Tim Hortons Inc. (Form: 10-Q, Received: 05/08/2013 07:45:32)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

¨	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 x 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 x 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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at May 6, 2013
Common shares		153,113,384 shares

Exhibit Index on page 41.

TIM HORTONS INC. AND SUBSIDIARIES

INDEX


	Pages

PART I: Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Operations for the first quarter ended March 31, 2013 and April 1, 2012		3
Condensed Consolidated Statement of Comprehensive Income for the first quarter ended March 31, 2013 and April 1, 2012		4
Condensed Consolidated Balance Sheet as at March 31, 2013 and December 30, 2012		5
Condensed Consolidated Statement of Cash Flows for the first quarter ended March 31, 2013 and April 1, 2012		6
Condensed Consolidated Statement of Equity for the first quarter ended March 31, 2013 and December 30, 2012		7
Notes to the Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		36
Item 4. Controls and Procedures		36
PART II: Other Information
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 6. Exhibits		39
Signature		40
Index to Exhibits		41

On May 3, 2013, 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$0.9924 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 website and such information should not be considered part of this documents.

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.

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 per share data)


	First quarter ended
	March 31, 2013			April 1, 2012
Revenues
Sales (note 13)	$	523,887		$	523,302
Franchise revenues
Rents and royalties		187,454			180,186
Franchise fees		20,196			17,796

		207,650			197,982

Total revenues		731,537			721,284

Costs and expenses
Cost of sales (note 13)		461,354			464,920
Operating expenses		75,733			65,925
Franchise fee costs		22,552			20,282
General and administrative expenses		38,668			41,423
Equity (income)		(3,349	)		(3,246	)
Corporate reorganization expenses (note 2)		9,475			0
Other (income) expense, net		(813	)		357

Total costs and expenses, net		603,620			589,661

Operating income		127,917			131,623
Interest (expense)		(8,663	)		(7,898	)
Interest income		928			711

Income before income taxes		120,182			124,436
Income taxes		33,259			34,457

Net income		86,923			89,979
Net income attributable to noncontrolling interests (note 12)		752			1,200

Net income attributable to Tim Hortons Inc.	$	86,171		$	88,779

Basic earnings per common share attributable to Tim Hortons Inc. (note 3)	$	0.56		$	0.57

Diluted earnings per common share attributable to Tim Hortons Inc. (note 3)	$	0.56		$	0.56

Weighted average number of common shares outstanding (in thousands) — Basic (note 3)		153,091			156,993

Weighted average number of common shares outstanding (in thousands) — Diluted (note 3)		153,548			157,490

Dividends per common share	$	0.26		$	0.21

See accompanying Notes to the Condensed Consolidated Financial Statements.

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands of Canadian dollars)


	First quarter ended
	March 31, 2013			April 1, 2012
Net income	$	86,923		$	89,979
Other comprehensive income (loss)
Translation adjustments gain (loss)		8,177			(7,836	)
Unrealized gains (losses) from cash flow hedges (note 8):
Gain (loss) from change in fair value of derivatives		2,772			(3,502	)
Amount of gain (loss) reclassified to earnings during the year		663			(1,148	)
Tax (expense) recovery on other comprehensive gain (loss) (note 8)		(992	)		1,285

Other comprehensive income (loss)		10,620			(11,201	)

Comprehensive income		97,543			78,778
Comprehensive income attributable to noncontrolling interests		752			1,200

Comprehensive income attributable to Tim Hortons Inc.	$	96,791		$	77,578

See accompanying Notes to the Condensed Consolidated Financial Statements.

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(in thousands of Canadian dollars, except share and per share data)


	As at
	March 31, 2013			December 30, 2012
Assets
Current assets
Cash and cash equivalents	$	74,641		$	120,139
Restricted cash and cash equivalents		104,021			150,574
Accounts receivable, net		211,137			171,605
Notes receivable, net (note 4)		5,932			7,531
Deferred income taxes		7,758			7,142
Inventories and other, net (note 5)		108,796			107,000
Advertising fund restricted assets (note 12)		43,543			45,337

Total current assets		555,828			609,328
Property and equipment, net		1,570,769			1,553,308
Intangible assets, net		3,423			3,674
Notes receivable, net (note 4)		5,672			1,246
Deferred income taxes		10,716			10,559
Equity investments		41,644			41,268
Other assets		71,326			64,796

Total assets	$	2,259,378		$	2,284,179

Liabilities and equity
Current liabilities
Accounts payable (note 6)	$	134,391		$	169,762
Accrued liabilities
Salaries and wages		13,969			21,477
Taxes		15,002			8,391
Other (note 6)		149,581			197,871
Deferred income taxes		581			197
Advertising fund liabilities (note 12)		44,542			44,893
Current portion of long-term obligations		19,337			20,781

Total current liabilities		377,403			463,372

Long-term obligations
Long-term debt		358,470			359,471
Long-term debt – Advertising fund		46,411			46,849
Capital leases		107,725			104,383
Deferred income taxes		10,049			10,399
Other long-term liabilities (note 6)		113,020			109,614

Total long-term obligations		635,675			630,716

Commitments and contingencies (note 9)
Equity
Equity of Tim Hortons Inc.
Common shares ($2.84 stated value per share), Authorized: unlimited shares, Issued: 153,404,839 shares		435,033			435,033
Common shares held in Trust, at cost: 314,334 shares and 316,923 shares, respectively		(13,247	)		(13,356	)
Contributed surplus		11,516			10,970
Retained earnings		939,853			893,619
Accumulated other comprehensive loss		(128,408	)		(139,028	)

Total equity of Tim Hortons Inc.		1,244,747			1,187,238
Noncontrolling interests (note 12)		1,553			2,853

Total equity		1,246,300			1,190,091

Total liabilities and equity	$	2,259,378		$	2,284,179

See accompanying Notes to the Condensed Consolidated Financial Statements.

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(in thousands of Canadian dollars)


	First quarter ended
	March 31, 2013			April 1, 2012
Cash flows provided from (used in) operating activities
Net income	$	86,923		$	89,979
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		35,638			30,956
Stock-based compensation expense (note 11)		7,387			7,181
Deferred income taxes		(1,113	)		303
Changes in operating assets and liabilities
Restricted cash and cash equivalents		46,766			44,630
Accounts receivable		(37,849	)		(19,799	)
Inventories and other		(5,331	)		(11,148	)
Accounts payable and accrued liabilities		(87,073	)		(70,481	)
Taxes		6,597			(12,572	)
Other		(3,741	)		7,329

Net cash provided from operating activities		48,204			66,378

Cash flows (used in) provided from investing activities
Capital expenditures		(47,479	)		(34,269	)
Capital expenditures - Advertising fund (note 12)		(2,761	)		(14,014	)
Other investing activities		1,601			960

Net cash (used in) investing activities		(48,639	)		(47,323	)


Cash flows (used in) provided from financing activities
Repurchase of common shares (note 10)		0			(86,416	)
Dividend payments to common shareholders		(39,885	)		(33,046	)
Short-term borrowings		0			25,000
Principal payments on long-term debt obligations		(4,488	)		(2,045	)
Other financing activities		(1,414	)		9,736

Net cash (used in) financing activities		(45,787	)		(86,771	)

Effect of exchange rate changes on cash		724			(1,011	)

(Decrease) in cash and cash equivalents		(45,498	)		(68,727	)
Cash and cash equivalents at beginning of period		120,139			126,497

Cash and cash equivalents at end of period	$	74,641		$	57,770

Supplemental disclosures of cash flow information:
Interest paid	$	5,297		$	4,656
Income taxes paid	$	35,178		$	53,190
Non-cash investing and financing activities:
Capital lease obligations incurred	$	6,241		$	4,439

See accompanying Notes to the Condensed Consolidated Financial Statements.

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(in thousands of Canadian dollars or thousands of common shares)


	Common Shares						Common Shares Held in the Trust											AOCI ⁽¹⁾
	Number			$			Number			$			Contributed Surplus $		Retained Earnings $			Translation Adjustment $			Cash Flow Hedges $			Total Equity THI $			NCI ⁽²⁾ $			Total Equity $
Balance as at January 1, 2012		157,815		$	447,558			(277	)	$	(10,136	)	$	6,375	$	836,968		$	(128,170	)	$	(47	)	$	1,152,548		$	1,885		$	1,154,433
Repurchase of common shares ⁽³⁾		(4,410	)		(12,525	)		(112	)		(6,154	)		0		(212,675	)		0			0			(231,354	)		0			(231,354	)
Disbursed or sold from the Trust ⁽⁴⁾		0			0			72			2,934			0		0			0			0			2,934			0			2,934
Stock based compensation		0			0			0			0			4,595		(2,143	)		0			0			2,452			0			2,452
Other comprehensive income		0			0			0			0			0		0			(7,268	)		(3,543	)		(10,811	)		0			(10,811	)
NCI transactions		0			0			0			0			0		(907	)		0			0			(907	)		907			0
Net income attributable to NCI		0			0			0			0			0		0			0			0			0			4,881			4,881
Net income attributable to THI		0			0			0			0			0		402,885			0			0			402,885			0			402,885
Dividends and distributions, net		0			0			0			0			0		(130,509	)		0			0			(130,509	)		(4,820	)		(135,329	)

Balance as at December 30, 2012		153,405		$	435,033			(317	)	$	(13,356	)	$	10,970	$	893,619		$	(135,438	)	$	(3,590	)	$	1,187,238		$	2,853		$	1,190,091
Disbursed or sold from the Trust ⁽⁴⁾		0			0			3			109			0		0			0			0			109			0			109
Stock based compensation		0			0			0			0			546		0			0			0			546			0			546
Other comprehensive income before reclassifications ⁽⁵⁾		0			0			0			0			0		0			8,177			1,910			10,087			0			10,087
Amounts reclassified from AOCI ⁽⁵⁾		0			0			0			0			0		0			0			533			533			0			533
NCI transactions		0			0			0			0			0		(52	)		0			0			(52	)		52			0
Net income attributable to NCI		0			0			0			0			0		0			0			0			0			752			752
Net income attributable to THI		0			0			0			0			0		86,171			0			0			86,171			0			86,171
Dividends and distributions, net		0			0			0			0			0		(39,885	)		0			0			(39,885	)		(2,104	)		(41,989	)

Balance as at March 31, 2013		153,405		$	435,033			(314	)	$	(13,247	)	$	11,516	$	939,853		$	(127,261	)	$	(1,147	)	$	1,244,747		$	1,553		$	1,246,300

⁽¹⁾	Accumulated other comprehensive income.

⁽²⁾	Noncontrolling interests.

⁽³⁾	Amounts reflected in Retained earnings represent consideration in excess of the stated value.

⁽⁴⁾	Amounts are net of tax (see note 11).

⁽⁵⁾	Amounts are net of tax (see note 8).

See accompanying Notes to the Condensed Consolidated Financial Statements.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business

Tim Hortons Inc. is a corporation governed by the Canada Business Corporations Act . References herein to “Tim Hortons,” or the “Company” refer to Tim Hortons Inc. and its subsidiaries. The Company’s principal business is the development and franchising of quick service restaurants primarily in Canada and the U.S., that serve premium coffee, espresso-based hot and cold specialty drinks, including lattes, cappuccinos, espresso shots, specialty teas and fruit smoothies, fresh baked goods, grilled Panini and classic sandwiches, wraps, soups, prepared foods and other food products. As the franchisor, we collect royalty revenue from franchised restaurant sales. The Company also controls the real estate underlying a substantial majority of the system restaurants, which generates another source of revenue. In addition, the Company has vertically integrated manufacturing, warehouse and distribution operations which supply a significant portion of our system restaurants with coffee and other beverages, non-perishable food, supplies, packaging and equipment.

The following table outlines the Company’s systemwide restaurant counts and activity:


	First quarter ended
	March 31, 2013			April 1, 2012
Systemwide Restaurant Count
Franchised restaurants in operation—beginning of period		4,242			3,996
Restaurants opened		33			30
Restaurants closed		(10	)		(2	)
Net transfers within the franchised system		6			(5	)

Franchised restaurants in operation—end of period		4,271			4,019
Company-operated restaurants		17			23

Total systemwide restaurants—end of period ⁽¹⁾		4,288			4,042

% of restaurants franchised—end of period		99.6	%		99.4	%

⁽¹ ⁾

Includes various types of standard and non-standard restaurant formats in Canada, the U.S. and the Gulf Cooperation Council (“GCC”) with differing restaurant sizes and menu offerings as well as self-serve kiosks, which serve primarily coffee products and a limited product selection. Collectively, the Company refers to all of these restaurants and kiosks as “systemwide restaurants.”

Excluded from the above table are 246 primarily licensed locations in the Republic of Ireland and the United Kingdom as at March 31, 2013 (first quarter fiscal 2012: 253 restaurants).

Basis of presentation and principles of consolidation

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 March 31, 2013, and the results of operations, comprehensive income and cash flows for the first quarters ended March 31, 2013 and April 1, 2012. These Condensed Consolidated Financial Statements should be read in conjunction with the 2012 Consolidated Financial Statements which are contained in the Company’s Annual Report on Form 10-K filed with the SEC and the CSA on February 21, 2013. The December 30, 2012 Condensed Consolidated Balance Sheet was derived from the audited 2012 Consolidated Financial Statements, but does not include all of the year-end disclosures required by U.S. GAAP.

The Condensed Consolidated Financial Statements include the results and balances of Tim Hortons Inc., its wholly-owned subsidiaries and certain entities and joint-ventures which the Company consolidates as variable interest entities (“VIEs”) (see note 12). Intercompany accounts and transactions among consolidated entities have been eliminated upon consolidation. Investments in non-consolidated affiliates over which the Company exercises significant influence, but for which the Company is not the primary beneficiary and does not have control, are accounted for using the equity method. The Company’s share of the earnings or losses of these non-consolidated affiliates is included in equity income, which is included as part of operating income since these investments are operating ventures closely integrated into the Company’s business operations.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

Accounting changes – new accounting standards

In the first quarter of fiscal 2013, we prospectively adopted Accounting Standards Update (“ASU”) No. 2013-02- Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires additional disclosure of significant reclassifications out of comprehensive income into net income, if the amount is required to be reclassified in its entirety (see Condensed Consolidated Statement of Equity and note 8).

NOTE 2

CORPORATE REORGANIZATION EXPENSES

The Company completed the realignment of roles and responsibilities under its new organizational structure at the end of the first quarter of fiscal 2013, and incurred termination costs and professional fees and other as set forth in the table below:


	March 31, 2013
Termination costs	$	6,632
Professional fees and other		2,543
CEO transition costs		300

Total Corporate reorganization expenses	$	9,475

The Company also incurred CEO transition costs in the first quarter of fiscal 2013, related primarily to an employment agreement with an executive officer, and retention agreements with certain senior executives. The retention agreements provide bonuses to certain senior executives if they remain employed for a specified time period subsequent to the transition to a new CEO. The expense is being recognized over the estimated service period of these agreements. The Company has accrued $0.8 million as at March 31, 2013 relating to the retention agreements, for which the total expense may be up to $2.8 million.

