Proposed Exemptions; Lone Star Industries, Inc. Master Retirement Trust, et al.

DEPARTMENT OF LABOR

[Application No. D-9295, et al.]

Proposed Exemptions; Lone Star Industries, Inc. Master Retirement

Trust, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, within 45 days from the

date of publication of this Federal Register Notice. Comments and

request for a hearing should state: (1) the name, address, and

telephone number of the person making the comment or request, and (2)

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

request for a hearing must also state the issues to be addressed and

include a general description of the evidence to be presented at the

hearing. A request for a hearing must also state the issues to be

addressed and include a general description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, room N-5649, U.S.

Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210.

Attention: Application No. stated in each Notice of Proposed Exemption.

The applications for exemption and the comments received will be

available for public inspection in the Public Documents Room of Pension

and Welfare Benefits Administration, U.S. Department of Labor, room N-

5507, 200 Constitution Avenue NW., Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

Lone Star Industries, Inc. Master Retirement Trust (the Master Trust)

Located in Chicago, IL

[Application No. D-9295]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR part

2570, subpart B (55 FR 32836, 32847, August 10, 1990).

Section I--Transactions

If the exemption is granted, effective September 10, 1990, the

restrictions of sections 406(a), 406(b)(1), 406(b)(2), and 407(a) of

the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the

Code, shall not apply to:

(a) the lease (the Lease) by the Master Trust of a certain parcel

of real property (the Property) located in Rancho Cordova, California,

to RMC Lonestar (RMC), a party in interest with respect to plans

participating in the Master Trust (the Plans);

(b) the obligations and guarantees to the Master Trust by Lone Star

Industries, Inc. (LSI), a party in interest with respect to the Plans,

arising under the terms of the Lease on the Property, subsequent to the

assignment by LSI of its leasehold interest in the Property to RMC; and

(c) the payment in the amount of $6,000,000 by LSI to the Master

Trust in exchange for a release of LSI's obligation to perform under

the terms of a certain yield guarantee agreement (the Guarantee

Agreement) signed December 18, 1992, by LSI and the Master Trust;

provided that the conditions set forth in section II below are

met.1

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\1\For purposes of this exemption, references to specific

provisions of Title I of the Act, unless otherwise specified, refer

also to the corresponding provisions of the Code.

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Section II--Conditions

This exemption is conditioned upon the adherence to the material

facts and representations described herein and upon the satisfaction of

the following requirements:

(a) the Bankruptcy Court for the Southern District of New York (the

Bankruptcy Court) enters an order confirming the modified amended

consolidated plan of reorganization filed by LSI and its affiliates,

pursuant to Chapter 11 of the Bankruptcy Code;

(b) the obligations and guarantees of LSI to the Master Trust under

the Lease are assumed by LSI and continue after the plan of

reorganization is confirmed by the Bankruptcy Court;

(c) LSI pays the $6,000,000 in a single lump-sum payment in cash to

the Master Trust, not later than sixty (60) days following the later of

(1) the date of the order of the Bankruptcy Court approving the

payment, or (2) the date the grant of this exemption is published in

the Federal Register;

(d) Morrison, Karsten, Ramzy & Arthur, Inc. (MKRA), acting as

independent qualified fiduciary on behalf of the Master Trust (the I/

F), has negotiated, reviewed, and approved the transactions, and has

determined that the transactions were feasible, in the interest of, and

protective of the participants and beneficiaries of the Plans invested

in the Master Trust, as of the effective date of this exemption;

(e) MKRA at the time of its appointment was unrelated to LSI, RMC,

and any other parties involved in the Lease and will at all times

remain independent of such parties;

(f) the provisions of the amendment to the Lease, as described in

paragraph 11 below, executed in December 1992 (the First Amendment)

become effective on the date that the grant of this exemption is

published in the Federal Register;

(g) the terms of the Lease, as modified by the First Amendment, are

at least as favorable to the Master Trust, the Plans, and their

participants and beneficiaries, as those which could have been obtained

by the Master Trust in an arm's length negotiations with an unrelated

third party under similar circumstances;

(h) from September 10, 1990, to June 1, 1993, the Northern Trust

Company (the Trustee), an independent party with respect to LSI, RMC,

and their affiliates, managed the Property on behalf of the Master

Trust and monitored and enforced the terms of the Lease;

(i) from June 1, 1993, MKRA managed the Property on behalf of the

Master Trust and monitored and enforced the terms of the Lease, and

MKRA or its successors, will act as I/F with respect to the Property

and will monitor and enforce the provisions of the Lease as long as

such Property is leased to a party in interest;

(j) MKRA or its successors will monitor the fair market value of

the Master Trust in order to insure that the fair market value of the

Property will at no time exceed twenty percent (20%) of the total fair

market value of the assets of the Master Trust;

(k) LSI has either paid directly or reimbursed the Master Trust for

any fees, other than trustee and investment management fees, incurred

with respect to the ownership of the Property by the Master Trust, and

in the future, the Master Trust will incur no fees in connection with

the transactions, other than fees paid to the trustee and to the

investment manager; and

(l) LSI has filed Forms 5330 and paid the excise taxes with respect

to the Lease of the Property for years 1987-1989 and will file Forms

5330 and pay the excise taxes for the period after December 31, 1989,

and before the effective date of this exemption.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption

will be effective as of September 10, 1990.2

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\2\The Department is not proposing exemptive relief for the

prohibited transactions described herein prior to September 10,

1990. In this regard, it is represented that LSI on July 31, 1990,

filed an excise tax return on Forms 5330 for plan years 1987, 1988,

and 1989 and paid the excise taxes with respect to the Property for

years 1987-1989. It is also represented that LSI will file Forms

5330 and pay the excise taxes for the period after December 31,

1989, and before the effective date of this proposed exemption.

