Empire Company
Annual Report 2001

Plain-text annual report

A N N U A L R E P O R T 2 0 0 1 Growing VALUE E M P I R E C O M P A N Y L I M I T E D Growing Value Empire Company Limited is a diversified Canadian company whose key businesses include food distribution, real estate and corporate investment activities. Guided by conservative business principles, our primary goal is to grow long-term shareholder value through income and cash flow growth and equity appreciation. We accomplish this through direct ownership and equity participa- tion in businesses that have the potential for long-term growth and profitability. Growth in Shareholder Value since going Public in July, 1982 $ 282,000 $ 10,000 As of July 1982 End of fiscal 2001 Since Empire became a public company in July 1982, our focus on enhancing value has produced annu- al compound growth in the value of shareholder capital of more than 19%. That means a $10,000 investment in Empire approximately 19 years ago would have been worth $282,000 as of April 30, 2001. Financial Highlights Empire At-a-Glance Letter to Shareholders Management’s Discussion and Analysis Management’s and Auditors’ Report Consolidated Balance Sheet Consolidated Statement of Retained Earnings and Earnings Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Eleven-year Financial Review Directors and Officers Investor Information Mission Statement, Corporate Governance and Community Involvement 3 4 6 17 29 30 31 32 33 42 43 44 IBC Growing Value in 2001 • Revenues a record $11.53 billion • Net capital gains and other items of $491 million • Operating earnings per share of $2.66 is up 21% • Operating cash flow per share of $8.82 is up 12% • Book value per share of $33.63 is up 93% • Net debt-to capital ratio improved to 46% Enhanced Potential • Growing revenues and operating earnings • Rising net asset value through an EVA discipline • Strong financial position • A healthy liquid investment portfolio • Growing occupancy levels and cash flow in our real estate division • Building sustainable worth in our food distribution division Financial Highlights ($ in millions, except per share amounts) O p e r a t i o n s Revenue (1) Operating income Earnings before net capital gains and other items Capital gains and other items, net of tax Net earnings Operating cash flow (2) Fi n a n c i a l Po s i t i o n Total assets Shareholders’ equity Pe r S h a r e I n f o r m a t i o n Earnings before goodwill charges, net capital gains and other items Earnings before net capital gains and other items Capital gains and other items, net of tax Net earnings Operating cash flow(2) Book value Dividends S h a r e P r i c e High Low Close (1) Adjusting for the additional week in fiscal 2000, revenue increased 5.3%. (2) Operating cash flow before restructuring charges, net change in other current items and after preferred dividends. • Revenue increased $374 million to $11.53 billion. • Realized net capital gains and other items of $491 million. • Operating earnings per share of $2.66, a 21% increase. 2001 2000 Change 11,538.6 11,164.5 374.3 88.5 491.5 580.0 289.3 374.2 84.7 2.1 86.8 297.0 3.4% – 4.5% – 568.2% (2.6)% 4,254.3 1,115.0 4,171.0 602.8 2.0% 85.0% 3.02 2.66 14.98 17.64 8.82 33.63 0.34 36.50 27.75 34.00 2.52 2.20 0.05 2.25 7.86 17.45 0.28 33.95 24.65 32.10 19.8% 20.9% – 684.0% 12.2% 92.7% 21.4% 5.9% Total Revenue ($ in millions) Operating Income ($ in millions) 11,164 11,538 374.2 374.3 Share Performance Empire Class A Shares ($ per share) 32.10 34.00 27.25 26.00 6,378 222.9 149.8 165.6 15.70 3,150 3,320 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 0 3 a n n u a l r e p o r t 2 0 0 1 Empire At-a-Glance F O O D D I S T R I B U T I O N Sobeys Inc. (“Sobeys”), a 62%-owned subsidiary of Empire, is one of Canada’s largest food distribution companies with annual revenues of more than $11 billion. With a national network of 1,351 corporate and franchised stores that spans 10 provinces and includes popular banners such as IGA, Sobeys and Price Chopper, thousands of wholesale customers, and SERCA, Canada’s largest and the only national foodservice operation, Sobeys is well-positioned for continuing growth in a consolidating industry. R E A L E S T A T E Empire’s Real Estate operation controls one of the largest portfolios of prime retail properties in Atlantic Canada through wholly owned subsidiaries Atlantic Shopping Centres Limited (“ASC”) and Sobey Leased Properties Limited (“SLP”). SLP’s portfolio is primarily directed at supporting retail operations, while ASC’s is a more diversified portfolio made up of enclosed shopping centres and business centres. The Real Estate operation owns and manages 12.0 million square feet of commercial property. I N V E S T M E N T S Empire manages an investment portfolio that was valued at $593 million as of fiscal 2001 year-end. Our investments provide financial flexibility and a pool of capital that can augment the growth of our core operations. During fiscal 2001, the annualized rate of return on our investments was 29%. Empire’s other operations consist of Empire Theatres Limited (“Empire Theatres”), the leading movie exhibitor in Atlantic Canada with 126 screens in 20 locations. Food Distribution Revenue Food Distribution Operating Income ($ in millions) ($ in millions) 11,006 11,370 265.6 262.9 6,232 3,155 2,978 121.1 62 48.2 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Real Estate Revenue Real Estate Operating Income ($ in millions) ($ in millions) 82.3 141.0 139.0 148.0 157.1 165.8 62.0 60.5 70.1 65.1 Key Developments The Company exceeded its target of $70 million in integration synergies by the end of fiscal 2001. Discontinued development and implementation of the enterprise- wide software and related systems, taking an associated restructuring charge of $30.3 million after-tax and minority interest. Sobeys issued 9.17 million common shares in November 2000 to finance the capital expenditure program and retire debt. Built 51 new or replacement stores and expanded or modernized 92 others in fiscal 2001. Purchased a 40% interest in Genstar Development Partnership, a residential land development company, for $29 million. Improved occupancy levels, higher net effective rental rates and lower operating costs contributed to record revenues and operating income in fiscal 2001. • • • • • • • Major developments included: construction of new 5-plex cinemas for Empire Theatres at Summerside, Prince Edward Island, and Douglastown, New Brunswick; the re-development of Aberdeen Mall in New Glasgow, Nova Scotia into a business center; and the expansion of Zellers stores at County Fair Mall in New Minas, 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Nova Scotia and Bridgewater Mall in Bridgewater, Nova Scotia. Empire Company Investment Income ($ in millions) 41.3 36.7 37.3 34.1 38.2 37.9 35.6 30.9 Empire Company Market Value and Book Value of Investments ($ in millions) 1,166.1 1,046.9 29.8 786.6 757.2 15.7 449.2 482.0 384.4 405.7 593.3 534.6 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Dividends and Interest Equity Earnings Unrealized Gain Book Value • • Realized net investment gains of $589.5 million during fiscal 2001. Cash proceeds of $745 million from the sale of our investment in Hannaford Bros. Co. (“Hannaford”) allowed for the repayment of $365 million in short-term debt. • Empire participated in Sobeys’ November 2000 equity issue, purchasing an additional 5.7 million Sobeys common shares for $155 million to maintain its 62% interest. • Empire Theatres posted new records for revenues and operating income. pa u l d . s o b e y , p r e s i d e n t a n d c e o pa u l d . s o b e y , p r e s i d e n t a n d c e o d o n a l d r . s o b e y, c h a i r m a n d o n a l d r . s o b e y, c h a i r m a n Dear Fellow Shareholders, Growing Value, the theme of this year’s annual report, reflects our belief that management’s primary objective is to maximize the long-term sustainable value of Empire for its shareholders. Our unwavering goal is to enhance the worth of the Company’s net assets and ultimately, have that value reflected in Empire’s share price. At the same time, we are committed to maintaining a reliable and increasing dividend. 0 6 E m p i r e c o m p a n y l i m i t e d l e t t e r t o s h a r e h o l d e r s Accordingly, we measure success by the long-term growth of our shareholders’ investment. Since Empire has been a public company – close to 19 years – our focus on enhancing value has produced annual compound growth in the value of shareholder capital of more than 19 percent. To put it another way, a $10,000 investment made when Empire went public in July 1982 would have been worth $282,000 at the end of fiscal 2001. While we acknowledge that past returns are not a guarantee of future performance, our objective remains focused on the unwavering goal to enhance the net worth of your company. We have achieved this performance by consistently building tangible asset value in each of our divisions: Food Distribution; Real Estate; and Investments, including our Empire Theatres operation. Going forward, we will continue to direct our resources toward the most promising opportunities within these businesses, in order to maximize whatever potential exists within our field of expertise. Our Vision As a publicly traded, diversified holding company we are committed to the creation of superior shareholder return by: exercising a supportive role through our controlling interest in Sobeys; identifying, investing and being actively involved in businesses where Empire can add tangible value; and prudently managing a portfolio of tradable investments that provides diversification and liquidity. Empire Company Total Return vs. TSE 300 40 $ 178.1 165.7 Empire Company Share Price Performance (1) 139.4 89.2 77.6 76.2 36.2 33.8 1996 1997 1998 1999 2000 Calendar year Empire Company TSE 300 32 24 16 8 0 1996 1997 1998 1999 2000 2001 (1) Share price at fiscal quarter end dates. 0 7 a n n u a l r e p o r t 2 0 0 1 l e t t e r t o s h a r e h o l d e r s How We Create Value Empire brings a particular perspective to its investments – one that is characterized by a controlling share- holder’s proprietary interest and long-term focus. As such, we will not sacrifice longer-term growth in shareholder value for simply a short-term win. We believe that the two key factors in the creation of value are first, strong management and second, an emphasis on long-term growth in cash flow that exceeds the after-tax dollar cost of capital. Capital is directed at high-potential opportunities for which we have reasonable assurance that the return on capital employed will be in excess of our cost of capital. To better monitor our ability to grow value, Empire has recently adopted an economic value added (EVA) approach to capital allocation. This approach is fostered by linking key management performance incentives directly to growth in economic value added. Strong Financial Results Overall, the past year was a good one for Empire. Revenue reached a record $11.53 billion in 2001, an increase of $374 million or 3.4% over the prior year. Adjusted for the extra week in fiscal 2000, annual revenue increased $528 million or 5.3%. Fiscal 2001 earnings before net capital gains and other items amounted to $88.5 million or $2.66 per share, as compared to $84.7 million or $2.20 per share last year, an increase of 4.5% in absolute dollars and 21% on an earnings per share basis. Capital gains and other items amounted to $491.5 million after-tax or $14.98 per share, which was principally associated with the sale of our 25% equity interest in Hannaford during the first quarter. Empire Company Net Asset Value Per Share ($ per share) 48.00 48.87 39.75 35.25 29.00 Empire Company Book Value and Unrealized Capital Gains Per Share ($ per share) 33.63 23.17 18.06 17.45 15.27 14.12 11.86 9.05 9.94 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 1.79 Book Value per share Unrealized Capital Gains per share 0 8 E m p i r e c o m pa n y l i m i t e d l e t t e r t o s h a r e h o l d e r s Thanks to stronger operating earnings in our core businesses, effective allocation of the Hannaford sale cash proceeds and the repurchase of 6.5 million of Empire’s Class A common shares in the fourth quarter of fiscal 2000, we have more than offset the loss of Hannaford’s equity earnings. At the same time, we have strengthened our balance sheet and enhanced our financial flexibility, as well as that of Sobeys, through our $155 million pro rata participation in their $250 million equity issuance in November 2000. Operating cash flow per share increased 12% to $8.82 per share. Our book value per common share increased from $17.45 last year to $33.63 this year, while our pre-tax net asset value per share improved marginally to a record $48.87 in fiscal 2001, 44% above Empire’s year-end share price. This solid fundamental performance was impacted by the operational disruption caused by an enter- prise system failure at Sobeys in the third quarter of fiscal 2001. On January 24, 2001 Sobeys announced that it was abandoning its enterprise-wide systems initiative and writing off all costs associated with this project. Empire’s share of this special charge amounted to $30.3 million, after-tax and minority interest, and is included in our net capital gains and other items. What was viewed as an enabler became a serious distraction from Sobeys’ primary objective of being a customer-focused organization with a supporting technology infrastructure. With a fresh set of eyes, Sobeys’ leadership examined the project’s original objectives versus the EVA of the existing approach, and came to what Bill McEwan, Sobeys’ CEO, characterized as a conclusion too logical to ignore. Our regret with respect to this decision is that it was not taken sooner. Empire Company Earnings Per Share before net Capital Gains and Other Items ($ per share) 2.66 2.20 1.69 1.55 1.29 Empire Company Operating Cash Flow per Share ($ per share) 8.82 7.86 4.31 2.97 2.54 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 0 9 a n n u a l r e p o r t 2 0 0 1 Sobeys Inc. a 61%-owned subsidiary of Empire, is the second largest food distribution company in Canada and one of the largest in North America with annual revenues of more than $11 billion. The Next Stage of Development in Food Distribution Sobeys revenues rose $364 million or 3.3% to reach $11.37 billion. Adjusting for the extra week in fiscal 2000, revenues increased 5.3%. Earnings before interest, taxes, depreciation and amortization (EBITDA) was relatively unchanged from the prior year – up $0.5 million to $364.1 million. As noted, Sobeys’ net income fell short of expectations due to serious inventory disruptions in Atlantic Canada during the 2000 pre-Christmas season and the subsequent decision to abandon further develop- ment and implementation of the enterprise-wide system. Prior to the one-time after-tax charge mentioned above, Sobeys’ earnings for the year were $91.2 million or $1.50 per share compared to $80.2 million or $1.43 per share last year. In November 2000, Sobeys announced the appointment of Bill McEwan to replace retiring CEO Doug Stewart and lead the company in its next stage of development. Bill came to Sobeys from the Great Atlantic and Pacific Tea Company, where he was most recently President & CEO of the United States Atlantic Region and, prior to that, President of A&P Canada. 