10-K 1 a4q13thi10-k.htm 10-K 4Q13 THI 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _________________________________________________________________________
 FORM 10-K
  _________________________________________________________________________
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 29, 2013
¨
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-32843
 _________________________________________________________________________
 TIM HORTONS INC.
(Exact name of Registrant as specified in its charter)
 __________________________________________________________________________
Canada
 
98-0641955
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
874 Sinclair Road, Oakville, ON, Canada
 
L6K 2Y1
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code 905-845-6511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Shares, without par value
 
New York Stock Exchange
Associated Share Purchase Rights
 
Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ý    NO  ¨.
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  ý.
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  ý    NO  ¨.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    YES  ý    NO  ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý.
The aggregate market value of the common shares held by non-affiliates of the Registrant computed by reference to the price at which such shares were last sold, as of June 28, 2013, was Cdn.$8,587,689,502 (US$8,172,497,059).
Number of common shares outstanding as of February 21, 2014: 138,165,308
DOCUMENTS INCORPORATED BY REFERENCE: N/A
EXPLANATORY NOTE
Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act (the “Company”), qualifies as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although as a foreign private issuer the Company is no longer required to do so, the Company currently continues to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers.
The Company prepares and files a management proxy circular and related material under Canadian requirements. As the Company’s management proxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference information required by Part III of this Form 10-K from its management proxy circular. Accordingly, in reliance upon and as permitted by Instruction G(3) to Form 10-K, the Company will be filing an amendment to this Form 10-K containing the Part III information no later than 120 days after the end of the fiscal year covered by this Form 10-K.
All references to our websites contained herein do not constitute incorporation by reference of information contained on such websites and such information should not be considered part of this document.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Form 10-K, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We refer to all of these as forward-looking statements. A forward-looking statement is not a guarantee of the occurrence of future events or circumstances, and such future events or circumstances may not occur. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “target,” “aspiration,” “outlook,” “forecast” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Examples of forward-looking statements that may be contained in our public disclosure from time-to-time include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future results, our goals and aspirations, our strategic priorities, and the economic and business outlook for us, for each of our business segments, and for the economy generally. The forward-looking statements contained in this Form 10-K are based on currently available information and are subject to various risks and uncertainties, including, but not limited to, the risks and uncertainties discussed in Item 1A. Risk Factors as well as in Item 1. Business and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K, that could materially and adversely impact our business, financial condition and results of operations (i.e., the “risk factors”). Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: (i) prospects and execution risks concerning our growth strategy; (ii) the absence of an adverse event or condition that damages our strong brand position and reputation; (iii) the absence of a significant increase in competition or in volume or type of competitive activity within the quick service restaurant segment of the food service industry; (iv) the cost and availability of commodities; (v) the absence of an adverse event or condition that disrupts our distribution operations or impacts our supply chain; (vi) a continuing positive working relationship with the majority of our restaurant owners; (vii) the absence of any material adverse effects arising as a result of litigation; (viii) no significant changes in our ability to comply with current or future regulatory requirements; (ix) our ability to retain our senior management team and attract and retain qualified personnel; (x) our ability to maintain investment grade credit ratings; (xi) our ability to obtain financing on favorable terms; and (xii) general worldwide economic conditions. We are presenting this information for the purpose of informing you of management’s current expectations regarding these matters, and this information may not be appropriate for any other purpose.

Many of the factors that could determine our future performance are beyond our ability to control or predict. Investors should carefully consider our risk factors and the other information set forth in this Form 10-K and are further cautioned not to place undue reliance on the forward-looking statements contained in this Form 10-K, which speak only as of the date of this Form 10-K. The events and uncertainties outlined in the risk factors, as well as other events and uncertainties not set forth below, could cause our actual results to differ materially from the expectation(s) included in the forward-looking statement and, if significant, could materially affect the Company’s business, revenue, share price, financial condition, and/or future results, including, but not limited to, causing the Company to: (i) close restaurants, (ii) fail to realize our same-store sales growth targets, which are critical to achieving our financial targets, (iii) fail to meet the expectations of securities analysts or investors, or otherwise fail to perform as expected, (iv) experience a decline and/or increased volatility in the market price of our stock, (v) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase programs, or (vi) increase costs, corporately or at restaurant level, which may result in increased restaurant-level pricing, which, in turn, may result in decreased guest demand for our products resulting in lower sales, revenue, and earnings. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.
Throughout this Form 10-K, the words “include,” “including” or words of similar effect mean “include, without limitation” or “including, without limitation,” as applicable.


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TIM HORTONS INC.
2013 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

 
 
Page
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
PART II
 
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
The noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York, were:
(US$)
 
At End of
Fiscal Year
 
Year
Average
 
High
 
Low
January 3, 2010
 
0.9559

 
0.8834

 
0.9719

 
0.7695

January 2, 2011
 
0.9991

 
0.9663

 
1.0040

 
0.9280

January 1, 2012
 
0.9835

 
1.0151

 
1.0584

 
0.9480

December 30, 2012
 
1.0049

 
1.0008

 
1.0299

 
0.9600

December 29, 2013
 
0.9348

 
0.9668

 
1.0164

 
0.9348

On February 21, 2014, the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York was US$0.8986 for Cdn.$1.00.

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PART I
Item 1.    Business
The Company
We are one of the largest publicly-traded quick service restaurant chains in North America based on market capitalization and the largest in Canada based on systemwide sales and number of locations. We appeal to a broad range of consumer tastes, with a menu that includes our premium blend coffee, espresso-based hot and cold specialty drinks (including lattes, cappuccinos and espresso shots), iced cappuccinos, specialty and steeped teas, cold beverages, fruit smoothies, home-style soups, chili, grilled Panini and classic sandwiches, wraps, yogurt and berries, oatmeal, breakfast sandwiches and wraps, and fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies, croissants, Danishes, pastries and more.
The first Tim Hortons® restaurant was opened in 1964 by Tim Horton, a National Hockey League All-Star defenseman. In 1967, Tim Horton and Ron Joyce, then the operator of three Tim Hortons restaurants, became partners and together they opened 37 restaurants over the next seven years until Mr. Horton’s death in 1974. Mr. Joyce became the sole owner in 1975. In the early 1990s, Tim Hortons and Wendy’s®, now owned by The Wendy’s Company (“Wendy’s”), entered into a partnership to develop real estate and combination restaurant sites with Wendy’s and Tim Hortons restaurants under the same roof. In 1995, Wendy’s purchased Mr. Joyce’s interest in the Tim Hortons system and incorporated the company known as Tim Hortons Inc., a Delaware corporation (“THI USA”), as a wholly-owned subsidiary. In 2006, we became a standalone public company pursuant to an initial public offering and a subsequent spin-off of our common stock to Wendy’s stockholders through a stock dividend in September 2006.
In September 2009, THI USA was reorganized such that Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act (the “Company”), became the publicly held parent company of the group of companies previously controlled by THI USA, and each outstanding share of THI USA’s common stock automatically converted into one common share of the Canadian public company. The issuance of the Company’s common shares (and the associated share purchase rights) was registered under the Securities Act of 1933, as amended (the “Securities Act”) and, like the common stock of THI USA previously, the Company’s common shares are traded on both the Toronto Stock Exchange and the New York Stock Exchange under the symbol “THI.” Accordingly, references to “we,” “our,” “us” or the “Company” refer to THI USA and its subsidiaries for periods on or before September 27, 2009 and to Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act, and its subsidiaries, for periods on or after September 28, 2009, unless specifically noted otherwise.
Our primary business model is to identify potential restaurant locations, develop suitable sites, and make these new restaurants available to approved restaurant owners. Selectively, where it may complement our growth strategies, we will also seek to enter into strategic relationships with restaurant owners that will complement our development with their own capital deployment, site selection, and development. These relationships permit the development of our restaurants without our own capital being deployed, as the restaurant owner controls the real estate.
As at December 29, 2013, restaurant owners operated substantially all of our systemwide restaurants. We directly own and operate (without restaurant owners) only a small number of company restaurants in Canada and the U.S. We also have significant supply chain operations, including procurement, warehousing and distribution, to supply paper and dry goods to a substantial majority of our Canadian restaurants, and procure and supply frozen baked goods and some refrigerated products to most of our Ontario and Quebec restaurants. In the U.S., we supply similar products to system restaurants through third-party distributors. Our operations also include coffee roasting plants in Rochester, New York, and Hamilton, Ontario, and a fondant and fills manufacturing facility in Oakville, Ontario. See Operations—Manufacturing below. These vertically integrated manufacturing, warehouse, and distribution capabilities benefit our restaurant owners and are important elements of our business model which allow us to improve product quality and consistency; protect proprietary interests; facilitate the expansion of our product offerings; control availability and timely delivery of products; provide economies of scale and labour efficiencies; and generate additional sources of income and financial returns.
Our business model results in several distinct sources of revenues and corresponding income, consisting of distribution sales, franchise rent and royalties revenues, manufacturing income, and, to a much lesser extent, equity income, and sales from Company-operated restaurants. Franchise royalties are based on a percentage of gross restaurant sales. Rental revenues result from our controlling interest (i.e., lease or ownership) in the real estate for a substantial majority of full-serve system restaurants in Canada and the U.S., generating base rent and percentage rent in Canada, and percentage rent only in the U.S. Percentage rent arrangements result in higher rental income as same-store sales increase. Historically, as we have opened new restaurants and made them available to restaurant owners, our operating income base has expanded. In addition, our product distribution and warehouse operations have generated consistent positive operating income.

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Our segments, for financial reporting purposes, are the Canadian and U.S. business units, and Corporate services. Financial information about these segments is set forth in Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis and Item 8. Financial Statements—Note 21 Segment Reporting in this Annual Report on Form 10-K (“Annual Report”). In addition, reference should be made to the Consolidated Financial Statements and Supplementary Data in Item 8 of this Annual Report for further information regarding revenues, segment operating profit and loss, total assets attributable to our segments, and for financial information attributable to certain geographic areas.
All dollar amounts referenced in this Annual Report are in Canadian dollars, unless otherwise expressly stated.
 
Strategic Overview
The Company operates in the highly competitive quick service restaurant (“QSR”) segment of the foodservice industry. Persistently weak economic conditions in North America for the past several years have resulted in fragile consumer confidence, relatively high levels of unemployment in many regions and changed discretionary spending patterns. While there has been some modest economic recovery, particularly in the U.S. recently, the pace and nature of the recovery has been gradual and inconsistent. The economic situation has created a low-growth environment for many consumer and restaurant companies, and has resulted in high levels of competitive intensity. Furthermore, many restaurant and foodservice companies are targeting the breakfast daypart and coffee categories, which are traditional strengths for the Company.
Against this backdrop, restaurant companies must also adapt to important macro trends impacting the industry. These trends include:
the evolution of consumer tastes and preferences, including new flavours and an increasing desire for balanced menu options to address interest in health, wellness and nutrition;
a continued shift in demographics, including an aging population, increasing ethnic diversity and the increasing importance of ‘Millennials’ as a consumer segment; and
the emergence of technology and data to drive both marketing and menu insights and to respond to increasingly inter-connected consumers, as key potential sales drivers.
Tim Hortons has a new strategic plan, “Winning in the New Era,” that charts a course designed to position the Company to compete effectively and win in the continuously changing restaurant sector landscape and to build sustainable, long-term growth.
Our overarching brand promise is to delight every consumer who comes into contact with our brand by providing superior quality products and services, and the ultimate guest experience. We are focused on value creation by delivering sustainable growth, operating profit improvement and responsible use of capital, thereby contributing to the success of our restaurant owners, shareholders, employees and other stakeholders.
Our strategic plan also includes a focus on driving new levels of productivity and efficiency across our business. By actively managing costs, including general and administrative costs, and other key efficiency efforts, we expect to leverage the scale that comes from continued growth investments to drive innovation and top-line growth. Our focus also includes ongoing work to optimize our supply chain while maintaining excellent service levels to our restaurant network.
Each of our geographic markets plays a different and important role in our strategic plan. We have defined a set of strategic pillars and initiatives within each business unit that are designed to deliver on our shareholder value creation goals.
Canada: Lead, Defend and Grow
In Canada, we enjoy unparalleled market leadership, consumer reach and loyalty. Today, 15% of Canadians over the age of 15 visit Tim Hortons at least once a day, and we command approximately 42% of traffic in the QSR sector.
However, the QSR sector in Canada is evolving and industry growth has slowed over the past decade. Following several years of significant growth, the brewed coffee market has seen many new market entrants, who are also targeting the breakfast daypart, even as sector brewed coffee growth has flattened. Despite this environment, we believe that our enviable guest loyalty, strong restaurant base and differentiated brand position, coupled with initiatives planned in our strategic plan, will present significant opportunities and untapped potential to grow our Canadian business over the next five years.
We plan to defend our core business by delivering on the ultimate guest experience more consistently. This includes reducing wait times, improving order accuracy and working to improve consistency in operations standards for fast, friendly

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service and cleanliness. We intend to better leverage technology, and we are striving to make our restaurants inviting and comfortable. We are driving innovation to new levels, looking to deliver differentiated innovation in products and services using guest insights to sense and build our understanding of evolving needs and expectations. We also plan to extend our category leadership in the key coffee category, as well as in key snacking and food offerings that appeal to various dayparts and occasions.
Our roadmap includes a concerted effort to narrow the average cheque gap with sector averages, while protecting our core value brand positioning. We believe we have opportunities to increase items per order by focusing on combination product offers, and evaluating size and premium options.
Over the next five years, we also plan to evaluate and pursue opportunities in QSR consumer demand spaces in which we already enjoy significant marketshare, and target those that we believe offer compelling growth opportunities. Proprietary research identifies several consumer needs and occasions which the Company fulfills very well, and others which represent significant potential sales opportunities. In the context of the full breadth of consumer needs and occasions in the QSR segment, we believe there are substantial and varied opportunities to leverage our brand, our connection with our guests, our restaurant assets and our franchising capabilities.
In Canada, continued restaurant development also plays a significant role in our strategic plan. We believe there is opportunity to develop at least 4,100 restaurants in Canada, and we are targeting approximately 500 net additional locations by the end of 2018. Beyond these targeted sites, we also believe there is an opportunity to extend our brand reach through new formats and sizes that target under-represented captive audiences such as office, sporting venue, healthcare and educational settings. We also believe there are additional opportunities for smaller ‘captive audience’ sites to add to our brand presence.
Brand and channel extensions represent another area of growth in our Canadian business, and we will seek select opportunities, working together with our restaurant owners, to go beyond our restaurant footprint to create additional value for the Company and our restaurant owners.
U.S.: Must-Win Battle
As the largest foodservice market in the world, and one that is still growing, we are committed to the U.S. Our proprietary research demonstrates we have made significant inroads and progress in building consumer brand awareness and convenience in our core and priority markets, and that we have a significant opportunity to build product trial and strength beyond our breakfast daypart in these markets.
For existing restaurants, our focus is on driving average unit volumes to improve returns. For new assets, we are focused on optimizing our business model to generate increased profit and growth, concentrated in our priority markets, through a less capital intense model.
By focusing on core and priority markets, we are concentrating our resources, investments and capabilities for maximum benefit. Growing the core business underpins our strategy in the U.S. for the next five years. We plan to deliver new and exciting beverages, snacks and meal items, and compelling combos, to grow order size and make us more relevant to a broader number of U.S. consumers. We plan to leverage technology, marketing and promotional initiatives to appeal to consumer needs, different dayparts and occasions, all designed to drive sales and traffic. Our view, similar to the Canadian market, is that we have opportunities to grow average cheque while delivering value to consumers.
Winning in the New Era charts a course for our U.S. segment that will result in us expanding the number of consumer needs and eating occasions that we target. While we enjoy strong traffic at the breakfast daypart, we believe we have significant opportunities in our priority markets to further increase loyalty during this key daypart. In addition, our plan has a strong focus on converting guests beyond the breakfast daypart into other dayparts such as snacking and lunch.
Development in our U.S. business will be targeted in a relatively small number of core and priority markets to drive further improvements in convenience and brand awareness and penetration. By targeting our investment in priority markets, and focusing on increasing average unit volumes, we expect to increase return and profitability, while continuing to develop the brand’s relevance and success in the U.S. We expect to open approximately 300 restaurants in the U.S. during the strategic plan period.
Our development plans will be complemented by brand and channel extensions to drive brand awareness. We will also, as a complementary focus, continue to selectively pursue traditional franchising alternatives, through means such as Area Development Agreements and Master Licensing Agreements, when and where we believe this activity will complement our strategy and enhance our brand success in the U.S

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We expect this multi-layered, disciplined approach to developing our U.S. business will result in substantial growth in U.S. operating income of up to $50.0 million by 2018, which will in turn result in the U.S. business becoming a more meaningful contributor to our profitability over the strategic plan period.
International: Grow, Learn, Expand
We are adopting a pragmatic and disciplined approach to continued international growth. We have established a brand presence across the Gulf Cooperation Council (“GCC”), with 38 restaurant locations. Our strategic plan outlines continued growth and development internationally, following further learning and expansion in the GCC, where we have a roadmap to approximately 220 locations.
While we are pleased with our success outside of North America, our strategic plan focuses most of our resources and management attention on our core markets of Canada and the U.S. Our strategic plan also outlines our intent to prioritize markets and develop due diligence to position us to enter new international markets in 2015.
 
Operations
Restaurant formats. Tim Hortons restaurants operate in a variety of formats. Our standard restaurant locations typically range from 1,000 to 3,080 square feet.
Our non-standard restaurant locations include small, full-service restaurants; self-serve kiosks, typically with a limited product offering, in offices, hospitals, colleges, airports, grocery stores, gas and other convenience locations; and full-serve locations in sports arenas and stadiums that operate only during on-site events. Our self-serve kiosks typically generate much smaller average unit volumes compared to non-standard, full-serve restaurants in their respective markets that have staff, larger locations, and more expansive beverage and food product offerings. Average unit volumes at self-serve kiosks are highly variable, depending upon the location and size of the site, product offerings, and hours of operation. Self-serve kiosks currently contribute nominal amounts to our financial results, but complement our core growth strategy by increasing guest convenience and frequency of visits and allowing for additional market penetration of our brand, including in areas where we may not be as well known or where an alternative model for unit growth and development is appropriate. Additionally, in Canada, we have used self-serve kiosks where existing full-service locations are at full capacity.
See also Cold Stone Creamery and Combination restaurants, an ongoing relationship with Wendy’s below.
Restaurant development. The development process for each standard restaurant location that we develop typically takes 12 to 18 months. Development of non-standard restaurants and self-serve kiosks usually requires much less time. We oversee and direct all aspects of restaurant development for system restaurants that we develop, including an initial review of a location’s demographics, site access, visibility, traffic counts, mix of residential/retail/commercial surroundings, competitive activity, and proposed rental/ownership structure. As part of this process, we also consider the performance of nearby Tim Hortons locations, projections of the selected location’s ability to meet financial return targets, restaurant owner identification, physical land development, and restaurant design and construction costs. The design and construction of our recognizable standard, standalone restaurants vary to fit local architecture and municipal requirements and to cater to the local market and neighbourhoods. For U.S. restaurants developed by our restaurant owners with their own capital, we review criteria similar to that detailed above, and we retain approval rights over site selection and restaurant design and construction.

In Canada, we typically retain a controlling interest in the real estate for full-service system restaurants that we develop by either owning the land and building, leasing the land and owning the building, or leasing both the land and building, although, increasingly, restaurant owners are also investing their own capital to develop restaurants. In the U.S., we expect that our restaurant owners will develop more than half of the restaurants to be opened in 2014.
In Canada, we believe we have opportunity for development of at least 4,100 locations. In fiscal 2013, we continued active development of both standard and non-standard restaurants in Canadian growth markets by focusing development primarily in Western Canada, Ontario, Quebec and major urban markets. Our restaurant designs have continued to evolve over time, responding to guest needs, both pertaining to new restaurants we open and restaurants that we renovate. During the past year, we have increased the number of restaurants we are renovating, and enhanced the restaurant designs more significantly, with new features, including softer lighting, more contemporary fixtures and designs, and new exterior facades. We have continued to evolve and evaluate flexible new restaurant designs to respond to consumer trends and interests including designs tailored to urban and rural markets. We have also focused our renovations on increasing capacity at existing Canadian restaurants through design efficiencies and implementation of a combination of drive-thru activities, including order station relocations, single-lane/double-order stations and, in certain locations, double-lane/double-order drive-thrus. In addition, we continued to evolve our in-restaurant guest experience and, in certain locations, our queuing systems.

