UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2014
OR
TRANSITION 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)
(IRS Employer
Identification Number)
874 Sinclair Road, Oakville, ON, Canada
L6K 2Y1
(Address of principal executive offices)
(Zip code)
905-845-6511
(Registrant’s phone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the Registrant has submitted electronically 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
No
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
(Do not check if a smaller reporting company)
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common shares
Outstanding at August 1, 2014
132,817,871 shares
No
TIM HORTONS INC. AND SUBSIDIARIES
INDEX
Pages
PART I: Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Operations for the second quarters and year-to-date periods
ended June 29, 2014 and June 30, 2013
Condensed Consolidated Statement of Comprehensive Income for the second quarters and year-todate periods ended June 29, 2014 and June 30, 2013
Condensed Consolidated Balance Sheet as at June 29, 2014 and December 29, 2013
Condensed Consolidated Statement of Cash Flows for the second quarters and year-to-date periods
ended June 29, 2014 and June 30, 2013
Condensed Consolidated Statement of Equity for the year-to-date periods ended June 29, 2014 and
December 29, 2013
Notes to the Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
Signature
Index to Exhibits
3
4
5
6
7
8
18
29
29
30
30
30
30
30
31
31
32
33
On August 1, 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$0.9159 for Cdn$1.00.
Availability of Information
Tim Hortons Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act (the
“CBCA”), 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 U.S.
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 (“CSA”). All references to our websites contained
herein do not constitute incorporation by reference of the information contained on the websites and such information should
not be considered part of this document.
Reporting Currency
The majority of the Company’s operations, restaurants and cash flows are based in Canada, and the Company is primarily
managed in Canadian dollars. As a result, the Company’s reporting currency is the Canadian dollar. All amounts are expressed
in Canadian dollars unless otherwise noted.
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands of Canadian dollars, except share and per share data)
Second quarter ended
June 29, 2014
Year-to-date period ended
June 30, 2013
June 29, 2014
June 30, 2013
Revenues
Sales (note 13)
Franchise revenues
Rents and royalties
Franchise fees
$
613,829
Total revenues
Costs and expenses
Cost of sales
Operating expenses
Franchise fee costs
General and administrative expenses
Equity (income)
Corporate reorganization expenses
Other (income) expense, net
Total costs and expenses, net
Operating income
Interest (expense)
Interest income
Income before income taxes
Income taxes (note 2)
Net income
Net income attributable to noncontrolling interests
(note 12)
Net income attributable to Tim Hortons Inc.
Basic earnings per common share attributable to Tim
Hortons Inc. (note 3)
Diluted earnings per common share attributable to
Tim Hortons Inc. (note 3)
Weighted average number of common shares
outstanding (in thousands) – Basic (note 3)
Weighted average number of common shares
outstanding (in thousands) – Diluted (note 3)
Dividends per common share
$
568,562
$
1,154,859
$
1,092,449
224,953
35,565
260,518
874,347
209,289
22,288
231,577
800,139
424,462
61,428
485,890
1,640,749
396,743
42,484
439,227
1,531,676
527,132
489,092
1,000,715
950,446
84,411
34,906
40,241
(3,975)
76,986
23,326
38,038
(3,916)
165,669
62,589
79,460
(7,321)
152,719
45,878
76,706
(7,265)
—
(735)
681,980
604
(570)
623,560
192,367
(18,648)
176,579
(8,922)
337,654
(35,324)
304,496
(17,585)
1,138
174,857
49,425
125,432
791
168,448
43,886
124,562
2,115
304,445
86,658
217,787
1,719
288,630
77,145
211,485
—
1,983
1,303,095
10,079
(1,383)
1,227,180
$
1,682
123,750
$
826
123,736
$
3,128
214,659
$
1,578
209,907
$
0.92
$
0.81
$
1.58
$
1.38
$
0.92
$
0.81
$
1.57
$
1.37
$
133,899
152,083
136,007
152,597
134,367
0.32
152,637
0.26
136,477
0.64
153,133
0.52
$
$
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
$
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of Canadian dollars)
Second quarter ended
June 29, 2014
Net income
Other comprehensive income
Translation adjustments (loss) gain
Unrealized gains (losses) from cash flow hedges (note 9)
(Loss) gain from change in fair value of derivatives
Amount of net (gain) loss reclassified to earnings
during the period
Tax recovery (expense) (note 9)
Other comprehensive (loss) income
Comprehensive income
Comprehensive income attributable to noncontrolling
interests
Comprehensive income attributable to Tim Hortons
Inc.
$
125,432
June 30, 2013
$
124,562
June 29, 2014
$
217,787
211,485
15,205
(2,830)
23,382
(4,968)
5,307
(5,910)
8,079
378
(1,333)
(3,700)
1,041
(2,325)
1,763
(21,969)
1,476
(10,964)
103,463
19,557
144,119
206,823
30,177
241,662
1,682
826
3,128
1,578
101,781
$
143,293
$
203,695
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
June 30, 2013
$
(17,765)
(999)
$
Year-to-date period ended
$
240,084
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands of Canadian dollars, except share and per share data)
As at
June 29, 2014
Assets
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents (note 6)
Accounts receivable, net
Notes receivable, net (note 4)
Deferred income taxes
Inventories and other, net (note 5)
Advertising fund restricted assets (note 12)
Total current assets
Property and equipment, net
Notes receivable, net (note 4)
Deferred income taxes
Equity investments
Other assets
Total assets
Liabilities and equity
Current liabilities
Accounts payable (note 6)
Tim Card obligation (note 6)
Accrued liabilities (note 6)
Advertising fund liabilities (note 12)
Short-term borrowings
Current portion of long-term obligations
Total current liabilities
Long-term obligations
Long-term debt (note 7)
Capital leases
Deferred income taxes
Other long-term liabilities
Total long-term obligations
Commitments and contingencies (note 10)
Equity
Equity of Tim Hortons Inc.
Common shares ($2.84 stated value per share), Authorized: unlimited shares.
Issued: 133,126,058 and 141,329,010 shares, respectively
Common shares held in Trust, at cost: 329,089 and 293,816 shares, respectively
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Total equity of Tim Hortons Inc.
Noncontrolling interests (note 12)
Total equity
Total liabilities and equity
$
$
$
$
25,087
85,926
220,157
7,619
9,985
117,776
39,078
505,628
1,681,010
598
11,693
40,372
117,452
2,356,753
$
171,118
128,517
65,835
38,782
15,000
18,336
437,588
$
$
50,414
155,006
210,664
4,631
10,165
104,326
39,783
574,989
1,685,043
4,483
11,018
40,738
117,552
2,433,823
204,514
184,443
89,565
59,912
30,000
17,782
586,216
1,293,035
125,048
8,123
108,557
1,534,763
843,020
121,049
9,929
112,090
1,086,088
377,442
(15,422)
11,914
131,926
(123,066)
382,794
1,608
384,402
2,356,753 $
400,738
(12,924)
11,033
474,409
(112,102)
761,154
365
761,519
2,433,823
See accompanying Notes to the Condensed Consolidated Financial Statements.
5
December 29, 2013
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands of Canadian dollars)
Year-to-date period ended
June 29, 2014
June 30, 2013
Cash flows provided from (used in) operating activities
Net income
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization
Stock-based compensation expense (note 11)
Deferred income taxes
Changes in operating assets and liabilities
Restricted cash and cash equivalents
Accounts receivable
Inventories and other
Accounts payable and accrued liabilities
Taxes
Settlement of interest rate forwards
Deposit with tax authorities
Other
Net cash provided from operating activities
Cash flows (used in) provided from investing activities
$
Capital expenditures
Capital expenditures – Advertising fund
Other investing activities
Net cash (used in) investing activities
Cash flows (used in) provided from financing activities
Repurchase of common shares
Dividend payments to common shareholders
Net proceeds from issuance of debt
Short-term (repayments) borrowings, net
Principal payments on long-term debt obligations
Other financing activities
Net cash (used in) financing activities
Effect of exchange rate changes on cash
(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
217,787
$
211,485
79,774
886
2,149
72,368
12,535
(2,539)
69,141
(16,667)
(13,593)
46,356
(8,254)
(5,218)
(81,678)
(9,230)
(4,851)
(1,721)
(14,274)
227,723
(75,262)
4,144
—
—
2,714
258,329
(94,442)
(4,438)
(88,272)
(5,224)
3,038
(95,842)
6,125
(87,371)
(493,476)
(86,910)
(113,803)
(79,348)
448,299
(15,000)
(8,280)
(1,980)
(157,347)
139
(25,327)
50,414
25,087 $
—
—
(8,543)
(5,001)
(206,695)
2,201
(33,536)
120,139
86,603
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Non-cash investing and financing activities:
Capital lease obligations incurred
$
$
30,712
102,946
$
$
17,131
77,540
$
14,173
$
19,219
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(in thousands of Canadian dollars or thousands of common shares)
Common Shares Held
in the Trust
Common Shares
Number
$
Balance as at December 30, 2012
153,405
Repurchase of common shares(3)
(12,076)
$
Number
AOCI(1)
Contributed
Surplus
Retained
Earnings
Translation
Adjustment
Cash Flow
Hedges
Total Equity
THI
NCI(2)
$
$
$
$
$
$
$
435,033
(317)
(34,295)
$
(13,356)
$
10,970
$
893,619
$
$
(3,590)
$
1,187,238
$
$
2,853
$
1,190,091
(43)
(2,453)
—
—
—
Disbursed or sold from the Trust(4)
—
—
66
2,885
—
—
—
—
Stock-based compensation
—
—
—
—
63
(712)
—
—
Other comprehensive income (loss)
before reclassifications(5)
—
—
—
—
—
—
31,333
(2,407)
28,926
—
28,926
Amounts reclassified from AOCI(5)
—
—
—
—
—
—
—
(2,000)
(2,000)
—
(2,000)
NCI transactions
—
—
—
—
—
(483)
—
—
(483)
483
—
Net income
—
—
—
—
—
—
—
4,280
428,649
Dividends and distributions, net
Balance as at December 29, 2013
Repurchase of common shares(3)(6)
—
141,329
—
$
(8,203)
—
—
400,738
(294)
(23,296)
(59)
(3,548)
$
(12,924)
(686,243)
(135,438)
Total Equity
424,369
(156,141)
—
$
11,033
$
474,409
—
$
(470,178)
—
(104,105)
(722,991)
(7,997)
(156,141)
—
—
761,154
(649)
—
424,369
$
2,885
—
(649)
—
$
(722,991)
—
2,885
(163,392)
(7,251)
$
(497,022)
365
$
761,519
(497,022)
—
Disbursed or sold from the Trust(4)
—
—
24
1,050
—
—
—
—
1,050
—
1,050
Stock-based compensation
—
—
—
—
881
215
—
—
1,096
—
1,096
Other comprehensive income (loss)
before reclassifications(5)
—
—
—
—
—
—
(5,705)
(8,535)
—
(8,535)
Amounts reclassified from AOCI(5)
—
—
—
—
—
—
—
(2,429)
(2,429)
—
(2,429)
NCI transactions
—
—
—
—
—
(269)
—
—
(269)
269
—
Net income
—
—
—
—
—
—
—
3,128
217,787
Dividends and distributions, net
Balance as at June 29, 2014
—
133,126
—
$
377,442
—
(329)
—
$
(15,422)
214,659
(86,910)
—
$
11,914
(2,830)
$
131,926
—
$
(106,935)
214,659
(86,910)
—
$
(16,131)
$
382,794
(89,064)
(2,154)
$
1,608
$
384,402
________________
(1)
(2)
(3)
(4)
(5)
(6)
Accumulated other comprehensive income (“AOCI”).
Noncontrolling interests (“NCI”).
Amounts reflected in Retained earnings represent consideration in excess of the stated value.
Amounts are net of tax.
Amounts are net of tax (see note 9).
The 2014 share repurchase program, as described in the Company’s Annual Report on Form 10-K for the year ended December 29, 2013 (“Annual Report”), filed with the SEC and the CSA on February 25,
2014, commenced on February 28, 2014.
See accompanying Notes to the Condensed Consolidated Financial Statements.
7
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial
Statements contain all adjustments (all of which are normal and recurring in nature) necessary to state fairly the Company’s
financial position as at June 29, 2014, and the results of operations, comprehensive income and cash flows for the second
quarters ended June 29, 2014 and June 30, 2013. These Condensed Consolidated Financial Statements should be read in
conjunction with the audited 2013 Consolidated Financial Statements which are contained in our most recent Annual Report.
The December 29, 2013 Condensed Consolidated Balance Sheet included herein was derived from the audited 2013
Consolidated Financial Statements, but does not include all of the year-end disclosures required by U.S. GAAP.
Stock-based compensation - performance stock units
In May 2014, the Company granted performance stock units ("PSUs") to certain of its employees. PSU payout levels will
be based on two forward looking performance measures: return on assets and total shareholder return. PSUs are expensed on a
straight-line basis over the relevant vesting period.
NOTE 2
INCOME TAXES
The effective income tax rate was 28.3% for the second quarter ended June 29, 2014 (second quarter fiscal 2013: 26.1%)
and 28.5% for the year-to-date period ended June 29, 2014 (year-to-date period fiscal 2013: 26.7%). The increase in the
effective tax rate for the 2014 quarter-to-date and year-to-date periods as compared to the respective 2013 periods is primarily
due to the favourable impact of a change in reserve balances in 2013 and an increase in costs in 2014 related to the Company’s
new long-term debt, for which a full tax benefit cannot be recognized.
NOTE 3
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO TIM HORTONS INC.
Second quarter ended
June 29, 2014
Net income attributable to Tim Hortons Inc.
$
Weighted average shares outstanding for computation of
basic earnings per common share attributable to Tim Hortons
Inc. (in thousands)
Dilutive impact of restricted stock units (“RSUs”) and PSUs
(in thousands)
Dilutive impact of stock options with tandem stock
appreciation rights (“SARs”) (in thousands)
Weighted average shares outstanding for computation of
diluted earnings per common share attributable to Tim
Hortons Inc. (in thousands)
Basic earnings per common share attributable to Tim
Hortons Inc.
Diluted earnings per common share attributable to Tim
Hortons Inc.
123,750
Year-to-date period ended
June 30, 2013
$
123,736
June 29, 2014
$
214,659
June 30, 2013
$
209,907
133,899
152,083
136,007
152,597
260
295
252
286
208
259
218
250
134,367
152,637
136,477
153,133
$
0.92
$
0.81
$
1.58
$
1.38
$
0.92
$
0.81
$
1.57
$
1.37
8
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 4
NOTES RECEIVABLE, NET
As at
June 29, 2014
Franchise Incentive Program (“FIP”)
notes(1)
Other notes receivable(3)
Notes receivable
Allowance
Notes receivable, net
$
$
15,702
7,465
23,167
December 29, 2013
VIEs(2)
Gross
$
$
Total
(12,824) $
(715)
(13,539)
$
Current portion, net
Long-term portion, net
$
$
VIEs(2)
Gross
2,878 $
6,750
9,628 $
(1,411)
8,217
16,677
8,256
24,933
$
$
Total
(13,668) $
(649)
(14,317)
7,619
598
$
3,009
7,607
10,616
(1,502)
9,114
$
$
4,631
4,483
As at
June 29, 2014
Class and Aging
Current status (FIP notes and other)
Past-due status < 90 days (FIP notes)
Past-due status > 90 days (FIP notes)
Notes receivable
Allowance
Notes receivable, net
Gross
$
$
8,222
329
14,616
23,167
VIEs
$
$
December 29, 2013
(2)
Total
(1,353) $
(329)
(11,857)
(13,539) $
$
6,869 $
—
2,759
9,628 $
(1,411)
VIEs(2)
Gross
9,688
328
14,917
24,933
$
$
Total
(2,081) $
—
(12,236)
(14,317) $
8,217
$
7,607
328
2,681
10,616
(1,502)
9,114
________________
(1)
(2)
(3)
The Company has outstanding FIP arrangements with certain U.S. restaurant owners, which generally provided interest-free financing for the purchase of
certain restaurant equipment, furniture, trade fixtures and signage.
The notes payable to the Company by VIEs are eliminated on consolidation, which reduces the Notes receivable, net recognized on the Condensed
Consolidated Balance Sheet (see note 12).
Relates primarily to notes issued to vendors in conjunction with the financing of property sales, and on various equipment and other financing programs.
NOTE 5
INVENTORIES AND OTHER, NET
As at
June 29, 2014
Raw materials
Finished goods
$
Inventory obsolescence provision
Inventories, net
Prepaids and other
Total Inventories and other, net
$
9
December 29, 2013
25,061 $
78,332
103,393
(1,418)
101,975
15,801
117,776
$
22,789
69,348
92,137
(1,754)
90,383
13,943
104,326
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 6
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable
As at
June 29, 2014
Accounts payable
Construction holdbacks and accruals
Corporate reorganization accrual
Total Accounts payable
$
$
December 29, 2013
137,112
33,065
941
171,118
$
$
142,131
57,527
4,856
204,514
Tim Card obligation
The decrease in our Tim Card obligation, and resulting decrease in Restricted cash and cash equivalents, is primarily
driven by Tim Card redemptions, which can be seasonal. In addition, Restricted cash and cash equivalents decreased due to
additional borrowings by the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (“Ad Fund”) (see note 12).
Accrued liabilities
As at
June 29, 2014
Salaries and wages
$
Taxes payable
(1)
De-branding accruals
(2)
Other accrued liabilities
Total Accrued liabilities
________________
(1)
(2)
$
14,276
December 29, 2013
$
22,553
5,316
14,542
1,947
9,538
44,296
42,932
65,835
$
89,565
®
Accruals related to Cold Stone Creamery de-branding activity in Tim Hortons locations in Canada.
Includes accruals for contingent rent, current portion of the Maidstone Bakeries supply contract, deferred revenues, deposits, the current portion of
deferred income taxes, and various equipment and other accruals.
NOTE 7
LONG TERM DEBT
The Company offered Senior Unsecured Notes, Series 3, due April 1, 2019 (“Series 3 Notes”) on a private placement
basis in the first quarter of 2014 for total net proceeds of $449.9 million, which included a discount of $0.1 million. A portion of
the proceeds from the Series 3 Notes were used to retire the balance of our 364-day $400.0 million revolving bank facility.
Please refer to Note 7, Long term debt, in the interim financial statements for the quarter ended March 30, 2014, filed on Form
10-Q with the SEC and CSA on May 7, 2014, for further information.
10
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 8
FAIR VALUES
Financial assets and liabilities measured at fair value
As at
June 29, 2014
Fair value
hierarchy
December 29, 2013
Fair value
asset (liability)(1)
Fair value
hierarchy
Fair value
asset (liability)(1)
Derivatives
Forward currency contracts(2)
Interest rate swap(3)
Interest rate forwards(4)
Total return swaps (“TRS”)(5)
Total Derivatives
Level 2
Level 2
n/a
Level 2
$
$
(2,030)
(204)
—
17,147
14,913
Level 2
Level 2
Level 2
Level 2
$
$
4,181
(49)
285
21,393
25,810
________________
(1)
(2)
(3)
(4)
(5)
The Company values its derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on observable inputs to
the valuation model.
The fair value of forward currency contracts is determined using prevailing exchange rates.
The fair value is estimated using discounted cash flows and market-based observable inputs, including interest rate yield curves and discount rates.
The interest rate forwards were settled as part of the issuance of the Series 3 Notes (see note 7).
The fair value of the TRS is determined using the Company’s common share closing price on the last business day of the fiscal period, as quoted on the
Toronto Stock Exchange.
Other financial assets and liabilities not measured at fair value
As at June 29, 2014 and December 29, 2013, the carrying values of Cash and cash equivalents and Restricted cash and
cash equivalents approximated their fair values due to the short-term nature of these investments. The following table
summarizes the fair value and carrying value of other financial assets and liabilities that are not recognized at fair value on a
recurring basis on the Condensed Consolidated Balance Sheet:
As at
June 29, 2014
Bearer deposit notes(1)
Notes receivable, net(2)
Series 1 Notes(3)
Series 2 Notes(3)
Series 3 Notes(3)
Advertising fund term debt(4)
Other debt(5)
Fair value
hierarchy
Fair value
asset (liability)
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
Level 3
$
$
$
$
$
$
$
42,520
8,217
(317,877)
(474,687)
(453,614)
(27,673)
(138,650)
December 29, 2013
Carrying
value
Fair value
hierarchy
Fair value
asset (liability)
Carrying
value
$
42,520
$
8,217
$ (301,022)
$ (449,898)
$ (449,880)
$ (27,673)
$ (72,664)
Level 2
Level 3
Level 2
Level 2
n/a
Level 3
Level 3
$
41,403 $
41,403
$
9,114 $
9,114
$ (315,519) $ (301,196)
$ (445,419) $ (449,892)
$
— $
—
$ (30,189) $ (30,189)
$ (126,548) $ (69,794)
________________
(1)
(2)
(3)
(4)
(5)
The Company holds these notes as collateral to reduce the carrying costs of the TRS. The interest rate on these notes resets every 90 days; therefore, the
fair value of these notes, using a market approach, approximates the carrying value.
Management generally estimates the current value of notes receivable, using a cost approach, based primarily on the estimated depreciated replacement
cost of the underlying equipment held as collateral.
The fair value of the senior unsecured notes, using a market approach, is based on publicly disclosed trades between arm’s length institutions as
documented on Bloomberg L.P.
Management estimates the fair value of this variable rate debt using a market approach, based on prevailing interest rates plus an applicable margin.
Management estimates the fair value of its Other debt, primarily consisting of contributions received related to the construction costs of certain
restaurants, using an income approach, by discounting future cash flows using a Company risk-adjusted rate over the remaining term of the debt.
11
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 9
DERIVATIVES
As at
June 29, 2014
Asset
Derivatives designated as
cash flow hedging
instruments
Forward currency
$
contracts(1)
919
December 29, 2013
Classification on
Condensed
Consolidated
Balance Sheet
Net
asset
(liability)
Liability
Accounts
$ (2,142) $ (1,223) payable, net
Interest rate swap(2)
$
—
$
Interest rate forwards(3)
$
—
$
$17,160
$
(204) $
—
—
$ 4,181
Accounts
receivable, net
$
$
—
$
n/a
$
285
$
—
$
Other assets
$21,393
$
—
$ 21,393
Other assets
$
$
—
$
n/a
Other long-term
—
Liability
Classification on
Condensed
Consolidated
Balance Sheet
$ 4,181
(204) liabilities
$
Asset
Net
asset
(liability)
(49) $
Other long-term
(49) liabilities
285
Accounts
receivable, net
Derivatives not
designated as
hedging instruments
TRS(4)
Forward currency
contracts(1)
$
15
$
(13) $ 17,147
(822) $
Accounts
(807) payable, net
—
—
________________
(1)
(2)
(3)
(4)
Notional value as at June 29, 2014 of $167.8 million (December 29, 2013: $154.0 million), with maturities ranging between June 2014 and April 2015; no
associated cash collateral.
