Proposed Exemptions; TSC International Ltd., Custom Marketing and Import Profit Sharing Plan (the Plan)

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DEPARTMENT OF LABOR

[Application No. D-09956, et al.]

Proposed Exemptions; TSC International Ltd., Custom Marketing and

Import Profit Sharing Plan (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemption.

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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

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

406(b) of the Act, requests for hearing 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, N.W., Washington, D.C.

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, N.W., Washington, D.C. 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.

TSC International Ltd., Custom Marketing and Import Profit Sharing Plan

(the Plan) Located in Kansas City, MO

[Application No. D-09956]

Proposed Exemption

The Department of Labor 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,

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) shall not apply to the proposed (1)

redemption by TSC International Merchandising Ltd., Custom Marketing

and Import Company (TSC) of 19,000 shares of common stock issued by TSC

and held by the Plan; and (2) the extension of credit by the Plan to

TSC in connection with the redemption of the stock.1

1 Because Mr. Jack Hardgree is the sole participant in the

Plan, there is no jurisdiction under Title I of the Employee

Retirement Income Security Act of 1974 (the Act). However, there is

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

the Code.

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The proposed exemption is conditioned on the following

requirements:

(1) The redemption price for the stock is determined by a

qualified, independent appraiser.

(2) The note which evidences the redemption price for the stock

represents not more than 25 percent of the Plan's assets.

(3) The terms of the note are based upon terms that are comparable

to those that would be extended by a third party lender.

(4) The stock, which secures TSC's obligations under the note, at

all times represents 200 percent of the outstanding balance of the

note; however, if the value of the stock ever falls below the 200

percent level, TSC will pledge additional collateral.

(5) The Plan is not required to pay any fees or commissions in

connection with the redemption of the stock or the administration of

the note.

(6) Boatmen's First National Bank of Kansas City (Boatmen's) holds

certificates representing the stock in an escrow account until TSC pays

the redemption price in full.

(7) The Plan increases its liquidity and investment yield by

disposing of an asset and receives cash to promote asset

diversification.

Summary of Facts and Representations

1. The Plan is a profit sharing plan with Mr. Jack Hardgree as its

only participant. As of December 12, 1994, the Plan had net assets of

$565,500. The trustee of the Plan and the decisionmaker with respect to

the Plan's investments is Mr. Hardgree.

2. TSC is a ``C'' corporation that maintains its principal place of

business in Prairie Village, Kansas. It is engaged in the import

business and primarily deals in metal products for U.S. manufacturers.

Mr. Hardgree is the sole director, officer and employee of TSC.

3. The Plan currently holds 19,000 shares of common stock of TSC.

The stock has a stated par value of $10 per share and it is not

publicly-traded. The shares of stock that are held by the Plan

represent 97 percent of the issued and outstanding stock of TSC. The 3

percent remaining shares of stock are owned by Mr. Hardgree.

4. Prior to the incorporation of TSC in January 1984, Mr. Hardgree

was a manufacturer's representative with an unrelated company,

Merchandise International, Inc. (MII). That company had a money

purchase pension plan (the MII Plan) with individually-directed

accounts. In late 1983, Mr. Hardgree resigned from his employment with

MII, having been bought out by the two remaining principals of MII.

Although Mr. Hardgree had no further connections with MII as an

employee or

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owner after his resignation, he continued to participate in the MII

Plan.

5. In January 1984, Mr. Hardgree formed TSC. At the time of

incorporation of TSC, Mr. Hardgree, in his personal capacity, acquired

500 shares of TSC common stock directly from TSC for $10 per share.

This amount represented the par value of such stock. In May 1985, Mr.

Hardgree directed the trustee of the MII Plan to acquire, from TSC,

9,500 shares of TSC common stock for his individually-directed account

in such Plan. The acquisition price for the stock was $10 per share.

Although the stock had been authorized in TSC's corporate charter, it

had not been been issued.

In 1986, Mr. Hardgree again directed the trustee of the MII Plan to

acquire, from TSC, an additional 9,500 shares of TSC's authorized but

unissued common stock, for his individually-directed account in the MII

Plan. The acquisition price for the stock was also established at $10

per share. It is represented that at the time of both stock

acquisitions, Mr. Hardgree had no interest in MII other than as a

participant in the MII Plan. It is also represented that following the

stock acquisitions, TSC common stock constituted the majority of the

assets of Mr. Hardgree' account in the MII Plan.2

2 The Department expresses no opinion herein on whether the

acquisition of TSC common stock by Mr. Hardgree's individually-

directed account in the MII Plan violated any of the provisions of

Part 4 of Title I of the Act.

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6. In January 1991, TSC established the Plan by adopting the Mid

American Bank & Trust Company Defined Contribution Master Plan. Soon

after the establishment of the Plan, the trustee of the MII Plan

transferred all 19,000 shares of TSC common stock to Mid American Bank

& Trust Company, the former trustee of the Plan, in a ``trustee-to-

trustee transfer.'' It is represented that Mr. Hardgree was advised

that the stock transfer which was made on behalf of the Plan did not

constitute a prohibited transaction.3

3 The Department expresses no opinion herein on whether the

transfer of the TSC common stock from the MII Plan to the Plan

violated the exclusive benefit rule of section 401(a) of the Code.

