MTY Food Group
Annual Report 2012

Plain-text annual report

MESSAGE TO SHAREHOLDERS Dear shareholders: Fiscal 2012 will be a year to remember for the exceptional financial growth realized during this period. MTY Food Group Inc. (“MTY”) takes great pride in its operational and financial success, both past and future. The results of your corporation for the 2012 fiscal year have once more established new highs, fueled by the successful integration of its most recent acquisitions. The following are some highlights of the 2012 fiscal year: • Net income increased by 36%, to reach $1.15 per share • Same store sales grew by 1.08% during the year, despite challenging Q3 and Q4 • System sales were up 31%, to $688.7 million • Cash and equivalents at the end of the year were $33.0 million • The number of locations were at 2,199 at the end of the year • MTY acquired the assets of Mr. Souvlaki and its 14 franchised stores in Canada The 2012 fiscal period was marked by an unpredictable and challenging retail environment as well as intensification of the competitive pressure on some of our concepts. During this period, MTY has continued to emphasize on quality and innovation and has worked with its franchise partners to respond to those external threats. In January of 2013, MTY announced another major increase of its quarterly dividend. This reflects the confidence we have in our concepts, our franchise partners, our employees and in our ability to generate sustainable cash flows in the long run. Going into 2013, the retail environment is expected to remain very challenging, with a relatively weak economy and intense competitive pressure. MTY will continue to concentrate on the excellence of its operations, opening new locations of existing concepts and developing its brands outside of Canada. Financial discipline will remain at the core of our values, as we continue to diligently seek out new potential acquisitions. In closing, I wish to personally thank each member of the MTY team, franchisees, business partners and shareholders for their continuous support and contribution to our success in 2012. I truly appreciate and thank you for being a part of our growing family. MTY Food Group Inc. ______________________________ Stanley Ma Chairman and Chief Executive Officer February 13, 2013 Management’s Discussion and Analysis For the fiscal year ended November 30, 2012 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 financial statements and the Company‟s consolidated read accompanying notes for the fiscal year ended November 30, 2012. 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. The disclosures and values in this MD&A were prepared in accordance with International Financial Reporting Standards (IFRS) and with the current issued and adopted interpretations applied to fiscal years beginning on or after January 1, 2011. Comparative figures as at November 30, 2011 have been restated in accordance with IFRS. As a result of the adoption of IFRS a number of areas of financial reporting are impacted by the changeover to IFRS; they are highlighted in the MD&A under the heading “Accounting policies adopted in 2012” and in note 34 of the consolidated financial statements. This MD&A was prepared as at February 13, 2013. Supplementary information about MTY, including its latest annual and quarterly reports, and press releases, is available on SEDAR‟s website at www.sedar.com. Page 1 Forward looking statements This MD&A and, in particular, but without limitation, the sections of this MD&A entitled Outlook, Same-Store Sales, Contingent Liabilities and Subsequent Event, contain forward-looking 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 2012. Forward-looking statements also include any other statements that do not refer to independently verifiable 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 13, 2013 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 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 13, 2013. 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 Page 2 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 and 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 13, 2013. 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 expected impact in a meaningful way or in the same way we present known risks affecting our business. Compliance with International Financial Reporting Standards Unless otherwise indicated, the financial information presented below, including tabular amounts, is expressed in Canadian dollars and prepared in accordance with International Financial Reporting Standards (“IFRS”). MTY uses income before income taxes, interest on long-term debt, depreciation and amortization (“EBITDA”) because this measure enables management to assess the Company‟s operational performance. The Company also discloses same-store sales growth, which are defined as comparative sales generated by stores that have been open for at least thirteen months or that have been acquired more than thirteen months ago. These measures are widely accepted financial indicators but have no standardized definition as prescribed by GAAP. As a result, they may not be comparable to the EBITDA and same store-sales growth presented by other companies. Page 3 Highlights of significant events during the fiscal year On September 26, 2012, the Company announced it had completed the acquisition of most of the assets of Souvlaki Ltd for an estimated consideration of $0.9 million. Core business MTY franchises and operates quick-service restaurants under the following banners: Tiki- Ming, Sukiyaki, La Crémière, Au Vieux Duluth Express, Carrefour Oriental, Panini Pizza Pasta, Chick „n‟ Chick, Franx Supreme, Croissant Plus, Villa Madina, Cultures, Thaï Express, Vanellis, Kim Chi, “TCBY”, Yogen Früz, Sushi Shop, Koya Japan, Vie & Nam, Tandori, O‟Burger, Tutti Frutti, Taco Time, Country Style, Buns Master, Valentine, Jugo Juice, Mr. Sub, Koryo Korean Barbeque and Mr. Souvlaki. As at November 30, 2012, MTY had 2,199 locations in operation, of which 2,179 were franchised or under operator agreements and the remaining 20 locations were operated by MTY. format within petroleum 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 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 Crémière, “TCBY”, Sushi Shop, Taco Time, Tutti Frutti, Valentine and Mr. Sub banners. La Crémière 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 Santé/Veggirama chain in 1999,  74 locations from the La Crémière 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 Thaï 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, Page 4  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. 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. The transaction was effective September 1, 2010,  On August 24, 2011, the Company acquired the assets of Jugo Juice International Inc. with 136 outlets in operation at the date of closing. The transaction was effective August 18, 2011,  On November 1, 2011, the Company acquired the assets of Mr. Submarine Limited, with 338 stores in operations at the date of closing,  On November 10, 2011, the Company acquired the assets of Koryo Korean BBQ Franchise Corp. with 20 stores in operations at the effective date of closing. The transaction was effective November 1, 2011.  On September 26, 2012, the Company acquired the assets of Mr. Souvlaki Ltd. with 14 stores in operation at the effective date of closing. 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, supplier contributions and sales of other goods and services to franchisees. Revenues from corporate owned locations include sales generated from corporate owned locations. Operating expenses related to franchising 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, rent, supplies and equipment sold to franchisees. Corporate owned location expenses include the costs incurred to operate corporate owned locations. MTY generates revenues from the food processing business discussed herein. The plant produces various products that range from ingredients and ready to eat food sold to restaurants or other food processing plants to microwavable meals sold in retail stores. The plant generates most of its revenues selling its products to distributors and retailers. The Company also generates revenues from its distribution center located on the south shore of Montreal. The distribution center mainly serves our Valentine and Franx Page 5 Supreme franchisees with a broad range of products required in the day-to-day operations of the restaurants. Description of recent acquisitions On September 26, 2012, the Company announced it had completed the acquisition of most of the assets of Mr. Souvlaki Ltd. for a total consideration of $0.9 million. At the date of closing, there were 14 Mr. Souvlaki stores in operation, all of which were franchised. Of the purchase price, MTY withheld an amount of $0.17 million in holdbacks. On November 10, 2011, the Company acquired the assets of Koryo Korean BBQ Franchise Corp for an estimated total consideration of $1.8 million. At the effective date of closing, November 1, 2011, the Koryo network was composed of 19 franchised stores and 1 corporate store. Of the purchase price, MTY withheld an amount of $0.35 million in holdbacks. On November 1, 2011, the Company acquired substantially all of the assets of Mr. Submarine Limited and Mr. Sub Realty Inc. for an estimated total consideration of $23.0 million. At the date of closing, there were 338 Mr. Sub stores in operations, all of which were franchised or subject to an operator agreement. MTY withheld an amount of $2.5 million as holdback, which will become payable in November 2013. On August 24, 2011, the Company acquired all of the assets of Jugo Juice International Inc., Jugo Juice Canada Inc. and Jugo Juice Western Canada Inc. for an estimated total consideration of $15.45 million. At the effective date of closing, August 18, 2011, 136 Jugo Juice outlets were in operations, 2 of which we corporately owned and 134 were franchised. Of the total consideration, MTY withheld $1.735 million as holdbacks on the transaction. On December 17, 2010, the Company acquired a 51% interest in a food processing plant. The total transaction value was estimated at approximately $3.5 million including land, building, equipment, inventories, existing workforce and certifications. The newly formed company contracted at $3.5 million bank loan to finance the acquisition. As part of the transaction, one of the shareholders in the newly formed company brought in existing activities from another operating plant, in exchange for mandatorily redeemable preferred shares. One third of the preferred shares will be redeemed annually, at a value contingent on the performance of the plant. The value of such shares was estimated at $300,000 at the inception of the shareholders‟ agreement and subsequently revalued at $200,000 following changes in the purchase price allocation. Page 6 Summary of quarterly financial information Quarters ended in thousands of $ February 2011 May 2011 August 2011 November 2011 February 2012 May 2012 August 2012 November 2012 Revenue $16,761 $18,629 $19,852 $23,116 $21,945 $23,689 $24,239 $26,347 Net income and comprehensive income attributable to owners $3,490 $3,583 $4,388 $4,733 $4,392 $5,283 $6,129 $6,263 Per share $0.18 $0.19 $0.23 $0.25 $0.23 $0.28 $0.32 $0.33 Per diluted share $0.18 $0.19 $0.23 $0.25 $0.23 $0.28 $0.32 $0.33 Results of operations for the fiscal year ended November 30, 2012 Revenue During the year ended November 30, 2012, the Company‟s total revenue increased by 23% to reach $96.2 million. Revenues for the four segments of business are broken down as follows: November 30,2012 ($ million) November 30, 2011 ($ million) Variation Franchise operation Corporate stores Distribution Food processing Intercompany transactions Total operating revenues 70.9 12.2 6.1 8.1 (1.0) 96.2 56.0 10.8 6.1 6.3 (0.8) 78.4 27% 13% 0% 27% N/A 23% Page 7 As is shown in the table above, revenue from franchise locations progressed by 27%. Several factors contributed to the variation, as listed below: Revenues, 2011 fiscal year Increase in recurring revenue streams Increase in turn-key, sales of material to franchisees and rent revenues Increase in initial franchise fees Other non-material variations Revenues, 2012 fiscal year $million 56.0 13.0 0.8 1.0 0.1 70.9 During the 2012 fiscal year, the Company benefitted from the results of its most recent acquisitions, which account for $10.3 million of the increase in recurring streams of revenues. Other factors accounting for the increase in the recurring revenue streams include a favorable same-store-sales growth as well as the good performance of stores opened in the last 12 months. Revenue from corporate owned locations increased 13%, to $12.2 million during the 2012 fiscal year. The increase is mainly due to the consolidation of certain Special Purpose Entities acquired with Mr. Sub during the fourth quarter of 2011, which generated approximately $4.5 million during the year. This increase was partly offset by the disposal of certain corporate stores during 2012. The Company also generated food processing revenues of $8.1 million during the twelve- month period. The increase of 27% is attributable to the timing of the acquisition in the first quarter of 2011 as well as to the transition period which affected the performance of the plant in the early stages following the transaction. Cost of sales and other operating expenses During 2012, operating expenses increased by 18% to $61.3 million, from $51.9 million for the same period in 2011. Operating expenses for the four business segments were incurred as follows: November 30, 2012 ($ million) November 30, 2011 ($ million) Variation Franchise operation Corporate stores Distribution Food processing Intercompany transactions Total operating expenses 36.3 12.4 5.6 8.0 (1.0) 61.3 30.2 10.7 5.5 6.2 (0.8) 51.9 20% 15% 2% 29% N/A 18% Operating expenses related to the franchising operations increased by $6.1 million, mainly as a result the additional expenses created by the operations of the recent acquisitions. Page 8 During the year, expenses for corporate owned locations increased by $1.7 million. The increase is caused by the consolidation of the Special Purposes Entities of Mr Sub, which was partially offset by the divestiture of certain corporate stores during 2012. The expenses of the food processing plant were up by 29%, for the reasons described in the Revenues section above. Earnings before interest, taxes, depreciation and amortization (EBITDA) (In millions) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Franchise Corporate $70.91 $36.33 $34.58 49% $12.17 $12.35 ($0.18) N/A Fiscal year ended November 30, 2012 Distribution Processing Consolidation ($0.99) ($0.99) $0.00 N/A $6.08 $5.63 $0.45 7% $8.05 $7.97 $0.08 1% Total $96.22 $61.29 $34.93 36% Franchise Corporate Fiscal year ended November 30, 2011 Distribution Processing Consolidation ($0.76) ($0.76) $0.00 $0.00 N/A (In millions) Revenues Expenses Restructuring EBITDA(1) EBITDA as a % of Revenue EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. (1)EBITDA is defined as operating revenues less operating expenses. $55.95 $30.23 $0.45 $25.27 45% $10.78 $10.73 $0.00 $0.05 0% $78.36 $51.93 $0.45 $25.98 33% $6.06 $5.53 $0.00 $0.53 9% $6.33 $6.20 $0.00 $0.13 2% Total Total EBITDA increased by 34%, from $26.0 million to $34.9 million for the 2012 fiscal year. During the year, the franchising operations generated $34.6 million in EBITDA, a 37% increase over the results of the same period last year. The increase is mainly attributable to the contribution of the recent acquisitions which accounts for approximately three quarters of the growth, the increase in same-store-sales and the performance of stores opened in the last twelve months. The 2011 EBITDA also included a $0.45 million restructuring charge. EBITDA from franchise operations as a percentage of revenue increased to 49% because of a change in the composition of the revenues that saw a reduced relative weight for revenues generated by the deliveries of turnkeys and materials to franchisees, which typically generate low profit margins. Page 9 EBITDA from corporate owned locations declined slightly during the twelve-month period, mainly because of the disposition of some profitable stores in 2012. The food processing plant generated $0.1 million EBITDA in the 2012 and 2011 fiscal year. 2012 results had been affected by a low margin contract which has now been renegotiated. Net income For the fiscal year ended November 30, 2012, the Company‟s net income attributable to owners increased by 36% over the same period last year. MTY reported a net income and comprehensive income attributable to its owners of $22.1 million or $1.15 per share ($1.15 per diluted share) compared to $16.5 million or $0.85 per share ($0.85 per diluted share) in 2011. The increase in net income is mostly attributable to the impact of recent acquisitions as well as to strong generic growth in revenues, which more than offset the decline in the non-recurring other income items. Amortization expense The amortization of intangible assets was up by $0.7 million in 2012 because of the amortization of the recently acquired franchise rights. Other income and charges The gain on disposal of assets, which results from the sale of the assets of corporate stores, was $0.5 million in 2012 compared to a gain of $0.9 million during 2011. The unusual 2011 gain was mainly caused by the sale of one corporate restaurant that generated above-average returns and thus commanded a higher sales price. During the year, the Company took an impairment charge of $0.1 million on the assets of eight of its corporate stores, each one representing a cash-generating unit (“CGU”). The charge was taken following disappointing 2012 results, which indicated a potential impairment. The assets of all eight stores are now carried at their fair value less cost to sell, which was higher than their value in use based on discounted cash flows. During the year, the Company recorded a gain of $0.1 million for the redemption of the preferred shares issued by one of its subsidiaries. The shares are mandatorily redeemable instalments, with redemption values based on the performance of the subsidiary. Due to the financial performance of the subsidiary for 2012, the redemption value of the shares was $nil. three yearly in The Company also recorded a gain of $0.1 million on the loan forgiveness of non- controlling shareholders of a subsidiary. Page 10 Income taxes The provision for income taxes for the 2012 fiscal year was 27.7% of the Company‟s income before taxes. This is higher than the average statutory rate of 26.9% applicable to the Company‟s income for the year. The discrepancy is mainly due to an income tax assessment that resulted in a charge of approximately $0.3 million. Results of operations for the fourth quarter ended November 30, 2012 Revenue During the fourth quarter of our 2012 fiscal year, the Company‟s total revenue increased by 14% to reach $26.3 million. Revenues for the four segments of business are broken down as follows: November 30,2012 ($ million) November 30, 2011 ($ million) Variation Franchise operation Corporate stores Distribution Food processing Intercompany transactions Total operating revenues 20.0 2.5 1.9 2.3 (0.3) 26.3 16.1 3.3 1.9 2.0 (0.2) 23.1 24% (24%) 0% 13% N/A 14% As is shown in the table above, revenue from franchise locations progressed by 24%. Several factors contributed to the variation, as listed below: Revenues, fourth quarter of 2011 Increase in recurring revenue streams Increase in turn-key, sales of material to franchisees and rent revenues Increase in initial franchise fees