Empire Company Annual Report 2004

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FY2004 Annual Report · Empire Company

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15916 Empire_Cover 7/27/04 9:37 AM Page 1

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ABOVE: Near Langford, British Columbia, 1939
EMILY CARR (1871 – 1945)
From the collection of the Sobey Art Foundation, on display at Crombie House in Pictou County, Nova Scotia.

Emily Carr (1871 – 1945) of Victoria, British Columbia,
studied at the San Francisco School of Art (1889 – 1894)
and at the Westminster School of Art, London, which
included other locations in England (1899 – 1904).
She returned to British Columbia after each period to
teach and to paint the Indian villages on the Pacific
Coast. Carr then traveled to Europe to study briefly at
the Academie Colarossi in Paris (1910 – 1911) where
she aimed to discover the “new art” which today we call
post-Impressionism. She painted and traveled with several
artists in Sweden and in Brittany.The New Zealand artist
Frances Hodgkins provided considerable encouragement
to Carr, urging her to seek her own artistic independence.
In October 1911, Carr was represented by two paintings
in the famous Salon d’Automne in Paris. However,
upon her return to Canada, she considered her new
work to be unappreciated.

Emily Carr held her first exhibition in Vancouver and
painted the Indian villages in Fauve style. In 1913 she
returned to Victoria, where she built an apartment house
(the “House of All Sorts”). In the 1920’s to supplement

her rental income she made pottery and carpets with
west coast native designs. Carr continued to paint and
exhibit sporadically until 1927, when at her first
exhibition in Eastern Canada, she met the members
of the Group of Seven. Lawren Harris in particular
inspired her to develop her characteristic, monumental
style. She was also influenced by the American artist
Mark Tobey, who first visited her in 1928. In 1933,
Carr joined Group of Seven artists in forming the
Canadian Group of Painters.

According to Emily Carr’s biographer Maria Tippett,
Carr’s failing health in the late 1930’s curtailed her
painting activities. However, in the summer of 1939,
Carr went camping near Langford, British Columbia,
and it is likely that this painting was completed at that
time, or shortly thereafter, along with several other
canvasses. Her painting reflects Carr’s preoccupation
with regeneration of logged-over areas and the spiritual
energy that emanates from the forest. Carr’s later
work is known for its expansiveness of feeling, and
Near Langford is a very fine example of this.

WE VALUE CANADIAN CULTURE
Colour reproductions of this painting are available in limited numbers, upon request.
Please write to: The Sobey Art Foundation, c/o Empire Company Limited, or visit our website at www.empireco.ca.

E M P I R E

What we value

Empire Company Limited 2004 Annual Report

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FINANCIAL HIGHLIGHTS

Years Ended April 30 th
($ in millions, except per share amounts)

Operations
Revenue
Operating income
Operating earnings
Capital gain (loss) and other items, net of tax
Gain on sale of discontinued operations, net of tax
Net earnings

Financial Condition
Total assets
Long-term debt
Shareholders’ equity

Per Share Information, basic and diluted
Operating earnings
Capital gain (loss) and other items, net of tax
Gain on sale of discontinued operations, net of tax
Net earnings
Book value
Dividends

Share Price
High
Low
Close

2004

2003

2002

$11,284.0
423.6
163.9
9.2
–
173.1

$10,624.2
444.9
159.9
(6.0)
–
153.9

$ 9,926.5
416.2
132.2
13.7
50.0
195.9

4,681.7
985.4
1,576.8

2.49
0.14
–
2.63
23.81
0.4000

29.50
23.10
26.65

4,516.1
1,112.0
1,427.1

2.43
(0.09)
–
2.34
21.54
0.3300

33.25
23.70
23.85

4,318.0
1,060.6
1,290.6

2.00
0.21
0.76
2.97
19.47
0.2138

33.30
15.75
28.88

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 PARTICIPATION IN BUSINESSES THAT HAVE THE POTENTIAL FOR LONG-TERM GROWTH

AND PROFITABILITY.

CONTENTS

A View of Empire
Letter to Shareholders
Message from Operating Management
Long-term Progress
Message from the Chairman
Corporate Governance
Board of Directors
Community Involvement
Corporate Officers
Management’s Discussion and Analysis

Management’s and Auditors’ Reports
Consolidated Balance Sheets
Consolidated Statements of Retained Earnings
Consolidated Statements of Earnings
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Eleven-year Financial Review
Investor Information
Mission Statement

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64
66
67

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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

We believe that the three key factors in the creation of value are first,
strong management, second, financial structures which facilitate growth
and third, emphasis on long-term growth in cash flow that exceeds the
after-tax dollar cost of capital.

VALUES

Empire will be a good corporate citizen, upholding the highest standards
of integrity and ethical conduct.

www.empireco.ca

E M P I R E

C O M P A N Y L I M I T E D

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What we value

At Empire, our business and investment philosophy is very simple
and straightforward – there is no mystery as to what we value in our
core businesses and our investments. We value businesses we know
and understand – solid businesses in fundamental industry sectors that
are often undervalued. We value strong management and dedicated
people – reflecting the basic values of good corporate citizenship and
social responsibility. We value disciplined financial management and
conservative business principles. We value consistent, steady, long-term
performance. We value our legacy of value creation, and we value
our prospects for future growth.

PAUL D. SOBEY

PRESIDENT AND C.E.O.

DONALD R. SOBEY

CHAIRMAN

1
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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A view of Empire

Food Distribution

Real Estate

Sobeys Inc. (“Sobeys”), a 65%-owned subsidiary of Empire, is a

Empire owns one of the largest portfolio’s of prime retail properties

leading national grocery retailer and food distribution company in

in Eastern Canada through wholly-owned Crombie Properties Limited

Canada with annual revenue of $11 billion. Headquartered in

(“Crombie”) and its affiliates. Crombie and its affiliates own and

Stellarton, Nova Scotia, Sobeys owns or franchises more than

operate a diversified portfolio which includes shopping centres and

1,300 stores in all 10 provinces under retail banners that include

office properties. The real estate division, through Crombie, also

Sobeys, IGA extra, IGA and Price Chopper. During fiscal 2004,

owns Atcan self-storage and 35.8% of Genstar Development

Empire increased its ownership in Sobeys to 65% from 62%

Partnership (“Genstar”), a residential land development business

a year earlier.

with operations primarily in Western Canada.

FOOD DISTRIBUTION
REVENUE (1)
($ in millions)

FOOD DISTRIBUTION
OPERATING INCOME
($ in millions)

REAL ESTATE REVENUE (1)
($ in millions)

REAL ESTATE
OPERATING INCOME
($ in millions)

4
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1
6
0
,
1
1

5
.
4
1
4
,
0
1

0
.
2
3
7
,
9

0
.
3
6
1
,
9

0
.
2
4
9
,
8

7
.
4
2
4 3
.
5
9
2

5
.
4
9
2

2
.
9
3
2

7
.
9
2
2

5
.
0
1
2

6
.
8
9
1

1
.
5
8
8 1
.
5
6
1

1
.
7
5
1

1
.
1
1
1

8
.
3
0
1

6
.
0
0
1

3
.
2
8

1
.
0
7

YEAR ENDED APRIL 30TH
(1) Includes gain of $14.6 million on sale of
redundant real estate in fiscal 2004.

YEAR ENDED APRIL 30TH

YEAR ENDED APRIL 30TH
(1) Revenue is before inter-segment elimination.

YEAR ENDED APRIL 30TH

2
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Other Operations

Investments

Empire’s other operations consist primarily of wholly-owned

Empire manages an investment portfolio that carried a market

Empire Theatres Limited (“Empire Theatres”), the leading movie

value of $390.9 million as at fiscal 2004 year-end. Empire is

exhibitor in Atlantic Canada with 149 screens in 22 locations at

committed to maintaining a high quality, liquid investment

fiscal year-end. Empire Theatres is committed to providing its

portfolio that offers a combination of yield and attractive growth

customers with an enjoyable movie-going experience by offering

characteristics, providing Empire with a pool of capital to support

modern stadium-style seating, a broad concession variety, and

the growth and development of our operating businesses and to

exceptional customer service.

enhance shareholder net asset value.

OTHER OPERATIONS
REVENUE
($ in millions)

OTHER OPERATIONS
OPERATING INCOME
($ in millions)

INVESTMENT INCOME (1)
($ in millions)

INVESTMENT PORTFOLIO
TOTAL RETURN*
VS. BENCHMARKS

4
.
4
6

5
.
0
2 6
.
6
5

1
.
9
4

0
.
6
4

8
.
9

0
.
9

5
.
6

7
.
5

2
.
8
3

9
.
7
3

8
.
9
2

7
.
5
1

TOTAL
INVESTMENT
INCOME

EQUITY
EARNINGS

0
.
8
1

0
.
3

9
.
4
1

6
.
0

8
.
5
1

1
.
5

EMPIRE
COMPANY
INVESTMENT
PORTFOLIO

S&P/TSX INDEX

S&P 500 INDEX
(in Canadian $)

$100

$180

$150

$120

$90

$60

$146.39

$96.89

$73.99

YEAR ENDED APRIL 30TH

YEAR ENDED APRIL 30TH
(1) The decline in equity earnings is related
to the sale of Empire’s investment in
Hannaford Bros. Co. on July 28, 2000.

YEAR ENDED APRIL 30TH
*$100 invested on 04/30/2000 in Empire
Company investment portfolio or the index,
including reinvestment of dividends.

3
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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LETTER TO SHAREHOLDERS

Adding value

Empire delivered growth in earnings in fiscal 2004, despite a challenging year for
our food division. A decline in Sobeys’ operating earnings was offset by the continued
strong performance for our real estate, theatre and investment operations.

In fiscal 2004 Empire revenues increased by 6%,
operating earnings grew by 2% to reach $2.49
per share, and the common dividend rate per
share increased by 21%.

This is a good indication of the value of our
diversified business base and our business and
investment balance, which has contributed
over the long term to ongoing growth and
profitability.While both real estate and food
distribution are basic and complementary
businesses, they are driven by different market
dynamics and economic cycles. Having both
sectors in our business mix reduces volatility
and stabilizes growth trends over time.

Sobeys faced a number of unplanned events
during the year, but maintained national market
share and posted sales growth of 6% in a highly
competitive marketplace. Unplanned events
ranged from SARS, an Ontario power failure
and recovery from a labour disruption at an
Ontario operation, among others. All businesses
face unanticipated events and challenges from
time to time; the real test of management is the
ability to withstand short term challenges and
build a healthy, competitive and sustainable
business for the future by executing on their
strategic plan. Sobeys’ strategic direction is sound
and progress is being made.We are confident
that management will continue to focus on

4
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

improving the operations of the business and
grow profitability in fiscal 2005.

Growing diversity
Our business balance and diversity has been
enhanced over the past few years by growing the
geographic diversity of our operating businesses
as we have expanded steadily and carefully
beyond our traditional core markets in Atlantic
Canada. Sobeys gained a national platform in
Canada with the acquisition of the Oshawa
Group in December 1998, and has built on that,
growing in every region. In real estate, Crombie
has been increasing its presence in Ontario –
and, through Genstar, we are participating in high
growth residential markets principally in Western
Canada. As well, in our theatre business, we have
developed a new platform for growth through an
established theatre operator in Western Canada.

This geographic expansion is important for two
reasons – it has broadened growth opportunities,
and it has provided us with greater resilience to
regional downturns.

Supporting this diversification is one of the
ways that Empire has added value as a holding
company. At Empire, we don’t micromanage
our operating businesses, nor do we attempt
to manage the other businesses in which we
invest. Our primary role is to ensure excellent

15916 p01_23 ENG 7/21/04 2:39 PM Page 5

ABOVE: PAUL SOBEY, President and Chief Executive Officer, Empire Company Limited

management is in place and that they remain
focused on executing day-to-day improvements
to the business with care, passion and integrity.
In assessing management, we have learned over
time not to confuse good markets with good
management or difficult and challenging markets
with poor management.We don’t get concerned
with short-term fluctuations based on changing
market conditions, and we don’t have a lot of
time for quick fix “flavours of the week” in terms
of management strategies and theory.We look
to the long term, we look for steady progress
on the execution of each operating company’s
strategic plan, and we are not disappointed.
Empire’s long-term track record reflects the
benefit of this approach.

With strong operating management in place,
we strive to add value through our stewardship
role – reviewing strategies, monitoring progress,
determining capital allocation in support of
growth initiatives, strengthening our financial
resources, and providing guidance and stability –

as owners with a long-term perspective, broad
business experience and a profound and
passionate commitment to our businesses.

Managing growth in 2004
Sobeys, while not meeting our earnings
expectations in 2004, made significant progress
in very tough competitive markets. Sobeys
continued to invest in pricing, while pursuing
its highly focused strategies for strengthening
the value proposition for customers, enhancing
and expanding the store network, improving
merchandising, and investing in operations.
Sobeys focused on top line performance and
delivered top line improvements with a strong
increase in sales.

Our real estate business had another strong year
with a 9.4% increase in operating earnings,
supported by continued earnings growth from
Genstar and from our commercial retail business.
Genstar continued to perform above our
expectation with an 8.1% growth in operating

5
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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LETTER TO SHAREHOLDERS

LEFT: CROMBIE PROPERTIES MANAGEMENT DISCUSS REAL ESTATE DEVELOPMENT.

PICTURED FROM LEFT: SCOTT MACLEAN, Vice-President Operations; STUART BLAIR,

President and Chief Executive Officer; PAUL WIGGINTON, Comptroller; FRANK SOBEY,

Chairman; ALLAN MACDONALD, Vice-President Leasing

RIGHT: SOBEYS’ MANAGEMENT MEET TO DISCUSS REGULATORY REQUIREMENTS.

PICTURED FROM LEFT: JAMES DICKSON, Executive Vice-President, Chief Development

Officer and Secretary; JANE MCDOW, Assistant Secretary; PAUL JEWER Vice-President,

Finance and Treasury OPPOSITE PAGE: EMPIRE COMPANY MANAGEMENT MEET TO

DISCUSS RISK MANAGEMENT CONTROLS. PICTURED FROM LEFT: STUART FRASER,

President and Chief Executive Officer (Empire Theatres Limited); JOHN MORROW,

Vice-President and Comptroller; CAROL CAMPBELL, Vice-President, Risk Management

earnings over the past year.While we believe
that kind of growth rate is not sustainable
year-over-year, Genstar has a very focused
strategic approach and has shown an ongoing
ability to outperform in its market sector.

Crombie’s commercial retail business also had
positive year-over-year results, posting improve-
ments in occupancy and rental rates, while
increasing future value with the acquisition of
seven strip plaza properties in Ontario.

Empire Theatres’ performance continued to
be strong, expanding with three new theatres
in Atlantic Canada and one joint venture in
Western Canada, enhancing its offering and
delivering record revenues and earnings.

We also achieved first quartile return
performance from our investments including

a solid turnaround by our equity accounted
investment in Wajax Limited (“Wajax”).

Emerging synergies
Our operating businesses are distinct and
autonomous, but some synergies have emerged.
Clearly, real estate strategies are vital to both
the ongoing development and expansion of the
food distribution business and the theatre business,
while knowledge of retail and consumer trends
is vital to the real estate business. Our businesses
all benefit from the pool of market and industry
knowledge that we collectively represent, and
this has been extremely beneficial as each has
expanded beyond Atlantic Canadian markets.

Clear evidence of this was the joint approach
to the acquisition of Commisso’s – a regional
grocery business in Southwestern Ontario. Both
Sobeys and Crombie had identified Commisso’s

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EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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‘‘The management teams are supported by the

diligence and efforts of thousands of dedicated
people who have the passion, the integrity, the
knowledge and the will to succeed. That has
driven our performance in the past and will
continue in the future.”

as an attractive acquisition candidate.Together,
they were able to determine the full and potential
value of the acquisition and through a joint
approach, Sobeys was able to acquire Commisso’s
grocery business assets, while Crombie was able
to buy the real estate assets.

Accounting for value
As Empire has grown, we have worked hard to
identify and measure the value of our businesses
and to report accurately to our shareholders.
While this will be more challenging going
forward given that the new accounting principles
will impact all of our operating companies, we
remain committed to ensuring transparency to
the investment community.

New accounting principles, both enacted and
pending, will affect depreciation charges, revenue
recognition, accounting for acquisitions of rental
properties, and potentially consolidation of
franchising arrangements, to name a few.While
these accounting changes will not impact the
cash position of the corporation or its underlying
economic value, they risk making the financial
statements more confusing for our shareholders,
masking actual improvements in fundamental
values, particularly for our real estate business.

While complying with the new rules, we will
endeavour to provide commentary that will
give as accurate a picture of underlying value
as possible.

Looking forward
Going forward, we intend to stay the course
by supporting and encouraging the management
of our operating businesses towards continued
progress on the successful execution of their
respective business plans. In doing so we are
confident that the fundamentals of each of our
core operating businesses – food distribution,
real estate and theatres – will improve.

We enter fiscal 2005 in a strong financial
position and with strong and balanced operating
businesses that know where they are going and
have the business plans, leadership teams and
people to get them there.

PAUL D. SOBEY

PRESIDENT AND C.E.O.

JULY 19, 2004

7
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MESSAGE FROM OPERATING MANAGEMENT

‘‘We are setting Sobeys apart by focusing first and

foremost on our core business – food.”

PROGRESS With our proactive and aggressive
pricing posture, coupled with improved
merchandising execution, we increased sales,
consistent with our expectations, in a highly
competitive marketplace in fiscal 2004.
Operating earnings reflect our promotional
investments and a series of one-time costs
throughout the year. Our progress in executing
our strategy is on track. In 2004, we successfully
launched the full service format and Sobeys
banner in Western Canada with the rapid
conversion or opening of 43 stores, and we
acquired Commisso’s 15-store grocery chain in
Southwestern Ontario. Going forward, we will
stay the course, executing our plans to improve
sales per square foot by continuing to update
our store network and customer offerings.
We anticipate, and are prepared for, challenges
along the way – but we know that we have the
right strategy and are confident that growing
customer satisfaction, driven by our focus on
food, will result in greater value creation.

BILL MCEWAN

PRESIDENT AND C.E.O., SOBEYS INC.

SIR GRAHAM DAY

CHAIRMAN, SOBEYS INC.

ABOVE: BILL MCEWAN, President and Chief Executive Officer,

Sobeys Inc.

Food Distribution
CHALLENGES AND OPPORTUNITIES Canada’s retail
food industry is a high turnover, low margin
business that has seen increasing competitive
pressures over the past decade. Marketplace
dynamics have changed with demographics and
lifestyle preferences of Canadians who are looking
for more choice and greater convenience. In
these challenging conditions, opportunities are
there for those that satisfy the full array of
household food requirements with the best
value proposition.

STRATEGIC FOCUS Building on our position –
and our national market presence – Sobeys has
established a differentiated position with our focus
on food, driven by our fresh expertise, in the
right-sized stores, supported by superior customer
service.We have been driving our formats,
merchandising programs, staffing and service
levels accordingly – with the right size and right
format stores for each market we serve. Our
value proposition is compelling and is supported
by highly competitive pricing and a focus on
continuously improving our operating systems,
business processes, and distribution efficiencies
to further enhance value for all stakeholders.

8
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Real Estate
CHALLENGES AND OPPORTUNITIES Commercial retail
real estate operations by their nature produce
a relatively consistent return over the long term,
while residential land development is more
cyclical, being dependent on macro factors such
as mortgage rates and regional economic growth.

STRATEGIC FOCUS Our strategic focus continues
to be on the growth and development of our
commercial retail property portfolio while also
benefiting from the residential land development
business through our investment in Genstar – a
successful developer that has delivered outstanding
returns to Crombie.We continue to look for
residential land development opportunities in
Canada and, through joint venture opportunities,
in selected centres in U.S. markets.

