Proposed Exemptions; Timberland Investment Group, Inc. (Timberland) and Wachovia Bank of Georgia, N.A. (the Investment Manager)

DEPARTMENT OF LABOR

[Application Nos. D-09969 and D-09970]

Proposed Exemptions; Timberland Investment Group, Inc.

(Timberland) and Wachovia Bank of Georgia, N.A. (the Investment

Manager)

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).

[[Page 63065]]

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.

Timberland Investment Group, Inc. (Timberland) and Wachovia Bank of

Georgia, N.A. (the Investment Manager) Located in Atlanta, GA; Proposed

Exemption

[Application Nos. D-09969 and D-09970]

Based on the facts and representations set forth in the

application, 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).1

1 For purposes of this exemption, reference to provisions of

Title I of the Act, unless otherwise specified, refer also to the

corresponding provisions of the Code.

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Section I. Covered Transaction

If the exemption is granted, the restrictions of section 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)(E) of the

Code, shall not apply to the payment of an incentive fee (the Incentive

Fee) by Timberland, a special purpose corporation which holds plan

assets from the American Telephone and Telegraph Master Trust (the AT&T

Trust) and the BellSouth Master Pension Trust (the BellSouth Trust;

collectively, the Trusts), to the Investment Manager of Timberland, a

party in interest with respect to the Trusts.

This proposed exemption is conditioned upon the requirements set

forth below in Section II.

Section II. General Conditions

(a) The investment of the assets of each Trust in Timberland,

including the terms and payment of the Incentive Fee, is approved in

writing by a Trust fiduciary who is independent of the Investment

Manager and its affiliates (the Independent Fiduciary).

(b) Each Trust participating in Timberland has total assets that

are in excess of $50 million and no Trust has invested more than one

percent of its assets in Timberland.

(c) The terms of the Trusts' investment management agreements for

Timberland, including the Incentive Fee, are at least as favorable to

the Trusts as those obtainable in an arm's length transaction with an

unrelated party.

(d) Prior to investing in Timberland, each Independent Fiduciary

entered into an agreement with the Investment Manager disclosing all

material facts concerning the purpose, structure and operation of

Timberland including the fee arrangements.

(e) With respect to its ongoing participation in Timberland, each

Trust receives the following written documentation from the Investment

Manager:

(1) Audited financial statements of Timberland prepared by

independent, qualified public accountants on an annual basis, which

disclose the fees that are paid to the Investment Manager and its

affiliates.

(2) Quarterly valuations, transmitted routinely to the Trusts,

which indicate the fair market value of Timberland's assets as

established by appraisers who are independent of the Investment Manager

and its affiliates.

(3) Upon request, valuations performed by independent appraisers at

three year intervals which determine the underlying land value of

Timberland.

(4) Upon request, a timber inventory valuation of Timberland

performed every five years by independent, registered consulting

foresters in order to determine timber volume and growth rates.

(f) The total fees paid to the Investment Manager constitute no

more than reasonable compensation.

(g) The Incentive Fee is payable to the Investment Manager upon the

complete liquidation of the Trusts' account in Timberland (the

Timberland Account) and only if the Trusts recover distributions equal

to their initial investments in Timberland.

(h) In the event that the Investment Manager resigns or is removed

prior to the complete liquidation of the Timberland Account,

(1) The Trusts will appoint a successor Investment Manager to

effect the liquidation of such account.

(2) The Incentive Fee will not be paid to the former Investment

Manager until the complete liquidation of the Timberland Account takes

place.

(3) The Incentive Fee will only be paid to the former Investment

Manager if it represents the lowest of three fee amounts.

[[Page 63066]]

(i) The Investment Manager maintains, for a period of six years,

the records necessary to enable the persons described in paragraph (i)

of this Section to determine whether the conditions of this exemption

have been met, except that (1) a prohibited transaction will not be

considered to have occurred if, due to circumstances beyond the control

of the Investment Manager and/or its affiliates, the records are lost

or destroyed prior to the end of the six year period, and (2) no party

in interest other than the Investment Manager shall be subject to the

civil penalty that may be assessed under section 502(i) of the Act, or

to the taxes imposed by section 4975 (a) and (b) of the Code, if the

records are not maintained, or are not available for examination as

required by paragraph (i) below.

(i)(1) Except as provided in section (2) of this paragraph and

notwithstanding any provisions of subsections (a)(2) and (b) of section

504 of the Act, the records referred to in paragraph (i) of this

Section shall be unconditionally available at their customary location

during normal business hours by:

(A) Any duly authorized employee or representative of the

Department or the Internal Revenue Service (the Service);

(B) Any fiduciary of a plan (the Plan) participating in the Trusts

or any duly authorized representative of such fiduciary;

(C) Any contributing employer to any Plan participating in the

Trusts or any duly authorized employee representative of such employer;

and

(D) Any participant or beneficiary of any Plan participating in the

Trusts, or any duly authorized representative of such participant or

beneficiary.

(2) None of the persons described above in subparagraphs (B)-(D) of

this paragraph (i) shall be authorized to examine the trade secrets of

the Investment Manager or commercial or financial information which is

privileged or confidential.

Section IV. Definitions

For purposes of this exemption:

(a) An ``affiliate'' of the Investment Manager includes--

(1) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with the Investment Manager. (For purposes of this subsection, the term

``control'' means the power to exercise a controlling influence over

the management or policies of a person other than an individual.)

(2) Any officer, director, employee, relative of, or partner of any

such person, and

(3) Any corporation or partnership of which such person is an

officer, director, partner or employee.

(b) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(c) An ``Independent Fiduciary'' is a Trust fiduciary which is

independent of the Investment Manager and its affiliates.

Summary of Facts and Representations

1. Wachovia Corporation (Wachovia) is a Southeastern interstate

bank holding company maintaining dual headquarters in Winston-Salem,

North Carolina and Atlanta, Georgia. The Investment Manager is one of

Wachovia's principal banking subsidiaries. As of December 31, 1994, the

Investment Manager had 493 branches in 206 cities and 3 states.

2. The American Telephone & Telegraph Company (AT&T), a New York

corporation, and BellSouth Corporation (BellSouth), a Georgia

corporation, provide telecommunication services. AT&T, whose

headquarters are in New York, New York, primarily provides long

distance telephone communication services. BellSouth, one of the seven

regional telephone companies that was divested from AT&T in 1984 as

part of the Department of Justice's antitrust settlement with AT&T, is

located in Atlanta, Georgia and provides a wide array of

telecommunication services, including mobile communications and

advertising services.

3. The AT&T Trust covers active management and nonmanagement

employees of AT&T as well as retirees throughout the United States. The

AT&T Trust is comprised of the AT&T Management Pension Plan (the AT&T

Management Plan) and the AT&T Nonmanagement Pension Plan (the AT&T

Nonmanagement Plan). As of December 31, 1993, the participant and asset

breakdown of these Plans were as follows:

------------------------------------------------------------------------

AT&T Trust Participants Net ssset value

------------------------------------------------------------------------

Management Plan....................... 180,491 $20,024,695,000

Nonmanagement Plan.................... 262,237 18,210,547,000

---------------------------------

Totals.............................. 442,728 $38,235,242,000

------------------------------------------------------------------------

The AT&T Trust has six trustees. They are Citibank, N.A.; Chase

Manhattan Bank, N.A.; Northern Trust Company; Bankers Trust Company;

Mellon Bank, N.A.; and State Street Bank & Trust Company.

