Minutes of expert meeting

Monsieur Alain MARTIN Expert 101, rue de Prony 75017 PARIS Monsieur Jean-Luc DUMONT Expert 15, rue Beaujon 75008 PARIS Paris Court of Appeal Judgment of 9 December 1998 - RG 1998 / 14119 SEBOL v. MAC DONALD ' S FRANCE Minutes of expert meeting no. 2 on 11 May 1999 at 3.00 pm These minutes contain neither conclusion nor opinion of the experts. Their sole purpose is to take stock of the statements exchanged and the documents examined. If the parties note any clerical errors in these minutes, they should point them out, as the report may reproduce them in whole or in part. 1. PERSONS PRESENT • Maître CLEMENT, Counsel for the Appellant • Mr COLLORAFI, Appellant • Ms DE BORDA, Legal Director representing the Respondent • Mr LE BOURDONNEC, Financial Consulting Manager representing the Respondent • Maître LELOUP, Counsel for the Respondent • Ms MAZIERES-VICECONTI, Legal Manager representing the Respondent • Mr DUMONT, Expert • Mr MARTIN, Expert • Mr FENARD, Experts' assistant FRAMEWORK OF THE EXPERT MEETING The purpose of this second expert meeting was to discuss the elements of response to the questions put to the experts, to hear the parties on their statements and to take stock of the additional information useful to the experts to carry out their assignment. At the end of the session, the next important dates of the expert examination were specified (see §4). CONDUCT OF THE EXPERT MEETING The experts go through the questions put to them and discuss with the parties the elements used to answer them. These discussions allow the parties to provide the experts with useful clarifications for their understanding of the questions. The main points noted are set out below, question by question. It should first be recalled that questions numbered 1 to 4 concern the period prior to 1 July 1997 (a date corresponding approximately to the opening of the Antibes-Ouest and Vallauris restaurants) whereas those numbered 5 to 10 concern the period after 1 July 1997. Thus, in order to answer the first four questions, the analyses must consider, for 1997, a period of 6 months, running from 1 January to 30 June. Question 1 • state "whether, if Mr COLLORAFI had halved his salary in 1995 and 1996 and had left in the 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 contribution to the current account in 1997, this would not have enabled these two companies to reach the annual break-even point, which is the turnover that balances the operation, in 1996 and 1997," • To answer this question, it is necessary to carry out restatements of B. COLLORAFI's salary and dividends. The amounts used for salaries and dividends in 1995, 1996 and 1997 are confirmed by the parties. Question 2 • "state whether the amendment to the contract of the aforementioned company B et O 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 he in fact received any from that company," • A discussion arose on the royalty policy of MAC DONALD'S. An increase is noted in the minimum royalty due in B&O compared with that due in SEBOL. The representatives of MAC DONALD'S specify, in this respect, that the minimum royalty is directly linked to the cost of MAC DONALD'S's investment and that this is much higher for "Antibes Nord" (B&O) than for "Carrefour shopping centre" (SEBOL). It is also specified that the objective of this royalty policy is a return on investment, for the operator, of 30 to 40%, and for MAC DONALD'S, of 20%. The financial provisions of the lease-management agreement (*location-gérance*) concluded between B&O and MAC DONALD'S, before and after the amendment, are recalled. They give rise to no particular comments from the parties. Question 3 • 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 Mr GANDUR asserts in his annual report drawn up at the request of Mr COLLORAFI (see page 24);" • A discussion took place on the trend in SEBOL's fixed costs, from 1995 to 1997, based on Mr GANDUR's report, on the table attached to Maître CLEMENT's submission no. 1 as an element of response to the third question, and on a supplementary table which redefines administrative expenses in relation to the previous table (appendix no. 190 to Maître CLEMENT's submission no. 3). In his report, Mr GANDUR notes a saving in fixed costs between 1995 and 1996, and between 1995 and 1997, which breaks down as follows: Total fixed cost saving compared with 1995 Saving attributable to the opening of Quick Saving attributable to the opening of Antibes Nord and Ouest, and of Vallauris The table presenting these amounts is shown on page 23 of Mr GANDUR's report. The table attached to Maître CLEMENT's submission no. 1 shows the trend in fixed costs from 1993 to 1998, in SEBOL, B&O (from 1996) and LES PINS (from 1997), and on a consolidated basis from 1996. The analysis of this table raises a question concerning the trend in the item "manager salaries", between 1995 and 1996 and between 1996 and 1997. It appears that, in certain years, this item includes the salary of the crew members. B. COLLORAFI is asked to provide clarifications on this point. The table shown in exhibit 190 appended to Maître CLEMENT's third submission takes up the previous table as regards the trend in administrative costs alone, including in these costs the fixed costs that were previously allocated to non-controllable fixed costs. B. COLLORAFI presents the details of the administrative costs incurred by the management of the three restaurants concerned, assesses the amounts and compares the total amount obtained with the salary he was receiving. Moreover, MAC DONALD'S answers the experts that the administrative costs observed on average among franchisees amount to 420 KF per year. In view of these analyses, a certain number of clarifications prove necessary for the experts to carry out their investigations and answer this third question. It is therefore necessary to obtain additional information on: • the trend in the item "manager salaries and social security contributions", • the nature of the costs saved when a second restaurant was opened. Moreover, since this question concerns the period prior to 31 July 1997, B. COLLORAFI is asked to break down the 1997 accounts over the first 6 months of the year, so as to be able to analyse the trend in SEBOL's fixed costs in 1997 taking into account only the impact of the opening of Antibes Nord (B&O). Question 4 • "That finally the said court-appointed experts will be invited 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 concerned;" › This summary question gives rise to no particular comments. Question a • state "whether the new "Antibes-Ouest" restaurant was viable in itself or whether, since the company MC DONALD'S opened it at the same time as that of Vallauris, which is no coincidence 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 lease-management of which the