10-Q

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

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

For the quarterly period ended April 2, 2006

OR

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

For the transition period from                      to                     

Commission File Number 001-32843

TIM HORTONS INC.

(Exact name of Registrant as specified in its charter)

Delaware	51-0370507
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

874 Sinclair Road, Oakville, ON, Canada	L6K 2Y1
(Address of principal executive offices)	(Zip code)

905-845-6511
(Registrant’s phone number, including area code)

N/A

               (Former name, former address and former               

fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes o No þ.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ.

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

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

Class	Outstanding at May 10, 2006
Common shares, US$0.001 par value per share	193,302,977 shares

Exhibit Index on page 47.

2

TIM HORTONS INC. AND SUBSIDIARIES
INDEX

	Pages
PART I: Financial Information
Item 1. Financial Statements (Unaudited):		5
Condensed Consolidated Statements of Operations for the quarters ended April 2, 2006 and April 3, 2005		5
Condensed Consolidated Balance Sheets as of April 2, 2006 and January 1, 2006		6
Condensed Consolidated Statements of Cash Flows for the quarters ended April 2, 2006 and April 3, 2005		8
Notes to the Condensed Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures about Market Risk		42
Item 4. Controls and Procedures		42
PART II: Other Information
Item 1A. Risk Factors		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 6. Exhibits		45
Signature		46
Index to Exhibits		47
Exhibit 10(a) Amendment No. 1 to Senior Credit Facilities Agreement, attached to and filed with the Form 8-K filed by the Issuer with the SEC on April 27, 2006 is hereby incorporated herein by reference.
Exhibit 10(a)(i) Form of Restricted Stock Unit Conversion Award Agreement		48
EX-10.A.I
EX-31.A
EX-31.B
EX-32.A
EX-32.B
EX-99

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	Pages
Exhibit 10 (b) Tim Hortons Inc. 2006 Stock Incentive Plan, attached to and filed with the Form S-8 filed by the Issuer with the SEC on May 1, 2006 is hereby incorporated herein by reference.
Exhibit 31(a)		53
Exhibit 31(b)		54
Exhibit 32(a)		55
Exhibit 32(b)		56
Exhibit 99		57

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TIM HORTONS INC. AND SUBSIDIARIES

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	First quarter			First quarter
	Ended			Ended
	April 2,			April 3,
	2006			2005
	(Unaudited)
	(Canadian dollars in thousands,
	except share data)
Revenues
Sales	$	242,651		$	209,296
Franchise revenues
Rents and royalties		115,524			102,056
Franchise fees		14,583			12,237
		130,107			114,293
Total revenues		372,758			323,589
Costs and expenses
Cost of sales		213,912			183,067
Operating expenses		42,995			38,194
Franchise fee costs		13,917			12,036
General and administrative expenses		28,286			25,463
Equity (income)		(8,453	)		(7,606	)
Other (income) expense, net		(1,010	)		(74	)
Total costs and expenses, net		289,647			251,080
Operating income		83,111			72,509
Interest (expense)		(4,116	)		(853	)
Interest income		2,429			752
Affiliated interest (expense), net		(6,789	)		(1,754	)
Income before income taxes		74,635			70,654
Income taxes		11,045			23,153
Net income	$	63,590		$	47,501
Basic and fully dilutive earnings per share of common stock	$	0.39		$	0.30
Weighted average number of shares of common stock outstanding — basic and fully dilutive		161,785,395			159,952,977

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	April 2,		January 1,
	2006		2006
	(Unaudited)
	(Canadian dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	978,075	$	186,182
Accounts receivable, net		89,425		85,695
Notes receivable, net		12,741		11,545
Deferred income taxes		6,228		4,273
Inventories and other		47,927		39,322
Advertising fund restricted assets		19,275		17,055
Total current assets		1,153,671		344,072
Property and equipment, net		1,075,771		1,061,646
Notes receivable, net		13,753		15,042
Deferred income taxes		18,424		17,913
Intangible assets, net		4,087		4,221
Equity investments		141,066		141,257
Other assets		11,281		12,712
Total assets	$	2,418,053	$	1,596,863

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	April 2,			January 1,
	2006			2006
	(Unaudited)
	(Canadian dollars in thousands,
	except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	82,274		$	110,086
Accrued expenses
Salaries and wages		6,388			15,033
Taxes		44,961			62,952
Other		41,326			61,944
Deferred income taxes		239			349
Advertising fund restricted liabilities		34,321			34,571
Amounts payable to Wendy’s		14,851			10,585
Notes payable to Wendy’s		622,077			1,116,288
Current portion of long-term obligations		208,069			7,985
Total current liabilities		1,054,506			1,419,793
Long-term obligations
Term debt		321,521			21,254
Advertising fund restricted debt		26,641			22,064
Capital leases		44,273			44,652
Total long-term obligations		392,435			87,970
Deferred income taxes		9,754			15,159
Other long-term liabilities		34,858			34,563
Commitments and contingencies
Stockholders’ equity
Common stock (U.S. $0.001 par value per share), Authorized: 1,000,000,000 shares, Issued: 193,302,977 and 159,952,977 shares, respectively		289			239
Capital in excess of stated value		918,767			81,249
Retained earnings		80,020			16,430
Accumulated other comprehensive expense:
Cumulative translation adjustments and other		(72,576	)		(52,911	)
		926,500			45,007
Unearned compensation — restricted stock		—			(5,629	)
Total stockholders’ equity		926,500			39,378
Total liabilities and stockholders’ equity	$	2,418,053		$	1,596,863

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	First quarter			First quarter
	Ended			Ended
	April 2,			April 3,
	2006			2005
	(Unaudited)
	(Canadian dollars in thousands)
Net cash (used in) provided from operating activities	$	(17,216	)	$	15,427
Cash flows from investing activities
Capital expenditures		(39,788	)		(38,577	)
Principal payments on notes receivable		1,007			1,209
Short-term loans to Wendy’s, net		—			(21,910	)
Other investing activities		240			(1,780	)
Net cash used in investing activities		(38,541	)		(61,058	)
Cash flows from financing activities
Proceeds from share issuance		903,825			—
Share issue costs		(55,130	)		—
Proceeds from issuance of debt, net		498,323			—
Repayment of borrowings from Wendy’s		(493,550	)		(30,400	)
Principal payments on long-term obligations		(1,065	)		(987	)
Net cash provided by (used in) financing activities		852,403			(31,387	)
Effect of exchange rate changes on cash		(4,753	)		166
Increase (decrease) in cash and cash equivalents		791,893			(76,852	)
Cash and cash equivalents at beginning of period		186,182			129,301
Cash and cash equivalents at end of period	$	978,075		$	52,449
Supplemental disclosures of cash flow information:
Interest paid	$	21,067		$	643
Income taxes paid	$	54,516		$	34,980
Non-cash investing and financing activities:
Capital lease obligations incurred	$	1,136		$	1,600

See accompanying Notes to the Condensed Consolidated Financial Statements.

8

TIM HORTONS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Canadian dollars, unless otherwise stated)
(Unaudited)

NOTE 1 MANAGEMENT’S STATEMENT

     In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to state fairly the financial position of Tim Hortons Inc. and its subsidiaries (the “Company”) as of April 2, 2006 and January 1, 2006, and the condensed results of operations, comprehensive income (see Note 5) and cash flows for the quarters ended April 2, 2006 and April 3, 2005. All of these financial statements are unaudited. The Consolidated Financial Statements which are contained in our registration statement on Form S-1 (Registration No. 333-13035) filed with the Securities and Exchange Commission ("SEC") on December 1, 2005, as amended thereafter, should be read in conjunction with these condensed consolidated financial statements. The January 1, 2006 condensed consolidated balance sheet was derived from audited consolidated financial statements, contained in the Company’s Form S-1, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Wendy’s International, Inc. (“Wendy’s”) owns 82.75% of the Company as of April 2, 2006.

NOTE 2 EXPENSE ALLOCATIONS

     The condensed consolidated statements of operations include expense allocations for certain functions historically provided by Wendy’s. These allocations include costs related to corporate functions such as executive oversight, risk management, information technology, accounting, legal, investor relations, human resources, tax, employee benefits and equity compensation granted under Wendy’s and the Company’s plans and other services. In 2005, the allocations were primarily based on specific identification and the relative percentage of the Company’s revenues and headcount to the respective total Wendy’s costs. For the first quarter of 2006 the expense allocations from Wendy’s were based on the amounts determined under the shared services agreement with Wendy’s. This agreement was entered into on March 29, 2006 at the completion of the initial public offering. The first quarter 2006 charges were consistent with those outlined in the shared services agreement. The costs under this agreement were established on the same basis as those charged in 2005. Substantially all of these allocations are reflected in general and administrative expenses in the Company’s condensed consolidated statements of operations and totaled $3.7 million and $3.8 million on a pre-tax basis for the three month periods ended April 2, 2006 and April 3, 2005, respectively.

     The Company and Wendy’s considered these general corporate expense allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense the Company would have incurred as a stand-alone company.

NOTE 3 NET INCOME PER SHARE

     Basic earnings per share of common stock are computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. No potentially dilutive options or shares have been issued.

NOTE 4 STOCK-BASED COMPENSATION

     On November 18, 2005, the Company’s stockholder approved the 2006 Stock Incentive Plan (“2006 Plan”). The 2006 Plan is an omnibus plan, designed to allow for a broad range of equity based

compensation awards in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalent rights, performance awards and share awards to eligible employees and directors of the Company or its subsidiaries. No awards were made under this plan in 2005 or through the first quarter of 2006.

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     Certain employees of the Company have participated in various Wendy’s plans which provided options and, beginning in 2005, restricted stock units that would settle in Wendy’s common stock. The following is a description of the impact on the Company related to Wendy’s plans and tables summarizing stock option and restricted stock unit activity for the Company’s employees.

     Prior to January 2, 2006, Wendy’s and the Company used the intrinsic value method to account for stock-based employee compensation as defined in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. Accordingly, because stock options granted prior to January 2, 2006 were granted at market value at the date of grant, and therefore had no intrinsic value at grant date, compensation expense related to stock options was recognized using the Black-Scholes method only when stock option awards were modified after the grant date. During the fourth quarter of 2005, Wendy’s accelerated the vesting of all outstanding options, excluding those held by the independent directors of Wendy’s. Prior to January 2, 2006, compensation expense related to restricted stock unit awards was measured based on the market value of Wendy’s common stock on the date of grant. Wendy’s generally satisfies exercises of options through the issuance of new shares of Wendy’s stock while Wendy’s restricted stock units granted to Company employees are expected to be converted to the Company’s restricted stock units at an equivalent fair value and then net-settled with the Company’s shares to meet the employee’s minimum statutory withholding tax requirements (see Note 15 with respect to restricted stock units converted on May 1, 2006).

     On January 2, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment”, which requires share-based compensation cost to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employee’s requisite service period, which is generally the vesting period of the equity grant. The Company elected to adopt SFAS No. 123R using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior period presented in this Form 10-Q has not been restated to reflect the fair value method of expensing stock options. Also, because the value used to measure compensation expense for restricted stock unit awards is the same for APB Opinion No. 25 and SFAS No. 123R and because all of Wendy’s stock option grants granted to employees of the Company were fully vested prior to January 2, 2006, the adoption of SFAS 123R did not have a material impact on the Company’s operating income, pretax income or net income. In accordance with SFAS No. 123R, the unearned compensation amount previously separately displayed under stockholders’ equity was reclassified during the first quarter of 2006 to capital in excess of stated value on the Company’s condensed consolidated balance sheets. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the SEC’s interpretation of SFAS No. 123R. The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123R.

     Stock option awards made by Wendy’s generally have a term of 10 years from the grant date and become exercisable in installments of 25 percent on each of the first four anniversaries of the grant date. Restricted stock unit grants made by Wendy’s to Canadian employees of the Company vest over a 30 month period. Restricted stock unit grants made by Wendy’s to U.S. employees of the Company generally vest in increments of 25% on each of the first four anniversaries of the grant date. Restricted stock units generally have dividend participation rights under which dividends are reinvested in additional Wendy’s shares. The number of remaining authorized shares under all of Wendy’s equity plans, net of exercises, totaled 6.6 million as of April 2, 2006. The number of shares of common stock authorized under the Company’s 2006 plan totals 2.9 million.

     The Company recorded $0.8 million ($0.5 million net of tax) in stock compensation expense for restricted stock units representing the amount allocated to the Company from Wendy’s based on a specific employee basis for the first quarter 2006. No compensation expense for restricted stock units

11

was recorded in the first quarter of 2005 as no restricted stock units had been granted. The pro-forma disclosures for the quarter ended April 3, 2005 below are provided as if the Company had adopted the cost recognition requirements under SFAS No. 123 “Accounting for Stock-Based Compensation". Under SFAS No. 123, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires the use of subjective assumptions that can materially affect fair value estimates, and therefore, this model does not necessarily provide a reliable single measure of the fair value of Wendy’s stock options. Had compensation expense been recognized for stock-based compensation plans in accordance with provisions of SFAS No. 123 in the first quarter of 2005, the Company would have recorded net income and earnings per share as follows (Canadian dollars in thousands, except per share data):

	First quarter
	ended
	April 3,
	2005
Net income, as reported	$	47,501
Add: Stock compensation cost recorded under APB Opinion No. 25, net of tax		—
Deduct: Stock compensation cost calculated under SFAS No. 123, net of tax		(1,669	)
Pro forma net income	$	45,832
Earnings per share:
Basic as reported	$	0.30
Basic pro forma	$	0.29

     The above stock compensation cost calculated under SFAS No. 123, net of tax, is based on costs computed over the vesting period of the award. Upon adoption, SFAS No. 123R requires compensation cost for stock-based compensation awards to be recognized immediately for retirement eligible employees and over the period from the grant date to the date retirement eligibility is achieved, if that period is shorter than the normal vesting period. If the guidance on recognition of stock compensation expense for retirement eligible employees were applied to the periods reflected in the financial statements, the impact on the Company’s reported net income would have been a benefit of $0.1 million as of April 2, 2006 and would have had no impact as of April 3, 2005. The impact on the Company’s pro-forma net income would have been a benefit of $0.8 million as of April 3, 2005.