1 0 E m p i r e c o m pa n y l i m i t e d l e t t e r t o s h a r e h o l d e r s Since then, the company has embarked upon a number of ambitious initiatives that are designed to help Sobeys build sustainable worth for each of its key stakeholder groups – customers, suppliers, franchisees, employees and shareholders. Based on early indications, we are confident that Bill and his entire senior management group are creating a more integrated, customer-focused, higher growth organization. During the past year the company completed a comprehensive regional overview process that will guide the development of its key IGA (including Garden Market IGA and IGA extra), Sobeys and Price Chopper banners in a manner that optimizes profitability in each of its local markets across Canada. An aggressive level of capital spending will continue to be an important ingredient of those plans. During the year, total system-wide investment by the company, franchise owners and through third party financing reached $505 million. The majority of this amount was directed at modernizing and expanding the retail network; 51 new or replacement stores were opened with another 92 stores expanded or modernized. Next year an additional $550-$600 million in company-wide capital spending is planned of which $460 million or close to 80% will be directly committed to retail store projects. At the same time, Sobeys has been reengineering its national procurement and merchandising strate- gy to shift the focus from maximizing product volumes to more accurately identifying and responding to the preferences of distinct consumer groups. Winning a greater share of customer requirements represents an enormous growth opportunity and the national procurement and marketing strategy is one of the keys to realizing it. So, too, is the continuing revitalization of the company’s stores. At Garden Market IGA and Sobeys stores, for example, the company is offering an unprecedented “fresh” experience with the clustering of bakery, meat, deli and produce departments in a colourful “open market” just inside the front door. It is complemented by an impressive range of products and services that now includes in-store banking, home- meal replacement and expanded pharmacy/natural foods departments. Sobeys also continues to invest in SERCA – the largest and only national foodservice business in Canada. In September 2000, SERCA opened a new 265,000 square foot distribution warehouse in Mississauga, Ontario, which has enabled the rationalization of the number of distribution centres in the province from eleven to five. The new facility will continue to increase inventory turns and productivity while further enhancing customer service. 1 1 a n n u a l r e p o r t 2 0 0 1 Sobeys Inc. a 61%-owned subsidiary of Empire, is the second largest food distribution company in Canada and one of the largest in North America with annual revenues of more than $11 billion. A Record Performance in Real Estate The real estate operation enjoyed another record year in 2001. As a result of continued strong growth in Atlantic Canada, the skills of a leading leasing team and the efforts of all employees, new records were posted for revenue, operating earnings and cash flow. A net increase of 287,000 square feet were leased dur- ing the year with occupancy levels at year-end reaching 93.4% versus 91.8% a year earlier. Thanks also to corresponding strength in leasing rates, real estate division revenues were ahead 5.5% to $165.8 million while operating income increased $12.2 million or 17.4% to $82.3 million. Empire’s real estate business continues to be primarily focused on retail assets that are complementary to, and in direct support of, related retail operations. In fact, our skill at acquiring and developing commercial property traces its roots to the 1960s, when securing prime sites for Sobeys necessitated the development of our own network. Today, 84% of the 12.0 million sq. ft. in our real estate portfolio is retail space, of which 30% is leased to a Sobeys or another Empire-affiliated company. 1 2 E m p i r e c o m pa n y l i m i t e d l e t t e r t o s h a r e h o l d e r s At the same time, we have successfully diversified our portfolio with a wide range of other high- quality tenants. As an example, today our Real Estate Group leases more than 688,000 square feet of space to 21 call centres throughout Atlantic Canada. They are occupied by many of the region’s leading compa- nies including Aliant, CIBC, Client Logic, ICT Group, Purolator and Scotiabank. In fact, the Scotia Square, Halifax property contains the largest concentration of corporate call and data centres in eastern Canada. Fiscal 2001 was another active development year for the real estate group. Major projects included: the re-development of the Aberdeen Mall in New Glasgow, Nova Scotia as a business centre; the completion of a major expansion for Zellers at our property in County Fair Mall, New Minas, Nova Scotia; the construc- tion of new 5-plex cinemas for Empire Theatres at Summerside, Prince Edward Island and Douglastown, New Brunswick, and the expansion of a Zellers store at our Bridgewater Mall, Bridgewater, Nova Scotia. New opportunities evaluated during the year resulted in the purchase of a 40% interest in Genstar Development Partnership (“Genstar”) in January 2001 for $29 million. Genstar owns and develops land for the residential market primarily in western Canada and is currently exploring opportunities in the southwestern United States. This investment complements our real estate group’s residential activities in Nova Scotia and Minneapolis, USA. We are very pleased with the returns and future prospects for our residential operations. Going forward, Empire’s real estate group will continue to grow in support of both Sobeys and other related tenants. Overall occupancy is expected to improve during fiscal 2002 as a result of relatively stronger economic conditions in Atlantic Canada and the diligence of our leasing team. Management will continue its policy of maximizing and reinvesting cash flow to ensure an even stronger property portfolio. Real Estate Division Occupancy Rate (% of gross leasable area leased) 89.8 90.5 91.9 91.8 93.4 Real Estate Division Gross Leasable Area (millions of square feet) 11.3 11.5 10.4 12.0 12.0 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 1 3 a n n u a l r e p o r t 2 0 0 1 Sobeys Inc. a 61%-owned subsidiary of Empire, is the second largest food distribution company in Canada and one of the largest in North America with annual revenues of more than $11 billion. Capital Appreciation in our Investments Fiscal 2001 was a banner year for our Investment division despite the severity of the general market correction over the past year. As previously mentioned, we sold our position in Hannaford at the end of the first quarter for a net capital gain of $573 million. Cash proceeds of $745 million Canadian dollars from the sale of our investment in Hannaford allowed us to repay $365 million of short-term debt to enhance our financial flexibility. Such debt included $220 million in bank loans used to fund the repurchasing of 6.5 million Empire Class A common shares in the fourth quarter of fiscal 2000. The balance of the Hannaford proceeds was earmarked for our portfolio of liquid investments. During the year we realized further net capital gains of $16 million on this portfolio. At fiscal year-end, our portfolio had a market value of $593 million, $58 million over book value, and provided a total annualized shareholder return of 29% as compared to the TSE 300 index total return of (13%) over this period. While we do not expect our portfolio returns to match those of the prior year, we will continue to manage it prudently to ensure appropriate diversification and liquidity. 1 4 E m p i r e c o m pa n y l i m i t e d l e t t e r t o s h a r e h o l d e r s We are sometimes asked the question: “Why does Empire have an investment portfolio?” There are two reasons. First, we have the financial ability to make investments and second, a liquid investment portfolio provides financial flexibility with a pool of capital that augments the growth in our food and real estate businesses. What’s more, we have been successful in generating investment returns in excess of the company’s cost of capital. We will continue to allocate our capital from this portfolio to support the growth and development of our operating divisions as and when opportunities arise. For example, Empire utilized part of its portfolio to participate in Sobeys’ November 2000 equity issue by purchasing an additional 5.7 million Sobeys common shares for $155 million to maintain its 62% interest. As well, we reallocated $29 million to fund our real estate division’s investment in Genstar. We are continuing to look for opportunities that are complementary to our core food and real estate operations and are committed to the prudent management of our capital. The after-tax investment gains of $589.5 million during the year were offset by a reduction in real estate book value of $45.9 million after-tax; a reduction in the book value of our investment in Wajax Limited’s (“Wajax”) common shares of $41.2 million after-tax; and by our share of Sobeys’ restructuring charge in the amount of $30.3 million (after-tax and minority interest). Empire Company Investment Income ($ in millions) 41.3 36.7 37.3 34.1 38.2 37.9 35.6 30.9 29.8 15.7 Empire Company Market Value and Book Value of Investments ($ in millions) 1,166.1 1,046.9 786.6 757.2 449.2 482.0 384.4 405.7 593.3 534.6 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Dividends and Interest Equity Earnings Unrealized Gain Book Value 1 5 a n n u a l r e p o r t 2 0 0 1 l e t t e r t o s h a r e h o l d e r s Solid Performance at Empire Theatres Wholly owned Empire Theatres also had a good year, posting new records for revenue and operating income. These results reflect management’s continued focus on customer satisfaction and operational efficiency. As the largest movie exhibitor in Atlantic Canada with 126 screens in 20 locations, Empire Theatres continued to strengthen its competitive position through further modernization of its cinemas. During fiscal 2001, Empire Theatres opened new Studio 5 theatre complexes in Summerside, Prince Edward Island and Douglastown, New Brunswick. Looking Ahead While fiscal 2001 was a good year, we believe the best is yet to come. Going forward you can be assured that we will not sacrifice long-term growth in shareholder value for short-term wins. We possess a solid foundation for growth in our core businesses and are well positioned to continue to look for growth opportunities. In doing so we are committed to allocating our capital wisely and will continue to encourage capable management in support of growing value for our shareholders over the long term. Our performance has, and will continue to be, the direct result of the contributions of more than 33,000 employees, franchisees and affiliates at Empire and its related companies. We offer our sincere thanks for their ongoing support of our strategies to grow value by making our customers our number one focus. One employee in particular deserves special mention, Chester D. Thompson, who retired as Empire’s Comptroller in June of this year after 27 years of dedicated and exemplary service. Empire has greatly benefited from Chester’s presence and we thank him for his support. We would also like to acknowledge the contributions of Doug Stewart who served the last five years as Vice-Chairman and Chief Executive Officer of Sobeys Inc., and was also a member of the Empire Board of Directors. Finally, on behalf of the entire board, we also wish to thank our customers, business partners and shareholders for their continued contributions to Empire’s success. Paul D. Sobey President and CEO July 6, 2001 Donald R. Sobey Chairman 1 6 E m p i r e c o m pa n y l i m i t e d Management’s Discussion & Analysis Total Revenue ($ in millions) Operating Income ($ in millions) 11,164 11,538 374.2 374.3 6,378 3,150 3,320 222.9 149.8 165.6 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Total Revenue Revenue increased 3.4% in fiscal 2001, primarily the result of continued growth in our food O pe r at i n g I n c o m e Operating income remained relatively unchanged in fiscal 2001, primarily the result of distribution and real estate businesses. Adjusting for the improved performance in real estate operations offset by extra week in Sobeys’ fiscal 2000, revenue increased 5.3% in decreased contribution to consolidated operating income fiscal 2001. from investments. Earnings Per Share before net Capital Gains and Other Items ($ per share) 2.66 2.20 1.69 1.55 1.29 Net Asset Value Per Share ($ per share) 48.00 48.87 39.75 35.25 29.00 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Earnings Per Share Earnings per share before net capital gains and other items increased to $2.66 in fiscal 2001, Net Asset Value Per Share Net asset value per share of $48.87 in fiscal 2001, has grown by 68% during the past a 21% increase. four years. 