<Page>
Exhibit 13.1
[THE JEAN COUTU GROUP (PJC) INC. LOGO]
The JEAN COUTU Group (PJC) Inc.
2004 ANNUAL REPORT
[GRAPHIC]
A GROWING NORTH AMERICAN PRESENCE
<Page>
2004
<Page>
Summary
<Table>
FINANCIAL HIGHLIGHTS 08
MESSAGE TO SHAREHOLDERS 13
REVIEW OF OPERATIONS 18
MANAGEMENT'S DISCUSSION AND ANALYSIS 21
CONSOLIDATED FINANCIAL STATEMENTS 36
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS 42
BOARD OF DIRECTORS 64
CORPORATE OFFICER 65
GENERAL INFORMATION 66
</Table>
<Page>
[GRAPHIC]
For the past 35 years, The Jean Coutu Group (PJC) Inc. has stayed the course of
steady growth. During 2003-2004, the Company continued to assert its leadership
by signing an agreement to acquire from TDI Consolidated Corporation, a
wholly-owned subsidiary of J.C. Penney Corporation, Inc., 1,549 Eckerd
drugstores in 13 states in the Northeast and mid-Atlantic United States.
Thus, on August 1, 2004, the Jean Coutu Group became the fourth largest
drugstore chain in North America with 2,204 outlets that include the new Eckerd
branches, 319 PJC franchised outlets in Canada and 336 Brooks corporate outlets
in the U.S.
staying the course
<Page>
[GRAPHIC]
<Page>
customer driven
The success of the Jean Coutu Group stems from its firm commitment to provide
quality centrally located neighbourhood outlets that offer a wide variety of
products to meet the needs of their local clientele. With the recent acquisition
of 1,549 Eckerd drugstores, the Company counts on nearly 60,000 people to make
the PJC, BROOKS and ECKERD banners synonymous with quality.
<Page>
[PHOTO]
<Page>
[PHOTO]
<Page>
always reaching higher
The drugstore industry is booming, and in its constant search for excellence,
the Jean Coutu Group takes all the means at its disposal to guarantee access to
first-rate pharmaceutical care. To this end, the Company:
- - looks for innovative ways to conduct its business,
- - promotes rapprochement with the next generation of pharmacists, and
- - contributes to the advancement of the pharmacist profession.
<Page>
08 FINANCIAL HIGHLIGHTS THE JEAN COUTU GROUP (PJC) INC.
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
Years ended May 31 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA AND RATIOS) $ $ $ $ $
FINANCIAL PERFORMANCE
Revenues(1)
Canada(2) 1,667,562 1,355,163 1,422,285 1,282,858 1,151,491
United States 2,428,576 2,692,400 2,054,546 1,547,684 1,338,447
- --------------------------------------------------------------------------------------------------------------------------------
Total 4,096,138 4,047,563 3,476,831 2,830,542 2,489,938
- --------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes(2) 258,472 230,385 205,146 163,170 133,535
Net earnings(2) 176,923 160,092 136,474 105,941 86,191
Cash flow provided by operating activities 245,456 213,595 118,514 135,290 88,900
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Capital assets 742,684 687,890 634,140 407,035 365,942
Total assets(2) 1,834,786 1,716,632 1,658,200 1,230,805 1,032,671
Shareholders' equity(2) 1,165,832 1,012,934 942,654 831,927 588,578
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA(3)
Net earnings (basic)(2) 0.78 0.71 0.61 0.49 0.41
Cash flow provided by operating activities 1.08 0.94 0.53 0.62 0.42
Dividends 0.12 0.12 0.09 0.08 0.06
Shareholders' equity(2) 5.14 4.48 4.19 3.84 2.79
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Working capital 2.02:1 1.88:1 2.03:1 2.62:1 1.82:1
Total indebtedness on equity(2) 0.24:1 0.35:1 0.43:1 0.21:1 0.37:1
Return on average shareholders' equity (%)(2) 16.2 16.4 15.4 14.9 15.7
- --------------------------------------------------------------------------------------------------------------------------------
NETWORK PERFORMANCES
Franchised establishments (Canada) 2,603,495 2,418,363 2,264,451 2,065,244 1,880,891
Corporate establishments (United States) 2,419,525 2,681,608 2,043,460 1,536,133 1,331,949
- --------------------------------------------------------------------------------------------------------------------------------
Total 5,023,020 5,099,971 4,307,911 3,601,377 3,212,840
- --------------------------------------------------------------------------------------------------------------------------------
SHARE INFORMATION(3)
High 19.79 20.00 19.72 13.97 9.06
Low 14.15 13.25 11.82 8.55 6.74
Close 18.95 15.71 19.12 13.22 7.50
================================================================================================================================
</Table>
(1) Revenues comprise sales and other revenues.
(2) The figures were restated to take into account the retroactive application
by the Company of the new recommendations made by the Emerging Issues
Committee (EIC-123) of the CICA and the change of accounting policy for
incentive paid to franchisees, as mentioned in Note 2 a) and 2 d).
(3) On September 29, 2000 and September 25, 2002, the Company declared a
2-for-1 split of its Class A subordinate shares and Class B shares. The per
share figures have been calculated taking into consideration these stock
splits.
<Page>
THE JEAN COUTU GROUP (PJC) INC. FINANCIAL HIGHLIGHTS 09
[GRAPHIC]
SOUND GROWTH MANAGEMENT
[CHART]
NET EARNINGS
(IN MILLIONS OF $)
<Table>
2000 86.2
2001 105.9
2002 136.5
2003 160.1
2004 176.9
</Table>
[CHART]
REVENUES
(IN MILLIONS OF $)
<Table>
2000 2,489.9
2001 2,830.5
2002 3,476.8
2003 4,047.6
2004 4,096.1
</Table>
[CHART]
PJC RETAIL SALES
(IN MILLIONS OF $)
<Table>
2000 1,880.9
2001 2,065.2
2002 2,264.5
2003 2,418.4
2004 2,603.5
</Table>
[CHART]
BROOKS RETAIL SALES
(IN MILLIONS OF US$)
<Table>
2000 904.8
2001 1,013.3
2002 1,301.7
2003 1,757.0
2004 1,802.6
</Table>
<Page>
[GRAPHIC]
A GROWING NORTH AMERICAN PRESENCE
[PJC JEAN COUTU LOGO]
QUEBEC
NEW BRUNSWICK
ONTARIO
[BROOKS(R) LOGO]
MAINE
CONNECTICUT
RHODE ISLAND
NEW HAMPSHIRE
VERMONT
MASSACHUSETTS
NEW YORK
[ECKERD(R) LOGO]
NEW YORK
PENNSYLVANIA
NORTH CAROLINA
GEORGIA
NEW JERSEY
SOUTH CAROLINA
VIRGINIA
TENNESSEE
DELAWARE
MARYLAND
CONNECTICUT
WEST VIRGINIA
OHIO
ON AUGUST 1, 2004, THE JEAN COUTU GROUP BECAME A DOMINANT PLAYER IN ITS INDUSTRY
AS THE SECOND LARGEST DRUGSTORE CHAIN IN EASTERN CANADA AND THE U.S. AND THE
FOURTH LARGEST IN NORTH AMERICA. THE COMPANY MANAGES A COMBINED NETWORK OF 2,204
OUTLETS.
1,885 BROOKS AND ECKERD CORPORATE OUTLETS IN 18 STATES COVERING THE REGIONS OF
NEW ENGLAND, NORTHEAST UNITED STATES, THE ATLANTIC COAST AND THE SOUTHEAST
UNITED STATES.
319 PJC JEAN COUTU AND PJC CLINIQUE FRANCHISED OUTLETS IN THE PROVINCES OF
QUEBEC, ONTARIO AND NEW BRUNSWICK.
<Page>
THE JEAN COUTU GROUP (PJC) INC. FINANCIAL HIGHLIGHTS 11
OVER 100 YEARS OF DRUGSTORE EXPERTISE
[ECKERD(R) LOGO]
THE ECKERD DRUGSTORE CHAIN ACQUIRED BY THE JEAN COUTU GROUP HOLDS AN ENVIABLE
PLACE IN THE DISTRIBUTION AND RETAIL SALES SECTOR OF PHARMACEUTICAL AND
PARAPHARMACEUTICAL PRODUCTS IN NORTH AMERICA. LAUNCHED IN 1898, THE ECKERD
BANNER IS ONE OF THE OLDEST AND MOST RESPECTED IN THE U.S. RETAIL DRUGSTORE
INDUSTRY.
THE FOURTH LARGEST DRUGSTORE CHAIN IN NORTH AMERICA
CHOICE LOCATIONS SERVING DENSITY POPULATED AREAS
FIRST OR SECOND IN SOME 60% OF THE MARKETS IN WHICH IT IS PRESENT
TYPICAL STORE SPACE RANGING FROM 10,000 SQ. FT. TO 13,500 SQ. FT.
STATE-OF-THE-ART DISTRIBUTION CENTRES
FILLS 103 MILLION PRESCRIPTIONS ANNUALLY AND AN AVERAGE OF 67,000 PRESCRIPTIONS
PER OUTLET
INVESTED US$370 MILLION OVER THE PAST THREE YEARS TO MODERNIZE 65% OF ITS
NETWORK
OFFERS BETWEEN 18,000 AND 25,000 PRODUCTS, OF WHICH 2,000 ARE PRIVATE LABEL, IN
THE FOLLOWING CATEGORIES: BEAUTY, OVER-THE-COUNTER DRUGS, PERSONAL CARE AND
CONSUMER PRODUCTS
<Page>
History and Success
1969 FIRST JEAN COUTU PHARMACY OPENS IN MONTREAL
1973 FRANCHISE CONCEPT LAUNCHED IN THE CANADIAN NETWORK
1983 CANADIAN NETWORK OF FRANCHISED OUTLETS EXPANDS TO ONTARIO AND NEW
BRUNSWICK
1986 COMPLETES IPO ON THE MONTREAL AND TORONTO STOCK EXCHANGES
1987 INTEGRATES 15 CADIEUX PHARMACIES INTO THE CANADIAN FRANCHISEE NETWORK
PENETRATES THE U.S. MARKET WITH THE OPENING OF A CORPORATE OUTLET IN
MASSACHUSETTS
1989 INTEGRATES 12 CLOUTIER PHARMACIES INTO THE CANADIAN FRANCHISEE NETWORK
PURCHASES 16 DOUGLAS DRUG PHARMACIES IN RHODE ISLAND
1994 ACQUIRES 221 BROOKS DRUGSTORES IN SIX STATES IN THE NORTHEAST U.S.
1995 CONTINUES EXPANDING WITH THE ACQUISITION OF 30 DRUGSTORES UNDER THE
RITE-AID BANNER IN MASSACHUSETTS AND RHODE ISLAND
1996 INTEGRATES 8 MAYRAND DRUGSTORES INTO THE CANADIAN FRANCHISEE NETWORK.
1997 INTEGRATES 23 CUMBERLAND DRUGSTORES INTO THE CANADIAN FRANCHISEE NETWORK
1999 PURCHASES 11 CITY DRUG PHARMACIES IN VERMONT AND NEW YORK
2002 ACQUIRES 80 OSCO DRUGSTORES IN MASSACHUSETTS AND NEW HAMPSHIRE
2004 ACQUIRES 1,549 ECKERD DRUGSTORES IN 13 STATES COVERING THE NORTHEAST AND
MID-ATLANTIC UNITED STATES
<Page>
THE JEAN COUTU GROUP (PJC) INC. MESSAGE TO SHAREHOLDERS 13
STEADY GROWTH
[PHOTO OF JEAN COUTU]
JEAN COUTU
CHAIRMAN OF THE BOARD
THE JEAN COUTU GROUP (PJC) INC.
[PHOTO OF FRANCOIS J. COUTU]
FRANCOIS J. COUTU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE JEAN COUTU GROUP (PJC) INC.
[PHOTO OF MICHEL COUTU]
MICHEL COUTU
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
THE JEAN COUTU GROUP (PJC) USA, INC.
The Jean Coutu Group (PJC) Inc. has become a force in North America since its
creation 35 years ago. In fiscal 2003-2004, the Company kept its growth and
success record intact by delivering an excellent financial performance that
attests to strong, sound management. Thus, revenues as at May 31, 2004, were
$4.096 billion dollars, while net earnings increased 10.5% over last year to
$176.9 million.
At the end of another successful year, the Jean Coutu Group continues to
maximize its potential by following a structured approach to achieve its growth
objectives and expand its presence in North America.
The financial and operating performance of the PJC and Brooks chains in
2003-2004 is largely attributable to the sustained efforts of the Company's
valued franchisees and employees, who day in and day out meet the highest
quality standards for customer service and pharmaceutical care.
<Page>
In 2004, the Jean Coutu Group became a dominant player in its industry as the
fourth largest drugstore chain in North America.
<Page>
THE JEAN COUTU GROUP (PJC) INC. MESSAGE TO SHAREHOLDERS 15
OPTIMAL PERFORMANCE
A WATERSHED YEAR
Fiscal 2003-2004 was a turning point in the achievement of the Company's growth
objectives. We orchestrated strategies and actions to leverage employee
productivity, processes and resources in order to set up conditions conducive to
optimizing the performance of our administrative and commercial operations. To
this end, we re-engineered the Company to ensure a solid foundation capable of
supporting our daily challenges and of promoting excellence in all our
franchised and corporate outlets.
This year saw the successful completion of the most important transaction in the
history of our organization. We reached an agreement to acquire from TDI
Consolidated Corporation, a wholly-owned subsidiary of J.C. Penney Corporation,
Inc., Eckerd's head office, 1,549 pharmacies and six distribution centres spread
across 13 states in the Northeast and mid-Atlantic United States. Thus, as of
August 1, 2004, the Jean Coutu Group has been operating 2,204 franchised and
corporate outlets in eastern Canada, and in the Northeast and mid-Atlantic
United States. By becoming the fourth largest drugstore chain in North America,
we are entering 2004-2005 from a position of strength.
In the U.S., the Brooks and Eckerd banners already rank first or second in some
60% of the markets they serve. The geographical concentration of the outlets,
their choice location and proximity to very density populated areas, combined
with the reputation of the Brooks and Eckerd brands, place the Jean Coutu Group
in a position to maintain sustainable growth.
The business model we have espoused since our foray into the U.S. market in
1987, and our steady financial performance, are proof positive that our
organization has the ability to maximize the full potential of a corporate
network that today boasts 1,885 outlets in the U.S. We plan to leverage this
model and our know-how in advanced technologies and quality control processes to
enhance both the operational and financial performances of our new Eckerd
stores.
<Page>
16 MESSAGE TO SHAREHOLDERS THE JEAN COUTU GROUP (PJC) INC.
A SOLID PERFORMANCE AND A PROMISING FUTURE
The results of fiscal 2003-2004 once again attest to the excellence and
performance of our PJC franchised outlets and Brooks corporate stores. We
continued to expand on the Canadian market by opening nine new branches in
Quebec and New Brunswick, and by buying three Pharmasave outlets in Ontario. As
for the U.S., the Eckerd acquisition and the opening of five new Brooks branches
confirm our leadership in that market and the potential it represents in a
rapidly growing industry.
The investments made in improving our outlets and in the fields of training,
technology, promotion and marketing have allowed us to set ourselves apart. As
drugstore professionals, we make it a priority to guarantee access to top
quality services. Growing healthcare needs are prompting us to innovate in the
way we do things, promote rapprochement with the next generation of pharmacists
and become actively involved in advancing the profession.
Our achievements in 2003-2004 will help support our growth in the years to come.
Our growing presence in North America places us in a choice position to turn a
new page in our history and guarantees us a most promising future.
"EVERYTHING WE DO IS AIMED AT PROVIDING OUR CUSTOMERS WITH THE BEST IN
PHARMACEUTICAL SERVICES TODAY AND IN THE YEARS TO COME, QUALITY OUTLETS THAT
OFFER PRODUCTS AND SERVICES SUITED TO THEIR NEEDS, ACCESS TO LOYALTY PROGRAMS,
AND A UNIQUE ENVIRONMENT THAT STRIVES FOR EXCELLENCE IN CUSTOMER SERVICE."
<Page>
THE JEAN COUTU GROUP (PJC) INC. MESSAGE TO SHAREHOLDERS 17
OPPORTUNITIES
Next year we will continue our efforts using a structured approach to optimize
the performance of our Canadian and U.S. networks. We will focus on a dynamic
approach that relies on the synergy of our resources and the sharing of
knowledge in order to reach our full potential. We will make a concerted effort
to affirm our leadership on a North American scale, and remain on the lookout
for new opportunities to increase our market share and presence in Canada and
the U.S.
We will achieve our objectives through best management practices. We will
continue to deploy strategies aimed at improving our operating efficiency as
well as training programs and other promising initiatives to ensure the highest
customer service standards. We will contribute to the advancement of the
profession and encourage the next generation of pharmacists in order to
guarantee access to and the continuity of quality pharmaceutical care.
ACKNOWLEDGEMENTS
We regretfully announce the retirement of Yvon Bechard, a founding pillar of the
Jean Coutu Group. His vast expertise in finance and the economy allowed us to
reach unparalleled heights. We thank him for his unwavering devotion and
invaluable contribution to the success of our organization.
