SEC Division of Investment Management staff letter: Andrews & Kurth L.L.P.

5 APR 1994 p Our Ref. No. 94-52-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Andrews & Kurth L. L. P .
DIVISION OF INVESTMENT MAAGEMENT File No. 132-3 Your letters dated January 28, 1994, February 24, 1994 (as

corrected on April 5, 1994) and April 1, 1994 seek our

concurrence that a finance subsidiary organized as a limited

liability company that issues non-voting preferred member

interests, 11 or a partnership that issues non-voting preferred

partner interests as described in your letter may rely on the

exemption for finance subsidiaries under Rule 3a-5 under the

Investment Company Act of 1940 (the "Investment Company Act"). ZI

You state that a finance subsidiary established as a

partnership issuing preferred partner interests will comply fully

,in all respects with Rule 3a-5, except that the transaction will invol ve the issuance of non-voting preferred partner interests by a partnership instead of non-voting preferred stock by a

corporation. ll You state that a partnership may issue preferred

partner interests with the same rights, preferences, voting and

other investment characteristics as those of preferred stock

issued by a corporation. 41 You further state that the parent

company of the partnership, or a company controlled by the parent

company, will own all of the partnership's securities other than

11 The staff previously has taken the position that finance subsidiaries organized as limited liability companies that

issue non-voting preferred member interests may rely on the

exemption for finance subsidiaries under Rule 3a-5. See

Lehman Brothers Inc. (pub. avail. Mar. 8, 1994); Inco

Limi ted (pub. avail. Mar. 4, 1994); Merrill Lynch & Co.

(pub. avail. Mar. 2, 1994). Having stated our views, we no

longer will respond to letters in this area unless they present novel or unusual issues. ÄI Generally, Rule 3a-5 exempts from the definition of

investment company a subsidiary that is organized to finance

the operations of its parent company or companies controlled

by its parent company, provided such companies are not

themselves investment companies under Section 3 (a) of the Investment Company Act. Under paragraph (b) (1) of Rule 3a￾5, "(a) 'finance subsidiary' shall mean any corporation (i)

(a) 11 of whose securities other than debt securities or non￾voting preferred stock. . . are owned by its parent company

or a company controlled by its parent company."

ll Telephone conver~~tion on March 25, 1994 between Alison Baur

and Stuart Bressman.

l-I Id.

..~.
Ï(. the non-voting preferred partner interests as required by Rule 3 a - 5 (b) (1 ) (i). 2/ , .,

In the release adopting Rule 3a-5, the Commission stated

that it was appropriate to exempt a finance subsidiary from all

provisions of the Investment Company Act where neither its

structure nor its mode of operation resembles that of an

investment company. 2/ The Commission stated that it found this

to be the case where the primary purpose of the subsidiary is to

finance the business operations of its parent or other

subsidiaries of its parent, and where any purchaser of the

finance sUbsidiary's debt instruments ultimately looks to the

parent for repayment and not to the finance subsidiary.

You state that, as is the case with a finance subsidiary

organized as a corporation, the partnership will be formed for

the purpose of financing the business operations of its parent or

other subsidiaries of its parent, and the proceeds from the sale

of preferred partner interests will be loaned by the partnership

to its parent company or companies controlled by the parent

company. You further state that the preferred partner interests

issued by the partnership would (i) have priority rights to

certain distributions equivalent to the rights of preferred

stock; (ii) have a liquidation preference that is equivalent to

the liquidation preference for preferred stock; (iii) be non￾voting, except under limited circumstances that are effectively

the same as those under which non-voting preferred stockholders

of a corporation relying on Rule 3a-5 would have voting rights;

(iv) be convertible or exchangeable in compliance with Rule 3a-5

if the terms of the preferred partner interests provide for

conversion and exchange; and (v) benefit from a parent's

guarantee in compliance with Rule 3a-5. 7/

á/ According to your letters of February 24 and April 1, when

Rule 3a-5 was adopted in 1984, institutions, including

banks, thrifts, and insurance companies, were the primary

purchasers of the securities of finance subsidiaries. You

represent that, at that time, state investment laws greatly

restricted the kinds of entities, other than corporations,

in which these institutions could invest. You believe,

therefore, that partnerships were not included in the

definition of finance subsidiary in Rule 3a-5 because, at

the time the rule was adopted, the partnership structure did

not offer a viable financing alternative for institutions in

which to invest.

6/ Investment Company Act Release No. 14275 (Dec. 20, 1984)

(adopting Rule 3a-5).
7/ Telephone conversation on ~arch 25, 1994 between Alison Baur

and stuart Bressman.

• 2
  .

Based on the facts and representations in your letters and

telephone conversation, we would not recommend enforcement action

to the Commission if a finance subsidiary organized as a

partnership that issues non-voting preferred partner interests as

described in your letter relies on the exemption for finance

subsidiaries under Rule 3a-5. Because this position is based on

the facts and representations made in your letters and telephone

conversation, you should note that any different facts or

circumstances might require a different conclusion.
~ 9:.. ~ ~ ;; Alison E~~ ·
Attorney

• 3

. ¡

AN DREWS & Ku RTH L. L. P.
A REGISTERED LIMITED LIABILITY PARTNERSHIP
ATTORNEYS
OTHER OFFICES: 425 LEXINGTON AVENUE
HOUSTON
WASHINGTON, D.C. NEW YORK/ NEW YORK 10017 TELEPHONE:1212l 850-2800 DALLAS LOS ANGELES TELECOPI ER: 1212) 850-2929 THE WOODLANDS WRITER'S DIRECT NUM8ER:
(212) 850-2833
ACT ~ e.A eÇ. \ 9 4 ()

SECTION
." '30 - S
RULlo _u'
PUB:,;:¡j A /~'L'~4- Investment Company Act of 1940 Rule 3a-5 A VLILABILITY "\ / ~ January 28, 1994

VI TELECOPY AND FEDERA EXPRESS

Offce of Chief Counsel
Division of Investment Management
Securities and Exchange Commssion
450 Fifth Street, N.W.
Washington, D.C. 20549