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During fiscal 2013, we continued to focus on accelerating the time it takes to create critical mass for convenience and advertising scale in our most developed U.S. markets, primarily through deployment of the substantial majority of our U.S. restaurant development capital into core growth markets to increase awareness of the brand. Further, we continued to complement our U.S. standard format restaurant development activity with non-standard formats and locations through strategic partnerships and relationships. We also continued to seek other marketing means, such as community involvement, sponsorships, event site product agreements and other forms of communication, to supplement traditional advertising to reinforce our brand position with guests and to broaden our brand awareness as a Cafe & Bake Shop destination.
As at December 29, 2013, the number of Tim Hortons restaurants across Canada, both standard and non-standard locations, which for this purpose includes self-serve kiosks, totaled 3,588. Standard restaurants constitute approximately 71.1% of this total. Also as at December 29, 2013, our restaurant owners (See Franchise and Other Arrangements—Other arrangements below for a description of “operators”) operated substantially all of our Canadian restaurants. In the U.S., as at December 29, 2013, we had a strong regional presence with 859 restaurants, including self-serve kiosks, in 15 states, concentrated in the Northeast in New York and Maine, and in the Midwest in Michigan, Ohio and Pennsylvania, with standard full-serve restaurants representing approximately 58.3% of all U.S. restaurants. We own, rather than lease, the land underlying a higher percentage of our standard system restaurants in the U.S. than in Canada. As at December 29, 2013, restaurant owners operated substantially all of our restaurants in the U.S. See Item 2. Properties for a description of the number and type of restaurants by province/territory in Canada, and by state in the U.S., owned or operated by our restaurant owners and owned by the Company.
Our international development model minimizes our capital requirements, while still allowing us to pursue identified growth opportunities. In 2011, we granted a master license to Apparel FZCO (“Apparel”) in the GCC States of the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman, which is primarily a royalty-based model that includes franchise fees upon the opening of each location, and restaurant equipment and distribution sales. Apparel is responsible for the capital investment and real estate development required to open new restaurants, along with operations and marketing. As at December 29, 2013, Apparel operated a total of 38 locations in the United Arab Emirates, Qatar, Kuwait and Oman and is expected to develop up to 120 multi-format restaurants through 2015. In addition, in fiscal 2013, the Company signed an area development agreement with Apparel to develop 100 multi-format restaurants in Saudi Arabia over the next five years. Development in Saudi Arabia will be managed by Apparel and will focus on major urban markets, with opportunity for development beyond the initial 100 targeted locations.
At the end of 2013, there were also 196 Tim Hortons kiosks in the Republic of Ireland and 59 Tim Hortons kiosks in the United Kingdom. These locations are primarily licensed and generally offer self-serve premium coffee, tea, specialty hot beverages and a selection of donuts and muffins at gas stations and other convenience locations. These locations are not included in our new restaurant development or systemwide restaurant count.
Historically, international activities have not contributed significantly to financial results; consequently, operating results from these international locations are currently reported as part of Corporate services within our segmented operating results. Notwithstanding the foregoing, we believe these, and other activities we may test or undertake in the future, provide us with opportunities to evaluate a variety of new strategies for the development of our brand which, if successful, may be adapted to existing and new markets. See Franchise and Other Arrangements—Master License Agreements below and Item 2. Properties for a listing of our international locations by country.
Restaurant owners and their teams. Finding exceptional restaurant owner candidates is critical to our system’s successful growth and development, and we have implemented a comprehensive restaurant owner screening and recruitment process that employs multi-level interviews with our senior operations management and requires candidates to work different shifts in an existing restaurant. Each new restaurant owner typically participates in a mandatory seven week intensive training program to learn all aspects of operating a Tim Hortons restaurant in accordance with our standards. Management-level employees of restaurant owners also have the opportunity to complete the seven week training program. We provide ongoing training and education to restaurant owners and their staff after completion of the initial training programs. To further assist restaurant owners, we have standardized our restaurant management software with an application service provider to give our restaurant owners the ability to more effectively manage a variety of day-to-day operations and management functions.
Distribution. The Company is a distributor to Tim Hortons restaurants through five distribution centres located in Langley, British Columbia; Calgary, Alberta; Guelph, Ontario; Kingston, Ontario; and Debert, Nova Scotia. The Guelph and Kingston facilities distribute frozen, refrigerated and shelf-stable products to restaurants in our Ontario and Quebec markets. As with other vertical integration initiatives, we believe that our distribution centres deliver important system benefits, including improved efficiency and cost-effective service for our restaurant owners, as well as providing an additional source of income and financial return.

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Under our franchise arrangements, each Canadian restaurant owner is required to purchase substantially all food and other products, such as coffee, sugar, and restaurant supplies, from us or our designated suppliers and distributors. We own or lease a significant number of trucks and trailers that regularly deliver to most of our Canadian restaurants. We continue to review our distribution business for opportunities to enhance the number of restaurant locations that are able to receive all products (frozen, refrigerated and shelf-stable) on one truck from us or our designated suppliers and distributors.
We offer home-brew coffee through various lines of distribution in Canada and the U.S., including certain grocery stores. Through TimShop®, an e-commerce platform, Canadian and U.S. guests can order a range of items online at shop.timhortons.com and shopus.timhortons.com, respectively. Although TimShop currently contributes nominal amounts to our financial results, we believe this platform increases guest convenience and allows for additional market penetration of our brand.
Menu items and new product innovation. Each restaurant offers a relatively standard menu that spans a broad range of categories designed to appeal to guests throughout the day. While the largest portion of systemwide sales is generated in the morning, we generate significant sales across all of our dayparts. A substantial majority of restaurants in Canada, and approximately 60% of our restaurants in the U.S., are open 24 hours. Our approximate average cheque size is $3.25 to $4.50 in Canada, and U.S.$3.50 to U.S.$4.25 in the U.S. (for both standard and non-standard locations); however, the average cheque sizes in some regions may be higher or lower than this range.
Our menu includes our premium blend coffee, espresso-based hot and cold specialty drinks (including lattes, cappuccinos and espresso shots), iced cappuccinos, specialty and steeped teas, cold beverages, fruit smoothies, home-style soups, chili, grilled Panini and classic sandwiches, wraps, yogurt and berries, oatmeal, breakfast sandwiches and wraps, and fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies, croissants, Danishes, pastries and more. In Canada, we expanded our breakfast daypart in fiscal 2013 with the introduction of the Flatbread Breakfast Panini, and our lunch daypart with the introduction of the Extreme Italian Sandwich. We also expanded our Panini platform in both Canada and the U.S. with the introduction of the Steak and Cheese Panini. In addition, we introduced our first certified gluten-free product, the Coconut Macaroon. New product offerings have historically contributed significantly to same-store sales growth.
In fiscal 2012, we introduced our premium-blend coffee, decaffeinated coffee, and lattes, in a single-serve format using the Kraft Tassimo® T-Disc on-demand beverage platform, which is being sold primarily in Tim Hortons restaurants in Canada and the U.S. and other retail channels in the U.S. As an extension of our single-serve product offerings, in fiscal 2013, we introduced our Tim Hortons RealCupTM product in both Canada and the U.S., which is compatible with K-Cup® brewers, although not affiliated with K-Cup or Keurig®.
In fiscal 2013, we continued to reinforce our commitment to providing guests with value by focusing advertising and promotions on new and existing product-specific items, which included combos in the U.S. In addition to food items, our restaurants sell a variety of promotional products and merchandise on a seasonal basis and also sell home coffee brewers, home-brew coffee, boxed teas, and other products throughout the year. Although key menu offerings have remained substantially the same, we tailored certain of our menu offerings to meet the needs of our international guests in connection with our international expansion into the GCC.
Quality control. Our quality control programs focus on maintaining product quality, freshness, and availability, as well as speed of service, cleanliness, security, and employment standards. These programs are implemented by our restaurant owners (and the Company for Company-operated restaurants), with assistance from our field management. In addition, because the Tim Hortons brand is so closely linked to the public’s perception of our food quality and safety, we require our restaurant owners, as well as their managers and operations personnel, to complete and pass the Advanced.fst® food safety program for our Canadian restaurants and the ServSafe® program for our U.S. restaurants, with recertification every five years. All restaurant staff must complete a multi-level food safety training module as part of their mandatory training. We also conduct site visits on a regular basis and, twice a year at a minimum, we perform unscheduled food safety audits. We have a comprehensive supplier quality approval process, which requires all supplied products to pass our quality standards and the supplier’s manufacturing process and facilities to pass on-site food safety inspections.
Manufacturing. We have two wholly-owned coffee roasting facilities in Rochester, New York and Hamilton, Ontario. We blend all of the coffee for our restaurants to protect the proprietary blend of our premium restaurant coffee and, where practical, we also do so for our take home, packaged coffee. We also own a facility in Oakville, Ontario that produces fondants, fills, and ready-to-use glaze, which are used in connection with a number of the products produced in our Always Fresh baking system.
Until October 2010, we owned a 50% joint-venture interest in CillRyan’s Bakery Limited (“Maidstone Bakeries”), our supplier of certain bread, pastries, donuts and Timbits. Maidstone Bakeries continues to manufacture and supply all par-baked donuts, Timbits and selected breads, following traditional Tim Hortons recipes, as well as European pastries, including

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Danishes, croissants, and puff pastry. Those products are partially baked and then flash frozen and delivered to system restaurants, most of which have an Always Fresh oven with the Company’s proprietary technology. The restaurant completes the baking process with this oven and adds final finishing such as glazing and fondant, allowing the product to be served warm to guests within a few minutes of baking. The Company sold its 50% joint-venture interest in Maidstone Bakeries to its former joint-venture partner, IAWS Group plc (now owned by Aryzta AG) (“Aryzta”), for gross cash proceeds of $475 million in October 2010. For additional information regarding Maidstone Bakeries, see Source and Availability of Raw Materials below.
Cold Stone Creamery. We are party to an agreement with Kahala Franchise Corp., the franchisor of the Cold Stone Creamery® brand, pursuant to which we have exclusive development rights in Canada. We are also party to an agreement with Kahala Franchising, L.L.C. in the U.S., pursuant to which we have the right to use the Cold Stone Creamery trademarks in specified locations in the U.S. In Canada, after evaluation of strategic considerations and the overall performance of the Cold Stone Creamery business in Tim Hortons locations, we made the decision to remove Cold Stone Creamery from Tim Hortons restaurants in Canada. This decision will allow the owners of the affected restaurants to simplify their operations and focus entirely on Tim Hortons. This decision does not affect our U.S. Cold Stone Creamery co-branded operations, as the nature of the business, and the support required by the Company, is significantly different than in Canada.
Combination restaurants, an ongoing relationship with Wendy’s. Since the early 1990s, TIMWEN Partnership, owned on a 50/50 basis by the Company and Wendy’s, jointly developed the real estate underlying “combination restaurants” in Canada that offer Tim Hortons and Wendy’s products at the same location, typically with separate restaurant owners operating the Tim Hortons and the Wendy’s restaurants. The combination restaurants have separate drive-thrus, if the site allows for drive-thrus, but share a common entrance way, seating area and restrooms. Separate front counters and food preparation areas are also in place for each of the two restaurant concepts. TIMWEN Partnership owns or leases the underlying real estate from a third party, and leases, or subleases, as applicable, a portion of the location to the Company (for the Tim Hortons restaurant) and to Wendy’s (for the Wendy’s restaurant).
As at December 29, 2013, there were 99 combination restaurants in the TIMWEN Partnership, all of which were in Canada, and all of which were franchised. We also have a small number of combination restaurants that are not held by the TIMWEN Partnership. As at December 29, 2013, there were 18 such restaurants in Canada, all of which were franchised, and 30 such restaurants in the U.S., all of which were franchised. For the U.S. combination restaurants, we generally own or lease the land, and typically own the building and lease or sublease, as applicable, a portion of the location to the Tim Hortons restaurant owner (for the Tim Hortons restaurant) and to Wendy’s (for the Wendy’s restaurant). There has not been significant development of these restaurants in recent years.
Credit, Debit and Cash Card Arrangements. As of December 29, 2013, electronic payment capabilities (including our Tim Card®, see below) were in place at approximately 3,185 locations in Canada and 570 locations in the U.S. Our Tim Card is our signature quick-pay cash card program. The Tim Card is a reloadable cash card that can be used by guests for purchases at system restaurants. Guests can reload the Tim Card online at www.timhortons.com. Our electronic payment systems provide guests with more payment options, including mobile payment options through our Timmy Me mobile application, as well as tap-to-pay technology. As at December 29, 2013, we had outstanding guest deposits on Tim Cards of approximately $173.2 million, of which $155.0 million is represented by “Restricted cash and cash equivalents”.
 
Source and Availability of Raw Materials
Our products are sourced from a combination of third-party suppliers and our own manufacturing facilities. Neither we nor our restaurant owners have experienced any material shortages of food, equipment, fixtures, or other products that are necessary to restaurant operations, nor do we currently anticipate any product shortages. Alternative suppliers are available for most of our products, although we currently source some of our beverage and food offerings from a single supplier. As described below, in the event of an interruption in supply from any of these sources, our restaurants could experience shortages of certain products. While guests might purchase other products when a desired menu item is unavailable, this might not entirely offset the loss of revenue from the unavailable products, and may injure our relationships with restaurant owners and our guests’ perception of the Tim Hortons brand.
While we have multiple suppliers for coffee from various coffee-producing regions, the available supply and price for high-quality coffee beans can fluctuate dramatically. Accordingly, we monitor world market conditions for green (unroasted) coffee and contract for future supply volumes to obtain expected requirements of high quality coffee beans at acceptable prices. It may be necessary for us to adjust our sources of supply or carry more inventory from time to time to achieve the desired blend, and we expect that we will continue to be able to do so. The addition of our second coffee roasting plant in Hamilton, Ontario, enabled all of the coffee brewed in our system restaurants to be blended and roasted at our facilities. We utilize third-party suppliers for a small portion (retail pack and canned, single-serve) of our ongoing coffee requirements.

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Despite the sale of our 50% joint-venture interest in Maidstone Bakeries in 2010, we have ongoing obligations to purchase donuts and Timbits from Maidstone Bakeries until early 2016. We also have rights to purchase from Maidstone Bakeries until late 2017, at our option, allowing us sufficient flexibility to secure alternative means of supply, if necessary. Our rights to purchase could expire before the expiry date if a triggering event occurs with respect to the Company. Such a triggering event could include a breach of our obligation to purchase all of our donuts and Timbits from Maidstone Bakeries until early 2016 or our failure to cooperate in estimating the supply needs of our system. All triggering events which could lead to the termination of our ability to purchase products from Maidstone Bakeries until late 2017 are within our control.
As a result of our exit from the Maidstone Bakeries joint venture, under certain circumstances, we may be required to purchase products currently sourced from Maidstone Bakeries at a higher cost, build our own facility to manufacture these products, or find alternative products and/or production methods, any of which would cause us to incur significant start-up and other costs. Also, if Maidstone Bakeries’ operations were negatively impacted by an unexpected event, our restaurants could experience shortages of donuts, Timbits, European pastries, and other bread products sourced from Maidstone Bakeries. We expect that any such shortage for most products would be for a limited period of time, until such products could be sourced from alternate suppliers, except for certain par-baked donuts and Timbits, for which alternate suppliers would likely require significant lead-time to source the equipment necessary to manufacture donuts and Timbits.
Our fondant and fills manufacturing facility produces, and is the sole supplier of, ready-to-use glaze and certain fondants and fills which are used in connection with a number of our products. However, should our facility be unable to supply ready-to-use glaze, it may be replicated by restaurant-level operations and, should our facility be unable to supply for an extended period, we believe substitute fondants and fills could be supplied by third parties. We sell most other raw materials and supplies, including coffee, sugar, paper goods and other restaurant supplies, to system restaurants. We purchase those raw materials and supplies from multiple suppliers and generally have alternative sources of supply for each.
World markets for some of the commodities that we use in our business (such as coffee, wheat, edible oils and sugar) have experienced high volatility. While we typically have purchase contracts in place to secure key commodities such as coffee, wheat, sugar, and edible oils that typically extend over a six-month period, we may be subject to higher commodity prices depending upon prevailing market conditions at the time we make purchases beyond our current commitments. The position of the Canadian dollar against the U.S. dollar, and our policy of hedging foreign currency exposure through forward foreign currency contracts, may help to mitigate some, but not all, of these price increases as certain of these commodities are sourced in U.S. dollars.
Our business will continue to be subject to changes related to the underlying cost of key commodities. These cost changes can impact revenues, costs and margins, and can create volatility quarter-over-quarter and year-over-year. Increases and decreases in commodity costs are largely passed through to restaurant owners, resulting in higher or lower revenues and higher or lower cost of sales from our business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up. Although we have implemented purchasing practices that mitigate our exposure to volatility to a certain extent, as mentioned above, if costs increased to a greater degree for fiscal 2014 purchases, we and our restaurant owners have some ability to increase product pricing to offset a rise in commodity prices, but these price increases could negatively affect our transactions if our customers do not accept them.
In addition, we purchase certain products, such as coffee, in U.S. dollars. As the Canadian dollar strengthens against the U.S. dollar, these products become less expensive for us and, therefore, our Canadian restaurant owners. For our U.S. restaurant owners, as the U.S. dollar weakens against the Canadian dollar, certain other products become more expensive for them. As a result, although world commodity prices have increased, in a rising Canadian dollar environment, the positive impact of foreign exchange partially offsets the overall effect to us and our Canadian restaurant owners of such price increases. Conversely, if the U.S. dollar strengthens against the Canadian dollar, the negative impact of foreign exchange may impact products we purchase in U.S. dollars and, therefore, our Canadian restaurant owners. For our U.S. restaurant owners, as the U.S. dollar strengthens against the Canadian dollar, certain products become less expensive for them. See Item 1A. Risk Factors—Fluctuations in U.S. and Canadian dollar exchange rates can affect our results, as well as the price of common shares and certain dividends we pay and Item 7A. Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Risk and Commodity Risk.





