The Wall Street Journal-20080130-Lionel Takes Steps to End Bankruptcy

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Lionel Takes Steps to End Bankruptcy

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A bankruptcy judge signed off on Lionel LLC's bid to pay Chief Executive Jerry Calabrese, who has shepherded the model-train maker through bankruptcy-court protection for more than three years, a base salary of $1 million a year.

Judge Burton R. Lifland of the U.S. Bankruptcy Court in New York approved Mr. Calabrese's deal and a $465,000-a-year pact for Mark Erickson, the executive vice president of marketing and business development.

Judge Lifland also signed off on changes to Lionel's pacts with Wachovia Corp. and Guggenheim Corporate Funding LLC, which have been funding the company's Chapter 11 case. The changes extend Lionel's bankruptcy loans to May 30.

Lionel, which intends to exit bankruptcy protection later this year, is trying to line up exit financing. But the recent credit crunch has made it more difficult to secure.

The company said in court papers that retaining Messrs. Calabrese and Erickson, whose employment pacts expired Dec. 31, was essential to the confirmation of Lionel's reorganization plan. The new deals more than double both executives' yearly base salaries but eliminate annual bonuses based on the company's financial performance. Mr. Calabrese was named CEO of Lionel in September 2004.

Closely held Lionel, based in Chesterfield, Mich., is owned by the estate of the late Martin Davis, once chairman of Paramount Communications Inc., and rock musician Neil Young.

According to court papers, if Lionel is sold for more than $60 million Messrs. Calabrese and Erickson will receive part of the proceeds. If the company's Chapter 11 plan is confirmed, the two executives will receive options to purchase a stake. Mr. Calabrese has previously said he was interested in buying a stake in Lionel.

The 107-year-old Lionel filed for bankruptcy Nov. 15, 2004, after a jury awarded rival MTH Electric Trains $38.6 million in a trade- secrets dispute with the company.

In October, Lionel reached a tentative deal with MTH to settle their long-running dispute, paving the way for an exit from Chapter 11. Lionel has already filed a reorganization plan with the bankruptcy court that would pay its creditors in full.

Judge Lifland has scheduled a confirmation hearing on Lionel's exit plan for March 13.