Fiduciary Counselors notes that there will be no change in its providing objective and independent investment management. Upon consideration of all of the comments received and testimony offered at the Hearing, the Department has determined to grant the proposed exemption subject to certain modifications. Northwest appointed Fiduciary Counselors investment manager of the Investment Fund and Fiduciary Counselors has accepted this appointment. Northwest believes this is the best outcome for all Plan participants and beneficiaries. (m) An analysis of the marketability, or lack thereof of the Pinnacle Stock, with specific reference to any restrictions, understandings, agreements, or obligations limiting the Plans' ability to dispose of the Pinnacle Stock. The 4.48% discount represents what Eclat used for Pinnacle's pre-tax cost of debt (9.6%) adjusted for a six-month period. 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 the Omnibus Agreement to the extent commercially reasonable. 6. There will be no change in their personnel assigned to this engagement or in the manner in which the fees are split between the two organizations. A comprehensive set of representations and warranties relating to both Pinnacle, Northwest and its affiliates. The Department asked whether Northwest intends to contribute cash or some other asset to satisfy the balance of the calendar year 2003 funding requirements of the Salaried and Contract Plans that will not be met by the Pinnacle Stock contribution as a result of the Letter Agreement. The stock has long term upside potential because of the planned IPO. If, on August 1, 2003, NWA Corp. decides not to repurchase the Series C Preferred Stock, beginning on August 1, 2003 and on each succeeding quarter end date, NWA Corp. must use all Available Cash (a defined term in the Agreements) to effect partial repurchases of the Series C Preferred Stock, but only if and to the extent NWA Corp. is not prohibited from making such repurchases under applicable Delaware corporate law or any loan agreement to which NWA Corp. is a party. Signed at Washington, DC this 14th day of August 2003. Northwest has from 30 to 180 days to settle the option. publication in the future. Northwest ended the 3rd quarter with over $2.5 billion in cash and short-term receivables. Northwest asserts that, if its current cash needs were not so great, Northwest would make its pension contributions in cash as it has in the past. The Special Conversion Option expired on February 9, 1994. better and aid in comparing the online edition to the print edition. In doing so, Fiduciary Counselors' legal obligations run exclusively to the Plans, not to Northwest. Northwest noted that the Pinnacle Stock is being held in an Investment Fund established in connection with the Master Trust, and the amounts were allocated to the Contract Plan and Salaried Plan consistent with the provisions of the Master Trust, as described in the Proposed Exemption. Each document posted on the site includes a link to the 4. In this regard, Fiduciary Counselors plans to hold periodic conference calls to report to the representatives of the participants covered by collective bargaining agreements on developments with respect to the Pinnacle Stock held by the plans. As Northwest's track record demonstrates, Northwest agrees that the Plans need to be soundly funded. Dated 2009. documents in the last year, by the International Trade Commission Although Eclat cannot know what market conditions might be like during this settlement period, this rate also exceeds the Plan's assumed asset earnings rate. NORTHWEST AIRLINES INC. 2700 Lone Oak Pkwy. For the reasons set forth below, the Independent Fiduciary has concluded that it is prudent for the Plans to accept the Contribution and that the Contribution is in the interest of the Plans and their participants and beneficiaries: Transfer restrictions on Pinnacle Stock held by the Plans are reasonable in light of the Put Option. 2. At the present time, the Board was unable to make this finding. If accepting an in-kind contribution is not prudent, not solely in the interest of the participants and beneficiaries of the plan, or would result in an improper lack of diversification of plan assets, the responsible fiduciaries of the plan Start Printed Page 49800would be liable for any losses resulting from such a breach of fiduciary responsibility, even if a contribution in kind does not constitute a prohibited transaction under section 406 of ERISA. The Independent Fiduciary must ensure that all of the conditions above are satisfied with respect to any past contributions of Pinnacle Stock, as well as any future contributions. on NARA's archives.gov. In this process, Northwest and Fiduciary Counselors each select their own nationally recognized valuation expert (Principals' Experts), which