Other non-material variations Revenues, fourth quarter of 2012 $million 16.1 2.5 1.2 0.5 (0.3) 20.0 During the fourth quarter of 2012, the Company benefited from the results of its most recent acquisitions, which account for $2.2 million of the increase in recurring streams of revenues. Other factors accounting for the increase in such revenues include the good performance of stores opened in the last 12 months and higher turnkey revenue. Revenue from corporately-owned locations decreased 24%, to $2.5 million during the fourth quarter of our 2012 fiscal period. The decrease is due to the disposal of certain stores since the beginning of 2012. The Company generated food processing revenues of $2.3 million during the fourth quarter of 2012, up 13% compared to the same period last year. The increase is mainly attributable to a new line of production that was put in place during the fourth quarter. Page 11 Cost of sales and other operating expenses During the fourth quarter of 2012, operating expenses increased by 14% to $17.4 million, from $15.3 million for the same period in 2011. Operating expenses for the four business segments were incurred as follows: November 30, 2012 ($ million) November 30, 2011 ($ million) Variation Franchise operation Corporate stores Distribution Food processing Intercompany transactions Total operating expenses 11.0 2.7 1.7 2.3 (0.3) 17.4 8.6 3.3 1.7 1.9 (0.2) 15.3 28% (20%) 0% 23% N/A 13% Operating expenses related to the franchising operations increased by $2.4 million, mainly as a result the additional expenses created by the operations of its recent acquisitions, which account for $0.7 million of this increase. The balance of the increase is due to the increase in revenues generated from turn-keys, sales of material to franchisees and rent. During the period, expenses for corporate owned locations decreased by $0.6 million. The decrease was caused by the reduction in the number of corporate stores in the last 12 months. The expenses of the food processing plant were up by 23%, increasing as a result of the additional revenues the plant generates. Earnings before interest, taxes, depreciation and amortization (EBITDA) (In millions) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Franchise Corporate $20.05 $11.02 $9.03 45% $2.49 $2.65 ($0.16) N/A Three months ended November 30, 2012 Distribution Processing Consolidation ($0.33) ($0.33) $0.00 N/A $2.27 $2.28 $(0.01) N/A $1.87 $1.74 $0.12 7% Total $26.35 $17.37 $8.98 34% Franchise Corporate Three months ended November 30, 2011 Distribution Processing Consolidation ($0.19) ($0.19) $0.00 N/A (In millions) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. (1)EBITDA is defined as operating revenues less operating expenses. $3.29 $3.34 ($0.06) N/A $16.15 $8.58 $7.57 47% $23.12 $15.32 $7.80 34% $1.87 $1.74 $0.13 7% $2.01 $1.85 $0.16 8% Total Page 12 EBITDA increased by 15%, from $7.8 million in the fourth quarter of 2011 to $9.0 million for the three months ended November 30, 2012. During the period, the franchising operations generated $9.0 million in EBITDA, a 19% increase over the results of the same period last year. The increase is mainly attributable to the contribution of recent acquisitions and the performance of stores opened in the last twelve months. EBITDA from franchise operations as a percentage of revenue decreased to 45%, because of the higher relative weight of sales to franchises. These revenues typically generate lower profit margins. Corporate stores had a loss of $0.2 million in EBITDA, a decrease of $0.1 million compared to the same period in 2011. This was mainly due to the disposition of some profitable stores in 2012. The food processing plant generated a slightly negative EBITDA in the fourth quarter of 2012. Net income For the three months ended November 30, 2012, MTY reported a net income and comprehensive income attributable to its owners of $6.3 million or $0.33 per share ($0.33 per diluted share) compared to $4.7 million or $0.25 per share ($0.25 per diluted share) for the same period last year, representing a net income increase of 32%. Amortization expense The amortization of intangible assets in the fourth quarter of 2012 was comparable to the same period last year. Other income and charges During the fourth quarter, the Company took an impairment charge of $0.1 million on the assets of eight of its corporate stores (each one representing a cash-generating unit (“CGU”). The charge was taken following disappointing results in 2012. The assets of all eight stores are now carried at their fair value, which was higher than their value in use based on discounted cash flows. During the fourth quarter, the Company recorded a gain of $0.1 million for the redemption of the preferred shares of its processing plant. The shares are mandatorily redeemable in three yearly instalments, with redemption values based on the performance of the processing plant. Due to the EBITDA generated by the processing plant, the redemption was valued at zero. The Company also recorded a gain of $0.1 million on the loan forgiveness of non- controlling shareholders of a subsidiary which is owned at 45%. Page 13 Income taxes The provision for income taxes as a percentage of income before taxes decreased slightly during the fourth quarter of 2012 compared to the same period last year. This was mainly due to reductions in the corporate tax rates in the territories in which the Company has permanent establishments, as well as a rate adjustment on non-capital losses carried forward accounted for in the fourth quarter of 2011. Contractual obligations and long-term debt 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 (In thousands $) 12 months ending November 2013 12 months ending November 2014 12 months ending November 2015 12 months ending November 2016 12 months ending November 2017 Balance of commitments Long term debt(1) $7,334 $287 $- $- $- $- $7,621 Net lease commitments $2,258 $2,202 $1,883 $1,670 $1,355 $3,918 $13,286 Total contractual obligations $9,592 $2,489 $1,883 $1,670 $1,355 $3,918 $20,907 (1) Amounts shown represent the total amount payable at maturity and are therefore undiscounted. For total commitments, please refer to November 30, 2012 consolidated financial statements Long-term debt includes non-interest bearing holdbacks on acquisitions, a bank loan used to finance the acquisition of the food processing plant acquired in December 2010 as well as mandatorily redeemable preferred shares issued to a minority shareholder of a subsidiary. The bank loan used to finance the acquisition of the food processing plant was classified as current in 2012 as two of the covenants were not met as at November 30, 2012. 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 2012 and March 2013. The total commitment amounts to $1.0 million. In relation to the items listed above, the Company has entered into contracts to minimize the impact of variations in foreign currencies. The total commitment on these contracts amounts to approximately $0.4 million. Page 14 Liquidity and capital resources As of November 30, 2012, the amount held in cash and cash equivalents totalled $33.0 million, an increase of $22.4 million over the cash and cash equivalents and temporary investments held at the end of our 2011 fiscal period. The increase is attributable to the strong cash flows generated by our operations during the 2012 fiscal year. Cash flows generated by operating activities were $29.4 million during the 12 months of 2012. Excluding the variation in non-cash working capital items, income taxes and interest paid, our operations generated $35.8 million in cash flows, compared to $26.2 million in 2011, which represents an increase of 37% compared to the same period last year. The main drivers for this increase are the 34% increase in EBITDA discussed above as well as the receipt of material amounts of deferred revenues that will be recognized into income in the coming quarters. 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 $10.0 million that remained unused at November 30, 2012. The facility, when used, bears interest at the bank‟s annual prime rate plus a margin not exceeding 0.5% established based on the Company‟s funded debt/EBITDA ratio. Cash flows generated by our operations are typically held in high yield savings account or guaranteed investment certificates until they are required. Statement of financial position During the year, the Company has liquidated its remaining investments and has now allocated its cash and cash equivalents on hand in high yield savings accounts with various recognized institutions. Accounts receivable at the end of the fourth quarter were at $13.6 million, compared to $10.5 million at the end of our 2011 fiscal period. The increase is mainly due to the increase in revenues and the related working capital requirements. The provision for doubtful accounts has increased by $0.3 million since November 30, 2011, mainly as a result of the unpredictable environment in which some of our franchisees operate that result in uncertain collection of amounts due. Page 15 Property, plant and equipment and intangible assets both decreased during the year. The decrease in property, plant and equipment is the result of the dispositions of some corporate stores during the period, as well as of the depreciation and amortization recorded during the period. The decrease in intangible assets, which is due to the amortization recorded during the period, was partially offset by the acquisition of franchise rights valued at $0.5 million and the acquisition of Mr. Souvlaki valued at $0.9 million. Accounts payable remained consistent at $13.4 million from $13.5 million in 2011. 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. The balance as at November 30, 2012 was $2.2 million, an increase of $0.6 million compared to the balance at the end of 2011. The variation is due to increases in franchise fee deposits which are dependent on the level of activity and deliveries during a certain period. These amounts will be recognized into revenues as they are earned. The long-term debt is composed of non-interest bearing holdbacks on acquisitions, of bank loans contracted by a subsidiary to finance an acquisition and of mandatorily redeemable preferred shares payable to a minority shareholder of a subsidiary. Repayments of $1.6 million were made on non-interest bearing holdbacks. In addition, payments were made on the bank loan of a subsidiary following a period during which only interest payments were required. There were no material issuances since the beginning of the year. One third of the preferred shares will be redeemed annually at a value that is contingent on the performance of a subsidiary. Management expects that the value of the preferred shares at redemption will be approximately $100,000. Further details on the above statement of financial position items can be found in the notes to the November 30, 2012 consolidated financial statements. Capital stock No shares were issued during the quarter ended November 30, 2012. As at February 13, 2013 there were 19,120,567 common shares of MTY outstanding. Page 16 Location information 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 revenue than the shopping malls, food courts and street front locations. format within petroleum Franchises, beginning of year Corporate owned, beginning of year Acquired during the year Opened during the period Mall Street Non-traditional Closed during the period Mall Street Non-traditional Total end of period Franchises, end of period Corporate owned, end of period Total end of period Number of locations fiscal year ended Number of locations fiscal year ended November 2012 November 2011 2,233 30 14 45 33 51 (49) (45) (113) 2,199 2,179 20 2,199 1,701 26 494 41 37 49 (16) (21) (48) 2,263 2,233 30 2,263 During the fiscal year ended November 30, 2012, the Company‟s network experienced a net reduction of 78 outlets, compared to a net addition of 42 stores for the same period a year ago, excluding those coming from the acquisitions completed during the two respective years. This net reduction is partially attributable to the loss of two non- traditional store contracts cancellations suffered during the first and third quarter of the year which resulted in a total reduction of 54 non-traditional outlets. During the year, the Company closed street and mall locations that were not seen viable in the long term. Some mall and street locations closures are also due to lease non renewals upon expiry. At the end of the period, the Company had 20 corporate stores, a net decrease of ten. During the year, twelve corporate-owned locations were sold, five were added, and three were closed. As at November 30, 2012, there were two test locations in operation, both which were excluded from the numbers presented above. Page 17 The chart below provides the breakdown of MTY‟s locations and system sales by type: Location type % of location count % of system sales fiscal year ended Shopping mall & food court Street front Non-traditional format November 30, November 30, November 30, November 30, 2012 38% 36% 26% 2011 36% 36% 28% 2012 50% 41% 9% 2011 50% 40% 10% The geographical breakdown of MTY‟s locations and system sales consists of: Geographical location % of location count % of system sales fiscal year ended November 30, November 30, November 30, November 30, 2012 46% 28% 20% 2% 4% 2011 48% 27% 20% 2% 3% 2012 36% 34% 24% 1% 4% 2011 32% 40% 22% 1% 5% Ontario Quebec Western Canada Maritimes International System wide sales System wide sales for the year ended November 30, 2012 grew 31%, reaching $688.7 million during the period, compared to $527.6 million for the same period last year. Approximately 80% of the increase in system wide sales for the year is attributable to the recent acquisitions. Approximately 4% of the increase comes from the growth in the same-store sales, and the rest is due to new restaurants opened in the last 12 months. System wide sales include sales for corporate and franchise locations and exclude sales realized by the distribution center or by the food processing plant. Page 18 Same-store sales During the 2012 fiscal year, same-stores sales improved by 1.08% over the same period last year. For the fourth quarter, same store sales have declined by 0.91% Most of our major concepts experienced growth in same-store sales during the year. The outlets located in western provinces continue to outperform the other regions, experiencing the strongest same-store sales growth, while those located in Ontario on average suffered a decrease. Street front and mall locations showed stronger growth during the 2012 fiscal year, while non-traditional locations have experienced a slight decrease over the same period. During the fourth quarter, same store sales performances declined compared to the previous quarters; this was felt across all regions in which our stores operate, and across all types of restaurants and concepts. As discussed in our previous MD&A, we are witnessing high volatility on the market which seems to affect some of our brands more than others at various times. During the fourth quarter, this volatility has resulted in a downward pressure that was felt throughout the network. The following table shows quarterly information on same-stores sales growth for the last 13 quarters: Page 19 Stock options During the period, no options were granted or exercised. As at November 30, 2012 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 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. Sales for shopping malls locations are also higher than average in December during the Christmas shopping period. 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. Risks and uncertainties Despite the fact that the Company has various numbers of concepts, diversified in type of locations and geographics 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 costs, 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 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. Page 20 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 Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation. Details of transactions between the Company and other related parties are disclosed below. Compensation of key management personnel The remuneration of key management personnel and directors during the fiscal year was as follows: (in thousands) Period ended November 30, 2012 Period ended November 30, 2011 $ $ Short-term benefits Post-employment benefits, share-based payments and other long-term benefits Board member fees Total remuneration of key management personnel 659 Nil 40 699 581 Nil 40 621 Key management personnel is composed of the Company‟s CEO, COO and CFO. The remuneration of directors and key executives is determined by the Board of directors having regard to the performance of individuals and market trends. The increase in the remuneration of key management personnel is mainly due to the division in the COO/CFO role into two distinct positions. Given its widely held share base, the Company does not have an ultimate controlling party; its most important shareholder is its CEO, who controls 26% of the outstanding shares. Page 21 The Company also pays employment benefits to individuals related to members of the key management personnel described above. Their total remuneration for the year was as follows (in thousands) Short-term benefits Post-employment benefits, share-based payments and other long-term benefits Period ended November 30, 2012 Period ended November 30, 2011 $ 472 Nil $ 447 nil Total remuneration of employees related to key management personnel 472 447 A corporation owned by individuals related to key management personnel has participation in two of the Company‟s subsidiaries. During the period, dividends of nil (2011- $140) were paid by those subsidiaries to the above-mentioned company, and advances of nil (2011- $78) were repaid. During the year, one of the Company‟s subsidiaries loan payable to its non-controlling shareholders was forgiven by individuals related to key management personnel for an amount of $50. Critical accounting estimates In the application of the Company's accounting policies, which are described in note 3 of the consolidated financial statements, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgments in applying accounting policies The following are the critical judgements, apart from those involving estimations, that management has made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Page 22 Identification of cash-generating units The Company assesses whether there are any indicators of impairment for all non- financial assets at each reporting period date. Doing so first requires the identification of cash-generating units; the determination is done based on management‟s best estimation of what constitutes the lowest level at which an asset or group of asset has the possibility of generating cash inflows. Revenue recognition In making their judgement, management considered the detailed criteria for the recognition of revenue from the sale of goods and for construction contracts set out in IAS 18 Revenue and, in particular, whether the Company had transferred to the buyer the significant risks and rewards of ownership of the goods. Consolidation of special purpose entities In determining which entities are required to be consolidated in the fashion described below, the Company must exercise judgment to determine who has de facto control of the entities being considered. Such judgment is reassessed yearly to take into account the most recent facts relevant to each entity‟s situation. