Empire Company announces third quarter results



    STELLARTON, NS, March 15 /CNW/ - Empire Company Limited (TSX: EMP.A)
today announced earnings before capital gain (loss) and other items for its
third quarter ended February 3, 2007 of $36.1 million ($0.54 per share on a
fully diluted basis) compared to $47.7 million ($0.72 per share on a fully
diluted basis) in the third quarter last year.
    Included in earnings for the third quarter are $20.2 million of pre-tax
costs incurred by Sobeys Inc. related to its business process and system
initiative, severance in both its Atlantic and Ontario regions as a result of
business rationalization, along with fixed asset and inventory write-offs.
Sobeys incurred $4.9 million of pre-tax costs related to its business process
and system initiative in the third quarter last fiscal year.
    This $20.2 million impact on Sobeys' third quarter operating income
resulted in a $9.8 million impact on Empire's net earnings in its third
quarter ($0.15 per share) compared to a $2.2 million impact on Empire's net
earnings in the third quarter last year ($0.03 per share).
    Net earnings in the third quarter amounted to $35.1 million ($0.53 per
share on a fully diluted basis) versus $56.0 million ($0.85 per share on a
fully diluted basis) in the third quarter last year. The Company realized a
capital loss and other items, net of tax, of $1.0 million ($0.01 per share) in
the third quarter compared to a realized capital gain, net of tax, of 
$8.3 million ($0.13 per share) in the third quarter last year.

    
    Third Quarter Financial Highlights

    - Revenue of $3.28 billion, up $46.7 million or 1.4 percent.
    - Sobeys' same-store sales increased 1.8 percent.
    - Sobeys incurred pre-tax costs totalling $20.2 million related to its
      business process and system initiative and rationalization costs.
    - Earnings before capital gain (loss) and other items of $36.1 million,
      down $11.6 million from the third quarter last year.
    - Fully diluted earnings per share, before capital gain (loss) and other
      items, net of tax, of $0.54 compared to $0.72 per share recorded in
      the third quarter last year.
    - Net earnings of $35.1 million ($0.53 per share on a fully diluted
      basis) versus $56.0 million ($0.85 per share on a fully diluted basis)
      last year.
    - Funded debt to total capital of 31.3 percent compared to 34.9 percent a
      year ago.

    Paul Sobey, President and Chief Executive Officer stated, "Empire's
financial performance in the third quarter was impacted by costs incurred by
Sobeys in connection with its business process and system initiative,
including business rationalization costs along with Sobeys' commitment to
sustain its price position as competition intensified, particularly in
Ontario. During the quarter we also experienced a reduction in residential
selling activity for the real estate division; despite this decline, we expect
stronger performance in the fourth quarter and a record year for our
residential real estate operation."

    Dividend Declaration

    The Board of Directors declared a quarterly dividend of $0.15 per share on
both the Non-Voting Class A shares and the Class B common shares that will be
payable on April 30, 2007 to shareholders of record on April 13, 2007. In
addition, the Board declared regular dividends on the Company's outstanding
preferred shares.

    Financial Overview

    Revenue

    Consolidated revenue for the third quarter was $3.28 billion, an increase
of $46.7 million or 1.4 percent from the third quarter last year. Growth in
food division sales of $94.7 million was partially offset by a $32.8 million
reduction in revenue from the real estate division largely as a result of the
sale of 44 properties to Crombie REIT in the fourth quarter last fiscal year
and by a $15.2 million reduction in investments and other operations revenue.
The decline in investments and other operations revenue is largely due to a
change in fiscal year-end for Empire Theatres Limited to align with industry
practice. Because of this change, the third quarter contained only nine weeks
of theatres' revenue versus 13 weeks in the third quarter last fiscal year.

    There are several items that impacted revenue comparability for the    
13 weeks and 39 weeks ended February 3, 2007, as compared to the 13 weeks and
39 weeks ended February 4, 2006, as follows:

    - Sobeys' sales were negatively impacted by the disposition on March 31,
      2006 of its Cash and Carry business in Ontario and Quebec;
    - The sale of 44 properties to Crombie REIT has reduced the quarter and
      fiscal year-to-date sales when compared to the prior year;
    - Sobeys continued to experience declines in its tobacco sales. Late in
      the second quarter of fiscal 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 Sobeys acquisition on August 27,
      2006 of Achille de la Chevrotière Ltée and its associated companies
      ("ADL"). The acquisition included 25 owned or franchised retail store
      operations, other wholesale supply agreements and a distribution
      facility in Rouyn-Noranda, Quebec;
    - Empire Theatres changed its fiscal year-end from the last Thursday in
      April to the last Thursday in December effective December 28, 2006.
      This change in Empire Theatres' fiscal year-end was made to align with
      industry practice. However, because of this change, the third quarter
      and fiscal year-to-date ended February 3, 2007 contained nine weeks and
      35 weeks of operations, respectively, while the quarter and fiscal
      year-to-date ended February 4, 2006 contained 13 weeks and 39 weeks of
      operations, respectively; and
    - Revenue for the quarter and fiscal year-to-date ended February 3, 2007,
      include nine weeks and 35 weeks of revenue, respectively, related to
      the acquisition of the 28 movie theatres, whereas the quarter and
      fiscal year-to-date ended February 4, 2006, reflect 13 weeks and 17
      weeks, respectively, of revenue from the acquired movie theatres.

    As presented in the following table, excluding the impact of: the sale of
the Cash and Carry business; the sale of 44 properties to Crombie REIT; the
decline in wholesale tobacco sales; the ADL acquisition, and the theatre
acquisition and the change in its fiscal year-end date, revenue growth would
have been 3.7 percent for the third quarter and 4.0 percent on a fiscal
year-to-date basis.

