Commissioner's Opinion No. 72 / 31F

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. Joseph A. Calamari
Assistant General Counsel
Cadence Industries Corporation
641 Lexington Avennue
New York, NY 10022

Dear Mr. Calamari:

Consideration has been given by the Commissioner to the request contained in your letter dated July 29, 1972 for reconsideration of the views expressed in our letter dated July 3, 1972, addressed to Mr. Joseph A. Calamari with respect to the proposed offer and sale of franchises by Hudson Pharmaceutical Corporation, a Delaware corporation {"Hudson"), a wholly-owned subsidiary of Cadence Industries Corporation. Based upon the additional factual information submitted with your letter dated July 29, 1972, but only on the assumptions hereinafter made, it is our opinion that such offer and sale of franchises by Hudson is exempted from the registration requirement of Section 31110 of the California Franchise Investment Law by virtue of the provision of Section 31101 of that law.

You have represented that Hudson is a wholly-owned subsidiary of Cadence Industries Inc. ("Cadence") and that Hudson was organized on March 23, 1972 as the successor in interest to Hudson National Inc., a wholly-owned subsidiary of Cadence, which in 1966 succeeded to a similar business conducted by a publicly-owned corporation also known as Hudson National Inc. We understand that Cadence caused the assets of the vitamin and drug business of Hudson National Inc. to be transferred to Hudson, the newly-formed Delaware corporation. You further represent that Hudson has been in the business as a mail order and detail distributor of vitamin and drug products for over 25 years and has been owned by Cadence since 1966.

You state that Hudson will furnish prospective franchisees all information required by items 1 through 14 of Section 31101 (c) at least 48 hours prior to the execution by the prospective franchisee of any binding franchise or other agreement.

You have submitted an audited financial statement of Hudson dated December 31, 1971 and an unaudited statement dated June 30, 1972, which statements show net worths of $1,443,635 and $1,848;331, respectively. You have also submitted an audited consolidated financial statement of Cadence dated December 31,1971, which. statement shows a consolidated net worth of $2,839,627. You represent that Cadence has made an exchange offer to its 5% note holders to exchange their notes for a pre-determined number of Cadence common shares. You state that this offer was accepted by several institutional investors and an aggregate of $14,300,000 in notes were tendered for exchange. You represent that giving effect to this exchange, Cadence's net worth, as reflected in its unaudited statement dated March 31, 1972, would increase from $3,139,000 to $16,166,000. The exchange of notes for common shares will be voted upon by the stockholders of the company on September 15, 1972, and until such date, the exchange will not be finalized.

Section 31101 of the Franchise Investment Law provides that there shall be exempted from the disclosure and registration requirements of Chapter 2 of Part 2 of the law, and, especially from the registration requirement of Section 32110, the offer and sale of a franchise if the standard as to financial condition is set forth in subdivision (a) and the standard as to scope of operations set forth in Subdivision (b) of the Section are met, and, provided further, that the franchisor complies with the disclosure requirements specified in Subdivision (c) of the Section.

If at the time of the offer and sale of franchises by Hudson, the most recent audited financial statements of Hudson and Cadence reflect a net worth of not less than $1,000,000 for Hudson and a net worth on a consolidated basis of not less than $5,000,000 on the part of Cadence, we are of the opinion that the standard set forth in subdivision (a) would be satisfied.

In this connection, the Commissioner has taken the position that pro forma financial statements do not meet the requirements of this section since the net worth of $5,000,000 must be established by the most recent audited financial statement.

With regard to the standard as to scope of operation set forth in Subdivision (b) of Section 31101, you have represented that the franchisor has conducted the type of business which is the subject of the franchise operation for a period of 25 years and that Hudson has been owned by Cadence since 1966. Thus, it is our conclusion that Hudson meets the standard as to scope of operations set forth in Subdivision (b).

Therefore, assuming that Hudson, in connection with the proposed offer and sale of franchises, will comply with the disclosure requirements specified in Subdivision (c) of Section 31101, such offer and sale, in our opinion, would be exempted from the registration requirement of Section 31110 by virtue of Section 31101, if Hudson and Cadence meet the standards as to financial condition set forth in Subdivision (a) and Hudson meets the standard as to scope of operations set forth in Subdivision (b) of said Section.

Dated: San Francisco, California
September 27, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
J. DOMINIQUE OLCONENDY
Senior Corporations Counsel
Office of Policy