The opportunity for long-term growth in our
commercial real estate portfolio continues to
rely on our leasing efforts, the quality of new
developments and programs to improve our
existing properties, and on the acquisition of new
properties that meet our economic valuation
criteria.With a full service approach and a highly
experienced team, Crombie and its affiliates have
become the leaders in this market in Atlantic
Canada, with 73 properties, and now own
1.0 million square feet of gross leaseable area in
Ontario and Quebec, for 12.9 million square
feet in total.

‘‘Our real estate business continues to focus

on growth and diversification outside of
our traditional Atlantic Canada base. As we
grow our commercial retail business we look
forward to capitalizing on the synergies that
exist with Empire’s food retail division and
other operations.”

PROGRESS Performance of our real estate division
was buoyed by another significant contribution
from Genstar in fiscal 2004. Our commercial
retail business also delivered increased earnings,
while acquiring seven properties in Ontario –
including six properties previously owned by
Commisso’s Properties Inc. in conjunction with
Sobeys’ acquisition of Commisso’s food retail
stores. Our occupancy rate improved to 93.6%
from 92.7% a year ago, with total real estate
division earnings growing by 7.7% to reach
$41.9 million.We expect further progress in the
year ahead, although expansion may slow as our
targeted markets in Ontario appear somewhat
overvalued at present.

J. STUART BLAIR

PRESIDENT AND C.E.O., CROMBIE PROPERTIES LIMITED

FRANK C. SOBEY

CHAIRMAN, CROMBIE PROPERTIES LIMITED

ABOVE: STUART BLAIR, President and Chief Executive Officer,

Crombie Properties Limited

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EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MESSAGE FROM OPERATING MANAGEMENT

‘‘At Empire Theatres, we have grown successfully

by focusing on relatively smaller communities
where we can become the entertainment
destination of choice.”

We have pursued this focus with success in
Atlantic Canada.We have launched a second
platform for growth in Western Canada,
through a joint venture arrangement with
Landmark Cinemas of Canada Limited –
a like-minded operator.

PROGRESS Steady progress continued in fiscal 2004.
Our performance exceeded our expectations;
we posted record revenues and earnings while
continuing our measured expansion with the
opening of three new theatres in Atlantic Canada
and one in Western Canada as part of our joint
venture with Landmark. As well, we tested
programming alternatives in key markets and
are expanding our agreement with the WWE
for live sporting event broadcasts.We will
continue to pursue our focused strategy in
the year ahead.

STUART G. FRASER

PRESIDENT AND C.E.O., EMPIRE THEATRES LIMITED

ABOVE: STUART FRASER, President and Chief Executive Officer,

Empire Theatres Limited

Other Operations
CHALLENGES AND OPPORTUNITIES The theatre
business in North America is generally viewed
as mature in major urban markets with increasing
competition from home entertainment alternatives.
Yet for many, the modern cinema remains a
wonderful experience and a great gathering place
for social occasions.

STRATEGIC FOCUS At Empire Theatres, our
strategic focus has been very simple – to offer
the consumer the best movie-going experience
at good value in communities where we have
the opportunity to be the entertainment or social
occasion destination of choice.

We have grown by providing customers with
a terrific “big city” cinema experience – with
modern complexes featuring stadium seating,
self-serve electronic ticketing, large curved screens
and digital sound, modern arcade amenities,
and branded food choices. As a social occasion
centre, we have the opportunity to expand the
entertainment offering beyond movie releases
to meet local needs, with live broadcast sporting
events or business meetings, for example.

10
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Investments
CHALLENGES AND OPPORTUNITIES The past four
years have shown investors just how volatile equity
markets can be. Despite impressive gains over
the past year, annualized four-year returns for the
major North American stock indexes were flat
or negative by March 31, 2004. Markets remain
volatile.The challenge for Empire as a long-term
value investor is uncovering opportunities that
meet our investment criteria.

STRATEGIC FOCUS In managing our investment
portfolio, we take the same long-term perspective
as we do with our operating businesses – and
we place the same priority on good management.
We focus on significant equity investments in
a relatively small number of large cap companies,
with high liquidity to ensure access to capital
that may be required to support the growth of
our operating businesses.We focus on undervalued
businesses that have outstanding fundamentals
and growth prospects – we are not interested in
the latest hot stock or industry fad.

Our approach is highly disciplined with strict
criteria and our investment committee actively
monitors the portfolio to enhance returns.
We currently own only 12 stocks, many of

which we will hold for the long-term – our best
investments tend to be the ones we never sell.

PROGRESS In fiscal 2004, we benefited from
our long-term disciplined approach, a strong
turnaround at Wajax and the rebound in equity
markets, maintaining first quartile return
performance with a total annual return well
above the S&P/TSX Composite Index and
the S&P 500 Index in Canadian dollars –
our main benchmarks. Empire’s investment
returns over the past four years have been 10%
annualized – compared to negative returns for
that period by the benchmark indexes. During
fiscal 2004 we also invested further in our
operations by allocating $68 million in capital
to purchase close to two million additional
common shares of Sobeys.This increased our
ownership interest from 62% to 65%.

STEWART H. MAHONEY

VICE-PRESIDENT, TREASURY AND INVESTOR RELATIONS

‘‘As with our operating businesses, we take a

long-term perspective to our investment portfolio,
looking to invest in businesses we know and
understand with strong management and with
a sound strategic direction for long-term
profitable growth.”

FROM LEFT: FRANK SOBEY, Chairman, Crombie Properties Limited;

PAUL SOBEY, President and Chief Executive Officer, Empire Company

Limited; STEWART MAHONEY, Vice-President, Treasury and Investor

Relations, Empire Company Limited; VIVEK SOOD, Manager, Treasury

and Investor Relations, Empire Company Limited

11
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Long-term progress

The value of Empire’s long-term perspective and business philosophy can be seen in
its long-term performance through different business cycles since the Company went
public 22 years ago. It all adds up to a legacy of value creation.

December, 1993
The real estate division increases its

ownership of Halifax Developments Limited

(HDL) to 100% from 36% at a cost of

$12.7 million.

February, 1983
Empire increases ownership in Hannaford

Bros. Co. (a U.S. food retailer) to 25% resulting

in a cost base of $20 million.

July, 1982
On July 9, 1982 Empire goes public at

$8/share, $0.67 split adjusted. Annual revenue

$300 million; total assets $260 million; net

earnings $7 million.

$625

$4.6

$0.51

1983

June, 1987
Empire purchases common shares of Sobeys

to increase its ownership to 100%.

12
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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January, 2001
The real estate division purchases a 35.8%

interest in Genstar Development

Partnership.

December, 1998
Sobeys went public with the TSE on

December 9, 1998. The assets of The Oshawa

Group were acquired for $1.5 billion, tripling

the size of the company’s food operations.

Empire owns 62% of Sobeys.

March, 2002
Sobeys sells its SERCA Foodservice operation

to SYSCO for $411 million.

2004

$11,284

$163.9

$26.65

February, 2004
Acquisition of Commisso’s Food Markets by

Sobeys and six real estate properties owned

by Commisso’s Properties by Crombie.

March, 2000
Empire completes a 5.5 million share

repurchase (11.0 million split adjusted) of its

Class A Non-Voting shares at $33.95 per share

($16.975 split adjusted).

March, 1996
Empire sells its investment in Univa

July, 2000
Empire sells its 25% investment in

(previously Provigo) for net proceeds of

Hannaford Bros. Co. for a $1.2 billion

$145 million.

Canadian consideration.

REVENUE
($ in millions)

OPERATING EARNINGS
($ in millions)

SHARE PRICE
($ per share)

13
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MESSAGE FROM THE CHAIRMAN

Defining values

What we value in our businesses and in people really reflects our corporate values
statement: ‘Empire will be a good corporate citizen, upholding the highest standards
of integrity and ethical conduct’. We believe living by these values is fundamental to
long-term value creation in any enterprise.

At Empire, we don’t spend a lot of time talking
about our values of good corporate citizenship –
we just try and live by them. Over the past few
years, the newspapers and media have been full
of headlines chronicling corporate misbehaviour,
fraud, accounting scandals and the fall of
many a mighty enterprise.This has increased
concerns about governance, accountability and
transparency – and the conduct of management,
directors and major shareholders. It has also
underscored the importance of acting in a
socially responsible manner, as good corporate
citizens – in the interests of all stakeholders.

We believe Empire’s legacy of steady growth
and value creation over the long term is clear
evidence of our values in action.

The value of family control
For the better part of a century, the Sobey family
created value in our communities by building
strong and growing businesses. Since Empire
was launched as a public company twenty-two
years ago, our family has maintained its role as
controlling shareholder and we have been
actively involved in building on the legacy of this
company.We have every intention of maintaining
control and participating over the long term.

With concern about governance issues in recent
years, there has been considerable discussion about
the pros and cons of different ownership and
governance models. From our perspective, we
believe family-ownership models tend to benefit
from long-term ownership and commitment –
providing stability to businesses through economic
cycles and structural change. Long-term
shareholders with a stake in the enterprise tend
to be less concerned with quarter-over-quarter
earnings fluctuations or with sharp, short-term,
market driven changes in share value and more
concerned with steady performance over time;
this reduces pressure on management to sacrifice
long-term viability for short-term wins.

When families are major long-term shareholders,
they tend to stay with an enterprise for a
combination of growth potential and sustainable
income and dividend potential.We believe Empire
has achieved a good balance throughout our
history.We have redistributed substantial income
to all shareholders while fuelling the growth and
viability of our core businesses. Over the past
few years, each of our operating businesses has
established new, national platforms for growth
beyond our core traditional markets in Atlantic
Canada – enhancing future prospects.

14
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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ABOVE: DONALD SOBEY, Chairman, Empire Company Limited

The value of good governance
and independent, outside directors
As mentioned in the CEO’s Letter to
Shareholders, we value good management in
our operating businesses and in the companies
in which we invest – and we don’t micromanage
the businesses. As a holding company, Empire
plays a stewardship role. Critical to that role and
to ensuring effective governance is the role of
the Board.

Family shareholders and independent shareholders
alike are well served by the outside directors on
the Board of Empire and on the Boards of our
core operations.We have great outside directors –
business leaders representing diverse industry
experience and bringing fresh and thoughtful
perspectives and advice to the table.They ask
good and probing questions, holding management
to account and ensuring that Empire meets all
our obligations as corporate citizens.

An indication of the value we place on Board
participation and advice can be seen in the very
existence of our Board for Crombie Properties.
Crombie is a wholly-owned subsidiary of Empire
and there is no requirement for it to have its
own board. Clearly, we believe shareholders and
all stakeholders of Empire are well served by the
stewardship role and Board governance model.

We are very grateful for the efforts of all of our
Board members, and this year we pay special
tribute to Mary Mogford and Peter Godsoe,
who will not be standing for re-election to the
Empire Board of Directors. Mary and Peter have
each provided exemplary service and wise counsel
to the Empire Board and we thank them for
their outstanding contributions.We are pleased
that Peter has agreed to join the Sobeys Board
of Directors and will therefore continue to
be a major contributor to the governance of
the Company.

15
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MESSAGE FROM THE CHAIRMAN

‘‘On behalf of the Board of Directors, we

extend our sincere appreciation to all stakeholders
in every community we serve – and to the tens
of thousands of employees and associates of
Empire and our businesses for the value we have
built together and for your ongoing support,
contributions and commitment to a proud legacy.”

Delivering value to all stakeholders
In our annual reports and discussions of results,
we tend to focus on performance from a share-
holder’s perspective.We could not deliver such
a strong performance over the long term if we
didn’t make progress with and for all stakeholders.
Delivering value to and meeting the interests of
employees, customers, suppliers and people in all
the communities we serve is the essence of good
corporate citizenship. It is also good business.

To achieve success – past and future – we are
very fortunate to have the support, commitment
and efforts of our employees – more than 34,000
people across Canada.We strive to ensure that all
employees throughout our enterprise are treated
well and fairly, and that they have the opportunity
to benefit from the success and growth of the
enterprise through good employment policies
and benefits, and rewarding career opportunities.
We are proud of our pension program, which
we believe is second to none in Canada.

Our success also rests on earning and maintaining
the trust and loyalty of customers, and we need
to help maintain the prosperity of communities
where we do business.We contribute in part
by delivering on good programs of community
support and corporate philanthropy.

16
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

It is also vital to ensure that we have sound
environmental policies in place, good programs
for workplace health and safety, and, in our food
distribution business, a clear focus on food safety
in the interest of our customers.We hold ourselves
accountable and monitor performance in these
critical areas, which are also subject to regular
review by the Board.This is essential to both
good corporate citizenship and risk management;
failure to deliver on such responsibilities carries
a significant business risk and could entail serious
costs down the road. Cutting corners in any of
these areas to meet short-term performance targets
makes no sense. Serving stakeholder interests is
in our own self interest. It’s also the right thing
to do.That’s why we do more than give lip service
to our corporate values; we live by them and
strive to make them part of our culture.

By living our values, Empire has created consider-
able value over time, not just for shareholders but
for all stakeholders.That’s a legacy we are very
proud of – and it is a legacy we aim to build upon.

DONALD R. SOBEY

CHAIRMAN

JULY 19, 2004

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CORPORATE GOVERNANCE

literacy tests set out in policies recently adopted
by most Canadian securities regulators.The
committees of the Board include:

CORPORATE GOVERNANCE AND NOMINATING COMMITTEE –
develops Empires’ corporate governance policies,
including responsibility for disclosure; assesses
and recommends candidates for election or
appointment as Directors; reviews and assesses
the performance and effectiveness of the Board,
its committees and individual directors; and
recommends compensation of directors.

AUDIT COMMITTEE – reviews and assesses financial
reporting practices and procedures, assesses
risk management and reviews and approves
consolidated quarterly and annual consolidated
financial statements and related communications.
The external auditor reports directly to the
Audit Committee.

HUMAN RESOURCES COMMITTEE – reviews our
management training and development programs,
monitors succession planning and management
compensation.

Governance policies and practices
At Empire, we are dedicated to good governance
in the interest of all stakeholders. A comprehensive
review of our corporate governance policies and
practices can be found in our Management Proxy
Circular and on our website at www.empireco.ca.
As well, our Code of Business Conduct is available
on the website; as is a detailed explanation of our
Comprehensive Disclosure Policy, approved by
the Corporate Governance Committee of our
Board of Directors.

Canada’s regulatory environment has been
evolving rapidly and we continue to assess our
own policies and practices in light of changes
to ensure that Empire keeps pace with the
expectations of stakeholders and with best
practices in governance.

Empire’s Board is composed of a talented group
of business executives who have explicit respons-
ibility for the stewardship of the Company. A
majority of the Board is independent as defined
by both current and proposed securities rules.

Board committees
Governance by our Board of Directors is
supported by three key committees of the Board.
In accordance with regulatory guidelines,
membership of all the committees is comprised
of outside directors, the majority of whom are
also unrelated. In addition, the Audit Committee
members meet the independence and financial

ABOVE: PAUL BEESLEY, Senior Vice-President, Chief Financial

Officer and Secretary, Empire Company Limited

17
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Board of Directors

SIR GRAHAM DAY 3,5

Hantsport, Nova Scotia
Director since 1991.
Counsel to Stewart McKelvey
Stirling Scales and Chairman
of Sobeys Inc.

ROBERT P. DEXTER 3,6

Halifax, Nova Scotia
Director since 1987.
Chairman and
Chief Executive Officer of
Maritime Travel Inc.

JOHN L. BRAGG 3,5

Collingwood, Nova Scotia
Director since 1999.
Chairman, President and
Co-Chief Executive Officer of
Oxford Frozen Foods Ltd.

PETER C. GODSOE 1

Toronto, Ontario
Director since 1993.
Corporate Director

JAMES W. GOGAN 2

New Glasgow, Nova Scotia
Director since 1972.
Corporate Director

ED HARSANT1

Woodbridge, Ontario
Director since 2003.
Corporate Director

MARY MOGFORD 1

Newcastle, Ontario
Director since 2002.
Corporate Director

E. COURTNEY PRATT 4,5

Toronto, Ontario
Director since 1995.
President and Chief Executive
Officer of Stelco Inc.

18
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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J. WILLIAM SINCLAIR 5

Pictou, Nova Scotia
Director since 1980.
Corporate Director

DAVID F. SOBEY 3

New Glasgow, Nova Scotia
Director since 1963.
Chairman Emeritus
of Sobeys Inc.

JOHN R. SOBEY 1

Pictou County, Nova Scotia
Director since 1979.
Corporate Director

DONALD R. SOBEY 3

Pictou County, Nova Scotia
Director since 1963.
Chairman of
Empire Company Limited

1 Audit Committee Member
2 Audit Committee Chairman
3 Human Resources

Committee Member

4 Human Resources

Committee Chairman

5 Corporate Governance and
Nominating Committee
Member

6 Corporate Governance and
Nominating Committee
Chairman

KARL R. SOBEY 3

Halifax, Nova Scotia
Director since 2001.
Corporate Director

PAUL D. SOBEY3

Pictou County, Nova Scotia
Director since 1993.
President and
Chief Executive Officer of
Empire Company Limited

ROB G. C. SOBEY3

Stellarton, Nova Scotia
Director since 1998.
Senior Vice-President,
Merchandising and Marketing
of Sobeys Atlantic

19
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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COMMUNITY INVOLVEMENT

‘‘The Sobey Foundation supports programs that

promote the education, well being and health of
our communities. This support is strengthened
and enhanced by the volunteer efforts of thousands
of employees in communities across Canada.”

We value our community

Empire’s operating businesses – grocery retailing,
real estate and theatres – are all community
based, dependent on the economic vitality of the
markets where we operate and on the support of
the people who live in the communities we serve.
As our Company has grown and prospered, we
have always understood the importance of giving
something back, and we have endeavoured to
demonstrate leadership in corporate philanthropy.

We believe we have a particular responsibility
to provide leadership in Atlantic Canada, as one
of the major corporations based in the region.
Our family and business roots are here.While
contributing to the fabric of our communities,
we are also very aware of the important role we
play in enhancing the economic vitality and
quality of life of this magnificent part of Canada.

Empire is proud to be a member of the Imagine
Corporate Giving Program and we sponsor
numerous charitable initiatives through our
operating companies and franchisees as well as
through the Sobey Foundation.The Sobey
Foundation supports programs that promote

the education, well being and health of our
communities.This support is strengthened and
enhanced by the volunteer efforts of thousands
of employees in communities across Canada.

We value education
We believe quality education is the most
important contributor to future growth of our
communities and to employment opportunities
for young people. As a result, Sobeys Inc. and
the Sobey family have had a special focus on
education and scholarships, including:

SOBEYS INC. SCHOLARSHIP PROGRAM The Sobeys Inc.
Scholarship Program is designed to assist eligible
employees and their children or spouses in
continuing their university education, with 30
annual scholarships of $1,000 for up to four years
of full-time study.

FRANK H. SOBEY FUND The Frank H. Sobey Fund
for Excellence in Business Studies awards six
scholarships of $8,000 annually to eligible full-
time business students at universities within the
Atlantic Provinces.

20
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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IN FISCAL 2004, SOBEYS INC. SUPPORTED HUNDREDS OF CHARITIES ACROSS

CANADA, RANGING FROM KIDS HELP PHONE AND CHILDREN’S WISH TO UNITED

WAY/CENTRAIDE AND EASTER SEALS AS WELL AS HOSPITALS, SPORTS AND

RECREATIONAL PROGRAMS AND COMMUNITY FOOD BANKS. ABOVE: KIDS HELP

PHONE PICTURED: SOPHIA LABONTÉ, Counsellor LEFT: SCHOOL IS COOL

PICTURED: GRAHAM BROMLEY, Sobeys Franchisee

DONALD R. SOBEY ATLANTIC LEADERSHIP SCHOLARSHIP
Donald R. Sobey, a Bachelor of Commerce
graduate of Queens University (1957) committed
$3 million to his alma mater to establish annual
scholarships for five Atlantic Canadian students
planning to attend Queen's School of Business
in Kingston, Ontario.