                                               13 Weeks Ended
                           --------------------------------------------------
                               Feb. 3,      Feb. 4,
                                 2007         2006       Change       Change
    ($ in millions)                ($)          ($)          ($)          (%)
    -------------------------------------------------------------------------
    Financially reported
     sales                 $  3,281.9   $  3,235.2   $     46.7          1.4%
                                                     ----------
    Add (deduct) the
     impact of:
      Cash and Carry disposal                              48.1
      Sale of 44 commercial
       properties to
       Crombie REIT                                        31.0
      Wholesale tobacco decline                            41.0
      ADL acquisition                                     (60.4)
      Theatre acquisition
       and year-end change(1)                              13.9
                                                     ----------
      Subtotal                                             73.6
                                                     ------------------------
                                                     $    120.3          3.7%
                                                     ------------------------
                                                     ------------------------


                                               39 Weeks Ended
                           --------------------------------------------------
                               Feb. 3,      Feb. 4,
                                 2007         2006       Change       Change
    ($ in millions)                ($)          ($)          ($)          (%)
    -------------------------------------------------------------------------
    Financially reported
     sales                 $ 10,016.3   $  9,837.0   $    179.3          1.8%
                                                     ----------
    Add (deduct) the
     impact of:
      Cash and Carry disposal                             169.7
      Sale of 44 commercial
       properties to
       Crombie REIT                                        89.2
      Wholesale tobacco decline                            86.4
      ADL acquisition                                    (110.4)
      Theatre acquisition
       and year-end change(1)                             (19.5)
                                                     ----------
      Subtotal                                            215.4
                                                     ------------------------
                                                     $    394.7          4.0%
                                                     ------------------------
                                                     ------------------------


    (1) The impact for theatres' revenue, reflected in the above table,
        represents the reduction of 4 weeks of revenue for both the current
        quarter and fiscal year-to-date as a result of Empire Theatres'
        fiscal year-end change as well as an additional 13 weeks of revenue
        in the current fiscal year-to-date as a result of the acquisition of
        28 movie theatres in the second quarter of the prior fiscal year.

    The food division generated sales of $3.23 billion compared to
$3.14 billion for the same quarter last year, an increase of 3.0 percent.
Sobeys' same-store sales (sales from stores in the same locations in both
reporting periods) increased by 1.8 percent in the third quarter.
    The growth in food retail sales was driven by continued implementation of
sales and merchandising initiatives across the country, coupled with the
increased retail selling square footage resulting from the development of new
stores and an ongoing program to enlarge and renovate existing store assets.
Food division sales growth in the third quarter was also positively impacted
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, Quebec.
    Sobeys continued to experience declines in its wholesale tobacco sales in
the third quarter of fiscal 2007. Wholesale tobacco sales declined
$41.0 million in the third quarter compared to the same quarter last year.
Sales growth was also negatively impacted by the disposition on March 31, 2006
of Sobeys' Cash and Carry business in Ontario and Quebec. Cash and Carry sales
in the third quarter last fiscal year were $48.1 million.
    Excluding the impact of the wholesale tobacco decline, the disposition of
the food division's Cash and Carry business, and the impact of the ADL
acquisition, Sobeys' sales growth would have been 3.9 percent for the third
quarter.
    There were no corporate or franchised stores acquired by the food division
in the third quarter. A total of 14 corporate and franchised stores were
opened or relocated in the third quarter compared to 25 corporate or
franchised stores opened or relocated during the third quarter last year. An
additional nine stores were expanded during the quarter compared to seven
stores expanded during the third quarter of fiscal 2006. Ten stores were
closed during the third quarter of fiscal 2007 compared to 20 in the third
quarter last year. There were five stores rebannered in the third quarter of
fiscal 2007 compared to one store in the same quarter last year.
    Net retail square footage increased during the third quarter of fiscal
2007 by 252,482 square feet. At the end of the third quarter Sobeys' square
footage totalled 26.3 million, a 4.0 percent increase over the third quarter
last year.
    Real estate division revenue (net of inter-segment) equalled
$21.8 million, a decrease of $32.8 million over the $54.6 million recorded in
the third quarter last year. Commercial property revenue declined
$26.8 million over the third quarter last year. This revenue decline was
expected given the sale of 44 commercial properties to Crombie REIT in the
fourth quarter of last year. These properties accounted for approximately
$31.0 million of revenue in the third quarter last year. At the end of the
third quarter, Empire Company maintained a 48.1 percent ownership position in
Crombie REIT which is equity accounted. Revenue from residential operations
equalled $12.1 million in the third quarter compared to $18.1 million last
year, a $6.0 million or 33.1 percent decrease. The decline in residential
operations revenue is largely attributed to the timing of land parcel and lot
sales which are now expected to be finalized in the fourth quarter.

    Operating income

    Consolidated operating income (earnings before minority interest, income
taxes, capital gain (loss) and other items, and interest expense) in the third
quarter totalled $79.7 million, a decrease of $38.6 million or 32.6 percent,
compared to the $118.3 million reported in the third quarter last year.
    The food division contributed operating income of $54.8 million during the
third quarter, a decrease of $23.8 million or 30.3 percent from the third
quarter last year. Third quarter food division operating margin (operating
income divided by revenue) was 1.70 percent compared to 2.51 percent in the
third quarter last year.
    Impacting third quarter fiscal 2007 operating income was a $3.9 million
increase in food division depreciation and amortization expense reflecting
Sobeys continued capital investments. Of greater impact to third quarter food
division operating income was $20.2 million of pre-tax costs ($4.9 million
pre-tax in the third quarter of fiscal 2006) consisting of $7.0 million of
pre-tax costs related to its business process and system initiative and
$13.2 million of pre-tax costs related to business rationalization costs, the
major component being severance in both its Atlantic and Ontario regions. 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 final costs associated with exiting the
Commisso's banner. Operating income was also impacted by Sobeys' commitment to
sustain its price position as competition intensified, particularly in
Ontario.
    Sobeys expects to incur additional administrative rationalization costs in
its next two quarters as a result of its continuing business process and
system initiative. The dollar value of these additional costs will be
quantified and disclosed in future quarters. Sobeys also expects to incur
distribution rationalization costs in the fourth quarter related to its Quebec
distribution network. Sobeys recently announced the closure of two small
facilities, one in Anjou and one in the Abitibi region of Quebec.
Rationalization costs related to these facilities of approximately
$5.4 million are expected to be incurred in the fourth quarter; annualized
savings of approximately $5.0 million are expected thereafter.
    The real estate division contributed third quarter operating income of
$17.5 million, a decrease of $14.7 million from the $32.2 million recorded in
the third quarter last year. Operating income generated from commercial
properties declined $8.0 million while operating income from residential
operations decreased $6.7 million from the third quarter last year. The
decline in commercial property operating income was anticipated as a result of
the sale of 44 commercial properties to Crombie REIT in the fourth quarter of
last fiscal year. The decline in residential operating income reflects the
reduction in residential selling activity as mentioned.
    Investments and other operations' operating income, net of corporate
expenses, equalled $7.4 million in the third quarter compared to $7.5 million
in the same quarter last year. An increase in dividend and interest income and
equity earnings from Empire's 27.6 percent interest in Wajax Income Fund was
more than offset by a decline in operating income from Empire Theatres
Limited. The decline in Empire Theatres' operating income primarily reflects
weaker overall film product in the third quarter of fiscal 2007 versus the
same quarter last year which negatively impacted overall attendance levels.