Attention: Thomas S. Harman, Esq.
Chief Counsel
Re: Interpretive Advice with Respect to Rule 3a-5 under the Investment Company Act of 1940 Dear Mr. Harman:
We wish to request the advice of the Staff of the Division of Investment Management of the Securities and Exchange Commssion with respect to the following interpretive question with respect to Rule 3a-5 under the Investment Company Act of 1940, as amended (the "Act"). We have previously discussed this issue with Alison Baur of the Staff, and we are submitting this request at her suggestion. Rule 3a-5(a) under the Act provides that, subject to certain enumerated conditions, a finance subsidiar will not be considered an investment company under Section 3(a) of the Act and securities of a finance subsidiary held by the parent company will not be considered investment securities under Section 3(a)(3) of the Act. Paragraph (b) of Rule 3a￾5(b) states that a "'finance subsidiary' shall mean any corporation" that satisfies the conditions in clauses (i) and (ii) of that paragraph. A number of our clients have inquired of us whether they can use a partnership or a limited liability company as a finance subsidiary under Rule 3a-5. We hereby seek your concurrence that the definition of "finance subsidiar" in Rule 3a-5(b) is not strictly limited to corporate entities and may include a partnership or

ANDREWS & KURTH L.L.P.
A REGISTERED LIMITED LIAalLITY PARTNERSHIP
Offce of Chief Counsel
January 28, 1994

a limited liability company that otherwse satisfies the conditions set forth in Rules 3a-5(a) and 3a-5(b). In Securities and Exchange Commssion Release No. IC-14275 (the "Release"), the Commssion stated that it "believes that it is appropriate to exempt a finance subsidiary from all provisions of the Act where neither its structure nor its mode of operations resembles that of an investment company. " We believe that whether the subsidiary is organized as a corporation or as a partnership or a limited liability company and whether the securities held by the parent are shares of stock, partnership interests or member interests should be irrelevant in determining whether its structure or mode of operation resembles that of an investment company. As stated in the Release, the "primary purpose" of the finance subsidiary is "to finance the business operations of the parent" (page 17) and should be unaffected by whether it is organized as a corporation, a partnership or a limited liability company. In addition, whether the entity is a corporation, a partnership or a limited liability company, it would stil satisfy the Commssion's intent, as stated in the Release, that "the finance subsidiary is essentially a conduit for the parent to raise capital for its own operations or for the business operations of its other subsidiaries" (page 5). Although the introduction to the definition of "finance subsidiary" in paragraph (b) of Rule 3a-5 does not expressly include partnerships or limited liability companies, there appears to be no legislative or practical policy for such entities to be excluded from such definition. Section 2(a)(43) of the Act contains a definition of the term "wholly-owned subsidiary," which includes "a company 95 per centum or more of the outstanding securities of which are owned by (a). . . person." The term "company," in turn, is defined in Section 2(a)(8) as a corporation, a partnership, an association, a joint-stock company, a trust, a fund, or any organized group of persons whether incorporated or not.. . . " In addition, Rule 8b-2 (Definitions) under the Act states that "(a) 'subsidiary' of a specified person is an affiliated person who is controlled by the specified person. . . ." The term "person," as defined in
Section 2(a)(28) of the Act, means "a natural person or a company," thereby including a
partnership. We submit that in keeping with the tenor of the statute, Rule 3a-5(b) should be interpreted to define a finance subsidiary as any "company" that meets the conditions thereafter set forth. Although the limited liability company form is relatively new in the United States, at least 37 states have enacted limited liability company legislation. Limited liability companies are quite similar in their characteristics to limited partnerships, as well as corporations. The members of limited liability companies are shielded from personal liability, as are the stockholders of a corporation or the limited partners of a limited partnership. A limited liability company is generally managed by a small commttee of members, such as the general partner of a limited partnership or the directors of a corporation. Similar to limited partnerships and corporations (and unlike S corporations), limited liability companies can have more than one class of ownership interests with different priorities and allocations. Thus, in terms of issuing securities, all three forms of business entities are practically indistinguishable. The voting equity of all three can be held by one parent entity, while non

ANDREWS & KURTH L.L.P.
A REGISTERED LIMITED L.IABILITY PARTNERSHIP
Office of Chief Counsel
Januar 28, 1994

voting securities can be issued to raise capital- the essential function of a finance subsidiary.

A finance subsidiary that is a partnership or a limited liability company would issue preferred securities rather than shares of preferred stock. In the case of a partnership,

such securities would take the form of preferred partner interests and in the case of a limited liability company such securities would take the form of preferred member interests. State laws governing partnerships and limited liability companies permit such entities to issue such interests having such relative rights, powers and duties as the governing documents of such entities may establish, in the same manner that preferred stock may have such classes of

relative rights, powers and duties as a corporation's charter may establish. Accordingly, preferred securities of a partnership or a limited liability company could be drawn to have substantially the same rights, preferences, voting and other investment characteristics as corporate preferred stock. Therefore, as a corollary to the above request, we also request that the Staff concur that the term "non-voting preferred stock" in Rules 3a-5(b) and (b)(l)

encompass non-voting preferred partner interests in the case of a partnership and non-voting preferred member interests in the case of a limited liability company. In view of the foregoing, we respectfully request that the Staff concur with our conclusions that (i) the definition of "finance subsidiary" in Rule 3a-5(b) of the Act includes partnerships and limited liability companies, as well as corporations, and (ii) the term "non￾voting preferred stock" in Rule 3a-5 includes preferred partner interests and preferred member interests with similar investment characteristics. If you have any questions with regard to this request, please contact Mark Zvonkovic of this firm at (212) 850-2828 or the undersigned at the number above, In addition, should you disagree with the conclusion which we have expressed herein, we request an opportunity to discuss the same prior to your response to this letter. Sincerely yours, .~~. Stuart Bressman cc: Alison Baur, Esq.

A143:57860SB.INT

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Iß
THC WOOPV.NOS WIlITE.,'G DIIlEC:T NU...EIl:
iiiZIIlI82l
In.vestment Company Ac~ or 1940 Rule 3a-6
Febniry 24, 1994

Offco of Chief Counel
Diviion or Investment Maagement
Securities and Exchano Conusson
450 Fi Street, NW

Washingt, DC 20549

At.tention: Aln BauT, Esq.

