Tim Hortons 10-Q 2013 Q2 Quarterly report

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 June 30, 2013

OR

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

For the transition period from                    to                    

Commission File Number 001-32843

TIM HORTONS INC.

(Exact name of Registrant as specified in its charter)

Canada	98-0641955
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
874 Sinclair Road, Oakville, ON, Canada	L6K 2Y1
(Address of principal executive offices)	(Zip code)

905-845-6511

(Registrant’s phone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  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.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as  defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    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 August 5, 2013
Common shares	150,986,208 shares

Exhibit Index on page 47.

TIM HORTONS INC. AND SUBSIDIARIES

INDEX

	Pages
PART I: Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Operations for the second quarters and year-to-date periods ended June 30, 2013 and July 1, 2012		3
Condensed Consolidated Statement of Comprehensive Income for the second quarters and year-to-date periods ended June 30, 2013 and July 1, 2012		4
Condensed Consolidated Balance Sheet as at June 30, 2013 and December 30, 2012		5
Condensed Consolidated Statement of Cash Flows for the year-to-date periods ended June  30, 2013 and July 1, 2012		6
Condensed Consolidated Statement of Equity for the year-to-date-periods ended June  30, 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		22
Item 3. Quantitative and Qualitative Disclosures about Market Risk		41
Item 4. Controls and Procedures		41
PART II: Other Information
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 5. Other Information		45
Item 6. Exhibits		45
Signature		46
Index to Exhibits		47

On August 2, 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$0.9635 for Cdn$1.00.

Availability of Information

Tim Hortons Inc. (the “Company”), a corporation incorporated under theCanada 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 document.

Reporting Currency

The majority of the Company’s operations, restaurants and cash flows are based in Canada, and the Company is primarily managed in Canadian dollars. As a result, the Company’s reporting currency is the Canadian dollar. All amounts are expressed in Canadian dollars unless otherwise noted.

2

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

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

	Second quarter ended						Year-to-date period ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Revenues
Sales (note 14)	$	568,562		$	563,772		$	1,092,449		$	1,087,074
Franchise revenues
Rents and royalties		209,289			198,973			396,743			379,159
Franchise fees		22,288			22,836			42,484			40,632
		231,577			221,809			439,227			419,791
Total revenues		800,139			785,581			1,531,676			1,506,865
Costs and expenses
Cost of sales (note 14)		489,092			492,900			950,446			957,820
Operating expenses		76,986			72,314			152,719			138,239
Franchise fee costs		23,326			24,794			45,878			45,076
General and administrative expenses		38,038			40,272			76,706			81,695
Equity (income)		(3,916	)		(3,859	)		(7,265	)		(7,105	)
Corporate reorganization expenses (note 2)		604			1,277			10,079			1,277
Other (income) expense, net		(570	)		(956	)		(1,383	)		(599	)
Total costs and expenses, net		623,560			626,742			1,227,180			1,216,403
Operating income		176,579	��		158,839			304,496			290,462
Interest (expense)		(8,922	)		(8,650	)		(17,585	)		(16,548	)
Interest income		791			723			1,719			1,434
Income before income taxes		168,448			150,912			288,630			275,348
Income taxes (note 3)		43,886			41,675			77,145			76,132
Net income		124,562			109,237			211,485			199,216
Net income attributable to noncontrolling interests (note 13)		826			1,170			1,578			2,370
Net income attributable to Tim Hortons Inc.	$	123,736		$	108,067		$	209,907		$	196,846
Basic earnings per common share attributable to Tim Hortons Inc. (note 4)	$	0.81		$	0.70		$	1.38		$	1.27
Diluted earnings per common share attributable to Tim Hortons Inc. (note 4)	$	0.81		$	0.69		$	1.37		$	1.26
Weighted average number of common shares outstanding (in thousands) – Basic (note 4)		152,083			155,351			152,597			155,589
Weighted average number of common shares outstanding (in thousands) – Diluted (note 4)		152,637			155,995			153,133			156,207
Dividends per common share	$	0.26		$	0.21		$	0.52		$	0.42

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands of Canadian dollars)

	Second quarter ended						Year-to-date period ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Net income	$	124,562		$	109,237		$	211,485		$	199,216
Other comprehensive income (loss)
Translation adjustments gain (loss)		15,205			8,342			23,382			506
Unrealized gains (losses) from cash flow hedges (note 9)
Gain (loss) from change in fair value of derivatives		5,307			2,114			8,079			(1,389	)
Amount of net gain (loss) reclassified to earnings during the period		378			(800	)		1,041			(1,948	)
Tax (expense) recovery (note 9)		(1,333	)		(334	)		(2,325	)		951
Other comprehensive income (loss)		19,557			9,322			30,177			(1,880	)
Comprehensive income		144,119			118,559			241,662			197,336
Comprehensive income attributable to noncontrolling interests		826			1,170			1,578			2,370
Comprehensive income attributable to Tim Hortons Inc.	$	143,293		$	117,389		$	240,084		$	194,966

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

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

	As at
	June 30, 2013			December 30, 2012
Assets
Current assets
Cash and cash equivalents	$	86,603		$	120,139
Restricted cash and cash equivalents		104,780			150,574
Accounts receivable, net		188,989			171,605
Notes receivable, net (note 5)		5,946			7,531
Deferred income taxes		6,844			7,142
Inventories and other, net (note 6)		109,639			107,000
Advertising fund restricted assets (note 13)		38,264			45,337
Total current assets		541,065			609,328
Property and equipment, net		1,588,991			1,553,308
Intangible assets, net		3,195			3,674
Notes receivable, net (note 5)		5,662			1,246
Deferred income taxes		11,540			10,559
Equity investments		41,830			41,268
Other assets		72,603			64,796
Total assets	$	2,264,886		$	2,284,179
Liabilities and equity
Current liabilities
Accounts payable (note 7)	$	140,648		$	169,762
Accrued liabilities
Salaries and wages		14,642			21,477
Taxes		12,574			8,391
Tim Card obligation and other (note 7)		147,913			197,871
Deferred income taxes		1,052			197
Advertising fund liabilities (note 13)		42,624			44,893
Current portion of long-term obligations		20,130			20,781
Total current liabilities		379,583			463,372
Long-term obligations
Long-term debt		364,335			359,471
Long-term debt – Advertising fund		44,393			46,849
Capital leases		115,645			104,383
Deferred income taxes		8,468			10,399
Other long-term liabilities (note 7)		116,601			109,614
Total long-term obligations		649,442			630,716
Commitments and contingencies (note 10)
Equity
Equity of Tim Hortons Inc.
Common shares ($2.84 stated value per share), Authorized: unlimited shares. Issued: 151,319,384 and 153,404,839 shares, respectively (note 11)		429,105			435,033
Common shares held in Trust, at cost:
340,314 and 316,923 shares, respectively (note 13)		(14,969	)		(13,356	)
Contributed surplus		13,388			10,970
Retained earnings		916,421			893,619
Accumulated other comprehensive loss		(108,851	)		(139,028	)
Total equity of Tim Hortons Inc.		1,235,094			1,187,238
Noncontrolling interests (note 13)		767			2,853
Total equity		1,235,861			1,190,091
Total liabilities and equity	$	2,264,886		$	2,284,179

See accompanying Notes to the Condensed Consolidated Financial Statements.

5

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(in thousands of Canadian dollars)

	Year-to-date period ended
	June 30, 2013			July 1, 2012
Cash flows provided from (used in) operating activities
Net income	$	211,485		$	199,216
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization		72,368			62,379
Stock-based compensation expense (note 12)		12,535			11,869
Deferred income taxes		(2,539	)		(2,081	)
Changes in operating assets and liabilities
Restricted cash and cash equivalents		46,356			43,290
Accounts receivable		(8,254	)		(32,425	)
Inventories and other		(5,218	)		7,285
Accounts payable and accrued liabilities		(75,262	)		(64,156	)
Taxes		4,144			(8,674	)
Other		2,714			(352	)
Net cash provided from operating activities		258,329			216,351
Cash flows (used in) provided from investing activities
Capital expenditures		(88,272	)		(66,628	)
Capital expenditures – Advertising fund (note 13)		(5,224	)		(30,830	)
Other investing activities		6,125			(8,710	)
Net cash (used in) investing activities		(87,371	)		(106,168	)
Cash flows (used in) provided from financing activities
Repurchase of common shares (note 11)		(113,803	)		(136,509	)
Dividend payments to common shareholders		(79,348	)		(65,661	)
Net proceeds from issue of debt – Advertising fund (note 13)		0			32,262
Principal payments on long-term debt obligations		(8,543	)		(4,078	)
Other financing activities		(5,001	)		(4,739	)
Net cash (used in) financing activities		(206,695	)		(178,725	)
Effect of exchange rate changes on cash		2,201			(222	)
(Decrease) in cash and cash equivalents		(33,536	)		(68,764	)
Cash and cash equivalents at beginning of period		120,139			126,497
Cash and cash equivalents at end of period	$	86,603		$	57,733
Supplemental disclosures of cash flow information:
Interest paid	$	17,131		$	16,199
Income taxes paid	$	77,540		$	94,605
Non-cash investing and financing activities:
Capital lease obligations incurred	$	19,219		$	13,133

See accompanying Notes to the Condensed Consolidated Financial Statements.

6

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

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

	Common Shares						Common Shares Held in the Trust						Contributed Surplus $		Retained Earnings $			AOCI(1)						Total  Equity THI $			NCI(2) $			Total  Equity $
	Number			$			Number			$								Translation Adjustment $			Cash  Flow Hedges $
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 loss		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
Repurchase of common shares(3)		(2,086	)		(5,928	)		(43	)		(2,453	)		0		(107,875	)		0			0			(116,256	)		0			(116,256	)
Disbursed or sold from the Trust(4)		0			0			20			840			0		0			0			0			840			0			840
Stock based compensation		0			0			0			0			2,418		171			0			0			2,589			0			2,589
Other comprehensive income before reclassifications(5)		0			0			0			0			0		0			23,382			5,938			29,320			0			29,320
Amounts reclassified from AOCI(5)		0			0			0			0			0		0			0			857			857			0			857
NCI transactions		0			0			0			0			0		(53	)		0			0			(53	)		53			0
Net income attributable to NCI		0			0			0			0			0		0			0			0			0			1,578			1,578
Net income attributable to THI		0			0			0			0			0		209,907			0			0			209,907			0			209,907
Dividends and distributions, net		0			0			0			0			0		(79,348	)		0			0			(79,348	)		(3,717	)		(83,065	)
Balance as at June 30, 2013		151,319		$	429,105			(340	)	$	(14,969	)	$	13,388	$	916,421		$	(112,056	)	$	3,205		$	1,235,094		$	767		$	1,235,861

⁽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 12).

⁽⁵⁾  Amounts are net of tax (see note 9).

See accompanying Notes to the Condensed Consolidated Financial Statements.

7

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business

Tim Hortons Inc. is a corporation governed by theCanada 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 and 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 count and activity:

	Second quarter ended						Year-to-date period  ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Systemwide Restaurant Count
Franchised restaurants in operation – beginning of period		4,271			4,019			4,242			3,996
Restaurants opened		27			38			60			68
Restaurants closed		(12	)		(10	)		(22	)		(12	)
Net transfers within the franchised system		(2	)		3			4			(2	)
Franchised restaurants in operation – end of period		4,284			4,050			4,284			4,050
Company-operated restaurants		20			21			20			21
Total systemwide restaurants – end of period(1)		4,304			4,071			4,304			4,071
% of restaurants franchised – end of period		99.5	%		99.5	%		99.5	%		99.5	%

⁽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 251 primarily licensed locations in the Republic of Ireland and the United Kingdom as at June 30, 2013 (second quarter fiscal 2012: 243 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 June 30, 2013, and the results of operations, comprehensive income and cash flows for the second quarters ended June 30, 2013 and July 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 which the Company consolidates as variable interest entities (“VIEs”) (see note 13). 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 because these investments are operating ventures closely integrated into the Company’s business operations.

8

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 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 9).