company MC DONALD'S, contrary to what seems to have been its forecasts, entrusted to two different persons, - the "Antibes-Ouest" restaurant being merely the complement of the "locomotive" Vallauris;". • The discussion around this question seems to clarify the situation: • the results of Vallauris are worse than those of Antibes Ouest, • independently of any judgment on the viability of Antibes Ouest, the two parties agree that the award of Vallauris to Mr COLLORAFI would not have changed the financial situation of Antibes Ouest. Question 6 • state "whether, given the financial situation of the "Carrefour" - "Antibes Nord" group and the fact that Mr COLLORAFI claimed he could not finance the "Straight licence" contract for Antibes-Ouest, the company Mc DONALD'S gave Mr COLLORAFI a "poisoned gift", as he seems to claim, or whether on the contrary it wished to give him an additional chance to pull through;" • The previous discussions (see question 5) lead the parties to state that Antibes Ouest was not a "poisoned gift". B. COLLORAFI specifies that he does not dispute the usefulness, for MAC DONALD'S, of opening Antibes Ouest but it seemed natural to him that its operation be entrusted to him, as well as that of Vallauris, since these two restaurants were located in his catchment area. Question 7 • "Considering that the experts must give their opinion on the consistency of the overall financial management of Mr COLLORAFI in the three companies until 1 January 1998;". • A discussion took place on the comparison of B. COLLORAFI's management with that of the company MAR on the one hand, and with that of the average of franchisees on the other. Two tables illustrating these comparisons had been sent to the experts in Maître LELOUP's submission of 16 April 1999 (appendices E1 and E2). Complementing the points already addressed in response to question 3, question 7 reopens the discussion on administrative costs and on the levels of profit after controllable expenses (PAC) of the restaurants managed by B. COLLORAFI. It is moreover recalled that the administrative costs recorded by the average of lease-managers amount to approximately 420 KF per year. B. COLLORAFI puts into perspective the results of the company MAR for the 2nd half of 1998 by indicating that MAC DONALD'S benefited from a drop in the cost of its raw materials and an increase in the selling prices of its products. The supplement to his third submission that Maître CLEMENT sends to the experts and to Maître LELOUP at the start of the meeting deals in particular with this point. The comments made otherwise by the parties on this question are set out in their submissions. Question 8 i "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;". • This question calls for no particular remarks. The discussions held on this question, which concern in particular administrative costs, are set out in the parties' submissions. Question 9 • "Considering that, on the other hand, the experts must give their opinion on another assertion contained in the document: "Objective No. 3": make the Restaurants profitable With the spreading of administrative costs over several restaurants, we will reduce administrative costs". "...; that in other words, the experts must state whether the increase in the cumulative royalties of the three restaurants could be offset by the reduction in their administrative costs;". • Apart from the remarks on administrative costs mentioned when analysing the tables in Mr GANDUR's report, this question prompts no other comments from the parties. Question 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 reach his "objective no. 2"". • This question, which it is for the company MAC DONALD'S to answer, gives rise to no particular comments. EXPERT EXAMINATION DOCUMENTS Documents handed over at the meeting • The experts give the parties a copy of the request for an additional deposit, dated 22 March 1999, which they sent to the Paris Court of Appeal. • Maître CLEMENT, counsel for the Appellants, gives the experts and Maître LELOUP an appendix to submission no. 3, dated 11 May 1999. Documents requested For the Appellant: » The monthly income statements of the companies SEBOL, B&0 and LES PINS and consolidated, for the year 1997, in the format of the tables prepared by Mr GANDUR (see question 3). › The clarifications relating to the item "manager salaries and social security contributions" (see question 3: Mr GANDUR's tables). For the parties: › All clarifications useful to the experts in assessing B. COLLORAFI's financial management such as the nature of the fixed costs saved when a second restaurant was opened, the amount of the salary and administrative costs of the average lease-managers, etc. CONTINUATION AND PROCEDURE OF THE EXPERT OPERATIONS On the delivery to the parties of a first preliminary expert report The experts inform the parties that they are awaiting from the Court the order for the deposit of the additional fee in order to continue the expert work. Nevertheless, on the probable assumption of an order at the end of May and of a deposit by the parties as soon as possible, it is agreed to send the parties a first preliminary report by 15 June 1999. The experts received a submission from Maître CLEMENT, dated 3 June 1999, which provides some of the clarifications requested from Mr COLLORAFI at the expert meeting. On the third expert meeting Insofar as the 15 June deadline can be met, the experts and the parties present jointly agree to convene a third expert meeting in order to hear the parties on the first preliminary expert report on: Thursday 15 July 1999 at 3.00 pm, 101, rue de Prony 75017 - Paris On the delivery to the parties of a second preliminary expert report Following the third expert meeting, it is planned to send the parties a second preliminary expert report by 25 July 1999. On the fourth expert meeting The experts and the parties present jointly agree to convene a fourth expert meeting in order to hear the parties on the second preliminary expert report on: Wednesday 8 September 1999 at 3.00 pm, 101, rue de Prony 75017 - Paris On the request for an extension of time The experts, in agreement with the parties, will request an extension of the time limit for filing their report, in order to allow the parties to express any observations they may have on the second expert report.? Paris, 9 June 1999 For the experts, one of them, Jean-Luc DUMONT Financial Expert at the Paris Court of Appeal The experts sent the Court, on 17 May 1999, a request for an extension of the time limit, to file the report on 25 October 1999. A fax from Maître CLEMENT, dated 7 June 1999, informing the experts of the meeting convened by the Pre-trial Judge (Conseiller de la mise en état) on 7 June, indicates that the Court has extended the time limit for filing the report to 30 September 1999.