Asociate Counsel

Rt: Interpretive Advico with Respect to Rule 3a-5 under

tho Investment Company Act or 1940
Dear Ms. Baur:
This letter is in response to the questions the Staff raised in a telephone cal with me on Febru 22, 1994 and supplements this firmls Jetter to you, dated Januar 28. 1994, which requested interpretivo advice with respect to Rule 3a-G under the Investment Company Act or 1940, us amended (the "Act"). In the aforementioned tolephone converstion the Staff raised the question why limited parnerships were not included in the dcrintion or "finance subsidiary" in Rule 38-5 ovon though, unlike limited libilty companies. lited partnerships existed

under most state laws in 1984, when Rule Sa-5 was enacted. Nothing in Releiise No. ie￾1427ú (under which Rule 3a.5 was enacted) suggest an answer to that inqui, nor does

anything in such releas or in other rcluuses related to the finiince subsidiary exemption 8ugges~ tJt limite partierships were intentionally excluded. We believe that the

Commission indV'ertently excludod limited partnerships in the definition of "finance subsidi: because in 1984 lited parnerships Were used only in cort. industries,

priy oil and gai and real estate, and in any event were not entities that issued

securities or the type that would be isued by the trditional "rmance subsidiary." In fact, in 1984, lega investment laWR in effect in most states ¡reatly restricted the tyes and amounts or Investments that reguliit.d intitutions in those states (e.g. l bunks, savings anù loan institutions. trts and inurace companies) could make in securit.ies issued by

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~V .VI nu .v~¿, r .V-i
Offce or Chief' C0UD1
Febru 24. 1994

entities other than corporations. Since in 1984 tho pri purchasers or a finance subsidia.. securities were reguaLed institutions and such institutions did not invest in securities isued by liited patnerships, proponents of the enactment or the fínanco

subsidiar oxemption would not havo brought to the Comnsson's attention the failuru or the Rule to includo lited paerships in the definition of finance subsidiar. Since 1984. legal inveatment laws in the states have been amended to recogn aecuties luued by lited panerships 88 pemutted Investments for regulated

institutions In addition. lited parerships are now entities widoly U8d by many

industres and may lited partnerahp debt and preferred equity securitios ai'e listed Ob tho maor securities exges. In short, securties ised by limited partnerships are now inv~stments commonly accepted by paricipants in the financial nukets. We believe that

there is no policy reason with respect to the availabilty of the finace subsidiary exemption to ditinguish between limited parnerships, limited libilty compabieR and

corporations
State laws moeating limited partnerships and limited liabilty companies specifically authorize thoBO entitle. to ise prererred securities. A comparison or Section 17-302 of the Delaware Limted Parership Act and Section 18-302 of the Delaware

Limited Liilty Compay Act shows the t.wo authorizing provisions to be alost idenUcnl. Both Sections are in al materia respects the samo as Secton 151 ortle Delaware Corporation Low. Each of those three sections authorize tho entity, whether it be a corporation, lited partnership or limited liabilty company, to issue securities having

such relative rights, powers and duties as the ontities' governing instruments shall designte. Ea section also authorizes the entity to confer upon holders or its securities full, limited or no voting rights. Accrdingly, we believe that limited partnorships and limited liabilty compaies may authorize and isue bon-voting preference securities in cmcUy the sarno maer as corporations do. Many publicl trded limtod parerships have issued Preference Units. An

exiple is Arcadi Partners, L,P. Its securities are listed on the New Yoi'k Stock

Exchange, These secuties have a preferred right to distributions, in the sae way that. corporate preferrd stock does, and these securities have liited voUng rights except in

tho certa cicustaces (e.g., liquidation or merger) as corporate preferred would. At the time of issuance of the80 preference securities, aU or the securities issued by Arcadian Partners other than tle preference securities and other than debt securit.ieR were owned

by Arcadian', paent compay. Although to our knowledge no similar examplei; or publiciy traded limited liilty compaes exist there is no statutory or practical reason that a limited liabilty company could not also issue a non-voting preference security and

otherwe have al or its seities, other than such non-voUng preference security and

debt securties, owned by its parent or companes controlled by its parent. In view of the foregoing, we respectfully request that the St. or the

Division or Investment Maagement concur wit.h our conclusions that (i) the definition or

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ANDAEWS & KUATH L.'-.R A ItCOI...... ,"IMt'&,U ........ lT ",,.NiE......

Offco of Chief Counsel
Februar 24, 1994

Page a
llnance subsidi- in Rule Sa-6(b) of the Act includes partnerships and limitecllibiJty

companies. as well as corporations, and (ii) tho term 'Uon-voting preferreù øLockM in Rule

3a.5 include. preferred paner interests and preferred member interests with sinular investment chaacteristics. It you have any questions with regard to this request, pleaso contact Stuar BrossmA" or this firm at (212) 850-2833 or the undel'ed at the number above. In addition. should YO\1 disagree wit. the conclusion which we have expressed herein, we request. an opportty to di the sa pnor to your response to this letter. Sincerely, ~r' cc: Stuar Breumn

ANDREWS & KURTH L. L . P . I D : 2128502929 APR 01'94 12:21 No.OOl P.02 ANDREWS & KURTH L. L. P.
,. .c.....C....D i.....IIE.. ......un ......CLL......
Á'rTO....iiV.
ÒTHER O,.,ICI:SI "'S LEXINOTON AVENUe
HOUSTON
W"&HIr.OTON, D.l;
DAi.LA&
NEW VO.iK. NEW VORK 10017 'I:LE"HoNEllallil 050-iti¡oo TCI'ECOPIEllllelri 8SD-leit9 Loa ....GE&.~S THl: WòODLANDO \lAln:R's DIIll:CT Nl,hlBE'-' (BIB) 861MUl3 Apri 1, 1994 c'. VI TRTÆ'£OPY AND FEDERA EXRESS Alon Baur, Esq. " Offce of Chief Counel Divion of IDvestint M~nAgement

Securities and Ext:hAnge Commisson
450 Fi Street, N.W. ~
Wasingon, D.C. 20549
Re: Intretative Advic with Respect to Rule 3ci~ undr the

Investmt Company Act of 1940

Dear Ms. Baur:
La week, you requested some independent support for tho two statements made on pago 2 of our letter to the Division, dated Februar 24, 1994, regadig the stat.us of lited parershps and their troatment under state lega investment laws in 1984 (see

copy enclosed). Afr revewing all sources readiy avaable to us and contacting a number of law firms and state secuties commilUioners, we have been unable to obtan copies of the specic legal investment laws that were in effect at that time. However, enclosed are the following suppoit niteri, which I hope you will find helpful:

1. A Survey aa to Legaty for Investment prepared by this firm with

respect to a public offering in 1986 of Depositi Units representing Lited ParLDe:r' Interests in Perki Famly Restaurants, L.P. (the

"Legi Investment Survey");

2. A copy of the Prospectus, dated
Augut 7, 1986 (the "Mesa Prospectus "), from a Subordted Note offerig by Mesa Capita Corporation (.MCC"), a subsidi of Mesa Lirrted Parership ("MLP"), with cert sectons highlighted (excerpted pages only in telecopy);
8. A copy of a rug request letter, dated Octber 23, 1986 (tho "Ruling

Letter"), submitted to the Interna Revenue Service by Baker & Botts.

