- Get ready for yet another 10-digit accounting scandal
from the world of big business: The astonishing disappearance - behind
the drawn curtains of a federal bankruptcy court in Delaware - of more
than $1 billion of corporate assets from the books of Polaroid Corp., and
the reappearance of most of it, free of charge, in the pockets of a Wall
Street buyout fund.
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- How this has happened stands as a cautionary reminder
that bankruptcy courts are one of the riskiest places of all for investors.
Yet as the economy weakens and more and more big companies keel over, that's
where more and more shareholders are likely to wind up.
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- For what awaits them, check out the plight of bankrupted
Polaroid Corp.'s shareholders, who are about to be shorn of $1.1 billion
in balance sheet assets and $175 million of shareholder equity.
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- THE ploy? An accounting maneuver that is shifting the
assets, seemingly free of charge, from Polaroid's books to the books of
a Wall Street partnership that is set to take Polaroid private in a buyout
for less than $24 million of actual cash money.
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- Some of the biggest names in high finance are involved
in this stunt, from the fancy-pants law firm of Skadden, Arps, Slate, Meagher
& Flom to the infamous Arthur Andersen crowd.
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- There are lawyers from Davis Polk & Wardwell in the
game, along with attorneys from Aiken Gump, as well as advisers from Zolfo
Cooper, Houlihan Lokey and Dresdner Kleinwort Wasserstein.
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- This is corporate embalming's A-team, and for months
its members have been trudging up and down the courthouse steps of Wilmington,
Del.'s federal bankruptcy court in preparation for the solemn and final
act that will send Polaroid to its eternal reward.
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- That act will take place on July 29 in New York - most
likely in the offices of one of the law firms involved - when the parties
will sign on the dotted line to close the sale.
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- By doing so, they will convey 65 percent of Polaroid's
reorganized common equity, including 65 percent of the value of those $1.1
billion worth of mysteriously missing assets, to the aforementioned Wall
Street buyout fund.
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- According to a Polaroid spokesman, the purchase price
for the shares will be $255 million. But court papers in the matter indicate
that less than $24 million in net new cash will be all that the buyout
fund actually hands over.
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- At that point, Polaroid will become a private entity
and no longer required to issue public financial statements. So the company's
ravaged public investors will never get to see those $1.1 billion of balance
sheet assets - including a priceless corporate art collection and the stock
of all Polaroid's foreign subsidiaries - magically reappear.
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- In reality, the assets hadn't disappeared at all. They'd
simply been valued at zero for the purposes of the bankruptcy proceedings,
even though the company had valued them at more than $1 billion in a public
financial filing only eight weeks before going bankrupt.
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- In this way, balance sheet assets that Polaroid had listed
in an official financial statement with the Securities and Exchange Commission
in August of 2001 as totaling $1.8 billion shrank by October to less than
$715 million when the company entered bankruptcy.
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- In the process, shareholder equity - which totaled $176
million in the SEC filing - was wiped out entirely and replaced with a
negative net worth of $385 million.
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- The chief beneficiary of these lowball numbers has of
course been the aforementioned buyout fund, which bears the name One Equity
Partners and is financed by Bank One Corp. of Chicago.
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- ONE Equity Partners, which was brought into the deal
by the Dresdner Kleinwort Wasserstein bunch, turned out to be the only
known bidder in a court-ordered auction of the company last month. As a
result, its offer won, in effect, by default. "It's ridiculous,"
said one incredulous Wall Street analyst, speaking of the price. "Bank
One is making out like bandits."
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- In fact, the fund could easily wind up getting the whole
company for free.
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- For starters, Polaroid's most recent bankruptcy court
filings show that as of June the company had more than $108 million of
cash on its books as well as nearly $50 million of marketable receivables.
On top of that, a creditor's committee report to the court late last month
suggests that more cash has piled up from Polaroid's foreign operations
and that the actual cash outlay of net new money by One Equity Partners
will be $23.8 million.
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- And don't forget that once the fund is in control of
the company, it will be able to recover even that money by borrowing against
all those assets on Polaroid's books that had been valued at zero in the
bankruptcy proceeding.
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- Not surprisingly, when I asked a Polaroid official to
name the individual investors in One Equity Partners, he declined, saying,
"It's private. We're not divulging that." When I next asked whether
the fund's investors included members of Polaroid's management, he waffled
and said only, "Not that I know of."
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- With closing day for the sale fast approaching and with
so much money at stake, a cloak of secrecy and double-talk has enveloped
the proceedings.
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- THUS, when I asked the Polaroid spokesman why the company's
balance sheet assets had shrunk so dramatically between August and October,
he answered only that it was because Polaroid's foreign operations were
not part of the bankruptcy petition.
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- In reality, of course, the foreign assets were included
- as they legally had to be - but were simply given no value on the submitted
schedules.
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- When I asked why the assets had been assigned no values
in the schedules, even though they'd previously been valued at more than
$1 billion by the company in its SEC filings, I was told to read the company's
press releases to get myself "up to speed." The press releases
turned out to offer no explanation, either.
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- A similar request for enlightenment via Polaroid's outside
public relations firm in New York brought a promise to produce a legal
expert to answer questions. But no expert was produced. When I phoned back
a day later for an explanation, the spokesman said, "No one is interested
in talking."
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- Later, the man provided a transcript of some hearing
testimony on the discrepancy as if it would clear everything up. It didn't.
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- AT the end of the hearing, the judge in the case, Peter
Walsh, ruled that Polaroid's stated reasons for not having listed values
for the foreign operations were reasonable because the foreign operations
really only had a value as "going concerns" within Polaroid's
overall global operations.
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- But that is simply to say that the assets of the foreign
subsidiaries are entirely goodwill, which is hardly the case. Polaroid's
latest annual report prior to bankruptcy lists company-owned facilities
totaling more than 1 million square feet of manufacturing space in Scotland,
Mexico, China and the Netherlands alone. As business failures skyrocket
in the weakening economy, you can look for more of this sort of thing to
come out of bankruptcy courts - especially when the money that is up for
grabs is so huge.
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- At week's end, WorldCom was set to join Enron, Global
Crossing, Adelphia and Williams Communications as the latest multi-billion-dollar
behemoth to enter Chapter 11 bankruptcy. And there will doubtless be many
more.
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- As for Polaroid, expect to see stock in the company offered
by One Equity Partners to investors all over again, via an initial public
offering, as Wall Street's endless cycle, from IPO to Chapter 11 and back
again, repeats itself once more. It's the way Wall Street really works,
and it's why, from cradle to grave, the tricks of accounting lurk at every
turn.
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- Copyright 2001 NYP Holdings, Inc.
All rights reserved.
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- http://www.nypost.com/business/52971.htm
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