Polaroid files for Chapter 11

Like Xerox, a once mighty company hits hard times

Faces mountain of debt

Instant-photo niche is hurt by better film, one-hour processors

October 13, 2001|By William Patalon III | William Patalon III,SUN STAFF

Saddled by debt and overtaken by better technologies, Polaroid Corp. filed for bankruptcy protection yesterday, a depressing milestone for a firm that 30 years ago was regarded as one of the top investments in America.

"It's a sad ending to a unique company," said James Hardesty, president of Hardesty Capital Management in Baltimore and a longtime professional investor who remembers when Polaroid was one of the "Nifty Fifty" group of stocks.

Polaroid's Chapter 11 filing in U.S. Bankruptcy Court in Wilmington, Del., listed about $1.81 billion in assets and $948.4 million in liabilities.

The company has already pledged most of its assets to lenders, ratcheting up its debt load and using the proceeds in its search for a way to repeat its early successes.

Polaroid's hope is that the bankruptcy filing will enable it to devise a lifesaving strategy - either by recasting itself as a smaller, more-focused company, or by selling itself to another firm.

Filing for bankruptcy "allows us to initiate a formal process in which to intensify our exploration of our strategic alternatives," said Gary T. DiCamillo, the former Black & Decker Corp. executive who became Polaroid's chairman and chief executive officer in 1995.

The company faces a Nov. 15 deadline on a $360 million loan. Polaroid also owes bondholders $575 million, though their claim on the company is largely subordinate to the lenders. By filing for bankruptcy protection now, Polaroid gains some time to develop its plan without actually defaulting on its debts.

Strategically, "bankruptcy isn't a terrible thing at this point in time," said Robert Renck, an analyst with R.L. Renck & Co., which is a Polaroid stockholder. "I think they can be effective as a smaller organization."

Even so, it's an ignominious step for a once-revered company to take.

"It's unfortunate - they had such a neat idea behind them," management consultant Janet C. Barnard said of the company's pedigree. "They were the first to find a way [for consumers] to get instant gratification with their cameras."

Polaroid was founded in 1937 by Edwin Land, who dropped out of Harvard University to start the company.

Photography already was a widely enjoyed pastime, but processing those pictures took time. For years, color film had to be sent off to Eastman Kodak Co., in Rochester, N.Y., for processing and printing.

Land found a way for the pictures to develop themselves, and he continually improved the process.

At first, a Polaroid camera was weighty and bulky, and featured an expandable bellows. And the black-and-white prints, once developed, had to be coated with a messy gel to preserve the images on the slick specialty paper.

Ultimately, Polaroid made the cameras smaller, the process neater and introduced color film.

By the late 1960s and early 1970s, investors viewed the company with the same reverence as Xerox Corp. or Avon Products Inc. - firms whose profits, and stock prices, were expected to appreciate at steep, predictable rates for years.

In 1972, Morgan Guaranty Trust classified Polaroid, Xerox and Avon among the "Nifty Fifty," a group of stocks whose prospects were so terrific that they were labeled "one-decision" stocks. "The idea was that you'd never sell them," said Robert Stovall, an investment strategist at Prudential Securities Inc.

Thanks partly to the "Nifty Fifty" hype, many of the stocks on this list traded up to ridiculous levels, only to plunge in tandem with other shares in the 1973-1974 bear market.

Some problem-plagued products hampered growth while the proliferation of one-hour photo processors created new competition. Consumers found that 35 mm color film was cheaper, easier to use and could generate better-quality prints than instant film.

And one-hour photo shops took away Polaroid's one real market advantage - the customers' ability to see their pictures almost right away .

In late 1995, Polaroid broke with tradition: It hired an outsider to run the company for the first time. Wall Street analysts were thrilled with the move, which brought in Black & Decker's DiCamillo. He who promised to get Polaroid back on a growth path.

But that hasn't happened. The company's annual sales peaked at $2.31 billion in 1994, and fell by about 20 percent over the next four years. A slight revenue jump in 1999 was more than erased by a 22 percent drop in fourth-quarter sales last year. First-half revenue this year was down by 25 percent.

Digital cameras are taking over. They don't use film, the pictures can be displayed instantly on a computer screen and they can be sent across the country via e-mail, where the recipient can print them from a computer.

As Polaroid's profits plunged, layoffs mounted. Under an earlier company plan, a work force that peaked at about 20,000 in the late 1970s was to drop to about 5,500 by late next year.

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