    Interest expense

    Interest expense in the third quarter decreased $5.7 million, to
$15.9 million from $21.6 million in the third quarter last year as a result of
a $4.6 million decline in interest expense on long-term debt and a
$1.1 million decrease in interest expense on short-term debt. The decline in
long-term interest expense is largely the result of the formation of Crombie
REIT in the fourth quarter of last fiscal year and the related transfer of
long-term indebtedness connected to the 44 commercial properties sold to the
REIT.

    Capital Gain (Loss) and Other Items

    Capital loss and other items, net of tax, amounted to $1.0 million in the
third quarter as a result of the sale of investments compared to a capital
gain and other items, net of tax, of $8.3 million in the third quarter last
year.

    Net earnings

    Consolidated net earnings, including capital gain (loss) and other items,
net of tax, totalled $35.1 million ($0.53 per share) versus $56.0 million
($0.85 per share) in the third quarter last year.

    The table below presents a summary of financial performance for the 13
weeks and 39 weeks ended February 3, 2007 compared to the same periods last
fiscal year.


    ($ in millions, except          13 Weeks Ended            39 Weeks Ended
     per share data)      ------------------------- -------------------------
                          Feb 3, 2007  Feb 4, 2006  Feb 3, 2007  Feb 4, 2006
                          ------------ ------------ ------------ ------------
    Segmented Revenue
     (net of elimination
     entries)
      Food                 $  3,230.7   $  3,136.0   $  9,788.3   $  9,592.3
      Real estate
        Commercial                9.7         36.5         29.2        104.7
        Residential              12.1         18.1         89.3         53.8
    Investments and other
     operations                  29.4         44.6        109.5         86.2
                          ------------ ------------ ------------ ------------
                           $  3,281.9   $  3,235.2   $ 10,016.3   $  9,837.0
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Segmented Operating
     Income
      Food                 $     54.8   $     78.6   $    226.0   $    246.4
      Real estate
        Commercial               12.2         20.2         35.3         63.3
        Residential               5.3         12.0         36.6         34.3
      Investments & other
       operations                 7.4          7.5         19.2         16.5
                          ------------ ------------ ------------ ------------
                           $     79.7   $    118.3   $    317.1   $    360.5
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Earnings before capital
     gain (loss) and
     other items           $     36.1   $     47.7   $    140.6   $    145.1
    Capital gain (loss)
     and other items,
     net of tax                  (1.0)         8.3          5.0         33.3
                          ------------ ------------ ------------ ------------
    Net earnings           $     35.1   $     56.0   $    145.6   $    178.4
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Per Share, basic
    ----------------
    Earnings before capital
     gain (loss) and
     other items           $     0.55   $     0.72   $     2.14   $     2.21
    Capital gain (loss) and
     other items,
     net of tax                 (0.01)        0.13         0.08         0.51
                          ------------ ------------ ------------ ------------
    Net earnings           $     0.54   $     0.85   $     2.22   $     2.72
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Weighted average number
     of common shares
     outstanding, basic
     (in millions)               65.6         65.5         65.6         65.5
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Per Share, diluted
    ------------------
    Earnings before capital
     gain (loss) and
     other items           $     0.54   $     0.72   $     2.13   $     2.20
    Capital gain (loss) and
     other items,
     net of tax                 (0.01)        0.13         0.08         0.51
                          ------------ ------------ ------------ ------------
    Net earnings           $     0.53   $     0.85   $     2.21   $     2.71
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Weighted average number
     of common shares
     outstanding, diluted
    (in millions)                65.7         65.7         65.7         65.7
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    The 13 weeks and 39 weeks ended February 4, 2006 have been restated to
    reflect the retroactive adjustment related to EIC-156. Please see the
    section entitled Accounting for Consideration by a Vendor to a Customer
    (Including a Reseller of the Vendor's Products) ("EIC-156") in the
    Company's third quarter MD&A.

    Consolidated Financial Condition

    The consolidated financial condition of the Company showed continued
strength. The ratio of funded debt to total capital at the end of the third
quarter equalled 31.3 percent versus 34.9 percent at the end of the third
quarter last year. Operating income provided 5.0 times coverage of interest
expense in the third quarter versus 5.5 times coverage last year.
    At February 3, 2007, the market value of Empire's investments at cost plus
investments at equity totalled $720.3 million on a cost base of
$337.3 million, resulting in an unrealized gain of $383.0 million. This
compares to an unrealized gain of $306.8 million at the beginning of the
fiscal year and an unrealized gain of $164.6 million at the end of the third
quarter last fiscal year.
    The purchase of property, equipment and other assets in the third quarter
equalled $134.8 million as compared to $202.0 million in the same quarter last
year. Investment in food division property and equipment and other assets
accounted for $118.7 million of the total capital investment in the third
quarter. Capital expenditures for investments and other operations in the
third quarter equalled $16.1 million.