4. The BellSouth Trust covers active employees and retirees of

BellSouth. The BellSouth Trust is comprised of the BellSouth Personal

Retirement Account Pension Plan (the BellSouth PRA Plan), which covers

management employees, the BellSouth Corporation Pension Plan (the

BellSouth Pension Plan), which covers union employees, and the

Retirement Pension Plan of Stephens Graphics, Inc. (the Stephens Plan),

which covers management employees. In addition to covering active

employees of BellSouth, all three plans include retirees. The retirees

reside in all states comprising the United States. The active employees

reside in Florida, Georgia, Alabama, Mississippi, Louisiana, Tennessee,

Kentucky, North Carolina and South Carolina.

As of December 31, 1993, the participant and asset breakdown of the

BellSouth Trust were as follows:

------------------------------------------------------------------------

BellSouth Trust Participants Net asset value

------------------------------------------------------------------------

PRA Plan.............................. 43,669 $6,064,663,690

Pension Plan.......................... 91,797 7,065,931,097

Stephens Plan......................... 248 24,011,213

---------------------------------

Totals.............................. 135,714 $13,154,606,000

------------------------------------------------------------------------

The Investment Manager serves as the trustee of the BellSouth

Trust.

5. On January 1, 1985, AT&T and the First National Bank of Atlanta,

predecessor in interest to the Investment Manager, entered into an

investment management agreement (the AT&T Agreement) whereby the

Investment Manager agreed to serve as investment manager with respect

to a portion of the assets held in the AT&T Trust. Similarly, on

September 20, 1990, BellSouth Corporation entered into an investment

management agreement (the BellSouth Agreement) whereby the Investment

Manager agreed to serve as investment manager with respect to a portion

of the assets held in the BellSouth Trust. The decision by AT&T and

BellSouth to enter into the Agreements with the Investment Manager was

made by fiduciaries of the Trusts who are independent of the Investment

Manager following written disclosure of all of the relevant facts and

information concerning the purpose, structure and operation of

Timberland including the proposed fee arrangements described herein and

their

[[Page 63067]]

probable effect on the management of the assets of the Trusts.2

\2\ With respect to the proposed Incentive Fee, section 404 of

the Act requires, among other things, that a plan fiduciary act

prudently and solely in the interest of the plan's participants and

beneficiaries. Thus, the Department expects a plan fiduciary, prior

to entering into any performance-based compensation arrangement with

an investment manager, to fully understand the risks and benefits

associated with the compensation formula following disclosure by the

investment manager of all relevant information pertaining to the

proposed arrangement. In addition, a plan fiduciary must be capable

of periodically monitoring the actions taken by the investment

manager in the performance of its duties and must consider, prior to

entering into the arrangement, whether such plan fiduciary is able

to provide adequate oversight of the investment manager during the

course of the arrangement.

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6. As contemplated by both the AT&T Agreement and the BellSouth

Agreement, Timberland is a special purpose corporation with a projected

duration of 7 years.3 Timberland was formed in 1990 for the

purpose of holding title to timberland investments made on behalf of

the AT&T Trust and the BellSouth Trust. The stock of Timberland is

owned in equal shares by the Trusts. The assets of the Trusts that are

invested in Timberland have been placed in an account which is referred

to herein as the ``Timberland Account.'' 4 As of June 21, 1994,

the Timberland Account had total assets of $100,000,000.

3 Although Timberland is currently structured as a

corporation, the parties may, for tax reasons, decide to change that

form to, or make additional timberland investments through, a

partnership. The ownership interest in the partnership would be

unchanged, i.e., BellSouth and AT&T would each retain a 50 percent

ownership interest in the new entity. Furthermore, any change in the

form of ownership would only occur if agreed to by BellSouth, AT&T

and the Investment Manager.

4 The applicants are assuming, for purposes of this

exemption, that the assets of the Trusts that have been invested in

Timberland are ``plan assets'' within the meaning of 29 CFR 2510.3-

101. Although the applicants represent that they have considered

whether Timberland qualifies as a ``real estate operating company''

within the meaning of 29 CFR 2510.3-101(e), they are unable to

conclude that Timberland can qualify primarily due to the absence of

direct authority on whether the activities associated with

timberland management are real estate management activities as

contemplated by the regulatory definition of ``real estate operating

company.''

