Court-ordered expert report

Alain MARTIN Financial expert at the Paris Court of Appeal 101, rue de Prony 75017 PARIS Jean-Luc DUMONT Financial expert at the Paris Court of Appeal 15, rue Beaujon 75008 PARIS Paris Court of Appeal Judgment of 9 December 1998 RG 1998 / 14119 SEBOL MAC DONALD'S FRANCE Expert report 15 October 1999 Contents Presentation and definition of the assignment 1.1 The Parties to the case 1.2 The context of the assignment 1.3 Reminder of the judicial proceedings and definition of the assignment 2 Steps taken Documents examined 3.1 Documents received from the Appellants 3.2 Documents received from the Respondent Answers to the questions put by the Court to the experts 4.1 Question 1: Impact of a salary reduction and of a payment of dividends into the current account on the profitability of SEBOL and B&O, in 1996 and 1997 'Question 2: Amendment to the lease-management agreement (*location-gérance*) of the company B&O, of 10 June 1997 Question 3: Analysis of a transfer of fixed costs from SEBOL to B&O 4.4 Question 4: Summary of the operation of SEBOL and B&O, considered as an economic unit. 4.5 Question 5: Analysis of the viability of the Antibes Ouest restaurant and of the possible synergies of an Antibes Ouest-Vallauris whole 4.6 Question 6: Analysis of the award of Antibes Ouest to Mr Collorafi 4.7 Question 7: Analysis of the consistency of the overall financial management of Mr Collorafi in the three companies up to 1/1/98 Question 8: Analysis of the accounts of SEBOL, B&O and LES PINS from 1/01/98 to 10/06/98 Expert report SEBOL C/ MAC DONALD'S FRANCE Espere 1999/73 i. 4.9 Question 9: Increase in the cumulative fees compared with a reduction in administrative costs 4.10 Question 10: Effects of the award of Antibes Ouest on the minimum break-even thresholds 5 Conclusion and end of the expert assignment 5.1 On the impact of a salary reduction and of a payment of dividends into the current account on the profitability of SEBOL and B&O, in 1996 and 1997 (question 1) 5.2 On the amendment to the lease-management agreement (*location-gérance*) of the company B&O, of 10 June 1997 (question 2) On a transfer of fixed costs from SEBOL to B&O (question 3) On the operation of SEBOL and B&O, considered as an economic unit (question 4) 5.5 On the viability of the Antibes Ouest restaurant and the possible synergies of an Antibes Ouest-Vallauris whole (question 5) 5.6 On the decision of MCDONALD'S to award Antibes Ouest to B. Collorafi (question 6) 5.7 On the consistency of the overall financial management of B. Collorafi in the three companies up to 1 January 1998 (question 7) On the accounts of SEBOL, B&O and LES PINS from 01/01/98 to 10/06/98 (question 8) 5.9 On a possible set-off between the increase in the cumulative fees and the reduction in administrative costs (question 9) 5.10 On the effects of the award of Antibes Ouest on the minimum break-even thresholds (question 10) 5.11 Answer of the experts to the parties' submissions Expert report SEBOL CI MAC DONALD'S FRANCE RISEBOT septembre 1999/VI 1 Presentation and definition of the assignment 1.1 The Parties to the case BETWEEN: SA SEBOL "CARREFOUR" shopping centre Chemin de Saint Claude 06600 ANTIBES EURL B&O Rond Point Weisweller Route de Grasse 06600 ANTIBES Mr COLLORAFI Bernard 21 B, chemin de l'Esterelle 06100 LE CANNET ROCHEVILLE SARL LES PINS 32 avenue de Cannes 06160 JUAN LES PINS Appellants, represented by Maître Jean-Paul CLEMENT, 78 avenue Mozart 75016 PARIS Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999V1 AND: STE MAC DONALD'S FRANCE 1, rue Gustave Eiffel 78045 GUYANCOURT CEDEX Respondent, represented by Maître Jean-Marie LELOUP 128, bd Saint-Germain 75006 PARIS Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999Vi 1.2 The context of the assignment By agreement of 5 August 1987, the company Mac Donald's France leased under a lease-management agreement (*location-gérance*) to Mr Collorafi a fast-food business located in the Carrefour shopping centre in Antibes. This agreement was subsequently transferred, on 31 August 1987, to the company Sebol, wholly owned by Mr Collorafi. The lease-management agreement (*location-gérance*) between the company Mac Donald's and the company Sebol provided for the following financial terms: Date of agreement: 05/08/87 Security deposit: Initial payment (file fees): Base fee (monthly): Minimum base fee (monthly): Service fee (monthly): F. 100,000 excl. tax F. 120,000 excl. tax 12% of turnover excl. tax F. 150,000 excl. tax 5% of turnover excl. tax In order to counter the opening of a competing restaurant under the Quick brand (including a Drive service) a few hundred metres from the restaurant operated by Sebol, Mac Donald's decided, in 1996, to open a restaurant (fitted out with a Drive) opposite the Quick restaurant. The lease-management (*location-gérance*) of this restaurant, known as "Antibes Nord", located 500 metres from the restaurant operated by Sebol (primary catchment area), was given to Mr Collorafi on 9 October 1996, who entrusted its operation to the company B&O, of which he is the manager and sole partner. The lease-management agreement (*location-gérance*) between the company Mac Donald's and the company B&0 provided for the following financial terms: Date of agreement: 09/10/96 Security deposit: Initial payment (file fees): • Base fee (monthly): Minimum base fee (monthly): Service fee (monthly): F. 100,000 excl. tax F. 250,000 excl. tax 20% of turnover excl. tax F. 235,000 excl. tax 5% of turnover excl. tax Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOi septembre 1999/Vi This agreement was the subject of an amendment dated 10 June 1997 corresponding to an adjustment of the fees. Taking effect from 1 January 1997, it provided for the following financial terms: Base fee (monthly): • from 01/01/97 to 31/12/97: • from 01/01/98 to 08/10/2016: Minimum base fee (monthly): • from 01/01/97 to 31/12/97: • from 01/01/98 to 08/10/2016: Service fee (monthly): Date of amendment: 10/06/97 17% excl. tax 20% excl. tax F. 180,000 excl. tax F. 245,000 excl. tax 5% of turnover excl. tax (unchanged) At the end of 1996, Mac Donald's decided to open two restaurants in Antibes Ouest and Vallauris, located respectively five and seven kilometres from the "Carrefour shopping centre - Antibes Nord" complex. Despite Mr Collorafi's wish to be awarded the lease-management (*location-gérance*) of these two restaurants, Mac Donald's granted him only that of Antibes Ouest, by an agreement dated 18 June 1997 but concluded in substance as early as 30 April 1997, the restaurant having been open since 1 May 1997. Signature of the agreement was suspended pending the order of the Regional Court of Grasse, delivered on 18/06/97. This agreement was transferred to the company Les Pins, whose entire capital is owned by Mr Collorafi. The lease-management agreement (*location-gérance*) between the company Mac Donald's and the company Les Pins provided for the following financial terms: Security deposit: Initial payment (file fees): Base fee (monthly): Minimum base fee (monthly): Service fee (monthly): Equipment fee (monthly): Date of agreement: 18/06/97 F. 20,000 excl. tax F. 250,000 excl. tax 15% of turnover excl. tax F. 100,000 excl. tax 5% of turnover excl. tax 4.5% of turnover excl. tax Expert report SEROL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI The lease-management agreements (*location-gérance*) concerning the companies Sebol and B&O are agreements of the "straight licence" type, under which the lease-manager is the owner of the kitchen equipment, the furniture and the signage. For the company Les Pins, it is a so-called "BFL" (Business Facility Licence) agreement under which Mac Donald's also invests in the equipment. In return, the franchisee must pay an additional fee (equipment fee). Moreover, an Economic Interest Grouping, the GIE SODEVA, was set up between the three companies of Mr Collorafi, on 9 April 1997. Its purpose being the pooling of the administrative, accounting and commercial resources of the three companies, the GIE SODEVA is made up of 6 persons (accountants, administrative employees, receptionist, and hostess). From the beginning of 1997, given the financial situation of the two restaurants, Mr Collorafi had been unable to pay the monthly fees due to Mac Donald's for the operation of these two restaurants for the year 1997. On 26 June 1997, invoking "the collapse of the turnover of the company SEBOL, the large gaps between the operating forecasts provided by the company Mac Donald's at the openings of the restaurants Antibes Nord (B&O) and Antibes Ouest (Les Pins) and reality, the lack of profitability of the restaurants", the companies Sebol, B&O and Mr Collorafi summoned Mac Donald's before the Commercial Court of Paris. The tables, presented below, show the trend in turnover, net result and the amount of fees invoiced, of the companies Sebol, B&O and Les Pins. SA SEBOL (Carrefour Shopping Centre restaurant) Turnover Net result Base fees Service fees 1 21] 673 Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBÖL/septembre 1999/VI EURL B&O (3 months) (Antibes Nord restaurant) Turnover Net result Base fees Service fees • 1 226 477 SARL LES PINS (Antibes Ouest restaurant) Turnover Net result Base fees Service fees Equipment fees (8 months) Consolidation Turnover Net result Base fees Service fees Equipment fees 27 422 010 26 965 839 21 693 964 31 556 289 - 413833 - 2 695 122 2 916 606 5 097 922 Moreover, given the non-payment of fees due by Sebol, B&O and Les Pins, and after formal notice, Mac Donald's terminated the lease-management agreements (*location-gérance*) of these three companies on 2 January 1998. Then, by writs of 9 and 30 January 1998, Mac Donald's summoned Sebol, B&O and Les Pins in summary proceedings (*référé*) before the Commercial Court of Paris to obtain their eviction. The judgment of 18 May 1998 of the Commercial Court of Paris in particular recorded the termination by operation of law, on 2 January 1998, of the three disputed lease-management agreements (*location-gérance*) and ordered Sebol, B&O and Les Pins to pay to the company Mac Donald's the arrears of fees that these three companies had ceased to pay during the course of 1997. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOLiseptembre 1999/VI The eviction of the companies Sebol, B&O and Les Pins from the restaurants, respectively, Carrefour Shopping Centre, Antibes Nord and Antibes Ouest, took place on 10 June 1998. It was in these circumstances that the companies Sebol, B&O and Les Pins and Mr Collorafi appealed against this judgment. 1.3 Reminder of the judicial proceedings and definition of the assignment Ruling on the appeal lodged by the companies Sebol, B&O, Les Pins and Mr Collorafi, the Paris Court of Appeal considered that only the claims set out below are admissible: 1. "to state that the company Mc Donald's wrongfully terminated the disputed lease-management agreements (*location-gérance*), the partial non-payment of the fees being due to its own fault, and to dismiss outright its claim for termination, 2. to suspend the effects of the termination clause and grant them two years to pay their debt on the basis of a reasonable fee, fixed if need be by way of damages, the details of which are set out above, or to appoint an expert to enable the Court to rule on the fixing of a "reasonable fee", 3. to hold that the faults committed by the company Me Donald's are tortious in nature and to order it, in compensation for the loss suffered, to pay them various sums the details of which are set out above;". Firstly, the Court, in order to assess any breaches by the company Mac Donald's France of its obligations for the period prior to 1 July 1997, considers it necessary to supplement its information. This period is characterised by the opening of a second restaurant ("Antibes Nord") in the "primary catchment area" of the "Carrefour Shopping Centre" restaurant and by the collapse of the turnover and profitability of these two restaurants (both entrusted under lease-management (*location-gérance*) to Mr Collorafi). Among the factors that may explain the deterioration of the financial situation of these two restaurants, from 1996, the following three points emerge in particular: Expert report SRBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999V1 • the decision of Mac Donald's to open this second restaurant, • the amount of the fees applied by Mac Donald's, • the poor management of Mr Collorafi, in particular concerning his distribution policy, his remuneration and his control of fixed costs. It is thus that the Paris Court of Appeal puts four initial questions to the experts in order to assess the possible responsibility of the parties, which relate to the period prior to 1 July 1997. They are: 1. "to state whether Mr COLLORAFI had halved his salary in 1995 and 1996 and had left in current account all or part of the dividends received in those years, in the company SEBOL and if, in the company B et O (the Court having no information on the salaries possibly received by Mr COLLORAFI and his wife from that company) he had made a current-account contribution in 1997, this would not have enabled these two companies to reach the annual break-even point, which is the turnover enabling the operation to break even, in 1996 and 1997, 2. to state whether the amendment to the agreement of the company B et O mentioned above was made at the right time or too late and was sufficient if Mr COLLORAFI reduced his salary in the company B et O, if indeed he received one from that company, 3. to state whether the opening of the "Antibes-Nord" restaurant made it possible to partially transfer fixed costs from the company SEBOL to the company B et O as asserted by Mr GANDUR in his annual report drawn up at the request of Mr COLLORAFI (cf. page 24), 4. to present a summary of the operation of the companies SEBOL and B et O considered as an economic unit owing to the common interest of the parties in seeing them operate as such for the period in question;". Subsequently, MAC DONALD'S decided to open two restaurants, Antibes-Ouest and Vallauris, of which only the first was entrusted to Mr Collorafi, at 5 and 7* kilometres from the Carrefour shopping centre and Antibes Nord restaurants. These openings, taking place approximately on 1 July 1997, give rise to questions on the part of the Court, which seeks the opinion of the experts on the following points: 5. to state "whether the new "Antibes-Ouest" restaurant was viable in itself or whether, as the company Me DONALD'S opened it at the same time as that *According to the submission of Me CLEMENT, 4.2 and 5.8 km respectively. