.

Maintenance of sufficient availability of funding through an adequate amount of committed financing is necessary for us to fund our day-to-day operations. Our ability to make scheduled payments of principal, or to pay the interest or additional interest, if any, or to fund planned capital expenditures and store operations will depend on our ability to maintain adequate levels of available borrowing and our future performance, which to a certain extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other events that are beyond our control. We believe that we currently have sufficient working capital to fund our operations. This belief is based on certain assumptions about the state of the economy, the availability of borrowings to fund our operations and estimates of projected operating performance. To the extent that the economy and other conditions affecting our business are significantly worse than we anticipate, we may not achieve our projected level of financial performance and we may determine that we do not have sufficient capital to fund our operations.

The Company believes that it will be able to adequately fund its operations and meet its cash flow requirements for at least the next twelve months. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The financial statements do not reflect adjustments that would be necessary if the going concern assumption was not appropriate.

Research and development, patents and licenses, etc.

None.

 

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Trend Information

During fiscal 2019, we were faced with several challenges such as a weaker holiday season in the luxury retail industry globally, the planned major renovations of two of our flagship store locations (Montreal and Toronto), the temporary closure of our flagship store in Montreal, the delayed opening of the Toronto flagship store, and a softening in luxury spending by certain affluent tourists within our customer base. Increased competition for space in Canada continued to put pressure on occupancy costs and space retention for key locations. In fiscal 2019, we achieved several important milestones as evidenced by our investments in both short-term and long-term initiatives. We finalized the major renovations and remodeling of our three flagship locations, namely: Montreal (completed in June 2018), Vancouver (completed in February 2019) and Toronto (completed in March 2019).

We continue to successfully pursue our strategy to develop the Birks product brand and in fiscal 2019, we launched several new collections under the Birks brand. In addition, we continued to pursue our strategies to enhance our customers’ in-store experience which included the remodeling of our retail network (including the major renovations to our flagship locations) to provide our clients with an engaging buying experience.

Our gross profit margin from continuing operations has declined over the past five years primarily due to changes in our product sales mix and the increased efforts over the past years to more quickly and aggressively sell through slow moving and discontinued product brands in an effort to improve the productivity and turnover of our inventory. Going forward, we believe that our gross profit margin will stabilize and begin to increase as we continue to promote the development of the Birks product brand which we expect will provide us with higher gross profit margins. Going forward, we also intend to execute our merchandising strategy to expand gross margins by developing and marketing exclusive and unique third-party branded products with higher margins.

Over the past few years we have also decreased the number of stores we operate through our closure of underperforming stores. Going forward we will continue to evaluate the productivity of our existing stores and close unproductive stores. In addition, we will be continuing to review opportunities to open new stores in new prime retail locations when the right opportunities exist. Moreover, we will continue to invest in our website and e-commerce platform to bolster our online distribution channel which has experienced significant sales growth during fiscal 2019 (110% year-over-year) and which represents an area of focus for us going forward.

Off-balance sheet arrangements

From time to time, we guarantee a portion of our private label credit card sales to our credit card vendor. As of March 30, 2019 and March 31, 2018, the amount guaranteed under such arrangements was approximately $5.8 million and $2.7 million, respectively. The bad debt experienced under these guarantees has not been material. See Note 14(b) to the consolidated financial statements included in this Annual Report on Form 20-F for additional discussion. We had no other off-balance sheet arrangements as of March 30, 2019 other than our operating lease commitments as detailed below and in Note 13 to our consolidated financial statements.

Commitments and Contractual Obligations

The following table discloses aggregate information about our contractual cash obligations as of March 30, 2019 and the periods in which payments are due:

 

     Payments due by Period  
     Total     

Less Than

1 Year

     2-3 Years      4-5 Years     

More than

5 Years

 
            (In thousands)  

Contractual Obligations

              

Debt maturities(1)

     $ 63,450        $ 831        $ 48,115        $ 12,500        $ 2,004  

Capital lease obligations

     476        162        247        67         

Interest on debt(2)

     5,060        1,770        2,618        451        221  

Operating lease obligations(3)

     132,457        10,231        26,091        25,308        70,827  
  

 

 

 

Total(4)

     $     201,443        $         12,994        $     77,071        $       38,326        $         73,052    
  

 

 

 
(1)

Includes bank indebtedness in the 2-3 year category to reflect the current expiration date of the line of credit.

(2)

Excludes interest payments on amounts outstanding under our credit facility as the outstanding amounts fluctuate based on our working capital needs. Interest expense on other variable rate long-term debts was calculated assuming the rates in effect at March 30, 2019.

(3)

The operating lease obligations do not include insurance, taxes and common area maintenance (CAM) charges to which we are obligated. CAM charges were $1.8 million in fiscal 2019, $1.9 million in fiscal 2018, and $3.1 million in fiscal 2017.

(4)

In addition to the above and as of March 31, 2019, we had $1.0 million of outstanding letters of credit.

 

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Leases

We lease all of our retail locations under operating leases. Additionally, we have operating leases for certain equipment.

Operating leases for store locations are expensed over the term of the initial lease period. While lease renewal periods are available on most leases, renewal periods are not included in the accounting lease term because we believe there are no punitive terms or circumstances associated with non-renewal that would reasonably assure renewal. The accounting lease term typically includes a fixturing period and the rental payments are expensed on a straight-line basis over the lease term. All reasonably assured rent escalations, rent holidays, and rent concessions are included when considering the straight-line rent to be expensed. Lease incentives are recorded as deferred rent and amortized as reductions to lease expense over the lease term. Contingent rent payments vary by lease, are based on a percentage of revenue above a predetermined sales level and are expensed when it becomes probable the sales levels will be achieved. This level is different for each location and includes and excludes various types of sales.

Leasehold improvements are capitalized and typically include fixturing and store renovations. Amortization of leasehold improvements begins on the date the asset was placed in service and extends to the lesser of the economic life of the leasehold improvement and the initial lease term.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results may differ from those estimates. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various factors that are believed to be reasonable. We have identified certain critical accounting policies as noted below.

Going concern assumption

Our consolidated financial statements have been prepared on a going concern basis in accordance with generally accepted accounting principles in the U.S. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. In evaluating our ability to continue as a going concern, we are required to determine whether we have the ability to fund our operations and meet our cash flow requirements. This evaluation requires us to estimate and forecast our cash flows for at least the next twelve months from the date the financial statements were authorized for issuance. Significant estimates that have the greatest impact on our analysis include our estimate of sales, gross margins and expenses, estimates of collateral values performed by our lenders throughout the year which could increase or decrease our availability under our senior secured credit facility, timing of inventory acquisitions, vendor terms and payments, interest rate and foreign exchange rate assumptions. Further, we have also made judgments on whether any reserves would be imposed by our senior secured lenders. Significant variances from our assumptions used in preparing our going concern analysis could significantly impact our ability to meet our projected cash flows. Our ability to meet our projected cash flows could also be impacted if our senior secured lenders impose additional restrictions on our ability to borrow on our collateral or if we do not adhere to the financial covenant applicable under our senior secured credit facilities which is an event of default.

The Company funds its operations primarily through committed financing under its senior secured credit facility and its senior secured term loan described in Note 7 of our consolidated financial statements included elsewhere in this 20-F. The Credit Facility along with the Term Loan are used to finance working capital, finance capital expenditures, provide liquidity to fund the Company’s day-to-day operations and for other general corporate purposes. The Company’s ability to meet its cash flow requirements in order to fund its operations is dependent upon its ability to attain profitable operations as well as specified excess availability levels under its Credit Facility and its Term Loan. The sole financial covenant which the Company is required to adhere to under both Credit Facility and its Term Loan is to maintain minimum excess availability of not less than $8.5 million at all times, except that the Company shall not be in breach of this covenant if excess availability falls below $8.5 million for not more than two consecutive business days once during any fiscal month. In the event that excess availability falls below the minimum requirement, this would be considered an event of default under the Credit Facility and under the Term Loan, that could result in the outstanding balances borrowed under the Company’s Credit Facility and Term Loan becoming due immediately, which would result in cross defaults on the Company’s other borrowings. The Company met its excess availability requirement as of and throughout the year ended March 30, 2019 and as of the date the financial statements were authorized for issuance, and expects to have excess availability of at least $8.5 million for at least the next twelve months.

 

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Allowance for inventory shrink and slow moving inventory

The allowance for inventory shrink is estimated for the period from the last physical inventory date to the end of the reporting period on a store by store basis and at our distribution centers. The shrink rate from the most recent physical inventory, in combination with historical experience, is the basis for providing a shrink allowance.

We write down inventory for estimated slow moving inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Impairment of long-lived assets

We periodically review the estimated useful lives of our depreciable assets and changes in useful lives are made on a prospective basis unless factors indicate the carrying amounts of the assets may not be recoverable and an impairment write-down is necessary. However, we review our long-lived assets for impairment once events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition is less than its carrying value. Measurement of an impairment loss for such long-lived assets is based on the difference between the carrying value and the fair value of the asset, with fair value being determined based upon discounted cash flows or appraised values, depending on the nature of the asset. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. During fiscal 2019, the Company recorded impairment charges on long-lived assets of $0.1 million associated with the projected operating performance of a retail location. During fiscal 2018, the Company recorded impairment charges on long-lived assets of $2.8 million associated with the projected operating performance of a retail location and software impairment associated with a decision to modify the scope of the implementation of the Company’s new ERP. No impairment charges were recorded in fiscal 2017.

Inflation

The impact of inflation on our operations has not been significant to date.

Recent Accounting Pronouncements

See Note 2 (s) to the consolidated financial statements included in this Form 20-F.

Safe Harbor

See section entitled “Forward-Looking Information” at the beginning of this Annual Report on Form 20-F.

 

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Item 6. Directors, Senior Management and Employees

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information about our executive officers and directors, and their respective ages and positions as of June 1, 2019:

 

Name

    Age       

Position

Niccolò Rossi di Montelera

    46        Executive Chairman of the Board & Director

Jean-Christophe Bédos

    54        President, Chief Executive Officer & Director

Davide Barberis Canonico

    53        Director

Emily Berlin

    72        Director

Shirley A. Dawe

    72        Director

Frank Di Tomaso

    72        Director

Louis L. Roquet

    76        Director

Joseph F.X Zahra                

    63        Director

Pat Di Lillo

    57        Vice President, Chief Financial Officer

Maryame El Bouwab

    41        Vice President, Merchandising, Planning and Supply Chain

Miranda Melfi

    55        Vice President, Human Resources, Chief Legal Officer & Corporate Secretary

Aurélie Pépion

    38        Vice President, Omni-Channel Sales, Operations & Marketing

Directors

Niccolò Rossi di Montelera, age 46, was elected to the Company’s Board of Directors on September 23, 2010 and served as Vice-Chairman of the Company’s Board of Directors from June 2015 until being appointed Executive Chairman of the Board effective January 1, 2017. Mr. Rossi di Montelera’s term as a director of Birks Group expires in 2019. Mr. Rossi di Montelera was a consultant for Gestofi from August 2009 until December 31, 2016 and provided consulting services to the Company in the areas of new product and brand development in addition to being involved with the Company’s business development activities and strategic initiatives. From 2007 to 2009, he served as the Company’s Group Divisional Vice President responsible for product development, wholesale and e-commerce. From 2005 to 2006, he served as the Company’s Group Director responsible for product development. From 2002 to 2003, he worked at Regaluxe Investments SA and was responsible for the North American business development for Royale de Champagne and from 1999 to 2002 he was a Project Leader for Ferrero Group. He was a member of the Supervisory Board of Directors of Montrovest until June 30, 2012. Mr. Rossi di Montelera is the son of Dr. Rossi di Montelera, who was the Company’s Chairman of the Board until December 31, 2016, and is the brother-in-law of Mr. Carlo Coda-Nunziante who was the Company’s Vice President, Strategy until March 31, 2018.

Jean-Christophe Bédos, age 54, was appointed to the Company’s Board of Directors on April 19, 2012. He was the Company’s Chief Operating Officer from January 2012 to March 2012 and became the Company’s President and Chief Executive Officer on April 1, 2012. He became a director of Birks Group on April 19, 2012 and his term as a director expires in 2019. He has over 25 years of experience in merchandising, marketing, branding and product development in the global retail luxury sector. Mr. Bédos was President and Chief Executive Officer of French jeweler Boucheron from May 2004 to September 2011. Prior to that, he was the Managing Director of Cartier France from 2002 to 2004, and International Executive Manager alongside the President and Chief Executive Officer of Richemont International from 2000 to 2002. Mr. Bédos started his career in the jewelry industry at Cartier in 1988.

Davide Barberis Canonico, age 53, was elected to the Company’s Board of Directors in September 2013. Mr. Canonico’s term as a director of Birks Group expires in 2019. From January 1, 2016 until April 2018, Mr. Canonico was also the Chief Executive Officer of Autofil Yarn Ltd., a company in the textile industry supplying yarn to the automotive industry with manufacturing facilities in the United Kingdom and Bulgaria and was the Group Strategy Director from June 2015 to December 2015. From 1998 to March 2016, he was President and Chief Executive Officer of Manifattura di Ponzone S.p.A., an Italian family-owned company in the textile industry. From 2001 to 2015, he was also a member of the board of Sinterama S.p.A., a company in the textile industry with manufacturing facilities worldwide. He was a member of the Supervisory Board of Montrovest B.V. until April 2018.