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7. Timberland holds title to the underlying land and timber on

properties located in the States of Arkansas, Mississippi, Florida,

Georgia, North Carolina, South Carolina, Michigan, Alabama and

Louisiana. Such forest properties are primarily ``mature'' in that they

predominately consist of sawtimber-sized trees that can be converted

into lumber. Timberland also holds a fewer number of acres on which

smaller trees are grown. Some of these smaller trees are merchantable

as pulpwood while the remainder are premerchantable in that they have

not yet attained sufficient size to have any marketable value.

8. Effective October 15, 1990, Timberland entered into an

investment management agreement with the Investment Manager (the

Timberland Agreement). The Timberland Agreement was contemplated by

both the BellSouth Agreement and the AT&T Agreement and is intended to

ensure that the Timberland would bear directly on the investment

management fees for the Investment Manager's services to the

corporation. The Timberland Agreement is designed to reflect the

operative provisions of the BellSouth and AT&T Agreements as they

pertain to timberland investments.

9. Pursuant to the Timberland Agreement, the Investment Manager has

full discretion and authority to purchase, sell convey or transfer

timberland properties. To date, the Investment Manager has not incurred

any debt in connection with the timberland properties. According to the

applicants, it is not contemplated that such debt will ever be

incurred.

The Investment Manager is also empowered to establish an overall

plan for the management of timberland properties. In this regard, day-

to-day management of the timber is performed by independent consulting

foresters or their subcontractors who are retained on a per diem basis

by the Investment Manager. Some of the duties performed by the

consulting foresters include the construction and maintenance of

firelines, timber stand improvement, inspection for and control of

forest insects and disease, site preparation and planting, boundary

line marking and maintenance and estimation of forest inventory.

10. Prior to the purchase of a property, the Investment Manager has

the underlying bare land value and timber value independently

appraised, along with an inventory of the volume of timber on the

property, including estimates of the growth rates of the various

species and timber products present on the property. At the end of each

calendar quarter, the Investment Manager determines the closing market

valuation of the timberland assets (excluding any then pending trades,

accruals and cash) as of the end of that period. The Investment Manager

derives the current volume of timber, net of growth and removals (sales

and harvests), based on the independently arrived at growth rates. The

Investment Manager retains the services of the independent consulting

foresters licensed to do business in states in which the timber in

question is located to provide estimates of the per unit value of the

various timber species and products on each tract of timberland in

which Timberland has an interest.

As an additional method of valuation, the Investment Manager

utilizes the services of Timber Mart South, a price reporting service

which regularly quotes per unit market prices for timber products in

conjunction with the information provided by the consulting foresters

to establish a range of unit values of those areas. The Investment

Manager may also use its own judgment to determine the appropriate unit

values applicable to current volumes, employing the independently

established ranges of values and thus arriving at closing market values

for each timberland property in which Timberland has an interest.

In addition to quarterly valuations, the Investment Manager will

have the underlying land value (bare land value) reappraised every

three years by independent, state-certified appraisers. The purpose of

these appraisals is to assist the Investment Manager in deciding

whether to liquidate a tract of timberland. Further, the Investment

Manager will have the timber inventory of Timberland appraised every

five years by independent, registered consulting foresters to determine

timber volume and growth rates.

The Investment Manager will select the independent, registered

foresters referred to above based upon their prior satisfactory

performance or their professional reputations as ascertained from

knowledgeable sources within the industry. The consultants on timber

value will be chosen on the basis of their reputations for reliability

within the timber industry.

11. As compensation for its services under the Timberland

Agreement, the Investment Manager is entitled to receive an investment

management fee (the Management Fee). Initially, the Management Fee was

paid quarterly in arrears at the annual rate of $600,000. The first

payment was made at the conclusion of the calendar quarter which

included October 2, 1990. Over the next 11 quarters, Management Fee

payments continued to be calculated at this rate until September 30,

1993 when a final payment was made to the Investment Manager.

