Commissioner's Opinion No. 72 / 28F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. Roy J. Schmidt, Jr.
Attorney at Law
Gibson, Dunn & Crutcher
9601 Wilshire Boulevard
Beverly Hills, CA 90210

Dear Mr. Coombs:

The request for an interpretive opinion contained in your letter dated June 9, 1972, has been considered by the Commissioner. Your letter raises the question whether the offer and sale of franchises in the State of California by Sizzler Family steak Houses, a California corporation ("Sizzler"), is subject to the registration requirement of Section 31110 of the Franchise Investment Law. On the assumptions stated below, this question is answered in the negative.

You have represented that Sizzler is a wholly-owned subsidiary of Collins Foods International, Inc., a California corporation ("Collins"), and owns and operates and franchises family style, popularly priced steak restaurants; You have advised that the franchises which it proposes to offer and sell in this state, fall within the definition of Section 31005 of the Franchise Investment Law.

Sizzler was organized in July 1967, to acquire all of the outstanding shares of Sizzler, Inc., a California corporation ("Old Sizzler"), which had been operating and franchising family style, popularly priced steak restaurants under the name "Sizzler". At the time of the acquisition by sizzler of Old Sizzler's outstanding shares, 166 franchised restaurants were in existence, substantially all of which had been conducting business for the five-year period immediately preceding the date of your letter. Old Sizzler also owned and operated four restaurants, three of which had been in business for the five-year period immediately . preceding that date.

You have further represented that from the time of its organization in July 1967, to April 1968, all of the outstanding Sizzler shares were owned by Messrs. James S. Collins, Walter McBee, and Rushton O. Backer. During this time Sizzler had no material assets other than the shares of Old Sizzler, and no material liabilities other than obligations under the promissory notes in the aggregate principal amount of approximately $726,000 as of July 1967, which were executed and delivered as part of the purchase price for Old Sizzler's outstanding shares. In April 1968, Old Sizzler primarily for tax and administrative purposes, was merged into Sizzler, and Sizzler thus became an operating company. In November 1968, Messrs. Collins, McBee, and Backer transferred their Sizzler shares to Collins and received Collins shares in exchange. This transaction was part of a reorganization in which 40 affiliated corporations, including, we understand, Sizzler, became wholly-owned subsidiaries of Collins. Immediately thereafter, Collins made an underwritten public offering of its common shares, after which Messrs. Collins, McBee, and Backer owned, respectively, 50.2%, 6.7%, and 6.5%; of Collins' outstanding shares. They were, and continue to be, the three principal executive officers and the three largest shareholders of record of Collins (other than shares held in street names of investment brokerage house).

Since Sizzler's acquisition of the outstanding shares of Old Sizzler in July 1967, Sizzler while continuing to feature popularly priced steak dinners bas expanded its business, changed the format and design of the new and remodeled Sizzler restaurants, adopted a new logo, changed the menu, and standardized the terms upon which franchises are sold. It has also concentrated on opening company owned restaurants and has sold only 14 franchises. As of April 30, 1972, Sizzler had 53 company-owned and 133 franchised restaurants.

Section 31101 exempts from the disclosure and registration requirement of Section 31110 the offer and sale of a franchise, if the standard as to financial condition set forth in Subdivision {a) and the standard as to scope of operations set forth in Subdivision (b) are met, and if, moreover, the disclosures required by Subdivision (c) are made. You have represented that Sizzler will make the disclosures required by Subdivision (c), and that as of April 30, 1971, the date of the most recent available audited financial statements, the consolidated net worth of Sizzler was approximately $1,500,000 and the consolidated net worth of Collins $12,125,881.. Moreover you have represented that audited financial statements as of April 30, 1972, will be available on or about June 15, 1972, and are expected to reflect higher net worths. Assuming that these are the most recent audited financial statements of Sizzler and Collins, and that they confirm consolidated net worth of Sizzler amounting to not less than $1,000,000 and of Collins amounting to not less than $5,000,000 so as to meet the standard with respect to financial condition set forth in Subdivision (a) of Section 31101, and assuming also that the disclosures required by subdivision (c) will be made, the remaining question is whether Sizzler can satisfy the standard as to scope of operations set forth in Subdivision (b).

To reach the conclusion that that standard is satisfied., since Sizzler's parent, Collins, has not been in the business of franchising or operating restaurants, it must appear that the franchisor, Sizzler, has had at least 25 franchises conducting business at all times during the five year period immediately preceding the proposed offer or sale of franchises, or has continuously for that span of time conducted business of the type which is the subject of the franchises proposed to be offered and sold.

According to your factual representations as above reflected, Sizzler itself has engaged in the business of operating restaurants since April 1968 when, as a result of the merger, it succeeded to the operations of Old Sizzler., and we understand and assume for the purpose of this opinion that at least since that date it has at all times had at least 25 franchiseees active in the restaurant business, as well as itself conducted restaurant businesses of its own. However, we cannot reach the conclusion that Sizzler has a record of operations covering the five year period immediately preceding. the proposed offer or sale of franchises, unless we credit Sizzler additionally with the operations of Old Sizzler which, we understand you to represent, at all times at least since July 1967 have included at least 25 franchisees conducting restaurant businesses, as well as the conduct of such businesses by Old Sizzler itself.

Sizzler does not automatically receive credit for these operations of Old Sizzler solely by reason of the fact that Sizzler during the period held all of the outstanding shares of Old Sizzler; but we consider as significant the fact that the business with respect to which Sizzler proposes to offer and sell franchises, and concerning which therefore it should be experienced, namely, the operation of family style popularly priced steak restaurants, has been conducted since April 1968, by Sizzler, and this same type of business during the period in question, from July 1967 to April 1968, has also been conducted by Old Sizzler. The merger of Old Sizzler into Sizzler in April 1968 thus vested in Sizzler a business, including both franchising and operation of restaurants which had been operated by its predecessor, Old Sizzler at least since July 1967. Under these circumstances, it is appropriate in our opinion to conclude that the franchisor, Sizzler, meets the standard as to experience established by section 31101 in that by the merger it has succeeded and incorporated into itself the experience of its predecessor, Old Sizzler, without substantial change of identity.

Accordingly, it is our opinion that under the circumstances of the instant case and on the assumptions stated above, the exemption of Section 31101 is available and the offer and sale of franchises proposed by Sizzler, is not subject to the registration requirement of Section 31110 of the Franchise Investment Law.

Dated: San Francisco, California
August 10, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy