Proposed Exemptions; Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine) and Blue Alliance Mutual Insurance Company, et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-0948, et al.]

Proposed Exemptions; Associated Hospital Service of Maine d/b/a

Blue Cross and Blue Shield of Maine) and Blue Alliance Mutual Insurance

Company, 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.

Associated Hospital Service of Maine, (d/b/a Blue Cross and Blue Shield

of Maine) and Blue Alliance Mutual Insurance Company, Located in

Portland, Maine

[Application No. D-09848]

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 section 406(a) and (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

[[Page 3468]]

4975(c)(1) (A) through (E) of the Code \1\ shall not apply, effective

August 18, 1993, to the past sales of certain securities (the

Securities) by the Associated Hospital Service of Maine Retirement Plan

(the Plan) to the Associated Hospital Service of Maine (d/b/a Blue

Cross and Blue Shield of Maine) (BCBSME) and Blue Alliance Mutual

Insurance Company (Blue Alliance) (collectively, the Applicants),

parties in interest with respect to the Plan; provided that the

following conditions were met: (a) The sales of the Securities were

one-time transactions for cash; (b) the purchase price paid by BCBSME

and Blue Alliance was no less than the fair market value of the

Securities on the date of the sales; (c) the fair market value of the

Securities were determined by reference to an objective third party

pricing service, as of the date of the sales; (d) the terms of the

transactions were no less favorable to the Plan than those obtainable

in similar transactions negotiated at arm's length with unrelated third

parties; and (e) the Plan paid no costs, fees, or commissions

associated with the transactions, nor other expenses associated with

the application for exemption.

\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.

EFFECTIVE DATE: If this proposed exemption is granted, it will be

effective on August 18, 1993, the date of the sales of the Securities

to BCBSME and Blue Alliance.

Summary of Facts and Representations

1. The Plan, established in 1953, is an individually designed, tax-

qualified non-contributory defined benefit pension plan. As of July 8,

1994, the Plan had 1,009 participants including current retirees,

terminated vested employees, and their beneficiaries. It is represented

that the Plan has been fully funded since 1991 and no contribution was

required for 1994. As of December 31, 1993, the fair market value of

the assets of the Plan was $26,692,805.

The Plan provides for pension, disability retirement, and death

benefits. Plan benefits are funded through the Associated Hospital

Service of Maine Retirement Trust (the Trust). The Board of Directors

of BCBSME appoints the Board of Trustees for the Trust (the Trustees).

In this regard, in 1993 when the transaction occurred, two of the five

(5) Trustees were former employees of BCBSME, two (2) individuals were

officers of BCBSME, and one of the Trustees was also a member of the

Board of Directors of BCBSME. It is represented that the Trustees have

exclusive authority and discretion to manage and control the Plan's

assets in accordance with the provisions of the Trust, including the

power to appoint one or more investment managers.

The Plan covers employees of BCBSME, salaried employees of

Machigonne, Inc. (Machigonne), and employees of HRS Maine, Inc., a

corporation in which Machigonne holds a 45 percent (45%) ownership

interest.

2. BCBSME is organized under the laws of the State of Maine as a

non-profit hospital, medical, and health care service corporation.

BCBSME underwrites prepaid hospital, medical, and health care service

plans by providing hospital, medical and health care coverage and

Medicare supplemental coverage. BCBSME is the sponsor of the Plan and a

party in interest with respect to the Plan, as an employer any of whose

employees are covered by the plan, pursuant to section 3(14)(C) of the

Act.

3. Blue Alliance, an affiliate of BCBSME, is organized under the

laws of the State of Maine as a mutual insurance company. Blue Alliance

underwrites major medical and dental insurance coverage that is

intended to complement the health care coverage offered to subscribers

of BCBSME by covering services that are not covered under the BCBSME

contracts. With some exceptions, Blue Alliance and BCBSME insurance

products are offered only jointly to subscribers. As a mutual insurance

company owned by its policyholders, Blue Alliance is not directly or

indirectly owned in whole or in part by BCBSME. However, BCBSME

controls the management and policies of Blue Alliance. In this regard,

the most recent by-laws of Blue Alliance provide that all of the

directors of Blue Alliance must be directors or employees of BCBSME. At

the time the transactions were entered on August 18, 1993, it is

represented that at least seven (7) out of twelve (12) of the directors

of Blue Alliance were directors or employees of BCBSME.

Blue Alliance is not an employer of employees covered by the Plan,

as all of its business functions are performed by employees of BCBSME.

However, Blue alliance and BCBSME own, respectively, 15 percent (15%)

and 85 percent (85%) of the stock of Machigonne which is an employer of

employees covered by the Plan. Accordingly, Blue Alliance is party in

interest with respect to the Plan, as an 10 percent (10%) or more owner

of a participating employer in the Plan, pursuant to section 3(14)(H)

of the Act.

4. The sales of the Securities for which exemptive relief is

requested was part of a larger, integrated transaction that resulted in

a complete restructuring of the Plan's investment program. Prior to the

sales of the Securities, the investment responsibilities for the Plan

were divided between an external investment advisor and the Trustees.

The professional investment firm of David L. Babson & Company, Inc. was

retained to invest approximately 55 to 60 percent (55% to 60%) of the

assets of the Plan in domestic equity securities. The balance of the

Plan's assets were invested by the Trustees in fixed income securities

consisting of United States Treasury and agency notes and bonds and

investment-grade corporate notes and bonds.

At the Trustees' meeting of November 18, 1991, the Trustees decided

to engage an independent professional pension consulting firm.

Following interviews with several firms, on April 23, 1992, the

Trustees selected New England Pension Consultants (NEPC), located in

Cambridge, Massachusetts. NEPC assists corporations, endowments,

foundations, public funds, and Taft-Hartley accounts in pension plan

investment policy development, asset allocation analysis, investment

manager searches, and monitoring and performance analysis of plan asset

investments. NEPC's responsibilities with respect to the Plan included

a complete review and analysis of the Plan's investment structure,

investment policy, asset allocation, investment performance, choice of

investment managers, and manager guidelines. After conducting an in-

depth study of the Plan's investment performance over the previous five

(5) years, NEPC proposed that the Trustees no longer manage any of the

Plan's assets. Further, NEPC suggested that the asset classes in the

Plan's portfolio be expanded to include international equity, global

fixed income, and real estate asset classes, as well as the existing

domestic equity and fixed income classes. The Trustees adopted NEPC's

proposal, with minor modifications, at their February 18, 1993,

meeting.

At the same meeting, NEPC also advised the Trustees to appoint five

(5) new investment managers by December 31, 1994, with the first two

such managers to be in place by the end of 1993. Further, NEPC

expressed a preference for having each new manager liquidate the

securities, if necessary, after the assets of the Plan had been

transferred to them for investment purposes, rather than have the

Trustees do so. It is represented that this recommendation was made

because

[[Page 3469]]

NEPC believed that in many cases a direct transfer served to minimize

transaction costs. Further, NEPC believed that particularly in

circumstances where plan assets are being transferred for investment

from a former investment manager to a new manager, sale of such plan

assets by the new manager (whose performance will be monitored on an

ongoing basis) tends to maximize the return on the existing investments

to such plan. It is represented that the Trustees approved NEPC's

recommendations, and engaged NEPC to conduct a search for investment

management candidates.

In this regard, except for the selection of a real estate

investment manager which will be undertaken at the appropriate time,

the restructuring of the Plan's investment program was completed by

approximately May 4, 1994. Four new investment managers, Invesco

Capital Management, Inc. (Invesco), Pacific Investment Management

Company (PIMCO), Templeton Investment Counsel, Inc. (Templeton), and

Scudder, Stevens & Clark (Scudder), were selected in 1993 and 1994 by

the Trustees from a number of candidates.

With respect to the transfer of assets to Invesco, approximately 20

percent (20%) of the total assets of the Plan were transferred for

purposes of active management to Invesco by June 30, 1993. It is

represented that the Trustees were not required to liquidate any plan

assets, because Invesco was able to accept in-kind the securities held

by the Plan.