ANDREWS & KURTH L. L. P. ID: 2128502929 APR 01' 94 12:21 No.OOl P.03 ANOf:~W$ & KURTH L.L..P. -i ftK.""IEWCD LIM',.". "1A..Uft M.I"I:.."I"

Alson Baur. Esq.
Apri I, 1994

counl to ML and MeC, in connecton with the Mesa Offering (pages 1-8 only in telecopy); and
4. A copy of an arcle from the Sprig 1989 issue of The Journal of

Corpra Taxtin (the -JeT-) entitled "Use of Thiny Capitali,;ed Corprate Subsidies in FiclTrctions" (excerpted pags only

in teecopy).
The enclosd materi evdence the rac th as late as in 1986 and 1989, as the cae ma be, a flifcat number of state had lega investment laws and other

regutions tht prohibited or discuraged cert types of intitutions (e.g., banks and inurce companies) from i:ing loan to, or purchasg the debt or other secuities or, lited parterships. ~ 8. result of these prohibitions, a parnership would not have been

deemed a vible alternative to serve as a fluance subsidi at the time that Rule 8a-5 wa enacLod in 1984 and partnerships would likely not have been considered by the Commsson when adopti the Rule. .. The Legal Investment Surey indicates that tho subjecVsecurities (i.e., Deposita Units representig Lited Parners' Interests) were not lega investments for savi ban trt funds and inurance companes, Or were signcatly restricted in their

eligibilty as lega investents for such institutions (see footnotes (1), (2) and (4) - (9)), in a lage number of states. The Units were not elible for investment by sags banks in 41 states and were sicatly restricted as such in the nine remaining states. The Units were

not eligiblo for investment by trt funds in 12 states and were signifcatly restrcted as such in one additiona state. The Units were Dot eligible for investment by life insurance companes in nine states and were signcatly restrcted as such in 36 additiona states. The Units were not elile for investment by other inurance companes in 13 states and were

øigncatly restrctd in 34 additiona states.
The MCC Subrdited Note offering is an exple of how companes around thé time Rule 3a-6 was onactd responded to the states' investment prohibitions. In order to issue $300 mion of debt secuities, ML, a lited parership, orgaized a corporate fince subsidi, MOC, to isue its debt. It is our understadig that one or the priy rOBBons that ML set up this corporation wa that, at that time, the debt of a limited partnerahip was not an acceptable investment ror regulated institutions, but the debt of a corporlition was. This reasn is set forth in the Ruling Letter which states on page 3 that:
Normy, pension fuds and other fiduciar-managed orgaiv.;onii are lage purchasers of investmnt-grade debt

oblition isued by companes with substatial asets and net

wort ML wa advid, hower, that the laws or may states restrctd the right of such organzations to mae investments that do not meet cert criteri and that, while typicaly a debt

obliation or a corporation would meet such criteria, a debt obligation of a parership would not.

HNUKLW~ ~ ~UKIH L.L.~. lU:2i2~~U2929 APR 01 '94 12:22 No.OOt P.04 " AIIDREWS & KUFlTI' L.L..Pl A .&...9..... LI,..y.. ......."IT M.'IlC.....t.

Alson Baur, Es.
April 1, 1994

The JCT arcle st on pa 4 tht:

The motivation for interposig such a thinly capitaized (intermediar) corporation (in a ficing transaction) often

cos from state law. For exaple, a number of statea still have lega investment laws that prohibit or discourage certain types of lendi intitutions form mag loan to noncorporate

borowers or to foreig corporations. Where the ultite

borrer is to be a paership, a trst, or a foreign entity, the iiiterption of a corporation (domestic) ma mae it possible or

moro attctive for intitutions subject to these laws to parcipate as lenders. ~ The JeT arcle contiues on page 8 to state t.at.:
. . . the purpose of incorporatin such a corporation is normally

to acie9e an importt business advata, for exaple to

achievo the advatae of maing it posirble or more attractive for cert intitutions to mae funds available to the ultimate

borrower,
In addition. attorneys in this firm who were p'ersonaly involved in a number of partnership ficigs durg the late 1970's and early 1980's reca that in each of those

financings the isue aros whothor a corporate subsidi should be formed to issue debt

secuities rather than the parersip itself. This wa specificay because the debt secuities

of partnerships were not readiy accpted 88 permitted investments for regulted institutions

at that time. This recollecton has beon conrired with lawyers at a number of other law

firms. In addition, a number of states today (e.g., Caifornia, Massachusetts and Ohio)

continue to prohibit or signcatly restrict investments by reguated institutions in securities issued by paorsps. I hope the enclosed information satisfes your requiements. If you have any questions, or requie any futher informtion, please do not hesitate to cal Mike Rosenwaser of this offce at (212) 850-2816 or me at the nunber above. Sincerely yours, Q:~- Stuat Bressma cc: Michel Rosenwaer

Mak Zvonkovc
Alll&;1i7860im.llJ'

ANDREWS & KURTH L .L.P. ID:2128502929 APR 01 '94 12 :23 No .001 P .1051¡ " ANDl'U;WS & KURTH

.""0""'-=". .:i.
'11;... COMMICltCC 1'OWIClI

..O"'.TO... T£KAS 77002 I
WIll aio..&OO i
TCi.ICK. ,....0.
..00 ".."NIl.OIVING ,.OW!:D
,.. 4"1: HUe. H W I DAL.AS. ye.... ,.2'Ot
...~ ! 121'" .,..4,"00 aui';: 100
.iHO"CN. lO C zooo. 5.043.000 DEPOSITARY UNITS gOtl .6..1100 . .

Repre1na UIied Parten' lateret. Ia .
PERKINS FAMILY RESTAURANTS. LP.