1 7 a n n u a l r e p o r t 2 0 0 1 m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s This section of the annual report provides management’s Consolidated Earnings Per Share discussion and analysis of the financial condition of Empire Company Limited (the “Company”) and its financial perform- Earnings before certain items ance for the year ended April 30, 2001 with a comparison to the Goodwill amortization year ended April 30, 2000. As part of this discussion, we assess Earnings before net capital gains consolidated operating performance, the performance and out- and other items look of each business segment, the financial position of the Net capital gains and other items Company, capital resources and liquidity, and risk manage- Earnings per share ment. This discussion should be read in conjunction with the 2001 3.02 (0.36) $ $ 2000 2.52 (0.32) 2.66 14.98 $ 17.64 $ 2.20 0.05 2.25 consolidated financial statements, including the notes that The weighted average number of shares outstanding for accompany them, on pages 29 to 41. earnings per share calculation purposes was 32.8 million for Consolidated Operating Performance fiscal 2001, compared to 37.8 million for fiscal 2000. In August Operating Earnings Earnings before net capital gains 2000, a normal course issuer bid expired, under which 974,850 and other items reached $88.5 million in fiscal 2001, an Class A common shares were bought back by the company. increase of $3.8 million or 4.5% from last year’s $84.7 million. All of these shares were repurchased at prevailing market On a per share basis, earnings before net capital gains and other prices during fiscal 2000. In March 2000, Empire repurchased items increased 20.9% to $2.66 per share in 2001, from $2.20 5,503,900 Class A common shares through the completion of a per share in 2000. After including net capital gains and other substantial issuer bid. Total common shares outstanding at the items of $491.5 million in 2001, net earnings amounted to end of fiscal 2001 were 32.8 million, unchanged from the end of $580.0 million ($17.64 per share), an increase of $493.2 million fiscal 2000. or 568% over last year’s $86.8 million ($2.25 per share). The net Revenue and Operating Income capital gains and other items recorded in the 2001 fiscal year ($ in millions) 2001 2000 Change were primarily the result of the following: (i) the sale of the Hannaford investment for a net capital gain of $573.5 million; Revenue Food Distribution(1) (ii) the sale of liquid investments and properties during the Real Estate year for a net capital gain of $16.3 million; (iii) a restructuring Investment and Other charge in the food distribution business, with Empire’s share Inter-segment elimination amounting to $30.3 million after-tax and minority interest; (iv) a reduction in the book value of Wajax Limited of $41.2 Operating Income million after-tax; (v) a reduction in real estate book value of Food Distribution $45.9 million after-tax; and (vi) a decrease in the capital gain Real Estate tax rate resulting in a $20.1 million after-tax capital gain for Investment and Other the Company. Corporate $ 11,370.5 165.8 49.1 (46.8) $ 11,538.6 $ 11,006.1 157.1 46.0 (44.7) $ 11,164.5 $ 262.9 265.6 $ 82.3 36.3 (7.2) 70.1 43.9 (5.4) $ 374.3 374.2 $ 3.3% 5.5% 6.7% 4.7% 3.4% (1.0)% 17.4% (17.3)% (33.3)% 0.0% (1) Adjusting for the additional week in fiscal 2000, revenue increased 5.3%. Financial Information by Quarter (in millions, except per share information) April 2001 Jan. 2001 Oct. 2000 July 2000 April 2000 Jan. 2000 Oct. 1999 July 1999 Operations Revenue Earnings before goodwill, net capital gains and other items Goodwill amortization Earnings before net capital gains and other items Net capital gains (loss) and other items Net earnings $ 2,887.2 $ 2,863.7 $ 2,891.7 $ 2,896.0 $ 2,895.4 $ 2,706.8 $ 2,759.0 $ 2,803.3 27.4 (2.9) 24.5 8.1 32.6 20.3 (2.9) 17.4 (3.9) 13.5 23.7 (2.9) 20.8 0.9 21.7 28.9 (3.0) 25.9 486.4 512.3 23.9 (3.0) 20.9 – 20.9 24.9 (3.1) 21.8 0.5 22.3 23.6 (3.0) 20.6 1.6 22.2 24.3 (3.0) 21.3 0.1 21.4 1 8 E m p i r e c o m pa n y l i m i t e d m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s Re v e n u e Revenue increased 3.4% in fiscal 2001, to At year-end, Sobeys operated 402 corporate stores and 949 fran- $11.53 billion, an increase of $374.1 million over fiscal 2000, chised stores. Of the corporate stores, 129 operate under the primarily as a result of growth in the food distribution business Sobeys banner and 47 stores operate under the IGA banner. The and the real estate business. Food distribution revenue largest franchised banner is IGA, with 494 franchised stores. increased $364.4 million or 3.3%. Adjusting for the extra week The proportion of total retail store square footage by region in fiscal 2000, revenue increased 5.3%. Same store sales for all across Canada is as follows: 16.7% Western, 33.1% Ontario, food distribution banners grew by 3.7% in fiscal 2001, 29.1% Quebec, and 21.1% Atlantic. compared to same store sales growth in fiscal 2000 of 2.6%. Financial Performance Food distribution revenue Growth in real estate revenue was $8.7 million or 5.5%. increased 3.3% in fiscal 2001 to reach $11.37 billion, an Operating Income In fiscal 2001, operating income increase of $364.4 million over fiscal 2000 results. Adjusted for reached $374.3 million compared to $374.2 million in the prior the extra week in fiscal 2000, food distribution revenues year. The relatively unchanged result from the previous fiscal increased 5.3%. The increase is primarily the result of same year was primarily attributable to growth in operating income store sales growth, food price inflation and the effect of addi- in the real estate business being offset by the decrease in tional store selling area resulting from capital spending. Empire’s share of income from equity accounted companies Operating income for the year decreased by $2.7 million or within its investment portfolio. With respect to our investments 1.0%, to $262.9 million or 70.2% of Empire’s total operating and other operations, Empire recorded a decrease in operating income. The decrease in operating income is attributable to a income of $7.6 million from the prior year. This was primarily 10 basis point reduction in the trading margin (EBITDA/sales) the result of the sale of the Hannaford investment, partially off- partially offset by the 3.3% increase in revenues. EBITDA set by an increase in contribution from the Wajax investment increased from $363.6 million in 2000 to $364.1 million in fiscal compared to the prior year. Operating income from other opera- 2001, an increase of 0.1%. The trading margin (EBITDA/sales) tions increased by $0.8 million from the prior year, reflecting decreased to 3.20% in fiscal 2001 from 3.30% in fiscal 2000. Same another year of improved performance by Empire Theatres. stores sales growth was 3.7% in fiscal 2001 compared to 2.6% in Operating Overview & Performance By Segment the prior year. Food Distribution Food distribution’s contribution to Empire’s net earnings Overview Our food distribution business is carried on equaled $24.8 million in 2001, a decrease of $24.5 million or through our 62% ownership in Sobeys, the second largest food 49.7% from the $49.3 million contribution recorded in 2000. organization in Canada in terms of sales ($11.37 billion), num- This decrease is attributable to: (i) the decrease in income from ber of corporate and franchised stores (1,351 stores), and operations previously mentioned; and (ii) the $30.3 million geographic presence. Through its ownership of SERCA, Sobeys restructuring charge. is also Canada’s largest and the only national foodservice Restructuring Charge On January 24, 2001, Sobeys distributor. In fiscal 2001, food distribution accounted for announced that it would discontinue further development and 98.5% of Empire’s consolidated operating revenues, and 89.4% implementation of its enterprise-wide software and systems of operating cash flow. initiative, resulting in a net restructuring expense, after-tax and minority interest, for Empire of $30.3 million. The software has Financial Information by Quarter ($ per share) Per Share Information Earnings from before goodwill, net capital gains and other items Goodwill amortization Earnings before net capital gains and other items Net capital gains (loss) from other items Net earnings Fully diluted earnings per share Weighted average number of shares outstanding (millions) April 2001 Jan. 2001 Oct. 2000 July 2000 April 2000 Jan. 2000 Oct. 1999 July 1999 $ 0.82 (0.09) 0.73 0.25 0.98 0.98 32.8 $ 0.62 $ 0.72 $ 0.86 $ 0.66 $ 0.64 $ 0.61 $ 0.61 (0.09) (0.09) (0.09) (0.08) (0.08) (0.08) (0.08) 0.53 (0.13) 0.40 0.40 32.8 0.63 0.03 0.66 0.66 32.8 0.77 14.83 15.60 15.60 32.8 0.58 – 0.58 0.58 35.0 0.56 0.01 0.57 0.57 38.2 0.53 0.04 0.57 0.57 38.9 0.53 – 0.53 0.53 39.2 1 9 a n n u a l r e p o r t 2 0 0 1 m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s been phased out of 30 corporate Sobeys stores in Ontario. The The Canadian grocery distribution industry operates under a operations of Sobeys Quebec, Sobeys West, SERCA Foodservice mature market structure. Competition continues to be intense, and the remaining 379 stores in Ontario had not been convert- however there are currently no major price wars as large play- ed to the new enterprise-wide system. The Company has iden- ers continue to concentrate on integration issues. Sobeys’ focus tified alternate software options to meet business requirements. in this business environment is to: (i) emphasize the effective Common Share Issue In fiscal 2001, Sobeys announced optimization of its operations; (ii) reduce product and opera- an agreement with a syndicate of underwriters under which tional costs; (iii) expand and modernize its banners; the underwriters agreed to purchase from treasury 9,174,312 (iv) improve distribution network efficiencies; and (v) enhance common shares of Sobeys to be issued pursuant to a prospectus banner positioning. filed in all provinces of Canada. Empire subsequently Sobey’s long-term strategic goal is to achieve at least a num- purchased 5,688,073 of these shares at a price of $27.25 per ber two position in all of its major markets through a combina- share in order to maintain its 62% proportionate share owner- tion of organic growth and acquisitions. Following a signifi- ship of Sobeys. Synergies Sobeys’ integration model for the Oshawa cant change in senior management in fiscal 2001 with the appointment of Bill McEwan as President and CEO, Sobeys’ acquisition was based on realizing pre-tax integration savings near-term priorities include migration of existing merchandis- of $70 million by the end of the 2001 fiscal year. Sobeys exceed- ing and purchasing applications to a new platform, completion ed both its first year target of $35 million by the end of fiscal of the SERCA Ontario integration, realization of the full bene- 2000 and its $70 million target by the end of fiscal 2001. fits from its consolidated distribution systems, simplifying the Outlook Looking forward to fiscal 2002, management overall organizational structure, advancement of the category believes the food distribution operation is well positioned for management functions and optimization of the size of the strong growth in all of its markets. The renewed focus on store company by taking advantage of additional economies of scale. modernization, supply chain efficiency improvements, migra- Real Estate tion of best practices throughout Sobeys, development of core Overview The real estate operations are focused primarily competencies, and other Sobeys’ initiatives to re-energize and on the acquisition, development and management of a portfo- revitalize their organization should provide significant poten- lio of properties that complements or supports Empire’s food tial for further growth and profitability. distribution and other retail operations. Planned company-wide spending for fiscal 2002 is $550 to At the end of fiscal 2001, Empire’s real estate operations $600 million. Management is confident that this spending totaled 12.0 million square feet under ownership, relatively level, along with various initiatives designed to build on core unchanged from the prior year. Operations are conducted competencies in areas such as category management, private through 100%-owned Atlantic Shopping Centres Limited label brands and banner positioning, will result in significant (ASC) and 100%-owned Sobey Leased Properties Limited (SLP). earnings growth going forward. ASC’s portfolio consists of 31 shopping centres with a gross leaseable area of 5.9 million square feet and 12 office buildings Food Distribution revenue increased 3.3% to a record $11.37 billion in fiscal 2001. Operating income remained relatively unchanged largely as a result of the information systems disruption in the third quarter. Food Distribution Revenue Food Distribution R enue ood Distribution Revevenue Food Distribution Operating Income Food Distribution Operating Income ood Distribution Operating Income ($ in millions) ($ in millions) ($ in millions) ($ in millions) ($ in millions) ($ in millions) ($ in millions) ($ in millions) 11,006 11,370 265.6 262.9 6,232 3,155 2,978 121.1 62.0 48.2 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 0 E m p i r e c o m pa n y l i m i t e d m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s with a gross leaseable area of 1.6 million square feet. SLP’s port- Financial Performance Revenue from real estate opera- folio consists mainly of freestanding food stores and attached tions increased 5.5% to $165.8 million from $157.1 million in shopping plazas, together, having a total gross leaseable area of fiscal 2000. The real estate operation contributed $82.3 million 4.5 million square feet. or 22.0% of Empire’s total operating income in fiscal 2001, up At Empire’s fiscal year-end, the real estate portfolio 17.4% from $70.1 million in fiscal 2000. This performance is consisted of 84% retail space and 16% office space. More than the result of successful development activities, higher net effec- 30 percent of total retail square footage is leased to Sobeys or tive rental rates and lower costs (as reflected by a basis point another Empire subsidiary. This degree of integration creates reduction in the operating cost to revenue ratio from the prior strategic advantages for both landlord and tenant. For the retail year). Real estate’s contribution to Empire’s net earnings operations, it provides added flexibility to expand or modify decreased by $38.2 million in fiscal 2001 from the prior year. This properties in response to competitive developments. For real decrease is attributable to the $45.9 million after-tax write-down estate operations, it provides top-quality anchor tenants for our of certain real estate assets, partially offset by the improved oper- shopping centres, as well as a stable source of rental revenue ating income result in fiscal 2001. Operating cash flow for the real and cash flow. estate operations increased by 19.3% in 2001 to reach $39 million, The occupancy rate as at April 30, 2001 was 93.4%, equivalent to 13.5% of total Empire operating cash flow. compared to 91.8% a year earlier. In the 2001 fiscal year, an Genstar Acquisition In February 2001, Empire acquired additional 287,000 square feet was leased. This included the a 40% interest in Genstar for $29.0 million. Genstar is a residen- leasing of a 45,000 square foot space in the Loch Lomond Mall tial land development partnership, with operations primarily in at Saint John, New Brunswick, to Client Logic for a call centre. high growth communities in western Canada. In each of the next five years, no more than 9% of total leased Write-Down of Certain Assets As a result of a strategic space will come up for renewal. review of the carrying value of real estate assets completed dur- Major developments completed during fiscal 2001 included ing the first quarter of fiscal 2001, Empire determined that a (i) 5-plex theatre projects, for Empire Theatres at Summerside, write-down of the book value of certain real estate assets was Prince Edward Island and Douglastown, New Brunswick; appropriate. Accordingly, the carrying value of certain real (ii) completion of a Scotiabank Call Centre expansion, MTT estate assets was reduced by $73.7 million ($45.9 million Call Centre expansion and parkade renovations at Scotia after-tax). Square, Halifax, Nova Scotia; (iii) completion of new call cen- Outlook The Company plans continued growth for its real tres at Riverview Mall, Riverview, New Brunswick and Loch estate operations, primarily through development projects that Lomond Mall, Saint John, New Brunswick.; (iv) completion of a support Empire’s food business. During the coming year the 26,000 square foot expansion to the Zellers store at the leasing team will continue to aggressively pursue leasing Bridgewater Mall, Bridgewater, Nova