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 the following expenses, as set forth in the table below:

	Second quarter ended				Year-to-date period  ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Termination costs	$	0	$	0	$	6,632	$	0
Professional fees and other		0		1,277		2,543		1,277
CEO transition costs		604		0		904		0
Total Corporate reorganization expenses	$	604	$	1,277	$	10,079	$	1,277

The CEO transition costs incurred in the second quarter of 2013 consist primarily of stock-based compensation expense. The Company expects to incur an additional approximate $1.0 million related to CEO transition through the remainder of fiscal 2013. CEO transition costs also include expenses related 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 $1.1 million as at June 30, 2013 relating to the retention agreements, for which the total expense may be up to $2.8 million.

	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 fiscal 2013 to-date		6,632			2,543			904			10,079
Paid during fiscal 2013 to-date		(12,177	)		(5,185	)		(344	)		(17,706	)
Accrued as at June 30, 2013(1)	$	2,013		$	1,185		$	2,405		$	5,603

⁽¹⁾  Of the total accrual, $5.0 million is recognized in Accounts Payable (fiscal 2012: $12.4 million).

NOTE 3 INCOME TAXES

The effective income tax rate was 26.1% for the second quarter ended June 30, 2013 (second quarter fiscal 2012: 27.6%) and 26.7% for the year-to-date period ended June 30, 2013 (year-to-date period fiscal 2012: 27.6%). The reduction in the income tax rate in the second quarter of 2013 compared to the second quarter of 2012 is primarily due to the favourable impact related to a reserve release resulting from a statute of limitations lapse and tax benefits associated with other discrete items, partially offset by an increase to prior year tax reserves as a result of audit activity.

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 has issued notices of reassessment for the 2005 through 2009 taxation years for transfer pricing adjustments related to our former investment in the Maidstone Bakery joint venture. The proposed adjustments, including tax, penalty and interest, total approximately $60.0 million. We will be required to deposit approximately $35.0 million of the proposed adjustment with the CRA and other taxation authorities by October 2013. Although the outcome of this matter cannot be predicted with certainty, the Company intends to contest this matter vigorously and we believe that we will ultimately prevail based on the merits of our position. At this time, we believe that we have adequately reserved for this matter; however, we will continue to evaluate our reserves as we progress through the appeals or litigation process with the CRA. If the CRA’s position is ultimately sustained as proposed, it may have a material adverse impact on earnings in the period that the matter is settled.

9

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 4 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO TIM HORTONS INC.

	Second quarter ended				Year-to-date period  ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Net income attributable to Tim Hortons Inc.	$	123,736	$	108,067	$	209,907	$	196,846
Weighted average shares outstanding for computation of basic earnings per common share attributable to Tim Hortons Inc. (in thousands)		152,083		155,351		152,597		155,589
Dilutive impact of RSUs(1)		295		317		286		311
Dilutive impact of stock options with tandem SARs(2)		259		327		250		307
Weighted average shares outstanding for computation of diluted earnings per common share attributable to Tim Hortons Inc. (in thousands)		152,637		155,995		153,133		156,207
Basic earnings per common share attributable to Tim Hortons Inc.	$	0.81	$	0.70	$	1.38	$	1.27
Diluted earnings per common share attributable to Tim Hortons Inc.	$	0.81	$	0.69	$	1.37	$	1.26

⁽¹⁾  Restricted stock units (“RSUs”).

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

NOTE 5 NOTES RECEIVABLE, NET

	As at
	June 30, 2013								December 30, 2012
	Gross		VIEs(2)			Total			Gross		VIEs(2)			Total
Franchise Incentive Program (“FIP”) notes(1)	$	20,518	$	(15,333	)	$	5,185		$	20,235	$	(14,441	)	$	5,794
Other notes receivable(3)		8,249		0			8,249			4,773		0			4,773
Notes receivable	$	28,767	$	(15,333	)	$	13,434		$	25,008	$	(14,441	)	$	10,567
Allowance							(1,826	)							(1,790	)
Notes receivable, net						$	11,608							$	8,777
Current portion, net							(5,946	)							(7,531	)
Long-term portion, net						$	5,662							$	1,246

	As at
	June 30, 2013								December 30, 2012
Class and Aging	Gross		VIEs(2)			Total			Gross		VIEs(2)			Total
Current status (FIP Notes and other)	$	9,979	$	(1,931	)	$	8,048		$	6,969	$	(1,269	)	$	5,700
Past-due status < 90 days (FIP Notes)		234		(0	)		234			407		(407	)		0
Past-due status > 90 days (FIP Notes)		18,554		(13,402	)		5,152			17,632		(12,765	)		4,867
Notes receivable	$	28,767	$	(15,333	)	$	13,434		$	25,008	$	(14,441	)	$	10,567
Allowance							(1,826	)							(1,790	)
Notes receivable, net						$	11,608							$	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 13).

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

10

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 6 INVENTORIES AND OTHER, NET

	As at
	June 30, 2013			December 30, 2012
Raw materials	$	29,420		$	19,941
Finished goods		71,064			75,660
		100,484			95,601
Inventory obsolescence provision		(870	)		(1,015	)
Inventories, net		99,614			94,586
Prepaids and other		10,025			12,414
Total Inventories and other, net	$	109,639		$	107,000

NOTE 7 ACCOUNTS PAYABLE, TIM CARD OBLIGATION AND OTHER, AND OTHER LONG–TERM LIABILITIES

Accounts payable

	As at
	June 30, 2013		December 30, 2012
Accounts payable	$	114,881	$	126,312
Construction holdbacks and accruals		20,812		31,008
Corporate reorganization accrual (note 2)		4,955		12,442
Total Accounts payable	$	140,648	$	169,762

Tim Card obligation and other

	As at
	June 30, 2013		December 30, 2012
Tim Card obligation	$	112,508	$	159,745
Contingent rent expense accrual		8,895		9,962
Maidstone Bakeries supply contract deferred liability		7,553		7,929
Other accrued liabilities(1)		18,957		20,235
Total Accrued liabilities, Other	$	147,913	$	197,871

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

Other long-term liabilities

	As at
	June 30, 2013		December 30, 2012
Accrued rent leveling liability	$	30,149	$	29,244
Uncertain tax position liability(1)		32,724		28,610
Stock-based compensation liabilities (note 12)		23,112		17,479
Maidstone Bakeries supply contract deferred liability		11,763		15,352
Other accrued long-term liabilities(2)		18,853		18,929
Total Other long-term liabilities	$	116,601	$	109,614

⁽¹⁾  Includes accrued interest.

⁽²⁾  Includes deferred revenues and various other accruals.

11

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 FAIR VALUES

Financial assets and liabilities measured at fair value

	As at
	June 30, 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)	$	151,645	Level 2	$	7,073	$	195,081	Level 2	$	(2,014	)
Interest rate swap(3)		32,500	Level 2		35		0	Level 2		0
Total return swaps (“TRS”)(4)		41,403	Level 2		15,739		41,403	Level 2		7,504
Total Derivatives	$	225,548		$	22,847	$	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
	June 30, 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	$	86,603		$	86,603		Level 1	$	120,139		$	120,139
Restricted cash and cash equivalents(1)	Level 1		104,780			104,780		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		11,608			11,608		Level 3		8,777			8,777
Senior unsecured notes, series 1(4)	Level 2		(316,764	)		(301,370	)	Level 2		(325,857	)		(301,544	)
Advertising fund term debt(5)	Level 3		(52,464	)		(52,464	)	Level 3		(56,500	)		(56,500	)
Other debt(6)	Level 3		(113,623	)		(65,668	)	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 generally estimates the current value of notes receivable, using a cost approach, based primarily on the estimated depreciated replacement cost of the underlying equipment held as collateral.

⁽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.

12

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 DERIVATIVES

	As at
	June 30, 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)	$	6,931	$	(14	)	$	6,917	Accounts receivable, net	$	494	$	(2,315	)	$	(1,821	)	Accounts payable
Interest rate swap(2)	$	35	$	0		$	35	Other assets	$	0	$	0		$	0		n/a
Derivatives not designated as hedging instruments
TRS(3)	$	15,739	$	0		$	15,739	Other assets	$	8,614	$	(1,110	)	$	7,504		Other assets
Forward currency contracts(1)	$	156	$	0		$	156	Accounts receivable, net	$	5	$	(198	)	$	(193	)	Accounts payable

⁽¹⁾  Notional value as at June 30, 2013 of $151.6 million (fiscal 2012: $195.1 million), with maturities ranging between July 2013 and May 2014; no associated cash collateral.

⁽²⁾  Notional value as at June 30, 2013 of $32.5 million (fiscal 2012: $nil), with maturities through fiscal 2019; no associated cash collateral.

⁽³⁾  The notional value and associated cash collateral, in the form of bearer deposit notes (see note 8), was $41.4 million as at June 30, 2013 (fiscal 2012: $41.4 million). The TRS have maturities annually, in May, between fiscal 2015 and fiscal 2019.

		Second quarter ended June 30, 2013									Second quarter ended July 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	$	4,851		$	144		$	4,995		$	2,114		$	(973	)	$	1,141
Interest rate swap	Interest (expense)		456			61			517			0			0			0
Interest rate forwards(3)	Interest (expense)		0			173			173			0			173			173
Total			5,307			378			5,685			2,114			(800	)		1,314
Income tax effect	Income taxes		(1,279	)		(54	)		(1,333	)		(545	)		211			(334	)
Net of income taxes		$	4,028		$	324		$	4,352		$	1,569		$	(589	)	$	980

		Year-to-date period ended June 30, 2013									Year-to-date period ended July 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	$	8,124		$	615		$	8,739		$	(1,389	)	$	(2,294	)	$	(3,683	)
Interest rate swap	Interest (expense)		(45	)		80			35			0			0			0
Interest rate forwards(3)	Interest (expense)		0			346			346			0			346			346
Total			8,079			1,041			9,120			(1,389	)		(1,948	)		(3,337	)
Income tax effect	Income taxes		(2,141	)		(184	)		(2,325	)		441			510			951
Net of income taxes		$	5,938		$	857		$	6,795		$	(948	)	$	(1,438	)	$	(2,386	)

⁽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.

13

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

	Classification on Condensed Consolidated Statement of Operations	Second quarter ended						Year-to-date ended
		June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
TRS	General and administrative expenses	$	(1,482	)	$	(180	)	$	(8,235	)	$	(3,412	)
Forward currency contracts	Cost of sales		(69	)		211			(349	)		959
Total (gain) loss, net		$	(1,551	)	$	31		$	(8,584	)	$	(2,453	)

NOTE 10 COMMITMENTS AND CONTINGENCIES

On June 12, 2008, a proposed class action was issued against the Company and certain of its affiliates in the Ontario Superior Court by two of its franchisees, alleging, among other things, that the Company’s Always Fresh baking system and lunch offerings led to lower franchisee profitability. The claim, as amended, asserted damages of approximately $1.95 billion on behalf of certain Canadian restaurant owners. The action was dismissed in its entirety by summary judgment on February 24, 2012 and all avenues of appeal have been exhausted.

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 condition and earnings.

NOTE 11 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 defined under the TSX rules as of February 14, 2013. The 2013 Program received regulatory approval from the TSX. Under the 2013 Program, the Company’s common shares may be purchased through a combination of 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 may 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.

Share repurchase activity for fiscal 2013 and 2012 is reflected in the Condensed Consolidated Statement of Equity; all shares repurchased were cancelled.

The Company obtained regulatory approval from the TSX to amend its Normal Course Issuer Bid (“NCIB”) to remove the former maximum dollar cap of $250.0 million. The timing of the program and exact number of shares purchased under the NCIB will be at our discretion and subject to the negotiation and execution of a broker agreement. The Company’s common shares will be purchased under the program through a combination of a 10b5-1 automatic trading plan in accordance with pre-set trading instructions established at a time when the Corporation is not in possession of material, non-public information as well as at management’s discretion in compliance with regulatory requirements, and given market, cost and other considerations.

14

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 12 STOCK-BASED COMPENSATION

	Second quarter ended				Year-to-date period ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
RSUs	$	2,478	$	3,132	$	3,580	$	5,790
Stock options and tandem SARs		2,264		1,305		7,339		5,050
DSUs(1)		406		251		1,616		1,029
Total stock-based compensation expense(2)	$	5,148	$	4,688	$	12,535	$	11,869

⁽¹⁾  Deferred share units (“DSUs”).

⁽²⁾  Generally included in General and administrative expenses.