    Definition of Non-GAAP Measures

    Certain measures included in this news release do not have a standardized
meaning under Canadian Generally Accepted Accounting Principles and therefore
may not be comparable to similarly titled measures by other publicly traded
companies. The Company includes these measures because it believes certain
investors use these measures as a means of assessing Empire's financial
performance. Funded debt is all interest-bearing debt, and total capital is
calculated as funded debt plus shareholders' equity. Operating earnings is
calculated as net earnings before capital gain (loss) and other items.

    About Empire Company

    Empire Company Limited (TSX: EMP.A) is a diversified Canadian company
headquartered in Stellarton, Nova Scotia. Empire's key businesses include food
retailing, real estate, and corporate investment activities. With
approximately $5.1 billion in assets, Empire employs approximately        
37,000 people directly and through its subsidiaries. More information about
Empire Company can be found at www.empireco.ca.

    This news release contains forward-looking statements which reflect
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 that administrative and business rationalization
      activities in the current quarter and upcoming quarters will involve
      costs and provide annualized cost reductions, both of which could be
      impacted by the final scope and scale of these activities.
    - Sobeys' expectations regarding tobacco sales decline which could be
      impacted by changes in the sales and distribution practices of tobacco
      suppliers;
    - 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 the matter is
      resolved;
    - Sobeys' expectations that the closure of distribution centres in Quebec
      will reduce overall distribution costs, which could be impacted by the
      number of positions eliminated at its Quebec distribution centres; and
    - The Company's expectations that residential operations sales activity
      will increase in the fourth quarter which could be impacted by
      development delays or a slow down in the demand for residential land
      and building lots.

    Forward-looking statements are typically identified 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 filed with the Canadian securities regulatory authorities from time
to time, including those in the Risk Management section of the annual MD&A
included in the Company's 2006 Annual Report.
    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.

    Additional financial information, including management's discussion and
analysis of third quarter fiscal 2007 results, will be filed electronically
with various securities commissions in Canada through SEDAR.

    Conference Call Invitation

    The Company will provide additional details concerning its third quarter
results on a conference call to be held on Thursday, March 15, 2007 beginning
at 2:30 p.m. (Atlantic Daylight Time). To join this conference call dial
1-800-595-8550 or 1-416-644-3419. You may also listen to a live audio webcast
of the conference call by visiting the Company's web site located at
www.empireco.ca. Replay will be available by dialling 1-877-289-8525 or
1-416-640-1917 and entering passcode 21221513#. until midnight March 22, 2007,
or on the Company's website for 90 days after the meeting.



                           EMPIRE COMPANY LIMITED
                           ----------------------
                         CONSOLIDATED BALANCE SHEETS
                         ---------------------------
                                (in millions)


                                        February 3        May 6   February 4
                                              2007         2006         2006
                                         Unaudited      Audited    Unaudited
                                        -----------  -----------  -----------
    ASSETS

    Current
      Cash and cash equivalents         $    203.4   $    341.1   $    164.3
      Receivables                            328.4        275.4        274.9
      Inventories                            772.8        694.3        726.6
      Prepaid expenses                        51.9         51.5         50.6
      Assets held for sale (Note 3)              -            -         13.7
                                        -----------  -----------  -----------
                                           1,356.5      1,362.3      1,230.1
    Investments, at cost
      (quoted market value $280.0;
       May 6, 2006 $398.9;
       February 4, 2006 $348.3)              189.7        359.9        297.3
    Investments, at equity
      (realizable value $440.3;
       May 6, 2006 $425.3;
       February 4, 2006 $157.2)              147.6        157.5         43.6
    Property and equipment                 2,278.7      2,143.6      2,135.5
    Other assets (Note 5)                    299.1        273.3        247.4
    Long-term assets held for sale
     (Note 3)                                 23.9         23.1        556.6
    Goodwill                                 786.0        731.8        713.5
                                        -----------  -----------  -----------
                                        $  5,081.5   $  5,051.5   $  5,224.0
                                        -----------  -----------  -----------
                                        -----------  -----------  -----------
    LIABILITIES

    Current
      Bank indebtedness                 $     39.0   $     98.6   $    253.4
      Accounts payable and accrued
       liabilities                         1,176.2      1,241.8      1,130.3
      Income taxes payable                    17.9         35.8          1.2
      Future income taxes                     44.0         46.1         47.9
      Long-term debt due within one year      77.3         95.4         43.8
      Liabilities relating to assets
       held for sale (Note 3)                  6.9          7.1         43.5
                                        -----------  -----------  -----------
                                           1,361.3      1,524.8      1,520.1
    Long-term debt (Note 6)                  805.7        707.3        684.8
    Long-term lease obligation                23.8         20.8         13.1
    Other liabilities (Note 7)                13.8         18.9          0.9
    Employee future benefits obligation      102.6         97.3         98.0
    Future income taxes                      109.2        131.8        100.0
    Long-term liabilities relating to
     assets held for sale (Note 3)               -            -        345.2
    Minority interest                        585.2        585.4        606.1
                                        -----------  -----------  -----------
                                           3,001.6      3,086.3      3,368.2
                                        -----------  -----------  -----------
    SHAREHOLDERS' EQUITY

    Capital stock (Note 8)                   196.0        195.1        195.0
    Contributed surplus                        0.2          0.2            -
    Retained earnings                      1,885.1      1,771.0      1,662.1
    Cumulative translation adjustment         (1.4)        (1.1)        (1.3)
                                        -----------  -----------  -----------
                                           2,079.9      1,965.2      1,855.8
                                        -----------  -----------  -----------
                                        $  5,081.5   $  5,051.5   $  5,224.0
                                        -----------  -----------  -----------
                                        -----------  -----------  -----------

    Contingent liabilities (Note 17)

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                 --------------------------------------------
                               39 WEEKS ENDED
                               --------------
                           (Unaudited, in millions)