     The impact of applying SFAS No. 123R in these pro-forma disclosures is not necessarily indicative of future results.

Restricted stock units

     The following is a summary of unvested restricted stock unit activity for Company employees for the quarter ended April 2, 2006:

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				Weighted
				Average
				Fair Value
(Restricted stock units in thousands)	Restricted Stock Units			(in U.S. dollars)
Balance at January 1, 2006		174		$	42.95
Granted		1			42.95
Vested		—			—
Cancelled		(2	)		42.95
Balance at April 2, 2006		173		$	42.95

     As of April 2, 2006, total unrecognized compensation cost related to nonvested share-based compensation was $5.2 million and is expected to be recognized over a weighted-average period of 1.7 years. The Company expects substantially all of its restricted stock units to vest. No restricted stock units vested in the first quarter of 2006 or 2005.

Stock options

     The use of stock options is no longer a significant component of Wendy’s and the Company’s current equity compensation structure. Wendy’s last granted stock options in 2004, and all employee stock options are vested as of April 2, 2006. A summary of the stock option fair value assumptions used in prior years is included in the Company’s 2005 consolidated financial statements in the registration statement on Form S-1 (Registration No. 333-130035) filed with the SEC on December 1, 2005, as amended thereafter.

     The following is a summary of stock option activity for the Company’s employees for the quarter ended April 2, 2006:

				Weighted		Weighted
				Average		Average		Aggregate
	Shares			Price Per Share		Remaining		Intrinsic Value
(Shares in thousands)	Under Option			(in U.S. dollars)		Contractual Life		(in U.S. dollars)
Balance at January 1, 2006		1,214		$	35.32		7.2
Granted		—			—		—
Exercised		(411	)		34.91		—
Cancelled		(1	)		31.22		—
Outstanding at April 2, 2006		802		$	35.52		6.9	$	21,271

     All options outstanding at April 2, 2006 are also exercisable. The intrinsic value of a stock option is the amount by which the market value of the underlying Wendy’s stock exceeds the exercise price of the option. For the quarters ended April 2, 2006 and April 3, 2005, the total intrinsic value of stock options exercised was $9.6 million and $2.8 million, respectively. The Company received no proceeds and recognized no tax benefits for stock options exercised in any period presented.

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NOTE 5 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     The components of other comprehensive income (expense) and total comprehensive income are shown below:

	First quarter ended
	April 2,			April 3,
	2006			2005
	(Canadian dollars in thousands)
Net income	$	63,590		$	47,501
Other comprehensive income (expense)
Translation adjustments, net of tax		(20,467	)		(1,569	)
		43,123			45,932
Cash flow hedges:
Net change in fair value of derivatives, net of tax		(7,142	)		(10	)
Amounts realized in earnings during the year, net of tax		7,944			2,157
Total cash flow hedges		802			2,147
Comprehensive income	$	43,925		$	48,079

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     Other comprehensive expense is primarily comprised of translation adjustments related to fluctuations in the Canadian dollar versus the U.S. dollar and activity related to the Company’s cash flow hedges. During the quarter ended April 2, 2006, translation adjustments were impacted by the replacement of U.S. dollar denominated debt with Canadian dollar debt and the change in exchange rate between the closing date of the initial public offering and the exchange rate as at April 2, 2006. At the end of the fourth quarter 2005, the Canadian exchange rate was $1.1628 versus $1.1681 at April 2, 2006. At the end of the fourth quarter 2004, the Canadian exchange rate was $1.1995 versus $1.2161 at April 3, 2005. In addition, in the first quarter of 2006, there was a $2.6 million gain, net of taxes of $1.5 million related to the Company’s hedge of certain net investment positions. This gain is included in the first quarter of 2006 translation adjustments component of other comprehensive income.

NOTE 6 SEGMENT REPORTING

     The Company operates exclusively in the food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. The Company’s reportable segments are Canada and the U.S. There were no material amounts of revenues or transfers between reportable segments.

     The table below presents information about reportable segments:

	First quarter						First quarter
	ended			% of			ended			% of
	April 2, 2006			Total			April 3, 2005			Total
	(Canadian dollars in thousands, except where noted)
Revenues
Canada	$	339,340			91.0	%	$	296,476			91.6	%
U.S.		33,418			9.0	%		27,113			8.4	%
	$	372,758			100.0	%	$	323,589			100.0	%
Segment Operating Income (Loss)
Canada	$	91,910			99.6	%	$	81,995			101.8	%
U.S.		393			0.4	%		(1,457	)		(1.8	)%
Reportable Segment Operating Income	$	92,303			100.0	%	$	80,538			100.0	%
Corporate Charges (1)		(9,192	)					(8,029	)
Consolidated Operating Income	$	83,111					$	72,509
Capital Expenditures
Canada	$	28,901			72.6	%	$	24,940			64.6	%
U.S.		10,887			27.4	%		13,637			35.4	%
	$	39,788			100.0	%	$	38,577			100.0	%

⁽¹⁾ Corporate charges include certain overhead costs which are not allocated to individual segments.

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     Revenues consisted of the following:

	First quarter ended
	April 2,		April 3,
	2006		2005
	(Canadian dollars in thousands)
Sales
Warehouse sales	$	202,305	$	172,275
Company operated restaurant sales		15,380		15,100
Sales from restaurants consolidated under FIN46R		24,966		21,921
	$	242,651	$	209,296
Franchise revenues
Rents and royalties	$	115,524	$	102,056
Franchise fees		14,583		12,237
		130,107		114,293
Total revenues	$	372,758	$	323,589

     Cost of sales related to Company operated restaurant sales were $17.5 million and $17.5 million for the first quarters ended April 2, 2006 and April 3, 2005, respectively.

     Total assets of the Company increased $821.2 million from January 1, 2006 to April 2, 2006, primarily representing the net proceeds from the initial public offering which is allocated to the corporate assets.

     The following shows changes in the Company’s franchised locations for the first quarters ended April 2, 2006 and April 3, 2005:

	First quarter ended
	April 2,			April 3,
	2006			2005
Franchise Restaurant Progression
Franchise restaurants in operation – beginning of period		2,790			2,623
Franchises opened		25			22
Franchises closed		(6	)		(6	)
Net transfers within the system		(4	)		(1	)
Franchise restaurants in operation – end of period		2,805			2,638
Company-operated restaurants		98			100
Total systemwide restaurants		2,903			2,738

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NOTE 7 INTANGIBLE ASSETS, NET

     The table below presents amortizable intangible assets as of April 2, 2006 and January 1, 2006:

	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount
	(Canadian dollars in thousands)
April 2, 2006
Amortizable intangible assets:
Persona	$	6,455	$	(2,368	)	$	4,087
Other		2,784		(2,784	)		—
	$	9,239	$	(5,152	)	$	4,087
January 1, 2006
Amortizable intangible assets:
Persona	$	6,455	$	(2,234	)	$	4,221
Other		2,784		(2,784	)		—
	$	9,239	$	(5,018	)	$	4,221

     Persona of $4.1 million and $4.2 million as at April 2, 2006 and January 1, 2006, net of accumulated amortization of $2.4 million and $2.2 million, respectively, represents the use of the name and likeness of Ronald V. Joyce, a former owner and director of the Company. The name and likeness are being amortized over a period of 12 years ending in 2013.

     Total intangibles amortization expense was $0.1 and $0.3 million for the quarters ended April 2, 2006 and April 3, 2005, respectively. The estimated annual intangibles amortization expense for 2006 through 2010 is approximately $0.5 million.

NOTE 8 TERM DEBT

     On February 28, 2006, the Company entered into an unsecured five year senior bank facility with a syndicate of Canadian and U.S. financial institutions that comprises a $300.0 million Canadian term loan facility; a $200.0 million Canadian revolving credit facility (which includes $15.0 million in overdraft availability); and a US$100.0 million U.S. revolving credit facility (together referred to as the “senior bank facility”). The senior bank facility matures on February 28, 2011. The term loan facility bears interest at a variable rate per annum equal to Canadian prime rate or alternatively, one of Tim Hortons Inc.’s principal subsidiaries may elect to borrow by way of Bankers’ Acceptances (or loans equivalent thereto) plus a margin. The senior bank facility (as amended on April 24, 2006, effective February 28, 2006 – see Note 15) contains various covenants which, among other things, require the maintenance of two financial ratios – a consolidated maximum total debt to earnings before interest expenses, taxes, depreciation and amortization (EBITDA) ratio and a minimum fixed charge coverage ratio. The Company was in compliance with these ratios as at April 2, 2006 (see Note 15).

     The Canadian and U.S. revolving credit facility are both undrawn and are available for general corporate purposes. The Canadian revolving credit facility replaced the previous $25.0 million revolving facility except for approximately $5.0 million being used to support standby letters of credit which will remain in place until expiration of the respective letters of credit. The Company

17

incurs commitment fees based on the revolving credit facility, whether used or unused. The fees vary according to the Company’s leverage ratio and, as at April 2, 2006 equaled 0.15% of the facility amount. Advances under the Canadian revolving credit facility bear interest at a variable rate per annum equal to the Canadian prime rate or alternatively, one of Tim Hortons Inc.’s principal subsidiaries may elect to borrow by way of either Bankers’ Acceptances or LIBOR, plus a margin. Advances under the U.S. revolving credit facility bear interest at a rate per annum equal to the U.S. prime rate or LIBOR plus a margin.

     On February 28, 2006, the Company entered into an unsecured non-revolving $200.0 million bridge loan facility with two financial institutions which matures on April 28, 2007. The bridge loan facility bears interest at Bankers’ Acceptances plus a margin. The bridge loan facility agreement (as amended on April 24, 2006, effective February 28, 2006 – see Note 15) contains various covenants which, among other things, require the maintenance of two financial ratios – a consolidated maximum total debt to EBITDA ratio and a minimum fixed charge coverage ratio. The Company was in compliance with these ratios as at April 2, 2006. The bridge loan facility is classified as current on the condensed consolidated balance sheet, and it was repaid on May 3, 2006 (see Note 15).

     In connection with the term loan facility, one of the principal subsidiaries of the Company entered into a $100.0 million dollar interest rate swap on March 1, 2006 to help manage its exposure to interest rate volatility (see Note 14).

     The senior bank facility and the bridge loan facility contain certain covenants that will limit the ability of the Company to, among other things: incur additional indebtedness; create liens; merge with other entities; sell assets; make restricted payments; make certain investments, loans, advances, guarantees or acquisitions; change the nature of its business; enter into transactions with affiliates; and restrict dividends (see also Part II, Item 2) or enter into certain restrictive agreements.

     In connection with the senior bank facility and the bridge loan facility, the Company incurred a total of $1.7 million in financing costs, which were deferred and will be amortized (or expensed upon early repayment) over the terms of each facility to which the costs relate.

NOTE 9 CAPITAL STOCK

     On February 24, 2006, the Board of Directors approved a one to 228,504.252857143 stock split effective February 24, 2006. All share and per share amounts have been retroactively adjusted for all periods presented to reflect the one to 228,504.252857143 stock split. The Board of Directors also approved an increase in the number of authorized shares from 1,000 to 1,000,000,000 and approved a designation of par value of US$0.001 to each share. Both of these changes were retroactively reflected for all periods presented.

     On March 29, 2006 the Company completed its initial public offering of 33,350,000 shares of common stock at an offering price of $27.00 (US$23.162) per share of common stock. The gross proceeds of $903.8 million were offset by $61.3 million in underwriter and other third party costs with all such costs except $6.2 million paid as of April 2, 2006. In addition, approximately $1.6 million of costs associated with the initial public offering were expensed in the quarter ended April 2, 2006. After completion of the initial public offering the Company has 193,302,977 shares of common stock outstanding.

     Pursuant to a rights agreement adopted by the Company’s Board of Directors on February 28, 2006, the Company issued one right (“Right”) for each outstanding share of common stock. Each Right is initially exercisable for one ten-thousandth of a share of the Company’s preferred stock, par value US$0.001 per share, but the Rights are not exercisable until 10 days after the public announcement that a

18

person or group has acquired beneficial ownership of 15% or more of the Company’s common stock, or 10 days after a person or group begins a tender or exchange offer to acquire 15% or more of the Company’s common stock. If a person or group acquires 15% or more of the Company’s common stock, then each Right would entitle its holder, in lieu of receiving the Company’s preferred stock, to buy that number of shares of the Company’s common stock that, at the time of the 15% acquisition, had a market value of two times the exercise price of the Right. The exercise price of each Right is $150.00, subject to anti-dilution adjustments. If, after the Rights have been triggered, the Company is acquired in a merger or similar transaction, each Right would entitle its holder (other than the acquirer) to buy that number of shares of common stock of the acquiring company that, at the time of such transaction, would have a market value of two times the exercise price of the Right. The Rights have no effect on earnings per share until they become exercisable. If not redeemed, the Rights will expire on February 23, 2016.

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NOTE 10 INCOME TAXES

     The effective income tax rate for the quarter ended April 2, 2006 was 14.8%, compared to 32.8% for the comparative period ended April 3, 2005. This variance between periods includes the first quarter 2006 deferred tax reversal of $5.8 million in Canadian withholding taxes that are no longer expected to be paid compared to $1.3 million accrued for Canadian withholding taxes for the quarter ended April 3, 2005. The Canadian withholding taxes had been accrued for intercompany cross-border dividends that are no longer expected to be paid as a result of the IPO and related capital restructuring. The first quarter 2006 effective tax rate was also favourably impacted by $4.3 million in permanent book and tax differences for losses on certain hedging transactions. The Company does not expect to realize benefits of a similar nature in subsequent periods.