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Summary of Facts and Representations

1. The Plans are pension plans sponsored by LSI and its

subsidiaries. LSI, a corporation whose stock is publicly traded on the

New York Stock Exchange, engages in the mining, processing, and

distributing of sand, gravel, and crushed stone. In addition, LSI is a

major source of ready-mixed concrete and precast concrete products and

is a leading importer of cement and clinker. During 1987, LSI had net

sales of $760.8 million and a net profit of $57.2 million. Since

December 31, 1987, LSI has been one of two general partners, each of

whom own a fifty percent (50%) interest in RMC, a California general

partnership. Prior to that time, LSI and a wholly owned subsidiary

together owned a hundred percent (100%) interest in RMC. RMC, with

principal offices in Pleasanton, California, also engages in mining

operations.

2. On January 1, 1979, the Master Trust was established, to provide

for the commingled investment of the assets of Plans sponsored by LSI

and its affiliates. As of June 30, 1992, there were nine (9) such Plans

participating in a Master Trust, covering approximately 5,917

individual participants. As of the same date, the total value of the

assets held by the Master Trust was approximately $88,223,000 of which

approximately $29 million was held in a segregated fund for the benefit

of LSI's Salaried Employees Pension Plan. Of the remaining $59 million,

approximately $55 million was held for the benefit of the pension plans

for hourly employees of LSI, and an additional $4 million was held for

the benefit of the pension plans for salaried employees of LSI. It is

represented that, as of June 30, 1992, a value for the Property of

approximately $8,340,000 was included in and constituted approximately

14.1% of the $59 million dollar figure. Until June 1, 1993, when MKRA

was appointed as Property manager, the Northern Trust Company, as the

Trustee of the Master Trust, had discretionary authority over the

management of the Property.

3. The Property consists of approximately 800 acres in Rancho

Cordova, California located twelve (12) miles east of downtown

Sacramento, California, and adjacent to Mather Air Force Base. Most of

the Property is unimproved land currently being mined by RMC for sand,

gravel, stone, clay, or other materials, exclusive of gold or gold

tailings (the Aggregates), pursuant to the Lease between the Master

Trust and RMC. It is anticipated that approximately 100 acres of the

Property containing the plant site will not be mined.

4. The Master Trust acquired the Property from LSI on December 20,

1983, for a purchase price of $5,706,016, and simultaneously leased the

Property back to LSI. It is represented that the Property was part of a

larger tract of real estate (the Tract) which under California law

could not then be subdivided or separately conveyed to the Master

Trust. Accordingly, the Master Trust acquired from LSI an undivided

62.8% interest, while LSI, respectively, retained 37.2% interest in the

Tract.3 Subsequently, during 1984, applicable provisions of

California law necessary to subdivide the Tract were satisfied, and the

Master Trust became the sole owner and lessor of the Property.

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\3\The Department is expressing no opinion as to whether the

acquisition and holding by the Master Trust of a partial interest in

the Tract in which LSI owned the remaining interest violated section

406 of the Act, nor is the Department offering relief for such

transaction. Further, the Department is not proposing relief for any

violation of section 404 of the Act which may have arisen as a

result of any of the transactions described herein.

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It is represented that the Property was ``qualifying employer real

property,'' as defined in section 407(d)(4) of the Act, when acquired

by the Master Trust in 1983, because the Master Trust held other

parcels of real estate which were then leased to LSI or its affiliates

and which qualified as ``employer real property,'' as defined in

section 407(d)(2) of the Act.4 The applicant asserts that the sale

and leaseback of the Property between the Master Trust and LSI until

1986 were exempt from the prohibited transaction restrictions by reason

of section 408(e) of the Act.5

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\4\As set forth in relevant part below, section 407(d)(2) of the

Act defines the term, ``employer real property,'' as real property

(and related personal property) which is leased to an employer of

employees covered by the plan, or to an affiliate of such employer.

Section 407(d)(4) of the Act defines the term, ``qualifying employer

real property,'' as parcels of ``employer real property''--(A) if a

substantial number of the parcels are dispersed geographically; (B)

if each parcel of real property and the improvements thereon are

suitable (or adaptable without excessive cost) for more than one

use; (C) even if all of such property is leased to one lessee (which

may be an employer, or an affiliate of an employer); (D) if the

acquisition and retention of such property comply with the

provisions of this part (other than section 404(a)(1)(B) to the

extent it requires diversification, and sections 404(a)(1)(C), 406,

and subsection (a) of this section). The Department is expressing no

opinion, herein, whether the Property at any time constituted

``qualifying employer real property'' within the meaning of section

407(d)(4) of the Act.

\5\Section 408(e) of the Act provides, in pertinent part, that

sections 406 and 407 shall not apply to the acquisition or lease by

a plan of ``qualifying employer real property,'' as defined in

section 407(d)(4) of the Act, if specified conditions are satisfied.

Among these conditions are that such acquisition or lease is for

adequate consideration, that no commission is charged with respect

thereto, and, in the case of an acquisition or lease of ``qualifying

employer real property'' by a plan which is not an ``eligible

individual account plan,'' as defined in section 407(d)(3) of the

Act, that the lease or acquisition is not prohibited by section

407(a) of the Act. The Department is expressing no opinion herein as

to whether the sale and leaseback of the Property satisfied the

conditions, as set forth under section 408(e) of the Act.

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5. By 1986, except for the Property, the Trustee had disposed of

all other parcels of real estate in the Master Trust which were leased

to LSI or its affiliates. Accordingly, the Property became the only

parcel of ``employer real property,'' as defined by section 407(d)(2)

of the Act, which remained in the Master Trust. As the sole remaining

parcel of ``employer real property'' held in the Master Trust, the

applicant represents that the Property may have, at that time, no

longer constituted ``qualifying employer real property,'' because the

``substantial number'' requirement, as set forth in section

407(d)(4)(A) of the Act, may no longer have been satisfied. As a

result, the exemption for the Lease provided by section 408(e) may no

longer have been available.

