Individual Exemption Involving the Northwest
Airlines Pension Plan for Salaried Employees, the Northwest Airlines
Pension Plan for Pilot Employees, and the Northwest Airlines Pension
Plan for Contract Employees [01/17/2003]
Volume 68, Number 12, Page 2578-2590
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Numbers D-11137, 11138, and 11139]
Notice of Proposed Individual Exemption Involving the Northwest
Airlines Pension Plan for Salaried Employees, the Northwest Airlines
Pension Plan for Pilot Employees, and the Northwest Airlines Pension
Plan for Contract Employees (Collectively, the Plans) Located in Eagan,
MN
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of proposed individual exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (ERISA or the Act) and from certain taxes
imposed by the Internal Revenue Code of 1986 (the Code). If granted,
the proposed exemption would permit: (1) The in-kind contribution(s) of
the common stock of either Pinnacle Airlines, Inc. or Pinnacle Airlines
Corp. (Pinnacle Stock) to the Plans by Northwest Airlines, Inc.
(Northwest), a party in interest with respect to such Plans; (2) the
holding of the Pinnacle Stock by the Plans; (3) the sale of the
Pinnacle Stock by the Plans to Northwest; and (4) the acquisition,
holding, and exercise by the Plans of a put option (the Put Option)
granted to the Plans by Northwest (the Exemption Transactions). If
granted, the proposed exemption would affect participants and
beneficiaries of, and fiduciaries with respect to, the Plans.
DATES: Written comments and requests for a public hearing should be
received by the Department on or before March 3, 2003.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
January 15, 2003.
ADDRESSES: All written comments and requests for a public hearing
(preferably, three copies) should be sent to the Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210, (Attention: Exemption Application Numbers D-
11137-39).
Interested persons are also invited to submit comments and/or
hearing request to the Department by the end of the scheduled comment
period either by facsimile to (202) 219-0204 or by electronic mail to
moffittb@pwba.dol.gov. The application pertaining to the proposed
exemption and the comments received will be available for public
inspection in the Public Disclosure Room of the Pension and Welfare
Benefits Administration, U.S. Department of Labor, Room N-1513, 200
Constitution Avenue, NW., Washington, DC 20210.
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed individual exemption from the
restrictions of sections 406(a), 406(b)(1) and (b)(2), and 407(a) of
the Act and from the sanctions resulting from the application of
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A)
through (E) of the Code.
FOR FURTHER INFORMATION CONTACT: Wendy M. McColough or Christopher
Motta, Office of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor, telephone (202) 693-8540.
(This is not a toll-free number.)
Summary of Facts and Representations
1. Northwest. Northwest (hereinafter, Northwest or the Applicant)
is a Minnesota corporation with its principal headquarters in Eagan,
Minnesota. Northwest is the principal operating company of the
Northwest Airlines Corporation's controlled group and is the fourth
largest airline in the world. Northwest Airlines Corporation (NWAC),
the ultimate parent corporation, which indirectly owns 100 percent
(100%) of the stock of Northwest, is publicly traded (NASDAQ symbol
NWAC) and is a Delaware corporation. Northwest represents that all
significant members of NWAC's controlled group are airline-related. The
airline began service on October 1, 1926. Known primarily as an
international airline prior to the era of deregulation, Northwest
strengthened its domestic presence when the industry was deregulated.
To achieve this, Northwest acquired Republic Airlines in 1986. Today,
the Applicant states that Northwest has a 10 percent (10%) domestic
market share. In 1989, Northwest created the first international
airline alliance with KLM Royal Dutch Airlines (KLM), giving Northwest
an international presence between the U.S. and Europe and points
beyond. Northwest expanded its alliance strategy again in 1998 with
Continental Airlines (Continental) by creating the first domestic,
major airline alliance. This alliance was solidified with a new 25-year
alliance agreement in 2001. In August 2002, Northwest and Continental
announced that a ten-year cooperative marketing agreement had been
reached with Delta Air Lines. This agreement is subject to U.S.
government review and approval. NWAC was taken private in 1989. In
March 1994, NWAC completed an initial public offering and again became
a public company.
2. Northwest is the sponsor of the Northwest Airlines Pension Plan
for Salaried Employees (Salaried Plan), the Northwest Airlines Pension
Plan for Pilot Employees (Pilots Plan), and the Northwest Airlines
Pension Plan for Contract Employees (Contract Plan) with the authority,
directly or through a committee of officers designated by it (The
Northwest Airlines Pension Investment Committee), to appoint and remove
trustees and investment managers. Northwest also retains the authority,
subject to collective bargaining limitations, to amend and terminate
the Plans and to transfer assets and liabilities to and from the Plans.
Northwest is the plan administrator under the Plans and a
[[Page 2579]]
named fiduciary for purposes of section 402(a) of ERISA for the Plans.
In addition to Northwest, other fiduciaries include State Street
Global Advisors, The Northwest Airlines Pension Investment Committee,
investment managers hired by the Pension Investment Committee, Aon
Fiduciary Counselors, Inc. as it relates to the transactions described
in this proposal, certain employees of the Plan Sponsor, and the
Retirement Board as it relates to the Pilots Plan. Northwest, as
sponsor of the Plans, by and through the Pension Investment Committee
appointed by it as named fiduciary, generally has discretion with
respect to the investment of the Plans' assets. However, the discretion
to value, acquire, hold and dispose of the Pinnacle Stock as described
below, will be exercised by an independent fiduciary.
3. The Plans. The Applicant provides the following description of
the Plans:
Contract Plan. The plan year for the Contract Plan is the calendar
year. The Contract Plan was established effective January 1, 1970,
pursuant to a series of collective bargaining agreements with several
unions at various times during 1970. Nearly all the participants in
this Plan are employees represented for collective bargaining purposes
by several Northwest unions that have negotiated for participation in
the Contract Plan. At this time, these unions include the Aircraft
Technical Support Association (ATSA), Aircraft Mechanics Fraternal
Association (AMFA), the International Association of Machinists and
Aerospace Workers (IAM), International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America, Airline Division
(IBT), Northwest Airlines Meteorologists Association (NAMA), and
Transport Workers Union of America (TWUA). The number of employees
participating in the Contract Plan as of January 1, 2002, was 53,911.
The Applicant states that as of January 1, 2002, the Contract Plan had
assets with a fair market value of $1.279 billion, and was underfunded
by $741 million.
Salaried Plan. The plan year for the Salaried Plan is the calendar
year. The Salaried Plan was established in October 1946. All
participants in this Plan currently accruing benefits are ``salaried''
or ``management'' employees. None of the employee participants in this
Plan who are currently accruing benefits are represented for collective
bargaining purposes by any union. The Salaried Plan is a cash balance
plan. The number of employees participating in the Salaried Plan as of
January 1, 2002, was 10,517. The Applicant states that as of January 1,
2002, the Salaried Plan had assets with a fair market value of $349
million, and was underfunded by $67 million.
Pilots Plan. The plan year for the Pilots Plan is the calendar
year. The Pilots Plan was established effective October 29, 1956. All
participants in the Pilots Plan are employees represented for
collective bargaining purposes by the Airline Pilots Association
(ALPA). The number of employees participating in the Pilots Plan as of
January 1, 2002, was 8,326. The Applicant states that as of January 1,
2002, the Pilots Plan had assets with a fair market value of $2.753
billion, and was underfunded by $248 million. Pursuant to collective
bargaining agreements negotiated between the Pilot's union and
Northwest, the Pilots Plan is currently prohibited from investing in
employer stock; however, the Applicant anticipates that an agreement
with ALPA will be reached to permit the contributions. Northwest
represents that no contributions to the Pilots Plan will be made unless
such an agreement is reached. The Applicant proposes that in the event
that no agreement is reached to permit contributions of Pinnacle Stock
to the Pilots Plan, the Master Trust will be modified to permit the
holding of Pinnacle Stock for the benefit of the Contract Plan and
Salaried Plan
4. Contributions. The Applicant represents that Northwest has
remitted the full amount of all quarterly contributions when due,
including the full amount of quarterly contributions due to the
Contract Plan on April 15, July 15 and October 15, 2002. The last
quarterly contribution to the Contract Plan for the 2002 plan year is
due January 15, 2003.\1\ The ``catch-up'' contribution due in September
2003 relates to the 2002 plan years of the Contract Plan and the
Salaried Plan. The Applicant represents that the minimum funding rules
require (and permit) such a make-up contribution when the quarterly
contributions for a plan year as determined under Code section 412(m),
if any, total less than the full minimum funding amount determined to
be owed with respect to the plan year. \2\
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\1\ According to the Applicant, under Code section 412(m)(4),
Northwest owed no quarterly contributions during calendar year 2002
to the Pilots Plan or Salaried Plan for the 2002 plan year. However,
see below concerning a September 2003 ``catch-up'' contribution due
to the Salaried Plan.
\2\ See Code subsections 412(a) and (c)(10).
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The Applicant represents that the contributions required to satisfy
the Contract Plan's funding requirements for the 2002 plan year total
approximately $314 million, of which $111 million already has been paid
in three required quarterly contributions. For plan year 2002, an
additional quarterly contribution of $41 million is due January 15,
2003 and a final contribution of $162 million is due in September 2003.
Additionally, a plan year 2002 contribution of $20 million is due to
the Salaried Plan in September 2003 (the ``catch-up'' contributions).