Notional value as at June 29, 2014 of $27.5 million (December 29, 2013: $30.0 million), with maturities through fiscal 2019; no associated cash
collateral.
The interest rate forwards were settled in the first quarter of 2014 (notional amount at December 29, 2013: $90.0 million).
The notional value and associated cash collateral, in the form of bearer deposit notes (see note 8), was $42.5 million as at June 29, 2014 (December 29,
2013: $41.4 million). The TRS have maturities annually, in May, between fiscal 2015 and fiscal 2021.
Second quarter ended June 29, 2014
Derivatives designated as
cash flow
hedging instruments(1)
Forward currency
contracts
(3)
Classification on
Condensed
Consolidated
Statement of
Operations
Cost of sales
Interest rate swap
Interest (expense)
Interest rate forwards(4)
Interest (expense)
Amount of
gain (loss)
recognized
in OCI(2)
$
Total
Income tax effect
Net of income taxes
Income taxes
$
Amount of net
(gain) loss
reclassified
to earnings
(4,921) $
(47)
—
(4,968)
1,321
(3,647) $
12
Total effect
on OCI(2)
Second quarter ended June 30, 2013
Amount of
gain (loss)
recognized
in OCI(2)
(1,716) $
50
667
(999)
(6,637) $
3
667
(5,967)
442
(557) $
1,763
(4,204) $
Amount of net
(gain) loss
reclassified
to earnings
4,851 $
456
—
5,307
(1,279)
4,028 $
Total effect
on OCI(2)
144 $
61
173
378
(54)
324 $
4,995
517
173
5,685
(1,333)
4,352
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
Year-to-date period ended June 29, 2014
Classification on
Condensed
Consolidated
Statement of
Operations
Derivatives designated as
cash flow
hedging instruments(1)
Forward currency
contracts
(3)
Cost of sales
Interest rate swap
Interest (expense)
Interest rate forwards(4)
Interest (expense)
Amount of
gain (loss)
recognized
in OCI(2)
$
Total
Income tax effect
Income taxes
$
Net of income taxes
Amount of net
(gain) loss
reclassified
to earnings
(516) $
(258)
(5,136)
(5,910)
205
(5,705) $
Year-to-date period ended June 30, 2013
Amount of
gain (loss)
recognized
in OCI(2)
Total effect
on OCI(2)
(4,888) $
103
1,085
(3,700)
(5,404) $
(155)
(4,051)
(9,610)
1,271
(2,429) $
1,476
(8,134) $
Amount of net
(gain) loss
reclassified
to earnings
8,124 $
(45)
—
8,079
(2,141)
5,938 $
Total effect
on OCI(2)
615 $
80
346
1,041
(184)
857 $
8,739
35
346
9,120
(2,325)
6,795
_______________
(1)
(2)
(3)
(4)
Excludes amounts related to ineffectiveness, as they were not significant.
Other comprehensive income (“OCI”).
The Ad Fund entered into an amortizing interest rate swap to fix a portion of the interest expense on its term debt.
The Company entered into and settled interest rate forwards relating to the issuance of its long-term debt.
Derivatives not designated as
cash flow hedging instruments
Classification on Condensed Consolidated
Statement of Operations
TRS
General and administrative expenses
Forward currency contracts
Cost of sales
Forward currency contracts
Other (income) expense
Year-to-date period ended
June 29, 2014
June 30, 2013
$
$
$
Total loss (gain), net
NOTE 10
Second quarter ended
1,998
167
640
2,805
$
June 29, 2014
(1,482) $
(69)
—
(1,551) $
4,246
167
640
5,053
June 30, 2013
$
$
(8,235)
(349)
—
(8,584)
COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties to various legal actions and complaints arising in the ordinary course of
business. As of the date hereof, the Company believes that the ultimate resolution of such matters will not materially affect the
Company’s financial condition and earnings.
NOTE 11
STOCK-BASED COMPENSATION
Second quarter ended
June 29, 2014
RSUs and PSUs
Stock options and tandem SARs
1,386 $
(362)
Deferred share units (“DSUs”)
Total stock-based compensation expense
$
108
1,132
$
$
1,998
$
(1)
TRS loss (gain)
$
Year-to-date period ended
June 30, 2013
2,478
2,264
406
5,148
June 29, 2014
$
June 30, 2013
2,656 $
(1,864)
$
94
886
$
3,580
7,339
1,616
12,535
(1,482) $
4,246
$
(8,235)
________________
(1)
The Company has entered into TRS contracts as economic hedges, covering 1,027,000 of the Company’s underlying common shares (June 30, 2013:
1,008,000), which represents a portion of its outstanding stock options with tandem SARs, and substantially all of its cash obligation related to DSUs. See
note 9 for the revaluation of the TRS contracts.
During the second quarter of 2014, the Company granted a total of 62,000 RSUs and 72,000 PSUs (2013: total of 80,000
RSUs and 61,000 performance-conditioned restricted stock units), with a weighted average grant day fair value per unit of
$60.09 (2013: $56.12). Also during the second quarter of 2014, the Company granted 578,000 stock options and tandem SARs
(2013: 241,000), with a weighted average exercise per unit of $60.09 (2013: $56.12).
13
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 12
VARIABLE INTEREST ENTITIES
VIEs for which the Company is the primary beneficiary
The revenues and expenses associated with the Company’s consolidated Non-owned restaurants and advertising funds
presented on a gross basis, prior to consolidation adjustments, are as follows:
Second quarter ended
June 29, 2014
Restaurant
VIEs(1)
Sales
Advertising
fund VIEs(2)
Total
VIEs
Restaurant
VIEs(1)
Advertising
fund VIEs(2)
Total
VIEs
$
94,328
—
94,328
92,242
—
2,086
33
2,053
371
$
—
2,906
2,906
—
2,704
202
202
—
—
$
94,328
2,906
97,234
92,242
2,704
2,288
235
2,053
371
$
93,464
—
93,464
92,480
—
984
—
984
158
$
—
2,569
2,569
—
2,293
276
276
—
—
$
93,464
2,569
96,033
92,480
2,293
1,260
276
984
158
$
1,682
$
—
$
1,682
$
826
$
—
$
826
Advertising levies
Total revenues
Cost of sales
Operating expenses
Operating income
Interest expense
Income before taxes
Income taxes
Net income attributable to
noncontrolling interests
June 30, 2013
Year-to-date period ended
June 29, 2014
Restaurant
VIEs(1)
Sales
Total
VIEs
Restaurant
VIEs(1)
Advertising
fund VIEs(2)
Total
VIEs
$
177,709
—
177,709
173,855
—
3,854
33
3,821
693
$
—
5,898
5,898
—
5,466
432
432
—
—
$
177,709
5,898
183,607
173,855
5,466
4,286
465
3,821
693
$
180,224
—
180,224
178,346
—
1,878
—
1,878
300
$
—
5,100
5,100
—
4,392
708
708
—
—
$
180,224
5,100
185,324
178,346
4,392
2,586
708
1,878
300
$
3,128
$
—
$
3,128
$
1,578
$
—
$
1,578
Advertising levies
Total revenues
Cost of sales
Operating expenses
Operating income
Interest expense
Income before taxes
Income taxes
Net income attributable to
noncontrolling interests
June 30, 2013
Advertising
fund VIEs(2)
______________
(1)
(2)
Includes rents, royalties, advertising expenses and product purchases from the Company which are eliminated upon the consolidation of these VIEs.
The advertising levies, depreciation, interest costs, capital expenditures and financing associated with the Ad Fund’s program to acquire and install LCD
screens, media engines, drive-thru menu boards and ancillary equipment for our restaurants (the “Expanded Menu Board Program”) are presented on a
gross basis. Generally, the advertising levies that are not related to the Expanded Menu Board Program are netted with advertising and marketing
expenses incurred by the advertising funds in operating expenses, as these contributions are designated for specific purposes. The Company acts as an
agent with regard to these contributions.
14
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
The assets and liabilities associated with the Company’s consolidated Non-owned restaurants and advertising funds
presented on a gross basis, prior to consolidation adjustments, are as follows:
As at
June 29, 2014
Restaurant
VIEs(1)
Cash and cash equivalents
Advertising fund restricted assets – current
Other current assets
Property and equipment, net
Other long-term assets
Total assets
$
(2)(3)
Notes payable to Tim Hortons Inc. – current
Advertising fund liabilities – current
$
$
7,733
—
7,060
19,638
119
34,550
$
12,996
$
—
11,313
543
—
8,090
32,942
1,608
34,550
Other current liabilities(4)
Notes payable to Tim Hortons Inc. – long-term(2)(3)
Long-term debt(4)
Other long-term liabilities
Total liabilities
Equity of VIEs
Total liabilities and equity
December 29, 2013
Advertising
fund VIEs
Restaurant
VIEs(1)
$
$
—
39,078
—
65,661
960
105,699
$
23,040
$
38,782
5,268
13,680
22,641
2,288
105,699
—
105,699
Advertising
fund VIEs
$
$
7,773
—
7,155
20,471
370
35,769
$
—
39,783
—
70,485
1,271
111,539
$
13,689
$
3,040
$
—
11,706
628
—
9,381
35,404
365
35,769
$
59,913
5,253
15,200
25,157
2,976
111,539
—
111,539
______________
(1)
(2)
(3)
(4)
The Company consolidated 328 Non-owned restaurants as at June 29, 2014 (December 29, 2013: 331).
Various assets and liabilities are eliminated upon the consolidation of the Restaurant VIEs, the most significant of which are the FIP Notes payable to the
Company, which reduces the Notes receivable, net reported on the Condensed Consolidated Balance Sheet (see note 4).
The Notes payable to the Company by the Advertising Fund VIEs, which are funded by the Restricted cash and cash equivalents related to our Tim Card
program, are eliminated upon consolidation of the Ad Fund. The Ad Fund drew $20.0 million in the year-to-date period ended June 29, 2014 (year-to-date
period ended June 30, 2013: $nil) for purposes of the Expanded Menu Board Program.
Includes $27.7 million of Advertising fund VIEs debt with a Canadian financial institution relating to the Expanded Menu Board Program (December 29,
2013: $30.2 million), of which $5.0 million is recognized in Other current liabilities (December 29, 2013: $5.0 million) with the remainder recognized as
Long-term debt.
The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on the
Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets
recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by the
Company’s creditors as they are not legally included within the Company’s general assets.
NOTE 13
SEGMENT REPORTING
The Company operates exclusively in the quick service restaurant industry. The chief decision maker views and evaluates
the Company’s reportable segments as follows:
Canadian and U.S. business units.The results of each of the Canadian and U.S. business units includes substantially all
restaurant-facing activities, such as: (i) rents and royalties; (ii) product sales through our supply chain, as well as an allocation
of supply chain income, driven primarily by the business units’ respective systemwide sales; (iii) franchise fees; (iv) corporate
restaurants; (v) equity income related to restaurant operating ventures; and (vi) business-unit-related general and administrative
expenses. The business units exclude the effect of consolidating VIEs, consistent with how the chief decision maker views and
evaluates the respective business unit’s results.
15
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
Corporate services. Corporate services comprises services to support the Canadian and U.S. business units, including:
(i) general and administrative expenses; (ii) manufacturing income, and to a much lesser extent, manufacturing sales to third
parties; and (iii) income related to our distribution services, including the timing of variances arising primarily from commodity
costs and the related effect on pricing, which generally reverse within a year, associated with our supply chain management.
Our supply chain management involves securing a stable source of supply, which is intended to provide our restaurant owners
with consistent and predictable pricing. Many of these products are typically priced based on a fixed-dollar mark-up and can
relate to a pricing period which may extend beyond a quarter. Corporate services also includes the results of our international
operations, which are currently not significant.
Second quarter ended
June 29, 2014
Revenues(1)
Canada
U.S.
Corporate services
Total reportable segments
VIEs
Total
Operating Income (Loss)
Canada
U.S.
Corporate services
Total reportable segments
VIEs
Corporate reorganization expenses
Consolidated Operating Income
Interest, Net
Income before income taxes
$
721,599
51,878
3,636
777,113
97,234
874,347
$
$
$
Year-to-date period ended
June 30, 2013
$
$
657,682
41,220
5,204
704,106
96,033
800,139
June 29, 2014
$
$
1,344,784
103,053
9,305
1,457,142
183,607
1,640,749
June 30, 2013
$
$
1,251,355
85,668
9,329
1,346,352
185,324
1,531,676
188,866 $
9,254
(8,041)
174,760 $
2,587
(1,424)
342,332 $
13,611
(22,575)
320,581
3,497
(12,089)
190,079
2,288
—
192,367
(17,510)
174,857 $
175,923
1,260
(604)
333,368
4,286
—
337,654
(33,209)
304,445 $
311,989
2,586
(10,079)
176,579
(8,131)
168,448 $
304,496
(15,866)
288,630
________________
(1)
There are no inter-segment revenues included in the above table.
Consolidated Sales comprise the following:
Second quarter ended
June 29, 2014
Sales
Distribution sales
Company-operated restaurant sales
Sales from VIEs
Total Sales
$
511,762
7,739
94,328
613,829
$
16
Year-to-date period ended
June 30, 2013
$
$
468,597
6,501
93,464
568,562
June 29, 2014
$
$
964,115
13,035
177,709
1,154,859
June 30, 2013
$
$
899,748
12,477
180,224
1,092,449
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 14
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with
Customers. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues;
improve comparability of revenue recognition practices across entities, industries, jurisdictions and markets; and provide more
useful information to financial statement users through improved disclosure requirements. The amendments in this ASU are
effective for fiscal years and interim periods beginning on or after December 15, 2016, and should be applied retrospectively
using one of two acceptable application methods as noted in the ASU. The Company is currently assessing the potential impact
that the adoption and transition to this ASU may have on its Consolidated Financial Statements and related disclosures.
17
TIM HORTONS INC. AND SUBSIDIARIES
ITEM 2. 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”) filed with the U.S. Securities and Exchange Commission
(“SEC”) and the Canadian Securities Administrators (“CSA”) on February 25, 2014, and the Condensed Consolidated
Financial Statements and accompanying Notes included in our Interim Report on Form 10-Q for the quarter ended June 29,
2014 filed with the SEC and the CSA on August 6, 2014. 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, strategic plan, results and outlook based on current expectations, assumptions and information, including
information about our restaurant development plans, same-store sales expectations, earnings performance, capitalization
alternatives, targets and operational initiatives. Actual results may differ materially from the results discussed in the forwardlooking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to
Item 1A. “Risk Factors” in Part I of our Annual Report and set forth in our Safe Harbor Statement and attached hereto, as well
as risks described herein, 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 Companyoperated 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”). We believe
systemwide sales growth and same-store sales growth provide meaningful information to investors regarding the size of our
system, the overall health and financial performance of our system, and the strength of our brand and restaurant owner base,
which ultimately impacts our consolidated and segmented financial performance. Please refer to “Executive Overview” and
“Selected Operating and Financial Highlights” 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. and its
subsidiaries, 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. As the
franchisor, Tim Hortons collects royalty revenue from franchised restaurant sales. Our business generates additional revenues
by controlling the underlying real estate of our franchised restaurants; real estate that is not controlled by us is generally for our
non-standard restaurants. We warehouse and distribute coffee and other beverages, non-perishable food, supplies, packaging
and equipment to most system restaurants in Canada, and frozen, refrigerated and shelf-stable products to certain markets in
Canada. 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. In addition, the Company has vertically integrated manufacturing operations which include two coffee roasting
plants and a fondant and fills manufacturing facility.
Executive Overview
Both the Canadian and U.S. economies remain challenged and, in turn, the quick service industry’s operating
environment remains highly competitive. In the second quarter of 2014, we were pleased to achieve improved sales progression
owing to both product innovation and operational initiatives during the early stages of our strategic plan, and build sales
momentum into the second half of 2014. Our systemwide sales grew by 6.5% in the second quarter of 2014, on a constant
currency basis, driven by new restaurant development and same-store sales growth.
In the second quarter of 2014, same-store sales growth of 2.6% in Canada and 5.9% in the U.S. was driven by increases
in average cheque. In the year-to-date period of 2014, same-store sales growth in Canada was 2.1%, and in the U.S. was 3.9%.
18
Given our significant sales progression in the U.S., we believe that same-store sales growth in the U.S. will be at the high end,
or slightly above, our targeted range for 2014 of 2.0 - 4.0%.
Operating income increased 8.9% in the second quarter of 2014 compared to the second quarter of 2013. Growth in
operating income was primarily driven by systemwide sales growth, resulting in an increase in rents and royalties and supply
chain income, partially offset by increased general and administrative expenses.
Year-to-date in 2014, operating income increased 10.9%, and adjusted operating income (refer to non-GAAP table)
increased 7.3%, compared to the respective 2013 periods. Similar to the quarter, systemwide sales growth drove an increase in
both rents and royalties and supply chain income, partially offset by the timing of expenses related to our CIBC Visa cobranded loyalty rewards credit card (the “Double DoubleTM Card”), and increased general and administrative expenses. The
launch of our Double Double Card is expected to be cost-neutral on operating income over fiscal 2014.
Net income attributable to Tim Hortons Inc. was approximately flat in the second quarter of 2014 compared to the second
quarter of 2013, and increased 2.3% in the year-to-date period of 2014 compared to the year-to-date period of 2013. The change
in both periods was due primarily to higher operating income, as discussed above, partially offset by the effect of our
recapitalization, resulting in higher interest expense and a higher effective tax rate. The effective tax rates in 2013 were also
favourably impacted by a change in reserve balances in the respective 2013 periods.
Diluted earnings per share attributable to Tim Hortons Inc. (“EPS”) increased $0.11, or 13.6%, in the second quarter of
2014 compared to the second quarter of 2013. Year-to-date in 2014, EPS increased $0.20, or 14.7%, compared to the year-todate period of 2013, which was negatively impacted by approximately $0.05 due to corporate reorganization expenses. EPS
growth in both periods was driven by strong operating performance, as well as the impact of our recapitalization, primarily used
for our expanded share repurchase program, which resulted in a lower number of shares outstanding. Given our strong sales
progression to date in fiscal 2014 and momentum into the second half of 2014, we expect our EPS in 2014 to be at the high end,
or slightly above, our targeted range of $3.17 to $3.27.
Selected Operating and Financial Highlights
Second quarter ended
($ in millions, except per share data)
Systemwide sales growth(1)
Same-store sales growth(2)
Canada
U.S.
Systemwide restaurants
Revenues
Operating income
Adjusted operating income(3)
Net income attributable to Tim Hortons Inc.
Diluted EPS
Weighted average number of common shares outstanding
– Diluted (in millions)
June 29, 2014
$
$
$
$
$
Year-to-date ended
June 30, 2013
June 29, 2014
June 30, 2013
6.5%
5.0%
5.8%
4.1%
2.6%
5.9%
4,546
874.3
192.4
192.4
123.8
0.92
1.5%
1.4%
4,304
800.1
176.6
177.2
123.7
0.81
2.1%
3.9%
4,546
1,640.7
337.7
337.7
214.7
1.57
0.6%
0.5%
4,304
1,531.7
304.5
314.6
209.9
1.37
134.4
$
$
$
$
$
152.6
$
$
$
$
$
136.5
$
$
$
$
$
153.1
________________
(1)
(2)
(3)
Total systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. Foreign currency 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 our Republic of Ireland and United Kingdom licensed locations. Systemwide sales growth in Canadian dollars, including the effects of foreign
currency translation, was 7.2% and 5.1% for the second quarters of 2014 and 2013, respectively, and 6.6% and 4.2% for the year-to-date periods of 2014
and 2013, respectively.
Same-store sales growth represents the average growth in retail sales at restaurants (franchised and Company-operated restaurants) operating systemwide
that have been open for 13 or more months.
Adjusted operating income is a non-GAAP measure. See below for reconciliation of adjusting items used to calculate adjusted operating income.
Management uses adjusted operating income to assist in the evaluation of year-over-year performance and believes that it will be helpful to investors to
better evaluate underlying operational growth rates. 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 adjusted operating income may differ from similar measures reported by other companies.
Adjusted operating income should not be considered a measure of income generated by our business. The reconciliation of operating income, a GAAP
measure, to adjusted operating income, a non-GAAP measure, is set forth in the table below:
19
Second quarter ended
June 29,
2014
Year-to-date periods ended
Change
June 30,
2013
$
June 29,
2014
%
Change
June 30,
2013
$
%
($ in millions)
Operating income
$
192.4
$
192.4
Add: Corporate reorganization expenses
Adjusted operating income
$
176.6
$
177.2
—
$
15.8
(0.6)
n/m
$
15.2
8.6% $
0.6
8.9% $
337.7
$
304.5
$
314.6
—
337.7
$
10.1
$
33.2
10.9%
(10.1)
n/m
23.1
7.3%
________________
All numbers rounded
n/m
Not meaningful
Operational Highlights
Single-serve products. In line with our objective to increase consumer access to our products and further expand our
single-serve platform, we began shipments of our single-serve products through to the grocery channel towards the end of the
second quarter of 2014. We expect the Company and our restaurant owners to benefit from sales through this channel.
Technological innovation. In line with our strategy to increase guest convenience through the use of technology, we
introduced scan-to-pay and tap-to-pay mobile payments using our TimmyMeTM application at all of our integrated Canadian
and U.S. restaurants in the second quarter of 2014.
In July 2014, we launched our Double Double Card in conjunction with CIBC, which leverages unique two-button
technology to combine two cards into one: a CIBC Visa Credit card and our popular Tim Card program. The Double Double
Card allows cardholders to earn Tim Cash rewards on everyday purchases, which can be redeemed instantly at any of our
restaurants in Canada or the U.S. where the Tim Card is currently accepted, and also supports tap-to-pay technology, as
discussed above.
Temporary Foreign Worker Program
A substantial portion of our earnings come from royalties, rents, and other amounts paid by restaurant owners, who
operate substantially all of our restaurants. In April 2014, the Federal Government of Canada imposed a moratorium on the food
service sector’s access to the Temporary Foreign Workers Program (“TFWP”). On June 20, 2014, the Federal Government of
Canada lifted the moratorium but announced reforms that are expected to have the net effect of restricting or reducing access to
the TFWP in most markets where it existed previously. Access to labour through use of the TFWP, in some markets, particularly
in parts of western Canada, has been an important tool to help our restaurant owners fill labour shortages where Canadian
citizen and permanent resident employees are not sufficient. While the Company and our restaurant owners are pursuing
strategies to address the government’s TFWP policy changes, the reforms may result in less restaurant development and
reduced hours of operation in certain markets, and increases in labour or other costs to our owners. For further information,
please refer to Item 1A. Risk Factors of our Annual Report.
20
New Restaurant Development
The opening of restaurants in new and existing markets in Canada and the U.S. has been a significant contributor to our
growth. Set forth in the table below is a summary of restaurant openings and closures:
Second quarter ended June 29, 2014
Full-serve
Standard
and
Nonstandard
Canada
Restaurants opened
Restaurants closed
Net change
U.S.
