Boston Pizza Royalties Income Fund Annual Report 2013
CELEBRATING
ANNUAL REPORT 2013 ANNUAL REPORT 50 YEARS 1 OF BOSTON PIZZA
CELEBRATING 50 YEARS OF BOSTON PIZZA BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES PROFILE Founded in Alberta in 1964, Boston Pizza has grown to become Canada’s #1 casual dining brand by continually improving its menu offerings, customer experience and restaurant design. Boston Pizza’s success has allowed the concept to grow and prosper in new markets across Canada.
As at January 1, 2014 there were 358 Boston Pizza locations in Canada, stretching from Victoria to St. John’s, with all but three of the restaurants owned and operated by independent franchisees.
In every Boston Pizza location, customers enjoy a friendly atmosphere, professional service and an appealing and diverse menu. Whether it’s a business lunch, a family dinner or watching the game with friends, Boston Pizza provides its guests the opportunity to enjoy good food in a relaxed, comfortable atmosphere. It is this combination of key ingredients that has enabled Boston Pizza to serve more customers in more locations than any other full-service restaurant in Canada. BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 ANNUAL REPORT 2013 ANNUAL REPORT
2 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES
TABLE OF CONTENTS 2013 HIGHLIGHTS 1 BOSTON PIZZA ROYALTIES INCOME FUND STABILITY 2 MANAGEMENT’S DISCUSSION & ANALYSIS 13 GROWTH 4 MANAGEMENT’S STATEMENT OF RESPONSIBILITIES 29 COMMUNITY 6 INDEPENDENT AUDITORS’ REPORT 30 LETTER FROM THE CHAIRMAN CONSOLIDATED FINANCIAL STATEMENTS 31 OF BOSTON PIZZA ROYALTIES INCOME FUND 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 LETTER FROM THE CEO BOSTON PIZZA INTERNATIONAL INC. OF BOSTON PIZZA INTERNATIONAL INC. 11 MANAGEMENT’S DISCUSSION & ANALYSIS 45 INDEPENDENT AUDITORS’ REPORT 57 CONSOLIDATED FINANCIAL STATEMENTS 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 62 2013 HIGHLIGHTS • Record system-wide gross sales of $975 million.
• 12 new full service Boston Pizza Restaurants opened with 6 in the West, 4 in Ontario and 2 in Quebec.
• 37 existing restaurants renovated to the then latest Boston Pizza design standards.
• Number of restaurants in the Royalty Pool has more than doubled since the IPO in 2002 from 154 to 358 locations at January 1, 2014. ANNUAL REPORT 2013 ANNUAL REPORT ANNUAL REPORT 2013 ANNUAL REPORT • Boston Pizza International Inc. named to the Platinum Club of “Canada’s 50 Best Managed Companies”
3 a prestigious designation that Boston Pizza is proud to have received consistently since 1994. 1 • Boston Pizza Royalties Income Fund announces a distribution increase of 4.1%, from 9.8 cents per month to 10.2 cents per month, effective for the February 2013 distribution to unitholders. This marked the 16th distribution increase since the inception of the Fund in 2002.
• Boston Pizza opens 100th location in the province of Alberta (Ellerslie) and the first store to be built using the brand’s new store design.
• Boston Pizza launches innovative new Pizzaburger, a delicious bacon cheeseburger wrapped in a pepperoni BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES pizza. The item becomes an instant bestseller! BOSTON PIZZA ROYALTIES INCOME FUND 2 ANNUAL REPORT 2013 chain of16restaurantsthroughoutBC. the nexttenyearstwomenbuilta accountant BC. In 1973, with local Jim joined forces he openedhisrestaurantinPenticton, Boston Pizzafranchiseein1968when RCMP officer became the first former House.Spaghetti JimTreliving , a openedhisBostonPizzaand Agioritis Edmonton, Alberta in1964whenGus The BostonPizzaconceptbeganin CELEBRATING 50YEARS OF BOSTON PIZZA and over George Melvilleandover STABILITY offering in2002. offering cents perUnit. cashdistributionssincetheFund’sThis wasthesixteenth increasetomonthly initial public Growth—In2013,Demonstrated 4.1%to10.2 distributionsby ofmonthly theFundincreased therate distributions totalling$176.2million or$14.00perUnit. 6, February 2002andasat since theIPOinJuly 2014, theFund hadpaidout138consecutivemonthly Consistency — Demonstrated The FundhasprovidedcashdistributionstoUnitholdersineachmonth on debtand, therefore, toUnitholders. ratio canmaintainahighpayout franchisees.funded by expensesandinterest administrative expenditures and only The Fundhasnocapital Restaurants. are newlocations investmentsfor BostonPizzaRestaurants andcapital costsfor All operating A Top-LineFund — The structureof the FundprovidesUnitholderswithtop-lineroyaltiesfromBostonPizza 1,January 2014. year.of thefollowing Since2002, theRoyaltyPoolhasexpandedfrom154to358restaurantsasat markets. 1st new stores opened duringacalendaryearare added to theRoyaltyPoolon January Any andpotentialfranchiseesinordertoexpandthechainenternewout newrestaurantlocations marketing, purchasing, supporttoexistingfranchisees. andadministrative Inaddition, BPIseeks BostonPizzaRestaurantsandprovides asthefranchisorfor whichcontinuestooperate company of 4%theFranchise Sales ofBostonPizzaRestaurantsintheRoyaltyPool. BPIremainsaprivate aperiodof99years,BP Rightsfor in2002, beginning royaltypayment amonthly inexchangefor BPItheexclusivelicensetouse withtheFundwhichgives BPI thenenteredintoanagreement ofBostonPizzaRestaurantsinCanada.include trademarksusedinconnectionwiththeoperation 17th,On July 2002, Inc. BostonPizzaInternational soldtheBPRightstoFund. The BPRights A SUCCESSFULINCOMEFUND regularly selectioniscriticalandrestaurantdesignsareupdated —Realestate Attractive Locations Lunch, dinner,— Parts Multiple Day nightsandtake-out&delivery late and youngadults. restaurant and to sports both bar families under one roof appeals Customer Appeal — Full-service Broad A PROVENRESTAURANT CONCEPT Inc., andtheBostonPizzabrandistoensuresuccessoffranchisees. to ensure the success of the The Boston Pizza best Royalties way Income Fund, Boston Pizza International 3. A CommitmenttoFranchiseeProfitability allstakeholders. for value consumerstrustandwanttodobusinesswithcreates brandthat astrongandrecognizable Having 2. A CommitmenttoBuildingtheBostonPizzaBrand andnewtastesensations, oldfavourites features more. keepsguestscomingbackfor A vibrant, diningatmosphere, colourfuldesigninacasualandcomfortable combinedwithamenuthat towardimprovingtheexperienceofourrestaurantguests. andeffort Boston Pizzahas50yearsoffocus 1. ImprovingtheGuestExperience A CommitmenttoContinually and successofBostonPizza. The “Three Pillars” hasunderpinnedthedevelopment isthebackdropofalldecisionmakingthat strategy AN EXPERIENCEDFRANCHISOR . . 3.0 $2.9 $2.8 $2.8 $2.8 $2.7 $2.7 $2.7 ANNUAL $2.5 $2.6 GROSS 2.5 $2.4 REVENUE 2.0 PER LOCATION 1.5
C$ MILLIONS 1.0
0.5
0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 MILLION SYSTEM-WIDE
$RECORD 975 SALES ANNUAL REPORT 2013 ANNUAL REPORT 2013 ANNUAL REPORT
5 3 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES GROWTH
1964 – First Boston Pizza opens in Edmonton, Alberta
1968 – Jim Treliving leaves his job as an R.C.M.P. officer and opens his first Boston Pizza restaurant in Penticton, B.C.
1973 – George Melville, an accountant with Peat Marwick Mitchell & Co. in Penticton, B.C., becomes business partners with Jim Treliving and the two begin opening Boston Pizza franchises across B.C.
1983 – Jim and George, partners in 16 Boston Pizza Restaurants, think that buying the chain of 44 Boston CELEBRATING 50 YEARS Pizza locations is a “great idea” and do it. They sell all their franchises except one and become the OF BOSTON PIZZA new owners of the franchisor, Boston Pizza International Inc.
1986 – Boston Pizza debuts on the world stage as the official pizza supplier for Expo ’86 in Vancouver, B.C. generating more than $8 million in sales. Operating at Expo gave the company worldwide exposure and set the stage for expansion into the U.S.
1990 – The Boston Pizza Foundation is established to raise funds for people of all ages living with difficult circumstances throughout Canada. As at December 31, 2013 1993 – Boston Pizza receives 25-Year Award from The International Franchise Association.
In 1983, Jim Treliving and George 1994 – Named one of Canada’s 50 Best Managed Companies by the Financial Post and Arthur Andersen & 4 Melville purchased Boston Pizza Co., a recognition for which Boston Pizza has officially re-qualified every subsequent year. International Inc. (BPI) and its 44 restaurants, mainly in Wesern Canada. 1996 – Boston Pizza opens its 100th store in Cold Lake, Alberta on September 24th, 1996. With a commitment to grow the brand across Canada, the chain’s first 1998 – Mark G. Pacinda joins Boston Pizza and opens a regional office in Mississauga, Ontario to support Ontario location opened in Ottawa in 1998. Today there are more than 110 expansion in Eastern Canada. In addition, two locations open in the U.S. under the banner “Boston’s restaurants in Ontario and 18 in Atlantic The Gourmet Pizza.” Canada. Boston Pizza next opened its first Quebec restaurant in Laval in 1999 – Jim Treliving and George Melville earn the Ernst & Young Entrepreneur of the Year Award for 2005 and today the chain has over 25 locations province-wide. commitment to hospitality and tourism. 2002 – Boston Pizza Royalties Income Fund is created and begins trading on the TSX under the symbol BPF. UN following the initial public offering on July 17, 2002.
2003 – Boston Pizza is named as a Platinum Club Member of “Canada’s 50 Best Managed Companies” and has re-qualified for Platinum status every subsequent year.
2004 – Boston Pizza celebrates its 40th anniversary and begins expansion into Quebec with the opening of a corporate office in Laval.
2005 – Boston Pizza locations across Canada serve more than 30 million customers and the 200th location opens in Kitchener, Ontario.
2006 – Boston Pizza opens its first locations in Newfoundland and P.E.I., making Boston Pizza truly coast-to- coast.
2008 – The 300th Boston Pizza location opens in Mississauga, Ontario.
2012 – Boston Pizza Royalties Income Fund celebrates its 10-year anniversary on the Toronto Stock Exchange.
2013 – Boston Pizza International achieves record system-wide sales of $975 million, opens its 350th location in Canada and Boston Pizza Royalties Income Fund increases monthly cash distribution to unit holders by 4.1%.
2014 – Boston Pizza celebrates the brand’s fiftieth annversary. 358 TOTAL 340 340 343 348 350 323 300 NUMBER OF 300 266 LOCATIONS 250 226 195 200 URANTS
A 150
100 REST 50
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 LOCATIONS 358ACROSS CANADA ANNUAL REPORT 2013 ANNUAL REPORT 2013 ANNUAL REPORT
7 5 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES BOSTON PIZZA ROYALTIES INCOME FUND 6 ANNUAL REPORT 2013 pediatric cancerresearch. pediatric will help advance that Finn Foundation a bigfinancialcommitmenttothe Team mainland BostonPizzafranchisesmade start.since thevery Lastyear, thelower been a Team supporter FinnFoundation Above, has the Boston Pizza Foundation being ofchildrenandfamilies. improvethehealthandwell- to directly donated morethan$18.2million hasraisedand Pizza Foundation Since its inception in 1990, the Boston CELEBRATING 50YEARS OF BOSTON PIZZA COMMUNITY opportunities for leadership,opportunities for mentoring, training. andpresentation 24/7andtheJDRF services whichprovidesyouthand teenswithtype1diabetes Ambassador and Leadershipprogram ongoingaccesstoits essential,to ensureyoungpeople willhave counsellingandsupport professional andinnovative schools.and secondary BPFFutureProspectswillalsocontinue workingwithlong-standingpartners KidsHelpPhone schoolassemblies, deliversmotivational that throughCanada’s workshopsandleadershiptrainingprograms middle BPF FutureProspectshasalsocommitted $1millioninsupportofLiveDifferent, aCanadiannot-for-profit organization community, ofleaders.” butinvestinthefutureofCanadian kidsandinspireanewgeneration and ChairmanofBostonPizzaInternational. backtothe give “We proudtolaunchFutureProspectsand notonly arevery withoutthesupportandguidanceofarole modelormentor,” aretoday gottowherethey have saidJim Treliving, Owner successfulindividualinbusiness,“If youaskany sports, theartsorpublicsector, couldn’t they tellyouthat they’ll Pizza Restaurantsfromcoast-to-coast.” at Boston asmorethan23,000 youngpeopleareemployed day benefit of strongmentorship inour restaurants every our people,” saidGeorgeMelville, Co-Owner andCo-ChairmanofBostonPizzaInternational. “We seetheimpactand “For 50 years, Boston as are Pizza well important has as to been to us involved as with an causes organization that mentorship, frombothanindividualandacommunitylevel. Jim mentorship by Treliving andGeorgeMelville, BostonPizza’s ownersandchairmen, whorecognizethevalueof heldandlong-standingcommitmentto istheresultof adeeply theBostonPizzaFoundation This newdirectionfor helpincreasethenumberof that mentoring programs inBigBrothersSisters.‘Bigs’ participating Earlier thisyear, BPFFutureProspectsannouncedafive-yearpledgetoinvestminimumof$1.5millioninsupport inspirethemtothrive,that succeedandrealizetheirindividualgoals.” needtoprovidekidswithaccessmentorsandrolemodels franchisees fromcoast-to-coasttoaddressthegrowing FutureProspects.Boston PizzaFoundation “With thelaunchofFutureProspectswearecommittedtoworkingwithour strongrolemodelsinspirekidstobegreat,”“Boston Pizzabelievesthat saidCheryl Treliving, ExecutiveDirectorof helpCanadianchildrenandyouthreachtheirfullpotential.that rolemodelingandmentoringprograms for andawareness acrossCanadatoraisemoney with leadingorganizations (BPF)FutureProspects. calledBostonPizzaFoundation efforts fundraising andcharitable BPFFutureProspectsworks 15,On January 2014 itsnational causefor announcedthelaunchofanewsignature The BostonPizzaFoundation improve thehealthandwell-beingofchildrenfamilies. Since itsinceptionin1990, morethan$18.2milliontodirectly hasraisedanddonated theBostonPizzaFoundation that allhelpraisemuchneededfunds. that suchasour marketingprograms national Valentine’s Pizzapromotion, Heart-Shaped Day andBPKidsCardsprogram range from charity golf tournaments and to promotions that to programs is dedicated The Boston Pizza Foundation inthelivesofthoseneedacrossCanadaandaroundworld. difference theBostonPizzaFoundation,Boston Pizzain1990established onraisingfundstomakea focused apublicfoundation hasbeenaphilosophyandvalueweholddear.which weoperate To activity, thefirst25yearsofcharitable formalize Since BostonPizzafirstopeneditsdoorsinEdmonton,giving backtothecommunitiesin Albertain1964aspiritof 1000 905 943 975 848 853 SYSTEM-WIDE 755 831 800 GROSS SALES 647 731 755 699 659 661 664 & FRANCHISE 600 513 604 SALES 435 521 400 417
C$ MILLIONS 352 System wide gross sales totals include all Boston Pizza Restaurants. Franchise sales 200 totals include Boston Pizza Restaurants in the Fund’s Royalty pool 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 RECORD FRANCHISE SALES $755M IN 2013 ANNUAL REPORT 2013 ANNUAL REPORT 2013 ANNUAL REPORT
9 7 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES 8 BOSTONBOSTON PIZZAPIZZA ROYALTIESROYALTIES INCOMEINCOME FUNDFUND ANNUALANNUAL REPORTREPORT 20132013 SALES SAME STORE
10 -4 -2
0 PERCENT2 4 6 8 STORE SAME 2004 6.8% 2005 8.0% GROWTH SALES 2006 8.4% 2007 5.7% 1.5% 2008 0.7% -4.0% 2009 -1.3% 2010 2011 4.9% 2012 3.3% 2013 1.5% LETTER FROM THE CHAIRMAN BOSTON PIZZA ROYALTIES INCOME FUND
On behalf of the Trustees, I am pleased to present the fourth quarter report for liability”) and interest rate swaps. The $12.8 million increase in net income Boston Pizza Royalties Income Fund (the “Fund”). This report covers the period for the Year was driven mainly by the net $11.5 million difference in fair value from October 1, 2013 to December 31, 2013 (the “Period”) and from January adjustments on the Class B Unit liability and interest rate swaps together with 1, 2013 to December 31, 2013 (the “Year”). a $0.9 million increase in revenue. The Fund’s net income under International Financial Reporting Standards (“IFRS”) contains non-cash items, such as the Highlights fair value adjustments on the Class B Unit liability and interest rate swaps, that • Record System-Wide Gross Sales1 for the Period of $241.5 million and do not affect the Fund’s business operations or its ability to pay distributions to for the Year of $974.8 million. unitholders. In the Fund’s view, net income is not the only or most meaningful • Franchise Sales2 from royalty pool restaurants for the Period of $183.7 measurement of the Fund’s ability to pay distributions. Consequently, the Fund million and for the Year of $755.4 million. reports the non-IFRS metrics of Distributable Cash and Payout Ratio4 to provide investors with more meaningful information regarding the amount of cash • Same store sales growth of 1.5% and Distributable Cash3 per Unit that the Fund has generated to pay distributions. Readers are cautioned that increase of 2.0% for the Year despite comparably poor weather and Distributable Cash and Payout Ratio are non-IFRS financial measures that do challenging economic conditions experienced in the latter part of 2013. not have standardized meanings prescribed by IFRS and therefore may not be • Trustees declare January 2014 distribution to unitholders of 10.2 comparable to similar measures presented by other issuers. For a reconciliation cents per Unit. between cash flow from operating activities (the most directly comparable IFRS • Boston Pizza opened 12 new full service restaurant locations in 2013, measure) and Distributable Cash see the “Financial Summary” section of the including six in Western Canada, four in Ontario and two in Quebec. Fund’s Management’s Discussion and Analysisfor the Perioda. For a detailed discussion on the Fund’s Distributable Cash and Payout Ratio, please see the 2013 ANNUAL REPORT Readers are cautioned that they should refer to the annual consolidated financial “Operating Results – Distributable Cash / Payout Ratio” section in the Fund’s statements and Management’s Discussion and Analysis of the Fund for the Period Management’s Discussion and Analysis for the Period. 9 and Year, available on SEDAR at www.sedar.com and on the Fund’s website at www.bpincomefund.com, for a full description of the Fund’s financial results. The Fund’s Distributable Cash was $4.4 million or $0.292 per unit of the Fund (“Unit”) for the Period and $18.4 million or $1.208 per Unit for the Year Financial Highlights compared to $4.5 million or $0.303 per Unit and $17.4 million or $1.184 per Same store sales growth (“SSSG”), a key driver of distribution growth for Unit for the same periods, respectively, in 2012. This represents a decrease to unitholders of the Fund, was negative 1.5% for the Period and positive 1.5% Distributable Cash of 3.4% for the Period and an increase to Distributable Cash of for the Year compared to positive 2.2% and positive 3.3%, respectively, for 6.1% for the Year compared to the same periods, respectively, one year ago. The the same periods in 2012. Franchise Sales, the basis upon which royalties are decreases in Distributable Cash and Distributable Cash per Unit for the Period paid by BPI to the Fund, exclude revenue from the sale of liquor, beer, wine are attributed to negative SSSG in the Period. The increase in Distributable Cash and tobacco and approved national promotions and discounts. On a Franchise for the Year is attributed to positive SSSG and BPI’s exchange of class B general Sales basis, SSSG was negative 2.3% for the Period and positive 1.4% for the partner units of Boston Pizza Royalties Limited Partnership into 1,000,000 Fund Year compared to positive 3.0% and positive 3.4%, respectively, for the same Units on November 23, 2012. The increase in Distributable Cash on a per Unit INCOME FUND BOSTON PIZZA ROYALTIES periods in 2012. The negative SSSG for the Period was principally due to poor basis for the Year is attributed to higher royalty revenue. Distributions for the weather experienced in many parts of the country as well as challenging general Period were funded entirely by cash flow from operations. No debt was incurred economic conditions. Positive SSSG for the Year was principally due to higher at any point during the Period or the Year to fund distributions. take-out and delivery sales resulting from continued promotion of Boston Pizza’s online ordering system and menu re-pricing partially offset by the challenges The Fund’s Payout Ratio was 104.9% for the Period and 100.8% for the Year noted above experienced in the latter part of the Year. Franchise Sales of compared to 98.7% and 99.3%, respectively, in the same periods one year restaurants in the royalty pool were $183.7 million for the Period and $755.4 ago. The Fund’s Payout Ratio for the Period increased compared to the same million for the Year compared to $185.2 million and $731.5 million in the same period one year ago due to the decrease in Distributable Cash and the increase periods, respectively, in 2012. The decrease in Franchise Sales for the Period is in distributions payable. The Fund strives to provide unitholders with regular attributed to the negative SSSG. The increase in Franchise Sales for the Year is monthly distributions, and as a result, the Fund will generally experience seasonal attributed to the positive SSSG and the addition of five net new restaurants to the fluctuations in its Payout Ratio. The Fund’s Payout Ratio is likely to be higher in Fund’s royalty pool on January 1, 2013. the first and fourth quarters compared to the second and third quarters since Boston Pizza Restaurants experience higher Franchise Sales during the summer The Fund’s net income was $8.2 million for the Period and $14.8 million for the months when restaurants open their patios and benefit from increased tourist Year compared to $4.3 million for the fourth quarter of 2012 and $2.0 million in traffic. Higher Franchise Sales generally results in increases in Distributable 2012. The $3.9 million increase in net income for the Period was driven mainly Cash. A key feature of the Fund is that it is a “top line” structure, in which BPI by the net $3.7 million difference in fair value adjustments on the class B general pays the Fund a royalty equal to 4% of Franchise Sales from restaurants in the partner units of Boston Pizza Royalties Limited Partnership (the “Class B Unit Fund’s royalty pool. Accordingly, Fund unitholders are not directly exposed to 10 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 management’sa attracting todrivehigherguesttrafficinclude strategies guestcheque.and changesinaverage Inc. BostonPizzaInternational “BPI” SSSGarechangesincustomertraffic affect The twoprincipalfactorsthat across Canada. achieving positiveSSSGandcontinuingtoopennewBostonPizzalocations strengthen itspositionasthenumberonecasualdiningbrandinCanadaby andshouldcontinueto futuregrowth Boston Pizzaiswellpositionedfor Outlook $177.7 millionor$14.10perUnit. 2014, distributions totalling paid out 139 consecutive monthly the Fund will have increases. 2014distribution, IncludingtheJanuary whichwillbepaidinFebruary Fund’s in2002, initialpublicoffering received16distribution unitholdershave distributionflowtounitholders. andsustainable its policyofstable Sincethe 28,February 2014. reviews distribution levels basedon The Fund periodically 21, thecloseofbusinessonFebruary of recordat 2014andwillbepaidon 2014. January cents perUnitfor tounitholders The distributionwillbepayable The trusteesoftheFundannouncedacashdistributiontounitholders10.2 cashinordertomaximizereturnsunitholders.distribute allavailable close to 100% over time as the Ratio trustees of the Fund continue to Payout otherpurposes, for to retaincapital theFundwillmaintaina itisexpectedthat Restaurants. Giventhisstructure, theFundhasnocurrentmandate andthat ofBPIorindividualBostonPizza costsorprofitability changes intheoperating 4 3 2 1 Management’s Discussion and www.sedar.com at thePeriodavailable for Analysis andwww.bpincomefund.com. thecontentsofthisletter. approved The trustees oftheFundhave andourbusiness, information withforward-looking risks associated pleaserefertothe “Risks andUncertainties” and “Note RegardingForward-LookingInformation” sectionsincludedintheFund’s mostrecent ofthisletter. asofthedate andspeaksonly performance law, Exceptasrequiredby information. disclosedforward-looking previously toupdate theFundandBPI assumenoobligation Foracompletelistofthe those factorsdiscussedundertheheading “Risks andUncertainties” inthemostrecent FormoftheFund.Annual Information regardingfutureeventsandoperating reflectscurrentexpectations This information conditions, andregulation, legislation revenues, Cashandrelianceonoperating Distributable accountingpoliciesandpractices, andfinancialconditionofBPItheFund, theresultsofoperations aswell containedherein, information theforward-looking or impliedby to(amongothers)competition, relate trends, demographic spendingpatterns, consumerpreferencesanddiscretionary business and economic of changeslaws. Risks, causeactualresults, may uncertaintiesandotherfactorsthat futureresults, fromany different orachievementstobematerially performance orachievementexpressed performance of permitting, receiptoffranchisefeesandotheramounts, franchiseesaccesstofinancing, development, paceofcommercialrealestate absence protection ofintellectualpropertyrightsthePartnershipand containedinthispressreleaseincludethefollowing: information the forward-looking futureresultsbeingsimilartohistoricalresults, tofuturegeneraleconomic conditions, related expectation businessplans, speed includewordssuchas may information “anticipate”, “estimate”, “may”, “will”, “expect”, “believe”, “plan”, “should”, “continue” andothersimilarterminology. factorsandassumptionsusedtodevelop The material incremental salesincreasingafterstorerenovations, information. areforward-looking planstopursuerestaurantdevelopmentopportunitiesandothersuchmatters When usedinthispressrelease, forward-looking growth, thestrengtheningofBostonPizza’s positionasthenumberonecasualdiningbrandinCanada, theachievementofpositiveSSSG, openingofnewrestaurants, guestchequeslevels, increasesinaverage Cash, closeto100%willbemaintained, Ratio aPayout cashinorder tomaximizereturnsunitholders, trusteesoftheFundwillcontinue todistributeallavailable future BostonPizzabeingwellpositionedfor the future, including such things as, Ratio, in the Payout seasonal fluctuations fourth to quarters, be higher in the first is and likely Ratio the Payout result in increases in higher Distributable Franchise Sales generally All statements, ofhistoricalfacts, otherthanstatements addressactivities, includedinthepressreleasethat occurin willormay ofBPIexpectsoranticipates theFundormanagement eventsordevelopmentsthat Boston PizzaGPInc., BPI, BostonPizzaRestaurants, results, orindustry futureresults, fromany different tobematerially information. suchforward-looking orachievementsexpressedimpliedby performance or achievements of the Fund,performance Boston Pizza Holdings Trust, Boston Pizza Royalties Limited Partnership (“the in this letter constitutes Certain information information”“forward-looking involves known and unknown risks, that uncertainties, cause the and actual other results,factors which may future expectations BOSTON PIZZAROYALTIES INCOMEFUND LETTER FROMTHECHAIRMAN
Payout Ratio is calculated from a formula which includes Distributable Cash, whichincludesDistributable fromaformula iscalculated Ratio Payout whichisa non-IFRSmeasure, to anIFRSmeasureisnotpossible. Ratio ofPayout areconciliation regardingtheextent towhichtheFunddistributescashonUnits.useful information netincomemeasureofprofitability. thisshouldnotbeconstrued asanalternative Investorsarecautionedthat Asthe otherissuers. tosimilar measurespresentedby notbe comparable may IFRSandtherefore a standardizedmeaningprescribedby doesnothave that This non-IFRSfinancialmeasure providesinvestorswith period. inthat Cashgenerated theDistributable periodby theFundinrespect oftheapplicable by isanon-IFRSfinancial measure Ratio dividing thedistributionspayable Payout by iscalculated Ratio Payout to cash flows from operating activities,to cashflowsfromoperating IFRSmeasure. comparable which is themostdirectly net income measure of as profitability.an alternative in the Fund’s tables The related Discussion and most Management from thisfor non-IFRS the financial Period measure provide a reconciliation Analysis for distribution on theUnits. toinvestorsregardingtheamountofcash theFundhasgenerated non-IFRS financialmeasureprovidesusefulinformation thisshouldnotbe construed Investorsarecautionedthat by otherissuers. tosimilarmeasurespresented notbecomparable may by IFRSandtherefore astandardizedmeaningprescribed doesnothave Cashisanon-IFRSfinancialmeasurethat Distributable This audits ofearlierperiods. salesandsimilartaxes.applicable Nevertheless, itsfranchisees, conductsauditsoftheFranchiseSalesreportedtoitby BPIperiodically andtheFranchiseSalesreportedhereininclude resultsfromsales assurance, andinthecaseofboth(i)(ii), afterdeductingrevenuefromthesaleofliquor, beer, promotionsanddiscounts andexcluding national wineandtobaccorevenuefromBPIapproved revenue:gross franchised BostonPizzaRestaurantsinCanada, BPI;and(ii)reported toBPIby BostonPizzaRestaurantsinCanadaownedby (i)ofthecorporate ofindependent withoutauditorotherform (“FranchiseSales”). itmeanstherevenuesofBostonPizzaRestaurantsinrespectwhichroyaltyis payable Franchise salesisthebasisonwhichroyaltypayable; The term “revenue” referstothe discounts and excluding applicable salesandsimilartaxes. discounts andexcludingapplicable ofindependentassurance,audit orotherform andinthecase ofboth(i)and(ii), includingrevenuefromthesaleofliquor, beer, promotionsand national wineandtobaccorevenuefromBPIapproved “ System-wide GrossSales” revenue: meansthegross franchisedBostonPizzaRestaurantsinCanada, BPI;and(ii)reportedtoBPIby BostonPizzaRestaurantsinCanadaownedby (i)ofthecorporate without On behalfoftheBoard Trustees, across thecountry. pursuingfurtherrestaurantdevelopmentopportunities brand inCanadaby Pizza willcontinuetostrengthenitspositionasthenumberonecasualdining in2014.are underconstructiontodate BPI’s Boston believethat management 12 new Boston Pizza Restaurants opened in 2013 and the additional two that the futureexpansionasevidencedby Boston Pizzaremainswellpositionedfor the re-opening. andexperienceanincrementalsalesincreaseintheyearfollowing the renovation sevenyears.every twotothreeweekscomplete closefor Restaurantstypically eachBostonPizzaRestaurantundergoacompletestorerenovation requires that andannualmenure-pricing.innovation Inaddition, BPI’s franchiseagreement ofculinary cheque levelsareexpectedtobeachievedthroughacombination andlocalstorepromotions.a revisedcalendarofnational Increasedaverage alargermarketingbudgetversusthepreviousyearalongwith and leveraging parts of each location, a compelling value proposition to our offering guests wide varietyofguestsintotherestaurant, sportsbarandtake-out/delivery Boston PizzaRoyaltiesIncomeFund Chairman, JOHN COWPERTHWAITE Partnership”), Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., , FCPA, FCA
LETTER FROM THE CHIEF EXECUTIVE OFFICER OF BOSTON PIZZA INTERNATIONAL INC.
On behalf of Boston Pizza International Inc. (“BPI”), its board of directors, During June, July and August, Boston Pizza featured a barbeque-inspired, management team and employees, I am pleased to present our 2013 Annual summer rib promotion which included a feature menu with burgers, shrimp Report. This report covers the fiscal period of October 1, 2013 to December 31, tacos, summer salads and all new barbequed ribs. The feature menu helped 2013 (the “Period”) and January 1, 2013 to December 31, 2013 (the “Year”). keep Boston Pizza top-of-mind with guests and was supported by a new national television campaign. Highlights • Record system-wide gross sales of $974.8 million in 2013, an increase In September, Boston Pizza refreshed our national menu with 10 new items of 3.4% compared to 2012. available at all locations in Canada. At the same time, the new Boston Pizza Kids Pack was launched with a new children’s menu that comes with a whole • 12 new Boston Pizza locations opened during 2013 and were added variety of games and activities to keep kids entertained while they eat at Boston to the Fund’s royalty pool on January 1, 2014 bringing the total to Pizza. Families have been a big part of Boston Pizza’s concept for many years 358 restaurants nationwide. and we’ve had great reviews from our smaller guests on the new Kids Pack. • Key operational and marketing initiatives drive record top-line results On the development front, Boston Pizza continued to open traditional locations for BPI in 2013. in new markets across the country while also opening new development Readers are cautioned that they should refer to the consolidated financial opportunities as part of a multi-channel development strategy. Designed to statements and Management’s Discussion and Analysis of BPI for the Period accelerate the development of new restaurant locations and further establish and the Year, available on SEDAR at www.sedar.com and on the Fund’s website the Boston Pizza brand across the country, a new, small-store prototype at www.bpincomefund.com, for a full description of BPI’s financial results opened in Blackfalds, Alberta in the fall of 2013. This 4,000 square foot
model is perfect for smaller communities and trade areas where a traditional 2013 ANNUAL REPORT 2013 was a record setting year for Boston Pizza. We posted several new high Boston Pizza restaurant design cannot be accommodated. water marks including $974.8 million in annual system-wide gross sales, 11 $755.4 million in annual franchise sales of royalty pooled restaurants and Also in the fourth quarter of 2013, Boston Pizza unveiled a completely we exceeded 350 restaurants in Canada for the first time in the brand’s 50 new look and restaurant design at the new location built at Ellerslie Road year history. By year end, we had served over 40 million guests in 358 Boston in Edmonton, Alberta. This new contemporary design is also being used to Pizza locations and had further solidified our position as Canada’s number renovate existing stores that are scheduled for renovations as part of Boston one casual dining brand. These record results were made possible by the Pizza’s seven year renovation plan cycle. The new design is perfectly suited dedication and support of our franchisees, corporate and restaurant staff for stand-alone buildings as well as to be part of large shopping malls, members, and our suppliers and partners. In addition, we had a number of big-box pads, and is scalable for locations such as airports, campuses successful initiatives during the year that contributed to our strong results for and neighbourhood storefronts. Going forward, all newly built Boston Pizza the Year while advancing our consistent “three pillars” strategy of continually locations and renovations of existing restaurants will use the new design. improving the Guest experience, building the Boston Pizza brand and focusing In 2014, Boston Pizza will celebrate its 50th anniversary. Many events will on franchisee profitability. INC. BOSTON PIZZA INTERNATIONAL take place across the country to recognize this significant milestone and to Operational Highlights celebrate with all the people who have contributed to the success of Boston In the first quarter of 2013, Boston Pizza continued to deliver food innovation Pizza, including our franchisees, partners and of course the 40 million guests with the launch of our revolutionary Pizzaburger™, which has since received each year who frequent our restaurants in Canada. We are very proud to many positive guest reviews and has quickly become one of the most popular be a successful, Canadian-made restaurant brand and we look forward to items on our menu. The “Eat One For Me” campaign that accompanied the celebrating our 50th birthday this year. Pizzaburger™ launch used humour and a cast of memorable characters to Outlook invite guests in to try the new creation while also contributing to overall brand Boston Pizza is well positioned for future growth and should continue to awareness for Boston Pizza. strengthen its position as the number one casual dining brand in Canada by On May 6, 2013 Boston Pizza opened our 350th restaurant location in Canada achieving positive SSSG and continuing to open new Boston Pizza Restaurants which took place in Devon, Alberta. This was a milestone event for Boston across Canada. Pizza and we were pleased that the local community joined us to celebrate our newest addition and to recognize the continued expansion of Boston Pizza. By the end of 2013, we had opened a total of 12 new locations, further solidifying Boston Pizza’s position as Canada’s #1 casual dining brand by serving more customers in more locations that any other full-service restaurant brand. 12 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 The trustees of the Fund have approved thecontents ofthisletter. approved The trusteesoftheFund have “Note RegardingForward-Looking Information” sectionsincludedinthe Fund’s mostrecentManagement’s Discussion and www.sedar.com at thePeriodavailable for Analysis andwww.bpincomefund.com. information. disclosedforward-looking previously to update and ourbusiness, information withforward-looking Foracompletelistoftherisksassociated pleaserefertothe “Risks andUncertainties” and ofthis letter. asofthedate and speaks only performance regarding future events and operating reflects current expectations information by law, Except as required the FundandBPIassumeno obligation andfinancialconditionofBPItheFund,results ofoperations aswellthosefactorsdiscussedunder theheading “RisksandUncertainties” inthemostrecent FormoftheFund. AnnualInformation This spending patterns,preferences and discretionary business and economic conditions, and regulation, legislation revenues, Cash and reliance on operating Distributable accounting policies and practices, the future results, from any different contained herein, information the or forward-looking achievement expressed or implied by performance to (among others) competition, relate trends, demographic consumer ofchangeslaws.protection ofintellectual property rightsofthePartnership and absence Risks, causeactualresults, may uncertainties andotherfactorsthat orachievementstobematerially performance tofuturegeneraleconomicconditions,related businessplans, speedofpermitting, receiptoffranchisefeesand otheramounts, franchiseesaccess tofinancing, development, paceofcommercialrealestate containedinthispressreleaseincludethe following: information factorsandassumptionsusedtodeveloptheforward-looking The material futureresultsbeingsimilartohistoricalresults, expectation When usedinthispressrelease, includewordssuchas may information forward-looking “anticipate”, “estimate”, “may”, “will”, “expect”, “believe”, “plan”, “should”, “continue” andothersimilarterminology. guestchequeslevels,increases inaverage incrementalsalesincreasingafterstore renovations, information. areforward-looking planstopursuerestaurantdevelopmentopportunitiesandothersuchmatters futuregrowth,Pizza beingwellpositionedfor thestrengtheningofBostonPizza’s positionasthenumberonecasualdiningbrandinCanada, theachievement ofpositiveSSSG, openingofnewrestaurants, Cash,result inincreasesDistributable closeto100% willbemaintained, Ratio aPayout cashinordertomaximizereturnsunitholders, trusteesoftheFundwillcontinuetodistributeallavailable Boston occurinthefuture,will ormay includingsuchthingsas, Ratio, inthePayout seasonalfluctuations fourthquarters, tobehigherinthefirstand islikely Ratio thePayout higherFranchiseSalesgenerally information. All statements, ofhistoricalfacts, otherthanstatements addressactivities, includedinthepressreleasethat ofBPIexpectsoranticipates theFundormanagement eventsordevelopmentsthat Inc., BostonPizzaGPInc., BPI, BostonPizzaRestaurants, results, orindustry futureresults, fromany different tobematerially suchforward-looking orachievementsexpressedimplied by performance orachievementsoftheFund,performance BostonPizzaHoldings Trust, BostonPizzaRoyaltiesLimitedPartnership(“thePartnership”), BostonPizzaHoldingsLimited Partnership, BostonPizzaHoldingsGP inthisletterconstitutes Certain information information”“forward-looking involvesknownandunknownrisks, that uncertainties, causetheactualresults, andotherfactorswhichmay futureexpectations there-opening. incremental salesincreaseintheyearfollowing two and to experience three an weeks to complete close the for renovation sevenyears. every undergo acompletestorerenovation Restaurantstypically addition, BPI’s eachBostonPizzaRestaurant requiresthat franchiseagreement andannualmenure-pricing. innovation ofculinary through acombination In promotions. chequelevelsareexpectedtobeachieved Increasedaverage andlocalstore the previousyearalongwitharevisedcalendarofnational a larger marketing budget versus proposition to our guests and leveraging partsofeachlocation,bar andtake-out/delivery acompellingvalue offering attracting awidevarietyofguestsintotherestaurant,traffic include sports guestcheque.and changesinaverage BPI’s todrivehigherguest strategies SSSGarechangesincustomertraffic affect The twoprincipalfactorsthat BOSTON PIZZAINTERNATIONAL LETTER FROMTHECEO Boston Pizza International Inc. Boston PizzaInternational President &ChiefExecutiveOfficer, MARK PACINDA On behalf of Boston Pizza International Inc., On behalfofBostonPizzaInternational across thecountry. pursuingfurtherrestaurantdevelopmentopportunities brand inCanadaby Pizza willcontinuetostrengthenitspositionasthenumberonecasualdining in2014.are underconstructiontodate BPI’s Boston believethat management 12 new Boston Pizza Restaurants opened in 2013 and the additional two that the futureexpansionasevidencedby Boston Pizzaremainswellpositionedfor , MANAGEMENT’S DISCUSSION & ANALYSIS BOSTON PIZZA ROYALTIES INCOME FUND FOR THE PERIOD AND YEAR ENDED DECEMBER 31, 2013
FINANCIAL HIGHLIGHTS The tables below set out selected information from the annual consolidated financial statements of Boston Pizza Royalties Income Fund (the Fund“ ”1), which includes the accounts of Boston Pizza Royalties Limited Partnership (the “Partnership”), together with other data and should be read in conjunction with the annual consolidated financial statements of the Fund for the years ended December 31, 2013 and 2012. The financial information in the tables included in this Management’s Discussion and Analysis are reported in accordance with International Financial Reporting Standards (“IFRS”). The Fund’s net income under IFRS contains many non-cash items that do not affect the Fund’s ability to pay distributions, and as such, is not, in the Fund’s view, the only or most meaningful measurement of the Fund’s ability to pay distributions. Consequently, the Fund has provided the non-IFRS metrics of Distributable Cash2 and Payout Ratio3 (as set forth in the tables below) to provide, in the Fund’s opinion, investors with more meaningful information regarding the Fund’s ability to pay distributions on the trust units of the Fund (the “Units”).