6. As stated in paragraph 4 above, LSI entered into the Lease of

the Property with the Master Trust on December 20, 1983. On January 1,

1987, the Trustee of the Master Trust approved the assignment by LSI of

the Lease of the Property to RMC, and the Master Trust began to Lease

the Property to RMC rather than LSI. Notwithstanding the assignment of

the leasehold interest of LSI to RMC, it is represented that LSI was

not released from its obligations under the Lease, nor were the terms

of the Lease between LSI and the Master Trust altered by the assignment

of the Lease.

The Lease provides that its term shall end on December 31, 2003,

unless sooner terminated. The Trustee has the right to terminate the

Lease on certain portions of the Property prior to December 31, 2003,

effective on specified dates, provided RMC is given at least six months

prior written notice of such effective termination date. Under certain

circumstances, the Lease also gives the Trustee the right to terminate

such Lease with respect to any portion of the Property which is not

continuously mined or quarried during specified periods.

It is represented the Trustee recognized the need to maintain a

fair market rental throughout the duration of the Lease. Accordingly,

the rental rate under the terms of the Lease are based on royalties to

be paid to the Master Trust to compensate primarily for the removal of

the Aggregates from the Property and the subsequent sale of such

Aggregates. In this regard, under the terms of the Lease, the royalty

on the Aggregates was set in 1983 at thirty cents ($.30) per ton;

provided that in any lease year the lessee pays no less than seven

percent (7%) of the net realized income from the sale of such

Aggregates. For each year during the term of the Lease, commencing in

the second year, the Lease also provides that the royalty on Aggregates

is subject to a four percent (4%) yearly increase, compounded annually.

For example, in the second year of the Lease, the royalty on the

Aggregates increased from the initial 30 cents per ton to 31.2 cents

per ton of Aggregates. In addition, the Lease provides that for each

ton of gold or gold tailings extracted from the Property the lessee

shall pay a royalty equal to 33\1/3\% of the net realized income from

the sale of such gold or gold tailings. It is represented that all the

terms of the Lease are triple net and provide for the lessee to pay for

all taxes, maintenance, and insurance.

Notwithstanding the level of production or sale of Aggregates or

gold by the lessee, the Lease also provides for certain minimum

guaranteed annual payments of royalties by the lessee starting in the

sixth year (1989) and ending in the fifteenth year (1998) of the Lease.

In this regard, the Lease provides that these minimum guaranteed

royalties increase by $25,000 annually through 1998. For example, the

terms of the Lease established the minimum guaranteed royalty amount at

$375,000 for 1989 and at $600,000 in 1998, the fifteenth year of the

Lease. It is represented that the royalty payments actually made by RMC

have exceeded the minimum guaranteed royalty amounts for the years 1989

through 1992. As indicated in paragraph 6 above, despite the assignment

of the leasehold on the Property to RMC, LSI at all times remains

primarily liable to the Master Trust for the continuing obligations and

guarantees, including the minimum guaranteed royalties specified under

the Lease.

As originally contemplated by LSI and the Master Trust, although

the Lease term extended until 2003, the guarantee of minimum annual

royalty payments by LSI was not to extend beyond 1998. Such amounts are

not guaranteed by LSI, because it was originally anticipated that the

reserves of the Aggregates on the Property would be exhausted by 1998.

Nevertheless, it is represented that provision was made to continue the

Lease beyond 1998 in the event there was sufficient production or sale

of the Aggregates from the Property during the five-year period from

1999 to 2003.

7. In an attempt to obtain a prohibited transaction exemption from

the Department for the ongoing Lease, MKRA, a registered investment

advisor under the Investment Advisors Act of 1940, was appointed by LSI

in June 1990 to serve as the I/F to the Master Trust with respect to

the Lease. MKRA was appointed to determine whether the continued

holding of the Property by the Master Trust and the leasing of the

Property to RMC was in the best interests of the Plans. In doing so,

MKRA was to evaluate the Lease and to determine whether the terms of

the Lease provided a fair market rental return to the Master Trust. In

this regard, MKRA was authorized to engage an independent appraiser, as

needed. It is represented that, if MKRA were to conclude that the

continuation of the Lease was not in the best interests of the

participants of the Plans, MKRA was to notify and consult with LSI with

respect to such findings and to negotiate independently any changes to

the terms and conditions of the Lease, as would be necessary for MKRA

to determine that such continued holding of the Property and leasing of

such Property to RMC would be in the best interests of the participants

of the Plans.

On June 1, 1993, MKRA assumed further responsibilities in addition

to its duties as I/F. In this regard, LSI appointed MKRA to serve as

investment manager for the Property on behalf of the Master Trust.

MKRA's duties in this regard include monitoring and enforcing the terms

of the Lease. These duties had previously been performed by the

Trustee. MKRA maintains offices located in Santa Rosa, California and

specializes in the management and disposition of distressed and under

performing real estate assets for tax-exempt and non-exempt

institutional clients. MKRA is independent in that it is unrelated to

any of the parties involved in the Lease.

MKRA's qualifications include managing, as of 1990, approximately

$40 million in assets involving a variety of property types located

throughout the West and the Southwest. Further, it is represented that

MKRA is familiar with land value trends in the Sacramento area and has

an excellent network of contacts there for appraisal, geological, and

real estate transaction information. In this regard, with respect to

the highly specialized operations on the Property, MKRA interviewed and

consulted with independent third parties active in the sand and gravel

industry in the Sacramento or San Francisco Bay areas.

