OUR BANNERS
OUR BANNERS
LETTER FROM THE CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
Dear Shareholders:
LETTER FROM THE CHAIRMAN AND CHIEF
LETTER FROM THE CHAIRMAN AND
EXECUTIVE OFFICER
CHIEF EXECUTIVE OFFICER
The following are some highlights from the 2010 fiscal year;
Dear Shareholders:
Dear Shareholders:
On behalf of the Board of Directors, I am excited to present the 2010 Annual Report. This past year was
another exceptional year for our company, with strong financial results and a record-breaking 191 new
locations opened during the period.
On behalf of the Board of Directors, I am excited to present the 2010 Annual Report. This past year was
On behalf of the Board of Directors, I am very excited to present the 2009 Annual Report.
another exceptional year for our company, with strong financial results and a record-breaking 191 new
2009 was another record-breaking year for MTY, characterized by strong generic growth
locations opened during the period.
and marked by the Company’s largest ever acquisition.
The following are some highlights from the 2010 fiscal year;
The following are some highlights from the 2009 fiscal year;
(cid:131)(cid:3) Acquisition of Groupe Valentine Inc. and of its 95 outlets and 7 real estate properties;
(cid:131)(cid:3) Quarterly dividend policy was established and first dividend was declared;
(cid:131)(cid:3) Number of locations at year end total 1,727 up from 1,570 a year earlier;
(cid:131)(cid:3) Acquisition of Groupe Valentine Inc. and of its 95 outlets and 7 real estate properties;
(cid:131)(cid:3) Revenues reached $66.9 million, up 30% over the $51.5 million generated during 2009;
(cid:131)(cid:3) Quarterly dividend policy was established and first dividend was declared;
(cid:131) Acquisition of Country Style Food Services inc. and of its 480 existing outlets;
(cid:131)(cid:3) EBITDA rose by 21% to $26.4 million from $21.7 million;
(cid:131)(cid:3) Number of locations at year end total 1,727 up from 1,570 a year earlier;
(cid:131) Number of locations at year end total 1,570, up from 1,023 a year earlier;
(cid:131)(cid:3) Net income increased by 26% to $15.4 million or $0.81 per share from $12.3 million or $0.64 per
(cid:131)(cid:3) Revenues reached $66.9 million, up 30% over the $51.5 million generated during 2009;
(cid:131) Sharp increase in revenues, reaching $51.5 million, up 51% over the $34.2 million
(cid:131)(cid:3) EBITDA rose by 21% to $26.4 million from $21.7 million;
(cid:131)(cid:3) Net income increased by 26% to $15.4 million or $0.81 per share from $12.3 million or $0.64 per
(cid:131) EBITDA rose by 29% to $21.7 million from $16.84 million;
(cid:131) Net income increased by 24% to $12.3 million or $0.64 per share from $9.9 million
(cid:131)(cid:3) Operations have generated cash flows of over $21.8 million during 2010 compared to $16.1 million
(cid:131)(cid:3) Operations have generated cash flows of over $21.8 million during 2010 compared to $16.1 million
(cid:131)(cid:3) Despite disbursements to acquire Groupe Valentine and for the first dividend, liquidities at year-
generated during 2008;
in 2009.
share;
share;
end remained very strong with $29 million in cash and temporary investments;
or $0.52 per share;
in 2009.
(cid:131)(cid:3) System wide sales reached $461.9 million, up 18% from the $393.1 million generated during 2009;
(cid:131) Our operations have generated cash flows of over $16.1M during 2009 compared
(cid:131)(cid:3) Despite disbursements to acquire Groupe Valentine and for the first dividend, liquidities at year-
and
to $11.3 million in 2008.
end remained very strong with $29 million in cash and temporary investments;
(cid:131)(cid:3) Same store sales increased 2.03% during the fourth quarter of 2010, recording the Company’s first
(cid:131)(cid:3) System wide sales reached $461.9 million, up 18% from the $393.1 million generated during 2009;
(cid:131) MTY’s liquidities at year-end remain very strong, with $15.9 million in cash and
positive growth quarter since the first quarter of 2009 bringing the 2010 fiscal year same store
temporary investments; and
and
sales to a slight decrease of 0.34%.
(cid:131)(cid:3) Same store sales increased 2.03% during the fourth quarter of 2010, recording the Company’s first
(cid:131) System wide sales reached $393.1 million, up 55% from the $253.6 million
positive growth quarter since the first quarter of 2009 bringing the 2010 fiscal year same store
generated during 2008.
sales to a slight decrease of 0.34%.
Once again, these results were achieved in a challenging economic environment in which operational
excellence and commitment by our employees and franchisees were critical to reach our goals.
These results were achieved in a challenging economic environment in which operational
Once again, these results were achieved in a challenging economic environment in which operational
excellence was critical to reach our goals. Even though the economy weighed down on
Going into 2011, we seek to further establish our leadership in the quick service restaurant industry by
excellence and commitment by our employees and franchisees were critical to reach our goals.
same-store sales, the efforts deployed in the past to preserve our agility combined with
focusing on internal expansion and strengthen our base with a target of 85 new locations generated by
the commitment of our employees, franchisees and business partners have enabled us
existing concepts. With $29.0 million in liquidities at year-end, MTY is also well postioned to diligently
Going into 2011, we seek to further establish our leadership in the quick service restaurant industry by
mitigate the impact of the crisis.
seek out new prospective acquisitions.
focusing on internal expansion and strengthen our base with a target of 85 new locations generated by
existing concepts. With $29.0 million in liquidities at year-end, MTY is also well postioned to diligently
Going into 2010, we will continue to focus on internal expansion, with a target of 75 new
seek out new prospective acquisitions.
locations, as well as diligently seek out new prospective acquisitions.
During the year, MTY has made some changes to enhance shareholders’ value. On May 13, 2010, the
Company’s shares began trading on the TSX; in October, our first-ever dividend was declared; in
In closing, I wish to personally thank each member of the MTY team, franchisees, partners
November, our organisational structure was modified so that we could improve our short-term cash flows.
and shareholders for their continuous support and contribution to our success in 2010. I
truly appreciate and thank you for being a part of our growing Family.
In closing, I wish to personally thank each member of the MTY team, franchisees, partners and
shareholders for their continuous support and contribution to our success in 2010. I truly appreciate and
MTY Food Group Inc.
thank you for being a part of our growing Family.
During the year, MTY has made some changes to enhance shareholders’ value. On May 13, 2010, the
Company’s shares began trading on the TSX; in October, our first-ever dividend was declared; in
November, our organisational structure was modified so that we could improve our short-term cash flows.
In closing, I wish to personally thank each member of the MTY team, franchisees, partners and
shareholders for their continuous support and contribution to our success in 2010. I truly appreciate and
thank you for being a part of our growing Family.
MTY Food Group Inc.
___________________________
___________________________
MTY Food Group Inc.
Stanley Ma,
Stanley Ma
Chairman and Chief Executive Officer
Chairman and Chief Executive Officer
___________________________
February 15, 2011
February 22, 2010
Stanley Ma,
Chairman and Chief Executive Officer
February 15, 2011
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Management’s Discussion and Analysis
For the fiscal year ended November 30, 2010
General
Management's Discussion and Analysis of the financial position and results of operations
("MD&A") of MTY Food Group Inc. ("MTY”) is supplementary information and should be
read
financial statements and
the Company’s consolidated
accompanying notes and with the most recent annual report, for the fiscal year ended
November 30, 2010.
in conjunction with
In the MD&A, MTY Food Group Inc., MTY, or the Company, designates, as the case may
be, MTY Food Group Inc. and its Subsidiaries, or MTY Food Group Inc., or one of its
subsidiaries.
This MD&A was prepared as at February 15, 2011. Supplementary information about
MTY, including its latest annual and quarterly reports, and press releases, is available on
SEDAR’s website at www.sedar.com.
Forward looking statements
This MD&A and, in particular, but without limitation, the sections of this MD&A entitled
forward-looking
Outlook, Same Store Sales and Contingent Liabilities, contain
statements. These forward-looking statements include, but are not limited to, statements
relating to certain aspects of the business outlook of the Company during the course of
2010. Forward-looking statements also include any other statements that do not refer to
historical facts. A statement we make is forward-looking when it uses what we know and
expect today to make a statement about the future. Forward-looking statements may
include words such as aim, anticipate, assumption, believe, could, expect, goal,
guidance, intend, may, objective, outlook, plan, project, seek, should, strategy, strive,
target and will. All such forward-looking statements are made pursuant to the ‘safe
harbour’ provisions of applicable Canadian securities laws.
Unless otherwise indicated by us, forward-looking statements in this MD&A describe our
expectations at February 15, 2011 and, accordingly, are subject to change after such
date. Except as may be required by Canadian securities laws, we do not undertake any
obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Forward-looking statements, by their very nature, are subject to inherent risks and
uncertainties and are based on several assumptions which give rise to the possibility that
actual results or events could differ materially from our expectations expressed in or
implied by such forward-looking statements and that our business outlook, objectives,
plans and strategic priorities may not be achieved. As a result, we cannot guarantee that
any forward-looking statement will materialize and you are cautioned not to place undue
reliance on these forward-looking statements. Forward-looking statements are provided
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in this MD&A for the purpose of giving information about management’s current strategic
priorities, expectations and plans and allowing investors and others to get a better
understanding of our business outlook and operating environment. Readers are
cautioned, however, that such information may not be appropriate for other purposes.
Forward-looking statements made in this MD&A are based on a number of assumptions
that we believed were reasonable on February 15, 2011. Refer, in particular, to the
section of this MD&A entitled Risks and Uncertainties for a description of certain key
economic, market and operational assumptions we have used in making forward-looking
statements contained in this MD&A. If our assumptions turn out to be inaccurate, our
actual results could be materially different from what we expect.
Unless otherwise indicated in this MD&A, the strategic priorities, business outlooks and
assumptions described in the previous MD&A remain substantially unchanged.
Important risk factors that could cause actual results or events to differ materially from
those expressed in or implied by the above-mentioned forward-looking statements and
other forward-looking statements included in this MD&A include, but are not limited to:
the intensity of competitive activity, and the resulting impact on our ability to attract
customers’ disposable income; our ability to secure advantageous locations and renew
our existing leases at sustainable rates; the arrival of foreign concepts, our ability to
attract new franchisees; changes in customer tastes, demographic trends and in the
attractiveness of our concepts, traffic patterns, occupancy cost and occupancy level of
malls and office towers; general economic and financial market conditions, the level of
consumer confidence and spending, and the demand for, and prices of, our products; our
ability to implement our strategies and plans in order to produce the expected benefits;
events affecting the ability of third-party suppliers to provide to us essential products and
services; labour availability and cost; stock market volatility; operational constraints the
event of the occurrence of epidemics, pandemics and other health risks.
These and other risk factors that could cause actual results or events to differ materially
from our expectations expressed in or implied by our forward-looking statements are
discussed in this MD&A.
We caution readers that the risks described above are not the only ones that could
impact us. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also have a material adverse effect on our business,
financial condition or results of operations.
Except as otherwise indicated by us, forward-looking statements do not reflect the
potential impact of any non-recurring or other special items or of any dispositions,
monetizations, mergers, acquisitions, other business combinations or other transactions
that may be announced or that may occur after February 15, 2011. The financial impact
of these transactions and non-recurring and other special items can be complex and
depends on the facts particular to each of them. We therefore cannot describe the
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expected impact in a meaningful way or in the same way we present known risks
affecting our business.
Compliance with Generally Accepted Accounting Principles
Unless otherwise indicated, the financial information presented below, including tabular
amounts, is expressed in Canadian dollars and prepared in accordance with Canadian
generally accepted accounting principles (“GAAP”). MTY uses income before income
taxes, non-controlling interest and amortization (“EBITDA”) because this measure
enables management to assess the Company’s operational performance. This measure
is a widely accepted financial indicator but is not a measurement determined in
accordance with GAAP and may not be comparable to the EBITDA presented by other
companies.
Highlights of significant events during the fiscal year
On September 16, 2010, the Company acquired all of the issued and outstanding shares
of Groupe Valentine Inc. (“Valentine”) and 9180-7420 Quebec Inc, as well as seven
properties, including a distribution center located in St-Hyacinthe, Quebec. At the time of
the acquisition, Valentine had 95 stores in operation, including 9 corporate stores. Total
consideration was $8,764,126, including holdbacks of $961,518.
On October 19, 2010, the Company announced that it had established a dividend policy
and declared its first ever payment of dividends.
On November 30, 2010, the company amalgamated five of its wholly-owned subsidiaries
in an effort to accelerate the use non-capital losses carried forward available in two of
those subsidiaries.
Core business
MTY franchises and operates quick-service restaurants under the following banners: Tiki
Ming, Sukiyaki, La Cremiere, Caferama, Au Vieux Duluth Express, Carrefour Oriental,
Panini Pizza Pasta, Chick ‘N’ Chick, Franx Supreme, Croissant Plus, Villa Madina,
Cultures, Thai Express, Mrs. Vanelli's, Kim Chi, “TCBY”, Yogen Früz, Sushi Shop, Koya
Japan, Vie & Nam, Tandori, O’Burger, Tutti Frutti, Taco Time, Country Style,
Bunsmaster, and the newly acquired Valentine. During the second quarter of 2010, the
Company completed the conversion of the remaining Veggirama outlets into Cultures
outlets.