(in thousands of dollars – except restaurants, SSSG, Payout Ratio3 and per Unit items) 2013 2012 2011 System-wide Gross Sales4 974,837 943,053 904,872 Number of restaurants in Royalty Pool5 346 341 336 Franchise Sales6 reported by restaurants in the Royalty Pool 755,420 731,455 699,329
Revenues Royalty revenue – 4% of Franchise Sales 30,217 29,258 27,973 Interest income 1,811 1,814 1,815 Total revenues 32,028 31,072 29,788 ANNUAL REPORT 2013 ANNUAL REPORT Expenses Administrative expenses and interest on bank debt (2,104 ) (2,067 ) (1,894 ) 13 Interest expense on Class B Units and Class C Units7 (5,525 ) (6,295 ) (5,814 ) Fair value adjustment on Class B Unit liability8 (3,424 ) (14,867 ) (731 ) Fair value adjustment on interest rate swap 227 136 — Subtotal (10,826 ) (23,093 ) (8,439 ) Current income tax expense (6,039 ) (5,423 ) (5,474 ) Deferred income tax expense (350 ) (510 ) (290 ) Total expenses (17,215 ) (29,026 ) (14,203 )
Net Income Net income 14,813 2,046 15,585 Basic earnings per Unit 0.97 0.14 1.07
Diluted earnings per Unit 0.97 0.14 1.06 INCOME FUND BOSTON PIZZA ROYALTIES
Distributable Cash2/ Distributions / Payout Ratio3 Cash flows from operating activities 24,908 19,062 28,446 Class C distributions to BPI (1,800 ) (1,800 ) (1,800 ) BPI Class B entitlement (3,725 ) (4,495 ) (4,130 ) Interest paid on long-term debt (1,002 ) (887 ) (956 ) SIFT Tax on Units9 49 5,492 (5,474 ) Distributable Cash2 18,430 17,372 16,086 Distributions payable10 18,569 17,244 15,387 Payout Ratio3 100.8% 99.3 % 95.7 % Distributable Cash per Unit2 1.208 1.184 1.104 Distributions payable per Unit10 1.220 1.170 1.056 Other Same store sales growth 1.5% 3.3 % 4.9 % Number of restaurants opened during the Year 12 7 7 Number of restaurants closed during the Year 2 2 4
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Total assets 268,945 264,632 261,571 Total liabilities 119,726 99,353 99,794 14 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 Distributable Cash Distributable Cash Diluted earnings(loss)perUnit Diluted earnings(loss)perUnit Basic earnings(loss)perUnit Basic earnings(loss)perUnit Net income(loss) Net income(loss) Interest expenseonClassBUnitsandC Interest expenseonClassBUnitsandC Net Income(loss) Net Income(loss) Administrative expensesandinterestonbankdebt Administrative expensesandinterestonbankdebt Administrative
Total expenses Total Total expenses Total Expenses Expenses
Deferred income tax expense tax income Deferred expense tax income Deferred Total revenues Total revenues
Current income tax expense tax income Current Current incometaxexpense Interest income Interest income
Subtotal Subtotal Royalty revenue–4%ofFranchiseSales Royalty revenue–4%ofFranchiseSales Distributable cash Distributable cash Distributable
Payout Ratio Payout Payout Ratio Payout Cash flows from operating activities Cash flowsfromoperating activities Cash flowsfromoperating swap Fair valueadjustmentoninterestrate swap Fair valueadjustmentoninterestrate Fair valueadjustmentonClassBUnitliability Fair valueadjustmentonClassBUnitliability Distributions payable perUnit Distributions payable perUnit Distributions payable Distributable cashperUnit Distributable Franchise Sales cashperUnit Distributable Franchise Sales Distributions payable Distributions payable Number ofrestaurantsinRoyaltyPool Number ofrestaurantsinRoyaltyPool Revenues Revenues System-wide GrossSales (in thousandsofdollars–exceptrestaurants, Ratio Payout System-wide GrossSales (in thousandsofdollars–exceptrestaurants, Ratio Payout SIFT Tax onUnits SIFT Tax onUnits Interest paid on long-term debt long-term on paid Interest Interest paidonlong-termdebt BPI Class B entitlement B Class BPI BPI ClassBentitlement Class C distributions to BPI to distributions C Class Class CdistributionstoBPI 3 3
6 6 reported by restaurantsintheRoyaltyPool reportedby reported by restaurantsintheRoyaltyPool reportedby 2 2
2 2 10 10 /DistributionsPayout Ratio /DistributionsPayout Ratio
9 9
4 4
2 2
10 10
5 5
8 8
7 7 3 3
andperUnititems) andperUnititems) 3 3
4,342 241,488 183,742 239,764 185,197 (1,441 ) (1,897 ) (3,519 ) (1,421 ) (1,738 ) (1,978 ) 8,233 7,803 1,931 7,350 6,039 4,599 4,598 0.292 104.9 % 4,385 7,861 7,408 6,221 0.294 0.306 4,480 0.303 4,539 2013 2012 0.23 0.55 0.23 0.29 98.7 % (572 ) (297 ) (992 ) (450 ) (462 (215 ) (360 ) (986 ) (450 ) (198 346 430 453 453 633 341 (60 ) (31 ) 69 85 Q4 Q4
) ) 246,627 191,510 239,269 186,084 (1,529 ) (3,212 ) (1,166 ) (1,365 ) (1,581 (9,477 ) (4,801 ) (1,211 ) (1,350 ) (8,067 ) (5,890 ) (1,628 ) 3,312 8,113 7,660 6,482 4,605 0.324 4,894 7,896 7,443 6,319 0.294 0.306 4,284 0.311 4,528 (0.11 (0.11 2013 2012 0.22 0.22 94.1 % 94.6 % (545 ) (276 ) (915 ) (450 ) (616 (130 ) (450 ) (136 346 453 453 341 (60 ) (60 ) — 67 53 Q3 Q3
) ) ) ) ) 250,398 193,830 237,955 183,593 (1,606 ) (2,369 ) (1,144 ) (1,365 ) (1,608 ) (4,185 ) (1,178 ) (1,351 ) (1,628 ) 4,020 8,205 7,753 6,572 4,673 0.315 4,835 6,189 7,797 7,344 6,188 0.294 0.306 4,284 1,953 0.293 100.2 % 4,274 2013 2012 0.26 0.26 96.6 % 0.24 0.42 (510 ) (216 ) (915 ) (450 ) (512 (285 ) (210 ) (450 ) (187 ) (156 347 453 452 650 341 (70 ) — Q2 Q2 (1 )
) )
236,324 186,338 226,065 176,581 (752 (14,422 ) (13,101 ) (11,563 ) (1,463 (7,176 (5,712 (6,904 (8,659 ) (1,154 ) (1,301 ) (1,061 ) 7,907 108.7 % 7,454 5,815 4,692 0.277 4,316 7,518 7,063 5,524 0.288 0.302 4,196 0.274 105.0 % 3,997 (0.05 (0.05 (0.47 (0.47 2013 2012 (477 (213 (903 (450 (898 (477 (257 ) (450 ) 348 455 453 334 342 (20 ) (20 ) (89 ) — 67 Q1 Q1
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 1 Any further references to the Fund refer to the Fund and its subsidiaries, as the financial results in this Management’s Discussion and Analysis are presented on a consolidated basis unless expressly stated otherwise. 2 Distributable Cash (as defined herein) is a non-IFRS financial measure that does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This non-IFRS financial measure provides useful information to investors regarding the amount of cash the Fund has generated for distribution on the Units. Investors are cautioned that this should not be construed as an alternative net income measure of profitability. The preceding tables provide a reconciliation from this non-IFRS financial measure to cash flows from operating activities, which is the most directly comparable IFRS measure. See the “Operating Results – Distributable Cash / Payout Ratio” section of this Management’s Discussion and Analysis for more details. 3 Payout Ratio (as defined herein) is calculated by dividing the distributions payable by the Fund in respect of the applicable period by the Distributable Cash2 generated in that period. Payout Ratio is a non-IFRS financial measure that does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This non-IFRS financial measure provides investors with useful information regarding the extent to which the Fund distributes cash on the Units. Investors are cautioned that this should not be construed as an alternative net income measure of profitability. As the Payout Ratio is calculated from a formula which includes Distributable Cash, which is a non-IFRS measure, a reconciliation of Payout Ratio to an IFRS measure is not possible. See the “Operating Results – Distributable Cash / Payout Ratio” section of this Management’s Discussion and Analysis for more details. 4 “System-wide Gross Sales” means the gross revenue: (i) of the corporate Boston Pizza Restaurants (as defined herein) in Canada owned by BPI; and (ii) reported to BPI by franchised Boston Pizza Restaurants in Canada, without audit or other form of independent assurance, and in the case of both (i) and (ii), including revenue from the sale of liquor, beer, wine and tobacco and revenue from BPI approved national promotions and discounts and excluding applicable sales and similar taxes. 5 Number of restaurants in the Royalty Pool (as defined herein) excludes restaurants that permanently closed during the applicable period. 6 Franchise sales is the basis on which the royalty is payable; it means the revenues of Boston Pizza Restaurants in respect of which the royalty is payable (“Franchise Sales”). The term “revenue” refers to the gross revenue: (i) of the corporate Boston Pizza Restaurants in Canada owned by BPI; and (ii) reported to BPI by franchised Boston Pizza Restaurants in Canada, without audit or other form of independent assurance, and in the case of both (i) and (ii), after deducting revenue from the sale of liquor, beer, wine and tobacco and revenue from BPI approved national promotions and discounts and excluding applicable sales and similar taxes. Nevertheless, BPI periodically conducts audits of the Franchise Sales reported to it by its franchisees, and the Franchise Sales reported herein include results from sales audits of earlier periods. 7 The Class B general partner units of the Partnership (the “Class B Units”) and the Class C general partner units of the Partnership (the “Class C Units”) are classified as financial liabilities under IFRS, and as such, amounts paid by the Partnership to BPI in respect of the Class B Units and Class C Units are classified as interest expense and not distributions. See the “Operating Results – Expenses” section of this Management’s Discussion and Analysis for more details.
8 The Fund is required under IFRS to fair value the Class B Unit liability at the end of each period and adjust for any increase or decrease in the fair value of that liability as 2013 ANNUAL REPORT compared to the fair value of that liability at the end of the immediately preceding period. This adjustment has no impact on the Fund’s Distributable Cash2. See the “Operating Results – Expenses” section of this Management’s Discussion and Analysis for more details. 15 9 SIFT Tax on Units is the specified investment flow-through tax SIFT(“ Tax”) expense for the respective period (as a negative number) plus the amount of SIFT Tax paid in the respective period. See the “Operating Results – Distributable Cash/Payout Ratio” section of this Management’s Discussion and Analysis for more details. 10 Under the declaration of trust governing the Fund (the “Declaration of Trust”), the Fund pays distributions on the Units in respect of any particular calendar month not later than the last business day of the immediately subsequent month. Accordingly, distributions on the Units in respect of the calendar month of January are paid no later than the last business day of February, distributions on the Units in respect of the calendar month of February are paid no later than the last business day of March and so forth. Consequently, distributions payable by the Fund on the Units in respect of the Period (as defined herein) were the October 2013 distribution (which was paid on November 29, 2013), the November 2013 distribution (which was paid on December 31, 2013) and the December 2013 distribution (which was paid on January 31, 2014). Similarly, the distributions payable by the Fund on the Units in respect of any other period are the distributions paid in the immediately subsequent month of each month comprising such other period. BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES 16 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 were 346 the specificroyaltypool(the “Royalty Pool”). As ofDecember31, 2013, there Franchise Salesofthoserestaurants(“BostonPizzaRestaurants”)includedin a4%royalty(“RoyaltyPartnership licensestheBPRightstoBPIinreturnfor ”) of entitiesandfranchisees(herein referred toasits affiliated “BostonPizza”). The or when the franchise agreement hasexpiredorbeen terminated. or whenthefranchiseagreement Restaurants. A BostonPizzaRestaurantisclosedwhenitceasestobeviable the permanent closures of Boston Pizza by Franchise Sales are also affected there-opening. increase intheyearfollowing andexperienceanincrementalsales three weekstocompletetherenovation BPI. asrequiredby equipment upgrades twoto close for typically Locations sevenyears andcomplete every undergo acompletestorerenovation BPI’sthat eachBostonPizzaRestaurant requiresthat franchiseagreement is competitive strengthsinincreasingFranchiseSalesofexistinglocations conditions, pricing, BPI. undertakenby andmarketingprograms OneofBPI’s excellence,Boston PizzaRestaurantsmaintainingoperational generalmarket guestcheque.changes inaverage These factorsare dependentuponexisting SSSG are changes in customer traffic and affect The two principal factors that aminimum of 24months).previous year(whererestaurantswereopenfor thesameperiodin revenuesfor Restaurants ascomparedtothegross Fund (“Unitholders”), revenues of is Boston Pizza the change in gross (“SSSG”). SSSG, unitholders of the for driver of distribution growth a key Restaurants addedtotheRoyaltyPoolandsamestoresalesgrowth Increases inFranchiseSalesarederivedfrombothnewBostonPizza Boston PizzaRestaurantsintheRoyaltyPool. ofBPItomaintainandincreaseFranchiseSales ontheability primarily business.an operating Giventhisstructure, thesuccessofFunddepends with ofearningsorexpensesassociated Fund isnotsubjecttothevariability on theClassBUnitsandCUnits, andcurrentincometax. Therefore, the expenses and interest on debt,administrative the Partnership amounts paid by Restaurants intheRoyaltyPool. The Fund’s cashexpensesare only ofeitherBPIortheBostonPizza theprofitability and isnotdeterminedby revenue oftheFundisbasedonFranchiseSalesRoyaltyPoolrestaurants oftheFund’s attribute A key itisa structureisthat “top-line” fund. Royalty 11 the Restaurants inCanada(collectively “BP Rights Inc.International ofBostonPizza (“BPI”)usedinconnectionwiththeoperation Holdings Trust(the “Trust ”), BostonPizza the Canadian trademarks owned by toacquire,Fund wascreated throughthePartnershipandBostonPizza indirectly Units tradeonthe Toronto StockExchange(“TSX”)underthesymbolBPF.UN. 2002, inJuly The Fundisalimitedpurposeopen-endedtrustestablished andthe 6, February is dated 2014. 1,month period from January 2013 to December 31, 2013 (the “Year”) and from October1, 2013toDecember31, 2013(the “Period”) andthetwelve This Management’s Discussion and coversthethreemonthperiod Analysis General OVERVIEW MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAROYALTIES INCOMEFUND pending registration undertheTrade-Markspending registration Act(Canada). entities in its business, affiliated BPI or trademarks any or trade names used by and in particular do not include the rights or outside of Canada to the trademarks registered orpendingtrademarks.trademarks andthetrade nameswhichareconfusingwiththe registered The BPRightspurchased donotincludetherightsoutsideofCanada toany 17, July asat BP Rightsarethetrademarks that undertheTrade-Marks registration for orthesubjectofpendingapplications 2002wereregistered Act (Canada), andother 5 restaurantsintheRoyaltyPool. 11 ) andthebusinessofBPI, (CONTINUED)
The The respectively. to thePeriodisattributed The decreaseinFranchise Salesfor compared to$185.2millionand$731.5 millioninthesameperiods2012, the the Periodand$755.4millionfor Royalty Poolwere$183.7millionfor Year part ofthe latter Year. Franchise Sales of Boston Pizza Restaurants in the experiencedinthe thechallengesnotedabove by offset re-pricing partially from continuedpromotionofBostonPizza’s onlineorderingsystemandmenu the for Year salesresulting duetohighertake-outand delivery wasprincipally generaleconomicconditions. aswellchallenging country PositiveSSSG parts of the experienced in many duetopoorweather Period was principally the positive 1.4%for Year (2012–positive3.4%). the SSSG for The negative thePeriod(Q42012–positive3.0%)and 2.3%for SSSG wasnegative promotionsanddiscounts. national and approved OnaFranchiseSales basis, to theFund, excluderevenuefromthesaleofliquor, beer, wineandtobacco 2012.for FranchiseSales, BPI thebasisupon whichroyaltiesarepaidby quarterof2012andpositive3.3% positive 2.2%SSSGreportedinthefourth the thePeriodandpositive1.5%for 1.5%for was negative Year comparedto guestcheque.average changes incustomertrafficand SSSG a minimumof24months. SSSGare affect The twoprincipalfactorsthat thesameperiodinpreviousyear,for whererestaurantswereopenfor revenues revenues ofBostonPizzaRestaurantsascomparedtothegross SSSG, Unitholders, for driverofdistributiongrowth akey isthechangeingross SSSG andFranchiseSales OPERATING RESULTS been preparedinaccordancewithIFRS. areinCanadiandollarsandhave financialstatements The annualconsolidated notes. andaccompanying financialstatements annualconsolidated applicable financial positionoftheFundandshouldbereadinconjunctionwithFund’s and oftheoperations providesadditionalanalysis information The following BPI. Entitlements receivedby adjustment ismadetoreconciledistributionspaidBPIandthe Additional the Fund is determined. paid by tax rate the actual effective At such time an the royaltyrevenuesoftheserestaurantsreceivedfromBPIisperformed, and afullyear, beenpartoftheRoyaltyPoolfor new restaurantshave anauditof of distributionsfromthe Additional Entitlementsthroughouttheyear. Oncethese theFundareknownwithcertainty. paidby taxrate average BPIreceives100% ofthenewrestaurantsandactualeffective actual fullyearperformance 80% ofthe Additional Entitlementsinitially, withthebalancereceivedwhen the yieldofFund, Unitprice. theweightedaverage dividedby BPIreceives the Fund, to be paid by estimated tax rate average minus the effective divided by royaltyrevenueaddedtotheRoyaltyPool,of theestimated one multipliedby be accretivetoUnitholders. The 92.5% at Additional Entitlementsarecalculated new Franchise Sales addedtotheRoyaltyPoolisdesigned The adjustmentfor acquireadditionalUnits(the the righttoindirectly “Additional Entitlements”). Adjustment Date. addingnetadditionalroyaltyrevenue, Inreturnfor BPIreceives closedsincethelast permanently BostonPizzaRestaurantsthat remove any to add to the Royalty opened Pool and new to Boston Pizza Restaurants that 1 of eachyear(the On January “Adjustment Date”), an adjustment is made Addition ofNewRestaurantstoRoyalty Pool negative SSSG as discussed above. The increase in Franchise Sales for the taxes and $0.3 million for general and administrative expenses. For the same Year is attributed to the positive SSSG for the Year and the addition of five net period in 2012, the Fund’s expenses were $3.5 million, consisting of $0.2 new Boston Pizza Restaurants to the Fund’s Royalty Pool on January 1, 2013. million for interest expense on the Fund’s Credit Facilities and previous credit facilities, $2.0 million for interest expense to BPI on the Class B Units and New Store Openings, Closures and Renovations Class C Units, $1.8 million for SIFT Tax and deferred income taxes and $0.2 During the Period, seven new Boston Pizza Restaurants opened (Year – 12) million for general and administrative expenses offset by a net $0.7 million fair and zero Boston Pizza Restaurants closed (Year – 2). Subsequent to the value adjustment on Class B Units held by BPI and the interest rate swap on Period, two Boston Pizza Restaurants closed. As well during the Period, 13 Facility B (as defined herein). Boston Pizza Restaurants were renovated (Year – 37). Restaurants typically close for two to three weeks to complete the renovation and experience an The Fund’s expenses for the Year were $17.2 million consisting of $1.0 incremental sales increase in the year following the re-opening. Subsequent million for interest expense on the Credit Facilities, $5.5 million for interest to December 31, 2013, five additional restaurants were renovated, bringing expense to BPI on the Class B Units and Class C Units, $6.4 million for SIFT the total number of restaurants renovated from January 1, 2013 to February 6, Tax and deferred income taxes, a net $3.2 million fair value adjustment on 2014 to 42. The total number of restaurants in operation as of February 6, 2014 Class B Units held by BPI and the Swaps, and $1.1 million for general and is 356, all of which are in the Royalty Pool5. administrative expenses. For the same period in 2012, the Fund’s expenses were $29.0 million, consisting of $0.9 million for interest expense on the Seasonality Fund’s Credit Facilities, $6.3 million for interest expense to BPI on the Class Boston Pizza Restaurants experience seasonal fluctuations in Franchise Sales, B Units and Class C Units, $5.9 million for SIFT Tax and deferred income which are inherent in the full service restaurant industry in Canada. Seasonal taxes, a net $14.7 million fair value adjustment on the Class B Units held by factors such as better weather allow Boston Pizza Restaurants to open their BPI and the interest rate swap on Facility B, and $1.2 million for general and patios and generally increase Franchise Sales in the second and third quarters administrative expenses. compared to the first and fourth quarters. Tourism is also a seasonal factor 2013 ANNUAL REPORT positively impacting the same time frames. The effect of seasonality impacts The Fund’s expenses for the Period were $3.9 million lower and were $11.8 the Fund’s Distributable Cash2 and Payout Ratios3. See the “Operating Results million lower for the Year, compared with the same periods in 2012. These 17 - Distributable Cash / Payout Ratio” section of this Management’s Discussion changes were primarily due to the changes in the fair value adjustment of the and Analysis for more details. Class B Unit liability of $3.7 million for the Period and $11.5 million for the Year.
Revenues The Fund estimates the fair value of its Class B Unit liability using the Fund’s Total revenue earned by the Fund was $7.8 million for the Period and $32.0 market capitalization at the end of the applicable period and allocating BPI’s million for the Year compared to $7.9 million for the fourth quarter of 2012 entitlement based upon its percentage ownership of the Fund on a fully-diluted and $31.1 million for 2012. basis. As at December 31, 2013, the Fund’s closing price was $20.71 per Unit (September 30, 2013 – $22.76 per Unit) resulting in a market capitalization Royalty revenue earned by the Fund was $7.4 million for the Period and $30.2 of $357.7 million (September 30, 2013 – $393.1 million). BPI’s 13.0% million for the Year compared to $7.4 million for the fourth quarter of 2012 and ownership (September 30, 2013 – 13.0%) of the Fund (on a fully-diluted $29.3 million for 2012. Royalty revenue was based on the Royalty Pool of 3465 basis) was calculated to be valued at $46.4 million (September 30, 2013 – Boston Pizza Restaurants reporting Franchise Sales of $183.7 million for the $51.0 million). In general, the Fund’s Class B Unit liability will increase as the INCOME FUND BOSTON PIZZA ROYALTIES Period and $755.4 million for the Year. In the fourth quarter of 2012, Royalty market price of the Units increases and vice versa. The difference between revenue was based on the Royalty Pool of 3415 Boston Pizza Restaurants the Class B Unit liability at the end of the Period and September 30, 2013 is a reporting Franchise Sales of $185.2 million and $731.5 million for 2012. The decrease of $4.6 million. At December 31, 2012, the Class B Unit liability was decrease in Royalty revenue for the Period compared to the same period in $38.7 million based on a Unit price of $19.30 resulting in an increase to the 2012 was due to negative SSSG. The increase in Royalty revenue for the Class B Unit liability of $7.7 million for the Year. Year compared to the same period in 2012 was due to positive SSSG and the addition of five net new restaurants to the Royalty Pool on January 1, 2013. Net Income The Fund’s net income for the Period was $8.2 million and $14.8 million Interest income earned by the Fund was $0.5 million for the Period (Q4 2012 for the Year compared to a net income of $4.3 million for the fourth quarter – $0.5 million) and $1.8 million for the Year (2012 - $1.8 million). The Fund’s in 2012 and a net income of $2.0 million for 2012. The Fund’s basic interest income is mainly derived from the $24.0 million loan from the Fund to earnings per Unit for the Period and the Year were $0.55 and $0.97, BPI, which bears interest at a rate of 7.5% per annum and is paid monthly by respectively, compared to $0.29 and $0.14, respectively, for the same BPI in arrears (the “BP Loan”). periods in 2012. The Fund’s diluted earnings per Unit for the Period and Expenses Year were $0.23 and $0.97 respectively, compared to $0.23 and $0.14, The Fund’s net expenses for the Period resulted in a gain of $0.4 million due to respectively, for the periods in 2012. The Fund’s net income for the Period a net $4.4 million fair value gain on Class B Units held by BPI and the Swaps was $3.9 million higher than the same period one year ago principally due (as defined herein), offset by $0.3 million for interest expense on the Credit to the net $3.7 million change in the fair value adjustments of the Class B Facilities (as defined herein), $1.9 million for interest expense to BPI on the Unit liability and Swaps. The $12.8 million increase in net income for the Class B Units and Class C Units, $1.5 million for SIFT Tax and deferred income Year compared to the same period one year ago was primarily the result of 18 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 Distributions for the Distributions for Year wereasfollows: distributions 6, February As at 2014, the Fund had paid out 138 consecutive monthly $0.098 perUnitto$0.102Unit. Year to funddistributions. from operations. point duringthePeriodor any Nodebtwasincurred at the Periodandthe Distributions for Year cashflows by werefundedentirely * PaidsubsequenttothePeriod. 1–31,January 2013 PERIOD Cash of Distributable deferred incometaxes. Consequently, theFunddiscloses the non-IFRSmetric and andtheSwaps as thefairvalueadjustmentsonClassBUnitliability theFund’s donotaffect non-cashitemsthat contains many cashflows, such of theFund’s ofnetincome distributionsasthecalculation to pay ability itdoesnotprovidethemostmeaningfulmeasurement Fund isoftheviewthat While netincomeisthemeasurementofFund’s earningsunderIFRS, the togetherwitha$0.9millionincreaseinrevenues.and theSwaps infairvalue adjustment on theClassBUnitliability the $11.5million difference MANAGEMENT’S DISCUSSION&ANALYSIS paid in March 2013 and increased the monthly distribution paid inMarch2013andincreasedthemonthly 2013distribution theFebruary for distribution increase of4.1%waseffective since theFund’s ofUnits(“IPO”). initialpublicoffering The mostrecent on February 28,on February 2014. received16distribution Unitholdershave 21, thecloseofbusinessonFebruary Unitholders ofrecordat 2014, tobepaid 1,of theperiodJanuary 31, 2014toJanuary to 2014andwillbepayable distribution toUnitholdersof$0.102perUnit. This distributionisinrespect 6,On February 2014, cash amonthly thetrusteesofFund approved 1,000,000UnitsonNovember23,Class BUnitsfor 2012. exchanged3,479,575 increase inoutstandingUnitsasaresultofBPIhaving 2013distributionandthe theFebruary for distributioneffective in themonthly Year duetotheincrease comparedtothesameperiodsin2012wereprimarily amountofdistributionsdeclaredontheUnitsduringPeriodand the aggregate 2012.compared to$17.2millionor$1.170perUnitduringfor The increasesin distributions ontheUnitsinamountof$18.6millionor$1.220perUnit per Unitduringthesameperiodin2012. Duringthe Year, theFunddeclared amount of$6.1millionor$0.408perUnitcomparedto$5.9$0.392 During thePeriod, theFunddeclareddistributionsonUnitsinaggregate Distributions Units. See Ratio” Cash/Payout “Distributable details. sectionbelowfor regardingtheFund’smeaningful information distributionsonthe topay ability BOSTON PIZZAROYALTIES INCOMEFUND February 1–28,February 2013 March 1–31, 2013 April 1–30, 2013 May 1–31,May 2013 June 1–30, 2013 July 1–31,July 2013 August 1–31, 2013 September 1–30, 2013 October 1–31, 2013 November 1–30, 2013 December 1–31, 2013 12 bytheFund onUnits areclassified as distributions notinterest expense. amounts paid and that Units areclassified as equity and notfinancial liabilities This assumes that 12 totalling$176.2millionor$14.00perUnit. 2 toprovide, intheFund’s opinion, investorswithmore PAYMENT DATE February 28,February 2013 March 29, 2013 April 30, 2013 May 31,May 2013 June 28, 2013 July 31,July 2013 August 30, 2013 September 30, 2013 October 31, 2013 November 29, 2013 December 31, 2013 January 31,January 2014* 12 (CONTINUED) AMOUNT/UNIT amountfrom 12 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 10.20¢ 9.80¢ increases 2011 2012 The Fund’s Cash Distributable 1,000,000 UnitsonNovember23, 2012. is duetopositiveSSSGandBPI’s exchangeof3,479,575ClassBUnitsfor basis. Cash The decrease in Distributable anda6.1%increaseonyear-over-yearto thesameperiodoneyearago 2012.or $1.184perUnitfor This representsadecreaseof3.4%compared quarter of 2012 and $17.4 the million million fourth or $0.303 per Unit for the the Periodand$18.4millionor$1.208perUnitfor Year comparedto$4.5 issuers. Cash of Distributable A reconciliation The increase in Distributable Cash The increaseinDistributable SSSGinthePeriod. duetonegative isprimarily same periodoneyearago paid duringtheperiod. Cash Distributable debt, minus(d)theSIFT Tax expenseinrespectoftheperiod, plus(e) SIFT Tax Class BUnitsinrespectoftheperiod, minus(c)interestexpenseonlong-term distribution inrespectoftheperiod, minus(b)BPI’s entitlementinrespectofits Fund’s period minus (a) BPI’sfor that cash flow from operations Class C Unit Cash Fund hasprovidedthenon-IFRSmetricofDistributable measurement oftheFund’s distributions. topay ability Consequently, the such, netincomeisnot, intheFund’s view, ormostmeaningful theonly theFund’s donotaffect cash itemsthat distributions, topay ability andas As notedpreviously, theFund’s non- netincomeunderIFRScontainsmany Cash Distributable Distributable Cash Distributable Cash 2011 2012 2013 2013 Distributable Cash 1, 2011, ineachfinancialquarter, generated follows: areas “Distributable Cash” distributions ontheUnits. regardingtheFund’sinvestors withmoremeaningfulinformation topay ability issuers as the Fund may calculate Distributable Cash Distributable calculate issuers astheFundmay other tosimilarmeasurespresentedby notbecomparable may therefore IFRS, astandardizedmeaning prescribed by measure anddoesnothave and The Fund generated Distributable Cash Distributable The Fundgenerated and Analysis. Discussion in the “Financial Highlights” ofthisManagement’s thebeginning sectionat activities, IFRS measure, comparable which is the most directly is included Readers are cautioned that Distributable Cash Distributable Readers are cautioned that IFRSmeasure. comparable is themostdirectly particular period activities,and reconciles to cash flows from operating which distributionontheUnitsinrespectofany for theFundhasgenerated that
$4.3 million $3.6 million $4.0 million $0.277 $0.315$0.324 $0.292 $0.274 $0.293$0.311 $0.303 $1.184 $0.247 $0.280 $0.294$0.281 $1.104 Q1 Q1 2 2 2 2 /Payout Ratio perUnit $4.8 million 2 $4.1 million $4.3 million isdefinedtobe, particularperiod, inrespectofany the Q2 Q2 2 and Distributable Cash andDistributable 2 for the for Year comparedtooneyearago $4.9 million $4.3 million $4.5 million 3 2 of $4.4 million or $0.292 per Unit for of$4.4millionor$0.292perUnitfor Q3 Q3 2 2 represents the amount of money representstheamountofmoney for the Period compared to the for 2 to cash flows from operating to cash flows from operating $4.4 million 2 is a non-IFRS financial $4.1 million $4.5 million 2 2 per Unit since January perUnitsinceJanuary differently fromother differently Q4 Q4 $18.4 million $16.1 million $17.4 million 2 toprovide $1.208 Annual Annual Payout Ratio3 Because the Fund strives to provide Unitholders with regular monthly distributions, “Payout Ratio”3 is calculated by dividing the aggregate distributions payable the Fund will generally experience seasonal fluctuations in its Payout Ratio3. by the Fund in respect of the applicable period by the Distributable Cash2 The Fund’s Payout Ratio3 is likely to be higher in the first and fourth quarters generated in that period. Under the Declaration of Trust, the Fund pays compared to the second and third quarters since Boston Pizza Restaurants distributions on the Units in respect of any particular calendar month not later experience higher Franchise Sales levels during the summer months when than the last business day of the immediately subsequent month. Accordingly, restaurants open their patios and benefit from increased tourist traffic. Higher distributions on the Units in respect of the calendar month of January are Franchise Sales generally result in increases in Distributable Cash2. paid no later than the last business day of February, distributions on the Normal Course Issuer Bids Units in respect of the calendar month of February are paid no later than On August 22, 2012, the Fund announced that it had received TSX approval of the last business day of March and so forth. Consequently, for the purpose a Notice of Intention to Make a Normal Course Issuer Bid through the facilities of calculating the Payout Ratio3 for the Period, the distributions payable of the TSX or other Canadian marketplaces from September 4, 2012 to no later by the Fund on the Units in respect of the Period were the October 2013 than August 31, 2013 (the “2012 NCIB”). The 2012 NCIB permitted the Fund distribution (which was paid on November 29, 2013), the November 2013 to repurchase for cancellation up to 1,442,522 Units, being approximately distribution (which was paid on December 31, 2013) and the December 2013 9.9% of the Fund’s issued and outstanding Units (as at August 17, 2012) and distribution (which was paid on January 31, 2014). Similarly, for the purpose approximately 10.0% of its public float, then comprised of 14,452,221 Units. of calculating Payout Ratio3 for any other period, the distributions payable by The 2012 NCIB expired on August 31, 2013. The Fund acquired 541,100 the Fund on the Units in respect of such other period would be used, which Units at an average price of $22.74 per unit. The 541,100 Units acquired would be the distributions paid in the immediately subsequent month of each under the 2012 NCIB were cancelled. month comprising such other period. On September 12, 2013, the Fund announced that it had received TSX The Fund believes that the Payout Ratio3 provides investors with useful
approval of a Notice of Intention to Make a Normal Course Issuer Bid through 2013 ANNUAL REPORT information regarding the extent to which the Fund distributes cash on the the facilities of the TSX or other Canadian marketplaces from September 16, Units. Readers are cautioned that Payout Ratio3 is a non-IFRS financial 2013 to no later than September 15, 2014 (the “2013 NCIB”). The 2013 19 measure that does not have a standardized meaning prescribed by IFRS and NCIB permits the Fund to repurchase for cancellation up to 1,393,078 Units, therefore may not be comparable to similar measures presented by other being approximately 9.3% of the Fund’s issued and outstanding Units (as issuers as the Fund may calculate Payout Ratio3 differently from other issuers. at September 6, 2013) and approximately 10.0% of its public float, then As the Payout Ratio3 is calculated from a formula which includes Distributable comprised of 13,930,780 Units. Unitholders may obtain, without charge, a Cash2, which is a non-IFRS measure, a reconciliation of Payout Ratio3 to an copy of the Notice of Intention to Make a Normal Course Issuer Bid that the IFRS measure is not possible. A reconciliation of Distributable Cash2 to cash Fund filed with the TSX by contacting the Vice President of Investor Relations flows from operating activities, which is the most directly comparable IFRS for the Fund. All Units acquired under the 2013 NCIB will be cancelled. measure, is included in the “Financial Highlights” section at the beginning of this Management’s Discussion and Analysis. The Fund intends to finance purchases under the 2013 NCIB by drawing on the $12.7 million in remaining available credit on the Fund’s Facility C (as The Fund’s Payout Ratio3 for the Period was 104.9% compared to 98.7% in defined herein) that is included as part of the Credit Facilities. As of December the same period one year ago. The Payout Ratio3 for the Year was 100.8% 31, 2013, no Units have been purchased under the 2013 NCIB. See the INCOME FUND BOSTON PIZZA ROYALTIES compared to 99.3% in the same period one year ago. The increase in the “Liquidity & Capital Resources – Indebtedness” section of this Management’s Fund’s Payout Ratio3 for the Period compared to the same period one year ago Discussion and Analysis for more details. was due to a decrease in Distributable Cash2 and an increase in distributions payable10. A key feature of the Fund is that it is a “top line” structure, in New Restaurants Added to the Royalty Pool which BPI pays the Fund a Royalty equal to 4% of Franchise Sales from Boston Pizza Restaurants Added to Royalty Pool on January 1, 2013 Boston Pizza Restaurants in the Royalty Pool. Accordingly, Unitholders are not On January 1, 2013, seven new Boston Pizza Restaurants that opened across directly exposed to changes in the operating costs or profitability of BPI or of Canada between January 1, 2012 and December 31, 2012 were added to individual Boston Pizza Restaurants. Given this structure, and that the Fund the Royalty Pool and the two restaurants that permanently closed during 2012 has no current mandate to retain capital for other purposes, it is expected were removed from the Royalty Pool. The estimated annual gross franchise that the Fund will maintain a Payout Ratio3 close to 100% over time as the revenue for the seven new Boston Pizza Restaurants that opened less the Trustees continue to distribute all available cash in order to maximize returns revenue from the two permanent closures was $8.2 million. The calculation to Unitholders. The Fund’s quarterly and annual Payout Ratios3 with respect to for the number of Additional Entitlements received by BPI is designed to be each financial quarter since January 1, 2011 are as follows: accretive to existing Unitholders as the additional Royalty revenues from the new Q1 Q2 Q3 Q4 Annual restaurants are valued at a 7.5% discount. The estimated 4% Royalty revenue 2013 108.7% 96.6% 94.1% 104.9% 100.8% the Fund received in 2013 from these additional seven new restaurants, less 2012 105.0% 100.2% 94.6% 98.7% 99.3% revenue from the two permanent closures, was $0.3 million. The pre-tax Royalty 2011 102.0% 89.9% 93.7% 98.3% 95.7% revenue for the purposes of calculating the Additional Entitlements, therefore, was $0.3 million or 92.5% of $0.3 million. The estimated effective average tax 20 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 the Fundwillreceive in2014fromtheseadditional12 newrestaurants, less a7.5%discount.restaurants arevalued at 4%Royaltyrevenue The estimated to existingUnitholdersastheadditional Royaltyrevenuesfromthenew number of BPIisdesignedtobeaccretive Additional Entitlementsreceived by from thetwopermanentclosureswas $19.8million. the for The calculation opened less the revenue the12 new Boston Pizza Restaurants that revenue for were removedfromtheRoyaltyPool. franchise annualgross The estimated closedduring2013 permanently the RoyaltyPoolandtworestaurantsthat 1,Canada betweenJanuary 2013andDecember 31, 2013wereaddedto 1,On January 2014, openedacross 12newBostonPizzaRestaurantsthat Boston PizzaRestaurants 1,Added toRoyaltyPoolonJanuary 2014 Subsequent Events Entitlements. 88,411 Additional the Entitlements at in2012.Adjustment Date Followingtheaudit, BPIreceived taxrate. average and theeffective 80% of the BPIreceivedonly Additional onthefullnumberof to reconciledistributionspayable Additional Entitlements 2012 was23.6%. As aresult, toBPI thePartnershipmadeanominalpayment the Fund for paid by tax rate 2012 average was 25.0% and the actual effective greater. for theFundexpectedtopay taxrate average effective The original theFundreceivedwas$0.1million million andtheactualRoyaltyrevenuethat occurred in 2011 was $0.3 permanent closures that revenue from the four Fund expectedtoreceivefromthesesevennewrestaurantslesstheRoyalty 2012. for theFundexpected to pay tax rate Royaltyrevenuethe The original average effective 2012tothe estimated theFund for paidby tax rate average 2012andtocomparetheactualeffective the Fundexpectedtoreceivefor amountofRoyaltyrevenue from thesesevennewrestaurantstotheestimated determined. The purpose of this was to compare the actual Royalty revenue 2012was theFundfor paidby taxrate average and theactualeffective 1, were added totheRoyalty Pool on January that 2012 was performed 2013,In January an audit of the Royalty revenues of the seven new restaurants Audit ofBostonPizzaRestaurants 1,Added toRoyaltyPoolonJanuary 2012 Events” below. 2013 were known. the Fund for paid by tax rate average See “Subsequent ofthesenewRoyaltyPoolrestaurantsandtheactualeffective performance BPI inrespectofthese willoccuroncetheactual Additional Entitlementsthat Additional Entitlements, of thedistributions paid to subjectto a reconciliation distributionsbasedon100%ofthe BPI alsoreceivedanincreaseinmonthly 2013 were known. the Fund for paidby tax rate average the actual effective ofthesenewRoyaltyPoolrestaurantsand time astheactualperformance remaining 20%ofthe Additional Entitlements, were “held back” untilsuch 1, diluted basisonJanuary a fully 2013. 38,890Units, representingthe Additional Entitlementsrepresented0.9%ofthetotaloutstandingUnitson 2013areknownwithcertainty. theFundfor paidby tax rate The 155,559 average ofthenewrestaurantsandactualeffective year performance Additional Entitlements with the balance to be received when the actual full the righttoacquireanadditional155,559Units, representing80%ofthe revenue fromthetwopermanentclosures, totheRoyaltyPool, BPIreceived adding theRoyaltyrevenuefromthesesevennewrestaurants, lessRoyalty Entitlements was$0.2million($0.3x(1–0.25)). Inreturnfor the after-tax the thepurposesofcalculating Royaltyrevenuefor Additional theFundpaidincalendaryear2013was25%. that rate Accordingly, MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAROYALTIES INCOMEFUND (CONTINUED) 86,336 Additional Entitlements. 86,336 Additional the Entitlements at in2013.Adjustment Date Followingthe audit, BPIreceived taxrate. average and theeffective 80%ofthe BPIreceivedonly Additional onthefullnumberof to reconciledistributionspayable Additional Entitlements 2013 was24.4%. As aresult, toBPI thePartnershipmade anominalpayment the Fund for paid by tax rate 2013 average was 25.0% and the actual effective greater. for theFundexpectedtopay taxrate average effective The original theFundreceivedwas$0.1million million andtheactualRoyaltyrevenuethat occurredin2012was$0.3 revenue fromthetwopermanentclosuresthat Fund expectedtoreceivefromthesesevennewrestaurantslesstheRoyalty 2013. for theFundexpected to pay tax rate Royaltyrevenuethe The original average effective 2013tothe estimated theFund for paidby tax rate average 2013andtocomparetheactualeffective the Fundexpectedtoreceivefor amountofRoyaltyrevenue from thesesevennewrestaurantstotheestimated determined. The purpose of this was to compare the actual Royalty revenue 2013was theFundfor paidby taxrate average and theactualeffective 1, were added to the Royalty Pool on January that 2013 was performed 2014,In January an audit of the Royalty revenues of the seven new restaurants Audit ofBostonPizzaRestaurants 1,Added toRoyaltyPoolonJanuary 2013 closed. permanently two restaurantsintheRoyaltyPoolhave 2014, therewere358restaurantsintheRoyaltyPool. 1, SinceJanuary 2014, the Fund in 2014. paid by tax rate average actual effective 1,As of January by theFundin2014and 2015 toreflecttheactualRoyaltyrevenuereceived 2014areknown,for thenumberof Additional Entitlementswillbeadjustedin theFund paidby taxrate average 2014andtheactualeffective restaurants for 2014areknown.the Fundfor ofthesenew Onceboththeactualperformance paidby taxrate average new RoyaltyPoolrestaurantsandtheactualeffective ofthese willoccuroncetheactualperformance Additional Entitlementsthat ofthedistributionspaidtoBPIinrespectthese subject toareconciliation distributionsbasedon100%ofthe increase inmonthly Additional Entitlements, 2014 are known. the Fund for paid by taxrate average BPI also receives an ofthesenewRoyaltyPoolrestaurantsandtheactualeffective performance the Additional Entitlements, been have “held back” untilsuchtimeastheactual 1,basis onJanuary 2014. 88,938Units, representingtheremaining20%of Entitlements represented 2.0% of the diluted total outstanding Units on a fully 2014areknownwithcertainty. the Fundfor paid by The 355,750 Additional taxrate average ofthenewrestaurantsandactualeffective performance Additional Entitlementswiththebalancetobereceivedwhenactualfullyear the righttoacquireanadditional355,750Units, representing80%ofthe revenue fromthetwopermanentclosures, totheRoyaltyPool, BPIreceived addingtheRoyaltyrevenuefromthese12newrestaurants,for lessRoyalty Additional Entitlementsis$0.5million($0.7x(1–0.26)). Inreturn Accordingly, theafter-tax the thepurposesofcalculating Royaltyrevenuefor inthecalendaryear2014is26.0%. theFundwillpay that taxrate average therefore, is $0.7 million or 92.5% of $0.8 million. effective The estimated the the purposes of calculating Royalty revenue for Additional Entitlements, revenue fromthetwopermanentclosures, was$0.8million. The pre-tax Units Outstanding The table below sets forth a summary of the outstanding Units. BPI owns 100% of the Class B Units, 100% of the Class C Units and 1% of the ordinary general partner units of the Partnership. The Class B Units are exchangeable for Units. References to “BPI Additional Entitlements” in the table below are the number of Units into which the Class B Units held by BPI are exchangeable. Issued & Outstanding Units, Issued & Additional Outstanding Entitlements, Units, & & Holdback of Additional Additional Entitlements Entitlements Issued and Outstanding Units as of December 31, 2013 15,029,544 15,029,544 (1) BPI Additional Entitlements – Outstanding as of December 31, 2013 2,203,845 2,203,845 BPI Additional Entitlements – Holdback as of December 31, 2013 N/A 38,890 (2) Number of Fully Diluted Units as of December 31, 2013 17,233,389 17,272,279 BPI Percentage Ownership as of December 31, 2013 12.8% 13.0% Issued and Outstanding Units as of February 6, 2014 15,029,544 15,029,544 (1) BPI Additional Entitlements – Outstanding as of December 31, 2013 2,203,845 2,203,845 BPI Additional Entitlements – Issued in respect of 2013 after the audit 86,336 86,336(3) BPI Additional Entitlements – Issued as of January 1, 2014 (10 net new Restaurants added to Royalty Pool) 355,750 355,750 BPI Additional Entitlements – Holdback as of January 1, 2014 (10 net new Restaurants added to Royalty Pool) N/A 88,938 (4) Number of Fully Diluted Units as of February 6, 2014 17,675,475 17,764,413 2013 ANNUAL REPORT BPI Percentage Ownership as of February 6, 2014 15.0% 15.4% 21 (1) Issued and outstanding Units is after the repurchase and cancellation of 541,100 Units under the 2012 NCIB. (2) Additional Entitlements from the five net new restaurants added to Royalty Pool on January 1, 2013 prior to the audit of the five net new restaurants and actual effective average tax rate. (3) Additional Entitlements from the five net new restaurants added to Royalty Pool on January 1, 2013 determined in 2014, once audited results of the five net new restaurants and actual effective average tax rate paid by the Fund are known. (4) Holdback of Additional Entitlements from 10 net new restaurants added to Royalty Pool on January 1, 2014. Actual number of Additional Entitlements will be determined in early 2015, effective January 1, 2014, once audited results of the 10 net new restaurants and actual effective average tax rate paid by the Fund are known.