THE DRUGSTORE INDUSTRY: A BOOMING SECTOR
[CHART]
CANADA
PRESCRIPTION DRUG
SALES FROM 2000 TO 2008
<Table>
2000 9.8
2001 11.5
2002 12.9
2003 14.1
2004E 15.7
2005E 17.4
2006E 19.3
2007E 21.4
2008E 23.8
</Table>
SOURCE: IMS HEALTH
E: YEARS 2004-2008 ARE ESTIMATED
(IN BILLIONS CAN$)
[CHART]
UNITED STATES
PRESCRIPTION DRUG
SALES FROM 2000 TO 2008
<Table>
2000 147.0
2001 172.0
2002 192.0
2003 220.2
2004E 245.9
2005E 275.1
2006E 309.4
2007E 345.0
2008E 383.2
</Table>
SOURCE: IMS HEALTH
E: YEARS 2004-2008 ARE ESTIMATED
(IN BILLIONS US$)
<Page>
[GRAPHIC]
satisfaction
<Page>
THE JEAN COUTU GROUP (PJC) INC. REVIEW OF OPERATIONS 01
[PHOTO]
[THE JEAN COUTU GROUP (PJC) INC. LOGO]
Our priority: customer service
All of the Jean Coutu Group strategies are aimed at offering the best in
pharmaceutical care and customer service. The Company's actions in 2003-2004
attest to its know-how and ability to innovate in order to fulfill the needs of
a burgeoning market and evolve in step with consumers' changing needs.
<Page>
02 REVIEW OF OPERATIONS THE JEAN COUTU GROUP (PJC) INC.
MODERN, QUALITY NEIGHBOURHOOD OUTLETS
[PJC JEAN COUTU LOGO]
[CHART]
RETAIL SALES 2004
CAN$2.603 BILLION(1)
<Table>
PHARMACY 56%
FRONT-END 44%
</Table>
(1) Not included in the consolidated financial statements of the Company.
[BROOKS(R) LOGO]
[CHART]
RETAIL SALES 2004
US$1.803 BILLION
<Table>
PHARMACY 69%
FRONT-END 31%
</Table>
[ECKERD(R) LOGO]
[CHART]
RETAIL SALES 2004
US$7.892 BILLION(1)(2)
<Table>
PHARMACY 71%
FRONT-END 29%
</Table>
(1) Not included in the consolidated financial statements of the Company.
(2) For the 53-week period ended May 1, 2004, for the outlets acquired by the
Company on July 31, 2004.
<Page>
THE JEAN COUTU GROUP (PJC) INC. REVIEW OF OPERATIONS 03
THE JEAN COUTU GROUP HAS ALWAYS SET ITSELF APART IN ITS VISION TO DEVELOP A
NETWORK OF FRIENDLY, WELL MERCHANDISED, EASILY ACCESSIBLE OUTLETS IN LINE WITH
THE TASTES AND NEEDS OF THE CONSUMERS THEY SERVE.
[GRAPHIC]
[GRAPHIC]
[GRAPHIC]
<Page>
04 REVIEW OF OPERATIONS THE JEAN COUTU GROUP (PJC) INC.
EXPANDING AN ADDED-VALUE NORTH AMERICAN NETWORK
CAN
[PJC THE JEAN COUTU GROUP (PJC) INC. LOGO]
The JEAN COUTU Group (PJC) Inc.
FRANCHISEE NETWORK
June 1, 2003 to May 31, 2004
OPENINGS AND IMPROVEMENT PROJECTS
- - 7 new PJC Jean Coutu
- - 2 new PJC Clinique
- - 6 major renovation projects
- - 7 expansion projects
- - 4 relocations
ACQUISITION OF THREE NEW PHARMASAVE DRUGSTORES IN ONTARIO
ACQUISITION OF SEVEN NEW PROPERTIES IN QUEBEC
<Table>
<Caption>
Fiscal years ended May 31 2004 2003
- ---------------------------------------------------------
FRANCHISED
OUTLETS SALES
(IN THOUSANDS OF DOLLARS) 2,603,495 2,418,363
- ---------------------------------------------------------
NUMBER OF
FRANCHISED OUTLETS
PJC Jean Coutu 277 270
PJC Clinique 40 39
PJC Sante Beaute 2 2
- ---------------------------------------------------------
EMPLOYEES AT
FRANCHISED OUTLETS 13,043 12,416
- ---------------------------------------------------------
</Table>
INNOVATION
THE JEAN COUTU GROUP REMAINS AN UNCONTESTED LEADER DUE TO ITS CONTINUOUS
FRANCHISEE DEVELOPMENT AND IMPROVEMENT INITIATIVES. AMONG THIS YEAR'S NEW OUTLET
OPENINGS IS THE SECOND LARGEST OUTLET IN THE COMPANY'S CANADIAN NETWORK. LOCATED
IN MONTREAL ON BEAUMONT AVENUE AT THE CORNER OF ROCKLAND AVENUE, THIS NEW BRANCH
OFFERS:
- - A LEADING-EDGE LABORATORY AND A PRIVATE CONSULTATION AREA,
- - A CLINIC OFFERING SPECIALIZED MEDICAL SERVICES,
- - THE MOST ELEGANT PASSION FOR BEAUTY BOUTIQUE,
- - DRIVE-THRU SERVICE,
- - NEARLY 12,000 SQ. FT. OF SHOPPING SPACE.
<Page>
THE JEAN COUTU GROUP (PJC) INC. REVIEW OF OPERATIONS 05
DURING FISCAL 2003-2004, THE JEAN COUTU GROUP EXPANDED AND CONTINUOUSLY IMPROVED
ITS NETWORKS OF CANADIAN AND U.S. OUTLETS.
USA
[BROOKS(R) LOGO]
NETWORK OF CORPORATE OUTLETS
June 1, 2003 to May 31, 2004
OPENINGS AND IMPROVEMENT PROJECTS
- - 5 new Brooks pharmacies
- - 7 major renovation projects
- - 6 relocation projects
ACQUISITION OF EIGHT NEW PROPERTIES
- - 2 in Connecticut
- - 3 in Massachusetts
- - 2 in Vermont
- - 1 in Rhode Island
<Table>
<Caption>
Fiscal years ended May 31 2004 2003
- ---------------------------------------------------------
CORPORATE
OUTLETS SALES
(IN THOUSANDS OF
AMERICAN DOLLARS) 1,802,585 1,757,035
- ---------------------------------------------------------
NUMBER OF
CORPORATE OUTLETS 336 332
- ---------------------------------------------------------
EMPLOYEES AT
CORPORATE OUTLETS 8,859 8,075
- ---------------------------------------------------------
</Table>
EXPANSION
THE QUALITY OF THE 1,549 ECKERD DRUGSTORES ACQUIRED BY THE JEAN COUTU GROUP ON
AUGUST 1, 2004 IS A MAJOR ASSET TO THE COMPANY'S GROWTH AND EXPANSION IN THE
U.S.
- - A WELL-ESTABLISHED CHAIN OF OUTLETS WITH QUALITY, WELL-LOCATED REAL ESTATE.
- - MAJOR INVESTMENTS MADE OVER THE PAST THREE YEARS TO IMPROVE, RELOCATE AND
REMODEL 65% OF THE OUTLETS.
- - DRIVE-THRU SERVICE INTRODUCED IN SOME 680 ECKERD BRANCHES.
<Page>
06 REVIEW OF OPERATIONS THE JEAN COUTU GROUP (PJC) INC.
TECHNOLOGY
THROUGH ITS SUBSIDIARY THE RX INFORMATION CENTRE, THE JEAN COUTU GROUP HAS
BECOME AN EXPERT IN THE USE OF LEADING-EDGE TECHNOLOGIES TO ENSURE OPTIMAL
OPERATIONS MANAGEMENT. THESE TECHNOLOGIES PROVIDE A VERY EFFECTIVE WAY TO
INCREASE THE COMPANY'S PROFITABILITY WHILE MAINTAINING THE HIGHEST QUALITY
STANDARDS IN CUSTOMER SERVICE AND PHARMACEUTICAL CARE.
PRESCRIPTION SYSTEM
Customized to help pharmacists with their daily administrative tasks, the
prescription system is one of the most innovative tools currently used in the
field.
In 2003-2004, the Rx Information Centre completed the final implementation phase
of the new system in the U.S. In Canada, a new version was developed and rolled
out in the New Brunswick outlets. And finally, major modifications were made to
the system in light of the forthcoming deployment in the Ontario network.
DISTRIBUTION CENTRES
The Jean Coutu Group continues to rely on state-of-the-art technologies to
respond more effectively to the growing needs of a flourishing network of
franchisees and corporate outlets. During the year, the radio frequency system
in the Canadian distribution network was upgraded and can now use the most
advanced wireless technology currently available.
<Page>
THE JEAN COUTU GROUP (PJC) INC. REVIEW OF OPERATIONS 07
TECHNOLOGY INFRASTRUCTURE
The performance of the technology infrastructure is one of the Company's main
concerns. During 2003-2004, computer security and the telecommunications
infrastructure serving Quebec's franchisees were analyzed in depth to ensure
users secure, reliable facilities capable of meeting their future needs.
Always with an eye to continuous improvement, the U.S. Brooks subsidiary was
equipped with a direct store delivery system to optimize the chain's internal
control. Using wireless terminals to confirm merchandise deliveries helps the
outlets better monitor the quantities received and electronically check costs
against invoices. Currently being tested in 15 branches, the system will be
rolled out across the chain over the next year.
[GRAPHIC]
THE RX INFORMATION CENTRE IS DEDICATED TO DEVELOPING AND IMPLEMENTING
LEADING-EDGE TECHNOLOGY SOLUTIONS AIMED AT MAINTAINING THE OPERATING EFFICIENCY
OF THE CANADIAN AND U.S. ESTABLISHMENTS NETWORKS AS WELL AS THE HEAD OFFICES AND
DISTRIBUTION CENTRES.
<Page>
08 REVIEW OF OPERATIONS THE JEAN COUTU GROUP (PJC) INC.
TRAINING
DAY AFTER DAY, THE JEAN COUTU GROUP SETS ITSELF APART THROUGH THE QUALITY OF ITS
SERVICE. BECAUSE A COMPETENT EMPLOYEE BASE IS THE COMPANY'S GREATEST ASSET, THE
ORGANIZATION INVESTS IN TRAINING IN ORDER TO PROMOTE AND IMPLEMENT BEST
PRACTICES IN PHARMACEUTICAL CARE, CUSTOMER SERVICE, MANAGEMENT, AND COSMETICS.
In 2003-2004, the Company offered to its franchisees programs designed to help
them meet their challenges. Health is a key area of focus, and access to quality
professional services remains a constant concern. During the year, the Jean
Coutu Group therefore developed and launched a training program for lab
technicians with a twofold objective: to offer leading-edge training to
employees and to ensure the development of competent future technicians. This
initiative is a lasting solution that will guarantee pharmacists solid support
in the lab, allowing them to devote more time to delivering pharmaceutical care.
<Page>
THE JEAN COUTU GROUP [PJC] INC. REVIEW OF OPERATIONS 09
[GRAPHIC]
STATE-OF-THE-ART TRAINING PROGRAM
- - LABORATORY
- - CUSTOMER SERVICE
- - COSMETICS
THE JEAN COUTU GROUP CONSIDERS TRAINING TO BE ONE OF THE MOST EFFECTIVE WAYS TO
GUARANTEE HIGH-LEVEL PERFORMANCE ACROSS THE ENTIRE ORGANIZATION AS WELL AS
SERVICE QUALITY IN BOTH ITS NETWORKS.
<Page>
10 REVIEW OF OPERATIONS THE JEAN COUTU GROUP [PJC] INC.
PROFESSIONAL SERVICES
IN CANADA AS IN THE U.S., THE JEAN COUTU GROUP HAS ALWAYS BEEN A LEADER IN
PHARMACEUTICAL CARE AND PURSUES ITS MISSION TO CONTINUOUSLY DEVELOP THIS
STRATEGIC AREA OF ITS BUSINESS.
TRAINING PROGRAMS, PHARMACIST SUPPORT SERVICES AND THE DESIGN OF MODERN,
EFFICIENT LABORATORIES TO FACILITATE LAB WORK ARE PART OF A CONCERTED EFFORT TO
ALLOW THE JEAN COUTU GROUP'S PHARMACISTS TO FULFILL THE GROWING NEEDS OF THEIR
CLIENTELE.
ADVANCING THE PROFESSION
In the past few years, the Jean Coutu Group has made determined efforts to
promote the implementation of long-lasting solutions to contribute to the
advancement of the profession. Pharmacists in franchised outlets can rely on The
Jean Coutu Academy and the medical and pharmacological information centre to
meet their professional development and support needs.
INVESTING IN TOMORROW'S PHARMACISTS
One of the fundamental values of the Jean Coutu Group is to ensure the quality
and continuity of professional care offered throughout North America. To this
end, the Company makes financial aid and support programs available to students,
endeavours to create a quality work environment conducive to the practice of the
profession, organizes promotional campaigns and events, and offers educational
internship programs.
<Page>
THE JEAN COUTU GROUP [PJC] INC. REVIEW OF OPERATIONS 11
QUALITY OF PHARMACEUTICAL CARE IS A FUNDAMENTAL AREA IN WHICH THE COMPANY
CONTINUOUSLY INNOVATES AND INVESTS IN ORDER TO MEET THE GROWING DEMAND OF A
BURGEONING MARKET.
DESIGN AND OPERATION OF MODERN, FRIENDLY LABORATORIES DEVELOPED ON THE BASIS OF
A CAREFUL ANALYSIS OF WORK ORGANIZATION AND THE PHYSICAL LAYOUT OF THE PREMISES.
DEVELOPMENT OF A UNIQUE PRESCRIPTION SYSTEM IN NORTH AMERICA.
PRIVATE CONSULTATION AREAS WHERE PHARMACISTS CAN PROVIDE CUSTOMERS WITH
PERSONALIZED SERVICE.
[PHOTO]
<Page>
12 REVIEW OF OPERATIONS THE JEAN COUTU GROUP [PJC] INC.
DIVERSITY AND SATISFACTION
DURING THE YEAR, THE COMPANY'S ENTIRE MERCHANDISING STRATEGIES AND EFFORTS WERE
GEARED TO MAKING PJC AND BROOKS OUTLETS THE DESTINATION OF CHOICE FOR CONSUMERS.
IN FACT, THE JEAN COUTU GROUP WORKS TIRELESSLY TO OFFER PRODUCTS AND SERVICES
THAT FULFILL THE REQUIREMENTS.
LOYALTY PROGRAMS
Attracting an impressive number of enrolments, the AIR Miles(TM) reward program
launched in May 2003 in all PJC branches in Quebec has been a resounding
success.
For its part, Brooks Pharmacy joined the UPROMISE program in April 2004. Under
this innovative program, rebates are deposited in college savings accounts set
up by customers for their children.
<Page>
THE JEAN COUTU GROUP [PJC] INC. REVIEW OF OPERATIONS 13
DIGITAL PHOTO PROCESSING SERVICE
Just one year after its introduction, the Jean Coutu Group has once again made
its mark in the digital photography sector. The speed and quality of the digital
photo development facilities set up in all its franchised outlets have propelled
it to number one in its sector. Focusing on offering rapid, efficient service,
the Company offers two ordering methods: online through its web site or
in-store.
In the U.S., all Brooks outlets offer next-day photofinishing. Self-service
digital print kiosks are available in 77 outlets, while 144 outlets are equipped
with a self-service Kodak Picture Maker unit that allows customers to make
copies and enlargements from their favourite prints.
BEAUTY AND COSMETICS
Always attuned to beauty care trends, the Jean Coutu Group continually sets
itself apart by offering a variety of products that appeal to a vast clientele.
In Canada, the Jean Coutu Group is the first company to market the professional
MAKE UP FOR EVER line in pharmacies. The line will make its debut in the PASSION
FOR BEAUTY BOUTIQUE of its new outlet on Beaumont Street in Montreal. In the
U.S., the success of the dermocosmetics section introduced in Brooks outlets two
years ago prompted the Company to expand the concept to three branches in
Massachusetts in 2003-2004.
<Page>
14 REVIEW OF OPERATIONS THE JEAN COUTU GROUP [PJC] INC.
OUR CUSTOMERS: PRIORITY #1
[GRAPHIC] MORE THAN 240,000 PJC CUSTOMERS IN QUEBEC HAVE ENROLLED IN THE AIR
MILES(TM) PROGRAM SINCE ITS LAUNCH IN MAY 2003, A COMPELLING TESTIMONY
TO ITS POPULARITY.
Upromise(R)
LAUNCHED IN BROOKS PHARMACIES IN APRIL 2004, THE UPROMISE PROGRAM
ALLOWS CUSTOMERS TO SAVE FOR THEIR CHILDREN'S COLLEGE EDUCATION.
[GRAPHIC] INNOVATING IN DIGITAL PHOTOGRAPHY, THE JEAN COUTU GROUP IS DEPLOYING
SELF-SERVE KIOSKS AND Kodak Picture Maker UNITS IN THE U.S. AND IS THE
FIRST DRUGSTORE RETAILER IN QUEBEC TO DEVELOP DIGITAL PHOTOS, WITH
NEARLY 5 MILLION PHOTOS PRINTED IN 2003-2004.
[GRAPHIC] A PIONEER IN THE MARKETING OF DERMOCOSMETICS IN NORTH AMERICAN
DRUGSTORES, THE JEAN COUTU GROUP TODAY HAS 132 PJC FRANCHISED OUTLETS
IN CANADA WITH A DERMO-COSMETICS SECTION, INCLUDING 47 EQUIPPED WITH A
SKIN ANALYZER. IN THE U.S., THE COMPANY IS CONTINUING ITS EXPANSION IN
THIS INCREASINGLY POPULAR SECTOR.
[GRAPHIC] PJC AND BROOKS FLYERS ARE IMPORTANT PROMOTIONAL VEHICLES WITH A WEEKLY
CIRCULATION OF MORE THAN 2 MILLION COPIES IN CANADA AND OVER 4 MILLION
IN THE U.S.
