What’s Wrong with This Picture?

Polaroid's passage through Chapter 11 exposes how bankruptcy can give debtors too much power.

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.)

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