1250264 ONTARIO INC.

Transcription

Court File No. CV09-392962-00CP
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Plaintiff
- andPET VALU CANADA INC.
Defendant
AFFIDAVIT OF EDWARD CASEY
(sworn April 16, 2010)
I, EDWARD CASEY, of the City of Toronto, in the Province of Ontario, MAKE
OATH AND SAY:
1.
I am the President of Pet Valu Canada Inc. ("Pet Valu"), the Defendant in this
proceeding, and, as such, I have knowledge of the matters stated herein. To
the extent that I do not have personal knowledge of the matters stated herein,
I have set forth the source of my information or belief and I do verily believe
same to be true.
2.
I make this affidavit in response to the motion to certify this action as a class
proceeding and for no improper purpose.
3.
On behalf of Pet Valu, I deny the allegations contained in the affidavit of
Robert Rodger ("Rodger") and the Statement of Claim.
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BACKGROUND AND HISTORY
4.
I am the President of Pet Valu and have held this position since August 2001.
Prior to my appointment as President, I held other senior management
positions with Pet Valu.
5.
Pet Valu is a company amalgamated under the laws of British Columbia with a
registered office located in Markham, Ontario. Pet Valu franchised stores are
specialty retailers of pet food and pet supplies.
6.
The first Pet Valu store was opened in Scarborough, Ontario in 1976. By 1987,
the number of stores had expanded to seventy-five (75) throughout Ontario.
7.
In the late 1980's, Pet Valu began to convert existing stores to franchises
while continuing to expand the number of stores in the Canadian marketplace.
In 1993, with more than one-hundred and sixty (160) stores, Pet Valu went
public on the Toronto Stock Exchange.
8.
In 1995, Pet Valu International Inc., then a sister company of Pet Valu, opened
its first U.S. store in Maryland.
9.
In 1998, Pet Valu purchased Paulmac's Pet Food Inc. ("Paulmac's PFI"),
which was a competitor with approximately fifty-five (55) stores located in
Ontario at the time, of which thirty-five (35) were franchised. Franchisees of
the system operate pet food and supplies retail stores under the name
"Paulmac's Pet Food". In 2009, Paulmac's PFI continued under the laws of
British Columbia as Paulmac's Pet Food ULC.
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10.
By 2005, there were more than three-hundred and fifty (350) franchised and
corporate Pet Valu stores located throughout Ontario, Manitoba, Maryland,
New Jersey, Virginia, Pennsylvania and Delaware.
11 .
On August 22, 2008, Pet Valu acquired four corporations: Pets Choice
Distributors Ltd., 1517256 Ontario Inc., 1202772 Ontario Ltd. and 869317
Ontario Ltd .. Together, these four entities operate a chain of fifteen (15) pet
food and supply retail stores operating under the "Berrys ... Your PetsChoice"
name. The purchased companies were amalgamated and eventually became
Your PetsChoice ULC ("Berry's"). The newly acquired stores were located
throughout eastern Ontario. The primary reasons for the acquisition were to
expand Pet Valu's presence in Ontario.
12.
Currently, Pet Valu operates three-hundred and fifty-eight (358) franchised
and corporate stores classifying its operations into two geographical operating
segments: Canadian operations and U.S. operations.
13.
The Canadian stores are operated by Pet Valu and two subsidiary
corporations, Paulmac's PFI and Berry's, under six different store names: "Pet
Valu", "Pet Valu Better Pet Nutrition", "Paulmac's Pet Food", "Critter Cravings"
and "Berrys ... Your PetsChoice". Together the stores comprise the largest
retail operation in Canada dedicated to the sale of food and supplies for dogs,
cats, caged birds, wild birds, fish and small animals.
14.
Currently, Pet Valu operates one-hundred and fourteen (114) corporately
owned stores under the "Pet Valu" and "Pet Valu Better Pet Nutrition" name
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one-hundred and four (104) located in Ontario and ten (10) located in
Manitoba.
15.
In addition to the corporately owned stores, there are currently one-hundred
and fifty-five (155) franchised stores operating as a "Pet Valu" store; onehundred and forty-five (145) located in Ontario and ten (10) located in
Manitoba.
16.
PV International Inc., which amalgamated with Pet Valu, Inc. in 2009 ("PV
International"), operates sixty (60) corporately owned stores under the "Pet
Valu" name in the United States. Additionally, PV International operates one
"Pet Valu" franchised store located in the United States; however, the
franchise consists of a franchise agreement between PV International and the
franchisee. The franchise agreement is significantly different from the
franchise agreement signed by Canadian franchisees. In the United States,
PV International retains ownership of all inventories and records the full
amount of store sales at the retail level. The franchisee purchases the store
equipment and is responsible for certain store operating costs, including
labour, for which the franchisee receives an allowance from PV International.
In addition, the franchisee is paid a royalty based on the sales and operating
performance of the franchised store. The royalties and store operating cost
allowances paid by PV International to the franchisee are recorded as store
operating expenses by PV International.
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17.
Paulmac's PFI currently operates five (5) corporately owned stores in Ontario
under the name "Paulmac's Pet Food". Additionally, there are currently
fourteen (14) franchised stores located in Ontario operating under the name
"Paulmac's Pet Food". The franchisees in the "Paulmac's Pet Food" franchise
system entered into agreements between Paulmac's PFI and the franchisee
and are different from the franchise agreement used in the "Pet Valu"
franchise system.
18.
Berry's currently operates nine (9) corporately owned stores in Ontario under
the name "Berrys ... Your PetsChoice". Berry's does not have any franchised
stores within its system.
19.
Pet Valu, which consists of its subsidiaries, Paulmac's PFI and Berry's,
currently
employs
approximately
seven-hundred
and
fourteen
(714)
employees throughout the corporate head office and the corporately owned
stores in Canada. Additionally, PV International employs approximately threehundred and twenty-seven (327) employees in the United States.
20.
Pet Valu stores offer a wide range of pet food and pet-related supply products
for dogs, cats, domestic and wild birds, fish, reptiles and small animals such
as hamsters and gerbils, including national and premium brand products. Pet
Valu stores also carry a broad range of private label dog, cat and other pet
foods marketed under trademarks owned by Pet Valu. Pet Valu stores also
offer customers a large variety of non-food products, such as rawhide
products, collars, leashes, flea and tick products, pet cages and carriers, dog
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and cat toys, cat litter and other pet-related accessories. These products
include both brand name and private label brands. Additional pet-related
supply products, not regularly carried by stores, are available by special order
from Peton warehouses.
21.
In Canada, some Pet Valu stores sell fish, birds, reptiles, and/or small animals
and some Pet Valu stores offer grooming services. Pet Valu stores in Canada
do not sell dogs or cats, although some do facilitate the adoptions of cats and
dogs on behalf of local animal welfare organizations.
RENICHING
22.
Pet Valu stores compete with four main types of competitors: (i) grocery
product retailers; (ii) pet specialty stores; (iii) pet product superstores; and (iv)
pet shops.
Grocery
product
retailers
include
grocery
stores,
mass
merchandisers, warehouse clubs and convenience retailers such as some
convenience stores, discount stores, drug stores and hardware general
merchandise stores.
23.
Competition in pet food and supply retailing increased throughout the 1990's
and into the early 2000's. Mass merchants, such as Wal-Mart, Canadian Tire
and Zellers, as well as grocery store chains, expanded their offerings and
reduced pricing to induce customer visits.
24.
Additionally, "big box" format pet specialty retailers, such as PetStuff and its
successor Pet Smart and Petcetera, began to expand and indulge in predatory
pricing as a result of their mass purchasing power and large retail facilities.
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25.
In the 1990's, margins for the Pet Valu stores, both corporately owned and
franchised, began to tighten. Pet Valu attempted to counteract the competition
from the "big box" format pet specialty retailers by commencing an action
against Pet Smart for contravening the Competition Act. Additionally, Pet Valu
began to heavily subsidize the franchisees in order to soften the effects of the
aggressive and predatory pricing. The subsidies were in the form of credits
given on invoices to the franchisees to lower the price of certain items that
were being sold by competitors at prices below the variable cost of the
products to franchisee who met those competitive prices.
26.
Pet Valu and the franchise system as a whole experienced a reduction in
sales as a result of the competition from the mass merchants and the "big box"
format specialty pet retailers. For example, in 2002 and 2003, the system wide
sales in the Canadian stores decreased by $0.7 million or 0.7% from 2002 to
2003. Furthermore, the comparable store sales decreased by 1.4% between
2002 and 2003. Attached hereto and marked as Exhibit" A" is a true copy of
the 2003 Annual Report for Pet Valu.