 

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Franchise and Other Arrangements
Restaurant owners. Our objective is to have restaurant owners own or operate substantially all Tim Hortons restaurants and to maintain a small number of Company-operated restaurants primarily for restaurant owner training. As at December 29, 2013, restaurant owners owned or operated substantially all of our Canadian restaurants and U.S. restaurants.
Our restaurant owners operate under several types of license agreements, with a typical term for a standard restaurant of 10 years plus aggregate renewal period(s) of approximately 10 years. For new arrangements and renewals, restaurant owners who lease land and/or buildings from the Company typically pay a royalty of 3.0% to 4.5% of weekly gross sales of the restaurant, as defined in the license agreement. Under a separate lease or sublease, restaurant owners typically pay monthly rent based on a percentage (usually 8.5% to 10.0%) of monthly gross sales, as defined in the license agreement. Where the restaurant owner either owns the premises or leases it from a third party, the royalty is typically increased. Under the license agreement, each restaurant owner is required to make contributions to an advertising fund also based on a percentage of restaurant gross sales, as further described under “Advertising and Promotions,” below.
To keep system restaurants up-to-date, both aesthetically and operationally, our license agreements require a full-scale renovation of each restaurant by the restaurant owner, including our non-standard restaurants, which occurs approximately every 10 years, although may be subject to delay in certain circumstances. We typically, but are not required to, contribute up to 50% of the funding for certain front-of-restaurant construction costs incurred in connection with renovations on properties that we own or lease.
In Canada, we have not granted exclusive or protected areas or territories to restaurant owners. The license is a “location” license only, and we reserve the right to grant additional licenses for Tim Hortons restaurants at any other location. In addition, the royalty rates under license agreements entered into in connection with non-standard restaurants, including self-serve kiosks and strategic alliances with third parties, may vary from those described above for standard restaurants and are negotiated on a case-by-case basis. As part of our development approach in the U.S., we have granted limited exclusivity rights in a specific area to a restaurant owner in connection with an area development agreement where that owner is investing its own capital to develop restaurants. We expect to enter into similar arrangements in the U.S., on a limited basis, in fiscal 2014.
We reserve the right to terminate the license agreement for a variety of reasons described in the underlying license agreement, and generally, retain the right to reacquire a restaurant owner’s interest in a restaurant under certain circumstances.
Other arrangements. For new Canadian restaurant owners, we often enter into operator agreements, in which the operator acquires the right to operate a Tim Hortons restaurant, but we continue to be the owner of the equipment, signage and trade fixtures. These operator agreements are not typical of a franchise relationship. Such arrangements usually require the operator to pay approximately 20.0% of the restaurant’s weekly gross sales, as described in the operator agreement, to the Company. Additionally, the operator will be responsible for paying all trade debts, wages and salary expenses, maintenance and repair costs, taxes, and any other expenses incurred in connection with the operation of the restaurant. These operators also make the required contributions to our advertising funds, described below. In any such arrangement, the Company and the operator each have the option of terminating the agreement upon 30 days’ notice. Although we do not consider our operators to be typical restaurant owners, for purposes of this Form 10-K, references to restaurant owners include these operators, and references herein to license agreements include these operator agreements, unless otherwise indicated.
Historically, we offered a franchise incentive program (“FIP”) for certain of our U.S. restaurant owners, which provided interest-free financing (“FIP Note”) for the purchase of certain restaurant equipment, furniture, trade fixtures, and signage (the “equipment package”), with payment deferred for a period of 104 weeks from the date of opening. Commencing in fiscal 2011, we generally transitioned away from offering this arrangement and, as of fiscal 2013, the offering of FIP Notes ceased in its entirety. If our restaurant owners are unable to secure financing for the equipment package, we may extend the maturity date of an outstanding FIP Note on a case-by-case basis. If the restaurant owner does not make the required payments, we are able to take back ownership of the restaurant and equipment, based on the underlying franchise agreement. A significant portion of the outstanding FIP Notes are currently past due. Under Financial Accounting Standards Board Accounting Standards CodificationTM 810—Consolidation, we are required to consolidate the financial results of certain of these operators and FIP arrangements as set forth in Item 8. Financial Statements—Note 1 Summary of Significant Accounting Policies and Item 8. Financial Statements—Note 20 Variable Interest Entities of this Annual Report.
At our discretion, we may offer additional relief to restaurant owners primarily in developing markets in the U.S. where the brand is not yet established and the restaurants are underperforming. The terms of this additional relief vary depending on the circumstances, but may include assistance with costs of supplies; certain operating expenses, including real estate and equipment rent and royalties; and, in certain markets, labour and other costs. These “support costs” decrease the Company’s rents and royalties revenue. We also provide limited relief to Canadian restaurant owners in certain circumstances.

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Master License Agreements. We are party to master licensing arrangements, as licensee, with the franchisors of the Cold Stone Creamery brand in Canada and the U.S., although, in late 2013, we made the decision to stop developing Cold Stone Creamery locations in Tim Hortons restaurants in Canada. We are also party to two master license agreements, as licensor, with Apparel to develop Tim Hortons restaurants in the GCC. See Operations—Restaurant formats, Operations—Restaurant development and Operations—Cold Stone Creamery above and Trademarks and Service Marks below.
 
Advertising and Promotions
Our marketing is designed to focus on “It’s Time for Tims” and to create and extend our brand image as “your neighbourhood Tims” that offers “quality products at reasonable prices.” We use radio, television, print and online advertising; event sponsorship; our highly visible community caring programs; and our Tim Card, a reloadable cash card for guest purchases at system restaurants, to reinforce this brand image with our guests. We also host websites at www.everycup.ca and www.everycup.com which invite guests from Canada and the U.S. to share their stories and experiences with Tim Hortons, as well as Facebook and Twitter accounts.
National Marketing Program. Restaurant owners fund substantially all of our national marketing programs by making contributions to our Canadian or U.S. advertising funds, which were established to collect and administer contributions for advertising efforts. In fiscal 2013, restaurant owners and Company-operated restaurants in Canada contributed approximately 3.5% of their gross sales to the Canadian advertising fund. Although the franchise or license agreement requires contributions of up to 4.0% of gross sales, we have voluntarily reduced the current contribution to 3.5%, but retain the right to increase the contribution at any time. Restaurant owners and Company-operated restaurants in the U.S. contributed approximately 4.0% of their sales to the U.S. advertising fund. We have national advisory boards of elected restaurant owners. The mandate for these boards includes responsibility for assisting and advising the Corporation in connection with marketing and advertising matters.
In fiscal 2013, our Canadian advertising fund invested $22.0 million to expand the use of digital menu boards in our restaurants, and new rotating menu boards in our drive-thrus. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.
Regional Marketing Programs. Part of the national marketing program contribution is allocated to regional marketing groups (approximately 342 in Canada and 26 in the U.S.). The regional marketing groups sponsor and support locally targeted marketing programs. We also support these regional marketing groups with market strategy and regional plans and programs.
Required restaurant owner contributions to the advertising funds, and the allocation to local and regional advertising programs, are governed by the respective franchise agreements between the Company and its restaurant owners. Contributions by Company-operated restaurants for advertising and promotional programs are at the same percentage of retail sales as those made by franchised restaurants.
See Item 8. Financial Statements—Note 20 Variable Interest Entities for further information regarding our advertising funds.
 
Competition
We compete in the quick service restaurant segment in Canada and the U.S. We face significant competition from a wide variety of restaurants on a national, regional, and local level, including quick service and fast-casual restaurants focused on premium specialty and brewed coffee, baked goods, and sandwiches, as well as gas and other convenience locations that sell food and beverages. The size and strength of our competitors vary by region, and there are numerous competitors in nearly every market in which we conduct business or expect to enter.
We also compete with alternative methods of brewed coffee for home use. While these methods are a potential substitute for purchasing coffee from our restaurants, they also represent an opportunity for us. We have traditionally sold fine grind coffee for home brewers, and in fiscal 2012, we entered the single-serve coffee market.
We believe competition within the quick service restaurant segment is based on, among other things, product quality, taste, concept, atmosphere, guest service, operational excellence, convenience and price. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of marketing, general brand acceptance, and new product development by us and our competitors are also important factors. The prices charged by us for menu items may vary from market to market depending on competitive pricing and the local cost structure. Additionally, we compete with quick service restaurants and other specialty restaurants for personnel, suitable restaurant locations, and qualified restaurant owners.

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In Canada, we have the leading market position in this segment, based on systemwide sales and number of restaurants, with a strong presence in every province. According to NPD Crest, based on transactions, our system restaurants represented approximately 42% of the Canadian quick service restaurant sector for the 12 months ended November 2013 and 76% of the brewed coffee sector of the Canadian quick service restaurant sector for the same period, in each case based on number of guests served. Our strong brand, value positioning, convenience and ability to leverage our scale in advertising are designed to help support our goal of maintaining and building upon our market position in Canada in fiscal 2014.
In the U.S., we have developed a regional presence in certain markets in the Northeast and Midwest, but we still have limited brand awareness, even in many areas where we have a presence. Our competitors in the U.S. range from small local independent operators to well-capitalized national and regional chains, such as McDonald’s®, Wendy’s, Starbucks®, Subway® and Dunkin’ Donuts®. Many of our competitors in the U.S. are significantly larger than us, based on total systemwide sales and number of restaurants and, therefore, have substantially greater financial and other resources, including personnel and larger marketing budgets and greater leverage from marketing spending, which may provide them with a competitive advantage. We plan to continue expanding in our core and priority markets. We will likely need to build brand awareness in those markets through advertising and promotional activity. We do not get the same leverage from our television marketing activities in the U.S. as we do in Canada because our restaurants are spread across numerous distinct markets that require local purchases for television advertising, as opposed to leveraging local or regional advertising across larger marketing areas that are more highly penetrated with our restaurants.
Competition in both Canada and the U.S. has intensified over the past few years in the context of ongoing macro-level economic challenges and fragile consumer confidence. In an environment of limited overall growth in the quick service restaurant sector, several restaurant chains including Tim Hortons have been seeking to grow through a broadening of their menu offerings and an increased focus on dayparts beyond their traditional areas of strength. These strategies have also led to heightened competition in the coffee market and the breakfast daypart, among others, both of which are key parts of our business. A number of competitors, as well as Tim Hortons, have also engaged in discounting, “combo” or value-pricing practices, and other promotions. The combination of challenging macro-operating conditions and a cross-over of brands and menu offerings has led to an intensified competitive market with respect to price, value positioning and promotional activities. In fiscal 2013, we continued to offer targeted value-priced food and beverage programs, in addition to the launch of new products at a variety of everyday value price points, with the intent to strengthen and build on our value/quality positioning and to enhance this message with our guests in a tangible way. In the U.S., we also used coupons as a vehicle to attract new guests and introduce them to our brand and new product offerings. While we do not intend to stray from our core everyday positioning of quality food at reasonable prices, we are working with our restaurant owners to communicate and interact with guests in a manner that responds to their current situation and the economic environment. We believe that continued business refinements will help, over time, to positively position our U.S. business to defend aggressive competitive discounting activity, while also creating sales momentum.
 
Trademarks and Service Marks
We have registered various trademarks and service marks in Canada, the U.S. and certain other jurisdictions. We have also registered various internet domain names, including www.timhortons.com, www.rolluptherimtowin.com, www.timcard.ca, shop.timhortons.com, www.everycup.ca and www.everycup.com. Some of our most recognizable registered marks include:
Tim Hortons signature;
Tim Hortons and Always Fresh Oval Background Design;
Tim Hortons Cafe & Bake Shop Design;
Roll Up The Rim To Win;
Timbits;
Tim Card;
TimShop;
Where Quality Meets Value;
Camp Day; and
Making a True Difference.
In 2013, we also filed a pending application for “It’s Time for Tims”.
We believe our trademarks, service marks and other proprietary rights have significant value and are important to our brand-building efforts and the marketing of our restaurant system. We generally intend to renew trademarks and service marks that are scheduled to expire and to otherwise protect and vigorously defend and enforce our rights to this intellectual property. See also Item 1A. Risk Factors—We may not be able to adequately protect our intellectual property, which could decrease the value of our brand and branded products.

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We are also a party to two master license agreements with Apparel, as licensor, pursuant to which Apparel has the right to use certain Tim Hortons trademarks in Oman, Bahrain, Qatar, Kuwait and the United Arab Emirates, and in Saudi Arabia, respectively.
 
Sustainability and Responsibility
Sustainability and responsibility at Tim Hortons is integrated through our “Making a True Difference” framework which is divided into three core pillars—Individuals, Communities and the Planet. Within each pillar are a number of key issues determined to be of importance to our stakeholders such as nutrition, food safety, employees, children, animal welfare, community giving, environmental stewardship, climate change and sustainable supply chain practices. We have developed a number of commitments and goals with respect to each of these areas of focus, and have reported our performance against these goals in our annual Sustainability and Responsibility Report. Our Sustainability and Responsibility Report is, in large part, prepared in accordance with reporting which broadly models the Global Reporting Initiative’s (“GRI”) G3.1 Guidelines and is available online at http://sustainabilityreport.timhortons.com.
Governance and Accountability for Sustainability and Responsibility. Our Sustainability and Responsibility Policy includes a structure and supporting processes for effective sustainability and responsibility governance and accountability, and is reviewed regularly. The Tim Hortons Board of Directors governs sustainability and responsibility through the Nominating and Corporate Governance Committee of the Board. Oversight activities include review of policy development; sustainability and responsibility strategies, including mitigation of risks; and organizational sustainability and responsibility commitments, goals and external reporting. Management accountability for sustainability and responsibility resides within the Tim Hortons Executive Group.
Management of Sustainability Risks and Opportunities. The assessment and management of sustainability-related risks and opportunities is embedded as part of our governance framework, as is our sustainability and responsibility strategy and its supporting implementation plan. Key aspects of our approach include the assessment of sustainability and responsibility impacts of major business decisions; the integration of sustainability and responsibility into the Company’s Enterprise Risk Management Program, as applicable; the development of internal performance scorecards; monitoring our relations with our stakeholders; the assessment of sustainability and responsibility trends; and consideration of public policy, consumer, corporate, and general public trends, issues, and developments that may impact the Company.
 
Environmental Matters
Our operations, including our distribution and manufacturing operations, supply chain, restaurant site selection and development, and other aspects of our business, are subject to complex environmental, health and safety regulatory regimes, and involve the risk of environmental liability. There are also potential risks for releases of hazardous substances and accidents that could result in environmental contamination, that may not be within our control.
Our restaurants have not been the subject of any material environmental investigations or claims of which we are aware. Our current practice is to conduct environmental due diligence when considering potential new restaurant locations or other company-owned facilities. This due diligence typically includes a Designated Substance Survey and a Phase I Environmental Site Assessment, which assists in identifying environmental conditions associated with a property and, if warranted, a Phase II Environmental Site Assessment to further investigate any areas of potential environmental concern.
Certain municipal governments and environmental advocacy groups focus on the level of emissions from vehicles idling in drive-thrus. Certain of these municipalities have implemented a moratorium on drive-thru development and/or have considered implementing a restriction on drive-thru operations on smog-alert days. Anti-idling by-laws are also being considered in various communities, on both public and private lands. If such restrictions, moratoriums and/or by-laws are imposed, they could have a substantial negative impact on our business and would limit our ability to develop and/or operate restaurants with drive-thrus.
Variations in weather in the short-term, and climate change in the long-term, have the potential to impact growing conditions in regions where we source our agricultural commodities, including coffee, wheat, sugar and other products. Over time, climate change may result in changes in sea levels, weather and temperature change, disease and pest levels, drought and fires, and resource availability. On a year-to-year basis, agricultural production can be negatively affected by weather variations and resulting physical impacts to the environment. The overall supply, demand and quality of agricultural commodities and the price we pay for these commodities on the world market can therefore be impacted. We are unable to predict the effect on our operations, revenues, expenditures, cash flows, financial condition and liquidity due to the potential impacts of climate change.

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Proposed cap and trade systems and/or new carbon taxation may present risks or opportunities that will likely be unique to every business sector. We are unable to predict the effect on our operations of possible future environmental legislation or regulations in these areas.
Stewardship fee programs require all industry stewards with branded packaging, such as Tim Hortons, to contribute to a fund that subsidizes a portion of the annual costs of municipal recycling programs. Volumes of designated packaging are enumerated by the industry steward and fees are paid regardless of whether the designated materials are managed in municipal recycling programs. Stewardship programs for packaging currently exist in Ontario, Quebec, Manitoba and British Columbia.
Over time, it is expected that stewardship programs will evolve into full extended producer responsibility programs (“EPR”) where industry funds up to 100% of the end-of-life management for products and packaging. This evolution is aligned with the Canadian Council of Ministers of the Environment’s (“CCME”) Canada-Wide Action Plan for Extended Producer Responsibility, which recommends that all Canadian provinces develop and implement EPR legislation for packaging (and other designated materials) by 2015. Some provinces have begun this process. For example, Quebec implemented 100% producer funding for packaging and printed matter in 2013, and British Columbia plans to implement 100% producer funding in 2014. Other jurisdictions are currently contemplating similar requirements.
 
Acquisitions and Dispositions
We have from time to time acquired the interests of, and sold Tim Hortons restaurants to, restaurant owners, and we expect to continue to do so from time to time in the future, where prudent. We generally retain a right of first refusal in connection with any proposed sale of a restaurant owner’s interest.
In October 2010, we sold our 50% joint-venture interest in Maidstone Bakeries to our former joint venture partner. See Operations—Manufacturing above. During 2010 through 2012, we disposed of all Company-owned and/or controlled properties in the Providence, Rhode Island and Hartford, Connecticut markets in connection with the closures (in late 2010) of underperforming restaurants in these New England regions. In the fourth quarter of 2013, we closed certain underperforming restaurants across various U.S. markets.
We intend to evaluate other potential mergers, acquisitions, joint ventures, investments, strategic initiatives, alliances, vertical integration opportunities and divestitures when opportunities arise or our business warrants evaluation of such strategies. See Item 1A. Risk Factors—Our growth strategy and other important strategic initiatives may not be successful and may expose us to certain risks.
 
Seasonality
Our business is moderately seasonal. Revenues and operating income are generally lower in the first quarter due, in part, to a lower number of new restaurant openings and consumer post-holiday spending patterns. First quarter revenues and operating income may also be affected by severe winter weather conditions, which can limit our guests’ ability to visit our restaurants and, therefore, reduce sales. Revenues and operating income generally build over the second, third, and fourth quarters and are typically higher in the third and fourth quarters due, in part, to a higher number of restaurant openings having occurred year-to-date. Because our business is moderately seasonal, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
 
Employees
In August 2012, we announced the implementation of an organizational structure which includes a Corporate Centre and Business Unit design, and began the process of realigning roles and responsibilities under that new structure. The realignment was completed at the end of the first quarter of 2013. We believe that the new structure facilitates the execution of strategic initiatives as we continue to grow our business, and streamlines decision-making across the Company. We also believe that the new structure creates scalability for future growth and reduces our cost structure relative to what it otherwise would have been had we not undertaken the reorganization.
Marc Caira was appointed President and CEO effective July 2, 2013. Prior to assuming that role, Mr. Caira was most recently Global CEO of Nestlé Professional and a member of the Executive Board of Nestlé SA, the world’s largest food and beverage company and recognized leader in nutrition, health and wellness. He replaced Paul House, our prior President and CEO, who remains Chairman of the Board of Directors. Mr. House has held senior positions with the Company for 28 years.

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Our principal office locations are in Oakville, Ontario (Canada) and Dublin, Ohio (U.S.). We have 12 other regional offices, including our manufacturing facilities and distribution centres. Our manufacturing facilities are located in Rochester, New York; Hamilton, Ontario; and Oakville, Ontario. Our distribution centres are located in Guelph, Ontario; Kingston, Ontario; Langley, British Columbia; Calgary, Alberta; Debert, Nova Scotia; and a cross-deck facility in Vaudreuil Dorion, Quebec. Our other regional offices (other than our distribution and manufacturing facilities) are located in Lachine, Quebec; Brighton, Michigan; and Williamsville, New York.
As at December 29, 2013, we had approximately 2,148 employees in our principal offices, regional offices, distribution centres, and manufacturing facilities. We also had four employees that work on international activities in the Republic of Ireland and the U.K., Luxembourg, and the GCC.
As at December 29, 2013, the Company operated directly (without restaurant owners) 14 restaurants in Canada and two restaurants in the U.S. The total number of full-time employees working in these corporate restaurants at December 29, 2013 was approximately 233, with another approximately 177 employees working part-time, bringing the total number of our restaurant employees to approximately 410. None of our employees are covered by a collective bargaining agreement. At franchised locations, team members are hired and managed by the restaurant owners and not by the Company.
 