experts submit their appraisals to a third expert chosen by the Principals' Experts. documents in the last year, by the Indian Affairs Bureau In response to the commenters' concerns about the role of the independent fiduciary, the Department believes that it would be helpful to provide its views on the responsibilities of an independent fiduciary in connection with the in-kind contribution of property to an employee benefit plan. documents in the last year, 28 At the time a participant exercises conversion rights, the Series C Preferred Stock is converted to Common Stock, the Common Stock is sold and cash is allocated to participant accounts. Thus, the fourth bullet point in the second column at 68 FR 2585 (describing certain voting rights) should be modified accordingly. The IF Report summarizes that, in order to determine the value of Pinnacle, Eclat created a model based on the Three-Stage Free Cash Flow to Equity valuation technique. The Independent Fiduciary and its advisors analyzed the voting, transfer and put right features of the Pinnacle Stock and engaged in significant negotiations on those features with Northwest. documents in the last year, 973 Northwest stated that it would not. Northwest asserts that its beliefs in this regard have been independently verified. In the March 5 Comment, Fiduciary Counselors corrected previous information provided to the Department in the Proposed Exemption with reference to employer securities or employer real property in the last sentence of paragraph 14 in column 1 of 68 FR 2584 (emphasis added) and each other place it occurs. Northwest reported a net loss of $46 million, with operating income of $8 million in the 3rd quarter of 2002. The Independent Fiduciary and its advisors reviewed various documents relevant to the Contribution, including without limitation, Northwest's certificate of incorporation; Northwest's corporate bylaws; the certificate of incorporation of Pinnacle; the Master Trust agreement pursuant to which the Plan assets are currently held and managed; audited financial statements of the Plans for 2000 and 2001; the current Plan documents; the Plans' annual reports on Forms 5500 for 2000 and 2001; other information provided by Northwest regarding the Plans' assets (including the Plans' investment guidelines and portfolio composition); a statement prepared by the Plans' actuaries of the Plans' liquidity needs to pay benefits and administrative expenses in the near future and the sources of funds (other than the Pinnacle Stock) available to satisfy such liquidity needs; and certain of Pinnacle's collective bargaining agreements. Preview; Edit & Save; Related Documents; 50 of the Top 250 law firms use our Products every day. Pursuant to its engagement letter with Northwest, the scope of Fiduciary Counselors' engagement includes determining whether to accept the Contribution on behalf of the Plans, and if so, to value the Pinnacle Stock for Plan funding purposes. Northwest also believes that the value of Pinnacle Stock is less exposed to bankruptcy risk than Northwest stock. (i) The Plans incur no fees, costs or other charges as a result of their participation in any of the transactions described herein. Based on the Eclat and AIC valuations, the Independent Fiduciary determined that the contribution of 1,938,000 shares of Pinnacle Stock should be valued at $43,821,894 as of January 15, 2003, the date the contribution occurred. The Independent Fiduciary recognizes that all aspects of its engagement involved fiduciary actions, and, for that reason, representatives of the Independent Fiduciary and its financial and legal advisors actively participated in the negotiations relating to the Omnibus Agreement and in the evaluation of the decision of whether to accept the Contribution. Through the contribution of Pinnacle Stock, Northwest will be able to meet up to $330 million (based on the current valuation) in near term funding obligations while maintaining the airline's ability to weather difficult times, to the benefit of all concerned. You are here: . In its deliberations, which included its analysis of all aspects of the transactions, the Independent Fiduciary has consistently represented for the record that no contribution of Pinnacle Stock will be accepted on behalf of the Plans unless such transactions are found by the Independent Fiduciary to be in the interests of the Plans. Each share of the Series C Preferred Stock is convertible at any time into 1.364 shares of NWA Corp. Common Stock (Common Stock). Date: This exemption is effective as of January 15, 2003. The Term Sheet originally placed the right to request this fairness opinion solely on the Plans' director, who asked that this duty be placed on the independent directors of which the Plans' director is a member. The Department notes that the Preamble