27.
In the early 2000's, Pet Valu met with its franchisees and formulated a strategy
wherein Pet Valu stores would focus on their core strength, namely, customer
service through relationships with customers based on trust of the franchisees'
knowledge and experience with pet nutrition.
28.
The reniching program centered on providing the customer with pet nutrition
and pet product advice that they could not get from the grocery stores or the
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"big box" format stores. Pet Valu undertook a reniching program in order to
compete against its competitors, who were able to sell products at a drastically
discounted price. The objective of the reniching program was to offer products
at competitive prices as well as to introduce higher margin, higher-quality
products, including private label and natural and wellness focused products,
and to seek to provide a convenient, friendly, service-oriented shopping
environment in which customers may discuss their pets and obtain product
information and advice about the care of their pets from knowledgeable staff.
29.
Pet Valu identified that a major advantage that its stores had over many of its
competitors, such as the grocery stores or mass merchants, was the ability to
provide knowledgeable, well-trained staff who, through training and focus on
the pet nutrition area, had the ability to explain to customers the differences in
pet products and why certain premium brands were preferable even though
they were more expensive than other products that were sold through grocery
stores mass merchandisers and "big box" pet product stores. Essentially, the
reniching program's objective was to position the Pet Valu store as the retailer
of premium quality pet food and supplies.
30.
As part of the reniching program, Pet Valu undertook to refine/test the
marketing strategies, shift in-store presentations and introduce new pet foods
in the holistic category, which were not available to the large competitors. The
other key component of the reniching program involved changing store
locations to reflect changes in consumer traffic patterns, shopping centre
developments and competitive dynamics between mass merchandiser and
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specialty stores. Attached hereto and marked as Exhibit "B" is a true copy of
a memorandum, dated November 6, 2002, provided to franchisees outlining
the reniching program and the changes to the Pet Valu system.
31.
The reniching program was not intended to be a quick fix but, rather, a longterm objective. However, the reniching program did result in some immediate
and positive results for the franchise system as a whole. In addition to
providing focus for the stores and franchisees, the reniching program resulted
in a gradual increase in comparable store sales for the franchise system. For
example, in 2004, the Pet Valu stores, including both the corporately owned
and franchised stores, experienced an increase of one per cent (1%) in
comparable store sales. Attached hereto and marked as Exhibit
"e" is a true
copy of the 2004 Annual Report for Pet Valu.
32.
The reniching program also resulted in the availability of higher gross profits
for Pet Valu and its franchisees. Not all franchisees benefitted equally as some
franchisees were more successful at selling their customers on the higherquality, higher-margin products. Attached hereto and marked as Exhibit "0"
is a true copy of a memorandum, dated June 12, 2009, entitled "Average
Franchisee Margins". The reniching generally resulted in margins that were
above historical levels through the mid-to-Iate 2000's.
33.
Pet Valu's reniching program has contributed to strong results for Pet Valu and
its franchisees. It has improved, and is expected to continue to improve,
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operating profits and enhance the image of Pet Valu stores as a specialty
retailer.
34.
For example, in contrast to the store sales in the early 2000's, as noted in
paragraph 26 above, in 2007, the comparable store sales increased in
Canada by 6.5% and, in 2008, by 5.5% in Canada and 8.4% in the U.S ..
Factors contributing to the increase in Canada include product differentiation
strategies, store image strategies, in-store inventory positions and retail price
inflation. As a result of differentiation strategies, higher margin product sales
have continued to show strong growth, while lower margin product sales
declines have moderated. Store image strategies and improved in-store
inventory positions have contributed to a more positive shopping experience
for customers, resulting in higher sales levels. Attached hereto and marked as
Exhibit "E" is a true copy of the 2008 Annual Report for Pet Valu. The 2008
Annual Report indicated an increase in the system-wide sales as well as the
comparable stores sales.
35.
Pet Valu now offers over seven thousand (7,000) products, including national
and premium brands of pet foods, private label pet foods and pet supplies,
purchased from over two-hundred (200) suppliers in eleven (11) countries.
PRIVATE LABEL
36.
An important component of the reniching program was the creation and
marketing of premium private label product, which would permit Pet Valu
stores to differentiate themselves from other pet food and supplies retailers.
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Pet Valu stores offer a broad assortment of premium, super premium and
holistic private label brands scientifically developed by internal nutritionists.
These include:
(a)
Performatrin Ultra® Dog & Cat Foods that embrace holistic nutrition,
focusing on functional, whole foods;
(b)
Performatrin® Dog & Cat Super Premium Foods that are nutritionally
advanced; and
(c)
Premium Health Diet®, Feline Cuisine® and Canine Cuisine® Dog &
Cat Foods.
37.
Pet Valu also has a natural dog shampoo line called Homepath™ and various
lines of cat litter, including: fresh4Life® Clumping Cat Litter for various life
stages; Kitty's Best™ Clumping Cat Litter; and Feline Classic™.
38.
Pet Valu's philosophy, as a result of the reniching program, is to provide pet
owners with a wide selection of pet food and supply products at competitive
prices,
together
with
knowledgeable,
friendly
customer
service
and
convenience of store location. Stores typically range in size from 1,200 to
4,000 square feet and are located in or near neighborhood shopping plazas.
Pet Valu franchisees and staff are knowledgeable about the needs of pets. Pet
Valu encourages them to sharpen their expertise through informative articles
and seminars.
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PETON DISTRIBUTORS ULC
39.
Peton Distributors ULC ("Peton") is a wholly owned subsidiary of Pet Valu.
Peton purchases, warehouses and distributes pet food and pet-related
supplies for and to all of the "Pet Valu", "Pet Valu Better Pet Nutrition",
"Paulmac's Pet Food", "Critter Cravings" and "Berrys ... Your PetsChoice"
stores in Canada and the United States as well as to PetFoodDirect.com,
which is a corporation, located in Harleysville, Pennsylvania, selling pet food
supplies on the internet, and not related to Pet Valu.
40.
Peton operates out of two (2) distribution facilities in Canada owned by its
affiliates and operates out of an additional eight (8) distribution facilities leased
in Canada and two (2) distribution facilities leased in the U.S., which are
located as follows:
OWNED WAREHOUSES IN CANADA
1
35 Bates Drive, Carleton Place, Ontario
2
2365 Whittington Drive RR#3, Peterborough, Ontario
LEASED WAREHOUSES IN CANADA
3
130 Royal Crest Court, Markham, Ontario
4
225 Royal Crest Court, Markham, Ontario
5
327 Neptune Crescent, London, Ontario
6
1211 Martin Grove Road, Units 6 & 7, Toronto, Ontario
7
121 McPherson Street, Markham, Ontario
8
5477 Gorvan Drive, Mississauga, Ontario
9
55 Valleywood Drive, Markham, Ontario
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10
127 Paramount Road, Winnipeg, Manitoba
LEASED WAREHOUSES IN THE UNITED STATES
41.
11
7079 Oakland Mills Road, Columbia, Maryland
12
181 Wheeler Court, Langhorne, Pennsylvania
The total space in these facilities is approximately 525,000 square feet. Most
of these facilities are located regionally to support delivery logistics.
42.
The distribution facilities are designed and located to maximize efficiency and
minimize costs, which benefits Pet Valu and its franchisees. For example, of
the twelve (12) distribution centres, the four larger ones, are dedicated to
warehousing either small pet products, large pet products or canned pet food.
The remaining distribution facilities are regional facilities warehousing and
distributing high volume food products.
43.
The distribution services in both Canada and the U.S. are provided by a fleet
of vehicles owned or leased by or on behalf of Peton and supplemented by
outside carriers and short-term rentals. The services provided include delivery
of merchandise and supplies to Pet Valu corporate stores and franchised
stores as well as pick up of merchandise from some suppliers.
44.
In 1997, under a prior owner, the Plaintiff ("Aurora Co.") commenced carry on
business as a Pet Valu franchisee in Newmarket, Ontario.
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45.
In the early 2000's, under its prior owner and at a different location, Aurora Co.
began to experience a decrease in its overall sales. The decrease in the sales
was attributed to the increased overall competition in the pet food and supply
marketplace. In addition, changing demographics and traffic in and near the
franchised business contributed to its power sales. For example, in late 2000,
Walmart vacated the plaza wherein Aurora Co.'s store was located causing a
decrease in the general traffic in the area. Moreover, on July 28, 2001,
Petcetera opened a competing "big box" format store in the Newmarket area
and Paws & Claws pet food store opened in a new plaza across the street
from Aurora Co ..