SURVE' ,\S TO LEGALITY FOR INVESENT - i
Setember i 1. 1986 ! . ¡.
I
. i i
Drc:~C:' Burnbam Lamberl Incorporated : I

piiin Bo~worth Incorporated .' j
Moseley Scçuriiic:~ Corporation ï
SutrO &. Co. Incorporated 1
AS RepresC'nt3ii"'cfô or ihe Several Undcf'riters.
.; i cÎ" Drexel Burnham Lambert incorporaied . i , .
6() Broad Street
1'ew York. ~e\ York 10004
(jei" lemen; The (onowing survey (the "Su.rvey") cont,ains our opinion relating to the legality of ihe above 10 Ih. I... of d,poiiary .niu (h...in ..r.rri.. in ihe .iii.lar or ihe pl.ral, as i! _iexl may re'lre as -Uni"") ro, in.esim.ni by ...mll baks. fiducari and in.'ra ....p.nle subjec

ibe ,esp,c,i.' St.les and ,he DI.lri of Coi.mbil. SUC. opnlo is ""se .po .. exminaiion of i! \ee.1 in..i..'n' I.w., ir any (as ..ch laws .rc ....ma'izc or ,.prod.çe ia .nol publications) ~nancial ånrormation contained in the Perki.is family Restaurants. L,P. Registration Statement

o\iih ihe Sec:urities and E~change Commission ('~Comm¡sslon") on July 11,1986. and as amended

br A....dm.nt No. I Iliel filed wii. lhe Commi..ion on Se.mbe II. 1986. Th. S...Y is 10 i..i...liiy of

r.rni'ho only ror ih. ....,.1 informaiion of ihe prOlPCCÛ'" .ndcr,i.. .nd no ..vi.. bank.

i...'... ..mpan)' or liuciay is ..tiile to rely .po ii .. .n opion of cons as

ih~ Units ror invesiment purposes.

The opinion .contained in tbe Survey is restricted to lcialit)' as or tbe date bereof. The opinion

rdaies only \0 whether tbe Units arc of the type permitted in tbe various States and should nol be

cost,.ed ..Indlc.tlng thai forl rcul"U ..va .. complied wlih (Inc.dmg qunlificadon of

tbe Units wiih an)' public autborities) for rendering the Units eligible for investment in tbe various

Suues. Such requirements have not ben indicated in tbe Survey.

It should be noted that certain States impose. among otber things. limitations as lO the amount. pe'_laS' and characi.. of r.nd. tll ..ay be ¡R...ied in ccin iyp of ...riti.. ¡nel.din¡ ...ri￾tie:r. ihal arc: eligible only b)' virtue or authority to invc:st in secu.rities not otbcrwise eligible for invest￾ment and in the: securities of iny onc c:orporation, and as to tbe price that may be paid for scçuritics;

g.c:ncral requirements as to the application of "prudencc" and other tests in making investments; supervision by administrative autborit¡es~ and requirements a5 to the type of authorization for particu.

lar in'el'iments. E,u:ept as otherwi5C indicated. tbe opinion expressed herein is subject to any such

restriCiive provisions,
I. We: have not consulled witb local c:unsel in any state. and. as members of tbe Bar of the State of
~ Texas and the Disirici or Columbia, we do not purport to be experts in the law of any otber jurisdiction invol'ed. ! Sincerel)'. f t ANDREWS &. KURTH I ~. ~ 1 ~-_..

ANDREWS & KURTH L. L . P . I D : 2128502929 APR 01 '94 12:24 No.OOl P.06 , ,- , .

. I

i )
,
5.0"'3.000 OEI)OSIT ARY UNITS
Reprl5cmtlng LimIted PartnMS' IhterelS In .
PERKI~S FAI\lIL' RESTAURANTS. L.P.
SURVE' AS TO LEGALITY FOR INVESTMENT
~ ~
Ai or September 11. 1986 rr.1s Sur,cy should be read In tonJqßction with tM .pplieablt footnotes)

The status or the Units with respect to their cli,ibilty ror investment by sa~iniu¡ banb. tru~t rundi; pnd insurance companies under the statutes or the rollowin¡ Slates appears to be as indicated: . ~~l Satlnl!~ UtI' Il1unilK Ofht Insul'fI !!.~ £Wpank! C'omp*_~!. Alabama (I) Not Legal Legal Alaska (4) (I) Not LCBal () ) LegaJ(2) Legal(2) Arizona Not Leaal(14) (1 ) Lelal(2) Legal(2) Arkansa5 legal()) Legal(2) (I ) Leiial(2) Calirornia Not Legal ulal(J) Legal(S) Legal(2) Colorado (I ) Leial(l) Legal(2) Lcgal(2) Connecticut Legal(7) Legal(3) Legal (I) Delawarc Legal(3) Legal (I ) Legal District of Columbia (I ) Lelal(3) Legal(2) Not Legal Florida (I) Legal(3) Not Legal ( I 0) Not Legal( 10) Georgia (I ) Legal(3 ) Legal(2) Legal(2) Hawaii Not Legal LeBaH3) Legal(2) Lcgal(2) I j Idaho i (I) Legal(3) LCBal(2) Legal(2) Ilinois (I) Lepl(3) Legal I Legal I Indiana Lesal(3) Legal(3) Legal(2) Legal(2) I low. (I) Leaal(J) Not legal Lcgal(2) Kanla5 (I) Lcgal(3)(l3) Legal(S) Legal(S) Kentucky (I ) Not Legal legal(2) Legal(2) Louisiana (I ) lcgal(3) Legal(2) Legal(~) Maine Legal(6) Legal(3) Legal(4) Lc,al(4) Maryland (I ) (l ) Not Legal Masschusetts Not Leeal

Not Legal
(I) Not Legal Not Legal Michigan Not Legal Legal(J) Lcgal(2) ,Legal(2) Minnesota Not Legal LegBI(3) Legal(:!) Legal(2) Mississippi Missouri (I ) Legal(3) Lcgal(2) Lcgal(2) (J ) LegaJ(2) Montana (I) (I ) Not Legal legal(3) Lcgal(4) Legal(4) I.L~_

ANDREWS 8. KURTH L.L.P. ID: 2128502929 APR 01 '94 12:24 No.001 P.07 ",~; ) Uf4' IlIr.,, Oihi l..surilll .tlt ~tlnl! B.,!~ J!l Fu," c.~mp.n~ r~~p~"i", cbralika (I) Lea'I() ) 1.cgal(2) Legal(2)

Nc'ada (I) Le,.i(i) Lelal(4) L~,al(4)

N~.' Hunip¡hirc Lcgal(7) Not Legal Legal' Leaat

Nc'" Jcrwy . Lepl(2) Lcaal(3) Lelal(2) Lc,al(2)

New Mexico (1) Legal(l) Legal(4) Legal(4)

New York Legal(7) Legal(3) Legal Le,al(2) ,i i

Norih Carolina (I) Leail()) Lesal(2) Not Leaal !