Valued at $10,000 per year, the scholarship
is renewable in each of the four years of the
Bachelor of Commerce degree program.

We value Canadian culture
The Sobey Art Foundation was established in
1981 with a mandate to continue the work of
the late Frank H. Sobey as a dedicated supporter
and collector of Canadian visual art. Since then,
the Foundation has assembled one of the finest
collections of 19th and 20th century Canadian
art at Crombie House, the former home of Frank
and Irene Sobey in Pictou County, Nova Scotia.
The collection, which is open to the public

during July and August or by appointment
throughout the year, contains an impressive range
of works from many of Canada’s leading painters,
including Cornelius Kreighoff,Tom Thomson,
and J.E.H. MacDonald.

In 2001, the Foundation extended its support to
contemporary Canadian art with the creation of
the Sobey Art Award, which, at $50,000, is the
richest of its kind in Canada. Every two years, the
Sobey Art Award is bestowed upon an emerging
contemporary Canadian artist, 39 years of age or
younger, who has exhibited work in one of the
country’s public or private art galleries within the
past 18 months.The award is intended to provide
meaningful assistance to the country’s most
promising artists, while stimulating greater public
interest in their work.

For further information pertaining to the
Sobey Art Award please visit the website at
www.sobeyartaward.ca.

21
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Corporate Ofﬁcers

OFFICERS OF
EMPIRE COMPANY LIMITED

DONALD R. SOBEY
Chairman

PAUL D. SOBEY
President and
Chief Executive Officer

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
Vice-President and Comptroller

OFFICERS OF
OPERATING COMPANIES

SOBEYS INC.

SIR GRAHAM DAY
Counsel to Stewart McKelvey
Stirling Scales and Chairman

BILL MCEWAN
President and
Chief Executive Officer

JAMES M. (JIM) DICKSON
Executive Vice-President,
Chief Development Officer
and Secretary

R. GLENN HYNES
Executive Vice-President
and Chief Financial Officer

PAUL A. JEWER
Vice-President,
Finance and Treasurer

L. JANE MCDOW
Assistant Secretary

MICHAEL G. SCOTT
President Operations
of Sobeys Atlantic

MARC POULIN
President Operations
of Sobeys Quebec

CRAIG T. GILPIN
President Operations
of Sobeys Ontario

J. GARY KERR
President Operations
of Sobeys West

DUNCAN F. REITH
Chief Merchandising Officer

FRANÇOIS VIMARD
Executive Vice-President

CROMBIE PROPERTIES LIMITED

FRANK C. SOBEY
Chairman

J. STUART BLAIR
President and
Chief Executive Officer

ALLAN K. MACDONALD
Vice-President, Leasing

SCOTT R. MACLEAN
Vice-President,
Operations

JOHN G. MORROW
Vice-President,
Finance and Secretary

PAUL W. WIGGINTON
Comptroller

EMPIRE THEATRES LIMITED

STUART G. FRASER
President and
Chief Executive Officer

KEVIN J. MACLEOD
Vice-President, Operations

DIRECTORS OF
OPERATING COMPANIES

SOBEYS INC.

SIR GRAHAM DAY
Counsel to Stewart McKelvey
Stirling Scales and Chairman

BILL MCEWAN
President and
Chief Executive Officer

JOHN L. BRAGG
Chairman, President and
Co-Chief Executive Officer of
Oxford Frozen Foods Ltd.

MARCEL CÔTÉ
Senior Partner of Secor Inc.

CHRISTINE CROSS
President of Christine Cross Ltd.

ROBERT P. DEXTER
Chairman and
Chief Executive Officer of
Maritime Travel Inc.

PETER C. GODSOE
Corporate Director

MALEN NG
Chief Financial Officer of
Workplace Safety and
Insurance Board of Ontario

MEL A. RHINELANDER
President and
Chief Executive Officer of
Extendicare Inc.

DAVID F. SOBEY
Chairman Emeritus

DONALD R. SOBEY
Chairman of
Empire Company Limited

FRANK C. SOBEY
Chairman of
Crombie Properties Limited

JOHN R. SOBEY
Corporate Director

PAUL D. SOBEY
President and
Chief Executive Officer of
Empire Company Limited

CROMBIE PROPERTIES LIMITED

FRANK C. SOBEY
Chairman

J. STUART BLAIR
President and
Chief Executive Officer

WILLIAM T. BROCK
Corporate Director

DAVID G. GRAHAM
President of
Atlantic Developments Inc.

DAVID J. HENNIGAR
Chairman of Acadian
Securities Inc.

KENNETH C. ROWE
Chairman, President and
Chief Executive Officer of
IMP Group Ltd.

JOHN B. ROY
Corporate Director

DAVID F. SOBEY
Chairman Emeritus of
Sobeys Inc.

DONALD R. SOBEY
Chairman of
Empire Company Limited

JOHN R. SOBEY
Corporate Director

PAUL D. SOBEY
President and Chief
Executive Officer of
Empire Company Limited

22
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Management’s Discussion and Analysis

Revenue increased
6.2 percent in fiscal
2004, primarily the
result of continued
growth in our food
distribution and real
estate businesses.

TOTAL REVENUE (1)
($ in millions)

4
8
2
,
1
1

4
2
6
,
0
1

6
2
9
,
9

1
3
3
,
9

0
0
1
,
9

Operating earnings
per share increased
2.5 percent to $2.49
a share, compared to
$2.43 last year.

Shareholders’ equity
increased 10.5 percent
in fiscal 2004, primarily
as a result of a 12.5
percent increase in
net earnings.

OPERATING EARNINGS
PER SHARE(1)
($ per share)

SHAREHOLDERS’ EQUITY
($ in millions)

3
4
.
2

9
4
.
2

0
0
.
2

3
3
.
1

0
1
.
1

8
.
6
7
5
,
1

1
.
7
2
4
,
1

6
.
0
9
2
,
1

0
.
5
1
1
,
1

8
.
2
0
6

YEAR ENDED APRIL 30TH
(1) Includes gain of $14.6 million on sale of
redundant real estate in fiscal 2004.

YEAR ENDED APRIL 30TH
(1) Earnings before net capital gain (loss)
and other items.

YEAR ENDED APRIL 30TH

CONTENTS

25
Company Overview
27
Consolidated Operating Results
28
Explanation of Fiscal 2004 Annual Results
Operating Performance by Division and Outlook
30
Explanation of Fiscal 2004 Fourth Quarter Results 37
38
Consolidated Financial Position
43
Accounting Policy Changes

Critical Accounting Estimates
Related Party Transactions
Change in Fiscal Year-end
Contractual Obligations
Risk and Risk Management
Outlook

44
45
45
46
46
47

23
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Management’s Discussion and Analysis

This Management’s Discussion and Analysis (“MD&A”)
section of the Annual Report contains commentary from
management on the consolidated financial condition and
results of operations of Empire Company Limited
(“Empire” or the “Company”) for the fiscal year ended
April 30, 2004, as compared to the same period last year.
Management also provides an explanation of the
Company’s fourth quarter results, changes in accounting
policies, critical accounting estimates and factors that the
Company believes may affect its prospective financial
condition, cash flows and results of operations.The
information in this MD&A is current to June 24, 2004,
unless otherwise noted.

In December 2003, the Canadian securities regulators
released National Instrument 51-102 (“NI51-102”),
“Continuous Disclosure Obligations.” New disclosures
have been introduced in this MD&A in compliance
with NI51-102.

This discussion and analysis should be read in
conjunction with the audited consolidated financial
statements of the Company and the notes thereto for the
fiscal year ended April 30, 2004 and the fiscal year ended
April 30, 2003 respectively.

This discussion may contain forward-looking statements
that are subject to risks and uncertainties that may cause
actual results or events to differ materially from the
results or events predicted in this discussion. In addition
to the risks outlined in the Risk Management section,
factors which could cause actual events or events to
differ include, but are not limited to: the ability to
execute on operating company strategic initiatives; the
impact of competition; general economic conditions;
interest rate and currency exchange rate fluctuations;
conditions affecting the North American equity markets;
conditions affecting the growth and development of our
real estate property portfolio; the ability of our operating
companies to attract and retain quality employees and

franchisees; the availability of capital and the associated
cost of capital. As a result of these risk factors and others,
no guarantee can be given that the results implied by any
forward-looking statements will necessarily materialize.

DEFINING NON-GAAP MEASURES There are measures included
in this MD&A that do not have a standardized meaning
under Canadian generally accepted accounting principles
(“GAAP”) and therefore may not be comparable to
similarly titled measures presented by other companies.

The Company includes these measures because it
believes certain investors use these measures as a means
of evaluating relative financial performance. Empire’s
definition of the non-GAAP terms are as follows:

• EBITDA is calculated as operating income plus

depreciation and intangible amortization.

• Operating Income or EBIT is calculated as operating
earnings plus interest expense and income taxes plus
goodwill amortization.

• Operating earnings is calculated as net earnings before

net capital gains (losses) and other items.

• Funds from operations is calculated as operating

earnings plus depreciation expense.

• Interest coverage is calculated as operating income

divided by interest expense.

• Net working capital is calculated as receivables plus
inventories, plus prepaid expenses, less accounts
payable and accrued liabilities, less the current portion
of future income taxes payable.

• Funded debt is calculated as bank indebtedness
plus long-term debt due within one year, plus
long-term debt.

• Net debt is calculated as funded debt less cash and

cash equivalents.

• Total capital is calculated as funded debt plus

shareholders’ equity.

• Net asset value is management’s estimate of the market

value of the Company’s assets less liabilities.

24
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Company Overview

Empire is a diversified Canadian company headquartered in Stellarton, Nova Scotia.
Empire’s key businesses consist of: retail food distribution through a 65.0 percent
ownership interest in Sobeys Inc. (“Sobeys”); real estate through two wholly-owned
operating subsidiaries, Sobey Leased Properties Limited and Crombie Properties
Limited (“Crombie”), which includes a 35.8 percent ownership interest in Genstar
Development Partnership (“Genstar”); other operations including wholly-owned
Empire Theatres Limited; and corporate investment activities.

Guided by conservative business principles, Empire’s
primary goal is to grow long-term shareholder value
through income and cash flow growth and equity
appreciation.This is accomplished through direct
ownership and equity participation in businesses that
management believes have the potential for long-term
growth and profitability.

With assets of $4.7 billion, Empire employs approximately
34,000 people directly and through its subsidiaries.

FOOD DISTRIBUTION Empire’s food distribution operations
are carried on through its 65.0 percent ownership in
Sobeys. Headquartered in Stellarton, Nova Scotia, Sobeys
is a leading national retail grocery and food distributor.
Founded in Atlantic Canada in 1907, Sobeys owns or
franchises more than 1,300 corporate and franchised food
stores located in all 10 provinces under various retail
banners; including Sobeys, IGA extra, IGA, and Price
Chopper. Sobeys and its franchisees collectively generate
approximately $11.05 billion in retail sales annually.

Sobeys continues to attract new customers and sales
with right-sized stores and a focus on food, driven by
its fresh food expertise and well-communicated and
well-executed offerings. Sobeys’ vision is to build
sustainable worth by being the most worthwhile
experience for its customers, employees, franchisees,
suppliers and shareholders.

REAL ESTATE Empire’s real estate operations are focused
on the development and management of its existing
commercial property portfolio and through Genstar its
residential business, while also pursuing accretive
acquisitions and developments, primarily in Ontario.

At the end of fiscal 2004, real estate operations had
12.9 million square feet under ownership compared
to 12.2 million square feet last year. Commercial
real estate operations are conducted through Crombie
and Sobey Leased Properties Limited, while residential
land development is primarily conducted through
Genstar, which operates principally in high growth
communities in Ontario and Western Canada.

With the acquisition of six properties in Ontario on
February 1, 2004, the real estate division now manages
over 1.0 million square feet of property in Ontario and
Quebec.The trend towards increasing the percentage of
total property square footage in Ontario relative to the
total portfolio is expected to continue.

Today, 87 percent of the gross leaseable area in Empire’s
real estate portfolio is retail space, of which 40 percent
is leased to an Empire-affiliated company.The retail
segment of the real estate portfolio includes 73
properties.The commercial real estate portfolio also
includes 9 office properties, representing 13 percent of
total gross leaseable area.

25
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

INVESTMENTS AND OTHER OPERATIONS The third component of
Empire’s business is its investments and other operations.
Empire’s investment portfolio consists of Canadian and
U.S. equity investments. At fiscal year-end, Empire’s
investments carried a market value of $390.9 million
consisting of Canadian common equity investments
valued at $271.6 million, foreign common equities valued
at $117.8 million in Canadian dollars, and preferred
equities and other investments valued at $1.5 million.
The Canadian common equity investment market value
includes the market value of Empire’s equity accounted
investment in Wajax Limited (a 47.5 percent ownership
position) of $78.3 million at fiscal year-end. All of
Empire’s investments are listed on a recognized public
stock exchange.

Other operations primarily consist of wholly-owned
Empire Theatres Limited (“Empire Theatres” or
“Theatres”), a movie exhibitor with 149 screens in
22 locations in Atlantic Canada and through a joint
venture, 14 screens and four locations in Western
Canada. Subsequent to fiscal year-end, on June 15, 2004,
Empire Theatres announced the purchase of four
cinemas operating 23 screens from Famous Players, a
division of Viacom Canada Inc., in Nova Scotia and
New Brunswick.

EMPIRE’S STRATEGIC DIRECTION Management’s primary
objective is to maximize the long-term sustainable
value of Empire through enhancing the worth of the
Company’s net assets and in turn, having that value
reflected in Empire’s share price.

The strategic direction of the Company is to stay the
course by continuing to direct energy and capital
towards growing the long-term sustainable value of each
of its core operating businesses – food distribution, real
estate and theatres.While these respective core businesses
are well established and profitable in their own right,

the diversification they offer Empire by both business
line and by market area is considered by management to
be an additional source of strength.Together, these core
businesses reduce risk and volatility, thereby contributing
to consistency in consolidated earnings growth over
the long term. Going forward, the Company intends
to continue to direct its resources towards the most
promising opportunities within these core businesses in
order to maximize long-term shareholder value.

In carrying out the Company’s strategic direction,
Empire management defines its role as having four
fundamental responsibilities: first, to support the
development and execution of sound strategic plans for
each of its operating companies; second, to regularly
monitor developments within each operating company;
third, to ensure that Empire is well governed as a public
company; and fourth, to prudently manage a pool of
investment capital in order to augment the growth in
our core operating businesses.

The Company also remains committed to holding an
investment portfolio consisting largely of high quality
common equities. A liquid investment portfolio provides
Empire with the opportunity to augment earnings while
waiting to make further investment in its core operations
as attractive opportunities unfold. Historically the
Company has been successful in generating investment
returns in excess of the Company’s cost of capital and
well in excess of returns that would otherwise have been
generated by investing in money market investments.

26
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Consolidated Operating Results

CONSOLIDATED FINANCIAL RESULTS SUMMARY

Years Ended April 30th
($ in millions, except per share information)

% Change
over 2003

2004

2003

% Change
over 2002

2002

% Change
over 2001

Revenue

Food Distribution (1)
Real Estate, net of inter-segment
Other Operations

$ 11,061.4
158.2
64.4

6.2 % $ 10,414.5
6.0 %
149.2
6.4 %
60.5

$ 11,284.0

6.2 % $ 10,624.2

Consolidated revenue

Operating income

Food Distribution
Real Estate
Investments and Other

Consolidated operating income
Interest expense
Income taxes (from operating activities)
Goodwill amortization
Minority interest
Earnings from discontinued operations

Operating earnings
Capital gain (loss) and other items,

net of tax

Gain on sale of discontinued operations

Net earnings

Cash flows from operating activities

7.0 %
8.3 %
7.6 %

7.0 %

9.9 %
3.2 %
(18.8)%

6.9 %
(16.8)%
6.1 %
–
24.4 %
–

20.9 %

294.5
111.1
18.0

423.6
91.6
109.2
–
58.9
–

163.9

(9.3)% $
7.0 %
9.7 %

(4.8)%
(1.4)%
(12.1)%
–
(13.1)%
–

2.5 %

324.7
103.8
16.4

444.9
92.9
124.3
–
67.8
–

159.9

9.2
–

253.3 %
–

(6.0)
–

(143.8)%
–

173.1

12.5 % $

153.9

(21.4)%

467.0

31.3 % $

355.8

(42.7)%

Total assets

$ 4,681.7

3.7 % $

4,516.1

Total long-term liabilities

$ 1,684.5

(1.0)% $

1,701.5

4.6 %

1.5 %

PER SHARE, BASIC AND FULLY DILUTED
Operating earnings
Capital gain (loss) and other items,

net of tax

Gain on sale of discontinued operations

Net earnings

Basic and diluted weighted average
number of shares outstanding

2.49

2.5 % $

2.43

21.5 %

0.14
–

2.63

255.5 %
–

(0.09)
–

(142.8)%
–

12.4 % $

2.34

(21.2)%

65.8

–

65.8

0.2 %

9,732.5
137.8
56.2

9,926.5

6.2 %
15.8 %
14.5 %

6.4 %

295.4
100.6
20.2

416.2
111.6
117.1
9.5
54.5
8.7

132.2

28.6 %
22.2 %
(30.6)%

22.0 %
(23.5)%
60.2 %
2.2 %
224.7 %
(13.0)%

49.4 %

13.7
50.0

(97.2)%
–

195.9

(66.2)%

621.1

257.4 %

4,318.0

1,676.2

1.5 %

2.3 %

2.00

50.4 %

0.21
0.76

2.97

65.7

(97.2)%
–

(66.3)%

–

Dividends

0.4000

21.2 % $

0.3300

54.3 %

0.2138

25.8 %

(1) Includes a $14.6 million gain on the sale of redundant real estate which Empire has recorded in revenue in fiscal 2004.

27
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Explanation of Fiscal 2004 Annual Results

Each of Empire’s operating businesses contributed to the growth in the Company’s
consolidated revenue in fiscal 2004 over the prior fiscal year; an increase of
$659.8 million or 6.2 percent. Revenue and financial performance for each of
the Company’s businesses (food distribution; real estate; investments and other
operations) are discussed in detail in further sections of this MD&A.

OVERALL OPERATING PERFORMANCE The revenue increase
of $659.8 million or 6.2 percent in fiscal 2004, to
$11.28 billion, is largely attributed to an increase in food
division revenues of $646.9 million or 6.2 percent over
the prior year. Included in food division revenues is a
$14.6 million gain on the sale of redundant real estate.
Growth in real estate revenues (net of inter-segment)
totaled $9.0 million or 6.0 percent, while other
operations recorded revenue growth of $3.9 million
or 6.4 percent, primarily as a result of strong revenue
growth at Empire Theatres.

DEPRECIATION EXPENSE Depreciation expense increased by
$27.8 million or 19.3 percent over the prior year, largely
reflecting Sobeys’ ongoing capital investment in its retail
store network.

OPERATING INCOME The year-over-year decrease in
operating income or EBIT of $21.3 million or
4.8 percent is the result of a $30.2 million decline
in operating income contribution from the food
distribution, partially offset by a $7.3 million or
7.0 percent increase in operating income for the real
estate division and a $1.6 million or 9.8 percent increase
in operating income for investments and other

operations.The year-over-year change in operating
income for each division is explained in further sections
of this MD&A.

INTEREST EXPENSE Interest on long-term debt declined
$3.8 million, or 4.2 percent largely as a result of
$187.8 million of long-term debt repayments made
during the year compared to $14.9 million of new
long-term debt issued during the fiscal year. Interest
expense on short-term debt increased $2.5 million
largely as a result of an increase in bank indebtedness
of $41.5 million over the prior year.