 

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Emily Berlin, age 72, has been a member of the Company’s Board of Directors since November 2005. Ms. Berlin’s term as a director of Birks Group expires in 2019. She was a Senior Managing Director of Helm Holdings International from 2001 until December 2012, which was a member of a diversified privately owned group of companies operating principally in Central and South America where she focused principally on the banking and energy sectors. Since January 2013, Ms. Berlin has been a strategic consultant to SoEnergy International Inc., an affiliate of Helm Holdings International, operating in the energy sector. From 1974 to 2000, she was a member of the law firm Shearman & Sterling, becoming a partner in 1981.

Shirley A. Dawe, age 72, has been a member of the Company’s Board of Directors since 1999. Ms. Dawe’s term as a director of Birks Group expires in 2019. She is also a corporate director and has been President of Shirley Dawe Associates Inc., a Toronto-based management advisory company specializing in the retail sector since 1986. From 1969 to 1985, she held progressively senior executive positions with Hudson’s Bay Company. Her expertise in the retail sector led to her appointment on industry-specific public task forces and to academic and not-for-profit boards of directors. Her wide management and consumer marketing experience brought Ms. Dawe to the board of directors of numerous public and private companies in Canada and the U.S.

Frank Di Tomaso, age 72, was elected to the Company’s Board of Directors in September 2014. Mr. Di Tomaso’s term as a director of Birks Group expires in 2019. Mr. Di Tomaso is a corporate director. He has been a Chartered Professional Accountant since 1972. He was an audit and advisory partner at Raymond Chabot Grant Thornton LLP from 1981 to 2012 where he held the position of Managing Partner Audit – Public Companies until he retired in 2012. Mr. Di Tomaso also has been and currently is a member of a number of other public company corporate boards, namely Intertape Polymer Group Inc. and ADF Group Inc.

Louis L. Roquet, age 76, was appointed to the Company’s Board of Directors on May 11, 2016. Mr. Roquet’s term as a director of Birks Group expires in 2019. Mr. Roquet is the Chancellor and Chairman of the Board of Université de Montréal since June 2018. Mr. Roquet was previously a member of the Company’s Board of Directors from August 2007 to July 2014 before being appointed by the Québec Government to the position of Chairman of the Board of Investissement Québec in July 2014 from which he resigned on May 2, 2016. From 2012 to 2014, Mr. Roquet was Managing Director of Cevital Spa, a large Algerian manufacturer of food products. Mr. Roquet has served as General Manager of the City of Montréal from January 2010 to January 2012. From April 2004 to October 2009, he was President and Chief Operating Officer of Desjardins Venture Capital and was responsible for managing Desjardins’ venture capital funds together with those of Capital Régional and Coopératif Desjardins, a publicly-traded company established in 2001 with an authorized capitalization of $1.0 billion. From 2002 to 2004, Mr. Roquet served as President and General Manager of Société des alcools du Québec , Québec’s Liquor Board. Prior to 2002 he held the title of President and Chief Executive Officer of Investissement Québec, Secretary General of the City of Montréal and General Manager of Montréal Urban Community. He also serves as a director of numerous non-profit organizations.

Joseph F.X. Zahra, age 63, was appointed to the Company’s Board of Directors on November 9, 2016. Mr. Zahra’s term as a director of Birks Group expires in 2019. Mr. Zahra is a founding partner and director of SurgeAdvisory Limited, an advisory firm which focuses on strategy and transformation management, succession planning and boardroom coaching operating in Malta, since January 1, 2017. Prior thereto, he was a founding partner and managing director of MISCO, an independent consulting group operating in Malta, Cyprus and Italy from 1983 to 2016. Mr. Zahra also serves as director of several private, publicly-listed and regulated companies operating in the following industries: financial services (insurance and investment services), oil services, transportation, retail and hospitality. Mr. Zahra is also chairman of the board of directors of Forestals Investments Ltd. and of Multi Risk Ltd. and chairman of the audit committee of Corinthia Palace Hotel Co. Ltd., Medserv plc and member of the audit committee of United Finance plc. He also serves as chairman of the investment committee of Pendergardens Developments plc and of Multi Risk Indemnity Ltd. and is a member of the investment committee of Chasophie Group Limited. Mr. Zahra was director of the Central Bank of Malta from 1992 to 1996 and served as executive chairman of Bank of Valletta Plc from 1998 to 2004, Maltacom Plc in 2003 and Middlesea Insurance Plc from 2010 to 2012. Mr. Zahra was appointed as one of the five international auditors at the Prefettura per gli Affari Economici of the Holy See from 2010 to 2014 and was the president of the economic and administrative reform commission (COSEA) from 2013 to 2014 as well as the vice coordinator of the newly formed Council for the Economy of the Holy See since 2014.

Other Executive Officers

Pasquale (Pat) Di Lillo, age 57, is our Vice President, Chief Financial Officer and has been with Birks Group since January 2015. Prior to joining us, he was Senior Vice President, and Corporate Controller at SNC-Lavalin Group Inc., one of the world’s largest engineering and construction companies from May 2010 to December 2014 and was Vice-President, Taxation from August 2007 to May 2010. From October 1983 to August 2007, he was with KPMG LLP, where he was appointed a partner in 1995.

 

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Maryame El Bouwab, age 41, is our Vice President, Merchandising, Planning and Supply Chain. She has been with the Company since March 2013. Prior to her current position, she was the Company’s Vice President, Planning and Supply Chain from June 1, 2018 to September 30, 2018 and Vice President, Merchandise Planning from February 1, 2017 to May 31, 2018. From March 2013 to February 2017, she was the Company’s Director of Merchandise Planning. Prior to joining the Company, Ms. El Bouwab was, from 2005 to 2012, with Mexx Canada and Lucky Brand Jeans and held the position of Merchandising and Planning Manager.

Miranda Melfi, age 55, is our Vice President, Human Resources, Chief Legal Officer and Corporate Secretary and has been with Birks Group since April 2006. Prior to her current position, she was our Vice President, Legal Affairs and Corporate Secretary from April 2006 to September 2018. Prior to joining us, Ms. Melfi was with Cascades Inc., a publicly-traded pulp and paper company for eight years and held the position of Vice President, Legal Affairs, Boxboard Group. From 1994 to 1998, Ms. Melfi was Vice President, Legal Affairs and Corporate Secretary at Stella-Jones Inc., a publicly-traded wood products company, and from 1991 to 1994, practiced corporate, commercial and securities law with Fasken Martineau DuMoulin LLP.

Aurélie Pépion, age 38, is our Vice President, Omni-Channel Sales, Operations and Marketing, and has been with the Company since April 2018. Prior to her current position, she was our Vice President, Omni-Channel, Sales and Operations from April 2018 to September 2018. Prior to joining us, Ms. Pépion was the Managing Director Canada of Swarovski (Consumer Goods Business) from March 2016 to March 2018 and prior thereto, she held various positions with Swarovski since February 2009, namely, Director Multibrand (Europe, Middle East, Africa), Head of Retail Multibrand (France), Key Account Manager (France), and Watch Distribution Manager (France). Prior thereto, she was with Gucci Group Watches sales management from February 2007 to January 2009 and was a District Manager for Puig Prestige in 2005 and 2006.

COMPENSATION OF DIRECTORS AND OFFICERS

Director Compensation

During fiscal 2019, each director who was not an employee of the Company received an annual fee of USD$25,000 (approximately $33,000 in Canadian dollars) for serving on our Board of Directors, USD$1,500 (approximately $2,000 in Canadian dollars) for each Board meeting attended in person and USD$750 (approximately $1,000 in Canadian dollars) for each Board meeting attended by phone. The chairperson of each of the audit committee, compensation committee and corporate governance and nominating committee received an additional annual fee of USD$10,000, USD$8,000 and USD$5,000 (approximately $13,000, $10,500 and $6,500 in Canadian dollars) respectively. The members of each of the audit committee, compensation committee and corporate governance and nominating committee received an additional annual fee of USD$5,000, USD$4,000 and USD$2,500 (approximately $6,500, $5,250 and $3,275 in Canadian dollars), respectively, and the independent member of the executive committee received an additional annual fee of USD$4,000 (approximately $5,250 in Canadian dollars). The chairperson and any other members of any special independent committee of directors that may be established from time to time is entitled to receive compensation as may be determined by the Board of Directors for his or her service on such committee. Since September 2018 and every September thereafter, each director who is not an employee of the Company is entitled to receive deferred stock units equal to a value of USD$25,000 (approximately $33,000 in Canadian dollars). In November 2016, September 2017 and September 2018, each non-employee director received deferred stock units equal to a value of USD$10,000, USD$20,000 and USD$25,000 (approximately $13,000, $25,000 and $33,000 in Canadian dollars), respectively. In April 2014 and April 2015, 5,000 stock appreciation rights were granted to each non-employee director. In addition, in September 2014, 2,000 stock appreciation rights were granted to a new member of the Company’s Board of Directors. All directors were reimbursed for reasonable travel expenses incurred in connection with the performance of their duties as directors.

On November 15, 2016, the Company’s Board of Directors approved annual payments of €200,000 (approximately $303,000 in Canadian dollars) and €50,000 (approximately $76,000 in Canadian dollars) to Mr. Niccolò Rossi di Montelera for his role as Executive Chairman of the Board and Chairman of the Executive Committee, respectively, effective January 1, 2017.

Executive Compensation

We are a “foreign private issuer” under U.S. securities laws and not a reporting issuer under Canadian securities laws and are therefore not required to publicly disclose detailed individual information about executive compensation under U.S. securities laws to the extent that we comply with the rules of our home jurisdiction. As such, the executive compensation of our Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers are detailed in our Management Proxy Circular described below. Under the Canada Business Corporations Act, being the statute under which we were incorporated, we are required to provide certain information on executive compensation. The aggregate compensation paid by us to our five executive officers, and two executive officers that left, in fiscal 2019, was approximately $2,278,000 (annual salary).

 

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The summary compensation table regarding our Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers and the option/RSU grants and exercise of options/RSU tables in our Management Proxy Circular will be filed on Form 6-K with the SEC in connection with our 2019 Annual Meeting of Shareholders.

Birks Group Incentive Plans

The following plans make reference to stock prices, since BGI trades publicly on the NYSE American, all stock prices are denominated in U.S. dollars.

Long-Term Incentive Plan

In 2006, Birks Group adopted a Long-Term Incentive Plan to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants and to promote the success of Birks Group’s business. As of May 31, 2019, there were 110,000 cash-based stock appreciation rights exercisable by members of the Company’s Board of Directors and outstanding stock options to purchase 570,000 shares of the Company’s Class A voting shares granted to members of the Company’s senior management team under the Long-Term Incentive Plan. The stock appreciation rights outstanding as of May 31, 2019, under the Long-Term Incentive Plan, have a weighted average exercise price of $1.10 and the stock options outstanding as of May 31, 2019, under the Long-Term Incentive Plan have a weighted average exercise price of $1.05.

In general, the Long-Term Incentive Plan is administered by Birks Group’s Board of Directors or a committee designated by the Board of Directors (the “Administrator”). Any employee or consultant selected by the Administrator is eligible for any type of award provided for under the Long-Term Incentive Plan, except that incentive stock options may not be granted to consultants. The selection of the grantees and the nature and size of grants and awards are wholly within the discretion of the Administrator.

In the event of a change in control of Birks Group, the Administrator, at its sole discretion, may determine that all outstanding awards shall become fully and immediately exercisable and vested. In the event of dissolution or liquidation of Birks Group, the Administrator may, at its sole discretion, declare that any stock option or stock appreciation right shall terminate as of a date fixed by the Administrator and give the grantee the right to exercise such option or stock option right.

In the event of a merger or asset sale or other change in control, as defined by the Long-Term Incentive Plan, the Administrator may, in its sole discretion, take any of the following actions or any other action the Administrator deems to be fair to the holders of the awards:

 

 

Provide that all outstanding awards upon the consummation of such a merger or sale shall be assumed by, or an equivalent option or right shall be substituted by, the successor corporation or parent or subsidiary of such successor corporation;

 

Prior to the occurrence of the change in control, provide that all outstanding awards to the extent they are exercisable and vested shall be terminated in exchange for a cash payment equal to the change in control price; or

 

Prior to the occurrence of the change in control, provide for the grantee to have the right to exercise the award as to all or a portion of the covered stock, including, if so determined by the Administrator, in its sole discretion, shares as to which it would not otherwise be exercisable.

The Long-Term Incentive Plan authorized the issuance of 900,000 Class A voting shares, which consisted of authorized but unissued Class A voting shares. The Long-term Incentive Plan expired on February 10, 2016 and no further awards will be granted under this plan. However, this plan will remain effective until the outstanding awards issued thereunder terminate or expire by their terms.