to the Proposed Exemption stated that either party may terminate the Independent Fiduciary Agreement for any reason upon 60 days notice and that the Agreement may be terminated immediately for cause. The IF Report states that on January 15, 2003, Fiduciary Counselors determined that the Master Trust could accept a contribution by Northwest of 1,938,000 shares of Pinnacle Stock, valued at $43,821,894.00, on behalf of the Contract Plan on terms and conditions set forth in the Omnibus Agreement. Northwest and ALPA believe that the Letter Agreement also enhances protections for participants in all three Plans by giving the Independent Fiduciary first priority to sell Pinnacle Stock in an IPO where the number of shares sought to be sold exceeds the number that can be sold. Federal Register. This document has been published in the Federal Register. Representatives are available to assist you Comment: A number of comments noted that the airline industry is experiencing significant financial troubles and that some other airlines are in bankruptcy. In particular, the risk and the liquidity of the Pinnacle Stock were taken into account and are explained in the reports issued by Fiduciary Counselors and Eclat. The Employee Stock Plan was established through labor negotiations between Northwest and its unions in 1993 to hold contributions of Northwest Airlines Corporation Series C Preferred Stock. The information addressed, among other issues, how the possibility of a Northwest bankruptcy was factored into the valuation, how the valuation was stress tested for other assumptions contained in the valuation, and the reasons for the selection of a 15% liquidity discount. (e) A statement of the relevance or significance accorded to the valuation methodologies taken into account. As also mentioned in the March 3 Comment, the Independent Fiduciary notes that at the fifth paragraph of the Voting Provisions section in the Proposed Exemption at column 2 of 68 FR 2585, the description of the required affirmative vote of the director designated by the Plans should be expanded to include the approval of: amending the Note, amending Pinnacle's charter or by-laws in certain respects, implementing certain changes in Pinnacle's capital structure, or issuing capital stock prior to an IPO, as set forth in the Omnibus Agreement. The Initial Contribution was comprised of 1,819,833 shares valued at $22.61 per share. The President of the United States issues other types of documents, including but not limited to; memoranda, notices, determinations, letters, messages, and orders. (p) Any other factors necessary for a prudent determination of the market value of Pinnacle Stock. Reliance solely on the valuation provided by the appraiser would not be sufficient to meet this prudence requirement. The Additional Initial Contribution served to provide the Plans with added protection until Northwest obtained written assurances from the bank lenders that the Put Option does not violate the Credit Agreement. Based on input from AIC, Eclat then applied a 15 percent liquidity discount and a 5 percent minority discount. In view of the comments requesting a hearing, on March 11, 2003, the Department published in the Federal Register (68 FR 11589) a notice of hearing on the Proposed Exemption. While the U.S. market has suffered tremendous losses due to the slowdown in the U.S. economy and the terrorist attacks of 9/11, the global market has rebounded much quicker. documents in the last year, 12 Alternatively, Northwest may arrange for the stock to be purchased by a third party. Each of Northwest's three main unions at the time of the Agreements also was granted the right to appoint one director to the Northwest board of directors. The IF Report states that Eclat expects that low-cost carriers will expand and gain share in the future but feels that Northwest is in the best shape of any network carrier to compete. As of December 31, 2002, 4.3 million shares of Series C Preferred Stock have been converted into Common Stock and the remaining Start Printed Page 498044.8 million shares outstanding are convertible into 6.6 million shares of Common Stock. The Independent Fiduciary negotiated a comprehensive set of representations and warranties relating to both Pinnacle Corp. and Northwest and its affiliates relating to Northwest's ability to honor the Put Option and to the value of Pinnacle Corp. The labor situation is Start Printed Page 49797stable. (n) An analysis of the degree to which actual control (both in form and in substance) will pass to any of the Plans as a result of any of the contemplated transactions, (o) To the extent that Pinnacle's current or projected revenues and expenses are related to, or dependent upon, contracts, agreements, or understandings between Northwest and Pinnacle, an analysis of Northwest's financial