The majority of the Company’s debt remains at fixed
rates and therefore there is minimal exposure to interest
rate risk from fluctuating short-term interest rates.

INCOME TAXES The fiscal 2004 effective tax rate was
32.9 percent compared to 35.3 percent for fiscal 2003.
The year-over-year change is primarily a result of
reduced statutory tax rates.Total income tax expense
(from operating activities) for fiscal 2004 equaled
$109.2 million versus $124.3 million recorded last year,
as a result of lower taxable earnings in fiscal 2004 as
well as the lower effective income tax rate.

BELOW: DISTRIBUTION CENTRE, Debert, Nova Scotia PICTURED: Tim Cosh, Sobeys’ Employee; COMMISSO’S MARKET PLAZA, Hamilton, Ontario

28
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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resulting in the increase in ownership of Sobeys.These
share purchases totaled $67.7 million and were funded
through the sale of portfolio common equity investments
and bank indebtedness.

OPERATING EARNINGS The $4.0 million improvement in
operating earnings (earnings before net capital gain
(loss) and other items) over last year was the result of
the interaction of the 6.2 percent growth in sales as
explained, the 4.8 percent decline in operating income,
the 1.4 percent reduction in interest expense, the
12.1 percent reduction in income tax expense, and
the 13.1 percent decline in minority interest as
previously discussed.

NET CAPITAL GAIN (LOSS) Net capital gain of $9.2 million
primarily resulted from the sale of portfolio investments
during the year (2003 – $6.0 million net capital loss).

NET EARNINGS The increase in net earnings of
$19.2 million or 12.5 percent from last year is the
result of the $4.0 million increase in operating earnings
as discussed and the increase in net capital gain (loss)
over the prior year of $15.2 million.

MINORITY INTEREST The Company incurs minority interest
expense as a consequence of not owning 100.0 percent
of Sobeys. Fiscal 2004 minority interest equaled
$58.9 million, a decrease of $8.9 million or 13.1 percent
from the $67.8 million recorded in 2003.The decline in
minority interest is attributed to an increase in Empire’s
ownership interest in Sobeys, from 62.0 percent last year
to 65.0 percent at the end of 2004, along with Sobeys
reporting an $11.5 million decline in net earnings
relative to last year.

Empire purchased a total of 1.97 million common shares
of Sobeys between July 1, 2003 and April 30, 2004

OPERATING EARNINGS(1)
($ in millions)

OPERATING EARNINGS
PER SHARE(1)
($ per share)

9
.
9
5
1

9
.
3
6
1

2
.
2
3
1

3
4
.
2

9
4
.
2

0
0
.
2

5
.
8
8

7
.
4
8

3
3
.
1

0
1
.
1

YEAR ENDED APRIL 30TH
(1) Earnings before net capital gain (loss) and
other items.

BELOW: SOBEYS express, Truro, Nova Scotia; EMPIRE THEATRES STUDIO 7, Lower Sackville, Nova Scotia

29
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

ABOVE: SOBEYS FAST FUEL, Tantallon, Nova Scotia; SOBEYS QUEENSWAY, Toronto, Ontario

Operating Performance by Division and Outlook

Food Distribution Division

HIGHLIGHTS

• Sobeys achieved sales growth of 6.1 percent and

same-store sales growth of 1.4 percent.

• EBITDA as a percentage of sales declined to

4.04 percent compared to 4.32 percent last year.
• Total capital expenditures equaled $316.1 million
(total company-wide capital expenditures, which
includes franchisee and third party spending, equaled
$552.9 million).

• Opened or replaced 61 new stores, renovated or

expanded 28 stores, completed banner conversions on
89 stores and, in February 2004, acquired six cash and
carry’s and 15 Commisso’s stores.

• In Western Canada the Sobeys brand and Ready to
serve were launched through the conversion of 36
IGA Garden Market stores to Sobeys bannered stores.
• Expanded the “We Serve,You Save” program across most
of Sobeys and launched the “Hometown Advantage”
program in its community format IGA stores.
• Introduced its new “prototype” Sobeys express

convenience stores.

REVENUE In fiscal 2004, Sobeys recorded sales of $11.05
billion, an increase of $632.3 million or 6.1 percent over
fiscal 2003. Sales increased in all operating regions.

Sobeys’ same-store sales increased 1.4 percent despite
little or no national food price inflation throughout the
fiscal year.The growth in revenue was the result of:
Sobeys increased retail selling square footage; the fourth
quarter impact of the Commisso’s acquisition; Sobeys’
aggressive pricing posture and the continued

30
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

implementation of sales and merchandising initiatives
across the country; and Sobeys’ ongoing financial
commitment to upgrade and renovate existing store assets.
Management continues to focus on the opportunity to
increase sales per square foot in its 24.1 million square
foot retail network. Increased merchandising intensity,
improved marketing, and enhanced in-store promotional
programs have targeted a larger share of current
customers’ requirements in order to increase transaction
size with its existing customer base.

Store square footage increased by 6.6 percent in fiscal
2004 as a result of the opening of 61 new stores,
the expansion of 18 stores, and the acquisition of 15
Commisso’s stores.

Sobeys expects continued sales growth in fiscal 2005 as
a result of the ongoing capital investment in its retail
store network, the full-year benefit of the Commisso’s
acquisition and continued store offering, merchandising
and pricing improvements across Sobeys.

EBITDA AND OPERATING INCOME Sobeys’ EBITDA margin
declined to 4.04 percent of sales from 4.32 percent last
year, a decrease of 28 basis points.This decrease was
primarily due to the impact of lower retail prices in
increasingly competitive markets. Competitive pressure
in fiscal 2004 was particularly acute in the Ontario
region. Existing system and process complexities in the
Ontario business, including franchise and corporate
store business management and process inefficiencies,
compounded the heightened competitive intensity, to
significantly reduce the earnings in the region. As a
result, the Ontario region was the primary contributor

15916 p24_66 ENG 7/21/04 2:35 PM Page 31

to Sobeys’ overall earnings decline. Sobeys has been
actively addressing the business model and process
complexity issues. In March, Sobeys announced the
appointment of Craig Gilpin, an experienced Ontario
retail executive, to the position of President Operations,
Sobeys Ontario, to lead the ongoing simplification of
the Ontario business. Sobeys’ productivity initiatives and
business process optimization efforts will also enable
performance improvement and simplification in the near
and medium term.

The margin decline also reflects the short-term impact
of Sobeys’ acceleration of planned investments in its
stores and offerings during the year, necessary to
maintain and improve its competitive position while
continuing to grow its total retail sales.The combination
of lower retail selling prices arising from the Company’s
investments to remain competitive and relatively stable
cost of goods sold resulted in lower gross profit
percentages compared with the prior year.

In addition to the competitive environment, a number
of factors contributed to the decline in operating
income including: a reserve for the uninsured portion of
the cost of the August 2003 power failure in Ontario
($4.9 million pre-tax); the adverse outcome in a long-
standing real estate lawsuit ($4.0 million pre-tax);
an increase in the estimate of store closing costs
($5.3 million pre-tax); and pension and benefit costs for
employees on long-term disability ($4.8 million pre-tax).

Sobeys realized a pre-tax gain of $14.6 million in the
fourth quarter related to the sale of redundant real estate.

Sobeys undertook a number of specific initiatives during
the year which helped offset some of the margin decline.
Sobeys continued to reduce distribution and logistics
costs through improved productivity.Voice pick technology
was implemented in Sobeys’ distribution centres to
improve both order selection accuracy and productivity.
This technology enhances the order selection process,
substantially reducing the frequency of selection errors.
Sobeys also closed redundant distribution facilities in
Grand Prairie and Peace River, Alberta, recording closure
costs of $1.2 million pre-tax in its second quarter.

On January 31, 2004, the unionized employees at the
food division’s Milton, Ontario distribution centre
ratified a new three-year collective agreement.The
contract is consistent with Sobeys’ commitment to
building and sustaining a fair, equitable and competitive
infrastructure and cost base for the long term.

In the future, the continued focus on increasing sales per
square foot, banner rationalization, disciplined cost
management and reduction, distribution efficiencies and

migration of best practices across its four regions, are
expected to positively impact Sobeys’ operating income.

Sobeys’ depreciation expense increased by $26.4 million
year-over-year. Operating income or EBIT contribution
by the food division amounted to $294.5 million in
fiscal 2004, a decrease of $30.2 million or 9.3 percent
from 2003.

NET EARNINGS Sobeys’ fiscal year 2004 net earnings were
$167.5 million compared with $179.0 million last year, a
6.4 percent decrease. Net earnings per share were $2.54
for fiscal 2004 compared to $2.72 per share in fiscal 2003.

Sobeys’ net earnings are the result of heightened
competitiveness in the food retail business, increased
depreciation expense, the other costs incurred as
discussed, and investments made during the year.

Sobeys’ contribution to Empire’s net earnings equaled
$108.1 million (62.4% of Empire consolidated net
earnings) compared to $110.4 million the previous year,
a 2.1 percent earnings reduction.

FOOD DIVISION OUTLOOK Sobeys’ management believes that
Sobeys is well positioned for growth throughout fiscal
2005 and is confident in its strategy. Sobeys’ offerings
will continue to improve in each operating region and
Sobeys will remain competitive in increasingly
competitive markets, as demonstrated in fiscal 2004.
Sobeys’ focus will continue to be on growing sales and
earnings in fiscal 2005 and beyond in a sustainable
manner over the long term.

Sobeys is committed to building sustainable worth for all
its constituents.

FOOD DISTRIBUTION
REVENUE (1)
($ in millions)

FOOD DISTRIBUTION
OPERATING INCOME
($ in millions)

4
.
1
6
0
,
1
1

5
.
4
1
4
,
0
1

0
.
2
3
7
,
9

0
.
3
6
1
,
9

0
.
2
4
9
,
8

7
.
4
2
4 3
.
5
9
2

5
.
4
9
2

2
.
9
3
2

7
.
9
2
2

YEAR ENDED APRIL 30TH
(1) Includes gain of $14.6 million on sale of
redundant real estate in fiscal 2004.

YEAR ENDED APRIL 30TH

31
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

ABOVE: DOWNSVIEW MALL, Lower Sackville, Nova Scotia; BRIDGEWATER MALL, Bridgewater, Nova Scotia

Real Estate Division

HIGHLIGHTS

• Increased occupancy rate to 93.6 percent compared to 92.7 percent last year.
• Funds from operations increased 8.8 percent to $58.4 million.
• The real estate portfolio was strengthened and diversified through the redevelopment of existing properties, expansion
of residential development through Genstar and property acquisitions in Ontario. Crombie purchased seven properties
in Ontario resulting in over one million square feet of owned leaseable space in Ontario and Quebec.

The table below segments real estate division revenue, funds from operations and net earnings by commercial and
residential operations.

Years ended April 30th ($ in millions)

2004

% Change
over 2003

2003

% Change
over 2002

$ 180.4
30.1

$ 210.5
(52.3)

$ 158.2

40.8
17.6

58.4

24.9
17.0

41.9

4.1 %
19.0 %

6.0 %
5.9 %

6.0 %

9.4 %
7.3 %

8.8 %

18.0 %
(4.5)%

7.7 %

$ 173.3
25.3

$ 198.6
(49.4)

$ 149.2

37.3
16.4

53.7

21.1
17.8

38.9

3.6 %
41.3 %

7.3 %
4.4 %

8.3 %

6.0 %
26.2 %

11.4 %

11.1 %
18.3 %

12.7 %

Revenue

Commercial
Residential

Inter-segment

Funds from operations

Commercial
Residential

Net earnings

Commercial
Residential

32
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:35 PM Page 33

OPERATING INCOME The $7.3 million or 7.0 percent
increase in real estate division operating income for fiscal
2004 over the prior year was largely the result of a strong
contribution from Genstar, successful redevelopment
activities, higher net effective rental rates and lower
operating costs.The real estate operation contributed
26.2 percent of Empire’s total operating income in fiscal
2004 versus 23.3 percent a year earlier.

NET EARNINGS Real estate’s contribution to Empire’s fiscal
2004 net earnings was $41.9 million (24.2 percent of
Empire consolidated net earnings), an increase of
$3.0 million from the $38.9 million recorded in fiscal
2003.The increase is principally the result of the higher
operating income earned in fiscal 2004.

Funds from operations (net income plus depreciation)
increased 8.8 percent to $58.4 million from $53.7 million
last year as a result of improved operating earnings
performance.

REAL ESTATE DIVISION OUTLOOK Over the next year, Empire’s
real estate management group will continue its policy of
maximizing and prudently reinvesting its cash flow to
further strengthen and diversify its portfolio of residential
and commercial properties.

Empire’s real estate management group expects overall
retail occupancy levels to remain strong during fiscal
2005 as a result of the diligence of our leasing team and
general economic conditions.

REVENUE Commercial property related revenue increased
$7.1 million or 4.1 percent as a result of increased
leasing activity, generally stronger rental renewal rates
and property development and acquisition activity
during the year. In the first quarter, Crombie acquired
a community shopping centre property in Hamilton,
Ontario. At the start of the fourth quarter, Crombie
acquired six properties from Commisso’s Properties Ltd.
in Southwestern Ontario which added gross leaseable
area of 0.5 million square feet.

Leasing activity has been generally stronger than
anticipated with an overall (retail plus office) occupancy
rate of 93.6 percent compared to 92.7 percent a year
ago.The retail occupancy rate was 94.4 percent compared
to 93.2 percent a year earlier. Office vacancy, although
at 9.8 percent compared to 8.9 percent a year earlier,
was below the average vacancy rate in the Halifax and
Moncton markets, respectively.The majority of the
Company’s office space is located in the Halifax and
Moncton markets.

Revenue from residential activities increased $4.8 million
or 19.0 percent as a result of stronger than expected lot
sales in Genstar’s Western Canadian operation, particularly
in the Calgary and Edmonton markets.

REAL ESTATE REVENUE (1)
($ in millions)

REAL ESTATE
OPERATING INCOME
($ in millions)

5
.
0
1
2

6
.
8
9
1

1
.
5
8
8 1
.
5
6
1

1
.
7
5
1

1
.
1
1
1

8
.
3
0
1

6
.
0
0
1

3
.
2
8

1
.
0
7

YEAR ENDED APRIL 30TH
(1) Revenue is before inter-segment elimination.

YEAR ENDED APRIL 30TH

33
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

ABOVE: EMPIRE THEATRES STUDIO 7, Lower Sackville, Nova Scotia

Investments and Other Operations

HIGHLIGHTS

• Empire’s investments generated a 75.3 percent total return in fiscal 2004, resulting in first quartile return performance.
• Four-year annualized return performance for Empire’s liquid portfolio investments was 10.0 percent compared to a
negative 0.8 percent total return for the S&P/TSX Composite Index and a negative 7.9 percent total return for the
S&P 500 Index, in Canadian dollars.

• Net investment capital gains of $9.4 million were realized in fiscal 2004 largely as a result of the sale of common

equity investments.

• Empire Theatres continued to diversify its operations outside of Atlantic Canada through its joint venture
arrangement with Landmark Cinemas of Canada Limited, which has resulted in four locations to date.

PORTFOLIO VALUE AT APRIL 30, 2004 At fiscal year-end, April 30, 2004, Empire’s total investments (excluding cash) carried a
market value of $390.9 million on a cost base of $324.7 million, resulting in an unrealized gain of $66.2 million.This
compares to an unrealized gain of $46.7 million at the end of the third quarter and an unrealized loss of $68.7 million
at the end of fiscal 2003.

At April 30, 2004, Empire’s investment portfolio (excluding cash) consisted of:

$ in millions (Canadian)

Canadian equities
U.S. equities
Wajax
Preferred and other

Market
Value

$ 193.3
117.8
78.3
1.5

$ 390.9

% of
Portfolio

49.5%
30.1
20.0
0.4

100.0%

Cost

153.8
122.7
46.7
1.5

324.7

Unrealized
Gain (Loss)

$ 39.5
(4.9)
31.6
–

$ 66.2

Empire’s direct debt matched to these investments was $71.4 million Canadian at year-end, equivalent to 18 percent of
total investment market value. Management considers a ratio of debt to investment value of no greater than 35 percent
as prudent.

34
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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REVENUE Investments and other operations’ revenue,
primarily generated by Empire Theatres, reached
$64.4 million versus $60.5 million last year. Revenue
growth at Empire Theatres was primarily the result of
the availability of quality product and the modernization
of existing locations. Empire Theatres had 149 screens
in operation versus 141 at April 30, 2003.

INVESTMENT RETURN The total return on the Empire
investment portfolio, as independently benchmarked
against over 100 North American equity fund managers,
has provided first quartile return performance for each
of Canadian equities and U.S. equity investments over
two and three-year trailing periods ended March 31,
2004, respectively.Total portfolio return for the twelve-
month period ended March 31, 2004 was 75.3 percent.
This compares to a 37.7 percent total return for the
S&P/TSX Composite Index and a 20.5 percent total
return for the S&P 500 Index in Canadian dollars over
the same twelve-month period. Empire’s investment
return performance was ranked as being in the top 5th
percentile for each of Canadian equities and U.S. equities
over the twelve-month period ended March 31, 2004.

OTHER OPERATIONS
REVENUE
($ in millions)

OTHER OPERATIONS
OPERATING INCOME
($ in millions)

4
.
4
6

5
.
0
2 6
.
6
5

1
.
9
4

0
.
6
4

8
.
9

0
.
9

5
.
6

7
.
5

YEAR ENDED APRIL 30TH

The tables below present the return performance for Empire’s portfolio investments relative to Canadian and U.S.
equity benchmarks over each of the last four years ended March 31st, as well as on a two, three and four-year
compounded basis.Total portfolio return has been strong first quartile for 2004 and also on a two-year, three-year and
four-year annualized basis.

TOTAL INVESTMENT RETURN(1)
(Annual Returns for Periods Ended March 31st)

Empire Investment Portfolio
S&P/TSX Composite Index
S&P 500 Index (in Cdn.$)

2001

20.8%
-18.6%
-14.8%

TOTAL INVESTMENT RETURN(1)
(Annualized Compound Returns for Periods Ended March 31, 2004)

Empire Investment Portfolio
1st Quartile Manager Return
Median Manager Return
S&P/TSX Composite Index
S&P 500 Index (in Cdn.$)

2002

11.9%
4.9%
1.4%

2-year

5.2%
2.8%
0.9%
6.5%
-8.6%

2003

-27.8%
-17.6%
-30.7%

3-year

6.6%
3.9%
1.5%
6.0%
-5.4%

2004

50.0%
37.7%
20.5%

4-year

10.0%
3.1%
-0.5%
-0.8%
-7.9%

(1) Excludes the total return on Wajax Limited which is an equity accounted investment.With the total return on Wajax Limited included, total return for the

twelve-month period ended March 31, 2004 was 75.3 percent.

Despite the volatility in equity markets, management continues to believe that equity market returns will be superior
to either fixed income or money market investment returns over the long term. Empire remains committed to
prudently managing a high quality, liquid portfolio of common equities.

35
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

PERFORMANCE ATTRIBUTION The increase in investment
value over the last twelve months is primarily attributed
to three factors: first, a turnaround in the valuation of the
Delhaize Le Lion common equity investment which was
crystallized; second, a significant increase in Wajax share
price; and third, solid return performance from financial
services stocks and the equity market generally.

HEDGING INVESTMENT CURRENCY RISK At April 30, 2004,
Empire had hedged 60.5 percent of the market value
of its U.S. based common equity investments by way of
$52.0 million in U.S. dollar short-term borrowings.
The average foreign exchange rate associated with these
U.S. dollar bank loans is $1.3716 (72.9 cents).The fair
value of the hedge was close to zero dollars at the end
of fiscal 2004 as a result of the foreign exchange rate
equaling $1.3710 (72.9 cents) at the end of the fourth
quarter. Management has documented and accounted for
the U.S. bank loans as a fair value hedge.