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7. Mid American Bank & Trust Company later became part of Johnson

County Bank which was thereafter acquired by Mercantile Bank. In

December 1994, Mercantile Bank became the custodian for the Plan and

Mr. Hardgree, the trustee.

8. TSC paid an unrelated third-party investment banking firm, Stern

Brothers & Co. of Kansas City, Missouri for a valuation report of the

19,000 shares of TSC common stock that are held by the Plan. According

to the appraisal report dated December 14, 1994, which was prepared by

Messrs. John C. Korschot, CFA, ASA, CBA and David K. Jones, CBA of the

firm, as of December 2, 1994, the 19,000 shares of TSC common stock

held by the Plan had a fair market value of $535,500 or $27.46 per

share. The appraisers stated that they used the adjusted book value

approach and the market comparison approach in rendering their opinion

as to the fair market value of the Plan's controlling interest in the

stock. In addition, the appraisers explained that they applied a

discount factor of 15 percent to the initial value of $640,000 they had

determined for the stock due to its lack of marketability. The

appraisers further noted that a control premium was implied in the

$640,000 initial value.

9. Although the value of TSC common stock and Plan assets have

increased significantly, it is represented that by holding only TSC

stock, the Plan is in an illiquid position should assets be needed for

distributions. Moreover, it is represented that TSC cannot promise that

its stock will hold or increase in value. Therefore, TSC requests an

administrative exemption from the Department in order to redeem the

shares of TSC common stock that are held by the Plan in return for cash

and a promissory note.

10. TSC proposes to redeem the stock held by the Plan by giving the

Plan a cash downpayment of $394,125 and a promissory note in the

principal amount of $141,375. The note will bear a fixed rate of

interest of 11 percent per annum. The note will also provide for

monthly installments of principal and interest over a period of two

years after the date of the redemption. The note may be prepayable

without penalty at any time by TSC. In addition, the Plan will not be

required to pay any fees or commissions in connection with the

redemption of the TSC common stock or with respect to the

administration of the proposed loan.

11. The note will be secured by the shares of the TSC common stock

that are redeemed from the Plan. The security interest in such shares

will be a first security interest and it will be governed by an escrow

agreement (the Escrow Agreement) between TSC and Boatmen's, with whom

TSC currently has a revolving loan arrangement, as escrow agent. At all

times, the fair market value of the stock will represent 200 percent of

the outstanding principal balance of the note. If, however, the fair

market value of the stock should ever fall below this level, TSC will

pledge additional collateral to cover the loan payments made under the

note. As further security, Mr. Hardgree will assign a portion of his

life insurance policy in the amount of the note.

12. By letter dated June 23, 1995, TSC received a loan commitment

in the amount of $141,375 from an unrelated lender, Missouri Bank &

Trust Company of Kansas City (Missouri Bank & Trust). The terms offered

by Missouri Bank & Trust are comparable to the terms of the note.

13. Under the Escrow Agreement, TSC will pledge all 19,000 shares

of the stock that are redeemed from the Plan by the delivery of

certificates evidencing such pledged shares to Boatman's. Boatmen's

will hold the certificates until the loan is repaid. If at any time TSC

defaults in the payment of principal or interest on the note, and the

default remains uncured for two months after written notice, the entire

unpaid principal amount of the note and accrued interest thereon will

become immediately due and payable. Then, the Plan will have all of the

certificates on deposit delivered to it. At the end of 20 days after

receipt of a written demand from the Plan, together with evidence that

the notice of the demand has been given to TSC, Boatmen's will deliver

to the Plan the certificates held by Boatmen's. If, however,

satisfactory proof is presented to Boatmen's that all installments of

the note have been paid, Boatmen's will deliver to TSC, the shares

remaining in its possession. Afterwards, all obligations between the

Plan, TSC and Boatmen's will cease.

The Plan will not be required to pay any fees or expenses in

connection with the administration of the Escrow Agreement. Further, no

parties to the Escrow Agreement will grant a security interest in any

of the securities deposited with Boatmen's or create a lien,

encumbrance, or other claim against monies or borrow from such stock.

14. In summary, it is represented that the proposed transactions

will satisfy the statutory criteria for an exemption under section

4975(c)(2) of the Code because:

(a) The redemption price for the stock has been determined by a

qualified, independent appraiser.

(b) The note which evidences the redemption price for the stock

will represent 25 percent of the Plan's assets.

(c) The terms of the note are based upon terms that are comparable

to those that would be extended by a third party lender.

(d) The stock, which secures TSC's obligations under the note, at

all times will represent 200 percent of the outstanding balance of the

note.

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(e) The Plan will not be required to pay any fees or commissions in

connection with the redemption of the stock or the administration of

the note.

(f) Boatmen's will hold certificates representing the stock in an

escrow account until TSC pays the redemption price for the stock in

full.

(g) The Plan will increase its liquidity and investment yield by

disposing of an asset and receive cash to promote greater asset

diversification.

Notice to Interested Persons

Because Mr. Hardgree is the only participant in the Plan who will

be affected by the proposed transactions, it has been determined that

there is no need to distribute the notice of pendency to interested

persons. Therefore, comments and requests for a public hearing are due

30 days from the date of publication of this notice of proposed

exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady 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 31st day of August, 1995.

Ivan Strasfeld,

Director of Exemption Determinations Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 95-22043 Filed 9-5-95; 8:45 am]

BILLING CODE 4510-29-P