                                                     February 3   February 4
                                                           2007        2006
                                                     -----------  -----------

    Balance, beginning of period                     $  1,771.0   $  1,515.5

    Adjustment to minority interest (Note 16)                 -         (3.4)

    Net earnings                                          145.6        178.4

    Dividends
      Preferred shares                                     (0.3)        (0.2)
      Common shares                                       (29.6)       (27.5)

    Premium on common shares purchased for cancellation    (1.6)        (0.7)
                                                     -----------  -----------

    Balance, end of period                           $  1,885.1   $  1,662.1
                                                     -----------  -----------
                                                     -----------  -----------

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                     CONSOLIDATED STATEMENTS OF EARNINGS
                     -----------------------------------
                                PERIODS ENDED
                                -------------
             (Unaudited, in millions, except per share amounts)


                           February 3   February 4   February 3   February 4
                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                                          Restated                  Restated
                                           (Note 1)                  (Note 1)
                           -----------  -----------  -----------  -----------

    Revenue                $  3,281.9   $  3,235.2   $ 10,016.3   $  9,837.0
    Operating expenses
      Cost of sales,
       selling and
       administrative
       expenses               3,153.8      3,064.3      9,553.9      9,331.7
      Depreciation and
       amortization              59.7         60.2        179.1        169.1
                           -----------  -----------  -----------  -----------
                                 68.4        110.7        283.3        336.2
    Investment income
     (Note 9)                    11.3          7.6         33.8         24.3
                           -----------  -----------  -----------  -----------
    Operating income             79.7        118.3        317.1        360.5
                           -----------  -----------  -----------  -----------
    Interest expense
      Long-term debt             14.1         18.7         40.2         58.0
      Short-term debt             1.8          2.9          5.5          6.7
                           -----------  -----------  -----------  -----------
                                 15.9         21.6         45.7         64.7
                           -----------  -----------  -----------  -----------
                                 63.8         96.7        271.4        295.8
    Capital gain (loss) and
     other items (Note 10)       (1.2)        10.2          6.2         37.6
                           -----------  -----------  -----------  -----------
    Earnings before income
     taxes and minority
     interest                    62.6        106.9        277.6        333.4
                           -----------  -----------  -----------  -----------
    Income taxes
      Current                    15.7         36.7         86.1        106.7
      Future                      2.2          0.9          2.8          0.3
                           -----------  -----------  -----------  -----------
                                 17.9         37.6         88.9        107.0
                           -----------  -----------  -----------  -----------
    Earnings before
     minority interest           44.7         69.3        188.7        226.4
    Minority interest             9.6         13.3         43.1         48.0
                           -----------  -----------  -----------  -----------
    Net earnings           $     35.1   $     56.0   $    145.6   $    178.4
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------
    Earnings per share
     (Note 4)
      Basic                $     0.54   $     0.85   $     2.22   $     2.72
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------
      Diluted              $     0.53   $     0.85   $     2.21   $     2.71
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------
    Weighted average number
     of common shares
     outstanding, in millions
      Basic                      65.6         65.5         65.6         65.5
      Diluted                    65.7         65.7         65.7         65.7


    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                    -------------------------------------
                                PERIODS ENDED
                                -------------
                           (Unaudited, in millions)


                           February 3   February 4   February 3   February 4
                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                           -----------  -----------  -----------  -----------
    Operating Activities
      Net earnings         $     35.1   $     56.0   $    145.6   $    178.4
      Items not affecting
       cash (Note 11)            93.1         80.3        260.3        209.3
      Preferred dividends        (0.1)        (0.1)        (0.3)        (0.2)
                           -----------  -----------  -----------  -----------
                                128.1        136.2        405.6        387.5
      Net change in non-cash
       working capital          (79.5)        38.7       (238.1)       (92.6)
                           -----------  -----------  -----------  -----------
    Cash flows from
     operating activities        48.6        174.9        167.5        294.9
                           -----------  -----------  -----------  -----------

    Investing Activities
      Net decrease (increase)
       in investments           182.5         56.9        179.8        (19.1)
      Net proceeds from sale
       of Wajax Income Fund         -            -            -         50.5
      Purchase of shares in
       subsidiary, Sobeys Inc.      -            -        (48.6)           -
      Purchase of property,
       equipment and other     (134.8)      (202.0)      (378.7)      (409.1)
      Proceeds from sale of
       other property            29.9          0.9         57.2         12.2
      Business acquisitions,
       net of cash acquired         -         (0.2)       (90.3)       (87.5)
                           -----------  -----------  -----------  -----------
    Cash flows from (used in)
     investing activities        77.6       (144.4)      (280.6)      (453.0)
                           -----------  -----------  -----------  -----------

    Financing Activities
      (Decrease) increase
       in bank indebtedness    (116.8)      (102.7)       (59.6)        34.0
      Decrease in construction
       loans                        -         (2.0)           -            -
      Issue of long-term debt     5.6         70.6        138.9        254.3
      Repayment of long-term
       debt                     (14.4)       (11.9)       (71.0)      (225.4)
      Minority interest           1.9         (1.1)        (1.6)         6.6
      Repurchase of preferred
       shares                    (0.8)           -         (0.8)           -
      Issue of Non-Voting
       Class A shares               -            -          1.0          0.8
      Repurchase of Non-Voting
       Class A shares               -            -         (1.9)        (0.8)
      Common dividends           (9.9)        (9.2)       (29.6)       (27.5)
                           -----------  -----------  -----------  -----------
    Cash flows (used in) from
     financing activities      (134.4)       (56.3)       (24.6)        42.0
                           -----------  -----------  -----------  -----------
    Decrease in cash and
     cash equivalents            (8.2)       (25.8)      (137.7)      (116.1)
    Cash and cash equivalents,
     beginning of period        211.6        191.4        341.1        281.7
                           -----------  -----------  -----------  -----------
    Cash and cash equivalents,
     end of period (*)     $    203.4   $    165.6   $    203.4   $    165.6
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


    (*) Cash and cash equivalents at February 4, 2006 includes $1.3 in Assets
    held for sale (Note 3).