There are no 2002 plan year contributions due to the Pilots Plan. The
Applicant states that contribution requirements for plan years 2003 and
2004 cannot be forecast with certainty because Northwest does not yet
have final numbers regarding its funding requirements for those plan
years. Northwest's minimum funding obligations for plan year 2003 will
not be finally determined until its actuary completes it actuarial
valuation as of January 1, 2003, which will be completed in April or
May of 2003. In addition, all of the asset returns for the Plans are
not yet known. Northwest will provide the plan year 2003 information
when they are finalized and publicly available. The Applicant
represents, however, it is likely that all Plans will require
contributions for the 2003 and 2004 plan years.
5. The Master Trust. Contributions required to fund the Contract
Plan, the Salaried Plan, and the Pilots Plan are made to and held under
a single master trust, the Northwest Airlines, Inc. Master Trust for
Defined Benefit Plans (the Master Trust). The Master Trust is
structured so that each Plan has an undivided commingled interest in
all of the trust fund assets. The Trustee of the Master Trust is State
Street Bank and Trust Company. In addition to the Northwest Contract
Plan, Pilots Plan and Salaried Plan, the Master Trust holds assets
attributable to the Northwest Pension Plan for German Employees that
currently has assets of approximately $300,000.00. No assets are held
on behalf of any other plans in the Master Trust.
6. Pinnacle Airlines, Inc. Pinnacle Airlines, Inc. (Pinnacle
Airlines) is an indirect, wholly owned subsidiary of NWAC, and is a
sister corporation of Northwest. Pinnacle Airlines recently changed its
name from Express Airlines I, Inc., which was incorporated in 1985 in
Georgia. It is a regional airline with principal hubs in Detroit,
Michigan; Minneapolis, Minnesota; and Memphis, Tennessee. Pinnacle
Airlines Corporation was incorporated in Delaware on January 10, 2002,
to become a holding company of Pinnacle Airlines.
Northwest requests exemptive relief for the in-kind contribution of
Pinnacle
[[Page 2580]]
Stock. Shares of Pinnacle Stock are not registered or publicly traded
as of the time of filing of this Application. Northwest currently
anticipates that an initial public offering (IPO) of Pinnacle Airlines
would occur sometime in 2003 or 2004. According to the Applicant, the
IPO is expected to generate a premium price for shareholders as a
result of efforts currently taking place under the joint direction and
control of Northwest and Pinnacle Airlines' management to position
Pinnacle Airlines as a premier regional air carrier in the United
States.
The Pinnacle Stock held by the Plans would be subject to
registration rights under shareholder agreements or such other
contracts as necessary to permit the Plans to participate in any future
IPO of the Pinnacle Stock. It is expected that there will be certain
restrictions on the Pinnacle Stock contributed to the Plans, including
voting restrictions and limits on the ability of the Plans to dispose
of the Pinnacle Stock, except pursuant to an IPO initiated by Northwest
or by exercise of the Put Option. Any such restrictions will be
negotiated with the Independent Fiduciary. At the time of an IPO, the
Plans will participate pro rata on the same basis with other holders of
Pinnacle Stock.
Subject to negotiation of final terms with the Independent
Fiduciary, Northwest proposes that the Plans be granted a Put Option
with respect to the Pinnacle Stock, on the following terms:
[sbull] The Put Option, with respect to each share of Pinnacle
Stock, shall be exercisable at any time until the date after an IPO
during which such share of Pinnacle Stock can be sold during any 90-day
period under SEC Rule 144.\3\
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\3\ Provision is made for the Put Option to extend after the IPO
date in the event that less than 100 percent (100%) of Pinnacle
Stock is offered in connection with the IPO.
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[sbull] Northwest will provide quarterly notice to the Independent
Fiduciary of its liquidity so that the Independent Fiduciary can take
Northwest's liquidity into account in deciding whether to exercise the
put.
[sbull] In the event the Put Option is exercised, the price paid by
Northwest (or its affiliate) to the Plans shall be determined as
follows:
(i) If the Put Option is exercised prior to the IPO date, the
greater of the value of the stock at the time of the contribution or
the fair market value determined by the Independent Fiduciary as of the
exercise date, consistent with a valuation report prepared by a
qualified independent appraiser;
(ii) If the Put Option is exercised on the IPO date, the greater of
the value of the stock at the time of contribution or the IPO price per
share of Pinnacle Stock; or
(iii) If the Put Option is exercised after the IPO date, the
greater of the value of the stock at the time of the contribution or
the average of the closing price for the Pinnacle Stock on the public
market for the 10 trading days (or such other number if fewer than 10)
preceding the exercise date.
[sbull] The price of the Pinnacle Stock shall be determined as of
the exercise date and shall be paid by Northwest (or its affiliate) to
the Plans in full in cash on such terms and conditions as shall be
negotiated with the Independent Fiduciary.
7. Pinnacle Airlines Analysis. As a result of Northwest's request
to contribute Pinnacle Stock to the Plans in lieu of cash, the Pension
Benefit Guaranty Corporation (PBGC) recently contracted with Eclat
Consulting, an independent firm with experience in the airline industry
(Eclat), for an analysis of Pinnacle Airlines. The November 27, 2002
Eclat analysis (Eclat Report) includes competitive, operational and
financial elements essential to validating Pinnacle Airlines' current
market viability as a Northwest regional partner and as a stand-alone
airline as well as current U.S. market conditions relative to the
marketability of a successful Pinnacle Airlines IPO. The Department has
summarized the Eclat Report below. The Eclat Report is presented in
sections that examine the regional airline industry, Pinnacle Airlines,
and a brief financial review of Pinnacle Airlines and the stability of
Northwest.
Eclat Report Industry Analysis-- According to the report, as of
September 2002, the ``Big 6'' U.S. majors (the Majors) have lost over
$7 billion and now face the year's weakest quarter. They are facing
dramatic increases in low-fare competition, overcapacity and a
weakening business travel market. In contrast, the regional airline
industry is flourishing as a result of being in ``the right place at
the right time'' as the Majors are turning to their regional airline
partners to operate regional jets to bring high yield passengers from
small communities to their network systems. During the first eight
months of 2002 the regional industry has grown only 3 percent (3%) in
passenger enplanements, however, the group's Revenue Passenger Miles
(RPM)(production) has realized growth of nearly 25 percent (25%), the
Available Seat Miles (ASM)(output) growth of 20 percent (20%) and
Regional Jet (RJ) usage has increased almost 6 percentage points of
market share in the U.S. over the past year. The majority of regional
partner airlines now operate on a ``fee-per-departure'' or ``block
hour'' basis with a fixed operating margin, thus limiting risk during
market downturns and guaranteeing operating profit.
Eclat Report Pinnacle Airlines Analysis--According to the report,
Pinnacle Airlines operates only as Northwest Airlink, a wholly owned
subsidiary of NWAC and provides regional service on a fixed fee basis
utilizing Saab 340 turboprops and Bombardier CRJ regional jets. The
arrangement provides that 65 percent (65%) of the operational costs
(fuel, maintenance, rentals, facilities, etc.) are passed through to
Northwest for 100 percent (100%) reimbursement and 35 percent (35%) of
costs are paid based on historical performance with a target operating
margin of 13.0 percent (13.0%). Northwest has committed 95 regional jet
aircraft financed by Bombardier, and the RJs currently on hand have
doubled Pinnacle Airlines' size, seeing ASMs increase 68 percent (68%)
in 2001 (vs. 2000) making it the second fastest growing regional
airline. They operate 310 departures per day (12.4 percent (12.4%) of
the Northwest system) and 15,000 seats per day (5.9 percent (5.9%) of
the Northwest system).
Pinnacle Airlines generates revenue in two distinct manners for
Northwest. The first and smaller revenue generation comes from
transporting passengers to and from spoke markets to one of Northwest's
three hubs. This local, one-segment flying generates approximately $1.6
million in weekly revenue for Northwest, or 2 percent (2%) of
Northwest's domestic total. More importantly, the carrier brings
connecting passengers from the spoke markets to the hub to connect onto
the Northwest route network creating over $8 million in weekly revenue
(8 percent (8%) of Northwest's domestic total) for Northwest. Combined,
the regional carriers' value to the Northwest Domestic System is
between $520 million and $540 million annually as the carrier exists
today (Eclat Appendix 7).
The Eclat Report states that the current and immediate value of
Pinnacle Airlines is virtually removed if Northwest Airlines ceased to
exist, as there are limited opportunities for other major carrier
relationships. Without Northwest, Pinnacle Airlines has physical and
cash assets of $121.6 million, $5.2 million in cash, $62.4 million in
receivables and $54 million in aircraft spares and other property and
equipment. Pinnacle Airlines'
[[Page 2581]]
remaining intangible value would be dependent upon the other major
network carriers' desire to add another hub to their network systems at
Detroit, Memphis or Minneapolis. Currently, there are limited options
for Pinnacle Airlines as all of the major networks have very strong
ties with other regional operators.
Eclat Report Financial Review of Pinnacle Airlines and Stability of
Northwest--According to the report, Pinnacle Airlines is currently in
sound financial shape with a current operating margin of 13.2 percent
(13.2%), a profit margin of 8.9 percent (8.9%) and a return on equity
(ROE) of 29.1 percent (29.1%). The revenue growth for Pinnacle Airlines
has been strong over the period of 1998-2001 at a compound average
annual rate of 28.0 percent (28.0%). In the first 9 months of 2002,
this growth actually accelerated to 61.4 percent (61.4%) in a year-
over-year comparison.