     The U.S. portion of the tax provision for the first quarter of 2006 was computed on a stand alone basis, adjusted in accordance with the Company’s tax sharing agreement with Wendy’s.

     The determination of income tax expense takes into consideration amounts that may be needed to cover exposure for open tax years. The Canada Revenue Agency is currently conducting an examination of various Canadian subsidiaries of the Company for the years 1998 through 2003. The Internal Revenue Service is currently conducting an examination of the Wendy’s federal income tax returns for the years 2001 through 2006. The Company does not expect any material impact on earnings to result from the resolution of matters related to open tax years; however, actual settlements may differ from amounts accrued. Any settlement may have a material impact on cash flows in the quarter in which the settlement occurs.

NOTE 11 COMMITMENTS AND CONTINGENCIES

     The Company has guaranteed certain lease and debt payments primarily for franchisees, amounting to $0.9 million. In the event of default by a franchise owner, the Company generally retains the right to acquire possession of the related restaurants. The Company is also the guarantor on $5.0 million in letters of credit with various parties; however, management does not expect any material loss to result from these instruments because it does not believe performance will be required. The length of the lease, loan and other arrangements guaranteed by the Company or for which the Company is contingently liable varies, but generally does not exceed nine years.

     In addition to the above guarantees, the Company is party to many agreements executed in the ordinary course of business that provide for indemnification of third parties, under specified circumstances, such as lessors of real property leased by the Company, distributors, service providers for various types of services (including commercial banking, investment banking, tax, actuarial and other services), software licensors, marketing and advertising firms, securities underwriters and others. Generally, these agreements obligate the Company to indemnify the third parties only if certain events occur or claims are made, as these contingent events or claims are defined in each of these agreements. The Company believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the earnings or financial condition of the Company. The liability recorded related to the above indemnity agreements is not material.

NOTE 12 ADVERTISING FUND

     The Company participates in two advertising funds established to collect and administer funds contributed for use in advertising and promotional programs designed to increase sales and enhance the reputation of the Company and its franchise owners. Separate advertising funds are administered for

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Canada and the U.S. In accordance with SFAS No. 45, “Accounting for Franchisee Fee Revenue”, the revenue, expenses and cash flows of the advertising funds are not included in the Company’s condensed consolidated statements of operations or cash flows because the contributions to these advertising funds are designated for specific purposes, and the Company acts as an, in substance, agent with regard to these contributions. The assets held by these advertising funds are considered restricted. The current restricted assets, current restricted liabilities and advertising fund debt are identified on the Company’s Condensed Consolidated Balance Sheets. The current portion of advertising fund debt is included in restricted liabilities. In addition, at April 2, 2006 and January 1, 2006, property and equipment, net includes $41.7 million and $39.5 million, respectively, of advertising fund fixed assets.

NOTE 13 RELATED PARTY

     In March 2006, the Company entered into various agreements with Wendy’s that define the relationship in the interim period between the Company’s IPO and separation from Wendy’s, or, in some cases, until the Company can provide the services themselves. These agreements include a master separation agreement, a shared services agreement, a tax sharing agreement and a registration rights agreement (see Note 2).

     In September 2005, the Company distributed a note to Wendy’s in the amount of US$960.0 million ($1.1 billion). The outstanding principal of the note bears interest at an annual rate of 3.0%. Both the outstanding principal and accrued interest are due within 30 days of a demand for payment by Wendy’s and may be prepaid by the Company at any time. On March 3, 2006, the Company repaid US$427.4 million principal on the US$960.0 million note plus accrued interest of US$12.7 million (see Note 15).

     In connection with the Company entering into the senior bank facility, Wendy’s entered into a subordination agreement pursuant to which Wendy’s could not accept or demand any further payment on the US$960.0 million note until April 3, 2006. The remainder of the note payable was repaid in April 2006 (see Note 15).

NOTE 14 DERIVATIVES

     In 2005, the Company entered into forward currency contracts that matured in March 2006 to sell $500.0 million and buy US$427.4 million to hedge the repayment of cross-border intercompany notes being marked-to-market beginning in the third quarter of 2005. Previously, the translation of these intercompany notes was recorded into comprehensive income, rather than in the Condensed Consolidated Statements of Operations, in accordance with SFAS No. 52, “Foreign Currency Translation”. The fair value unrealized loss on these contracts as of January 1, 2006 was $2.3 million, net of taxes of $1.4 million. On the maturity date of March 3, 2006, the Company received US$427.4 million from the counterparties and disbursed to the counterparties $500.0 million, resulting in a net cash flow of US$13.1 million ($15.4 million) to the counterparties (representing the difference from the contract rate to spot rate on settlement). Per SFAS No. 95, “Statement of Cash Flows”, the net cash flow is reported in the net cash provided by operating activities line of the Condensed Consolidated Statements of Cash Flows for the quarter ended April 2, 2006. These forward currency contracts remained highly effective cash flow hedges and qualified for hedge accounting treatment through their maturity. As a result, during the first quarter of 2006, changes in the fair value of the effective portion of these foreign currency contracts offset changes in the cross-border intercompany notes, and a $0.9 million gain was recognized as the ineffective portion of the foreign currency contracts.

     In 2005, the Company entered into forward currency contracts to sell $578.0 million Canadian dollars and buy US$490.5 million in order to hedge certain net investment positions in Canadian subsidiaries. Under SFAS No. 133, these forward currency contracts were designated as highly

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effective hedges. The fair value unrealized loss on these contracts was $3.2 million, net of taxes of $1.9 million and $5.8 million, net of taxes of $3.6 million as of April 2, 2006 and January 1, 2006, respectively. Changes in the fair value of these foreign currency net investment hedges are included in the translation adjustments line of other comprehensive income (loss) (see Note 5). No amounts related to these net investment hedges impacted earnings (see Note 15).

     In connection with the term loan facility, one of the principal subsidiaries entered into a $100.0 million interest rate swap on March 1, 2006 to help manage its exposure to interest rate volatility. By entering into the interest rate swap, the Company agreed to receive interest at a variable rate and pay interest at a fixed rate. The interest rate swap essentially fixed the interest rate to 5.175% and matures on February 28, 2011. The interest rate swap is considered to be a highly effective cash flow hedge according to criteria specified in SFAS No. 133 – Accounting for Derivative Instruments and Hedging Activities. Tim Hortons Inc. and certain of its subsidiaries provided guarantees in connection with this transaction. The fair value unrealized loss on this contract as of April 2, 2006 was not material.

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NOTE 15 SUBSEQUENT EVENTS

     As of April 2, 2006 the Company had forward currency contracts outstanding to sell $578.0 million Canadian dollars and buy US$490.5 million in order to hedge certain net investment positions in Canadian subsidiaries. These hedges matured in April 2006. The Company received US$490.5 million from the counterparties and disbursed to the counterparties the US$ equivalent of $578.0 million, resulting in a net cash outflow of US$14.9 million ($17.6 million) to the counterparties.

     On April 24, 2006, effective February 28, 2006, Tim Hortons Inc. along with certain of its subsidiaries entered into an amendment of its senior bank facility and bridge credit facility with a syndicate of Canadian and U.S. financial institutions. Both amendments correct, on substantially similar terms, a drafting error in the original agreements by revising the timing of the application of the debt covenant thresholds to be consistent with the period during which Tim Hortons Inc. is permitted to repay certain intercompany debt. These corrected terms reflect the terms that had been agreed to by the parties prior to the effective dates of the original agreements. No additional changes were made and required lender approval was obtained for both amendments with no additional fees incurred other than drafting expenses for the amendments.

     On April 26, 2006 the Company repaid the remaining principal and interest outstanding from the US$960.0 million note distributed to Wendy’s. A total of US$532.6 million in principal plus accrued interest of US$2.0 million ($2.4 million) was paid using proceeds from the Company’s initial public offering.

     After completion of the Company’s initial public offering in March 2006 and the repayment of the note payable to Wendy’s in April 2006, Tim Hortons Inc. and certain of its subsidiaries changed their functional currency from the U.S. dollar to the Canadian dollar. The majority of the Company’s cash flows will now be in Canadian dollars, giving rise to the functional currency change. The functional currency of the Company’s operating subsidiaries is the local currency in which each subsidiary operates, which is either the Canadian or U.S. dollar.

     On May 1, 2006 the Company converted a portion of the 2005 Wendy’s restricted stock units granted to Company employees to Tim Hortons Inc. restricted stock units, maintaining fair value of the restricted stock units before and after conversion. In accordance with SFAS 123R, no incremental compensation cost was recorded since there was no change in fair value of the awards upon conversion. These restricted stock units vested on May 1, 2006 and were net settled by the Company with 61,256 shares purchased by an agent of the Company on the open market on May 1, 2006 at an average purchase price of $30.543.

     On May 3, 2006 one of the Company’s principal subsidiaries repaid the $200.0 million bridge loan facility in full. The Bridge Facility Credit Agreement was terminated at this time as a result of the voluntary prepayment.

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TIM HORTONS INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

     The following discussion of the financial conditions and results of operations of the company should be read in conjunction with the 2005 Annual Consolidated Financial Statements included in our registration statement on Form S-1 (Registration No. 333-130035) filed with the SEC on December 1, 2005, as amended thereafter. All amounts are expressed in Canadian dollars unless otherwise noted. The following discussion includes forward-looking statements that are not historical facts but reflect our current expectation regarding future results. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to “Risk Factors” included in our registration statement on Form S-1 and set forth in our Safe Harbor Statement attached hereto as Exhibit 99. Historical trends should not be taken as indicative of future operations.

     Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at both franchise and company-operated restaurants. As of April 2, 2006, 2,805 or 96.6% of our restaurants were franchised, representing 98.7% in Canada and 78.4% in the United States. The amount of systemwide sales impacts our franchisee royalties and rental income, as well as our distribution sales. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants. Average same-store sales, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants operating systemwide throughout the relevant period and provides a useful comparison between periods. We believe systemwide sales and average same-store sales provide meaningful information to investors concerning the size of our system, the overall health of the system and the strength of our brand. Information about systemwide sales and average same-store sales is included in this Form 10-Q report. Franchise restaurant sales generally are not included in our financial statements; however, franchise restaurant sales result in royalties and rental income, which are included in our franchise revenues.

Overview

     We franchise and operate Tim Hortons restaurants in Canada and the U.S. As the franchisor, we collect royalty income on our franchised restaurant sales. Also, our business model includes controlling the real estate for most of our franchise restaurants. As of April 2, 2006, we leased or owned the real estate for approximately 81% of our system restaurants, which generates a recurring stream of rental income. We distribute coffee and other drinks, non-perishable food, supplies, packaging and equipment to system restaurants in Canada through our five distribution centres. In the U.S. we supply similar products to system restaurants through third-party distributors.

     In the first quarter of 2006, our revenues increased $49.2 million, or 15.2%, over the first quarter of 2005 as a result of continued average same-store sales gains and growth in the number of systemwide restaurants, resulting in higher royalty, rental and distribution revenues. Operating income increased $10.6 million or 14.6% in the first quarter of 2006 compared to the first quarter of 2005 as a result of strong same-store sales growth and a higher number of restaurants in the system. In the first quarter of 2006, our net income increased $16.1 million, or 33.9% compared to the first quarter of 2005. The increase in net income was a result of the stronger operational results coupled with favourable tax benefits in the first quarter of 2006, offset in part by higher interest charges. Earnings per share were $0.39 in the first quarter of 2006 compared to $0.30 per share of common stock in the first quarter of 2005. In the first quarter of 2006, we completed our initial public offering (IPO) raising $842.5 million of proceeds, net of issuance costs. We also entered into a senior bank facility and a bridge loan facility borrowing $500.0

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million in February 2006 referred to herein as our “credit facilities”. The proceeds from the credit facilities and the IPO were used to repay borrowings to Wendy’s of US$960.0 million plus accrued interest in two payments in March and April 2006. One of the Company’s principal subsidiaries also repaid the bridge loan of $200.0 million plus accrued interest in May 2006 and terminated this facility.

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Selected Operating and Financial Highlights

	First quarter			First quarter
	ended			ended
	April 2, 2006			April 3, 2005
	(Canadian dollars in thousands,
	except where noted)
Systemwide sales growth(1)		14.0	%		13.9	%
Average same-store sales growth
Canada(2)		8.7	%		5.8	%
U.S.(2)		9.8	%		7.7	%
Systemwide restaurants		2,903			2,738
Revenues	$	372,758		$	323,589
Operating income	$	83,111		$	72,509
Net income	$	63,590		$	47,501
Basic and fully dilutive earnings per share	$	0.39		$	0.30
Weighted average number of shares of common stock outstanding - - Basic and fully dilutive (in millions)		161.8			160.0

(1)	Total systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted to Canadian dollar amounts using the average exchange rate of the base year for the period covered.
(2)	For Canadian restaurants, average same-store sales based on restaurants that have been opened for a minimum of one calendar year. For U.S. restaurants, a restaurant is included in our average same-store sales calculation beginning the 13th month after the restaurant’s opening.

Systemwide Sales Growth

     Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at both franchise and company-operated restaurants although approximately 96.6% of our system is franchised. The amount of systemwide sales impacts our franchisee royalties and rental income, as well as our distribution sales. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants.

Average Same-Store Sales Growth

     Average same-store sales, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants operating systemwide (i.e. includes both franchised and company-operated restaurants) throughout the relevant period and provides a useful comparison between periods.

     Our average same-store sales growth is attributable to several key factors, including new product introductions, improvements in restaurant speed of service and other operational efficiencies, more frequent customer visits, expansion into broader menu offerings and pricing. Restaurant-level price increases are primarily used to offset higher restaurant-level costs on key items such as coffee and labour.