THE WEB SITES OF THE TWO OUTLETS NETWORKS ALLOW CUSTOMERS TO ACCESS A
HOST OF PRACTICAL HEALTH AND BEAUTY INFORMATION AT ANY TIME, AS WELL
AS THE WEEKLY FLYER PROMOTIONS AND LOYALTY PROGRAMS.
(R) TM Trademarks of AIR MILES International Trading B.V. Used under
licence by Loyalty Management Group Canada Inc. and The Jean Coutu
Group (PJC) Inc.
<Page>
THE JEAN COUTU GROUP [PJC] INC. REVIEW OF OPERATIONS 15
[GRAPHIC]
PJC AND BROOKS OUTLETS OFFER A VAST SELECTION OF PRIVATE LABEL PRODUCTS AND
EXCLUSIVE IMPORTED ITEMS THAT ARE A HIT WITH CONSUMERS DUE TO THEIR QUALITY AND
COMPETITIVE PRICE.
<Page>
16 REVIEW OF OPERATIONS THE JEAN COUTU GROUP [PJC] INC.
CORPORATE CITIZENSHIP
CLOSE TO THE PEOPLE AND THEIR COMMUNITIES, THE JEAN COUTU GROUP HAS ALWAYS
HELPED SUPPORT SEVERAL ORGANIZATIONS AND CONTRIBUTES TO THE ADVANCEMENT OF
SOCIETY, PARTICULARLY THOSE INVOLVED IN HEALTH-RELATED MATTERS. IN ALL, OVER
$1,000,000 WAS DONATED TO HOSPITAL FOUNDATIONS, RESEARCH CENTRES AND
PHARMACEUTICAL FACULTIES LAST YEAR.
THE JEAN COUTU GROUP DONATED $200,000 TO THE FONDATION DE L'HOPITAL
SAINTE-JUSTINE IN 2003-2004. THE COMPANY HAS COMMITTED TO DONATING A TOTAL OF
SOME $2 MILLION TO THE FOUNDATION OVER THE NEXT 10 YEARS.
MORE THAN 200 ORGANIZATIONS, FOUNDATIONS, RESEARCH INSTITUTES AND PHARMACEUTICAL
FACULTIES HAVE RECEIVED SUPPORT FROM THE JEAN COUTU GROUP.
[GRAPHIC]
THE MARCELLE AND JEAN COUTU FOUNDATION GRANTED $12.5 MILLION TO UNIVERSITE DE
MONTREAL IN 2002 TO BUILD A NEW PHARMACEUTICAL FACULTY BUILDING. ITS
INAUGURATION IS SCHEDULED FOR THIS YEAR.
<Page>
[GRAPHIC]
<Page>
THE RESULTS OF FISCAL 2003-2004 ONCE AGAIN ATTEST TO THE EXCELLENCE AND
PERFORMANCE OF OUR PJC FRANCHISED OUTLETS AND BROOKS CORPORATE STORES.
<Page>
THE JEAN COUTU GROUP [PJC] INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE DISCUSSION THAT FOLLOWS PROVIDES AN ANALYSIS OF THE CONSOLIDATED OPERATING
RESULTS AND FINANCIAL POSITION OF THE JEAN COUTU GROUP (PJC) INC. (THE JEAN
COUTU GROUP) AS AT MAY 31, 2004. THE MANAGEMENT'S DISCUSSION AND ANALYSIS THAT
FOLLOWS CONCERNS THE JEAN COUTU GROUP INDEPENDENTLY AND DOES NOT INCLUDE ECKERD
OPERATIONS EXCEPT WHEN THE ECKERD ACQUISITION IS SPECIFICALLY MENTIONED.
EXCEPT WHERE OTHERWISE INDICATED, ALL FINANCIAL INFORMATION HEREIN IS EXPRESSED
IN CANADIAN DOLLARS AND DETERMINED ON THE BASIS OF CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP). HOWEVER, IT SHOULD BE NOTED THAT AS OF THE FIRST
QUARTER OF FISCAL 2004-2005, ENDING AUGUST 31, 2004, THE FINANCIAL DATA WILL
APPEAR IN U.S. DOLLARS, IN ACCORDANCE WITH CANADIAN GAAP, WHICH WILL MORE
ACCURATELY REFLECT THE OPERATING RESULTS OF THE COMPANY, PARTICULARLY SINCE THE
ECKERD ACQUISITION FINALIZED JULY 31, 2004. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
AS AT MAY 31, 2004. ADDITIONAL INFORMATION RELATING TO THE JEAN COUTU GROUP IS
ALSO AVAILABLE ON SEDAR AT www.sedar.com.
FORWARD LOOKING STATEMENTS
This report contains certain "forward-looking statements" as defined in the
PRIVATE SECURITIES LITIGATION REFORM ACT of 1995. Any statement in this report
not based on historical fact may be deemed a forward-looking statement. When
used in this report, the words "believe,""intend,""expect,""estimate"and other
similar expressions are generally intended to identify forward-looking
statements. Such statements are not guarantees of the future performance of the
Jean Coutu Group or its industry and involve known and unknown risks and
uncertainties that may cause the outlook, the actual results or performance of
the Jean Coutu Group or of its reportable segments to be materially different
from any future results or performance expressed or implied by such statements.
COMPANY PROFILE
We exercise our pharmaceutical activities in two broad geographic areas, eastern
Canada and the eastern United States and in two types of outlets: franchised
outlets (PJC) and corporate owned outlets (Brooks).
As at May 31, 2004, our network of PJC and Brooks outlets was broken down as
follows geographically and by type of outlet:
<Table>
<Caption>
CORPORATE-
FRANCHISED OWNED
OUTLETS OUTLETS TOTAL
- ------------------------------------------------------------
Canada 319(1) - 319
United States - 336 336
- ------------------------------------------------------------
Total 319(1) 336 655
- ------------------------------------------------------------
</Table>
(1) Excluding the three Pharmasave outlets.
CANADA. In Canada, our activities are divided into two major segments. The first
involves our franchising activities, which include operating a distribution
centre and providing services to our PJC franchised outlets. These services
comprise centralized purchasing, distribution, marketing, training, human
resources, management, operational consulting and information systems, as well
as participation in our private label program. Our PJC franchisees own and
manage their outlets and are responsible for merchandising and financing their
inventory. They must provision their outlets from our distribution centre
provided that the products requested are available and priced lower than other
suppliers. We supply our PJC franchisees with approximately 72% of their
products, including almost all prescription drugs. Although PJC outlet sales are
not included in our revenues, an increase or decrease in this regard will
directly affect our performance as it impacts distribution centre sales and
royalties.
Our second segment in Canada is real estate. The Jean Coutu Group has
considerable real estate assets. As at May 31, 2004, we owned 166 properties, of
which 126 housed PJC franchised outlets. We also sublease 193 locations to other
PJC franchisees under non-cancellable leases signed directly with the lessees.
Our real estate strategy is centered on acquiring first-rate sites close to
medical clinics so that they meet the needs of our franchisees and help them
control costs. Every property is acquired with this strategy in mind.
UNITED STATES. In the U.S., we operate a network of 336 outlets under the Brooks
banner, and one distribution centre.
<Page>
22 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP [PJC] INC.
SELECTED FINANCIAL DATA
The following table presents some financial data for the fiscal years ended May
31, 2004, 2003 and 2002.
<Table>
<Caption>
for the fiscal year ended 2004 2003 2002
- --------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $ $
RESTATED RESTATED
OPERATING RESULTS
Revenues(1)
Canada 1,667,562 1,355,163 1,422,285
United States 2,428,576 2,692,400 2,054,546
- --------------------------------------------------------------------------------
4,096,138 4,047,563 3,476,831
- --------------------------------------------------------------------------------
Cost of goods sold
Canada 1,364,725 1,092,367 1,170,588
United States 1,814,622 2,014,695 1,540,323
- --------------------------------------------------------------------------------
3,179,347 3,107,062 2,710,911
- --------------------------------------------------------------------------------
General and operating expenses
Canada 122,501 112,608 104,573
United States 464,217 515,727 396,517
- --------------------------------------------------------------------------------
586,718 628,335 501,090
- --------------------------------------------------------------------------------
Amortization
Canada(2) 9,395 8,739 7,770
United States 42,165 45,811 34,828
- --------------------------------------------------------------------------------
51,560 54,550 42,598
- --------------------------------------------------------------------------------
Operating income
Canada 169,382 141,449 139,354
United States 109,131 116,167 82,878
- --------------------------------------------------------------------------------
278,513 257,616 222,232
- --------------------------------------------------------------------------------
Financial expenses 20,041 27,231 17,086
Income before income taxes 258,472 230,385 205,146
Income taxes 81,549 70,293 68,672
- --------------------------------------------------------------------------------
Net income 176,923 160,092 136,474
- --------------------------------------------------------------------------------
Earnings per share
Basic 0.78 0.71 0.61
Diluted 0.78 0.70 0.60
- --------------------------------------------------------------------------------
</Table>
(1) Revenues comprise sales and other revenues.
(2) Excludes amortization of incentives paid to franchisees, which is applied
against royalties included in other revenues.
<Page>
THE JEAN COUTU GROUP [PJC] INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 23
<Table>
<Caption>
2004 2003 2002
- --------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $ $
RESTATED RESTATED
OTHER OPERATING DATA
Gross profit
Canada 91,687 68,297 71,885
United States 604,903 666,913 503,137
- --------------------------------------------------------------------------------------------
696,590 735,210 575,022
- --------------------------------------------------------------------------------------------
Gross margin
Canada 6.3% 5.9% 5.8%
United States 25.0% 24.9% 24.6%
- --------------------------------------------------------------------------------------------
Earnings before interest, taxes depreciation and
amortization (EBITDA) 334,166 316,776 269,276
Reconciliation of EBITDA with net income
Net income 176,923 160,092 136,474
Interest on long-term debt 16,394 22,008 13,556
Other interest 3,647 5,223 3,530
Income taxes 81,549 70,293 68,672
- --------------------------------------------------------------------------------------------
Operating income 278,513 257,616 222,232
- --------------------------------------------------------------------------------------------
Amortization 51,560 54,550 42,598
Amortization of incentives paid to franchisees 4,093 4,610 4,446
- --------------------------------------------------------------------------------------------
EBITDA 334,166 316,776 269,276
- --------------------------------------------------------------------------------------------
Total assets 1,834,786 1,716,632 1,658,200
- --------------------------------------------------------------------------------------------
Long-term debt 231,261 262,981 324,083
- --------------------------------------------------------------------------------------------
NETWORK DATA
Network sales
Canada(1) 2,603,495 2,418,363 2,264,451
United States 2,419,525 2,681,608 2,043,460
- --------------------------------------------------------------------------------------------
Sales growth--same-store basis
Canada(1)
Total 6.8% 4.6% 8.8%
Front-store 2.3% 0.4% 2.7%
Pharmaceutical 10.3% 8.6% 15.0%
United States(2)
Total 4.3% 6.3% 11.5%
Front store 2.1% 2.1% 4.0%
Pharmaceutical 5.3% 8.3% 15.3%
- --------------------------------------------------------------------------------------------
</Table>
(1) Franchised outlet sales are not included in the Company's consolidated
financial statements.
(2) Growth of same-stores sales for the years ended May 31, 2004 and 2003 are
adjusted to reflect the fact that the year ended May 31, 2003 was a 53-week
period for the U.S. operations.
<Page>
24 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP (PJC) INC.
DEFINITION OF FINANCIAL DATA
REVENUES
Revenues consist of Canadian and U.S. sales plus other revenues derived from
franchising, real estate and retail sales.
CANADA. Merchandise sales from our distribution centre to PJC franchisees
account for most of our sales in Canada. PJC sales are not included in our
revenues. However, changes in their sales directly affect our revenues since PJC
franchisees purchase most of their inventory from our distribution centre.
Canadian sales for the year ended May 31, 2004 include sales by our three
corporate outlets operating in Ontario under the Pharmasave banner. These
outlets accounted for less than one percent of Canadian sales in 2003-2004.
Other revenues consist of royalties from our franchisees based on a percentage
of sales and include advertising revenues, rent generated by our real estate
division and charge backs to our franchisees in exchange for certain services.
UNITED STATES. U.S. sales consist of retail sales generated by outlets operating
under the Brooks banner.
Other revenues include rental income from our U.S. owned properties leased to
unrelated parties, and miscellaneous U.S. vendor revenues.
GROSS PROFIT
Gross profit is calculated as follows: sales minus the cost of goods in our
distribution centre for our Canadian operations, and the cost of goods in store
for the U.S. network.
GENERAL AND OPERATING EXPENSES
General and operating expenses comprise costs associated with salaries and
benefits, repairs and maintenance, insurance, distribution centre and
professional fees, as well as costs incurred by our real estate division.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
Although earnings before interest, income taxes, depreciation and amortization
(EBITDA) are not a performance measure defined by Canadian GAAP, management uses
this measure to evaluate the operating and financial performance of its
reportable segments. Moreover, our definition of EBITDA may differ from the one
used by other companies. EBITDA is reconciled with net income--a performance
measure defined by Canadian GAAP--in the table of selected financial data
included in this report.
EXCHANGE RATE DATA
The assets and liabilities of our U.S. subsidiaries are translated into Canadian
dollars at the exchange rate in effect on the date of the balance sheet. Sales
and expenses are translated at the average monthly rates in effect during the
period. The following table shows exchange rates based on the Bank of Canada
closing rate expressed as Canadian dollars per US$1.00.
<Table>
<Caption>
May 31, 2004 May 31, 2003 May 31, 2002
- ------------------------------------------------------------------
Average rate(1) 1.3430 1.5250 1.5680
Closing rate 1.3634 1.3685 1.5280
- ------------------------------------------------------------------
</Table>
(1) Calculated using the average of the closing exchange rates of each day of
the period indicated.
COMPARISON OF THE YEARS ENDED MAY 31, 2004 AND MAY 31, 2003
REVENUES
Total revenues rose $48.6 million or 1.2% to $4.096 billion for the year ended
May 31, 2004, against $4.048 billion for the same period in 2003.
CANADA. Revenues from Canadian operations reached $1.668 billion, an increase of
$312.4 million or 23.1%. This strong growth takes into account the closing of
our distribution centre for 58 days in fiscal 2003 due to a labour dispute.
These revenues also reflect the fact that we had 8 more PJC franchised outlets,
we renovated or moved 17 outlets, and we experienced a growth in PJC sales. For
the year ended May 31, 2004, on a same-store basis, total PJC sales increased by
6.8%, pharmaceutical sales gained 10.3% and front-store sales picked up 2.3%
year-over-year.
UNITED STATES. Revenues from U.S. operations were $2.429 billion, down $263.8
million or 9.8% from last year. The drop in exchange rate between the two years
had a negative impact of $332.8 million on total revenues. Expressed in U.S.
dollars, operating revenues grew $45.2 million or 2.6% to $1.809 billion. It is
to consider that fiscal 2003 included an extra week in terms of operations.
Finally, on a same-store and comparable week basis, total sales increased by
4.3%, pharmaceutical sales gained 5.3% and front-store sales picked up 2.1%
year-over-year.
<Page>
THE JEAN COUTU GROUP (PJC) INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 25
GROSS PROFIT
Gross profit was $696.6 million, a decrease of $38.6 million or 5.3% from 2003.
CANADA. Gross profit from Canadian operations jumped $23.4 million or 34.2% over
last year to $91.7 million. This strong gain owes to the same factors that
influenced revenue growth, i.e., the 2003 labour dispute and network expansion.
Gross margin improved from 5.9% to 6.3%.
UNITED STATES. Gross profit from U.S. operations stood at $604.9 million, down
$62.0 million or 9.3% from 2003, reflecting a depreciation of the greenback that
amounted to $82.6 million. Gross profit calculated over the same number of weeks
and in U.S. dollars rose 5.0% year-over-year while gross margin remained the
same compared with last year (25.0% in 2004 and 24.9% in 2003).
GENERAL AND OPERATING EXPENSES
General and operating expenses ended the year at $586.7 million, down $41.6
million or 6.6% from the same period in 2003. This decrease is essentially
attributable to the U.S. operations, because of the lower exchange rates and the
additional week in fiscal 2003. General and operating expenses improved on the
Canadian side, representing 7.4% of revenues versus 8.3% last year and remained
stable in the U.S. (19.1% in 2004 and 19.2% in 2003).
EBITDA
EBITDA advanced 5.5% over 2003 to $334.2 million. The green-back's depreciation
had a negative impact of $20.8 million on EBITDA. As a percentage of revenues,
EBITDA improved, ending the year at 8.2%, compared with 7.8% in 2003, due to
streamlining and innovation efforts. Information technology, an aspect on which
the Company places great importance, also helped improve the efficiency of both
administrative services and distribution centres. The increase in EBITDA and
EBITDA margin for the year ended May 31, 2004 is attributable to both Canadian
and U.S. operations.
AMORTIZATION
Amortization was $51.6 million, down $3.0 million or 5.5% from 2003. This
decrease stems from the drop in the exchange rate between the two years, which
trimmed amortization by $5.8 million after conversion of U.S. operating results
into Canadian dollars for inclusion in our consolidated financial statements.
FINANCIAL EXPENSES
Financial expenses were $20.0 million during the year, a reduction of $7.2
million or 26.4% over the year-earlier period. Two factors explain this
improvement. First, with regards to our U.S. debt load, the effect of the
greenback's depreciation represented $2.7 million for the year. Second, on the
Canadian side, we used our line of credit to a lesser extent than last year.
INCOME TAXES
Income taxes increased $11.3 million or 16.0% over 2003 to $81.5 million. Our
effective tax rate rose from 30.5% last year to 31.6%.