Restaurants opened
Restaurants closed
Net change
International (GCC)
Restaurants opened
Total Company
Restaurants opened
Restaurants closed
Net change
Self-serve
Kiosks
Second quarter ended June 30, 2013
Full-serve
Standard
and
Nonstandard
Total
Total
26
(9)
17
3
—
3
29
(9)
19
(5)
2
(1)
21
(6)
20
14
1
15
1
(5)
(4)
—
—
—
1
(5)
(4)
5
(3)
2
—
(3)
(3)
5
(6)
(1)
6
—
6
2
—
2
33
(14)
19
3
—
3
36
(14)
26
(8)
28
(12)
22
18
2
(4)
(2)
Year-to-date period ended June 29, 2014
Full-serve
Standard
and
Nonstandard
Canada
Restaurants opened
Restaurants closed
Net change
U.S.
Restaurants opened
Restaurants closed
Net change
International (GCC)
Restaurants opened
Total Company
Restaurants opened
Restaurants closed
Net change
Self-serve
Kiosks
Self-serve
Kiosks
16
Year-to-date period ended June 30, 2013
Full-serve
Standard
and
Nonstandard
Total
Self-serve
Kiosks
Total
45
(10)
35
7
—
7
52
(10)
42
41
(12)
29
4
(1)
3
45
(13)
32
12
(5)
7
—
—
—
12
(5)
12
(7)
13
(10)
7
5
1
(3)
(2)
12
—
12
5
—
5
69
(15)
54
7
—
7
76
(15)
58
(19)
5
(4)
63
(23)
61
39
1
40
21
3
Systemwide Restaurant Count
As at
June 29, 2014
Canada
Company-operated
Franchised – standard and non-standard
Franchised – self-serve kiosk
Total
% Franchised
U.S.
Company-operated
Franchised – standard and non-standard
Franchised – self-serve kiosks
Total
% Franchised
International (GCC)
Franchised – standard and non-standard
% Franchised
Total system
Company-operated
Franchised – standard and non-standard
Franchised – self-serve kiosks
Total
% Franchised
December 29, 2013
June 30, 2013
15
3,473
142
3,630
99.6%
14
3,440
134
3,588
99.6%
17
3,324
127
3,468
99.5%
3
682
181
866
99.7%
2
676
181
859
99.8%
3
627
177
807
99.6%
50
100.0%
38
100.0%
29
100.0%
18
4,205
323
4,546
99.6%
16
4,154
315
4,485
99.6%
20
3,980
304
4,304
99.5%
Segment Operating Income
Our segments consist of the Canadian and U.S. business units, and Corporate Services (see Item 1. Financial Statements
—Note 13 Segment Reporting for further information). Set forth in the table below is the operating income (loss) of our
reportable segments:
Second quarter ended
June 29,
2014
Canada
U.S.
Corporate services
$
$
$
188.9 $
9.3 $
(8.0) $
Year-to-date period ended
Change
June 30,
2013
$
174.8 $ 14.1
2.6 $ 6.7
(1.4) $ (6.6)
June 29,
2014
%
($ in millions)
8.1% $
n/m $
n/m $
342.3 $
13.6 $
(22.6) $
June 30,
2013
Change
$
320.6 $ 21.8
3.5 $ 10.1
(12.1) $ (10.5)
%
6.8%
n/m
n/m
________________
All numbers rounded
n/m
Not meaningful
Canada
Operating income increased 8.1% in the second quarter of 2014 compared to the second quarter of 2013. Systemwide
sales growth of 5.8%, driven by the incremental sales of new restaurants year-over-year and same-store sales growth of 2.6%,
resulted in higher rents and royalties income and a higher allocation of supply chain income. Canada also benefited from higher
franchise fee income due to increased restaurant development (see Selected Operating and Financial Highlights—New
Restaurant Development) and increased renovation activity year-over-year.
Same-store sales growth in the second quarter of 2014 was driven by an increase in average cheque, resulting from
favourable product mix and pricing, partially offset by same-store transaction declines. We continued to grow total systemwide
transactions. In Canada, the increase in average cheque was aided by increased sales in the lunch daypart, led by the recent
22
introduction of our Crispy Chicken Sandwich, as well as increased sales in the breakfast daypart, aided by new product
introductions such as the Turkey Sausage Hot Breakfast Sandwich and the new Hash Brown.
For the year-to-date period of 2014, operating income increased 6.8% compared to the year-to-date period of 2013.
Operating income growth was driven primarily by systemwide sales growth of 5.2% in the year-to-date period of 2014,
resulting from the net addition of new restaurants and same-store sales growth of 2.1%. Similar to the quarter, same-store sales
growth in the year-to-date period of 2014 was driven by an increase in average cheque, resulting from favourable product mix
and pricing, partially offset by a decline in same-store transactions. Systemwide sales growth resulted in higher rents and
royalties income and a higher allocation of supply chain income. For the year-to-date period of 2014, we have recognized a net
expense of $2.4 million related to the launch of the Double Double Card, which we expect to be cost-neutral on Canada’s
operating income over fiscal 2014.
U.S.
Operating income was $9.3 million in the second quarter of 2014, a significant increase of $6.7 million compared to the
second quarter of 2013. Systemwide sales growth of 12.3% was driven by incremental sales from the addition of new
restaurants, and same-store sales growth of 5.9%. Systemwide sales growth led to growth in rents and royalties revenues, and
same-store sales growth led to a significant reduction in relief from restaurants open 13 months or more. We also noted lower
relief due to specific relief reduction measures, which began in the second half of 2013, and the closure of underperforming
restaurants in the fourth quarter of 2013. Rents and royalties income benefited slightly from favourable lease termination
settlements. A higher supply chain allocation, due primarily to systemwide sales growth and favourable product margin
variability, also contributed to U.S. operating income growth, while general and administrative expenses were flat year-overyear. Foreign currency translation increased U.S. operating income by approximately $0.6 million year-over-year.
In the second quarter of 2014, same-store sales growth was driven by gains in average cheque resulting from favourable
product mix and pricing. Our same-store transactions were essentially flat, and we continued to grow total systemwide
transactions, as evidenced by systemwide sales growth of 12.3%. Our same-store sales growth in the second quarter of 2014
benefited from sales of cold beverages, aided by the introduction of Frozen Hot Chocolate and ongoing innovation around our
Iced Capp platform, and similar to Canada, growth in the breakfast daypart.
For the year-to-date period of 2014, operating income was $13.6 million, an increase of $10.1 million compared to the
year-to-date period of 2013. Systemwide sales growth of 10.2% was driven by the net addition of new restaurants and samestore sales growth of 3.9%, due to an increase in average cheque resulting from favourable product mix and pricing, partially
offset by a decrease in same-store transactions. Similar to the second quarter of 2014, systemwide sales growth led to growth in
rents and royalties revenues, and same-store sales growth led to a significant reduction in relief from restaurants open 13
months or more. We also noted lower relief due to specific relief reduction measures and restaurant closures. This growth was
partially offset by higher operating expenses, due to an overall increase in the number of properties owned or leased. U.S.
operating income growth also benefited from a higher supply chain allocation, due to the same factors impacting the second
quarter of 2014, and the favourable timing of general and administrative expenses. Foreign currency translation increased U.S.
operating income by approximately $1.0 million year-over-year.
We continue to focus on increasing our returns in the U.S. segment. In the second quarter of 2014, consistent with our
strategic plan, we signed a multi-unit development agreement to develop approximately 20 standard and non-standard
restaurants affiliated with a chain of convenience stores and gas stations located in southwestern Pennsylvania and northern
West Virginia over a five-year term. In July 2014, we signed an area development agreement to develop approximately 25
restaurants in Richmond County, New York, and Middlesex County, New Jersey over a 10-year term. Since the fourth quarter
of 2013, we have entered into a total of six agreements to develop approximately 135 standard and non-standard restaurants
over the next 10 years in different U.S. markets.
Corporate services
Our Corporate services segment had an operating loss of $8.0 million in the second quarter of 2014, compared to an
operating loss of $1.4 million in the second quarter of 2013. The increased operating loss in our Corporate services segment
was driven by increased corporate costs, due in part to higher salaries and benefits and higher professional fees in the second
quarter of 2014 compared to the second quarter of 2013 (see Results of Operations— General and Administrative Expenses for
further information). Additionally, unfavourable product margins in our supply chain recognized in the second quarter of 2014
compared to favourable product margins recognized in the second quarter of 2013 contributed to the increased operating loss.
We expect product margin variability to generally reverse within the fiscal year, although timing differences can result in
fluctuations quarter-over-quarter.
Year-to-date in 2014, our Corporate services segment had an operating loss of $22.6 million, compared to an operating
loss of $12.1 million in the year-to-date period of 2013. The increased operating loss was primarily driven by unfavourable
23
product margins recognized in the year-to-date period of 2014, compared to favourable product margins recognized in the yearto-date period of 2013, as well as higher salaries and benefits and professional fees.
Results of Operations
Second quarter ended
June 29,
2014
June 30,
2013
Change
Year-to-date period ended
(1)
$
June 29,
2014
%
June 30,
2013
Change
(1)
$
%
($ in millions)
Revenues
Sales
Franchise revenues:
$ 613.8
$ 568.6
$ 45.3
225.0
35.6
874.3
209.3
22.3
800.1
15.7
13.3
74.2
7.5%
59.6%
9.3%
527.1
489.1
38.0
84.4
34.9
77.0
23.3
40.2
(4.0)
38.0
(3.9)
Rents and royalties(2)
Franchise fees
Total revenues
Costs and expenses
Cost of sales
Operating expenses
Franchise fee costs
General and administrative
expenses
Equity (income)
Corporate reorganization
expenses
Other expense (income), net
Total costs and expenses
Operating income
Operating income %
$1,092.4
$ 62.4
5.7%
424.5
61.4
1,640.7
396.7
42.5
1,531.7
27.7
18.9
109.1
7.0%
44.6%
7.1%
7.8%
1,000.7
950.4
50.3
5.3%
7.4
11.6
9.6%
49.6%
165.7
62.6
152.7
45.9
13.0
16.7
8.5%
36.4%
2.2
(0.1)
5.8%
1.5%
2.8
(0.1)
3.6%
0.8%
(10.1)
n/m
—
10.1
(1.4)
28.9%
2.0
3.4
9.4% 1,303.1
1,227.2
75.9
8.9% $ 337.7
$ 304.5
$ 33.2
20.6%
19.9%
n/m
n/m
6.2%
10.9%
(0.6)
—
0.6
(0.2)
(0.7)
(0.6)
682.0
623.6
58.4
$ 192.4
$ 176.6
$ 15.8
22.0%
22.1%
Interest (expense)
Income tax rate
(18.6)
28.3%
8.0% $1,154.9
(9.7)
(8.9)
26.1%
79.5
(7.3)
76.7
(7.3)
(35.3)
n/m
(17.6)
28.5%
(17.7)
n/m
26.7%
_____________
All numbers rounded
n/m
Not meaningful
(1)
The financial results of our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for consolidated reporting purposes. While
foreign currency translation, primarily related to the Canadian dollar relative to the U.S. dollar, impacted individual revenue and expense items in the
second quarter of 2014 and the year-to-date period of 2014, it did not have a significant impact on operating income.
(2)
Rents and royalties revenues includes rents and royalties derived from our franchised restaurant sales, and certain advertising levies primarily associated
with the Tim Hortons Advertising and Promotion Fund (Canada) Inc.’s (“Ad Fund”) program to acquire LCD screens, media engines, drive-thru menu
boards and ancillary equipment for our restaurants (“Expanded Menu Board Program”) (see Item 1. Financial Statements—Note 12 Variable Interest
Entities). Franchised restaurant sales are reported to us by our restaurant owners, and are not included in our Condensed Consolidated Financial
Statements, other than consolidated Non-owned restaurants. 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 (including consolidated Non-owned restaurants)
were:
Second quarter ended
June 29, 2014
Franchised restaurant sales
Canada (Canadian dollars)
U.S. (U.S. dollars)
Year-to-date period ended
June 30, 2013
June 29, 2014
June 30, 2013
(in millions)
$
$
1,660.4
163.8
$
$
1,570.8
145.5
$
$
3,134.2
312.1
$
$
2,979.3
282.7
Revenues
Sales
In the second quarter of 2014, the growth in sales compared to the second quarter of 2013 was driven primarily by
increased distribution sales. In the year-to-date period of 2014, the growth in sales compared to the year-to-date period of 2013
24
was again driven primarily by increased distribution sales, partially offset by a decrease in sales from variable interest entities
(“VIEs”).
Distribution sales. Distribution sales were $511.8 million in the second quarter of 2014, compared to $468.6 million in
the second quarter of 2013. The increase of $43.2 million, or 9.2%, was driven primarily by systemwide sales growth, which
contributed approximately 6.5% of the increase, and to a lesser extent, commodity-related pricing, reflective of their underlying
costs. For the year-to-date period of 2014, distribution sales were $964.1 million, an increase of $64.4 million, or 7.2%,
compared to the year-to-date period of 2013, driven primarily by systemwide sales growth, which contributed approximately
5.3% of the growth. Foreign currency translation increased distribution sales by approximately 0.5% in both periods.
Our distribution sales are subject to changes related to underlying costs of key commodities, such as coffee, wheat, edible
oils and sugar, and other products. Changes in underlying costs are largely passed through to restaurant owners, but will
typically occur after changes in spot market prices as we generally utilize fixed-price contracts as a method to provide
restaurant owners with consistent, predictable pricing and to secure a stable source of supply. We generally have forward
purchasing contracts in place for a six-month period of future supply for our key commodities, but have occasionally extended
beyond this time frame in periods of elevated market volatility or tight supply conditions. Underlying commodity costs can also
be impacted by currency changes. These cost changes can impact distribution sales, and cost of sales, and can create volatility
quarter-over-quarter and year-over-year. These changes may impact margins in a quarter as many of these products are typically
priced based on a fixed-dollar mark-up and can relate to a pricing period which may extend beyond a quarter.
The current market price of coffee, a key commodity for the Company, has recently experienced an increase. Our
purchase commitments to the end of fiscal 2014 reflect previous lower market coffee pricing, however, beginning in fiscal
2015, our purchase commitments are reflective of the elevated market price of coffee. As noted above, changes in underlying
costs are largely passed through to restaurant owners, and we and our restaurant owners have some ability to increase product
pricing to offset any rises 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. For a full description of the related risk factors, please refer to Item 1A. Risk Factors of our Annual Report.
Variable interest entities’ sales. VIEs’ sales were $94.3 million in the second quarter of 2014, an increase of 0.9%
compared to the second quarter of 2013. The increase was primarily due to foreign currency translation, which increased VIEs’
sales by 3.5%, and mix of consolidated restaurants, partially offset by a decrease, on average, of 16 fewer VIEs.
In the year-to-date period of 2014, VIEs’ sales were $177.7 million, a decrease of 1.4% compared to the year-to-date
period of 2013, driven primarily by the decrease, on average, of 23 fewer VIEs. The decrease was partially offset by foreign
currency translation, which increased VIEs’ sales by 3.8%, and mix of consolidated restaurants.
The number of consolidated Non-owned restaurants has decreased slightly since the end of fiscal 2013. The following
table outlines the number of consolidated Non-owned restaurants, on average, and in each respective period:
Second quarter ended
June 29, 2014
Year-to-date period ended
June 30, 2013
June 29, 2014
Average
Canada
U.S.
Total
106
225
331
June 30, 2013
As at
June 29, 2014
December 29, 2013
Average
114
233
347
106
224
330
118
235
353
105
223
328
106
225
331
Franchise Revenues
Rents and Royalties. Revenue from rents and royalties increased 7.5% in the second quarter of 2014 compared to the
second quarter of 2013. The increase was driven by systemwide sales growth, which contributed approximately 7.1% of the
increase, and foreign currency translation, which increased rents and royalties revenues by approximately 0.5%.
In the year-to-date period of 2014, revenue from rents and royalties increased 7.0% compared to the year-to-date period
of 2013. Similar to the quarter, the increase was driven primarily by systemwide sales growth, contributing approximately 6.1%
of the growth, and foreign currency translation, which increased rents and royalties revenues by approximately 0.6%.
Franchise Fees. Franchise fees increased $13.3 million in the second quarter of 2014 compared to the second quarter of
2013. The increase was driven by an increase in renovations, as well as increased restaurant resales and development, primarily
in Canada. In the year-to-date period of 2014, franchise fees increased $18.9 million compared to the year-to-date period of
25
2013, again due to an increase in renovations primarily in Canada, and increased restaurant development across all of our
markets.
Total Costs and Expenses
Cost of Sales
In both the second quarter and year-to-date period of 2014, the growth in cost of sales compared to the respective 2013
periods was driven primarily by growth in distribution cost of sales, partially offset by a decrease in VIEs’ cost of sales.
Distribution cost of sales. Distribution cost of sales was $438.4 million in the second quarter of 2014, compared to
$399.0 million in the second quarter of 2013. The increase of $39.4 million, or 9.9%, was primarily driven by systemwide sales
growth, which contributed approximately 6.8% of the increase and, to a lesser extent, commodity-related pricing. Foreign
currency translation increased distribution cost of sales by approximately 0.5%.
In the year-to-date period of 2014, distribution cost of sales was $832.4 million compared to $774.6 million in the yearto-date period of 2013. The increase of $57.8 million, or 7.5%, was driven primarily by systemwide sales growth, which
contributed approximately 5.4% of the increase. Foreign currency translation increased distribution cost of sales by
approximately 0.5%.
Our distribution costs are subject to changes related to the underlying costs of key commodities, such as coffee, wheat,
edible oils, sugar, and other product costs (see Revenues—Sales—Distribution Sales above for further information).
Variable interest entities’ cost of sales. VIEs’ cost of sales was $81.4 million in the second quarter of 2014, a decrease of
$2.1 million, or 2.5%, compared to the second quarter of 2013. In the year-to-date period of 2014, VIEs’ cost of sales was
$155.4 million, a decrease of $6.8 million, or 4.2%, compared to the year-to-date period of 2013. The decrease in both periods
was primarily due to the decrease in average number of VIEs, partially offset by foreign currency translation. Foreign currency
translation increased VIEs’ cost of sales by approximately 3.6% in the second quarter of 2014, and 3.9% in the year-to-date
period of 2014.
Operating Expenses
Total operating expenses increased $7.4 million, or 9.6% in the second quarter of 2014 compared to the second quarter of
2013. Property-related depreciation expense increased by $3.6 million, including foreign currency translation, due to both an
increase in the number of properties either owned or leased, and then subleased to restaurant owners, and renovations to
existing restaurants. Rent expense increased by $3.1 million year-over-year, primarily due to 161 additional properties that were
leased and then subleased to restaurant owners. Foreign currency translation increased operating expenses by approximately
0.9%.
In the year-to-date period of 2014, operating expenses increased $13.0 million, or 8.5%, compared to the year-to-date
period of 2013. Property-related depreciation increased by $7.0 million, including foreign currency translation, due to both new
and existing restaurants, and rent expense increased by $6.5 million year-over-year. Operating expenses related to the Expanded
Menu Board Program also increased by $1.1 million year-over-year. These increases were partially offset by favourable lease
termination settlements. Foreign currency translation increased operating expenses by approximately 1.0%.
We anticipate the growth in operating expenses to increase over the course of fiscal 2014, due to increased rent and
depreciation related to new restaurant openings, and increased depreciation related to renovations.
Franchise Fee Costs
Franchise fee costs increased $11.6 million in the second quarter of 2014 compared to the second quarter of 2013, due
primarily to an increase in renovations, as well as increased restaurant resales and restaurant development, primarily in Canada.
In the year-to-date period of 2014, franchise fee costs increased $16.7 million compared to the year-to-date period of 2013,
again due to an increase in renovations primarily in Canada, and increased restaurant development across all of our markets.
General and Administrative Expenses
General and administrative expenses increased 5.8% in the second quarter of 2014 compared to the second quarter of
2013, and in the year-to-date period of 2014, increased 3.6% compared to the year-to-date period of 2013. The increase in both
periods was due to increased salaries and benefits resulting primarily from fewer vacancies in the organization, and higher
professional fees related to strategic initiatives. Partially offsetting the increase were lower promotional expenses, related
primarily to Cold Stone Creamery in Canada. Foreign currency translation increased general and administrative expenses by
approximately 1.3% in both periods.
26
We anticipate that general and administrative expenses will continue to increase over fiscal 2014, primarily as vacancies
resulting from the corporate reorganization (see below) were filled over the course of fiscal 2013.
Corporate Reorganization Expenses
We completed the realignment of roles and responsibilities into our corporate centre and business unit design at the end of
the first quarter of 2013, and incurred additional Chief Executive Officer transition costs to the end of fiscal 2013 (please refer
to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report for a
full description).
Other Expense (Income), net
Other income recognized in the second quarter of 2014 and other expense recognized in the year-to-date period of 2014
primarily related to the launch of our Double Double Card, which occurred in July 2014. We continue to expect the launch of
the Double Double Card to be cost-neutral over fiscal 2014.
In comparison, other income recognized in the second quarter of 2013 was due primarily to foreign exchange gains. Other
income recognized in the year-to-date period of 2013 was primarily due to the gain on a corporate property sale, as well as
foreign exchange gains.
Interest Expense
The increase in interest expense in both the second quarter of 2014 and year-to-date period of 2014, compared to the
respective 2013 periods, was due to the increase in our long-term debt. Our interest expense in the second quarter of 2014 is
indicative of future interest expense related to the increase in our long-term debt (see Liquidity and Capital Resources for
further information).
Income Taxes
The increase in the effective income tax rate for the 2014 quarter-to-date and year-to-date periods as compared to the
respective 2013 periods is primarily due to the favourable impact of a change in reserve balances in 2013 and an increase in
costs in 2014 related to our new long-term debt, for which a full tax benefit cannot be recognized.
During the quarter, there have been no significant developments related to the Canada Revenue Agency matters discussed
in our Annual Report.
Liquidity and Capital Resources
Overview
Our primary source of liquidity has historically been, and continues to be, cash generated from Canadian operations
which has for the most part self-funded our operations, growth in new restaurants, capital expenditures, dividends, normal
course share repurchases, acquisitions and investments. In fiscal 2014, our U.S. operations have, and are expected to continue
to, contribute positively to our cash flow. Our $250.0 million revolving bank facility provides an additional source of liquidity
(see Credit Facilities below for additional information). During the second quarter of 2014, we borrowed $15.0 million on this
facility for general corporate purposes, which was fully repaid in July 2014. We believe that we will continue to generate
adequate operating cash flows over the next 12 months.
In March 2014, Tim Hortons Inc. raised $450.0 million in long-term debt through the issuance of Senior Unsecured
Notes, Series 3, due April 1, 2019 (“Series 3 Notes”), a portion of which was utilized to settle our $400.0 million revolving
bank facility, which is now fully retired. Please refer to Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations in the Company’s First Quarter Report for the quarter ended March 30, 2014, filed on Form 10-Q
with the SEC and CSA on May 7, 2014 for a full description.
