Chainsaw Al Part 2

Continued from Part 1

"THE DITTY BAG." As Sunbeam moved toward the holiday season, its struggle to make its numbers became more desperate. Of all the ploys, few were as controversial and daring as the "bill-and-hold" sales of barbecue grills the company began making in early November. Anxious to extend the selling season for the product and boost sales in Dunlap's "turnaround year," the company offered retailers major discounts to buy grills nearly six months before they were needed. The retailers did not have to pay for the grills or accept delivery of them for six months. The downside was evident: The company was booking what would have been future sales in the present. Indeed, after Dunlap's departure from the company, outside auditors would force a restatement of Sunbeam's financials, pushing most of these sales--$62 million worth--into future quarters. (Outside auditor Arthur Andersen & Co. declined to comment, citing pending litigation. Dunlap said bill-and-hold sales were proper under accepted accounting principles. "There is absolutely nothing improper about this practice," he said.)

In the fourth quarter, however, no amount of game playing or beating up on people could produce the numbers Dunlap had promised investors. So he turned to his longtime ally and CFO, Russell Kersh, who had been with him through his stints at Lily Tulip and Scott Paper.

In the often esoteric interpretations that are made in accounting, Kersh was rarely conservative or bashful about his creative competence during his tenure as Sunbeam's CFO. In a self-congratulatory tone, he would point to his chest and boast to fellow executives that he was "the biggest profit center" the company had. Dunlap knew it as well. At meetings, executives recalled, Dunlap would say: "If it weren't for Russ and the accounting team, we'd be nowhere." Several executives heard Dunlap shout to subordinates: "Make the goddamn number. And Russ, you cover it with your ditty bag."

The phrase itself was a nautical term. A ditty bag was used by sailors to hold small articles.

At Sunbeam, it was the collection of accounting techniques that Kersh could employ to maximize the company's net income and sales. Throughout 1997, Kersh had been regularly dipping into the bag to help create a "turnaround" for his boss.

One technique was simply to tap into the excess funds that had been placed in reserves when Dunlap took his $300 million restructuring charge in 1996. Like many CFOs, Kersh took a bigger write-off than he would need, allowing him to later bleed the excess into income. Until the fourth quarter, however, his reversals were fairly minimal. He took into income only $500,000 in the first quarter, $4.5 million in the second, and $1.5 million in the third, financial records later revealed. In the year's final quarter, however, when profits were off significantly, Kersh opened up the tap and poured $21.5 million from reserves into income. (Kersh said: "Al's instructions to me at all time were to act always in ways that were morally and legally responsible and that met our fiduciary duty to shareholders, and I did.")

Despite the boost from Kersh, Sunbeam's fourth-quarter financials still disappointed Wall Street. When Dunlap finally reported the numbers on Jan. 28, he turned in earnings of 47 cents per share, which was a cent short of analysts' expectations. The shortfall caused Sunbeam stock to fall nearly 10%, to $37.625. Dunlap attributed the stumble to lower sales of electric blankets.

What investors didn't know would have caused Sunbeam's stock to suffer a total collapse. Shifting the $21.5 million from reserves into income--a transaction that only came to light when Sunbeam restated its financial results a year later--enabled Kersh to disguise the company's calamitous erosion in profit margins. It helped to cover up the deep discounts given to customers by Sunbeam to stuff and load the retail channels. Auditors later concluded that grill sales made under massive discounts, extended credit terms, and "bill-and-hold" transactions inflated fourth-quarter sales by $50 million. Instead of reporting revenues that were up 26%, to $338.1 million, Sunbeam sales would have increased by only 7%. (Dunlap said: "I had no reason to doubt the accuracy of any financial statement Sunbeam made while I was CEO, and I have no reason to do so now." Kersh said he relied on managers to be factual and candid and not to withhold negative information. "Similarly, we shared negative information with the board, and disclosed it publicly, as it was known," he said.)

As the company's performance deteriorated, the pressure inside Sunbeam was building. There were signs that it was even getting to Dunlap. In February of 1998, the Boca Raton police department received a phone call from a golfer who alleged that he had been assaulted at the Boca Raton Resort & Club, where Dunlap lives. According to the police report, Frank Schienberg, who winters in Florida, had hit his ball just into a small lake near the 14th hole. As he and his wife strolled toward the lake, Schienberg saw Dunlap fish his ball out of the water with a metal golf ball retriever. When Schienberg asked for the ball back, Dunlap heaved it into the lake.

Schienberg told police that when he complained, an angry Dunlap rushed at him wielding the retriever and pressed the metal bar against Schienberg's throat, forcing him to his knees. When questioned by police, Dunlap denied that he assaulted the man but conceded he refused to hand Schienberg the ball back and said he dropped it where he found it. Schienberg, who later received a settlement from the club, could not be reached for comment. Dunlap received a much smaller settlement, charging the club had maligned him.