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre I999/Vi of Vallauris, which is no accident but shows that it had envisaged a "synergy" between these two restaurants, its profitability had not been assessed a priori within an "Antibes-Ouest" - "Vallauris" whole, the management of which the company Me DONALD'S has, contrary to what seems to have been its forecasts, entrusted by lease-management (*location-gérance*) to two different persons, - the "Antibes-Ouest" restaurant being only the complement of the locomotive "Vallauris";" 6i. to state "whether, given the financial situation of the "Carrefour" - "Antibes Nord" group and the fact that Mr COLLORAFI claimed to be unable to finance the "Straight licence" contract of Antibes-Ouest, the company Mc DONALD'S gave a "poisoned gift" to Mr COLLORAFI, as the latter seems to claim, or whether on the contrary it wanted to give him an additional chance to pull through;" 7. "Considering that the experts must give their opinion on the consistency of the overall financial management of Mr COLLORAFI in the three companies up to 1 January 1998;" 8. "Considering that the experts will give their opinion on the accounts of the companies SEBOL, B et O and LES PINS, between 1 January 1998 and 10 June 1998, the date of their eviction;" 9. "Considering that, on the other hand, the experts must give their opinion on another assertion contained in the document: "Objective No. 3: making the Restaurants profitable With the spreading of administrative costs over several restaurants, we will reduce administrative costs" ...; that in other words, the experts must say whether the increase in the cumulative fees of the three restaurants could be offset by the reduction in their administrative costs;". 10. "Considering finally that in this application document of the companies SEBOL and B&O. Mr COLLORAFI announced as one of his four objectives: "Objective No. 2: Increase in turnover Our current concern is to increase turnover very quickly in order to reach the minimum break-even thresholds"; That consequently, the company Mc DONALD'S must explain according to what precise calculations it thought that by awarding the "Antibes-Ouest" restaurant to Mr Collorafi, it would enable him to achieve his "objective no. 2"". Expert report SEBOL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 2 Steps taken It seems important to us to stress that all the expert meetings were conducted by the experts and that a certain number of tasks and research were carried out during the assignment by the experts' assistant under their supervision. 9 December 1998 Judgment of the Paris Court of Appeal (16th chamber - section A) appointing Jean-Luc Dumont and Alain Martin for the present expert assignment. 16 December 1998 Letter from the Paris Court of Appeal sending the Experts a copy of the decision appointing them as Experts. 23 December 1998 Letter from Alain Martin to the Paris Court of Appeal accepting the expert assignment entrusted to him on 9 December 1997. 24 December 1998 Letter from Jean-Luc Dumont to the Paris Court of Appeal accepting the expert assignment entrusted to him on 9 December 1997. 12 January 1999 Alain Martin sends, on behalf of the experts, a letter of summons to the Parties inviting them to a first expert meeting, scheduled for 2 February 1999, in his 25 January 1999 Letter from the Paris Court of Appeal informing the experts of the notice of payment of the deposit on account of the experts' remuneration, i.e. F. 20,000 to each of them. 2 February 1999 First expert meeting attended by: • Maître Clément, Counsel for the Appellants, • Mr Collorafi, Appellant, • Mrs De Borda, Legal Director representing the Respondent, • Mr Le Bourdonnec, Financial Management Consultant representing the Respondent, Expert report SEBOI. C/ MAC DONALD'S FRANCE RISEBOLIseptembre 1999/13 10 February 1999 23 February 1999 4 March 1999 22 March 1999 8 April 1999 16 April 1999 • Maître Leloup, Counsel for the Respondent, • Mrs Mazieres-Viceconti, Legal Manager representing the Respondent, • Mr Dumont, Expert, • Mr Martin, Expert, • Mr Fenard, Assistant to the Experts. Me Clément, counsel for the appellants, hands each of the experts a copy of part of his pleading file Jean-Luc Dumont sends the parties a report of expert meeting No. 1 held on 2 February 1999. Letter from Me Leloup, counsel for the respondent, to the experts, enclosing the documents requested at the 1st expert meeting of 2 February 1999 Letter from Me Clément, counsel for the appellants, to the experts, enclosing the documents requested at the 1st expert meeting of 2 February 1999 as well as a submission on the questions put by the Court to the experts. Letter from Jean-Luc Dumont, on behalf of the experts, to the Paris Court of Appeal, requesting an additional deposit of F. 160,709.76. Letter from Jean-Luc Dumont to the parties, informing them that the second expert meeting initially scheduled for 14 April 1999 is postponed to 11 May 1999, at Alain Martin's premises, and specifying that the submission of Me Leloup, counsel for the Respondent, must reach the experts by 13 April at the latest Me Leloup, counsel for the respondent, sends a submission to the experts, in reply to the opposing submission, setting out the position of the company Mac Donald's on the questions put to the experts. Expert report SEBOL C/ MAC DONALD'S FRANCK RISEBOL/septembre I999/Vi 19 April 1999 3 May 1999 11 May 1999 17 May 1999 3 June 1999 Me Clément, counsel for the appellants, sends a second submission to the experts, in reply to the documents communicated by the opposing party (with the exception of the submission which he had not yet received). Me Clément, counsel for the appellants, sends a third submission to the experts, in reply to the submission of Me Leloup of 16 April 1999 Second expert meeting attended by: • Maître Clément, Counsel for the Appellants, • Mr Collorafi, Appellant, • Mrs De Borda, Legal Director representing the Respondent, • Mr Le Bourdonnec, Financial Management Consultant representing the Respondent, • Maître Leloup, Counsel for the Respondent, • Mrs Mazieres-Viceconti, Legal Manager representing the Respondent, • Mr Dumont, Expert, • Mr Martin, Expert, • Mr Fenard, Assistant to the Experts. Me Clément, counsel for the appellants, hands each of the experts as well as Me Leloup, counsel for the respondent, an appendix to his submission no. 3 of 3 May 1999. Letter from Jean-Luc Dumont, on behalf of the experts, to the Paris Court of Appeal, requesting an extension of the time limit for filing the report, to 25 October 1999. Letter from Me Clément, dated 3 June 1999: • indicating that, according to the experts' office, the request for an extension of time that the experts sent to the Court, dated 22 March 1999, did not reach the Court, Expert report SEROL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/VJ 7 June 1999 9 June 1999 14 June 1999 16 June 1999 7 July 1999 16 July 1999 29 July 1999 • specifying that the parties are summoned before the pre-trial judge (Conseiller de la mise en état), on 7 June 1999, • enclosing a note from Mr Collorafi, counting as submission no. 4, in reply to some of the clarifications requested by the experts at the expert meeting of 11 May Letter from Me Clément, counsel for the appellants, according to which the pre-trial judge (Conseiller de la mise en état) ordered the additional deposit and extended the time limit for filing the report to 30 September 1999, and further indicating that he wishes to maintain the expert meeting of 15 July next. Jean-Luc Dumont sends the parties a report of expert meeting No. 2 held on 11 May 1999. Copies to the experts of the letters, sent to the parties, from the magistrate in charge of the pre-trial stage, granting the experts' request for an additional deposit and ordering an extension of time to 30 September 1999. Letter from Me Clément, dated 16 June 1999, enclosing Mr Collorafi's observations on the report of the expert meeting of 11 May 1999, counting as submission no. 5. Letter from the Paris Court of Appeal informing the experts that the additional deposit on account of their remuneration has been made. Submission of Me Leloup, counsel for the Respondent, in reply to the questions put by the experts in their report of the meeting of 11 May 1999. The experts send the parties a pre-report so that they may take note of the experts' analyses and may give them a summary submission in view of the expert meeting of 8 September 1999. Expert report SEROL C/ MAC DONALD'S FRANCE RISEBOLIseptembre 1999/VI 3 August 1999 Letter from Me Clément, counsel for the appellants, informing the experts that the documents necessary for the analysis of his client's management (in particular the income statements of eight specified restaurants) are in the hands of the company Mac Donald's and that they should be requested from it. 31 August 1999 3 September 1999 Submission of Me Clément in reply to the pre-report that was sent to the parties on 29 July. Fax sent to Me Leloup (copy to Me Clément), counsel for the Respondent, from the experts, asking him for additional documents (monthly income statements referring to the letter of Me Clément of 3 August 1999). 8 September 1999 Submission of Me Leloup on the pre-report. Third expert meeting attended by: • Maître Clément, Counsel for the Appellants, • Mr Collorafi, Appellant, • Mrs De Borda, Legal Director representing the Respondent, • Mr Le Bourdonnec, Financial Management Consultant representing the Respondent, • Maître Leloup, Counsel for the Respondent, • Mr Dumont, Expert, • Mr Martin, Expert, • Mr Fenard, Assistant to the Experts. 15 September 1999 Fax from JL. Dumont to the parties to confirm the meeting of 20 September 1999 and to specify its arrangements 17 September 1999 Submission of Me Clément, counsel for the appellants, on the expert meeting of 8 September and on the submission of Me Leloup handed over at the expert meeting of 8 September 1999. Expert report SEBOL C/ MAC DONALIS FRANCE RISEBOL/septembre I999/V1 20 September 1999 Meeting, to allow consultation of the income statements of franchisees which the Respondent did not wish to communicate for reasons of confidentiality, attended by: • Maître Clément, Counsel for the Appellants, • Mr Collorafi, Appellant, • Mr Guichard, Financial Management Consultant-Manager representing the Respondent, • Maître Leloup, Counsel for the Respondent, • Mr Martin, Expert, • Mr Fenard, Assistant to the Experts. 22 September Submission of Me Clément, on the meeting of 20 September 24 September 1999 Fax from Me Leloup, counsel for the Respondent, counting as submission No. 4, on the meeting of 20 September 1999 and the submission of Me Clément of 17 September 1999. 28 September 1999 Reply of Me Clément to submission No. 4 of Me Leloup. 4 October 1999 Submission of Me Clément on the report of the meeting of the Finance Committee of Mac Donald's dated 9 September 1999. 18 October 1999 Filing of the report in two copies with the registry of the Paris Court of Appeal, in one copy with the avoués of each of the parties and in one copy with the lawyers of each of the parties. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 29/04/1997. • Articles of association of the GIE SODEVA. • Balance sheets and income statements of the company SEBOL, years 1995 to Balance sheets and income statements of the company B&O, years 1996 and 1997. Balance sheet and income statement of the company LES PINS, year 1997. • Balance sheet and income statement of the GIE SODEVA, year 1997. • Balance sheets and income statements of the companies SEBOL, B&O, LES PINS and of the GIE SODEVA, at 10 June 1998. Expert report SEBOI, C/ MAC DONALD'S FRANCE RISEBOL/septembre I999VI • Monthly P&Ls (income statements), company SEBOL, years 1993 to • Monthly P&Ls (income statements), company B&O, years 1996 to 1998. • Monthly P&Ls (income statements), company LES PINS, years 1997 and. • DDAS (social security declarations), company SEBOL, years 1995 to 1997. • DDAS, company B&O, years 1996 and 1997. • DDAS, company LES PINS and GIE SODEVA, year 1997. • Statement of the salaries received by Mr and Mrs Collorafi, years 1987 to 1997 and at 31/05/1998. • Statement of the dividends received by Mr Collorafi, years 1993 to 1996. • Statement of Mr Collorafi's current account in SEBOL, at 31/12/96. • Statement of the capital and current-account payments by Mr Collorafi into B&0 and LES PINS • GANDUR report, dated 4 February 1998. • Ten submissions (or notes) from Me Clément containing: • his remarks on the management of Mr Collorafi, the fall in turnover, the pre-contractual financial documents, • elements of answer to the questions put by the court to the experts. • observations following reading of the pre-report. 