BPI also holds 100% of the special voting units (the “Special Voting Units”) restaurant industry, the Fund’s policy is to make equal distribution payments to of the Fund which entitle BPI to one vote for each Unit that BPI would be entitled Unitholders on a monthly basis in order to smooth out these fluctuations. Any to receive if it exchanged all of its Class B Units for Units. As of February further change in distributions will be implemented in such a manner so that 6, 2014, BPI was entitled to 2,645,931 votes, representing 15.0% of the the continuity of uniform monthly distributions is maintained, while making aggregate votes held by holders of Units and Special Voting Units (collectively, provisions for working capital due to seasonal variations of Boston Pizza
“Voting Unitholders”). The number of Units that BPI is entitled to receive Restaurant sales. It is expected that future distributions will continue to be INCOME FUND BOSTON PIZZA ROYALTIES upon the exchange of its Class B Units and the number of votes that BPI is funded entirely by cash flows from operations. The Fund has reviewed its cash entitled to in respect of its Special Voting Units is adjusted annually to reflect flows for general and administrative expenses and anticipates that it will have any additional Boston Pizza Restaurants that were added to the Royalty Pool. sufficient cash flows to cover these expenses and commitments for 2014.
TAX TREATMENT OF DISTRIBUTIONS Indebtedness Of the $1.220 in distributions declared per Unit during the Year, 6.27% or The Partnership has credit facilities with a Canadian chartered bank (the $0.076 per Unit represents a tax deferred return of capital and 93.73% or “Lender”) in the amount of up to $56.0 million (the “Credit Facilities”) $1.144 per Unit is taxable as eligible dividends. expiring on July 19, 2017. The Credit Facilities are comprised of: (a) a $1.0 million operating facility (“Facility A”); (b) a $30.0 million revolving credit LIQUIDITY & CAPITAL RESOURCES facility (“Facility B”); and (c) a $25.0 million revolving credit facility to facilitate The Fund’s distribution policy is to distribute the total amount of cash received the Fund repurchasing and canceling Units under normal course issuer bids by the Fund from the Trust on the trust units of the Trust and notes of the (“Facility C”). Trust and interest payments from BPI on the BP Loan, less the sum of: (a) administrative expenses and other obligations of the Fund; (b) amounts The Credit Facilities bear interest at fixed or variable interest rates, as selected which may be paid by the Fund in connection with any cash redemptions by the Partnership, comprised of either or a combination of the Lender’s of Units; (c) any interest expense incurred by the Fund; and (d) reasonable bankers’ acceptance rates plus between 1.00% and 1.50%, or the Lender’s reserves established by the trustees of the Fund in their sole discretion, prime rate plus between 0.00% and 0.50%, depending upon the amount including, without limitation, reserves to pay SIFT Tax, in order to maximize drawn on the Credit Facilities. returns to Unitholders. In light of seasonal variations that are inherent to the 22 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 (in thousandsofdollars) Debt: December 31areasfollows: on the Fund’sPrincipal repayments the next five years ending debt for onFacilityC. and$12.3millionwasdrawn drawn Facility Bwasfully working capital. As ofDecember31, 2013, onFacility noamountwasdrawn A, – $2.2million). The Fundhasnorequirementtomaintainacertainamountof As ofDecember31, 2013, oftheFundtotaled$2.0million(2012 workingcapital www.sedar.com at areavailable creditagreement the amendedandrestated . ended December31, 2013. oftheFund’sA copy and form annualinformation Partnership –CreditFacilities” intheFund’s theyear for form annualinformation of theendPeriod. Forfurtherdetails, seethesection “Description ofthe as compliance withallofitsfinancialcovenantsandconditiontests and financial condition tests.certain financial ratios in The Partnership was a numberofcovenantsandrestrictions, includingtherequirementtomeet Holdings GPInc. 19, July (“HoldingsGP”)andtheLenderdated 2012contains Boston PizzaHoldingsLimitedPartnership(“LP”), BostonPizza among thePartnership, BostonPizzaGPInc. (“BPGP”), theFund, the Trust, governstheCreditFacilities that creditagreement The amendedandrestated MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAROYALTIES INCOMEFUND in cash flow from operating activities for thePeriodisduetoa $0.1million activitiesfor fromoperating in cashflow 2012. quarterof2012 and$19.1millionfor fourth The $0.2milliondecrease the activities and$24.9millionfor Year comparedto$6.2millionduringthe During thePeriod, $6.0millionincashfromoperating the Fundgenerated Cash FlowfromOperating Activities Cash Flows ofcomprehensiveincomeorloss.statements the gain) anda$0.2milliongainfor Year (2012– $0.1milliongain)inthe thePeriod(2012–$0.1million for fair valuelossadjustmentontheSwaps the Fund’s comprehensiveincomeorloss. The Fund recordeda$0.2million isincluded in changeinthefairvalueofSwaps andany reporting date each techniquesat aredeterminedusingvaluation market valueoftheSwaps inaccordancewithIFRS. asaderivative theSwaps Fund accountsfor The fair toitsCreditFacilities. riskrelated itsexposuretointerestrate to mitigate The describedswap,previously the “Swaps”). The FundenteredintotheSwaps June 1, togetherwiththe onFacility C (thisswap $6.0million drawn 2018for atermending (assuming existingdebttoEBITDAlevelsaremaintained)for at 3.17%perannum tofixtheinterestrate swap into anotherinterestrate on Facility B.the $30.0 million drawn In addition, the Partnership entered atermending debt toEBITDAlevelsaremaintained)for August 1, 2017for sedar.com),at 2.69%perannum (assuming existing tofixtheinterest rate www. onSEDARat ofwhichisavailable Partnership andtheLender(acopy Dealers Swap International Master Association betweenthe Agreement underthe swap enteredintoaninterestrate The Partnershippreviously Interest RateSwaps 2018 andthereafter 2017 2016 2015 2014
(CONTINUED) $ 42,304 $ — 42,304 — — — total amount paid to BPI in respect of these services for thePeriodwas$0.1 for total amountpaid to BPIinrespectoftheseservices theseservices.certain out-of-pocket expensesincurredinperforming The governingthePartnership,agreement BPIisentitledtobereimbursedfor as ageneralpartnerofthePartnership. Underthetermsofpartnership Fund. Inturn, BPI by areperformed services certainoftheadministrative its administrator, on behalfofthe services toprovidecertainadministrative officers and directors of BPI and BPGP. the Partnership, The Fund has engaged virtueofthecommon partyoftheFundby BPI isconsideredtobearelated Related Party Transactions mentioned exchange. adecreaseinBPI’s by was offset ClassBUnitholdingsduetothepreviously the and $1.0millionfor Year astheincreaseinFund’s distributionrate thePeriod $0.1millionfor Class BUnitsandtheCdecreasedby 1,000,000 Units on November 23, 2012. interest on the Cash used to pay exchanged3,479,575ClassBUnitsfor Units asaresultofBPIhaving distributionsonanadditional 1,000,000 2013aswellpaying February Unitholders increased duetotheincreasein the Fund’s in distribution rate Fund’s previouscredit facilities. ForthePeriod and Year, cashdistributed to first quarterof2012, onthe by drawing $4.5millionofcashwasgenerated duringthe duetothefactthat financingactivitieshasincreasedprimarily for to thesameperiodsin2012. Duringthe Year theFund thecashusedby was $0.2millionhigherand$5.1duringthe Year, compared financingactivitiesduringthePeriod theFundfor The amountofcashusedby previous creditfacilities. to BPI, ontheFund’s drawing by $4.5millionofcashgenerated by offset interestontheCreditFacilities,to pay $0.1millionwasusedtoreturncapital interest toBPIontheClassBUnitsandCUnits, $0.8millionwasused distributionstoUnitholders,was usedtopay $6.4millionwasusedtopay Fund financing activities,used $19.9 million in cash for $17.1 million of which interestontheCreditFacilities.$0.2 millionwasusedtopay For2012, the interesttoBPIontheClassBUnitsandCUnits,was usedtopay and distributionstoUnitholders,$4.4 millionofwhichwasusedtopay $1.5million quarter of2012, financingactivities, theFundused$6.1millionincashfor Units, $12.3millioninproceedsfromlong-termdebt. by offset Inthefourth interestonitsCreditFacilities,used topay $12.3millionwasusedtopurchase interesttoBPI on theClass B Units and Class C Units,pay $1.0 million was distributionstoUnitholders,which wasusedtopay $5.4millionwasusedto the Fund financingused activities,$25.0 million in cash for $18.6 million of interestonitsCreditFacilities.$0.3 millionwasusedtopay Duringthe Year interesttoBPIontheClassBUnitsandC was usedtopay distributionstoUnitholders,$4.6 millionofwhichwasusedtopay $1.4million During thePeriod, financingactivities, theFundused$6.3millionincashfor Cash FlowusedinFinancing Activities from25.0%to26.0%. nominal taxrate increasedSIFT by offset Tax duetoanincreaseintheFund’s payments $0.3millionduetoincreasedRoyaltyrevenuepartially to 2012increasedby 2012,February activitiesduringthe cashflowsfromoperating Year compared installmentpayments.monthly madein Excludingthe$5.5millionpayout of$5.5millionasitbecamedue.liability SincethentheFundhasmade expenses.administrative 2012, InFebruary theFundpaidits2011SIFT Tax decrease inroyaltyrevenuetogetherwitha$0.1millionincreasegeneral million (Q4 2012 – $0.1 million). As at December 31, 2013, interest payable financial reporting. However, in May 2013, the Committee of Sponsoring by the Fund to BPI in respect of the Class B Units and Class C Units was Organizations of the Treadway Commission (COSO) released an updated $0.5 million (December 31, 2012 - $0.5 million). As at December 31, 2013, Internal Control – Integrated Framework: 2013. The Fund currently uses the Royalty receivable from BPI was $2.6 million (Q4 2012 – $2.8 million). See COSO 1992 original framework, and will transition to the updated framework the “Distributions” section of this Management’s Discussion and Analysis for during the transition period which extends to December 15, 2014, after which more details. the 1992 framework will be considered superseded by the 2013 framework. Management is currently assessing the impact of this transition and will report DISCLOSURE CONTROLS AND PROCEDURES any significant changes to the Fund’s internal controls over financial reporting The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of that may result. BPGP, managing general partner of the Partnership, administrator of the Fund have designed or caused to be designed under their supervision disclosure CRITICAL ACCOUNTING ESTIMATES controls and procedures to provide reasonable assurance that all relevant The preparation of the Fund’s annual consolidated financial statements in information is gathered and reported to senior management, including the accordance with IFRS requires management to make judgments, estimates CEO and CFO, on a timely basis, particularly during the period in which the and assumptions that affect the application of accounting policies and the annual filings are being prepared, so that appropriate decisions can be made reported amounts of assets, liabilities, income, and expenses. Actual results regarding public disclosure. may differ from these estimates.
An evaluation of the effectiveness of the Fund’s disclosure controls and Estimates and underlying assumptions are reviewed on an ongoing basis. procedures, as defined in National Instrument 52-109 Certification of Revisions to accounting estimates are recognized in the period in which the Disclosure in Issuers’ Annual and Interim Filings, was carried out under the estimates are revised. supervision of and with the participation of management, including the CEO Significant areas requiring the use of management estimates relate to the
and CFO. Based on that evaluation, the CEO and CFO have concluded that 2013 ANNUAL REPORT determination of the following: the design and operation of these disclosure controls and procedures were effective in providing reasonable assurance that: (a) information required to Consolidation 23 be disclosed by the Fund in its annual filings, interim filings or other reports Applying the criteria outlined in IFRS 10, judgment is required in determining filed and submitted by it under applicable securities legislation is recorded, whether the Fund controls the Partnership. Making this judgment involves taking processed, summarized and reported within the prescribed time periods into consideration the concepts of power over the Partnership, exposure and specified in securities legislation, and (b) material information regarding the rights to variable returns, and the ability to use power to direct the relevant Fund is accumulated and communicated to the Fund’s administrator, the activities of the Partnership so as to generate economic returns. Using these Partnership, including BPGP’s CEO and CFO in a timely manner, particularly criteria, management has determined that the Fund ultimately controls the during the period in which the annual filings are being prepared. Partnership through its 80% ownership of the managing general partner, BPGP.
Internal Control over Financial Reporting Intangible Assets – BP Rights The CEO and CFO have designed or caused to be designed under their The Fund carries the BP Rights at historical cost comprising the amount of supervision, internal control over financial reporting to provide reasonable consideration paid for the BP Rights in 2002, as well as the value of additional
assurance regarding the reliability of the Fund’s financial reporting and the Boston Pizza Restaurants rolled into the Royalty Pool to date. The value of INCOME FUND BOSTON PIZZA ROYALTIES preparation of financial statements for external purposes in accordance additional Boston Pizza Restaurants added to the Royalty Pool is determined with IFRS. on a formula basis that is designed to estimate the present value of the cash flows that would ultimately be payable to the Fund as a result of the new The Fund’s internal control over financial reporting may not prevent or detect Boston Pizza Restaurants being added to the Royalty Pool. The addition of misstatements. Therefore, even those systems determined to be effective these restaurants results in changes to the Intangible assets – BP Rights line can provide only reasonable assurance with respect to financial statement item as well as the Fund units line item on the statements of financial position. preparation and presentation. As such, the calculation is dependent on a number of different variables Management conducted an evaluation of the effectiveness of its control including the estimated long-term sales of the new restaurants, discount rate, over financial reporting on a risk based approach using the elements of and the tax rate. The value assigned to the new restaurants, and as a result, the framework in “Internal Control – Integrated Framework” issued by the the value assigned to the BP Rights, could differ from actual results. Committee of Sponsoring Organizations of the Treadway Commission (COSO), The Fund tests the BP Rights for impairment annually, which requires that and COSO’s guidance on how to apply the framework to smaller companies. the Fund use a valuation technique to determine if impairment exists. This Based on management’s assessment, the Fund concluded that its internal valuation technique may not represent the actual fair value less costs to sell control over financial reporting was effective as at December 31, 2013. the Fund expects the BP Rights to generate. Changes in Internal Control over Financial Reporting Class B Unit Fair Value Adjustment During the year ended December 31, 2013, there has been no change in the The Fund records its Class B Unit liabilities at fair value and may result in Fund’s internal control over financial reporting that has materially affected, changes to the Class B unit liability line on the statements of financial position, or is reasonably likely to materially affect, the Fund’s internal control over 24 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 consolidated financial statements. consolidated additional disclosures asrequiredonfairvaluemeasurements notedinthe period. The Fundhasreviewedtheimpactof this newstandardandprovided for the the measurementsonprofitorloss orothercomprehensiveincome inputs(Level3),measurements usingsignificantunobservable of theeffect recurringfairvalue inputs usedtodevelopthesemeasurements; and(ii)for of financialpositionafterinitialrecognition, techniquesand thevaluation fairvalueonarecurringand non-recurringbasisinthestatement measured at assessbothofthefollowing:statements are that assetsand liabilities (i)for requiredtohelpusersofthefinancial new standardclarifiestheinformation fairvaluemeasurements. disclosurerequirementsfor and establishes The fairvaluemeasurement This standardsetsoutasingleIFRSframeworkfor IFRS 13, Fair Value Measurement financialstatements. additional disclosuresintheconsolidated reviewed theimpactofthisnewstandardandhasdeterminedresulted in with,and risksassociated anentity’s interestinotherentities. The Fundhas of, addressthenature also introducessignificantadditionaldisclosurethat structured entities. existingdisclosuresand The standard carriesforward such assubsidiaries, jointarrangements, associates, andunconsolidated interestsinotherentities, disclosurerequirementsfor This standardestablishes IFRS 12, DisclosureofInterestsinOtherEntities BPGP,80%-owned subsidiary anditsinterestinthePartnership. Fund, subsidiaries the its wholly-owned Trust, Holdings GP and Holdings LP, its continuestoincludetheaccountsof financialstatements consolidated ofthesubsidiariesorinvestees. ofany status the consolidation The annual IFRS 10 this did new not standard result and in determined a that change in through itspowerovertheinvestee. The Fundhasreviewedtheimpactof its involvementwiththeinvestee, thosereturns toaffect andhastheability power overtheinvestee, isexposed, returnsfrom orhasrightstovariable aninvesteewhenithas This standardrequiresanentitytoconsolidate IFRS 10, FinancialStatements Consolidated 1, theFundonJanuary required andadoptedby 2013isprovidedbelow. standards. InaccordancewithIFRS, alistofthestandardsandamendments issued a number of new standards in addition to amendments to existing 1,Prior toJanuary 2013theInternational Accounting StandardsBoard(“IASB”) ADOPTION OFNEWACCOUNTINGPOLICIES impacttheFund’sUnits couldmaterially financialpositionandnetincome. ontheClassBUnitsandyieldofFund’schanges inthedistributionrate shouldsuchClassBUnitsbeextinguishedand value ofthefinancialliability 2013 –$51.0million). notrepresenttheactual technique may This valuation $46.4 million (September to 30,be valued diluted at basis) was calculated 13.0% ownership(September30, 2013–13.0%)oftheFund(onafully– of$357.7million(September30,capitalization 2013–$393.1million). BPI’s $20.71 perUnit(September30, 2013–$22.76perUnit)resultinginamarket basis.a fully-diluted December31,As at 2013, theFund’s closingpricewas BPI’sallocates ownershipoftheFundon entitlement basedonitspercentage using theFund’s periodand theendofapplicable at marketcapitalization reporting date. thefairvalueofClassBUnitliability The Fund estimates each at techniquetodeterminethevalueofClassBUnitliability valuation ofcashflows.line onthestatements theFundusea Thisrequiresthat comprehensive income(loss), andthecorrespondingnon-cashadjustment of inthestatements the fairvaluegain(loss)onClassBunitliability MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAROYALTIES INCOMEFUND (CONTINUED) proposition to our guests and leveraging a larger marketing budget versus proposition to our guests and leveraging partsofeachlocation,bar andtake-out/delivery acompellingvalue offering attracting awidevarietyofguestsinto therestaurant,traffic include sports guestcheque.and changesinaverage BPI’s todrivehigherguest strategies SSSG arechangesincustomertraffic affect The twoprincipalfactorsthat across Canada. achieving positive SSSG and continuing to open new Boston Pizza Restaurants strengthen its position as the number one casual dining brand in Canada by andshouldcontinue to futuregrowth Boston Pizzaiswellpositionedfor information. with forward-looking Uncertainties” adiscussionoftherisksanduncertaintiesin connection for Please see “Note RegardingForward-LookingInformation” and “Risks & containedin The information “Outlook” information. is forward-looking OUTLOOK income taxamountshadnoimpactontheFund’sfor thePeriod. cashflow sincetheinceptionofFund. thePartnershipgenerated by The deferred betweentheaccountingandtaxbasesofBPRightsowned differences of theFundrecording, inthePeriod, shareofthetemporary itscumulative December 31, 2013. asaresult arisesmainly The deferredincometaxliability million), asat andacorrespondingincreaseinthedeferredincometaxliability the Period (Q42012–$0.4million)andmillionfor Year (2012-$0.5 the The Fundrecordedadeferredincometaxexpenseof$0.1millionfor between theaccountingandtaxbasesofbalancesheetassetsliabilities. arising differences Deferred incometaxesarerecordedonthetemporary Income TaxesDeferred the (Q4 2012–$1.4million)and$6.0millionfor Year (2013–$5.4million). thePeriod The Fundrecordedacurrentincometaxexpenseof$1.4millionfor Tax income. asordinary primarily priortoSIFT accountscomparedtothecharacterization their Unitsintaxable bebeneficialtoCanadianresidentinvestorsholding Unitholders willgenerally Canadian corporation. distributionsto for dividendtreatment Eligible dividendsreceivedfromataxable aseligible Such distributionsaretreated SIFT Tax distributionstoUnitholders. for reducestheamountofcashavailable 1,On January 2011, theFundbecamesubjecttoSIFT Tax. of The payment Income TaxesCurrent INCOME TAXES financialstatements. on theconsolidated animpact itdidnothave the impactofthisnewstandardanddeterminedthat 1, onorafterJuly yearsbeginning for effective 2012. The Fundhasreviewed wouldneverbereclassifiedtoprofitorloss.from thosethat Thisamendmentis beclassifiedtoprofitorlossinthefuture may theitemsofOCIthat separately in othercomprehensiveincome(“OCI”), includingarequirementtopresent This standardwasamendedtochangethedisclosureofitemspresented IAS 1, ofFinancialStatements Presentation financialstatements. consolidated an impact on the it did of not this have new standard and determined that of financialassetsandliabilities. TheFundhasreviewedtheimpact This standard sets out the the offsetting objective to enhance disclosures about IFRS 7-FinancialInstruments: Disclosures the previous year along with a revised calendar of national and local store opening and success of a Boston Pizza Restaurant is dependent on a number promotions. Increased average cheque levels are expected to be achieved of factors, including: availability of suitable sites; negotiations of acceptable through a combination of culinary innovation and annual menu re-pricing. In lease or purchase terms for new locations; availability, training and retention addition, BPI’s franchise agreement requires that each Boston Pizza Restaurant of management and other employees necessary to staff new Boston Pizza undergo a complete store renovation every seven years. Restaurants typically Restaurants; adequately supervising construction; securing suitable financing; close for two to three weeks to complete the renovation and experience an and other factors, some of which are beyond the control of BPI. Boston Pizza incremental sales increase in the year following the re-opening. franchisees may not have all the business abilities or access to financial resources necessary to open a Boston Pizza Restaurant or to successfully Boston Pizza remains well positioned for future expansion as evidenced by the develop or operate a Boston Pizza Restaurant in their franchise areas in a 12 new Boston Pizza Restaurants opened in 2013 and the additional two that manner consistent with BPI’s standards. are under construction to date in 2014. BPI’s management believe that Boston Pizza will continue to strengthen its position as the number one casual dining BPI provides training and support to Boston Pizza franchisees, but the quality of brand in Canada by pursuing further restaurant development opportunities franchised operations may be diminished by any number of factors beyond BPI’s across the country. control. Consequently, Boston Pizza franchisees may not successfully operate restaurants in a manner consistent with BPI’s standards and requirements, or RISKS & UNCERTAINTIES may not hire and train qualified managers and other restaurant personnel. If Risks Related to the Casual Dining Restaurant Industry they do not, the image and reputation of BPI may suffer, and gross revenue and results of operations of the Boston Pizza Restaurants could decline. The Restaurant Industry and its Competitive Nature The performance of the Fund is directly dependent upon the Royalty and The Closure of Boston Pizza Restaurants May Affect the Amount of the Royalty interest payments received from BPI on the BP Loan. The amount of the The amount of the Royalty payable to the Partnership by BPI is dependent
Royalty received by the Partnership from BPI is dependent on various factors upon the Franchise Sales, which is dependent on the number of Boston Pizza 2013 ANNUAL REPORT that may affect the casual dining sector of the restaurant industry. The Restaurants that are included in the Royalty Pool and the Franchise Sales restaurant industry generally, and in particular the casual dining sector, is of those Boston Pizza Restaurants. Each year, a number of Boston Pizza 25 intensely competitive with respect to price, service, location and food quality. Restaurants may close and there is no assurance that BPI will be able to open Competitors include national and regional chains, as well as independently sufficient new Boston Pizza Restaurants to replace the Franchise Sales of the owned restaurants. If BPI and the Boston Pizza franchisees are unable to Boston Pizza Restaurants that have closed. successfully compete in the casual dining sector, Franchise Sales may be Revenue from Franchisees adversely affected; the amount of Royalty reduced and the ability of BPI to pay The ability of BPI to pay the Royalty is dependent, in part, on Boston Pizza the Royalty or interest on the BP Loan may be impaired. The restaurant industry franchisees’ ability to generate revenue and to pay royalties to BPI. Failure is also affected by changes in demographic trends, traffic patterns, and the of BPI to achieve adequate levels of collection from Boston Pizza franchisees type, number, and location of competing restaurants. In addition, factors such could have a serious effect on the ability of BPI to pay the Royalty or interest as government regulations, smoking bylaws, inflation, publicity from any on the BP Loan. food borne illnesses, increased food, labour and benefits costs, continuing operations of key suppliers and the availability of experienced management Intellectual Property BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES and hourly employees may adversely affect the restaurant industry in general The ability of BPI to maintain or increase its Franchise Sales will depend and therefore potentially affect Franchise Sales. BPI’s success also depends on its ability to maintain “brand equity” through the use of the BP Rights on numerous factors affecting discretionary consumer spending, including licensed from the Partnership. If the Partnership fails to enforce or maintain economic conditions, disposable consumer income and consumer confidence. any of its intellectual property rights, BPI may be unable to capitalize on its Adverse changes in these factors could reduce guest traffic or impose practical efforts to establish brand equity. All registered trademarks in Canada can be limits on pricing, either of which could reduce revenue and operating income, challenged pursuant to provisions of the Trade-marks Act (Canada) and if any which could adversely affect Franchise Sales, the Royalty and the ability of BPI BP Rights are ever successfully challenged, this may have an adverse impact to pay the Royalty to the Partnership or interest on the BP Loan to the Fund. on Franchise Sales and therefore on the Royalty. The Partnership owns the BP Rights in Canada. However it does not own identical or similar trademarks Growth of the Royalty owned by parties not related to BPI or the Partnership in other jurisdictions. The growth of the Royalty and other amounts payable by BPI to the Partnership Third parties may use such trademarks in jurisdictions other than Canada in a under the License and Royalty Agreement between the Partnership and (BPI manner that diminishes the value of such trademarks. If this occurs, the value for the license to use the BP Rights in Canada for 99 years, commencing on of the BP Rights may suffer and gross revenue by Boston Pizza Restaurants July 17, 2002) is dependent upon the ability of BPI to (i) maintain and grow its could decline. Similarly, negative publicity or events associated with such franchised restaurants, (ii) locate new restaurant sites in prime locations, and trademarks in jurisdictions outside of Canada may negatively affect the image (iii) obtain qualified operators to become Boston Pizza franchisees. BPI faces and reputation of Boston Pizza Restaurants in Canada, resulting in a decline in competition for restaurant locations and franchisees from its competitors and gross revenue by Boston Pizza Restaurants. from franchisors of other businesses. BPI’s inability to successfully obtain qualified franchisees could adversely affect its business development. The 26 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 the Tax Act. In addition, be a prohibited investment in a respect Unit of may a plans, accountsunder plans ortax-freesavings savings disability registered income funds, deferredprofitsharing plans, savings education registered plans, retirement savings registered investments for retirement registered theUnits willcontinuetobequalified There canbenoassurancethat Investment Eligibility Risk RelatedtotheStructureof Fund heldliable. a BostonPizzafranchiseeisultimately Restaurants, aretrue orwhetherBPI regardlessofwhethersuchallegations Boston Pizza the sales by affect materially may resulting from such allegations quality,or otherfood concerns. healthoroperational Adverse publicity illness, related food from guestsalleging onthepremises injuriessuffered bethesubjectofcomplaintsorlitigation BPI andBostonPizzafranchiseesmay andOtherComplaints Potential Litigation costs. Pizza Restaurants’labour accordingly, could increase further Boston increases in the minimum wage and, totheminimumwage related rates personnelarepaidat preparation credits. and food service SignificantnumbersofBostonPizzaRestaurants’ asworkingconditions, governingsuchmatters laws wage overtimeandtip ofBostonPizzaRestaurantsarealsosubjecttominimum The operations ConcerningEmployees Laws willbeadequate. suchinsurancecoverage There isnoassurancethat insurance. aspartofitsexistingcomprehensivegeneralliability coverage person. totheintoxicated alcoholic beverages BPIcarrieshostliquorliability served wrongfully that fromanestablishment the righttorecoverdamages certain provinces, person anintoxicated provideapersoninjuredby whichmay operations. in besubjecttolegislation BPIoraBostonPizzafranchiseemay restaurant’s that affect aBostonPizzaRestaurantwouldadversely liquor for The failure of BPI or a Boston Pizza franchisee to retain a license to serve of alcoholicbeverages. wholesale purchasing, control, inventory andhandling, anddispensing storage andemployees, ofpatrons minimum age hoursofoperation, advertising, ofBostonPizzaRestaurants, operations to numerousaspectsofdaily including time. any causeat suspended for relate controlregulations Alcoholic beverage Typically, berevokedor andmay licensesmust berenewedannually on Sundays. premises and, incertainlocations, extendedhoursand for toprovideservice a on license the or permit to municipal sell authorities alcoholic for beverages to provincial or require each Boston Pizza Restaurant to apply regulations customers.an importantfactorinattracting control Alcoholic beverage is alcoholicbeverages ofBostonPizzaRestaurantstoserve The ability Governing Regulations Alcoholic Beverages ofanexistingBostonPizzaRestaurant. or limittheoperations prevent thedevelopmentofanewBostonPizzaRestaurantinparticulararea or coulddelay obtaining orfailurestoobtaintherequiredlicensesapprovals control, smokinglaws,agencies. healthandsafetyfire Difficultiesin number ofgovernmentalauthorities, includealcoholicbeverage whichmay a by Each BostonPizzaRestaurant is subjecttolicensingandregulation BPI issubjecttovariousfederal, itsbusiness. affecting provincialandlocallaws Government Regulation MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAROYALTIES INCOMEFUND (CONTINUED) and other factors, the Partnership’s ofwhicharebeyond many control. conditions, levels, prevailinginterestrate andfinancial, competitive, business itreceivesfromBPI,dependent onthe Royalty payments prevailingeconomic on, ortorefinance, itsindebtednessdependsonfuturecashflows, whichis Partnership’s ofprincipal orinterest tomakescheduledpayments ability the Partnership, terms. to the Partnership on acceptable oravailable The to available eitherextensionorrefinancing of thisindebtednesswillbe that the Partnershipwillneedtorefinance suchloans. Therecanbenoassurance interest rates. 19,The CreditFacilitiesaredueonJuly 2017, whichpoint at ofinterest,rates whichexposes the Partnership to theriskofincreased to theFund;and(ii)certainofPartnership’s variable borrowingsareat interest onitsindebtedness, distribution for reducingfundsavailable thereby oftheprincipaland tothepayment could bededicated flow fromoperations consequences toUnitholders, including: (i)aportion ofthePartnership’s cash Facilities. important couldhave towhich thePartnershipisleveraged The degree under the Credit obligations The Partnership has third-party debt service Leverage: RestrictiveCovenants financial conditionofBPI. and andtheresultsofoperations referredtoabove dining restaurantindustry ofitsbusiness,in theoperation tothecasual includingtherisksrelating BP LoantotheFund, BPI andeachissubjecttotherisksencounteredby theRoyaltytoPartnershipandintereston and assetsofBPItopay The Partnership dependent and upon the the Fund operations are each entirely the RoyaltytoPartnershipandinterestonBPLoanFund. These expenses, of BPI to pay could impact the ability debts and obligations business, tothirdparties. expensesandincursdebtobligations BPIpays restaurants. revenuesfromitscorporate generates Intheconductof collects franchise fees and other amounts from Boston Pizza franchisees and BPItotheFund. by Partnership andtheinterestonBPLoanpayable BPI BPItothe by The solesourceofrevenuetheFundisRoyaltypayable HoldingsLP.Partnership heldby of thePartnershiptomakedistributionsonlimitedpartnerunits the on limitedpartnerunitsheldby Trust dependentupontheability isentirely the Holdings LPheldby Trust. ofHoldingsLPtomakedistributions The ability of Holdings LP to make distributions on the the limited ability partner units of make distributionson Trust dependent upon theFundisentirely Unitsheldby be.as thecasemay of the The ability Trust or itsinterest obligations to pay HoldingsLPorapermittedtransfereepursuant to theexchangeagreement,by partyorClassClimitedpartnerunitsofthePartnershipacquired related or any BPI thepurchaseofClassCgeneralpartnerunitsPartnershipheldby for oftheBPLoanasconsideration toassumepayment LP tomeetitsobligations ofHoldings theinterestonBPLoanandability ofBPItopay the ability and tomakedistributionsontheunitsof Trust (the “Trust Units”)andupon Series 2 Trust NotesandSeries3 Trust Notes(collectively, the “Trust”), Notes of the Trust itsinterestobligations, topay ifany, undertheSeries1 Trust Notes, dependentontheability The cashdistributionstotheUnitholdersareentirely Dependence oftheFundon Trust, HoldingsLPandBPI theacquisitionorholdingofnon-qualifiedprohibitedinvestments. for interest” (asdefinedinthe Tax Act)intheFund. The Tax Actimposespenalties arm’s be)doesnotdealat case may lengthwiththeFundorhasa “significant account where,free savings in general terms, the holder or annuitant (as the plan, retirementsavings registered retirementincomefundortax- registered The Credit Facilities contain numerous restrictive covenants that limit the insolvency or restructuring of the Fund, the rights of Unitholders will be different discretion of the Partnership’s management with respect to certain business from those of shareholders of an insolvent or restructuring corporation. matters. These covenants place restrictions on, among other things, the Nature of Units ability of the Partnership to incur additional indebtedness, to create liens or Securities such as the Units are hybrids in that they share certain attributes other encumbrances, to pay distributions or make certain other payments, common to both equity securities and debt instruments. The Units do not investments, loans and guarantees, to sell or otherwise dispose of assets, to represent a direct investment in the Trust, the Partnership or Holdings LP and allow a change of control, to change the terms of the Partnership’s limited should not be viewed by investors as units in the Trust, the Partnership or partnership agreement and to merge or consolidate with another entity. A Holdings LP. Unitholders will not have the statutory rights normally associated failure to comply with the obligations in the Credit Facilities could result in an with ownership of shares of a corporation including, for example, the right to event of default which, if not cured or waived, could result in the acceleration bring “oppression” or “derivative” actions. The Units represent a fractional of the relevant indebtedness. If the indebtedness under the Credit Facilities interest in the Fund. The Fund’s only assets are Series 1 Trust Notes, Trust were to be accelerated, there can be no assurance that the Partnership’s and Units, the BP Loan, common shares of BPGP and common shares of Holdings the Trust’s assets would be sufficient to repay that indebtedness. GP. The price per Unit is a function of the anticipated amount of distributions. Current and future borrowings by BPI could adversely affect BPI’s ability to pay Possible Unitholder Liability the Royalty and interest on the BP Loan. The Declaration of Trust of the Fund provides that no Unitholder will be subject Cash Distributions are Not Guaranteed and Will Fluctuate with the Partnership’s to any liability whatsoever to any person in connection with the holding of Performance Units. However, there remains a risk, which is considered by the Fund to Although the Fund’s policy is to distribute the total amount of cash received by be remote in the circumstances, that a Unitholder could be personally liable the Fund from the Trust on the Trust Units and the Trust Notes and from BPI on despite such statement in the Declaration of Trust for the obligations of the
the BP Loan, less the sum of: (a) administrative expenses and other obligations Fund to the extent that claims are not satisfied out of the assets of the Fund. 2013 ANNUAL REPORT of the Fund; (b) amounts which may be paid by the Fund in connection with any It is intended that the affairs of the Fund will be conducted to seek to minimize cash redemptions of Units; (c) any interest expense incurred by the Fund; and such risk wherever possible. There is legislation under the laws of British 27 (d) reasonable reserves established by the trustees of the Fund in their sole Columbia (discussed below) and certain other provinces which is intended to discretion, including, without limitation, reserves established to pay SIFT Tax, in provide protection for beneficial owners of trusts. order to maximize returns to Unitholders, there can be no assurance regarding On March 30, 2006, the Income Trust Liability Act (British Columbia) came the amounts of income to be generated by the Fund or the Partnership. The into force. This legislation creates a statutory limitation on the liability of actual amount distributed in respect of the Units will depend upon numerous beneficiaries of British Columbia income trusts such as the Fund. The factors, including payment of the Royalty and interest on the BP Loan by BPI. legislation provides that a unitholder of a trust will not be, as a beneficiary, Restrictions on Certain Unitholders and Liquidity of Units liable for any act, default, obligation or liability of the trustees. However, this The Declaration of Trust imposes various restrictions on Unitholders. legislation has not been judicially considered and it is possible that reliance Unitholders that are non-residents of Canada for the purposes of the Tax Act on the legislation by a Unitholder could be successfully challenged on (“Non-residents”) and partnerships that are not Canadian partnerships for jurisdictional or other grounds.