With respect to the transfer for purposes of active management of

assets of the Plan to Templeton and Scudder, because these managers

specialize in foreign investments, neither would accept in-kind

transfers of assets from the Plan. Accordingly, the Trustees liquidated

portions of the Plan's portfolio through sales to unrelated parties and

instead transferred the cash proceeds to the new managers.

With respect to the transfer for purposes of active management to

PIMCO of assets of the Plan, PIMCO replaced the Trustees as manager of

the Plan's fixed income assets on July 22, 1993. PIMCO is a subsidiary

of Pacific Financial Asset Management Corporation (PFAMCO) and manages

the Managed Bond and Income Portfolio of the PFAMCO Funds, a non-load,

open-end management investment company. However, as the securities

owned by the Plan did not match the investment characteristics of the

bonds then held in the Managed Bond and Income Portfolio, for

administrative convenience, PIMCO requested that the Plan assets be

transferred in cash. As of August 31, 1993, approximately 35 percent

(35% of the total assets of the Plan were transferred to the Managed

Bond and Income Portfolio, an investment-grade, commingled bond fund

for institutional investors managed by PIMCO in cash.

5. It is represented that prior to the transfer of cash to PIMCO,

the Trustees inquired of NEPC whether the securities that the Plan was

required to sell in order to effectuate the transfer of assets for

investment to PIMCO could be ``bundled'' and sold as a package. In this

regard, NEPC advised the Trustees that either: (1) The portfolio could

be liquidated in a program trade where all the securities would be sold

as a group to a broker who would typically receive a premium paid by

the seller to assume the market risk of subsequently liquidating such

securities; or (2) the Trustees could avoid paying a premium to the

broker by liquidating the securities in a series of individual

transactions as market opportunities presented themselves. It is

represented that after advising the Trustees of their options, NEPC did

not render any advice with respect to, had no knowledge with regard to,

and no further involvement with the execution of the sales of the

Securities by the Plan, including the transactions with parties in

interest.

The Trustees, in order to effect the transfer for purposes of

active management of the assets of the Plan to PIMCO, on four (4)

separate dates liquidated sixty-nine (69) different securities held by

the Plan worth approximately $8.8 million. In this regard, on August 11

and August 15, 1993, the Plan sold fourteen (14) corporate bonds for

approximately $1.5 million. On August 20, 1993, seventeen (17)

government-backed mortgage securities and three (3) Treasury notes were

sold for approximately $1.8 million. It is represented that the sales

of these thirty-four (34) securities were made by the Plan on the open

market to unrelated parties on the days specified.

The transactions for which retroactive relief is requested occurred

on August 18, 1993, and involved one-time cash sales by the Plan of the

Securities to each of the Applicants. The Securities consisted of

publicly-traded United States Treasury and agency securities for which

there was a readily ascertainable market price. It is represented that

the Plan sold a total of twenty-six (26) securities (fourteen Treasury

notes and twelve agency obligations) to BCBSME for a price of

$4,470,773 and a total of nine (9) securities (five Treasury notes and

four agency obligations) to Blue Alliance for a price of $1,031,516.

The Securities constituted approximately 20 percent (20%) of the total

Plan assets which as of July 31, 1993, were worth approximately

$26,487,645. It is represented that the sales of the Securities were

executed at fair market value.

6. With respect to the fair market value of the Securities, it is

represented that, as of approximately 11:50 A.M. Eastern Daylight Time

on August 18, 1993, the day of the sales, the Securities were worth

approximately $5.4 million. In this regard, M.G.S.I. Securities, Inc.,

an independent brokerage firm located in Houston, Texas, supplied the

fair market value contemporaneous with the actual sale of the

Securities by facsimile transmission of printouts generated by The

Bloomberg, a computerized, real-time independent financial reporting

service. It is represented that the Trustees executed the transactions

at the bid price for each of the Securities involved. Further, the

application contains a schedule that compares the prices paid by the

Applicants for the Securities and the prices for the Securities quoted

on August 19, 1993, in the Wall Street Journal (WSJ), which reflect the

market prices of the Securities, as of August 18, 1993, the day of the

sales. It is represented that there was a total favorable variance to

the Plan of $2,437.55 between the prices paid by the Applicants and the

prices quoted in the WSJ for the Securities.

7. Subsequent to the sales of the Securities to the Applicants,

PIMCO received in cash, on August 26, and August 30, 1993, $7.5 million

and $1.5 million, respectively, for reinvestment in the Managed Bond

and Income Portfolio. It is represented that the second transfer for

management purposes included approximately $84,000 of the Plan's cash

reserves in addition to the balance of cash realized from sales of the

Securities to the Applicants and from sales of other securities to

unrelated parties.

8. It is represented that none of the Trustees was aware that the

sales of the Securities to the Applicants violated the prohibited

transaction provisions of the Act until May 1994, when Ernst & Young

conducted the annual independent audit of the Plan. In this regard, it

is represented that the transactions were fully disclosed in the Plan's

audited financial statements for the Plan Year ending December 31,

1993. It is represented that the Trustees acted entirely in good faith

in believing that the transactions were not prohibited and acted to

protect the Plan from abuse and unnecessary risk by

[[Page 3470]]

obtaining current price quotations on the date of the sales from

objective third party sources to ensure that the Plan received the fair

market value for the Securities. Immediately upon becoming aware that

the sales to the Applicants were prohibited, the Trustees consulted

legal counsel, and subsequently, filed an application for retroactive

exemption, based on the applicable provisions of the Act, the

Department's regulations, and ERISA Technical Release 85-1.

The Applicants submit that undoing the transactions is not possible

without, at best, creating an undue risk of loss to the Plan through a

series of transactions required to liquidate Plan investments with

PIMCO, repurchase the Securities from the Applicants, resell those

Securities to unrelated parties, and reinvest the proceeds with PIMCO.

In addition, were these steps taken the Plan would be subject to

brokerage fees and other transactions costs.

9. The Applicants maintain that the transactions were in the

interest of the Plan in that the Trustees sought to liquidate the

Securities as expeditiously as possible. In addition, although certain

of the Securities were sold at a loss, the sales took place at fair

market value, and such loss would not have been avoided by sales to

unrelated parties. Moreover, it is represented that in the aggregate

the Plan realized a substantial gain. In this regard, the Plan obtained

a slightly better price for the Securities sold to the Applicants by

not having to pay a premium to a broker for the liquidation of the

fixed income assets and by avoiding brokerage fees (or dealer margins)

and ``odd lot'' discounts. It is represented that the total sales price

of the Securities aggregated $5.4 million, and the Plan gained

approximately $317,000 on the sales to the Applicants.

10. It is represented that the transactions were feasible in that

the sales of the Securities to the Applicants were one-time

transactions in which the Plan received only cash. In addition, it is

represented that the Plan was not required to pay any commissions,

costs, premiums or expenses in connection with the sales. Further, the

costs of filing the exemption application and of notifying interested

persons will be borne by BCBSME.

11. It is represented that at the time the transactions were

entered there were sufficient safeguards in place to protect the

interests of the Plan and its participants and beneficiaries. In this

regard, it is represented that the sales were an integral part of a

comprehensive restructuring of the Plan's investment program and asset

management that the Trustees had undertaken and were carrying out,

pursuant to the expert advice of NEPC, an independent pension

consultant. Further, the Applicants maintain that all terms and

conditions of the sales were at least as favorable to the Plan as those

obtainable in an arm's length transaction with an unrelated party. In

this regard, the Securities are publicly traded on an established

market, and the Plan received a sales price equal to at least the fair

market value of the Securities on the date of the sales. In addition,

the sales price for such Securities was determined by an independent

brokerage firm, using a well-established pricing service and based on

current market quotations on the date of the sales.

