Empire Company Annual Report 2007

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FY2007 Annual Report · Empire Company

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Clearly focused on our strengths

EMPIRE COMPANY LIMITED 2007 ANNUAL REPORT

7/26/07 7:17:56 AM
7/26/07
7:17:56 AM

EMPIRE COMPANY LIMITED (TSX: EMP.A) is a Canadian

company whose key businesses include food retailing

and related real estate. 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.

Financial Highlights

($ in millions, except per share amounts)

OPERATIONS

Revenue

Operating income

Operating earnings

Capital gains and other items, net of tax

Net earnings

FINANCIAL CONDITION

Total assets

Long-term debt

Shareholders’ equity

PER SHARE INFORMATION

Operating earnings (fully diluted)

Capital gains and other items, net of tax

Net earnings (fully diluted)

Book value

Dividends

SHARE PRICE

High

Low

(1) Restated.

TAB LE OF CONTE NTS

52 Weeks Ended
May 5, 2007

52 Weeks Ended

May 6, 2006 (1)

53 Weeks Ended
May 7, 2005

$ 13,366.7

$ 13,063.6

$ 12,435.2

440.3

204.4

5.7

210.1

491.4

202.0

94.8

296.8

463.7

182.9

3.7

186.6

5,224.9

5,051.5

4,929.2

881.9

2,135.4

809.8

1,965.2

974.4

1,709.0

3.10

0.09

3.19

32.37

0.60

45.25

39.49

42.33

3.07

1.44

4.51

29.77

0.56

44.35

33.37

43.29

2.78

0.05

2.83

25.87

0.48

38.00

24.25

36.66

E M PI R E TODAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LETTE R TO SHAR E HOLDE RS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

M ESSAG E FROM TH E CHAI R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MANAG E M E NT’S DISCUSSION AN D ANALYSIS . . . . . . . . . . . . . . . . . 29

MANAG E M E NT’S STATE M E NT OF R ESPONSI B I LITY

FOR FI NANCIAL R E PORTI NG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

COR PORATE GOVE R NANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

AU DITORS’ R E PORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

OPE RATIONS R EVI EW

CONSOLI DATE D FI NANCIAL STATE M E NTS . . . . . . . . . . . . . . . . . . . . . . . . . . 70

FOOD R ETAI LI NG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

NOTES TO TH E CONSOLI DATE D

100 YEARS I N FOOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

FI NANCIAL STATE M E NTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

R EAL ESTATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

E LEVE N-YEAR FI NANCIAL R EVI EW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

LONG-TE R M PROG R ESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

G LOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

COM M U N ITY SU PPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

SHAR E HOLDE R AN D I NVESTOR I N FOR MATION . . . . . . . . . . . . . . I BC

COR PORATE OFFICE RS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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A passionate commitment to food

and real estate. A refined corporate

structure designed to build on the synergies between

our businesses. Uncompromising values established

100 years ago by our founder J.W. Sobey. We are

clearly focused on these strengths, determined to

continue our century-old legacy of consistently growing

while building shareholder value.

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E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

Empire Today

Food Retailing

RIGHT FORMAT, RIGHT-SIZED STORES

COMPETITIVE STRENGTHS

Sobeys Inc. owns and operates over 1,300 corporate and franchise

afﬁ liate stores in every province across Canada under retail banners

that include Sobeys, IGA, IGA extra, Foodland and Price Chopper.

Our ﬁ ve core retail formats are each geared to ensure we have the

right-sized, right offering for each market we serve from the full

service format food stores to the convenience format stores, each

designed to satisfy our customers’ lifestyles and needs.

Our committed and knowledgeable franchise
affiliates and store operators.

Our fresh food expertise, the cornerstone of our
impassioned commitment to be “best in food.”
A successful private label program, Compliments.
Our ever-improving supply chain, processes,

systems and tools that enable our employees
to be more efficient, and provide superior
customer service.

FORMAT

BRANDS

PROFILE

MARKETS

STORES

Full
Service

Fresh
Service

Community
Service

Price
Service

Sobeys; IGA extra

Sobeys; IGA (Québec);
Sobeys express

IGA; Foodland

Price Chopper

Convenience
Service

Needs; Marché Bonichoix;
Les Marchés Tradition

Other

Lawtons; Cash and Carry;
Sobeys Fast Fuel;
Sobeys Spirits, Wine & Cold Beer

Total food shopping experience
with broadest assortment

Atlantic Canada, Québec,
Ontario, Western Canada

Ready to serve, ‘fresh fill-in’
and ‘today’s meal’ market

Québec, Ontario

‘Routine and fill-in’ shopping in
rural and one-store communities

Atlantic Canada, Ontario,
Western Canada

Everyday food needs in
price-driven markets

Atlantic Canada, Ontario,
Western Canada

‘On-the-go’ convenience needs

Atlantic Canada, Québec

Meeting other specialized
customer needs

Atlantic Canada, Ontario,
Western Canada

323

181

312

124

285

107

Performance

(cid:38) (cid:47)(cid:47)(cid:36)(cid:0)(cid:50) (cid:37)(cid:52)(cid:33)(cid:41)(cid:44)(cid:41)(cid:46)(cid:39)(cid:0)
(cid:50) (cid:37)(cid:54)(cid:37) (cid:46) (cid:53) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:38) (cid:47)(cid:47)(cid:36)(cid:0)(cid:50) (cid:37)(cid:52)(cid:33)(cid:41)(cid:44)(cid:41)(cid:46)(cid:39)(cid:0)
(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:46)(cid:39)(cid:0)(cid:41)(cid:46)(cid:35)(cid:47)(cid:45) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:17)(cid:19)(cid:12)(cid:16)(cid:19)(cid:18)(cid:14)(cid:16)

(cid:19)(cid:16)(cid:16)(cid:14)(cid:18)

(cid:17)(cid:18)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:25)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:22)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:19)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:19)(cid:18)(cid:16)

(cid:18)(cid:20)(cid:16)

(cid:17)(cid:22)(cid:16)

(cid:24)(cid:16)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

E M PI R E TODAY

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7/27/07 9:02:42 PM
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(cid:40) (cid:37) (cid:33) (cid:36)(cid:0) (cid:47)

(cid:35)

(cid:38) (cid:47) (cid:47) (cid:36)(cid:0)

(cid:52)(cid:33)

(cid:50) (cid:37) (cid:33) (cid:44)(cid:0) (cid:37) (cid:52)

Real Estate

FOCUSED ON FOOD-RELATED REAL ESTATE

COMPETITIVE STRENGTHS

Empire’s real estate business includes commercial and residential

property operations. Our commercial operations consist of

wholly-owned ECL Properties Limited and Sobey Leased Properties

Limited as well as a 48.1 percent ownership interest in publicly

traded Crombie REIT. Residential operations are predominantly

carried out through a 35.7 percent ownership interest in Genstar

Development Partnership.

Our knowledge, strength of management and experience
in the successful development of food-related real estate.

The preferential development agreement between ECL
Properties and Crombie REIT. This agreement reduces
risk and enhances opportunities for both businesses.

The strengthened relationship between Empire’s food
retailing and real estate businesses, allowing Empire
to accelerate the cross-Canada development of food-
anchored shopping plazas.

BUSINESS

COMPANY

PROFILE

MARKETS

Commercial
Development

ECL Properties

Development of food-anchored
shopping plazas

Atlantic Canada, Québec,
Ontario

SIZE

1.3 million sq. ft.

4.4 million sq. ft.

Atlantic Canada, Québec,
Ontario

Renovation and expansion of
existing assets, including
Sobeys-anchored shopping plazas,
Sobeys standalone stores
and Sobeys convenience stores

Ownership and management
of shopping centres and
office buildings

Atlantic Canada, Québec,
Ontario

7.7 million sq. ft.

Sobey Leased
Properties

Property
Management

Residential
Development

Crombie REIT

Genstar
Development
Partnership

Performance

(cid:50) (cid:37)(cid:33)(cid:44)(cid:0)(cid:37)(cid:51)(cid:52)(cid:33)(cid:52)(cid:37)(cid:0)
(cid:50) (cid:37)(cid:54)(cid:37) (cid:46) (cid:53) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:18)(cid:20)(cid:16)

(cid:17)(cid:24)(cid:16)

(cid:17)(cid:18)(cid:16)

(cid:22)(cid:16)

Development of master-planned
residential communities

Ontario, Manitoba,
Alberta, British Columbia

(cid:50) (cid:37)(cid:33)(cid:44)(cid:0)(cid:37)(cid:51)(cid:52)(cid:33)(cid:52)(cid:37)(cid:0)
(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:46)(cid:39)(cid:0)(cid:41)(cid:46)(cid:35)(cid:47)(cid:45) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

“Our real estate

division recorded

(cid:18)(cid:17)(cid:24)(cid:14)(cid:24)

(cid:17)(cid:17)(cid:24)(cid:14)(cid:16)

another solid year.”

(cid:17)(cid:18)(cid:16)

(cid:25)(cid:16)

(cid:22)(cid:16)

(cid:19)(cid:16)

PAU L D. SOB EY

PR ESI DE NT AN D CEO,

E M PI R E COM PANY LI M ITE D

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

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Clearly Focused

“With 100 years of experience in

food retailing and over 40 years

in real estate, we realized we could

best build shareholder value by

becoming even more focused on

our core strengths.”

PAU L D. SOB EY PR ESI DE NT AN D CEO, E M PI R E COM PANY LI M ITE D

$13.3 Billion

R E VE N U E F O R 2 0 07

LETTE R TO SHAR E HOLDE RS

BUILDING ALREADY STRONG RELATIONSHIPS
Our legacy of creating value decade after decade is based
on investing in businesses we know and understand – food
and related real estate – guided by strong management
supported by dedicated employees.

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his year, the leadership team at Empire had an

At the same time, 100 percent ownership of Sobeys by

important decision to make: Given our financial

Empire will strengthen the already solid relationship

capacity to make a major transaction, should

between our core businesses of food retail and related

we diversify our business further or focus even more tightly

real estate, which we believe will result in ongoing financial

on our core businesses – food retail and related real estate?

benefits. For decades we have benefited from an intimate

During the year, management and the Board of Directors

relationship between food retail and real estate development

undertook a comprehensive strategic review of our

as evidenced by our proven food-anchored shopping

businesses, thoroughly analyzing our potential growth

plaza presence throughout Atlantic Canada and now into

opportunities and capabilities. We came to realize that with

Ontario. We see significant opportunity to expand our

100 years of experience in food retailing and over 40 years

food-anchored shopping plaza model further into Central

in real estate, we could best build shareholder value by

Canada and into Western Canada. Having 100 percent

becoming even more focused on our core strengths.

ownership of both Sobeys and ECL Properties serves as a

Accordingly, Empire announced in the fourth quarter of

fiscal 2007 its intent to privatize Sobeys. This transaction

made sense for many reasons. Most importantly, we were

convinced it was in our best interest – and in the best

solid platform for future growth in food-anchored shopping

plaza development across Canada.

The privatization of Sobeys

interests of our shareholders – to acquire the 28 percent

reflects our complete confidence

of Sobeys shares not already owned by Empire. This

in its food-focused strategy to

transaction, which was completed subsequent to fiscal

build shareholder value.

DONALD CLOW (LE FT) AN D FRAN K SOB EY (R IG HT) OF

OU R R EAL ESTATE B USI N ESS WITH CRAIG G I LPI N

OF SOB EYS ONTAR IO.

year-end, was immediately accretive to our earnings

and resulted in Sobeys becoming a wholly-owned

subsidiary of Empire.

The privatization of Sobeys reflects our complete confidence

in its food-focused strategy to build shareholder value.

While Sobeys’ day-to-day operations are unaffected by

the transaction, Empire’s 100 percent ownership of the

business will allow Sobeys’ management to concentrate

squarely on their business operations. Ultimately, food

retail is a business that the leadership team of Empire

also knows and understands well. We feel comfortable

in the industry, despite its competitiveness, and will

provide Sobeys the support it needs to continue to make

progress towards achieving its goals.

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The announced Sobeys transaction was our most significant

SOBEYS

event of fiscal 2007, but it was by no means the only

Sobeys reached a major milestone in 2007, celebrating

one. Our real estate division recorded another solid year.

100 years in food retailing. This momentous occasion has

In its first full year of operations as a public company,

presented the opportunity to reflect on the entrepreneurial

Crombie REIT delivered outstanding performance that has

spirit that has sustained and renewed this business for a

translated into a more than 49 percent total investment

century. At the same time, it has given us pause to reflect on

return since the initial public offering in March 2006 to

Sobeys’ future within the Empire fold. While Sobeys will remain

the end of fiscal 2007. As well, our residential real estate

a standalone, limited entity, we believe that the leadership

operations, through Genstar Development Partnership,

team at Empire, with its experience in food, is exceptionally

enjoyed an unprecedented year with record earnings.

well positioned to guide Sobeys’ ongoing progress.

These achievements represent the culmination of efforts

that Empire management has made over the past few

years to grow value across our business lines.

FINANCIAL HIGHLIGHTS

Empire posted solid results in fiscal 2007. Revenues

grew by 2.3 percent to $13.37 billion while operating

earnings increased to a record $204.4 million, equivalent

to $3.10 per share. Dividends paid to common shareholders

increased by 7.1 percent to $0.60 per annum while book

value per share grew by 8.7 percent. Subsequent to

fiscal year-end, coinciding with the release of our fourth

quarter results on June 28, 2007, we were pleased to

announce a 10 percent increase in the Empire dividend

to $0.66 annually. This marks the twelfth consecutive year

of dividend increases. The capital markets have long

recognized both the soundness of our operating strategies

and the strength of our businesses as evidenced by a

compound average annual total return to shareholders of

19.8 percent over the last 10 years.

Sobeys achieved $13.0 billion in sales and $173.4 million in

net earnings in fiscal 2007. Sobeys’ strategy of differentiating

itself from the competition through an unwavering focus

on food and a sheer determination to “out-food”, “out-fresh”,

“out-service” and “out-market” the competition is resonating

with the Canadian food consumer as evidenced by Sobeys’

continued industry-leading same-store sales growth.

Within a food retail marketplace that remained fiercely

competitive in 2007, Sobeys continued to make significant

capital expenditures to renovate, expand and build its

store network while bringing as many individual stores as

possible to the same high operating standard. Sobeys

acquired Achille de la Chevrotière Ltée, a regional Québec

food retailer, to boost its position in the Québec market;

rolled out two exciting product lines under its Compliments

private label; continued to implement an enterprise-wide

information platform; and announced plans to build an

automated distribution centre to support Sobeys’ growth

in Ontario.

WITH MUCH MORE IN STORE
Building shareholder value rests firmly on meeting
customer needs, from the meal ideas in our industry-
leading Inspired magazine to our strong pharmacy
offering, both in-store and at our standalone Lawtons
Drug Stores.

LETTE R TO SHAR E HOLDE RS

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2007 witnessed the establishment

relatively strong into the first half of fiscal 2008. Wajax

of wholly-owned ECL Developments

Income Fund also generated solid performance in fiscal

as our commercial property

development company.

REAL ESTATE

This was Crombie REIT’s first full year of operations

after its creation by Empire in fiscal 2006, and we were

very pleased by the results. Empire continues to hold a

48.1 percent ownership interest in Crombie REIT, which

generated a 35 percent total investment return in fiscal

2007 reflecting its solid operating and financial performance.

Our interest in Crombie REIT represents a sizeable portion

of our involvement in commercial real estate.

2007, contributing equity earnings of $20.2 million, a

23.9 percent increase over the prior year. Wajax Income

Fund is a leading Canadian distributor and service support

provider of mobile equipment, industrial components and

power systems.

ACKNOWLEDGMENTS

The knowledge and experience of our Board, corporate

management and management in our core businesses

place Empire in an especially strong position to allocate

capital in an effective and prudent manner. Empire

provides financial strength and liquidity, as well as enhanced

risk control measures and oversight to our businesses, not

The year also witnessed the establishment of wholly-

only ensuring that they operate effectively and efficiently,

owned ECL Developments as our commercial property

but enhancing their ability to create value for shareholders.

development company which will work closely with Sobeys

on food-anchored shopping plaza development. Our

100 percent ownership of Sobeys will allow Empire to more

fully exploit this development pipeline by taking advantage

of favourable tenancy arrangements and other potential

benefits. Once developed, these properties will first be

offered for sale to Crombie REIT with capital generated

being redeployed into further property development.

Fiscal 2007 has brought clarity to our priorities while

reinforcing our determination and ability to continue to

deliver long-term value for our shareholders. I would

also like to acknowledge and offer my gratitude to our

employees across all of our business lines for another

year of excellent performance. It is through the hard work

and enthusiasm of our employees, hand-in-hand with

the leadership provided by our management team and

The focus of our real estate business in the future will

the Board, that Empire has been able to deliver and

therefore be primarily on the development and sale

sustain long-term value to our shareholders and to

of food-anchored shopping plazas rather than continued

the communities that we serve. We are confident that

ownership of these properties. We are pursuing a strategy

our strategies, particularly the decision to privatize

of aggressive yet disciplined growth, and have expanded

Sobeys, will bring us continued success and

our real estate management team to ensure our success.

profitable growth in the years ahead.

In particular, I would like to acknowledge Donald Clow who

joined Empire this year as President of ECL Developments,

bringing a wealth of talent and experience in the property

development business as we ramp up our activities in

commercial real estate development.

Empire shareholders also benefited from Empire’s interest

in Genstar. Driven by the continued strength of the

residential real estate market, particularly in Calgary and

Edmonton, Alberta, Genstar contributed record earnings

to Empire in fiscal 2007. While results were unusually

robust, we expect activity in Genstar’s markets to remain

Paul D. Sobey
President and CEO,
Empire Company Limited
June 28, 2007

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

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Excellence in Governance

“At Empire, the Board’s primary

responsibilities are the prudent

allocation of the Company’s capital

resources and the provision of

solid corporate stewardship and

overall governance.”

ROB E RT P. DEXTE R CHAI R, E M PI R E COM PANY LI M ITE D

HALI FAX, NOVA SCOTIA

DI R ECTOR SI NCE 1987.

CHAI R AN D CEO OF MAR ITI M E TRAVE L I NC.

JOH N L. B RAGG (3,6)

WI LLIAM T. B ROCK (3,5)

JAM ES W. GOGAN (2)

E DWAR D C. HARSANT (1)

COLLI NGWOOD, NS

TORONTO, ON

N EW G L ASGOW, NS

WOODB R I DG E, ON

DI R ECTOR SI NCE 19 9 9.

DI R ECTOR SI NCE 20 0 5.

DI R ECTOR SI NCE 1972 .

DI R ECTOR SI NCE 20 03 .

CHAI R MAN, PR ESI DE NT

COR PORATE DI R ECTOR

AN D CO-CH I E F EXECUTIVE

OFFICE R OF OXFOR D

FROZ E N FOODS LTD.

M ESSAG E FROM TH E CHAI R

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uring the past year, the Empire Board of Directors

I would also like to thank two Sobeys’ directors that are

was actively involved in examining the Company’s

retiring and not standing for election to the Empire Board.

growth opportunities and developing a long-term

Peter Godsoe was Chair of Sobeys since 2004 and

strategic direction. At this point in Empire’s evolution, we

a director of Empire from 1993 until 2004. His wise

had two options: further diversification or placing a stronger

counsel will be greatly missed. Robert Dutton joined the

focus on our core businesses. Ultimately, we chose to

Sobeys Board in 2006 and we appreciated the benefit

concentrate on the businesses we know best – food and

of his experience.

related real estate. Our capabilities within these businesses

have enabled Empire to post a compound average annual

total return to shareholders of 19.8 percent during the

past 10 years and we believe food and related real estate

will continue to be the foundation of our future success.

The privatization of Sobeys has meant that eight members

of the former Sobeys’ Board will be nominated for election

to the Empire Board at the upcoming Annual General

Meeting on September 12, 2007. While these new directors

will provide fresh views and strong food retailing experience,

I would first like to acknowledge the contributions of the

directors who will be retiring this year.

James Gogan has served on the Empire Board since 1972,

seeing the Company through a vast number of changes.

His breadth of knowledge and wisdom will be sincerely

missed. I would also like to thank Courtney Pratt, who joined

the Board in 1995; Anna Porter, who has served since

2004; and William Brock who has served since 2005.

These individuals brought a wealth of business expertise,

insight and thoughtfulness to their responsibilities. Their

A REVITALIZED BOARD

We look forward to welcoming eight new directors

to the Empire Board: Marcel Côté, Christine Cross,
David Ferguson, David Leslie, Bill McEwan, Malen Ng,

Mel Rhinelander, and Frank Sobey. These individuals

bring decades of experience as corporate directors to

our Board, as well as a healthy mix of backgrounds. I am

looking forward to working with our new Board as we

guide Empire towards continued long-term growth.

This revitalized Board will continue to examine Empire’s

opportunities for growth with an eye on maximizing the

Company’s long-term performance. We are fortunate

to have many veteran business leaders, from diverse

business backgrounds and with a wide range of skill sets

serving as board members. While the majority of our

directors are independent, the Sobey family will continue

1 AU DIT COM M ITTE E M E M B E R

2 AU DIT COM M ITTE E CHAI R

3 H U MAN R ESOU RCES COM M ITTE E M E M B E R

4 H U MAN R ESOU RCES COM M ITTE E CHAI R

contributions have served to strengthen Empire’s focus on

5 COR PORATE GOVE R NANCE

its core businesses and for that we are grateful.

AN D NOM I NATI NG COM M ITTE E M E M B E R

6 COR PORATE GOVE R NANCE AN D NOM I NATI NG

COM M ITTE E CHAI R

AN NA P ORTE R (1)

E. COU RTN EY PRATT (4,5)

STE PH E N J. SAVI DANT (1)

DAVI D F. SOB EY

DONALD R. SOB EY

TORONTO, ON

CALGARY, AB

N EW G L ASGOW, NS

PICTOU COU NTY, NS

DI R ECTOR SI NCE 20 0 4.

DI R ECTOR SI NCE 19 95.

DI R ECTOR SI NCE 20 0 4.

DI R ECTOR SI NCE 196 3 .

COR PORATE DI R ECTOR

CHAI R MAN,

CHAI R E M E R ITUS,

PROSPEX R ESOU RCES

SOB EYS I NC.

E M PI R E COM PANY LI M ITE D

LI M ITE D AN D

COR PORATE DI R ECTOR

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

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Empire directors have a wide

Despite the changes that have taken place this year,

range of skills acquired from

Empire’s commitment to corporate citizenship remains

diverse business backgrounds.

to be well represented on the Board. These long-term

stakeholders bring a proprietor’s perspective to the

decision-making process – one that has served to

keep Empire focused on long-term value creation and

patient investment in our core businesses of food

and related real estate.

At Empire, the Board’s primary responsibilities are the

prudent allocation of the Company’s capital resources

and the provision of solid corporate stewardship and

overall governance. As part of this process, we remain

attuned to the accomplishments within each of Empire’s

business lines. Sobeys has continued to perform well

in a highly competitive environment and its privatization

is more than just a smart investment; it underscores our

confidence in Sobeys’ strategic plan and in the strategic

priorities of their management team.

I would also like to acknowledge the management

of Empire and its operating companies for another

year of solid leadership that collectively supports our

long-term success. It was also a good year for our

investments in Genstar and Wajax with their excellent

management teams creating significant value for

Empire and our shareholders.

consistent. The Sobey family has a long tradition of

philanthropy and community involvement, particularly

in the Company’s home region of Atlantic Canada.

In fact, this year, Donald and David Sobey were inducted

into the Junior Achievement Canadian Business Hall of Fame.

I know their father, Frank H. Sobey, who was inducted in

1984, would have been proud to see his sons so justifiably
honoured, particularly on the 100th anniversary of Sobeys.

On behalf of the Board, I would like to congratulate them

for this historic achievement.

In closing, I would like to thank the management and

employees at Empire and in our operating companies for

helping Empire post solid results in fiscal 2007. I would

also like to express our appreciation for the continued

support of our shareholders. As we look ahead, the Board

remains confident that Empire’s renewed focus on its

core strengths in food retailing and related real estate has

positioned the Company for enduring success.

Robert P. Dexter
Chair,
Empire Company Limited
June 28, 2007

JOH N R. SOB EY (1)

KAR L R. SOB EY (3)

PAU L D. SOB EY

ROB G. C. SOB EY

PICTOU COU NTY,

HALI FAX, NOVA SCOTIA

PICTOU COU NTY,

STE LL ARTON, NOVA SCOTIA

NOVA SCOTIA

DI R ECTOR SI NCE 20 01.

NOVA SCOTIA

DI R ECTOR SI NCE 19 98 .

DI R ECTOR SI NCE 1979.

COR PORATE DI R ECTOR

DI R ECTOR SI NCE 19 93 .

PR ESI DE NT AN D CEO,

COR PORATE DI R ECTOR

PR ESI DE NT AN D CEO,

L AWTON’S DR UG STOR ES LI M ITE D

E M PI R E COM PANY LI M ITE D

M ESSAG E FROM TH E CHAI R

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Corporate Governance

mpire is committed to the highest level of

The primary responsibilities of each committee of the

corporate governance. Good governance and

Board are as follows:

long-term sustainability are interdependent.

We believe that a strict code of business conduct –

AUDIT COMMITTEE

emphasizing accountability – and a comprehensive

Reviews and assesses the Company’s financial reporting

disclosure policy – ensuring transparency – forms the

practices and procedures; reviews the adequacy and

foundation for a successful company.

reporting of internal accounting controls and the

Sustaining leadership in corporate governance – indeed,

sustaining Empire’s earnings growth – requires constantly

reviewing, monitoring and improving governance policies

and practices. Empire’s Board of Directors is committed

to delivering value to our stakeholders while assuming the

explicit responsibility of stewardship of the Company.

Our priority for fiscal 2008 is to clearly redefine the roles

and responsibilities of the Board and management.

independence of external auditors from management;

recommends the appointment of the external auditor;

communicates directly with internal and external auditors;

directly oversees the work of the external auditor; reviews

and assesses the Company’s risk management; and

reviews consolidated quarterly and annual financial

statements and related financial communications prior

to public disclosure.

A comprehensive review of our existing corporate

CORPORATE GOVERNANCE

governance policies and practices can be found in our

AND NOMINATING COMMITTEE

Management Information Circular and on our website at

Develops Empire’s corporate governance policies, including

www.empireco.ca. A detailed explanation of our Corporate

responsibility for disclosure; monitors and ensures

Disclosure Policy – approved by our Corporate Governance

compliance with those policies; monitors the composition

and Nominating Committee – and our Code of Business

of the Board for skill and expertise; identifies, evaluates

Conduct are also available on our website.

and recommends suitable candidates for election or

BOARD COMMITTEES

Governance at Empire is the responsibility of the Board of

Directors, supported by three key committees: Corporate

appointment as directors of the Company; annually reviews

and assesses the effectiveness of the Board as a whole,

the committees of the Board and the contributions of

individual directors; and recommends suitable compensation

Governance and Nominating Committee, Human Resources

of directors.

Committee, and Audit Committee. All members of the

Corporate Governance and Nominating Committee and

Audit Committee are independent directors according to

independence standards established by applicable

corporate and securities laws as well as Empire’s own

Board of Directors. In addition, members of the Audit

Committee meet the independence and financial literacy

tests set out in Multilateral Instrument 52-110 adopted by

most of the Canadian securities regulators.

HUMAN RESOURCES COMMITTEE

Reviews and approves management compensation and

compensation disclosure; reviews the Company’s management

training and development programs; undertakes CEO and

executive succession planning and monitors management

succession planning; conducts the CEO’s annual performance

review; establishes annual and longer-term objectives

for the CEO; and oversees the Company’s pension plan.

A comprehensive review of our corporate

governance policies and practices can be found

in our Management Information Circular and on

our website at www.empireco.ca.

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E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

Food Retailing

“The focus of Sobeys remains where it has always

been – on food – as we strive to be the very best food

retailer in Canada.”

B I LL McEWAN PR ESI DE NT AN D CEO, SOB EYS I NC.

$13.0 Billion

R E VE N U E F O R 2 0 07

OPE RATIONS R EVI EW

A REFRESHING NEW LOOK
Over Sobeys’ long history, generations of store
employees have worked hard to provide superior
customer service in the right format, right-sized
stores for each market we serve. In 2007, the Sobeys
banner introduced new uniforms for its employees,
reinforcing its fresh and food-focused image.

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he year 2007 represents a significant milestone
for Sobeys as we celebrate the 100th anniversary

Acquisition of Achille de la Chevrotière Ltée, a 25-store

chain in the Abitibi-Témiscamingue region of Québec.

of a true Canadian success story. The drive,

With this $80 million transaction, Sobeys further

determination and focus on serving the needs of customers

solidified its position as the leading food retailer in

that began with the entrepreneurial spirit of J.W. Sobey in

Québec with IGA and IGA extra.

Stellarton, Nova Scotia a century ago continues at Sobeys

Completed the rollout of the Compliments Organics

to this day as we strive to be the very best food retailer in

and Compliments balance-équilibre lines, affording

Canada. And while much has changed since J.W. Sobey

consumers an even wider range of alternative and

started the business, the focus of Sobeys remains where

healthy choices. All Compliments balance-équilibre

it always has been – on food. Our goal is to “out-food”,

products bear the Heart & Stroke Foundation’s

“out-fresh”, “out-service” and “out-market” all who choose to

Health Check™ symbol.

compete with us in the Canadian food retail marketplace.

Successful implementation of the SAP enterprise-wide

The privatization of Sobeys by Empire firmly reinforces our

focus. With the support of Empire and their commitment

to our strategy, Sobeys can continue to concentrate

on strategic priorities and day-to-day operations with the

same passion and determination as ever before.

information platform in Ontario. The establishment of

an enterprise-wide system began in 2005 in Atlantic

Canada and the successful implementation in Ontario

represents a significant step forward.

Announcement of an automated distribution centre in

Vaughan, Ontario – just north of Toronto – scheduled to

We will continue to drive our food-focused strategy with our

open in 2009.

fresh food excellence, innovation and superior customer

service, in the right format, right-sized stores for each

Great products and engaging

market we serve. We know and understand the differences

service come together to meet the

from market-to-market and that the needs of individual

needs of our customers.

customers can change from one shopping occasion to the

next. With five distinct store formats supported by strong

operating and merchandising teams in each of our four

geographic regions, we are competing more effectively for

the patronage and loyalty of customers.

HIGHLIGHTS OF FISCAL 2007

During 2007, we continued to make progress along our

continuum with every initiative aligned and contributing to

the achievement of the long-term goals that we established

almost five years ago. Company-wide highlights for fiscal

2007 include:

32 new stores, including three locations in the highly

competitive Toronto market. With right-sized Sobeys

and Sobeys express stores we are filling the gap

for quality fresh foods and convenient shopping in

the thriving downtown core.

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We are continually

expanding our product

and service offerings

to satisfy ever-changing

and diverse customer

expectations.

4,400

C O M P L I M E NTS
B R AN D
P R O D U CTS

OUR ASSURANCE OF QUALITY
Compliments has become one of Canada’s most
complete lines of quality products at everyday prices.
New products are being introduced almost daily, giving
our customers more of what they’re looking for – more
variety, more value, more information, more everyday
inspiration. The Compliments name is our assurance
of quality that is equal to or better than other national
and competitive store brands.

OPE RATIONS R EVI EW

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While the food retail marketplace remains highly

Our Inspired magazine is now recognized as a leading-

competitive, particularly in Ontario, Sobeys had a year of

edge, food ideas, food inspiration and food preparation

solid operational and financial performance. We sustained

publication and our suite of innovations includes the

our competitive retail price position by improving our

“Discover the World of Food” program which has migrated

product mix, reducing our costs and increasing productivity

as a best practice from our Québec region.

through SMART Retailing and other initiatives. Throughout

the year Sobeys achieved industry-leading same-store

2. Improve our cost base and productivity.

We continue to streamline our business processes,

systems and supply chain. During the year, we announced

the construction of an automated distribution centre in

Vaughan, Ontario. When operational this facility will serve

the diverse requirements of our five formats at substantially

lower costs and higher service levels. Numerous upgrades

and expansions in our distribution centres across the

country will ensure that the demands of our retail network

growth can be adequately and efficiently supplied.

SMART Retailing, our store-based operational excellence

and productivity program, continues to support our ability

to sustain our competitive retail price position. Focus

continued in fiscal 2007 on the program’s core objectives

to reduce shrink and improve production planning,

backroom inventory management

and shelf-stocking procedures.

sales growth, an important indicator of progress overall,

while sales per square foot increased in all of its operating

regions. Total revenue for the year equalled $13.03 billion

compared to $12.72 billion in fiscal 2006.

OUR IMPERATIVES

Our progress over the past year resulted from our

steadfast commitment to building a differentiated, healthy

and competitive retail food business and infrastructure

as we pursue our goal to be the very best food retailer in

the country. Achieving our goal demands focus on three

cornerstone imperatives:

1. Maintain our unwavering focus on food: to “out-food”,

“out-fresh”, “out-service” and “out-market” those

who choose to compete with us for a greater share

of Canadian consumers’ food requirements.

Though pleased with the progress we made in 2007 in

a challenging competitive environment, we know that

significant opportunities remain. We are continually

expanding our product and service offerings to satisfy

ever-changing and diverse customer expectations.