3.2 Documents received from the Respondent • Pleading file of Me Leloup, including in particular: • Judgment of the Paris Court of Appeal, of 9/12/98. • Judgment of the Commercial Court, of 18/5/98. • Reminder of the facts and of the proceedings. • Lease-management agreement (*location-gérance*) between MAC DONALD'S and Mr Collorafi, concerning the operation of the restaurant "Carrefour Shopping Centre", dated 31/08/87. • Statement of the sums owed by Mr Collorafi to MAC DONALD'S FRANCE at different dates. Expert report SEBOL (/ MAC DONALD'S FRANCE BISEBOIseptembre 19920 • Formal notices, dated 27/11/97, from MAC DONALD'S FRANCE requiring SEBOL, B&O and LES PINS to pay the entirety of their debt. • Additional documents: • Assignment report of the SEPT, drawn up by A. Dumoutier. • Vallauris location study. • Draft Vallauris balance. • Vallauris P&L from April 1997 to end of December 1998. • DADS, general ledger and P&L of the company MAR. • Explanatory note on the comparison of the Collorafi and MAR P&Ls. • Four submissions from Me Leloup containing: • elements of answer to the questions put by the Court to the experts, • observations following reading of the pre-report. Expert report SEROL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI 4 Answers to the questions put by the Court to the experts As presented in chapter 1 of this report, the Paris Court of Appeal puts nine questions to the experts, the first four relating to the period prior to 1 July 1997, the following five relating to the period after that date. This division of the questions into two periods is made by the Court in order to distinguish the experts' analyses that take into account only the opening of the second restaurant, Antibes Nord, from those that concern also the opening of two other restaurants, Antibes Ouest and Vallauris, on 1 July 1997. On the questions relating to the period prior to 1 July 1997 These questions concern the opening of a second Mac Donald's restaurant, Antibes Nord, which is entrusted to Mr Collorafi, 500 metres from Mr Collorafi's first restaurant (Carrefour Shopping Centre). The opening of this second restaurant in the catchment area of the first is not called into question by the Court, and therefore does not seem to call for comments from the experts, since it is linked to the opening of the Quick (competing brand) in July 1995. On the other hand, the poor results of Sebol and B&O in 1996 and 1997 give rise to questions on the part of the Court insofar as the expected "communicating vessels" effect on the activity of the Carrefour Shopping Centre restaurant does not occur owing to the impact of the opening of the Antibes Nord restaurant. In these circumstances, the questions put to the experts have the objective of defining the responsibility of Mr Collorafi and of the company Mac Donald's France in the poor results of the company B&0 (Antibes Nord) in 1996 and Thus, the questions put to the experts concern: • the remuneration, the dividend policy and, more generally, the consistency of Mr Collorafi's financial management (these elements are presented in the DUMOUTIER report), • the fee policy of MAC DONALD'S (and in particular the amendment to the lease-management agreement (*location-gérance*) between B&O and Mac Donald's), Expert report SEBOr C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/VJ • the possibility of transferring fixed costs between the two restaurants (cf. GANDUR report). On the questions relating to the period after 1 July This date corresponds approximately to the simultaneous opening of two MAC DONALD'S restaurants, Antibes Ouest and Vallauris, of which only Antibes Ouest is entrusted to Mr Collorafi. Three points are put forward by the Court in order to obtain clarification from the experts. They concern: • the viability of the "Antibes Ouest" restaurant, alone or within an "Antibes Ouest-Vallauris" whole, • the consistency of Mr Collorafi's financial management in the three companies and the allocation of administrative costs, • the accounting situation of the three companies concerned, from 1 January 1998 to 10 June 1998, the date of their eviction from the businesses that they operated under lease-management (*location-gérance*). Expert report SEBOL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 4.1 Question 1: Impact of a salary reduction and of a payment of dividends into the current account on the profitability of SEBOL and B&O, in 1996 and 1997 To state "whether Mr COLLORAFI had halved his salary in 1995 and 1996 and had left in current account all or part of the dividends received in those years, in the company SEBOL and if, in the company B et O (the Court having no information on the salaries possibly received by Mr COLLORAFI and his wife from that company) he had made a current-account contribution in 1997, this would not have enabled these two companies to reach the annual break-even point, which is the turnover enabling the operation to break even, in 1996 and 1997, ". In answer to the Court's question, the following restatements* should be made: • halving of Mr Collorafi's salary in 1995, 1996 and 1997 in SEBOL (the only company where he receives a salary), Mrs Olga Collorafi also receives a salary in SEBOL which amounts, in 1995, to F. 192,330 (annual gross salary, social contributions included), in 1996, to F. 193,490, in 1997, to F. 193,490. It will not be taken into account in the subsequent developments. • reduction of the dividends paid by SEBOL in 1995, 1996 and 1997, The Court's question concerns the retention, in current account in the company SEBOL, of all or part of the dividends received by Mr Collorafi. However, as Me Leloup stresses in his submission of 08/09/99, in a difficult financial situation, rather than a freezing of dividends in current account, it is the reduction of dividends that it is preferable to study. Indeed, freezing dividends in current account is a tax-costly operation (the beneficiary is obliged to pay *Restatements for 1997 will be made, although this is not explicitly mentioned in the question put by the Court, insofar as the question also concerns the break-even point in Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI tax on the dividends received), which is, in general, used only to get through a short-lived cash-flow "rough patch". However, in this particular case, as Mr Collorafi was obliged to invest in B&O in 1996 and 1997, we did not adopt the hypothesis of a total elimination of dividends, added to a salary reduction. Taking into account therefore an investment in B&O, of 600 KF in 1996 and of 200 KF in 1997, the hypothesis is adopted of a reduction in dividends of the remaining portion, i.e. 1.25 MF in 1995 and 800 KF in • contribution of liquidity in current account in B&O in 1997. In answer to the Court's question, the impact of the measures envisaged on the break-even point of SEBOL and B&O in 1996 and 1997 must be measured. These restatements have repercussions on the result (on profitability) and on the balance sheet of these two companies as indicated in paragraphs 4.1.1 and Secondly, on the basis of these restatements, the additional cash generated by a reduction in dividends is calculated (cf. § 4.1.3). 4.1.1 Impact of the restatements on the profitability of SEBOL (Carrefour Shopping Centre) Two impacts on the profitability of SEBOL in 1996 and 1997 are to be studied, one concerning the halving of Mr Collorafi's salary, the other relating to the reduction of Mr Collorafi's dividends The halving of Mr Collorafi's salary in 1995 and 1996 results in a reduction of administrative costs and therefore has a direct impact on the profitability of SEBOL. The fact that Mr Collorafi did not distribute in full the dividends received in 1995 and 1996 leads to an increase in permanent capital. This restatement has an impact on the profitability of SEBOL through a reduction in financial costs linked to lower recourse to borrowing and the realisation of financial income. Expert report SEBOLCH MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 SEBOL's income statement is modified by the restatements on Mr Collorafi's salary and on financial charges (via equity), as indicated below. Impact of a halving of Mr Collorafi's salary in 1995 and (in KF) Mr Collorafi's salary (incl. benefits in kind) Social contributions (44%) Total Saving made (50% reduction) = (a) Mr Collorafi's restated salary (incl. social contributions) (6 months) Impact of a reduction in dividends in 1995 and 1996 The increase in equity would have led to savings in financial costs* and would have enabled the realisation of financial income *SEROL took out a loan of F. 350,000 on 28 January 1997 over three years at the rate of 4.625%. At 30 June 1997, this loan represented a financial cost equal to 350,000 * 5/12 * 0.04625, i.e. F. 6,745 Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 Calculation of these impacts on the profitability of SEBOL in 1996 and 1997 (in KF) Net result (d) Improvement on salary saving on interest of Financial income. Total restatements (e) Corporate tax impact (36.67%) (f) (at 30/06) (847) NA loss-making Restatements (e) - (f) = (g) Restated net result (543) (d) + (g) The measures studied would have slowed but not prevented the deterioration in SEBOL's profitability and their impact is not significant enough for the company SEBOL to reach the break-even point at 30 June 1997. It should however be noted that the total of the restatements over the three years, i.e. 935 KF, is greater than SEBOL's loss at 30/06/97 of 847 KF Total 4.1.2 Impact of the restatements on the profitability of B&O (Antibes Nord) This involves studying the impact of a policy of current-account contributions in 1997 on the annual break-even point of B&O. It should be specified that Mr Collorafi does not receive a salary directly in B&0. As seen previously, the only impact of a current-account contribution on profitability is linked to the saving in financial costs which results from lower recourse to borrowing (made possible by an increase in permanent capital). *SEBOL's net result, at 30/06/97, is determined from the monthly income statements Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI The table, presented below, shows the very poor financial situation of the company B&O. Thus, in 1997, to obtain a positive level of permanent capital, , it would have been necessary to contribute in current account approximately 700 KF, in addition to the 750 KF already contributed, i.e. a level of current-account contribution of 1,450 KF. Balance sheet Equity Current accounts Permanent capital Income statement Saving in financial costs (a) Result Net result (b) Net result restated for the saving (716) (166) (766) (756) (1153) (703) (955)" (775) Total (1721) (1531) in financial costs (b)-(a) It emerges from the table that the impact of a policy of current-account contributions on the annual break-even point is not significant given the small saving in financial costs, to be compared with the losses recorded by B&O in those years. A current-account contribution would have had the sole effect of reducing the level of losses of B&O's situation but would not have enabled this company to reach the annual break-even point in 1996 and 4.1.3 Impact of the cumulative restatements on the profitability of the SEBOL-B&O whole The cumulative restatements on the profitability of the SEBOL- B&O whole give the results shown in the table below. *Net result at 30/00/97, determined from the monthly income statements. Expert report SEROL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VL Consolidated net result Cumulative restatements (e) Corporate tax impact (36.67%.) (D) Restatements (e) - (f) = (g) Restated consolidated net result (414) 547* (18021 NA (loss-making) (1318) Total (1206) 4.1.4 Additional cash linked to the retention of part of the dividends As already explained, taking into account an investment in B&O, of 600 KF in 1996 and of 200 KF in 1997, the hypothesis is adopted of a reduction in dividends of the remaining portion, i.e. 1.25 MF in 1995 and 800 KF in 1996. In these conditions, the reduction in dividends, the saving resulting from a reduction in Mr Collorafi's salary and the increase in the financial resources of the companies would have enabled these companies to generate additional cash at 30/06/97 of 3,323 KF, as indicated in the table below. Dividends not distributed + 2050 Restatements (cumulative salary reductions from +1273 1995 to 1997 - including social contributions - and of financial costs) net of corporate tax Total + 3 323 The additional cash thus obtained proves to just offset the late payment at 31 December 1997 by Mr Collorafi to Mac Donald's (amount of unpaid fees at 31/12/97 for the three companies = 3,905 Kf). At the rate of the losses recorded by the SEBOL-B&O whole over the first six months of 1997 (1,802 KF before restatement), this additional cash would not have enabled Mr Collorafi to meet the subsequent losses. " 547 = 537 (cf. p 27) + 10 (cf. p 28) : 484 = 304 (cf. p 27) + 180 (cf. p 28) *Corporate tax saving calculated by considering SEBOL and B&O as an economic unit Expert report SEBOI, C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999VI To answer Me Clément's submissions on the legitimacy of a distribution of dividends for the benefit of Mr Collorafi and of the retention of his salary, the following observations should be made. Despite the good financial situation of SEBOL in 1995, which made a profit of more than 1 MF (against 1.3 MF in 1994), the decision to distribute 1.85 MF of dividends was taken when a Quick restaurant was about to open in July 1995, and would without doubt compete with the "Carrefour shopping centre" restaurant located 500 metres from it. The situation is even clearer in 1996 since Mr Collorafi decided to distribute 1 MF of dividends, on 13 June 1996 (date of the annual ordinary general meeting), whereas the situation of his first restaurant was deteriorating owing to the impact of the Quick and the lease-management (*location-gérance*) of a second Mac Donald's restaurant, located opposite the Quick, was to be entrusted to him 4 months later (on 09/10/96). In these circumstances, it does not seem inappropriate to study the effects of non-distribution of dividends, at least beyond the investments made (800 KF), and of a salary reduction, in 1995 and 1996. In all the foregoing developments, no account has been taken of Mr Collorafi's personal tax situation, although it is certainly not neutral in the decisions he may have taken. Indeed, he did not wish to provide us with any information in this regard. One can therefore only keep to the following general principles: salaries and dividends received give rise to income tax; conversely, the company B&O having been constituted as an EURL not subject to corporate tax, it allows a saving in income tax, insofar as the losses recorded are deductible from Mr Collorafi's overall income In the same vein, it should be noted that Mr Collorafi, in order to invest, could have considered another legal and financial arrangement by setting up a holding company opting for the tax consolidation regime. This would have facilitated the reinvestment • of the sums earned by SEBOL to create B&O. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI Conclusion The preceding analyses lead to the following observations. The restatements made amount, cumulatively over 2.5 years, to 1,273 KF, i.e. substantially the same level as the losses recorded over the same period. However, the measures envisaged would only have delayed the deterioration in the profitability of the two restaurants. Substantially more than the measures mentioned would be needed for these companies to regain, on a lasting basis, their break-even point. Whereas B&O records a loss of 955 KF at 30 June 1997, the measures mentioned only allow an improvement of 180 KF (saving in financial costs) for 1997. It can also be noted that a total elimination of Mr Collorafi's salary in 1997 would not have enabled SEBOL to reach the break-even point at 30 June 1997. Moreover, in terms of cash, the fact for Mr Collorafi of reducing his dividends and halving his salary would have generated additional cash which appears however limited given the losses recorded by the companies SEBOL and B&O. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 4.2 Question 2: Amendment to the lease-management agreement (*location-gérance*) of the company B&O, of 10 June 1997 "to state whether the amendment to the agreement of the company B et O mentioned above was made at the right time or too late and was sufficient if Mr COLLORAFI reduced his salary in the company B et O, if indeed he received one from that company," An amendment to the lease-management agreement (*location-gérance*) concluded between MAC DONALD'S and B&O was made on 10 June 1997 and took effect retroactively from 1 January 1997. The financial terms provided for by the agreement and then by the amendment are shown in the table below. Before amendment Minimum fees Standard fees Service fees 235 KF / month 20% * turnover excl. tax monthly 5% * turnover excl. tax monthly After amendment 111197-31/12197 111198-31/12/2001 180 KF / month 245 KF / month 177. * turnover excl. tax monthly 20% * ('A IT monthly 5% * turnover excl. tax monthly 5% * turnover excl. tax monthly In order to calculate precisely the impact of the amendment, it is necessary to determine, from monthly turnover, which fee, standard or minimum, is due. The monthly turnover figures are given to us by the monthly income statements. These amounts are correct since their sum gives an annual turnover of F. 13,491,421, which is found in the tax return bundle. The monthly fees obtained from the monthly income statements are roughly correct (their sum gives an annual fee of F. 2,336,815 to be compared with F. 2,298,186 in the tax return bundle). It emerges that the saving made, following the amendment to the lease-management agreement (*location-gérance*), for the full year 1997, is F. 562,434, for the period prior to 1 July 1997, F. 265,656, as indicated in the table below. Expert report SEBOL CI MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI Turnover excl. tax Minimum fee (amendment) Minimum fee (if no amendment) Fee as % of turnover excl. tax (17%) - amendment Fee as % of turnover excl. tax (20%) Fee due (amendment) Fee due (if no amendment) Impact of the amendment Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 Total 1108852 1 143224 1223311 1313648 1063746 1 098607 6 951 388 180 000 1 080 000 235 000 1 410 000 186 763 1 181 736 219 721 1 390 278 186 763 1 181 736 235 000 1 447 392 Conclusion Despite the amendment, made retroactively from 1 January 1997, the company B&0 records a loss, at 30/6/97, of F. 955,000*. Moreover, question 2 concerns the impact of the amendment if Mr Collorafi halved his salary in B&0. Mr Collorafi receives a salary only in SEBOL, but via the services agreement that links these two companies, SEBOL re-invoices B&O for Mr Collorafi's salary in proportion to B&O's turnover. The annual amount re-invoiced is F. 440,000, i.e. F. 220,000 for the 1st half of 1997. The saving generated by halving the salary in B&O therefore comes out at 30/06/97 at F. 110,000, i.e. a level below the loss of F. 955,000. Despite the impact of the salary reduction, the amendment appears insufficient given the losses made by B&O from 1 January to 30 June 1997 (that is, independently of the losses that may be attributed to the opening of the Antibes Ouest and Vallauris restaurants on 1 July 1997). * Result at 30/6/97, established from the monthly income statements. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 On the question whether the amendment was made at the right time, it is important to specify that the amendment, signed on 10 June 1997, has retroactive effect to 1 January 1997. Mac Donald's alleges having sent this proposed amendment as early as 09/04/97 (cf. submission of Me Leloup dated 08/08/99) but Mr Collorafi was unable to specify on what date he had received and then signed this document. The amendment could not be made earlier insofar as B&O, having opened only in October 1996, a period of time seems necessary to record the financial difficulties of the company. In his submission, dated 16/4/99, on this question, Me Leloup indicates that the profitability of a restaurant is as much linked to "the quality of the management of the business owner" as to the level of fees. Mr Collorafi's management will be studied in answer to question 7. Expert report SEBOI C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 4.3 Question 3: Analysis of a transfer of fixed costs from SEBOL to B&O To state "whether the opening of the "Antibes-Nord" restaurant made it possible to partially transfer fixed costs from the company SEBOL to the company B et O as asserted by Mr GANDUR in his annual report drawn up at the request of Mr COLLORAFI (cf. page 24);" R. Gandur distinguishes two sources of the saving in fixed costs made in 1996 and 1997 in SEBOL. He thus explains, on page 24 of his report, that: "the extent of the loss of turnover is such that the structure of the business had to be reduced and savings were made, the opening of the new Antibes Nord and Ouest restaurants made it possible to partially transfer fixed costs from the company SEBOL to the companies B&O and Les PINS, for example managers and the lease-manager's (*location-gérance*) salary". The table, presented below, reproduces his estimate of the saving in fixed costs made. Total saving in fixed costs compared with - Saving attributable to the opening of the Quick - Saving attributable to the opening of Antibes* Nord and Ouest and of Vallauris To understand the evolution of fixed costs due to the opening of the Antibes Nord restaurant (entrusted under lease-management (*location-gérance*) to Mr Collorafi) and to answer question 3, it is first necessary to analyse this evolution by type of fixed cost. Expert report SeBOL C/ MAC DONALD'S FRANCE RISEBOLseptembre 1999/V1 i; The table, presented below, which was drawn up from tables prepared by Mr Collorafi and R. Gandur, shows the evolution of the fixed costs of Antibes Shopping Centre and Antibes Nord, from 1995 to 1997. Nature of fixed costs Managers' salaries and social contributions Travel expenses Local promotion External services Maintenance and repair of equipment Electricity gas telephone water Office supplies Cash shortages Controllable fixed costs Insurance Taxes Capital gains on asset disposals Depreciation and provisions Financial costs Financial income. Non-controllable fixed costs Accounting and legal fees Miscellaneous income and expenses Lease-manager's salary Other expenses Office expenses Administrative costs TOTAL fixed costs Artibes 1 600 000| ... 448.478 Aribes 1 - Antihes Centre commercial Carrefour Antibes 1: •Antibes Nord 5 362) Var" par / à 95 -58,2%l -59,5%| -38,9% 11.2% -13.5%! 7.0% 40,4%: : 108.5% -29,7%.. 119 124! ฿ 564: 1.554p. 439 143! 571j 4,2% 31,5% 98,8%%: 2.4%| - 10,9%j 30 689| - 17.4% H7 086 ...Ste 019 21.0% -22.7%% - 10,7% 38,9% 26,7%... 2,4% 5 072 379! - 17,8%! .276 193) Total B2 243 . 2 062 857 Antbes 1 Var Anttes Nord par : a 95 63,2% 67,8%% 42.4% 44,1%' •27.1% 8.7%! 41,5%, .. 9123 4327% 41.0% -15,2% -35,1% -38 500 -181.7% 616 0x00) 2.7% 15.4% -21.0% "44.3°%n -8.8% 58,9%! -26,4% 292593 34.8% 38,1% 38795891 37,19 4 632| .418 588) This table shows a reduction in fixed costs of Antibes Shopping Centre (SEBOL), in particular concerning controllable fixed costs (-44% from 1995 to 1997) and administrative costs (-38%). Five categories of fixed costs are in particular concerned by this finding. They are the items: managers' salaries, travel expenses, local promotion, external services and lease-manager's (*location-gérance*) salary. The share of these fixed costs in total fixed costs represents 51% in 1995, 44% in 1996 and 43% in Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOÏ/septembre Ï999/Vi Total _723 XE 547 174 56) A 15 000 The significant increase in the item "accounting and legal fees" is explained by the dispute between the companies of Mr Collorafi and MAC DONALD'S FRANCE. In order to answer question 3 precisely, it is therefore necessary on the one hand to distinguish the variations in fixed costs which result from a transfer of fixed costs, independently of other factors (opening of the Quick, staff reduction, etc.), and on the other hand to isolate the impact of the opening of B&O, independently of that of Antibes Ouest and of Vallauris, on 1 July On the transfer of fixed costs "Managers' salaries": a first question concerned this item, which went from 1.2 MF in 1995 to 524 KF in 1996 (whereas Antibes Nord was opened only in October 1996), then to 462 KF in 1997. At the expert meeting of 11 May 1999, Mr Collorafi was asked to provide clarification on this evolution. In a note dated 2 June 1999 (appended to the submission of Me Clément of 3 June 1999), Mr Collorafi indicates that the amounts of this item are correct but that part of the saving in fixed costs observed (F 468,797) comes from a staff reduction during 1996 (four managers left the restaurants of Mr Collorafi, three of whom were transferred to other Mac Donald's restaurants). In these circumstances the saving attributable to a transfer of fixed costs amounts to F 267,428, as Mr Collorafi indicates in his note of 2 June 1999. "Travel expenses": This item, of small amount, calls for no particular comments. "Local promotion": According to submission no. 2 of Me CLEMENT, dated 12 April 1999, this item concerns in particular the costs of displaying "advertising panels on the approaches to the restaurants or on the major routes". Economies of scale on this type of cost seem possible. The creation of the GIE SODEVA, in April 1997, whose purpose concerns in particular the pooling of the resources of SEBOL, B&O and LES PINS with a view to developing advertising, goes in this direction. "External services": This type of fixed cost is liable to be transferable. "Lease-manager's (*location-gérance*) salary": Mr Collorafi receives a salary only from the company SEBOL (shopping centre restaurant), which re-invoices part of this salary to the company B&O in proportion to its turnover. The fact that Mr Collorafi receives the same salary in 1995 and Expert report SEBOL CI MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI 1996 (900 KF) and a slightly higher salary in 1997 (1,022 KF, social contributions included) indicates that there was a transfer of costs from SEBOL to B&O. It appears that the five categories of fixed costs mentioned constitute "transferable" fixed costs, that is, liable to be spread among several restaurants. Moreover, the analysis of the table (cf. preceding) does indicate a reduction in fixed costs, part of which is attributable to the transfer of fixed costs following the opening of the Antibes Nord restaurant (B&O) entrusted to Mr Collorafi. On the impact of the opening of B&O The Antibes Nord restaurant (B&O) was opened on 9 October 1996. Another restaurant entrusted to Mr Collorafi and located 5 kilometres from the two others was opened on 1 July 1997. With the aim of analysing solely the impact of the opening of B&O on the evolution of the fixed costs of SEBOL and of isolating the transfer of fixed costs from SEBOL to B&O, from 1996 to 1997, it is necessary to analyse the evolution of fixed costs, monthly, from 1 January 1996 to 30 June 1997. The table (cf. below) shows this monthly evolution of fixed costs. Expert report SEROL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 Nature of fixed costs Monthly comparison of SEBOL's fixed costs in 1996 against those recorded in 1997 March June ! Managers' salaries and social contributions ¡Local promotion I External services Maintenance and repair of equipment Electricity gas telephone water •Office supplies Cash shortages Controllable fixed costs Total (at 30/06) 220, ..1! 9! ¡Miscellaneous income and expenses Lease-manager's salary Other expenses Office expenses Administrative costs 185 =9 0 _320 : Total fixed costs Food turnover Total fixed costs/turnover 25'- 26% 25% 32% 1873) 25%1 28% 27% 21% 279, 30% 26% 25%. Thus the monthly* comparison of SEBOL's fixed costs between 1996 and 1997 shows a significant reduction in fixed costs: managers' salaries, local promotion, external services, lease-manager's (*location-gérance*) salary and office expenses. On the cost of opening a second restaurant The table on page 36 shows the amount of the fixed costs of SEBOL in 1995, 1996 and 1997, of B&O since its opening in October 19r SAint les tinta sant de cont par ensemble Secho f0 en 1997 These levels of fixed costs are recalled in the table below. Controllable fixed costs Antibes 1 (SEBOL) Antibes 1-Antibes Nord 1997 (SEBOI-B&O) Difference Non-controllable fixed costs Administrative costs Total fixed costs 27% Var 42% 260% 35 %. -57%% 41% *This monthly comparison is made from the monthly income statements, 1996 and 1997, of the companies SEBOL and B&0 Expert report SEBOL CI MA DONALD'S FRANCE RISEBO septembre 19939 This table highlights the cost linked to the opening of Antibes Nord, which comes out at 2 MF. Compared with the cost of Antibes 1 (Carrefour Shopping Centre) of 6 MF in 1995, a saving therefore emerges linked to the opening of a second restaurant, which amounts to 4 MF. This saving is all the more notable as Antibes Nord is a larger restaurant than Antibes 1. Conclusion The analyses indicate that the opening of the Antibes Nord restaurant (B&0) made it possible to transfer fixed costs from the company SEBOL to the company B&O to the extent of approximately 2 MF, on an annual basis. As a result, the marginal cost of opening a second restaurant is relatively low. Expert report SEBOL CI MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI 4.4 Question 4: Summary of the operation of SEBOL and B&O, considered as an economic unit. "That finally the said court-appointed experts will be asked to present a summary of the operation of the companies SEBOL and B et O considered as an economic unit owing to the common interest of the parties in seeing them operate as such for the period in question;" In order to understand the operation of SEBOL and B&O considered as an economic unit, a consolidated income statement must be drawn up, bringing out the restatements defined in answer to the previous questions. Moreover, with the aim of isolating the opening of Antibes Nord from the two subsequent restaurant openings (Antibes Ouest and Vallauris) and of allowing an analysis of the evolution of the situations over time, a table is presented showing the evolution of the consolidated accounts from 1995 to 1997, but for financial years closed at 30 June (cf. table, next page). This table indicates that despite a level of activity achieved by the SEBOL-B&O whole at 30/06/97 almost identical to that reached by SEBOL at 30/06/95 and an effective transfer of fixed costs from SEBOL to B&O (cf. question 3), the overall cost structure of the SEBOL/B&O whole is such that a deterioration in the profitability of Mr Collorafi's operation follows. It should also be observed that the fee paid in 1997 by the SEBOL-B&O whole increased compared with that paid by SEBOL in 1995 (+ 36%) for an almost identical level of turnover. This difference comes from the level of the standard fee of SEBOL (12% of turnover) compared with the level of the standard fee of B&O (17% in 1997) and from the payment of the minimum fee (disconnected from turnover) for SEBOL in 1997. Thus, as the table indicates, by applying a low fee level of 12% of turnover, for the SEBOL-B&O whole, considered as an economic unit, a saving of 608 KF would be made, which does not, however, allow the SEBOL-B&O whole to return to profitability. Expert report SEBOLE MACDONALD'S FRANCE RISEBOL/septembre I999/Vi Total SEBOL TOraL SEBOL E E H "Verses de prode 1s aimerta es Coile d'atla res tota. 4 Relevarce sardar 3 Hyporise rosevarice a i24 . 