Government Regulations and Affairs
The successful development and operation of restaurants depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thrus), environmental (including litter and drive-thru emissions), traffic and transportation, land transfer tax, and other regulations. Restaurant operations, and our manufacturing and distribution facilities, are also subject to licensing and regulation by federal, state, provincial, and/or municipal departments relating to the environment, health, food preparation, sanitation and safety standards and, for our distribution business, traffic and transportation regulations; federal, provincial, and state labour laws (including applicable minimum wage requirements, overtime, working and safety conditions and employment eligibility requirements); federal, provincial, and state laws prohibiting discrimination; federal, provincial, state and local tax laws and regulations; and, other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990, the Accessibility for Ontarians with Disabilities Act and similar Canadian federal and provincial legislation that can have a significant impact on our restaurant owners and our performance. See also Environmental Matters above regarding environmental regulations affecting our Company.
A number of states in the U.S., and the provinces of Ontario, Alberta, Prince Edward Island, Manitoba and New Brunswick, have enacted or are in the final stages of enacting legislation that affects companies involved in franchising. Franchising activity in the U.S. is also regulated by the U.S. Federal Trade Commission. Much of the legislation and rules adopted have been aimed at providing detailed disclosure to a prospective restaurant owner, duties of good faith as between the franchisor and the restaurant owner, and/or periodic registration by the franchisor with applicable regulatory agencies. Additionally, some U.S. states have enacted legislation that governs the termination or non-renewal of a franchise agreement and other aspects of the franchise relationship. Certain other U.S. states, as well as the U.S. Congress, have also considered or are considering legislation of this nature. We have complied with regulatory requirements of this type in all applicable jurisdictions. We cannot predict the effect on our operations, particularly on our relationship with restaurant owners, of the future enactment of additional legislation or modifications of existing legislation in this area.
The Canadian government continues to work with members of the quick service restaurants sector to reduce sodium intake among consumers. We continue to work with suppliers to reduce the amount of sodium in our products. As of the end of 2013, we have gradually reduced sodium in several of our products, and plan to continue to work to further reduce sodium levels in our products.
Governments and consumer advocacy groups are encouraging alternative food processing methods to reduce trans fatty acids (“TFA”). Since 2006, significant progress has been made to reduce TFA in most of our products to at or below acceptable levels in Canada and the U.S. As required by Canadian and U.S. legislation, we comply with nutritional labeling for foods, including those that contain acceptable TFA levels. Certain municipal governmental authorities, such as New York City, have banned TFA. We continue to research approaches so that we do not exceed acceptable levels of TFA in our products, while still maintaining the taste and quality that guests desire.
Our main objective is to continue to provide our guests with the same great tasting, quality products, without sacrificing flavour and freshness. With respect to nutritional awareness, we have voluntarily posted the sodium content (along with 12 additional nutrients) of our products in our online and printed nutrition guides for a number of years as part of our commitment

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to providing our guests with up-to-date nutritional information. We also developed a nutrition application with the latest nutritional information which may be downloaded to certain smartphone devices.
Legislation has been enacted in certain U.S. jurisdictions requiring restaurants to post calorie count information on menu boards. We will monitor and comply with all regulations enacted by the U.S. Food and Drug Administration in connection with such calorie count posting requirements. Certain provinces of Canada are also considering similar laws that would require the posting of calorie count information on menu boards. National restaurant chains in Canada, including our Company, are engaged in a consistent, national approach to providing nutrition information. In addition, legislation aimed at curbing the consumption of, or discouraging the purchase of, certain food offerings may be implemented in Canada and the U.S., including regulations banning the use of certain types of food product additives, and/or regulations increasing the taxes payable on certain food products. 
 
Availability of Information
We currently qualify as a foreign private issuer in the U.S. for purposes of the Exchange Act. Although as a foreign private issuer we are no longer required to do so, we currently continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers. We make available, through our internet website for investors (www.timhortons-invest.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the SEC and with the Canadian Securities Administrators.
As a Canadian corporation and foreign private issuer in the U.S. that is not subject to the requirements of Section 14(a) of the Exchange Act or Regulation 14A, our management proxy circular (the “proxy circular”) and related materials are prepared in accordance with Canadian corporate and securities law requirements. As a result, for example, our officers and directors are required to file reports of equity ownership and changes in equity ownership with the Canadian Securities Administrators and do not file such reports under Section 16 of the Exchange Act.

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Item 1A. Risk Factors
We caution readers that in addition to the important factors described elsewhere in this Form 10-K (the “Report”), readers should carefully review the risks identified below as they describe important factors that could affect or cause our actual results to differ materially from those expressed in any forward-looking statements made by us and/or our historic trends.
Our growth strategy and other important strategic initiatives may not be successful and may expose us to certain risks.
Our growth strategy, to a large extent, depends on our ability to increase the number of Tim Hortons restaurants through internal growth and potentially through strategic initiatives (such as acquisitions, joint ventures, and/or alternative business models, such as self-serve kiosks, co-branding, strategic relationships, master licensing agreements, U.S. development alternatives, and area development agreements). There is no assurance that we will be able to achieve our growth objectives, new restaurants may not be profitable, and strategic initiatives may not be successful and may expose us to various risks.
(a) New restaurants and new markets
The addition of new restaurants in a market may negatively impact the same-store sales growth and profitability of existing restaurants in the market. If our new restaurants are not profitable or negatively affect the profitability of existing restaurants, we may be limited or unable to carry out expansion activities and our business model of franchising new or existing restaurants as we could have difficulty finding qualified restaurant owners willing to participate in our expansion or we may desire that the restaurant reach minimum profitability levels before franchising the restaurant. This may negatively impact our revenue growth and operating results. We may also need to provide relief and support programs for our restaurant owners in developing markets as well as expand our, or introduce new, financing support programs or extend financing on more generous terms than would be available from third parties, either of which could increase our costs and thus decrease net income. Alternatively, if we have interested restaurant owners, we may offer the restaurant to such owner through an operator agreement or other agreement, which may also result in an increase in restaurant owner relief and support costs.
We may enter markets where our brand is not well known and where we have little or no operating experience. New markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets and/or higher construction, occupancy, and operating costs compared to existing restaurants. As a result, new restaurants in those markets may have lower average restaurant sales than restaurants in existing markets and may take longer than expected to reach target sales and profit levels, and may never do so, thereby affecting our overall financial condition and/or financial results. We will need to build brand awareness in those markets we enter through advertising and promotional activity, and those activities may not promote our brand as effectively as intended, if at all.
(b) Restaurant performance
From time to time, we may rationalize and close underperforming restaurants in order to improve overall profitability. Such closures, however, may be accompanied by impairment charges, closure costs, and/or valuation allowances that may have a negative impact on our earnings. We may also deliberately slow the development of new restaurants in some markets, depending on various factors, including the sales growth of existing restaurants in those markets. Same-store sales growth is a measure we monitor, and, among other things, if sales growth falls below our expectations for a prolonged period of time based on applicable accounting rules, we will be required to assess whether the market is impaired, and the market may require an impairment charge. In addition, if we have significant negative cash flows in a market for several years, or if we close restaurants outside of the ordinary course of business, we may be forced to impair assets in affected markets, which could have a negative effect on our earnings.
(c) Location
The success of any restaurant depends in substantial part on its location. There can be no assurance that current locations will continue to be attractive as demographic patterns change. Neighbourhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. Competition for restaurant locations can also be intense and there may be delay or cancellation of new site developments by developers and landlords, which may be exacerbated by factors related to the commercial real estate or credit markets. If we cannot obtain desirable locations for our restaurants at reasonable prices due to, among other things, higher than anticipated acquisition, construction and/or development costs of new restaurants; difficulty negotiating leases with acceptable terms; onerous land use or zoning restrictions; or challenges in securing required governmental permits; then our ability to execute our growth strategies may be adversely affected. Similarly, our growth strategy includes renovation plans for certain of our restaurants. Our ability to complete our restaurant renovation plans as projected may be impacted by the same factors described above.

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(d) Vertical integration and growth
Our vertically integrated manufacturing, warehouse and distribution capabilities are important elements of our business model and allow us to: improve product quality and consistency; protect proprietary interests; facilitate the expansion of our product offerings; control availability and timely delivery of products; provide economies of scale and labour efficiencies; and generate additional sources of income and financial results. There are certain risks associated with our vertical integration growth strategy, including: delays and/or difficulties associated with owning a manufacturing, warehouse and distribution business; maintenance; operations and/or management of the facilities, equipment, employees and inventories; limitations on the flexibility of controlling capital expenditures and overhead; and the need for skills and techniques that are outside our traditional core expertise. If we do not adequately address the challenges related to our vertically integrated operations or our overall level of utilization or production decreases for any reason, our results of operations and financial condition may be adversely impacted.
We intend to continue to evaluate potential mergers, acquisitions, joint venture investments, alliances, and vertical integration opportunities. These transactions involve various financial and tax, managerial, and operational risks, including: accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition opportunities; the potential loss of key personnel of an acquired business; our ability to achieve projected economic and operating synergies; difficulties successfully integrating, operating, maintaining and managing newly acquired operations or employees; difficulties maintaining uniform standards, controls, procedures and policies; the possibility we could incur impairment charges if an acquired business performs below expectations; unanticipated changes in business and economic conditions affecting the acquired business; ramp-up costs, whether anticipated or not; the potential for the unauthorized use of our trademarks and brand name by third parties; the possibility of a breach of contract adversely affecting a business relationship with a third party; the potential negative effects such transactions may have on the Company’s relationship with restaurant owners and business relationships with suppliers; the potential exposure to restaurant owners and others arising from our reliance on and dissemination of information provided by third parties; and diversion of management’s and restaurant owners’ attention from the demands of the existing business. In addition, there can be no assurance that we will be able to complete desirable transactions, for reasons including restrictive covenants in debt instruments or other agreements with third parties, or a failure to secure financing. Strategic alliances have been an integral part of our growth strategies. There can be no assurance that: significant value will be recognized through such strategic alliances; we will be able to maintain our existing strategic alliances; or, we will be able to enter into new strategic relationships in the future. While we believe we could ultimately take action to terminate any alliances that prove to be unsuccessful, we may not be able to identify problems and take action quickly enough and, as a result, our brand image and reputation may suffer, or we may suffer increased liabilities, costs and other financial burdens. Entry into and the subsequent unwinding of strategic alliances may expose us to additional risks which may adversely affect our brand and business and decrease our revenue and growth prospects.
(e) Implementation
We developed and began implementing various new strategic plans and initiatives commencing in fiscal 2014, as an update to our previous strategic plan that was implemented in 2010. Our financial outlook and long-range aspirational earnings per share targets through the end of 2018 are based on the successful implementation, execution, and guest acceptance of such plans and initiatives. These strategic plans are also designed to improve our results of operations and drive long-term shareholder value. There can be no assurance that we will be able to implement our strategic plans and initiatives or that such plans and initiatives will yield the expected results, either of which could cause us to fall short of achieving our financial objectives and long-range aspirational goals.
Our success depends substantially on the value of the Tim Hortons brand and our Canadian segment performance.
Our success is largely dependent upon our ability to maintain and enhance the value of our brand, our guests’ connection to and perception of our brand, and a positive relationship with our restaurant owners. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may arise from events that are or may be beyond our ability to control and may damage our brand, such as: actions taken (or not taken) by one or more restaurant owners or their employees relating to health, safety, quality assurance, environmental, welfare, labour matters, public policy or social issues, or otherwise; litigation and claims; failure of, or security breaches or other fraudulent activities associated with, our networks and systems; illegal activity targeted at us; and negative incidents occurring at or affecting our business partners, suppliers, affiliates, or corporate social responsibility programs. Our brand could also be damaged by falsified claims or the quality of products from vertically integrated manufacturing facilities or our other suppliers, as well as negative publicity from various sources, whether true or not, which are beyond our control. In addition, a variety of risks to our brand are associated with the use of social media, including negative comments about us, improper disclosure of proprietary or personal information, exposure to personally identifiable information, fraud or out-of-date

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information which may lead to litigation or result in negative publicity that could damage our brand and reputation and result in lower sales and, ultimately, lower earnings and profits.
The Tim Hortons brand is synonymous with our ability to deliver quality food products at value prices. If we are unable to maintain in Canada, or unable to maintain and/or achieve in other markets, an appropriate price-to-value relationship for our products in the minds of guests, our ability, by and through our restaurant owners and independently, to increase or maintain same-store sales may be affected. Our ability to maintain or achieve the appropriate price-to-value relationship also may be affected by discounting or other promotional activity of competitors, which can be very aggressive.
Our financial performance is highly dependent on our Canadian business unit, which accounted for the substantial majority of our reportable segment revenues and our reportable segment operating income in fiscal 2013. Accordingly, any substantial or sustained decline in our Canadian business would materially and adversely affect our overall financial performance.
The quick service restaurant segment is highly competitive, and competition could lower our revenues, margins, and market share.
The quick service restaurant segment of the food service industry is intensely competitive. Tim Hortons restaurants compete with international, regional, and local organizations primarily through the quality, variety, and value perception of food and beverage products offered. Other key competitive factors include: the number and location of restaurants; quality and speed of service; attractiveness of facilities; effectiveness and magnitude of advertising, marketing, promotional, and operational programs; price; changing demographic patterns and trends; changing consumer preferences and spending patterns, including weaker consumer spending in difficult economic times, or a desire for a more diversified menu; changing health or dietary preferences and/or perceptions; and, new product development. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business opportunities, a loss of market share, and an inability to attract qualified restaurant owners in the future.
Our financial results and the success of our same-store sales growth strategy are largely dependent on our continued innovation and the successful development and launch of new products and product extensions.
The success of our same-store sales growth strategy is dependent on, among other things, our ability and capacity to extend our product offerings, introduce innovative new products, adapt to consumer trends and desires, achieve the hospitality and speed of service standards expected by our guests, provide a distinctive and overall quality guest experience, and respond to competitive pressures. Although we devote significant focus on product development, our ability to develop commercially successful new products will depend on our ability to gather sufficient data and effectively gauge the direction of market and consumer trends and initiatives and successfully identify, develop, manufacture, market and sell new or improved products in response to such trends. In addition, the marketing and promotion associated with our introduction of new products may generate litigation or other legal proceedings against us by competitors claiming infringement of their intellectual property or other rights, which could negatively impact our results of operations. The speed of service and capacity in our restaurants may also be impacted by the complexity of our menu and new product offerings which could have an adverse effect on customer acceptance, perceptions and reactions and, ultimately, our financial condition or results of operations.
Increases in the cost of commodities or decreases in the availability of commodities, as well as inconsistent quality of commodities, could have an adverse impact on our restaurant owners and on our business and financial results.
Our restaurant system is exposed to price volatility in connection with certain key commodities that we purchase in the ordinary course of business such as coffee, wheat, edible oils and sugar, which can impact revenues, costs and margins. Although we monitor our exposure to commodity prices and our forward hedging program (of varied duration, depending upon the type of underlying commodity) partially mitigates the negative impact of any cost increases, price volatility for commodities we purchase may increase due to conditions beyond our control, including economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage and changing global consumer demand and consumption patterns. Increases and decreases in commodity costs are largely passed through to restaurant owners, and we and our restaurant owners have some ability to increase product pricing to offset a rise in commodity prices, subject to restaurant owner and guest acceptance. Notwithstanding the foregoing, while it is not our current practice, we may choose not to pass along all price increases to our restaurant owners which could have a more significant effect on our business and results of operations than if we pass along all increases to our restaurant owners. Price fluctuations may also impact margins as many of these commodities are typically priced based on a fixed-dollar mark-up. Although we generally secure commitments for most of our key commodities that typically extend over a six-month period, we may be forced to purchase commodities at higher prices at the end of the respective terms of our current commitments. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Commodity Risk of this Report.

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If the supply or quality of commodities, including coffee, fails to meet demand or our and our guests’ quality standards, our restaurant owners may experience reduced sales which, in turn, would reduce our rents and royalty revenues as well as distribution sales. Such a reduction in our rents and royalty revenues and distribution sales may adversely impact our business and financial results.
Food-related health and safety concerns or perceptions may have an adverse effect on our business.
Incidents or reports, whether true or not, of: unclean water supply; food-borne illness (including E. coli, listeria, hepatitis A, “mad cow” disease, salmonella or other types of bacterial, parasitic or viral food-borne diseases); injuries caused by or claims of food tampering, food contamination, widespread product recall, employee hygiene and cleanliness failures or impropriety at Tim Hortons or other quick service restaurants unrelated to Tim Hortons; and, the potential health impacts of consuming certain of our products, including our core products; could result in negative publicity, damage our brand value, and potentially lead to product liability or other claims. Any decrease in guest traffic or temporary closure of any of our restaurants as a result of such incidents or negative publicity may have a material adverse effect on our business and results of operations. Food-borne illness or food safety issues may also adversely affect the availability, price and quality of ingredients, which could result in disruptions in our supply chain and/or negatively impact both the Company and our restaurant owners.
Our distribution operations and supply chain are subject to pressures and risks, many of which are outside our control, that could reduce our profitability.
Our distribution operations and supply chain may be impacted by various factors, some of which are beyond our control, that could injure our brand and negatively affect our results of operations and our ability to generate expected earnings and/or increase costs, including: increased transportation, shipping, food and other supply costs; inclement weather or extreme weather events; risks of having a single source of supply for certain of our food and beverage products; shortages or interruptions in the availability or supply of high-quality coffee beans, perishable food products and/or their ingredients; variations in the quality of our food and beverage products and/or their ingredients; potential cost and disruption of a product recall; potential negative impacts on our relationship with our restaurant owners associated with an increase of required purchases, or prices, of products purchased from our distribution business; and political, physical, environmental, labour, or technological disruptions in our own or our suppliers’ manufacturing and/or warehousing plants, facilities, or equipment.
Because we do not provide distribution services to our restaurant owners in certain geographic areas, our restaurant owners in such areas may not receive the same level of service and reliability as we are able to provide through our own distribution channels.
Our earnings and the success of our growth strategy depends in large part on our restaurant owners; actions taken by our restaurant owners may harm our business.
A substantial portion of our earnings come from royalties, rents, and other amounts paid by restaurant owners, who operated substantially all of our system restaurants as at December 29, 2013. Accordingly, our financial results are, to a large extent, dependent upon the operational and financial success of our restaurant owners. There can be no assurance that we will be able to maintain positive relationships with our existing restaurant owners or that we will be able to continue to attract, retain, and motivate sufficient numbers of qualified restaurant owners, either of which could materially and adversely affect our business and operating results. Furthermore, the success of our same-store sales growth strategy and brand reputation is dependent, among other things, on achievement of our hospitality, operational standards, and a positive overall guest experience. There can be no assurance that we and our restaurant owners will be able to continue to attract, retain and motivate sufficient numbers of qualified restaurant team members, who will be able and willing to achieve our hospitality and operational restaurant-level standards. Our restaurant owners are independent contractors and, as a result, some restaurant owners may not successfully operate restaurants in a manner consistent with our standards and requirements or comply with federal, provincial or state labour laws (including minimum wage requirements, overtime, working and safety conditions, employment eligibility and temporary foreign worker requirements), and may not be able to hire, train and retain qualified managers and other restaurant personnel. Any operational shortcoming of a franchised restaurant is likely to be attributed by guests to our entire system, thus damaging our brand reputation and potentially affecting revenues and profitability. Our principal competitors that have a significantly higher percentage of company-operated restaurants than we do may have greater control over their respective restaurant systems and have greater flexibility to implement operational initiatives and business strategies.
Since we receive revenues in the form of rents, royalties, and franchise fees from our restaurant owners, our revenues and profits would decline and our brand reputation could also be harmed if a significant number of restaurant owners were to: experience operational failures, including health, safety and quality assurance issues; experience financial difficulty (including bankruptcy); be unwilling or unable to pay us for food and supplies, or for royalties, rent or other fees; fail to be actively