This year saw the full launch and integration of our two

new Compliments lines – Compliments balance-équilibre

and Compliments Organics – further enhancing our variety

of natural and “wellness” foods, and we are pleased with

the early results.

Our suite of innovations

includes the “Discover the World

of Food” program that has

migrated as a best practice from

our Québec region.

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Our progress is fueled by our passion for the food business,

knowledge of the markets we serve and continued investment

in our store network, products and people.

1,332

TOTAL STO R E
C O U NT
(ALL BAN N E R S)

TAKING STOCK
At Sobeys, we are distinguishing ourselves by
improving every aspect of our business and our
stores – inside and out, on the shelf and behind
the scene – from products to service to operating
excellence. Our goal is to satisfy the needs of
our customers in each market we serve.

OPE RATIONS R EVI EW

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At the same time, we launched the third component

We understand and embrace the

of SMART Retailing with the rollout of Peer-to-Peer

industry’s opportunities and challenges.

Management. Peer-to-Peer allows stores across our

network to share information and best practices. Going

We conduct comprehensive surveys with our employees in

forward, we will launch several new programs as part of

our stores, offices and distribution centres. These surveys

the third phase of SMART Retailing, including initiatives

help guide management as we constantly seek to improve

in workforce management and fresh item management.

the level of understanding, the quality of communication

The success of SMART Retailing – like many of our

initiatives – is all about the detail of retail: continuous,

incremental improvements that all add up to enhance our

competitive position, increase productivity and contribute

to better top and bottom-line performance.

3. Invest in and develop our people as we nurture a

superior service and high-performance culture.

Over the past 100 years, Sobeys has earned a proud

and enviable reputation as an employer that respects

its people, fairly and consistently values individual

contributions, and supports the communities that have

built Sobeys.

Over the past four years we have strengthened the

leadership ranks of Sobeys. We have conducted training

programs for hundreds of managers and store operators

with more to come. Improving food knowledge, fresh food

handling skills, customer service capabilities and ability to

execute a safe and consistent food shopping experience

demands that we educate, reward, recognize and

communicate with our people. At the same time, as we

search for fresh talent, we are expanding our post-

secondary institution recruitment efforts and summer

co-op programs.

Our performance management system facilitates a

dialogue that allows supervisors and their employees

to set specific goals, measure performance and

reward achievement. This helps to ensure that our

employees can be more engaged in their work,

know what is expected of them and have the enabling

tools to be successful.

and the level of engagement with our people.

EMBRACING THE NEXT 100 YEARS

Sobeys is on solid financial and strategic ground as

we continue to implement the programs and initiatives

that will ensure our long-term growth and sustainability.

Franchise affiliates and employees across Sobeys

continue to show the commitment and dedication necessary

to sustain our success, by executing our food-focused,

customer-centric strategy.

At Sobeys we understand and embrace the opportunities

and challenges in this very dynamic retail food industry.

With the expertise and experience of 100 years and the

steadfast commitment to build a healthy and sustainable

retail food business and infrastructure for the long term,

we will do so with the stability and flexibility afforded by

our even stronger relationship with Empire.

We are confident that Sobeys will be able to meet the

challenges and exploit our opportunities for growth. We

intend to be the very best food retailer in the country, and

we will stay our course in that pursuit.

Bill McEwan
President and CEO,
Sobeys Inc.
June 28, 2007

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100 Years in Food

“When you think about the roots of this organization, dating back 100 years in

Pictou County to over 1,330 stores across the country today – each one

with its own sense of purpose and pride and passion just like the ﬁ rst store

in Stellarton, Nova Scotia in 1907 – that’s a pretty phenomenal story.”

B I LL McEWAN PR ESI DE NT AN D CEO, SOB EYS I NC.

1907
John William (J.W.) Sobey
starts a meat delivery
business in Stellarton,
Nova Scotia.

1924
Frank Sobey persuades
his father to expand the
business to include a full
line of groceries. The next
year, the Sobeys chain
is born.

1949
Sobeys opens its first
self-serve, all-cash
supermarket in Truro,
Nova Scotia.

1950s & 1960s
Rapid expansion through
the Atlantic provinces.
Frank’s sons – Donald,
Bill and David – become
involved in running
the business.

1982
Empire goes public at
$ 0.35 per share, split
adjusted. Annual revenue
is $ 300 million.

OPE RATIONS R EVI EW

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or 100 years now, the Sobey name has been

“The strength of any

a hallmark of quality, value, innovation and

organization is

customer service for Canadian food shoppers.

the people involved.”

From one store in northern Nova Scotia, Sobeys has

grown to become a leading national food retailer with

stores in all 10 provinces, fueled by a continuous drive to

make progress by always looking forward.

FRAN K H. SOB EY

(1902 – 1985 )

Our customers and employees across the country are
celebrating Sobeys’ 100th anniversary with store parties,

promotions, special displays and heritage products. In

Atlantic Canada, 100 days of activities commenced in late

May, including a tour of a replica Ford Model T similar to

allowed hungry workers and their families to take what

they needed. He simply asked that they leave a list

of what they had taken and to repay when able. This spirit

of giving endures to this day through the philanthropic

activities and community initiatives that, in large part,

the one Frank Sobey used in the early days of the business.

define the Sobeys’ legacy.

FROM HUMBLE BEGINNINGS

BUILDING ON THE VISION

While we have had many occasions to celebrate the rich

and vibrant history of Sobeys, we have even more to

look forward to in our future. By applying the acquired

experiences of the first 100 years we will forge ahead,

always finding new and better ways to serve our customers.

We will continue to innovate and grow, steadfast behind

our focus on food, rooted by our heritage in Atlantic Canada

and fueled by our growing, cross-Canada presence.

From humble beginnings to nationwide success, the Sobey

pride and purpose shines through to this day in locations

all across the country. But as the Sobey family moves

into its fifth generation in the food retail business, the

values held by J.W. Sobey remain at the core of the

business: dedication to our customers, employees, products

and our communities.

The Sobeys’ story is one of incredible entrepreneurial

spirit and courage, characterized by always looking

forward, always making progress and standing up as an

organization behind our core values. Those values were

demonstrated during a coal miners’ strike in Stellarton

in the 1920s, when Frank Sobey opened the doors and

1987
Sobeys records sales of
$1 billion for the first time.

1998
Sobeys acquires
Oshawa Group, tripling
Sobeys’ size overnight.

2003
The first Sobeys banner
store in Western Canada
opens in Winnipeg,
Manitoba. Today there
are close to 80 Sobeys
stores in the four
western provinces.

2005
Sobeys introduces
Compliments private label
to Canadian consumers.

2007 (JUNE )
Empire acquires all
outstanding shares of
Sobeys, providing
further support for its
food-focused strategy.

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

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Real Estate

“The privatization of Sobeys will strengthen the already

strong relationship between Empire’s food retailing and

real estate businesses.”

FRAN K C. SOB EY PR ESI DE NT, ECL PROPE RTI ES LI M ITE D

$218.8 Million

R E VE N U E F O R 2 0 07

OPE RATIONS R EVI EW

OUTSTANDING LOCATIONS AND SERVICES
Sobey Leased Properties and ECL Properties –
through ECL Developments and its investments in
Crombie REIT and Genstar – are committed to
developing and managing shopping centres, office
buildings and residential communities with outstanding
locations, facilities and services.

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his has been a year of change for Empire’s real

Our major goal for fiscal 2008 is to

estate business – ECL Properties – as we

expand our pipeline of food-anchored

continue the restructuring that began with the

shopping plazas.

launch of Crombie REIT in 2006. Our goal is to structure

our real estate assets and management to ensure we

During fiscal 2007, ECL Properties completed several

derive maximum value from the real estate we hold today

major redevelopment projects, including the Avalon Mall

while capitalizing on the development expertise that we’ve

in St. John’s, Newfoundland and the County Fair Mall in

acquired over the past four decades.

Summerside, Prince Edward Island. Ongoing redevelopment

Our real estate division continues to hold investments in

both commercial and residential real estate. Both segments

performed well in fiscal 2007. Empire holds a 35.7 percent

ownership interest in Genstar, which had a record year in

fiscal 2007 as it continued to benefit from unprecedented

strength in the residential real estate market, particularly

projects include the conversion of Fredericton Mall in

New Brunswick into a power centre, Phase II of the Greenfield

Park site in Montreal and the redevelopment of Highland

Square Mall in New Glasgow, Nova Scotia, resulting in

significant completion of our capital spending commitments

to the REIT as part of the original agreement.

in Calgary and Edmonton, Alberta. While we anticipate

Sobey Leased Properties (“SLP”), our second wholly-owned

more modest growth in the residential real estate market

commercial real estate subsidiary, provides a relatively

in fiscal 2008, we are confident that Genstar will continue

consistent stream of income to the real estate group. The

to yield solid results for Empire shareholders.

assets of SLP include Sobeys-anchored shopping plazas,

In commercial real estate, as of May 5, 2007, our share-

holders benefited from a 49 percent total investment

return in Crombie REIT since its initial public offering in

March, 2006. Empire continues to hold a 48.1 percent

ownership interest. Much of Crombie REIT’s success in

fiscal 2007 can be attributed to its management team,

which implemented strategies that increased rental

income, decreased vacancy and controlled expenses.

FOCUSED ON DEVELOPMENT

With the launch of Crombie REIT in 2006, the role of

Sobeys standalone stores and Sobeys convenience stores.

We continue to focus on the renovation and expansion

of our existing properties to meet Sobeys’ requirements.

REFINING OUR GOALS

With the privatization of Sobeys now complete, we

continue to be firmly focused on working together to

develop attractive food-anchored shopping plazas.

We are also focused on the review of our SLP property

portfolio to determine if there are opportunities to

offer certain properties for sale to Crombie REIT.

ECL Properties shifted from property acquisition to property

Our experience and expertise in real estate, as well as

development. Under the umbrella of ECL Properties,

our commitment to our investment criteria, will help to

ECL Developments will develop – or redevelop – food-

ensure that Empire can withstand the traditional economic

anchored shopping plazas, which it will then offer for sale

cycles of the real estate industry. We are building a solid

to Crombie REIT under the terms of their preferential

team, capable of executing effectively and dedicated

development agreement. The privatization of Sobeys by

to expanding our presence without incurring undue risk.

Empire will strengthen the already strong relationship

between Empire’s food retailing and real estate businesses,

allowing them to work more closely to formulate growth

strategies. This should result in decreased risk and greater

potential for value creation in both businesses.

Frank C. Sobey
President, ECL Properties Limited
and Sobey Leased Properties Limited
June 28, 2007

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

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Long-Term Progress

mpire’s ability to build shareholder value

Other milestones in Empire’s legacy of value creation are:

has been based on continually investing in

businesses we know and understand. This is

reflected in our long-term performance and progress

through different business cycles and will continue

December, 1993 – The real estate division increases

its ownership of Halifax Developments Limited to

100 percent from 36 percent.

to ensure solid performance despite competition in food

December, 1998 – After acquiring the Oshawa Group,

retailing and aggressive growth in real estate.

Sobeys Inc. became a public company with 62 percent

A CONSISTENT STRATEGY

Sobeys Stores Limited was our publicly listed entity on

major exchanges until Empire Company was listed on the

Toronto Stock Exchange in July, 1982. By June, 1987,

Empire had purchased 100 percent of Sobeys’ outstanding

shares creating a business with three components: food

retailing, real estate and other investments.

ownership by Empire Company Limited.

January, 2001 – The real estate division purchases a

35.8 percent interest in Genstar Development Partnership.

March, 2006 – Crombie REIT completes an initial

public offering with Empire retaining a 48.3 percent

ownership interest.

June, 2007 – Empire acquires remaining common shares

of Sobeys to increase its ownership to 100 percent from

72 percent at year-end.

Empire’s Legacy of Value Creation Since Going Public in 1982

+13.6%

R EVE N U E CAG R ( 1)

+20.2%

+17.1%

S HAR E P R I C E CAG R (1 )

O P E R ATI N G EAR N I N G S CAG R ( 1)

EM PIR E PE R F ORMANCE 1983–2007

REVENUE ($ IN MILLIONS)

SHARE PRICE ($ PER SHARE)

OPER ATING E ARNINGS ($ IN MILLIONS)

$ 625.0

$4.6

$ 0.51

$13,366.7

$42.33

$204.4

FISCAL YEAR
FISCAL YEAR

83
83

84
84

85
85

86
86

87
87

88
88

89
89

90
90

91
91

92
92

93
93

94
94

95
95

96
96

97
97

98
98

99
99

00
00

01
01

02
02

03
03

04
04

05
05

06
06

07
07

(1) COMPOUND ANNUAL GROW TH R ATE SINCE FIRST FISCAL YE AR AS A PUBLIC COMPANY.

LONG-TE R M PROG R ESS

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Initiatives that Deliver Results

Providing Optimum Choice

Focus on Property Development

Compliments, Sobeys’ private label brand launched in

Over the past two years, Empire has established a

fiscal 2005, has been a strong contributor to sales

new real estate structure, including the creation of

and earnings growth at stores across Canada while

ECL Developments. This new division will be focused

enjoying an ever-increasing share of our customers’

on food-anchored shopping plaza development under

shopping baskets.

At the end of fiscal 2007, the Compliments brand had

grown to more than 4,400 products from mouth-watering

meal solutions to products for babies, health and body,

home and garden, and pets. Compliments offers

three quality tiers – Value, Selection and Sensations –

supplemented by the Organics and balance-équilibre

lines launched in fiscal 2006.

the leadership of Donald Clow as President, one of

several key hires made by Empire in 2007 to support our

pursuit of aggressive growth in real estate.

DISCIPLINED GROWTH

As Empire increases its capital investment in real estate

development, we realize that our approach must be

disciplined. This means investment decisions that adhere

to a set of specific criteria, including:

Our Compliments Culinary Centres in Toronto

and Halifax – established in 2005 – have become

focal points for innovation and excellence,

providing outstanding support to Compliments

product development.

Every Organics product is certified by Quality Assurance

International (QAI) and accredited by Le Conseil des

appellations agroalimentaires du Québec (CAAQ).

Every Compliments balance-équilibre product has been

evaluated by the Heart and Stroke Foundation’s

registered dietitians and bears the Health Check™

symbol – a first for private label brands in Canada.

Projects are seen to generate a satisfactory return

on investment;

A beneficial competitive effect on Sobeys;

Credit-worthy tenants with long-term leases that

include contractual increases;

Enhanced geographic diversification; and

Competitive positioning in the project target market.

“Every investment

decision must adhere

New products are launched almost daily, giving

to a set of strict criteria.”

our customers more of what they’re looking for –

more variety, more value, more information, and more

everyday inspiration.

DONALD E. CLOW

PR ESI DE NT,

ECL DEVE LOPM E NTS LI M ITE D

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6:56:08 AM

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

Community Support

The management and employees within Empire support hundreds of

community projects aimed at promoting the well-being of our communities

and enhancing the lives of Canadians.

GIVING BACK
Many of Empire’s diverse community initiatives are related to
our businesses by promoting the well-being of communities, families
and children across Canada. One key focus is education. Several
scholarship programs for young people have been established and
substantial commitments made to the capital campaigns at several
Atlantic Canadian universities, including Saint Mary’s University
in Halifax, Nova Scotia (main photo).

COM M U N ITY SU PPORT

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OUR CORPORATE COMMITMENT

Boys and Girls Clubs of Canada – Through Sobeys

Ontario’s Annual Retailer Golf Tournament, more

t Empire and within our operating companies,

than $60,000 was collected to support this worthy

we have always believed in supporting the

charity, which helps children and youth develop the

communities that make our success possible.

skills and values they need.

We encourage our employees to volunteer, be active and

share their passion for service beyond their workplace.

In fiscal 2007, the management and employees within

Empire, Sobeys, ECL Properties and Empire Theatres

supported hundreds of charities across Canada at the

corporate, regional, community and personal levels.

Kids Help Phone Walk – Sobeys and Empire Theatres

employees were actively involved in fundraising and

organizing the walk to help support the Kids Help Phone.

A fundraising initiative in our Sobeys Atlantic stores in

January 2007 raised an additional $35,000.

Many are related to our businesses – such as dozens of

Pictou County Dragon Boat Race Festival – Since its

health and food related programs including local food

inception in 2001, Sobeys has been the presenting

banks, Cook for the Cure and Smart Options. But our

sponsor of this event, which raises funds to support

reach is broad, extending to such events and initiatives

the Women Alike Abreast Cancer Survivors Support

as the Special Olympics, Children’s Wish Foundation,

Association, Special Olympics of Northern Nova Scotia,

Kids Help Phone and the Atlantic Film Festival.

the Pictou County Prostate Cancer Support Association

Community-based events that took place in fiscal

2007 included:

and Nova Scotia Amateur Sport Fund. This one-day

event drew 45 teams this year, including several teams

from Sobeys, Real Estate and Empire Theatres who

Food Banks – Sobeys’ stores nationwide are regular

collectively raised over $112,000.

contributors to food banks. Regional campaigns in

Atlantic Canada, Ontario and the West have raised

hundreds of thousands of dollars for local food banks.

Employees of both Real Estate and Empire Theatres

also participated in food drives throughout the year to

support the children and families in their neighbourhoods.

Easter Seals Paper Egg Campaign – Once again,

Sobeys and IGA stores across the West and Ontario

sold paper eggs to raise money for children with

disabilities. This year, almost $200,000 was collected.

Heartfelt Rewards – For the 21st straight year,

IGA-affiliated retailers in Québec took part in the

$2 For A Heartfelt Reward campaign, supporting

the Montreal Heart Institute Foundation. A total of

$450,000 was collected in less than three weeks.

Environmental Initiatives – Empire and Sobeys both

share in the mission to help keep our community green

and clean. Recognizing the importance of encouraging

daily habits that help reduce waste, Sobeys introduced the

reusable Green Bag for Life in stores across the country.

Cook for the Cure – IGA and Foodland stores in

In the spirit of helping our community reduce waste every

Ontario raised over $210,000 for the Canadian Cancer

day throughout the year, Sobeys stores in Pictou County,

Society through the Cook for the Cure community

Nova Scotia supported the Go Clean, Get Green Campaign

barbecue and fundraising event. Stores and vendors

in which participants volunteered to clean up the areas

raised a total of over $500,000 through food sales,

surrounding their workplaces, schools and homes.

community events and corporate donations.

Cancer Research – Sobeys and IGA stores in the

West were regional sponsors of the Canadian Breast

To “proudly serve our communities”

Cancer Foundation’s CIBC Run for the Cure. Sobeys

is a corporate goal embraced

stores in Saskatchewan collected well over $50,000

by management and employees

for breast cancer research during a fundraising drive

across Empire.

in October 2006.

E M PI R E COM PANY LI M ITE D 20 07 AN N UAL R E PORT

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Christmas Events – Real Estate employees recognize

EMPLOYEES – SOBEYS VALUE CHAMPIONS

that every little bit makes a difference and throughout

Every year, Sobeys honours employees across the country

the year weekly events such as 50/50 draws cumulate

for their commitment to Sobeys’ core values. In fiscal 2007,

to help sponsor local families for Christmas. As well,

hundreds of outstanding individuals were nominated as

the Main Street IGA in Winnipeg held the One Big

Sobeys Value Champions. Below are four Value Champion

Day for Christmas event that had two radio stations

nominees who are shining examples of “living” our four

broadcast live for 12 hours, asking listeners and

core values.

customers to drop off food, toys and money in support

of the Winnipeg Christmas Cheer Board. The event

STEPHEN MACDONALD

brought in nearly $110,000 and more than 2,000 toys.

Both Empire and Sobeys continued their long-standing

commitment to Saint Mary’s University in Halifax

(home of the Sobey School of Business) through

contributions to the University’s Hearts & Minds

Capital Campaign. In 2005, the two companies pledged

$2 million to the University over a five-year period.

“Always Place The Customer First”
Sobeys Atlantic/National Departments –
Customer Service Clerk, Store 652, New Glasgow, Nova Scotia

Stephen was recently named Employee of the Year by the
Pictou County Chamber of Commerce, and has been recognized
by both co-workers and customers for his pride in his work and
his kind, friendly manner. His dedication to customer service
embodies the Sobeys’ spirit; in fact, Stephen’s store manager
calls him a “true ambassador of the Company.”

ANDRE DUPRE

“Stay Real”
Sobeys West – Edmonton Retail Support Centre

When a co-worker suffered a spinal injury and was immobilized
for three months, Andre selflessly and tirelessly helped with
the recovery effort. He cooked meals, ran errands and brought
his co-worker to medical appointments – all while refusing
any compensation. Andre’s co-worker recovered from the
injury in March 2007, and says the experience showed “there
are good and decent people in the world, one of them being
Mr. Andre Dupre.”

ANNIE BENOIT

“Proudly Serve Our Communities”
Sobeys Québec – Québec Retail Support Centre

Annie believes deeply in aiding sick children, as evidenced by
her 14-year-long involvement with Centraide (the United Way).
During that time, she has received the “Coup de coeur” award.
All along, Annie has acknowledged the support of her colleagues
in helping to make her community a better place, and says
being a Value Champion is truly a team victory. Annie’s photo
appears on page 27.

CANADIAN BUSINESS HALL OF FAME

Donald and David Sobey were inducted into the Junior

Achievement Canadian Business Hall of Fame in

May 2007, following in the footsteps of their father, the

CARLO CORDI

late Frank H. Sobey. This honour recognizes not only

their business acumen, but also their enduring belief

in supporting communities through personal and

corporate philanthropy. Empire believes in this approach

and, as our business continues to grow, we will always

remember to give back to the people and communities

who have helped us achieve our success.

“Get It Done With Passion and Integrity”
Sobeys Ontario – Viscount Office

Carlo is always willing to assist the team however he can.
Whether it’s accepting and completing last-second work requests
with efficiency and flair, or offering helpful advice to others in
the Viscount office, Carlo is known for always being ready to do
what it takes to get the job done, even at a moment’s notice.

COM M U N ITY SU PPORT

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7/26/07 6:57:26 AM
7/26/07
6:57:26 AM

THE SOBEY LEGACY

ARTS & CULTURE

Empire’s dedication to community service is closely tied to

Five talented artists from across Canada were short-listed

the legacy of the Sobey family, which is strongly represented

for this year’s Sobey Art Award presented by Scotiabank.

in the leadership and governance of our companies.

The winner was Annie Pootoogook (below) of Cape Dorset,

With the support of the Sobey Foundation, contributions

from our operating companies as well as the investments

by individual family members, we are proud to play a role

in enhancing the lives of Canadians.

EDUCATION

Education is a key focus of the Sobey family efforts, with

several scholarships dedicated to providing a brighter

future for young people and their communities:

Nunavut, who received $50,000 as well as valuable

exposure for her work. The Sobey Art Award, created in

2002 by the Sobey Art Foundation, is designed to

recognize and support deserving contemporary Canadian

artists under the age of 40. This year, the previously

biennial award became an annual prize with the support

of Scotiabank, the award’s presenting sponsor, ensuring

an even greater commitment to contemporary artists

throughout Canada. For more information about the

Sobey Art Award visit www.sobeyartaward.ca.

Frank H. Sobey Fund for Excellence in Business

Studies – provides six $10,000 scholarships to

HEALTHCARE

business students at universities in Atlantic Canada.

In fiscal 2007, the Frank and Irene Sobey Memorial Trust,

D&R Sobey Atlantic Leadership Scholarship –

provides six $14,000 scholarships to students from

Atlantic Canada entering the Commerce program at

Queen’s University.

together with the Aberdeen Hospital Foundation, contributed

nearly $1 million towards the purchase of a new MRI

unit at Aberdeen Hospital in New Glasgow, Nova Scotia

(centre photo below). This purchase significantly raises the

level of care available to residents of the area. Members

In addition, over the past two years the Sobey Foundation

of management at Empire and Sobeys volunteer their time

has made commitments to capital campaigns at several

to community-based groups such as the Aberdeen Hospital

Atlantic Canadian universities, including Cape Breton

Foundation, as well as the Dalhousie Medical Research

University, Saint Mary’s University, the University of

Foundation and Summer Street Industries Foundation.

New Brunswick, Mount Allison University, Acadia University

and the Coady International Institute at Saint Francis

Xavier University.

A BREADTH OF COMMITMENT
Our corporate commitment extends from the celebration
of employees in our stores who exemplify our corporate
values – our Value Champions – to improving the
quality of education and healthcare in our communities
and supporting talented young artists across Canada.

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7/26/07 6:58:14 AM
7/26/07
6:58:14 AM

Corporate Ofﬁ cers

as of July 26, 2007

Officers of Empire Company Limited

1
1

2
2

3
3

4
4

5
5

6
6

7
7

1 ROB E RT P. DEXTE R

3 PAU L V. B E ESLEY

5 STEWART H. MAHON EY

7 JOH N G. MOR ROW

CHAI R

EXECUTIVE VICE-PR ESI DE NT,

VICE-PR ESI DE NT,

2 PAU L D. SOB EY

PR ESI DE NT AN D

CH I E F FI NANCIAL OFFICE R

TR EASU RY AN D

AN D SECR ETARY

I NVESTOR R E L ATIONS

CH I E F EXECUTIVE OFFICE R

4 FRAN K C. SOB EY

6 CAROL A. CAM PB E LL

VICE-PR ESI DE NT,

R EAL ESTATE

VICE-PR ESI DE NT,

R ISK MANAG E M E NT

VICE-PR ESI DE NT AN D

COM PTROLLE R

Officers of Operating Companies

1
1

2
2

3
3

4
4

5
5

6
6

7
7

8
8

9
99

10
1010

11
1111

12
1212

SOB EYS INC.

4 J. GARY KE R R

7 DE N N IS F OLZ

10 KAR I N MCCASKI LL

PR ESI DE NT OPE RATIONS,

CH I E F H U MAN

SE N IOR VICE-PR ESI DE NT,

1 ROB E RT P. DEXTE R

SOB EYS WEST

R ESOU RCES OFFICE R

CHAI R

2 B I LL McEWAN

PR ESI DE NT AN D

CH I E F EXECUTIVE OFFICE R

5 JASON P OTTE R

8 FRANÇOIS VIMAR D

PR ESI DE NT OPE RATIONS,

CH I E F FI NANCIAL OFFICE R

11 PAU L A. J EWE R

SOB EYS ATL ANTIC

9 B E LI N DA YOU NGS

6 MARC P OU LI N

CH I E F MAR KETI NG OFFICE R

G E N E RAL COU NSE L

AN D SECR ETARY

SE N IOR VICE-PR ESI DE NT,

FI NANCE AN D TR EASU R E R

12 L. JAN E MCDOW

ASSISTANT SECR ETARY

3 CRAIG T. G I LPI N

PR ESI DE NT OPE RATIONS,

SOB EYS QUÉB EC

SOB EYS ONTAR IO

1
1

2
2

3
3

1
1

2
2

1
1

2
2

3
3

ECL PR OPE RTIES LIM ITE D

ECL DEVE LOPM E NTS

EM PIR E TH EATR ES LIM ITE D

& SOB EY LEASE D

PR OPE RTIES LIM ITE D

LIM ITE D

1 DONALD E. CLOW

1 STUART G. FRASE R

PR ESI DE NT AN D

1 FRAN K C. SOB EY

PR ESI DE NT

CH I E F EXECUTIVE OFFICE R

PR ESI DE NT

2 PAT MARTI N

2 KEVI N J. MACLEOD

2 JOH N G. MOR ROW

VICE-PR ESI DE NT,

EXECUTIVE VICE-PR ESI DE NT,

VICE-PR ESI DE NT, FI NANCE

ONTAR IO AN D QU E B EC

OPE RATIONS

AN D TR EASU R E R

3 PAU L V. B E ESLEY

SECR ETARY

Directors of Sobeys Inc.

3 PAU L W. WIGG I NTON

VICE-PR ESI DE NT, FI NANCE

AN D CH I E F FI NANCIAL OFFICE R

ROB E RT P. DEXTE R

CH R ISTI N E CROSS

M E L A. R H I N E LAN DE R

JOH N R. SOB EY

CHAI R

PR ESI DE NT,

VICE-CHAI R MAN,

COR PORATE DI R ECTOR

B I LL MCEWAN

PR ESI DE NT AN D

CH R ISTI N E CROSS LTD.

EXTE N DICAR E I NC. AN D

DAVI D S. FE RG USON

EXTE N DICAR E R E IT

CH I E F EXECUTIVE OFFICE R

PR I NCI PAL, D.S. FE RG USON

STE PH E N J. SAVI DANT

JOH N L. B RAGG

E NTE R PR ISES, LLC

CHAI R MAN, PR ESI DE NT

E DWAR D C. HARSANT

AN D CO-CH I E F EXECUTIVE

COR PORATE DI R ECTOR

CHAI R MAN, PROSPECTS

R ESOU RCES LI M ITE D

DAVI D F. SOB EY

CHAI R E M E R ITUS

DONALD R. SOB EY

CHAI R E M E R ITUS,

E M PI R E COM PANY LI M ITE D

DAVI D A. LESLI E

COR PORATE DI R ECTOR

MALE N NG

CH I E F FI NANCIAL OFFICE R,

WOR KPL ACE SAFETY

FRAN K C. SOB EY

AN D I NSU RANCE BOAR D

CHAI R MAN, CROM B I E R E IT

OF ONTAR IO

OFFICE R, OXFOR D FROZ E N

FOODS LTD.

MARCE L CÔTÉ

SE N IOR PARTN E R,

SECOR I NC.

KAR L R. SOB EY

COR PORATE DI R ECTOR

PAU L D. SOB EY

PR ESI DE NT AN D

CH I E F EXECUTIVE OFFICE R,

E M PI R E COM PANY LI M ITE D

ROB G.C. SOB EY

PR ESI DE NT AN D

CH I E F EXECUTIVE OFFICE R,

L AWTON’S DR UG

STOR ES LI M ITE D

9928_Front (no cover)-Eng_Final 28 28
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7/26/07 6:58:16 AM
7/26/07
6:58:16 AM

Management’s Discussion and Analysis

TAB LE OF CONTE NTS

I NTRODUCTION ............................................................................ 30

FI NANCIAL CON DITION ............................................................ 49

F ORWAR D-LOOKI NG I N F ORMATION .................................. 30

CAPITAL STR UCTU R E AN D KEY

NON-GAAP FI NANCIAL M EASU R ES ................................... 31

FI NANCIAL CON DITION M EASU R ES ............................... 49

OVE RVI EW OF TH E B USI N ESS .............................................. 31

SHAR E HOLDE RS’ EQU ITY .................................................. 49

FOOD R ETAI LI NG .................................................................... 31

LIAB I LITI ES ................................................................................. 50

R EAL ESTATE ............................................................................ 32

FI NANCIAL I NSTR U M E NTS .................................................. 51

I NVESTM E NTS & OTH E R OPE RATIONS .......................... 33

LIQU I DITY AN D CAPITAL R ESOU RCES ............................. 52

EM PI R E’S STRATEG IC DI R ECTION ...................................... 33

OPE RATI NG ACTIVITI ES ........................................................ 52

OPE RATIONAL CHANG ES ........................................................ 33

I NVESTI NG ACTIVITI ES .......................................................... 54

CONSOLI DATE D OPE RATI NG R ESU LTS ............................. 34

FI NANCI NG ACTIVITI ES ......................................................... 55

MANAG EM E NT’S EXPLANATION OF FISCAL 2007

ACCOU NTI NG P OLICY CHANG ES ....................................... 55

AN N UAL CONSOLI DATE D R ESU LTS ............................... 35

CR ITICAL ACCOU NTI NG ESTIMATES ................................. 58

R EVE N U E ................................................................................... 35

CONTROLS AN D PROCE DU R ES ........................................... 59

OPE RATI NG I NCOM E ............................................................. 36

I NTE R NAL CONTROLS OVE R

I NTE R EST EXPE NSE .............................................................. 36

FI NANCIAL R E P ORTI NG ...................................................... 60

I NCOM E TAXES ........................................................................ 37

R E LATE D PARTY TRANSACTIONS ....................................... 60

M I NOR ITY I NTE R EST ............................................................. 37

G UARANTE ES AN D COMM ITM E NTS .................................. 60

OPE RATI NG EAR N I NGS ........................................................ 37

DESIG NATION F OR E LIG I B LE DIVI DE N DS ....................... 61

CAPITAL GAI NS AN D OTH E R ITE M S ................................ 37

CONTI NG E NCI ES ........................................................................ 62

N ET EAR N I NGS ........................................................................ 37

R ISK MANAG EM E NT .................................................................. 63

FISCAL 2007 OPE RATI NG PE R F ORMANCE

SU BSEQU E NT EVE NTS ............................................................. 66

BY DIVISION .............................................................................. 38

OUTLOOK ........................................................................................ 67

FOOD R ETAI LI NG .................................................................... 38

NON-GAAP FI NANCIAL M EASU R ES ................................... 68

R EAL ESTATE ............................................................................ 41

I NVESTM E NTS AN D OTH E R OPE RATIONS ................... 43

QUARTE R LY R ESU LTS OF OPE RATIONS ........................... 46

R ESU LTS BY QUARTE R ........................................................ 46

FOU RTH QUARTE R R ESU LTS ............................................ 47

(cid:35)(cid:47)(cid:46)(cid:51)(cid:47)(cid:44)(cid:41)(cid:36)(cid:33)(cid:52)(cid:37) (cid:36)
(cid:50) (cid:37)(cid:54)(cid:37) (cid:46) (cid:53) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:17)(cid:19)(cid:12)(cid:19)(cid:22)(cid:22)(cid:14)(cid:23)

(cid:35)(cid:47)(cid:46)(cid:51)(cid:47)(cid:44)(cid:41)(cid:36)(cid:33)(cid:52)(cid:37) (cid:36)(cid:0)
(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:46)(cid:39)(cid:0)(cid:37)(cid:33)(cid:50) (cid:46) (cid:41)(cid:46)(cid:39)(cid:51)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:35)(cid:47)(cid:46)(cid:51)(cid:47)(cid:44)(cid:41)(cid:36)(cid:33)(cid:52)(cid:37) (cid:36)
(cid:51)(cid:40)(cid:33)(cid:50) (cid:37) (cid:40)(cid:47)(cid:44)(cid:36)(cid:37) (cid:50)(cid:51)(cid:7)(cid:0)(cid:37)(cid:49)(cid:53) (cid:41)(cid:52)(cid:57)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:18)(cid:12)(cid:17)(cid:19)(cid:21)(cid:14)(cid:20)

(cid:18)(cid:16)(cid:20)(cid:14)(cid:20)

(cid:17)(cid:18)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:25)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:22)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:19)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:18)(cid:16)(cid:16)

(cid:17)(cid:21)(cid:16)

(cid:17)(cid:16)(cid:16)

(cid:21)(cid:16)

(cid:18)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:17)(cid:12)(cid:21)(cid:16)(cid:16)

(cid:17)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:21)(cid:16)(cid:16)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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Management’s Discussion and Analysis

The following Management’s Discussion and Analysis (“MD&A”)
contains commentary from management on the consolidated
ﬁ nancial condition and results of operations of Empire Company
Limited (“Empire” or the “Company”) for the 52 weeks ended
May 5, 2007, as compared to the 52 weeks ended May 6, 2006.
Management also provides as 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 ﬁ nancial condition, cash ﬂ ows and
results of operations. This MD&A also provides analysis of the
operating performance of the Company’s divisions as well as
a discussion of cash ﬂ ows, the impact of risks and the outlook
for the business. Additional information about the Company,
including the Company’s Annual Information Form, can be found
on SEDAR at www.sedar.com.