46.
As a result of the decline in sales suffered by Aurora Co., Pet Valu began to
search for a new area wherein Aurora Co. could re-Iocate its store in order to
increase its sales. In late October 2004, Aurora Co., with the assistance of Pet
Valu, re-Iocated its franchised store about four (4) kilometers south and two (2)
kilometers east from 16655 Yonge Street, Newmarket, Ontario to 15340
Bayview Avenue, Unit B2, Aurora, Ontario. This location which was deemed to
be a much more desirable location due to the demographics and the relative
lack of competition in the pet food and supply business in the area.
TRANSFER OF 1250264 ONTARIO INC. TO RODGER
47.
On March 17,2005, Rodger purchased the shares in Aurora Co ..
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48.
On March 21, 2005, Rodger commenced comprehensive training from Pet
Valu, including in bookkeeping, in order to ensure that he would be prepared
to operate the business prior to assuming the ownership of Aurora Co ..
49.
On April 4, 2005, Rodger executed a new franchise Agreement on behalf of
Aurora Co. ("Franchise Agreemenf'). The Franchise Agreement was effective
up to June 15, 2008 with an option to renew for a further five year term.
Attached hereto and marked as Exhibit "F" is a true copy of the Franchise
Agreement.
50.
Prior to executing the Franchise Agreement, Rodger retained Lionel B. White,
a.c.
('White") in order to assist him with the share transfer and to review the
Franchise Agreement and sublease for the business premises. Attached
hereto and marked as Exhibit "G" is a true copy of the Certificate of Legal
Advice re Franchise Agreement and Sublease executed by Rodger and White.
51.
Rodger was provided with full financial disclosure of Aurora Co. by its prior
owner, which included receiving a copy of the 2004 Financial Statements for
Aurora Co .. Attached hereto and marked as Exhibit "H" is a true copy of the
facsimile, dated March 9, 2005, from Rodger's counsel, White, to Pet Valu
enclosing a copy of the 2004 Financial Statements.
52.
Interestingly, the 2004 Financial Statements indicated that the total sales in
2004 were $224,740.00, a decrease from $232,693.00 in 2003. Additionally,
Aurora Co. experienced a net loss for 2004 of $58,498.00 as opposed to a net
loss of $61,673.00 in 2003. There is no doubt that Rodger knew, or ought to
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have known from reviewing the 2004 Financial Statements, that the purchase
of Aurora Co. was not a "get rich quick" scheme.
BREACHES OF FRANCHISE AGREEMENT
53.
Unfortunately, since Rodger took control of the business, Aurora Co. has had
numerous defaults under the Franchise Agreement.
Failure to Pay Pet Valu on a Timely Basis
54.
The Franchise Agreement, in particular, Articles 18(b) and 22(d) thereof,
require Aurora Co. to pay its royalties and merchandise costs from Pet Valu on
a weekly basis. In order to facilitate the payment of all of the fees and
inventory costs, Pet Valu requires that all fees and inventory be paid by means
of a pre-authorized payment system in accordance with Schedule E of the Pet
Valu Business Franchise System. Attached hereto and marked as Exhibit "I"
is a true copy of the Pet Valu Franchise Business System.
55.
Since April 4, 2005, when Rodger took over the ownership of Aurora Co.,
Aurora Co. failed to pay invoices, in accordance with the aforesaid provisions
of the Franchise Agreement and Pet Valu Franchise Business System, on the
following twenty (20) occasions:
(a)
Cheque number 0036, dated September 8, 2005, provided as payment
for Pet Valu invoice number 509-648, was returned for insufficient
funds. Attached hereto and marked as Exhibit "J" is a true copy of the
letter, dated September 16, 2005, from Pet Valu to Rodger providing
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notice of the default and a copy of the dishonoured cheque and Pet
Valu internal email correspondence regarding the default;
(b)
Cheque number 0041, dated August 9, 2005, provided as payment for
Pet Valu invoice number 510-652, was returned for insufficient funds.
Attached hereto and marked as Exhibit "K" is a true copy of the letter,
dated October 12, 2005, from Pet Valu to Rodger providing notice of
the default and a copy of the dishonoured cheque and Pet Valu internal
email correspondence regarding the default;
(c)
Cheque number 0114, dated January 19, 2006, provided as payment
funds. Attached hereto and marked as Exhibit "L" is a true copy of the
letter, dated January 25, 2006, from Pet Valu to Rodger providing
(d)
Cheque number 0142, dated July 27, 2006, provided as payment for
Attached hereto and marked as Exhibit "M" is a true copy of the letter,
dated August 1, 2006, from Pet Valu to Rodger providing notice of the
default and a copy of the dishonoured cheque and Pet Valu internal
(e)
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Attached hereto and marked as Exhibit "N" is a true copy of the letter,
(f)
Attached hereto and marked as Exhibit "0" is a true copy of the letter,
dated September 6, 2006, from Pet Valu to Rodger providing notice of
the default and a copy of the dishonoured cheque and Pet Valu internal
(g)
Cheque number 0002, dated October 26, 2006, provided as payment
funds. Attached hereto and marked as Exhibit "P" is a true copy of the
letter, dated November 1, 2006, from Pet Valu to Rodger providing
(h)
Attached hereto and marked as Exhibit "Q" is a true copy of the letter,
dated July 31, 2007, from Pet Valu to Rodger providing notice of the
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(i)
Attached hereto and marked as Exhibit "R" is a true copy of the letter,
U)
Attached hereto and marked as Exhibit "S" is a true copy of the letter,
default;
(k)
Cheque number 0500, dated October 30, 2008, provided as payment
funds. Attached hereto and marked as Exhibit "T" is a true copy of the
(I)
Cheque number 0564, dated November 20, 2008, provided as payment
funds. Attached hereto and marked as Exhibit "U" is a true copy of the
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(m)
Cheque number 0631, dated April 9,2009, provided as payment for Pet
Valu invoice number 904-837, was returned for insufficient funds.
Attached hereto and marked as Exhibit "V" is a true copy of the letter,
dated April 17, 2009, from Pet Valu to Rodger providing notice of the
(n)
Cheque number 0682, dated May 28, 2009, provided as payment for
Attached hereto and marked as Exhibit "W" is a true copy of the letter,
dated June 2, 2009, from Pet Valu to Rodger providing notice of the
(0)
Cheque number 0695, dated July 9,2009, provided as payment for Pet
Valu invoice number 907-850, was returned for insufficient funds.
Attached hereto and marked as Exhibit "X" is a true copy of the letter,
dated July 16, 2009, from Pet Valu to Rodger providing notice of the
(p)
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Attached hereto and marked as Exhibit "V" is a true copy of the
dishonoured cheque and Pet Valu internal email correspondence
regarding the default;
(q)
Attached hereto and marked as Exhibit "Z" is a true copy of the letter,
default and Pet Valu internal email correspondence regarding the
default;
(r)
Cheque number 0782, dated November 26, 2009, provided as payment
funds. Attached hereto and marked as Exhibit "AA" is a true copy of
the letter, dated December 16, 2009, from Pet Valu to Rodger providing
notice of the default;
(s)
Cheque number 0830, dated March 25, 2010, provided as payment for
Pet Valu invoice number 1003-890, was returned for insufficient funds;
and
(t)
Cheque number 0831 dated March 31, 2010, provided as replacement
payment for dishonoured cheque 0830, was returned for insufficient
funds.
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56.
Additionally, due to the number of dishonoured cheques provided by Aurora
Co. in 2009, Pet Valu became concerned that Aurora Co. and Rodger were
not paying all other creditors as their invoices became due and payable as
required by Article 20 of the Franchise Agreement and Section 18 of Part E of
the Pet Valu Franchise Business System. Accordingly, on August 25, 2009,
Pet Valu conducted a search of the Personal Property Security Registry in
order to determine whether there were any other unpaid creditors. Pet Valu
discovered that on May 15, 2007, the Ministry of Finance for the Province of
Ontario registered a lien against the personal property of Aurora Co. for
unpaid retail sales taxes. Further, on April 28, 2008, the Ministry of Finance for
the Province of Ontario registered a further lien. Attached hereto and marked
as Exhibit "88" is a true copy of a facsimile, dated September 3, 2009, from
Barook to Lloyd Hoffer, counsel for Aurora Co. and Rodger at the time,
providing notice of the lien, which constituted a default of the Franchise
Agreement, and enclosing a copy of the Personal Property Security Registry
search results, dated August 25, 2009, for Aurora Co ..
