Commissioner's Opinion No. 79 / 1F

State of California Department of Corporations

Willie R. Barnes, 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 L. T. Ardery
Attorney at Law
Brown, Todd & Heyburn
Sixteenth Floor, Citizen Plaza
Louisville, Kentucky 40202

Dear Mr. Ardery:

The request for an interpretive opinion, contained in your letter dated October 31, 1978, as supplemented by your letter dated December 12, 1978, has been considered by the Commissioner. Your letters raise the question whether the offer and sale of a franchise by Mr. Gatti's, Inc., a wholly-owed subsidiary of LDB Food Services, Inc., is exempt from the registration requirement of Section 31110 of the Franchise Investment Law ("Law").

Section 31101 of the Law provides an exemption from the registration requirement of Section 31110 for any offer or sale of a franchise if the franchisor meets the net worth test of Subdivision (a) and the scope of operations test of Subdivision (b) and makes the disclosures required by Subdivision (c) or (d), as appropriate, of that section.

You have represented that Mr. Gatti's, Inc., according to its most recent audited financial statement (for the fiscal year ended July 29, 1978), has a net worth on a consolidated basis of $1,374,938. Audited financial statements have never been prepared with respect to LDB Food Services, Inc., which is a wholly-owned subsidiary of LDB Corporation, although LDB Corporation states that LDB Food Services, Inc has a net worth on a consolidated basis of $3,936,576 as of July 31, 1978. LDB Corporation, according to its most recent audited financial statement (for the year ended July 31, 1978), has a net worth on a consolidated basis of $13,708,000.

The standards as to financial conditions set forth in Section 31101(a) of the Law require, in part, that the franchisor have a net worth, according to its most recent audited financial statement, of not less than $1,000,000 and be at least 80% owned by a corporation which has a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than $5,000,000.

In the instant case, since audited financial statements have never been prepared with respect to LDB Food Services, Inc., the direct sole owner of Mr. Gatti's, Inc., the question is whether the net worth requirement of Subdivision (a) is satisfied by LDB Corporation's net worth on a consolidated basis of $13,708,000 for the year ended July 31, 1978, the date of its most recent audited financial statement. In our opinion this question is answered affirmatively, inasmuch as you have represented that Mr. Gatti's, Inc. is a wholly-owned subsidiary of LDB Food Services, Inc., which itself is a wholly-owned subsidiary of LDB Corporation.

You have represented as follows with respect, to the scope of operations test of Subdivision (b) of Section 31101. Pizza Place, Inc., a Texas Corporation ("Place"), had conducted the business of operating and franchising the operation of rapid service restaurants specializing in pizza and other Italian dishes beginning in January 1971. Place changed its name to Mr. Gatti's, Inc. ("Gatti's") on June 1 , 1973, at which time it owned and operated seven restaurants. Baker Investment Company, a Texas corporation ("Baker"), was formed on October 10, 1974, for the purpose of acquiring the shares of Gatti's and on October 11, 1974, became the sole shareholder of Gatti's. On January 31, 1975, Gatti's adopted a plan of complete liquidation and dissolution. On February 28, 1975, pursuant to the plan, the dissolution was completed, at which time Baker began conducting the operation of company owned and franchised Gatti's restaurants. On July 9, 1979; Baker changed its name to Mr. Gatti's, Inc. Mr. Gatti's, Inc. operates and franchises the operation of rapid service restaurants specializing in pizza and other Italian dishes, and has done so continuously since February 28, 1975.

The scope of operations test under Subdivision (b) of Section 31101 is satisfied if the franchisor itself has had at least 25 franchisees conducting business at all times during the five-year period immediately preceding the offer or sale; or has conducted business which is the subject of the franchise continuously for not less than five years preceding the offer or sale. In our opinion, the acquisition of all the shares of Gatti's (formerly Place) by Mr. Gatti's, Inc. (formerly Baker) and the subsequent liquidation of Gatti's (formerly Place) and continuation of operations by Mr. Gatti's, Inc. (formerly Bake) vests in Mr. Gatti's, Inc. (formerly Baker) a business, including both franchising and operating restaurants, which had been operated by Gatti's (formerly Place) at least since 1971.

Under these circumstances and based on the representations contained in your letters, as outlined above, it is our opinion that Mr. Gatti's, Inc. can be said to have conducted business which is the subject of the franchise continuously for not less than five years preceding the offer or sale and, thereby, to have satisfied the standard as to experience established by Subdivision (b) of Section 31101. (See Comm. Op. 72/28F.)

By way of summary, therefore, it is our opinion, based on the representations contained in your letters, as outlined above, and assuming that Mr. Gatti's, Inc. makes the disclosures required by Subdivision (c) or (d), as appropriate, of Section 31101, that the offer and sale by Mr. Gatti's, Inc. of franchises of rapid service restaurants specializing in pizza and other Italian dishes is exempt from the registration requirement of Section 31110 of the Law by virtue of the exemption provided by Section 31101.

Dated: Sacramento, California
July 26, 1979

By order of
WILLIE R. BARNES
Commissioner of Corporations

By __________________
ROBERT E. LA NOUE
Assistant Commissioner
Office of Policy
(916)322-3553