The Company has entered into TRS contracts as economic hedges, covering 1.0 million of the Company’s underlying common shares, which represents a portion of its outstanding stock options with tandem SARs, and substantially all of its DSUs. The Company recognized a gain of $1.5 million in the second quarter ended June 30, 2013 (second quarter fiscal 2012: gain of $0.2 million) and a gain of $8.2 million in the year-to-date period ended June 30, 2013 (year-to-date period fiscal 2012: gain of $3.4 million) in General and administrative expenses (see note 9) related to the revaluation of the TRS.

The Company’s Human Resource and Compensation Committee (“HRCC”) approves all stock-based compensation awards. All awards granted in May 2013 were granted under the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). Details of stock-based compensation grants and settlements are set forth below.

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(1)		(160	)		36.72
Forfeited		(32	)		46.35
Balance as at December 30, 2012		312		$	50.91
Granted		141			56.12
Dividend equivalent rights		4			53.49
Vested and settled(1)		(44	)		51.39
Forfeited		(15	)		51.23
Balance as at June 30, 2013		398		$	52.72

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

In the second quarter ended June 30, 2013, the Company funded the Trust, which, in turn, purchased approximately 43,000 common shares for $2.5 million (second quarter fiscal 2012: 112,000 common shares for $6.2 million).

15

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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

RSUs that vested during the second quarter of fiscal 2013 and 2012 were settled with the participants in the following manner:

	RSU Gross  Settlement		RSU Settlement, net of  tax
	Units		Units		Amount
	(in thousands)
2012
Settled with common shares from the Trust		34		18	$	670
Settled by an open market purchase		7		5		250
Total restricted stock settlement		41		23	$	920
2013
Settled with common shares from the Trust		33		17	$	730
Settled by an open market purchase		6		4		210
Total restricted stock settlement		39		21	$	940

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
Granted		241			56.12
Exercised(1)		(181	)		35.64
Forfeited		(10	)		52.38
Balance as at June 30, 2013		1,222		$	44.42

⁽¹⁾  Total cash settlement, net of applicable withholding taxes of $2.5 million of SARs in the year-to-date period ended June 30, 2013 (year-to-date period fiscal 2012: 96,000 units for $1.5 million). The associated options were cancelled.

Deferred share units

Approximately 7,600 DSUs were granted during the year-to-date period of fiscal 2013 (year-to-date period fiscal 2012: 8,100) at a fair market value of $52.54 (year-to-date period fiscal 2012: $53.78). There were no DSU settlements during the second quarter and year-to-date periods of fiscal 2013 (second quarter and year-to-date periods of fiscal 2012: 9,400).

16

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 13 VARIABLE INTEREST ENTITIES

VIEs for which the Company is the primary beneficiary

Non-owned restaurants

The Company has consolidated 350 Non-owned restaurants as at June 30, 2013 (fiscal 2012: 365 restaurants), or approximately 8.1% of the Company’s total systemwide restaurants (fiscal 2012: 8.6%). On average, a total of 347 Non-owned restaurants were consolidated during the second quarter of fiscal 2013 (second quarter fiscal 2012: average of 309 restaurants) and 353 were consolidated during the year-to-date period of fiscal 2013 (year-to-date-period of fiscal 2012: 307).

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 $58.6 million of equipment cumulatively since fiscal 2011 for the Expanded Menu Board Program. In February 2013, the Ad Fund entered into an amortizing interest rate swap to fix a portion of the interest expense on its term debt related to the Expanded Menu Board Program.

The advertising funds spent approximately $59.7 million in the second quarter of fiscal 2013 (second quarter fiscal 2012: $47.9 million) and $129.2 million in the year-to-date period of fiscal 2013 (year-to-date period fiscal 2012: $121.8 million). Company contributions to the Canadian and U.S. advertising funds consisted of the following:

	Second quarter ended				Year-to-date period ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Company contributions	$	2,809	$	2,718	$	5,512	$	5,321
Contributions from consolidated non-owned restaurants		3,488		3,167		6,725		6,064
Total Company contributions	$	6,297	$	5,885	$	12,237	$	11,385

17

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:

	Second quarter ended
	June 30, 2013						July 1, 2012
	Restaurant VIEs		Advertising fund VIEs		Total VIEs		Restaurant VIEs		Advertising fund VIEs		Total VIEs
Sales	$	93,464	$	0	$	93,464	$	85,459	$	0	$	85,459
Advertising levies(1)		0		2,569		2,569		0		1,056		1,056
Total revenues		93,464		2,569		96,033		85,459		1,056		86,515
Cost of sales(2)		92,480		0		92,480		84,066		0		84,066
Operating expenses(1)		0		2,293		2,293		0		677		677
Operating income		984		276		1,260		1,393		379		1,772
Interest expense		0		276		276		0		379		379
Income before taxes		984		0		984		1,393		0		1,393
Income taxes		158		0		158		223		0		223
Net income attributable to noncontrolling interests	$	826	$	0	$	826	$	1,170	$	0	$	1,170

	Year-to-date period ended
	June 30, 2013						July 1, 2012
	Restaurant VIEs		Advertising fund VIEs		Total VIEs		Restaurant VIEs		Advertising fund VIEs		Total VIEs
Sales	$	180,224	$	0	$	180,224	$	163,473	$	0	$	163,473
Advertising levies(1)		0		5,100		5,100		0		1,543		1,543
Total revenues		180,224		5,100		185,324		163,473		1,543		165,016
Cost of sales(2)		178,346		0		178,346		160,654		0		160,654
Operating expenses(1)		0		4,392		4,392		0		1,062		1,062
Operating income		1,878		708		2,586		2,819		481		3,300
Interest expense		0		708		708		0		481		481
Income before taxes		1,878		0		1,878		2,819		0		2,819
Income taxes		300		0		300		449		0		449
Net income attributable to noncontrolling interests	$	1,578	$	0	$	1,578	$	2,370	$	0	$	2,370

⁽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.

18

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 assets and liabilities associated with the Company’s consolidated Non-owned restaurants and advertising funds presented on a gross basis, prior to consolidation adjustments, are as follows:

	As at
	June 30, 2013				December 30, 2012
	Restaurant VIEs		Advertising fund VIEs		Restaurant VIEs		Advertising fund VIEs
Cash and cash equivalents	$	7,867	$	0	$	10,851	$	0
Advertising fund restricted assets – current		0		38,264		0		45,337
Other current assets		6,678		0		6,770		0
Property and equipment, net		22,162		57,769		19,536		57,925
Other long-term assets		176		1,633		572		2,095
Total assets	$	36,883	$	97,666	$	37,729	$	105,357
Notes payable to Tim Hortons Inc. – current(1)	$	14,453	$	0	$	13,637	$	0
Advertising fund liabilities – current		0		42,624		0		44,893
Other current liabilities		11,512		8,369		14,548		9,919
Notes payable to Tim Hortons Inc. – long-term(1)		880		0		804		0
Long-term debt(2)		0		44,393		0		46,849
Other long-term liabilities		9,271		2,280		5,887		3,696
Total liabilities		36,116		97,666		34,876		105,357
Equity of VIEs		767		0		2,853		0
Total liabilities and equity	$	36,883	$	97,666	$	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 (see note 5).

⁽²⁾  Balance as at June 30, 2013 includes $52.5 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.

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 participating Canadian employees. The cost of the shares held by the Trust of $15.0 million as at June 30, 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).

19

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 14 SEGMENT REPORTING

The Company operates exclusively in the quick service restaurant industry. Effective the first quarter of fiscal 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 includes 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 business units exclude the effect of consolidating VIEs, consistent with how the chief decision maker views and evaluates the respective business unit’s results.

Corporate services.Corporate services comprises services to support the Canadian and U.S. business units, including: (i) general and administrative expenses; (ii) manufacturing income, and manufacturing sales to third parties; and (iii) income related to our distribution services, including the timing of variances arising primarily from commodity costs and the related effect on pricing, which generally reverse within a year, associated with our supply chain management. Our supply chain management involves securing a stable source of supply, which is intended to provide our restaurant owners with consistent, predictable pricing, and 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.

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

	Second quarter ended						Year-to-date period ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Revenues(1)
Canada	$	657,682		$	651,361		$	1,251,355		$	1,251,244
U.S.		41,220			43,154			85,668			81,583
Corporate services		5,204			4,551			9,329			9,022
Total reportable segments		704,106			699,066			1,346,352			1,341,849
VIEs		96,033			86,515			185,324			165,016
Total	$	800,139		$	785,581		$	1,531,676		$	1,506,865
Operating Income (Loss)
Canada	$	174,760		$	165,360		$	320,581		$	312,586
U.S.		2,587			4,101			3,497			5,755
Corporate services		(1,424	)		(11,117	)		(12,089	)		(29,902	)
Total reportable segments		175,923			158,344			311,989			288,439
VIEs		1,260			1,772			2,586			3,300
Corporate reorganization expenses		(604	)		(1,277	)		(10,079	)		(1,277	)
Consolidated Operating Income		176,579			158,839			304,496			290,462
Interest, Net		(8,131	)		(7,927	)		(15,866	)		(15,114	)
Income before income taxes	$	168,448		$	150,912		$	288,630		$	275,348

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

	Second quarter ended				Year-to-date period  ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Capital expenditures
Canada	$	30,145	$	19,364	$	60,421	$	43,146
U.S.		7,785		10,697		23,146		18,689
Corporate services		2,863		2,298		4,705		4,793
Total reportable segments	$	40,793	$	32,359	$	88,272	$	66,628

20

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
	June 30, 2013		December 30, 2012
Total Property and equipment, net
Canada(1)	$	934,006	$	915,733
U.S.(1)		403,294		378,457
Corporate services(2)		175,295		184,938
Total reportable segments		1,512,595		1,479,128
VIEs		76,396		74,180
Consolidated Property and equipment, net	$	1,588,991	$	1,553,308
Total Assets
Canada	$	1,217,356	$	1,175,552
U.S.		427,576		400,231
Corporate services		278,850		281,043
Total reportable segments		1,923,782		1,856,826
VIEs		130,976		139,462
Unallocated assets(3)		210,128		287,891
Consolidated Total assets	$	2,264,886	$	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:

	Second quarter ended				Year-to-date period ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Sales
Distribution sales	$	468,597	$	471,274	$	899,748	$	911,002
Company-operated restaurant sales		6,501		7,039		12,477		12,599
Sales from VIEs		93,464		85,459		180,224		163,473
Total Sales	$	568,562	$	563,772	$	1,092,449	$	1,087,074

	Second quarter ended				Year-to-date period  ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Cost of sales
Distribution cost of sales	$	399,019	$	410,224	$	774,572	$	800,172
Company-operated restaurant cost of sales		6,613		7,697		13,623		13,777
Cost of sales from VIEs		83,460		74,979		162,251		143,871
Total Cost of sales	$	489,092	$	492,900	$	950,446	$	957,820

21

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 June 30, 2013 filed with the SEC and the CSA on August 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. These forward-looking statements include information regarding our future economic and sales performance, expectations and objectives of management including with respect to our ability to obtain financing, our expectations regarding investment grade credit ratings, and our U.S. market strategy, and promotional and marketing initiatives. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to Item 1A. “Risk Factors” in Part I of our Annual Report and set forth in our long-form Safe Harbor Statement referred to below under “Safe Harbor Statement” and attached hereto, as well as risks described herein, for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results.

Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at 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 a reconciliation to GAAP measures.

References herein to “Tim Hortons,” the “Company,” “we,” “our,” or “us” refer to Tim Hortons Inc. and its subsidiaries, unless specifically noted otherwise.

Description of Business

The Company’s principal business is the franchising of Tim Hortons restaurants, primarily in Canada and the U.S., that serve premium coffee, espresso-based hot and cold specialty drinks (including lattes, cappuccinos and 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, Tim Hortons collects royalty revenue from franchised restaurant sales. Our business generates additional revenue by controlling the underlying real estate of our franchised restaurants; at June 30, 2013, we leased or owned the real estate for approximately 83% of our full-serve system restaurants in North America, including 791 owned locations (532 sites in Canada and 259 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 distribute coffee and other beverages, non-perishable food, supplies, packaging and equipment to most system restaurants in Canada through our five distribution centres, and frozen, refrigerated and shelf stable products from our Guelph and Kingston distribution facilities in our Ontario and Quebec markets. Where we are not able to leverage our scale or create warehousing or transportation efficiencies, such as in the U.S. and in certain Canadian markets, we typically manage and control the supply chain but use third-party warehousing and transportation. Our supply chain activities also include a significant consumer packaged goods business, commanding the second largest market share in sales of large canned coffee grocery retail sales in Canada. Our vertical integration model also includes two coffee roasting facilities located in Hamilton, Ontario, and Rochester, New York, and a fondant and fills manufacturing facility in Oakville, Ontario.