J
North Dakota (I) Legal(l) LCIII(2) Lepl(2) f

Ohio Legal(8) Not Legal Legal(2) Legal(2) I

Okhihoma (I) Lc,al(3) lc:pl(2) Lcgal(2)

Oregon Lepl(2) Leial(3) Leaal(7) Legal(7)

¡. Pennsylvania Legal(9) Not Legal Not Legal Not Legal .:1 Rhod~ Island Not, Lesal Lesal (I) (I) r' ; ji

South Carolina (I ) Le,al(3) Not Leaal Not Le,al

South Dakola (1) Legal(3) Lcgal(2) Lcgal(2.)

lennesse (I) Leaal(J) Not Leaal( I 0) (I)

Texas (1) Lcgal(2)('1 ) LcBal(2) Le,al(2)
" j Uiah (I) Legal(3) Not Legal Not Leltal

Vermont Legal(2) (I )
Legal(7) Legal(7)

Virginia (1) Legal(J) Legal( i 2) Legal( 12)

Washiniton Not Lepl Legal(!) Legal(2) Le,al(2)

-"est Virginia (I) NOI Legal Legal(2) Lcgal(2)

Iiconsin Not Legal Legal()) Legal(2) Legal(2)

Wyomin¡ (I) legal()) Lesal( 4) Lcgal( 4)

(I) ?o.. relevant statutory provision.

1~IEli,ible 0111)' b)' virtue or authoity 10 ¡nvc¡t 10 a limited extent in s"urides not otherwise cli,iblc: (or inv"tmc:nt. C)) Provided "prudent invc:stor" tcs js met.

(..I Eli,iblc: onl' b)' virtllc: 01 .utbcrityto invm to a limiied cilleni in $Ciiriiic:s nOt oihc:rwiAC eliliblt for invc:!limcni, flrovidL-d the nciiriii¡s quam)' I. a "sond investmnt."

C~I Elilible for "eiiccss runds invement."

1t.1 EIi,ible only b)' virtiie or auihority 10 inves to a limited ellleni in scciiritiC$ not oiherwisc cli,ible ror inve~tmenl. r"l\id~d ihe s¡l\ni~ bank', direclor coc:r lhem 10 be ~nd. prudrni inveStmenls.

(71 Eh¡!ible. subject to "prudent investor" tesl, onl) b) virlUt 01 authoriiy 10 invesi Iv . liirited uient in securilieto nol

oiherwise eli,ible for invC$trnnt,
(lei Eliiibl~ Olil~' b)' virtue of authoriiy 10 in~1 tu. limiied eiitent in w:ciiriiici. 1101 oihcr,,'ji; cli,iblc rm innMmcnl. II ;ipprcn'c:d b) 11K inst¡tutiCH'S bord of clircclcm. '

t91 Le,iilir ,uch iiwèi.iment Ì$ iulboiie by ihe ..vin,s bank's 3tlicles or incorporliiion,

i 101 lonl.:... "I'rrm'cd for inv"uncnt by irpropriate stllte authorU).
1iii h"I'1 rur ,uardÌlns or eSlltes or warm..

II:! i Providcd the Unias i.'i1 ft subject buyer 10 an)' assiwmtni Gihtr than rOt ta.es or wøi~.

11) i F.x~e,,1 for con~.:rvator¡. who mu5I seure i cort order to authorir.e íniicstmenb.

ii.i, i:irccti,'c O.-iubcr I. 1916. there wil be no relevant slatulOr)' rr(Ii~ion. Attention is also dirccled to the ex.istence in the siaiutes or certain Slales or restrÎction~ as to ihe

percentage or asseis and charscler or funds which may be inve5ted in the Units.

12:25 No.001 P.08

K.ul'C ~:l4 c.\

R~t.+lo.lJ , PROCTUS o 3 -l-ltS'l ~ $300.000,000 :ID~(šm~ sa Capital Corporation (16 ll )Nit J il OCT U .. 1 Subøte Nol due Auali8l1, tll6 ,. -l.-i

IInle Poygble February i. :Way J. Aului I and NOYembe I J I BeIn,ia Seute 01 · Suboinate llÛI by and AUG J i :
Gaiersur Ma 5K by · Subo,te Not or L 79 ,

~Mesa Lited Parership.. 33-(,ys.¡..!l
The Noi. wi.. uncundiCipnallr iuaroni..d on (I tuinaie Ix,ø by Mes LinilUld Pcrtnenp and AiMa OperoUnl Umited Pcrlnerihip 'collecUvllY, thll ~Partneliip"J. ihe ìoe lloclrhoder of Mes Capito' C(lrporalion I"Capitol",. ar.d wil De teul" b" a .ubcdinaied nol. of equal tenor of ihe Pannenhip ftbe "Parinel'hip ~ote"J. The Partnership Nnte will be unsered. TIw NOle wfJl _ -lliinale 10 aU Senio Indebtednes. I ø. d..fined i of Capital. and thll luaronlee by lM Pottnllrs~' of U- Noia and ihe Parhip Niife wil boih ~ liibørdinale fo all SenifJt Indebtedneø 10. dened) 0 the Pàr:ter.hip. The indnr~ ~ur.uanl to which rhe Note. will be i"Lled win r.ol relrict lhe inimnce Senici Indebcednen by Capllal or Che Parlnersip. Th. principal amounl 0' Senior 'nikednm of the Partti$rihip at lune 3D, lHe WO approximately SI,078 ",ilion, which c.mouni ¡ll expetr. to be ndiiCe by apPIO~hnciCely 5286 miUn upon 'he aDpUcalion 01 rN ii' pro. 0-' ini, offering. Se .'(;pllolimUon" and "Deiption of NOles"

PaY..". -I Îllre .. ", ".. may, at Ui ii" wi Oiøl41 .. Ut I'f'Pfp, .. -l. 'II wlte .r '" pl ii tle",låY ..¡,. ..p...."ú.. co__ ii.. .f Ilmifed P.e,.lilp interaiii ll
Part...."I,. 1"'",.. U,,'l-"'. COPl"'on Unlrs 10 bi deliver lor purpoel oj any ,uch paymen. wil w

\tøhlfld al belwn 75tl and 90... dependinø on 1M 'rudinl. volulM of the Common UniCl. of tht ovell" So Pric; 105 defined' 01 rN (;ommon Ùnit. fOt II spinilìød perit) prior to rlw appJicab'e paYin.,nl dote. Se

"D".cripfion of XOlIi.~ - Pa~'menr of 'I\Ip.rf!,t iii Common l!nil. oj lhe PQrtnel'hip." Copllal ød lb

PartnenJp llll,. "".ni .. .ai. .11 paymeni- .f Jal.i- on ,.. Nol ;11 eM"

The Note. will be reeemClblll. ip whole al an)' Um~ or in pari flOm lime lo Urn.. of the oplion of Capilo' 01 :iifl rcidemplion price. ¿al ,forth herein, plus açcrur. ¡nferei llieren, except thot prior fo Augu" i. J991. no

stl,:h reemption may he made .frm or in onticipation oj money bol''£d ot an ejfeciivtl ¡"ietat cot 10 Capital or the Par.ntlt$hip 0,1 leis ihan U\496 per annum. * "Decriplioli oJ ~Oles:' AppUcallpn ha, ben rnad~ 10 ';51 the Note. on ilw ~ew Yorle 5coek ExchtJnl¡~. THESE SEIES HAVE NOT BIEN APPKOVED OK DISAPPOVE BY TH

SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPN THE ACLUR.-\CY OR ADEQACY OF THLC; PROSPECTS.