This discussion and analysis is the responsibility of management.
The Board of Directors carries out its responsibility for review

of this disclosure principally through its Audit Committee,
comprised exclusively of independent directors. The Audit
Committee has reviewed and approved this disclosure and
it has also been approved by the Board of Directors.

This discussion and analysis should be read in conjunction
with the audited annual consolidated ﬁ nancial statements
of the Company and the accompanying notes for the 52 weeks
ended May 5, 2007. The consolidated ﬁ nancial statements and
accompanying notes have been prepared in accordance with
Canadian Generally Accepted Accounting Principles (“GAAP”)
and are reported in Canadian dollars.

These consolidated ﬁ nancial statements include the accounts of
Empire and its subsidiaries and variable interest entities (“VIEs”)
which the Company is required to consolidate. Included in the
Company’s 2007 Annual Report, on page 100, is a glossary of
terms used throughout this MD&A. The information contained in
this MD&A is current to June 28, 2007, unless otherwise noted.

Forward-looking Information

This discussion contains forward-looking statements which
reﬂ ect management’s expectations regarding the Company’s
objectives, plans, goals, strategies, future growth, results
of operations, performance and business prospects and
opportunities. These forward-looking statements include the
following items:

Sobeys’ expectations regarding tobacco sales decline,

which could be impacted by further changes in the sales
and distribution practices of tobacco suppliers;

Management’s belief that the current growth rate in

residential lot sales is not sustainable over the long-term
and may be impacted by general economic conditions in the
Western housing market;

The Company’s expectations related to pending tax matters

with Canada Revenue Agency (“CRA”), which could be
determined differently by CRA. This could cause the
Company’s effective tax rate and its earnings to be affected
positively or negatively in the period in which the matters
are resolved;

Sobeys’ expectations that the new distribution centre
announced for Ontario and the closures of distribution
centres in Québec will reduce overall distribution costs,
which could be impacted by the number of positions
eliminated at Sobeys’ distribution centres in Ontario
and Québec;

Sobeys’ expectations that administrative and business

rationalization activities as well as system process initiatives
in the current year and upcoming quarters will have a cost
impact as expected and will provide thereafter annualized

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

cost reductions, both of which could be impacted by the
ﬁ nal scope and scale of these activities;

Sobeys’ expectation that sales growth will continue through
2008 could be impacted by market conditions and therefore
may not be realized;

The Company’s expectations that its capital resources
and liquidity position will meet its capital and liquidity
requirements over the next year;

The Company’s expectations on future capital spending for
its Real Estate and Food Retailing Divisions, which could
be impacted by the availability of labour, capital resource
allocation decisions, as well as general economic and
market conditions;

The Company’s discussion of the potential disposition

of real property by Sobey Leased Properties. There are
no agreements for any such transaction. There can be
no assurances that these transactions will occur and,
if they occur, no assurances as to the economic value of
the transactions;

The Company’s expectations that the pension plan merger

will be approved by the appropriate authorities. If this merger
is not completed, the value of the transitional pension assets
included in other assets on the balance sheet may be
impacted; and

The Company’s expectation of continued strong occupancy
levels which could be impacted by changes in demand for
the Company’s properties, tenant bankruptcies, the effect of
general economic conditions and competitive supply of retail
or ofﬁ ce locations in proximity to the Company’s locations.

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Forward-looking statements are typically identiﬁ ed by words or
phrases such as “anticipates”, “expects”, “believes”, “estimates”,
“intends” and other similar expressions. These statements are
based on management’s assumptions and beliefs in light of the
information currently available to them. These forward-looking
statements are subject to inherent uncertainties, risks and other
factors that could cause actual results to differ materially from
such statements. These uncertainties and risks are discussed
in the Company’s materials ﬁ led with the Canadian securities
regulatory authorities from time to time, including those in the
Risk Management section of this MD&A.

Non-GAAP Financial Measures

When relying on forward-looking statements to make decisions,
the Company cautions readers not to place undue reliance
on these statements, as a number of important factors could
cause actual results to differ materially from any estimates or
intentions expressed in such forward-looking statements. The
Company does not undertake to update any forward-looking
statements that may be made from time to time by or on behalf
of the Company.

There are measures included in this MD&A that do not have
a standardized meaning under Canadian GAAP. Management
includes these measures because it believes certain investors

use these measures as a means of assessing relative ﬁ nancial
performance. Additional information relating to non-GAAP
ﬁ nancial measures is provided at the end of this document.

Overview of the Business

Empire is a Canadian company headquartered in Stellarton,
Nova Scotia. Empire’s key businesses at year-end were: food
retailing through a 72.1 percent ownership interest in Sobeys
Inc. (“Sobeys”); real estate through two wholly-owned operating
subsidiaries: Sobey Leased Properties Limited (“SLP”), and
ECL Properties Limited (“ECL”) which includes wholly owned
ECL Developments Limited, a 35.7 percent ownership interest
in Genstar Development Partnership and a 43.3 percent interest
in Genstar Development Partnership 2 (collectively referred to
as “Genstar”) and a 48.1 percent ownership interest in Crombie
Real Estate Investment Trust (“Crombie REIT”); and corporate
investment activities and other operations which include wholly-
owned ETL Canada Holdings Limited (“Empire Theatres”),

Food Retailing

Sobeys is a leading national retail grocery and food distributor
headquartered in Stellarton, Nova Scotia. Founded 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, Price Chopper
and Foodland. Sobeys, its subsidiaries and its VIEs conduct
business in four retail regions: Sobeys West, Sobeys Ontario,
Sobeys Québec, and Sobeys Atlantic.

Kepec Resources Limited (“Kepec”), a joint venture with APL Oil
and Gas Limited which has ownership interests in various oil and
gas properties in Alberta, and a 27.6 percent ownership position
in Wajax Income Fund (“Wajax”). With approximately $5.2 billion
in assets, Empire employs approximately 40,000 people directly
and through its subsidiaries.

Empire’s primary goal is to grow long-term shareholder value
through income and cash ﬂ ow 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 proﬁ tability.

Sobeys’ strategy is focused on delivering the best food shopping
experience to its customers in the right format, right-sized
stores, supported by superior customer service. The ﬁ ve distinct
store formats deployed by Sobeys to satisfy its customers’
principal shopping requirements are: full service, fresh service,
convenience service, community service and price service.
Sobeys remains focused on improving the product, service and
merchandising offerings within each format by realigning and
renovating its current store base, while continuing to build new
stores. Sobeys’ ﬁ ve major banners are the primary focus of
these format development efforts.

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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During the year, Sobeys opened, replaced, expanded, renovated,
acquired and/or converted the banners in 150 stores (2006 –
83 stores). In ﬁ scal 2007, Sobeys continued to execute against
a number of initiatives in support of its food-focused strategy
including productivity initiatives and business process, supply
chain and system upgrades.

Compliments, Sobeys private label brand, was launched in
ﬁ scal 2005 to contribute to growth of company-wide sales
and proﬁ tability and earn a greater share of customers’ food
and grocery shopping requirements. The Compliments brand
consists of three quality tiers: Value, Selection and Sensations.
In addition, Sobeys introduced two sub-brands during ﬁ scal
2006, Compliments Organics and Compliments balance-
équilibre, an organic and healthy line of products, respectively.
At the end of ﬁ scal 2007, the Compliments brand consisted
of approximately 4,400 products.

During ﬁ scal 2007, Sobeys continued to make signiﬁ cant
progress in the implementation of system-wide business
process optimization initiatives that are designed to reduce
complexity and improve processes throughout Sobeys.

Real Estate

Empire’s real estate division consists of wholly-owned SLP and
ECL, which includes an interest in Genstar, a residential land
development business with operations primarily in Western
Canada. ECL also owns various commercial properties held
for redevelopment, a self-storage operation and a 48.1 percent
ownership interest in Crombie REIT. Empire segments its
real estate’s ﬁ nancial results between commercial property
operations, consisting of SLP and ECL, and residential property
operations which consist primarily of Genstar.

Genstar’s business is the development of raw land for residential
use primarily carried out in Ontario and Western Canada.
Genstar is accounted for on a proportionate consolidation basis.

At the end of ﬁ scal 2007, commercial real estate operations had
approximately 5.7 million square feet of gross leaseable area,
relatively consistent with the 5.9 million square feet at the end
of last ﬁ scal year.

SLP owns commercial properties in the Atlantic Provinces,
as well as in Ontario and Québec. The primary tenant of these
properties is Sobeys and its subsidiaries. There have been no
additions to SLP since 2001; its main focus remains on the
renovation and expansion of its existing portfolio.

In ﬁ scal 2006, Sobeys began its business process and
information systems plan for the Company by focusing on
the signiﬁ cant opportunity to upgrade information processing
and decision support capabilities and improve efﬁ ciencies in
the Ontario region. The system and processes that were
implemented were developed over several years and are also
employed in the Sobeys’ Atlantic region. The Ontario roll-out
standardized and streamlined the “back shop” in support of
Sobeys’ food-focused strategy. This move will allow Sobeys to
leverage technology investments, improve efﬁ ciencies and lower
costs over the long-term. During the third quarter of ﬁ scal 2007
Sobeys completed the implementation of the system in the
Ontario region in accordance with its plan. A similar business
process and system initiative began in the Western region
during ﬁ scal 2007. Costs associated with the Ontario and West
initiatives totalled $0.21 per Empire share in ﬁ scal 2007 as
compared to $0.13 per Empire share in ﬁ scal 2006.

Subsequent to year-end on June 15, 2007, Empire acquired the
outstanding common shares of Sobeys that it did not already
own, achieving 100 percent ownership. Further details can be
found in the section titled “Subsequent Events” near the end of
this MD&A.

The remaining wholly-owned real estate operations are focused
on commercial property development. For new commercial
property development management is committed to adhering to
a disciplined growth strategy. Speciﬁ cally, investment decisions
are expected to meet certain criteria, including:

A satisfactory return on investment;
A beneﬁ cial competitive effect on Sobeys;
Credit-worthy tenants with long-term leases that include

contractual increases;

Enhanced geographic diversiﬁ cation; and
Competitive positioning in the project target market.

Pursuant to a Development Agreement with Crombie REIT,
ECL provides Crombie REIT with a preferential right to acquire
all property developments proposed to be undertaken by ECL.
ECL also has a Non-Competition Agreement with Crombie REIT,
whereby it will not compete with Crombie REIT in the acquisition,
ownership, investment in or development of any grocery-anchored
shopping plazas in Canada. These agreements are for an initial
10-year term, subject to an extension reached by mutual
agreement. Empire subsidiaries will continue to work closely
with Crombie REIT to identify development opportunities that
further Crombie REIT’s external growth strategy.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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Investments & 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. common equity investments. At ﬁ scal year-
end, Empire’s investments, excluding its investment in Genstar
U.S. builder deals and in Crombie REIT, carried a market value
of $441.2 million consisting of Canadian common equity
investments valued at $391.7 million, foreign common equities
(including the value of the forward contract hedges) valued at
$48.0 million in Canadian dollars, 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 (approximately a 27.6 percent ownership

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 reﬂ ected in
Empire’s share price.

During the year, management and the Board of Directors
undertook a comprehensive strategic review of Empire’s
businesses, thoroughly analyzing our potential growth opportunities
and capabilities. As a consequence of this review it was
determined that with 100 years of experience in the retail food
industry and over 40 years in real estate, shareholder value
could be increased by becoming even more focused on the
core strengths of the Company. On April 26, 2007 Empire
and Sobeys jointly announced that they had entered into
an agreement pursuant to which Empire would acquire the
remaining outstanding common shares of Sobeys. Subsequent
to the end of the ﬁ scal year, on June 15, 2007, Empire
completed the privatization of Sobeys (see the section titled
“Subsequent Events” in this MD&A for more information).

This decision results in the Company being clearly focused on
its core strengths: food and related real estate development,
while continuing to direct its energy and capital towards growing

Operational Changes

position on a fully diluted basis) of $154.6 million at ﬁ scal
year-end. All of Empire’s portfolio investments are listed on a
recognized public stock exchange.

Subsequent to ﬁ scal year-end the liquid investments in the
portfolio, with the exception of the investment in Wajax, were
sold to assist in ﬁ nancing the acquisition of the remaining
common shares of Sobeys that Empire did not already own
(please see the section titled “Subsequent Events” in this
MD&A for more information).

Other operations include wholly-owned Empire Theatres, the
second largest movie exhibitor in Canada which owns or has an
interest in 56 locations representing 394 screens, and Kepec.

the long-term sustainable value of each of its core operating
businesses. While these respective core businesses are well
established and proﬁ table in their own right, the diversiﬁ cation
they offer Empire by both business line and by market area
served is considered by management to be an additional source
of strength. Together, these core businesses reduce risk and
volatility, thereby contributing to greater 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 deﬁ nes its role as having four fundamental
responsibilities: ﬁ rst, to support the development and execution
of sound strategic plans for each of its operating companies;
second, to regularly monitor the development and the execution
of business plans within each operating company; third, to
ensure that Empire is well governed as a public company; and
fourth, to prudently manage its capital in order to augment the
growth in its core operating businesses.

Listed below is a summary of events that impacted the ﬁ scal
year 2007 operating results and which affect the comparability
of information for the 13-week and 52-week periods ended
May 5, 2007 versus the 13-week and 52-week periods ended
May 6, 2006:

On August 27, 2006, Sobeys completed the acquisition of

Achille de la Chevrotière Ltée and its associated companies

(“ADL”), which included 25 owned or franchised retail store
operations, other wholesale supply agreements and
distribution facilities;

For the 12 months ended May 5, 2007, Empire acquired
1,248,950 common shares of Sobeys, increasing its
ownership position from 70.3 percent at May 6, 2006 to
its position of 72.1 percent at May 5, 2007;

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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On March 23, 2006, the Company completed the sale of
44 commercial properties to Crombie REIT. For both the
quarter and ﬁ scal year ended May 5, 2007, the Company
is equity accounting its 48.1 percent ownership in Crombie
REIT, whereas for the 13-week and 52-week periods ended
May 6, 2006, the results included 100 percent of the
operations related to these 44 commercial properties;

Empire Theatres changed its year-end from the last

Thursday in April to the last Thursday in December effective
December 28, 2006. This change in Empire Theatres’ year-
end was made to align with industry practice. However,
because of this change, the ﬁ scal year ended May 5, 2007
contained 48 weeks of operations while the ﬁ scal year
ended May 6, 2006 contained 52 weeks of operations; and

On September 30, 2005, Empire Theatres acquired

28 movie theatres. There are approximately 30 weeks of
operations related to these newly acquired theatres in ﬁ scal
2006 whereas there are 48 weeks included in ﬁ scal 2007.

Also impacting comparability year-over-year are costs related
to Sobeys’ business process and system initiative, business
rationalization, and privatization costs as outlined under the section
titled “Fiscal 2007 Operating Performance by Division – Food”.

The reader should note that management explains the impact
of the above events when discussing the operating results for
the food division, the real estate division and investments and
other operations.

Consolidated Operating Results

The consolidated ﬁ nancial overview provided below reports on the ﬁ nancial performance for ﬁ scal 2007 relative to the last
two ﬁ scal years.

Summary Table of Consolidated Financial Results

52 Weeks Ended

53 Weeks Ended

($ in millions,
except per share information)

May 5,
2007

% of
Revenue

May 6,
2006 (1)

% of
Revenue

May 7,
2005

% of
Revenue

Consolidated revenue

Operating income

Operating earnings

Capital gains and other items, net of tax

$ 13,366.7

100.00%

$ 13,063.6

100.00%

$ 12,435.2

100.00%

440.3

204.4

5.7

3.29%

1.53%

0.04%

491.4

3.76%

463.7

3.73%

202.0

94.8

1.55%

0.72%

182.9

3.7

1.47%

0.03%

Net earnings

210.1

1.57%

296.8

2.27%

186.6

1.50%

BASIC EARNINGS PER SHARE

Operating earnings

Capital gains and other items, net of tax

Net earnings

Basic weighted average number

of shares outstanding (in millions)

3.11

0.09

3.20

3.08

1.45

2.79

0.05

4.53

2.84

DILUTED EARNINGS PER SHARE

Operating earnings

Capital gains and other items, net of tax

65.6

3.10

0.09

65.5

3.07

1.44

65.5

2.78

0.05

Net earnings

3.19

4.51

2.83

Diluted weighted average number

of shares outstanding (in millions)

65.7

Dividends per share

0.60

0.56

0.48

(1) Restated.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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Management’s Explanation of Fiscal 2007 Annual Consolidated Results

The 13 weeks and 52 weeks ended May 6, 2006 have
been restated to reﬂ ect the retroactive adjustment related to
EIC-156. Please see the section entitled “Accounting Policy
Changes – Accounting for Consideration by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products)
(“EIC-156”)” in this MD&A.

The following is a review of Empire’s consolidated ﬁ nancial
performance for the 52-week periods ended May 5, 2007
compared to May 6, 2006.

Revenue

The consolidated revenue for ﬁ scal 2007 was $13.4 billion,
an increase of $303.1 million or 2.3 percent compared to
ﬁ scal 2006. Growth in Sobeys’ sales of $313.9 million and in
investments and other operations of $27.4 million was partially
offset by a $38.2 million reduction in revenue from the real
estate division.

Items impacting revenue comparability:

Sobeys’ sales were negatively impacted by the disposition

on March 31, 2006 of its Cash and Carry business in
Ontario and Québec;

Sobeys continued to experience declines in its tobacco
sales. Late in the second quarter of ﬁ scal 2007 a major
Canadian tobacco supplier began to sell and distribute
directly to certain Sobeys’ customers, further impacting
the decline;

Revenue was positively impacted by the acquisition on

August 27, 2006 of ADL. The acquisition included 25 owned
or franchised retail store operations, other wholesale supply
agreements and a distribution facility in Rouyn-Noranda,
Québec;

Revenue and ﬁ nancial performance of each of the Company’s
businesses (food retailing, real estate, and investments and
other operations) are discussed in detail in the section entitled
“Fiscal 2007 Operating Performance by Division” in this MD&A.

Empire Theatres changed its year-end from the last

Thursday in April to the last Thursday in December effective
December 28, 2006. This change in Empire Theatres’
year-end was made to align with industry practice. However,
because of this change, ﬁ scal year ended May 5, 2007
contained 48 weeks of operations while the ﬁ scal year ended
May 6, 2006 contained 52 weeks of operations, respectively;

Revenue for the ﬁ scal year-to-date ended May 5, 2007,

included 48 weeks of revenue related to the acquisition of
the 28 movie theatres, whereas the ﬁ scal year-to-date ended
May 6, 2006, included 30 weeks of revenue from the
acquired movie theatres; and

The sale of 44 properties to Crombie REIT has reduced the
quarter and year-to-date revenue when compared to the
prior year.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

As presented in the following table, excluding the impact of the above items, revenue growth would have been 4.3 percent in
ﬁ scal 2007 compared to ﬁ scal 2006.

REVENUE TABLE

52 Weeks Ended ($ in millions)

May 5, 2007

May 6, 2006

$ Change

% Change

Financially reported sales

$ 13,366.7

$ 13,063.6

303.1

2.3%

Add (deduct) the impact of:

Cash and Carry disposal

Wholesale tobacco decline

ADL acquisition

Theatre acquisition and year-end change (1)

Sale of 44 commercial properties to Crombie REIT

Subtotal

196.1

123.9

(151.8)

(22.8)

116.7

262.1

565.2

4.3%

(1) The impact for theatres’ revenue, reﬂ ected in the above table, represents the reduction of four weeks of revenue for ﬁ scal 2007 as a result of

Empire Theatres’ ﬁ scal year-end change as well as an additional 18 weeks of revenue in the current ﬁ scal year-to-date as a result of the acquisition
of 28 movie theatres in the second quarter of the prior ﬁ scal year.

Please refer to the section entitled “Fiscal 2007 Operating Performance by Division” for an explanation of the change in revenue by division.

Operating Income

Interest Expense

Consolidated operating income, deﬁ ned as operating earnings
before minority interest, interest expense, income taxes
and capital gains and other items, in ﬁ scal 2007 totalled
$440.3 million compared to $491.4 million last year, a decrease
of $51.1 million or 10.4 percent. The decrease in operating
income is the result of a $31.4 million or 9.5 percent decrease
in operating income contribution from the food retailing division
and a decrease in real estate division operating income of
$20.3 million or 14.7 percent, partially offset by a $0.6 million
or 2.8 percent increase in operating income from investments
and other operations, net of corporate expenses.

Included in operating income for ﬁ scal 2007 are $51.7 million of
pre-tax costs incurred by Sobeys related to its business process
and system initiative, severance in its Atlantic, Québec and
Ontario regions as a result of business rationalization, along
with ﬁ xed asset and inventory write-offs, and privatization costs.
Sobeys incurred $18.6 million of pre-tax costs related to its
business process and system initiative during the last ﬁ scal year.

Please refer to the section entitled “Fiscal 2007 Operating
Performance by Division” for an explanation of the change in
operating income for each division.

For the 52 weeks ended May 5, 2007, interest expense
equalled $60.1 million, versus $83.8 million in the prior year.
The $23.7 million decrease in ﬁ scal 2007 consolidated interest
expense compared to last ﬁ scal year is primarily due to a
$21.5 million reduction in interest expense connected to
long-term debt.

Long-term debt, including long-term debt related to properties
sold to Crombie REIT, was $240.8 million lower in ﬁ scal 2007
compared to ﬁ scal 2006. The decrease in long-term debt and
related long-term interest expense in ﬁ scal 2007 is primarily
related to the repayment of long-term debt as a result of the
sale of 44 commercial properties to Crombie REIT in March
2006, partially offset by the issuance of $125 million of Medium
Term Notes (“MTN”) in the second quarter by the food division.

Short-term interest expense declined $2.2 million, to $6.0 million
from $8.2 million last year. The decrease in short-term interest
expense is primarily the result of proceeds generated from the
sale of investments which were used in part to reduce bank
indebtedness.

The majority of the Company’s debt is long-term in nature
carrying ﬁ xed interest rates; accordingly there is limited
exposure to interest rate volatility. The Company is exposed
to interest rate risk when arranging new debt.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

9928_Back-Eng_Final v1a.indd 36
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9:58:03 PM

Income Taxes

The effective income tax rate for ﬁ scal 2007 was 32.5 percent
versus 34.8 percent last year. The main reason for the ﬁ scal
year decrease is due to reductions in the Canadian federal and
certain provincial statutory income tax rates and the application
of those lower rates to future tax balances.

Minority Interest

In ﬁ scal 2007, Empire recorded minority interest expense
of $57.0 million compared to $66.9 million last year. The
decrease of $9.9 million in minority interest expense is primarily
the result of lower Sobeys’ earnings as well as an increase in
Empire’s ownership in Sobeys from 70.3 percent at May 6, 2006,
to 72.1 percent at May 5, 2007. Empire purchased
1,248,950 common shares of Sobeys during ﬁ scal 2007.

As mentioned, $51.7 million of pre-tax costs incurred by Sobeys
resulted in a $24.4 million impact on Empire’s ﬁ scal 2007 net
earnings ($0.37 per share), whereas there were $18.6 million of
pre-tax costs incurred by Sobeys in ﬁ scal 2006 that resulted in
a $8.6 million impact on Empire’s net earnings ($0.13 per share).

Capital Gains and Other Items

The Company generated capital gains and other items, net of
tax, of $5.7 million in ﬁ scal 2007 largely as a result of net gains
on the sale of investments. Fiscal 2006 capital gains and other
items, net of tax, of $94.8 million was realized primarily from the
gain of $76.2 million on the sale of properties to Crombie REIT
and a net gain of $23.5 million on the sale of 2.875 million
Wajax Income Fund units last year, partially offset by a reduction
in book value of real estate assets held for redevelopment of
$17.0 million, net of tax.

Operating Earnings

Net Earnings

The $2.4 million or 1.2 percent increase in ﬁ scal 2007 operating
earnings (earnings before capital gains and other items) over
the prior year was the result of the $51.1 million reduction in
operating income partially offset by the $23.7 million reduction
in interest expense, the $19.9 million reduction in income taxes
and the $9.9 million decrease in minority interest as discussed.

Consolidated net earnings, including capital gains and other
items, net of tax, totalled $210.1 million ($3.19 per share)
in ﬁ scal 2007, a decrease of $86.7 million or 29.2 percent
compared to last year. The decline in net earnings for ﬁ scal
2007 compared to ﬁ scal 2006 largely reﬂ ects lower capital
gains and other items of $89.1 million.

(cid:35)(cid:47)(cid:46)(cid:51)(cid:47)(cid:44)(cid:41)(cid:36)(cid:33)(cid:52)(cid:37) (cid:36)
(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:46)(cid:39)(cid:0)(cid:37)(cid:33)(cid:50) (cid:46) (cid:41)(cid:46)(cid:39)(cid:51)
(cid:4)(cid:0)(cid:48)(cid:37) (cid:50)(cid:0)(cid:51)(cid:40)(cid:33)(cid:50) (cid:37)(cid:0)(cid:38)(cid:53) (cid:44)(cid:44)(cid:57)(cid:0)(cid:36)(cid:41) (cid:44)(cid:53)(cid:52)(cid:37) (cid:36)

(cid:18)(cid:16)(cid:20)(cid:14)(cid:20)

(cid:19)(cid:14)(cid:17)(cid:16)

(cid:18)(cid:16)(cid:16)

(cid:17)(cid:21)(cid:16)

(cid:17)(cid:16)(cid:16)

(cid:21)(cid:16)

(cid:19)(cid:14)(cid:16)(cid:16)

(cid:18)(cid:14)(cid:18)(cid:21)

(cid:17)(cid:14)(cid:21)(cid:16)

(cid:16)(cid:14)(cid:23)(cid:21)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

The modest increase in operating
earnings reﬂ ects reduced operating
income from both food retailing and
real estate offset by lower interest
expense, income taxes and minority
interest expense.

9928_Back-Eng_Final v1a.indd 37
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9:58:03 PM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Fiscal 2007 Operating Performance by Division

Food Retailing

HIGHLIGHTS

Sobeys is celebrating 100 years in the food industry.
Sobeys achieved ﬁ scal 2007 sales growth of $313.9 million
or 2.5 percent and same-store sales growth of 2.4 percent.

Total capital expenditures equalled $482.8 million (total

company-wide capital expenditures, which included
franchisee and third party spending equalled $580.0 million).

Opened, or replaced 48 corporate and franchised stores,
acquired 29 stores, expanded 24 stores and rebannered/
redeveloped 49 stores.

To assess its ﬁ nancial performance and condition, Sobeys’
management monitors a set of ﬁ nancial measures, which
evaluate sales growth, proﬁ tability and ﬁ nancial condition.

The primary ﬁ nancial performance and condition measures for
Sobeys are set out below.

52 Weeks Ended

May 5, 2007

May 6, 2006

Same-store sales growth
Sales growth
Basic earnings per share growth
Return on equity
Funded debt to total capital
Funded debt to EBITDA
Company-wide capital

2.4%
2.5%
(8.9%)
9.1%
23.7%
1.2x

4.0%
5.4%
1.7%
10.8%
21.1%
0.9x

expenditures (in millions)

580

560

The table below presents sales, operating income and net earnings for Sobeys:

($ in millions)

Sales

Operating income

Net earnings

SALES

52 Weeks Ended
May 5, 2007

52 Weeks Ended
May 6, 2006

Year over Year

$ Change

% Change

$ 13,032.0

$ 12,718.1

300.2

173.4

331.6

189.4

313.9

(31.4)

(16.0)

2.5%

(9.5%)

(8.4%)

In ﬁ scal 2007, Sobeys achieved sales of $13.0 billion, an
increase of $313.9 million or 2.5 percent over ﬁ scal 2006. During
the ﬁ scal year, same-store sales (sales from stores in the same
locations in both reporting periods) increased by 2.4 percent.
Same-store sales growth does not include wholesale sales.

Sales growth, for the year, was driven by Sobeys’ continued
implementation of sales and merchandising initiatives across the
country, coupled with an increase in retail selling square footage
resulting from the development of new stores, an ongoing
program to enlarge and renovate existing store assets, and by
the acquisition on August 27, 2006 of ADL. This acquisition
included 25 owned or franchised retail store operations, other
wholesale supply agreements and a distribution facility in
Rouyn-Noranda, Québec.

Store square footage increased by 4.0 percent in ﬁ scal 2007 as
a result of the opening of 77 new or replacement stores and the
expansion of 24 stores. There were 38 stores closed in ﬁ scal 2007.

Sobeys expects sales growth to continue in ﬁ scal 2008 as a
result of the ongoing capital investment in its retail store
network, and continued offering, merchandising and pricing
improvements across the country.

Sobeys experienced declines in its wholesale tobacco
sales during ﬁ scal 2007. Wholesale tobacco sales declined
$123.9 million in ﬁ scal 2007 compared to ﬁ scal 2006. Sales
growth was also negatively impacted by the disposition on
March 31, 2006 of Sobeys’ Cash and Carry business in Ontario
and Québec. Cash and Carry sales were $196.1 million in
ﬁ scal 2006. As shown in the table below, excluding the impact
of the wholesale tobacco decline, the Cash and Carry disposition,
and the ADL acquisition, Sobeys’ sales growth would have been
3.8 percent in ﬁ scal 2007.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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7/26/07 8:00:45 AM
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8:00:45 AM

52 Weeks Ended ($ in millions)

May 5, 2007

May 6, 2006

$ Change

% Change

Sobeys’ ﬁ nancially reported sales

$ 13,032.0

$ 12,718.1

313.9

2.5%

Add (deduct) the impact of:

Cash and Carry disposal

Wholesale tobacco decline

ADL acquisition

Subtotal

As noted in previous quarters, late in the second quarter of
ﬁ scal 2007 a major Canadian tobacco supplier began to sell and
distribute directly to certain Sobeys’ customers further impacting
the decline in sales. This change is expected to reduce sales
on an annual basis by approximately $300.0 million. Margins on
tobacco sales are signiﬁ cantly lower than on other products:
the loss of these sales are not expected to have a material
impact on earnings.

BUSINESS PROCESS AND SYSTEM

INITIATIVE, BUSINESS RATIONALIZATION

AND PRIVATIZATION COSTS

Included in earnings for ﬁ scal 2007 were costs related to
Sobeys’ business process and system initiative as well
as business rationalization and privatization costs. In total
these costs had a $51.7 million pre-tax impact on earnings
($18.6 million pre-tax in ﬁ scal 2006).

These costs include:

Business process and system initiative costs – For the
52 weeks ended May 5, 2007, $30.3 million ($18.6 million
in ﬁ scal 2006) of pre-tax costs ($4.9 million for the 13 weeks
ended May 5, 2007 and $5.3 million for the 13 weeks ended
May 6, 2006) were incurred related to the business process
and system initiative as outlined in “Overview of the Business”
section. The business process and system initiative costs
primarily include labour, implementation and training
costs associated with the business process and system
implementation as well as ﬁ nal costs associated with exiting
the Commisso’s banner. During the third quarter, Sobeys
completed the implementation of the system in Ontario in
accordance with its plans. This implementation supports all
aspects of Sobeys’ Ontario business including operations,
merchandising, distribution and ﬁ nance and is an important
enabler of further initiatives in Ontario including the new
distribution facility in Ontario as further discussed below.
Sobeys continues its work on the business process and
system initiative in the Western region.