8. In a report dated September 10, 1990, MKRA stated that the Lease

needed to be modified in several respects. MKRA determined, among other

modifications, that the Master Trust should receive a ``put option''

(the Put Option) which would require LSI to purchase the Property from

the Master Trust at the end of the Lease at a cash price that, when

considered with all royalties and earlier disposition proceeds, if any,

received by the Master Trust over the life of the investment, would

generate a twelve percent (12%) internal rate of return on the Property

for the Master Trust. Provided this modification and others were made,

MKRA concluded that the continued holding of the Property by the Master

Trust and the leasing to RMC would be in the best interests of the

Plans.

9. MKRA's conclusion was based, in part, on its review, among other

materials, of the annual reports and related financial information of

LSI and RMC and the presumption that LSI and RMC were and would remain

sufficiently creditworthy to honor the recommended Put Option and

thereby assure the Master Trust a 12% market yield for the Property as

leased. However, on December 10, 1990, while the application for

exemption was under consideration by the Department, LSI filed a

petition to reorganize under Chapter 11 of the United States Bankruptcy

Code.

As a result of LSI's petition in Bankruptcy Court, MKRA raised

concerns as to: (1) LSI's ability to perform under the Put Option; and

(2) the viability of such Put Option, without modification, to serve as

a reliable yield guarantee device. In response, LSI requested that MKRA

further determine whether the continuation of the Lease to RMC would

remain in the best interests of participants and beneficiaries of the

Plans, given the fact that LSI had filed a petition for reorganization

in Bankruptcy Court.

10. In order to make this analysis, MKRA engaged in an extensive

review and analysis of the Property, including obtaining an additional

evaluation of the soil conditions on the Property. In this regard, MKRA

hired Jo Crosby and Associates (Crosby), a geotechnical consultant

located in Mountain View, California. Crosby's report, issued in

December 1992, updated the observations and conclusions of its two

prior reports, dated February 22, 1991, and September 18, 1991, which

had addressed the ability of the Property to support future commercial

development upon completion of the mining operations. In addition,

Crosby reviewed the status of the mining operation, and RMC's proposed

plans for completion of the quarrying, and assessed the validity and

costs of previously recommended soil remediation measures.

In its December 1992 report, Crosby stated that remediation of 525

acres of quarry floor would cost $7,000 per acre, plus up to $1,500 per

acre for geotechnical engineering, and supervision for a total cost of

from $3,150,000 to $4,462,500. With respect to approximately 180 acres

of the Property to be quarried in the future, Crosby estimated

remediation would cost $5,200 per acre, plus $1,000 per acre for

engineering and supervision, if certain recommendations were followed.

While remediation of the Property to enable commercial development

at the termination of the Lease would have a high cost, paying this

price would be optional to the then Property owner. There are no

regulatory requirements to engage in so extensive a remediation. In

fact, with regard to soil remediation of the Property upon completion

of the mining, it is represented that the State of California does not

have any requirements. However, the County of Sacramento requires upon

completion of mining: (1) The rough grading of slopes--no greater than

two feet horizontal to one foot vertical, (2) the seeding of such

slopes within one year of the completion of mining, (3) the

encouragement of natural growth in reclaimed areas, and (4) the

maintenance of reclaimed areas free of derelict machinery and

materials. In this regard, the Lease requires the lessee to reclaim

portions of the Property that it has mined in accordance with the

requirements of the law, and those of the Property Use Permit dated May

9, 1975, as revised on August 8, 1983. The lessee is also obliged to

remove all improvements, fixtures, and equipment from the Property at

the end of the Lease term. It is represented that RMC has complied with

these reclamation requirements in all areas where mining has been

completed.

11. After reviewing the information described in the paragraph

above, MKRA concluded that continuing the Lease would be in the best

interests of the participants of the Plans provided the Lease was

amended, and LSI agreed to certain modifications in the guaranteed rate

of return. Accordingly, LSI, the Trustee, and MKRA signed, in December

1991, a letter of understanding, and subsequently, on December 18,

1992, signed the final Guarantee Agreement, first mentioned in

paragraph (b) of section I above. Though the Guarantee Agreement was

executed by LSI, MKRA, and the Trustee, the agreement would only become

effective upon approval by the Bankruptcy Court and was also

conditioned on the Department granting LSI's application for exemption

from the prohibited transaction provisions of the Act.

The Guarantee Agreement provided for a guarantee by LSI to the

Master Trust of a fourteen percent (14%) annual internal rate6 of

return on $5,706,000, the purchase price paid by the Master Trust for

the Property in 1983. It is represented that MKRA increased the

internal rate of return to fourteen percent (14%) from the twelve

percent (12%) it had previously recommended, due to changes in market

conditions for institutional investment in real estate. The guaranteed

return was to be provided either through a ``put'' of the Property to

LSI or through the payment by LSI of a yield guarantee amount, subject

to a $10,000,000 limit on LSI's liability. In order to secure the

guaranteed return, LSI, under the terms of the Guarantee Agreement, was

required to: (1) Post an irrevocable letter of credit in a form

satisfactory to the Master Trust, or (2) deposit in an escrow account

either cash (initially in the amount of approximately $6,700,000 but

subject to annual adjustments) or liquid securities meeting pre-

specified requirements in terms of investment grade and quality.

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\6\It is represented that internal rate of return is defined as

the rate of return at which the discounted future cash flows,

including the reversion, equal the initial cash outlay (in this

instance the initial purchase price of $5,706,016). The internal

rate of return is also defined as the discount rate at which the net

present value of a series of cash flows, including the initial

investment outflow (investment amount) and the reversion, is zero.