COMPARISON OF THE YEARS ENDED MAY 31, 2003 AND MAY 31, 2002
REVENUES
Total revenues advanced $570.7 million or 16.4% from $3.477 billion in 2002 to
$4.048 billion in 2003.
CANADA. Revenues from Canadian operations stood at $1.355 billion, down $67.1
million or 4.7%, reflecting the 58-day labour dispute in our distribution centre
during 2003. Notwithstanding the impact of the labour dispute, revenues reflect
an increase in the number of PJC franchised outlets in 2003 as well as a general
improvement in PJC sales. During the year, 9 franchised outlets joined the
network and 22 outlets renovated, expanded or moved. In 2003, on a same-store
basis, total PJC network sales advanced 4.6%, pharmaceutical sales gained 8.6%
and front-store sales picked up 0.4% over 2002.
UNITED STATES. Revenues from U.S. operations jumped 31.0% or $637.9 million in
2002 to $2.692 billion in 2003, fuelled mainly by the acquisition of 80 OSCO
stores in January 2002. Part of this growth is also explained by the fact that
fiscal 2003 had 53 weeks. On a same-store and comparable week basis, total sales
calculated in U.S. dollars rose 6.3%, front-store sales advanced 2.1% and
pharmaceutical sales climbed 8.3%, driven by higher prescription volume and an
increase in drug prices due to inflation in the first and second quarters of the
year ended May 31, 2003.
<Page>
26 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP (PJC) INC.
GROSS PROFIT
Gross profit jumped 27.9% to $735.2 million over 2002.
CANADA. Gross profit from Canadian operations shrank $3.6 million or 5.0% from
2002 to $68.3 million as a result of the 58-day labour dispute at the Canadian
distribution centre in 2003. Gross margin remained stable (5.9% in 2003 and 5.8%
in 2002).
UNITED STATES. Gross profit from U.S. operations soared $163.8 million or 32.6%
from 2002 to $666.9 million in 2003 as a result of the acquisition of 80 OSCO
stores in January 2002 and by the fact that the year ended May 31, 2003 was a
53-week period. Gross margin rose to 24.9% from 24.6% in 2002.
GENERAL AND OPERATING EXPENSES
General and operating expenses grew $127.2 million or 25.4% over 2002 to $628.3
million a year later. This significant increase stems primarily from integration
expenses related to the OSCO acquisition. Expressed as a percentage of revenues,
Canadian general and operating expenses rose from 7.4% in 2002 to 8.3% in 2003
as a result of the labour dispute. The U.S. ratio remained unchanged (19.2% in
2003 and 19.3% in 2002).
EBITDA
EBITDA climbed 17.6% from 2002 to $316.8 million. As a percentage of revenues,
EBITDA was 7.8%, virtually unchanged from the 7.7% recorded in 2002.
AMORTIZATION
Amortization jumped $12.0 million or 28.1% from 2002 to $54.6 million, chiefly
due to our U.S. operations, which recorded a $10.0 million increase in
amortization following the acquisition of 80 OSCO outlets in January 2002.
FINANCIAL EXPENSES
Financial expenses were $27.2 million, up $10.1 million or 59.4% as a result of
bank loans used to finance the acquisition of 80 OSCO outlets in January 2002.
INCOME TAXES
Income taxes were $70.3 million, $1.6 million or 2.4% higher than in 2002. Our
effective tax rate declined from 33.5% in 2002 to 30.5%.
FOURTH QUARTER
For the three-month period ended May 31, 2004, the revenues of the Jean Coutu
Group's Canadian operations amounted to $439.6 million, a 14.3% increase over
the $384.6 million recorded in the corresponding year-ago period. U.S.
operations generated revenues of US$456.3 million compared to US$438.1 million
last year, an increase of 4.1%.
The Company's net income rose 11.0% over the same period last year to $43.0
million ($0.19 per share).
EBITDA amounted to $82.9 million against $75.7 million in the year-earlier
quarter.
The Jean Coutu Group's Canadian franchise network recorded retail sales of
$669.4 million, compared to $626.9 million for the same period last year. The
U.S. corporate outlets network posted retail sales of US$457.4 million, against
US$436.6 million in last year's fourth quarter.
<Page>
THE JEAN COUTU GROUP (PJC) INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 27
UNAUDITED QUARTERLY FINANCIAL DATA
The following consolidated financial data was drawn from the unaudited interim
consolidated financial statements for the last eight quarters.
<Table>
<Caption>
YEAR MAY 31, FEBRUARY 29, NOVEMBER 30, AUGUST 31,
2004 2004 2004(2) 2003(2) 2003(2)
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT AMOUNTS PER SHARE) $ $ $ $ $
REVENUES(1)
Franchising 1,600,204 421,517 403,161 409,462 366,064
Real estate 67,358 18,049 17,131 15,677 16,501
Retail sales 2,428,576 615,167 616,363 588,441 608,605
- ----------------------------------------------------------------------------------------------------------------------------------
4,096,138 1,054,733 1,036,655 1,013,580 991,170
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of goods sold 3,179,347 820,940 801,858 792,413 764,136
General and operating expenses 586,718 151,681 147,677 141,112 146,248
Amortization 51,560 13,985 12,638 12,437 12,500
- ----------------------------------------------------------------------------------------------------------------------------------
3,817,625 986,606 962,173 945,962 922,884
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 278,513 68,127 74,482 67,618 68,286
- ----------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 16,394 3,900 3,952 4,171 4,371
Other interest 3,647 678 1,128 567 1,274
- ----------------------------------------------------------------------------------------------------------------------------------
20,041 4,578 5,080 4,738 5,645
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 258,472 63,549 69,402 62,880 62,641
INCOME TAXES 81,549 20,586 21,775 19,487 19,701
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 176,923 42,963 47, 627 43,393 42,940
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic 0.78 0.19 0.21 0.19 0.19
Diluted 0.78 0.19 0.21 0.19 0.19
- ----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Revenues comprise sales and other revenues.
(2) Restated.
<Page>
28 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP (PJC) INC.
UNAUDITED QUARTERLY FINANCIAL DATA
(continued)
<Table>
<Caption>
Year May 31, February 28, November 30, August 31,
2003(2) 2003(2) 2003(2) 2002(2) 2002(2)(3)
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT AMOUNTS PER SHARE) $ $ $ $ $
REVENUES(1)
Franchising 1,292,824 367,483 228,726 351,381 345,234
Real estate 62,339 17,073 15,675 14,640 14,951
Retail 2,692,400 631,912 693,343 666,543 700,602
- ----------------------------------------------------------------------------------------------------------------------------------
4,047,563 1,016,468 937,744 1,032,564 1,060,787
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of goods sold 3,107,062 787,714 702,912 795,604 820,832
General and operating expenses 628,335 154,288 154,658 157,414 161,975
Amortization 54,550 12,734 13,805 13,924 14,087
- ----------------------------------------------------------------------------------------------------------------------------------
3,789,947 954,736 871,375 966,942 966,894
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 257,616 61,732 66,369 65,622 63,893
- ----------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 22,008 4,877 5,385 5,615 6,131
Other interest 5,223 1,306 1,499 1,167 1,251
- ----------------------------------------------------------------------------------------------------------------------------------
27,231 6,183 6,884 6,782 7,382
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 230,385 55,549 59,485 58,840 56,511
INCOME TAXES 70,293 16,818 17,938 17,795 17,742
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 160,092 38,731 41,547 41,045 38,769
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic 0.71 0.17 0.18 0.18 0.17
Diluted 0.70 0.17 0.18 0.18 0.17
- ----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Revenues comprise sales and other revenues.
(2) Restated.
(3) 14-week quarter for the U.S. operations.
CASH POSITION AND FINANCING SOURCES
The Company's cash flows are generated by: i) the sale of prescription drugs and
other products by our corporate-owned outlets, ii) merchandise sales and rent
from properties leased to our PJC franchisees, iii) the collection of royalties
from PJC franchisees, and iv) rent from properties leased to tenants other than
PJC franchisees. These cash flows are mainly used: i) to purchase products for
resale, ii) to finance operating expenses, iii) for debt service, iv) to acquire
real estate and v) to finance capital expenditures incurred to renovate and open
outlets and replace equipment. We have typically financed capital expenditures,
working capital requirements and other acquisitions through cash flow from
operating activities and an operating line of credit. Our larger acquisitions
have been financed through long-term loans and directly or indirectly, through
proceeds from share issuance.
CASH FLOW FROM OPERATING ACTIVITIES
Operating cash flow was $245.5 million for the year ended May 31, 2004, compared
with $213.6 million in fiscal 2003. This increase results from changes in
working capital.
CASH FLOW FROM INVESTING ACTIVITIES
Cash flow from investing activities stood at $117.3 million for the year ended
May 31, 2004, compared with $154.2 million in fiscal 2003. Both Canadian and
U.S. operations invested similar amounts in their respective activities during
the year. Canadian investments in capital assets amounted to $41.7 million,
<Page>
THE JEAN COUTU GROUP (PJC) INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 29
compared with $58.5 million for the same period in 2003. These investments are
mainly related to real estate activities. The U.S. operations invested $57.9
million in capital assets during the year--mostly for improvements to our Brooks
outlets--versus $85.0 million a year earlier.
CASH FLOW FROM FINANCING ACTIVITIES
During the year ended May 31, 2004, we used cash flows totalling $97.1 million,
of which $72.5 million was used to repay the debt and $27.2 million for
dividends.
CAPITAL STOCK
On February 27, 2004, 3,750,000 Class B shares were exchanged for an equivalent
number of Class A subordinate voting shares. In addition, 353,960 new Class A
subordinate voting shares were issued due to the exercise of stock options.
These transactions bring the total number of Class A subordinate voting shares
to 106,673,510 and the number of Class B shares to 120,250,000 as at May 31,
2004.
In July 2004, 33,350,000 Class A subordinate voting shares were issued in a
public offering.
CONTRACTUAL AND COMMERCIAL COMMITMENTS
The following table presents a summary of our principal contractual obligations
for the next five years.
<Table>
<Caption>
2005 2006 2007 2008 2009 thereafter Total
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $ $ $ $ $ $
Long-term debt 30,167 66,710 84,402 104,804 78,907 3,119,970 3,484,960
Capital lease obligations 670 488 304 169 - - 1,631
Operating lease obligations 60,905 53,369 46,934 39,459 32,295 153,722 386,684
Inventories and capital
assets commitments 67,828 - - - - - 67,828
- --------------------------------------------------------------------------------------------------------------------------------
Total 159,570 120,567 131,640 144,432 111,202 3,273,692 3,941,103
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
LONG-TERM DEBT
The term loan, the balance of which was CAN$252,229,000 or US$185,000,000 as at
May 31, 2004, was refinanced and integrated into the Eckerd financing on July
31, 2004. The information above reflects the refinancing described in Note 25 to
the financial statements of this Annual Report.
CAPITAL LEASE OBLIGATIONS
We use few capital leases as a means of financing. Obligations in connection
with these contracts and related assets are included in our consolidated balance
sheet.
OPERATING LEASE OBLIGATIONS
We lease a significant portion of our properties through conventional operating
leases. In Canada and the U.S., property leases typically have an initial term
of 10 years and 10-20years respectively. A renewal option is offered in both
cases.
Operating leases until 2022 amounted to $386,684,000 and are mostly in
connection with properties that are leased in our Canadian and U.S. operations.
In Canada, we also signed lease and sublease agreements under which we will
receive minimum payments totalling $310,886,000 until 2022 which are not
included in the table above.
<Page>
30 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP (PJC) INC.
GUARANTEES AND BUYBACK AGREEMENTS
The Company has guaranteed reimbursement of certain bank loans contracted by
franchisees to a maximum amount of $11,991,000 ($17,626,000 in 2003). The
Company is also committed to financial institutions to purchase the equipment
and inventories of some of its franchisees. As of May 31, 2004, the maximum
value of the equipment and inventories buyback agreements was approximately
$28,695,000 and $74,127,000 respectively ($29,858,000 and $66,374,000 in 2003).
SWAP CONTRACT
We also entered into a swap contract at a fixed interest rate of 4.34% maturing
in January 2005 as a hedge against interest rate fluctuations on our term loan,
which amounted to CAN$252,229,000 or US$185,000,000 as at May 31, 2004.
RELATED PARTY TRANSACTIONS
Our operations include transactions with two shareholders with significant
influence on the Company. Jean Coutu, founder and Chairman of the Board, owned a
PJC franchise as at May 31, 2004 and 2003. Francois Jean Coutu, the Company's
President and CEO, owned four PJC franchises as at May 31, 2003 and one as at
May 31, 2004.
The transactions between the Jean Coutu Group and these two shareholders are
executed in the normal course of business. Details of these transactions are
provided in Note 21 of the financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
ESTIMATES
This management's discussion and analysis of financial position and operating
results is based on our consolidated financial statements, which have been
prepared in accordance with Canadian GAAP. The preparation of these consolidated
financial statements and related notes requires us to make estimates and
assumptions that affect the reported amounts. These estimates are based on our
historical experience and various other assumptions that we believed to be
reasonable under the circumstances, the results of which form the basis for
making judgements about the carrying values of assets and liabilities that are
not readily apparent from other sources. The use of different estimates could
have resulted in different amounts than those presented. Actual results could
differ from these estimates.
INVENTORY
Our inventory consists primarily of products acquired for resale, including
prescription drugs and over-the-counter medications, as well as household,
cosmetic and photography products. Inventory is valued at the lower of cost and
net realizable value, the cost being determined using the first in, first out
method and selling price less a normal gross profit method. Determining gross
profit margins requires that management make judgments and estimates that could
affect inventory valuation at the end of the year and operating results.
INTANGIBLE ASSETS
Intangible assets with finite life are recorded at cost and are made up of
customer prescription files, non-compete agreements and leasehold interests.
Prescription files are generally amortized over a period of five years,
non-compete agreements over the service lives of the agreements and leasehold
interests over the residual term of the leases. The use of different assumptions
with regards to the duration of useful life could give rise to different book
values for the intangible assets.
GOODWILL
Goodwill represents the excess of the acquisition cost of companies over the
fair value of the identifiable net assets acquired. Goodwill is tested for
impairment annually or more frequently when changes in circumstances indicate a
potential impairment. An impairment test may be necessary if a return is clearly
insufficient in relation to historical or projected operating results, material
changes in the use of acquired assets or in the Company's broad strategy, and
significant negative economic or segmented trends. For the purpose of our
analysis on impairment, we use estimates and assumptions to establish the fair
value of our reporting units. If these assumptions are incorrect, the carrying
value of the goodwill may have been overestimated.
<Page>
THE JEAN COUTU GROUP (PJC) INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 31
INCENTIVES PAID TO FRANCHISEES
Incentives paid to franchisees are deferred charges recorded at cost and
amortized over a 10-year period. The use of various assumptions with regards to
useful life could give rise to different book value for incentives paid to
franchisees that are included in other long-term assets.
IMPAIRMENT OF LONG-LIVED ASSETS
We determine the book value of our long-lived assets on an ongoing basis. To
determine the possibility of impairment, we examine the estimated undiscounted
cash flows expected to be generated by these assets as well as other indicators.
Any permanent impairment in the carrying value of the assets is charged against
earnings in the period the impairment is determined.
DEFINED BENEFIT PENSION PLANS
The cost of pensions and other retirement benefits earned by employees is
actuarially determined using the projected benefit method prorated on service
and management's best estimate of expected plan investment performance, salary
escalation and retirement age of employees. The use of different assumptions
could result in different book values.
CHANGE IN ACCOUNTING POLICIES
INCENTIVES PAID TO FRANCHISEES
In the last quarter of the fiscal year ended May 31, 2004, we changed our method
of accounting for banner development costs. These costs were previously
considered intangible assets with an indefinite life and were therefore not
subject to depreciation. Banner development costs are now considered as deferred
costs representing incentives paid to franchisees and are amortized over a
10-year period. They are applied against royalties included in other revenues.
Due to this change in accounting method, our audited consolidated financial
statements for the years ended May 31, 2003 and 2002 and our unaudited interim
financial statements for the third quarter of the years ended May 31, 2004 and
2003 were restated to reflect this change. We have filed our restated
consolidated financial statements for the periods mentioned above with the
Canadian Securities Administrators on SEDAR. The financial information in our
Annual Information Form dated October 17, 2003 and management analysis for the
fiscal year ended May 31, 2003 concerning the above-mentioned periods was also
adjusted. Modified versions of these documents were filed with the securities
regulatory authorities and integrated by reference into the short form
prospectus of July 8, 2004.
STOCK-BASED COMPENSATION
On June 1, 2003, we prospectively adopted the new recommendations of the
Canadian Institute of Chartered Accountants (CICA) Handbook Section 3870. Under
this standard, all stock awards are accounted for using the fair value method of
accounting. According to that method, awards of stock options are measured on
grant date using the fair value method and expensed and credited to contributed
surplus over the vesting period. This credit is reclassified as capital stock
when the options are exercised. The effect of these recommendations has been a
decrease in net income and an increase in contributed surplus of $251,000 for
the year ended May 31, 2004.
IMPAIRMENT OF LONG-LIVED ASSETS
On June 1, 2003, we adopted the new recommendations of CICA Handbook Section
3063. Under this standard, when the carrying amount of a long-lived asset
exceeds the sum of the expected undiscounted cash flows, an impairment loss is
recognized. The implementation of this recommendation has had no impact on our
results.