As at November 30, 2010, MTY had 1727 locations in operation, of which 1701 were
franchised and the remaining 26 locations were operated by MTY.
MTY’s locations can be found in: i) food courts and shopping malls; ii) street front; and, iii)
retailers, convenience stores, cinemas,
non-traditional
format within petroleum
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amusement parks and in other venues or retailers shared sites. The non-traditional
locations are typically smaller in size, require a lower investment and generate lower
revenues than the locations found in shopping malls, food courts or street front locations.
The street front locations are mostly made up of the Country Style, La Cremiere, “TCBY”,
Sushi Shop, Taco Time, Tutti Frutti and Valentine banners. La Cremiere and “TCBY”
operate primarily from April to September and the others banners operate year round.
MTY has developed several quick service restaurant concepts: Tiki Ming - Chinese
cuisine, was its first banner, followed by Sukiyaki - A Japanese delight, Franx Supreme –
hot dog/hamburger, Panini Pizza Pasta, Chick’n’Chick, Caferama, Carrefour Oriental,
Villa Madina, Kim Chi, Vie & Nam, Tandori and O’Burger. Other banners added through
acquisitions include: 18 locations from the Fontaine Sante/Veggirama chain in 1999, 74
locations from the La Cremiere ice cream chain in 2001, 20 locations from the Croissant
Plus chain in 2002, 24 locations from the Cultures chain in 2003, 6 locations from the
Thai Express chain in May 2004, 103 locations from the Mrs. Vanelli’s chain in June
2004, 91 locations of The Country’s Best Yogurt “TCBY” with the undertaking of the
Canadian master franchise right in September 2005. On April 1, 2006, MTY acquired the
exclusive master franchise rights to franchise Yogen FrüzTM throughout Canada with its
network of 152 existing locations. On September 1, 2006, MTY acquired the Sushi Shop
banner with its 42 franchise locations and 5 corporate owned locations and on October 19,
2006, the Company acquired the Koya Japan banner with its 24 franchise locations and one
corporate owned location. On September 1, 2007 MTY purchased 15 existing Sushi Shop
franchise locations from an investor group. On September 15, 2008, MTY acquired the Tutti
Frutti banner with its 29 outlets. This banner caters to the breakfast and lunch crowd. On
October 31, 2008, MTY acquired the Canadian franchising rights of Taco Time in Canada.
As at the date of acquisition, there were 117 Taco Time restaurants operating in Western
Canada. On May 1, 2009, the Company acquired the outstanding shares of Country Style
Food Services Holdings Inc. with the 480 outlets operated by its subsidiaries. On
September 16, 2010, the Company acquired the outstanding shares of Groupe Valentine
inc. and of its network of 95 stores. MTY also has an exclusive area development
agreement with Restaurant Au Vieux Duluth to develop and sub-franchise Au Vieux Duluth
Express quick-service restaurants in the Provinces of Ontario and Quebec.
Revenues from franchise locations are generated from royalty fees, franchise fees, sales
of turn key projects, rent, sign rental and sales of other goods and services to
franchisees. Revenues from corporate owned locations include sales generated from
corporate owned locations. Other operating expenses include salaries, general and
administrative costs associated with existing and new franchisees, expenses in the
development of new markets, costs of setting up turn key projects, supplies and
equipment sold to franchisees. Corporate owned location expenses include the costs to
operate corporate owned locations.
Description of recent acquisition
On April 13, 2009, MTY announced that its wholly owned subsidiary MTY Tiki Ming
Enterprises Inc. would be acquiring all the issued shares of Country Style Food Services
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Holdings Inc. The acquisition was completed on May 1, 2009. The Company has paid
$7,936,791 in cash and $6,750,000 as repayment of long-term debt on closing and
retained the amounts of $997,868 and $794,576 as holdbacks and withholding taxes
respectively. An amount of $2,697,762 of post-closing adjustments is to be reimbursed
by the sellers to the Company in accordance with the provisions of the purchase
agreement. The post-closing adjustments are under litigation.
As at the date of acquisition, there were 117 Country Style traditional restaurants, 348 non-
traditional Country Style outlets as well as 15 Bunsmaster retail outlets. All these units were
franchised with the exception of 5 corporate owned traditional restaurants.
As a result of the litigation regarding post-closing adjustments, the purchase price of
Country Style has not been finalized as of October 1, 2010.
On September 16, 2010, the Company completed the acquisition of all of the issued and
outstanding shares of Groupe Valentine Inc., 9180-7420 Quebec Inc., as well as seven
real estate properties owned by an affiliated corporation. At the date of the closing, there
were 95 Valentine outlets, including 86 franchise outlets and 9 corporate-owned
restaurants.
Selected annual information
Total assets
Total long-term liabilities*
Revenue
Income before income taxes and
non-controlling interest
Net income and comprehensive
income
EPS basic
EPS diluted
Weighted daily average number
of common shares
Year ended
November 30,2008
Year ended
November 30,2009
Year ended
November 30,2010
$60,087,474
$2,217,748
$34,239,041
$76,535,459
$2,463,229
$51,537,788
$96,554,108
$3,544,590
$66,886,441
$14,327,700
$17,927,708
$22,303,714
$9,911,506
$0.52
$0.52
$12,261,503
$0.64
$0.64
$15,446,794
$0.81
$0.81
19,120,567
19,120,567
19,120,567
Weighted average number of
diluted common shares
* Total long-term liabilities exclude non-controlling interest
19,120,567
19,120,567
19,120,567
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Summary of quarterly financial information
February
2009
May
2009
August
2009
November
2009
February
2010
May
2010
August
2010
November
2010
Quarters ended
$9,777,233 $11,434,753 $14,838,378 $15,487,424 $14,313,553 $17,287,393 $15,941,775 $19,343,720
$2,199,526
$2,901,760
$3,384,504
$3,775,712
$3,003,595
$3,809,139
$4,150,813
$4,483,247
Revenue
Net income
and
comprehen-
sive income
Per share
$0.12
$0.15
$0.18
$0.20
$0.16
$0.20
$0.22
$0.23
Per diluted
share
$0.12
$0.15
$0.18
$0.20
$0.16
$0.20
$0.22
$0.23
Results of operations for the fiscal year ended November 30, 2010
Revenue
During its 2010 fiscal year, the Company’s total revenue increased by 30%, to $66.9
million, from $51.5 million during the same period last year.
For the same period, revenue from franchise locations increased by 38%, progressing
from $42.2 million in 2009 to $58.2 million in 2010. While 59% of the increase comes
from the impact of acquisitions, several other factors contributed to the growth in
revenues, as listed below:
Revenues, 2009 fiscal year
Increase attributable to Country Style
Increase attributable to Valentine
Increase in revenues from turnkeys*
Increase in initial franchise fees*
Increase in royalties*
Decrease in other revenues*
Revenues, 2010 fiscal year
* Excludes amounts attributable to Country Style and Valentine
$million
42.2
7.5
2.0
4.0
1.1
1.4
-0.0
58.2
During fiscal 2010, the Company opened 191 new stores compared to 114 for the same
period last year, generating a stronger volume of initial franchise fees and turnkey
deliveries as compared to the same period last year. Royalties generated by new stores
opened during the last 12 months contributed $1.4 million to the increase.
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Revenue from corporate owned locations decreased to $8.7 million during our 2010 year,
from $9.4 million for the same period last year, representing a reduction of 7%. This
reduction is mainly due to the decrease in the number of corporate owned locations
during the first three quarters of the period, before the acquisition of Valentine and of its
nine corporate locations.
Cost of sales and other operating expenses
During 2010, other operating expenses increased by 56% to $33.4 million, from $21.3
million for the same period in 2009. Most of the variance is coming from a $7.8 million
increase in the cost of sales in franchise locations, which are mainly composed of costs
incurred to deliver turnkey locations and of rental expenses related to franchised
locations. Both of these items are associated with a stream of revenues.
Labour costs increased by $2.0 million mainly because of the additions of Country Style
and Valentine. Royalty payments and commissions, which are a function of revenue
streams, account for $0.9 million of the increase. Office and general, advertising and
professional fees account for the remainder.
Expenses for corporate owned locations decreased to $7.7 million from $8.8 million during
the year, as the Company reduced the number of corporate-owned locations during the first
three quarters of the period.
EBITDA
Fiscal year ended
November 30, 2009
Fiscal year ended
November 30, 2010
Total
$42.52
$21.33
$21.19
49.8%
Franchise Corporate
$9.35
$8.81
$0.54
5.8%
(In millions)
Revenues (1)
Expenses
EBITDA
EBITDA as a %
of Revenue
EBITDA (income before income taxes, non-controlling interest and amortization) is not an earnings measure
recognized by GAAP and therefore may not be comparable to similar measures presented by other companies.
(1)For purposes of the EBITDA analysis, interest income and gain on disposal of capital assets and on foreign exchange
have been included with Franchise revenue. See reconciliation to net income and comprehensive income on page 18.
Franchise Corporate
$8.65
$7.73
$0.92
10.7%
$58.81
$33.36
$25.45
43.3%
$51.87
$30.14
$21.73
41.9%
$67.46
$41.09
$26.37
39.1%
Total
EBITDA increased by 21%, from $21.7 million to $26.4 million for the twelve months
ended November 30, 2010.
For the same period, EBITDA from franchised locations increased from $21.2 million in
2009 to $25.5 million in 2010. The generic growth from stores opened in the last quarter
of 2009 and during 2010 is the main driver of the increase.
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EBITDA as a percentage of revenue decreased mainly due to a larger number of turnkey
projects delivered and increased sales of products and services made to franchisees,
which typically generate lower profit margins.
EBITDA from corporate owned locations increased from $0.5 million in 2009 to $0.9
million in 2010, mainly because of the stronger general performance of the remaining
stores. For the same reason, EBITDA as a percentage of revenue from corporate owned
locations increased to 11% for the period, compared to 6% in 2009.
Net income
For the year ended November 30, 2010, MTY reported a net income of $15.4 million or
$0.81 per share ($0.81 per diluted share) compared to a net income of $12.3 million or
$0.64 per share ($0.64 per diluted share) for the same period last year, representing a
net income increase of 26%. The increase in net income for the period is mainly
attributable to strong generic growth.
Amortization expense
Amortization of capital assets increased slightly by $0.1 million for during the year. The
increase is due to the additional amortization of capital assets resulting from the
acquisition of Country Style, which was partly offset by the reduction in amortization
related to the disposal of the assets used in corporate stores that were franchised.
Amortization of intangible assets increased to $3.0 million for the period compared to
$2.8 million in 2009. The increase is entirely attributable to the amortization of franchise
rights and distribution rights that resulted from the acquisition of Country Style.
Other income
Interest income, which is generated from the Company’s investments in short-term notes,
was stable during 2010. The higher amount invested was offset by interest rates
prevailing during 2010.
The gains on disposal of capital assets results from the sale of the assets of corporate
stores, mainly in the fourth quarter of 2010.
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Results of operations for the fourth quarter ended November 30, 2010
Revenue
For the quarter ended November 30, 2010, total revenue increased by 25%, to $19.3
million from $15.5 million in the fourth quarter of last year.
During the same period, revenue from franchise locations increased by 26% to $16.8
million from $13.3 million. Of this variance, $2.0 million came from the acquisition of
Valentine; there was a generic growth of $0.8 million in royalties and an increase of $0.7
million in revenues from turnkeys and other revenues.
Revenue from corporate owned locations increased by 16% to $2.5 million for the
quarter, from $2.2 million for the same quarter last year. The increase is mainly
attributable to the acquisition of Valentine, which operated nine corporate stores at the
date of the transaction and opened two more during the fourth quarter.
Cost of sales and other operating expenses
For the quarter ended November 30, 2010, other operating expenses increased by 43%
to $10.0 million from $7.0 million for the same quarter in 2009. The aforementioned
increase is mainly attributable to the acquisition of Valentine, while the higher number of
turnkeys delivered during the quarter of 2010 also contributed to the variation.
Expenses for corporate owned locations were 16% higher for the fourth quarter of 2010
than they were for the same period a year before, at $2.6 million from $2.2 million. The
increase is attributable to the increase in the number of corporate stores following the
acquisition of Valentine.
EBITDA
Fourth quarter ended
November 30, 2009
Fourth quarter ended
November 30, 2010
Total
$13.57
$7.00
$6.57
48.4%
Franchise Corporate
$2.18
$2.20
-$0.02
-1.1%
(In millions)
Revenues (1)
Expenses
EBITDA
EBITDA as a %
of revenue
EBITDA (income before income taxes, non-controlling interest and amortization) is not an earnings measure
recognized by GAAP and therefore may not be comparable to similar measures presented by other companies.
(1)For purposes of the EBITDA analysis, interest income and gain on disposal of capital assets and on foreign exchange
have been included with Franchise revenue. See reconciliation to net income and comprehensive income on page 18.