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Further, the Guarantee Agreement required LSI to contribute,

beginning in 1995, or if earlier, upon completion of payments to

creditors pursuant to a confirmed plan of reorganization, up to

$200,000 per year, subject to certain limiting conditions, which would

be used to prepare and implement a program of soil remediation on the

Property. Under the terms of the Guarantee Agreement, LSI had the right

to purchase the Property at the higher of its fair market value or an

amount necessary to provide the Master Trust with its 14% internal rate

of return. If the purchase were to occur prior to December 31, 1998,

LSI was required to pay an ``early purchase premium'' of up to $1

million to exercise this right. However, the Master Trust could offer

the Property for sale to LSI without the ``early purchase premium'' at

the higher of the fair market value of the Property or an amount

necessary to provide the Master Trust with the 14% internal rate of

return.

In connection with the Guarantee Agreement, LSI also agreed to the

First Amendment to the Lease on the Property. As indicated in paragraph

(f) of section II above, the First Amendment to the Lease will become

effective on the date the grant of this proposed exemption is published

in the Federal Register. The First Amendment will provide: (1) For

notice to the Master Trust at least twelve months in advance of the

monthly due date for non-guaranteed minimum annual royalties of RMC's

intent not to pay such royalties to the Master Trust,7 (2) for a

limitation on the increase in the number of acres on the Property used

as settlement ponds, and (3) for access to the Property by the Master

Trust for soil remediation activities. In addition, the First Amendment

deleted section 25 of the Lease which had provided LSI with a ``right

of first opportunity'' to purchase the Property should the Master Trust

determine to sell to third parties and corrected a typographical error

in the language under section 23 of the Lease, with respect to the

remedies available to the Master Trust in the event RMC, as lessee,

attempted to occupy the Property or any part of the Property after

termination of either the Lease or the lessee's right to possession of

the Property.

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\7\In the event such minimum non-guaranteed annual royalties are

not paid, the Master Trust, as lessor, may at its election, upon not

less than ten days written notice to RMC, the lessee, terminate the

Lease and all of RMC's rights thereunder.

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12. Subsequently, LSI determined that, in lieu of its performance

under the Guarantee Agreement, it would prefer to make a cash payment

to the Master Trust. LSI believes such payment will increase the level

of funding for the Plans and will assist in negotiations occurring in

bankruptcy with the Pension Benefit Guaranty Corporation (the PBGC),

respecting, among other things, potential underfunding of the Plans,

and PBGC's contingent claims should the Plans be terminated with

insufficient assets to satisfy benefit liabilities.

Accordingly, after discussions with MKRA and the Trustee of the

Master Trust, in a letter dated July 9, 1993, LSI offered to pay the

Master Trust $6,000,000 (the Proposed Offer), if the Master Trust would

give up certain rights, as set forth in the Guarantee Agreement. In

this regard, acceptance of the Proposed Offer is contingent upon: (a)

the $6,000,000 payment being approved by the Bankruptcy Court; (b) the

Department issuing a final administrative exemption; (c) the Trustee

withdrawing all claims currently pending before the Bankruptcy Court

filed on behalf of the Master Trust relating to or arising from the

ownership of the Property by the Master Trust and the leasing of the

Property;8 (d) the Master Trust providing LSI, RMC, their

affiliates, officers, directors, and employees, and all fiduciaries of

the Master Trust with a complete release of any claims against such

parties based on the Lease of the Property to LSI or to RMC which may

have been deemed to be a prohibited transaction under section 406 of

the Act or section 4975 of the Code or which may involve a breach of

fiduciary duty under section 404 of the Act;9 and (e) the Master

Trust releasing LSI from all obligations under the terms of the

Guarantee Agreement. Notwithstanding the release of LSI from its

obligations under the Guarantee Agreement, it is represented that the

First Amendment to the Lease, which provides for the notice to the

Master Trust of non-payment of certain royalties, the limitation on

settlement ponds, access by the Master Trust for remediation activities

on the Property, the deletion of the ``right of first opportunity'' for

LSI to purchase the Property, and correction of certain typographical

errors in the Lease, as described in paragraph 11 above, will become

effective on the date this proposed exemption is granted.

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\8\It is represented that on October 15, 1991, the Trustee, on

behalf of the Master Trust, filed a proof of claim in the Bankruptcy

Court against LSI. The proof of claim alleges contingent liability

of LSI to the Master Trust as a result of the continuation of the

Lease and as a result of possible violations of the prohibited

transaction restrictions of the Code and the Act. In addition, it is

represented that the Trustee and the PBGC each filed contingent

claims to cover the possibility of funding deficiencies or unfunded

pension liabilities in the pension plans sponsored by LSI. In this

regard, on October 15, 1991, the PBGC filed three separate proofs of

claim against LSI. The PBGC's claims consist of: (1) a claim for

$196,129 based on the alleged failure of the debtors to pay annual

premiums; (2) a claim for $2,318,288 based upon the alleged failure

of the debtors to meet minimum funding requirements in the event of

the termination of certain plans; and (3) a contingent claim for

$61,066,255 based on the potential liability should such plans be

terminated with insufficient assets to satisfy all benefit

liabilities.

\9\The Department notes that the decisions affecting the Master

Trust made by the fiduciaries, including the Trustee and MKRA, are

governed by the fiduciary responsibility requirements of part 4,

subtitle B, title I of the Act. Section 404 of the Act requires that

a fiduciary of a plan must act prudently, solely in the interest of

the participants and beneficiaries of such plan, and for the

exclusive purpose of providing benefits to such participants and

beneficiaries. In this regard, the Department notes that in order to

act prudently in determining to release the above-described claims

and to accept the Proposed Offer on behalf of the Master Trust, the

fiduciaries must consider, among other factors, the consequences of

that decision in relation to those of alternative courses of action.

The Department is expressing no opinion, herein, whether any

provision of part 4, subtitle B, title I of the Act will be violated

by the decision of the Master Trust to provide a complete release of

all claims against LSI, RMC, their affiliates, officers, directors,

and employees, and any other fiduciaries of the Master Trust. In

this regard, the Department notes that no relief from sections 406

and 407 of the Act is provided, herein, for transactions other than

those specifically described in section I(a)-(c) of this proposed

exemption. The Department further notes that the Plans' release of

claims in connection with the Lease transaction does not affect the

Department's ability to take any action that it deems appropriate.