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Business combinations For business combinations, the Company must make assumptions and estimates to determine the purchase price allocation of the business being acquired. To do so, the Company must determine the acquisition-date fair value of the identifiable assets acquired, including such intangible assets as franchise rights and trademarks, and liabilities assumed. Goodwill is measured as the excess of the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree over the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date. These assumptions and estimates have an impact on the asset and liability amounts recorded in the consolidated statement of financial position on the acquisition date. In addition, the estimated useful lives of the acquired amortizable assets, the identification of intangible assets and the determination of the indefinite or finite useful lives of intangible assets acquired will have an impact on the Company‟s future profit or loss. Page 23 Impairment of non-financial assets The recoverable amounts of the Company‟s assets is generally estimated based on value-in-use calculations as this was determined to be higher than fair value less cost to sell, except for certain corporate store assets for which fair value less cost to sell was higher than their value in use. The fair value less cost to sell of corporate stores is generally determined by estimating the liquidation value of the restaurant equipment. Other than the value of the assets of certain corporate stores and of one of the company‟s trademarks, the value in use of cash-generating units (“CGUs”) tested was higher or equal to the carrying value of the assets. Impairment assessments were established using a 17% discount rate on the corporate store CGU‟s and 15% on the trademarks and franchise rights. Discount rates are based on pre-tax rates that reflect the current market assessments, taking the time value of money and the risks specific to the CGU into account. During the year, the Company recognized impairments on the property, plant and equipment related to eight of its CGUs following a decline in their performance. All eight CGUs are groups of assets related to corporate-owned stores. The total impairment of $135 represents a write down of the carrying value of the leasehold improvements and equipment to their fair value less cost to sell, which was higher than their value in use. These calculations take into account our best estimate of future cash flows, using previous year‟s cash flows for each CGU to extrapolate a CGU‟s future performance to the earlier of the termination of the lease (if applicable) or 5 years and a terminal value is calculated beyond this period, assuming no growth to the cash flows of previous periods. A cash flow period of 5 years was used as predictability for future periods cannot be estimated with reasonable accuracy. A 1% change to the discount rate used in the calculation of the impairment would result in an additional impairment of $41 on the trademarks and franchise rights and $7 on the property, plant and equipment of our corporate stores. During the year, the Company also reversed an impairment of $67 related to the trademark of one of its brands. The reversal, which is shown on the consolidated statement of comprehensive income on the “impairment of property, plant and equipment” line, represents the full original impairment taken on the asset and is based on new estimated future cash flows of the CGU. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash- generating unit and a suitable discount rate in order to calculate present value. It was determined that goodwill is not impaired as at November 30, 2012, November 30, 2011 and December 1, 2010. Page 24 The Company used a 13% discount rate for its assessment of goodwill. No growth was applied to the cash flows used to estimate the terminal value. Useful lives of property, plant and equipment and intangible assets As described in Note 3 above, the Company reviews the estimated useful lives of property, plant and equipment and intangible assets with definite useful lives at the end of each year and assesses whether the useful lives of certain items should be shortened or extended, due to various factors including technology, competition and revised service offerings. During the years ended November 30, 2012 and 2011, the Company was not required to adjust the useful lives of any assets based on the factors described above. Provisions The Company makes assumptions and estimations based on its current knowledge of future disbursements it will have to make in connection with various events that have occurred in the past and for which the amount to be disbursed and the timing of such disbursement are uncertain at the date of producing its financial statements. Valuation of financial instruments The Company uses valuation techniques that include inputs that are not based on observable market data to estimate the fair value of certain types of financial instruments. Management believe that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments. Consolidation of special purpose entities The Company is required to consolidate a small number of special purpose entities. In doing so, the Company must make assumptions with respect to some information that is either not readily available or that is not available within reporting time frames. As a result, assumptions and estimates are made to establish a value for the current assets, short-term and long-term liabilities and results of operations in general. Onerous contracts A provision for onerous contracts is recognized when the unavoidable costs of meeting our obligations under the contract exceed the expected benefits to be received from the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of completing the contract. Contingencies The Company is involved in various litigation and disputes as a part of the business that could affect some of its operating segments. Pending litigations represent potential loss to the business. Page 25 MTY accrues potential losses if it believes the loss is probable and can be reasonably estimated, based on information that is available at the time. Any accrual would be charged to earnings and included in accounts payable and accrued liabilities. Any cash settlement would be deducted from cash from operating activities. Management estimates the amount of the loss by analyzing potential outcomes and assuming various litigation and settlement strategies. Accounts receivable The Company recognizes an allowance for doubtful accounts based on past experience, outlet-specific situation, counterparty‟s current financial situation and age of the receivables. Trade receivables include amounts that are past due at the end of the reporting period and for which the Company has not recognized an allowance for doubtful accounts because there was no significant change in the credit quality of the counterparty and the amounts are therefore considered recoverable. Accounting policies adopted in 2012 On December 1, 2010, MTY adopted International Financial Reporting Standards for its financial reporting, using December 1, 2010 as its transition date. Accordingly, the consolidated financial statements for the fiscal year ended November 30, 2012 and comparative figures have been prepared in accordance with IFRS 1 “First-Time Adoption of International Financial Reporting Standards” issued by the International Accounting Standards Board (“IASB”). The accounting policies used to prepare these financial statements and the comparative figures are presented in Note 3 of the consolidated financial statements for the year ended November 30, 2012. These accounting policies have been applied retrospectively to December 1, 2010. Reconciliations for the Company‟s income and financial position are presented in Note 34 of the consolidated financial statements. The following standards had an impact on the financial information that had previously been presented in accordance with Canadian GAAP: IFRS 3 “Business Combinations” IFRS 3 eliminated the concept of negative goodwill and instead introduces “gain on bargain purchase”. Under Canadian GAAP, when the consideration paid for an acquisition was lower than the fair value of the identifiable assets received, the difference was pro-rated over the non-financial assets acquired. Under IFRS 3, a gain needs to be recognized on the statement of comprehensive income. This resulted in the restatement of one of the acquisitions realized during our 2011 fiscal year; as a result, the historical cost of the non-financial assets acquired was increased by $0.1 million, deferred income taxes were restated to reflect the variation in the temporary differences and the depreciation charge on the increased cost of the property, plant and equipment was also restated. The net impact on the net income and comprehensive income was $0.1 million. Page 26 IAS 12 “Income Taxes” Under IFRS, deferred taxes related to intangible assets and goodwill are accounted for differently than they were under Canadian GAAP when intangible assets are acquired through a business combination. Upon initial recognition of the business combination, a long-term deferred tax asset or liability must be recognized when a difference, temporary or permanent, exists between the fair value of an asset and its tax base according to the applicable corporate tax laws. Specifically, the Company had to restate the deferred taxes on its trademarks. Because the Company had elected not to apply IFRS 3 to acquisitions made prior to the transition date, the adjustment to deferred taxes related to this period was applied against retained earnings. For acquisitions subsequent to that date, the adjustment impacted the amount of goodwill recognized on each business combination. In addition, IAS 12 eliminates the short-term portion of deferred income taxes. Consequently, short-term deferred tax assets are now reported with long term assets. As at December 1, 2010, the Company reclassified an amount of $3.6 million in such fashion. IAS 16 “Property, Plant and Equipment” The Company has elected to use the cost method of accounting for its property, plant and equipment (“PP&E”) and will continue to use this method to recognize such assets. Other than the impact on property, plant and equipment (“PP&E”) of IFRS 3 discussed above, the Company has identified a conversion adjustment resulting from a difference in the consumption patterns of components of PP&E. Under IFRS, components of capitalized assets are required to be isolated and depreciated separately. Previously, components of one given asset were depreciated as a whole. The effect of this change has been to reduce the carrying value of PP&E by $0.04 million at the date of transition, December 1, 2010, reduce the deferred tax liability by $0.01 million and reduce retained earnings by the net of the two previously mentioned amounts. Subsequent depreciation and gains or losses on disposition were also impacted by the change in the depreciation policy. IAS 18 “Revenue” Under Canadian GAAP, the Company accounted for its turnkey projects using the completed contract method and as a result recognized revenues, expenses and profits from projects once they were delivered to the franchisees. Under IFRS, the Company is required to use the percentage of completion method, which accelerates the recognition of revenues and expenses on individual projects. Accordingly, accounts receivable, accounts payable and inventories of projects under construction held for resale had to be restated. Page 27 As of December 1, 2010, the Company had to increase its retained earnings by $0.10 million for amounts that should have been recognized in the previous fiscal period; as a result, the net income of the subsequent period, in which such profits had been recognized under Canadian GAAP, were reduced by the same amount. The reversal of revenues and expenses recognized in previous fiscal periods on transition date creates a reduction of revenues in the first quarter of 2011 of $1.08 million, a reduction of expenses of $0.94 million and a reduction of the income tax expense of $0.04 million. This change if partly offset by additional revenues and expenses recognized in the first quarter of 2011. The net impact is presented in Note 34 to the consolidated financial statements. IAS 39 “Financial instruments: recognition and measurement” Under Canadian GAAP, the Company did not discount the non-interest bearing holdbacks on its acquisitions because a specific exemption existed. Under IFRS, such exemption is no longer available; as a result, the Company discounted its non-interest bearing holdbacks and adjusted the consideration paid for its acquisitions accordingly, with the impact of the reduction in the fair value of the holdbacks being allocated to goodwill. Because of the exemption available under IFRS 1, the Company did not, however, restate the purchase price of the Valentine acquisition; the differences between the carrying values of the holdbacks per Canadian GAAP and IFRS were offset into retained earnings. The impact on retained earnings was $0.1 million. Future accounting changes IFRS 9 “Financial Instruments” IFRS 9 “Financial Instruments” was issued in November 2009 and contains requirements for financial assets. It addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 “Financial Instruments: Recognition and Measurement” for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where such equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent they do not clearly represent a return on investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated other comprehensive income indefinitely. In October 2010, the IASB amended IFRS 9 “Financial Instruments,” which replaced IFRS 9 “Financial Instruments” and IFRIC 9 “Reassessment of Embedded Derivatives.” This change provides guidance on classification, reclassification and measurement of financial liabilities and on the presentation of gains and losses, through profit or loss, of financial liabilities designated as measured at fair value. The requirements for financial liabilities, added in October 2010, largely replicate the requirements of IAS 39 “Financial Instruments: Recognition and Measurement,” except with respect to changes in fair value Page 28 attributable to credit risk for liabilities designated as measured at fair value through profit or loss, which would generally be recognized in other comprehensive income. This new standard applies to fiscal years beginning on or after January 1, 2015. Early application is permitted. IFRS 10 “Consolidated Financial Statements” In May 2011, the IASB issued IFRS 10 “Consolidated Financial Statements,” which establishes principles for the preparation and presentation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 provides a single consolidation model that identifies control as being the basis for consolidation. The new standard describes how to apply the principle of control to identify situations when a company controls another company and must therefore present consolidated financial statements. IFRS 10 also provides disclosure requirements for the presentation of consolidated financial statements. IFRS 10 cancels and replaces IAS 27 “Consolidated and Separate Financial Statements” and SIC-12 “Consolidation – Special Purpose Entities.” This new standard applies to fiscal years beginning on or after January 1, 2013. Early application is permitted. IFRS 12 “Disclosure of Interests in Other Entities” In May 2011, the IASB issued IFRS 12 “Disclosure of Interests in Other Entities.” IFRS 12 incorporates, in a single standard, guidance on disclosing interests in subsidiaries, joint arrangements, associates and structured entities. The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate the basis of control, any restrictions on consolidated assets and liabilities, exposures to risks arising from interests in non-consolidated structured entities and the share of minority interests in the activities of consolidated entities. This new standard applies to fiscal years beginning on or after January 1, 2013. Early application is permitted. IFRS 13 “Fair Value Measurement” In May 2011, the IASB issued a guide to fair value measurement providing note disclosure requirements. The guide is set out in IFRS 13 “Fair Value Measurement,” and its objective is to provide a single framework for measuring fair value under IFRS. It does not provide additional opportunities to use fair value. This new standard applies to fiscal years beginning on or after January 1, 2013. Early application is permitted. Page 29 IAS 1 “Presentation of Financial Statements” In June 2011, the IASB amended IAS 1 “Presentation of Financial Statements” requiring entities preparing financial statements in accordance with IFRS to group together items of other comprehensive income (OCI) that potentially may be reclassified to the profit or loss section of the income statement and to separately group items that will not be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that profit or loss and OCI be presented as either a single statement or two consecutive statements. This amended version of this standard applies to fiscal years beginning on or after July 1, 2012. Early application is permitted. IAS 19 “Employee Benefits” In June 2011, the IASB amended IAS 19 “Employee Benefits” to improve the accounting for pensions and other post-employment benefits. The amendments make important improvements by: • Eliminating the option to defer the recognition of gains and losses, known as the “corridor method” or the “deferral and amortization approach”; • Simplifying the presentation of changes in assets and liabilities arising from defined in other benefit plans, comprehensive income, thereby separating those changes from changes frequently perceived to be the result of day-to-day operations; and • Enhancing the disclosure requirements for defined benefit plans, providing better information about the characteristics of defined benefit plans and the risks to which entities are exposed through their participation in those plans. to be presented re-measurements including requiring This amended version of this standard applies to fiscal years beginning on or after January 1, 2013. Early application is permitted. IFRS 7 “Financial Instruments: Disclosures” and IAS 32 “Financial Instruments: Presentation” In December 2011, the IASB amended IFRS 7 “Financial Instruments: Disclosures” and IAS 32 “Financial Instruments: Presentation” as part of its offsetting financial assets and the disclosure financial requirements with those of the Financial Accounting Standards Board (FASB), while IAS 32 was amended to clarify certain items and address inconsistencies encountered upon practical application of the standard. IFRS 7 was amended liabilities project. to harmonize The amended versions of IFRS 7 and IAS 32 apply retrospectively to annual periods beginning on or after January 1, 2013 and on or after January 1, 2014, respectively. Early application is permitted. The Company is assessing the impact of adopting these new standards on its consolidated financial statements and will determine whether it will opt for early application. Page 30 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. Financial instruments and financial risk exposure 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: In thousands of $ Financial assets Cash and cash equivalents Temporary investments Accounts receivable Loans receivable Prepaid and deposits Financial liabilities Accounts payable and accrued At November 30, 2012 At November 30, 2011 Carrying amount $ Fair value $ Carrying amount $ Fair value $ 33,036 - 13,631 919 338 33,036 - 13,631 919 338 5,995 4,632 10,496 1,119 312 5,995 4,632 10,496 1,119 312 liabilities Long-term debt 13,426 7,476 13,426 7,476 13,540 9,008 13,540 9,008 Determination of fair value The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Page 31 Cash and cash equivalents, temporary investments, accounts receivable, deposits, accounts payable and accrued liabilities - The carrying amounts approximate fair values due to the short maturity of these financial instruments. 