12. In summary, the Applicants represent that the proposed

transactions meet the statutory criteria of section 408(a) of the Act

because:

(a) The sales of the Securities to the Applicants were one-time

transactions for cash;

(b) The purchase price paid by BCBSME and Blue Alliance was no less

than the fair market value of the Securities on the date of the sales;

(c) The fair market value of the Securities were determined by

reference to an objective third party pricing service, as of the date

of the sales;

(d) The terms of the transactions were no less favorable to the

Plan than those obtainable in similar transactions negotiated at arm's

length with unrelated third parties; and

(e) The Plan paid no costs, fees, or commissions associated with

the transactions, nor other expenses associated with the application

for exemption.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

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

Spreckels Industries, Inc. Employee Stock Ownership Plan (the ESOP);

Spreckels Industries, Inc. Incentive Savings Plan for Union Hourly

Employees (the Hourly Plan); and Spreckels Industries, Inc. Employees'

Incentive Savings Plan (the Incentive Plan; collectively, the Plans)

Located in Pleasanton, California,

[Application Nos. D-09999 through D-10001

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)(1)(A), 406(a)(1)(E),

406(a)(2), 407(a), 406(b)(1), and 406(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) and (E) of the Code,\2\ shall not

apply to the proposed acquisition, holding or exercise by the Plans of

certain warrants (the Warrants) for the purchase of Class A new common

stock (the New Common Stock) of Spreckels Industries, Inc. (the

Employer), a party in interest with respect to the Plans; provided that

the following conditions are satisfied:

\2\ 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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(a) An independent fiduciary (the I/F) will manage the Warrants and

monitor the value of the Warrants at all times and will be empowered to

assign, transfer, sell, and exercise the Warrants in order to serve the

best interest of the Plans and their participants and beneficiaries;

(b) The fair market value of the Warrants will at no time exceed

twenty-five percent (25%) of the value of the total assets of the

Hourly Plan or the Incentive Plan;

(c) The Warrants that the Plans will acquire resulted from a

bankruptcy proceeding, in which all holders of the Class A old common

stock (the Old Common Stock) in Spreckels Industries, Inc. (Old

Spreckels) were treated in a like manner, including the Plans;

(d) The Plans will not incur any expenses or fees in connection

with the proposed transactions;

(e) Any assignment, sale, or other transfer of the Warrants will

not involve a party in interest with respect to the Plans, as defined

in section 3(14) of the Act, unless such transfer is to the Employer,

pursuant to an exercise of the Warrants; and

(f) The I/F will determine the fair market value of the Warrants

upon acquisition by the Plans, and an independent qualified appraiser

will determine the fair market value of the Warrants on a periodic

basis (but not less frequently than annually).

Summary of Facts and Representations

1. The Employer, a Delaware corporation with offices in Pleasanton

California, is a holding company that operates through ten (10) wholly-

owned subsidiaries. Through these subsidiaries, the Employer engages in

three principal businesses: (a) The production and marketing of sugar

products in the United States; (b) the production and marketing of

electrical

[[Page 3471]]

and manual hoists, actuators, rotating joints, jacks, and other

materials-handling equipment; and (c) the production and sale of a wide

range of speciality industrial products, including circuit breakers,

hydraulic scissors-lifts, and machine parts.

2. The Plans are defined contribution plans created for its

employees by Old Spreckels. Pursuant to the reorganization in

bankruptcy of Old Spreckels, as more fully discussed below, the

Employer became the sponsor of the ESOP, the Hourly Plan, and the

Incentive Plan.

The ESOP was designed to compensate employees for services rendered

by giving them an equity interest in Old Spreckels. In this regard, all

of the ESOP's stock in Old Spreckels was acquired in a leveraged

transaction in January of 1988. It is represented that such stock in

Old Spreckels was allocated to the accounts of the participants in the

ESOP, over a five (5) year period ending in 1992.\3\ As of April 14,

1995, the ESOP had 947 participants and beneficiaries. The assets of

the ESOP totalled $1,344,599, as of December 31, 1994.

\3\ The Department expresses no opinion herein, as to whether

the described transactions relating to the ESOP satisfy the

conditions set forth under section 408(b)(3) of the Act.

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A committee of five (5) individuals serves as named co-fiduciary

with the Employer, with respect to the administration, operation,

control, and management of the ESOP. The trustee for the ESOP is the

Business Trust Department of First Interstate Bank in San Francisco,

California. It is represented that the trustee's fees and other

administrative expenses of the ESOP are paid by the Employer.

The Hourly Plan is intended to qualify as a profit-sharing plan

under section 401(a) of the Code and contains a salary deferral

agreement that is intended to qualify under section 401(k) of the Code.

As of April 14, 1995, the Hourly Plan had 1084 participants and

beneficiaries. The assets of the Hourly Plan totalled $1,251,916, as of

December 31, 1994.

The Hourly Plan was established by Old Spreckels, as of July 1,

1991, to assist eligible employees in accumulating funds for retirement

by providing a regular means of savings. Eligible employees include

union hourly employees of the Employer or any participating subsidiary.

Enrollment in the Hourly Plan is voluntary, and employees are eligible

to become participants after the completion of thirty (30) days of

employment. It is represented that the Hourly Plan is an eligible

individual account plan, as defined under section 407(d)(3) of the Act.

Employee contributions are directed by participants in the Hourly Plan

into two investment fund options. The first option is a common stock

and short-term investment fund that invests primarily in the common

stock of the Employer. The second option is a guaranteed income fund

that invests in contracts issued primarily by insurance companies.

Participants may also elect to make after-tax and tax-deferred

contributions to the Hourly Plan. The Employer's matching contributions

to the Hourly Plan are based on the attainment of financial targets by

the Employer and each of its operating subsidiaries.

The Incentive Plan was established by Old Spreckels to assist

eligible employees in accumulating funds for retirement by providing a

regular means of savings. Eligible employees include any salaried or

non-union hourly employee who is employed on a regular full-time basis

by the Employer or a participating subsidiary. Such employee is

eligible to become a participant on the first day of the month

following the completion of a month of continuous service. It is

represented that the Incentive Plan is an eligible individual account

plan, as defined under section 407(d)(3) of the Act. Participants in

the Incentive Plan may direct their contributions (and earnings

thereon) into various investment funds offered by the Incentive Plan,

including a common stock and short-term investment fund that invests

primarily in the common stock of the Employer. The Employer may elect

to make matching contributions to the Incentive Plan, based on total

eligible tax-deferred and after-tax employee contributions. As of April

14, 1995, the Incentive Plan had 1006 participants and beneficiaries.

The assets of the Incentive Plan totalled $35,207,827, as of December

31, 1994.

All of the assets of the Hourly Plan and the Incentive Plan are

held in trust by the same trustee. Effective January 1, 1995: (a) The

trustee of the Hourly Plan and the Incentive Plan changed from Bank of

America to Harris Bank & Trust; (b) the recordkeeper of the Hourly Plan

and the Incentive Plan changed from Buck Consultants to William M.

Mercer, Inc.; and (c) the Hourly Plan and the Incentive Plan became

responsible for paying the trustee's fees, instead of the Employer.

3. On October 14, 1992, Old Spreckels filed a voluntary petition

for bankruptcy with the United States Bankruptcy Court for the Northern

District of California (Case No. 92-47497-J), pursuant to Chapter 11 of

the Bankruptcy Code. It is represented that the bankruptcy filing was

made as a result of the inability of Old Spreckels to meet scheduled

payments of principal and interest on long-term debt in the amount of

approximately $140 million dollars. At the time the bankruptcy petition

was filed, Old Spreckels was a holding company with ten (10) wholly-

owned operating subsidiaries. It is represented that none of the

operating subsidiaries of Old Spreckels were part of the Chapter 11

filing.

On June 22, 1993, the Bankruptcy Court held a hearing on the Third

Amended Plan of Reorganization (the Reorganization Plan) of Old

Spreckels. The Reorganization Plan was confirmed by the Bankruptcy

Court on August 4, 1993. Subsequently, on September 2, 1993, Old

Spreckels emerged from Chapter 11 of the federal bankruptcy law,

reorganized as the Employer.

4. Prior to its reorganization, the authorized capital stock of Old

Spreckels consisted of 15 million shares of Class A voting Old Common

Stock, 15 million shares of Class B non-voting Old Common Stock, and

one million shares of preferred stock. Pursuant to the Reorganization

Plan of Old Spreckels, all of the shares of outstanding Old Common

Stock were cancelled and exchanged for shares of the New Common Stock

of the Employer, and approximately $75 million dollars worth of the

long term debt of Old Spreckels was converted into equity of the

Employer. The effect of such conversion was to significantly reduce the

debt of the Employer in comparison to Old Spreckels. It is represented

that the exchange ratio of 9.9088387 shares of Old Common Stock for one

share of New Common Stock was the same for all equity holders.