Our management of supply chain activities enables us to leverage our scale in Canada to create efficiencies, build competitive advantage, and provide quality, cost-competitive and timely deliveries to our restaurant owners. Our supply chain model is an important contributor to our profitability, generating strong returns for our shareholders while requiring relatively modest deployment of capital. As such, we view our supply chain activities as being central to our business model and an important means of supporting our business units in meeting the needs of our restaurant owners. We generally invest in vertical integration if we consider that the investment would be strategic, would provide value to our restaurant owners and would generate a reasonable rate of return.

Executive Overview

Systemwide sales grew 5.0% in the second quarter of 2013, driven by new restaurant development and same-store sales growth of 1.5% in Canada and of 1.4% in the U.S. In the first half of 2013, systemwide sales grew by 4.1%, led by new restaurant development and same-store sales growth of 0.6% in Canada and 0.5% in the U.S. In both Canada and the U.S., we grew total systemwide transactions during the second quarter and the first half of 2013.

22

While our systemwide and same-store sales growth have improved in comparison to the first quarter of 2013, we continue to operate in a challenging macro-economic climate with low growth. We believe that the macro-economic climate has impacted consumer confidence and discretionary spending in both Canada and the U.S., leading to an overall intensified competitive environment, and ultimately, negatively impacting the performance of several restaurant chains. We believe that these factors continued to negatively impact our systemwide and same-store sales growth in both Canada and the U.S. during the quarter.

In the second quarter and first half of 2013, same-store sales growth in Canada was driven by gains in average cheque resulting primarily from pricing, and to a lesser extent, favourable product mix, partially offset by a decrease in transactions due in part, we believe, to the factors noted above. Our year-to-date same-store sales growth was negatively impacted by unfavourable weather conditions in the first quarter of 2013 compared to the first quarter of 2012. Additionally, we had strong prior year comparables in the first quarter of 2013 compared to the first quarter of 2012. Although we anticipate positive same-store sales growth in the last half of 2013, given our year-to-date results, we expect to be below our targeted full year same-store sales growth range of 2.0% to 4.0%.

In the second quarter of 2013, same-store sales growth in the U.S. was driven primarily by an increase in transactions, with minimal growth from pricing. For the first half of 2013, same-store sales growth in the U.S. was driven by gains in average cheque, primarily due to pricing in the first quarter of 2013. Similar to Canada, on a year-to-date basis, our same-store sales growth was negatively impacted by unfavourable weather conditions in the first quarter of 2013 compared to the first quarter of 2012. Additionally, we had strong prior year comparables in the first half of 2013 compared to the first half of 2012. Although we anticipate positive same-store sales growth in the last half of 2013, given our year-to-date results, we expect to be below our targeted full year same-store sales growth range of 3.0% to 5.0%.

We have a number of initiatives, including a strong promotional calendar, planned for the balance of fiscal 2013, which we believe will help drive same-store sales growth in both Canada and the U.S. We intend to introduce a number of category extensions, including the expansion of our single-serve products with the introduction of a Tim Hortons RealCup™ product, which is compatible with K-Cup^® brewers, although not affiliated with K-Cup or Keurig^®. We will also continue to focus on our long-term initiatives, such as our drive-thru initiatives, including enhanced menu boards, double order stations, and order station relocations, currently planned at more than 1,000 locations in Canada. These initiatives, as well as a review of other key aspects of the business, will be undertaken in connection with the strategic planning process currently underway, which is anticipated to be completed later in the year.

Marc Caira was appointed President and CEO effective July 2, 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 a recognized leader in nutrition, health and wellness. On the same date, Paul House became Chairman of the Board of Directors, having formerly served as President and CEO, and Executive Chairman. Mr. House has agreed to provide transition services through the balance of fiscal 2013.

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. As a result of the corporate reorganization, effective from the first quarter of 2013, we have revised our segment reporting to align with our new internal reporting structure, which now comprises the business units in both Canada and the U.S., and Corporate services (seeSegment Operating Income).

Operating income increased $17.7 million, or 11.2%, to $176.6 million in the second quarter of 2013, and adjusted operating income (refer to non-GAAP reconciliation), which excludes Corporate reorganization expenses, increased $17.1 million, or 10.7%. The growth was driven primarily by systemwide and same-store sales growth, resulting in higher rents and royalties and supply chain income. Our supply chain also benefited from operational improvements and favourable product margin variability, some of which is expected to reverse in the last half of 2013. Lower general and administrative expenses, due primarily to lower salaries and benefits, also contributed favourably to operating income growth in the second quarter of 2013. Our operating margin improved in the second quarter of 2013 to 22.1%, as compared to 20.2% in the second quarter of 2012.

Year-to-date, operating income increased $14.0 million, or 4.8%, to $304.5 million, and adjusted operating income (refer to non-GAAP table), which excludes our year-to-date Corporate reorganization expenses, increased $22.8 million, or 7.8%. The same factors that impacted the operating income growth in the second quarter of 2013 also impacted the first half of 2013.

Net income attributable to Tim Hortons Inc. increased $15.7 million, or 14.5%, to $123.7 million in the second quarter of 2013, and increased $13.1 million, or 6.6%, to $209.9 million in the first half of 2013. The increase in both periods was driven by higher operating income, as well as a lower effective tax rate of 26.1% in the second quarter of 2013 compared to 27.6% in the second quarter of 2012, and 26.7% in the first half of 2013 compared to the 27.6% in the first half of 2012. Our year-to-date results continue to be significantly impacted by Corporate reorganization expenses of $10.1 million ($7.9 million after-tax).

Diluted earnings per share attributable to Tim Hortons Inc. (“EPS”) increased 17.0% to $0.81 in the second quarter of 2013, compared to $0.69 in the second quarter of 2012. Year-to-date, EPS increased 8.8% to $1.37 in the first half of 2013, compared to $1.26 in the second quarter of 2012. In addition to higher net income attributable to Tim Hortons Inc., our share repurchase program was a contributor to EPS growth in both periods, as we had, on average, 3.4 million, or 2.2%, fewer fully diluted common shares outstanding during the second quarter of 2013 compared to the first half of 2012, and 3.1 million, or 2.0%, fewer fully diluted common shares outstanding in the first half of 2013. Corporate reorganization expenses recognized in the first half of 2013 reduced

23

our EPS by approximately $0.05, and by $0.01 in the first half of 2012. Given our year-to-date results, including our systemwide and same-store sales growth, lower general and administrative expenses, and the benefit of a lower effective tax rate, we expect to be within our targeted full year EPS range of $2.87 – $2.97 for fiscal 2013.

Selected Operating and Financial Highlights

	Second quarter ended						Year-to-date ended
($ in millions, except per share data)	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Systemwide sales growth(1)		5.0	%		6.0	%		4.1	%		7.6	%
Same-store sales growth(1)
Canada		1.5	%		1.8	%		0.6	%		3.4	%
U.S.		1.4	%		4.9	%		0.5	%		6.6	%
Systemwide restaurants		4,304			4,071			4,304			4,071
Revenues	$	800.1		$	785.6		$	1,531.7		$	1,506.9
Operating income	$	176.6		$	158.8		$	304.5		$	290.5
Adjusted operating income(2)	$	177.2		$	160.1		$	314.6		$	291.7
Net income attributable to Tim Hortons Inc.	$	123.7		$	108.1		$	209.9		$	196.8
Diluted EPS	$	0.81		$	0.69		$	1.37		$	1.26
Weighted average number of common shares outstanding – Diluted (in millions)		152.6			156.0			153.1			156.2

⁽¹⁾  SeeSystemwide Sales Growth andSame-Store Sales Growth.

⁽²⁾  Adjusted operating income is a non-GAAP measure. See below for reconciliations of adjusting items used to calculate adjusted operating income. Management uses adjusted operating income to assist in the evaluation of year-over-year performance, and believes that it will be helpful to investors 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:

	Second quarter ended				Change from prior year
	June 30, 2013		July 1, 2012		$			%
	(in millions)
Operating income	$	176.6	$	158.8	$	17.7			11.2	%
Add: Corporate reorganization expenses		0.6		1.3		(0.7	)		n/m
Adjusted operating income	$	177.2	$	160.1	$	17.1			10.7	%

	Year-to-date period  ended				Change from prior year
	June 30, 2013		July 1, 2012		$		%
	(in millions)
Operating income	$	304.5	$	290.5	$	14.0		4.8	%
Add: Corporate reorganization expenses		10.1		1.3		8.8		n/m
Adjusted operating income	$	314.6	$	291.7	$	22.8		7.8	%

All numbers rounded

^n/m Not meaningful

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.

24

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. Systemwide sales growth in Canadian dollars, including the effects of foreign currency translation, was 5.1% and 6.4% for the second quarters of 2013 and 2012, respectively, and 4.2% and 7.9% in the first half of 2013 and 2012, respectively.

Our financial results are driven largely by changes in systemwide sales primarily in Canada and the U.S., with approximately 99.5% of our system franchised as at June 30, 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 353 and 307 consolidated Non-owned restaurants, on average, for the first half 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. In Canada, we expanded our cold beverage selection with the introduction of the Orange Tangerine Real Fruit Smoothie, and also introduced the Apple Cobbler donut, inspired by the Donut Showdown featured on Food Network^™ Canada. In the U.S., we expanded our breakfast menu with the introduction of the Jalapeno Flatbread Breakfast Sandwich. In both Canada and the U.S., we introduced our Tim Hortons Coffee Partnership Blend, of which $1 from every sale helps support our Coffee Partnership Program.

We had a strong promotional calendar in the second quarter of 2013, including a promotion in Canada in which guests who purchased a Tim Hortons Tassimo T-Disc bundle received a Tassimo brewer. In both Canada and the U.S., we introduced our Iced Capp Chill to Win^TM contest, and beginning in the second quarter and expected to continue throughout the summer of 2013, we are offering a small Iced Coffee, Frozen Lemonade and Iced Latte for $1 each plus applicable taxes.

New Restaurant Development

The opening of restaurants in new and existing markets in Canada and the U.S. has been a significant contributor to our growth. Set forth in the table below is a summary of restaurant openings and closures:

	Second quarter ended June 30, 2013									Second quarter ended July 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		19			2			21			19			0			19
Restaurants closed		(5	)		(1	)		(6	)		(3	)		(5	)		(8	)
Net change		14			1			15			16			(5	)		11
U.S.
Restaurants opened		5			0			5			6			9			15
Restaurants closed		(3	)		(3	)		(6	)		(1	)		(1	)		(2	)
Net change		2			(3	)		(1	)		5			8			13
International (GCC)
Restaurants opened		2			0			2			5			—			5
Total Company
Restaurants opened		26			2			28			30			9			39
Restaurants closed		(8	)		(4	)		(12	)		(4	)		(6	)		(10	)
Net change		18			(2	)		16			26			3			29

25

	Year-to-date period ended  June 30, 2013									Year-to-date period ended  July 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		41			4			45			40			1			41
Restaurants closed		(12	)		(1	)		(13	)		(5	)		(5	)		(10	)
Net change		29			3			32			35			(4	)		31
U.S.
Restaurants opened		12			1			13			12			10			22
Restaurants closed		(7	)		(3	)		(10	)		(1	)		(1	)		(2	)
Net change		5			(2	)		3			11			9			20
International (GCC)
Restaurants opened		5			0			5			6			—			6
Total Company
Restaurants opened		58			5			63			58			11			69
Restaurants closed		(19	)		(4	)		(23	)		(6	)		(6	)		(12	)
Net change		39			1			40			52			5			57

From the end of the second quarter of 2012 to the end of the second quarter of 2013, we opened 233 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. We have also closed, and may continue to close, restaurants which have 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. In the second quarter of 2013, the Company signed an area development agreement with Apparel to develop 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 June 30, 2013, 251 primarily licensed locations in the Republic of Ireland and in the United Kingdom compared to 243 locations as at July 1, 2012, which are not included in our new restaurant development or systemwide restaurant count.

