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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23642
NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4205287
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2700 LONE OAK PARKWAY, EAGAN, MINNESOTA 55121
(Address of principal executive offices)
(612) 726-2111
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ----------------
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE THE NASDAQ NATIONAL MARKET
PREFERRED STOCK PURCHASE RIGHTS THE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 1997 was $2.0 billion.
As of February 28, 1997, there were 93,900,681 shares of the registrant's Class
A Common Stock and 3,890,175 shares of the registrant's Class B Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Form 10-K incorporates by reference certain information from the
registrant's Form 8-K filed on March 6, 1997. Part III of this Form 10-K
incorporates by reference certain information from the registrant's Proxy
Statement for its Annual Meeting of Stockholders to be held on April 25, 1997.
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PART I
Item 1. BUSINESS
Northwest Airlines Corporation ("NWAC" and, together with its
subsidiaries, the "Company") was incorporated in February 1989 under the laws of
the State of Delaware. Northwest Airlines, Inc. ("Northwest"), the principal
wholly-owned indirect subsidiary of NWAC, operates the world's fourth largest
airline (as measured by 1995 revenue passenger miles ("RPMs")) and is engaged
principally in the commercial transportation of passengers and cargo.
Northwest's business focuses on the development of a global airline network
through the optimization of its domestic hubs at Detroit, Minneapolis/St. Paul
and Memphis, an extensive Pacific route system with hubs at Tokyo and Osaka, and
a transatlantic alliance with KLM Royal Dutch Airlines ("KLM") which operates
through a hub in Amsterdam. Northwest began operations in 1926.
OPERATIONS AND ROUTE SYSTEMS
Northwest operates substantial domestic and international route
networks and directly serves more than 150 cities in 18 countries on the
continents of North America, Asia and Europe. Northwest had more than 52
million enplanements and flew over 68 billion RPMs in 1996.
The airline industry is both cyclical and seasonal in nature. The
demand for air transportation is closely related to general United States
("U.S.") and worldwide economic conditions. Due to seasonal fluctuations, the
Company's operating results for any interim period are not necessarily
indicative of those for the entire year. The Company's second and third quarter
operating results have historically been more favorable due to increased leisure
travel on domestic and international routes during the spring and summer months.
DOMESTIC SYSTEM
Operating revenues from Northwest's domestic operations were $6.26
billion in 1996, $5.64 billion in 1995 and $5.23 billion in 1994. Northwest's
domestic route authority from the U.S. Department of Transportation (the "DOT")
permits it to engage in the interstate and overseas transportation of
passengers, freight and mail between all points in the U.S. and its territories
and possessions. The domestic system serves 43 states, the District of
Columbia, Mexico, Canada and the Caribbean. Northwest operates its domestic
system based on the hub-and-spoke strategy. Northwest's hubs at Detroit,
Minneapolis/St. Paul and Memphis provide point-to-point and connecting service
and feed traffic into Northwest's gateway cities for international service.
Northwest operates international flights from its Detroit and Minneapolis/St.
Paul hubs as well as from Boston, Seattle, San Francisco, Los Angeles, Honolulu,
Chicago, Washington D.C. and New York.
DETROIT. Northwest and its Northwest Airlink regional partners
("Northwest Airlink") together serve over 115 cities from Detroit. In 1996,
Northwest enplaned approximately 68% of originating jet passengers from this
hub, while the next largest competitor enplaned approximately 7%. Detroit,
which is the seventh largest origination/destination hub in the U.S., is the
Company's largest international gateway from the continental U.S., offering non-
stop flights to 15 foreign cities, including 17 non-stop flights to Japan per
week.
MINNEAPOLIS/ST. PAUL. Northwest and Northwest Airlink together serve
over 130 cities from Minneapolis/St. Paul. In 1996, Northwest enplaned
approximately 77% of originating jet passengers from this hub, while the next
largest competitor enplaned approximately 4%. Minneapolis/St. Paul is the tenth
largest origination/destination hub in the U.S.
MEMPHIS. Northwest and Northwest Airlink together serve over 85
cities from Memphis. In 1996, Northwest enplaned approximately 59% of
originating jet passengers from this hub, while the next largest competitor
enplaned approximately 17%.
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MEXICAN/CARIBBEAN/CANADIAN ROUTES. Northwest, together with Northwest
Airlink, currently operates service to six cities in Mexico, 14 cities in Canada
and five cities in the Caribbean.
INTERNATIONAL SYSTEM
Operating revenues from foreign operations were approximately $3.39
billion in 1996, $3.17 billion in 1995 and $2.83 billion in 1994. Northwest
operates its international routes pursuant to route certificates issued by the
DOT. A substantial portion of Northwest's Pacific route certificates are
permanent and do not require renewal by the DOT. Certain other international
route certificates are temporary and subject to periodic renewal by the DOT.
Northwest requests extensions of these certificates when and as appropriate.
The DOT typically renews temporary authorities on routes where the authorized
carrier is providing a reasonable level of service.
PACIFIC. Northwest has served the Pacific market since 1947 and has
one of the world's largest Pacific route networks, with over 450 weekly flights.
Northwest's Pacific operations are concentrated at its Tokyo hub.
Northwest provides passenger service between various points in the
U.S. and Japan and operates flights between Japan and Korea, Taiwan, Hong
Kong, the Philippines, Thailand, Singapore, China and Northern Mariana
Islands. Northwest also operates direct flights from Detroit to Seoul, Korea
and from Seattle to Hong Kong. At the end of 1996, Northwest was providing
seven flights each week to China, including three non-stop flights between
Detroit and Beijing, the only regularly scheduled non-stop service from the
U.S. to China's capital operated by a U.S. carrier. Northwest also provides
extensive service to Osaka and currently operates 42 weekly departures from
Osaka.
Northwest's Japan presence results from the 1952 U.S.-Japan bilateral
aviation agreement, which establishes route rights to carry traffic between
Japan and as many as 16 U.S. gateway cities and extensive "fifth freedom" rights
between Japan and other Asian destinations. Northwest has the largest slot
portfolio of any non-Japanese airline at Tokyo's slot-constrained Narita
International Airport, with 316 weekly takeoff and landing slots. Northwest
uses its route certificate and slot portfolio to operate a network linking eight
U.S. gateways and ten Asian and Micronesian destinations via Tokyo. Northwest
and United Air Lines, Inc. ("United") are the only U.S. passenger carriers that
have fifth freedom rights for Japan.
ATLANTIC. Northwest and KLM presently operate their transatlantic
flights pursuant to a joint venture alliance. Through this alliance, Northwest
has expanded its presence in the transatlantic market by operating joint service
between 11 U.S. cities and Amsterdam, KLM's hub airport. In September 1992, the
U.S. and The Netherlands entered into an "open-skies" bilateral aviation treaty
which authorizes the airlines of each country to provide international air
transportation between any U.S.-Netherlands city pair and to operate connecting
service to destinations in other countries. Based primarily on the open-entry
market created by this treaty and the limited competitive overlap between route
systems, Northwest and KLM petitioned the DOT for joint immunity from the U.S.
antitrust laws and were granted such immunity in January 1993. Code-sharing has
been implemented on flights to 31 European, eight Middle Eastern, five African
and 180 U.S. cities. Northwest will begin service to Mumbai and Delhi, India
effective June 1, 1997 from Amsterdam. Northwest and KLM also coordinate
pricing, scheduling, product development and marketing. Northwest and KLM are
parties to a Commercial Cooperation and Integration Agreement which is
terminable by either party upon twelve months notice.
OTHER OPERATIONS
CARGO. Northwest is the world's tenth largest cargo air carrier
(based on 1995 freight ton miles) and the only U.S. passenger airline to operate
its own dedicated Boeing 747 all-cargo freighter fleet. Cargo accounts for
almost 8% of the Company's operating revenues, and the majority of its cargo
revenues are of Asian origination or destination. Through its Tokyo cargo hub,
Northwest serves most major air freight markets between the U.S. and the Pacific
market.
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AIRLINK AND OTHER PARTNERSHIPS. Northwest has marketing agreements
with two regional carriers: Mesaba Aviation, Inc. and Express Airlines I,
Inc. Pursuant to these agreements, the regional carriers operate their
flights under the Northwest "NW" code. The primary purpose of these
marketing agreements is to provide increased feed traffic at Detroit,
Minneapolis/St. Paul and Memphis. On March 22, 1997, the Company entered
into a stock purchase agreement to acquire for cash all the outstanding
common stock of Express Airlines I, Inc. The transaction is expected to close
in April 1997.
Northwest has additional marketing agreements with Horizon Air, Trans
States Airlines, Inc., America West Airlines, Inc. and Alaska Airlines for code-
sharing on some of these carriers' routes in the western U.S. The Company also
has code-sharing agreements with Mahalo Air, Hawaiian Airlines, Asiana Airlines
and Pacific Island Aviation. The primary purpose of the arrangements with these
airlines (which operate their routes under their own names) is to feed
Northwest's Pacific route network and maintain a presence in certain markets
that Northwest does not directly serve. Northwest also has marketing agreements
with Business Express Airlines for code-sharing in the Boston area to feed its
domestic and transatlantic route network and with Eurowings and Air UK, which
further enhances Northwest's service to Europe.
OTHER ACTIVITIES
NORTHWEST AEROSPACE TRAINING CORPORATION. Northwest Aerospace
Training Corporation ("NATCO") provides training and aircraft simulation
services to pilots for Northwest, other airlines, governments and corporations.
The NATCO training facility is among the world's largest aircraft simulation
facilities, with 27 full-flight simulators and training devices. In 1996, 40%
of NATCO's revenues came from third parties. NATCO's customer base includes
both domestic and international airlines.
MLT INC. MLT Inc. ("MLT") is among the largest vacation wholesale
companies in the U.S. In addition to its MLT Vacations charter program, MLT
markets and supports Northwest's WorldVacation packages and offers leisure fares
to several domestic and international destinations, primarily on Northwest.
NORTHWEST PARS, INC. Northwest PARS, Inc. holds a 32% limited
partnership interest in WORLDSPAN. WORLDSPAN operates and markets a computer
reservations and passenger processing system ("CRS") for the travel industry.
Delta Air Lines, Inc. ("Delta"), Trans World Airlines, Inc. ("TWA") and ABACUS
Distributions Systems Pte Ltd own 38%, 25% and 5% of WORLDSPAN, respectively.
COMPETITION
Since the passage of the Airline Deregulation Act of 1978, the airline
industry has been characterized by strong competition and industry
consolidation. A number of airlines have filed for bankruptcy and/or ceased
operations. Airlines offer discount fares, a wide range of schedules, frequent
flyer mileage programs and ground and in-flight services as competitive tools to
attract passengers and increase market share. Because of the relative ease with
which U.S. carriers can enter new markets, Northwest's domestic service is
subject to potential increases in competition from other air carriers, the
extent and effect of which cannot be predicted.
The airline industry is subject to substantial price competition as
U.S. airlines are free to determine domestic pricing policies without government
regulation. Price competition has accelerated the efforts of airline management
to reduce costs and improve productivity. Northwest's pricing decisions are
influenced by, among other things, competition from other airlines. Northwest
utilizes yield management programs that are designed to manage the number of
discount seats offered on each flight in an effort to maximize revenues.
Northwest expects to continue periodic discount fare programs in order to
attract discretionary customers who might not otherwise travel at normal fare
levels. International fares are subject to the jurisdiction of the governments
of the foreign countries being served and the DOT. However, the Company
generally has substantial discretion with respect to its international pricing
policies.
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Northwest has developed strategies that are designed to utilize the
Company's strategic assets to its competitive advantage. These strategies focus
on providing consistently convenient and reliable service, including superior
on-time performance. In addition, the Company's frequent flyer program,
targeted fare promotions and customer service improvements are designed to
maintain and improve its competitive position.
WORLDSPAN COMPUTER RESERVATION SYSTEM
The large majority of travel agencies in the U.S. obtain their airline
travel information through access to a CRS. A CRS, which is typically owned or
operated by an airline or airlines, is used by travel agents to make airline,
hotel and car reservations and to issue airline tickets. Northwest's presence
through WORLDSPAN in the CRS market gives it a voice in the distribution of its
airline product. Based on the number of passenger segments sold and the number
of agency locations, WORLDSPAN ranks third in market share among travel agents
in the U.S. WORLDSPAN is subject to CRS regulations promulgated by the DOT and
the European Economic Community.
MARKETING
Consistent with the experience of other carriers, approximately 84% of
ticket sales for travel on Northwest are sold by travel agents. Travel agents
generally receive commissions on sales of tickets. Airlines often pay
additional commissions in connection with special revenue programs.
In January 1996, Northwest introduced electronic ticketing for its
flights between Minneapolis/St. Paul and Chicago's O'Hare Airport. During 1996,
Northwest's entire U.S. and Canadian route system became "E-ticket capable".
Also during 1996, Northwest began offering CyberSaver fares via its
site on the World Wide Web (www.nwa.com). These fares offer travelers the
opportunity to realize deep discounts for weekend travel on selected domestic
routes. Northwest has allowed customers to make direct bookings on a third-
party web site and, beginning in March 1997, began offering direct booking from
its own web site.
FREQUENT FLYER PROGRAM
Northwest operates a frequent flyer marketing program known as
"WORLDPERKS" under which mileage credits are earned by flying on Northwest or
participating airlines and by using the services of participating bank credit
cards, hotels and car rental firms. Northwest sells mileage credits to the
other companies participating in the program. The program was designed to
retain and increase the business of frequent travelers by offering incentives
for their continued patronage.
The WORLDPERKS program is based on a mileage banking system (pursuant
to which miles earned are accumulated in an account for each member). Mileage
credits can be redeemed for free or upgraded travel on Northwest and other
participating airlines or for other travel industry awards. Additional features
include the use of seasonal awards based on peak/off-peak period travel and a
two-tier award structure.
Northwest accounts for its frequent flyer obligation on the accrual
basis using the incremental cost method. Northwest includes food and beverage,
fuel, insurance, security, miscellaneous claims and WORLDPERKS service center
expense in its incremental cost calculation. The incremental costs do not
include any contribution to overhead or profit. Food, beverage and other costs
are based on average cost per passenger for the current twelve-month period.
The incremental fuel unit cost per passenger is based on engineering formulas
that determine the average fuel cost per pound carried. Average year-to-date
fuel price and estimated average weight of each added onboard passenger and
luggage are factored into the incremental cost computation and converted to a
rate per passenger per award.
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The number of estimated travel awards outstanding at December 31,
1996, 1995 and 1994 was approximately 4,536,000, 3,853,000 and 4,186,000 awards,
respectively (data for December 31, 1996 and 1995 is based on an average of
23,900 miles per award, instead of the previous 20,000 miles per award).
Northwest estimated its recorded liability based on 3,642,000, 3,001,000 and
3,380,000 of these awards, respectively. The estimated liability excludes
accounts that have never attained the lowest travel award level and awards that
are expected to be redeemed for upgrades or are not expected to be redeemed at
all, and includes an estimate for partially earned awards on accounts that
previously earned an award. The number of estimated travel awards used for
travel on Northwest during the years ended December 31, 1996, 1995 and 1994 was
approximately 1,025,000, 1,213,000 and 1,255,000, respectively. These awards
represented an estimated 5.5%, 6.0% and 6.5% of Northwest's total RPMs for each
such year, respectively. Northwest believes displacement of revenue passengers
is minimal based on the low ratio of WORLDPERKS award usage to revenue passenger
miles, the Company's ability to manage frequent flyer inventory through seat
allocations and blackout dates, and program incentives to travel during off-peak
periods.
AIRCRAFT FUEL
Northwest's worldwide aircraft fuel requirements are met by
approximately 50 different suppliers. Northwest has contracts with these
suppliers, the terms of which vary as to price, payment terms, quantities and
duration. Northwest also makes purchases of fuel based on price and
availability. In order to provide a measure of control over price and supply,
Northwest trades and ships fuel and maintains fuel storage facilities to support
its flight operations. Petroleum product prices, including jet fuel, are
primarily driven by crude oil costs. The market's alternate uses of crude oil
to produce petroleum products other than jet fuel (e.g., heating oil and
gasoline) as well as the adequacy of refining capacity and other supply
constraints affect the price and availability of jet fuel. Major changes in the
price or availability of fuel could materially affect the financial results of
the Company. A one cent change in the cost per gallon of fuel (based on 1996
consumption) would impact operating expense by approximately $1.6 million per
month.
The following table summarizes Northwest's fuel consumption and costs
for the years ended December 31, 1996, 1995 and 1994:
Years Ended December 31
-------------------------------
1996 1995 1994
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Gallons consumed (in millions) . . . 1,945 1,846 1,793
Total costs (in millions) (1). . . . $ 1,307 $ 1,027 $ 1,008
Average cost per gallon (cents). . . 67.21 55.66 56.23
Percentage of operating expenses . . 14.8% 12.6% 13.4%
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(1) Excludes taxes and into-plane fees.
REGULATION
GENERAL. Four of the nation's airports, Chicago's O'Hare, New York's
LaGuardia and Kennedy International and Washington's National airports, have
been designated by the Federal Aviation Administration (the "FAA") as "high
density traffic airports", and the number of take offs and landings at such
airports ("slots") have been limited during certain peak demand time periods.
Currently the FAA permits the buying, selling, trading or leasing of these
slots, subject to certain restrictions. The DOT has the authority to regulate
deceptive and unfair competitive practices and maintains jurisdiction over
international route authorities and certain consumer protection matters, such as
advertising, denied boarding compensation, baggage liability and CRSs.
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With respect to foreign air transportation, the DOT must approve
agreements between air carriers, including code-sharing agreements, and may
grant antitrust immunity for those agreements. The DOT must also approve the
transfer between U.S. carriers of international route certificates. Northwest's
rights to operate to foreign countries, including Japan and other countries in
the Pacific, are governed by aviation agreements between the U.S. and the
respective foreign countries. Many aviation agreements permit an unlimited
number of carriers to operate between the U.S. and the respective foreign
country, while other aviation agreements limit the number of carriers and
flights on a given international route. From time to time, the U.S. or its
foreign country counterpart may seek to renegotiate or cancel an aviation
agreement. In the event an aviation agreement is amended or canceled, such a
change could adversely affect Northwest's ability to maintain and/or expand air
service to the foreign country.
Operations to and from foreign countries are subject to the applicable
laws and regulations of those countries. There are restrictions on the number
and timing of operations at certain international airports served by Northwest,
including Tokyo and Osaka. Additionally, slots for international flights are
subject to certain restrictions on use and transfer.
LABOR. The Railway Labor Act ("RLA") governs the labor relations of
employers and employees engaged in the airline industry. Comprehensive
provisions are set forth in the RLA establishing the right of airline employees
to organize and bargain collectively along craft or class lines and imposing a
duty upon air carriers and their employees to exert every reasonable effort to
make and maintain collective bargaining agreements. The RLA contains detailed
procedures that must be exhausted before a lawful work stoppage may occur.
Pursuant to the RLA, Northwest has collective bargaining agreements with six
domestic unions representing 11 separate employee groups. In addition,
Northwest has agreements with four unions representing its employees in
countries throughout Asia, which agreements are not subject to the RLA.
NOISE ABATEMENT. The Airport Noise and Capacity Act of 1990 ("ANCA")
requires the phaseout of Stage II aircraft operations (as defined in Part 36 of
the Federal Aviation Regulations) by December 31, 1999, subject to certain
exceptions. The FAA regulations which implement the ANCA require carriers to
modify or reduce the number of Stage II aircraft operated by 25% by the end of
1994, 50% by the end of 1996, 75% by the end of 1998 and 100% by the end of
1999. Alternatively, a carrier could satisfy these compliance requirements by
operating a fleet that is at least 55% Stage III by the end of 1994, 65% Stage
III by the end of 1996, 75% Stage III by the end of 1998 and 100% Stage III by
the end of 1999. As of December 31, 1996, Northwest operated 253 Stage III
aircraft and 146 Stage II aircraft. Northwest achieved 1996 compliance by
reducing the number of Stage II aircraft in its fleet by more than 50% and has
plans in place to enable it to meet future year-end operational requirements.
The ANCA also recognizes the right of airport operators with special
noise problems to implement local noise abatement procedures as long as such
procedures do not interfere unreasonably with the interstate and foreign
commerce of the national air transportation system. The ANCA generally requires
FAA approval of local noise restrictions on Stage II aircraft and establishes a
regulatory notice and review process for local restrictions on Stage II aircraft
first proposed after October 1990. As a result of litigation and pressure from
airport area residents, airport operators have taken local actions over the
years to reduce aircraft noise. These actions include restrictions on nighttime
operations, restrictions on frequency of aircraft operations and various
operational procedures for noise abatement. While to date Northwest has
sufficient operational and scheduling flexibility to accommodate current local
noise restrictions, its operations could be adversely affected if locally-
imposed regulations become more restrictive or widespread.
SAFETY. The FAA has jurisdiction over aircraft maintenance and
operations, including equipment, dispatch, communications, training, flight
personnel and other matters affecting air safety. To ensure compliance with its
regulations, the FAA requires all U.S. airlines to obtain operating,
airworthiness and other certificates which are subject to suspension or
revocation for cause. During 1995, Northwest received an exceptional report
from the Federal Aviation Administration during the most recent National
Aviation Safety Inspection Program (NASIP) audit.
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The Company's aircraft require various levels of maintenance or
"checks" and periodically undergo complete overhauls. Maintenance efforts are
monitored closely by the FAA, with FAA representatives present at the Company's
maintenance facilities. The FAA has issued several Airworthiness Directives
("ADs") which mandate changes to an air carrier's maintenance program for older
aircraft. These ADs (which include structural modifications to certain
aircraft) were issued to ensure that the oldest portion of the nation's
transport aircraft fleet remains airworthy. The Company is currently, and
expects to remain, in compliance with all applicable requirements under the FAA-
issued ADs.
A combination of FAA and Occupational Safety and Health Administration
regulations on both the federal and state levels apply to all of Northwest's
ground-based operations.
ENVIRONMENTAL. The Company is subject to regulation under various
environmental laws and regulations, which are administered by numerous state and
federal agencies, including the Clean Air Act, the Clean Water Act and
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). In addition, many state and local governments have adopted
environmental laws and regulations to which the Company's operations are
subject.
Federal and state laws and regulations impose certain requirements for
the upgrading of underground storage tanks ("USTs"). These requirements,
including upgrading of USTs to new construction standards and installation with
leak detection systems, are phased into effect based on the age, construction
and use of existing tanks. Northwest operates a number of underground and
above-ground storage tanks throughout its system, which are primarily used for
the storage of fuel, deicing fluids and solvents. A program for the removal or
upgrading of USTs and remediation of any contamination from such USTs has been
ongoing since 1989.
Northwest has been identified by the U.S. Environmental Protection
Agency as a potentially responsible party ("PRP") pursuant to CERCLA at the
Union Scrap Iron & Metal Co. site in Minneapolis, Minnesota; Oak Grove Landfill
site in Anoka County, Minnesota; Memphis International Airport in Shelby County,
Tennessee; and Petroleum Products site in Broward County, Florida. In addition,
the Massachusetts Department of Environmental Protection has identified a number
of contaminated sites at Boston's Logan Airport, for which Northwest has been
identified as a PRP under Massachusetts law.
Management believes that neither compliance with the federal and state
UST laws and regulations nor the cleanup for each of the sites described above
will have a material adverse effect on the Company's financial statements taken
as a whole.
EMPLOYEES
As of December 31, 1996, the Company had approximately 47,500 full-
time equivalent employees of which approximately 2,700 were foreign nationals
working in Asia and Europe. Approximately 90% of the Company's employees are
represented by unions. Collective bargaining agreements provide standards for
wages, hours of work, working conditions, settlement of disputes and other
matters. The major agreements with domestic employees became amendable on
various dates as follows:
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<TABLE>
<CAPTION>
Approximate
Number of
Full-time
Equivalent
Employees Amendable
Employee Group Covered Union Date
- -------------------------------------------- ----------- --------------------------------------- ---------
<S> <C> <C> <C>
Pilots . . . . . . . . . . . . . . . . . . . 5,600 Air Line Pilots Association 10/31/96
International
Flight Attendants. . . . . . . . . . . . . . 9,100 International Brotherhood of 08/02/96
Teamsters, Chauffeurs,
Warehousemen & Helpers of America
Clerks and Agents. . . . . . . . . . . . . . 10,400 International Association of Machinists 10/03/96
& Aerospace Workers ("IAM")
Mechanics and Related Employees. . . . . . . 8,200 IAM 10/03/96
Equipment Service Employees and Stock Clerks 6,400 IAM 10/03/96
</TABLE>
As previously discussed, the above agreements are governed by the RLA.
Pursuant to the RLA, each agreement became amendable at the expiration of its
stated term, and continues in effect while the parties pursue agreement on a new
contract. Contract negotiations with each union commenced in late 1996. In
addition to the direct negotiation phase, the RLA also provides for a period of
mediation, potential arbitration of unresolved issues, and a 30-day "cooling
off" period before either party can resort to self help.
For further discussion regarding the status of the collective
bargaining agreements and the expiration of the wage savings agreements with
each of the Company's domestic unions see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
The Company through its management may from time to time make oral
forward-looking statements. In connection with the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the Company is
hereby identifying important factors that could cause actual results to
differ materially from those contained in any forward-looking statement made
by or on behalf of the Company. Any such statement is qualified by reference
to the following cautionary statements.
It is not reasonably possible to itemize all of the many factors
and specific events that could affect the outlook of an airline operating in
the global economy. Some factors that could significantly impact expected
capacity, load factors, revenues, expenses and cash flows include the airline
pricing environment, fuel costs, labor negotiations both at the Company and
other carriers, low-fare carrier expansion, capacity decisions of other
carriers, actions of the U.S. and foreign governments, foreign currency
exchange rate fluctuations, inflation, the general economic environment and
other factors discussed herein.
Developments in any of these areas, as well as other risks and
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings, could cause the Company's results to differ from
results that have been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements that may be made from time to time by or on behalf of the Company.
Item 2. PROPERTIES
FLIGHT EQUIPMENT
The Company operated a fleet of 399 aircraft at December 31, 1996,
consisting of 325 narrow-body and 74 wide-body aircraft. The diversity of the
fleet accommodates both the Company's domestic hub-and-spoke system and its
international routes and enhances the Company's ability to more efficiently
match its aircraft to its route network requirements.
As of December 31, 1996, 273 aircraft were owned and 126 aircraft
were leased. The Company currently operates 50 (of which 22 are owned)
Airbus A320 aircraft with an average age of 5.1 years. The Company's fleet
of Boeing aircraft includes 43 (of which 29 are owned) 727 aircraft with an
average age of 17.6 years, 48 (of which 15 are owned) 757 aircraft with an
average age of 7.3 years, 33 (of which 18 are owned) 747 aircraft with an
average age of 15.1 years and eight (of which 5 are owned) 747 freighters
with an average age of 16.6 years. The Company's fleet of McDonnell Douglas
aircraft includes 176 (of which 151 are owned) DC-9 aircraft with an average
age of 26.4 years, 33 (of which 25 are owned) DC-10 aircraft with an average
age of 22.7 years and eight (all of which are owned) MD-80 aircraft with an
average age of 14.5 years.
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Although the DC-9 and DC-10 average aircraft age exceeds twenty
years, these aircraft have considerable remaining technological life, based
upon the cycle life (capacity for number of landings) expected by the
manufacturer and other factors. The Company also believes that these aircraft
have economic value for the Company given its route network and maintenance
programs. The Company has adopted programs to refurbish and hushkit 173 DC-9
aircraft. As a result of these programs, the Company estimates these
aircraft could fly on average approximately 16 additional years beyond 1996
based upon the manufacturer's expected cycle life for such aircraft and their
projected annual utilization by Northwest. The Company estimates that its
DC-10 aircraft fleet could fly on average approximately 24 additional years
beyond 1996 based upon the manufacturer's expected cycle life for such
aircraft and their projected annual utilization by Northwest.
For further information related to the Company's leases and
commitments see Notes D, I and M to Consolidated Financial Statements included
within Item 8. Consolidated Financial Statements and Supplementary Data.
OTHER PROPERTY AND EQUIPMENT
Northwest's primary offices are located at or near the Minneapolis/St.
Paul International Airport. The Company owns a 160-acre site east of the
Minneapolis/St. Paul International Airport containing the Company's corporate
offices. Additional owned buildings include reservation centers in Baltimore,
Detroit, Tampa and Chisholm, Minnesota; a data processing center in Eagan,
Minnesota; and several office buildings. The Company owns property in Tokyo,
including a 1.3-acre site in downtown Tokyo and a 33-acre land parcel, 512-room
hotel and flight kitchen located near Narita International Airport.
Northwest leases the majority of its airport facilities, support
services buildings and sales and reservations offices. Expiration dates on
these leases range from 1997 to 2025. The Company operates reservations
centers in or near Honolulu, Los Angeles, New York City and Seattle.
Maintenance bases under operating leases are located in Minneapolis/St. Paul,
Atlanta, Georgia and Duluth, Minnesota. The Company also operates
approximately 70 city ticket offices. In certain cases, the Company has
constructed a facility on leased land which reverts to the lessor upon
expiration of the lease. These facilities include cargo buildings in
Anchorage, Boston, Los Angeles, San Francisco and Honolulu; support buildings
at the Minneapolis/St. Paul International Airport; a hangar in Cleveland; and
a flight kitchen in Seattle.
Item 3. LEGAL PROCEEDINGS
NORTHWEST AIRLINES, INC. V. AMERICAN AIRLINES, INC. (U.S.D.C. District of
Minnesota, Civ. No. 4-91-539). After written threats of litigation from
American Airlines, Inc. ("American"), in July 1991 Northwest filed a declaratory
judgment action in the United States District Court for the District of
Minnesota seeking a determination that Northwest's hiring of certain American
employees was lawful. After an unsuccessful attempt to litigate its claims in
the United States District Court for the Northern District of Texas, American
filed a counterclaim for damages in Northwest's declaratory judgment proceeding
alleging tortious interference with employment contracts, conversion of trade
secrets and copyright infringement with respect to Northwest's hiring of 13
American employees in the yield management and finance areas and seeking damages
in excess of $300 million. The parties have completed pretrial discovery; no
trial date has been scheduled.
KLM ROYAL DUTCH AIRLINES V. A. CHECCHI, ET AL. (Delaware Court of
Chancery, New Castle County, Civil Action No. 14764). On November 16, 1995, the
Board of Directors approved a stockholder rights plan. On December 28, 1995,
KLM instituted litigation against the Company and its directors (other than
those directors designated by KLM) seeking to rescind the adoption of the
stockholder rights plan or, alternately, to require that KLM's option on certain
shares of common stock, exercisable in August 1998, be exempted from the
operation of the stockholder rights plan.
10
<PAGE>
Other disputes between NWAC and KLM also presently exist with respect
to KLM's participation in NWAC's corporate governance and the parties'
transatlantic alliance. In addition, in November 1995, KLM instituted
litigation against certain stockholders of NWAC who are parties to a
stockholders' agreement with KLM over the validity of certain amendments to that
stockholders' agreement.
In recent months, Northwest and KLM have had meetings
regarding a possible resolution of all matters in dispute. No resolution of
these matters was reached at these meetings. These meetings included discussion
of various settlement proposals, including a proposal to lengthen the term of
the alliance agreement between Northwest and KLM and to provide for KLM's
divestiture over a multi-year period of NWAC common stock, either by NWAC
repurchases or by other means. As of the date of this report, there has been no
resolution of the matters in dispute and the outcome of future discussions,
if any, cannot be determined at this time.
IN RE: TRAVEL AGENCY COMMISSION ANTITRUST LITIGATION (U.S.D.C.
District of Minnesota, Multi-District Litigation Docket No. 1058). On
February 9, 1995, Delta announced that it would impose caps of $25 (for
one-way tickets) and $50 (for round-trip tickets) on the 10% base commissions
earned by travel agents for selling tickets for domestic travel on Delta.
Northwest subsequently adopted a similar travel agent commission structure,
as did five other airlines. Thereafter, Northwest was named as a codefendant
in a series of treble-damage antitrust class action complaints by various
individual travel agencies and by the American Society of Travel Agents. The
complaints sought injunctive relief and unspecified damages. On September 3,
1996, an agreement in principle to settle the antitrust class litigation
between a class of travel agency plaintiffs and American, Delta, United and
the Company was reached. Under the settlement agreement, the Company agreed
to pay $10.8 million of the $72 million aggregate settlement payment to be
made by the four airlines. (Separate settlement agreements were reached by
the plaintiffs with Continental Airlines, Inc., US Airways and TWA. The
aggregate amount of all settlement payments is approximately $86 million.)
In agreeing to settle the case, the Company vigorously denied any wrongdoing
and agreed to settle the litigation solely to avoid the uncertainty and
expense and diversion of management time and effort associated with a
protracted trial. On February 7, 1997, the Court granted final approval to
the settlement agreement. The time for any party to appeal the Court's final
approval of the settlement has expired and no parties filed an appeal.
In addition, in the ordinary course of its business, the Company is
party to various other legal actions which the Company believes are incidental
to the operation of its business. The Company believes that the outcome of the
proceedings to which it is currently a party (including those described above)
will not have a material adverse effect on the Company's consolidated financial
statements taken as a whole.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1996.
11
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, together with their ages and
business experience, are set forth below:
JOHN H. DASBURG, age 54, has served as President & Chief Executive
Officer and a director of NWAC and Northwest since 1990. Mr. Dasburg joined
Northwest in November 1989 as Executive Vice President-Finance and
Administration and was named President and Chief Executive Officer in November
1990. From 1987 to 1989, Mr. Dasburg served as President of Marriott's Lodging
Group and as an Executive Vice President of Marriott Corp. From 1980 through
1987, he held various senior executive positions at Marriott. Prior to 1980, he
was a partner of KPMG Peat Marwick. Mr. Dasburg is on the board of directors of
Owens Corning, The St. Paul Companies, Inc. and the Mayo Foundation.
JAMES A. LAWRENCE, age 44, has served as Executive Vice President &
Chief Financial Officer of NWAC and Northwest since October 1996. Prior to
joining Northwest, Mr. Lawrence was President & Chief Executive Officer of The
Pepsi-Cola Company, Asia, Middle East and Africa from 1993 to 1996. From 1992
through 1993, he served as Executive Vice President, Pepsi-Cola International.
Prior to joining PepsiCo in 1992, Mr. Lawrence co-founded a management
consulting firm, The LEK Partnership, and was a partner at Bain and Company.
MICHAEL E. LEVINE, age 55, has served as Executive Vice President-
Marketing & International of Northwest since August 1994. He joined Northwest
as Executive Vice President-Marketing in July 1992. Prior to joining Northwest,
Mr. Levine was a professor at Yale University's School of Management from 1987
to 1992, and was Dean from 1988 to 1992. Mr. Levine also served as Executive
Vice President-Marketing at Continental from 1981 to 1982 and then as President
and Chief Executive Officer of New York Air from 1982 to 1984. Mr. Levine held
senior positions at the U.S. Civil Aeronautics Board, serving as General
Director, International and Domestic Aviation, in 1979.
WILLIAM D. SLATTERY, age 54, has served as President of Northwest
Cargo & Charter, a division of Northwest, since August 1994. From August
1994 to December 1996, he also served as Executive Vice President of
Northwest. From June 1992 to August 1994, he served as Northwest's Executive
Vice President-International. He joined Northwest in April 1988 as Executive
Vice President-Operations and Chief Safety Officer. In 1987 and 1988, he
served as Executive Vice President of Carlson Travel Group, a unit of Carlson
Companies which is engaged in the travel agency business. From 1985 to 1987,
Mr. Slattery was Senior Vice President-Marketing of Air Cal, and from 1983 to
1985 he was President of Braniff, Inc. From 1980 to 1983 he was Vice
President-International of TWA.
DONALD A. WASHBURN, age 52, has served as Executive Vice President-
Customer Service & Operations of Northwest since July 1994. He joined Northwest
in 1990 and has served in a number of executive positions. From 1980 to 1990,
Mr. Washburn held various executive positions with Marriott Corporation,
including Executive Vice President and General Manager of Marriott's Courtyard
Division.
RICHARD H. ANDERSON, age 41, has served as Senior Vice
President-Technical Operations & Airport Affairs of NWAC and Northwest since
January 1997. From July 1994 to December 1996, he was Senior Vice
President-Labor Relations, State Affairs & Law. He joined Northwest in 1990
as Vice President-Deputy General Counsel. Prior to joining Northwest, Mr.
Anderson was Staff Vice President and Deputy General Counsel of Continental.
From 1989 to 1990, Mr. Anderson was Associate General Counsel of Continental.
CHRISTOPHER E. CLOUSER, age 45, has served as Senior Vice President-
Administration since September 1996. From July 1993 to September 1996, he
served as Senior Vice President-Communications, Advertising & Human Resources.
He joined Northwest in April 1991 as Senior Vice President-Corporate
Communications and Advertising. From 1988 to 1991, Mr. Clouser was Vice
President-Corporate Relations and Advertising for Bell Atlantic Corporation. He
also served on the board of directors of the Bell Telephone Company of
Pennsylvania. Mr. Clouser has previously held officer positions at Hallmark
Cards, U.S. Sprint and United Telecommunications, Inc.
12
<PAGE>
JOSEPH E. FRANCHT, JR., age 46, has been Senior Vice President-Finance
and Treasurer since July 1990. From 1980 to 1990, Mr. Francht held senior
executive positions with the New York branch of Banque Paribas, including the
post of Senior Vice President-Leveraged Capital Group.
RICHARD B. HIRST, age 52, has served as Senior Vice President-
Corporate Affairs of NWAC and Northwest since July 1994. He joined
Northwest as Senior Vice President, General Counsel in 1990. From 1986 to 1990,
Mr. Hirst served as Vice President, General Counsel and Secretary at
Continental.
MARK W. OSTERBERG, age 46, joined the Company as Vice President and
Chief Accounting Officer in June 1990. Prior to joining Northwest, Mr.
Osterberg held senior financial management positions with Braniff, Inc.,
including Senior Vice President-Finance, from 1984 to 1989.
DOUGLAS M. STEENLAND, age 45, has served as Senior Vice President,
General Counsel and Secretary of NWAC and Northwest since July 1994. He
joined Northwest as Vice President-Deputy General Counsel and Secretary in July
1991. Prior to joining Northwest, Mr. Steenland was a senior partner at the
Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson and Hand.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market under symbol
NWAC. The table below shows the high and low sales prices for the Company's
Class A Common Stock during 1996 and 1995:
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
Quarter HIGH LOW High Low
- ----------------------------------------------------------------------------
1st 55 1/8 40 1/2 28 1/2 15 7/8
2nd 52 7/8 38 35 3/4 24 3/4
3rd 40 1/2 34 42 7/8 33 1/4
4th 42 1/8 30 1/2 52 1/2 39 3/8
- ----------------------------------------------------------------------------
As of February 28, 1997 there were 458 stockholders of record.
Since the acquisition in 1989 of NWAC's principal subsidiary, NWA Inc., which is
the parent of Northwest, NWAC has not declared or paid any dividends on its
common stock and does not currently intend to do so. In addition, the Company
is effectively precluded from paying dividends or making other distributions to
the holders of the common stock or repurchasing the common stock without the
consent of the holders of the Series A and Series B Preferred Stock. While KLM
as one of the two holders of such shares has provided such consent, there can be
no assurance that the other holder will grant such a consent. In addition,
under the provisions of certain of the Company's debt arrangements, NWAC's
ability to pay dividends on or repurchase its common stock is restricted. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors, subject to applicable limitations under Delaware law, and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
LIQUIDITY FOR EMPLOYEE SHARES
13
<PAGE>
NWAC has previously contributed to the Northwest Airlines Corporation
Employee Stock Plan (the "Plan") shares of its capital stock representing
23,993,401 shares of Class A Common Stock on a fully converted basis, and
prior to March 31, 1997 it is obligated to make additional contributions
representing another 5,851,775 shares of Class A Common Stock on a fully
converted basis. Such contributed shares are periodically allocated to
individual participants' accounts in accordance with criteria specified in
the Plan.