purposes of the Tax Act are prohibited from beneficially owning more than INCOME FUND BOSTON PIZZA ROYALTIES Distribution of Securities on Redemption or Termination of the Fund 50% of the Units (on a non-diluted and a fully-diluted basis). These restrictions Upon a redemption of Units or termination of the Fund, the trustees may may limit (or inhibit the exercise of) the rights of certain Unitholders, including distribute Series 2 Trust Notes and Series 3 Trust Notes directly to the Non-residents, to acquire Units, to exercise their rights as Unitholders and Unitholders, subject to obtaining all required regulatory approvals. There is to initiate and complete take-over bids in respect of the Units. As a result, currently no market for Series 2 Trust Notes or Series 3 Trust Notes. In addition, these restrictions may limit the demand for Units from certain Unitholders and the Series 2 Trust Notes and Series 3 Trust Notes are not freely tradable and thereby adversely affect the liquidity and market value of the Units held by are not currently listed on any stock exchange. Securities of the Trust so the public. distributed may not be qualified investments for trusts governed by registered Fund not a Corporation retirement savings plans, registered retirement income funds, deferred profit Investors are cautioned that, although the Fund is a legal entity, it is not sharing plans, registered education savings plans, registered disability savings generally regulated by established corporate law and Unitholders’ rights are plans or tax free savings accounts and may be prohibited investments for governed primarily by the specific provisions of the Declaration of Trust of the registered retirement savings plans, registered retirement income funds and Fund, which address such items as the nature of the Units, the entitlement tax free savings accounts depending upon the circumstances at the time. of Unitholders to cash distributions, restrictions respecting non-resident The Fund May Issue Additional Units Diluting Existing Unitholders’ Interests holdings, meetings of Unitholders, delegation of authority, administration, The Declaration of Trust authorizes the Fund to issue an unlimited number Fund governance and liabilities and duties of the trustees to Unitholders. As of Units and Special Voting Units for such consideration and on such terms well, under certain existing legislation such as the Bankruptcy and Insolvency and conditions as shall be established by the trustees of the Fund without the Act and the Companies’ Creditor Arrangement Act, the Fund is not a legally approval of any Unitholders. Additional Units will be issued by the Fund upon recognized entity within the definitions of these statutes. In the event of an the exchange of the Class B Units held by BPI or any related party. 28 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 Management’s Discussionand Analysis. of this asofthedate and speaks only performance events and operating terminology. regardingfuture reflectscurrentexpectations This information “may”, “will”, “expect”, “believe”,similar “plan”,other “should”and includewordssuchas may information “anticipate”, “intend”, “estimate”, When usedinthisManagement’s Discussionand Analysis, forward-looking information. suchforward-looking or achievementsexpressedimpliedby results,industry futureresults, fromany different tobematerially performance Partnership, HoldingsLP, HoldingsGP, BPGP, BostonPizzaRestaurants, or actual results, orachievementsofBPI, performance theFund, the Trust, the uncertainties, causethe andotherfactorswhichmay futureexpectations information”“forward-looking involvesknownandunknownrisks, that inthisManagement’sCertain information Discussionand constitutes Analysis NOTE REGARDINGFORWARD-LOOKING INFORMATION www.bpincomefund.com. Fund, www.sedar.com onSEDARat isavailable orontheFund’s websiteat Holdings LP, HoldingsGPandBPI, ofthe form includingtheannualinformation totheFund, relating Additional information thePartnership, BPGP, the Trust, ADDITIONAL INFORMATION oftheFundtoundertakefinancingsandacquisitions.Units andtheability Unitholders. The SIFT Tax ofthe themarketability affect alsoadversely may of theSIFT Tax distributionsto for reducestheamountofcashavailable 1,On January 2011, theSIFT topay theFundbecameliable Tax. The payment income. in theirtaxable to includeanamountequalthefairmarketvalueofthosedistributedUnits Unitholders inlieuofcashdistributions. berequired Unitholderswillgenerally of the Declaration Trust be distributed to additional Units may provides that ontheBPLoanareduebutnotpaidinwholeorpart),interest payments instance,declared toUnitholders(for wheredistributionsonthe Trust Unitsor cashtodistributetheamountsso available sufficient the Funddoesnothave determinefromtimetotime.as thetrusteesmay Where, inaparticularyear, declaredistributionstoUnitholdersinsuchamounts trustees oftheFundmay Trust andHoldingsLP)insuchyear. of The Declaration Trust the providesthat thePartnershiptoFund(through exceedthecashdistributedby may Fund (throughthe Trust andHoldingsLP), inrespectofaparticularfiscalyear paid.or not actually As a result, to the the income of the Partnership allocated income tax purposes the whether Partnership level for accrue at Royalty may paid. incometaxpurposeswhetherornotactually Fund levelfor Similarly, the Distributions onthe Trust the UnitsandinterestontheBPLoanaccrueat incertainrespects. different adversely and toUnitholderswouldbematerially afforded the incometaxtreatment If theFundceasestoqualifyasa “mutual fundtrust” underthe Tax Act, theFundandUnitholders. affects adversely be changedinamannerthat willnot Canadianfederalincometaxlaws There canbenoassurancethat Income TaxMatters MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAROYALTIES INCOMEFUND (CONTINUED) events orcircumstances. toreflectnew information orrevise forward-looking toupdate no obligation hereofand,is providedasofthedate law, exceptasrequired by weassume information. suchforward-looking or underlying Forward-looking information fromthoseexpressed in materially couldcauseactualresultstodiffer that This Management’s Discussionand discussessomeofthefactors Analysis and Analysis. Discussion conjunction with the risks and uncertainties set out inthis Management’s listoffactorsisnotexhaustiveandshouldbeconsideredin The foregoing future expectations including,future expectations butnotlimitedto: involvesanumberofrisks, information This forward-looking uncertaintiesand assumptions including, amongotherthings: disclosedhereinisbasedonanumberof information The forward-looking includes, butisnotlimitedto, suchthingsas: inthisManagement’sForward-looking information Discussionand Analysis • • • • • • • • competition; • • • • • • • • • • • • • the results of operations andfinancialconditionsofBPItheFund. the resultsofoperations accounting policiesandpractices; cash distributionsarenotguaranteed; andgovernmentregulation; legislation andlocalbusinesseconomicconditions; changes innational spending patterns; changes in consumer preferences and discretionary trends; changes indemographic expectations related tofuturegeneraleconomicconditions. related expectations future resultsbeingsimilartohistoricalresults;and speed ofpermitting; BPItotheFund; theamountofRoyaltypaidby affect materially there willbenoclosuresofBostonPizzaRestaurantsthat franchisefeesandotheramounts; paying franchisees’ duly franchisees’ accesstofinancing; development; pace ofcommercialrealestate protection ofBPRights; ofchangesinlaw; absence Credit Facilities. onthe by drawing the Fundfinancingpurchasesunder2013NCIB the Fund maintaining a Payout Ratio the FundmaintainingaPayout acrossCanada; Pizza locations achievingpositiveSSSGandcontinuingtoopennewBoston Canada by to strengthenitspositionasthenumberonecasualdiningbrandin andshouldcontinue futuregrowth Boston Pizzaiswellpositionedfor the futureexpansionofBostonPizzaRestaurants; 3 closeto100%overtime;and MANAGEMENT’S STATEMENT OF RESPONSIBILITIES BOSTON PIZZA ROYALTIES INCOME FUND
The accompanying consolidated financial statements are the responsibility of management and have been reviewed and approved by the Board of Directors of Boston Pizza GP Inc. and the Trustees of Boston Pizza Royalties Income Fund (the “Fund”). The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards and, where appropriate, reflect management’s best estimates and judgments.
Management maintains appropriate policies, procedures and systems of internal control which provide reasonable assurance that the Fund’s assets are safeguarded and the financial records are relevant, reliable, and provide a proper basis for the preparation of the consolidated financial statements and other financial information.
The Board of Directors of Boston Pizza GP Inc. and the Trustees of the Fund ensure that management fulfills its responsibilities for financial reporting and internal control through the Audit Committee. The Audit Committee meets with management and meets independently with the external auditors to satisfy itself that management’s responsibilities are properly discharged. The Audit Committee also reviews the consolidated financial statements and reports to the Board of Directors of Boston Pizza GP Inc. and the Trustees of the Fund. The Fund’s external auditors have full and direct access to the Audit Committee.
The consolidated financial statements have been independently audited by KPMG LLP in accordance with Canadian generally accepted auditing standards. Their report follows and expresses their opinion on the Fund’s consolidated financial statements.
MARK PACINDA Chief Executive Officer, Boston Pizza GP Inc. 2013 ANNUAL REPORT on behalf of the Board of Directors 29
JOHN COWPERTHWAITE Chairman, Boston Pizza Royalties Income Fund on behalf of the Trustees
February 6, 2014 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES 30 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 Vancouver, Canada 6,February 2014 Chartered Accountants Financial ReportingStandards. 2013 andDecember31, 2012, financialperformance, itsconsolidated fortheyearsthenendedinaccordancewithInternational cashflows anditsconsolidated In ouropinion, presentfairly, financialstatements theconsolidated respects, inallmaterial atDecember31, financialpositionoftheFundas theconsolidated Opinion for ourauditopinion. We toprovideabasis appropriate obtainedinourauditsissufficientand theaudit evidencewehave believethat management,made by financialstatements. oftheconsolidated theoverallpresentation aswellevaluating of theFund’s internalcontrol. ofaccountingestimates ofaccountingpoliciesusedandthereasonableness theappropriateness An auditalsoincludesevaluating in the circumstances, in are order appropriate to design audit procedures statements that the purpose of expressing an but opinion not on for the effectiveness or error. Inmaking those risk assessments, weconsider internal control relevanttothe Fund’s financial of the consolidated and fair presentation preparation selected dependonourjudgment, financialstatements, oftheconsolidated misstatement includingtheassessmentofrisksmaterial whetherduetofraud financialstatements. theamountsanddisclosuresinconsolidated procedurestoobtainauditevidenceabout An auditinvolvesperforming Theprocedures misstatement. arefreefrommaterial financialstatements whethertheconsolidated assurance about acceptedauditingstandards.generally theaudittoobtainreasonable withethicalrequirementsandplanperform wecomply Those standardsrequirethat based onOur ourresponsibility audits.is to financialexpress statements an opinion on these consolidated We conducted our audits in accordance with Canadian Auditors’ Responsibility misstatement,are freefrommaterial whetherduetofraudorerror. that financial statements of consolidated the preparation to enable determines is necessary such internal control as Reporting management Standards and for Financial inaccordancewithInternational financialstatements oftheseconsolidated andfairpresentation thepreparation isresponsiblefor Management Management’s ResponsibilityfortheConsolidatedFinancialStatements for theyearsthenended,and cashflows information. andnotes, ofsignificantaccountingpoliciesandotherexplanatory comprisingofasummary at December31, offinancialpositionas statements 2013andDecember31, 2012, ofcomprehensiveincome, statements theconsolidated changesinequity We of Boston Pizza Royalties Incomefinancial Fund statements (“the Fund”) which comprise theconsolidated consolidated audited the accompanying have To theUnitholdersofBostonPizzaRoyaltiesIncomeFund BOSTON PIZZAROYALTIES INCOMEFUND INDEPENDENT AUDITORS’ REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION BOSTON PIZZA ROYALTIES INCOME FUND
December 31, December 31, (in thousands of Canadian dollars) 2013 2012 ASSETS Current assets Cash and cash equivalents $ 1,493 $ 1,624 Interest receivable on note receivable from Boston Pizza International Inc. (note 4) 150 150 Royalty receivable from Boston Pizza International Inc. 2,619 2,816 Prepaid expenses 48 39 Current income tax receivable 66 17 4,376 4,646
Interest rate swaps (note 6) 363 136
Note receivable from Boston Pizza International Inc. (note 4) 24,000 24,000
Intangible assets – BP Rights (note 7) 240,206 235,850
Total assets $ 268,945 $ 264,632
LIABILITIES AND UNITHOLDERS’ EQUITY ANNUAL REPORT 2013 ANNUAL REPORT Current liabilities Accounts payable and accrued liabilities $ 360 $ 478 31 Distributions payable to Fund unitholders 1,533 1,526 Interest payable on Class B and Class C units (note 8) 532 482 2,425 2,486
Credit Facilities (note 6) 42,304 30,000
Deferred income taxes (note 5) 4,550 4,200
Class B unit liability (note 8) 46,447 38,667 Class C unit liability (note 8) 24,000 24,000
Unitholders’ equity Fund units (note 9) 184,936 197,240
Accumulated deficit (35,717 ) (31,961 ) INCOME FUND BOSTON PIZZA ROYALTIES 149,219 165,279 Organization and nature of operations (note 1) Subsequent events (note 14)
Total liabilities and unitholders’ equity $ 268,945 $ 264,632
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Trustees:
JOHN COWPERTHWAITE WILLIAM BROWN W. MURRAY SADLER 32 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 FOR THE YEARS ENDEDDECEMBER31, 2013 AND 2012 BOSTON PIZZAROYALTIES INCOMEFUND CONSOLIDATED STATEMENTS OF Diluted earningsperFundunit Basic earningsperFundunit Weighted dilutedunits outstanding fully average Weighted unitsoutstanding average Net incomeandcomprehensivefortheperiod Total taxexpense Profit before fair value adjustmentsandincometaxes Deferred incometaxes Profit beforeincometaxes swaps Fair valueadjustmentoninterestrate Net interestexpense Fair value adjustment on Class B unit liability Fair valueadjustmentonClassBunitliability Current incometaxes The accompanying notes are an integral part of these consolidated financialstatements. partoftheseconsolidated notesareanintegral The accompanying Royalty income Revenue (in thousandsofCanadiandollars, exceptperFundunitdata)) Interest expense on Class B and Class C unit liabilities Interest expenseonClassBandCunitliabilities Interest expenseondebt Interest income Profit beforenetinterest expense, fair value adjustmentsandincometaxes Trustee feesandexpenses expenses Other administrative Professional fees Inc. chargetoBostonPizzaInternational Administration (note 10) (note 5)
(note 5)
(note 3(f))
(note 3(f))
(note 6) (note 8)
(note 8)
COMPREHENSIVE INCOME 31, December 2013 2012 17,504,325 15,261,599 $ 0.97 $ 30,217 $ 14,813 $ 0.97
29,167
24,399 21,202 (1,811 ) 6,389 3,424 4,768 6,039 3,197 1,054 1,050 5,525 (136 ) (227 ) 289 256 300 350 205 eebr 31, December
17,574,152 14,674,469 510 14,867 6,295 14,731 7,979 28,132 941 $ $ 2,046 $ $ 22,710 29,258 (1,814 ) 5,933 5,422 5,423 1,126 0.14 0.14 186 396 244 300 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY BOSTON PIZZA ROYALTIES INCOME FUND
Accumulated (in thousands of Canadian dollars) Fund units deficit Total equity
Balance – January 1, 2013 $ 197,240 $ (31,961 ) $ 165,279
Acquisition of Fund units (note 6) (12,304 ) — (12,304 ) Net income and comprehensive income for the period — 14,813 14,813 Distributions declared — (18,569 ) (18,569 )
Balance – December 31, 2013 $ 184,936 $ (35,717 ) $ 149,219
Balance – January 1, 2012 $ 178,540 $ (16,763 ) $ 161,777
Exchange of Class B Units for Fund units 18,700 — 18,700 Net income and comprehensive income for the period — 2,046 2,046 Distributions declared — (17,244 ) (17,244 )
Balance – December 31, 2012 $ 197,240 $ (31,961 ) $ 165,279
The accompanying notes are an integral part of these consolidated financial statements.
ANNUAL REPORT 2013 ANNUAL REPORT
33 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES 34 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 FOR THE YEARS ENDEDDECEMBER31, 2013 AND 2012 BOSTON PIZZAROYALTIES INCOMEFUND CONSOLIDATED STATEMENTS OF Current incometaxpaid Current incometaxexpense Changes innon-cashworkingcapital Distributions paidtoFundunitholders Financing activities activities fromoperating Net cashgenerated Interest received Finance expense Finance income Return ofcapital Proceeds fromlong-termdebt Acquisition ofFundunits Interest paidonlong-termdebt Interest paidonClassBandCunitliabilities Net cashusedinfinancingactivities Supplemental cashflowinformation Cash andcashequivalents –endofperiod ofperiod Cash andcashequivalents–beginning Decrease incashandequivalents Adjustments for: theperiod Net incomefor Operating activities by(usedin) Cash flowsprovided (in thousandsofCanadiandollars) The accompanying notes are an integral part of these consolidated financialstatements. partoftheseconsolidated notesareanintegral The accompanying Interest expenseonClassBandCunitliabilities swap Fair valueadjustmentoninterestrate Fair valueadjustmentonClassBunitliability Deferred incometaxes
(note13) CASH FLOWS 2013 2012 $ 14,813 $ 1,493
1,054
(18,562 ) (12,304 ) (25,039 ) 24,908 12,304 (6,088 ) (1,811 ) (1,002 ) (5,475 ) 6,039 5,525 3,424 1,811 1,624 (227 ) (131 ) 350 — 18
5,423 6,295 19,062 1,818
2,467 $ 1,624 $ 2,046
(10,915 ) (17,058 ) (19,905 ) 14,867 (1,814 ) (6,378 ) 4,500 (136 ) (887 ) (843 ) 915 510 (82 — 53 ) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS BOSTON PIZZA ROYALTIES INCOME FUND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
1. General information: assumptions that affect the application of accounting policies and the (a) Organization: reported amounts of assets, liabilities, income, and expenses. Actual Boston Pizza Royalties Income Fund together with its subsidiaries (note results may differ from these estimates. 3(b)) (the “Fund”) is an unincorporated open-ended limited purpose trust Estimates and underlying assumptions are reviewed on an ongoing established under the laws of the Province of British Columbia, Canada, basis. Revisions to accounting estimates are recognized in the period in and is governed by the Declaration of Trust signed June 10, 2002, and which the estimates are revised. as amended and restated on July 17, 2002, September 22, 2008, and December 7, 2010. The Fund’s principal business office is located at Significant areas requiring the use of management estimates relate to 10760 Shellbridge Way, Richmond, BC. the determination of the following:
The Fund was established to indirectly, through the Boston Pizza Royalties • Consolidation Limited Partnership (the “Partnership”), acquire the trademarks and Applying the criteria outlined in IFRS 10, judgment is required in trade names owned by Boston Pizza International Inc. (“BPI”) used in determining whether the Fund controls the Partnership. Making connection with the operation of Boston Pizza Restaurants in Canada this judgment involves taking into consideration the concepts of (collectively, the “BP Rights”). The BP Rights do not include the rights power over the Partnership, exposure and rights to variable returns, outside of Canada to any trademarks or trade names used by BPI or and the ability to use power to direct the relevant activities of the any affiliated entities in its business, and in particular do not include Partnership so as to generate economic returns. Using these criteria, the rights outside of Canada to the trademarks registered or pending management has determined that the Fund ultimately controls the registration under the Trade-Marks Act (Canada). Partnership through its 80% ownership of the managing general ANNUAL REPORT 2013 ANNUAL REPORT partner, Boston Pizza GP Inc. (“BPGP”). The Fund was also established to acquire, directly from a bank, the BPI loan (the “BP Loan”) in the principal amount of $24.0 million. • Intangible Assets – the BP Rights (note 7) 35 The Fund carries the BP Rights at historical cost comprising the amount (b) Nature of operations: of consideration paid for the BP Rights in 2002, as well as the value of The Fund, as indirect owner of the BP Rights, has granted BPI exclusive additional Boston Pizza Restaurants rolled into the Royalty Pool to date. license to the use of the BP Rights for a term of 99 years beginning in July, The value of additional Boston Pizza Restaurants added to the Royalty 2002 (the “License and Royalty Agreement”). In return, BPI pays the Pool is determined on a formula basis that is designed to estimate the Fund a Royalty of 4% of Franchise Sales of Boston Pizza Restaurants in present value of the cash flows that would ultimately be payable to the the Royalty Pool. There are 346 Boston Pizza Restaurants in the Royalty Fund as a result of the new Boston Pizza Restaurants being added to Pool as at December 31, 2013 (December 31, 2012 – 341). BPI carries the Royalty Pool. As such, the calculation is dependent on a number of on business as a franchisor of casual dining pizza and pasta restaurants different variables including the estimated long-term sales of the new and operates only in Canada. The rights to operations outside of Canada, restaurants, discount rate, and the tax rate. The value assigned to the which are owned by an affiliated company and certain restaurants in new Boston Pizza Restaurants, and as a result, the value assigned to Canada, are not included in the Royalty Pool of the Fund. INCOME FUND BOSTON PIZZA ROYALTIES the BP Rights, could differ from actual results. Substantially all of the Fund’s revenues are earned from certain operations The Fund tests the BP Rights for impairment annually, which requires of BPI and, accordingly, the revenues of the Fund and its ability to pay that the Fund use a valuation technique to determine if impairment distributions to Fund unitholders is dependent on the ongoing ability of exists. This valuation technique may not represent the actual fair value BPI to generate and pay royalties to the Fund. less costs to sell that the Fund expects the BP Rights to generate. 2. Basis of preparation: • Class B Unit Fair Value Adjustment (note 8) (a) Statement of compliance: The Fund records its Class B unit liabilities at fair value. This requires These consolidated financial statements have been prepared in that the Fund use a valuation technique to determine the value of accordance with International Financial Reporting Standards (“IFRS”) as the Class B unit liability at each reporting date. The Fund estimates issued by the International Accounting Standards Board (“IASB”). the fair value of the Class B unit liability using the Fund’s market The consolidated financial statements were authorized for issue by the capitalization at the end of the applicable period and allocates BPI’s Trustees on February 6, 2014. entitlement based on its percentage ownership of the Fund on a fully- diluted basis. This valuation technique may not represent the actual (b) Functional and presentation currency: value of the financial liability should such units be extinguished and These consolidated financial statements are presented in Canadian changes in the distribution rate on the Class B units and the yield of dollars, which is the Fund’s functional currency. the Fund’s units could materially impact the Fund’s financial position (c) Use of estimates and judgments: and net income. The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and 36 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 BOSTON PIZZAROYALTIES INCOMEFUND (e) (d) Revenue: (c) (b) Consolidation: (a) aredescribedbelow. financialstatements consolidated The ofsignificant these accounting policies used in the preparation 3. NOTES appropriate by the trusteesoftheFund. by appropriate beconsidered asmay reserves workingcapital retaining suchreasonable Distributions arerecorded whendeclaredandaresubject totheFund through tax(“SIFT”)expenseandpaid. entitlement inrespectofitsClassB Units, specifiedinvestmentflow- items such as BPI’sadjusted for Class C Unit distribution, BPI’s determined with reference to the Fund’s cash flow from operations tobedistributed toFundunitholdersis The amountofcashavailable paid toFundunitholders. cash distributions were million (2012 – $17.1 million) in discretionary trustees oftheFund. Fortheyearended, December31, 2013, $18.6 thediscretionof ofdistributionsfromtheFundareat Declarations Distributions onFundUnits: as earned. Royalty revenueandinterestarerecognizedonanaccrualbasis months orless. deposit withbanks, andshort-terminvestmentswithtermsofthree Cash andcashequivalentsconsistofonhand, balanceson Cash andcashequivalents: activities ofanotherentity. convertible areconsideredwhenassessingwhethertheFunddirects or exercisable arecurrently ofpotentialvotingrightsthat and effect to obtaineconomicbenefitsfromtheirrelevantactivities. Theexistence policiesofsuchentitiessoas power togovernthefinancialandoperating the having Subsidiaries arethoseentitieswhichtheFundcontrolsby BPI. by owned orindirectly 20% residualownershipofBPGPiseitherdirectly of thePartnershipandBPIisageneralpartnerPartnership. The and its interest in the Partnership. general partner BPGP is the managing Limited Partnership(“HoldingsLP”), BPGP, its80%-ownedsubsidiary “Trust”), BostonPizzaHoldingsGPInc. andBostonPizzaHoldings Fund, subsidiaries Boston Pizza Holdings its wholly-owned Trust (the include the accounts of the financial statements These consolidated • • offinancialposition: statements itemsinthe material thefollowing historical costbasisexceptfor been prepared on the have financial statements The consolidated Basis ofmeasurement: Significant accountingpolicies: at fair value and changes therein are accounted for inprofitandloss. fairvalueandchangesthereinareaccountedfor at Subsequent toinitialrecognition, arerecognized financialderivatives transaction costsarerecognizedinprofitandlossasincurred. fairvalue;attributable at accounting arerecognizedinitially exposure.interest rate notusinghedge Financialderivatives its financialinstrumentstomanage The Fundholdsderivative of comprehensiveincome. fairvaluethroughthestatement ismeasuredat Class Bunitliability TO THE CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED) (f) (g) (in thousands, exceptperFundunitdata) reconcilesthebasicearningstodilutedearnings: The following unit equalsthebasicearningsperFundunit. Entitlements are anti-dilutive. Accordingly, the diluted earnings per Fund with certainty. For the year ended December 31, 2013, the Additional ofthenewrestaurantsisknown when theactualfull-yearperformance 1ofeachyearonDecember31 January and adjustedtobeeffective areissued they units aredeterminedtobeoutstandingfromthedate numberofunitsoutstanding,For thepurposesofweightedaverage units outstandingtoassumeconversionofall Additional Entitlements. numberofFund adjustingtheweightedaverage by 8) andiscalculated Diluted earningsperFundunitincludesthe Additional Entitlements(note Additional Entitlements(note8)outstandingduringtheperiod. numberofFundunitsand Fund unitisbasedontheweightedaverage of Fundsunitsoutstandingduringtheperiod. Dilutedearningsper number Basic earningsperFundunitisbasedontheweightedaverage Basic anddilutedearningsperFundunit:
Adjusted for: Net income for theperiod Net incomefor
Diluted earningsperFundunit • instruments wereacquired: whichthe dependingonthepurposesfor categories in thefollowing At initial recognition, theFund classifies itsfinancial instruments simultaneously.or realizetheassetandsettleliability the recognizedamountsandthereisanintentiontosettleonanetbasis righttooffset enforceable in thebalancesheetwhenthereisalegally andthenetamountisreported areoffset Financial assetsandliabilities allrisksandrewardsofownership. substantially beentransferredandtheFundhas expiredorhave have are derecognizedwhentherightstoreceivecashflowsfromassets a partytothecontractualprovisionsofinstrument. Financialassets arerecognizedwhentheFundbecomes Financial assetsandliabilities Financial instruments: Weighted diluted fully average Fund’s dilutedearnings units outstanding Decrease inFund’s current Fair valueadjustmenton Decrease ininterestexpense the contractual obligation todistributecash.the contractualobligation to due (note8)asafinancial liability classified theClass Bunitliability as hedges. are designated unless they this category The Fund has the short-term. financialinstrumentsarealsoincludedin Derivative the purposesofsellingor repurchasing in for acquired principally if category classified inthis isgenerally A financialassetorliability fair valuethroughprofitorloss: at Financial assetsandliabilities and deferredincometaxes Class Bunitliability on ClassBunitliability
$ $ 14,813 17,504,325
3,424 20,491 (1,471 ) 3,725 2013 0.97
$
$ 2,046 17,574,152 14,867 19,763 (1,645 ) 4,495 2012 0.14 Financial instruments in this category are recognized initially and • Level 2 – pricing inputs are other than quoted in active markets subsequently at fair value and transaction costs are expensed in the included in Level 1. Prices in Level 2 are either directly or indirectly statement of comprehensive income in the period incurred. Gains observable as of the reporting date. and losses arising from changes in fair value are presented in the • Level 3 – valuations in this level are those with inputs for the asset statement of comprehensive income in the period in which they or liability that are not based on observable data. arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be The fair value of the Class B unit liability and the interest rate swaps are realized or paid beyond twelve months of the balance sheet date, determined using Level 2 inputs. which is classified as non-current. The following table presents the carrying amounts of each category of financial The Class B unit liability is classified as a financial liability at fairvalue assets and liabilities: through profit or loss due to the terms of the instrument permitting December 31, December 31, (in thousands) 2013 2012 the exchange of Class B units into Fund units at the holders’ option. Assets carried at fair value • Derivative financial instruments: The requirement of the Fund to Fair value of interest rate swaps $ 363 $ 136 settle its note receivable from BPI in exchange for Class C general Assets carried at amortized cost partner units (“Class C Units”, note 8) is classified as a derivative Cash and cash equivalents $ 1,493 $ 1,624 instrument. The Fund has reviewed the net impact of this potential Interest receivable on note from exchange requirement on its cash flows and has determined there Boston Pizza International Inc. 150 150 is no significant value applicable to this feature. Additionally, the Royalty receivable from Fund has classified the interest rate swaps as derivative instruments Boston Pizza International Inc. 2,619 2,816
which are accounted for at fair value through profit and loss. Note receivable from 2013 ANNUAL REPORT • Loans and receivables: Loans and receivables are non-derivative Boston Pizza International Inc. 24,000 24,000 37 financial assets with fixed or determinable payments that are not $ 28,262 $ 28,590 quoted in an active market. Cash and cash equivalents, interest Liabilities carried at fair value receivable on the note receivable from BPI, royalties receivable, and Class B unit liability $ 46,447 $ 38,667 the note receivable from BPI are included in this category. Liabilities carried at amortized cost Loans and receivables are initially recognized at the amount expected Accounts payable and accrued liabilities $ 360 $ 478 to be received less, when material, a discount to reduce the loans Distributions payable to Fund unitholders 1,533 1,526 and receivables to fair value. Interest payable on Class B and Class C units 532 482 Subsequently, loans and receivables are measured at amortized cost Credit Facilities 42,304 30,000 using the effective interest method. Class C unit liability 24,000 24,000 • Financial liabilities at amortized cost: Financial liabilities at amortized $ 68,729 $ 56,486 cost include accounts payable and accrued liabilities, distributions INCOME FUND BOSTON PIZZA ROYALTIES Unless otherwise noted, the fair values on instruments noted approximate their payable to Fund unitholders, interest payable on Class B and C units, carrying amount largely due to the short-term maturities of these instruments. Class C unit liability, and credit facilities. These items are initially recognized at the amount required to be paid less, when material, The Fund has recorded the Credit Facilities at amortized cost as noted above. a discount to reduce the payables to fair value or transaction costs The Partnership uses interest rate swap agreements to manage risks from incurred. Subsequently, these items are measured at amortized cost fluctuations in interest rates on $36.0 million of this balance, and any changes using the effective interest rate mehod. in the fair value of the interest rate swaps are recorded in the statement of comprehensive income in the period in which they arise. Without factoring Financial liabilities are classified as current liabilities if payment is in the interest rate swaps, the fair value of the $36.0 million of the Credit due within twelve months. Otherwise, they are presented as non- Facilities approximates its carrying amount since the debt has variable interest current liabilities. rates at terms that the Fund believes are reflective of those currently available. The Fund must classify fair value measurements according to a hierarchy that The fair value of the remaining Credit Facilities balance, which equals the reflects the significance of the inputs used in performing such measurements. carrying amount, is $6.3 million (December 31, 2012 – nil) since this debt The Fund’s fair value hierarchy comprises the following levels: also has variable interest rates at terms that the Fund believes are reflective • Level 1 – quoted prices are available in active markets for identical of those currently available. assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. 38 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 (j) (i) If suchevidenceexists, theFundrecognizesanimpairmentlossasfollows: (h) BOSTON PIZZAROYALTIES INCOMEFUND NOTES accounts represents theFund’s maximum creditexposure. The Fund notes receivable, allbeingduefrom BPI. The outstandingbalancesinthese to creditriskarisesfromitsroyalties receivable, and interestreceivable induetime. its obligations to pay party isunable The Fund’s exposure Credit riskisdefinedasanunexpected lossincashandearningsifanother Credit risk totheidentifiedfinancial instruments. relate risk asthey exposedtocreditrisk,The Fundisprimarily liquidityriskand interestrate Financial riskmanagement: and determinednoimpairmentexists December31, impairmentat The FundtestedtheBPRightsfor 2013 amount. thanitscarrying is determinedtobegreater amount. bereversedifthefairvalue oftheasset Impairmentlossesmay whichtheasset’samount by amountexceedsitsrecoverable carrying flows oftherelevantasset).for the Animpairment lossisrecognized sell andvalueinuse(beingthepresentofexpectedfuturecash amountisthehigherofanasset’srecoverable fairvaluelesscoststo cashflows. identifiable whichthereareseparately lowest levelsfor The amounts,purpose ofmeasuringrecoverable the at assetsaregrouped BP Rights, aresubjecttoanannualimpairmenttest(note7). Forthe recoverable. arenotamortized, Long-livedassetsthat suchasthe not be amount may the carrying that in circumstances indicate impairmentwheneventsorchanges assetsaretestedfor Intangible Impairment ofnon-financialassets: • • • • • • loss existsinclude: The criteria used to determine if objective evidence of an impairment afinancialassetisimpaired. evidence that At eachreportingdate, theFundassesseswhetherthereisobjective Impairment offinancialassets: from BPI and has determined that no indicators ofimpairmentexist. noindicators from BPIandhasdeterminedthat from BPI, fromBPI, theroyaltyreceivable andthenotereceivable on The note Fund receivablehas reviewed its interest receivable ofimpairment. beenintheabsence cost wouldhave itsamortized morethanwhat theassetat doesnotstate amount that after theimpairmentwasrecognized. The reversalislimitedtoan toan event occurring objectively and the decrease can be related reversed insubsequentperiodsiftheamountoflossdecreases at amortizedcostareImpairment lossesonfinancialassetscarried the instrument’s interestrate. effective original futurecashflows,present valueoftheestimated discountedusing andthe between theamortizedcostsofloanorreceivable amortizedcost:Financial assetscarriedat thelossisdifference other financialreorganization. theborrowerwillenterintobankruptcyor that It becomesprobable and Delinquencies ininterestorprincipalpayments; Significant financialdifficultyoftheFund’s counterparty; TO THE CONSOLIDATED FINANCIALSTATEMENTS (note 7) . (CONTINUED) rate of7.5%,rate party, isfroma related 2042. andisdueinJuly fromBPI.bearing notereceivable has afixedinterest The notereceivable note 6. risk include the interest- interest rate Other amounts impacted by aredetailedin riskandthese swaps interestrate Agreement”) tomanage Dealers Swap International Master Association (the Agreement “ISDA facilities. underthe swaps The Fund has entered into interest rate The Fund’s throughthecredit riskismainly exposuretointerestrate risk Interest rate Credit facilities onClassBandunits Interest payable toFundunitholders Distributions payable andaccruedliabilities Accounts payable as follows: activities.operating oftheFund’sThe maturities are financialliabilities The Fund’s resourcesarecomprisedofcashandflowfrom capital in note3(l). requirements arisingfromthecreditfacilitiesandarefurtherdescribed The Fund is subject to certain guarantor covenants and reporting 2017, maturity. termsbefore noscheduledrepayment andhave afirstchargeovertheassetsofFund,are securedby 19, July mature The Fund’s underthecreditfacilities, obligations asdetailedinnote6, equivalents, anditscreditfacilities. The Fund’s resourcesarecomprisedofitscashand capital of lessthanthreemonths. will bemet. At December31, 2013, hadamaturity allcurrentliabilities currentandfuturedistributionstoFundunitholders flows toensurethat management, and cash monitorsitsoperations theFundconstantly financial obligations. andcash networkingcapital effective Beyond Liquidity riskresultsfromtheFund’s tomeetits potentialinability Liquidity risk recorded initsfinancialstatements. December31,As at 2013, creditrisk theFundhadnoprovisionfor impactBPI’smay royalties orinterestduetotheFund. topay ability royalties are paid, affected. be adversely may The reduction of royalties an extended period of time,weak for Franchise Sales, the basis on which is competeinthecasualdiningsectororeconomy to successfully service, location, quality. and food If BPI and its franchisees are unable the casual dining sector, competitive with respect to price, is intensely economic conditions. Ingeneral, therestaurantindustry, andinparticular includingcompetitionandgeneral dining sectoroftherestaurantindustry thecasual affect may from BPIisdependentonvariousfactorsthat receivedfromBPI.interest payments The amountofroyaltyreceived dependentupontheroyaltyand oftheFundisdirectly The performance basis. onatimely interest orroyaltiesreceivable activities ofBPI. Sinceitsinception, theFundhasneverfailedtocollectits andfinancing monitors thisriskthroughitsregularreview of operating
42,304 1,533 Value 532 360 < 1year < 1year < 1year Maturity 2017 (k) Identifiable intangible assets: will continue to include the accounts of the Fund, its wholly-owned Intangible assets consist of the BP Rights (note 7). The intangible assets subsidiaries, the Trust, Boston Pizza Holdings GP Inc. and Holdings LP, are indefinite life assets and are not amortized but tested for impairment its 80%-owned subsidiary BPGP, and its interest in the Partnership on an annual basis. (collectively the “Fund”).