Commencing in December 1993, the twelfth full quarter, the

Management Fee is being paid quarterly in arrears in accordance with

the following Annual Fee Schedule:

------------------------------------------------------------------------

Annual fee schedule

------------------------------------------------------------------------

First $100 Million........................................... 0.60%

[[Page 63068]]

Next $200 Million............................................ 0.50%

Next $300 Million............................................ 0.40%

Balance.................................................... 0.30%

------------------------------------------------------------------------

Such fee is being computed on the basis of the closing market value

of timberland assets as of the end of each calendar quarter based on

independent appraisals of timber volume and bare land.5

5 The applicants represent that the Management Fee is

statutorily exempt under section 408(b)(2) of the Act. However, the

Department expresses no opinion herein on whether such fee is

statutorily exempt under section 408(b)(2) of the Act.

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12. In addition to the Management Fee, the Investment Manager is

entitled to receive an Incentive Fee upon the complete liquidation of

the Trusts' Timberland Account provided the Trusts recover

distributions equal to their initial investments. Liquidation of the

Trusts' Timberland Account is to be completed by October 2, 1997. This

is also the ``termination date'' for Timberland.6

6 Initially, October 2, 1997 was the expected ``termination

date'' for Timberland, subject to an extension for two additional

years. However, no reinvestments in Timberland are currently being

made and proceeds from the disposition of properties are being

distributed to the Trusts as the proceeds are collected. It is not

anticipated that further reinvestments will occur. Thus, absent

agreement by the parties that changes in the investment climate

warrant further investment, Timberland will cease to operate when

its present holdings have been disposed of. Although the rate of

disposition of these holdings will depend on prevailing market

conditions, the current expectation is that liquidation will be

completed by October 2, 1997.

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The intent of the Incentive Fee is to induce the Investment Manager

to liquidate the assets of the Timberland Account in a manner that

maximizes the return to the Trusts. However, market conditions at the

time of the liquidation will dictate the pattern governing the sale of

assets in the Timberland Account as well as the sales price of such

assets. To the extent that the Investment Manager can exercise

discretion regarding the timing or the amount of the Incentive Fee, the

applicants recognize that a violation of the prohibited transaction

rules may occur. Accordingly, the applicants request an administrative

exemption from the Department.

The Incentive Fee is a one-time fee that will be based on the

annual, real internal rate of return (the IRR) achieved on the assets

of Timberland. The IRR is the periodic rate at which an investment of a

given size grows to a terminal value of a given size. The IRR is

determined by the interaction of three variables--(a) the percentage

gain in net asset value of the Timberland Account, (b) the time over

which the gain is achieved, and (c) the rate of inflation.7

7 For purposes of calculating the IRR, the rate of inflation

used will be defined as the ``Consumer Price Index-U, United States,

all items (1982-84 = 100)'' (the CPI) currently prepared and

published by the Department's Bureau of Labor Statistics.

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13. The proposed Incentive Fee payment would be based upon the IRR

achieved on Timberland's assets consisting of a capital commitment (the

Capital Commitment) of $100 million or other amount as mutually agreed

to by the Trusts and the Investment Manager. Such amount will be net of

all fees, expenses, income taxes and debt and calculated in accordance

with the Timberland Account Incentive Fee Payment Schedule which sets

forth various IRRs (which begin at 1 percent and have no limit) and

Incentive Fee payments (which are capped at $10.5 million) applicable

to the IRRs.

Basically, the Incentive Fee Payment Schedule provides that for

each 0.1 percent increase in the IRR, the Incentive Fee is increased by

the dollar amount of the prior increment plus $500. For example, to

determine the Incentive Fee earned with respect to an IRR of 3 percent,

the incremental difference between the Incentive Fee earned with

respect to an IRR of 2.8 and 2.9 percent must be determined initially.