Scotia; (v) a new Sobeys opportunities. As a result, the unit occupancy level is expected food store in Stratford, Prince Edward Island; and (vi) modern- to improve. Because of these factors Empire views the outlook ization of County Fair Mall in New Minas, Nova Scotia. for its real estate business as positive. Going forward, the real Empire’s Real Estate operations posted record revenues and operating income thanks to successful development activities, higher net effective rental rates and lower costs. Real Estate Revenue Real Estate R enue eal Estate Revenue ($ in millions) ($ in millions) ($ in millions) ($ in millions) Real Estate Operating Income Real Estate Operating Income eal Estate Operating Income ($ in millions) ($ in millions) ($ in millions) ($ in millions) 82.3 141.0 139.0 148.0 157.1 165.8 62.0 60.5 70.1 65.1 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 1 a n n u a l r e p o r t 2 0 0 1 m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s estate operation will continue to undertake additional Freres et Cie “Le Lion” S.A. (“Delhaize Group”) shares and development initiatives as required in order to strengthen its above-market performance for other common equity position in core markets. Investments & Other Operations investments. Financial Performance Investments and other opera- Overview The third component of Empire’s business is its tions contribution to Empire’s operating earnings (before net investments, consisting of an investment portfolio of short capital gains and other items) decreased by $9.4 million or and long-term equity investments and investment in 33.8% from the prior year. The decrease is primarily attributed other operations. to the inclusion of equity accounted earnings contribution Empire’s investment portfolio carried a market value of from Empire’s investment in Hannaford for only the first quar- $593.3 million at April 30, 2001, on a cost base of $534.6 mil- ter of the year versus the full year in fiscal 2000. In fiscal 2001, lion, resulting in an unrealized gain of $58.7 million. At year- equity earnings from Hannaford amounted to $9.9 million versus end, the investment portfolio consisted of: $35.7 million in fiscal 2000. Equity accounted earnings contri- Investment Portfolio ($ in millions Canadian) Delhaize Group Wajax Limited Other Common Equity Investments Preferred Share Investments Other Investments Total Investments Market Value 271.0 41.0 177.1 94.9 9.3 593.3 $ $ $ $ Percentage Cost of Portfolio 200.2 61.4 167.8 96.4 8.8 534.6 45.7% 6.9% 29.8% 16.0% 1.6% 100% Empire’s direct debt matched to these investments equaled $153.0 million at year-end, equivalent to 26% of total investment market value. Management considers a ratio of debt to investment value of no greater than 30% as prudent. Other operations consist primarily of wholly owned Empire Theatres, the leading movie exhibitor in Atlantic Canada with 126 screens in 20 locations. Investment Returns The time weighted annual return on investments in fiscal 2001 was 29.3%, driven primarily from increased market value of Etablissements Delhaize bution from Wajax amounted to $5.8 million in fiscal 2001, an increase of 164% from the $2.2 million reported in fiscal 2000. Other operations’ contribution to Empire’s operating earn- ings increased by $0.5 million or 19.2% from the prior year. This increase is primarily the result of strong revenue growth and effective expense control at wholly owned Empire Theatres . Sale of Hannaford Bros. Co. On July 28, 2000, Empire and its subsidiaries completed the sale of their interest in Hannaford by transferring approximately 24.6% of Hannaford’s outstanding common shares to Delhaize America, Inc. (“Delhaize America”) in exchange for approximately 11.9 million non-voting class A common shares of Delhaize America and US$501 million in cash. The US cash was subse- quently converted to CDN$745 million and re-deployed as follows: (i) $220 million, or 29.5%, to buyback Empire Class A common shares; (ii) $14 million, or 1.9%, to buyback Empire Series 2 preferred shares; (iii) $51 million, or 6.8%, to purchase Sobeys common shares; (iv) $80 million, or 10.7%, to purchase a portfolio of high quality, preferred share investments; (v) $171 million, or 23.0%, to repay debt; (vi) $183 million, or Revenue from Investments and Other Operations increased $3.1 million compared to fiscal 2000. This increase was the result of improved performance from Empire Theatres. Operating income reflects the loss of equity earnings from Hannaford, partially offset by higher earnings from the balance of the investment portfolio. Investments and Other Operations estments and Other Operations InvInvestments and Other Operations Revevenue enue Revenue Investments and Other Operations estments and Other Operations InvInvestments and Other Operations Operating Income Operating Income Operating Income ($ in millions) ($ in millions) ($ in millions) ($ in millions) 67.0 63.8 46.0 49.1 38.1 ($ in millions) ($ in millions) ($ in millions) ($ in millions) 48.9 43.9 43.9 41.7 36.3 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 2 E m p i r e c o m pa n y l i m i t e d m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s 24.6%, to purchase a portfolio of high quality, liquid, common components through a network of approximately 140 branch- share investments; and (vii) $26 million, or 3.5%, to unwind es across Canada and the western United States. Its customer cross currency swaps previously held to hedge against foreign base spans the natural resources, construction, transportation, exchange risk associated with the Hannaford investment. manufacturing, industrial processing and utilities sectors. Delhaize Group On September 7, 2000, Delhaize Group, As a result of a strategic review of the carrying value of the largest shareholder of Delhaize America, offered to investments completed during the first quarter of fiscal 2001, exchange shares of Delhaize Group for all of the outstanding Empire determined that a write-down of the book value of its Class A and Class B common shares of Delhaize America. A Wajax investment was appropriate. Accordingly, the carrying committee of independent directors of Delhaize America con- value of Wajax was reduced by $47.8 million ($41.2 million after sidered the offer and recommended acceptance with a conver- tax) or approximately 40% of its original book value. sion rate of 0.4 shares of Delhaize Group for each share of For its fiscal year ended December 31, 2000, Wajax reported Delhaize America. This recommendation was subsequently revenue of $1,147 million, a $109.1 million or 11% increase ratified by the board of directors of Delhaize America and over the prior year. Wajax’s fiscal 2000 net earnings before accepted by the majority of its shareholders and the Delhaize unusual items equaled $11.8 million, up 195% from the $4.0 Group on April 24, 2001. As at year-end, Empire held 3.32 mil- million recorded the prior year. In fiscal 2000, Wajax posted lion shares of Delhaize Group with a market value in Canadian a net loss of $9.7 million after including unusual items, a dollars of $271.0 million, equal to 45.7% of the Company’s decrease of $13.4 million from fiscal 1999. total investment portfolio value. Wajax reported an unusual loss in its fiscal 2000 year of As stated in their corporate press releases, Delhaize Group is $21.4 million, primarily the result of a charge to dispose of its a food retailer headquartered in Belgium and listed on Pacific North Equipment business unit. Euronext Brussels and the New York Stock Exchange. At the On May 8, 2001, subsequent to Empire’s fiscal year-end, end of the first quarter of 2001, Delhaize Group’s sales network Wajax reported first quarter revenue of $271.4 million, an consisted of 2,402 stores in ten countries on three continents. increase of 3.0%, and net earnings of $1.3 million, an increase In 2000, Delhaize Group achieved sales of EUR$18.2 billion of 63% from the first quarter last year. Wajax has noted that (US$16.8 billion) and net earnings of EUR$160.7 million the company is continuing to realize the positive effects of (US$148.1 million). Delhaize Group employs approximately business building and cost reduction initiatives that were put 152,000 people. in place in 1999. Wajax Limited Empire has a 48% equity interest in Wajax Common Equity and Preferred Share Investment with a market value at April 30, 2001 of $41.0 million (versus Portfolio The Company’s investment and other operations $35.0 million on April 30, 2000). As stated on their corporate component includes a common equity and preferred share website, Wajax is comprised of three core distribution investment portfolio with a market value of $272.0 million at businesses engaged in the sale and after-sales parts and service April 30, 2001, on a cost base of $264.2 million. The portfolio is support of mobile equipment, diesel engines and industrial liquid in nature and consists of a diversified mix of high Book value per share increased 93% in fiscal 2001, primarily as a result of the crystallization of the unrealized gain in our Hannaford Bros. Co. investment and the repurchase of 6.5 million Empire common shares funded by that transaction. Empire Company Empire Company Empire Company Book V nrealized Capital Gains alue and Unrealized Capital Gains Book Value and U Book Value and Unrealized Capital Gains Empire Company Empire Company Empire Company Book V nrealized Capital Gains alue and Unrealized Capital Gains Book Value and U Book Value and Unrealized Capital Gains ($ in millions) ($ in millions) ($ in millions) ($ in millions) 1,104.2 ($ per share)e) ($ per shar ($ per shar ($ per share)e) 33.63 706.7 760.5 522.4 482.0 449.2 441.0 571.8 384.4 23.17 18.06 17.45 15.27 14.12 11.86 9.05 9.94 58.7 1.79 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 Book Valuealue Book V Book V Book Valuealue nrealized Gain Unrealized Gain Unrealized Gain nrealized Gain alue per share Book Value per share Book Value per share Book V Book V alue per share nrealized Gain per share Unrealized Gain per share Unrealized Gain per share nrealized Gain per share 2 3 a n n u a l r e p o r t 2 0 0 1 m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s quality, Canadian and U.S. investments with strong historical Net capital gains generated from investments and other opera- performance. No one investment in this portfolio exceeds 5.0% tions equaled $568.3 million or $17.33 per share in fiscal 2001, an of Empire’s total investment value. increase of $566.3 million from last year’s recorded net capital Investment Income ($ in millions) Dividend and interest income Share of income of companies accounted for by the equity method Hannaford Bros. Co. Wajax Limited Total Investment Income $ 2001 2000 Change $ 14.1 $ 0.3 4,600% 9.9 5.8 15.7 29.8 35.7 2.2 37.9 38.2 (72.3)% 163.6% (58.6)% (22.0)% $ Dividend and interest income was $14.1 million compared to $0.3 million in fiscal 2000. This increase is attributed to the dividend income earned from the common equity and the preferred share investment portfolio. These investment port- folios were established in fiscal 2001 with cash proceeds from the sale of the Hannaford investment. gains of $2.0 million or $0.05 per share. This increase was primari- ly the result of the sale of the Hannaford investment. Net capital gains on the sale of liquid investments amounted to $16.0 million in fiscal 2001 versus $2.4 million in fiscal 2000. Outlook The loss of Hannaford equity earnings as a result of the sale of our interests in that company had a significant impact on fiscal 2001 equity earnings. Going forward, investment income is expected to grow on the strength of continued appreciation by our investment portfolio. Empire Theatres’ outlook remains highly dependent on the quality and cost of films. Based on the quality of film releases expected in fiscal 2002, an experienced management team, and planned screen development, Empire looks forward to con- tinued growth in this business. Consolidated Financial Position Assets Total assets at year-end of $4,254.3 million represent a $83.3million or 2.0% increase over fiscal 2000. Total assets in food distribution decreased 0.9%, from $2,857.3 million at April 30, 2000 to $2,830.2 million at April 30, 2001. Total assets in real estate Unrealized Gain on Investment Portfolio decreased $2.1 million or 0.2%, from $846.6 million at April 30, ($ in millions) Market Value Book Value Unrealized Gain 2001 $ 593.3 534.6 $ 58.7 2000 1,166.1 405.6 760.5 $ $ 2000 to $844.5 million at April 30, 2001. Net Asset Value At April 30, 2001, management calculates Empire’s consolidated net asset value at $1,603 million ($48.87 per Empire common share), an increase of $29 million or 1.8% from a calculated consolidated net asset value at April 30, 2000 of $1,574 Excluding the Hannaford investment, the market value of million ($48.00 per share). Management calculates that on a per investments at the end of the 2000 fiscal year equaled $70.7 share basis, net asset value has increased by $0.87 per Empire million, with an unrealized loss of $66.6 million. share or 1.8% over the prior year. Total assets increased $83.3 million or 2.0% in fiscal 2001 to a record $4,254.3 million, primarily reflecting the crystallization of the Hannaford gain and subsequent re-deployment of those proceeds. Net asset value per common share increased from $48.00 to $48.87 reflecting higher net asset value in food distribution and real estate operation. Empire Company Empire Company Empire Company Total Assets otal Assets Total Assets ($ in millions) ($ in millions) ($ in millions) ($ in millions) 4,023.5 4,171.0 4,254.3 1,797.4 1,907.2 Empire Company Empire Company Empire Company Net Asset V er Share alue Per Share Net Asset Value Per Share et Asset Value P ($ per share)e) ($ per shar ($ per shar ($ per share)e) 48.00 48.87 39.75 35.25 29.00 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 4 E m p i r e c o m pa n y l i m i t e d m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s The table below presents the composition of value by division. recommendations of the CICA. This change has been applied This net asset value calculation values Sobeys common shares on a retroactive basis without restatement of the prior years. and Delhaize Group common shares at their respective Accordingly, the opening retained earnings has been decreased April 30, 2001 market values. With Delhaize Group, value by $2.0 million (net of minority interest of $1.3 million), is expressed in Canadian equivalent dollars. For each dollar accrued benefit obligations have increased by $59.1 million, increase in Sobeys’ share price, Empire’s net asset value goodwill has increased by $26.2 million (net of amortization) increases by $1.23 per share. and future tax liabilities have decreased by $24.4 million. Net Asset Value ($ in millions) April 30, 2001 April 30, 2000 handbook section 3465 relating to future income taxes. This Effective May 1, 2000, the Company adopted the CICA new $ Value % of Total Food Distribution $ Real Estate * Investments & Other ** 896 235 625 Less: corporate debt Net asset