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New Restaurant Development

     Opening restaurants in new and existing markets in Canada and the U.S. has been a significant contributor to our growth. In the first quarter of 2006 we opened 20 new restaurants in Canada and 7 in the United States for a total of 2,611 restaurants in Canada and 292 restaurants in the United States. In fiscal 2006 we expect to open 140 to 150 new restaurants in Canada and 40 to 50 new restaurants in the U.S. Although we anticipate new restaurant development will continue in the range of 180 to 200 stores annually, future escalation of real estate and/or construction costs may slow this growth and our mix between standard and non-standard restaurants may shift towards non-standard depending upon real estate availability and market needs, among other things.

     From the end of the first quarter of 2005 to the end of the first quarter of 2006, we opened 191 system restaurants including both franchised and company-operated restaurants, and we had 26 restaurant closures for a net increase of 165 restaurants. Typically, 20 to 30 system restaurants are closed annually, primarily in Canada. Restaurant closures typically result from an opportunity to acquire a better location which will permit us to upgrade size and layout or add a drive-thru. In the first quarter of 2006 we closed 9 restaurants, 6 in Canada and 3 in the U.S. for a net increase of restaurants in the system of 18. As of April 2, 2006, 2,805 of our restaurants, or 96.6%, were franchise restaurants (representing 98.7% in Canada and 78.4% in the U.S.).

     The following table shows our restaurant count as of the April 2, 2006, January 1, 2006 and April 3, 2005. Also included in the table is a breakdown of our company-operated and franchise restaurants.

     Systemwide Restaurant Count

	As of		As of		As of
	April 2,		January 1,		April 3,
	2006		2006		2005
Canada
Company-operated		35		33		33
Franchise		2,576		2,564		2,445
Total		2,611		2,597		2,478
U.S.
Company-operated		63		62		67
Franchise		229		226		193
Total		292		288		260
Total system
Company-operated		98		95		100
Franchise		2,805		2,790		2,638
Total		2,903		2,885		2,738

Our Relationship with Wendy’s

     As of April 2, 2006, Wendy’s owns 82.75% of our outstanding common stock and the remainder of our shares are widely held. In March 2006, we entered into various agreements with Wendy’s that define our relationship in the interim period between our IPO and separation, or, in some cases, until we are able to provide the services ourselves. These agreements include a master separation agreement, a shared services agreement, a tax sharing agreement and a registration rights agreement.

     Wendy’s has advised us that it intends to distribute all of our shares of common stock that it owns to its shareholders as soon as practical, which is expected to occur by December 31, 2006. Wendy’s has announced that it may effect the distribution as a spin-off, a split-off, or a combination of the two. However, other than its obligations under the master separation agreement, Wendy’s is not subject to any contractual obligation to complete the spin-off (although a standstill agreement Wendy’s entered into with

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certain of its shareholders would be terminable by those shareholders if the spin-off does not occur by December 31, 2006). Wendy’s has agreed not to sell, dispose of or hedge any of our common stock, subject to specified exceptions, for a period of 180 days commencing March 23, 2006 without the prior written consent of the underwriters of the IPO. The 180-day period may be extended under certain circumstances. Wendy’s lock-up agreement will not restrict its ability to distribute all of our common stock that it owns to its common shareholders, nor will it restrict any recipients of our common stock in any such distribution. In addition, without our prior written consent, Wendy’s will not effect the distribution of the shares of our common stock it owns to its shareholders unless Wendy’s has obtained a private letter ruling from the U.S. Internal Revenue Service or an opinion of legal counsel, in either case reasonably acceptable to the Wendy’s board of directors, to the effect that (i) Wendy’s will recognize no gain or loss (and no amount will be included in its income) upon the spin-off under Section 355 of the U.S. Internal Revenue Code and (ii) no gain or loss will be recognized by (and no amount will be included in the income of) the U.S. shareholders of Wendy’s upon their receipt of our common stock pursuant to the distribution of our shares. There are a number of requirements that must be met under the Income Tax Act (Canada) before gain recognized by Canadian shareholders as a result of a spin-off would be deferred under the Income Tax Act. There can be no assurance that all of these requirements will be satisfied.

     Because we were a wholly-owned subsidiary of Wendy’s for many years prior to the IPO, we and Wendy’s have historically shared many internal administrative resources. The shared services agreement was designed to help us and Wendy’s transition to being two separate public companies, each with its own administrative resources. Under the shared services agreement, Wendy’s provides us services relating to corporate functions such as executive oversight, risk management, information technology, accounting, legal, investor relations, human resources, tax, other services and employee benefits and incentives. In the first quarter of 2006, we incurred total charges under the shared services agreement of $3.7 million, comprised of $2.9 million fixed charges and $0.8 million pass-through billing for costs related to restricted stock units which were issued to our employees by Wendy’s in 2005. These services and billings may be modified quarterly by mutual agreement between Wendy’s and us and are not expected to affect our ability to build our own infrastructure and provide the same services from internal sources. We and Wendy’s will perform these services in the manner and at the level of service substantially similar to that immediately prior to the date of the shared services agreement, and the use of such services generally will not be substantially greater than the level of use required prior to the completion of our IPO. The basis for the 2006 charges under the shared services agreement and the charges from Wendy’s in 2005 were derived on a similar basis.

     The services under the shared services agreement, other than insurance services and information technology services, will be provided until the earlier of the spin-off or until December 31, 2008 unless otherwise mutually agreed upon by both parties. Wendy’s has agreed to provide insurance services until at least December 31, 2006 and information technology services beyond the date of the spin-off, terminable thereafter on twelve months notice. Other than insurance or information technology services, either we or Wendy’s may terminate the provision of any service under the shared services agreement on 30 days notice if the service becomes commercially impracticable for the party providing the service. Also, either party may terminate any individual service to be provided if the other party fails to provide that service for 30 days after receiving a notice from the terminating party of its failure to perform. Neither we nor Wendy’s will be liable under the shared services agreement for damages associated with services provided, or failure to provide services, under that agreement except where (i) the applicable party is grossly negligent or engages in willful misconduct and (ii) the damaged party is disproportionately harmed relative to the other party.

     We do not expect our increasing independence from Wendy’s to materially harm our relationships with our customers or suppliers or to otherwise cause significant changes in our results of operations and

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business trends when compared to prior years. During the transition period, certain officers and directors of Wendy’s will also act as our officers and directors, some of whom may continue beyond the spin-off.

     In accordance with the terms of the master separation agreement, the Company is using commercially reasonable efforts to cause (i) beneficiaries of guarantees entered into by Wendy’s (or its subsidiaries not affiliated with the Company) for liabilities of the Company and its subsidiaries, to release Wendy’s from such guarantees, and (ii) the guarantee by Wendy’s of obligations of the Tim Hortons Children’s Foundation to be released and replaced with guarantee(s) by the Company and/or its subsidiaries prior to the date of Wendy’s distribution of the remaining shares of the Company to its shareholders. If such release(s) are not obtained by the date of such distribution, the Company and Wendy’s have agreed to continue to work together and use commercially reasonable efforts to cause such guarantees to be released as soon as reasonably practicable.

Operating Income

     For the quarter ended April 2, 2006, we recorded operating income of $83.1 million, an increase of $10.6 million, or 14.6%, compared to the first quarter of 2005. This increase is due primarily to strong revenue growth from both same-store sales and new unit expansion. General and administrative expenses were $2.8 million higher in 2006 than the first quarter of 2005 reflecting expenses of the IPO, restricted stock unit expenses and higher costs in anticipation of being a public company. We started issuing and expensing restricted stock units in the second quarter of 2005. Income from equity investments was $0.8 million higher than the first quarter of 2005 primarily from our bakery joint venture and our TIMWEN Partnership (which leases Canadian Tim Hortons/Wendy’s combination restaurants) also as a result of stronger first quarter sales.

     The Guelph distribution facility commenced operations in the first quarter of 2006. Once fully operational this distribution centre will service approximately 85% of our Ontario stores for both shelf-stable and frozen products. We will be phasing in our move to frozen distribution from this new distribution centre beginning in the second quarter of 2006 with approximately 65% of the Ontario stores being serviced by year end. During this phase-in period for frozen distribution we will be faced with higher distribution costs without the full benefit of the new distribution revenues. See “Total Costs and Expenses, Cost of Sales” under Management’s Discussion and Analysis for a description of this impact in the first quarter of 2006. In 2006, revenues will increase as a result of the addition of some frozen products to our distribution operations. Margins on frozen products are lower than some of our other products but will be a positive contribution to our net income once we are fully operational. Distribution is a critical element of our business model as it allows us to control costs to our franchisees and service our stores efficiently and effectively while contributing to our profitability.

Segment Operating Income

     Systemwide sales and average same-store sales growth are affected by the business and economic environments in Canada and the U.S. We manage and review financial results from Canadian and U.S. operations separately. We therefore have determined the reportable segments for our business to be Canada and the U.S.

     Segment operating income increased $11.8 million, or 14.6%, for the first quarter of 2006 as compared to the first quarter of 2005. Our Canadian segment operating income increased by $9.9 million, or 12.1%. Canadian average same-store sales increased 8.7% over the first quarter of 2005 and we opened 20 new system restaurants in the first quarter of 2006 in Canada. The U.S. operating segment income was $0.4 million in the first quarter of 2006 compared to a $1.5 million loss in the first quarter of 2005. U.S. average same-store sales increased 9.8% in the quarter compared to 2005 and we opened 7 new

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restaurants. This improvement in our U.S. business is primarily a result of higher sales volumes. Losses from company-operated restaurants were flat compared to the first quarter of 2005.

     Overall, our total segment operating income from our reportable segments as a percent of total revenues was 24.8% and 24.9% for the quarters ended April 2, 2006 and April 3, 2005, respectively.

     The following tables show information about the operating income of our reportable segments:

Operating Income (Loss)

	First quarter												Change from
	April 2,			% of			April 3,			% of			prior year
	2006			Revenues			2005			Revenues			Dollars			Percentage
	(Canadian dollars in thousands, except where noted)
Canada	$	91,910			24.7	%	$	81,995			25.3	%	$	9,915			12.1	%
U.S.		393			0.1	%		(1,457	)		(0.4	)%		1,850			127.0	%
Total Segment operating income		92,303			24.8	%		80,538			24.9	%		11,765			14.6	%
Corporate(1)		(9,192	)		(2.5	)%		(8,029	)		(2.5	)%		(1,163	)		14.5	%
Total operating income	$	83,111			22.3	%	$	72,509			22.4	%	$	10,602			14.6	%

⁽¹⁾ Corporate charges include certain overhead costs that are not allocated to individual business units and the impact of certain foreign currency exchange gains and losses.

Basis of Presentation

     The functional currency of Tim Hortons Inc. has historically been the U.S. dollar primarily because of its financial inter-relatedness with Wendy’s. Tim Hortons Inc. is essentially a holding company that holds investments and obligations that historically could have been be carried on the books of Wendy’s, and the functional currency of Wendy’s is the U.S. dollar. With the completion of the IPO and the repayment of the indebtedness to Wendy’s, there is no longer a significant inter-relatedness with Wendy’s, and Tim Hortons Inc.’s cash flows have changed to be predominantly Canadian-dollar based. As a result, the functional currency of Tim Hortons Inc. and several subsidiaries was changed to the Canadian dollar when the indebtedness to Wendy’s was repaid in April 2006. The functional currency of each of our operating subsidiaries is the local currency in which each subsidiary operates, which is either the Canadian or U.S. dollar. The majority of our operations, restaurants and cash flows are based in Canada and we are primarily managed in Canadian dollars.

     The discussion below should be read in conjunction with our historical interim condensed consolidated financial statements and the notes thereto for a full understanding of our financial position and results of operations as well as our annual consolidated financial statements and the notes thereto as well as financial definitions included in our registration statement on Form S-1 (Registration No. 333-130035) as filed with the SEC on December 1, 2005 as amended thereafter.

Results of Operations

     Below is a summary of comparative results of operations and a more detailed discussion of results for the first quarter of 2006 as compared to the first quarter of 2005.

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	First quarter ended												Change from
	April 2,			% of			April 3,			% of			prior year
	2006			Revenues			2005			Revenues			$			%
	(Canadian dollars in thousands, except where noted)
Revenues
Sales	$	242,651			65.1	%	$	209,296			64.7	%	$	33,355			15.9	%
Franchise revenues:
Rents and royalties		115,524			31.0	%		102,056			31.5	%		13,468			13.2	%
Franchise fees		14,583			3.9	%		12,237			3.8	%		2,346			19.2	%
		130,107			34.9	%		114,293			35.3	%		15,814			13.8	%
Total revenues		372,758			100.0	%		323,589			100.0	%		49,169			15.2	%
Costs and expenses
Cost of sales		213,912			57.4	%		183,067			56.6	%		30,845			16.8	%
Operating expenses		42,995			11.5	%		38,194			11.8	%		4,801			12.6	%
Franchise fee costs		13,917			3.7	%		12,036			3.7	%		1,881			15.6	%
General and administrative expenses		28,286			7.6	%		25,463			7.9	%		2,823			11.1	%
Equity income		(8,453	)		(2.3	)%		(7,606	)		(2.4	)%		(847	)		11.1	%
Other (income) expense, net		(1,010	)		(0.3	)%		(74	)		0.0	%		(936	)		n/m
Total costs and expenses, net		289,647			77.6	%		251,080			77.6	%		38,567			15.4	%
Operating income		83,111			22.3	%		72,509			22.4	%		10,602			14.6	%
Interest (expense)		(4,116	)		(1.1	)%		(853	)		(0.3	)%		(3,263	)		n/m
Interest income		2,429			0.7	%		752			0.2	%		1,677			n/m
Affiliated interest (expense), net		(6,789	)		(1.8	)%		(1,754	)		(0.5	)%		(5,035	)		n/m
Income before income taxes		74,635			20.0	%		70,654			21.8	%		3,981			5.6	%
Income taxes		11,045			3.0	%		23,153			7.2	%		(12,108	)		(52.3	)%
Net income	$	63,590			17.1	%	$	47,501			14.7	%	$	16,089			33.9	%

n/m – Not meaningful

Revenues

Sales

     In the first quarter of 2006, sales were $242.7 million, an increase of $33.4 million, or 15.9%, over the first quarter of 2005. Warehouse sales increased $30.0 million, or 17.4%, driven by an $11.7 million increase due to the number of franchise restaurants open and a $15.3 million increase due to higher average same-store sales. The remaining increase in warehouse sales was primarily related to a $5.1 million increase in coffee sales as a result of rising prices with respect to the underlying cost of coffee which has in part, been passed on to franchisees.