This difference, as reflected in the Incentive Fee Payment Schedule, is

$11,750 ($137,750 minus $126,000). Thus, the Incentive Fee for

achieving an IRR of 3 percent would be $150,000 according to the

Incentive Fee Payment Schedule ($137,750 plus $11,750 plus $500).

According to the applicant, the parties agreed to this formula for

determining the Incentive Fee after considerable negotiation based on

the understanding that each 0.1 percent increase in the IRR would be

more difficult to achieve. In other words, increasing the IRR from 2.8

percent to 2.9 percent is more difficult than increasing it from 1.8

percent to 1.9 percent. Therefore, the Incentive Fee is designed to

encourage this extra effort.

14. For purposes of computing the Incentive Fee, when calculating

the IRR, any distributions made from the Timberland Account by the

Investment Manager prior to October 2, 1994 and not recalled to fund

additional timberland investments, will be subtracted from the cash

flow used to determine the IRR. Also, any portion of the Capital

Commitment not called prior to October 1, 1994 will cause the Incentive

Fee payment amounts to be reduced by the same proportion as the ratio

of uncalled capital to the Capital Commitment. All capital distributed

to the Trusts from which said capital is contributed must be recalled

prior to any additional portion of the Capital Commitment being

called.8

\8\ If the requested exemption is not granted, the Timberland

Agreement provides for the payment, to the Investment Manager, of an

alternative fee (the Alternative Fee) (in addition to the Management

Fee) upon the termination of Timberland. The Alternative Fee is

based upon the value of the assets that are under the control of the

Investment Manager. The Alternative Fee consists of (a) the payment

of $100,000 for each of the first twelve quarters of the Timberland

investment and (b) for the remaining period prior to complete

liquidation of Timberland removal), an amount equal to a fixed

percentage of the closing market value of timberland assets as of

the end of each calendar quarter. The applicants represent that the

Alternative Fee would be covered by section 408(b)(2) of the Act and

the regulations promulgated thereunder (see 29 CFR 2550.408b-2).

However, the Department expresses no opinion herein on whether the

payment of such fee would satisfy the conditions of section

408(b)(2) of the Act.

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15. The Incentive Fee is payable to the Investment Manager upon the

termination of Timberland (i.e., October 2, 1997). However, if the

Investment Manager resigns or is removed for any reason prior to

October 2, 1997 by either AT&T, BellSouth or by both Trusts, the Trusts

may appoint a successor Investment Manager to complete the liquidation

of the Timberland Account. In this event, the Incentive Fee will

calculated, but it will not be paid to the former Investment Manager

until the Timberland Account is completely liquidated (i.e., by October

2, 1997). The actual fee that is paid to the former Investment Manager

will be the lesser of:

(a) An amount based on the IRR achieved from the inception of

the Timberland Account to completion of the liquidation of such

account;

(b) An amount based on the IRR achieved from the inception of

the Timberland Account to the effective date of the former

Investment Manager's removal or resignation, which shall be

determined based upon the assumption that the liquidation proceeds

are distributed to the Trusts on the termination date of the former

Investment Manager in an amount equal to the independently appraised

value of the property of Timberland as of such termination date (net

of all fees, expenses and taxes); or

(c) An amount based upon the Alternative Fee described in the

preceding footnote. Under such circumstances, the Alternative Fee

will be computed through the date of the Investment Manager's

resignation or removal.

For purposes of calculating the Incentive Fee, if the Investment

Manager is removed or resigns prior to the complete liquidation of the

Timberland Account, any required appraisal will be performed by an

independent appraiser approved by both the Trusts and the Investment

Manager. The independent appraiser will determine the fair market value

of

[[Page 63069]]

the properties in the Timberland Account by assuming the orderly

liquidation of said properties, normal expenses of liquidation and

income tax liabilities based on an estimate prepared by an independent

certified public accounting firm approved by both the Trusts and the

Investment Manager.