The Company does not anticipate incurring significant additional costs related to the reorganization, with the exception of CEO transition costs, the amount of which is not yet determined.


	Termination costs			Professional fees and other			CEO transition charges			Total
Cost incurred during fiscal 2012	$	9,016		$	7,602		$	2,256		$	18,874
Paid during fiscal 2012		(1,458	)		(3,775	)		(411	)		(5,644	)

Accrued as at December 30, 2012		7,558			3,827			1,845			13,230
Cost incurred during the first quarter of fiscal 2013		6,632			2,543			300			9,475
Paid during the first quarter of fiscal 2013		(10,894	)		(4,063	)		(275	)		(15,232	)

Accrued as at March 31, 2013	$	3,296		$	2,307		$	1,870		$	7,473

Of the total accrual noted above, $6.2 million is recognized in Accounts payable, with the remaining balance primarily recognized in Other long-term liabilities.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 3

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO TIM HORTONS INC.


	First quarter ended
	March 31, 2013		April 1, 2012
Net income attributable to Tim Hortons Inc.	$	86,171	$	88,779

Weighted average shares outstanding for computation of basic earnings per common share attributable to Tim Hortons Inc. (in thousands)		153,091		156,993
Dilutive impact of RSUs ⁽¹⁾		221		227
Dilutive impact of stock options with tandem SARs ⁽²⁾		236		270

Weighted average shares outstanding for computation of diluted earnings per common share attributable to Tim Hortons Inc. (in thousands)		153,548		157,490

Basic earnings per common share attributable to Tim Hortons Inc .	$	0.56	$	0.57

Diluted earnings per common share attributable to Tim Hortons Inc.	$	0.56	$	0.56

⁽¹⁾	Restricted stock units (“RSUs”).

⁽²⁾	Stock appreciation rights (“SARs”).

NOTE 4

NOTES RECEIVABLE, NET


	As at
	March 31, 2013								December 30, 2012

	Gross		VIEs ⁽²⁾			Total			Gross		VIEs ⁽²⁾			Total
Franchise Incentive Program (“FIP”) notes ⁽¹⁾	$	19,797	$	(14,918	)	$	4,879		$	20,235	$	(14,441	)	$	5,794
Other notes receivable ⁽³⁾		8,341		0			8,341			4,773		0			4,773

Notes receivable		28,138		(14,918	)		13,220			25,008		(14,441	)		10,567

Allowance							(1,616	)							(1,790	)

Notes receivable, net						$	11,604							$	8,777
Current portion, net							(5,932	)							(7,531	)

Long-term portion, net						$	5,672							$	1,246


	As at
	March 31, 2013								December 30, 2012

Class and Aging	Gross		VIEs ⁽²⁾			Total			Gross		VIEs ⁽²⁾			Total
Current status (FIP Notes and other)	$	10,215	$	(1,952	)	$	8,263		$	6,969	$	(1,269	)	$	5,700
Past-due status < 90 days (FIP Notes)		391		(391	)		0			407		(407	)		0
Past-due status > 90 days (FIP Notes)		17,532		(12,575	)		4,957			17,632		(12,765	)		4,867

Notes receivable		28,138		(14,918	)		13,220			25,008		(14,441	)		10,567

Allowance							(1,616	)							(1,790	)

Notes receivable, net						$	11,604							$	8,777

⁽¹⁾	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.

⁽²⁾	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).

⁽³⁾	Relates primarily to notes receivable on various equipment and other financing programs, and notes issued to vendors in conjunction with the financing of certain property sales.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 5

INVENTORIES AND OTHER, NET


	As at
	March 31, 2013			December 30, 2012
Raw materials	$	25,354		$	19,941
Finished goods		77,457			75,660

		102,811			95,601
Inventory obsolescence provision		(1,174	)		(1,015	)

Inventories, net		101,637			94,586
Prepaids and other		7,159			12,414

Total Inventories and other, net	$	108,796		$	107,000

NOTE 6

ACCOUNTS PAYABLE, ACCRUED LIABILITIES, OTHER, AND OTHER LONG–TERM LIABILITIES

Accounts payable


	As at
	March 31, 2013		December 30, 2012
Accounts payable	$	100,492	$	126,312
Construction holdbacks and accruals		27,724		31,008
Corporate reorganization accrual (note 2)		6,175		12,442

Total Accounts payable	$	134,391	$	169,762

Accrued liabilities, Other


	As at
	March 31, 2013		December 30, 2012
Tim Card obligations	$	110,410	$	159,745
Contingent rent expense accrual		8,191		9,962
Maidstone Bakeries supply contract deferred liability		7,553		7,929
Other accrued liabilities ⁽¹⁾		23,427		20,235

Total Accrued liabilities, Other	$	149,581	$	197,871

⁽¹⁾	Includes deferred revenues, deposits, and various equipment and other accruals.

Other long-term liabilities


	As at
	March 31, 2013		December 30, 2012
Accrued rent leveling liability	$	28,660	$	29,244
Uncertain tax position liability ⁽¹⁾		28,726		28,610
Stock-based compensation liabilities (note 11)		22,443		17,479
Maidstone Bakeries supply contract deferred liability		13,746		15,352
Other accrued long-term liabilities ⁽²⁾		19,445		18,929

Total Other long-term liabilities	$	113,020	$	109,614

⁽¹⁾	Includes accrued interest.

⁽²⁾	Includes deferred revenues and various other accruals.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 7

FAIR VALUES

Financial assets and liabilities measured at fair value


	As at
	March 31, 2013							December 30, 2012
	Notional value		Fair value hierarchy		Fair value asset (liability) ⁽¹⁾			Notional value		Fair value hierarchy		Fair value asset (liability) ⁽¹⁾
Derivatives:
Forward currency contracts ⁽²⁾	$	165,318		Level 2	$	2,009		$	195,081		Level 2	$	(2,014	)
Interest rate swap ⁽³⁾		33,750		Level 2		(482	)		0		Level 2		0
Total return swaps (“TRS”) ^{(4 )}		41,403		Level 2		14,257			41,403		Level 2		7,504

Total Derivatives	$	240,471			$	15,784		$	236,484			$	5,490

⁽¹⁾	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.

⁽²⁾	The fair value of forward currency contracts is determined using prevailing exchange rates.

⁽³⁾

In February 2013, the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (“Ad Fund”) entered into an amortizing interest rate swap to fix a portion of the interest expense on its term debt. The fair value is estimated using discounted cash flows and market-based observable inputs, including interest rate yield curves and discount rates.

⁽⁴⁾	The fair value of the TRS is determined using the Company’s closing common share price on the last business day of the fiscal period, as quoted on the Toronto Stock Exchange (“TSX”).

Other financial assets and liabilities not measured at fair value

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
	March 31, 2013								December 30, 2012
	Fair value hierarchy		Fair value asset (liability)			Carrying value			Fair value hierarchy		Fair value asset (liability)			Carrying value
Cash and cash equivalents ⁽¹⁾		Level 1	$	74,641		$	74,641			Level 1	$	120,139		$	120,139
Restricted cash and cash equivalents ⁽¹⁾		Level 1		104,021			104,021			Level 1		150,574			150,574
Bearer deposit notes ⁽²⁾		Level 2		41,403			41,403			Level 2		41,403			41,403
Notes receivable, net ⁽³⁾		Level 3		11,604			11,604			Level 3		8,777			8,777
Senior unsecured notes, series 1 ⁽⁴⁾		Level 2		(325,725	)		(301,457	)		Level 2		(325,857	)		(301,544	)
Advertising fund term debt ⁽⁵⁾		Level 3		(54,482	)		(54,482	)		Level 3		(56,500	)		(56,500	)
Other debt ⁽⁶⁾		Level 3		(123,286	)		(59,223	)		Level 3		(125,000	)		(60,223	)

⁽¹⁾	The carrying values approximate fair values due to the short-term nature of these investments.

⁽²⁾	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.

⁽³⁾	Management estimates the current value, using a cost approach, based primarily on the estimated depreciated replacement cost of the underlying equipment held as collateral.

⁽⁴⁾	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 LP.

⁽⁵⁾	Management estimates the fair value of this variable rate debt using a market approach, based on prevailing interest rates plus an applicable margin.

⁽⁶⁾	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.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 8

DERIVATIVES


	As at
	March 31, 2013									December 30, 2012
	Asset		Liability			Net asset (liability)			Classification on Condensed Consolidated Balance Sheet	Asset		Liability			Net asset (liability)			Classification on Condensed Consolidated Balance Sheet
Derivatives designated as cash flow hedging instruments
Forward currency contracts ⁽¹⁾	$	2,361	$	(438	)	$	1,923		Accounts receivable, net	$	494	$	(2,315	)	$	(1,821	)	Accounts payable
Interest rate swap ⁽²⁾	$	0	$	(482	)	$	(482	)	Other long-term liabilities	$	0	$	0		$	0		n/a
Derivatives not designated as hedging instruments
TRS ⁽³⁾	$	14,257	$	0		$	14,257		Other assets	$	8,614	$	(1,110	)	$	7,504		Other assets
Forward currency contracts ⁽¹⁾	$	92	$	(6	)	$	86		Accounts receivable, net	$	5	$	(198	)	$	(193	)	Accounts payable

⁽¹⁾	Notional value as at March 31, 2013 of $165.3 million (fiscal 2012: $195.1 million), with maturities ranging between April 2013 and March 2014; no associated cash collateral.

⁽²⁾	Notional value as at March 31, 2013 of $33.8 million (fiscal 2012: $nil), with maturities through fiscal 2019; no associated cash collateral.

⁽³⁾

TRS contracts cover 1.0 million of the Company’s underlying common shares. The notional value and associated cash collateral, in the form of bearer deposit notes (see note 7), was $41.4 million as at March 31, 2013 (fiscal 2012: $41.4 million). The TRS have maturities annually, in May, between fiscal 2015 and fiscal 2019.


		First quarter ended March 31, 2013									First quarter ended April 1, 2012
Derivatives designated as cash flow hedging instruments ⁽¹⁾	Classification on Condensed Consolidated Statement of Operations	Amount of gain (loss) recognized in OCI ⁽²⁾			Amount of net (gain) loss reclassified to earnings			Total effect on OCI ⁽²⁾			Amount of gain (loss) recognized in OCI ⁽²⁾			Amount of net (gain) loss reclassified to earnings			Total effect on OCI ⁽²⁾

Forward currency contracts	Cost of sales	$	3,273		$	471		$	3,744		$	(3,502	)	$	(1,321	)	$	(4,823	)
Interest rate swap	Interest (expense)		(501	)		19			(482	)		0			0			0
Interest rate forwards ⁽³⁾	Interest (expense)		0			173			173			0			173			173

Total			2,772			663			3,435			(3,502	)		(1,148	)		(4,650	)
Income tax effect	Income taxes		(862	)		(130	)		(992	)		987			298			1,285

Net of income taxes		$	1,910		$	533		$	2,443		$	(2,515	)	$	(850	)	$	(3,365	)

⁽¹⁾	Excludes amounts related to ineffectiveness, as they were not significant.

⁽²⁾	Other comprehensive income (“OCI”).

⁽³⁾	The Company entered into and settled interest rate forwards in fiscal 2010 relating to the Company’s outstanding term debt.

The following table summarizes the (gain) loss on derivatives not designated as hedging instruments:


	Classification on Condensed Consolidated Statement of Operations	First quarter ended
		March 31, 2013			April 1, 2012
TRS	General and administrative expenses	$	(6,753	)	$	(3,232	)
Forward currency contracts	Cost of sales		(279	)		748

Total net gain		$	(7,032	)	$	(2,484	)

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 9

COMMITMENTS AND CONTINGENCIES

On June 12, 2008, a claim was filed against the Company and certain of its affiliates in the Ontario Superior Court of Justice (the “Court”) by two of its franchisees, Fairview Donut Inc. and Brule Foods Ltd., alleging, generally, that the Company’s Always Fresh baking system and expansion of lunch offerings have led to lower franchisee profitability. The claim, which sought class action certification on behalf of Canadian restaurant owners, asserted damages of approximately $1.95 billion. Those damages were claimed based on breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentations, unjust enrichment and price maintenance. The plaintiffs filed a motion for certification of the putative class in May 2009, and the Company filed its responding materials as well as a motion for summary judgment in November 2009. The 2 motions were heard in August and October 2011. On February 24, 2012, the Court granted the Company’s motion for summary judgment and dismissed the plaintiffs’ claims in their entirety. The Court also found that certain aspects of the test for certification of the action as a class proceeding had been met, but all of the underlying claims were nonetheless dismissed as part of the aforementioned summary judgment decision.

While the Court found in favour of the Company on all claims, the plaintiffs appealed from the summary judgment decision with respect to some of the claims for breach of contract and with respect to the claim for breach of the duty of good faith. The appeal was heard in December 2012 at which time the Court of Appeal for Ontario dismissed all claims in their entirety. The plaintiffs have filed an application to seek leave to appeal to the Supreme Court of Canada. If leave is granted and the appeal determined adversely to the Company, the matter could ultimately proceed to trial. The Company continues to believe that it would have good and tenable defenses if leave to appeal were granted, the plaintiffs were successful in the appeal, and the matters were to proceed to trial. However, if the matters were determined adversely to the Company at trial and that determination was upheld after all avenues of appeal were exhausted, it is possible that the claims could have a material adverse impact on the Company’s financial position or liquidity.

In addition, 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 conditions and earnings.

NOTE 10

COMMON SHARES

Share repurchase programs

On February 20, 2013, our Board of Directors approved a new share repurchase program (“2013 Program”) authorizing the repurchase of up to $250.0 million in common shares, not to exceed the regulatory maximum of 15,239,531 shares, representing 10% of our public float as of February 14, 2013, as defined under the TSX rules. The 2013 Program has received regulatory approval from the TSX. Under the 2013 Program, the Company’s common shares will be purchased through a combination of a 10b5-1 automatic trading plan purchases, as well as purchases at management’s discretion in compliance with regulatory requirements, and given market, cost and other considerations. Repurchases will be made on the TSX, the New York Stock Exchange (“NYSE”), and/or other Canadian marketplaces, subject to compliance with applicable regulatory requirements, or by such other means as may be permitted by the TSX and/or NYSE, and under applicable laws, including private agreements under an issuer bid exemption order issued by a securities regulatory authority in Canada. Purchases made by way of private agreements under an issuer bid exemption order by a securities regulatory authority will be at a discount to the prevailing market price as provided in the exemption order. The 2013 Program commenced on February 26, 2013 and is due to expire on February 25, 2014, or earlier if the $250.0 million or 10% share maximum is reached. Common shares purchased pursuant to the 2013 Program will be cancelled. The 2013 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 2013 Program.