196.1

123.9

(151.8)

168.2

482.1

3.8%

Business rationalization costs – Also during the third
quarter of ﬁ scal 2007, Sobeys completed a rationalization of
administrative functions in Atlantic Canada. This administrative
rationalization was completed following the recent successful
implementation of Sobeys’ ﬁ rst phase of the business process
and system initiative. In addition to asset write-offs, in excess
of 100 people were impacted by this rationalization; however,
a number of these people were redeployed into Sobeys’
retail store network. Pre-tax costs of $7.9 million were incurred
during the third quarter of ﬁ scal 2007 as a result of this
rationalization. Sobeys’ expectations are for full-year expense
reductions in ﬁ scal 2008 in excess of these costs.
Ontario distribution network rationalization –
On November 21, 2006, Sobeys announced plans to build
a new distribution centre in Vaughan, Ontario. Utilizing
automation technology, the new facility is expected to
signiﬁ cantly increase Sobeys’ warehouse and distribution
capacity while reducing overall distribution costs and
improving service to its store network and customers.
During the third quarter of the ﬁ scal year Sobeys recognized
$5.3 million of severance costs associated with this
rationalization. This new distribution centre, when opened in
ﬁ scal 2009, is expected to provide annual distribution cost
savings in excess of the costs incurred in the third quarter
and any additional business rationalization or restructuring
costs incurred leading up to its opening.
Québec distribution network rationalization – In the fourth
quarter Sobeys completed the closure of two small facilities,
one in Anjou and one in the Abitibi region of Québec.
Rationalization costs related to these facilities of $5.6 million
were incurred in the fourth quarter. It is expected that
the annualized savings associated with this closure will be
approximately $5.0 million.

9928_Back-Eng_Final v1a.indd 39
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7/27/07 10:05:53 PM
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10:05:53 PM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Privatization – On April 26, 2007, Empire and Sobeys
jointly announced that they had entered into an agreement
pursuant to which Empire would acquire the common shares
of Sobeys, other than those owned by Empire or its subsidiaries
at a price of $58.00 per share. Pre-tax costs of $2.6 million
were incurred in the fourth quarter related to this transaction.
Subsequent to the end of the ﬁ scal year, on June 15, 2007,
Empire completed the privatization of Sobeys (see the
section titled “Subsequent Events” near the end of this MD&A).

reﬂ ecting Sobeys’ continued capital investments. Also included
in operating income are the business process and system
initiative, rationalization and privatization costs outlined previously.

Sobeys will continue to focus on disciplined cost management
initiatives, supply chain and retail productivity improvements and
migration of best practices across its four regions to continue to
fuel and fund investments to drive sales and improve margins
over time.

Sobeys expects to incur additional administrative rationalization
costs into the ﬁ rst half of ﬁ scal 2008, as a result of its
continuing business process and system initiative. The dollar
value of these additional costs will be quantiﬁ ed and disclosed
in the ﬁ rst quarter of ﬁ scal 2008.

OPERATING INCOME

Sobeys’ operating income equalled $300.2 million during ﬁ scal
2007, a 9.5 percent decrease from last year, with an operating
income margin of 2.30 percent compared to 2.61 percent in
ﬁ scal 2006. Included in ﬁ scal 2007 operating income was an
$18.7 million increase in depreciation and amortization expense,

NET EARNINGS

Sobeys’ ﬁ scal 2007 net earnings equalled $173.4 million,
a decrease of 8.4 percent compared to the $189.4 million
recorded in the prior year. Empire’s 72.1 percent ownership of
Sobeys contributed net earnings of $123.9 million in ﬁ scal
2007 ($130.1 million in ﬁ scal 2006 based on a 70.3 percent
ownership interest at the end of the year).

Sobeys’ net earnings for the 52-week period ended May 5, 2007
included the increased depreciation and amortization expense,
and the business process and system initiative costs as well
as the business rationalization and privatization costs referred
to above.

F OOD R ETAILING
OPE RATING INCOM E
$ I N M I LLIONS

(cid:17)(cid:19)(cid:12)(cid:16)(cid:19)(cid:18)(cid:14)(cid:16)

300.2

(cid:17)(cid:18)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:25)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:22)(cid:12)(cid:16)(cid:16)(cid:16)

(cid:19)(cid:12)(cid:16)(cid:16)(cid:16)

320

240

160

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

FISCAL YEAR

Despite growth in revenue,
operating income declined as
a result of Sobeys’ continuing
investment in its stores, business
processes and systems
and rationalization as well as
privatization costs.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

9928_Back-Eng_Final v1a.indd 40
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7/27/07 10:05:54 PM
7/27/07
10:05:54 PM

Real Estate

HIGHLIGHTS

A record year for residential operations with growth
in operating income contribution of $19.9 million or
38.8 percent.

A 49.0 percent total investment return from Crombie REIT

since the initial public offering in March 2006.

Appointed Donald Clow as President of ECL Developments

with a mandate to become the developer of choice for
Crombie REIT with Sobeys as a key tenant.
Completed the Martello condominium project.

Real estate management assesses its ﬁ nancial performance
and condition through monitoring of key ﬁ nancial measures.
The primary ﬁ nancial performance and condition measures are
set out below.

52 Weeks Ended

May 5, 2007

May 6, 2006

Total square footage (in millions)
Occupancy
Funds from operations ($ in millions)
Return on equity
Funded debt to total capital

5.7
92.9%
74.6
17.5%
39.8%

5.9
93.2%
76.5
17.3% *
41.9%

* Excluding gain on the sale of properties to Crombie REIT.

The table below presents revenue, operating income, net earnings and funds from operations for the real estate division’s commercial
operations and residential operations.

52 Weeks Ended ($ in millions)

May 5, 2007

May 6, 2006

$ Change

% Change

REVENUE

Commercial
Residential

Inter-segment

OPERATING INCOME

Commercial
Residential

NET EARNINGS

Commercial (1)
Residential

FUNDS FROM OPERATIONS

Commercial
Residential

72.7
146.1

218.8
(34.3)

191.8
84.9

276.7
(54.0)

(119.1)
61.2

(57.9)
19.7

184.5

222.7

(38.2)

46.8
71.2

118.0

21.0
46.8

67.8

26.8
47.8

74.6

87.0
51.3

138.3

85.8
32.9

118.7

43.2
33.3

76.5

(40.2)
19.9

(20.3)

(64.8)
13.9

(50.9)

(16.4)
14.5

(1.9)

(62.1%)
72.1%

(20.9%)
(36.5%)

(17.2%)

(46.2%)
38.8%

(14.7%)

(75.5%)
42.2%

(42.9%)

(38.0%)
43.5%

(2.5%)

(1) There were no net capital gains in net earnings for ﬁ scal 2007 compared to $59.1 million last ﬁ scal year.

9928_Back-Eng_Final v1a.indd 41
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7/26/07 8:00:46 AM
7/26/07
8:00:46 AM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

REVENUE

Real estate division revenues (net of inter-segment amounts)
during ﬁ scal 2007 declined $38.2 million or 17.2 percent
compared to the previous ﬁ scal year. Commercial property
revenue declined $99.4 million. This revenue decline was
expected given the sale of 44 commercial properties to Crombie
REIT, which accounted for approximately $116.7 million of
revenue last ﬁ scal year. Revenue from residential operations
equalled $146.1 million in ﬁ scal 2007 compared to $84.9 million
last year, a $61.2 million or 72.1 percent increase. This increase
is primarily attributed to higher Genstar revenue. Management
continues to caution that the pace of growth experienced in
residential lot sales is not sustainable over the long-term, but
does expect continued strength in the Alberta market over the
next several months.

properties to Crombie REIT in March 2006 which accounted
for approximately $39.1 million of the decline. The residential
operating income increase in ﬁ scal 2007 reﬂ ects the continued
strength in the Western housing market.

NET EARNINGS

Real estate division net earnings contribution in ﬁ scal 2007
amounted to $67.8 million compared to $118.7 million last year,
a $50.9 million or 42.9 percent decrease. The earnings decline
largely reﬂ ects the $20.3 million reduction in operating income
as discussed and a decrease in capital gains, net of tax, of
$59.1 million, partially offset by a $23.3 million reduction in
interest expense due to lower long-term debt levels as a result
of the sale of 44 commercial properties to Crombie REIT and
lower income tax expense of $5.2 million.

OPERATING INCOME

FUNDS FROM OPERATIONS

During ﬁ scal 2007, real estate division operating income
declined $20.3 million or 14.7 percent compared to last year
as the result of a $40.2 million decline in commercial operating
income partially offset by a $19.9 million increase in residential
operating income. The commercial operating income decline was
anticipated and is primarily attributed to the sale of 44 commercial

Funds from real estate operations in ﬁ scal 2007 of $74.6 million
decreased $1.9 million or 2.5 percent compared to last year as
a result of a decrease in commercial funds from operations of
$16.4 million due to lower operating earnings, partially offset by
higher residential funds from operations of $14.5 million due to
higher operating earnings.

(cid:18)(cid:17)(cid:24)(cid:14)(cid:24)

(cid:17)(cid:17)(cid:24)(cid:14)(cid:16)

(cid:18)(cid:20)(cid:16)

(cid:17)(cid:24)(cid:16)

(cid:17)(cid:18)(cid:16)

(cid:22)(cid:16)

(cid:17)(cid:18)(cid:16)

(cid:25)(cid:16)

(cid:22)(cid:16)

(cid:19)(cid:16)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

Real estate division performance
reﬂ ects the impact of the sale of
44 commercial properties to
Crombie REIT partially offset by
improved residential performance.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

9928_Back-Eng_Final v1a.indd 42
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7/26/07
8:00:46 AM

Investments & Other Operations

HIGHLIGHTS

A $27.4 million or 22.3 percent increase in revenue.
A $5.3 million or 21.5 percent increase in investment income.
A $0.6 million or 2.8 percent increase in operating income.
Capital gains of $6.2 million generated on the sale

Subsequent to year-end, the investment portfolio, excluding
Wajax, was sold for proceeds of $288 million, resulting in a
net capital gain of $101.4 million.

of investments.

INVESTMENT VALUE

Four year annualized return performance for Empire’s

portfolio was 27.3 percent compared to a 22.4 percent for
the S&P/TSX Composite Index and a 9.0 percent total
return for the S&P 500 Index, in Canadian dollars.

At the end of ﬁ scal 2007, Empire’s total investments, excluding
its investment in Genstar U.S. investments and in Crombie REIT,
carried a market value of $441.2 million on a cost base of
$221.9 million, resulting in an unrealized gain of $219.3 million
(2006 – $214.3 million).

The table below presents a reconciliation of the consolidated balance sheet investments, both equity and cost, to those related to the
investment and other operations division:

(in millions)

Investments, at cost

Investments, at equity

Less: Crombie REIT

Less: Genstar U.S. (1)

Plus: Hedge value

May 5, 2007

May 6, 2006

Market
Value

Cost
Value

Unrealized
Gain

Market
Value

Cost
Value

Unrealized
Gain

283.1 $

189.7 $

93.4

398.9 $

359.9 $

434.0

278.1

1.3

3.5

142.8

109.3

1.3

–

291.2

168.8

–

3.5

425.3

220.7

11.6

15.4

157.5

112.8

11.6

–

39.0

267.8

107.9

–

15.4

441.2 $

221.9 $

219.3

607.3 $

393.0 $

214.3

(1) Assumes market value equals book value.

During ﬁ scal 2007 there was a realized capital gain on the
sale of investments equal to $6.2 million compared to an
$11.6 million capital gain last year. The Company sold a
signiﬁ cant portion of its U.S. equity investments during the year
due to perceived market risk and used the proceeds to reduce
bank indebtedness. The total unrealized gain position at the end
of ﬁ scal 2007 was $219.3 compared to $214.3 million at the
end of ﬁ scal 2006.

Realized capital gain for ﬁ scal 2007, plus unrealized capital
gain, combined to equal $225.5 million at the end of the year.
This compares to a total realized gain on investment sales plus

capital gains at the end of ﬁ scal 2006 equal to $225.9 million.
The decrease in the realized plus unrealized gain position of
$0.4 million since the end of ﬁ scal 2006 is largely the result
of a decrease in the valuation of Wajax which was largely offset
by an increase in valuations of other investments.

Subsequent to year-end the investment portfolio, with the
exception of Wajax, was sold for proceeds of approximately
$288 million. For further details, please see the section entitled
“Subsequent Events” in this MD&A.

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8:00:46 AM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

PORTFOLIO COMPOSITION

At May 5, 2007, Empire’s investment portfolio (excluding cash) consisted of:

($ in millions Cdn.)

Canadian equities

Wajax

U.S. equities

Preferred shares & other

Hedge value(1)

Total

Unrealized Gain (Loss)

Market
Value

% of
Total

Cost

May 5,
2007

May 6,
2006

237.1

53.8%

144.9 $

92.2

68.8 $

154.6

44.5

1.5

3.5

35.0%

10.1%

0.3%

0.8%

32.2

43.3

1.5

–

122.4

1.2

–

3.5

159.9

(29.8)

–

15.4

May 7,
2005

51.4

89.5

(1.3)

–

5.2

441.2

100.0%

221.9 $

219.3

214.3 $

144.8

(1) The hedge value of $3.5 million is based on the $1.0 million mark-to-market position of $31 million CAD in currency forwards carrying an average
forward foreign exchange rate of $1.1377 CAD/USD plus $2.5 million in deferred foreign currency gains on the repayment of U.S. dollar loans.

Empire’s direct debt matched to the investment portfolio as
of May 5, 2007 was $6.5 million, representing approximately
1.5 percent of the investment portfolio’s market value, including
the hedge value. Management considers a ratio of debt to
investment value of no greater than 35 percent as prudent.

INVESTMENT RETURN

The table below presents the total return performance for
Empire’s investments (excluding the 48.1 percent interest in
Crombie REIT) relative to Canadian and U.S. equity benchmark
returns on an annualized one through four-year basis for
periods ended March 31, 2007.

EMPIRE INVESTMENT PORTFOLIO TOTAL RETURN

For Periods Ending March 31, 2007
Annualized Returns

Empire Portfolio

Median Manager

S&P/TSX Index

S&P 500 Index in (C$)

One
Year

1.1%

11.4%

10.5%

Two
Years

12.6%

17.6%

19.6%

9.1%

Three
Years

17.2%

15.3%

17.7%

5.4%

Four
Years

27.3%

19.5%

22.4%

9.0%

The total return on the Empire investment portfolio, as indepen-
dently benchmarked against the performance of over 100 equity
fund managers, has been ranked as ﬁ rst quartile (ﬁ rst quartile
means the top 25 percent of surveyed equity fund managers)
investment return performance over the three and four-year
trailing periods ended March 31, 2007. Total return performance
was relatively weak for the one-year period ended March 31, 2007
at 1.1 percent (fourth quartile), as a result of a decrease in the
market price per unit of Wajax over this period of 14.0 percent.
Wajax represented approximately one-third of the average
portfolio value during ﬁ scal 2007. The value of Wajax units was
impacted by the announcement on October 31, 2006 made by
the Government of Canada regarding the “Tax Fairness Plan”,
which intends to impose a tax on distributions from publicly
traded income trusts and limited partnerships.

HEDGING INVESTMENT CURRENCY RISK

At May 5, 2007, Empire had hedged approximately 70.0 percent
of the market value of its U.S. based common equity investments
by way of $31 million CAD of forward currency contracts.
The average foreign exchange rate associated with these U.S.
forward currency contracts is $1.1377. The fair value of the
hedge was $1.0 million at the end of the fourth quarter.

The forward currency contracts replaced U.S. dollar borrowings
which were repaid with a portion of the net cash proceeds from
the closing of the Crombie REIT initial public offering on March
23, 2006. The repayment of the U.S. based borrowings resulted
in a deferred hedge gain of $10.2 million which will be realized
on the eventual disposition of the underlying U.S. dollar portfolio
investments. In ﬁ scal 2007, $7.7 million of this deferred gain
had been recognized, resulting in a deferred hedge gain of
$2.5 million at the end of ﬁ scal 2007.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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7/26/07 8:00:47 AM
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8:00:47 AM

The table below presents investments and other operations’ ﬁ nancial highlights for the 52 weeks ended May 5, 2007 compared to the
same period last year.

52 Weeks Ended ($ in millions)

May 5, 2007

May 6, 2006

Year over Year Increase (Decrease)

Revenue

Investment income

Operating earnings
Capital gains and other items, net of tax

Net earnings

REVENUE

Investments and other operations’ revenue, primarily generated
by Empire Theatres, equalled $150.2 million for ﬁ scal 2007
versus $122.8 million last year. There are 48 weeks of revenue
included in ﬁ scal 2007 compared to 52 weeks last year from
Empire Theatres as a result of the change in Empire Theatres’
year-end date. Fiscal 2006 included approximately 30 weeks of
sales related to those newly acquired theatres in September 2006
compared to 48 weeks in ﬁ scal 2007, which resulted in a net
$22.8 million increase in revenue, as previously mentioned.

INVESTMENT INCOME

Investment income (excluding equity earnings from Crombie
REIT and Genstar’s U.S. investments) equalled $29.9 million
in ﬁ scal 2007, an increase of $5.3 million over the $24.6 million
recorded last year. The increase is the result of dividend income
that was $1.4 million higher than last year and equity earnings
from Wajax being $3.9 million higher than last year.

OPERATING EARNINGS

Investment (net of corporate expenses) and other operations’
operating earnings equalled $12.7 million in ﬁ scal 2007,
consistent with last year. This was the result of lower interest
expense, higher equity earnings contribution from Wajax and
higher dividend income, partially offset by higher income taxes.

150.2

122.8

27.4

29.9

12.7

5.7

24.6

12.7
35.3

5.3

–
(29.6)

18.4

48.0

(29.6)

22.3%

21.5%

0.0%
(83.9%)

(61.7%)

Empire’s non-consolidated bank loans totalled $6.5 million at
the end of ﬁ scal 2007 versus $71.2 million at the beginning of
the ﬁ scal year, and $25.2 million at the end of the third quarter
this year. Cash proceeds from investments sales in the third
quarter were used in part to reduce bank loans.

CAPITAL GAINS AND OTHER ITEMS

Capital gains, net of tax, realized from investment sales in ﬁ scal
2007 amounted to $5.7 million compared to $35.3 million last
year. The bulk of the capital gains, net of tax, for ﬁ scal 2007
relates to the sale of common equity investments. The bulk
of the net capital gains in the last ﬁ scal year resulted from the
sale of 2.875 million units of Wajax in the ﬁ rst quarter, with
Empire retaining 4,577,994 units of Wajax.

NET EARNINGS

Investments (net of corporate expenses) and other operations
contributed $18.4 million to Empire’s consolidated ﬁ scal
2007 net earnings compared to a $48.0 million net earnings
contribution last year. The decrease is primarily the result
of lower realized investment capital gains, net of tax, during
the year.

(cid:41)(cid:46)(cid:54)(cid:37)(cid:51)(cid:52)(cid:45) (cid:37) (cid:46)(cid:52)(cid:51)(cid:0)(cid:33)(cid:46) (cid:36)(cid:0)
(cid:47)(cid:52)(cid:40) (cid:37) (cid:50)(cid:0)(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:47)(cid:46)(cid:51)(cid:0)(cid:36)(cid:41)(cid:54)(cid:41)(cid:51)(cid:41)(cid:47)(cid:46)(cid:0)
(cid:50) (cid:37)(cid:54)(cid:37) (cid:46) (cid:53) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:17)(cid:21)(cid:16)(cid:14)(cid:18)

(cid:41)(cid:46)(cid:54)(cid:37)(cid:51)(cid:52)(cid:45) (cid:37) (cid:46)(cid:52)(cid:51)(cid:0)(cid:33)(cid:46) (cid:36)(cid:0)
(cid:47)(cid:52)(cid:40) (cid:37) (cid:50)(cid:0)(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:47)(cid:46)(cid:51)(cid:0)(cid:36)(cid:41)(cid:54)(cid:41)(cid:51)(cid:41)(cid:47)(cid:46)(cid:0)
(cid:47)(cid:48)(cid:37) (cid:50)(cid:33)(cid:52)(cid:41)(cid:46)(cid:39)(cid:0)(cid:41)(cid:46)(cid:35)(cid:47)(cid:45) (cid:37)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:19)(cid:17)(cid:14)(cid:22)

(cid:17)(cid:22)(cid:16)

(cid:17)(cid:18)(cid:16)

(cid:24)(cid:16)

(cid:20)(cid:16)

(cid:19)(cid:18)

(cid:18)(cid:20)

(cid:17)(cid:22)

(cid:24)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

With the change in the year-end date for
Empire Theatres, ﬁ scal 2006 includes
52 weeks of sales, including 30 weeks
of revenue from newly acquired
theatres, compared to 48 weeks of
sales in ﬁ scal 2007.

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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Quarterly Results of Operations

The following table is a summary of selected ﬁ nancial information from the Company’s consolidated ﬁ nancial statements (unaudited)
for each of the eight most recently completed quarters.

Results by Quarter

Fiscal 2007

Fiscal 2006 (1)

($ in millions, except
per share information)

Q4
(13 Weeks)
May 5,
2007

Q3
(13 weeks)
Feb. 3,
2007

Q2
(13 weeks)
Nov. 4,
2006

Q1
(13 weeks)
Aug. 5,
2006

Q1
(13 weeks) (13 weeks) (13 weeks) (13 weeks)
Aug. 6,
2005

Nov. 5,
2005

Feb. 4,
2006

May 6,
2006

Revenue

$ 3,350.4 $ 3,281.9 $ 3,353.4 $ 3,381.0 $ 3,226.6 $ 3,235.2 $ 3,263.7 $ 3,338.1

Operating income

123.2

79.7

116.2

121.2

130.9

118.3

122.1

120.1

Operating earnings(2)

Capital gains (losses) and

63.8

36.1

51.2

53.3

56.9

47.7

47.8

49.6

other items, net of tax

0.7

(1.0)

6.0

–

61.5

8.3

0.8

24.2

Net earnings

PER SHARE

INFORMATION, DILUTED

64.5 $

35.1 $

57.2 $

53.3 $ 118.4 $

56.0 $

48.6 $

73.8

Operating earnings

0.97 $

0.54 $

0.78 $

0.81 $

0.87 $

0.72 $

0.73 $

0.75

Capital gains (losses) and

other items, net of tax

0.01

(0.01)

0.09

–

0.93

0.13

0.01

0.37

Net earnings

0.98 $

0.53 $

0.87 $

0.81

1.80 $

0.85 $

0.74 $

1.12

Diluted weighted average

number of shares

outstanding (in millions)

65.7

(1) All quarters prior to the ﬁ rst quarter of ﬁ scal 2007 have been restated to reﬂ ect retroactive adjustments related to EIC-156. Please see the section

entitled “EIC-156” in this MD&A.

(2) Operating earnings is net earnings before capital gains (losses) and other items, net of tax.

Revenue and operating earnings growth have been inﬂ uenced by the Company’s investing activities, the competitive environment,
general industry trends and by other risk factors as outlined in this MD&A.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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Fourth Quarter Results

SUMMARY TABLE OF CONSOLIDATED FINANCIAL RESULTS FOR THE FOURTH QUARTER

($ in millions,
except per share information)

13 Weeks Ended
May 5, 2007

% of
Revenue

13 Weeks Ended
May 6, 2006

% of
Revenue

Consolidated revenue

Operating income

Operating earnings

Capital gains and other items, net of tax

Net earnings

BASIC EARNINGS PER SHARE

Operating earnings

Capital gains and other items, net of tax

Net earnings

Basic weighted average number of

shares outstanding (in millions)

DILUTED EARNINGS PER SHARE

Operating earnings

Capital gains and other items, net of tax

Net earnings

Diluted weighted average number of

shares outstanding (in millions)

3,350.4

100.00%

3,226.6

100.00%

123.2

63.8

0.7

64.5

0.97

0.01

0.98

65.6

0.97

0.01

0.98

65.7

3.68%

1.91%

0.02%

1.93%

130.9

56.9

61.5

118.4

4.06%

1.76%

1.91%

3.67%

0.87

0.94

1.81

65.5

0.87

0.93

1.80

65.7

The following is a review of ﬁ nancial performance for the 13-week period ended May 5, 2007 compared to the 13-week period ended
May 6, 2006.

REVENUE

Revenue for the fourth quarter was $3.35 billion compared to $3.23 billion last year, a $123.8 million or 3.8 percent increase.
As shown in the following table, excluding the quarterly impact of: the sale of the Sobeys’ Cash and Carry business, the sale
of 44 properties to Crombie REIT, the decline in wholesale tobacco sales and the ADL acquisition, revenue growth would have
been 5.4 percent for the fourth quarter.

13 Weeks Ended ($ in millions)

May 5, 2007

May 6, 2006

$ Change

% Change

Financially reported sales

Add (deduct) the impact of:

Cash and Carry disposal

Wholesale tobacco decline

ADL acquisition

Sale of 44 commercial properties to Crombie REIT

Subtotal

3,350.4

3,226.6

123.8

3.8%

26.4

37.5

(41.5)

27.5

49.9

173.7

5.4%

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Food retailing division revenue increased by $117.9 million or
3.8 percent compared to the fourth quarter of ﬁ scal 2006.
Same-store sales increased 2.3 percent during the fourth quarter
of ﬁ scal 2007. The growth in retail sales was a direct result of
the continued implementation of sales and merchandising
initiatives across Sobeys, and the ongoing ﬁ nancial commitment
to upgrade and renovate existing store assets. As outlined above
the decline in wholesale tobacco sales and the disposition of
Sobeys’ Cash and Carry business in Ontario and Québec had a
negative impact on fourth quarter sales, however this was offset
in part by the ADL acquisition. Excluding the impact of the
tobacco decline, the impact of the Cash and Carry disposition,
and the ADL acquisition, Sobeys’ sales growth would have been
4.5 percent on a comparable 13-week basis.

Real estate operations reported fourth quarter revenues (net
of inter-company elimination) of $66.0 million, an increase of
$1.8 million or 2.8 percent over the fourth quarter last year.
Commercial property revenue declined by $23.9 million or
72.2 percent while revenue from residential operations
increased by $25.7 million or 82.6 percent. The decline in
commercial property revenues was expected, resulting primarily
from the sale of 44 properties to Crombie REIT nine days prior
to the end of the fourth quarter last year. The increase in
residential revenue from Genstar was the result of exceptionally
strong lot sales, particularly in the Calgary and Edmonton,
Alberta markets.

Revenue from investments and other operations in the fourth
quarter equalled $40.7 million, an increase of $4.1 million or
11.2 percent over the fourth quarter last year. This is primarily
related to higher revenue contributions from both Empire
Theatres and Kepec.

OPERATING INCOME

Consolidated operating income in the fourth quarter of
ﬁ scal 2007 totalled $123.2 million compared to $130.9 million
in the fourth quarter last year, a decrease of $7.7 million or
5.9 percent. The decrease in operating income is the result
of an $11.0 million or 12.9 percent decline in operating income
contribution from the food division, partially offset by an increase
in real estate division operating income of $5.4 million or
13.3 percent.

Included in operating income for the fourth quarter are
$13.1 million of pre-tax costs incurred by Sobeys related to its
business process and system initiative, warehouse closure costs
in Québec and privatization costs. Sobeys incurred $5.3 million
of pre-tax costs related to its business process and system
initiative in the fourth quarter last year.

Residential real estate operating income of $34.6 million
increased $17.6 million compared to the fourth quarter last year,
reﬂ ecting the development and timing of land parcel and lot
sales during the quarter. Commercial real estate operating
income of $11.5 million declined $12.2 million from the same
quarter last year, largely the result of the sale of 44 properties
to Crombie REIT in the fourth quarter last year.

INTEREST EXPENSE

The $4.7 million decrease in fourth quarter consolidated interest
expense compared to the same quarter last year is primarily due
to a $3.7 million reduction in long-term interest expense. This is
primarily related to the decrease in real estate long-term debt as
a result of the sale of commercial property to Crombie REIT in
the fourth quarter last year, as previously discussed.

INCOME TAXES

The effective income tax rate for the fourth quarter was
30.3 percent versus 32.9 percent in the fourth quarter last year.
The main reason for this decrease in the tax rate is due to a
reduction in the Canadian federal and certain provincial statutory
income tax rates and the application of those lower rates to
future tax balances, related to the real estate operations.

MINORITY INTEREST

In the fourth quarter of ﬁ scal 2007, Empire recorded minority
interest expense of $13.9 million compared to $18.9 million
in the fourth quarter last year. The decrease of $5.0 million in
minority interest is primarily the result of lower Sobeys’ earnings
as well as an increase in Empire’s ownership in Sobeys from
70.3 percent at May 6, 2006 to 72.1 percent at May 5, 2007.

OPERATING EARNINGS

The $6.9 million or 12.1 percent increase in operating earnings
(earnings before capital gains and other items) over the prior
year was the result of the $7.7 million reduction in operating
income more than offset by the $4.7 million reduction in interest
expense, the $4.9 million reduction in income taxes and the
$5.0 million reduction in minority interest, as discussed.

CAPITAL GAINS AND OTHER ITEMS

The Company generated capital gains and other items,
net of tax, of $0.7 million in the fourth quarter compared to
$61.5 million last year. The fourth quarter of ﬁ scal 2006
included the gains from the sale of properties to Crombie REIT.

NET EARNINGS

Consolidated net earnings, including capital gains and other
items, net of tax, totalled $64.5 million ($0.98 per share) in the
fourth quarter, a decrease of $53.9 million or 45.5 percent over
the fourth quarter last year.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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10:18:11 PM

Financial Condition

Capital Structure and Key Financial Condition Measures

The Company’s ﬁ nancial condition at the end of ﬁ scal 2007 remained healthy as indicated by the following ﬁ nancial condition measures.

($ in millions, except per share and ratio calculations)

May 5, 2007

May 6, 2006

May 7, 2005

Shareholders’ equity

Book value per share

Minority interest

Bank indebtedness

Long-term debt, including current portion(1)

Funded debt to total capital

Net debt to capital ratio(2)

Adjusted debt to total capital(3)

Debt to EBITDA

Interest coverage

Total assets

2,135.4

1,965.2

1,709.0

32.37

590.2

30.1

881.9

29.9%

22.4%

48.1%

1.42x

7.33x

29.77

585.4

98.6

809.8

31.6%

22.4%

50.4%

1.33x

5.86x

25.87

556.3

219.4

974.4

41.1%

34.8%

53.5%

1.85x

5.35x

5,224.9

5,051.5

4,929.2

(1) Includes liabilities related to assets held for sale.
(2) Net debt to total capital reduces funded debt by cash and cash equivalents.
(3) Adjusted debt includes capitalization of lease obligations based on six times net annual lease payments (gross lease payments net of expected

sub-lease income).

Empire’s ﬁ nancial condition continued to strengthen as evidenced by the improvement in interest coverage, a reduction in funded debt
to total capital and an increase in the book value per share.

Shareholders’ Equity

Book value per common share was $32.37 at May 5, 2007, compared to $29.77 at May 6, 2006 and $25.87 at May 7, 2005.
The increase in book value largely reﬂ ects the Company’s earnings growth.

The Company’s share capital on May 5, 2007 consisted of:

Preferred shares, par value $25 each, issuable in series
2002 Preferred shares par value $25 each, issuable in series
Non-Voting Class A shares, without par value
Class B common shares, without par value, voting

Authorized
Number of Shares

Issued and
Outstanding
Number of Shares

2,814,100
992,000,000
259,107,435
40,800,000

300,000
–
31,174,037
34,560,763

Total Non-Voting Class A and Class B common shares outstand-
ing at May 5, 2007 equalled 65,734,800, slightly lower than the
previous ﬁ scal year-end, May 6, 2006. There were 31,174,037
Non-Voting Class A and 34,560,763 Class B common shares
outstanding at May 5, 2007. Empire had no options outstanding
at May 5, 2007 compared to 27,674 options outstanding at
May 6, 2006. There were 27,674 options exercised during the

second quarter of ﬁ scal 2007. During the third quarter of ﬁ scal
2007 the Company purchased for cancellation 31,900 Series 2
Preferred shares for $0.8 million; no preferred shares were
purchased in ﬁ scal 2006. The Company plans to purchase for
cancellation an additional 100,000 Series 2 Preferred shares
by the end of calendar 2007.

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

9928_Back-Eng_Final v1a.indd 49
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7/26/07 8:00:48 AM
7/26/07
8:00:48 AM

Empire has a policy of repurchasing enough Non-Voting Class A
shares to offset the dilutive effect of shares issued to fulﬁ ll the
Company’s obligation under its stock option and share purchase
plans. During ﬁ scal 2007, Empire purchased 46,047 Non-Voting
Class A shares for cancellation versus 20,254 shares purchased
for cancellation in ﬁ scal 2006.