We regularly assess capital structure, and seek to identify opportunities to generate value for shareholders. Since the third
quarter of 2013, our outstanding long-term debt increased by $900.0 million, which was used for the retirement of the 2013
Revolving Bank Facility, and general corporate purposes, including share repurchases. The accretive benefits to EPS of our
expanded share repurchase program more than offset the after-tax cost of our interest expense that resulted from increasing the
amount of our debt to fund those repurchases. Under our current structure, increasing our debt levels substantially beyond
$900.0 million to repurchase shares 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 capital 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
27
manner could negatively affect our projected results, future operations, and financial condition. For a full description of this
related risk factor, please refer to Item 1A. Risk Factors of our Annual Report.
If additional funds are needed for strategic initiatives or other corporate purposes beyond those currently available, we
believe that, with the strength of our balance sheet and our strong capital structure, we could borrow additional funds. Our
ability to incur additional indebtedness will also be limited by our financial and other covenants under our $250.0 million
revolving bank facility (see Credit Facilities below for additional information). Our Senior Unsecured Notes, Series 1, due June
1, 2017, Senior Unsecured Notes, Series 2, due December 1, 2023, and Series 3 Notes are not subject to any financial
covenants; however, certain other covenants apply. Any additional borrowings may result in an increase in our borrowing costs.
If such additional borrowings are significant, our credit rating may be downgraded, and it is possible that we would not be able
to borrow on terms which are favourable to us.
When evaluating our leverage position, we look at metrics that consider the impact of long-term operating and capital
leases as well as other long-term debt obligations. We believe this provides a more meaningful measure of our leverage position
given our significant investments in real estate. As at June 29, 2014, we had approximately $1.4 billion in long-term debt and
capital leases (excluding current portion) on our balance sheet, excluding Ad Fund debt related to the Expanded Menu Board
Program.
Credit Facilities
We have a $250.0 million unsecured senior revolving facility credit agreement (the “Revolving Bank Facility”), which we
expect to be used for general corporate purposes, including potential acquisitions and other business purposes. The Revolving
Bank Facility includes a $25.0 million overdraft availability and a $25.0 million letter of credit facility. At June 29, 2014, we
had drawn $15.0 million for general corporate purposes, which was fully repaid in July 2014, and had utilized $5.7 million of
the Revolving Bank Facility to support standby letters of credit. The Revolving Bank Facility requires the maintenance of two
financial ratios: a consolidated maximum total debt coverage ratio, and a minimum fixed charge coverage ratio. We were in
compliance with these covenants as at June 29, 2014.
Common Shares
Our outstanding share capital is comprised solely of common shares. An unlimited number of common shares, without
par value, is authorized, and as at June 29, 2014, we had 133,126,058 common shares outstanding, and outstanding stock
options with tandem stock appreciation rights held by current and former officers and employees to acquire 1,667,495 of our
common shares pursuant to our 2006 Stock Incentive Plan and 2012 Stock Incentive Plan, of which 769,495 were exercisable.
Comparative Cash Flows
Operating Activities. Net cash provided from operating activities in the year-to-date period of 2014 was $227.7 million
compared to $258.3 million in the year-to-date period of 2013, a decrease of $30.6 million in the year-to-date period of 2014
compared to the year-to-date period of 2013. The decrease was primarily due to the timing of taxes payable. The settlement of
interest rate forwards and cash deposits with tax authorities in the year-to-date period of 2014 also resulted in a decrease in cash
flow from operating activities.
Investing Activities. Net cash used in investing activities was $95.8 million in the year-to-date period of 2014 compared
to $87.4 million in the year-to-date period of 2013, an increase of $8.5 million. The increase year-over-year is primarily due to
increased capital expenditures at existing restaurants, due to both an increase in the number of renovations year-over-year and
timing of renovations completed in the fourth quarter of 2013, and new restaurant development. Below is a summary of our
capital expenditures:
Year-to-date periods ended
June 29, 2014
June 30, 2013
(in millions)
Capital expenditures(1)
New restaurants
$
Existing restaurants(2)
Other capital expenditures(3)
Total capital expenditures
$
________________
(1)
All numbers rounded.
Reflected on a cash basis, which can be impacted by the timing of payments compared to the actual date of acquisition.
28
34.6
51.3
8.6
94.4
$
$
38.9
36.6
12.7
88.3
(2)
(3)
The increase in capital expenditures related to existing restaurants was primarily driven by an increase in renovations completed in the fourth quarter of
2013, but paid in the first quarter of 2014.
Related primarily to our distribution facilities, and other corporate needs.
Capital expenditures for each of our reportable segments was as follows:
Year-to-date periods ended
June 29, 2014
June 30, 2013
(in millions)
Canada
U.S.
Corporate Services
Total capital expenditures
$
$
75.6
12.2
6.6
94.4
$
$
60.4
23.1
4.7
88.3
Financing Activities. Financing activities used cash of $157.3 million in the year-to-date period of 2014 compared to
using cash of $206.7 million in the year-to-date period of 2013, a decrease of $49.3 million. Net proceeds from the issuance of
our Series 3 Notes were offset by an additional $387.2 million returned to shareholders in the form of common share
repurchases and dividends paid in the year-to-date period of 2014 compared to the year-to-date period of 2013.
Off-Balance Sheet Arrangements
We did not have “off-balance sheet” arrangements as at June 29, 2014 or December 29, 2013.
Contractual Obligations
In the first quarter of 2014, we issued Series 3 Notes of $450.0 million, and also entered into an agreement with one of
our suppliers requiring minimum purchase obligations, within the normal course of operations, of U.S. $115.8 million over the
six-year term of the agreement. Other than these developments, our contractual obligations have not changed materially since
December 29, 2013.
Recent Accounting Pronouncements
See Item 1. Financial Statements—Note 14 Recent Accounting Pronouncements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than as noted above, there are no material changes to our exposure to various foreign exchange, commodity,
interest rate, and inflationary risks as reported in our Annual Report.
ITEM 4.
CONTROLS AND PROCEDURES
(a) The Company, under the supervision and with the participation of its management, including its Chief Executive Officer
and Chief Financial Officer, performed an evaluation of the Company’s disclosure controls and procedures, as
contemplated by Securities Exchange Act Rule 13a-15. Disclosure controls and procedures include those designed to
ensure that information required to be disclosed is accumulated and communicated to the Company’s management as
appropriate to allow timely decisions regarding disclosure. Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure
controls and procedures were effective.
(b) There has been no change in our internal control over financial reporting during the last fiscal quarter which has been
identified in connection with Management’s evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange
Act, as amended, that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
29
PART II: OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various legal actions and complaints arising in the ordinary course of
business. As of the date hereof, the Company believes that the ultimate resolution of such matters will not materially affect the
Company’s financial condition and earnings.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under
the heading “Risk Factors” in our Annual Report, as well as information in our other public filings, press releases, and in our
Safe Harbor statement. Any of these “risk factors” could materially affect our business, financial condition or future results. The
risks described in the 2013 Form 10-K, and the additional information provided in this Form 10-Q and elsewhere, as described
above, may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we
currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating
results.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
Total Number
of Shares
Purchased(1)
Period
Monthly Period #4 (March 31, 2014 – May 4, 2014)
Monthly Period #5 (May 5, 2014 – June 1, 2014)
Monthly Period #6 (June 2, 2014 – June 29, 2014)
Total
(b)
Average Price
Paid per
Share (Cdn.)(2)
(c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
(d)
Maximum
Approximate
Dollar Value of
Shares that
May Yet be
Purchased
Under the
2014 Program
(Cdn) (3)
2,010,350
60.95
2,010,350
$ 206,167,975
816,857
59.67
753,500
161,262,622
383,800
3,211,007
59.10
60.40
383,800
3,147,650
138,581,690
$ 138,581,690
________________
(1)
(2)
(3)
Based on settlement date.
Inclusive of commissions paid to the broker to repurchase the common shares.
On February 20, 2014, we announced we obtained regulatory approval from the Toronto Stock Exchange (“TSX”) to commence a new share repurchase
program (“2014 Program”), authorizing the repurchase of $440.0 million in common shares, not to exceed the regulatory maximum of 13,726,219 shares,
representing 10% of our public float as defined under the TSX rules. The 2014 Program commenced February 28, 2014 and is due to terminate on
February 27, 2015, or earlier if the $440.0 million or 10% share maximum is reached. Common shares purchased pursuant to the 2014 Program will be
cancelled. The 2014 Program may be terminated by us at any time, subject to compliance with regulatory requirements. As such, there can be no
assurance regarding the total number of shares or the equivalent dollar value of shares that may be repurchased under the 2014 Program.
Dividend Restrictions with Respect to Part II, Item 2 Matters
The Company’s Revolving Bank Facility limits 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 Facility, and there is no default outstanding under the
Revolving Bank Facility.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURE
None.
30
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
See Index to Exhibits following the signature page to this Form 10-Q, which is incorporated by reference herein.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TIM HORTONS INC. (Registrant)
Date: August 6, 2014
/s/ CYNTHIA J. DEVINE
Cynthia J. Devine
Chief Financial Officer
32
TIM HORTONS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Description
Where found
*10(a)
Form of Restricted Stock Unit Award Agreement (2014
Award)
Filed herewith.
*10(b)
Form of Performance Stock Unit Award Agreement (2014
Award)
Filed herewith.
*10(c)
Form of Nonqualified Stock Option Award Agreement (2014
Award)
Filed herewith.
*10(d)
Form of Amended and Restated Deferred Stock Unit Award
Agreement (Canadian)
Filed herewith.
*10(e)
Form of Amended and Restated Deferred Stock Unit Award
Agreement (U.S.)
Filed herewith.
31(a)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
Filed herewith.
31(b)
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
Filed herewith.
32(a)
Section 1350 Certification of Chief Executive Officer
Filed herewith.
32(b)
Section 1350 Certification of Chief Financial Officer
Filed herewith.
Safe Harbor under the Private Securities Litigation Reform
Act 1995 and Canadian securities laws
Filed herewith.
101.INS
XBRL Instance Document.
Filed herewith.
101.SCH
XBRL Taxonomy Extension Schema Document.
Filed herewith.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Document.
Filed herewith.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
Filed herewith.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
Filed herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document.
Filed herewith.
99
* Denotes management contract or compensatory arrangement.
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The
financial information contained in the XBRL-related documents is “unaudited” and/or “unreviewed.”
33
34
Exhibit 10(a)
[Note: Text in [ ] is only included in agreements with individuals employed by U.S. subsidiaries
of Tim Hortons Inc. Text in { } is only included in agreements with individuals employed by
Tim Hortons Inc.]
Participant Name (“Grantee”):
Employee Number:
Grant Name:
Date of Grant:
May 15, 2014
Total Award:
Vest Schedule – RSUs
Vest Date
March 1, 2015
March 1, 2016
March 1, 2017
Vest Quantity
1/3
1/3
1/3
RESTRICTED STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)
Tim Hortons Inc.
Grant Year: 2014
May 15, 2014
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (this “Agreement”) is
made effective as of the 15th day of May, 2014 (the “Date of Grant”), {between} [by and
among] Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations
Act (the “Company”), [the below noted Employer,] and the above-noted Grantee (collectively,
the “Parties”).
WHEREAS, the Company has adopted the Tim Hortons Inc. 2012 Stock Incentive
Plan, as amended from time to time (the “Plan”), in order to provide additional incentive
compensation to certain employees and directors of the Company and its Subsidiaries; and
WHEREAS, pursuant to Section 4.2 of the Plan, the Human Resource and
Compensation Committee (“Committee”) of the Board of Directors of the Company (“Board”)
-2-
has determined to grant to the Grantee on the Date of Grant an award of the above-noted
number of Restricted Stock Units (the “Award”) with related Dividend Equivalent Rights to
encourage the Grantee’s efforts toward the continuing success of the Company and its
Subsidiaries; and
WHEREAS, the Award is evidenced by this Agreement, which (together with the Plan
and the Equity Grant and Settlement Policy), describes all the terms and conditions of the
Award.
NOW, THEREFORE, the Parties agree as follows:
1.
Award.
1.1
The Company (or in the case of a Grantee employed by a Subsidiary {(the
“Employer”)}, the Employer) hereby grants to the Grantee in respect of employment
services provided by the Grantee the Award with an equal number of related Dividend
Equivalent Rights. For greater certainty, the Award granted hereunder is in respect of
services rendered by the Grantee in the calendar year in which the Date of Grant occurs.
In no event may the Award be allocated to the Grantee for or in respect of services
rendered in any period prior to the commencement of the calendar year in which the
Award is granted. Subject to Section 6 hereof, each Restricted Stock Unit represents
the right to receive, at the absolute discretion of the Company, (i) one (1) Share from
the Company, (ii) cash delivered to a broker to acquire one (1) Share on the Grantee’s
behalf, or (iii) one (1) Share delivered by the Trustee (as defined in Section 7), in any
case at the time and in the manner set forth in Section 7 hereof.
1.2
Each Dividend Equivalent Right represents the right to receive the equivalent of all
of the cash dividends that would be payable with respect to the Share represented by
the Restricted Stock Unit to which the Dividend Equivalent Right relates. With respect
to each Dividend Equivalent Right, any amount related to cash dividends shall be
converted into additional Restricted Stock Units based on the Fair Market Value of a
Share on the date such dividend is made. Any additional Restricted Stock Units granted
pursuant to this Section shall be subject to the same terms and conditions applicable
to the Restricted Stock Unit to which the Dividend Equivalent Right relates, including,
without limitation, the restrictions on transfer, forfeiture, vesting and payment
provisions contained in Sections 2 through 7, inclusive, of this Agreement. In the
event that a Restricted Stock Unit is forfeited pursuant to Section 6 hereof, the related
Dividend Equivalent Right shall also be forfeited. Fractional Restricted Stock Units
may be generated upon the automatic settlement of Dividend Equivalent Rights into
additional Restricted Stock Units and upon the vesting of a portion of a Restricted
Stock Unit award (see Section 3). These fractional Restricted Stock Units continue
to accrue additional Dividend Equivalent Rights and accumulate until the fractional
interest is of sufficient value to acquire an additional Restricted Stock Unit as a result
of the settlement of future Dividend Equivalent Rights, subject to adjustment upon
the vesting of a portion of the underlying Restricted Stock Unit award (see Section 3).
The Committee shall determine appropriate administration for the tracking and
-3-
settlement of Dividend Equivalent Rights, including with respect to fractional interests,
and the Committee’s determination in this regard shall be final and binding upon all
Parties.
1.3
This Agreement shall be construed in accordance and consistent with, and is subject
to, the provisions of the Plan (the provisions of which are hereby incorporated by
reference), as well as any and all determinations, policies, instructions, interpretations,
rules, etc., of the Committee in connection with the Plan. Except as otherwise expressly
set forth herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2.
Restrictions on Transfer.
The Restricted Stock Units and Dividend Equivalent Rights granted pursuant to this
Agreement may not be sold, transferred or otherwise disposed of and may not be pledged or
otherwise hypothecated.
3.
Vesting.
Except as otherwise provided in this Agreement, Restricted Stock Units granted
hereunder shall vest as follows:
(a)
One-third (1/3) of the total Shares covered by the Award shall vest on March
1, 2015, subject to rounding down the Award to the nearest whole Share as of the vesting date;
(b)
One-half (1/2) of the remaining Shares covered by the Award shall vest on
March 1, 2016, subject to rounding down the Award to the nearest whole Share as of the
vesting date; and
(c)
All of remaining Shares covered by the Award shall vest on March 1, 2017,
subject to rounding down the Award to the nearest whole Share as of the vesting date.
Fractional Restricted Stock Units may be generated and/or adjusted upon the vesting
of the Restricted Stock Units awarded under this Agreement. See Section 7 regarding
settlement of fractional Restricted Stock Units.
4.
Effect of Terminations of Employment.
4.1
Death, Disability or Termination in Connection with Certain Dispositions. If Grantee’s
employment terminates as a result of Grantee’s death or becoming Disabled, or if the
Grantee is terminated without Cause in connection with the sale or disposition of a
Subsidiary, in each case if such termination occurs on or after the Date of Grant, all
Restricted Stock Units which have not become vested in accordance with Section 3
or 5 hereof shall vest as of the Termination Date.
4.2
Retirement. If Grantee’s employment terminates as a result of the Grantee’s
Retirement, and if such termination occurs on or after the Date of Grant, any unvested
-4-
Restricted Stock Units will remain outstanding and will continue to vest in accordance
with the vesting schedule described in Section 3 of this Agreement. For the purposes
of this Agreement, “Retirement” means a termination of employment after attaining
age 60 with at least ten (10) years of service (as defined in the Company’s qualified
retirement plans) and other than by (A) death; (B) Disability; (C) for Cause; or (D) a
voluntary termination by the Grantee or without Cause termination by the Company,
unless the Company and Grantee mutually agree that such termination shall be
considered a “Retirement;” provided that if an Award is subject to Section 409A of
the Code, a termination of employment must also constitute a “separation from
service” within the meaning of Section 409A of the Code in order for the foregoing
to apply.
4.3
Trading Policies and Transfer of Shares. For a period of six (6) months following a
termination of employment, whether under Section 4, 5, or 6 of this Agreement,
Grantee shall continue to be subject to the Company’s insider trading and window
trading policies and must follow all pre-clearance procedures, and all other
requirements, included in those policies. In the case of Retirement, a termination due
to Disability, or death, Grantee or Grantee’s estate or legal representative, as the case
may be, shall take all reasonable steps to transfer all Shares received under this
Agreement (and all other Shares that have vested and are maintained by the Plan
Administrator (as defined in Section 7) in a brokerage account for the benefit of
Grantee) from the Plan Administrator within five (5) years following the Grantee’s
termination of employment. For terminations arising for any reason other than death,
Disability or Retirement, Grantee shall transfer all Shares received under this
Agreement (and all other Shares that have vested and are maintained by the Plan
Administrator in a brokerage account for the benefit of Grantee) from the Plan
Administrator within one (1) year following the Grantee’s termination of employment.
4.4
Termination. For purposes of this Agreement, the word “terminate” or “termination”
in connection with the Grantee’s employment shall mean the Grantee ceasing to
perform services for the Company or such Subsidiary, as the case may be, without
regard to: (i) whether such Grantee continues thereafter to receive any payment from
the Company or such Subsidiary, as the case may be, in respect of the termination of
such Grantee’s employment, including, without limitation, any continuation of salary
or other compensation in lieu of notice of such termination, or (ii) whether or not
Grantee is entitled or claims to be entitled at law to greater notice of such termination
or greater compensation in lieu thereof than has been received by such Grantee. In
addition, to the extent necessary to comply with the requirements of Section 409A of
the Code, any reference to the Grantee’s Termination shall mean the Grantee’s
“separation from service” as defined by Section 409A of the Code.
5.
Effect of Change in Control.
Subject to Section 6 hereof, in the event of a Change in Control, Section 10.6 of the
Plan will apply to the unvested portion of the Award.
-5-
6.
Forfeiture of Award.
Except as otherwise provided in this Agreement, any and all Restricted Stock Units
which have not become vested in accordance with Section 3, 4 or 5 hereof shall be forfeited
upon:
(a)
the termination of the Grantee’s employment with the Company or any
Subsidiary for any reason other than those set forth in Section 4 hereof prior to such vesting;
or
(b)
the commission by the Grantee of an Act of Misconduct prior to such vesting.
For purposes of this Agreement, an “Act of Misconduct” shall mean the occurrence
of one or more of the following events: (x) the Grantee uses for profit or discloses to
unauthorized persons, confidential information or trade secrets of the Company or any of its
Subsidiaries, (y) the Grantee breaches any contract with or violates any fiduciary obligation
to the Company or any of its Subsidiaries, or (z) the Grantee engages in unlawful trading in
the securities of the Company or any of its Subsidiaries or of another company based on
information gained as a result of the Grantee’s employment with, or status as a director to,
the Company or any of its Subsidiaries.
7.
Satisfaction of Award.
In order to satisfy Restricted Stock Units after vesting pursuant to this Agreement, the
Company (or in the case of a Grantee employed by a Subsidiary, the Employer) shall, at its
election either (i) deliver authorized but unissued Shares; (ii) deliver cash to a broker designated
by the Company who, as agent for the Grantee, shall purchase the appropriate number of
Shares on the open market; (iii) contribute cash to a trust fund (the “Trust”) to be used by the
trustee thereof (the “Trustee”) to purchase Shares for the purpose of satisfying the Grantee’s
entitlements under this Agreement, which Shares shall be held by the Trustee, and the Trustee,
upon direction, shall deliver such Shares to the Grantee; or, (iv) any combination of the above.
The aggregate number of Shares issued by the Company, purchased by a broker for
the Grantee or delivered by the Trustee to a Grantee at any particular time pursuant to this
Section 7 shall correspond to the number of Restricted Stock Units that become vested on the
vesting date, with one (1) Restricted Stock Unit corresponding to one (1) Share, subject to
any withholding as may be required under Section 9 of this Agreement, notwithstanding any
delay between a vesting date and the settlement date. Fractional Shares may be issued or
delivered upon settlement of vested Restricted Stock Units. All parties understand,
acknowledge and agree that fractional Shares cannot be traded in the public markets, and
therefore, any fractional Share issued or delivered to Grantee upon settlement of a vested
Restricted Stock Unit, after taking into account the reduction to the number of Shares as
required under Section 9 of this Agreement, if applicable, will ultimately be settled in cash
when the Grantee sells Shares through the Plan Administrator or transfers Shares out of the
Plan Administrator’s system. The Committee shall determine appropriate administration for
the settling of vested Restricted Stock Units, including with respect to fractional interests, and
-6-
the Committee’s determination in this regard shall be final and binding upon all Parties. As
used herein, “Plan Administrator” shall mean the party engaged by the Company to
administratively track awards and accompanying Dividend Equivalent Rights granted under
the Plan, as well as handle the process of vesting and settlement of such awards.
The Company will satisfy its obligations in this Section 7 on each vesting date or as
soon as administratively practicable but no later than the earlier of: (a) December 31 of the
year in which such vesting date occurs, or (b) sixty (60) days after such vesting date.
Notwithstanding the foregoing, with respect to Restricted Stock Units that become vested
pursuant to Section 4 (other than as a result of the Grantee’s death), if the Grantee is a “specified
employee” within the meaning of Section 409A of the Code as of the date the Grantee’s
employment terminates and settlement of such Restricted Stock Units is required to be delayed
pursuant to Section 409A(a)(2)(B)(i) of the Code, then the Company shall satisfy its
obligations in this Section 7 by the later of (i) the date otherwise required by this Section 7
or (ii) the first business day of the calendar month following the date which is six (6) months
after the Grantee’s employment terminates.
Any of the Company’s obligations in this Section 7 may be satisfied by the Company
or the Employer.
8.
No Right to Continued Employment.
Nothing in this Agreement or the Plan shall interfere with or limit in any way the right
of the Company or its Subsidiaries to terminate the Grantee’s employment, nor confer upon
the Grantee any right to continuance of employment by the Company or any of its Subsidiaries
or continuance of service as a Board member.
