Report of Independent Registered Public Accounting Firm
EXHIBIT 99.1
_____________________________________________________________________________________________________________________________________________
Report of Independent Registered Public Accounting Firm
To the Partners of TIMWEN Partnership
We have audited the accompanying balance sheets of TIMWEN Partnership as of January 2, 2011 and January 3, 2010, and the related statements of income and comprehensive income, partners’ equity and cash flows for the years then ended. These financial statements are the responsibility of the partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TIMWEN Partnership at January 2, 2011 and January 3, 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
March 3, 2011
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.
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TIMWEN Partnership
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Balance Sheet
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January 2, 2011
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January 3, 2010
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Assets
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Revenue-producing properties
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$ | 78,769,169 | $ | 83,077,625 | ||||
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Cash and cash equivalents
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1,639,055 | 74,876 | ||||||
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Accounts receivable
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4,529,085 | 4,988,910 | ||||||
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Investment in Grimsby Food Court Ltd.
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2,374,589 | 2,513,657 | ||||||
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Prepaid rent
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625,957 | 637,155 | ||||||
| $ | 87,937,855 | $ | 91,292,223 | |||||
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Liabilities
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Accounts payable and accrued liabilities
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$ | 2,169,089 | $ | 2,257,466 | ||||
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Deferred lease inducements
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3,667,963 | 3,961,036 | ||||||
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Straight-line rent
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5,670,879 | 5,119,497 | ||||||
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Commitments and contingencies
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11,507,931 | 11,337,999 | ||||||
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Partners' equity
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76,429,924 | 79,954,224 | ||||||
| $ | 87,937,855 | $ | 91,292,223 | |||||
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Approved by the Partners,
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Xxxxx's Restaurants of Canada Inc.
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Barhav Developments Ltd.
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TIMWEN Partnership
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Statements of Income and Comprehensive Income
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Year Ended
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Year Ended
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January 2, 2011
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January 3, 2010
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Revenues
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Rental income
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$ | 38,361,003 | $ | 38,471,112 | ||||
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Expenses
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Rental expense - net of lease inducements
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8,216,495 | 5,979,952 | ||||||
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Operating expenses
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520,244 | 424,966 | ||||||
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Depreciation and amortization
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4,794,250 | 4,252,157 | ||||||
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Loss on retirement of revenue producing properties
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59,312 | 459,367 | ||||||
| 13,590,301 | 11,116,442 | |||||||
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Operating income for the year
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24,770,702 | 27,354,670 | ||||||
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Other income
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Interest income
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16,886 | 23,171 | ||||||
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Equity in income of Grimsby Food Court Ltd.
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180,933 | 140,524 | ||||||
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Other income
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7,179 | 13,995 | ||||||
| 204,998 | 177,690 | |||||||
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Net income and comprehensive income
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$ | 24,975,700 | $ | 27,532,360 | ||||
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TIMWEN Partnership
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Statement of Partners' Equity
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Year Ended
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Year Ended
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January 2, 2011
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January 3, 2010
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Xxxxx's
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Barhav
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Restaurants of
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Developments
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Canada Inc.
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Ltd.
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Total
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Total
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Partners equity - beginning of year
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$ | 39,977,112 | $ | 39,977,112 | $ | 79,954,224 | $ | 85,421,864 | ||||||||
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Distributions to partners
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(14,250,000 | ) | (14,250,000 | ) | (28,500,000 | ) | (33,000,000 | ) | ||||||||
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Net income for the year
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12,487,850 | 12,487,850 | 24,975,700 | 27,532,360 | ||||||||||||
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Partners' equity - end of year
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$ | 38,214,962 | $ | 38,214,962 | $ | 76,429,924 | $ | 79,954,224 | ||||||||
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TIMWEN Partnership
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Statement of Cash Flows
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Year Ended
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Year Ended
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January 2, 2011
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January 3, 2010
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Cash provided by (used in)
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Operating activities
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Net income for the year
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$ | 24,975,700 | $ | 27,532,360 | |||||
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Add:
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Items not affecting cash -
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Depreciation and amortization
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4,794,250 | 4,252,157 | |||||||
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Straight-line rent
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551,382 | (1,486,640 | ) | ||||||
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Amortization of deferred lease inducements
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(293,073 | ) | (293,073 | ) | |||||
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Distributions received from Grimsby
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320,000 | 160,000 | |||||||
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Loss on retirement of revenue producing properties
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59,312 | 459,367 | |||||||
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Equity in earnings of investment in Grimsby
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(180,932 | ) | (140,524 | ) | |||||
| 30,226,639 | 30,483,647 | ||||||||
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Change in operating assets and liabilities
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Accounts receivable
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459,825 | (1,650,073 | ) | ||||||
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Prepaid rent
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11,198 | (27,666 | ) | ||||||
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Accounts payable and accrued liabilities
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(88,377 | ) | (263,838 | ) | |||||
| 30,609,285 | 28,542,070 | ||||||||
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Investing activities
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Additions to revenue producing properties
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(545,106 | ) | (530,528 | ) | |||||
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Financing activities
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Distributions to partners
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(28,500,000 | ) | (33,000,000 | ) | |||||
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Change in cash and cash equivalents
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1,564,179 | (4,988,458 | ) | ||||||
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Cash and cash equivalents - Beginning of year
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74,876 | 5,063,334 | |||||||
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Cash and cash equivalents - End of year
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$ | 1,639,055 | $ | 74,876 | |||||
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TIMWEN Partnership
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Notes to Financial Statements
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January 2, 2011 and January 3, 2010
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1.