 

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Omnibus Long-Term Incentive Plan

On August 15, 2016, the Board of Directors adopted the Company’s Omnibus Long-Term Incentive Plan (the “Omnibus LTIP”), and same was approved by the Company’s shareholders on September 21, 2016. Under the Omnibus LTIP, the Company’s directors, officers, senior executives and other employees of the Company or one of its subsidiaries, consultants and service providers providing ongoing services to the Company and its affiliates may from time-to-time be granted various types of compensation awards, as same are further described below. The Omnibus LTIP is meant to replace the Company’s former equity awards plans. A total of 1,000,000 shares of the Company’s Class A voting shares are reserved for issuance under the Omnibus LTIP. In no event shall the Company issue Class A voting shares, or awards requiring the Company to issue Class A voting shares, pursuant to the Omnibus LTIP if such issuance, when combined with the Class A voting shares issuable upon the exercise of awards granted under the Company’s former plan or any other equity awards plan of the Company, would exceed 1,796,088 Class A voting shares, unless such issuance of Class A voting shares or awards is approved by the shareholders of the Company. This limit shall not restrict however, the Company’s ability to issue awards under the Omnibus LTIP that are payable other than in shares. As of May 31, 2019, the only awards outstanding under the Omnibus LTIP were 257,005 deferred stock units granted to members of the Company’s Board of Directors, 102,000 restricted stock units granted to members of the Company’s senior management team and 168,000 Class A voting shares underlying options granted to members of the Company’s senior management team.

Birks Employee Stock Option Plan

Effective May 1, 1997, Birks adopted an Employee Stock Option Plan (the “Birks ESOP”) designed to attract and retain the services of selected employees or non-employee directors of Birks or its affiliates who are in a position to make a material contribution to the successful operation of its business. The Birks ESOP was amended as of June 20, 2000. Effective as of November 15, 2005, no awards will be granted under the Birks ESOP. However, the Birks ESOP will remain in effect until the outstanding awards thereunder terminate or expire by their terms. As of May 31, 2019, there were 3,060 Class A voting shares underlying options granted under the Birks ESOP at a weighted average exercise price of $1.05 per share.

 

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BOARD PRACTICES

Our by-laws state that the Board of Directors will meet immediately following the election of directors at any annual or special meeting of the shareholders and as the directors may from time to time determine. See “Item 10. Additional Information—Articles of Incorporation and By-laws.”

Under our Restated Articles of Incorporation, our directors serve one-year terms although they will continue in office until successors are appointed. None of the members of our Board has service agreements providing for benefits upon termination of employment, except for Mr. Bédos, our President and Chief Executive Officer. See “Item 10. Additional Information—Material Contracts—Employment Agreements.”

Our Board of Directors has determined that five of our eight directors (Emily Berlin, Shirley A. Dawe, Frank Di Tomaso, Louis L. Roquet and Joseph F.X Zahra) qualify as independent directors within the meaning of Section 803A of the NYSE American Company Guide.

All of the directors on our Compensation, Corporate Governance and Audit committees are independent. We are a “controlled company” (one in which more than 50% of the voting power is held by an individual, a group or another company) within the meaning of the rules of the NYSE American. Accordingly, we are not required under the NYSE American rules to have a majority of independent directors, a nominating and corporate governance committee and a compensation committee (each of which, under the NYSE American rules, would otherwise be required to be comprised entirely of independent directors). Since November 2005, our Board of Directors has been comprised of a majority of independent directors, except for (i) fiscal year 2013 following the appointment of Mr. Bédos, our President and Chief Executive Officer, as an additional director of the Company, during which period our Board of Directors was comprised of 50% independent directors, (ii) part of fiscal year 2015 following the 2014 annual shareholder meeting where four of the Company’s eight directors qualified as independent directors, (iii) part of fiscal year 2016 following the resignation of Mr. Guthrie J. Stewart in December 2015 until the appointment of Mr. Louis L. Roquet in May 2016, and (iv) part of fiscal year 2017 until the appointment of Mr. Joseph F.X. Zahra, during which period our Board of Directors was comprised of a majority of non-independent directors.

Notwithstanding the fact that we qualify for the “controlled company” exemption, we maintain a Corporate Governance and Nominating Committee and a Compensation Committee comprised solely of independent directors.

During fiscal 2019, our Board of Directors held a total of eight board of directors meetings and eighteen committee meetings. During such period, all of the directors attended 100% of the meetings of the Board of Directors except for one member who attended 88% of these meetings.

Our Board of Directors is supported by committees, which are working groups that analyze issues and provide recommendations to the Board of Directors regarding their respective areas of focus. The executive officers interact periodically with the committees to address management issues. During fiscal 2019, our Board of Directors was composed of the four main committees below. The Board of Directors may from time to time also create special committees of the Board as needed.

1. Audit Committee. We have a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The audit committee operates under a written charter adopted by the Board of Directors. The audit committee reviews the scope and results of the annual audit of our consolidated financial statements conducted by our independent auditors, the scope of other services provided by our independent auditors, proposed changes in our financial accounting standards and principles, and our policies and procedures with respect to its internal accounting, auditing and financial controls. The audit committee also examines and considers other matters relating to our financial affairs and accounting methods, including selection and retention of our independent auditors. During fiscal 2019, the audit committee held four meetings. During such period, all the members of the audit committee attended 100% of these meetings, except for one member who attended 75% of these meetings. During fiscal year 2019, the audit committee was comprised of Frank Di Tomaso (Chair), Emily Berlin, Louis L. Roquet and Joseph F.X. Zahra, each of whom was financially literate and an independent (as defined by the NYSE American listing standards and SEC rules), non-employee director of the Company. We have determined that Frank Di Tomaso is an “audit committee financial expert” as this term is defined under SEC rules. Neither the SEC nor the NYSE American requires us to designate an “audit committee financial expert”. A copy of the audit committee charter is available on the Company’s website at www.birks.com.

 

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2. Compensation Committee. We have a standing compensation committee. The compensation committee operates under a written charter adopted by the Board of Directors. The purpose of the compensation committee is to recommend to the Board of Directors (i) director compensation and (ii) executive compensation, including base salaries, bonuses and long-term incentive awards for the Chief Executive Officer and certain other executive officers of Birks Group. The compensation committee also establishes criteria for goals and objectives for variable compensation, evaluates the performance of the Chief Executive Officer on an annual basis and provides recommendations to the Board of Directors regarding Chief Executive Officer and senior management succession plans. Certain decisions regarding compensation of certain other executive officers are reviewed by the compensation committee. During fiscal 2019, the compensation committee held six meetings and all of the members of the compensation committee attended 100% of these meetings during such period. During fiscal 2019, the compensation committee was comprised of Shirley A. Dawe (Chair), Frank Di Tomaso and Louis L. Roquet. Each member of the compensation committee is an independent (as defined by the NYSE American listing standards), non-employee director of the Company.

3. Corporate Governance and Nominating Committee. The corporate governance and nominating committee is responsible for overseeing all aspects of our corporate governance policies. The corporate governance and nominating committee is also responsible for the oversight and review of all related party transactions and for nominating potential nominees to the Board of Directors. Our policy with regard to the consideration of any director candidates recommended by a shareholder is that we will consider such candidates and evaluate such candidates by the same process as candidates identified by the corporate governance and nominating committee. During fiscal 2019, the corporate governance and nominating committee held four meetings and all members of the corporate governance and nominating committee attended 100% of these meetings during such period. Our corporate governance and nominating committee is comprised of three directors and operates under a written charter adopted by the Board of Directors. During fiscal 2019, the corporate governance and nominating committee was comprised of: Emily Berlin (Chair), Shirley Dawe, and Frank Di Tomaso. Every member of the corporate governance and nominating committee is an independent (as defined by the NYSE American listing standards), non-employee director of Birks Group.

4. Executive Committee. We have a standing executive committee. The executive committee operates under a written charter adopted by the Board of Directors. The purpose of the executive committee is to provide a simplified review and approval process in between meetings of the Board of Directors for certain corporate actions. The intent of the executive committee is to facilitate our efficient operation with guidance and direction from the Board of Directors. The goal is to provide a mechanism that can assist in our operations, including but not limited to monitoring the implementation of policies, strategies and programs. In addition, the executive committee’s mandate is to assist the Board with respect to the development, continuing assessment and execution of the Company’s strategic plan. The executive committee is comprised of at least three members of the Board of Directors. Vacancies on the committee are filled by majority vote of the Board of Directors at the next meeting of the Board of Directors following the occurrence of the vacancy. During fiscal year 2019, the executive committee consisted of: Niccolò Rossi di Montelera (Chair), Jean-Christophe Bédos, Davide Barberis Canonico, Louis L. Roquet and Joseph F.X. Zahra. For fiscal 2019, the executive committee held six meetings. All of the members of the executive committee attended 100% of these meetings during such period. Messrs. Roquet and Zahra are independent, non-employee directors of the Company.

 

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EMPLOYEES

As of March 30, 2019, we employed 341 persons. None of our employees are governed by a collective bargaining agreement with a labor union. We believe our relations with our employees are good and we intend to continue to place an emphasis on recruiting, training, retraining and developing the best people in our industry.

Retail employees include only those employees within our retail selling locations, while administration includes all other activities including corporate office, merchandising, supply chain operations and wholesale sales. The table below sets forth headcount by category for our continuing operations in the periods indicated.

 

               Total            

  As of March 30, 2019:

  

  Administration

     123             

  Retail

     218             
  

 

 

 

 Total

     341             
  

 

 

 

  As of March 31, 2018:

  

  Administration

     124             

  Retail

     224             
  

 

 

 

 Total

     348             
  

 

 

 

  As of March 25, 2017:

  

  Administration

     135             

  Retail

     224             
  

 

 

 

 Total

     359             
  

 

 

 

 

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SHARE OWNERSHIP

The following table sets forth information regarding the beneficial ownership of our Class A voting shares as of May 31, 2019, based on 10,242,911 Class A voting shares, by each executive officer and each director:

 

Name of Beneficial Owner

   Number of Class A
Voting Shares
                        Beneficially Owned                         
     Percentage of
  Beneficially Owned  
 

Niccolò Rossi di Montelera

     —                          —        

Jean-Christophe Bédos(1)

     416,666                          4.1%        

Davide Barberis Canonico

     —                          —        

Shirley A. Dawe(2)

     1,545                          *        

Emily Berlin(3)

     46,952                          *        

Frank Di Tomaso

     —                          —        

Louis L. Roquet

     —                          —        

Joseph F.X. Zahra

     —                          —        

Pat Di Lillo(4)

     77,333                          *        

Maryame El-Bouwab

     —                          —        

Miranda Melfi(5)

     85,000                          *        

Aurélie Pépion

 

     —                          —        

 

* Less than 1%.

 

(1)

Includes (a) an option to purchase 150,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.04 per share and which expires on January 4, 2022; (b) an option to purchase 100,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$0.84 per share and which expires on April 18, 2023, and (c) an option to purchase 100,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019 at a price of USD$0.78 per share and which expires on September 16, 2025; and (d) an option to purchase 100,000 Class A voting shares, of which 66,666 shares are exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.43 per share and which expires on November 15, 2026.

(2)

Includes 1,545 Class A voting shares.

(3)

Includes 46,952 Class A voting shares.

(4)

Includes (a) an option to purchase 50,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.94 per share and which expires on January 5, 2025; (b) an option to purchase 10,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$0.78 per share and which expires on September 16, 2025, and (c) an option to purchase 26,000 Class A voting shares, of which 17,333 are exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.43 per share and which expires on November 15, 2026.

(5)

Includes (a) an option to purchase 15,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.25 per share and which expires on September 23, 2020; (b) an option to purchase 10,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$0.89 per share and which expires on November 14, 2022; (c) an option to purchase 25,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.66 per share and which expires on September 12, 2023; (d) an option to purchase 25,000 Class A voting shares, currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$0.78 per share and which expires on September 16, 2025; and (e) an option to purchase 15,000 Class A voting shares, of which 10,000 shares are currently exercisable or exercisable within 60 days of May 31, 2019, at a price of USD$1.43 per share and which expires on November 15, 2026.

For arrangements involving the issuance or grant of options or shares of the Company to such named executive officers and other employees, see above under the heading “Compensation of Directors and Officers” and Item 10. “Additional Information—Material Contracts—Employment Agreements.”

 

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Item 7. Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

The following table sets forth information regarding the beneficial ownership of our Class A voting shares as of May 31, 2019 by each person or entity who beneficially owns 5% or more of outstanding voting securities, including the Class A voting shares and/or Class B multiple voting shares. The major shareholders listed with Class B multiple voting shares are entitled to ten votes for each Class B multiple voting share held, whereas holders of Class A voting shares are entitled to one vote per Class A voting share held. Unless otherwise indicated in the table, each of the individuals named below, to the Company’s knowledge, has sole voting and investment power with respect to the voting shares beneficially owned by them. The calculation of the percentage of outstanding shares is based on 10,242,911 Class A voting shares and 7,717,970 Class B multiple voting shares outstanding on May 31, 2019, adjusted where appropriate, for shares of stock beneficially owned but not yet issued.