The Eclat Report concludes that through 2005 (the amendable date
for the contract with Northwest), there is no reason to suspect that
the company will not continue such strong revenue growth. ``Salaries,
wages, and benefits'' only accounted for 21.5 percent (21.5%) of costs
(the average is mid-thirties). As the company currently is constructed
(prior to the expected IPO), their long-term debt load is virtually
non-existent and their liquidity is superb. Current financial
conditions clearly indicate an ability to cover any short-term
obligations. However, if the company were to go public, the balance
sheet will be fundamentally altered by the assumption of a $200 million
note payable to Northwest. Such a note would raise the debt/equity
ratio to 277 percent (277%) and would significantly limit Pinnacle
Airlines' ability to borrow in the future and radically raise the cost
of capital. Due to the guaranteed operating margin, however, even a
note of this magnitude would not be difficult for the company to cover.
In order to estimate the value of a Pinnacle Airlines IPO, Eclat
created a model based on the Three-Stage Free Cash Flow to Equity
(FCFE) valuation technique.\4\ The result of the FCFE model is that the
estimated value of a Pinnacle Airlines IPO is approximately $221.6
million if Eclat assumes that the growth in the first phase is
approximately 14 percent (14%) and lasts for five years (Eclat Appendix
9-1).\5\ Eclat believes this growth assumption is conservative when
compared to Pinnacle Airlines' recent growth, but is based on only the
``guaranteed'' portion (95 total RJs) of their agreement with
Northwest. The five-year term assumption was a result of the fact that
Northwest is able to renegotiate in 2008. This Eclat model was adjusted
by Eclat based on differing high growth revenue assumptions and the
impact of such adjustments dramatically lowered the value of the IPO.
The value of equity for Pinnacle Airlines, assuming a high growth
period revenue growth rate of 11 percent (11%), would be $147.7 million
(Eclat Appendix 9-2). Assuming a high growth period revenue growth rate
of 8 percent (8%), the value of equity for Pinnacle drops to $81
million (Eclat Appendix 9-3).
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\4\ This model is designed to value firms, like Pinnacle
Airlines, that are expected to go through three phases of growth--an
initial phase of high growth, a transitional period where the growth
rate declines, and a steady-state period where growth is stable.
Once these growth assumptions are made, the present value of
expected free cash flow is calculated.
\5\ During the second stage, the growth assumption is 10 percent
(10%) and a term of three years. The 10 percent (10%) is consistent
with the industry's long-term revenue average, and the three-year
term is based on the belief that such strong growth will last for a
total of 8 years from 2003. In the third and final stage, the model
assumes that growth will continue to commence at a constant rate of
5 percent (5%). This assumption brings the growth rate back in line
with Pinnacle Airlines' growth in the years prior to their
arrangement with Northwest. Other assumptions made in the model
include Beta and Net Capital Expenditure growth. Pinnacle Airlines'
Beta was based on a calculation off of industry average and is
assumed to be .66 in the high growth period. According to Eclat,
while this appears at first glance to be a very low figure, it is
very much related to the terms of the fixed fee relationship with
Northwest. According to the terms of the agreement, growth is
virtually assured and therefore the company's stock is unlikely to
fluctuate as wildly as the market in general. In the other two
phases, the firm Beta is linked to the current industry average. The
assumptions about net capital expenditure growth in all three phases
are standard figures based on historical norms. When estimating the
cost of equity for Pinnacle Airlines, a market risk premium of 5.3
percent (5.3%) was assumed. This number is based on the historical
risk premium found between stocks and treasury bonds published by
the Federal Reserve Bank (in the United States from 1962-2000).
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According to Eclat, Northwest has emerged as, perhaps, the most
stable airline in the industry with minimal low fare carrier exposure
and with the smallest losses of any carrier. Northwest reported a net
loss of $46 million, with operating income of $8 million in the third
quarter of 2002. Northwest ended the quarter with over $2.5 billion in
cash and short-term receivables. Northwest is a global carrier with an
alliance with KLM and its Amsterdam hub and a Northwest Tokyo Hub. The
labor situation is stable with all of its unions currently under
contract.
8. Reasons for Entering into the Exemption Transactions. The
Applicant represents that, for several years leading up to 2001,
Northwest had been among the most profitable of the nation's major
airlines. The Applicant notes Northwest's financial performance in 1998
and 1999 was adversely affected by labor disruptions; however,
Northwest's performance quickly recovered in 2000. However, the airline
industry began to suffer a significant financial downturn in early 2001
that was substantially worsened by the events of September 11, 2001,
which in combination, have disproportionately affected the airline
industry. Northwest states that industry losses in 2001 totaled $10
billion, of which Northwest's share was $700 million.\6\ Northwest
asserts that, because of the potential of a war with Iraq, which has
dramatically increased fuel prices, as well as ongoing terrorism
threats, the timing of an economic recovery for the airline industry is
uncertain. Northwest concludes that to weather the current economic
uncertainty, Northwest and other major airlines must maintain a high
level of liquidity. The Applicant notes that Northwest is, by many
measures, the best prepared among the industry to withstand this
difficult period and expects to return to
[[Page 2582]]
profitability when the economy recovers. The Applicant represents that
preservation of liquidity is one of the keys to maintaining a strong
financial position in light of the current economic uncertainty, and
Northwest has maintained one of the strongest liquidity positions in
the industry. Northwest already has taken many aggressive, proactive
actions to reduce costs and preserve liquidity.
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\6\ These numbers are exclusive of federal funds received by the
airlines as a result of the Air Transportation Safety and System
Stabilization Act, Pub. L. No. 107-42 (September 21, 2001) (Airline
Stabilization Act). In 2001, Northwest recognized $461 million of
grant income from the United States Government that was recorded as
non-operating income. The events of September 11, 2001 had an
immediate and severe impact on the U.S. airline industry's passenger
traffic and yields. Immediately following these events, the Federal
Aviation Administration (FAA) ordered all aircraft operating in the
U.S. to be grounded, an order that remained in place for over 48
hours. Northwest Airlines was only able to operate a limited portion
of its scheduled flights for several days after the grounding order
was lifted as it repositioned displaced aircraft and crews.
Passenger traffic and yields on both domestic and international
flights declined significantly when flights were permitted to
resume, and the number of tickets refunded was substantially above
normal. Northwest has continued to experience significantly lower
revenue and has incurred additional costs (e.g., higher security
costs and insurance premiums) as compared to periods prior to
September 11, 2001. In addition to increased rates, aviation
insurers have also significantly reduced the maximum amount of
insurance coverage available to commercial air carriers for
liability to persons other than employees or passengers for claims
resulting from acts of terrorism, war or similar events.
Under the Airline Stabilization Act, each air carrier is
entitled to receive a maximum amount of compensation payments equal
to the lesser of (i) its direct and incremental pretax losses
attributed to the terrorist attacks for the period of September 11,
2001, to December 31, 2001, or (ii) its available seat mile and/or
revenue ton mile allocation of the $5 billion compensation available
under the Airline Stabilization Act. Northwest Airlines received a
total of $410 million as of December 31, 2001, and was expected to
receive a final $51 million of additional funds under the Airline
Stabilization Act in early 2002.
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While the current environment creates significant challenges for
Northwest and the other major airlines, the Applicant believes that
these circumstances create opportunities for efficient regional
carriers, including Pinnacle Airlines. Northwest represents that,
although current market conditions are not favorable to an IPO of the
Pinnacle Stock because valuations of commuter airlines have declined
from their historical levels during the past six to eight months,
Northwest anticipates that the Pinnacle Stock proposed to be
contributed to the Plans will be sold through an IPO at a favorable
price. The Applicant notes that market conditions are expected to
improve within the next 30 months and that significant efforts have
been undertaken by Northwest to prepare Pinnacle Airlines for public
sale.
9. Northwest asserts that the relief requested in this Application
offers significant potential benefits both to the Plans and to
Northwest. The Plans will benefit by receiving the full value of the
minimum funding contribution of Northwest, through the opportunity to
invest in a strong regional airline, and through sharing in the
anticipated premium that would attach to such stock in the event of an
IPO. Furthermore, the Plans' investment in Pinnacle Stock will be
subject to the protections of an independent fiduciary. The Plans will
also benefit from Northwest's preservation of liquidity, ensuring that
it remains in a strong financial position and maximizing its ability to
contribute to the Plans in the future. Northwest represents that its
decision to seek an exemption to contribute Pinnacle Stock creates no
more risk to the Plans, and perhaps even less risk, than investing in
publicly-traded NWAC stock, which constitutes qualifying employer
securities within the meaning of ERISA section 407(d)(5) and would be
exempt from the prohibitions of ERISA sections 406 and 407 by reason of
the statutory exemption set forth in ERISA section 408(e). The
Applicant concludes by noting that the exemption sought by Northwest is
one part of Northwest's overall strategy to manage its financial
liquidity during a time of extraordinary financial challenges, while
still meeting its long-term pension plan commitments. In this regard,
Northwest notes that it is applying to the Internal Revenue Service for
a waiver of its minimum funding contributions with respect to both the
Contract Plan and the Salaried Plan for plan year 2003.
10. Northwest requests exemptive relief from certain of the
prohibited transaction restrictions of sections 406 and 407 of the Act
and section 4975 of the Code for the periodic contributions of Pinnacle
Stock to the Plans in order to satisfy all or any portion of
Northwest's minimum funding requirements for plan years 2002, 2003, or
2004 that are due in calendar years 2003 or 2004.
Northwest requests exemptive relief because of its belief that the
contributions of Pinnacle Stock would not meet the requirements for the
acquisition of ``employer securities'' under section 408(e) of the Act.