CAPITAL ALLOCATION FROM INVESTMENTS During fiscal 2004,
Empire purchased a total of 1,968,800 common shares of
Sobeys for a total cost of $67.7 million.This outlay was
funded through capital reallocation from the investment
division and bank indebtedness.This resulted in an
increase in Empire’s ownership of Sobeys Inc. of three
percentage points, with total interest at fiscal year-end of
65.0 percent versus 62.0 percent a year earlier.

INVESTMENT INCOME For the full fiscal year, investment
income increased by $0.9 million to reach $15.8 million.
The increase is the result of equity accounted earnings
from Wajax Limited (“Wajax”) being higher than last year
by $4.5 million combined with a decrease in dividend
income of $3.6 million.The decline in dividend income
was expected as a result of the change in the investment
portfolio mix and the sale of portfolio investments to
purchase additional common shares of Sobeys.

OPERATING EARNINGS The $2.7 million or 24.5 percent
improvement in investments and other operations
operating earnings over the prior year is attributed
to the $0.9 million increase in investment income,
a $0.8 million increase in theatre operating earnings
and reduced interest expense.

CAPITAL GAIN (LOSS) The net capital gain realized in fiscal
2004 of $9.4 million (2003 – $6.4 million net capital
loss) were largely the result of the sale of common
equity investments.

NET EARNINGS Investments (net of corporate expenses)
and other operations contributed $23.1 million to
Empire’s consolidated net earnings (13.3 percent of
Empire consolidated net earnings).This compares to
a $4.6 million net earnings contribution last year
(3.0 percent of Empire consolidated net earnings).The
improvement is the result of the increased operating
earnings and the realized capital gains as discussed.

INVESTMENT PORTFOLIO AND OTHER OPERATIONS OUTLOOK
Growth in the portfolio will be dependent on a
number of factors including investor sentiment in the
U.S. and Canada. Equity markets may continue to
remain volatile.

With respect to Empire Theatres’ outlook, management
recognizes that future growth will remain highly
dependent on a steady supply of quality product. Based
on the quality of film releases expected in fiscal 2005,
an experienced operations team, and planned screen
development and acquisitions, management looks
forward to continued revenue growth in this business.

36
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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Explanation of Fiscal 2004 Fourth Quarter Results

The following table summarizes key operating results, by quarter, for the last eight quarters:

Fiscal 2004

Fiscal 2003

($ in millions,
except per share information)

Revenue
Operating income
Operating earnings
Net capital gain (loss)
and other items

$2,876.4
100.3
41.1

$2,798.5
110.4
44.2

$2,794.4
104.9
39.0

$2,814.7
108.0
39.6

$ 2,624.7
110.4
41.8

$ 2,643.6
107.6
39.3

$ 2,664.9
111.7
39.0

$ 2,687.3
115.2
39.8

(0.1)

8.8

(2.2)

2.7

(5.8)

–

(0.2)

–

Net earnings

41.0

53.0

36.8

42.3

36.0

39.3

38.8

39.8

PER SHARE INFORMATION,

BASIC AND FULLY DILUTED

Operating earnings (1)
Net capital gain (loss)
and other items

0.63

0.67

0.59

0.60

0.64

0.60

0.59

0.60

Net earnings

0.63

–

0.13

0.80

(0.03)

0.56

0.04

0.64

(0.09)

–

0.55

0.60

0.59

0.60

Weighted average number
of shares outstanding

65.8

65.9

65.8

65.9

65.8

(1) Earnings before net capital gain (loss) and other items.

Revenue for the fourth quarter was $2.87 billion
compared to $2.62 billion last year, a 9.6 percent increase.
The food division reported revenue of $2.80 billion, an
increase of $234.6 million or 9.1 percent over the fourth
quarter last year. Food division revenue growth was
positively influenced by the acquisition of Commisso’s
at the beginning of the fourth quarter, increased retail
selling square footage of 1.2 million additional square
feet, inclusive of Commisso’s (1.0 million net of store
closures), its aggressive pricing posture, the continued
implementation of sales and merchandising initiatives
across the country and Sobeys’ ongoing financial
commitment to upgrade and renovate existing store
assets. Same store sales grew 1.0 percent during the
quarter with little or no inflation.

Real estate operations reported fourth quarter revenues
(net of inter-segment) of $43.4 million, a decrease
of $0.2 million over the fourth quarter last year.
Commercial property revenue grew by $2.0 million or
6.3 percent while revenue from Genstar declined by
$2.2 million or 18.5 percent.The growth in commercial
property revenues was the result of higher occupancy
levels, generally higher rental renewal rates and the
positive impact of the acquisition of the six Commisso’s

properties.The decline in residential revenue from
Genstar was not unexpected given the exceptionally
strong lot sales recorded in the fourth quarter last year.

The 9.1 percent decline in consolidated operating
income in the fourth quarter is due to a $10.0 million
or 13.3 percent decline in food division operating income
contribution to Empire compared to the fourth quarter
last year. Food division operating income or EBIT
continued to be impacted by competitive retail conditions
across the country and by higher depreciation expense.

During the fourth quarter, Sobeys sold redundant real
estate for a pre-tax gain of $14.6 million. Expenses were
impacted by an increase in the estimate of store closing
costs of $5.3 million and pension and benefit costs for
employees on long-term disability of $4.8 million, both
before tax. Included in fourth quarter operating income
or EBIT for fiscal 2003 was the $11.3 million pre-tax
impact of the Whitby, Ontario distribution centre
labour disruption.

Fourth quarter EBITDA for Sobeys totaled $109.2 million,
an increase of $1.4 million or 1.3 percent over the fourth
quarter of 2003. As a percentage of sales, EBITDA
equaled 3.90 percent, a decrease of 30 basis points from

37
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

the 4.20 percent recorded in the fourth quarter last year.
EBITDA declines were more significant in the Ontario
region, as discussed earlier.

Real Estate division operating income generated from
commercial properties increased by $1.0 million or
4.5 percent over the fourth quarter last year. Operating
income from the residential real estate operations
declined $2.2 million, consistent with the decline in
revenue previously discussed.

Investments and other operations’ fourth quarter operating
income increased by $1.1 million, primarily due to
increased operating income from theatre operations.

Consolidated Financial Position

A net capital loss of $0.1 million and $5.8 million was
recorded in the fourth quarter of fiscal 2004 and fiscal
2003, respectively, primarily resulting from the sale
of investments.

Net earnings in the fourth quarter, including net capital
loss and other items, totaled $41.0 million or $0.63 per
share versus $36.0 million or $0.55 per share in the
fourth quarter last year.

ASSETS AND NET ASSET VALUES At April 30, 2004, management calculates Empire’s consolidated net asset value (management’s
estimate of the market value of the Company’s assets less indebtedness) at $2,045 million ($31.08 per Empire common
share), a decrease of $186 million or 8.3 percent from the calculated net asset value at April 30, 2003 of $2,231 million
($33.91 per Empire common share).The table below presents the composition of net asset value by segment.

($ in millions)

Food Distribution (1)
Real Estate (2)
Investments and Other (3)

Less: corporate debt and preferred shares

Net asset value

Per share

April 30, 2004

April 30, 2003

Net Asset
Value

1,226
452
453

2,131
86

2,045

31.08

% of
Total

58%
21%
21%

100%

Net Asset
Value

1,515
414
374

2,303
72

2,231

33.91

% of
Total

66%
18%
16%

100%

(1) Food distribution net asset value at April 30, 2004 equals the 42.81 million common shares of Sobeys owned at fiscal year-end times the market price of
a Sobeys’ common share at fiscal year-end.Food distribution net asset value at April 30, 2003 equaled the 40.84 million common shares of Sobeys owned
at fiscal year-end times the market price of a Sobeys’ common share at fiscal year-end.

(2) Real estate net asset value for April 30, 2004 has been calculated at 9 times trailing funds from commercial operations plus 5 times trailing funds from
operations from residential operations. April 30, 2003 net asset value for real estate has been adjusted to reflect multiples consistent with fiscal 2004.

(3) Investment net asset value is derived from stated public market values of securities in the portfolio.

At April 30, 2004, approximately 80 percent of Empire’s
net asset value was derived from assets that are valued by
publicly available market prices and trade on recognized
public stock exchanges.This includes Sobeys’ common
shares and securities held in Empire’s investment
portfolio. For each dollar increase in Sobeys’ share price,
Empire’s net asset value increases by $0.65 per share.

Book value per common share was $23.81 at
April 30, 2004, compared to $21.54 at April 30, 2003.

CAPITAL STRUCTURE AND KEY FINANCIAL CONDITION MEASURES

April 30th ($ in millions,
except ratio calculations)

Shareholders’ equity
Short-term debt
Long-term debt, including

current portion
Debt to total capital
Net debt to total capital
Interest coverage

2004

2003

$ 1,576.8
140.8
$

$ 1,427.1
99.3
$

985.4
41.7%
36.9%
4.62x

$ 1,112.0
45.9%
38.5%
4.79x

38
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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SHAREHOLDERS EQUITY Total common shares outstanding at
April 30, 2004 equaled 65,754,810, relatively unchanged
from a year ago.There were 30,869,585 Non-Voting
Class A shares outstanding and 34,885,225 Class B
common shares outstanding at April 30, 2004. During
fiscal 2004, 30,000 options were exercised compared to
27,800 in fiscal 2003. At April 30, 2004, Empire had
37,074 options outstanding with expiry dates ranging
from June 2004 to October 2006.

Empire has a policy of repurchasing enough Class A
Non-Voting shares to offset the dilutive effect of shares
issued to fulfill the Company’s obligation under its stock
option and share purchase plans. During fiscal 2004
Empire purchased 68,477 Non-Voting Class A shares for
cancellation versus 60,124 in fiscal 2003.

At June 24, 2004, Empire had 30,878,985 Non-Voting
Class A shares and 34,885,225 Class B common shares
outstanding. Empire had 27,674 options outstanding on
June 24, 2004.

Dividends paid to common shareholders amounted to
$26.3 million ($0.40 per share) versus $21.7 million
($0.33 per share) for the same period last year.

LIABILITIES Empire finances a significant portion of its
assets through the use of debt (bank indebtedness, long-
term debt and long-term debt due within one year), the
majority of which is fixed-rate and long-term in nature.
Total fixed-rate, long-term debt (including the current
portion of long-term debt) at year-end of $985.4 million
represents 87 percent of Empire’s total funded debt.
Long-term debt by operating company is detailed in the
table below.

April 30th ($ in millions)

Food Distribution
Real Estate
Other Operations

Total

2004

442.8
538.2
4.4

985.4

2003

585.4
521.5
5.1

$ 1,112.0

Of the total fixed-rate, long-term debt, 44.9 percent
was directly related to the food distribution segment,
54.6 percent was directly related to the real estate
segment, and 0.5 percent was related to other operations.
There is no long-term debt carried by the investment
segment.The investment segment’s assets are short-term
and liquid in nature, therefore associated financing is also
short-term. Empire finances its long-term assets with
fixed-rate, long-term debt, thereby reducing both interest
rate and refinancing risk.

NET ASSET VALUE
PER SHARE
($ per share)

SHARE PRICE
($ per share)

BOOK VALUE PER SHARE
($ per share)

COMMON DIVIDENDS
PER SHARE
($ per share)

7
5
.
9
3

1
9
.
3
3

8
0
.
1
3

8
8
.
8
2

5
8
.
3
2

5
6
.
6
2

4
8
.
4
2

8
8
.
4
2

0
0
.
7
1

5
0
.
6
1

1
8
.
3
2

4
5
.
1
7 2
4
.
9
1

2
8
.
6
1

3
7
.
8

0
4
.
0

3
3
.
0

1
2
.
0

7
1
.
4 0
1
.
0

YEAR ENDED APRIL 30TH

39
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

At April 30, 2004, interest coverage (operating income
divided by interest expense) was 4.62 times, which
was slightly down from the 4.79 times reported as of
April 30, 2003. Reduced interest expense in fiscal 2004
was more than offset by the year-over-year decline in
operating income of 4.8 percent. Interest coverage
improved for the real estate, investments, and other
operation segments, but coverage for the food segment
declined to 6.95 times from 7.79 times a year earlier.
The lower interest coverage recorded by the food
segment was a direct result of the lower operating
income reported in fiscal 2004 versus 2003.

The debt to total capital ratio declined 4.2 percentage
points as a result of lower debt levels and higher retained
earnings.The net debt (debt less cash and cash equivalents)
to total capital ratio declined 1.6 percentage points.
In addition to the Company’s cash and cash equivalents,
Empire’s investment portfolio consisting of liquid publicly
traded securities strengthened its financial position. At
April 30, 2004, the portfolio carried a market value of
$390.9 million.

Empire has a corporate unsecured debt rating of
BBB- (stable trend) from Standard & Poor’s and a debt
rating of BBB (negative trend) from Dominion Bond
Rating Service. Sobeys has a corporate unsecured debt
rating of BBB- (stable trend) from Standard and Poor’s
and a debt rating of BBB high (negative trend) from
Dominion Bond Rating Service. On April 26, 2004,
Dominion Bond Rating Service put the Company and
Sobeys on a negative trend as a result of increased
competitive pressures which have impacted margins.

DEBT TO TOTAL CAPITAL
(percentage)

INTEREST COVERAGE
(times)

4
.
1
6

6
.
9
4 4
.
6
4

9
.
5
4

7
.
1
4

8
.
4

6
.
4

7
.
3

3
.
2

9
.
1

YEAR ENDED APRIL 30TH

40
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

Empire and its subsidiaries have provided covenants to
its lenders in support of various financing facilities.
All covenants were complied with in fiscal 2004 and
fiscal 2003.

Empire anticipates ready availability of any required
longer-term financing due to its investment grade credit
rating, previous experience in the capital markets, and
Sobeys established Medium Term Note program
pursuant to its amended shelf prospectus expiring
February 19, 2005, which provides for the issuance of up
to $500.0 million of unsecured Medium Term Notes.

HEDGING INSTRUMENTS Empire utilizes hedging
instruments from time to time to prudently manage
exposure to interest rate volatility. At April 30, 2004,
the gross notional amount of all interest exchange agree-
ments totaled $29.8 million at rates ranging from 4.0
percent to 6.4 percent.The food division had in place a
gross notional value of $11.8 million and effectively
exchanged floating-rate interest payments to 6.4 percent
fixed-rate interest payments.The real estate division had
in place a gross notional value of $18.0 million and
effectively exchanged floating-rate interest payments to
4.0 percent fixed rate interest payments.

To mitigate the currency risk associated with the
Company’s U.S. dollar investments, Empire has designated
U.S. bank loans as hedges.This debt is short-term in
nature and provides flexibility to hedge the U.S. dollar
exposure.

Empire and its subsidiaries use hedging instruments to
mitigate risk exposure, not for speculative purposes.

CAPITAL RESOURCES AND SOURCES OF LIQUIDITY Empire’s
liquidity remains strong as a result of:

• internally generated cash flow from operating activities;
• net cash on hand;
• an improved working capital position;
• unutilized bank credit facilities;
• ready availability of long-term debt financing; and
• Empire’s investment portfolio of liquid short-term
investments which carried a market value at fiscal
year-end of $390.9 million.

The Company anticipates that these sources of liquidity
will be sufficient to meet expected cash outflows over
the next year.The Company normally refinances
existing long-term debt as it matures, and maintains
financial flexibility through its investment portfolio and
access to the capital markets for additional long-term

15916 p24_66 ENG 7/21/04 2:36 PM Page 41

debt or equity financing. Longer-term financing is
obtained by Sobeys through Canadian public debt
markets via Sobeys established Medium Term Note
program pursuant to its amended shelf prospectus filed
on February 17, 2003. Sobeys also utilizes capital leases
for the financing of selected properties and assets.The
Company, along with Sobeys, anticipates continued
ready access to financing sources as a result of in-place
investment grade credit ratings and previous experience
in the capital markets.

BANK CREDIT FACILITIES On a non-consolidated basis,
Empire maintains authorized bank lines for operating,
general and corporate purposes of $325.0 million, of
which 23 percent was utilized at year-end. Financial
instruments are used from time to time to manage the
risk of short-term interest rate fluctuations on underlying
short-term bank indebtedness. On a consolidated basis,
Empire’s authorized bank credit facilities exceeded
borrowings by $621.6 million at April 30, 2004.

WORKING CAPITAL During 2004, Empire decreased it working capital requirements by $63.3 million.The decrease is
primarily the result of stronger inventory and payables management by the food division, providing higher payables as
a percent of inventory at the end of the year.The table below details the primary working capital components and
respective values compared to last year.

($ in millions)

Receivables
Inventories
Prepaid expenses
Accounts payables
Income taxes payable

Net working capital change

At April 30
2004

329.5
492.9
49.3
(1,141.2)
(10.6)

At April 30

Increase
(Decrease) in
2003 Working Capital

348.8
478.2
37.1
(1,037.4)
(43.5)

(19.3)
14.7
12.2
(103.8)
32.9

(63.3)

CASH AND CASH EQUIVALENTS At April 30, 2004 cash and cash equivalents were $202.2 million versus $316.8 million at
April 30, 2003. In October 2003, the food division used $100.0 million to repay an outstanding Medium Term Note
issue. Cash is currently invested in guaranteed investment certificates.

CAPITAL REQUIREMENTS Capital requirements during fiscal
2004 included:

• capital expenditures;
• working capital needs;
• dividend payments;
• debt repayments; and
• share repurchases under the Company’s normal

course issuer’s bid.

CAPITAL EXPENDITURES Consolidated on balance sheet
purchases of property equipment and other assets totaled
$431.0 million compared to $442.0 million last year.The
table below presents balance sheet capital expenditures
over the last two years by business segment.

($ in millions)

Food Distribution
Real Estate
Investments and Other

Total capital expenditures

2004

384.9
34.2
11.9

431.0

2003

411.2
25.1
5.7

442.0

During fiscal 2004, food division company-wide capital
spending, which includes expenditures by Sobeys,
franchisees, and third parties, totaled $552.9 million, with
87 percent of the food division’s total capital spending
directed towards the expansion and modernization of its
retail store network. Sobeys used its regional market
overview process to identify and prioritize investment
opportunities in each of its four regions.

This capital spending represents an increase of
$6.9 million from the $546.0 million total company-
wide spending made by the food distribution segment
in fiscal 2003. Also included was the purchase of
15 Commisso’s stores and six cash and carry outlets in
Ontario. In addition, the food division added 2.4 million
square feet, as compared to 1.5 million square feet
added in fiscal 2003.Total square footage, net of store
closures, increased by 1.5 million square feet, an
increase of 6.6 percent over the prior year.

41
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The table below details the new and replacement stores
opened in fiscal 2004.

2004

2003

Sobeys Banner
IGA (Garden Market IGA and

IGA extra)
Price Chopper
Other

Total

18
11
13

22
8
8

In addition to the new stores opened or replaced during
the year, 28 stores were renovated and/or expanded in
fiscal 2004 versus 29 in the previous fiscal year. At fiscal
year-end 2004, the food division operated 1,311 stores
(433 corporate stores and 878 franchised stores).

The majority of Sobeys’ total company-wide spending
in fiscal 2005, which will approximate the average
capital expenditures of the past number of years, will be
allocated to the retail store network. During fiscal 2005,
Sobeys plans to open, expand, or renovate approximately
100 corporate and franchise stores across Canada,
increasing square footage by approximately 4 percent.

Real estate capital spending in fiscal 2004 includes
investment in the existing property portfolio and the
purchase of six Commisso’s properties in Ontario.