26

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 June 30, 2013, we had 256 co-branded locations, 146 in Canada and 110 in the U.S. (103 in Tim Hortons restaurants and 7 in Cold Stone Creamery locations) as compared to 239 locations as at July 1, 2012, 139 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 39 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
	June 30, 2013			December 30, 2012			July 1, 2012
Canada
Company-operated		17			18			11
Franchised – standard and non-standard		3,324			3,294			3,200
Franchised – self-serve kiosk		127			124			115
Total		3,468			3,436			3,326
% Franchised		99.5	%		99.5	%		99.7	%
U.S.
Company-operated		3			4			10
Franchised – standard and non-standard		627			621			551
Franchised – self-serve kiosks		177			179			173
Total		807			804			734
% Franchised		99.6	%		99.5	%		98.6	%
International (GCC)
Franchised – standard and non-standard		29			24			11
% Franchised		100.0	%		100.0	%		100.0	%
Total system
Company-operated		20			22			21
Franchised – standard and non-standard		3,980			3,939			3,762
Franchised – self-serve kiosks		304			303			288
Total		4,304			4,264			4,071
% Franchised		99.5	%		99.5	%		99.5	%

27

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 (seeResults of Operations – Corporate Reorganization Expenses). Effective 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 includes 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 business units exclude the effect of consolidating VIEs, consistent with how the chief decision maker views and evaluates the respective business unit’s results.

Corporate services.Corporate services comprises services to support the Canadian and U.S. business units, including: (i) general and administrative expenses; (ii) manufacturing income, and manufacturing sales to third parties; and (iii) income related to our distribution services, including the timing of variances arising primarily from commodity costs and the related effect on pricing, which generally reverse within a year, associated with our supply chain management. Our supply chain management involves securing a stable source of supply, which is intended to provide our restaurant owners with consistent, predictable pricing, and 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. As a result of the appointment of our new CEO on July 2, 2013, there may be further changes to our segment reporting.

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 operating income (loss) of our reportable segments:

	Second quarter ended			% of Total			Second quarter ended			% of Total			Change
	June 30, 2013			Revenues			July 1, 2012			Revenues			Dollars			Percentage
	($ in thousands)
Operating Income (Loss)
Canada	$	174,760			21.8	%	$	165,360			21.1	%	$	9,400			5.7	%
U.S.		2,587			0.3	%		4,101			0.5	%		(1,514	)		(36.9	)%
Corporate services		(1,424	)		n/m			(11,117	)		n/m			9,693			n/m
Reportable segment operating income		175,923			22.0	%		158,344			20.2	%		17,579			11.1	%
VIEs		1,260			0.2	%		1,772			0.2	%		(512	)		(28.8	)%
Corporate reorganization expenses		(604	)		n/m			(1,277	)		n/m			673			n/m
Consolidated Operating income	$	176,579			22.1	%	$	158,839			20.2	%	$	17,740			11.2	%

	Year-to-date period ended			% of Total			Year-to-date period ended			% of Total			Change
	June 30, 2013			Revenues			July 1, 2012			Revenues			Dollars			Percentage
	($ in thousands)
Operating Income (Loss)
Canada	$	320,581			20.9	%	$	312,586			20.7	%	$	7,995			2.6	%
U.S.		3,497			0.2	%		5,755			0.4	%		(2,258	)		(39.2	)%
Corporate services		(12,089	)		n/m			(29,902	)		n/m			17,813			n/m
Reportable segment operating income		311,989			20.4	%		288,439			19.1	%		23,550			8.2	%
VIEs		2,586			0.2	%		3,300			0.2	%		(714	)		(21.6	)%
Corporate reorganization expenses		(10,079	)		n/m			(1,277	)		n/m			(8,802	)		n/m
Consolidated Operating income	$	304,496			19.9	%	$	290,462			19.3	%	$	14,034			4.8	%

All numbers rounded

^n/m  Not meaningful

28

Canada

Operating income was $174.8 million in the second quarter of 2013, an increase of $9.4 million, or 5.7%, compared to the second quarter of 2012. Systemwide sales growth of 4.4%, driven by the incremental sales of new restaurants year-over-year and same-store sales growth of 1.5%, resulted in higher rents and royalties income, and a higher allocation of supply chain income. Higher franchise fee income due to decreased support costs, and lower general and administrative expenses due primarily to vacancies, some of which may be filled during the balance of fiscal 2013, also contributed favourably to operating income growth in Canada. In the second quarter of 2013, we saw growth in total restaurant transactions as a result of the net addition of new restaurants.

Same-store sales growth in the second quarter of 2013 was driven by gains in average cheque resulting primarily from pricing, and to a lesser extent, favourable product mix, partially offset by a decrease in transactions. In the first half of 2013, we saw growth in total restaurant transactions as a result of the net addition of new restaurants. We opened 21 restaurants and closed 6 in the second quarter of 2013, as compared to opening 19 restaurants and closing 8 in the second quarter of 2012.

For the first half of 2013, operating income was $320.6 million, an increase of $8.0 million, or 2.6%, compared to the first half of 2012. Systemwide sales growth of 3.5% in the first half of 2013, driven by the net addition of new restaurants and same-store sales growth of 0.6%, resulted in higher rents and royalties income, although higher support costs related to property maintenance in the first half of 2013 had an unfavourable impact on operating income growth. The remaining factors influencing operating income growth in the second quarter of 2013 were also prevalent in the first half of 2013. In the first half of 2013, we opened 45 restaurants and closed 13, as compared to opening 41 restaurants and closing 10 in the first half of 2012. Similar to prior years, we expect that our restaurant openings will be concentrated in the second half of 2013.

In Canada, we continue to pursue menu, promotional and operational initiatives to adapt to the current operating environment and grow our business. Recently, our product efforts included the national launch of Panini sandwiches and single-serve coffee. We also continue to execute medium to longer-term growth-oriented strategies. These activities 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 are targeting to implement our drive-thru capacity and throughput initiatives at approximately 1,000 restaurants, continue our restaurant development, and increase the scale of our renovation program.

U.S.

Operating income was $2.6 million in the second quarter of 2013, a decrease of $1.5 million, compared to the second quarter of 2012. Systemwide sales growth of 8.6% was driven by incremental sales from the net addition of new restaurants, and same-store sales growth of 1.4%. 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. In the second quarter of 2012, we recognized a $0.7 million benefit due primarily to the reversal of previously accrued closure costs related to markets in New England. Franchise fee income also decreased due to variability in support costs. Partially offsetting these unfavourable items was a higher allocation of supply chain income, driven by an increase in systemwide sales growth.

In the second quarter of 2013, growth in the U.S. was driven primarily by an increase in transactions. We had minimal pricing in the second quarter of 2013 and our average cheque remained flat primarily as a result of promotional activity, offset for the most part by favourable product mix. Total systemwide restaurant transactions increased due to the net addition of new restaurants, and due to an increase in same-store transactions. In the second quarter of 2013, we opened 5 restaurants and closed 6 (including the net decrease of 3 self-serve kiosks), as compared to opening 15 restaurants and closing 2 (including the net addition of 8 self-serve kiosks) in the second quarter of 2012.

For the first half of 2013, operating income was $3.5 million, a decrease of $2.3 million compared to the first half of 2012. Systemwide sales growth of 8.2% was driven by the net addition of new restaurants and same-store sales growth of 0.5%. The same factors influencing operating income growth in the second quarter of 2013 were also prevalent in the first half of 2013. We opened 13 restaurants and closed 10 (including the net decrease of 2 self-serve kiosks) in the first half of 2013, as compared to opening 22 restaurants and closing 2 (including the net addition of 9 self-serve kiosks) in the first half of 2012. All of the restaurant closures in the first half of 2013 were non-standard restaurants or self-serve kiosks. Similar to prior years, we expect that our restaurant openings will be concentrated in the second half of 2013.

We believe the U.S. market has the potential to significantly contribute to the Company’s long-term earnings growth, and we are committed to driving market success. Our sales progression in many U.S. markets mirrors that of many of our Canadian markets in their early development stages. However, overall sales volumes in our newer U.S. markets do not yet match our larger, more developed markets in the U.S., and, as a result, do not generate a strong return. We are seeking meaningful improvement in the returns on the capital we have deployed in the U.S. segment, and we have accordingly begun to accelerate our initiative to partner with well-capitalized franchisees in the U.S. as part of our development approach. While development capital in 2013 is mostly committed, starting in 2014, we expect to reduce capital being deployed in the U.S. segment as we look to new ways to develop in the U.S. market.

29

Corporate services

Our Corporate services segment had an operating loss of $1.4 million in the second quarter of 2013, compared to an operating loss of $11.1 million in the second quarter of 2012. Year-to-date, our Corporate services segment had an operating loss of $12.1 million, compared to an operating loss of $29.9 million in the first half of 2012. The primary driver of the lower operating loss in both periods was income from distribution services resulting from operational improvements in our distribution centres, and favourable product margin variability, some of which we expect will reverse in the second half of 2013. Also contributing to the reduced operating loss were lower general and administrative expenses due primarily to lower salaries and benefits (seeResults of Operations – General and Administrative Expenses),and increased manufacturing income driven by lower manufacturing costs. Our International operations also contributed positively, due in part to our expansion into Saudi Arabia. In the first half of 2013, other income related primarily to a corporate property sale, was recognized in Corporate services and also contributed favourably to the lower operating loss.

Variable interest entities (“VIEs”)

Operating income from our VIEs was $1.3 million in the second quarter of 2013, a decrease of $0.5 million compared to the second quarter of 2012. In the first half of 2013, operating income from our VIEs was $2.6 million, a decrease of $0.7 million compared to the first half of 2012. We consolidated, on average, an additional 38 and 46 Non-owned restaurants in the second quarter and first half of 2013, respectively, compared to the second quarter and first half of 2012. The increase in consolidated Non-Owned restaurants in both periods was driven primarily by U.S. restaurants, which generally have lower profitability than our Canadian restaurants, and resulted in the decline in operating income from VIEs.

30

Results of Operations

	Second quarter ended			% of			Second quarter ended			% of			Change(1)
	June 30, 2013			Revenues			July 1, 2012			Revenues			Dollars			Percentage
	($ in thousands)
Revenues
Sales	$	568,562			71.1	%	$	563,772			71.8	%	$	4,790			0.8	%
Franchise revenues:
Rents and royalties(2)		209,289			26.2	%		198,973			25.3	%		10,316			5.2	%
Franchise fees		22,288			2.8	%		22,836			2.9	%		(548	)		(2.4	)%
		231,577			28.9	%		221,809			28.2	%		9,768			4.4	%
Total revenues		800,139			100.0	%		785,581			100	%		14,558			1.9	%
Costs and expenses
Cost of sales		489,092			61.1	%		492,900			62.7	%		(3,808	)		(0.8	)%
Operating expenses		76,986			9.6	%		72,314			9.2	%		4,672			6.5	%
Franchise fee costs		23,326			2.9	%		24,794			3.2	%		(1,468	)		(5.9	)%
General and administrative expenses		38,038			4.8	%		40,272			5.1	%		(2,234	)		(5.5	)%
Equity (income)		(3,916	)		(0.5	)%		(3,859	)		(0.5	)%		(57	)		1.5	%
Corporate reorganization expenses		604			0.1	%		1,277			0.2	%		(673	)		n/m
Other (income), net		(570	)		(0.1	)%		(956	)		(0.1	)%		386			n/m
Total costs and expenses, net		623,560			77.9	%		626,742			79.8	%		(3,182	)		(0.5	)
Operating income		176,579			22.1	%		158,839			20.2	%		17,740			11.2	%
Interest (expense)		(8,922	)		(1.1	)%		(8,650	)		(1.1	)%		(272	)		3.1	%
Interest income		791			0.1	%		723			0.1	%		68			9.4	%
Income before income taxes		168,448			21.1	%		150,912			19.2	%		17,536			11.6	%
Income taxes		43,886			5.5	%		41,675			5.3	%		2,211			5.3	%
Net income		124,562			15.6	%		109,237			13.9	%		15,325			14.0	%
Net income attributable to noncontrolling interests		826			0.1	%		1,170			0.1	%		(344	)		(29.4	)%
Net income attributable to Tim Hortons Inc.	$	123,736			15.5	%	$	108,067			13.8	%	$	15,669			14.5	%