Old Spreckels was required prior to the hearing on August 4, 1993,

which confirmed the Reorganization Plan to file with the Bankruptcy

Court a new certificate of incorporation and new by-laws for the

Employer. The certificate of incorporation of the Employer authorized

the issuance of 15 million shares of New Common Stock, but did not

authorize the issuance of preferred or other non-voting stock. As

provided in the Reorganization Plan, 6 million shares of New Common

Stock were issued along with Warrants to purchase New Common Stock. On

September 3, 1993, it is represented that the par value of the New

Common Stock was $.01 per share. On January 6, 1994, the New Common

Stock was listed on the National Association of Security Dealers

Automated Quotations System (NASDAQ). It is represented that on

[[Page 3472]]

September 14, 1995, the closing price of the New Common Stock on the

NASDAQ National Market was $9.00 per share.

5. Prior to confirmation on August 4, 1993, of the reorganization

of Old Spreckels, it is represented that the ESOP, the Hourly Plan, and

the Incentive Plan held, respectively, 2,054,250 shares, 39,586 shares,

and 419,064 shares of Class A Old Common Stock, which constituted

approximately 41%, .8%, and 8.3% of the Old Common Stock then issued.

As of June 30, 1993, the fair market value of the old Common Stock held

by the ESOP, the Hourly Plan, and the Incentive Plan, respectively, was

approximately $1,705,028, $32,856, and $347,823. As of June 30, 1993,

the Old Common Stock represented approximately 100%, 4.8% and 1%,

respectively, of the total assets of the ESOP, the Hourly Plan, and the

Incentive Plan.

It is represented that post-confirmation, the Plans, like all other

similarly situated shareholders of Old Common Stock, received their pro

rata share of the New Common Stock in exchange for Old Common Stock.

The ESOP, the Hourly Plan, and the Incentive Plan, respectively, were

issued 207,315 shares, 3,995 shares, and 42,292 shares of New Common

Stock, which constituted approximately 3.5%, .1%, and .7% of the then

issued shares of New Common Stock. As of October 31, 1993, the New

Common Stock constituted 100 percent (100%) of the assets of the ESOP.

As of November 30, 1993, the New Common Stock held by the Hourly Plan

and the Incentive Plan represented approximately 4.1% and 1% of the

total assets of those two plans, respectively. It is represented that

the Old Common Stock and the New Common Stock are ``qualifying employer

securities,'' as defined in section 407(d)(5) of the Act.\4\

\4\ The Department, herein, expresses no opinion as to whether

the Old Common Stock or the New Common Stock constitute ``qualifying

employer securities,'' as defined in section 407(d)(5) of the Act,

or whether the acquisition and holding by the Plans of such

securities satisfied the conditions, as set forth under section

408(e) of the Act. Further, the Department, herein, is offering no

relief for transactions other than those proposed.

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On April 14, 1995, the ESOP, the Hourly, and the Incentive Plan,

respectively, held 186,680 shares, 18,735 shares, and 11,252 shares

which constituted approximately 3.11%, .31% and .187% of the then

issued shares of New Common Stock. Subsequently, as of September 20,

1995, the percentage of shares of New Common Stock in the ESOP, the

Hourly Plan, and the Incentive Plan when compared to the approximately

5,599,900 shares of New Common Stock then issued and outstanding was,

respectively, 2.5% (151,352 shares), .74% (44,412 shares) and 3.9%

(233,252 shares).

6. Pursuant to the reorganization, the Plans, like all other

similarly situated shareholders of Old Common Stock, in addition to

receiving New Common Stock were also entitled to receive a pro rata

share of Warrants to purchase additional shares of New Common Stock.

The Warrants are not registered with the Securities and Exchange

Commission, and are not freely transferrable or marketable. Holders of

the Warrants are not generally entitled to vote, to receive dividends,

or to be deemed holders of New Common Stock. It is represented that the

Warrants will expire on September 2, 2001, and are subject to all

applicable federal and state securities laws. The Plans will receive

the Warrants following the grant of this exemption.

Once acquired the Warrants must be held, by the Plans and all other

similarly situated shareholders of Old Common Stock, until such time as

the Warrants may be exercised, transferred, or assigned pursuant to

their terms. The Warrants to be received by the Plans are divided into

three classes as follows: (a) The First Old Equity Warrants--Series B

(the First Old Equity Warrants); (b) the Second Old Equity Warrants;

and (c) the Third Old Equity Warrants. Generally, each of the First Old

Equity Warrants and each of the Second Old Equity Warrants are

exercisable for one share of New Common Stock by the holder at the

price discussed in the paragraph below, at any time or from time to

time, during the term of such Warrants, in whole or in part (but, if in

part, in multiples of 1,000 shares). Each of the Third Old Equity

Warrants are exercisable, at the price discussed in the paragraph

below, for one share of New Common Stock, but not until the closing

price of the New Common Stock shall have equaled or exceeded $17.50 for

twenty (20) consecutive days, and thereafter, regardless of whether or

not the closing price of such stock shall be above or below $17.50, may

be exercisable by the holder in whole or in part (but, if in part, in

multiples of 1,000 shares).

The terms of the Warrants provide for the adjustment of the

exercise price and the number of shares of New Common Stock purchasable

under the Warrants upon the occurrence of certain events, such as a

change in the corporate structure of the Employer and changes in the

form and/or value of New Common Stock. Subject to adjustment under

certain circumstances, the exercise price for the First Old Equity

Warrants, the Second Old Equity Warrants, and the Third Old Equity

Warrants is, respectively $11.67, $15.00, and $1.00.

7. The applicant represents that it believes that the Warrants are

securities under federal securities law but are not ``qualifying

employer securities,'' as defined in section 407(d)(5) of the Act.

Accordingly, the ESOP, the Hourly Plan, and the Incentive Plan seek

exemptive relief to acquire and hold, in the aggregate, 132,189 First

Old Equity Warrants, 462,664 Second Old Equity Warrants, and 132,189

Third Old Equity Warrants. The Employer represents that the Plans will

be amended in all necessary respects to provide for, among other

things, the acquisition, retention, exercise, transfer, assignment, and

distribution of the Warrants. It is represented that the Warrants will

not be issued to the Plans, unless this proposed exemption is granted.

8. The applicant points out that the transactions do not arise from

the ordinary course of business, but arise as a result of an

extraordinary event (i.e. the issuance of the Warrants to stockholders

of Old Common Stock under the terms of the Reorganization Plan of Old

Spreckels approved by the Bankruptcy Court). It is represented that the

Bankruptcy Court has approved the Reorganization Plans as the best

means of providing creditors and equity holders, including the Plans,

with a fair opportunity to recover from the reorganization of Old

Spreckels and to profit from the success of the Employer. It is

represented that the Warrants which the Plans will acquire resulted

from the bankruptcy proceeding, in which all holders of the Class A Old

Common Stock were treated in like manner, including the Plans. It is

further represented that during the bankruptcy proceeding, the ESOP was

represented by the law firm of Wendel, Rosen, Black, Dean, and Levitan,

an independent fiduciary appointed by the Bankruptcy Court. In this

regard, the applicant maintains that the interests of the Hourly Plan

and the Incentive Plan were substantially similar to those of the ESOP

and that thus such plans were well protected during the bankruptcy

proceeding.\5\

\5\ The relief provided in this exemption is limited to the

acquisition, holding or exercise by the Plans of the Warrants. The

Department, herein, expresses no opinion as to whether any of the

relevant provisions of part 4, subpart B, of Title I of the Act have

been violated regarding the representation of the Plans' interest in

the bankruptcy proceeding or the ultimate outcome of such

proceeding, and no exemption from such provisions is proposed

herein.

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The applicant maintains that the transactions are in the interest

of the

[[Page 3473]]

Plans. In this regard, it is represented that the acquisition of the

Warrants offers an opportunity for economic gain to the Plans, in that

the Plans could exercise the Warrants and purchase New Common Stock at

a favorable price, if the price of such stock rises above the exercise

price. Further, the Plans would experience a loss if they, unlike all

other similarly situated shareholders of Old Common Stock, were not

permitted to receive the full value under the terms of the

Reorganization Plan. The applicant maintains that the Plans should not

be made to suffer a detriment relative to such other shareholders of

Old Common Stock.