value Net asset value per share $ 1,756 (153) $ 1,603 $ 48.87 $ Value % of Total 34% 9% 57% 100% 51% $ 716 196 13% 36% 1,191 100% $ 2,103 (529) $ 1,574 $ 48.00 * Valued at 7 times funds from operations for fiscal 2001 and 2000, respectively. ** Investments are valued at stated market values except for Empire Theatres, which is valued at four times EBITDA. At April 30, 2001, the book value of Empire’s common shares was $33.63 compared to $17.45 at April 30, 2000. Accounting Policy Changes Implemented in Fiscal 2001 The Canadian Institute of Chartered Accountants (“CICA”) issued two new accounting standards in the past year, section 3465 “Income Taxes” and Section 3461 “Employee Future Benefits”, effective for fiscal years beginning on or after January 1, 2000. Effective May 1, 2000, the company changed its method of accounting for employee future benefits to conform with the change has been applied retroactively through an adjustment to retained earnings of $2.8 million (net of minority interest of $0.5 million). Prior periods have not been restated as permitted under the standard. Capital Resources & Liquidity Debt and Interest Coverage Empire finances a significant portion of its assets through the use of debt, the majority of which is fixed-rate and long-term in nature. Total fixed-rate, long-term debt at year-end was $1,197.3 million, including the current portion of long-term debt. Of this fixed- rate, long-term debt, 55% was directly related to the food distribution segment and 45% was directly related to the real estate segment. The investment segment carries no long-term debt. Given that the underlying investments are highly liquid in nature, financing matched to the investment segment is short term in nature. Empire finances its long-term assets with fixed-rate debt, thereby reducing both interest rate and refinancing risk. Food distribution and real estate assets, which remained relatively unchanged in fiscal 2001, continue to provide a solid foundation for future growth. Food Distribution Food Distribution ood Distribution Assets Assets Assets ($ in millions) ($ in millions) ($ in millions) ($ in millions) 2864.6 2857.3 2830.2 Real Estate Real Estate eal Estate Assets Assets Assets ($ in millions) ($ in millions) ($ in millions) ($ in millions) 818.8 846.6 844.5 769.8 728.6.0 532.8 562.0 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 5 a n n u a l r e p o r t 2 0 0 1 m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s The table below presents the debt to total capital ratio and The table below presents the balance sheet capital expendi- interest coverage ratio for each segment of Empire along with tures over the last two years by business segment. consolidated totals. April 30, 2001 Debt to total Capital Food Distribution Estate Real Investments & Other Operations Empire Total * 52.3% 76.4% 43.6% 46.4% Interest Coverage April 30, 2000 ** 3.56 1.58 1.81 2.63 Debt to total Capital * 53.1% 78.6% 37.9% 61.4% Interest Coverage ** 2.99 1.35 2.05 2.35 * Funded debt (including accounts receivable securitization) at book value divided by total capitalization. Total capitalization excludes minority interest and deferred taxes. Funded debt is net of the estimated after-tax proceeds on the sale of investments. ** Operating income divided by interest expense. Operating income remained stable in fiscal 2001 compared to the prior year, while interest expense decreased by 11.0% due ($ in millions) Food Distribution Real Estate Investments & Other Total Capital Expenditures 2001 269.9 20.6 2.1 292.6 $ $ 2000 185.8 52.6 8.3 246.7 $ $ During fiscal 2001, company-wide capital spending totaled $505.0 million for the food distribution segment. This capital spending, which includes expenditures by Sobeys, franchisees and third parties, represents an increase of $118.8 million or 31% over the $386.2 million in total spending for fiscal 2000. Planned company-wide spending for fiscal 2002 is $550 million to $600 million. The bulk of the expenditures will be devoted to strengthening the corporate retail and franchised retail store to lower borrowing costs and short-term cash flow manage- networks across the country. ment initiatives. The net effect of these factors was an increase in Empire’s overall interest coverage to 2.63 times from 2.35 times in fiscal 2000. Funded debt (less estimated after-tax pro- ceeds on the sale of investments) to total capital decreased by 15 percentage points to 46.4% from 61.4% last year. Total fund- ed debt, net of cash and estimated after-tax proceeds on sale of investments, equaled $956.5 million at April 30, 2001, an increase of $51.5 million or 5.7% from $905.0 million last year. Capital Expenditures In fiscal 2001, on balance sheet capital expenditures of $292.6 million represented an increase of 18.6% over fiscal 2000. Liquidity Short-term liquidity remains strong as a result of internally generated cash flow, net cash on hand, unutilized- bank credit facilities and short-term investments. On a non- consolidated basis, Empire maintains authorized bank lines for operating, general and corporate purposes of $335 million, of which 46% was utilized at year-end. Financial instruments are used from time to time to manage short-term interest rate fluc- tuations on underlying short-term lines of credit. At year-end, on a consolidated basis, the company’s author- ized bank credit facilities exceeded borrowings by $572 mil- lion. The Company, at its option, can convert $250 million of its authorized revolving-term credits into non-revolving fixed-rate financing for a term up to 30 months. Empire maintains direct access to capital markets for longer- term capital resources. The real estate operation generally On balance sheet capital expenditures increased 18.6% in fiscal 2001 to a record $292.6 million, reflecting an increased focus on Empire’s high-growth food distribution business. Food Distribution Food Distribution ood Distribution Capital Expenditures Capital Expenditures Capital Expenditures ($ in millions) ($ in millions) ($ in millions) ($ in millions) 269.9 216.2 185.8 Real Estate Real Estate eal Estate Capital Expenditures Capital Expenditures Capital Expenditures ($ in millions) ($ in millions) ($ in millions) ($ in millions) 61.7 55.7 52.6 28.7 20.6 70.3 51.4 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 6 E m p i r e c o m pa n y l i m i t e d m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s structures its long-term obligations with fixed rates and fully Empire redeemed 262,352 Series 3 Preferred Shares at a price of amortized debt to reduce interest rate and refinancing risk. The $25 plus accrued and unpaid dividends of $0.50 per share on long-term financial flexibility of the Company is enhanced January 23, 2001. The total redemption price was $6,558,800 through access to capital markets. Empire maintains a corpo- plus accrued and unpaid dividends of $131,176. The shares rate unsecured debt rating of BBB- (stable) from Standard & redeemed represented all of the outstanding Series 3 Preferred Poor’s and BBB (negative trend) from Dominion Bond Rating Shares of Empire. Service Limited. Empire redeemed 545,000 Series 2 Preferred Shares at On June 22, 2000, Sobeys filed a short-form shelf prospectus redemption price of $13.6 million during fiscal 2001. to establish an unsecured medium-term notes program, which At April 30, 2001, there were 431,900 Series 2 Preferred Shares permits the issuance of up to $500 million in medium-term outstanding. notes (MTN’s), from time to time over the next two years. On Risk & Risk Management June 29, 2000, Sobeys refinanced $810 million in secured bank Empire conducts business through its food distribution, real debt by: (a) issuing $175 million unsecured Series A MTN’s estate and theatre operations, each of which has its own risk with an interest rate of 7.60%, maturing November 1, 2005; profile and risk management strategy. (b) securitizing $210 million in trade receivables; and (c) nego- Empire’s retail food distribution and foodservice businesses tiating a non-revolving $250 million unsecured bank credit are effectively diversified through the geographic scope of its facility to be repaid over five years and a $300 million unse- operations. Sales in any one operation (Western, Ontario, cured revolving bank credit facility. Sobeys achieved an annual Quebec, Atlantic, Foodservice) do not exceed 26% of total sales. reduction in interest expense of approximately $9.0 million as This ensures that the Company is not overly exposed should a result of the refinancing program. competition in a particular region intensify or the outlook for On September 15, 2000, Sobeys redeemed series M, N, and O an area change. Management is committed to controlling oper- Sobeys Group Inc. sinking fund debentures totaling $8.75 mil- ating risks through continual innovation (store format and lion, resulting in a balance of $91.8 million. In October 2000, positioning, retail brand development, customer loyalty initia- Sobeys issued a $100 million Series B three-year MTN at an tives), and through the realization of lower costs from increas- effective interest rate of 7.05%. ing economies of scale. In November 2000, Sobeys announced an agreement with a Empire’s food distribution business utilizes a variety of store syndicate of underwriters who agreed to purchase from treas- formats and store banners in order to ensure the optimum fit to ury 9,174,312 common shares of Sobeys to be issued pursuant each market area. By operating across Canada through 402 cor- to a prospectus filed in all provinces of Canada. Empire subse- porate stores and 949 franchised stores, by servicing thousands quently purchased 5,688,073 of these shares at a price of $27.25 of independent accounts and through vertical integration of per share in order to maintain its 62% proportionate share certain operations, the food distribution division has effectively ownership of Sobeys. Net proceeds from the offering of $245.9 minimized its exposure to regional economic risk. million were primarily used by Sobeys to reduce funded debt Empire’s real estate operations generate a stable source of and fund capital expenditures. cash flow and income from ongoing tenant rent payments. While operating cash flow declined slightly, on a per share basis, operating cash flow reached a record $8.82 largely as a result of the re-purchase of Empire Company Limited shares during fiscal 2000 and 2001. Empire Company Empire Company Empire Company Operating Cash Flow P er Share Operating Cash Flow Per Share Operating Cash Flow Per Share ($ per share)e) ($ per shar ($ per shar ($ per share)e) 8.82 7.86 4.31 2.97 2.54 Empire Company Empire Company Empire Company Operating Cash Flow Operating Cash Flow Operating Cash Flow ($ in millions) ($ in millions) ($ in millions) ($ in millions) 297.0 289.3 161.5 109.8 93.9 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2 7 a n n u a l r e p o r t 2 0 0 1 m a n a g e m e n t ’ s d i s c u s s i o n & a n a l y s i s Continued growth of rental income is dependent on renewing availing US bankers’ acceptances. At April 30, 2001, the expiring leases and finding new tenants to fill vacancies at Company had US $67.2 million bankers’ acceptance short-term prevailing rental rates, thereby ensuring an attractive return on obligations. our investment. The success of the real estate portfolio is sub- Empire’s operating companies regularly complete a compre- ject to general economic conditions, the supply and demand hensive environmental compliance report and the Company is for rental property in key markets served and the availability of not aware of any significant environmental liabilities. All oper- attractive financing to expand the real estate portfolio where ating companies are self-insured for limited risks while deemed prudent. During fiscal 2001, our real estate operations maintaining comprehensive loss prevention and management encountered relatively positive economic conditions in our programs to mitigate retained risks. The range of non-insured key markets and a relative lack of new rental space resulted in related risk exposure is not expected to be material to the over- improved rental rates. all operations of the Company. Empire’s Board of Directors has approved a formal debt man- Certain forward-looking statements are included in this agement policy, which details certain directives to ensure that annual report relating to capital expenditures, cost reduction prudent financial management is adhered to. The Board has and operating performance. Such statements are based on also approved a hedge policy for the use of defensive interest management’s assumptions and beliefs in light of information rate and currency risk management instruments. This policy currently available. These forward-looking statements are sub- also has established guidelines regarding counter-party risk. In ject to inherent uncertainties and risks, including but not lim- the ordinary course of managing its debt, Empire and its oper- ited to: business and economic conditions generally in the ating companies have entered into various financial instru- Company’s operating regions; pricing pressures and other com- ments, which are not reflected on the balance sheet, to reduce petitive factors; results of the Company’s ongoing efforts to or eliminate exposure to interest rate risks. Interest rate swaps, reduce costs; and the availability and terms of financing. and forward rate contracts are used to hedge or reduce the Consequently, actual results and events may vary significantly exposure to floating interest rate movements. At April 30, 2001, from those included in or contemplated or implied by such $25 million in short-term obligations were covered by an statements. extendable fixed rate interest rate swap. The instrument was Outlook effective for a one year period from February 2001 at a fixed Management has projected stronger financial performance interest rate of 4.98%. The instrument is extendable for any in fiscal 2002, primarily as a result of continued growth in additional year at the option of the issuer upon maturity. contribution from each operating company, along with appre- Concerning long-term debt management, Empire has not ciation in investments. We have assumed the continuation of entered into interest rate or currency swaps. intense competition in our projections and have factored in To reduce the foreign exchange risk associated with our conservative cost of capital assumptions. We are committed to investment in the Delhaize Group, the Company has hedged its growing value in each of our businesses and thereby, growing currency risk by entering into certain short-term borrowing by value in Empire Company Limited, on behalf of all shareholders. 2 8 E m p i r e c o m pa n y l i m i t e d Management’s Responsibility for Financial Reporting Preparation of the consolidated financial statements accompanying this annual report and the presentation of all other information in the report is the responsibility of management. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and reflect management’s best estimates and judgements. All other financial information in the report is consistent with that contained in the financial statements. The Board of Directors, through its Audit Committee, oversees management in carrying out its responsibilities for financial reporting and systems of internal control. The Audit Committee, which is chaired by and composed of non-management directors, meets regularly with financial management and external auditors to satisfy itself as to reliability and integrity of financial information and the safeguarding of assets. The Audit Committee reports its findings to the Board of Directors for consideration in approving the annual financial statements to be issued to shareholders. The external auditors have full and free access to the Audit Committee. Paul D. Sobey Paul V. Beesley President and Chief Executive Officer Senior Vice President, June 29, 2001 Chief Financial Officer and Secretary June 29, 2001 Auditors’ Report To the Shareholders of Empire Company Limited We have audited the consolidated balance sheet of Empire Company Limited as at April 30, 2001 and 2000, and the consolidated statements of earnings, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the com- pany as at April 30, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. New Glasgow, Nova Scotia Chartered Accountants June 18, 2001 2 9 a n n u a l r e p o r t 2 0 0 1 Consolidated Balance Sheet April 30 (in millions) Assets Current Cash Receivables Income taxes recoverable Inventories Prepaid expenses Investments, at cost (quoted market value $552.3; 2000 $15.0) Investments, at equity (quoted market value $41.0; 2000 $1,151.1) (Note 2) Current assets and marketable investments Property and equipment (Note 4) Other assets (Note 5) Liabilities Current Bank loans and notes payable (Note 6) Payables and accruals Income taxes payable Future income taxes Long term debt due within one year Long term debt (Note 7) Deferred revenue Employee future benefit obligation (Note 18) Minority interest Future income taxes Shareholders' Equity Capital stock (Note 9) Retained earnings Foreign currency translation (Note 1) See accompanying notes to the consolidated financial statements. On behalf of the Board 2001 2000 $ 83.5 428.9 – 551.8 48.0 473.2 54.2 487.8 18.2 492.5 55.1 13.8 1,585.4 1,121.6 $ $ 61.4 1,646.8 1,654.3 953.2 4,254.3 229.2 1,130.3 33.8 16.4 89.0 1,498.7 1,108.3 14.1 60.8 406.9 50.5 391.8 1,513.4 1,740.3 917.3 4,171.0 589.1 1,173.8 – – 92.8 1,855.7 1,323.7 16.6 – 312.6 59.6 3,139.3 3,568.2 193.4 923.1 (1.5) 1,115.0 4,254.3 212.1 360.3 30.4 602.8 $ 4,171.0 $ $ $ $ Director Director 3 0 E m p i r e c o m pa n y l i m i t e d Consolidated Statement of Retained Earnings Year Ended April 30 (in millions) Balance, beginning of year, as previously reported Adjustment relating to employee future benefits net of minority interest of $1.3 (Note 1) Adjustment relating to future income taxes, net of minority interest of $0.5 (Note 1) Balance, beginning of year, as restated Net earnings Dividends paid Preferred shares Common shares Excess of purchase price paid over average paid-up value of common shares purchased for cancellation Costs of purchasing common shares for cancellation Balance, end of year See accompanying notes to the consolidated financial statements. 2001 360.3 (2.0) (2.8) 355.5 580.0 935.5 1.2 11.2 – – 12.4 923.1 $ $ Consolidated Statement of Earnings Year Ended April 30 (in millions except per share amounts) Revenue Cost of sales, selling and administrative expenses $ 2001 11,538.6 11,076.2 Depreciation Investment income (Note 10) Operating income Interest expense Long term debt Short term debt Capital gains and other items (Note 11) Income taxes (Note 12) Current income tax expense Future income tax expense Minority interest Earnings before goodwill amortization Goodwill amortization (Note 1) Net earnings Earnings per share (Note 3) See accompanying notes to the consolidated financial statements. $ $ 3 1 a n n u a l r e p o r t 2 0 0 1 462.4 117.9 344.5 29.8 374.3 115.0 27.1 142.1 232.2 531.3 763.5 103.8 44.8 148.6 614.9 23.2 591.7 11.7 580.0 17.64 2000 425.8 – – 425.8 86.8 512.6 1.7 10.4 140.0 0.2 152.3 360.3 2000 11,164.5 10,707.1 457.4 121.4 336.0 38.2 374.2 128.9 30.7 159.6 214.6 3.1 217.7 25.2 55.3 80.5 137.2 38.3 98.9 12.1 86.8 2.25 $ $ $ $ $ Consolidated Statement of Cash Flows Year Ended April 30 (in millions except per share amounts) Cash provided by (used for) operations Net earnings Items not affecting cash (Note 13) Payment of preferred dividends Operating cash flow Net change in other current items Cash provided by (used for) financing Net increase (decrease) in bank loans Net increase in construction loans Proceeds from issue of long term debt Revolving securitization of accounts receivable Repayment of long term debt Redemption of preferred shares Purchase of Non-Voting Class A Shares for cancellation Increase in minority interest Issue of Non-Voting Class A shares, net of costs Payment of common dividends Total cash available (used) Cash used for (provided by) investments Net proceeds from sale of investment in Hannaford Bros. Co. Purchase of shares in subsidiary, Sobeys Inc. Purchase of property, equipment and other assets Proceeds from sale of property Increase in employee future benefit obligation Decrease in deferred foreign currency translation gains Net increase (decrease) in short term investments Total cash (available) used Increase (decrease) in cash Cash, beginning of year Cash, end of year Operating cash flow per share (Note 3) See accompanying notes to the consolidated financial statements. 2001 2000 580.0 (289.5) (1.2) 289.3 (143.3) 146.0 (359.9) 0.2 553.1 150.0 (772.5) (20.2) – 93.9 1.1 (11.2) (365.5) (219.5) (667.8) 10.9 292.6 (56.9) (1.7) 2.0 172.1 (248.8) 29.3 54.2 83.5 8.82 $ $ $ 86.8 211.9 (1.7) 297.0 (24.5) 272.5 153.5 1.5 95.1 – (166.5) – (215.2) – 2.4 (10.4) (139.6) 132.9 – – 246.7 (85.3) – – (10.7) 150.7 (17.8) 72.0 54.2 7.86 $ $ $ 3 2 E m p i r e c o m pa n y l i m i t e d Notes to the Consolidated Financial Statements ($ millions except per share amounts) 1. Accounting policies Principles of consolidation These consolidated financial statements include the accounts of the Company and all subsidiary companies. Investments in which the Company has significant influence are accounted for by the equity method. Investments in real estate joint ven- tures are consolidated on a proportionate basis. The excess of cost over net assets acquired for equity accounted investments is amortized to income on a straight- line basis up to 40 years. Depreciation The sinking fund method is used to record depreciation of the real estate buildings, calculated as an amount which, com- pounded annually at the rate of 5%, will fully amortize the cost of the buildings over their estimated useful lives ranging from 20 to 40 years. During the year, the Company changed the esti- mated useful lives of its rental properties based on a review of its properties. This change in accounting estimate has been applied prospectively. Prior to 2001, estimated lives ranged from 20 to 50 years from the date of acquisition. Deferred leas- ing costs are amortized over the terms of the related leases and included in operating expenses. Depreciation of other property and equipment is recorded on a straight-line basis over the estimated useful lives of the assets as follows: Equipment Building Leasehold improvements 3 – 10 years 15 – 40 years 7 – 10 years Capitalization of costs A) Construction projects Certain subsidiary companies and joint ventures capitalize interest during the construction period until the project opening date. The amount of interest capitalized to construction in progress in the current year was $0.8 (2000 - $0.8). B) Rental properties Certain subsidiaries and joint ventures capitalize the direct carrying and operating costs applicable to the unleased areas of each new project for a reasonable period from the project opening date until a certain level of occupancy is reached. C) Land held for future development A subsidiary company capitalizes interest and real estate taxes to the extent that they relate to properties for immediate development. No amounts were capitalized in 2001 or 2000. The carrying costs on the balance of properties held for future development are expensed as incurred. Cost of financing The direct costs of debt financing are being amortized over the terms of the related debt. Goodwill Goodwill represents the excess of the purchase price of the business acquired over the fair value of the under- lying net tangible assets acquired at the date of acquisition. Goodwill is amortized on a straight-line basis over its estimat- ed life of 40 years. Goodwill amortization is net of income tax recovery of $0.9 and minority interest of $7.4 (2000 income taxes of $0.6 and minority interest of $7.3). The Company evaluates the carrying value of goodwill for possible impairment by considering whether the amortization of the goodwill balance over the remaining life can be recovered through undiscounted future operating cash flow of the acquired operations. Inventories Warehouse inventories are valued at the lower of cost and net realizable value with cost being substantially determined on a first-in, first-out basis. Retail inventories are valued at the lower of cost and net realizable value less normal profit margins as determined by the retail method of inventory valuation. Leases Leases meeting certain criteria are accounted for as capital leases. The imputed interest is charged against income and the capitalized value is depreciated on a straight-line basis over its estimated useful life. Obligations under capital leases are reduced by rental payments net of imputed interest. All other leases are accounted for as operating leases with rental payments being expensed as incurred. Oil and gas properties and exploration costs The Company follows the full cost method of accounting for its exploration and production activities. All costs of exploring for and developing oil and gas reserves are capitalized, net of government grants, and charged to operations over the life of estimated future production (proved reserves) on the unit- of-production method. Deferred revenue Deferred revenue consists of a long term purchase agreement and rental revenue arising from the sale of subsidiaries. Deferred revenue is being taken into income over the term of the related agreement and leases. Foreign currency Assets and liabilities of self-sustaining foreign investments are translated at exchange rates prevailing at the balance sheet date. The revenues and expenses are trans- lated at average exchange rates prevailing during the year. The gains and losses on translation are deferred and included as a separate component of shareholders’ equity titled “foreign currency translation”. Exchange gains or losses on monetary items identified as a hedge against long term foreign denominated investments are charged to “foreign currency translation” in shareholders’ equity. Development and store opening expenses Development and opening expenses of new stores and store conversions are written off during the first year of operation. Employee future benefits Effective May 1, 2000, the company changed its method of accounting for employee future benefits to conform with the recommendations of the Canadian Institute of Chartered Accountants. This change has 3 3 a n n u a l r e p o r t 2 0 0 1 n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s been applied on a retroactive basis without restatement of the prior years. Accordingly, the opening retained earnings has been decreased by $2.0 (net of minority interest of $1.3), accrued benefit obligations have increased by $59.1, goodwill has increased by $26.2 (net of amortization) and future tax lia- bilities have decreased by $24.4. Future income taxes liability Effective May 1, 2000, the Company adopted the Canadian Institute of Chartered Accountants new handbook section 3465 relating to future income taxes. This change has been applied retroactively through an adjustment to retained earnings of $2.8 (net of minority interest of $0.5). Prior periods have not been restated as permitted under the standard. Accounting estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the con- solidated financial statements and accompanying notes. These estimates are based on management’s best knowledge of cur- rent events and actions that the Company may undertake in the future. 2. Sale of Hannaford Bros. Co. On July 28, 2000 the company sold the Hannaford Bros. Co. investment. Details of the sale are as follows: Proceeds Cash 11,915,463 shares Delhaize America Inc. Expenses and foreign currency translation losses Book value net of foreign currency translation gains Gain before income taxes Income taxes Gain $ $ 745.0 287.3 1,032.3 39.6 992.7 268.5 724.2 150.7 573.5 3. Earnings and cash flow per share Earnings and cash flow per share amounts are calculated on the weighted average number of shares outstanding (2001 – 32,813,000 shares; 2000 – 37,786,000 shares) after providing for preference share dividends accrued to the balance sheet date. Fully diluted earnings per share have been calculated on the assumption that all the outstanding stock options were exercised at the beginning of the year. Earnings applicable to common shares is comprised of the following: Earnings before certain items $ Preferred share dividends Goodwill amortization Capital gains and other items Earnings applicable to common shares Earnings per share is comprised of the following: Earnings before certain items, less preferred share dividends Goodwill amortization Earnings before capital gains and other items Capital gains and other items Net earnings per share Fully diluted earnings per share Other cash flow information Net interest paid Net income taxes paid $ $ $ $ $ $ 2001 100.2 1.2 99.0 11.7 87.3 491.5 578.8 3.02 (0.36) 2.66 14.98 17.64 17.64 146.1 67.2 2000 96.8 1.7 95.1 12.1 83.0 2.1 85.1 2.52 (0.32) 2.20 0.05 2.25 2.25 166.1 40.3 $ $ $ $ $ $ $ 3 4 E m p i r e c o m pa n y l i m i t e d n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s 4. Property and equipment Real estate segment Land Land held for future development Buildings Food distribution and other Land Land held for future development Buildings Information systems development costs Equipment Leasehold improvements Assets under capital leases Total 5. Other assets Accumulated Depreciation 2001 Net 2000 Net Book Value Book Value $ – $ – 138.0 138.0 – – 96.7 – 750.0 115.7 5.4 967.8 $ 111.1 8.3 637.4 756.8 75.6 69.6 260.6 – 377.4 101.3 13.0 897.5 $ 1,105.8 $ 1,654.3 $ 115.2 8.8 694.5 818.5 83.5 60.0 239.9 74.7 369.3 89.4 5.0 921.8 1,740.3 Cost 111.1 8.3 775.4 894.8 75.6 69.6 357.3 – 1,127.4 217.0 18.4 1,865.3 2,760.1 $ $ Mortgages and loans $ Goodwill (less accumulated amortization of $50.2 2000 - $45.1) Deferred charges $ 6. Bank loans and notes payable 2001 115.4 723.5 114.3 953.2 2000 103.6 720.7 93.0 917.3 $ $ As security for certain bank loans, the Company has provided an assignment of certain marketable securities and, in certain divisions and subsidiaries, general assignments of receivables and leases, first floating charge debentures on assets and the assignment of proceeds of fire insurance policies. Under the terms of a credit agreement entered into between the Company and a banking syndicate arranged by the Bank of Nova Scotia, a revolving term credit facility of $300.0 was established. This unsecured facility will expire on June 28, 2001, however, various provisions of the agreement provide the Company with the ability to extend the facility for a minimum period of two years. Interest is payable on this facil- ity at rates which fluctuate with changes in the prime rate. In the ordinary course of managing its debt, the Company uses various financial instruments, which are not reflected on the balance sheet, to reduce or eliminate exposure to interest rate and foreign currency risks. Interest rate swaps, caps, collars and forward contracts are used to hedge or reduce the exposure to floating interest rates and foreign currency fluctuations associated with short-term obligations. At April 30, 2001, $25.0 in short-term obligations were covered by such instruments with a maximum interest rate of 4.98% maturing in 2002 or 2003 at the option of the bank. Loans of $67.2 US have been designated as a hedge against a foreign denominated investment. 