16. The following examples illustrate the manner in which the

Incentive Fee would be calculated in four hypothetical situations:

Example 1.

Assume that Timberland has a life of 7 years and that the Trusts

invest a total of $100 million in Timberland. At the end of year 7,

the sales price of timber plus land, net of all expenses, is

$207,620,000. Assume also that the rate of inflation is 0%. The IRR

for this investment can be calculated directly because there is a

single cash outflow of $100,000,000 and a single cash inflow of

$207,620,000. The calculation is as follows: [($207,620,000/

$100,000,000) 1/7-1] x 100=11%

Once the IRR is calculated, the Incentive Fee that will be paid

by the Trusts can be determined from the Incentive Fee Payment

Schedule which has been reproduced, in part, as follows:

------------------------------------------------------------------------

Incentive fee

Annual real IRR (> or =) payment

------------------------------------------------------------------------

10.8%................................................... $2,646,000

10.9%................................................... 2,697,750

11.0%................................................... 2,750,000

------------------------------------------------------------------------

Thus, the total Incentive Fee that will be paid by the Trusts to

the Investment Manager based upon an IRR of 11% is $2,750,000.

The above IRR is both a nominal and a real rate because

inflation was assumed to be 0%. If inflation is positive, however,

the nominal IRR will be greater than the real IRR. With positive

inflation as measured by the CPI, the nominal IRR must be adjusted

for inflation and the Incentive Fee calculated on the basis of the

adjusted or real IRR. This is done in Example 2.

Example 2.

Same as Example 1, except now assume inflation occurred at a 4%

annual rate over the life of the Trusts' investment in Timberland.

To determine the real IRR, the 11% nominal IRR must be adjusted

for 4% inflation. This figure is calculated by dividing the nominal

IRR by the CPI: 1.11/1.04=1.0673=6.73%.

Once the real IRR is computed, the Incentive Fee that will be

paid by Trusts can be determined by referring to the Incentive Fee

Payment Schedule which has been reproduced, in part, as follows:

------------------------------------------------------------------------

Incentive fee

Annual real IRR (> or =) payment

------------------------------------------------------------------------

6.6%.................................................... $924,000

6.7%.................................................... 954,750

6.8%.................................................... 986,000

------------------------------------------------------------------------

Thus, the total Incentive Fee that will be paid by the Trusts to

the Investment Manager based upon a real IRR of 6.73% is $954,750.

Example 3.

Assume the Trusts give the Investment Manager $100 million to

invest in Timberland and that the Investment Manager increases the

investment amount to $170 million (which is the fair market value

determined by independent appraisals), net of expenses, by the end

of 4 years. Assume also that the Investment Manager resigns and is

replaced by a new Investment Manager. Assume further that the rate

of inflation over the 4 year period is 4% annually.

The nominal IRR can be computed directly because there is one

cash inflow and one cash outflow: [($170,000,000/

$100,000,000)1/4-1] x 100=14.19%. To determine the real IRR,

the 14.19% nominal IRR must be adjusted for 4% inflation. This

figure is calculated by dividing the nominal IRR by the CPI: 1.1419/

1.04=1.0979=9.79%.

From the Incentive Fee Payment Schedule, the Trusts would pay

the former Investment Manager an Incentive Fee of $2,109,750 based

upon a real IRR of 9.79%.

------------------------------------------------------------------------

Incentive fee

Annual real IRR (> or =) payment

------------------------------------------------------------------------

9.6%.................................................... $2,064,000

9.7%.................................................... 2,109,750

9.8%.................................................... 2,156,000

------------------------------------------------------------------------

However, the actual fee paid to the former Investment Manager

would be the lowest of (a) $2,109,750, (b) the Alternative Fee or

(c) an Incentive Fee determined by reference to the IRR achieved

through the complete liquidation of Timberland (including investment

results achieved by the successor Investment Manager).