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               ----------------------------------------------
                               FEBRUARY 3, 2007
                               ----------------
             (Unaudited, in millions, except per share amounts)

    1. Summary of Significant Accounting Policies

    Interim financial statements

    The unaudited interim period consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP"). These interim consolidated financial statements do not include all
of the disclosures included in the Company's annual consolidated financial
statements. Accordingly, these interim consolidated financial statements
should be read in conjunction with the consolidated financial statements for
the year ended May 6, 2006, as set out in the 2006 Annual Report.

    Generally accepted accounting principles

    The accounting policies used in the preparation of these interim
consolidated financial statements conform with those used in the Company's
2006 annual consolidated financial statements. Selected changes in accounting
policies adopted in fiscal 2007 and those changes adopted in 2006 are noted
below:

    a) Vendor consideration

       During the first quarter of fiscal 2007, the Company implemented, on a
       retroactive basis, Emerging Issues Committee Abstract ("EIC") 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 reflect 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
       the third quarter and year-to-date of fiscal 2007 of $36.1 and $106.8,
       respectively (2006 - $35.9 and $98.4). As reclassifications, these
       changes did not impact net earnings or earnings per share.

    b) Vendor allowances

       During the first quarter of fiscal 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 15).

    Inventories

    Warehouse inventories are valued at the lower of cost and net realizable
value with cost being determined substantially on a first-in, first-out
("FIFO") 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 profit 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.

    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,
affiliated stores and independent accounts. Revenue received from non-VIE
franchised stores, affiliated 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.

    Pension benefit plans and other benefit plans

    The cost of the Company's pension benefits for defined contribution plans
are expensed at the time active employees are compensated. The cost of defined
benefit pension plans and other benefit plans is accrued based on actuarial
valuations, which are determined using the projected benefit 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 benefit plan assets. The
obligation related to employee future benefits 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 benefit plans, the actuarial gains and losses and the
impact of changes in the actuarial basis in excess of 10 percent of the
greater of the projected benefit 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 5 years. For other benefit plans,
actuarial gains and losses are recognized immediately.

    Use of estimates

    The preparation of consolidated financial statements, in conformity with
Canadian GAAP, requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. These estimates are based on management's best knowledge
of current events and actions that the Company may undertake in the future.
Actual results could differ from those estimates.


    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                                                  $     50.5
    Book value                                                          21.1
                                                                  -----------
                                                                        29.4
    Equity share of income fund conversion-related items                 3.1
                                                                  -----------
    Capital gain before income taxes                                    26.3
    Income taxes                                                         2.1
                                                                  -----------
    Net capital gain                                              $     24.2
                                                                  -----------
                                                                  -----------

    In the fourth quarter of fiscal 2006, the Capital gain before income taxes
was adjusted to $25.6 and the Net capital gain was adjusted to $23.5.


    3. Sale of Property to Crombie REIT

    During the third quarter of fiscal year 2006, the Board of Directors of
the Company approved a plan ("Plan") and initiated a program to dispose of 44
real estate properties which were held in wholly owned subsidiaries and which
were included in the Real estate segment of the business. In accordance with
Section 3475 of the CICA Handbook, the assets and liabilities of these
properties were reclassified as held for sale.
    In the fourth quarter of fiscal 2006, the Company's Real estate segment
completed the Plan and sold the properties to Crombie Real Estate Investment
Trust ("Crombie REIT"). Included in the proceeds was 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.


    4. Earnings Per Share

    Earnings per share amounts are calculated by dividing the earnings
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
using the treasury method and assumes that all the outstanding stock options
were exercised and share purchase loans were repaid at the beginning of the
period.


    Earnings applicable to common shares is comprised of the following:

                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                           -----------  -----------  -----------  -----------
    Operating earnings     $     36.1   $     47.7   $    140.6   $    145.1
    Capital gain (loss)
     and other items,
     net of tax of $(0.2);
     $1.9; $1.2; $4.3            (1.0)         8.3          5.0         33.3
                           -----------  -----------  -----------  -----------
    Net earnings                 35.1         56.0        145.6        178.4
    Preferred share dividends    (0.1)        (0.1)        (0.3)        (0.2)
                           -----------  -----------  -----------  -----------
    Earnings applicable to
     common shares         $     35.0   $     55.9   $    145.3   $    178.2
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


    Earnings per share is comprised of the following:

    Operating earnings     $     0.55   $     0.72   $     2.14   $     2.21
    Capital gain (loss)
     and other items            (0.01)        0.13         0.08         0.51
                           -----------  -----------  -----------  -----------
    Basic earnings per
     share                 $     0.54   $     0.85   $     2.22   $     2.72
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------
    Operating earnings     $     0.54   $     0.72   $     2.13   $     2.20
    Capital gain (loss)
     and other items            (0.01)        0.13         0.08         0.51
                           -----------  -----------  -----------  -----------
    Diluted earnings
     per share             $     0.53   $     0.85   $     2.21   $     2.71
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


    5. Other Assets

                                        February 3        May 6   February 4
                                              2007         2006         2006
                                        -----------  -----------  -----------
    Loans and mortgages receivable      $     60.5   $     68.4   $     63.6
    Deferred costs                           201.8        177.7        159.5
    Intangibles (less accumulated
     amortization of $10.4
     May 6, 2006 $7.6;
     February 4, 2006 $4.2)                   36.8         27.2         24.3
                                        -----------  -----------  -----------
                                        $    299.1   $    273.3   $    247.4
                                        -----------  -----------  -----------
                                        -----------  -----------  -----------


    6. Long-Term Debt

    On October 6, 2006, Sobeys Inc. (a subsidiary of the Company) issued new
Medium Term Notes of $125.0, interest rate of 5.8%, maturing on October 6,
2036.


