Nice work from KPMG LLP:
Report hits Polaroid maneuvers
Bonus was given, payment skipped before '01 filing
By Jeffrey Krasner, Globe Staff, 8/23/2003
boston.com
Polaroid Corp.'s directors and auditors engaged in a host of questionable actions as the instant photography company approached bankruptcy, according to a report issued yesterday by a court-appointed examiner.
Among the disclosures:
-- Polaroid's board of directors gave then-chief executive Gary DiCamillo a special bonus of $1.4 million in July 2001, less than three months before the company filed for bankruptcy.
-- Polaroid had the cash to pay interest on bonds in July 2001, but bowed to pressure from bank lenders and skipped the payment.
-- At least eight top managers of Polaroid now own pieces of the new company that emerged from bankruptcy court protection last summer.
== The company's auditors, KPMG LLP, ignored warning signs that the company was likely to go out of business and failed to warn investors of its precarious financial position.
In addition, KPMG helped Polaroid disguise just how tenuous its survival was by approving questionable financial maneuvers in late 2000 and early 2001, and improperly relied on assurances from Polaroid's investment bankers that the company had a "90 percent" likelihood of refinancing debt and regaining its footing.
KPMG had fought this week to have its documents removed from the examiner's report, or if not, to have the report filed under court seal so it could only be read by a few people.
In an emergency teleconference yesterday morning, US Bankrutpcy Court Judge Peter J. Walsh denied KPMG's requests. "Let me make it clear I'm not going to approve a redacted report," Walsh said. "It's going to be an entirely 100 percent public disclosure document."
In a statement, KPMG spokesman Timothy P. Connolly defended the firm's work for Polaroid, saying, "KPMG remains confident that it acted appropriately at all times and stands by its actions in this matter."
Polaroid's decline and bankruptcy had a devastating impact on tens of thousands of its employees and their families in Greater Boston. From a peak employment of nearly 21,000 in 1978, the company shrank dramatically, reaching 5,500 by the end of last year. As part of its bankruptcy, Polaroid eliminated health and life insurance for thousands of retirees and disabled employees. Thousands more lost much of their life savings, which had to be invested in Polaroid shares. The shares were worth pennies after the bankruptcy.
Retirees and shareholders have said that the company understated its financial performance in 2001 before the bankruptcy, making the company appear worse than it was, and hid valuable assets. Ultimately, the company was sold last summer for $255 million, which the retirees and shareholders said was a fraction of its value.
Walsh appointed the examiner, Perry M. Mandarino, in February, after receiving letters from Polaroid shareholders alleging the company engaged in improper accounting to orchestrate the bankruptcy, enabling insiders to profit when the company emerged from bankruptcy.
In his 91-page report, Mandarino, a certified public accountant with the New York firm of Traxi LLC, turned those assertions on their heads. Far from being a healthy company hiding its financial strength, he said, Polaroid was deteriorating rapidly -- yet trying to portray financial stability.
One of Polaroid's main problems was a crushing debt load. In late 2000, it had $575 million in bonds due in 2002, 2006, and 2007, and owed about $300 million to a group of banks. The agreements with the bondholders required that Polaroid maintain certain levels of cash reserves indicative of its financial health. If Polaroid fell below those required levels, its lenders could demand immediate repayment of the bonds.
One of the ways the company did that was by reversing, in late 2000, a $5.8 million charge it had taken to pay for layoffs in 1997 and 1998. Reversing the charge put more money on the company's books, giving it a cash cushion to meet the requirements, said Mandarino in the report. But the benefit was fleeting; the next year, the company had to pay out $5.1 million to cover expenses related to the layoffs.
In part because Polaroid was trying to renegotiate with its lenders, KPMG had to consider whether to include a "going concern" opinion in its audits of the firm's 2000 annual report and March 31, 2001, quarterly report. Such a statement -- usually saying the company may not be able to continue as a "going concern" -- is a red flag to investors.
Officials at Dresdner Kleinwort Wasserstein and Miller Buckfire Lewis Ying & Co., financial advisers to Polaroid, had heard that KPMG was considering issuing such a warning for the 2000 annual report, which came out in March 2001. "We would have more difficulty in obtaining the financing if the opinion were there," said Durc Savini, a principal at Miller Buckfire, in a deposition cited in the report.
At about that time, DiCamillo called Stephen Butler, the chairman and chief executive of KPMG, to talk about the issue of including a "going concern" warning. The move was highly unusual, not only because DiCamillo was calling the head of the firm, instead of the partner in charge of the Polaroid account, but also because DiCamillo and Butler served together on the board of an unspecified nonprofit organization, according to the report. Butler refused to answer questions from the examiner during his investigation, according to the report. Efforts to reach DiCamillo last night were unsuccessful.
The going concern warning wasn't included until the June 30, 2001, quarterly report -- six months after it should have if Polaroid had properly reported its debts, according to the report.
Polaroid's board gave DiCamillo a $1.4 million payment in July 2001 to ensure that he would remain at the company, according to former director Stephen Kaufman. The payment was disclosed in bankruptcy court filings, but the company never explained the reason for it. The board also gave DiCamillo $25,000 to pay for lawyers to help him in "protecting his interests in a potential bankruptcy filing," according to the report. The next month, the directors were paid hundreds of thousands in deferred compensation.
Since buying the company out of bankruptcy last July, Polaroid's new owners, led by the venture capital group of Bank One of Chicago, have steadfastly refused to say who else owns the new company. Mandarino's report makes clear what retirees and shareholders have long suspected: Former managers who stayed with the new company got a piece of the ownership, throwing into question whether they were acting in the best interests of creditors and shareholders.
Those with equity stakes in the new Polaroid, now based in Waltham, include former top lawyer Neal D. Goldman, former chief financial officer William L. Flaherty, and Gianfranco Palma, Donald M. Halsted III, Cornelia McGilvray, Arthur Braunstein, and Julie O. Petrini.
Mandarino said it's unclear exactly when Goldman and Flaherty began to discuss the possibility of their employment with and ownership of the new Polaroid began and whether those discussions took place before the sale of the company's assets was approved by the court.
Jeffrey Krasner can be reached at krasner@globe.com.
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