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Tuesday, February 15, 2000

Liberty House
pay raises disputed

Despite its parent's objections,
the retailer says the hikes were
needed to retain execs

By Peter Wagner


Liberty House JMB Realty Corp., one of two groups fighting for ownership of bankrupt Liberty House, is objecting to what it calls "eye popping" pay raises of more than 30 percent to a handful of the Hawaii retailer's top executives despite flat sales last year.

"This is not a situation where top management has gone without pay raises and desperately needs some cost-of-living increase to make matters right," said Chicago-based JMB in filings in U.S. Bankruptcy Court last week.

But Liberty House, citing heavy turnover in its top ranks since filing for Chapter 11 bankruptcy nearly two years ago, said the raises were critical to stem the loss of key employees in the face of higher industry pay standards. Some 46 of 91 merchandising positions have been replaced since the bankruptcy, according to court records.

JMB has asked the court to rescind two pay raises given to top managers last year, saying they were never approved by the court. Liberty House says no approval was necessary because the raises were within the scope of ordinary business. The arguments are to be heard in bankruptcy court on Feb. 28.

On March 19, 1998, JMB filed the reorganization bankruptcy for its Hawaii retail unit as major creditors, led by Bank of America, moved to take over the chain. The two sides have since been fighting for control of the retailer in federal bankruptcy court.

According to JMB, separate raises were given to 11 Liberty House executives in March and August totaling more than 30 percent for some. Both were awarded by a board of directors appointed by the Bank of America-led lending group over the objections of a board appointed by JMB.

"The salary increases were given at an unusual time of the year (management already had received their "regular' annual salary increases at the beginning of 1999) and represented eye-popping increases for top management," JMB's filing says.

The first set of raises, in March, totaled 10 percent for Liberty House Chief Executive John Monahan and 5.2 percent for other executives, court documents say.

The second round, in August, gave an additional hike of 18.2 percent to Monahan and 23.3 percent to Robert Eiford, executive vice president of merchandising.

Monahan's annual salary of $275,000 rose to $325,000 in August. Eiford's pay, formerly $215,000, climbed to $265,000. Other executives were given raises ranging from $10,000 to $25,000.

A Liberty House survey of top level salaries in the retail and consulting industries showed the company lagging by 70 percent to 108 percent, with comparable chief executives averaging $551,700 and senior vice presidents $305,300. Monahan yesterday had no comment.

Lesser pay raises also were given last year to all 3,000 Liberty House employees, along with improved company benefits, none of which have been challenged by JMB. Liberty House attorney Bruce Bennett said the only issue properly before the court is whether the increases were within the scope of ordinary business.

"They don't say the results of the survey are wrong," Bennett said. "They talk about lots of other things that frankly, after reviewing the law, don't have anything to do with this question."

JMB noted in its filing that the raises came despite Liberty House's flat sales picture last year. The company had improved profits last year thanks to a much leaner operation but reported sales of about $284 million -- nearly identical to the year before. While Liberty House didn't increase sales, other retailers in Hawaii enjoyed strong growth, JMB said.

"The owners do not dispute that during the past two years the debtor's management has cut costs, closed unprofitable stores and otherwise worked to prepare the debtor for emergence from bankruptcy as a viable entity," JMB's filing says. "However, the debtor's sales have not kept pace with other Hawaii retailers, many of whom are now experiencing the strongest sales growth in the nation."

JMB cites recent figures from TeleCheck Services Inc., a national check-authorizing company, showing Hawaii leading the nation with 6.2 percent sales growth in December, the most important month for retailers. TeleCheck monthly indexes show Hawaii sales with an average growth of 3.9 percent last year.

Bennett yesterday dismissed TeleCheck's numbers -- which track only purchases made by check -- as a gauge of sales. A more accurate picture, he said, is shown in state tax collections, which show only a 1.6 percent growth in Hawaii sales last year through September, the most recent figures available. Moreover, he said, because of store closings and other factors, annual sales comparisons are not the best measure of the company's health.

Recent financial reports show Liberty House with a $2.4 million cumulative profit since filing for bankruptcy in 1998. But the high cost of the ongoing bankruptcy -- more than $9 million in attorney and professional fees through December -- has left the company with a heavy burden. The company currently is operating at a cumulative loss of $15.3 million since the bankruptcy.

While several sticky problems continue to stall the bankruptcy, including differences between JMB and the BOA group over what Liberty House is worth, the biggest single obstacle is a $138 million Internal Revenue Service tax claim against Liberty House.

The disputed claim has been in quiet negotiations for months and none of the parties is commenting on the status of the claim.

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