There were no share repurchases during the first quarter of fiscal 2013. Share repurchase activity for fiscal 2012 is reflected in the Condensed Consolidated Statement of Equity; all shares repurchased in fiscal 2012 were cancelled.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 11

STOCK-BASED COMPENSATION


	First quarter ended
	March 31, 2013		April 1, 2012
RSUs	$	1,102	$	2,658
Stock options and tandem SARs		5,075		3,745
DSUs ⁽¹⁾		1,210		778

Total stock-based compensation expense ⁽²⁾	$	7,387	$	7,181

⁽¹⁾	Deferred share units (“DSUs”).

⁽²⁾	Generally included in General and administrative expenses on the Condensed Consolidated Statement of Operations.

The Company has entered into TRS as economic hedges for a portion of its outstanding stock options with tandem SARs, and substantially all of its DSUs, and recognized a gain of $6.7 million in the first quarter ended March 31, 2013 (first quarter fiscal 2012: gain of $3.2 million) in General and administrative expenses (see note 8).

Deferred share units

Approximately 4,300 DSUs were granted during the first quarter ended March 31, 2013 (first quarter fiscal 2012: 4,400), at a fair market value of $50.07 (first quarter fiscal 2012: $52.80). There were no DSU settlements during the first quarters of fiscal 2013 or fiscal 2012.

Restricted stock units

The following table is a summary of activity for RSUs granted to employees under the Company’s 2006 and 2012 Stock Incentive Plans for the periods set forth below:


	Restricted Stock Units			Weighted Average Grant Value per Unit
	(in thousands)			(in dollars)
Balance as at January 1, 2012		306		$	40.91
Granted		192			54.49
Dividend equivalent rights		6			50.30
Vested and settled		(160	)		36.72
Forfeited		(32	)		46.35

Balance as at December 30, 2012		312		$	50.91
Dividend equivalent rights		2			52.55
Vested and settled ⁽¹⁾		(5	)		52.85
Forfeited		(8	)		51.29

Balance as at March 31, 2013		301		$	50.80

⁽¹⁾	Settled with common shares from the TDL RSU Employee Benefit Plan Trust (“Trust”).

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

Stock options and tandem SARs


	Stock Options with SARs			Weighted Average Exercise Price
	(in thousands)			(in dollars)
Balance as at January 1, 2012		1,182		$	36.05
Granted		254			54.86
Exercised		(218	)		31.64
Forfeited		(46	)		41.66

Balance as at December 30, 2012		1,172		$	40.73
Exercised ⁽¹⁾		(77	)		32.57

Balance as at March 31, 2013		1,095		$	41.30

⁽¹⁾	Total cash settlement of $1.4 million of SARs in the first quarter of fiscal 2013 (first quarter fiscal 2012: $0.6 million). The associated options were cancelled.

NOTE 12

VARIABLE INTEREST ENTITIES

VIEs for which the Company is the primary beneficiary

Non-owned restaurants

The Company has consolidated 345 Non-owned restaurants as at March 31, 2013 (fiscal 2012: 365 restaurants), or approximately 8.0% of the Company’s total systemwide restaurants (fiscal 2012: 8.6%). On average, a total of 358 Non-owned restaurants were consolidated during the first quarter of fiscal 2013 (first quarter fiscal 2012: average of 306 restaurants).

Advertising Funds

The Ad Fund has rolled out a program to acquire and install LCD screens, media engines, drive-thru menu boards and ancillary equipment for our restaurants (“Expanded Menu Board Program”). The advertising levies, depreciation, interest costs, capital expenditures and financing associated with the Expanded Menu Board Program are presented on a gross basis on the Condensed Consolidated Statement of Operations and Cash Flows. The Ad Fund has purchased $2.8 million of equipment for the Expanded Menu Board Program in the first quarter of fiscal 2013 and $56.2 million cumulatively since fiscal 2011.

In February 2013, the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (“Ad Fund”) entered into an amortizing interest rate swap to fix a portion of the interest expense on its term debt.

The advertising funds spent approximately $69.5 million in the first quarter of fiscal 2013 (first quarter fiscal 2012: $73.7 million). Company contributions to the Canadian and U.S. advertising funds consisted of the following:


	First quarter ended
	March 31, 2013		April 1, 2012
Company contributions	$	2,704	$	2,603
Contributions from consolidated Non-owned restaurants		3,237		2,897

Total Company contributions	$	5,941	$	5,500

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

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:


	First quarter ended
	March 31, 2013						April 1, 2012
	Restaurant VIEs		Advertising fund VIEs		Total VIEs		Restaurant VIEs		Advertising fund VIEs		Total VIEs
Sales	$	86,760	$	0	$	86,760	$	78,014	$	0	$	78,014
Advertising levies ⁽¹⁾		0		2,531		2,531		0		487		487

Total revenues		86,760		2,531		89,291		78,014		487		78,501
Cost of sales ⁽²⁾		85,866		0		85,866		76,588		0		76,588
Operating expenses ⁽¹⁾		0		2,099		2,099		0		385		385

Operating income		894		432		1,326		1,426		102		1,528
Interest expense		0		432		432		0		102		102

Income before taxes		894		0		894		1,426		0		1,426
Income taxes		142		0		142		226		0		226

Net income attributable to noncontrolling interests	$	752	$	0	$	752	$	1,200	$	0	$	1,200

⁽¹⁾

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.

⁽²⁾	Includes rents, royalties, advertising expenses and product purchases from the Company which are eliminated upon the consolidation of these VIEs.

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
	March 31, 2013				December 30, 2012
	Restaurant VIEs		Advertising fund VIEs		Restaurant VIEs		Advertising fund VIEs
Cash and cash equivalents	$	9,044	$	0	$	10,851	$	0
Advertising fund restricted assets – current		0		43,543		0		45,337
Other current assets		6,350		0		6,770		0
Property and equipment, net		18,463		56,995		19,536		57,925
Other long-term assets ⁽¹⁾		440		2,341		572		2,095

Total assets	$	34,297	$	102,879	$	37,729	$	105,357

Notes payable to Tim Hortons Inc. – current ⁽¹⁾	$	13,646	$	0	$	13,637	$	0
Advertising fund liabilities – current		0		44,542		0		44,893
Other current liabilities ⁽¹⁾		12,652		8,830		14,548		9,919
Notes payable to Tim Hortons Inc. – long-term ⁽¹⁾		1,272		0		804		0
Long-term debt ⁽²⁾		0		46,411		0		46,849
Other long-term liabilities		5,174		3,096		5,887		3,696

Total liabilities		32,744		102,879		34,876		105,357

Equity of VIEs		1,553		0		2,853		0

Total liabilities and equity	$	34,297	$	102,879	$	37,729	$	105,357

⁽¹⁾	Various assets and liabilities are eliminated upon the consolidation of these 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.

⁽²⁾	Balance as at March 31, 2013 includes $54.5 million of debt relating to the Expanded Menu Board Program (fiscal 2012: $56.5 million), of which $8.1 million is recognized in Other current liabilities (fiscal 2012: $9.7 million) with the remainder recognized as Long-term debt.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

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.

Trust

In connection with RSUs granted to certain employees, the Company established the Trust, which purchases and retains common shares of the Company to satisfy the Company’s contractual obligation to deliver shares to settle the awards for most Canadian employees. The cost of the shares held by the Trust of $13.2 million as at March 31, 2013 (fiscal 2012: $13.4 million), is presented as a reduction in outstanding common shares on the Condensed Consolidated Balance Sheet.

VIEs for which the Company is not the primary beneficiary

These VIEs are primarily real estate ventures, the most significant being the TIMWEN Partnership. The Company does not consolidate these entities as control is considered to be shared by both the Company and the other joint owner(s).

NOTE 13

SEGMENT REPORTING

The Company operates exclusively in the quick service restaurant industry. Beginning in the first quarter of 2013, the chief decision maker views and evaluates the Company’s reportable segments as follows:

Canadian and U.S. business units. Each of the Canadian and U.S. business units include the results of 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 based on the unit’s respective systemwide sales; (iii) franchise fees; (iv) corporate restaurants; and (v) business-unit-related general and administrative expenses. The respective business units exclude the effect of VIEs, consistent with how the chief decision maker views and evaluates the business unit’s results.

Corporate services. Corporate services is comprised of services to support the Canadian and U.S. business units, including: (i) general and administrative expenses; (ii) manufacturing income, and 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 to provide our restaurants owners with consistent, predictable pricing, which may extend beyond a quarter. Corporate services also includes the results of our International operations, which are currently not significant.

Previously, the results of manufacturing activities and distribution services were included within the respective geographic segment where the facility was located. Additionally, we have revised the allocation of shared restaurant services, such as restaurant technology and operations standards, between the Canadian and U.S. business units.

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

The Company has reclassified the segment data for the prior period to conform to the current period’s presentation.


	First quarter ended
	March 31, 2013			April 1, 2012
Revenues ⁽¹⁾
Canada	$	593,673		$	599,883
U.S.		44,448			38,429
Corporate services		4,125			4,471

Total reportable segments		642,246			642,783
VIEs		89,291			78,501

Total	$	731,537		$	721,284


Segment Operating Income (Loss)
Canada	$	145,821		$	147,226
U.S.		910			1,654
Corporate services		(10,665	)		(18,785	)

Total reportable segments		136,066			130,095
VIEs		1,326			1,528
Corporate reorganization expenses		(9,475	)		0

Consolidated Operating Income	$	127,917		$	131,623
Interest, Net		(7,735	)		(7,187	)

Income before income taxes	$	120,182		$	124,436

⁽¹⁾	There are no inter-segment revenues included in the above table.


	First quarter ended
	March 31, 2013		April 1, 2012
Capital expenditures
Canada	$	30,276	$	23,782
U.S.		15,361		7,992
Corporate services		1,842		2,495

Total reportable segments	$	47,479	$	34,269

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

The following table provides a reconciliation of reportable segment Property and equipment, net and Total assets to consolidated Property and equipment, net and consolidated Total assets, respectively:


	As at
	March 31, 2013		December 30, 2012
Total Property and equipment, net
Canada ⁽¹⁾	$	926,564	$	915,733
U.S. ⁽¹⁾		389,856		378,457
Corporate services ⁽²⁾		182,295		184,938

Total reportable segments		1,498,715		1,479,128
VIEs		72,054		74,180

Consolidated Property and equipment, net	$	1,570,769	$	1,553,308


Total Assets
Canada	$	1,231,250	$	1,175,552
U.S.		415,550		400,231
Corporate services		286,124		281,043

Total reportable segments		1,932,924		1,856,826
VIEs		133,139		139,462
Unallocated assets ⁽³⁾		193,315		287,891

Consolidated Total assets	$	2,259,378	$	2,284,179

⁽¹⁾	Includes primarily restaurant-related assets such as land, building and leasehold improvements.

⁽²⁾	Includes property and equipment related to distribution services, manufacturing activities, and other corporate assets.

⁽³⁾	Includes Cash and cash equivalents, Restricted cash and cash equivalents, Deferred income taxes and Prepaids, except as related to VIEs.

Consolidated Sales and Cost of sales comprise the following:


	First quarter ended
	March 31, 2013		April 1, 2012
Sales
Distribution sales	$	431,151	$	439,728
Company-operated restaurant sales		5,976		5,560
Sales of VIEs		86,760		78,014

Total Sales	$	523,887	$	523,302


Cost of sales
Distribution cost of sales	$	375,553	$	389,948
Company-operated restaurant cost of sales		7,010		6,080
Cost of sales of VIEs		78,791		68,892

Total Cost of sales	$	461,354	$	464,920

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 2012 Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K for the year ended December 30, 2012 (“Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”) and the Canadian Securities Administrators (“CSA”) on February 21, 2013, and the Condensed Consolidated Financial Statements and accompanying Notes included in our Interim Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC and the CSA on May 8, 2013. 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. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to “Risk Factors” included elsewhere in our Annual Report 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 franchisee-owned restaurants and restaurants run by independent operators (collectively, we hereunder refer to both franchisee-owned and franchisee-operated restaurants as “franchised restaurants”), and Company-operated restaurants. Please refer to “Systemwide Sales Growth” and “Same-Store Sales Growth” below for additional information.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding the Company’s performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP and 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

We predominantly franchise Tim Hortons restaurants primarily in Canada and the U.S., that serve premium coffee, espresso-based hot and cold specialty drinks, including lattes, cappuccinos, espresso shots, specialty teas and fruit smoothies, fresh baked goods, grilled Panini and classic sandwiches, wraps, soups, prepared foods and other products. As the franchisor, we collect royalty revenue from franchised restaurant sales. Our business model also includes controlling the real estate for the substantial majority of our franchised restaurants, which generates another source of revenue. As at March 31, 2013, we leased or owned the real estate for approximately 83.0% of our full-serve system restaurants in North America, including 792 owned locations (534 sites in Canada and 258 sites in the U.S.). Real estate that is not controlled by us is generally for our non-standard restaurants, including, for example, full-serve kiosks in offices, retail locations, hospitals, colleges, stadiums, arenas, and airports, as well as self-serve kiosks located in gas stations, grocery stores, and other convenience locations as well as for our restaurants located outside of North America. We view our supply chain activities as being central to our business model and an important means of supporting our business units in meeting the needs of our restaurant owners. We distribute coffee and other beverages, non-perishable food, supplies, packaging and equipment to most system restaurants in Canada through our 5 distribution centres, and frozen, refrigerated and shelf-stable products from our Guelph and Kingston distribution facilities in our Ontario and Quebec markets. Our management of supply chain activities enables us to leverage our scale in Canada to create efficiencies, build competitive advantage, and provide quality, cost-competitive and timely deliveries to our restaurant owners, while generating returns for our shareholders. Where we are not able to leverage our scale or create warehousing or transportation efficiencies, such as in the U.S. market and in select parts of Canada, we typically still manage and control the supply chain but use third-party warehousing and transportation. In keeping with our vertical integration model, we also operate 2 coffee roasting facilities located in Hamilton, Ontario, and Rochester, New York, and a fondant and fills manufacturing facility in Oakville, Ontario.

Executive Overview

Systemwide sales grew 3.2% in the first quarter of 2013, driven by new restaurant development, but partially offset by a decline in same-store sales in both Canada and the U.S. Both the Canadian and U.S. economies continue to show signs of weakness as unemployment levels have recently risen in Canada, and U.S. unemployment levels remain elevated relative to pre-recessionary levels. We believe that concerns about high household debt and a cooling housing market in Canada, and tighter fiscal policy, among other things in the U.S., continue to impact consumer confidence and discretionary spending. As a result, we continue to operate in a challenging macro-economic environment with low growth, further aggravated by intensified promotional activity, such as discounts,

bundling, product giveaways, and coupons, which may also have negatively impacted our same-store sales growth. Our same-store sales results were negatively impacted by the inclusion of both New Year’s Day and the Easter weekend in the first quarter of 2013, as these holidays did not affect the operating results of the first quarter of 2012. Additionally, we had strong prior year comparables in both Canada and the U.S., which benefited from unseasonably warm weather across most of our Canadian and U.S. markets in the first quarter of 2012, and resulted in minimal lost operating days and accelerated sales of our specialty cold drinks. In comparison, we experienced more traditional winter weather throughout the first quarter of 2013, with more days impacted by colder weather and higher levels of precipitation in certain key markets.