RECENT PRONOUNCEMENTS
In July 2003, the CICA released Handbook Section 1100 entitled "Generally
Accepted Accounting Principles." This section establishes standards for
financial reporting in accordance with Canadian GAAP and provides guidance on
sources to consult when selecting accounting policies and appropriate disclosure
when a matter is not dealt with explicitly in the primary sources of Canadian
GAAP. This new standard will be applied prospectively as of June 1, 2004. The
standard will require the Company to record depreciation on its real estate
segment buildings on a straight-line basis instead of on a compound interest
basis. Due to the prospective nature of this change, there is no impact on the
Company's consolidated financial statements as of the implementation date.
<Page>
32 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP (PJC) INC.
In June 2003, the CICA issued Accounting Guideline 15 entitled "Consolidation of
Variable Interest Entities"(AcG-15). AcG-15 addresses the consolidation of
variable interest entities (VIE) to which current consolidation conditions do
not apply since the VIE have no voting interests or are otherwise not subject to
control on the basis of ownership of voting interests. Existing non-consolidated
VIE must be consolidated by their primary beneficiary. The rules of AcG-15 are
complex and their interpretation continues to change. AcG-15 will be effective
for annual and interim periods beginning on or after November 1, 2004. We have
not yet assessed the impact, if any, of the application of AcG-15 on our
financial statements.
In January 2004, the CICA Emerging Issues Committee issued Abstract 144
(EIC-144) "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor". EIC-144 provides details regarding the
accounting methods of certain considerations received from a vendor. EIC-144
must be applied retroactively to all financial statements for annual and interim
periods ending after August 15, 2004. EIC-144 stipulates that cash consideration
received by a customer from a vendor is presumed to represent a reduction of the
price of the vendor's products or services and should, therefore, be accounted
for as a reduction of cost of sales and related inventory when recognized in the
company's income statement and balance sheet. The Company will adopt this new
standard on June 1, 2004.
ECKERD
On April 4, 2004, following the signature of an agreement, TDI Consolidated
Corporation, a wholly-owned subsidiary of J.C. Penney Corporation, Inc., which
operated more than 2,800 outlets under the Eckerd banner, agreed to sell the
chain to the Jean Coutu Group and CVS Corporation.
Under this agreement, closed on July 31, 2004, the Jean Coutu Group acquired
1,549 Eckerd drugstores in 13 states, as follows:
<Table>
Connecticut 6
Delaware 22
Georgia 194
Maryland 20
New Jersey 147
New York 365
North Carolina 251
Ohio 1
Pennsylvania 297
South Carolina 109
Tennessee 48
West Virginia 2
Virginia 87
- -------------------------------------------------------
Total 1,549
- -------------------------------------------------------
</Table>
The acquisition was completed at a price of US$2.375 billion plus closing
adjustments estimated at US$112.5 million and transaction costs of approximately
US$35.0 million.
The preliminary allocation of the purchase price indicated below was determined
based on available information and preliminary evaluations and is subject to
change as new data becomes available and integration and restructuring
strategies are implemented.
<Table>
<Caption>
MILLIONS OF US $
- -------------------------------------------------------
$
Net assets acquired
Non-cash working capital items 686.7
Capital assets 860.7
Intangible assets 775.4
Goodwill 594.0
Future income tax liabilities (250.0)
Other liabilities (148.4)
- -------------------------------------------------------
Net non-cash assets acquired 2,518.4
Cash and cash equivalents 4.1
- -------------------------------------------------------
Net assets acquired 2,522.5
- -------------------------------------------------------
Cash consideration 2,522.5
- -------------------------------------------------------
</Table>
<Page>
THE JEAN COUTU GROUP (PJC) INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 33
The purchase price, together with the repayment of existing debts totalling
US$195.0 million at the date of acquisition, has been financed through:
- - Debt financing consisting of committed first rank credit facilities of $1.7
billion broken down as follows:
- a five-year revolving variable-rate facility of US$350.0 million;
- a five-year variable-rate loan facility of US$250.0 million; and
- a seven-year variable-rate loan facility of US$1.1 billion.
- - A US$1.2 billion note offering consisting of:
- US$350.0 million of unsecured senior notes bearing interest at 7.625% and
maturing on August 1, 2012, and
- US$850.0 million of unsecured senior subordinated notes bearing interest
at 8.5% and maturing on August 1, 2014.
- - The issue of 33,350,000 new Class A subordinate voting shares for gross
proceeds of CAN$582.0 million.
The following table presents highlights of Eckerd's operating data for the years
ended January 31, 2004, January 25, 2003 and January 26, 2002. Since the
acquisition was only completed on July 31, 2004, the data is not included in the
Company's consolidated financial statements as at May 31, 2004.
<Table>
<Caption>
January 31, January 25, January 26,
2004 2003 2002
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS) $ $ $
OPERATING RESULTS:
Revenues, net 7,894,320 7,598,305 7,090,897
Gross profit 1,856,503 1,796,934 1,643,618
Selling, general and administrative expenses 1,663,220 1,578,574 1,516,830
- -----------------------------------------------------------------------------------------------------
% % %
OTHER DATA (UNAUDITED):
Sales percentage increase (decrease)
Total sales 3.9 7.2 7.2
Same-store basis(1) 1.0 6.5 9.4
Front-end (6.2) 1.2 0.9
Pharmaceutical 4.4 9.1 14.1
Amounts as a percentage of sales:
Gross profit 23.5 23.6 23.2
Selling, general and administrative expenses 21.1 20.8 21.4
- -----------------------------------------------------------------------------------------------------
</Table>
(1) Growth on a same-store basis for the year ended January 31, 2004 is
calculated on a 52-week basis.
<Page>
34 MANAGEMENT'S DISCUSSION AND ANALYSIS THE JEAN COUTU GROUP (PJC) INC.
As a result of the Eckerd acquisition, our network has now expanded to 2,204
outlets, including 1,885 corporate-owned outlets operating under the Brooks and
Eckerd banners in 18 states in eastern United States and 319 franchised outlets
under the PJC banner, including PJC Jean Coutu and PJC Clinique, located in
three Canadian provinces. Management is of the opinion that the Eckerd
acquisition will add a solid, well-known banner to our portfolio, expand our
outlet network and significantly increase our geographic diversification.
Moreover, as a result of this acquisition, the Jean Coutu Group's and Eckerd's
financial results will be presented on a consolidated basis in U.S. dollars and
prepared according toCanadian GAAP.
RISKS AND UNCERTAINTIES
ECKERD ACQUISITION
The Eckerd purchase, completed after the year end, is the Jean Coutu Group's
largest acquisition to date. Integrating Eckerd's activities into our U.S.
operations entails certain risks. While we firmly believe we have the resources
to make this acquisition a success, we could run into difficulties that will
prevent us from integrating these activities as effectively as we have done with
other acquisitions, such as problems implementing systems or improving outlet
performance.
PRESCRIPTION DRUG PLAN
A significant part of our revenues and profits are derived from the sale of
prescription drugs. Because we receive payment for these medications from
governments and insurance companies, our margin could be affected by any changes
to the drug plans for example, a reduction in reimbursements. We are therefore
deploying all the resources necessary to ensure the governments are aware of the
issues at play in the pharmaceutical field.
NUMBER OF PHARMACISTS
We believe that our success relies in part on our ability to continue attracting
and retaining competent pharmacists. Over the years, a serious shortage of
pharmacists has developed due to competition in this field and from other
sectors, thereby creating an ongoing upward pressure on compensation.
Difficulties recruiting and retaining a sufficient number of pharmacists could
have an impact on our ability to offer extended business hours. In the last few
years, we have set up various incentive programs to recruit new pharmacists. We
believe the quality of our franchise system and U.S. network gives us a
competitive edge in this regard.
CONVERSION OF PRESCRIPTION DRUGS
The conversion of prescription drugs to over-the-counter medication often
creates a source of confusion for the customer that could result in a decrease
in our retail sales and those of our franchisees. By prioritizing employee
training, we can give our customers proper information and help them choose the
best product for their needs.
COMPETITION
We face competition from all sides: local, regional and national companies,
other pharmacy chains and banners, independent pharmacies, supermarkets, big-box
stores and discount outlets. We are also contending with more competition from
online and mail-order pharmacies, which could exert pressure on sales volume and
prices. This increased competition could lead to greater pressure on prices in
general, a situation that would force us to increase sales volume and sell
products and services at a lower price in order to remain competitive. However,
given the ongoing improvement of our outlets, our effective loyalty and
marketing programs and quality customer service, we believe we have what it
takes to compete.
ADVERTISING, MARKETING AND PROMOTIONAL PROGRAMS
Our success rests on our ability to create effective advertising, marketing and
promotional programs (including pricing strategies and price reduction programs
implemented in response to competitive pressures and/or to stimulate demand).
The pricing strategy and products proposed must satisfy our target customers and
in-store inventory must be optimized based on sales trends. We believe that our
35 years of experience combined with the competence of our employees is an asset
that will help us keep developing effective promotions.
<Page>
THE JEAN COUTU GROUP (PJC) INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 35
VARIABLE RATE DEBT
Some of our loans, including our senior secured credit facilities, are subject
to variable interest rates, thus exposing us to interest rate risk. Should
interest rates rise, our variable-rate debt service obligations would increase
even if the amount borrowed remained the same.
CURRENCY FLUCTUATION
Our revenues are realized in U.S. and Canadian dollars whereas payments on notes
and a good portion of the loans made as part of our senior secured credit
facilities are issued in U.S. currency. Fluctuations in the Canadian and U.S.
exchange rates could therefore expose us to currency risks.
SEASONAL NATURE OF OUR BUSINESS
The weather has an effect on the general population's health and by extension on
our retail sales and those of our franchisees. For example, in winter, we sell
more cold and flu medicine, while in the summer, allergy and sun protection
products are in greater demand. Corporate and franchisee sales are also affected
by holidays such as Christmas, Easter, Thanksgiving, St. Valetine's Day,
Mother's Day and Father's Day. Of course, we ring in the most sales at
Christmas.
OUTLOOK
Integrating our Eckerd outlets is our priority for fiscal 2004-2005, and steps
to streamline their operations will be taken as soon as possible.
With regards to the Brooks and PJC networks, we will continue to deploy all the
efforts required to ensure their growth. As in the past, a number of outlets
will undergo major renovations or be relocated. Some projects are already in
development and will be executed in the coming months. We plan to open between
12 and 15 outlets next year.
Our customers remain our first priority, and we are well placed to fulfill their
needs thanks to well located and laid out outlets, a broad selection of
competitively priced merchandise, well-trained employees, and cutting-edge
information technology.
August 13, 2004
<Page>
36 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
MANAGEMENT'S REPORT WITH RESPECT TO THE FINANCIAL STATEMENTS
The consolidated financial statements of The Jean Coutu Group (PJC) Inc.
contained in this report, including the notes thereto, were prepared by
management in accordance with Canadian generally accepted accounting principles.
In addition, the financial information contained elsewhere in the annual report
is consistent with the financial statements.
The Board of Directors is responsible for the financial statements included in
this annual report. The Audit Committee reviews the contents of the financial
statements prior to their approval by the Board of Directors. The external
auditors discuss their audit work with the Committee.
The Company's external auditors, Samson Belair/Deloitte & Touche, s.e.n.c.r.l.,
are responsible for auditing the financial statements and providing an opinion
thereon. Their report is presented below.
/s/ Francois J. Coutu /s/ Andre Belzile
FRANCOIS J. COUTU ANDRE BELZILE
PRESIDENT AND CHIEF EXECUTIVE OFFICER SENIOR VICE-PRESIDENT FINANCE
THE JEAN COUTU GROUP (PJC) INC. AND CORPORATE AFFAIRS
AUDITOR'S REPORT
To the Shareholders of
The Jean Coutu Group (PJC) Inc.
We have audited the consolidated balance sheets of The Jean Coutu Group (PJC)
Inc. as at May 31, 2004 and 2003 and the consolidated statements of income,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 2004 and
2003 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
/s/ Samson Belair/Deloitte & Touche, S.e.n.c.r.l.
SAMSON BELAIR/DELOITTE & TOUCHE, S.E.N.C.R.L.
CHARTERED ACCOUNTANTS
AUGUST 13, 2004
MONTREAL, CANADA
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 37
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
For the years ended May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT FOR PER SHARE AMOUNTS) $ $
RESTATED
SALES 3,875,937 3,842,272
OTHER REVENUES (Note 3) 220,201 205,291
- ---------------------------------------------------------------------------------------------
4,096,138 4,047,563
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of goods sold 3,179,347 3,107,062
General and operating expenses 586,718 628,335
Amortization (Note 4) 51,560 54,550
- ---------------------------------------------------------------------------------------------
3,817,625 3,789,947
- ---------------------------------------------------------------------------------------------
OPERATING INCOME 278,513 257,616
- ---------------------------------------------------------------------------------------------
Interest on long-term debt 16,394 22,008
Other interest 3,647 5,223
- ---------------------------------------------------------------------------------------------
20,041 27,231
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 258,472 230,385
INCOME TAXES (Note 5) 81,549 70,293
- ---------------------------------------------------------------------------------------------
NET INCOME 176,923 160,092
=============================================================================================
EARNINGS PER SHARE (Note 6)
Basic 0.78 0.71
Diluted 0.78 0.70
=============================================================================================
</Table>
The segmented information and the accompanying notes are an integral part of
these consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<Table>
<Caption>
For the years ended May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $
RESTATED
BALANCE, BEGINNING OF YEAR 851,138 -
As previously reported - 721,585
Restatement related to a change in accounting policy (Note 2a) - (3,405)
- ---------------------------------------------------------------------------------------------
RESTATED BALANCE - 718,180
Net income 176,923 160,092
- ---------------------------------------------------------------------------------------------
1,028,061 878,272
Dividends 27,225 27,134
- ---------------------------------------------------------------------------------------------
BALANCE, END OF YEAR 1,000,836 851,138
=============================================================================================
</Table>
The segmented information and the accompanying notes are an integral part of
these consolidated financial statements.
<Page>
38 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
CONSOLIDATED BALANCED SHEETS
<Table>
<Caption>
As at May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $
RESTATED
ASSETS
Current assets
Cash 19,834 -
Accounts receivable 272,341 284,762
Inventories 536,417 490,755
Prepaid expenses and other current assets 30,022 23,743
- ---------------------------------------------------------------------------------------------
858,614 799,260
INVESTMENTS (Note 7) 29,107 21,376
CAPITAL ASSETS (Note 8) 742,684 687,890
INTANGIBLE ASSETS AND GOODWILL (Note 9) 156,280 155,133
OTHER LONG-TERM ASSETS (Note 10) 48,101 52,973
- ---------------------------------------------------------------------------------------------
1,834,786 1,716,632
=============================================================================================
LIABILITIES
Current liabilities
Bank overdraft and bank loans (Note 11) 20,451 76,617
Accounts payable and accrued liabilities 315,659 317,659
Income taxes payable 57,403 2,327
Current portion of long-term debt (Note 12) 30,773 28,630
- ---------------------------------------------------------------------------------------------
424,286 425,233
LONG-TERM DEBT (Note 12) 231,261 262,981
OTHER LONG-TERM LIABILITIES (Note 13) 13,407 15,484
- ---------------------------------------------------------------------------------------------
668,954 703,698
- ---------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 14) 212,315 209,678
Contributed surplus 251 -
Retained earnings 1,000,836 851,138
Foreign currency translation adjustments (Note 16) (47,570) (47,882)
- ---------------------------------------------------------------------------------------------
1,165,832 1,012,934
- ---------------------------------------------------------------------------------------------
1,834,786 1,716,632
=============================================================================================
</Table>
GUARANTEES, CONTINGENCIES AND COMMITMENTS (Notes 17 and 18)
The segmented information and the accompanying notes are an integral part of
these consolidated financial statements.
Approved by the Board
/s/ Francois J. Coutu /s/ Denis Desautels
FRANCOIS J. COUTU DENIS DESAUTELS
DIRECTOR DIRECTOR
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
For the years ended May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $
RESTATED
OPERATING ACTIVITIES
Net income 176,923 160,092
Items not affecting cash
Amortization (Note 4) 51,560 54,550
Amortization of incentives paid to franchisees 4,093 4,610
Amortization of deferred financing fees 1,559 1,743
Loss on disposal of assets 116 924
Future income taxes (18,734) 25,977
Stock-based compensation (Note 15) 251 -
Share in income of companies subject to significant influence (124) (193)
- ---------------------------------------------------------------------------------------------
215,644 247,703
Net changes in non-cash of asset and liability items 29,812 (34,108)
- ---------------------------------------------------------------------------------------------
245,456 213,595
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Business acquisitions (Note 20) (5,425) 1,555
Investments (1,386) (5,937)
Purchase of capital assets (99,526) (143,579)
Proceeds from the disposal of capital assets 2,220 3,651
Intangible assets and goodwill (5,688) (3,283)
Other long-term assets (7,481) (6,585)
- ---------------------------------------------------------------------------------------------
(117,286) (154,178)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Changes in bank loans (44,080) 26,723
Repayment of long-term debt (28,450) (33,275)
Issuance of capital stock 2,637 5,915
Dividends (27,225) (27,134)
- ---------------------------------------------------------------------------------------------
(97,118) (27,771)
- ---------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 127 (42,471)
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,179 (10,825)
BANK OVERDRAFT, BEGINNING OF YEAR (11,345) (520)
- ---------------------------------------------------------------------------------------------
CASH (BANK OVERDRAFT), END OF YEAR 19,834 (11,345)
=============================================================================================
</Table>
See complementary cash flow information in Note 23.
The segmented information and the accompanying notes are an integral part of
these consolidated financial statements.