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13. MKRA has determined that the acceptance by the Master Trust of

the Proposed Offer is feasible, in the interest of and protective of

the participants and beneficiaries of the Plans, provided the

Bankruptcy Court approves the $6 million dollar payment and provided

that the obligations of LSI, as set forth under the Lease, will

continue unaffected and will become obligations of LSI upon

confirmation of a plan of reorganization. In this regard, MKRA has

opined that the $6,000,000 cash payment, if received by April 30, 1994,

will produce in combination with the Lease an overall transaction which

is (i) superior to that produced by the Guarantee Agreement, (ii) is

feasible, in the best interest of, and protective of the beneficiaries

of the Master Trust, and (iii) is equal or superior to transactions

which could be negotiated with unrelated third parties.

MKRA offers the following reasons for this opinion regarding the

Proposed Offer:

(a) MKRA asserts that the Proposed Offer completely eliminates the

risk of capital recovery and achievement of a current fair market

yield. MKRA calculates that the Proposed Offer will generate an

internal rate of return of 11.02%, assuming the $6,000,000 cash payment

is received on or before April 30, 1994. MKRA explains that this means

that from commencement of the Lease through 1993, the Master Trust will

have received total consideration in an amount equal to its original

investment of $5,706,000 plus an annual yield on that investment of

11.02% for each year during the term of the Lease through April 30,

1994--even if the Master Trust does not receive royalty payments or any

reversionary amount for the Property subsequent to receipt of the $6

million dollar payment. MKRA concludes that, as the Proposed Offer

eliminates the risk of recovery of capital, an internal rate of return

of 11.02% represents a yield equal or superior to the current market

yield required by pension funds. In the opinion of MKRA, such current

market yield ranges from nine to ten percent (9% to 10%) on

investments, such as single tenant properties leased for periods of ten

(10) or more years on an absolute net basis to AAA-rated tenants.

(b) MKRA asserts that with the Proposed Offer there is greater

opportunity for enhanced yield in excess of the fourteen percent (14%)

rate of return provided for under the Guarantee Agreement. In analyzing

the Guarantee Agreement, MKRA calculated that in order to generate an

annual fourteen percent (14%) rate of return, the Property would have

to have a reversionary value of $14,656,000 (only $10 million of which

under the Guarantee Agreement would have been guaranteed by LSI) upon

the expiration of the Lease in 1998. In analyzing the Proposed Offer,

MKRA asserts that if the $6,000,000 cash payment were to be made by

April 30, 1994, the reversionary value of Property in 1998 would only

need to be $3,475,000 to generate a fourteen percent (14%) internal

rate of return for the Master Trust. MKRA states in a letter dated

January 27, 1994, that as of December 31, 1993, the estimated fair

market value of the fee simple estate interest in the Property is

$5,750,000. Because the current fair market value of the Property, as

determined by MKRA, exceeds the $3,475,000 value which MKRA calculates

would be needed in 1998 to generate a fourteen percent (14%) internal

rate of return, MKRA concludes that the Proposed Offer produces an

enhanced opportunity for the investment in the Property by the Master

Trust to produce an internal rate of return in excess of fourteen

percent (14%).

(c) MKRA asserts that under the terms of the Proposed Offer, a

yield in excess of 11.02% is assured to the Master Trust. In this

regard, MKRA explains that every dollar of reversionary value, and

future royalties paid for the Property in excess of zero will produce a

yield in excess of the 11.02% rate of return generated by royalties

received to date by the Master Trust, plus the $6,000,000 cash payment.

Notwithstanding the soils remediation issues that exist for the

Property, MKRA expresses certainty that the Property will have some

value upon expiration of the Lease. In this regard, MKRA explains that

the acreage representing the plant site will not be mined, and

accordingly, the value of that portion will not be affected. According

to MKRA, the 100 acres on the Property representing the plant site have

a current fair market value of approximately $1,200,000, as of January

27, 1994. Thus, MKRA states that, even if all of the areas which are

mined and require remediation prior to future development prove to be

valueless, the Property would still have a value of approximately

$1,200,000, subject to future market conditions, when the Lease

terminates. Assuming a $1,200,000 reversionary value for the Property

and receipt of the $6,000,000 cash payment by April 30, 1994, MKRA

calculates that upon expiration of the Lease the Property will have

generated a 12.18% internal rate of return. In the opinion of MKRA,

such a rate of return is well in excess of market yield requirements

for comparable investments.

14. In summary, the applicant represents that the subject

transactions satisfy the criteria for exemption, as set forth in

section 408(a) of the Act because:

(a) LSI will pay $6,000,000 in a single lump-sum payment in cash to

the Master Trust, not later than sixty (60) days following the later of

(1) the date of the order of the Bankruptcy Court approving the

payment, or (2) the date the grant of this exemption is published in

the Federal Register;

(b) MKRA, acting as I/F on behalf of the Master Trust, has

negotiated, reviewed, and approved the transactions, and has determined

that the transactions were feasible, in the interest of, and protective

of the participants and beneficiaries of the Plan invested in the

Master Trust, as of the effective date of this exemption;

(c) the terms of the Lease, as modified by the First Amendment, are

represented to be at least as favorable to the Master Trust, the Plans,

and their participants and beneficiaries, as those which could have

been obtained by the Master Trust in an arm's length negotiation with

an unrelated third party under similar circumstances;

(d) MKRA, as I/F on behalf of the Master Trust, has managed the

Property, and MKRA or its successors, will act as independent

investment manager of the Property and will enforce the provisions of

the Lease; for as long as such Property is leased to a party in

interest;

(f) MKRA or its successors will monitor the fair market value of

the Master Trust in order to insure that the fair market value of the

Property will at no time exceed twenty percent (20%) of the total fair

market value of the assets of the Master Trust; and

(g) LSI has either paid directly or reimbursed the Master Trust for

any fees, other than trustee and investment management fees, incurred

with respect to the ownership of the Property by the Master Trust, and

in the future, the Master Trust will incur no fees in connection with

the transactions, other than fees paid to the trustee and to the

investment manager.