Same-store sales declined in Canada by 0.3%. Same-store sales were positively impacted by higher average cheque due to both pricing and favourable product mix, which was more than offset by a decline in same-store transactions due, we believe, to the factors noted above. Our product mix continues to benefit from our Panini sandwiches and single-serve offerings using Kraft’s Tassimo ^® T-Disc on-demand beverage platform, which was launched in late fiscal 2012. We also introduced, towards the end of the first quarter of 2013, flatbread Breakfast Panini sandwiches and vanilla bean lattes.

Same-store sales declined in the U.S. by 0.5%. Same-store sales were positively impacted from higher average cheque, due primarily to pricing, which was more than offset by a decline in same-store transactions due, we believe, to the factors noted above. In the U.S., traditional winter weather in the first quarter of 2013 had a negative effect on sales of both our cold specialty drinks and our Cold Stone Creamery ^® products. Our promotional activity in the first quarter of 2013 emphasized our value positioning, in light of the challenging macro-economic environment.

A number of initiatives are planned for the balance of fiscal 2013, which we believe will help drive same-store sales growth in both Canada and the U.S., including a strong promotional calendar, category extensions and operational initiatives. We will also continue to focus on our long-term initiatives to increase capacity, such as our drive-thru initiatives currently planned at more than 1,000 locations in Canada, including enhanced menu boards, and may include double order stations and order station relocations.

Marc Caira has been appointed President and CEO effective July 2nd, 2013. Mr. Caira was most recently Global CEO of Nestlé Professional and a member of the Executive Board of Nestlé SA, the world’s largest food and beverage company, and recognized leader in nutrition, health and wellness. He replaces Paul House, who will become Chairman of the Board of Directors at that time. Mr. House has led the Company since May of 2011 serving as Executive Chairman, President and CEO.

We completed the realignment of roles and responsibilities within our Corporate Centre and Business Unit design at the end of the first quarter of 2013, and recognized a related charge of $9.5 million in the first quarter of 2013. We do not anticipate significant further charges related to the reorganization, with the exception of CEO transition costs, the amount of which is not yet determined. As a result of the Corporate reorganization, effective in the first quarter of 2013, we have revised our segment reporting to align with our new internal reporting structure, which is now comprised of business units in both Canada and the U.S., and Corporate services. Our discussion and analysis for the first quarter of 2013 is presented based on this new segment structure.

Operating income decreased $3.7 million, or 2.8%, to $127.9 million in the first quarter of 2013 compared to $131.6 million in the first quarter of 2012. Adjusted operating income (refer to non-GAAP table), which excludes Corporate reorganization expenses, increased $5.8 million, or 4.4%. The increase was driven primarily by systemwide sales growth, resulting in higher rents and royalties revenues and distribution income, and lower general and administrative expenses due primarily to lower stock-based compensation expense, partially offset by higher operating expenses including higher support costs related to property maintenance.

Net income attributable to Tim Hortons Inc. was $86.2 million in the first quarter of 2013, as compared to $88.8 million in the comparative period, decreasing $2.6 million or 2.9%. The decrease was primarily due to lower operating income, which was significantly impacted by the Corporate reorganization expenses recognized of $9.5 million ($7.4 million after-tax).

Diluted earnings per share attributable to Tim Hortons Inc. (“EPS”) was $0.56, which was flat compared to the first quarter of 2012. Corporate reorganization expenses recognized in the first quarter of 2013 reduced our EPS by approximately $0.05. EPS was positively impacted by the cumulative effect of our share repurchase program, as we had approximately 3.9 million, or 2.5%, fewer average fully-diluted common shares outstanding in the first quarter of 2013 than the first quarter of 2012. The favourable impact from the share repurchase program was offset by the decrease in net income attributable to Tim Hortons Inc., as noted above.

Selected Operating and Financial Highlights


	First quarter ended
($ in millions, except per share data)	March 31, 2013			April 1, 2012
Systemwide sales growth ⁽¹⁾		3.2	%		9.4	%
Same-store sales growth (decline)
Canada		(0.3	)%		5.2	%
U.S.		(0.5	)%		8.5	%
Systemwide restaurants		4,288			4,042
Revenues	$	731.5		$	721.3


	First quarter ended
($ in millions, except per share data)	March 31, 2013		April 1, 2012
Operating income	$	127.9	$	131.6
Adjusted operating income ⁽²⁾	$	137.4	$	131.6
Net income attributable to Tim Hortons Inc.	$	86.2	$	88.8
Diluted EPS	$	0.56	$	0.56
Weighted average number of common shares outstanding – Diluted (in millions)		153.5		157.5

⁽¹⁾

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, which includes the effects of foreign currency translation, was 3.2% and 9.5% for the first quarters of 2013 and 2012, respectively.

⁽²⁾

Adjusted operating income is a non-GAAP measure. See below reconciliations for adjusting items 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 as a measure of 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. The reconciliation of operating income, a GAAP measure, to adjusted operating income, a non-GAAP measure, is set forth in the table below:


	First quarter ended				Change from prior quarter
	March 31, 2013		April 1, 2012		$			%
	(in millions)
Operating income	$	127.9	$	131.6	$	(3.7	)		(2.8	)%
Add: Corporate reorganization expenses		9.5		—		9.5			n/m

Adjusted operating income ^(a)	$	137.4	$	131.6	$	5.8			4.4	%

All numbers rounded

^n/m

Not meaningful

^(a)

Includes operating income for non-owned restaurants consolidated pursuant to applicable accounting rules (“consolidated Non-owned restaurants”) and from the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (“Ad Fund”) of $1.3 million and $1.5 million in the first quarters of 2013 and 2012, respectively, which decreased adjusted operating income growth by 0.2%.

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 the system, and the strength of our brand and restaurant owner base, which ultimately impacts our consolidated and segmented financial performance.

Systemwide Sales Growth

Systemwide sales include restaurant-level sales at both franchised and Company-operated restaurants, but exclude sales from our Republic of Ireland and United Kingdom licensed locations, as these locations operate on a significantly different business model compared to our North American and other International operations. 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.

Our financial results are driven largely by changes in systemwide sales primarily in Canada and the U.S., with approximately 99.6% of our system franchised as at March 31, 2013. Franchised restaurant sales and transactional data are reported to us by our restaurant owners. Franchised restaurant sales are not included in our Condensed Consolidated Financial Statements, other than approximately 358 and 306 consolidated Non-owned restaurants, on average, for the first quarters of 2013 and 2012, respectively. Systemwide sales impact our royalties and rental revenues, as well as our distribution sales.

Changes in systemwide sales are driven by changes in same-store sales and changes in the number of restaurants ( i.e. , historically, the net addition of new restaurants), and are ultimately driven by consumer demand.

Same-Store Sales Growth

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. It is one of the key metrics we use to assess our

performance and provides a useful comparison between periods. Our same-store sales growth is generally attributable to several key factors, including: new product introductions; improvements in restaurant speed of service and other operational efficiencies; hospitality initiatives; frequency of guest visits; expansion into, and enhancement of, broader menu offerings; promotional activities; pricing; and weather. Restaurant-level price increases are primarily used to offset higher restaurant-level costs on key items such as coffee and other commodities, labour, supplies, utilities and business expenses. There can be no assurance that these price increases will result in an equivalent level of sales growth, which depends upon guests maintaining the frequency of their visits and the same volume of purchases at the new pricing.

Product innovation is one of our long-standing, focused strategies to drive same-store sales growth, including innovation at breakfast, lunch and snacking dayparts. Our Panini sandwiches and single-serve products, both introduced towards the end of fiscal 2012, continue to prove popular amongst our guests. Towards the end of the first quarter of 2013, we introduced, in Canada, our new flatbread Breakfast Panini sandwiches, which leveraged our existing Panini platform, and expanded our hot beverage selection with the introduction of vanilla bean lattes. In both Canada and the U.S., we introduced our new thick-cut bacon, which is used across all of our dayparts.

Following the successful launch of the Company’s single-serve coffee offering on the Tassimo system in fiscal 2012, we have reached an agreement to introduce premium Tim Hortons coffee on the Mother Parkers Tea & Coffee RealCup™ platform. The RealCup system uses a unique, patented filter design that is compatible with K-Cup ^® brewers, but is not affiliated with K-Cup or Keurig ^® . Under the terms of the agreement, Tim Hortons premium-blend coffee and decaf coffee will be sold in Tim Hortons restaurants in Canada and the U.S., and online in a single-serve format. This market introduction, anticipated in July of this year, will provide access to approximately half of the Canadian market not currently reached by our existing single-serve coffee offering, and an even larger share in the U.S.

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 below is a summary of restaurant openings and closures for the first quarters ended March 31, 2013, and April 1, 2012.


	First quarter ended March 31, 2013								First quarter ended April 1, 2012
	Full-serve Standard and Non-standard			Self-serve Kiosks		Total			Full-serve Standard and Non-standard			Self-serve Kiosks		Total
Canada
Restaurants opened		22			2		24			21			1		22
Restaurants closed		(7	)		—		(7	)		(2	)		—		(2	)

Net change		15			2		17			19			1		20

U.S.
Restaurants opened		7			1		8			6			1		7
Restaurants closed		(4	)		—		(4	)		—			—		—

Net change		3			1		4			6			1		7

International (GCC)
Restaurants opened		3			—		3			1			—		1

Total Company
Restaurants opened		32			3		35			28			2		30
Restaurants closed		(11	)		—		(11	)		(2	)		—		(2	)

Net change		21			3		24			26			2		28

From the end of the first quarter of 2012 to the end of the first quarter of 2013, we opened 246 system restaurants, net of restaurant closures. Typically, 20 to 40 system restaurants are closed annually, the majority of which have been in Canada. Restaurant closures made in the normal course of operations may result from an opportunity to acquire a more suitable location, which will permit us to upgrade size and layout or add a drive-thru, and typically occur at the end of a lease term or the end of the useful life of the principal asset. The restaurant closures in the first quarter of 2013 were all in the normal course of operations. We have also closed, and may continue to close, restaurants for which the restaurant location has performed below our expectations for an extended period of time, and/or we believe that sales from the restaurant can be absorbed by surrounding restaurants.

Self-serve locations generally have significantly different economics than our full-serve restaurants, including substantially less capital investment, as well as significantly lower sales and, therefore, lower associated royalties and distribution sales. In the U.S., self-serve locations are intended to increase our brand presence and create another outlet to drive convenience, which we believe is important in our developing markets. In Canada, we have used self-serve kiosks in locations where existing full-service locations are at capacity, among other reasons.

We have a master license agreement with Apparel FZCO (“Apparel”) for the development and operation of Tim Hortons restaurants in the Gulf Cooperation Council (“GCC”). The master license agreement is primarily a royalty-based model that includes franchise fees upon the opening of each location, and restaurant equipment and distribution sales. Apparel is responsible for the capital investment and real estate development required to open new restaurants, along with operations and marketing. The Company has recently signed an area development agreement with Apparel to develop up to 100 Tim Hortons multi-format restaurants in Saudi Arabia over the next 5 years. Development in Saudi Arabia will be managed by Apparel and will focus on major urban markets, with opportunity for development beyond the initial 100 targeted locations. We continue to assess additional markets for development in various regions of the world as part of our international strategy with a view to further expanding our international presence over time.

The Company also had, as at March 31, 2013, 246 primarily licensed locations in the Republic of Ireland and in the United Kingdom compared to 253 locations as at April 1, 2012, which are not included in our new restaurant development or systemwide restaurant count.

We have exclusive development rights in Canada, and certain rights to use licenses in the U.S. within Tim Hortons locations, to operate Cold Stone Creamery ice cream and frozen confection retail outlets. As at March 31, 2013, we had 257 co-branded locations, 147 in Canada and 110 in the U.S. (103 in Tim Hortons restaurants and 7 in Cold Stone Creamery locations) as compared to 235 locations as at April 1, 2012, 135 in Canada and 100 in the U.S. (93 in Tim Hortons restaurants and 7 in Cold Stone Creamery locations). We have also complemented our Cold Stone Creamery offering in Canada with 32 Cold Stone Creamery self-serve freezers in Tim Hortons locations, which are not included in our Cold Stone Creamery restaurant count.

Set forth in the table below is our restaurant count by restaurant type:

Systemwide Restaurant Count


	As at
	March 31, 2013			December 30, 2012			April 1, 2012
Canada
Company-operated		15			18			16
Franchised – standard and non-standard		3,312			3,294			3,179
Franchised – self-serve kiosks		126			124			120

Total		3,453			3,436			3,315

% Franchised		99.6	%		99.5	%		99.5	%

U.S.
Company-operated		2			4			7
Franchised – standard and non-standard		626			621			549
Franchised – self-serve kiosks		180			179			165

Total		808			804			721

% Franchised		99.8	%		99.5	%		99.0	%

International (GCC)
Franchised – standard and non-standard		27			24			6

% Franchised		100	%		100	%		100	%

Total system
Company-operated		17			22			23
Franchised – standard and non-standard		3,965			3,939			3,734
Franchised – self-serve kiosks		306			303			285

Total		4,288			4,264			4,042

% Franchised		99.6	%		99.5	%		99.4	%

Segment Operating Income

We have revised our segment reporting as a result of the realignment of roles and responsibilities within our Business Unit and Corporate Centre design (see Results of Operations – Corporate Reorganization Expenses) . Beginning in the first quarter of 2013, the chief decision maker views and evaluates the Company’s reportable segments as follows:

The Company has reclassified the segment data for the prior periods to conform to the current period’s presentation. Set forth in the table below is the segment operating income of our reportable segments for the first quarter of 2013 as compared to the first quarter of 2012:


	First quarter ended March 31, 2013			% of Revenues			First quarter ended April 1, 2012			% of Revenues			Change
	First quarter ended March 31, 2013			% of Revenues			First quarter ended April 1, 2012			% of Revenues			Dollars			Percentage
	($ in thousands)
Operating Income (Loss)
Canada	$	145,821			24.6	%	$	147,226			24.5	%	$	(1,404	)		(1.0	)%
U.S.		910			2.0	%		1,654			4.3	%		(745	)		(45.0	)%
Corporate services		(10,665	)		n/m			(18,785	)		n/m			8,120			(43.2	)%

Reportable segment operating income		136,066			21.2	%		130,095			20.2	%		5,971			4.6	%
VIEs		1,326			1.5	%		1,528			1.9	%		(202	)		(13.2	)%
Corporate reorganization expenses		(9,475	)		n/m			—			n/m			(9,475	)		n/m

Consolidated Operating income	$	127,917			17.5	%	$	131,623			18.3	%	$	(3,706	)		(2.8	)%

n/m	Not meaningful

Canada

Operating income was $145.8 million in the first quarter of 2013, a decrease of $1.4 million, or 1.0%, compared to the first quarter of 2012. Systemwide sales growth of 2.5% was driven by incremental sales from the net addition of new restaurants, partially offset by a decline in same-store sales of 0.3%. Adjusting for the estimated effect of the additional holidays in the first quarter of 2013, we believe that we would have noted marginally positive same-store sales growth. Systemwide sales growth resulted in growth in rents and royalties revenues, which was more than offset by increased operating expenses due to an overall increase in the number of properties owned or leased and higher support costs related to property maintenance. The decrease in rents and royalties income was partially offset by an increase in supply chain income, driven by the growth in systemwide sales.