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. 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 estimated borrowing rate for a similar debt. 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 November 30, 2012. Credit risk The Company‟s credit risk is primarily attributable to its trade receivables. The amounts disclosed in the statement of financial position 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: - Other than receivables from international locations, the Company‟s broad client base is spread mostly across Canada limits the concentration of credit risk. - The Company accounts for a specific bad debt provision when management considers that the expected recovery is less than the actual account receivable. The credit risk on cash and cash equivalents and temporary investments is limited because the Company invests its excess liquidity in high quality financial instruments and with credit-worthy counterparties. The credit risk on the loans receivable is similar to that of accounts receivable. There is currently an allowance for doubtful accounts recorded for loans receivable of $55 ($nil as at November 30, 2011). 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, 2012, the total value of such contracts was approximately $458,000. Other than the above-mentioned contracts, the Company has minimal exposure to the US$ 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. Page 32 As of November 30, 2012, the Company carried US$ cash of CDN$425,000 and had net accounts receivable of CDN$429,000. As a result, a 1% change in foreign exchange rates would result in a change in net comprehensive income of approximately $9,000 Canadian dollars. Interest rate risk The Company is exposed to interest rate risk with regards temporary investments. Given the very short term nature of the temporary investments, the risk that changes in interest rates will cause material fluctuations in the fair value is considered limited. The Company‟s is also exposed to interest rate risk with its operating line of credit and a bank loan contracted by a subsidiary. Both facilities bear interest at a variable rate and as such the interest burden could potentially become more important. The line of credit is not currently used by the Company; as a result, the exposure to interest rate risk in minimal. A 100 basis points increase in the bank‟s prime rate would result in additional interest of $34,000 per annum on the outstanding bank loan. 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, 2012: In thousands of $ Accounts payable and accrued liabilities Long-term debt Interest on long-term debt Outlook Carrying Amount $ Contractual Cash Flows $ 0 to 6 Months $ 6 to 12 Months 12 to 24 Months $ $ 13,426 7,476 N/A 20,902 13,426 7,621 N/A 21,047 13,426 3,733 151 17,310 - 3,601 130 3,731 - 287 137 424 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 consumers. Page 33 Management will maintain its focus on completing the integration of the latest acquisitions and maximizing the value of those new locations and concepts to our network. Management also remains committed on offering its customers a wide range of innovative menus and modern store designs. The quick service restaurant industry will remain challenging in the future, and management believes that the focus on the food offering, consistency and store design will give MTY‟s restaurants a stronger position to face challenges. 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. 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, 2012, 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, 2012, 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. Limitations of Controls and Procedures Management, including the President and Chief Executive Officer and Chief Financial Officer, believes that any disclosure controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have Page 34 been prevented or detected. These inherent limitations include the realities judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any control system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. Limitation on scope of design The Company‟s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, has limited the scope of the design of the Company‟s disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures and internal control over financial reporting of certain special purpose entities (“SPEs”) on which the Company has the ability to exercise de facto control and which have as a result been consolidated in the Company‟s consolidated financial statements. For the twelve-month period ended November 30, 2012, these SPEs represent 0% of the Company‟s current assets, 0% of its non-current assets, 1% of the Company‟s current liabilities, 0% of long-term liabilities, 5% of the Company‟s revenues and 0% of the Company‟s net earnings. “Stanley Ma” __________________________ Stanley Ma, Chief Executive Officer “Eric Lefebvre” __________________________ Eric Lefebvre, CPA, CA, MBA Chief Financial Officer Page 35 Consolidated financial statements of MTY FOOD GROUP INC. For the years ended November 30, 2012 and 2011 Deloitte s.e.n.c.r.l. 1 Place Ville Marie Suite 3000 Montreal QC H3B 4T9 Canada Tel: 514-393-7115 Fax: 514-390-4104 www.deloitte.ca INDEPENDENT AUDITOR’S REPORT To the Shareholders of MTY Food Group Inc. We have audited the accompanying consolidated financial statements of MTY Food Group Inc., which comprise the consolidated statements of financial position as at November 30, 2012, November 30, 2011 and December 1, 2010 , and the consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years ended November 30, 2012 and November 30 2011, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.    Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of MTY Food Group Inc. as at November 30, 2012, November 30, 2011 and December 1, 2010, and its financial performance and its cash flows for the years ended November 30, 2012 and November 30, 2011 in accordance with International Financial Reporting Standards. February 13, 2013 ____________________ 1 CPA auditor, CA, public accountancy permit No. A114814 MTY FOOD GROUP INC. Consolidated statements of comprehensive income For the years ended November 30, 2012 and 2011 (in thousands of Canadian dollars except per share amounts) Revenue (notes 23 and 31) Expenses Operating expenses (notes 24 and 31) Depreciation – property, plant and equipment Amortization – intangible assets Restructuring Interest on long-term debt Other income (charges) Foreign exchange (loss) gain Interest income Gain on bargain purchase Gain on preferred share redemption (note 17) Gain on loan forgiveness of a non-controlling shareholder of a subsidiary (note 17) Impairment of property, plant and equipment (note 4) Gain on disposal of property, plant and equipment Income before taxes Income taxes (note 30) Current Deferred Net income and comprehensive income Net income (loss) and comprehensive income (loss) attributable to: Owners Non controlling interest Earnings per share (note 20) Basic Diluted See accompanying notes to the consolidated financial statements Page 3 of 66 2012 $ 2011 $ 96,220 78,358 61,294 1,128 3,867 - 335 66,624 (27) 282 - 100 110 (68) 511 908 51,928 1,233 3,179 447 213 57,000 18 357 140 - - - 948 1,463 30,504 22,821 8,511 (61) 8,450 2,957 3,344 6,301 22,054 16,520 22,067 (13) 22,054 16,194 326 16,520 1.15 1.15 0.85 0.85 MTY FOOD GROUP INC. Consolidated statements of financial position as at November 30, 2012 and 2011 (in thousands of Canadian dollars except per share amounts) Assets Current assets Cash and cash equivalents (note 7) Temporary investments Accounts receivable (note 8) Income taxes receivable Inventories (note 9) Loans receivable (note 10) Prepaid expenses and deposits Loans receivable (note 10) Other receivable Property, plant and equipment (note 11) Intangible assets (note 12) Deferred income taxes (note 30) Goodwill (note 13) Liabilities Current liabilities Accounts payable and accrued liabilities Provisions (note 15) Income taxes payable Deferred revenue and deposits (note 16) Current portion of long-term debt (note 17) Deferred revenue and deposits (note 16) Long-term debt (note 17) Deferred income taxes (note 30) Commitments, guarantee and contingent liabilities (notes 26, 27, 28 and 29) Shareholders’ equity Equity attributable to owners Capital stock (note 18) Contributed surplus Retained earnings Equity attributable to non-controlling interest November 30, November 30, December 1, 2011 $ 2010 $ 2012 $ 33,036 - 13,631 - 1,609 358 338 48,972 561 - 9,382 57,213 167 20,266 136,561 13,426 2,266 2,863 2,169 7,199 27,923 - 277 2,298 30,498 19,792 481 85,635 105,908 155 106,063 136,561 5,995 4,632 10,496 1,419 1,568 414 312 24,836 705 - 10,185 59,566 70 20,266 115,628 13,540 1,150 – 1,561 1,958 18,209 11 7,050 2,248 27,518 19,792 481 67,800 88,073 37 88,110 115,628 5,637 23,383 8,156 - 795 336 186 38,493 909 2,698 6,941 36,208 116 7,125 92,490 10,992 1,034 851 1,485 1,873 16,235 9 853 - 17,097 19,792 481 55,048 75,321 72 75,393 92,490 See accompanying notes to the consolidated financial statements Approved by the Board on February 13, 2013 ……“Stanley Ma”……………Director …… “Claude St-Pierre”….. Director Page 4 of 66 MTY FOOD GROUP INC. Consolidated statements of changes in shareholders’ equity For the years ended November 30, 2012 and 2011 (in thousands of Canadian dollars except per share amounts) Equity attributable to owners Share capital $ Contributed surplus $ Retained earnings $ Total $ Equity attributable to non- controlling interest $ Total $ Balance as at December 1, 2010 19,792 481 55,048 75,321 72 75,393 Net income and comprehensive income for the year ended November 30, 2011 Dividends – – – – 16,194 16,194 (3,442) (3,442) 326 (361) 16,520 (3,803) Balance as at November 30, 2011 19,792 481 67,800 88,073 37 88,110 Net income and comprehensive income for the year ended November 30, 2012 Investment in common stock of a subsidiary by non-controlling interest Equity transaction with non-controlling interest - - - - - - 22,067 22,067 (13) 22,054 - - 147 147 (26) (26) 34 (50) 155 8 (4,256) 106,063 Dividends Balance as at November 30, 2012 - 19,792 - 481 (4,206) 85,635 (4,206) 105,908 The following dividends were declared and paid by the Company: For the year ended November 30, 2012 $ For the year ended November 30, 2011 $ $0.220 per common share (2011 - $0.180 per common share) 4,206 3,442 See accompanying notes to the consolidated financial statements Page 5 of 66 MTY FOOD GROUP INC. Consolidated statements of cash flows For the years ended November 30, 2012 and 2011 (in thousands of Canadian dollars except per share amounts) Operating activities Net income and comprehensive income Items not affecting cash: Interest on long-term debt Depreciation – property, plant and equipment Amortization – intangible assets Gain on disposal of property, plant and equipment Impairment of property, plant and equipment Gain on bargain purchase Gain on preferred share redemption Gain on loan forgiveness of a non-controlling shareholder of a subsidiary Income tax expense Deferred revenue Income tax refunds received Income taxes paid Interest paid Changes in non-cash working capital items (note 32) Cash flows provided by operating activities Investing activities Net cash outflow on acquisitions Temporary investments Additions to property, plant and equipment Additions to intangible assets Proceeds on disposal of property, plant and equipment Cash flows provided by (used in) investing activities Financing activities Share buy-back paid to non-controlling shareholders of subsidiaries Issuance of long-term debt Repayment of long-term debt Issuance of shares to non-controlling interest of subsidiaries Dividends paid to non-controlling shareholders of subsidiaries Dividends paid Cash flows used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period See accompanying notes to the consolidated financial statements Page 6 of 66 November 30, November 30, 2012 $ 2011 $ 22,054 16,520 335 1,128 3,867 (511) 68 - (100) (110) 8,450 608 35,789 1,041 (5,269) (162) (2,002) 29,397 (748) 4,632 (1,057) (518) 1,108 3,417 - 58 (1,722) 147 (50) (4,206) (5,773) 27,041 5,995 33,036 213 1,233 3,179 (948) - (140) - - 6,301 (143) 26,215 321 (5,479) (143) (2,905) 18,009 (36,088) 18,751 (954) – 1,655 (16,636) (16) 3,500 (721) 25 (361) (3,442) (1,015) 358 5,637 5,995 8 8 9 24 29 30 36 36 37 37 38 40 42 43 MTY FOOD GROUP INC. Table of Contents Note 1 Note 2 Note 3 Note 4 Note 5 Description of the business……………………………………………………. Basis of preparation………………………………………………………….... Significant accounting policies………………………………………………... Critical accounting judgments and key sources of estimation uncertainty…… Future accounting changes……………………………………………………. Note 6 Business acquisitions………………………………………………………...... Note 7 Note 8 Note 9 Note 10 Note 11 Note 12 Note 13 Note 14 Note 15 Note 16 Note 17 Note 18 Note 19 Note 20 Note 21 Note 22 Note 23 Note 24 Note 25 Note 26 Note 27 Note 28 Note 29 Note 30 Note 31 Note 32 Note 33 Note 34 Note 35 Cash and cash equivalents…………………………………………………….. Accounts receivable.…………………………………………………………... Inventories…………………………………………………………………….. Loans receivable………………………………………………………………. Property, plant and equipment………………………………………………… Intangible assets……………………………………………………………….. Goodwill………………………………………………………………………. Credit facilities………………………………………………………………… Provisions……………………………………………………………………… 44 Deferred revenue and deposits………………………………………………… Long-term debt………………………………………………………………... 45 45 Capital stock…………………………………………………………………… 46 Stock options…………………………………………………………………... Earnings per share……………………………………………………………... Financial instruments………………………………………………………….. Capital disclosures…………………………………………………………….. Revenues………………………………………………………………………. Operating expenses……………………………………………………………. Restructuring…………………………………………………………………... Operating lease arrangements…………………………………………………. Commitments………………………………………………………………….. Guarantee……………………………………………………………………… Contingent liabilities…………………………………………………………... 46 47 47 50 51 51 51 51 52 52 53 Income taxes…………………………………………………………………… 53 Segmented information………………………………………………………… 54 Statement of cash flows………………………………………………………... Related party transactions……………………………………………………... Transition to IFRS…………………………………………………………….. Subsequent events……………………………………………………………... 57 57 58 66 Page 7 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 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. The Company also operates a distribution center and a food processing plant, both of which are located in the province of Quebec. The Company is incorporated under the Canada Business Corporations Act and is listed on the Toronto Stock Exchange. The Company’s head office is located at 8150, Autoroute Transcanadienne, Suite 200, Ville Saint-Laurent, Quebec. 2. Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company, and tabular amounts are rounded to the nearest thousand ($000) except when otherwise indicated. Statement of compliance The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which include interpretations as issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Standards Interpretation Committee. They are the first annual consolidated financial statements prepared in accordance with IFRS and IFRS 1 First Time Adoption of IFRS. The IFRS transition date was December 1, 2010. The Company’s consolidated financial statements were previously prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The transition from previous GAAP to IFRS had impacts on the Company’s financial position, financial performance and cash flows. An explanation of how the transition to IFRS has affected these is provided in Note 34, Transition to IFRS. These consolidated financial statements were authorized for issue by the Board of Directors on February 13, 2013. Page 8 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements and in preparing the opening consolidated statement of financial position as at December 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated (note 34). Basis of consolidation The consolidated financial statements include the accounts of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Principal subsidiaries are as follows: Principal subsidiaries MTY Tiki Ming Enterprises Inc. 7687567 Canada Inc 154338 Canada Inc. Percentage of equity interest % 100 51 50 Income and expenses of subsidiaries acquired during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. All intercompany transactions, balances, revenues and expenses are eliminated in full on consolidation. 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 comprehensive income, but rather as operations in the accounts payable to the promotional fund. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value. This is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company and liabilities incurred by the Company to the former owners of the acquiree in exchange for control of the acquiree. Acquisition- related costs are recognized in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value at the acquisition date, except for deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements, which are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively. Page 9 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Business combinations (continued) Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. Non-controlling interests are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation. This may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by- transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39 Financial Instruments: recognition and measurement, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. When a business combination is achieved in stages, the Company’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Company obtains control) and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. Page 10 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Business combinations (continued) If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted retrospectively during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date. Changes of ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions, with no effect on net earnings or on other comprehensive income. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash- generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss in the consolidated statement of comprehensive income. An impairment loss recognized for goodwill is not reversed in subsequent periods. Where goodwill forms part of a cash-generating unit and part of the operation within the unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation and the portion of the cash-generating unit retained. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes and duty. Revenue is generally recognized on the sale of products or services when the products are delivered or the services are performed, all significant contractual obligations have been satisfied and the collection is reasonably assured. Page 11 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Revenue recognition (continued) 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. They are recognized on an accrual basis in accordance with the substance of the relevant agreement, provided that it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. 