57.
As of April 16, 2010, a search of the Personal Property Security Registry
reveals that the lien by the Ministry of Finance has not been discharged.
Attached hereto and marked as Exhibit "CC" is a true copy of Personal
Property Security Registry conducted on April 16, 2010.
Royalties Adjustment and Financial Statements
58.
Pet Valu currently, and historically, has two different methods of collecting
royalties and percentage rent. First, franchisees pay royalties based upon their
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actual gross sales. Thus, the franchisee is required to seJl its product and
report the sale of the product to Pet Valu, who, in turn, would charge both
royalties and percentage rent on the figures reported by the franchisee.
Currently, the self-reporting occurs through the use of the POS system.
59.
Due to the possibility of a franchisee failing to record the sale, and thus avoid
paying royalties and percentage rent on the sale of the item, Pet Valu
introduced a system where franchisees paid royalties and rent on the basis of
their imputed gross sales. The benefit of initiaJly charging royalties based upon
weekly imputed gross sales is that it reduces the costs of bookkeeping and
auditing procedures for both Pet Valu and the franchisees and avoids the
temptation to avoid reporting sales.
60.
Throughout the class period proposed by Rodger, the number of franchisees
paying royalties based upon each system varies.
61.
The Franchise Agreement, in particular, Articles 18(b) and (f) thereof, require
Aurora Co. to pay its royalties, percentage rent and revenue surcharge, on a
weekly basis, based upon the imputed gross sales for the franchised store.
However, the royalties, percentage rent and revenue surcharge are required to
be adjusted if a franchisee either under reports its outside purchases or
charges higher than the suggested maximum retail price, upon which imputed
gross sales are calculated.
62.
The normal process for Pet Valu is to conduct an annual review, based upon
the financial information provided by the franchisee, which will result in a
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determination of whether the imputed sales match the actual sales reported by
the franchisee. If the results show that the imputed and actual sales are within
one per cent (1 %) of each other, no further action is taken. If imputed sales
exceed actual sales, no action is taken. If the actual sales exceed the imputed
sales, the franchisee is charged percentage rent and royalties on the
difference.
63.
In these circumstances, Aurora Co. has failed to properly provide annual
financial statements or balance sheets to Pet Valu as required by Article 16(f)
of the Franchise Agreement.
64.
On numerous occasions since Rodger became the sole shareholder of Aurora
Co., representatives of Pet Valu have verbally requested that Aurora Co.
provide the financial information in accordance with Article 16(f) of the
Franchise Agreement. Additionally, on numerous occasions, Pet Valu has
requested the financial information in writing as outlined below.
65.
On January 29, 2008, Jim Young ("Young"), Assistant Vice President,
Operations, at Pet Valu, sent a letter requesting the Financial Statements for
the fiscal years ending 2005, 2006 and 2007. Attached hereto and marked as
Exhibit
66.
''~O''
is a true copy of the said letter.
Rodger responded to Young's correspondence by acknowledging that he had
not provided the financial statements for 2005, 2006 and 2007, although he
would attempt to do so as soon as possible. Attached hereto and marked as
- 25 -
Exhibit "EE" is a true copy of the letter, dated February 15, 2008, from
Rodger to Young.
67.
In any event, on or about May 19, 2009, Rodger, on behalf of Aurora Co.,
provided the financial statements for Aurora Co. for the fiscal years 2006 and
2007. Attached hereto and marked as Exhibit "FF" is a true copy of the 2006
Financial Statement for Aurora Co .. Attached hereto and marked as Exhibit
"GG" is a true copy of the 2007 Financial Statement for Aurora Co ..
68.
Due to the failure of Aurora Co. to provide the annual financial statements
within the time prescribed by the Franchise Agreement, Pet Valu was not able
to conduct a review of the actual sales for Aurora Co. in order to conduct an
adjustment of the royalties, percentage rent and revenue surcharges.
69.
After receiving the requested financial information, along with the year end
inventory valuation for the franchised store, Pet Valu commenced its review of
the actual gross sales to determine whether Aurora Co. owed a further amount
for the royalties, and percentage rent.
70.
After the review was conducted, it was determined that Aurora Co. owed to
Pet Valu a further sum of $10,077.25 for the adjustment of the percentage rent
and $7,557.94 for the adjustment of the royalties. Attached hereto and marked
as Exhibit "HH" is a true copy of the letter, dated September 26, 2008, from
Pet Valu to Aurora Co. providing notice of the actual sales in excess of the
imputed gross sales for the period of April 4, 2005 to December 29, 2007,
along with a schedule outlining the calculation of the excess. The total amount
- 26-
outstanding to Pet Valu is $18,516.95, which represents the percentage rent
and royalties owing on $125,965.59 in actual sales in excess of the imputed
gross sales for the same period.
71.
The calculation of the excess was based upon, in part, the year end inventory,
as supplied by Aurora Co. for the period ending December 29,2007. Attached
hereto and marked as Exhibit "II" is a true copy of the Franchisee Inventory
Count Sheet, dated December 26, 2007, signed by Rodger on behalf of
Aurora Co .. Attached hereto and marked as Exhibit "JJ" is a true copy of the
Franchise Year End Inventory Reconciliation.
72.
In 2009, Pet Valu undertook a similar process for the period between
December 30, 2007 to April 4, 2009. After the review was conducted, it was
determined that Aurora Co. owed to Pet Valu a further sum of $7,193.13 for
the adjustment of the percentage rent and $5,394.85 for the adjustment of the
royalties. Attached hereto and marked as Exhibit "KK" is a true copy of the
letter, dated December 16, 2009, from Pet Valu to Aurora Co. providing notice
of the actual sales in excess of the imputed gross sales for the period of
December 30, 2007 to April 4, 2009, along with a schedule outlining the
calculation of the excess. The total amount outstanding to Pet Valu is
$13,217.38, which represents the percentage rent and royalties owing on
$89,914.09 in actual sales in excess of the imputed gross sales for the same
period.
- 27-
73.
Pet Valu has, on numerous occasions, requested that Aurora Co. pay to Pet
Valu the excess calculation adjustments, however, to date, Aurora Co. has
failed to pay the outstanding amount of $32,901.19 as of February 8, 2010,
plus interest in the amount of $3.70 accruing on a daily basis pursuant to
Article 20(d) of the Franchise Agreement, although properly due and owing.
Attached
hereto and
marked as Exhibit "LL"
is a true
copy of
,
correspondence, dated February 8, 2010, from Geoffrey B. Shaw, counsel for
f
Pet Valu, to Sterns demanding payment. The failure of Aurora Co. to pay the
I
outstanding amount continues to constitute a breach of the Franchise
Agreement.
74.
Despite repeatedly advising Rodger of the necessity of providing the annual
financial statements on a timely manner, Aurora Co. failed to provide its 2008
Financial Statement in the time prescribed by the Franchise Agreement.
Attached hereto and marked as Exhibit "MM" is a true copy of
correspondence, dated January 16, 2009, from Pet Valu to Rodger requesting
the 2008 Financial Statement for Aurora Co .. Attached hereto and marked as
Exhibit "NN" is a true copy of the correspondence dated, November 6, 2009,
from Pet Valu to Rodger requesting the 2008 Financial Statement for Aurora
Co ..
75.
On December 2, 2009, Rodger sent to Thomas McNeely ("McNeely"), Chief
Executive Officer of Pet Valu, and Young a copy of the 2008 Financial
Statement for Aurora Co .. Attached hereto and marked as Exhibit "00" is a
true copy of the email correspondence from Rodger attaching the 2008
- 28-
Financial Statement, along with the 2008 Financial Statement for Aurora Co ..
Aurora Co. delivered to Pet Valu the 2008 Financial Statements more than
eighteen (18) months after they was required to be provided to Pet Valu.
76.
Despite repeated requests, including in the correspondence, dated December
16, 2009, sent from Pet Valu to Aurora Co. referred to above, Aurora Co.
failed to provide its 2009 Financial Statements to Pet Valu until February 9,
2010, which is more than eight (8) months after they were required to be
provided. Attached hereto and marked as Exhibit "PP" is a true copy of the
email correspondence from Sterns to Pet Valu's counsel attaching a copy of
the 2009 Financial Statements.