1 538 265 Altres charges varables 7 2T7 991 Totei crarges varables y Salaires manages e: en Soc 10 trais de voyage ! Promotion locale 12| Services extéreurs 13 Patreten et réparations equipem 14 Electricité gaz téléprone eau 15 Foumaures de turea: le Ecarts de carsse... Charges ixes consplat es 19 Assurance : 9 Taxes $ 538 405 749| Depreciation and provisions 22 Restated financial costs Produrts "nardes. Charges ixes non conSisties 23 Accounting and legal fees 2e Miscellaneous income and expenses 27 Restated lease-manager's salary Other expenses is Office expenses . Fa 31 Total fixed costs 33 Corporate tax Il Net result 35 + saving from a reduction in the fee Net result………. from the tax return bundle i ^ 318 Kr and § 4 3} Conclusion SESOI 182 067| T 813 4 266 719| 4 752! 176 696} ..?. 6 846 773| 104 ê10l Total SEBOLBSO Var 9795 4214936| 5378346| ... 354; : 493 6л 8 B93 308551} |979 597 oi ... 4? .. 708 330, 5253; 243 225) ....377 95: ... 432 450 ..-1 536310 .NSI The restatements made on Mr Collorafi's salary and on financial costs (cf. question 1) would only reduce the losses of the SEBOL-B&O whole, which would remain loss-making. The study of the operation of the companies SEBOL and B&O indicates that the consolidated level of activity observed in 1997, although equivalent to that of Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI 1995 for SEBOL, is not sufficient to offset the additional fixed costs inherent in operating two restaurants. The problem lies in the collapse of SEBOL's activity, which went from 12.8 MF at 30/6/95 to 9.5 MF at 30/6/96, and which is linked to the opening of the competing QUICK restaurant. Thus a first "communicating vessels" effect occurs at the expense of SEBOL because of this competition. By deciding to open a second restaurant, MAC DONALD'S made an effective counter-attack which enabled it to return in 1997 (30/06) to a level of activity, for the two MAC DONALD'S restaurants, equivalent to that of 1995 (12.5 MF). Nevertheless, the opening of this second restaurant, Antibes Nord, produced a 2nd "communicating vessels" effect, by reducing further the level of activity of the Carrefour Shopping Centre restaurant (SEBOL) to 5.6 MF. In these circumstances, even if, as we studied in answer to question 3, the opening of a second restaurant has a lower cost (owing to the transfer of fixed costs that it entails), it still causes additional fixed costs, which explains the substantial losses (1.5 MF) recorded by the SEBOL-B&O whole, at 30/6/97. In a way, Mr Collorafi bore the brunt of this situation of "economic war". Expert report SEBOL C/ MAC DONALD'S FRANCE RiSEBO septembre 1999/V7 4.5 Question 5: Analysis of the viability of the Antibes Ouest restaurant and of the possible synergies of an Antibes Ouest-Vallauris whole To state "whether the new "Antibes-Ouest" restaurant was viable in itself or whether, as the company Me DONALD'S opened it at the same time as that of Vallauris, which is no accident but shows that it had envisaged a "synergy" between these two restaurants, its profitability had not been assessed ¡ priori within an "Antibes-Ouest" - "Vallauris" whole, the management of which the company Mc DONALD'S «, contrary to what seems to have been its forecasts, entrusts by lease-management (*location-gérance*) to two different persons, - the "Antibes- Ouest" restaurant being only the complement of the locomotive "Vallauris";". In answer to this question, it is necessary on the one hand to find out whether the Antibes Ouest restaurant of Mr Collorafi (operated by the company LES PINS) was viable in itself, and on the other hand to estimate the contribution of the Vallauris restaurant to the profitability of Antibes Ouest On the viability of Antibes Ouest The comparison between the income statements of Antibes Ouest for the 2nd half of 1997 and the 1st half of 1998 shows a recovery in the financial situation of Antibes Ouest. As the table below indicates, the company records in the 1st half of 1998 a positive result before tax (F. 14,923) in clear increase. Moreover, the results of Antibes Ouest in the 2nd half of 1997 must be qualified, because of the opening of this restaurant in May 1997. The results of Antibes Ouest in the 2nd half of 1998 (management of MAR) show that the improvement in the profitability of this restaurant continues since Antibes Ouest records in the 2nd half of 1998 a result before tax of F. 129,728. As a result, the Antibes Ouest restaurant appears viable, if not in itself, at least within the group made up of the two other restaurants, Carrefour shopping centre and Antibes Nord, in any case without Vallauris. Expert report SEBOL C/ MAC DONALD'S FRANCK R/SEBOL/septembre 1999/Vi Headings of the Mac Donald's P&Ls , Total sales Food sales Gross profit PAC 1 Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax Antibes Ouest (opening in May 1997) 2nd half 97 (a) 1st half 98 (b) 2nd half 98 !c! On possible synergies between Antibes Ouest and Vallauris Antibes Ouest and Vallauris are located more than 5 kilometres from each other and are not in the same catchment area. In these circumstances, the synergy between the two restaurants is limited to the transfer of fixed costs that results from operating several restaurants (cf. above § 4.3). In this respect, it was noted, in answer to question three (cf. above § 1.3), that the cost of the Carrefour Shopping Centre restaurant amounts to 6 MF in 1995 whereas the cost linked to Mr Collorafi's second restaurant (Antibes Nord) is 2 MF (in 1996). The cost of this third restaurant follows the logic of cost transfer insofar as it shows a level of fixed costs for Antibes Ouest (the smallest of the three restaurants) in 1997 of 1.4 MF for 8 months, i.e. 2 MF for 12 months. SEBOL-B8O Controllable fixed costs Non-controllable fixed costs Administrative costs Total fixed costs Les Pins May to December [Sebol-B&O-Les Pins 9 623 B27 Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOUseptembre 1999/VI Moreover, as was mentioned at the second expert meeting, the results of Vallauris are worse than those of Antibes Ouest and, in that case, the award of Vallauris to Mr Collorafi would not have led to an improvement in Mr Collorafi's financial situation. The table, presented below, thus shows a loss of nearly 1.5 MF for Vallauris in 1997, higher than that recorded by Antibes Ouest in the same year (429 KF). Income statements at 31/12/97 Les Pins (opened Vallauris (opened in May 97) in April 97 Food product sales /Non-food sales Total turnover Other variable costs Total variable costs ..... Margin on variable costs. Managers' salaries and social contributions Travel expenses Insurance Accounting and legal fees Total fixed costs. Net result before tax Corporate tax Net result 5 000) Conclusion In view of these analyses, it appears that the Antibes Ouest restaurant was viable within this whole made up of three restaurants and that its profitability must be assessed independently of that of Vallauris. Expert report SEBOL C/ MAC DONALD'S FRANCH 16i RISEBOL/septembre 1999/V1 the operation of these two restaurants to another of its franchisees (Mr Gilarsky, who had moreover been vice-president of the company MAC DONALD'S). Faced with Mr Collorafi's insistence, MAC DONALD'S had agreed to award him one of the two restaurants. The opening of these two restaurants was of definite interest to franchisees. As we have seen, it is advantageous for a franchisee to own several restaurants insofar as the marginal cost of a new restaurant is low compared with that of a first restaurant. It would therefore have been natural for the opening of these two restaurants, without being competitors but located in a nearby area, to be entrusted to Mr Collorafi. However, MAC DONALD'S justified this situation by invoking Mr Collorafi's difficult financial situation. Conclusion In these circumstances, this opening is neither a poisoned gift nor an additional chance to pull through. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBO septembre 1999/7 4.7 Question 7: Analysis of the consistency of the overall financial management of Mr Collorafi in the three companies up to 1/1/98 "Considering that the experts must give their opinion on the consistency of the overall financial management of Mr COLLORAFI in the three companies up to 1 January 1998; " To assess the consistency of Mr Collorafi's financial management, it is appropriate to analyse his distribution policy, his remuneration and his entrepreneurial management. On Mr Collorafi's distribution policy Mr Collorafi's distribution policy from 1995 to 1997 and its effects on the financial situation of the companies he owns are summarised in the table below. (in KF) SEBOL SEBOL 1° share capital 1° partner's current account dividends distributed Net result 1° equity resources (1) + 300 + 1010 +50 B&O +50 + 50 + 550 + 600 0l SEBOL B&0 + 200! LES PINS + 50 + 6 + 50 Total + 100 + 756 + 352 - 971 - 1226 - 498 - 2 695 + 296 +241 + 3860 +4101 + 61 +3561 1° resources I.MT (1) + (2) 1° investment + 3337 + 127 +3851 + 3331 + 162) + 536 - 916 - 3142 + 3 275 1° change in working capital requirement A" cash + 481 + 5:39 + 30 - 8341 - 1 5:30 - 978 - 3 344 + 160 + 63 + 32 Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 This table calls for a comment on the evolution of the apparent working capital requirement in 1997, which comes from the non-payment of the fees due to Mac Donald's (amount of unpaid fees at 31/12/97 for the three companies = F. 3,905,270). It is interesting to note that the cumulative amount of the sums distributed net of reinvestments (2 MF) is equivalent to that of the overall loss of Mr Collorafi's restaurants over the period. It thus emerges from this table that the deterioration of the equity resources of the three companies is due, in equal parts, to Mr Collorafi's distribution policy and to the sharp fall in results. In 1995, Mr Collorafi pays himself 90% of the reserves of 1994 and in 1996, 95% of the reserves of the preceding year. This policy also led to a swelling of bank debt. This situation raises questions as to the consistency of Mr Collorafi's financial management. Is it, as Me Clément explains in his submission of 4 March 1999, that Mr Collorafi was receiving "the fruits of his hard work" and had no reason to reinvest the sums he paid himself? • Is it, as Me Leloup asserts in his submission of 16 April 1999, that "Mr Collorafi did not behave as a responsible business owner: he allocated to himself the profit of the profitable years without reinvesting enough"? It appears that Mr Collorafi pursued a policy of massive distribution from 1995. Having the consequence of drying up equity resources, this policy deprives the companies of resources available to invest and ensure their development, notably in a very competitive environment. In 1995, Mr Collorafi distributes 1.8 MF of dividends whereas a Quick restaurant is about to open 500 metres from his restaurant (the opening of the Quick took place in July 1995). In June 1996, Mr Collorafi distributes 1 MF of dividends whereas the opening of the Quick led to a reduction in the activity of "Carrefour shopping centre" (cf. appendix E4 of the submission of Me Leloup, of 08/08/99) and a second Mac Donald's restaurant (Antibes Nord) was to open 4 months later opposite the Quick It must nevertheless be taken into account that Mr Collorafi subsequently invested 800 KF in B&O and 56 KF in LES PINS Expert report SEBOL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 On Mr Collorafi's salary The table, presented below, recalls Mr Collorafi's salary from 1995 to Mr Collorafi's salary (gross salary + benefits in kind + employee and employer contributions) as already studied in answer to question no. 1 (for the companies SEBOL and B&O), the impact of halving Mr Collorafi's salary on the profitability of the restaurants is not significant given the losses recorded by the three companies. On "group" management Several factors indicate that Mr Collorafi actively manages the whole made up of his three restaurants. Thus one notes the existence of services agreements concluded between SEBOL and B&O (October 1996), and between SEBOL and LES PINS (April 1997)* as well as the creation of a GIE in April 1997 which pools the administrative resources common to the three restaurants. Moreover, the answer to question no. 3 made it possible to note a transfer of fixed costs between SEBOL and B&O. Nevertheless, these results do not allow conclusions to be drawn on Mr Collorafi's management performance and must be supplemented by a comparative analysis. Analysis by the regression line The regression analysis of profits after controllable expenses (PAC) of all the Mac Donald's in France was discussed with the parties, carried out from the income statements supplied by the lease-managers (*location-gérance*) at 31 December of the past year. From the scatter plot showing the turnover (x-axis) and the level of PAC (y-axis) of each franchisee, by type of restaurant, a regression line is established which passes through the middle of the cloud in order to measure the position of each franchisee in relation to this line. * These agreements provide that SEBOL re-invoices B&O and LES PINS, in proportion to their turnover, administrative costs, persons employed across several units, office expenses and vehicle costs. Expert report SEBOL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 Thus, the 1997 regression line for Free Stander restaurants opened before 31/12/96 indicates that for a level of turnover (food) of 13 MF (Antibes Nord), the average PAC level is nearly 5 MF, to be compared with a lower PAC level for Antibes Nord, of 4 MF. The 1997 regression line for Mall restaurants opened before 31/12/96 makes it possible to see where the "Carrefour shopping centre" restaurant is positioned relative to the average of Mall-type restaurants. Thus one finds that for the food turnover achieved by this restaurant (11.5 MF), the corresponding PAC level lies on the line at more than 3.5 MF, i.e. a level slightly higher than that of the "Carrefour shopping centre" restaurant. As Mac Donald's indicates, "average" PAC levels do not constitute targets. Comparison Mr Collorafi / average lease-managers (*location-gérance*) It is appropriate