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engaged in their business such that they are unable to operate their restaurants in a manner consistent with our standards; fail to enter into renewals of franchise, operating or license agreements; or experience labour shortages, including due to changes in employment eligibility requirements, the cessation or limitation of access to federal or provincial labour programs, including the temporary foreign worker program, or significant increases in labour or other costs of running their businesses. Our advertising levies may also be at risk, which could impact the magnitude and extent of our marketing initiatives. In addition, the ability of restaurant owners to finance the equipment and renovation costs or improvements and additions to existing restaurants, and our sale of restaurants to restaurant owners, are affected by economic conditions, including interest rates and the cost and availability of borrowed funds. A weakening in restaurant owner financial stability would have a negative impact on our business and may cause us to finance purchases for our restaurant owners or, if we elect not to do so or we are unable to do so, our ability to grow our business in the way we would like may be adversely impacted.
Our business activities subject us to litigation risk that could adversely affect us by subjecting us to significant monetary damages and other remedies or by increasing our litigation expense.
From time to time, we are subject to claims incidental to our business, such as “slip and fall” accidents at franchised or Company-operated restaurants, claims and disputes in connection with site development and construction of system restaurants and employment claims. In addition, class action lawsuits have been filed in the past, and may continue to be filed, against quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with their products or that certain food products contribute to obesity. Any negative publicity resulting from these claims may adversely affect our reputation, making it more difficult to attract and retain qualified restaurant owners and grow our business. We may also be subject to claims from employees, guests, and others relating to health and safety risks and conditions of our restaurants associated with design, operation, construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations. In addition, from time to time, we may face claims from: (a) our employees relating to employment or labour matters, including, potentially, class action suits regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, or overtime compensation; (b) our restaurant owners and/or operators regarding their profitability, wrongful termination of their franchise or operating (license) agreement, as the case may be, or other restaurant-owner relationship matters; (c) taxation authorities regarding tax disputes or tax positions taken by the Company; and/or (d) business partners, stakeholders or other third parties relating to intellectual property infringement claims. Furthermore, in certain of our agreements, we may agree to indemnify our business partners against any losses or costs incurred in connection with claims by a third party alleging that our services infringe the intellectual property rights of the third party. Companies have increasingly become subject to infringement threats from non-practicing organizations (sometimes referred to as ‘‘patent trolls’’) filing lawsuits for patent infringement. We, or our business partners, may become subject to claims for infringement and we may be required to indemnify or defend our business partners from such claims. We are also exposed to a wide variety of falsified or exaggerated claims due to our size and brand recognition. All of these types of matters have the potential to unduly distract management’s attention and increase costs, including costs associated with defending such claims. Our current exposure with respect to legal matters pending against us could change if determinations by judges and other finders of fact are not in accordance with management’s evaluation of the claims. Should management’s evaluations prove incorrect and such claims are successful, our exposure could exceed expectations and have a material adverse effect on our business, financial condition and results of operations. Although some losses may be covered by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are insufficient to offset our losses fully, our consolidated financial condition or results of operations may be adversely affected.
Tax regulatory authorities may disagree with our positions and conclusions regarding certain tax attributes and treatments, including relating to certain of our corporate reorganizations, capital structure initiatives, or internal or external transactions, resulting in unanticipated costs or non-realization of expected benefits.
A taxation authority may disagree with certain views of the Company, including, for example, the allocation of profits by tax jurisdiction, and the deductibility of our interest expense, and may take the position that material income tax liabilities, interests, penalties, or other amounts are payable by us, in which case, we expect that we would contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful, the implications could be materially adverse to us and affect our effective tax rate or operating income, where applicable.
There can be no assurance that the Canada Revenue Agency (the “CRA”) and/or the U.S. Internal Revenue Service (the “IRS”) will agree with our interpretation of the tax aspects of reorganizations, initiatives, transactions, or any related matters associated therewith that we have undertaken. The CRA or the IRS may disagree with our view and take the position that material Canadian or U.S. federal income tax liabilities, interest and penalties, respectively, are payable or that our tax positions or views are invalid. If we are unsuccessful in disputing the CRA’s or the IRS’ assertions, we may not be in a position to take advantage of the effective tax rates and the level of benefits that we anticipated to achieve as a result of corporate reorganizations, initiatives and transactions, and the implications could be materially adverse to us, including an increase in our

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effective tax rate. Even if we are successful in maintaining our positions, we may incur significant expense in contesting positions asserted or claims made by tax authorities that could have a material impact on our financial position and results of operations. Similarly, other costs or difficulties related to the reorganizations and related transactions, which could be greater than expected, could also affect our projected results, future operations, and financial condition.
Under our current corporate structure, an increase in debt levels beyond our current target of $900.0 million could result in further increases in the effective tax rate resulting from incurring additional interest expense for which we may not receive a tax benefit, and/or increases in income or withholding taxes on distributions from our Canadian operating company to our parent corporation. Addressing constraints in our corporate structure is an important consideration to maintaining our effective tax rate over the longer term, although there can be no assurance that we will be able to address these constraints in a timely or tax efficient manner. Our inability to address these constraints in a timely or efficient manner could negatively affect our projected results, future operations, and financial condition.
Our business is subject to various laws and regulations and changes in such laws and regulations and/or failure to comply with existing or future laws and regulations, or our planning initiatives related to such laws and regulations, could adversely affect us and our shareholders and expose us to litigation, damage our brand reputation or lower profits.
Compliance with these laws and regulations and planning initiatives undertaken in connection with such laws and regulations could increase our cost of doing business; reduce operational efficiencies; and, depending upon the nature of our and our restaurant owners’ responsive actions to or planning in connection with such laws, regulations, and other matters, damage our reputation. Increases in costs impact our profitability and the profitability of our restaurant owners. Failure to comply with such laws or regulations on a timely basis may lead to civil and criminal liability, cancellation of licenses, fines, and other corrective action, any of which could adversely affect our business and future financial results and have an adverse impact on our brand due to potentially negative publicity regarding our business practices.
We and our restaurant owners are subject to various international, federal, state, provincial and local laws, treaties and regulations affecting our and their businesses. These laws and regulations include those regarding or relating to: zoning, land use (including the development and/or operation of drive-thru windows), transportation and traffic; health, food, sanitation and safety; taxes; privacy laws, including the collection, retention, sharing and security of data; immigration, employment and labour laws (such as the U.S. Fair Labor Standards Act and similar Canadian legislation), including some increases in minimum wage requirements that were implemented in certain provinces in Canada and states in the U.S. in 2013 and other increases in such jurisdictions that may occur in the future, that have increased, or will increase, our and our restaurant owners’ labour costs in those provinces and states; laws preventing discrimination and harassment in the workplace and providing certain civil rights to individuals with disabilities; laws affecting the design of facilities and accessibility (such as the Americans with Disabilities Act of 1990 and similar Canadian legislation); taxes; environmental matters; product safety; nutritional disclosure and regulations regarding nutritional content, including menu labeling and TFA content; advertising and marketing; record keeping and document retention procedures; and new and/or additional franchise legislation. We are also subject to applicable accounting and reporting requirements and regulations, including those imposed by Canadian and U.S. securities regulatory authorities, the NYSE and the TSX. The complexity of the regulatory environment in which we operate and the related costs of compliance are both increasing due to additional legal and regulatory requirements.
Many of our employees and our restaurant owners’ employees are subject to various minimum wage requirements. Many of our restaurants are located in provinces or states where the minimum wage was recently increased and may further increase in the future, and in other provinces or states in which increases are being considered. In addition, one-day strikes for fast-food employees in certain U.S. markets for an increase in the minimum wage may result in increases in the minimum wage which would affect all restaurant employees in these markets. Any minimum wage increases may cause an increase in prices which, in turn, could have a material adverse effect on our business, financial condition, results of operations or cash flows. 
With respect to environmental laws and regulations, our operations, including our distribution and manufacturing operations and supply chain, are governed and impacted by laws, regulations, local by-laws or limitations regarding climate change, energy consumption and our management, handling, release and/or disposal of water resources, air resources, hazardous or toxic substances, solid waste and other environmental matters, including:
regulations regarding drive-thrus, including banning or imposing idling restrictions in drive-thrus, which could limit our ability to develop or operate restaurants with drive-thrus in certain locations and/or affect the efficiency of drive-thru locations; local building codes, which may require more expensive building materials or restaurant types as well as programs requiring greater use of recyclable materials that can be processed by the waste management industry and/or requiring contributions to residential blue box programs in Ontario, Quebec, Manitoba and British Columbia, or similar programs in the U.S. that result in increased costs because certain municipalities do not accept our recyclable packaging; and

23


regulations relating to the discharge, storage, handling, release and/or disposal of hazardous or toxic substances, particularly with respect to: certain of our operations (e.g., distribution and manufacturing); restaurant locations that were formerly gas stations or other commercial or industrial sites which utilized hazardous or toxic substances (or that are adjacent or exposed to such sites); septic systems with insufficient capacity; and treatment of well water.
In addition, third parties may make claims against owners or operators of properties for personal injuries or property damage associated with releases of hazardous or toxic substances.
As “sustainability” issues become more prevalent and accepted, there may be increased governmental, shareholder, and other stakeholder awareness and sentiment for more regulation as well as voluntarily adopted programs relating to the reduction and mitigation of environmental or other impacts. There is a possibility that, when and if enacted, the final form of such legislation or any voluntary actions taken by us in this regard would impose stricter requirements or alternative modes of conducting business, which could lead to the need for significant capital expenditures in order to meet those requirements
and/or higher ongoing compliance and operating costs. Our participation in or implementation of, or our decision not to participate in or implement, certain types of programs also may have an adverse impact on our brand due to potentially negative publicity or the negative perception of stakeholders regarding our business practices and lack of willingness to demonstrate environmental leadership. Such injury to our brand and reputation may, in turn, also reduce revenues and profits. See also Item 1. Business—Sustainability and Responsibility regarding our planned activities with respect to sustainability and corporate responsibility initiatives.
We continue to review the implications on us of the Patient Protection and Affordable Care Act of 2010, a comprehensive U.S. health care reform law regarding government-mandated health benefits, as well as the FDA Food Safety Modernization Act, the new U.S. food safety modernization law that was enacted in January 2011 and the FDA’s proposed implementation rules. Although we cannot currently determine with certainty the financial and operational impact that the laws will have on us, our restaurant owners and/or our third-party suppliers and distributors, we expect that costs will increase over the long term as a result of these laws. Any significant increased costs associated with compliance with such laws could adversely affect our financial results and our restaurant owners’ profitability.
Additionally, we must, or may become required to, comply with a number of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, the Corruption of Foreign Public Officials Act (Canada) and The Bribery Act of 2010 (U.K.), which prohibit improper payments to foreign officials for the purpose of obtaining or retaining business. The scope and enforcement of anti-corruption laws and regulations may vary. There can be no assurance that our employees, contractors, licensees or agents will not violate these laws and regulations. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business and operations.
Failure to retain our existing senior management team or the inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
Our success will continue to depend to a significant extent on our executive management team and the ability of other key management personnel to replace executives who retire or resign. Failure to retain our leadership team and attract and retain other important personnel could lead to ineffective management and operations, which would likely decrease our profitability.
Effective July 2, 2013, our Board of Directors appointed Mr. Marc Caira to the position of President and Chief Executive Officer. With the change in leadership, there is a risk to retention of other members of senior management, even with the existing retention program in place.
We rely extensively on systems to process transactions, summarize results and manage our business, and a disruption, failure or security breach of such networks, systems or technology could harm our ability to run our business and expose us to litigation.
Network and information systems and other technology systems are integral to retail operations at our restaurants, in our distribution facilities, at our manufacturing facilities, and at our office locations. We also rely heavily on computer systems in managing financial results. These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer worms, viruses, phishing and other destructive or disruptive software, security breaches, catastrophic events and improper or personal usage by employees. Such an event could have an adverse impact on us and our guests, employees and restaurant owners, including a disruption of our business; disruption of corporate, distribution and manufacturing operations; guest dissatisfaction; negative publicity; loss of reputation; or a loss of guests or revenues; as well as result in our non-compliance with laws or regulations. Such an event also could result in expenditures necessary to repair or replace such networks or information systems, to protect them from similar events in the future, or to conduct a review or analysis of the circumstances. Any such event could also expose us to litigation.

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In connection with our integrated financial system and our electronic payment solutions, we rely extensively on third-party suppliers to retain data, process transactions, and provide certain services. While we make every reasonable effort to confirm that these suppliers have appropriate processes and controls so that there is continuity of services and protection of data, we have no direct control over same; consequently, the possibility of failure in such third-party suppliers’ systems and processes exists. In such an event, we could experience business interruptions or privacy and/or security breaches surrounding guest, employee, supplier, restaurant owner, licensee and Company data or personal information.
We continue to enhance our integrated financial systems. These systems will integrate and exchange data with the financial systems already in place. There may be risks associated with adjusting to and supporting the new module which may impact our relations with our restaurant owners and suppliers, and the conduct of our business generally. With our use of credit payment systems, our reloadable cash card, and use of debit card and mobile payment systems, we are more susceptible to the risk of an external security breach of guest information that we or third parties under arrangements with us control (including those with whom we have strategic alliances). We could become subject to various claims, including those arising out of theft of data or hardware and fraudulent transactions in the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employee, guest, supplier, restaurant owner, third-party (including those with whom we have strategic alliances), licensee, business partner, or, company data or personal information. This may also result in the suspension of electronic payment processing services and fines from credit card companies or regulatory authorities. This could harm our reputation as well as divert management attention and expose us to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. In addition, if our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems, not only to protect the security of the information stored, but also to appropriately track and record data.
Any failures or inadequacies of our security measures or systems could damage our brand reputation and result in an increase in service charges, suspension of service, lost sales, fines, or lawsuits, as well as expose us to significant unreserved losses, which could result in an earnings and share price decline. Although some losses may be covered by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are insufficient to offset our losses fully, our consolidated financial condition or results of operations may be adversely affected.
Fluctuations in U.S. and Canadian dollar exchange rates can affect our results, as well as the price of common shares and certain dividends we pay.
The majority of our operations, income, revenues, expenses and cash flows are in Canadian dollars and we report our results in Canadian dollars. When the U.S. dollar falls in value relative to the Canadian dollar, any profits reported by our U.S. business contribute less to (or, for losses, do not impact as significantly) our consolidated Canadian dollar earnings because of the weaker U.S. dollar. Conversely, when the U.S. dollar increases in value relative to the Canadian dollar, any profits reported by our U.S. business contribute more to (or, for losses, impact more significantly) our consolidated Canadian dollar earnings because of the stronger U.S. dollar.
Royalties paid to us by our international restaurant owners will be based on a conversion of local currencies to U.S. dollars using the prevailing exchange rate, and changes in the exchange rate could adversely affect our revenues. To the extent that the portion of any revenues generated from international operations increases in the future, our exposure to change in currency fluctuations will increase.
Canadian dollars drive our earnings per share; accordingly, our earnings per share may be translated into U.S. dollars by analysts and others. Given the foregoing, the value of an investment in our common shares to a U.S. shareholder will fluctuate as the U.S. dollar rises and falls against the Canadian dollar. Our decision to declare a dividend depends on results of operations reported in Canadian dollars, and we declare dividends in Canadian dollars. As a result, U.S. and other shareholders seeking U.S. dollar total returns, including increases in the share price and dividends paid, are subject to foreign exchange risk as the U.S. dollar rises and falls against the Canadian dollar. See Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Report for additional information regarding the currency conversion process for dividends.
We may not be able to adequately protect our intellectual property, which could decrease the value of our brand and branded products.
The success of our business depends on our continued ability to use our existing trademarks, service marks, and other components of our brand in order to increase brand awareness and further develop branded products in the U.S. and Canadian markets, as well as in international markets in which we have expanded or may wish to expand in the future. We may not be able to adequately protect our trademarks, and use of these trademarks may result in liability for trademark infringement,

25


trademark dilution, or unfair competition. Even where we have effectively secured statutory protection for our trademarks and other intellectual property, our competitors may misappropriate our intellectual property and our employees, consultants, suppliers or other business partners may breach their contractual obligations not to reveal our confidential information, including trade secrets. There can be no assurance that these protections will be adequate or that third parties will not independently develop products or concepts that are substantially similar to ours. Despite our efforts, it may be possible for third parties to reverse-engineer, otherwise obtain, copy, and use information that we regard as proprietary. Furthermore, defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking an injunction
and/or compensation for misappropriation of confidential information, could result in the expenditure of significant resources and divert the attention of management, which in turn may materially and adversely affect our business and operating results.
Although we monitor and restrict restaurant owner, operator and licensee activities through our franchise, operator and license agreements, restaurant owners, operators and licensees may refer to our brands improperly in public statements to the media or public, writings or conversation, resulting in the dilution or damage of our intellectual property and brand. Restaurant owner, operator and licensee non-compliance with the terms and conditions of our franchise, operator and license agreements may reduce the overall goodwill of our brand, whether through the failure to meet health and safety standards, or to engage in quality control or maintain product consistency, or through participation in improper or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of our brands, resulting in guest confusion or dilution. Any reduction or dilution of our brand’s goodwill, or any guest confusion, is likely to impact sales, and could materially and adversely impact our business and operating results.
In addition, in certain jurisdictions outside of the U.S. and Canada, there are substantial uncertainties regarding the interpretation and application of laws and regulations relating to, and the enforceability of, intellectual property and related contract rights. Our business could be adversely affected if we are unable to adequately monitor the use of our intellectual property or enforce our intellectual property and related contract rights in courts in international jurisdictions.
Our ownership and leasing of significant amounts of real estate exposes us to possible liabilities, losses, and risks.
As at December 29, 2013, we owned or leased the land or building for a substantial majority of our full-service system restaurants. Accordingly, we are subject to all of the risks associated with owning and leasing the real estate. In particular, the value of our real estate assets could decrease, and/or our costs could increase, because of changes in the investment climate for real estate, demographic trends, demand for restaurant sites and other retail properties, and exposure to or liability associated with environmental contamination and reclamation, as further discussed above under “Our business is subject to various laws and regulations and changes in such laws and regulations and/or failure to comply with existing or future laws and regulations, or our planning initiatives related to such laws and regulations, could adversely affect us and our shareholders and expose us to litigation, damage our brand reputation or lower profits.”
We lease land generally for initial terms of 10 to 20 years. Most of our leases provide for rent increases over the term of the lease and require us to pay all of the costs of insurance, taxes, maintenance, utilities, and other property-related costs. We generally cannot cancel these leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease, including, among other things, paying the rent, insurance, taxes, maintenance, utilities, and other property-related costs for the balance of the lease term. Certain leases may limit our ability to cease operations at a particular location, making it more costly to close undesirable locations. In addition, as leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations.
Typically the costs of insurance, taxes, maintenance, utilities, and other property-related costs due under a prime lease with a third-party landlord are passed through to the restaurant owner under our sublease. If the restaurant owner fails to perform the obligations passed through under their sublease, we will be required to perform those obligations pursuant to the prime lease. In addition, the rent the restaurant owner pays to the Company under the sublease is generally based on a percentage of gross sales. If gross sales at a certain restaurant are less than the Company projects, we may pay more rent to a third-party landlord under the prime lease than we receive from the restaurant owner under the sublease. These events could result in an inability to fully recover from the restaurant owner expenses incurred on leased properties, resulting in increased leasing and operational costs to the Company.
A downgrade of our credit rating could adversely affect our cost of funds, liquidity and access to capital markets.
Failure to maintain our credit rating could adversely affect our cost of funds, liquidity and access to capital markets. Although we have indicated our intent to target maintenance of an investment grade credit rating, ratings are evaluated and determined by independent third parties and may be impacted by events both outside of our control as well as significant decisions made by us, including major acquisitions or divestitures. Credit rating agencies perform independent analysis when

26


assigning credit ratings and such analysis includes a number of criteria, including, but not limited to, various financial tests, business composition, and market and operational risks. The credit rating agencies continually review the criteria for industry sectors and various credit ratings. Accordingly, such criteria may change from time to time. A downgrade of our credit rating may limit our access to capital markets and increase our cost of borrowing under debt facilities or future note issuances. In addition, if our rating agency were to downgrade our credit rating, the instruments governing our future indebtedness could impose additional restrictions on our ability to make capital expenditures or otherwise limit our flexibility in planning for, or reacting to changes in our business and the industry in which we operate and our ability to take advantage of potential business opportunities. These modifications could also require us to meet more stringent financial ratios and tests or could require us to grant a security interest in our assets to secure the indebtedness in the future. Our ability to comply with covenants contained in the instruments governing our existing and future indebtedness may be affected by events and circumstances beyond our control. If we breach any of these covenants, then one or more events of default, including defaults between multiple components of our indebtedness, could result and the payment of principal and interest due and payable on our outstanding senior notes may become accelerated. These events of default could permit our creditors to declare all amounts owing to be immediately due and payable, and terminate any commitments to make further extensions of credit. The lack of access to cost-effective capital resources, an increase in our financing costs, or a breach of debt instrument covenants, could have an adverse effect on our business, financial condition, or future results. A downgrade in our credit rating could also affect the value and marketability of our outstanding notes.
Credit ratings are not recommendations to buy, sell or hold investments in the rated entity. Ratings are subject to revision or withdrawal at any time by the ratings agencies and there can be no assurance that we will be able to maintain our credit rating even if we meet or exceed their criteria, or that other credit rating agencies will assign us similar ratings.
Our operating results and financial condition could be adversely impacted by challenging economic conditions.
Our operating results and financial condition are sensitive to and dependent upon discretionary spending by guests, which may be affected by uncertainty in general economic conditions that could drive down demand for our products and result in fewer transactions or decreased average cheque per transaction at our restaurants. We cannot predict the timing or duration of challenging economic conditions or the timing or strength of a full economic recovery, and many of the effects and consequences of these conditions are currently unknown. Any one or all of them could have an adverse effect on our business, results of operations, financial condition, liquidity and/or capital resources.
Our international operations are subject to various factors of uncertainty and there is no assurance that international operations will be profitable.
In fiscal 2011, we granted a master license for the development of Tim Hortons restaurants in the GCC. The licensee is expected to open and operate up to 120 multi-format restaurants by 2016, which includes the 38 restaurant locations that were open for business by the end of 2013. In fiscal 2013, we granted a five year master license for the development of at least 100 multi-format restaurants in Saudi Arabia with the same licensee. There can be no assurance that our international licensee will satisfy its development commitments to open the number of Tim Hortons restaurants stated in the master license agreements. We may grant additional master licenses to licensees in other international markets in the future. International licensees may fail to meet their development commitments or may open restaurants more slowly than forecasted at the time such master license agreements are entered into, which would impact the level of expected financial return from such agreements.
Expansion into new international markets carries risks similar to those risks described above relative to expansion into new North American markets, many of which may be more pronounced in markets outside Canada and the U.S. due to cultural, political, legal, economic, regulatory and other conditions and differences. In addition, our international business operations are subject to further legal, accounting, tax and regulatory risks associated with doing business internationally, including: tariffs, quotas, other trade protection measures; import or export regulations and licensing requirements; foreign exchange controls; restrictions on our ability to own or operate or repatriate profits from our subsidiaries, and/or make investments or acquire new businesses in foreign jurisdictions; difficulties in enforcement of contractual obligations governed by non-Canadian or non-U.S. law due to differing interpretation of rights and obligations in connection with international franchise or licensing agreements; difficulties collecting royalties from international restaurant owners; compliance with multiple and potentially conflicting laws; new and potentially untested laws and judicial systems; reduced or diminished protection of intellectual property; theft or misuse of our intellectual property; and our business partners’ compliance with anti-corruption laws.