FOOD DISTRIBUTION
CAPITAL EXPENDITURES
($ in millions)

REAL ESTATE
CAPITAL EXPENDITURES
($ in millions)

9
.
8
5
4

2
.
1
1
4

9
.
4
8
3

6
.
2
5

1
.
8
4

7
.
6
5
2

1
.
1
7
1

2
.
4
3

1
.
5
2

6
.
0
2

YEAR ENDED APRIL 30TH

42
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

DIVIDEND PAYMENTS Dividends of $26.3 million ($0.40 per
share) were paid in fiscal 2004 on Empire’s common
shares, up from the $21.7 million ($0.33 per share) paid
in fiscal 2003.The dividend rate increased from $0.33 to
$0.40 per share.There was no material change in the
number of common shares outstanding year-over-year.

DEBT REPAYMENTS Empire’s funded debt was reduced
year-over-year primarily as a result of the food division
repaying long-term debt of $162.7 million largely as
a result of a $100.0 million repayment of Medium
Term Notes which matured October 2, 2003, and other
scheduled long-term debt repayments.The $100.0 million
repayment was made with the proceeds of a Sobeys
Medium Term Note issued in February 2003.

SHARE REPURCHASES During fiscal 2004, Empire repurchased
68,477 Non-Voting Class A shares ($1.8 million) under
a Normal Course Issuer Bid announced June 26, 2003.
The Company issued 64,429 Non-Voting Class A shares
($1.1 million) to fulfill its obligations under its stock
option and share purchase plans.

The Company anticipates that its capital resources
and liquidity position will meet its capital and liquid
requirements over the next year, which is expected to
include capital expenditures, dividend payments and
debt reduction.

On March 8, 2004, Sobeys announced its intention to
file a Normal Course Issuer Bid with the Toronto Stock
Exchange to purchase for cancellation up to 2,000,000
common shares representing approximately 3.0 percent
of the shares outstanding.The Board of Directors and
management of Sobeys believe that the repurchase of
its shares at recent prevailing market prices is a worth-
while investment and in the best interests of Sobeys.
Shareholders may obtain a copy of the notice of
intention by contacting Sobeys Investor Relations
department, 115 King Street, Stellarton, N.S., B0K 1S0.

On July 8, 2004, Empire announced its intention to file
a Normal Course Issuer Bid with the Toronto Stock
Exchange to purchase for cancellation of up to 617,391
Class A Non-Voting shares representing approximately
2.0 percent of the Class A Non-Voting shares currently
outstanding.The Board of Directors and Management of
Empire believe that the repurchase of its shares at recent
prevailing market prices is a worthwhile investment and
in the best interests of the Company. Shareholders may
obtain a copy of the notice of intention by contacting
Empire’s Investor Relations department, 115 King Street,
Stellarton, N.S., B0K 1S0.

15916 p24_66 ENG 7/21/04 2:36 PM Page 43

Accounting Policy Changes

ACCOUNTING STANDARDS IMPLEMENTED IN FISCAL 2004
Effective May 1, 2003, the Company adopted two new
Canadian Institute of Chartered Accounts (“CICA”)
Handbook Sections. Section 3063,“Impairment of
long-lived assets”, provides guidance on the recognition,
measurement and disclosure of the impairment of long-
lived assets.There was no impact of the application of
Section 3063 on the consolidated financial statements.
Section 3475,“Disposal of long-lived assets and discon-
tinued operations”, provides guidance on the recognition,
measurement, presentation, and disclosure of any long-
lived assets not held for use and any discontinued
operations. During the current fiscal year, land and
buildings have been listed for sale and reclassified as
“Assets for realization”.These assets are expected to be
sold within a twelve-month period, are no longer
productive assets and there is no longer intent to develop
the land for future use. Assets for realization are valued at
the lower of cost and fair value less costs to sell.

Effective May 1, 2003, the Company adopted CICA
Handbook Section 3870, “Stock-based Compensation
and Other Stock-based Payments”, which had no impact
on the Company’s earnings. In fiscal 2004 the Emerging
Issues Committee issued Abstract 132, “Share Purchase
Financing”.This Abstract required share purchase loans
that are not treated as assets on the balance sheet to
be accounted for as stock-based compensation.The
Company has determined there is no impact on the
consolidated financial statements.

ACCOUNTING STANDARDS TO BE IMPLEMENTED IN FISCAL 2005
The CICA has issued Accounting Guideline Number 15
draft, “Consolidation of Variable Interest Entities”, which,
if adopted as proposed, is applicable to the Company’s
third quarter of fiscal 2005 in relation to disclosure of
and accounting for Variable Interest Entities.The purpose
of this guideline is to provide guidance for determining
when an enterprise includes the assets, liabilities and
results of activities of certain entities that are subject to
control on a basis other than ownership of voting
interest. A Variable Interest Entity (“VIE”) is any type of
legal structure not controlled by voting equity, but rather
by contractual and/or other financial arrangements.The
Company has identified potential VIE’s and is currently

reviewing Accounting Guideline 15 to determine what
extent, if any at all, consolidation and note disclosure will
be required.The consolidation of potential VIE’s is not
expected to result in any material change in the reported
earnings or underlying tax, legal or credit risks facing
the Company.

In January 2004, the CICA issued a new accounting
standard EIC-144 titled “Accounting by a Customer
(Including a Reseller) for Certain Consideration
Received from a Vendor”. EIC-144 provides that cash
consideration received from a vendor is presumed to be
a reduction in the prices of the vendor’s products or
services and should, therefore, be characterized as a
reduction in cost of sales and related inventory when
recognized in the customer’s income statement and
balance sheets. If the consideration is a payment for
assets or services delivered to the vendor, the cash
consideration should be characterized as revenue or
other income. If it is a reimbursement of costs incurred
to sell the vendor’s products, the cash consideration
should be characterized as a reduction of that cost,
provided certain conditions are met. EIC-144 requires
retroactive application to all financial statements for
annual and interim periods ending after August 15, 2004.
The Company is currently assessing the impact of these
recommendations and will implement them in the first
quarter of fiscal 2005.

The CICA has also introduced handbook section 1100
which discusses primary sources of GAAP, what to do
when a matter is not dealt explicitly in the sources of
GAAP and identifies some other sources to be consulted
when a matter is not dealt with in the sources of GAAP.
The new standard is effective for the Company’s fiscal
year-end 2005.The Company is currently assessing the
impact of these recommendations.

To date, the real estate division has identified that real
estate industry practice with respect to depreciation and
lease accounting will not be acceptable.Therefore, the
real estate division will change their method of deprecia-
tion from the sinking fund method to the straight-line
method. In addition, the real estate segment will
recognize income from tenant leases on a straight-line
basis. Both of these policies will be adopted prospectively
without restatement.

43
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MANAGEMENT’S DISCUSSION AND ANALYSIS

Critical Accounting Estimates

PENSION, POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
Certain estimates and assumptions are used in actuarially
determining the Company’s defined pension and
employee future benefit obligations.

Significant assumptions used to calculate the pension and
employee future benefit obligations are the discount rate,
the expected long-term rate of return on plan assets
and expected growth rate of health care costs.These
assumptions depend on various underlying factors such
as economic conditions, investment performance,
employee demographics and mortality rates.These
assumptions may change in the future and may result in
material changes in the pension and employee benefit
plans expense.The magnitude of any immediate impact
however is mitigated by the fact that net actuarial gains
and losses in excess of 10.0 percent of the greater of the
accrued benefit plan obligation and the market value of
the benefit plan assets are amortized on a straight-line

basis over the average remaining service period of the
active employees. Changes in financial market returns
and interest rates could also result in changes in
funding requirements for Sobeys’ defined benefit
pension plans.

The discount rate is based on current market interest
rates, assuming a portfolio of Corporate AA bonds with
terms to maturity that, on average, match the terms
of the obligation.The appropriate discount rate is
determined on April 30 every year. For 2004, the
discount rate used for calculation of pension benefit
plans and other benefit plans expense was 6.0 percent
compared to 6.5 percent in 2003.The expected long-
term rate of return on plan assets for pension benefit
plans for each of 2004 and 2003 was 7.0 percent.The
expected growth rate in health care costs is 10.0 percent
for fiscal 2004.The cumulative growth rate to 2010 is
expected to be 6.0 percent.The expected future growth
rate is evaluated on an annual basis.

The table below outlines the sensitivity of the 2004 key economic assumptions used in measuring the accrued benefit
plan obligations and related expenses of the Company’s pension and other benefit plans.The sensitivity of each key
assumption has been calculated independently. Changes to more than one assumption simultaneously may amplify or
reduce impact on the accrued benefit obligations or benefit plan expenses.

($ in 000’s)

Expected long-term rate of return on plans assets
Impact of: 1% increase
1% decrease

Discount rate
Impact of: 1% increase
1% decrease

Growth rate of health care costs
Impact of: 1% increase
1% decrease

PENSION PLANS

OTHER BENEFIT PLANS

Accrued Benefit
Obligations

Pension
Expense

Accrued Benefit
Obligations

Pension
Expense

7.0%
(2,190)
2,190

6.0%
(1,920)
2,037

$
$

6.0%
$ (27,307)
30,661
$

6.0%
$ (15,618)
18,890
$

9.0%
$
17,495
$ (14,870)

6.0%
(2,056)
2,224

9.0%
1,524
(1,410)

$
$

44
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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VALUATION OF ASSETS AND ASSET IMPAIRMENT Goodwill is not
amortized and is assessed for impairment at the reporting
unit level at least annually. Any potential goodwill
impairment is identified by comparing the fair value of a
reporting unit to its carrying value. If the fair value of
the reporting unit exceeds its carrying value, goodwill is
considered not to be impaired. If the carrying value of
the reporting unit exceeds its fair value, potential
goodwill impairment has been identified and must be
quantified by comparing the estimated fair value of the
reporting unit’s goodwill to its carrying value. Any
goodwill impairment will result in a reduction in the
carrying value of goodwill on the consolidated balance
sheet and in the recognition of a non-cash impairment
charge in operating income.

The Company periodically assesses the recoverability
of long-lived assets when there are indications of
potential impairment. In performing these analyses, the
Company considers such factors as current results, trends
and future prospects, current market value and other
economic factors.

A substantial change in estimated undiscounted future
cash flows for these assets could materially change their
estimated fair values, possibly resulting in additional
impairment. Changes which may impact future cash
flows include, but are not limited to, competition and
general economic conditions and unrecoverable increases
in operating costs.

INCOME TAXES Future income tax assets and liabilities are
recognized for the future income tax consequences
attributable to temporary differences between the
financial statement carrying values of assets and liabilities
and their respective income tax bases. Future income tax
assets or liabilities are measured using enacted or
substantively enacted income tax rates expected to apply
to taxable income in the years in which those temporary
differences are expected to be recovered or settled.The
calculation of current and future income taxes requires
management to make estimates and assumptions and to
exercise a certain amount of judgment.The financial
statement carrying values of assets and liabilities are

subject to accounting estimates inherent in those balances.
The income tax bases of assets and liabilities are based
upon the interpretation of income tax legislation across
various jurisdictions.The current and future income tax
assets and liabilities are also impacted by expectations
about future operating results and the timing of reversal
of temporary differences as well as possible audits of tax
filings by the regulatory authorities. Management
believes it has adequately provided for income taxes
based on current available information.

Changes or differences in these estimates or assumptions
may result in changes to the current or future income
tax balances on the consolidated balance sheet, a charge
or credit to income tax expense and may result in cash
payments or receipts.

Related Party Transactions

Sobeys continues to lease certain real property from
Crombie and its affiliates at formula determined rates.
The rates are determined based primarily on the
financing of the actual costs incurred at the time of
construction of the leased properties.The aggregate net
payments under these leases amounted to approximately
$52.2 million (2003 – $49.8 million). Sobeys was
charged administrative expenses of $0.4 million (2003 –
$0.5 million). At May 1, 2004, mortgage receivables of
$2.2 million were owing to Sobeys from related parties.

Empire Theatres leased certain real property from
Crombie and its affiliates, at fair market value, during the
year.The aggregate payments under the leases amounted
to approximately $3.2 million (2003 – $3.0 million).

Change in Fiscal Year-end

Effective for fiscal 2005, Empire’s fiscal year-end is
changing from April 30th to the first Saturday in May.
As such, the quarter-end dates and fiscal year-end will
be consistent with Sobeys Inc.

45
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Contractual Obligations

The table below details operating lease commitments, capital lease obligations and long-term debt payments.

($ in millions)

Long-term debt
Capital leases
Operating leases

2005

77.7
3.8
197.8

2006

$ 222.9
3.4
184.3

2007

34.1
2.1
165.4

2008

62.7
1.0
142.0

2009

Onwards

Total

71.3
0.7
125.1

$ 502.6
1.6
1,072.1

$ 971.3
12.6
1,886.7

Total contractual obligations

$ 279.3

$ 410.6

$ 201.6

$ 205.7

$ 197.1

$ 1,576.3

$ 2,870.6

Operating leases, net of lease income received by the Company, are as follows:

2005

71.7

2006

65.6

2007

55.2

2008

46.7

2009

47.5

Onwards

Total

$ 491.7

$ 778.4

Other contractual obligations not reflected in the table
above are discussed below.

At April 30, 2004, Sobeys was contingently liable for
letters of credit issued in the aggregate amount of
$22.0 million (2003 – $27.4 million). Sobeys has also
guaranteed certain bank loans contracted by franchisees.
As at April 30, 2004, these loans amounted to
approximately $5.0 million (2003 – $7.3 million).

Upon entering into the lease of its new Mississauga
distribution centre, in March 2000, Sobeys Capital
Incorporated (a subsidiary of Sobeys Inc.) guaranteed to
the landlord the performance, by SERCA Foodservice
Inc., of all its obligation under the lease.The remaining
term of the lease is 16 years with an aggregate obligation
of $48.8 million. At the time of the sale of assets of
SERCA Foodservice Inc. to Sysco Corp., the lease of
the Mississauga distribution centre was assigned to and
assumed by a subsidiary of the purchaser and Sysco
Corp. agreed to indemnify and hold Sobeys Capital
Incorporated harmless from any liability it may incur
pursuant to its guarantee.

Sobeys leases space for certain company-owned and
franchised stores.The terms of these leases vary by
location with typical renewal options.

At April 30, 2004 Crombie was contingently liable for
letters of credit issued in the aggregate amount of
$20.0 million (2003 – $20.1 million).

Risk and Risk Management

Through its operating companies and investment
portfolio, Empire is exposed to a number of risks in
the normal course of business that have the potential
to affect its operating performance.These risks include
competitive risk, environmental risk, financial risk,
operational risk, and equity price risk.

COMPETITIVE RISK Empire’s food distribution business,
through Sobeys, operates in a dynamic and competitive
market. Other national and regional food distribution
companies along with non-traditional competitors, such
as mass merchandisers and warehouse clubs, represent a
competitive risk to Sobeys’ ability to attract customers
and operate profitably in its markets.

Sobeys maintains a strong national presence in the
Canadian retail food and food distribution industry.
The most significant risk to Sobeys is the potential
for reduced revenues and profit margins as a result of
increased competition.To mitigate this risk, Sobeys’
strategy is to be geographically diversified with the
benefits of national scale, to be customer and market-
driven, to be focused on superior execution, and to have
efficient cost effective operations. Sobeys reduces its
exposure to competitive or economic pressures in any
one region of the country by operating in each region
of Canada through a network of corporate, franchised,
and affiliated stores, and through servicing the needs of
thousands of independent, wholesale accounts. Sobeys
approaches the market with a variety of store formats,
sizes, and banners, in order to enhance profitability by
region and by target market.

Empire’s real estate operations compete with numerous
other developers, managers, and owners of real estate
properties in seeking tenants and new properties for

46
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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future development.The existence of competing
developers, managers, and owners could affect our real
estate group’s ability to lease space in its properties and
on rents charged or concessions granted. Commercial
property revenue is also dependent on the renewal of
lease arrangements by key tenants.These factors could
adversely affect revenues and cash flows. Other than space
leased to affiliated companies, no one tenant accounts for
more than 5.0 percent of real estate division total base
rental income.

Continued growth of rental income is dependent on
renewing expiring leases and finding new tenants to
fill vacancies at market rental rates, thereby ensuring an
attractive return on our investment.The success of the
real estate portfolio is also subject to general economic
conditions, the supply and demand for rental property
in key markets served, and the availability of attractive
financing to expand the real estate portfolio where
deemed prudent. During fiscal 2004, our real estate
operations encountered generally positive economic
conditions in our key markets and a relative lack of
new rental space resulted in relatively stable rental rates.

ENVIRONMENTAL RISK Empire has an effective
environmental program in place including policies
targeted at ensuring compliance with all applicable
environmental legislative requirements. Each operating
business conducts an ongoing, comprehensive environ-
mental monitoring process and the Company is unaware
of any material environmental liabilities in any of its
operating companies. Empire’s Board of Directors
receives quarterly reports that review any outstanding
issues including plans to resolve them.

use of U.S. dollar denominated debt against the assets.
At April 30, 2004 the ratio of U.S. dollar debt to the
market value of U.S. equities was 60.5 percent.

OPERATIONAL RISK Empire and its subsidiaries are self-
insured in respect of certain operational risks. In
addition, comprehensive loss prevention programs are
maintained to mitigate the financial impact to the
Company or its affiliates. Sobeys, as part of its quality
control program, recognizes food safety, particularly in
perishable products, is of utmost importance.The
Company maintains strict policies in its facilities to
ensure food quality and safety are not compromised.

Sobeys’ operational risk also includes the risk of labour
disruption. In the first quarter of fiscal 2004, employees
at the Whitby, Ontario distribution centre (CAW, local
1090) ratified a new three-year contract. Labour
disruptions pose a moderate operational risk, as the
Company has good relations with its employees and
unions, and does not anticipate any material labour
disruptions in fiscal 2005.

EQUITY PRICE RISK The carrying values of the investments
in Empire’s investment portfolio are based on cost;
however, the realizable value of each investment and
therefore the portfolio is based on market prices and is
subject to market price fluctuations. Empire has a
disciplined, long-term approach to select quality invest-
ments and has been successful in generating above
market portfolio returns.While portfolio returns may
not match those of the prior year, or exceed median
manager returns, management will continue to manage
the portfolio prudently to ensure appropriate
diversification and liquidity.

FINANCIAL RISK Empire and its operating companies have
adopted a number of financial policies to manage interest
rate risk and foreign exchange risk.

Outlook

The majority of Empire’s consolidated debt is at fixed
rates and accordingly there is limited exposure to interest
rate fluctuations. Fixed rate debt issues have staggered
maturity dates which minimize the Company’s exposure
to refinancing risk.

In the ordinary course of managing floating rate debt,
the Company utilizes financial instruments to manage
the volatility of borrowing costs. Financial instruments
are not used for speculative purposes.

At April 30, 2004, Empire had equities totaling
$117.8 million denominated in U.S. dollar currency.
To mitigate exposure to currency fluctuation, the
Company has hedged its U.S. investments through the

Management has projected stronger financial
performance for fiscal 2005, assuming continued intense
competition and conservative cost of capital assumptions.
Management remains committed to executing operational
and capital allocation decisions that will grow the cash
flow and net asset value in each of our businesses over
the long term.

Additional financial information relating to Empire,
including the Company’s Annual Information Form, can
be found on the Company’s web site or on the SEDAR
web site for Canadian regulatory filings at www.sedar.com.

Dated: June 24, 2004

47
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MANAGEMENT’S STATEMENT OF 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 consolidated financial statements have been pre-
pared in accordance with Canadian generally accepted accounting principles and reflect management’s best estimates
and judgments. All other financial information in the report is consistent with that contained in the consolidated
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, meet 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 consolidated financial statements to be issued to
shareholders.The external auditors have full and free access to the Audit Committee.