Beneficial ownership is determined under rules issued by the SEC. Under these rules, beneficial ownership includes any of the Class A voting shares or Class B multiple voting shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days through the exercise of any warrant, stock option or other right. The inclusion in this Annual Report of such voting shares, however, does not constitute an admission that the named individual is a direct or indirect beneficial owner of such voting shares. The voting shares that a person has the right to acquire within 60 days of May 31, 2019 are deemed outstanding for the purpose of calculating the percentage ownership of such person, but are not deemed outstanding for the purpose of calculating the percentage owned by any other person listed. For information regarding entities or persons that directly or indirectly control us, see “Item 3. Key Information – Risk Factors – Risks Related to the Company.”

 

      Name of Beneficial Owner(1)

   Number of Class A
Voting Shares
      Beneficially Owned      
       Percentage of Beneficially  
Owned
 

The Grande Rousse Trust(2)

     13,646,692              76.0%                  

Meritus Trust Company Limited(3)

     13,646,692              76.0%                  

Montel Sàrl(4)

     8,846,692              63.4%                  

Mangrove Holding S.A.(5)

     4,800,000              33.7%                  

 

 

(1)

Unless otherwise noted, each person has sole voting and investment power over the shares listed opposite its name.

(2)

Includes 13,646,692 Class A voting shares, of which 7,717,970 Class A voting shares to which Montel Sàrl (“Montel” previously Montrovest B.V. (“Montrovest”)) and Mangrove Holding S.A. (“Mangrove”) collectively would be entitled upon conversion of the Class B multiple voting shares held by Montel and Mangrove collectively. The Class B multiple voting shares entitle the holder to ten votes for each Class B multiple voting share held and each Class B multiple voting share is convertible into one Class A voting share. The shares held by Montel and Mangrove collectively are beneficially owned by The Grande Rousse Trust. Montrovest merged with its parent company, Montel, on August 31, 2018 (the “Montrovest Merger”), and as such, all of the shares hel by Montrovest at the time of the Montrovest Merger are now held by Montel. Confido Limited has the power to remove the trustee of The Grande Rousse Trust. As a result, Confido Limited may be deemed to have beneficial ownership of the Class A voting Shares held by Montel or Mangrove.

(3)

Trustee of The Grande Rousse Trust. Includes 13,646,692 Class A voting shares, of which 7,717,970 Class A voting shares to which Montel and Mangrove collectively would be entitled upon conversion of the Class B multiple voting shares held by Montel and Mangrove collectively. The Class B multiple voting shares entitle the holder to ten votes for each Class B multiple voting share held and each Class B multiple voting share is convertible into one Class A voting share. The shares held by Montel and Mangrove collectively are beneficially owned by The Grande Rousse Trust. Meritus Trust Company Limited replaced Rohan Private Trust Company Limited as trustee of The Grande Rousse Trust on December 21, 2017.

(4)

Comprised of 8,846,692 Class A voting shares, of which 3,717,970 Class A voting shares, to which Montel would be entitled upon conversion of the Class B multiple voting shares held by Montel and Mangrove collectively. The Class B multiple voting shares entitle the holder to ten votes for each Class B multiple voting share held and each Class B multiple voting share is convertible into one Class A voting share.

(5)

Includes 4,800,000 Class A voting shares, of which 4,000,000 Class A voting shares to which Mangrove would be entitled upon conversion of the Class B multiple voting shares held by Mangrove. The Class B multiple voting shares entitle the holder to ten votes for each Class B multiple voting share held and each Class B multiple voting share is convertible into one Class A voting share. The Grande Rousse Trust is the sole shareholder of Mangrove.

As of May 31, 2019, there were a total of 174 holders of record of our Class A voting shares, of which 128 were registered with addresses in the United States. Such United States record holders were, as of such date, the holders of record of approximately 74% of our outstanding Class A voting shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees. None of our Class B multiple voting shares are held in the United States. Each Class B multiple voting share entitles the holder to ten (10) votes at all meetings of our shareholders (except meetings at which only holders of another specified class of shares are entitled to vote pursuant to the provisions of our restated articles or the Canada Business Corporations Act).

 

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RELATED PARTY TRANSACTIONS

Management Consulting Services Agreement

Effective January 1, 2016, the Company entered into a management consulting services agreement with Gestofi S.A. (“Gestofi”), all in accordance with the Company’s Code of Conduct relating to related party transactions. Under the management consulting services agreement, Gestofi provides the Company with services related to the obtaining of financing, mergers and acquisitions, international expansion projects, and such other services as the Company may request. Under the agreement, The Company paid an annual retainer of €140,000 (approximately $202,000 in Canadian dollars). The original term of the agreement was until December 31, 2016 and the agreement was automatically extended for successive terms of one year as neither party gave a 60 days’ notice of its intention not to renew. The yearly renewal of the agreement was subject to the review and approval of the Company’s corporate governance and nominating committee and the Board of Directors in accordance with the Company’s Code of Conduct relating to related party transactions. In November 2018, the agreement was renewed on the same terms and conditions except that the retainer was reduced to €40,000 (approximately $61,000 in Canadian dollars). In fiscal 2019, 2018, and 2017, the Company incurred expenses of €40,000, €115,000 and €140,000 (approximately $61,000, $173,000 and $202,000 in Canadian dollars) respectively under this agreement to Gestofi. In March 2019, the agreement was amended to (i) eliminate the yearly retainer and reimburse only the out-of-pocket expenses related to the services, and (ii) allow for a success fee to be mutually agreed upon between the Company and Gestofi in the event that financing or a capital raise is achieved.

Cash Advance Agreements

The Company has a cash advance outstanding from the Company’s controlling shareholder, Montel (formerly Montrovest), of USD$1.5 million (approximately $2 million in Canadian dollars) originally received in May 2009 from Montrovest. This cash advance was provided to the Company by Montrovest to finance working capital needs and for general corporate purposes. This advance and any interest thereon is subordinated to the indebtedness of the Company’s Credit Facility and Term Loan. This cash advance bears an annual interest rate of 11%, net of withholding taxes, representing an effective interest rate of approximately 12%, and is repayable upon demand by Montel once conditions stipulated in the Company’s Credit Facility permit such a payment. At March 30, 2019 and March 31, 2018, advances payable to Montel amounted to USD$1.5 million (approximately $2.0 million in Canadian dollars).

On July 28, 2017, the Company received a USD$2.5 million (approximately $3.3 million in Canadian dollars) loan from Montrovest, to finance its working capital needs. The loan bears interest at an annual rate of 11%, net of withholding taxes, representing an effective interest rate of approximately 12%, and is due and payable in two equal payments of USD$1.25 million (approximately $1.55 million in Canadian dollars) in each of July 2018 and July 2019. During fiscal year 2019, USD$1.25 million (approximately $1.55 million in Canadian dollars) was repaid. The Company obtained a one year moratorium on principal repayments and as such the loan will become due in July 2020. At March 30, 2019 and March 31, 2018, loans payable to Montel amounted to USD$1.25 million and USD$2.5 million (approximately $1.7 million and $3.2 million in Canadian dollars) respectively.

Due to the Montrovest Merger, Montrovest’s separate legal existence ceased and as a result of such merger, all of the shares previously held by Montrovest are now held by Montel.

 

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Consulting Services Agreement

On June 30, 2009, our Company’s Board of Directors approved our Company entering into a consulting services agreement with Gestofi in accordance with our Company’s Code of Conduct relating to related party transactions. Under the agreement, Gestofi undertook to assign Mr. Niccolò Rossi di Montelera as the employee of Gestofi responsible for providing the consulting services. The consulting services relate to providing advice and assistance in (i) new product development and product brand collection assortment, (ii) strategic and business development projects and financial matters, (iii) the implementation of the Company’s strategy and planning, and (iv) such other services reasonably requested by our Chief Executive Officer or Chairman (collectively, the “Consulting Services”). The initial one-year term of the agreement began on August 1, 2009 and the agreement may be renewed for additional one-year terms. The agreement has been renewed yearly. The Consulting Services prior to June 2014, were provided to us for a fee of approximately $13,700 per month less any applicable taxes plus out of pocket expenses. In June 2014, upon the renewal of the agreement for an additional one-year term, the monthly fee changed to 13,000 Swiss francs (CAD$15,560). On August 1, 2015, an amended and restated consulting agreement was entered into on substantially the same terms and conditions until July 31, 2016. In June 2016, the agreement was renewed for an additional one-year term. In addition, in February 2015, our Board of Directors approved the payment of an annual fee of $12,500 in U.S dollars (approximately CAD$15,625) to Gestofi for services it provided in connection with the issuance and maintenance of a letter of credit for our benefit. The agreement as it relates to the Consulting Services provided by Mr. Niccolò Rossi di Montelera was terminated effective December 31, 2016. Mr. Niccolò Rossi di Montelera is a member of the Company’s Board of Directors and is the son of Dr. Rossi di Montelera, the Company’s former Chairman and a director and chairman of the board of Gestofi.

Reimbursement Letter Agreement

In accordance with the Company’s Code of Conduct related to related party transactions, in April 2011, the Company’s corporate governance and nominating committee and Board of Directors approved the reimbursement to Regaluxe Srl, of certain expenses, such as rent, communication, administrative support and analytical service costs, incurred in supporting the office of Dr. Lorenzo Rossi di Montelera, the Company’s then Chairman, and of Mr. Niccolò Rossi di Montelera, the Company’s Chairman of the Executive Committee and the Company’s current Executive Chairman of the Board, for the work performed on behalf of the Company, up to a yearly maximum of US$260,000 (approximately $340,000 in Canadian dollars). The yearly maximum was reduced to US$130,000 (approximately $170,000 in Canadian dollars). This agreement has been renewed annually and was renewed in March 2019 for an additional one-year term, except that the only services being reimbursed are for administrative support and analytical services costs. During fiscal 2019, 2018, and 2017, the Company incurred expenses of USD$127,000, USD$245,000, and USD$177,000 (approximately $167,000, $315,000 and $234,000 in Canadian dollars) respectively to Regaluxe Srl under this agreement.

Distribution Agreement

In April 2011, our corporate governance and nominating committee and Board of Directors approved the Company’s entering in a Wholesale and Distribution Agreement with Regaluxe Srl. Under the agreement, Regaluxe Srl is to provide services to the Company to support the distribution of the Company’s products in Italy through authorized dealers. The initial one-year term of the agreement began on April 1, 2011. Under this agreement, the Company pays Regaluxe Srl a net price for the Company’s products equivalent to the price, net of taxes, for the products paid by retailers to Regaluxe Srl less a discount factor of 3.5%. The agreement’s initial term was until March 31, 2012, and may be renewed by mutual agreement for additional one year terms. This agreement has been renewed annually and in March 2019, the agreement was renewed for an additional one-year term. During fiscal year 2019, fiscal 2018 and fiscal 2017, the Company did not make any payments to Regaluxe Srl under this agreement.

Advisory Consulting Services Agreement

On November 15, 2016, the Company’s Board of Directors approved entering into a consulting services agreement with Gestofi effective January 1, 2017. Under the agreement, Dr. Lorenzo Rossi di Montelera is providing advice and assistance on strategic and development projects and financial matters for a total fee of $50,000 in U.S dollars (approximately CAD$65,000) during the period from January to September 2017. In fiscal 2018, the Company paid US$33,333 (approximately CAD$43,000) in relation to this agreement. In fiscal 2017, the Company paid US$16,667 (approximately CAD$22,000) in relation to this agreement.

 

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Consulting Agreement

On March 28, 2018, the Company’s Board of Directors approved the Company’s entry into a consulting services agreement with Carlo Coda Nunziante effective April 1, 2018. Under the agreement, Carlo Coda Nunziante, the Company’s former Vice President, Strategy, is providing advice and assistance on the Company’s strategic planning and business strategies for a total annual fee, including reimbursement of out-of-pocket expenses of €146,801 (approximately $222,000 in Canadian dollars), net of applicable taxes. In fiscal 2019, the Company incurred charges of €153,000 (approximately $231,000 in Canadian dollars), including applicable taxes. This agreement has been renewed in March 2019 for an additional one-year term upon the same terms and conditions.

Item 8. Financial Information

Consolidated Financial Statements

See Item 18. “Financial Statements.”

Dividend Policy

For a discussion of our dividend policy, see Item 3. “Key Information—Dividends and Dividend Policy.”

Legal Proceedings

We are from time to time involved in litigation incident to the conduct of our business. Although such litigation is normally routine and incidental, it is possible that future litigation can result in large monetary awards for compensatory or punitive damages. We believe that no litigation that is currently pending or threatened will have a material adverse effect on our financial condition.

Significant Changes

No significant changes have occurred since the date of the annual financial statements included in this Annual Report.

Item 9. The Offer and Listing

TRADING MARKET

Effective November 15, 2005, our Class A voting shares were listed and began to trade on the NYSE American and are currently trading under the symbol “BGI.”