A participant may from time to time direct the relevant trustee under the Plan
to sell all or any portion of the "liquid shares" allocated to such participant,
which have not been previously sold or withdrawn from the Plan. The aggregate
cumulative number of liquid shares that may be designated for sale by
participants (which will be reduced by prior sales or withdrawals from the Plan)
increases over time, as reflected in the following table:
<TABLE>
<CAPTION>
Aggregate Cumulative Aggregate Cumulative
Number of Number of
Date Liquid Shares Date Liquid Shares
---- -------------------- ---- --------------------
<S> <C> <C> <C>
12/31/96 to 3/30/97. . . 15,100,474 12/31/97 to 3/30/98 . . . . 24,255,039
3/31/97 to 6/29/97 . . . 17,640,028 3/31/98 to 6/29/98. . . . . 26,460,042
6/30/97 to 9/29/97 . . . 19,845,032 6/30/98 to 9/29/98. . . . . 28,665,046
9/30/97 to 12/30/97. . . 22,050,035 9/30/98 and thereafter. . . 29,845,176
</TABLE>
The number of liquid shares that an individual participant could direct for sale
as of a given date would be the "liquid percentage" of such participant's
allocated shares as of such period, minus the number of shares previously sold
or otherwise withdrawn from the Plan by such participant. The "liquid
percentage" means the percentage based on a fraction, the numerator of which is
the aggregate cumulative number of liquid shares as of the date of determination
and the denominator of which is the number of previously allocated shares as of
such date for all participants, without regard to prior sales or withdrawals.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY
NORTHWEST AIRLINES CORPORATION YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
Operating revenues
Passenger $ 8,598.3 $ 7,762.0 $ 7,010.1 $ 6,619.5 $ 6,277.3
Cargo 745.8 751.2 755.8 734.8 736.2
Other 536.4 571.7 559.0 510.5 446.5
- ----------------------------------------------------------------------------------------------------------------------------------
9,880.5 9,084.9 8,324.9 7,864.8 7,460.0
Operating expenses 8,826.7 8,171.5 7,485.3 7,586.5 7,829.9
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,053.8 913.4 839.6 278.3 (369.9)
Amounts before 1995 extraordinary
item and 1992 cumulative effect of
accounting change:
Income (loss) $ 536.1 $ 342.1(1) $ 295.5 $ (115.3) $ (970.7)(1)
Earnings (loss) per common share:
PRIMARY $ 4.93(2) $ 3.02(2) $ 2.92 $ (2.82) $ (16.11)
FULLY DILUTED $ 4.48(2) $ 2.85(2) $ 2.87 $ (2.82) $ (16.11)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (IN MILLIONS)
Cash, cash equivalents and unrestricted
short-term investments $ 752.1 $ 970.9 $ 968.3 $ 139.6 $ 244.7
Total assets 8,511.7 8,412.3 8,070.1 7,571.3 7,545.4
Long-term debt, including
current maturities 2,060.4 2,467.1 4,013.5 4,437.9 4,271.4
Long-term obligations under capital
leases, including current obligations 772.2 841.2 890.3 928.1 966.0
Mandatorily redeemable preferred security
of subsidiary 549.2 618.4 -- -- --
Redeemable preferred stock 602.6 945.5 795.0 749.9 566.1
Common stockholders' equity (deficit)(3) 92.9 (818.8) (1,370.7) (2,030.5) (1,732.5)
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Scheduled service:
Available seat miles (ASM) (millions) 93,913.7 87,472.0 85,015.6 87,212.5 89,647.3
Revenue passenger miles (millions) 68,639.1 62,515.2 57,873.2 58,130.1 58,624.9
Passenger load factor 73.1% 71.5% 68.1% 66.7% 65.4%
Revenue passengers (millions) 52.7 49.3 45.5 44.1 43.5
Revenue yield per passenger mile 12.53 CENTS 12.42 CENTS 12.11 CENTS 11.39 CENTS 10.71 CENTS
Passenger revenue per scheduled ASM 9.16 CENTS 8.87 CENTS 8.25 CENTS 7.59 CENTS 7.00 CENTS
Operating revenue per total ASM (4) 9.85 CENTS 9.58 CENTS 8.93 CENTS 8.23 CENTS 7.59 CENTS
Operating expense per total ASM (4) 8.78 CENTS 8.66 CENTS 8.08 CENTS 8.00 CENTS 8.10 CENTS
Operating expense excluding stock-based
compensation per total ASM (4) 8.52 CENTS 8.11 CENTS 7.95 CENTS 7.89 CENTS 8.10 CENTS
Cargo ton miles (millions) 2,215.8 2,246.3 2,322.3 2,188.0 2,106.9
Cargo revenue per ton mile 33.7 CENTS 33.4 CENTS 32.5 CENTS 33.6 CENTS 34.9 CENTS
Fuel gallons consumed (millions) 1,945.1 1,846.2 1,792.8 1,801.7 1,848.6
Average fuel cost per gallon 67.21 CENTS 55.66 CENTS 56.23 CENTS 62.09 CENTS 64.48 CENTS
Number of operating aircraft at year-end 399 380 361 358 366
Full-time equivalent employees at year-end 47,536 45,124 43,673 43,358 45,455
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1995 extraordinary gain was $49.9 million ($.53 per primary share and
$.49 per fully diluted share) and the 1992 cumulative effect of accounting
change was $108.8 million ($1.67 per share).
(2) Excludes the effects of the 1996 preferred stock transaction ($.74 per
primary share and $.67 per fully diluted share) and the 1995 preferred
stock transaction ($.62 per primary share and $.58 per fully diluted
share).
(3) No dividends have been paid on common stock for any period presented.
(4) Excludes the estimated revenues and expenses associated with the operation
of Northwest's fleet of eight 747 freighter aircraft and MLT Inc.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by the Item is set forth under "Item 5:
Other Events-Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 2 through 6 of the Company's Form 8-K dated
March 6, 1997, and is incorporated herein by reference.
On March 18, 1997, Northwest issued $150,000,000 of 8.375% notes
due 2004 and $100,000,000 of 8.70% notes due 2007.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth under "Item 5:
Other Events-Report of Ernst & Young LLP, Independent Auditors and
Consolidated Financial Statements and Notes" on pages 7 through 31 of the
Company's Form 8-K dated March 6, 1997, and is incorporated herein by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth under the
heading "Election of Directors-Information Concerning Director-Nominees" to be
included in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1996, and is incorporated herein by reference. The information regarding
executive officers is included in Part I of this report under the caption
"Executive Officers of the Registrant".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth under the
headings "Election of Directors--Compensation of Directors", "Election of
Directors--Compensation Committee Interlocks and Insider Participation" and
"Executive Compensation" to be included in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders to be filed with the Commission within 120
days of December 31, 1996, and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth under the
heading "Beneficial Ownership of Securities" to be included in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 1996, and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth under the
headings "Election of Directors--Compensation Committee Interlocks and Insider
Participation" and "Election of Directors--Related Party Transactions" to be
included in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1996, and is incorporated herein by reference.
15
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following is an index of the financial statements, schedule and exhibits
included in this Report.
(A) 1. FINANCIAL STATEMENTS: PAGE
----
Consolidated Balance Sheets--December 31, 1996 and
December 31, 1995 *
Consolidated Statements of Income--For the years ended
December 31, 1996, 1995 and 1994 *
Consolidated Statements of Cash Flows--For the years
ended December 31, 1996, 1995 and 1994 *
Consolidated Statements of Common Stockholders' Equity
(Deficit)--For the years ended December 31, 1996,
1995 and 1994 *
Notes to Consolidated Financial Statements *
---------------------------
* Incorporated in this Report by reference from pages 8 through
31 of the Company's Form 8-K dated March 6, 1997.
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II-Valuation and Qualifying Accounts--
For the years ended December 31, 1996, 1995 and 1994 S-1
Schedules not included have been omitted because they are not
applicable or because the required information is included in the
consolidated financial statements or notes thereto.
3. EXHIBITS
The following is an index of the exhibits included in this Report or
incorporated herein by reference.
3.1 Second Amended and Restated Certificate of Incorporation of NWAC
(filed as Exhibit 3.1 to the Registration Statement on Form S-1,
File No. 33-74210 (the "S-1") and incorporated herein by reference).
3.2 Certificate of Amendment to the Second Amended and Restated
Certificate of Incorporation of NWAC (filed as Exhibit 3.3 to the
S-1 and incorporated herein by reference).
3.3 Amended and Restated Bylaws of NWAC (filed as Exhibit 3.2 to the S-1
and incorporated herein by reference).
3.4 Restated Certificate of Incorporation of Northwest (filed as Exhibit
3.3 to Northwest's Registration Statement on Form S-3 File No. 33-
74772 (the "Debt S-3") and incorporated herein by reference).
3.5 Bylaws of Northwest (filed as Exhibit 3.4 to the Debt S-3 and
incorporated herein by reference).
4.1 Amended and Restated Certificate of Designation of Series A
Preferred Stock of NWAC (included in Exhibit 3.1).
16
<PAGE>
4.2 Amended and Restated Certificate of Designation of Series B
Preferred Stock of NWAC (included in Exhibit 3.1).
4.3 Certificate of Designation of Series C Preferred Stock of NWAC
(included in Exhibit 3.1).
4.4 Certificate of Designation of Series D Junior Participating
Preferred Stock of NWAC (filed as Exhibit A to Exhibit 1 to NWAC's
Current Report on Form 8-K dated November 16, 1995 (the "8-K") and
incorporated herein by reference).
4.5 Rights Agreement dated as of November 16, 1995 between NWAC and
Norwest Bank Minnesota, N.A., as Rights Agent (filed as Exhibit 1 to
the 8-K and incorporated herein by reference).
4.6 Share Exchange Agreement dated as of June 28, 1996 between NWAC and
KLM and First Amendment of Share Exchange Agreement dated as of
July 25, 1996 between NWAC and KLM (filed as Exhibits 10.1 and 10.2
to NWAC's Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
4.7 The registrant hereby agrees to furnish to the Commission, upon
request, copies of certain instruments defining the rights of
holders of long-term debt of the kind described in Item 601 (b) (4)
of Regulation S-K.
9.1 Voting Trust Agreement dated as of March 29, 1990 and Amendment No.
1 thereto among NWAC, KLM and Citibank N.A., as trustee (filed as
Exhibit 9.1 to the S-1 and incorporated herein by reference).
10.1 Second Amended and Restated Investor Stockholders' Agreement dated
as of December 23, 1993 among NWAC and the Original Investors named
therein ("Second Amended and Restated Stockholders' Agreement")
(filed as Exhibit 4.9 to the S-1 and incorporated herein by
reference).
10.2 Supplement dated as of December 23, 1993 to Second Amended and
Restated Stockholders' Agreement (filed as Exhibit 4.11 to NWAC's
Annual Report on Form 10-K for the year ended December 31, 1994 (the
"10-K") and incorporated herein by reference).
10.3 Amendment dated as of December 14, 1994 to Second Amended and
Restated Stockholders' Agreement (filed as Exhibit 4.13 to the 10-K
and incorporated herein by reference).
10.4 Amendment dated as of January 6, 1995 to Second Amended and Restated
Stockholders' Agreement (filed as Exhibit 4.14 to the 10-K and
incorporated herein by reference).
10.5 Amendment dated as of January 25, 1995 to Second Amended and
Restated Stockholders' Agreement (filed as Exhibit 4.15 to the 10-K
and incorporated herein by reference).
10.6 Amendment dated as of October 23, 1995 to the Second Amended and
Restated Stockholders' Agreement (filed as Exhibit 4.11 to NWAC's
Registration Statement on Form S-3, File No. 33-98494 (the "S-3")
and incorporated herein by reference).
10.7 Stockholders' Agreement, dated as of September 9, 1994, among NWAC,
the Original Investors named therein and the Unions named therein
(the "Stockholders' Agreement") (filed as Exhibit 4.13 to NWAC's and
Northwest's Registration Statement on Form S-4, File No. 33-87250,
and incorporated herein by reference).
10.8 Amendment dated as of October 3, 1994 to Stockholders' Agreement
(filed as Exhibit 4.12 to the 10-K and incorporated herein by
reference).
17
<PAGE>
10.9 Amendment dated as of December 14, 1994 to the Stockholders'
Agreement (filed as Exhibit 4.22 to the 10-K and incorporated herein
by reference).
10.10 Amendment dated as of January 25, 1995 to the Stockholders'
Agreement (filed as Exhibit 4.23 to the 10-K and incorporated herein
by reference).
10.11 Amendment dated as of November 1, 1995 to the Stockholders'
Agreement (filed as Exhibit 4.12 to the S-3 and incorporated herein
by reference).
10.12 Series B Preferred Stock Registration Rights Agreement dated as of
July 21, 1989 among Wings Holdings Inc. and the holders of the
Series B Preferred Stock (filed as Exhibit 4.19 to the 10-K and
incorporated herein by reference).
10.13 First Amended and Restated Common Stock Registration Rights
Agreement among NWAC, the holders of the Series C Preferred Stock
and the Original Investors named therein (filed as Exhibit 4.18 to
the 10-K and incorporated herein by reference).
10.14 Registration Participation Agreement dated as of October 20, 1995
among the Unions named therein, holders of Series C Preferred Stock
and NWAC (filed as Exhibit 10.14 to NWAC's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference).
10.15 Agreement dated as of December 23, 1993 between the Company and
Koninklijke Luchtvaart Maatschappij N.V. ("KLM") (filed as Exhibit
4.11 to the S-1 and incorporated herein by reference).
10.16 Commercial Cooperation and Integration Agreement dated as of
September 9, 1992 between Northwest and KLM (filed as Exhibit 10.1
to the S-1 and incorporated herein by reference).
10.17 Sales Intermediary Agreement between Northwest and KLM (filed as
Exhibit 10.2 to the S-1 and incorporated herein by reference).
10.18 Code Sharing Agreement between Northwest and KLM (filed as Exhibit
10.4 to the S-1 and incorporated herein by reference).
10.19 Special Facilities Lease between Charter County of Wayne, Michigan
and Republic Airlines, Inc. dated December 1, 1985 and Guarantee by
and between Northwest (as successor to Republic) and Manufacturers
National Bank of Detroit (filed as Exhibit 10.6 to the S-1 and
incorporated herein by reference).
10.20 Indenture of Lease Agreement dated October 5, 1961 and related
amendments, between the Board of County Road Commissioner of the
County of Wayne, Michigan and Northwest, as successor to North
Central Airlines, Inc. (filed as Exhibit 10.7 to the S-1 and
incorporated herein by reference).
10.21 Amendatory Agreement between The Charter County of Wayne, Michigan
and Northwest dated as of October 8, 1996 (filed as
Exhibit 10.1 to NWAC's Form 10-Q for the quarter ended September 30,
1996 (the "10-Q") and incorporated herein by reference).
10.22 First Amended and Restated Airport Agreement between The Charter
County of Wayne, Michigan and Northwest dated as of October 10, 1996
(filed as Exhibit 10.2 to the 10-Q and incorporated herein by
reference).
10.23 Second Amended and Restated Airport Agreement between The Charter
County of Wayne, Michigan and Northwest dated as of October 10,
1996 (filed as Exhibit 10.3 to the 10-Q incorporated herein by
reference).
18
<PAGE>
10.24 Airport Terminal Building Lease for Minneapolis-St. Paul
International Airport dated as of June 18, 1964 and related
amendments entered into by and between The Minneapolis-St. Paul
Metropolitan Airports Commission and Northwest, as successor to
Northwest Orient Airlines, Inc. (filed as Exhibit 10.8 to the S-1
and incorporated herein by reference).
10.25 Master Financing Agreement dated as of March 29, 1992 among NWAC,
Northwest and the State of Minnesota (filed as Exhibit 10.9 to the
S-1 and incorporated herein by reference).
10.26 Facilities and Equipment Lease Agreement dated March 27, 1992
between Metropolitan Airports Commission as Lessor and Northwest
Aerospace Training Corporation, as Lessee (filed as Exhibit 10.10 to
the S-1 and incorporated herein by reference).
10.27 Facilities and Equipment Lease Agreement dated as of March 27, 1992
between Metropolitan Airports Commission as Lessor and NWA Inc.
(filed as Exhibit 10.11 to the S-1 and incorporated herein by
reference).
10.28 Facilities and Equipment Lease Agreement dated as of March 27, 1992
between Metropolitan Airports Commission as Lessor and Northwest
(filed as Exhibit 10.12 to the S-1 and incorporated herein by
reference).
10.29 Equity Letter Agreement dated as of August 1, 1993 between Northwest
and The Air Line Pilots Association International (filed as Exhibit
10.13 to the S-1 and incorporated herein by reference).
10.30 Equity Letter Agreement dated as of August 1, 1993 between Northwest
and The International Association of Machinists and Aerospace
Workers (filed as Exhibit 10.14 to the S-1 and incorporated herein
by reference).
10.31 Equity Letter Agreement dated as of August 1, 1993 between Northwest
and The International Brotherhood of Teamsters (filed as Exhibit
10.15 to the S-1 and incorporated herein by reference).
10.32 Equity Letter Agreement dated as of August 1, 1993 between Northwest
and The Transport Workers Union of America (filed as Exhibit 10.16
to the S-1 and incorporated herein by reference).
10.33 Equity Letter Agreement dated as of August 1, 1993 between Northwest
and the Airline Technical Support Association (filed as Exhibit
10.17 to the S-1 and incorporated herein by reference).
10.34 Equity Letter Agreement dated as of August 1, 1993 between Northwest
and The Northwest Airlines Meteorologists Association (filed as
Exhibit 10.18 to the S-1 and incorporated herein by reference).
10.35 Amendment dated as of December 14, 1994 to the Equity Letter
Agreements listed as Exhibits 10.26 through 10.31 (filed as Exhibit
10.19 to the 10-K and incorporated herein by reference).
10.36 Labor Cost Savings Agreement dated as of July 30, 1993 between
Northwest and The Air Line Pilots Association International (filed
as Exhibit 10.19 to the S-1 and incorporated herein by reference).
10.37 Labor Cost Savings Agreement dated as of August 4, 1993 between
Northwest and The International Association of Machinists and
Aerospace Workers (filed as Exhibit 10.20 to the S-1 and
incorporated herein by reference).
10.38 Labor Cost Savings Agreement dated as of July 30, 1993 between
Northwest and The International Brotherhood of Teamsters (filed as
Exhibit 10.21 to the S-1 and incorporated herein by reference).
19
<PAGE>
10.39 Labor Cost Savings Agreement dated as of July 30, 1993 between
Northwest and The Transport Workers Union of America (filed as
Exhibit 10.22 to the S-1 and incorporated herein by reference).
10.40 Labor Cost Savings Agreement dated as of July 29, 1993 between
Northwest and The Airline Technical Support Association (filed as
Exhibit 10.23 to the S-1 and incorporated herein by reference).
10.41 Labor Cost Savings Agreement dated as of July 28, 1993 between
Northwest and The Northwest Airlines Meteorologists Association
(filed as Exhibit 10.24 to the S-1 and incorporated herein by
reference).
10.42 Purchase Agreement No. 1630 between Northwest and The Boeing Company
("Boeing") dated December 1, 1989 and related letter agreements
relating to the purchase of 747-400 aircraft (filed as Exhibit 10.34
to the S-1 and incorporated herein by reference).
10.43 Supplemental Agreement No. 4 to Purchase Agreement No. 1630, dated
as of February 3,1995, and related letter agreements between Boeing
and Northwest (filed as Exhibit 10.34 to the 10-K and incorporated
herein by reference; the Commission has granted confidential
treatment for certain portions of this document).
10.44 Purchase Agreement No. 1631 between Northwest and Boeing and related
letter agreements relating to the acquisition of 757 aircraft (filed
as Exhibit 10.35 to the S-1 and incorporated herein by reference).
10.45 Supplemental Agreement No. 4 to Purchase Agreement No. 1631, dated
as of February 3, 1995, and related letter agreements between Boeing
and Northwest. (filed as Exhibit 10.36 to the 10-K and incorporated
herein by reference; the Commission has granted confidential
treatment for certain portions of this document).
10.46 Supplemental Agreement No. 5 to Purchase Agreement No. 1631, dated
as of February 17, 1995, and related letter agreements between
Boeing and Northwest. (filed as Exhibit 10.37 to the 10-K and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.47 Airbus A330 Purchase Agreement dated February 10, 1989 and related
letter agreements between AVSA S.A.R.L. and Northwest Aircraft Inc.
(filed as Exhibit 10.36 to the S-1 and incorporated herein by
reference).
10.48 Amendment No. 5 to A330 Purchase Agreement among AVSA, S.A.R.L. and
Northwest Aircraft Inc. (filed as Exhibit 10.4 to the 10-Q and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
* 10.49 Employment Agreement with Michael E. Levine dated as of September
1, 1996.
* 10.50 Employment Agreement with Christopher E. Clouser dated as of
September 1, 1996.
* 10.51 Employment Agreement with Douglas M. Steenland dated as of
September 1, 1996.
* 10.52 Employment Agreement with Donald A. Washburn dated as of September
1, 1996.
* 10.53 Northwest Retirement Plan for Management Employees (filed as Exhibit
10.41 to the S-1 and incorporated herein by reference).
* 10.54 Key Employee Annual Cash Incentive Program (filed as Exhibit 10.42
to the S-1 and incorporated herein by reference).
20
<PAGE>
* 10.55 Northwest Officers Excess Benefit Plan (filed as Exhibit 10.43 to
the S-1 and incorporated herein by reference).
* 10.56 1990 Stock Option Plan for Key Employees of the Company (filed as
Exhibit 10.44 to the S-1 and incorporated herein by reference).
* 10.57 1994 NWAC Stock Incentive Plan, as amended (filed as Exhibit 10.5 to
the 10-Q and incorporated herein by reference).
* 10.58 1996 NWAC Retention and Long-Term Incentive Compensation Plan (filed
as Exhibit 10.53 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference).
* 10.59 Unit Award Agreement with John H. Dasburg dated as of January 26,
1996 (filed as Exhibit 10.54 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference).
* 10.60 Agreement Evidencing A Grant of Phantom Stock Units for John H.
Dasburg dated as of January 26, 1996 (filed as Exhibit 10.55 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
* 10.61 Northwest Airlines, Inc. Supplemental Executive Retirement Plan
(1995 Statement).
* 10.62 Letter agreements dated December 20, 1996 and March 14, 1996 with
John H. Dasburg with respect to participation in the Northwest
Airlines, Inc. Supplemental Executive Retirement Program.
* 10.63 Form of Non-Qualified Stock Option Agreement and form of Amendment
thereto for executive officers under the 1994 NWAC Stock Incentive
Plan, as amended.
11.1 Computation of Primary Earnings Per Share.
11.2 Computation of Fully Diluted Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Requirements.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
99.1 NWAC Current Report on Form 8-K dated March 6, 1997, certain
portions of which are incorporated by reference herein.
- ---------------------------------------
* Compensatory plans in which the directors and executive officers of NWAC
participate.
(b) REPORTS ON FORM 8-K:
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 27th day of March,
1997.
NORTHWEST AIRLINES CORPORATION
By /s/ Mark W. Osterberg
----------------------------------
Mark W. Osterberg
VICE PRESIDENT & CHIEF ACCOUNTING
OFFICER (PRINCIPAL ACCOUNTING
OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the 27th day of March, 1997 by the
following persons on behalf of the registrant and in the capacities indicated.
/s/ John H. Dasburg /s/ Thomas Ducy
------------------------------ --------------------------------------
John H. Dasburg Thomas Ducy
PRESIDENT, CHIEF EXECUTIVE DIRECTOR
OFFICER & DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
--------------------------------------
/s/ James A.Lawrence Marvin L. Griswold
------------------------------ DIRECTOR
James A. Lawrence
EXECUTIVE VICE PRESIDENT & /s/ Thomas L. Kempner
CHIEF FINANCIAL OFFICER --------------------------------------
(PRINCIPAL FINANCIAL OFFICER) Thomas L. Kempner
DIRECTOR
/s/ Mark W. Osterberg
------------------------------ /s/ Frederic V. Malek
Mark W. Osterberg --------------------------------------
VICE PRESIDENT & CHIEF Frederic V. Malek
ACCOUNTING OFFICER (PRINCIPAL DIRECTOR
ACCOUNTING OFFICER)
/s/ Walter F. Mondale
/s/ Alfred A. Checchi --------------------------------------
------------------------------ Walter F. Mondale
Alfred A. Checchi DIRECTOR
CO-CHAIRMAN OF THE BOARD
/s/ V.A. Ravindran
/s/ Gary L. Wilson --------------------------------------
------------------------------ V.A. Ravindran
Gary L. Wilson DIRECTOR
CO-CHAIRMAN OF THE BOARD
/s/ Richard C. Blum --------------------------------------
------------------------------ George J. Vojta
Richard C. Blum DIRECTOR
DIRECTOR
/s/ Duane E. Woerth
--------------------------------------
Duane E. Woerth
DIRECTOR
22
<PAGE>
NORTHWEST AIRLINES CORPORATION
SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------ ---------- ---------------------- ---------- ------
ADDITIONS
----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END
DESCRIPTION OF PERIOD EXPENSES --DESCRIBE --DESCRIBE OF PERIOD
- ----------------------------------------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 21.5 $ 6.1 $ -- $ 7.9 (1) $ 19.7
Accumulated allowance for depreciation
of flight equipment spare parts 111.8 21.9 2.7 (2) 9.1 (3) 127.3
YEAR ENDED DECEMBER 31, 1995
Allowances deducted from asset accounts:
Allowance for doubtful accounts 19.5 10.6 -- 8.6 (1) 21.5
Accumulated allowance for depreciation
of flight equipment spare parts 86.2 20.3 12.7 (2) 7.4 (3) 111.8
YEAR ENDED DECEMBER 31, 1994
Allowances deducted from asset accounts:
Allowance for doubtful accounts 22.0 15.2 -- 17.7 (1) 19.5
Accumulated allowance for depreciation
of flight equipment spare parts 69.6 18.2 7.3 (2) 8.9 (2) 86.2
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Interaccount transfers
(3) Dispositions and write-offs
S-1
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
between
NORTHWEST AIRLINES, INC.
and
MICHAEL E. LEVINE
dated as of
September 1, 1996
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
MANAGEMENT COMPENSATION AGREEMENT made as of the 1st day of
September, 1996 between Northwest Airlines, Inc., a Delaware corporation (the
"Company")and Michael E. Levine (the "Executive").
PREAMBLE
The Company and Executive previously entered into a Management
Compensation Agreement dated as of October 1, 1994 (the "Prior Agreement").
As of the date hereof, the Company and Executive have agreed to replace the
Prior Agreement with this Agreement with this Agreement, which shall
supersede the Prior Agreement in all respects.
In consideration of the foregoing and of the respective covenants
and agreements herein contained, the Company and Executive have agreed as
follows:
1. TERMS OF EMPLOYMENT.
1.1 EMPLOYMENT. The Company agrees to continue to employ
Executive, and Executive agrees to continue to serve the Company, on the
terms and conditions set forth herein.
1.2 POSITION AND DUTIES. Executive shall continue to have his
powers and duties as on the Effective Date and shall have such other powers
and duties as may from time to time be prescribed by the Board, provided that
such powers and duties are consistent with or represent a promotion from
Executive's duties as of the Effective Date, unless otherwise consented to in
writing by Executive; provided, however, as long as Executive retains a
substantial portion of his then current oversight responsibility, the Board
shall be permitted to transfer a portion of Executive's oversight
responsibility without the consent of Executive. Executive shall devote
substantially all his working time and efforts to the business and affairs of
the Company and its subsidiaries.
2. COMPENSATION.
2.1 BASE SALARY. Executive's Base Salary shall be his annual base
salary in effect on the Effective Date, as increased thereafter by the
Company. Executive's Base Salary in effect from time to time may only be
reduced in connection with a Company-wide base wage reduction, by an amount
not to exceed 20% of Base Salary in effect on the date of such Company-wide
wage reduction. For purposes of calculating any other payments or benefits
hereunder (except as specified in Section 2.4) any reductions in Base Salary
shall be disregarded. Executive's Base Salary shall be payable in accordance
with the Company's normal payroll polices.
<PAGE>
2
2.2 BONUS. Executive shall be entitled to participate in the
Company's Key Employee Cash Incentive Bonus Program, and any successor annual
bonus plan, the terms and conditions of which shall be established by the
Board in its sole discretion from time to time.
2.3 EXPENSES. During the term of Executive's employment hereunder,
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred in performing services hereunder, provided that
Executive properly accounts therefor in accordance with written Company
policy.
2.4 COMPENSATION AND BENEFIT PROGRAMS OF THE COMPANY. Except as set
forth below, Executive shall continue while employed hereunder to participate
in the Company's employee compensation and benefit programs (or any successor
programs) at levels in effect on the Effective Date. Exceptions to the
preceding sentence are:
(a) Amounts payable to Executive under the Company's benefit
programs may be reduced to reflect a Company-wide benefit reduction, in
the same manner that Company employees are generally affected by such
reduction.
(b) Executive shall not participate in any severance pay plan or
annual bonus plan maintained by the Company except to the extent necessary
to receive any severance or bonus payments specifically provided for
hereunder.
2.5 MEDICAL BENEFITS. While employed hereunder, Executive shall be
reimbursed by the Company for all out of pocket medical expenses incurred by
him and not otherwise paid or provided for under any medical plan maintained
for the benefit of Executive.
2.6 SERP. Executive shall be a participant in the Company's
Supplemental Executive Retirement Program (the "SERP"), a copy of which is
attached hereto, and shall be entitled to receive the benefits provided for
therein.
(a) As provided for in Section 4.1.1(a)(iii) of the SERP, the grant
to Executive of two additional years of Benefit Service for each actual year
of employment completed shall be with respect to Executive's employment
commencing on and after March 24, 1994.
(b) A pre-retirement death benefit shall be payable, in the event
of Executive's death while employed hereunder, to the individual who was
Executive's spouse on the date of death. Such benefit shall be in an amount
equal to 50% of the Executive's Base Salary at the time of his death and such
amount shall be payable annually for a maximum of ten years or, if earlier,
until Executive would have attained age 65; provided, however, that the
amounts payable hereunder shall be reduced by
<PAGE>
3
all pre-retirement death benefits payable to Executive's spouse under the
Company's qualified pension plan or a supplemental executive retirement plan.
3. OTHER BENEFITS.
3.1 AIRLINE PASS. Executive is entitled to receive a lifetime
airline pass for the personal use of such Executive and his spouse and
children so long as spouses and children of employees generally are eligible
for nonrevenue travel pursuant to the Company's pass policies (hereinafter,
"Eligible Individuals"). Such airline pass (the "Airline Pass") shall entitle
Executive and Eligible Individuals to travel on regularly scheduled Northwest
domestic and international flights, subject to charges then applicable to
senior executives of the Company and their dependents, with boarding priority
of (i) F-1 or the equivalent thereof for ten years from and after the date
such pass is issued, (ii) Y-1/F-2 or the equivalent thereof for the next
succeeding ten years and (iii) 2-R or the equivalent thereof after the
aggregate twenty-year period described in clauses (i) and (ii) above. Each
Executive shall be responsible for any personal income tax liability arising
from such pass travel. The Airline Pass shall be issued to Executive upon
Executive's termination of employment with the Company; provided, however,
that all benefits under this Section 3.1 shall immediately and permanently
cease in the event Executive is or becomes, at any time thereafter, an
employee of any of the top five airlines in the United States (other than the
Company) ranked by revenue passenger miles (the "Top Five Airlines").
3.2 OTHER MEDICAL BENEFITS. In the event Executive remains an
employee of the Company from the date of this Agreement to September 1, 1998,
Executive and his covered dependents (only as long as they shall remain
dependents) shall be entitled to medical coverage for the life of Executive
and his spouse; provided, however, if and for so long as Executive is
employed by another employer, medical coverage hereunder will become
secondary to any coverage provided by the new employer.
4. TERMINATION OF EMPLOYMENT.
4.1 UPON DEATH. Executive's employment hereunder shall terminate
upon his death.
4.2 BY THE COMPANY. The Company may terminate Executive's
employment hereunder at any time with or without Cause.
4.3 BY THE EXECUTIVE. Executive may terminate his employment
hereunder at any time for any reason.
4.4 NOTICE OF TERMINATION, PAYMENTS. Any termination of Executive's
employment hereunder (other than by death) shall be communicated by 30 days
advance written Notice of Termination
<PAGE>
4
by the terminating party to the other party to this Agreement; provided that
no advance Notice of Termination of Executive for Cause by the Company is
required. Unless otherwise provided in Section 5, any amounts owed by the
Company to Executive pursuant to Section 5 shall be paid on the Date of
Termination.
5. PAYMENTS IN THE EVENT OF TERMINATION OF EMPLOYMENT.
5.1 PAYMENTS IN THE EVENT OF TERMINATION BY THE COMPANY FOR CAUSE
OR VOLUNTARY TERMINATION BY EXECUTIVE. Except as provided in Section 5.3, if
Executive's employment hereunder is terminated by the Company for Cause or by
Executive other than for Good Reason, the Company shall pay Executive (a) his
accrued and unpaid Base Salary through the Date of Termination and (b) any
payments or other rights or benefits Executive may be otherwise entitled to
receive pursuant to the terms of (i) any retirement, pension or other
employee benefit or compensation plan maintained by the Company at the time
or times provided therein or (ii) Sections 2.6 and 3 hereof.
5.2 PAYMENTS IN THE EVENT OF ANY OTHER TERMINATION OF EMPLOYMENT.
Except as provided in Section 5.3, if Executive's employment hereunder is
terminated by the Company other than for Cause, as a result of death or
Disability or by Executive for Good Reason:
(a) The Company shall pay Executive (i) his accrued and unpaid Base
Salary through the Date of Termination, (ii) any bonus under the Key
Employee Cash Incentive Bonus Program, or any successor annual bonus plan,
(the "Incentive Bonus") for any calendar year ended before the Date of
Termination, (iii) a pro rata share (based on days employed during the
applicable year) of the Incentive Bonus Executive would otherwise have
received with respect to the year in which the Date of Termination
occurs, payable at the time the Incentive Bonus would otherwise be
payable to Executive; provided, however, that 100% of the Incentive Bonus
shall be determined solely with reference to the financial performance of
the Company for the year (based on the goals previously established with
respect thereto) (rather than a portion of the Incentive Bonus determined
on the basis of individual performance); provided, further, in the event
that Company's performance exceeds 100% of the financial performance
target for the year, that portion of the Incentive Bonus that would
have, but for this Section 5.2(a), related to the achievement of the
individual performance target shall be 100% and (iv) any payments or
other rights or benefits Executive may be otherwise entitled to receive
pursuant to the terms of (x) any retirement, pension or other employee
benefit or compensation plan maintained by the Company at the time or
times provided therein or (y) Sections 2.6 and 3 hereof.
<PAGE>
5
(b) In addition to the compensation and benefits described in
Section 5.2(a):
(i) The Company shall pay Executive a lump sum amount equal to
two times the sum of (i) Executive's Base Salary and (ii) the
target Incentive Bonus for Executive with respect to the year in
which the Date of Termination occurs (or if no target has been set
for that year, the target Incentive Bonus for the immediately
preceding year).
(ii) Executive's pension shall vest with respect to his years
of employment with the Company and any subsidiary of the Company.
In addition, irrespective of Executive's actual full years of
employment from March 25, 1994 through his termination under this
Section 5.2, Executive shall be granted service credit as if he
were an employee of Company for the number of full years necessary
to achieve the maximum additional accruals under Section 2.6(a)
herein and Section 4.1.1(a)(iii) of the SERP; provided, however,
that any SERP benefit shall continue to be subject to Section 7 of
the SERP. Any such vested pension benefits which cannot be paid
under the Company's qualified pension plan shall be paid directly
by the Company.
(iii) Executive and his covered dependents (only so long as
they shall remain dependents) shall be entitled to medical coverage
for the life of Executive and his spouse; provided, however, if
Executive is employed by another employer, medical coverage
hereunder will become secondary to any coverage provided by the new
employer. With regard to group life insurance and group disability
insurance, until the earlier of the second anniversary of
Executive's Date of Termination or the date Executive is employed
by a new employer, Executive, his dependents, beneficiaries and
estate shall be entitled to all benefits under such group life
insurance and group disability insurance as if Executive were still
employed by the Company hereunder during such period. If any such
benefits cannot be provided to Executive for any reason, the
Company shall pay to Executive, or pay Executive the cost of
obtaining, such benefits.
(c) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 5.2 by seeking other employment or
otherwise, and no such payment shall be offset or reduced as a result of
Executive obtaining new employment.
<PAGE>
6
5.3 PAYMENTS FOR CERTAIN TERMINATIONS OF EMPLOYMENT AFTER A CHANGE
IN CONTROL. If Executive elects to terminate his employment for any reason
during the six month period commencing on the second anniversary of the Change
in Control, or in the event of termination by the Company other than for
Cause or termination by Executive for Good Reason within two years after a
Change in Control, Executive shall receive all of the payments, and shall be
accorded all of the rights, set forth in Section 5.2. All other terminations
of Executive's employment shall be governed by Sections 4 and 5 of this
Agreement irrespective of a Change of Control.
5.4 EXCISE TAX.
(a) If any payment or distribution by the Company to or for the
benefit of Executive (whether paid or payable pursuant to this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 5.4 (a "Payment")) is subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties thereon (together the
"Excise Tax") then Executive shall be entitled to an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive of all
taxes including, without limitation, any income taxes (together with any
interest or penalties thereon, the "Additional Income tax") or any Excise
Tax, imposed upon the Gross-Up Payment Executive retains an amount of the
Gross-up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to Section 5.4(c), all determinations required to be
made under this Section 5.4, including whether a Gross-Up Payment is required
and the amount of such Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit its financial
statements (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and executive within fifteen (15) business
days after the receipt of notice from Executive that there has been a
Payment, or such earlier time as is requested by the Company. All fees and
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 5.4, shall be paid
to Executive within five (5) business days after the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm
shall be binding upon the Company and Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
additional Gross-Up payments should have been made by the Company (an
"Underpayment"). If the Company exhausts its remedies pursuant to Section
5.4(c) and Executive thereafter is
<PAGE>
7
required to make a payment of any Excise Tax, the accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notice shall be given as soon
as practicable but no later than ten (10) business days after Executive knows
of such claim and shall apprise the Company of the nature and date of
requested payment of such claim. Executive shall not pay such claim before
the earlier of (x) the date thirty (30) days after Executive's notice to the
Company or (y) the date on which payment of taxes with respect to such claim
is due. If the Company notifies Executive in writing prior to the expiration
of such period that it desires to contest such claim, Executive shall:
(i) give the Company any reasonable requested information relating
to such claim;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim; provided, however that the Company shall bear and pay
directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify
and hold such Executive harmless, on an after-tax basis, for any Excise
Tax or additional Income Tax imposed as a result of such representation
and payment of costs and expenses. Without limiting this Section 5.4(c),
the Company shall control all proceeding taken in connection with such
contest and, at its sole option, may (1) pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and (2) either direct
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner. Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a
court of initial jurisdiction and in one or more appellate courts, as
the Company shall determine; provided, however, that if the Company
directs such Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to Executive, on an
interest-free basis, and shall indemnify and hold Executive harmless,
on an after-tax basis, from any Excise Tax or Income Tax imposed with
<PAGE>
8
respect to such advance; and further provided that any extension of the
statute of limitations for the taxable year of Executive with respect to
which such contested amount is claimed to be due is limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest any other issue raised
by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of any amount advanced by
the Company pursuant to Section 5.4(c), Executive becomes entitled to
receive any refund with respect to such claim, executive shall (subject
to the Company's complying with the requirements of Section 5.4(c))
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If,
after the receipt by Executive of an amount advanced by the Company
pursuant to Section 5.4(c), a determination is made that such Executive
shall not be entitled to any refund with respect to such claim and the
Company does not notify Executive in writing of its intent to contest
such denial of refund prior to the expiration of thirty days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of any Gross-Up Payment required to be
paid.