     Company-operated restaurant sales were $15.4 million and $15.1 million in the first quarter of 2006 and 2005, respectively.

     The consolidation under FIN 46R of 87 and 80 franchise restaurants on average during the first quarter of 2006 and 2005 resulted in sales of $25.0 million and $21.9 million, respectively.

     U.S. sales are denominated in U.S. dollars and translated into Canadian dollars for reporting of our results. The strengthening of the Canadian dollar relative to the U.S. dollar during the first quarter of 2006 reduced the value of reported sales by approximately 0.6% compared to the value that would have been reported had there been no exchange rate movement.

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Franchise Revenues

     Rents and Royalties. Revenues from rents and royalties increased $13.5 million, or 13.2%, in the first quarter of 2006 over the first quarter of 2005. Our net growth in both rental income and royalty income is driven by an increase of approximately $8.8 million due to the positive average same-store sales growth over this time period and approximately $4.7 million increase due to an increase in the number of franchised restaurants open. Stronger same-store sales growth was driven by our promotional calendar, new product offerings, operational execution at store level and price increases in some regions.

     Franchise Fees. Franchise fees during the first quarter of 2006 increased $2.3 million, or 19.2%, from the first quarter of 2005, mainly due to higher unit sales in Canada for both standard and non-standard restaurants of $1.7 million, recognition of higher deferred franchise fees of $1.0 million from our U.S. franchisees, offset by a $0.4 million decrease in restaurant resales, replacements and transfers. Non-standard restaurants include kiosks and locations in gas stations, hospitals, universities and office buildings.

     U.S. franchise revenues are denominated in U.S. dollars and translated into Canadian dollars for reporting of our results. The strengthening of the Canadian dollar relative to the U.S. dollar between the first quarters of 2006 and 2005 reduced the value of reported franchise revenues by approximately 0.5% compared to the value that would have been reported had there been no exchange rate movement.

Total Costs and Expenses

Cost of Sales

     Cost of sales increased $30.8 million, or 16.8% compared to the first quarter of 2005. This increase was primarily driven by an increase in warehouse cost of sales of $28.9 million, or 19.5%, during the period of which $13.1 million resulted from an increase in systemwide sales and $10.1 million increase due to the number of franchise restaurants open. In addition, warehouse cost of sales was also impacted by a $5.1 million increase in the cost of coffee.

     Warehouse cost of sales expressed as a percentage of warehouse sales increased to 87.5% in the first quarter of 2006 as compared to 86.0% in the first quarter of 2005. This increase is attributable in part to the start up costs associated with the opening of the Guelph, Ontario distribution centre in the first quarter of 2006 without the benefit of the full revenue stream from this facility.

     Company-operated restaurant cost of sales, which includes food, paper, labour and occupancy costs, varies with the average number and mix of company-operated restaurants. These costs remained flat at $17.5 million in the first quarter 2005 and the first quarter of 2006. The number of company-operated restaurants also remained constant in the first quarter of 2006 as compared to the first quarter 2005.

     The consolidation of 87 and 80 franchise restaurants, on average, under FIN 46R during the quarters ended April 2, 2006 and April 3, 2005, respectively, resulted in cost of sales of $19.3 million and $17.3 million, respectively.

     The strengthening of the Canadian dollar relative to the U.S. dollar during the first quarter of 2006 over the first quarter of 2005 reduced the value of reported cost of sales by approximately 0.6%.

Operating Expenses

     Total operating expenses representing primarily rent expense and property costs increased by $4.8 million in the first quarter of 2006 as compared to the first quarter of 2005, representing an increase of 12.6%. Our Canadian operations contributed the majority of the change with an increase of $3.0 million

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in rent expense and other property costs during the period as a result of an increase of 114 properties being leased and then subleased to franchisees. As at April 2, 2006 there were 2,044 properties owned or leased by us in Canada and then subleased to franchisees, compared to 1,930 such properties as at April 3, 2005. Rent expense also increased due to higher percentage rent costs on certain properties resulting from the increases in systemwide sales.

Franchise Fee Costs

     Franchise fee costs increased $1.9 million, or 15.6%, from the first quarter of 2005, mainly due to an increase of $1.4 million resulting from higher standard and non-standard restaurant sales and renovations and recognition of $1.0 million in deferred franchise fee costs from our U.S. franchisees offset by a $0.5 million decrease from restaurant resales, replacements and transfers. Non-standard restaurants include kiosks and locations in gas stations, hospitals, universities and office buildings and typically have lower operating costs.

General and Administrative Expenses

     General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support current operations and provide the infrastructure to support future growth. This expense category also includes charges from Wendy’s under the shared services agreement as described under “Our Relationship With Wendy’s” and in Note 2 to our condensed consolidated financial statements. In the first quarter 2006, these allocations were determined as if the shared services agreement was in effect during the quarter. In the first quarter of 2005, these allocations were primarily based on specific identification and the relative percentage of our revenues and headcount to the respective total Wendy’s costs. These allocations in the first quarter of 2006 and 2005 have been calculated on a comparable basis and totaled $3.7 million and $3.8 million on a pre-tax basis for the first quarters of 2006 and 2005, respectively.

     General and administrative expenses increased $2.8 million from $25.5 million in the first quarter ended April 3, 2005 to $28.3 million in the first quarter of 2006. The increase is attributable to costs associated with the IPO of $1.6 million, compensation costs related to the issuance of Wendy’s restricted stock units to some of our employees of $0.8 million, and $1.3 million relating to increased costs in anticipation of being a public company, offset by lower shared service costs from Wendy’s (excluding expenses related to restricted stock units) of $0.9 million in the first quarter of 2005. We started issuing and expensing restricted stock units in the second quarter of 2005. Prior to that, stock options of Wendy’s were issued to employees. At that time, stock options were not required to be expensed. As a percentage of revenues, general and administrative expenses decreased from 7.9% in the first quarter of 2005 to 7.6% in the first quarter of 2006.

Equity Income

     Equity income relates to income from equity investments in joint ventures and other investments over which we exercise significant influence. Our two most significant equity investments are our 50-50 joint venture with IAWS Group plc which provides our system with par-baked donuts, Timbits and bread products and our TIMWEN Partnerships which leases Canadian Tim Hortons/Wendy’s combination restaurants. In the first quarter of 2006, equity income was $8.4 million, up $0.8 million from the first quarter of 2005 as a result of stronger systemwide sales growth.

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Other Income and Expense, net

     Other income and expense, net, includes amounts that are not directly derived from our primary businesses. This includes expenses related to restaurant closures, other asset write-offs, foreign exchange gains and losses and minority interest. Other income, net of other expenses, increased by $0.9 million from the first quarter of 2005 relating primarily to foreign exchange gains.

Interest Expense (Including Affiliated Interest Expense, Net)

     Interest expense was $10.9 million in the first quarter of 2006 and $2.6 million in the first quarter of 2005, an increase of $8.3 million. Affiliate interest expense, net, increased $5.0 million primarily as a result of the interest on the US$960.0 million note payable to Wendy’s at an interest rate of 3% per annum. We repaid US$427.4 million principal and accrued interest of US$12.7 million on March 3, 2006 with available cash and the net proceeds from $500.0 million in indebtedness we incurred under our new credit facilities and bridge loan facility. On April 26, 2006, we repaid the remainder of the US$960.0 million note of US$532.6 million plus accrued interest of US$2.0 million ($2.4 million) using the proceeds from our IPO. We do not expect to have similar borrowings from Wendy’s in the future.

     As selected by the Company under the terms of the senior credit facilities, the credit facilities bear interest at Bankers’ Acceptances plus an applicable margin. Interest on our new borrowings contributed the majority of the $3.3 million increase in our non-affiliated interest expense in the first quarter of 2006 as compared to the first quarter of 2005.

     Historically, affiliated interest expense, net, in the consolidated statements of operations reflected interest costs related to specific net borrowings by us from Wendy’s. Wendy’s has not allocated a portion of its external debt interest cost to us. As a result, interest expense recorded by us in 2005 does not reflect the expense we would have incurred as a stand-alone company.

     In February 2006, we and one of our subsidiaries entered into new credit facilities including a five-year senior bank facility and a $200.0 million bridge loan facility. The senior bank facility consists of a $300.0 million term loan facility, a $200.0 million Canadian revolving credit facility and a US$100.0 million U.S. revolving credit facility. As a result of this change in our capital structure, we expect that annual interest costs will increase by approximately $11 million to $12 million in 2006 post IPO, compared to our 2005 historical financial statements, after taking into account the bridge loan repayment on May 3, 2006 and assuming the revolving credit facilities remain undrawn.

Interest Income

     Interest income was $2.4 million in the quarter ended April 2, 2006 and $0.8 million in the first quarter of 2005, primarily relating to higher average cash balances on hand including the proceeds from the IPO in March 2006 and higher interest rates in Canada.

Income Taxes

     The effective income tax rate for the quarter ended April 2, 2006 was 14.8%, compared to 32.8% for the comparative period ended April 3, 2005. This variance between periods includes the first quarter 2006 deferred tax reversal of $5.8 million in Canadian withholding taxes that are no longer expected to be paid compared to $1.3 million accrued for Canadian withholding taxes for the quarter ended April 3, 2005. The Canadian withholding taxes had been accrued for intercompany cross-border dividends that are no longer expected to be paid as a result of the IPO and related capital restructuring. The first quarter 2006 effective tax rate was also favourably impacted by $4.3 million in permanent book and tax

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differences for losses on certain hedging transactions. The Company does not expect to realize benefits of a similar nature in subsequent periods.

     The U.S. portion of the tax provision for the first quarter of 2006 was computed on a stand alone basis, adjusted in accordance with the Company’s tax sharing agreement with Wendy’s. Our tax provision reflects an expected benefit for foreign tax credits. The utilization of these credits is dependent upon the tax position of Wendy’s during its 2006 taxable year and other factors. Wendy’s management believes that it is more likely than not that we will realize the expected benefit; however, utilization of these credits is dependent on future results from Wendy’s operations which could be adversely impacted by a variety of business factors.

     The determination of income tax expense takes into consideration amounts that may be needed to cover exposure for open tax years. The Canada Revenue Agency is currently conducting an examination of various Canadian subsidiaries of ours for the years 1998 through 2003. The Internal Revenue Service is currently conducting an examination of the Wendy’s federal income tax returns for the years 2001 through 2006. We do not expect any material impact on earnings to result from the resolution of matters related to open tax years; however, actual settlements may differ from amounts accrued. Any settlement may have a material impact on cash flows in the quarter in which the settlement occurs.

Comprehensive Income

     In the first quarter of 2006, comprehensive income was $43.9 million compared to $48.1 million in the first quarter of 2005. Net income increased $16.1 million from the first quarter of 2005 to the first quarter of 2006. Other components of comprehensive income included translation expense of $20.4 million and an unrealized gain on derivatives of $0.8 million, net of tax. The translation expense in the first quarter of 2006 was driven by the replacement of U.S. dollar debt, being the note payable to Wendy’s, with Canadian dollar denominated debt and the change in exchange rate between the closing date of the IPO and the foreign exchange rate on April 2, 2006. In addition, in the first quarter of 2006, there was a $2.6 million gain, net of taxes of $1.5 million related to the Company’s hedge of certain net investment positions. This gain is included in the translation adjustments component of other comprehensive income in the first quarter of 2006.

Liquidity and Capital Resources

Overview

     Our primary liquidity and capital requirements are for new store construction and general corporate needs. Historically, our working capital needs have not been significant because of our focused management of accounts receivable and inventory. Operating cash flows have historically funded our capital expenditure requirements for new restaurant development, remodeling, maintenance, technology initiatives and other capital needs. In the first quarter of 2006 we used $17.2 million of cash as compared to cash provided by operations of $15.4 million in the first quarter of 2005 for a net change of $32.6 million. Interest and tax payments were higher by $20.4 million and $19.5 million, respectively, compared to the first quarter of 2005. We believe that we will continue to generate adequate operating cash flows to fund both our capital expenditures and expected debt service requirements both over the next 12 months and in the long term.

     In February 2006, the Company entered into an unsecured senior credit facility consisting of a $300.0 million term loan component and two revolving credit facilities: a $200.0 million Canadian revolving credit facility and a US$100.0 million U.S. revolving credit facility. We, along with one of our principal subsidiaries, also entered into a $200.0 million bridge loan facility in February 2006,

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and we repaid this bridge loan facility on May 3, 2006. For so long as Wendy’s is required to consolidate our results of operations and financial position, the master separation agreement provides that we may not incur any additional indebtedness if the incurrence of indebtedness either (i) will cause Wendy’s to be in breach or default under any contract or agreement, (ii) is reasonably likely, in Wendy’s reasonable opinion, to adversely impact Wendy’s credit rating or (iii) involves more than US$10.0 million without a written consent from Wendy’s . Under the master separation agreement we are permitted to incur indebtedness under our senior bank facility or refinance our bridge loan facility.