Franchise Corporate
$2.52
$2.56
-$0.04
-1.5%
$17.39
$9.98
$7.41
42.6%
$15.75
$9.20
$6.55
41.6%
Total
$19.91
$12.54
$7.37
37.0%
Total EBITDA grew by 13%, from $6.6 million to $7.4 million for the fourth quarter of
2010.
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EBITDA from franchise locations for the quarter increased 13%, from $6.6 million in 2009
to $7.4 million in 2010. The main driver of that growth is the increase in royalties
generated by stores opened in the last twelve months.
EBITDA as a percentage of revenue for franchise locations declined to 42.6% from
48.4% a year ago. The acquisition of Valentine, which earns a high proportion of its
revenues from sale of products to franchisees at a lower profit margin, accounts for most
of the variance.
EBITDA from corporate owned locations was stable with a slight negative contribution.
This result is mainly due to the acquisition of certain stores presenting lower performance
levels in the Valentine transaction.
Net income
For the quarter ended November 30, 2010, net income progressed 19% compared to the
fourth quarter of 2009. MTY reported a net income of $4.5 million or $0.23 per share
($0.23 per diluted share) compared to a net income of $3.8 million or $0.20 per share
($0.20 per diluted share) for the same quarter last year.
Most of the increase in net income for the quarter is attributable to growth in royalties
generated by outlets opened during the last twelve months.
Amortization
Amortization of capital assets was stable at $0.3 million for the fourth quarter.
Amortization of intangible assets increased during the fourth quarter of 2010 at $0.8
million, compared to $0.7 million for the same quarter in 2009. This is attributable to the
amortization of the franchise rights acquired in the Valentine transaction.
Other income
For the fourth quarter of 2010, gains on disposal of assets amounted to $0.5 million,
compared to $0.2 for the same period last year. These gains are related to the
disposition of the capital assets of certain corporate-owned stores during the quarter.
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Contractual obligations and long-term debt
Long-term debt includes non-interest bearing holdbacks on acquisitions with a balance of
$2,393,897 as well as $284,400 of debt of a partly-owned subsidiary to its non-controlling
shareholders and bank loans in the amount of $125,916 contracted by subsidiaries of
Valentine. The obligations pertaining to the long-term debt and the minimum rentals for
the leases that are not subleased are as follows:
For the period ending
Long term debt
12 months ending November 2011
12 months ending November 2012
12 months ending November 2013
12 months ending November 2014
12 months ending November 2015
Balance of commitments
$1,873,213
$558,000
$372,000
-
-
-
$2,803,213
Net lease
commitments
$1,933,629
$2,029,416
$1,752,725
$1,621,269
$1,449,878
$4,910,718
$13,697,635
Total contractual
obligations
$3,806,842
$2,587,416
$2,124,725
$1,621,269
$1,449,878
$4,910,718
$16,500,848
In addition to the above, the Company has entered into supplier agreements for
purchases of coffee beans, wheat, sugar and shortening for delivery between December
2010 and March 2011. The total commitment amounts to $0.8 million.
In relation to the items listed above, the Company has entered into a contract to minimize
the impact of variations in foreign currencies. The total commitment on this contract
amounts to approximately $1.2 million.
Liquidity and capital resources
Cash and highly liquid temporary investments amounted to $29.0 million on November
30, 2010, compared $15.9 million at the end of the 2009 fiscal period.
During fiscal year 2010, cash flows generated by operating activities were $21.8 million,
compared to $16.1 million during 2009. The main drivers of the increase in cash flows
are the Company’s growth during the period and the lower requirements for working
capital.
For the fourth quarter of 2010, operating cash flows reached $5.5 million, compared to
$5.1 million for the same period last year, an increase that is attributable to the growth in
EBITDA.
During the fourth quarter of 2010, the Company disbursed $7.4 million to acquire
Valentine and seven related properties and paid $0.9 million in dividends, both items
affecting non-operating cash flows.
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In the short-term, Management will continue to open new locations that will be funded by
new franchisees. MTY will continue its efforts to sell some of its existing corporate
owned locations and will seek new opportunities to acquire other food service operations.
MTY has an available line of credit of $5.0 million that remained unused at November 30,
2010. The facility, when used, bears interest at the bank’s annual prime rate plus 1.00%.
Balance sheet
Temporary investments increased to reach $23.4 million at the end of the fourth quarter,
up from $14.6 million as at November 30, 2009. Strong cash flows generated by our
operations are typically invested until they are needed to fund acquisitions.
These temporary investments are comprised of highly liquid, short-term notes valued at
fair value. They have maturity dates between December 2010 and August 2011 and have
rates of return between 0.82% and 1.45% (0.35% to 1.01% in November 2009).
Accounts receivable at the end of our 2010 fiscal period were at $7.6 million, an increase
of $0.9 million compared to balance at the same period a year before. $0.4 million of this
increase is attributable to the acquisition of Valentine, while the remainder is mainly
driven by the increase in revenues.
Franchise locations under construction under construction increased $0.1 million during
2010. The balance at the end of the fourth quarter is $0.2 million higher than it was three
months earlier, mainly because of the higher number of projects under construction and
their respective stages of completion.
Loans receivable were up $0.7 million, reaching $1.2 million at the end of our 2010 fiscal
year. During the year, six new loans were granted in relation to newly franchised
restaurants while one was extinguished. The Company also acquired $0.4 million in
loans receivable in the Valentine transaction.
Capital assets increased to $7.1 million at the end of the year, up $3.4 million compared
to the balance at our 2009 fiscal period, because of the acquisition of Valentine and of
the seven related properties, which account for a combined addition of $4.3 million.
The impact of this acquisition was partly offset by the disposal of the assets of several
corporate locations during the period.
Intangible assets increased from $35.1 million as at November 30, 2009 to $36.3 million
at the end of 2010. Franchise rights and a trademark were acquired at a cost of $4.2
million in the acquisition of Valentine; this was partially offset by amortization charges of
$3.0 million incurred during the year.
During the year, two transactions impacted goodwill; the first is a change in estimate
recorded in the allocation of the purchase price of Country Style, causing future income
tax assets to increase by $1.2 million and goodwill to decrease by a corresponding
amount. The second transaction is the acquisition of Valentine, which included $1.4
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million in goodwill. The combined effect of the above-mentioned transaction was an
increase of $0.3 million in goodwill, which was $7.1 million at the end of our 2010 fiscal
year.
Accounts payable increased from $9.3 million to $12.5 million between November 30,
2009 and November 30, 2010. Valentine accounts for $1.0 million of the variance. The
remainder of the variance is mainly due to higher accruals and payables in relation to the
construction of turnkey locations to be delivered later in the year.
Deferred revenues consist of distribution rights which are earned on a consumption basis
and include initial franchise fees to be earned once substantially all of the initial services
have been performed. Deferred revenues coming from distribution rights were up by $0.1
million, while unearned franchise fees declined by $0.3 million, for a net decrease of $0.2
million in deferred revenues. The balance at the end of the fiscal period was $1.5 million.
Long-term debt increased by $0.8 million, mainly because of $1.0 million in holdbacks
conditionally owed to the former owners of Valentine. Settlements and legal fees paid by
the Company and withdrawn from one of the holdbacks payables offset the increase
described above. The long-term debt is composed of non-interest bearing holdbacks on
acquisitions, of debt contracted by two of the company’s subsidiaries for the set up of
their operations, and of two bank loans contracted by subsidiaries of Valentine prior to
the acquisition.
With the exception of those created in the Valentine transaction, the holdbacks should
be repaid over the next year, while the debt from the subsidiaries carry no terms of
repayment and will be repaid when this subsidiary generates sufficient cash flow to repay
its debt without impairing its operations. The two bank loans were repaid subsequent to
year end and the subsidiaries are now financed by MTY’s cash on hand.
Further details on the above balance sheet items can be found in the notes to the
November 30, 2010 consolidated financial statements.
Capital stock
No shares were issues during the Company’s 2010 fiscal period. As at February 15, 2011
there were 19,120,567 common shares of MTY outstanding.
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Location information
Number of
locations
12 months
Number of
locations
12 months
November 2010 November 2009
Franchises, beginning of year
Corporate owned, beginning of year
Opened during the year
Closed during the year
Additions by acquisition during the period
Total end of year
Franchises, end of year
Corporate owned, end of year
Total end of year
1,550
20
191
(129)
95
1,727
1,701
26
1,727
996
27
114
(47)
480
1,570
1,550
20
1,570
During 2010, the Company realized a net addition of 157 locations, compared to a net
addition of 547 locations for the same period a year earlier. Excluding the impact of
acquisitions, the net additions are 62 and 67 for 2010 and 2009 respectively.
Of the 129 locations closed, 66 were the result of a transaction between two petroleum
retailers in which non-traditional stores are being replaced by one of the retailers’ own
outlets. Losses in relation to this transaction are expected to have been materially
completed at the end of 2010.
Of the 191 stores opened during the year, 69 were in shopping malls and food courts, 43
were street front and 79 were non-traditional. In comparison, there were 88 non-
traditional, 13 street front and 28 shopping mall and food court locations closed during
the same period.
The net addition of 62 locations is therefore broken down as follows: 29 street front
locations and 42 mall locations were added while there was a net loss of 9 non-traditional
locations.
During the year, 12 corporate-owned locations were sold, 10 were added and 1 was
closed. 9 others came from the acquisition of Valentine.
As at November 30, 2010, there were 2 test locations in operation, all of which were
excluded from the numbers presented above. This is a decrease of 25 since the end of
our 2009 fiscal year, resulting from 27 test outlets being closed and 2 opened during the
period. Of the 27 outlets closed, 26 result from the losses of two contracts to competitors
in a non-traditional environment.
MTY’s locations can be found in: i) food courts and shopping malls; ii) street front; and iii)
non-traditional
retailers, convenience stores, cinemas,
amusement parks and in other venues or retailers shared sites. The non-traditional
locations are typically smaller in size, require lower investment and generate lower
format within petroleum
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17
revenue than the shopping malls, food courts and street front locations. The chart below
provides the breakdown of MTY’s locations by type as at November 30, 2010:
Location type
Shopping mall & food court
Street front
Non-traditional format
% of total location
count
39%
27%
34%
% of system sales
fiscal year 2010
51%
39%
10%
The geographical breakdown of MTY’s locations at November 30, 2010 consists of:
Geographical location
Ontario
Quebec
Western Canada
Maritimes
International
% of total location
count
45%
33%
16%
2%
4%
% of system sales
fiscal year 2010
36%
36%
21%
1%
6%
System wide sales
System wide sales reached to $461.9 million during the year ended November 30, 2010,
compared to $393.1 million for the same period last year, representing an increase of
18%. System wide sales include sales for corporate and franchise locations, which are for
the vast majority of them as reported by franchisees. Approximately half of the increase
in system wide sales is attributable to the acquisition of Country Style, while one tenth of
the increase comes from Valentine. The remainder is generated by new locations
opened since the end of 2009.
For the fourth quarter of 2010, system sales amounted to $124.0 million, up 16%
compared to the same period last year. While Valentine accounts for approximately 40%
of the increase, the main driver of this growth is the increased number of stores opened in
the last twelve months.
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The following chart shows the growth in system sales in the fiscal years 2005 to 2010,
in $ millions:
Same store sales
For the 2010 fiscal year, same store sales decreased 0.34%. During the fourth quarter,
same store sales increased 2.03%, recording the Company’s first positive growth quarter
since the first quarter of 2009.
The following table shows quarterly information on same stores sales growth for fiscal
periods 2007 to 2010:
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Investors relations
On January 19, 2004, MTY appointed, for a 12 month-term, Mr. Jean-Francois Dube of
Boxe Comm, as its investor relation's specialist. Mr. Dube is responsible for communicating
to existing shareholders, potential investors and members of the brokerage community, for
and on behalf of MTY. The Company further extended the contract with Boxe Comm to
end in April 2011, subject to terms and conditions contained in the Agreement. For the
twelve-month period ended November 30, 2010, MTY has paid an amount of $48,000 to
Boxe Comm.
Stock options
During the year, no options were granted or exercised. As at November 30, 2010 there
were no options outstanding.
Seasonality
Results of operations for the interim period are not necessarily indicative of the results of
operations for the full year. The Company expects that seasonality will not to be a
material factor in the quarterly variation of its results. System sales fluctuate seasonally,
during January and February sales are historically lower than average due to weather
conditions. Sales are historically above average during May to August. This is generally
as a result of higher traffic in the street front locations, higher sales from seasonal
locations only operating during the summer months and higher sales from shopping
centre locations. Sale for shopping malls locations are also higher than average in
December during the Christmas shopping period.
Use of estimates
The preparation of financial statements in conformity with Canadian generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and revenue and expenses during the
period reported. Significant areas requiring the use of management estimates relate to the
carrying value of long lived assets, valuation of allowances for accounts receivable and
inventories, liabilities for potential claims and settlements, income taxes, the useful life of
assets used when calculating amortization, the determination of fair value of assets and
liabilities in business acquisitions and impairment testing on goodwill and trademarks.
Estimates and assumptions are reviewed periodically and the effects of revisions are
reflected in the consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
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Contingent liabilities
The Company is involved in legal claims associated with its current business activities,
the outcome of which is not determinable. Management believes that these legal claims
will have no significant impact on the financial statements of the Company.