Item 10. Additional Information

ARTICLES OF INCORPORATION AND BY-LAWS

Our Restated Articles of Incorporation do not restrict the type of business that we may carry on. A copy of our Restated Articles of Incorporation were set out in the F-4 registration statement (File No. 333-126936) that was filed with the SEC on July 27, 2005 and subsequently amended on September 8, 2005, September 21, 2005 and September 29, 2005, and which we incorporate by reference. A copy of our By-law No. One is contained as an exhibit to the Form 20-F that we filed with the SEC on July 3, 2012, and which we incorporate by reference. Additionally, certain rights of our shareholders pursuant to our Restated Articles of Incorporation, our By-laws and the Canada Business Corporations Act were set out in the F-4 registration statement (File No. 333-126936) that was filed with the SEC on July 27, 2005, and which we incorporate by reference herein and we refer you to the headings therein entitled “Description of Birks Capital Stock” and “Comparison of Stockholder Rights.”

On April 19, 2012, our Board of Directors approved an amendment to our By-laws to, among other things, add the title and description of the Vice Chairman position, revise the declaration of dividends section of the By-laws, and add a banking and borrowing arrangements section to the By-laws. Under Canadian law, the amendment to our By-laws had to be ratified by the shareholders of the Company. At our 2012 Annual and Special Meeting of Shareholders, our shareholders ratified the amendment to our By-laws.

 

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On September 12, 2013, at our Annual Meeting of Shareholders, our shareholders approved articles of amendment to our Restated Articles of Incorporation to change our corporate name to Birks Group Inc. A copy of the articles of amendment is filed with our Annual Report on Form 20-F filed with the SEC on July 25, 2014.

On September 24, 2014, at our Annual Meeting of Shareholders, our shareholders approved articles of amendment to our Restated Articles of Incorporation to allow our board of directors, at any time and from time to time, to issue preferred shares for an aggregate consideration to be received by the Company of up to five million Canadian dollars ($5,000,000) which shall be subject to a 5% dividend limitation as contained in the Restated Articles of Incorporation. A copy of the articles of amendment is filed with our Annual Report on Form 20-F filed with the SEC on June 26, 2015.

MATERIAL CONTRACTS

We have not entered into any material contract other than in the ordinary course of business and other than those described below or in Items 4, 5, 7 and 19 of this Annual Report on Form 20-F.

Employment Agreements

Jean-Christophe Bédos

On January 4, 2012, we entered into an employment agreement, or the “Agreement”, with Jean-Christophe Bédos, who became the President & Chief Executive Officer effective April 1, 2012, and prior to that was our Chief Operating Officer. The Agreement provides Mr. Bédos with a base salary of $700,000 an annual cash bonus set at a minimum of $282,500 for fiscal year ended March 30, 2013, of which $141,250 was paid during fiscal 2012 and $141,250 was paid in fiscal 2014, an annual target cash bonus of 85% of base salary based on achievement of a targeted level of performance and performance criteria set by the Company, an option to purchase 150,000 shares of the Company’s Class A voting shares which vested over three years and other health and retirement benefits. Mr. Bédos’ base salary was increased to $730,000, and $750,000, effective October 1, 2015 and November 1, 2016, respectively. If Mr. Bédos is terminated without “cause” or resigns for “good reason,” as these terms are defined in the Agreement, the Agreement provides that Mr. Bédos will receive (i) any earned and accrued but unpaid base salary, (ii) up to 12 months of salary in lieu of further salary or severance payments, which may be increased by one additional month after five years of service for each additional year of service thereafter, up to a maximum of eighteen months after ten years of service, (iii) certain health benefits for the period that the severance will be payable in, and (iv) his bonus through the date of termination and up to twelve months average annual cash bonus (based on the average annual cash bonus paid to him over the previous three fiscal years). Mr. Bédos is prohibited from competing with us during his employment and for a period of twelve-months thereafter.

EXCHANGE CONTROLS

There are currently no laws, decrees, regulations or other legislation in Canada that restricts the export or import of capital or that affects the remittance of dividends, interest or other payments to non-resident holders of our securities other than withholding tax requirements. There is no limitation imposed by Canadian law or by our Restated Articles of Incorporation or our other organizational documents on the right of a non-resident of Canada to hold or vote our Class A voting shares, other than as provided in Investment Canada Act.

The Investment Canada Act requires notification and, in certain cases, advance review and approval by the federal minister of Innovation, Science and Economic Development of the acquisition by a “non-Canadian” of “control of a Canadian business”, all as defined in the Investment Canada Act. Generally, the threshold for review will be higher in monetary terms, and in certain cases an exemption will apply, for an investor ultimately controlled by persons who are WTO investors or trade agreement investors, in each case within the meaning of the Investment Canada Act. The Investment Canada Act also provides for review of investments in Canada, including by acquisition of the whole or part of any entity with operations in Canada, if the aforementioned Minister determines that such an investment may be injurious to national security.

 

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TAXATION

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF OWNING AND DISPOSING OF BIRKS CLASS A VOTING SHARES

The following discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the Code), applicable Treasury regulations, administrative rulings and pronouncements and judicial decisions currently in effect, all of which could change. Any change, which may be retroactive, could result in U.S. federal income tax consequences different from those discussed below. The discussion is not binding on the Internal Revenue Service, and there can be no assurance that the Internal Revenue Service will not disagree with or challenge any of the conclusions described below.

Except where specifically noted, the discussion below does not address the effects of any state, local or non-U.S. tax laws (or other tax consequences such as estate or gift tax consequences). The discussion below relates to persons who hold Birks Group Class A voting shares as capital assets within the meaning of Section 1221 of the Code. The tax treatment of those persons may vary depending upon the holder’s particular situation, and some holders may be subject to special rules not discussed below. Those holders would include, for example:

 

 

banks, insurance companies, trustees and mutual funds;

 

 

tax-exempt organizations;

 

 

financial institutions;

 

 

pass-through entities and investors in pass-through entities;

 

 

traders in securities who elect to apply a mark-to-market method of accounting;

 

 

broker-dealers;

 

 

holders who are not U.S. Holders (as defined below);

 

 

persons whose “functional currency” is not the U.S. dollar;

 

 

holders who are subject to the alternative minimum tax; and

 

 

holders of Birks Group Class A voting shares who own 5% or more of either the total voting power or the total value of the outstanding Class A voting shares of Birks Group.

Holders should consult their own tax advisors concerning the U.S. federal income tax consequences of the ownership of Birks Group Class A voting shares in light of their particular situations, as well as any consequences arising under the laws of any other taxing jurisdiction.

As used in this document, the term “U.S. Holder” means a beneficial holder of Birks Group Class A voting shares that is (1) an individual who is a U.S. citizen or U.S. resident alien, (2) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the U.S. or any political subdivision of the U.S., (3) an estate which is subject to U.S. federal income tax on its worldwide income regardless of its source or (4) a trust (x) that is subject to primary supervision of a court within the U.S. and the control of one or more U.S. persons as described in section 7701(a)(30) of the Code or (y) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

If a partnership holds Birks Group Class A voting shares, the U.S. federal income tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Partners of partnerships that hold Birks Group Class A voting shares should consult their tax advisors regarding the U.S. federal income tax consequences to them.

 

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Dividends and Distributions

Subject to the passive foreign investment company (PFIC) rules discussed below, the gross amount of dividends paid to U.S. Holders of our Class A voting shares, including amounts withheld to reflect Canadian withholding taxes, will be treated as dividend income to these U.S. Holders, to the extent paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. This income will be includable in the gross income of a U.S. Holder on the day actually or constructively received by the U.S. Holder. Dividends generally will not be eligible for the dividends received deduction allowed to corporations upon the receipt of dividends distributed by U.S. corporations.

Subject to certain conditions and limitations, Canadian withholding taxes on dividends may be treated as foreign taxes eligible for credit against a U.S. Holder’s U.S. federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on our Class A voting shares will be treated as income from sources outside the U.S. and generally will constitute “passive income.” Special rules apply to certain individuals whose foreign source income during the taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). U.S. Holders should consult their tax advisors to determine their eligibility to use foreign tax credits.

To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution first will be treated as a tax-free return of capital, causing a reduction in the adjusted basis of our Class A voting shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by the U.S. Holder on a subsequent disposition of the Class A voting shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange.

With respect to certain U.S. Holders who are not corporations, including individuals, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A “qualified foreign corporation” includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the U.S. Treasury determines to be satisfactory for these purposes and which includes an exchange of information program. U.S. Treasury guidance indicates that the current income tax treaty between Canada and the U.S. meets these requirements, and we believe we are eligible for the benefits of that treaty. In addition, a foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares that are readily tradable on an established securities market in the U.S. Our Class A voting shares, which are listed on the NYSE American, should be considered readily tradable on an established securities market in the U.S. Individuals that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of the trading status of our Class A voting shares. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. U.S. Holders should consult their own tax advisors regarding the application of these rules given their particular circumstances. The rules governing the foreign tax credit are complex. Certain U.S. Holders of our Class A voting shares may not be able to claim a foreign tax credit with respect to amounts withheld for Canadian withholding taxes. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

Sale or Exchange of Class A Voting Shares

For U.S. federal income tax purposes, subject to the rules relating to PFICs described below, a U.S. Holder generally will recognize taxable gain or loss on any sale or exchange of our Class A voting shares in an amount equal to the difference between the amount realized for our Class A voting shares and the U.S. Holder’s tax basis in such shares. This gain or loss will be capital gain or loss and generally will be treated as U.S. source gain or loss. Long-term capital gains recognized by certain U.S. Holders who are not corporations, including individuals, generally will be subject to a maximum rate of U.S. federal income tax of currently 23.8%, which includes the 3.8% Medicare surtax imposed by Section 1411 of the Code. The deductibility of capital losses is subject to limitations.

 

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Passive Foreign Investment Company

We believe that our Class A voting shares should not be treated as stock of a PFIC for U.S. federal income tax purposes, and we expect to continue our operations in such a manner that we will not be a PFIC. In general, a company is considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income. The 50% of value test is based on the average of the value of our assets for each quarter during the taxable year. If we own at least 25% by value of another company’s stock, we will be treated, for purposes of the PFIC rules, as owning our proportionate share of the assets and receiving our proportionate share of income of the other company. Based on the nature of our income, assets and activities, and the manner in which we plan to operate our business in future years, we do not expect that we will be classified as a PFIC for any taxable year.

If, however, we are or become a PFIC, U.S. Holders could be subject to additional U.S. federal income taxes on gain recognized with respect to our Class A voting shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred by the U.S. Holder under the PFIC rules.

Backup Withholding and Information Reporting

In general, information reporting requirements will apply to dividends in respect of our Class A voting shares or the proceeds received on the sale, exchange, or redemption of our Class A voting shares paid within the United States (and in certain cases, outside of the U.S.) to U.S. Holders other than certain exempt recipients (such as corporations), and a 24% backup withholding tax may apply to these amounts if the U.S. Holder fails to provide an accurate taxpayer identification number, to report dividends required to be shown on its U.S. federal income tax returns or, in certain circumstances, to comply with applicable certification requirements. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or credit against the U.S. Holder’s U.S. federal income tax liability, provided that the required information or appropriate claim for refund is furnished to the Internal Revenue Service in a timely manner.

Certain Information Reporting Obligations

Certain U.S. Holders are required to report their ownership of specified foreign financial assets, including stock or securities issued by non-U.S. entities, subject to exceptions, by including a completed IRS Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they own such assets. U.S. Holders are urged to consult their own tax advisors regarding information reporting requirements relating to the ownership of Class A voting shares.

MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR CLASS A VOTING SHARES

The following discussion is a summary of the material Canadian federal income tax considerations under the Income Tax Act (Canada) and the regulations adopted thereunder (referred to in this Form 20-F as the “Canadian Tax Act”) of the ownership of our Class A voting shares, generally applicable to holders of our Class A voting shares who, for purposes of the Canadian Tax Act and at all relevant times, are not (and are not deemed to be) resident in Canada, are the beneficial owners of our Class A voting shares, hold our Class A voting shares as capital property, deal at arm’s length, and are not affiliated, with Birks Group, and who do not use or hold (and are not deemed to use or hold) Class A voting shares in connection with carrying on business or part of a business in Canada (referred to in this Form 20-F as “Non-resident Holders”). This discussion does not apply to Non-resident Holders that are insurers that carry on an insurance business in Canada and elsewhere or an “authorized foreign bank” (as defined under the Canadian Tax Act).

This summary is based upon the current provisions of the Canadian Tax Act, the current provisions of the Canada-United States Income Tax Convention (1980), as amended, if applicable (referred to in this Form 20-F as the “Convention”), all specific proposals to amend the Canadian Tax Act publicly announced by the Minister of Finance of Canada prior to the date hereof (referred to in this Form 20-F as the “Tax Proposals”) and the current published administrative and assessing practices of the Canada Revenue Agency. This summary assumes that the Tax Proposals will be enacted substantially as proposed and does not otherwise take into account or anticipate any change in law or administrative and assessing practices, whether by legislative, governmental or judicial action, although no assurance can be given in these respects. This summary does not take into account or consider any provincial, territorial or foreign income tax legislation or considerations. For purposes of the Canadian Tax Act, all amounts relevant in computing a Non-resident Holder’s liability under the Canadian Tax Act must be computed in Canadian dollars. Amounts denominated in a currency other than Canadian dollars (including adjusted cost base and proceeds of disposition) must be converted into Canadian dollars based on the prevailing exchange rate at the relevant time.