     If additional funds are needed for strategic initiatives or other corporate purposes, we believe we could borrow additional funds while maintaining a strong capital structure. Our ability to incur additional indebtedness will be limited by covenants under our credit facilities, as described below under “Credit Facilities” and our agreements with Wendy’s as described above. Any such borrowings may result in an increase in our borrowing costs. If such additional borrowings were significant, they could result in a weaker capital structure and it might be possible that we would not be able to borrow on acceptable terms. Our ability to issue additional equity is constrained until Wendy’s distributes our shares to its shareholders because our issuance of additional shares may cause the distribution to be taxable, and under the tax sharing agreement we would be required to indemnify Wendy’s against the tax in this situation.

Credit Facilities

     As of January 1, 2006, we had a $25.0 million revolving credit facility that was guaranteed by Wendy’s and undrawn except for approximately $5.0 million that was committed to support standby letters of credit. This facility was cancelled on February 28, 2006 and replaced with new facilities except for the amount being used to support the standby letters of credit which will remain in place until the expiration of the respective letters of credit.

     On February 28, 2006, the Company entered into an unsecured credit facility which may be drawn by us or one of our principal subsidiaries. Our 5-year senior bank facility (referred to herein as the “senior bank facility”) consists of a $300.0 million term loan facility, a $200.0 million Canadian revolving credit facility and a US$100.0 million U.S. revolving credit facility. We borrowed the entire $300.0 million principal amount of the term loan component of the senior bank facility as a single advance, and applied the net proceeds toward the US$960.0 million note payable by us to Wendy’s.

     The $200.0 million Canadian revolving credit facility includes an overdraft facility of $15.0 million. The revolving credit facility components of the senior bank facility may be borrowed and repaid on a revolving basis over the life of that facility until February 28, 2011. These borrowings may be made under different floating rate loan indices as selected by us or one of our principal subsidiaries and will include, where applicable, a margin determined by our “applicable leverage ratio,” as defined in the agreement governing the senior bank facility or, if applicable, the rating level of our long-term debt (if and when applicable). The senior bank facility will mature in 2011. To limit our exposure to interest rate variability we entered into an interest rate swap in February 2006 for $100.0 million of our $300.0 million term loan facility that converts a portion of the variable rate debt from floating rate to fixed rate. The interest rate swap essentially fixed the interest rate on one third of the $300.0 million term loan facility to 5.175% and matures on February 28, 2011.

     In addition, the Company entered into an unsecured $200.0 million bridge loan facility (referred to herein as the “bridge loan facility”). We borrowed the entire $200.0 million principal amount of the bridge loan facility as a single advance, and applied the net proceeds toward the US$960.0 million note payable by us to Wendy’s. We repaid our bridge loan facility on May 3, 2006 and terminated the facility.

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     The credit facilities contain certain covenants that will limit the ability of us and certain of our subsidiaries to, among other things: incur additional indebtedness; create liens; merge with other entities; sell assets; make restricted payments; make certain investments, loans, advances, guarantees or acquisitions; change the nature of our business; enter into transactions with affiliates; and restrict dividends (see also Part II, Item 2) or enter into certain restrictive agreements. The credit facilities also require compliance with a maximum debt coverage ratio and a minimum fixed charge coverage ratio. The maximum debt coverage ratio must not exceed 3.50 in respect of the first fiscal quarter ending after February 28, 2006 and 2.50 thereafter and is computed as consolidated total debt divided by net income before interest expense, taxes, depreciation and amortization, and net of extraordinary non-cash losses and gains incurred outside the ordinary course of business (as amended on April 24, 2006 – see discussion below). Consolidated total debt (the numerator) primarily includes all liabilities for borrowed money, capital lease obligations, letters of credit (whether or not related to borrowed money), the net marked-to-market liability under swap agreements and guarantee liabilities.

     The minimum fixed charge coverage ratio must be no less than 2.25 in respect of the first fiscal quarter ending after February 28, 2006 and 2.75 thereafter. It is computed as net income before interest expense, taxes, depreciation and amortization, rent expense, and net of extraordinary non-cash losses and gains incurred outside the ordinary course of business, collectively as the numerator, divided by consolidated fixed charges (as amended on April 24, 2006 – see discussion below). Consolidated fixed charges includes interest, rent expense, cash dividends paid by Tim Hortons Inc. before the IPO, and principal payments made under the US$960 million note to Wendy’s after March 3, 2006, less share issuance proceeds and proceeds of additional subordinated debt, to the extent the foregoing are used to repay principal under the US$960 million note to Wendy’s.

     In conjunction with the senior bank facility, Wendy’s entered into a subordination agreement. Under the terms of the subordination agreement, Wendy’s could not accept or demand any further payment on the US$960.0 million note until April 3, 2006 or thereafter.

     The Company entered into an amendment of its senior bank facility and bridge credit facility on April 24, 2006, with an effective date of February 28, 2006. Both amendments correct, on substantially similar terms, a drafting error in the original agreements by revising the timing of the application of the debt covenant thresholds to be consistent with the period during which the Company is permitted to repay certain intercompany debt. These corrected terms reflect the terms that had been agreed to by both parties prior to the effective date of the original agreement. No additional changes were made and required lender approval was obtained for both amendments with no additional fees incurred other than drafting expenses for the amendments.

     Events of default under the credit facilities include, among other things: a default in the payment of the obligations under the credit facilities; a breach of any representation, warranty or covenant by us or certain of our subsidiaries under the credit facilities; certain events of bankruptcy, insolvency or liquidation involving us or certain of our subsidiaries; any payment default or acceleration of indebtedness of us or certain of our subsidiaries if the total amount of such indebtedness unpaid or accelerated exceeds $25.0 million; and a change of control, excluding Wendy’s distribution of our shares to its shareholders.

     We will use the borrowings under the revolving portions, if drawn, of the senior bank facility for general corporate purposes, including potential acquisitions.

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     In September 2005, we distributed, as a dividend on our common stock, a promissory note to Wendy’s in the principal amount of US$960.0 million ($1.1 billion). We issued the US$960.0 million note to Wendy’s in order to introduce additional leverage in our capital structure and to provide Wendy’s with a return on its investment in us prior to the IPO through a distribution of current and accumulated earnings and profits. The note was payable within 30 days of demand and bears an interest rate of 3.0% per annum. We paid Wendy’s approximately US$12.7 million of accrued interest, and repaid approximately US$427.4 million of principal, on March 3, 2006 with proceeds from the $300.0 million term loan component of our senior bank facility and our $200.0 million bridge loan facility plus available cash. On April 26, 2006, we repaid the remainder of the US$960.0 million note of US$532.6 million plus accrued interest of US$2.0 million ($2.4 million) using the proceeds from our IPO.

Comparative Cash Flows

     Operating Activities. Net cash used in operating activities was $17.2 million in the first quarter 2006 as compared to $15.4 million provided from operations in the first quarter of 2005. Operating cash flows declined by $32.6 million in the first quarter of 2006 as compared to the first quarter of 2005. Interest and tax payments were higher by $20.4 million and $19.5 million, respectively, compared to the first quarter of 2005. Other factors contributing to the lower operating cash flows include differences in working capital relating to payments of accounts payable, accrued expenses, inventory and amounts due from and to Wendy’s. In addition, the Company paid US$13.1 million ($15.4 million) to settle certain forward currency contracts that were entered into in the third quarter 2005. Operating income was higher in the first quarter of 2006 compared to the first quarter of 2005 by $10.6 million partially offsetting these operating cash flow declines.

     Investing Activities. Net cash used in investing activities totaled $38.5 million in the first quarter 2006 compared to $61.1 million in the first quarter of 2005. Capital expenditures in the first quarter of 2006 were $39.8 million, which were essentially flat to the first quarter 2005 capital expenditures of $38.6 million. Other significant items impacting our investing cash flows in the first quarter of 2005 included net loans repaid to Wendy’s of $21.9 million.

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     Capital expenditures are typically the largest ongoing component of our investing activities and include expenditures for new restaurants, improvements to existing restaurants and other capital expenditures. A summary of capital expenditures for the quarter is as follows:

	First quarter ended
	April 2,		April 3,
	2006		2005
Capital expenditures	(Canadian dollars in millions)
New restaurants	$	23.1	$	22.8
Store improvements		5.7		4.3
Guelph Distribution Centre		8.1		6.6
Other capital needs		2.9		4.9
Total capital expenditures	$	39.8	$	38.6

     In the first quarter of 2006, capital expenditures were $39.8 million for new restaurant development, remodeling, maintenance, technology initiatives and other capital needs. Capital spending in the first quarter of 2005 was $38.6 million. In the first quarter of 2006 we substantially completed and commenced operations of our new Guelph distribution and warehouse facility which will better serve our distribution needs. The expected investment in the new facility is approximately $74 million, of which approximately 95% was spent as at April 2, 2006. In the first quarter of 2006 we opened 20 new restaurants in Canada and 7 in the U.S. compared with 14 in Canada and 9 in the U.S. in the first quarter of 2005. In fiscal 2006 we expect to open 140 to 150 new restaurants in Canada and 40 to 50 new restaurants in the U.S. Although we anticipate new restaurant development will continue in the range of 180 to 200 stores annually, future escalation of real estate and/or construction costs may slow this growth. We expect fiscal 2006 capital expenditures to be between $185.0 million and $210.0 million for new restaurant development, remodeling, maintenance, technology initiatives and other capital needs. We anticipate future capital needs related to our normal business activities will be funded through ongoing operations.

     Financing Activities. Financing activities provided cash of $852.4 million in the first quarter of 2006 and used cash of $31.4 million in the first quarter of 2005. In the first quarter of 2006 we entered into new credit facilities providing $498.3 million net proceeds related to debt in the principal amount of $500.0 million and incurred $1.7 million in financing costs that have been deferred over the terms of the related facilities. The net proceeds from the new credit facilities plus available cash were used to repay a portion of the US$960.0 million note to Wendy’s plus accrued interest, totaling $493.6 million. In April 2006, we repaid the remainder of the US$960.0 million note of US$532.6 million plus accrued interest of US$2.0 million ($2.4 million) using the proceeds from our IPO.

     In addition, during the first quarter of 2006, we completed our IPO, issuing 33,350,000 shares of our common stock at an offering price of $27.00 (US$23.162) per share. The IPO generated cash proceeds of $903.8 million and share issue costs paid in the quarter were $55.1 million. In the first quarter of 2005, cash used in financing activities was $31.4 million mainly driven by repayment of borrowings to Wendy’s.

     Certain of our U.S. employees participate in two Wendy’s-sponsored U.S. domestic defined benefit pension plans. Wendy’s manages those plans on a consolidated basis and makes contributions to those plans in amounts sufficient, on an actuarial basis, to fund, at a minimum, its portion of the plans’ normal cost on a current basis, and to fund its portion of the actuarial liability for past service costs in accordance with Department of Treasury Regulations. Obligations to persons who are participants as of the date of March 24, 2006 will remain the responsibility of Wendy’s. We do not intend to adopt a new U.S. defined

39

benefit pension plan. Based on a headcount allocation approach, our pro rata expense related to the Wendy’s plans was not significant.

Off-Balance Sheet Arrangements

     We do not have “off-balance sheet” arrangements as of April 2, 2006 and April 3, 2005 as that term is described by the SEC.

Application of Critical Accounting Policy

     On November 18, 2005, the Company’s stockholder approved the 2006 Stock Incentive Plan (“2006 Plan”). The 2006 Plan is an omnibus plan, designed to allow for a broad range of equity based compensation awards in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalent rights, performance awards and share awards to eligible employees and directors of the Company or its subsidiaries. No awards were made under this plan in 2005 or through the first quarter of 2006.

     Certain employees of the Company have participated in various Wendy’s plans which provided options and, beginning in 2005, restricted stock units that would settle in Wendy’s common stock. The following is a description of the impact on the Company related to Wendy’s plans and tables summarizing stock option and restricted stock unit activity for the Company’s employees.

     Prior to January 2, 2006, Wendy’s and the Company used the intrinsic value method to account for stock-based employee compensation as defined in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. Accordingly, because stock options granted prior to January 2, 2006 were granted at market value at the date of grant, and therefore had no intrinsic value at grant date, compensation expense related to stock options was recognized using the Black-Scholes method only when stock option awards were modified after the grant date. During the fourth quarter of 2005, Wendy’s accelerated the vesting of all outstanding options, excluding those held by the independent directors of Wendy’s. Prior to January 2, 2006, compensation expense related to restricted stock unit awards was measured based on the market value of Wendy’s common stock on the date of grant. Wendy’s generally satisfies exercises of options through the issuance of new shares of Wendy’s stock while Wendy’s restricted stock units granted to Company employees are expected to be converted to the Company’s restricted stock units at an equivalent fair value and then net-settled with the Company’s shares to meet the employee’s minimum statutory withholding tax requirements (see Note 15 with respect to restricted stock units converted on May 1, 2006).

     On January 2, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment”, which requires share-based compensation cost to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employee’s requisite service period, which is generally the vesting period of the equity grant. The Company elected to adopt SFAS No. 123R using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior period presented in this Form 10-Q has not been restated to reflect the fair value method of expensing stock options. Also, because the value used to measure compensation expense for restricted stock unit awards is the same for APB Opinion No. 25 and SFAS No. 123R and because all of Wendy’s stock option grants granted to employees of the Company were fully vested prior to January 2, 2006, the adoption of SFAS 123R did not have a material impact on the Company’s operating income, pretax income or net income. In accordance with SFAS No. 123R, the unearned compensation amount previously separately displayed under stockholders’ equity was reclassified during the first quarter of 2006 to capital in excess of stated value on the Company’s condensed consolidated balance sheets. In

40

March 2005, the SEC issued Staff Accounting Bulletin No. 107 regarding the SEC’s interpretation of SFAS No. 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123R.