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Nature of operations
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The TIMWEN Partnership is between Barhav Developments Limited (a wholly owned subsidiary of TDL Group Corp. Ltd. (TDL)) and Xxxxx's Restaurants of Canada Inc. (WROC), and was formed in 1995. The partnership develops and leases restaurant facilities to WROC and TDL.
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Fiscal Year
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The partnership's fiscal year ends on the Sunday nearest to December 31. The 2010 and 2009 fiscal years consisted of 52 weeks and 53 weeks, respectively.
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2.
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Summary of significant accounting policies partnership accounts
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Partnership accounts
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The accompanying financial statements include only the assets and liabilities of the business carried on under the name of TIMWEN partnership and do not include the other assets, liabilities, revenues and expenses of the partners. No provision for income taxes has been made in these financial statements since earnings of the partnership are taxable in the hands of the partners.
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Basis of presentation
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The partnership prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP). In the opinion of management, the partnership's financial statements and accompanying notes to the financial statements contain all adjustments (all of which are normal and recurring in nature, other than the item described in Note 3) necessary to state fairly the partnership's financial position as of January 2, 2011 and January 3, 2010, and it results of operations, comprehensive income, and cash flows for the years ended January 2, 2011 and January 3, 2010.
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The functional currency of the partnership is local currency in which it operates, which is the Canadian dollar, as the majority of the partnership's operations and cash flows are based in Canada and the partnership's operations are primarily managed in Canadian dollars. As a result, the partnership's reporting currency is the Canadian dollar.
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Cash and cash equivalents
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Cash and cash equivalents includes balances with banks. Cash equivalents are short-term, highly liquid investments with maturities of three months or less and consist principally of cash in bank money market accounts.
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Revenue-producing properties
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Revenue producing properties are stated at acquisition cost, less accumulated depreciation and amortization. Acquisition cost is comprised of land acquisition and building construction costs including interest expense on land acquisition and building construction costs during the period of construction. Depreciation and amortization is provided for on the straight-line basis over the estimated useful lives of the assets at the following rates:
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Buildings
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Up to 40 years
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Leasehold Improvements and deferred design costs and other
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The lesser of the useful life of the asset or the lease term.
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Construction-in-progress
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Stated at cost and is not amortized
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Long-lived Assets
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Long-lived assets are analyzed for impairment at the individual restaurant level, which represents the lowest level of independent cash flows for the business. They are tested for impairment whenever an event or circumstance occurs that indicates impairment may exist including a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of prior to its estimated useful life. There were no such events noted in the current or prior year.
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Leases
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The partnership's leases from TDL and third parties are classified as either operating leases or capital leases for financial reporting purposes. When determining the lease term for operating and capital leases, the partnership includes renewal periods for which failure to renew the lease imposes an economic penalty in such an amount that a renewal appears, at the inception of the lease, to be reasonably assured. The primary penalty to which the partnership is subject, is the economic detriment associated with the existence of leasehold improvements that might be impaired if the partnership chooses not to exercise the available renewal options.
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For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as rent expense on a straight-line basis (straight-line rent) over the applicable lease terms and any periods during which the partnership has the use of the property but is not charged rent by a landlord. See Note 3 for a correction of an out of period adjustment for straight-line rent in 2009. Lease terms are generally for 20 years and, in most cases, provide for rent escalations and renewal options.
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Investment in Grimsby Food Court Ltd.
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The investment in the Grimsby Food Court Ltd. is accounted for as an equity investment. The investment is analyzed for other than temporary impairment where evidence exists that there is an inability to recover the carrying amount of the investment or inability to sustain an earnings capacity that would justify the carrying amount of the investment. No such indicator was noted in the current or prior year.
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Deferred lease inducements
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Lease inducements are leasehold improvements paid by landlords and are recorded as a liability and amortized as a reduction in rent expense. They are deferred and amortized on a straight-line basis over the "lease term" to a maximum of 20 years.
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Revenue Recognition
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Rental revenue is recognized on a percentage of sales volume and is recognized as earned.
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Income Taxes
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The accompanying financial statements do not include a provision for taxes as they are the responsibility of the respective partners.