In this regard, section 408(e) provides, in part, that sections 406 and
407 of the Act shall not apply to the acquisition or sale by a plan of
``qualifying employer securities,'' as defined in section 407(d)(5) of
the Act, if such acquisition or sale is for adequate consideration, no
commission is charged, and, in the case of a plan other than an
eligible individual account plan, such as a defined benefit plan, such
acquisition does not exceed 10 percent (10%) of the fair market value
of the assets of such plan. Under section 407(d)(5), stock is a
``qualifying employer security,'' if such stock is issued by an
employer of employees covered by the plan or by an affiliate of such
employer. Section 407(d)(5) further provides that in the case of a plan
other than an eligible individual account plan, such as a defined
benefit plan, an employer security shall be considered a ``qualifying
employer security,'' only if such employer security satisfies the
requirements of section 407(f)(1). Section 407(f)(1) provides that
stock satisfies the requirements of this paragraph if no more than 25
percent (25%) of the aggregate issued and outstanding shares of stock
of the same class is held by the plan and at least 50 percent (50%) of
the aggregate amount of such shares is held by persons independent of
the issuer.
In this regard, Northwest anticipates that, after all of the
proposed in-kind contributions of Pinnacle Stock to the Plans,
substantially more than 25 percent (25%) of all issued and outstanding
shares of Pinnacle Stock would be held by the Plans. The Applicant
expects that nearly 100 percent (100%) of the Pinnacle Stock may
ultimately be held by the Plans, with any remainder being held by
Northwest. Thus, the requirement that 50 percent (50%) of the shares of
Pinnacle Stock be held by persons independent of the issuer would not
be met. Accordingly, the shares of Pinnacle Stock to be contributed to
the Plans would not satisfy the requirements of sections 407(f)(1) of
the Act and thus would not constitute ``qualifying employer
securities'' within the meaning of section 407(d)(5) of the Act. If the
shares of Pinnacle Stock do not constitute ``qualifying employer
securities,'' the exemptive relief under section 408(e) of the Act
would not be available. For the same reasons, it is anticipated that
section 408(e) would not exempt the Plans' acquisition and holding of
the Put Option.
11. The Independent Fiduciary.\7\ Aon Fiduciary Counselors, Inc.
(Fiduciary Counselors or Independent Fiduciary) has been retained as
the Independent Fiduciary to represent the Plans' interests with
respect to the proposed transactions. Fiduciary Counselors represents
that it is qualified to serve as Independent Fiduciary on behalf of the
Plans with respect to the proposed Exemption Transactions. Fiduciary
Counselors acts primarily as an independent fiduciary for large pension
plans. Prior to December 1999, Fiduciary Counselors operated as a
business unit within Actuarial Sciences Associates, now Aon Consulting
of New Jersey, Inc., a subsidiary of Aon Consulting, Inc. (Aon
Consulting). In the past five years, Fiduciary Counselors has acted as
independent fiduciary in transactions involving plan assets totaling
more than $4 billion.
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\7\ The Department notes that the Act's general standards of
fiduciary conduct would apply to the transactions permitted by this
proposed exemption, if granted. In this regard, section 404 of the
Act requires, among other things, a fiduciary to discharge his
duties respecting a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent manner. Accordingly,
an independent plan fiduciary must act prudently with respect to:
(1) The decision to enter into the transactions described herein;
and (2) the negotiation of the terms of such a transaction,
including, among other things, the specific terms by which the Plans
will (A) acquire, hold, and sell the Pinnacle Stock and (B) acquire,
hold and exercise the Put Option. The Department further emphasizes
that it expects the independent plan fiduciary, prior to authorizing
each acquisition of the Pinnacle Stock and any sale of such Stock,
and prior to exercising the Put Option, to fully understand the
benefits and risks associated with such transactions. In addition,
the Department notes that such plan fiduciary must periodically
monitor, and have the ability to so monitor, the Pinnacle Stock and
the Put Option.
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In evaluating the proposed Exemption Transactions, Fiduciary
Counselors notes that it will use the services of investment
professionals at Aon
[[Page 2583]]
Investment Consulting, Inc. (AIC), an affiliated registered investment
adviser under the Investment Advisers Act of 1940, to provide certain
investment and financial advice in support of Fiduciary Counselors'
determinations. AIC is the full service investment-consulting
subsidiary of Aon Consulting, providing investment management
consulting services to institutional tax-exempt funds. Aon Consulting
has investment consulting operations in the United States, United
Kingdom, Canada, Continental Europe, Australia and New Zealand.
Worldwide, Aon Consulting has about 125 people in its investment
consulting practice. AIC has offices in seven U.S. cities and a U.S.
staff of about forty.
Neither Fiduciary Counselors nor AIC provides any other services to
Northwest or its affiliates other than the independent fiduciary and
related services they provide in connection with the proposed
contribution of Pinnacle Stock to the Plans. An affiliate, Aon Risk
Services of Minnesota, does provide insurance brokerage services to
Northwest. However, the fees paid to Aon Risk Services of Minnesota and
the fees paid to Fiduciary Counselors represent less than 1 percent
(1%) of the revenue of Aon Corporation, one of the nation's largest
risk management and benefits consulting companies, which is the
ultimate parent company of Fiduciary Counselors, AIC, Aon Consulting
and Aon Risk Services of Minnesota.
In connection with the November 5, 2002 Independent Fiduciary
Agreement between Fiduciary Counselors and Northwest (the Agreement),
Northwest has agreed to pay Fiduciary Counselors an annual fee that
would cover both the independent fiduciary and investment management
services to be provided by Fiduciary Counselors and the investment
advisory services to be provided by AIC. The initial fee was remitted
directly to Aon Consulting, a parent company of both Fiduciary
Counselors and AIC. Aon Consulting internally allocated 25 percent
(25%) of the fee to Fiduciary Counselors, which comprised less than 5
percent (5%) of Fiduciary Counselors' annual revenue, and 75 percent
(75%) to AIC, which comprised less than 5 percent (5%) of AIC's
revenue. So long as there is no change in control of Fiduciary
Counselors or AIC, future payments will be allocated in a similar
manner.
12. At the request of Northwest's management, Morgan Stanley & Co.
Incorporated (Morgan Stanley) prepared a preliminary valuation study of
Pinnacle Airlines, dated September 24, 2002, which Fiduciary Counselors
may take into account in determining the valuation of the Pinnacle
Stock to be contributed to the Plans.\8\ Morgan Stanley, as part of its
investment banking and advisory business, is continuously engaged in
the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. In
connection with its investment banking and advisory business, Morgan
Stanley has represented a number of companies in the airlines industry.
The Applicant represents that the Independent Fiduciary has unfettered
discretion to choose the methodologies and the ultimate values of the
Pinnacle Stock contributed to the plans and the related Put Option. The
Independent Fiduciary is not required to use only the Morgan Stanley
valuation.
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\8\ Morgan Stanley is listed in the Securities and Exchange
Commission Form S-1 registration statement for the Pinnacle Stock
IPO as one of the underwriters for the IPO of the Pinnacle Stock.
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13. Under the terms of the Agreement, Fiduciary Counselors makes
all the decisions on behalf of the Master Trust and the Plans regarding
the acceptance of the proposed in-kind contribution of Pinnacle Stock,
determines (with the assistance of the qualified independent appraiser
engaged by the Independent Fiduciary) the value of the Pinnacle Stock
held by the Master Trust from time to time, and make such other
decisions with regard to the Pinnacle Stock as are contemplated by the
Exemption Application as it may be ultimately approved. In this regard,
Fiduciary Counselors has retained Eclat Consulting to prepare a
valuation of the Pinnacle Stock that will serve as the basis for
Fiduciary Counselors' determination.
In making this determination to accept the securities, the
Independent Fiduciary shall have discretion to negotiate the final
terms and conditions of the contribution, including the registration,
shareholder and put rights. The contributed Pinnacle Stock would be
held as an ``Investment Fund'' within the Master Trust, under the
management and control of the Independent Fiduciary as investment
manager thereof, until such time as the Independent Fiduciary
determines it is in the best interests of the Plans' participants and
beneficiaries to dispose of such Pinnacle Stock.
The Independent Fiduciary shall thereafter, until all transactions
contemplated by the Exemption Application are concluded or it has been
replaced by another independent fiduciary as hereinafter provided,
continue to serve as Independent Fiduciary and continue to discharge
the functions assigned to it as such in accordance with the provisions
of the Exemption Application.
The Independent Fiduciary confirms that it is (and shall continue
to be during the term of its engagement hereunder) an ``investment
adviser'' within the meaning of the Investment Advisers Act of 1940,
and further acknowledges that, with respect to its duties pursuant to
the Agreement, it is a fiduciary as defined in section 3(21) of ERISA.
The Independent Fiduciary shall act for the exclusive benefit and in
the sole interest of the Plans and their participants and beneficiaries
and with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.
The Independent Fiduciary represents that, in evaluating the
proposed Exemption Transactions, it has reviewed those documents that
it deems relevant to the transactions including, but not limited to:
(i) Copies of the current documents for the Plans and the Master Trust
including all amendments thereto, as well as current summary plan
descriptions and all other disclosures provided to participants and
beneficiaries in the Plans regarding the Master Trust; (ii) copies of
the Plans' most recent Form 5500 filings and all other financial and
other information regarding the Plans reasonably requested by the
Independent Fiduciary; (iii) copies of (or electronic access to)
Northwest's most recent filings made with the Securities and Exchange
Commission (SEC) as requested in order for the Independent Fiduciary to
perform its obligations hereunder, including reasonable access to
internal staff and outside professionals engaged by Northwest or the
Plans regarding the Master Trust; and (iv) copies of (or electronic
access to) Pinnacle Airlines' most recent filings made with the SEC as
requested in order for the Independent Fiduciary to perform its
obligations hereunder, including reasonable access to internal staff
and outside professionals engaged by Pinnacle Airlines.