     The Company recorded $0.8 million ($0.5 million net of tax) in compensation expense for restricted stock units for the first quarter 2006. There was no such expense in the first quarter of 2005. As of April 2, 2006, total unrecognized compensation cost related to nonvested share-based compensation was $5.2 million and would normally be recognized over a weighted-average period of 1.7 years according to the original terms of the grant.

Market Risk

     With the exception of the items discussed herein, our exposure to various market risks remain substantially the same as reported on January 1, 2006. Our disclosures about market risk are incorporated herein by reference from our registration statement on Form S-1 (Registration No. 333-130035) filed with the SEC on December 1, 2005 and subsequently amended.

Foreign Exchange Risk

     In connection with the completion of our IPO, certain intercompany notes were expected to be repaid and, accordingly, were marked-to-market in fiscal 2005. Previously, the translation of these intercompany notes was recorded as a component of comprehensive income, rather than in income, in accordance with SFAS No. 52 — “Foreign Currency Translation”. To manage this additional exposure, we entered into forward currency contracts to sell $500.0 million and buy US$427.4 million. Under SFAS No. 133, these forward currency contracts are designated as highly effective cash flow hedges. In accordance with SFAS No. 133, we defer unrealized gains and losses arising from these contracts until the impact of the related transactions occur. The fair value unrealized losses on these contracts as of January 1, 2006 were $2.3 million, net of taxes of $1.4 million. On the maturity date of March 3, 2006, we received US$427.4 million from the counterparties and disbursed to the counterparties $500.0 million Canadian, resulting in a net cash flow of US$13.1 million ($15.4 million) to the counterparties (representing the difference from contract rate to spot rate on settlement). Per SFAS No. 95, “Statement of Cash Flows”, the net cash flow is reported in the net cash provided by operating activities line of the Consolidated Statements of Cash Flows for the quarter ended April 2, 2006. These forward currency contracts remained highly effective cash flow hedges and qualified for hedge accounting treatment through their maturity. As a result, during the first quarter of 2006, changes in the fair value of the effective portion of these foreign currency contracts offset changes in the cross-border intercompany notes and a $0.9 million gain was recognized in the first quarter of 2006 as the ineffective portion of the foreign currency contracts.

     In the fourth quarter of 2005, we entered into forward currency contracts to sell $578.0 million and buy US$490.5 million in order to hedge certain net investment positions in Canadian subsidiaries under SFAS No. 133, these forward currency contracts were designated as highly effective hedges. The fair value unrealized loss on these contracts was $3.2 million, net of taxes of $1.9 million and $5.8 million, net of taxes of $3.6 million as of April 2, 2006 and January 1, 2006, respectively. Changes in the fair value of these foreign currency net investment hedges are included in the translation adjustments line of accumulated other comprehensive expense. Derivative fair values are based on quoted market prices. These hedges matured in April 2006. The Company received US$490.5 million from the counterparties and disbursed to the counterparties the US$ equivalent of $578.0 million, resulting in a net cash outflow of US$14.9 million ($17.6 million) to the counterparties in the second quarter of 2006. No amounts related to these net investment hedges were reclassified to earnings.

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Interest Rate Risk

     Prior to the first quarter of 2006, we have had insignificant external borrowings. We are exposed to interest rate risk impacting our net borrowing costs because our new borrowings of $500.0 million bear a floating rate of interest. We will seek to manage our exposure to interest rate risk and to lower our net borrowing costs by managing the mix of fixed and floating rate instruments based on capital markets and business conditions. Accordingly, we entered into an interest rate swap for $100.0 million of our $300.0 million term loan facility that converts a portion of the variable rate debt from floating rate to fixed rate. The interest rate swap essentially fixed the interest rate on one third of the $300.0 million term loan facility to 5.175% and matures on February 28, 2011. The interest rate swap is considered to be a highly effective cash flow hedge according to criteria specified in SFAS No. 133 – Accounting for Derivative Instruments and Hedges Activities. We will not enter into speculative swaps or other speculative financial contracts. Each one-eighth point change in interest rates would result in a $0.3 million change in interest expense on an annualized basis, after repayment of the bridge loan facility on May 3, 2006.

SAFE HARBOR STATEMENT

     Certain information contained in this Form 10-Q, particularly information regarding future economic performance and finances, plans and objectives of management, is forward looking. In some cases, information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appears together with such statement. In addition, the following factors, in addition to other possible factors not listed, could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include: competition within the quick-service restaurant industry, which remains extremely intense, particularly with respect to price, service, location, personnel, qualified franchisees, and type and quality of food; changes in economic and political conditions, consumer preferences and perceptions (including food safety, health and dietary preferences and perceptions), and other conditions; harsh weather and other calamities; food costs; labor and benefit costs; legal claims; disruptions in supply chain or changes in the price, availability and shipping costs (including changes in international commodity markets, especially for coffee); risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new restaurant development; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; changes in applicable accounting rules; increased competition experienced by the Company’s manufacturing and distribution operations; possibility of termination of the Maidstone Bakeries joint venture; risk associated with the Company being controlled by Wendy’s International, Inc.; risk associated with the Company’s investigation of and/or completion of acquisitions, mergers, joint ventures or other targeted growth opportunities; risk associated with the Company’s significant debt obligations; and other factors set forth in Exhibit 99 attached hereto.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     This information is incorporated by reference from the section titled “Market Risk” on page 41 of this Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

(a) The Company, under the supervision, and with the participation, of its management, including its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the Company’s disclosure controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective.

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(b)	During the first quarter of fiscal 2006, the Company completed the implementation of a new warehouse and inventory management system at its Guelph distribution centre.
	Except for the preceding change, there was no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1A. RISK FACTORS

     In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under the heading “Risk Factors” in our registration statement on Form S-1 (Registration No. 333-130035), originally filed with the SEC on December 1, 2005 and subsequently amended, which could materially affect our business, financial condition or future results. The risks described in the registration statement on Form S-1 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     On March 24, 2006, the Company commenced its initial public offering of common stock, US$0.001 par value per share, together with associated per share purchase rights, pursuant to the registration statement on Form S-1, as amended, filed by the Company with the Securities and Exchange Commission (Registration No. 333-130035) and which became effective on March 23, 2006. The per share purchase rights granted under the rights agreement trade with and are inseparable from, the Company’s common stock. All shares of common stock offered by the Company as part of its initial offering, a total of 33,350,000 shares of common stock, which includes those additional shares available to the underwriters for purchase upon the exercise of their over-allotment option, were sold. The offering has now terminated.

     The 33,350,000 shares of common stock registered in connection with the Company’s initial offering were offered and sold under the offering at a per share price of $27.00 (US$23.1620), for a maximum aggregate offering price and gross proceeds to the Company generated by the offering of $903,825,000 (US$769,232,000). After deduction of estimated underwriting discounts, commissions, and fees and other offering expenses estimated through the effective date of the registration statement (March 23, 2006), the estimated net proceeds to the Company, as further described in the Form S-1, were $838,600,000 (US$719,396,000). The co-managing underwriters in the offering were Goldman, Sachs & Co., RBC Capital Markets Corporation, JPMorgan, Scotia Capital, Bear, Stearns & Co. Inc., CIBC World Markets, Cowen & Company, Harris Nesbitt, Lazard Capital Markets, Merrill Lynch & Co., and TD Securities.

     The actual net proceeds received by the Company in the offering were $840.9 million (US$715.6 million). These actual net proceeds were determined after deduction of $54.2 million (US$46.2 million) in actual underwriting discounts, commissions, and fees, including those associated with the underwriters’ exercise of the over-allotment option, and other actual fees and expenses incurred in connection with the offering of $8.7 million (US$7.5 million). All of these expenses were incurred prior to April 2, 2006. There were no finder’s fees incurred by the Company in connection with the initial public offering.

     The actual net proceeds of $840.9 million (US$715.6 million) differed from those estimated in the Company’s Form S-1 due to the effects of foreign exchange resulting from the allocation of the Company’s shares between Canada and the U.S. (and the proceeds received by the Company from the sale of such shares in Canadian and U.S. dollars) and lower expenses of the offering than originally estimated.

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     None of the underwriting discounts and commissions or other offering fees or expenses were incurred or paid, nor were any proceeds of the offering applied or payments made therefrom, as of the end of the reporting period, directly or indirectly, to the Company’s officers, directors, or their associates, to persons owning ten percent (10%) or more of any of the Company’s equity securities, or to any of the Company’s affiliates.

     On March 29, 2006, the Company purchased U.S. dollar currency with the $447.4 million of net proceeds from its Canadian dollar sales of common stock as part of the offering, yielding US$380.8 million. As of the ending date of the Company’s first fiscal quarter (April 2, 2006), net proceeds of US$718.7 million were invested on a temporary basis in short-term, interest bearing, investment-grade securities.

     On April 26, 2006, the Company used net proceeds of the offering to repay the remaining balance of principal and accrued interest under the US$960.0 million note payable to Wendy’s in the amount of US$534.6 million. The Company further used net proceeds of the offering plus available cash to repay the $200.0 million bridge loan facility on May 3, 2006. The remaining proceeds of US$84.1 million continue to be invested on a temporary basis in the same type of accounts described above.

Dividend Restrictions with Respect to Part II, Item 2 Matters

     The terms of the senior credit facilities contain limitations on the payment of dividends by the Company. The Company may not make any dividend distribution unless, at the time of, and after giving effect to the aggregate dividend payment the Company is in compliance with the financial covenants contained in the senior credit facilities, and there is no default outstanding under the senior credit facilities. The Company is not restricted from declaring dividends payable solely in additional equity securities of the Company, except that during the 180-day period commencing on March 23, 2006 (which may be extended under certain circumstances), the Company may not issue any such dividends without the prior written consent of the underwriters of the initial public offering.

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ITEM 6. EXHIBITS

(a) Index to Exhibits on Page 47.

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SIGNATURE

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

	TIM HORTONS INC.
	(Registrant)
Date: May 11, 2006	/s/ Cynthia J. Devine
	Cynthia J. Devine
	Executive Vice President and
	Chief Financial Officer

46

TIM HORTONS INC. AND SUBSIDIARIES

INDEX TO EXHIBITS

Exhibit
Number	Description	Page No.
10(a)	Amendment No. 1 to Senior Credit Facilities Agreement	Incorporated herein by reference from Exhibit 10(a) of the Form 8-K filed by the Issuer with the SEC on April 28, 2006.
10(a)(i)	Form of Restricted Stock Unit Conversion Award Agreement
10(b)	Tim Hortons Inc. 2006 Stock Incentive Plan	Incorporated herein by reference from Exhibit 10 of the Form S-8 filed by the Issuer with the SEC on May 1, 2006
31(a)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	53
31(b)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	54
32(a)	Section 1350 Certification of Chief Executive Officer	55
32(b)	Section 1350 Certification of Chief Financial Officer	56
99	Safe Harbor Under the Private Securities Litigation Reform Act of 1995	57

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EX-10.A.I

Exhibit 10(a)(i)

STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)

Tim Hortons Inc.

May 1, 2006

     THIS AGREEMENT, made effective as of 9:30 a.m. on the 1^st day of May, 2006 (the “Date of Grant”), between Tim Hortons Inc., a Delaware corporation (the “Company”), The TDL Group Corp., an Ontario corporation (the “Employer”) and                                          (the “Grantee”).

     WHEREAS, Wendy’s International, Inc. (“WII”) adopted the Wendy’s International, Inc. 2003 Stock Incentive Plan (the “WII Plan”) in order to provide additional incentive to certain employees and directors of WII and its Subsidiaries;

     WHEREAS, effective as of May 1, 2005, WII granted to the Grantee (subject to any rejection by the Grantee) an award of stock units and related dividend equivalent rights under the WII Plan (the “Original Award”);

     WHEREAS, the Company has adopted the Tim Hortons Inc. 2006 Stock Incentive Plan (the “THI Plan”) in order to provide additional incentive to certain employees and directors of the Company and its Subsidiaries; and

     WHEREAS, subject to the Grantee submitting, on or before 5:00 p.m. Eastern Time on April 28, 2006, a notice evidencing its intent to irrevocably reject the portion of the Original Award that is otherwise scheduled to vest on May 1, 2006 in accordance with the terms of the Original Award (the “Rejection”), the Committee has determined to grant to the Grantee under the THI Plan an Award of Stock Units with related Dividend Equivalent Rights (the “New Award”) as provided herein to encourage the Grantee’s efforts toward the continuing success of the Company and its Subsidiaries.

     NOW, THEREFORE, the parties hereto agree as follows:

     1. Award.

          1.1 Provided that there has been a Rejection by the Grantee (or the Grantee’s estate, if applicable) and provided further that Grantee has executed and returned this Agreement as provided in Section 8 hereof, the Company hereby grants to the Grantee in respect of 2004 employment services a New Award of a number of Stock Units, as determined below, with an equal number of related Dividend Equivalent Rights. Each Stock Unit represents the right to receive one (1) Share at the time and in the manner set forth in Section 7 hereof.

48

          1.2 The number of Stock Units to be awarded pursuant to this Agreement shall be determined by applying the following formula:

[WR] x [WC/TC]

where:

WR = the number of stock units due to vest on May 1, 2006 pursuant to the Original Award, which may be further described by the following formula: (a) the number of stock units granted under the Original Award, together with (b) the number of additional stock units granted pursuant to the dividend equivalent rights granted under the Original Award prior to the first vesting date, the sum of which is divided by three and rounded up to the nearest whole number

WC = the closing price of WII stock on the New York Stock Exchange on Friday, April 28, 2006; and

TC = the closing price of THI stock on the New York Stock Exchange on Friday, April 28, 2006.

No fractional Stock Units shall be granted hereunder; the number of Stock Units granted shall be rounded down to the next whole Stock Unit, if necessary.