The applicant maintains that the Plans and their participants and

beneficiaries were protected during the bankruptcy proceedings, in that

the process afforded the Plans the same opportunity pursuant to the

terms of the Reorganization Plan to acquire the New Common Stock and

the Warrants. In this regard, it is represented that the terms of the

Reorganization Plan apply in the same manner to all shareholders of the

Class A Old Common Stock, including the Plans.

It is represented that the Plans will not incur any expenses or

fees in connection with the proposed transactions. Further, the costs

of filing the exemption application and of notifying interested persons

will be borne by the Employer.

9. If this proposed exemption is approved, the Employer will issue

in the aggregate approximately 594,343 Warrants to the ESOP.

Specifically, the ESOP will receive 108,062 First Old Equity Warrants,

378,219 Second Old Equity Warrants, and 108,062 Third Old Equity

Warrants. With regard to the allocation of the Warrants, it is

represented that each participant will receive a pro rata share of the

Warrants issued to the ESOP based on the number of shares of Old Common

Stock in such participant's account just prior to the conversion to New

Common Stock. It is represented that this allocation of the Warrants to

the ESOP participants will be made in whole numbers of Warrants, and

any fractional interest will be rounded to the nearest whole number. If

a participant in the ESOP terminates employment and requests a

distribution when unexercised and unsold Warrants still remain

allocated to this account, the Warrants will be distributed to the

participant in-kind, in the same manner and at the same time as any New

Common Stock in such account is distributed to such participant.

Provided this proposed exemption is granted, the Employer will also

issue approximately 11,452 Warrants to the Hourly Plan. Specifically,

the Hourly Plan will receive 2,082 First Old Equity Warrants, 7,288

Second Old Equity Warrants, and 2,082 Third Old Equity Warrants. With

respect to the Hourly Plan, the Warrants will be allocated to and held

in a fund which currently holds the New Common Stock and investments

with up to 360 days' maturity. Once the Warrants are allocated to the

fund, the value of the Warrants in such fund, as determined by the I/F,

will be reflected in the units received by each participant of the

Hourly Plan invested in such fund.

If the Department grants this proposed exemption, the Employer will

issue approximately 121,247 Warrants to the Incentive Plan.

Specifically, the Incentive Plan will receive 22,045 First Old Equity

Warrants, 77,157 Second Old Equity Warrants, and 22,045 Third Old

Equity Warrants. With respect to the Incentive Plan, the Warrants will

be allocated to an investment fund which holds New Common Stock and

investments with up to 360 days' maturity. Each participant in the

Incentive Plan invested in such fund will receive units based on his

investments in the fund and on the addition of the value of the

Warrants, as determined by the I/F, to such fund. It is represented

that the Incentive Plan will manage the Warrants in exactly the same

manner as the Hourly Plan.

10. Pursuant to the terms of an agreement signed January 17, 1995,

L. Scott Maclise (Mr. Maclise), a registered investment advisor with

Linsco/Private Ledger Financial Services (LPL), in San Rafael,

California, has accepted the appointment to serve as the I/F on behalf

of the Plans for purposes of this exemption, and except in the event of

his discharge or resignation, as described below, will serve throughout

the duration of the transactions which are the subject of this

exemption. In this regard, Mr. Maclise states that he understands his

duties as I/F under the Act and shall assume all duties,

responsibilities, and obligations imposed upon him as I/F of the Plans

in connection with the proposed transactions, pursuant to the

provisions of the Act and the Code.

Mr. Maclise represents that he is qualified to serve as I/F with

respect to the Plans. In this regard, Mr. Maclise states that he is

experienced in representing clients as a fiduciary in stock

transactions. Mr. Maclise is a graduate of California State University

in San Francisco. Before joining LPL in 1992, Mr. Maclise had sixteen

(16) years of investment experience with other firms, including Dean

Witter, Merrill Lynch, and Shearson Lehman Brothers.

Mr. Maclise represents that he is independent of the Employer and

its officers, directors, shareholders, agents, and representatives. In

this regard, Mr. Maclise represents that he is not affiliated with the

Employer and that his income from the Employer represents less that 1

percent (1%) of his income annually. It is further represented that Mr.

Maclise shall have the power to negotiate and act independently of the

Employer, and its officers, directors, shareholders, agents, and

representatives with respect to the proposed transactions.

In fulfilling his responsibility as I/F to the Plans, Mr. Maclise

represents that he will take whatever acts are necessary to review,

analyze, negotiate, monitor, and approve or disapprove the proposed

transactions, and will be responsible for the Plans' acquisition and

holding of the Warrants. Bearing in mind his fiduciary duties under the

Act, Mr. Maclise represents that he shall determine whether the

proposed transactions: (a) Are prudent and for the exclusive purpose of

providing benefits to participants; (b) are fair to the Plans from a

financial point of view; and (c) are in accordance with terms and

conditions, as set forth in this proposed exemption.

With respect to the acquisition of the Warrants by the Plans, Mr.

Maclise represents that he will conduct due diligence to evaluate

whether the Plans should enter into the proposed transactions. In this

regard, Mr. Maclise will decide on behalf of the Plans (a) whether or

not the Plans should acquire and hold the Warrants; and (b) when, if at

all, the Warrants should be exercised to acquire New Common Stock, or

sold and the proceeds used to acquire such stock.

With respect to the holding of the Warrants by the Plans, Mr.

Maclise has determined that the Plans' holding of the Warrants will not

impair diversification, prudence, or liquidity as mandated by the Act.

In this regard, Mr. Maclise represents that he retains full power to

manage and monitor the value of the Warrants at all times and is

empowered to assign, transfer, sell, and exercise the Warrants in order

to serve the best interests of the participants and beneficiaries of

the Plans.

Mr. Maclise may resign his appointment as I/F at any time upon six

(6) months prior written notice, unless the Employer and Mr. Maclise

mutually agree to a shorter period of time. In addition, it is

represented that the Employer can remove Mr. Maclise as I/F ``for

cause,'' upon thirty (30) days' prior written notice, unless the

Employer and Mr. Maclise mutually

[[Page 3474]]

agree to a shorter period of time. It is represented that ``for cause''

means a breach of the agreement between the Employer and Mr. Maclise,

or the I/F's negligence, gross negligence, willful misconduct or lack

of good faith in the execution of his duties, or in the event Mr.

Maclise's fee for the services is being renegotiated, the inability of

the Employer and Mr. Maclise to agree upon the fee under such

agreement.

11. It is represented that the I/F will determine the fair market

value of the Warrants upon acquisition by the Plan. It is further

represented that, as appropriate, the Warrants will be appraised by an

independent appraiser. Such appraisals will be done on a periodic basis

(but not less frequently than annually).

12. In summary, the applicant represents that the proposed

transactions meet the statutory critiera of section 408(a) of the Act

because:

(a) The I/F will manage the Warrants and monitor the value of the

Warrants at all times and will be empowered to assign, transfer, sell,

and exercise the Warrants in order to serve the best interest of the

Plans and their participants and beneficiaries;

(b) The fair market value of the Warrants will at no time exceed

twenty-five percent (25%) of the value of the total assets of the

Hourly Plan or the Incentive Plan;

(c) The Warrants that the Plans will acquire resulted from a

bankruptcy proceeding, in which all holders of the Class A Old Common

Stock in Old Spreckels were treated in a like manner, including the

Plans;

(d) The Plans will not incur any expenses or fees in connection

with the proposed transactions;

(e) Any assignment, sale, or other transfer of the Warrants will

not be to a party in interest with respect to the Plans, as defined in

section 3(14) of the Act, unless such transfer is to the Employer,

pursuant to an exercise of the Warrants; and

(f) The I/F will determine the fair market value of the Warrants

upon acquisition by the Plans, and an independent qualified appraiser

will determine the fair market value of the Warrants on a periodic

basis (but not less frequently than annually).