(l) Capital disclosures: (ii) IFRS 12, Disclosure of Interests in Other Entities, establishes The Fund’s objective when managing capital is to safeguard its ability to disclosure requirements for interests in other entities, such as continue as a going concern so that it can continue to provide distributions subsidiaries, joint arrangements, associates, and unconsolidated to unitholders and benefits for other stakeholders. The Fund includes its structured entities. The standard carries forward existing disclosures credit facilities and unitholders’ equity, in its definition of capital. and also introduces significant additional disclosure that address the nature of, and risks associated with, an entity’s interest in other The Fund seeks to maintain a balance between the higher returns that entities. The Fund has reviewed the impact of this new standard and might be possible with the leverage afforded by higher borrowing levels has provided additional disclosures as required on interests in other and the security afforded by a sound capital structure. It does this by entities noted in the consolidated financial statements. maintaining appropriate debt levels in relation to its cash flows, working capital and other assets in order to provide the maximum distributions (iii) IFRS 13, Fair Value Measurement, sets out a single IFRS framework to unitholders commensurate with the level of risk. Also, the Fund utilizes for fair value measurement and establishes disclosure requirements its debt capabilities to buy back Fund units, when appropriate, in order to for fair value measurements. The new standard clarifies the maximize cash distribution rates for remaining Fund unitholders. information required to help users of the financial statements assess both of the following: for assets and liabilities that are measured at The Fund maintains formal financial policies to manage its capital structure fair value on a recurring and non-recurring basis in the statement of that are adjusted to respond to changes in economic conditions, the
financial position after initial recognition, the valuation techniques 2013 ANNUAL REPORT underlying risks inherent in its operations, and capital requirements and inputs used to develop these measurements, and for recurring to maintain and grow its operations. In order to maintain or adjust fair value measurements using significant unobservable inputs 39 its capital structure, the Fund may adjust the amount of distributions (Level 3), the effect of the measurements on profit or loss or other paid to unitholders, purchase Fund units in the market, or issue new comprehensive income for the period. The Fund has reviewed the Fund units. The Fund’s policy is to distribute all available cash from impact of this new standard and has provided additional disclosures operations to Fund unitholders after provisions for cash required for as required on fair value measurements noted in the consolidated working capital and other reserves considered advisable by the Fund’s financial statements. trustees. The Fund has eliminated the impact of seasonal fluctuations by equalizing monthly distributions. (iv) IFRS 7, Financial Instruments: Disclosures, sets out the objective to enhance disclosures about offsetting of financial assets and financial The Fund had debt of $42.3 million at December 31, 2013 liabilities. The Fund has reviewed the impact of this new standard (December 31, 2012 – $30.0 million). In addition, the Fund’s and determined that it does not have an impact on the condensed banking covenants currently require it to limit its funded debt consolidated financial statements. to rolling 12 month EBITDA to 2.00:1. The Fund’s funded debt to EBITDA ratio at December 31, 2013 was 1.45:1 (December 31, 2012 – (v) IAS 1, Presentation of Financial Statements, was amended to change INCOME FUND BOSTON PIZZA ROYALTIES 1.07:1) which is below its banking covenant requirements. The Fund is in the disclosure of items presented in Other comprehensive income compliance with its covenants as at December 31, 2013. (“OCI”), including a requirement to present separately the items of OCI that may be classified to profit or loss in the future from those The Fund is not subject to any other statutory capital requirements and that would never be reclassified to profit or loss. This amendment has no commitments to sell or otherwise issue Fund units, other than the is effective for years beginning on or after July 1, 2012. The Fund commitment to exchange Class B units held by BPI for Fund units, as has reviewed the impact of this new standard and determined that described in notes 8 and 9. it does not have an impact on the consolidated financial statements. (m) Accounting standards and amendments adopted by the Fund: (n) Accounting standards and amendments issued but not yet adopted: Effective January 1, 2013, the following standards and amendments have been adopted by the Fund: Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2014 (i) IFRS 10, Consolidated Financial Statements, requires an entity to with earlier adoption permitted. The Fund has not yet assessed the consolidate an investee when it has power over the investee, is impact of these standards and amendments or determined whether they exposed, or has rights to, variable returns from its involvement will be adopted early. with the investee and has the ability to affect those returns through its power over the investee. The Fund has reviewed the impact of (i) IAS 32, Financial Instruments: Presentation these new standards and determined that upon adoption of the new The Fund intends to adopt the amendments to IAS 32 in its financial standard on January 1, 2013, the consolidated financial statements statements for the annual period beginning January 1, 2014. 40 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 BOSTON PIZZAROYALTIES INCOMEFUND 2013 (December31, 2012–$0.2million). December31, was$0.2millionat onthenotereceivable Interest receivable Class CUnittransferred. eachamount oftheindebtednessunderBPLoanequalto$10.00for of, with respectto, andtheconcurrentreleaseofBPIitsobligations an theFund theassumptionby for Class CUnitstotheFundinconsideration BPI, astheholderof2,400,000ClassCUnits, hastherighttotransfer notbeassignedwithoutthepriorconsentofBPI. The notemay ageneralsecurityagreement. 2002andissecuredby Rights fromBPIinJuly thetimeofFund’s at The noteoriginated indirectacquisitionoftheBP withinterestpayable Note receivable (in thousands) 4. NOTES
due July 17,due July 2042 7.5%perannum, at monthly Note receivable fromBostonPizzaInternationalInc.: (iii) (ii) The mandatory effective date isnotyetdetermined. date effective The mandatory fairvaluewillberecognizedinprofitorloss. measured at fair value. Gainsandlossesonre-measurementoffinancialassets amortized cost,assets measured at at or financial assets measured oninitialrecognition:classified intooneoftwocategories financial sale, for available andloansreceivables. Financialassetswillbe ofheldtomaturity, theexistingIAS39categories standard eliminates measurement of financialassetsand liabilities. The – RecognitionandMeasurement, and ontheclassification IFRS 9replacestheguidanceinIAS39, FinancialInstruments the IASBpublishedamendmentstostandardinOctober2010. IFRS 9, FinancialInstruments, wasissuedinNovember2009and impact onthefinancialstatements. amaterial doesnotexpecttheamendmentstohave The Company 1, onJanuary theannualperiodbeginning for statements 2014. The Fundintendstoadopttheseamendmentsinitsfinancial would alsoapply. in whichcase, consequentialamendmentstootherIFRSs therelated 1, on or after July beginning is permitted, 2014; earlier application annualperiods for prospectively Most amendmentswillapply amendmentstoIFRS.urgent butnecessary The IASBusestheannualimprovementsprocesstomakenon- total ofninestandardsaspartitsannualimprovementsprocess. In December 2013, theIASB issued narrow-scope amendments to a cycles Annual ImprovementstoIFRS(2010–2012)and(20112013) TO THE CONSOLIDATED FINANCIALSTATEMENTS
December 31, $ 24,000 2013
$ 24,000 December 31, 2012 (CONTINUED) income tax liability isasfollows: income taxliability risetothedeferred gives that differences ofthetemporary The taxeffect Total ofincome taxexpenseperstatement
are taxable Increased by: Decreased by: Computed expectedtaxexpense Combined Canadianfederal Profit before incometaxes Profit before (in thousandsexcepttaxrate) isasfollows: taxrate tostatutory The reconciliation theperiod. for inception of the Fund. This expense had no impact on the Fund’s cash flow sincethe thePartnershipgenerated tax basesoftheBPRightsownedby between the accounting and differences share of the temporary cumulative as a resultofthe Fund recording,arises mainly in the current period, its December31,2012 to$4.6millionat 2013. The deferredincometaxliability December31, from$4.2millionat change inthefutureincometaxliability year endedDecember31, 2013(2012–$0.5million)andacorresponding the The Fundhasrecordedadeferredincometaxexpenseof$0.4millionfor SIFT taxexpense. resultoftheFund’scumulative SIFTtaxinstallmentsexceedingtheFund’s change in the current income tax asset. The current income tax asset is the year endedDecember31, 2013(2012–$5.4million)andacorresponding The Fund has recorded current the income tax expense of $6.0 million for 5. Deferred incometaxliabilities: (in thousands) unused portions oftheCredit Facilities, basis. onaquarterly payable of0.2%to0.30% onany rates subjecttocommitment feesat additionally arising fromtheCredit Facilitieswhicharedescribedin note3(l). The Fundis The Fund is subject to certainguarantor covenants and reporting requirements Facilities andtheFund’s fundeddebttoEBITDAratio. plus between0.0%and0.5%, ontheCredit dependingontheamountdrawn plusbetween 1.0%and1.5%,bankers’ acceptancerates ortheprimerate theFund,selected by comprisedofeither, of, oracombination theLender’s interestrates, fixedorvariable The CreditFacilitiesbearinterestat as of theFundundernormalcourseissuerbids(“Facility C”). theFundrepurchasingandcancellingadditionalunits credit facilitytofacilitate million revolvingcreditfacility(“Facility B”);and(c)a$25.0millionrevolving comprised of: facility(“Facility (a)a$1.0millionoperating A”);(b)a$30.0 19, a fiveyear termexpiring on July having 2017. TheCredit Facilities are “Lender”) inthe amount of upto$56.0 million (the “Credit Facilities”) The PartnershiphascreditfacilitieswithaCanadiancharteredbank (the 6. Net deferredtaxliability
Change inthetaxbase Current year’s earningsthat Current year’s earningsnottaxable and provincialrate Income taxes: Operating lineofcredit, termloanandNCIBcreditfacilities: totheBPRights related Difference of theBPRights
$ 6,389 $ 21,202 $ 4,550 $ 4,550
(1,668 ) 2,247 5,460 2013 2013 25.8 % 350 510 5,257 1,995
$ $ 7,979 $ 4,200 $ 4,200 (1,829 ) 5,933 2012 2012 25.0 % The Partnership previously entered into an interest rate swap under the December 31, December 31, International Swap Dealers Association Master Agreement with the Lender to (in thousands) 2013 2012 fix the interest rate at 2.7% per annum (assuming existing debt to EBITDA Bank of Montreal Credit Facility B bearing levels are maintained) for a term of five years for the $30.0 million drawn on interest at 1.44% plus between 1.00% Facility B. In addition, during the year the Partnership entered into another and 1.50% per annum, with a maturity interest rate swap to fix the interest rate at 3.2% per annum (assuming date of July 19, 2017 $ 30,000 $ 30,000 existing debt to EBITDA levels are maintained) for a term of five years for $6.0 Bank of Montreal Credit Facility C million drawn on Facility C (this swap together with the previously described bearing interest at 1.92% plus swap, the “Swaps”). The Fund recorded a financial derivative asset of $0.4 between 1.00% and 1.50% per million based on the fair value of the Swaps at December 31, 2013 (December annum, with a maturity date of June 1, 2018 6,000 — 31, 2012 – $0.1 million) in accordance with accounting for derivatives under IFRS. The Fund intends to hold the Swaps to maturity. Bank of Montreal Credit Facility C bearing interest at bankers’ On August 22, 2012, the Fund announced that it had received Toronto Stock acceptance rate (1.22% at Exchange (“TSX”) approval of a Notice of Intention to make a Normal Course December 31, 2013) plus between Issuer Bid through the facilities of the TSX or other Canadian marketplaces from 1.00% and 1.50% per annum, with September 4, 2012 to no later than August 31, 2013 (the “2012 NCIB”). The a maturity date of July 19, 2017 6,304 — 2012 NCIB permitted the Fund to repurchase for cancellation up to 1,442,522 $ 42,304 $ 30,000 units, being approximately 9.9% of the Fund’s issued and outstanding units The fair value of the Fund’s debt is $42.3 million since the debt has variable (as at August 17, 2012) and approximately 10.0% of its public float, then interest rates at terms that the Fund believes are reflective of those currently comprised of 14,452,221 units. The 2012 NCIB expired on August 31, 2013.
available. Accordingly, the impact of a 1% change in the prime rate would not 2013 ANNUAL REPORT All units acquired under the 2012 NCIB were cancelled. result in any change in the fair value of the debt. 41 On March 18, 2013, the Fund established an automatic securities purchase Principal repayments on debt for the years ending December 31 are as follows: plan with its broker to allow for the repurchase of Units under the 2012 NCIB (in thousands) at any time, including when it ordinarily would not be active in the market 2014 $ — due to its own internal trading blackout periods, insider trading rules or 2015 — otherwise. The plan was to terminate on the earliest of: (a) the date on which 2016 — the purchase limits specified in the plan have been attained, (b) the date on 2017 42,304 which the 2012 NCIB terminates, (c) the date on which the Fund terminates 2018 and thereafter — the plan in accordance with the terms of the plan, in which case the Fund will $ 42,304 issue a press release announcing such termination, and (d) August 31, 2013. All purchases were to be made on the open market through the facilities of the The Fund plans to refinance its long-term debt before maturity and does not TSX or other Canadian marketplaces in accordance with the requirements of expect to be required to repay any portion of the principal amount outstanding the TSX and applicable securities laws. prior to maturity. BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES
From January 1, 2013 to August 31, 2013, the Fund acquired 541,100 Units 7. Intangible assets – BP Rights: at an average price of $22.74 per Unit (total of $12.3 million). As at December The BP Rights are trademarks registered in Canada including “Boston Pizza” 31, 2013, all of the repurchased units were cancelled. The Fund financed and other similar related terms, logos and designs that are the property of purchases under the 2012 NCIB by drawing on the $25.0 million Facility C the Partnership. The Partnership and BPI entered into a license and royalty that is included as part of the Fund’s Credit Facilities. As at December 31, agreement to allow BPI the use of the BP Rights for a term of 99 years beginning 2013, the Fund had drawn down Facility C by $12.3 million (December 31, in July 2002, for which BPI pays a royalty equal to 4% of the franchise revenues 2012 – nil). of the restaurants in the Royalty Pool. Since the trademarks may remain in force indefinitely, the BP Rights have an indefinite life, are recognized at cost and are not amortized but are tested for indicators of impairment at each reporting date and tested for impairment annually on December 31. In January of each year, new restaurants are added to the Royalty Pool. In exchange for adding new stores into the Royalty Pool, BPI is granted the Additional Entitlements (note 8), the fair value of which are determined using the expected annual sales of the new stores discounted by the yield of the Fund’s units. The value of the Additional Entitlements is adjusted in the following year once the annual sales of the new stores are known for certain. 42 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 BOSTON PIZZAROYALTIES INCOMEFUND (a) 8. value.exceeds thecarrying noimpairmentexists.The Fundhasdeterminedthat in December 31,As at 2013, the impairment Fund has tested the BP Rights for with theprevioussaleandexchangeofitsunits. liabilities. thecoststosellbasedonpastexperience estimates Management between the book value and fair value differences of these other assets and assets andliabilities, thereareno material has determined that management current marketpriceoftheoutstandingunits. oftheother Basedonthenature assets andliabilities. The fairvalueoftheFundisdeterminedbasedon Fund, andthendeductsfromthisvaluethefairofallFund’s other fair valuelesscoststosell. firstdeterminesthefairvalueof Management amountoftheBPRightsbasedonits The Funddeterminestherecoverable exceeds thefairvaluelesscoststosell(the amount”). “recoverable impairment.Rights for valueoftheBPRights Impairmentexistsifthecarrying Each yearonDecember31, valueoftheBP theFundtestscarrying Balance –December31, 2013 Adjustment toprioryear Additional Entitlementsfor net5newrestaurantsopened Additional Entitlementsfor Balance –December31, 2012 Adjustment toprioryear Additional Entitlementsfor net3newrestaurants Additional Entitlementsfor 1,Balance –January 2012 (in thousands) valueoftheBPRights. assetandareaddedtothecarrying intangible generated The fairvaluesofthe Additional Entitlementsarerecognizedasaninternally NOTES
the manner described above and has determined that the recoverable amount amount therecoverable and has determined that the manner described above in 2011andaddedtotheRoyaltyPool2012 ofnewrestaurantsopened actual performance 1, January granted 2013 in 2012andaddedtotheRoyaltyPool2013– in 2010andaddedtotheRoyaltyPool2011 ofnewrestaurantsopened actual performance 1, January in 2012–granted 2012 opened in2011andaddedtotheRoyaltyPool of the Class B unit liability is described later inthisnote. isdescribedlater of theClassBunitliability fairvalue. reportedat subsequently of the fairvalue The determination and andareinitially The ClassBunitsareclassifiedasafinancialliability the accounts of of the the Partnership Fund under consolidating IFRS. BPIandarepresentedintheFund’sby asaresult financialstatements “Class Bunits” beenissuedtoandareheld arethoseunitswhichhave Class Bunits Partnership unitliabilities: TO THE CONSOLIDATED FINANCIALSTATEMENTS
$ $ $ 240,206 235,850 232,068 3,722 3,089 634 693 (CONTINUED)
the remaining Additional Entitlements, 88,411Fundunits. 2012. Based on these adjustments, portion of BPI received its pro rata 1,new additional restaurants added to theRoyalty Pool on January ofthreenet Entitlements weremadebasedontheactualperformance 2013,In early and adjustmentstoroyaltypayments Additional ofthenewstores. actual performance 1,until January 1, 2014(2012units–January 2013)basedonthe units), conversiontoFundunits for remainunissuedandarenoteligible the Additional Entitlements, 20%(2013–38,890units;201243,633 distributionsfromthePartnership. increaseinmonthly proportionate Of to 194,449(2012–218,166)Fundunits. BPIwillalsoreceivea the Additional Entitlements, BPI’s Additional Entitlementsareequivalent of theadditionalnetsalestoRoyaltyPool, andassuming100%of the RoyaltyPoolwasincreasedto348. As aresultofthecontribution $8.2million. at has beenestimated The totalnumberofrestaurantsin were removed. The Franchise Sales ofthesefivenetnewrestaurants closedduring2012 added totheRoyaltyPoolwhiletworestaurantsthat 1,during theperiodfromJanuary 2012toDecember31, 2012were 1,On January 2013, opened 7newBostonPizzaRestaurantsthat time. that Entitlements outstandingat voting entitled rights equivalent to the number of fully carry Additional ofthe new stores.the actual performance BPI ClassBunits held by the numberof distributionsto Additional Entitlementsandassociated from BPIisperformed. At suchtime, anadjustmentismadetoreconcile full year, anauditoftheroyaltyrevenuesnewrestaurantsreceived the year. a beenintheRoyaltyPoolfor Oncethenewrestaurantshave 100% ofthedistributionsfrom Additional Entitlementsthroughout certain. theFundareknownfor paidby taxrate average BPIreceives ofthenewstoresandactualeffective received oncetheperformance Entitlements on the withthebalance(the Adjustment Date “Holdback”) (the “AdditionalEntitlements”). BPIreceives80%ofthe Additional revenue, acquireadditionalFundunits BPIreceivestherighttoindirectly the previous Adjustment Date. adding net additional royalty In return for closedsince permanently BostonPizzaRestaurantsthat to removeany openedand to addtheRoyaltyPoolnewBostonPizzaRestaurantsthat 1ofeachyear(the January “Adjustment Date”), anadjustmentismade the netfranchisesalesfromrestaurantsaddedtoRoyaltyPool. On based, time, any at whichisbasedinparton onadefinedcalculation anumberofFundunits BPI hastherighttoexchangeClassBunitsfor Issued and (b) Class C units outstanding “Class C units” are those 2,400,000 units which have been issued Issued and Additional outstanding Entitlements to and are held by BPI. These units have an obligation to pay the Class Additional including Class B unit C distribution of $0.0625 per unit on a monthly basis as long as the (in thousands, except unit data) Entitlements Holdback liability note receivable from BPI (note 4) is outstanding. Accordingly, this item Balance at December 31, 2011 2,723,861 2,735,458 $ 38,800 is classified as a financial liability and is measured at amortized cost.
Additional Entitlements for addition The requirement of the Fund to settle its note receivable from BPI in of zero net new restaurants exchange for Class C units represents an embedded derivative. The Fund to the Royalty Pool in 2011 – has reviewed the net impact of this potential exchange requirement on granted January 1, 2012 174,533 218,166 3,089 its cash flows and has determined there is no significant value applicable Adjustment to prior year Additional to this feature. Entitlements for actual 9. Fund units: performance of new restaurants added to Royalty (a) “Fund units” are defined as those units which have been issued to the Pool in 2010 61,481 49,884 693 public. The Fund’s Declaration of Trust provides that an unlimited number of Fund units may be issued. Each Fund unit is transferable Return of capital — — (82 ) and represents an equal undivided beneficial interest in any distributions Exchange of Class B Units of the Fund and in the net assets of the Fund. All Fund units have for Fund units (1,000,000 ) (1,000,000 ) (18,700 ) equal rights and privileges. Each Fund unit entitles the holder thereof to participate equally in the allocations and distributions and to one vote at Fair value adjustment — — 14,867
all meetings of Fund unitholders for each Fund unit held. The Fund units 2013 ANNUAL REPORT Balance at December 31, 2012 1,959,875 2,003,508 $ 38,667 issued are not subject to future calls or assessments. 43 Additional Entitlements for addition Pursuant to the Declaration of Trust, the holders, other than the Fund or of 5 net new restaurants to its subsidiaries, of the Class A general partner units of the Partnership the Royalty Pool in 2012 – (“Class A Units”) and Class B Units are entitled to vote in all votes of granted January 1, 2013 155,559 194,449 3,722 Fund unitholders as if they were holders of the number of Fund units Adjustment to prior year they would receive if Class A Units and Class B Units were exchanged Additional Entitlements for into Fund units at the record date of such votes, and will be treated in all actual performance of new respects as Fund unitholders for the purpose of any such votes. restaurants added to Royalty Pool in 2011 88,411 44,778 634 Fund units are redeemable at any time at the option of the Fund Fair value adjustment — — 3,424 unitholder at a price based on market value as defined in the Declaration Balance at December 31, 2013 2,203,845 2,242,735 $ 46,447 of Trust, subject to a maximum of $50,000 in cash redemptions in any one month. The limitation may be waived at the discretion of the Trustees BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES The fair value of the Class B unit liability is determined by using the Fund’s of the Fund. Redemptions in excess of these amounts, assuming no market capitalization as at December 31, 2013 and allocating BPI’s entitlement waiving of the limitation, shall be paid by way of distribution in specie of based upon its percentage ownership of the Fund on a fully-diluted basis. As at a pro rata number of securities of the Trust held by the Fund. December 31, 2013, the Fund’s closing price was $20.71 per Unit (December 31, 2012 – $19.30 per Unit) resulting in a market capitalization of $357.7 million (b) Fund units outstanding: (December 31, 2012 – $339.2 million). BPI’s 13.0% ownership As at December 31, 2013, BPI held Class B units equivalent to (December 31, 2012 – 11.4%) of the Fund (on a fully–diluted basis) was 2,203,845 Fund units or 12.8% of the issued and outstanding Fund calculated to be valued at $46.4 million (December 31, 2012 – $38.7 units on a fully diluted basis. Number of Fund units million). The Fund has no obligation to settle this financial liability in cash. If BPI (in thousands, except unit data) Fund units as equity were to exchange all of its Additional Entitlements for Fund units on December 31, Opening balance at January 1, 2013 15,570,644 $ 197,240 2013, the Fund would issue the equivalent number of Fund units and the Class B Acquisition and cancellation unit liability would be extinguished. of Fund units (541,100 ) (12,304 ) Balance at December 31, 2013 15,029,544 $ 184,936
(c) Distributions declared to Fund unitholders during the year ended December 31, 2013 totaled $18.6 million (2012 – $17.2 million) or $1.22 per Fund unit (2012 – $1.17). 44 BOSTON PIZZA ROYALTIES INCOME FUND ANNUAL REPORT 2013 administration charge. administration the Fund through the by indirectly personnel are compensated management individual Trustees providedintheFund’s Form.Annual Information Otherkey of the remuneration about below with further out information in the table are the Trustees oftheFund. areset detailsoftheirremuneration Aggregate fromtheFund personnelwhoreceivedirectremuneration management Key 12. 2012 –$2.8million). – $0.2million), fromBPIwas$2.6million(December31, androyaltyreceivable $0.5 million), from BPI was $0.2 million (December interest 31,receivable 2012 to BPIonClassBandCunitswas$0.5million(December31, 2012– $0.3 million(2012–million). December31,As at 2013, interestpayable theyearendedDecember31, for BPI inrespectoftheseservices 2013was onbehalfoftheFund. services certain administrative The totalamountpaidto and directors in thePartnership and BPI. BPItoprovide The Fund has engaged virtueofcommonofficers partyoftheFundby BPI isconsideredtobearelated 11. fourth quarters. third quarterscomparedtothefirstand increaseFranchiseSalesinthesecondand andgenerally open theirpatios allowBoston Pizza Restaurants to factors suchastourism and betterweather inCanada. restaurantindustry which areinherentinthefullservice Seasonal inFranchise Sales,Boston Pizza Restaurants experience seasonal fluctuations Royalty income–4%ofFranchisesales restaurants Franchise salesreportedby BOSTON PIZZAROYALTIES INCOMEFUND Remuneration paidto Remuneration Trustees (in thousands) Restaurants intheRoyaltyPool of restaurantsintheRoyaltyPool) (in thousands, exceptnumber 10. NOTES
Operations: Compensation ofkeymanagement: Related partytransactions: in theRoyaltyPool TO THE CONSOLIDATED FINANCIALSTATEMENTS
December 31, $ 755,420 $ 171 For theyear
30,217 ended 2013 2013 346
29,258 341
$ 731,455 $ December 31, For theyea ended 2012 2012 171 (CONTINUED) (b) (a) 14. Non-cash transactions: (in thousands) 13.
of theremaining Additional Entitlements, 86,336Fundunits. 2013. Based on these adjustments, portion BPI will receive its pro rata 1,new additional restaurants added to theRoyalty Pool on January of fivenet Entitlements were made based on theactual performance 2014,In early and adjustmentstoroyaltypayments Additional ofthenewstores. actual performance 1,until January 1, 2015(2013units–January 2014)basedonthe units), conversiontoFundunits for remainunissuedandarenoteligible the Additional Entitlements, 20%(2014–88,938units;201338,890 distributionsfromthePartnership. increaseinmonthly proportionate Of to 444,688(2012–194,449)Fundunits. BPIwillalsoreceivea the Additional Entitlements, BPI’s Additional Entitlementsareequivalent of theadditionalnetsalestoRoyaltyPool, andassuming100%of the RoyaltyPoolwasincreasedto358. As aresultofthecontribution $19.8million. at been estimated The totalnumberofrestaurantsin removed. The FranchiseSalesofthese10netnewrestaurantshas closedduring2013were to theRoyaltyPoolwhiletworestaurantsthat 1,the periodfromJanuary 2013toDecember31, 2013wereadded 1,On January 2014, openedduring 12newBostonPizzaRestaurantsthat Subsequent events: Unit exchange 1,Roll-in ofnewstores–January net Supplemental cashflowinformation:
December 31, $ 4,356 For theyear
ended 2013 —
$ December 31, For theyear 18,700 3,782 ended 2012 MANAGEMENT’S DISCUSSION & ANALYSIS BOSTON PIZZA INTERNATIONAL INC. FOR THE PERIOD AND YEAR ENDED DECEMBER 31, 2013
FINANCIAL HIGHLIGHTS The tables below set out selected information from the annual consolidated financial statements of Boston Pizza International Inc. (“BPI”), together with other data, and should be read in conjunction with the annual consolidated financial statements of BPI for the years ended December 31, 2013 and 2012. The financial results reported in the tables are reported in accordance with International Financial Reporting Standards (“IFRS”).