 

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This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to Non-resident Holders of our Class A voting shares. Accordingly, Non-resident Holders of our Class A voting shares should consult their own tax advisors with respect to their particular circumstances.

Dividends on Our Class A Voting Shares

Dividends paid or credited (or deemed to have been paid or credited) on our Class A voting shares to a Non-resident Holder will be subject to Canadian withholding tax of 25% of the gross amount of those dividends (subject to reduction in accordance with an applicable income tax convention between Canada and the Non-resident Holder’s country of residence). In the case of a Non-resident Holder who is a resident of the U.S. for purposes of the Convention, is entitled to the benefits of the Convention (referred to in this Form 20-F as a “U.S. Holder”) and is the beneficial owner of the dividend, the rate of withholding tax will generally be reduced to 15% or, if the Non-resident Holder is a corporation that owns at least 10% of our voting shares, to 5%.

Disposition of Our Class A Voting Shares

A Non-resident Holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain realized by that Non-resident Holder on a disposition (or deemed disposition) of a Class A voting share, unless the Class A voting share constitutes “taxable Canadian property” (as defined in the Canadian Tax Act) of the Non-resident Holder at the time of disposition and the Non-resident Holder is not entitled to relief under an applicable income tax convention between Canada and the Non-resident Holder’s country of residence. If at the time of such disposition the Class A voting shares are listed on a “designated stock exchange” (which includes the NYSE American), the Class A voting shares will generally not constitute taxable Canadian property of a Non-resident Holder unless (A) at any time during the 60-month period that ends at the time the Class A voting shares are disposed of, both (i) 25% or more of the issued shares of any class of the capital stock of the Corporation were owned by or belonged to one or any combination of (a) the Non-resident Holder, (b) persons with whom the Non-resident Holder did not deal at arm’s length, and (c) partnerships in which the Non-resident Holder or a person referred to in (b) holds a membership interest, directly or indirectly, through one or more partnerships, and (ii) more than 50% of the fair market value of the Class A voting shares was derived, directly or indirectly, from one or any combination of real or immovable property situated in Canada, “Canadian resource properties”, “timber resource properties” (as such terms are defined under the Canadian Tax Act) or options in respect of, interests in, or civil law rights in, any such properties, or (B) the Class A voting shares are otherwise deemed to be taxable Canadian property. Generally, to the extent that the Class A voting share are no longer listed on a “designated stock exchange” at the time of their disposition, the above-listed criteria (with the exception of (i)) will apply to determine if the Class A voting shares are “taxable Canadian property”.

As long as Class A voting shares are listed on a “recognized stock exchange” (which includes the NYSE American), a Non-resident Holder who disposes of Class A voting shares that are taxable Canadian property will not be required to satisfy the obligations imposed under section 116 of the Canadian Tax Act.

DOCUMENTS ON DISPLAY

We file reports, including Annual Reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the following location of the SEC, Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Filings we make electronically with the SEC are also available to the public on the Internet at the SEC’s website at http://www.sec.gov.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We have not entered into derivative or other financial instruments for trading or speculative purposes.

Interest Rate Risk

We are exposed to market risk from fluctuations in interest rates. Borrowing under the credit facility and the term loan from Crystal Financial and the loans from Investissement Québec bear interest at floating rates, which are based on LIBOR, CDOR or prime plus a fixed additional interest rate. As of March 30, 2019, we have not hedged these interest rate risks. As of March 30, 2019, we had approximately $59.6 million of floating-rate debt. Accordingly, our net income will be affected by changes in interest rates. Assuming a 100 basis point increase or decrease in the interest rate under our floating rate debt, our interest expense on an annualized basis would have increased or decreased, respectively, by approximately $0.6 million.

 

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Currency Risk

The Company has changed its reporting currency in fiscal 2019 from U.S. dollars to Canadian dollars for the period commencing April 1, 2018 in order to better reflect the fact that subsequent to the Company’s divestiture of its former wholly-owned subsidiary, Mayor’s Jewelers Inc. on October 23, 2017, its business is primarily conducted in Canada, and a substantial portion of its revenues, expenses, assets, and liabilities are denominated in $CAD. The Company’s functional currency remains $CAD.

To mitigate the impact of foreign exchange volatility on our earnings, from time to time we may enter into agreements to fix the exchange rate of U.S. dollars to Canadian dollars. For example, we may enter into agreements to fix the exchange rate to protect the principal and interest payments on our U.S. dollar denominated debt and other liabilities held in our Canadian operation. If we do so, we will not benefit from any increase in the value of the Canadian dollar compared to the U.S. dollar when these payments become due. As of March 30, 2019, we had not hedged these foreign exchange rate risks. As of March 30, 2019, we had approximately $8.8 million of net liabilities subject to foreign exchange rate risk related to changes in the exchange rate between the U.S. dollar and Canadian dollar, which would impact the level of our earnings if there were fluctuations in U.S. and Canadian dollar exchange rate. Assuming a 100 basis point strengthening or weakening of the Canadian dollar in relationship to the U.S. dollar, as of March 30, 2019, our earnings would have increased or decreased, respectively, by approximately $0.1 million. This analysis does not consider the impact of fluctuations in U.S. and Canadian dollar exchange rates on the translation of Canadian dollar results into U.S. dollars. Changes in the exchange rates of Canadian dollars to U.S. dollars could also impact our Canadian sales and gross margin if the Canadian dollar strengthens significantly and impacts our Canadian consumers’ behavior.

Commodity Risk

The nature of our operations results in exposure to fluctuations in commodity prices, specifically diamonds, platinum, gold and silver. We do not currently use derivatives to hedge these risks. Our retail sales and gross margin could be materially impacted if prices of diamonds, platinum, gold or silver rise so significantly that our consumers’ behavior changes or if price increases cannot be passed onto our customers.

Item 12. Description of Securities Other than Equity Securities

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 30, 2019, our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), were effective.

 

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Management’s Annual Report on Internal Control over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statements preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this Annual Report based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on that assessment, our Chief Executive Officer and Chief Financial Officer concluded that as of March 30, 2019, our internal control over financial reporting was effective.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal controls over financial reporting. As a non-accelerated filer, our report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only our report on internal controls over financial reporting in this Annual Report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

The Board of Directors determined that Frank Di Tomaso, an independent director, meets the requirements to be designated an “audit committee financial expert” as such term is defined by the SEC. See “Item 6. Directors, Senior Management and Employees—Board Practices.”

Item 16B. Code of Ethics

We have adopted a code of ethics, within the meaning of this Item 16B of Form 20-F under the Exchange Act. Our code of ethics applies our Chief Executive Officer, Chief Financial Officer, and Controller. Our code of ethics is available on our website at www.birks.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address. We also have a similar code of ethics that applies to our financial directors. The Company has also adopted a Code of Conduct that applies to all employees of the Company.

Item 16C. Principal Accountant Fees and Services

During fiscal 2019 and fiscal 2018, we retained KPMG LLP, our independent registered public accountant, to provide services in the following categories and amounts:

 

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Audit Fees

The aggregate fees billed by KPMG LLP for professional services rendered for the audit and interim review of our consolidated financial statements was $373,500 in fiscal 2019 and $438,000 in fiscal 2018.

Audit Related Fees

During fiscal 2019 and 2018, KPMG LLP provided audit related services for a total amount of $2,850 and $5,000, respectively.

Tax Fees

During fiscal 2019 and fiscal 2018, KPMG LLP provided tax advisory services for a total amount of $13,450 and $28,000, respectively.

All Other Fees

During fiscal 2019 and fiscal 2018, KPMG LLP provided advisory services for a total amount of $1,500 and $4,000, respectively.

Pre-Approval Policies and Procedures

The audit committee has established a pre-approval policy as described in Rule 2-01(c)(7)(i) of Regulation S-X. The audit committee approves in writing, in advance, any audit or non-audit services provided to Birks Group by the independent accountants that are not specifically disallowed by the Sarbanes-Oxley Act of 2002. None of the services described in Item 16C were approved by the audit committee pursuant to Rule 2-01(c)(7)(i)(C).

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not, nor did any affiliated purchaser, purchase any of our equity securities during fiscal 2019.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

Our securities are listed on the NYSE American. There are no significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of that exchange except for proxy delivery requirements. The NYSE American requires the solicitation of proxies and delivery of proxy statements for all shareholder meetings, and requires that these proxies be solicited pursuant to a proxy statement that conforms to the proxy rules of the U.S. Securities and Exchange Commission. As a foreign private issuer, the Company is exempt from the proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the Act. The Company solicits proxies in accordance with applicable rules and regulations in Canada.

Item 16H. Mine Safety Disclosure

Not applicable.

Item 17. Financial Statements

Not applicable.

 

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Item 18. Financial Statements

The financial statements required by this item are found at the end of this Annual Report beginning on page F-1.

PART III

Item 19. Exhibits

The following exhibits are part of this Annual Report on Form 20-F.

 

Exhibit Number    Description of Document
1.1   

Restated Articles of Incorporation of Birks Group Inc., effective as of November 14, 2005. Incorporated by reference from the Henry Birks  & Sons Inc. Registration Statement on Form F-4 originally filed with the SEC on July 27, 2005 and as subsequently amended on September 8, 2005, September 21, 2005 and September 29, 2005.

1.2   

Articles of Amendment of Birks Group Inc., effective as of October 1, 2013. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 25, 2014.

1.3   

Articles of Amendment of Birks Group Inc. effective as of October 3, 2014. Incorporated by referenced from Birks Group Inc.’s Form 20-F filed with the SEC on June 26, 2015.

1.4   

By-law No. One of Birks Group Inc. adopted on December 28, 1998 and amended on April 9, 2012. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 3, 2012.

2.1   

Form of Birks Class  A voting share certificate as amended as of October 1, 2013. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 25, 2014.

4.1   

Agreement and Plan of Merger and Reorganization, dated as of April 18, 2005, as amended as of July 27, 2005, among Henry Birks & Sons Inc., Mayor’s, Inc. and Birks Merger Corporation, a wholly-owned subsidiary of Henry Birks & Sons Inc. Incorporated by reference from the Henry Birks & Sons Inc. Registration Statement on Form F-4 originally filed with the SEC on July 27, 2005 and as subsequently amended on September 8, 2005, September 21, 2005 and September 29, 2005.

4.2   

Form of Directors and Officers Indemnity Agreement. Incorporated by reference from the Henry Birks & Sons Inc. Registration Statement on Form F-4 originally filed with the SEC on July 27, 2005 and as subsequently amended on September 8, 2005, September 21, 2005 and September 29, 2005.

4.3   

Henry Birks & Sons Inc. Employee Stock Option Agreement, dated as of May 1, 1997, amended as of June 20, 2000. Incorporated by reference from the Henry Birks  & Sons Inc. Registration Statement on Form F-4 originally filed with the SEC on July 27, 2005 and as subsequently amended on September 8, 2005, September 21, 2005 and September 29, 2005.

4.4   

Henry Birks  & Sons Inc., Form of Amended Stock Option Agreement under the 1997 Stock Option Plan. Incorporated by reference from the Birks Group Inc. Schedule TO-1 filed with the SEC on March 18, 2010.

4.5   

Agreement of Principal Lease between 7739907 Canada Inc. and Birks Group Inc. executed on March 17, 2017. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on May 12, 2017.

4.6   

Employment Agreement between Miranda Melfi and Birks Group dated February 24, 2006. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.7   

Management Consulting Services Agreement between Birks Group Inc. and Gestofi S.A. entered into as of November 20, 2015. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on June 30, 2016.

 

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4.9   

Birks Group Inc. 2006 Employee Stock Purchase Plan. Incorporated by reference from Birks Group Inc.’s Form 20-F filed with the SEC on July 19, 2006.

4.10   

Birks Group Inc. Long-Term Incentive Plan. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.11   

Birks Group Inc. Omnibus Long-Term Incentive Plan. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on August 26, 2016.

4.12   

Warrant Agreement dated November 14, 2005 between Mayor’s Jewelers, Inc. and Carlo Coda-Nunziante. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.13   

Warrant Agreement dated November 14, 2005 between Mayor’s Jewelers, Inc. and Joseph A. Keifer. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.14   

Warrant Agreement dated November 14, 2005 between Mayor’s Jewelers, Inc. and Marco Pasteris. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.15   

Amended and Restated Warrant Agreement dated November 14, 2005 between Mayor’s Jewelers, Inc. and Henry Birks & Sons Inc. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.16   

Amended and Restated Warrant Agreement dated November 14, 2005 between Mayor’s Jewelers, Inc. and Henry Birks & Sons Inc. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.17   

Amended and Restated Warrant Agreement dated November 14, 2005 between Mayor’s Jewelers, Inc. and Henry Birks & Sons Inc. Incorporated by reference the from Birks Group Inc. Form 20-F filed with the SEC on July 19, 2006.