Catastrophic events may disrupt our business.
Unforeseen events, including war, armed conflict, terrorism and other international, regional or local instability or conflicts (including labour issues), embargos, trade barriers, public health issues (including tainted food, food-borne illnesses, food tampering, or water supply or widespread/pandemic illness such as the avian, H1N1 or norovirus flu), natural disasters

27


such as flooding, earthquakes, hurricanes, or other adverse weather and climate conditions, whether occurring in Canada, the U.S. or abroad, could disrupt our operations; disrupt the operations of our restaurant owners, licensees, suppliers, or guests; or, result in civil disturbances and political or economic instability. For instance, guests might avoid public gathering places in the event of a health pandemic, and local, regional, or national governments might limit or ban public gatherings to halt or delay the spread of disease. These events could reduce traffic in our restaurants and demand for our products; make it difficult or impossible to adequately staff our restaurants, receive products from suppliers, deliver products to our restaurant owners on a timely basis, or perform functions at the corporate level; and, otherwise impede our ability to continue our business operations in a manner consistent with the level and extent of our business activities prior to the occurrence of the unexpected event or events. The impact of a health pandemic, in particular, might be disproportionately greater on us than on other companies that depend less on the gathering of people for the sale of their products. Although some losses may be covered by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are insufficient to offset our losses fully, our consolidated financial condition or results of operations may be adversely affected.
Our articles, by-laws, shareholder rights plan and certain Canadian legislation contain provisions that may have the effect of delaying or preventing a change in control.
Certain provisions of our articles of incorporation and by-laws, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control, and limit the price that certain investors might be willing to pay for our common shares. Our articles authorize our Board of Directors to issue an unlimited number of preferred shares, which are commonly referred to as “blank cheque” preferred shares and, therefore, our Board of Directors may designate and create the preferred shares as shares of any series and determine the respective rights and restrictions of any such series. The rights of the holders of our common shares will be subject to, and may be adversely affected by, the rights of the holders of any preferred shares that may be issued in the future. The issuance of preferred shares could delay, deter, or prevent a change in control and could adversely affect the voting power or economic value of the common shares.
In addition, our by-laws contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders’ meetings. Furthermore, under these provisions, directors may be removed by the Board after its consideration of a majority shareholder vote at a meeting of shareholders. For a further description of these provisions, see our articles, by-laws, and the Canada Business Corporations Act.
Pursuant to our shareholder rights plan (the “Rights Plan”), one right to purchase a common share (a “Right”) has been issued in respect of each of the outstanding common shares and an additional Right will be issued in respect of each additional common share issued prior to the Separation Time (as defined in the Rights Plan). The purpose of the Rights Plan is to provide holders of our common shares, and our Board of Directors, with the time necessary so that, in the event of a take-over bid (generally referred to as a “tender offer” in the U.S.) for our Company, alternatives to the bid which may be in the best interests of our Company are identified and fully explored. The Rights Plan can potentially impose a significant penalty on any person or group that acquires, or begins a tender or exchange offer that would result in such person acquiring, 20.0% or more of the outstanding common shares. See Exhibit 4(a) to this Report for reference to our Rights Plan, which is also described in more detail in the Notes to our Consolidated Financial Statements contained in this Report.
The Investment Canada Act requires that a “non-Canadian,” as defined therein, file an application for review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where prescribed financial thresholds are exceeded. Otherwise, there are no limitations either under the laws of Canada or in our articles on the rights of non-Canadians to hold or vote our common shares.
Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.
 
Item 1B.     Unresolved Staff Comments
None.

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Item 2. Properties
We have construction and site management personnel who oversee the construction of the restaurants we develop by outside contractors. The restaurants are built to our specifications as to exterior style and interior decor. Tim Hortons restaurants operate in a variety of formats. A standard Tim Hortons restaurant is a free-standing building typically ranging in size from 1,000 to 3,080 square feet, with a dining room and drive-thru window. Each of these restaurants typically includes a kitchen capable of supplying, among other things, fresh baked goods throughout the day. We also have non-standard restaurants designed to fit anywhere, consisting of small full-service restaurants and/or self-serve kiosks in offices, hospitals, colleges, airports, grocery stores, gas and convenience locations, drive-thru-only units on smaller pieces of property, and full-serve sites and carts located in sports arenas and stadiums that operate only during events with a limited product offering. These units typically average between 150 to 1,000 square feet. Some of the drive-thru-only units, kiosks, and carts also have bakery production facilities on site.
“Combination restaurants” that include Tim Hortons and Wendy’s restaurants in single free-standing units, typically average about 5,780 square feet. For additional information regarding combination restaurants, see Item 1. Business—Operations—Combination restaurants, an ongoing relationship with Wendy’s.
As at December 29, 2013, the number of Tim Hortons restaurants, both standard and non-standard locations across Canada, the U.S. and the GCC, totaled 4,485, with standard restaurants comprising 68.7% of the total. For purposes of the foregoing, we have included self-serve kiosks as “non-standard locations.” As at December 29, 2013, all but 16 of the Tim Hortons restaurants were franchise-operated. Of the 4,469 franchised restaurants, 796 were sites owned by the Company and leased to restaurant owners, 2,625 were leased by us, and in turn, subleased to restaurant owners, with the remainder, including all self-serve locations, either owned or leased directly by the restaurant owner. Our land or land and building leases are generally for terms of 10 to 20 years, and often have one or more five-year renewal options. In certain lease agreements, we have the option to purchase or right of first refusal to purchase the real estate. Certain leases require the payment of additional rent equal to a percentage (ranging from 0.75% to 13.0%) of annual sales in excess of specified base rental amounts.

The following tables illustrate Tim Hortons system restaurant locations by type, and whether they are operated by the Company or our restaurant owners, as at December 29, 2013.
Company and Franchised Locations
Canadian Locations by Province/Territory
Standard
 
Non-Standard
 
Self-Serve
Kiosks
 
 
 
Company
 
Franchise
 
Company
 
Franchise
 
Franchise
 
Total
Alberta

 
237

 

 
92

 
21

 
350

British Columbia

 
226

 

 
66

 
28

 
320

Manitoba
2

 
61

 
2

 
34

 
5

 
104

New Brunswick

 
100

 

 
14

 

 
114

Newfoundland and Labrador

 
46

 

 
10

 
1

 
57

Nova Scotia
1

 
137

 

 
29

 
5

 
172

Northwest Territories

 
1

 

 

 

 
1

Nunavut

 

 

 

 
5

 
5

Ontario
5

 
1,197

 
1

 
526

 
61

 
1,790

Prince Edward Island

 
13

 

 
7

 

 
20

Quebec
3

 
465

 

 
108

 
6

 
582

Saskatchewan

 
54

 

 
15

 
2

 
71

Yukon

 
2

 

 

 

 
2

Canada
11

 
2,539

 
3

 
901

 
134

 
3,588


% of restaurants that are standard—Canada        71.1%


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United States Locations by State
Standard
 
Non-Standard
 
Self-Serve
Kiosks
 
 
 
Company
 
Franchise
 
Company
 
Franchise
 
Franchise
 
Total
California

 

 

 
3

 

 
3

Delaware

 

 

 
1

 

 
1

Florida

 

 

 
2

 

 
2

Indiana

 
1

 

 

 

 
1

Kentucky

 
2

 

 
2

 

 
4

Maine

 
22

 

 
4

 

 
26

Maryland

 

 

 
2

 

 
2

Michigan

 
185

 

 
39

 
4

 
228

New Jersey

 

 

 
2

 

 
2

New York

 
147

 

 
96

 
162

 
405

North Dakota

 
1

 

 
1

 

 
2

Ohio
1

 
121

 

 
19

 

 
141

Pennsylvania
1

 
14

 

 
5

 
15

 
35

Virginia

 
1

 

 
1

 

 
2

West Virginia

 
5

 

 

 

 
5

United States
2

 
499

 

 
177

 
181

 
859

 
% of restaurants that are standard—U.S.        58.3%
 
Gulf Cooperation Council Locations by Country
Standard
 
Non-Standard
 
Self-Serve
Kiosks
 
 
  
Company
 
Franchise
 
Company
 
Franchise
 
Franchise
 
Total
United Arab Emirates

 
28

 

 
6

 

 
34

Oman

 
2

 

 

 

 
2

Kuwait

 
1

 

 

 

 
1

Qatar

 
1

 

 

 

 
1

Total

 
32

 

 
6

 

 
38


% of restaurants that are standard—GCC        84.2%
% of restaurants that are standard—Systemwide    68.7%

Republic of Ireland and United Kingdom Locations
Non-Standard
 
 
 
Self-Serve Kiosks
 
Full-Service
Locations
 
Total
Republic of Ireland(1) 
193

 
3

 
196

United Kingdom(1)
59

 

 
59

Total
252

 
3

 
255

_____________
(1) 
Represents licensed self-serve kiosks and full-serve locations primarily located in gas and convenience locations. See Item 1. Business—Operations—Restaurant development. These locations are not included in our Canadian, U.S. or GCC restaurant counts, but are described, as set forth in the table above, separately by country.


30


The following table sets forth the Company’s owned and leased office, warehouse, manufacturing and distribution facilities, including the approximate square footage of the facilities. None of these owned properties, or the Company’s leasehold interest in leased property, is encumbered by a mortgage.
Location
Type
 
Owned/Leased
 
Approximate Square
Footage
Rochester, New York (U.S. coffee roasting facility)
Manufacturing
 
Leased
 
38,000

Oakville, Ontario (fondant and fills facility)
Manufacturing
 
Owned
 
36,650

Hamilton, Ontario (Canadian coffee roasting facility)
Manufacturing
 
Owned
 
76,000

Guelph, Ontario
Distribution/Office
 
Owned
 
191,679

Calgary, Alberta
Distribution/Office
 
Owned
 
35,500

Debert, Nova Scotia
Distribution/Office
 
Owned
 
28,000

Langley, British Columbia
Distribution/Office
 
Owned
 
27,500

Kingston, Ontario
Distribution/Office
 
Owned
 
135,080

Montreal, Quebec
Distribution/Office
 
Leased
 
30,270

Oakville, Ontario
Warehouse
 
Owned
 
37,000

Oakville, Ontario
Offices
 
Owned
 
153,060

Dublin, Ohio
Office
 
Leased
 
23,614

Lachine, Quebec
Office
 
Owned
 
5,000

Lachine, Quebec
Office
 
Leased
 
8,000

Williamsville, New York
Office
 
Leased
 
< 2,500

Brighton, Michigan
Office
 
Leased
 
< 2,500

Vaudreuil Dorion, Quebec
Warehouse/Office
 
Leased
 
12,500

 
Item 3. Legal Proceedings
On June 12, 2008, a claim was filed against the Company and certain of its affiliates in the Ontario Superior Court of Justice (the “Court”) by two of its franchisees, Fairview Donut Inc. and Brule Foods Ltd., alleging, generally, that the Company’s Always Fresh baking system and expansion of lunch offerings led to lower franchisee profitability. The claim, which sought class action certification on behalf of Canadian restaurant owners, asserted damages of approximately $1.95 billion. Those damages were claimed based on breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentations, unjust enrichment and price maintenance. The plaintiffs filed a motion for certification of the putative class in May of 2009, and the Company filed its responding materials as well as a motion for summary judgment in November 2009. The two motions were heard in August and October 2011. On February 24, 2012, the Court granted the Company’s motion for summary judgment and dismissed the plaintiffs’ claims in their entirety. All avenues of appeal were exhausted in fiscal 2013.
Reserves related to the resolution of legal proceedings are included in the Company’s Consolidated Balance Sheets as a liability under “Accounts payable.” As of the date hereof, the Company believes that the ultimate resolution of such matters will not materially affect the Company’s financial condition or earnings. Refer also to Item 1A. Risk Factors.
 
Item 4. Mine Safety Disclosures
Not applicable.

31


PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity             Securities
The Company’s common shares are traded on the Toronto Stock Exchange (“TSX”) and New York Stock Exchange (“NYSE”) (trading symbol: THI). The following tables set forth the High, Low and Close prices of the Company’s common shares on the NYSE and TSX commencing with the first quarter 2012, as well as the dividends declared per share for such period.
Market Price of Common Shares on the Toronto Stock Exchange and New York Stock Exchange(1) 
 
Toronto Stock Exchange (Cdn.$)
 
New York Stock Exchange (US$)
2012 Fiscal Year 
High    
 
Low
 
Close
 
High     
 
Low
 
Close
First Quarter (Ended April 4)
$54.92
 
$47.36
 
$53.36
 
$55.31
 
$46.55
 
$53.54
Second Quarter (Ended July 4)
$57.91
 
$56.90
 
$53.67
 
$58.47
 
$50.43
 
$52.64
Third Quarter (Ended September 30)
$55.73
 
$49.62
 
$51.16
 
$55.02
 
$49.59
 
$52.03
Fourth Quarter (Ended December 30)
$52.60
 
$45.11
 
$48.51
 
$53.91
 
$45.41
 
$48.68
 
Toronto Stock Exchange (Cdn.$) 
 
New York Stock Exchange (US$)
2013 Fiscal Year 
High   
 
Low
 
Close
 
High  
 
Low
 
Close
First Quarter (Ended March 31)
$55.50
 
$47.83
 
$55.21
 
$54.62
 
$47.76
 
$54.32
Second Quarter (Ended June 30)
$58.85
 
$53.25
 
$56.88
 
$58.01
 
$51.86
 
$54.13
Third Quarter (Ended September 29)
$61.52
 
$56.06
 
$59.45
 
$59.72
 
$53.74
 
$57.70
Fourth Quarter (Ended December 29)
$64.18
 
$58.67
 
$62.29
 
$61.46
 
$56.77
 
$58.19
________________
(1) 
Source: FactSet
As at February 21, 2014, there were 138,165,308 common shares outstanding, of which 293,816 were owned by The TDL RSU Employee Benefit Plan Trust.
Dividends Declared Per Common Share (Cdn.$)
2012 Fiscal Year
 
First Quarter (Declared February 2012)
$0.21
Second Quarter (Declared May 2012)
$0.21
Third Quarter (Declared August 2012)
$0.21
Fourth Quarter (Declared November 2012)
$0.21
2013 Fiscal Year
 
 
First Quarter (Declared February 2013)
$0.26
Second Quarter (Declared May 2013)
$0.26
Third Quarter (Declared August 2013)
$0.26
Fourth Quarter (Declared November 2013)
$0.26
The Company declares and pays dividends in Canadian dollars, eliminating the foreign exchange exposure for our shareholders ultimately receiving Canadian dollars. For U.S. beneficial shareholders, however, CDS Clearing and Depository Services Inc. (“CDS”) will convert, and for U.S. registered shareholders, we will convert, the Canadian dividend amounts into U.S. dollars based on exchange rates prevailing at the time of conversion and pay such dividends in U.S. dollars. Shareholders ultimately receiving U.S. dollars are exposed to foreign exchange risk from the date the dividend is declared until the date CDS or we, as applicable, convert the dividend payment to U.S. dollars.
 
All dividends paid by the Company after September 28, 2009, unless otherwise indicated, are designated as eligible dividends for Canadian tax purposes in accordance with subsection 89(14) of the Income Tax Act (Canada), and any applicable

32


corresponding provincial and territorial provisions. The Income Tax Act (Canada) requires the Company to deduct and withhold tax from all dividends remitted to non-residents. According to the Canada-U.S. Income Convention (tax treaty), the Company has deducted a withholding tax of 15% on dividends paid to residents of the U.S. after September 28, 2009, except in the case of a company that owns 10% of our voting stock. In the latter case, the withholding tax, if applicable, would be 5%.
In fiscal 2013, our Board of Directors approved an increase in the quarterly dividend from Cdn.$0.21 to Cdn.$0.26 per common share based on our dividend payout range of 35% to 40% of prior year, normalized annual net income attributable to Tim Hortons Inc., which is net income attributable to Tim Hortons Inc. adjusted for certain items, such as gains on divestitures, tax impacts and certain asset impairments that affect our annual net income attributable to Tim Hortons Inc. In February 2014, our Board of Directors approved a 23.1% increase in the quarterly dividend from $0.26 per common share to $0.32 per common share for the first quarter of 2014. Notwithstanding the recent increase in our dividend, the declaration and payment of all future dividends remain subject to the discretion of our Board of Directors and the Company’s continued financial performance, debt covenant compliance, and other factors the Board may consider relevant when making dividend determinations.
Each of the Revolving Bank Facilities contains limitations on the payment of dividends by the Company. The Company may not make any dividend distribution unless, at the time of, and after giving effect to the aggregate dividend payment, the Company is in compliance with the financial covenants contained in the Revolving Bank Facilities and there is no default outstanding under the senior credit facilities. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.
 
Shareholders
As of February 21, 2014, we had approximately 43,402 shareholders of record (as registered shareholders), as determined by the Company based on information supplied by our transfer agent, Computershare Trust Company of Canada.
See Item 8. Financial Statements—Note 18 Common Shares for information on related shareholder matters.
 