(in thousands of dollars except number of restaurants, and per share items) 2013 2012 2011 System-wide Gross Sales1 974,837 943,053 904,872 Number of Boston Pizza Restaurants2 358 348 343 Franchise Sales reported by Boston Pizza Restaurants3 761,780 737,191 707,086
Income Statement Data Total revenues 77,920 74,576 70,613
Royalty expense 30,217 29,258 27,973 Other expenses 38,683 41,311 38,457 Earnings before depreciation, amortization, management fee, interest and fair value gain, gain on disposal of financial assets, and provision of financial assets 9,020 4,007 4,183 Depreciation, management fee and amortization of deferred gain 1,981 1,608 1,235 Earnings before interest and fair value gain, gain on disposal of financial assets and provision of financial assets 7,039 2,399 2,948
Net interest income 3,692 4,455 3,994 2013 ANNUAL REPORT Fair value gain, gain on disposal and provision of financial assets 6,137 4,608 731 Earnings before income taxes 16,868 11,462 7,673 45 Current and deferred income tax expense 2,618 809 2,098 Net income and comprehensive income 14,250 10,653 5,575 Basic and diluted earnings per share 0.14 0.10 0.05 Dividends per share 0.03 0.22 0.05
Balance Sheet Data Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Total assets 155,360 152,600 154,871 Total liabilities 257,251 265,953 256,107 BOSTON PIZZA INTERNATIONAL INC. BOSTON PIZZA INTERNATIONAL
1 “System-wide Gross Sales” means the gross revenue: (i) of the corporate Boston Pizza Restaurants (as defined herein) in Canada owned by BPI; and (ii) reported to BPI by franchised Boston Pizza Restaurants in Canada, without audit or other form of independent assurance, and in the case of both (i) and (ii), including revenue from the sale of liquor, beer, wine and tobacco and revenue from BPI approved national promotions and discounts and excluding applicable sales and similar taxes. 2 As at the end of the applicable period or year. 3 Franchise sales is the basis on which the royalty is payable; it means the revenues of Boston Pizza Restaurants in respect of which the royalty is payable (“Franchise Sales”). The term “revenue” refers to the gross revenue: (i) of the corporate Boston Pizza Restaurants in Canada owned by BPI; and (ii) reported to BPI by franchised Boston Pizza Restaurants in Canada, without audit or other form of independent assurance, and in the case of both (i) and (ii), after deducting revenue from the sale of liquor, beer, wine and tobacco and revenue from BPI approved national promotions and discounts and excluding applicable sales and similar taxes. Nevertheless, BPI periodically conducts audits of the Franchise Sales reported to it by its franchisees, and the Franchise Sales reported herein include results from sales audits of earlier periods. 46 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAINTERNATIONAL INC.
Basic anddilutedearnings(loss)pershare Basic anddilutedearnings(loss)pershare Net income(loss)andcomprehensive Net income(loss)andcomprehensive Current anddeferredincometaxexpense(recovery) Current anddeferredincometaxexpense(recovery) Earnings (loss) before incometaxes Earnings (loss)before Earnings (loss) before incometaxes Earnings (loss)before Fair valuegain(loss)andprovisiononfinancialassets Fair valuegain(loss)andprovisiononfinancialassets Net interest income Net interestincome Earnings before interestandfairvaluegain(loss)onfinancialassets Earnings before Earnings before interestandfairvaluegain(loss)provisiononfinancialassets Earnings before Depreciation, ofdeferredgain feeandamortization management Depreciation, ofdeferredgain feeandamortization management depreciation,Earnings before amortization, fee, management depreciation,Earnings before amortization, fee, management interest Other expenses Other expenses Royalty expense Royalty expense Total revenues Total revenues Income StatementData Income StatementData Franchise Sales reported by BostonPizzaRestaurants Franchise Salesreportedby Franchise Sales reported by BostonPizzaRestaurants Franchise Salesreportedby Number ofBostonPizzaRestaurants Number ofBostonPizzaRestaurants System-wide GrossSales (in thousandsofdollarsexceptnumberrestaurantsandpershareitems) System-wide GrossSales (in thousandsofdollarsexceptnumberrestaurantsandpershareitems) interest andfairvaluegain(loss)onfinancialassets and fairvaluegain(loss)provisiononfinancialassets 1 1
2 2
3 3
(CONTINUED)
187,046 241,488 187,364 239,764 (10,892 19,268 10,334 18,911 (4,598 (4,603 (3,945 (8,548 1,432 2,829 3,713 7,350 1,522 1,169 8,205 7,408 (0.04 (0.01 (337 (431 2012 2013 358 822 347 884 348 94 Q4 Q4
) ) ) ) ) ) ) ) ) 193,940 246,627 188,087 239,269 19,651 18,823 6,721 1,933 2,336 7,660 5,686 6,333 1,977 1,035 8,310 5,890 3,879 1,172 1,248 1,851 9,529 9,655 7,443 2012 2013 0.05 0.06 909 351 603 403 344 Q3 Q3
195,268 250,398 184,655 237,955 20,023 10,948 10,486 18,843 (1,953 3,472 1,419 1,784 7,753 3,641 1,144 1,165 7,344 (0.01 (169 2012 2013 0.03 (564 (601 909 351 187 364 365 551 343 (37 Q2 Q2 ) ) ) ) ) ) 185,526 236,324 177,085 226,065 18,978 12,301 11,563 10,500 10,337 17,999 7,012 1,187 7,454 5,354 9,487 2,814 1,658 5,712 7,063 2012 2013 0.05 0.09 442 858 596 142 294 329 348 436 344 Q1 Q1
OVERVIEW • The commitment to franchisee profitability
General • The commitment to continually enhance the Boston This Management’s Discussion and Analysis covers the three month period Pizza brand from October 1, 2013 to December 31, 2013 (the “Period”) and the twelve • The commitment to continually improve the guest experience month period from January 1, 2013 to December 31, 2013 (the “Year”) and is dated February 6, 2014. BPI realizes that its franchisees have to be profitable to succeed. To enhance profitability and to facilitate the growth of Boston Pizza, BPI aggressively BPI is a privately controlled company and is the franchisor of the Boston Pizza enhances and promotes the Boston Pizza brand through national television (as defined herein) concept in Canada. BPI competes in the casual dining and radio advertising, and national and local promotions. The costs associated sector of the restaurant industry and Boston Pizza is the number one casual with national marketing of Boston Pizza are paid for by Boston Pizza Co-op dining brand in Canada. With 356 restaurants stretching from Victoria to St. Advertising (the “Co-op”). Franchisees pay 3% of Franchise Sales into the John’s, Boston Pizza has more locations and serves more customers annually Co-op; 76% of these funds are used to purchase television and radio media than any other casual dining restaurant chain in Canada. advertising, and the remaining 24% is used for production of materials and BPI charges a 7% royalty fee on Franchise Sales for full-service and fast administration. Both Boston Pizza franchisees and the corporate support staff casual Boston Pizza Restaurants open in Canada and a 5% royalty fee on continuously find new ways to improve the guests’ experience so that they Franchise Sales for Boston Pizza quick express restaurants that are open in will return to Boston Pizza again and again. Management is confident that Canada (collectively, the “Boston Pizza Restaurants”). BPI pays Boston this “Three Pillars” strategy will continue to focus BPI’s efforts and develop Pizza Royalties Limited Partnership (the “Partnership”), an entity controlled new markets and continue to strengthen Boston Pizza’s position as Canada’s by Boston Pizza Royalties Income Fund (the “Fund”), a 4% royalty fee (the number one casual dining brand. “Royalty”) based on Franchise Sales from the Boston Pizza Restaurants in the The following information provides additional analysis of the operations and royalty pool (the “Royalty Pool”) for the use of the Boston Pizza trademarks financial position of BPI and should be read in conjunction with the annual 4 5 in Canada (the “BP Rights ” ). As at December 31, 2013, there were 346 consolidated financial statements and accompanying notes. The annual Boston Pizza Restaurants in the Royalty Pool. consolidated financial statements are in Canadian dollars and have been 2013 ANNUAL REPORT Addition of New Restaurants to Royalty Pool prepared in accordance with IFRS. 47 On January 1 of each year (the “Adjustment Date”), an adjustment is made OPERATING RESULTS to add to the Royalty Pool new Boston Pizza Restaurants that opened and to remove any Boston Pizza Restaurants that permanently closed since the Same Store Sales Growth (“SSSG”) last Adjustment Date. In return for adding net additional royalty revenue, SSSG, a key driver of distribution growth for Unitholders, is the change in gross BPI receives the right (the “Additional Entitlements”) to indirectly acquire revenues of Boston Pizza Restaurants as compared to the gross revenues additional units of the Fund (“Units”). The adjustment for new Franchise Sales for the same period in the previous year, where restaurants were open for added to the Royalty Pool is designed to be accretive to unitholders of the Fund a minimum of 24 months. The two principal factors that affect SSSG are (“Unitholders”). The Additional Entitlements are calculated at 92.5% of the changes in customer traffic and changes in average guest cheque. SSSG estimated royalty revenue added to the Royalty Pool, multiplied by one minus was negative 1.5% for the Period and positive 1.5% for the Year compared to the effective average tax rate estimated to be paid by the Fund, divided by the positive 2.2% SSSG reported in the fourth quarter of 2012 and positive 3.3%
yield of the Fund, divided by the weighted average Unit price. BPI receives for 2012. Franchise Sales, the basis upon which royalties are paid by BPI INC. BOSTON PIZZA INTERNATIONAL 80% of the Additional Entitlements initially, with the balance received when the to the Fund, exclude revenue from the sale of liquor, beer, wine and tobacco actual full year performance of the new restaurants and the actual effective and approved national promotions and discounts. On a Franchise Sales basis, average tax rate paid by the Fund are known with certainty. BPI receives SSSG was negative 2.3% for the Period (Q4 2012 – positive 3.0%) and 100% of distributions from the Additional Entitlements throughout the year. positive 1.4% for the Year (2012 – positive 3.4%). The negative SSSG for the Once these new restaurants have been part of the Royalty Pool for a full year, Period was principally due to poor weather experienced in many parts of the an audit of the royalty revenues of these restaurants received from BPI is country as well as challenging general economic conditions. Positive SSSG performed, and the actual effective tax rate paid by the Fund is determined. At for the Year was principally due to higher take-out and delivery sales resulting such time an adjustment is made to reconcile distributions paid to BPI and the from continued promotion of Boston Pizza’s online ordering system and menu Additional Entitlements received by BPI. re-pricing partially offset by the challenges noted above experienced in the latter part of the Year. Business Strategy The success of the business of BPI, its affiliated entities and franchisees New Store Openings, Closures and Renovations (“Boston Pizza”) can be attributed to three simple underlying principles During the Period, seven new Boston Pizza Restaurants opened (Year – 12) that are the foundation for all of our strategic decision-making – the “Three and zero Boston Pizza Restaurants closed (Year – 2). Subsequent to the Pillars” strategy. Period, two Boston Pizza Restaurants closed. As well during the Period, 13 Boston Pizza Restaurants were renovated (Year – 37). Restaurants typically
4 BP Rights are the trademarks that as at July 17, 2002 were registered or the subject of pending applications for registration under the Trade-Marks Act (Canada), and other trademarks and the trade names which are confusing with the registered or pending trademarks. The BP Rights purchased do not include the rights outside of Canada to any trademarks or trade names used by BPI or any affiliated entities in its business, and in particular do not include the rights outside of Canada to the trademarks registered or pending registration under the Trade-Marks Act (Canada).
5 Number of restaurants in the Royalty Pool excludes restaurants that permanently closed during the applicable period. 48 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 and addingnewBostonPizza BPIfor Additional Entitlementsreceivedby BP Rightstothe Partnership aspartoftheFund’s initialpublicoffering withBPI’s ofthedeferredgainassociated Amortization saleofthe original feeallocation. management the Period and fees for in management Year was due to a reassessment of the million) and$1.7millionfor Year (2012–$1.3million). The increase the Period(Q42012–$0.4 feeswere$0.7millionfor Management 2012. million for the for Year, quarterof2012 and$2.6 thefourth comparedto$0.6millionfor thePeriodand$2.6million assets anddeferredchargeswere$0.7millionfor of property, andamortization Depreciation plantand equipment, intangible Deferred GainandEarnings Depreciation andAmortization, ManagementFees, Amortization of added totheRoyaltyPool. the resulting frompositiveSSSGfor Year andnewBostonPizzaRestaurants areincludedintheprioryear,that higherRoyaltyexpenses by offset partially the Period,for with BPI’s costs associated bi-annual franchisee conference costs. the The expensesfor Year decreasedduetothedecreaseinexpenses Period decreasedduetolowercompensation, advertisingandconsulting owned restaurants. of the three corporately operation the The expenses for providedtofranchisedBostonPizzaRestaurantsandthe with theservices Restaurants intheRoyaltyPool), andothercostsassociated compensation BPI tothePartnership(being4%ofFranchiseSalesfromBostonPizza 2012.to $70.6millionfor by These expensesincludetheRoyaltypayable the same period in 2012. For the Year expenses were $68.9 million compared BPI’s thePeriodwere$15.6millioncomparedto$17.7for expensesfor Expenses the Year.during the income resultingfrompositiveSSSGfor Year andnewstoreopenings BPIduringthe in totalrevenueearnedby Year wasduetoincreasedroyalty to theroyaltyrevenuesfromnewstoreopeningsin Year. The increase fees. BPIduringthePeriodisdueThe increaseintotalrevenueearnedby restaurants, initial franchise fees, and franchise renewal supplier rebates from franchisedBostonPizzaRestaurants, owned salesfromcorporately 2012.million for BPI’s derivedfromroyaltyincome revenueisprincipally Year quarterof2012and$74.6 thefourth comparedto$18.9millionfor BPI’s the thePeriodand$77.9million for total revenue was$19.3million for Revenues impactingthesametimeframes. positively fourth quarters.compared tothefirstand Tourism isalsoaseasonalfactor increase Franchise Sales in the second and and third generally quarters patios allowBostonPizzaRestaurants to opentheir factors suchasbetterweather inCanada. restaurantindustry which areinherentinthefullservice Seasonal inFranchise Sales,Boston Pizza Restaurants experience seasonal fluctuations Seasonality 42. 6, asofFebruary The totalnumberofrestaurantsinoperation 2014is356. 1, fromJanuary 6,number ofrestaurantsrenovated 2013toFebruary 2014to December 31, 2013, fiveadditionalrestaurantswererenovated, thetotal bringing there-opening.incremental salesincreaseintheyearfollowing Subsequentto two and to experience three an weeks to complete close the for renovation MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAINTERNATIONAL INC. (CONTINUED) the priceofUnitsinto whichClassBUnitsareexchangeable. change in BPI’s ownership of the Partnership and the change percentage in in fairvalueoftheClassBUnits. The changeinfairvalue resultsfromthe moredetails. for Analysis The increaseinthegainisalsodueto thechange of Long-Term Investments” sectionofthisManagement’s Discussionand the disposaloflong-terminvestments. Seethe Results–Disposal “Operating due to the change in the Period mainly and a $2.7 million gain recognized on on disposaloffinancialassets, forthe andprovisionoffinancial assets Yearis change infairvalueoftheClassBUnits. The increaseinfairvaluegain, gain inDecember2012, company noteduefromanaffiliated promissory andthe due tothe impairment ofa$9.3 million for thePeriod ismainly financial assets increase in fair value gain, gain on disposal of financial assets, and provisionof 2012.assets of$6.1millioncomparedtoagain$4.6for The fair valuegain, gainondisposaloffinancialassets, andprovisionoffinancial thesameperiodin2012.$10.9 millionfor Duringthe Year, BPIrecordeda assets, andprovisionoffinancialassets$4.6millioncompared toalossof During thePeriod, BPIrecordedafairvaluegain, gain ondisposaloffinancial Financial AssetsandEarningsBeforeTaxes Fair Value Gain, GainonDisposalofFinancialAssets, of Provision 1,000,000 UnitsonNovember23, 2012. the Partnership resulting from the exchange of 3,479,575 Class B Units for duetodecreaseddistributionsfrom to thesameperiodsin2012wasmainly Loan. thePeriodand The decreaseinnetinterestincomefor Year compared BPItotheFundonBP $1.8millionofinterestpaidby by off-set partially BPIontheClassBUnitsandCUnits,of interestincomereceivedby 2012was$4.5million,net interestincomefor comprisedof$6.3million BPItotheFundonBPLoan. $1.8millionofinterestpaidby set by BPI’s BPIontheClassBUnitsandCUnits,income receivedby off- partially the for Year was$3.7 million, of$5.5millioninterest comprisedmainly BPItotheFundonBPLoan.of interestpaidby BPI’s netinterestincome BPI ontheClassBUnitsandCUnits, $0.5million by off-set partially was $1.5million, comprisedof$2.0millioninterestincomereceivedby Fund ontheBPLoan. BPI’s quarterof2012 thefourth netinterestincomefor Class CUnits, BPItothe $0.5millionofinterestpaidby by off-set partially BPIontheClassBUnitsand of $1.9millioninterestincomereceivedby BPI’s netinterestincomeduringthePeriodwas$1.4million, comprisedmainly Net InterestIncome 2012. and $2.4millionfor the million for Year quarter of 2012 the fourth compared to $1.2 million for and current and deferred the income Period tax and was $7.0 $2.8 million for on Units”), BPItotheFundonBPLoan(asdefinedherein), interestpaidby interest general partnerunits(“ClassBUnits”)andC BPI’s the Partnership to BPI amounts on the paid by Class earnings before 2012 –$200.3million). December31,deferred gainasat 2013was$202.4million(December31, Partnership andBPI(the “License andRoyalty Agreement”). The net in 2002, thetermofLicenseandRoyalty betweentheAgreement periods in2012. The deferredgainisamortizedover99yearsbeginning the Period and$2.3millionfor Year, thesame unchangedfor relatively the 1was$0.6millionfor Restaurants intotheRoyaltyPooleachJanuary long-term debt, fair value gain, gain on disposal and provision of financial assets B BPI estimates the fair value of the Class B Units using the Fund’s market in expenses for the Year, in addition to a higher fair value gain and gain on capitalization at the end of the applicable period and allocating BPI’s disposal of financial assets resulting from a $2.7 million gain recognized on the entitlement based upon its percentage ownership of the Fund on a fully- disposal of long-term investments, the change in fair value of the investment diluted basis. As at December 31, 2013, the Fund’s closing price was $20.71 in the Partnership, and no provision of financial assets recognized in 2013. per Unit (September 30, 2013 – $22.76 per Unit) resulting in a market New Restaurants Added to the Royalty Pool capitalization of $357.7 million (September 30, 2013 - $393.1 million). BPI’s 13.0% ownership (September 30, 2013 – 13.0%) of the Fund (on a fully- Boston Pizza Restaurants Added to Royalty Pool on January 1, 2013 diluted basis) was calculated to be valued at $46.4 million (September 30, On January 1, 2013, seven new Boston Pizza Restaurants that opened across 2013 – $51.0 million). In general, the value of the Class B Units will increase Canada between January 1, 2012 and December 31, 2012 were added to as the market price of the Units increases and vice versa. The difference the Royalty Pool and the two restaurants that permanently closed during 2012 between the Class B Units at the end of the Period and September 30, 2013 were removed from the Royalty Pool. The estimated annual gross franchise is a decrease of $4.6 million. At December 31, 2013, the value of the Class revenue for the seven new Boston Pizza Restaurants that opened less the B Units was $46.4 million, an increase of $7.7 million, which relates to a $3.4 revenue from the two permanent closures was $8.2 million. The calculation million fair value change attributed to an increase in the Unit price, and $4.3 for the number of Additional Entitlements received by BPI is designed to be million from the granting of Additional Entitlements in January 2013. accretive to existing Unitholders as the additional Royalty revenues from the new restaurants are valued at a 7.5% discount. The estimated 4% Given the combined effects of the above-noted factors, BPI had a loss before Royalty revenue the Fund received in 2013 from these additional seven new income taxes of $0.3 million for the Period and $16.9 million for the Year restaurants, less revenue from the two permanent closures, was $0.3 million. compared to a loss of $8.5 million for fourth quarter of 2012 and earnings of The pre-tax Royalty revenue for the purposes of calculating the Additional $11.5 million for 2012. The increase in earnings before taxes for the Period Entitlements, therefore, was $0.3 million or 92.5% of $0.3 million. The and Year compared to 2012 was mainly due to the increase in revenues,
estimated effective average tax rate that the Fund paid in the calendar year 2013 ANNUAL REPORT decrease in expenses, and increase in fair value gain, gain on disposal of 2013 was 25%. Accordingly, the after-tax Royalty revenue for the purposes financial assets, and provision of financial assets for the Year. of calculating the Additional Entitlements was $0.2 million ($0.3 million x (1 49 Income Taxes – 0.25)). In return for adding the Royalty revenue from these seven new BPI recorded a $1.0 million current income tax expense for the Period and restaurants, less Royalty revenue from the two permanent closures, to the $1.2 million current income tax expense for the Year compared to a $2.1 Royalty Pool, BPI received the right to acquire an additional 155,559 Units, million current income tax expense for the fourth quarter in 2012 and $3.3 representing 80% of the Additional Entitlements with the balance to be million for 2012. The decrease in current income tax expense for the Period received when the actual full year performance of the new restaurants and and Year compared to 2012 is mainly due to $0.8 million of taxes recoverable the actual effective average tax rate paid by the Fund for 2013 are known in 2013 relating to an impairment of a promissory note due from an affiliated with certainty. The 155,559 Additional Entitlements represented 0.9% of the company and higher tax in 2012 relating to tax on the exchange of Class B total outstanding Units on a fully diluted basis on January 1, 2013. 38,890 Units in November 2012. Units, representing the remaining 20% of the Additional Entitlements, were
“held back” until such time as the actual performance of these new Royalty INC. BOSTON PIZZA INTERNATIONAL BPI recorded a deferred income tax recovery of $0.9 million for the Period and Pool restaurants and the actual effective average tax rate paid by the Fund an expense of $1.4 million for the Year compared to a deferred income tax for 2013 were known. BPI also received an increase in monthly distributions recovery of $6.0 million for the fourth quarter of 2012 and a recovery of $2.5 based on 100% of the Additional Entitlements, subject to a reconciliation of million for 2012. The decrease in deferred income tax recovery for the Period the distributions paid to BPI in respect of these Additional Entitlements that will is mainly due to higher recovery in 2012 resulting from the decrease in the fair occur once the actual performance of these new Royalty Pool restaurants and value gain of the investment in the Partnership, and the recognition of deferred the actual effective average tax rate paid by the Fund for 2013 were known. tax recovery from the impairment of an affiliated company promissory note. See “Subsequent Events” below. The increase in deferred income tax expense for the Year compared to 2012 is mainly due to the decrease in deferred income tax recovery for the Period and Audit of Boston Pizza Restaurants Added to Royalty Pool on January 1, 2012 the increase in general corporate income tax rate in British Columbia in 2013. In January 2013, an audit of the Royalty revenues of the seven new restaurants that were added to the Royalty Pool on January 1, 2012 was performed Net Income and the actual effective average tax rate paid by the Fund for 2012 was BPI’s net loss during the Period was $0.4 million compared to a net loss of determined. The purpose of this was to compare the actual Royalty revenue $4.6 million during the same period in 2012. BPI’s net income for the Year from these seven new restaurants to the estimated amount of Royalty revenue was $14.3 million compared to $10.7 million for 2012. The decrease in net the Fund expected to receive for 2012 and to compare the actual effective loss for the Period is mainly due to a lower fair value loss on financial assets average tax rate paid by the Fund for 2012 to the estimated effective average resulting from the change in fair value of the investment in the Partnership tax rate the Fund expected to pay for 2012. The original Royalty revenue the and no provision of financials assets recognized in 2013, partially offset by the Fund expected to receive from these seven new restaurants less the Royalty increase in revenues and lower expenses for the Period. The increase in net revenue from the four permanent closures that occurred in 2011 was $0.3 income for the Year is mainly due to the increase in revenues and decrease million and the actual Royalty revenue that the Fund received was $0.1 million 50 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 actual performance ofthesenewRoyaltyPoolrestaurantsandtheactual actual performance to BPIinrespectofthese willoccuroncethe Additional Entitlementsthat Additional Entitlements, of the distributions paid subject to a reconciliation distributions based on 100% of the BPI also receives an increase in monthly 2014areknown. theFundfor paidby taxrate average and theactualeffective ofthesenewRoyaltyPoolrestaurants such timeastheactualperformance remaining 20% of the Additional Entitlements, been have “held back” until 1, dilutedbasisonJanuary a fully 2014. 88,938Units, representingthe Additional Entitlementsrepresented2.0%ofthetotaloutstandingUnitson 2014areknownwithcertainty. theFundfor paidby tax rate The 355,750 average ofthenewrestaurantsandactualeffective year performance Additional Entitlements with the balance to be received when the actual full the righttoacquireanadditional355,750Units, representing80%ofthe revenue fromthetwopermanentclosures, totheRoyaltyPool, BPIreceived addingtheRoyaltyrevenuefromthese12newrestaurants,for lessRoyalty Additional Entitlementsis$0.5million($0.7x(1–0.26)). Inreturn Accordingly, theafter-tax the thepurposesofcalculating Royaltyrevenuefor inthecalendaryear2014is26.0%. theFundwillpay that taxrate average therefore, is $0.7 million or 92.5% of $0.8 million. effective The estimated the the purposes of calculating Royalty revenue for Additional Entitlements, revenue fromthetwopermanentclosures, was$0.8million. The pre-tax the Fundwillreceivein2014fromtheseadditional12newrestaurants, less a7.5%discount.restaurants arevaluedat 4%Royaltyrevenue The estimated to existingUnitholdersastheadditionalRoyaltyrevenuesfromnew number of BPIisdesignedtobeaccretive Additional Entitlementsreceivedby from thetwopermanentclosureswas$19.8million. the for The calculation opened less the revenue the12 new Boston Pizza Restaurants that revenue for were removedfromtheRoyaltyPool. franchise annualgross The estimated closedduring2013 permanently the RoyaltyPoolandtworestaurantsthat 1,Canada betweenJanuary 2013andDecember31, 2013wereaddedto 1,On January 2014, openedacross 12newBostonPizzaRestaurantsthat Boston PizzaRestaurants 1,Added toRoyaltyPoolonJanuary 2014 Subsequent Events Entitlements. 88,411 Additional the Entitlements at in2012.Adjustment Date Followingtheaudit, BPIreceived taxrate. average and theeffective 80%ofthe BPIreceivedonly Additional onthefullnumberof to reconciledistributionspayable Additional Entitlements 2012 was23.6%. As aresult, toBPI thePartnershipmadeanominalpayment the Fund for paid by tax rate 2012 average was 25.0% and the actual effective greater. for theFundexpectedtopay taxrate average effective The original MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAINTERNATIONAL INC. (CONTINUED) notes receivedfromthedisposaloflong-terminvestments. companies$2.8millionofpromissory assigningtotheaffiliated the dividendby declaredadividendof$2.8millionon subsequently August 27, 2013andpaid ofcomprehensiveincome. statements of financialassetsintheconsolidated BPI million wasrecognizedandisincludedinthefairvaluegainondisposal cost. saleinvestmentsat for asavailable and wereaccountedfor A gainof$2.7 investments consistofpreferredsharescompaniesundercommoncontrol companiesof$2.8million. notesfromaffiliated promissory Thelong-term $2.8 millionthroughaseriesoftransactionswhichresultedinthereceipt During the Year, proceeds of BPI disposed of long-term investments for Disposal ofLong-termInvestments Entitlements. 86,336 Additional the Entitlements at in2013.Adjustment Date Followingtheaudit, BPIreceived taxrate. average and theeffective 80%ofthe BPIreceivedonly Additional onthefullnumberof to reconciledistributionspayable Additional Entitlements 2013 was24.4%. As aresult, toBPI thePartnershipmadeanominalpayment the Fund for paid by tax rate 2013 average was 25.0% and the actual effective greater. for theFundexpectedtopay taxrate average effective The original theFundreceivedwas$0.1million million andtheactualRoyaltyrevenuethat occurredin2012was$0.3 revenue fromthetwopermanentclosuresthat Fund expectedtoreceivefromthesesevennewrestaurantslesstheRoyalty 2013. for theFundexpected to pay tax rate Royaltyrevenuethe The original average effective 2013tothe estimated theFund for paidby tax rate average 2013andtocomparetheactualeffective the Fundexpectedtoreceivefor amountofRoyaltyrevenue from thesesevennewrestaurantstotheestimated determined. The purpose of this was to compare the actual Royalty revenue 2013was theFundfor paidby taxrate average and theactualeffective 1, were added totheRoyalty Pool on January that 2013 was performed 2014,In January an audit of the Royalty revenues of the seven new restaurants Audit ofBostonPizzaRestaurants 1,Added toRoyaltyPoolonJanuary 2013 closed. permanently have in theRoyaltyPool. 1, SinceJanuary 2014, tworestaurantsintheRoyaltyPool theFundin2014.paid by 1,As ofJanuary 2014, therewere358restaurants taxrate average theFundin2014andactualeffective revenue receivedby of Additional Entitlementswillbeadjustedin2015toreflecttheactualRoyalty 2014areknown, theFundfor paidby taxrate average effective thenumber 2014andtheactual ofthesenewrestaurantsfor the actualperformance 2014areknown. theFundfor paidby taxrate average effective Onceboth Units Outstanding The table below sets forth a summary of the outstanding Units. BPI owns 100% of the Class B Units, 100% of the Class C Units and 1% of the ordinary general partner units of the Partnership. The Class B Units are exchangeable for Units. References to “BPI Additional Entitlements” in the table below are the number of Units into which the Class B Units held by BPI are exchangeable. Issued & Outstanding Units, Issued & Additional Outstanding Entitlements, Units, & & Holdback of Additional Additional Entitlements Entitlements Issued and Outstanding Units as of December 31, 2013 15,029,544 15,029,544 (1) BPI Additional Entitlements – Outstanding as of December 31, 2013 2,203,845 2,203,845 BPI Additional Entitlements – Holdback as of December 31, 2013 N/A 38,890 (2) Number of Fully Diluted Units as of December 31, 2013 17,233,389 17,272,279 BPI Percentage Ownership as of December 31, 2013 12.8% 13.0% Issued and Outstanding Units as of February 6, 2014 15,029,544 15,029,544(1) BPI Additional Entitlements – Outstanding as of December 31, 2013 2,203,845 2,203,845 BPI Additional Entitlements – Issued in respect of 2013 after the audit 86,336 86,336(3) BPI Additional Entitlements – Issued as of January 1, 2014 (10 net new Restaurants added to Royalty Pool) 355,750 355,750 BPI Additional Entitlements – Holdback as of January 1, 2014 (10 net new Restaurants added to Royalty Pool) N/A 88,938 (4)
Number of Fully Diluted Units as of February 6, 2014 17,675,475 17,764,413 2013 ANNUAL REPORT BPI Percentage Ownership as of February 6, 2014 15.0 % 15.4% (1) Issued and outstanding Units is after the repurchase and cancellation of 541,100 Units under the 2012 NCIB. 51 (2) Additional Entitlements from the five net new restaurants added to Royalty Pool on January 1, 2013 prior to the audit of the five net new restaurants and actual effective average tax rate. (3) Additional Entitlements from the five net new restaurants added to Royalty Pool onJanuary 1, 2013 determined in 2014, once audited results of the five net new restaurants and actual effective average tax rate paid by the Fund are known. (4) Holdback of Additional Entitlements from 10 net new restaurants added to Royalty Pool on January 1, 2014. Actual number of Additional Entitlements will be determined in early 2015, effective January 1, 2014, once audited results of the 10 net new restaurants and actual effective average tax rate paid by the Fund are known.