Guarantee
The Company has provided a guarantee in the form of a letter of credit for an amount of
$45,000. It has also guaranteed payment of construction costs incurred by an area
developer in the amount of approximately $125,000.
EBITDA reconciliation to net income and comprehensive income
The following table provides reconciliation of EBITDA to net income and comprehensive
income disclosed in this MD&A.
(In millions)
EBITDA
Less:
3 months ended
November 30,
2010
$
3 months ended
November 30,
2009
$
12 months
ended
November 30,
2010
$
12 months
ended
November 30,
2009
$
7.37
6.55
26.37
21.73
Amortization – capital assets
Amortization – intangible assets
Total income taxes
Non-controlling interest
Net income and comprehensive
income
0.33
0.76
1.80
0.00
0.31
0.68
1.78
0.00
1.05
3.02
6.78
0.07
0.98
2.83
5.62
0.05
4.48
3.78
15.45
12.26
Risks and uncertainties
Despite the fact that the Company has a various number of concepts, diversified in type
of locations and geographically across Canada, the performance of the Company is also
influenced by changes in demographic trends, traffic patterns, occupancy level of malls
and office towers and the type, number, and location of competing restaurants. In
addition, factors such as innovation, increased food, labour and benefits costs,
occupancy costs and the availability of experienced management and hourly employees
may adversely affect the Company. Changing consumer preferences and discretionary
spending patterns could oblige the Company to modify or discontinue concepts and/or
menus and could result in a reduction of revenue and operating income. Even if the
Company was able to compete successfully with other restaurant companies with similar
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concepts, it may be forced to make changes in one or more of its concepts in order to
respond to changes in consumer tastes or dining patterns. If the Company changes a
concept, it may lose additional customers who do not prefer the new concept and menu,
and it may not be able to attract a sufficient new customer base to produce the revenue
needed to make the concept profitable. Similarly, the Company may have different or
additional competitors for its intended customers as a result of such a concept change
and may not be able to successfully compete against such competitors. The Company's
success also depends on numerous factors affecting discretionary consumer spending,
including economic conditions, disposable consumer income and consumer confidence.
Adverse changes in these factors could reduce customer traffic or impose practical limits
on pricing, either of which could reduce revenue and operating income.
The growth of MTY is dependant on maintaining the current franchise system which is
subject to the renewal of existing leases at sustainable rates, MTY’s ability to continue to
expand by obtaining acceptable store sites and lease terms, obtaining qualified
franchisees, increasing comparable store sales and completing acquisitions. The time,
energy and resources involved in the integration of the acquired businesses into the MTY
system and culture could also have an impact on MTY’s results.
Off-balance sheet arrangement
MTY has no off-balance sheet arrangements
Future accounting policies
International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board (“AcSB”) confirmed that
Canadian GAAP, as used by publicly accountable enterprises, will be superseded by
IFRS for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual
framework similar to Canadian GAAP, but there are significant differences on recognition,
measurement and disclosures. For the Company, the conversion to IFRS will be
required for interim and annual financial statements for the year ending November 30,
2012.
The following information is presented pursuant to the October 2008 recommendations of
the Canadian Performance Reporting Board relating to pre-2011 communications about
IFRS conversion and to comply with the guidance provided in Canadian Securities
Administration Staff notice 52-320, Disclosure of Expected Changes in Accounting
Policies Relating to Changeover to International Financial Reporting Standards. This
information is provided to enable investors and others to gain a better understanding of
the Company’s transition plan and the resulting impacts on financial statements and
financial reporting. This information reflects the Company’s most recent assumptions
and expectations; circumstances may arise which would change these assumptions and
expectations.
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The change to IFRS will require restatements of the 2011 numbers used for comparative
purposes so they are in accordance with IFRS for comparative purposes. In order to
achieve a successful transition, the Company will be using two parallel sets of accounting
records during its 2011 fiscal period.
The Company’s transition plan is composed of the following phases:
1. Diagnostics and Scoping
2. Analysis and Evaluation
3. Design
4. Implementation and review
Diagnostics and Scoping Phase
A preliminary overview of the major differences between GAAP and IFRS in the context
of MTY was completed during the third quarter of our 2010 fiscal period and updated
following the acquisition of Groupe Valentine Inc. The objective of this phase was to
determine, at a high level, the financial reporting differences under IFRS and the key
areas that will be impacted. This identification will in turn largely influence the efforts
deployed during the next phases of the project. The areas which have been identified to
have a potential impact are as follows:
Investment Property (IAS 40),
Impairment of assets (IAS 36),
Income Taxes (IAS 12),
• Presentation of Financial Statements (IAS 1),
• Business Combinations (IFRS 3),
• Property, Plant and Equipment (IAS 16),
•
•
•
• Leases (IAS 17),
• Revenues (IAS 18),
• Provisions and Contingent Liabilities (IAS 37),
• Customer Loyalty Programmes (IFRIC 13),
• Consolidated and separate financial statements (IAS 27 & SIC 12).
This list is not all-inclusive and remains subject to change as the Company’s operations
and accounting standards evolve.
Furthermore, IFRS 1, First-Time Adoption of International Financial Reporting Standards,
provides entities adopting IFRS for the first time with a number of optional exemptions
and mandatory exceptions to the general requirement of full retrospective application of
IFRS which may differ from the requirements of the sections listed above. The Company
will be analyzing the various accounting policy choices available and will implement those
determined to be most appropriate in the Company’s circumstances. The Company has
not yet determined the aggregate financial impact of adopting IFRS 1 on its consolidated
financial statements.
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As part of this phase, the Company also assessed the impact of the transition on its
Internal Controls over Financial Reporting (ICFR); at the moment, given the Company’s
structure, the organization of the work and the flow of the information, the Company’s
ICFR are expected to be materially impacted during transition from Canadian GAAP to
IFRS.
Analysis and Evaluation Phase
A more detailed evaluation is currently underway to assess the impact of the above
mentioned sections on our financial reporting and is expected to be completed during the
first and second quarter of our 2011
include
documentation of the rationale supporting accounting policy choices and where possible
quantification of the impacts of the changeover. In cases in which quantification is not
possible, an action plan will be established to ensure a timely resolution of any
outstanding issues.
Deliverables will
fiscal period.
An important part of this phase involves producing a detailed evaluation of the choices
that are available to the Company as part of IFRS 1. The Company has completed its
analysis of the choices available under IFRS 1. Note that this assessment was based on
existing standards and economic context in place today and could change before the
changeover date. Below are a discussion and a preliminary guidance regarding the
relevant optional exemptions provided by IFRS 1:
Relevant optional
exemptions
Business combinations
Deemed cost
Preliminary findings
IFRS 3
The Company may elect not
retrospectively to all of the acquisitions that occurred prior
to transition date or to choose a date after which to apply
the standard.
to apply
Other than the impact of the changeover on deferred
income taxes, the Company’s past practices have been
generally similar to the ones dictated by IFRS 3. The
company will elect to apply IFRS 3 prospectively only, and
as a result will not restate the acquisitions that have
occurred prior to IFRS transition date.
On transition, the Company may elect to use fair value as
the deemed cost of its Property, Plant and Equipment,
Investment Properties and Intangible Assets for which an
active market exists.
The Company does not intend to revalue its PP&E,
Investment Properties or Intangible Assets at transition.
Preliminary assessments suggest that the IRFS cost of the
assets described above will be similar to the carrying
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amounts under Canadian GAAP at the date of transition.
Compound financial
instruments
Some instruments contain both an equity and a liability
component; under IAS 32, an entity is required to separate
the two components.
In cases in which the liability component is no longer
outstanding, this exemption provides relief in that IAS 32
can be applied prospectively from the IFRS transition date
and no retroactive restatement is required.
The company intends to use this exemption and apply IAS
32 prospectively from the IFRS transition date.
Designation of previously
recognized financial
instruments
This exemption provides the opportunity to designate
financial assets as either Available for Sale (AFS) or Fair
Value through Profit or Loss (FVTPL).
Share-based payments
Gains or losses in fair value of financial assets designated
as AFS flow through Other Comprehensive Income,
whereas they would flow into the P&L under the FVTPL.
The Company’s temporary investments do not meet the
criteria to be classified as FVTPL. As a result, the
temporary
exemption does not apply
investments will be classified as AFS.
to MTY and
For equity-settled awards with non-employees, IFRS 2
requires that the transaction be measured at the fair value
of the goods or services received rather than at the fair
value of the equity instrument provided.
As a result, some old share-based payments would have
to be revisited. At year-end, no instruments issued as
compensation to acquire assets were unvested.
The company will elect to use this exemption and apply
IFRS 2 prospectively after the IFRS transition date.
In addition to its assessment of IFRS 1, the Company has undertaken a thorough review
of the potential changes to accounting policies arising from the changeover. Information
regarding the relevant sections and of the status of the process is presented below:
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25
Business combinations
As mentioned previously, the Company’s past practices are generally similar to the
requirements of IFRS 3; one area of difference is the measurement period which, under
IFRS 3, is limited to twelve months following the business combination transaction, even
in cases in which there remains unknown items.
The Company is still reviewing other potential impacts of the changeover.
Property, Plant and Equipment
We have assessed IFRS against our current accounting policies and at this time we do
not foresee a major impact to our financial statements outside of additional disclosure.
As mentioned previously, the Company will use IFRS historical costs as its measurement
basis, and impairment will continue to be assessed annually if there is an indicator of
impairment. Some assets currently categorized as Capital Assets on the Company’s
balance sheet could be reclassified as Investment Property.
Investment Property
As part of the acquisition of Groupe Valentine Inc., the Company has acquired assets
that generate rental income. The Company is evaluating whether some of these
properties will qualify as investment properties. The Company will apply the cost model
to account for Investment Properties, if any. Additional disclosure will be required,
including the fair value of the properties.
Impairment of assets
Under IAS 36, impairment tests are conducted using a one-step approach, in which the
assets’ or cash generating units’ (“CGU”) carrying value is compared to the assets’ or
CGU’s discounted cash flows. This method is different from Canadian GAAP, which
includes as a first step an undiscounted cash flow screen. This increases the likelihood
that an impairment would have to be recognized under IFRS.
The Company is still in the process of identifying its cash generating units for impairment
testing purposes. Once that is established, specific tests will be conducted to evaluate
whether some assets are impaired or not.
Income Taxes
The conceptual approach under IFRS and Canadian GAAP with respect to accounting for
deferred income taxes (referred to as future income taxes under Canadian GAAP) are
consistent; both use the liability method in assessing the impact of temporary differences
between the tax bases and carrying values for financial reporting purposes.
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25
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The Company is currently assessing the impact of IAS 12 specifically on deferred income
taxes arising from indefinite life intangible assets such as Goodwill and Trademarks.
Leases
Under IFRS, more judgment is required when classifying leases due to the lack of
quantitative guidance. The Company is currently assessing the impact of the transition
on the existing leases.
Revenues
IAS 11 states that percentage of completion is required for construction contracts. The
Company currently uses the completed contract method for revenues related to the
delivery of turnkey restaurants. Early guidance obtained on the matter suggests that an
accounting policy change with retroactive application and restatement of retained
earnings will be required; more specifically, cost incurred on construction contracts will be
recognized in the period in which they are incurred. Percentage of completion revenues
will be recognized up to a maximum of the expensed costs and the profit will be
recognized when the project is delivered.
Provisions and contingent liabilities
Provisions need to be recognized in the financial statements when there is a present
obligation arising from a past event that is probable to require a cash outflow. Canadian
GAAP required recognition when the outflow was likely, whereas IFRS requires
recognition when it is probable (defined as more likely than not); as a result, more
provisions could be required under IFRS than under Canadian GAAP. Additionally,
disclosure will be more detailed and provisions will need to be presented specifically
rather than being aggregated with other trade payables.
An analysis is currently being undertaken to quantify the impact of this requirement.
Customer loyalty programmes
IFRIC 13 is expected to have no significant impact on the Company’s financials. The
MTY Rewards program is in effect owned by the Company’s clients; MTY collects the
amounts that make up the amount payable for redemptions and recognizes a
corresponding liability on its books.
As part of this phase, employees involved in accounting and financial reporting functions
have been offered sufficient education and training to ensure that IFRS and the specific
choices made by the Company are applied consistently and accurately. Furthermore,
seminars will be offered throughout the transition period to members of the Audit
Committee, management and finance and accounting staff. We expect to complete this
phase during the first quarter of our 2011 fiscal period.
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27
Design Phase
The objective of this phase of the transition project is to ensure that our accounting
records reflect the choices made by the company and that the potential impacts on
disclosure, financial reporting, information technology, internal controls over financial
reporting and disclosure controls are assessed and addressed. The objective is to have
this phase completed before the end of the third quarter of our 2011 fiscal period, with a
final confirmation of the elections by the changeover date, December 1, 2011.
Implementation and Review Phase
This phase will involve the implementation of the changes to accounting policies and
financial reporting and the compilation of the comparative financial data. The culmination
of the process is expected to be the board approval of the 2011 financial statements
presented under IFRS as comparative figures for our 2012 fiscal period.