On July 26, 2006, Empire ﬁ led a Notice of Intention to make
a Normal Course Issuer Bid with the Toronto Stock Exchange
to purchase for cancellation up to 623,200 shares representing
approximately 2.0 percent of the issued and outstanding
Non-Voting Class A shares. The Board of Directors and senior
management of Empire are of the opinion that from time to time
the purchase of Class A Non-Voting shares at the prevailing
market prices is a worthwhile use of funds and in the best

Liabilities

interests of Empire and its shareholders. The Normal Course
Issuer Bid expires on July 27, 2007. The Company intends to
renew its Normal Course Issuer Bid.

As at June 28, 2007, the Company had total Non-Voting Class A
and Class B common shares outstanding of 31,174,037 and
34,560,763 respectively.

Dividends paid to Non-Voting Class A and Class B common
shareholders amounted to $39.5 million in ﬁ scal 2007
($0.60 per share) versus $36.7 million ($0.56 per share) in
ﬁ scal 2006. Subsequent to ﬁ scal year-end, on June 28, 2007,
the Company announced an increase in the dividend rate to
$0.66 per share annually.

Historically, Empire has ﬁ nanced a signiﬁ cant portion of its
assets through the use of bank indebtedness and long-term debt.
Longer-term assets are generally ﬁ nanced with ﬁ xed rate, long-
term debt, thereby reducing both interest rate and reﬁ nancing risk.
Total ﬁ xed rate, long-term debt (including the current portion of
long-term debt) at May 5, 2007 was $700.9 million, representing
76.8 percent of Empire’s total funded debt of $912.0 million.
Funded debt has increased $3.6 million from the previous ﬁ scal
year, May 6, 2006 ($908.4 million). The increase over ﬁ scal 2006
is primarily the result of the $125 million MTN issued by Sobeys
in the second quarter of ﬁ scal 2007, partially offset by reductions
in indebtedness matched to investment and other operations of

$78.4 million and real estate of $40.7 million. The reduction in
investment and other operations indebtedness is the result of
proceeds on investment sales being used to reduce the short-term
debt levels, while the real estate reduction relates to payments to
Crombie REIT in connection with commitments for capital
expenditures, rental income subsidies, interest rate subsidies and
tax subsidies as detailed in various commercial agreements
between ECL and Crombie REIT.

The majority of Empire’s funded debt is long-term in nature.
The long-term debt, excluding bank indebtedness, is segmented
by division as follows:

Long-term debt ($ in millions)

May 5, 2007

May 6, 2006

May 7, 2005

Food retailing

Real estate

Investments and other operations

Total

612.7

228.1

41.1

490.0

261.0

58.8

457.8

512.2

4.4

881.9

809.8

974.4

On October 6, 2006, Sobeys issued a $125.0 million Series E
MTN with a maturity date of October 6, 2036 (30 years) and a
coupon rate of 5.79 percent, the proceeds of which were used
for general corporate purposes.

Interest coverage in ﬁ scal 2007 was 7.3 times, an increase from
the 5.9 times reported for the ﬁ scal year ended May 6, 2006.
The increase in the interest coverage ratio relative to the prior
year is the result of lower interest expense.

Since last ﬁ scal year-end, the consolidated funded debt
to total capital ratio has decreased 1.7 percentage points
to 29.9 percent as higher debt levels were more than offset
by growth in total capital.

Empire and its subsidiaries have provided covenants to its
lenders in support of various ﬁ nancing facilities. All covenants
were complied with for the 52 weeks ended May 5, 2007 and
for ﬁ scal 2006.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

9928_Back-Eng_Final v1a.indd 50
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7/26/07 8:00:48 AM
7/26/07
8:00:48 AM

(cid:38)(cid:53) (cid:46) (cid:36)(cid:37) (cid:36)(cid:0)(cid:36)(cid:37) (cid:34)(cid:52)(cid:0)
(cid:52)(cid:47)(cid:0)(cid:35)(cid:33)(cid:48)(cid:41)(cid:52)(cid:33)(cid:44)
(cid:48)(cid:37) (cid:50)(cid:35)(cid:37) (cid:46)(cid:52)(cid:33)(cid:39) (cid:37)

(cid:41)(cid:46)(cid:52)(cid:37) (cid:50) (cid:37)(cid:51)(cid:52)
(cid:35)(cid:47)(cid:54)(cid:37) (cid:50)(cid:33)(cid:39) (cid:37)
(cid:52)(cid:41) (cid:45) (cid:37)(cid:51)

Empire’s ﬁ nancial condition
remained healthy in almost
every ﬁ nancial metric.

(cid:23)(cid:14)(cid:19)

(cid:20)(cid:24)

(cid:19)(cid:22)

(cid:18)(cid:20)

(cid:17)(cid:18)

(cid:18)(cid:25)(cid:14)(cid:25)

(cid:24)(cid:14)(cid:16)

(cid:22)(cid:14)(cid:16)

(cid:20)(cid:14)(cid:16)

(cid:18)(cid:14)(cid:16)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

Financial Instruments

Empire utilizes interest rate instruments from time to time to
prudently manage its exposure to interest rate volatility and also
to ﬁ x future long-term debt maturities that are expected to be
reﬁ nanced. At May 5, 2007, there were no interest rate hedges
in place by Empire directly or with any of its operating companies,
other than Empire Theatres. Empire Theatres entered into
two interest rate swaps on December 27, 2006, which ﬁ xed
the interest rate on $20.0 million of the ﬂ oating rate debt at
4.28 percent plus a stamping fee, for a ﬁ ve-year term. These
swaps ﬁ xed the interest rate on approximately 40 percent of
Empire Theatres’ total indebtedness, all of which is borrowed
at ﬂ oating rates.

To mitigate the currency risk associated with the Company’s
U.S. dollar investments, including its investment in Genstar U.S.,
Empire entered into and designated $31.0 million CAD dollar
forward currency contracts with staggered maturities to act
as a hedge against the effect of a stronger Canadian dollar

relative to the U.S. dollar. The fair value of these currency
forwards at May 5, 2007 was positive $0.9 million U.S.
Approximately 70 percent of the market value of U.S. dollar
common equities in the Empire investment portfolio was hedged
at an average foreign exchange rate of $1.1377. These forward
exchange contracts have variable maturities over the next year
and were wound-up subsequent to year-end.

The Company also uses forward contracts to ﬁ x the exchange
rate on some of its expected requirements for Euros and U.S.
dollars. Amounts received or paid related to instruments used
to hedge foreign exchange, including any gains and losses, are
recognized in the cost of purchases. The fair value of these
contracts at year-end was $0.9 million.

Empire and its subsidiaries utilize hedging instruments
as deemed appropriate to mitigate risk exposure, not for
speculative purposes.

9928_Back-Eng_Final v1a.indd 51
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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Liquidity and Capital Resources

Empire’s liquidity remained strong at May 5, 2007 as a result
of the following sources of liquidity:

Cash and cash equivalents on hand;
Unutilized bank credit facilities;
Availability of long-term debt ﬁ nancing;
Empire’s portfolio of liquid investments; and
Cash generated from operating activities.

At May 5, 2007, cash and cash equivalents equalled
$294.9 million versus $341.1 million at May 6, 2006.

At the end of ﬁ scal 2007, on a non-consolidated basis, Empire
maintained authorized bank lines for operating, general and
corporate purposes of $325.0 million, of which $6.5 million
or 2.0 percent was utilized. On a consolidated basis, Empire’s

authorized bank credit facilities exceeded borrowings
by $661.0 million at May 5, 2007, versus $626.4 million
at May 6, 2006.

Subsequent to ﬁ scal year-end, on June 15, 2007, Empire
purchased all of the outstanding common shares of Sobeys that
it did not then own for a total consideration of approximately
$1.06 billion. Please see the section titled “Subsequent Events”
for more details.

The Company anticipates that its capital resources will meet
its ﬁ nancial and liquidity requirements over the next year, including
capital expenditures, dividends and scheduled debt repayments.

The following table highlights major cash ﬂ ow components
for the 13 weeks and 52 weeks ended May 5, 2007 compared
to the 13 weeks and 52 weeks ended May 6, 2006.

MAJOR CASH FLOW COMPONENTS

($ in millions)

13 Weeks Ended
May 5, 2007

13 Weeks Ended
May 6, 2006

52 Weeks Ended
May 5, 2007

52 Weeks Ended
May 6, 2006

Earnings for common shareholders

Items not affecting cash

Net change in non-cash working capital

Cash ﬂ ows from operating activities

Cash ﬂ ows used in investing activities

Cash ﬂ ows used in ﬁ nancing activities

64.4

127.2

191.6

90.3

281.9

(154.8)

(35.6)

118.3

45.1

163.4

168.3

331.7

(19.9)

(136.3)

209.7

387.5

597.2

(147.8)

449.4

(435.4)

(60.2)

296.5

254.4

550.9

75.7

626.6

(472.9)

(94.3)

Increase (decrease) in cash and cash equivalents

91.5

175.5

(46.2)

59.4

Operating Activities

Fourth quarter cash ﬂ ows from operating activities equalled
$281.9 million compared to $331.7 million in the comparable
period last year. The decline of $49.8 million is largely attributed
to a decrease in the net change in non-cash working capital of
$78.0 million, and by a decrease in net earnings available for
common shareholders of $53.9 million as discussed, partially
offset by an increase in items not affecting cash of $82.1 million.
The decrease in earnings for common shareholders is primarily
the result of the $76.2 million gain last year associated with the
sale of properties to Crombie REIT.

In ﬁ scal 2007, operating activities generated cash ﬂ ow of
$449.4 million compared to $626.6 million last year. After
adjusting for the one-time gain on the sale of Wajax units of
$23.5 million and the gain on the sale of property to Crombie
REIT of $76.2 million in ﬁ scal 2006, earnings for common
shareholders increased $13.0 million and items not affecting
cash, primarily Sobeys’ rationalization costs and depreciation
and amortization, increased $33.4 million, partially offset by
reduced minority interest. Non-cash working capital decreased
$223.5 million, resulting in a $177.2 million decrease in cash
ﬂ ows from operating activities for the 52 weeks ended
May 5, 2007.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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The following tables present non-cash working capital changes on a quarter-over-quarter basis and on a year-over-year basis.

NON-CASH WORKING CAPITAL (QUARTER-OVER-QUARTER)

($ in millions)

Receivables

Inventories

Prepaid expenses

Accounts payable and accrued liabilities

Income taxes receivable (payable)

Impact of rationalization costs on working capital

Impact of business acquisitions on working capital

Other items

Total

May 5, 2007

Feb. 3, 2007

Q4 F2007 vs.
Q3 F2007
Increase
(Decrease) in
Cash Flows

Q4 F2006 vs.
Q3 F2006
Increase
(Decrease) in
Cash Flows

326.8

757.5

51.4

(1,260.3)

3.6

(0.6)

(1.6)

(8.1)

328.4

772.8

51.9

(1,176.2)

(17.9)

–

1.6

15.3

0.5

84.1

(21.5)

0.6

1.6

8.1

(0.5)

32.3

(0.9)

111.5

34.6

–

(8.7)

(131.3)

(41.0)

90.3

168.3

NON-CASH WORKING CAPITAL (YEAR-OVER-YEAR)

($ in millions)

Receivables

Inventories

Prepaid expenses

Accounts payable and accrued liabilities

Income taxes receivable (payable)

Impact of rationalization costs on working capital

Impact of business acquisitions on working capital

Other items

Total

The net increase in non-cash working capital of $90.3 million in
the fourth quarter was largely due to an $84.1 million increase
in payables and a $15.3 million decrease in inventories, partially
offset by decreased income taxes payable of $21.5 million
compared to the third quarter ended February 3, 2007. The
decrease in inventory is primarily related to lower inventory
requirements in the food division following the December selling
season. The decrease in taxes payable compared to the third
quarter reﬂ ects the timing of tax remittances, while the
increased accounts payable and accrued liabilities reﬂ ects
higher supplier payables and accrued liabilities as construction
activities have increased.

May 5, 2007

May 6, 2006

Year-Over-Year
Increase
(Decrease) in
Cash Flows

326.8

757.5

51.4

(1,260.3)

3.6

12.1

(12.9)

13.2

275.4

694.3

51.5

(1,241.8)

(35.8)

–

(51.4)

(63.2)

0.1

18.5

(39.4)

(12.1)

12.9

(13.2)

(108.6)

(256.4)

(147.8)

Year-over-year, non-cash working capital decreased $147.8 million.
Sobeys contributed $88.7 million to this decrease related to
increased receivables, inventory and associated payables
necessary to support Sobeys’ higher sales volume due to the
increased amount of square footage in its expanded store
network. The $147.8 million decrease was also signiﬁ cantly
impacted by tax deposits with CRA related to reassessments,
described in the section titled “Contingencies” in this MD&A.

9928_Back-Eng_Final v1a.indd 53
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8:00:49 AM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Investing Activities

Cash used in investing activities equalled $154.8 million in the
fourth quarter of ﬁ scal 2007 compared to $19.9 million in the
fourth quarter last year. The fourth quarter investing activities
last year beneﬁ ted from proceeds of $267.7 million related to
the sale of property to Crombie REIT, which was partially offset
by the purchase of Sobeys’ common shares in the amount of
$49.5 million and the purchase of portfolio investments totalling
$112.9 million. Investment in property, equipment and other
assets totalled $166.5 million in the fourth quarter versus
$137.3 million in the same quarter last year.

For the ﬁ scal year, cash used in investing activities decreased
$37.5 million to total $435.4 million. This was primarily the
result of: (i) a net decrease in investments of $317.4 million,
(ii) proceeds on sale of property to Crombie REIT in ﬁ scal 2006
of $267.7 million, (iii) reduced purchases of property plant and
equipment of $1.2 million and (iv) increased proceeds on the
sale of other property of $39.6 million.

Consolidated on-balance sheet purchases of property, equipment
and other assets totalled $545.2 million compared to $546.4 million
last ﬁ scal year. The table below presents on-balance sheet
capital expenditures over the last two years by division.

($ in millions)

May 5, 2007

May 6, 2006

Food retailing
Real estate
Investments and

482.8
16.2

421.3
67.9

other operations

46.2

57.2

Total

545.2

546.4

Food division company-wide capital investment which includes
on-balance sheet capital expenditures, all known capital
investments by franchise afﬁ liates and capital investment by
third-party landlords totalled $580.0 million in ﬁ scal 2007, an
increase of $20.0 million from $560.0 million recorded in the
previous year.

The table below outlines the number of stores Sobeys invested in during ﬁ scal 2007 compared to ﬁ scal 2006.

SOBEYS’ CORPORATE AND FRANCHISED STORE CONSTRUCTION ACTIVITY

# of Stores

Opened/Relocated

Acquired

Expanded

Rebannered/Redeveloped

Closed

13 Weeks Ended
May 5, 2007

13 Weeks Ended
May 6, 2006

52 Weeks Ended
May 5, 2007

52 Weeks Ended
May 6, 2006

–

(9)

–

(38)

–

(76)

(cid:38) (cid:47)(cid:47)(cid:36)(cid:0)(cid:50) (cid:37)(cid:52)(cid:33)(cid:41)(cid:44)(cid:41)(cid:46)(cid:39)
(cid:35)(cid:33)(cid:48)(cid:41)(cid:52)(cid:33)(cid:44)(cid:0)(cid:37)(cid:56)(cid:48)(cid:37) (cid:46) (cid:36)(cid:41)(cid:52)(cid:53) (cid:50) (cid:37)(cid:51)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:50) (cid:37)(cid:33)(cid:44)(cid:0)(cid:37)(cid:51)(cid:52)(cid:33)(cid:52)(cid:37)
(cid:35)(cid:33)(cid:48)(cid:41)(cid:52)(cid:33)(cid:44)(cid:0)(cid:37)(cid:56)(cid:48)(cid:37) (cid:46) (cid:36)(cid:41)(cid:52)(cid:53) (cid:50) (cid:37)(cid:51)
(cid:4)(cid:0)(cid:41) (cid:46)(cid:0)(cid:45) (cid:41) (cid:44)(cid:44)(cid:41)(cid:47)(cid:46)(cid:51)

(cid:20)(cid:24)(cid:18)(cid:14)(cid:24)

(cid:20)(cid:24)(cid:16)

(cid:19)(cid:22)(cid:16)

(cid:18)(cid:20)(cid:16)

(cid:17)(cid:18)(cid:16)

(cid:22)(cid:16)

(cid:20)(cid:21)

(cid:19)(cid:16)

(cid:17)(cid:21)

Empire’s capital expenditure
program is focused on developing
food-anchored shopping plazas
that build on the relationship
between the food retailing and
real estate businesses.

(cid:17)(cid:22)(cid:14)(cid:18)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

(cid:38)(cid:41)(cid:51)(cid:35)(cid:33)(cid:44)(cid:0)(cid:57)(cid:37)(cid:33)(cid:50)(cid:0)

(cid:16)(cid:19)(cid:0)

(cid:16)(cid:20)(cid:0)

(cid:16)(cid:21)(cid:0)

(cid:16)(cid:22)(cid:0)

(cid:16)(cid:23)

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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The following table shows Sobeys’ square footage changes
for the 13 weeks and 52 weeks ended May 5, 2007 by type.

SOBEYS’ SQUARE FOOTAGE CHANGES

Square Feet

Opened
Relocated
Acquired
Expanded
Rebannered/Redeveloped
Closed

13 Weeks Ended 52 Weeks Ended
May 5, 2007

May 5, 2007

58,278
142,368
–
3,480
–
(138,846)

464,166
548,372
437,362
120,895
(13,714)
(567,172)

65,280

989,909

At May 5, 2007, Sobeys’ square footage totalled 26.4 million
square feet, a 4.0 percent increase over May 6, 2006.

Sobeys continues to focus on growth through a combination
of new store openings, renovations, replacements and
enlargements and, where appropriate, through strategic

Financing Activities

Financing activities during the fourth quarter used $35.6 million
of cash compared to $136.3 million of cash used in the
comparable period of ﬁ scal 2006. Net repayments of funded
debt amounted to $19.0 million in the fourth quarter (repayments
of $40.9 million net of issuances of $21.9 million) compared to
net repayments of $126.5 million (repayments of $281.7 million
net of issuances of $155.2 million) in the fourth quarter of
ﬁ scal 2006. In the fourth quarter of ﬁ scal 2006 some of the
proceeds from the sales of property to Crombie REIT were used
to pay down bank indebtedness, and also to purchase common
shares of Sobeys.

Accounting Policy Changes

The following accounting standards have been implemented
during ﬁ scal 2007 and 2006:

ACCOUNTING FOR CONSIDERATION BY A

VENDOR TO A CUSTOMER (INCLUDING A RESELLER

OF THE VENDOR’S PRODUCTS) (“EIC-156”)

Issued in September 2005, EIC-156 addresses cash consider-
ation, including a sales incentive, given by a vendor to a
customer. This consideration is presumed to be a reduction of
the selling price of the vendor’s products and should therefore
be classiﬁ ed as a reduction of sales in the vendor’s income

acquisitions. It is expected that there will be an increase in
capital expenditures in ﬁ scal 2008. This will include a continued
focus on the retail store network along with increased spending
on landbank sites and logistics infrastructure, particularly the
new distribution centre in Vaughan, Ontario as previously
announced. During ﬁ scal 2008, Sobeys plans to open, expand,
or renovate approximately 150 corporate and franchised stores
across Canada, increasing square footage by approximately
four percent.

Capital expenditures for the real estate division equalled
$16.2 million in ﬁ scal 2007 ($67.9 million in ﬁ scal 2006) as a
result of ongoing property developments and land additions.
The capital expenditures are expected to accelerate in ﬁ scal
2008 as a result of ECL Developments’ focus on acquiring sites
for grocery-anchored shopping plaza development.

Capital spending by investments and other operations equalled
$46.2 million in ﬁ scal 2007 ($57.2 million in ﬁ scal 2006) as a
result of expenditures to invest in selected oil and gas properties
in Alberta through Kepec and to modernize and develop various
movie theatre locations.

For the ﬁ scal year, ﬁ nancing activities decreased cash by
$60.2 million compared to a $94.3 million decline last year.
Bank indebtedness decreased in ﬁ scal 2007 by $68.5 million
compared to a $110.6 million decrease last year. In ﬁ scal 2007,
proceeds from the sale of investments were used to reduce
bank indebtedness. The Company added net long-term debt of
$57.8 million in ﬁ scal 2007 versus $47.0 million added last year.

statement. These recommendations were effective for all interim
and annual ﬁ nancial statements for ﬁ scal years beginning on or
after January 1, 2006.

Prior to the implementation of EIC-156, Sobeys recorded
certain sales incentives paid to independent franchisees,
associates and independent accounts in cost of sales, selling
and administrative expenses. As reclassiﬁ cations, these changes
did not impact net earnings.

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

9928_Back-Eng_Final v1a.indd 55
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7/27/07 10:21:43 PM
7/27/07
10:21:43 PM

Effective in the ﬁ rst quarter of ﬁ scal 2007, sales ﬁ gures were retroactively restated as required by EIC-156. The following is a
summary of the restatement of selected consolidated ﬁ nancial statements for each of the eight most recently completed quarters.

Fiscal 2007

Fiscal 2006 (1)

Q4
(13 Weeks)
May 5,
2007

Q3
(13 weeks)
Feb. 3,
2007

Q2
(13 weeks)
Nov. 4,
2006

Q1
(13 weeks)
Aug. 5,
2006

Q4
(13 weeks)
May 6,
2006

Q3
(13 weeks)
Feb. 4,
2006

Q2
(13 weeks)
Nov. 5,
2005

Q1
(13 weeks)
Aug. 6,
2005

($ in millions)

Sales as previously reported

$ 3,384.8 $ 3,318.0 $ 3,388.6 $ 3,416.5 $ 3,263.4 $ 3,271.1 $ 3,295.9 $ 3,368.4

Sales after reclassiﬁ cation

$ 3,350.4 $ 3,281.9 $ 3,353.4 $ 3,381.0

$ 3,226.6 $ 3,235.2 $ 3,263.7 $ 3,338.1

Reclassiﬁ cation between

sales and cost of sales,

selling and administrative

expenses

34.4 $

36.1 $

35.2 $

35.5 $

36.8 $

35.9 $

32.2 $

30.3

ACCOUNTING BY A CUSTOMER (INCLUDING A

FUTURE ACCOUNTING STANDARDS

RESELLER) FOR CERTAIN CONSIDERATION RECEIVED

FINANCIAL INSTRUMENTS, HEDGING

FROM A VENDOR (“EIC–144”)

AND COMPREHENSIVE INCOME

During ﬁ scal 2006, the Company adopted the amendment to
EIC-144 issued in January 2005. The amendment requires
disclosure of the amount of vendor allowances that have been
recognized in income but for which the full requirements for
entitlement have not yet been met. Certain allowances from
vendors are contingent on the Company achieving minimum
purchase levels. In accordance with EIC-144, the Company
recognizes these allowances in income when it is probable
that the minimum purchase level will be met, and the amount
of allowance can be estimated. As of the ﬁ scal year ended
May 5, 2007, the Company has recognized $2.4 million
(May 6, 2006 – $3.5 million) of allowances in income where
it is probable that the minimum purchase level will be met and
the amount of allowance can be estimated.

ACCOUNTING FOR CONDITIONAL ASSET

RETIREMENT OBLIGATIONS (“EIC-159”)

This abstract provides guidance on when a conditional asset
retirement obligation should be recognized in accordance with
CICA Section 3110, “Asset Retirement Obligations.” The abstract
was applied on a retroactive basis effective in the fourth quarter
of ﬁ scal 2006. The abstract requires an entity to recognize
a conditional asset retirement obligation if the fair value of
the liability can be reasonably estimated. A conditional asset
retirement obligation refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may not be
within the control of the entity. The obligation to perform the
asset retirement activity is unconditional even though uncertainty
exists about the timing and/or method of settlement.

As part of Canada’s current move toward harmonization with
International Accounting Standards (currently expected to be
completed by 2011), the CICA issued three new accounting
standards that apply to the Company as of the ﬁ rst day of its
2008 ﬁ scal year.

CICA Section 1530, “Comprehensive Income”, introduces a
statement of comprehensive income which will be included in
interim and annual ﬁ nancial statements. Comprehensive income
is comprised of net income and other comprehensive income,
and represents the change in equity during a period from
transactions and other events with non-owner sources. It
includes all changes in equity during a period except those
resulting from investments by owners and distributions to
owners. Other comprehensive income will include unrealized
gains and losses on ﬁ nancial assets that are classiﬁ ed as
available-for-sale and changes in fair value of the effective
portion of cash ﬂ ow hedges.

CICA Section 3855, “Financial Instruments – Recognition and
Measurement”, requires that all ﬁ nancial assets be classiﬁ ed
as held for trading, available for sale, held-to-maturity or loans
and receivables and all ﬁ nancial liabilities as held for trading
or as other liabilities. All derivative instruments, including any
embedded derivatives that are required to be separated from
the host instruments, must be classiﬁ ed as held for trading.
Financial assets and liabilities classiﬁ ed as held for trading are
measured at fair value with gains and losses during the period
recognized in net income in the periods in which they arise.
Financial assets classiﬁ ed as available-for-sale are measured at
fair value with gains and losses recognized in other comprehensive
income until the underlying ﬁ nancial asset is derecognized or

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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becomes impaired. Held-to-maturity investments, loans and
receivables and other liabilities are measured at amortized cost.
Gains or losses on ﬁ nancial assets and liabilities carried at
amortized cost are recognized in net income when the ﬁ nancial
asset or ﬁ nancial liability is derecognized or impaired.

CICA Section 3865, “Hedges”, establishes standards for
when and how hedge accounting may be applied. The standard
requires that hedges be designated as either fair value hedges,
cash ﬂ ow hedges or hedges of a net investment in a self-
sustaining operation. For a fair value hedge, the gain or loss
on the hedging item is recognized in earnings for the period
together with the offsetting change on the hedged item
attributable to the hedged risk. For a cash ﬂ ow hedge, as well
as a hedge of a net investment in a self-sustaining foreign
operation, the effective portion of the unrealized gain or loss on
the hedging item is reported in other comprehensive income and
subsequently recognized in earnings when the hedged item
affects earnings.

These new standards are effective for ﬁ scal year ends beginning
after October 1, 2006. Therefore, the Company will adopt these
standards effective May 6, 2007. Prior periods presented will not
be restated; the opening balance of retained earnings, net of
income taxes, will be adjusted by the following:

The difference between the previous carrying amount and
the fair value of ﬁ nancial assets and liabilities designated
as held for trading under the fair value option;

The ineffective portion of the gain or loss on the hedging

items in designated cash ﬂ ow hedging relationships and the
total gain or loss on the hedging items in designated fair
value hedging relationships;

The difference between the carrying amount and the fair

value of derivatives or non-derivatives that no longer meet
the hedging criteria; and

The fair value of “embedded derivatives” (i.e. clauses in

contracts that are in essence derivatives).

The opening balance of “Accumulated other comprehensive
income”, net of income taxes, will be adjusted by the following:

The difference between the previous carrying amount and

the fair value of assets classiﬁ ed as available for sale;

The effective portion of the gain or loss on the hedging items
that are included in designated cash ﬂ ow hedging relation-
ships; and

The accumulated foreign currency translation adjustment on
the translation of certain subsidiaries historically accounted
for using the current rate method.

The Company has gone through a process of determining the
transitional impact on the Fiscal 2008 Consolidated Financial
Statements. While the future impact of the new standards on
the Company’s results of operations, ﬁ nancial position and cash
ﬂ ows cannot be determined at present, as they are partially
contingent upon future events, the new standards are not
expected to have a material impact on business strategy or
business risks.

CICA Section 3070 “Deferred Charges” has been withdrawn
with the introduction of CICA Sections 3855, 3865, and 1530
as discussed above.

CICA Section 1506 “Accounting Changes” requires that all
companies are permitted to change an accounting policy only
when it results in ﬁ nancial statements that provide reliable and
more relevant information or results from a requirement under
a primary source of Canadian GAAP. This guidance also
addresses how to account for a change in accounting policy,
estimate or corrections of errors, and establishes enhanced
disclosures about their effects on the ﬁ nancial statements.
These recommendations are effective for ﬁ scal years beginning
on or after January 1, 2007. The Company will implement these
recommendations as required on a prospective basis.

CICA Section 3031 “Inventories” which has replaced Section
3030 with the same title was approved in March 2007. The new
section establishes that inventories should be measured at the
lower of cost and net realizable value, with guidance on the
determination of cost. The ﬁ nal standard is effective for interim
and annual ﬁ nancial statements relating to ﬁ scal years
beginning on or after January 1, 2008 and are applicable for the
Company’s ﬁ rst quarter of ﬁ scal 2009. The Company is currently
evaluating the impact of this new standard.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Critical Accounting Estimates

The preparation of ﬁ nancial statements in accordance with
Canadian GAAP requires management to make estimates
and assumptions that affect the reported amounts and
disclosures made in the consolidated ﬁ nancial statements and
accompanying notes. Management continually evaluates the
estimates and assumptions it uses. Actual results could differ
from these estimates.

PENSION, POST-RETIREMENT AND

POST-EMPLOYMENT BENEFITS

Certain estimates and assumptions are used in actuarially
determining the Company’s deﬁ ned pension and employee
future beneﬁ ts obligation.

Signiﬁ cant assumptions used to calculate the pension and
employee future beneﬁ ts obligation 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 beneﬁ t
plans expense. The magnitude of any immediate impact,

however, is mitigated by the fact that net actuarial gains and
losses in excess of 10 percent of the greater of the accrued
beneﬁ t plan obligation and the market value of the beneﬁ t plan
assets are amortized on a straight-line basis over the average
remaining service period of the active employees. Changes in
ﬁ nancial market returns and interest rates could also result in
changes in funding requirements for the Company’s deﬁ ned
beneﬁ t 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 rates are determined on April 30 th every
year. For ﬁ scal 2007, the discount rate used for calculation of
pension and other beneﬁ t plan expense was 5.0 percent and
5.25 percent, respectively (ﬁ scal 2006 – 5.5 percent for both
pension and other beneﬁ t plans). The expected long-term rate of
return on plan assets for pension beneﬁ t plans for each of ﬁ scal
2007 was 7.0 percent (ﬁ scal 2006 – 7.0 percent). The expected
growth rate in health care costs was 10.0 percent for ﬁ scal
2007 (ﬁ scal 2006 – 10.0 percent). The cumulative growth rate
in health care costs to 2016 is expected to be 5.0 percent. The
expected future growth rate is evaluated on an annual basis.

The table below outlines the sensitivity of the 2007 key economic assumptions used in measuring the accrued beneﬁ t plan obligations
and related expenses of the Company’s pension and other beneﬁ t plans. The sensitivity of each key assumption has been calculated
independently. Changes to more than one assumption simultaneously may amplify or reduce the impact on the accrued beneﬁ ts
obligation or beneﬁ t plan expenses.

($ in millions)

Expected long-term rate of return on plan assets

Impact of: 1% increase

Impact of: 1% decrease

Discount rate

Impact of: 1% increase

Impact of: 1% decrease

Growth rate of health care costs (2)

Impact of: 1% increase

Impact of: 1% decrease

Pension Plans

Other Benefit Plans

Benefit
Obligations

Benefit
Cost (1)

Benefit
Obligations

Benefit
Cost (1)

7.0%

(2.8)

2.8

5.0%

0.4

(0.8)

5.0%

(32.6)

36.7

5.25%

(17.2)

20.7

10.0%

17.4

(13.6)

5.25%

(0.6)

0.7

10.0%

1.8

(1.3)

(1) Reﬂ ects the impact on the current service cost, the interest cost and the expected return on assets.
(2) Gradually decreasing to 5.0 percent in 2016 and remaining at that level thereafter.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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The Company has also assumed that a pending merger of
pension plans will be completed. If this merger is not completed,
the valuation of the transitional pension asset included in other
assets on the balance sheet may need to be re-evaluated.

GOODWILL AND LONG LIVED ASSETS

Goodwill is not amortized and is assessed for impairment at
the reporting unit level. This is done, at a minimum, annually.
Any potential goodwill impairment is identiﬁ ed 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 impair-
ment has been identiﬁ ed and must be quantiﬁ ed 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
ﬂ ows for these assets could materially change their estimated
fair values, possibly resulting in additional impairment. Changes
which may impact future cash ﬂ ows 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 ﬁ nancial 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

Controls and Procedures

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
judgement. The ﬁ nancial 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 ﬁ lings 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 may result in cash payments or receipts.

VALUATION OF INVENTORIES

Inventories are valued at the lower of cost and estimated net
realizable value. Signiﬁ cant estimation or judgment is required
in the determination of (i) inventories counted and adjusted to
cost and (ii) estimated inventory reductions due to spoilage,
shrinkage and allowances, occurring between the last physical
inventory count and the balance sheet date.

Inventory shrinkage, which is calculated as a percentage of the
related inventory, is evaluated throughout the year and provides
for estimated inventory shortages from the last physical count
to the balance sheet date. To the extent that actual losses
experienced vary from those estimated, both inventories and
operating income may be impacted.

Changes or differences in these estimates may result in
changes to inventories on the consolidated balance sheet
and a charge or credit to operating income in the consolidated
statement of earnings.