The Agreement states that, as compensation for the services to be
rendered by the Independent Fiduciary and its affiliates in connection
with the Agreement, Northwest shall pay to the
[[Page 2584]]
Independent Fiduciary an annual fee of $250,000 for as long as Pinnacle
Stock is owned by the Master Trust.
The Independent Fiduciary has engaged the law firm of Jones, Day,
Reavis & Pogue to advise it and to serve as legal counsel. As
previously noted, the Independent Fiduciary has engaged the services of
Eclat to assist it in determining the value of the Pinnacle Stock at
the time of the initial acquisition by the Plans.
The Agreement contemplates that either party may terminate such
Agreement for any reason upon 60 days notice and that the Agreement may
be terminated immediately for cause. In the event that a successor
Independent Fiduciary is appointed, or there is a change in control of
Fiduciary Counselors, the rights exercised by Fiduciary Counselors on
behalf of the Plans in connection with the Term Sheet and the proposed
Omnibus Agreement (see below) shall be exercised by the successor
Independent Fiduciary (with the approval of the Department). The
parties to the Agreement shall notify the Department within thirty (30)
calendar days of any decision regarding the resignation, termination or
change in control of the Independent Fiduciary.
14. The Term Sheet and the Proposed Omnibus Agreement. The Term
Sheet (as provided to the Department on January 10, 2003) provides that
Northwest and Fiduciary Counselors will enter into an Omnibus Agreement
that governs the terms upon which Northwest may make periodic
contributions of Pinnacle Stock to the Plans in order to satisfy all or
any portion of Northwest's minimum funding requirements that are due in
calendar years 2003 or 2004. Contributions may also be made during
calendar years 2003 or 2004 with respect to a plan year for which there
is no required minimum funding contribution, thus creating a credit
balance with respect to the relevant plan. No contribution of Pinnacle
Stock shall be made that would cause the total combined value of all
employer securities or employer real property held by any plan,
immediately after the contribution, to exceed 10 percent (10%) of the
total assets of such plan.
The SEC Form S-1 registration statement for the IPO involving
Pinnacle Airlines, Inc. describes a proposed share exchange. The
Applicant represents that prior to the initial contribution, the
following transactions will take place in the order indicated:
(a) Pinnacle Airlines, Inc. will distribute, as a dividend, a $200
million promissory note to NWA Inc., the sole shareholder of Pinnacle
Airlines, Inc.
(b) NWA Inc. will transfer to Pinnacle Airlines Corp. all of the
outstanding shares of Pinnacle Airlines, Inc. and in consideration
thereof, Pinnacle Airlines Corp. will issue to NWA Inc. 15 million
shares of common stock of Pinnacle Airlines Corp. and one share of
Series A Preferred Stock of Pinnacle Airlines Corp.
(c) NWA Inc. will transfer the common stock of Pinnacle Airlines
Corp. and the Series A Preferred Stock to Northwest as a contribution
to the capital of Northwest.
As a result of these transactions, Pinnacle Airlines, Inc. will
become a wholly owned subsidiary of Pinnacle Airlines Corp. and
Pinnacle Airlines Corp. will be a wholly owned subsidiary of Northwest.
The terms of the Series A Preferred Stock and the terms of the $200
million note are set forth in exhibits to the SEC Form S-1 registration
statement.
The Applicant represents that the holder of the Series A Preferred
Stock has certain other voting rights in addition to the right to elect
two members to the board of directors. An affirmative vote of NWA Inc.
(the affiliate of Northwest which currently holds all of the shares of
Pinnacle Airlines, Inc., including the Series A Preferred Stock) will
be required in order for Pinnacle to:
[sbull] Enter into business combinations and change of control
transactions with a third party;
[sbull] Sell or dispose of any capital stock of Pinnacle Airlines,
Inc. or substantially all of the assets of Pinnacle Airlines Corp. or
Pinnacle Airlines, Inc.;
[sbull] Effect reorganizations and restructuring transactions;
[sbull] Acquire airline assets that generate annual revenues of
$500 million or more;
[sbull] Increase the size of the board of directors;
[sbull] Agree to allow a major airline other than Northwest to
appoint more than one director to Pinnacle Airlines' board;
[sbull] Amend Pinnacle Airlines' certificate of incorporation in a
manner that would adversely affect the rights of the Series A preferred
shareholder; or
[sbull] Enter into any definitive agreements relating to the
foregoing matters.
The effect of this voting right will be to enable NWA Inc. to
preclude Pinnacle Airlines from carrying out any of the foregoing
proposals if NWA Inc. does not vote in favor of the proposal. Under the
Term Sheet, Northwest has agreed not to exercise its rights under the
Series A Preferred Stock to block an IPO or sale of Pinnacle Airlines
if the Independent Fiduciary, on behalf of the Plans, initiates such an
IPO or a sale after an ``Early Termination Event'' (defined below). The
Term Sheet material terms that will be reflected in the Omnibus
Agreement between the Independent Fiduciary and Northwest are set forth
below.
Request To Contribute Pinnacle Shares
Except with respect to the first such contribution, as to which
Northwest and the Independent Fiduciary will agree on a shorter notice
period, no later than 60 days before any date in calendar year 2003 or
2004 on which Northwest proposes to make a contribution of Pinnacle
Stock to the Plans, Northwest shall provide written notice to the
Independent Fiduciary of its proposal to make such contribution and
shall indicate the dollar value of the Pinnacle Stock that it intends
to contribute.
Valuation of Pinnacle Shares
The Term Sheet states that no later than 30 days prior to each date
on which Northwest proposes to contribute Pinnacle Stock (or, with
respect to the first such contribution, such earlier date as may be
agreed), the Independent Fiduciary shall notify Northwest in writing
(accompanied by a written valuation report) of the per share value that
the Independent Fiduciary then preliminarily ascribes to the shares of
Pinnacle Stock. In addition to determining the value of Pinnacle Stock
at the time of a proposed contribution, the Independent Fiduciary shall
provide to Northwest on an annual basis a written valuation of the per
share value of all Pinnacle Stock held by the Plans as of each December
31 and at any time the Independent Fiduciary exercises the Put Option.
On the relevant contribution date, subject to the Independent
Fiduciary's review and approval, Northwest may contribute to one or
more Plans shares of Pinnacle Stock based on the per share value
ascribed to such shares by the Independent Fiduciary. The Independent
Fiduciary and the Plans will have the rights associated with such
shares as described below. As a condition to any such contribution by
Northwest, the Independent Fiduciary must determine on behalf of the
Plans that the acceptance of the contributed shares is prudent and in
the interests of the Plans' participants and beneficiaries and
otherwise consistent with the fiduciary standards of ERISA. In
addition, the Independent Fiduciary shall monitor on an ongoing basis
the prudence of the Plans' continued holding of Pinnacle Stock
consistent with the fiduciary standards of ERISA,
[[Page 2585]]
subject to the determination from time to time by the appropriate
fiduciary of the Plans (other than the Independent Fiduciary) that such
investment will not impair the liquidity of the Plans such that the
Plans would not be able to pay benefits and expenses when due. If such
appropriate Plan fiduciary determines the liquidity of the Plans is
impaired, such fiduciary shall direct the Independent Fiduciary to
dispose of all or a portion of the Pinnacle Stock consistent with the
terms of this agreement to the extent commercially reasonable.
All transactions involving the Plans in connection with the
contribution of Pinnacle shares will be no less favorable to the Plans
than arms' length transactions involving unrelated parties. No
commissions, fees, costs, charges or other expenses will be borne by
the Independent Fiduciary or the Plans in connection with any
acquisition, holding or disposition of Pinnacle shares to or from the
Plans, other than the underwriters' discount or other broker-dealer
fees or commissions charged in any sale of such shares.
The Applicant represents that the valuation approach that the
Independent Fiduciary takes into account when determining the value of
Pinnacle Stock with respect to any specific transaction will be the
method that the Independent Fiduciary determines to be in the best
interests of the Plans' participants and beneficiaries.
The Independent Fiduciary's valuations will be used by the Master
Trust Trustee for such Pinnacle Stock and by Northwest as plan
administrator as the initial value of the Pinnacle Stock for Plan and
Master Trust reporting purposes, and as the initial value to be used by
each Plan's actuaries for valuation purposes. In addition to
determining the fair market value of the Pinnacle Stock at the time it
is contributed to the Plans, the Independent Fiduciary will thereafter
determine the fair market value as of each March 31, June 30, September
30, and December 31; at any time the Pinnacle Stock is sold or
exchanged by the Plans (e.g., for purposes of exercising its Put
Option, as described below); and at such other times as the Independent
Fiduciary determines to be in the interests of participants and
beneficiaries in any of the Plans.
Northwest proposes that the contribution of Pinnacle Stock to the
Master Trust be subject to a Put Option held by the Plans with respect
to all of the Pinnacle Stock held by the Plans. The Put Option may be
exercised on behalf of the Plans by the Independent Fiduciary,
obligating Northwest (or an affiliate) to purchase the Pinnacle Stock
from the Plans at a price not less than the greater of its fair market
value as of the exercise date (as determined by the Independent
Fiduciary) or the value placed on the stock at the time of its
contribution.
Voting Provisions
The Term Sheet provides that the shares of Pinnacle Stock
contributed to the Plans will be identical to the shares retained by
Northwest. With respect to the voting of such shares and related
matters, the Omnibus Agreement will also provide as follows:
[sbull] The initial board of directors of Pinnacle Airlines will be
comprised of six individuals, four of whom will be individuals
previously identified by Northwest in the S-1 registration statement,
one of whom shall designated by Northwest and one of whom will be an
individual designated by the Plans and reasonably acceptable to
Northwest.