condition, the likelihood of a Northwest bankruptcy, and the potential impact of a Northwest bankruptcy on those contracts, agreements, or understandings, and on the market value of Pinnacle Stock, and. Specifically, the Independent Fiduciary negotiated a limited period for the transfer restrictions (until July 1, 2006) and the elimination of such restrictions upon the occurrence of an Early Termination Event. In addition, as reflected in the Omnibus Agreement, the Independent Fiduciary has negotiated a lapse of all transfer restrictions on the Pinnacle Stock held by the Plans on July 1, 2006, and upon an Early Termination Event (including a breach of the Omnibus Agreement by Northwest or Pinnacle or Northwest's failure to honor its Put Option obligations, but excluding violations of the scope clause limitations in certain of Northwest's collective bargaining agreements[5] The holders of outstanding Series C Preferred Stock have a put right in 2003 to require NWA Corp. to repurchase such shares for an amount equal to the actual wage savings achieved under the 1993 labor agreement (projected to be $226 million at the August 1, 2003 put date). Prior to valuing the put option, Eclat's estimate of the value of Pinnacle was $333,436,072, after application of an illiquidity discount of 15% and a minority discount of 5%. for better understanding how a document is structured but The notice also invited interested persons to submit comments on the proposed exemption and/or to request that a public hearing be held. This feature is not available for this document. The Department wishes to clarify that any replacement Independent Fiduciary must be acceptable to the Department and must assume its responsibility prior to the effective date of the removal of the predecessor Independent Fiduciary. 6. Schedule Health & Welfare Appointment. As a result, Northwest has a strong interest in ensuring that maximum value is obtained in connection with an IPO and Northwest believes that it is appropriate for it to determine the timing of an IPO. 5. As reflected in the Proposed Exemption, another Aon affiliate does provide non-plan services to Northwest, albeit services representing less than 1% of Aon's total annual revenue. The Series C Preferred Stock ranks senior to Common Stock with respect to liquidation and certain dividend rights. (g) a description of the nature of Pinnacle's business and history. Start Printed Page 49808. However, Northwest understands that some of United's airline services agreements have been renegotiated and that it has been reported that the airline services agreement between United and Atlantic Coast Airlines is the subject of current negotiations. The Omnibus Agreement provided for two contributions to be made to the Contract Plan on January 15, 2003. ALPA represents that it recognizes the need for Northwest to preserve liquidity so ALPA has agreed to modify the collective bargaining agreement and the Pilot Plan to permit the Pilot Plan to acquire and hold employer securities through a voluntary contribution to the Pilot Plan. The ASA provides a range of revenues to be paid by Northwest to Pinnacle, and Eclat valued the Company based on the minimum revenues, which would result from the ASA. Federal Register issue. Comments: Commenters expressed a concern that the contribution of Pinnacle Stock involves a conflict of interest on the part of Northwest. A Notice by the Employee Benefits Security Administration on 08/19/2003. 2. Northwest notes that quarterly valuations were contemplated in the Application, but a change to annual valuations was made when Northwest and Fiduciary Counselors agreed to the Term Sheet. Finally, Fiduciary Counselors requests that in Section III. 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) The Independent Fiduciary determines the fair market value of the Pinnacle Stock contributed to each plan as of the date of each such contribution. 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) The availability of this exemption is subject to the express condition that the material facts and representations contained in the application are true and complete and accurately describe all material terms of the transactions, which are the subjects of the exemption. 68 FR 2585 ( describing certain voting rights ) should be modified accordingly has long term upside potential because the... Appraiser would not ; 50 of the nature of Pinnacle Stock is less exposed bankruptcy! 'S pre-tax cost of debt ( 9.6 % ) adjusted for a prudent determination of the nature Pinnacle. A 5 percent minority discount Related documents ; 50 of the market value of Pinnacle Stock involves conflict... To be made to the print edition rights ) should be modified accordingly documents ; 50 of the relevance significance... 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