6. CONFIDENTIALITY; NON-COMPETE.
While employed by the Company and thereafter, Executive shall not
disclose any confidential information either directly or indirectly, to
anyone (other than the Company, its employees and advisors), or use such
information for his own account, or for the account of any other person or
entity, without the prior written consent of the Company or except as
required by law. This confidentiality covenant has no temporal or
geographical restriction. Upon termination of this Agreement, Executive
shall promptly supply to the Company all property and any other tangible
product or document which has been produced by, received by or otherwise
submitted to Executive during or prior to his term of employment, and shall
not retain any copies thereof.
Executive acknowledges that his services are of special, unique and
extraordinary value to the Company. Accordingly, in the event Executive
resigns without Good Reason or is terminated for Cause during the term
hereof, Executive shall not at any time prior to the first anniversary of the
Date of Termination become an employee, consultant, officer, partner or
director of any air carrier which competes with the Company (or any of its
affiliates) or have any significant interest (I.E., 10% or more of the voting
stock) in any such air carrier. This covenant not to compete shall expire on
December 31, 1998 and thereafter shall no longer be applicable to Executive;
<PAGE>
9
provided, however, if on or prior to December 31, 1998, Executive has
resigned without Good Reason or has been terminated for Cause, the
non-compete shall remain in full force and effect and shall be enforceable
according to its terms until the first anniversary of Executive's Date of
Termination, notwithstanding the December 31, 1998 expiration of the covenant
not to compete provided for herein.
Executive agrees that any breach of terms of this Section 6 would
result in irreparable injury and damage for which there would be no adequate
remedy at law, and that, in the event of said breach or any threat of breach,
the Company shall be entitled to an immediate injunction and restraining order
to prevent such breach or threatened breach, without having to prove damages,
in addition to any other remedies to which the Company may be entitled at law
or in equity. Executive further agrees that the provisions of the covenant not
to compete are reasonable. Should a court determine, however, that any
provision of the covenant not to compete is unreasonable, either in period of
time, geographical area, or otherwise, the parties hereto agree that the
covenant should be interpreted and enforced to the maximum extent which such
court deems reasonable. The provisions of this Section 6 shall survive any
termination of this Agreement and Executive's term of employment. The
existence of any claim or cause of action or otherwise, shall not constitute
a defense to the enforcement of the covenants and agreements of this Section
6.
7. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall bind any successor to Significant Assets,
whether by purchase, merger, consolidation or otherwise, in the same manner
and to the same extent that the Company would be obligated under this
Agreement if no such succession had taken place. Notwithstanding that a
successor to Significant Assets becomes bound to this Agreement, the Company
shall continue to be liable for the obligations hereunder as a guarantor. In
any agreement providing for succession to Significant Assets, the Company
shall cause each and every successor expressly and unconditionally to assume
and agree to perform the Company's obligations under this Agreement.
(b) In the event that another air carrier directly or indirectly
acquires Significant Assets, the Company shall cause such airline to provide
Executive and Eligible Individuals with pass privileges equivalent to those
provided under the Airline Pass described in Section 3.1.
(c) This Agreement and all rights of Executive hereunder shall inure
to the benefit of and be enforceable by, Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
<PAGE>
10
8. TERM.
The term of this Agreement shall commence on the Effective Date and
end upon the Executive's termination of employment. The rights and obligations
of the Company and Executive shall survive the termination of this Agreement
to the extent necessary to give effect to the terms hereof.
9. NOTICES.
Notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly given when
delivered to and mailed by United States mail, addressed: (a) if to
Executive, Michael E. Levine, 2675 E. Lake of the Isle Parkway, Minneapolis,
Minnesota 55408, and
(b) if to the Company, c/o Northwest Airlines, Inc., 5101 Northwest
Drive, St. Paul, Minnesota 55111-3034, Attention: General Counsel, or to such
other address as may have been furnished in writing.
10. COUNSEL FEES AND INDEMNIFICATION.
(a) The Company shall pay, or promptly reimburse on an as-incurred
basis to Executive, the reasonable fees and expenses of Executive's legal
counsel for its services rendered in connection with, Executive's enforcement
of this Agreement provided, however, that if Executive institutes any
proceeding to enforce this Agreement and the judge, arbitrator or other
individual presiding over the proceeding affirmatively finds that Executive
instituted the proceeding in bad faith, Executive shall pay all costs and
expenses, including attorney's fees, of Executive and the Company.
(b) The Company shall indemnify and hold Executive harmless, to the
maximum extent permitted by law, against judgments, fines, amounts paid
in settlement and reasonable expenses, including attorneys' fees incurred by
Executive, in connection with any action or proceeding (or any appeal from
any action or proceeding) with respect to the Company or activities engaged
in by Executive in the course of employment with the Company in which
Executive is made, or is threatened to be made, a party or a witness.
11. WITHHOLDING.
All payments required to be made by the Company hereunder shall be
subject to the withholding of such amounts as are required to be withheld
pursuant to any applicable law or regulation.
12. CERTAIN DEFINED TERMS.
<PAGE>
11
As used herein, the following terms have the following meanings:
"AGREEMENT" shall mean this Management Compensation Agreement, as
the same may be amended, supplemented or otherwise modified from time to time.
"BASE SALARY" shall mean the annual salary of the Executive in
effect from time to time under Section 2.1.
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean with respect to termination of Executive's
employment hereunder (i) an act or acts of personal dishonesty by Executive
intended to result in substantial personal enrichment of Executive at the
expense of the Company, (ii) an act or acts of personal dishonesty by
Executive intended to cause substantial injury to the Company, (iii) material
breach (other than as a result of a Disability) by Executive of Executive's
obligations under this Agreement which action was (a) undertaken without a
reasonable belief that the action was in the best interest of the Company and
(b) not remedied within a reasonable period of time after receipt of written
notice from the Company specifying the alleged breach, or (iv) the conviction
of Executive of a felony.
"CHANGE IN CONTROL" means any one of the following:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
50% or more of either (i) the then outstanding shares of Common Stock of
Parent (the "Outstanding Parent Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of Parent
entitled to vote generally in the election of directors (the
"Outstanding Parent Voting Securities"); provided, however, this
subsection (a) shall not apply to the Investor Stockholders party to the
Second Amended and Restated Stockholders' Agreement dated as of December
23, 1993; or
(b) Individuals who, as of June 1, 1994, constitute the Board of
Directors of Parent (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided, however, that
any individual becoming a director subsequent to June 1, 1994, whose
election, or nomination for election by Parent's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose
<PAGE>
12
initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board of Directors
of Parent; or
(c) Approval by the shareholders of Parent of a reorganization,
merger or consolidation (a "Business Combination"), in each case,
unless, following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Parent Common Stock and Outstanding
Parent Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns Parent through one or more subsidiaries) in substantially the same
proportions as their ownership immediately prior to such Business
Combination of the Outstanding Parent Stock and Outstanding Parent
Voting Securities, as the case may be and (ii) at least a majority of
the members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement or of the action of such
Board, providing for such Business Combination; or
(d) Approval by the shareholders of Parent of (i) a complete
liquidation or dissolution of Parent or (ii) the sale or other
disposition of all or substantially all of the assets of Parent, other
than to a corporation with respect to which following such sale or other
disposition, (X) more than 50% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power
of the then outstanding voting securities of such corporation entitled
to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners respectively, of
the Outstanding Parent Common Stock and Outstanding Parent Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership immediately prior
to such sale or other disposition of the Outstanding Parent Common Stock
and Outstanding Parent Voting Securities, as the case may be and (Y) at
least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement, or other action of such Board,
providing for such sale or
<PAGE>
13
other disposition of assets of Parent or were elected, appointed
or nominated by the Incumbent Board.
"COMMON STOCK" shall mean all issued and outstanding common stock,
of all classes, of the Parent, including any outstanding securities
convertible into such common stock.
"DATE OF TERMINATION" shall mean, with respect to Executive, the
date of termination of Executive's employment hereunder after the notice
period provided by Section 4.4.
"DISABILITY" shall mean Executive's physical and mental condition
which prevents continued performance of his duties hereunder, if Executive
establishes by medical evidence that such condition will be permanent and
continuous during the remainder of Executive's life or is likely to be of at
least three years' duration.
"EFFECTIVE DATE" shall mean September 1, 1996.
"GOOD REASON" shall mean with respect to an Executive, any one or
more of the following:
(a) a material reduction in Executive's compensation or other
benefits (except as permitted hereunder) including the Company's failure
to adopt and maintain an annual bonus plan in which Executive shall
participate on the terms and conditions applicable to similarly situated
executives;
(b) any material change in Executive's job responsibilities;
provided that, so long as Executive retains a substantial part of his
then current oversight responsibility, a transfer of a portion of such
oversight responsibility of Executive shall not in and of itself
constitute a material change in Executive's job responsibilities;
(c) the relocation of the Company's principal executive offices
to a location outside the Minneapolis-St. Paul Metropolitan Area;
(d) a failure by the Company to comply with any material provision
of this Agreement which has not been cured within ten (10) days after the
Company knows or has notice of such noncompliance;
(e) John Dasburg no longer serves as the Chief Executive Officer
of Northwest Airlines Inc. and Executive is not appointed as his
immediate successor.
In order for an Executive's termination of his employment to be
considered for Good Reason, such termination must occur within one year
after the event giving rise to such Good Reason. Executive's continued
<PAGE>
14
employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
"NOTICE OF TERMINATION" shall mean a notice specifying the Date of
Termination, which notice shall (i) indicate the specific termination
provision (if any) in this Agreement applicable to the termination, and (ii)
set forth in reasonable detail the facts and circumstances claimed to provide
a basis for termination of Executive's employment under the provision so
indicated.
"PARENT" shall mean Northwest Airlines Corporation.
"PERSON" shall mean an individual, a corporation, a company, a
voluntary association, a partnership, a trust, an unincorporated organization
or a government or any agency, instrumentally or political subdivision
thereof.
"SIGNIFICANT ASSETS" shall mean (i) all or substantially all of the
assets and/or business or outstanding voting securities, of the Company (ii)
all or substantially all of Northwest's routes between the United States and
Japan.
"SUBSIDIARY" of a Person shall mean any corporation, partnership
(limited or general), trust or other entity of which a majority of the stock
(or equivalent ownership or controlling interest) having voting power to
elect a majority of the board of directors (if a corporation) or to select
the trustee or equivalent controlling interest, shall at the time such
reference becomes operative, be directly or indirectly owned or controlled by
such Person or one or more of the other subsidiaries of such Person or any
combination thereof.
"2-R" shall mean space available travel in first, business or coach
class, with boarding priority (i) ahead of the categories specified below
category "2-R" on Exhibit A attached hereto and (ii) within category "2-R,"
based on seniority with the Company.
"F-1" shall mean confirmed seating in first class or business class
if first class is not offered, with boarding priority (i) ahead of the
categories specified below category "F-I" on Exhibit A attached hereto and
(ii) within category "F-I," based on seniority with the Company.
"Y-1/F-2" shall mean confirmed seating travel in coach class and
space available travel in first or business class, with boarding priority (i)
ahead of the categories specified below category "Y-a/F-2" in Exhibit A
attached hereto, and (ii) within category "Y-1/F-2," based on seniority with
the Company.
13. MISCELLANEOUS.
<PAGE>
15
No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by Executive and such officer as may be specifically
designated by the Board. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made
by either party which are not set forth expressly in this Agreement. There
shall be no right of set-off or counterclaim, in respect of any claim, debt
or obligation, against any payments to Executive, his dependents,
beneficiaries or estate provided for in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of Minnesota, without regard to principles
of conflicts of laws.
14. VALIDITY.
The invalidity or unenforceability of any provision or provisions
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement which shall remain in full force and effect.
15. DISPUTES; REMEDIES.
If either the Company, on the one hand, or Executive, on the other
hand, breaches or threatens to commit a breach of the terms and conditions
hereof, the other party shall have the following rights and remedies:
(a) Specific performance (I.E., the right and remedy to have
the terms and conditions hereof specifically enforced by any court
of competent jurisdiction), it being agreed that any breach or threatened
breach of the terms and conditions hereof would cause irreparable injury
and that money damages may not provide an adequate remedy; and
(b) Damages (I.E., the right to receive from any violator of
the terms and conditions hereof, any and all damages, costs and expenses
incurred by the injured party as a result of the breach of the terms and
conditions hereof).
16. PARENT UNDERTAKING.
Northwest Airlines corporation, as parent corporation to the
Company, hereby agrees to cause the Company to perform all
<PAGE>
16
of its obligations hereunder and Executive shall be deemed to have entered
into this Agreement in reliance upon the undertaking set forth herein.
NORTHWEST AIRLINES, INC.
by: /s/ Douglas M. Steenland
_______________________________________
NORTHWEST AIRLINES CORPORATION
by: /s/ Douglas M. Steenland
_______________________________________
/s/ Michael E. Levine
_______________________________________
Michael E. Levine
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
between
NORTHWEST AIRLINES, INC.
and
CHRISTOPHER E. CLOUSER
dated as of
September 1, 1996
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
MANAGEMENT COMPENSATION AGREEMENT made as of the 1st day of
September, 1996 between Northwest Airlines, Inc., a Delaware corporation (the
"Company") and Christopher E. Clouser (the "Executive").
PREAMBLE
The Company and Executive previously entered into a Management
Compensation Agreement dated as of December 1, 1994 (the "Prior Agreement").
As of the date hereof, the Company and Executive have agreed to replace the
Prior Agreement with this Agreement, which shall supersede the Prior
Agreement in all respects.
In consideration of the foregoing and of the respective covenants
and agreements herein contained, the Company and Executive have agreed as
follows:
1. TERMS OF EMPLOYMENT.
1.1 EMPLOYMENT. The Company agrees to continue to employ
Executive, and Executive agrees to continue to serve the Company, on the
terms and conditions set forth herein.
1.2 POSITION AND DUTIES. Executive shall continue to have his
powers and duties as on the Effective Date and shall have such other powers
and duties as may from time to time be prescribed by the Board, provided that
such powers and duties are consistent with or represent a promotion from
Executive's duties as of the Effective Date, unless otherwise consented to in
writing by Executive; provided, however, as long as Executive retains a
substantial portion of his then current oversight responsibility, the Board
shall be permitted to transfer a portion of Executive's oversight
responsibility without the consent of Executive. Executive shall devote
substantially all his working time and efforts to the business and affairs of
the Company and its subsidiaries.
2. COMPENSATION.
2.1 BASE SALARY. Executive's Base Salary shall be his annual
base salary in effect on the Effective Date, as increased thereafter by the
Company. Executive's Base Salary in effect from time to time may only be
reduced in connection with a Company-wide base wage reduction, by an amount
not to exceed 20% of Base Salary in effect on the date of such Company-wide
wage reduction. For purposes of calculating any other payments or benefits
hereunder (except as specified in Section 2.4) any reductions in Base Salary
shall be disregarded. Executive's Base Salary shall be payable in accordance
with the Company's normal payroll policies.
<PAGE>
2
2.2 BONUS. Executive shall be entitled to participate in the
Company's Key Employee Cash Incentive Bonus Program, and any successor annual
bonus plan, the terms and conditions of which shall be established by the
Board in its sole discretion from time to time.
2.3 EXPENSES. During the term of Executive's employment
hereunder, Executive shall be entitled to receive prompt reimbursement for
all reasonable expenses incurred in performing services hereunder, provided
that Executive properly accounts therefor in accordance with written Company
policy.
2.4 COMPENSATION AND BENEFIT PROGRAMS OF THE COMPANY. Except
as set forth below, Executive shall continue while employed hereunder to
participate in the Company's employee compensation and benefit programs (or
any successor programs) at levels in effect on the Effective Date. Exceptions
to the preceding sentence are:
(a) Amounts payable to Executive under the Company's benefit
programs may be reduced to reflect a Company-wide benefit reduction, in the
same manner that Company employees are generally affected by such
reduction.
(b) Executive shall not participate in any severance pay plan
or annual bonus plan maintained by the Company except to the extent
necessary to receive any severance or bonus payments specifically provided
for hereunder.
2.5 MEDICAL BENEFITS. While employed hereunder, Executive
shall be reimbursed by the Company for all out of pocket medical expenses
incurred by him and not otherwise paid or provided for under any medical plan
maintained for the benefit of Executive.
2.6 SERP. Executive shall be a participant in the Company's
Supplemental Executive Retirement Program (the "SERP"), a copy of which is
attached hereto, and shall be entitled to receive the benefits provided for
therein.
(a) As provided for in Section 4.1.1(a)(iii) of the SERP, the
grant to Executive of two additional years of Benefit Service for each actual
year of employment completed shall be with respect to Executive's employment
commencing on and after March 24, 1994.
(b) A pre-retirement death benefit shall be payable, in the
event of Executive's death while employed hereunder, to the individual who
was Executive's spouse on the date of death. Such benefit shall be in an
amount equal to 50% of the Executive's Base Salary at the time of his death
and such amount shall be payable annually for a maximum of ten years or, if
earlier, until Executive would have attained age 65; provided, however, that
the amounts payable hereunder shall be reduced by
<PAGE>
3
all pre-retirement death benefits payable to Executive's spouse under the
Company's qualified pension plan or a supplemental executive retirement plan.
3. OTHER BENEFITS.
3.1 AIRLINE PASS. Executive is entitled to receive a lifetime
airline pass for the personal use of such Executive and his spouse and
children so long as spouses and children of employees generally are eligible
for nonrevenue travel pursuant to the Company's pass policies (hereinafter,
"Eligible Individuals"). Such airline pass (the "Airline Pass") shall entitle
Executive and Eligible Individuals to travel on regularly scheduled Northwest
domestic and international flights, subject to charges then applicable to
senior executives of the Company and their dependents, with boarding priority
of (i) F-1 or the equivalent thereof for ten years from and after the date
such pass is issued, (ii) Y-1/F-2 or the equivalent thereof for the next
succeeding ten years and (iii) 2-R or the equivalent thereof after the
aggregate twenty-year period described in clauses (i) and (ii) above. Each
Executive shall be responsible for any personal income tax liability arising
from such pass travel. The Airline Pass shall be issued to Executive upon
Executive's termination of employment with the Company; provided, however,
that all benefits under this Section 3.1 shall immediately and permanently
cease in the event Executive is or becomes, at any time thereafter, an
employee of any of the top five airlines in the United States (other than the
Company) ranked by revenue passenger miles (the "Top Five Airlines").
3.2 OTHER MEDICAL BENEFITS. In the event Executive remains an
employee of the Company from the date of this Agreement to September 1, 1998,
Executive and his covered dependents (only as long as they shall remain
dependents) shall be entitled to medical coverage for the life of Executive
and his spouse; provided, however, if and only for so long as Executive is
employed by another employer, medical coverage hereunder will become
secondary to any coverage provided by the employer.
4. TERMINATION OF EMPLOYMENT.
4.1 UPON DEATH. Executive's employment hereunder shall
terminate upon his death.
4.2 BY THE COMPANY. The Company may terminate Executive's
employment hereunder at any time with or without Cause.
4.3 BY THE EXECUTIVE. Executive may terminate his employment
hereunder at any time for any reason.
4.4 NOTICE OF TERMINATION, PAYMENTS. Any termination of
Executive's employment hereunder (other than by death) shall be communicated
by 30 days advance written Notice of Termination
<PAGE>
4
by the terminating party to the other party to this Agreement; provided that
no advance Notice of Termination of Executive for Cause by the Company is
required. Unless otherwise provided in Section 5, any amounts owed by the
Company to Executive pursuant to Section 5 shall be paid on the Date of
Termination.
5. PAYMENTS IN THE EVENT OF TERMINATION OF EMPLOYMENT.
5.1 PAYMENTS IN THE EVENT OF TERMINATION BY THE COMPANY FOR
CAUSE OR VOLUNTARY TERMINATION BY EXECUTIVE. Except as provided in Section
5.3, if Executive's employment hereunder is terminated by the Company for
Cause or by Executive other than for Good Reason, the Company shall pay
Executive (a) his accrued and unpaid Base Salary through the Date of
Termination and (b) any payments or other rights or benefits Executive may be
otherwise entitled to receive pursuant to the terms of (i) any retirement,
pension or other employee benefit or compensation plan maintained by the
Company at the time or times provided therein or (ii) Sections 2.6 and 3
hereof.
5.2 PAYMENTS IN THE EVENT OF ANY OTHER TERMINATION OF
EMPLOYMENT. Except as provided in Section 5.3, if Executive's employment
hereunder is terminated by the Company other than for Cause, as a result of
death or Disability or by Executive for Good Reason:
(a) The Company shall pay Executive (i) his accrued and unpaid
Base Salary through the Date of Termination, (ii) any bonus under the
Key Employee Cash Incentive Bonus Program, or any successor annual
bonus plan, (the "Incentive Bonus") for any calendar year ended before
the Date of Termination, (iii) a pro rata share (based on days employed
during the applicable year) of the Incentive Bonus Executive would
otherwise have received with respect to the year in which the Date of
Termination occurs, payable at the time the Incentive Bonus would
otherwise be payable to Executive; provided, however, that 100% of the
Incentive Bonus shall be determined solely with reference to the
financial performance of the Company for the year (based on the goals
previously established with respect thereto) (rather than a portion of
the Incentive Bonus determined on the basis of individual performance);
provided, further, in the event that Company's performance exceeds 100%
of the financial performance target for the year, that portion of the
Incentive Bonus that would have, but for this Section 5.2(a), related
to the achievement of the individual performance target shall be 100%
and (iv) any payments or other rights or benefits Executive may be
otherwise entitled to receive pursuant to the terms of (x) any
retirement, pension or other employee benefit or compensation plan
maintained by the Company at the time or times provided therein or (y)
Sections 2.6 and 3 hereof.
<PAGE>
5
(b) In addition to the compensation and benefits described in
Section 5.2(a):
(i) The Company shall pay Executive a lump sum amount equal
to two times the sum of (i) Executive's Base Salary and (ii) the target
Incentive Bonus for Executive with respect to the year in which the
Date of Termination occurs (or if no target has been set for that year,
the target Incentive Bonus for the immediately preceding year).
(ii) Executive's pension shall vest with respect to his
years of employment with the Company and any subsidiary of the Company.
In addition, irrespective of Executive's actual full years of
employment from March 25, 1994 through his termination under this
Section 5.2, Executive shall be granted service credit as if he were an
employee of Company for the number of full years necessary to achieve
the maximum additional accruals under Section 2.6(a) herein and Section
4.1.1(a)(iii) of the SERP: provided, however, that any SERP benefit
shall continue to be subject to Section 7 of the SERP. Any such vested
pension benefits which cannot be paid under the Company's qualified
pension plan shall be paid directly by the Company.
(iii) Executive and his covered dependents (only so long as
they shall remain dependents) shall be entitled to medical coverage for
the life of Executive and his spouse; provided, however, if Executive
is employed by another employer, medical coverage hereunder will become
secondary to any coverage provided by the new employer. With regard to
group life insurance and group disability insurance, until the earlier
of the second anniversary of Executive's Date of Termination or the
date Executive is employed by a new employer, Executive, his
dependents, beneficiaries and estate shall be entitled to all benefits
under such group life insurance and group disability insurance as if
Executive were still employed by the Company hereunder during such
period. If any such benefits cannot be provided to Executive for any
reason, the Company shall pay to Executive, or pay Executive the cost
of obtaining, such benefits.
(c) Executive shall not be required to mitigate the amount of
any payment provided for in this Section 5.2 by seeking other employment or
otherwise, and no such payment shall be offset or reduced as a result of
Executive obtaining new employment.
(d) Notwithstanding anything else to the contrary in this
Agreement, the Company's obligation to make the payments provided for in
Sections 5.2(a)(iii) and 5.2(b)(i),
<PAGE>
6
(ii) and (iii) is expressly conditioned upon the execution and delivery of a
release in the form attached hereto as Appendix A.
5.3 PAYMENTS FOR CERTAIN TERMINATIONS OF EMPLOYMENT AFTER A
CHANGE IN CONTROL. If Executive elects to terminate his employment for any
reason during the six month period commencing on the second anniversary of
the Change in Control, or in the event of termination by the Company other
than for Cause or termination by Executive for Good Reason within two years
after a Change in Control, Executive shall receive all of the payments, and
shall be accorded all of the rights, set forth in Section 5.2. All other
terminations of Executive's employment shall be governed by Sections 4 and 5
of this Agreement irrespective of a Change in Control.
5.4 EXCISE TAX.
(a) If any payment or distribution by the Company to or
for the benefit of Executive (whether paid or payable pursuant to this
Agreement or otherwise, but determined without regard to any additional
payments required under this Section 5.4 (a "Payment")) is subject to
the excise tax imposed by Section 4999 of the Code or any interest or
penalties thereon (together the "Excise Tax") then Executive shall be
entitled to an additional payment (a Gross-Up Payment") in an amount
such that after payment by Executive of all taxes including, without
limitation, any income taxes (together with any interest or penalties
thereon, the "Additional Income tax") or any Excise Tax, imposed upon
the Gross-Up Payment Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to Section 5.4(c), all determinations
required to be made under this Section 5.4, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment,
shall be made by the firm of independent public accountants selected by
the Company to audit its financial statements (the "Accounting Firm")
which shall provide detailed supporting calculations both to the
Company and the executive within fifteen (15) business days after the
receipt of notice from Executive that there has been a Payment, or such
earlier time as is requested by the Company. All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any Gross-Up
Payment, as determined pursuant to this Section 5.4, shall be paid to
Executive within five (5) business days after the receipt of the
Accounting Firm's determination. Any determination by the Accounting
Firm shall be binding upon the Company and Executive. As a result of
the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it
is possible that additional Gross-Up payments should have been made by
the Company (an "Underpayment"). If the Company exhausts its remedies
pursuant to Section 5.4(c) and Executive thereafter is
<PAGE>
7
required to make payment of any Excise Tax, the accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notice shall be given as
soon as practicable but no later than ten (10) business days after Executive
knows of such claim and shall apprise the Company of the nature and date of
requested payment of such claim. Executive shall not pay such claim before
the earlier of (x) the date thirty (30) days after Executive's notice to the
Company or (y) the date on which payment of taxes with respect to such claim
is due. If the Company notifies Executive in writing prior to the expiration
of such period that is desires to contest such claim, Executive shall:
(i) give the Company any reasonable requested information
relating to such claim;
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the
Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim; provided, however that the Company shall bear
and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and
shall indemnify and hold such Executive harmless, on an after-tax
basis, for any Excise Tax or additional Income Tax imposed as a
result of such representation and payment of costs and expenses.
Without limiting this Section 5.4(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole
option, may (1) pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in
respect of such claim and (2) either direct Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible
manner. Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs such
Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to Executive, on an interest-free
basis, and shall indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or Income Tax imposed with
<PAGE>
8
respect to such advance; and further provided that any extension of
the statute of limitations for the taxable year of Executive with
respect to which such contested amount is claimed to be due is
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and Executive shall be entitled to settle or
contest any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by Executive of any amount
advanced by the Company pursuant to Section 5.4(c), Executive becomes
entitled to receive any refund with respect to such claim, executive
shall (subject to the Company's complying with the requirements of
Section 5.4(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 5.4(c), a determination
is made that such Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in
writing of its intent to contest such denial of refund prior to the
expiration of thirty days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the
amount of any Gross-Up Payment required to be paid.
6. CONFIDENTIALITY; NON-COMPETE.
While employed by the Company and thereafter, Executive shall not
disclose any confidential information either directly or indirectly, to
anyone (other than the Company, its employees and advisors), or use such
information for his own account, or for the account of any other person or
entity, without the prior written consent of the Company or except as
required by law. This confidentiality covenant has no temporal or
geographical restriction. Upon termination of this Agreement, Executive shall
promptly supply to the Company all property and any other tangible product or
document which has been produced by, received by or otherwise submitted to
Executive during or prior to his term of employment, and shall not retain any
copies thereof.
Executive acknowledges that his services are of special, unique
and extraordinary value to the Company. Accordingly, in the event Executive
resigns without Good Reason or is terminated for Cause during the term
hereof, Executive shall not at any time prior to the first anniversary of the
Date of Termination become an employee, consultant, officer, partner or
director of any air carrier which competes with the Company (or any of its
affiliates) or have any significant interest (I.E., 10% or more of the voting
stock) in any such air carrier.
<PAGE>
9
Executive agrees that any breach of the terms of this Section 6
would result in irreparable injury and damage for which there would be no
adequate remedy at law, and that, in the event of said breach or any threat
of breach, the Company shall be entitled to an immediate injunction and
restraining order to prevent such breach or threatened breach, without having
to prove damages, in addition to any other remedies to which the Company may
be entitled at law or in equity. Executive further agrees that the provisions
of the covenant not to compete are reasonable. Should a court determine,
however, that any provision of the covenant not to compete is unreasonable,
either in period of time, geographical area, or otherwise, the parties hereto
agree that the covenant should be interpreted and enforced to the maximum
extent which such court deems reasonable. The provisions of this Section 6
shall survive any termination of this Agreement and Executive's term of
employment. The existence of any claim or cause of action or otherwise, shall
not constitute a defense to the enforcement of the covenants and agreements
of this Section 6.
7. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall bind any successor to Significant
Assets, whether by purchase, merger, consolidation or otherwise, in the same
manner and to the same extent that the Company would be obligated under this
Agreement if no such succession had taken place. Notwithstanding that a
successor to Significant Assets becomes bound to this Agreement, the Company
shall continue to be liable for the obligations hereunder as a guarantor. In
any agreement providing for succession to Significant Assets, the Company
shall cause each and every successor expressly and unconditionally to assume
and agree to perform the Company's obligations under this Agreement.
(b) In the event that another air carrier directly or indirectly
acquires Significant Assets, the Company shall cause such airline to provide
Executive and Eligible Individuals with pass privileges equivalent to those
provided under the Airline Pass described in Section 3.1.
(c) This Agreement and all rights if Executive hereunder shall
inure to the benefit of and be enforceable by, Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
8. TERM.
The term of this Agreement shall commence on the Effective Date
and end upon the Executive's termination of employment. The rights and
obligations of the Company and Executive shall survive the termination of
this Agreement to the extent necessary to give effect to the terms hereof.
<PAGE>
10
9. NOTICES.
Notices and all other communications provided for in this Agreement shall
be in writing and shall be deemed to have been duly given when delivered to
and mailed by United States mail, addressed: (a) if to Executive,
Christopher E. Clouser, 4810 Bywood Street West, Edina, Minnesota 55436, and
(b) if to the Company, c/o Northwest Airlines, Inc., 5101 Northwest
Drive, St. Paul, Minnesota 55111-3034, Attention: General Counsel, or to such
other address as may have been furnished in writing.
10. COUNSEL FEES AND INDEMNIFICATION.
(a) The Company shall pay, or promptly reimburse on an as-incurred basis
to Executive, the reasonable fees and expenses of Executive's legal counsel
for its services rendered in connection with, Executive's enforcement of this
Agreement provided, however, that if Executive institutes any proceeding to
enforce this Agreement and the judge, arbitrator or other individual
presiding over the proceeding affirmatively finds that Executive instituted
the proceeding in bad faith, Executive shall pay all costs and expenses,
including attorney's fees, of Executive and the Company.
(b) The Company shall indemnify and hold Executive harmless, to the
maximum extent permitted by law, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees incurred by
Executive, in connection with any action or proceeding (or any appeal from
any action or proceeding) with respect to the Company or activities engaged
in by Executive in the course of employment with the Company in which
Executive is made, or is threatened to be made, a party or a witness.
11. WITHHOLDING.
All payments required to be made by the Company hereunder shall be
subject to the withholding of such amounts as are required to be withheld
pursuant to any applicable law or regulation.
12. CERTAIN DEFINED TERMS.
As used herein, the following terms have the following meanings:
"AGREEMENT" shall mean this Management Compensation Agreement, as the
same may be amended, supplemented or otherwise modified from time to time.
"BASE SALARY" shall mean the annual salary of the Executive in effect
from time to time under Section 2.1.
<PAGE>
11
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean with respect to termination of Executive's employment
hereunder (i) an act or acts of personal dishonesty by Executive intended to
result in substantial personal enrichment of Executive at the expense of the
Company, (ii) an act or acts of personal dishonesty by Executive intended to
cause substantial injury to the Company, (iii) material breach (other than as
a result of a Disability) by Executive of Executive's obligations under this
Agreement which action was (a) undertaken without a reasonable belief that
the action was in the best interest of the Company and (b) not remedied within a
reasonable period of time after receipt of written notice from the Company
specifying the alleged breach, or (iv) the conviction of Executive of a
felony.
"CHANGE IN CONTROL" means any one of the following:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) or the Securities Exchange
Act of 1934 (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (i) the then outstanding
shares of Common Stock of Parent (the "Outstanding Parent Common
Stock") or (ii) the combined voting power of the then outstanding
voting securities of Parent entitled to vote generally in the
election of directors (the "Outstanding Parent Voting Securities");
provided, however, this subsection (a) shall not apply to the
Investor Stockholders party to the Second Amended and Restated
Stockholders' Agreement dated as of December 23, 1993; or
(b) Individuals who, as of June 1, 1994, constitute the Board of
Directors of Parent (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided, however, that
any individual becoming a director subsequent to June 1, 1994, whose
election, or nomination for election by Parent's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors of Parent; or
(c) Approval by the shareholders of Parent of a reorganization,
merger or consolidation (a "Business Combination"), in each case,
unless, following such Business Combination, (i) all or substantially
all of the individuals
<PAGE>
12
and entities who were the beneficial owners, respectively, of the
Outstanding Parent Common Stock and Outstanding Parent Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns Parent through
one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Parent Stock and Outstanding Parent Voting Securities, as
the case may be and (ii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement or of the action of such Board,
providing for such Business Combination; or
(d) Approval by the shareholders of Parent of (i) a complete
liquidation or dissolution of Parent or (ii) the sale or other
disposition of all or substantially all of the assets of Parent,
other than to a corporation with respect to which following such sale
or other disposition, (X) more than 50% of, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the
beneficial owners respectively, of the Outstanding Parent Common
Stock and Outstanding Parent Voting Securities immediately prior to
such sale or other disposition in substantially the same proportion
as their ownership immediately prior to such sale or other
disposition of the Outstanding Parent Common Stock and Outstanding
Parent Voting Securities, as the case may be and (Y) at least a
majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement, or other action of such Board,
providing for such sale or other disposition of assets of Parent or
were elected, appointed or nominated by the Incumbent Board.
"COMMON STOCK" shall mean all issued and outstanding common stock, of all
classes, of the Parent, including any outstanding securities convertible into
such common stock.
"DATE OF TERMINATION" shall mean, with respect to Executive, the date of
termination of Executive's employment hereunder after the notice period
provided by Section 4.4.
<PAGE>
13
"DISABILITY" shall mean Executive's physical and mental condition which
prevents continued performance of his duties hereunder, if Executive
establishes by medical evidence that such condition will be permanent and
continuous during the remainder of Executive's life or is likely to be of at
least three years' duration.
"EFFECTIVE DATE" shall mean September 1, 1996.
"GOOD REASON" shall mean with respect to an Executive, any one or more of
the following:
(a) a material reduction in Executive's compensation or other benefits
(except as permitted hereunder);
(b) any material change in Executive's job responsibilities; provided
that, so long as Executive retains a substantial part of his then current
oversight responsibility, a transfer of a portion of such oversight
responsibility of Executive shall not in and of itself constitute a
material change in Executive's job responsibilities;
(c) the relocation of the Company's principal executive offices to a
location outside the Minneapolis-St.Paul Metropolitan Area;
(d) a failure by the Company to comply with any material provision of
this Agreement which has not been cured within ten (10) days after the
Company knows or has notice of such noncompliance.
In order for an Executive's termination of his employment to be
considered for Good Reason, such termination must occur within one year
after the event giving rise to such Good Reason. Executive's continued
employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
"NOTICE OF TERMINATION" shall mean a notice specifying the Date of
Termination, which notice shall (i) indicate the specific termination
provision (if any) in this Agreement applicable to the termination, and (ii)
set forth in reasonable detail the facts and circumstances claimed to provide
a basis for termination of Executive's employment under the provision so
indicated.
"PARENT" shall mean Northwest Airlines Corporation.
"PERSON" shall mean an individual, a corporation, a company, a voluntary
association, a partnership, a trust, an unincorporated organization or a
government or any agency, instrumentally or political subdivision thereof.
<PAGE>
14
"SIGNIFICANT ASSETS" shall mean (i) all or substantially all of the
assets and/or business or outstanding voting securities, of the Company (ii)
all or substantially all of Northwest's routes between the United States and
Japan.
"SUBSIDIARY" of a Person shall mean any corporation, partnership (limited
or general), trust or other entity of which a majority of the stock (or
equivalent ownership or controlling interest) having voting power to elect a
majority of the board of directors (if a corporation) or to select the
trustee or equivalent controlling interest, shall at the time such reference
becomes operative, be directly or indirectly owned or controlled by such
Person or one or more of the other subsidiaries of such Person or any
combination thereof.
"2-R" shall mean space available travel in first, business or coach
class, with boarding priority (i) ahead of the categories specified below
category "2-R" on Exhibit A attached hereto and (ii) within category "2-R,"
based on seniority with the Company.
"F-1" shall mean confirmed seating in first class or business class if
first class is not offered, with boarding priority (i) ahead of the
categories specified below category "F-I" on Exhibit A attached hereto and
(ii) within category "F-I," based on seniority with the Company.
"Y-1/F-2" shall mean confirmed seating travel in coach class and space
available travel in first or business class, with boarding priority (i) ahead
of the categories specified below category "Y-a/F-2" in Exhibit A attached
hereto, and (ii) within category "Y-1/F-2," based on seniority with the
Company.
13. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed
by Executive and such officer as may be specifically designated by the Board.
No agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. There shall be no right of set-off
or counterclaim, in respect of any claim, debt or obligation, against any
payments to Executive, his dependents, beneficiaries or estate provided for in
this Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of Minnesota,
without regard to principles of conflicts of laws.
<PAGE>
15
14. VALIDITY.
The invalidity or unenforceability of any provision or provisions of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and effect.
15. DISPUTES; REMEDIES.
If either the Company, on the one hand, or Executive, on the other hand,
breaches or threatens to commit a breach of the terms and conditions hereof,
the other party shall have the following rights and remedies:
(a) Specific performance (I.E., the right and remedy to have the terms
and conditions hereof specifically enforced by any court of competent
jurisdiction), it being agreed that any breach or threatened breach of
the terms and conditions hereof would cause irreparable injury and that
money damages may not provide an adequate remedy; and
(b) Damages (I.E., the right to receive from any violator of the
terms and conditions hereof, any and all damages, costs and expenses
incurred by the injured party as a result of the breach of the terms
and conditions hereof).
16. PARENT UNDERTAKING.
Northwest Airlines Corporation, as parent corporation to the Company,
hereby agrees to cause the Company to perform all of its obligations
hereunder and Executive shall be deemed to have entered into this agreement
in reliance upon the undertaking set forth herein.
NORTHWEST AIRLINES, INC.
by: /s/ Douglas M. Steenland
----------------------------
NORTHWEST AIRLINES CORPORATION
by: /s/ Douglas M. Steenland
----------------------------
/s/ Christopher E. Clouser
-------------------------------
Christopher E. Clouser
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
between
NORTHWEST AIRLINES, INC.
and
DOUGLAS M. STEENLAND
dated as of
September 1, 1996
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
MANAGEMENT COMPENSATION AGREEMENT made as of the 1st day of September,
1996 between Northwest Airlines, Inc., a Delaware corporation (the "Company")
and Douglas M. Steenland (the "Executive").
PREAMBLE
The Company and Executive previously entered into a Management
Compensation Agreement dated as of December 1, 1994 (the "Prior Agreement").
As of the date hereof, the Company and Executive have agreed to replace the
Prior Agreement with this Agreement, which shall supersede the Prior
Agreement in all respects.
In consideration of the foregoing and of the respective covenants and
agreements herein contained, the Company and Executive have agreed as follows:
1. TERMS OF EMPLOYMENT.
1.1 EMPLOYMENT. The Company agrees to continue to employ Executive, and
Executive agrees to continue to serve the Company, on the terms and
conditions set forth herein.
1.2 POSITION AND DUTIES. Executive shall continue to have his powers and
duties as on the Effective Date and shall have such other powers and duties
as may from time to time be prescribed by the Board, provided that such
powers and duties are consistent with or represent a promotion from
Executive's duties as of the Effective Date, unless otherwise consented to in
writing by Executive; provided, however, as long as Executive retains a
substantial portion of his then current oversight responsibility, the Board
shall be permitted to transfer a portion of Executive's oversight
responsibility without the consent of Executive. Executive shall devote
substantially all his working time and efforts to the business and affairs of
the Company and its subsidiaries.
2. COMPENSATION.
2.1 BASE SALARY. Executive's Base Salary shall be his annual base salary
in effect on the Effective Date, as increased thereafter by the Company.
Executive's Base Salary in effect from time to time may only be reduced in
connection with a Company-wide base wage reduction, by an amount not to
exceed 20% of Base Salary in effect on the date of such Company-wide wage
reduction. For purposes of calculating any other payments or benefits
hereunder (except as specified in Section 2.4) any reductions in Base Salary
shall be disregarded. Executive's Base Salary shall be payable in accordance
with the Company's normal payroll policies.
<PAGE>
3
all pre-retirement death benefits payable to Executive's spouse under the
Company's qualified pension plan or a supplemental executive retirement plan.
3. OTHER BENEFITS.
3.1 AIRLINE PASS. Executive is entitled to receive a lifetime airline
pass for the personal use of such Executive and his spouse and children so
long as spouses and children of employees generally are eligible for
nonrevenue travel pursuant to the Company's pass policies (hereinafter,
"Eligible Individuals"). Such airline pass (the "Airline Pass") shall entitle
Executive and Eligible Individuals to travel on regularly scheduled Northwest
domestic and international flights, subject to charges then applicable to
senior executives of the Company and their dependents, with boarding priority
of (i) F-1 or the equivalent thereof for ten years from and after the date
such pass is issued, (ii) Y-1/F-2 or the equivalent thereof for the next
succeeding ten years and (iii) 2-R or the equivalent thereof after the
aggregate twenty-year period described in clauses (i) and (ii) above. Each
Executive shall be responsible for any personal income tax liability arising
from such pass travel. The Airline Pass shall be issued to Executive upon
Executive's termination of employment with the Company; provided, however,
that all benefits under this Section 3.1 shall immediately and permanently
cease in the event Executive is or becomes, at any time thereafter, an
employee of any of the top five airlines in the United States (other than the
Company) ranked by revenue passenger miles (the "Top Five Airlines").
3.2 OTHER MEDICAL BENEFITS. In the event Executive remains an employee
of the Company from the date of this Agreement to September 1, 1998,
Executive and his covered dependents (only as long as they shall remain
dependents) shall be entitled to medical coverage for the life of Executive
and his spouse; provided, however, if and for so long as Executive is
employed by another employer, medical coverage hereunder will become
secondary to any coverage provided by the new employer.
4. TERMINATION OF EMPLOYMENT
4.1 UPON DEATH. Executive's employment hereunder shall terminate upon
his death.
4.2 BY THE COMPANY. The Company may terminate Executive's employment
hereunder at any time with or without Cause.
4.3 BY THE EXECUTIVE. Executive may terminate his employment hereunder
at any time for any reason.
4.4 NOTICE OF TERMINATION, PAYMENTS. Any termination of Executive's
employment hereunder (other than by death) shall be communicated by 30 days
advance written Notice of Termination
<PAGE>
4
by the terminating party to the other party of this Agreement; provided that
no advance Notice of Termination of Executive for Cause by the Company is
required. Unless otherwise provided in Section 5, any amounts owed by the
Company to Executive pursuant to Section 5 shall be paid on the Date of
Termination.
5. PAYMENTS IN THE EVENT OF TERMINATION OF EMPLOYMENT.
5.1 PAYMENTS IN THE EVENT OF TERMINATION BY THE COMPANY FOR CAUSE OR
VOLUNTARY TERMINATION BY EXECUTIVE. Except as provided in Section 5.3, if
Executive's employment hereunder is terminated by the Company for Cause or by
Executive other than for Good Reason, the Company shall pay Executive (a) his
accrued and unpaid Base Salary through the Date of Termination and (b) any
payments or other rights or benefits Executive may be otherwise entitled to
receive pursuant to the terms of (i) any retirement, pension or other
employee benefit or compensation plan maintained by the Company at the time
or times provided therein or (ii) Sections 2.6 and 3 hereof.
5.2 PAYMENTS IN THE EVENT OF ANY OTHER TERMINATION OF EMPLOYMENT. Except
as provided in Section 5.3, if Executive's employment hereunder is terminated
by the Company other than for Cause, as a result of death or Disability or by
Executive for Good Reason:
(a) The Company shall pay Executive (i) his accrued and unpaid Base
Salary through the Date of Termination, (ii) any bonus under the Key
Employee Cash Incentive Bonus Program, or any successor annual bonus
plan, (the "Incentive Bonus") for any calendar year ended before the
Date of Termination, (iii) a pro rata share (based on days employed
during the applicable year) of the Incentive Bonus Executive would
otherwise have received with respect to the year in which the Date of
Termination occurs, payable at the time the Incentive Bonus would
otherwise be payable to Executive; provided, however, that 100% of the
Incentive Bonus shall be determined solely with reference to the
financial performance of the Company for the year (based on the goals
previously established with respect thereto) (rather than a portion of
the Incentive Bonus determined on the basis of individual performance);
provided, further, in the event that Company's performance exceeds 100%
of the financial performance target for the year, that portion of the
Incentive Bonus that would have, but for this Section 5.2(a), related to
the achievement of the individual performance target shall be 100% and
(iv) any payments or other rights or benefits Executive may be otherwise
entitled to receive pursuant to the terms of (x) any retirement, pension
or other employee benefit or compensation plan maintained by the Company
at the time or times provided therein or (y) Sections 2.6 and 3 hereof.
<PAGE>
5
(b) In addition to the compensation and benefits described in
Section 5.2(a):
(i) The Company shall pay Executive a lump sum amount equal to
two times the sum of (i) Executive's Base Salary and (ii) the target
Incentive Bonus for Executive with respect to the year in which the
Date of Termination occurs (or if no target has been set for that
year, the target Incentive Bonus for the immediately preceding year).
(ii) Executive's pension shall vest with respect to his years of
employment with the Company and any subsidiary of the Company. In
addition, irrespective of Executive's actual full years of employment
from March 25, 1994 through his termination under this Section 5.2,
Executive shall be granted service credit as if he were an employee
of Company for the number of full years necessary to achieve the
maximum additional accruals under Section 2.6(a) herein and
Section 4.1.1(a)(iii) of the SERP; provided, however, that any SERP
benefit shall continue to be subject to Section 7 of the SERP. Any
such vested pension benefits which cannot be paid under the Company's
qualified pension plan shall be paid directly by the Company.
(iii) Executive and his covered dependents (only so long as
they shall remain dependents) shall be entitled to medical coverage
for the life of Executive and his spouse; provided, however, if
Executive is employed by another employer, medical coverage hereunder
will become secondary to any coverage provided by the new employer.
With regard to group life insurance and group disability insurance,
until the earlier of the second anniversary of Executive's Date of
Termination or the date Executive is employed by a new employer,
Executive, his dependents, beneficiaries and estate shall be entitled
to all benefits under such group life insurance and group disability
insurance as if Executive were still employed by the Company hereunder
during such period. If any such benefits cannot be provided to
Executive for any reason, the Company shall pay to Executive, or pay
Executive the cost of obtaining, such benefits.
(c) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 5.2 by seeking other employment or
otherwise, and no such payment shall be offset or reduced as a result of
Executive obtaining new employment.
(d) Notwithstanding anything else to the contrary in this
Agreement, the Company's obligation to make the payments provided for in
Sections 5.2(a)(iii) and 5.2(b)(i),
<PAGE>
6
(ii) and (iii) is expressly conditioned upon the execution and delivery of a
release in the form attached hereto as Appendix A.
5.3 PAYMENTS FOR CERTAIN TERMINATIONS OF EMPLOYMENT AFTER A CHANGE IN
CONTROL. If Executive elects to terminate his employment for any reason
during the six month period commencing on the second anniversary of the
Change in Control, or in the event of termination by the Company other than
for Cause or termination by Executive for Good Reason within two years after a
Change in Control, Executive shall receive all of the payments, and shall be
accorded all of the rights, set forth in Section 5.2. All other terminations of
Executive's employment shall be governed by Sections 4 and 5 of this Agreement
irrespective of a Change in Control.
5.4 EXERCISE TAX.
(a) If any payment or distribution by the Company to or for the benefit
of Executive (whether paid or payable pursuant to this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 5.4 (a "Payment")) is subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties thereon (together the
"Excise Tax") then Executive shall be entitled to an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive of all
taxes including, without limitation, any income taxes (together with any
interest or penalties thereon, the "Additional Income tax") or any Excise Tax,
imposed upon the Gross-Up Payment Executive retains an amount of the Gross-up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to Section 5.4(c), all determinations required to be made
under this Section 5.4, including whether a Gross-Up Payment is required and
the amount of such Gross-Up Payment, shall be made by the firm of independent
public accountants selected by the Company to audit its financial statements
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and executive within fifteen (15) business days after the
receipt of notice from Executive that there has been a Payment, or such
earlier time as is requested by the Company. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment,
as determined pursuant to this Section 5.4, shall be paid to Executive within
five (5) business days after the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the lime of the initial determination by the
Accounting Firm hereunder, it is possible that additional Gross-Up payments
should have been made by the Company (an "Underpayment"). If the Company
exhausts its remedies pursuant to Section 5.4(c) and Executive thereafter is
<PAGE>
required to make a payment of any Excise Tax, the accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
(c) Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notice shall be given as soon as
practicable but no later than ten (10) business days after Executive knows of
such claim and shall appraise the Company of the nature and date of requested
payment of such claim. Executive shall not pay such claim before the earlier of
(x) the date thirty (30) days after Executive's notice to the Company or (y) the
date on which payment of taxes with respect to such claim is due. If the Company
notifies Executive in writing prior to the expiration of such period that it
desires to contest such claim, Executive shall:
(i) give the Company any reasonable requested information relating
to such claim;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating
so such claim; provided, however that the Company shall bear and pay
directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify
and hold such Executive harmless, on an after-tax basis, for any Excise Tax
or additional Income Tax imposed as a result of such representation and
payment of costs and expenses. Without limiting this Section 5.4(c), the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may (1) pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and (2) either direct Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner. Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs such Executive to
pay such claim and sue for a refund, the Company shall advance the amount
of such payment to Executive, on an interest-free basis, and shall
indemnify and hold Executive harmless, on an after-tax basis, from any
Excise Tax or Income Tax imposed with
<PAGE>
respect to such advance; and further provided that any extension of the
statute of limitations for the taxable year of Executive with respect to
which such contested amount is claimed to be due is limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest any other issue raised by
the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of any amount advanced by the
Company pursuant to Section 5.4(c), Executive becomes entitled to receive
any refund with respect to such claim, executive shall (subject to the
Company's complying with the requirements of Section 5.4 (c)) promptly pay
to the Company the amount of such refund (together with any interest paid
or credited thereon after taxes applicable thereto). If, after the receipt
by Executive of an amount advanced by the Company pursuant to
Section 5.4(c), a determination is made that such Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
any Gross-Up Payment required to be paid.
6. CONFIDENTIALITY; NON-COMPETE.
While employed by the Company and thereafter, Executive shall not
disclose any confidential information either directly or indirectly, to
anyone (other than the Company, its employees and advisors), or use such
information for his own account, or for the account of any other person or
entity, without the prior written consent of the Company or except as
required by law. This confidentiality covenant has no temporal or
geographical restriction. Upon termination of this Agreement, Executive shall
promptly supply to the Company all property and any other tangible product or
document which has been produced by, received by or otherwise submitted to
Executive during or prior to his term of employment, and shall not retain any
copies thereof.
Executive acknowledges that his services are of special, unique and
extraordinary value to the Company. Accordingly, in the event Executive
resigns without Good Reason or is terminated for Cause during the term
hereof, Executive shall not at any time prior to the first anniversary of the
Date of Termination become an employee, consultant, officer, partner or
director of any air carrier which competes with the Company (or any of its
affiliates) or have any significant interest (I.E., 10% or more of the voting
stock) in any such air carrier.
<PAGE>
Executive agrees that any breach of the terms of this Section 6 would
result in irreparable injury and damage for which there would be no adequate
remedy at law, and that, in the event of said breach or any threat of breach,
the Company shall be entitled to an immediate injunction and restraining
order to prevent such breach or threatened breach, without having to prove
damages, in addition to any other remedies to which the Company may be
entitled at law or in equity. Executive further agrees that the provisions of
the covenant not to compete are reasonable. Should a court determine,
however, that any provision of the covenant not to compete is unreasonable,
either in period of time, geographical area, or otherwise, the parties hereto
agree that the covenant should be interpreted and enforced to the maximum
extent which such court deems reasonable. The provisions of this Section 6
shall survive any termination of this Agreement and Executive's term of
employment. The existence of any claim or cause of action or otherwise, shall
not constitute a defense to the enforcement of the covenants and agreements
of this Section 6.
7. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall bind any successor to Significant Assets,
whether by purchase, merger, consolidation or otherwise, in the same manner
and to the same extent that the Company would be obligated under this
Agreement if no such succession had taken place. Notwithstanding that a
successor to Significant Assets becomes bound to this Agreement, the Company
shall continue to be liable for the obligations hereunder as a guarantor. In
any agreement providing for succession to Significant Assets, the Company
shall cause each and every successor expressly and unconditionally to assume
and agree to perform the Company's obligations under this Agreement.
(b) In the event that another air carrier directly or indirectly
acquires Significant Assets, the Company shall cause such airline to provide
Executive and Eligible Individuals with pass privileges equivalent to those
provided under the Airline Pass described in Section 3.1.
(c) This Agreement and all rights of Executive hereunder shall inure to
the benefit of and be enforceable by, Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
8. TERMS.
The term of this Agreement shall commence on the Effective Date and end
upon the Executive's termination of employment. The rights and obligations of
the Company and Executive shall survive the termination of this Agreement to
the extent necessary to give effect to the terms hereof.
<PAGE>
9. NOTICES.
Notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly given when
delivered to and mailed by United States mail, addressed; (a) if to
Executive, Douglas M. Steenland, 4528 Fremont Avenue South, Minneapolis,
Minnesota 55409, and
(b) if to the Company, c/o Northwest Airlines, Inc., 5101 Northwest
Drive, St. Paul, Minnesota 55111-3034, Attention: General Counsel, or to such
other address as may have been furnished in writing.
10. COUNSEL FEES AND INDEMNIFICATION.
(a) The Company shall pay, or promptly reimburse on an as-incurred basis
to Executive, the reasonable fees and expenses of Executive's legal counsel
for its services rendered in connection with, Executive's enforcement of this
Agreement provided, however, that if Executive institutes any proceeding to
enforce this Agreement and the judge, arbitrator or other individual
presiding over the proceeding affirmatively finds that Executive instituted
the proceeding in bad faith, Executive shall pay all costs and expenses,
including attorney's fees, of Executive and the Company.
(b) The Company shall indemnify and hold Executive harmless, to the
maximum extent permitted by law, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees incurred by
Executive, in connection with any action or proceeding (or any appeal from
any action or proceeding) with respect to the Company or activities engaged
in by Executive in the course of employment with the Company in which
Executive is made, or is threatened to be made, a party or a witness.
11. WITHHOLDING.
All payments required to be made by the Company hereunder shall be
subject to the withholding of such amounts as are required to be withheld
pursuant to any applicable law or regulation.
12. CERTAIN DEFINED TERMS.
As used herein, the following terms have the following meanings:
"AGREEMENT" shall mean this Management Compensation Agreement, as the
same may be amended, supplemented or otherwise modified from time to time.
"Base Salary" shall mean the annual salary of the Executive in effect
from time to time under Section 2.1.
<PAGE>
11
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean with respect to termination of Executive's
employment hereunder (i) an act or acts of personal dishonesty by Executive
intended to result in substantial personal enrichment of Executive at the
expense of the Company, (ii) an act or acts of personal dishonesty by
Executive intended to cause substantial injury to the Company, (iii) material
breach (other than as a result of a Disability) by Executive of Executive's
obligations under this Agreement which action was (a) undertaken without a
reasonable belief that the action was in the best interest of the Company and
(b) not remedied within a reasonable period of time after receipt of written
notice from the Company specifying the alleged breach either, or (iv) the
conviction of Executive of a felony.
"CHANGE IN CONTROL" means any one of the following:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13 (d)(3) or 14 (d)(2) or the Securities Exchange Act
of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
50% or more of either (i) the then outstanding shares of Common Stock of
Parent (the "Outstanding Parent Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of Parent
entitled to vote generally in the election of directors (the
"Outstanding Parent Voting Securities"); provided, however, this
subsection (a) shall not apply to the Investor Stockholders party to the
Second Amended and Restated Stockholders' Agreement dated as of December
23, 1993; or
(b) Individuals who, as of June 1, 1994, constitute the Board of
Directors of Parent (the "Incumbent Board") cease for any reason to
constitute as least a majority of such Board; provided, however, that
any individual becoming a director subsequent to June 1, 1994, whose
election, or nomination for election by Parent's shareholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs
as a result of an actual or threatened election contest with respect to
the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of Parent; or
(c) Approval by the shareholders of Parent of a reorganization,
merger or consolidation (a "Business Combination"), in each case,
unless, following such Business Combination, (i) all or substantially
all of the individuals
<PAGE>
12
and entities who were the beneficial owners, respectively, of the
Outstanding Parent Common Stock and Outstanding Parent Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns Parent through one or more
subsidiaries) in substantially the same proportions as their ownership
immediately prior to such Business Combination of the Outstanding Parent
Stock and Outstanding Parent Voting Securities, as the case may be and
(ii) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement or
of the action of such Board, providing for such Business Combination; or
(d) Approval by the shareholders of Parent (i) a complete
liquidation or dissolution of Parent or (ii) the sale or other
disposition of all or substantially all of the assets of Parent, other
than to a corporation with respect to which the following such sale or
other disposition, (X) more than 50% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners
respectively, of the Outstanding Parent Common Stock and Outstanding
Parent Voting Securities immediately prior to such sale or other disposition
in substantially the same proportion as their ownership immediately prior to
such sale or other disposition of the Outstanding Parent Common Stock and
Outstanding Parent Voting Securities, as the case may be and (Y) at least a
majority of the members of the board of directors of such corporation were
members of the Incumbent Board at the time of the execution of the initial
agreement, or other action of such Board, providing for such sale or other
disposition of assets of Parent or were elected, appointed or nominated by
the Incumbent Board.
"COMMON STOCK" shall mean all issued and outstanding common stock,
of all classes, of the Parent, including any outstanding securities
convertible into such common stock.
"DATE OF TERMINATION" shall mean, with respect to Executive, the
date of termination of Executive's employment hereunder after the notice
period provided by Section 4.4.
<PAGE>
13
"DISABILITY" shall mean Executive's physical and mental condition
which prevents continued performance of his duties hereunder, if
Executive establishes by medical evidence that such condition will be
permanent and continuous during the remainder of Executive's life or is
likely to be of at least three years' duration.
"EFFECTIVE DATE" shall mean September 1, 1996.
"GOOD REASON" shall mean with respect to an Executive, any one or
more of the following:
(a) a material reduction in Executive's compensation or other
benefits (except as permitted hereunder);
(b) any material change in Executive's job responsibilities;
provided that, so long as Executive retains a substantial part of his
then current oversight responsibility, a transfer of a portion of such
oversight responsibility of Executive shall not in and of itself constitute
a material change in Executive's job responsibilities;
(c) the relocation of the Company's principal executive offices
to a location outside the Minneapolis - St. Paul Metropolitan Area;
(d) a failure by the Company to comply with any material
provision of this Agreement which has not been cured within ten (10)
days after the Company knows or has notice of such noncompliance.
In order for an Executive's termination of his employment to be
considered for Good Reason, such termination must occur within one year
after the event giving rise to such Good Reason. Executive's continued
employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
"NOTICE OF TERMINATION" shall mean a notice specifying the Date of
Termination, which notice shall (i) indicate the specific termination
provision (if any) in this Agreement applicable to the termination, and
(ii) set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Executive's employment under the
provision so indicated.
"PARENT" shall mean Northwest Airlines Corporation.
"PERSON" shall mean an individual, a corporation, a company, a
voluntary association, a partnership, a trust, an unincorporated
organization or a government or any agency, instrumentally or political
subdivision thereof.
<PAGE>
14
"SIGNIFICANT ASSETS" shall mean (i) all or substantially all of
the assets and/or business or outstanding voting securities, of the
Company (ii) all or substantially all of Northwest's routes between the
United States and Japan.
"SUBSIDIARY" of a Person shall mean any corporation, partnership
(limited or general), trust or other entity of which a majority of the
stock (or equivalent ownership or controlling interest) having voting
power to elect a majority of the board of directors (if a corporation)
or to select the trustee or equivalent controlling interest, shall at
the time such reference becomes operative, be directly or indirectly
owned or controlled by such Person or one or more of the other
subsidiaries of such Person or any combination thereof.
"2-R" shall mean space available travel in first, business or
coach class, with boarding priority (i) ahead of the categories specified
below category "2-R" on Exhibit A attached hereto and (ii) within
category "2-R," based on seniority with the Company.
"F-1" shall mean confirmed seating in first class or business
class if first class is not offered, with boarding priority (i) ahead of
the categories specified below category "F-I" on Exhibit A attached
hereto and (ii) within category "F-I," based on seniority with the
Company.
"Y-1/F-2" shall mean confirmed seating travel in coach class and
space available travel in first or business class, with boarding
priority (i) ahead of the categories specified below category "Y-a/F-2"
in Exhibit A attached hereto, and (ii) within category "Y-1/F-2," based
on seniority with the Company.
13. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by Executive and such officer as may be specifically
designated by the Board. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. There shall be no right of set-off or counterclaim, in
respect of any claim, debt or obligation, against any payments to
Executive, his dependents, beneficiaries or estate provided for in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of Minnesota,
without regard to principles of conflicts of laws.
<PAGE>
15
14. VALIDITY.
The invalidity or unenforceability of any provision or provisions
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement which shall remain in full force and effect.
15. DISPUTES; REMEDIES.
If either the Company, on the one hand, or Executive, on the
other hand, breaches or threatens to commit a breach of the terms and
conditions hereof, the other party shall have the following rights and
remedies:
(a) Specific performance (I.E., the right and remedy to have
the terms and conditions hereof specifically enforced by any court of
competent jurisdiction), it being agreed that any breach or threatened
breach of the terms and conditions hereof would cause irreparable injury
and that money damages may not provide an adequate remedy; and
(b) Damages (I.E., the right to receive from any violator of
the terms and conditions hereof, any and all damages, costs and expenses
incurred by the injured party as a result of the breach of the terms and
conditions hereof).
16. PARENT UNDERTAKING.
Northwest Airlines Corporation, as parent corporation to the
Company, hereby agrees to cause the Company to perform all of its
obligations hereunder and Executive shall be deemed to have entered into
this Agreement in reliance upon the undertaking set forth herein.
NORTHWEST AIRLINES, INC.
by: /s/ Christopher E. Clouser
---------------------------
NORTHWEST AIRLINES CORPORATION
by: /s/ Christopher E. Clouser
---------------------------
/s/ Douglas M. Steenland
------------------------------
Douglas M. Steenland
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
between
NORTHWEST AIRLINES, INC.
and
DONALD A. WASHBURN
dated as of
September 1, 1996
<PAGE>
MANAGEMENT COMPENSATION AGREEMENT
MANAGEMENT COMPENSATION AGREEMENT made as of the 1st day of
September, 1996 between Northwest Airlines, Inc., a Delaware corporation (the
"Company") and Donald A. Washburn (the "Executive").
PREAMBLE
The Company and Executive previously entered into a Management
Compensation Agreement dated as of December 1, 1994 (the "Prior Agreement").
As of the date hereof, the Company and Executive have agreed to replace the
Prior Agreement with this Agreement, which shall supersede the Prior
Agreement in all respects.
In consideration of the foregoing and of the respective covenants
and agreements herein contained, the Company and Executive have agreed as
follows:
1. TERMS OF EMPLOYMENT.
1.1 EMPLOYMENT. The Company agrees to continue to employ
Executive, and Executive agrees to continue to serve the Company, on the
terms and conditions set forth herein.
1.2. POSITION AND DUTIES. Executive shall continue to have his
powers and duties as on the Effective Date and shall have such other powers
and duties as may from time to time be prescribed by the Board, provided that
such powers and duties are consistent with or represent a promotion from
Executive's duties as of the Effective Date, unless otherwise consented to in
writing by Executive; provided, however, as long as Executive retains a
substantial portion of his then current oversight responsibility,
the Board shall be permitted to transfer a portion of Executive's oversight
responsibility without the consent of Executive. Executive shall devote
substantially all his working time and efforts to the business and affairs of
the Company and its subsidiaries.
2. COMPENSATION.
2.1 BASE SALARY. Executive's Base Salary shall be his annual base
salary in effect on the Effective Date, as increased thereafter by the
Company. Executive's Base Salary in effect from time to time may only be
reduced in connection with a Company-wide base wage reduction, by an amount
not to exceed 20% of Base Salary in effect on the date of such Company-wide
wage reduction. For purposes of calculating any other payments or benefits
hereunder (except as specified in Section 2.4) any reductions in Base Salary
shall be disregarded. Executive's Base Salary shall be payable in accordance
with the Company's normal payroll policies.
<PAGE>
2.2 BONUS. Executive shall be entitled to participate in the
Company's Key Employee Cash Incentive Bonus Program, and any successor annual
bonus plan, the terms and conditions of which shall be established by the
Board in its sole discretion from time to time.
2.3 EXPENSES. During the term of Executive's employment hereunder,
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred in performing services hereunder, provided that
Executive properly accounts therefor in accordance with written Company
policy.
2.4 COMPENSATION AND BENEFIT PROGRAMS OF THE COMPANY. Except as
set forth below, Executive shall continue while employed hereunder to
participate in the Company's employee compensation and benefit programs (or
any successor programs) at levels in effect on the Effective Date. Exceptions
to the preceding sentence are:
(a) Amount payable to Executive under the Company's benefit
programs may be reduced to reflect a Company-wide benefit
reduction, in the same manner that Company employees are
generally affected by such reduction.
(b) Executive shall not participate in any severance pay plan or
annual bonus plan maintained by the Company except to the
extent necessary to receive any severance or bonus payments
specifically provided for hereunder.
2.5 MEDICAL BENEFITS. While employed hereunder, Executive shall be
reimbursed by the Company for all out of pocket medical expenses incurred by
him and not otherwise paid or provided for under any medical plan maintained
for the benefit of Executive.
2.6 SERP. Executive shall be a participant in the Company's
Supplement Executive Retirement Program (the "SERP"), a copy of which is
attached hereto, and shall be entitled to receive the benefits provided for
therein.
(a) As provided for in Sections 4.1.1(a)(iii) of the SERP, the
grant to Executive of two additional years of Benefit Service for each actual
year of employment completed shall be with respect to Executive's employment
commencing on and after March 24, 1994.
(b) A pre-retirement death benefit shall be payable, in the event
of Executive's death while employed hereunder, to the individual who was
Executive's spouse on the date of death. Such benefit shall be in an amount
equal to 50% of the Executive's Base Salary at the time of his death and such
amount shall be payable annually for a maximum of ten years or, if earlier,
until Executive would have attained age 65; provided, however, that the
amounts payable hereunder shall be reduced by
<PAGE>
all pre-retirement death benefits payable to Executive's spouse under the
Company's qualified pension plan or a supplemental executive retirement plan.
3. OTHER BENEFITS.
3.1 AIRLINE PASS. Executive is entitled to receive a lifetime
airline pass for the personal use of such Executive and his spouse and
children so long as spouses and children of employees generally are eligible
for nonrevenue travel pursuant to the Company's pass policies (hereinafter,
"Eligible Individuals"). Such airline pass (the "Airline Pass") shall entitle
Executive and Eligible Individuals to travel on regularly scheduled Northwest
domestic and international flights, subject to charges then applicable to
senior executives of the Company and their dependents, with boarding priority
of (i) F-1 or the equivalent thereof for ten years from and after the date
such pass is issued, (ii) Y-1/F-2 or the equivalent thereof for the next
succeeding ten years and (iii) 2-R or the equivalent thereof after the
aggregate twenty-year period described in clauses (i) and (ii) above. Each
Executive shall be responsible for any personal income tax liability arising
from such pass travel. The Airline Pass shall be issued to Executive upon
Executive's termination of employment with the Company; provided, however,
that all benefits under this Section 3.1 shall immediately and permanently
cease in the event Executive is or becomes, at any time thereafter, an
employee of any of the top five airlines in the United States (other than the
Company) ranked by revenue passenger miles (the "Top Five Airlines").
3.2 OTHER MEDICAL BENEFITS. In the event Executive remains an
employee of the Company from the date of this Agreement to September 1, 1998,
Executive and his covered dependents (only so long as they shall remain
dependents) shall be entitled to medical coverage for the life of Executive
and his spouse; provided, however, if and for so long as Executive is
employed by another employer, medical coverage hereunder will become
secondary to any coverage provided by his new employer.
4. TERMINATION OF EMPLOYMENT.
4.1 UPON DEATH. Executive's employment hereunder shall terminate
upon his death.
4.2 BY THE COMPANY. The Company may terminate Executive's
employment hereunder at any time with or without Cause.
4.3 BY THE EXECUTIVE. Executive may terminate his employment
hereunder at any time for any reason.
4.4 NOTICE OF TERMINATION, PAYMENTS. Any termination of Executive's
employment hereunder (other than by death) shall be communicated by 30 days
advance written Notice of Termination
<PAGE>
by the terminating party to the other party to this Agreement; provided that
no advance Notice of Termination of Executive for Cause by the Company is
required. Unless otherwise provided in Section 5, any amounts owed by the
Company to Executive pursuant to Section 5 shall be paid on the Date of
Termination.
5. PAYMENTS IN THE EVENT OF TERMINATION OF EMPLOYMENT.
5.1 PAYMENTS IN THE EVENT OF TERMINATION BY THE COMPANY FOR CAUSE
OR VOLUNTARY TERMINATION BY EXECUTIVE. Except as provided in Section 5.3, if
Executive's employment hereunder is terminated by the Company for Cause or by
Executive other than for Good Reason, the Company shall pay Executive (a) his
accrued and unpaid Base Salary through the Date of Termination and (b) any
payments or other rights or benefits Executive may be otherwise entitled to
receive pursuant to the terms of (i) any retirement, pension or other
employee benefit or compensation plan maintained by the Company at the time
or times provided therein or (ii) Sections 2.6 and 3 hereof.
5.2 PAYMENTS IN THE EVENT OF ANY OTHER TERMINATION OF EMPLOYMENT.
Except as provided in Section 5.3, if Executive's employment hereunder is
terminated by the Company other than for Cause, as a result of death or
Disability or by Executive for Good Reason:
(a) The Company shall pay Executive (i) his accrued and unpaid Base
Salary through the Date of Termination, (ii) any bonus under the Key Employee
Cash Incentive Bonus Program, or any successor annual bonus plan, (the
"Incentive Bonus") for any calendar year ended before the Date of
Termination, (iii) a pro rata share (based on days employed during the
applicable year) of the Incentive Bonus Executive would otherwise have
received with respect to the year in which the Date of Termination occurs,
payable at the time the Incentive Bonus would otherwise be payable to
Executive; provided, however, that 100% of the Incentive Bonus shall be
determined solely with reference to the financial performance of the Company
for the year (based on the goals previously established with respect thereto)
(rather than a portion of the Incentive Bonus determined on the basis of
individual performance); provided, further, in the event that Company's
performance exceeds 100% of the financial performance target for the year,
that portion of the Incentive Bonus that would have, but for this Section
5.2(a), related to the achievement of the individual performance target shall
be 100% and (iv) any payments or other rights or benefits Executive may be
otherwise entitled to receive pursuant to the terms of (x) any retirement,
pension or other employee benefit or compensation plan maintained by the
Company at the time or times provided therein or (y) Sections 2.6 and 3
hereof.
<PAGE>
5
(b) In addition to the compensation and benefits described in
Section 5.2(a):
(i) The Company shall pay Executive a lump sum
amount equal to two times the sum of (i) Executive's Base
Salary and (ii) the target Incentive Bonus for Executive with
respect to the year in which the Date of Termination occurs
(or if no target has been set for that year, the target
Incentive Bonus for the immediately preceding year).
(ii) Executive's pension shall vest with respect to
his years of employment with the Company and any subsidiary of the
Company. In addition, irrespective of Executive's actual full
years of employment from March 25, 1994 through his termination
under this Section 5.2, Executive shall be granted service credit
as if he were an employee of Company for the number of full years
necessary to achieve the maximum additional accruals under Section
2.6(a) herein and Section 4.1.1(a)(iii) of the SERP; provided,
however, that any SERP benefit shall continue to be subject to
Section 7 of the SERP. Any such vested pension benefits which
cannot be paid under the Company's qualified pension plan shall be
paid directly by the Company.
(iii) Executive and his covered dependents (only so long
as they shall remain dependents) shall be entitled to medical
coverage for the life of Executive and his spouse; provided, however,
if Executive is employed by another employer, medical coverage
hereunder will become secondary to any coverage provided by the new
employer. With regard to group life insurance and group disability
insurance, until the earlier of the second anniversary of Executive's
Date of Termination or the date Executive is employed by a new
employer, Executive, his dependents, beneficiaries and estate shall
be entitled to all benefits under such group life insurance and group
disability insurance as if Executive were still employed by the
Company hereunder during such period. If any such benefits cannot be
provided to Executive for any reason, the Company shall pay to
Executive, or pay Executive the cost of obtaining, such benefits.
(c) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 5.2 by seeking other employment or
otherwise, and no such payment shall be offset or reduced as a result of
Executive obtaining new employment.
(d) Notwithstanding anything else to the contrary in this
Agreement, the Company's obligation to make the payments provided for in
Sections 5.2(a)(iii) and 5.2(b)(i),
<PAGE>
6
(ii) and (iii) is expressly conditioned upon the execution and delivery
of a release in the form attached hereto as Appendix A.
5.3 PAYMENTS FOR CERTAIN TERMINATIONS OF EMPLOYMENT AFTER A CHANGE
IN CONTROL. If Executive elects to terminate his employment for any reason
during the six month period commencing on the second anniversary of the
Change in Control, or in the event of termination by the Company other than
for Cause or termination by Executive for Good Reason within two years after
a Change in Control, Executive shall receive all of the payments, and shall
be accorded all of the rights, set forth in Section 5.2. All other
terminations of Executive's employment shall be governed by Sections 4 and 5
of this Agreement irrespective of a Change in Control.
5.4 EXCISE TAX.
(a) If any payment or distribution by the Company to or for the
benefit of Executive (whether paid or payable pursuant to this Agreement
or otherwise, but determined without regard to any additional payments
required under this Section 5.4 (a "Payment")) is subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties
thereon (together the "Excise Tax") then Executive shall be entitled to
an additional payment (a "Gross-Up Payment") in an amount such that
after payment by Executive of all taxes including, without limitation,
any income taxes (together with any interest or penalties thereon, the
"Additional Income Tax") or any Excise Tax, imposed upon the Gross-Up
Payment Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Payments.
(b) Subject to Section 5.4(c), all determinations required to be
made under this Section 5.4, including whether a Gross-Up Payment is
required and the amount of such Gross-Up Payment, shall be made by the
firm of independent public accountants selected by the Company to audit
its financial statements (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and executive
within fifteen (15) business days after the receipt of notice from
Executive that there has been a Payment, or such earlier time as is
requested by the Company. All fees and expenses of the Accounting Firm
shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 5.4, shall be paid to Executive
within five (5) business days after the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall
be binding upon the Company and Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is
possible that additional Gross-Up payments should have been made by the
Company (an "Underpayment"). If the Company exhausts its remedies
pursuant to Section 5.4(c) and Executive thereafter is
<PAGE>
7
required to make a payment of any Excise Tax, the accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit
of Executive.
(c) Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notice shall be given as soon as
practicable but no later than ten (10) business days after Executive knows
of such claim and shall apprise the Company of the nature and date of
requested payment of such claim. Executive shall not pay such claim before
the earlier of (x) the date thirty (30) days after Executive's notice to
the Company or (y) the date on which payment of taxes with respect to such
claim is due. If the Company notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim, Executive
shall:
(i) give the Company any reasonable requested information
relating to such claim;
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim; provided, however that the Company shall bear
and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and
shall indemnify and hold such Executive harmless, on an after-tax
basis, for any Excise Tax or additional Income Tax imposed as a
result of such representation and payment of costs and expenses.
Without limiting this Section 5.4(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole
option, may (1) pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in
respect of such claim and (2) either direct Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible
manner. Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs
such Executive to pay such claim and sue for a refund, the Company
shall advance the amount of such payment to Executive, on an
interest-free basis, and shall indemnify and hold Executive harmless,
on an after-tax basis, from any Excise Tax or Income Tax imposed with
<PAGE>
8
respect to such advance; and further provided that any extension of
the statute of limitations for the taxable year of Executive with
respect to which such contested amount is claimed to be due is
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and Executive shall be entitled to settle or
contest any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by Executive of any amount advanced by the
Company pursuant to Section 5.4(c), Executive becomes entitled to
receive any refund with respect to such claim, executive shall (subject
to the Company's complying with the requirements of Section 5.4(c))
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If,
after the receipt by Executive of an amount advanced by the Company
pursuant to Section 5.4(c), a determination is made that such Executive
shall not be entitled to any refund with respect to such claim and the
Company does not notify Executive in writing of its intent to contest
such denial of refund prior to the expiration of thirty days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of any Gross-Up Payment required to be paid.