77.
The failure of Aurora Co. to provide the required Financial Statements on a
timely basis is problematic for two reasons. First, it hinders the ability of Pet
Valu to reconcile the actual gross sales of the franchised business with the
imputed gross sales in order to determine whether there is any excess or
credit owing on the royalties and percentage rent.
78.
Second, the financial statements permit Pet Valu to assess the financial state
of each franchisee in order to assist the franchisee with operating the
franchised business and earn a profit. For example, a review of the 2006
Financial Statements for Aurora Co. indicates the following issues:
(a)
The 2006 Financial Statements indicate that the actual sales for Aurora
Co. were $624,647.00, however, the point-of-sale system ("POS
- 29-
System") at the franchised business indicates that the actual sales were
$660,868.00. The difference is approximately three weeks of sales.
(b)
The 2006 Financial Statements indicate that the purchases attributed to
Aurora Co. were $422,703.00, however, Pet Valu billing records
indicates that the purchases were $378,252.00, which consists of
$369,494.00 of product purchased from Pet Valu and $8,758.00 of
products reported by Aurora Co. as purchased from another supplier.
The difference between the purchases contained in the 2009 Financial
Statement and Pet Valu records is $44,451.00.
(c)
The 2006 Financial Statements indicate that the gross profit for Aurora
Co. was $245,743.00, however, as a result of the differences in the
reported sales and purchases, Pet Valu calculated the actual gross
profit as $326,315.00, which is $80,572.00 higher.
(d)
The 2006 Financial Statements indicate that the royalties and franchise
fees paid by Aurora Co. during the 2006 fiscal year were $38,153.00,
which is approximately $3,500.00 less than the actual royalties and
franchise fees paid during that time.
(e)
The 2006 Financial Statements indicate that the utilities for the
franchised business were $17,212.00, or approximately $7.63 per
square foot. The utilities for the corporately-owned stores averaged
approximately $2.00 per square feet, which is more in line with the
$1.42 per square feet estimated in the business plan for Aurora Co ..
- 30-
The difference in the cost of utilities for Aurora Co. versus the
corporately-owned stores is approximately $13,000.00 for the 2006
fiscal year.
(f)
The 2006 Financial Statements indicate that the supplies for the fiscal
year were $13,375.00 or 2.1% of the reported sales. The corporatelyowned stores averaged a cost of supplies in the amount of 0.75% of
sales for the 2006 fiscal year. Applying a similar cost of supplies for the
franchised business would result in a reduction in the cost of supplies
by approximately $8,000.00.
(g)
The 2006 Financial Statements indicate that $11,675.00 for "office and
general", which is not a line item expense normally appearing on a Pet
Valu franchised business financial statements.
(h)
The 2006 Financial Statements indicate that $10,293.00 is attributed to
"automobile, operating", presumably, an expense that Rodger receives
a direct benefit.
(i)
insurance, which, presumably, due to the high premiums, also includes
the auto insurance for Rodger.
U)
The 2006 Financial Statements indicate that $3,404 is attributed to
"telecommunications", which is approximately $1,200.00 higher than the
average telecommunications expense for the corporately-owned stores.
- 31 -
(k)
The 2006 Financial Statements indicate that the amount owed to the
shareholder decreased from $385,795.00 in 2005 to $340,985.00,
presumably, the difference of $44,810.00 was paid to Rodger as the
sole shareholder.
79.
A similar analysis is applicable to the 2007 Financial Statements. A review of
the 2007 Financial Statements for Aurora Co. indicates the following issues:
(a)
Co. were $786,501.00, however, the POS System at the franchised
business indicates that the actual sales were $814,034.00. The
difference is approximately two weeks of sales.
(b)
indicates that the purchases were $464,769.00, which are all products
purchased from Pet Valu. Aurora Co. did not report any purchases of
products from another supplier. The difference between the purchases
contained in the 2007 Financial Statement and Pet Valu records is
$147,435.00.
(c)
profit as $359,166.00, which is a staggering $174,969.00 higher.
- 32-
(d)
;.f:
I
fiscalyea~
~;
?
(e)
"automobile, operating", presumably, an expense that Rodger receives
a direct benefit.
(f)
shareholder decreased from $340,985.00 in 2006 to $333,089.00 in
2007, presumably, the difference of $7,896.00 was paid to Rodger as
the sole shareholder.
80.
A similar analysis is applicable to the 2008 Financial Statements. A review of
the 2008 Financial Statements for Aurora Co. indicates the following issues:
(a)
Co. were $957,768.00, however, the POS System at the franchised
business indicates that the actual sales were $1,000,984.00.
- 33 -
(b)
Statements and Pet Valu records is $163,033.00.
(c)
profit as $459,803.00, which is a staggering $206,549.00 higher.
(d)
The 2008 Financial Statements indicate that the wages paid by Aurora
Co. were $80,441.00, however, the 2007 Financial Statements
indicated that the wages for the 2007 fiscal year were only $28,514.00.
The wages for Aurora Co. almost tripled between the 2007 fiscal year
and the 2008 fiscal year.
(e)
insurance, which, presumably, due to the high premiums, also includes
the auto insurance for Rodger. The insurance premiums are more than
two and a half times the cost of insurance for Aurora Co. as stated in
the 2007 Financial Statements.
- 34-
(f)
fiscal year.
(g)
shareholder was $386,028.00, which is approximately the same amount
as the $385,795.00 reported for the 2005 fiscal year.
81.
Finally, a review of the 2009 Financial Statements for Aurora Co. indicates the
following issues:
(a)
Co. were $1,020,884.00, however, the POS System at the franchised
business indicates that the actual sales were $1,019,961.00.
(b)
- 35 -
Statement and Pet Valu records is $46,645.00.
(c)
profit as $378,486.00, which is $45,272.00 higher.
(d)
franchised business were $9,369.00, or approximately $4.15 per square
foot.
The
utilities
for
the
corporately-owned
stores
averaged
corporately-owned stores is approximately $6,000.00 for the 2009 fiscal
year.
(e)
The 2009 Financial Statements indicate that the wages paid by Aurora
Co. increased approximately 36% from $80,441.00 in 2008 to
$109,125.00 in 2009, while sales only grew by approximately 6.5%.
(f)
The 2009 Financial Statements indicate that the insurance paid by
Aurora Co. in 2009 was $14,421.00, despite the fact that Pet Valu
negotiated an arrangement for all franchisees to pay $554.00 for
property and liability insurance.
- 36-
(g)
The 2009 Financial Statements indicate that Aurora Co. paid $8,101.00
to operate an automobile, presumably, an expense that Rodger
receives a direct benefit.
82.
A review of the financial statements recently provided by Aurora Co. is
problematic for Pet Valu as there are serious discrepancies between the sales
and purchases reported, which have a serious impact on the gross profits.
Moreover, the under reporting of the gross profits results in Pet Valu losing the
payment of royalties, percentage rent and surcharges on the $507,812.00.
83.
Due to the discrepancies in the financial statements provided by Aurora Co.,
Pet Valu invoked its right, pursuant to Article 18(i) of the Franchise Agreement,
to require Aurora Co. to submit to an audit. Pet Valu retained KPMG LLP to
attend at Aurora Co. to audit the financial records over the years 2006 through
2009. Pet Valu has undertaken to pay the cost of the audit itself pending the
outcome of the motion. Attached hereto and marked as Exhibit "QQ" is a true
copy of the correspondence, dated February 23, 2010, from Pet Valu's
counsel to Sterns.
84.
The issues arising from the annual financial statements for Aurora Co. are the
result of Rodger's refusal to properly follow the system put in place by Pet
Valu. For example, on January 10, 2006, Rosanna Orrico-Simone ("OriccoSimone"), a representative of Pet Valu, attended at the franchised store
operated by Aurora Co., she was advised by Rodger that he was incorrectly
recording the sale of merchandise purchased from third party suppliers.
- 37 -
Rodger, at the time, was using the inventory control number for merchandise
supplied by Pet Valu and then adjusting the price to the amount of the sale.
The method employed by Rodger was in contravention of the Franchise
Agreement because it unduly affected the cost of the merchandise versus the
retail sale price. Thus, Pet Valu would not be able to properly track the
inventory and sales in order to charge the appropriate royalties, percentage
rent and/or revenue surcharges. Attached hereto and marked as Exhibit "RR"
is a true copy of the email correspondence, dated January 10, 2006, wherein
Orrico-Simone reports the aforesaid conduct to Young.