In the first quarter of 2013, we saw continued growth in average cheque, which benefited from both pricing and favourable product mix. Our product mix was positively impacted by the continued success of our Panini sandwiches and our new single-serve take-home products, which offset a decrease in our hot beverage sales, which in the first quarter of 2012, had both new product

innovation and extensive promotional activity. We also introduced category extensions towards the end of the first quarter of 2013, such as our Breakfast Panini sandwiches and vanilla bean lattes. There was a slight decline in systemwide transactions in the first quarter of 2013, due in part, we believe, to continued challenging general macro-economic operating conditions, the inclusion of holidays within the first quarter of 2013 that fell outside of the first quarter of 2012, and strong prior year comparables benefiting from unseasonably warm weather in the first quarter of 2012 as compared to more typical winter weather in the first quarter of 2013.

We opened 24 restaurants and closed 7 in the normal course of operations, in the first quarter of 2013, as compared to opening 22 restaurants and closing 2 in the first quarter of 2012.

In Canada, we continue to pursue menu, promotional and operational initiatives to adapt to the current operating environment and grow our business. Recently, these initiatives included the national launch of Panini sandwiches in Canada, and single-serve coffee in both Canada and the U.S. We also continue to execute medium to longer-term growth-oriented initiatives. These initiatives include active development in Canada as we believe there is considerable opportunity to further build our presence in key markets across the country. Our capital investments in Canada have increased in fiscal 2013 as we work to create additional capacity at approximately 1,000 restaurants under our drive-thru programs, continue our restaurant development and increase the scale of our renovation program.

U.S.

Operating income was $0.9 million in the first quarter of 2013, representing a decrease of $0.7 million, or 45.0%, compared to the first quarter of 2012. Systemwide sales growth of 7.8% was driven by incremental sales from the net addition of new restaurants, partially offset by a decline in same-store sales of 0.5%. Adjusting for the estimated effect of additional holidays in the first quarter of 2013 would have reduced the decline in our U.S. same-store sales. Systemwide sales growth led to growth in rents and royalties revenues, which was more than offset by an increase in relief primarily related to restaurants opened in fiscal 2012 and higher operating expenses due to an overall increase in the number of properties owned or leased, and increased renovation activity. This decrease was partially offset by an increase in supply chain income, driven by the growth in systemwide sales.

In the first quarter of 2013, we saw continued growth in average cheque, primarily as a result of pricing. Our promotions in the U.S., such as our breakfast options for under $2.00 and $0.49 donut with a hot beverage purchase, emphasized our value offerings in light of challenging macro-economic operating conditions. Total system restaurant transactions continued to grow as a result of the addition of new restaurants.

We opened 8 restaurants and closed 4 in the normal course of operations, in the first quarter of 2013, as compared to opening 7 restaurants and no closures in the first quarter of 2012.

Our approach to development of the U.S. market has changed during our two decades of active development, and we expect it to continue to evolve. Having initially seeded a number of local markets in 11 states, we have more recently been deploying our capital into our highest U.S. growth markets to increase the density of our restaurant footprint, which leverages advertising scale and creates opportunity for increased guest frequency and average unit volumes. While we have achieved systemwide sales progression in our U.S. business, we believe there may be additional opportunities to drive better returns in the U.S. market through a less capital-intensive development approach. In conjunction with our strategic planning, as we make decisions that will guide capital allocation to drive growth for the next few years, one of the options we will actively explore in the U.S. is working with well-capitalized franchisees. Working with such franchisees would enable us to deploy less capital, while increasing development and brand awareness in various markets. There can be no assurances at this time as to whether we will be able to implement such approaches or that such approaches will yield the anticipated results.

Corporate services

Our Corporate services segment had an operating loss of $10.7 million in the first quarter of 2013, compared to an operating loss of $18.8 million in the first quarter of 2012. The primary driver of the lower operating loss was income from distribution services resulting from operational improvements in our distribution centres, the timing of certain expenses, and variability related to commodity costs which is likely to reverse in the latter part of fiscal 2013. Also contributing to the reduced operating loss were lower general and administrative expenses due primarily to lower salaries and benefits (see Results of Operations – General and Administrative Expenses) . Other income, related primarily to a corporate property sale, was also recognized in Corporate services in the first quarter of 2013.

Variable interest entities (“VIEs”)

Operating income from our VIEs was $1.3 million in the first quarter of 2013, a decrease of $0.2 million compared to the first quarter of 2012. Although we consolidated, on average, 52 additional Non-owned restaurants in the first quarter of 2013, 49 were U.S. restaurants, which generally have lower profitability than our Canadian restaurants.

Results of Operations


	First quarter ended March 31, 2013			% of Revenues			First quarter ended April 1, 2012			% of Revenues			Change ⁽¹⁾
	First quarter ended March 31, 2013			% of Revenues			First quarter ended April 1, 2012			% of Revenues			Dollars			Percentage
	($ in thousands)
Revenues
Sales	$	523,887			71.6	%	$	523,302			72.6	%	$	585			0.1	%
Franchise revenues:
Rents and royalties ⁽²⁾		187,454			25.6	%		180,186			25.0	%		7,268			4.0	%
Franchise fees		20,196			2.8	%		17,796			2.5	%		2,400			13.5	%

		207,650			28.4	%		197,982			27.4	%		9,668			4.9	%

Total revenues		731,537			100.0	%		721,284			100.0	%		10,253			1.4	%

Costs and expenses
Cost of sales		461,354			63.1	%		464,920			64.5	%		(3,566	)		(0.8	)%
Operating expenses		75,733			10.4	%		65,925			9.1	%		9,808			14.9	%
Franchise fee costs		22,552			3.1	%		20,282			2.8	%		2,270			11.2	%
General and administrative expenses		38,668			5.3	%		41,423			5.7	%		(2,755	)		(6.7	)%
Equity (income)		(3,349	)		(0.5	)%		(3,246	)		(0.5	)%		(103	)		3.2	%
Corporate reorganization expenses		9,475			1.3	%		—			0.0	%		9,475			n/m
Other (income) expense, net		(813	)		(0.1	)%		357			0.0	%		(1,170	)		n/m

Total costs and expenses, net		603,620			82.5	%		589,661			81.8	%		13,959			2.4	%

Operating income		127,917			17.5	%		131,623			18.2	%		(3,706	)		(2.8	)%
Interest (expense)		(8,663	)		(1.2	)%		(7,898	)		(1.1	)%		(765	)		9.7	%
Interest income		928			0.1	%		711			0.1	%		217			30.5	%

Income before income taxes		120,182			16.4	%		124,436			17.3	%		(4,254	)		(3.4	)%
Income taxes		33,259			4.5	%		34,457			4.8	%		(1,198	)		(3.5	)%

Net income		86,923			11.9	%		89,979			12.5	%		(3,056	)		(3.4	)%
Net income attributable to noncontrolling interests		752			0.1	%		1,200			0.2	%		(448	)		(37.3	)%

Net income attributable to Tim Hortons Inc.	$	86,171			11.8	%	$	88,779			12.3	%	$	(2,608	)		(2.9	)%

^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. The change of the Canadian dollar relative to the U.S. dollar year-over-year did not have a significant impact on any component of net income in the first quarter of 2013.

⁽²⁾

Rents and royalties revenues includes rents and royalties derived from our franchised restaurant sales, and advertising levies of $2.5 million and $0.5 million in the first quarters of 2013 and 2012, respectively, primarily associated with the Ad Fund’s program to acquire LCD screens, media engines, drive-thru menu boards and ancillary equipment for our restaurants (“Expanded Menu Board Program”). 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:


	First quarter ended
	March 31, 2013		April 1, 2012
Franchised restaurant sales:
Canada (Canadian dollars)	$	1,408,454	$	1,375,274
U.S. (U.S. dollars)	$	137,169	$	126,482

Revenues

Sales

Sales for the first quarter of 2013 increased $0.6 million, or 0.1%, over the first quarter of 2012 to $523.9 million. The increase in sales was driven by the increase in the number of consolidated Non-owned restaurants, partially offset by a decrease in distribution sales.

Distribution sales . Distribution sales were $431.2 million in the first quarter of 2013, compared to $439.7 million in the first quarter of 2012, decreasing $8.6 million, or 2.0%. Pricing, driven primarily by lower prices for coffee and other commodities and reflective of their lower underlying costs, and to a lesser extent, product mix, decreased distribution sales by approximately $21.9 million. Partially offsetting the decrease was systemwide sales growth, which drove an increase in distribution sales of $12.5 million.

Our distribution sales continue to be subject to changes related to underlying costs of key commodities, such as coffee, wheat, edible oils, sugar, and other product costs. 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 6-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.

Company-operated restaurants sales . Company-operated restaurant sales were $6.0 million in the first quarter of 2013, compared to $5.6 million in the first quarter of 2012. The increase of $0.4 million, or 7.5%, was driven by the increase in the average number of Company-operated restaurants, as well as the mix of Company-operated restaurants between Canada and the U.S. On average, we operated 21 Company-operated restaurants during the first quarter of 2013, 18 in Canada and 3 in the U.S., as compared to 20 in the first quarter of 2012, 12 in Canada and 8 in the U.S. Company-operated restaurant sales vary with the average number and mix ( i.e. , size, location and type) of Company-operated restaurants.

We ended the first quarter of 2013 with 15 Company-operated restaurants in Canada, and 2 in the U.S., representing approximately 0.4% of total systemwide restaurants. Comparatively, we ended the first quarter of 2012 with 16 Company-operated restaurants in Canada, and 7 in the U.S., representing 0.6% of total systemwide restaurants. On occasion, we may repurchase restaurants from existing restaurant owners, operate them corporately for a short period of time, and then refranchise these restaurants. As such, Company-operated revenue is also impacted by the timing of these events throughout the year.

Variable interest entities’ sales . VIEs’ sales were $86.8 million and $78.0 million in the first quarters of 2013 and 2012, respectively, representing an increase of 11.2%. The increase in VIEs’ sales of $8.7 million was primarily due to an increase in the number of consolidated Non-owned restaurants, partially offset by lower restaurant sales in our U.S. consolidated Non-owned restaurants. During the first quarter of 2013, we consolidated, on average, approximately 358 Non-owned restaurants (122 in Canada and 236 in the U.S.), compared to 306 Non-owned restaurants (119 in Canada and 187 in the U.S.) in the first quarter of 2012.

Franchise Revenues

Rents and Royalties . Revenue from rents and royalties was $187.5 million in the first quarter of 2013, as compared to $180.2 million in the first quarter of 2012, increasing $7.3 million, or 4.0%, from the comparative quarter. Rents and royalties growth was driven primarily by sales from the net addition of 225 new full-serve restaurants across all of our markets, partially offset by the decrease in same-store sales growth in the first quarter of 2013 as compared to the first quarter of 2012, resulting in an approximate $5.1 million, or 2.8%, growth in rents and royalties revenues. We also recognized an additional $2.0 million of advertising levies specifically attributed to the Ad Fund’s Expanded Menu Board Program.

Franchise Fees . Franchise fees were $20.2 million in the first quarter of 2013, increasing $2.4 million, or 13.5%, from the first quarter of 2012. The primary factors resulting in the increase were a higher number of renovations, and type and number of restaurant resales, partially offset by fewer non-standard and standard restaurant sales. We opened more restaurants in the first quarter of 2013 under operator agreements in both Canada and the U.S. compared to the first quarter of 2012. Restaurants opening under operator agreements do not result in the recognition of any franchise fees as we retain ownership of the equipment.

Total Costs and Expenses

Cost of Sales

Cost of sales was $461.4 million in the first quarter of 2013, compared to $464.9 million in the first quarter of 2012, representing a decrease of $3.6 million, or 0.8%. The decrease in cost of sales was driven by lower distribution cost of sales, partially offset by higher cost of sales from VIEs.

Distribution cost of sales. Distribution cost of sales was $375.6 million in the first quarter of 2013, compared to $389.9 million in the first quarter of 2012, decreasing $14.4 million, or 3.7%. Pricing, related primarily to lower underlying commodity costs for coffee and other commodities, and to a lesser extent, product mix, contributed $25.7 million of the decrease, partially offset by systemwide sales growth, which drove an increase in distribution cost of sales of $11.1 million.

Company-operated restaurants’ cost of sales . Cost of sales for our Company-operated restaurants was $7.0 million, representing an increase of $0.9 million, or 15.3%. The increase was primarily attributable to an overall increase in restaurant operating costs resulting from the type of Company-operated restaurants, as well as the fact that we operated, on average, 1 additional Company-operated restaurant in the first quarter of 2013 compared to the first quarter of 2012. Cost of sales for our Company-operated restaurants, which includes food, paper, labour and occupancy costs, varies with the average number and mix ( i.e. , size, location and type) of Company-operated restaurants.

Variable interest entities’ cost of sales. VIEs’ cost of sales was $78.8 million and $68.9 million in the first quarters of 2013 and 2012, respectively. The increase in VIEs’ cost of sales of $9.9 million was primarily due to an increase in the average number of consolidated Non-owned restaurants, largely in the U.S.

Operating Expenses

Total operating expenses were $75.7 million in the first quarter of 2013, as compared to $65.9 million in the first quarter of 2012, increasing $9.8 million, or 14.9%. Total depreciation expense increased by $4.6 million year-over-year, $1.7 million of which was depreciation related to the Ad Fund’s Expanded Menu Board Program. The remaining increase in depreciation was due to an increase in the number of properties that we either own or lease, and then sublease to restaurant owners, and renovations to existing restaurants. Additionally, total rent expense increased by $2.7 million year-over-year, primarily due to 151 additional properties that were leased and then subleased to restaurant owners, partially offset by lower percentage rent expense on certain properties resulting from lower restaurant sales. Operating expenses also increased by approximately $2.7 million related to property maintenance.

Franchise Fee Costs

Franchise fee costs were $22.6 million in the first quarter of 2013, an increase of $2.3 million, or 11.2%, over the first quarter of 2012. The increase in franchise fee costs was primarily driven by an increase in the number and type of renovations in the first quarter of 2013 compared to the first quarter of 2012, partially offset by fewer non-standard and standard restaurant sales.