[sbull] For so long as the Plans hold at least 5 percent (5%) of
such shares, the Plans will have the right to designate one nominee to
Pinnacle Airlines' board of directors, and Northwest will vote the
shares of Pinnacle Stock held by it in favor of such designee.
[sbull] The director designated by the Plans will have the right to
serve on Pinnacle Airlines' audit committee to the extent permitted
under applicable SEC and stock exchange requirements.
[sbull] At such time as the Plans hold more than 50 percent (50%)
of such shares, and until the earlier of either (i) the Plans hold less
than 25 percent (25%) of such shares or (ii) the Put Option has
terminated as to all shares held by the Plans, the affirmative vote of
the director designated by the Plans shall be required to approve the
appointment of any new Chief Executive Officer of Pinnacle and
compensation of any Chief Executive Officer. In addition, the
appointment and compensation of any Chief Executive Officer shall be
approved by a majority of the directors, excluding the director
designated by Northwest.
[sbull] The Independent Fiduciary will direct the trustee of the
Plans to vote shares of Pinnacle Stock held by the Plans in favor of
the slate of director nominees proposed by Pinnacle's board of
directors, except as the Plans and Northwest may otherwise agree.
[sbull] The Independent Fiduciary will direct the trustee of the
Plans to vote shares of Pinnacle Stock held by the Plans in favor of
any merger or other matter requiring stockholder approval as
recommended by Pinnacle Airlines' board of directors, provided such
transaction or other action does not otherwise treat the shares held in
the Plans differently than other shares of Pinnacle Stock.
Affiliate Transactions
The Term Sheet provides that any change to the Airline Services
Agreement (ASA) between Pinnacle and Northwest as in effect at the time
of the initial contribution, including any early termination of the ASA
by Pinnacle Airlines, must be approved by a majority of Pinnacle
Airlines' independent directors, which majority must include the
director designated by the Plans. Any other transaction between
Pinnacle Airlines and Northwest or one of its affiliates (other than
immaterial transactions in the ordinary course of business) that is not
pursuant to and in accordance with the ASA is subject to the following
requirements:
[sbull] Each such transaction must be approved by a majority of the
independent directors;
[sbull] If the transaction is outside the ordinary course of
business and involves more than $2 million, or if the transaction is in
the ordinary course of business and involves more than $5 million, it
must be approved by a majority of the independent directors and, at the
request of the director designated by the Plans, a nationally
recognized investment banking firm (which may include a ``boutique''
firm that specializes in airline related matters) must deliver a
fairness opinion with respect to such transaction; and
[sbull] If the transaction involves more than $10 million, it must
be approved by a majority of the independent directors, which majority
must include the director designated by the Plans.
Transfer Restrictions and Early Termination Events
The Term Sheet provides that until July 1, 2006, or such earlier
date on which Northwest (1) does not, by the latest date to which
Northwest may before the closing, purchase, sell to the public in a
registered public offering or sell to a third party the Pinnacle Stock
held by the Plans as to which the Independent Fiduciary has exercised
the Put Option (as described below) or (2) breaches the Omnibus
Agreement (and such breach is not cured within 30 days thereafter)
(collectively, an ``Early Termination Event''), shares of Pinnacle
Stock contributed to the Plans may not be transferred other than to
Northwest or one of its designated affiliates in accordance with the
Put Option described below. Such shares may, however, be transferred in
the IPO, as
[[Page 2586]]
described below, or in a bona fide public offering in accordance with
the registration rights described below. In no event may shares be
transferred directly or indirectly in any manner that would result in
Northwest being in violation of the ``scope clause'' under Northwest's
collective bargaining agreement with its pilots.\9\
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\9\ The Applicant notes that in general terms, as relevant to
Pinnacle Airlines, the pilot scope clause requires that all
``revenue flying'' performed by or for Northwest be performed by
Northwest's pilots and generally prohibits Northwest from
codesharing with another air carrier that operates aircraft with 60
or more seats or with another air carrier whose parent or subsidiary
operates aircraft with 60 or more seats. The scope clause also
requires that any regional jets operated by Pinnacle Airlines be
operated at all times with the Northwest designator code.
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The July 1, 2006 sunset date, together with the inclusion of an
Early Termination Event, are the product of negotiation between
Northwest and Fiduciary Counselors and balance Northwest's interest in
having a reasonable period of time during which to determine the most
advantageous timing of an IPO and the Plans' interest in enhancing the
liquidity of Pinnacle Stock.
In the event of a transfer of shares of Pinnacle Stock by the
Plans, the Plans will exercise commercially reasonable efforts to
maximize the amount realized for such shares, and to that end will
follow customary procedures (including the retention, at Northwest's
expense, of a nationally recognized investment banking firm) applicable
to a transaction such as the sale of such shares.
In the event of a proposed transfer of shares of Pinnacle Stock by
the Plans after July 1, 2006, absent an Early Termination Event,
Northwest will have a right of first refusal. This means that, if the
Plans receive a bona fide offer from a third party to purchase such
shares, the Plans must first offer such shares to Northwest at the
offered price. If after 30 days from such offer Northwest declines to
purchase such shares at the offered price, the Plans will be free for
90 days to sell such shares to the third party who made the initial
offer to purchase such shares at a price not less than the offered
price. The Pinnacle Stock may not be sold at a price less than such
offered price without re-offering such shares to Northwest and having
these provisions apply again.
Initial Public Offering
According to the Term Sheet, it is contemplated that Pinnacle
Airlines will undertake an IPO. Until July 1, 2006, or the earlier
occurrence of an Early Termination Event, the IPO will be undertaken at
the sole discretion of Northwest. After such date or the earlier
occurrence of an Early Termination Event, either the Plans or Northwest
may trigger the IPO. In the event of an IPO, the Plans will be required
to sell shares of Pinnacle Stock held by the Plans in accordance with
the following requirements:
[sbull] If at the time of the IPO the Plans own less than 50
percent (50%) of the outstanding Pinnacle Stock, the Plans will sell
shares ratably with Northwest's sale of shares in the IPO. If the
aggregate number of shares sought to be sold by Northwest and the Plans
collectively exceeds the number of shares that the managing underwriter
advises can be sold without having an adverse effect on the IPO,
Northwest and the Plans will be cutback pro rata.
[sbull] If at the time of the IPO the Plans own 50 percent (50%) or
more of the outstanding Pinnacle Stock, the Plans will sell, ratably
with Northwest's sale of shares in the IPO, not less than such number
of shares as is requested by the managing underwriter in the IPO in
order to have an offering of optimal size (taking into account all the
shares being sold). Beyond that, the Plans may sell additional shares
at their discretion. However, if the aggregate number of shares sought
to be sold by Northwest and the Plans collectively exceeds the number
of shares that the managing underwriter advises can be sold without
having an adverse effect on the IPO, Northwest and the Plans will be
cutback pro rata.
[sbull] Any shares as to which the Put Option shall have already
been exercised (but shall not yet have been purchased) must be included
in the IPO if requested by Northwest.
The Independent Fiduciary may, on behalf of the Plans, engage an
investment bank reasonably acceptable to Northwest to provide advice to
the Plans in connection with any proposed IPO and subsequent
disposition of Pinnacle Stock by the Plans, and Northwest will pay the
reasonable fees and expenses in this regard. Northwest will consult
with the Independent Fiduciary regarding any changes in the managing
underwriter currently contemplated for the IPO.
Any sale of shares in a registered public offering will be subject
to the requirements described below:
Northwest and the Plans will enter into a customary registration
rights agreement covering the registration of all of the shares
previously contributed to the Plans that are to be sold in the IPO or
that are to be sold through a shelf registration or as otherwise
contemplated by the Term Sheet. Such registration rights agreement will
provide that, in the case of an underwritten offering, the Plans will
enter into a customary underwriting agreement as may be negotiated by
Northwest with the managing underwriter(s), and the Plans will sell in
accordance with such underwriting agreement the shares of Pinnacle
Stock that are to be sold by the Plans, on the same economic terms that
shares of Pinnacle Stock held by Northwest are sold. The Plans will
receive the net proceeds from the sale of their shares in the IPO. If
Pinnacle Airlines has not consummated the IPO by the earlier of July 1,
2006, or the date of the occurrence of an Early Termination Event, the
Plans may exercise demand registration rights for an IPO.
The Plans will be entitled to retain all of the net proceeds from
the sale, even if such net proceeds are in excess of the initial
contribution value ascribed to the Pinnacle Stock being sold in the
IPO. If such net proceeds are less than such initial contribution
value, however, Northwest will be obligated, no later than the closing
date of the IPO, to remit to the Plans immediately available funds
representing the amount by which, with respect to the shares actually
sold, such net proceeds are less than the initial contribution value.
If less than all of the shares of Pinnacle Stock held by the Plans
are sold in the IPO, the Plans will have continuing registration rights
to sell all or any portion of its remaining shares (subject to the same
lock-up provisions that are imposed on Pinnacle Airlines). If there is
an Early Termination Event or if at the time of the IPO such remaining
shares are valued (based on the IPO price) at $50 million or more, the
Plans will have one demand registration right.
In the underwriting agreement, the indemnification obligation of
the Plans will be limited to what a selling stockholder normally
provides, namely, an obligation to indemnify in respect of information
relating to itself and its holdings that is provided by the Plans to
the underwriters expressly for inclusion in the registration statement.