Empire’s management, with the participation of the Chief Executive Ofﬁ cer (“CEO”) and Chief Financial Ofﬁ cer (“CFO”), has reviewed
and evaluated the Corporation’s disclosure controls and procedures (as that term is deﬁ ned in Multi-National Instrument 52-109) as
of May 5, 2007. Based on that evaluation the CEO and CFO have concluded that the design and operation of the system of disclosure
controls and procedures was effective.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Internal Controls Over Financial Reporting

Empire’s management, with the participation of the CEO and
CFO, has reviewed and evaluated the design of the Corporation’s
internal controls over ﬁ nancial reporting (as that term is deﬁ ned
in MI 52-109) as of May 5, 2007. Internal controls over ﬁ nancial
reporting are designed to provide reasonable assurance
regarding the reliability of the Company’s ﬁ nancial reporting
and its preparation of ﬁ nancial statements for external purposes
in accordance with Canadian GAAP. All internal control
systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to
ﬁ nancial reporting.

As a result of this evaluation, management is in the process
of remediating several control deﬁ ciencies. However, these
deﬁ ciencies, even in aggregate, are not material in nature.
Therefore, Empire’s CEO and CFO have concluded that
the design of its internal controls over ﬁ nancial reporting
was effective.

In addition, management has evaluated whether there were
changes in our internal controls over ﬁ nancial reporting during
the interim period ended May 5, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal
controls over ﬁ nancial reporting. While there are no such
changes, we continue to undergo a system transition initiative
that will further enhance our internal controls.

Related Party Transactions

The Company rents premises from Crombie REIT. In addition,
Crombie REIT provides administrative and management services
to the Company. The rental payments are at fair value and the
charges incurred for administrative and management services
are on a cost recovery basis. The Company has non-interest
bearing notes payable to Crombie REIT in the amount of
$33.1 million.

Guarantees and Commitments

On October 2, 2006, the Company sold two commercial
properties to Crombie REIT, for cash proceeds of $32.4 million,
which was fair market value. Since the sale was to an equity
accounted investment, no gain was recorded on the sale.

The following illustrates the Company’s signiﬁ cant contractual obligations.

GROSS OBLIGATIONS EXCLUDING LEASE INCOME

($ in millions)

2008

2009

2010

2011

2012

Thereafter

Total

Long-term debt

Capital leases

Operating leases

Total contractual

72.3

10.2

249.1

74.2

33.8

38.8

27.1

579.2

825.4

7.7

230.6

7.2

219.0

6.5

207.2

5.6

12.5

49.7

195.8

1,392.1

2,493.8

obligations

331.6

312.5

260.0

252.5

228.5

$ 1,983.8

$ 3,368.9

OPERATING LEASES, NET OF EXPECTED LEASE INCOME RECEIVED BY THE COMPANY

($ in millions)

2008

2009

2010

2011

2012

Thereafter

Total

187.1

164.7

157.0

151.1

144.0

$ 1,073.5

$ 1,877.4

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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FRANCHISE AFFILIATES

OTHER

Sobeys has guaranteed certain bank loans contracted by
franchise afﬁ liates. As at May 5, 2007, these loans amounted
to approximately $2.9 million (May 6, 2006 – $1.3 million).

At May 5, 2007, the Company was contingently liable for
letters of credit issued in the aggregate amount of $48.5 million
(May 6, 2006 – $47.6 million).

Sobeys also has guaranteed certain equipment leases of its
franchise afﬁ liates. Under the terms of the guarantee should
a franchise afﬁ liate be unable to fulﬁ ll its lease obligation
Sobeys would be required to fund the difference of the lease
commitments up to a maximum of $100.0 million on a
cumulative basis. Sobeys approves each of the contracts.

The aggregate, annual, minimum rent payable under the
guaranteed equipment leases for ﬁ scal 2008 is approximately
$29.4 million. The guaranteed lease commitments over the
next ﬁ ve ﬁ scal years are:

Upon entering into the lease of its new Mississauga distribution
centre in March 2000, Sobeys guaranteed to the landlord the
performance by SERCA Foodservice Inc. of all of its obligations
under the lease. The remaining term of the lease is 13 years
with an aggregate obligation of $40.4 million (May 6, 2006 –
$43.3 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 harmless from any liability it may incur pursuant to
its guarantee.

($ in millions)

2008

2009

2010

2011

2012

Thereafter

Guaranteed
Lease Commitments

29.4

25.5

21.7

17.0

6.4

–

Designation for Eligible Dividends

The new dividend regime for the favourable tax treatment of
“eligible dividends” has been brought into effect by Bill C-28
which came into effect on February 21, 2007. Passage of this
bill has important implications for corporations paying eligible
dividends. To be eligible dividends, dividends paid:

On or after February 21, 2007, must be designated as such

at the time of payment;

Before February 21, 2007, can be designated as such up to

May 22, 2007.

Empire has, in accordance with the administrative position of the
Canada Revenue Agency, included the appropriate language on
its website to designate the dividends paid by Empire as eligible
dividends unless otherwise designated.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Contingencies

In the ordinary course of business, the Company is subject to
ongoing audits by tax authorities. While the Company believes
that its tax ﬁ ling positions are appropriate and supportable, from
time to time certain matters are reviewed and challenged by
tax authorities.

On June 21, 2005, Sobeys received a notice of reassessment
from CRA for the ﬁ scal years 1999 and 2000 related to the
Goods and Services Tax (“GST”). CRA asserts that Sobeys was
obliged to collect GST on sales of tobacco products to Status
Indians. The total tax, interest and penalties in the reassessment
were $13.6 million. Sobeys has reviewed this matter, has
received legal advice and believes it was not required to collect
GST. During the second quarter of ﬁ scal 2006, Sobeys ﬁ led a
Notice of Objection with CRA. Accordingly, Sobeys has not
recorded in its statement of earnings any of the tax, interest or
penalties set-out in the notice of reassessment. Sobeys has
deposited with CRA funds to cover the total tax, interest and
penalties in the reassessment and has recorded this amount
as a long-term receivable from CRA pending resolution of
the matter.

The Company and certain subsidiaries are presently under audit
by CRA and certain provincial taxing authorities for ﬁ scal years
2001 through 2006. The principal matters under audit are:

a) The tax treatment of gains realized on the sale of shares
in Hannaford Bros. Co. (“Hannaford”) in ﬁ scal 2001;

b) The tax treatment of gains realized on the sale of shares in
Delhaize America Inc. in ﬁ scal years 2001 and 2002; and
c) The taxation of income from certain of the Company’s real

estate investments for ﬁ scal years 2003 to 2006.

Reassessments have been received in respect of the sale
of shares of Hannaford. In the event that the tax authorities
are successful in respect of the Hannaford transaction,
which the Company believes is unlikely, the maximum potential
exposure in excess of provisions taken is approximately
$30 million.

The Company has appealed the reassessments in respect of the
sale of the Hannaford shares. The Company expects that it will
be substantially successful on its appeals of each of these
reassessments. The Company also believes that the ultimate
resolution of these matters will not, in any event, have a material
impact on earnings because it has made adequate provisions for
each of these matters. Should the ultimate outcome materially
differ from the provisions established, the effective tax rate and
earnings of the Company could be materially affected, negatively
or positively, in the period in which the matters are resolved.

In the third quarter of ﬁ scal 2007, Sobeys was named as a
defendant in a lawsuit brought by beneﬁ ciaries of a multi-employer
pension plan. The lawsuit alleges mismanagement of certain
pension plan investments by the trustees of the pension plan
and seeks, among other remedies, payment of $1 billion in
damages from the trustees and the contributing employers, of
which Sobeys is one of approximately 440. Sobeys played no
role in the management of the pension plan and intends to
contest the lawsuit. Accordingly, Sobeys has not recorded in its
statement of earnings any amount related to this lawsuit.

The Company entered into an agreement with Crombie REIT
to fund certain property redevelopments and originally issued
and recorded a note payable to Crombie REIT in the amount
of $39.6 million related thereto. The Company has agreed to pay
all additional costs and expenses required for the redevelopment
of those properties. In the event that the redevelopment costs
are less than $39.6 million, the savings will be paid to
the Company.

The Company has agreed to indemnify its directors and ofﬁ cers
and particular employees in accordance with the Company’s
policies. The Company maintains insurance policies that may
provide coverage against certain claims.

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.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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Risk Management

Through its operating companies and its investment portfolio,
Empire is exposed to a number of risks in the normal course
of business that have the potential to affect operating
performance. The Company has operating and risk management
strategies and insurance programs to help minimize these
operating risks.

During ﬁ scal 2006, Sobeys adopted an annual enterprise risk
management assessment which is overseen by the Company’s
Leadership Committee and reported to the Board and
Committees of the Board. The enterprise risk management
framework sets out principles and tools for identifying,
evaluating, prioritizing and managing risk effectively and
consistently across Sobeys.

Continued growth of rental income is dependent on renewing
expiring leases and ﬁ nding new tenants to ﬁ ll 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 ﬁ nancing to expand the real estate portfolio where
deemed prudent. During ﬁ scal 2007, our real estate operations
encountered generally positive economic conditions with
relatively stable occupancy levels and healthy rental renewal
rates. During ﬁ scal 2007, capitalization rates remained low which
impacted the number of potential properties that generate an
attractive return on investment.

COMPETITION

Empire’s food retail 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 proﬁ tably in its markets.

Sobeys maintains a strong national presence in the Canadian
retail food and food distribution industry through regionally
managed operations. The most signiﬁ cant risk to Sobeys is the
potential for reduced revenues and proﬁ t margins as a result of
increased competitive intensity. To mitigate this risk, Sobeys’
strategy is to be geographically diversiﬁ ed with the beneﬁ ts of
national scale, to be customer and market-driven, to be focused
on superior execution, and to have efﬁ cient, 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 afﬁ liated stores, and through servicing
the needs of thousands of independent, wholesale accounts.
Sobeys approaches the market with ﬁ ve distinct formats, sizes,
and banners, to meet anticipated needs of its customers in order
to enhance proﬁ tability by region and by target market.

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

FINANCIAL

The Company employs numerous professionally accredited
accountants throughout its ﬁ nance group.

Empire and its operating companies have adopted a number
of key ﬁ nancial policies to manage interest rate risk and foreign
exchange risk. Risks can also arise from changes in the rules
or standards governing accounting or ﬁ nancial reporting.

In the ordinary course of managing its debt, the Company
utilizes ﬁ nancial instruments from time to time to manage the
volatility of borrowing costs. Financial instruments are not used
for speculative purposes. The majority of Empire’s consolidated
debt is at ﬁ xed rates and accordingly there is limited exposure
to interest rate ﬂ uctuations.

INTEREST RATE RISK

Interest rate risk is the potential for ﬁ nancial loss arising
from changes in interest rates. The majority of the Company’s
long-term debt is generally at a ﬁ xed interest rate, and therefore,
the Company’s exposure to interest rate cash ﬂ ow risk during
the term of the debt is minimal.

INSURANCE

Empire and its subsidiaries are self-insured on a limited basis
with respect to certain operational risks and also purchase
excess insurance coverage from ﬁ nancially stable third-party
insurance companies. In addition to maintaining comprehensive
loss prevention programs, the Company maintains management
programs to mitigate the ﬁ nancial impact of operational risks.

HUMAN RESOURCES

Empire is exposed to the risk of labour disruption in its
operating companies. Labour disruptions pose a moderate
operational risk, as Sobeys operates an integrated network
of more than 21 distribution centres across the country for

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the food division. Sobeys has good relations with its employees
and unions and does not anticipate any material labour
disruptions in ﬁ scal 2008. However, Sobeys has stated that
it will accept the short-term costs of a labour disruption to
support a steadfast commitment to building and sustaining a
competitive cost structure for the long-term.

Effective leadership is very important to the growth and
continued success of the Company. The Company develops
and delivers training programs at all levels across its various
operating regions in order to improve employee knowledge
and to better serve its customers. The ability of the Company
to properly develop and retain its employees could affect
the Company’s future performance.

BUSINESS CONTINUITY

The Company is subject to unexpected events and natural
hazards which could cause sudden or complete cessation
of its day-to-day operations.

One such unexpected and natural hazard is the risk of a
pandemic. Sobeys is working with industry and government
sources to develop a pandemic preparedness plan.

Responsibility for business continuity planning has been
designated to Sobeys’ Leadership Committee.

ENVIRONMENTAL, HEALTH AND SAFETY

The Company is continually enhancing its programs in areas
of environmental, health and safety and is in compliance with
relevant legislation. Employee awareness and training programs
are conducted and environmental, health and safety risks are
reviewed on a regular basis.

Any environmental site remediation is completed using
appropriate, qualiﬁ ed internal and external resources and health
and safety issues are proactively dealt with. The Board of
Directors receives regular reports which review outstanding
matters, identify new legislation and outline new programs
being implemented across the Company to positively impact
the environment and employee health and safety. Existing
environmental protection regulatory requirements are not
expected to have a material ﬁ nancial or operational effect on
the capital expenditures, earnings or competitive position of
the Company during the current ﬁ scal year or in future years.

Sobeys has developed programs to promote a healthy and safe
workplace, as well as progressive employment policies focused
on the well-being of the thousands of employees who work
in its stores, distribution centres and ofﬁ ces. These policies
and programs are reviewed regularly by the Human Resources
Committee of the Board.

Each operating business conducts an ongoing, comprehensive
environmental 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.

FOOD SAFETY

Sobeys is subject to potential liabilities connected with its
business operations, including potential liabilities and expenses
associated with product defects, food safety and product
handling. Such liabilities may arise in relation to the storage,
distribution and display of products and, with respect to private
label products, in relation to the production, packaging and
design of products.

A large majority of Sobeys’ sales are generated from food
products and Sobeys could be vulnerable in the event of a
signiﬁ cant outbreak of food-borne illness or increased public
health concerns in connection with certain food products.
Such an event could materially affect ﬁ nancial performance.
Procedures are in place to manage food crises, should
they occur. These procedures identify risks, provide clear
communication to employees and consumers and ensure that
potentially harmful products are removed from inventory
immediately. Food safety related liability exposures are insured
by the Company’s insurance program. In addition, Sobeys has
food safety procedures and programs, which address safe food
handling and preparation standards. Sobeys employs best
practices for storage and distribution of food products.

TECHNOLOGY

The Company and each of its operating companies are
committed to improving their respective operating systems, tools
and procedures in order to become more efﬁ cient and effective.
The implementation of major information technology projects
carries with it various risks that must be mitigated by disciplined
change management and governance processes. Sobeys has a
business process optimization team staffed with knowledgeable
internal and external resources that is responsible for implementing
the various initiatives. Sobeys’ Board of Directors has also
created an oversight committee to ensure appropriate governance
of these change initiatives is in place and this committee
receives regular reports from the Company’s management.

REAL ESTATE

The Company utilizes a capital allocation process which is
focused on obtaining the most attractive real estate locations
for its retail grocery stores as well as for its commercial property
and residential development operations, with direct Company
ownership being an important, but not overriding, consideration.
Sobeys develops certain retail store locations on owned sites,
however, the majority of its store development is done in
conjunction with external developers. The availability of high
potential new store sites and/or the ability to expand existing

6 4

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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stores is therefore in large part contingent upon successful
negotiation of operating leases with these developers and
Sobeys’ ability to purchase these sites.

LEGAL, TAXATION AND ACCOUNTING

Changes to any of the various federal and provincial laws, rules
and regulations related to the Company’s business could have
a material impact on its ﬁ nancial results. Compliance with any
proposed changes could also result in signiﬁ cant cost to the
Company. Failure to fully comply with various laws, rules and
regulations may expose the Company to proceedings which may
materially affect its performance.

Similarly, income tax regulations and/or accounting pronounce-
ments may be changed in ways which could negatively affect
the Company. The Company mitigates the risk of not being in
compliance with the various laws, rules and regulations by
monitoring for newly adopted activities, improving technology
systems and controls, improving internal controls to detect
and prevent errors and overall, application of more scrutiny
to ensure compliance.

OPERATIONS

The success of Empire is closely tied to the performance of
Sobeys’ retail stores. Franchise afﬁ liates operate approximately
56 percent of these retail stores. Sobeys relies on the franchise
afﬁ liates and corporate store management to successfully
execute retail programs and strategies.

To maintain controls over Sobeys’ brands and the quality
and range of products and services offered at its stores, each
franchisee agrees to purchase merchandise from Sobeys.
In addition, each store agrees to comply with the policies,
marketing plans and operating standards prescribed by Sobeys.
These obligations are speciﬁ ed under franchise agreements
which expire at various times for individual franchisees. As well,
Sobeys maintains head lease control, or has long-term buying
agreements, to control the vast majority of its retail locations.

UTILITY AND FUEL PRICES

The Company is a signiﬁ cant consumer of electricity, other
utilities and fuel. Unanticipated cost increases in these items
could negatively affect the Company’s ﬁ nancial performance.
The Company has various consumption and procurement
programs in place to minimize utility risk.

FOREIGN OPERATIONS

Empire does not directly carry out foreign operations, however,
Sobeys and ECL do have certain foreign operations. Sobeys’
foreign operations are limited to a small number of produce
brokerage ofﬁ ces based in the United States.

ECL, through its interest in Genstar, has certain residential
land development in the California market but on a limited scale.
These foreign operations are relatively small and are not
considered material to Empire on a consolidated basis, as such,
the Company does not have any material risks associated with
foreign operations.

FOREIGN CURRENCY

The Company conducts the majority of its operating business
in Canadian dollars and its foreign exchange risk is limited to
currency ﬂ uctuations between the Canadian dollar, the Euro,
and the U.S. dollar. U.S. dollar purchases of product by the food
division represent approximately three percent of Sobeys’ total
annual purchases with Euro purchases limited to speciﬁ c
contracts for capital expenditures. Sobeys has processes in
place to use forward contracts with high quality counter-parties
to ﬁ x the exchange rate on some of its expected requirements
for Euros and U.S. dollars.

With respect to portfolio investments denominated in U.S.
dollar currency, to mitigate exposure to currency ﬂ uctuations,
the Company has hedged a portion of its foreign currency
exposure through the use of U.S. forward currency contracts.
At May 5, 2007 the ratio of U.S. dollar debt to the market value
of U.S. equities was approximately 70.0 percent.

SUPPLY CHAIN

ETHICAL BUSINESS CONDUCT

Sobeys is exposed to potential supply chain disruptions that
could result in shortages of merchandise in its retail store
network. Sobeys mitigates this risk through effective supplier
selection and procurement practices along with a reliance on
the efﬁ cient maintenance and evolution of its supply and
logistics chain to sustain and meet growth objectives.

SEASONALITY

The Company’s operations as they relate to food, speciﬁ cally
inventory levels, sales volume and product mix, are impacted
to some degree by certain holiday periods in the year.

Any failure of the Company to adhere to its policies, the law or
ethical business practices could signiﬁ cantly affect its reputation
and brands and could therefore, negatively impact the Company’s
ﬁ nancial performance. The Company’s framework for managing
ethical business conduct includes the adoption of a Code
of Business Conduct which employees and Directors of the
Company are required to acknowledge and agree to on a regular
basis and as part of an independent audit and security function,
maintenance of a whistle-blowing hotline.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

6 5

INFORMATION MANAGEMENT

The integrity, reliability and security of information in all its
forms are critical to the Company’s daily and strategic
operations. Inaccurate, incomplete or unavailable information
and/or inappropriate access to information could lead to
incorrect ﬁ nancial and/or operational reporting, poor decisions,
privacy breaches and/or inappropriate disclosure or leaks
of sensitive information.

Information management is identiﬁ ed as a risk in its own right,
separate from the technology risk. The Company recognizes
that information is a critical enterprise asset. Currently, the
information management risk is being managed at the Regional
and National levels through the development of policies and
procedures pertaining to security access, system development,
change management and problem and incident management.
With a view to enhancing and standardizing the controls to
manage the information management risk, the Company is

developing corporate operating policies which establish
minimum standards for the usage, security and appropriate
destruction of information. Furthermore, enterprise metrics are
being identiﬁ ed to assist in monitoring signiﬁ cant information
management risks.

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 ﬂ uctuations. Empire has a
disciplined, long-term approach to selecting quality investments
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 diversiﬁ cation and liquidity.

Subsequent Events

(a) On April 26, 2007, Empire and Sobeys jointly announced
that they had entered into an arrangement agreement (the
“Arrangement”) pursuant to which Empire would acquire all of the
outstanding common shares of Sobeys that it did not then own at
a price of $58.00 per share. The transaction valued the Sobeys
shares not then owned by Empire at approximately $1.06 billion.

The Arrangement required various approvals to comply with
applicable corporate and securities laws: The Sobeys share holders
approved the Arrangement at a special shareholders’ meeting
held on June 9, 2007 by the requisite majority; the Supreme
Court of Nova Scotia gave its sanction to the Arrangement on
June 13, 2007; the Arrangement became effective upon
registration of the ﬁ nal Court order with the Nova Scotia Registry
of Joint Stock Companies at the close of business on June 15,
2007, at which time the Company acquired all the outstanding
shares of Sobeys that it did not previously own. Subsequently,
the Sobeys common shares ceased trading on the Toronto
Stock Exchange, and were de-listed at the close of business on
June 18, 2007.

The acquisition was ﬁ nanced by funds from the sale of certain
portfolio investments for proceeds of $278 million and advances
of $784 million under new credit facilities (the “Credit Facilities”).
The Credit Facilities consist of a $950 million unsecured
revolving credit facility maturing on June 8, 2010 (subject to
annual extensions at the request of the Company) and a
$50 million unsecured non-revolving credit facility maturing
June 30, 2007. The Credit facilities are subject to certain ﬁ nancial
covenants. Interest on the debt varies based on the designation
of the loan (bankers’ acceptances (“BA”) rate loans, Canadian
prime rate loans, U.S. base rate loans or LIBOR loans), ﬂ uctuations

in the underlying rates, and in the case of BA rate loans or
LIBOR loans, the margin applicable to the ﬁ nancial covenants.

On June 18, 2007, Empire entered into two delayed ﬁ xed rate
interest swaps. The ﬁ rst swap in an amount of $200.0 million
is for a period of three years at a ﬁ xed interest rate of
4.998 percent. The second swap in an amount of $200.0 million
is for a period of ﬁ ve years at a ﬁ xed interest rate of 5.051 percent.
Both swaps became effective on July 23, 2007.

On June 27, 2007, pursuant to the terms of the Credit Facilities,
Empire and Sobeys ﬁ led notice with the lenders requesting the
establishment of a new $300.0 million ﬁ ve-year credit facility
in favour of Sobeys at the same interest rate as the Credit
Facilities. On July 23, 2007, Sobeys drew down $300.0 million
from the new credit facility, the proceeds of which were used to
pay a dividend to Empire. Empire used the proceeds from the
dividend to reduce its indebtedness under the Credit Facilities
and the Credit Facilities were reduced accordingly. On that date,
Empire transferred the second swap to Sobeys.

(b) On July 16, 2007, the Company announced that Sobeys and
Thrifty Foods (“Thrifty”) have entered into an agreement that will
see Sobeys purchase the British Columbia-based grocery retailer.
The transaction is based on an enterprise value of $260.0 million
and is subject to adjustments for, among other items, assumed
liabilities and working capital at closing. Thrifty’s business
includes 20 full-service supermarkets, a main distribution centre
and a wholesale division on Vancouver Island and the lower mainland
of British Columbia. The deal is expected to close during the
Company’s second quarter following receipt of regulatory approval
and completion of due diligence. The transaction is expected to
be ﬁ nanced with cash and available banking facilities.

MANAG E M E NT’S DISCUSSION AN D ANALYSIS

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Outlook

Management’s primary objective will continue to be 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 reﬂ ected in Empire’s share price.

Management is clearly focused on directing its energy and
capital towards growing the long-term sustainable value of
its food retail, real estate and related businesses. While the
Company’s core businesses are well established and proﬁ table
in their own right, the diversiﬁ cation they offer Empire by both
business line and by market area served is considered by
management to be an additional source of strength. 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.

FOOD RETAILING DIVISION

Sobeys intends to continue to invest in infrastructure and
productivity improvements in a manner consistent with its
expressed intention to build a healthy and sustainable retail
business and infrastructure for the long term.

In ﬁ scal 2008, Sobeys intends to advance its business process
and information systems installation plan for the Company by
focusing on the signiﬁ cant opportunity to upgrade information
processing and decision support capabilities and improve
efﬁ ciencies in its Western region. The system and processes
that are being implemented have been developed over several
years and are currently employed in Sobeys’ Ontario and
Atlantic regions. These initiatives will simplify, standardize and
streamline the “back shop”, in support of Sobeys’ food-focused
strategy. This move will leverage technology investments,
improve efﬁ ciency and lower costs over the long term.

The approach taken for this set of initiatives will be guided and
informed by Sobeys’ previous experience. The complexity of this
comprehensive set of initiatives, which impacts every aspect
of the business, requires that a signiﬁ cant investment be made
to manage the risk of implementation but also to prepare
employees to secure and sustain the beneﬁ ts of more efﬁ cient
processes and systems after they have been implemented. The
necessary re-training of thousands of employees in Ontario
continues and will continue through the ﬁ rst six months of ﬁ scal
2008. The implementation costs as well as training costs for
thousands of employees in the Western region will be ﬁ nalized
during ﬁ scal 2008.

REAL ESTATE DIVISION

Over the next year, Empire’s real estate management group
intends to continue its policy of maximizing and prudently
reinvesting its cash ﬂ ow 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 ﬁ scal 2008 as a result
of the diligence of the leasing team and general economic
conditions. Management looks forward to continuing its strong
relationship with Sobeys and to pursuing attractive opportunities
to jointly develop locations with Sobeys.

As previously advised, Empire is continuing to explore the potential
sale of some or all of the SLP commercial real estate portfolio.
Pursuant to a Non-Competition Agreement between Empire
and Crombie REIT, any property sold from SLP must ﬁ rst be
offered to Crombie REIT. Any potential transaction, if deemed
appropriate, would be subject to customary Board approval.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Non-GAAP Financial Measures

There are measures included in this MD&A that do not have a
standardized meaning under GAAP and therefore may not be
comparable to similarly titled measures presented by publicly
traded companies. The Company includes these measures
because it believes certain investors use these measures as a
means of assessing ﬁ nancial performance. Empire’s deﬁ nition
of the non-GAAP terms are as follows:

Operating income or EBIT is calculated as operating

earnings before minority interest, interest expense and
income taxes.

EBITDA is calculated as EBIT plus depreciation and

amortization.

Operating earnings is calculated as net earnings before

capital gains and other items.

Funds from operations are calculated as operating earnings

plus depreciation and amortization.

Interest coverage is calculated as operating income divided

by interest expense.

Funded debt is all interest bearing debt, which includes bank
loans, bankers’ acceptances, long-term debt and liabilities
relating to assets held for sale.

Net debt is calculated as funded debt less cash and

cash equivalents.

Total capital is calculated as funded debt plus

shareholders’ equity.

Adjusted debt is funded debt plus the capitalized value
of net operating lease payments, which is calculated as
six times net annual operating lease payments.

Company-wide capital investment includes on-balance sheet
capital expenditures, all known capital investments by franchise
afﬁ liates and capital investments by third-party landlords.

Same-store sales are sales from stores in the same

locations in both reporting periods.

The following table reconciles Empire’s funded debt and total capital to GAAP measures reported in the unaudited interim period
balance sheets as at May 5, 2007, May 6, 2006 and May 7, 2005, respectively:

($ in millions)

Bank indebtedness

Long-term debt due within one year

Liabilities relating to assets held for sale

Long-term debt

Funded debt

Total shareholders’ equity

Total capital

May 5, 2007

May 6, 2006

May 7, 2005

30.1

82.5

6.8

792.6

912.0

2,135.4

98.6

95.4

7.1

707.3

908.4

1,965.2

219.4

247.0

–

727.4

1,193.8

1,709.0

3,047.4

2,873.6

2,902.8

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

Dated: June 28, 2007
Stellarton, Nova Scotia, Canada

6 8

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Management’s Statement of
Responsibility for Financial Reporting

Preparation of the consolidated ﬁ nancial statements accompanying this annual report and the presentation of all other information
in the report is the responsibility of management. The consolidated ﬁ nancial statements have been prepared in accordance with
Canadian generally accepted accounting principles and reﬂ ect management’s best estimates and judgements. All other ﬁ nancial
information in the report is consistent with that contained in the consolidated ﬁ nancial statements.

Management of the Company has established and maintains a system of internal control that provides reasonable assurance as to the
integrity of the consolidated ﬁ nancial statements, the safeguarding of Company assets, and the prevention and detection of fraudulent
ﬁ nancial reporting.

The Board of Directors, through its Audit Committee, oversees management in carrying out its responsibilities for ﬁ nancial reporting
and systems of internal control. The Audit Committee, which is chaired by and composed solely of directors who are unrelated to, and
independent of, the Company, meet regularly with ﬁ nancial management and external auditors to satisfy itself as to reliability and
integrity of ﬁ nancial information and the safeguarding of assets. The Audit Committee reports its ﬁ ndings to the Board of Directors for
consideration in approving the annual consolidated ﬁ nancial statements to be issued to shareholders. The external auditors have full
and free access to the Audit Committee.

Paul D. Sobey
President and
Chief Executive Ofﬁ cer

June 28, 2007

Paul V. Beesley
Executive Vice-President,
Chief Financial Ofﬁ cer and Secretary

June 28, 2007

Auditors’ Report

To the Shareholders of Empire Company Limited

We have audited the consolidated balance sheets of Empire Company Limited as at May 5, 2007 and May 6, 2006, and the
consolidated statements of earnings, retained earnings, and cash ﬂ ows for the 52 week ﬁ scal years then ended. These consolidated
ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated ﬁ nancial 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 ﬁ nancial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated ﬁ nancial state-
ments. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by management, as well as
evaluating the overall consolidated ﬁ nancial statement presentation.

In our opinion, these consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of the Company
as at May 5, 2007 and May 6, 2006, and the results of its operations and its cash ﬂ ows for the ﬁ scal years then ended in accordance
with Canadian generally accepted accounting principles.

Chartered Accountants
New Glasgow, Canada

June 15, 2007, except for Note 27 which is as of July 23, 2007

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

6 9

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Consolidated Balance Sheets

May 5, 2007

May 6, 2006

294.9
326.8
3.6
757.5
51.4

1,434.2
189.7
142.8
2,302.9
24.1
344.6
786.6

341.1
275.4
–
694.3
51.5

1,362.3
359.9
157.5
2,143.6
23.1
273.3
731.8

5,224.9

5,051.5

30.1
1,260.3
–
40.4
82.5
6.8

1,420.1
792.6
36.9
14.0
102.1
133.6
590.2

3,089.5

196.1
0.3
1,939.6
(0.6)

2,135.4

98.6
1,241.8
35.8
46.1
95.4
7.1

1,524.8
707.3
20.8
18.9
97.3
131.8
585.4

3,086.3

195.1
0.2
1,771.0
(1.1)

1,965.2

5,224.9

5,051.5

(in millions)

ASSETS

Current
Cash and cash equivalents
Receivables

Income taxes receivable
Inventories

Prepaid expenses

Investments, at cost (quoted market value $283.1; 2006 - $398.9)
Investments, at equity (realizable value $434.0; 2006 - $425.3) (Note 5)
Property and equipment (Note 6)
Assets held for sale
Other assets (Note 7)
Goodwill

LIABILITIES

Current
Bank indebtedness (Note 8)
Accounts payable and accrued liabilities

Income taxes payable
Future income taxes (Note 14)
Long-term debt due within one year
Liabilities relating to assets held for sale

Long-term debt (Note 9)
Long-term lease obligation
Other liabilities (Note 10)
Employee future beneﬁ ts obligation (Note 21)
Future income taxes (Note 14)
Minority interest

SHAREHOLDERS’ EQUITY

Capital stock (Note 11)
Contributed surplus
Retained earnings
Cumulative translation adjustment

Contingent liabilities (Note 19)
Subsequent events (Note 27)

Approved on behalf of the Board

Director

See accompanying notes to the consolidated ﬁ nancial statements

CONSOLI DATE D FI NANCIAL STATE M E NTS

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Consolidated Statements of Retained Earnings

52 Weeks Ended
(in millions)

Balance, beginning of year
Net earnings
Adjustment to minority interest (Note 26)
Dividends
Preferred shares
Common shares
Premium on common shares purchased for cancellation (Note 11)

Balance, end of year

See accompanying notes to the consolidated ﬁ nancial statements

May 5, 2007

May 6, 2006

1,771.0
210.1
–

1,515.5
296.8
(3.6)

(0.4)
(39.5)
(1.6)

(0.3)
(36.7)
(0.7)

1,939.6

1,771.0

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Consolidated Statements of Earnings

52 Weeks Ended
(in millions except per share amounts)

Revenue
Operating expenses
Cost of sales, selling and administrative expenses
Depreciation and amortization

Investment income (Note 12)

Operating income

Interest expense

Long-term debt
Short-term debt

Capital gains and other items (Note 13)

Earnings before income taxes and minority interest

Income taxes (Note 14)
Current
Future

Earnings before minority interest
Minority interest

Net earnings

Earnings per share (Note 4)
Basic

Diluted

Weighted average number of common
shares outstanding, in millions
Basic

Diluted

See accompanying notes to the consolidated ﬁ nancial statements

May 5, 2007

May 6, 2006
Restated (Note 1)

$ 13,366.7

$ 13,063.6

12,724.0
243.9

12,378.2
225.8

398.8
41.5

440.3

54.1
6.0

60.1

380.2
7.1

387.3

104.8
15.4

120.2

267.1
57.0

210.1

3.20

3.19

65.6

65.7

459.6
31.8

491.4

75.6
8.2

83.8

407.6
109.4

517.0

141.8
11.3

153.1

363.9
67.1

296.8

4.53

4.51

65.5

65.7

CONSOLI DATE D FI NANCIAL STATE M E NTS

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Consolidated Statements of Cash Flows

52 Weeks Ended
(in millions)

OPERATING ACTIVITIES

Net earnings

Items not affecting cash (Note 15)

Preferred dividends

Net change in non-cash working capital

Cash ﬂ ows from operating activities

INVESTING ACTIVITIES

Net decrease (increase) in investments
Net proceeds from sale of Wajax Income Fund
Proceeds from sale of property to Crombie REIT
Purchase of shares in subsidiary, Sobeys Inc.
Purchase of property, equipment and other
Proceeds from sale of other property
Business acquisitions, net of cash acquired

Cash ﬂ ows used in investing activities

FINANCING ACTIVITIES

Decrease in bank indebtedness
Increase in construction loans
Issue of long-term debt

Repayment of long-term debt
Minority interest
Repurchase of preferred shares

Issue of Non-Voting Class A shares

Repurchase of Non-Voting Class A shares for cancellation
Common dividends

Cash ﬂ ows used in ﬁ nancing activities

(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 ﬁ nancial statements

May 5, 2007

May 6, 2006

210.1
387.5
(0.4)

597.2
(147.8)

449.4

185.4
–
–
(48.6)
(545.2)
68.9
(95.9)

(435.4)

(68.5)
1.2
159.6
(103.0)
(8.3)
(0.8)
1.0
(1.9)
(39.5)

(60.2)

(46.2)
341.1

296.8
254.4
(0.3)

550.9
75.7

626.6

(132.0)
50.8
267.7
(49.5)
(546.4)
29.3
(92.8)

(472.9)

(110.6)
–
409.5
(362.5)
6.0
–
0.8
(0.8)
(36.7)

(94.3)

59.4
281.7

294.9

341.1

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Notes to the Consolidated Financial Statements

May 5, 2007 (in millions except share capital)

Note 1 Summary of Signiﬁ cant Accounting Policies

BASIS OF CONSOLIDATION

ADOPTED DURING FISCAL 2006

Empire Company Limited (the “Company”) is a diversiﬁ ed
Canadian company whose key businesses include food retailing,
real estate and corporate investment activities. These consolidated
ﬁ nancial statements have been prepared in accordance with
Canadian generally accepted accounting principles (“GAAP”),
and include the accounts of the Company, all subsidiary
companies, including 72.1% owned Sobeys Inc. (“Sobeys”), and
certain enterprises considered variable interest entities (“VIEs”)
where control is achieved on a basis other than through
ownership of a majority of voting rights. Investments in which
the Company has signiﬁ cant inﬂ uence are accounted for by the
equity method. Investments in signiﬁ cant joint ventures are
consolidated on a proportionate basis.