3 5 a n n u a l r e p o r t 2 0 0 1 n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s 7. Long term debt First mortgage loans, average interest rate 9.6%, due 2001-2024 Secured loans, average interest rate 6.8%, due June 29, 2005 Medium term note, interest rate 7.6%, due November 1, 2005 Medium term note, interest rate 7.0%, due October 2, 2003 Debentures, average interest rate 10.7%, due 2002-2016 Notes payable and other debt at interest rates fluctuating with the prime rate Construction loans at interest rates fluctuating with the prime rate Capital lease obligations, due 2001-2011, net of imputed interest Less amount due within one year $ Real Food Estate Distribution & Segment Foodservice 2001 Total $ 386.7 $ 41.5 $ 428.2 $ 2000 Total 437.9 691.5 – – 192.5 70.7 1,392.6 220.0 175.0 100.0 175.3 71.7 1,170.2 13.5 13.3 13.6 1,197.3 89.0 1,108.3 $ 10.6 1,416.5 92.8 1,323.7 $ – – – 86.8 47.8 521.3 13.5 – 534.8 35.8 499.0 $ 220.0 175.0 100.0 88.5 23.9 648.9 – 13.6 662.5 53.2 609.3 As security for certain construction loans, the Company has Operating leases provided a first charge on land and buildings under construc- The net aggregate, annual, minimum rent payable under oper- tion. These loans become due for refinancing at various dates ating leases for fiscal 2002 is approximately $81.3 ($164.0 gross in 2001. It is intended that these loans will be refinanced by less expected sub-lease income of $82.7). The net commitments long term borrowings. over the next five fiscal years are: Long term debt is secured by land and buildings, specific charges on certain assets and additional security as described in Note 6. During the year a short form prospectus was filed providing for the issuance of up to $500.0 in unsecured medium term notes. The company also negotiated a new unsecured $550.0 credit facility consisting of $250.0 of non-revolving debt to be repaid over five years, plus a $300.0 revolving line of credit. 2002 2003 2004 2005 2006 Net Lease Obligation 81.3 $ 75.5 57.8 52.8 48.4 8. Accounts receivable securitization Debt retirement payments and capital lease obligations in On June 29, 2000, the Company entered into a revolving secu- each of the next five fiscal years are: ritization program, whereby some accounts receivable were 2002 2003 2004 2005 2006 Long term Capital cant risks and rewards of ownership. The transaction was sold to a banking syndicate under terms that transfer signifi- $ Debt 86.9 67.8 168.7 130.0 217.9 Leases 2.1 $ 1.8 1.8 1.6 1.6 recognized as a sale and the accounts receivables were removed from the consolidated balance sheets. As at April 30, 2001, the Company had received $150.0 from the banking syndicate. The Company has retained interest of $116.0 which is included in receivables. 3 6 E m p i r e c o m pa n y l i m i t e d n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s 9. Capital stock Authorized Preferred shares, par value of $25 each, issuable in series as a class. Series 2 cumulative, redeemable, rate of 75% of prime. Series 3 cumulative, redeemable, rate 8%. Non-Voting Class A shares, without par value Class B common shares, without par value, voting Issued and outstanding Preferred shares, Series 2 Preferred shares, Series 3 Non-Voting Class A Class B common Loans receivable from employees and directors under share purchase plan 2001 No. of Shares 431,900 – 15,380,044 17,448,728 2000 No. of Shares 976,900 262,352 15,325,929 17,448,728 $ $ 10.8 – 180.0 7.7 198.5 (5.1) 193.4 Number of Shares 34,261,305 136,583,367 20,400,000 $ $ 24.4 6.6 178.9 7.7 217.6 (5.5) 212.1 During the year, the Company purchased for cancellation shares, the holders of the Non-Voting Class A shares shall be 545,000 of its Series 2 preferred shares for $13.6 and 262,352 of entitled to receive a follow-up offer at the highest price per its Series 3 preferred shares for $6.6. share paid, pursuant to such offer to purchase Class B In 2000, the Company purchased 6,478,750 Non-Voting common shares. Class A shares. The purchase price was $215.2 including $0.2 costs. $140.2 of the purchase price was charged to retained 10. Investment income earnings. During the year 34,872 (2000 – 63,004) options were exer- Dividend and interest cised resulting in 34,872 (2000 – 63,004) Non-Voting Class A income shares being issued for $0.5 (2000 – $0.8). Options allow holders Share of income of companies to purchase Non-Voting Class A shares at $13.11 per share. accounted for by the Options expire at dates from June 2002 to October 2006. There equity method 2001 14.1 15.7 29.8 $ $ were 89,003 options outstanding at April 30, 2001. During the year 19,243 (2000 – 57,269) Non-Voting Class A shares were issued under the Company’s share purchase plan to certain officers and employees for $0.6 (2000 – $1.6), which 11. Capital gains and other items 2001 was based on the average trading price of the Non-Voting Class Gain on sale of investments A shares on the Toronto Stock Exchange for the five previous Loss on sale of properties trading days. Restructuring expenses Loans receivable from officers and employees of $5.1 (2000 – Gain on sale of investment in $5.5) under the Company’s share purchase plan are classified as Hannaford Bros. Co. a reduction of Shareholders’ Equity. Loan repayments will Reduction of book value result in a corresponding increase in Share Capital. The loans of investments are non-interest bearing and non-recourse, secured by 225,368 Reduction of book value of (2000 – 277,831) Non-Voting Class A shares. Market value of the real estate assets shares at April 30, 2001 was $7.7 (2000 – $8.9). Under certain circumstances, where an offer (as defined in the share conditions) is made to purchase Class B common $ $ 19.1 (1.4) (89.1) 724.2 (47.8) (73.7) 531.3 3 7 a n n u a l r e p o r t 2 0 0 1 2000 0.3 37.9 38.2 2000 3.6 (0.5) – – – – 3.1 $ $ $ $ n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s On January 24, 2001 Sobeys Inc., the Company’s food distribu- The tax effect of temporary differences that give rise to tion segment subsidiary, announced its decision to discontinue significant portions of future income taxes at April 30, 2001 are $ $ $ $ $ 76.2 53.7 (27.0) (16.7) 13.6 14.8 (56.2) 8.5 66.9 16.4 50.5 66.9 2000 121.4 20.0 64.7 8.3 (28.3) 25.8 – – – 2001 117.9 20.0 (10.7) 23.2 (13.3) 29.5 30.3 (573.5) 45.9 41.2 (289.5) $ – 211.9 $ further development and implementation of its enterprise- presented below: wide software and systems initiative. This resulted in an expense of $89.1 or $30.3 net of income taxes of $39.9 and Real estate division property minority interest of $18.9. Investments As a result of a strategic review completed during the first Future employee benefit obligation quarter, including a review of the carrying value of invest- Restructuring provisions ments and real estate assets, the company determined that a Pension contributions write-down was appropriate. Accordingly, the carrying value of Deferred cost Wajax was reduced by $47.8 ($41.2 after tax) and the Tax loss carry-forward carrying value of certain real estate properties was reduced by Other $73.7 ($45.9 after tax). 12. Income taxes Income tax expense varies from the amount that would be computed by applying the combined federal and provincial statutory tax rate as a result of the following: Future income taxes – current Future income taxes – non-current 13. Items not affecting cash 2001 2000 Depreciation $ Income tax expense according to combined statutory Goodwill amortization Future income taxes rate of 40.4% (2000 – 42.9%) $ 85.7 $ 83.9 Amortization of deferred items Increase (reduction) in income Equity in earnings of other companies, taxes resulting from adjustment to future tax assets and liabilities for substantially enacted changes in tax laws and reduction in capital gains inclusion rate Non-taxable gains Non-taxable dividends and equity earnings Non-deductible goodwill amortization Other non-deductible costs Large corporation tax Total income taxes (before capital gains 1.5 (0.5) (9.7) 7.7 – 4.2 and other items) Capital gains and other items 88.9 58.8 147.7 $ $ – – (15.9) 7.6 0.4 3.9 79.9 – 79.9 net of dividends received Minority interest Restructuring charges, net of taxes of $39.9 and minority interest of $18.9 Gain on sale of investment in Hannaford Bros. Co., net of income taxes of $150.7 Reduction of book value of real estate assets, net of income taxes of $27.8 Reduction of book value of investments, net of income taxes of $6.6 April 30, 2001 income tax expense attributable to net income consists of: Operations Capital gains and other items Goodwill Current 80.4 $ 23.4 – $ 103.8 Future 9.4 35.4 (0.9) 43.9 $ $ Total 89.8 58.8 (0.9) 147.7 $ $ 3 8 E m p i r e c o m pa n y l i m i t e d n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s 14 . Real estate joint ventures The financial statements include the Company’s proportionate share of the accounts of incorporated and unincorporated real estate joint ventures. A summary of these amounts is as follows: Assets Liabilities Equity and advances Revenues Expenses Income before income taxes Cash provided (used) Operating activities Investing activities Financing activities 2001 76.2 32.0 44.2 76.2 4.4 2.4 2.0 8.9 (53.1) 43.5 (0.7) $ $ $ $ $ $ $ 2000 14.6 0.6 14.0 14.6 4.1 2.3 1.8 3.4 – (1.3) 2.1 $ $ $ $ $ $ $ On January 15, 2001 the Company acquired a 40% interest in the joint venture Genstar Development Partnership for cash proceeds of $29.0. The company’s proportionate share of the assets and liabilities acquired are as follows: Assets Liabilities Equity and advances 15. Segmented information $ $ $ 73.3 44.3 29.0 73.3 Operating income Food Food distribution Foodservice Real estate Other operations Investment income Corporate expenses Identifiable assets Food Food distribution Foodservice Goodwill Real estate Investments Other Depreciation Food Food distribution Foodservice Real estate Corporate and other Capital expenditure Food 2001 2000 Food distribution $ 9,161.0 2,209.5 $ 8,936.2 2,069.9 11,370.5 11,006.1 Foodservice Real estate Corporate and other $ $ $ $ $ $ $ $ 231.0 31.9 262.9 82.3 6.5 29.8 (7.2) 374.3 231.8 33.8 265.6 70.1 5.7 38.2 (5.4) 374.2 $ $ 1,740.6 366.1 723.5 2,830.2 844.5 534.6 45.0 4,254.3 $ 1,776.4 366.0 714.9 2,857.3 846.6 405.7 61.4 $ 4,171.0 87.0 12.5 99.5 14.7 3.7 117.9 255.8 14.1 269.9 20.6 2.1 292.6 86.5 11.5 98.0 19.9 3.5 121.4 171.1 14.7 185.8 52.6 8.3 246.7 $ $ $ $ Revenue Food Food distribution Foodservice Real estate Outside Inter-segment Other operations Elimination 119.0 46.8 165.8 49.1 112.4 44.7 157.1 46.0 The Company operates principally in three business segments: food distribution, foodservice and real estate. The food distri- bution segment consists of distribution of food products in Canada. The foodservice segment supplies the institutional, 11,585.4 11,209.2 chain and independent restaurant markets in Canada. The real (46.8) $ 11,538.6 (44.7) $11,164.5 estate segment consists of development, rental and manage- ment of shopping centres and office buildings located princi- pally in the Atlantic Provinces. Intersegment transactions are at market values. 3 9 a n n u a l r e p o r t 2 0 0 1 n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s 16. Financial instruments Defined benefit plans Credit risk There is no significant concentration of credit risk. The credit risk exposure is considered normal for the business. Other financial instruments The book value of cash, receivables, mortgages and loans receivable, bank loans and notes payable, accounts payables and accrued charges and income taxes payable approximate fair values at April 30, 2001. The fair value of investments is $593.3. The total fair value of long term debt is estimated to be $1,295.2. The fair value of variable rate debt is assumed to approximate its carrying amount. The fair value of other long term debt has been estimated by discounting future cash flows at a rate offered for debt of similar maturities and credit quality. Interest rate risk The majority of the Company debt is at fixed rates. Accordingly, there is limited exposure for interest rate risk. 17. Contingent liabilities At April 30, 2001, the Company was contingently liable for letters of credit issued in the aggregate amount of $42.7. The Company has guaranteed certain bank loans contracted by franchisees. As at April 30, 2001, these loans amounted to approximately $14.7. There are various claims and litigation, which the Company is involved with, arising out of the ordinary course of business operations. The Company’s management does not consider the exposure to such litigation to be material, although this cannot be predicted with certainty. 