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Use of estimates
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The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates.
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Subsequent events
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The partnership has evaluated events subsequent to January 2, 2011 and up to March 2, 2011, which corresponds the date these financial statements were issued (or available to be issued).
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Newly adopted accounting pronouncements
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In June 2009, the FASB issued guidelines on the consolidation of variable interest entities which alters how a company determines when an entity that is insufficiently capitalized or not controlled through voting interests should be consolidated. A company has to determine whether it should provide consolidated reporting of an entity based upon the entity's purpose and design and the parent company's ability to direct the entity's actions. This guidance was effective commencing for the partnership's 2010 fiscal year. The adoption of this guidance did not have a significant impact on the partnership's financial statements.
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In January 2010, the FASB issued amendments to the existing fair value measurements and disclosures guidance which requires new disclosures and clarifies existing disclosure requirements. The purpose of these amendments is to provide a greater level of disaggregated information, as well as more disclosure around valuation techniques and inputs to fair value measurements. The guidance was effective commencing with our 2010 fiscal year. The adoption of this guidance did not have a significant impact on the partnership's financial statements.
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3.
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Straight-line rent - Out of period adjustment
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In 2009 the partnership recorded an adjustment related to the calculation of straight-line rent, which is included in "Rental expense - net of lease inducements" in the Statement of Income and Comprehensive Income. Correcting the error increased net income and comprehensive income by $1,600,000 related to years prior to 2009.
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Since this error was not material to any of the prior years' or current year's financial statements, the partnership recorded the correction of this error in the 2009 financial statements.
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4.
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Revenue-producing properties
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January 2, 2011
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January 3, 2010
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Accumulated
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depreciation and
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Cost
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amortization
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Net
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Net
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Land
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$ 21,231,151
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$ -
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$ 21,231,151
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$ 21,231,151
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Buildings
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34,295,719
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14,089,225
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20,206,494
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21,352,777
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Leasehold improvements
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66,157,767
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30,311,298
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35,846,469
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38,954,270
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Deferred design, construction costs and other
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2,354,402
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990,178
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1,364,224
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1,507,630
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124,039,039
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45,390,701
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78,648,338
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83,045,828
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Construction-in-progress
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120,831
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-
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120,831
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31,797
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$ 124,159,870
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$ 45,390,701
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$ 78,769,169
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$ 83,077,625
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5.
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Related party transactions and balances
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During the year, the partnership had the following transactions with related parties.
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January 2, 2011
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January 3, 2010
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Rental Income
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TDL
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$ 24,017,601
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$ 23,690,191
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WROC
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14,343,402
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14,780,921
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$ 38,361,003
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$ 38,471,112
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Amounts included in Accounts Receivable
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TDL
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$ 2,595,092
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$ 2,544,608
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WROC
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1,933,993
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2,444,302
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$ 4,529,085
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$ 4,988,910
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Management Fee
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TDL - included in revenue producing properties
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$ 205,650
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$ 159,950
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WROC - included in operating expenses
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$ 275,000
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$ 273,313
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Related party rental expense
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TDL
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$ 227,422
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$ 241,257
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Amounts included in Accounts Payable
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TDL
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$ 122,648
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$ 522,733
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WROC
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70,036
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-
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$ 192,685
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$ 522,733
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These transactions are in the normal course of operations.
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The amounts due from the partners, which have arisen as a result of the above transactions, are non-interest bearing and due on demand.
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6.
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Deferred lease inducements
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January 2, 2011
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January 3, 2010
|
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Accumulated
|
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Cost
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amortization
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Net
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Net
|
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Deferred lease inducements
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$ 6,679,525
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$ 3,011,562
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$ 3,667,963
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$ 3,961,036
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7.
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Leases
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Minimum lease payments under long-term operating lease agreements for various properties are as follows:
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2011
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$ 7,526,000
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2012
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$ 7,466,000
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2013
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$ 7,583,000
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2014
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$ 7,621,000
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2015
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$ 7,629,000
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2016 and thereafter
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$ 39,413,000
|
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Total
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$ 77,238,000
|
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The minimum lease payments include $41,068,000 related to renewal periods reasonably assured of being exercised.
|
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All leased locations are subleased to WROC or to TDL at amounts based on restaurant revenues.
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8.
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Financial instruments
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Due to their short-term maturities, the carrying value of the partnership's cash and cash equivalents, accounts receivable as well as accounts payable and accrued liabilities approximate their estimated fair value.
|
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9.
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Commitments and contingencies
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The Partnership is party to various legal actions and complaints arising in the ordinary course of business. It is the opinion of the partnership's management that the ultimate resolution of such matters will not materially affect the partner's financial condition or earnings.
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10.
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Comparative Figures
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Certain comparative figures have been reclassified to conform to the current year's financial statement presentation.
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