31

	Year-to-date period ended			% of			Year-to-date period ended			% of			Change(1)
	June 30, 2013			Revenues			July 1, 2012			Revenues			Dollars			Percentage
	($ in thousands)
Revenues
Sales	$	1,092,449			71.3	%	$	1,087,074			72.1	%	$	5,375			0.5	%
Franchise revenues:
Rents and royalties(2)		396,743			25.9	%		379,159			25.2	%		17,584			4.6	%
Franchise fees		42,484			2.8	%		40,632			2.7	%		1,852			4.6	%
		439,227			28.7	%		419,791			27.9	%		19,436			4.6	%
Total revenues		1,531,676			100.0	%		1,506,865			100	%		24,811			1.6	%
Costs and expenses
Cost of sales		950,446			62.1	%		957,820			63.6	%		(7,374	)		(0.8	)%
Operating expenses		152,719			10.0	%		138,239			9.2	%		14,480			10.5	%
Franchise fee costs		45,878			3.0	%		45,076			3.0	%		802			1.8	%
General and administrative expenses		76,706			5.0	%		81,695			5.4	%		(4,989	)		(6.1	)%
Equity (income)		(7,265	)		(0.5	)%		(7,105	)		(0.5	)%		(160	)		2.3	%
Corporate reorganization expenses		10,079			0.7	%		1,277			0.1	%		8,802			n/m
Other (income), net		(1,383	)		(0.1	)%		(599	)		0.0	%		(784	)		n/m
Total costs and expenses, net		1,227,180			80.1	%		1,216,403			80.7	%		10,777			0.9	%
Operating income		304,496			19.9	%		290,462			19.3	%		14,034			4.8	%
Interest (expense)		(17,585	)		(1.1	)%		(16,548	)		(1.1	)%		(1,037	)		6.3	%
Interest income		1,719			0.1	%		1,434			0.1	%		285			19.9	%
Income before income taxes		288,630			18.8	%		275,348			18.3	%		13,282			4.8	%
Income taxes		77,145			5.0	%		76,132			5.1	%		1,013			1.3	%
Net income		211,485			13.8	%		199,216			13.2	%		12,269			6.2	%
Net income attributable to noncontrolling interests		1,578			0.1	%		2,370			0.2	%		(792	)		(33.4	)%
Net income attributable to Tim Hortons Inc.	$	209,907			13.7	%	$	196,846			13.1	%	$	13,061			6.6	%

^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 second quarter of 2013. The exchange rates were as follows:

	As at
	June 30, 2013		March 31, 2013		December 30, 2012		July 1, 2012		April 1, 2012		January 1, 2012
US $1.00	$	1.0518	$	1.0160	$	0.9965	$	1.0181	$	0.9975	$	1.0170

⁽²⁾  Rents and royalties revenues includes rents and royalties derived from our franchised restaurant sales, and advertising levies of $2.6 million and $1.1 million in the second quarters of 2013 and 2012, respectively, and $5.1 million and $1.5 million in the first half 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:

	Second quarter ended				Year-to-date ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
	(in thousands)
Franchised restaurant sales
Canada(Canadian dollars)	$	1,570,814	$	1,504,083	$	2,979,268	$	2,879,357
U.S.(U.S. dollars)	$	145,498	$	133,120	$	282,667	$	259,602

32

Revenues

Sales

Sales for the second quarter of 2013 increased $4.8 million, or 0.8%, over the second quarter of 2012 to $568.6 million and, in the first half of 2013, increased $5.4 million or 0.5% to $1,092.4 million. Systemwide sales growth drove an increase in distribution sales, which was more than offset by a decrease due to lower commodity costs. Sales increased due to an increase in the number of consolidated Non-owned restaurants.

Distribution sales. Distribution sales were $468.6 million in the second quarter of 2013, compared to $471.3 million in the second quarter of 2012, decreasing $2.7 million, or 0.6%. 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 $12.5 million. Partially offsetting the decrease was systemwide sales growth, which increased distribution sales by approximately $9.6 million.

For the first half of 2013, distribution sales decreased $11.3 million, or 1.2% to $899.7 million. Similar to the second quarter of 2013, pricing, driven primarily by lower prices for coffee and other commodities and reflective of their underlying costs, and to a lesser extent product mix, decreased distribution sales by approximately $33.8 million, partially offset by an increase of approximately $22.1 million driven by systemwide sales growth.

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 products. Changes in underlying costs are largely passed through to restaurant owners, but will typically occur after changes in spot market prices as we generally utilize fixed-price contracts as a method to provide restaurant owners with consistent, predictable pricing and to secure a stable source of supply. We generally have forward purchasing contracts in place for a 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 restaurant sales. Company-operated restaurant sales were $6.5 million in the second quarter of 2013, compared to $7.0 million in the second quarter of 2012, decreasing $0.5 million due to the type of Company-operated restaurants. On average, we operated 21 Company restaurants in both the second quarter of 2013 and 2012. Company-operated restaurant sales varies with the average number and mix (i.e., size, location and type) of Company-operated restaurants.

For the first half of 2013, Company-operated restaurant sales were $12.5 million compared to $12.6 million in the first half of 2012, decreasing $0.1 million. Similar to the second quarter of 2013, the type of Company-operated restaurants drove the decline in Company-operated restaurant sales, partially offset by an average of 2 additional Company-operated restaurants.

We ended the second quarter of 2013 with 17 Company-operated restaurants in Canada, and 3 in the U.S., representing approximately 0.5% of total systemwide restaurants. Comparatively, we ended the second quarter of 2012 with 11 Company-operated restaurants in Canada, and 10 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 $93.5 million and $85.5 million in the second quarters of 2013 and 2012, respectively, an increase of $8.0 million, or 9.4%. VIEs’ sales were $180.2 million and $163.5 million in the first half of 2013 and 2012, respectively, an increase of $16.8 million, or 10.2%. The increase in VIEs’ sales in both periods was driven by the increase in the average number of consolidated Non-owned restaurants, partially offset by a higher proportion of U.S. restaurants, which generally have lower sales. The following table outlines the number of consolidated Non-owned restaurants in each respective period:

	Second quarter ended				Year-to-date period  ended				As at
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012		June 30, 2013		December 30, 2012
	Average				Average
Canada		114		121		118		120		117		131
U.S.		233		188		235		187		233		234
Total		347		309		353		307		350		365

Franchise Revenues

Rents and Royalties. Revenue from rents and royalties was $209.3 million in the second quarter of 2013, as compared to $199.0 million in the second quarter of 2012, increasing $10.3 million, or 5.2%. Rents and royalties growth was driven primarily by sales

33

from the net addition of 217 new full-serve restaurants across all of our markets and same-store sales growth, both of which resulted in an approximate $9.0 million, or 4.5%, growth in rents and royalties revenues. We also recognized an additional $1.2 million of advertising levies primarily attributed to the Ad Fund’s Expanded Menu Board Program.

In the first half of 2013, revenue from rents and royalties was $396.7 million, as compared to $379.2 million in the first half of 2012, increasing $17.6 million, or 4.6%. Similar to the second quarter of 2013, the primary driver of growth was higher systemwide sales, which resulted in an approximate additional $14.2 million, or 3.8%. We also recognized an additional $3.6 million of advertising levies primarily attributed to the Ad Fund’s Expanded Menu Board Program.

Franchise Fees. Franchise fees were $22.3 million in the second quarter of 2013, decreasing $0.5 million, or 2.4%, from the second quarter of 2012. The decrease in franchise fees was due to a lower number and the type of restaurant sales and resales, partially offset by an increase in renovations. We also recognized the initial franchise fee related to our international expansion in Saudi Arabia.

In the first half of 2013, franchise fees were $42.5 million, increasing $1.9 million, or 4.6%, from the first half of 2012. The increase in franchise fees was due to an increase in renovations, and the recognition of the initial franchise fee related to our international expansion in Saudi Arabia, partially offset by a decrease in the number and the type of restaurant sales.

Total Costs and Expenses

Cost of Sales

Cost of sales was $489.1 million in the second quarter of 2013, compared to $492.9 million in the second quarter of 2012, a decrease of $3.8 million, or 0.8%. For the first half of 2013, cost of sales was $950.4 million as compared to $957.8 million, a decrease of $7.4 million, or 0.8%. The decrease during both of these periods 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 $399.0 million in the second quarter of 2013, compared to $410.2 million in the second quarter of 2012, decreasing $11.2 million, or 2.7%. Pricing, related primarily to lower underlying commodity costs for coffee and other commodities, and to a lesser extent, operational improvements in our distribution centres, contributed approximately $19.8 million to the decrease, partially offset by systemwide sales growth, which drove an increase in distribution cost of sales of approximately $8.4 million.

For the first half of 2013, distribution cost of sales was $774.6 million, compared to $800.2 million in the first half of 2012, decreasing $25.6 million or 3.2%. Similar to the second quarter of 2013, pricing, related primarily to lower underlying commodity costs for coffee and other commodities, and to a lesser extent, operational improvements in our distribution centres, contributed approximately $45.6 million of the decrease, partially offset by an increase of approximately $19.6 million driven by systemwide sales growth.

Company-operated restaurants’ cost of sales. 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. Cost of sales for our Company-operated restaurants was $6.6 million in the second quarter of 2013, decreasing $1.1 million, or 14.1%, compared to the second quarter of 2012, driven primarily by the type of Company-operated restaurants, with lower sales resulting in lower cost of sales.

For the first half of 2013, cost of sales for our Company-operated restaurants was $13.6 million, representing a decrease of $0.2 million, or 1.1% compared to the first half of 2012. The decrease was primarily due to the type of Company-operated restaurants, with lower sales resulting in lower cost of sales, partially offset by an increase in the average number of Company-operated restaurants.

Variable interest entities’ cost of sales. VIEs’ cost of sales was $83.5 million and $75.0 million in the second quarters of 2013 and 2012, respectively, an increase of $8.5 million. For the first half of 2013, VIEs’ cost of sales was $162.3 million compared to $143.9 million in the first half of 2012, an increase of $18.4 million. The increase in VIEs’ cost of sales in both periods was primarily driven by the increase in the average number of consolidated restaurants.

Operating Expenses

Total operating expenses were $77.0 million in the second quarter of 2013, as compared to $72.3 million in the second quarter of 2012, increasing $4.7 million, or 6.5%. Property-related depreciation expense increased by $2.4 million, due to an increase of 172 properties that we either own or lease, and then sublease to restaurant owners. Additionally, rent expense increased by $1.6 million year-over-year, primarily due to 152 additional properties that were leased and then subleased to restaurant owners. Operating expenses related to the Ad Fund, consisting primarily of depreciation expense related to the Expanded Menu Board Program, also increased by $1.4 million. Partially offsetting these increases were favourable support and other expenses in the second quarter of 2013.

34

In the first half of 2013, operating expenses increased $14.5 million, or 10.5%, to $152.7 million compared to $138.2 million in the first half of 2012. Year-over-year, property-related depreciation expense increased by $4.5 million, and rent expense increased by $4.3 million, due primarily to additional properties opened. Operating expenses related to the Ad Fund, consisting primarily of depreciation expense related to the Expanded Menu Board Program, increased by $3.3 million. Operating expenses also increased by approximately $2.0 million related to property maintenance.

Franchise Fee Costs

Franchise fee costs were $23.3 million in the second quarter of 2013, a decrease of $1.5 million, or 5.9%, over the second quarter of 2012. The decrease in franchise fee costs was primarily due to a lower number and the type of restaurant sales, and favourable support costs year-over-year, partially offset by an increase in renovations in the second quarter of 2013 compared to the second quarter of 2012.

Year-to-date in 2013, franchise fee costs were $45.9 million, an increase of $0.8 million, or 1.8%, over the first half of 2012. The increase in franchise fee costs was primarily driven by an increase in renovations in the first half of 2013 compared to the first half of 2012, partially offset by a lower number and the type of restaurant sales and favourable support costs year-over-year.

General and Administrative Expenses

General and administrative expenses were $38.0 million in the second quarter of 2013, decreasing by $2.2 million, or 5.5%, from the second quarter of 2012. The primary driver of the decrease was lower salaries and benefits due to vacancies, some of which we expect may be filled in the balance of fiscal 2013, and lower stock-based compensation expenses due to variability in stock-based compensation. Partially offsetting these decreases were additional promotional expenses incurred, primarily related to our international expansion, in the second quarter of 2013 as compared to the second quarter of 2012.