PAUL D. SOBEY

PRESIDENT AND

PAUL V. BEESLEY

SENIOR VICE PRESIDENT,

CHIEF EXECUTIVE OFFICER

CHIEF FINANCIAL OFFICER AND SECRETARY

JUNE 24, 2004

AUDITORS’ REPORT

To the Shareholders of Empire Company Limited

We have audited the consolidated balance sheets of Empire Company Limited as at April 30, 2004 and 2003, and the
consolidated statements of earnings, retained earnings, and cash flows for the years then ended.These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards.Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of
the Company as at April 30, 2004 and 2003, and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.

CHARTERED ACCOUNTANTS

NEW GLASGOW

NOVA SCOTIA, CANADA

JUNE 10, 2004

48
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CONSOLIDATED BALANCE SHEETS

April 30th (in millions)

ASSETS
Current

Cash and cash equivalents (Note 2)
Receivables
Inventories
Prepaid expenses
Discontinued operations

Investments, at cost (quoted market value $312.6; 2003 - $288.9)
Investments, at equity (realizable value $92.4; 2003 - $29.8)

Current assets and marketable investments
Property and equipment (Note 4)
Other assets (Note 5)
Goodwill

LIABILITIES
Current

Bank indebtedness (Note 6)
Accounts payable and accrued liabilities
Income taxes payable
Future income taxes (Note 11)
Long-term debt due within one year

Long-term debt (Note 7)
Deferred revenue
Employee future benefit obligation (Note 17)
Minority interest
Future income taxes (Note 11)

SHAREHOLDERS’ EQUITY
Capital stock (Note 8)
Retained earnings
Cumulative translation adjustment (Note 1)

See accompanying notes to the consolidated financial statements.

Approved on behalf of the Board,

PAUL D. SOBEY

DIRECTOR

DONALD R. SOBEY

DIRECTOR

2004

2003

202.2
329.5
492.9
49.3
–

1,073.9
278.0
60.8

1,412.7
2,288.1
324.0
656.9

316.8
348.8
478.2
37.1
1.9

1,182.8
345.7
41.7

1,570.2
2,105.2
271.4
569.3

$ 4,681.7

$ 4,516.1

140.8
1,141.2
10.6
46.3
81.5

1,420.4
903.9
6.6
90.4
546.0
137.6

3,104.9

196.7
1,380.7
(0.6)

1,576.8

99.3
1,037.4
43.5
18.4
188.9

1,387.5
923.1
6.7
77.1
539.2
155.4

3,089.0

196.0
1,230.6
0.5

1,427.1

$ 4,681.7

$ 4,516.1

49
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Years Ended April 30th
(in millions)

Balance, beginning of year
Net earnings

Refundable taxes recovered

Dividends declared
Preferred shares
Common shares

Premium on common shares purchased for cancellation (Note 8)

Balance, end of year

See accompanying notes to the consolidated financial statements.

2004

2003

$ 1,230.6
173.1

1,403.7

5.1

0.4
26.3

26.7

1.4

$ 1,094.5
153.9

1,248.4

4.9

0.3
21.7

22.0

0.7

$ 1,380.7

$ 1,230.6

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CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended April 30th
(in millions except per share amounts)

Revenue (Note 14)
Cost of sales, selling and administrative expenses

Depreciation
Intangible amortization

Investment income (Note 9)

Operating income

Interest expense

Long-term debt
Short-term debt

Capital gain (loss) and other items (Note 10)

Income taxes (Note 11)

Current
Future

Minority interest

Net earnings

Earnings per share, basic and diluted (Note 3)

See accompanying notes to the consolidated financial statements.

2004

2003

$11,284.0
10,704.3

$ 10,624.2
10,050.6

579.7
171.4
0.5

407.8
15.8

423.6

86.1
5.5

91.6

332.0
11.6

343.6

93.4
18.2

111.6

232.0
58.9

173.1

2.63

573.6
143.6
–

430.0
14.9

444.9

89.9
3.0

92.9

352.0
(9.9)

342.1

77.0
43.4

120.4

221.7
67.8

153.9

2.34

51
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

2004

2003

173.1
271.5
(0.4)

444.2
22.8

467.0

53.4
(74.2)
(431.0)
81.4
(64.1)
(1.1)

(435.6)

41.5
(0.9)
14.9
(187.8)
6.9
1.1
(1.8)
(26.3)
5.1

(147.3)

(115.9)
1.3

(114.6)
316.8

202.2

153.9
267.5
(0.3)

421.1
(65.3)

355.8

134.1
(5.8)
(442.0)
37.4
–
–

(276.3)

(107.9)
2.1
131.5
(82.2)
4.1
1.6
(1.6)
(21.7)
4.9

(69.2)

10.3
3.9

14.2
302.6

316.8

15916 p24_66 ENG 7/21/04 2:36 PM Page 52

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended April 30th
(in millions)

Operating

Net earnings
Items not affecting cash (Note 12)
Preferred dividends

Net change in non-cash working capital

Cash flows from operating activities

Investing

Net decrease in investments
Purchase of shares in subsidiary, Sobeys Inc.
Purchase of property, equipment and other assets
Proceeds from sale of property
Business acquisitions, net of cash acquired
Cumulative translation adjustment

Cash flows used in investing activities

Financing

Bank indebtedness
Construction loans
Issue of long-term debt
Repayment of long-term debt
Minority interest
Issue of Non-Voting Class A shares
Repurchase of Non-Voting Class A shares
Common dividends
Refundable taxes

Cash flows used in financing activities

(Decrease) increase in cash from continuing operations
Discontinued operations

(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

See accompanying notes to the consolidated financial statements.

52
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:36 PM Page 53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2004 (in millions, except share capital)

1. Summary of Significant
Accounting Policies

The consolidated financial statements have been prepared
in accordance with Canadian generally accepted
accounting principles.

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 significant joint ventures are
consolidated on a proportionate basis.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Effective
May 1, 2003, the Company adopted two new Canadian
Institute of Chartered Accountants (CICA) Handbook
Sections. Section 3063,“Impairment of long-lived assets”,
provides guidance on the recognition, measurement and
disclosure of the impairment of long-lived assets.There
was no impact of the application of Section 3063 on the
consolidated financial statements. Section 3475,“Disposal
of long-lived assets and discontinued operations”,
provides guidance on the recognition, measurement,
presentation and disclosure of long-lived assets not held
for use and discontinued operations. See “Assets for
realization” as described in Note 5.

Effective May 1, 2003, the Company adopted the CICA
Handbook Section 3870, “Stock-based compensation
and other stock-based payments”. In fiscal 2004, the
Emerging Issues Committee issued Abstract 132, “Share
purchase financing”.This Abstract requires share purchase
loans that are not treated as assets on the balance sheet
to be accounted for as stock-based compensation.The
Company has determined there is no impact on the
consolidated financial statements.

CASH AND CASH EQUIVALENTS Cash and cash equivalents are
defined as cash, treasury bills, guaranteed investments and
temporary investments.

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. Real estate
inventory of residential properties is carried at the lower
of cost and net realizable value.

DEPRECIATION AND AMORTIZATION The sinking fund method
was used to record depreciation of the real estate
buildings, calculated as an amount which, compounded
annually at the rate of 5 percent, would fully amortize
the cost of the buildings over their estimated useful lives
ranging from 20 to 40 years. Deferred leasing costs are
amortized over the terms of the related leases and are
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
Buildings
Leasehold improvements

CAPITALIZATION OF COSTS

3 – 20 years
10 – 40 years
7 – 10 years

A) CONSTRUCTION PROJECTS Certain subsidiary companies
and joint ventures capitalize interest during the con-
struction period until the project opening date.The
amount of interest capitalized to construction in progress
in the current year was $0.6 (2003 – $1.3).

B) COMMERCIAL 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. No amounts
were capitalized in fiscal 2003 or 2004.

C) DEVELOPMENT PROPERTIES AND 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.The carrying
costs on the balance of development properties are
expensed as incurred.The amount of real estate taxes
capitalized in the current year was $0.1 (2003 – $0.2).

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.

GOODWILL Goodwill represents the excess of the purchase
price of the business acquired over the fair value of the
underlying net tangible and intangible assets acquired at
the date of acquisition.

53
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 54

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and intangible assets with indefinite useful
lives are subject to an annual impairment review. Any
permanent impairment in the book value of goodwill or
intangible assets will be written off against earnings.The
Company has completed its review and has determined
the book value of existing goodwill is not impaired.

INTANGIBLES Intangibles represent the purchase of existing
franchises and the acquisition of prescription files. No
transactions occurred until fiscal 2004, with the method
of amortization being on a straight-line basis over
10-15 years.

COST OF FINANCING The direct costs of debt financing are
being amortized over the terms of the related debt.

STORE OPENING EXPENSES Opening expenses of new stores
and store conversion are written off during the first year
of operation.

STOCK-BASED COMPENSATION PLANS The Directors of the
Company and its subsidiary, Sobeys Inc., can choose to
defer the receipt of their compensation and have the
ultimate amount to be received tied to the market
value of their respective Company’s stock.The deferred
amounts are to be repaid when they cease to be a
Director.The Company records a liability based on the
current market value of the Companies’ stock. At
April 30, 2004 the liability recorded under the plans is
$2.1 (2003 – $1.6).

The Company’s stock option plan and share purchase
plan are described in Note 8.

FUTURE INCOME TAXES The Company accounts for income
taxes under the liability method.The difference between
the tax basis of assets and liabilities and their carrying
value on the balance sheet is used to calculate future tax
assets and liabilities.The future tax assets and liabilities
have been measured using the substantially enacted tax
rates that will be in effect when the differences are
expected to reverse.

DEFERRED REVENUE Deferred revenue consists of long-term
supplier purchase agreements 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 TRANSLATION Assets and liabilities of self-
sustaining foreign investments are translated at exchange
rates in effect at the balance sheet date.The revenues and

54
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

expenses are translated at average exchange rates for the
year. Cumulative gains and losses on translation are
shown as a separate component of shareholders’ equity.

Other assets and liabilities are translated at the currency
exchange rate in effect at the balance sheet date.These
exchange gains or losses are recognized in operating
income. Revenues and expenses denominated in foreign
currencies are translated into Canadian dollars at the
average currency exchange rate for the period.

REVENUE RECOGNITION Food distribution sales are recorded
at the point of sale. Food distribution sales include
revenues from customers through corporate stores
operated by the Company and revenue from sales to
franchised stores, associated stores and independent
accounts. Real estate revenue is recognized in accordance
with the lease agreements with tenants.

FINANCIAL INSTRUMENTS The Company uses interest rate
instruments to manage exposure to fluctuations in
interest rates.The realized gain or loss arising from these
instruments is included in interest expense.

The Company also uses derivative financial instruments
to partially hedge its exposure to foreign exchange in its
U.S. dollar denominated investment portfolio.These
instruments are accounted for as hedges of anticipated
transactions and accordingly, gains and losses on these
instruments are included in measurement of the related
hedged risk when realized.

USE OF ESTIMATES The preparation of consolidated financial
statements in conformity with Canadian generally
accepted accounting principles requires management to
make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
accompanying notes.These estimates are based on
management’s best knowledge of current events and
actions that the Company may undertake in the future.

EARNINGS PER SHARE Earnings per share is calculated by
dividing the net earnings available to common share-
holders by the weighted average number of common
shares outstanding during the year. Diluted earnings per
share is calculated using the treasury stock method.
Earnings per share reflect the two-for-one stock split of
the Non-Voting Class A shares and Class B common
shares as described in Note 8.

15916 p24_66 ENG 7/21/04 2:37 PM Page 55

2. Cash and Cash Equivalents

Included in cash and cash equivalents is restricted cash of $30.4 relating to the sale of assets.

3. Earnings per Share

Earnings per share amounts are calculated on the weighted average number of shares outstanding (2004 – 65,772,518
shares; 2003 – 65,781,807 shares) after providing for preferred share dividends accrued to the balance sheet date. Diluted
earnings per share have been calculated on the assumption that all the outstanding stock options were exercised and
share purchase loans were repaid at the beginning of the year.There is no effect as a result of this calculation.

Earnings applicable to common shares is comprised of the following:

Operating earnings
Capital gain (loss) and other items, net of tax of $2.4 (2003 – tax recovery of $3.9)

Net earnings
Preferred share dividends

Earnings applicable to common shares

Earnings per share is comprised of the following:

Operating earnings
Capital gain (loss) and other items

Basic earnings per share

Diluted earnings per share

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
Equipment
Leasehold improvements
Assets under capital leases

2004

163.9
9.2

173.1
0.4

172.7

2.49
0.14

2.63

2003

159.9
(6.0)

153.9
0.3

153.6

2.43
(0.09)

2.34

2004

Cost

Accumulated
Depreciation

Net
Book Value

144.4
11.7
887.7

1,043.8

72.8
82.0
573.0
1,613.6
293.0
15.7

2,650.1

–
–
161.7

161.7

–
–
107.4
957.0
173.9
5.8

144.4
11.7
726.0

882.1

72.8
82.0
465.6
656.6
119.1
9.9

1,244.1

1,406.0

Total

$ 3,693.9

$ 1,405.8

$ 2,288.1

55
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 56

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Real estate segment

Land
Land held for future development
Buildings

Food distribution and other

Land
Land held for future development
Buildings
Equipment
Leasehold improvements
Assets under capital leases

Accumulated
Depreciation

2003

Net
Book Value

–
–
151.5

151.5

–
–
102.7
791.5
150.9
5.0

118.7
16.8
676.7

812.2

84.0
81.4
420.7
571.8
124.7
10.4

1,050.1

1,293.0

Cost

118.7
16.8
828.2

963.7

84.0
81.4
523.4
1,363.3
275.6
15.4

2,343.1

Total

$ 3,306.8

$ 1,201.6

$ 2,105.2

5. Other Assets

Loans and mortgages

receivable
Deferred costs
Assets for realization
Intangibles (less accumulated
amortization of $0.5)

2004

2003

147.8
146.8
16.3

13.1

324.0

132.3
139.1
–

–

271.4

LOANS RECEIVABLE Loans receivable represent long-term
financing to certain retail associates.These loans are
primarily secured by inventory, fixtures and equipment,
bear various interest rates and have repayment terms up
to ten years.The carrying amount of the loans receivable
approximates fair value based on the variable interest
rates charged on the loans and the operating relationship
of the associates with the Company.

The loans and mortgages receivable are net of current
portions of $15.4 (2003 – $15.4).

DEFERRED COSTS Deferred costs are amortized as follows:

Deferred store marketing – 7 years
Deferred financing – over the term of the debt
Deferred purchase agreements – over the term of the

franchise agreement

Transitional pension asset – over the average remaining

service period of the active employees

ASSETS FOR REALIZATION Land and buildings have been
listed for sale and reclassified as “Assets for realization”
in accordance with CICA Handbook Section 3475.

56
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

These assets are expected to be sold within a twelve-
month period, are no longer productive assets and there
is no longer an intent to develop for future use. Assets
for realization are valued at the lower of cost and fair
value less costs to sell.

6. Bank Indebtedness

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 24, 2004, 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 facility 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, 2004 the Company
had no such instruments in place.

15916 p24_66 ENG 7/21/04 2:37 PM Page 57

7. Long-term Debt

First mortgage loans, average interest rate 9.1%,

due 2004 – 2026

Bank loans, average interest rate 6.4%,

due September 30, 2004

Medium term note, interest rate 7.6%,

due November 1, 2005

Medium term note, interest rate 7.0%,

due October 2, 2003

Medium term note, interest rate 7.2%,

due February 26, 2018

Debentures, average interest rate 10.6%,

due 2004 – 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 2005 – 2011,

net of imputed interest

Less amount due within one year

The Company has fixed the interest rate on $29.8 of its
long-term debt at rates from 4.0 percent to 6.4 percent
by utilizing interest exchange agreements.

Long-term debt is secured by land and buildings, specific
charges on certain assets and additional security as
described in Note 6.

During fiscal 2001 the Company 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. As of April 30, 2004
$230.0 of the non-revolving debt had been retired. On
December 20, 2002 (amended on February 17, 2003)
Sobeys filed a final short form prospectus providing for
the issuance of up to $500.0 of unsecured medium-term
notes over the next two years.

Real
Estate
Segment

Food
Distribution
Segment

2004

2003

Total

420.3

23.3

443.6

421.8

–

74.3

46.5

541.1

1.5

–

542.6
49.6

493.0

20.0

175.0

–

100.0

73.3

38.6

430.2

–

12.6

442.8
31.9

410.9

20.0

175.0

–

100.0

147.6

85.1

971.3

1.5

12.6

985.4
81.5

903.9

60.0

175.0

100.0

156.9

86.4

1,100.1

2.5

9.4

1,112.0
188.9

923.1

Debt retirement payments and capital lease obligations in
each of the next five fiscal years are:

2005
2006
2007
2008
2009

Long-term Debt

Capital Leases

$
$
$
$
$

77.7
222.9
34.1
62.7
71.3

$
$
$
$
$

3.8
3.4
2.1
1.0
0.7

OPERATING LEASES The net aggregate, annual, minimum
rent payable under operating leases for fiscal 2005 is
approximately $71.7 ($197.8 gross less expected sub-
lease income of $126.1).The net commitments over the
next five fiscal years are:

2005
2006
2007
2008
2009

Net Lease Obligation

$
$
$
$
$

71.7
65.6
55.2
46.7
47.5

57
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 58

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. 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

Non-Voting Class A shares, without par value
Class B common shares, without par value, voting

Number of Shares

1,034,261,305
259,235,875
40,800,000

Number of Shares

2004

ISSUED AND OUTSTANDING:
Preferred shares, Series 2
Non-Voting Class A shares
Class B common shares

Loans receivable from officers and employees

under share purchase plan

431,900
30,869,585
34,885,225

10.8
182.5
7.7

201.0

(4.3)

196.7

431,900
30,861,402
34,897,456

2003

10.8
181.8
7.7

200.3

(4.3)

196.0

Effective October 7, 2002, both the Non-Voting Class A
shares and Class B common shares were split on the basis
of two-for-one. All number of shares and per share
amounts have been restated to reflect the stock split.

During the year, the Company purchased for cancellation
68,477 (2003 – 60,124) Non-Voting Class A shares.
The purchase price was $1.8 of which $1.4 of the
purchase price (representing the premium on common
shares purchased for cancellation) was charged to
retained earnings.

During the year, 30,000 (2003 – 27,800) options were
exercised resulting in 30,000 (2003 – 27,800) Non-Voting
Class A shares being issued for $0.2 (2003 – $0.2).
Options allow holders to purchase Non-Voting Class A
shares at $6.555 per share. Options expire at dates from
June 2004 to October 2006.There were 37,074 options
outstanding at April 30, 2004.

During the year, 34,429 (2003 – 47,506) Non-Voting
Class A shares were issued under the Company’s share
purchase plan to certain officers and employees for
$0.9 (2003 – $1.4), which was based on the average
trading price of the Non-Voting Class A shares on the
Toronto Stock Exchange for the five previous
trading days.

Loans receivable from officers and employees of $4.3
(2003 – $4.3) under the Company’s share purchase plan
are classified as a reduction of Shareholders’ Equity. Loan
repayments will result in a corresponding increase in
Share Capital.The loans are non-interest bearing and

non-recourse, secured by 255,597 (2003 – 276,219)
Non-Voting Class A shares. Market value of the shares
at April 30, 2004 was $6.8 (2003 – $6.6).

Under certain circumstances, where an offer (as defined
in the share conditions) is made to purchase Class B
common shares, the holders of the Non-Voting Class A
shares shall be entitled to receive a follow-up offer at the
highest price per share paid, pursuant to such offer to
purchase Class B common shares.

During the year, 12,231 Class B common shares were
exchanged for 12,231 Non-Voting Class A shares.