The changes in accounting policies may impact the financial statements of the Company
materially. The full impact of the change is not reasonably determinable at this time.
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Critical accounting policies
MTY’s significant accounting policies are those which are set forth in the notes to the
consolidated financial statements as at November 30, 2010. There are no critical
accounting estimates that, if changed, would materially affect MTY's overall financial
condition or results of operations.
Inventories
Inventory is valued at the lower of cost and net realizable value. Cost is determined
on a first-in, first-out basis. Cost is equivalent to acquisition costs, net of
consideration received from suppliers.
Franchise locations under construction held for resale
The Company constructs franchise locations for resale. The Company capitalizes all
direct costs relating to the construction of these franchise locations. If a franchisee
is not immediately identified, the Company operates the franchise location as a
corporate-owned location until a franchisee is identified. The franchise locations
under construction and held for resale are carried at the lower of cost and estimated
net realizable value.
Capital assets
Capital assets are recorded at cost. Amortization is based on their estimated useful
life using the following methods and rates or terms:
Buildings
Structure
Components
Equipment
Leasehold improvements
Rolling stock
Computer hardware
Computer software
Signs
Straight-line
Straight-line
Declining balance
Straight-line
Declining balance
Declining balance
Declining balance
Straight-line
50 years
20 to 30 years
10%-20%
Term of lease
15%-30%
20%-30%
50%
Term of lease
Goodwill
Goodwill represents the excess of the purchase price over the fair values assigned
to identifiable net assets acquired. Goodwill, which is not amortized, is tested for
impairment annually or more frequently if impairment indicators arise to determine
whether the fair value of each reporting unit to which goodwill has been attributed is
less than the carrying value of the reporting unit’s net assets including goodwill, thus
indicating impairment. The fair value of a reporting unit is calculated based on future
cash flows. Any impairment is then recorded as a separate charge against income
and a reduction of the carrying value of goodwill. An impairment adjustment in the
carrying value of goodwill was not required for the years ended November 30, 2010
and 2009.
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29
Intangible assets
Franchise rights and master franchise rights
The franchise rights and master franchise rights represent the fair value of the
future revenue stream related to the acquisition of franchises. The franchise rights
and master franchise rights are generally amortized on a straight-line basis over the
term of the agreements which range between 10 to 20 years. Master franchise
rights with an indefinite life are not amortized. They are tested for impairment
annually or more frequently when events or circumstances indicate that the master
franchise rights might be impaired. An impairment adjustment in the carrying value
of franchise rights was not required for the years ended November 30, 2010 and
2009.
Trademarks
Trademarks represent the cost incurred to operate under a trade name and are not
amortized as they have an indefinite life. They are tested annually for impairment or
more frequently when events or circumstances indicate that the trademarks might
be impaired. The impairment test compares the carrying amount of the trademarks
with their fair value. An impairment adjustment in the carrying amount of trademarks
was not required for the years ended November 30, 2010 and 2009.
Leases
Leases, which represent the value associated to preferential terms or locations, are
amortized on a straight-line basis over the term of the leases.
Other
Included in other intangible assets are a sponsorship fee and a licensing agreement
acquired in the 2004 acquisition of Mrs. Vanelli’s Restaurants Ltd., which are both
fully amortized, and distributions rights obtained from the acquisition of Country
Style Food Services Inc., which are being amortized over the remaining life of the
contracts (three years at the date of acquisition).
Impairment of long-lived assets
Long-lived assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. An
impairment loss is recognized when their carrying value exceeds the total
undiscounted cash flows expected from their use and eventual disposition. The
amount of the impairment loss is determined as the excess of the carrying value of
the asset over its fair value.
28
29
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Revenue recognition
Revenue is generally recognized on the sale of products or services when the
products are delivered or the services performed, all significant contractual
obligations have been satisfied and the collection is reasonably assured.
Revenue from franchise locations
Royalties are based either on a percentage of gross sales as reported by the
franchisees or on a fixed monthly fee and are recognized as revenue in the period
earned.
Initial franchise fees are recognized when substantially all of the initial services as
required by the franchise agreement have been performed. This usually occurs
when the location commences operations.
Revenue from the sale of franchise locations is recognized at the time the
franchisee assumes control of the franchise location.
Restaurant construction and renovation revenue are accounted for in accordance
with the completed contract method. Losses are fully recognized as they become
probable.
Master license fees are recognized when the Company has performed substantially
all material initial obligations under the agreement, which usually occurs when the
agreement is signed.
Renewal and transfer fees are recognized when substantially all applicable services
required by the Company under the franchise agreement have been performed.
This generally occurs when the agreement is signed.
The Company earns rent revenues on certain leases it holds and sign rental
revenues; both are recognized in the month they are earned.
receives considerations
The Company
contributions are recognized as revenues as they are earned.
from certain suppliers.
Supplier
Revenue from corporate-owned locations
Revenue from corporate-owned locations is recorded when services are rendered.
Foreign currency
Foreign currency transactions and balances are translated using the temporal
method. Under this method, all monetary assets and liabilities are translated at the
exchange rates prevailing at the balance sheet date. Non-monetary assets and
liabilities are translated at historical exchange rates.
30
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31
Revenue and expenses are translated at the average exchange rates for the month,
except for amortization which is translated on the same basis as the related
assets. Translation gains and losses are reflected in net income.
Income taxes
The Company follows the liability method of accounting for income taxes. Under this
method, future income taxes are recognized based on the expected future tax
consequences of differences between the carrying amount of balance sheet items
and their corresponding tax basis, using the enacted and substantively enacted
income tax rates for the years in which the differences are expected to reverse.
Future income tax assets are recognized to the extent it is more likely than not they
will be realized. The effect of changes in income tax rates on future income tax
assets and liabilities is recognized in earnings in the year that includes the date of
enactment or substantive enactment of the changes.
Financial instruments
Financial assets and financial liabilities are initially recognized at fair value and their
subsequent measurement is dependent on their classification as described below.
Their classification depends on the purpose for which the financial instruments were
acquired or issued, their characteristics and the Company’s designation of such
instruments.
Classification
Cash
Temporary investments
Accounts receivable
Deposits
Loans receivable
Other receivable
Accounts payable and accrued liabilities
Long-term debt
Held for trading
Held for trading
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Held for trading
Held for trading financial assets are financial assets typically acquired for resale prior
to maturity or that are designated as held for trading. They are measured at fair value
at the balance sheet date. Fair value fluctuations including interest earned, interest
accrued, gains and losses realized on disposal and unrealized gains and losses are
included in other income.
30
31
Page 29
Loans and receivables
Loans and receivables are accounted for at amortized cost using the effective interest
method.
Other liabilities
Other liabilities are recorded at amortized cost using the effective interest method and
include all financial liabilities other than derivative instruments.
Effective interest method
The Company uses the effective interest method to recognize interest income or
expense which includes transaction costs or fees, premiums or discounts earned or
incurred for financial instruments.
Embedded derivatives
An embedded derivative is a component of a contract with characteristics similar to a
derivative. Management of the Company conducted a review of its contracts and
determined that no embedded derivatives exist as at November 30, 2010 and 2009.
Derivative financial instruments
Derivative financial instruments that are not eligible for hedge accounting are
recognized on the balance sheet at their fair value, with changes in fair value
recognized in net earnings.
32
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33
Credit risk
The Company’s credit risk is primarily attributable to its trade receivables. The
amounts disclosed in the balance sheet are net of allowances for bad debts,
estimated by the Company’s management based on prior experience and their
assessment of the current economic environment. The Company believes that the
credit risk of accounts receivable is limited for the following reasons:
‐ The Company’s broad client base is spread mostly across Canada.
‐ The Company accounts for a specific bad debt provision when management
considers that the expected recovery is less than the actual account receivable.
The following table sets forth details of the age receivables that are not overdue as
well as an analysis of overdue amounts and the related allowance for doubtful
accounts:
November 30, 2010 November 30, 2009
Total accounts receivable
Less: Allowance for doubtful accounts
Total accounts receivable, net
Of which:
$
8,360,696
783,261
7,577,435
Not past due
5,665,888
Past due for more than one day but for no more than 30 days 255,948
Past due for more than 31 days but for no more than 60 days 217,314
1,438,285
Past due for more than 61 days
7,577,435
Total accounts receivable, net
Allowance for doubtful accounts beginning of year
Additions
Acquisition
Write-off
Allowance for doubtful accounts end of period
754,110
384,531
-
(355,380)
783,261
$
7,429,147
754,110
6,675,037
5,003,899
147,782
616,139
907,217
6,675,037
648,934
443,939
115,107
(453,870)
754,110
The credit risk on cash and temporary investments is limited because the Company
invests its excess liquidity in high quality financial instruments.
The credit risk on the loans receivable is similar to that of accounts receivable. There
is currently no allowance for doubtful accounts applicable to the loans receivable.
32
33
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Economic environment risk
The business of the Company is dependent upon numerous aspects of a healthy general
economic environment, from strong consumer spending to provide sales revenue, to
available credit to finance the franchisees and the Company. In light of recent upheaval in
economic, credit and capital markets, the Company’s performance and market price may
be adversely affected. The Company’s current planning assumptions forecast that the
quick service restaurant industry will be impacted by the current economic recession in
the provinces in which it operates. However, management is of the opinion that the
current economic situation will not have a major impact on the Company due to the
following reasons: 1) the Company has strong cash flows; 2) quick service restaurants
represent an affordable dining out option for consumers in an economic slowdown.
Subsequent event
On December 17, 2010, the Company acquired a 51% interest in a food processing
plant. The total value of the transaction was approximately $3.5 million and included
land, a building, equipment and inventory. To finance the acquisition, the newly formed
company contracted a $3.6 million loan from a third party lender.
Outlook
It is Management’s opinion that the trend in the quick service restaurants industry will
continue to grow in response to the demand from busy and on-the-go customers.
Management will maintain its focus on producing innovative menus and revamping the
store designs of its banners which should result in positive same store sales growth when
renovations are completed.
For 2011, management plans on of opening 85 new locations and remains committed in
seeking potential acquisitions to further strengthen its market position.
Controls and Procedures
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed in reports filed with the securities regulatory
authorities are recorded, processed, summarized and reported in a timely fashion. The
disclosure controls and procedures are designed to ensure that information required to
be disclosed by the Company in such reports is then accumulated and communicated to
the Company’s management to ensure timely decisions regarding required disclosure.
The Company's management, including the CEO and the CFO, does not expect that the
Company's disclosure controls and procedures will prevent or detect all errors and all
fraud. Because of the inherent limitations in all control systems, an evaluation of controls
can provide only reasonable, not absolute, assurance that all control issues and
instances of fraud or error, if any, within the Company have been detected.
34
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35
Based upon the evaluation of the disclosure controls and procedures, subject to the
inherent limitations noted above, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company’s disclosure controls and procedures were effective as
at November 30, 2010, in providing reasonable assurance that the material information
relating to the Company is made known to the Company's management.
Internal controls over financial reporting
The Chief Executive Officer and the Chief Financial Officer are responsible for
establishing and maintaining internal control over financial reporting. The Company’s
internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian GAAP.
The Chief Executive Officer and the Chief Financial Officer, together with Management,
after evaluating the effectiveness of the Company’s internal control over financial
reporting as at November 30, 2010, have concluded that the Company’s internal control
over financial reporting was effective.
The Chief Executive Officer and the Chief Financial Officer, together with Management,
have concluded after having conducted an evaluation and to the best of their knowledge
that, as at November 30, 2010, no change in the Company’s internal control over
financial reporting occurred that could have materially affected or is reasonably likely to
materially affect the Company’s internal control over financial reporting.
“Stanley Ma”
__________________________
Stanley Ma, Chief Executive Officer
“Claude St-Pierre”
_________________________
Claude St-Pierre, Chief Financial Officer
“Eric Lefebvre”
__________________________
Eric Lefebvre, CA, Vice President Finance
34
35
Page 33
36
37
Consolidated financial statements of
MTY FOOD GROUP INC.
November 30, 2010
36
37
38
39
Samson Bélair/Deloitte & Touche
s.e.n.c.r.l.
1 Place Ville Marie
Suite 3000
Montreal QC H3B 4T9
Canada
Tel: 514-393-7115
Fax: 514-390-4111
www.deloitte.ca
Auditors’ report
To the Shareholders of
MTY Food Group Inc.
We have audited the consolidated balance sheets of MTY Food Group Inc. (the “Company”) as at
November 30, 2010 and 2009 and the consolidated statements of earnings and comprehensive income,
retained earnings and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial
position of the Company as at November 30, 2010 and 2009 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Montreal, February 7, 2011
____________________
1 Chartered accountant auditor permit No. 17456
38
Page 2 of 27
39
MTY FOOD GROUP INC.