85.
For example, in fiscal year 2009, Aurora Co. processed sales through the POS
System of item number 20182, which is a private label cat food (that is only
available through Peton) with a retail price of $0.99, in the amount of
$63,265.61, despite the fact that Aurora Co. only purchased one-hundred and
ninety-two (192) cans during that same period. In October, 2008, the retail
price of item number 20182 increased to $1.09 per can and Aurora Co.
subsequently ceased processing sales through the POS System using the
item number.
86.
In November, 2008, Aurora Co. began processing sales of item number
21822, which is a private label canned cat food with a retail price of $0.99.
Between November, 2008 and March, 2009, the date when the retail price of
the item number increased to $1.09, Aurora Co. processed through the POS
System $36,650.00 in sales for the item, despite the fact that Aurora Co. had
only purchased twenty-four (24) cans of the product during that same period.
- 38 -
87.
Finally, in March, 2009, Aurora Co. began processing sales of item number
41950, which is a rodent salt spool with a retail price of $0.99. Between March,
2009 and December, 2009, Aurora Co. processed through the P~S System
$34,533.00 in sales, however, during that same period, Aurora Co. did not
purchase any of the items from Pet Valu.
88.
P~S
Rodger and the staff at Aurora Co. were manipulating the
System in
order to sell other merchandise, likely merchandise purchased from a third
party supplier or multi-dollar sale items, with the effect that Pet Valu could not
track the actual sales of the franchised business. In addition to making it
difficult for Pet Valu to track the actual sales, the manipulation of the P~S
System would have the effect of producing a false or inaccurate receipt for the
customer, and thereby compromising the integrity of the Pet Valu brand.
89.
The manipulation of the sales processed through the
P~S
System is not an
issue arising from one rogue or incompetent clerk employed by Aurora Co ..
Rather, the manipulation of the items processed through the
P~S
System is
occurring through the use of all of the clerk codes, including the clerk code
assigned to Rodger.
90.
The issue of the
P~S
System has been a persistent problem with Rodger. For
some reason, Rodger does not believe that the
his purposes, despite the fact that the
for the Pet Valu franchise system.
Chronic Lack of Profitability
P~S
P~S
System was adequate for
System was specifically designed
- 39-
91 .
Rodger's claim that Aurora Co. has a "chronic lack of profitability" is, quite
bluntly, not the result of the fees or charges of Pet Valu but, rather, Rodger's
failure to properly use the POS Systems, as noted above, Rodger's failure to
ensure that the expenses of Aurora Co. are reasonable and commensurate
with the expenses of other Pet Valu stores, as noted above, and, finally,
Rodger's failure to properly account for the cash contained in the cash register
for the franchised business.
92.
In particular, every year that Rodger has operated Aurora Co., Aurora Co. has
posted a substantial withdrawal of funds from the cash register. The following
sums were removed from the cash register for Aurora Co. since April 4, 2005:
(a)
April, 2005 to April, 2006 - $60,074.79. Attached hereto and marked as
Exhibit "55" is a true copy of the Cash Paid Out Transaction Details
for the period between April 1,2005 to March 31,2006 for Aurora Co.;
(b)
Exhibit "TT" is a true copy of the Cash Paid Out Transaction Details
for the period between April 1,2006 to March 31,2007 for Aurora Co.;;
(c)
Exhibit "UU" is a true copy of the Cash Paid Out Transaction Details
for the period between April 1,2007 to March 31,2008 for Aurora Co.;;
(d)
Exhibit "VV" is a true copy of the Cash Paid Out Transaction Details
- 40-
for the period between April 1,2008 to March 31, 2009 for Aurora Co.;
and
(e)
April 1, 2009 to January 8, 2010 - $9,005.29. Attached hereto and
marked as Exhibit "WW" is a true copy of the Cash Paid Out
Transaction Details for the period between April 1, 2009 to January 8,
2010 for Aurora Co ..
RENEWAL OF THE FRANCHISE AGREEMENT
93.
In accordance with Article 5(a) of the Franchise Agreement, Aurora Co.'s term
was scheduled to expire on June 15, 2008.
94.
Prior to the expiration of the Franchise Agreement, Young advised Rodger that
Aurora Co. had failed to regularly perform and observe all of its obligations
under the Franchise Agreement.
95.
Rodger advised Young that he intended to rectify the outstanding defaults of
the Franchise Agreement, including, properly maintaining the required
inventory levels, in accordance with the POS System, and providing the
annual financial statements on a timely basis. As a result, Pet Valu offered to
extend the Franchise Agreement for a term of one (1) year (i.e. until June 15,
2009). Attached hereto and marked as Exhibit "XX" is a true copy of the
Letter Agreement, dated June 5, 2008, wherein the parties agreed to extend
the term of the franchise for a further one (1) year period ("2008 Letter
Agreement").
- 41 -
96.
Prior to the expiration of the 2008 Letter Agreement, Young, once again,
contacted Rodger in order to discuss the fact that Aurora Co. was in chronic
breach of the Franchise Agreement. In particular, Aurora Co. consistently
failed to properly order merchandise in accordance with the inventory control
number. Once again, Rodger agreed to correct the default. As a result, Pet
Valu offered to extend the Franchise Agreement for a term of four (4) year (i.e.
until June 15, 2013). Attached hereto and marked as Exhibit "YY" is a true
copy of the Letter Agreement, dated June 15, 2009, wherein the parties
agreed to extend the term of the franchise for a further four (4) year period
("2009 Letter Agreemenf').
RODGER'S ATTEMPT TO SELL AURORA CO.
97.
Despite Rodger's assurances that he intended to cure the defaults contained
in the 2008 Letter Agreement and 2009 Letter Agreement, Rodger failed to
take any steps to correct his practice of improperly ordering merchandise
and/or improperly tracking the sale of merchandise through the POS System.
Attached hereto and marked as Exhibit "ZZ" is a true copy of an email
correspondence, dated July 28, 2009, from Orrico-Simone providing a report
of her meeting with Rodger.
98.
Furthermore, despite the fact that Rodger had executed the 2009 Letter
Agreement and, thus, renewing the Franchise Agreement until June 15, 2013,
Rodger immediately began to express his frustration with the Pet Valu
franchise system and his desire to sell his franchised business to Pet Valu.
Attached hereto and marked as Exhibit "AAA" is a true copy of an email
- 42-
exchange between Rodger and Young between July 14, 2009 and August 17,
2009. In said email exchange.RodgerstatedonAugust17.2009that •.this
relationship has got to end".
99.
Pet Valu wished to see the relationship between Aurora Co. and Pet Valu
continue, therefore, Young attempted to provide some advice and assistance
to Rodger with respect to the operation of the franchised business. In
particular, Young outlined areas in which Aurora Co. could decrease expenses
in order to increase its profitability. Attached hereto and marked as Exhibit
"BBB" is a true copy of email correspondence, dated August 18, 2009, from
Young to Rodger attaching a Franchised Business Valuation Estimator.
100.
It became immediately clear that Rodger no longer intended to attempt to take
the necessary steps in order to make the franchised business viable but,
rather, Rodger had decided that the franchised business must be purchased,
at a premium price, by Pet Valu.
101.
Rodger engaged in a discussion with Young for Pet Valu to purchase the
franchised business. I have been advised by Young that he spoke with Rodger
on numerous occasions with respect to the purchase of the franchised
business and, further,
that Young kept notes with
respect to said
conversations. Attached hereto and marked as Exhibit "CCC" is a true copy
of the handwritten notes of Young from his telephone conversation with
Rodger on August 25,2009. Attached hereto and marked as Exhibit "DOD" is
- 43 -
a true copy of the handwritten notes of Young from his telephone conversation
with Rodger on September 11, 2009.
102.
I have been further advised by Young that, on September 1, 2009, Rodger
contacted him with respect to the potential purchase of his franchised
business by Pet Valu. Rodger advised Young that his "opening position",
regarding the value of his franchised business, is $951,855.00. Moreover,
Rodger indicated that his accountant was preparing a formal valuation of his
business. Attached hereto and marked as Exhibit "EEE" is a true copy of the
handwritten notes of Young from his telephone conversation with Rodger on
September 1, 2009. Attached hereto and marked as Exhibit "FFF" is a true
copy of email correspondence on September 1, 2009 from Rodger to Young
attaching a copy of the Franchised Business Valuation Estimator and Rodger's
modified version of same.
103.