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 is recognized by reference to the stage of completion of the contract activity at the end of the reporting period. This is measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that the amount can be measured reliably and its receipt is considered probable. When it is probable that total contract costs will exceed contract revenue, the expected loss is recognized as an expense immediately. When the outcome of the project cannot be estimated reliably, revenues are recognized to the extent of expenses recognized in the period. The excess of revenue recognized over amounts billed is recorded as part of accounts receivable. 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, which is recorded in initial franchise fees (note 23). 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. This revenue is recorded in other revenue (note 23). The Company earns rent revenues on certain leases it holds and sign rental revenues; the Company’s policy is described below. The Company receives considerations from certain suppliers. Supplier contributions are recognized as revenues as they are earned and are recorded in other franchising revenue (note 23). ii. Revenue from distribution center Distribution revenues are recognized when goods have been delivered or when significant risks and rewards of ownership have been transferred and it is probable that the economic benefit associated with the transaction will flow to the Company. Page 12 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Revenue recognition (continued) iii. Revenue from food processing Food processing revenues are recognized when goods have been delivered to end-users or when significant risks and rewards of ownership have been transferred to distributors and it is probable that the economic benefit associated with the transaction will flow to the Company. iv. Revenue from corporate-owned locations Revenue from corporate-owned locations is recorded when goods are delivered to customers. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Company as lessor Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. The Company as lessee Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Foreign currencies At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise. Page 13 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Page 14 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Taxation (continued) Current and deferred tax for the year Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the consolidated statement of financial position at their historical costs less accumulated depreciation (buildings) and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, including any costs directly attributable to bringing the asset to a working condition for its intended use. Equipment, leasehold improvements, rolling stock and computer hardware are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognized so as to write off the cost or valuation of assets (other than land) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each year, with the effect of any changes in estimate accounted for on a prospective basis. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Depreciation is based on the following terms: Buildings Structure and components Equipment Leasehold improvements and signs Rolling stock Computer hardware Straight-line Straight-line Straight-line Straight-line Straight-line 25 to 50 years 3 to 10 years Term of the lease 5 to 7 years 3 to 7 years Page 15 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Intangible assets Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives and amortization methods are reviewed at the end of each year, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Subsequent to initial recognition, intangible assets having a finite life acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Intangible assets having an indefinite life are not amortized and are therefore carried at cost less accumulated impairment losses, if applicable. Derecognition of intangible assets An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized. The Company currently carries the following intangible assets in its books: Franchise rights and master franchise rights The franchise rights and master franchise rights acquired through business combinations were recognized at the fair value of the estimated 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 typically range between 10 to 20 years. Some master franchise rights have no specific terms; as a result, those are not amortized as they have an indefinite life. Trademarks Trademarks acquired through business combinations were recognized at their fair value at the time of the acquisition and are not amortized. Trademarks were determined to have an indefinite useful life based on their strong brand recognition and their ability to generate revenues through changing economic conditions with no foreseeable time limit. Page 16 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Intangible assets (continued) 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 distributions rights obtained from the acquisition of Country Style Food Services Inc., which were being amortized over the remaining life of the contracts. The distribution rights were fully amortized at the end of the period. Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Page 17 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Intangible assets (continued) Impairment of goodwill At the end of each reporting period, the Company reviews the carrying amounts of goodwill to determine whether there is any indication that it has suffered an impairment loss. If any such indication exists, the recoverable amount of the cash-generating unit to which goodwill is allocated is estimated in order to determine the extent of the impairment loss (if any). Regardless of whether there is an indication of impairment or not, goodwill is tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of the cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the goodwill is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Cash and cash equivalents Cash and cash equivalents item includes cash on hand and short-term investments, if any, with maturities upon acquisition of generally three months or less or that are redeemable at any time at full value and for which the risk of a change in value is not significant. Inventories Inventories are measured at the lower of cost and net realizable value. Costs of inventories are determined on a first-in-first-out basis and include acquisition costs, conversion costs and other costs incurred to bring inventories to their present location and condition. The cost of finished goods includes a pro rata share of production overhead based on normal production capacity. In the normal course of business, the Company enters into contracts for the construction and sale of franchise locations. The related work in progress inventory includes all direct costs relating to the construction of these locations, and is recorded at the lower of cost and net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Page 18 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Provisions (continued) The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Onerous contracts Present obligations arising under onerous contracts are recognized and measured as provisions. An onerous contract is considered to exist where the Company has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. Gift card and loyalty program liabilities Gift card liability represents liabilities related to unused balances on reloadable payment cards. Loyalty program liabilities represent the dollar value of the loyalty points earned and unused by customers. Restructuring A restructuring provision is recognized when the Company has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. Litigation, disputes and closed stores Provisions for the expected cost of litigation, disputes and the cost of settling leases for closed stores are recognized when it becomes probable the Company will be required to settle the obligation, at management’s best estimate of the expenditure required to settle the Company’s obligation. Contingent liabilities acquired in a business combination Contingent liabilities acquired in a business combination are initially measured at fair value at the acquisition date. At the end of subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognized in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less cumulative amortization recognized. Page 19 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Financial instruments Financial assets and financial liabilities are recognized when an entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. The subsequent measurement of financial assets and financial liabilities 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 and cash equivalents and temporary investments Loans and receivables Loans and receivables Accounts receivable Loans and receivables Deposits Loans and receivables Loans receivable and other receivables Other financial liabilities Accounts payable and accrued liabilities Other financial liabilities Long-term debt Financial assets Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”), ‘held-to-maturity’ investments, ‘available-for-sale’ (“AFS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. Page 20 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Financial assets (continued) Available-for-sale financial assets (AFS financial assets) AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade and other receivables, cash and cash equivalents and deposits) are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For all other financial assets, objective evidence of impairment could include: • significant financial difficulty of the issuer or counterparty; or • breach of contract, such as a default or delinquency in interest or principal payments; or • • it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or the disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past a certain credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. Page 21 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Financial assets (continued) The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Derecognition of financial assets The Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. Financial liabilities Classification as debt or equity Debt and equity instruments issued by an entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs. Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’. Page 22 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Financial liablities (continued) Other financial liabilities Other financial liabilities (including borrowings) are subsequently measured at amortized cost using the effective interest method. Derecognition of financial liabilities The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss. Derivative financial instruments The Company enters into a variety of derivative financial instruments to manage its exposure to the volatility in the price of certain commodities and foreign exchange rate risks, including foreign exchange forward contracts. Further details of derivative financial instruments are disclosed in note 21. Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Company currently has no designated hedges. Embedded derivatives Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL. The Company does not have any embedded derivatives as at November 30, 2012 and November 30, 2011. Promotional funds The Company manages the promotional funds of its banners. They are established specifically for each banner to collect and administer funds dedicated for use in advertising and promotional programs as well as other initiatives designed to increase sales and enhance the image and reputation of the banners. Contributions to the funds are made based on a percentage of sales. The revenue and expenses of the promotional funds are not included in the Company’s Statement of Comprehensive Income because the contributions to these funds are segregated and designated for specific purposes. The combined amount payable resulting from the promotional fund reserves amounts to $2,726 (November 30, 2011 - $2,902; December 1, 2010 - $2,556). These amounts are included in accounts payable and accrued liabilities. Page 23 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 3. Significant accounting policies (continued) Segment disclosure An operating segment is a distinguishable component of the Company that engages in business activities from which it may earn revenue and incur expenses, including revenue and expenses that relate to transactions with any of the Company’s other components, and for which separate financial information is available. Segment disclosures are provided for the Company’s operating segments (note 31). The operating segments are determined based on the Company’s management and internal reporting structure. All operating segments’ operating results are regularly reviewed by management to make decisions on resources to be allocated to the segment and to assess its performance. The Company operates in four separate segments: franchising, corporate, distribution and processing. 4. Critical accounting judgments and key sources of estimation uncertainty In the application of the Company’s accounting policies, which are described in Note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgements in applying accounting policies The following are the critical judgements, apart from those involving estimations, that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Identification of cash-generating units The Company assesses whether there are any indicators of impairment for all non-financial assets at each reporting period date. Doing so requires the identification of cash-generating units; the determination is done based on management’s best estimation of what constitutes the lowest level at which an asset or group of asset has the possibility of generating cash inflows. Revenue recognition In making their judgement, management considered the detailed criteria for the recognition of revenue from the sale of goods and for construction contracts set out in IAS 18 Revenue and IAS 11 Construction contracts and, in particular, whether the Company had transferred to the buyer the significant risks and rewards of ownership of the goods. Page 24 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Critical judgements in applying accounting policies (continued) Consolidation of special purpose entities In determining which entities are required to be consolidated in the fashion described above, the Company must exercise judgment to determine who has de facto control of the entities being considered. Such judgment is reassessed yearly to take into account the most recent facts relevant to each entity’s situation. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Business combinations For business combinations, the Company must make assumptions and estimates to determine the purchase price allocation of the business being acquired. To do so, the Company must determine the acquisition-date fair value of the identifiable assets acquired, including such intangible assets as franchise rights and trademarks, and liabilities assumed. Goodwill is measured as the excess of the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree over the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date. These assumptions and estimates have an impact on the asset and liability amounts recorded in the consolidated statement of financial position on the acquisition date. In addition, the estimated useful lives of the acquired amortizable assets, the identification of intangible assets and the determination of the indefinite or finite useful lives of intangible assets acquired will have an impact on the Company’s future profit or loss. Impairment of non-financial assets The recoverable amounts of the Company’s assets is generally estimated based on value-in-use calculations as this was determined to be higher than fair value less cost to sell, except for certain corporate store assets for which fair value less cost to sell was higher than their value in use. The fair value less cost to sell of corporate stores is generally determined by estimating the liquidation value of the restaurant equipment. Other than the value of the assets of certain corporate stores and of one of the company’s trademarks, the value in use of cash-generating units (“CGUs”) tested was higher or equal to the carrying value of the assets. Impairment assessments were established using a 17% discount rate on the corporate store CGU’s and 15% on the trademarks and franchise rights. Discount rates are based on pre-tax rates that reflect the current market assessments, taking the time value of money and the risks specific to the CGU into account. Page 25 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Key sources of estimation uncertainty (continued) Impairment of non-financial assets (continued) During the year, the Company recognized impairments on the property, plant and equipment related to eight of its CGUs following a decline in their performance. All eight CGUs are groups of assets related to corporate-owned stores. The total impairment of $135 represents a write down of the carrying value of the leasehold improvements and equipment to their fair value less cost to sell, which was higher than their value in use. These calculations take into account our best estimate of future cash flows, using previous year’s cash flows for each CGU to extrapolate a CGU’s future performance to the earlier of the termination of the lease (if applicable) or 5 years and a terminal value is calculated beyond this period, assuming no growth to the cash flows of previous periods. A cash flow period of 5 years was used as predictability for future periods cannot be estimated with reasonable accuracy. A 1% change to the discount rate used in the calculation of the impairment would result in an additional impairment of $41 on the trademarks and franchise rights and $7 on the property, plant and equipment of our corporate stores. During the year, the Company also reversed an impairment of $67 related to the trademark of one of its brands. The reversal, which is shown on the consolidated statement of comprehensive income on the “impairment of property, plant and equipment” line, represents the full original impairment taken on the asset and is based on new estimated future cash flows of the CGU. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. It was determined that goodwill is not impaired as at November 30, 2012, November 30, 2011 and December 1, 2010. The Company used a 13% discount rate for its assessment of goodwill. No growth was applied to the cash flows used to estimate the terminal value. Useful lives of property, plant and equipment and intangible assets As described in Note 3 above, the Company reviews the estimated useful lives of property, plant and equipment and intangible assets with definite useful lives at the end of each year and assesses whether the useful lives of certain items should be shortened or extended, due to various factors including technology, competition and revised service offerings. During the years ended November 30, 2012 and 2011, the Company was not required to adjust the useful lives of any assets based on the factors described above. Page 26 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Key sources of estimation uncertainty (continued) Provisions The Company makes assumptions and estimations based on its current knowledge of future disbursements it will have to make in connection with various events that have occurred in the past and for which the amount to be disbursed and the timing of such disbursement are uncertain at the date of producing its financial statements. Revenue recognition for construction and renovation contracts Restaurant construction and renovation revenue is recognized by reference to the stage of completion of the contract activity at the end of the reporting period. Management makes an estimate on the percentage of completion based on costs incurred to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Valuation of financial instruments The Company uses valuation techniques that include inputs that are not based on observable market data to estimate the fair value of certain types of financial instruments. Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments. Consolidation of special purpose entities The Company is required to consolidate a small number of special purpose entities. In doing so, the Company must make assumptions with respect to some information that is either not readily available or that is not available within reporting time frames. As a result, assumptions and estimates are made to establish a value for the current assets, current and long-term liabilities and results of operations in general. Onerous contracts A provision for onerous contracts is recognized when the unavoidable costs of meeting our obligations under the contract exceed the expected benefits to be received from the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of completing the contract. Page 27 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Key sources of estimation uncertainty (continued) Contingencies The Company is involved in various litigations and disputes as a part of our business that could affect some of our operating segments. Pending litigations represent potential losses to the business. Management accrues potential losses if they believe the loss is probable and can be reasonably estimated, based on information that is available at the time. Any accrual would be charged to earnings and included in provisions. Any cash settlement would be deducted from cash from operating activities. Management estimate the amount of the losses by analyzing potential outcomes and assuming various litigation and settlement strategies. Accounts receivable The Company recognizes an allowance for doubtful accounts based on past experience, outlet- specific situation, counterparty’s current financial situation and age of the receivables. Trade receivables include amounts that are past due at the end of the reporting period and for which the Company has not recognized an allowance for doubtful accounts because there was no significant change in the credit quality of the counterparty and the amounts are therefore considered recoverable. Page 28 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 5. Future accounting changes A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board (“IASB”) that are not yet effective for the period ended November 30, 2012, and have not been applied in preparing these consolidated financial statements. The following standards may have a material impact on the consolidated financial statements of the Corporation: Effective for annual periods starting on or after: Amendment to IFRS 7 Financial Instruments: Disclosures IFRS 9 Financial Instruments IFRS 10 Consolidated Financial Statements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement Amendments to IAS 1 Presentation of Financial Statements Amendments to IAS 19 Employee Benefits Amendments to IAS 32 Financial January 1, 2013 January 1, 2015 January 1, 2013 Early adoption permitted Early adoption permitted Early adoption permitted January 1, 2013 January 1, 2013 Early adoption permitted Early adoption permitted January 1, 2013 January 1, 2013 Early adoption permitted Early adoption permitted Instruments: Presentation January 1, 2014 Early adoption permitted IFRS 7 was amended to harmonize the disclosure requirements with those of the Financial Accounting Standard Board (“FASB”). IFRS 9 replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets and financial liabilities. The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. This is the first phase of that project. IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. It provides a single model to be applied in the control analysis for all investees. IFRS 12 establishes disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. IFRS 13 replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. The standard clarifies the definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. Page 29 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 5. Future accounting changes (continued) The amendments to IAS 1 require that an entity present separately the items of other comprehensive income (“OCI”) that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. The Company is in the process of determining the extent of the impact of these standards on its consolidated financial statements. 6. Business acquisitions I) 2012 acquisition On September 26, 2012, the Company’s wholly-owned subsidiary, MTY Tiki-Ming Enterprises Inc., acquired the assets of Mr. Souvlaki Ltd. for a total consideration of $0.9 million. The acquisition was effective September 26, 2012. The purpose of the acquisition was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid Purchase price Net obligations assumed Net purchase price Holdbacks Net cash outflow The preliminary purchase price allocation is as follows: Net assets acquired: Current assets Franchise rights Trademark Current liabilities Accounts payable Deferred income taxes Net purchase price Included in the above-mentioned results are $nil in expensed acquisition-related costs. Page 30 of 66 915 (2) 913 165 748 $ $ 629 300 929 2 2 14 16 913 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 6. Business acquisitions (continued) I) 2012 acquisition (continued) From September 26 to November 30, 2012, the business has generated $43 in revenues and $27 in pre-tax profits. Had the acquisition occurred December 1, 2011, consolidated revenues and pre-tax profits would have been $96,477 and $30,698 respectively. II) 2011 acquisition On December 17, 2010 the Company’s wholly-owned subsidiary, MTY Tiki-Ming Enterprises Inc., acquired a 51% interest in a newly formed company established to purchase a food processing plant. The purpose of the acquisition is to further integrate MTY’s business and enable the production of certain goods destined to the retail markets. The acquisition was financed by a long-term bank loan of $3,500 (Note 17). Consideration paid The purchase price allocation is as follows: Net assets acquired: Current assets Inventories Deferred expenses Land Building Equipment Deferred income tax asset Goodwill Current liabilities Accounts payable Mandatorily redeemable preferred shares Fair value of net assets acquired Less: Gain on bargain purchase, net of deferred tax impact Total purchase price $ 3,497 340 30 370 690 1,210 1,470 42 200 3,982 178 178 200 3,604 107 3,497 At the date of the acquisition of the plant, a gain was recognized as the consideration paid for the identifiable tangible assets acquired was lower than their fair value, as determined by an independent valuation specialist. Page 31 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 6. Business acquisitions (continued) II) 2011 acquisition (continued) The goodwill was fully deducted for tax purposes as this acquisition was an asset purchase. The redeemable preferred shares were issued in exchange for the existing business relationships and activities (classified as goodwill) of one of the shareholders of the newly formed company. One third of the issued preferred shares is redeemable annually, at a price contingent on the performance of the plant for the three years following the inception of business. Management estimates the contingent consideration at $200, with a range of redemption values comprised between $100 and $300. From December 17 to November 30, 2011, the business generated $6,330 in revenues and $219 in pre-tax loss. Included in the above-mentioned results are $nil in expensed acquisition-related costs. III) 2011 acquisition On August 24, 2011, the Company’s wholly-owned subsidiary, MTY Tiki-Ming Enterprises Inc., acquired the assets of Jugo Juice International Inc., Jugo Juice Canada Inc., and Jugo Juice Western Canada Inc. for a total consideration of $15,450. The acquisition was effective August 18, 2011. The purpose of the acquisition was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid Purchase price Discount on non-interest bearing holdbacks Net obligations assumed Net purchase price Holdbacks Balance of sale Net cash outflow $ 15,450 (99) (609) 14,742 1,636 1,200 11,906 Page 32 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 6. Business acquisitions (continued) III) 2011 acquisition (continued) The purchase price allocation is as follows: Net assets acquired: Current assets Cash and cash equivalents Inventories Current portion of loans receivable Deposits Loans receivable Property, plant and equipment Franchise rights Trademark Goodwill Deferred income taxes Current liabilities Accounts payable Unearned revenue Net purchase price $ 1 46 62 10 119 60 551 3,273 5,425 5,533 569 15,530 587 201 788 14,742 Acquisition-related costs of approximately $50 have been expensed during the Company’s 2011 fiscal period. The goodwill created by the transaction primarily results from the anticipated synergies in revenue creation resulting from the combination of Jugo Juice’s strong brand and network to MTY’s expertise and experience in franchising quick service restaurant. The full amount of goodwill was deducted for tax purposes. Non-interest bearing holdbacks were discounted using a rate of 4.5%, which is the rate paid on the bank loan used to acquire the food processing plant. From August 18 to November 30, 2011, the business generated $855 in revenues and $184 in pre- tax profits. Page 33 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 6. Business acquisitions (continued) IV) 2011 acquisition On November 1, 2011, the Company’s wholly-owned subsidiary, MTY Tiki-Ming Enterprises Inc., acquired the assets of Mr Submarine Ltd. and Mr Submarine Realty Ltd. for a total consideration of $23 million. The purpose of the acquisition was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid Purchase price Discount on non-interest bearing holdback Net obligations assumed Net purchase price Holdbacks Net cash outflow The purchase price allocation is as follows: Net assets acquired: Current assets Prepaid and deposits Property, plant and equipment Franchise rights Trademark Goodwill Deferred income taxes Current liabilities Accounts payable Deferred income taxes Net purchase price $ 23,000 (272) (1,233) 21,495 2,228 19,267 417 417 332 4,745 11,307 5,957 395 23,153 1,650 1,650 8 1,658 21,495 Acquisition-related costs of approximately $50 have been expensed during the Company’s 2011 fiscal period. The goodwill created by the transaction primarily results from the anticipated synergies in revenue creation resulting from the combination of Mr Sub’s strong brand and network to MTY’s expertise and experience in franchising quick service restaurant. The full amount of goodwill was deducted for tax purposes. Non-interest bearing holdbacks were discounted using a rate of 4.5%, which is the rate paid on the bank loan used to acquire the food processing plant. From November 1 to November 30, 2011, the business generated $662 in revenues and $419 in pre- tax profits. Page 34 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 6. Business acquisitions (continued) V) 2011 acquisition On November 10, 2011, the Company’s wholly-owned subsidiary, MTY Tiki-Ming Enterprises Inc., acquired the assets of Koryo Korean BBQ Franchise Corp. for a total consideration of $1.8 million. The acquisition was effective November 1, 2011. The purpose of the acquisition was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid Purchase price Net obligations assumed Net purchase price Holdbacks Net cash outflow The purchase price allocation is as follows: Net assets acquired: Current assets Inventories Property, plant and equipment Franchise rights Trademark Current liabilities Accounts payable Unearned revenues Deferred income taxes Net purchase price $ 1,800 (33) 1,767 350 1,417 $ 2 2 20 652 1,135 1,809 13 20 33 9 42 1,767 Acquisition-related costs of approximately $10 have been expensed during the Company’s 2011 fiscal period. From November 1 to November 30, 2011, the business generated $38 in revenues and $32 in pre-tax profits. On a consolidated basis, had the four 2011 acquisitions occurred December 1, 2010, the revenues and pre-tax profits of the Company would have been approximately $96,475 and $29,069 respectively. Page 35 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 7. Cash and cash equivalents Cash Cash equivalents Total cash and cash equivalents 8. Accounts receivable November 30, November 30, December 1, 2012 $ 2011 $ 2010 $ 13,345 19,691 33,036 2,962 3,033 5,995 5,637 - 5,637 The following table sets forth details of the age of receivables that are not overdue as well as an analysis of overdue amounts and the related allowance for doubtful accounts: November 30, November 30, December 1, 2012 $ 2011 $ 2010 $ 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 Write-off Allowance for doubtful accounts end of year 14,799 1,168 13,631 8,045 2,579 676 2,331 13,631 856 692 (380) 1,168 11,352 856 10,496 8,939 783 8,156 8,024 6,245 739 256 215 1,518 10,496 783 336 (263) 856 217 1,438 8,156 754 384 (355) 783 The Company has recognized an allowance for doubtful accounts based on past experience, outlet- specific situation, counterparty’s current financial situation and age of the receivables. Trade receivables disclosed above include amounts that are past due at the end of the reporting period and for which the Company has not recognized an allowance for doubtful accounts because there was no significant change in the credit quality of the counterparty and the amounts are therefore considered recoverable. The Company does not hold any collateral or other credit enhancements over these balances nor does it have the legal right of offset against any amounts owed by the Company to the counterparty. The concentration of credit risk is limited due to the fact that the customer base is large and unrelated. Page 36 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 9. Inventories Raw materials Work in progress Finished goods Total inventories November 30, November 30, December 1, 2012 $ 2011 $ 2010 $ 1,363 34 212 1,609 1,348 27 193 1,568 646 149 - 795 Inventories are presented net of an $11 allowance for obsolescence ($26 as at November 30, 2011 and $30 as at December 1, 2010). All of the inventories are expected to be sold within the next twelve months. Inventories expensed during the year ended November 30, 2012 was $22,952 (2011 - $19,327). 10. Loans receivable The loans receivable generally result from the sales of franchises and of various advances to certain franchisees and consist of the following: Loans receivable, carrying no interest and without terms of repayment Loans receivable bearing interest between nil and 10% per annum, receivable in monthly instalments of $28 in aggregate, including principal and interest, ending in April 2017 Current portion The capital repayments in subsequent years will be: November 30, November 30, December 1, 2012 $ 2011 $ 2010 $ 31 45 - 888 919 (358) 561 1,074 1,119 (414) 705 1,245 1,245 (336) 909 2013 2014 2015 2016 2017 Thereafter $ 358 222 155 64 28 92 919 Page 37 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 11. Property, plant and equipment Leasehold improve- Land Buildings ments Equipment $ $ $ $ Computer hardware $ Rolling stock $ Total $ 1,285 2,064 3,152 1,947 392 40 8,880 - - 73 (4) 355 378 93 (819) (435) (10) - - 899 (1,268) Cost Balance at December 1, 2010 Additions Disposals Acquisition through business combinations 690 1,645 89 1,818 31 - 4,273 Balance at November 30, 2011 1,975 3,778 2,777 3,708 506 40 12,784 Additions Disposals Impairment Balance at November 30, 2012 - - - 57 392 540 81 - - (642) (111) (615) (47) (24) - - - - 1,070 (1,304) (135) 1,975 3,835 2,416 3,609 540 40 12,415 Page 38 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 11. Property, plant and equipment (continued) Accumulated depreciation Land Buildings ments Equipment $ $ $ $ Leasehold improve- Computer hardware $ Rolling stock $ Total $ Balance at December 1, 2010 Eliminated on disposal of assets Depreciation expense Balance at November 30, 2011 Eliminated on disposal of assets Depreciation expense Balance at November 30, 2012 - - - - - - - 19 1,289 501 120 10 1,939 (3) (363) (203) (4) - (573) 151 536 167 1,462 434 732 100 216 12 1,233 22 2,599 - (443) (224) (27) - (694) 178 339 345 1,358 485 993 115 304 11 1,128 33 3,033 Carrying amounts Land Buildings ments Equipment $ $ $ $ Leasehold improve- Computer hardware $ Rolling stock $ Total $ December 1, 2010 November 30, 2011 November 30, 2012 1,285 1,975 1,975 2,045 3,611 3,490 1,863 1,315 1,058 1,446 2,976 2,616 272 290 236 30 6,941 18 10,185 9,382 7 Land, buildings and equipment with a carrying amount of $3,294 as at November 30, 2012 ($3,262 as at November 30, 2011 and $nil as at December 1, 2010) have been pledged as security to secure borrowings of the Company’s food processing division. Page 39 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 12. Intangible assets Cost Balance at December 1, 2010 Acquisition through business combinations Franchise and master franchise rights(1) $ 31,375 Trademarks $ 14,799 Leases $ 1,000 Other $ 272 Total $ 47,446 8,670 17,867 - - 26,537 Balance at November 30, 2011 40,045 32,666 1,000 272 73,983 Additions (2) Reversal of impairment Acquisition through business combinations 500 - - 67 629 300 - - - 18 518 - - 67 929 Balance at November 30, 2012 41,174 33,033 1,000 290 75,497 Accumulated amortization Balance at December 1, 2010 Amortization Balance at November 30, 2011 Amortization Balance at November 30, 2012 Franchise and master franchise rights(1) $ 10,614 2,941 13,555 3,723 17,278 Trademarks $ Leases $ - - - - - 481 147 628 105 733 Other $ 143 Total $ 11,238 91 3,179 234 14,417 39 3,867 273 18,284 Page 40 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 12. Intangible assets (continued) Carrying amounts December 1, 2010 November 30, 2011 November 30, 2012 Franchise and master franchise rights(1) $ 20,761 26,490 23,896 Trademarks $ 14,799 32,666 33,033 Leases Other Total $ 129 38 17 $ 519 372 267 $ 36,208 59,566 57,213 (1) Franchise and master franchise rights include an amount of $1,500 ($1,500 in November 2011 and December 1, 2010) of unamortizable master franchise right. The master franchise right has no specific terms and is valid for as long as MTY does not default on the agreement. (2) Additions in 2012 are comprised of purchased franchise rights of $500 and purchased software of $18. Indefinite life intangibles have been allocated for impairment testing purposes to the following cash generating units: November 30, November 30, December 1, Taco Time La Crémière Croissant Plus Cultures Thai Express Mrs Vanelli’s Sushi Shop Tutti Frutti Koya Country Style Valentine Jugo Juice Mr. Sub Koryo Mr. Souvlaki 2012 $ 1,500 9 125 500 145 2,700 1,600 1,100 1,253 4,096 3,338 5,425 11,307 1,135 300 34,533 2011 $ 1,500 9 125 500 145 2,700 1,600 1,100 1,186 4,096 3,338 5,425 11,307 1,135 - 34,166 2010 $ 1,500 9 125 500 145 2,700 1,600 1,100 1,186 4,096 3,338 - - - - 16,299 Page 41 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 13. Goodwill The changes in the carrying amount of goodwill are as follows: Balance, beginning of year Goodwill acquired during the year through business acquisitions (note 6) Adjustment of purchase price following settlement of litigation (1) Balance, end of period November 30, 2012 $ 20,266 November 30, 2011 $ 7,125 - - 20,266 11,691 1,450 20,266 (1) An amount of $2,698 of post-closing adjustments was claimed to the sellers following the acquisition of Country Style Food Services Holdings Inc. In May of 2011, a settlement was reached that ended the litigation whereby MTY Tiki Ming Enterprises Inc. received a compensation of $1,247 from the sellers, which was made of $205 received in cash (note 32) and $1,042 as an offset from the remaining holdbacks and withholding taxes. The resulting adjustment was recorded as goodwill. Goodwill has been allocated for impairment testing purposes to the following cash generating units or groups of cash generating units: November 30, November 30, December 1, Food processing plant Franchising activities (1) 2012 $ 200 20,066 20,266 2011 $ 200 20,066 20,266 2010 $ - 7,125 7,125 (1) This portion of goodwill was not allocated to individual CGUs; the Company has determined that the valuation of goodwill cannot be done at the CGU level, since the strength of the network comes from grouping the many banners from which the goodwill arose from. As a result, except for the goodwill related to the acquisitions of the food processing plant, which operate relatively independently, goodwill will be tested as a whole, at the franchising operating segment level. 