    7. Other Liabilities

                                        February 3        May 6   February 4
                                              2007         2006         2006
                                        -----------  -----------  -----------
    Deferred revenue                    $      6.4   $      3.3   $      0.9
    Deferred hedge gain                        2.5         10.2            -
    Above market leases from acquisitions      4.5          5.0            -
    Asset retirement obligations               0.4          0.4            -
                                        -----------  -----------  -----------
                                        $     13.8   $     18.9   $      0.9
                                        -----------  -----------  -----------
                                        -----------  -----------  -----------


    8. Capital Stock

    During the period, under a normal course issuer bid which expired on
July 27, 2006, 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 third quarter, the
Company purchased for cancellation 31,900 Series 2 preferred shares for $0.8.
During the period 46,047 (2006 - 20,254) Non-Voting Class A shares were issued
under the Company's stock option and share purchase plans to certain officers
and employees for $1.0 (2006 - $0.8). Loans receivable from officers and
employees of $3.6 (May 6, 2006 - $4.6; February 4, 2006 - $4.7) under the
Company's share purchase plan are classified as a reduction of Shareholders'
Equity.


    9. Investment Income

                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                           -----------  -----------  -----------  -----------
    Dividend and interest
     income                $      2.8   $      2.1   $      7.7   $      6.3
    Share of earnings of
     entities accounted
     using the equity
     method                       8.5          5.5         26.1         18.0
                           -----------  -----------  -----------  -----------
                           $     11.3   $      7.6   $     33.8   $     24.3
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


    10. Capital Gain (Loss) and Other Items

                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                           -----------  -----------  -----------  -----------
    Gain on sale of Wajax
     Income Fund (Note 2)  $        -   $        -   $        -   $     26.3
    Gain (loss) on sale
     of investments              (0.8)        10.1          6.2         11.6
    Other items                  (0.4)         0.1            -         (0.3)
                           -----------  -----------  -----------  -----------
                           $     (1.2)  $     10.2   $      6.2   $     37.6
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


    11. Supplementary Cash Flow Information

                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                           -----------  -----------  -----------  -----------
    a) Items not affecting
     cash

    Depreciation and
     amortization          $     59.7   $     60.2   $    179.1   $    169.1
    Future income taxes           2.2          0.9          2.8          0.3
    Amortization of
     deferred items               6.9          6.4         21.4         22.2
    Equity in earnings of
     other entities, net of
     dividends received           2.5          1.3            -         (2.5)
    Minority interest             6.7         10.7         34.8         39.9
    Stock-based
     compensation                 0.2          0.3          0.7          0.6
    Long-term lease
     obligation                   0.6         (0.2)         3.0          0.8
    Employee future
     benefits obligation          1.1          0.7          5.3          5.2
    Rationalization costs
     (Note 19)                   13.2            -         13.2            -
    Gain on sale of Wajax
     Income Fund                    -            -            -        (26.3)
                           -----------  -----------  -----------  -----------
                           $     93.1   $     80.3   $    260.3   $    209.3
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------

    b) Other cash flow
     information

    Net interest paid      $      8.3   $     14.3   $     36.6   $     53.5
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------
    Net income taxes paid  $     63.0   $     21.3   $    133.0   $     95.8
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


    12. Segmented Information
                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                                          Restated                  Restated
                                           (Note 1)                  (Note 1)
                           -----------  -----------  -----------  -----------
    Revenue
    Food                   $  3,230.7   $  3,136.0   $  9,788.3   $  9,592.3
                           -----------  -----------  -----------  -----------
    Real estate
      Commercial                  9.7         36.5         29.2        104.7
      Inter-segment               9.0         13.6         25.5         40.0
      Residential                12.1         18.1         89.3         53.8
                           -----------  -----------  -----------  -----------
                                 30.8         68.2        144.0        198.5
                           -----------  -----------  -----------  -----------
    Investment and other
     operations                  29.4         44.6        109.5         86.2
                           -----------  -----------  -----------  -----------
                              3,290.9      3,248.8     10,041.8      9,877.0
    Elimination                  (9.0)       (13.6)       (25.5)       (40.0)
                           -----------  -----------  -----------  -----------
                           $  3,281.9   $  3,235.2   $ 10,016.3   $  9,837.0
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------


                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
    Operating income       -----------  -----------  -----------  -----------
    Food                   $     54.8   $     78.6   $    226.0   $    246.4
    Real estate
      Commercial                 12.2         20.2         35.3         63.3
      Residential                 5.3         12.0         36.6         34.3
    Investment and other
     operations                   9.7          9.5         26.3         23.5
    Corporate expenses           (2.3)        (2.0)        (7.1)        (7.0)
                           -----------  -----------  -----------  -----------
                           $     79.7   $    118.3   $    317.1   $    360.5
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------

                                        February 3        May 6   February 4
                                              2007         2006         2006
                                        -----------  -----------  -----------
    Identifiable assets
    Food                                $  3,247.2   $  3,119.5   $  2,913.7
    Goodwill                                 745.9        691.7        681.3
                                        -----------  -----------  -----------
                                           3,993.1      3,811.2      3,595.0
    Real estate                              616.5        634.7      1,087.0
    Investment and other
     operations (including
     goodwill of $40.1;
     May 6, 2006 $40.1;
     February 4, 2006 $32.2)                 471.9        605.6        542.0
                                        -----------  -----------  -----------
                                        $  5,081.5   $  5,051.5   $  5,224.0
                                        -----------  -----------  -----------
                                        -----------  -----------  -----------


                                 2007         2006         2007         2006
                            (13 weeks)   (13 weeks)   (39 weeks)   (39 weeks)
                           -----------  -----------  -----------  -----------
    Capital expenditure
    Food                   $    118.7   $    145.6   $    334.5   $    313.0
    Real estate                     -         27.6          9.7         55.4
    Investment and other
     operations                  16.1         28.8         34.5         40.7
                           -----------  -----------  -----------  -----------
                           $    134.8   $    202.0   $    378.7   $    409.1
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------

    13. Employee Future Benefits

    During the Company's third quarter and year-to-date of fiscal 2007, the
net employee future benefit expense was $6.1 and $18.3 respectively (2006 -
$5.7 and $17.7). The expense included costs for the Company's defined
contribution pension plans, defined benefit pension plans, post-retirement
benefit plans and post-employment benefit plans.