The Company’s ﬁ scal year ends on the ﬁ rst Saturday in May.
As a result of this, the ﬁ scal year is usually 52 weeks but results
in a duration of 53 weeks every ﬁ ve to six years.

CHANGES IN ACCOUNTING POLICIES

ADOPTED DURING FISCAL 2007

Vendor consideration

During the ﬁ rst quarter of ﬁ scal 2007, the Company implemented,
on a retroactive basis, the Canadian Institute of Chartered
Accountants (“CICA”) Emerging Issues Committee (“EIC”)
Abstract 156, “Accounting by a Vendor for Consideration Given
to a Customer (including a Reseller of the Vendor’s Products)”.
This abstract requires a vendor to generally record cash
consideration given to a customer as a reduction to the selling
price of the vendor’s products or services and reﬂ ect it as
a reduction of revenue when recognized in the statement
of earnings.

Prior to the implementation of EIC-156, the Company recorded
certain sales incentives paid to independent franchisees,
associates and independent accounts in cost of sales, selling
and administrative expenses on the statement of earnings.
Accordingly, the implementation of EIC-156 on a retroactive
basis resulted in a reduction in both revenue and cost of
sales, selling and administrative expenses during ﬁ scal 2007
of $141.2 (2006 – $135.2). As reclassiﬁ cations, these changes
did not impact net earnings or earnings per share.

Vendor allowances

During the ﬁ rst quarter of ﬁ scal 2006, the Company adopted
the amendment to EIC-144 issued in January 2005. The
amendment requires disclosure of the amount of any vendor
allowances that have been recognized in income but for which
the full requirements for entitlement have not yet been met
(see Note 25).

FUTURE CHANGES IN ACCOUNTING POLICIES

Financial instruments

In January 2005, the CICA issued Section 3855 of the Handbook,
“Financial Instruments – Recognition and Measurement”, which
describes the standards for recognizing and measuring ﬁ nancial
assets, ﬁ nancial liabilities and derivatives. This Section requires
that all ﬁ nancial assets be measured at fair value, with some
exceptions for loans and investments that are classiﬁ ed as
held-to-maturity, and that all ﬁ nancial liabilities be measured
at fair value if they are derivatives or classiﬁ ed as held for
trading purposes. Other financial liabilities are measured at
their amortized cost, and all derivative financial instruments
are measured at fair value, even when they are part of a
hedging relationship.

The CICA has also reissued Handbook Section 3860 as
Section 3861, “Financial Instruments – Disclosure and
Presentation”, which establishes standards for presentation of
ﬁ nancial instruments and non-ﬁ nancial derivatives, and identiﬁ es
the information that should be disclosed about them.

These changes are applicable to the Company for the ﬁ rst
quarter of ﬁ scal 2008. The effect of adopting this Section is
not expected to be signiﬁ cant as investments, at a cost of $188.2,
have been sold in the ﬁ rst quarter of ﬁ scal 2008 (see Note 27).

Hedges

In January 2005, the CICA issued Section 3865 of the
Handbook, “Hedges”, which describes how and when hedge
accounting can be used.

Hedging is an activity used to change an exposure to one or
more risks by creating an offset between changes in the fair
value of a hedged item and a hedging item, changes in the
cash ﬂ ows attributable to a hedged item and a hedging item,
or changes resulting from a risk exposure related to a hedged
item and a hedging item.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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Under hedge accounting, all gains, losses, revenues and
expenses from the derivative and the item it hedges are
recorded in the statement of earnings or the other
comprehensive income statement in the same period.

These changes are applicable to the Company for the ﬁ rst
quarter of ﬁ scal 2008. The effect of adopting this section
is not expected to be signiﬁ cant.

Comprehensive income

In January 2005, the CICA issued Handbook Section 1530,
“Comprehensive Income”. The section describes how to report
and disclose comprehensive income and its components.
The main components of other comprehensive income include
unrealized gains and losses on available-for-sale investments,
and gains and losses on cash ﬂ ow hedges.

These changes are applicable to the Company for the ﬁ rst
quarter of ﬁ scal 2008. The effect of adopting these sections
is not expected to be signiﬁ cant.

Inventories

In March 2007, the CICA issued Handbook Section 3031,
“Inventories”, which has replaced existing Section 3030 with the
same title. The new Section establishes that inventories should
be measured at the lower of cost and net realizable value, with
guidance on the determination of cost. The new standard is
effective for interim and annual ﬁ nancial statements relating
to ﬁ scal years beginning on or after January 1, 2008 and is
therefore applicable for the Company’s ﬁ rst quarter of ﬁ scal
2009. The Company is currently evaluating the impact of this
new standard.

Accounting changes

In July 2006, the CICA issued Handbook Section 1506,
“Accounting Changes”, which describes the criteria for changing
accounting policies, along with the accounting and disclosure for
changes in accounting policies, changes in accounting estimates
and corrections of errors. These changes came into effect as
of January 1, 2007 and are applicable for the ﬁ rst quarter of
ﬁ scal 2008.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are deﬁ ned as cash, treasury bills
and guaranteed investments with a maturity less than 90 days
at date of acquisition.

INVENTORIES

Warehouse inventories are valued at the lower of cost and net
realizable value with cost being determined on a ﬁ rst-in, ﬁ rst-out
(“FIFO”) or a moving average cost basis. Retail inventories are
valued at the lower of cost and net realizable value. Cost is
determined using FIFO or the retail method. The retail method
uses the anticipated selling price less normal proﬁ t margins,
substantially on an average cost basis. Real estate inventory
of residential properties is carried at the lower of cost and net
realizable value.

PORTFOLIO INVESTMENTS

Portfolio investments are accounted for under the cost method.
Investment income is recognized on an accrual basis. Portfolio
investments are written down when the inherent loss is
determined to be other than temporary. Gains and losses
on sale of investments are recorded in earnings as realized.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at net book value, being
original cost less accumulated depreciation and any writedowns
for impairment.

Depreciation on real estate buildings is calculated using the
straight-line method with reference to each property’s book
value, its estimated useful life (not exceeding 40 years) and
its residual value. Deferred leasing costs are amortized over
the terms of the related leases.

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

3 – 20 years
10 – 40 years

improvements

Lesser of lease term and 7 – 10 years

Property and equipment is reviewed for impairment when events
or circumstances indicate that the carrying value exceeds the
sum of the undiscounted future cash ﬂ ows expected from use
and eventual disposal. Property and equipment is reviewed for
impairment annually. The carrying value of the property and
equipment is also reviewed whenever events or changes in
circumstances indicate that the carrying value of property and
equipment may not be recoverable. If property and equipment is
determined to be impaired, the impairment loss is measured at
the excess of the carrying value over fair value.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Assets to be disposed are classiﬁ ed as held for sale and are no
longer depreciated. Assets held for sale are recognized at the
lower of book value and fair value less cost of disposal.

The Company follows the full cost method of accounting for
its exploration and development of petroleum and natural gas
reserves. Costs initially capitalized are depleted and depreciated
using the unit-of-production method based on production
volumes, before royalties, in relation to the Company’s share
of estimated proved petroleum and natural gas reserves.

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.
Goodwill is not amortized but rather is subject to an annual
impairment review or more frequently if circumstances exist that
might indicate the value is impaired. Should the carrying value
exceed the fair value, the carrying value will be written down
to the fair value.

CAPITALIZATION OF COSTS

(a) Construction projects

Certain subsidiary companies and joint ventures capitalize
interest during the construction period until the project opening
date. The amount of interest capitalized to construction in
progress in the current year was $1.5 (2006 – $0.5).

(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 ﬁ scal 2006 or 2007.

land held for future development

A subsidiary company capitalizes interest, real estate taxes and
other expenses to the extent that they relate to properties for
immediate development. To the extent that the resulting carrying
value exceeds its fair market value, the excess is charged
against income. The carrying costs on the balance of properties
held for future development are capitalized as incurred. An amount
of $0.7 (2006 – $0.2) was capitalized during the year.

LEASES

Leases meeting certain criteria are accounted for as capital
leases. The imputed interest is charged against income. If the
lease contains a term that allows ownership to pass to the
Company or there is a bargain purchase option the capitalized
value is depreciated over the estimated useful life of the related
asset. Otherwise the capitalized value is depreciated on a
straight-line basis over the lesser of the lease term and its
estimated useful life. Capital lease obligations are reduced by
rental payments net of imputed interest. All other leases are
accounted for as operating leases.

Lease allowances and incentives received are recorded as a
deferred credit and amortized as a reduction of lease expense
over the terms of the lease. Real estate lease expense is
amortized straight-line over the entire term of the lease
including free rent periods related to store ﬁ xturing. A store
ﬁ xturing period varies by store but is generally considered
to be one month prior to the store opening.

INTANGIBLES

Intangibles arise on the purchase of a new business, existing
franchises and the acquisition of pharmacy prescription ﬁ les.
Amortization on limited life intangibles is recorded on a straight-
line basis over 10-15 years. Intangible assets with indeﬁ nite
useful lives are not amortized but rather are subject to an annual
impairment review or more frequently if circumstances exist that
might indicate their value is impaired. Should the carrying value
exceed the fair value of intangible assets (e.g. trademarks), the
carrying value will be written down to the fair value.

DEFERRED COSTS

Deferred costs consist of deferred store marketing, deferred
ﬁ nancing and deferred purchase agreements and are included
in other assets.

Deferred costs are amortized on a straight-line basis as follows:

Deferred store marketing – up to 7 years
Deferred ﬁ nancing – over the term of the debt
Deferred purchase agreements – over the term of the

purchase agreement

ASSETS HELD FOR SALE

Certain land and buildings have been listed for sale and
reclassiﬁ ed as “Assets held for sale” in accordance with CICA
Handbook Section 3475, “Disposal of Long-lived Assets and
Discontinued Operations”. 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
held for sale are valued at the lower of book value and fair value
less cost of disposal.

STORE OPENING EXPENSES

Opening expenses of new stores and store conversions
are written off on a straight-line basis during the ﬁ rst year
of operation.

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

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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to calculate future tax assets and liabilities. The future tax
assets and liabilities have been measured using substantively
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, rental revenue arising from the sale of subsidiaries
and gains on sale leaseback transactions. Deferred revenue is
being taken into income on a straight-line basis over the term of
the related agreements.

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 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 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 exchange rate for the period.

REVENUE RECOGNITION

Food sales are recognized at the point-of-sale. Sales include
revenues from customers through corporate stores operated
by the Company and consolidated VIEs, and revenue from sales
to non-VIE franchised stores, afﬁ liated stores and independent
accounts. Revenue received from non-VIE franchised stores,
afﬁ liated stores and independent accounts is mainly derived from
the sale of product. The Company also collects franchise fees
under two types of arrangements. Franchise fees contractually
due based on the dollar value of product shipped are recorded
as revenue when the product is shipped. Franchise fees
contractually due based on the franchisee’s retail sales
are recorded as revenue weekly upon invoicing based on the
franchisee’s retail sales. Real Estate revenue is recognized in
accordance with the lease agreements with tenants on a
straight-line basis.

FINANCIAL INSTRUMENTS

The Company uses various derivative ﬁ nancial instruments to
hedge its exposure to foreign exchange and interest rate risks.
If documentation and effectiveness requirements are met, gains
and losses on these instruments are deferred and recognized in
earnings in the same period the related hedged risk is realized
(settlement accounting). If effectiveness requirements are not met,
gains and losses on these instruments are recognized in earnings
as the fair value of the instrument changes. Amounts received
or paid, including any gains and losses on instruments used to
hedge these risks are recognized over the term of the hedged
item. The derivatives are not recorded on the balance sheet.

PENSION BENEFIT PLANS AND OTHER BENEFIT PLANS

The cost of the Company’s pension beneﬁ ts for deﬁ ned
contribution plans are expensed at the time active employees
are compensated. The cost of deﬁ ned beneﬁ t pension plans
and other beneﬁ t plans is accrued based on actuarial valuations,
which are determined using the projected beneﬁ t method
pro-rated on service and management’s best estimate of
the expected long-term rate of return on plan assets, salary
escalation, retirement ages and expected growth rate of health
care costs.

Current market values are used to value beneﬁ t plan assets.
The obligation related to employee future beneﬁ ts is measured
using 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 impact of changes in plan amendments is amortized on a
straight-line basis over the expected average remaining service
life (“EARSL”) of active members. For pension beneﬁ t plans, the
actuarial gains and losses and the impact of changes in the
actuarial basis in excess of 10% of the greater of the projected
beneﬁ t obligation and the market value of assets are amortized
on a straight-line basis over the EARSL of the active members.
For the Company’s Supplemental Executive Retirement Plan,
the impact of changes in the plan provisions are amortized over
ﬁ ve years. For other beneﬁ t plans, actuarial gains and losses are
recognized immediately.

USE OF ESTIMATES

The preparation of consolidated ﬁ nancial statements in
conformity with Canadian generally accepted accounting
principles, requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
ﬁ nancial statements and accompanying notes. Certain of these
estimates require subjective or complex judgements by
management that may be uncertain. Some of these items
include the valuation of inventories, goodwill, employee future
beneﬁ ts and income taxes. Changes to these estimates could
materially impact the ﬁ nancial statements. These estimates
are based on management’s best knowledge of current events
and actions that the Company may undertake in the future.
Actual results could differ materially from these estimates.

EARNINGS PER SHARE

Earnings per share is calculated by dividing the earnings
available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted
earnings per share is calculated using the treasury stock method.

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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Note 2 Sale of Wajax Income Fund

On June 6, 2005, the shareholders of Wajax Limited, an equity
accounted investment, approved a Plan of Arrangement to
convert into Wajax Income Fund (“Wajax”). The Company owned
approximately 45% of the outstanding shares of Wajax Limited
(on a fully diluted basis). The Plan of Arrangement was
completed on June 15, 2005 with the Company receiving
one unit of Wajax for each Wajax Limited share held. Through a
secondary offering on June 21, 2005, the Company sold a total
of 2.5 million Wajax units for net proceeds of approximately
$44.0. On June 29, 2005, the underwriter exercised their over-
allotment option to purchase 375,000 Wajax units at $19.25 per

unit, resulting in additional net proceeds of $6.8. This reduced
the Company’s ownership percentage to approximately 27.6%.
Details of the sale are as follows:

Net proceeds
Book value

Equity share of income fund
conversion-related items

Capital gain before income taxes
Income taxes

Net capital gain

50.8
21.1

29.7

4.1

25.6
2.1

23.5

Note 3 Sale of Property to Crombie REIT

On March 23, 2006, the Company’s real estate segment sold 44 commercial properties to Crombie Real Estate Investment Trust
(“Crombie REIT”). Included in the proceeds is an interest in Crombie REIT giving the Company effective ownership of 48.3%.
The Company’s investment in Crombie REIT is accounted using the equity method. Details of the sale are as follows:

Proceeds
Cash

Investment in Crombie REIT

Book value of assets sold and liabilities assumed
Property and equipment
Net working capital

Employee future beneﬁ ts obligation
Future income taxes
Long-term debt

Early extinguishment of long-term debt
Share of issue costs
Other costs

Capital gain before deferral and income taxes
Deferral of capital gain related to retained interest

Capital gain before income taxes
Income taxes

Net capital gain

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

267.7
200.8

468.5

593.2
(1.0)
(2.2)
(44.7)
(312.9)

232.4
25.4
9.4
17.1

284.3

184.2
(88.2)

96.0
19.8

76.2

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Note 4 Earnings Per Share

Earnings per share amounts are calculated on the weighted average number of shares outstanding after providing for preferred share
dividends accrued to the balance sheet date. Diluted earnings per share is calculated on the assumption that all the outstanding stock
options were exercised and share purchase loans were repaid at the beginning of the year.

Earnings applicable to common shares is comprised of the following:

Operating earnings
Capital gains and other items, net of tax of $1.4 (2006 – $14.4)

Net earnings
Preferred share dividends

Earnings applicable to common shares

Earnings per share is comprised of the following:

Operating earnings
Capital gains and other items

Basic earnings per share

Operating earnings
Capital gains and other items

Diluted earnings per share

Note 5 Investments, at Equity

Wajax Income Fund (27.6% interest)
Crombie REIT (48.1% interest)
U.S. residential real estate partnerships

2007

204.4
5.7

210.1
(0.4)

2006

202.0
94.8

296.8
(0.3)

209.7

296.5

2007

3.11
0.09

3.20

3.10
0.09

3.19

2006

3.08
1.45

4.53

3.07
1.44

4.51

May 5, 2007

May 6, 2006

32.2
109.3
1.3

142.8

33.1
112.8
11.6

157.5

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

The Company’s carrying value of its investment in Wajax Income Fund is as follows:

Balance, beginning of year
Equity earnings
Distributions received
Book value of equity interest sold

Balance, end of year

The Company’s carrying value of its investment in Crombie REIT is as follows:

Balance, beginning of year
Interest received in Crombie REIT
Less deferral of gain due to retained interest
Equity earnings
Distributions received

Balance, end of year

Note 6 Property and Equipment

Food segment
Land
Land held for future development

Buildings

Equipment
Leasehold improvements
Assets under capital leases

Real estate and other segments

Land
Land held for future development

Buildings

Equipment
Leasehold improvements

Petroleum and natural gas costs

May 5, 2007

May 6, 2006

33.1
20.6
(21.5)
–

32.2

55.1
16.3
(13.1)
(25.2)

33.1

May 5, 2007

May 6, 2006

112.8
–

11.6
(15.1)

–
200.8
(88.2)
0.2
–

109.3

112.8

Cost

Accumulated
Depreciation

May 5, 2007
Net
Book Value

152.8
129.0
782.5
1,819.5
397.9
83.1

3,364.8

78.8
26.8
399.1
72.7
52.4
78.7

708.5

–
–
161.7
1,170.1
243.9
34.5

1,610.2

–
–
102.2
32.6
12.1
13.3

160.2

152.8
129.0
620.8
649.4
154.0
48.6

1,754.6

78.8
26.8
296.9
40.1
40.3
65.4

548.3

Total

4,073.3

1,770.4

2,302.9

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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Food segment
Land
Land held for future development

Buildings

Equipment
Leasehold improvements
Assets under capital leases

Real estate and other segments

Land
Land held for future development

Buildings*
Equipment
Leasehold improvements

Petroleum and natural gas costs

Cost

Accumulated
Depreciation

May 6, 2006
Net
Book Value

138.6
89.5
681.1
1,707.4
361.0
78.9

3,056.5

79.6
23.6
385.9
69.4
51.6
54.0

664.1

–
–
135.7
1,062.7
218.2
27.7

1,444.3

–
–
94.1
26.9
8.3
3.4

132.7

138.6
89.5
545.4
644.7
142.8
51.2

1,612.2

79.6
23.6
291.8
42.5
43.3
50.6

531.4

Total

3,720.6

1,577.0

2,143.6

* During the year ended May 6, 2006, based on revised estimates of holding periods, it was determined that the carrying value of ﬁ ve commercial

properties was impaired. Accordingly, the Company recorded an impairment charge of $27.4 to reduce their carrying value to estimated fair value using
external appraisals.

Note 7 Other Assets

Loans and mortgages receivable
Deferred costs
Accrued beneﬁ t asset (Note 21)
Restricted cash
Other
Intangibles (less accumulated amortization of $11.7; 2006 – $7.6)

May 5, 2007

May 6, 2006

65.1
144.3
42.7
5.7
48.6
38.2

344.6

68.4
101.4
36.2
14.7
25.4
27.2

273.3

LOANS RECEIVABLE

Loans receivable represent long-term ﬁ nancing to certain retail associates. These loans are primarily secured by inventory, ﬁ xtures
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 $14.5 (2006 – $15.9).

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Note 8 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, ﬁ rst ﬂ oating charge debentures on assets and the
assignment of proceeds of ﬁ re insurance policies.

Note 9 Long-term Debt

First mortgage loans, average interest rate 9.3%,

due 2008-2026

Medium Term Notes, interest Rate 5.8%,

due October 6, 2036

Medium Term Notes, interest rate 6.1%,

due October 29, 2035

Medium Term Notes, interest rate 7.2%,

due February 26, 2018

Debentures, average interest rate 10.4%, due 2008-2016
Notes payable and other debt primarily

at interest rates ﬂ uctuating with the prime rate

Capital lease obligations, net of imputed interest

Less amount due within one year

Under the terms of a credit agreement entered into between the
Company and a banking syndicate, a revolving term credit facility
of $300.0 was established. During the third quarter of ﬁ scal
2006, the expiry date of the revolving unsecured credit facility
was extended from June 22, 2006 to December 20, 2010.
All indebtedness and obligations under the agreement shall be
payable in full on December 20, 2010. Interest payable on this
facility ﬂ uctuates with changes in the prime interest rate.

May 5, 2007

May 6, 2006

Food
Segment

Real Estate
and other
Segments

Total

25.2

130.4

155.6

167.2

125.0

175.0

100.0
58.1

79.7
49.7

612.7
30.0

–

–
30.7

101.3
–

262.4
52.5

582.7

209.9

125.0

175.0

100.0
88.8

181.0
49.7

875.1
82.5

792.6

–

175.0

100.0
95.7

215.6
49.2

802.7
95.4

707.3

Long-term debt is secured by land and buildings, speciﬁ c
charges on certain assets and additional security as
described in Note 8. Capital lease obligations are secured
by the related capital lease asset.

On October 21, 2005, the Company ﬁ led a short form base
shelf prospectus providing for the issuance of up to $500.0
of unsecured Medium Term Notes. On October 28, 2005, the

Company issued new Medium Term Notes of $175.0, maturing
on October 29, 2035. On November 1, 2005, Medium Term
Notes of $175.0 were repaid according to the terms of the
agreement. On October 6, 2006, the Company issued new
Medium Term Notes of $125.0, maturing on October 6, 2036.

During the year, the Company increased its capital lease
obligation by $5.6 (2006 – $29.0) with a similar increase
in assets under capital lease.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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7/27/07 10:28:12 PM
7/27/07
10:28:12 PM

Debt retirement payments and capital lease obligations in each
of the next ﬁ ve ﬁ scal years are:

2008
2009
2010
2011
2012
Thereafter

Long Term Debt

Capital Leases

$
$
$
$
$
$

72.3
74.2
33.8
38.8
27.1
579.2

$
$
$
$
$
$

10.2
7.7
7.2
6.5
5.6
12.5

OPERATING LEASES

The net aggregate, annual, minimum rent payable under
operating leases for ﬁ scal 2008 is approximately $178.1
($249.1 gross less expected sub-lease income of $71.0).
The commitments over the next ﬁ ve ﬁ scal years are:

2008
2009
2010
2011
2012
Thereafter

Net Lease
Obligation

Gross lease
Obligation

$
$
$
$
$
$

178.1
164.7
157.0
151.1
144.0
1,073.5

$
$
$
$
$
$

249.1
230.6
219.0
207.2
195.8
1,392.1

Note 10 Other Liabilities

Deferred revenue
Deferred hedge gain
Above market leases from acquisitions
Asset retirement obligations

Note 11 Capital Stock

May 5, 2007

May 6, 2006

6.5
2.5
4.4
0.6

14.0

3.3
10.2
5.0
0.4

18.9

AUTHORIZED

Preferred shares, par value of $25 each, issuable in series. Series 2 cumulative, redeemable, rate of 75% of prime.
2002 Preferred Shares, par value of $25 each, issuable in series.
Non-Voting Class A shares, without par value.
Class B common shares, without par value, voting.

2,814,100
992,000,000
259,107,435
40,800,000

No. of Shares

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

ISSUED AND OUTSTANDING:

Preferred shares, Series 2
Non-Voting Class A
Class B common

Loans receivable from ofﬁ cers and

employees under share purchase plan

May 5, 2007

May 6, 2006

No. of Shares

300,000
31,174,037
34,560,763

7.5
184.5
7.7

199.7

(3.6)

331,900
31,175,047
34,560,763

8.3
183.7
7.7

199.7

(4.6)

196.1

195.1

During the year, under a normal course issuer bid which expires
on July 27, 2007, the Company purchased for cancellation
46,047 (2006 – 20,254) Non-Voting Class A shares. The
purchase price was $1.9 of which $1.6 of the purchase price
(representing the premium on common shares purchased for
cancellation) was charged to retained earnings.

During the year, the Company purchased for cancellation
31,900 Series 2 preferred shares for $0.8.

During the year, 27,674 options were exercised for $0.2. Options
allowed holders to purchase Non-Voting Class A shares at
$6.555 per share. There are no longer any options outstanding.

During the year, 18,373 (2006 – 20,254) Non-Voting Class A
shares were issued under the Company’s share purchase plan
to certain ofﬁ cers and employees for $0.8 (2006 – $0.8), which
was based on the average trading price of the Non-Voting Class
A shares on the Toronto Stock Exchange for the ﬁ ve previous
trading days.

Note 12 Investment Income

Loans receivable from ofﬁ cers and employees of $3.6 (2006 –
$4.6) under the Company’s share purchase plan are classiﬁ ed
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 125,265
(2006 – 229,484) Non-Voting Class A shares. Market value of
the shares at May 5, 2007 was $5.3 (May 6, 2006 – $9.9).

Under certain circumstances, where an offer (as deﬁ ned 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, Nil (2006 – 24,462) Class B common
shares were exchanged for Nil (2006 – 24,462) Non-Voting
Class A shares.

Dividend and interest income
Share of earnings of companies accounted using the equity method

2007

9.7
31.8

41.5

2006

8.3
23.5

31.8

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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7/27/07 10:31:23 PM
7/27/07
10:31:23 PM

Note 13 Capital Gains and Other Items

Gain on sale of investments
Other items
Gain on sale of Wajax Income Fund (Note 2)
Gain on sale of property to Crombie REIT (Note 3)
Reduction of book value of real estate assets (Note 6)

Note 14 Income Taxes

2007

6.2
0.9
–
–
–

7.1

2006

11.6
3.4
25.6
96.2
(27.4)

109.4

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 32.5% (2006 – 34.8%)

123.0

141.8

2007

2006

Increase (decrease) in income taxes resulting from
Rate changes effect on timing differences
Non-taxable dividends and equity earnings

Large corporation tax

Capital gains and other items

May 5, 2007 income tax expense attributable to net earnings consists of:

Operations
Capital gains and other items

May 6, 2006 income tax expense attributable to net earnings consists of:

Operations
Capital gains and other items

(2.0)
(2.2)
–

118.8
1.4

120.2

Current

Future

104.9
(0.1)

104.8

13.9
1.5

15.4

Current

Future

127.7
14.1

141.8

11.0
0.3

11.3

(1.6)
(3.5)
2.0

138.7
14.4

153.1

Total

118.8
1.4

120.2

Total

138.7
14.4

153.1

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7/26/07 8:00:58 AM
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8:00:58 AM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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

Property and equipment
Investments
Employee future beneﬁ ts obligation
Restructuring provisions
Pension contributions
Deferred costs
Deferred credits
Goodwill and intangibles
Other

Future income taxes – current liabilities
Future income taxes – non-current liabilities

Note 15 Supplementary Cash Flow Information

a) Items not affecting cash
Depreciation and amortization

Future income taxes

Amortization of deferred items

Equity in earnings of other companies, net of dividends received

Minority interest

Stock-based compensation
Long-term lease obligation
Employee future beneﬁ ts obligation

Rationalization costs (Note 24)
Gain on sale of Wajax Income Fund, net of tax of $2.1
Gain on sale of property to Crombie REIT, net of tax of $19.8
Reduction of book value of real estate assets, net of tax of $(10.4)

b) Other information
Net interest paid

Net income taxes paid

May 5, 2007

May 6, 2006

71.3
38.9
(34.9)
(11.6)
18.6
41.0
54.8
10.2
(14.3)

174.0

40.4
133.6

174.0

64.1
59.0
(34.8)
(5.0)
17.4
28.4
54.6
8.6
(14.4)

177.9

46.1
131.8

177.9

2007

2006

243.9
15.4
44.4
–
46.0
1.4
16.1
4.8
15.5
–
–
–

387.5

58.9

168.2

225.8
10.1
35.8
(4.1)
55.8
1.0
8.5
4.2
–
(23.5)
(76.2)
17.0

254.4

83.1

102.1

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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7/26/07
8:00:58 AM

Note 16 Joint Ventures

The ﬁ nancial 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

May 5, 2007

May 6, 2006

136.3

72.7
63.6

136.3

2007

111.8
41.7

70.1

68.7
(34.2)
3.3

37.8

101.0

60.0
41.0

101.0

2006

98.2
43.4

54.8

62.3
4.7
3.9

70.9

Note 17 Segmented Information

2007

2006

2007

2006

Restated (Note 1)

Operating income

Revenue
Food

Real estate

Commercial

Inter-segment

Residential

Investment and

other operations

Elimination

$ 13,032.0

$ 12,718.1

38.4
34.3
146.1

218.8

137.8
54.0
84.9

276.7

150.2

122.8

13,401.0
(34.3)

13,117.6
(54.0)

$ 13,366.7

$ 13,063.6

Food
Real estate

Commercial
Residential
Investment and

other operations
Corporate expenses

300.2

331.6

46.8
71.2

31.6
(9.5)

87.0
51.3

31.3
(9.8)

440.3

491.4

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10:32:24 PM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Identiﬁ able assets

Food
Goodwill

Real estate

Investment and

other operations
(including goodwill of
$40.1; 2006 – $40.1)

Depreciation and amortization

Food

Real estate

Investment and

other operations

May 5, 2007

May 6, 2006

2007

2006

3,409.0
746.5

4,155.5
609.4

3,119.5
691.7

3,811.2
634.7

Capital expenditure

Food
Real estate

Investment and

other operations

482.8
16.2

46.2

421.3
67.9

57.2

545.2

546.4

The Company operates principally in two business segments:
food and real estate. The food segment consists of distribution
of food products in Canada. The real estate segment consists of
development and ownership of both commercial and residential
properties. Commercial real estate is mainly shopping centres
and ofﬁ ce buildings in Central and Eastern Canada. Residential
real estate is the development of housing lots for resale.
Inter-segment transactions are at market values.