to examine whether, as Me Leloup claims in his submission, dated 16 April 1999, Mr Collorafi is "clearly less successful than the other lease-managers in similar situations". In an appendix to this submission (appendix E2), Me Leloup attaches a table that shows the comparison between the levels of profit before tax and after controllable expenses (PAC), obtained for the average of lease-managers (by type of comparable restaurants) in 1997, with those obtained by the restaurants operated by Mr Collorafi the same year, as indicated in the table below. PAC Difference PAC Difference PAC Difference Comparison Mr Collorafi / average lease-managers in 1997 (in KF) Antibes 1 Average Mall * 29.85% 33.16% - 3.61% (in KF) Antibes Nord 29.64% -6.57% Average FS * 36.20% (in KF) Antibes Ouest 27.83% - 5.84% Average FS * 33.67% Expert report SEBOL CI MAC DONALD'S FRANCE RISEBOL/septembre i999VI * Unlike Malls, which are located in a shopping centre, the "FS" restaurants, for Free-stander, are independent of any other building. The level of profit after controllable expenses (PAC) is calculated as follows: PAC: Total net sales (-cost of food and products sold - controllable expenses The PAC level is a relevant indicator for judging management performance**. This table therefore goes in the direction of less successful management by Mr Collorafi compared with the average of lease-managers (*location-gérance*). However, it should be specified that the average consolidated turnover level of Mr Collorafi's restaurants is at a lower level (11.5 MF) than that of the average franchisee (14.5 MF). Moreover, this comparison of management levels, which relies on the regression line mentioned above, must be put in perspective insofar as the turnover levels reached by B. Collorafi's restaurants are below what they should be given their respective structures. Moreover, in his submission no. 3 (3 May 1999), Me Clément indicates that this "table must be used with caution" and that the profitability of an investment can be obtained only "if the restaurant achieves the sales figure for which this investment was made" He even adds, in an appendix to his third submission, dated 11/5/99, that the table is erroneous following a "computer error in the carry-forwards of the cumulative PAC". This challenge to the reliability of the franchisees' PAC is however rejected by MAC DONALD'S (submission no. 2 of Me Leloup of 16/7/99). Concerning SEBOL, account must be taken of the fall in activity, which went from 27 MF in 1993 to 12 MF in 1997, and of the heavy losses recorded. In such a context, reorganisations are * Controllable expenses: crew labour, managers' salaries, travel expenses, advertising, local promotion, external services, uniforms, operating supplies, maintenance and repairs, electricity, gas, water, office supplies, miscellaneous ** In his report, A. Dumoutier indicates that the "PAC level reflects the quality of the management of a restaurant. It takes into account all the expenses over which the management team may have Expert report SEBOLCI MAC DONALD'S FRANCE RISEBOLiseptembre I999/Vł necessary and management is much more difficult there. As a result, the use of the regression line to assess SEBOL's management is unsuitable. As regards administrative costs, Mac Donald's indicates (cf. submission of Me Leloup, of 16/07/99) that the average administrative costs per franchised restaurant comes to 517 KF, i.e. 1.5 MF for 3 restaurants, whereas the administrative costs of Mr Collorafi's three restaurants come to 2.5 MF. This amount of 517 KF is however disputed by Mr Collorafi Comparison Mr Collorafi / specified lease-managers (*location-gérance*) With the aim of understanding Mr Collorafi's management as well as possible, a meeting was held on 20/09/99 in the offices of one of the experts, in order to analyse the income statements of franchisees. The study of 4 restaurants, two proposed by Mr Collorafi (he had however asked Mac Donald's to provide the accounts of eight restaurants) and two proposed by Mac Donald's, leads to the remarks set out below*** , despite Mr Collorafi's reservations on the sincerity of the accounts presented by Mac Donald's. First of all, the comparison of Antibes Nord with two comparable restaurants (Free Stander, similar turnover level) shows similar operating expense levels but poorer levels of profit after controllable expenses (PAC) for Antibes Nord (difference in PAC levels of 5% to 10%). However it is specified that the Antibes Nord restaurant is large, has a particular configuration (3 dining-room levels, 2 terraces, ...), and a delicate competitive situation, which seem to explain these PAC differences. The analysis of the administrative costs of one of these two restaurants, whose lease-manager (*location-gérance*) owns only one restaurant (in order to make the comparison relevant, unbiased by group management), indicates levels of administrative costs, notably lease-manager's salary, substantially equivalent to those observed for Antibes Nord. The comparison of the "Carrefour shopping centre" restaurant with the two other restaurants of the sample, only one of which truly allows a relevant comparison (Mall, comparable turnover) shows similar levels of profit after controllable expenses (PAC). The salary of the lease-manager (*location-gérance*) of this restaurant is on the other hand substantially *** For reasons of confidentiality and following the request of the company Mac Donald's, the names of the restaurants making up the sample will not be mentioned, nor the content of the income statements concerning them detailed. Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999V1 necessary and management is much more difficult there. As a result, the use of the regression line to assess SEBOL's management is unsuitable. As regards administrative costs, Mac Donald's indicates (cf. submission of Me Leloup, of 16/07/99) that the average administrative costs per franchised restaurant comes to 517 KF, i.e. 1.5 MF for 3 restaurants, whereas the administrative costs of Mr Collorafi's three restaurants come to 2.5 MF. This amount of 517 KF is however disputed by Mr Collorafi Comparison Mr Collorafi / specified lease-managers (*location-gérance*) With the aim of understanding Mr Collorafi's management as well as possible, a meeting was held on 20/09/99 in the offices of one of the experts, in order to analyse the income statements of franchisees. The study of 4 restaurants, two proposed by Mr Collorafi (he had however asked Mac Donald's to provide the accounts of eight restaurants) and two proposed by Mac Donald's, leads to the remarks set out below*** , despite Mr Collorafi's reservations on the sincerity of the accounts presented by Mac Donald's. First of all, the comparison of Antibes Nord with two comparable restaurants (Free Stander, similar turnover level) shows similar operating expense levels but poorer levels of profit after controllable expenses (PAC) for Antibes Nord (difference in PAC levels of 5% to 10%). However it is specified that the Antibes Nord restaurant is large, has a particular configuration (3 dining-room levels, 2 terraces, ..), and a delicate competitive situation, which seem to explain these PAC differences. The analysis of the administrative costs of one of these two restaurants, whose lease-manager (*location-gérance*) owns only one restaurant (in order to make the comparison relevant, unbiased by group management), indicates levels of administrative costs, notably lease-manager's salary, substantially equivalent to those observed for Antibes Nord The comparison of the "Carrefour shopping centre" restaurant with the two other restaurants of the sample, only one of which truly allows a relevant comparison (Mall, comparable turnover) shows similar levels of profit after controllable expenses (PAC). The salary of the lease-manager (*location-gérance*) of this restaurant is on the other hand substantially *** For reasons of confidentiality and following the request of the company Mac Donald's, the names of the restaurants making up the sample will not be mentioned, nor the content of the income statements concerning them detailed. Expert report SEBOLCI MA DONALD'S FRANCE RISEBOI/septembre 1999/VI lower than that of Mr Collorafi but the comparison does not allow direct conclusions to be drawn insofar as the franchisee concerned owns three other restaurants and may have lodged overheads in an ad hoc structure. In these circumstances, it appears that Mr Collorafi's management does not seem to be open to criticism. Without bearing directly on the management indicators, it is interesting to note that the reports of Mac Donald's financial review at the end of 1997 indicate excellent levels of quality, service and cleanliness (even exceptional) for the three restaurants. It should also be stressed that the Mall-type restaurant compared with the "Carrefour shopping centre" (one of those proposed by B. Collorafi) bore a high standard fee rate but that this was the subject of an adjustment. Given the financial difficulties of the restaurant, Mac Donald's indeed reduced this fee rate by nearly 50%. This adjustment thus illustrates an interesting situation where Mac Donald's takes on part of the financial difficulties encountered by a franchisee Moreover, documents attached to the submission of Me Clément of 3/5/99 concern the balance sheets and income statements of three companies that operate MAC DONALD'S restaurants in Cannes and Mougins. The Mougins restaurant Mougins (SARL GILEX), which was opened one month after Antibes Ouest and Vallauris, shows a turnover level of 5.6 MF (against 6.5 MF for Antibes Ouest) and a loss of 412 KF (against 498 KF), i.e. results comparable with those of Antibes Ouest. The Cannes restaurant (SARL LES ALLEES) achieves in 1997 a turnover level of 29 MF which enables it to show a profit of 523 KF. Comparison Mr Collorafi / MAR The company MAR (MAC DONALD'S RESTAURANTS) has managed the three restaurants formerly operated by Mr Collorafi since 11 June 1998. In his submission of 16 April 1999 (appendix E1), Me Leloup compares the income statement for the second half of 1997 (Mr Collorafi) with that for the second half of 1998 (MAR). These results are reproduced as they are in the table below. On the other hand, in his submission no. 3 of 3/5/99, Me Clément indicates that the PAC levels are erroneous and proposes a corrected version, indicated next to the tables (corrected PAC). Expert report SEBON C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VJ Antibes 1 Total sales Food sales Gross profit PAC 1 Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax Antibes Nord Total sales Food sales Gross profit PAC Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax Antibes Ouest Total sales Food sales Gross profit Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax g'm sem 97 z'me sem 98 - 1 069 725 zi sem 97 1978 108| - I 133 863 - 174 374| - 1 464 995 - 1 079 148 2e sem 97 20 sem 98 Var in % 2,23%. 8,77 Corrected PAC: (5,1%) 69% ¡ Var in % 9,39% 11,1% - 76% - 136% Var in % 13,43% 16% - 67% 150% Corrected PAC: (10,7%) Corrected PAC: (15,5%) Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBO septembre 199911 TOTAL Total sales Food sales Gross profit PAC Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax 2 sem 97 - 2 722 805 - 2 138 052 2'm° sem 98 - 3 252 170 • 2 886 340 Var in % 7.97% 11.8% Corrected PAC: (11,3%) - 71,3% 21,6% These tables show an increase in turnover, an improvement in PAC levels and a very significant saving in administrative costs in the second half of 1998 (MAR) compared with the second half of 1997 (Collorafi), and this despite an increase in the standard fee in the 2nd half of 1998. • The evolution of turnover seems to be linked to the reduction in the impacts of the restaurant openings (and for the company LES PINS, to its start-up). • An improvement in PAC levels emerges in the 2nd half of 1998. A first explanation for this increase is linked to the increase in sales in the second half of 1998. This evolution also seems to be explained by the fall in the cost of raw materials and the increase in selling prices, as Me Clément indicates in an appendix to submission no. 3, dated 11/5/99. • On the other hand, the comparison of administrative costs, which shows a saving in administrative costs of more than 65% in MAR, seems to indicate more successful management by MAR than that of Mr Collorafi. Several factors may be put forward to explain this evolution of administrative costs. Administrative costs include the lease-manager's (*location-gérance*) salary, other expenses and office expenses. The latter include in particular administrative salaries. Now it appears that the number of employees included in administrative costs was reduced from 6 to 4 persons. In his submission no. 3 of 3/5/99, Me Clément explains that the company MAR "in a short time Expert report SEBOL C/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 "eliminated" two substantial salaries (700,000 francs annually) by transferring the managers concerned to its Paris head office". Moreover, this type of cost includes, to a significant extent, the remuneration of the lease-manager (*location-gérance*) (1,022 KF in 1997) and the costs induced by the latter. The very significant saving in administrative costs made by MAR is therefore essentially linked to the saving on the remuneration of Mr Collorafi and to the reduction in administrative staff. This source of saving may result from administrative cost management that was not optimised on the part of Mr Collorafi, from management of MAR's overheads made easier owing to its belonging to the Mac Donald's France group or else from the absence of the financial advisory role of Mac Donald's with Mr Collorafi. It should be noted that, although clearly better, the situation of the consolidated whole of the three restaurants operated by MAR remains loss-making in the 2nd half of 1998. Conclusion The preceding analyses seem first of all to indicate that the collapse of SEBOL's result is more linked to the fall in activity than to Mr Collorafi's remuneration policy (dividends and salaries). The difficult situation of B&O seems to be due to the competitive context that characterises it (a competing Quick restaurant is located opposite Antibes Nord). All the same, it should be noted that in the 2nd half of 1997, (management of Mr Collorafi), Antibes Nord shows a positive net operating result (222 KF) higher than that achieved in the 2nd half of 1998 (management of MAR) which is negative (-318 KF). The evolution of the situation of the company LES PINS indicates a recovery since the company makes a profit in the 2nd half of 1998 of 130 KF. Concerning Mr Collorafi's