AN REREENAnON TO THE OONTKY IS A ciUMJNAL OFFSE.
The nel ~f'_ io Capilal OM rM Parl"mlÙf, /tm ChI' ~,.~. of 'he Noiei wIU be SZ86.821.D lor 95.60i'1I pe Nui~,. plus occurd intp.tet. i.f any, .to AUIU.l 14. J986, be/on deduction of Up8ii eslimoied 01 $580.0. Capiiol and th. Portner.hip haN Qicree 10 indemnify lhe Underwter alaiJU, and to provide contr,burio with repe to. cerla;n liabilW.. including J;obililies under rhe Seurites Ac of 1933. Se '.Und~iwiln.." TM Noi. ftv be iiold b~' D,."fll' Bprnhom Lanifir1 Incorporolod 10 lhe ptiblic in one or mo 'ran.action. prior 10 AUlUII 14. i88,OI negotiClied priuc nr 01 varying prices deiermined 01 fhe fime of soer

Th. Not. are bring olfell by the Underwiler lUb;ecl to prior sol., ivhen. o. and 11 deUvèr to and

accplcd bv the l'nderwil.:r and iubiecl 10 opproval o,f cerlain lesal matl~t; b)' counsel JOt the Underwfer.

II is f!~ctèd tho. delivery of 'he Xoles wil bè motle again.i paymenr lli~tci,for on or about Aiisust 14. .988 or

di~ o./ce. o.f Drexel Burnham Lamberi 'nr.rpor~Jled, li Broad Slf/ll. New Yorle, ~I! Yorle..

Drexel Burnham Lambert ~lD
Augu.t 'I, 111'

12:26 No.001 P.09

SL"YMARY . /t.... a-lw .. il ff '" ti.. *'l- ii... ~

.... -i,. _ .. lI"o. .. jØla ~ .. .. --i- .. re~ .. "...
~
Th ..ip .. c.

.. .. AI. 0."_, hmlll plfllp cw in iil nøn fo Md ~ or 01 uc pi" l- ç.l ll na Puip .. f' to ~ 101M- bunn .. -l at M.. .. Co . Dela.__ eoio o. JIl~ 31. III tli Puttip ae 1M- MI .. .. .. WM .t Pi.. C".I. . T.. Mfío

c. AI . ~Md DelaWaR ~ or .. hr nctly orpU' fo the pu .. ni .. Ir ".lemallO~ fo 1M IiIl of ~ Pa..rshlp

l..i. c....
..ia eï MC .... ~.. .ii_ Ilpiiiily da.. ,il lnt ..r or 19&. iu Fwl- pn

relll.. .. pob". n.",... ~mllly . ..wid su.. ul Gl an . nilinwi IUrp in

natu.. deverablllty. Suh fadtl C!td ~i)' afè' t_ opla ;md 8Mnc.I ~ndti or the Panhlp.
lu... .... .., It.... .....,....

Inler Pa~ baes . . . . . . .
Gu.................. l,

Se ...... .. . .. l'" . . .. . ...
Subordl_Io............ ....
For. O(..re ..".... . . . .
OpnN Reptlo . . . . . . . . .
Ule of ~'.,............

U1tiii . "... . .. . . . "... . .. . . . n. Mm. l3.o.0i or 1ft Svuted So du Aupl 1. i Fel-uy I. ~y .. A__ i ai Ni-..r i.

P."meiii of pilllpa al -i Iii'cr .. ihe Not" will be antl. tlonal)' pahl.c 0f . J.bøiitd l- by ihe Palp. n. Nat.. wiD be l-u'" ~ tM ii of ibe Pune Note. whwh will ~ u~ NMI1lNnale-. Th Noi" will.~ lubc~ 10 ai. riiiltßl an rutll~ 5erilo Inde-btedhelS of CaUi an the eunn~e an ihe Panllblp Not will ~ i\lbona to .u edini and fiatu ~nio IlIebt. ecne Jibe ParMl At June 30 198 ih. Parnershi hil outØai", Senior Indednn lnrudlnl indirbtedne ol Pi nee uime br th ..Amip on IUch dae. in the IlC prlnrpa amn' of lriiin,dely $1.078 inllion. Upo iiilca "on or ihr -i pr~ 01 thi oferng. the aicae prMl~ ..nl at !lenlor IndedlW at the Paneship Is expel. 10

be rell bv iiOlIMtely *. million. Neithe t:.,. ille.. tUf pwmiin. aM Notts an the Cuntro: no tñe lnana "1M'" Kfmihl tM 'N\Mnip Noit' win r~ the in~ur. "ii~ or Seior Indtd~ hy Caital or tile I'arncnip. Inter 0,. ,he Noles .. be pi in C'h or. III tlae opion of Catal an the Pal'ip. ma be pa In whoe or in pu in the rtm or Coni Uiati. Anv .u"h Comll Unhi will be vaue fG! 5"eh purp .. belwir is.. and 9O. ~ndnJ on the tnlt ¥Gui- or tM Con Unl'" or tM iiven Sae Prci of thf' CoIl Unlti fu . splled pe pn 10 ,he aPJ!lNb hltl.rn pa)'nt dae. CapitN an the Puhip ourfthdy intend to .w all pa)'nU or Inlerl! on the Noes iii cuh. nie Noa will be ~ at I.. opllon or Cçla, in whole 'W In pa .. the ~irpl pr le ronh b~rei". plus Dtered inle,"t t11t"l'n. .Ke~ tha pror to Åll51 i. 1991. ..,: 'oh remplion ma, be .. with IlGnev borrowEd at an e~!i'fo

illf c- of le ih iaw. pr ";niaM.