6. CONFIDENTIALITY; NON-COMPETE.
While employed by the Company and thereafter, Executive shall
not disclose any confidential information either directly or indirectly, to
anyone (other than the Company, its employees and advisors), or use such
information for his own account, or for the account of any other person or
entity, without the prior written consent of the Company or except as
required by law. This confidentiality covenant has no temporal or
geographical restriction. Upon termination of this Agreement, Executive shall
promptly supply to the Company all property and any other tangible product or
document which has been produced by, received by or otherwise submitted to
Executive during or prior to his term of employment, and shall not retain any
copies thereof.
Executive acknowledges that his services are of special, unique
and extraordinary value to the Company. Accordingly, in the event Executive
resigns without Good Reason or is terminated for Cause during the term
hereof, Executive shall not at any time prior to the first anniversary of the
Date of Termination become an employee, consultant, officer, partner or
director of any air carrier which competes with the Company (or any of its
affiliates) or have any significant interest (I.E., 10% or more of the voting
stock) in any such air carrier.
<PAGE>
9
Executive agrees that any breach of the terms of this Section 6
would result in irreparable injury and damage for which there would be no
adequate remedy at law, and that, in the event of said breach or any threat
of breach, the Company shall be entitled to an immediate injunction and
restraining order to prevent such breach or threatened breach, without having
to prove damages, in addition to any other remedies to which the Company may
be entitled at law or in equity. Executive further agrees that the provisions
of the covenant not to compete are reasonable. Should a court determine,
however, that any provision of the covenant not to compete is unreasonable,
either in period of time, geographical area, or otherwise, the parties hereto
agree that the covenant should be interpreted and enforced to the maximum
extent which such court deems reasonable. The provisions of this Section 6
shall survive any termination of this Agreement and Executive's term of
employment. The existence of any claim or cause of action or otherwise, shall
not constitute a defense to the enforcement of the covenants and agreements
of this Section 6.
7. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall bind any successor to Significant
Assets, whether by purchase, merger, consolidation or otherwise, in the same
manner and to the same extent that the Company would be obligated under this
Agreement if no such succession had taken place. Notwithstanding that a
successor to Significant Assets becomes bound to this Agreement, the Company
shall continue to be liable for the obligations hereunder as a guarantor. In
any agreement providing for succession to Significant Assets, the Company
shall cause each and every successor expressly and unconditionally to assume
and agree to perform the Company's obligations under this Agreement.
(b) In the event that another air carrier directly or
indirectly acquires Significant Assets, the Company shall cause such airline
to provide Executive and Eligible Individuals with pass privileges equivalent
to those provided under the Airline Pass described in Section 3.1.
(c) This Agreement and all rights of Executive hereunder shall
inure to the benefit of and be enforceable by, Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
8. TERM.
The term of this Agreement shall commence on the Effective Date
and end upon the Executive's termination of employment. The rights and
obligations of the Company and Executive shall survive the termination of
this Agreement to the extent necessary to give effect to the terms hereof.
<PAGE>
10
9. NOTICES.
Notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly given when
delivered to and mailed by United States mail, addressed: (a) if to
Executive, Donald A. Washburn, 4621 Wooddale Avenue South, Edina, Minnesota
55424, and
(b) if to the Company, c/o Northwest Airlines, Inc., 5101
Northwest Drive, St. Paul, Minnesota 55111-3034, Attention: General
Counsel, or to such other address as may have been furnished in writing.
10. COUNSEL FEES AND INDEMNIFICATION.
(a) The Company shall pay, or promptly reimburse on an as-incurred
basis to Executive, the reasonable fees and expenses of Executive's legal
counsel for its services rendered in connection with, Executive's enforcement
of this Agreement provided, however, that if Executive institutes any
proceeding to enforce this Agreement and the judge, arbitrator or other
individual presiding over the proceeding affirmatively finds that Executive
instituted the proceeding in bad faith, Executive shall pay all costs and
expenses, including attorney's fees, of Executive and the Company.
(b) The Company shall indemnify and hold Executive harmless, to
the maximum extent permitted by law, against judgments, fines, amounts paid
in settlement and reasonable expenses, including attorneys' fees incurred by
Executive, in connection with any action or proceeding (or any appeal from
any action or proceeding) with respect to the Company or activities engaged
in by Executive in the course of employment with the Company in which
Executive is made, or is threatened to be made, a party or a witness.
11. WITHHOLDING.
All payments required to be made by the Company hereunder shall be
subject to the withholding of such amounts as are required to be withheld
pursuant to any applicable law or regulation.
12. CERTAIN DEFINED TERMS.
As used herein, the following terms have the following meanings:
"AGREEMENT" shall mean this Management Compensation Agreement, as
the same may be amended, supplemented or otherwise modified from time to
time.
"BASE SALARY" shall mean the annual salary of the Executive in
effect from time to time under Section 2.1.
<PAGE>
11
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean with respect to termination of Executive's
employment hereunder (i) an act or acts of personal dishonesty by Executive
intended to result in substantial personal enrichment of Executive at the
expense of the Company, (ii) an act or acts of personal dishonesty by
Executive intended to cause substantial injury to the Company, (iii) material
breach (other than as a result of a Disability) by Executive of Executive's
obligations under this Agreement which action was (a) undertaken without a
reasonable belief that the action was in the best interest of the Company and
(b) not remedied within a reasonable period of time after receipt of written
notice from the Company specifying the alleged breach, or (iv) the conviction
of Executive of a felony.
"CHANGE IN CONTROL" means any one of the following:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) or the Securities
Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (i) the then outstanding shares
of Common Stock of Parent (the "Outstanding Parent Common Stock") or
(ii) the combined voting power of the then outstanding voting securities
of Parent entitled to vote generally in the election of directors (the
"Outstanding Parent Voting Securities"); provided, however, this
subsection (a) shall not apply to the Investor Stockholders party to the
Second Amended and Restated Stockholders' Agreement dated as of
December 23, 1993; or
(b) Individuals who, as of June 1, 1994, constitute the Board
of Directors of Parent (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided, however, that
any individual becoming a director subsequent to June 1, 1994, whose
election, or nomination for election by Parent's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors of Parent; or
(c) Approval by the shareholders of Parent of a reorganization,
merger or consolidation (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals
<PAGE>
12
and entities who were the beneficial owners, respectively, of the
Outstanding Parent Common Stock and Outstanding Parent Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns Parent through
one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Parent Stock and Outstanding Parent Voting Securities, as
the case may be and (ii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination
were members of the Incumbent Board at the time of the executions of the
initial agreement or of the action of such Board, providing for such
Business Combination; or
(d) Approval by the shareholders of Parent of (i) a complete
liquidation or dissolution of Parent or (ii) the sale or other
disposition of all or substantially all of the assets of Parent, other
than to a corporation with respect to which following such sale or
other disposition, (X) more that 50% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners
respectively, of the Outstanding Parent Common Stock and Outstanding
Parent Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership
immediately prior to such sale or other disposition of the Outstanding
Parent Common Stock and Outstanding Parent Voting Securities, as the
case may be and (Y) at least a majority of the members of the board of
directors of such corporation were members of the Incumbent
Board at the time of the execution of the initial agreement, or other
action of such Board, providing for such sale or other disposition of
assets of Parent or were elected, appointed or nominated by the
Incumbent Board.
"COMMON STOCK" shall mean all issued and outstanding common stock,
of all classes, of the Parent, including any outstanding securities
convertible into such common stock.
"DATE OF TERMINATION" shall mean, with respect to Executive, the
date of termination of Executive's employment hereunder after the notice
period provided by Section 4.4.
<PAGE>
13
"DISABILITY" shall mean Executive's physical and mental condition
which prevents continued performance of his duties hereunder, if Executive
established by medical evidence that such condition will be permanent and
continuous during the remainder of Executive's life or is likely to be of at
least three years' duration.
"EFFECTIVE DATE" shall mean September 1, 1996.
"GOOD REASON" shall mean with respect to an Executive, any one or
more of the following:
(a) a material reduction in Executive's compensation or other
benefits (except as permitted hereunder);
(b) any material change in Executive's job responsibilities;
provided that, so long as Executive retains a substantial part of his
then current oversight responsibility, a transfer of a portion of such
oversight responsibility of Executive shall not in and of itself
constitute a material change in Executive's job responsibilities;
(c) the relocation of the Company's principal executive
offices to a location outside the Minneapolis-St. Paul Metropolitan Area;
(d) a failure by the Company to comply with any material
provision of this Agreement which has not been cured within ten (10)
days after the Company knows or has notice of such noncompliance.
In order for an Executive's termination of his employment to
be considered for Good Reason, such termination must occur within one
year after the event giving rise to such Good Reason. Executive's
continued employment shall not constitute consent to, or waiver of
rights with respect to, any circumstance constituting Good Reason
hereunder.
"NOTICE OF TERMINATION" shall mean a notice specifying the Date of
Termination, which notice shall (i) indicate the specific termination
provision (if any) in this Agreement applicable to the termination, and (ii)
set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated.
"PARENT" shall mean Northwest Airlines Corporation.
"PERSON" shall mean an individual, a corporation, a company, a
voluntary association, a partnership, a trust, an unincorporated organization
or a government or any agency, instrumentally or political subdivision
thereof.
<PAGE>
14
"SIGNIFICANT ASSETS" shall mean (i) all or substantially all of the
assets and/or business or outstanding voting securities, of the Company (ii)
all or substantially all of Northwest's routes between the United States and
Japan.
"SUBSIDIARY" of a Person shall mean any corporation, partnership
(limited or general), trust or other entity of which a majority of the stock
(or equivalent ownership or controlling interest) having voting power to
elect a majority of the board of directors (if a corporation) or to select
the trustee or equivalent controlling interest, shall at the time such
reference becomes operative, be directly or indirectly owned or controlled by
such Person or one or more of the other subsidiaries of such person or any
combination thereof.
"2-R" shall mean space available travel in first, business or coach
class, with boarding priority (i) ahead of the categories specified below
category "2-R" on Exhibit A attached hereto and (ii) within category "2-R,"
based on seniority with the Company.
"F-1" shall mean confirmed seating in first class or business class
if first class is not offered, with boarding priority (i) ahead of the
categories specified below category "F-I" on Exhibit A attached hereto and
(ii) within category "F-I," based on seniority with the Company.
"Y-1/F-2" shall mean confirmed seating travel in coach class and
space available travel in first or business class, with boarding priority
(i) ahead of the categories specified below category "Y-a/F-2" in Exhibit A
attached hereto, and (ii) within category "Y-1/F-2," based on seniority with
the Company.
13. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by Executive and such officer as may be specifically
designated by the Board. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this
Agreement. There shall be no right of set-off or counterclaim, in respect of
any claim, debt or obligation, against any payments to Executive, his
dependents, beneficiaries or estate provided for in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Minnesota, without regard to
principles of conflicts of laws.
<PAGE>
15
14. VALIDITY.
The invalidity or unenforceability of any provision or provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and effect.
15. DISPUTES; REMEDIES.
If either the Company, on the one hand, or Executive, on the other
hand, breaches or threatens to commit a breach of the terms and conditions
hereof, the other party shall have the following rights and remedies:
(a) Specific performance (I.E., the right and remedy to have the
terms and conditions hereof specifically enforced by any court of
competent jurisdiction), it being agreed that any breach or threatened
breach of the terms and conditions hereof would cause irreparable injury
and that money damages may not provide an adequate remedy; and
(b) Damages (I.E., the right to receive from any violator of the
terms and conditions hereof, any and all damages, costs and expenses
incurred by the injured party as a result of the breach of the terms and
conditions hereof).
16. PARENT UNDERTAKING.
Northwest Airlines Corporation, as parent corporation to the
Company, hereby agrees to cause the Company to perform all of its obligations
hereunder and Executive shall be deemed to have entered into this Agreement
in reliance upon the undertaking set forth herein.
NORTHWEST AIRLINES, INC.
by: /s/ Douglas M. Steenland
--------------------------
NORTHWEST AIRLINES CORPORATION
by: /s/ Douglas M. Steenland
--------------------------
/s/ Donald A. Washburn
-----------------------------
Donald A. Washburn
<PAGE>
Exhibit 10.61
NORTHWEST AIRLINES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(1995 Statement)
<PAGE>
NORTHWEST AIRLINES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(1995 STATEMENT)
TABLE OF CONTENTS
PAGE
SECTION 1. INTRODUCTION ......................................... 1
SECTION 2. PLAN NAME ............................................ 2
SECTION 3. PARTICIPANTS ......................................... 2
3.1. Participants
3.2. COntinuation of Status
SECTION 4. BENEFITS PAYABLE ..................................... 2
4.1. Benefit for Participants
4.2. Benefit for BEneficiaries
4.3. ancillary Agreements
SECTION 5. FUNDING .............................................. 5
5.1. Unfunded Obligation
5.2. Hedging Investments
5.3. Corporate Obligation
SECTION 6. GENERAL MATTERS ...................................... 5
6.1. Amendments
6.2. ERISA Administrator
6.3. Service of Process
6.4. Limited Benefits
6.5. Spendthrift Provision
6.6. Certifications
6.7. Errors in Computation
SECTION 7. FORFEITURE OF BENEFITS ............................... 6
SECTION 8. CLAIMS PROCEDURE ..................................... 6
8.1. Initiating Benefits
8.2. Original Claim
8.3. Claims Review Procedure
8.4. General Rules
SECTION 9. CONSTRUCTION ......................................... 8
9.1. Defined Terms
9.2. ERISA Status
9.3. IRC Status
9.4. Effect on Other Plans
9.5. Disqualification
9.6. Rules of Document Construction
9.7. References to Laws
9.8. Effect on EMployment
9.9. Choice of Law
SIGNATURE ....................................................... 9
APPENDIX A -- SAMPLE COMPUTATIONS ............................... A-1
APPENDIX B -- DEFINITIONS ....................................... B-1
-i-
<PAGE>
NORTHWEST AIRLINES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(1995 STATEMENT)
SECTION 1
INTRODUCTION
NORTHWEST AIRLINES, INC., a Minnesota corporation, (the "Principal
Sponsor") and certain affiliated corporations maintain a tax-qualified defined
benefit pension plan known as the NORTHWEST AIRLINES, INC. RETIREMENT PLAN FOR
MANAGEMENT EMPLOYEES (the "Pension Plan") for the purpose of providing
retirement benefits to certain eligible employees. The pension Plan is subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and is intended to qualify as a defined benefit pension plan under section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). By
operation of section 401(a)(16) of the Code, benefits under the Pension Plan
are restricted so that they do not exceed certain maximum benefits allowed
under section 415 of the Code. With respect to benefits accruing under the
Pension Plan during years beginning after December 31, 1988, section
401(a)(17) of the Code restricts the maximum amount amount of annual
compensation which may be taken into account in determining the benefits for
any employee. Under the rules of section 401(a)(4) of the Code, some
pre-participation and imputed service may not be recognized under the Pension
Plan in computing benefits.
Section 3(36) and section 4(b)(5) of ERISA recognize and authorize the
establishment of an unfunded, nonqualified plan of deferred compensation
maintained by an employer solely for the purpose of providing benefits for
employees in excess of the limitations on benefits imposed under section 415
of the Code. Section 201, 301 and 401 of ERISA also recognize the creation of
an unfunded plan maintained by an employer primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees.
The Principal Sponsor, pursuant to these provisions of ERISA, previously
established and now maintains for the benefit of some management or highly
compensated employees who are Participants in the Pension Plan a
nonqualified, defined benefits to compensate select officers and management
employees for qualified and nonqualified retirement benefits that would have
been earned but for a mid-career change of employment and to provide and
incentive to remain with the Principal Sponsor.
Therefore, effective as of January 1, 1995, the Principal Sponsor hereby
creates and establishes this nonqualified deferred compensation plan for the
purpose of providing retirement benefits to eligible employees.
<PAGE>
SECTION 2
PLAN NAME
This employee pension benefit plan shall be referred to as the NORTHWEST
AIRLINES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "SERP"),
SECTION 3
PARTICIPANTS
3.1 PARTICIPANTS. The Participants in the SERP shall be those individuals
who have been expressly designated as Participants by the Principal Sponsor
in writing. The effective date for the commencement of SERP participation for
each such individual shall be the date specified in such writing.
3.2 CONTINUATION OF STATUS. Any individual who has become a Participant in
the SERP shall continue as a Participant until all benefits which are due
under this SERP have been received without regard to whether he or she
continues as an officer or a participant in the Pension Plan or an active
employee.
SECTION 4
BENEFITS PAYABLE
4.1. BENEFIT FOR PARTICIPANTS.
4.1.1. ENTITLEMENT AND AMOUNT. Upon the retirement or other
termination of employment of a Participant who has any vested and
nonforfeitable entitlement to an Accrued Benefit under the Pension Plan, this
SERP shall pay to a Participant the excess, if any, of:
(a) the amount that would have been payable to the Participant under the
Pension Plan if such benefit had been determined:
(i) without regard to the benefit limitations under section 415 of the
Code, and
(ii) without regard to the compensation limitation of section
401(a)(17) of the Code, and
(iii) assuming that the Participant's actual Benefit Service was
increased by two (2) additional deemed years of Benefit Service
for each actual year of employment completed by the Participant
on or after the Participant's effective date for the commencement
of SERP participation (not to exceed ten additional deemed years
over and above the actual Benefit Service), and
(iv) computing the Participant's Earnings and Final Average Earnings
on the basis of thirty-six (36) months rather than sixty (60)
months and without regard to whether those thirty-six (36) months
are consecutive, and
(v) by including in Earnings and in Final Average Earnings amounts
not otherwise included because they were deferred at the election
of the
- 2 -
<PAGE>
Participant under a nonqualified deferred compensation plan at
the time or times when they would have been included but for
such election to defer; minus
(b) the amount actually paid from the Pension Plan and the Excess Plan.
The definitions of Earnings and Final Average Earnings are, except as
specifically provided herein, contained in the Pension Plan. For this purpose
and for similar purposes in Section 4.2. notwithstanding anything to the
contrary in the definition of Earnings and Final Average Earnings in the
Pension Plan: (a) bonuses paid pursuant to the Principal Sponsor's annual
bonus program shall be spread evenly over the months on the calendar year in
which such bonuses were earned, (b) other bonuses (such as "sign on bonuses")
shall be spread evenly over the twelve (12) months in the calendar year in
which such bonuses are paid, (c) income attributable in any manner to stock
options is not included in Earnings either when paid or received, (d)
severance payments, however denominated, are not included in Earnings, and
(e) any gross up payments shall be excluded from Earnings if they relate to
items that are themselves excluded from Earnings (such as relocation
payments).
4.1.2. FORM OF PAYMENT. Except as may otherwise be specifically
provided in this SERP, this benefit (minus the withholding, payroll and other
taxes which must be deducted therefrom) shall be paid to the Participant in
the same manner, at the same time, for the same duration and in the same form
as if such benefit had been paid directly from the Pension Plan. All
elections and optional forms of settlement in effect and all other rules
governing the payment of benefits under the Pension Plan shall, to the extent
practicable, be given effect under this SERP so that the Participant will
receive from a combination of the Pension Plan, the Excess Plan and this SERP
the same benefit (minus the withholding, payroll and other taxes which must
be deducted therefrom) which would have been received under the Pension Plan.
Notwithstanding the foregoing, the benefit payable from this SERP shall
commence until:
(a) at or after the Participant attains age sixty (60) years, or
(b) at or after the Participant attains age fifty-five (55) years, but
only if the retirement or other termination of employment was :
(i) by action of the Principal Sponsor other than for Cause (as
defined in Section 9), or
(ii) for Good Reason (as defined in Section 9), or
(iii) at the request of or with the prior consent of the Principal
Sponsor.
Notwithstanding the provisions of the Pension Plan and the Excess Plan
regarding the reduction of benefits for early commencement, if the first
payment of the benefit payable under this SERP precedes the last day of the
month following the month in which the Participant would attain age
sixty-five (65) years, the amount otherwise payable under those first payment
precedes the last day of the calendar month following the month in which the
Participant would attain age sixty-five (65) years. (Payments made under the
Pension Plan and the Excess Plan shall be reduced for early commencement in
accordance with the rules in the Pension Plan and the Excess Plan.)
4.2. BENEFIT FOR THE BENEFICIARIES.
4.2.1. ENTITLEMENT AND AMOUNT. Upon the death of a Participant, this
SERP shall pay to the surviving spouse or other joint or contingent annuitant
or beneficiary of a Participant the excess, if any, of:
- 3 -
<PAGE>
(a) the amount which would have been payable to such person under
the Pension Plan if such benefit had been determined:
(i) without regard to the benefit limitations under section
415 of the Code, and
(ii) without regard to the compensation limitation of section
401(a)(17) of the Code, and
(iii) assuming that the Participant's actual Benefit Service
was increased by two (2) additional deemed years of
Benefit Service for each actual year of employment
completed by the Participant on or after the
Participant's effective date for the commencement of SERP
participation (not to exceed ten additional deemed years
over and above the actual Benefit Service), and
(iv) computing the Participant's Earnings and Final Average
Earnings on the basis of thirty-six (36) months rather
than sixty (60) months and without regard to whether
those thirty-six (36) months are consecutive, and
(v) by including in Earnings and in Final Average Earnings
amounts not otherwise included because they were deferred
at the election of the Participant under a nonqualified
deferred compensation plan at the time or times when they
would have been included but for such election to defer;
minus
(b) the amount actually paid from the Pension Plan and the Excess
Plan.
4.2.2. FORM OF PAYMENT. This benefit (minus the withholding, payroll
and other taxes which must be deducted therefrom) shall be paid to the
Participant in the same manner, at the same time, for the same duration and
in the same form as if such benefit had been paid directly from the Pension
Plan. All elections and optional forms of settlement in effect and all other
rules governing the payment of benefits under the Pension Plan shall, to the
extent practicable, be given effect under this SERP so that the Participant
will receive from a combination of the Pension Plan, the Excess Plan and this
SERP the same benefit (minus the withholding, payroll and other taxes which
must be deducted therefrom) which would have been received under the Pension
Plan if the Excess Plan and the SERP benefit had been paid from the Pension
Plan. To the extent relevant to the determination of the amount of benefit
payable to a surviving spouse or other joint or contingent annuitant under
this SERP, early commencement reduction factors consistent with those
applicable to payments to a Participant under Section 4.1 shall also be
applied to the benefit payable to any survivor under this Section 4.2.
4.3. ANCILLARY AGREEMENTS. A Participant and the Principal Sponsor may, from
time to time, enter into other written agreements which vary the entitlement
to, computation of and form of benefits under this SERP including, but not
limited to, agreements requiring that this SERP recognize additional periods
of Benefit Service or Vesting Service or both and that this SERP recognize
additional Earnings and Final Average Earnings. With respect to any such
Participant, such written agreement shall be given effect under this SERP as
if fully set forth herein.
- 4 -
<PAGE>
SECTION 5
FUNDING
5.1. UNFUNDED OBLIGATION. The obligation of the Principal Sponsor to make
payments under this SERP constitutes only the unsecured (but legally
enforceable) promise of the Principal Sponsor to make such payments. The
Participant shall have no lien, prior claim or other security interest in any
property of any Principal Sponsor. If a fund is established by the Principal
Sponsor in connection with this SERP, the property therein shall remain the
sole and exclusive property of the Principal Sponsor. The Principal Sponsor
will pay the cost of this SERP out of its general assets.
5.2. HEDGING INVESTMENTS. If the Principal Sponsor elects to finance all or
a portion of its costs in connection with this SERP through the purchase of
life insurance or other investments, the Participant agrees, as a condition
of participation in this SERP, to cooperate with the Principal Sponsor and
relinquishes any claim he or she may have either for himself or herself or
any beneficiary to the proceeds of any such investment or any other rights or
interests in such investment. If a Participant fails or refuses to cooperate,
then notwithstanding any other provision of this SERP (including, without
limiting the generality of the foregoing, Section4) the Principal Sponsor
shall immediately and irrevocably terminate and forfeit the Participant's
entitlement to benefits under the SERP.
5.3. CORPORATE OBLIGATION. Neither the Principal Sponsor's officers nor any
member of its Board of Directors in any way secures or guarantees the payment
of any benefit or amount which may become due and payable hereunder to or
with respect to any Participant. Each Participant and other person entitled
at any time to payments hereunder shall look solely to the assets of the
Principal Sponsor for such payments as an unsecured, general creditor. After
benefits shall have been paid to or with respect to a Participant and such
payment purports to cover in full the benefit hereunder, such former
Participant or other person or persons, as the Sponsor in connection with
this SERP. Neither the Principal Sponsor nor any of its officers nor any
member of its Board of Directors shall be under any liability or
responsibility for failure to effect any of the objectives or purposes of the
SERP by reason of the insolvency of the Principal Sponsor.
SECTION 6
GENERAL MATTERS
6.1 AMENDMENTS. This SERP may be amended by action of the Principal Sponsor
without the consent of any Participant in whole or in part, from time to time
and at any time; PROVIDED, HOWEVER, that no amendment of this SERP shall be
effective as to a Participant to the extent the amendment would have the
effect of diminishing the benefits payable to or with respect to the
Participant under this SERP or the procedural rights of the Participant under
this SERP unless the Participant has consented to such amendment in writing.
6.2. ERISA ADMINISTRATOR. The Principal Sponsor shall be the plan
administrator of this SERP.
6.3. SERVICE OF PROCESS. In the absence of any designation to the contrary
by the Principal Sponsor, the Secretary of the Principal Sponsor is
designated as the appropriate and exclusive agent for the receipt of service
of process directed to the Plan in any legal proceeding, including
arbitration, involving the plan.
- 5 -
<PAGE>
6.4. LIMITED BENEFITS. This SERP shall not provide any benefits determined
with respect to any defined contribution plan.
6.5. SPENDTHRIFT PROVISION. No Participant, surviving spouse, joint or
contingent annuitant or beneficiary shall have the power to transmit, assign,
alienate, dispose of, pledge or encumber any benefit payable under this SERP
before its actual payment to such person. The Principal Sponsor shall not
recognize any such effort to convey any interest under this SERP. No benefit
payable under this SERP shall be subject to attachment, garnishment,
execution following judgment or other legal process before actual payment to
such person.
6.6. CERTIFICATIONS. In formation to be supplied or written notices to be
made or consents to be given by the Principal Sponsor pursuant to any
provision of this SERP may be signed in the name of the Principal Sponsor by
any other officer who has been authorized to make such certification or to
give such notices or consents.
6.7. ERRORS IN COMPUTATIONS. The Principal Sponsor shall not be liable or
responsible for any error in the computation of any benefit payable to or
with respect to any Participant resulting from any misstatement of fact made
by the Participant or by or on the behalf of any survivor to whom such
benefit shall be payable, directly or indirectly, to the Principal Sponsor,
and used by the Principal Sponsor in determining the benefit. The Principal
Sponsor shall not be obligated or required to increase the benefit payable to
or with respect to such Participant which, on discovery of the misstatement,
is found to be understated as a result of such misstatement of the
Participant. However, the benefit of any Participant which is overstated by
reason of any such misstatement or any other reason shall be reduced to the
amount appropriate in view of the truth (and to recover any prior
overpayment).
SECTION 7
FORFEITURE OF BENEFITS
All benefits under this SERP, shall be permanently forfeited if the
Participant becomes at any time an employee of any of the top five (5)
passenger airlines in the United States (other than the Principal SPonsor) as
ranked by revenue passenger miles. In no event shall this Section serve as a
basis for requiring a Participant to repay any benefits previously paid to a
Participant prior to commencement of such employment.
SECTION 8
CLAIMS PROCEDURE
8.1. INITIATING BENEFITS. At the earliest time that a Participant may be
entitled to receive benefits under this SERP, the Principal Sponsor shall
notify the Participant of that entitlement and of the procedures for
requesting the payment of benefits hereunder. Without regard to whether such
notification is given by the Principal Sponsor, a Participant may request the
payment of benefits under this SERP. The Principal Sponsor shall, upon
receipt of such request expeditiously process the payment of benefits
hereunder.
8.2. ORIGINAL CLAIM. Any person may file with the Principal SPonsor a
written claim for benefits under the SERP. Within thirty (30) days after the
filing of such a claim, the Principal Sponsor shall notify the claimant in
writing whether his or her claim is upheld or denied in circumstances
requiring a specified amount of additional time (but not more than sixty days
from the date the claim was filed) to reach a decision on the claim. If the
claim is denied in whole or in part, the Principal Sponsor shall state in
writing:
- 6 -
<PAGE>
(a) the specific reasons for the denial;
(b) the specific references to the pertinent provisions of this
SERP on which the denial is based;
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(d) an explanation of the claims review procedure set forth in this
section.
8.3. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of notice
that his or her claim has been denied in whole or in part, the claimant may
file with the Principal Sponsor a written request for a review and may, in
conjunction therewith, submit written issues and comments. Within thirty (30)
days after the filing of such request for review, the Principal Sponsor shall
notify the claimant in writing whether, upon review, the claim was upheld or
denied in whole or in part or shall furnish the claimant a written notice
describing specific special circumstances requiring a specified amount of
additional time (but not more than sixty days from the date the request was
filed) to reach a decision on the request for review.
8.4. GENERAL RULES.
(a) No inquiry or question shall be deemed to be a claim or a
request for a review of a denial claim unless made in
accordance with the claims procedure. The Principal Sponsor may
require that any claim for benefits and any request for a review
of a denied claim be filed on forms to be furnished by the
Principal Sponsor upon request.
(b) All decisions on claims and on requests for a review of denied
claims shall be made by the Principal Sponsor.
(c) The Principal Sponsor may, in its discretion, hold one or more
hearings on a claim or a request for a review of a denied claim.
(d) Claimants may be represented by a lawyer or other
representative (at their own expense). A claimant's
representative shall be entitled to receive copies of notices
sent to the claimant.
(e) The decision of the Principal Sponsor on a request for a review
of a denied claim shall be served on the claimant in writing.
If a decision or notice is not received by a claimant within
the time specified, the claim or request for a review of a
denied claim shall be deemed to be denied.
(f) Prior to filing a claim or a request for a review of a denied
claim, the claimant or his or her representative shall have a
reasonable opportunity to review a copy of this SERP and all
other pertinent documents in the possession of the Principal
Sponsor.
(g) The Principal Sponsor may permanently or temporarily delegate
all or a portion of its authority and responsibility under this
Section 8 to a committee or individual.
(h) The procedures and remedies herein are not exclusive. A
Participant shall not be required to exhaust these
administrative remedies. If there is litigation regarding the
benefits payable to or with respect to a Participant,
- 7 -
<PAGE>
determinations by the Principal Sponsor shall not be afforded
any deference and the matter shall be heard DE NOVO.
SECTION 9
CONSTRUCTION
9.1. DEFINED TERMS. Words and phrases used in this SERP with initial capital
letters, which are defined in the Pension Plan documents and which are not
separately defined in this SERP shall have the same meaning ascribed to them
in the Pension Plan documents unless in the context in which they are used it
would be clearly inappropriate to do so. For the purposes of this SERP, the
terms "Change in Control," "Cause" and "Good Reason" shall have the meanings
specified in the Appendix B to this SERP.
9.2. ERISA STATUS. This SERP is adopted with the understanding that it is
an unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
as provided in section 201(2), section 301(3) and section 401(a)(1) of ERISA.
Each provision shall be interpreted and administered accordingly.
9.3. IRC STATUS. This SERP is intended to be a nonqualified deferred
compensation arrangement. The rules of section 401(a) ET. SEQ. of the Code
shall not apply to this SERP. The rules of section 3121(v) and section
3306(r)(2) of the Code shall apply to this SERP.
9.4. EFFECT ON OTHER PLANS. This SERP shall not alter, enlarge or diminish
any person's employment rights or obligations or rights or obligations under
the Pension Plan, the Excess Plan or any other plan. It is specifically
contemplated that the Pension Plan and Excess Plan could, from time to time,
be amended and possibly terminated. This SERP shall not preclude any such
amendments or terminations. Although the Principal Sponsor is generally free
to amend and terminate the Pension Plan and the Excess Plan, no amendment or
termination of the Pension Plan or the Excess Plan shall be effective as to a
Participant to the extent the amendment or termination would have the effect
of diminishing the benefits payable to or with respect to the Participant (or
the procedural rights of the Participant) under this SERP unless the
Participant has affirmatively agreed in writing to such amendment or
termination.
9.5. DISQUALIFICATION. Notwithstanding any other provision of this SERP
or any election or designation made under the SERP, any individual who
feloniously and intentionally kills a Participant shall be deemed for all
purposes of this SERP and all elections and designations made under this SERP
to have died before such Participant. A final judgment of conviction of
felonious and intentional killing is conclusive for this purpose. In the
absence of a conviction of felonious and intentional killing, the Principal
Sponsor shall determine whether the killing was felonious and intentional for
this purpose.
9.6. RULES OF DOCUMENT CONSTRUCTION. Whenever appropriate, words used
herein in the singular may be read in the plural, or words used herein in the
plural may be read in the singular; the masculine may include the feminine;
and the words "hereof," "herein" or "hereunder" or other similar compounds of
the word "here" shall mean and refer to the entire SERP and not to any
particular paragraph or Section of this SERP unless the context clearly
indicates to the contrary. The titles given to the various Sections of this
SERP are inserted for convenience of reference only and are not part of this
SERP, and they shall not be considered in determining the purpose, meaning or
intent of any provision hereof. Notwithstanding any thing apparently to the
contrary contained in this SERP, the SERP shall be construed and administered
to prevent the duplication of benefits provided under this SERP and any other
qualified or nonqualified plan maintained in whole or in part by the
Principal Sponsor.
- 8 -
<PAGE>
9.7. REFERENCES TO LAWS. Any reference in this SERP to a statute or
regulation shall be considered also to mean and refer to any subsequent
amendment or replacement of that statute or regulation.
9.8. EFFECT ON EMPLOYMENT. Neither the terms of this SERP nor the benefits
hereunder nor the continuance thereof shall be a term of the employment of
any employee. The terms of this SERP shall not give any employee the right to
be retained in the employment of any Employer.
9.9. CHOICE OF LAW. This instrument has been executed and delivered in the
State of Minnesota and has been drawn in conformity to the laws of that State
and shall, except to the extent that federal law is controlling, be construed
and enforced in accordance with the laws of the State of Minnesota.
- 9 -
<PAGE>
APPENDIX A
SAMPLE COMPUTATIONS
The following examples are intended to illustrate
the computation of benefits under the SERP
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EXAMPLE 1: Pension Plan Excess Plan SERP
Actual age upon early 60 60 60
retirement in this
example
- -------------------------------------------------------------------------------------------------------------------
Benefit Service at the 5 5 5
effective date for
commencement of SERP
participation
- -------------------------------------------------------------------------------------------------------------------
Benefit Service upon 10 10 20
early retirement
- -------------------------------------------------------------------------------------------------------------------
Vesting Service upon 10 10 20
early retirement for
early discount
purposes
- -------------------------------------------------------------------------------------------------------------------
Final Average $150,000 $500,000 (lower than $600,000 (higher than Excess
Earnings upon early SERP because of 60 Plan because of
retirement month rule) 36 month rule)
- -------------------------------------------------------------------------------------------------------------------
Age 65 single life 60% x 10/30 x $150,000 = 60% x 10/30 x $500,000 = 60% x 20/30 x $600,000 =
annuity "gross" $30,000 $100,000 $140,000
benefit (ignoring for
the purpose of this
example the Covered
Compensation offset)
- -------------------------------------------------------------------------------------------------------------------
Age 65 benefit payable $30,000 $100,000 - $30,000 = $240,000 - $30,000 - $70,000 =
from this plan $70,000 $240,000
- -------------------------------------------------------------------------------------------------------------------
Reduction for this 24 months x 7/12% = 14% 24 months x 7/12% = 14% 60 months x 5/12% = 25%
piece of the benefit
for commencement at
age 60
- -------------------------------------------------------------------------------------------------------------------
Benefit at early $30,000 - (14% x $30,000) = $70,000 - (14% x 70,000) = $140,000 - (25% x $140,000) =
retirement age from $25,800 $60,200 $105,000
this plan
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A - 1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EXAMPLE 2: Pension Plan Excess Plan SERP
- -------------------------------------------------------------------------------------------------------------------
Actual age upon early 55 55 55
retirement in this
example
- -------------------------------------------------------------------------------------------------------------------
Benefit Service at the 5 5 5
effective date for
commencement of SERP
participation
- -------------------------------------------------------------------------------------------------------------------
Benefit Service upon 10 10 20
early retirement
- -------------------------------------------------------------------------------------------------------------------
Vesting Service upon 10 10 20
early retirement for
early discount
purposes
- -------------------------------------------------------------------------------------------------------------------
Final Average $150,000 $500,000 (lower than $600,000 (higher than Excess
Earnings at SERP because of 60 Plan because of
retirement month rule) 36 month rule)
- -------------------------------------------------------------------------------------------------------------------
Age 65 single life 60% x 10/30 x $150,000 = 60% x 10/30 x $500,000 = 60% x 20/30 x $600,000 =
annuity "gross" $30,000 $100,000 $240,000
benefit (ignoring for
the purpose of this
example the Covered
Compensation offset)
- -------------------------------------------------------------------------------------------------------------------
Age 65 benefit payable $30,000 $100,000 - $30,000= $240,000 - $30,000 - $70,000 =
from this plan $70,000 $140,000
- -------------------------------------------------------------------------------------------------------------------
Reduction for this 60 months x 7/12% = 35% 60 months x 7/12% = 35% 120 months x 5/12% = 50%
piece of the benefit plus plus
for commencement at 24 months x 1/3% = 8% 24 months x 1/3% = 8%
age 55 total = 43% total = 43%
- -------------------------------------------------------------------------------------------------------------------
Benefit at early $30,000 - (43% x $30,000) = $70,000 - (43% x 70,000) = $140,000 - (50% x $140,000) =
retirement age from $17,100 $39,900 $70,000
this plan
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A - 2
<PAGE>
APPENDIX B
DEFINITIONS
When used in the SERP with initial capital letters, the following terms
shall have the following meanings.
""CAUSE'' shall mean with respect to termination of Participant's employment
hereunder
(a) an act or acts of personal dishonesty by Participant intended to
result in substantial personal enrichment of Participant at the
expense of the Principal Sponsor.
(b) an act or acts of personal dishonesty by Participant intended to
cause substantial injury to the Principal Sponsor.
(c) material breach (other than as a result of a Disability) by
Participant of Participant's obligations under written agreement
between the Principal Sponsor and the Participant which action was
(i) undertaken without a reasonable belief that the action was in
the best interest of the Principal Sponsor, and
(ii) not remedied within a reasonable period of time after receipt
of written notice from the Principal Sponsor specifying the
alleged breach, or
(d) the conviction of Participant of a felony.