460.0

605.6

5,224.9

5,051.5

2007

2006

215.3
6.8

21.8

196.6
16.9

12.3

243.9

225.8

Note 18 Financial Instruments

CREDIT RISK

FOREIGN CURRENCY RISK

There is no signiﬁ cant concentration of credit risk. The credit
risk exposure is considered normal for the business.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The book value of cash and cash equivalents, receivables, income
taxes receivable, loans and mortgages, bank indebtedness, and
accounts payable and accrued liabilities approximate fair values
at May 5, 2007. The fair value of investments is $717.1 (May 6,
2006 – $824.2).

The total fair value of long-term debt is estimated to be $907.5
(May 6, 2006 – $866.4). The fair value of variable rate long-
term debt is assumed to approximate its carrying amount.
The fair value of other long-term debt has been estimated by
discounting future cash ﬂ ows at a current rate offered for debt
of similar maturities and credit quality.

INTEREST RATE RISK

The majority of the Company’s debt is at ﬁ xed rates. Accordingly,
there is limited exposure for interest rate risk.

The Company has ﬁ xed the interest rate on $20 of its long term
debt at 4.28% by utilizing interest rate exchange agreements
of which $10 expires in December, 2011 and $10 expires
in January, 2012. The fair value of these contracts at year-end
was nil.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

Investments include $44.5 Canadian that is denominated in
U.S. funds. Bank indebtedness includes $4.5 Canadian that is
denominated in U.S. funds and it acts as a partial hedge to
the foreign exchange ﬂ uctuations inherent in the residual value
of certain equipment.

At May 5, 2007, there are outstanding forward exchange
contracts to sell a notional amount of $31.0, maturing over
the next 12 months at a weighted average rate of
U.S. 87.90 cents per Canadian dollar. The fair value of the
outstanding forward exchange contracts, based on settlement
requirements at May 5, 2007, is a positive value of U.S. $0.9
due to the strengthening of the Canadian dollar since the dates
on which the contracts were entered.

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7/27/07 10:35:40 PM
7/27/07
10:35:40 PM

Note 19 Contingent Liabilities

At May 5, 2007 the Company was contingently liable for
letters of credit issued in the aggregate amount of $48.5
(May 6, 2006 – $47.6).

Sobeys has guaranteed certain bank loans contracted by
franchise afﬁ liates. As at May 5, 2007 these loans amounted
to approximately $2.9 (May 6, 2006 – $1.3).

Sobeys has guaranteed certain equipment leases of its
franchise afﬁ liates. Under the terms of the guarantee should
a franchise afﬁ liate be unable to fulﬁ ll their lease obligation,
Sobeys would be required to fund the difference of the lease
commitments up to a maximum of $100.0 on a cumulative basis.
Sobeys approves each of the contracts. The aggregate, annual,
minimum rent payable under the guaranteed operating
equipment leases for ﬁ scal 2008 is approximately $29.4.
The guaranteed lease commitments over the next ﬁ ve ﬁ scal
years are:

2008
2009
2010
2011
2012
Thereafter

Guaranteed
lease commitments

$
$
$
$
$
$

29.4
25.5
21.7
17.0
6.4
–

Upon entering into the lease of its Mississauga distribution
centre in March 2000, Sobeys guaranteed to the landlord the
performance, by SERCA Foodservice, of all its obligation under
the lease. The remaining term of the lease is 13 years with an
aggregate obligation of $40.4 (2006 – $43.3). 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 harmless from any liability it may
incur pursuant to its guarantee.

On June 21, 2005 Sobeys received a notice of reassessment
from Canada Revenue Agency (“CRA”) for ﬁ scal years 1999
and 2000 related to the Goods and Services Tax (“GST”).
CRA asserts that Sobeys was obliged to collect GST on sales
of tobacco products to Status Indians. The total tax, interest
and penalties in the reassessment was $13.6. Sobeys has
reviewed this matter, has received legal advice and believes it

was not required to collect GST. During the second quarter of
ﬁ scal 2006, Sobeys ﬁ led a Notice of Objection with CRA.
Accordingly the company has not recorded in its statement of
earnings any of the tax, interest or penalties in the notice of
reassessment. Sobeys has deposited with CRA funds to cover
the total tax, interest and penalties in the reassessment and has
recorded this amount as a long-term receivable from CRA
pending resolution of the matter.

In the third quarter of ﬁ scal 2007, Sobeys was named as a
defendant in a lawsuit brought by beneﬁ ciaries of a multi-
employer pension plan. The lawsuit alleges mismanagement of
certain pension plan investments by the trustees of the pension
plan and seeks, among other remedies, payment of $1,000.0
in damages from the trustees and the contributing employers,
of which Sobeys is one of approximately 440. Sobeys played
no role in the management of the pension plan and intends to
contest the lawsuit. Accordingly, the Company has not recorded
in its statement of earnings any amount related to this lawsuit.

The Company and certain subsidiaries are presently under audit
by CRA and certain provincial taxing authorities for ﬁ scal years
2001 through 2006. The principal matters under audit are:

a) The tax treatment of gains realized on the sale of shares
in Hannaford Bros. Co. (“Hannaford”) in ﬁ scal 2001;

b) The tax treatment of gains realized on the sale of shares in
Delhaize America Inc. in ﬁ scal years 2001 and 2002; and
c) The taxation of income from certain of the Company’s real

estate investments for ﬁ scal years 2003 to 2006.

Reassessments have been received in respect of the sale of
shares of Hannaford. In the event that the tax authorities are
successful in respect of the Hannaford transaction, which the
Company believes is unlikely, the maximum potential exposure
in excess of provisions taken is approximately $30.0.

The Company has appealed the reassessments in respect of
the sale of Hannaford shares. The Company expects that it will
be substantially successful on its appeals of each of these
reassessments. The Company also believes that the ultimate
resolution of these matters will not, in any event, have a material
impact on earnings because it has made adequate provisions for
each of these matters. Should the ultimate outcome materially
differ from the provisions established, the effective tax rate and
earnings of the Company could be materially affected, negatively
or positively, in the period in which the matters are resolved.

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7/27/07 10:35:41 PM
7/27/07
10:35:41 PM

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

The Company entered into an agreement with Crombie REIT to
fund certain property redevelopments and originally issued and
recorded a note payable to Crombie REIT in the amount of
$39.6 related thereto. The Company has agreed to pay for all
additional costs and expenses required for the redevelopment of
those properties. In the event that the redevelopment costs are
less than $39.6, the savings will be paid to the Company.

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.

Note 20 Related Party Transactions

Note 21 Employee Future Beneﬁ ts

On October 2, 2006, the Company sold two commercial
properties to Crombie REIT for cash proceeds of $32.4, which
was fair market value. Since the sale was to an equity accounted
investment, no gain was recorded on the sale.

The company has a number of deﬁ ned beneﬁ t and deﬁ ned
contribution plans providing pension and other retirement
beneﬁ ts to most of its employees.

The Company uses December 31 as an actuarial valuation date
and April 30 as a measurement date for accounting purposes for
its deﬁ ned beneﬁ t pension plans.

DEFINED CONTRIBUTION PENSION PLANS

The contributions required by the employee and the employer
are speciﬁ ed. The employee’s pension depends on what level of
retirement income (for example, annuity purchase) that can be
achieved with the combined total of employee and employer
contributions and investment income over the period of plan
membership, and the annuity purchase rates at the time of the
employee’s retirement.

DEFINED BENEFIT PENSION PLANS

The ultimate retirement beneﬁ t is deﬁ ned by a formula that
provides a unit of beneﬁ t for each year of service. Employee
contributions, if required, pay for part of the cost of the beneﬁ t,
but the employer contributions fund the balance. The employer
contributions are not speciﬁ ed or deﬁ ned within the plan text;
they are based on the result of actuarial valuations which
determine the level of funding required to meet the total
obligation as estimated at the time of the valuation.

Retirement

Pension Plan
Senior Management
Pension Plan

Most recent
valuation date

Next required
valuation date

December 31, December 31,

2004

2007

December 31, December 31,

2004

2007

DEFINED CONTRIBUTION PLANS

The total expense and cash contributions for the Company’s
deﬁ ned contribution plans are as follows:

2007
2006

$
$

14.5
14.2

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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7/26/07 8:00:59 AM
7/26/07
8:00:59 AM

DEFINED BENEFIT PLANS

Information about the Company’s deﬁ ned beneﬁ ts plans, in aggregate, is as follows:

Pension
Benefit Plans
2007

Pension
Benefit Plans
2006

Other
Benefit Plans
2007

Other
Benefit Plans
2006

ACCRUED BENEFIT OBLIGATION

Balance, beginning of year
Current service cost, net of employee contributions

Interest cost
Employee contributions

Divestitures
Beneﬁ ts paid
Actuarial losses (gains)

Balance, end of year

PLAN ASSETS

Market value, beginning of year
Actual return on plan assets
Employer contributions
Employee contributions

Beneﬁ ts paid

Market value, end of year

283.3

FUNDED STATUS

Deﬁ cit
Unamortized past service cost
Unamortized actuarial losses

Accrued benefit asset (liability)

EXPENSE

Current service cost

Interest cost

Actual return on plan assets
Actuarial losses (gains)

Expense (income) before adjustments
Expected vs actual return on plan assets
Recognized vs actual past service costs
Recognized vs actual actuarial (gains) losses

Net expenses

CLASSIFICATION OF ACCRUED

BENEFIT ASSET (LIABILITY)

Other assets
Other liabilities

Accrued benefit asset (liability)

269.3
2.3
14.9
0.3
–

(18.6)
20.5

267.0
2.4
14.5
0.4
(0.8)
(20.0)
5.8

114.1
2.5
5.9
–
–
(3.8)
(2.1)

108.7
2.9
6.1
–
(2.2)
(3.7)
2.3

288.7

269.3

116.6

114.1

267.2
27.9
6.5
0.3
(18.6)

(5.4)
0.5
47.6

42.7

2.3
14.9
(27.9)
20.4

9.7
9.4
0.2
(19.3)

244.4
33.0
9.3
0.4
(19.9)

267.2

(2.1)
0.7
37.6

–
–
3.8
–
(3.8)

–

(116.6)
1.0
13.5

36.2

(102.1)

2.5
14.5
(33.0)
5.8

(10.2)
16.0
0.2
(3.9)

2.5
5.9
–
(2.1)

6.3
–
0.1
2.2

8.6

–

2.1

68.4
(25.7)

42.7

60.8
(24.6)

–
(102.1)

36.2

(102.1)

–
–
3.7
–
(3.7)

–

(114.1)
1.1
15.7

(97.3)

2.9
6.1
–
2.3

11.3
–
0.1
(3.5)

7.9

–
(97.3)

(97.3)

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Included in the above accrued beneﬁ t obligation at year-end are the following amounts in respect of plans that are not funded:

Accrued beneﬁ t obligation

20.9

19.9

102.1

97.3

Pension
Benefit Plans
2007

Pension
Benefit Plans
2006

Other
Benefit Plans
2007

Other
Benefit Plans
2006

The signiﬁ cant actuarial assumptions adopted in measuring the Company’s accrued beneﬁ t obligations are as follows
(weighted-average assumptions as of May 5, 2007):

Pension
Benefit Plans
2007

Pension
Benefit Plans
2006

Other
Benefit Plans
2007

Other
Benefit Plans
2006

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

5.00%
7.00%
4.00%

5.50%
7.00%
4.00%

5.25%

5.50%

For measurement purposes, a 10% ﬁ scal 2007 annual rate of increase in the per capita cost of covered health care beneﬁ ts was
assumed. The cumulative rate expectation to 2016 is 5%. The expected average remaining service period of the active employees
covered by the pension beneﬁ t plans ranges from 11 to 13 years with a weighted average of 11 years at year end. The expected
average remaining service period of the active employees covered by the other beneﬁ t plans range from 12 to 16 years with a
weighted average of 16 years at year end.

The table below outlines the sensitivity of the ﬁ scal 2007 key economic assumptions used in measuring the accrued beneﬁ t plan
obligations and related expenses of the Company’s pension and other beneﬁ t 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 beneﬁ t
obligations or beneﬁ t plan expenses.

Expected long term rate of return on plan assets

Impact of: 1% increase
1% decrease

Discount rate

Impact of: 1% increase
1% decrease

Growth rate of health costs (2)
Impact of: 1% increase
1% decrease

Pension Plans

Other Benefit Plans

Benefit
Obligations

5.00%
(32.6)
36.7

$
$

Benefit
Cost(1)

7.00%

(2.8)
2.8
5.00%
0.4
(0.8)

$
$

Benefit
Obligations

Benefit
Cost(1)

5.25%
(17.2)
20.7
10.00%
17.4
(13.6)

$
$

5.25%
(0.6)
0.7
10.00%
1.8
(1.3)

$
$

(1) Reﬂ ects the impact on the current service cost, the interest cost and the expected return on assets.
(2) Gradually decreasing to 5.0% in 2016 and remaining at that level thereafter.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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The asset mix of the deﬁ ned beneﬁ t pension plans as at year end is as follows:

Cash and short-term investments
Bonds, debenture, ﬁ xed income pooled funds and real estate funds
Equities and pooled equities fund
Accrued interest and dividends
Foreign currency hedges

2007

2.43%
18.20%
78.55%
0.22%
0.60%

2006

3.32%
17.92%
77.91%
0.20%
0.65%

Total investments

100.00%

Within these securities are investments in Empire Company Limited. The market value of these shares at year end are as follows:

2007

% of plan
assets

2006

92.2

9.3%

93.4

% of plan
assets

10.2%

Note 22 Business Acquisitions

SOBEYS

During ﬁ scal 2007, the Company increased its ownership
interest in Sobeys from 70.3% to 72.1% by way of purchase
of shares on the open market. The acquisition was accounted
using the purchase method with operating results being
included in the consolidated ﬁ nancial statements from the date
of each share acquisition. The cash consideration paid was
$48.6, goodwill increased by $13.0 and minority interest
decreased by $35.6.

During ﬁ scal 2006, the Company increased its ownership
interest in Sobeys from 68.4% to 70.3% by way of purchase
of shares on the open market. The acquisition was accounted
using the purchase method with operating results being
included in the consolidated ﬁ nancial statements from the
date of each share acquisition. The cash consideration paid
was $49.5, goodwill increased by $13.2 and minority interest
decreased by $36.3.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

OTHER ACQUISITIONS

During ﬁ scal 2007, Sobeys acquired franchisee stores and
prescription ﬁ les as part of its normal course of operations
for total cash consideration of $16.7. The acquisitions were
accounted using the purchase method with net identiﬁ able
assets recorded at $15.8 (including intangible assets of $8.2)
and goodwill recorded at $0.9.

On August 27, 2006, Sobeys acquired substantially all of the
food distribution assets of Achille de la Chevrotière Ltée and
its associated companies (“ADL”) for an amount of $79.2.
The assets acquired include 25 owned or franchised retail store
operations, other wholesale supply agreements and distribution
facilities in Rouyn-Noranda, Québec. Sixteen of the franchised
retail store operations are considered VIEs under the Company’s
policy (see Note 27). They have been included in the consolidated
results of the Company. The acquisition was accounted using
the purchase method with the results of ADL being consolidated
since the acquisition date. During the third quarter, management
carried out a detailed analysis and changes were made to
the preliminary allocation of the excess consideration paid
over net assets acquired as disclosed in the second quarter.
The measurement and allocation of intangible assets was also

completed and amended from $21.5 to $6.8. As a result goodwill
was adjusted from $21.7 to $41.3 to reﬂ ect the ﬁ nalized valuation of
ADL. The ﬁ nal purchase price allocation, which has incorporated
management’s assessment of fair value, is as follows:

Consideration
Cash
Acquisition costs

Total consideration paid

Net assets acquired

Current assets

Long term assets

Current liabilities assumed

Long term liabilities assumed

Total net assets acquired

Excess consideration paid over

net assets acquired

Allocation of excess consideration paid

over net assets acquired
Intangible assets

Goodwill

75.8
3.4

79.2

28.0
27.7
(20.0)
(4.6)

31.1

48.1

6.8
41.3

48.1

During ﬁ scal 2006, Sobeys acquired franchisee stores and
prescription ﬁ les as part of its normal course of operations
for total cash consideration of $5.3. The acquisitions were
accounted using the purchase method with net identiﬁ able
assets recorded at $5.0 (including intangible assets of $1.2)
and goodwill recorded at $0.3.

On September 30, 2005, ETL Canada Holdings Limited (a
subsidiary of the Company) acquired 27 theatres with 202
screens located in Ontario and Western Canada from Cineplex
Galaxy LP. On October 21, 2005 ETL Canada Holdings Limited
further acquired one theatre with four screens in Western
Canada from Motion Picture Distribution LP. The total cash
consideration of the acquisitions was $87.8. The acquisitions
were accounted using the purchase method with net identiﬁ able
assets recorded at $51.5 (including intangible assets of $6.0)
and goodwill recorded at $36.3.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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Note 23 Stock-based Compensation

DEFERRED SHARE UNITS

Members of the Board of Directors may elect to receive all or
any portion of their fees in Deferred Share Units (“DSUs”) in lieu
of cash. The number of DSUs received is determined by the
market value of the Company’s Non-Voting Class A shares on
each director’s fee payment date. Additional DSUs are received
as dividend equivalents. DSUs cannot be redeemed for cash
until the holder is no longer a director of the Company. The
redemption value of a DSU equals the market value of an
Empire Company Limited Non-Voting Class A share at the time
of the redemption. On an ongoing basis, the Company values
the DSU obligation at the current market value of a correspond-
ing number of Non-Voting Class A shares and records any
increase in the DSU obligation as an operating expense. At
May 5, 2007, there were 66,435 (May 6, 2006 – 60,470) DSUs
outstanding. During the year, the stock-based compensation
expense was $0.6 (2006 – $1.0).

SHARE PURCHASE LOANS

The Company has a Share Purchase Loan plan for employees
of the Company whereby loans are granted to purchase Non-
Voting Class A Shares. These loans have been treated as
stock-based compensation in accordance with EIC Abstract 132.

Note 24 Business Rationalization Costs

The compensation cost relating to the ﬁ scal 2007 Share
Purchase Loans was determined to be $0.2 (2006 – $0.2)
with amortization of the cost over 7 years. The total increase
in contributed surplus in relation to the Share Purchase Loan
compensation cost for ﬁ scal 2007 is $0.1 (2006 – $0.2). The
contributed surplus balance was reduced by $0.1 in relation to
shares issued under the Share Purchase Loan that have been
treated as stock-based compensation that became fully vested
with the employee during ﬁ scal 2007. Shares become vested
when the employees’ outstanding loan balance is reduced.
The compensation cost was calculated using the Black-Scholes
model with the following assumptions:

Expected life
Risk-free interest rate
Expected volatility
Dividend yield

2007

2006

7 years
4.40%
19.7%
1.4%

7 years
4.25%
21.8%
1.5%

During the third quarter of ﬁ scal 2007, Sobeys completed a
rationalization of administrative functions in Atlantic Canada.
Sobeys also began to incur costs associated with the
development of a new grocery distribution centre in Vaughan,
Ontario. These costs primarily relate to severance in both the
Atlantic and Ontario regions along with ﬁ xed asset and inventory
write-offs. In the fourth quarter of ﬁ scal 2007, Sobeys also
recorded rationalization costs related to its Québec distribution

network. Sobeys expects to incur additional administrative
rationalization costs in the ﬁ rst half of ﬁ scal 2008 enabled by
its continuing business process and system initiative. The dollar
value of these additional costs will be quantiﬁ ed and disclosed
in the ﬁ rst quarter of ﬁ scal 2008. The costs associated with
the organizational change are recorded as incurred as cost
of sales, selling and administrative expenses in the statement of
earnings, as follows:

Severance
Atlantic
Ontario
Québec
Other costs

Asset write-offs

Beginning
Liability

Incurred

Paid
Written off

Ending
Liability

Anticipated

Total

–
–
–
–

–
–

–

4.7
5.3
4.3
1.1

15.4
3.4

1.5
0.7
–
1.1

3.3
3.4

3.2
4.6
4.3
–

12.1
–

18.8

6.7

12.1

–
–
–
–

–
–

–

4.7
5.3
4.3
1.1

15.4
3.4

18.8

E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

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Note 25 Vendor Allowances

The Company receives allowances from certain vendors whose
products are purchased for resale. Included in these vendor
programs are allowances for volume purchases, exclusivity
allowances, listing fees and other allowances. The Company
recognizes these allowances as a reduction of cost of sales,
selling and administrative expenses and related inventories in
accordance with EIC-144. Certain allowances from vendors are

contingent on the Company achieving minimum purchase
levels. These allowances are recognized when it is probable
that the minimum purchase level will be met, and the amount of
allowance can be estimated. As of the year ended May 5, 2007,
the Company has recognized $2.4 (2006 – $3.5) of allowances
in income where it is probable that the minimum purchase level
will be met and the amount of allowance can be estimated.

Note 26 Variable Interest Entities

Variable interest entities are deﬁ ned under Accounting Guideline
(“AcG”)-15, “Consolidation of Variable Interest Entities”, as
entities that do not have sufﬁ cient equity at risk to ﬁ nance their
activities without additional subordinated ﬁ nancial support, or
where the equity holders lack the overall characteristics of a
controlling ﬁ nancial interest. The guideline requires that the VIE
be consolidated with the ﬁ nancial results of the entity deemed
to be the primary beneﬁ ciary of the VIE’s expected losses and
its expected residual returns.

The Company implemented AcG-15 on May 7, 2005
retroactively without restatement of prior periods. Entities
that have been identiﬁ ed as meeting the characteristics
of a VIE were consolidated in the Company’s results effective
for the fourth quarter of ﬁ scal 2005.

The Company has identiﬁ ed the following entities as VIEs:

FRANCHISE AFFILIATES

The Company has identiﬁ ed 271 (May 6, 2006 – 300) franchise
afﬁ liate stores whose franchise agreements result in the
Company being deemed the primary beneﬁ ciary of the entity
according to AcG-15. The results for these entities were
consolidated with the results of the Company.

WAREHOUSE AND DISTRIBUTION AGREEMENT

The Company has an agreement with an independent entity
to provide warehouse and distribution services for one of its
distribution centres. The terms of the agreement with this entity
require the Company to consolidate its results with those of the
Company pursuant to AcG-15.

The Company has consolidated the results of these franchise
afﬁ liates and the entity providing warehouse and distribution
services effective at the fourth quarter of ﬁ scal 2005.

In the prior year, a charge of $3.6 (net of minority interest of
$1.9) to retained earnings was required to reﬂ ect additional
minority interest in the VIEs.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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Note 27 Subsequent Events

(a) On April 26, 2007, the Company and Sobeys jointly announced
that they had entered into an arrangement agreement (“the
Arrangement”) pursuant to which the Company would acquire
all of the outstanding common shares of Sobeys that it did
not then own at a price of $58.00 per share. The transaction
valued the Sobeys shares not then owned by the Company at
approximately $1.06 billion.

The Arrangement required various approvals to comply with
applicable corporate and securities laws: The Sobeys share-
holders approved the Arrangement at a special shareholders’
meeting held on June 9, 2007 by the requisite majority; the
Supreme Court of Nova Scotia gave its sanction to the
Arrangement on June 13, 2007; the Arrangement became
effective upon registration of the ﬁ nal Court order with the
Nova Scotia Registry of Joint Stock Companies at the close
of business on June 15, 2007, at which time the Company
acquired all the outstanding shares of Sobeys that it did not
previously own. Subsequently, the Sobeys common shares
ceased trading on the Toronto Stock Exchange, and were
de-listed at the close of business on June 18, 2007.

The acquisition was ﬁ nanced by funds of $278.0, received
primarily from sale of certain portfolio investments, and by
advances of $784.0 under new credit facilities (the “Credit
Facilities”). The Credit Facilities consist of a $950.0 unsecured
revolving credit maturing on June 8, 2010 (subject to annual
extensions at the request of the Company) and a $50.0
unsecured non-revolving credit maturing June 30, 2007.
The Credit Facilities are subject to certain ﬁ nancial covenants.
Interest on the debt varies based on the designation of the loan
(bankers’ acceptances (“BA”) rate loans, Canadian prime rate
loans, U.S. base rate loans or LIBOR loans), ﬂ uctuations in the
underlying rates, and in the case of the BA rate loans or LIBOR
loans, the margin applicable to the ﬁ nancial covenants.

Note 28 Comparative Figures

On June 18, 2007, the Company entered into two delayed ﬁ xed
rate interest swaps. The ﬁ rst swap in an amount of $200.0 is
for a period of three years at a ﬁ xed interest rate of 5.00%.
The second swap in an amount of $200.0 is for a period of ﬁ ve
years at a ﬁ xed interest rate of 5.05%. Both swaps became
effective on July 23, 2007.

(b) On July 16, 2007, the Company announced that Sobeys and
Thrifty Foods (“Thrifty”) have entered into an agreement that
will see Sobeys purchase the British Columbia-based grocery
retailer. The transaction is based on an enterprise value of
$260.0 and is subject to adjustments for, among other items,
assumed liabilities and working capital at closing. Thrifty’s
business includes 20 full-service supermarkets, a main
distribution centre and a wholesale division on Vancouver Island
and the lower mainland of British Columbia. The deal is expected
to close during the Company’s second quarter following
receipt of regulatory approval and completion of due diligence.
The transaction is expected to be ﬁ nanced with cash and
available banking facilities.

Comparative ﬁ gures have been reclassiﬁ ed, where necessary, to reﬂ ect the current year’s presentation and to record the effects of
retroactive application of certain new accounting standards.

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Eleven-Year Financial Review

Years Ended (1)

2007

2006

2005

2004

Restated

$ 13,366.7
440.3
60.1
120.2
57.0

$ 13,063.6
491.4
83.8
153.1
67.1

$ 12,435.2
463.7
86.7
131.2
63.6

$ 11,284.0
422.8
92.4
111.0
58.5

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 (2)
Operating earnings (3)
Capital gains (losses) 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

204.4
–
204.4
5.7
210.1
10.3%

5,224.9
792.6
2,135.4

PER SHARE DATA ON A FULLY DILUTED BASIS ($ per share)

Operating earnings
Capital gains (losses) and other items, net of tax
Net earnings
Dividends
Non-Voting Class A shares
Class B common shares
Book value

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

High
Low
Close
Diluted weighted average number of
shares outstanding (in millions)

3.10
0.09
3.19

0.600
0.600
32.37

45.25
39.49
42.33

65.7

202.0
–
202.0
94.8
296.8
16.2%

5,051.5
707.3
1,965.2

3.07
1.44
4.51

0.560
0.560
29.77

44.35
33.37
43.29

65.7

182.9
–
182.9
3.7
186.6
11.4%

4,929.2
727.4
1,709.0

2.78
0.05
2.83

0.480
0.480
25.87

38.00
24.25
36.66

65.7

163.3
–
163.3
9.2
172.5
11.6%

4,679.7
913.0
1,567.6

2.47
0.14
2.61

0.400
0.400
23.67

29.50
23.10
26.65

65.8

(1) Fiscal years ended April 30 th except ﬁ scal 2005, which ended May 7, 2005, ﬁ scal 2006, which ended May 6, 2006 and ﬁ scal 2007 which ended

May 5, 2007, reﬂ ecting a change in ﬁ scal year end to the ﬁ rst Saturday in May, consistent with the ﬁ scal year end of Sobeys Inc.
(2) Discontinued operations reﬂ ect the ﬁ nancial contribution of SERCA Foodservice operations, which was sold at the end of 2002.
(3) Operating earnings equals net earnings before capital gains (losses) and other items.

NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS

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2002

2001

2000

1999

1998

1997

2003

Restated

$ 10,624.2
444.4
93.7
120.0
67.5

159.3
–
159.3
(6.0)
153.3
11.4%

4,519.3
923.1
1,418.5

2.42
(0.09)
2.33

0.330
0.330
21.41

33.25
23.70
23.85

9,926.5
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

0.214
0.214
19.47

33.30
15.75
28.88

65.8

65.7

9,331.1
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

0.170
0.170
16.82

18.25
13.88
17.00

65.6

9,100.1
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

0.140
0.140
8.73

16.98
12.33
16.05

75.6

5,362.7
184.4
112.6
49.1
9.2

2,912.2
108.6
76.8
17.9
–

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

0.136
0.136
9.03

16.27
12.50
13.00

75.0

56.1
8.1
64.2
23.6
87.8
17.9%

1,907.2
616.5
558.3

0.85
0.32
1.17

0.121
0.116
7.06

14.25
7.80
13.63

73.9

3,149.7
114.2
79.2
16.9
0.4

51.5
–
51.5
1.4
52.9
11.9%

1,797.4
606.8
479.6

0.65
0.02
0.67

0.110
0.090
5.93

7.85
6.13
7.85

74.0

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E M PI R E COM PANY LI M ITE D 2007 AN N UAL R E PORT

Glossary

ADJUSTED DEBT

Funded debt plus capitalized value of operating lease
payments, which is calculated as six times net annual
operating lease payments

ADJUSTED DEBT TO CAPITAL

Adjusted debt divided by the sum of adjusted debt and
shareholders’ equity

BOOK VALUE PER SHARE

Shareholders’ equity less preferred shares divided by Non-Voting
Class A shares and Class B common shares outstanding

NET DEBT TO TOTAL CAPITAL

Funded debt less cash and cash equivalents divided by funded
debt less cash and cash equivalents plus shareholders’ equity

ON BALANCE SHEET INVESTMENT

The Company’s investment in property and equipment that is
recorded on the balance sheet

OPERATING EARNINGS

Net earnings before capital gains (losses) and other items,
net of tax

CAPITAL EXPENDITURE

Payments made for the acquisition of property and equipment

Operating earnings before minority interest, interest expense
and income taxes

OPERATING INCOME

COMPANY-WIDE CAPITAL EXPENDITURES

Total investment in property and equipment, which includes
investment ﬁ nanced by the Company, third party operating
leases, landlords and franchise afﬁ liates

EBITDA

Operating income plus depreciation and amortization

EXPANDED STORES

Stores that undergo construction resulting in a square footage
increase during the year

FUNDED DEBT

All interest bearing debt, which includes bank loans, bankers’
acceptances, long-term debt and liabilities relating to assets
held for sale

OPERATING MARGIN

Operating income divided by sales

PRIVATE LABEL

A brand of products that is marketed, distributed and owned by
the Company

RENOVATED STORES

Stores that undergo construction, resulting in no increase in
square footage

RETURN ON EQUITY

Net earnings divided by average shareholders’ equity

SAME-STORE SALES

Sales from stores in the same location in both reporting periods

FUNDS FROM OPERATIONS

Operating earnings plus depreciation

TOTAL CAPITAL

Funded debt plus shareholders’ equity

HEDGE

A ﬁ nancial instrument used to manage foreign exchange or
interest rate risk by making a transaction which offsets the
existing position

INTEREST COVERAGE

Operating income divided by interest expense

LETTERS OF CREDIT

Financial instruments issued by a ﬁ nancial institution to
guarantee the Company’s payments to a third party

VIE (VARIABLE INTEREST ENTITY)

An entity that does not have sufﬁ cient equity at risk to ﬁ nance
its activities without additional subordinated ﬁ nancial support,
or where the equity holders lack the overall characteristics of a
controlling ﬁ nancial interest

WEIGHTED AVERAGE NUMBER OF SHARES

Number of Non-Voting Class A shares plus Class B common
shares outstanding adjusted to take into account the time the
shares are outstanding in the reporting period

10 0

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Shareholder and Investor Information

EMPIRE COMPANY LIMITED

OUTSTANDING SHARES

AS OF JUNE 28, 2007

Non-Voting Class A shares
Class B common shares, voting

31,174,037
34,560,763

TRANSFER AGENT

CIBC Mellon Trust Company
Investor Correspondence
P.O. Box 7010
Adelaide Street Postal Station
Toronto, Ontario
M5C 2W9
Telephone: (800) 387-0825
Email: enquires @cibcmellon.com

BANKERS

Bank of Montreal
Bank of Nova Scotia
Bank of Tokyo-Mitsubishi
Canadian Imperial Bank of Commerce
National Bank of Canada
Rabobank
Royal Bank of Canada
TD Canada Trust

SOLICITORS

Stewart McKelvey
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 mailing for each. If this occurs, please contact
CIBC Mellon Trust Company at (800) 387-0825 to eliminate
the multiple mailings.

Head Office:
115 King St.
Stellarton, Nova Scotia
B0K 1S0
Telephone: (902) 755-4440
Fax: (902) 755-6477
Website: 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

Communication regarding investor records including changes
of address or ownership, lost certificates or tax forms, should
be directed to the Company’s transfer agent and registrar,
CIBC Mellon Trust Company.

SHAREHOLDERS’ ANNUAL GENERAL MEETING

September 12, 2007 at 11: 00 a.m. (ADT)
Empire Studio 7 Cinemas
610 East River Road
New Glasgow, Nova Scotia

SUBSIDIARY COMPANY WEB ADDRESSES

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www.sobeys.com
www.empiretheatres.com

STOCK EXCHANGE LISTING

The Toronto Stock Exchange

STOCK SYMBOLS

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

AVERAGE DAILY TRADING VOLUME (TSX)

28,814

COMMON DIVIDEND RECORD AND

PAYMENT DATES FOR FISCAL 2008

RECORD DATE

PAYMENT DATE

July 16, 2007
October 15, 2007*
January 14, 2008*
April 14, 2008*

July 31, 2007
October 31, 2007*
January 31, 2008*
April 30, 2008*

* Subject to the approval of the Board of Directors

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

www.empireco.ca

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