Notice to Interested Persons

Included among those persons who may be interested in the pendency

of the proposed exemption are all fiduciaries, all active participants,

and all inactive participants of the Plans. It is represented that

these various classes of interested persons will be provided with a

copy of the Notice of Proposed Exemption (the Notice), plus a copy of

the supplemental statement (Supplemental Statement), as required,

pursuant to 29 CFR 2570.43(b)(2) within fifteen (15) calendar days of

publication of the Notice in the Federal Register. Notification will be

provided to all fiduciaries and all inactive participants of the Plans

either by mailing first class or overnight express delivery of a copy

of the Notice, plus a copy of the Supplemental Statement. Notification

will be provided to active participants by posting a copy of the

Notice, plus a copy of the Supplemental Statement at those locations

within the principal places of employment of the Employer which are

customarily used for notices regarding labor-management matters for

review.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

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

H.E.B. Investment and Retirement Plan (the Plan), Located in San

Antonio, Texas

[Application No. D-10035]

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), 406(b)(1) and

406(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 by the Plan

to H.E. Butt Grocery Company (the Company), a party in interest with

respect to the Plan, of an interest in a certain parcel of improved

real property (the Property) known as the South Congress Shopping

Center in Austin, Texas, provided that the following conditions are

met:

(a) The sale is a one-time transaction for cash;

(b) The Plan will receive an amount equal to the greater of either:

(1) $2,975,666, or (2) the fair market value of the Property at the

time of the transaction, as determined by a qualified, independent

appraiser;

(c) The Plan will not pay any commissions or other expenses with

respect to the sale; and

(d) The Plan's trustees determine that the sale of the Property to

the Company is appropriate for the Plan and in the best interests of

the Plan and its participants and beneficiaries at the time of

transaction.

Summary of Facts and Representations

1. The Company is a Texas corporation engaged primarily in the

retail grocery business in Texas. The Company has sponsored the Plan

since 1956. The Plan has also been adopted by the following entities

which are affiliated with the Company: HEBCO Partners, Ltd., Parkway

Distributors, Inc., Parkway Transport, Inc., C.C. Butt Grocery Company

and High-Tech Commercial Services, Inc. Parkway Distributors, Inc. and

Parkway Transport, Inc., are engaged in the business of intrastate and

interstate trucking.

2. The Plan is a defined contribution plan incorporating a

qualified cash or deferred arrangement and had approximately 20,773

participants as of December 31, 1994. As of that date, the Plan had

total assets with a fair market value of approximately $386,537,043, of

which approximately 8.7% reflect direct real estate investments.

The trustees of the Plan are John C. Broulliard, James F. Clingman,

Jr., Richard M. Ellwood, Bea Weicker Irvin, Louis M. Laguardia, Allen

B. Market, Robert A. Neslund, Wesley D. Nelson, Todd A. Piland, Charles

W. Sapp, and Edward C. Gotthordt (collectively, the Trustees). The

Trustees are all either current or former officers and/or employees of

the Company or its affiliates.

3. The Plan and the Company currently own interests in a tract of

realty known as the South Congress Shopping Center (the Shopping Center

Property), located at 2400 South Congress Avenue in the City of Austin,

County of Travis, State of Texas.\6\

\6\ The Department is providing no opinion in this proposed

exemption as to whether the joint ownership by the Plan and the

Company of interests in the Shopping Center Property resulted in any

Plan fiduciary violating his fiduciary responsibilities under Part 4

of Title 1 of the Act. However, the Department notes that section

404(a) of the Act requires, among other things, that a fiduciary of

a plan act prudently, solely in the interest of the plan's

participants and beneficiaries, and for the exclusive purpose of

providing benefits to participants and beneficiaries when making

investment decisions on behalf of a plan. In addition, section

406(b) of the Act, in pertinent part, prohibits a fiduciary of a

plan from dealing with the assets of a plan in his own interest or

for his own account or from acting in any transaction on behalf of a

party whose interests are adverse to the interests of the plan.

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The Shopping Center Property consists of approximately 6.21 acres

of land (the Land) and a single-story masonry, multi-tenant building

with approximately 98,918 square feet (the Building). The Land is

described as a

[[Page 3475]]

nearly rectangular corner site with 420 feet of frontage on South

Congress Avenue, 620 feet along Oltorf Avenue, and 53 feet along Euclid

Avenue. The Company owns the eastern 29,638 square feet of the Land,

and the portions of the Building related thereto, and an additional

55x135 foot strip of the Land (i.e., 7425 square feet) at the southwest

corner of the Shopping Center Property. The Plan owns the remaining

portions of the Building, the Land related thereto, and a three-quarter

(\3/4\) undivided interest in the Land used for the parking lot. (The

portions of the Land and the Building owned by the Plan are referred to

herein as ``the Property''.) The Company owns the remaining one-quarter

(\1/4\) interest in the Land used for the parking lot.

The Plan acquired the Property in 1960 from the Company as an

employer contribution to the Plan.\7\ The Property has generated a

cash-on-cash return, based on its current appraised value, of 9.1

percent, 9.5 percent, and 12.4 percent for the years 1992, 1993, and

1994, respectively. The applicant represents that the Property's total

net income to the Plan has produced a reasonable rate of return as an

investment for the Plan since 1960, but that there is no assurance that

the current income stream from the existing leases (as noted below)

will continue.

\7\ The applicant represents that the acquisition preceded the

effective date of the Act, but that it met the requirements of the

Code which governed such transactions at that time. However, the

Department expresses no opinion in this proposed exemption as to

whether the Plan's acquisition of the Property satisfied the

requirements of the Code.

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The Property is currently subdivided into separate leasehold

parcels. These leasehold parcels are subject to existing leases (the

Existing Leases) to the following tenants:

(i) Tandy Corporation (lease expiring December 7, 1997 with no

renewal options);

(ii) Texas State Optical, Inc. (lease expiring August 31, 1996 with

no renewal options);

(iii) Gregory J. Tomczyk (Mother Nature's Health Foods) (lease on a

month-to-month tenancy);

(iv) Walgreen Company (lease expiring June 30, 1996 with no renewal

options);

(v) Western Auto Supply Company (lease expiring January 31, 1996

with no renewal options); and

(vi) H.E. Butt Grocery Company (lease expiring June 14, 2001 with

four renewal options of five years each).

The applicant states that the Plan's lease to the Company of a

portion of the Property, as noted in item (vi) above, constitutes

``qualifying employer real property'' (QERP) within the meaning of

section 407(d)(4) of the Act. In this regard, the applicant represents

that the leasing of such parcel of the Property to the Company is and

has been statutorily exempt under section 408(e) of the Act.\8\

\8\ The applicant states that the parcel of the Property leased

to the Company is one of several such parcels of real property

leased by the Plan to the Company. The applicant maintains that such

leasehold parcels are located throughout the State of Texas and that

these parcels are suitable or adaptable without excessive cost for

more than one use, as required by section 407(d)(4) of the Act. In

addition, the applicant states that these leases did not involve the

payment of any commissions and were entered into for adequate

consideration, as required by section 408(e) of the Act.

In this regard, the Department is expressing no opinion as to

whether the Property constitutes QERP, within the meaning of section

407(d)(4) of the Act, or whether the Plan's leasing transactions

with the Company meet the conditions of section 408(e) of the Act

and the regulations thereunder (see 29 CFR 2550.408e).

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The applicant requests an exemption for the proposed sale of the

Property by the Plan to the Company. The applicant states that because

the Property encompasses leasehold parcels which are not leased to the

Company, the proposed sale of the Property to the Company would not

meet the statutory requirements for an exempt sale of QERP under

section 403(e) of the Act.

4. With respect to the reasons for the proposed transaction, the

applicant states that the Property is in excess of 30 years old, is

antiquated in appearance, and needs both interior and exterior

refurbishing to compete with more modern shopping center facilities. In

addition, in order to be competitive in the retail grocery market, the

Company desires to expand its existing grocery store beyond the current

portion of the Property which it leases from the Plan.\9\ In order to

effect such expansion, the applicant represents that it will be

necessary to demolish other portions of the Building on the Property

that are currently leased to third parties and to effect significant

construction. The Company believes that it would be in a better

position to effect such demolition and construction activities without

the participation of the Plan and that, in fact, entering into such

activities with the Plan would be inappropriate.