The Independent Fiduciary will cause the Plans to provide such
information to the underwriters and otherwise to provide reasonable
cooperation in order to facilitate the offering. Northwest will provide
the Plans with the same indemnification and contribution it provides to
the underwriters in the offering. In no event will the Plans be
obligated to provide in such underwriting agreement representations and
warranties beyond due authorization, good title, no conflicts and the
like.
[[Page 2587]]
The Plans will also have unlimited ``piggyback'' registration
rights in the event Pinnacle Airlines files a registration statement
(other than on Form S-4 or S-8) covering shares of its common stock.
Upon the request of Northwest or the Plans, Pinnacle Airlines will file
a shelf registration statement (subject to customary lock-up
provisions) covering all of the Pinnacle shares owned by the Plans,
provided that Pinnacle Airlines is eligible to use Form S-3 at the time
of such request.
Liquidity and Financial Information
The Term Sheet provides that beginning March 31, 2003, Northwest
will provide as promptly as practicable after the end of each calendar
quarter a notice to the Independent Fiduciary of its cash liquidity as
of the end of such quarter. However, if the aggregate initial
contribution value of Pinnacle Stock held by the Plans is equal to or
less than $225 million and if Northwest's liquidity at the end of any
month is less than $1.75 billion, it will provide such notice monthly
until such time as its liquidity exceeds $1.75 billion. If liquidity at
any week end is less than $1.5 billion, Northwest will provide the
Independent Fiduciary with such reports on a weekly basis until
liquidity increases to $1.5 billion or more. If the aggregate initial
contribution value of Pinnacle Stock held by the Plans is greater than
$225 million and if Northwest's liquidity at the end of any month is
less than $1.75 billion, it will provide such notice monthly until such
time as its liquidity exceeds $1.75 billion. If liquidity at any week
end is less than $1.6 billion, Northwest will provide the Independent
Fiduciary with such reports on a weekly basis until liquidity increases
to $1.6 billion or more. Notwithstanding the above, the weekly
reporting requirement described above shall not apply until the
aggregate initial contribution value of Pinnacle Stock is greater than
or equal to $50 million.
Northwest shall provide to the Independent Fiduciary the
information referred to in sections 6.1, 6.2, 6.7 and 6.11 of the
$1.125 billion Credit and Guarantee Agreement dated as of October 24,
2000, under which Northwest is the borrower (the Credit Agreement), and
any other information required to be provided to the lenders, at the
same time the information is provided to the lenders under the Credit
Agreement, as the same may be amended from time to time (or similar
information required to be provided to the lenders under any successor
credit agreement). In addition, Northwest shall provide to the
Independent Fiduciary copies of any amendments to the Credit Agreement.
Put Option
According to the Term Sheet, the Plans will be granted a ``Put
Option'' with respect to each share of Pinnacle Stock, which may be
exercised by the Independent Fiduciary at any time and from time to
time. To exercise the Put Option, the Independent Fiduciary must
provide written notice to Northwest of its election to put to Northwest
any or all of the shares of Pinnacle Stock then held by the Plans. The
date of the notice of the election shall be the ``exercise date.'' The
closing date of the purchase and sale of shares with respect to which
the Put Option has been exercised will be the 30th calendar day after
such notice is given. However, if Pinnacle has not yet consummated the
IPO by the date that would otherwise be the closing date, Northwest
will have the right to defer such closing date as follows:
In the event the aggregate initial contribution value of Pinnacle
Stock held by the Plans is equal to or less than $225 million:
[sbull] If Northwest's liquidity is equal to or greater than $1.75
billion, Northwest may defer the closing date for up to an additional
150 days;
[sbull] If Northwest's liquidity is equal to or greater than $1.5
billion and less than $1.75 billion, Northwest may defer the closing
date for up to an additional 90 days;
[sbull] If Northwest's liquidity is equal to or greater than $1.25
billion and less than $1.5 billion, Northwest may defer the closing
date for up to an additional 60 days.
In the event the aggregate initial contribution value of Pinnacle
Stock held by the Plans is greater than $225 million and equal to or
less than $325 million:
[sbull] If Northwest's liquidity is equal to or greater than $1.75
billion, Northwest may defer the closing date for up to an additional
150 days;
[sbull] If Northwest's liquidity is equal to or greater than $1.6
billion and less than $1.75 billion, Northwest may defer the closing
date for up to an additional 90 days;
[sbull] If Northwest's liquidity is equal to or greater than $1.5
billion and less than $1.6 billion, Northwest may defer the closing
date for up to an additional 60 days.
In the event the aggregate initial contribution value of Pinnacle
Stock held by the Plans is greater than $325 million:
[sbull] If Northwest's liquidity is equal to or greater than $1.75
billion, Northwest may defer the closing date for up to an additional
120 days;
[sbull] If Northwest's liquidity is equal to or greater than $1.6
billion and less than $1.75 billion, Northwest may defer the closing
date for up to an additional 60 days;
[sbull] If Northwest's liquidity is equal to or greater than $1.5
billion and less than $1.6 billion, Northwest may defer the closing
date for up to an additional 30 days.
If during the period of any such deferral, Northwest's liquidity
falls below the threshold for the applicable deferral period, such
period shall be shortened to the lesser of (i) the remaining time in
the original deferral period, or (ii) the applicable deferral period
based on such lower level of liquidity. However, if before the end of
such period Northwest's liquidity increases to a higher level, the
longer deferral period will apply (subject to reduction if liquidity
falls below the relevant threshold).
If at the time of such exercise shares of Pinnacle Stock are
publicly traded and remain so traded, Northwest may defer the closing
date, but the deferral periods based on the liquidity levels described
above will be 120 days, 60 days and 30 days, respectively.
The closing date may be further deferred and deferred payments may
be made by Northwest as agreed to by the Independent Fiduciary beyond
these prescribed periods, through the posting (within 30 days following
the exercise date) of collateral by Northwest in an amount and on terms
satisfactory to the Independent Fiduciary.
Notwithstanding the foregoing, the closing date shall accelerate to
the date on which Northwest's obligations under its revolving credit
facility shall have accelerated.
Prior to the applicable closing date (which shall not be subject to
further extension without the Independent Fiduciary's consent),
Northwest may in its discretion arrange for the Pinnacle Stock as to
which the Put Option has been exercised, instead of being sold to
Northwest, to be sold to the public in an underwritten offering or to a
third party selected by Northwest. The Plans will be entitled to retain
all of the net proceeds from such underwritten offering or sale of the
Pinnacle Stock belonging to the Plans to a third party, even if such
net proceeds are in excess of the applicable ``Put Price'' (as defined
below). If the net proceeds received by the Plans in such underwritten
offering or sale to a third party are less than such Put Price,
Northwest will be obligated, no later than the closing date of such
offering or sale, to remit to the Plans
[[Page 2588]]
immediately available funds representing the amount by which such net
proceeds are less than the Put Price. The Plans will at the request of
Northwest enter into a customary agreement with respect to such sale.
In no event will the Plans be obligated to provide representations and
warranties beyond due authorization, good title, no conflicts and the
like.
In an IPO that is not triggered by the exercise of the Put Option,
if the Plans voluntarily choose to sell less than all of the shares of
Pinnacle Stock held by the Plans, and if the net proceeds per share in
such offering are equal to or greater than the ``Floor Price'' (as
defined below), the Put Option will expire with respect to the shares
retained in the Plans. In addition, if in such offering the net
proceeds per share are less than the Floor Price, and the Plans
voluntarily choose to sell less than all of the shares of Pinnacle
Stock held by the Plans, Northwest's maximum put obligation with
respect to the retained shares will be equal to the excess of the Floor
Price over the net proceeds per share in such offering.
The Put Option will be suspended if all of the remaining shares of
Pinnacle Stock held by the Plans have a ``Market Value'' (as defined
below) not less than 110 percent (110%) of the Floor Price and such
shares are ``Freely Tradeable.'' Shares are Freely Tradeable while they
are (i) eligible to be sold under Rule 144(k) or (ii) covered during
such period by an effective shelf registration statement on Form S-3.
The Put Option will terminate when (i) the Pinnacle Stock held by
the Plans is Freely Tradeable, (ii) more than 50 percent (50%) of the
outstanding Pinnacle Stock is held by the public and (iii) one of the
following applies: (A) If the Plans own less than 10 percent (10%) of
the outstanding shares of Pinnacle Stock, the weighted average daily
trading price of Pinnacle Stock is 110 percent (110%) of the Floor
Price for any 30 trading days within a 60 consecutive trading day
period; (B) if the Plans own equal to or greater than 10 percent (10%)
and less than 25 percent (25%) of the outstanding shares of Pinnacle
Stock, the weighted average daily trading price of Pinnacle Stock is
110 percent (110%) of the Floor Price for any 60 trading days within a
90 consecutive trading day period or (C) if the Plans own equal to or
greater than 25 percent (25%) and less than 50 percent (50%) of the
outstanding shares of Pinnacle Stock, the weighted average daily
trading price of Pinnacle Stock is 110 percent (110%) of the Floor
Price for any 90 trading days within a 120 consecutive trading day
period. The time periods are tolled for any black-out or lock-up
period.
The ``Put Price'' as of a particular date will be the greater of
(i) the ``Floor Price,'' which is the initial contribution value
ascribed to the Pinnacle Stock with respect to which the determination
is being made or (ii) the ``Market Value'' (as described below) of such
Pinnacle Stock as of the applicable exercise, closing or other relevant
date, unless Northwest has arranged for a sale to the public in an
underwritten offering in which case the Put Price will be the initial
contribution value ascribed to the Pinnacle Stock as to which the Put
Option has been exercised.