General and Administrative Expenses

General and administrative expenses decreased by $2.8 million to $38.7 million in the first quarter of 2013, due primarily to lower salaries and benefits. Salaries and benefits decreased due to lower stock-based compensation, resulting from a higher gain on our economic hedges partially offset by stock option revaluations in the first quarter of 2013 compared to the first quarter of 2012, as well as an equity grant which occurred in February 2012. Salaries and benefits also decreased in the first quarter of 2013 due to vacancies from the Corporate reorganization, which are expected to be filled as 2013 progresses. Partially offsetting these decreases was the favourable timing of certain benefit costs in the first quarter of 2012.

In general, our objective is for general and administrative expense growth not to exceed systemwide sales growth over the longer term. There can be quarterly fluctuations in general and administrative expenses due to the timing of certain expenses or events that may impact growth rates in any particular quarter.

Equity Income

Equity income was $3.3 million in the first quarter of 2013, which was comparable to $3.2 million in in the first quarter of 2012. Our most significant equity investment is our 50% interest in TIMWEN Partnership, which leases the Canadian Tim Hortons/Wendy’s ^® combination restaurants to restaurant owners or operators.

Corporate Reorganization Expenses

We completed the realignment of roles and responsibilities within our Corporate Centre and Business Unit design at the end of the first quarter of 2013 and recognized a related charge of $9.5 million, comprised of termination costs of $6.6 million, professional fees and other of $2.5 million, and CEO transition costs of $0.3 million. CEO transition costs, comprised of an employment agreement and retention agreements with certain senior executives, are being recognized over the estimated service period. We do not anticipate significant further costs related to the reorganization, with the exception of CEO transition costs, the amount of which is not yet determined.

Other (Income) Expense, net

Other (income), net, was $0.8 million in the first quarter of 2013 compared to other expense, net, of $0.4 million in the first quarter of 2012. Other (income), net in the first quarter of 2013 was primarily due to a corporate property sale, and favourable foreign exchange in comparison to the first quarter of 2012.

Interest Expense

Total interest expense, including interest on our long-term debt, capital leases and credit facilities, was $8.7 million and $7.9 million in the first quarters of 2013 and 2012, respectively, representing an increase of $0.8 million. The increase related primarily to interest associated with the Ad Fund’s borrowings for the Expanded Menu Board Program, and an increased number of capital leases outstanding.

Interest Income

Interest income is comprised primarily of interest earned from our cash and cash equivalents. Interest income was $0.9 million in the first quarter of 2013, an increase of $0.2 million compared to the first quarter of 2012, due primarily to higher average cash balances.

Income Taxes

The effective income tax rate for the first quarter of 2013 was 27.7% which was flat compared to the first quarter of 2012, as the benefit associated with Canadian statutory rate reductions has stabilized.

For Canadian federal tax purposes, the 2005 and subsequent taxation years remain open to examination and potential adjustment by the Canada Revenue Agency (“CRA”). The CRA is continuing to conduct an examination of the 2005 through 2010 taxation years in respect of certain international issues related to transfer pricing. During the first quarter of 2013, we provided responses to additional queries received from the CRA. Also, a Notice of Appeal to the Tax Court of Canada was filed on July 27, 2012 in respect of a dispute with the CRA related to the deductibility of approximately $10.0 million of interest expense for the 2002 taxation year. As of the date hereof, the Company believes that it will ultimately prevail in sustaining the tax benefit of the interest deduction. In addition, the CRA is conducting a general examination of various subsidiaries of the Company for the 2008 and 2009 taxation years. For U.S. federal income tax purposes, the Company remains open to examination commencing with the 2009 taxation year. Income tax returns filed with various provincial and state jurisdictions are generally open to examination for periods of 3 to 5 years subsequent to the filing of the respective return. The Company does not currently expect any material impact on earnings to result from the resolution of matters related to open taxation years; however, it is possible that actual settlements may differ from amounts accrued.

Subsequent to the end of the first quarter of 2013, the Company and Wendy’s International, Inc. (“Wendy’s”) agreed to settle all outstanding claims under the separation agreements relating to our initial public offering and spin-off from Wendy’s. The agreed upon settlement will be reflected positively in our financial statements for the second quarter of 2013, and will not have a material impact on our earnings. As part of the settlement, the Company and Wendy’s agreed to a full and final release of all claims under the separation agreements, provided, however, that any matters arising in connection with outstanding Competent Authority claims remain open.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests decreased by $0.4 million to $0.8 million in the first quarter of 2013. Although we consolidated, on average, 52 additional Non-owned restaurants as compared to the first quarter of 2012, 49 were U.S. restaurants, which generally have lower profitability than our Canadian restaurants.

Comprehensive Income

In the first quarter of 2013, comprehensive income attributable to Tim Hortons Inc. was $96.8 million, compared to $77.6 million in the first quarter of 2012, an increase of $19.2 million. The increase was primarily due to a translation adjustment gain of $8.2 million in the first quarter of 2013, as compared to a translation adjustment loss of $7.8 million in the first quarter of 2012, resulting in $16.0 million of translation adjustment changes year-over-year. Translation adjustment gains/losses arise primarily from the translation of our U.S. net assets into our reporting currency, Canadian dollars, at period-end rates. When the U.S. dollar strengthens or weakens relative to the Canadian dollar, we incur a translation adjustment gain or loss. Additionally, in the first quarter of 2013, we had a $2.4 million gain, net of taxes, related to cash flow hedges, compared to a $3.4 million loss in the first quarter of 2012. These increases were partially offset by the decrease in net income of $3.1 million from the first quarter of 2013 compared to the first quarter of 2012.

The exchange rates were as follows:


	As at
	March 31, 2013		December 30, 2012		April 1, 2012		January 1, 2012
US $1.00	$	1.0160	$	0.9965	$	0.9975	$	1.0170

XBRL Filing

Attached as Exhibit 101 to this report are documents formatted in Extensible Business Reporting Language (“XBRL”). The financial information contained in the XBRL-related documents are “unaudited” and/or “unreviewed,” as applicable.

As a result of the inherent limitations within the rendering tools, we have identified discrepancies that could not be corrected and, therefore, our XBRL tagged financial statements and footnotes should be read in conjunction with our Condensed Consolidated Financial Statements contained within this Form 10-Q.

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. Our U.S. operations have historically been a net user of cash given investment plans and stage of growth, and we expect this trend to continue through the remainder of fiscal 2013. Our $250.0 million revolving bank facility (“Revolving Bank Facility”) provides an additional source of liquidity (see Credit Facilities below for additional information).

In the first quarter of 2013, we generated $48.2 million of cash from operations, compared to $66.4 million in the first quarter of 2012, a decrease of $18.2 million (see Comparative Cash Flows below for a description of sources and uses of cash). We believe that we will continue to generate adequate operating cash flows to fund both our capital expenditures, excluding the Expanded Menu Board Program which is a capital expenditure of the Ad Fund, and our expected debt service requirements over the next 12 months. If additional funds are needed for strategic initiatives or other corporate purposes beyond those currently available under our Revolving Bank Facility, 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 be limited by our financial and other covenants under our Revolving Bank Facility. Our Senior Unsecured Notes, 4.2% coupon, Series 1, due June 1, 2017 (“Senior Notes”) are not subject to any financial covenants; however, the Senior Notes contain certain other covenants, which are described below. Any such 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 March 31, 2013, we had approximately $466.2 million in long-term debt and capital leases on our balance sheet, excluding Ad Fund debt related to the Expanded Menu Board Program. We continue to believe that the strength of our balance sheet, including our cash position, provides us with opportunity and flexibility for future growth while still enabling us to return excess cash to our shareholders through a combination of dividends and our share repurchase program.

Capital Allocation

The Company’s first priority in relation to its business model and capital allocation philosophy is to reinvest in the business to drive growth and the success of our system to create long-term value for our shareholders. Given our significant financial strength, the Company also regularly reviews opportunities for creating value and maximizing shareholder returns.

In particular, in early 2013 we evaluated potential options regarding the possible transfer of real estate under our control to a Real Estate Investment Trust (“REIT”) structure as we have seen significant recent REIT transactions in both Canada and the U.S. We had also previously evaluated whether a REIT structure could create value for the Company. For reasons specific to our Company, including that a majority of our real estate is leased, and that, under current arrangements with our restaurant owners, a significant portion of the income we derive in connection with the real estate under our control may not be qualifying income for a REIT, the Company has determined that establishing a REIT structure at this time would not create significant value. The Company’s analysis and conclusions in this regard have been reviewed and confirmed by the Company’s external financial and legal advisors.

In addition, in light of the persistent and historically low interest rate environment, and the financial flexibility afforded us by the strength of our balance sheet, we have evaluated, and continue to actively evaluate, the optimal capital structure for our Company. This analysis will be informed by a number of factors, including an assessment of the appropriate debt capacity of the Company and our objective of maintaining our investment grade rating. We believe maintaining our investment grade rating is important to facilitate access to capital at attractive rates, needed to enable business growth and the success of our system, which we believe leads to the creation of shareholder value.

Our review of our optimal capital structure, including consideration of potential share repurchase activity and other uses of leverage, also includes an analysis of how best to manage certain tax complexities unique to Tim Hortons. These complexities present challenges to moving cash through our cross-border corporate structure. Substantially all of our free cash flow is generated from our Canadian operations and passes through a U.S. holding company before distribution to the Canadian public company and, ultimately, our shareholders. This subjects the Canadian earnings to U.S. income and withholding taxes. A portion of the corporate structure was modified in fiscal 2009 when we completed our Canadian public company reorganization, and, in addition to providing operational and administrative efficiencies, has resulted in significant benefit to the Company as our effective tax rate in fiscal 2012 alone was approximately 8% lower than it would have been had we not undertaken the reorganization. Our effective tax rate is now based primarily on Canadian corporate statutory rates rather than the higher U.S. corporate statutory rates. We are working on various alternatives to address the constraints embedded in our current corporate structure. Addressing these constraints is an important consideration when evaluating potential benefits associated with any particular capital allocation strategy, and to maintaining our lower effective tax rate over the longer term.

We continue to actively explore these and other ideas designed to drive value and returns for our shareholders. Given the complexities associated with these matters, there can be no assurance at this time as to the ultimate determination and/or the nature and timing of any activities we may contemplate.

Common Shares

On February 20, 2013, our Board of Directors approved a new share repurchase program (“2013 Program”) authorizing the repurchase of up to $250.0 million in common shares, not to exceed the regulatory maximum of 15,239,531 shares, representing 10% of our public float as of February 14, 2013, as defined under the Toronto Stock Exchange (“TSX”) rules. The 2013 Program has received regulatory approval from the TSX. Our common shares will be purchased under the 2013 Program through a combination of a 10b5-1 automatic trading plan purchases, as well as purchases at management’s discretion in compliance with regulatory requirements, and given market, cost and other considerations. Repurchases will be made on the TSX, the New York Stock Exchange (“NYSE”), and/or other Canadian marketplaces, subject to compliance with applicable regulatory requirements, or by such other means as may be permitted by the TSX and/or NYSE, and under applicable laws, including private agreements under an issuer bid exemption order issued by a securities regulatory authority in Canada. Purchases made by way of private agreements under an issuer bid exemption order by a securities regulatory authority will be at a discount to the prevailing market price as provided in the exemption order. The 2013 Program began on February 26, 2013 and will expire on February 25, 2014, or earlier if the $250.0 million or the 10.0% share maximum is reached. Common shares purchased pursuant to the 2013 Program will be cancelled. The 2013 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 2013 Program.

During the first quarter of 2013, there were no share repurchases as part of the 2013 Program. We commenced our 2013 program in the second quarter of 2013 through a 10b5-1 automatic trading plan.

Our outstanding share capital is comprised of common shares. An unlimited number of common shares, without par value, is authorized, and we had 153,404,839 common shares outstanding as at March 31, 2013. As at this same date, we had outstanding stock options with tandem stock appreciation rights to acquire 1,094,556 of our common shares to officers of the Corporation pursuant to our 2006 Stock Incentive Plan and 2012 Stock Incentive Plan, of which 516,403 were exercisable.

Dividends

In February 2013, our Board of Directors approved an increase in the targeted dividend payout range to 35% to 40% of prior year, normalized annual net income attributable to Tim Hortons Inc., which is net income attributable to Tim Hortons Inc. adjusted for certain items, such as gains on divestitures, tax impacts and asset impairments that affect our annual net income attributable to Tim Hortons Inc. Also in February 2013, our Board of Directors approved an increase of 23.8% in the quarterly dividend to $0.26 per common share. The Board declared and we paid our March 2013 dividend at this new rate. On May 8, 2013, our Board of Directors declared a $0.26 per share quarterly dividend, payable on June 7, 2013 to shareholders of record at the close of business on May 23, 2013. Dividends are declared and paid in Canadian dollars to all shareholders with Canadian resident addresses. For U.S. resident shareholders, dividends paid will be converted to U.S. dollars based on prevailing exchange rates at the time of conversion by the Clearing and Depository Services Inc. for beneficial shareholders and by us for registered shareholders. Notwithstanding our targeted payout range and the recent increase in our dividend, the declaration and payment of all future dividends remain subject to the discretion of our Board of Directors and the Company’s continued financial performance, debt covenant compliance, and other risk factors.

Credit Facilities

We have an unsecured Revolving Bank Facility, which will mature on January 26, 2017. The facility is supported by a syndicate of 7 financial institutions, of which Canadian financial institutions hold approximately 64% of the total funding commitment. We may use the borrowings under the Revolving Bank Facility for general corporate purposes, including potential acquisitions and other business initiatives.

The Revolving Bank Facility is for $250.0 million (which includes $25.0 million overdraft availability and a $25.0 million letter of credit facility). As at March 31, 2013, we had utilized $6.0 million of the facility to support standby letters of credit.

The Revolving Bank Facility provides variable rate funding options including bankers’ acceptances, LIBOR, or prime rate plus an applicable margin. This facility does not carry a market disruption clause. The Revolving Bank Facility contains various covenants which, among other things, require the maintenance of 2 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 March 31, 2013.

Ad Fund

As at March 31, 2013, the Ad Fund has a 7-year Term Loan (“Term Loan”) of $54.5 million with a Canadian financial institution related to the Expanded Menu Board Program. The Term Loan matures in November 2019 and will be repaid in equal quarterly installments. It bears interest of a Banker’s Acceptance Fee plus an applicable margin, with interest payable quarterly in arrears. In February 2013, the Ad Fund entered into an amortizing interest rate swap to fix a portion of the interest expense on the Term Loan. Prepayment of the loan is permitted without penalty at any time in whole or in part. We expect this debt to be serviced by the Ad Fund, and not from cash from operations.

The Ad Fund also has a Revolving Credit Facility bearing interest of a Banker’s Acceptance Fee plus an applicable margin of $39.3 million, which was undrawn as at March 31, 2013. The Term Loan and Revolving Credit Facility are secured by the Ad Fund’s assets and are not guaranteed by Tim Hortons Inc. or any of its subsidiaries.

There are no other financial covenants associated with the Revolving Credit Facility or the Term Loan. Events of default under the Term Loan include: a default in the payment of the obligations under the Term Loan; certain events of bankruptcy, insolvency or liquidation; and any material adverse effect in the financial or environmental condition of the Ad Fund.