<Page>
40 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
CONSOLIDATED SEGMENTED INFORMATION
The Company has three reportable segments: franchising, real estate, and retail
sales. Within the segment of franchising, the Company carries on the franchising
activity under the "PJC Jean Coutu" banner, operates a distribution centre and
coordinates several other services for the benefit of its franchisees. Since the
quarter ended November 30, 2003, the franchising segment includes the operating
results of its three Pharmasave corporate outlets.
The Company operates retail sales outlets selling pharmaceutical and other
products under the "Brooks" banner.
The Company analyzes the performance of its operating segments based on their
earnings before interest, income taxes and amortization, which is not a measure
of performance under Canadian generally accepted accounting principles (GAAP);
however, management uses this performance measure for assessing the operating
performance of its reportable segments.
Segmented information is summarized as follows:
<Table>
<Caption>
For the years ended May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $
RESTATED
REVENUES(1)
Franchising 1,600,204 1,292,824
Real estate 67,358 62,339
Retail sales 2,428,576 2,692,400
- ---------------------------------------------------------------------------------------------
4,096,138 4,047,563
=============================================================================================
EARNINGS BEFORE INTEREST, INCOME TAXES AND AMORTIZATION
Franchising 158,887 133,964
Real estate 23,983 20,834
Retail sales 151,296 161,978
- ---------------------------------------------------------------------------------------------
334,166 316,776
=============================================================================================
AMORTIZATION
Franchising 10,001 10,172
Real estate 3,487 3,177
Retail sales 42,165 45,811
- ---------------------------------------------------------------------------------------------
55,653 59,160
=============================================================================================
OPERATING INCOME
Franchising 148,886 123,792
Real estate 20,496 17,657
Retail sales 109,131 116,167
- ---------------------------------------------------------------------------------------------
278,513 257,616
=============================================================================================
ACQUISITION OF CAPITAL ASSETS AND INTANGIBLE ASSETS(2)
Franchising 6,135 8,311
Real estate 35,528 51,059
Retail sales 63,551 88,316
- ---------------------------------------------------------------------------------------------
105,214 147,686
=============================================================================================
</Table>
- ----------
(1) Revenues include sales and other revenues.
(2) Excluding business acquisitions.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 41
<Table>
<Caption>
For the years ended May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $
RESTATED
TOTAL ASSETS
Franchising 343,737 352,246
Real estate 292,624 262,709
Retail sales 1,198,425 1,101,677
- ---------------------------------------------------------------------------------------------
1,834,786 1,716,632
=============================================================================================
</Table>
The Company's revenues, capital assets, intangible assets and goodwill
attributed to Canada and the United States are as follows:
<Table>
<Caption>
For the years ended May 31 2004 2003
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) $ $
RESTATED
REVENUES(1)
Canada 1,667,562 1,355,163
United States 2,428,576 2,692,400
- ---------------------------------------------------------------------------------------------
4,096,138 4,047,563
=============================================================================================
CAPITAL ASSETS, INTANGIBLE ASSETS AND GOODWILL
Canada 347,986 311,845
United States 550,978 531,178
- ---------------------------------------------------------------------------------------------
898,964 843,023
=============================================================================================
</Table>
- ----------
(1) Revenues include sales and other revenues.
<Page>
42 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
A) DESCRIPTION OF BUSINESS
The Company is incorporated under the COMPANIES ACT OF QUEBEC. It has three
reportable segments. In Canada, the Company operates in two segments. Its
franchising operations involve coordinating various services for its
franchised network of 319 outlets as of May 31, 2004 (2003 - 311), and
operating a distribution centre. Its franchised network retails
pharmaceutical and parapharmaceutical products. Its real estate activities
entail managing the properties that house all franchisees' outlets. In the
New England area of the United States, the Company operates a network
comprising 336 corporate establishments as of May 31, 2004 (2003 - 332) that
retail pharmaceutical and parapharmaceutical products. (See Note 25 on
subsequent events).
B) FINANCIAL STATEMENT PRESENTATION
The financial statements are prepared in accordance with Canadian generally
accepted accounting principles (GAAP). Except as otherwise indicated,
amounts are expressed in Canadian currency.
C) CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all its subsidiaries. All intercompany transactions and balances have
been eliminated on consolidation.
D) USE OF ESTIMATES
The preparation of financial statements in accordance with Canadian GAAP
requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, related amounts of revenues and expenses
and disclosure of contingent assets and liabilities. Consequently, actual
amounts could differ from those estimates.
E) REVENUE RECOGNITION
Sales to our franchisees are recognized when merchandise is shipped.
Revenues from external customers from retail sales are recognized at the
time of the sale to the consumer. The Company recognized its revenues net of
returns.
Royalties, based on the franchisees' sales, are recorded as income as they
are earned.
Services to franchisees and from the real estate segment are recognized when
services are rendered.
Revenues are recognized when reasonable assurance exists regarding
collectibility.
F) FOREIGN CURRENCY TRANSLATION
Transactions concluded in foreign currencies are translated according to the
temporal method. Therefore, monetary assets and liabilities are translated
at the rate of exchange in effect at the balance sheet date, non-monetary
assets and liabilities at their historical rates and revenue and expense
items at the average monthly rates of exchange. All exchange gains and
losses are current in nature and are included in the statements of income.
The financial statements of self-sustaining foreign subsidiaries are
converted according to the current rate method. Based on this method, assets
and liabilities are translated at the exchange rate in effect at the balance
sheet date, and revenue and expense items are translated at the average
monthly rates. Translation adjustments resulting from exchange rate
fluctuations are included in "foreign currency translation adjustments" in
shareholders' equity.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
G) INVENTORIES
Inventories are valued at the lower of cost and net realizable value, the
cost being determined using the first in, first out basis and retail selling
price less a normal gross profit.
H) INVESTMENTS
Investments in companies subject to significant influence are accounted for
using the equity method. Other investments are accounted for using the cost
method. Periodically, management analyzes each loan, advance and long-term
receivable and when a serious doubt as to their recovery is identified, a
provision is applied to reduce their book value to the estimated realizable
value.
I) CAPITAL ASSETS
Capital assets are accounted for at cost.
Amortization of buildings held for leasing is based on their estimated
useful lives using the compound interest method. Amortization of other
capital assets is based on their estimated useful lives using the
straight-line and the diminishing balance methods at the following rates:
<Table>
Buildings 3% to 5%
Buildings held for leasing 5% and 10%
Furniture and equipment 14% to 20%
Computer equipment and software 20% to 33 1/3%
Leasehold improvements Term of the lease or useful life,
whichever is shorter
Vehicles 14% to 30%
</Table>
Construction in progress is not amortized until the asset is ready for its
intended use.
J) INTANGIBLE ASSETS AND GOODWILL
Intangible assets with a finite service life are accounted for at cost. They
consist mainly of the customer prescription files, non-compete agreements
and leasehold interests. The prescription files are generally amortized over
a five-year period. Non-compete agreements are amortized over the service
lives of the agreements. Leasehold interests are amortized over the residual
term of the leases.
Goodwill represents the excess of the acquisition cost of companies over the
fair value of the identifiable net assets acquired. Goodwill is tested for
impairment annually or more frequently if changes in circumstances indicate
a potential impairment.
K) OTHER LONG-TERM ASSETS
Other assets are, among others, the incentives paid to franchisees and
deferred costs. Incentives paid to franchisees are amortized over a ten-year
period and are applied against royalties, included in other revenues.
Deferred costs are accounted for at cost and are mainly rental costs and
financing fees. Amortization is calculated using the straight-line method
over the term of the long-term loan or of the lease.
<Page>
44 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
L) FUTURE INCOME TAXES
The Company uses the tax liability method to account for income taxes. Under
this method, future tax assets and liabilities are determined according to
differences between the carrying amounts and tax bases of assets and
liabilities. They are measured by applying enacted or substantively enacted
tax rates and laws at the date of the financial statements for the years in
which the temporary differences are expected to reverse. It is more likely
than not that all of the future income tax assets will be realized.
M) OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist, among others, of the deferred revenues
and deferred lease obligations.
Deferred revenues: The Company receives allowances from its vendors as
consideration for exclusivity agreements. The revenue related to these
agreements is deferred when cashed. These amounts are recognized as
purchases are made, as stipulated by the agreement, and the related
inventory is sold.
Deferred lease obligations: The Company conducts a part of its operations in
leased premises. Some store leases include escalation clauses. The deferred
lease obligations represent, on the one hand, the rent expense in excess of
cash paid, that is amortized on a straight-line basis over the life of
original lease, and on the other hand, the value attributed to unfavourable
leases resulting from a business acquisition. The value of the unfavourable
leases is amortized on a straight-line basis over the term of the leases.
N) DEFINED BENEFIT PENSION PLANS
The Company accrues its obligations under employee benefit plans and the
related costs, net of plan assets. The cost of pensions and other retirement
benefits earned by employees is actuarially determined using the projected
benefit method prorated on service and management's best estimate of
expected plans' performance, salary escalation and retirement ages of
employees.
For the purpose of calculating the expected return on plan assets, those
assets are valued at fair value.
Past service costs are amortized on a straight-line basis over the average
remaining service period of active employees, which was nine years as of May
31, 2004 and 2003.
The excess of the net actuarial gain or loss over 10% of the greater of the
benefit obligation and the fair value of plan assets is amortized over the
average remaining service period of active employees.
O) DEFINED CONTRIBUTION PENSION PLAN
For the defined contribution plan, the pension expense is equal to the
contributions paid by the Company.
P) DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap contracts are used to hedge current and anticipated
interest rate risks. Interest to be paid or received under such swap
contracts is recognized over the life of the contracts as adjustments to
interest expense. Unrealized gains or losses resulting from market movements
are not recognized.
Q) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash, bank overdraft and highly
liquid investments that have maturities of less than three months at the
date of acquisition.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
2. ACCOUNTING POLICIES
CHANGES IN ACCOUNTING POLICIES
A) INCENTIVES PAID TO FRANCHISEES
During the fourth quarter of the year ended May 31, 2004, the Company
changed its basis of accounting for banner development costs. Banner
development costs were previously considered indefinite life intangible
assets and therefore not subject to amortization. Banner development costs
are now considered deferred costs representing incentives paid to
franchisees. These costs are amortized over a ten-year period and are
applied against royalties included in other revenues. This change in
accounting policy has been applied retroactively, and the consolidated
financial statements have been restated as follows:
<Table>
<Caption>
2003
Increase Decrease
----------------------------------------------------------------------------
$ $
Intangible assets 31,933
Other assets:
Incentives paid to franchisees 22,877
Future income taxes 2,121
Other revenues 4,610
Income taxes 1,080
Net income 3,530
Earnings per share
Basic 0.016
Diluted 0.016
----------------------------------------------------------------------------
</Table>
B) STOCK-BASED COMPENSATION
On June 1, 2002, the Company adopted the recommendations of Section 3870 of
the Canadian Institute of Chartered Accountants (CICA) Handbook related to
stock-based compensation and other stock-based payments. Subsequently, on
June 1, 2003, the Company prospectively adopted the new recommendations of
Section 3870 of the CICA Handbook. Under these new recommendations,
stock-based compensations are to be recorded under the fair value method.
According to that method, awards of stock options are measured on their date
of grant using the fair value based method. They are expensed and credited
to contributed surplus over their vesting period. This credit is
reclassified to capital stock when stock options are exercised. The impact
of these recommendations was to decrease the net earnings and to increase
contributed surplus by $251,000 for the year ended May 31, 2004.
Prior to June 1, 2003, the Company accounted for stock-based compensation by
measuring compensation cost for employee stock options as the excess, if
any, of the quoted market price of the Class A subordinate voting shares at
the date of grant over the amount an employee must pay to acquire these
shares. Besides, for the options granted during the year ended May 31, 2003,
the Company includes in the notes to the consolidated financial statements
pro forma disclosures of net income and earnings per share as if the fair
value method of accounting had been applied (see Note 15). Any consideration
paid on exercise of stock options or purchase of stock is credited to
capital stock.
<Page>
46 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
2. ACCOUNTING POLICIES (continued)
C) IMPAIRMENT OF LONG-LIVED ASSETS
On June 1, 2003, the Company adopted the new recommendations of sections
3063 of the CICA Handbook entitled "Impairment of Long-lived Assets". This
section sets out standards for recognizing, measuring and reporting the
impairment of long-lived assets. It supersedes the write-down provisions
included in Section 3061, "Property, Plant and Equipment". This new section
requires that the Company recognize an impairment loss for long-lived assets
to be kept and used when events or changes in circumstances result in their
carrying amount exceeding the sum of the undiscounted cash flows expected to
result from their use and eventual disposition. The impairment loss is
equivalent to the amount by which the asset's carrying amount exceeds its
fair value. The application of these recommendations has no impact on net
book value of capital assets.
D) REPORTING DROP SHIPMENT REVENUE NET
During the year ended May 31, 2003, the Company retroactively adopted the
new recommendations of Abstract 123 of Emerging Issues Committee of the CICA
(EIC-123) entitled "Reporting revenue gross as a principal versus net as a
agent". Under these recommendations, the Company is required to report its
transactions resulting from merchandise shipped directly to the franchisees
by the suppliers, but charged to the Company and recharged to the
franchisees on a net basis. Previously, these transactions were reported
gross in the sales and in the cost of goods sold. The impact of these
recommendations is to decrease the sales and the cost of goods sold by
$104,899,000 for the year ended May 31, 2003. The application of these
recommendations has no impact on the net income of the Company.
RECENT PRONOUNCEMENTS
A) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In July 2003, the CICA issued Handbook Section 1100, "Generally Accepted
Accounting Principles". This Section establishes standards for financial
reporting in accordance with Canadian GAAP, and provides guidance on sources
to consult when selecting accounting policies and determining appropriate
disclosures when a matter is not dealt with explicity in the primary sources
of Canadian GAAP. The Company will implement the new Section prospectively
beginning on June 1, 2004. The standard will require the Company to record
depreciation on its real estate segment buildings on a straight-line basis
instead of on a compound interest basis. Due to the prospective nature of
this change, there is no impact on the Company's consolidated financial
statements as of the implementation date.
B) CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In June 2003, the CICA issued Accounting Guideline 15 (AcG-15),
"Consolidation of Variable Interest Entities". The guideline addresses
consolidation of variable interest entities (VIE) to which the usual
condition for consolidation does not apply because the VIE have no voting
interests or are otherwise not subject to control through ownership of
voting interests. It requires existing unconsolidated VIE to be consolidated
by the primary beneficiary. The guideline is expected to be effective for
annual and interim periods beginning on or after November 1, 2004. The
Company has not yet determined what impact, if any, the application of
AcG-15 will have on its financial statements.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
2. ACCOUNTING POLICIES (continued)
C) RECORDING OF CERTAIN CONSIDERATION RECEIVED BY A VENDOR
In January 2004, the Emerging Issues Committee of the CICA released Abstract
144 (EIC-144), "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received From a Vendor".
EIC-144 specifies the accounting methods to be applied to certain
consideration received from a vendor. EIC-144 should be applied
retroactively to all financial statements for annual and interim periods
ending after August 15, 2004.
EIC-144 stipulates that cash consideration received by a company from a
vendor is presumed to be a reduction of the prices of the vendor's products
or services and should, therefore, be accounted for as a reduction of cost
of goods sold and related inventory when recognized in the company's income
statement and balance sheet.
The Company will apply this new recommendation on June 1, 2004. The Company
is currently evaluating the impact of this new recommendation.
3. OTHER REVENUES
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------
$ $
Royalties 90,613 84,324
Rent 62,464 59,028
Sundry 67,124 61,939
----------------------------------------------------------------------------------
220,201 205,291
==================================================================================
</Table>
<Table>
<Caption>
4. AMORTIZATION
2004 2003
----------------------------------------------------------------------------------
$ $
Capital assets 41,413 40,653
Intangible assets 9,091 13,108
Deferred costs 1,056 789
----------------------------------------------------------------------------------
51,560 54,550
==================================================================================
</Table>
<Page>
48 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
5. INCOME TAXES
The Company's effective tax rate differs from the combined statutory rate.
The difference is attributable to the following items:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------
% %
Combined statutory rate 34.0 36.0
Tax rate increase (decrease) resulting from:
Income taxable at reduced rates (3.0) (4.7)
Input credit deducted for tax purposes - (0.6)
Other 0.6 (0.2)
----------------------------------------------------------------------------------
31.6 30.5
==================================================================================
</Table>
The provision for income taxes is as follows:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------
$ $
Current taxes 100,283 44,316
Future taxes (18,734) 25,977
----------------------------------------------------------------------------------
81,549 70,293
==================================================================================
</Table>
Future income tax assets and liabilities are as follows:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------
$ $
FUTURE INCOME TAX ASSETS:
Inventories 4,182 5,717
Capital assets 15,392 13,562
Intangible assets, goodwill and incentives paid to franchisees 7,677 11,787
Current liabilities 6,286 5,663
Deferred revenue and deferred lease obligations 1,620 2,655
Capital stock issuance expenses 393 841
Other 3,863 2,350
----------------------------------------------------------------------------------
39,413 42,575
----------------------------------------------------------------------------------
FUTURE INCOME TAX LIABILITIES:
Current liabilities - 22,120
Capital assets 9,275 8,842
Other 1,354 144
----------------------------------------------------------------------------------
10,629 31,106
----------------------------------------------------------------------------------
FUTURE INCOME TAX ASSETS, NET 28,784 11,469
==================================================================================
</Table>
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
5. INCOME TAXES (continued)
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------
$ $
AS FOLLOWS:
Short-term future income tax asset(1) 13,334 11,738
Long-term future income tax asset (Note 10) 19,608 25,212
Short-term future income tax liability(2) - (21,095)
Long-term future income tax liability (Note 13) (4,158) (4,386)
----------------------------------------------------------------------------------
28,784 11,469
==================================================================================
</Table>
(1) Included in prepaid expenses and other current assets.