distribution policy, it appears that it has a limited impact on the profitability of the restaurants he operates insofar as financial costs are not high (57 KF in 1996, 200 KF in 1997) relative to the losses recorded by the companies (414 KF in 1996, 2,695 KF in 1997). A more consistent distribution policy would only have slowed the collapse of the restaurants' profitability (by avoiding recourse to borrowing and thus reducing financial costs). Expert report SEBOL C / MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 One may however be surprised by Mr Collorafi's decision to distribute so many dividends, notably in 1996 at a time when the financial situation of Mr Collorafi's restaurants was beginning to deteriorate. Concerning Mr Collorafi's management, the comparison with the management of other lease-managers (*location-gérance*) does not allow the conclusion that he managed badly. It appears that the economic context and the structure of Mr Collorafi's restaurants contribute more to explaining their difficult financial situation. Likewise, the comparison between the management of Mr Collorafi's three restaurants and that of MAR does not allow clear conclusions to be drawn. Consequently, Mr Collorafi's overall financial management in the three companies up to 1 January 1998 does not seem to explain the poor results of these three companies. Expert report SEBOL C/ MAC DONALD'S FRANCH RISEBOL/septembre 1999/V1 4.8 Question 8: Analysis of the accounts of SEBOL, B&O and LES PINS from 1/01/98 to 10/06/98 "Considering that the experts will give their opinion on the accounts of the companies SEBOL, B et O and LES PINS, between 1 January 1998 and 10 June 1998, the date of their eviction;". Firstly, B. Collorafi's management was studied at 1 September 1998 by comparing the monthly income statements (P&L) of the 1st half of 1998 with those of the immediately preceding half-years (1st and 2nd half of 1997) and of the immediately following half-year (2nd half of 1998). For the comparison to be relevant, the results at 30 June 1998, calculated from the monthly income statements* , were used even though the companies and Mr Collorafi were evicted on 10 June 1998 Unlike the figures for the 2nd half of 1997 and the 2nd half of 1998 which were given to us by MAC DONALD'S (submission of Me Leloup dated 16/4/99), the figures for the 1st halves of 1997 and 1998 were calculated from the monthly income statements of the three companies concerned. The income statements for the month of June 1998, which were given to us by the respondent, cover only 20 days (MAR operation). The tables, presented below, show the half-yearly evolution of the result of the companies SEBOL, B&O, LES PINS, from the first half of 1997 (for SEBOL and B&O) to the end of 1998. Headings of the P&Ls of 1st half 97 2nd half 97 Mac Donald's (b) (c) Total sales Food sales Gross profit PAC Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax • 1 095 645 1st half 98 (a) Antibes 1 Var in % (a)//(b) - 13,7%; Var in % (a)//(c) 2nd half 98 (d) Var in % (d) //(a) 5982396 4 778048 - 20%: • 11,6% - 22% 73% - 60% _ 132042 + 28% + 41)% -23% * Monthly income statements (P&L) of the 3 restaurants from January to May (operation by Mr Collorafi) cumulated with those of the month of June (over 20 days only, from 10 to 30/06, operation by MAR). Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI Headings of the P&Ls of Mac Donald's Total sales Food sales Gross profit PAC Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax Antibes Nord (opening in October 1996) 1st half 97 (b) 2nd half 97 1st half 98 | Var in % (a) (a)//(b) Var in % 2nd half 98 | Var in % 6 015 247 | + 7,2% + 7% - 1 163 410 : - 1 133 863. - 39G 596 • 234 685| -41% .L. - 1 464 995 - 1 079 148 +17% +53. Headings of the P&Ls of 1st half 97 Mac Donald's Total sales Food sales Not significant Gross profit PAC Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax Antibes Ouest (opening in May 1997) 2nd half 97 1st half 98 Var in Var in% 2nd half 98 Var in (a) // (b) (a) //(c) (d) // (a) - 67% + 21% I 479 920 224 006 | -38% +1177 +87 Headings of the P&Ls of Mac Donald's Total sales Food sales Gross profit PAC: Standard fee ! Other non-controllable exp. Net operating result Administrative costs Result before tax 2nd half 97 (b) 11 976 216: 5 297 530 - 2 722 805 - 2 138 052 1st half 98 (a) - 2 589 735 TOTAL. Var in % (a)//(b) -11% 16'7 2nd half 98 (c) - 3 252 170 Var in % (c) // (a) +22%% +2173 Expert report SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 These tables bring out the following points: • a level of activity in the 1st half of 1998 lower than those of the 1st half of 1997, 2nd half of 1997 and 2nd half of 1998, • an increase in non-controllable expenses in the 1st half of 1998, compared with the 2nd half of 1997, which continues in the 2nd half of 1998, • a significant fall in administrative costs in the 1st half of 1998, which continues in the 2nd half of 1998, • a level of result in the 1st half of 1998 lower than those of the 2nd half of 1997 (except for Antibes Ouest) and the 2nd half of 1998. In view of these results, notably the levels of profit after controllable expenses and of administrative costs, Mr Collorafi's management does not appear inconsistent. Moreover, in his submission no. 2, dated 12/4/99, Me Clément specifies that the 2nd half of 1998 sees a reduction in the cost of food, in energy expenses and better staff productivity, and indicates restatements to be made to make the management levels comparable. The better control of administrative costs in the restaurants operated by Mr Collorafi in the 1st half of 1998 prompts a question on the part of Me Leloup (cf. submission of 16/04/99). Moreover, the comparison between the operation of Mr Collorafi and that of MAR, notably concerning administrative costs, was studied in answer to question 7. A sharp reduction in activity over the period studied (1st half of 1998) is also noted. According to Me Clément (submission no. 2), the 2nd half of the year is a "period stronger in turnover". Secondly, examination of the statements drawn up at 10 June 1998 gives rise to the observations set out below. The aim here is to give an opinion on these statements, not to carry out a genuine in-depth audit Me Leloup recalls, in his submission dated 16 April 1999, that the period from 1/01/98 to 10/06/98 "is a period during which, ..., the appellants remained in the premises without right or title". Expert report SABOT C/ MAC DONALD'S FRANCE RISEBOL/septembre 19997V1 The balance sheet of SA SEBOL is as follows: Net intangible fixed assets Equity Net tangible fixed assets Bank debt Current assets Trade payables 3,275,278 Total assets Total liabilities SEBOL's income statement at 10/06/98 shows turnover of F. 4,828,729 and a net result of F. -578,756. It also shows standard fees of F. 800,000 and service fees of F. 225,617, to be compared with the occupation indemnity for 160 days at F. 16,000, i.e. F. 2,560,000. The balance sheet of EURL B&O is as follows: Net intangible fixed assets Equity - 2,693,105 Net tangible fixed assets Bank debt Current assets Trade payables Total assets Total liabilities The analysis of B&O's balance sheet shows that Mr Collorafi withdrew F. 684,919 from his current account, leaving only F. 65,184. Maître Clément states, in his statement of 3 May 1999, that “these sums were withdrawn after the judgment of the Commercial Court, faced with the threat (which subsequently became real) of seizure of the accounts by MC DONALD'S”. B&O's income statement at 10/06/98 shows turnover of F. 5,757,090 and a net result of F. -750,485. It also shows standard fees of F. 1,288,500 and service fees of F. 284,905, to be compared with the occupation indemnity for 160 days at F. 24,000, i.e. F. 3,840,000. Expertise SEBOL C/ MAC DONALD'S PRANCE RISEBOL/septembre 1999/J The balance sheet of SARL LES PINS is as follows: Fixed assets Equity Net intangible Net tangible fixed assets Bank debt Current assets Trade payables Total assets Total liabilities LES PINS's income statement at 10/06/98 shows turnover of F. 4,046,424 and a net result of F. -70,035. It also shows standard fees of F. 606,745, service fees of F. 202,248 and equipment fees of F. 182,024, to be compared with the occupation indemnity for 160 days at F. 16,000, i.e. F. 2,560,000. The balance sheet of GIE SODEVA is as follows: Net intangible fixed assets Equity Net tangible fixed assets Bank debt Current assets Trade payables 5,633 Total assets Total liabilities The income statement of GIE SODEVA at 10/06/98 shows nil turnover and net result (administrative costs re-invoiced to the three companies in proportion to their turnover). The analysis of these positions leads to the following observations. Tangible fixed assets still appear in the balance sheets of these companies and of GIE SODEVA for a net book value of F. 4,528,333. Yet, if these tangible fixed assets are located in the restaurants, they represent a loss for Mr Collorafi. It thus appears that these accounts were drawn up on the assumption that the restaurants would continue trading, whereas a provision for impairment would have been necessary to reflect the loss suffered by Mr Collorafi. Expertise SEBOL (/ MAC DONALD'S FRANCE R/SEBOL/septembre 1999/V1 These positions did not take into account the occupation indemnities of F. 8960 000 but did take into account the contractual fees of F. 3,590,039, even though the agreements had been terminated by the Paris Commercial Court. Taking these indemnities into account would have increased the losses of the companies by F. 5,369,961. Conclusion The analysis of the companies' accounts at 30 June 1998 does not show any management by Mr Collorafi different from that of the previous half-year, and the results obtained by MAR in the 2ªi half of 1998 do not indicate a significant improvement in management levels. Moreover, as mentioned, the accounts for the 1ª half of 1998 include for the month of June 1998 only the operation of MAR (20 days), thus making the comparison less relevant. It is nevertheless interesting to note that, for the three companies, lo second half of 1998 corresponds to a clear increase in activity and a reduction in losses. This observation points towards an improvement in the companies' financial situation over time, although apart from the Antibes Ouest restaurant (LES PINS), the operation of the two other restaurants remains loss-making. Whereas the overall net result of the restaurants in 1997 was -2.7 MF, it is -1.4 MF in 1998. Consequently, this analysis highlights the fact that in a context of improving profitability of the restaurants, efforts on the part of the parties (adjustment of the fees and financial advice from MAC DONALD'S to better control fixed costs, waiting for an improvement in the situation of his restaurants by accepting a temporary loss of remuneration on the part of Mr Collorafi®) could have allowed the companies to get through the “difficult patch” caused by the opening of a Quick restaurant in July 95, and by the strategic response of Mac Donald's (opening of Antibes Nord in October 1996). The analysis of the positions of the three companies concerned, closed by the firm Price Waterhouse Coopers on 1 March 1999, leads to the following findings. The equity of SEBOL, B&O and LES PINS is negative for a total amount of F. 4,073,258. * It is recalled that a halving of Mr Collorafi's salary in 1997 allows a saving of 511 KF Expertise SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI Mr Collorafi withdrew almost all of the current accounts in his companies. Recording all the consequences of the decisions of the Paris Commercial Court of 18 May 1998 would have led to positions showing cumulative negative equity of F. 13,971 552, analysed as follows: • cumulative equity • - tangible fixed assets still shown on the balance sheet • - occupation indemnities net of fees F. - 4,073258 - F. 4,528,333 - F. 5,369,961 Expertise SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI 4.9 Question 9: Increase in cumulative fees compared with a decrease in administrative costs “Whereas, on the other hand, the experts must give their opinion on another statement contained in the document: “Objective No. 3”: make the Restaurants profitable By spreading the administrative costs over several restaurants, we will reduce the administrative costs „ ...; in other words, the experts must state whether the increase in the cumulative fees of the three restaurants could be offset by the decrease in their administrative costs;”. To answer this question, it is appropriate to analyse the breakdown of administrative costs, which are the fixed costs, and the increase in cumulative base fees resulting from the opening of the three restaurants in question. The table presented below shows the cost per restaurant and gives the breakdown of fixed costs. Saznes managhis et ir Soc Fracs de voyage Framation locale Seinces exleneurs tecticile gar lelephoue-eau Foumitures de barran Ecats de caisse Pharges fixes controlable Plesterardo Tititur Assurance Tases • valtes sur cessions d acht Amortissements et provisions fras manciers Promuts financie's Charges (xes mon connisiapies Fras complables et judiciaires Produts el charges ducis zame du locatare gerall duses dépenses ¿Depenses de bureu Frais amnistratels Total fixed costs SEBOL 5: 29A f41 494 SEBOL 461 3a5 270 0mn) .! 7OS 396 616 00C L 104.2201 105 759฿ _292 593 Expertise SEBOL C/ MAC DONALD'S FRANCE S0 304 29% 637 ... 2 173 330 SEBOL.860 Ecart 97/93 1 40ti 995 66€ 704 536 A55 E23 574 265 $52 99,098 E30 994 76a 547 87 450) 74 R61 .418 .58t 675,000 . 1500% Les Pine 2947% 51 90+ 56 00X5. ... 