9.
Withholding of Taxes.
Upon (i) the delivery to the Grantee (or the Grantee’s estate, if applicable) of authorized
and unissued Shares; (ii) the delivery of cash to a broker to purchase and deliver Shares; or
(iii) the delivery by the Trustee of Shares pursuant to the Trust Agreement, in each case pursuant
to Sections 1 and 7 hereof, the Company {(or in the case of a Grantee employed by a Subsidiary,
the Employer)} [, the Employer] or the Trust, as applicable, shall require payment of or other
provision for, as determined by the Company, an amount equal to the federal, state, provincial
and local income taxes and other amounts required by law to be withheld or determined to be
necessary or appropriate to be withheld by the Company, the Employer or the Trust, as
applicable, in connection with such delivery. In its sole discretion, the Company, the Employer
or the Trust, as applicable, may require or permit payment of or provision for such withholding
taxes through one or more of the following methods: (a) in cash, bank draft, certified cheque,
personal cheque or other manner acceptable to the Committee and/or set forth in the relevant
exercise procedures; (b) by withholding such amount from other amounts due to the Grantee;
(c) by withholding a portion of the Shares then issuable or deliverable to the Grantee having
an aggregate fair market value equal to such withholding taxes and, at the Company’s election,
either (I) canceling the equivalent portion of the underlying Award and the Company or the
Trust paying the withholding taxes on behalf of the Grantee in cash, or (II) selling such Shares
-7-
on the Grantee’s behalf; or (d) by withholding such amount from the cash then issuable in
connection with the Award.
Fractional Shares may be issued or delivered and/or adjusted upon the withholding of
taxes in accordance with this Section 9, and the settlement of the Restricted Stock Units into
Shares will be adjusted by the amount of the withholding, including by the fractional Shares
generated and/or adjusted upon the withholding transaction. Any fractional Shares will
ultimately be paid or settled in cash in accordance with Section 7 of this Agreement. Additional
fractional Shares may continue to accrue and be added to existing fractional Shares upon
future vesting and settlement of Restricted Stock Units (in accordance with the terms of this
Agreement) if vested Shares remain in the Plan Administrator’s system.
10.
Grantee Bound by the Plan.
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof. This Agreement shall be construed in accordance and
consistent with, and is subject to, the provisions of the Plan (the provisions of which are hereby
incorporated by reference), as well as any and all determinations, policies, instructions,
interpretations and rules of the Committee in connection with the Plan. Except as otherwise
expressly set forth herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
11.
Modification of Agreement.
This Agreement may be modified, amended, suspended or terminated, and any terms
or conditions may be waived, but only by a written instrument executed by the Parties hereto.
12.
Severability.
Should any provision of this Agreement be held by a court of competent jurisdiction
to be unenforceable or invalid for any reason, the remaining provisions of this Agreement
shall not be affected by such holding and shall continue in full force in accordance with their
terms.
13.
Governing Law.
The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the Province of Ontario and the federal laws of Canada applicable
therein.
14.
Successors in Interest and Assigns.
The Company and the Employer may assign any of their respective rights and
obligations under this Agreement without the consent of the Grantee. This Agreement shall
inure to the benefit of and be binding upon any successors and assigns of the Company and
the Employer. This Agreement shall inure to the benefit of the successors of the Grantee
including, without limitation, the estate of the Grantee and the executor, administrator or
-8-
trustee of such estate. All obligations imposed upon the Grantee and all rights granted to the
Company and the Employer under this Agreement shall be binding upon the successors of the
Grantee including, without limitation, the estate of the Grantee and the executor, administrator
or trustee of such estate.
15.
Language.
The Parties hereto acknowledge that they have requested that this Agreement and all
documents ancillary thereto, including all the documentation provided to the Grantee in respect
of the Award, be drafted in the English language only. Les parties aux présentes reconnaissent
qu’elles ont exigé que la présente convention et tous les documents y afférents, y compris toute
la documentation transmise au bénéficiaire relativement à l’octroi des droits prévu aux
présentes, soient rédigés en langue anglaise seulement.
16.
Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a result of, or in any way
relate to, the interpretation, construction or application of this Agreement shall be determined
by the Committee. Any determination made hereunder shall be final, binding and conclusive
on the Grantee, the Grantee’s heirs, executors, administrators and successors, and the Company
and its Subsidiaries for all purposes.
17.
Entire Agreement.
This Agreement and the terms and conditions of the Plan (as well as any and all
determinations, policies, instructions, interpretations and rules of the Committee in connection
with the Plan) constitute the entire understanding between the Grantee and the Company and
its Subsidiaries, and supersede all other agreements, whether written or oral, with respect to
the Award.
18.
Headings.
The headings of this Agreement are inserted for convenience only and do not constitute
a part of this Agreement.
19.
Counterparts.
This Agreement may be executed simultaneously in two or more counterparts, each
of which shall constitute an original, but all of which taken together shall constitute one and
the same agreement.
20.
Compliance with Section 409A.
This Agreement is not intended to provide for the deferral of compensation within the
meaning of Section 409A of the Code. If for any reason this Agreement is subject to the
requirements of Section 409A of the Code, then this Agreement is intended to satisfy the
requirements of Section 409A of the Code and is intended not to be a “salary deferral
-9-
arrangement” (a “SDA”) within the meaning of the Income Tax Act (Canada) (“Canadian Tax
Act”), and shall be interpreted and administered consistent with such intent. To the extent
that the interpretation and administration of this Agreement in accordance with Section 409A
of the Code would cause any of the arrangements contemplated herein to be a SDA, then for
any Grantee who is subject to the Canadian Tax Act and not subject to Section 409A of the
Code, the Agreement shall be interpreted and administered with respect to such Grantee so
that the arrangements are not SDAs. For Grantees subject to both Section 409A of the Code
and the Canadian Tax Act, the terms of this Award shall be interpreted, construed, and given
effect to achieve compliance with both Section 409A of the Code and the Canadian Tax Act,
to the extent practicable. If compliance with both Section 409A of the Code and the Canadian
Tax Act is not practicable in connection with the Award covered by this Agreement, the terms
of this Award and this Agreement remain subject to amendment at the sole discretion of the
Committee to reach a resolution of the conflict as it shall determine in its sole discretion.
21.
Recoupment Policy upon Restatement of Financial Results.
The Award, and any proceeds therefrom, is subject to the Company’s right to reclaim
its benefits: (i) in the event of a financial restatement pursuant to the Recoupment Policy
Relating to Performance-Based Compensation (the “Recoupment Policy”) adopted by the
Board, as may be amended from time to time; or (ii) in accordance with the terms of any
separate agreement, understanding or arrangement between the Grantee and the Company, or
any affiliate thereof. In accordance with the Recoupment Policy, if the Company’s financial
statements are required to be restated for any reason (other than restatements due to changes
in accounting policy with retroactive effect), the Board will review the Award earned by the
Grantee. If the Board determines that, after a review of all of the relevant facts and
circumstances, the grant of the Award was predicated upon the achievement of certain financial
results that were subsequently corrected as part of a restatement and a lower Award would
have been made to the Grantee based upon the restated financial results, then the Board will
seek recoupment of the Award to the extent that the Board deems appropriate and as provided
by applicable law {and as provided by applicable law}.
22.
Accessing Information.
A copy of the Plan and prospectus for the Plan, as may be amended, can be found by
the Grantee by accessing his/her Solium Shareworks account at www.solium.com. That site
also contains other general information about the Award.
23.
Confirming Information.
By accepting this Agreement, either through electronic means or by providing a signed
copy, the Grantee (i) acknowledges and confirms that he/she has read and understood the Plan,
the related prospectus, this Agreement and all information about the Award available at the
Solium website, and that he/she has had an opportunity to seek separate fiscal, legal and
taxation advice in relation thereto; (ii) acknowledges that he/she has been provided with a
hard copy or an electronic copy of the Annual Report on Form 10-K for the most recently
completed fiscal year of the Company; (iii) agrees to be bound by the terms and conditions
- 10 -
stated in this Agreement, including without limitation the terms and conditions of the Plan,
incorporated by reference herein; and (iv) acknowledges and agrees that acceptance of this
Agreement through electronic means is equivalent to doing so by providing a signed copy.
TIM HORTONS INC.
by
Name:
Title:
[ ____________________(“Employer”)
by
Name:
Title: ]
Exhibit 10(b)
[Note: Text in [ ] is only included in agreements with individuals employed by U.S. subsidiaries
of Tim Hortons Inc. Text in { } is only included in agreements with individuals employed by
Tim Hortons Inc.]
Participant Name (“Grantee”):
Employee Number:
Grant Name:
Date of Grant:
May 15, 2014
Total Award:
Vest Date:
March 1, 2017
PERFORMANCE STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)
Tim Hortons Inc.
Grant Year: 2014
May 15, 2014
THIS PERFORMANCE STOCK UNIT AWARD AGREEMENT (this “Agreement”)
is made effective as of the 15th day of May, 2014 (the “Date of Grant”), {between} [by and
among] Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations
Act (the “Company”), [the below noted Employer,] and the above-noted Grantee (collectively,
the “Parties”).
WHEREAS, the Company has adopted the Tim Hortons Inc. 2012 Stock Incentive
Plan, as amended from time to time (the “Plan”), in order to provide additional incentive
compensation to certain employees and directors of the Company and its Subsidiaries; and
WHEREAS, pursuant to Section 4.2 of the Plan, the Human Resource and
Compensation Committee (“Committee”) of the Board of Directors of the Company (“Board”)
has determined to grant to the Grantee on the Date of Grant an award of the above-noted
number of Performance Stock Units (the “Award”) with related Dividend Equivalent Rights
to encourage the Grantee’s efforts toward the continuing success of the Company and its
Subsidiaries; and
-2-
WHEREAS, the Award is evidenced by this Agreement, which (together with the Plan
and the Equity Grant and Settlement Policy), describes all the terms and conditions of the
Award.
NOW, THEREFORE, the Parties agree as follows:
1.
Award.
1.1
The Company (or in the case of a Grantee employed by a Subsidiary {(the
“Employer”)}, the Employer) hereby grants to the Grantee in respect of employment
services provided by the Grantee the Award with an equal number of related Dividend
Equivalent Rights. For greater certainty, the Award granted hereunder is in respect of
services rendered by the Grantee in the calendar year in which the Date of Grant occurs.
In no event may the Award be allocated to the Grantee for or in respect of services
rendered in any period prior to the commencement of the calendar year in which the
Award is granted. Subject to Section 6 hereof, each Performance Stock Unit represents
the right to receive, at the absolute discretion of the Company, (i) one (1) Share from
the Company, (ii) cash delivered to a broker to acquire one (1) Share on the Grantee’s
behalf, or (iii) one (1) Share delivered by the Trustee (as defined in Section 7), in any
case at the time and in the manner set forth in Section 7 hereof.
1.2
Each Dividend Equivalent Right represents the right to receive the equivalent of all
of the cash dividends that would be payable with respect to the Share represented by
the Performance Stock Unit to which the Dividend Equivalent Right relates. With
respect to each Dividend Equivalent Right, any amount related to cash dividends shall
be converted into additional Performance Stock Units based on the Fair Market Value
of a Share on the date such dividend is made. Any additional Performance Stock Units
granted pursuant to this Section shall be subject to the same terms and conditions
applicable to the Performance Stock Unit to which the Dividend Equivalent Right
relates, including, without limitation, the restrictions on transfer, forfeiture, vesting
and payment provisions contained in Sections 2 through 7, inclusive, of this
Agreement. In the event that a Performance Stock Unit is forfeited pursuant to Section
6 hereof, the related Dividend Equivalent Right shall also be forfeited. Fractional
Performance Stock Units may be generated upon the automatic settlement of Dividend
Equivalent Rights into additional Performance Stock Units and upon the vesting of a
portion of a Performance Stock Unit award (see Section 3). These fractional
Performance Stock Units continue to accrue additional Dividend Equivalent Rights
and accumulate until the fractional interest is of sufficient value to acquire an additional
Performance Stock Unit as a result of the settlement of future Dividend Equivalent
Rights, subject to adjustment upon the vesting of a portion of the underlying
Performance Stock Unit award (see Section 3). The Committee shall determine
appropriate administration for the tracking and settlement of Dividend Equivalent
Rights, including with respect to fractional interests, and the Committee’s
determination in this regard shall be final and binding upon all Parties.
-3-
1.3
This Agreement shall be construed in accordance and consistent with, and is subject
to, the provisions of the Plan (the provisions of which are hereby incorporated by
reference), as well as any and all determinations, policies, instructions, interpretations,
rules, etc., of the Committee in connection with the Plan. Except as otherwise expressly
set forth herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2.
Restrictions on Transfer.
The Award and Dividend Equivalent Rights granted pursuant to this Agreement may
not be sold, transferred or otherwise disposed of and may not be pledged or otherwise
hypothecated.
3.
Performance Criteria and Vesting.
Performance criteria for determining the number of Performance Stock Units to be
vested is forward-looking, based on the Company’s performance from the Date of Grant to
March 1, 2017 using both an internal performance metric of Return on Assets (75% weighting)
and a relative performance metric of Total Shareholder Return (25% weighting). The
performance against target determines the payout to be made along the payout curve (0% to
175% of units granted). Notwithstanding the above, the number of Performance Stock Units
that vest on March 1, 2017 is guaranteed to be at least 95% of the number of Performance
Stock Units granted. Fractional Performance Stock Units may be generated and/or adjusted
upon the vesting of the Performance Stock Units awarded under this Agreement. See Section
7 regarding settlement of fractional Performance Stock Units.
4.
Effect of Terminations of Employment.
4.1
Death, Disability or Termination in Connection with Certain Dispositions. If Grantee’s
employment terminates as a result of Grantee’s death or becoming Disabled, or if the
Grantee is terminated without Cause in connection with the sale or disposition of a
Subsidiary, in each case if such termination occurs on or after the Date of Grant, all
Performance Stock Units which have not become vested in accordance with Section
3 or 5 hereof shall vest as of the Termination Date.
4.2
Retirement. If Grantee’s employment terminates as a result of the Grantee’s
Retirement, and if such termination occurs on or after the Date of Grant, any unvested
Performance Stock Units will remain outstanding and will continue to vest in
accordance with the vesting schedule described in Section 3 of this Agreement. For
the purposes of this Agreement, “Retirement” means a termination of employment
after attaining age 60 with at least ten (10) years of service (as defined in the Company’s
qualified retirement plans) and other than by (A) death; (B) Disability; (C) for Cause;
or (D) a voluntary termination by the Grantee or without Cause termination by the
Company, unless the Company and Grantee mutually agree that such termination shall
be considered a “Retirement;” provided that if an Award is subject to Section 409A of
the Code, a termination of employment must also constitute a “separation from
-4-
service” within the meaning of Section 409A of the Code in order for the foregoing
to apply.
4.3
Trading Policies and Transfer of Shares. For a period of six (6) months following a
termination of employment, whether under Section 4, 5, or 6 of this Agreement,
Grantee shall continue to be subject to the Company’s insider trading and window
trading policies and must follow all pre-clearance procedures, and all other
requirements, included in those policies. In the case of Retirement, a termination due
to Disability, or death, Grantee or Grantee’s estate or legal representative, as the case
may be, shall take all reasonable steps to transfer all Shares received under this
Agreement (and all other Shares that have vested and are maintained by the Plan
Administrator (as defined in Section 7) in a brokerage account for the benefit of
Grantee) from the Plan Administrator within five (5) years following the Grantee’s
termination of employment. For terminations arising for any reason other than death,
Disability or Retirement, Grantee shall transfer all Shares received under this
Agreement (and all other Shares that have vested and are maintained by the Plan
Administrator in a brokerage account for the benefit of Grantee) from the Plan
Administrator within one (1) year following the Grantee’s termination of employment.
4.4
Termination. For purposes of this Agreement, the word “terminate” or “termination”
in connection with the Grantee’s employment shall mean the Grantee ceasing to
perform services for the Company or such Subsidiary, as the case may be, without
regard to: (i) whether such Grantee continues thereafter to receive any payment from
the Company or such Subsidiary, as the case may be, in respect of the termination of
such Grantee’s employment, including, without limitation, any continuation of salary
or other compensation in lieu of notice of such termination, or (ii) whether or not
Grantee is entitled or claims to be entitled at law to greater notice of such termination
or greater compensation in lieu thereof than has been received by such Grantee. In
addition, to the extent necessary to comply with the requirements of Section 409A of
the Code, any reference to the Grantee’s Termination shall mean the Grantee’s
“separation from service” as defined by Section 409A of the Code.
5.
Effect of Change in Control.
Subject to Section 6 hereof, in the event of a Change in Control, Section 10.6 of the
Plan will apply to the unvested portion of the Award.
-5-
6.
Forfeiture of Award.
Except as otherwise provided in this Agreement, any and all Performance Stock Units
which have not become vested in accordance with Section 3, 4 or 5 hereof shall be forfeited
upon:
(a)
the termination of the Grantee’s employment with the Company or any
Subsidiary for any reason other than those set forth in Section 4 hereof prior to such vesting;
or
(b)
the commission by the Grantee of an Act of Misconduct prior to such vesting.
For purposes of this Agreement, an “Act of Misconduct” shall mean the occurrence
of one or more of the following events: (x) the Grantee uses for profit or discloses to
unauthorized persons, confidential information or trade secrets of the Company or any of its
Subsidiaries, (y) the Grantee breaches any contract with or violates any fiduciary obligation
to the Company or any of its Subsidiaries, or (z) the Grantee engages in unlawful trading in
the securities of the Company or any of its Subsidiaries or of another company based on
information gained as a result of the Grantee’s employment with, or status as a director to,
the Company or any of its Subsidiaries.
7.
Satisfaction of Award.
In order to satisfy Performance Stock Units after vesting pursuant to this Agreement,
the Company (or in the case of a Grantee employed by a Subsidiary, the Employer) shall, at
its election either (i) deliver authorized but unissued Shares; (ii) deliver cash to a broker
designated by the Company who, as agent for the Grantee, shall purchase the appropriate
number of Shares on the open market; (iii) contribute cash to a trust fund (the “Trust”) to be
used by the trustee thereof (the “Trustee”) to purchase Shares for the purpose of satisfying
the Grantee’s entitlements under this Agreement, which Shares shall be held by the Trustee,
and the Trustee, upon direction, shall deliver such Shares to the Grantee; or, (iv) any
combination of the above.
The aggregate number of Shares issued by the Company, purchased by a broker for
the Grantee or delivered by the Trustee to a Grantee at any particular time pursuant to this
Section 7 shall correspond to the number of Performance Stock Units that become vested on
the vesting date, with one (1) Performance Stock Unit corresponding to one (1) Share, subject
to any withholding as may be required under Section 9 of this Agreement, notwithstanding
any delay between a vesting date and the settlement date. Fractional Shares may be issued
or delivered upon settlement of vested Performance Stock Units. All parties understand,
acknowledge and agree that fractional Shares cannot be traded in the public markets, and
therefore, any fractional Share issued or delivered to Grantee upon settlement of a vested
Performance Stock Unit, after taking into account the reduction to the number of Shares as
required under Section 9 of this Agreement, if applicable, will ultimately be settled in cash
when the Grantee sells Shares through the Plan Administrator or transfers Shares out of the
Plan Administrator’s system. The Committee shall determine appropriate administration for
-6-
the settling of vested Performance Stock Units, including with respect to fractional interests,
and the Committee’s determination in this regard shall be final and binding upon all Parties.
As used herein, “Plan Administrator” shall mean the party engaged by the Company to
administratively track awards and accompanying Dividend Equivalent Rights granted under
the Plan, as well as handle the process of vesting and settlement of such awards.
The Company will satisfy its obligations in this Section 7 on each vesting date or as
soon as administratively practicable but no later than December 31 of the year in which such
vesting date occurs. Notwithstanding the foregoing, with respect to Performance Stock Units
that become vested pursuant to Section 4 (other than as a result of the Grantee’s death), if the
Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the
date the Grantee’s employment terminates and settlement of such Performance Stock Units
is required to be delayed pursuant to Section 409A(a)(2)(B)(i) of the Code, then the Company
shall satisfy its obligations in this Section 7 by the later of (i) the date otherwise required by
this Section 7 or (ii) the first business day of the calendar month following the date which is
six (6) months after the Grantee’s employment terminates.
Any of the Company’s obligations in this Section 7 may be satisfied by the Company
or the Employer.
8.
No Right to Continued Employment.
Nothing in this Agreement or the Plan shall interfere with or limit in any way the right
of the Company or its Subsidiaries to terminate the Grantee’s employment, nor confer upon
the Grantee any right to continuance of employment by the Company or any of its Subsidiaries
or continuance of service as a Board member.
9.
Withholding of Taxes.
Upon (i) the delivery to the Grantee (or the Grantee’s estate, if applicable) of authorized
and unissued Shares; (ii) the delivery of cash to a broker to purchase and deliver Shares; or
(iii) the delivery by the Trustee of Shares pursuant to the Trust Agreement, in each case pursuant
to Sections 1 and 7 hereof, the Company {(or in the case of a Grantee employed by a Subsidiary,
the Employer)} [,the Employer] or the Trust, as applicable, shall require payment of or other
provision for, as determined by the Company, an amount equal to the federal, state, provincial
and local income taxes and other amounts required by law to be withheld or determined to be
necessary or appropriate to be withheld by the Company, the Employer or the Trust, as
applicable, in connection with such delivery. In its sole discretion, the Company, the Employer
or the Trust, as applicable, may require or permit payment of or provision for such withholding
taxes through one or more of the following methods: (a) in cash, bank draft, certified cheque,
personal cheque or other manner acceptable to the Committee and/or set forth in the relevant
exercise procedures; (b) by withholding such amount from other amounts due to the Grantee;
(c) by withholding a portion of the Shares then issuable or deliverable to the Grantee having
an aggregate fair market value equal to such withholding taxes and, at the Company’s election,
either (I) canceling the equivalent portion of the underlying Award and the Company or the
Trust paying the withholding taxes on behalf of the Grantee in cash, or (II) selling such Shares
-7-
on the Grantee’s behalf; or (d) by withholding such amount from the cash then issuable in
connection with the Award.
Fractional Shares may be issued or delivered and/or adjusted upon the withholding of
taxes in accordance with this Section 9, and the settlement of the Performance Stock Units
into Shares will be adjusted by the amount of the withholding, including by the fractional
Shares generated and/or adjusted upon the withholding transaction. Any fractional Shares
will ultimately be paid or settled in cash in accordance with Section 7 of this Agreement.
Additional fractional Shares may continue to accrue and be added to existing fractional Shares
upon future vesting and settlement of Performance Stock Units (in accordance with the terms
of this Agreement) if vested Shares remain in the Plan Administrator’s system.
10.
Grantee Bound by the Plan.
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof. This Agreement shall be construed in accordance and
consistent with, and is subject to, the provisions of the Plan (the provisions of which are hereby
incorporated by reference), as well as any and all determinations, policies, instructions,
interpretations and rules of the Committee in connection with the Plan. Except as otherwise
expressly set forth herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
11.