To date, Rodger has not provided a copy of a valuation report from his
accountant indicating, in his opinion, the value of Aurora Co ..
104.
Rodger retained Hoffer, once again, to assist him and participate in the
possibility of Pet Valu purchasing the franchised business from Aurora Co ..
Attached hereto and marked as Exhibit "GGG" is a true copy of the facsimile,
dated August 27, 2009, from Hoffer indicating that he represented Rodger
"concerning the possibility of a buy-out of the franchise".
105.
I have been advised by Young that, on September 17, 2009, Rodger
contacted him in order to discuss the possibility of Pet Valu purchasing the
- 44-
franchised business from Aurora Co .. During said telephone conversation,
Rodger indicated to Young that he believed that the franchised business was
worth $625,000.00 and inquired whether Pet Valu believed that the price was
reasonable. Young advised Rodger that Pet Valu does not intend to purchase
his franchised business and, moreover, $625,000.00 was a greatly inflated
value.
106.
I have been further advised by Young that, during the telephone call, Rodger
stated to him that, if Pet Valu was not prepared to pay his asking price, then
he was prepared to retain his "personal friend", "Sotos", in order to commence
a class action against Pet Valu. Sterns, a litigator at Sotos LLP, is well known
in franchising circles as a niche prosecutor of issues relating to rebates in
franchising businesses such as Bulk Barn, Quiznos, Midas and A&P.
107.
On September 18, 2009, Rodger sent email correspondence to me requesting
a formal offer to purchase the franchised business from Aurora Co .. My
response, on September 21, 2009, was simply, ''we are not interested in
purchasing the store back". Attached hereto and marked as Exhibit "HHH" is
a true copy of the email exchange between Rodger and Casey.
108.
The next correspondence that Pet Valu received, after I rejected Rodger's
demand that Pet Valu purchase his business, was a letter, dated November 4,
2009, from Sterns wherein Sterns demands information with respect to the
vendor rebates received by PET VALU without providing any evidence to
support any claim, even though Aurora Co. was obligated by its franchise
- 45-
agreement with PET VALU to provide at a minimum some evidence that the it
could find better prices form another supplier on a scale that would support a
claim. Attached hereto and marked as Exhibit "III" is a true copy of the said
correspondence from Sterns.
109.
On November 23, 2009, Rodger sent email correspondence to McNeely
indicating that he had instructed Sterns to move forward with the class action
on the basis that he and Pet Valu could not reach an agreement with respect
to the purchase of his business. Rodger stated that "I cannot however see us
coming to an agreement regarding a buyout as you are talking about 300k and
I'm more than double that. Given this I have conveyed to David to move
forward." Attached hereto and marked as Exhibit "JJJ" is a true copy of the
email correspondence, dated November 23, 2009, from Rodger to McNeely.
COMMON ISSUES
Improper Mark-up on Private Label Products
110.
One of the common issues identified in Rodger's affidavit is whether Pet Valu
marks up private label products by more than ten per cent (10%), which is the
amount permitted by section 22(c) of the Franchise Agreement. The
allegations of Rodger are located at paragraph 38 of his affidavit.
111.
Furthermore, the Statement of Claim alleges at paragraph 21 that the mark up
cannot be more than ten per cent (10%) from the "net cosf' of the products.
112.
It is my belief that Rodger's affidavit is wrong for several reasons. First, neither
Article 22(c) of the Franchise Agreement nor the Pet Valu Franchise Business
- 46-
System refer to a surcharge being charged against the "net cosf'. Article 22(c)
of the Franchise Agreement simply states that a "surcharge of up to ten
percenf' may be charged. It does not specify that the surcharge is on net cost
or gross cost.
113.
Section 2 of Part C of the Pet Valu Franchise Business System refers to the
surcharge on "the Franchisee's invoice cost" and is calculated as ten per cent
(10%) of the cost to the franchisees before the surcharge is added.
114.
Second, despite the bald allegations contained in Rodger's affidavit, Pet Valu
does not receive a direct financial benefit to the surcharge referred to in Article
22(c) of the Franchise Agreement. As noted in the Pet Valu Franchise
Business System, the funds collected from the surcharge are set aside in the
Private Label Development Fund for the use prescribed in the Franchise
Agreement and Pet Valu Franchise Business System.
115.
The Private Development Fund, as noted in section 2 of Part C of the Pet Valu
Franchise Business System, is intended to defray the costs associated with
the research and development associated with creating new private label
products for the Pet Valu franchise. The creation of private label products
designed and created specifically for Pet Valu is similar to the concept of the
private label products President's Choice™ or No Name™ designed and
created specifically for Loblaws and its affiliated stores. The private label
products are intended to be sold exclusively in the stores operated under
banners controlled by Pet Valu, specifically, PET VALU, PAULMAC'S AND
- 47 -
BERRYS YOUR PET'S CHOICE stores, which requires customers to attend
those stores if they wish to purchase the private label products. The hope is to
create brand loyalty of private label products amongst customers in order to
distinguish the Pet Valu and affiliated stores from our competitors. The
development and promotion of private label products is part of the reniching
strategy developed by Pet Valu and described more fully above.
116.
The development of the private label products is a direct benefit to the Pet
Valu franchisees, including Aurora Co., as these products induce customers to
shop more exclusively at Pet Valu franchised stores.
117.
Further, the franchisees are not paying a flat fee with respect to the research
and development of the private label products but, rather, the franchisees are
paying a percentage based upon the demand for the private label product. If
the private label products are not popular with customers and they choose to
purchase other labels, the franchisee does not pay the surcharge. Thus, Pet
Valu viewed the surcharge on the private label products as more fair than
simply a flat fee for research and development as it creates an incentive to
ensure that Pet Valu creates an excellent product that the customers want to
purchase.
118.
Third, despite the bald allegations contained in Rodger's affidavit, at no time
has Pet Valu charged Aurora Co. or other franchisees a surcharge over ten
per cent (10%) of the franchisee's invoice cost.
- 48-
119.
Aurora Co., much like other franchisees, receives a billing summary and a set
of detailed invoices for the products that it purchases on a weekly basis. The
billing package provides a breakdown of all of the fees and charges related to
each of the products purchased by Aurora Co .. Product invoices, which are
included in the weekly billing package, show a breakdown of the actual
amount paid by the franchisee for the surcharge. Attached hereto and marked
as Exhibit "KKK" is a true copy of a sample of the last page of an invoice for
product shipped to Aurora Co. showing the surcharge. As noted in the billings,
Pet Valu has never charged a surcharge on private label products, which
exceeds ten per cent (10%) of the invoice cost. I further note that Rodger's
affidavit has failed to produce any invoices indicating otherwise.
I mproper Mark-ups on Non-Private Label Products
120.
marks up prices for non-private label products. The allegations of Rodger are
located at paragraphs 39 to 42 of his affidavit.
121.
The Franchise Agreement, in particular, section 27(b) thereof, provides Pet
Valu the right to charge a three per cent (3%) charge on all gross sales for
products purchased from other suppliers. The section further states that "PVCI
may also impose additional charges", which arguably permits additional mark
ups without limitation that would permit Pet Valu to discourage purchases from
third party suppliers.
- 49-
122.
Pet Valu has never imposed a surcharge, be it three per cent (3%) or any
other permitted charge, for the purchase of products from other suppliers,
despite the fact that it is entitled to do so pursuant to the Franchise
Agreement. The fact that Pet Valu has not charged a surcharge for products
purchased from other suppliers ought to be apparent to Rodger when he
reviews his invoices and weekly billing summaries.
123.
Furthermore, Pet Valu has not taken any actions to discourage purchases
from third party suppliers. In fact, Pet Valu has streamlined the approval
process for new outside purchase items. Pursuant to Article 27(d) of the
Franchise Agreement, a franchisee is required to go through an approval
process, which requires the franchisee to submit the proposed product for
testing and approval by Pet Valu. Pet Valu has not enforced the process
prescribed in Article 27(d) of the Franchise Agreement and simply requires the
franchisee to submit a form so that the product can be added into the POS
System. I cannot recall of any circumstance where Pet Valu refused to add a
product from an outside supplier into the system.
Supplier Rebates and Non-Monetary Benefits
124.
allocates supplier rebates and allowances to its franchisees. The allegations of
Rodger are located at paragraphs 15 to 21 and 37 of his affidavit.
125.