208 149 RISEBOL/septembre 1999V1 The opening of a new restaurant entails in particular the payment of an additional cumulative fee. The table presented below shows the change in the amount of the fee due from 1995 to 1997. (in KF) Base fee The level of fee recorded in 1996, which is slightly lower than in 1995 despite the payment of a fee for “Antibes Nord” (B&O) over 3 months (the latter restaurant having opened in October 1996), is linked to the fall in turnover of “centre commercial Carrefour” (SEBOL). The additional fee in 1997 is linked to the payment of three fees and to the fact that for these three restaurants, the monthly fee that is duc is most often the minimum fee, which is disconnected from turnover. The three companies recorded substantial losses in 1997 (see table below), which indicate that the increase in the cumulative fees of the three restaurants could not be immediately offset by the overall decrease in administrative costs. The change in the financial situation of the group made up of SEBOL, B&O and LES PINS, from 1995 to 1997, is recalled. % CA Turnover Net result Base fee Administrative costs 4.1% 12% 25% % CA % CA 16% 31% Expertise SEBOL C/ MAC DONALD'S FRANCE RISERO septembre 199107 Conclusion The increase in the cumulative fees of the three restaurants could not be offset by the decrease in their administrative costs. These restaurants would have needed to generate a sufficient level of turnover to significantly improve their profitability. As a result, the allocation of fixed costs benefits LES PINS more, which generates a higher level of profitability than SEBOL and B&O. SEBOL suffers from the successive reorganisations caused by the collapse of its level of activity. B&O, which was opened to counter the opening of a restaurant under the competing QUICK brand, is affected by this competitive context and does not generate a sufficient level of activity to be profitable. Relating the increase in cumulative fees to the decrease in administrative costs linked to the opening of a new restaurant also leads to a comparison of the franchisee's return on investment with that of Mac Donald's. In a statement (dire) dated 31/08/99, Maître Clément indicates, by calculating the return on investment (ROI) of each of the three restaurants concerned and of Mac Donald's, that the franchisee is far more penalised by a difficult economic context than Mac Donald's. Insofar as the franchisee's ROI depends on the result of his restaurant, in a context of loss, the franchisee is far from achieving his ROI objectives (between 30% and 407). Insofar as the return on investment of the company Mac Donald's depends on the fees it receives from its franchisees and on the fact that a minimum fee has been established, disconnected from the activity of the restaurants, Mac Donald's bears difficult situations less harshly than its franchisees. As a result, the appellants consider that there is no equitable sharing of financial difficulties between Mac Donald's and the franchisees. However, as was seen in analysing the income statements of a franchisee's restaurant (see question 7 on the comparison Collorafi / average lessee-managers) and as was noted for the “Antibes Nord” restaurant (see question 2), it happens that Mac Donald's offers an adjustment of the fees when a franchisee encounters difficulties financial difficulties linked to a difficult economic context. Expertise SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999V1 Nevertheless, it is recalled by Mac Donald's that a franchisee is an independent entrepreneur who must manage the economic risk linked to the operation of his restaurant. Maître Clément indicates, in a statement (dire) of 04/10/99' , that Mac Donald's looked into the case of city-centre restaurants (In Store) which showed levels of profitability lower than the average of “In Store” restaurants. As stated in the minutes (attached as an annex to this statement) of the meeting of Mac Donald's finance committee, dated 9 September 1999, Mac Donald's introduced a sliding-scale system which takes into account the operating conditions negatively affecting the profitability of the city-centre restaurants concerned so that the latter never generate negative cash flow. As a result, Maître Clément states that this system, introduced by Mac Donald's from 1 January 1998 for restaurants of the “In Store” type, would have been desirable to remedy the poor profitability of Mr Collorafi's restaurants, notably by adapting the level of fees to the turnover achieved by these restaurants. " Given the date of this statement, which is later than the date set for filing the report, it could not give rise to a reply statement on the part of Maître Leloup. Expertise SeBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/VI 4.10 Question 10: Effects of the award of Antibes Ouest on the minimum profitability thresholds “Considering lastly that in this application file of the companies SEBOL and B&O, Monsieur COLLORAFI announced as one of his four objectives: “Objective No. 2: Increase in turnover Our current concern is to increase turnover very rapidly in order to reach the minimum profitability thresholds”; That consequently, the company Mc DONALD'S must explain by what precise calculations it thought that, by awarding the “Antibes-Ouest” restaurant to Monsieur Collorafi, it would enable him to reach his “objective no. 2””. Mac Donald's answers this question (see statement (dire) of Maître Leloup dated 16/07/99) by providing the elements for estimating the turnover of a restaurant that is about to open. Turnover depends notably on the “capture rate”, that is to say the number of potential transactions of the site, which is a function of various elements (characteristics of the population, size of the restaurant, competitive situation, etc.). This estimate is then analysed. Furthermore, as stated in the statement (dire), the estimate, in value terms, of turnover is linked to the takeaway sales rate, which benefits from a VAT rate of 5.5% (against 20.6% for on-site consumption). While the statement thus explains the method used to estimate the turnover potential of a restaurant, it does not set out in detail the precise calculations that were applied to the “Antibes Ouest” restaurant to estimate the number of potential transactions and the takeaway sales rate. Mac Donald's invokes reasons of confidentiality to justify its refusal. Expertise SEBOI. C/ MAC DONALD'S FRANCE RISEBÖL/septembre I999W1 5 Conclusion and end of the expert assignment 5.1 On the impact of a salary reduction and of dividend payments into the current account on the profitability of SEBOL and B&O, in 1996 and 1997 (question 1) We were led to calculate the impact on the profitability of the two restaurants concerned of a reduction of Mr Collorafi's salary by half (in SEBOL, the only company where he receives a salary) and of a reduction in SEBOL's dividends in 1995, 1996 and 1997 (30/06) given the investments made in B&O and LES PINS in 1996 and 1997, as well as of a contribution to the current account in B&O in 1997 (30/06). It emerges from these analyses that substantially more than the measures mentioned would be needed for the companies SEBOL and B&O to reach break-even in 1996 and 1997 (30/06). The measures studied, notably the reduction of Mr Collorafi's salary by half, would have slowed but not prevented the deterioration in the profitability of the two restaurants. To complete the analysis, the effects of these measures on the cash position of the SEBOL-B&O group were examined. They would only have made it possible to pay the fees due to Mac Donald's, but they would not have made it possible to cope with the subsequent losses. 5.2 On the amendment to the lease-management agreement of the company B&O, of 10 June 1997 (question 2) The quantified impact of the amendment was assessed by determining the monthly fee due, from January to June 1997. It emerges from this calculation that, despite the saving made following the amendment of B&O's lease-management agreement, which amounts for the first half of 1997 to 266 KF, this company remains loss-making (- 955 KF) at 30 June 1997. The amendment, which is retroactive to 01/01/97, came at the right time, all the more so as the proposed amendment was sent to Mr Collorafi well before June 1997 and perhaps even as early as 9 April 1997. Expertise SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 However, the adjustment of the fees (monthly minimum fee reduced from 235 KF to 180 KF for one year, standard fee reduced from 20% to 17% of turnover excluding VAT for one year) subsequently proved wholly insufficient. 5.3 On a transfer of fixed costs from SEBOL to B&O (question 3) The change in SEBOL's fixed costs was studied before and after the opening of B&O in October 1996. The study of the “transferable” nature of certain fixed costs and the comparison of the level of fixed costs reached by SEBOL in 1995 with that reached by the SEBOL-B&O group in 1997 complete the analysis. It emerges that the opening of the “Antibes Nord” restaurant (B&O) made it possible to transfer fixed costs from the company SEBOL to B&O, in the amount of approximately 2 MF, on an annual basis. 5.4 On the operation of SEBOL and B&O, considered as an economic unit (question 4) The operation of SEBOL and B&O considered as an economic unit shows a synergy effect based on a wider spreading of certain fixed costs and on the saving that results from the opening of a new restaurant. Nevertheless the activity of the group remains insufficient to reach break-even in a difficult economic context and given the costs inherent in opening a restaurant, particularly “Antibes Nord” (B&O), which is of a large size and of a configuration that makes it difficult to manage. Expertise SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/Vi 5.5 On the viability of the Antibes Ouest restaurant and of the possible synergies of an Antibes Ouest- Vallauris group (question 5) An analysis was carried out of the change in the financial situation of Antibes Ouest, from June 1997 to June 1998, as well as a comparison of the accounts of Ouest and Vallauris at 31/12/97. In parallel, the possible existence of synergies between these two restaurants was studied. The results indicate an improvement in the financial situation of Antibes Ouest, which shows a positive pre-tax result at 30/06/98 (F. 14,923) and a financial situation at 31/12/97 better than colle de Vallauris over the same period. Antibes Ouest is therefore viable independently of Vallauris. It should be specified, however, that the “viability” of Antibes Ouest is assessed taking into account the fact that Antibes Ouest is part of a group made up of three restaurants. The synergies between the two restaurants appear limited to the transfer of fixed costs that results from operating several restaurants. 5.6 On the decision of MCDONALD'S to award Antibes Ouest to B. Collorafi (question 6) This question brings to the fore Mac Donald's siting policy, which falls within the strategy of that company. At the same time, it recalls the advantage for a franchisee of being awarded several restaurants (spreading of fixed costs). On the basis of these remarks, it was examined whether the award of the “Antibes Ouest” restaurant was an opportunity for Mr Collorafi. It appears, to use the Court's terms, that the award of this restaurant is neither a “poisoned chalice”, nor “an additional chance to pull through”. Expertise SBOL CI MAC DONALD'S FRANCE RISEBOL/septembre 19997V1 5.7 On the consistency of the overall financial management of B. Collorafi in the three companies until 1 January 1998 (question 7) Mr Collorafi's financial management is first addressed through his distribution policy and his remuneration. A comparative analysis was then carried out of Mr Collorafi's management with that of other franchisees as well as with that of MAR (a management company belonging to the Mac Donald's group, which took over Mr Collorafi's three restaurants after his eviction). It emerges from these analyses that Mr Collorafi's management does not appear to explain the poor results of his restaurants, these being more closely linked to the fall in their activity. The “Centre commercial Carrefour” restaurant was penalised by the successive openings, first of the competing “Quick” restaurant, then of “Antibes Nord”. Located opposite the Quick to counter its expansion, the latter is affected by this competitive context and appears, owing to its configuration, particularly difficult to manage. “Antibes Ouest”, which is, for its part, of a smaller size and less exposed to the competition mentioned owing to its relative distance, sees its financial situation improve. Mr Collorafi's dividend distributions may nevertheless appear surprising in an increasingly delicate economic context louverture of the Quick restaurant in July 1995, opening of the B&O restaurant in October 1996). 5.8 On the accounts of SEBOL, B&O and LES PINS from 01/01/98 to 10/06/98 (question 8) Apart from better control of administrative costs in the 1st half of 1998 compared with the 1st half of 1997 (restaurants operated by Mr Collorafi), the accounts of the three companies from 01/01/98 to 10/06/98, that is for the period immediately prior to Mr Collorafi's eviction and immediately after the termination by operation of law of the lease-management agreements, do not call for any particular remarks concerning Mr Collorafi's management. It should be noted that the decisions of the Commercial Court dated 18/05/98, had they been taken into account in the positions at 10/06/98, would have led to the presentation of cumulative negative equity of F. 13,971,552. Expertise SEROL. C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/Vi 5.9 On a possible offsetting between the increase in cumulative fees and the decrease in administrative costs (question 9) The reduction in administrative costs, following the opening of the two new restaurants of Mr Collorafi, was compared with the increase in cumulative fees of Mr Collorafi's three restaurants. It emerges from the comparison that the increase in cumulative fees was not offset by the saving in administrative costs that results from the opening of a new restaurant. This situation is explained by the collapse in the activity of the restaurants in 1997, which did not allow these restaurants to improve their profitability. It also leads to the observation that, independently of the fall in turnover, the franchisee must pay a minimum fee, thus guaranteeing Mac Donald's a minimum return on investment. The case is different for the franchisee, whose return on investment is linked to the profitability of his restaurants and therefore to their activity. 5.10 On the effects of the award of Antibes Ouest on the minimum profitability thresholds (question 10) In a statement (dire) of 16/07/99, Maître Leloup explains the method used to estimate the turnover potential of a restaurant, without, for reasons of confidentiality, accompanying this explanation with precise calculations applied to the case of “Antibes Ouest”. Expertise SEBOL C/ MAC DONALD'S FRANCE RISEBOL/septembre 1999/V1 5.11 Experts' response to the parties' statements (dires) The observations presented in the parties' statements (dires) and letters were answered in the body of the report. Done at Paris, 15 October 1999, The Experts Nol war - Alain MARTIN Distribution list of this report: • Maîre PAMART, avoué representing the appellants, one copy, • Maîte CLEMENT, lawyer representing the appellants, one copy. • SCT FISSELIER-CHILOUX-BOULAY, avoué representing the respondent, one copy, •Maire LELOUP, lawyer representing the respondent, one copy. • Registry of the Paris Court of Appeal, 2 copies. Expertise SEBOI, C/ MAC DONALD'S FRANCE RISEBÖL/septembre 1999/Vl