4.18   

Form of Stock Appreciation Rights Agreement. Incorporated by reference from the Birks Group Inc. Annual Report on Form 20-F filed with the SEC on June 18, 2007.

4.19   

Loan Agreement between Birks Group Inc. and Investissement Québec entered into on September 12, 2013. Incorporated by reference from the Birks Group Inc. Annual Report on Form 20-F filed with the SEC on July 25, 2014.

4.20   

Loan Agreement between Birks Group Inc. and Investissement Québec entered into on July 25, 2014. Incorporated by reference from the Birks Group Inc. Annual Report on Form 20-F filed with the SEC on June 26, 2015.

4.21   

Letter Agreement entered into on August 19, 2015 which amends the loan agreements between Birks Group Inc. and Investissement Québec. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on December 4, 2015.

4.22   

Letter Agreement entered into on November 19, 2015 which amends the loan agreements between Birks Group Inc. and Investissement Québec. Incorporated by reference from Birks Group Inc. Form 6-K filed with the SEC on December 4, 2015.

4.23   

Letter Agreement between Birks Group Inc. and Investissement Québec dated October 28, 2016 which amends the loan agreement between Birks Group Inc. and Investissement Québec. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on January 24, 2017.

 

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4.24   

Amended and Restated Cash Advance Agreement between Birks Group Inc. and Montrovest B.V., dated June 8, 2011. Incorporated by reference from the Birks Group Inc. Annual Report on Form 20-F filed with the SEC on July 8, 2011.

4.25   

Master Lease Agreement dated March 15, 2017 among Birks Group Inc., Mayors Jewelers of Florida, Inc. and Onset Financial, Inc. Incorporated by reference from the Birks Group Inc. Form 6-K filing with the SEC on May 12, 2017.

4.26   

Letter Agreement between Mayor’s Jewelers and Thomas A. Andruskevich, dated November 14, 2005. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-3 filed with the SEC on March 25, 2011.

4.27   

Letter Agreement between Mayor’s Jewelers and Filippo Recami, dated November 14, 2005. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-3 filed with the SEC on March 25, 2011.

4.28   

Letter Agreement between Mayor’s Jewelers and Joseph Keifer, dated November 14, 2005. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-3 filed with the SEC on March 25, 2011.

4.29   

Letter Agreement between Mayor’s Jewelers and Marco Pasteris, dated November 14, 2005. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-3 filed with the SEC on March 25, 2011.

4.30   

Letter Agreement between Mayor’s Jewelers and Carlo Coda-Nunziante, dated November 14, 2005. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-3 filed with the SEC on March 25, 2011.

4.31   

Employment Agreement between Birks Group Inc. and Jean-Christophe Bédos, dated January 4, 2012. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-1 filed with the SEC on April 27, 2012.

4.32   

Amendment Letter to Employment Agreement between Birks Group Inc. and Jean-Christophe Bédos dated April 18, 2013. Incorporated by reference from the Birks Group Inc. Annual Report on Form 20-F filed with the SEC on June 26, 2015.

4.33   

Amendment Letter to Employment Agreement between Birks Group Inc. and Jean-Christophe Bédos effective October 1, 2015. Incorporated by reference from the Birks Group Inc. Form 20-F filed with the SEC on June 30, 2016.

4.34   

Employment Agreement between Birks Group Inc. and Pasquale (Pat) Di Lillo, dated October 30, 2014. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on November 11, 2014.

4.35   

Canadian Offering Memorandum, dated as of April 27, 2012. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-1 filed with the SEC on April 27, 2012.

4.36   

Form of Subscription Rights Certificate. Incorporated by reference from the Birks Group Inc. Registration Statement on Form F-1 filed with the SEC on May 24, 2012.

4.37   

Employment Agreement between Aurelie Pepion and Birks Group Inc., dated as of April 2, 2018. Incorporated by reference from Birks Group Inc. Form 20-F filed with SEC on July 3, 2018.

4.42   

Consulting Services Agreement between Carlo Coda Nunziante and Birks Group Inc., dated March 31, 2018. Incorporated by reference from Birks Group Inc. Form 20-F filed with SEC on July 3, 2018.

4.43   

Stock Purchase Agreement entered into between Birks Group Inc., and Aurum Holdings. Ltd. dated August 11, 2017. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on August 11, 2017.

 

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4.44   

Credit Agreement by and among Wells Fargo Canada Corporation, as Administrative Agent, the lenders that are parties thereto as the Lenders, and Birks Group Inc. dated as of October 23, 2017. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on October 27, 2017.

4.45   

Amendment No.1 to the Credit Agreement by and among the lenders thereto as lenders, Wells Fargo Canada Corporation as administrative agent, and Birks Group Inc. dated June 29, 2018. Incorporated by reference from Birks Group Inc. Form 20-F filed with SEC on July 3, 2018.

4.46   

Credit Agreement by and among Crystal Financial LLC, as Agent, the lenders that are parties thereto as the Lenders, and Birks Group Inc. dated as of June 29, 2018.

4.47   

Employment Agreement dated June 29, 2018 entered into between Birks Group Inc. and Maryame El Bouwab. Incorporated by reference from the Birks Group Inc. Form 6-K filed with the SEC on July 13, 2018.

8.1*   

Subsidiaries of Birks Group Inc.

12.1*   

Certification of President and Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

12.2*   

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

13.1*   

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2*   

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

15.1*   

Consent of KPMG LLP.

101.INS*   

XBRL Instance Document*

101.SCH*   

XBRL Taxonomy Extension Schema Document*

101.CAL*   

XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF*   

XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB*   

XBRL Taxonomy Extension Label Linkbase Document*

101.PRE*   

XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith.

 

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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.

 

  

BIRKS GROUP INC.

Date: June 21, 2019

  

/s/ Pasquale (Pat) Di Lillo

    

     Pasquale (Pat) Di Lillo,
     Vice President, Chief Financial Officer

 

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INDEX TO FINANCIAL STATEMENTS

 

      Page   

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Balance Sheets as of March 30, 2019 and March  31, 2018

     F-3  

Consolidated Statements of Operations for the Fiscal Years Ended March  30, 2019, March 31, 2018, and March 25, 2017

     F-4  

Consolidated Statements of Other Comprehensive Income (loss) for the Fiscal Years Ended March 30, 2019, March 31, 2018, and March 25, 2017

     F-5  

Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended March 30, 2019, March 31, 2018, and March 25, 2017

     F-6  

Consolidated Statements of Cash Flows for the Fiscal Years Ended March  30, 2019, March 31, 2018, and March 25, 2017

     F-7  

Notes to Consolidated Financial Statements

     F-8  

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Birks Group Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Birks Group Inc. (the “Company”) as of March 30, 2019 and March 31, 2018, the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years ended March 30, 2019, March 31, 2018, and March 25, 2017, and the related notes (collectively the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 30, 2019 and March 31, 2018, and the results of its operations and its cash flows for the years ended March 30, 2019, March 31, 2018, and March 25, 2017, in conformity with in United States generally accepted accounting principles.

Change in Accounting Policy

As discussed in Note 1 to the consolidated financial statements, the Company has elected to change its reporting currency from U.S. dollars to Canadian dollars and the change in policy is accounted for retrospectively.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ KPMG LLP*

We have served as the Company’s auditor since 2000.

Montreal, Canada
June 20, 2019

 

*CPA auditor, CA, public accountancy permit No. A125211

 

KPMG LLP is a Canadian limited liability partnership and a

member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG

 

International”), a Swiss entity. KPMG Canada provides services to

KPMG LLP

 

F-2


Table of Contents

BIRKS GROUP INC.

Consolidated Balance Sheets

 

     As of
     March 30, 2019   March 31, 2018*
     (In thousands)

Assets

    

Current assets:

    

Cash and cash equivalents

     $ 1,179       $ 1,005  

Accounts receivable and other receivables

     3,537       5,845  

Inventories

               91,541                 84,827  

Prepaids and other current assets

     2,142       4,929  
  

 

 

 

 

 

 

 

Total current assets

     98,399       96,606  

Property and equipment

     29,727       19,426  

Long-term receivables

     1,266       365  

Intangible assets and other assets

     4,403       3,878  
  

 

 

 

 

 

 

 

Total non-current assets

     35,396       23,669  
  

 

 

 

 

 

 

 

Total assets

     $ 133,795       $ 120,275  
  

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Bank indebtedness

     $ 47,021       $ 36,925  

Accounts payable

     33,264       26,364  

Accrued liabilities

     9,657       7,496  

Current portion of long-term debt

     993       3,372  
  

 

 

 

 

 

 

 

Total current liabilities

     90,935       74,157  

Long-term debt

     16,111       4,838  

Other long-term liabilities

     12,966       8,803  
  

 

 

 

 

 

 

 

Total long-term liabilities

     29,077       13,641  

Stockholders’ equity:

    

Class A common stock – no par value,

unlimited shares authorized, issued and outstanding 10,242,911

     35,593       35,593  

Class B common stock – no par value,

unlimited shares authorized, issued and outstanding 7,717,970

     57,755       57,755  

Preferred stock – no par value,

unlimited shares authorized, none issued

     -       -  

Additional paid-in capital

     19,120       19,042  

Accumulated deficit

     (98,473     (79,787

Accumulated other comprehensive loss

     (212     (126
  

 

 

 

 

 

 

 

Total stockholders’ equity

     13,783       32,477  
  

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

     $ 133,795       $ 120,275  
  

 

 

 

 

 

 

 

(*) Recast (refer to note 1)

See accompanying notes to consolidated financial statements

On behalf of the Board of Directors:

 

/s/ Jean-Christophe Bédos     /s/ Frank Di Tomaso
Jean-Christophe Bédos, Director     Frank Di Tomaso, Director

 

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BIRKS GROUP INC.

Consolidated Statements of Operations

 

     Fiscal Year Ended
          March 30, 2019        March 31, 2018*         March 25, 2017*     
     (In thousands, except per share amounts)

Net sales

     $     151,049       $     146,608       $     152,992  

Cost of sales

     92,472       90,915       91,460  
  

 

 

 

 

 

 

 

 

 

 

 

Gross profit

     58,577       55,693       61,532  

Selling, general and administrative expenses

     67,106       66,754       61,599  

Restructuring charges

     1,182       894       897  

Depreciation and amortization

     3,859       3,264       3,428  

Impairment of long-lived assets

     46       2,788       -  
  

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

     72,193       73,700       65,924  
  

 

 

 

 

 

 

 

 

 

 

 

Operating loss

     (13,616     (18,007     (4,392

Interest and other financial costs

     4,689       3,988       4,467  
  

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

     (18,305     (21,995     (8,859

Income taxes (benefits)

     -       -       -  
  

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

     (18,305     (21,995     (8,859

Discontinued operations:

      

(Loss) income from discontinued operations, net of tax

     (381     (1,592     15,934  

Gain on disposal of discontinued operations

     -       37,682       -  
  

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from discontinued operations, net of tax

     (381     36,090       15,934  
  

 

 

 

 

 

 

 

 

 

 

 

      
  

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

     $ (18,686     $ 14,095       $ 7,075  
  

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

      

Basic

     17,961       17,961       17,961  

Diluted

     17,961       18,393       18,418  

Net (loss) income per common share:

      

Basic

     $ (1.04     $ 0.7     $ 0.3

Diluted

     (1.04     0.7     0.3

Net (loss) income from continuing operations per common share:

      

Basic

     $ (1.02     $ (1.2 2)      $ (0.4 9) 

Diluted

     (1.02     (1.2 0)      (0.4 8) 

(*) Recast (refer to note 1)

See accompanying notes to consolidated financial statements

 

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BIRKS GROUP INC.

Consolidated Statements of Other Comprehensive Income (loss)

 

     Fiscal Year Ended  
             March 30, 2019              March 31, 2018*              March 25, 2017*  
    

 

(In thousands)

 

Net (loss) income

     $ (18,686)         $ 14,095          $ 7,075    

Other comprehensive (loss) income:

        

Foreign currency translation adjustments (1)

     (86)         907          10    
  

 

 

    

 

 

    

 

 

 

Total other comprehensive (loss) income

     $ (18,772)         $ 15,002          $ 7,085    
  

 

 

    

 

 

    

 

 

 

 

  (1)

Item that may be reclassified to the Statement of Operations in future periods

(*) Recast (refer to note 1)

See accompanying notes to consolidated financial statements.

 

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BIRKS GROUP INC.