(2) Included in accounts payable and accrued liabilities.
6. EARNINGS PER SHARE
The reconciliation of the number of shares used to calculate the diluted
earnings per share, considering the September 25, 2002 stock split, is
established as follows:
<Table>
<Caption>
2004 2003
------------------------------------------------------------------------------------
Weighted average number of shares used
to compute basic earnings per share 226,812,864 226,052,767
Dilution effect 1,204,894 1,637,382
------------------------------------------------------------------------------------
Weighted average number of shares used
to compute diluted earnings per share 228,017,758 227,690,149
====================================================================================
</Table>
7. INVESTMENTS
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------
$ $
Loans, advances and long-term operating receivables
from franchisees, variable interest, some of which carry
repayment terms until 2015 and are renewable (net
of a provision for losses of $1,575,000;
2003 - $1,210,000) 33,319 28,263
Other 3,991 3,905
---------------------------------------------------------------------------------
37,310 32,168
Current portion (included in accounts receivable) 8,203 10,792
---------------------------------------------------------------------------------
29,107 21,376
=================================================================================
</Table>
During the year, a $600,000 bad debt expense has been accounted for in
respect of these receivables (2003 - $600,000).
<Page>
50 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
8. CAPITAL ASSETS
<Table>
<Caption>
2004
---------------------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net book value
---------------------------------------------------------------------------------------------------------------
$ $ $
Land 92,083 - 92,083
Land held for leasing 85,337 - 85,337
Buildings 231,867 38,364 193,503
Buildings held for leasing 225,211 27,070 198,141
Furniture and equipment 90,126 50,431 39,695
Computer equipment and software 69,379 51,327 18,052
Leasehold improvements 165,014 60,981 104,033
Vehicles 4,040 2,668 1,372
Computer equipment and software under capital leases 3,947 2,625 1,322
Construction in progress 9,146 - 9,146
---------------------------------------------------------------------------------------------------------------
976,150 233,466 742,684
===============================================================================================================
<Caption>
2003
---------------------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net book value
---------------------------------------------------------------------------------------------------------------
$ $ $
Land 92,198 - 92,198
Land held for leasing 80,144 - 80,144
Buildings 227,023 31,346 195,677
Buildings held for leasing 200,279 23,770 176,509
Furniture and equipment 79,707 43,288 36,419
Computer equipment and software 62,224 43,562 18,662
Leasehold improvements 126,008 47,343 78,665
Vehicles 4,120 2,554 1,566
Computer equipment and software under capital leases 3,947 1,953 1,994
Construction in progress 6,056 - 6,056
---------------------------------------------------------------------------------------------------------------
881,706 193,816 687,890
===============================================================================================================
</Table>
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
9. INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill are detailed as follows:
<Table>
<Caption>
2004
---------------------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net book value
---------------------------------------------------------------------------------------------------------------
$ $ $
Goodwill 129,990 - 129,990
Prescription files 57,388 35,703 21,685
Non-compete agreements 7,134 5,209 1,925
Leasehold interests 6,478 3,798 2,680
---------------------------------------------------------------------------------------------------------------
200,990 44,710 156,280
===============================================================================================================
<Caption>
2003
---------------------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net book value
---------------------------------------------------------------------------------------------------------------
$ $ $
Goodwill 128,779 - 128,779
Prescription files 49,366 27,862 21,504
Non-compete agreements 5,694 4,303 1,391
Leasehold interests 6,912 3,453 3,459
---------------------------------------------------------------------------------------------------------------
190,751 35,618 155,133
===============================================================================================================
</Table>
The Company acquired intangible assets for an amount of $9,172,000 during
the year (2003 - $3,101,000).
The changes in the book value of goodwill are as follows:
<Table>
<Caption>
2004
---------------------------------------------------------------------------------------------------------------
Franchising Retail sales Total
---------------------------------------------------------------------------------------------------------------
$ $ $
Balance, beginning of year 19,993 108,786 128,779
Acquisition (Note 20) 1,616 - 1,616
Foreign currency translation adjustments - (405) (405)
---------------------------------------------------------------------------------------------------------------
Balance, end of year 21,609 108,381 129,990
===============================================================================================================
<Caption>
2003
---------------------------------------------------------------------------------------------------------------
Franchising Retail sales Total
---------------------------------------------------------------------------------------------------------------
$ $ $
Balance, beginning of year 19,993 120,352 140,345
Acquisition and purchase price adjustment (Note 20) - 1,111 1,111
Foreign currency translation adjustments - (12,677) (12,677)
---------------------------------------------------------------------------------------------------------------
Balance, end of year 19,993 108,786 128,779
===============================================================================================================
</Table>
<Page>
52 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
10. OTHER LONG-TERM ASSETS
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------------------------------------
$ $
Incentives paid to franchisees, net 24,601 22,877
Future income taxes 19,608 25,212
Deferred costs, net 3,571 4,429
Deposits on acquisition of assets 321 455
---------------------------------------------------------------------------------------------------------------
48,101 52,973
===============================================================================================================
</Table>
11. BANK OVERDRAFT AND BANK LOANS
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------------------------------------
$ $
Bank overdraft - 11,345
Bank loans 20,451 65,272
---------------------------------------------------------------------------------------------------------------
20,451 76,617
===============================================================================================================
</Table>
The Company has authorized lines of credit that are renewable annually and
bear interest at a rate based on the prime rate of 3.75% as of May 31, 2004
(2003 - 5%) or LIBOR plus a variable margin (1.875% and 2.38% as of May 31,
2004 and 2003 respectively). The authorized lines of credit are as follows:
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------------------------------------
CAN US CAN US
---------------------------------------------------------------------------------------------------------------
$ $ $ $
Canadian dollar loan 75,000 - 75,000 -
American dollar loan - 60,000 - 60,000
Letters of credit - 15,000 - 15,000
Issued letters of credit - 7,091 - 4,888
---------------------------------------------------------------------------------------------------------------
</Table>
Under the terms of the credit agreements, the Company must satisfy certain
restrictive covenants as to minimum financial ratios and must satisfy
certain conditions. (See Note 25 on subsequent events).
In accordance with the credit agreement relative to Canadian operations, the
Company may not give its short-term assets relative to these operations, nor
the shares of its American subsidiaries as security to other creditors.
In accordance with the credit agreement relative to United States
operations, the Company gave the accounts receivable and inventories of its
American subsidiaries as security to its creditors, but may not give its
capital assets, except for an amount of US$10,000,000 as security to other
creditors.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
12. LONG-TERM DEBT
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Term loan of US$185,000,000 (2003 - US$205,000,000), bearing interest
at LIBOR rate plus a variable margin (2.125% and 2.375% as of May 31, 2004
and 2003 respectively), repayable by quarterly instalments of $6,817,000
(US$5,000,000) and subject to the same terms and conditions as the credit
agreement relative to United States operations(1) 252,229 280,542
Loans, secured by real estate having a net book value of $17,136,000
(2003 - $18,490,000), repayable by maximum monthly combined instalments of
$97,000 including principal and interest at rates varying from 6.7% to
7.85% and the balance in December 2007 8,290 8,843
Computer equipment and software capital leases, repayable through May 2008
in maximum monthly combined instalments of $55,000 (2003 - $71,000)
including interest calculated at rates varying from 4.55% to 6.55%, with
purchase options of $243,000 (2003 - $331,000) at maturity 1,515 2,226
----------------------------------------------------------------------------------------------------------------
262,034 291,611
Current portion 30,773 28,630
----------------------------------------------------------------------------------------------------------------
231,261 262,981
================================================================================================================
</Table>
(1) This loan was refinanced on July 31, 2004, as mentioned in Note 25 on
subsequent events.
Repayments to be made during the forthcoming years of the following table
take into account the financing arrangement described in Note 25 on
subsequent events.
<Table>
<Caption>
Long-term debt Capital leases
----------------------------------------------------------------------------------------------------------------
Principal Principal Interest
----------------------------------------------------------------------------------------------------------------
$ $ $
2005 30,167 606 64
2006 66,710 453 35
2007 84,402 291 13
2008 104,804 165 4
2009 78,907 - -
----------------------------------------------------------------------------------------------------------------
</Table>
13. OTHER LONG-TERM LIABILITIES
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Deferred revenues 1,694 2,425
Deferred lease obligations 7,555 8,673
Future income taxes 4,158 4,386
----------------------------------------------------------------------------------------------------------------
13,407 15,484
================================================================================================================
</Table>
<Page>
54 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
14. CAPITAL STOCK
AUTHORIZED, UNLIMITED NUMBER
Class A subordinate voting shares, participating, one vote per share,
exchangeable, at the option of the holder, for the same number of Class B
shares in the event of a take-over bid being made in respect to Class B
shares, without par value
Class B shares, participating, ten votes per share, exchangeable for Class A
subordinate voting shares on the basis of one Class A subordinate voting
share for one Class B share, without par value
Class C shares, to be issued in one or more series subject to rights,
privileges, conditions and restrictions to be determined, non-participating,
non-voting, without par value
Changes that occured on Class A subordinate voting shares are presented as
follows:
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------------------------------------
Shares $ Shares $
---------------------------------------------------------------------------------------------------------------
Outstanding shares, beginning of year 102,569,550 209,676 50,858,940 203,761
Stock split on September 25, 2002 - - 50,858,940 -
Class B shares exchanged for an equal
number of Class A shares 3,750,000 - - -
Options exercised 353,960 2,637 851,670 5,915
---------------------------------------------------------------------------------------------------------------
Outstanding shares, end of year 106,673,510 212,313 102,569,550 209,676
===============================================================================================================
</Table>
Changes that occured on Class B shares are presented as follows:
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------------------------------------
Shares $ Shares $
---------------------------------------------------------------------------------------------------------------
Outstanding shares, beginning of year 124,000,000 2 62,000,000 2
Stock split on September 25, 2002 - - 62,000,000 -
Class B shares exchanged for an equal
number of Class A shares (3,750,000) - - -
---------------------------------------------------------------------------------------------------------------
Outstanding shares, end of year 120,250,000 2 124,000,000 2
===============================================================================================================
</Table>
15. STOCK-BASED COMPENSATION PLAN
The Company has a fixed stock option plan. Under the 1995 executive officers
Stock Option Plan, the Company may grant options to those employees for up
to 8 million Class A subordinate voting shares. Under the plan, the exercise
price of each option equals the closing market price of the Company's stock
at the Toronto Stock Exchange on the date of grant and an option's maximum
term is 10 years. Granted options vest annually by increments of 20%.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
15. STOCK-BASED COMPENSATION PLAN (continued)
Changes that occurred in the number of options, considering the September
25, 2002 stock split, are presented as follows:
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------------------------------------------------
Number Weighted average Number Weighted average
of options exercise price of options exercise price
---------------------------------------------------------------------------------------------------------------
$ $
Options outstanding, beginning of year 2,956,790 9.10 3,552,360 7.98
Options granted 331,600 17.02 256,100 17.49
Options exercised (353,960) 7.46 (851,670) 6.95
Options cancelled (27,340) 14.75 - -
---------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 2,907,090 10.15 2,956,790 9.10
===============================================================================================================
Options exercisable, end of year 2,171,258 8.75 1,518,102 8.35
===============================================================================================================
</Table>
The following table summarizes information about the fixed stock options
outstanding at May 31, 2004:
<Table>
<Caption>
Options Options
outstanding exercisable
----------------------------------------------------------------------------------------------------------------
Weighted
Number average remaining Number
Price of options contractual life of options
----------------------------------------------------------------------------------------------------------------
$ YEARS
2.18 44,250 0.9 44,250
2.30 10,000 2.5 10,000
4.24 7,000 3.5 7,000
7.01 1,136,800 5.5 1,136,800
8.85 580,640 6.3 440,240
9.37 230,000 6.5 179,408
13.00 325,400 7.5 190,680
15.99 22,400 9.7 4,480
16.80 267,100 9.5 53,420
17.49 241,400 8.5 96,560
18.95 42,100 9.9 8,420
----------------------------------------------------------------------------------------------------------------
2,907,090 2,171,258
================================================================================================================
</Table>
<Page>
56 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
15. STOCK-BASED COMPENSATION PLAN (continued)
Had compensation cost been determined using the fair value based method at
the date of grant for awards granted during the year ended May 31, 2003, the
Company's pro forma net income, net earnings per share and diluted earnings
per share would have been as presented in the table below.
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Net income as reported 176,923 160,092
Pro forma impact 378 284
----------------------------------------------------------------------------------------------------------------
Pro forma net income 176,545 159,808
================================================================================================================
Pro forma net earnings per share
Basic 0.78 0.71
Diluted 0.77 0.70
----------------------------------------------------------------------------------------------------------------
</Table>
The following data represents the weighted average assumptions used in the
stock options valuation in accordance with the Black-Scholes model:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
Dividend yield 0.73% 0.70%
Expected volatility 28.20% 27.00%
Risk-free interest rate 4.19% 4.75%
Expected life (years) 6 6
----------------------------------------------------------------------------------------------------------------
</Table>
During the year ended May 31, 2004, the Company granted 331,600 stock
options. The weighted average fair value of those options is $5.61.
Therefore, an amount of $251,000 was expensed for the stock option plan and
the equivalent adjustment was made to contributed surplus.
16. FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
These adjustments represent unrealized gains (loss) pursuant to the
translation of the financial statements of the Company's self-sustaining
American subsidiaries. The variation of this item is due to the fluctuation
of the exchange rate during the year and to the increase or reduction in the
net investment in subsidiaries.
17. GUARANTEES AND CONTINGENCIES
GUARANTEES
The Company has guaranteed the reimbursement of certain bank loans
contracted by franchisees for a maximum amount of $11,991,000 (2003 -
$17,626,000). As at May 31, 2004, these loans amount to approximately
$11,964,000 (2003 - $16,353,000). Most of those guarantees apply to loans
with a maximum maturity of eight years. Those loans are also personally
guaranteed by the franchisees.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
17. GUARANTEES AND CONTINGENCIES (continued)
BUYBACK AGREEMENTS
Under buyback agreements, the Company is committed to financial institutions
to purchase the inventories of some of its franchisees up to the amount of
advances made by those financial institutions to the franchisees. As of May
31, 2004, financing related to these inventories amounted to approximately
$74,127,000 (2003 - $66,374,000). However, under these agreements, the
Company is not committed to cover any deficit that may arise should the
value of these inventories be less than the amount of the advances.
Under buyback agreements, the Company is committed to financial
institutions, to purchase equipment held by franchisees and financed by
capital leases not exceeding five years and loans not exceeding eight years.
For capital leases, the buyback value is linked to the net balance of the
lease at the date of the buyback. For equipment financed by bank loans, the
minimum buyback value is set by contract with the financial institutions. As
at May 31, 2004, financing related to the equipment amounts to approximately
$28,695,000 (2003 - $29,858,000). However, it is the opinion of management
that the realizable value of the assets cannot be lower than the eventual
amount of the buyback.
The Company did not record any liability with respect to these guarantees in
its financial statements for the years ended May 31, 2004 and 2003.
CONTINGENCIES
Various claims and legal proceedings have been initiated against the Company
in the normal course of its operating activities. Although the outcome of
these proceedings cannot be determined with certainty, management estimates
that any payments resulting from their outcome are not likely to have a
substantial negative impact on the Company's results and financial position.
18. COMMITMENTS
The balance of the commitments under the terms of building and vehicle
operating leases maturing in 2022 totals $386,684,000. Minimum payments
payable over the next five years are as follows:
<Table>
<Caption>
----------------------------------------------------------------------------
$
2005 60,905
2006 53,369
2007 46,934
2008 39,459
2009 32,295
----------------------------------------------------------------------------
</Table>
Under the terms of building leases and subleases, the Company will receive,
up to the year 2022, minimum payments totalling $310,886,000. This amount
takes into account the renewal of subleases at the same terms and conditions
as the lease agreements.
The Company concluded agreements with suppliers under which it is committed
to purchase a minimum of CAN$61,688,000 or US$45,246,000 until 2005.
The Company has commitments with contractors for the construction of
buildings amounting to $6,140,000.
<Page>
58 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
19. PENSION PLANS
The Company offers defined benefit and defined contribution pension plans
providing pension benefits to its employees.
The defined benefit and defined contribution plans expenses are as follows:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Defined contribution plan 3,412 3,120
================================================================================================================
Defined benefit plans
Current service costs 590 602
Interest expense 725 642
Expected return on plan assets (423) (289)
Amortization of past service cost 1,955 834
Net actuarial loss 3 104
----------------------------------------------------------------------------------------------------------------
Benefit plans expense 2,850 1,893
================================================================================================================
</Table>
Information about the Company's defined benefit plans is as follows:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Accrued benefit obligations
Balance, beginning of year 11,513 10,420
Current service cost 590 602
Interest expense 725 642
Past service cost (3,425) -
Actuarial gains (303) (151)
----------------------------------------------------------------------------------------------------------------
Balance, end of year 9,100 11,513
================================================================================================================
Plan assets
Fair value, beginning of year 3,150 2,254
Actual return on plan assets 117 34
Employer contributions 4,372 862
Benefits paid (3,425) -
----------------------------------------------------------------------------------------------------------------
Fair value, end of year 4,214 3,150
================================================================================================================
Accrued benefit obligations 9,100 11,513
Plan assets 4,214 3,150
----------------------------------------------------------------------------------------------------------------
4,886 8,363
----------------------------------------------------------------------------------------------------------------
Unamortized past service cost 3,622 5,577
----------------------------------------------------------------------------------------------------------------
Accrued benefit liability (included in accounts payable and accrued liabilities) 1,264 2,786
================================================================================================================
</Table>
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
19. PENSION PLANS (continued)
The main actuarial assumptions adopted in measuring the Company's accrued
benefit obligations are as follows:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
% %
Discount rate 6.00 6.00
Expected long-term rate of return on plan assets 6.75 6.75
Rate of compensation increase 4.00 4.00
----------------------------------------------------------------------------------------------------------------
</Table>
20. BUSINESS ACQUISITIONS
PHARMASAVE
During the second quarter of the year 2003-2004, the Company purchased the
shares of three drugstores operating in Ontario under the "Pharmasave"
banner. The acquisition has been accounted for under the purchase method and
the results of operations have been included in the consolidated financial
statements since the acquisition date.