DISILLUSIONED AUDITOR. Back at headquarters, others were also reacting to the pressure. In March, a young, low-level employee in the company's internal audit department decided she'd had enough. Deidra DenDanto, 26, had joined the company in late 1996 after a two-year stint with Arthur Andersen. With Internal Audit Director Thomas Hartshorne, whom Kersh had originally recruited to Scott Paper, she was part of a two-person internal audit group.

Almost from the start, DenDanto had challenged deficiencies she perceived in operations. By early 1998, she had come to believe that most of her work at Sunbeam was futile. There was little follow-up to her recommendations. She believed that company officials provided few satisfactory answers to the questions she raised about the company's aggressive sales tactics. When Sunbeam resorted to hawking appliances in parking lots and empty storefronts to boost revenue, she unsuccessfully challenged the transactions on the basis of inadequate controls. Product returns, the focus of one of her earliest audit reports, had become an even larger problem. For example, fully one-third of the merchandise sold in Canada in 1997 had been returned. "There was no consequence to it," she said.

Disillusioned, she put her frustrations on the record. In a memo dated Mar. 12, 1998, DenDanto raised questions about the function of the internal audit department, the bill-and-hold transactions, and the accounting measures for them. She also expressed dissatisfaction over her department's inability

to correct perceived misdeeds or mistakes.

"It is with much disappointment that internal audit must again bring to management's attention the lack of prudent, ethical behavior being engaged in by this organization in order to `make numbers' for the company...," DenDanto wrote. She added that the bill-and-hold sales were "clearly in violation of GAAP" (generally accepted accounting principles).

DenDanto intended to address the memo to Dunlap, Kersh, and Uzzi and to copy it to Hartshorne and the board of directors. Before sending it, however, she wanted her boss to see it. Though angry, she felt a sense of loyalty to Hartshorne, who she thought was "stonewalled" as often as she. On Mar. 12, she called her boss aside and handed him the two-page memo.

"I'm done," she said. "I'm so sick and tired of doing my job and having it mean nothing."

Hartshorne, she recalled, glanced at the document and quickly ushered her into an empty office.

"You can't send this to the board," he said.

"Tom, you're my boss," she replied. "It's my responsibility to pass this to you. You do with it what you want."

(In a written statement, Hartshorne denied that he advised DenDanto against sending the memo. "I asked her if she had analyzed all of the relevant facts and she admitted that she had not.... I told her she had better make sure of all the facts before she sent out any memos," he said.)

Hartshorne picked up the phone and called Kersh.

"Russ," he said, "I've got Deidra here with me. She's very upset." Without mentioning the memo, Hartshorne explained DenDanto's concerns. Kersh attempted to reassure the auditor.

"There's nothing going on here," Kersh told her. "It's not what you're thinking."

After Kersh hung up, DenDanto recalls, Hartshorne again advised her against sending the memo. "Let's see what happens," he said. "I'm sorry you're frustrated. But let's just wait."

DenDanto, not wanting to undermine her boss and reluctant to violate the chain of command, decided to keep the document in her laptop computer. But Kersh's words did little to comfort her. "We were a token internal audit department," she said later. "I believed the intention was that we do nothing."

(In his statement, Hartshorne said he did not believe the bill-and-hold sales violated GAAP and, further, that he had discussed the transactions with Sunbeam's audit committee and with the outside auditors.)

STOCK CRATERS. It wasn't until Apr. 3, after Dunlap had acquired a trio of companies, including camping equipment maker Coleman Co., and after he had already warned Wall Street of a slowdown in first-quarter sales, that Sunbeam began to publicly unravel. Early that morning, investor relations chief Rich Goudis had driven his Maxima into the parking lot at the Sunbeam building. Once inside, he left a succinct letter of resignation on Kersh's desk. It was a gracious letter, one that disguised his growing disgust for what was going on at Sunbeam.

Goudis was leaving the building when David Fannin pulled into the lot.

"Hi, Rich," he said. "What's going on?"

"Well," Goudis replied, "I'm leaving the company. I've always had great respect for you, but I can't work with Al and Russ anymore."

It was not a good omen. Fannin thought it was the worst possible time for the head of investor relations to quit. They were about to disclose news of another downturn in sales that would rock the stock market and draw hundreds of telephone calls from analysts, reporters, and investors.

He called Kersh at home.

"Rich Goudis has resigned," he said.

"Oh shit!" replied Kersh. "What's that all about? Why is he doing it?"

"He's taken another job. He left notes for everybody."

"All right," he said, "I'll be in in a few minutes."

Dunlap strolled into the office around 8:15 a.m., his normal starting time, with his normal starting words.

"What's happening?" he asked Fannin.

"Well, for starters, Rich Goudis is gone. He quit."

"Goddamn it!" said Dunlap. "I don't understand this generation. Well, we'll deal with it."