Consolidated statements of earnings and comprehensive income
years ended November 30
Revenue
Franchise locations (Note 17)
Corporate owned locations
Expenses
Other operating expenses
Corporate owned locations
Amortization – capital assets
Amortization – intangible assets
Other income
(Loss) Gain on foreign exchange
Interest income
Gain on disposal of capital assets
Income before income taxes and
non-controlling interest
Income taxes (Note 21)
Current
Future
Income before non-controlling interest
Non-controlling interest
Net income and comprehensive income
Earnings per share (Note 22)
Basic
Diluted
2010
$
2009
$
58,233,878
8,652,563
66,886,441
42,185,577
9,352,211
51,537,788
33,360,073
7,730,568
1,045,931
3,024,716
45,161,288
(14,221)
195,897
396,885
578,561
21,336,098
8,806,712
980,437
2,825,282
33,948,529
1,720
212,945
123,784
338,449
22,303,714
17,927,708
6,006,792
776,405
6,783,197
4,640,215
979,513
5,619,728
15,520,517
(73,723)
15,446,794
12,307,980
(46,477)
12,261,503
0.81
0.81
0.64
0.64
See accompanying notes to consolidated financial statements
Page 3 of 27
40
41
MTY FOOD GROUP INC.
Consolidated statements of retained earnings
years ended November 30
Balance, beginning of year
Net income
Dividends
Balance, end of year
2010
$
2009
$
41,338,029
29,076,526
15,446,794
12,261,503
(860,426)
55,924,397
-
41,338,029
40
See accompanying notes to consolidated financial statements
Page 4 of 27
41
MTY FOOD GROUP INC.
Consolidated balance sheets
as at November 30
Assets
Current assets
Cash
Temporary investments (Note 4)
Accounts receivable
Inventories (Note 5)
Franchise locations under construction held for resale
Loans receivable (Note 6)
Prepaid expenses
Deposits
Future income taxes (Note 21)
Loans receivable (Note 6)
Other receivable (Note 3)
Capital assets (Note 7)
Intangible assets (Note 8)
Goodwill (Note 9)
Future income taxes (Note 21)
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Deferred revenue and deposits (Note 11)
Current portion of long-term debt (Note 12)
Deferred revenue and deposits (Note 11)
Long-term debt (Note 12)
Future income taxes (Note 21)
Non-controlling interest
2010
$
2009
$
5,636,912
23,383,261
7,577,435
645,528
1,091,488
336,067
140,549
45,292
3,561,864
42,418,396
908,619
2,697,762
7,138,466
36,266,114
7,124,751
-
96,554,108
12,529,748
851,138
1,485,295
1,873,213
16,739,394
8,708
930,000
2,605,882
71,939
20,355,923
1,245,844
14,631,473
6,675,037
392,995
1,005,816
153,643
91,210
-
1,272,003
25,468,021
383,771
2,697,762
3,734,657
35,092,165
6,834,249
2,324,834
76,535,459
9,293,003
44,032
1,593,704
1,435,859
12,366,598
82,918
545,518
1,834,793
93,815
14,923,642
Commitments, guarantees and contingent liabilities (Notes 18, 19 and 20)
Shareholders’ equity
Capital stock (Note 13)
Contributed surplus
Retained earnings
19,792,468
481,320
55,924,397
76,198,185
96,554,108
19,792,468
481,320
41,338,029
61,611,817
76,535,459
See accompanying notes to consolidated financial statements
Approved by the Board …``Stanley Ma``………Director ……``Claude St-Pierre``….Director
Page 5 of 27
42
43
2010
$
2009
$
15,446,794
12,261,503
MTY FOOD GROUP INC.
Consolidated statements of cash flows
years ended November 30
Operating activities
Net income
Items not affecting cash:
Amortization – capital assets
Amortization – intangible assets
Deferred revenue
Investment from non-controlling interest in a subsidiary company
Non-controlling interest
Dividends paid to non-controlling shareholders of subsidiaries
Gain on disposal of capital assets
Future income taxes
Changes in non-cash working capital items (Note 23)
1,045,931
3,024,716
(287,479)
55
73,723
(75,000)
(396,885)
776,405
19,608,260
2,192,748
21,801,008
Investing activities
(4,023,698)
Business acquisitions (Note 3)
(402,571)
Repayment of long-term debt arising from acquisition (Note 3)
Acquisition of properties resulting from business acquisition (Note 3) (3,372,000)
(8,751,788)
Temporary investments
(1,203,616)
Additions to capital assets
1,473,525
Proceeds on disposal of capital assets
(16,280,148)
980,437
2,825,282
751,607
510
46,477
(40,000)
(123,784)
979,513
17,681,545
(1,537,108)
16,144,437
(7,838,501)
(6,750,000)
-
(176,817)
(642,464)
527,574
(14,880,208)
Financing activities
Dividends
Issuance of long-term debt to non-controlling
shareholders of subsidiaries (Note 12)
Repayment of long-term debt
Net increase in cash
Cash, beginning of year
Cash, end of year
See accompanying notes to consolidated financial statements
(860,426)
110,000
(379,366)
(1,129,792)
4,391,068
1,245,844
5,636,912
-
204,000
(1,041,734)
(837,734)
426,495
819,349
1,245,844
42
Page 6 of 27
43
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
1. Description of the business
MTY Food Group Inc. (the “Company”) is a franchisor in the quick service food industry. Its activities consist of
franchising and operating corporate-owned locations under a multitude of banners.
During its 2010 fiscal year, the company has opened 191 stores and acquired 95, bringing the total number of
stores to 1,727. Of this number, 26 were corporate stores at the end of period. At the end of 2009, the Company
had 1,570 stores in operations, including 20 corporate locations.
2. Accounting policies
a) Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries
from the date of their acquisition. In addition, the consolidated financial statements include the accounts of three
subsidiaries in which it owns between 50% and 67% of the controlling shares and two other subsidiaries in which
it owns 49% and 45% of the controlling shares respectively and exercises effective control. All significant
intercompany accounts and transactions have been eliminated upon consolidation.
The consolidated financial statements must include the variable interest entities (“VIEs”). VIEs are entities in
which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated financial support provided by other
parties. VIEs are consolidated by their primary beneficiary (i.e., the party that receives the majority of the
expected residual returns and/or absorbs the majority of the entity’s losses). Management of the Company
conducted a review of the ownership and contractual interest in entities and determined that no significant VIEs
exist as of November 30, 2010.
Pursuant to the franchise agreements, franchisees must pay a fee to the promotional fund. These amounts are
collected by the Company in its capacity as agent and must be used for promotional and advertising purposes,
since the amounts are set aside to promote the respective banners for the franchisees’ benefit. The fees collected
by the Company for the promotional fund are not recorded in the Company’s consolidated statement of earnings,
but rather as operations in the accounts payable to the promotional fund.
b) Use of estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses
during the period reported. Significant areas requiring the use of management estimates relate to the carrying
value of long-lived assets, valuation of allowances for accounts receivable and inventories, liabilities for potential
claims and settlements, income taxes, the useful life of assets used when calculating amortization, the
determination of fair value of assets and liabilities in business acquisitions and impairment testing on goodwill
and intangible assets.
Page 7 of 27
44
45
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
2. Accounting policies (cont.)
b) Use of estimates (cont.)
Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual results could differ from those
estimates.
c) Inventories
Inventory is valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis.
Cost is equivalent to acquisition costs, net of consideration received from suppliers.
d) Franchise locations under construction held for resale
The Company constructs franchise locations for resale. The Company capitalizes all direct costs relating to the
construction of these franchise locations. If a franchisee is not immediately identified, the Company operates the
franchise location as a corporate-owned location until a franchisee is identified. The franchise locations under
construction and held for resale are carried at the lower of cost and estimated net realizable value.
e) Capital assets
Capital assets are recorded at cost. Amortization is based on their estimated useful life using the following
methods and rates or terms:
Buildings
Structure
Components
Equipment
Leasehold improvements
Rolling stock
Computer hardware
Computer software
Signs
Straight-line
Straight-line
Declining balance
Straight-line
Declining balance
Declining balance
Declining balance
Straight-line
50 years
20 to 30 years
10%-20%
Term of lease
15%-30%
20%-30%
50%
Term of lease
f) Goodwill
Goodwill represents the excess of the purchase price over the fair values assigned to identifiable net assets
acquired. Goodwill, which is not amortized, is tested for impairment annually or more frequently if impairment
indicators arise to determine whether the fair value of each reporting unit to which goodwill has been attributed is
less than the carrying value of the reporting unit’s net assets including goodwill, thus indicating impairment. The
fair value of a reporting unit is calculated based on future cash flows. Any impairment is then calculated as the
difference between the fair value of the reporting unit and the carrying value, and is recorded as a separate charge
against income and a reduction of the carrying value of goodwill. An impairment adjustment in the carrying value
of goodwill was not required for the years ended November 30, 2010 and 2009.
44
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45
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
2. Accounting policies (cont.)
g) Intangible assets
Franchise rights and master franchise rights
The franchise rights and master franchise rights represent the fair value of the future revenue stream related to the
acquisition of franchises. The franchise rights and master franchise rights are generally amortized on a
straight-line basis over the term of the agreements which range between 10 to 20 years. Master franchise rights
with an indefinite life are not amortized. They are tested for impairment annually or more frequently when events
or circumstances indicate that the master franchise rights might be impaired. An impairment adjustment in the
carrying value of franchise rights was not required for the years ended November 30, 2010 and 2009.
Trademarks
Trademarks represent the cost incurred to operate under a trade name and are not amortized as they have an
indefinite life. They are tested annually for impairment or more frequently when events or circumstances indicate
that the trademarks might be impaired. The impairment test compares the carrying amount of the trademarks with
their fair value. An impairment adjustment in the carrying amount of trademarks was not required for the years
ended November 30, 2010 and 2009.
Leases
Leases, which represent the value associated to preferential terms or locations, are amortized on a straight-line
basis over the term of the leases.
Other
Included in other intangible assets are a sponsorship fee and a licensing agreement acquired in the 2004
acquisition of Mrs. Vanelli’s Restaurants Ltd., which are both fully amortized, and distributions rights obtained
from the acquisition of Country Style Food Services Inc., which are being amortized over the remaining life of the
contracts (three years at the date of acquisition).
h) Impairment of long-lived assets
Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. An impairment loss is recognized when their carrying value exceeds the
total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment
loss is determined as the excess of the carrying value of the asset over its fair value.
Page 9 of 27
46
47
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
2. Accounting policies (cont.)
i) Revenue recognition
Revenue is generally recognized on the sale of products or services when the products are delivered or the
services performed, all significant contractual obligations have been satisfied and the collection is reasonably
assured.
i. Revenue from franchise locations
Royalties are based either on a percentage of gross sales as reported by the franchisees or on a fixed monthly
fee and are recognized as revenue in the period earned.
Initial franchise fees are recognized when substantially all of the initial services as required by the franchise
agreement have been performed. This usually occurs when the location commences operations.
Revenue from the sale of franchise locations is recognized at the time the franchisee assumes control of the
franchise location.
Restaurant construction and renovation revenue are accounted for in accordance with the completed contract
method. Losses are fully recognized as they become probable.
Master license fees are recognized when the Company has performed substantially all material initial
obligations under the agreement, which usually occurs when the agreement is signed.
Renewal and transfer fees are recognized when substantially all applicable services required by the Company
under the franchise agreement have been performed. This generally occurs when the agreement is signed.
The Company earns rent revenues on certain leases it holds and sign rental revenues; both are recognized in
the month they are earned.
The Company receives considerations from certain suppliers. Supplier contributions are recognized as
revenues as they are earned.
ii. Revenue from corporate-owned locations
Revenue from corporate-owned locations is recorded when services are rendered.
j) Foreign currency
Foreign currency transactions and balances are translated using the temporal method. Under this method, all
monetary assets and liabilities are translated at the exchange rates prevailing at the balance sheet date.
Non-monetary assets and liabilities are translated at historical exchange rates.
Revenue and expenses are translated at the average exchange rates for the month, except for amortization which is
translated on the same basis as the related assets. Translation gains and losses are reflected in net income.
46
Page 10 of 27
47
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
2. Accounting policies (cont.)
k) Income taxes
The Company follows the liability method of accounting for income taxes. Under this method, future income
taxes are recognized based on the expected future tax consequences of differences between the carrying amount of
balance sheet items and their corresponding tax basis, using the enacted and substantively enacted income tax
rates for the years in which the differences are expected to reverse. Future income tax assets are recognized to the
extent it is more likely than not they will be realized. The effect of changes in income tax rates on future income
tax assets and liabilities is recognized in earnings in the year that includes the date of enactment or substantive
enactment of the changes.
l) Financial instruments
Financial assets and financial liabilities are initially recognized at fair value and their subsequent measurement is
dependent on their classification as described below. Their classification depends on the purpose for which the
financial instruments were acquired or issued, their characteristics and the Company’s designation of such
instruments.
Classification
Cash
Temporary investments
Accounts receivable
Deposits
Loans receivable
Other receivable
Accounts payable and accrued liabilities
Long-term debt
Held for trading
Held for trading
Held for trading
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Held for trading financial assets are financial assets typically acquired for resale prior to maturity or that are
designated as held for trading. They are measured at fair value at the balance sheet date. Fair value fluctuations
including interest earned, interest accrued, gains and losses realized on disposal and unrealized gains and losses are
included in other income.
Loans and receivables
Loans and receivables are accounted for at amortized cost using the effective interest method.