BPI also holds 100% of the special voting units (the “Special Voting Units”) of Cash Flow from Financing Activities the Fund which entitle BPI to one vote for each Unit that BPI would be entitled to During the Period, financing activities used $2.4 million of cash compared receive if it exchanged all of its Class B Units for Units. As of February 6, 2014, to $1.3 million of cash used for the same period in 2012. During the Year, BPI was entitled to 2,645,931 votes, representing 15.0% of the aggregate financing activities used $5.9 million of cash compared to $5.5 million BOSTON PIZZA INTERNATIONAL INC. BOSTON PIZZA INTERNATIONAL votes held by holders of Units and Special Voting Units (collectively, “Voting of cash used for 2012. The increase in net cash used for the Period and Unitholders”). The number of Units that BPI is entitled to receive upon the Year compared to the same periods in 2012 were mainly due to increased exchange of its Class B Units and the number of votes that BPI is entitled to in promissory note payments, partially offset by proceeds received from long- respect of its Special Voting Units is adjusted annually to reflect any additional term debt for renovations at BPI’s corporately owned restaurants in 2013. Boston Pizza Restaurants that were added to the Royalty Pool. Cash Flow from Investing Activities LIQUIDITY & CAPITAL RESOURCES During the Period, investing activities generated $0.7 million of cash compared BPI is an entirely franchised business except for three corporate restaurants. to $1.0 million of cash used during the same period in 2012. During the Year, For 2014, BPI has forecasted capital requirements of approximately $2.9 investing activities generated $3.0 million of cash compared to $1.8 million million, which consist mainly of the development of software applications, of cash generated during 2012. Cash generated from investing activities computer equipment and a corporate restaurant renovation. BPI believes represents distributions received by BPI on the Class B Units and Class C it has sufficient cash and capital resources to cover expenditures, capital Units partially offset by capital and intangible asset purchases. The increase requirements, commitments and repayments for 2014. in cash generated during the Period and Year is due to decreased purchases of property, plant and equipment, partially offset by decreased distributions Cash Flows received on Class B Units as a result of the exchange of Class B Units for Cash Flow from Operating Activities 1,000,000 Units on November 23, 2012. During the Period, operating activities generated $1.0 million of cash, compared to $2.8 million of cash generated during the same period in 2012. During the Year, operating activities generated $2.7 million of cash compared to $3.4 million during 2012. The principal reasons for the decrease in cash generated during the Period and Year are mainly due to the timing of cash receipts from accounts receivable and cash payments for accounts payable. 52 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 2018 andthereafter 2017 2016 2015 2014 (in thousandsofdollars) Long-Term LeaseObligations: DebtandCapital follows: the nextfiveyearsandthereafterendingDecember31areas onBPI’sPrincipal repayments for leaseobligations long-termdebtandcapital received proceedsof$0.5million. Centre Inc. receivedproceedsof$0.4millionand Winston ChurchillPizzaLtd. among the subsidiaries. December 31,As at 2013, Corporate Laval Training due in2020, restaurantequipmentandcrossguarantees andaresecuredby a Banker’sloans bear interest at plus 4.55% per annum,Acceptance Rate are GE CanadaEquipmentFinancingG.P. toborrowatotalof$0.9million. The Centre Inc., and Winston ChurchillPizzaLtd. with enteredintoloanagreements During the Year, BPI’s subsidiaries, wholly-owned Corporate Laval Training companies. related assignment ofbookdebtsandcertainguaranteesfromBPI, shareholdersand specificassetsofBPI.secured by by ageneral Thesetermloansaresecured BPI’s is also include equipment financing that long-term debt obligations Other Long-Term Debt orfranchiseBostonPizzaRestaurantsinCanada. not operate pizza/pastarestaurantsintheUSAorMexicoanddo operate that affiliates BPI except: BPI;and (ii) equity and debtinvestments of BPI in (i) Units held by 2042. allpresentandafteracquiredpropertyof The BPLoanissecuredby 17, onJuly outstanding undertheBPLoanwillbecomedueandpayable month. The principalamount, togetherwithallaccruedandunpaidinterest, ofeach BPItotheFundonfirstday inarrearsby and interestispayable of7.5%perannum therate all amountsoutstandingundertheBPLoanat 17, occurredonJuly Units that 2002(the “BP Loan”). Interestaccrueson withtheFundaspartofFund’sestablished of initialpublicoffering was that BPI owestheFund$24.0millionpursuanttoacreditagreement BP Loan Long-Term DebtObligations end ofthePeriod. covenants and financial condition testsgoverning the line ofcreditas ofthe (December 31, 2012–nil). BPIwasincompliancewithallofthefinancial upon demand. December 31,As at 2013, the line of credit was not drawn needed. thebank’sThe lineofcreditbearsinterestat andisdue primerate inthebusinessif requirementsthroughnormalseasonalvariations operating termtocoverBPI’samount of$7.5millionwitha180day day-to-day lineofcreditwithaCanadiancharteredbankinthe BPI hasanavailable Operating CreditFacility MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAINTERNATIONAL INC. (CONTINUED) $ 1,015 $ 182 126 131 217
359 the circumstances. under arebelievedtobereasonable with variousotherassumptionsthat knowledge ofeconomics, along marketfactorsandtherestaurant industry disclosures.related arebasedonhistoricalexperienceand These estimates reported amountsofassetsandliabilities, earningsand expenses, and the affect andjudgmentstobemadethat with IFRSrequiresestimates ofBPI’sThe preparation inaccordance financialstatements consolidated CRITICAL ACCOUNTINGESTIMATES to BPI’s result. may internalcontrolsoverfinancialreportingthat significantchanges assessing theimpactofthistransitionandwillreportany the2013framework.considered supersededby iscurrently Management extends toDecember15, 2014, afterwhichthe1992frameworkwillbe frameworkduringthetransitionperiodwhich and willtransitiontotheupdated Framework: 2013. framework, uses the COSO 1992 original BPI currently InternalControl–Integrated Commission (COSO)releasedanupdated 2013,in May ofthe theCommitteeofSponsoringOrganizations Treadway affect,materially BPI’s internalcontrolsoverfinancialreporting. However, affected, materially over financialreporting that to likely orisreasonably During thePeriodand Year, therewasnochangeinBPI’s internalcontrol CHANGES ININTERNALCONTROLOVERFINANCIALREPORTING note(December31,promissory 2012–$5.5million). theendofPeriod,As at $0.9millionundera BPIoweditsparentcompany companiesof$0.9million(December31,associated 2012–$1.5million). $0.3 million). theendofPeriod,As at from BPIhadaccountsreceivable companiesof$0.3million(December31, duetoassociated payable 2012– rendered. services parent for theendofPeriod,As at BPIhad accounts the million) and$1.7millionfor Year (2012–$1.3million)paidtoBPI’s thePeriodis$0.7million(Q42012–$0.4 feesfor included inmanagement Year (2012–$1.9million)tocompaniesundercommoncontrol. Additionally the thePeriod(Q42012–$0.4million)and$1.5millionfor of $0.1millionfor $3.2 million). fees expensecostsaremanagement Includedincompensation the thePeriod(Q42012–$0.8million)and$2.9millionfor for Year (2012– undercommoncontrolof$0.7million BPI earnedrevenuesfromacompany the million) and$1.8millionfor Year (2012–$1.8million). thePeriod(Q42012–$0.5 to theFundof$0.5milliononBPLoanfor the million) and $0.3 million for Year (2012 – $0.3 million). BPI paid interest thePeriodwas$0.1million(Q42012– for in respectoftheseservices theseservices.expenses incurredinperforming The totalamountpaidtoBPI the Partnership, certainout-of-pocket BPIisentitledtobereimbursedfor the Partnership. UnderthetermsofPartnership governing Agreement BPIasageneralpartnerof by areperformed services of theadministrative onbehalfoftheFund. services provide certainadministrative Inturn, certain Partnership. the Partnership,The Fund has engaged its administrator, to generalpartnerofthe officers anddirectorsinBPIthemanaging virtueofcommon partyofBPIby The Fundisconsideredtobearelated Related Party Transactions BPI believes that the following selected accounting policies are critical to ADOPTION OF NEW ACCOUNTING POLICIES understanding the estimates, assumptions and uncertainties that affect the Prior to January 1, 2013 the International Accounting Standards Board (“IASB”) amounts reported and disclosed in BPI’s consolidated financial statements issued a number of new standards in addition to amendments to existing and related notes: standards. In accordance with IFRS, a list of the standards and amendments required and adopted by BPI on January 1, 2013 is provided below. Deferred Income Tax Expense The determination of deferred income taxes requires the use of judgment and IFRS 10, Consolidated Financial Statements estimates in determining the timing when taxable temporary differences will This standard requires an entity to consolidate an investee when it has reverse and the appropriate tax rates to be applied. If certain judgments or power over the investee, is exposed, or has rights, to variable returns from estimates prove to be inaccurate, or if certain tax rates or laws change, BPI’s its involvement with the investee and has the ability to affect those returns results of operations and financial position could be materially impacted in the through its power over the investee. BPI has reviewed the impact of these deferred income taxes line items. new standards and determined that IFRS 10 did not result in a change in the consolidation status of any of the subsidiaries or investees. The annual Investment in the Partnership consolidated financial statements continues to include the accounts of BPI, The investment in the Partnership is principally comprised of the Class B Units and its wholly-owned subsidiaries Lansdowne Holdings Ltd., Winston Churchill and Class C Units. The value of additional Boston Pizza Restaurants rolled into Pizza Ltd., and Laval Corporate Training Centre Inc. the Royalty Pool is also recognized within BPI’s investment in the Partnership through the entitlement of additional Class B Units. The value of the additional IFRS 12, Disclosure of Interests in Other Entities Class B Units entitled as a result of adding new Boston Pizza Restaurants to This standard establishes disclosure requirements for interests in other entities, the Royalty Pool is determined on a formula basis that is designed to estimate such as subsidiaries, joint arrangements, associates, and unconsolidated the present value of the cash flows due to the Fund as a result of the new structured entities. The standard carries forward existing disclosures and also
Boston Pizza Restaurants being added to the Royalty Pool. As such, the introduces significant additional disclosure that address the nature of, and 2013 ANNUAL REPORT calculation is dependent on a number of variables including the estimated risks associated with, an entity’s interest in other entities. BPI has reviewed long-term sales of the new Boston Pizza Restaurants and a discount rate. The the impact of this new standard and has provided additional disclosures as 53 value of the additional Class B Units entitled as a result of adding new Boston required on interests in other entities noted in the annual consolidated financial Pizza Restaurants to the Royalty Pool could differ from actual results and may statements. impact the investment in the Partnership and deferred gains line items. IFRS 13, Fair Value Measurement Class B Units Fair Value Adjustment This standard sets out a single IFRS framework for fair value measurement BPI has elected under IFRS to measure the Class B Units as a financial asset at and establishes disclosure requirements for fair value measurements. The fair value through profit and loss. The fair value of the Class B Units asset for new standard clarifies the information required to help users of the financial BPI mirrors the fair value of the Class B Units liability recorded by the Fund for statements assess both of the following: for assets and liabilities that are any particular period. The Class B Units are exchangeable into Units, and thus, measured at fair value on a recurring and non-recurring basis in the statement it is estimated that their fair values approximate each other. BPI estimates of financial position after initial recognition, the valuation techniques and the fair value of the Class B Units using the Fund’s market capitalization at inputs used to develop these measurements, and for recurring fair value INC. BOSTON PIZZA INTERNATIONAL the end of the applicable period and allocates BPI’s entitlement based upon measurements using significant unobservable inputs (Level 3), the effect of its percentage ownership of the Fund on a fully-diluted basis. This valuation the measurements on profit or loss or other comprehensive income for the technique may not represent the actual value of the financial asset should period. BPI has reviewed the impact of this new standard and has provided such Class B Units be exchanged and may impact the investment in the additional disclosures as required on fair value measurements noted in the Partnership and the fair value gain, gain on disposal, and provision for financial annual consolidated financial statements. assets line items. IFRS 7, Financial Instruments: Disclosures Consolidation This standard sets out the objective to enhance disclosures about offsetting Applying the criteria outlined in IFRS 10, judgment is required in determining of financial assets and financial liabilities. BPI has reviewed the impact of this whether BPI controls the Partnership. Making this judgment involves taking new standard and determined that it did not have an impact on the annual into consideration the concepts of power over the Partnership, exposure and consolidated financial statements. rights to variable returns, and the ability to use power to direct the relevant IAS 1, Presentation of Financial Statements activities of the Partnership so as to generate economic returns. Using these This standard was amended to change the disclosure of items presented criteria, management has determined that BPI does not ultimately control in other comprehensive income (“OCI”), including a requirement to present the Partnership. separately the items of OCI that may be classified to profit or loss in the future from those that would never be reclassified to profit or loss. This amendment is effective for years beginning on or after July 1, 2012. BPI has reviewed the impact of this new standard and determined that it did not have an impact on the annual consolidated financial statements. 54 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 the type, number, of competing restaurants. and location In addition, factors trends, changesindemographic by isalsoaffected industry traffic patterns, and beimpaired. theRoyaltyorinterestonBPLoanmay to pay The restaurant ofBPI theamountofRoyaltyreducedandability affected; adversely competeinthecasualdiningsector,successfully be FranchiseSalesmay owned restaurants. to IfBPIandtheBostonPizzafranchiseesare unable chains, andregional Competitors includenational aswell asindependently competitivewithrespecttoprice,intensely service, quality. andfood location generally,restaurant industry andinparticularthecasual diningsector, is thecasualdiningsectorofrestaurantindustry. affect may that The thePartnershipfromBPIisdependentonvariousfactors Royalty receivedby receivedfromBPIontheBPLoan.interest payments The amountofthe dependentupontheRoyaltyand oftheFundisdirectly The performance anditsCompetitiveNature The RestaurantIndustry Risks RelatedtotheCasualDiningRestaurantIndustry RISKS &UNCERTAINTIES across thecountry. pursuingfurtherrestaurantdevelopmentopportunities brand inCanadaby Pizza willcontinuetostrengthenitspositionasthenumberonecasualdining in2014.are underconstructiontodate BPI’s Boston believethat management 12 new Boston Pizza Restaurants opened in 2013 and the additional two that the futureexpansionasevidencedby Boston Pizzaremainswellpositionedfor there-opening. incremental salesincreaseintheyearfollowing two and to experience three an weeks to complete close the for renovation sevenyears. every undergo acompletestorerenovation Restaurantstypically addition, BPI’s eachBostonPizzaRestaurant requiresthat franchiseagreement andannualmenure-pricing. innovation ofculinary through acombination In promotions. chequelevelsareexpectedtobeachieved Increasedaverage andlocalstore the previousyearalongwitharevisedcalendarofnational a larger marketing budget versus proposition to our guests and leveraging partsofeachlocation,bar andtake-out/delivery acompellingvalue offering attracting awidevarietyofguestsintotherestaurant,traffic include sports guestcheque.and changesinaverage BPI’s todrivehigherguest strategies SSSGarechangesincustomertraffic affect The twoprincipalfactorsthat across Canada. achieving positive SSSG and continuing to open new Boston Pizza Restaurants strengthen its position as the number one casual dining brand in Canada by andshouldcontinueto futuregrowth Boston Pizzaiswellpositionedfor information. with forward-looking Uncertainties” adiscussionoftherisksanduncertaintiesinconnection for Please see “Note RegardingForward-LookingInformation” and “Risks & containedin The information “Outlook” information. isforward-looking OUTLOOK MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAINTERNATIONAL INC. (CONTINUED) Boston Pizza Restaurants that have closed. have Boston PizzaRestaurantsthat sufficient newBostonPizzaRestaurants toreplacetheFranchiseSalesof to open BPI will be able closeand there is no assurance that Restaurants may of thoseBostonPizzaRestaurants. Eachyear, anumberofBostonPizza areincludedintheRoyaltyPoolandFranchiseSales Restaurants that upon theFranchiseSales, whichisdependentonthenumber ofBostonPizza BPIisdependent tothePartnershipby The amountoftheRoyaltypayable The ClosureofBostonPizzaRestaurantsMay the Affect Amount oftheRoyalty oftheBostonPizzaRestaurantscoulddecline. and resultsofoperations do not,they suffer, of BPI may and reputation the image revenue and gross andotherrestaurantpersonnel. nothireandtrainqualifiedmanagers may If restaurants in a manner consistent with BPI’s standards and requirements, or control. Consequently, operate notsuccessfully BostonPizzafranchiseesmay BPI’s number of factors beyond any be diminished by may franchised operations BPI providestrainingandsupporttoBostonPizzafranchisees, butthequalityof manner consistentwithBPI’s standards. a Boston Pizza Restaurantin their franchise areas in a develop or operate toopenaBostonPizzaRestaurantorsuccessfully resources necessary oraccesstofinancial allthebusinessabilities nothave franchisees may and otherfactors, thecontrolofBPI. someofwhicharebeyond BostonPizza financing; construction;securingsuitable supervising Restaurants; adequately newBostonPizza tostaff andotheremployeesnecessary of management availability, newlocations; lease orpurchasetermsfor trainingandretention of factors, including: of acceptable sites; negotiations of suitable availability opening and success of aBoston Pizza Restaurant is dependent on a number itsbusinessdevelopment. affect qualified franchiseescouldadversely The from franchisorsofotherbusinesses. BPI’s obtain tosuccessfully inability andfranchiseesfromitscompetitors restaurantlocations competition for to become Boston(iii) Pizzaobtain franchisees.qualified operators BPI faces franchised restaurants, newrestaurantsitesinprimelocations, (ii)locate and 17,July its of BPIto(i)maintain and grow 2002)is dependent upon the ability 99years, thelicensetouseBPRightsinCanadafor (for commencingon under theLicenseandRoyalty betweenthePartnershipandBPI Agreement BPItothePartnership by oftheRoyaltyandotheramountspayable The growth Growth oftheRoyalty theRoyaltytoPartnershiporinterestonBPLoanFund. to pay FranchiseSales, affect which couldadversely ofBPI theRoyaltyandability limits onpricing, income, eitherofwhichcouldreducerevenueandoperating Adverse changesinthesefactorscouldreduceguesttrafficorimposepractical economic conditions, consumerincomeandconfidence. disposable consumerspending, discretionary on numerousfactorsaffecting including FranchiseSales. affect potentially and therefore BPI’s successalsodepends ingeneral therestaurantindustry affect adversely employeesmay and hourly of experienced management suppliers and the availability of key operations borneillnesses,food increasedfood, andbenefitscosts, labour continuing such asgovernmentregulations, smokingbylaws, inflation, publicityfromany Revenue from Franchisees The failure of BPI or a Boston Pizza franchisee to retain a license to serve The ability of BPI to pay the Royalty is dependent, in part, on Boston Pizza liquor for a Boston Pizza Restaurant would adversely affect that restaurant’s franchisees’ ability to generate revenue and to pay royalties to BPI. Failure operations. BPI or a Boston Pizza franchisee may be subject to legislation in of BPI to achieve adequate levels of collection from Boston Pizza franchisees certain provinces, which may provide a person injured by an intoxicated person could have a serious effect on the ability of BPI to pay the Royalty or interest the right to recover damages from an establishment that wrongfully served on the BP Loan. alcoholic beverages to the intoxicated person. BPI carries host liquor liability coverage as part of its existing comprehensive general liability insurance. Intellectual Property There is no assurance that such insurance coverage will be adequate. The ability of BPI to maintain or increase its Franchise Sales will depend on its ability to maintain “brand equity” through the use of the BP Rights Laws Concerning Employees licensed from the Partnership. If the Partnership fails to enforce or maintain The operations of Boston Pizza Restaurants are also subject to minimum any of its intellectual property rights, BPI may be unable to capitalize on its wage laws governing such matters as working conditions, overtime and tip efforts to establish brand equity. All registered trademarks in Canada can be credits. Significant numbers of Boston Pizza Restaurants’ food service and challenged pursuant to provisions of the Trade-marks Act (Canada) and if any preparation personnel are paid at rates related to the minimum wage and, BP Rights are ever successfully challenged, this may have an adverse impact accordingly, further increases in the minimum wage could increase Boston on Franchise Sales and therefore on the Royalty. The Partnership owns the Pizza Restaurants’ labour costs. BP Rights in Canada. However it does not own identical or similar trademarks Potential Litigation and Other Complaints owned by parties not related to BPI or the Partnership in other jurisdictions. BPI and Boston Pizza franchisees may be the subject of complaints or litigation Third parties may use such trademarks in jurisdictions other than Canada in a from guests alleging food related illness, injuries suffered on the premises manner that diminishes the value of such trademarks. If this occurs, the value or other food quality, health or operational concerns. Adverse publicity of the BP Rights may suffer and gross revenue by Boston Pizza Restaurants
resulting from such allegations may materially affect the sales by Boston Pizza 2013 ANNUAL REPORT could decline. Similarly, negative publicity or events associated with such Restaurants, regardless of whether such allegations are true or whether BPI or trademarks in jurisdictions outside of Canada may negatively affect the image a Boston Pizza franchisee is ultimately held liable. 55 and reputation of Boston Pizza Restaurants in Canada, resulting in a decline in gross revenue by Boston Pizza Restaurants. ADDITIONAL INFORMATION Additional Information relating to BPI, the Partnership and the Fund, including Government Regulation the annual information form of the Fund, is available on SEDAR at www.sedar. BPI is subject to various federal, provincial and local laws affecting its business. com or on the Fund’s website at www.bpincomefund.com. Each Boston Pizza Restaurant is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage NOTE REGARDING FORWARD-LOOKING INFORMATION control, smoking laws, health and safety and fire agencies. Difficulties in Certain information in this Management’s Discussion and Analysis constitutes obtaining or failures to obtain the required licenses or approvals could delay or “forward-looking information” that involves known and unknown risks, prevent the development of a new Boston Pizza Restaurant in a particular area uncertainties, future expectations and other factors which may cause the actual results, performance or achievements of BPI, the Fund, Boston Pizza Holdings
or limit the operations of an existing Boston Pizza Restaurant. INC. BOSTON PIZZA INTERNATIONAL Trust, the Partnership, Boston Pizza Holdings Limited Partnership, Boston Regulations Governing Alcoholic Beverages Pizza Holdings GP Inc., Boston Pizza GP Inc., Boston Pizza Restaurants, or The ability of Boston Pizza Restaurants to serve alcoholic beverages is industry results, to be materially different from any future results, performance an important factor in attracting customers. Alcoholic beverage control or achievements expressed or implied by such forward-looking information. regulations require each Boston Pizza Restaurant to apply to provincial or When used in this Management’s Discussion and Analysis, forward-looking municipal authorities for a license or permit to sell alcoholic beverages on the information may include words such as “anticipate”, “estimate”, “may”, premises and, in certain locations, to provide service for extended hours and “will”, “should”, “expect”, “believe”, “plan” and other similar terminology. on Sundays. This information reflects current expectations regarding future events and Typically, licenses must be renewed annually and may be revoked or operating performance and speaks only as of the date of this Management’s suspended for cause at any time. Alcoholic beverage control regulations relate Discussion and Analysis. to numerous aspects of daily operations of Boston Pizza Restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control, and handling, storage and dispensing of alcoholic beverages. 56 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 assumptions including, amongotherthings: disclosedhereinisbasedonanumberof information The forward-looking includes, butisnotlimitedto, suchthingsas: inthisManagement’sForward-looking information Discussionand Analysis information. occurinthefutureareforward-looking willormay anticipates ofBPIexpectsor management addresseventsordevelopmentsthat that All statements, ofhistoricalfacts, otherthanstatements includedherein MANAGEMENT’S DISCUSSION&ANALYSIS BOSTON PIZZAINTERNATIONAL INC. • • • • • • • • • • • • expectations related tofuturegeneraleconomicconditions. related expectations future resultsbeingsimilartohistoricalresults;and speed ofpermitting; BPItothePartnership; theamountofRoyaltypaidby affect materially there willbenoclosuresofBostonPizzaRestaurantsthat franchisefeesandotheramounts; paying franchisees duly franchisees’ accesstofinancing; development; pace ofcommercialrealestate protection ofBPRights; ofchangesinlaw; absence new BostonPizzaRestaurantsacrossCanada. achieving annual positive SSSG and continuing Canada by to open to strengthenits position as the numberonecasual dining brand in andshouldcontinue futuregrowth Boston Pizzaiswellpositionedfor guestchequelevels;and expected increasesinaverage the futureexpansionofBostonPizzaRestaurants; (CONTINUED) events orcircumstances. toreflectnew information orreviseforward-looking toupdate no obligation hereofand,is providedasofthedate law, exceptasrequiredby weassume information. suchforward-looking or underlying Forward-lookinginformation fromthoseexpressedin materially couldcauseactualresultstodiffer that This Management’s Discussionand discussessomeofthefactors Analysis and Analysis. Discussion conjunction with the risks and uncertainties set out inthis Management’s listoffactorsisnotexhaustiveandshouldbeconsideredin The foregoing including, butnotlimitedto: contained herein looking information the forward expressed or implied by results, fromany different to bematerially orachievements performance causeactualresults, may other factorsthat orachievements performance involvesanumberofrisks, information This forward-looking uncertaintiesand • • • • • patterns; • • • competition; the results of operations andfinancialconditionsofBPItheFund. the resultsofoperations accounting policiesandpractices; cash distributionsarenotguaranteed; andgovernmentregulation; legislation andlocalbusinesseconomicconditions; changes innational spendingchanges inconsumerpreferencesanddiscretionary trends; changes indemographic INDEPENDENT AUDITORS’ REPORT BOSTON PIZZA INTERNATIONAL INC.
To the Shareholders of Boston Pizza International Inc.
We have audited the accompanying consolidated financial statements of Boston Pizza International Inc. (“the Entity”) which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012, the consolidated statements of comprehensive income, changes in shareholder’s deficiency and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates 2013 ANNUAL REPORT made by management, as well as evaluating the overall presentation of the consolidated financial statements. 57 We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2013 and December 31, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Accountants
February 6, 2014 BOSTON PIZZA INTERNATIONAL INC. BOSTON PIZZA INTERNATIONAL Vancouver, Canada 58 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 Deferred gain Other long-termliabilities Total liabilitiesandshareholders’deficiency Investment inBostonPizzaRoyaltiesLimitedPartnership Loan fromBostonPizzaRoyaltiesIncomeFund Deferred revenue Intangible assets Intangible Property, plant&equipment Long-term investments Long-term receivables Deferred incometaxes
George Melville, Director Approved onbehalfoftheBoard: financialstatements. partoftheseconsolidated notesareanintegral The accompanying Current assets ASSETS (in thousandsofCanadiandollars) BOSTON PIZZAINTERNATIONAL INC. CONSOLIDATED STATEMENTS OF Long-term debt Subsequent events
Current liabilities LIABILITIES ANDSHAREHOLDERS’DEFICIENCY Total assets Organization and nature of operations ofoperations andnature Organization Shareholders’ deficiency Advertising fundrestrictedassets Prepaid expensesandothercurrentassets Advertising fundrestrictedliabilities notepayable Promissory Interest receivable fromBostonPizzaRoyaltiesLimitedPartnership Interest receivable Accounts receivable Accounts receivable Cash andcashequivalents Current portionoflong-termdebt Deferred revenue Income taxpayable andaccruedliabilities Accounts payable Accumulated deficit Accumulated (note 12) (note10) (note 8) (note21)
(note 4) (note 13) (note 5)
(note 4)
(note7)
(note 11)
(note 1) (note10)
(note 3(m)) (note3(m))
(note11)
(note 6) James Treliving, Director
FINANCIAL POSITION 31, December 2013 2012
$ 155,360 $ 827 $ 8,578 $ 155,360 10,318 24,000
28,353
15,073 26,226
781 36,911 202,356
(101,891 ) 70,447 10,516 15,073 1,603 2,838 3,010 6,123 998 833 945 182 532 667 — eebr 31, December
14,210 24,000
1,226 118 62,667 32,382 3,281 15,769 1,041
$ 152,600 $ $ 11,813 $ 152,600 (113,353 200,308 10,023 15,769 37,191 38,294 3,110 5,520 5,878 1,082 2,733 839 315 482 75 ) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME BOSTON PIZZA INTERNATIONAL INC. FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands of Canadian dollars) 2013 2012
Revenue Franchise, restaurant and other $ 77,920 $ 74,576
Royalty expense 30,217 29,258 Restaurant operating costs 7,342 7,340 Compensation expense (note 17) 19,731 20,040 Other expenses (note 15) 11,610 13,931 68,900 70,569
Earnings before depreciation, amortization, management fee, interest, fair value gain, gain on disposal, and provision for financial assets 9,020 4,007
Depreciation and amortization 2,613 2,594 Management fee (note 17) 1,676 1,276 Amortization of deferred gain (note 12) (2,308 ) (2,262 ) 1,981 1,608
Earnings before interest and fair value gain on disposal and provision for financial assets 7,039 2,399
Interest income from Boston Pizza Royalties Limited Partnership (5,525 ) (6,295 ) 2013 ANNUAL REPORT Interest on loan from Boston Pizza Royalties Income Fund (note 17) 1,800 1,800 59 Interest on long-term debt 33 40 Net interest income (3,692 ) (4,455 )
Fair value gain, gain on disposal, and provision for financial assets(note 4, 5 and 6) (6,137 ) (4,608 )
Earnings before income taxes 16,868 11,462
Current income tax expense (note 13) 1,235 3,323 Deferred income tax expense (recovery) (note 13) 1,383 (2,514 ) 2,618 809
Net income and comprehensive income for the period $ 14,250 $ 10,653
Basic and diluted earnings per share $ 0.14 $ 0.10 INC. BOSTON PIZZA INTERNATIONAL
The accompanying notes are an integral part of these consolidated financial statements. 60 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 The accompanying notes are an integral part of these consolidated financialstatements. partoftheseconsolidated notesareanintegral The accompanying Dividends declared theperiod Net incomeandcomprehensivefor Balance –December31, 2012 (in thousandsofCanadiandollars) BOSTON PIZZAINTERNATIONAL INC. CHANGES INSHAREHOLDERS’DEFICIENCIES CONSOLIDATED STATEMENTS OF Balance –December31, 2012 Dividends declared theperiod Net incomeandcomprehensivefor Balance –December31, 2011 Balance –December31, 2013 (note6and11) (note5) Share capital
$ $ $ $
(22,770 — — (2,788 — — — — — —
Accumulated $ $ (113,353 $ $ (101,891 (113,353 ) (101,236 ) 14,250 10,653 deficit (22,770 ) ) (2,788 ) ) ) ) $ $ (113,353) $ $ (101,891 deficiency (113,353 ) (101,236 ) 14,250 10,653 Total ) CONSOLIDATED STATEMENTS OF CASH FLOWS BOSTON PIZZA INTERNATIONAL INC. FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(in thousands of Canadian dollars) 2013 2012
Cash flows provided by (used in)
Operating activities Net income $ 14,250 $ 10,653 Adjustments for: Depreciation and amortization 2,613 2,594 Current income tax expense 1,235 3,323 Deferred income tax expense (recovery) 1,383 (2,514 ) Amortization of deferred gain (2,308 ) (2,262 ) Fair value gain, gain on disposal, and provision for financial assets (6,137 ) (4,608 ) Impairment of intangible asset — 785 Interest income from Boston Pizza Royalties Limited Partnership (5,525 ) (6,295 ) Interest on loan from Boston Pizza Royalties Income Fund 1,800 1,800 Interest on long-term debt 33 40 Change in non-cash operating items (note 18(a)) (1,474 ) 1,324 Income tax paid (3,203 ) (2,153 ) Income tax received 16 730 ANNUAL REPORT 2013 ANNUAL REPORT Net cash generated from operating activities 2,683 3,417
Financing activities 61 Repayment of long-term debt (359 ) (464 ) Proceeds of long-term debt 850 — Payment of promissory note (4,575 ) (3,200 ) Interest paid (1,833 ) (1,840 ) Net cash used in financing activities (5,917 ) (5,504 )
Investing activities Interest received from Investment in Boston Pizza Royalties Limited Partnership 5,475 6,378 Return of capital from Investment in Boston Pizza Royalties Limited Partnership — 82 Purchase of property, plant and equipment, net (1,492 ) (3,085 ) Purchase of intangible assets, net (1,004 ) (1,571 ) INC. BOSTON PIZZA INTERNATIONAL Net cash generated from investing activities 2,979 1,804
Decrease in cash and cash equivalents (255 ) (283 )
Cash and cash equivalents – beginning of period 1,082 1,365
Cash and cash equivalents – end of period $ 827 $ 1,082
Supplemental cash flow information (note 18)
The accompanying notes are an integral part of these consolidated financial statements. 62 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 (c) (b) (a) 2. Way, Richmond, BC. in Canada. at 10760Shellbridge The principalbusinessofficeislocated andfranchisingofBostonPizzaRestaurantsbusiness activityistheoperation the CanadaBusinessCorporations Act on August 26, 2002. Itsprincipal 26,on May ofBritishColumbiaandcontinuedunder 1982underthelaws Inc.Boston PizzaInternational (the or “BPI”)wasincorporated” “Company 1. FOR THE YEARS ENDEDDECEMBER31, 2013 AND 2012 BOSTON PIZZAINTERNATIONAL INC. NOTES
• • areasfollows: estimates areas requiringtheuseofmanagement arerevisedandinfutureperiodsaffected.the estimates Significant are recognized in Revisions the period to in accounting which estimates assumptions are reviewedonanongoingbasis. andunderlying Estimates fromtheseestimates. differ results may reported amountsofassets, liabilities, incomeandexpenses. Actual ofaccountingpoliciesandthe theapplication affect assumptions that tomakejudgments,with IFRSrequiresmanagement and estimates inconformity financialstatements oftheconsolidated The preparation andjudgments: Use ofestimates nearest thousand. presentedinCanadiandollarshasbeenroundedtothe information dollars, whichistheCompany’s functionalcurrency. All financial arepresentedinCanadian financialstatements These consolidated currency: Functional andpresentation 6, issueonFebruary Directors for 2014. by theapproved were financial statements These consolidated the International as issued by Accounting Standards Board (“IASB”). FinancialReportingStandards(“IFRS”) accordance withInternational been prepared in have financial statements These consolidated ofcompliance: Statement Basis ofpreparation: Organization andnatureofoperations: Royalty Pool. As such, isdependentonanumber thecalculation a resultofthenew BostonPizzaRestaurantsbeingadded tothe thepresentvalueofcash flowsduetotheFundas estimate isdesignedto basisthat Royalty Poolisdeterminedonaformula entitled asaresultofaddingnewBoston PizzaRestaurantstothe additional ClassBUnits. The valueoftheadditionalClassBUnits Company’s investmentinthePartnershipthroughentitlement of Restaurants rolledintotheRoyaltyPoolisalsorecognizedwithin Class BUnitsandCUnits. The value ofadditionalBostonPizza comprisedofthe The investmentinthePartnershipisprincipally (“the Partnership”) Investment inBostonPizzaRoyalties LimitedPartnership impacted. financial positioncouldbematerially change, or laws or if certain tax rates BPI’s and results of operations be applied. provetobeinaccurate, Ifcertainjudgmentsorestimates to taxrates willreverseandtheappropriate differences temporary in determining the timing judgment when and taxable estimates ofdeferredincometaxesrequirestheuse The determination Deferred IncomeTax Expense TO THE CONSOLIDATED FINANCIALSTATEMENTS (b) Consolidation: (a) aredescribedbelow. financialstatements consolidated The ofsignificant these accounting policies used in the preparation 3.
Inc.Boston PizzaInternational andsubsidiaries: entities: operating following include the accounts of the financial statements These consolidated • • or loss. fairvalue: itemsmeasuredat hasthefollowing The Company at fairvaluethroughprofit financial instrumentswhicharemeasured financialinstrumentsand derivative historical costbasisexceptfor been prepared on the have financial statements The consolidated Basis ofmeasurement: Significant accountingpolicies: • Consolidation •
The parent company ofBPI is The parentcompany Ltd. Services T&M Management Lansdowne HoldingsLtd. totheClassCUnits(note6) Limited Partnershiprelating oftheInvestmentinBostonPizzaRoyaltiesEmbedded derivative the ClassBUnits(note6) toInvestment inBostonPizzaRoyaltiesLimitedPartnershiprelating the Partnership. control BPIdoesnotultimately hasdeterminedthat management economic returns.Partnership so as to generate Using these criteria, tousepowerdirecttherelevantactivities of the and theability over thePartnership, returns, exposureandrightstovariable theconceptsofpower judgment involvestakingintoconsideration determining whetherBPIcontrolsthePartnership. Makingthis the criteria outlined in IFRS 10,Applying judgment is required in the financialassetshouldsuchClassBUnitsbeexchanged. basis. not represent the actual value technique of may This valuation ownershipoftheFundonafully-diluted based uponitspercentage BPI’s periodandallocates theendofapplicable at entitlement fair value of the Class B Units using the Fund’s market capitalization each other.their fair values approximate the estimates The Company into Fund Units,Units are exchangeable andthus, that it is estimated particularperiod. any Income Fund(“the”)for The ClassB BostonPizzaRoyalties recordedby value oftheClassBUnitsliability mirrorsthefair theCompany value oftheClassBUnitsassetfor at fairvaluethroughprofitandloss.as afinancialasset Thefair haselected under IFRS to measurethe Class BUnits The Company Class BUnitsFair Value Adjustment Pizza from Restaurants actual to results. the Royalty Pool could differ additional ClassBUnitsentitledasaresultofaddingnewBoston Boston PizzaRestaurantsandadiscountrate. The valueofthe long-termsalesofthenew including the estimated of variables Winston ChurchillPizzaLtd. Laval Corporate Corporate Laval Training CentreInc.
100% 100% 100% All intercompany transactions, balances and unrealized gains and losses Gains and losses on disposals of property, plant and equipment are from intercompany transactions are eliminated on consolidation. determined by comparing the proceeds with the carrying amount of the asset and are included as other expense in the statement of Subsidiaries are those entities (including special purpose entities) which comprehensive income. the Company controls by having the power to govern the financial and operating policies of such entities so as to obtain economic benefits from (f) Depreciation and amortization: their activities. The existence and effect of potential voting rights that Depreciation is calculated over the depreciable amount, which is the cost are currently exercisable or convertible are considered when assessing of an asset, or other amount substituted for cost, less its residual value. whether the Company controls another entity. The Company provides for depreciation of property, plant and equipment (c) Investment in Boston Pizza Royalties Limited Partnership: over their estimated useful lives as follows: The investment in the Partnership is principally comprised of Class Assets Basis Rate B Units and Class C Units. The Class B Units are accounted for as a Office furniture and equipment Declining balance 10 – 50% financial asset which is measured each reporting date at fair value. The Class C Units are accounted for as a financial asset at amortized Office furniture and equipment Straight-line at up to 5 years cost with its embedded derivative being measured at a fair value of nil. under capital lease various rates The statement of comprehensive income includes interest revenue as Leasehold improvements Straight-line shorter of term of earned, and the impact of the fair value adjustments on the Class B the lease or useful life Units. The fair value of the Class B Units is determined by calculating the (g) Intangible assets: Company’s share (Additional Entitlements including holdback) of Boston 2013 ANNUAL REPORT Intangible assets include computer software costs which are amortized Pizza Royalties Income Fund as determined by the Fund’s closing market on a declining balance basis at a rate of 30% per year. Amortization price on the reporting date. 63 of intangible assets is charged to depreciation and amortization on the The Partnership was established to hold the trademarks and trade names statement of comprehensive income. used in connection with the operation of Boston Pizza Restaurants in (h) Revenue recognition and deferred revenue: Canada (collectively, the “BP Rights”). The Partnership and the (i) Franchise revenues: Company also entered into a license and royalty agreement to allow the Company the use of the BP Rights for a term of 99 years, for which Monthly franchise fee: the Company pays the Partnership 4% of the Franchise Revenues (as Monthly franchise fees are recorded as they are earned. defined) of certain restaurants located in Canada (the “Royalty Pool”). Franchise fee deposits: (d) Cash and cash equivalents: Franchise fee deposits are deferred and recorded net of expenses
Cash and cash equivalents, consists of cash on hand, balances with incurred relating to the sale of the franchise. When the franchise INC. BOSTON PIZZA INTERNATIONAL banks, and short-term investments with a term of three months or less. commences operations, the franchise deposits are recorded as franchise revenue and the related costs are included as an expense. (e) Property, plant and equipment: Property, plant and equipment are measured at cost less accumulated (ii) Supplier contributions: depreciation and accumulated impairment losses. The Company receives supplier contributions from franchisee suppliers to be used for various franchise activities. Supplier Cost includes expenditures that are directly attributable to the acquisition contributions are recorded as they are earned. of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is (i) Earnings per share: probable that future economic benefits associated with the item will flow The Company presents basic and diluted earnings per share (EPS) data to the Company and the costs can be measured reliably. The carrying for its common shares. Basic EPS is calculated by dividing the profit or amount of a replaced asset is derecognized when replaced. Repairs loss attributable to common shareholders of the Company by the weighted and maintenance costs are charged to the statement of comprehensive average number of common shares outstanding during the period. income during the period in which they are incurred. Diluted EPS is determined by adjusting the profit or loss attributable to The Company allocates the amount initially recognized in respect of common shareholders and the weighted average number of common property, plant and equipment to its significant parts and depreciates shares outstanding for the effects of all dilutive potential common shares. each such part. Residual values, methods of depreciation and useful There are no dilutive factors effecting EPS for the Company. lives of the assets are reviewed annually and adjusted if appropriate. 64 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 BOSTON PIZZAINTERNATIONAL INC. NOTES (l) (k) (j) the revenuefrom saleoftheproduct. BostonPizzaRestaurant,owned andoperated recognizes theCompany acorporately cardtopurchaseproduct at When acustomer uses agift offinancialposition. statement ontheconsolidated assets andliabilities cardsarerecorded as thesegift for obligations Advertising Fundrestricted customers. These cashbalancesaswellthe outstandingcustomer restricted assetsrepresentstheprepaid amountsnotyetredeemedby cardsrecordedin tothegift restricted cashrelated Advertising Fund through increasedexposure, aswelltoincrease FranchiseSales. The is The to purpose of expand the the Gift Boston Card Pizza brand Program cash orcreditcard, whenandasneeded. cardthrough loadingadollarvalueontotheirgift Pizza Restaurantsby Boston participating futurepurchasesat for allows customerstoprepay (the hasaGiftCardprogram The Company “Gift Cardprogram ”) which Gift cards: ofcomprehensiveincome. of thedeferredgainonstatement (note 12). ofthegainonBPRightsischargedtoamortization Amortization amortized overthe99yeartermoflicenseandroyaltyagreement The gainrealizedonthesaleofBPRightsisbeingdeferredand Deferred gain: ismade. suchadetermination in theperiodthat wouldimpacttaxexpenses suchchangestotaxliabilities tax liabilities; tochangeitsjudgmentregardingtheadequacyofexisting the Company futureevents.about causes that becomeavailable may Newinformation involve a series of and judgments assumptions and may on estimates andpriorexperience. oftaxlaw interpretations This assessmentrelies factors, basedonmany areadequate taxliabilities accruals for including bedue.additional taxesandinterestmay its believesthat The Company takes into account the impact of uncertain tax positions and whether In determiningtheamountofcurrentanddeferredtaxCompany non-current. arenettedandpresentedas Deferred incometaxassetsandliabilities subsequent additionalentitlementsandunitsales. arising ontheinvestmentinPartnership, thedeferredgain, differences provided on temporary Deferred income tax is primarily theassetscanberecovered. that probable is settled. itis Deferredtaxassetsarerecognizedtotheextentthat whenthedeferredtaxassetorliability andareexpectedtoapply date the balance sheet enacted at been enacted or substantively have that andlaws tax isdeterminedonanon-discountedbasisusingrates financialstatements.amounts intheconsolidated Deferredincome andtheircarrying arising betweenthetaxbasesofassetsandliabilities In general, differences deferredtaxisrecognizedinrespectoftemporary reporting period, adjustmentsinrespectofpreviousperiods. andany enacted,using taxrates enacted, orsubstantively theendof at theperiod, incomefor ontaxable Current taxistheexpectedpayable ofcomprehensiveincome.recognized inthestatement Income taxcomprisesofcurrentanddeferredtax. Incometaxis Income taxes: TO THE CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED) (n) (m) • instruments wereacquired: whichthe depending onthepurposesfor categories in thefollowing At initial recognition, classifies its financial instruments the Company on anetbasis, simultaneously. orrealizetheassetandsettleliability therecognizedamountsandthereisanintentiontosettle right tooffset enforceable offinancialpositionwhen thereisalegally on thestatement andthenetamountisreported areoffset Financial assetsandliabilities allrisksandrewardsofownership. has transferredsubstantially beentransferredandtheCompany expiredorhave from theassetshave Financial assetsarederecognizedwhentherightstoreceivecashflows becomes apartytothecontractualprovisionsofinstrument. arerecognizedwhentheCompany Financial assetsandliabilities Financial instruments: Fund restrictedassets. December31,million at 2012), whichwasincludedin Advertising December31,Advertising Fundasat 2013was$5.5million($3.6 cardprogram.and toadministerthegift The deficitbalanceofthe advertising,and national promotionalprograms, brandprotection the Advertising Fund. local,These contributions are used for regional contributionto restaurantsfor franchisees andCompany-operated financial position. collects3%ofFranchiseSalesfrom TheCompany restricted andarerecordedassuchontheCompany’s of statement the heldby The assetsandliabilities Advertising Fundareconsidered with regardtothesecontributions. specific purposes, acts, andtheCompany insubstance,agent asan contributions tothe Advertising Fundaresegregated, for designated of comprehensive income and cash flowsstatement because the cash flowsofthe AdvertisingFundarenotincludedintheCompany’s In accordancewithIAS18–Revenue, therevenue, expensesand anditsfranchiseowners. oftheCompany and enhancethereputation designedtoincreasesalesin advertisingandpromotionalprograms use tocollectandadministerfundscontributedfor Fund”) established inan participates The Company Advertising Fund(the “Advertising Advertising fund: time,that the incomeisrecognizedby breakage Advertising Fund. cardisissued.unredeemed canbedetermined24monthsafterthegift At Based onhistoricalinformation, cardremaining thelikelihoodofagift basedonhistoricalredemptionpatterns.determines GiftCardBreakage cardvaluetorelevantjurisdictions.the unredeemedgift The Company toremit thereisnolegalobligation being redeemedisremoteandthat certificate thelikelihoodofgift Breakage”) whenitcandeterminethat cards(“GiftCard recognizesincomeonunredeemedgift The Company sale oftheproduct. recognizesrevenues,Company ofroyalties, intheform arisingfromthe afranchisedrestaurant, cardat When acustomerusesgift the are designated ashedges. are designated short-term. unless they arealsoincluded inthiscategory Derivatives the purposes ofsellingorrepurchasingin the for acquired principally if category classified in this is generally A financial asset or liability fair valuethroughprofitorloss: at Financial assetsandliabilities Financial instruments in this category are recognized initially and Measurement Categories subsequently at fair value. Transaction costs are expensed in the The following table shows the carrying values of assets and liabilities statement of comprehensive income. Gains and losses arising for each of these categories at December 31, 2013 and 2012. Unless from changes in fair value are presented in the statement of otherwise noted, the fair values on the instruments approximate their comprehensive income within other gains and losses in the period carrying amount. in which they arise. December 31, December 31, (in thousands) 2013 2012 Financial assets and liabilities at fair value through profit or loss are Financial assets classified as current except for the portion expected to be realized or paid beyond twelve months of the balance sheet date, which are Loans and receivables: classified as non-current. Cash and cash equivalents $ 827 $ 1,082 Accounts receivable 10,318 14,210 • Loans and receivables: Loans and receivables are non-derivative Interest receivable from financial assets with fixed or determinable payments that are not Boston Pizza Royalties quoted in the active market. Limited Partnership 532 482 Long-term receivables 10,516 10,023 Loans and receivables are initially recognized at the amount expected Class C Units Investment to be received less, when material, a discount to reduce the loans in Boston Pizza Royalties and receivables to fair value. Subsequently, loans and receivables Limited Partnership 24,000 24,000 are measured at amortized cost using the effective interest method Fair value through profit and loss: less a provision for impairment. Class B Units Investment in Boston Pizza Royalties • Financial liabilities at amortized cost: Financial liabilities at amortized 2013 ANNUAL REPORT Limited Partnership 46,447 38,667 cost are initially recognized at the amount required to be paid less, $ 92,640 $ 88,464 when material, a discount to reduce the payables to fair value or 65 transaction costs incurred. Subsequently, these items are measured Financial Liabilities at amortized cost using the effective interest rate method. Amortized cost: Financial liabilities are classified as current liabilities if payment is Accounts payable due within twelve months. Otherwise, they are presented as non- and accrued liabilities $ 8,578 $ 11,813 current liabilities. Promissory note payable 945 5,520 Long-term debt 1,015 433 • Derivative financial instruments: The right to transfer Class C general Loan from Boston Pizza Royalties partner units in consideration of its note payable to the Fund is Income Fund 24,000 24,000 classified as a derivative instrument. The Company has reviewed the Other long-term liabilities 2,838 3,110 net impact of this potential exchange requirement on its cash flows $ 37,376 $ 44,876 INC. BOSTON PIZZA INTERNATIONAL and has determined its fair value to be nil. The Class C Units investment and loan approximate fair value due to the requirement of the Fund to settle the loan in exchange for the Class C Units investment.