For the first half of 2013, general and administrative expenses decreased by $5.0 million, or 6.1%, to $76.7 million compared to the first half of 2012. Similar to the second quarter of 2013, the primary driver of the decrease was lower salaries and benefits from lower stock-based compensation expenses due to an additional equity grant in the first half of 2012 and variability in stock-based compensation, and vacancies, some which we expect may be filled in the balance of fiscal 2013. Partially offsetting these decreases was the unfavourable timing of certain benefit and other expenses year-over-year, and additional promotional expenses incurred in the first half of 2013 compared to the first half 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. We expect general and administrative expenses to increase in the second half of 2013, as some vacancies may be filled.

Equity Income

Equity income was $3.9 million in the second quarter of 2013, which was comparable to $3.9 million in the second quarter of 2012. For the first half of 2013, equity income was $7.3 million, compared to $7.1 million in the first half of 2012. Our most significant equity investment is our 50% interest in TIMWEN Partnership, which controls the real estate for the Canadian Tim Hortons/Wendy’s^® combination restaurants.

Corporate Reorganization Expenses

In August 2012, we began the realignment of roles and responsibilities within a new organizational structure, which includes a Corporate Centre and Business Unit design, and completed that realignment at the end of the first quarter of 2013. We believe that the new structure will facilitate the execution of strategic initiatives as we continue to grow our business and streamline decision-making across the Company. We also believe that the new structure will create scalability for future growth and reduce our cost structure relative to what it otherwise would have been had we not undertaken the reorganization.

In the second quarter of 2013, we recognized $0.6 million of CEO transition costs comprised primarily of stock-based compensation expense, and costs related to an employment agreement and retention agreements with certain senior executives, which are being recognized over the estimated service period. In the second quarter of 2012, we incurred $1.3 million of professional fees.

In the first half of 2013, we recognized a total charge of $10.1 million, consisting primarily of termination costs and professional fees, compared to $1.3 million of professional fees in the first half of 2012. We do not anticipate significant further costs related to the reorganization, with the exception of approximately $1.0 million related to CEO transition in the balance of fiscal 2013.

Other (Income), net

Other (income), net, was $0.6 million in the second quarter of 2013, compared to other (income), net, of $1.0 million in the second quarter of 2012. In the second quarter of 2013, we recognized the favourable impact resulting from the settlement of a claim under the separation agreements with Wendy’s International, Inc. (“Wendy’s”) (seeResults of Operations – Income Taxes), offset by the loss on the sale of a corporate asset. The remaining balance consists primarily of favourable foreign exchange. In comparison, in the second quarter of 2012, we recognized a $0.7 million benefit due primarily to the reversal of previously accrued closure costs related to markets in New England.

35

For the first half of 2013, other (income), net, was $1.4 million compared to other (income), net of $0.6 million in the first half of 2012. In addition to the items recognized in the second quarter of 2013, we also recognized, in the first half of 2013, the gain on a corporate property sale, and more favourable foreign exchange in comparison to the first half of 2012.

Interest Expense

Total interest expense, including interest on our long-term debt, capital leases and credit facilities, was $8.9 million and $8.7 million in the second quarters of 2013 and 2012, respectively. On a year-to-date basis, interest expense was $17.6 million in 2013 and $16.5 million in 2012. The increase in both periods was primarily due to an increase in the number of capital leases outstanding.

Interest Income

Interest income is comprised primarily of interest earned on our cash and cash equivalents. Interest income was $0.8 million and $0.7 million in the second quarters of 2013 and 2012, respectively. On a year-to-date basis, interest income was $1.7 million in 2013 and $1.4 million in 2012. The increase in both periods was primarily due to higher average cash balances.

Income Taxes

The effective income tax rate was 26.1% for the second quarter ended June 30, 2013, compared to 27.6% for the second quarter ended July 1, 2012. The effective income tax rate for the year-to-date periods ended June 30, 2013 and July 1, 2012 was 26.7% and 27.6%, respectively. The reduction in the income tax rate in the second quarter of 2013 compared to the second quarter of 2012 was primarily due to the favourable impact related to a reserve release resulting from a statute of limitations lapse and tax benefits associated with other discrete items, partially offset by an increase to prior year tax reserves as a result of audit activity.

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 has issued notices of reassessment for the 2005 through 2009 taxation years for transfer pricing adjustments related to our former investment in the Maidstone Bakery joint venture. The proposed adjustments, including tax, penalty and interest, total approximately $60.0 million. We will be required to deposit approximately $35.0 million of the proposed adjustment with the CRA and other taxation authorities by October 2013. The cash deposit requirement will not have a material adverse impact on our liquidity. Although the outcome of this matter cannot be predicted with certainty, the Company intends to contest this matter vigorously and we believe that we will ultimately prevail based on the merits of our position. At this time, we believe that we have adequately reserved for this matter; however, we will continue to evaluate our reserves as we progress through the appeals or litigation process with the CRA. If the CRA’s position is ultimately sustained as proposed, it may have a material adverse impact on earnings in the period that the matter is settled.

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 2009 taxation year. 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. Except as described previously, 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.

During the quarter, the Company and Wendy’s agreed to a settlement of claims under the separation agreements relating to our initial public offering and spin-off from Wendy’s. The agreed upon settlement was reflected positively in our earnings, and did not have a material impact. 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.

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 is “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.

36

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 (seeCredit Facilities below for additional information).

In the first half of 2013, we generated $258.3 million of cash from operations, compared to $216.4 million in the first half of 2012, an increase of $41.9 million (seeComparative 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 June 30, 2013, we had approximately $480.0 million in long-term debt (excluding current portion) 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 regularly assesses our optimal capital structure and seeks to identify opportunities to generate value for shareholders. Consistent with this approach, early in 2013 the Company began reviewing its capital structure considering both external factors, such as the interest rate environment, as well as internal factors, such as our cross border inter-corporate structure and our future financial flexibility.

After careful consideration, the Board has approved a $900.0 million increase in debt levels of the Company, intended to be used to repurchase common shares. We are targeting a total of $1 billion in share repurchases over the next twelve months, subject to market conditions, the negotiation and execution of agreements, and regulatory approvals. This amount includes approximately $100.0 million from the authorization remaining in the existing share repurchase program, and the additional $900.0 million that we plan to finance by bank debt and/or bond issuance. The Company believes that our debt will remain investment grade at this increased leverage and our goal would be to maintain investment grade status in the future.

Consistent with this approach, the Company has obtained regulatory approval from the Toronto Stock Exchange (“TSX”) to amend our Normal Course Issuer Bid (“NCIB”) to remove the former maximum dollar cap of $250.0 million. As a result, under our amended NCIB, we will be entitled to purchase up to 10% of our “public float” as at February 14, 2013 (being 15,239,531 common shares). In order to commence the share purchases immediately, the amended NCIB will begin in August subject to negotiation and execution of an amended broker agreement. We plan to retain flexibility and evaluate alternative means of purchasing shares, including, for example, implementing a new normal course or substantial issuer bid (“SIB”), subject to market conditions, the negotiation and execution of agreements, and regulatory approvals, for the remainder of the targeted $1 billion in share purchases in the most effective, efficient means possible.

The Company also assesses its capital structure in the context of strategic planning. While strategic planning activity will not be concluded until later in the year, we do expect to initiate a higher level of share repurchases now in order to take advantage of current historically low interest rates, which may begin to rise. We believe that this recapitalization would place our debt ratios more in line with both our Canadian retail peer group and many of our U.S. restaurant peers with similar capital intensity. We believe this planned additional leverage preserves our strong balance sheet, cash flows, and access to capital as we complete our strategic planning work later this year while allowing us to return value to shareholders. In assessing the appropriate capital structure, the Company took the following into account:

• Remaining consistent with our focus on building shareholder value and our strong track record of returning capital to shareholders. We have repurchased approximately $1.7 billion in common shares since our initial public offering in 2006 while regularly increasing our dividends. We believe that leveraging our balance sheet strength and strong cash flows to buy back the targeted level of shares would be accretive, enhance shareholder value, and remain within the boundaries of a disciplined capital structure with adequate liquidity to execute our plans.

37

• Maintaining a structure that is aligned with thecapital intensity of our business. Our business model requires us to invest in our system to grow our business and drive Company returns and profitability over time, unlike some highly leveraged peers who do not have the same level of capital intensity. Our capital investments in Canada have generated significant return on invested capital and substantial profitability. In our view, the additional leverage is appropriate, given comparable benchmarks among Canadian consumer companies and U.S. restaurant chains with similar levels of capital intensity.

• Preservingstrategic flexibility. We believe that increasing leverage while maintaining an overall investment grade credit rating would allow us to responsibly manage our business in the future during all stages of the economic cycle and would protect our ability to access capital to invest in and grow our business for both the short- and long-term.

• Addressing the constraints arising within our corporate structure.Our cross-border structure was a key consideration in determining the appropriate level of additional debt. The accretive benefits of our proposed heightened share repurchases are expected to more than offset the non-deductible portion of interest that results from increasing the amount of our debt to fund such repurchases. Under our current structure, increasing our debt levels substantially beyond an additional $900.0 million to repurchase shares could significantly accelerate our obligation to pay Canadian withholding taxes on distributions from our Canadian operating company to our parent corporation, and/or could also result in our incurring additional interest expense that may not be deductible for Canadian tax purposes. The Company carefully evaluates its cross-border structure with a view to mitigating the potential for a future increase in our effective tax rate. Addressing these constraints is an important consideration to maintaining our lower effective tax rate over the longer term.

In addition to evaluating our capital structure, the Company has periodically evaluated options regarding the possible transfer of real estate under our control to a real estate investment trust (“REIT”) structure. More recently, there have been a significant number of REIT transactions in both Canada and the U.S. Unlike many of the companies pursuing such transactions, the majority of our real estate is most often single-purpose use and leased, and, 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. As a result, 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. The Company will continue to review regularly its portfolio and structure.

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 defined under the TSX rules as of February 14, 2013. The 2013 Program received regulatory approval from the TSX. Our common shares may 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 may 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 half of 2013, we repurchased 2.1 million of our common shares at a cost of $113.8 million as part of the 2013 Program at an average cost of $54.52 per share.

On August 7, 2013, the Company obtained regulatory approval from the TSX to amend its Normal Course Issuer Bid (“NCIB”) to remove the former maximum dollar cap of $250.0 million. The timing of the program and exact number of shares purchased under the NCIB will be at our discretion and subject to the negotiation and execution of a broker agreement. The Company’s common shares will be purchased under the program through a combination of a 10b5-1 automatic trading plan in accordance with pre-set trading instructions established at a time when the Corporation is not in possession of material, non-public information as well as at management’s discretion in compliance with regulatory requirements, and given market, cost and other considerations.

Our outstanding share capital is comprised of common shares. An unlimited number of common shares, without par value, is authorized, and we had 151,319,384 common shares outstanding as at June 30, 2013. As at this same date, we had outstanding stock options with tandem stock appreciation rights to acquire 1,222,346 of our common shares held by current and former officers of the Corporation pursuant to our 2006 Stock Incentive Plan and 2012 Stock Incentive Plan, of which 722,294 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

38

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 and June 2013 dividend at this new rate. On August 7, 2013, our Board of Directors declared a $0.26 per share quarterly dividend, payable on September 4, 2013 to shareholders of record at the close of business on August 19, 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 June 30, 2013, we had utilized $6.8 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 June 30, 2013.

Ad Fund

As at June 30, 2013, the Ad Fund had a 7-year Term Loan (“Term Loan”) of $52.5 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, which was undrawn as at June 30, 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 half of 2013 was $258.3 million compared to $216.4 million in the first half of 2012, an increase of $41.9 million. The increase was due to higher earnings in the first half of 2013 compared to the first half of 2012, and working capital movements, specifically higher cash receipts driven by the timing of a statutory holiday in the comparative period and changes in tax balances receivable or payable to the comparative quarter related to specific transactions, partially offset by increased inventory balances and higher payments in the first half of 2013 related to the Corporate reorganization.