"CHANGE IN CONTROL" means any one of the following:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) or the Securities Exchange
Act of 1934 (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of the Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (i) the then outstanding
shares of Common Stock of Northwest Airlines Corporation (the
"Outstanding Parent Common Stock") or (ii) the combined voting power
of the then outstanding voting securities of Northwest Airlines
Corporation entitled to vote generally in the election of directors
(the "Outstanding Parent Voting Securities"); or
(b) Individuals who, as of June 1, 1994, constitute the Board of
Directors of Northwest Airlines Corporation (the "Incumbent Board")
cease for any reason to constitute at least a majority of such Board:
provided, however, that any individual becoming a director subsequent
to June 1, 1994, whose election or nomination for election by
Northwest Airlines Corporation's shareholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board
of Directors or Northwest Airlines Corporation; or
(c) Approval by the shareholders of Northwest Airlines Corporation of a
reorganization, merger or consolidation (a "Business Combination"),
in each case, unless, following such Business Combination, (i) all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Parent Common
Stock and Outstanding Parent Voting Securities
B-1
<PAGE>
immediately prior to such Business Combination beneficially own,
directly, or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns
Northwest Airlines Corporation through one or more subsidiaries) in
substantially the same proportions as their ownership immediately
prior to such Business Combination of the Outstanding Parent Stock
and Outstanding Parent Voting Securities, as the case may be and (ii)
at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial
agreement or of the action of such Board, providing for such Business
Combination: or
(d) Approval by the shareholders of Northwest Airlines Corporation of (i)
a complete liquidation or dissolution of Northwest Airlines
Corporation or (ii) the sale or other disposition of all or
substantially all of the assets of Northwest Airlines Corporation,
other than to a corporation with respect to which following such sale
or other disposition, (X) more than 50% of, respectively, the ten
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the
beneficial owners respectively, of the Outstanding Parent Common
stock and Outstanding Parent Voting Securities immediately prior to
such sale or other disposition in substantially the same proportions
as their ownership immediately prior to such sale or other
disposition of the Outstanding Parent Common Stock and Outstanding
Parent Voting Securities, as the case may be and (Y) at least a
majority of the members of the board of directors of such corporation
wee members of the Incumbent Board at the time of the execution of
the initial agreement, or other action of such Board, providing for
such sale or other disposition of assets of Northwest Airlines
Corporation or were elected, appointed or nominated by the Incumbent
Board.
"GOOD REASON" shall mean with respect to an Participant, any one or more of
the following:
(a) a material reduction in participant's compensation or other benefits
(except as permitted hereunder);
(b) any material change in participant's job responsibilities: provided
that, so long as Participant retains a substantial part of his then
current oversight responsibility, a transfer of a portion of such
oversight responsibility of Participant shall not in and of itself
constitute a material change in Participant's job responsibilities.
(c) the relocation of the Principal Sponsor's principal Participant
offices to a location outside the Minneapolis-St. Paul Metropolitan
Area;
(d) a failure by the Principal Sponsor to comply with any material
provision of a written agreement between the Principal Sponsor and
the Participant which has not been cured within ten (10) days after
the Principal Sponsor knows or has notice of such noncompliance.
In order for an Participant's termination of his employment to be considered
for Good Reason, such termination must occur within one (1) year after the
event giving rise to such Good Reason. Participant's continued employment
shall not constitute consent to, or a waiver of rights with respect to, any
circumstance constituting Good Reason hereunder.
B-2
<PAGE>
Exhibit 10.62
DOUGLAS M. STEENLAND
Senior Vice President
General Counsel and Secretary
Northwest Airlines, Inc. 612 727-6500
Department A1180 612 726-7123 Fax
5101 Northwest Drive
St. Paul MN 55111-3034
March 14, 1997
Mr. John H. Dasburg
One Overholt Pass
Edina, MN 55439
Dear Mr. Dasburg:
Pursuant to a letter agreement dated December 20, 1996, you presently are a
participant in Northwest Airlines, Inc.'s Supplemental Executive Retirement
Program (the ""SERP''). As provided for in Section 4.3 of the SERP, this
letter shall constitute an agreement requiring the SERP to recognize
additional years of benefit service with respect to your SERP benefit and
shall be given effect under the SERP as if fully set forth therein. We hereby
agree as follows:
1. The following rules shall apply to the determination of the benefit
payable to or with respect to you from the SERP.
a. On January 1, 1997, you shall be entitled to five (5) additional
years of Benefit Service in addition to the years to which you are
entitled under Section 4.1.1(a) and Section 4.2.1(a) of the SERP.
b. On January 1, 1998, you shall be entitled to three (3) additional years
of Benefit Service in addition to the years to which you are entitled
under Section 4.1.1(a) and Section 4.2.1(a) of the SERP and
paragraph 1(a) of this letter agreement, provided that you remain an
employee of the Company from the date hereof to January 1, 1998.
c. On January 1, 1999, you shall be entitled to [three (3) years] of
Benefit Service in addition to the years to which you are entitled
under Section 4.1.1(a) and Section 4.2.1(a) of the SERP and
paragraphs 1(a) and 1(b) of this letter agreement, provided that you
remain an employee of the Company from the date hereof to January 1,
1999.
<PAGE>
Mr. John Dasburg
March 14, 1997
Page 2
d. Notwithstanding the benefit calculation otherwise provided for under
the SERP, provided that you have remained an employee with the
Company through January 1, 1999 and commence receipt of your
retirement benefits at age 60 or thereafter, the composite annual
benefit payable to or with respect to you under the SERP, the Excess
Plan and the Pension Plan shall not be less than $500,000.
2. The additional years of Benefit Service and minimum annual benefit
payments provided for in Section 4.1.1(a) and Section 4.2.1(a) of the
SERP and paragraph 1 of this letter agreement shall accelerate upon (i) a
Change of Control, (ii) the termination of your employment by the Company
without Cause or (iii) the termination of your employment for Good
Reason. The definitions of the terms "Change of Control," "Cause" and
"Good Reason" shall be as set forth in Appendix B to the SERP.
If this letter accurately reflects your agreement with the Company, please
sign where indicated below.
Sincerely yours,
/s/ Douglas M. Steenland /s/ Christopher E. Clouser
- ------------------------ --------------------------
Douglas M. Steenland Christopher E. Clouser
Accepted and Agreed:
/s/ John H. Dasburg
- -------------------
John H. Dasburg
<PAGE>
DOUGLAS M. STEENLAND
Senior Vice President
General Counsel and Secretary
Northwest Airlines, Inc. 612 727-6500
Department A1180 612 726-7123 Fax
5101 Northwest Drive
St. Paul MN 55111-3034
December 20, 1996
Mr. John H. Dasburg
President
Northwest Airlines Corporation
2700 Lone Oak Parkway
Eagan, MN 55121
Dear Mr. Dasburg:
This letter shall evidence your participation in Northwest Airlines, Inc.'s
(the "Company") Supplemental Executive Retirement Program (the "SERP"), a
copy of which is attached hereto, and your entitlement to receive the
benefits provided for therein.
As provided for in Section 4.1.1(a)(iii) of the SERP, the grant to you of two
additional years of Benefit Service for each actual year of employment
completed shall be with respect to your employment commencing on and after
March 24, 1994.
A pre-retirement death benefit shall be payable, in the event of your death
while employed hereunder, to the individual who was your spouse on the date
of death. Such benefit shall be in an amount equal to 50% of your Base Salary
at the time of your death and such amount shall be payable annually for a
maximum of ten years or, if earlier, until you would have attained age 65;
provided, however, that the amounts payable hereunder shall be reduced by all
pre-retirement death benefits payable to your spouse under the Company's
qualified pension plan or a supplemental executive plan.
Sincerely yours,
/s/ Douglas M. Steenland
Douglas M. Steenland
Accepted and Agreed
/s/ John H. Dasburg
- -------------------
John H. Dasburg
cc: Chris Clouser
Dasburg Personnel File
<PAGE>
EXHIBIT 10.63
Name of Optionee: Number of Shares Subject
[ ] to the Option: [ ]
Grant Date: [ ]
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is made by and between Northwest Airlines Corporation, a
Delaware corporation ("NAC"), and [ ], the optionee
named above (the "OPTIONEE"), and employee of NAC or a Subsidiary (as defined
below) of NAC.
WHEREAS, pursuant to, and subject to the terms and conditions of, the 1994
Northwest Airlines Corporation Stock Incentive Plan (the "PLAN"), NAC granted
to the Optionee on [ ] (the "GRANT DATE") the nonqualified
option herein described (the "OPTION") and notified the Optionee of the grant
of the Option;
WHEREAS, the Plan provides that each option granted thereunder shall be
evidenced by a written option agreement; and
WHEREAS, NAC and the Optionee desire to enter into this Option Agreement for
the purpose of complying with the provisions of the Plan with respect to the
Option.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used in this Agreement shall have the meaning
attributed to them in the Plan or as set forth below, unless the context
indicates otherwise.
SECTION 1.1 - CAUSE
"CAUSE" shall mean with respect to the termination of the Optionee's
employment with NAC or a Subsidiary (a) an act or acts of personal dishonesty
by the Optionee intended to result in substantial personal enrichment of the
Optionee at the expense of NAC, (b) an act or acts of personal dishonesty by
the Optionee intended to cause substantial injury to NAC, (c) material breath
(other than as a result of a Disability) by the Optionee of the Optionee's
obligations under the terms and conditions of Optionee's employment, which
actions was (i) undertaken without a reasonable belief that the action was in
the best interest of NAC and (ii) not remedied within a reasonable period of
time after receipt of written notice from NAC specifying the alleged breach,
or (d) the conviction of the Optionee of a felony.
-1-
<PAGE>
SECTION 1.2 - COMMITTEE
"COMMITTEE" shall mean the Compensation and Stock Option Committee of NAC's
Board of Directors, the Compensation Administration Subcommittee thereof, or
such other committee of the Board of Directors of NAC that shall be appointed
from time to time to administer the Plan.
SECTION 1.3 - DISABILITY
"DISABILITY" shall mean the Optionee's physical or mental condition which
prevents continued performance of his or her duties and for which the
Optionee establishes by medical evidence that such condition will be
permanent and continuous during the remainder of the Optionee's life or is
likely to be of at least three (3) years' duration.
SECTION 1.4 - EXPIRATION DATE
"EXPIRATION DATE" shall mean the date on which the Option shall expire
pursuant to Section 2.4, unless terminated earlier pursuant to Section 3.2.
SECTION 1.5 - PURCHASE PRICE
"PURCHASE PRICE" shall mean the price set forth in Section 2.3 of this
Agreement.
SECTION 1.6 - RETIREMENT
"RETIREMENT" shall mean separation from service with NAC or a Subsidiary on
or after attainment of age sixty-five (65) or, with the prior written consent
of the Committee that such separation will be treated as a Retirement,
separation from service with NAC or a Subsidiary prior to attainment of age
sixty-five (65).
SECTION 1.7 - SECRETARY
"SECRETARY" shall mean the Secretary of NAC.
SECTION 1.8 - SUBSIDIARY
"SUBSIDIARY" shall mean any corporation in an unbroken chain of corporations
beginning with NAC if each of the corporations other than the last
corporation in the unbroken chain then
-2-
<PAGE>
owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one (1) of the other corporations in
such chain.
SECTION 1.9 - TERMINATION OF EMPLOYMENT
"TERMINATION OF EMPLOYMENT" shall mean the time when the employee-employer
relationship between the Optionee and NAC or any Subsidiary ceases for any
reason whatsoever.
ARTICLE II
THE OPTION
SECTION 2.1 - NUMBER OF SHARES
For good and valuable consideration, on the Grant Date, NAC irrevocably
grants to the Optionee on option to purchase all or any part of an aggregate
of [ ] shares of its Class A Common Stock, par value $.01 per share (the
"COMMON STOCK"), upon the terms and conditions set forth in this Agreement.
SECTION 2.2 - ADJUSTMENTS IN SHARES
If all or any portion of the Option is exercised subsequent to any stock
dividend, stock split, recapitalization, merger, consolidation, combination
or exchange of shares, separation, reorganization or liquidation as a result
of which shares of any class shall be issued in respect of outstanding shares
of Common Stock, or shares of Common Stock shall be changed into the same or
a different number of shares of the same or another class or classes, the
Optionee shall receive, upon exercise of the Option and for the aggregate
price paid upon such exercise of the Option, the aggregate number and class
of shares which, if shares of Common Stock (as authorized at the Grant Date)
had been purchased at the Grant Date for the same aggregate price (on the
basis of the Purchase Price per share set forth in Section 2.3 hereof) and
had not been disposed of, the Optionee would be holding, at the time of such
exercise, as a result of such purchase and any such stock dividend, stock
split, recapitalization, merger, consolidation, combination or exchange of
shares, separation, reorganization or liquidation; PROVIDED, HOWEVER, that no
fractional share shall be issued upon any such exercise, and the aggregate
price paid shall be appropriately reduced on account of any fractional share
not issued.
SECTION 2.3 - PURCHASE PRICE
The Purchase Price of the shares of Common Stock subject to the Option shall
be $[ ] per share without commission or other charge.
-3-
<PAGE>
SECTION 2.4 - OPTION TERM
The term of the Option shall be for a period of ten (10) years from the Grant
Date, subject to earlier termination as provided in Section 3.2 hereof.
ARTICLE III
EXERCISABILITY; TERMINATION
SECTION 3.1 - EXERCISABILITY
Subject to the provisions of Section 3.2 hereof, the Option, to the extent
not theretofore exercised, may be exercised at any time or from time to time,
as to any part or all of the shares subject to the Option in accordance with
the following schedule:
Date Option Becomes Percentage of Total Shares as
Exercisable to Which Option is Exercisable
- ------------------- ------------------------------
[
]
SECTION 3.2 - TERMINATION
(a) RETIREMENT. If a Termination of Employment shall occur by reason
of the Optionee's Retirement, any portion of the Option that was
exercisable as of the date of such Retirement and not theretofore
exercised, may be exercised by the Optionee at any time within one
(1) year after the date of such Retirement; PROVIDED, HOWEVER, that
if the Optionee dies or becomes Disabled within one (1) year after
such Retirement, then any portion of the Option that was exercisable
as of the date of the Optionee's Retirement and not theretofore
exercised shall not terminate pursuant to this Section 3.2 and may
be exercised during the remainder of the term of the Option by
the Optionee or by the estate of the Optionee or a person who shall
have acquired the right to exercise the Option by bequest or
inheritance. Any portion of the Option that was not exercisable as
of the date of such Retirement shall be cancelled immediately upon
such Retirement.
(b) DEATH OR DISABILITY. If a Termination of Employment shall occur by
reason of the Optionee's death or Disability, then any portion of the
Option that was exercisable as of the date of such death or
Disability and not theretofore exercised shall not terminate and may
be exercised during the remainder of the
-4-
<PAGE>
term of the Option by the Optionee or by the estate of the Optionee
or a person who shall have acquired the right to exercise the Option
by bequest or inheritance. Any portion of the Option that was not
exercisable as of the date of such death or Disability shall be
cancelled immediately upon such death or Disability.
(c) TERMINATION OF EMPLOYMENT FOR CAUSE. If the Optionee's employment
shall terminate for Cause, the Option, to the extent not theretofore
exercised, shall be cancelled immediately upon such Termination of
Employment.
(d) TERMINATION OF EMPLOYMENT OTHER THAN FOR CAUSE, DEATH, DISABILITY
OR RETIREMENT. If the employment of the Optionee shall be terminated
otherwise than by reason of Cause, death, Disability or Retirement,
any portion of the Option that was exercisable as of the date of such
Termination of Employment and not theretofore exercised may be
exercised by the Optionee at any time within ninety (90) days after
the date of such Termination of Employment. Any portion of the Option
that was not exercisable as of the date of such Termination of
Employment shall be cancelled immediately upon such Termination of
Employment.
ARTICLE IV
EXERCISE OF OPTION; ISSUANCE OF SHARES
SECTION 4.1 - TRANSFERABILITY
The Option may not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated and shall not be subject to execution, attachment
or similar process. Any attempted sale, transfer, pledge, assignment,
hypothecation or other disposition of the Option contrary to the provisions
hereof, or the levy of any execution, attachment or similar process upon the
Option, shall be null and void and without effect. In addition, the Option
may be exercised during the lifetime of the Optionee only by the Optionee.
Notwithstanding the foregoing, the designation of a beneficiary by the
Optionee does not constitute such transfer and, after the death of the
Optionee, any exercisable portion of the Option may be exercised by the
estate of the Optionee or by a person who shall have acquired the right to
exercise the Option by bequest or inheritance in accordance with the
provisions of Sections 3.2(a) and 3.2(b).
SECTION 4.2 - MANNER OF EXERCISE
Subject to the terms and conditions of this Agreement, the Option, or any
portion thereof, may be exercised by delivery of written notice of such
exercise to NAC at its principal office at 5101 Northwest Drive, St. Paul,
Minnesota 55111-3034, attention of the Secretary. Such notice shall state the
election to exercise the Option and the number of shares in respect of
-5-
<PAGE>
which it is being exercised and shall be signed by the person or persons so
exercising the Option. Such notice shall be accompanied by payment of the
full Purchase Price of such shares in the following manner:
(a) By cash (in United States dollars) or by check, bank draft or money
order payable to the order of NAC;
(b) through the delivery of shares of Common Stock with an aggregate
fair market value on the date the Option is exercised equal to the
full Purchase Price of such shares (the fair market value of such
shares shall be determined by the average of the high and low sale
price of a share of Common Stock on the NASDAQ National Market
System on such date);
(c) to the extent authorized by the Committee in its sole discretion, by
delivery of irrecovable instructions to a financial institution to
deliver promptly to NAC a portion of the proceeds obtained from the
sale of the shares of Common Stock issuable upon exercise of the
Option, which proceeds shall equal the full Purchase Price of such
shares; or
(d) by any other means which the Committee shall approve.
Such notice shall also be accompanied by payment of all amounts which NAC is
required under federal, state or local law to withhold upon the exercise of
the Option. In the event that the Option shall be exercised, pursuant to
Sections 3.2(a) and 3.2(b) hereof, by any person or persons other than the
Optionee, such notice shall be accompanied by appropriate proof of the right
to such person or persons to exercise the Option.
SECTION 4.3 - ISSUANCE OF SHARES OF COMMON STOCK
The certificate or certificates for the shares as to which the Option shall
have been exercised in the manner set forth in Section 4.2 hereof shall be
registered in the name of the person or persons so exercising the Option and
shall be delivered after payment of the full Purchase Price and any
applicable withholding taxes to or upon the written order of the person or
persons exercising the Option. All shares that shall be purchased upon the
exercise of the Option shall be fully paid and nonassessable. Anything in
this Agreement to the contrary notwithstanding, the obligation of NAC to sell
and deliver shares of Common Stock upon exercise of the Option shall be
subject to (i) all applicable laws, rules and regulations and such approvals
by any governmental agencies as may be required, including, without
limitation, the effectiveness of a registration statement under the
Securities Act of 1933, as amended, as deemed necessary or appropriate by
counsel for NAC and (ii) such shares having been approved for trading on the
NASDAQ National Market System.
-6-
<PAGE>
ARTICLE V
MISCELLANEOUS
SECTION 6.1 - ADMINISTRATION
The Committee shall have the power to interpret the Plan and this Agreement
and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or
revoke any such rules. All actions taken and all interpretations and
determinations made by the Committee shall be final and binding upon the
Optionee, NAC and all other interested persons. No member of the Committee
shall be personally liable for any action, determination or interpretation
made in good faith with respect to the Plan or the Option. In its absolute
discretion, the Board of Directors of NAC may at any time and from time to
time exercise any and all rights and duties of the Committee under the Plan
and this Agreement.
SECTION 6.2 - TERMINATION OF EMPLOYMENT
For purposes of this Option, the Committee, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Employment, including, without limitation, all questions of whether
particular leaves of absence constitute Terminations of Employment and
whether any reemployment by NAC shall be deemed to be simultaneous with
termination.
SECTION 6.3 - PLAN DOES NOT CONFER EMPLOYMENT OR STOCKHOLDER RIGHTS
Nothing in this Agreement shall confer upon the Optionee any right to
continue in the employ of NAC or any Subsidiary or interfere in any way with
the right of NAC or any Subsidiary to terminate the employment of the
Optionee at any time. Neither the Optionee nor any person entitled to
exercise the Optionee's rights in the event of the Optionee's death shall
have any of the rights of a stockholder of NAC with respect to the shares
subject to the Option except and to the extent that, and until, such shares
shall have been issued by NAC upon the exercise of the Option.
SECTION 6.4 - SHARES TO BE RESERVED
NAC shall at all times during the term of the Option reserve and keep
available such number of shares of Common Stock as will be sufficient to
satisfy the requirements of this Agreement.
-7-
<PAGE>
SECTION 6.5 - TITLES
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.
SECTION 6.6 - AMENDMENT
This Agreement may be amended only by a writing executed by the parties
hereto which specifically states that it is amending this Agreement.
SECTION 6.7 - GOVERNING LAW
The laws of the State of Delaware shall govern the interpretation, validity
and performance of the terms of this Agreement regardless of the law that
might be applied under principles of conflicts of laws.
SECTION 6.8 - JURISDICTION
Any suit, action or proceeding against the Optionee with respect to this
Agreement, or any judgment entered by any court in respect of any thereof,
may be brought in any court of competent jurisdiction in the States of
Delaware, Minnesota or New York, as NAC may elect in its sole discretion, and
the Optionee hereby submits to the non-exclusive jurisdiction of such courts
for the purpose of any such suit, action, proceeding or judgment.
SECTION 6.9 - NOTICES
All notices and other communications provided for herein shall be in writing
and shall be deemed to have been duly given if delivered by hand (whether by
overnight courier or otherwise) or sent by registered or certified mail,
return receipt requested, postage prepaid, to the party to whom it is
directed:
(a) If to NAC, to it at the following address:
Northwest Airlines Corporation
5101 Northwest Drive
St. Paul, Minnesota 55111-3034
Attn: Senior Vice President, General Counsel and Secretary
(b) If to the Optionee, to him at the address set forth below under his
signature;
or at such other address as either party shall from time to time specify by
notice in writing to the other.
-8-
<PAGE>
SECTION 6.10 - COUNTERPARTS
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
Dated as of ___________________, _________
NORTHWEST AIRLINES CORPORATION
By: ______________________________________
Its: SVP-General Counsel & Secretary
OPTIONEE
__________________________________________
Optionee's Taxpayer Identification
Number_________________________
OPTIONEE'S ADDRESS:
-9-
<PAGE>
Northwest Airlines, Inc. 612 727-6500
Department A1180 612 726-7123 Fax
5101 Northwest Drive
St. Paul MN 55111-3034
[ ]
To: [ ]
Dear [ ]:
You presently are party to [ ] Non-Qualified Stock Option Agreement[s]
with the Company dated [ ] in which portions
of the options granted to you are not yet exercisable.
By this letter, each of these Agreements is hereby amended to add a new
Section 3.3:
SECTION 3.3 - ACCELERATION
Notwithstanding the provisions in Section 3.1 above, any portion of the
Option that is not yet exercisable and has not otherwise been canceled
pursuant to Section 3.2 above shall otherwise become exercisable as
follows:
(a) Upon the occurrence of a Change of Control (as defined below), all
shares subject to the Option not theretofore exercised or canceled
shall become exercisable; or
(b) In the event of a merger between NAC and any U.S. passenger airline
conducting jet operations using aircraft with 100 or more seats,
which merger does not constitute a Change in Control of NAC for
purposes of this Agreement, but would constitute a Change in
Control of the other air
<PAGE>
Page 2
carrier if the definition of Change in Control in this Agreement were to be
applied to such air carrier, all shares subject to the Option not theretofore
exercised or canceled shall become exercisable in the event that, after such
a merger, (i) the Optionee's employment is terminated by the Company other
than for Cause or (ii) the Optionee terminates his or her employment for Good
Reason, (as the term "Good Reason" is defined in that certain Management
Compensation Agreement between Optionee and Northwest Airlines, Inc.).
(c) The term "Change of Control" shall mean any one of the following:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act"))(a "Person") of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% of more of either
(i) the then outstanding shares of Common Stock of NAC (the
"Outstanding Parent Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of NAC
entitled to vote generally in the election of directors (the
"Outstanding Parent Voting Securities") provided, however,
that this subsection (a) shall not apply to the Investor
Stockholders party to the Second Amended and Restated
Stockholders' Agreement dated as of December 23, 1993; or
(ii) Individuals who, as of June 1, 1994, constitute the Board of
Directors of NAC (the "Incumbent Board") cease for any reason
to constitute at least a majority of such Board; provided
however, that any individual becoming a director subsequent to
June 1, 1994, whose election, or nomination for election by
NAC's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with
respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board of Directors of
NAC; or
(iii) Approval by the stockholders of NAC of a reorganization,
merger or consolidation (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or
substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding
Parent Common Stock and
<PAGE>
Page 3
Outstanding Parent Voting Securities immediately prior to
such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting
power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may
be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation
which as a result of such transaction owns NAC through one or
more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business
Combination of the Outstanding Parent Stock and Outstanding
Parent Voting Securities, as the case may be, and (ii) at
least a majority of the members of the board of directors of
the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution
of the initial agreement or of the action of such Board,
providing for such Business Combination; or
(iv) Approval by the stockholders of NAC of (i) a complete
liquidation or dissolution of NAC or (ii) the sale or other
disposition of all or substantially all of the assets of NAC,
other than to a corporation with respect to which following
such sale or other disposition, (X) more than 50% of,
respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were
the beneficial owners respectively, of the Outstanding Parent
Common Stock and Outstanding Parent Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportion as their ownership
immediately prior to such sale or other disposition of the
Outstanding Parent Common Stock and Outstanding Parent Voting
Securities, as the case may be, and (Y) at least a majority
of the members of the board of directors of such corporation
were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of such
Board, providing for such sale or other disposition of assets
of NAC or were elected, appointed or nominated by the
Incumbent Board.
<PAGE>
Page 4
If this amendment is acceptable to you, please sign where indicated below.
Sincerely yours,
Douglas M. Steenland
Accepted and Agreed
- -----------------------
[ ]
<PAGE>
EXHIBIT 11.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Year ended December 31
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Reconciliation of net income applicable to common stockholders:
Income before extraordinary item per consolidated statement
of income $ 536.1 $ 342.1 $ 295.5
Preferred stock requirements (37.5) (57.8) (59.3)
------------ ----------- -----------
Income applicable to common stockholders before
extraordinary item and preferred stock transactions $ 498.6 $ 284.3 $ 236.2
Net gain on extinguishment of debt -- 49.9 --
Preferred stock transactions 74.5 58.9 --
------------ ----------- -----------
Net income applicable to common stockholders $ 573.1 $ 393.1 $ 236.2
------------ ----------- -----------
------------ ----------- -----------
Reconciliation of weighted average number of common shares outstanding
to amount used in primary earnings per share computation:
Weighted average number of common shares outstanding,
excluding shares issued to employee trusts 81,929,616 80,834,803 73,766,980
Weighted average number of common shares earned by employees
since August 1, 1993 due to the exercise of the Series C
Preferred Stock special conversion option in February 1994 15,685,963 10,543,706 5,070,769
Weighted average number of shares of Series C Preferred Stock
converted to common stock 1,116,338 -- --
Stock options outstanding reduced by the number of shares which
could have been purchased with the proceeds from exercise of
such options 2,355,398 2,924,019 2,050,794
------------ ----------- -----------
Weighted average number of common shares outstanding, as
adjusted 101,087,315 94,302,528 80,888,543
------------ ----------- -----------
------------ ----------- -----------
Earnings per common share - primary:
Before extraordinary item and preferred stock transactions $ 4.93 $ 3.02 $ 2.92
Net gain on extinguishment of debt -- .53 --
Preferred stock transactions .74 .62 --
------------ ----------- -----------
Earnings per common share $ 5.67 $ 4.17 $ 2.92
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
<PAGE>
EXHIBIT 11.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Year ended December 31
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Reconciliation of net income applicable to common stockholders:
Income before extraordinary item per consolidated statement
of income $ 536.1 $ 342.1 $ 295.5
Preferred stock requirements (37.5) (57.8) (59.3)
Addback: Series C Preferred Stock requirements .9 7.7 6.2
------------ ----------- -----------
Income applicable to common stockholders before extraordinary
item and preferred stock transactions $ 499.5 $ 292.0 $ 242.4
Net gain on extinguishment of debt -- 49.9 --
Preferred stock transactions 74.5 58.9 --
------------ ----------- -----------
Net income applicable to common stockholders, as adjusted $ 574.0 $ 400.8 $ 242.4
------------ ----------- -----------
------------ ----------- -----------
Reconciliation of weighted average number of shares outstanding to
amount used in fully diluted earnings per share computation:
Weighted average number of common shares outstanding,
excluding shares issued to employee trusts 81,929,616 80,834,803 73,766,980
Weighted average number of common shares earned by employees
since August 1, 1993 due to the exercise of the Series C
Preferred Stock special conversion option in February 1994 15,685,963 10,543,706 5,070,769
Weighted average number of shares of Series C Preferred Stock
earned by employees since August 1, 1993 for which the
special conversion option was not elected and converted to
common stock or assumed to be converted to common stock 11,333,277 7,441,240 3,563,242
Stock options outstanding reduced by the number of shares which
could have been purchased with the proceeds from exercise of
such options 2,410,046 3,421,357 2,091,076
------------ ----------- -----------
Weighted average number of common shares outstanding,
as adjusted 111,358,902 102,241,106 84,492,067
------------ ----------- -----------
------------ ----------- -----------
Earnings per common share assuming full dilution:
Before extraordinary item and preferred stock transactions $ 4.48 $ 2.85 $ 2.87
Net gain on extinguishment of debt -- .49 --
Preferred stock transactions .67 .58 --
------------ ----------- -----------
Earnings per common share $ 5.15 $ 3.92 $ 2.87
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
<PAGE>
EXHIBIT 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income (loss) before income taxes, 1995
extraordinary item and 1992 cumulative
effect of accounting change $ 872.4 $ 543.5 $ 498.3 $ (123.2) $ (1,482.1)
Less: Income (loss) from less than 50%
owned investees 15.7 (10.3) (4.8) -- (1.1)
Add:
Rent expense representative of interest (1) 191.5 193.4 185.7 188.2 180.7
Interest expense net of capitalized interest 251.7 374.3 374.0 364.8 290.2
Interest of preferred security holder 27.2 7.1 -- -- --
Amortization of debt discount and expense 10.8 13.1 9.7 7.2 47.5
Amortization of interest capitalized 2.9 4.0 3.3 4.1 3.8
--------- --------- --------- --------- -----------
ADJUSTED EARNINGS $ 1,340.8 $ 1,145.7 $ 1,075.8 $ 441.1 $ (958.8)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
FIXED CHARGES:
Rent expense representative of interest (1) $ 191.5 $ 193.4 $ 185.7 $ 188.2 $ 180.7
Interest expense net of capitalized interest 251.7 374.3 374.0 364.8 290.2
Interest of preferred security holder 27.2 7.1 -- -- --
Amortization of debt discount and expense 10.8 13.1 9.7 7.2 47.5
Capitalized interest 7.3 13.9 3.5 2.4 36.3
--------- --------- --------- --------- -----------
FIXED CHARGES $ 488.5 $ 601.8 $ 572.9 $ 562.6 $ 554.7
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
RATIO OF EARNINGS TO FIXED CHARGES 2.74 1.90 1.88 - -
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
COVERAGE DEFICIENCY $ 121.5 $ 1,513.5
--------- -----------
--------- -----------
(2) (2)
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
(2) Excluding nonrecurring special charges of $94.3 million for the year ended
December 31, 1993 and $792.7 million for the year ended December 31, 1992,
earnings were inadequate to cover fixed charges by $27.2 million and $720.8
million for the two periods, respectively.
<PAGE>
EXHIBIT 12.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
REQUIREMENTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income (loss) before income taxes, 1995
extraordinary item and 1992 cumulative
effect of accounting change $ 872.4 $ 543.5 $ 498.3 $ (123.2) $ (1,482.1)
Less: Income (loss) from less than 50%
owned investees 15.7 (10.3) (4.8) -- (1.1)
Add:
Rent expense representative of interest (1) 191.5 193.4 185.7 188.2 180.7
Interest expense net of capitalized interest 251.7 374.3 374.0 364.8 290.2
Interest of preferred security holder 27.2 7.1 -- -- --
Amortization of debt discount and expense 10.8 13.1 9.7 7.2 47.5
Amortization of interest capitalized 2.9 4.0 3.3 4.1 3.8
--------- --------- --------- --------- -----------
ADJUSTED EARNINGS $ 1,340.8 $ 1,145.7 $ 1,075.8 $ 441.1 $ (958.8)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
FIXED CHARGES AND PREFERRED STOCK REQUIREMENTS:
Rent expense representative of interest (1) $ 191.5 $ 193.4 $ 185.7 $ 188.2 $ 180.7
Interest expense net of capitalized interest 251.7 374.3 374.0 364.8 290.2
Preferred stock requirements 61.0 91.8 100.0 92.2 75.5
Interest of preferred security holder 27.2 7.1 -- -- --
Amortization of debt discount and expense 10.8 13.1 9.7 7.2 47.5
Capitalized interest 7.3 13.9 3.5 2.4 36.3
--------- --------- --------- --------- -----------
FIXED CHARGES AND PREFERRED
STOCK REQUIREMENTS $ 549.5 $ 693.6 $ 672.9 $ 654.8 $ 630.2
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS 2.44 1.65 1.60 - -
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
COVERAGE DEFICIENCY $ 213.7 $ 1,589.0
--------- -----------
--------- -----------
(2) (2)
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
(2) Excluding nonrecurring special charges of $94.3 million for the year ended
December 31, 1993 and $792.7 million for the year ended December 31, 1992,
earnings were inadequate to cover fixed charges by $119.4 million and
$796.3 million for the two periods, respectively.
<PAGE>
EXHIBIT 21.1
NORTHWEST AIRLINES CORPORATION
NORTHWEST AIRLINES
CORPORATION
Delaware Corp.
NWA INC.
Delaware Corp.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NORTHWEST NORTHWEST MLT INC. NORTHWEST NWA AIRCRAFT NORTHWEST CAPITAL NORTHWEST PARS
AIRCRAFT INC. AEROSPACE Minnesota Corp. AIRLINES, INC. FINANCE, INC. FUNDING CORP. HOLDINGS, INC.
Delaware Corp. TRAINING CORP. Minnesota Corp. Delaware Corp. Delaware Corp. Delaware Corp.
Delaware Corp.
</TABLE>
99% LIMITED PARTNER
WINGS FINANCE WIN-WIN L.P.
COMPANY Delaware Limited
Japanese Corp. Partnership
* Each subsidiary is 100% wholly-owned unless otherwise noted.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Northwest Airlines Corporation of our report dated January 21, 1997
included in the Current Report (Form 8-K) dated March 6, 1997 of Northwest
Airlines Corporation.
Our audit also included the financial statement schedule of Northwest
Airlines Corporation listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audit. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 33-87252 and 333-13307) of Northwest Airlines
Corporation and Northwest Airlines, Inc. and in the related Prospectuses and
in the Registration Statements on Form S-8 (Nos. 33-85220, 333-2652,
333-14445 and 333-12571) of our report dated January 21, 1997, with respect
to the consolidated financial statements incorporated herein by reference,
and our report included in the preceding paragraph with respect to the
financial statement schedule included in this Annual Report (Form 10-K) of
Northwest Airlines Corporation.
Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 559
<SECURITIES> 253
<RECEIVABLES> 676
<ALLOWANCES> 20
<INVENTORY> 262
<CURRENT-ASSETS> 2,090
<PP&E> 6,208
<DEPRECIATION> 1,668
<TOTAL-ASSETS> 8,512
<CURRENT-LIABILITIES> 2,883
<BONDS> 0
603
0
<COMMON> 1
<OTHER-SE> 92
<TOTAL-LIABILITY-AND-EQUITY> 8,512
<SALES> 9,881
<TOTAL-REVENUES> 9,881
<CGS> 0
<TOTAL-COSTS> 8,827
<OTHER-EXPENSES> 181
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 872
<INCOME-TAX> 336
<INCOME-CONTINUING> 536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536
<EPS-PRIMARY> 5.67
<EPS-DILUTED> 5.15
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 6, 1997
NORTHWEST AIRLINES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
----------
(State or other jurisdiction of incorporation)
0-23642 95-4205287
------- ----------
(Commission File Number) (I.R.S. Employer Identification Number)
Northwest Airlines Corporation
2700 Lone Oak Parkway
Eagan, Minnesota 55121
(612)726-2111
(Address, including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Office)
Page 1 of _ Pages
The Exhibit Index Appears on Page _
<PAGE>
ITEM 5: OTHER EVENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Northwest Airlines Corporation ("NWAC" or the "Company") reported net income of
$536.1 million, the largest annual net income in the Company's history, and
operating income of $1.05 billion for the year ended December 31, 1996. Primary
earnings per share were $5.67 ($5.15 fully diluted) compared with $4.17 per
primary share ($3.92 fully diluted) in 1995. Income before extraordinary item
and operating income increased by $194.0 million and $140.4 million,
respectively, compared with 1995. Excluding the impacts of preferred stock
transactions in both periods and a 1995 extraordinary item, primary earnings per
share were $4.93 ($4.48 fully diluted) compared with $3.02 ($2.85 fully diluted)
in 1995. The improved profitability was primarily the result of increased
passenger revenue and decreased interest expense.
Northwest Airlines, Inc. ("Northwest") is the principal indirect operating
subsidiary of NWAC, accounting for more than 97% of the Company's 1996
consolidated operating revenues and expenses. The Company's operating results
are significantly impacted by both general and industry economic environments.
Small fluctuations in revenue per available seat mile ("RASM") and cost per
available seat mile can have significant impacts on profitability.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
OPERATING REVENUES. Operating revenues were $9.88 billion, an improvement of
$795.6 million (8.8%). Revenue per total service available seat mile ("ASM")
increased 2.8%. System passenger revenue (which represented 87% of total
operating revenue) increased 10.8%. The increase was due to a 7.4% increase in
scheduled service ASMs and a 3.3% increase in passenger RASM which was
attributable to a .9% increase in system yield and a 2.2% (1.6 points) increase
in passenger load factor.
The composition of the Company's operating revenues in each of the past three
years is summarized below:
- ----------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------
PASSENGER REVENUE
Domestic 57.9% 56.1% 56.8%
Pacific 22.8 23.8 22.0
Atlantic 6.4 5.5 5.4
CARGO REVENUE 7.5 8.3 9.1
OTHER REVENUE 5.4 6.3 6.7
- ----------------------------------------------------------------
Total operating
revenues 100.0% 100.0% 100.0%
- ----------------------------------------------------------------
Domestic passenger revenue of $5.72 billion increased $618.1 million (12.1%). A
6.3% increase in scheduled service ASMs and a 5.4% increase in RASM resulted in
the improved performance. The increase in scheduled service ASMs resulted
primarily from the addition of 19 aircraft, which allowed the Company to
increase frequencies to 23 cities and enter seven new markets. The increase in
RASM was largely driven by a 4.6% increase in yield which was favorably
impacted by the lapsed federal taxes on airline tickets. See "Other
Information - U.S. Transportation Taxes". Pacific passenger revenue increased
$92.4 million (4.3%) to $2.25 billion due to an 8.3% increase in scheduled
service ASMs resulting primarily from new service to Beijing, China and
additional frequencies due to higher utilization of existing aircraft.
However, RASM decreased by 3.8% because of a 7.5% decrease in yield which was
somewhat mitigated by a 4.1% (3.1 points) increase in passenger load factor.
The Pacific yield decreased primarily because of a weaker Japanese yen. The
average yen per U.S. dollar exchange rate for the years ended December 31,
1996 and 1995 was 108 and 94, respectively, a weakening of the yen of 14.9%.
Atlantic passenger revenue increased $125.9 million (24.9%) to $630.5 million
due to a 12.0% increase in scheduled service ASMs and an 11.5% increase in
RASM which was largely yield related.
Cargo revenue decreased $5.4 million (.7%) due to 1.4% fewer cargo ton miles.
Cargo capacity was reduced because of increased passenger loads. Other revenue
decreased $35.3 million (6.2%) due primarily to decreased charter activity.