\9\ The Company owns and occupies the eastern 29,638 square feet

of the existing grocery store and leases the western 19,100 square

feet of the grocery store from the Plan.

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5. The Trustees have determined that it would be in the best

interests of the Plan and its participants and beneficiaries to sell

the Property to the Company for a number of reasons.

First, retail shopping centers have a certain ``life cycle'' (i.e.,

a period of time over which they are commercially viable without

significant renovation and updating). The trustees believe that the

Property has reached the end of its ``life cycle'' and needs a

substantial amount of capital to renew itself and go forward on a

commercially competitive basis in the future. Second, the Trustees have

determined that it is not in the Plan's best interest to undertake the

type of demolition and construction activities, as well as the

additional interior and exterior cosmetic refurbishing, which will be

necessary for the Property in order to maintain its commercial

viability for the future. Third, after reviewing a current appraisal of

the Property, the Trustees have concluded that it would be in the best

interests of the Plan to liquidate such investment and reinvest the

cash in assets which would not require the oversight, updating,

construction and expenditure that will be necessary for the Property in

the future.

In sum, the Trustees believe that the sale of the Property to the

Company at the present time would enable the Plan to convert an

existing illiquid real estate investment, which will require

significant expenditures to preserve and maintain, into more liquid and

potentially more profitable investments.

6. The applicant represents that the sale of the Property to the

Company will be a one-time transaction for cash at a price which is no

less than the fair market value of the Property as determined by an

independent, qualified appraiser.

7. The Property has been appraised by Russell T. Thurman (Mr.

Thurman) of Sayers & Associates, Inc., an independent, qualified real

estate appraiser in Austin, Texas, as of July 31, 1995 (the Appraisal).

Mr. Thurman states that the Appraisal relied primarily on the

income approach (the Income Approach) to value the Property, taking

into consideration the present value of the income stream on the

Existing Leases. The Income Approach was based on actual contract rents

for occupied space (approximately 88% of the leasable space) and

current economic market rents for vacant space (approximately 12% of

the leasable space) on the Property as of July 31, 1995. In addition,

the Appraisal considered the market approach (the Market Approach) to

value the Property, with an analysis of recent sales of similar

properties in the area. Finally, the Appraisal considered the cost

approach (the Cost Approach) to value the Property, with an estimation

of the reproduction cost for the improvements, minus accrued

depreciation, added to the value of the Land obtained from a sales

comparison approach.

[[Page 3476]]

Based on this analysis, the Appraisal concluded that the fair

market value of the Property, as of July 31, 1995, was $2,825,000,

based on the Income Approach. However, the data provided by the

Appraisal indicated that the current market value of the Property, as

of such date, was approximately $3,178,000, based on the Market

Approach, and $2,924,000, based on the Cost Approach. The Appraisal

also concluded that the fair market value of the Shopping Center

Property as of such date, including the portions of the Land and the

Building owned by the Company, was $4,541,000, based on the Market

Approach, and $4,287,000, based on the Cost Approach.

After reviewing the results of the Appraisal, the Company agreed to

pay the Plan at least $2,975,666 for the Property, an amount determined

based on the average of values provided by the Income Approach, the

Market Approach, and the Cost Approach.\10\

\10\ In this regard, please note that

$2,825,000+$3,178,000+$2,924,000=$8,927,000 divided by 3=$2,975,666.

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The applicant states that the Appraisal will be updated by Mr.

Thurman at the time of the proposed transaction to establish the

current fair market value of the Plan's leased fee interest in the

Property. For purposes of establishing the fair market value of the

Property under the Income Approach, Mr. Thurman will determine the

value of the Company's leasehold interest based on the greater of

either (i) the actual contract rent under the Existing Lease,\11\ or

(ii) the fair market rental value of the leased space currently

occupied by the Company.

\11\ The Appraisal states that the Company pays the Plan a base

rental rate of $4,628.41 per month plus a percentage rent of 40% of

the increase on gross sales over the base year (1991) for the entire

premises.

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

Finally, the applicant represents that the Plan will not pay any

commissions or other expenses in connection with the proposed sale.

8. In summary, the applicant represents that the proposed

transaction will satisfy the statutory requirements of section 408(a)

of the Act because: (a) The sale of the Property will be a one-time

transaction for cash; (b) the Plan will receive a sale price for the

Property which is equal to the greater of either (i) $2,975,666, or

(ii) the fair market value of the Plan's leased fee interest in the

Property at the time of the transaction, as determined by an

independent, qualified appraiser; (c) the transaction will enable the

Plan to divest itself of an illiquid real estate asset and invest the

proceeds of the sale in more profitable, liquid investments; (d) the

Plan will not pay any commissions or other expenses in connection with

the transaction; and (3) the Trustees have determined that the sale of

the Property to the Company would be appropriate for and in the best

interest of the Plan and its participants and beneficiaries.

Notice of Interested Persons

The applicant states that notice of the proposed exemption shall be

made to all interested persons by first class mail, except that persons

who are participants in the Plan and who are actively employed by the

Company, or an affiliate thereof, may be provided such notice by

posting upon bulletin boards customarily used for the provision of

information required to be provided to employees or by publication in

one or more general employee communications.

Notice to interested persons shall be made within thirty (3) days

following the publication of the proposed exemption in the Federal

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

exemption as published in the Federal Register and a supplemental

statement (see 29 CFR 2570.43(b)(2)) which informs interested persons

of their right to comment on and/or request a hearing with respect to

the proposed exemption. Comments and requests for a public hearing are

due within sixty (60) days following the publication of the proposed

exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. WIlliams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

Aircon Energy, Inc. 401(k) Profit Sharing Plan (the Plan), Located in

Sacramento, California

[Application No. D-10073]

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 section 406(a), 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 sale by the Plan of certain

office equipment (the Workstations) to Aircon Energy, Inc. (Aircon), a

party in interest with respect to the Plan, provided that the following

conditions are satisfied: (1) The sale is a one-time transaction for

cash; (2) the Plan pays no commissions nor any other expenses relating

to the sale; (3) the purchase price is the greater of: (a) The fair

market value of the Workstations as determined by a qualified,

independent appraiser, or (b) the Plan's initial acquisition cost plus

opportunity costs attributable to the Workstations while in storage;

(4) Aircon reimburses the Plan for the fair market rental value with

respect to the prohibited use of certain of the Workstations; (5)

Aircon reimburses the Plan for losses and opportunity costs assocaited

with the sale of certain of the Workstations to an unrelated third

party; and (6) within 90 days of the publication in the Federal

Register of the grant of this notice of proposed exemption, Aircon

files Form 5330 with the Internal Revenue Service (the Service) and

pays all applicable additional excise taxes that are due by reason of

the prohibited use transactions.

Summary of Facts and Representations

1. The Plan is a profit sharing plan sponsored by Aircon. As of

December 31, 1994, the Plan had approximately 43 participants and total

assets of approximately $1,638,373. The trustees of the Plan are

officers, employees, or shareholders of Aircon as follows: Scott

Slavensky, President; Atlthea Slavensky, Administrative Clerk; Frank

Slavensky, Service Consultant; and Chris Costi, Shareholder. Aircon, a

California corporation, is engaged in the business of installing and

repairing residential and commercial heating and air conditioning

systems and is located in Sacramento, California.

2. Among the assets of the Plan are 45 Workstations. The Plan

originally purchased 48 used mahogany Workstations on December 8, 1989

for a total of $41,125 ($856.77 per unit), including shipping and

handling costs, from an unrelated third party, R&M Office Furniture of

Sacramento, California. Scott Slavensky, a Plan trustee, made the

decision to invest in the Workstations after determining that the

purchase price was well below the then prevailing market rate.\12\ On

September 30, 1993, three of the Workstations owned by the Plan were

sold to an unrelated third party for $3,600 ($1,200 per unit) through

Innovators Office Furniture, a broker of used office furniture. Net of

commissions and other expenses of sale, the Plan received a total of

$2,160 ($720 per unit).