14. Credit facilities As at November 30, 2012, the Company has access to an authorized revolving credit facility of $10,000 and a treasury risk facility of $1,000. Bank indebtedness’s are secured by a moveable hypothec on all the assets of the Company. Page 42 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 14. Credit facilities (continued) The revolving credit facility bears interest at the bank’s prime rate for advances in C$ (or the bank’s U.S. base rate for advance in US$) plus a margin not exceeding 0.5% established based on the Company’s funded debt/EBITDA ratio. As at November 30, 2012, the bank’s prime rate was 3.25%. The treasury risk facility bears interest at the market rate as determined by the lender’s treasury department. Under the terms of the credit facilities, the Company must satisfy a funded debt to EBITDA ratio of 2 to 1 and a minimum interest coverage ratio of 4.5:1. The credit facility is payable on demand and is renewable annually. As at November 30, 2012, no amounts were drawn from the facilities and the Company is in compliance with the facility’s covenants. 15. Provisions Included in provisions are the following amounts: November 30, November 30, December 1, 2011 $ 2010 $ 2012 $ Litigations and disputes Closed stores Gift card liabilities/loyalty programs liabilities Restructuring Other Total 433 923 910 - - 2,266 195 211 493 205 46 1,150 553 196 239 - 46 1,034 The provision for litigation and disputes represent management’s best estimate of the outcome of litigations and disputes that are on-going or that are expected to happen at the date of the statement of financial position. This provision is made of multiple items; the timing of the settlement of this provision is unknown given its nature, as the Company does not control the litigation timelines. The payables related to closed stores mainly represent amounts that are expected to be disbursed to exit leases of underperforming or closed stores. The negotiations with the various stakeholders are typically short in duration and are expected to be settled within a few months following the recognition of the provision. Page 43 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 15. Provisions (continued) The gift card and loyalty programs liabilities are the estimated value in gift cards and points outstanding at the date of the statement of financial position. The timing of the reversal of this provision is dependent on customer behaviour and therefore outside of the Company’s control. The restructuring provision is made of amounts that remain payable following the restructuring of the Country Style activities that occurred during our 2011 fiscal period. This provision was fully extinguished during the third quarter of 2012 (note 25). In the provisions above, $121 was unused and reversed into income. The amounts used in the period include $393 of the provisions for restructuring and disputes and closed stores; this amount was used for the settlement of litigation and for the termination of the leases of closed stores. Additions during the year include $1,464 to the litigation and closed stores provisions. The provisions were increased to reflect new information available to management. 16. Deferred revenue and deposits November 30, November 30, December 1, 2011 $ 2010 $ 2012 $ Franchise fee deposits Deferred landlord lease incentives Supplier contributions and other allowances Current portion 1,825 72 272 2,169 (2,169) - 1,023 - 549 1,572 (1,561) 11 904 - 590 1,494 (1,485) 9 Page 44 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 17. Long-term debt November 30, November 30, December 1, 2012 $ 2011 $ 2010 $ Non-interest bearing holdbacks on acquisition Non-interest bearing holdbacks on acquisition, repayable September 2013. The effective interest rate is 4.50%. Non-interest bearing holdbacks on acquisition, repayable between February 2013 and August 2014. The effective interest rate is 4.50%. Non-interest bearing holdback on acquisition, repayable in November 2013. The effective interest rate is 4.50%. Non-interest bearing holdback on acquisition, repayable between December 2012 and November 2013 Bank loans backed by the assets of two subsidiaries Non-interest bearing holdbacks and withholding taxes on the acquisition of Country Style Food Services Holdings Inc. Non-interest bearing holdbacks on acquisition of Mr. Souvlaki, repayable September 2014 Bank loan(i) bearing interest at the bank’s prime plus 0.50%, secured by the property, plant and equipment of a subsidiary, repayable in fixed monthly capital repayments at $24 plus interest with a maturity date of November 1, 2015. As of November 30, 2012, the bank’s prime rate is 4.00% Mandatorily redeemable preferred shares(ii), non- cumulative, redeemable in three yearly instalments beginning December 2011,with redemption value based on the performance of a subsidiary - 351 810 2,399 248 - - 165 - 892 1,662 2,294 350 - - - 3,403 3,500 100 200 179 885 - - - 126 1,253 - - - Page 45 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 17. Long-term debt (continued) Non-interest bearing loans(iii) from non-controlling shareholders of subsidiaries with no terms of repayment Current portion November 30, November 30, December 1, 2012 $ 2011 $ 2010 $ - 7,476 (7,199) 277 110 9,008 (1,958) 7,050 283 2,726 (1,873) 853 (i) This loan is subject to restrictive covenants that have to be respected as at November 30, 2012. The requirements are for a subsidiary of the corporation to maintain certain working capital, interest coverage and debt to equity ratios. As of November 30, 2012, two of the covenants were not met. As a result of the breach in covenant, the debt was classified as current on the consolidated statement of financial position. (ii) The Company recorded a gain of $100 for the redemption of the preferred shares as the shares were redeemed for a value of $0 given the performance of the subsidiary. (iii) The Company recorded a gain of $110 for the loan forgiveness of a non-controlling shareholder of a subsidiary of one of its corporate stores which was franchised during the year. 18. Capital stock Authorized, unlimited number of common shares without nominal or par value November 30, 2012 December 1, 2010 November 30, 2011 Number Amount Number Amount Number Amount $ $ $ 19,120,567 19,792 19,120,567 19,792 19,120,567 19,792 Balance at beginning and end of period 19. 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, 2012. There are no options outstanding as at November 30, 2012, November 2011 or December 1, 2010. Page 46 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 20. Earnings per share The following table provides the weighted average number of common shares used in the calculation of basic earnings per share and that used for the purpose of diluted earnings per share: Weighted daily average number of common shares 19,120,567 19,120,567 November 30, November 30, 2012 2011 21. 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, 2012 Carrying amount $ Fair value $ November 30, 2011 Carrying amount $ Fair value $ December 1, 2010 Fair value $ Carrying amount $ Financial assets Cash and cash equivalents 33,036 Temporary investments - 13,631 Accounts receivable 919 Loans receivable Other receivable - Prepaid expense and 33,036 - 13,631 919 - 5,995 4,632 10,496 1,119 - 5,995 4,632 10,496 1,119 - 5,637 23,383 8,156 1,245 2,698 5,637 23,383 8,156 1,245 N/A deposits 338 338 312 312 186 186 Financial liabilities Accounts payable and accrued liabilities Long-term debt Determination of fair value 13,426 7,476 13,426 7,476 13,540 9,008 13,540 9,008 10,992 2,726 10,992 2,726 The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Cash and cash equivalents, temporary investments, accounts receivable, deposits, accounts payable and accrued liabilities - The carrying amounts approximate fair values due to the short maturity of these financial instruments. Loans receivable - The loans receivable generally bear interest at market rates and therefore it is management’s opinion that the carrying value approximates the fair value. Page 47 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 21. Financial instruments (continued) Determination of fair value (continued) Other receivable - The other receivable was the result of post-closing adjustments claimed by the Company from the sellers of Country Style Food Services Holdings Inc. in accordance with the provisions of the purchase agreement. The litigation has been settled during the second quarter of our 2011 fiscal period. 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 estimated borrowing rate for a similar debt. 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 November 30, 2012. Credit risk The Company’s credit risk is primarily attributable to its trade receivables. The amounts disclosed in the statement of financial position 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: - Other than receivables from international locations, the Company’s broad client base is spread mostly across Canada, which limits the concentration of credit risk. - The Company accounts for a specific bad debt provision when management considers that the expected recovery is less than the actual account receivable. The credit risk on cash and cash equivalents and temporary investments is limited because the Company invests its excess liquidity in high quality financial instruments and with credit-worthy counterparties. The credit risk on the loans receivable is similar to that of accounts receivable. There is currently an allowance for doubtful accounts recorded for loans receivable of $55 ($nil as at November 30, 2011 and December 1, 2010). 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, 2012, the total value of such contracts was approximately $458. Page 48 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 21. Financial instruments (continued) Foreign exchange risk (continued) Other than the above-mentioned contracts, the Company has minimal exposure to the US$ 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. As of November 30, 2012, the Company carried US$ cash of CAD$425 and had net accounts receivable of CAD$429. As a result, a 1% change in foreign exchange rates would result in a change in net comprehensive income of $9 Canadian dollars. Interest rate risk The Company is exposed to interest rate risk with regards temporary investments. Given the very short term nature of the temporary investments, the risk that changes in interest rates will cause material fluctuations in the fair value is considered limited. The Company is also exposed to interest rate risk with its revolving credit facility and treasury risk facility and a bank loan contracted by a subsidiary. Both facilities bear interest at a variable rate and as such the interest burden could potentially become more important. The line of credit is not currently used by the Company; as a result, the exposure to interest rate risk in minimal. A 100 basis points increase in the bank’s prime rate would result in additional interest of $34 per annum on the outstanding bank loan. 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, 2012: Carrying amount $ Contractual cash flows $ 0 to 6 months $ 0 to 12 months $ 12 to 24 months $ Accounts payable and accrued liabilities Long-term debt Interest on long-term debt 13,426 7,476 - 20,902 13,426 7,621 - 21,047 13,426 3,733 151 17,310 - 3,601 130 3,731 - 287 137 424 Page 49 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 22. 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 cash equivalents 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, 2012, November 30, 2011 and December 1, 2010 were as follows: Debt Equity Debt-to-equity ratio November 30, November 30, December 1, 2012 $ 30,498 106,063 0.29 2011 $ 27,518 88,110 0.31 2010 $ 17,097 75,393 0.23 During the year ended November 30, 2012, the Company has generated cash flows that have enabled it to improve its debt-to-equity ratio to 0.29. Maintaining a low debt to equity ratio is a priority in order to preserve the Company’s ability to secure financing at a reasonable cost for future acquisitions. As at November 30, 2012, the Company does not have any debt outstanding that is subject to its consolidated debt to equity ratio. Page 50 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 23. Revenues The Company’s revenues include: Royalties Initial franchise fees Rent Sale of goods, including construction revenues Other franchising revenue Other 24. Operating expenses Operating expenses are broken down as follows: Cost of goods sold and rent Wages and benefits Consulting and professional fees Royalties Other 25. Restructuring November 30, 2012 $ November 30, 2011 $ 34,483 2,890 5,173 35,132 15,163 3,379 96,220 25,671 1,852 5,865 30,432 11,024 3,514 78,358 November 30, November 30, 2012 $ 36,503 13,343 3,445 778 7,225 61,294 2011 $ 30,575 11,003 1,678 2,222 6,450 51,928 During the second quarter of 2011, the Company has undertaken a restructuring of its Country Style operations following unsatisfactory performances. The total cost of the terminations incurred at that time was $447. As at November 30, 2012, the full liability has been paid. 26. Operating lease arrangements Operating leases as lessee relate to leases of premises in relation to the Company’s operations. Leases typically have terms ranging between 5 and 10 years at inception. The Company does not have options to purchase the premises on any of its operating leases. Page 51 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 26. Operating lease arrangements (continued) 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: 2013 2014 2015 2016 2017 Thereafter Lease commitments $ Sub-leases $ Net commitments $ 49,368 46,607 42,573 37,951 32,517 84,227 293,243 47,110 44,405 40,690 36,281 31,162 80,309 279,957 2,258 2,202 1,883 1,670 1,355 3,918 13,286 Payments recognized as a net expense during the year ended November 30, 2012 amount to $8,260 (2011 - $6,681). Operating leases as lessor relate to the properties leased or owned by the Company, with lease terms ranging between 5 to 10 years. Some have options to extend the duration of the agreements, for periods ranging between 1 and 15 years. None of the agreements contain clauses that would enable the lessee or sub-lessee to acquire the property. During the year ended November 30, 2012, the company has earned rental income of $5,173 (2011 - $5,865). The Company has recognized a liability of $923 (November 30, 2011 - $211) for the leases of premises in which it no longer has operations but retains the obligations contained in the lease agreement (Note 15). 27. Commitments The Company has entered into supplier agreements for purchases of coffee beans, wheat, sugar and shortening for delivery dates ranging from December 2012 to March 2013. The total commitment amounts to approximately $1,042. 28. Guarantee The Company has provided a guarantee in the form of a letter of credit for an amount of $45 ($45 as at November 30, 2011 and December 1, 2010). Page 52 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 29. Contingent liabilities The Company is involved in legal claims associated with its current business activities. The Company’s estimate of the outcome of these claims is disclosed in Note 15. The timing of the outflows, if any, is out of the control of the Company and is as a result undetermined at the moment. 30. 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: Combined income tax rate Add effect of: Impact of disposition of capital property Non-deductible items Losses in a subsidiaries for which no deferred income tax asset was recorded Change in applicable tax rate Adjustment to prior year provisions Other – net Provision for income taxes November 30, 2012 November 30, 2011 $ 8,205 % 26.9 $ 6,458 % 28.3 (69) 26 (46) (200) 543 (9) 8,450 (0.2) 0.1 (0.2) (0.7) 1.8 0.0 27.7 (134) 16 (114) 218 (142) (1) 6,301 (0.6) 0.1 (0.5) 0.9 (0.6) (0.0) 27.6 The statutory tax rate has decreased in 2012 as a result of the reduction in the applicable Federal tax rate. Included in the adjustment to prior year provisions is an amount of $171 in deferred income taxes resulting from an income tax reassessment, while $372 is an adjustment to current income taxes. The variation in deferred income taxes during the year were as follows: 2012 Net deferred tax assets (liabilities) in relation to: Property, plant and equipment Provisions Holdbacks Non-capital losses Intangible assets November 30, 2011 Recognized in profit or loss Acquisition November 30, 2012 (302) 417 (85) 50 (2,258) (2,178) 506 40 46 82 (613) 61 - - - - (14) (14) 204 457 (39) 132 (2,885) (2,131) Page 53 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 30. Income taxes (continued) 2011 Net deferred tax assets (liabilities) in relation to: Property, plant and equipment Provisions Holdbacks Revenue recognition Non-capital losses Intangible assets December 1, 2010 Recognized in profit or loss Acquisitions Other November 30, 2011 55 279 (22) (39) 3,562 (3,719) 116 (447) 138 19 39 (3,512) 419 (3,344) 90 - (82) - - 981 989 - - - - - 61 61 (302) 417 (85) - 50 (2,258) (2,178) Included in deferred income taxes are non-capital losses of a subsidiary which suffered a loss in its previous fiscal period. The realization of the $132 deferred income tax asset is dependent on the realization of future taxable profits. The Company is confident that sufficient taxable income will be generated to use the non-capital losses. As at November 30, 2012 there were approximately $6,706 of capital losses which may be applied against capital gains for future years and be carried forward indefinitely. The deferred income tax benefit of these capital losses has not been recognized. As at November 30, 2012, there were approximately $110 (2011- $60) in non-capital losses accumulated in one of the Company’s subsidiaries for which no deferred income tax asset was recognized. These losses will expire in 2030 and 2031. The deductible temporary difference in relation to an investment in a subsidiary for which a deferred tax asset has not been recognized amounts to $120 (2011 - $28). 