Comparative Cash Flows

Operating Activities. Net cash provided from operating activities in the first quarter of 2013 was $48.2 million compared to $66.4 million in the first quarter of 2012, a decrease of $18.2 million. The decrease was primarily due to working capital movements from lower cash receipts driven by the timing of statutory holidays at the end of the quarter, as well as higher payments related to the Corporate reorganization in the first quarter of 2013, partially offset by changes in tax balances receivable or payable to the comparative quarter related to specific transactions.

Investing Activities. Net cash used in investing activities was $48.6 million in the first quarter of 2013 compared to $47.3 million in the first quarter of 2012, an increase of $1.3 million. The increase was primarily due to increased capital expenditures for new and existing restaurants year-over-year, partially offset by a decrease in the Ad Fund’s capital expenditures related to the Expanded Menu Board Program. Capital expenditures are typically the largest ongoing component of our investing activities and include expenditures for new restaurants, improvements to existing restaurants, and other corporate capital needs. A summary of capital expenditures is as follows:


	First quarter ended
	March 31, 2013		April 1, 2012
	(in millions)
Capital expenditures ⁽¹⁾
New restaurants	$	22.8	$	17.0
Existing restaurants ⁽²⁾		19.0		13.6
Ad Fund ⁽³⁾		2.8		14.0
Other capital expenditures		5.6		3.7

Total capital expenditures	$	50.2	$	48.3

⁽¹⁾	Reflected on a cash basis, which can be impacted by the timing of payments compared to the actual date of acquisition.

⁽²⁾	Related primarily to renovations and restaurant replacements.

⁽³⁾	Related to the Expanded Menu Board Program which is being funded by the Ad Fund.

Capital expenditures for new restaurants in Canada and the U.S. were as follows:


	First quarter ended
	March 31, 2013		April 1, 2012
	(in millions)
Canada	$	10.7	$	10.3
U.S. ⁽¹⁾		12.1		6.7

Total	$	22.8	$	17.0

⁽¹⁾	There were significant cash capital expenditures in the U.S. in the first quarter of 2013 relating to restaurants opened in the latter part of the fourth quarter of 2012.

Financing Activities. Financing activities used cash of $45.8 million in the first quarter of 2013 compared to $86.8 million in the first quarter of 2012. Our decreased use of cash for financing activities is a direct result of our share repurchase activity in the first quarter of 2013 as compared to the first quarter of 2012. We did not repurchase shares in the first quarter of 2013, whereas we accelerated the repurchase of common shares in the first quarter of 2012, temporarily funded by short-term borrowing of $25.0 million. Partially offsetting the decreased use of cash for share repurchases were our increased dividend payments reflecting the higher dividend rate, as we paid dividends of $39.9 million in the first quarter of 2013, compared to $33.0 million in the first quarter of 2012.

Off-Balance Sheet Arrangements

We do not have “off-balance sheet” arrangements as at March 31, 2013 and December 30, 2012 as that term is described by the SEC.

The Application of Critical Accounting Policies

The Condensed Consolidated Financial Statements and accompanying footnotes included in this report have been prepared in accordance with U.S. GAAP, with certain amounts based on management’s best estimates and judgments. To determine appropriate carrying values of assets and liabilities that are not readily available from other sources, management uses assumptions based on historical results and other factors that they believe are reasonable. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions or from using materially different assumptions. However, management currently believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely.

Other than the adoption of a new accounting standard, as noted in Note 1 of the Condensed Consolidated Financial Statements, there have been no significant changes in critical accounting policies or management estimates since the year ended December 30, 2012. A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K for the year ended December 30, 2012, filed with the SEC and the CSA on February 21, 2013.

Market Risk

Our exposure to various foreign exchange, commodity, interest rate, and inflationary risks remains substantially the same as reported in our 2012 Form 10-K for the year ended December 30, 2012.

SAFE HARBOR STATEMENT

Certain information contained in our Report on Form 10-Q for the first quarter ended March 31, 2013 (“Report”), including information regarding future financial performance and plans, expectations, and objectives of management constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We refer to all of these as forward-looking statements. A forward-looking statement is not a guarantee of the occurrence of future events or circumstances, and such future events or circumstances may not occur. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “outlook,” “forecast” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Examples of forward-looking statements in the Report include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future results, our strategic goals and our priorities, and the economic and business outlook for us, for each of our business segments and for the economy generally. The forward-looking statements contained in our Report are based on currently-available information and are subject to various risks and uncertainties, including, but not limited to, risks described in our Report on Form 10-K filed on February 21, 2013 (the “2012 Form 10-K”) with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators, and the risks and uncertainties discussed in the Report, that could materially and adversely impact our business, financial condition and results of operations (i.e. , the “risk factors”). Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of an adverse event or condition that damages our strong brand position and reputation; the absence of a material increase in competition within the quick service restaurant segment of the food service industry; cost and availability of commodities; continuing positive working relationships with the majority of the Company’s restaurant owners; the absence of any material adverse effects arising as a result of litigation; there being no significant change in the Company’s ability to comply with current or future regulatory requirements; and 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 other purposes.

Many of the factors that could determine our future performance are beyond our ability to control or predict. Investors should carefully consider our risk factors and the other information set forth in our Report (including our long-form Safe Harbor statement contained in Exhibit 99 thereto), and our 2012 Form 10-K, and are further cautioned not to place undue reliance on the forward-looking statements contained in our Report, which speak only as to management’s expectations as of the date of the Report. The events and uncertainties outlined in the risk factors, as well as other events and uncertainties not set forth below, could cause our actual results to differ materially from the expectation(s) included in the forward-looking statement, and if significant, could materially affect the Company’s business, sales revenues, stock 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, which are critical to achieving our operating income and other 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, corporately or at restaurant-level, which may result in increased restaurant-level pricing, which, in turn, may result in decreased guest demand for our products resulting in lower sales, revenues, and earnings. 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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is incorporated by reference from the section titled “Market Risk” on page 35 of this Form 10-Q.

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 was no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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 2012 Form 10-K filed on February 21, 2013 with the SEC and the CSA, 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 2012 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 deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We are updating certain of the risk factors previously disclosed in Part I, Item 1A of our 2012 Form 10-K, as set forth below, in order to reflect certain events which have occurred since the 2012 Form 10-K was filed.

Failure to retain our existing senior management team or the inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

Our success will continue to depend to a significant extent on our executive management team and the ability of other key management personnel to replace executives who retire or resign. We may not be able to retain our executive officers and key personnel or attract additional qualified management personnel to replace executives who retire or resign. Failure to retain our leadership team and attract and retain other important personnel could lead to ineffective management and operations, which would likely decrease our profitability.

We are currently in a CEO transition period and our Board of Directors has appointed Mr. Marc Caira to the position of President and Chief Executive Officer, effective July 2, 2013. 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, as well as to continuity of business initiatives, plans and strategies through the transition period.

In August 2012, we announced the implementation of an organizational structure which includes a Corporate Centre and Business Unit design. We completed the process of realigning roles and responsibilities under that new structure by the end of the first quarter of 2013. As a result of the Corporate reorganization, there has been a slight net reduction in the size of our employee base due to the departure of certain employees, and we currently have vacancies in certain positions which need to be filled. Any lack of required resources for a prolonged period of time could negatively impact our operations and ability to execute our strategic initiatives; harm our ability to retain and motivate employees; and negatively impact our ability to attract new employees.

Tax regulatory authorities may disagree with our positions and conclusions regarding certain tax attributes and treatment, including relating to certain of our corporate reorganizations, resulting in unanticipated costs or non-realization of expected benefits.

A taxation authority may disagree with certain views of the Company, including, for example, the allocation of profits by tax jurisdiction, and may take the position that material income tax liabilities, interests, penalties or amounts are payable by us, in which case, we expect that we would contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful in disputing the assessment, the implications could be materially adverse to us and affect our anticipated effective tax rate or operating income, where applicable.

Based on the provisions of the Income Tax Act (Canada), the U.S. Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder at the time of completing certain of our public or internal company corporate reorganizations (the “Reorganizations”), we anticipated that the Reorganizations would not result in any ongoing material Canadian and/or U.S. federal income tax liabilities to us. However, there can be no assurance that the Canada Revenue Agency (the “CRA”) and/or the U.S. Internal Revenue Service (the “IRS”) will agree with our interpretation of the tax aspects of the Reorganizations or any related matters associated therewith. The CRA or the IRS may disagree with our view and take the position that material Canadian or U.S. federal income tax liabilities, interest and penalties, respectively, are payable as a result of the Reorganizations. If we are unsuccessful in disputing the CRA’s or the IRS’ assertions, we may not be in a position to take advantage of the effective tax rates and the level of benefits that we anticipated to achieve as a result of the Reorganizations and the implications could be materially adverse to us. Even if we are successful in maintaining our positions, we may incur significant expense in contesting positions asserted or claims made by tax authorities that could have a material impact on our financial position and results of operations. Similarly, other costs or difficulties related to the Reorganizations and related transactions, which could be greater than expected, could also affect our projected results, future operations, and financial condition.

See additional disclosure under “Liquidity and Capital Resources – Capital Allocation ” in Part I, Item 2 of this Form 10-Q that is incorporated into this section by reference.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES


Period	(a) Total Number of Shares Purchased ⁽¹⁾		(b) Average Price Paid per Share (Cdn.) ⁽²⁾		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (Cdn.) ^{(3) (4) (5)}
Monthly Period #1 (December 31, 2012 — February 3, 2013)		—		n/a		—	$	—
Monthly Period #2 (February 4, 2013 — March 3, 2013)		—		n/a		—		250,000,000
Monthly Period #3 (March 4, 2013 — March 31, 2013)		—		n/a		—		250,000,000

Total		—		n/a		—	$	250,000,000

⁽¹⁾	Based on settlement date.

⁽²⁾	Inclusive of commissions paid to the broker to repurchase the common shares.

⁽³⁾	Exclusive of commissions paid to the broker to repurchase the common shares.

⁽⁴⁾

On February 23, 2012, we announced we obtained regulatory approval from the Toronto Stock Exchange (the “TSX”) to commence a 2012 share repurchase program (“2012 Program”) for up to $200.0 million in common shares, not to exceed the regulatory maximum of 13,668,332 common shares, representing 10% of our public float as of February 20, 2012, as defined under the TSX rules. The 2012 Program commenced March 5, 2012 and was due to terminate on March 4, 2013 or earlier if the $200.0 million or 10% share maximum was reached. The 2012 Program was completed on December 28, 2012 as the $200.0 million total repurchase limit was reached. The common shares purchased under the 2012 Program were cancelled.

⁽⁵⁾

On February 21, 2013, we announced we obtained regulatory approval from the TSX to commence a new share repurchase program (“2013 Program”) authorizing the repurchase of up to $250.0 million in common shares, not to exceed the regulatory maximum of 15,239,531 shares, representing 10% of our public float as of February 14, 2013, as defined under the TXS rules. The 2013 Program was scheduled to commence on February 26, 2013 and is due to terminate on February 25, 2014, or earlier if the $250.0 million or 10% share maximum is reached. Common shares purchased pursuant to the 2013 Program will be cancelled. The 2013 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 2013 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 6.

EXHIBITS

(a)	Index to Exhibits on Page 41.

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. AND SUBSIDIARIES

INDEX TO EXHIBITS


Exhibit	Description	Where found

*10(a)	Amended and Restated Non-Employee Director Deferred Stock Unit Plan effective September 28, 2009, as further amended and restated effective February 21, 2013	Incorporated herein by reference to Exhibit 10(r) to the Annual Report on Form 10-K of the Registrant filed with the Commission on February 21, 2013 (File No. 001-32843).

*10(b)	Form of Restricted Stock Unit Award Agreement (2013 Award)	Filed herewith.

*10(c)	Form of Nonqualified Stock Option Award Agreement (2013 Award)	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.

99	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.

*	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.”

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.]

Form of Restricted Stock Unit Award Agreement

(2013 Award – NEOs, VPs and Up)


Participant Name (“Grantee”):

Employee Number:

Grant Name:

Date of Grant:		May 15, 2013

Total Award:


Vest Schedule – RSUs

Vest Date		Vest Quantity
November 15, 2015		100%

RESTRICTED STOCK UNIT AWARD AGREEMENT

(with related Dividend Equivalent Rights)

Tim Hortons Inc.

Grant Year: 2013

May 15, 2013

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (this “Agreement”) is made effective as of the 15 ^th day of May, 2013 (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 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 (as defined in the Plan); 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 Restricted Stock Units with related Dividend Equivalent Rights as provided herein 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), describes all the terms and conditions of the Award.

NOW, THEREFORE, the Parties agree as follows:

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 an award of the above-noted number of Restricted Stock Units (the “Award”) with an equal number of related Dividend Equivalent Rights (as defined in the Plan). 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 (as defined in the Plan) 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 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.

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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.

Vesting .

Except as otherwise provided in this Agreement, Restricted Stock Units granted hereunder shall vest in their entirety on November 15, 2015. 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 (as defined in the Plan), 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 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

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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 (as defined in the Plan), 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 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.

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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 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 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.

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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 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 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.

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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 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.

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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 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.	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

- 8 -

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.

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.


TIM HORTONS INC.

by
		Name:
		Title:

[ (“Employer”)

by
		Name:
		Title:]

- 9 -

Exhibit 10(c)

Form of Nonqualified Stock Option Award

Agreement (2013 Award – NEOs, VPs and Up)


Participant Name (“Grantee”):

Employee Number:

Grant Name:

Date of Grant:		May 15, 2013

Expiration Date:		May 15, 2020

Option Price:		Cdn.$

Total Award:


Vest Schedule – Options

Vest Date		Vest Quantity
May 15, 2014		1/3
May 15, 2015		1/3
May 15, 2016		1/3

TIM HORTONS INC.

2013 STOCK INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AWARD AGREEMENT

(with related Stock Appreciation Right)

Grant Year: 2013

THIS NONQUALIFIED STOCK OPTION AWARD AGREEMENT (this “Agreement”) is made effective as of the 15 ^th day of May, 2013 (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 above-noted Grantee (collectively, the “Parties”).

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 is evidenced by this Agreement, which (together with the Plan) describes all the terms and conditions of the Award.

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 above-noted 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 May 15, 2014, subject to rounding down the Award to the nearest whole Share as of the vesting date;

(b) One-third (1/3) of the total Shares covered by the Award shall vest on May 15, 2015, subject to rounding down the Award to the nearest whole Share as of the vesting date; and

(c) One-third (1/3) of the total Shares covered by the Award shall vest on May 15, 2016, subject to rounding down the Award to the nearest whole Share as of the vesting date.

The Award shall expire May 15, 2020 (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 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.

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(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 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.

- 3 -

(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 (as defined in the Plan), 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, 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

- 4 -

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 (as defined in the Plan), 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.

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,

- 5 -

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.

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.

- 6 -

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 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.

20. 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.