Other liabilities
Other liabilities are recorded at amortized cost using the effective interest method and include all financial liabilities
other than derivative instruments.
Page 11 of 27
48
49
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
2. Accounting policies (cont.)
l) Financial instruments (cont.)
Effective interest method
The Company uses the effective interest method to recognize interest income or expense which includes transaction
costs or fees, premiums or discounts earned or incurred for financial instruments.
Embedded derivatives
An embedded derivative is a component of a contract with characteristics similar to a derivative. Management of the
Company conducted a review of its contracts and determined that no embedded derivatives exist as at November 30,
2010 and 2009.
Derivative financial instruments
Derivative financial instruments that are not eligible for hedge accounting are recognized on the balance sheet at
their fair value, with changes in fair value recognized in net earnings.
m) Future accounting policies
i.
International Financial Reporting Standards
In February 2008, Canada's Accounting Standards Board (AcSB) confirmed that Canadian GAAP, as used by
publicly accountable enterprises, will be superseded by International Financial Reporting Standards (IFRS) for
fiscal years beginning on or after January 1, 2011. For the Company, the conversion to IFRS will be required for
interim and annual financial statements for the year ending November 30, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences on
recognition, measurement and disclosures. The Company is currently preparing its IFRS conversion. The
Company is currently assessing the impact of the new reporting framework on its consolidated financial
statements and is developing an implementation strategy.
ii. Business Combinations
In January 2009, the CICA issued the following new Handbook sections: Section 1582, Business Combinations,
Section 1601, Consolidated Financial Statements and Section 1602, Non-Controlling Interests which replace
Section 1581, Business Combinations and Section 1600, Consolidated Financial Statements. These new Sections
will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. Early
adoption is permitted to the extent the three new Sections are adopted simultaneously. Together, the new Sections
establish standards for the accounting for a business combination, the preparation of consolidated financial
statements and the accounting for a non-controlling interest in subsidiary in consolidated financial statements
subsequent to a business combination. The Company is currently evaluating the impact of the adoption of these
new Sections on its consolidated financial statements. The Company has elected not to adopt these Sections
early.
Page 12 of 27
49
48
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
3. Business acquisitions
1) 2010 acquisitions
On September 16, 2010 the Company’s wholly-owned subsidiary, MTY Tiki-Ming Enterprises Inc., acquired all of
the outstanding shares of Groupe Valentine Inc. as well as seven real estate properties for a consideration of
$8,764,126.
Consideration paid
Share purchase
Repayment of long-term debt
Acquisition of properties
Total purchase price
Of the consideration above, the Company has retained $961,518 as holdbacks (Note 11).
The preliminary purchase price allocation is as follows:
Net assets acquired:
Current Assets
Cash
Accounts receivable
Inventory
Franchise locations under construction held for resale
Current portion of loans receivable
Prepaid expenses
Loans receivable
Property, plant and equipment
Franchise rights
Trademark
Goodwill (not tax deductible)
Minority interest
Current Liabilities
Accounts payable
Income taxes payable
Loans payable
Unearned revenue
Future income taxes
Total purchase price
4,989,555
402,571
3,372,000
8,764,126
4,336
499,247
324,962
270,631
117,695
26,246
1,243,117
232,735
4,322,764
860,770
3,337,895
1,446,061
20,657
11,463,999
1,193,109
87,005
129,683
104,860
1,514,657
1,185,216
8,764,126
The final purchase price for the acquisition has not yet been finalized.
Page 13 of 27
50
51
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
3. Business acquisitions (cont.)
II) 2009 acquisition
On May 1, 2009, the Company’s wholly-owned subsidiary, MTY Tiki Ming Enterprises Inc., acquired all of the
issued and outstanding shares of Country Style Food Services Holdings Inc., the second largest coffee and baked
goods franchisor in Ontario’s quick service restaurant sector, for a total consideration of $13,810,564. The
Company has paid $7,936,791 in cash and $6,750,000 as repayment of long-term debt on closing and retained the
amounts of $997,868 and $794,576 as holdbacks and withholding taxes respectively. An amount of $2,697,762 of
post-closing adjustments is to be reimbursed by the sellers to the Company in accordance with the provisions of the
purchase agreement. The post-closing adjustments are under litigation.
The allocation of the purchase price of the acquisition is as follows:
Consideration paid
Share purchase
Repayment of long-term debt
Post closing adjustments
Acquisition costs
Total purchase price
Net assets acquired:
Current Assets
Cash
Accounts receivable
Inventory
Franchise locations under construction held for resale
Prepaid expenses
Future income taxes
Future income taxes
Property, plant and equipment
Franchise rights
Trademarks
Distribution agreements
Goodwill (not tax deductible)
Current Liabilities
Accounts payable and accrued liabilities
Total purchase price
$
9,729,235
6,750,000
(2,697,762)
29,091
13,810,564
127,381
2,039,936
368,768
627,542
196,000
1,290,000
4,649,627
4,458,559
1,584,724
1,016,000
4,096,000
272,000
1,704,441
17,781,351
3,970,787
13,810,564
50
The final purchase price for this acquisition has not been finalized.
Page 14 of 27
51
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
3. Business acquisitions (cont.)
II) 2009 acquisition (cont.)
During the period, the Company has adjusted the future income tax asset following a revision of the excess of the
fair value of eligible assets over their tax value at the date of the change of control. Tax returns have been amended
accordingly. The impact of this adjustment was to increase future income tax assets by $1,155,559 and reduce
goodwill by an equivalent amount.
4. Temporary investments
Temporary investments are comprised of short-term notes recorded at fair value. They have maturity dates between
December 2010 and August 2011 and have rates of return between 0.82% and 1.45% (0.35% to 1.01% in November
2009).
5.
Inventories
Inventories expensed during the year amount to $14,640,623 (2009 - $10,083,911).
Page 15 of 27
52
53
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
6. Loans receivable
The loans receivable result from the sales of franchises and consist of the following:
November 30, 2010 November 30, 2009
$ $
Loans receivable bearing interest between nil and 9% per annum,
receivable in monthly instalments of $44,780 in aggregate,
including principal and interest, ending in April 2017
Current portion
1,244,686
1,244,686
(336,067)
908,619
537,414
537,414
(153,643)
383,771
The capital repayments in subsequent years will be:
12 months ending November 2011
12 months ending November 2012
12 months ending November 2013
12 months ending November 2014
12 months ending November 2015
Thereafter
$
336,067
331.816
175,826
153,469
75,645
171,863
1,244,686
52
Page 16 of 27
53
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
7. Capital assets
Corporate-owned locations
Equipment
Leasehold improvements
Computer hardware
Land
Buildings
Equipment
Computer hardware
Computer software
Leasehold improvements
Rolling stock
Corporate-owned locations
Equipment
Leasehold improvements
Computer hardware
Equipment
Computer hardware
Computer software
Leasehold improvements
Rolling stock
____________ November 30, 2010
Cost
$
1,659,267
1,624,452
42,000
1,285,281
2,064,144
557,784
409,944
163,148
1,624,204
39,558
9,469,782
Accumulated
amortization
$
497,509
643,851
30,764
-
18,604
161,687
214,709
105,249
646,373
12,570
2,331,316
_____________November 30, 2009
Cost
$
1,426,763
2,226,297
96,975
340,962
252,975
109,164
1,469,000
24,119
5,946,255
Accumulated
amortization
$
698,478
811,351
55,824
103,635
162,928
75,899
298,187
5,296
2,211,598
Net book
value
$
1,161,758
980,601
11,236
1,285,281
2,045,540
396,097
195,235
57,899
977,831
26,988
7,138,466
Net book
value
$
728,285
1,414,946
41,151
237,327
90,047
33,265
1,170,813
18,823
3,734,657
Page 17 of 27
54
55
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
8.
Intangible assets
Franchise and master franchise rights(1)
Trademarks
Leases
Other
____________ November 30, 2010
Cost
$
31,375,604
14,856,855
1,000,000
504,725
47,737,184
Accumulated
amortization
$
10,613,665
-
481,116
376,289
11,471,070
Net book
value
$
20,761,939
14,856,855
518,884
128,436
36,266,114
__________________November 30, 2009
Net book
value
$
Accumulated
amortization
$
Cost
$
Franchise and master franchise rights(1)
Trademarks
Leases
Other
30,514,834
11,518,960
1,000,000
504,725
43,538,519
7,827,977
-
332,760
285,617
8,446,354
22,686,857
11,518,960
667,240
219,108
35,092,165
(1) Franchise and master franchise rights include an amount of $1,500,000 ($1,500,000 in November
2009) of unamortizable master franchise right.
54
Page 18 of 27
55
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
9. Goodwill
The changes in the carrying amount of goodwill for the years ended November 30, 2010 and 2009 are as follows:
Balance, beginning of the year
Goodwill acquired during the year (Note 3)
Reduction of goodwill due to adjustment in
future income taxes (Note 3)
Balance, end of year
2010
$
6,834,249
1,446,061
(1,155,559)
7,124,751
2009
$
3,974,249
2,860,000
-
6,834,249
Goodwill has been tested for impairment during the year. No adjustment for impairment was required.
10. Bank indebtedness
As at November 30, 2010, the Company has an authorized operating line of credit of $5,000,000. Bank
indebtedness is secured by a moveable hypothec on all the assets of the Company. The interest rate charged is the
bank’s annual prime rate (3.00% on November 30, 2010) plus 1.00%. Under the terms of the line of credit, the
Company must satisfy a funded debt to EBITDA ratio of 1 to 1, a current ratio of 1.45 to 1, and a debt service
coverage ratio of 1.8 to 1. The company is in compliance with all these ratios. The operating line of credit is payable
on demand and is renewable annually.
11. Deferred revenue and deposits
Franchise fee deposits
Distribution rights
Current portion
November 30, 2010
$
November 30, 2009
$
903,876
590,127
1,494,003
(1,485,295)
8,708
1,241,500
435,122
1,676,622
(1,593,704)
82,918
Page 19 of 27
56
57
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
12. Long-term debt
Non-interest bearing holdbacks on acquisition,
repayable in semi-annual instalments
of $100,000 ending 2010
November 30, 2010 November 30, 2009
$
$
179,070
189,415
Non-interest bearing holdbacks on acquisition,
repayable between December 2010 and September 2013
961,518
Bank loans bearing interest at prime plus 1.75%,
backed by the assets of two subsidiaries, payable in
monthly instalments of $3,917. Both loans are expected
to be completely paid off during 2011.
125,916
Non-interest bearing holdbacks and withholding taxes
on the acquisition of Country Style Food Services Holdings Inc.,
repayable at various dates, due no later than 2011.
1,253,309
Non-interest bearing loans from non-controlling
shareholders of subsidiaries with no terms of repayment
Current portion
13. Capital stock
283,400
2,803,213
(1,873,213)
930,000
-
-
1,587,962
204,000
1,981,377
(1,435,859)
545,518
Authorized, unlimited number of common shares without nominal or par value
November 30, 2010
November 30, 2009
Number
Amount
$
Number
Amount
$
Balance, beginning and end of period
19,120,567
19,792,468
19,120,567
19,792,468
14. Stock options
Under various plans, the Company may grant stock options on the common shares at the discretion of the Board of
Directors, to senior executives, directors and certain key employees. Of the 3,000,000 common shares initially
reserved for issuance, 699,500 were available for issuance under the share option plan as at November 30, 2010.
There are no options outstanding as at November 30, 2010.
56
Page 20 of 27
57
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
15. Financial instruments
In the normal course of business, the Company uses various financial instruments which by their nature involve risk,
including market risk and the credit risk of non performance by counterparties. These financial instruments are
subject to normal credit standards, financial controls, risk management as well as monitoring procedures.
Fair value of recognized financial instruments
Following is a table which sets out the fair values of recognized financial instruments using the valuation methods
and assumptions described below:
$ $ $ $
November 30, 2010
Fair
value
Carrying
value
November 30, 2009
Carrying
value
Fair
value
Financial assets
Cash
Temporary investments
Accounts receivable
Loans receivable
Other receivable
Deposits
Financial liabilities
Accounts payable and
accrued liabilities
Long-term debt
Determination of fair value
5,636,912
23,383,261
7,577,435
1,244,686
2,697,762
45,292
5,636,912
23,383,261
7,577,435
1,244,686
N/A
45,292
1,245,844
14,631,473
6,675,037
537,414
2,697,762
-
1,245,844
14,631,473
6,675,037
537,414
N/A
-
12,529,748
2,803,213
12,529,748
2,786,336
9,293,003
1,981,377
9,293,003
1,977,559
The following methods and assumptions were used to estimate the fair values of each class of financial instruments:
Accounts receivable, deposits, accounts payable and accrued liabilities - The carrying amounts approximate fair
values due to the short maturity of these financial instruments.
Cash and temporary investments - The carrying amounts are reflected at market values, which are determined by
quoted prices in active markets for identical securities (Level 1).
Loans receivable - The loans receivable bear interest at market rates and therefore it is management’s opinion that
the carrying value approximates the fair value.
Other receivable - The other receivable is currently under litigation (Note 3). As a result, the timing of the cash
flows is undetermined, and it bears no interest.