OPERATING EXPENSES. Operating expenses increased $655.2 million (8.0%). While
operating capacity increased 7.3% to 94.0 billion total service ASMs, operating
expense per total service ASM increased 1.4%. Operating expense per total
service ASM excluding stock-based compensation increased 5.1% to 8.52 cents
largely related to higher fuel prices and increased maintenance costs. Salaries,
wages and benefits increased $297.3 million (12.3%) due primarily to an increase
in average full-time equivalent employees of 4.7% and the end of the Wage
Savings Period as discussed under "Labor Agreements". The increase in full-time
equivalent employees was attributable to the increased flying of 7.3% and
increased traffic of 6.8%. Additionally, included in the increased salaries,
wages and benefits expense was a $73.8 million unfavorable impact
<PAGE>
of pension expense due to a lower pension discount rate in 1996 compared to
1995. Non-cash stock-based employee compensation expense is a function of shares
earned by employees and the period-ending common stock price. The 1996 stock-
based compensation expense decreased to $242.8 million from $478.0 million for
1995 because fewer shares were earned by employees in 1996 (7.2 million common
equivalent shares compared with 9.4 million common equivalent shares earned in
1995) and the common stock price used to measure expense decreased to a weighted
average of $33.77 per share for 1996 from $51.00 per share for 1995. Aircraft
fuel and related taxes increased 28.9% from $1.08 billion to $1.40 billion. A
20.8% increase in average fuel cost per gallon and an excise tax increase which
was effective October 1995 caused $256.6 million of the increase with the
balance attributable to increased flying. Commissions increased $27.9 million
(3.3%) as a result of a 10.8% increase in passenger revenue somewhat offset by
the impact of a decrease in the effective domestic commission rate. Aircraft
maintenance materials and repairs increased $160.8 million (40.7%) due to a
number of factors including the timing of maintenance activities, increased
flying, higher engine overhaul costs and the impact of favorable vendor
settlements in 1995. Other rentals and landing fees decreased $22.2 million
(4.7%) due primarily to the weakening of the Japanese yen. Other expenses (the
principal components of which include outside services, selling and marketing
expenses, passenger food, personnel, advertising and promotional expenses,
communication expenses and supplies) increased $86.5 million (4.8%) due
primarily to increased volume and rates for outside services, promotional and
personnel expenses.
OTHER INCOME AND EXPENSE. Interest expense-net decreased $124.8 million (32.2%)
primarily due to the retirement of debt prior to scheduled maturity and the
October 1995 restructuring of the Company's financing arrangement related to
certain property in Japan. The foreign currency gain of $19.1 million was
attributable to balance sheet remeasurement of foreign currency-denominated
assets and liabilities. The $18.0 million benefit in other-net was largely due
to a $25.5 million increase in income related to an equity investment in an
affiliate offset by the payment of $10.9 million made related to the travel
agency litigation settlement.
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
OPERATING REVENUES. Operating revenues were $9.08 billion, an improvement of
$760.0 million (9.1%). Revenue per total service ASM increased 7.3%. System
passenger revenue increased 10.7%. The increase was due to a 2.9% increase in
scheduled service ASMs and a 7.5% increase in RASM which was attributable to a
2.6% increase in system yield and a 5.0% (3.4 points) increase in passenger load
factor.
Domestic passenger revenue of $5.10 billion increased $369.7 million (7.8%).
RASM increased 5.6% and scheduled service ASMs increased 2.1%. The increase in
RASM resulted primarily from an increase in passenger load factor of 5.4% (3.5
points). Pacific passenger revenue increased $325.9 million (17.8%) to $2.16
billion. RASM increased 12.2% and scheduled service ASMs increased 5.1%. The
increase in RASM resulted from a 5.0% (3.6 points) increase in passenger load
factor and a 6.8% increase in yield (largely due to changes in the yen to dollar
rate of exchange). Atlantic passenger revenue increased $56.3 million (12.6%) to
$504.6 million due to an 11.6% increase in RASM which was largely due to a 9.8%
increase in yield.
Cargo revenue decreased $4.6 million (.6%) due to 3.3% fewer cargo ton miles.
Cargo capacity was reduced because of increased passenger loads. Other revenue
increased $12.7 million (2.3%) due primarily to ticket exchange fee revenue and
other incidental services provided to third parties, offset by decreased charter
activity.
OPERATING EXPENSES. Operating expenses increased $686.2 million (9.2%). While
operating capacity increased 2.1% to 87.6 billion total service ASMs, operating
expense per total service ASM increased 7.2%. Excluding stock-based compensation
in both periods, operating expense per total service ASM increased 2.0% largely
related to increased load factor and strengthening of the Japanese yen.
Salaries, wages and benefits increased $86.5 million (3.7%) due to an increase
in average full-time equivalent employees of 2.4% and overtime, which were
largely needed to handle the increased flying of 2.1% and increased traffic, and
was partially offset by decreased pension expense. Non-cash stock-based employee
compensation expense was $478.0 million and $107.2 million during 1995 and 1994,
respectively. The stock-based compensation expense is a function of shares
<PAGE>
earned by employees during the period and the period-ending common stock price,
which increased to $51.00 per share at December 29, 1995 from $15.75 per share
at December 30, 1994. Commissions increased $70.3 million (9.1%) as a result of
a 10.7% increase in passenger revenue and a higher Pacific effective commission
rate, offset by the favorable impact of the new domestic commission structure
implemented by Northwest in February 1995. Aircraft fuel and taxes increased
$31.0 million (2.9%) due primarily to a 3.0% increase in gallons consumed. In
October 1995, the United States increased taxes on aircraft fuel by 4.3 cents
per gallon increasing expense for the fourth quarter of 1995 by $12.1 million.
Other rentals and landing fees increased $40.2 million (9.2%) due largely to
changes in foreign currency exchange rates and increased volume and rates for
landing fees. Other expenses increased $86.2 million (5.1%) due primarily to
increased volume and rates for selling and marketing fees and outside services.
OTHER INCOME AND EXPENSE. Investment income increased by $30.5 million (72.3%)
due to increased invested cash. The foreign currency loss of $36.9 million was
attributable to a $27.6 million loss on the balance sheet remeasurement of
foreign currency-denominated assets and liabilities and a $9.3 million charge
for Japanese yen collar option contracts. The $31.7 million unfavorable change
in other-net for 1995 was largely due to miscellaneous licensing revenues
received in 1994 and losses related to an equity investment in an affiliate in
1995.
Net income for 1995 included a $49.9 million net extraordinary gain which
relates primarily to the restructuring of the Company's financing arrangement
with respect to certain property owned in Japan. See Note E to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During the past three years, the Company has substantially improved its
financial position while also acquiring aircraft and commencing a program to
upgrade existing aircraft. Cash flows provided by operating activities together
with financing transactions have enabled the Company to reduce aggregate long-
term debt and capital lease obligations, including current maturities, from
$5.37 billion at December 31, 1993 to $2.83 billion at December 31, 1996, a
reduction of 47.3%. In addition, the Company's common stockholders' equity
became positive at December 31, 1996.
At December 31, 1996, the Company had cash and cash equivalents of $559.4
million, unrestricted short-term investments of $192.7 million and borrowing
capacity of $486.8 million under its revolving credit facility, providing total
available liquidity of $1.24 billion. In addition, the Company has the ability
under another facility to borrow up to $240 million using existing aircraft as
collateral. Cash flow from operating activities was $1.37 billion for 1996,
$1.46 billion for 1995 and $1.38 billion for 1994. Net cash used in investing
and financing activities during 1996, 1995 and 1994 was $1.66 billion, $1.08
billion and $1.05 billion, respectively.
INVESTING ACTIVITIES. Investing activities in 1996 pertained primarily to
aircraft additions. The acquisition of 13 Boeing 757 aircraft, seven DC9-30
aircraft, three DC10-30 aircraft and two 747-200 aircraft; the purchase off
lease of 13 DC-9 aircraft, seven 727 aircraft and two MD-80 aircraft; and the
refurbishment of DC-9 aircraft account for most of the $1.21 billion of capital
expenditures in 1996. Capital expenditures for 1995 pertain primarily to
aircraft modifications, the acquisition of two Boeing 757 aircraft for sale-
leaseback, the acquisition of 14 DC-9 aircraft and deposits on ordered aircraft.
Capital expenditures for 1994 pertain primarily to aircraft modifications and
the acquisition of 22 DC-9 aircraft.
FINANCING ACTIVITIES. Financing activities in 1996 pertained primarily to the
sale and leaseback of seven Boeing 757 aircraft and the payment of debt and
capital lease obligations, including the prepayments of $150 million of the term
loan and $30 million of the term certificates. In October 1996, the Credit
Agreement was amended to increase the term loan to $150 million and extend the
final maturity to 2002. The revolving credit facility was increased to $500
million and the availability period was extended to 2001. In July 1996, the
Company acquired from KLM 3,691.2 shares of NWAC Series A Preferred Stock and
2,962.8 shares of NWAC Series B Preferred Stock in exchange for $379 million of
unsecured promissory notes which were repaid December 1996.
In October 1995 the Company completed a restructuring of its financing
arrangement related to certain property the Company owns in Japan. As a result,
long-term debt decreased by $695.9 million and was replaced by a $622.0 million
non-recourse obligation with longer maturities which is reflected in the
Company's balance sheet as a Mandatorily Redeemable Preferred Security of
<PAGE>
Subsidiary which holds a solely non-recourse obligation of Company. In December
1995 the Company also retired the 1989 acquisition loan by prepaying the
remaining $837 million loan outstanding using proceeds from a new credit
facility and available funds. Also during 1995, Bankers Trust New York
Corporation exchanged 1,727 shares of NWAC's Series B Preferred Stock for
2,050,000 shares of the Company's common stock. During 1994 the Company
completed more than $1.78 billion in capital market transactions, including an
initial public offering of common stock and refinancing of existing
indebtedness, and substantially rescheduled its debt maturities.
See Note C to Consolidated Financial Statements for maturities of long-term debt
for the five years subsequent to December 31, 1996, which do not exceed $225
million for any year.
CAPITAL COMMITMENTS. The current aircraft delivery schedule provides for the
acquisition of 68 aircraft. See Notes I and M to Consolidated Financial
Statements for additional discussion of aircraft capital commitments. Other
capital expenditures and costs to commission presently owned aircraft that have
not yet entered revenue service are projected for 1997 to be approximately $240
million and $130 million, respectively, which the Company anticipates funding
primarily with cash from operations.
In addition, the Company has adopted programs to hushkit and modify 173 DC-9
aircraft to meet noise and aging aircraft requirements. As of December 31, 1996,
the Company had hushkitted 79 of these 173 DC-9 aircraft. Capital expenditures
for engine hushkits and aging aircraft modifications were $75 million in 1996
and are expected to aggregate $510 million during the next five years for these
aircraft. The Company has also elected to upgrade aircraft systems and refurbish
interiors for the 173 DC-9 aircraft. Capital expenditures associated with
upgrading systems and interior refurbishment were $107 million in 1996 and are
expected to aggregate $190 million during the next five years. In addition, the
Company has adopted a program to hushkit and modify 29 727 aircraft, estimated
to cost approximately $85 million over the next five years. The Company has
arranged supplier financing of up to approximately $170 million for DC-9 and 727
engine hushkit shipsets.
The Company has also adopted a program to refurbish the interiors in 35 of its
747 aircraft and 26 of its DC-10 aircraft, estimated to aggregate $120 million
over the next five years.
LABOR AGREEMENTS. The labor cost savings discussed in Note B to Consolidated
Financial Statements, which improved the Company's 1993 to 1996 cash flow from
operating activities, ended on July 31, 1996 for flight attendants, September
30, 1996 for mechanics, ground personnel and management and October 30, 1996 for
pilots. The Company's agreements with the employee unions provide that wage
scales at the end of the Wage Savings Period snapback to August 1, 1993 levels
and potentially snap-up pursuant to formulae based in part on wage rates and
wage rate increases at other large U.S. airlines. Consequently, at the end of
the Wage Savings Period, salaries and wages increased by approximately $310
million on an annualized basis for both the snapbacks and snap-ups and financial
reporting recognition of stock-based employee compensation expense ceased. Each
of the unions representing the pilots and flight attendants has challenged the
Company's calculation of the snap-up and these issues are now subject to
arbitration.
The Company's labor contract with each of its unions became amendable as each
labor cost savings agreement ended. Consequently, future labor wage rates and
costs are subject to collective bargaining. While the Company cannot predict the
wage rates that will ultimately be in effect (since such rates will be
determined by collective bargaining), management believes that its labor costs
will remain competitive in comparison to the largest carriers. The Company has
identified and continues to identify various work rule changes and productivity
improvements which, if incorporated into new labor agreements and work
processes, would mitigate the effect of wage rate increases.
WORKING CAPITAL. The Company operates, like its competitors, with a working
capital deficit which aggregated $793.3 million at December 31, 1996. The
working capital deficit is attributable primarily to the $1.01 billion air
traffic liability for advance ticket sales.
OTHER INFORMATION
INCOME TAXES. Sections 382 and 383 of the Internal Revenue Code of 1986 (the
"Code") and the regulations thereunder impose limitations on the carryforward
amounts of net operating losses ("NOLs"), alternative minimum tax net operating
losses ("AMTNOLs") and credits that can be used to offset taxable income (or
used as a credit) in any single year if the corporation experiences more than a
50% ownership change, as
<PAGE>
defined therein, over a three-year testing period ending on any testing date.
See Note H to Consolidated Financial Statements for information regarding income
taxes and NOLs, AMTNOLs and credits.
Management believes that an offering of outstanding common stock by existing
stockholders in November 1995 triggered an ownership change, but that no
ownership change occurred prior to such offering. If such an ownership change in
fact occurred as a result of the November 1995 offering, management believes
that even as limited by Sections 382 and 383 of the Code, the NOLs, AMTNOLs and
credits would be used significantly earlier than their expiration, and the
annual limitations would not have a material adverse impact on the Company.
However, if the Internal Revenue Service (the "IRS") were to successfully assert
that an ownership change had occurred on any prior date, including August 1,
1993 (the date of the labor cost savings agreements), the impairment of the
Company's ability to use its NOLs, AMTNOLs and credit carryforwards would be
significant because the value of the Company's stock on certain prior testing
dates (which adversely affects the annual limitations described above) was
relatively low, and such low value would be used in computing the annual
limitations with respect to losses incurred prior to the testing date.
FOREIGN CURRENCY. In general, each time the yen strengthens (weakens), the
Company's on-going operating income is favorably (unfavorably) impacted and a
nonoperating foreign currency loss (gain) is recognized due to the remeasurement
of net yen-denominated liabilities. The Company's 1996 yen-denominated revenues
exceeded its yen-denominated expenses by approximately 70 billion yen
(approximately $650 million) and its yen-denominated liabilities exceeded its
yen-denominated assets by an average of 14.6 billion yen during 1996. The
Company's operating income was negatively impacted by approximately $120 million
due to a weaker yen in 1996 than in 1995. The yen to U.S. dollar exchange rate
at December 31, 1996, 1995 and 1994 was 116 yen to $1, 103 yen to $1 and 100 yen
to $1, respectively.
USE OF FINANCIAL INSTRUMENTS. From time to time, the Company uses a collar
option strategy to hedge its anticipated yen-denominated net cash flows.
There was no material impact on 1996 earnings associated with the Japanese
yen collar option contracts. As of December 31, 1996, the Company had entered
into collar option contracts to hedge approximately 85% of its first quarter
1997 yen net cash flows. See Note N to Consolidated Financial Statements. In
the ordinary course of business, the Company manages the price risk of fuel
costs utilizing both regulated exchange traded futures contracts and fuel
swap agreements. Gains or losses on hedge contracts are deferred until the
related fuel inventory is expensed. As of December 31, 1996, the Company had
no material hedges for future fuel requirements.
U.S. TRANSPORTATION TAXES. The United States 10% passenger ticket tax applicable
to domestic travel, the 6.25% domestic cargo waybill tax and the $6 per
passenger international departure tax expired on December 31, 1995.
Consequently, the Company ceased collecting these taxes (which aggregated $505
million in 1995) on January 1, 1996. These taxes were reinstated for tickets
sold subsequent to August 27, 1996 for travel through December 31, 1996. The
Company collected $146 million of such taxes during 1996. The taxes lapsed again
on January 1, 1997 and Congress passed legislation which reauthorized these
taxes for tickets sold from March 7, 1997 to September 30, 1997. The impact on
future operating income of such reinstatement is uncertain.
STOCK REPURCHASE AUTHORIZATION. In December 1996, the Company's Board of
Directors approved a stock repurchase program authorizing the Company to
repurchase during the next two years up to five million shares of its Class A
Common Stock. As of February 1997, the Company had not made any stock
repurchases.
DETROIT MIDFIELD TERMINAL. In October 1996, the Company and Wayne County,
Michigan (the "County") entered into an agreement pursuant to which, subject to
the satisfaction of certain conditions set forth in the agreement, the Company
will manage and supervise the design and construction of a $700 million terminal
at Detroit Metropolitan Wayne County Airport. The new terminal is scheduled to
be completed in 2001 and is anticipated to be funded from federal and State of
Michigan grants, passenger facility charges and the County's issuance of airport
bonds payable primarily from future passenger facility charges. The Company and
the County have entered into agreements pursuant to which the Company will lease
space in the new terminal for a term of 30 years from the date the terminal
opens.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors Northwest Airlines Corporation
We have audited the accompanying consolidated balance sheets of Northwest
Airlines Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income, common stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northwest Airlines
Corporation at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Minneapolis, Minnesota
January 21, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Northwest Airlines Corporation December 31
- --------------------------------------------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 559.4 $ 850.9
Short-term investments 253.1 260.7
Accounts receivable, less allowance
(1996-$19.7; 1995-$21.5) 656.1 700.3
Flight equipment spare parts, less allowance
(1996-$127.3; 1995-$111.8) 262.2 268.0
Deferred income taxes 95.5 82.8
Prepaid expenses and other 263.6 175.5
- --------------------------------------------------------------------------------------------------
2,089.9 2,338.2
- --------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Flight equipment 4,724.0 4,050.7
Less accumulated depreciation 1,107.6 953.5
- --------------------------------------------------------------------------------------------------
3,616.4 3,097.2
- --------------------------------------------------------------------------------------------------
Other property and equipment 1,484.2 1,487.4
Less accumulated depreciation 560.1 505.2
- --------------------------------------------------------------------------------------------------
924.1 982.2
- --------------------------------------------------------------------------------------------------
4,540.5 4,079.4
- --------------------------------------------------------------------------------------------------
FLIGHT EQUIPMENT UNDER CAPITAL LEASES
Flight equipment 927.4 940.9
Less accumulated amortization 255.9 230.8
- --------------------------------------------------------------------------------------------------
671.5 710.1
- --------------------------------------------------------------------------------------------------
OTHER ASSETS
Investments in affiliated companies 164.4 154.1
International routes, less accumulated
amortization (1996-$216.3; 1995-$192.0) 751.4 775.7
Other 294.0 354.8
- --------------------------------------------------------------------------------------------------
1,209.8 1,284.6
- --------------------------------------------------------------------------------------------------
$ 8,511.7 $ 8,412.3
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------------
(In millions, except share data) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability $ 1,010.7 $ 888.4
Accounts payable and other liabilities 796.7 790.8
Accrued compensation and benefits 456.8 361.6
Accrued commissions 177.4 214.7
Accrued aircraft rent 196.7 173.2
Current maturities of long-term debt 144.4 329.7
Current obligations under capital leases 61.7 62.1
Short-term borrowings 38.8 20.1
- --------------------------------------------------------------------------------------------------
2,883.2 2,840.6
- --------------------------------------------------------------------------------------------------
LONG-TERM DEBT 1,916.0 2,137.4
- --------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 710.5 779.1
- --------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 947.2 772.5
Long-term pension and postretirement health care benefits 461.2 831.1
Other 348.9 306.5
- --------------------------------------------------------------------------------------------------
1,757.3 1,910.1
- --------------------------------------------------------------------------------------------------
MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY WHICH
HOLDS SOLELY NON-RECOURSE OBLIGATION OF COMPANY - NOTE E
(Redemption value 1996-$628.8; 1995-$715.4) 549.2 618.4
- --------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK
Series A and B 239.8 656.9
Series C, liquidation value (1996-$371.0; 1995-$322.4) 362.8 288.6
- --------------------------------------------------------------------------------------------------
602.6 945.5
- --------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; shares authorized-315,000,000;
shares issued and outstanding (1996-97,604,056; 1995-91,345,808) 1.0 .9
Additional paid-in capital 1,151.1 970.7
Accumulated deficit (945.2) (1,517.8)
Other (114.0) (272.6)
- --------------------------------------------------------------------------------------------------
92.9 (818.8)
- --------------------------------------------------------------------------------------------------
$ 8,511.7 $ 8,412.3
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Northwest Airlines Corporation Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Passenger $ 8,598.3 $ 7,762.0 $ 7,010.1
Cargo 745.8 751.2 755.8
Other 536.4 571.7 559.0
- ------------------------------------------------------------------------------------------------------------------
9,880.5 9,084.9 8,324.9
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries, wages and benefits 2,709.4 2,412.1 2,325.6
Stock-based employee compensation 242.8 478.0 107.2
Aircraft fuel and taxes 1,396.9 1,083.8 1,052.8
Commissions 868.4 840.5 770.2
Aircraft maintenance materials and repairs 556.2 395.4 396.0
Other rentals and landing fees 454.0 476.2 436.0
Aircraft rentals 346.3 338.9 337.8
Depreciation and amortization 377.7 358.1 357.4
Other 1,875.0 1,788.5 1,702.3
- ------------------------------------------------------------------------------------------------------------------
8,826.7 8,171.5 7,485.3
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,053.8 913.4 839.6
OTHER INCOME (EXPENSE)
Interest expense (269.8) (401.2) (387.2)
Interest capitalized 7.3 13.9 3.5
Interest of mandatorily redeemable preferred security holder (27.2) (7.1) -
Investment income 71.2 72.7 42.2
Foreign currency gain (loss) 19.1 (36.9) (20.2)
Other - net 18.0 (11.3) 20.4
- ------------------------------------------------------------------------------------------------------------------
(181.4) (369.9) (341.3)
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 872.4 543.5 498.3
Income tax expense 336.3 201.4 202.8
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 536.1 342.1 295.5
Net gain on extinguishment of debt (less applicable
income taxes of $29.4) - 49.9 -
- ------------------------------------------------------------------------------------------------------------------
NET INCOME 536.1 392.0 295.5
Preferred stock requirements (37.5) (57.8) (59.3)
Preferred stock transactions 74.5 58.9 -
- ------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 573.1 $ 393.1 $ 236.2
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
PRIMARY
Before effects of extraordinary item and preferred
stock transactions $ 4.93 $ 3.02 $ 2.92
Net gain on extinguishment of debt - .53 -
Preferred stock transactions .74 .62 -
- ------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 5.67 $ 4.17 $ 2.92
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
FULLY DILUTED
Before effects of extraordinary item and preferred
stock transactions $ 4.48 $ 2.85 $ 2.87
Net gain on extinguishment of debt - .49 -
Preferred stock transactions .67 .58 -
- ------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 5.15 $ 3.92 $ 2.87
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Northwest Airlines Corporation Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------
(In millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 536.1 $ 392.0 $ 295.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 377.7 358.1 357.4
Income tax expense 336.3 201.4 202.8
Payment of income taxes (256.6) (116.9) (22.2)
Stock-based employee compensation 242.8 478.0 107.2
Pension and other postretirement benefit contributions
(in excess of) less than expense 14.7 (97.6) 33.2
Other - net (40.2) (59.4) 18.8
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable 18.6 (56.0) 89.8
Decrease (increase) in flight equipment spare parts 12.2 (59.7) (45.2)
Decrease (increase) in prepaid expenses and other (6.6) 28.3 233.9
Increase (decrease) in air traffic liability 122.3 127.3 (35.2)
Increase (decrease) in accounts payable and other liabilities (60.7) 243.3 149.7
Increase (decrease) in accrued compensation and benefits 75.7 21.8 (6.5)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,372.3 1,460.6 1,379.2
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,205.3) (569.5) (156.1)
Purchases of short-term investments (501.2) (659.3) (992.1)
Proceeds from maturities of short-term investments 511.2 991.4 452.2
Other - net (46.6) (8.3) 1.3
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,241.9) (245.7) (694.7)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt and capital lease obligations (550.4) (1,279.3) (1,493.7)
Payment of short-term notes payable (379.2) - -
Proceeds from long-term debt 184.8 352.1 1,182.0
Proceeds from sale and leaseback transactions 350.0 100.0 10.9
Issuance of common stock - - 249.1
Decrease in borrowings under revolving credit facility - - (272.2)
Other - net (27.1) (4.8) (32.2)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (421.9) (832.0) (356.1)
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (291.5) 382.9 328.4
Cash and cash equivalents at beginning of period 850.9 468.0 139.6
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 559.4 $ 850.9 $ 468.0
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 752.1 $ 970.9 $ 968.3
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Available to be borrowed under revolving credit facility $ 486.8 $ 187.6 $ 290.8
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Northwest Airlines Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT OTHER TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994 58.0 $ .6 $ 253.2 $ (2,147.1) $ (137.2) $ (2,030.5)
Net income 295.5 295.5
Issuance of common stock 20.4 .2 248.9 249.1
Shares earned by employees including
shares issued to employee benefit plans 5.8 121.4 121.4
Accrued cumulative dividends
on Series A and B Preferred Stock (54.5) (54.5)
Accretion of Series C Preferred Stock (4.8) (4.8)
Tax benefit related to stock issued
to employees 10.0 10.0
Translation adjustments, net of
income taxes (14.1) (14.1)
Pension liability adjustment,
net of income taxes 53.9 53.9
Other .1 3.1 .2 3.3
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 84.3 .8 636.6 (1,910.9) (97.2) (1,370.7)
Net income 392.0 392.0
Exchange of preferred stock for
common stock 2.0 37.9 58.9 96.8
Shares earned by employees including
shares issued to employee benefit plans 3.4 280.3 280.3
Accrued cumulative dividends
on Series A and B Preferred Stock (50.3) (50.3)
Accretion of Series C Preferred Stock (7.7) (7.7)
Tax benefit related to stock issued
to employees 2.1 2.1
Translation adjustments, net of
income taxes 1.7 1.7
Pension liability adjustment,
net of income taxes (179.1) (179.1)
Series C Preferred Stock
converted to common stock .5 8.1 8.1
Other 1.1 .1 5.7 .2 2.0 8.0
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 91.3 .9 970.7 (1,517.8) (272.6) (818.8)
Net income 536.1 536.1
Acquisition of preferred stock 74.5 74.5
Shares earned by employees including
shares issued to employee benefit plans 4.8 137.5 137.5
Accrued cumulative dividends
on Series A and B Preferred Stock (36.6) (36.6)
Accretion of Series C Preferred Stock (.9) (.9)
Tax benefit related to stock issued
to employees 7.0 7.0
Translation adjustments, net of
income taxes (.1) (.1)
Pension liability adjustment,
net of income taxes 157.5 157.5
Series C Preferred Stock
converted to common stock 1.0 32.0 32.0
Other .5 .1 3.9 (.5) 1.2 4.7
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 97.6 $1.0 $ 1,151.1 $ (945.2) $ (114.0) $ 92.9
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: Northwest Airlines Corporation ("NWAC") is a holding
company whose principal indirect operating subsidiary is Northwest Airlines,
Inc. ("Northwest"). The consolidated financial statements include the accounts
of NWA Corp. and all subsidiaries (collectively, the "Company"). All significant
intercompany transactions have been eliminated. Investments in 20% to 50% owned
companies are accounted for by the equity method. Other investments are
accounted for by the cost method.
Certain amounts for 1995 and 1994 have been reclassified to conform with the
1996 financial statement presentation.
BUSINESS: Northwest's operations comprise more than 97% of the Company's
consolidated operating revenues and expenses. Northwest is a major air carrier
engaged principally in the commercial transportation of passengers and cargo,
directly serving more than 150 cities in 18 countries in North America, Asia and
Europe. Northwest's global airline network includes domestic hubs at Detroit,
Minneapolis/St. Paul and Memphis, an extensive Pacific route system with hubs at
Tokyo and Osaka, and a transatlantic alliance with KLM Royal Dutch Airlines
("KLM") which operates through a hub in Amsterdam.
FLIGHT EQUIPMENT SPARE PARTS: Flight equipment spare parts are carried at
average cost. An allowance for depreciation is provided at rates which
depreciate cost, less residual value, over the estimated useful lives of the
related aircraft.
PROPERTY, EQUIPMENT AND DEPRECIATION: Owned property and equipment are stated at
cost. Property and equipment acquired under capital leases are stated at the
lower of the present value of minimum lease payments or fair market value at the
inception of the lease. Property and equipment are depreciated to residual
values using the straight-line method over the estimated useful lives of the
assets. Commencing with the acquisition of the parent of Northwest in 1989,
estimated useful lives generally range from 4 to 25 years for flight equipment
and 3 to 32 years for other property and equipment. Leasehold improvements are
generally amortized over the remaining period of the lease or the estimated
service life of the related asset, whichever is less. Property and equipment
under capital leases are amortized over the lease terms or the estimated useful
lives of the assets.
Effective January 1, 1996, the Company reports gains (losses) relating to the
disposition of assets as part of operating expenses instead of other income
(expense). Reclassifications increased operating income $11.2 million and $9.2
million for 1995 and 1994, respectively.
AIRFRAME AND ENGINE MAINTENANCE: Routine maintenance and airframe and engine
overhauls are charged to expense as incurred. Modifications that enhance the
operating performance or extend the useful lives of airframes or engines are
capitalized and amortized over the remaining useful life of the asset.
FREQUENT FLYER PROGRAM: The estimated incremental cost of providing travel
awards earned under Northwest's WorldPerks frequent flyer program is accrued.
The Company sells mileage credits to participating companies in its frequent
flyer program. A portion of such revenue is deferred and amortized as
transportation is provided.
POSTRETIREMENT HEALTH CARE BENEFITS: The Company provides medical, dental and
life insurance benefits to certain eligible retirees and their dependents. The
expected future cost of providing such postretirement benefits is accrued over
the service life of active employees.
<PAGE>
OPERATING REVENUES: Passenger and cargo revenues are recognized when the
transportation is provided. The air traffic liability represents the estimated
value of sold but unused tickets and is regularly evaluated by the Company.
ADVERTISING: Advertising costs, included in other operating expenses, are
expensed as incurred and were $120.4 million, $119.4 million and $120.4 million
in 1996, 1995 and 1994, respectively.
EMPLOYEE STOCK OPTIONS: The Company uses the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for employee stock options.
Under the intrinsic value method, compensation expense is recognized to the
extent the market price of the common stock exceeds the option price at the date
of the grant.
FOREIGN OPERATIONS: Operating revenues from foreign operations, primarily in the
Pacific region, totaled approximately $3.39 billion, $3.17 billion and $2.83
billion in 1996, 1995 and 1994, respectively. International routes are amortized
on a straight-line basis, generally over 40 years. International operating route
authorities are regulated by governmental policy and bilateral agreements
between nations. Changes in such policies or agreements could favorably or
adversely impact Northwest.
Assets and liabilities denominated in foreign currency are remeasured at current
exchange rates with resulting gains and losses generally included in net income.
The Preferred Security (see Note E) and other assets and liabilities of certain
properties located outside of the United States whose cash flows are primarily
in the local functional currency are translated at current exchange rates, with
translation gains and losses recorded directly to common stockholders' equity.
The cumulative foreign translation loss, net of tax, was $39.4 million as of
December 31, 1996.
INCOME TAXES: The Company accounts for income taxes utilizing the liability
method. Deferred income taxes are primarily recorded to reflect the tax
consequences of differences between the tax and financial reporting bases of
assets and liabilities.
EARNINGS PER SHARE: Primary earnings per share is based on the weighted average
number of common and common stock equivalent shares outstanding and includes the
common stock shares earned by employees. Common stock equivalents include the
dilutive effect of the assumed exercise of stock options using the treasury
stock method. Primary earnings per share in 1996, 1995 and 1994 are based on
101,087,315 shares, 94,302,528 shares and 80,888,543 shares, respectively. For
fully diluted earnings per share, both net income applicable to common
stockholders and weighted average shares outstanding are adjusted as if the
Series C Preferred Stock earned by employees was converted to common stock.
Fully diluted earnings per share in 1996, 1995 and 1994 are based on 111,358,902
shares, 102,241,106 shares and 84,492,067 shares, respectively.
USE OF ESTIMATES: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in its
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
<PAGE>
NOTE B - LABOR AGREEMENTS
The Company's labor agreements provided for wage and other compensation savings
(the "Actual Savings") by domestic employees, including management, and other
cost reductions which aggregated $897 million over a 36 to 39 month period
(depending on the labor group) (the "Wage Savings Period") which ended between
August and November 1996. As part of an overall revised compensation plan
provided by the labor agreements, the Company agreed, among other things, to
issue to trusts for the benefit of participating employees 18,214,419 shares of
a new class of Series C cumulative, voting, convertible, redeemable preferred
stock (the "Series C Preferred Stock") and provided the union groups with three
positions on the Board of Directors. The Company has authorized 25,000,000
shares of Series C Preferred Stock, par value $.01 per share.
Pursuant to a one-time special conversion right exercised in February 1994, the
Company is issuing to certain of such trusts approximately 17.5 million shares
of common stock (in lieu of approximately 9.1 million of the shares of Series C
Preferred Stock that would have otherwise been issued). Information with respect
to the shares issued to trusts for the benefit of employees is as follows (in
millions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SERIES C PREFERRED STOCK COMMON STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES SHARES FINANCIAL SHARES SHARES FINANCIAL
TO BE SHARES HELD BY STATEMENT TO BE SHARES HELD BY STATEMENT
ISSUED EARNED TRUSTS AMOUNT ISSUED EARNED TRUSTS AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994 18.2 2.5 - $ 99.3 - - - $ -
Exercise of special conversion option (9.3) (1.4) - (62.7) 17.8 2.8 - 62.7
Shares earned by employees - 2.9 - 48.5 - 5.0 - 58.7
Shares issued to trusts (3.0) - 3.0 - (5.8) - 5.8 -
Accretion and other - - - 6.2 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 5.9 4.0 3.0 91.3 12.0 7.8 5.8 121.4
Shares earned by employees - 2.9 - 197.7 - 5.5 - 280.3
Shares issued to trusts (1.8) - 1.8 - (3.4) - 3.4 -
Series C Preferred Stock
converted to common stock - - (.4) (8.1) - - .5 8.1
Withdrawals from trusts - - - - - - (2.0) -
Accretion - - - 7.7 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 4.1 6.9 4.4 288.6 8.6 13.3 7.7 409.8
Shares earned by employees - 2.2 - 105.3 - 4.2 - 137.5
Shares issued to trusts (2.6) - 2.6 - (4.8) - 4.8 -
Series C Preferred Stock
converted to common stock - - (.8) (32.0) - - 1.0 32.0
Withdrawals from trusts - - - - - - (2.3) -
Accretion and other .2 - - .9 (.3) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 1.7 9.1 6.2 $ 362.8 3.5 17.5 11.2 $ 579.3
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The final contribution of the Series C Preferred Stock and common stock to the
trusts is scheduled for March 1997. The Series C Preferred Stock ranks junior to
Series A and B Preferred Stock and senior to common stock with respect to
liquidation and certain dividend rights. As long as the Class A Common Stock is
publicly traded, no dividends accrue on the Series C Preferred Stock. Each share
of the Series C Preferred Stock is convertible at any time into 1.364 shares of
common stock. Consequently, at December 31, 1996 the aggregate 7.9 million
shares of Series C Preferred Stock held by trusts and to be issued are
convertible into approximately 10.8 million shares of common stock.
Series C Preferred Stock is required to be redeemed in 2003 for a pro rata share
of Actual Savings ($371 million for the Series C Preferred Stock outstanding as
of December 31, 1996 and to be issued). The Company has the option to redeem in
cash, issue additional common stock, or use a combination thereof, to satisfy
the redemption requirements. A decision to issue only additional common stock
must be approved by a majority of the three directors elected by the holders of
the Series C Preferred Stock. If the Company fails to redeem the Series C
Preferred Stock, dividends accrue at the higher of (i) 12% or (ii) the highest
penalty rate on any then outstanding series of preferred stock, and the employee
unions receive three additional Board of Directors positions. The financial
statement carrying value of the Series C Preferred Stock is being accreted over
ten years commencing August 1993 to the ultimate redemption amount. Prior to
2003, the Company at its option may redeem in whole or in part the Series C
Preferred Stock. The consent of the holders of the Series A and B Preferred
Stock must be received in order to redeem or repurchase the Series C Preferred
Stock.
Because of applicable accounting requirements, the Company recognized
compensation expense for each year based on the values at the measurement date
of the Series C Preferred Stock and the common stock earned by employees. Such
non-cash stock-based compensation expense was calculated each month by (1)
determining the aggregate current value of all Series C Preferred Stock and
common stock earned by employees since the previous January 1 using current per
share values as of the balance sheet date and then (2) subtracting the non-cash
compensation previously recognized since January 1. The final measurement dates
for 1996 coincided with the end of the Wage Savings Period for each of the labor
groups and the final measurement date for 1995 and 1994 was December 31, 1995
and 1994, respectively. Any increase (decrease) in share value increased
(decreased) non-cash compensation expense and the recorded effect in any month
of a change in share prices was a function of all shares earned since the
previous January 1.
Approximately ninety percent of the Company's employees are members of
collective bargaining units. All of the labor agreements became amendable in
1996 at the end of the Wage Savings Period and hence future labor costs are
subject to collective bargaining.
<PAGE>
NOTE C - LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consisted of the following (in millions, with interest rates as
of December 31, 1996):
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured notes due through 2009, 7.0% weighted average rate (a) $ 348.9 $ 348.9
NWA Trust No. 2 aircraft notes due through 2012, 10.6% weighted average rate (b) 337.9 345.0
Equipment pledge notes due through 2013, 7.7% weighted average rate 286.8 307.9
Sale-leaseback financing obligations due through 2020, 9.9% imputed rate (c) 262.5 263.0
NWA Trust No. 1 aircraft notes due through 2006, 8.6% weighted average rate (d) 220.4 230.4
Senior unsecured floating rate notes due through 1998, 6.4% weighted average rate (e) 152.0 -
Term loan due through 2002, 6.5% (f) 150.0 300.0
Term certificates due 1999, 6.6% (g) 145.0 175.0
8.625% unsecured notes due 1996, net of discount (1995--$3.8) - 196.2
Unsecured notes due through 1999, 12.1% 79.0 89.0
Hushkit financing due through 2002, 7.6% (h) 12.3 12.3
Other 65.6 199.4
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 2,060.4 2,467.1
Less current maturities 144.4 329.7
- -------------------------------------------------------------------------------------------------------------------
$ 1,916.0 $ 2,137.4
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In April 1996, the Company restructured floating rate notes with certain
manufacturers. Principal repayments are due semi-annually beginning 2001.
(b) In December 1994, the Company completed a structured aircraft financing
transaction in which 13 Airbus A320 aircraft were transferred from Northwest
(subject to existing indebtedness) to an owner trust (NWA Trust No. 2). A
limited partnership, of which Northwest is the limited partner and Norbus, Inc.
(an affiliate of Airbus Industrie A.I.E.) is the general partner, is the sole
equity participant in the owner trust. All proceeds from the transaction were
used to repay equipment pledge notes which had previously been issued to finance
the acquisition of these aircraft by Northwest. The aircraft were simultaneously
leased back to Northwest.
Financing of $352 million was obtained through the issuance of $176 million of
9.25% Class A Senior Aircraft Notes, $66 million of 10.23% Class B Mezzanine
Aircraft Notes, $44 million of 11.30% Class C Mezzanine Aircraft Notes and $66
million of 13.875% Class D Subordinated Aircraft Notes. The notes are payable
semiannually from rental payments made by Northwest under the lease and are
secured by the aircraft subject to the lease as well as the lease itself.