9. Investment Income

2004

2003

Dividend and interest

income

Share of income of

10.7

14.3

companies accounted for
by the equity method

5.1

15.8

10. Capital Gain (Loss) and

Other Items

Gain (loss) on sale of

investments

Other items

2004

11.7
(0.1)

11.6

0.6

14.9

2003

(9.7)
(0.2)

(9.9)

58
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 59

11. 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:

Income tax expense according to combined statutory rate of 34.6% (2003 – 36.7%)
Increase (decrease) in income taxes resulting from

Adjustment to future tax assets and liabilities for substantially enacted changes in tax laws
Non-taxable gains
Non-taxable dividends and equity earnings
Other
Large corporation tax

Capital gain (loss) and other items

April 30, 2004 income tax expense attributable to net income consists of:

Operations
Capital gain (loss) and other items

April 30, 2003 income tax expense attributable to net income consists of:

Operations
Capital gain (loss) and other items

Current

85.0
8.4

93.4

Current

81.0
(4.0)

77.0

2004

2003

115.2

129.0

(3.8)
(1.4)
(4.1)
–
3.3

109.2
2.4

111.6

Future

24.2
(6.0)

18.2

Future

43.3
0.1

43.4

(3.6)
(0.4)
(3.0)
(1.4)
3.7

124.3
(3.9)

120.4

Total

109.2
2.4

111.6

Total

124.3
(3.9)

120.4

The tax effect of temporary differences that give rise to
significant portions of future income taxes are presented
below:

12. Supplementary Cash
Flow Information

Property and equipment
Investments
Future employee benefit

obligation

Restructuring provisions
Pension contributions
Deferred cost
Deferred credits
Goodwill
Other

Future income taxes –

current

Future income taxes –

non-current

2004

91.9
35.4

(31.0)
(1.5)
16.2
18.8
47.8
6.3
–

183.9

46.3

137.6

183.9

2003

83.5
48.5

(24.3)
(2.7)
12.3
14.9
34.9
4.4
2.3

173.8

18.4

155.4

173.8

a) Items not affecting cash
Depreciation
Intangible amortization
Future income taxes
Amortization of deferred costs
Equity in earnings of

other companies, net
of dividends received

Minority interest
Employee future benefit

obligation

b) Other information
Net interest paid

Net income taxes paid

2004

2003

171.4
0.5
18.2
25.5

(4.8)
48.7

12.0

271.5

93.2

145.6

143.6
–
43.4
17.0

(0.6)
58.7

5.4

267.5

95.2

100.4

59
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 60

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13. Joint Ventures

The financial statements include the Company’s
proportionate share of the accounts of incorporated
and unincorporated 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

2004

81.4

55.1
26.3

81.4

34.4
7.0

27.4

23.6
(18.0)
(3.6)

2.0

2003

76.8

54.0
22.8

76.8

30.6
5.1

25.5

30.7
0.3
4.0

35.0

14. Segmented Information

2004

2003

Revenue

Food distribution

Sales
Gain on sale of assets

$ 11,046.8
14.6

$ 10,414.5
–

11,061.4

10,414.5

Real estate
Outside
Inter-segment

Other operations

Elimination

158.2
52.3

210.5

64.4

149.2
49.4

198.6

60.5

11,336.3
(52.3)

10,673.6
(49.4)

$ 11,284.0

$ 10,624.2

Sobeys Inc. sold several redundant real estate assets.These
assets were not considered strategic for the long-term
plans of the Company.The gain realized on the sale of
these assets was $14.6.

60
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

2004

2003

Operating income

Food distribution
Real estate
Other operations
Investment income
Corporate expenses

294.5
111.1
9.8
15.8
(7.6)

423.6

Identifiable assets

Food

Food distribution
Goodwill
Discontinued operations

Real estate
Investments
Other

Depreciation

Food distribution
Real estate
Corporate and other

Capital expenditure
Food distribution
Real estate
Corporate and other

2,619.4
656.9
–

3,276.3
989.8
324.6
91.0

4,681.7

150.4
16.3
4.7

171.4

384.9
34.2
11.9

431.0

324.7
103.8
9.0
14.9
(7.5)

444.9

2,601.5
569.3
1.9

3,172.7
902.0
387.3
54.1

4,516.1

124.0
15.2
4.4

143.6

411.2
25.1
5.7

442.0

The Company operates principally in two business
segments: food distribution and real estate.The food
distribution segment consists of distribution of food
products in Canada.The real estate segment consists of
development, rental and management of shopping
centres and office buildings located principally in Central
and Eastern Canada. Inter-segment transactions are at
market values.

15916 p24_66 ENG 7/21/04 2:37 PM Page 61

15. Financial Instruments

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 and
cash equivalents, receivables, loans and mortgages, bank
indebtedness, accounts payables and accrued liabilities
and income taxes payable approximate fair values at
April 30, 2004.The fair value of investments is $405.0.

The total fair value of long-term debt is estimated to be
$1,119.8.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.

FOREIGN CURRENCY RISK Investments include $136.9
Canadian that is denominated in U.S. funds. Bank
indebtedness includes $77.9 Canadian that is denominated
in U.S. funds and it acts as a partial hedge to the foreign
exchange fluctuations inherent in the market value of
the U.S. investments.

16. Contingent Liabilities

At April 30, 2004 the Company was contingently liable
for letters of credit issued in the aggregate amount of
$42.0 (2003 – $47.5).

The Company has guaranteed certain bank loans
contracted by franchisees. As at April 30, 2004 these
loans amounted to approximately $5.0 (2003 – $7.3).

Upon entering into the lease of its new Mississauga
distribution centre in March 2000, Sobeys Capital
Incorporated (a subsidiary of Sobeys Inc.) guaranteed
to the landlord the performance, by SERCA Foodservice,

of all its obligations under the lease.The remaining term
of the lease is 16 years with an aggregate obligation
of $48.8. At the time of the sale of assets of SERCA
Foodservice to Sysco Corp. the lease of the Mississauga
distribution centre was assigned to and assumed by the
purchaser and Sysco Corp. agreed to indemnify and hold
Sobeys Capital Incorporated harmless from any liability
it may incur pursuant to its guarantee.

On March 26, 2003 the Shareholders of IGA Canada
Limited approved a resolution terminating the operations
of the IGA Canada Buying Group effective December
31, 2003. On April 14, 2003 the members of the Buying
Group were notified of the shareholders’ intention to
terminate the operations of the Buying Group.The
Buying Group operations ceased effective December 31,
2003.The cross guarantees for members of the Buying
Group have been eliminated with the wind-up of the
Buying Group as of December 31, 2003.

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.

17. Employee Future Benefits

The Company has a number of defined benefit and
defined contribution plans providing pension and other
retirement benefits to most of its food distribution and
real estate employees.

DEFINED CONTRIBUTION PLANS The total expense for the
Company’s defined contribution plans is as follows:

2004
2003

$
$

11.2
11.0

61
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 62

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DEFINED BENEFIT PLANS Information about the Company’s defined benefits plans, in aggregate, is as follows:

ACCRUED BENEFIT OBLIGATION

Balance, beginning of year
New incidence (post-employment benefits)
Current service cost
Interest cost
Employee contributions
Special termination benefits
Plan amendments
Benefits paid
Plan merger
Actuarial loss

Balance, end of year

PLAN ASSETS

Market value, beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Plan merger
Benefits paid

Market value, end of year

FUNDED STATUS
Deficit
Unamortized past service cost
Unamortized actuarial loss

Accrued benefit asset (liability)

EXPENSE

Current service cost
Interest cost
Amortization
Special termination benefits
New incidence (post-employment benefits)
Expected return on plan assets

Pension
Benefit Plans

Other
Benefit Plans

2004

2003

2004

2003

235.0
–
2.5
14.9
0.5
1.3
–
(16.6)
–
14.4

252.0

199.8
36.8
3.0
0.5
–
(16.6)

223.5

(28.5)
0.4
53.1

25.0

2.5
14.9
3.5
1.3
–
(13.5)

8.7

206.8
–
2.9
15.0
0.5
–
–
(17.2)
11.8
15.2

235.0

203.5
(13.3)
15.1
0.5
11.2
(17.2)

199.8

(35.2)
0.4
65.5

30.7

2.9
15.0
0.2
–
–
(15.1)

3.0

90.4
7.7
2.4
6.2
–
–
1.3
(4.4)
–
8.4

112.0

–
–
4.5
–
–
(4.5)

–

(112.0)
–
21.6

(90.4)

2.3
6.2
1.5
–
7.7
–

90.9
–
3.2
6.3
–
–
–
(4.7)
–
(5.3)

90.4

–
–
4.7
–
–
(4.7)

–

(90.4)
–
13.3

(77.1)

3.2
6.4
0.6
–
–
–

17.7

10.2

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
Benefit Plans

Other
Benefit Plans

2004

18.5

2003

17.5

2004

90.4

2003

77.1

62
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 63

The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations are as follows
(weighted-average assumptions as of April 30, 2004):

Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase

Pension
Benefit Plans

Other
Benefit Plans

2004

6.00%
7.00%
4.00%

2003

6.50%
7.00%
4.00%

2004

6.00%

2003

6.50%

For measurement purposes, a 10 percent fiscal 2004 annual rate of increase in the per capita cost of covered health care
benefits was assumed.The cumulative rate expectation to 2010 is 6 percent.The average remaining service period of
the active employees covered by the pension benefit plans and other benefit plans is 12 and 18 years respectively.

18. Business Acquisitions

SOBEYS INC. During the year the Company increased its
ownership interest in Sobeys Inc. from 62% to 65% by
way of purchase of shares on the open market.The
acquisition was accounted for using the purchase method
with operating results being included in the consolidated
financial statements from the date of each share
acquisition.The cash consideration paid was $74.2,
goodwill increased by $26.2 and minority interest
decreased by $48.0.

COMMISSO’S ACQUISITIONS During the fiscal year the
Company acquired substantially all of the assets and
trade liabilities of Commisso’s Food Markets Limited,
Commisso’s Grocery Distributors Limited and
Commisso’s Properties Inc. which are located in
Southern Ontario. Acquired were six grocery stores
(and the shopping centres where they are located),
nine additional grocery stores, six cash-and-carry
outlets and a wholesale business and distribution centre.
The acquisition was completed February 1, 2004 and
was accounted for using the purchase method, with
operating results being included in the consolidated
financial statements at this date. Due to the size and
complexity of the acquisition, the determination of fair
value of certain net assets is still being finalized.To the
extent that the estimates need to be adjusted, they will
be adjusted accordingly.

Inventory
Property and equipment
Goodwill
Intangibles
Other assets
Accounts payable
Long-term liabilities
Other liabilities

Expenses

Cash consideration

16.2
56.1
62.5
5.4
3.1
(32.1)
(38.5)
(21.2)

51.5
(0.8)

50.7

OTHER ACQUISITIONS Sobeys Inc. acquires franchisee stores
and prescription files as part of its normal operations.
The purchase method was used to account for these
acquisitions and the results are included in the
consolidated financial statements.

FRANCHISEES
Inventory
Property and equipment
Intangibles
Other assets

Cash consideration

PRESCRIPTION FILES
Intangibles

Cash consideration

2.4
3.0
8.0
0.1

13.5

0.2

19. Comparative Figures

Comparative figures have been reclassified, where
necessary, to reflect the current year’s presentation.

63
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 8:03 PM Page 64

ELEVEN-YEAR FINANCIAL REVIEW

(Years ended April 30 th)

2004

2003

2002

2001

FINANCIAL RESULTS ($ in millions; except ROE)

Revenue

Operating income

Interest expense

Income taxes

Minority interest

Earnings from continuing operations

before net capital gains and other items

Earnings from discontinued operations (1)

Operating earnings (2)

Capital gain (loss) and other items, net of tax

Net earnings

Return on equity

FINANCIAL POSITION ($ in millions)

Total assets

Long-term debt (excluding current portion)

Shareholders’ equity

PER SHARE DATA ($ per share)

Operating earnings

Capital gain (loss) and other items, net of tax

Net earnings

Dividends

Non-Voting Class A common shares

Class B common shares

Book value

SHARE PRICE, NON-VOTING CLASS A SHARES ($ per share)

High

Low

WEIGHTED AVERAGE NUMBER OF COMMON

SHARES OUTSTANDING (in millions)

$ 11,284.0

$ 10,624.2

$ 9,926.5

$ 9,331.1

423.6

91.6

111.6

58.9

163.9

–

163.9

9.2

173.1

11.6%

4,681.7

903.9

1,576.8

2.49

0.14

2.63

0.4000

23.81

29.50

23.10

26.65

65.8

444.9

92.9

120.4

67.8

159.9

–

159.9

(6.0)

153.9

11.4%

4,516.1

923.1

1,427.1

2.43

(0.09)

2.34

0.3300

21.54

33.25

23.70

23.85

65.8

416.2

111.6

104.8

50.0

123.5

8.7

132.2

63.7

195.9

16.4%

4,318.0

975.0

1,290.6

2.00

0.97

2.97

0.2138

19.47

33.30

15.75

28.88

65.7

341.1

145.8

131.9

34.3

78.5

10.0

88.5

491.5

580.0

69.1%

4,254.3

1,107.2

1,115.0

1.33

7.49

8.82

0.1700

16.82

18.25

13.88

17.00

65.6

(1) Discontinued operations reflect the financial contribution of SERCA Foodservice operations, which was sold at the end of 2002.

(2) Operating earnings equals net earnings before capital gain (loss) and other items.

64
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 65

2000

1999

1998

1997

1996

1995

1994

$ 9,100.1

$ 5,362.7

$ 2,912.2

$ 3,149.7

$ 2,915.2

$ 2,699.5

$ 2,577.4

309.7

159.6

68.1

32.9

78.8

5.9

84.7

2.1

86.8

13.3%

4,171.0

1,332.0

602.8

1.10

0.03

1.13

0.1400

8.73

16.98

12.33

16.05

75.6

184.4

112.6

49.1

9.2

59.0

1.1

60.1

74.9

135.0

21.7%

4,023.5

1,391.8

737.5

0.78

1.00

1.78

0.1363

9.03

16.27

12.50

13.00

75.0

108.6

76.8

17.9

–

56.1

8.1

64.2

23.6

87.8

114.2

79.2

16.9

0.4

51.5

–

51.5

1.4

52.9

17.9%

11.9%

1,907.2

616.5

558.3

0.85

0.32

1.17

0.1213

0.1163

7.06

14.25

7.80

13.63

73.9

1,797.4

606.8

479.6

0.65

0.02

0.67

0.1100

0.0900

5.93

7.85

6.13

7.85

74.0

110.1

87.7

13.7

0.5

41.1

–

41.1

(19.4)

21.7

3.9%

1,731.4

656.1

474.9

0.47

(0.26)

0.21

0.1075

0.0825

5.24

7.88

5.75

6.15

74.6

122.5

89.3

16.8

0.5

42.7

–

42.7

(1.5)

41.2

9.4%

1,761.1

648.0

469.5

0.49

(0.02)

0.47

0.1000

0.0600

5.12

8.25

6.50

6.69

74.5

117.6

81.4

19.4

0.5

42.9

–

42.9

5.0

47.9

12.2%

1,696.9

633.6

447.9

0.48

0.07

0.55

0.1000

0.0600

4.80

8.88

6.13

8.07

70.0

65
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 p24_66 ENG 7/21/04 2:37 PM Page 66

INVESTOR INFORMATION

EMPIRE COMPANY LIMITED
Head Office:
115 King Street
Stellarton, Nova Scotia
B0K 1S0
Telephone: (902) 755-4440
Fax: (902) 755-6477
Internet: www.empireco.ca

INVESTOR RELATIONS AND INQUIRIES
Shareholders, analysts, and investors should direct their
financial inquiries or requests to:
Stewart H. Mahoney, cfa,
Vice President,Treasury and Investor Relations
E-mail: investor.relations@empireco.ca

Communications regarding investor records
including changes of address or ownership, should
be directed to the Company’s transfer agent,
CIBC Mellon Trust Company.

AFFILIATED COMPANY WEB ADDRESSES
www.sobeys.com
www.empiretheatres.com
www.crombieproperties.com

SHAREHOLDERS’ ANNUAL GENERAL MEETING
September 9, 2004 at 11:00 a.m.
Aberdeen Cinemas
610 East River Road
New Glasgow, Nova Scotia

STOCK SYMBOLS
Non-Voting Class A shares - EMP.A
Preferred shares:
Series 2 - EMP.PR.B

AVERAGE DAILY TRADING VOLUME (TSE)
30,097

COMMON DIVIDEND RECORD AND PAYMENT DATES FOR FISCAL 2005*

STOCK EXCHANGE LISTING
The Toronto Stock Exchange

OUTSTANDING SHARES

As of July 7, 2004

Non-Voting Class A common

30,878,985

27,674
34,885,225

Options exercisable

with Class A common shares

Class B common, voting

TRANSFER AGENT
CIBC Mellon Trust Company
Telephone: (800) 387-0825
Email: enquiries@cibcmellon.com

BANKERS
Bank of Montreal
Bank of Nova Scotia
Canadian Imperial Bank of Commerce
National Bank of Canada
Royal Bank of Canada
TD Canada Trust

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 CIBC Mellon Trust Company at (800) 387-0825
to eliminate the multiple mailings.

EXEMPLAIRE FRANÇAIS
Vous pouvez obtenir un exemplaire français de ce
rapport annuel en écrivant à :

Record Date

July 15, 2004
October 15, 2004
January 14, 2005
April 15, 2005
* subject to approval by Board of Directors

Payment Date

July 30, 2004
October 29, 2004
January 31, 2005
April 29, 2005

Empire Company Limited
Investor Relations
115 King Street
Stellarton, Nova Scotia
B0K 1S0E

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66
EMPIRE COMPANY LIMITED ANNUAL REPORT 2004

15916 Empire_Cover 7/27/04 9:37 AM Page 3

FINANCIAL HIGHLIGHTS

Years Ended April 30 th
($ in millions, except per share amounts)

Operations
Revenue
Operating income
Operating earnings
Capital gain (loss) and other items, net of tax
Gain on sale of discontinued operations, net of tax
Net earnings

Financial Condition
Total assets
Long-term debt
Shareholders’ equity

Per Share Information, basic and diluted
Operating earnings
Capital gain (loss) and other items, net of tax
Gain on sale of discontinued operations, net of tax
Net earnings
Book value
Dividends

Share Price
High
Low
Close

2004

2003

2002

$11,284.0
423.6
163.9
9.2
–
173.1

$10,624.2
444.9
159.9
(6.0)
–
153.9

$ 9,926.5
416.2
132.2
13.7
50.0
195.9

4,681.7
985.4
1,576.8

2.49
0.14
–
2.63
23.81
0.4000

29.50
23.10
26.65

4,516.1
1,112.0
1,427.1

2.43
(0.09)
–
2.34
21.54
0.3300

33.25
23.70
23.85

4,318.0
1,060.6
1,290.6

2.00
0.21
0.76
2.97
19.47
0.2138

33.30
15.75
28.88

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 PARTICIPATION IN BUSINESSES THAT HAVE THE POTENTIAL FOR LONG-TERM GROWTH

AND PROFITABILITY.

CONTENTS

48
49
50
51
52
53
64
66
67

2
4
8
12
14
17
18
20
22
23

MISSION STATEMENT

GOAL

HOW

VALUES

Empire will be a good corporate citizen, upholding the highest standards
of integrity and ethical conduct.

www.empireco.ca

E M P I R E

C O M P A N Y L I M I T E D

15916 Empire_Cover 7/27/04 9:37 AM Page 1

E
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E

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Y

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2
0
0
4

ABOVE: Near Langford, British Columbia, 1939
EMILY CARR (1871 – 1945)
From the collection of the Sobey Art Foundation, on display at Crombie House in Pictou County, Nova Scotia.

E M P I R E

What we value

Empire Company Limited 2004 Annual Report