What's Wrong with This Picture?

There are no strict standards for what companies qualify for protection, which experts claim may be a good thing. "The bankruptcy code is designed to be very flexible," says Harvard Business School professor Stuart Gilson. "When you base the reorganization on rigid rules and regulations, you can make costly errors. You can get a lot of gaming by management in that case." Still, of course, there's no guarantee that companies won't game today's system, either.

Current Polaroid executives, and most other principals, generally won't discuss the case, citing the continuing court proceedings. In his June 28, 2002, sale order to OEP, though, Walsh praised the participants and said unsecured creditors, particularly, had "achieved a significant result in producing value." Still, steps by the debtor, which unsecured creditors fought until the 11th hour, seem to have led ultimately to sharply lower valuations than might otherwise have been possible.

Anatomy of a Bankruptcy
Early in 2001, Polaroid retained business advisory firm Zolfo Cooper and investment bankers Dresdner Kleinwort Wasserstein to help it restructure debt or complete a nonbankruptcy reorganization — efforts Polaroid abandoned when it defaulted in July and August on $26.3 million in bond payments. That caused the immediate maturity of $575 million in debt securities, magnifying its financial pressure. It then ramped up its efforts to find a buyer. But former Polaroid CFO William O'Neill, a 30-year veteran who left the company in 1999 and now serves on the board of Polaroid unsecured creditor Concord Camera, says chances were slim that then-managers could create a workable reorganization plan. "Where was the credibility of the old management?" asks O'Neill, by way of explaining Polaroid's financial plight at the time. "The company needed financing, and who was going to loan them money under the old management? The answer was nobody."

Dire financial straits notwithstanding, Polaroid paid senior executives and directors a total of $6.3 million in bonuses, consulting fees, and lump-sum pension payouts in the months before the filing. Payments included $1.7 million in incentive comp to former CEO DiCamillo, while former CFO Judy Boynton got $300,000 in severance, a $510,000 stock award, and a $638,000 lump-sum pension payout. (Boynton, now the CFO of Royal Dutch/Shell Group, is listed as an unsecured creditor, for an additional severance of $600,000 she is still owed.)

Even after its filing, the company continued trying to enrich senior executives, while lowering asset values. In November, it sought the court's permission to pay top executives who had stayed through the filing — including Flaherty, Boynton's replacement — up to $19 million in so-called key-employee retention programs (KERPs), including some proceeds from any future sale of the company. While KERPs are common, Judge Walsh balked at the amount. He eventually capped a total package at $6 million, saying that "to swallow the...program that the debtors put forth, quite frankly, is too much for me." The following month, when the company asked him to approve the $32 million sale of one profitable Polaroid business, Polaroid ID Systems Inc., to a divisional president, Walsh instead ordered that it be put out for bids.

E.K. Ranjit, CFO of Digimarc Corp., which won the division with a bid of $55 million, says Digimarc expressed interest in the Polaroid ID Systems business before the bankruptcy filing, but "couldn't work out good economic terms." When Digimarc heard that a sale to a manager was being arranged, Ranjit says, "we approached them again, but they said, 'Sorry, we're selling to management.'" Only after the order for a bidding contest was Digimarc able to compete, he says.

Assets Without Value?
When Polaroid made startling changes in the financial picture it presented to the court, though, Judge Walsh went along. On December 17, 2001, Polaroid filed its official Schedules of Assets and Liabilities, intended as a more-comprehensive summary than the preliminary "First Day" numbers used in seeking Chapter 11 protection. Suddenly, Polaroid claimed a far lower asset base: $714.8 million, compared with the $1.8 billion in the First Day report. (Liabilities were listed as $1.1 billion, up from $948.4 million.)

Most of the $1.1 billion asset change reflected exclusion of cash, real estate, equipment, inventories, and accounts receivable belonging to Polaroid's foreign subsidiaries, which the company had chosen not to place under court protection. After its bankruptcy filing, Polaroid stopped submitting financial statements for the subsidiaries, which the 2000 annual report listed as generating up to 80 percent of Polaroid's net income (due in part to the concentration of marketing and R&D costs in the United States).

Even though the foreign subsidiaries were not in bankruptcy, the company was required to list the value of its stock in them. Polaroid, however, called that value "undetermined," meaning that the subsidiaries were recorded at an effective value of zero in the asset schedule.

In court, shareholder representatives and others raised questions about this valuation of foreign assets and other items for which Polaroid listed the value as undetermined — including trademarks, patents, and a 24,000-piece art collection. Said Walsh at one point: "I'm not sure the revenue produced by the patents and copyrights are all that important in evaluating the company's affairs." It was a comment some in the courtroom considered strange, since Polaroid's entire revenue stream is generated by patented product lines. (Future revenues will also rely heavily on brand licensing deals, according to a Polaroid spokesman.)

• « previous
• 1
• 2
• 3
• 4
• next »