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands of dollars except shares amounts)

 

     Voting common     
stock     
  outstanding       
        Voting      
common      
  stock        
        Additional  
  paid-in capital    
            Accumulated  
deficit
       Accumulated         
other         
  comprehensive          
loss         
          Total

Balance at March 26, 2016*

     17,960,881                         93,348        $          18,855        $          (100,957   $          (1,043)        $                  10,203  

Net income

               –             –             7,075          –              7,075  

Cumulative translation adjustment(1)

               –             –                      10              10  
                               

 

 

 

Total comprehensive loss

               –             –                      –              7,085  

Compensation expense resulting from stock options granted to Management

               –             205                      –              205  
  

 

 

 

     

 

 

 

     

 

 

       

 

 

 

    

 

 

       

 

 

 

Balance at March 25, 2017*

     17,960,881      $          93,348        $          19,060        $          (93,882   $          (1,033)        $          17,493  

Net income

               –             –             14,095          –              14,095  

Cumulative translation adjustment(1)

               –             –                      907              907  
                               

 

 

 

Total comprehensive income

               –             –                      –              15,002  

Re-classification to Net income from discontinued operations

                        (193)                       (193

Compensation expense resulting from stock options granted to Management

               –             175                      –              175  
  

 

 

 

     

 

 

 

     

 

 

       

 

 

 

    

 

 

       

 

 

 

Balance at March 31, 2018*

     17,960,881      $          93,348        $          19,042        $          (79,787   $          (126)        $          32,477  

Net loss

               –             –             (18,686        –              (18,686

Cumulative translation adjustment(1)

               –             –                      (86)             (86
                               

 

 

 

Total comprehensive loss

               –             –                      –              (18,772

Compensation expense resulting from stock options and stock appreciation rights granted to Management

               –             78                      –              78  
  

 

 

 

     

 

 

 

     

 

 

       

 

 

 

    

 

 

       

 

 

 

Balance at March 30, 2019

     17,960,881      $          93,348        $          19,120        $          (98,473   $          (212)        $          13,783  
  

 

 

 

     

 

 

 

     

 

 

       

 

 

 

    

 

 

       

 

 

 

 

  (1)

The change in cumulative translation adjustments is not due to reclassifications out of accumulated other comprehensive income (loss).

(*) Recast (refer to note 1)

See accompanying notes to consolidated financial statements.

 

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BIRKS GROUP INC.

Consolidated Statements of Cash Flows

 

     Fiscal Year Ended
          March 30, 2019           March 31, 2018*          March 25, 2017*   
     (In thousands)

Cash flows (used in) from operating activities:

      

Net (loss) income attributable to owners of the Company

       $ (18,686       $ 14,095         $ 7,075  

Net (loss) income from discontinued operations

     (381     36,090       15,934  
  

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

     (18,305     (21,995     (8,859

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

      

Depreciation and amortization

         3,859       3,275       3,476  

Impairment of long-lived assets

     46       2,770       -  

Amortization of debt costs

     332       298       394  

Other operating activities, net

     364       (89     1,043  

(Increase) decrease in:

      

Accounts receivable, other receivables and long-term receivables

     1,407       (2,907     (715

Inventories

     (6,714     130       1,062  

Prepaids and other current assets

     2,787       (3,100     4  

Increase (decrease) in:

      

Accounts payable

     5,562       770       (749

Accrued liabilities and other long-term liabilities

     6,322       1,100       (29
  

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities from continuing operations

     (4,340     (19,748     (4,373
  

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities from discontinued operations

     (381     (18,508     13,922  
  

 

 

 

 

 

 

 

 

 

 

 

     (4,721     (38,256     9,549  
  

 

 

 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by investing activities:

      

Additions to property and equipment

     (11,580     (6,538     (5,745

Additions to intangible assets and other assets

     (2,031     (2,169     (16
  

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities from continuing operations

     (13,611     (8,707     (5,761
  

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities from discontinued operations

     -       137,299       (895
  

 

 

 

 

 

 

 

 

 

 

 

     (13,611     128,592       (6,656
  

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in) financing activities:

      

Increase (decrease) in bank indebtedness

     10,096       (20,802     13,647  

Increase in long-term debt

     12,500       3,830       -  

Repayment of long-term debt

     (3,121     (7,396     (3,316

Repayment of obligations under capital leases

     (269     (3,782     (639

Payment of loan origination fees and costs

     (591     (794     (486

Other financing activities

     (109     (182     (66

Advance from shareholder

     -       3,212       -  

Proceeds from capital lease funding

     -       3,810       493  
  

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities from continuing operations

     18,506       (22,104     9,633  
  

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities from discontinued operations

     -       (69,262     (13,028
  

 

 

 

 

 

 

 

 

 

 

 

     18,506       (91,366     (3,395
  

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash

     -       (565     (8
  

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

     174       (1,595     (510

Cash and cash equivalents, beginning of year

     1,005       2,600       3,110  
  

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

       $ 1,179         $ 1,005         $ 2,600  
  

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

      

Interest paid

       $ 3,654         $ 4,604         $ 4,501  

Non-cash transactions:

      

Property and equipment additions acquired through capital leases

       $ -         $ 1,398         $ 492  

Property and equipment and intangible assets additions included in accounts payable and accrued liabilities

       $ 4,300         $ 3,133         $ 1,342  

 

(*)

Recast (refer to note 1)

See accompanying notes to consolidated financial statements.

 

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BIRKS GROUP INC.

Notes to Consolidated Financial Statements

Years ended March 30, 2019, March 31, 2018, and March 25, 2017

 

 

Birks Group Inc. (“Birks Group” or “Birks” or “the Company”) is incorporated under the Canada Business Corporations Act. The principal business activities of the Company and its subsidiaries are the design and retail sale of prestige jewelry, timepieces and giftware. The Company’s consolidated financial statements are prepared using a fiscal year which consists of 52 or 53 weeks and ends on the last Saturday in March of each year. The fiscal year ended March 30, 2019 includes 52 weeks. The fiscal years ended March 31, 2018 and March 25, 2017, include 53 and 52 weeks, respectively.

1.    Basis of presentation:

These consolidated financial statements, which include the accounts of Birks Group Inc. for all periods presented and with its former wholly-owned subsidiary, Mayor’s Jewelers, Inc. (“Mayors”) for the fiscal years ended March 31, 2018 and March 25, 2017, are reported in accordance with accounting principles generally accepted in the U.S. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes.

The most significant estimates and judgments include the assessment of the going concern assumption, the valuation of inventories, accounts receivable, deferred tax assets, and the recoverability of long-lived assets. Actual results could differ from these estimates. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements relative to current conditions and records the effect of any necessary adjustments. All significant intercompany accounts and transactions have been eliminated upon consolidation. During the year, the Company made a non-material correction to comparative information to classify assets from accounts receivable and other receivables to long-term receivables that had a net book value of $0.4 million.

The Company changed its reporting currency in the first half of fiscal 2019 from U.S. dollars (USD) to Canadian dollars (CAD) for the period commencing April 1, 2018, in order to better reflect the fact that subsequent to the Company’s divesture of Mayors on October 23, 2017, its business is primarily conducted in Canada, a substantial portion of its revenues, expenses, assets and liabilities are denominated in CAD, and its functional currency remains CAD. The change in reporting currency is a voluntary change and is accounted for retrospectively. All prior periods’ comparative financial information has been recast as if the Company always used CAD as its reporting currency. The consolidated financial statements for comparative periods have been recast to CAD using the procedures outlined below:

1. Statements of Operations, Comprehensive (Loss) Income, Cash Flows and Earnings per share have been translated into CAD using monthly average foreign currency rates prevailing for the relevant period.

2. Assets and liabilities in the Balance Sheet have been translated into CAD at the closing foreign currency rates on the relevant balance sheet dates.

3. The shareholder’s equity section of the Balance Sheet, including accumulated other comprehensive income (loss), cumulative translation adjustments, retained earnings (deficit), additional paid-in capital and share capital has been translated into CAD using historical rates.

On August 11, 2017, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Aurum Holdings Ltd., a company incorporated under the laws of England and Wales, which assigned its rights and obligations under the Stock Purchase Agreement to Aurum Group USA, Inc., a Delaware corporation (now known as Watches of Switzerland) (“Aurum”) to sell its wholly-owned subsidiary, Mayors, which operated in Florida and Georgia and was engaged primarily in luxury timepieces and jewelry retail activities.

 

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Table of Contents

The sale was completed on October 23, 2017 for total consideration of $135.0 million (USD $106.8 million). The activities of Mayors have been segregated and classified as discontinued operations in the consolidated statement of operations and cash flows for all periods presented. This is further described in note 17.

Future operations

These financial statements have been prepared on a going concern basis in accordance with generally accepted accounting principles in the U.S. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Company funds its operations primarily through committed financing under its senior secured credit facility and its senior secured term loan described in Note 6. The senior secured credit facility along with the senior secured term loan are used to finance working capital, finance capital expenditures, provide liquidity to fund the Company’s day-to-day operations and for other general corporate purposes.

For fiscal 2019, the Company reported a net loss from continuing operations of $18.3 million (consolidated net loss of $18.7 million). The Company reported a net loss from continuing operations of $22.0 million (consolidated net income of $14.1 million) and a net loss from continuing operations of $8.9 million (consolidated net income of $7.1 million) for fiscal 2018 and fiscal 2017, respectively. The Company used cash in operating activities from continuing operations of $4.3 million, $19.7 million and $4.4 million for fiscal 2019, 2018 and 2017, respectively.

The Company’s ability to meet its cash flow requirements in order to fund its operations is dependent upon its ability to attain profitable operations and/or continued adherence to the terms of its committed financings and maintenance of sufficient availability of funding under its senior secured credit facility and senior secured term loan. The sole financial covenant which the Company is required to adhere to under both its senior secured credit facility and its senior secured term loan is to maintain minimum excess availability of not less than $8.5 million at all times, except that the Company shall not be in breach of this covenant if excess availability falls below $8.5 million for not more than two consecutive business days once during any fiscal month. In the event that excess availability falls below the minimum requirement, this would be considered an event of default under the senior secured credit facility and under the senior secured term loan, that could result in the outstanding balances borrowed under the Company’s senior secured credit facility and senior secured term loan becoming due immediately, which would also result in cross defaults on the Company’s other borrowings. Similarly, both the Company’s senior secured revolving credit facility and the senior secured term loan are subject to cross default provisions with all other loans pursuant to which the Company is in default of any other loan, the Company will immediately be in default of both the senior secured revolving credit facility and the senior secured term loan. The Company met its excess availability requirement as of and throughout the year ended March 30, 2019 and as of the date the financial statements were authorized for issuance. In addition, the Company expects to have excess availability of at least $8.5 million for at least the next twelve months from the date of these financial statements.

The Company’s ability to make scheduled payments of principal, or to pay interest, or to fund planned capital expenditures and store operations will also depend on its ability to maintain adequate levels of available borrowing and its future performance, which to a certain extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other events that are beyond the Company’s control.

 

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BIRKS GROUP INC.

Notes to Consolidated Financial Statements

Years ended March 30, 2019, March 31, 2018, and March 25, 2017

 

 

 

 

The Company continues to be actively engaged in identifying alternative sources of financing that include raising additional funds through public or private equity, the disposal of assets, and debt financing, including funding from government sources. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that could restrict the Company’s operations. Financing may be unavailable in amounts or on terms acceptable to the Company or at all, which may have a material adverse impact on its business, including its ability to continue as a going concern.

Notwithstanding, the Company believes that it will be able to adequately fund its operations and meet its cash flow requirements for at least the next twelve months.

 

2.

Significant accounting policies:

 

(a)

Revenue recognition:

Sales are recognized at the point of sale when merchandise is picked up by the customer or delivered to a customer. Sales to our wholesale customers are recognized upon transfer of control, which occurs upon receipt by the customer. Shipping and handling fees billed to customers are included in net sales.

Revenues for gift certificate sales and store credits are recognized upon redemption. Prior to recognition as a sale, gift certificates are recorded as accounts payable on the balance sheet. Based on historical redemption rates, the Company estimates the portion of outstanding gift certificates (not subject to unclaimed property laws) that will ultimately not be redeemed and records this amount as breakage income. The Company recognizes such breakage income in proportion to redemption rates of the overall population of gift certificates and store credits. Gift certificates and store credits outstanding and subject to unclaimed property laws are maintained as accrued liabilities until remitted in accordance with local ordinances.

Sales of consignment merchandise are recognized at such time as the merchandise is sold, and are recorded on a gross basis because the Company is the primary obligor of the transaction, has general latitude on setting the price, has discretion as to the suppliers, is involved in the selection of the product and has inventory loss risk.

Sales are reported net of returns and sales taxes. The Company generally gives its customers the right to return merchandise purchased by them within 10 to 90 days, depending on the product sold and records a provision at the time of sale for the effect of the estimated returns which is determined based on historical experience.

Revenues for repair services are recognized when the service is delivered to and accepted by the customer.

Licensing fees are recognized when the product is delivered to and accepted by the customer.

 

(b)

Cost of sales:

Cost of sales includes direct inbound freight and duties, direct labor related to repair services, design and creative (labor and overhead) inventory shrink, inventory thefts, and boxes (jewelry, watch and giftware). Indirect freight including inter-store transfers, purchasing and receiving costs, distribution costs and warehousing costs are included in selling, general and administrative expenses. Purchase discounts are recorded as a reduction of inventory cost and are recorded to cost of sales as the items are sold. Mark down dollars received from vendors are recorded as a reduction of inventory costs to the specific items to which they apply and are recognized in cost of sales once the items are sold.

 

(c)

Cash and cash equi