For Further Information Contact: Angelena C. Le Blanc, of the

Department, telephone (202) 219-8883. (This is not a toll-free number.)

Wally L. Morgan IRA (the IRA) Located in Dallas, TX

[Application No. D-9581]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 4975(c)(2) of the Code and in accordance with the

procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,

32847, August 10, 1990.) If the exemption is granted, the sanctions

resulting from the application of section 4975 of the Code, by reason

of section 4975(c)(1) (A) through (E) of the Code, shall not apply to

the proposed cash sale of three 50% undivided interests (the Interests)

in each of three parcels of unimproved land (the Parcels) by the IRA to

Wally L. Morgan (Mr. Morgan), a disqualified person with respect to the

IRA; provided that the following conditions are satisfied:10

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\1\0Pursuant to 29 CFR 2510.3-2(d), there is no jurisdiction

with respect to the IRA under Title I of the Act. However, there is

jurisdiction under Title II of the Act pursuant to section 4975 of

the Code.

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(a) The proposed sale will be a one-time cash transaction;

(b) The IRA in this transaction will receive the aggregate current

fair market value of the three 50% Interests as established at the time

of the sale by an independent qualified appraiser;

(c) The IRA will pay no expenses associated with the sale; and (d)

Mr. Morgan as the sponsor of the IRA will be the only individual

affected by the transaction.

Summary of Facts and Representations

1. The IRA is an individual retirement account which was

established on October 12, 1987. Mr. Morgan is the sponsor of the IRA.

As of March 31, 1993, the IRA had net assets valued at $627,414. The

principal assets of the IRA consisted of those obtained as a result of

rollover distributions from the Information Retrieval Method Inc.

Employees Profit Sharing Plan (the Plan), which was terminated in

October, 1987. It is represented that no additional contributions have

been made to the IRA.

2. Part of the distributions from the Plan rolled over into the IRA

consisted of the three 50% undivided Interests in the three Parcels of

unimproved land. Parcel I contains 1.2436 acres and is located at the

southeast corner of Denton Drive and Carlisle Street in Denton County,

Texas. Parcel II contains .959 acres and is located at 483 Bennett

Lane, and Parcel III contains .923 acres and is located at 500 Bennett

Lane, Denton County, Texas. Parcel II is located on the north side of

Bennett Lane and Parcel III is located on the south side of Bennett

Lane. The remaining 50% undivided interests in the Parcels are held as

an asset in Jack Brandenburger's IRA. Mr. Brandenburger has no

relationship to Mr. Morgan or to Mr. Morgan's IRA.

3. The Parcels were originally acquired from unrelated parties by

the Plan in three separate cash transactions. Specifically, Parcel I

was acquired on August 15, 1984, for $95,059.83. Parcel II was acquired

on January 20, 1984, for $54,450. Parcel III was acquired on December

16, 1983, for $69,397.14. It is represented that the Parcels were

acquired as vacant land and remain undeveloped. Upon the termination of

the Plan in October 1987, the aggregate fair market value of the

Parcels was determined by three independent real estate brokers at

$284,550, and, therefore, the three 50% Interests had a value of

$142,275.

4. The Parcels were appraised on September 28, 1993 (the

Appraisal), by Ted Brooks, MAI, an independent and qualified appraiser

with Noyd & O'Connell, Incorporated (Mr. Brooks). In establishing the

fair market value of the Parcels, Mr. Brooks relied on the direct sales

comparison approach to value, and determined that the fair market value

of Parcel I was $22,000, for Parcel II the fair market value was

$21,000, and for Parcel III the fair market value was $20,000.

Therefore, the aggregate fair market value for the Parcels as of

September 28, 1993, was $63,000, and, as such, the three 50% Interests

had an aggregate fair market value of $31,500. Mr. Morgan represents

that the Parcels are not encumbered by any debt, and that no other

disqualified person or related party owns or has owned land adjacent to

the Parcels. Mr. Morgan further maintains that the Parcels were never

used by any disqualified person.

5. It is represented that the proposed transaction is in the best

interest and protective of the IRA because the transaction will enable

the IRA to divest itself of a non-income producing asset that has

depreciated in value since original acquisition and will provide the

IRA with liquidity. The transaction is protective of the IRA because as

a result of the sale the IRA will receive the current fair market value

of the three 50% Interests established at the time of the sale by an

independent qualified appraiser.

6. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 4975(c)(2) of the Code

because:

(a) the proposed sale will be a one-time cash transaction;

(b) the IRA in this transaction will receive the current fair

market value of the three 50% Interests established at the time of the

sale by an independent qualified appraiser;

(c) the IRA will pay no expenses associated with the sale;

(d) the sale will provide the IRA with liquidity; and

(e) Mr. Morgan as the sponsor of the IRA will be the only

individual affected by the transaction.

Notice to Interested Persons

Because Mr. Morgan is the sole participant of the IRA, it has been

determined that there is no need to distribute the notice of proposed

exemption to interested persons. Comments and requests for a hearing

are due 30 days from the date of publication of this notice in the

Federal Register.

For Further Information Contact: Ekaterina A. Uzlyan of the

Department at (202) 219-8883. (This is not a toll-free number.)