(c) In March 1992, the Company completed agreements with the Minneapolis-St.
Paul Metropolitan Airports Commission ("MAC") for the sale and leaseback of
various corporate assets. The sale-leaseback agreements, which are accounted for
as debt, call for increasing quarterly payments over a 30-year term and include
a provision which gives the Company the option to repurchase the assets. The
agreements with the MAC are part of a group of financing arrangements with the
State of Minnesota and other government agencies.
(d) In March 1994, Northwest consummated a financing transaction in which six
Boeing 747-200 and four Boeing 757-200 aircraft were sold to an owner trust (NWA
Trust No. 1) of which NWA Aircraft Finance, Inc., an indirect subsidiary of the
Company, is the sole equity participant. A portion of the purchase price was
financed through the issuance of $177 million of 8.26% Class A Senior Aircraft
Notes and $66 million of 9.36% Class B Subordinated Aircraft Notes. The aircraft
were simultaneously leased back to Northwest. The notes are payable semiannually
from rental payments made by Northwest under the lease and are secured by the
aircraft subject to the lease as well as the lease itself.
(e) In December 1996, the Company issued $152 million of Senior Unsecured
Floating Rate Notes, due in two installments of $76 million each in July 1997
and January 1998.
<PAGE>
(f) During 1996, the Company prepaid $150 million of its $300 million term loan.
In October 1996, the Company amended its credit agreement (the "Credit
Agreement") to extend the final maturity of the term loan to 2002. The floating
rate term loan is payable in three equal annual installments beginning 2000.
The amended Credit Agreement also provides an unsecured $500 million revolving
credit facility scheduled to expire in October 2001. A commitment fee (.225% at
December 31, 1996) is payable by the Company on the unused portion of the
revolving credit facility at a floating rate per annum determined by reference
to the Company's unsecured debt rating. At December 31, 1996, $486.8 million
remained available to be borrowed as a result of the issuance on behalf of the
Company of $13.2 million of letters of credit.
(g) In March 1994, Northwest agreed to sell certain receivables on an ongoing
basis to Northwest Capital Funding Corp., an indirect subsidiary of the Company,
which has issued through a master trust floating rate Term Certificates. These
privately placed certificates require payment of interest only during their term
with the principal due in 1999 and are secured by the purchased receivables and
restricted cash.
(h) The Company has arranged supplier financing of engine hushkit shipsets for
DC-9 and 727 aircraft. The credit facilities allow for borrowings up to
approximately $170 million prior to December 1999. Generally, amounts borrowed
under the facilities are payable in quarterly installments over six years
commencing not later than one year from the date of such borrowing.
Maturities of long-term debt for the five years subsequent to December 31, 1996
are as follows (in millions):
1997 $ 144.4
1998 165.3
1999 220.2
2000 110.5
2001 127.9
The debt and lease agreements of the Company contain certain restrictive
covenants, including limitations on indebtedness, equity redemptions and the
declaration of dividends, as well as requirements to maintain certain financial
ratios, including collateral coverage ratios. At December 31, 1996, the Company
was in compliance with the covenants of all of its debt and lease agreements.
Various assets, principally aircraft, having an aggregate book value of $2.2
billion at December 31, 1996, were pledged under various loan agreements.
Cash payments of interest, net of capitalized interest, aggregated $263.3
million in 1996, $365.6 million in 1995, and $332.7 million in 1994.
The maximum and average outstanding balances of short-term borrowings, used
primarily for financing aircraft insurance premiums, fuel hedging activities and
the acquisition of preferred stock (see Note F) were as follows (dollars in
millions):
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Maximum amount of
borrowings outstanding
during period $418.0 $50.5 $46.4
Average daily borrowings
during period $193.7 $23.1 $17.8
Weighted average interest
rate on borrowings
during period 7.00% 5.81% 5.95%
- --------------------------------------------------------------------------------
NOTE D - LEASES
The Company leases certain aircraft, space in airport terminals, land and
buildings at airports, ticket, sales and reservations offices, and other
property and equipment under noncancelable operating leases which expire in
various years through 2025. Portions of certain facilities are subleased under
noncancelable operating leases expiring in various years through 2020.
At December 31, 1996, the Company leased 126 of the 399 aircraft it operates. Of
these, 33 were capital leases and 93 were operating leases. Expiration dates
range from 1997 to 2009 for aircraft under capital leases, and from 1997 to 2019
for aircraft under operating leases. The Company's aircraft leases can generally
be renewed for terms ranging from one to five years at rates based on the
aircraft's fair market value at the end of the lease term. Ninety-six of the 126
aircraft lease agreements provide the Company with purchase options at the end
of the lease term which approximate fair market value.
<PAGE>
Rental expense for all operating leases consisted of (in millions):
Year Ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Gross rental expense $ 596.5 $ 601.9 $ 578.8
Sublease rental income (62.2) (57.6) (57.2)
- --------------------------------------------------------------------------------
Net rental expense $ 534.3 $ 544.3 $ 521.6
- --------------------------------------------------------------------------------
At December 31, 1996, future minimum lease payments under capital leases and
noncancelable operating leases with initial or remaining terms of more than one
year were as follows (in millions):
- --------------------------------------------------------------------------------
Capital Operating
Leases Leases
- --------------------------------------------------------------------------------
1997 $ 120.2 $ 452.2
1998 113.5 452.7
1999 105.4 422.4
2000 103.2 405.8
2001 104.1 394.5
Thereafter 583.6 4,541.8
- --------------------------------------------------------------------------------
1,130.0 6,669.4
Less sublease rental income 85.3
- --------------------------------------------------------------------------------
Total minimum operating
lease payments $ 6,584.1
- --------------------------------------------------------------------------------
Less amounts
representing interest 357.8
- --------------------------------------------------------------------------------
Present value of future
minimum capital lease payments 772.2
Less current obligations
under capital leases 61.7
- --------------------------------------------------------------------------------
Long-term obligations
under capital leases $ 710.5
- --------------------------------------------------------------------------------
NOTE E - MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY WHICH HOLDS
SOLELY NON-RECOURSE OBLIGATION OF COMPANY
In October 1995, the Company completed a restructuring of its yen-denominated
non-recourse obligation secured by land and buildings the Company owns in Tokyo.
A newly formed consolidated subsidiary of the Company (the "Subsidiary") entered
into a Japanese business arrangement designated under Japanese law as a tokumei
kumiai ("TK"). Pursuant to the TK arrangement, the holder of the non-recourse
obligation restructured such obligation and then assigned title to and ownership
of such obligation to the Subsidiary as operator under the TK arrangement in
exchange for a preferred interest in the profits and returns of capital from the
business of the Subsidiary (the "Preferred Security"). The restructured
non-recourse obligation is the sole asset of the Subsidiary. As a result of this
restructuring, the original holder of such non-recourse obligation is no longer
a direct creditor of the Company and the Company's obligation is reflected in
the Company's Consolidated Balance Sheet as "Mandatorily Redeemable Preferred
Security of Subsidiary which holds solely non-recourse obligation of Company".
NWAC has guaranteed the obligation of the Subsidiary to distribute payments on
the Preferred Security pursuant to the TK arrangement if and to the extent
payments are received by the Subsidiary.
The restructured obligation matures in three approximately equal annual
installments due in 2005, 2006 and 2007. In addition to these installments, cash
payments on the restructured obligation will be payable semiannually at the rate
of 4% per annum until March 31, 2000 and at a rate based upon a floating
long-term Japanese prime rate (capped at 6%) thereafter. During the first three
years, one-fourth of the cash payments are applied to reduce the obligation. The
obligation remains non-recourse to the Company. In addition, the Company retains
the ability (exercisable at any time after September 30, 2001) to transfer the
property in full satisfaction of all Company obligations related to the
financing.
The initial financial statement carrying value of the Preferred Security
reflected the fair value as of the closing date. The excess of the financial
statement carrying value of the original non-recourse obligation over the fair
value of the Preferred Security at the date of the restructuring resulted in a
1995 gain of $62 million, net of tax. This gain, together with losses on other
debt extinguishments, is shown as an extraordinary item.
The carrying value is being accreted over 12 years from October 1995 to the
ultimate maturity value of 72.9 billion yen ($628.8 million based on the
December 31, 1996 exchange rate). Such accretion is included as a component of
"Interest of mandatorily redeemable preferred security holder" in the
Consolidated Statements of Income.
<PAGE>
NOTE F - SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK
Series A and Series B Preferred Stock issued and outstanding consisted of the
following (dollars in millions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B ACCRUED
SHARES AMOUNT SHARES AMOUNT DIVIDENDS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994 5,000.0 $ 250.0 6,853.0 $ 342.7 $ 57.9 $ 650.6
Accrued dividends - - - - 53.1 53.1
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 5,000.0 250.0 6,853.0 342.7 111.0 703.7
Exchange of preferred stock
for common stock - - (1,727.0) (86.4) (10.7) (97.1)
Accrued dividends - - - - 50.3 50.3
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 5,000.0 250.0 5,126.0 256.3 150.6 656.9
Acquisition of preferred stock (3,691.2) (184.6) (2,962.8) (148.1) (121.0) (453.7)
Accrued dividends - - - - 36.6 36.6
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 1,308.8 $ 65.4 2,163.2 $ 108.2 $ 66.2 $ 239.8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For each of the Series A and Series B Preferred Stock, 10,000 shares are
authorized, par value is $.01 per share and the stated value is $50,000 per
share. Both series are entitled to a preference in voluntary and involuntary
liquidation, in the amount of $50,000 per share, plus accrued and unpaid
dividends. Holders of the Series A and Series B Preferred Stock have voting
rights for the election of directors. Both series accrue dividends at 8% per
year and dividends accruing prior to August 1, 1998 are deferred until
redemption. Dividends are cumulative if unpaid and, to the extent required cash
dividends are not paid, the annual dividend rate will increase every six months
by 1/2% up to a maximum of 10%.
The Series A Preferred Stock ranks senior to the Series B and Series C Preferred
Stock and all classes of common stock with respect to liquidation and dividend
rights. The Series A Preferred Stock is redeemable at its liquidation preference
at any time, in whole but not in part, at the option of the Company, and must be
redeemed in three equal installments starting two years prior to August 1, 2002.
Beginning August 1, 1998, dividends are payable semiannually in cash.
The Series B Preferred Stock ranks senior to the Series C Preferred Stock and
all classes of common stock with respect to liquidation and dividend rights. The
Series B Preferred Stock is redeemable at its liquidation preference at any
time, in whole or in $50 million increments, at the option of the Company, and
must be redeemed in three equal installments starting two years prior to August
1, 2003. The consent of the holders of the Series A Preferred Stock must be
received in order to redeem or repurchase the Series B Preferred Stock.
Beginning August 1, 1998, dividends are payable semiannually in cash if all the
accrued dividends on the Series A Preferred Stock have been paid.
In July 1996, the Company acquired from KLM 3,691.2 shares of Series A Preferred
Stock and 2,962.8 shares of Series B Preferred Stock in exchange for two
unsecured promissory notes aggregating $379 million, both of which were repaid
December 1996. These transactions resulted in an increase to net income
applicable to common stockholders of $74.5 million. In connection with these
repurchases, KLM as a holder of Series A and Series B Preferred Stock consented
through August 15, 1998 to the Company's payment of dividends on, and its
redemptions or repurchases of, its common stock, Series C Preferred Stock and
Series B Preferred Stock.
In January 1995, the Company consumated an agreement with Bankers Trust New York
Corporation to exchange 1,727 shares of the Company's Series B Preferred Stock
for 2,050,000 shares of newly issued Class B Common Stock. This transaction
resulted in a transfer from redeemable preferred stock to common stockholders'
equity deficit of $96.8 million, net of expenses, and an increase to net income
applicable to common stockholders of $58.9 million.
<PAGE>
NOTE G - COMMON STOCKHOLDERS' EQUITY (DEFICIT)
The Company's classes of common stock consisted of (shares in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class A voting Class B non-voting
Par value $.01 Par value $.01 TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 39.7 18.3 58.0
Issuance of common stock 20.4 - 20.4
Shares issued to employee trusts 5.1 .7 5.8
Conversion of Class B to Class A 11.8 (11.8) -
Other .1 - .1
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 77.1 7.2 84.3
Exchange of Series B Preferred Stock for common stock - 2.0 2.0
Shares issued to employee trusts 3.0 .4 3.4
Conversion of Class B to Class A 6.2 (6.2) -
Conversion of Series C Preferred Stock .4 .1 .5
Other 1.1 - 1.1
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 87.8 3.5 91.3
Shares issued to employee trusts 4.2 .6 4.8
Conversion of Class B to Class A .3 (.3) -
Conversion of Series C Preferred Stock .9 .1 1.0
Other .5 - .5
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 93.7 3.9 97.6
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Authorized shares are 250 million and 65 million of Class A and Class B Common
Stock, respectively. Shares of Class B Common Stock are convertible at any time
into an equal number of shares of Class A Common Stock and vice versa. The
Company is effectively precluded from paying dividends or repurchasing for cash
its common stock without the consent of the holders of the Series A and Series B
Preferred Stock.
Pursuant to the Stockholder Rights Plan (the "Rights Plan"), each share of
common stock has attached thereto a right and, until the rights expire or are
redeemed, each new share of common stock issued by the Company, including the
shares of common stock into which the Series C Preferred Stock is convertible,
will include one right. Upon the occurrence of certain events, each right
entitles the holder to purchase one one-hundredth of a share of Series D Junior
Participating Preferred Stock at an exercise price of $150, subject to
adjustment. The rights become exercisable only after any person or group (other
than the trusts holding common stock for the benefit of employees) acquires
beneficial ownership of 19% or more of the Company's "outstanding" common stock
(as defined in the Rights Plan) or commences a tender or exchange offer that
would result in such person or group acquiring beneficial ownership of 19% or
more of the Company's outstanding common stock. If any person or group acquires
beneficial ownership of 19% or more of the Company's outstanding common stock,
the holders of the rights (other than the acquiring person or group) will be
entitled to receive upon exercise of the rights, Class A Common Stock of the
Company having a market value of two times the exercise price of the right. In
addition, if after the rights become exercisable the Company is involved in a
merger or other business combination or sells more than 50% of its assets or
earning power, each right will entitle its holder (other than the acquiring
person or group) to receive common stock of the acquiring company having a
market value of two times the exercise price of the rights. The rights expire on
November 16, 2005 and may be redeemed by the Company at a price of $.01 per
right prior to the time they become exercisable.
In December 1996, the Company's Board of Directors approved a stock repurchase
program (to which the holders of the Series A and Series B Preferred Stock have
consented) authorizing the Company to repurchase up to five million shares of
its Class A Common Stock from time to time in open market or negotiated
transactions.
The Company has stock option plans for officers and key employees. Options
generally become exercisable in equal annual installments over four or five
years and expire 10 years from the date of the grant. The Company's policy is to
grant options with the exercise price equal to the market price of the common
stock on the date of grant.
<PAGE>
To the extent that options are granted with an exercise price less than the
market price on the date of the grant, compensation expense is recognized over
the vesting period of the grant.
Following is a summary of stock option activity (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,509 $ 10.57 4,525 $ 8.70 2,891 $ 5.65
Granted 1,836 35.04 206 26.06 1,852 13.19
Forfeited (118) 15.55 (165) 10.72 (61) 4.74
Canceled - - - - (19) 24.43
Exercised (453) 7.92 (1,057) 5.38 (138) 4.74
Outstanding at end of year 4,774 20.11 3,509 10.56 4,525 8.70
Exercisable at end of year 1,907 9.16 1,594 7.95 1,835 5.91
Class A Common Stock:
Reserved for issuance 7,948 4,948 4,948
Available for future grants 1,487 205 246
</TABLE>
AT DECEMBER 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVG.
RANGE OF REMAINING WEIGHTED-AVG. WEIGHTED-AVG.
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.74 to $13.00 2,442 6.7 years $ 9.10 1,665 $ 7.85
14.00 to 31.875 1,102 8.5 25.89 232 17.29
34.00 to 43.688 1,230 9.7 36.79 10 38.23
</TABLE>
The weighted-average fair value of options granted during 1996 and 1995 is
$14.89 and $11.68 per option, respectively. The fair value of each option grant
is estimated as of the date of grant using the Black-Scholes single option-
pricing model assuming a weighted average risk-free interest rate of 6.4% and
6.9% for 1996 and 1995, respectively, and expected lives of six years and
volatility of 30% for 1996 and 1995. Had compensation expense for stock options
been determined based on the fair value method (instead of intrinsic value
method) at the grant dates for awards, the Company's 1996 and 1995 net income
and earnings per share would have decreased by less than 1%. The effects of
applying the fair value method of measuring compensation expense for 1996 and
1995 are likely not representative of the effects for future years in part
because the fair value method was applied only to stock options granted after
December 31, 1994.
A long term performance and retention plan was established in 1996 under which
500,000 phantom stock units were awarded at no cost. The units are payable in
cash based on the market value of the Company's common stock at the time the
units vest. Of the units granted, 100,000 of the units vested and were paid in
1996. The remaining 400,000 units can vest, subject to the satisfaction of
performance criteria, in installments over two-year performance periods, the
first of which ends in 1998 and the final of which ends in 2004. As of December
31, 1996, 400,000 units were outstanding, none of which were vested.
<PAGE>
NOTE H - INCOME TAXES
Income tax expense consisted of the following (in millions):
Year Ended December 31
- -------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
CURRENT:
Federal $ 175.0 $ 89.1 $ 11.9
Foreign 4.1 3.9 5.3
State 22.3 13.0 5.3
- --------------------------------------------------------------------------------
201.4 106.0 22.5
DEFERRED:
Federal 112.1 91.4 168.1
Foreign 16.6 .7 (5.3)
State 6.2 3.3 17.5
- --------------------------------------------------------------------------------
134.9 95.4 180.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total income tax
expense $336.3 $ 201.4 $ 202.8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reconciliation of the statutory rate to the Company's income tax expense is as
follows (in millions):
Year Ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Statutory rate applied
to income before
income taxes and
extraordinary item $305.3 $190.2 $174.4
Add (deduct):
State income tax net
of federal benefit 18.5 13.5 16.0
Non-deductible meals
and entertainment 9.5 9.0 8.9
Adjustment to valuation
allowance and other
income tax accruals 6.2 (12.3) 3.0
Other (3.2) 1.0 .5
- --------------------------------------------------------------------------------
Total income tax
expense $336.3 $201.4 $ 202.8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The net deferred tax liabilities listed below include a current net deferred tax
asset of $95.5 million and $82.8 million and a long-term net deferred tax
liability of $947.2 million and $772.5 million as of December 31, 1996 and 1995,
respectively.
Significant components of the Company's net deferred tax liability were as
follows (in millions):
December 31
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Financial accounting basis
of assets in excess of tax
basis $ 1,392.0 $ 1,357.5
Expenses other than
depreciation accelerated
for tax purposes 287.9 260.1
Other 7.9 22.9
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,687.8 1,640.5
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Pension and postretirement
benefits 186.3 273.1
Expenses accelerated for
financial reporting
purposes 437.4 326.2
Leases capitalized for
financial reporting
purposes 114.8 141.2
Alternative minimum tax
credit carryforwards 97.6 145.6
Net operating loss
carryforwards - 48.1
Foreign tax credit
carryforwards - 16.6
- --------------------------------------------------------------------------------
Total deferred tax assets 836.1 950.8
- --------------------------------------------------------------------------------
Net deferred tax liability $ 851.7 $ 689.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of December 31, 1996, the Company has utilized all of its regular net
operating loss carryforwards ("NOLs"). For tax purposes, the Company utilized
NOLs of approximately $129.5 million, $684.4 million and $394.4 million in 1996,
1995 and 1994, respectively. The Company utilized alternative minimum tax net
operating losses ("AMTNOLs") of $105.1 million and $446.7 million in 1995 and
1994, respectively. The Company has alternative minimum tax credits of
approximately $97.6 million available for carryforward to future years' tax
returns. The alternative minimum tax credit has an unlimited carryforward
period. In 1995, the Company utilized its remaining AMTNOL carryforward, as well
as its remaining investment credit carryforward and its remaining foreign tax
credits available for alternative minimum tax purposes.
Sections 382 and 383 of the Internal Revenue Code of 1986 (the "Code") and the
regulations thereunder impose limitations on the carryforward amounts of NOLs,
AMTNOLs and credits that can be used to offset taxable income (or used as a
credit) in any single year if the
<PAGE>
corporation experiences more than a 50% ownership change, as defined therein,
over a three-year testing period ending on any testing date. The annual
limitation on the amount of such NOLs, AMTNOLs and credits is calculated in part
based on the value of the Company's stock. Management believes that the offering
of outstanding common stock by existing stockholders in November 1995 triggered
an ownership change, but that no ownership change occurred prior to the
offering. If such an ownership change in fact occurred as a result of the
November 1995 offering, management believes that even as limited by Sections 382
and 383 of the Code, the NOLs, AMTNOLs and credits would be used significantly
earlier than their expiration, and the annual limitation would not have an
adverse impact on the Company. However, if the Internal Revenue Service (the
"IRS") were to assert successfully that an ownership change had occurred on any
prior date, including August 1, 1993 (the date of the labor agreements), the
impairment of the Company's ability to use its NOLs, AMTNOLs and credit
carryforwards would be significant because the value of the Company's stock on
certain prior testing dates (which adversely affects the annual limitation
described above) was relatively low.
In November 1995, the IRS issued proposed adjustments to the tax returns of the
Company for the 1988 through 1991 tax years. Certain of these proposed
adjustments result from a disagreement between the Company and the IRS as to the
timing of the recognition of approximately $385 million of taxable income. The
IRS has also proposed that the Company recognize additional taxable income of
approximately $375 million. The Company disagrees with the IRS' proposals. The
Company is vigorously contesting all of the proposed adjustments and believes
that its positions are correct. To the extent the IRS were to prevail on any of
these issues, the Company would recognize taxable income and utilize net
operating loss carryforwards sooner than otherwise scheduled. For financial
reporting purposes, any adjustments to taxable income would largely be accounted
for as temporary differences and would not result in a material charge to income
tax expense.
NOTE I - COMMITMENTS
The Company's new aircraft orders as of December 31, 1996, include commitments
to acquire 20 Airbus A320 aircraft (13 in 1998 and seven in 1999), 25 Boeing
757-200 aircraft from 2003 through 2005, and 16 Airbus A330 aircraft (eight each
in 2004 and 2005). The Company also has agreed to purchase three DC9-30 aircraft
in 1997. Committed expenditures for these aircraft and related equipment,
including estimated amounts for contractual price escalations and predelivery
deposits, will be approximately: $19 million in 1997, $536 million in 1998, $298
million in 1999, $87 million in 2001, and $3.6 billion from 2002 to 2005. The
Company has substitution rights with respect to the Airbus A330 aircraft.
In addition to the above, the Company has ordered four Boeing 747-400 aircraft
at an aggregate cost, including related equipment and contractual price
escalations, of approximately $750 million. The Company is scheduled to take
delivery of two aircraft in 2002 and two aircraft as early as 1999 or as late as
2003. The Company is required to make pre-delivery deposits approximately two
years prior to delivery of the aircraft.
Consistent with prior practice, the Company intends to finance its aircraft
deliveries through a combination of internally generated funds, debt and lease
financing. Financing has been arranged for the Airbus A320 aircraft deliveries.
This financing is available for use at the option of the Company and can be
utilized as either debt or lease financing. In addition, the Company has another
facility (which expires in October 1999) pursuant to which the lenders have
extended commitments to provide, at the option of the Company, up to $240
million of debt financing for up to six B757 aircraft delivered in 1996 and/or
the Airbus A320 aircraft to be delivered in 1998 and 1999. There were no
borrowings outstanding under this facility at December 31, 1996. Loans
thereunder have a final maturity not later than October 2016.
NOTE J - LITIGATION
The Company is involved in a variety of legal actions relating to antitrust,
contract, trade practice, environmental and other legal matters relating to the
Company's business. While the Company is unable to predict the ultimate outcome
of these legal actions, it is the opinion of management that the disposition of
these matters will not have a material adverse effect on the Company's
Consolidated Financial Statements taken as a whole.
<PAGE>
NOTE K - PENSION BENEFITS
The Company has several noncontributory pension plans covering substantially all
of its employees. The benefits for these plans are based primarily on years of
service and/or employee compensation. It is the Company's policy to annually
fund at least the minimum contribution as required by the Employee Retirement
Income Security Act of 1974.
The net periodic pension cost of defined benefit pension plans included the
following (in millions):
<TABLE>
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 115.7 $ 77.3 $ 89.0
Interest cost on projected benefit obligations 267.2 237.0 216.9
Actual (gain) loss on plan assets (399.1) (564.8) 23.4
Net amortization and deferral 201.3 361.8 (188.6)
- ---------------------------------------------------------------------------------------------------
Net periodic pension cost $ 185.1 $ 111.3 $ 140.7
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the defined benefit pension plans' funded status
and amounts recognized in the Company's Consolidated Balance Sheets as of
December 31 (in millions):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------
ASSETS ACCUMULATED Assets Accumulated
EXCEED BENEFITS Exceed Benefits
ACCUMULATED EXCEED Accumulated Exceed
BENEFITS ASSETS Benefits Assets
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF:
Vested benefit obligations $ 218.9 $ 2,792.4 $ 221.9 $ 2,702.8
Nonvested benefit obligations 25.3 245.7 30.0 277.9
- ----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 244.2 3,038.1 251.9 2,980.7
Effect of projected future salary increases 42.2 374.5 35.5 435.9
- ----------------------------------------------------------------------------------------------------------------
Projected benefit obligations $ 286.4 $ 3,412.6 $ 287.4 $ 3,416.6
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Plan assets at fair value $ 292.4 $ 2,716.3 $ 268.5 $ 2,285.1
Less projected benefit obligations 286.4 3,412.6 287.4 3,416.6
- ----------------------------------------------------------------------------------------------------------------
Projected benefit obligations (in excess of)
less than plan assets 6.0 (696.3) (18.9) (1,131.5)
Unrecognized prior service cost 5.1 198.0 4.9 218.6
Unrecognized net loss 5.4 346.7 39.7 727.7
Adjustment required to recognize minimum liability - (188.4) - (528.5)
- ----------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost at December 31 $ 16.5 $ (340.0) $ 25.7 $ (713.7)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1996 and 1995, plan assets were invested primarily in equity
and debt securities.
Assumptions used in the accounting for the defined benefit plans as of December
31 were as follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Weighted average discount rate 7.60% 7.10% 9.15%
Rate of increase in future compensation levels 3.50% 3.50% 3.75%
Expected long-term rate of return on plan assets 10.50% 10.50% 10.50%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
An additional minimum liability is required to be recorded to the extent that a
plan's accumulated benefit obligation less the accrued pension liability exceeds
plan assets. The minimum liability is recorded as a long-term liability with a
corresponding intangible asset (to the extent of unrecognized prior service
cost) with the difference between the minimum liability and the intangible asset
recorded as a reduction to equity (net of tax). The minimum pension liability
adjustment of $188.4 million has resulted in a $71.6 million intangible asset
included in other assets and a $73.5 million, net of tax, cumulative reduction
in common stockholders' equity at December 31, 1996.
NOTE L - POSTRETIREMENT HEALTH CARE BENEFITS
The Company sponsors various contributory and noncontributory medical, dental
and life insurance benefit plans covering certain eligible retirees and their
dependents. Retired employees are not offered Company-paid medical and dental
benefits after age 64, with the exception of certain employees who retired prior
to 1987 and receive lifetime Company-paid medical and dental benefits. Prior to
age 65, the retiree share of the cost of medical and dental coverage is based on
a combination of years of service and age at retirement. Medical and dental
benefit plans are unfunded and costs are paid as incurred. The pilot group is
provided Company-paid life insurance coverage in amounts which decrease based on
age at retirement and age at time of death.
Net periodic postretirement benefit cost included the following components (in
millions):
Year Ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 10.3 $ 7.3 $ 6.8
Interest cost 22.1 20.8 15.1
Net amortization and deferral 3.2 .2 .1
Actual gain on plan assets (.4) (.4) (.5)
- --------------------------------------------------------------------------------
Net periodic
postretirement
benefit cost $ 35.2 $ 27.9 $ 21.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth the plans' combined funded status and amounts
recognized in the Company's Consolidated Balance Sheet as of December 31 (in
millions):
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION:
Retirees $ 103.7 $ 116.8
Fully eligible active plan
participants 67.1 52.7
Other active plan
participants 142.8 116.6
- --------------------------------------------------------------------------------
313.6 286.1
Plan assets at fair value 5.1 5.1
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation in excess
of plan assets 308.5 281.0
Unrecognized net loss (72.4) (65.7)
- --------------------------------------------------------------------------------
Accrued postretirement
benefit cost $ 236.1 $ 215.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1996, the weighted average annual assumed rate of increase in
the per capita cost of covered benefits (i.e., health care cost trend rate) is
7.0% for 1997 and is assumed to decrease gradually to 4.5% for 2002 and remain
at that level thereafter (a rate of 7.5% was assumed for 1996). This health care
cost trend assumption has a significant impact on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point would increase the accumulated postretirement benefit obligation as of
December 31, 1996, by $35.9 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1996 by
$4.8 million. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.6% at December 31, 1996 and
7.10% at December 31, 1995.
<PAGE>
NOTE M - RELATED PARTY TRANSACTIONS
KLM Royal Dutch Airlines owns 21,684,099 shares of Class A Common Stock of the
Company at December 31, 1996. During 1992, Northwest and KLM signed a Commercial
Cooperation and Integration Agreement. The intent of the agreement is to enhance
the joint presence of each airline in the United States, Europe and other
destinations by integrating the systems and services of each carrier. Northwest
and KLM have been granted antitrust immunity by the U.S. Department of
Transportation, enabling them to operate their transatlantic flights pursuant to
a joint venture alliance and to coordinate pricing, scheduling, product
development and marketing. Northwest and KLM have implemented code-sharing (the
joint designation of flights under the Northwest "NW" code and the KLM "KL"
code) on flights to certain European, Middle Eastern, African and U.S. cities,
with additional cities planned for 1997. Net settlements, other than normal
interline ticket settlements, related to the transatlantic alliance have not
been material in any period.
The Company has an investment in WORLDSPAN, an affiliate that provides computer
reservations services, which it accounts for using the equity method. The
Company recorded expenses for certain reservation system services provided by
this affiliate of $83.4 million, $87.7 million and $86.4 million in 1996, 1995
and 1994, respectively.
The Company owns 29.5% of the common stock of Mesaba Holdings, Inc., the holding
company of Mesaba Aviation, Inc. ("Mesaba"), which operates as a Northwest
Airlink. Northwest has an Airline Services Agreement ("ASA") with Mesaba under
which Northwest determines Mesaba's commuter aircraft scheduling. In return,
Northwest has agreed to guarantee Mesaba certain pre-tax profit levels for the
year ending March 31, 1997. As of December 31, 1996, the Company has leased six
Saab 340 aircraft and is committed to lease an additional 44 aircraft. Mesaba
has agreed to sublease these aircraft subject to the execution of a new ASA
which is currently under negotiation.
The Company entered into a Regional Jet Services Agreement with Mesaba in
October 1996. The Company has also agreed to purchase 12 Avro Regional Jet
aircraft. These aircraft are scheduled for delivery, eight in 1997 and four in
1998, and will be subleased to Mesaba. Committed expenditures for these
aircraft, including related equipment and contractual price escalations, are
approximately $300 million.
<PAGE>
NOTE N - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FAIR VALUES OF FINANCIAL INSTRUMENTS The financial statement carrying values
and estimated fair values of the Company's financial instruments, including
current maturities, as of December 31 were (in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS:
Held-to-maturity debt securities:
Commercial paper $ 435.6 $ 435.6 $ 604.7 $ 604.7
Other 8.5 8.5 161.7 161.7
Available-for-sale debt securities 101.5 101.5 70.1 70.1
Cash 13.8 13.8 14.4 14.4
- ---------------------------------------------------------------------------------------------------------
$ 559.4 $ 559.4 $ 850.9 $ 850.9
- ---------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS:
Held-to-maturity debt securities:
Commercial paper $ 10.5 $ 10.5 $ 1.0 $ 1.0
Other 91.9 91.9 259.7 259.7
Available-for-sale debt securities 150.7 150.7 - -
- ---------------------------------------------------------------------------------------------------------
$ 253.1 $ 253.1 $ 260.7 $ 260.7
- ---------------------------------------------------------------------------------------------------------
Long-term Debt $ 2,060.4 $ 2,166.7 $ 2,467.1 $ 2,738.8
Mandatorily Redeemable Preferred
Security of Subsidiary 549.2 536.2 618.4 611.4
Series A and B Preferred Stock 239.8 198.7 656.9 522.9
Series C Preferred Stock 362.8 332.4 288.6 309.3
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Company considers all unrestricted investments with an original maturity of
three months or less on their acquisition date to be cash equivalents. The
Company classifies investments with an original maturity of more than three
months that are expected to be sold or called by the issuer within the next
year, and those temporarily restricted, as short-term investments. Purchases of
short-term investments classified as available-for-sale securities during 1996
were $161.3 million and proceeds from sales of such securities were $10.6
million. At December 31, 1996 and 1995, short-term investments included $60.4
and $140.7 million, respectively, of temporarily restricted investments. The
temporarily restricted investments were pledged as collateral under various
agreements.
The fair values of the Company's long-term debt were estimated using quoted
market prices, where available. For long-term debt and preferred securities not
actively traded, other than Series C Preferred Stock, fair values were estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of securities. The fair value of the Series C
Preferred Stock shares is based on the assumed conversion to common stock and
valuing such shares at the closing quoted market price for Class A Common Stock.
<PAGE>
FOREIGN EXCHANGE RISK MANAGEMENT The Company is exposed to the effect of
foreign exchange rate fluctuations on the U.S. dollar value of foreign
currency-denominated operating revenues and expenses. The Company's largest
exposure to foreign currency fluctuations comes from the Japanese yen. In
1996, yen-denominated revenues exceeded yen-denominated expenses by
approximately 70 billion yen (which was approximately 56% of the aggregate
excess of foreign currency-denominated revenues over foreign
currency-denominated expenses). From time to time, the Company uses a collar
option strategy to hedge a portion of its anticipated yen-denominated net
cash flows. As of December 31, 1996, the Company had $94 million (10.9
billion yen) in collar options outstanding to hedge approximately 85% of its
anticipated first quarter 1997 yen net cash flows. The collars involve the
purchase of Japanese yen put options coupled with the simultaneous sale of
Japanese yen call options with identical expiration dates and notional yen
amounts. The Company is exposed to credit loss in the event of nonperformance
by counterparties to the yen collar options. The counterparties to the option
contracts as of December 31, 1996, consist of five banks. The Company does
not anticipate nonperformance by any of these counterparties. The amount of
such credit exposure is generally the unrealized gains in such contracts.
Realized and unrealized gains and losses on Japanese yen collar option
contracts are recognized currently in net income. Open contracts are recorded
at fair value since they do not qualify as hedges for financial accounting
purposes. As of December 31, 1996, there are no material unrealized gains or
losses on outstanding yen collar option contracts.
FUEL PRICE RISK MANAGEMENT The Company manages a portion of the price risk
of fuel costs utilizing both regulated exchange traded futures contracts and
fuel swap agreements. Gains or losses on hedge contracts are deferred until
the related fuel inventory is expensed. As of December 31, 1996, the Company
had no material hedges for future fuel requirements.
<PAGE>
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly results of operations for the years ended December 31, 1996
and 1995, are summarized below (in millions, except per share amounts):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Operating revenues $ 2,264.8 $ 2,540.4 $ 2,735.2 $ 2,340.1
Operating income 134.4 374.7 469.4 75.3
Net income $ 53.4 $ 202.8 $ 253.9 $ 26.0
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PRIMARY PER COMMON SHARE:
Before effects of acquisition of preferred stock $ .41 $ 1.90 $ 2.42 $ .20
Acquisition of preferred stock - - .73 -
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ .41 $ 1.90 $ 3.15 $ .20
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED PER COMMON SHARE:
Before effects of acquisition of preferred stock $ .37 $ 1.72 $ 2.20 $ .19
Acquisition of preferred stock - - .66 -
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ .37 $ 1.72 $ 2.86 $ .19
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
1995:
Operating revenues $ 2,043.0 $ 2,279.4 $ 2,561.0 $ 2,201.5
Operating income 147.3 249.6 425.2 91.3
Income before extraordinary item 2.6 104.8 231.1 3.6
Net gain on extinguishment of debt - - - 49.9
Net income $ 2.6 $ 104.8 $ 231.1 $ 53.5
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PRIMARY:
Before effects of extraordinary item
and exchange of preferred stock $ (.13) $ .96 $ 2.27 $ (.10)
Net gain on extinguishment of debt - - - .51
Exchange of preferred stock .65 - - -
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ .52 $ .96 $ 2.27 $ .41
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED:
Before effects of extraordinary item
and exchange of preferred stock $ (.10) $ .92 $ 2.11 $ (.09)
Net gain on extinguishment of debt - - - .47
Exchange of preferred stock .61 - - -
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ .51 $ .92 $ 2.11 $ .38
- -----------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The sum of the quarterly earnings per share amounts does not equal the annual
amount reported since per share amounts are computed independently for each
quarter and for the full year based on respective weighted average common share
equivalents outstanding.
<PAGE>
NOTE P - CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF NORTHWEST AIRLINES,
INC.
Northwest Airlines Corporation (formerly Wings Holdings Inc.) and its wholly
owned subsidiary, Wings Acquisition Corp., were formed and incorporated by a
group of investors in order to acquire all of the outstanding stock of NWA Inc.
(the "Acquisition"), the parent company of Northwest Airlines, Inc. In 1989,
Wings Acquisition Corp. was merged with and into NWA Inc., with NWA Inc. being
the surviving entity. The Acquisition was recorded using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair market value at
the date of Acquisition, determined primarily by independent appraisals.
After reflecting these values and certain acquisition indebtedness of NWA Inc.
in the financial statements of Northwest, condensed financial information of
Northwest consists of the following (in millions):
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
- ---------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 9,651.3 $ 8,806.6 $ 8,057.0
Operating expenses 8,641.7 7,937.0 7,257.7
- ---------------------------------------------------------------------------------------------------
Operating income 1,009.6 869.6 799.3
Other income (expense) (183.6) (316.4) (298.1)
- ---------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 826.0 553.2 501.2
Income tax expense 308.8 215.9 198.2
- ---------------------------------------------------------------------------------------------------
Income before extraordinary item 517.2 337.3 303.0
Net gain on extinguishment of debt - 50.4 -
- ---------------------------------------------------------------------------------------------------
Net income $ 517.2 $ 387.7 $ 303.0
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
December 31
- ------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 1,626.8 $ 1,861.1
Noncurrent assets 5,818.3 5,460.9
Current liabilities 2,832.2 2,535.6
Long-term debt and obligations under capital leases 2,103.9 2,351.8
Deferred credits and other liabilities 935.7 1,277.3
Mandatorily redeemable preferred security of subsidiary 549.2 618.4
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 6, 1997
NORTHWEST AIRLINES CORPORATION
By: /s/ Mark W. Osterberg
Name: Mark W. Osterberg
Title: Vice President/Chief Accounting
Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
23.1 Consent of Ernst & Young LLP
25.1 Form T-1
27.1 Financial Data Schedule
99.1 Prospectus Supplement, Subject to Completion, dated
March 6, 1997 (as filed pursuant to Rule 424(b)(3) (File
Nos. 333-13307 and 333-2516) and incorporated herein by
reference)