\12\ The Department expresses no opinion herein on whether the

acquisition and holding of the Workstations by the Plan violated any

of the provisions of Part 4 of Title I in the Act.

[[Page 3477]]

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Of the remaining 45 Workstations, 25 Workstations are being held in

storage, while 20 Workstations are currently being used by Aircon. The

applicant represents that various Workstations were set up in Aircon's

offices at various times. Initially, the Plan trustees set up four

Workstations in January 1990 for demonstration purposes. Subsequently,

additional Workstations came into use as follows: Six in May 1990,

three in December 1992, and seven in September 1994. Aircon has paid

all storage costs associated with the Workstations.

3. The applicant obtained an independent appraisal of 18 of the

Workstations currently being used by Aircon from Alex Sabbadini,

F.A.S.A., of Alex Sabbadini, Inc., a professional personal property

appraiser in Sacramento, California. Using the sales comparison

valuation method, Mr. Sabbadini estimated that the aggregate fair

market value of the 18 Workstations as of March 17, 1995 was $7,245

($402.50 per unit).

4. The applicant represents that despite diligent marketing efforts

paid for by Aircon, the Plan trustees have been unable to sell the

remaining Workstations and have concluded that there is no current

market for the Workstations. In order to divest the Plan of non-income

producing, illiquid assets, and to correct the ongoing prohibited

transactions resulting from the use of 20 of the Workstations, Aircon

proposes to purchase all 45 Workstations from the Plan for the greater

of: (a) The fair market value of the Workstations as determined by a

qualified, independent appriaser, or (b) the Plan's initial acquisition

cost plus opportunity costs attributable to the Workstations. Because

the fair market value of the Workstations is less than their

acquisition cost, Aircon will purchase the Workstations from the Plan

for the amount specified under (b) above. Accordingly, Aircon wil pay

the Plan a purchase price of $51,770.34. The purchase price was

calculated by taking the Workstations' acquisition cost ($38,564.65)

and adding to that amount an assumed eight percent annual return \13\

for each of the years the Plan has held the Workstations in storage

since December 1989 ($13,205.69). Accordingly, the total opportunity

costs attritutable to the Workstations while in storage was calculated

as follows: [(Unit cost x No. Units x .08)/(12 Mos.)] x (No. Mos.).

\13\ The Department notes the applicant's representation that

the eight percent figure is 105% of the five-year average of the

Applicable Federal Funds Rate (AFR). The AFR is calculated by the

Service and is used for determining reasonable rates of interest.

The applicant represents that the AFR is thus an appopriate measure

to calculate opportunity costs attributable to the Workstations.

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

Period Unit cost No. units Mos. @ 8% Opp'ty cost

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

12/89-4/90.......................... $856.77 41 5 $1,170.90

5/90-11/92.......................... 856.77 35 31 6,197.21

12/92-8/94.......................... 856.77 32 21 3,838.38

9/94-10/95.......................... 856,77 25 14 1,999.20

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

Subtotal...................... ................. ................. ................. 13,205.69

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

The Plan will pay no commissions nor any other expenses relating to the

sale.

5. The applicant acknowledges that Aircon's ongoing use of 20

Workstations without paying any compensation to the Plan constitutes a

violation of the prohibited transaction provisions of the Act. Aircon

proposes to make the Plan whole by paying the fair market rental value

with respect to the prohibited use of these Workstations. The applicant

represents that because the custom for the industry is a lease-to-own

arrangement (rather than a pure rental), and because the total rent

paid under a lease-to-own arrangement would greatly exceed the purchase

price of the Workstations within a short time, a rental rate of $20 per

month per unit is an appropriate rate of compensation to the Plan, a

total of $17,580. This rate is at least as favorable to the Plan as

that obtainable in an arm's length transaction because it is based on

the average of quotes received from various local office furniture

rental companies with respect to the rental value of a new executive

desk with a retail price of $500. The applicant represents that the

three companies contacted provided the following rental rates for such

an office desk, based on a one-year contract: Evans Furniture Rental

($21 per month); Globe Furniture Rental ($19 per month); and Brook

Furniture Rental ($21 per month). Moreover, a rental rate of $20 per

month represents a 28 percent annual return on the initial cost per

Workstation paid by the Plan. The rent is to be assessed from the time

that each Workstation came into use through October 31, 1995, as

follows:

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

Period No. units Mos. Rent/mo. Amount

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

01/90-10/95......................... 4 70 $20 $5,600.00

05/90-10/95......................... 6 66 20 7,920.00

12/92-10/95......................... 3 35 20 2,100.00

09/94-10/95......................... 7 14 20 1,960.00

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

Subtotal...................... ................. ................. ................. 17,580.00

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

The applicant represents that within 90 days of the publication in

the Federal Register of the grant of this notice of proposed exemption,

Aircon will file Form 5330 with the Service and pay all applicable

additional excise taxes that are due by reason of the prohibited use

transactions.

6. Aircon will also reimburse the Plan $1,267.25 for losses and

opportunity costs associated with the sale of three of the Workstations

to an unrelated third party on September 30, 1993. This amount was

calculated as follows. Aircon will restore to the Plan $410.31, which

represents the difference between the three Workstations' acquisition

cost ($2,570.31) and the net sales price ($2,160). In addition, Aircon

will pay the Plan $788.44, which represents an assumed eight percent

annual return on the acquisition cost of the three Workstations while

in storage for the period from December 1989 to

[[Page 3478]]

September 30, 1993. Finally, Aircon will pay the Plan $68.50, which

represents an assumed eight percent annual return for the period from

October 1993 to October 31, 1995 on the $410.31 loss the Plan incurred

on the sale of the three Workstations.

7. Aircon's total obligation to the Plan will thus be $70,617.59

and was calculated as follows:

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

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

Acquisition cost of 45 Workstations........................ $38,564.65

Opp'ty costs on 45 Workstations in storage................. 13,205.69

Fair market rental value of 20 Workstations................ 17,580.00

Loss and opp'ty costs on 3 Workstations sold............... 1,267.25

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

Total................................................ 70,617.59

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

The applicant represents that the proposed transaction is in the

interests of the Plan because if the Plan is forced to attempt a sale

of the Workstations on the open market, the Plan will receive

substantially less than the amount the applicant is willing to pay. In

addition, the sale will convert non-income producing, illiquid assets

into liquid assets that could then be redirected into more productive

investments.

8. In summary, the applicant represents that the proposed

transaction satisfies the statutory criteria for an exemption under

section 408(a) of the Act for the following reasons:

(1) The sale will be a one-time transaction for cash; (2) the Plan

will pay no commissions nor any other expenses relating to the sale;

(3) the sale will enhance the liquidity of the assets of the Plan; (4)

the sale will enable Aircon to correct ongoing prohibited transactions;

(5) the purchase price will be the greater of: (a) The fair market

value of the Workstations as determined by a qualified, independent

appraiser, or (b) the Plan's initial acquisition cost plus opportunity

costs attributable to the Workstations while in storage; (6) Aircon

will reimburse the Plan for the fair market rental value with respect

to the prohibited use of 20 of the Workstations; (7) Aircon will

reimburse the Plan for losses and opportunity costs associated with the

sale of three of the Workstations; and (8) within 90 days of the

publication in the Federal Register of the grant of this notice of

proposed exemption, Aircon will file Form 5330 with the Service and pay

all applicable additional excise taxes that are due by reason of the

prohibited use transactions.

Tax Consequences of Transaction

The Department of the Treasury has determined that if a transaction

between a qualified employee benefit plan and its sponsoring employer

(or affiliate thereof) results in the plan either paying less than or

receiving more than fair market value, such excess may be considered to

be a contribution by the sponsoring employer to the plan and therefore

must be examined under applicable provisions of the Code, including

sections 401(a)(4), 404 and 415.

Notice to Interested Persons

Notice of the proposed exemption shall be given to all interested

persons by personal delivery and by first-class mail within 15 days of

the date of publication of the notice of pendency 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/or to request a

hearing with respect to the proposed exemption. Comments and requests

for a hearing are due within 45 days of the date of publication of this

notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Karin Weng 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 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 that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 25th day of January, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 96-1778 Filed 1-30-96; 8:45 am]

BILLING CODE 4510-29-M