Long-term debt - The fair value of long-term debt is determined using the present value of future cash flows under
current financing agreements based on the Company’s current rate of return on its treasury bank accounts.
Page 21 of 27
58
59
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
15. Financial instruments (cont.)
Risk management policies
The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis
provides a measurement of risks as at the balance sheet date of November 2010.
Credit risk
The Company’s credit risk is primarily attributable to its trade receivables. The amounts disclosed in the balance
sheet are net of allowances for bad debts, estimated by the Company’s management based on prior experience and
their assessment of the current economic environment. The Company believes that the credit risk of accounts
receivable is limited for the following reasons:
‐ The Company’s broad client base is spread mostly across Canada.
‐ The Company accounts for a specific bad debt provision when management considers
that the expected recovery is less than the actual account receivable.
The following table sets forth details of the age receivables that are not overdue as well as an analysis of overdue
amounts and the related allowance for doubtful accounts:
November 30, 2010 November 30, 2009
Total accounts receivable
Less: Allowance for doubtful accounts
Total accounts receivable, net
Of which:
Not past due
Past due for more than one day but for no more than 30 days
Past due for more than 31 days but for no more than 60 days
Past due for more than 61 days
Total accounts receivable, net
Allowance for doubtful accounts beginning of year
Additions
Acquisition
Write-off
Allowance for doubtful accounts end of period
$
8,360,696
783,261
7,577,435
5,665,888
255,948
217,314
1,438,285
7,577,435
754,110
384,531
-
(355,380)
783,261
$
7,429,147
754,110
6,675,037
5,003,899
147,782
616,139
907,217
6,675,037
648,934
443,939
115,107
(453,870)
754,110
The credit risk on cash and temporary investments is limited because the Company invests its excess liquidity in
high quality financial instruments.
The credit risk on the loans receivable is similar to that of accounts receivable. There is currently no allowance for
doubtful accounts applicable to the loans receivable.
58
Page 22 of 27
59
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
15. Financial instruments (cont.)
Foreign exchange risk
The Company has entered into a contract to minimize its exposure to fluctuations in foreign currencies, mainly on
purchases of coffee. As of November 30, 2010, the total value of such contracts, which range between December
2010 and March 2011, was approximately $1,222,000. Immediate liquidation of the contracts at November 30, 2010
would have resulted in a gain of approximately $6,000.
Other than the above-mentioned contracts, the Company has minimal exposure to the US$ and is subject to
fluctuations as a result of exchange rate variations to the extent that transactions are made in the currency. The
Company considers this risk to be relatively limited.
Interest rate risk
The Company is exposed to interest rate risk with regards to cash, temporary investments and its operating line of
credit.
Liquidity risk
The Company actively maintains credit facilities to ensure it has sufficient available funds to meet current and
foreseeable financial requirements at a reasonable cost.
The following are the contractual maturities of financial liabilities as at November 30, 2010:
Carrying
Amount
$
Contractual
Cash Flows
$
0 to 6
Months
$
6 to 12
Months
$
12 to 24
Months
$
Accounts payable
and accrued
liabilities
Long-term debt
12,529,748
2,803,213
15,332,961
12,529,748
2,803,213
15,332,961
12,529,748
1,873,213
14,402,961
-
-
-
-
558,000
558,000
The following are the contractual maturities of financial liabilities as at November 30, 2009:
Accounts payable
and accrued
liabilities
Long-term debt
Carrying
Amount
$
Contractual
Cash Flows
$
0 to 6
Months
$
6 to 12
Months
$
12 to 24
Months
$
9,293,003
1,981,377
11,274,380
9,293,003
1,981,377
11,274,380
9,293,003
1,142,444
10,435,447
-
293,415
293,415
-
545,518
545,518
Page 23 of 27
60
61
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
16. Capital Disclosures
The Company’s objectives when managing capital are:
1- To safeguard the Company’s ability to obtain financing should the need arise;
2- To provide an adequate return to its shareholders;
3- To maintain financial flexibility in order to have access to capital in the event of future acquisitions.
The company defines its capital as follows:
1- Shareholders’ equity;
2- Long-term debt including the current portion;
3- Deferred revenue including the current portion;
4- Cash and temporary investments.
The Company’s financial strategy is designed and formulated to maintain a flexible capital structure consistent with
the objectives stated above and to respond to changes in economic conditions and the risk characteristics of the
underlying assets. The Company may invest in longer or shorter-term investments depending on eventual liquidity
requirements.
The Company monitors capital on the basis of the debt-to-equity ratio. The debt-to-equity ratios at November 30,
2010 and November 30, 2009 were as follows:
Debt
Equity
November 30, 2010
$
November 30, 2009
$
20,283,984
14,829,827
76,198,185
61,611,817
Debt-to-equity ratio
0.27
0.24
The increase is due primarily to the holdbacks created with the acquisition of Groupe Valentine Inc. The Company
intends to reduce its total debt with the positive cash flows generated from its operations. Maintaining a low debt-to-
equity ratio is a priority in order to permit the Company to secure financing at a reasonable cost for future
acquisitions.
17. Franchise fees
Included in revenue from franchise locations are initial franchise fees in the amount of $3,019,913 ($1,675,719 in
2009).
60
Page 24 of 27
61
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
18. Commitments
The Company has entered into various long-term leases and has sub-leased substantially all of the premises based on
the same terms and conditions as the original lease to unrelated franchisees. The minimum rentals, exclusive of
occupancy and escalation charges, and additional rent paid on a percentage of sales basis, payable under the leases
are as follows:
12 months ending November 2011
12 months ending November 2012
12 months ending November 2013
12 months ending November 2014
12 months ending November 2015
Thereafter
Lease
commitments
$
35,212,273
33,166,853
30,203,909
27,546,737
24,079,381
68,484,611
218,693,764
Sub leases
$
33,278,644
31,137,437
28,451,184
25,925,468
22,629,503
63,573,893
204,996,129
Net
commitments
$
1,933,629
2,029,416
1,752,725
1,621,269
1,449,878
4,910,718
13,697,635
The Company has entered into supplier agreements for purchases of coffee beans, wheat, sugar and shortening for
delivery between December 2010 and March 2011. The total commitment amounts to approximately $820,000.
Based on market rates at November 30, 2010, a gain of $77,049 would result from immediate liquidation of all
contracts.
19. Guarantee
The Company has provided a guarantee in the form of a letter of credit for an amount of $45,000. It has also
guaranteed payment of construction costs incurred by an area developer in the amount of approximately $125,000.
20. Contingent liabilities
The Company is involved in legal claims associated with its current business activities, the outcome of which is not
determinable. Management believes that these legal claims will have no significant impact on the consolidated
financial statements of the Company.
Page 25 of 27
62
63
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
21.
Income taxes
Variations of income tax expense from the basic Canadian Federal and Provincial combined tax rates applicable to
income from operations before income taxes are as follows:
November 30, 2010
%
$
November 30, 2009
$
%
Statutory income tax rate
Add effect of:
Impact of disposition of capital property
Permanent impact of tax assessment
Non-deductible interest
Non-deductible meals
Non-deductible car rental expenses
Other – net
6,713,418
(25,115)
52,310
19,130
10,250
6,365
6,839
Provision for income taxes
6,783,197
30.1
(0.1)
0.2
0.1
0.1
0.0
0.0
30.4
5,606,630
31.2
17,885
-
-
-
(4,787)
5,619,728
0.1
-
-
-
(0.0)
31.3
As at November 30, 2010 there were approximately $6,706,035 of net allowable capital losses which may be applied
against capital gains for future years and be carried forward indefinitely. The future income tax benefit of these
capital losses has not been recognized. The Company also has non-capital losses carry-forwards of $11,268,131
which may be used to reduce future years’ taxable income. The future income tax benefit of the non capital losses
has been recognized.
Significant components of future income tax assets and liabilities are as follows:
Future income tax assets
Non-capital loss carry-forward
Future income tax liabilities
Capital assets
Intangible assets
November 30, 2010
$
November 30, 2009
$
3,561,864
3,596,837
(61,834)
2,667,716
2,605,882
65,092
1,769,701
1,834,793
22. Earnings per share
The following table provides a reconciliation between the number of basic and fully diluted shares outstanding:
November 30, 2010
November 30, 2009
Weighted daily average number of common shares
Diluted effect of stock options
Weighted average number of diluted common shares
19,120,567
-
19,120,567
19,120,567
-
19,120,567
62
Page 26 of 27
63
MTY FOOD GROUP INC.
Notes to the consolidated financial statements
As at November 30, 2010
23. Statement of cash flows
Net changes in non-cash working capital balances relating to continuing operations are as follows:
November 30, 2010
November 30, 2009
Accounts receivable
Income taxes receivable
Inventory
Franchise locations under construction held for resale
Loans receivable
Prepaid expenses
Deposits
Accounts payable and accrued liabilities
Income taxes payable
(403,151)
-
72,429
184,959
(356,842)
(23,093)
(45,291)
2,043,636
720,101
2,192,748
Supplemental disclosure of cash flows
(609,278)
184,134
439,984
(105,019)
(116,439)
150,469
-
(1,524,991)
44,032
(1,537,108)
Income taxes paid
5,466,254
4,412,049
Income tax refund received
266,569
-
24. Comparative Figures
Certain comparative figures have been reclassified to conform to the current year’s presentation.
25. Subsequent Events
Subsequent to year-end, the Company acquired 51% of a food processing plant for approximately $3.6
million. The acquisition was completely financed by a bank loan.
Page 27 of 27
64
CORPORATE
CORPORATE
INFORMATION 2010
INFORMATION
annual report
CORPORATION OFFICE >
CORPORATION OFFICE >
3465 Thimens Blvd.
3465 Thimens Blvd.
St-Laurent
St-Laurent
QC H4R 1V5
QC H4R 1V5
Canada
Canada
T. : 514.336.8885
T. : 514.336.8885
F. : 514.336.9222
F. : 514.336.9222
www.mtygroup.com
www.mtygroup.com
TRANSFER AGENT &
TRANSFER AGENT &
REGISTRAR >
REGISTRAR >
Computershare Trust
Computershare Trust
Company of Canada
Company of Canada
100 University Ave.,
100 University Ave.,
9th Floor, Toronto
9th Floor, Toronto
ON M5J 2Y1
ON M5J 2Y1
Canada
Canada
T. : 1.800.564.6253
T. : 1.800.564.6253
service@computershare.com
service@computershare.com
AUDITORS >
AUDITORS >
SOLICITORS >
SOLICITORS >
Samson Bélair/Deloitte &
Samson Bélair/Deloitte &
Touche s.e.n.c.r.l.
Touche s.e.n.c.r.l.
1 Place Ville Marie
1 Place Ville Marie
Suite 3000
Suite 3000
Montreal
Montreal
QC H3B 4T9
QC H3B 4T9
Canada
Canada
Salley Bowes Harwardt
Salley Bowes Harwardt
Barrister & Solicitor
Barrister & Solicitor
Suite 1750
Suite 1750
1185 West Georgia Street
1185 West Georgia Street
Vancouver
Vancouver
BC V6E 4E6
BC V6E 4E6
Canada
Canada
T. : 514.393.7115
T. : 514.393.7115
F. : 514.390.4109
F. : 514.390.4109
T. : 604.688.0788
T. : 604.688.0788
F. : 604.688.0778
F. : 604.688.0778
DIRECTORS >
DIRECTORS >
Stanley Ma
Stanley Ma
Claude St-Pierre
Claude St-Pierre
Stephen Stone*
Stephen Stone*
David Wong*
David Wong*
Murat Armutlu*
Murat Armutlu*
*Audit Committee
*Audit Committee
INVESTORS
INVESTORS
RELATIONS >
RELATIONS >
Jean François Dubé
Jean François Dubé
T. : 450.226.8475
T. : 450.226.8475
F. : 450.226.7549
F. : 450.226.7549
jfdube@mac.com
jfdube@mac.com
Au Vieux Duluth express Buns MAster CAférAMA ChiCk’n’ChiCk CroissAnt plus Cultures frAnx Suprême kimChi koya La Crémière o’burger panini Sukiyaki SuShi Shop TaCo Time Tandori TCby Thaï expreSS Tiki-ming TuTTi FruTTi VaLenTine VaneLLiS Vie&nam ViLLa madina yogen Früz Au Vieux Duluth express Buns MAster CAférAMA ChiCk’n’ChiCk CroissAnt plus Cultures frAnx Suprême kimChi koya La Crémière o’burger panini Sukiyaki SuShi Shop TaCo Time Tandori TCby Thaï expreSS Tiki-ming TuTTi FruTTi VaLenTine VaneLLiS Vie&nam ViLLa madina yogen Früz
MTY Food Group Inc.
Groupe d’alimentation MTY Inc.
MTY Food Group Inc.
Groupe d’alimentation MTY Inc.
3465 Thimens Blvd.
3465 Thimens Blvd.
St-Laurent, Quebec
St-Laurent
H4R 1V5 Canada
QC H4R 1V5
Canada
T. : 514.336.8885
T. : 514.336.8885
F. : 514.336.9222
F. : 514.336.9222
www.mtygroup.com
www.mtygroup.com
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