PI of ihe Olefne Wil be UM t.. rmuee outindlt indebt￾edne Ilnd thf! Parnmip'5 prllp~ rnolving eredt fality. Applieali ha ~n .. to list the Notn on ihe Nt' Yor St~1c

Eiohia.
3

ANDREWS & KURTH L. L . P . ID : 2128502929 APR 01'94 12:27 No.OOl P.10

RNnREWS & KURTH L. L. P. in: 2128502929 APR 01 '94 12:27 No.OOl P.LL BAKER & BOTTS

• OTHè" orria.:a ONe _HE"" ~LAZA

1i......O'tON. DC, "I:L&~"ONE :~llI "._I,;t6
..0 LDU'..AN"
"''''-. T'&LltCO,"ICII i'.~i .a.-ln'Q

"'''.T'IN HOU8TON. TEXAS 7700a...88. t'CLC., ,...".

G-42,081 October 23, 1986 MESA LIMITED PARTNRSHIP (Mesa Capital)

Associate Chief Counsel (Technical)

Internal Revenue Service

Attentioni CCiINDiSi3, Room 6545

1111 Constitution Avenue, N.W.

Wa~hington, D.C. 20224

Rei Mesa Limited Partnership

Dear Sir;
You are respectfully requested to rule that certain

promissory notes in the aggregate principal amount of $300

million issued by Mesa Capital Corporation ("Capital") should

be treated as direct obligations of Mesa Licited Partnership i

("MIPU), a publicly-owned, billion-dollar li.ited ~artnership,

because such notes were issued solely to raise funas for use

in MLP i s business, were sold solely on the credit of MLP' 8

guarantee, and will be serviced 801ely with funds provided

by MLP, all as more particularly described below.

Unless otherwise indicated, all section references

are to the Internal Revenue Code of 1954, as amended (the

Code"), and all regulatory references are to the Treasury

regula tions thereunder.
PAR.TIES
The parties involved are

MLP, . Delaware limited partnership whose

Employer Identification Number 1s 75-2110450,"

T. Boone Pickens, Jr. ("Pickens"), an

individual whose Taxpayer Identification Number is

445-24..1904,11
Pickens Operating Co. ("Pickens Co. II), a Texas corporation wholly owned by Pickens whose Employer

Identification Number is 75-207i043,~

HNU~tW~ K KU~ I H L. L. P. ID: 2128502929 APR 01'94 12:28 No.OOl P.12

! r,

Associate' Chief Counsel (Technical) -2
Me.a Ç)erating Limited Partnership ("Operating

LP"), a Delaware liinited partnership whose Employer

Identification Numer ii 7S-2iiOS~S,and
. .
Capital, a Delaware corporation whose Employer

Identification Number is 75-2115388.,

The address of each of MLP, Operating LP, Pickens. .'
Pickens Co., and Capital is One Mesa Square, P.O. Box 2009, Amarillo, Texas 79189; and the telephone number of each is . (806) 378-1000t Their tax and information returns are filed on the basis of the calendar year, and the District Director ," at Dall.a, Texaa, has audit jurisdiction over such returns.

P1.ckena and Pickens Co. use the cash method of accounting i' .'

the other parties use the accrual method J~

Pickens and Pickens Co. (collectively "General

Partners") are the sole general partners of .MLP and

Operating LP 0" The General Partners have a lZ" interest in

the general profits and losses and capital of MLP and a

i .101%1' interest in the general profits and losses and capi￾tal of Operating LP. MLP owns all of the limited partner￾ship interest in Operating LP, which consists of a 98.9899%

interest in the general profits and 108ses and capital of

Operat1ng LP. Operating LP is engaged primarily in the

development and production of oil and gas. The two~tier

partnership structure permits changes in ownership of limited

partnership interests in MLP without resulting in a change '

in the partners of Operating LP and thereby avoids the neces￾sity of having to record changes in ltmited partnership inter￾ests in each of the states in which the Operating LP engages

in business. For convenience, Operating LP will be disre￾garded and its assets and liabilities will be treated as if

owned directly by MLP in which the General Partners have a

2% interest. The assets, liabilities, business, and finan￾cial statements of NtP are described in more detail at pages

4-14 of the prospectus attached hereto as Exhibit A ("Pro￾spectus") .
The limited partnership interest in MLP has been

divided into Units, of which currently there are two classes:

Common Units and Preference A Units. The two classes of

Units are economicaiiy the same except that for a limited

period the Preference A Units have a preferred and limited

right to earnings and distributions. As of July 18, 1986,

there Were over 65 million COmmon units issued and outstand￾ing and over 61 million Preference A Units issued and out.

standing. Both Units trade on the New York Stock Exchange

and on July 18. 1986, had an aggregate market value in

007lJCGDL/132DOl

ANDREWS & KURTH L. L . P . I D : 2128502929 APR 01 '94 12:29 No.OOl P.13 Associate Chief Counsel (Technical) -3 excess of $1.5 billion. Ai of the date of this letter. the

number of outstanding Units and the aggregate market value

is substantially greater.

BACKGROUND
ML waa formed at the end of 1985 to succeed to the oil and gas business of Mesa Petroleum Co. As of June .. 30i 1986, HLP had assets with a book value in excesa of $2.6

bi lion,: and debts in excess of $1 billion, most of which

was borrowed pursuant to a revolving bank credit agreement.

MLP wished to issue its lO-year subordinated debentures to

obtain fundi to reduce 1t~ bank debt.

Normlly, pension funds and other fiduciary- managed organizations are large purchasers of investment-

grade debt obligations issued by companies with substantial

assets and net worth. l-!LP was advised, however, that the

laws of many states restricted the right of such organ12a￾tions to make investments that do not meet certain criteria

and that. while typically a debt obligation of a corporation

would meet such criteria, a debt obligation of a partnership

would not.
THE PLAN

As a possible means of permitting more state reg- J

ulated organizations to invest in MLP debt obligations, MLP

adopted the following plan:
(a) Capital was organized with $1,000 cash and a

$999,000 nota receivable from MLP. Its purpose was

limited to offering securities or borrowing money for

the benefit of MLP. Page 4 of the Prospectus.

(b) Capital was made the nominal issuer of

promissory notes, that had an aggregate face amount of

$300 million. an interest rate of 12% per annum, and a

maturity date of August 1. 1996 ('ICapital Notes"). The

Capital Notes were guaranteed by MLP.

ec) The Capital Notes were sold in a Firm Under. writing for $286,821.000. In the Prospectus, the busi. nesa and financial condition of Capital are disclosed

in three sentences. The business and financial condi￾tion of MLP are discussed in considerable detail.

Cd) All the proceeds from the sale of the Capital ~tote. were immediately lent to KLP for an MLP note ('IMLP

Note") exactly sufficient to service the Capital Notes.

007WCGDL/l32DOl
..
."
"