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth, as of the end of the Company’s last fiscal year, (a) the number of securities that could be issued upon exercise of outstanding options and vesting of outstanding restricted stock units and restricted stock awards under the Company’s equity compensation plans, (b) the weighted average exercise price of outstanding options under such plans, and (c) the number of securities remaining available for future issuance under such plans, excluding securities that could be issued upon exercise of outstanding options.
EQUITY COMPENSATION PLAN INFORMATION 
Plan Category 
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights(1)
(a) 
 
Weighted-
average
exercise price of
outstanding
options, warrants
and rights
(b)(2) 
 
Number of securities
remaining available
for future issuance under
equity compensation
plans (excluding securities
reflected in column (a)) (c) 
Equity compensation plans approved by security holders
1,502,663

 
$47.11
 
1,397,337

Equity compensation plans not approved by security holders
N/A

 
N/A
 
N/A

Total
1,502,663

 
$47.11
 
1,397,337

________________
(1) 
The Company’s 2006 Stock Incentive Plan (the “2006 Plan”) provided that an aggregate of 2.9 million common shares may be awarded as restricted stock, stock units, stock options, stock appreciation rights (“SARs”), performance shares, performance units, dividend equivalent rights, and/or share awards. The Company’s 2012 Stock Incentive Plan (the “2012 Plan”) was adopted as a result of the substantial completion of the 2006 Plan. The 2012 Plan authorizes up to a maximum of 2.9 million common shares (representing 1.8% of our issued and outstanding common shares as of March 13, 2012) for grants of stock options, restricted stock, stock appreciation rights, dividend equivalent rights, performance shares, performance units, share awards and stock units (collectively, “Awards”). Common shares that were never subject to awards granted under the 2006 Plan and remained available to be granted under the 2006 Plan as of May 10, 2012 (the “Effective Date”), as well as common shares that are subject to outstanding awards granted under the 2006 Plan but that are forfeited or otherwise cease to be subject to such awards following the Effective Date (other than to the extent they are exercised for or settled in vested and non-forfeitable common shares) shall be transferred to and may be made available as Awards under the 2012 Plan, provided that the aggregate number of common shares authorized for grants of Awards under the 2012 Plan shall not exceed 2.9 million common shares. Accordingly, notwithstanding that the terms of the 2006 Plan shall continue to govern awards granted under the 2006 Plan (all of which were granted prior to the Effective Date), following the Effective Date: (i) no further awards will be made under the 2006 Plan, and (ii) an aggregate maximum of 2.9 million common shares will be authorized under both the 2006 Plan and the 2012 Plan. Included in the 1,502,663 total number of securities in column (a) above are approximately 306,932 restricted stock units (“RSUs,” including RSUs subject to performance conditions) (consisting of 31,017 and 275,915 RSUs under the 2006 Plan and the 2012 Plan, respectively), subject to vesting requirements, and dividend equivalent rights associated with the RSUs and 1,195,731 stock options and related SARs (consisting of 602,315 and 593,416 stock options and SARs under the 2006 Plan and the 2012 Plan, respectively). Of the 1,195,731 options/SARs

33


outstanding at December 29, 2013, only 573,860 were exercisable as of that date due to vesting requirements. Historically, SARs have been cash-settled and associated options cancelled and RSUs have been settled by way of an open market purchase by an agent of the Company on behalf of the eligible employee or by way of disbursement of shares from The TDL RSU Employee Benefit Plan Trust. See Item 8. Financial Statements—Note 19 Stock-Based Compensation.
(2)
The average exercise price in this column is based only on stock options and related SARs, as RSUs (including P+RSUs) have no exercise price required to be paid by the recipient upon vesting and settlement.
 
 
Performance Graph
The following graph compares the yearly percentage change in the Company’s cumulative total shareholder return on the TSX and NYSE as measured by (i) the change in the Company’s share price from December 26, 2008 to December 27, 2013, and (ii) the reinvestment of dividends at the closing price on the dividend payment date, against the cumulative total return of the S&P/TSX Composite Index, S&P/TSX Consumer Discretionary Index, and S&P 500. The information provided under the heading “Performance Graph” shall not be considered “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference in any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

CUMULATIVE TOTAL RETURN (1) 
Assuming an investment of US/CDN $100 and reinvestment of Dividends
 
26-Dec-08

31-Dec-09

31-Dec-10

30-Dec-11

28-Dec-12 

27-Dec-13

S&P/TSX Composite Index (Cdn.$)(2)
$
100.0

$
146.3

$
172.0

$
157.1

$
166.8

$
189.7

S&P/TSX Consumer Discretionary Index (Cdn.$)(2)
$
100.0

$
125.4

$
157.4

$
133.1

$
161.4

$
232.0

S&P 500 (U.S.$)
$
100.0

$
152.6

$
186.1

$
185.9

$
214.8

$
296.4

Tim Hortons Inc. (TSX)
$
100.0

$
98.1

$
127.3

$
155.1

$
155.0

$
202.7

Tim Hortons Inc. (NYSE)
$
100.0

$
112.3

$
153.8

$
183.4

$
187.4

$
228.1

________________
(1) 
The majority of the Company’s operations, income, revenues, expenses, and cash flows are in Canadian dollars, and the Company reports financial results in Canadian dollars. As a result, our Canadian-dollar earnings per share may be translated to U.S. dollars by investors, analysts and others. Fluctuations in the foreign exchange rates between the U.S. and Canadian dollar can affect the Company’s share price. See Item 1A. Risk Factors—Fluctuations in U.S. and Canadian dollar exchange rates can affect our results, as well as the price of common shares and certain dividends we pay. The primary cause of the appreciation in the U.S. dollar share price relative to the Canadian share price during 2009, 2010 and 2012 is the percentage by which Canadian dollar appreciated against the U.S. dollar as noted below. Conversely, in 2008, 2011 and 2013, the Canadian dollar depreciated relative to the U.S. dollar by the

34


percentages set forth below causing the opposite effect, resulting in a decline in the U.S. dollar share price as a result of currency fluctuations that are not directly attributable to changes in the Company’s underlying business or financial condition aside from the impact of foreign exchange.
Year
F/X Change Cdn.$ compared to US$
2008
(23)%
2009
13%
2010
5%
2011
(2)%
2012
2%
2013
(7)%
(2)  Since September 29, 2006, the Company has been included in the S&P/TSX Composite Index and the S&P/TSX Consumer Discretionary Index.
 
Sales and Repurchases of Equity Securities
The following table presents the Company’s repurchases of its common shares for each of the three periods included in the fourth quarter ended December 29, 2013:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a)
Total Number
of Shares
Purchased(1)
 
(b)
Average Price
Paid per
Share (Cdn.)(2)
 
(c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced 
Plans or
Programs
 
(d)
Maximum
Number of
Shares that May
Yet be Purchased
Under the Plans
or Programs (3)
Monthly Period #10 (September 30, 2013 – November 3, 2013)
1,966,350

 
$61.15
 
1,966,350

 
8,990,750

Monthly Period #11 (November 4, 2013 – December 1, 2013)
3,514,877

 
$60.91
 
3,506,048

 
5,484,702

Monthly Period #12 (December 2, 2013 – December 29, 2013)
2,321,000

 
$62.27
 
2,321,000

 
3,163,702

Total
7,802,227

 
$61.31
 
7,793,398

 
3,163,702

________________
(1) 
Based on settlement date.
(2) 
Inclusive of commissions paid to the broker to repurchase the common shares.
(3) 
On February 21, 2013, we announced that we obtained regulatory approval from the TSX to commence a new share repurchase program (“2013 Program”), not to exceed the regulatory maximum of 15,239,531 shares, representing 10% of our public float as of February 14, 2013, as defined under the TSX rules, but subject to a cap of $250.0 million in the aggregate. On August 8, 2013, the Company obtained regulatory approval to amend the 2013 Program to remove the former maximum dollar cap of $250.0 million. The 2013 Program began on February 26, 2013 and was terminated in February 2014 as the 10% public float maximum was reached. Common shares purchased pursuant to the 2013 Program were canceled.

35


 
Item 6.
Selected Financial Data
The following table presents our selected historical consolidated financial and other data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report. Our historical consolidated financial information may not be indicative of our future performance.
 
Fiscal Years(1)(2)
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands, except per share data,
number of restaurants, and otherwise where noted)
Consolidated Statements of Operations Data
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Sales
$
2,265,884

 
$
2,225,659

 
$
2,012,170

 
$
1,755,244

 
$
1,704,065

Franchise revenues:
 
 
 
 
 
 
 
 
 
Rents and royalties(3)
821,221

 
780,992

 
733,217

 
687,039

 
644,755

Franchise fees
168,428

 
113,853

 
107,579

 
94,212

 
90,033

 
989,649

 
894,845

 
840,796

 
781,251

 
734,788

Total revenues
3,255,533

 
3,120,504

 
2,852,966

 
2,536,495

 
2,438,853

Corporate reorganization expenses
11,761

 
18,874

 

 

 

De-branding costs(4)
19,016

 

 

 

 

Asset impairment and closure costs, net(5)
2,889

 
(372
)
 
372

 
28,298

 

Other costs and expenses
2,600,772

 
2,507,477

 
2,283,119

 
1,997,034

 
1,913,251

Total costs and expenses
2,634,438

 
2,525,979

 
2,283,491

 
2,025,332

 
1,913,251

Gain on sale of interest in Maidstone Bakeries(6)

 

 

 
361,075

 

Operating income
621,095

 
594,525

 
569,475

 
872,238

 
525,602

Interest expense, net
35,466

 
30,413

 
25,873

 
24,180

 
19,184

Income before income taxes
585,629

 
564,112

 
543,602

 
848,058

 
506,418

Income taxes
156,980

 
156,346

 
157,854

 
200,940

 
186,606

Net income
$
428,649

 
$
407,766

 
$
385,748

 
$
647,118

 
$
319,812

Net income attributable to non controlling interests
$
4,280

 
$
4,881

 
$
2,936

 
$
23,159

 
$
23,445

Net income attributable to Tim Hortons Inc.
$
424,369

 
$
402,885

 
$
382,812

 
$
623,959

 
$
296,367

Diluted earnings per common share attributable to Tim Hortons Inc.
$
2.82

 
$
2.59

 
$
2.35

 
$
3.58

 
$
1.64

Weighted average number of common shares outstanding – diluted
150,622

 
155,676

 
162,597

 
174,215

 
180,609

Dividends per common share
$
1.04

 
$
0.84

 
$
0.68

 
$
0.52

 
$
0.40

Consolidated Balance Sheets Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
50,414

 
$
120,139

 
$
126,497

 
$
574,354

 
$
121,653

Restricted cash and cash equivalents and Restricted investments
$
155,006

 
$
150,574

 
$
130,613

 
$
105,080

 
$
80,815

Total assets
$
2,433,823

 
$
2,284,179

 
$
2,203,950

 
$
2,481,516

 
$
2,094,291

Long-term debt and capital leases(7)
$
981,851

 
$
531,484

 
$
457,290

 
$
437,348

 
$
411,694

Total liabilities
$
1,672,304

 
$
1,094,088

 
$
1,049,517

 
$
1,039,074

 
$
838,605

Total equity
$
761,519

 
$
1,190,091

 
$
1,154,433

 
$
1,442,442

 
$
1,255,686


36


 
Fiscal Years(1)(2)
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands, except per share data,
number of restaurants, and otherwise where noted)
Other Financial Data
 
 
 
 
 
 
 
 
 
EBITDA attributable to Tim Hortons Inc.(8)
$
764,579

 
$
714,485

 
$
678,997

 
$
956,532

 
$
599,939

Capital expenditures (including Canadian Advertising Fund)
$
242,970

 
$
235,808

 
$
181,267

 
$
132,912

 
$
160,458

Operating margin(9) (%)
19.1
%
 
19.1
%
 
20.0
%
 
34.4
%
 
21.6
%
Other Operating Data
 
 
 
 
 
 
 
 
 
Total systemwide sales growth(10)(11)
4.7
%
 
6.9
%
 
7.4
%
 
6.2
%
 
7.9
%
Systemwide restaurant unit growth(11) 
5.1
%
 
6.3
%
 
7.1
%
 
4.8
%
 
4.1
%
Canada average same-store sales growth(11) 
1.1
%
 
2.8
%
 
4.0
%
 
4.9
%
 
2.9
%
U.S. average same-store sales growth(11) 
1.8
%
 
4.6
%
 
6.3
%
 
3.9
%
 
3.2
%
Total system restaurants franchised (%)
99.6
%
 
99.5
%
 
99.6
%
 
99.5
%
 
99.5
%
Restaurants open at end of year – Canada
 
 
 
 
 
 
 
 
 
Standard(12)
2,550

 
2,454

 
2,373

 
2,279

 
2,193

Non-standard(13)
904

 
858

 
803

 
757

 
724

Self-serve kiosk(13)
134

 
124

 
119

 
112

 
98

Total Canada
3,588

 
3,436

 
3,295

 
3,148

 
3,015

Restaurants open at end of year – U.S.
 
 
 
 
 
 
 
 
 
Standard(12)
501

 
478

 
435

 
405

 
422

Non-standard(13)
177

 
147

 
115

 
74

 
54

Self-serve kiosk(13)
181

 
179

 
164

 
123

 
87

Total U.S.
859

 
804

 
714

 
602

 
563

Total North America
4,447

 
4,240

 
4,009

 
3,750

 
3,578

Average sales per standard restaurant:(11)(12)
 
 
 
 
 
 
 
 
 
Canada
$
2,177

 
$
2,170

 
$
2,129

 
$
2,070

 
$
2,025

U.S. (U.S. dollars)
$
1,089

 
$
1,095

 
$
1,069

 
$
978

 
$
957

U.S. (Canadian dollars)
$
1,125

 
$
1,096

 
$
1,059

 
$
1,012

 
$
1,097

Average sales per non-standard restaurant:(11)(13)
 
 
 
 
 
 
 
 
 
Canada
$
907

 
$
891

 
$
870

 
$
830

 
$
794

U.S. (U.S. dollars)
$
434

 
$
449

 
$
451

 
$
459

 
$
426

U.S. (Canadian dollars)
$
448

 
$
449

 
$
447

 
$
475

 
$
488

 ________________
(1) 
Fiscal years include 52 weeks, except for fiscal 2009, which included 53 weeks.
(2) 
Our selected historical consolidated financial data has been derived from our audited financial statements for the years ended December 29, 2013, December 30, 2012, January 1, 2012, January 2, 2011 and January 3, 2010.
(3) 
Rents and royalties revenues includes advertising levies primarily associated with the Canadian Advertising Fund’s program to acquire and install LCD screens, media engines, drive-thru menu boards and ancillary equipment in our restaurants (“Expanded Menu Board Program”).
Franchised restaurant sales are reported to us by our restaurant owners and are not included in our Consolidated Financial Statements, other than Non-owned restaurants consolidated pursuant to applicable accounting rules. Franchised restaurant sales do, however, result in royalties and rental revenues, which are included in our franchise revenues, as well as distribution sales. The reported franchised restaurant sales for the last five years were:
 
Fiscal Years(1)(2)
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands)
Franchised restaurant sales:
 
 
 
 
 
 
 
 
 
Canada (Canadian dollars)
$
6,152,096

 
$
5,907,481

 
$
5,564,263

 
$
5,181,831

 
$
4,880,934

U.S. (U.S. dollars)
$
586,515

 
$
532,214

 
$
472,969

 
$
439,227

 
$
409,882


(4) 
In Canada, after evaluation of strategic considerations and the overall performance of the Cold Stone Creamery® business in Tim Hortons locations, we made the decision to remove the Cold Stone Creamery brand from Tim Hortons restaurants in Canada, and recognized a related charge in fiscal 2013 as a result of this initiative.

37


(5) 
In fiscal 2010, we recognized an impairment in our Portland, Providence and Hartford markets, and closed 34 restaurants and 18 self-serve kiosks in our Hartford and Providence markets and two restaurants in our Portland market.
(6) 
The Company sold its 50% joint-venture interest in Maidstone Bakeries in October 2010.
(7) 
Long-term debt includes long-term debt associated with the Canadian Advertising Fund’s Expanded Menu Board Program and capital leases, including their current portions.
(8) 
Net income before interest, taxes, depreciation and amortization (“EBITDA”) attributable to Tim Hortons Inc. is defined as EBITDA after deducting EBITDA attributable to variable interest entities (“VIEs”), which is EBITDA attributable to non controlling interests associated with our non-owned restaurants consolidated pursuant to applicable accounting rules, and any EBITDA attributable to our advertising funds. EBITDA is used by management as a performance measure for benchmarking against our peers and our competitors. We believe EBITDA is meaningful and helpful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is not a recognized term under U.S. GAAP. In addition, our Revolving Bank Facilities require us to maintain certain financial ratios which require us to calculate and monitor EBITDA. EBITDA should not be viewed in isolation and does not purport to be an alternative to operating income or net income as an indicator of operating performance or as an alternative to cash flows from operating activities as a measure of liquidity. There are material limitations associated with making the adjustments to calculate EBITDA and using this non-GAAP financial measure as compared to the most directly comparable GAAP financial measure. For instance, EBITDA does not include:
 
interest expense, and because we have borrowed money for various corporate purposes, interest expense is a necessary element of our costs;
 
depreciation and amortization expense, and because we use property and equipment, depreciation and amortization expense is a necessary element of our costs; and
 
income tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate.
Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as capital expenditures, contractual commitments, interest payments, tax payments and debt service requirements. Since not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies.
EBITDA should not be considered a measure of income generated by our business. Our management compensates for these limitations by relying primarily on GAAP results, and by using EBITDA on a supplemental basis.The following table is a reconciliation of EBITDA to our net income and operating income:
 
Fiscal Years(1)(2)
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands)
Net income
$
428,649

 
$
407,766

 
$
385,748

 
$
647,118

 
$
319,812

Interest expense, net
35,466

 
30,413

 
25,873

 
24,180

 
19,184

Income tax expense
156,980

 
156,346

 
157,854

 
200,940

 
186,606

Operating income
621,095

 
594,525

 
569,475

 
872,238

 
525,602

Depreciation and amortization
161,809

 
132,167

 
115,869

 
118,385

 
113,475

EBITDA*
782,904

 
726,692

 
685,344

 
990,632

 
639,077

EBITDA attributable to VIEs
18,325

 
12,207

 
6,347

 
34,091

 
39,138

EBITDA attributable to Tim Hortons Inc.
$
764,579

 
$
714,485

 
$
678,997

 
$
956,532

 
$
599,939

* EBITDA includes and has not been adjusted for the de-branding costs in fiscal 2013 other than related depreciation and amortization, Corporate reorganization expenses in fiscal 2013 and 2012, asset impairment and closure costs, net, in fiscal 2013, 2012, 2011 and 2010, and items related to the sale of Maidstone Bakeries in fiscal 2010.
(9) 
Operating margin represents operating income expressed as a percentage of Total revenues.
(10) 
Total systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted into Canadian dollar amounts using the average exchange rate of the base year for the period covered. Systemwide sales growth excludes sales from the Republic of Ireland and the United Kingdom licensed locations.
(11) 
Includes both franchised and Company-operated restaurants. Franchised restaurant sales are not included in our Consolidated Financial Statements, other than restaurants whose results of operations are consolidated with ours pursuant to applicable accounting rules. U.S. average sales per standard and non-standard restaurant are disclosed in both U.S. and Canadian dollars, the functional and reporting currency, respectively, of our U.S. operations. The U.S. average sales per standard and non-standard restaurant were converted into Canadian dollars for each year using the average foreign exchange rate in the applicable year, which includes the effects of exchange rate fluctuations and decreases comparability between the years. We believe the presentation of the U.S. dollar average sales per standard and non-standard restaurant is useful to investors to show the local currency amounts for restaurants in the U.S. and provides transparency on the underlying business performance without the impact of foreign exchange.
(12) 
Our standard restaurant typically measures between 1,000 to 3,080 square feet, with a dining room and drive-thru service. Standard restaurants comprised 68.7% of our system as at December 29, 2013.
(13) 
Our non-standard restaurants include small, full-service restaurants and/or self-serve kiosks in offices, hospitals, colleges, airports, grocery stores, gas and convenience locations, including full-serve sites located in sports arenas and stadiums that operate only during events with a limited product offering. See Item 1. Business—Operations—Restaurant formats for further information. Included in our U.S. non-standard restaurant counts as at December 29, 2013 are 44 event sites. On average, 25 of these sites were operating during fiscal 2013 and had annual average unit volumes of approximately $92 thousand. These sites are important as they heighten brand awareness in our developing markets by exposing the brand to a large number of guests and encourage trial as we generally have product exclusivity at these locations. Non-standard restaurants comprised 31.3% of our total system as at December 29, 2013.
Average unit volumes for non-standard restaurants exclude volumes from self-serve kiosks. Self-serve kiosks differ in size and product offering and, as a result, have significantly different economics than our full-serve standard and non-standard restaurants, including substantially less capital investment, and also contribute significantly less to both systemwide sales as well as our revenues and operating income in each respective region. Self-serve kiosks currently contribute nominal amounts to our financial results, but complement our core growth strategy by increasing guest convenience and frequency of visits and allowing for additional market penetration of our brand, including in areas where we may not be as well known or where an alternative model for unit growth and development is not appropriate.