Modification of Agreement.
This Agreement may be modified, amended, suspended or terminated, and any terms
or conditions may be waived, but only by a written instrument executed by the Parties hereto.
12.
Severability.
Should any provision of this Agreement be held by a court of competent jurisdiction
to be unenforceable or invalid for any reason, the remaining provisions of this Agreement
shall not be affected by such holding and shall continue in full force in accordance with their
terms.
13.
Governing Law.
The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the Province of Ontario and the federal laws of Canada applicable
therein.
14.
Successors in Interest and Assigns.
The Company and the Employer may assign any of their respective rights and
obligations under this Agreement without the consent of the Grantee. This Agreement shall
inure to the benefit of and be binding upon any successors and assigns of the Company and
the Employer. This Agreement shall inure to the benefit of the successors of the Grantee
including, without limitation, the estate of the Grantee and the executor, administrator or
-8-
trustee of such estate. All obligations imposed upon the Grantee and all rights granted to the
Company and the Employer under this Agreement shall be binding upon the successors of the
Grantee including, without limitation, the estate of the Grantee and the executor, administrator
or trustee of such estate.
15.
Language.
The Parties hereto acknowledge that they have requested that this Agreement and all
documents ancillary thereto, including all the documentation provided to the Grantee in respect
of the Award, be drafted in the English language only. Les parties aux présentes reconnaissent
qu’elles ont exigé que la présente convention et tous les documents y afférents, y compris toute
la documentation transmise au bénéficiaire relativement à l’octroi des droits prévu aux
présentes, soient rédigés en langue anglaise seulement.
16.
Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a result of, or in any way
relate to, the interpretation, construction or application of this Agreement shall be determined
by the Committee. Any determination made hereunder shall be final, binding and conclusive
on the Grantee, the Grantee’s heirs, executors, administrators and successors, and the Company
and its Subsidiaries for all purposes.
17.
Entire Agreement.
This Agreement and the terms and conditions of the Plan (as well as any and all
determinations, policies, instructions, interpretations and rules of the Committee in connection
with the Plan) constitute the entire understanding between the Grantee and the Company and
its Subsidiaries, and supersede all other agreements, whether written or oral, with respect to
the Award.
18.
Headings.
The headings of this Agreement are inserted for convenience only and do not constitute
a part of this Agreement.
19.
Counterparts.
This Agreement may be executed simultaneously in two or more counterparts, each
of which shall constitute an original, but all of which taken together shall constitute one and
the same agreement.
20.
Compliance with Section 409A.
This Agreement is not intended to provide for the deferral of compensation within the
meaning of Section 409A of the Code. If for any reason this Agreement is subject to the
requirements of Section 409A of the Code, then this Agreement is intended to satisfy the
requirements of Section 409A of the Code and is intended not to be a “salary deferral
-9-
arrangement” (a “SDA”) within the meaning of the Income Tax Act (Canada) (“Canadian Tax
Act”), and shall be interpreted and administered consistent with such intent. To the extent
that the interpretation and administration of this Agreement in accordance with Section 409A
of the Code would cause any of the arrangements contemplated herein to be a SDA, then for
any Grantee who is subject to the Canadian Tax Act and not subject to Section 409A of the
Code, the Agreement shall be interpreted and administered with respect to such Grantee so
that the arrangements are not SDAs. For Grantees subject to both Section 409A of the Code
and the Canadian Tax Act, the terms of this Award shall be interpreted, construed, and given
effect to achieve compliance with both Section 409A of the Code and the Canadian Tax Act,
to the extent practicable. If compliance with both Section 409A of the Code and the Canadian
Tax Act is not practicable in connection with the Award covered by this Agreement, the terms
of this Award and this Agreement remain subject to amendment at the sole discretion of the
Committee to reach a resolution of the conflict as it shall determine in its sole discretion.
21.
Recoupment Policy upon Restatement of Financial Results.
The Award, and any proceeds therefrom, is subject to the Company’s right to reclaim
its benefits: (i) in the event of a financial restatement pursuant to the Recoupment Policy
Relating to Performance-Based Compensation (the “Recoupment Policy”) adopted by the
Board, as may be amended from time to time; or (ii) in accordance with the terms of any
separate agreement, understanding or arrangement between the Grantee and the Company, or
any affiliate thereof. In accordance with the Recoupment Policy, if the Company’s financial
statements are required to be restated for any reason (other than restatements due to changes
in accounting policy with retroactive effect), the Board will review the Award earned by the
Grantee. If the Board determines that, after a review of all of the relevant facts and
circumstances, the grant of the Award was predicated upon the achievement of certain financial
results that were subsequently corrected as part of a restatement and a lower Award would
have been made to the Grantee based upon the restated financial results, then the Board will
seek recoupment of the Award to the extent that the Board deems appropriate and as provided
by applicable law and as provided by applicable law.
22.
Accessing Information.
A copy of the Plan and prospectus for the Plan, as may be amended, can be found by
the Grantee by accessing his/her Solium Shareworks account at www.solium.com. That site
also contains other general information about the Award.
23.
Confirming Information.
By accepting this Agreement, either through electronic means or by providing a signed
copy, the Grantee (i) acknowledges and confirms that he/she has read and understood the Plan,
the related prospectus, this Agreement and all information about the Award available at the
Solium website, and that he/she has had an opportunity to seek separate fiscal, legal and
taxation advice in relation thereto; (ii) acknowledges that he/she has been provided with a
hard copy or an electronic copy of the Annual Report on Form 10-K for the most recently
completed fiscal year of the Company; (iii) agrees to be bound by the terms and conditions
- 10 -
stated in this Agreement, including without limitation the terms and conditions of the Plan,
incorporated by reference herein; and (iv) acknowledges and agrees that acceptance of this
Agreement through electronic means is equivalent to doing so by providing a signed copy.
TIM HORTONS INC.
by
Name:
Title:
[ _____________________(“Employer”)
by
Name:
Title: ]
Exhibit 10(c)
[Note: Text in [ ] is only included in agreements with individuals employed by U.S.
subsidiaries of Tim Hortons Inc. Text in { } is only included in agreements with individuals
employed by Tim Hortons Inc.]
Participant Name (“Grantee”):
Employee Number:
Grant Name:
Date of Grant:
May 15, 2014
Expiration Date:
May 15, 2021
Option Price:
Cdn.$
Total Award:
Vest Schedule – Options
Vest Date
March 1, 2015
March 1, 2016
March 1, 2017
Vest Quantity
1/3
1/3
1/3
TIM HORTONS INC.
2012 STOCK INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AWARD AGREEMENT
(with related Stock Appreciation Right)
Grant Year: 2014
THIS NONQUALIFIED STOCK OPTION AWARD AGREEMENT (this
“Agreement”) is made effective as of the 15th day of May, 2014 (the “Date of Grant”), [by
and among] {between} Tim Hortons Inc., a corporation incorporated under the Canada
Business Corporations Act (the “Company”), [the below-noted Employer,] and the abovenoted Grantee (collectively, the “Parties”).
-2-
WHEREAS, the Company has adopted the Tim Hortons Inc. 2012 Stock Incentive
Plan, as amended from time to time (the “Plan”), in order to provide additional incentive
compensation to certain employees and directors of the Company and its Subsidiaries;
WHEREAS, pursuant to Sections 5 and 6 of the Plan, the Human Resource and
Compensation Committee (the “Committee”) of the Board of Directors of the Company
(the “Board”) has determined to grant to the Grantee on the Date of Grant a Nonqualified
Stock Option and a related Stock Appreciation Right (“SAR”), each as provided herein, to
encourage the Grantee’s efforts toward the continuing success of the Company and its
Subsidiaries; and
WHEREAS, the Award (as defined herein) is evidenced by this Agreement, which
(together with the Plan and the Equity Grant and Settlement Policy) describes all the
terms and conditions of the Award (as defined herein).
NOW, THEREFORE, the Parties agree as follows:
1.
Grant of Award. The Company (or in the case of a Grantee employed by a
Subsidiary {the “Employer”,}, the Employer) hereby grants to the Grantee, on the Date of
Grant, a Nonqualified Stock Option (the “Option”) with a related SAR to purchase the abovenoted number of Shares at the above-noted Option Price, subject to the terms and conditions
of this Agreement and the Plan (the “Award”). The Option is not intended to be treated as
an option that complies with Section 422 of the Internal Revenue Code of 1986, as amended.
2.
Vesting; Term of Award. Except as otherwise provided in this Agreement,
the Award shall vest as follows:
(a)
One-third (1/3) of the total Shares covered by the Award shall vest on March
1, 2015, subject to rounding down the Award to the nearest whole Share as of the vesting
date;
(b)
One-half (1/2) of the remaining Shares covered by the Award shall vest on
March 1, 2016, subject to rounding down the Award to the nearest whole Share as of the
vesting date; and
(c)
All of remaining Shares covered by the Award shall vest on March 1, 2017,
subject to rounding down the Award to the nearest whole Share as of the vesting date.
The Award shall expire May 15, 2021 (the “Expiration Date”), unless sooner terminated as
provided in Section 4 of this Agreement. Notwithstanding anything to the contrary contained
in this Agreement, if the Award expires outside of a Trading Window, then the Expiration
Date shall be the later of: (i) the date the Award would have expired by its original terms
(including the terms set forth in Section 4 of this Agreement), or (ii) the end of the tenth
trading day of the immediately succeeding Trading Window during which the Company
-3-
would allow the Grantee to trade in its securities; provided, however, that in no event shall
the Award expire beyond the tenth anniversary of the Date of Grant.
3.
Exercise of Award. Subject to the limitations set forth in this Agreement, the
Plan, and in the exercise procedures and requirements established by the Committee, the
vested portion of the Award may be exercised in whole or in part by providing to the Company
or its designee written notice of exercise; provided that the Award may be exercised with
respect to whole Shares only. Such notice shall specify (i) whether the Grantee intends to
exercise the Option or the SAR and (ii) the number of Shares with respect to which the
Award is to be exercised. The Grantee shall have the discretion to determine whether to
exercise the Option or the SAR.
(a)
Exercise of SAR. If the Grantee desires to receive cash, as opposed
to Shares, upon exercise of all or a portion of the vested amount of the Award, the Grantee
will exercise the SAR. Upon the exercise of the SAR, the Grantee shall be entitled to receive
a cash amount from the Company or the Employer equal to the product of: (i) the excess of
the Fair Market Value of a Share on the date of exercise of the SAR over the Option Price;
multiplied by (ii) the number of Shares as to which the SAR is being exercised {, less
applicable withholdings}.
(b)
Exercise of Option. If the Grantee desires to receive Shares, as
opposed to cash, upon exercise of all or a portion of the vested amount of the Award, the
Grantee will exercise the Option. If the Option is exercised, payment of the Option Price
for the number of Shares specified in the notice of exercise shall accompany the written
notice of exercise. The payment of the Option Price may be made, as determined by the
Committee in its sole discretion as of the time of exercise, as follows: (i) in cash, personal
or certified cheque, bank draft or other property acceptable to the Committee; or (ii) through
a cashless exercise, including through a registered broker-dealer. The Committee shall
determine the means and manner by which Shares to be delivered upon exercise of the
Option shall be settled and/or satisfied, in its sole and absolute discretion. Notwithstanding
the foregoing sentence and Section 3.1(i) of the Plan, Shares delivered upon the exercise of
an Option shall be newly-issued Shares.
(c)
Tandem Nature of Award. Upon the exercise of the SAR, the Option
shall be canceled (i.e., surrendered to the Company) to the extent of the number of Shares
as to which the SAR is exercised. Upon the exercise of the Option, the SAR shall be canceled
(i.e., surrendered to the Company) to the extent of the number of Shares as to which the
Option is exercised or surrendered.
(d)
Automatic Exercise of SAR. If the Award (or any portion thereof)
has not been exercised by the Expiration Date (and has not been forfeited or otherwise
terminated in accordance with the terms of this Agreement), then effective as of the
Expiration Date the Grantee will be deemed to have automatically exercised the SAR with
respect to the Award (or any remaining portion thereof), and will be entitled to receive a
cash amount from the Company or the Employer equal to the product of: (i) the excess of
-4-
the Fair Market Value of a Share on the date of exercise of the SAR over the Option Price;
multiplied by (ii) the number of Shares as to which the SAR is being exercised, less applicable
withholdings.
4.
Termination of Employment.
(a)
Death or Disability. Upon termination of the Grantee’s employment
with the Company and its Subsidiaries as a result of the Grantee’s death or the Grantee
becoming Disabled, the Award shall become immediately exercisable as of the Termination
Date, and the Grantee (or, to the extent applicable, the Grantee’s legal guardian, legal
representative or estate) shall have the right to exercise the Award for a period of four (4)
years after the date of such termination or, if earlier, until the Expiration Date.
(b)
Retirement. Upon termination of the Grantee’s employment with the
Company and its Subsidiaries by reason of the Grantee’s Retirement, for a period of four
(4) years following the Termination Date (but in no event beyond the Expiration Date), the
Award shall remain outstanding and (i) to the extent not then fully vested, shall continue to
vest in accordance with the vesting schedule set forth in Section 2 of this Agreement, and
(ii) the Grantee shall have the right to exercise the vested portion of the Award. For the
purposes of this Agreement, “Retirement” means a termination of employment after attaining
age 60 with at least ten (10) years of service (as defined in the Company’s qualified retirement
plans) and other than by (A) death; (B) Disability; (C) for Cause; or (D) a voluntary
termination by the Grantee or without Cause termination by the Company, unless the
Company and Grantee mutually agree that such termination shall be considered a
“Retirement;” provided that if an Award is subject to Section 409A of the Code, a termination
of employment must also constitute a “separation from service” within the meaning of
Section 409A of the Code in order for the foregoing to apply.
(c)
Termination in Connection with Certain Dispositions. In the event
the Grantee’s employment with the Company and its Subsidiaries is terminated without
Cause in connection with a sale or other disposition of a Subsidiary, the Award shall remain
outstanding and (i) to the extent not then fully vested, will become immediately vested on
the Termination Date, and (ii) the Grantee will have the right to exercise such vested portion
of the Award for a period of one (1) year following the Termination Date or, if earlier, until
the Expiration Date.
(d)
Termination for Cause. Upon the termination of the Grantee’s
employment with the Company and its Subsidiaries for Cause, the portion of the Award that
has not been exercised shall be forfeited (whether or not then vested and exercisable) on the
Termination Date.
(e)
Termination for Any Other Reason. Upon the termination of the
Grantee’s employment with the Company and its Subsidiaries for any reason not described
in Section 4(a), 4(b), 4(c), or 4(d) of this Agreement, the Award shall (i) to the extent not
vested and exercisable as of the Termination Date, terminate as of the Termination Date,
-5-
and (ii) to the extent vested and exercisable as of the Termination Date, remain exercisable
for a period of ninety (90) days following the Termination Date or, in the event of the
Grantee’s death during such ninety (90) day period, remain exercisable by the Grantee’s
estate until the end of one (1) year period following the Termination Date; provided, however,
that, in either case, the Award shall not remain exercisable beyond the Expiration Date.
(f)
Termination Date. For purposes of this Agreement, the word
“terminate” or “termination” in connection with the Grantee’s employment shall mean the
Grantee ceasing to perform services for the Company or such Subsidiary, as the case may
be, without regard to: (i) whether such Grantee continues thereafter to receive any payment
from the Company or such Subsidiary, as the case may be, in respect of the termination of
such Grantee’s employment, including, without limitation, any continuation of salary or
other compensation in lieu of notice of such termination, or (ii) whether or not Grantee is
entitled or claims to be entitled at law to greater notice of such termination or greater
compensation in lieu thereof than has been received by such Grantee.
5.
Effect of Change in Control. In the event of a Change in Control, Section
10.6 of the Plan will apply to the unvested portion of the Award.
6.
Forfeiture of Award. Except as otherwise provided in this Agreement, any
and all Awards which have not become vested in accordance with Section 2, 4 or 5 hereof
shall be forfeited upon the commission by the Grantee of an Act of Misconduct prior to such
vesting. For purposes of this Agreement, an “Act of Misconduct” shall mean the occurrence
of one or more of the following events: (x) the Grantee uses for profit or discloses to
unauthorized persons, confidential information or trade secrets of the Company or any of
its Subsidiaries, (y) the Grantee breaches any contract with or violates any fiduciary
obligation to the Company or any of its Subsidiaries, or (z) the Grantee engages in unlawful
trading in the securities of the Company or any of its Subsidiaries or of another company
based on information gained as a result of the Grantee’s employment with, or status as a
director to, the Company or any of its Subsidiaries.
7.
Non-Transferability of Award. Except to the extent that the Grantee’s legal
representative or estate is permitted to exercise the Award pursuant to the terms of the Plan
or in accordance with a determination of the Committee, the Award is exercisable only during
the Grantee’s lifetime and only by the Grantee. Unless otherwise provided for by a
determination of the Committee, the Award shall not be transferable except by will or the
laws of descent and distribution.
8.
No Right to Continued Employment. Nothing in this Agreement or the Plan
shall interfere with or limit in any way the right of the Company or its Subsidiaries to
terminate the Grantee’s employment, nor be construed as giving the Grantee any right to
continuance of employment by the Company or any of its Subsidiaries or continuance of
service to the Company or any of its Subsidiaries.
-6-
9.
Withholding of Taxes. Upon the exercise of the Award, the Company or the
Employer {,as applicable,} shall require payment of or other provision for, as determined
by the Company, an amount equal to the federal, state, provincial and local income taxes
and other amounts required by law to be withheld or determined to be necessary or
appropriate to be withheld by the Company or the Employer, as applicable, in connection
with such exercise. In its sole discretion, the Company or the Employer, as applicable, may
require or permit payment of or provision for such withholding taxes through one or more
of the following methods: (a) in cash, bank draft, certified cheque, personal cheque or other
manner acceptable to the Committee and/or set forth in the relevant exercise procedures;
(b) by withholding such amount from other amounts due to the Grantee; (c) by withholding
the delivery of a portion of the Shares then deliverable to the Grantee having an aggregate
fair market value equal to such withholding taxes (provided that, for clarity, Shares with an
aggregate value equal to the gross amount of the Award shall be issued) and, at the Company’s
election, either (I) the Company or the Employer paying the withholding taxes on behalf of
the Grantee in cash, or (II) selling such Shares on the Grantee’s behalf; (d) by withholding
such amount from the cash then issuable in connection with the Award; or (e) by entering
into any other arrangements for the receipt of such amount suitable to the Company. The
Grantee acknowledges and agrees that, notwithstanding that the Employer is not a party to
this Agreement, the Employer, if applicable, shall be entitled to take such actions provided
for in this Section as the Employer shall deem appropriate.
10.
Grantee Bound by Plan; Award Subject to Terms of Plan. The Grantee hereby
acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and
provisions thereof. This Agreement shall be construed in accordance and consistent with,
and is subject to, the provisions of the Plan (the provisions of which are hereby incorporated
by reference), as well as any and all determinations, policies, instructions, interpretations
and rules of the Committee in connection with the Plan, including the Option/SAR Exercise
and Settlement Policy and related procedures adopted by the Committee. Except as
otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have
the same definitions as set forth in the Plan.
11.
Modification of Agreement. The Board or Committee may make
amendments or changes to this Award, subject to the terms and conditions of Section 21 of
the Plan.
12.
Severability. Should any provision of this Agreement be held by a court of
competent jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall continue in full
force in accordance with their terms.
13.
Governing Law. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the Province of Ontario and the federal
laws of Canada applicable therein.
-7-
14.
Successors in Interest and Assigns. The Company and the Employer may
assign any of their respective rights and obligations under this Agreement without the consent
of the Grantee. This Agreement shall inure to the benefit of and be binding upon any
successors and assigns of the Company and the Employer. This Agreement shall inure to
the benefit of the successors of the Grantee including, without limitation, the estate of the
Grantee and the executor, administrator or trustee of such estate. All obligations imposed
upon the Grantee and all rights granted to the Company and the Employer under this
Agreement shall be binding upon the successors of the Grantee including, without limitation,
the estate of the Grantee and the executor, administrator or trustee of such estate.
15.
Resolution of Disputes. Any dispute or disagreement which may arise under,
or as a result of, or in any way relate to, the interpretation, construction or application of
this Agreement shall be determined by the Committee. Any determination made hereunder
shall be final, binding and conclusive on the Grantee, the Grantee’s heirs, executors,
administrators and successors, and the Company and its Subsidiaries for all purposes.
16.
Entire Agreement. This Agreement and the terms and conditions of the Plan
(as well as any and all determinations, policies, instructions, interpretations and rules of the
Committee in connection with the Plan, including the Option/SAR Exercise and Settlement
Policy and related procedures adopted by the Committee) constitute the entire understanding
between the Grantee and the Company and its Subsidiaries, and supersede all other
agreements, whether written or oral, with respect to the Award.
17.
Headings. The headings of this Agreement are inserted for convenience only
and do not constitute a part of this Agreement.
18.
Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall constitute an original, but all of which taken together
shall constitute one and the same agreement.
19.
Recoupment Policy upon Restatement of Financial Results. The Award, and
any proceeds therefrom, is subject to the Company’s right to reclaim its benefits: (i) in the
event of a financial restatement pursuant to the Recoupment Policy Relating to PerformanceBased Compensation (the “Recoupment Policy”) adopted by the Board, as may be amended
from time to time; or (ii) in accordance with the terms of any separate agreement,
understanding or arrangement between the Grantee and the Company, or any affiliate thereof.
In accordance with the Recoupment Policy, if the Company’s financial statements are
required to be restated for any reason (other than restatements due to changes in accounting
policy with retroactive effect), the Board will review the Award earned by the Grantee. If
the Board determines that, after a review of all of the relevant facts and circumstances, the
grant of the Award was predicated upon the achievement of certain financial results that
were subsequently corrected as part of a restatement and a lower Award would have been
made to the Grantee based upon the restated financial results, then the Board will seek
recoupment of the Award to the extent that the Board deems appropriate and as provided by
applicable law.
-8-
20.
Compliance with Section 409A. This Agreement is not intended to provide
for the deferral of compensation within the meaning of Section 409A of the Code. If for
any reason this Agreement is subject to the requirements of Section 409A of the Code, then
this Agreement is intended to satisfy the requirements of Section 409A of the Code and is
intended not to be a “salary deferral arrangement” (a “SDA”) within the meaning of the
Income Tax Act (Canada) (“Canadian Tax Act”), and shall be interpreted and administered
consistent with such intent. To the extent that the interpretation and administration of this
Agreement in accordance with Section 409A of the Code would cause any of the
arrangements contemplated herein to be a SDA, then for any Grantee who is subject to the
Canadian Tax Act and not subject to Section 409A of the Code, the Agreement shall be
interpreted and administered with respect to such Grantee so that the arrangements are not
SDAs. For Grantees subject to both Section 409A of the Code and the Canadian Tax Act,
the terms of this Award shall be interpreted, construed, and given effect to achieve compliance
with both Section 409A of the Code and the Canadian Tax Act, to the extent practicable. If
compliance with both Section 409A of the Code and the Canadian Tax Act is not practicable
in connection with the Award covered by this Agreement, the terms of this Award and this
Agreement remain subject to amendment at the sole discretion of the Committee to reach
a resolution of the conflict as it shall determine in its sole discretion.