          1.3 Each Dividend Equivalent Right represents the right to receive all of the cash dividends that are or would be payable with respect to the Share represented by the Stock Unit to which the Dividend Equivalent Right relates. With respect to each Dividend Equivalent Right, any such cash dividends shall be converted into additional Stock Units based on the Fair Market Value of a Share on the date such dividend is made (provided that no fractional Stock Units shall be granted). Such additional Stock Units shall be subject to the same terms and conditions applicable to the Stock Unit to which the Dividend Equivalent Right relates, including, without limitation, the restrictions on transfer, forfeiture, vesting and payment provisions contained in Sections 2 through 8, inclusive, of this Agreement. In the event that a Stock Unit is forfeited pursuant to Section 6 or 8 hereof, the related Dividend Equivalent Right shall also be forfeited.

          1.4 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the THI Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the THI Plan.

     2. Restrictions on Transfer.

          The Stock Units granted pursuant to this Agreement may not be sold, transferred or otherwise disposed of and may not be pledged or otherwise hypothecated.

     3. Vesting.

          Except as provided in Section 8 of this Agreement, the Stock Units granted hereunder shall vest at 9:30 a.m. Eastern Time on May 1, 2006 (the “Vesting Date”).

     4. RESERVED.

     5. RESERVED.

     6. RESERVED.

     7. Delivery of Shares.

          On the Vesting Date or as soon thereafter as administratively feasible, and in any event no later than December 31, 2007, the Company shall, after reducing the number of Shares to reflect the withholding pursuant to Section 11, at its option either (i) issue treasury Shares to the Grantee (or, if applicable, the Grantee’s estate); or (ii) deliver cash to a broker who, as agent for the Grantee, shall purchase the reduced number of Shares on the Toronto Stock Exchange. In the event the Company elects to deliver cash to a broker who, as agent for the Grantee, shall purchase the reduced number of Shares on the Toronto Stock Exchange, Grantee acknowledges that such Shares will be considered as being delivered to the Grantee at the time the Shares are purchased by the purchasing agent on the Grantee’s behalf. In no event will the Grantee receive cash in respect of this New Award. No fractional Shares shall be delivered hereunder; the number of Shares delivered shall be rounded down to the next whole Stock Unit, if necessary.

     8. Execution of the Award

          The Stock Units and Dividend Equivalent Rights granted to the Grantee pursuant to the New Award shall be subject to the Grantee’s execution and return of the Rejection and this Agreement to the Company or its designee (including by electronic means, if so provided) no later than 8:30 a.m. Eastern Time on May 1, 2006 (the “Grantee Return Date”); provided that if the Grantee dies before the Grantee Return Date, this requirement shall be deemed to be satisfied. If this Agreement is not so executed and returned on or prior to the Grantee Return Date, the Stock Units and Dividend Equivalent Rights evidenced by this Agreement shall be forfeited, and neither the Grantee nor the Grantee’s heirs, executors, administrators and successors shall have any rights with respect thereto.

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     9. No Right to Continued Employment.

          Nothing in this Agreement or the THI Plan shall interfere with or limit in any way the right of the Company or its Subsidiaries to terminate the Grantee’s employment, nor confer upon the Grantee any right to continuance of employment by the Company or any of its Subsidiaries or continuance of service as a Board member.

     10. Withholding of Taxes.

          Prior to the delivery of cash to a broker to purchase and deliver Shares pursuant to Sections 1 and 7 hereof, the Company shall withhold from such cash an amount equal to the federal and provincial income taxes and other amounts as may be required by law to be withheld by the Company or the Employer with respect to the delivery of such Shares.

     11. Grantee Bound by the THI Plan.

          The Grantee hereby acknowledges receipt of a copy of the THI Plan and agrees to be bound by all the terms and provisions thereof.

     13. Modification of Agreement.

          This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto.

     14. Severability.

          Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

     15. Governing Law.

          The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof.

     16. Successors in Interest.

          This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Grantee’s legal representatives. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee’s heirs, executors, administrators and successors.

     17. Resolution of Disputes.

          Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee, the Grantee’s heirs, executors, administrators and successors, and the Company and its Subsidiaries for all purposes.

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     18. Entire Agreement.

          This Agreement and the terms and conditions of the THI Plan constitute the entire understanding between the Grantee and the Company and its Subsidiaries, and supersede all other agreements, whether written or oral, with respect to the New Award.

     19. Headings.

          The headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

     20. Counterparts.

          This Agreement may be executed simultaneously in two or more counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same agreement.

TIM HORTONS INC.

By:

Name:

Title:

THE TDL GROUP CORP.

By:

Name:

Title:

GRANTEE

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EX-31.A

Exhibit 31(a)

CERTIFICATIONS

I, Paul D. house, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2006

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

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EX-31.B

Exhibit 31(b)

CERTIFICATIONS

I, Cynthia J. Devine, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2006

/s/ Cynthia J. Devine
Name:	Cynthia J. Devine
Title:	Chief Financial Officer

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EX-32.A

Exhibit 32(a)

Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended April 2, 2006 of Tim Hortons Inc. (the “Issuer”).

I, Paul D. House, the Chief Executive Officer of Issuer certify that, to the best of my knowledge:

(i)	the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii)	the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: May 11, 2006

/s/ Paul D. House
Name:	Paul D. House

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EX-32.B

Exhibit 32(b)

Certification of CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended April 2, 2006 of Tim Hortons Inc. (the “Issuer”).

I, Cynthia J. Devine, the Chief Financial Officer of Issuer certify that, to the best of my knowledge:

(i)	the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii)	the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: May 11, 2006

/s/ Cynthia J. Devine
Name:	Cynthia J. Devine

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EX-99

Exhibit 99

TIM HORTONS INC. AND SUBSIDIARIES

Safe Harbor Under the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Tim Hortons Inc. (the “Company”) desires to take advantage of the “safe harbor” provisions of the Act.

Certain information in this news release, particularly information regarding future economic performance and finances, and plans, expectations, and objectives of management, is forward-looking. The following factors, in addition to other factors set forth in the Company’s final Prospectus filed with the Securities and Exchange Commission (“SEC”) on March 24, 2006 and in other press releases, communications, or filings made with the SEC or the Ontario Securities Commission, and other possible factors not previously identified, could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements:

Competition. The quick-service restaurant industry is intensely competitive with respect to price, service, location, personnel, qualified franchisees, and type and quality of food. The Company and its franchisees compete with international, regional and local organizations, primarily through the quality, variety, and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of advertising/marketing and operational programs, and new product development by the Company and its competitors are also important factors. Certain of the Company’s competitors have substantially larger marketing budgets.

Economic, Market and Other Conditions. The quick-service restaurant industry is affected by changes in international, national, regional, and local economic and political conditions, consumer preferences and perceptions (including food safety, health, or dietary preferences and perceptions), spending patterns, consumer confidence, demographic trends, seasonality, weather events and other calamities, traffic patterns, the type, number and location of competing restaurants, enhanced governmental regulation (including nutritional and franchise regulations), changes in capital market conditions that affect valuations of restaurant companies in general or the Company’s goodwill in particular, litigation relating to food quality, handling, or nutritional content, and the effects of war or terrorist activities and any governmental responses thereto. Factors such as inflation, food costs, labor and benefit costs, legal claims, disruptions to supply chain or changes in the price, availability, and shipping costs of supplies, and utility and other operating costs also affect restaurant operations and expenses. The ability of the Company and its franchisees to finance new restaurant development, improvements, and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to franchisees, are affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds.

Factors Affecting Growth. There can be no assurance that the Company or its franchisees will be able to achieve new restaurant growth objectives in Canada or the U.S. The opening and ongoing financial success of the Company’s and its franchisees’ restaurants depends on various factors, including many of the factors set forth in this cautionary statement, as well as sales levels at existing restaurants, factors affecting construction costs generally, and the generation of sufficient cash flow by the Company to pay ongoing construction costs. In addition, the U.S. markets in which the Company seeks to expand may have competitive conditions (including higher construction, occupancy, or operating costs), consumer tastes, or discretionary spending patterns that differ from the Company’s existing markets, and there may be a lack of brand awareness in such markets. There can be no assurance that the Company will be able to successfully adapt its brand, development efforts, and restaurants to these differing market conditions.

Manufacturing and Distribution Operations. The occurrence of any of the following factors is likely to result in increased operating costs and depressed profitability of the Company’s distribution operations and may also damage the Company’s relationship with franchisees: higher transportation costs, disruptions in supply chain, price fluctuations, climate conditions, industry demand, changes in international commodity markets (especially for coffee, which is highly volatile in terms of price and supply), and the adoption of additional environmental or health and safety laws and regulations. The Company’s manufacturing and distribution operations in the U.S. are also subject to competition from other qualified distributors, which could reduce the price the Company receives for supplies sold to U.S. franchisees.

Joint Venture to Manufacture and Distribute Par-Baked Products for Tim Hortons Restaurants. The profitability of the Maidstone Bakeries joint venture, which manufactures and distributes par-baked products for the Company’s and its franchisees’ restaurants, could be affected by a number of factors, including many of the factors set forth in this cautionary statement. Additionally, there can be no assurance that both the Company and its joint venture partner will continue with the joint venture. If the joint venture terminates, it may be necessary, under certain circumstances, for the Company to build its own par-baking facility or find alternate products or production methods.

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Importance of Locations. The success of Company and franchised restaurants is dependent in substantial part on location. There can be no assurance that current locations will continue to be attractive, as demographic patterns change. It is possible the neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations.

Government Regulation. The Company and its franchisees are subject to various federal, state, provincial, and local (“governmental”) laws affecting its and its franchisees’ businesses. The development and operation of restaurants depend to a significant extent on the selection, acquisition, and development of suitable sites, which are subject to zoning, land use (includes drive thrus), environmental, traffic, franchise, design and operational requirements, and other regulations. Additional governmental laws and regulation affecting the Company and its franchisees include: licensing; health, food preparation, sanitation and safety; labour (including applicable minimum wage requirements, overtime, working and safety conditions, and citizenship requirements); tax; employee benefits; accounting; and anti-discrimination. Changes in these laws and regulations, or the implementation of additional regulatory requirements, particularly increases in applicable minimum wages, taxes, or franchise requirements, may adversely affect financial results.

Foreign Exchange Fluctuations. The majority of the Company’s business is conducted in Canada. If the U.S. dollar falls in value relative to the Canadian dollar, then U.S. operations would be less profitable because of the increase in U.S. operating costs resulting from the purchase of supplies from Canadian sources, and U.S. operations will contribute less to the Company’s consolidated results. Exchange rate fluctuations may also cause the price of goods to increase or decrease for the Company and its franchisees.

The Company’s Relationship with Wendy’s. As long as Wendy’s has voting control of the Company, Wendy’s will have the ability to control all matters affecting the Company, including the composition of its board of directors and the resolution of conflicts of interest that may arise between Wendy’s and the Company in a number of areas. The separation agreements with Wendy’s may severely limit the Company’s ability to affect future financings, acquisitions, dispositions, the issuance of additional securities and certain debt instruments, and to take certain other actions.

Mergers, Acquisitions and Other Strategic Transactions. The Company intends to evaluate potential mergers, acquisitions, joint venture investments, alliances, vertical integration opportunities and divestitures. These transactions involve various inherent risks, including accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; the potential loss of key personnel of an acquired business; the Company’s ability to achieve projected economic and operating synergies; difficulties successfully integrating, operating, maintaining and managing newly-acquired operations or employees; difficulties maintaining uniform standards, controls, procedures and policies; the possibility the Company could incur impairment charges if an acquired business performs below expectations; unanticipated changes in business and economic conditions affecting an acquired business; and diversion of management’s attention from the demands of the existing business. In addition, there can be no assurance that the Company will be able to complete desirable transactions, for reasons including a failure to secure financing, as a result of the Company’s arrangements with Wendy’s, or restrictive covenants in debt instruments or other agreements with third parties, including the Maidstone Bakeries joint venture arrangements.

Debt Obligations. The Company’s significant debt obligations could have adverse consequences, including increasing the Company’s vulnerability to adverse economic, regulatory, and industry conditions, limiting the Company’s ability to compete and its flexibility in planning for, or reacting to, changes in its business and the industry; limiting the Company’s ability to borrow additional funds, and requiring the Company to dedicate significant cash flow from operations to payments on debt (and there can be no assurance that the Company’s cash flow will be sufficient to service its debt), thereby reducing funds available for working capital, capital expenditures, acquisitions, and other purposes. In addition, the Company’s credit facilities include restrictive covenants that limit its flexibility to respond to future events and take advantage of contemplated strategic initiatives.

Other Factors Affecting the Company. The following factors could also cause actual results to differ from expectations: an inability to retain executive officers and other key personnel or attract additional qualified management personnel to meet business needs; an inability to adequately protect the Company’s intellectual property and trade secrets from infringement actions or unauthorized use by others; operational or financial shortcomings of franchised restaurants and franchisees; liabilities and losses associated with owning and leasing significant amounts of real estate; new and significant legal, accounting, and other expenses to comply with public-company corporate governance and financial reporting requirements; failure to implement or ineffective maintenance of securities compliance, internal control processes, or corporate governance; implementation of new or changes in interpretation of U.S. GAAP policies or practices; and, potential unfavorable variance between estimated and actual liabilities and volatility of actuarially-determined losses and loss estimates.

Readers are cautioned not to place undue reliance on forward-looking statements contained in this news release, which speak only as of the date thereof. Except as required by federal or provincial securities laws, the Company undertakes no obligation to publicly release any revisions to the forward-looking statements contained in this release, or to update them to reflect events or circumstances occurring after the date of this release, or to reflect the occurrence of unanticipated events, even if new information, future events, or other circumstances have made them incorrect or misleading.

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