Supplier rebates and allowances are negotiated and taken by Peton. Peton
uses its combined purchasing power, its warehouse space and its working
- 50-
capital to minimize the net cost from its suppliers. Some vendors prefer to
provide rebates and allowances, either based on specific performance (e.g.
purchase by Peton of full truckloads) or otherwise, other vendors prefer to
provide lower costs. Peton makes decisions on a vendor-by-vendor and
order-by-order basis as to the best cost/rebate/allowance trade-off in respect
of use of warehouse space and cost of working capital. The ultimate optimized
cost-allowance-rebate scheme is entered into Peton's system on an item by
item basis.
126.
Peton allocates the rebates, allowances and negotiated costs to merchandise
items by using them to reduce the price of the merchandise it sells to its
customers, including Pet Valu. Peton also includes costs, such as inbound
freight, foreign exchange rate differences and brokerage fees in its price. Like
any wholesaler, Peton marks-up its costs to arrive at the price it charges its
customers. Pet Valu passes on that price plus its applicable fees and charges
to the franchisees. Attached hereto and marked as Exhibit "LLL" is a Product
Cost Worksheet illustrating the costing and pricing of merchandise in the Pet
Valu system and my notes explaining on a line-by-line basis the contents of
the Product Cost Worksheet.
127.
Pet Valu also passes the distribution fee back to Peton in exchange for a lower
mark-up on product than is charged to Paulmac's stores and franchisees.
Because the prices are item specific, each franchisee will benefit from the
lower costs, rebates and allowances to a different degree depending on the
mix of merchandise purchased by that franchisee and on when the
- 51 -
merchandise is purchased in connection with temporary deals offered to the
franchisees pursuant to the terms of the franchise agreements and franchise
business system.
128.
Merchandise is also purchased by Pet Valu from Peton for its corporate Pet
Valu stores, Paulmac's and Berry's stores. Rebates and subsidies applied to
the price of merchandise from Peton is also earned by Pet Valu in its
corporate retail operations.
129.
Peton also sells to PV International and Petfooddirect.com using the same
pricing systems. Vendor rebates and subsidies would also be passed on to
these retailers on the basis of the mix of merchandise purchased by them.
130.
The issue raised in Roger's affidavit can only be addressed on an individual
franchisee-by-franchisee basis by conducting a review of each franchisee's
particular purchases from Pet Valu. Aggregating franchisees for the purpose of
such a review would serve no purpose. This point is driven home by the fact
that the franchisees are treated differently for the purposes of both the cost of
products and the prices for which the franchisees may sell their products.
131.
First, Pet Valu has divided its franchisees into cost zones. There are four (4)
cost zones, which each cost zone varying in price for each product purchased
from Pet Valu by the franchisees. The four (4) price zones are as follows:
(a)
Southern Ontario (107 franchisees);
(b)
Winnipeg (11 franchisees);
- 52-
(c)
Northern Ontario (5 franchisees); and
(d)
Stores located near a Pet Smart, regardless of the location of the store
(32 franchisees).
132.
Second, in accordance with Article 22(b) of the Franchise Agreement, Pet
Valu is entitled to "impose a Suggested Maximum Retail Price" ("SMRP") that
"may vary from region to region or from franchise to franchise based on local
competitive forces or other market or economic factors". Accordingly, Pet Valu
has also divided the franchisees into different price zones.
133.
Pet Valu sets the SMRP at a base level for the cost zone. Pet Valu, through
various means also gathers local market retail prices of key competitors. We
have noted that generally, all stores of a competing banner to Pet Valu (such
as Loblaws, A&P, Walmart or PetSmart) tend to have the same price for each
product.
We have organized our stores into retail pricing groups ("Price
Lanes") by proximity to one or more of the competing banners.
134.
There can also be combination Price Lanes by grouping of competing banners
(e.g. Loblaws/PetSmart, or A&PlWalmart). Each Pet Valu store may have a
Price Lane associated with it. SMRPs for the same item may, therefore, vary
significantly between two Pet Valu stores that are in relatively close proximity
to each other depending on the Price Lane they are in. Allocation of stores to
Price Lanes changes with the coming and going of competitors and with
changes in the location of the Pet Valu store within the market. SMRPs within
any Price Lane would change as the information about competitive prices
- 53 -
changes; this could be weekly, but not necessarily for every Price Lane at the
same time.
135.
Since the SMRP drives the franchisee margins, the margins franchisees are
able to earn are affected by the number of varying factors that go into
determining the pricing lanes for that store at any particular time.
136.
Price subsidies are also affected differently depending on the Price Lane
configuration at the time. As a result, the net price that franchisees pay to Pet
Valu for merchandise will differ accordingly.
137.
Due to the dynamic nature of the Pricing Lane structure, it is not possible to
generalize on the number of stores that have been in any particular Price Lane
let alone the impact that this might have on franchisee margins.
Delivery Charges
138.
is entitled to charge its franchisees a distribution fee or delivery charge. The
allegations of Rodger are located at paragraphs 43 to 47 of his affidavit.
139.
The Franchise Agreement, in particular, Articles 22(c), 27(b) and 29(a) thereof,
and the Pet Valu Franchise Business System, in particular, Section 4 thereof,
expressly permit Pet Valu to charge a delivery fee. As such, Pet Valu charges
its franchisees a delivery or distribution charge of 5.14% based upon the
suggested retail price.
- 54-
140.
The 5.14% delivery or distribution charge was determined on the basis of
historical costs of warehousing and delivery at Pet Valu prior to the advent of
franchising in the late 1980s. The charge was originally five per cent (5%) and
remained at that level until October 2005 when a fuel surcharge component of
0.14% was added. Attached hereto and marked as Exhibit "MMM" is a true
copy of the Memorandum that I sent to the franchisees, dated September 20,
2005, outlining the increase in the distribution charge. Even at 5.14%, the
charge does not fully recover Peton's costs of warehousing and delivery.
141.
Furthermore, depending on the location of the Pet Valu store, a franchisee will
carry an unique mix of products in each store due to the demands of the
particular demographics in the area. For instance, Pet Valu stores located in
larger urban centres tend to cater more to customers who have smaller dogs.
Thus, such stores tend to carry more pet-related accessories than food items.
Pet Valu stores located in more rural areas, on the other hand, tend to cater
more to customers with larger dogs. Thus, such stores tend to have a bigger
focus on pet food.
142.
The distinction is important for two reasons. First, pet-related supplies tend to
have higher margins than pet food (including litter), therefore, a determination
of whether the distribution charge is "commercially reasonable" must be
assessed on an individual basis and not an aggregate basis. From the
franchisees' perspective, margins for pet-related supplies averaged 51.2%, for
the past fifty-two (52) weeks, as opposed to pet food, which averaged 33.7%
- 55 -
during the same period. The average for Aurora Co. during the same period is
similar; a 52% average for pet-related products and 33.5% for pet food.
143.
A franchisee in a large urban centre that sells a higher volume of pet-related
products, such as collars, jackets or toys, is impacted to a lesser degree in
terms of the effect of the distribution charge on the overall margins on the petrelated products delivered to its store. A franchise that sells more lower
volume pet food will be affected differently by the exact same distribution
charge.
144.
Second, stores that are located closer to the distribution centre where the
products are being shipped from will view the flat-rate distribution charge
differently than the franchised store located in a more rural area much further
away from the distribution centre. A flat-rate distribution charge of 5.14% may
appear unreasonable when the product is being shipped a relatively short
distance but is very generous when the product is being shipped a long
distance away. Pet Valu purposely averaged the cost of the distribution charge
in order to avoid a situation where the franchisees located furthest from the
distribution centre are paying prohibitive shipping fees.
SWORN BEFORE ME at the City of
Toronto, Province of Ontario, on
April 16, 2010.
,<
§=k(
Commissioner for Taking Affidavits
EDWARD CASEY
Plaintiff
d
an
PET VALU CANADA INC.
Defendant
Court File No: CV09-392962-00CP
ONTARIO
SUPERIOR COURT OF JUSTICE
Proceeding commenced at
Toronto
AFFIDAVIT OF EDWARD CASEY
(SWORN APRIL 16, 2010)
Cassels Brock & Blackwell LLP
2100 Scotia Plaza
40 King Street West
Toronto, Ontario M5H 3C2
Geoffrey B. Shaw LSUC#: 26367J
Tel: 416.869.5982
Fax: 416.350.6916
Shawn L. Graham LSUC#: 49191 N
Tel: 416.860.6558
Fax: 416.642.7145
Lawyers for the Defendant

1250264 ONTARIO INC.

Transcription

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