BGI

Business Context and Reporting Period

Company: Birks & Mayors Inc.
Filing Type: Form 20-F (Annual Report)
Period Ended: March 25, 2006 (Fiscal Year 2005)
Overview: Birks & Mayors is a leading North American luxury jewelry retailer operating 67 stores (39 under the Birks brand in Canada and 28 under the Mayors brand in the U.S.). The company designs, manufactures, and retails fine jewelry, timepieces, and giftware. The reporting period follows the November 2005 merger of Mayors Jewelers, Inc. into Birks, resulting in the full consolidation of Mayors and the elimination of minority interest.

Key Financial Metrics

Cash Flow: Net cash provided by continuing operations was $14.0 million in Fiscal 2005, compared to $6.4 million in Fiscal 2004. Net cash used in investing activities was $6.8 million, primarily for capital expenditures. Net cash used in financing activities was $7.1 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 14.6% to $274.3 million, driven by an 11% increase in comparable store sales and a stronger Canadian dollar (contributing approximately $7.6 million to sales).
• Profitability: Operating income rose 49.3% to $14.7 million. Net income surged 389% to $5.7 million, largely due to the elimination of minority interest losses from Mayors following the merger and improved gross margins.
• Merger Impact: The November 2005 merger with Mayors resulted in the acquisition of remaining minority shares, increasing goodwill by approximately $13.4 million and eliminating the minority interest line item that previously reduced net income in prior periods.
• Debt Structure: The company entered a new $135 million revolving credit facility and an $11.7 million junior secured term loan in January 2006. Total indebtedness increased to $106.4 million.

Guidance, Outlook, and Risks

Outlook and Capital Expenditures: Management projects capital expenditures of $10 million to $11 million for the fiscal year ending March 31, 2007, split evenly between U.S. and Canadian operations. The company expects to finance these from operating cash flow and existing credit facilities. Two new Mayors stores are planned for opening in Florida.

Key Risks and Contingencies:

• Concentration Risk: Rolex merchandise accounted for approximately 22% of total net sales in Fiscal 2005. The loss of this supplier would have a material adverse effect.
• Control Structure: Dr. Lorenzo Rossi di Montelera beneficially owns or controls 68.9% of voting shares, allowing him to control most corporate actions.
• Currency Risk: Significant exposure to fluctuations between the Canadian and U.S. dollars, as a substantial portion of sales are in Canadian dollars but reported in U.S. dollars.
• SEC Inquiry: The SEC conducted an informal inquiry regarding Mayors' warrants issued in 2002. The company has cooperated fully, and no further requests were made since September 2005.
• Dividend Policy: The company has not paid dividends since 1998 and does not intend to pay dividends in the foreseeable future due to credit agreement restrictions.

Investor Verification Checklist

• Rolex Dependency: Verify the status of the distribution agreement with Rolex, given its 22% contribution to sales.
• Debt Covenants: Review the financial covenants in the new $135 million credit facility, specifically the Fixed Charge Coverage Ratio and EBITDA requirements.
• Merger Integration: Assess the realization of synergies and cost savings from the full integration of Mayors into Birks.
• Related Party Transactions: Review the Management Consulting Services Agreement with Iniziativa S.A. (controlling shareholder) and diamond supply agreements with Prime Investments SA.
• Inventory Valuation: Monitor inventory levels and potential write-downs, as the company holds significant consignment inventory and is exposed to commodity price fluctuations (gold, diamonds).