By Richard Craver
Winston-Salem Journal, N.C.
The management of Furniture Brands International Inc. should be denied incentive pay related to the efforts to sell the bankrupt company’s assets, especially with a significantly underfunded pension plan, a bankruptcy trustee said in a filing Wednesday.
A hearing on the overall $2.17 million request is set for noon today before the U.S. Bankruptcy Court in Delaware.
Furniture Brands filed for Chapter 11 bankruptcy protection Sept. 9.
An auction for the company’s assets is set for Dec. 10, with KPS Capital Partners established Oct. 2 as the stalking-horse bidder at $280 million. A stalking horse typically sets the floor for a potential auction bid for assets.
In many Chapter 11 cases, incentive and retention pay is provided to key executives to help with any transition or restructuring.
The trustee, Roberta DeAngelis, wrote that part of her objection is tied to executives not benefiting financially after allowing the company’s pension plan to become significantly underfunded, and after making the decision Sept. 4 to terminate medical, disability, life insurance and death benefits for retirees and former employees.
The company has said in bankruptcy filings that the pension plan is underfunded by at least $191.8 million.
“The proposed bonus payments do not appear to be justified by the facts and circumstances of the case, particularly when the debtors have a substantially underfunded pension plan and have terminated certain retiree benefits,” DeAngelis wrote.
There are about 20,000 pension plan participants.
EXECS ‘IN DISGUISE’
DeAngelis objects to the company’s request to pay seven management officials out of a key employee incentive plan. The amount could range from a combined $375,000 to $1.7 million for achieving each of two financial targets: a successful sale of the company’s line of business at a set price level; and keeping and/or enhancing the company’s financial condition by meeting liquidity goals.
Another 48 employees, listed as noninsiders by the company, also could receive payment.
DeAngelis said the company has not demonstrated that the incentive request is necessary, and that it is not retention pay for executives “in disguise.”
“The debtors fail to demonstrate that the sale targets, which provide for increased bonus payments based on increased gross sale proceeds, are anything more than mere lay-ups” for management, she said.
She said the increase in the stalking horse bid from $166 million to $280 million occurred primarily through the work done by the creditors’ committee, as well as an investment banker and a financial adviser hired by the debtor.
In March, the company’s board of directors agreed to a three-year contract extension with Ralph Scozzafava, its chairman and chief executive, to April 1, 2016.
The amended contract raises Scozzafava’s annual salary by $50,000 to $800,000 during the contract extension period. For fiscal 2012, Scozzafava had total compensation of $1.98 million, up 8 percent from 2011.
Each of the company’s top five executives received at least $100,000 in incentive pay during fiscal 2012, including $541,968 for Scozzafava in fiscal 2012 and $4 million in fiscal 2010.
The company also has experienced eight years of revenue declines. For fiscal 2012, the company had a loss of $47.3 million compared with a loss of $43.7 million in fiscal 2011. Sales were down 3 percent to $1.07 billion.
DeAngelis said any additional duties assumed by management while in bankruptcy should not be rewarded with extra compensation. “Increased work for insiders is true in virtually all Chapter 11 cases,” she said.
KPS disclosed Oct. 2 it would extend employment offers “to substantially all of the debtors’ employees as of the closing of the sale.”
It is possible that Furniture Brands’ management could request that Pension Benefit Guaranty Corp. take over the underfunded pension obligations.
The PGBC, a U.S. government agency, insures pensions and assumes responsibility for plans that can no longer pay benefits. Its maximum benefit guarantee is set each year under provisions of ERISA, the Employee Retirement Income Security Act.
The PBGC is listed as Furniture Brands’ largest unsecured creditor. It has one of seven seats on a creditors’ committee formed last week by the bankruptcy court. It said Sept. 22 that it was taking a stand-by approach.