21.
Language. The Parties hereto acknowledge that they have requested that this
Agreement and all documents ancillary thereto, including all the documentation provided
to the Grantee in respect of the Award, be drafted in the English language only. Les parties
aux présentes reconnaissent qu’elles ont exigé que la présente convention et tous les
documents y afférents, y compris toute la documentation transmise au bénéficiaire
relativement à l’octroi des droits prévu aux présentes, soient rédigés en langue anglaise
seulement.
22.
Accessing Information. A copy of the Plan and prospectus for the Plan, as
may be amended, can be found by the Grantee by accessing his/her Solium Shareworks
account at www.solium.com. That site also contains other general information about the
Award.
23.
Confirming Information. By accepting this Agreement, either through
electronic means or by providing a signed copy, the Grantee (i) acknowledges and confirms
that he/she has read and understood the Plan, the related prospectus, this Agreement and all
information about the Award available at the Solium website, and that he/she has had an
opportunity to seek separate fiscal, legal and taxation advice in relation thereto; (ii)
acknowledges that he/she has been provided with a hard copy or an electronic copy of the
Annual Report on Form 10-K for the most recently completed fiscal year of the Company;
(iii) agrees to be bound by the terms and conditions stated in this Agreement, including
without limitation the terms and conditions of the Plan, incorporated by reference herein;
and (iv) acknowledges and agrees that acceptance of this Agreement through electronic
means is equivalent to doing so by providing a signed copy.
-9-
{24. Company Election. Unless the Committee has expressly indicated in writing
and delivered to the Grantee, the Committee’s intention to cause the Company to elect in
prescribed form and duly file any election (the “Company Election”) required in subsection
110(1.1) of the Income Tax Act (Canada) that neither the Company nor any person not dealing
at arm’s length with the Company will deduct in computing its income for a taxation year,
any amount paid to a Grantee upon the exercise by the Grantee of a SAR hereunder in
accordance with the provisions of paragraph 3(a), then upon the exercise by a Grantee of a
SAR hereunder, the Committee at its sole discretion, may or may not cause the Company
to make the Company Election.}
TIM HORTONS INC.
By:
Name:
Title:
[TIM HORTONS USA INC. “Employer”)
By:
Name:
Title:
]
Exhibit 10(d)
AMENDED AND RESTATED
DEFERRED STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)
(Canadian Directors)
Tim Hortons Inc.
Date
THIS AGREEMENT, made effective as of the
day of
,
(the “Effective
Date”) is between Tim Hortons Inc., a Federal corporation incorporated under the Canada Business
Corporations Act (the “Company”) and
(the “Grantee”);
WHEREAS, pursuant to Section 4 of the Tim Hortons Inc. Non-Employee Director
Deferred Stock Unit Plan (the "Plan"), the Company may grant, from time-to-time, to the Grantee
Elective DSUs, Formula DSUs, Voluntary Formula DSUs and Discretionary DSUs (all as defined
in the Plan and collectively referred to herein as "DSUs" or, individually, a "DSU") with related
Dividend Equivalent Rights;
AND WHEREAS, each grant of DSUs shall be evidenced by this Agreement, which
(together with the Plan), describes all the terms and conditions of the respective DSU grant;
AND WHEREAS, the Grantee serves as a director of the Company and is not otherwise
employed by the Company or its subsidiaries ("Subsidiaries") in any capacity and is therefore
eligible to participate in the Plan;
AND WHEREAS, subject to the terms of the Plan and this Agreement, the DSUs awarded
to the Grantee under this Agreement will vest and be paid to the Grantee after the Grantee ceases
to serve as a director of the Company;
AND WHEREAS, the Company has determined that the Grantee is subject to the tax laws
of the Canada (and not subject to tax under the laws of the United States) in respect of the DSUs
granted hereunder;
NOW, THEREFORE, the Parties agree as follows:
1
Award.
1.1
The Company hereby grants to the Grantee awards (the "Awards") of the number of
Formula DSUs, Voluntary Formula DSUs, Elective DSUs and Discretionary DSUs as set out on
Schedule A hereto with an equal number of related Dividend Equivalent Rights on the date(s) of
grant (each, a "Grant Date") set forth on Schedule A. Grants of DSUs are subject to certain
administrative determinations to be made by the Human Resource and Compensation Committee
of the Company (the "Committee") from time-to-time, which are described on Schedule A and
which, unless otherwise specified on Schedule A, shall apply in respect of all existing and future
Awards; provided that no such administrative determination will impair the rights of the Grantee
without the consent of the Grantee, except as may be permitted pursuant to Section 11 of this
Agreement. Each DSU is a bookkeeping entry, equivalent in value to one common share of Company
or any other securities into which such share is converted or for which such share is exchanged
("Share"). Distributions and payments for DSUs and Dividend Equivalent Rights shall be made in
accordance with the terms of Section 5 and 6 hereof, respectively. The DSUs and related Dividend
Equivalent Rights granted pursuant to the Awards were subject to the execution and return of this
Agreement by the Grantee. On a quarterly basis, the Company will deliver to the Grantee an updated
Schedule A setting out the total number of DSUs that have been granted to the Grantee under the
Plan and pursuant to this Agreement from the Effective Date to the date of such Schedule. Grantee
shall be deemed to have (i) accepted and agreed to the terms and conditions of the Awards and other
information described on the Schedule and (ii) confirmed their agreement and acknowledgment
that the terms of this Agreement continue to apply in full force and effect to all such future Awards,
unless Grantee notifies the Company within 15 business days after receipt of the respective quarterly
Schedule A.
1.2
Each Dividend Equivalent Right is a bookkeeping entry, equivalent in value to the
cash dividends or other distributions that are or would be payable with respect to the number of
DSUs held by the Grantee if the DSUs were Shares. Dividend Equivalent Rights shall be converted
into additional DSUs based on the Fair Market Value of a Share on the date such dividend is paid.
"Fair Market Value" or "FMV" on any relevant date shall mean the closing price for Shares traded
on the Toronto Stock Exchange, or if the Committee elects on or prior to such date, the New York
Stock Exchange, for the immediately preceding date on which the Toronto Stock Exchange or New
York Stock Exchange, as applicable, is open for trading. Any additional DSUs granted pursuant to
this Section shall be subject to the same terms and conditions applicable to the DSU to which the
Dividend Equivalent Right relates, including, without limitation, the restrictions on transfer,
forfeiture, vesting and payment provisions contained in Sections 2 through 5, inclusive, of this
Agreement. In the event that a DSU is forfeited pursuant to Section 5 hereof, the related Dividend
Equivalent Right shall also be forfeited.
1.3
This Agreement shall be construed in accordance and consistent with, and subject
to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and,
except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall
have the same definitions as set forth in the Plan.
2
Restrictions on Transfer.
The DSUs and Dividend Equivalent Rights granted pursuant to this Agreement may not be
sold, transferred or otherwise disposed of and may not be pledged or otherwise hypothecated.
3
Vesting.
All DSUs and accompanying Dividend Equivalents Rights granted hereunder shall vest
upon the Grantee's separation from service. For purposes of this Agreement, "separation from
2
service" shall occur on the earliest date on which both the following conditions have been met: (i)
the Grantee has ceased to be employed by the Company or any of its Subsidiaries for any reason
whatsoever and (ii) the Grantee is not a member of the Board of Directors of the Company or any
of its Subsidiaries.
4
Effect of Change of Shares Subject to the Plan.
In the event of a Change in Capitalization (as defined in the Tim Hortons Inc. 2012 Stock
Incentive Plan (the "2012 Stock Plan")), the Committee shall conclusively determine the appropriate
adjustments, if any, to the Grantee's outstanding DSUs. If adjustments are to be made, they shall
be made in the same manner as adjustments are made to awards that are outstanding under the 2012
Stock Plan. Adjusted DSUs shall remain subject to the same conditions that were applicable to the
DSUs prior to the adjustments, provided that, notwithstanding the foregoing, any adjustment to a
DSU shall be on the basis that the amounts payable under such DSU shall continue to depend on
the FMV of the Shares of the Company, or a corporation related thereto, at a time within the period
beginning one year before the Grantee's separation from service and ending at the time of receipt
of payment.
5
Distributions.
All DSUs granted to Grantee under the Agreement shall be paid out in a lump sum as soon
as administratively possible following separation from service, but no later than 30 days after
separation from service, unless the Grantee has filed an election, in accordance with the provisions
of Section 4.7 of the Plan, to defer the payment of the DSUs subject to such election. Notwithstanding
the foregoing, and for greater certainty, Formula DSUs (not including Voluntary Formula DSUs or
Elective DSUs) and, unless otherwise set out on Schedule A hereto with respect to a specific Award,
Discretionary DSUs, shall be forfeited and no payment shall be made in respect thereof if the
Grantee's separation from service is as a result of the Grantee being removed from service due to
the commission of an act of fraud or intentional misrepresentation or an act of embezzlement,
misappropriation or conversion of assets or opportunities of the Company or any of its Subsidiaries.
6
Payment.
All DSUs shall be paid in cash based on the Fair Market Value of a Share on the date of the
Grantee's separation from service in accordance with the administrative determinations made by
the Committee from time-to-time regarding the payments of DSUs upon settlement, which shall be
noted on Schedule A from time-to-time, as applicable. Notwithstanding the foregoing, the Company
shall be entitled to withhold and/or deduct any and all amounts required to be withheld from any
payment hereunder on account of taxes or other governmental charges.
7
No Right to Continued Service.
Nothing in this Agreement or the Plan shall confer upon the Grantee any right to continuance
of service as a Board member or otherwise as an employee of the Company or any of its Subsidiaries.
3
8
Residency of Grantee.
The Grantee certifies that he or she is a resident of Canada for Canadian and U.S. income
tax purposes and is not subject to U.S. income tax in respect of the DSUs covered by this Agreement.
The Grantee hereby agrees to notify the Company within 15 business days of any change in his or
her residency for Canadian and U.S. income tax purposes.
9
Grantee Bound by the Plan.
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by
all the terms and provisions thereof. In the event of a conflict between the terms of the Plan and
the terms of this Agreement, the terms of the Plan will govern. Capitalized terms used in this
Agreement that are not otherwise defined herein shall have the meanings attributed to such terms
in the Plan.
In the event of a separation of service as a result of the death or disability of the Grantee,
the payment in respect of the DSUs held by the Grantee shall be made to the Grantee's estate or
legal representatives, as applicable.
10
Modification of Agreement.
This Agreement may be modified, amended, suspended or terminated, and any terms or
conditions may be waived, but only by a written instrument executed by the Parties hereto; provided,
however, that (a) Grantee shall be deemed to have accepted, without signature required, the terms
and conditions of this Agreement applicable to future grants, unless notice of objection is made, as
described in Section 1 hereof and (b) nothing herein shall restrict the Committee's right to amend
this Agreement without the Grantee's consent and without additional consideration to the Grantee
to the extent necessary to avoid penalties arising under Section 409A of the Code, or to comply
with the requirements of Regulation 6801(d) under the Income Tax Act (Canada) (the "ITA"), even
if those amendments reduce, restrict or eliminate rights granted under this Agreement before those
amendments are adopted.
11
Notice.
All notices and other communications hereunder shall be in writing. Any notice, request,
demand, claim or other communication hereunder shall be deemed duly given if (and then three
business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid,
and addressed to the intended recipient as set forth below:
If to the Company:
Tim Hortons Inc.
874 Sinclair Road
Oakville, Ontario L6K 2Y1
Attn:
Executive Vice President, General Counsel and Secretary
4
Fax:
905-845-2931
If to Grantee:
Name:
Address:
Tel:
Fax:
Email:
Either party may send any notice or other communication hereunder to the intended recipient
at the address, facsimile number or electronic mail address set forth above using any other means
(including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail
or electronic mail), but no such notice, request, demand, claim or other communication will be
deemed to have been duly given unless and until it actually is received by the intended recipient.
Either party may change the address, facsimile number or electronic mail address to which notices
and other communications hereunder are to be delivered by giving the other parties notice in the
manner herein set forth.
12
Severability.
Should any provision of this Agreement be held by a court of competent jurisdiction to be
unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be
affected by such holding and shall continue in full force in accordance with their terms.
13
Governing Law.
The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.
14
Successors in Interest.
This Agreement shall inure to the benefit of and be binding upon any successor to the
Company. This Agreement shall inure to the benefit of the Grantee's legal representatives. All
obligations imposed upon the Grantee and all rights granted to the Company under this Agreement
shall be binding upon the Grantee's heirs, executors, administrators and successors.
15
Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a result of, or in any way relate
to, the interpretation, construction or application of this Agreement shall be determined by the
Committee. Any determination made hereunder shall be final, binding and conclusive on the
Grantee, the Grantee's heirs, executors, administrators and successors, and the Company and its
Subsidiaries for all purposes.
5
16
Entire Agreement.
This Agreement and the terms and conditions of the Plan, including the provisions of the
2012 Stock Plan to the extent specifically referred to herein or directly applicable to the terms hereof,
constitute the entire understanding between the Grantee and the Company and its Subsidiaries, and
supersede all other agreements, whether written or oral, with respect to the Award.
17
Headings.
The headings of this Agreement are inserted for convenience only and do not constitute a
part of this Agreement.
18
Counterparts.
This Agreement may be executed simultaneously in two or more counterparts, each of which
shall constitute an original, but all of which taken together shall constitute one and the same
agreement.
19
Compliance with Section 409A.
This Agreement is intended to satisfy the requirements of Section 409A of the Internal
Revenue Code of 1986, as amended (the "Code") and is intended not to be a "salary deferral
arrangement" (a "SDA") within the meaning of the ITA, and shall be interpreted and administered
consistent with such intent. To the extent that the interpretation and administration of this Agreement
in accordance with Section 409A of the Code would cause any of the arrangements contemplated
herein to be a SDA, then for any Grantee who is subject to the ITA and not subject to Section 409A
of the Code, the Agreement shall be interpreted and administered with respect to such Grantee so
that the arrangements are not SDAs. For Grantees subject to both Section 409A of the Code and
the ITA, the terms of the Awards shall be interpreted, construed, and given effect to achieve
compliance with both Section 409A of the Code and the ITA, to the extent practicable. If compliance
with both Section 409A of the Code and the ITA is not practicable in connection with the Awards
covered by this Agreement, the terms of the Awards and this Agreement remain subject to amendment
at the sole discretion of the Committee to reach a resolution of the conflict as it shall determine in
its sole discretion.
[SIGNATURE PAGE FOLLOWS ON NEXT PAGE]
6
TIM HORTONS INC.
By:
Name:
Title:
GRANTEE
By:
Name:
7
SCHEDULE A
Grant Date
Cash Value (Cdn.$)
on
Grant Date
# and Type of DSUs*
Director Residency
Total of DSUs as of <>: <>
* Specify Formula DSUs, Voluntary Formula DSUs, Elective DSUs or Discretionary DSUs.
Notice Regarding Administrative Decisions made by the Committee
•
Grants and settlements of DSUs shall be determined in accordance with the Equity Grant and Settlement
Policy (the "Policy") approved and adopted by the Human Resource and Compensation Committee of the
Board of Directors of the Company, as may be amended from time to time.
•
No interest or other compensation shall accrue as a result of the delay between the date of the Board
meeting and the actual DSU grant date as set forth in the Policy.
•
Consistent with Section 6 of the Agreement, DSUs are payable and will be settled in Canadian dollars.
Exhibit 10(e)
AMENDED AND RESTATED
DEFERRED STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)
(U.S. Directors)
Tim Hortons Inc.
Date
THIS AGREEMENT, made effective as of the
day of
,
(the “Effective
Date”) is between Tim Hortons Inc., a Federal corporation incorporated under the Canada Business
Corporations Act (the “Company”) and
(the “Grantee”);
WHEREAS, pursuant to Section 4 of the Tim Hortons Inc. Non-Employee Director
Deferred Stock Unit Plan (the "Plan"), the Company may grant, from time-to-time, to the Grantee
Elective DSUs, Formula DSUs, Voluntary Formula DSUs and Discretionary DSUs (all as defined
in the Plan and collectively referred to herein as "DSUs" or, individually, a "DSU") with related
Dividend Equivalent Rights;
AND WHEREAS, each grant of DSUs shall be evidenced by this Agreement, which
(together with the Plan), describes all the terms and conditions of the respective DSU grant;
AND WHEREAS, the Grantee serves as a director of the Company and is not otherwise
employed by the Company or its subsidiaries ("Subsidiaries") in any capacity and is therefore
eligible to participate in the Plan;
AND WHEREAS, subject to the terms of the Plan and this Agreement, the DSUs awarded
to the Grantee under this Agreement will vest and be paid to the Grantee after the Grantee ceases
to serve as a director of the Company;
AND WHEREAS, the Company has determined that the Grantee is subject to the tax laws
of the United States in respect of the DSUs granted hereunder;
NOW, THEREFORE, the Parties agree as follows:
1
Award.
1.1
The Company hereby grants to the Grantee awards (the "Awards") of the number of
Formula DSUs, Voluntary Formula DSUs, Elective DSUs and Discretionary DSUs as set out on
Schedule A hereto with an equal number of related Dividend Equivalent Rights on the date(s) of
grant (each, a "Grant Date") set forth on Schedule A. Grants of DSUs are subject to certain
administrative determinations to be made by the Human Resource and Compensation Committee
of the Company (the "Committee") from time-to-time, which are described on Schedule A and
1
which, unless otherwise specified on Schedule A, shall apply in respect of all existing and future
Awards; provided that no such administrative determination will impair the rights of the Grantee
without the consent of the Grantee, except as may be permitted pursuant to Section 11 of this
Agreement. Each DSU is a bookkeeping entry, equivalent in value to one common share of Company
or any other securities into which such share is converted or for which such share is exchanged
("Share"). Distributions and payments for DSUs and Dividend Equivalent Rights shall be made in
accordance with the terms of Section 5 and 6 hereof, respectively. The DSUs and related Dividend
Equivalent Rights granted pursuant to the Awards were subject to the execution and return of this
Agreement by the Grantee. On a quarterly basis, the Company will deliver to the Grantee an updated
Schedule A setting out the total number of DSUs that have been granted to the Grantee under the
Plan and pursuant to this Agreement from the Effective Date to the date of such Schedule. Grantee
shall be deemed to have (i) accepted and agreed to the terms and conditions of the Awards and other
information described on the Schedule and (ii) confirmed their agreement and acknowledgment
that the terms of this Agreement continue to apply in full force and effect to all such future Awards,
unless Grantee notifies the Company within 15 business days after receipt of the respective quarterly
Schedule A.
1.2
Each Dividend Equivalent Right is a bookkeeping entry, equivalent in value to the
cash dividends or other distributions that are or would be payable with respect to the number of
DSUs held by the Grantee if the DSUs were Shares. Dividend Equivalent Rights shall be converted
into additional DSUs based on the Fair Market Value of a Share on the date such dividend is paid.
"Fair Market Value" or "FMV" on any relevant date shall mean the closing price for Shares traded
on the Toronto Stock Exchange, or if the Committee elects on or prior to such date, the New York
Stock Exchange, for the immediately preceding date on which the Toronto Stock Exchange or New
York Stock Exchange, as applicable, is open for trading. Any additional DSUs granted pursuant to
this Section shall be subject to the same terms and conditions applicable to the DSU to which the
Dividend Equivalent Right relates, including, without limitation, the restrictions on transfer,
forfeiture, vesting and payment provisions contained in Sections 2 through 5, inclusive, of this
Agreement. In the event that a DSU is forfeited pursuant to Section 5 hereof, the related Dividend
Equivalent Right shall also be forfeited.
1.3
This Agreement shall be construed in accordance and consistent with, and subject
to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and,
except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall
have the same definitions as set forth in the Plan.
2
Restrictions on Transfer.
The DSUs and Dividend Equivalent Rights granted pursuant to this Agreement may not be
sold, transferred or otherwise disposed of and may not be pledged or otherwise hypothecated.
3
Vesting.
All DSUs and accompanying Dividend Equivalents Rights granted hereunder shall vest
upon the Grantee's separation from service. For purposes of this Agreement, "separation from
2
service" shall mean a "separation from service" within the meaning of Section 409A of the Internal
Revenue Code of 1986, as amended (the "Code"), and Treasury Regulation Section 1.409A-1(h).
4
Effect of Change of Shares Subject to the Plan.
In the event of a Change in Capitalization (as defined in the Tim Hortons Inc. 2012 Stock
Incentive Plan (the "2012 Stock Plan")), the Committee shall conclusively determine the appropriate
adjustments, if any, to the Grantee's outstanding DSUs. If adjustments are to be made, they shall
be made in the same manner as adjustments are made to awards that are outstanding under the 2012
Stock Plan. Adjusted DSUs shall remain subject to the same conditions that were applicable to the
DSUs prior to the adjustments, provided that, notwithstanding the foregoing, any adjustment to a
DSU shall be on the basis that the amounts payable under such DSU shall continue to depend on
the FMV of the Shares of the Company, or a corporation related thereto, at a time within the period
beginning one year before the Grantee's separation from service and ending at the time of receipt
of payment.
5
Distributions.
All DSUs granted to Grantee under the Agreement shall be paid out in a lump sum as soon
as administratively possible following separation from service, but no later than 30 days after
separation from service, unless the Grantee has filed an election, in accordance with the provisions
of Appendix A of the Plan, to defer the payment of the DSUs subject to such election.
Notwithstanding the foregoing, and for greater certainty, Formula DSUs (not including Voluntary
Formula DSUs or Elective DSUs) and, unless otherwise set out on Schedule A hereto with respect
to a specific Award, Discretionary DSUs, shall be forfeited and no payment shall be made in respect
thereof if the Grantee's separation from service is as a result of the Grantee being removed from
service due to the commission of an act of fraud or intentional misrepresentation or an act of
embezzlement, misappropriation or conversion of assets or opportunities of the Company or any
of its Subsidiaries.
6
Payment.
All DSUs shall be paid in cash based on the Fair Market Value of a Share on the date of the
Grantee's separation from service in accordance with the administrative determinations made by
the Committee from time-to-time regarding the payments of DSUs upon settlement, which shall be
noted on Schedule A from time-to-time, as applicable. Notwithstanding the foregoing, the Company
shall be entitled to withhold and/or deduct any and all amounts required to be withheld from any
payment hereunder on account of taxes or other governmental charges.
7
No Right to Continued Service.
Nothing in this Agreement or the Plan shall confer upon the Grantee any right to continuance
of service as a Board member or otherwise as an employee of the Company or any of its Subsidiaries.
3
8
Residency of Grantee.
The Grantee certifies that he or she is a citizen of, or resident in, the United States for
Canadian and U.S. tax purposes. The Grantee hereby agrees to notify the Company within 15
business days of any change in his or her residency for Canadian and U.S. income tax purposes.