The fair values of the financial instruments carried at fair value have been measured by one of the following valuation methods:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
• Inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).
• Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs) (Level 3).
The fair value of the Class B Units has been measured using Level 2 valuation methods. The methods and assumptions used in estimating the financial asset are described in note 2(c) and note 6. 66 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 BOSTON PIZZAINTERNATIONAL INC. (o) NOTES (q) (p) • recognizesanimpairmentloss,Company asfollows: afinancialassetisimpaired.evidence that Ifsuchevidenceexists, the At eachreportingdate, assesseswhetherthereisobjective theCompany Impairment offinancialassets: • to cover its currently known shortandlongtermcashobligations. to coveritscurrently itscurrentsourcesofliquidityaresufficient believesthat The Company will bemet. currentandfutureobligations and cashflowsto ensure that financial obligations. monitorsitsoperations constantly TheCompany Liquidity riskresultsfromtheCompany’s to meetits potentialliability Liquidity risk additionalinterestexpense. negligible would resultin rate 1%increaseinthevariable every impact for debt. rate has $0.9million(2012–$0.1million)infloating Theannual risk.minimize the overall financial interest rate currently The Company to ontheseobligations riskmanagement interestrate does notperform totheFund,interest-bearing notepayable the Company andtherefore withfixedinterestrates, hasobligations Company for example the riskresultsfromtheCompany’sInterest rate long-termdebt. The risk Interest rate totheCompany’s relate credit riskasthey identifiedfinancialinstruments. risk, has exposure to interest rate primarily The Company liquidity risk and Financial riskmanagement: reversals wheneventsorcircumstanceswarrantsuchconsideration. amount. potential impairment losses for evaluates The Company whichtheasset’sthe amountby amountexceedsitsrecoverable carrying cash flowsoftherelevantasset).for Animpairmentlossisrecognized to sellandvalueinuse(beingthepresentofexpectedfuture amountisthehigherofanasset’sThe recoverable fairvaluelesscosts unitsor cashflows(cash-generating identifiable separately “CGU’s”). amounts, whichthereare thelowestlevelsfor at assetsaregrouped an annualimpairmenttest. Forthepurposeofmeasuringrecoverable recoverable. arenotamortizedsubjectto Long-livedassetsthat not be amount may the carrying that in circumstances indicate impairmentwheneventsorchanges restricted assetsaretestedfor Property, plantandequipment, assetsandadvertisingfund intangible Impairment ofnon-financialassets: ofimpairment. beenintheabsence have theamortizedcostwould morethanwhat theassetat does notstate impairment wasrecognized. The reversalislimitedtoanamountthat toaneventoccurringafterthe objectively the decreasecanberelated reversed insubsequentperiodsiftheamountoflossdecreasesand at amortizedcostare Impairment lossesonfinancialassetscarried Financial assets carried at amortizedcost:Financial assetscarriedat thelossisdifference Financial assets carried at fairvaluethroughprofitandloss:Financial assetscarriedat these the instrument’s interestrate. effective original futurecashflows,present valueoftheestimated discountedusing andthe between theamortizedcostsofloanorreceivable comprehensive income. of withchangesinfairvaluerecordedonthestatement date at eachreportingat fairvalue financial assetsaremeasured TO THE CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED) (r) • • objectives • • The Company’s are: itsliquidityandcapital objectivesinmanaging disclosures: Capital million (2012–$9.1million). fromcompaniesundercommoncontrolof$9.1 long-term receivables $1.4million(2012–$0.9million)aswellthevalueof receivables of$10.3million(2012–$14.2million),receivable long-termtrade Company’s maximumexposuretocreditriskisthevalueofitsaccounts creditevaluations. processandpassmandatory thorough interview The competency of theCompany. Eachpotential franchisee must complete a control. monitoring and controlling of credit risk is a core The effective fromcompaniesundercommon andlong-termreceivables receivable obligations, fromtheCompany’s andarisesprincipally accounts a counterpartytofinancialinstrumentfailsmeetitscontractual if Credit riskisdefinedastheoffinanciallosstoCompany Credit risk Other long-termliabilities Loan fromBostonPizza Long-term debt notepayable Promissory Current portionof Income taxpayable and Accounts payable (in thousands) oftheCompany’sThe maturities follows: areas financialliabilities Capitalization: Liquidity: (in thousands)
Shareholder’s deficiency Deferred gain Royalties IncomeFund 24,000 long-term debt accrued liabilities Return excesscashthroughdividends the levelofrisk To with return to shareholders commensurate providean adequate andflexibilitytomeetitsstrategic Provide financialcapacity To safeguardtheCompany’s tocontinueasagoingconcern ability RoyaltiesIncomeFund Loan fromBostonPizza note Promissory Total liquidity creditfacilities Undrawn Cash andcashequivalents Long-term debt Total debt December 31, $ 8,578 2,838 2013 781 833 945 182
December 31, $ 827 $ 100,465
25,960 $ December 31, (113,353 ) (101,891 )
202,356 24,000 8,327 1,015 7,500 24,000 11,813 2013 3,110 5,520 2,733 945 2012 118 315 5,520 7,500 8,582 24,000 433 200,308 29,953
Less than1year Less than1year Less than1year Less than1year 2014 –2023 2015 –2020 $ 1,082 $ 86,955 December 31, Maturity 2042 2012 The Company manages its capital mainly through the periodic sales of (v) IAS 1, Presentation of Financial Statements, was amended to change Boston Pizza Royalties Limited Partnership units, accumulated deficit, as well the disclosure of items presented in Other comprehensive income as through the use of short-term financing. The Company maintains formal (“OCI”), including a requirement to present separately the items of policies to manage capital. Liquidity and capital structure are managed by OCI that may be classified to profit or loss in the future from those adjusting for changes to economic conditions, understanding the underlying that would never be reclassified to profit or loss. This amendment is risks inherent in its operations and managing the capital requirements to effective for years beginning on or after July 1, 2012. The Company maintain and grow its operations. has reviewed the impact of this new standard and determined that it does not have an impact on the consolidated financial statements. The Company is not subject to any statutory capital requirements and has no commitments to sell or otherwise issue common shares. (t) Accounting standards and amendments issued but not yet adopted:
The Company’s credit facility includes a $7.5 million unsecured line of credit IFRS 9, Financial Instruments, was issued in November 2009 and which is subject to certain financial covenants (note 9). the IASB published amendments to the standard in October 2010. IFRS 9 replaces the guidance in IAS 39, Financial Instruments – (s) Accounting standards adopted as of January 1, 2013: Recognition and Measurement, on the classification and measurement (i) IFRS 10, Consolidated Financial Statements, requires an entity to of financial assets and financial liabilities. The standard eliminates consolidate an investee when it has power over the investee, is the existing IAS 39 categories of held to maturity, available for sale, exposed, or has rights, to variable returns from its involvement with the and loans and receivables. Financial assets will be classified into one investee and has the ability to affect those returns through its power of two categories on initial recognition: financial assets measured at over the investee. The Company has reviewed the impact of these new amortized cost, or financial assets measured at fair value. Gains and standards and determined that IFRS 10 does not result in a change losses on re-measurement of financial assets measured at fair value in the consolidation status of any of the subsidiaries or investees. The
will be recognized in profit or loss. The IASB has deferred the mandatory 2013 ANNUAL REPORT consolidated financial statements will continue to include the accounts effective date and early adoption of the standard is permitted. The of the Company and its wholly-owned subsidiaries. Company has not yet assessed the impact of the standard or determined 67 whether it will be adopted early. (ii) IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities, such as subsidiaries, 4. Accounts and other receivables: joint arrangements, associates, and unconsolidated structured December 31, December 31, (in thousands) 2012 entities. The standard carries forward existing disclosures and also 2013 Trade receivables due from related parties $ 888 $ 1,454 introduces significant additional disclosure that address the nature Other trade receivables 9,430 12,756 of, and risks associated with, an entity’s interest in other entities. $ 10,318 $ 14,210 The Company has reviewed the impact of this new standard and has provided additional disclosures as required on interests in other Long-term receivables: entities noted in the consolidated financial statements. Advances to affiliated companies,
non-interest bearing, unsecured INC. BOSTON PIZZA INTERNATIONAL (iii) IFRS 13, Fair Value Measurement, sets out a single IFRS framework with no specified terms for fair value measurement and establishes disclosure requirements of repayment $ 614 $ 614 for fair value measurements. The new standard clarifies the Long-term trade receivables information required to help users of the financial statements assess (net of allowance) 1,380 887 both of the following: for assets and liabilities that are measured at Promissory note due from fair value on a recurring and non-recurring basis in the statement of affiliated company 8,522 8,522 financial position after initial recognition, the valuation techniques $ 10,516 $ 10,023 and inputs used to develop these measurements, and for recurring The promissory note is comprised of notes receivable from a company related fair value measurements using significant unobservable inputs through common control. Although the promissory note has no specific terms (Level 3), the effect of the measurements on profit or loss or other of repayment, the Company has classified it as a long-term receivable as comprehensive income for the period. The Company has reviewed repayment is expected over a period longer than 12 months. No interest the impact of this new standard and has provided additional income was recorded in the current or prior year on the note as interest was disclosures as required on fair value measurements noted in the waived. The Company tests this receivable for impairment at every reporting consolidated financial statements. date under IFRS.
(iv) IFRS 7, Financial Instruments: Disclosures, sets out the objective to At December 31, 2012, management concluded that based on its assessment enhance disclosures about offsetting of financial assets and financial of the discounted value of expected future cash flows, the note from one of liabilities. The Company has reviewed the impact of this new standard the affiliated companies was impaired. The Company recorded a provision and determined that it does not have an impact on the consolidated for the full $9.3 million face value of the note. This provision is included in financial statements. the fair value gain, gain on disposal, and provision for financial assets in the consolidated statements of comprehensive income in the comparative period. 68 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 BOSTON PIZZAINTERNATIONAL INC. is nominal, all of the cash flows fromas thesubstantially Partnership are general Partnershipunit. The valueoftheequityinvestment inthePartnership thesharesofBostonPizzaGPInc.the Partnershipisrepresentedby andthe Inc., andonegeneralPartnershipUnit. The Company’s equityinvestmentin amortizedcost,measured at aswelltwentysharesofBostonPizzaGP fair value through profitClass andB loss,Units measured at Class C Units The Company’s totalinvestmentinthePartnershipiscomprisedof 6. notesreceivedfromthedisposaloflong-terminvestments.promissory companies$2.8millionof assigningtotheaffiliated and paidthedividendby the currentyear. declaredadividendof$2.8million subsequently The Company for ofcomprehensiveincome financialassetsinthestatements and provisionfor million was recognized and is included in the fair value gain, gain on disposal, cost. saleinvestmentsat for asavailable and wereaccountedfor A gainof$2.7 investments consistedofpreferredsharescompaniesundercommoncontrol companiesof$2.8million. notesfromaffiliated of promissory Thelong-term of $2.8million, throughaseriesoftransactionswhichresultedinthereceipt During theyear, proceeds disposedoflong-terminvestmentsfor theCompany 5. outstanding invoices. Company’sagainst theoldest cashreceipts apply collectionspolicyistofirst (December 31, long-term trade receivables against 2012 – $0.7 million). The 2013 (December31, entirely 2012–$0.8million)andhadbeenapplied December31, doubtful accounts was $1.3million as at The allowancefor Past dueover91days Past due61-90days Past due31-60days Past due1-30days Current (in thousands) areasfollows: thereportingdates at oftradereceivables The aging planswithexistingfranchisees. payment balances, tocollectalllong-termreceivable effort every includingestablishing expected totakelongerthantwelvemonths. continuestomake The Company is fromfranchiseesareclassifiedaslong-termwhenpayment The receivables NOTES
Investment inBostonPizzaRoyalties LimitedPartnership: Long-term investments: TO THE CONSOLIDATED FINANCIALSTATEMENTS 31, December $ 11,698 $ 7,392
1,399 1,533 2013 381 993
1,028 1,403 722
$ 15,097 $ December 31, 10,833 1,111 2012 (CONTINUED) (in thousands) $46.4 million. tobe basis)wascalculated 13.0% ownershipoftheFund(onafully-diluted of $357.7million(December31, 2012–$339.2million). The Company’s (December 31, 2012–$19.30perUnit)resultinginamarketcapitalization December31,As at 2013, theFund Units closingpricewas$20.71perUnit price oftheFund. fairvalueusingtheclosingunit ownership oftheClassBunitsmeasuredat totheCompany’s asitrelates of theinvestmenthasexposuretovariability Royalties LimitedPartnershipthroughacontractualarrangement. The value a structured entity. The Fund controls the relevant activities of Boston Pizza interestin The investmentinthePartnershipisconsideredanunconsolidated December31,amortized costwas$24millionasat 2013and2012. the InvestmentinBostonPizzaRoyaltiesLimitedPartnershipmeasuredat are notentitledtodistributions. The valueoftheClassCUnitsincludedin while thesharesofBostonPizzaGPInc. andthegeneralPartnershipunit toPartnershipunitssuchastheClassBandCUnits,attributable notes receivedfromthesaleof1,000,000Units. assigning to the parent companies of BPI the by $17.8 million of promissory declared $22.8millionofdividendsandpaid$17.8those period.comprehensive incomeinthecomparative InDecember2012, BPI gain, gainondisposal, of financialassetsinthestatements andprovisionfor notereceived is includedin the fairvalue sold and the valueofpromissory million. valueoftheasset betweenthecarrying The $0.9milliondifference person,control andarelated notestotaling$17.8 promissory inexchangefor companies sold through the common 1,000,000 Units to the related Company 1,000,000FundUnits.million for FollowingthecompletionofExchange, In 2012, valueof$18.7 BPIexchanged3,479,575ClassBUnitswithacarrying Ending Balance Change infairvalueoftheClassBunits Exchange andsaleofUnits Return ofcapital Additional Entitlements 1,Balance –January 2013 (note 12)
$ 62,667 $ 70,447
4,356 3,424 2013 — —
14,866
$ $ 62,801 (18,700 ) 62,667 3,782 2012 (82 )
7. Property, plant and equipment: Office furniture Office and equipment furniture and under capital Leasehold Cost (in thousands) equipment lease improvements Auto Total
Opening – January 1, 2012 $ 7,712 $ 2,575 $ 6,419 $ 24 $ 16,730 Net additions 1,122 72 1,970 — 3,164
Ending – December 31, 2012 $ 8,834 $ 2,647 $ 8,389 $ 24 $ 19,894
Net additions 742 91 835 — 1,668 Disposals (1,160 ) — — — (1,160 )
Ending – December 31, 2013 $ 8,416 $ 2,738 $ 9,224 $ 24 $ 20,402
Office furniture Office and equipment Accumulated furniture and under capital Leasehold Depreciation (in thousands) equipment lease improvements Auto Total
Opening – January 1, 2012 $ 5,989 $ 2,244 $ 4,180 $ 24 $ 12,437 Depreciation for the year 515 228 836 — 1,579
Ending – December 31, 2012 $ 6,504 $ 2,472 $ 5,016 $ 24 $ 14,016
Depreciation for the year 667 133 538 — 1,338 2013 ANNUAL REPORT Disposals (1,075 ) — — — (1,075 ) 69 Ending – December 31, 2013 $ 6,096 $ 2,605 $ 5,554 $ 24 $ 14,279
Net book value
At December 31, 2012 $ 2,330 $ 175 $ 3,373 $ — $ 5,878 At December 31, 2013 2,320 133 3,670 — 6,123
The disposal of office furniture and equipment relates to the sale of office furniture to a related party for $0.1 million.
8. Intangible assets: Computer Cost (in thousands) Other software Total
Opening – January 1, 2012 $ 1,107 $ 6,453 $ 7,560 INC. BOSTON PIZZA INTERNATIONAL Net additions — 1,571 1,571 Impairment (1,050 ) — (1,050 )
Ending – December 31, 2012 $ 57 $ 8,024 $ 8,081
Net additions — 1,004 1,004
Ending – December 31, 2013 $ 57 $ 9,028 $ 9,085
Computer Amortization (in thousands) Other software Total
Opening – January 1, 2012 $ 318 $ 3,785 $ 4,103 Amortization for the year 53 1,015 1,068
Impairment (371 ) – (371 )
Ending – December 31, 2012 $ – $ 4,800 $ 4,800
Amortization for the year – 1,275 1,275
Ending – December 31, 2013 $ – $ 6,075 $ 6,075
Net book value
At December 31, 2012 $ 57 $ 3,224 $ 3,281 At December 31, 2013 57 2,953 3,010 70 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 BOSTON PIZZAINTERNATIONAL INC. Current portion leases Other includingcapital GE CanadaEquipmentFinancingG.P. GE CanadaEquipmentFinancingG.P. GE CanadaEquipmentFinancingG.P. Term Loans: (in thousands) Long-term debtconsistsof: 10. the lineofcredit. On December 31, 2013 and 2012, there were no amounts outstanding under least125%oftheamountoutstandingonLineCredit. time equaltoat which are convertible into units value,of the Fund which would have any at theCompany a minimumnumberofClassBgeneralpartnerunitsheldby has,The Company totheBank, aspartofthesecuritygranted topledge agreed afirstchargeovertheseassets.Fund anditssubsidiarieswillcontinuetohave thePartnership on thoseClassCgeneralpartnership units.distribution by The andthemonthly theCompany the Class C generalpartnership units held by assets: fromitsfranchisees, theCompany receivedby theroyaltypayments afirstchargeovertheCompany’ssecured by following assetsotherthanthe primeandisdueupondemand.bears interestat The lineofcreditfacilityis inthebusinessifneeded.through normalseasonalvariations The lineofcredit termtocovertheCompany’sa 364day requirements operating day-to-day lineofcreditintheamount$7.5millionwith hasanavailable The Company 9. December31,at 2012. assettonilandisincludedinotherrevenuesas million reducestheintangible asset nolongeryieldedfutureeconomicbenefits. Thewrite-downof$0.8 an11.5%discountrate. at calculations thisintangible Itwasdeterminedthat usingpresentvalueinuse anareadevelopmentagreement for forecasted In June2012, refinedprojectedstoreandsalesestimates management NOTES
by restaurantequipment by and duein2014–2015secured primeplus2.75%perannum at interest term loansbearingvariable restaurant equipment annum andduein2013securedby 5.75%–6.95%per interest at of term loansbearingfixedrates subsidiaries and crossguaranteesby restaurantequipment secured by per annumandduein2020 bankers’acceptanceplus4.55% at interest term loansbearingvariable Long-term debt: Line ofcredit: TO THE CONSOLIDATED FINANCIALSTATEMENTS eebr 31, December $ 829 $ 833
1,015 2013 182 125 — 61
$ 433 151 $ December 31, 2012 118 315 202 (CONTINUED) — 80 Pizza Holdings Limited Partnership in consideration for theassumption for Pizza HoldingsLimited Partnershipinconsideration has therighttotransfer suchclassCgeneralpartnership unitstotheBoston The Company, as the holder of 2,400,000 class C general partnership units, of theCompany. security agreement. not be assigned without the prior consent The loan may ageneral 2002andissecuredby inJuly trade namesfromtheCompany thetimeofsaletrademarks and The loanfromtheFundaroseat Currentportion totheparent notepayable Promissory Loan fromBostonPizzaRoyaltiesIncome (in thousands) 11. 2016 2015 2014 leaseobligations: Capital 2018 andthereafter 2017 2016 2015 2014 Long-term debt: (in thousands) follows: areas leaseobligations onlong-termdebtandcapital Principal repayments ofcomprehensiveincome. value andthestatement wouldresultina minimal impactonthefairmarket rate increase inthevariable oflong-termdebtusingcurrentlendingrates.calculation The impactofa1% completinganetpresentvalue 2012 –$0.4million)whichwasdeterminedby The fair valueoftheCompany’s long-term debtis$1.0million(December31, Winston ChurchillPizzaLtd. receivedproceedsof$0.5million. Corporate Laval Training CentreInc. receivedproceedsof$0.4millionand and crossguaranteesamongthesubsidiaries. December31,As at 2013, 4.55% per annum, are due in 2020, restaurant equipment and are secured by total of$0.9million. Bankers’ The loansbearinterestat plus Acceptance Rate withGECanadaEquipmentFinancingG.P.agreements (“GE”)toborrowa Training CentreInc. and Winston ChurchillPizzaLtd. enteredintoloan During theyear, theCompany’s subsidiaries, wholly-owned Corporate Laval
and dueondemand company, non-interestbearing 17,July 2042 7.5%perannum,at due monthly Fund withinterestpayable
Notes payable:
eebr 31, December
$ 24,000 $ 24,000 24,945
2013 945 945
5,520 5,520
December 31, $ 24,000 $ 24,000 $ 1,015 December 31, 29,520 2012 2013 890 126 116 177 112 125 359 40 70 15 of the Boston Pizza Holdings Limited Partnership of, and the concurrent In early 2013, adjustments to royalty payments and Additional Entitlements release of the Company of its obligations with respect to, an amount of the were made based on the actual performance of three net new restaurants indebtedness under the BP loan equal to $10.00 for each Class C general added to the Royalty Pool on January 1, 2012. Based on these adjustments, partnership unit transferred. the Company received its pro rata portion of the remaining Additional Entitlements, 88,411 Fund units. During the year, the Company made payments of $4.6 million (2012 – $3.2 million) against the non-interest bearing, due upon demand, promissory note 13. Income Taxes: payable to its parent company. In 2012, the Company settled $5.0 million of Income tax expense as reported differs from the amount that would be dividends through the issuance of additional promissory notes payable with computed by applying the combined Federal and Provincial statutory income the same terms, and also settled $0.5 million of the note through a reduction tax rates to earnings before income taxes. The reasons for the differences of note receivables with an affiliated company. are as follows: (in thousands) 2013 2012 12. Deferred gain: December 31, December 31, Earnings before income taxes $ 16,868 $ 11,462 (in thousands) 2013 2012 Combined Canadian federal Balance, beginning of year $ 200,308 $ 198,788 and provincial tax rates 26.1% 25.6% Additional Entitlements 4,356 3,782 Computed expected tax expense 4,403 2,934 Amortization of deferred gain (2,308 ) (2,262 ) Increased (reduced) by: Balance, end of year $ 202,356 $ 200,308 Permanent differences (468 ) 102 Difference from rates other Annually, on January 1, the number of Boston Pizza Restaurants in the Royalty than statutory rate (238 ) (1,454 ) Pool on which the Company pays a royalty to the Fund are adjusted to Change in statutory tax rates (1,079 ) (773 ) include the adjusted Franchise Sales from new Boston Pizza Restaurants Income tax expense $ 2,618 $ 809 2013 ANNUAL REPORT opened on or before December 31 of the prior year, less Franchise Sales from any Boston Pizza Restaurants that have permanently closed during The tax effects of temporary differences that give rise to significant portions of 71 the year. In return for adding this net Franchise Sales to the Royalty Pool, the deferred income tax assets and liabilities are: Boston Pizza receives the right to indirectly acquire additional Fund units December 31, December 31, (in thousands) 2013 2012 (the “Additional Entitlements”). Future income tax assets (liabilities): The Additional Entitlements are calculated as 92.5% of the Franchise Sales Investment in Boston Pizza added to the Royalty Pool, multiplied by one minus the effective average tax Royalties Limited Partnership $ (16,830 ) $ (14,783 ) rate estimated to be paid by the Fund, divided by the yield of the Fund, divided Deferred gain 53,063 51,300 by the weighted average Unit price. Promissory note to an affiliated company — 870 Other 678 907 The Company receives 80% of the Additional Entitlements initially with $ 36,911 $ 38,294 the balance received when the actual full year performance of the new BOSTON PIZZA INTERNATIONAL INC. BOSTON PIZZA INTERNATIONAL restaurants and the actual effective average tax rate is known with certainty. 14. Share capital: Monthly distributions from the Fund are based on full Additional Entitlements, The Company has an unlimited number of Class A Common Shares without and are subject to adjustment on January 1 of the next fiscal year when full par value authorized of which 104,600,000 are issued and outstanding. performance of the restaurants is known with certainty. 15. Other expenses: On January 1, 2013, seven new Boston Pizza Restaurants that opened during The following are the components of other expenses: the period from January 1, 2012 to December 31, 2012 were added to December 31, December 31, (in thousands) 2012 the Royalty Pool while two restaurants that closed during this period were 2013 removed. The Franchise Sales of these five net new restaurants have been Marketing and advertising $ 2,773 $ 4,043 estimated at $8.2 million. The total number of restaurants in the Royalty Pool Office, rent & utilities 2,407 2,562 has increased to 348. As a result of the contribution of the additional net sales Travel 2,633 2,516 to the Royalty Pool, and assuming 100% of the Additional Entitlement, the Other 3,797 4,810 Company’s Additional Entitlement is equivalent to 194,449 (2012 – 218,166) $ 11,610 $ 13,931 Fund units. The Company will also receive a proportionate increase in monthly distributions from the Partnership. Of the Additional Entitlement, 20% (2013 – 38,890 units; 2012 – 43,633 units), remain unissued and are not eligible for exchange into Fund units until January 1, 2014 (2012 units – January 1, 2013) based on the actual performance of the new stores. 72 BOSTON PIZZA INTERNATIONAL INC. ANNUAL REPORT 2013 BOSTON PIZZAINTERNATIONAL INC. Other long-termliabilities Other assets Long-term receivables Deferred revenue andaccruedliabilities Accounts payable Prepaid expensesandothercurrentassets Accounts receivable (in thousands) (a) 18. totheparentcompany. notepayable million) inapromissory December31,As at 2013, owes$0.9million(2012–$5.5 theCompany – $29.3million). (2012 –$1.8million)andincurredroyaltyexpensesof$30.2million totheFundof$1.8million paidinterestonanotepayable The Company companies.million) duefromassociated parent company. is$0.9million(2012–$1.5 Includedinaccountsreceivable is$0.3million(2012–million)duetothe Included inaccountspayable December 31, 2013(2012–$5.8million). theyearended was$5.9millionfor personnelcompensation management oftheCompany. directionandoperations oversees thestrategic Key teamthat personnelincludetheseniormanagement management Key Company’s rendered. services parentfor feesis$1.7million(2012–$1.3million)paidtothe included inmanagement (2012 –$1.9million)tocompaniesundercommoncontrol. Additionally feesof$1.5million expensecostsaremanagement Included incompensation undercommoncontrol.company earned revenues of $2.9 million The (2012 Company – $3.2 million) from a 17. 2019 andthereafter 2018 2017 2016 2015 2014 (in thousands) as follows: thenextfiveyearsendingDecember31are undertheseleasesfor payments restaurant space and advertising contracts. The minimum annual rental officespace, leasecontractsfor iscommittedunderoperating The Company 16. NOTES Commitments: Change in non-cash operating items: Change innon-cashoperating Supplemental cashflowinformation: transactions: Related partyandsubsidiary TO THE CONSOLIDATED FINANCIALSTATEMENTS
$ $
(764 (1,474 ) 3,682 (3,235 ) 3,892 2013 1,585 (272 ) 273 (493 ) (602 ) —
293 )
December 31, $ 1,324 $ (3,817 ) 5,019 1,163 1,212 1,448 1,966 2,057 2013 2012 (744 ) (CONTINUED) 52
(b) (a) 21. adoptedinthecurrentperiod. presentation statement tothefinancial beenreclassified toconform comprehensive income have of statements figuresintheconsolidated Certain ofthecomparative 20. fourth quarters. third quarterscomparedtothefirstand increase Franchise Sales in the second and and generally open their patios allowBostonPizzaRestaurantsto factors suchastourismandbetterweather inCanada. restaurantindustry which areinherentinthefullservice Seasonal inFranchiseSales,Boston PizzaRestaurantsexperienceseasonalfluctuations 19. from theexchangeofunitsthrough companies investments notefroman Receipt ofpromissory disposal oflong-terminvestments asproceedsfrom company affiliated Non-cash transactions: (in thousands) (b) Seasonality: affiliated companies affiliated with reduction ofnotereceivable through Settlement ofnotepayable Settlement ofdividendspayable arising Settlement ofnotesreceivable arising Issuance ofnotesreceivable Dividend paidthroughassignmentof notefroman Receipt ofpromissory Property, plant&equipmentacquired Additional Entitlements, 86,336 Fundunits. these adjustments, portion of BPI will the remaining receive its pro rata 1,restaurants added totheRoyaltyPoolonJanuary 2013. Basedon offivenet newadditional were madebased on theactualperformance 2014,In early and adjustments to royalty payments Additional Entitlements ofthenewstores. actual performance 1,until January 1, 2015(2013units–January 2014)basedonthe units), conversiontoFundunits for remainunissued andarenoteligible the Additional Entitlements, 20%(2014–88,938 units; 2013–38,890 distributionsfromthePartnership. increaseinmonthly proportionate Of to 444,688(2012–194,449)Fundunits. BPIwillalso receivea the Additional Entitlements, BPI’s Additional Entitlements are equivalent of theadditionalnetsalestoRoyaltyPool, andassuming 100%of the RoyaltyPoolwasincreasedto358. As aresultofthecontribution $19.8million. at been estimated The totalnumberofrestaurantsin removed. The FranchiseSalesofthese10netnewrestaurants has closedduring2013were to theRoyaltyPoolwhiletworestaurantsthat 1,the periodfromJanuary 2013toDecember 31, 2013wereadded 1,On January 2014, opened during 12 newBostonPizzaRestaurants that Subsequent events: Comparative figures: Supplementary information: Supplementary through issuanceofnotespayable issuance ofdividends from exchangeofunits notesfromaffiliated promissory from disposaloflong-term asproceeds company affiliated through leasetransactions
$ 1,100
93 — 2,788 1,688 — 2013 — —
17,770 — — — $ (17,770 ) 5,000 2012 (500 ) 72 BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA INTERNATIONAL INC.
UNITHOLDER INFORMATION SHAREHOLDER INFORMATION
BOSTON PIZZA ROYALTIES INCOME FUND TRUSTEES BOSTON PIZZA INTERNATIONAL INC. SENIOR EXECUTIVE TEAM
Left to right: W. Murray Sadler, John L. Cowperthwaite, William C. Brown Left to right: Wes Bews, George C. Melville, Jim Treliving, Mark Pacinda
CORPORATE OFFICE LEGAL COUNSEL CORPORATE OFFICE #100 – 10760 Shellbridge Way Borden Ladner Gervais LLP #100 – 10760 Shellbridge Way
ANNUAL REPORT 2013 ANNUAL REPORT Richmond, BC, V6X 3H1 Registered and Records Office Richmond, BC, V6X 3H1 #1200 – 200 Burrard Street INVESTOR RELATIONS EASTERN OFFICE 75 Vancouver, BC V7X 1T2 #100 – 10760 Shellbridge Way Suite 708 – 1 City Centre Drive Richmond, BC, V6X 3H1 DIRECTORS OF Mississauga, ON L5B 1M2 Tel: 604-270-1108 BOSTON PIZZA GP INC. – THE MANAGING GENERAL PARTNER QUÉBEC OFFICE Fax: 604-270-4188 OF BOSTON PIZZA ROYALTIES 3030 boulevard Le Carrefour Email: [email protected] LIMITED PARTNERSHIP bureau 802, Laval, PQ, H7P 2P5 Web: www.bpincomefund.com John L. Cowperthwaite MANAGEMENT TEAM TRUSTEES OF THE FUND Director* Corporate Director Jim Treliving John L. Cowperthwaite Chairman & Owner Corporate Director William C. Brown Director* George C. Melville William C. Brown Corporate Director Chairman & Owner
BOSTON PIZZA ROYALTIES INCOME FUND BOSTON PIZZA ROYALTIES Corporate Director W. Murray Sadler Mark Pacinda W. Murray Sadler Director* President and Chief Executive Corporate Director Corporate Director Officer TRANSFER AGENT Mark Pacinda Wes Bews Computershare Investor Services Inc. Director Chief Financial Officer Chief Executive Officer STOCK EXCHANGE LISTING Wes Bews Toronto Stock Exchange: BPF.UN Director Chief Financial Officer AUDITORS *Audit Committee and KPMG LLP Governance Committee Boston Pizza Royalties Income Fund Annual Report 2013
® Boston Pizza Royalties Limited Partnership. All Boston Pizza registered Canadian trademarks and unregistered Canadian trademarks containing the words “Boston”, “BP”, and/or “Pizza” are trademarks owned by the Boston Pizza Royalties Limited Partnership and licensed by the Boston Pizza Royalties Limited Partnership to Boston Pizza International Inc. Boston Pizza Foundation is a registered trademark of Boston Pizza Royalties Limited Partnership, used under license. Future Prospects Role Models For Life and design are trademarks of Boston Pizza Foundation. © Boston Pizza International Inc. 2014
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