    14. Business Acquisitions

    During the first two quarters, the Company increased its ownership
interest in Sobeys Inc. 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 financial 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 the period, Sobeys Inc. acquired franchisee stores and prescription
files for total cash consideration of $11.1. The acquisitions were accounted
using the purchase method with net identifiable assets recorded at $10.8
(including intangible assets of $5.5) and goodwill recorded at $0.3.
    On August 27, 2006, Sobeys Inc. 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, Quebec. Sixteen of the franchised
retail store operations are considered VIEs under the Company's policy (see
Note 16). 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 reflect the finalized
valuation of ADL. The final purchase price allocation, which has incorporated
management's assessment of fair value, is as follows:

    Consideration
      Cash                                                        $     75.8
      Acquisition costs                                                  3.4
                                                                  -----------
      Total consideration paid                                          79.2
                                                                  -----------
    Net assets acquired
      Current assets                                                    28.0
      Long-term assets                                                  27.7
      Current liabilities assumed                                      (20.0)
      Long-term liabilities assumed                                     (4.6)
                                                                  -----------
      Total net assets acquired                                         31.1
                                                                  -----------
    Excess consideration paid over net assets acquired            $     48.1
                                                                  -----------
                                                                  -----------

    Allocation of excess consideration paid over net assets
     acquired
      Intangible assets                                           $      6.8
      Goodwill                                                          41.3
                                                                  -----------
                                                                  $     48.1
                                                                  -----------
                                                                  -----------


    15. 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.
Certain allowances from vendors are contingent on the Company achieving
minimum purchase levels. The Company recognizes these allowances in income in
accordance with EIC-144 when it is probable that the minimum purchase level
will be met, and the amount of allowance can be estimated. By the third
quarter of fiscal 2007, the Company recognized $2.1 (February 4, 2006 - $2.1)
of allowances in income where it is probable that the minimum purchase level
will be met and the amount of allowance can be estimated.


    16. Variable Interest Entities

    Variable interest entities are defined under Accounting Guideline
("AcG")15, "Consolidation of Variable Interest Entities", as entities that do
not have sufficient equity at risk to finance their activities without
additional subordinated financial support, or where the equity holders lack
the overall characteristics of a controlling financial interest. The guideline
requires that the VIE be consolidated with the financial results of the entity
deemed to be the primary beneficiary of the VIE's expected losses and its
expected residual returns.
    The Company has identified the following entities as VIEs:

    Franchise Affiliates
    --------------------

    The Company has identified 269 (May 6, 2006 - 273; February 4, 2006 - 294)
franchise affiliate stores whose franchise agreements result in the Company
being deemed the primary beneficiary 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 affiliates and
the entity providing warehouse and distribution services effective at the
fourth quarter of fiscal 2005.
    In the prior period of fiscal year 2006, a charge of $3.4 (net of minority
interest of $1.9) to retained earnings was required to reflect additional
minority interest in the VIEs.


    17. Contingent Liabilities

    In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, from time to time certain matters
are reviewed and challenged by tax authorities.
    On June 21, 2005, Sobeys Inc. received a notice of reassessment from
Canada Revenue Agency ("CRA") for fiscal years 1999 and 2000 related to the
Goods and Service Tax ("GST"). CRA asserts that Sobeys Inc. 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 Inc. has reviewed
this matter, has received legal advice, and believes it was not required to
collect GST. During the second quarter of fiscal 2006, Sobeys Inc. filed 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 Inc. 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 fiscal years 2001 through 2006. The
principle matters under audit are:

    a) The tax treatment of gains realized on the sale of shares in
       Hannaford Bros. Co. ("Hannaford") in fiscal 2001;

    b) The tax treatment of gains realized on the sale of shares in Delhaize
       America Inc. in fiscal years 2001 and 2002; and

    c) The taxation of income from certain of the Company's real estate
       investments for fiscal 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 very unlikely, the
maximum potential exposure in excess of provisions taken is approximately
$40.0.
    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.
    In the third quarter, Sobeys Inc. was named as a defendant in a lawsuit
brought by beneficiaries 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 Inc. is one
of approximately 440. Sobeys Inc. 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.
    There are various claims and litigation, which the Company is involved
with, arising out of the ordinary course of business operations. The Company's
management does not consider the exposure to such litigation to be material,
although this cannot be predicted with certainty.


    18. Related Party Transactions

    On October 2, 2006, the Company sold two commercial properties to Crombie
REIT, an equity accounted investment, 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.


    19. Business Rationalization Costs

    During the third quarter of fiscal 2007, Sobeys Inc. completed a
rationalization of administrative functions in Atlantic Canada. Sobeys Inc.
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 fixed asset and
inventory write-offs. Sobeys Inc. expects to incur additional administrative
rationalization costs in the next two quarters associated with the Vaughan
distribution centre and distribution rationalization costs related to its
Quebec network. The dollar value of these additional costs will be quantified
and disclosed in future quarters. The costs associated with the organizational
change are recorded as incurred as cost of sales in the statement of earnings
before tax as follows:

                                          Incurred  Anticipated        Total
                                        -------------------------------------
     Severance       Atlantic region    $      4.7   $        -   $      4.7
                     Ontario region            5.3            -          5.3
                     Quebec region               -          5.4          5.4
     Other costs                               1.1            -          1.1
     Asset write-offs                          2.1            -          2.1
                                        -------------------------------------
                                        $     13.2   $      5.4   $     18.6
                                        -------------------------------------
                                        -------------------------------------


    20. Comparative Figures

    Comparative figures have been reclassified, where necessary, to reflect
the current period's presentation and to record the effects of retroactive
application of certain new accounting standards.
    




For further information:

For further information: Paul V. Beesley, Executive Vice President and
Chief Financial Officer, (902) 755-4440


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