9
Grantee Bound by the Plan.
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by
all the terms and provisions thereof. In the event of a conflict between the terms of the Plan and
the terms of this Agreement, the terms of the Plan will govern. Capitalized terms used in this
Agreement that are not otherwise defined herein shall have the meanings attributed to such terms
in the Plan.
In the event of a separation of service as a result of the death or disability of the Grantee,
the payment in respect of the DSUs held by the Grantee shall be made to the Grantee's estate or
legal representatives, as applicable.
10
Modification of Agreement.
This Agreement may be modified, amended, suspended or terminated, and any terms or
conditions may be waived, but only by a written instrument executed by the Parties hereto; provided,
however, that (a) Grantee shall be deemed to have accepted, without signature required, the terms
and conditions of this Agreement applicable to future grants, unless notice of objection is made, as
described in Section 1 hereof and (b) nothing herein shall restrict the Committee's right to amend
this Agreement without the Grantee's consent and without additional consideration to the Grantee
to the extent necessary to avoid penalties arising under Section 409A of the Code, or to comply
with the requirements of Regulation 6801(d) under the Income Tax Act (Canada) (the "ITA"), even
if those amendments reduce, restrict or eliminate rights granted under this Agreement before those
amendments are adopted.
11
Notice.
All notices and other communications hereunder shall be in writing. Any notice, request,
demand, claim or other communication hereunder shall be deemed duly given if (and then three
business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid,
and addressed to the intended recipient as set forth below:
If to the Company:
Tim Hortons Inc.
874 Sinclair Road
Oakville, Ontario L6K 2Y1
Attn:
Executive Vice President, General Counsel and Secretary
Fax:
905-845-2931
4
If to Grantee:
Name:
Address:
Tel:
Fax:
Email:
Either party may send any notice or other communication hereunder to the intended recipient
at the address, facsimile number or electronic mail address set forth above using any other means
(including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail
or electronic mail), but no such notice, request, demand, claim or other communication will be
deemed to have been duly given unless and until it actually is received by the intended recipient.
Either party may change the address, facsimile number or electronic mail address to which notices
and other communications hereunder are to be delivered by giving the other parties notice in the
manner herein set forth.
12
Severability.
Should any provision of this Agreement be held by a court of competent jurisdiction to be
unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be
affected by such holding and shall continue in full force in accordance with their terms.
13
Governing Law.
The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein
and, to the extent applicable, the Code.
14
Successors in Interest.
This Agreement shall inure to the benefit of and be binding upon any successor to the
Company. This Agreement shall inure to the benefit of the Grantee's legal representatives. All
obligations imposed upon the Grantee and all rights granted to the Company under this Agreement
shall be binding upon the Grantee's heirs, executors, administrators and successors.
15
Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a result of, or in any way relate
to, the interpretation, construction or application of this Agreement shall be determined by the
Committee. Any determination made hereunder shall be final, binding and conclusive on the
Grantee, the Grantee's heirs, executors, administrators and successors, and the Company and its
Subsidiaries for all purposes.
5
16
Entire Agreement.
This Agreement and the terms and conditions of the Plan, including the provisions of the
2012 Stock Plan to the extent specifically referred to herein or directly applicable to the terms hereof,
constitute the entire understanding between the Grantee and the Company and its Subsidiaries, and
supersede all other agreements, whether written or oral, with respect to the Award.
17
Headings.
The headings of this Agreement are inserted for convenience only and do not constitute a
part of this Agreement.
18
Counterparts.
This Agreement may be executed simultaneously in two or more counterparts, each of which
shall constitute an original, but all of which taken together shall constitute one and the same
agreement.
19
Compliance with Section 409A.
This Agreement is intended to satisfy the requirements of Section 409A of the Code and is
intended not to be a "salary deferral arrangement" (a "SDA") within the meaning of the ITA, and
shall be interpreted and administered consistent with such intent. To the extent that the interpretation
and administration of this Agreement in accordance with Section 409A of the Code would cause
any of the arrangements contemplated herein to be a SDA, then for any Grantee who is subject to
the ITA and not subject to Section 409A of the Code, the Agreement shall be interpreted and
administered with respect to such Grantee so that the arrangements are not SDAs. For Grantees
subject to both Section 409A of the Code and the ITA, the terms of the Awards shall be interpreted,
construed, and given effect to achieve compliance with both Section 409A of the Code and the ITA,
to the extent practicable. If compliance with both Section 409A of the Code and the ITA is not
practicable in connection with the Awards covered by this Agreement, the terms of the Awards and
this Agreement remain subject to amendment at the sole
6
discretion of the Committee to reach a resolution of the conflict as it shall determine in its
sole discretion.
TIM HORTONS INC.
By:
Name:
Title:
GRANTEE
By:
Name:
7
SCHEDULE A
Grant Date
Cash Value (Cdn.$)
on
Grant Date
# and Type of DSUs*
Director Residency
Total DSUs as of <>: <>
* Specify Formula DSUs, Voluntary Formula DSUs, Elective DSUs or Discretionary DSUs.
Notice Regarding Administrative Decisions made by the Committee
•
Grants and settlements of DSUs shall be determined in accordance with the Equity Grant and Settlement
Policy (the "Policy") approved and adopted by the Human Resource and Compensation Committee of the
Board of Directors of the Company, as may be amended from time to time.
•
No interest or other compensation shall accrue as a result of the delay between the date of the Board
meeting and the actual DSU grant date as set forth in the Policy.
•
Consistent with Section 6 of the Agreement, DSUs are payable and will be settled in Canadian dollars. For
a director subject to U.S. taxation in respect of his or her DSUs, the Canadian dollars will be translated into
U.S. dollars as of the date of separation of service, unless the director provides notice to the Company that
he or she would like to receive Canadian dollars; provided, however, that additional deferrals under the
U.S. Non-Employee Director Deferred Compensation Plan (for DSUs granted in respect of 2009 and prior
years' services) or in accordance with Appendix A of the Plan (for all other awards) can be made only in
U.S. dollars.
Exhibit 31(a)
CERTIFICATION OF PERIODIC REPORT
UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Marc Caira, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: August 6, 2014
/s/ MARC CAIRA
Name: Marc Caira
Title: Chief Executive Officer
Exhibit 31(b)
CERTIFICATION OF PERIODIC REPORT
UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Cynthia J. Devine, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: August 6, 2014
/s/ CYNTHIA J. DEVINE
Name: Cynthia J. Devine
Title: Chief Financial Officer
Exhibit 32(a)
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended June 29, 2014 of
Tim Hortons Inc. (the “Issuer”).
I, Marc Caira, the Chief Executive Officer of Issuer certify that, to the best of my knowledge:
(i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results
of operations of the Issuer.
Dated: August 6, 2014
/s/ MARC CAIRA
Name: Marc Caira
*
This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed”
for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent that the Company specifically incorporates this certification therein by reference.
Exhibit 32(b)
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended June 29, 2014 of
Tim Hortons Inc. (the “Issuer”).
I, Cynthia J. Devine, the Chief Financial Officer of Issuer certify that, to the best of my knowledge:
(i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results
of operations of the Issuer.
Dated: August 6, 2014
/s/ CYNTHIA J. DEVINE
Name: Cynthia J. Devine
*
This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed”
for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent that the Company specifically incorporates this certification therein by reference.
Exhibit 99
TIM HORTONS INC.
Safe Harbor Under the Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage
companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those
disclosed in the statement. Canadian securities laws have corresponding safe harbor provisions, subject to certain additional
requirements including the requirement to state the assumptions used to make the forecasts set out in forward-looking statements.
Tim Hortons Inc. (the “Company”) desires to take advantage of these “safe harbor” provisions.
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-totime include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future
results, our strategic goals, our aspirations, our strategic priorities, and the economic and business outlook for us, for each of our
business segments, and for the economy generally. Many of the factors that could determine our future performance are beyond our
ability to control or predict. The following factors, in addition to other factors set forth in our Form 10-K filed on February 25,
2014 (“Form 10-K”), as updated in the Quarterly Report on Form 10-Q filed on August 6, 2014, with the U.S. Securities and
Exchange Commission (“SEC”) and the Canadian Securities Administrators (“CSA”), and in other press releases, communications,
or filings made with the SEC or the CSA, could cause our actual results to differ materially from the expectation(s) included in
forward-looking statements 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 our
securities analysts or investors, or otherwise fail to perform as expected, (iv) experience a decline and/or increased volatility in the
market price of its stock, (v) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase
programs, or (vi) increase costs at the corporate or 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.
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 material increase in competition or
in volume or type of competitive activity within the quick service restaurant segment of the food service industry; (iv) 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) continuing positive working relationships with the majority of the Company’s restaurant owners; (vii) the
absence of any material adverse effects arising as a result of litigation; (viii) there being no significant change in the Company’s
ability to comply with current or future regulatory requirements; (ix) the ability to retain our senior management team or the
inability to attract and retain new qualified personnel; (x) the Company’s ability to maintain investment grade credit ratings; (xi)
the Company’s 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 purposes.
Factors Affecting Growth and Other Important Strategic Initiatives. The Company’s growth strategy and other strategic
initiatives may not be successful and may expose the Company to certain risks, including the following:
•
•
There can be no assurance that the Company will be able to achieve new restaurant or same-store sales growth objectives,
that new restaurants will be profitable or that strategic initiatives will be successfully implemented. Early in the
development of new markets, the opening of new restaurants may negatively impact the same-store sales growth and
profitability of existing restaurants in the market. When the Company enters new markets, it may be necessary to extend
or provide relief and support programs for restaurant owners which could increase costs and thus decrease net income.
The Company may enter markets where its brand is not well known and where it has little or no operating experience.
New markets may have different competitive conditions, consumer tastes or discretionary spending patterns than existing
markets and/or higher construction, occupancy, and operating costs for 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 or may never do so, thereby affecting overall financial condition and/or financial
results. The Company will need to build brand awareness in those markets it enters through advertising and promotional
activity which may not be as effective as intended.
The Company may rationalize and close underperforming restaurants in order to improve overall profitability. Such
closures may be accompanied by impairment charges, closure costs, and/or valuation allowances that may have a negative
impact on earnings.
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 or economic conditions change. If the Company cannot obtain
desirable locations for restaurants at reasonable prices, then the Company’s ability to affect its growth strategy will be
adversely affected.
The Company has vertically integrated manufacturing, warehouse and distribution capabilities which may, at times, result
in delays or difficulties.
The Company intends to evaluate potential mergers, acquisitions, joint-venture investments, alliances, vertical integration
opportunities and divestitures, which are subject to many of the same risks that also affect new store development as well
as various other risks. There can be no assurance that the Company will be able to complete desirable transactions.
The Company may continue to pursue strategic alliances (including co-branding) with third parties but there can be no
assurance that new strategic partners can be found, that current strategic alliances can be maintained or that significant
value will be recognized through such strategic alliances. Furthermore, such relationships as well as the expansion of the
Company’s current business through other similar initiatives may expose it to additional risks that may adversely affect
the Company’s brand and business.
The Company’s financial outlook and long-range targets are based on the successful implementation, execution and guest
acceptance of the Company’s strategic plans and initiatives. Accordingly, the failure of any of these criteria could cause
the Company to fall short of achieving its financial objectives and long-range aspirational goals.
The Importance of Canadian Segment Performance and Brand Reputation. The Company’s success is largely dependent
upon its ability to maintain and enhance the value of its brand, guests’ connection to and perception of the brand, and a positive
relationship with 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 beyond the
Company’s control and may damage the 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, labor matters, public policy or social issues, or
otherwise; litigation and claims; failure of, or security breaches or other fraudulent activities associated with, the Company’s
networks and systems; illegal activity targeted at the Company; negative incidents occurring at or affecting business partners,
suppliers, affiliates, or corporate social responsibility programs of the Company; the quality of products from vertically integrated
manufacturing facilities or the Company’s other suppliers; negative comments about us or improper disclosure of proprietary or
personal information on social media; and negative publicity, whether true or not.
The Tim Hortons brand is synonymous with the delivery of quality food products at value prices. If the Company is unable to
maintain in Canada, or unable to maintain and/or achieve in other markets, an appropriate price-to-value relationship for its products
in the minds of guests, its ability to increase or maintain same-store sales may be affected. The ability of the Company 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. Furthermore, the Company’s financial performance is highly dependent on its Canadian business unit
and any substantial or sustained decline in its Canadian business would materially and adversely affect the overall financial performance
of the Company.
Competition. The quick service restaurant segment of the food service industry is intensely competitive. The Company
competes 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 the Company is unable to maintain its competitive position there could be a
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.
Innovation. The success of the Company’s same-store sales growth strategy is dependent partly on its ability to extend
product offerings, introduce innovative new products, adapt to consumer trends and desires, achieve the hospitality and speed of
service standards expected by guests and provide a distinctive and overall quality guest experience. The Company’s ability to
develop commercially successful new products will depend on its ability to gather sufficient data and effectively gauge the
direction of trends and identify, develop, manufacture, market and sell new or improved products in response to such trends. The
speed of service and capacity in Tim Hortons restaurants may be impacted by new product offerings which could have an adverse
effect on financial conditions or results of operations.
Commodities. The Company is exposed to price volatility in connection with certain key commodities that it purchases in
the ordinary course of business such as coffee, wheat, edible oils and sugar, which can impact revenues, costs and margins.
Although the Company monitors its exposure to commodity prices and its forward hedging program partially mitigates the
negative impact of any cost increases, price volatility for commodities it purchases has increased due to conditions beyond its
control, including economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage
and changing consumer demand and consumption patterns. Increases and decreases in commodity costs are largely passed through
to restaurant owners and the Company and its restaurant owners have some ability to increase product pricing to offset a rise in
commodity prices, subject to restaurant owner and guest acceptance. The Company may choose not to pass along all commodity
cost increases to its restaurant owners which could have a significant effect on the business and results of operations of the
Company. Price fluctuations may also impact margins as many of these commodities are typically priced based on a fixed-dollar
mark-up. Although the Company generally secures commitments for most of its key commodities that generally extend over a sixmonth period, these may be at higher prices than its previous commitments. If the supply or quality of commodities, including
coffee, fails to meet demand or quality standards, the Company’s restaurant owners may experience reduced sales which would
reduce rents and royalty income as well as distribution income of the Company. Such a reduction in the Company’s income may
adversely impact the Company’s business and financial results.
Food Safety and Health Concerns. Incidents or reports, whether true or not, of: unclean water; food-borne illness; food
tampering, food contamination, product recall, hygiene and cleanliness failures or impropriety at Tim Hortons, or other quick
service restaurants unrelated to Tim Hortons, or potential health impacts of consuming certain of the Company’s products,
including its core products, could result in negative publicity, damage to the Company’s brand value and, potentially, product
liability or other claims. Any decrease in guest traffic or temporary closure of any of the Company’s restaurants as a result of such
incidents or negative publicity may have a material adverse effect on the business, results of operations and financial condition of
the Company.
Distribution Operations and Supply Chain. The Company’s distribution operations and supply chain may be impacted by
various factors, some of which are beyond its control, that could injure its brand and negatively affect results of operations 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 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 the
Company’s food and beverage products and/or their ingredients; potential cost and disruption of a product recall; potential negative
impacts on the Company’s relationship with restaurant owners associated with an increase of required purchases, or prices, of
products purchased from its distribution business; and political, physical, environmental, labor, or technological disruptions in
manufacturing and/or warehousing plants, facilities, or equipment.
Importance of Restaurant Owners. A substantial portion of the Company’s earnings come from royalties and other amounts
paid by restaurant owners, who operate substantially all of the Tim Hortons restaurants. Accordingly, the Company’s financial
results are, to a large extent, dependent upon the operational and financial success of Tim Hortons restaurant owners. There can be
no assurance that the Company will be able to maintain positive relationships with existing restaurant owners or attract sufficient
numbers of qualified restaurant owners, either of which could materially and adversely affect its business and operating results.
Furthermore, success of the Company’s same-store sales growth strategy and brand reputation is dependent on, among other
things, achievement of hospitality, operational standards, and a positive overall guest experience. There can be no assurance that
the Company and restaurant team members will be able to continue to attract, retain and motivate sufficient numbers of qualified
restaurant employees who will be able and willing to achieve the hospitality and operational restaurant-level standards of the
Company. Restaurant owners are independent contractors and some restaurant owners may not successfully operate restaurants in a
manner consistent with the Company’s standards and requirements or comply with federal, provincial or state labor laws (including
minimum wage requirements, overtime, working and safety conditions, employment eligibility and temporary foreign worker
requirements). Furthermore, some restaurant owners 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 the Company,
thus damaging its brand reputation and potentially affecting revenues and profitability. Competitors that have a significantly
higher percentage of company-operated restaurants than Tim Hortons may have greater control over their respective restaurant
systems and have greater flexibility to implement operational initiatives and business strategies. Since the Company receive
revenues in the form of rents, royalties, and franchise fees from restaurant owners, its revenues and profits would decline and its
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; be unwilling or unable to pay for food and
supplies, or for royalties, rent or other fees; fail to enter into renewals of franchise, operating or license agreements; or experience
labor shortages, including due to changes in employment eligibility requirements, the cessation or limitation of access to federal or
provincial labor programs, including the temporary foreign worker program, or significant increases in labor or other costs of
running their businesses.
Litigation. From time to time, the Company is subject to claims incidental to its business, such as “slip and fall” accidents
at franchised or Company-operated restaurants, claims and disputes in connection with site development and restaurant
construction as well as employment claims. In addition, class action lawsuits have been filed in the past, and may continue to be
filed, against quick service restaurants alleging that quick service restaurants have failed to disclose the health risks associated with
their products or that certain food products contribute to obesity. The Company may also be subject to claims from employees,
guests, and others relating to health and safety risks and conditions of Tim Hortons restaurants associated with design, operation,
construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations. In
addition, the Company may face claims from: (a) employees relating to employment or labor matters, including, potentially, class
action suits regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, or overtime
compensation; (b) 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. In certain agreements, the Company may agree to indemnify its business partners against
any losses or costs incurred in connection with claims by a third party alleging that the Company’s 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. The Company, or its partners, may
become subject to claims for infringement and it may be required to indemnify or defend its business partners from such claims.
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. The Company’s current exposure with respect to pending legal matters could change if
determinations by judges and other finders of fact are not in accordance with management’s evaluation of such claims. Should
management’s evaluations prove incorrect and such claims are successful, the Company’s exposure could exceed expectations and
have a material adverse effect on its 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 Authorities. A taxation authority may disagree with certain views of the Company, including, for example, the
allocation of profits by tax jurisdiction, the deductibility of interest expenses, or the tax aspects of reorganizations, initiatives or
transactions that the Company has undertaken and such tax authority may take the position that material income tax liabilities,
interests, penalties, or other amounts are payable by the Company. The Company expects it would contest such an assessment, but
this may be lengthy and costly and, if unsuccessful, the implications could be materially adverse to the Company and affect its
effective tax rate or operating income. Under the Company’s current corporate structure, an increase in debt levels beyond the
current target of $900.0 million could result in further increases in the effective tax rate resulting from incurring additional interest
expense for which it may not receive a tax benefit, and/or increases in income or withholding taxes on distributions from the
Canadian operating company to its parent corporation. Addressing constraints in the Company’s corporate structure is an important
consideration to maintaining its effective tax rate over the longer term, although there can be no assurance that the Company will
be able to address these constraints in a timely or tax efficient manner. The Company’s inability to address these constraints in a
timely or efficient manner could negatively affect its projected results, future operations, and financial condition.
Regulation. The Company is subject to various laws and regulations, including laws and regulations 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
labor 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, the Company’s and restaurant owners’ labor costs in
those provinces and states; 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; new and/or additional franchise legislation; and anti-corruption laws. The Company is 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 the Company operates and
the related costs of compliance are increasing. Changes in such laws and regulations and/or failure to comply with existing or
future laws and regulations could adversely affect the Company and expose it to litigation or sanction, damage its brand reputation
and/or lower profits. Compliance with these laws and regulations and planning initiatives undertaken in connection with such laws
and regulations could increase the Company’s cost of doing business; reduce operational efficiencies; and, damage its reputation.
Increases in costs could impact profitability of the Company and 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 the business and future financial results of the Company and have an adverse impact on its brand.
Senior Management Team. The Company’s success will continue to depend to a significant extent on its executive
management team and the ability of other key management personnel to replace executives who retire or resign. The Company
may not be able to retain its executive officers and key personnel or attract additional qualified management personnel to replace
executives who retire or resign. Failure to retain the leadership team of the Company and attract and retain other important
personnel could lead to ineffective management and operations, which could decrease profitability. Effective July 2, 2013, the
board of directors of the Company 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.
Reliance on Systems. If the network and information systems and other technology systems that are integral to retail
operations at system restaurants and at the Company’s manufacturing and distribution facilities, and at its office locations are
damaged or interrupted 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 the Company and its guests, restaurant owners and employees, including a disruption of
its operations, guest dissatisfaction or a loss of guests or revenues. The Company relies on third-party vendors to retain data,
process transactions and provide certain services. In the event of failure in such third-party vendors’ systems and processes, the
Company could experience business interruptions or privacy and/or security breaches surrounding its data. The Company
continues to enhance its integrated enterprise resource planning system. The introduction of new modules for inventory
replenishment, sustainability, and business reporting and analysis will be implemented. There may be risks associated with
adjusting to and supporting the new modules which may impact the Company’s relations with its restaurant owners, vendors and
suppliers and the conduct of its business generally. If the Company fails to comply with new and/or increasingly demanding laws
and regulations regarding the protection of guest, supplier, vendor, restaurant owner, employee and/or business data, or if the
Company (or a third-party with which it has entered into a strategic alliance) experiences a significant breach of guest, supplier,
vendor, restaurant owner, employee or Company data, the Company’s reputation could be damaged and result in lost sales, fines,
lawsuits and diversion of management attention. The use of electronic payment systems and the Company’s reloadable cash card
makes it more susceptible to a risk of loss in connection with these issues, particularly with respect to an external security breach
of guest information that the Company, or third parties under arrangement(s) with it, control.
Other Significant Risk Factors. The following factors could also cause the Company’s actual results to differ from its
expectations: (i) fluctuations in the U.S. and Canadian dollar exchange rates; (ii) an inability to adequately protect the Company’s
intellectual property and trade secrets from infringement actions or unauthorized use by others; (iii) potential liabilities and losses
associated with owning and leasing significant amounts of real estate; (iv) changes in its debt levels and a downgrade of its credit
ratings; (v) challenging economic conditions; (vi) uncertain international expansion; (vii) catastrophic events; and (viii) certain
anti-takeover provisions that may have the effect of delaying or preventing a change in control.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date and time
made. Except as required by federal or provincial securities laws, the Company undertakes no obligation to publicly release any
revisions to forward-looking statements, or to update them to reflect events or circumstances occurring after the date forwardlooking statements are made, or to reflect the occurrence of unanticipated events.