- 7 -

21. 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.

22. 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.

{23. 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:				]

- 8 -

Exhibit 31(a)

CERTIFICATIONS

I, Paul D. House, certify that:

I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;

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;

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;

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:

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;

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;

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

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

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):

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

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: May 8, 2013


/s/ PAUL D. HOUSE
Name:		Paul D. House
Title:		Chief Executive Officer

Exhibit 31(b)

CERTIFICATIONS

I, Cynthia J. Devine, certify that:

I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;

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: May 8, 2013


/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 March 31, 2013 of Tim Hortons Inc. (the “Issuer”).

I, Paul D. House, 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: May 8, 2013

/s/ PAUL D. HOUSE

Name: Paul D. House

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 *

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: May 8, 2013

/s/ CYNTHIA J. DEVINE

Name: Cynthia J. Devine

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.

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,” “outlook,” “forecast” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Examples of forward-looking statements that may be contained in our public disclosure from time-to-time include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future results, our strategic goals and our 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 21, 2013 (“Form 10-K”), as updated in the Quarterly Report on Form 10-Q filed on May 8, 2013, 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, sales revenue, share price, financial condition, and/or future results, including causing the Company to (i) close restaurants, (ii) fail to realize 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, corporately or at restaurant-level, which may result in increased restaurant-level pricing, which in turn may result in decreased guest demand for our products resulting in lower sales, revenue, and earnings. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of an adverse event or condition that damages our strong brand position and reputation; the absence of a material increase in competition or in volume of type of competitive activity within the quick service restaurant segment of the food service industry; general worldwide economic conditions; cost and availability of commodities; the ability to retain our senior management team or the inability to attract and retain new qualified personnel; continuing positive working relationships with the majority of the Company’s restaurant owners; the absence of any material adverse effects arising as a result of litigation; and there being no significant change in the Company’s ability to comply with current or future regulatory requirements. 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 . 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 have a negative effect on the same-store sales of existing restaurants in the market. The Company may also enter markets where its brand is not well-known and where it has little or no operating experience and as a result, may not achieve the level of penetration needed in order to drive brand recognition, convenience, increased leverage to marketing dollars, and other benefits the Company believes penetration yields. When the Company enters new markets, it may be necessary to increase restaurant owner relief and support costs, which lowers its earnings. There can be no assurance that the Company will be able to successfully adapt its brand, development efforts, and restaurants to these differing market conditions. The Company’s failure to successfully implement growth and various other strategies and initiatives related to international development may have a negative impact on the overall operation of its business and may result in increased costs or inefficiencies that it cannot currently anticipate. The Company may also continue to selectively close restaurants that are not achieving acceptable levels of profitability or change its growth strategies over time, where appropriate. Such closures may be accompanied by impairment charges that may have a negative impact on the Company’s 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 we cannot obtain desirable locations for restaurants at reasonable prices, 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 also 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. In addition, there can be no assurance that the Company will be able to complete the desirable transactions, for reasons including restrictive covenants in debt instruments or other agreements with third parties. The Company may continue to pursue strategic alliances (including co-branding) with third parties for different types of development models and products and there can be no assurance that: significant value will be recognized through such strategic alliances; the Company will be able to maintain its strategic alliances; or, the Company will be able to enter into new strategic relationships in the future. Entry into such relationships as well as the expansion of the Company’s current business through such 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 achievement of its financial objectives and long-range aspirational goals.

The Importance of Canadian Segment Performance and Brand Reputation . The Company’s financial performance is highly dependent upon its Canadian operating segment, which accounted for approximately 94.0% of our reportable segment revenues, and 97.5% of our reportable segment operating income in fiscal 2012. Any substantial or sustained decline in the Company’s Canadian business would materially and adversely affect its financial performance. The Company’s success is also dependent on its ability to maintain and enhance the value of its brand, its guests’ connection to and perception of its brand, and a positive relationship with its restaurant owners. Brand value can be severely damaged, even by isolated incidents, including those that may be beyond the Company’s control such as: actions taken or not taken by its restaurant owners relating to health, safety, environmental, welfare, labour, public policy or social issues; contaminated food; litigation and claims (including litigation by, other disputes with, or negative relationship with restaurant owners); failure of security breaches or other fraudulent activities associated with its networks and systems; illegal activity targeted at the Company; and negative incidents occurring at or affecting its strategic business partners (including in connection with co-branding initiatives, international licensing arrangements and its self-serve kiosk model), affiliates, and corporate social responsibility programs. The Company’s brand could also be damaged by falsified claims or the quality of products from its vertically integrated manufacturing plants, and potentially negative publicity from various sources, including social media sites on a variety of topics and issues, whether true or not, which are beyond its control.

Competition . The quick service restaurant industry is intensely competitive with respect to price, service, location, personnel, qualified restaurant owners, real estate sites and type and quality of food. The Company and its restaurant owners compete with international, regional and local organizations, primarily through the quality, variety, and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of advertising/marketing, promotional and operational programs, discounting activities, 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 perceptions, and new product development by the Company and its competitors are also important factors. Certain of the Company’s competitors, most notably in the U.S., have greater financial and other resources than it does, including substantially larger marketing budgets and greater leverage from their marketing spend. In addition, the Company’s major competitors continue to engage in discounting, free sampling and other promotional activities.

Economic Conditions . The Company’s operating results and financial condition are sensitive to and dependent upon discretionary spending by guests, which may be affected by uncertainty in general economic conditions that could drive down demand for its products and result in fewer transactions or decrease average cheque per transaction at our restaurants. The Company cannot predict the timing or duration of suppressed economic conditions which could have an adverse effect on our business, results of operations and financial condition.

Product Innovation and Extensions . Achievement of the Company’s same-store sales strategy is dependent, among other things, on its ability to extend the product offerings of its existing brands and introduce innovative new products. Although it devotes significant focus to the development of new products, the Company may not be successful in developing innovative new products or its new products may not be commercially successful. The Company’s financial results and its ability to maintain or improve its competitive position will depend on its ability to effectively gauge the direction of the market and consumer trends and initiatives and successfully identify, develop, manufacture, market and sell new or improved products in response to such trends.

Senior Management Team . The Company is currently in a CEO transition period. 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, as well as the continuity of business initiatives, plans and strategies through the transition period. The Company is also in the process of implementing a corporate reorganization involving the realignment of roles and responsibilities under the new structure, which has resulted in a slight net reduction in the size of its employee base due to the departure of certain employees as well as vacancies in certain positions which need to be filled. Any lack of required resources for a prolonged period of time could negatively impact our operations and ability to execute our strategic initiatives, harm our ability to retain and motivate our current employees, and negatively impact our ability to attract new employees.

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, sugar, and other product costs 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 costs increases, price volatility for commodities it purchases has increased due to conditions beyond its control, including recent economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage and 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, respectively. A number of commodities have recently experienced elevated prices relative to historic prices. Although the Company generally secures commitments for most of its key commodities that generally extend over a six-month period, these may be at higher prices than its previous commitments. In addition, if further escalation in prices continues, the Company may be forced to purchase commodities at higher prices at the end of the respective terms of its current commitments. If the supply of commodities, including coffee, fails to meet demand, the Company’s restaurant owners may experience reduced sales which in turn, would reduce our rents and royalty income as well as distribution income. 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 food-borne illness and injuries caused by or claims of food tampering, employee hygiene and cleanliness failures or impropriety at Tim Hortons, and the potential health impacts of consuming certain of the Company’s products or other quick service restaurants unrelated to Tim Hortons, could result in negative publicity, damage the Company’s brand value and potentially lead to 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 its business, results of operations and financial condition.

Distribution Operations and Supply Chain . The occurrence of any of the following factors is likely to result in increased operating costs and decreased profitability of the Company’s distribution operations and supply chain and may also injure its brand, negatively affect its results of operations and its ability to generate expected earnings and/or increase costs, and/or negatively impact the Company’s relationship with its restaurant owners: higher transportation or shipping costs; inclement weather; increased food and other supply costs; having a single source of supply for certain of its food products; potential cost and disruption of a product recall; shortages or interruptions in the availability or supply of perishable food products and/or their ingredients; potential negative impacts on our relationship with our restaurant owners associated with an increase of required purchases, or prices, of products purchased from the Company’s distribution business; and political, physical, environmental, labour or technological disruptions in the Company’s or its suppliers’ manufacturing and/or warehouse 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 operated 99.5% of the Tim Hortons restaurants as of December 30, 2012. The Company’s revenues and profits would decline and its brand reputation could also be harmed if a significant number of restaurant owners were to experience, among other things, operational or financial difficulties or labour shortages or significant increases in labour costs. Although the Company generally enjoys a positive working relationship with the vast majority of its restaurant owners, active and/or potential disputes with restaurant owners could damage its reputation and/or its relationships with the broader restaurant owner group. The Company’s restaurant owners are independent contractors and, as a result, the quality of their operations may be diminished by factors beyond the Company’s control. Any operational shortcoming of a franchise restaurant is likely to be attributed by consumers to the Company’s entire system, thus damaging its brand reputation and potentially affecting revenues and profitability. There can be no assurance that the Company will be able to continue to attract, retain and motivate higher performing restaurant owners.

Litigation . The Company is or may be subject to claims incidental to the business, including: obesity litigation; health and safety risks or conditions of the Company’s restaurants associated with design, construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations; employee claims for employment or labour matters, including potentially, class action suits regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, or overtime compensation claims; claims from restaurant owners and/or operators regarding profitability or wrongful termination of their franchise or operating (license) agreement(s); taxation authorities regarding certain tax disputes; and falsified 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 these claims and the Company’s exposure could exceed expectations and have a material adverse effect on its financial condition and results of operations.

Government Regulation . The Company and its restaurant owners are subject to various international, federal, state, provincial, and local (“governmental”) laws and regulations. The development and operation of restaurants depend to a significant extent on the selection, acquisition, and development of suitable sites, which are subject to laws and regulations regarding zoning, land use, environmental matters (including limitation of vehicle emissions in drive-thrus; anti-idling bylaws; regulation of litter, packaging and recycling requirements; regulation relating to discharge, storage, handling, release and/or disposal of hazardous or toxic substances; and other governmental laws and regulations), traffic, franchise, design and other matters. Additional governmental laws and regulations affecting the Company and its restaurant owners include: business licensing; franchise laws and regulations; health, food preparation, sanitation and safety; privacy; immigration, employment and labour (including applicable minimum wage requirements, benefits, overtime, working and safety conditions, family leave and other employment matters, and citizenship requirements); advertising and marketing; product safety and regulations regarding nutritional content, including menu labeling; existing, new or

future regulations, laws, treaties or the interpretation or enforcement thereof relating to tax matters that may affect the Company’s ongoing tax disputes, realization of the Company’s tax assets, disclosure of tax-related matters, and expansion of the Company’s business into new territories through its strategic initiatives, joint-ventures, or other types of programs, projects or activities; tax laws affecting restaurant owners’ business; accounting and reporting requirements and regulations; anti-corruption; and new or future regulations regarding sustainability. Compliance with these laws and regulations and planning initiatives undertaken in connection therewith could increase the cost of doing business and, depending upon the nature of the Company’s and its restaurant owners’ responsive actions thereto, could damage the Company’s reputation. Changes in these laws and regulations, or the implementation of additional regulatory requirements, particularly increases in applicable minimum wages, tax law, planning or other matters may, among other things, adversely affect the Company’s financial results; anticipated effective tax rate, tax liabilities, and/or tax reserves; business planning within its corporate structure; its strategic initiatives and/or the types of projects it may undertake in furtherance of its business; or franchise requirements.

In addition, a taxation authority may disagree with certain views of the Company with respect to the interpretation of tax treaties, laws and regulations and take the position that material income tax liabilities, interests, penalties or amounts are payable by the Company, including in connection with certain of its public or internal company reorganizations. Contesting such disagreements or assessments may be lengthy and costly and, if the Company were unsuccessful in disputing the same, the implications could be materially adverse to it and affect its anticipated effective tax rate, projected results, future operations and financial condition, where applicable.

International Operations . The Company’s international operations are and will continue to be subject to various factors of uncertainty, and there is no assurance that international operations will achieve or maintain profitability or meet planned growth rates. The implementation of the Company’s international strategic plan may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. Expansion into new international markets carries risks similar to those risks described above and more fully in the Form 10-K relative to expansion into new markets in the U.S.; however, some or all of these factors may be more pronounced in markets outside Canada and the U.S. due to cultural, political, legal, economic, regulatory and other conditions and differences. Additionally, the Company may also have difficulty exporting its proprietary products into international markets or finding suppliers and distributors to provide it with adequate supplies of ingredients meeting its standards in a cost-effective manner.

Market and Other Conditions . The quick service restaurant industry is affected by changes in international, national, regional, and local economic and political conditions, consumer preferences and perceptions (including food safety, health or dietary preferences and perceptions), discretionary spending patterns, consumer confidence, demographic trends, seasonality, weather events and other calamities, traffic patterns, the type, number and location of competing restaurants, enhanced governmental regulation, changes in capital market conditions that affect valuations of restaurant companies in general or the value of the Company’s stock in particular, and litigation relating to food quality, handling or nutritional content. Factors such as inflation, higher energy and/or fuel costs, food costs, the cost and/or availability of a qualified workforce and other labour issues, benefit costs, legal claims, legal and regulatory compliance (including environmental regulations), new or additional sales tax on the Company’s products, disruptions in its supply chain or changes in the price, availability and shipping costs of supplies, and utility and other operating costs, also affect restaurant operations and expenses and impact same-store sales and growth opportunities. The ability of the Company and its restaurant owners to finance new restaurant development, improvements and additions to existing restaurants, acquire and sell restaurants, and pursue other strategic initiatives (such as acquisitions and joint-ventures), are affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds. In addition, unforeseen catastrophic or widespread events affecting the health and/or welfare of large numbers of people in the markets in which the Company’s restaurants are located and/or which otherwise cause a catastrophic loss or interruption in the Company’s ability to conduct its business, would affect its ability to maintain and/or increase sales and build new restaurants. Unforeseen events, including war, armed conflict, terrorism and other international, regional or local instability or conflicts (including labour issues), embargos, trade barriers, public health issues (including tainted food, food-borne illness, food tampering and water supply or widespread/pandemic illness such as the avian, H1N1 or norovirus flu), and natural disasters such as flooding, earthquakes, hurricanes, or other adverse weather and climate conditions could disrupt the Company’s operations, disrupt the operations of its restaurant owners, suppliers, or guests, or result in political or economic instability.

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: fluctuations in the U.S. and Canadian dollar exchange rates; an inability to adequately protect the Company’s intellectual property and trade secrets from infringement actions or unauthorized use by others (including in certain international markets that have uncertain or inconsistent laws and/or application with respect to intellectual property and contract rights); liabilities and losses associated with owning and leasing significant amounts of real estate; changes in its debt levels and a downgrade on its credit ratings; and 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 forward-looking statements are made, or to reflect the occurrence of unanticipated events.