38


 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the fiscal 2013 Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K for the year ended December 29, 2013 (“Annual Report”). All amounts are expressed in Canadian dollars unless otherwise noted. The following discussion includes forward-looking statements that are not historical facts, but reflect our current expectations regarding future results. These forward-looking statements include information regarding our future economic and sales performance, expectations and objectives of management including with respect to our ability to obtain financing, our expectations regarding investment grade credit ratings, our Canadian and U.S. market strategy, and promotional and marketing initiatives. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to“Risk Factors” included in our Annual Report, and set forth in our long-form Safe Harbor Statement referred to below under “Safe Harbor Statement” and attached hereto, for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results.
Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at Company-operated restaurants, and franchisee-owned restaurants and restaurants run by independent operators (collectively, we hereunder refer to both franchisee-owned and franchisee-operated restaurants as “franchised restaurants”). Please refer to “Systemwide Sales Growth” and “Same-Store Sales Growth” below for additional information.
We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding the Company’s performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP and a reconciliation to GAAP measures.
References herein to “Tim Hortons,” the “Company,” “we,” “our,” or “us” refer to Tim Hortons Inc., a corporation governed by the Canada Business Corporations Act, and its subsidiaries for periods on or after September 28, 2009 and to Tim Hortons Inc., a Delaware corporation, and its subsidiaries (“THI USA”) for periods on or before September 27, 2009, unless specifically noted otherwise.
Description of Business
The Company’s principal business is the franchising of Tim Hortons restaurants, primarily in Canada and the U.S., that serve premium blend coffee, espresso-based hot and cold specialty drinks (including lattes, cappuccinos and espresso shots), iced cappuccinos, specialty and steeped teas, cold beverages, fruit smoothies, home-style soups, chili, grilled Panini and classic sandwiches, wraps, yogurt and berries, oatmeal, breakfast sandwiches and wraps, and fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies, croissants, Danishes, pastries and more. As the franchisor, Tim Hortons collects royalty revenue from franchised restaurant sales. Our business generates additional revenue by controlling the underlying real estate for the majority of our franchised restaurants; at December 29, 2013, we leased or owned the real estate for approximately 83.0% of our full-serve system restaurants in North America, including 796 owned locations (532 sites in Canada and 264 sites in the U.S.). Real estate that is not controlled by us is generally for our non-standard restaurants, including, for example, full-serve kiosks in offices, retail locations, hospitals, colleges, stadiums, arenas, and airports, self-serve kiosks located in gas stations, grocery stores, and other convenience locations, and for our restaurants located outside of North America.
We distribute coffee and other beverages, non-perishable food, supplies, packaging and equipment to most system restaurants in Canada through our five distribution centres, and frozen, refrigerated and shelf-stable products from our Guelph and Kingston distribution facilities in our Ontario and Quebec markets. Where we are not able to leverage our scale or create warehousing or transportation efficiencies, such as in the U.S. and in certain Canadian markets, we typically manage and control the supply chain, but use third-party warehousing and transportation. Our supply chain activities include the second largest market share in sales of large canned coffee grocery retail sales in Canada. Our vertical integration model also includes two coffee roasting facilities located in Hamilton, Ontario, and Rochester, New York, and a fondant and fills manufacturing facility located in Oakville, Ontario.
Our management of supply chain activities enables us to leverage our scale in Canada to create efficiencies, build competitive advantage, and provide quality, cost-competitive and timely deliveries to our restaurant owners. Our supply chain

39


model is an important contributor to our profitability, generating strong returns for our shareholders while requiring relatively modest deployment of capital. As such, we view our supply chain activities as being central to our business model and an important means of supporting our business units in meeting the needs of our restaurant owners. We generally invest in vertical integration if we consider that the investment would provide value to our restaurant owners and would generate a reasonable rate of return.
2013 Performance Against Targets
The following table sets forth our fiscal 2013 actual performance as compared to our fiscal 2013 financial targets, as well as management’s views on our performance relative to such targets.
Measure
Target
Actual
Commentary
Same-store Sales Growth
 
 
 
Canada
2.0% - 4.0%
1.1%
Our same-store sales growth was below our targeted ranges in both Canada and the U.S. due to, we believe, the persistently challenged economic environment in which the quick service restaurant industry operates, including an increasingly intense competitive environment and lower discretionary spending.
U.S.
3.0% - 5.0%
1.8%
Restaurant Development
 
 
 
Canada
160 - 180 restaurants
168 restaurants
Our Canadian restaurant development was within our targeted range. Approximately two-thirds of restaurants developed in fiscal 2013 were standard format, in-line with our targets, and included 12 self-serve kiosks.
U.S.
70 - 90 full-serve restaurants
74 full-serve restaurants
We also achieved our U.S. development target, of which approximately half were standard format restaurants. Additionally, we opened five self-serve kiosks.
International
Approximately 20 restaurants
14 restaurants
Although we were below our target, we continued to actively expand within the Gulf Cooperation Council (“GCC”) with primarily standard restaurant openings.
Effective tax rate
Approximately 28%
26.8%
Our actual fiscal 2013 effective tax rate was lower than the targeted effective tax rate primarily due to releases of tax reserves.
Diluted earnings per share attributable to Tim Hortons Inc. (“EPS”)
$2.87 - $2.97 (excluding Corporate reorganization expenses)
$2.82 (as reported)
Our actual EPS includes a $0.06 per share reduction related to Corporate reorganization costs, which was not included as part of Management’s fiscal 2013 guidance. It also includes a $0.10 per share reduction related to Cold Stone Creamery® de-branding costs, and the benefits from a lower effective tax rate (see above) and fewer shares outstanding due to our expanded share repurchase program, none of which were contemplated as part of Management’s fiscal 2013 guidance.

40


Measure
Target
Actual
Commentary
Capital Expenditures
 
 
 
Canada and U.S.
$250 - $300 million
$221.0 million
Our capital expenditures include renovations at over 300 restaurants in Canada and the U.S., and drive-thru initiatives at over 1,400 locations in Canada. Our actual capital expenditures are reflected on a cash basis, which can be impacted by the timing of payments compared to the actual date of acquisition.
Canadian Advertising Fund
Up to $50 million
$22.0 million
Performance against 2010-2013 Strategic Plan Aspirations
We are at the end of our current “More than a Great Brand” strategic cycle. Our earnings aspirations of compounded annual growth of EPS and operating income noted below exclude items primarily for comparability, which were not originally anticipated in our strategic plan aspirational goals (see non-GAAP reconciliations below). The following table sets forth our actual performance as compared to our strategic plan targets, as well as management’s views on our performance relative to such targets.
Measure
Target
Actual
Commentary
Compounded annual adjusted operating income growth (from 2010 - 2013)(1)
8% - 10%
7.8%
Our compounded annual adjusted operating income growth was below our targeted range due, we believe, to the persistently challenging economic environment and slow recovery following the global recession in 2008 and 2009.
Compounded annual adjusted EPS growth (from 2010 - 2013)(1)
12% - 15%
13.5%
Our EPS growth during this period benefited from an increase in net income, reflective, in part, of a lower effective tax rate due to discrete items recognized in fiscal 2013, and an expanded share repurchase program, both of which were not anticipated in our original targets.
New restaurant development
 
 
 
    Canada
Approximately 600
651
In Canada, we now have 3,588 total system restaurants, including an increased presence in Quebec.
    U.S.
Approximately 300
387
In the U.S., we now have 859 system restaurants in 15 states, including 181 self-serve kiosks.
    Total North America
Approximately 900
1,038
In North America, we have increased our total restaurants since 2010 by approximately 24%. Our total system restaurants in North America now number 4,447. In addition, we began developing restaurants Internationally.
_____________  
(1)  
Adjusted operating income and adjusted EPS are non-GAAP measures. Management uses adjusted operating income and adjusted EPS to assist in the evaluation of performance over the strategic plan period and believes that it will be helpful and meaningful to investors as a measure of underlying operational growth rates over this strategic plan period. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. The Company’s use of the term adjusted operating income and adjusted EPS may differ from similar measures reported by other companies. Adjusted operating income and adjusted EPS should not be considered a measure of income generated by our business. Our management compensates for these limitations by relying primarily on GAAP results, and by using adjusted operating income and adjusted EPS on a supplemental basis. The reconciliation of operating income and EPS, which are GAAP measures, to adjusted operating income and adjusted EPS, which are non-GAAP measures, is set forth in the table below:

41


 
2013(a)
 
2010(a)
Operating income
$
621.1

 
$
872.2

Add: De-branding costs
19.0

 
 
Add: Corporate reorganization expenses
11.8

 
 
Add: Asset impairment and related closure costs
 
 
28.3

Add: Restaurant owner allocation
 
 
30.0

Less: Gain on sale of our interest in Maidstone Bakeries
 
 
(361.1
)
Less: Operating income attributable to Maidstone Bakeries(b)
 
 
(48.9
)
Adjusted operating income
651.9

 
520.5

 
2013(a)
 
2010(a)
EPS
2.82

 
3.58

Add: De-branding costs
0.10

 
 
Add: Corporate reorganization expenses
0.06

 
 
Add: Asset impairment and related closure costs
 
 
0.16

Add: Restaurant owner allocation
 
 
0.14

Less: Gain on sale of our interest in Maidstone Bakeries
 
 
(1.84
)
Adjusted EPS
2.98

 
2.04

_____________  
(a)  
All numbers rounded. Time periods presented for purposes of compounded annual growth rate calculation.
(b) 
An adjustment is required to operating income for the operating income attributable to Maidstone Bakeries, however, a similar adjustment is not required to EPS as the proceeds from the sale were utilized to repurchase shares, which negated the effect of operating income attributable to Maidstone Bakeries on the adjusted EPS calculation.
Executive Overview
Systemwide sales grew by 4.7% in fiscal 2013, driven by new restaurant development and same-store sales growth of 1.1% in Canada and 1.8% in the U.S. While our systemwide and same-store sales growth improved over the course of fiscal 2013 due to our targeted marketing initiatives, category extensions, product innovation, restaurant development, and operational initiatives, we continue to adapt to the challenging economic environment. Economic growth was moderate in Canada and, overall, was below expectations in fiscal 2013. Additionally, while the unemployment rate in Canada continues to improve, it has yet to return to pre-recessionary rates. While the U.S. economy gained traction in the latter part of the year and the U.S. unemployment rate continues to improve, it also has yet to return to pre-recessionary rates. We believe that ongoing concerns about the pace of economic recovery in both Canada and the U.S. have created this persistently challenged economic environment with increased competition and lower consumer discretionary spending.
In order to compete in this economic era, we focused on providing the ultimate in guest service with each and every transaction. In fiscal 2013, we began several new operational initiatives. These initiatives include menu board simplification, both inside and outside the restaurants, making it easier for our guests to place an order and for our restaurants to execute those orders, as well as enhanced payment options for our guests. In certain locations, we began testing beverage express lines in order to improve our overall speed of service and deal with capacity constraints. We continued our ongoing renovation program, including restaurant renovations with more contemporary design elements and our drive-thru initiatives in Canada, including double order stations, targeted to enhance the guest experience and improve speed of service. We have also undertaken simplification efforts, such as delisting certain menu items, which will continue in fiscal 2014.
Same-store sales growth in Canada of 1.1% in fiscal 2013 was driven by gains in average cheque resulting from pricing and favourable product mix, partially offset by a decline in transactions. We continued to grow total systemwide transactions. Our average cheque and product mix continued to benefit from product innovation, such as further expansion and promotional activity in the single-serve category, as well as growth in the lunch daypart with product offerings such as the Grilled Steak and Cheese Panini. Our same-store sales growth was negatively impacted by unfavourable weather conditions in the first quarter of 2013 compared to the first quarter of 2012.
After evaluation of strategic considerations and the overall performance of the Cold Stone Creamery business in Tim Hortons locations, we have decided to remove the Cold Stone Creamery brand from Tim Hortons restaurants in Canada. This decision will allow the owners of the affected restaurants to simplify their operations and focus entirely on Tim Hortons. The Company recognized a total charge of $19.0 million in fiscal 2013 in connection with this initiative, and does not expect to incur significant further charges. The de-branding activity is expected to be complete in the first half of fiscal 2014. In the U.S.,

42


we continue to develop and support our Cold Stone Creamery operations, as the nature of the business, and the support required by the Company, is significantly different than in Canada.
In the U.S., same-store sales growth of 1.8% was also driven by gains in average cheque, resulting from pricing and an increase in transactions in fiscal 2013, which has been a focus for our U.S. team. We continue to see gains in the breakfast daypart, supported in part by continued product innovation and product offerings such as the Steak and Egg Panini. Similar to Canada, our same-store sales growth was negatively impacted by unfavourable weather conditions in the first quarter of 2013 compared to the first quarter of 2012.
Marc Caira was appointed President and CEO effective July 2, 2013, and on the same date, Paul House became Chairman of the Board of Directors, having formerly served as President and CEO, and Executive Chairman. Mr. House provided transition services through the balance of fiscal 2013. In addition, we completed the realignment of roles and responsibilities within our Corporate Centre and Business Unit design in fiscal 2013, and have therefore revised our segment reporting to align with our new internal reporting structure, which now consists of business units in both Canada and the U.S., and Corporate services (see Segment Operating Income below).
As part of the Company's recapitalization plan, we are targeting a total of $1 billion in share repurchases over the 12-month period ending August 2014, subject to market conditions, the negotiation and execution of agreements, and regulatory approvals. The expanded share repurchase program commenced in September 2013, and to date, we have repurchased approximately $582.3 million under this program. In November 2013, we raised $450.0 million in long-term debt through the issuance of Senior Unsecured Notes, Series 2, due December 1, 2023 (“Series 2 Notes”), which represents a portion of the planned $900.0 million increase in our debt levels. The funds raised can be used for general corporate purposes, including the expanded share repurchase program. The Company is currently finalizing alternatives for financing the remaining planned $450.0 million increase in our debt levels.
Operating income increased $26.6 million, or 4.5%, to $621.1 million in fiscal 2013 compared to fiscal 2012, and adjusted operating income (refer to non-GAAP reconciliation in Selected Operating and Financial Highlights), which excludes Corporate reorganization expenses and Cold Stone Creamery de-branding costs in Canada, increased $38.5 million, or 6.3%, to $651.9 million. Growth in operating income was driven by systemwide sales growth, resulting in an increase in rents and royalties and supply chain income, partially offset by the recognition of U.S. restaurant closure costs. Operating income growth in fiscal 2013 was also driven by increased franchise fee income, as a result of standard restaurant development, renovations and resales; distribution services income due primarily to operational improvements; and lower general and administrative expenses, due primarily to lower salaries and benefits resulting from the reorganization and stock option variability, compared to fiscal 2012.
Net income attributable to Tim Hortons Inc. (“net income”) increased $21.5 million, or 5.3%, to $424.4 million in fiscal 2013 compared to fiscal 2012, primarily due to higher operating income and a lower effective tax rate of 26.8% in fiscal 2013 compared to 27.7% in fiscal 2012.
EPS increased $0.23 to $2.82 in fiscal 2013, compared to $2.59 in fiscal 2012. In addition to higher net income attributable to Tim Hortons Inc., as outlined above, our EPS growth continued to benefit from the positive, cumulative impact of our expanded share repurchase program, as we had, on average, approximately 5.1 million, or 3.2%, fewer fully diluted common shares outstanding during fiscal 2013 compared to fiscal 2012.
2014 Performance Targets
The following table sets forth management’s views regarding fiscal 2014 performance and our expectations for achievement of the key financial objectives set forth below:
Measure
Target
Commentary
Same-store Sales Growth
 
 
Canada
1.0% - 3.0%
We expect to continue our positive same-store sales growth trends in both Canada and the U.S., despite the increasingly intense competitive environment, by undertaking a multi-faceted approach that emphasizes our unique market differentiators. These include: leveraging our fiscal 2013 investments in drive-thru initiatives and renovations to improve speed of service; product and menu innovation aimed at driving higher average cheque; and marketing and promotional activity.
U.S.
2.0% - 4.0%

43


Measure
Target
Commentary
Restaurant Development
 
We expect to open approximately 215-255 restaurants, in Canada, the U.S. and Internationally.
Canada
140 - 160
In Canada, we expect our restaurant development to be evenly split between standard and non-standard locations, a slight shift from historical norms. We continue to look for opportunities to build our brand across Canada and offer convenience to our customers. The non-standard formats provide us with an opportunity to do so in a capital-efficient manner. We intend to continue our development focus in our growth markets, specifically in Western Canada, Ontario, and Quebec, and in major urban markets.
U.S.
40 - 60 full-serve restaurants
In the U.S., we also expect restaurant development to be evenly split between standard and non-standard full-serve locations, and we expect to complement these restaurant openings with self-serve kiosks to enhance convenience for our guests. Our development will be primarily in core and priority markets. We are focused on improving our returns on the capital that we deploy in the U.S. segment and, accordingly, will seek less capital intensive development opportunities.
Effective tax rate
Approximately 29.0%
We expect our effective tax rate, excluding the impact of any discrete events or legislative changes, to be slightly higher than our fiscal 2013 target of approximately 28.0%, as a result of changes to our capital structure.
EPS
$3.17 - $3.27
We expect operating income to grow in both Canada and the U.S. in fiscal 2014 through continued same-store sales growth coupled with new restaurant development. We added leverage to our capital structure in late fiscal 2013, and plan to increase leverage in the first half of fiscal 2014, the proceeds of which can be used for general corporate purposes, including to fund our expanded share repurchase program. The increased leverage drives both higher interest expense and a higher effective tax rate, but coupled with our expanded share repurchase program, is accretive to our overall EPS growth. We expect that our 2014 share repurchase program, to a maximum of $440.0 million, will commence in February 2014 and end in February 2015, or earlier if the applicable maximums are reached.
Capital Expenditures
 
 
Total (excluding Advertising Fund)
$180 - $220 million
Our 2014 capital expenditure targets reflect our focus on reducing the amount of our capital employed; of this target, our U.S. capital expenditures are expected to be U.S. $30.0 million. We plan to increase the number of restaurant renovations in Canada in fiscal 2014 as compared to fiscal 2013. We will continue to invest in technology and other corporate initiatives to drive new levels of productivity and efficiency across our business.
Strategic Plan Aspirations (2015 - 2018)
EPS compounded annual growth from 2015 to the end of 2018 is expected to be between 11.0% to 13.0%.
U.S. segment operating income of up to $50.0 million by 2018.
Cumulative free cash flow1 of approximately $2.0 billion from 2015 to 2018.
Total new restaurant development in Canada, U.S. and the GCC from 2015 to 2018 is expected to be more than 800 locations, including a small number of self-serve locations.
_____________  
(1)
Free cash flow is a non-GAAP measure. Free cash flow is generally defined as net income adjusted for amortization and depreciation, net of capital requirements to sustain business growth. Management believes that free cash flow is an important tool to compare underlying cash flow generated from core operating activities once capital investment requirements have been met. Free cash flow does not represent residual cash flow available for discretionary expenditures. This non-GAAP measure is not intended to replace the presentation of our financial results in accordance with GAAP. The Company’s use of the term free cash flow may differ from similar measures reported by other companies. Free cash flow as contemplated above, was calculated as follows: Net income attributable to THI, plus depreciation and amortization (excluding VIEs), less capital expenditures (excluding VIEs).

44


Notes
The performance targets established for fiscal 2014 and strategic plan aspirations (2015 - 2018) are based on the accounting, tax, and/or other legislative and regulatory rules in place at the time the targets are issued and on the continuation of share repurchase programs as expected. The impact of future changes in accounting, tax, and/or other legislative and regulatory rules that may or may not become effective in fiscal 2014 and future years, changes to our share repurchase activities, and accounting, tax, audit or other matters not contemplated at the time the targets were established that could affect our business, were not included in the determination of these targets. In addition, the targets are forward-looking and are based on our expectations and outlook on, and shall be effective only as of, the date the targets were originally issued.

Selected Operating and Financial Highlights
 
Fiscal Years
($ in millions, except per share data)
2013
 
2012
 
2011
Systemwide sales growth(1)
4.7
%
 
6.9
%
 
7.4
%
Same-store sales growth(1)
 
 
 
 
 
Canada
1.1
%
 
2.8
%
 
4.0
%
U.S.
1.8
%
 
4.6
%
 
6.3
%
Systemwide restaurants
4,485

 
4,264

 
4,014

Revenues
$
3,255.5

 
$
3,120.5

 
$
2,853.0

Operating income
$
621.1

 
$
594.5

 
$
569.5

Adjusted operating income(2)
$
651.9

 
$
613.4

 
$
575.7

Net income attributable to Tim Hortons Inc.
$
424.4

 
$
402.9

 
$
382.8