In any event, at a time prior to Pinnacle Stock being publicly
traded, in connection with a sale to a third party by Northwest in
response to the Independent Fiduciary's exercise of the Put Option, the
Plans will receive the greater of (i) the initial contribution value,
(ii) the fair market value as determined by the Independent Fiduciary
at the time of the exercise of the Put Option, or (iii) the proceeds
from the sale of Pinnacle Stock held by the Plans sold by Northwest to
a third party.
The ``Market Value'' of the Pinnacle Stock will be (i) if the
Pinnacle shares are not then traded on the NYSE or NASDAQ, the greater
of the fair market value determined by the Independent Fiduciary on (I)
the exercise date or (II) the closing date, (ii) if the Pinnacle shares
are then traded on the NYSE or NASDAQ, the greater of (I) the average
of the closing price for the Pinnacle shares over the ten trading days
prior to the exercise date or (II) the closing price for the Pinnacle
shares on the closing date.
Amount Credited to Funding Standard Account
Northwest will cause to be credited to the funding standard account
of each Plan an amount equal to the value of the shares of Pinnacle
Stock contributed to each Plan as determined by the Independent
Fiduciary on the date of the contribution, regardless of the amount of
Northwest's deduction for such contribution for federal income tax or
any other purpose.
Modification of Draft of ASA
The draft of the ASA should be revised to provide that the
acquisition or disposition of shares of Pinnacle Stock pursuant to the
terms of the Omnibus Agreement does not constitute a Change of Control
(as defined in the ASA).
The draft should also be revised to eliminate the unilateral right
of Northwest to terminate the ASA in the event of the bankruptcy of
Northwest. The Applicant also notes that in a Chapter 11 proceeding, a
debtor in possession can reject an executory contract (like the ASA).
In such an event, the other party to the rejected contract (Pinnacle)
would have an unsecured claim for contract damages arising from the
rejection of the contract. The Applicant represents that the more
likely result in the case of the ASA would be a renegotiation of the
contract.
15. In summary, the Applicant represents that the proposed
transactions meet the requirements set forth in section 408(a) of the
Act since, among other things:
(a) An Independent Fiduciary will represent the Plans' interests
for all purposes with respect to the Pinnacle Stock, and will
determine, prior to entering into any of the transactions described
herein, that each such transaction, including the contribution of the
Pinnacle Stock, is in the interests of the Plans;
(c) The Independent Fiduciary will negotiate and approve the terms
of any of the transactions between the Plans and Northwest that relate
to the Pinnacle Stock;
(d) The Independent Fiduciary will manage the holding and
disposition of the Pinnacle Stock and take whatever actions it deems
necessary to protect the rights of the Plans with respect to the
Pinnacle Stock;
(e) The terms of any transactions between the Plans and Northwest
will be no less favorable to the Plans than terms negotiated at arm's-
length under similar circumstances between unrelated third parties;
(f) An independent qualified appraiser selected by the Independent
Fiduciary will determine the fair market value of the Pinnacle Stock
contributed to each Plan as of the date of each such contribution;
(g) The terms of (1) the Put Option granted by Northwest; (2) any
exercise of the Put Option by the Plans; and (3) any sale of the
Pinnacle Stock by the Plans to Northwest other than through the
exercise of the Put Option will be in accordance with the terms set
forth in the Term Sheet and the proposed Omnibus Agreement;
(h) Immediately after each contribution, employer securities and
employer real property, including the Pinnacle Stock, will represent no
more than 10 percent (10%) of the value of each Plan's assets; and
(i) The Plans will not incur any fees, costs or other charges as a
result of their
[[Page 2589]]
participation in any of the transactions described herein.
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 section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and 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 require, among other things, that a fiduciary
discharge his or her 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 requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) The proposed exemption, if granted, will not extend to
transactions prohibited under section 406(b)(3) of the Act and section
4975(c)(1)(F) of the Code;
(3) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interest of the plan
and of its participants and beneficiaries and protective of the rights
of participants and beneficiaries of the plan;
(4) This proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions. 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
(5) This proposed exemption, if granted, is subject to the express
condition that the facts and representations set forth in this notice
accurately describe, where relevant, the material terms of the
transactions to be consummated pursuant to such exemption.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemption to the address above,
within the time frame set forth above, after the publication of this
proposed exemption in the Federal Register. All comments will be made a
part of the record. Comments received will be available for public
inspection with the referenced applications at the address set forth
above.
Notice to Interested Persons
Within fifteen (15) calendar days of publication of the Notice of
Proposed Exemption (the Notice) in the Federal Register, Northwest
shall provide notice to all participants of the Plans (including active
employees, separated vested participants and retirees) by mailing first
class a photocopy of the Notice, plus a copy of the supplemental
statement (Supplemental Statement), as required, pursuant to 29 CFR
2570.43(b)(2). Northwest shall also provide the same notice by first
class mailing to the representatives of the unions that represent
employees of Northwest who currently participate in the Plans.
Proposed Exemption
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).
Section I. Covered Transactions
The restrictions of sections 406(a), 406(b)(1) and (b)(2), and
407(a) of the Act and the sanctions resulting from the application of
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A)
through (E) of the Code, shall not apply to:
(1) The transfer of the common shares of either Pinnacle Airlines,
Inc. or Pinnacle Airlines Corp. (Pinnacle Stock) to the Northwest
Airlines Pension Plan for Salaried Employees, the Northwest Airlines
Pension Plan for Pilot Employees, and the Northwest Airlines Pension
Plan for Contract Employees (the Plans) through the in-kind
contribution(s) of such shares by Northwest Airlines, Inc. (Northwest),
a party in interest with respect to such Plans;
(2) The holding of the Pinnacle Stock by the Plans;
(3) The sale of the Pinnacle Stock by the Plans to Northwest; and
(4) The acquisition, holding, and exercise by the Plans of a put
option (the Put Option) granted by Northwest which permits the Plans to
sell the Pinnacle Stock to Northwest.
Section II. Conditions
This exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following requirements:
(a) The Plans acquire the Pinnacle Stock through one or more
contributions by Northwest during the calendar years 2003 and 2004;
(b) An independent qualified fiduciary (the Independent Fiduciary),
acting on behalf of the Plans, represents the Plans' interests for all
purposes with respect to the Pinnacle Stock, and determines, prior to
entering into any of the transactions described herein, that each such
transaction, including the contribution of the Pinnacle Stock, is in
the interests of the Plans;
(c) The Independent Fiduciary negotiates and approves the terms of
any of the transactions between the Plans and Northwest that relate to
the Pinnacle Stock;
(d) The Independent Fiduciary manages the holding and disposition
of the Pinnacle Stock and takes whatever actions it deems necessary to
protect the rights of the Plans with respect to the Pinnacle Stock;
(e) The terms of any transactions between the Plans and Northwest
are no less favorable to the Plans than terms negotiated at arm's-
length under similar circumstances between unrelated third parties;
(f) An independent qualified appraiser selected by the Independent
Fiduciary determines the fair market value of the Pinnacle Stock
contributed to each Plan as of the date of each such contribution;
(g) The terms of (1) the Put Option granted by Northwest; (2) any
exercise of the Put Option by the Plans; and (3) any sale of the
Pinnacle Stock by the Plans to Northwest other than through the
exercise of the Put Option will be in accordance with the terms set
forth in the Term Sheet and the proposed Omnibus Agreement;
(h) Immediately after each contribution, employer securities and
employer real property, including the Pinnacle Stock, will represent no
more than 10 percent (10%) of the value of each Plan's assets. For
purposes of this requirement, the term ``employer real property'' means
real property leased to, and the term ``employer securities'' means
securities issued by, an employer any of whose employees are covered by
the Plans or by an affiliate of such employer; and
(i) The Plans incur no fees, costs or other charges as a result of
their participation in any of the transactions described herein.
[[Page 2590]]
Section IV. Definitions
(a) The term ``independent fiduciary'' means a fiduciary who is:
(1) Independent of and unrelated to Northwest and its affiliates, and
(2) appointed to act on behalf of the Plans for all purposes related
to, but not limited to, (A) the in-kind contribution of the Pinnacle
Stock by Northwest to the Plans, (B) the holding of the Pinnacle Stock
by the Plans; (C) the acquisition, holding, and exercise by the Plans
of the Put Option, and (D) any sale of the Pinnacle Stock by the Plans.
For purposes of this exemption, a fiduciary will not be deemed to be
independent of and unrelated to Northwest if: (1) Such fiduciary
directly or indirectly controls, is controlled by or is under common
control with Northwest, (2) such fiduciary directly or indirectly
receives any compensation or other consideration in connection with any
transaction described in this exemption; except that an independent
fiduciary may receive compensation for acting as an independent
fiduciary from Northwest in connection with the transactions
contemplated herein if the amount or payment of such compensation is
not contingent upon or in any way affected by the independent
fiduciary's ultimate decision, and (3) more than 5 percent (5%) of such
fiduciary's gross income, for federal income tax purposes, in its prior
tax year, will be paid by Northwest and its affiliates in the
fiduciary's current tax year.
(b) The term ``affiliate'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) any officer, director, employee, relative, or partner in any
such person; and
(3) any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Signed at Washington, DC, this 14th day of January 2003.
Ivan L. Strasfeld,
Director, Office of Exemption, Determinations, Pension and Welfare
Benefits Administration, Department of Labor.
[FR Doc. 03-1187 Filed 1-16-03; 8:45 am]
BILLING CODE 4510-29-P
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