31. Segmented information The Company’s activities are comprised of Franchise operations, Corporate store operations, Distribution operations and Food processing operations. Operating segments were established based on the differences in the types of products or services offered by each division. The products and services offered by each segment are as follows: Franchising operations The franchising business mainly generates revenues from royalties, supplier contributions, franchise fees, rent and the sale of turnkeys. Corporate store operations Corporate stores generate revenues from the direct sale of prepared food to customers. Page 54 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 31. Segmented information (continued) Distribution operations The distribution operations generate revenues by distributing raw materials to restaurants of our Valentine and Franx banners. Food processing operations The Food processing plant generates revenues from the sale of ingredients and prepared food to restaurant chains, distributors and retailers. Below is a summary of each segment’s performance during the periods. For the year ended November 30, 2012: Franchising $ Corporate Distribution $ $ Processing $ Inter- company $ 6,076 5,630 446 8,051 7,970 81 (990) (990) – Operating revenues Operating expenses Other expenses Depreciation - property, plant and equipment Amortization – intangible assets Interest on long-term debt Other income Foreign exchange (loss) gain Interest income Gain on preferred share redemption Gain on shareholder loan forgiveness Impairment of property, plant and equipment Gain on disposal of property, plant and equipment Operating income Current income taxes Deferred income taxes Net income and comprehensive income Total assets Total liabilities 70,909 36,332 34,577 436 3,867 173 (28) 282 – – 67 566 30,988 8,581 56 22,351 128,457 25,385 12,174 12,352 (178) 441 – – – – – 110 (135) (55) (699) (188) (64) (447) 2,988 429 Page 55 of 66 Total $ 96,220 61,294 34,926 1,128 3,867 335 (27) 282 100 110 (68) 511 30,504 8,511 (61) 22,054 – – – – – – – – – – – – – (1,617) 136,561 (142) 30,498 8 – – – – – – – – 438 118 – 320 1,296 508 243 – 162 1 – 100 – – – (223) – (53) (170) 5,437 4,318 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 31. Segmented information (continued) For the year ended November 30, 2011: Franchising $ Corporate Distribution $ $ Processing $ Inter- company $ Total $ Operating revenues Operating expenses Other expenses Depreciation - property, plant and equipment Amortization – intangible assets Restructuring Interest on long-term debt Other income Foreign exchange gain Interest income Gain on bargain purchase Gain on disposal of property, plant and equipment Operating income Current income taxes Deferred income taxes Net income and comprehensive income Total assets Total liabilities 55,954 30,234 25,720 617 3,179 447 63 18 357 – 948 22,737 2,807 3,470 16,460 108,432 22,285 10,775 10,728 47 401 – – 9 – – – – (363) – (103) (260) 3,604 637 6,063 5,528 535 6,330 6,202 128 (764) (764) – 78,358 51,928 26,430 1,233 3,179 447 213 18 357 140 948 22,821 2,957 3,344 16,520 – – – – – – – – – – – – (1,866) 115,628 – 27,518 7 – – – – – – – 528 150 – 378 1,163 409 208 – – 141 – – 140 – (81) – (23) (58) 4,295 4,187 During the year ended November 30, 2012, two customers of the food processing segment respectively accounted for 25% and 13% of the revenues of the segment. None of the other segments had customers who represented more than 10% of their revenues. Page 56 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 32. Statement of cash flows Net changes in non-cash working capital balances relating to continuing operations are as follows: Accounts receivable Inventories Loans receivable Other receivable (note 13) Prepaid expenses and deposits Accounts payable and accrued liabilities Provisions November 30, November 30, 2012 $ 2011 $ (3,135) (41) 200 – (26) (116) 1,116 (2,002) (2,340) (385) 248 205 331 (1,080) 116 (2,905) The Company acquired the remaining control in one of the corporate stores through a non-cash transaction. This resulted in a reversal of NCI of $26 which is not reflected in the consolidated statements of cash flows. 33. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation. Details of transactions between the Company and other related parties are disclosed below. Compensation of key management personnel The remuneration of key management personnel and directors during the period was as follows: Short-term benefits Post-employment benefits, share-based payments and other long-term benefits Board member fees Total remuneration of key management personnel November 30, 2012 $ November 30, 2011 $ 659 – 40 699 581 – 40 621 Key management personnel is composed of the Company’s CEO, COO and CFO. The remuneration of directors and key executives is determined by the Board of directors having regard to the performance of individuals and market trends. Given its widely held share base, the Company does not have an ultimate controlling party; its most important shareholder is its CEO, who controls 26% of the outstanding shares. Page 57 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 33. Related party transactions (continued) The Company also pays employment benefits to individuals related to members of the key management personnel described above. Their total remuneration was as follows: November 30, 2012 $ November 30, 2011 $ Short-term benefits Post-employment benefits, share-based payments and other long-term benefits Total remuneration of individuals related to key management personnel 472 – 472 447 – 447 A corporation owned by individuals related to key management personnel has participation in two of the Company’s subsidiaries. During the year ended November 30, 2012, dividends of nil (2011- $140) were paid by those subsidiaries to the above-mentioned company, and advances of nil (2011- $78) were repaid. During the year, one of the Company’s subsidiaries loan payable was forgiven by two members for an amount of $50. 34. Transition to IFRS Our accounting policies presented in Note 3, Significant accounting policies, have been applied in preparing the consolidated financial statements for the year ended November 30, 2012, the comparative information for the year ended November 30, 2011 and the opening statement of financial position at December 1, 2010. First-time adoption elections As the burden of issuers adopting IFRS for the first time could be significant, IFRS 1 provides for a limited number of mandatory exceptions required to apply the mandatory exceptions, but they have a choice to apply or not the optional exemptions. The Company has applied all mandatory exceptions and has applied certain of the optional exemptions, resulting in the prospective application of IFRS related to these exceptions and exemptions. The following are the transition optional exemptions which have been applied: a. The Company has elected not to apply IFRS 3 – Business combinations retrospectively to business combinations that occurred prior to transition date. b. The Company has elected not to apply IFRS 2 – Share-based payment for equity settled share- based payments granted on or before November 7th, 2002, nor to share-based payments granted after November 7th, 2002 but that vested before the date of transition. c. The Company has elected not to apply IAS 32 – Financial Instruments: Presentation to its compound financial instruments for which the liability component did not exists at the transition date. d. The Company has elected not to apply IAS 37 – Provision, contingent liabilities and contingent assets, to its decommissioning liabilities retrospectively to changes in such liabilities that occurred before the date of transition. Page 58 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) The following tables and accompanying notes provide explanations on how the transition from previous GAAP to IFRS impacted the Company’s financial position, financial performance and cash flows. Reconciliation of the consolidated statement of financial position as at December 1, 2010 Canadian Reclassi- Notes GAAP fications Adjustments Assets Current assets Cash and cash equivalents Temporary investments Accounts receivable Inventories Franchise locations under construction Loans receivable Prepaid expenses and deposits Deferred income taxes Loans receivable Other receivable Property, plant and equipment Intangible assets Deferred income taxes Goodwill Liabilities Current liabilities Accounts payable and accrued liabilities Provisions Income taxes payable Deferred revenue and deposits Current portion of long-term debt a a a bd de a Deferred revenue and deposits Long-term debt Deferred income taxes Non-controlling interest g abdefg Shareholders’ equity Equity attributable to owners Capital stock Contributed surplus Retained earnings Equity attributable to non- controlling interest $ $ $ 5,637 23,383 7,577 645 1,091 336 186 3,562 42,417 909 2,698 7,138 36,266 - 7,125 96,553 12,530 - 851 1,485 1,873 16,739 9 930 2,606 72 20,356 19,792 481 55,924 76,197 - 76,197 96,553 - - - 150 (150) - - (3,562) (3,562) - - - - 116 - (3,446) (1,034) 1,034 - - - - - - (3,446) (72) (3,518) - - - - 72 72 (3,446) - - 579 - (941) - - - (362) - - (197) (58) - - (617) (504) - - - - (504) - (77) 840 - 259 - - (876) (876) - (876) (617) Page 59 of 66 IFRS $ 5,637 23,383 8,156 795 - 336 186 - 38,493 909 2,698 6,941 36,208 116 7,125 92,490 10,992 1,034 851 1,485 1,873 16,235 9 853 - - 17,097 19,792 481 55,048 75,321 72 75,393 92,490 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) Reconciliation of the consolidated statement of financial position as at November 30, 2011 Canadian Reclassi- Notes GAAP fications Adjustments Assets Current assets Cash and cash equivalents Temporary investments Accounts receivable Income taxes receivable Inventories Franchise locations under construction Loans receivable Prepaid expenses and deposits Deferred income taxes Loans receivable Property, plant and equipment Intangible assets Deferred income taxes Goodwill Liabilities Current liabilities Accounts payable and accrued liabilities Provisions Deferred revenue and deposits Current portion of long-term debt a a a bcd de f fg a g Deferred revenue and deposits Long-term debt Deferred income taxes g bcdefg Shareholders’ equity Equity attributable to owners Capital stock Contributed surplus Retained earnings Equity attributable to non- controlling interest c $ $ $ 5,995 4,632 9,549 1,419 1,540 1,202 414 312 440 25,503 705 10,180 59,624 1,531 19,509 117,053 14,908 - 1,561 1,982 18,451 11 7,343 2,337 28,142 19,792 481 68,637 88,910 - 88,911 117,053 - - - - 28 (28) - - (440) (440) - - - (564) - (1,004) (1,140) 1,150 - - 10 - - (1,004) (994) - - - - (10) (10) (1,004) - - 947 - - (1,174) - - - (227) - 5 (58) (897) 757 (420) (228) - - (24) (252) - (293) 915 370 - - (837) (837) 47 (790) (420) IFRS $ 5,995 4,632 10,496 1,419 1,568 - 414 312 - 24,836 705 10,185 59,566 70 20,266 115,628 13,540 1,150 1,561 1,958 18,209 11 7,050 2,248 27,518 19,792 481 67,800 88,073 37 88,110 115,628 Page 60 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) Reconciliation of the consolidated statement of comprehensive income for the year ended November 30, 2011: Canadian Reclassi- Notes GAAP fications Adjustments $ $ $ IFRS $ Revenues Expenses Operating expenses Depreciation – property, plant and equipment Amortization – intangible assets Restructuring Interest on long-term debt Other income Gain (loss) on foreign exchange Interest income Gain on bargain purchase Gain (loss) on disposal of property, plant and equipment Income before taxes Income taxes Current Deferred a a bc g c b f Net income and comprehensive income 78,465 51,819 1,262 3,179 447 150 56,858 18 357 - 858 1,233 22,841 2,957 3,467 6,424 16,417 Net income and comprehensive income attributable to: Owners Non-controlling interest 16,154 263 16,417 Basic and diluted earnings per share (Note 20) 0.84 - - - - - - - - - - - - - - - - - - - - (107) 78,358 109 51,928 (29) - - 63 143 - - 140 90 230 (20) - (123) (123) 103 40 63 103 1,233 3,179 447 213 57,000 18 357 140 948 1,463 22,821 2,957 3,344 6,301 16,520 16,194 326 16,520 0.85 Page 61 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) Notes to the reconciliation tables: a. Franchise locations under construction held for resale Under IAS 11, the Company is required to use the percentage of completion method to recognize revenues and expenses on projects for which construction is in progress, whereas under Canadian GAAP the completion method was used to recognize such revenues and expenses. When retrospectively applying IAS 18, the Company increased revenues and expenses and impacted accounts receivable, accrued liabilities and retained earnings in the process, while creating a reduction in the amount capitalized for such projects on the statement of financial position. Statement of comprehensive income Change in revenues Change in operating expenses Change in income before taxes Statement of financial position Change in accounts receivable Change in inventories Change in franchise locations under construction held for resale Change in accounts payable and accrued liabilities Change in deferred income tax liability November 30, 2011 $ (107) 109 (216) November 30, 2011 $ December 1, 2010 $ 947 28 579 150 (1,202) (1,091) (228) - (504) 39 Page 62 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) b. Property, plant and equipment As part of the conversion to IAS 16, the Company identified different components for some items of property, plant and equipment and therefore adjusted its depreciation methods to reflect the consumption pattern of these components. Statement of comprehensive income Change in depreciation of property, plant and equipment Change in gains (losses) on disposals of assets Change in income before taxes Statement of financial position Change in property, plant and equipment Change in deferred income tax liability November 30, 2011 $ (34) 90 124 November 30, 2011 $ December 1, 2010 $ 32 (8) (35) (9) c. Bargain purchase In December 2010, the Company, through a subsidiary, acquired a food processing plant; in the transaction the fair value of the assets acquired, as determined by an independent evaluator, exceeded the consideration paid. Under previous GAAP, the discrepancy was allocated over non-monetary assets as a proportion of their carrying value; under IFRS 3, such discrepancy is recorded as a gain on the statement of comprehensive income. This results in higher property, plant and equipment and therefore has an impact on deferred income taxes. Because the Company owns 51% of the subsidiary, the gain on the bargain purchase and the increase in the depreciation of the identifiable assets acquired with finite useful lives it created have an impact on the equity attributable to non-controlling interest. Statement of comprehensive income Gain on bargain purchase Change in depreciation of property, plant and equipment Change in income before taxes November 30, 2011 $ 140 5 135 Page 63 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) Statement of financial position Change in property, plant and equipment Change in deferred income tax liability Equity attributable to non-controlling interest d. Impairment of assets November 30, 2011 $ December 1, 2010 $ 135 28 47 - - - At transition date, the Company had to perform impairment tests on its assets based on discounted cash flows, as required by IAS 36, whereas under Canadian GAAP, the primary tests for assets with a finite life were performed using undiscounted cash flows. This resulted in impairments being recorded on one of the Company’s trademarks as well as on some property, plant and equipment used for corporate restaurant operations. Statement of financial position Change in property, plant and equipment Change in intangible assets Change in deferred income tax liability e. Intangible assets November 30, 2011 $ (162) (67) (64) December 1, 2010 $ (162) (67) (64) Under IFRS, intangible assets with indefinite useful lives are not amortized but tested at least annually for impairment. IAS 38, Intangible assets, requires retrospective application of those requirements. Under Canadian GAAP, those assets were amortized until November 30, 2002 and transitional provisions did not require the reversal of amortization previously recorded. Therefore, at the date of transition, the Company reversed all amortization recorded in respect of intangible assets with indefinite lives. The impact of the change is as follows: Statement of financial position Change in intangible assets Change in deferred income tax liability November 30, 2011 $ December 1, 2010 $ 9 2 9 2 Page 64 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) f. Deferred income tax assets and liabilities The retrospective application of IAS 12 resulted in decreases in deferred income taxes assets and increases in deferred income tax liabilities, mainly as a result of the accounting treatment of permanent differences between accounting and tax values on certain intangible assets and goodwill. Statement of comprehensive income Change in deferred income taxes Statement of financial position Change in goodwill Change in deferred income tax liability Change in deferred income tax asset g. Long-term debt November 30, 2011 $ (90) November 30, 2011 $ December 1, 2010 $ 980 872 (897) - 848 - Under IAS 39, holdbacks on business acquisitions are required to be discounted using an interest rate similar to one the Company could obtain on open markets. Under previous GAAP, the effective interest method was not used because the timing of the cash outflows could not be easily determined in cases in which the holdbacks were to be applied against transactions prescribed in the asset purchase agreements. The resulting adjustment reduces the value of the consideration paid (lower value attributed to holdbacks) and therefore reduces the amount of goodwill on the transactions. It also gives rise to periodic interest charges and the resulting deferred income tax impact. Statement of comprehensive income Interest on long-term debt November 30, 2011 $ 63 Page 65 of 66 MTY FOOD GROUP INC. Notes to the consolidated financial statements As at November 30, 2012 (in thousands of Canadian dollars except per share amounts) 34. Transition to IFRS (continued) Statement of financial position Change in goodwill Change in long-term debt Change in deferred income tax liability h. Goodwill November 30, 2011 $ December 1, 2010 $ (223) (317) 85 - (77) 22 Goodwill was impacted by the variations of the deferred income tax assets and liabilities described in Note f. above relating to acquisitions realised during the 2010 and 2011 fiscal periods. It was also impacted by the difference in the recognized amounts for holdbacks, described in Note g. above. Goodwill being the difference between the consideration paid and the fair value of the identifiable net assets acquired (which include deferred income taxes), variations in the value of deferred income taxes result in direct impacts on the value attributed to goodwill. Other than the transition to IAS12, the Company has chosen not to present the income tax impact of the other reconciling items presented above. Reconciliation of the statement of cash flows There were no material changes to the statement of cash flows on adoption of IFRS other than the changes to presentation of certain elements, including interest on long-term debt and income taxes. 35. Subsequent events On January 23, 2013, the Company declared dividends of $0.07 per share payable February 15, 2013. This will result in a total payment of $1,338. Page 66 of 66 

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