Once Kersh arrived, he and Fannin went into Dunlap's office with a draft press release announcing what would now be the third consecutive piece of disappointing news to Wall Street. Dunlap, however, refused to read the statement.

"No one should be looking at the current results," Dunlap insisted. "They should be looking at the [company's] potential.... If you're going to do this, get yourself a new boy. I'm out of here!"

Before they could release any statement, though, the stock market opened and Sunbeam shares began to crater. There was a torrent of telephone calls from investors and analysts wanting to know what was going on. Goudis' secretary kept running back and forth between the offices with messages. "What do I tell them about Rich?" she asked. "Who's going to talk to them?"

Kersh soon discovered that the stock's tumble was caused by Andrew Shore, the PaineWebber analyst. Always skeptical of Dunlap, he had become increasingly concerned by the deterioration of Sunbeam's balance sheet as well as the departure of several top executives. So he downgraded the company's shares.

In the face of the stock's free fall, Dunlap had become resigned to the fact that they would have to put out the press release. It said that Sunbeam expected to show a loss for the first quarter on sales that would be 5% below the year-earlier period.

On a conference call with analysts that afternoon, Dunlap had lost his usual ebullience. Reading from a prepared statement, he stumbled over the words and sounded stilted and wary as he insisted that the market had overreacted to Sunbeam's disclosure. By the time the market closed, Sunbeam, the most actively traded issue on the New York Stock Exchange, had lost almost a quarter of its value, ending the day at $34.375.

For Kersh, Sunbeam's keeper of the numbers, it had to be one of the most turbulent days of his career. It could not have eased his worries when DenDanto came into his office late in the afternoon to say goodbye. Disenchanted by the company's accounting practices, she had quit her internal auditing job.

SEC PROBE. The stock's collapse that day did much to tarnish Dunlap's image on the Street. Futile attempts over the next few months to restore the company to profitability would ultimately lead to his dramatic boardroom ouster in June. Kersh was dismissed soon after.

More than a year later, Sunbeam continues to struggle. In 1998, the company's losses totaled $898 million. Its new management team narrowed the net loss to $108 million in the first half of 1999 on $1.2 billion in revenues.

Sunbeam's stock, which hit a peak of $53 under Dunlap, has been mired in its own bear market, trading under $6 a share for most of the past 12 months. The company has been forced to renegotiate its loans four times since Dunlap's ouster. A number of shareholder lawsuits are pending, as well as a formal investigation of alleged by the Securities & Exchange Commission.

Many members of Dunlap's management team have gone on to other things. William Kirkpatrick was fired in January, 1998, allowing him to cash out his vested options near the stock's peak. In his first year off, he played 65 rounds of golf, rode his Harley motorcycle 2,000 miles, and read 200 books. He does some consulting but generally lives off the gains he collected from his Scott Paper and Sunbeam stock-option and severance packages. "When Sunbeam stock hit $50 a share, I genuflected and blessed Al every minute of the day," he says. "Al Dunlap has improved the wealth of my family."

Others have tried to put their experiences at Sunbeam behind them as they moved on to new jobs and challenges. Uzzi is now senior vice-president for global marketing at Electronic Data Systems Corp. Fannin is general counsel of Office Depot Inc., while human resources chief James Wilson found a similar job at Lennox Inc. Internal auditor DenDanto works as a consultant in New York.

Two who have been unable to move on are Dunlap and Kersh. In June, the pair won a court ruling that required Sunbeam to reimburse them for legal fees they incurred defending themselves against the ongoing lawsuits and to pay for a new study by Burnett's firm reexamining the restatement of Sunbeam's financials. They have also filed arbitration claims in which Dunlap is seeking $5.3 million in severance pay and the repricing of his stock options at $7 a share.

Though unemployed, Dunlap traveled to Australia in late May to participate in a series of leadership lectures with Norman Schwarzkopf and Mikhail Gorbachev. To great applause, as well as a reported $500,000 fee for five appearances, the executive delivered pithy one-liners, including his oft-repeated remark: "If you want a friend, buy a dog. I've got two." More recently, the caretakers of the golf course at the Boca Raton Resort and Club, reported seeing him wandering the links, retrieving stray golf balls.

This adaptation is from the forthcoming HarperBusiness book Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price, written by BUSINESS WEEK Senior Writer John A. Byrne.

*EDITOR'S NOTE: Chainsaw is based on interviews with more than 250 insiders, including Sunbeam executives, managers, and directors, Wall Street analysts and investors, and others. It was through their cooperation that Byrne reconstructed scenes and dialogue. In doing so, the author interviewed as many participants as possible to make the scenes as accurate as memory might allow. In some cases, sources wrote out line-by-line accounts of conversations as they recalled them. Al Dunlap and Russell Kersh declined to be interviewed by Byrne but released statements to the press in July, 1998. Others submitted statements to BUSINESS WEEK.

Parts of their comments have been included.