Potter Law Firm Retirement Plan (the Plan) Located in Tyler, TX

[Application No. D-9617]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR part

2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted the restrictions of sections 406(a) and 406(b)(1) and (b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the

Code shall not apply to the proposed cash sale (the Sale) of a certain

one-half undivided interest in real property (the Property) by the Plan

to Potter, Minton, Roberts, Davis & Jones, P.C., (the Employer) a party

in interest with respect to the Plan; provided that (1) the Sale is a

one-time transaction for cash; (2) the Plan does not suffer any loss

nor incur any expenses in the proposed transaction; (3) the Plan

receives as consideration the greater of either the fair market value

of the property as determined by an independent appraiser on the date

of the Sale, or receives all the funds expended by the Plan in

acquiring and maintaining the Property; and (4) the trustee of the Plan

has determined that the proposed Sale is appropriate for the Plan and

is in the best interests of the Plan and its participants and

beneficiaries.

Summary of Facts and Representations

1. The Plan is a defined contribution plan, designated as a profit

sharing plan, with 29 participants and beneficiaries and total assets

of approximately $3,169,000, as of September 30, 1993. The Employer and

NationsBank of Texas, N.A., located in Dallas, Texas, as trustee (the

Trustee), are co-fiduciaries of the Plan.

The Employer, which sponsors the Plan, is a Texas professional

corporation engaged in the practice of law and is located in Tyler,

Texas.

2. The Property consists of an undivided one-half interest in

86.751 acres of unimproved land, subject to no zoning restrictions,

located in the E. Stephensen Survey, A-940, Smith County, Texas. It is

described as 40 percent wooded with the remainder open with a

scattering of large trees. There is 512 feet of frontage on County Road

383. A year-round creek borders on the back of the Property. Utilities

are available in the area of the location of the Property.

The Property was acquired by the Plan for the consideration of

$67,232.02 on February 6, 1985, from a Mr. and Mrs. Jack N. Zorn, who

are unrelated persons with respect to the Plan and the Employer. The

Trustee represents that the Plan incurred expenses totalling $9,185.56

in maintaining the Property from the date of purchase in 1985 through

1993, consisting of property taxes, appraisal fees, mowing charges, and

other expenditures. No income has been received by the Plan from its

ownership of the Property.11

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\1\1The Department notes that the decisions to acquire and hold

the Property are governed by fiduciary responsibility requirements

of part 4, subtitle B, title I of the Act. In this regard the

Department herein is not proposing relief for any violations of part

4 of the Act which may have arisen as a result of the acquisition

and holding of the Property.

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The Trustee has had the Property appraised each year. The last

appraisal was on January 25, 1994, by James E. Justice, MAI of Real

Estate Appraisal Services, Inc., Tyler, Texas, who determined that the

fair market value of the entire Property was $100,000. One year

earlier, Mr. Justice, in an appraisal of the Property on January 15,

1993, determined that the fair market value of the entire Property was

$110,000.

3. The applicant represents that at the time the Plan purchased its

interest in the Property in 1985 real estate prices had been

increasing, and the fiduciaries of the Plan expected that after a few

years the property could be sold for a profit. However, the applicant

represents that the real estate market declined in activity and values

during the years following the acquisition of the Property by the Plan,

resulting in the Plan also incurring expenses with no correlating

income.

The owner of the other one-half undivided interest in the Property,

Mr. Herbert Buie, as trustee of an unrelated trust, has stated that

there is no objection by him to the Plan selling its interest in the

Property to the Employer. Furthermore, Mr. Buie states that he has no

interest in purchasing the Plan's interest in the Property and knows of

no one that desires to purchase the Plan's interest.

Three local realtors, PreJean Real Estate, Burns & Noble, and

Simmons, all of Tyler, Texas, stated in separate documents that there

is no market for the one-half undivided interest in the Property owned

by the Plan, and further, that there is difficulty in obtaining

financing for the purchase of a fractional interest in unimproved land.

4. The Employer, as the applicant, proposes to purchase the

Property from the Plan for either the higher of the fair market value

of the Property, or for the sum of all the expenditures the Plan

incurred in acquiring and maintaining the Property. The applicant and

the Trustee represent that the Property is an illiquid investment for

the Plan, which is depreciating in value and incurring expenses while

producing no income for the Plan. Further, the applicant and the

Trustee find that the investment prevents the Plan from utilizing a

computerized daily accounting system which would allow each participant

to select an individual asset mix.12

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\1\2In this proposed exemption the Department expresses no

opinion as to whether the Plan will satisfy the requirements of

section 404(c) of the Act.

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The applicant represents that numerous inquiries have been made

with the co-owner and the local realtors regarding the marketability of

the Property. The applicant has concluded that there is no purchaser in

the forseeable future of the Plan's one-half interest in the Property.

In addition, the Trustee represents that the transaction is appropriate

and in the best interest of the Plan and its participants and

beneficiaries.

The applicant represents that the Plan will not incur any expenses

from the proposed Sale of the Property or from obtaining an exemption

from the prohibited transaction provisions of the Act.

5. In summary, the applicant represents that the proposed

transaction will satisfy the criteria of section 408(a) of the Act

because (a) the Sale of the Property involves a one-time transaction

for cash; (b) the Plan will not incur any expenses incidental to the

Sale; (c) the Plan will receive as consideration for the Sale the

greater of either the fair market value of the Property as determined

on the date of the Sale by a qualified, independent appraiser, or will

receive all of the funds expended by the Plan in obtaining and

maintaining the Property; (d) the Sale will permit the Plan to reinvest

illiquid assets into income producing, liquid assets; and (e) the Plan

will avoid the expenses and risks involved in retaining and developing

the Property.

For Further Information Contact: Mr. C. E. Beaver of the

Department, telephone (202) 219-8881. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the Act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 3rd day of March, 1994.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 94-5249 Filed 3-7-94; 8:45 am]

BILLING CODE 4510-29-P