<Table>
<Caption>
Purchase price allocation: 2004
----------------------------------------------------------------------------
$
Net assets acquired:
Non-cash working capital 1,179
Capital assets 399
Intangible assets:
Prescription files 2,684
Non-compete agreements 800
Goodwill 1,616
Future income tax liabilities (1,253)
----------------------------------------------------------------------------
Non-cash assets acquired 5,425
Cash and cash equivalents 163
----------------------------------------------------------------------------
Net assets acquired 5,588
============================================================================
Cash consideration 5,588
============================================================================
</Table>
OSCO
On December 5, 2001, the Company entered into an agreement to purchase the
assets of 80 retail drug stores operating under the "OSCO" banner and five
drug store development projects located in the northeastern United States
(OSCO). The acquisition of OSCO has been accounted for under the purchase
method. The results of OSCO operations have been included in the
consolidated financial statements of the Company as of its acquisition date
in January 2002.
<Page>
60 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
20. BUSINESS ACQUISITIONS (continued)
During the year ended May 31, 2003, the Company completed the final purchase
price allocation of OSCO, resulting in a net increase in goodwill of
CAN$929,000 (US$578,000) from the amount initially recorded. The goodwill
adjustments related to the finalization of the provision for stores closures
which resulted in the decision to keep certain OSCO stores open, the
inclusion of deferred lease obligations related to unfavourable leases, the
settlement of a legal dispute with the seller resulting in net proceeds of
CAN$1,555,000 (US$967,000), which has been reflected as a reduction of the
purchase price, and other adjustments that relate primarily to future income
taxes.
<Table>
<Caption>
Purchase price allocation: 2003 2002
----------------------------------------------------------------------------------------------------------------
$ $
FINAL INITIAL
Net assets acquired:
Non-cash working capital 99,590 91,693
Capital assets 169,915 169,915
Future income tax assets 5,837 7,228
Intangible assets:
Prescription files 25,330 25,330
Non-compete agreements 976 976
Leasehold interests 4,278 4,278
Goodwill (tax deductible, $76,000) 88,645 87,716
Deferred lease obligations (8,990) -
----------------------------------------------------------------------------------------------------------------
Non-cash assets acquired 385,581 387,136
Cash and cash equivalents 321 321
----------------------------------------------------------------------------------------------------------------
Net assets acquired 385,902 387,457
================================================================================================================
Cash consideration 385,902 387,457
================================================================================================================
</Table>
21. RELATED PARTY TRANSACTIONS
The Company entered into the following transactions with enterprises
controlled by shareholders having a significant influence over the Company:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Revenues
Sales 21,111 23,980
Royalties 902 1,318
Rent 1,738 1,497
Sundry 400 1,377
----------------------------------------------------------------------------------------------------------------
24,151 28,172
================================================================================================================
</Table>
As at May 31, 2004, accounts receivable include an amount of $1,102,000
(2003 - $1,304,000) resulting from these transactions.
These transactions are carried out in the ordinary course of business and
are measured at the exchange amount.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
22. FINANCIAL INSTRUMENTS
FAIR VALUE
The fair value of cash, receivables, bank overdraft and bank loans, accounts
payable and accrued liabilities approximates their book value because of
their forthcoming maturity.
The fair value of loans, advances and long-term receivables from franchisees
was not determined, since these balances result from transactions carried
out in the context of privileged commercial relationships and under terms
and conditions that may differ from those that could be negotiated with
non-franchisees.
The fair value of the long-term debt, obtained by discounting contractual
cash flows at the interest rates in effect for debts having similar
characteristics, approximates its book value.
The interest rate swap agreements have a negative fair value of
CAN$5,025,000 or US$3,686,000 (2003 - CAN$13,480,000 or US$9,850,000).
INTEREST RATE RISK
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements in order to reduce the
impact of fluctuating interest rates on a portion of its long-term debt.
These swaps require the periodic exchange of payments without the exchange
of the notional principal amount on which the payments are based. The
Company designates these interest rate swap agreements as hedges of the
underlying debt. Interest expense on the debt is adjusted to include the
payments made or received under the interest rate swaps designated as
hedges.
These agreements are detailed as follows:
<Table>
<Caption>
2004
---------------------------------------------------------------------------------------------------------------
US CAN Interest rate
---------------------------------------------------------------------------------------------------------------
$ $ %
Agreement maturing in January 2005 185,000 252,229 4.34
===============================================================================================================
<Caption>
2003
---------------------------------------------------------------------------------------------------------------
US CAN Interest rate
---------------------------------------------------------------------------------------------------------------
$ $ %
Agreement maturing in June 2003 60,000 82,110 5.175
Agreement maturing in January 2005 145,000 198,432 4.34
---------------------------------------------------------------------------------------------------------------
205,000 280,542
===============================================================================================================
</Table>
<Page>
62 CONSOLIDATED FINANCIAL STATEMENTS THE JEAN COUTU GROUP (PJC) INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
22. FINANCIAL INSTRUMENTS (continued)
CREDIT RISK
The Company's exposure to concentrations of credit risk is limited. It
arises mostly from accounts receivable, loans, advances and long-term
operating receivables from franchisees. The non-collection risk is reduced
by the fact that accounts receivable are generated by a large diversity of
customers. Besides, the financial position of the franchisees to whom the
Company grants loans, advances and long-term operating receivables is
analysed in detail regularly.
23. SUPPLEMENTAL CASH FLOW INFORMATION
NET CHANGES IN NON-CASH ASSET AND LIABILITY ITEMS
The net changes in non-cash assets and liability items are detailed as
follows:
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Accounts receivable, prepaid expenses and other current assets 1,505 (54,820)
Inventories (45,662) 24,728
Accounts payable, accrued liabilities and income taxes payable 77,936 (8,066)
Other items (3,967) 4,050
----------------------------------------------------------------------------------------------------------------
Net changes in non-cash asset and liability items 29,812 (34,108)
================================================================================================================
</Table>
OTHER INFORMATION
<Table>
<Caption>
2004 2003
----------------------------------------------------------------------------------------------------------------
$ $
Capital assets acquired through capital leases - 824
Interest paid 18,975 23,627
Income taxes paid 51,201 57,927
----------------------------------------------------------------------------------------------------------------
</Table>
24. COMPARATIVE FIGURES
Certain 2003 figures have been reclassified to conform with the presentation
adopted in 2004.
<Page>
THE JEAN COUTU GROUP (PJC) INC. CONSOLIDATED FINANCIAL STATEMENTS 63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 2004 and 2003
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES AND OPTIONS DATA)
25. SUBSEQUENT EVENTS
THE ECKERD ACQUISITION
On July 31, 2004, the Company acquired the shares of three subsidiaries of
TDI Consolidated Corporation, a wholly-owned subsidiary of J.C. Penney
Corporation, Inc., that own 1,549 outlets of the Eckerd drugstore chain
located throughout 13 states in northeastern, mid-Atlantic and southeastern
United States for a purchase price of US$2.375 billion, plus preliminary
closing adjustments of US$112.5 million.
The purchase price, together with the transaction costs estimated at US$35.0
million and the repayment of existing debts totalling US$195.0 million at
the date of aquisition, has been financed through:
- Debt financing consisting of secured first rank credit facilities in the
amount of US$1.7 billion as follows:
- a five-year revolving facility of US$350.0 million bearing interest at
variable interest rates
- a five-year term loan facility of US$250.0 million bearing interest at
variable interest rates, and
- a seven-year term loan facility of US$1.1 billion bearing interest at
variable interest rates
- US$1.2 billion notes offering comprised of:
- US$350.0 million of unsecured senior notes, bearing interest at 7.625%
and maturing on August 1, 2012, and
- US$850.0 million of unsecured senior subordinated notes, bearing
interest at 8.5% and maturing on August 1, 2014
- Public offering of 33,350,000 new Class A Subordinate voting shares issued
for gross proceeds of CAN$582.0 million.
The preliminary allocation of the purchase price that follows was
established based on information available and on the basis of preliminary
evaluations. This allocation is subject to changes should new information
become available and when the strategies of integration and restructuring
assets have been completed.
<Table>
<Caption>
Millions of
US dollars
----------------------------------------------------------------------------------------------
Net assets acquired
Non-cash working capital 686.7
Capital assets 860.7
Intangible assets 775.4
Goodwill 594.0
Future income tax liabilities (250.0)
Other liabilities (148.4)
----------------------------------------------------------------------------------------------
Non-cash assets acquired 2,518.4
Cash and cash equivalents 4.1
----------------------------------------------------------------------------------------------
Net assets acquired 2,522.5
==============================================================================================
Cash consideration 2,522.5
==============================================================================================
</Table>
<Page>
64 BOARD OF DIRECTORS THE JEAN COUTU GROUP (PJC) INC.
BOARD OF DIRECTORS
[PHOTO OF JEAN COUTU]
JEAN COUTU
CHAIRMAN OF THE BOARD
[PHOTO OF LISE BASTARACHE]
LISE BASTARACHE
REGIONAL VICE-PRESIDENT,
QUEBEC RBC PRIVATE BANKING
[PHOTO OF LOUIS COUTU]
LOUIS COUTU
VICE-PRESIDENT, COMMERCIAL POLICIES
[PHOTO OF MICHEL COUTU]
MICHEL COUTU
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
THE JEAN COUTU GROUP (PJC) USA, INC.
[PHOTO OF L. DENIS DESAUTELS]
L. DENIS DESAUTELS
EXECUTIVE-IN-RESIDENCE,
SCHOOL OF MANAGEMENT,
UNIVERSITY OF OTTAWA
[PHOTO OF NICOLLE FORGET]
NICOLLE FORGET
CORPORATE DIRECTOR
[PHOTO OF YVON MARTINEAU]
YVON MARTINEAU
SENIOR PARTNER,
FASKEN MARTINEAU DUMOULIN L.L.P.
[PHOTO OF LAURENT PICARD]
LAURENT PICARD
CORPORATE DIRECTOR
VICE-CHAIRMAN OF THE BOARD
[PHOTO OF FRANCOIS J. COUTU]
FRANCOIS J. COUTU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
[PHOTO OF JACQUES BOISVERT]
JACQUES BOISVERT*
PRESIDENT, DOSEX INC.
[PHOTO OF MARIE-JOSEE COUTU]
MARIE-JOSEE COUTU
PRESIDENT, FONDATION MARCELLE ET JEAN COUTU
[PHOTO OF SYLVIE COUTU]
SYLVIE COUTU
PRESIDENT, SYLVIE COUTU DESIGN
[PHOTO OF MARCEL DUTIL]
MARCEL DUTIL
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
THE CANAM MANAC GROUP INC.
[PHOTO OF CLAIRE LEGER]
CLAIRE LEGER
CHAIRMAN OF THE BOARD,
ST-HUBERT GROUP INC.
[PHOTO OF ERIK PELADEAU]
ERIK PELADEAU
CHAIRMAN OF THE BOARD OF QUEBECOR MEDIA INC.
AND VICE CHAIRMAN OF THE BOARD OF QUEBECOR
WORLD INC. AND QUEBECOR INC.
[PHOTO OF DENNIS WOOD]
DENNIS WOOD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DENNIS WOOD HOLDINGS INC.
* Jacques Boisvert, who passed away on July 12, 2004, served on the Board of
the Jean Coutu Group for two years. The management team wishes to underscore
Mr. Boisvert's exceptional contribution to the Company's development during
those years.
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THE JEAN COUTU GROUP (PJC) INC. CORPORATE OFFICERS 65
CORPORATE OFFICERS
THE JEAN COUTU GROUP (PJC) INC.
JEAN COUTU
CHAIRMAN OF THE BOARD
FRANCOIS J. COUTU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ANDRE BELZILE
SENIOR VICE-PRESIDENT FINANCE AND CORPORATE AFFAIRS
MICHEL BOUCHER
CHIEF INFORMATION OFFICER
CAROLE BOUTHILLETTE
VICE-PRESIDENT, FINANCE
DENIS COURCY
VICE-PRESIDENT, HUMAN RESOURCES AND LEGAL AFFAIRS
LOUIS COUTU
VICE-PRESIDENT, COMMERCIAL POLICIES
ALPHONSE GALLUCCIO
VICE-PRESIDENT, INTERNAL AUDIT
YVON GOYER
VICE-PRESIDENT, SERVICES AND PROMOTIONS
CAROLINE GUAY
DIRECTOR, LEGAL AFFAIRS AND CORPORATE SECRETARY
ALAIN LAFORTUNE
SENIOR VICE-PRESIDENT, PURCHASING AND MARKETING
JACQUES LAMOUREUX
VICE-PRESIDENT, OPERATIONS
RICHARD MAYRAND
VICE-PRESIDENT, PHARMACY AND PUBLIC AFFAIRS
JOHANNE MELOCHE
VICE-PRESIDENT, COSMETICS, EXCLUSIVE BRANDS
AND BEAUTY PROGRAMS
NORMAND MESSIER
SENIOR VICE-PRESIDENT NETWORK EXPLOITATION
JEAN-PIERRE NORMANDIN
VICE-PRESIDENT, DISTRIBUTION CENTRE
CAROLE RENNIE
CONTROLLER
THE JEAN COUTU GROUP (PJC) USA, INC.
MICHEL COUTU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BARBARA DONNELLAN
VICE-PRESIDENT, INFORMATION SYSTEMS
KAI GOTO
VICE-PRESIDENT, WAREHOUSE AND DISTRIBUTION
C. DANIEL HARON
VICE-PRESIDENT, PHARMACY AND PROFESSIONAL AFFAIRS
DON KINNEY
VICE-PRESIDENT, DRUGSTORE OPERATIONS
DAVID A. MOROCCO
SENIOR VICE-PRESIDENT, MARKETING
SUSAN MANVILLE
CONTROLLER
ROBERT POULIOT
VICE-PRESIDENT, PURCHASING
PETER SCHMITZ
VICE-PRESIDENT, REAL ESTATE
KENNETH SPADER
VICE-PRESIDENT, CONSTRUCTION, FACILITIES,
ENGINEERING AND STORE PLANNING
KATHLEEN TOPOR
TREASURER
WILLIAM Z. WELSH, JR.
EXECUTIVE VICE-PRESIDENT AND CHIEF OPERATING OFFICER
RANDY WYROFSKY
SENIOR VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
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66 GENERAL INFORMATION THE JEAN COUTU GROUP (PJC) INC.
GENERAL INFORMATION
THE JEAN COUTU GROUP (PJC), INC.
530 BERIAULT STREET
LONGUEUIL, QC
J4G 1S8
(450) 646-9760
AUDITORS
SAMSON BELAIR/DELOITTE & TOUCHE, S.E.N.C.R.L.
1 PLACE VILLE-MARIE
SUITE 3000
MONTREAL, QC
H3B 4T9
FINANCIAL COMMUNICATIONS
DRAFT
600 DE MAISONNEUVE BLVD. WEST
27TH FLOOR
MONTREAL, QC
H3A 3J2
THE JEAN COUTU GROUP (PJC) USA, INC.
50 SERVICE ROAD
WARWICK, RHODE ISLAND
U.S.A. 02886
(401) 825-3900
TRANSFER AGENT AND REGISTRAR
NATIONAL BANK TRUST
1100 UNIVERSITY STREET
9TH FLOOR
MONTREAL, QC
H3B 2G7
STOCK MARKET INFORMATION
TICKER SYMBOL: PJC.A
TORONTO STOCK EXCHANGE
INTERNET SITES
THE JEAN COUTU GROUP (PJC) INC.
www.jeancoutu.com
THE JEAN COUTU GROUP (PJC) USA, INC.
www.brooks-rx.com
www.eckerd.com
ANNUAL GENERAL AND SPECIAL MEETING
THE ANNUAL GENERAL AND SPECIAL MEETING OF SHAREHOLDERS OF THE JEAN COUTU GROUP
(PJC), INC. WILL BE HELD ON OCTOBER 26, 2004 AT 9:30 A.M. AT THE HEAD OFFICE OF
THE COMPANY, 551 BERIAULT STREET, LONGUEUIL, QUEBEC, CANADA.
ANNUAL INFORMATION FORM
THE ANNUAL INFORMATION FORM FOR THE YEAR ENDED MAY 31, 2004 WILL BE AVAILABLE
UPON REQUEST AS OF SEPTEMBER 24,2004.
POUR OBTENIR LA VERSION FRANCAISE DE CE RAPPORT, VEUILLEZ ECRIRE A:
LE GROUPE JEAN COUTU (PJC) INC.
A/S DE CELINE LAMONDE
530, RUE BERIAULT
LONGUEUIL (QUEBEC) J4G 1S8
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Design: MP1 Computer graphics : Fronde, Inc.
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[PHOTO]
[PHOTO]
[PHOTO]
[PJC JEAN COUTU LOGO] jeancoutu.com
[BROOKS(R) LOGO] brooks-rx.com
[ECKERD(R) LOGO] eckerd.com