Example 4 demonstrates how poor performance by a successor

Investment Manager can reduce the actual payment made to the former

Investment Manager.

Example 4.

Same as Example 3, assuming further that the successor

Investment Manager continues for a year and that all of Timberland's

assets are liquidated in one transaction at the end of that period.

During the extra year, the fair market value of Timberland remains

at $170 million and the rate of inflation remains at 4 percent.

The nominal IRR can be computed as follows: [($170,000,000/

$100,000,000)1/5-1] x 100=11.20%.

To determine the real IRR, the 11.20% nominal IRR must be

adjusted for 4% inflation. This figure is calculated by dividing the

nominal IRR by the CPI: 1.112/1.04=6.92%.

From the Incentive Fee Payment Schedule, shown in part below,

the former Investment Manager would be entitled to an Incentive Fee

of $1,017,750 based on a real IRR of 6.92 percent.

------------------------------------------------------------------------

Incentive fee

Annual real IRR (> or =) payment

------------------------------------------------------------------------

6.8%.................................................... $986,000

6.9%.................................................... 1,017,750

7.0%.................................................... 1,050,000

------------------------------------------------------------------------

Since this Incentive Fee is lower than the Incentive Fee based

on independent appraisals (see Example 3), the Trusts would pay the

former Investment Manager the lower of this fee or the Alternative

Fee.

17. The Investment Manager will provide the Trusts with quarterly

unaudited financial statements prepared by Price Waterhouse & Company

(Price Waterhouse). In addition, the Investment Manager will provide

the Trusts with annual audited financial statements, also prepared by

Price Waterhouse. These documents will generally be issued within

thirty days following their preparation.

18. In summary, it is represented that the proposed transaction

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because:

(a) The investment of the assets of each Trust in Timberland,

including the terms and payment of the Incentive Fee, has been approved

in writing by a fiduciary who is independent of the Investment Manager

and its affiliates.

(b) Each Trust participating in Timberland has total assets that

are in excess of $50 million and no Trust may invest more than one

percent of its assets in Timberland.

(c) The terms of the Trusts' investment management agreements for

Timberland, including the Incentive Fee, will remain at least as

favorable to the Trusts as those obtainable in an arm's length

transaction with an unrelated party.

(d) Prior to investing in Timberland, each Independent Fiduciary

received offering materials which disclose all material facts

concerning the purpose, structure and operation of Timberland including

the fee arrangements.

(e) The Investment Manager will make periodic written disclosures

to the Trusts with respect to the financial condition of Timberland and

the fees paid to the Investment Manager.

(f) The total fees paid to the Investment Manager will constitute

no more than reasonable compensation.

(g) The Incentive Fee will be payable to the Investment Manager

upon the complete liquidation of the Timberland Account and only if the

Trusts recover distributions equal to their initial investments in

Timberland.

(h) In the event that the Investment Manager resigns or is removed

prior to the complete liquidation of the Timberland Account, the Trusts

will appoint a successor Investment Manager to effect the liquidation

of such account. Under such circumstances, the Incentive Fee will not

be paid to the former Investment Manager until the Timberland Account

is fully liquidated and if paid, such Incentive Fee must be

[[Page 63070]]

represent the lowest of three fee amounts.

Notice to Interested Persons

Notice of the proposed exemption will be provided to all interested

persons within 30 days of the publication of the notice of pendency in

the Federal Register. The notice will include a copy of the notice of

proposed exemption as published in the Federal Register and a statement

informing interested persons of their right to comment on and/or to

request a hearing with respect thereto. The notice will be provided to

all active employees of AT&T and BellSouth by posting. Mailed notice

will be given to AT&T and BellSouth union representatives, plan

administrators and representatives of retirees. Comments to the

Department are due within 60 days of the publication of the 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 5th day of December, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 95-29984 Filed 12-07-95; 8:45 am]

BILLING CODE 4510-29-P