39

Investing Activities.Net cash used in investing activities was $87.4 million in the first half of 2013 compared to $106.2 million in the first half of 2012, a decrease of $18.8 million. The decrease year-over-year is primarily due to a reduction in capital expenditures relating to our Expanded Menu Board Program and proceeds from the sale of corporate assets, partially offset by increased capital expenditures for new and existing restaurants year-over-year. 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:

	Year-to-date period ended
	June 30, 2013		July 1, 2012
	(in millions)
Capital expenditures(1)
New restaurants	$	38.9	$	31.7
Existing restaurants(2)		36.6		27.3
Other capital expenditures		12.8		7.7
Total capital expenditures, excluding Ad Fund	$	88.3	$	66.7
Ad Fund(3)		5.2		30.8
Total capital expenditures, including Ad Fund	$	93.5	$	97.5

⁽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:

	Year-to-date period ended
	June 30, 2013		July 1, 2012
	(in millions)
Canada	$	20.3	$	17.2
U.S.		18.6		14.5
Total	$	38.9	$	31.7

Financing Activities.Financing activities used cash of $206.7 million in the first half of 2013 compared to $178.7 million in the first half of 2012, an increase of $28.0 million. This increase was primarily due to the receipt of borrowings related to the Expanded Menu Board Program in the first half of 2012. We purchased and cancelled $113.8 million of common shares and paid dividends of $79.3 million in the first half of 2013, compared to $136.5 million and $65.7 million, respectively, in the first half of 2012.

Off-Balance Sheet Arrangements

We do not have “off-balance sheet” arrangements as at June 30, 2013 or 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.

40

SAFE HARBOR STATEMENT

Certain information contained in our Report on Form 10-Q for the second quarter ended June 30, 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; ability to obtain financing on favourable terms; ability to maintain investment grade credit ratings; prospects and execution risks concerning the U.S. market strategy; 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 40 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.

41

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 12, 2008, a proposed class action was issued against the Company and certain of its affiliates in the Ontario Superior Court by two of its franchisees, alleging, among other things, that the Company’s Always Fresh baking system and lunch offerings led to lower franchisee profitability. The claim, as amended, asserted damages of approximately $1.95 billion on behalf of certain Canadian restaurant owners. The action was dismissed in its entirety by summary judgment on February 24, 2012 and all avenues of appeal have been exhausted.

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.

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 at 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. 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.

42

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.

Increases in the cost of commodities or decreases in the availability of commodities could have an adverse impact on our restaurant owners and on our business and financial results.

Our restaurant system is exposed to price volatility in connection with certain key commodities that we purchase in the ordinary course of business such as coffee, wheat, edible oils and sugar, which can impact revenues, costs and margins. Although we monitor our exposure to commodity prices and our forward hedging program (of varied duration, depending upon the type of underlying commodity) partially mitigates the negative impact of any cost increases, price volatility for commodities we purchase has increased due to conditions beyond our control, including economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage and changing global consumer demand and consumption patterns. Increases and decreases in commodity costs are largely passed through to restaurant owners, and we and our restaurant owners have some ability to increase product pricing to offset a rise in commodity prices, subject to restaurant owner and guest acceptance, respectively. Notwithstanding the foregoing, while it is not our operating practice, we may choose not to pass along all price increases to our restaurant owners. As a result, commodity cost increases could have a more significant effect on our business and results of operations than if we had passed along all increases to our restaurant owners. Price fluctuations may also impact margins as many of these commodities are typically priced based on a fixed-dollar mark-up. Although we generally secure commitments for most of our key commodities that typically extend over a 6-month period, we may be forced to purchase commodities at higher prices at the end of the respective terms of our current commitments. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk – Commodity Risk of our 2012
Form 10-K Report.

If the supply of commodities, including coffee, fail to meet demand, our restaurant owners may experience reduced sales which in turn, would reduce our rents and royalty revenues as well as distribution sales. Such a reduction in our rents and royalty revenues and distribution sales may adversely impact our business and financial results.

Our international operations are subject to various factors of uncertainty and there is no assurance that international operations will be profitable.

We have granted a master license for the development of Tim Hortons restaurants in the GCC. The licensee is expected to open and operate up to 120 multi-format restaurants over 5 years ending in 2016, which includes the 24 restaurant locations that were open for business by the end of 2012. We have also granted a 5 year master license for the development of 100 multi-format restaurants in Saudi Arabia with the same master licensee. Notwithstanding the foregoing, there can be no assurance that our international licensee will satisfy its development commitments to open the number of Tim Hortons restaurants stated in the master license agreement. From time to time, we may grant additional master licenses to licensees in other international markets in the future. International licensees may fail to meet their development commitments or may open restaurants more slowly than forecasted at the time such master license agreements are entered into, which would impact the level of expected financial return from such agreements.

43

The implementation of our international strategic plan may require considerable or dedicated 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 relative to expansion into new markets in the U.S.; however, some or all of these factors, including food safety; brand protection and intellectual property protection; and difficulty in staffing, developing and managing operations and supply chain logistics, including consistency of product quality and service; may be more pronounced in markets outside Canada and the U.S. due to cultural, political, legal, economic, regulatory and other conditions and differences. As such, our international business operations are subject to additional legal, accounting, tax and regulatory risks associated with doing business internationally, including: tariffs, quotas, other trade protection measures; import or export regulations and licensing requirements; foreign exchange controls; restrictions on our ability to own or operate or repatriate profits from our subsidiaries, make investments or acquire new businesses in foreign jurisdictions; difficulties in enforcement of contractual obligations governed by non-Canadian or non-U.S. law due to differing interpretation of rights and obligations in connection with international franchise or licensing agreements; difficulties collecting royalties from international restaurant owners; compliance with multiple and potentially conflicting laws; new and potentially untested laws and judicial systems; reduced or diminished protection of intellectual property; and anti-corruption laws.

For example, we currently export our proprietary products to our licensee in the GCC. Numerous government regulations apply to both the export of food products from Canada and the U.S., as well as the import of food products into other countries. If one or more of the ingredients in our products are banned, alternative ingredients would need to be identified and sourced. Although we intend to be proactive in addressing any product ingredient issues, such requirements may delay our ability to open restaurants in other countries in accordance with our planned or desired schedule.

Any operational shortcoming of a licensee is likely to be attributed by guests to our entire system, thus damaging our brand reputation and potentially affecting revenues and profitability. Additionally, we may also have difficulty finding suppliers and distributors to provide us with adequate and stable supplies of ingredients meeting our standards in a cost-effective manner. We also may become subject to lawsuits or other legal actions resulting from the acts or omissions of a licensee and, even though we may have taken reasonable steps to protect against such liabilities, including by obtaining contractual indemnifications and insurance coverage, there is no assurance that we will not incur costs and expenses as a result of a licensee’s conduct even when we are not legally liable.

Although we believe we have developed the support structure required for international growth, there can be no assurance that our international operations will achieve or maintain profitability or meet planned growth rates. There also can be no assurance that appropriate restaurant owners and/or other licensees will be available in our new international markets. We currently expect that our international restaurant owners may be responsible for the development of a larger number of restaurants than typical for our Canadian or U.S. restaurant owners. As a result, our international operations may be more closely tied to the success of a smaller number of our restaurant owners than is typical for our Canadian and U.S. operations. Operating results from our international operations are currently insignificant to us.

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)
Monthly Period #1 (April 1, 2013 – May 5, 2013)		291,455		54.56		291,455	$	234,100,000
Monthly Period #2 (May 6, 2013 – June 2, 2013)		1,586,027		54.53		1,539,000		150,273,052
Monthly Period #3 (June 3, 2013 – June 30, 2013)		257,000		54.76		257,000		136,200,707
Total		2,134,482		54.56		2,087,455	$	136,200,707

⁽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.

44

⁽⁴⁾  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 TSX rules. The 2013 Program commenced 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. On August 7, 2013, the Company obtained regulatory approval to amend the 2013 Program to remove the former maximum dollar cap of $250.0 million. 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 5. OTHER INFORMATION

Automatic Share Disposition Program

During the second quarter of 2013, Paul D. House, then, the Executive Chairman, President and Chief Executive Officer of the Company (effective as of July 2, 2013, the Chairman of the Company), adopted an automatic securities disposition plan (the “Plan”). Pursuant to the Plan, commencing on the third business day after the release of the Corporation’s earnings release for the second quarter of 2013, a brokerage firm will be authorized to exercise a certain number of vested stock appreciation rights (“SARs”) held by Mr. House based on pre-established trading instructions. The Plan expires on May 30, 2014, but may terminate sooner in accordance with its terms. The maximum number of SARs that can be exercised over the duration of the Plan is 99,708. The Plan is intended to assist Mr. House with diversifying his personal investment holdings and tax and estate planning given his retirement as President and CEO of the Company.

Appointment of New Directors

Sherri Brillon and Thomas V. Milroy have been appointed to the Tim Hortons Board of Directors, effective August 8, 2013. Both new directors bring considerable financial expertise and leadership experience to the Board.

Ms. Brillon is Executive Vice-President and Chief Financial Officer of Encana Corporation, a leading North American energy producer. In her current role, Ms. Brillon directs the financial operations of the company and manages the availability of financial resources to enable the company to execute its strategy. Since joining one of Encana’s predecessor companies in 1985, her achievements have included key leadership roles in helping the company achieve some of its most significant milestones, including structuring the $22.5 billion merger that created Encana in 2002 and restructuring the organization into a pure play natural gas company in 2009. She has played a pivotal role in evaluating Encana’s investment opportunities and resource allocation and has been instrumental in assisting with corporate and operations planning, strategic planning and supply management. Ms. Brillon’s professional accomplishments include recognition as one of Canada’s Most Powerful Women: Top 100 Hall of Fame^®. She has also been recognized by the Women of Influence organization.

Mr. Milroy is Chief Executive Officer of BMO Capital Markets, and is responsible for all of BMO Financial Group’s businesses involving corporate, institutional and government clients in North America and globally. Prior to his current role, to which he was appointed in 2008, Mr. Milroy had senior roles in investment and corporate banking, and was responsible for the integration of Bank of Montreal’s corporate banking with the investment banking capabilities of Nesbitt Burns. He was subsequently also responsible for the integration of the corporate banking business of Harris Bank and Nesbitt Burns in the U.S. In 2001, Mr. Milroy was appointed Vice-Chair and Global Head of Investment and Corporate Banking, and in 2006 he was named Co-President of BMO Capital Markets. Previously, Mr. Milroy worked in the Mergers and Acquisition group of a U.S. investment banking firm in New York and Toronto. Prior to that, he practiced securities law as a partner in a Toronto-based law firm.

Compensation Program Review

        At the Corporation’s Annual Meeting of Shareholders held on May 9, 2013, the Corporation’s non-binding advisory resolution regarding executive compensation (“say-on-pay”) received 94.9% approval from shareholders. In order to consider shareholder sentiment, the say-on-pay policy provides that the Human Resource and Compensation Committee of the Board of Directors (the “HRCC”) consider whether any adjustments should be made to the Corporation’s executive compensation policies in light of the results of the say-on-pay vote. The HRCC undertook this assessment and acknowledged the strong say-on-pay approval. As described in the Corporation’s management proxy circular dated March 12, 2013, however, the HRCC, with the assistance of its independent compensation consultant, has commenced a comprehensive review of the Corporation’s executive compensation programs. Following completion of the review, the HRCC expects that changes will be made to the Corporation’s executive compensation programs, including with respect to new and/or additional performance objectives under the short- and long-term incentive plans. These changes are expected to be adopted during 2013 and apply to 2014 compensation.

ITEM 6. EXHIBITS

(a) Index to Exhibits on Page 47.

45

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TIM HORTONS INC. (Registrant)
Date: August 8, 2013	/s/ CYNTHIA J. DEVINE
	Cynthia J. Devine
	Chief Financial Officer

46

TIM HORTONS INC. AND SUBSIDIARIES

INDEX TO EXHIBITS

Exhibit	Description	Where found
*10(a)	Employment Offer Letter by and between Tim Hortons Inc. and Marc Caira	Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Registrant.
*10(b)	Employment and Post-Employment Covenants Agreement by and between Tim Hortons Inc. and Marc Caira	Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Registrant.
*10(c)	Change in Control Agreement by and between Tim Hortons Inc. and Marc Caira	Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of the Registrant.
*10(d)	Amended and Restated Supplemental Executive Retirement Plan, adopted to be effective January 1, 2009 and most recently amended on May 8, 2013	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.”

47