18. Employee future benefits The company has a number of defined benefit and defined con- tribution plans providing pension and other retirement bene- fits to most of its food distribution and foodservice employees. Defined contribution plans The total expense for the Company’s defined contribution plans is as follows: 2001 2000 $ $ 7.7 5.7 Information about the Company’s defined benefit plans, in aggregate, is as follows: Pension Other Benefit Plans 2001 Benefit Plans 2001 Accrued benefit obligation Balance, beginning of year $ 195.9 $ Current service cost Interest cost Employee contributions Plan amendments Benefits paid Curtailment Actuarial loss Balance, end of year 4.3 14.4 0.3 0.4 (15.7) 0.1 6.7 $ 206.4 Plan assets Market value, beginning of year $ Actual return on plan assets Employer contributions Employee contributions Benefits paid Market value, end of year Funded status Surplus Unamortized past service cost Unamortized actuarial loss Accrued benefit asset (liability) Expense Current service cost Interest cost Expected return on plan assets $ $ $ $ $ 205.6 11.3 8.0 0.3 (15.7) 209.5 3.1 0.4 12.0 15.5 4.3 14.4 (16.6) 2.1 $ $ $ $ $ $ $ 59.1 1.5 4.1 – – (3.9) – 1.0 61.8 – – 3.9 – (3.9) – (61.8) – 1.0 (60.8) 1.5 4.1 – 5.6 Included in the above accrued benefit obligation at year end are the following amounts in respect of plans that are not funded: Accrued benefit obligation Pension Other Benefit Plans 2001 Benefit Plans 2001 $ 16.0 $ 61.8 4 0 E m p i r e c o m pa n y l i m i t e d n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s The significant actuarial assumptions adopted in measuring For measurement purposes, a 4.5% to 5.0% annual rate of the Company’s accrued benefit obligations are as follows increase in the per capita cost of covered health care benefits (weighted-average assumptions as of April 30, 2001): was assumed, a rate that is expected to be slightly in excess of inflation. The average remaining service period of the Pension Other active employees covered by the pension benefit plans and Benefit Plans 2001 Benefit Plans 2001 other benefit plans is 13 and 17 years, respectively. Discount rate Expected long term rate of return on plan assets Rate of compensation increase 7.35% 8.00% 4.00% 7.35% 19. Comparative figures Comparative figures have been reclassified, where necessary, to reflect the current year’s presentation. – – Consolidated Schedule of Investments April 30 (in millions except number of shares) Long Term Investments Investments, at equity Wajax Limited Current investments Listed investments Unlisted investments, at cost Number of Shares Realizable Value 7,452,994 $ $ 41.0 543.1 9.2 552.3 593.3 Realizable value is the quoted market value for shares listed on a recognized stock exchange, and cost which is less than fair market value, for other investments. 4 1 a n n u a l r e p o r t 2 0 0 1 Eleven Year Financial Review Years ended April 30 Operations ($ in millions) Revenue Cost of sales, selling and 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 11,538.6 11,164.5 6,377.7 3,320.0 3,149.7 2,915.2 2,699.5 2,577.4 2,358.4 2,235.5 2,087.9 administrative expenses 11,076.2 462.4 Depreciation Operating income before investment income Investment income Operating income Gain (loss) on sale of 117.9 344.5 29.8 374.3 properties and investments 531.3 Earnings before interest expense and income taxes 905.6 142.1 148.6 Interest expense Income taxes Minority interest Earnings before certain items 100.2 11.7 Goodwill Other items/discontinued 23.2 operations Net earnings Cash flow from operating activities Capital expenditures 491.5 580.0 146.0 292.6 Financial Position ($ in millions) Net working capital 10,707.1 6,098.2 3,127.1 2,971.9 2,746.0 2,521.5 2,409.9 2,209.6 2,101.4 1,959.7 457.4 121.4 336.0 38.2 374.2 279.5 93.9 185.6 37.3 222.9 192.9 68.6 124.3 41.3 165.6 177.8 63.6 114.2 35.6 149.8 169.2 59.1 110.1 32.7 142.8 178.0 55.5 122.5 30.1 152.6 167.5 49.9 117.6 27.0 144.6 148.8 44.1 104.7 27.6 132.3 134.1 39.6 128.2 33.9 94.5 21.1 94.3 28.1 115.6 122.4 3.1 37.8 6.5 1.4 2.1 (2.8) 5.4 1.7 0.2 0.8 377.3 159.6 80.5 38.3 96.8 12.1 2.1 86.8 272.5 246.7 260.7 112.4 48.6 9.5 90.2 6.0 50.8 135.0 303.2 276.0 172.1 151.2 144.9 149.8 150.0 134.0 115.8 123.2 76.7 25.1 – 70.3 1.8 19.3 87.8 79.2 16.9 0.4 54.7 1.8 – 52.9 87.7 13.7 0.5 43.0 0.9 (20.4) 21.7 89.3 16.8 0.5 43.2 2.0 – 41.2 133.1 137.5 107.2 82.7 85.2 125.7 103.0 120.1 81.4 19.4 0.5 48.7 0.8 – 47.9 68.0 98.1 73.4 15.6 0.3 44.7 0.6 (15.6) 28.5 66.2 40.5 76.1 11.0 1.5 27.2 0.6 (5.6) 21.0 67.1 93.0 76.8 12.0 2.7 31.7 0.6 (16.7) 14.4 38.2 97.5 (including marketable investments) Property and equipment Total assets Long term debt (excluding current position) Shareholders’ equity 148.1 (342.3) (217.9) 153.1 128.8 178.5 1,654.3 1,740.3 1,689.7 1,069.0 1,001.9 1,004.5 183.6 968.8 204.3 909.9 240.4 714.5 189.6 720.3 228.0 673.4 4,254.3 4,171.0 4,023.5 1,907.2 1,797.4 1,731.4 1,761.1 1,696.9 1,426.5 1,421.9 1,402.0 1,108.3 1,323.7 1,392.4 1,115.0 602.8 737.7 616.6 558.3 606.8 479.6 656.1 474.9 648.0 469.5 633.6 447.9 514.9 401.6 472.6 398.9 430.7 398.0 Per Share Information ($ per share) Earnings before certain items Net earnings Operating cash flow Dividend paid 3.02 17.64 8.82 Non-voting Class A Shares Class B common shares 0.34 0.34 2.52 2.25 7.86 0.28 0.28 33.63 17.45 2.20 3.55 4.31 1.81 2.33 2.97 0.2725 0.2725 18.06 0.2425 0.2325 14.12 1.33 1.33 2.54 0.22 0.18 11.86 Book value Financial Ratios Return on equity – continuing operations, before certain items Return on equity 10.6% 69.1% 13.0% 13.3% 13.4% 21.7% 13.9% 17.9% 11.9% 11.9% Share Price, Non-voting Class A Shares ($ per share) High Low Close 34.00 27.75 36.50 24.65 32.10 33.95 32.55 25.00 26.00 28.50 15.60 27.25 15.70 12.25 15.70 4 2 E m p i r e c o m pa n y l i m i t e d 0.96 0.41 2.22 0.215 0.165 10.48 9.3% 3.9% 15.75 11.50 12.30 0.93 0.93 2.17 0.20 0.12 10.24 1.09 1.09 2.33 0.20 0.12 9.59 0.98 0.52 2.11 0.18 0.09 7.66 0.44 0.28 1.57 0.16 0.06 7.35 9.4% 9.4% 12.2% 12.2% 12.7% 6.8% 5.9% 3.7% 16.50 13.00 13.38 17.75 12.25 16.13 14.75 10.00 14.25 13.75 11.00 12.63 0.49 0.01 1.32 0.16 0.06 7.23 6.6% 0.1% 13.50 8.75 11.88 Directors and Officers Robert P. Dexter 3,6 William G. (Bill) McEwan John B. Roy Halifax, Nova Scotia President and CEO, Director since 1987. Chairman Sobeys Inc. Maritime Travel (Group) Limited. James M. Dickson Ronald V. Joyce Senior Chairman, Executive Vice President, Corporate Services, General Counsel & Secretary Dr. Elizabeth Parr-Johnston 1 The TDL Group Limited. Duncan F. Reith with the Company for 43 years. J. William Sinclair 3 President, Home Depot Canada. Frank C. Sobey Stellarton, Nova Scotia Director since 1990. Chairman of Westville, Nova Scotia Director since 1980. Corporate Director. Atlantic Shopping Centres Limited, John R. Sobey O f f i c e r s Donald R. Sobey Chairman Paul D. Sobey President and CEO Paul V. Beesley Senior Vice President, Chief Financial Officer and Secretary Stewart H. Mahoney Vice President, Treasury and Investor Relations Carol A. Campbell Vice President, Risk Management John G. Morrow Comptroller E xe c u t i v e D i r e c to r s David F. Sobey 3 New Glasgow, Nova Scotia Director since 1963. Chairman of Sobeys Inc, has been with the Company for 49 years. Donald R. Sobey 3 New Glasgow, Nova Scotia Director since 1963. Chairman of Empire Company Limited, has been has been with the Company for 23 years. Paul D. Sobey New Glasgow, Nova Scotia Director since 1993. President and CEO of Empire Company Limited, has been with the Company for 19 years. Robert G. Sobey Stellarton, Nova Scotia Director since 1998. Director Leadership Administration, Sobeys Inc., has been with the Company for 12 years. Independent Directors John L. Bragg 3,5 Collingwood, Nova Scotia Director since 1999. Director and President, Oxford Frozen Foods Ltd. Sir Graham Day 2,5 Hantsport, Nova Scotia Director since 1991. Counsel to Stewart McKelvey Stirling Scales. Douglas B. Stewart New Glasgow, Nova Scotia Director since 1992. Corporate Director and CEO of Maritime Travel (Group) Limited. Peter C. Godsoe 1 Toronto, Ontario Director since 1993. Chairman and CEO of The Bank of Nova Scotia. James W. Gogan 1 New Glasgow, Nova Scotia Director since 1972. Corporate Director. James L. Moody, Jr4 Cape Elizabeth, Maine Director Since 1998. Corporate Director. Independent Directors John L. Bragg President, Oxford Frozen Foods Limited. Marcel Côté Senior Partner, Secor Inc. Sir Graham Day Counsel to Stewart McKelvey Stirling Scales. Robert P. Dexter Chairman and CEO, Fredericton, New Brunswick Director since 1994. President and Vice Chancellor of the University of New Brunswick. E. Courtney Pratt 3,5 Toronto, Ontario Director since 1995. Karl R. Sobey Corporate Director. John R. Sobey Corporate Director. Lawrence N. Stevenson President, Pathfinder Capital. President and CEO of Toronto Hydro. Annette Verschuren At l a n t i c S h o ppin g C e n t r e s L i m i t e d Executive Directors J. Stuart Blair President and CEO, Atlantic Shopping Centres Limited. David F. Sobey Chairman, Sobeys Inc. Stellarton, Nova Scotia Director since 1979. Corporate Director. 1 Audit Committee Member 2 Audit Committee Chairman Donald R. Sobey 3 Human Resources Committee Member 4 Human Resources Committee Chairman 5 Corporate Governance Committee Member 6 Corporate Governance Committee Chairman D i r e c to r s o f O pe r at i n g C o m pa n i e s S o b e y s I nc . Executive Directors David F. Sobey Chairman, Sobeys Inc. Donald R. Sobey Chairman, Empire Company Limited. Paul D. Sobey President and CEO, Empire Company Limited. Chairman, Empire Company Limited. Frank C. Sobey Chairman, Atlantic Shopping Centres Limited. Paul D. Sobey President and CEO, Empire Company Limited. Independent Directors David G. Graham President, Atlantic Developments Inc. David J. Hennigar Chairman, Annapolis Basin Group Inc. Kenneth C. Rowe Chairman and CEO, IMP Group Ltd. 4 3 a n n u a l r e p o r t 2 0 0 1 President, Summit REIT. John R. Sobey Corporate Director. O f f i c e r s o f O pe r at i n g C o m pa n i e s S o b e y s I nc . David F. Sobey Chairman William G. (Bill) McEwan President and CEO R. Glenn Hynes Executive Vice President & Chief Financial Officer Executive Vice President & Chief Merchandising Officer Clinton D. Keay Treasurer John K. Lynn President Operations, Atlantic Region Marc Poulin President Operations, Quebec Region Eugene J. Duynstee President Operations, Ontario Region Wayne A. Wagner President Operations, Western Region Gary H. Seaman President, SERCA Foodservice Inc. At l a n t i c S h o ppi n g C e n t r e s L i m i t e d Frank C. Sobey Chairman J. Stuart Blair President and CEO John G. Morrow Vice President, Finance and Secretary Allan K. Macdonald Vice President, Leasing Scott R. Maclean Vice President, Operations Paul W. Wigginton Comptroller Empire Theatres Limited Stuart G. Fraser President and CEO Kevin J. Macleod Vice President, Operations Investor Information Empire Company Limited Transfer Agents Head Office 115 King Street Stellarton, Nova Scotia B0K 1S0 Telephone: (902) 755-4440 Fax: (902) 755-6477 Internet: www.empireco.ca Investor Relations For additional information please write to the company, c/o Stewart H. Mahoney, CFA Vice President, Treasury and Investor Relations E-mail: investor.relations@empireco.com Affiliated Company web addresses www.sobeys.com www.empiretheatres.com www.atlanticshoppingcentres.com Shareholders' Annual Meeting September 12th, 2001 at 11:00 a.m. Aberdeen Cinemas 610 East River Road New Glasgow, Nova Scotia Stock Exchange Listings The Toronto Stock Exchange Stock Symbols Non-voting Class A shares – EMP.A Preferred shares: Series 2 – EMP.PR.B Average Daily Trading Volume (TSE) 13,700 Computershare Trust Company of Canada Telephone: (800) 564-6253 Non-voting Class A shares CIBC Mellon Trust Company Telephone: (902) 420-3821 Series 2 Preferred shares Bankers Bank of America (Canada) Bank of Montreal Bank of Nova Scotia Canadian Imperial Bank of Commerce National Bank of Canada Royal Bank of Canada Toronto-Dominion Bank Solicitors Stewart McKelvey Stirling Scales Halifax, Nova Scotia Auditors Grant Thornton, LLP New Glasgow, Nova Scotia Multiple Mailings If you have more than one account, you may receive a separate annual report for each. If this occurs, please contact Computershare at (800) 564-6253 to eliminate the multiple mailings. Investor Inquiries Communications regarding investor records, including changes of address or ownership, should be directed to the Company’s transfer agent, Computershare Investor Services, Inc., at the above contact information. Common Dividend Record and Payment Dates for Fiscal 2002* Examplaire français Vous pouvez obtenir un exemplaire français de ce rapport Record Date July 13, 2001 Oct. 15, 2001 Jan. 15, 2002 Apr. 15, 2002 Payment Date July 31, 2001 Oct. 31, 2001 Jan. 31, 2002 Apr. 30, 2002 annuel en écrivant à : Empire Company Limited Investor Relations 115 King Street Stellarton, Nova Scotia * subject to approval by Board of Directors B0K 1S0 Outstanding Shares As of July 7th, 2001 Non-Voting Class A common 15,382,144 Options excercisable for Class A common shares Class B common, voting 86,903 17,448,728 4 4 E m p i r e c o m pa n y l i m i t e d 9888-CRAIB/Empire Cover 7/20/01 9:26 AM Page c Mission Statement Goal: Empire is committed to building shareholder value through long-term profitability and growth by becoming a market leader in its core operating businesses and by investing in other opportunities to augment this growth in value. How: Empire will achieve this goal by treating employees in ways that create extraordinary customer service and shareholder value. Values: Empire will be a good corporate citizen, upholding the highest standards of integrity and ethical conduct. Corporate Governance The governance of the corporation is the responsibility of Empire’s Board of Directors, which has three committees: Corporate Governance; Human Resource; and Audit. For a more detailed review of the Company’s governance practices see Empire’s 2001 Management Information Circular. Community Involvement Empire is an active member of the communities in which it operates through the volunteer efforts of its employees and the financial support provided each year by the Sobey Foundation. The Company is a member of the “Imagine” corporate giving program and sponsors numerous charitable initiatives through its operating companies including the popular “Tape Saver” program and the annual “Run for the Cure” in support of breast cancer research. a i t o c S a v o N , n o t r a l l e t S , . d t L t n i r P - n g i S n r e t s a E : g n i t n i r P . c n I y n a p m o C & n n u l B : s e c i v r e S l a i r o t i d E s c i h p a r G e t a r o p r o C b i a r C : n o i t c u d o r P d n a n g i s e D La chute des feuille, Sainte-Rose, 1937, © sodart 2001 Marc- Aurèle Fortin, A.R.C.A. (1888-1970) Empire’s custom of featuring a Canadian painting from the Sobey collection in its annual reports continues with this dazzling autumn scene from the Province of Quebec. Marc-Aurele Fortin studied in Montreal with the conservative painters Ludger Larose and Edmond Dyonnet, and in the years just before the First World War, at the Art Institute of Chicago and in Boston and New York. He also travelled widely in the mid-1930s in southern France and northern Italy. Seen as a major landscape painter of his generation in Quebec, Fortin found his subjects in his native village of Sainte-Rose, north of Montreal. He also depicted life along the Saint Lawrence River and in the Gaspe, as well as in relatively detached views of Montreal. He responded warmly to rural subjects and landscape while his scenes of the city of “Hochelaga” were always at a physical and psychological distance. By the 1930’s he was being widely collected in Quebec, his landscapes being decorative yet imbued with the power to suggest a spiritual element that Fortin could only find outside the urban areas. La chute des feuilles – the fall of autumn leaves – is a signpost of the reassuring cycle of rural life while the bright colours reflect the influence of his sojourn in southern Europe. Colour reproductions of this painting are available in limited numbers, upon request. Please write to the company c/o The Sobey Art Foundation or visit our website at www.emp-a-com. 

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