THROUGHOUT corporate America, the economic aftermath
of Sept. 11 means hard times. For a company like the Polaroid
Corporation, which was already well down the path to insolvency, it
could mean the end of the road.
The sluggish economy was already causing trouble for
photography companies, long before terrorism reared its head. For
example, the Eastman Kodak Company said last week that its third-quarter
earnings would be much lower than the company had anticipated, because
of low sales in August. Now Kodak, like many film companies, finds its
bleak outlook even bleaker, as travel and revelry -- prime
picture-taking opportunities -- are in a slump.
But Kodak, Fuji, Canon and most other photography
players will probably revive when the economy does. Analysts are not as
optimistic about Polaroid.
''Polaroid just does not generate enough cash to
make it through until the economy recovers, and Sept. 11 made it even
less likely that the company will ever be healthy,'' said Gibboney
Huske, a Credit Suisse First Boston analyst who dropped coverage of
Polaroid stock in July because she no longer saw equity value in it.
The stock, which traded at $14.19 a year ago, closed
yesterday at 49 cents a share, down 6 cents, on the New York Stock
Exchange. About 17 percent of those penny-stock shares are owned by
employees.
On Monday, the company, which is based in Cambridge,
Mass., notified its employees that its pension fund had a $100 million
shortfall, though Polaroid added that the fund's existing assets of more
than $900 million would cover 90 percent of benefits.
Gary T. DiCamillo, Polaroid's chief executive since
1995, turned down requests for an interview, and no one at the company
would speculate about its future.
Polaroid's problems have been a long time building.
Financial missteps grew from maneuvers the company took in 1988 to duck a
hostile takeover. And strategic blunders included a delayed reaction
and a series of clumsy responses to the threat digital photography posed
to Polaroid's chemical-and-paper instant pictures.
For years, though, the magnitude of those mistakes
were not evident to the outside world. In February 1996 the company's
management was promising Wall Street that by 2000 its annual sales would
be more than $3.4 billion. In fact, last year's revenue was only $1.9
billion. The company began losing money in the third quarter of 2000,
and the red ink keeps flowing.
Today, its credit and bond ratings are barely above
junk grade. Polaroid has about $950 million in debt, more than half of
it short term. Even though its banks have kept giving short-term waivers
on principal repayments, the company's credit line will run out on Dec.
31. It has defaulted on several interest payments to bondholders and
has $150 million in bonds that mature on Jan. 15.
Polaroid says the negotiations with its bondholders
are going well, but if they break down, they could force the company
into bankruptcy. Some analysts have suggested that Polaroid pre-empt
such a move by filing for voluntary bankruptcy, or reach a deal with
bondholders that would let it trade much of its debt for equity.
Other analysts expect either a financial investor or
a camera company to buy Polaroid. Several point to Canon, which would
welcome Polaroid's consumer distribution network, or to Olympus Optical,
which already produces a hybrid digital and instant-film camera in
partnership with Polaroid. Neither company would comment on the
speculation.
''I expect by the time the year is out, the chairman
will have resigned, Polaroid will have sold significant assets or the
whole company, or bondholders will have clamped down,'' Ms. Huske said.
The real financial trouble dates to the hostile
takeover attempted by Shamrock Holdings in 1988. Polaroid fought back by
creating its employee stock plan, buying back shares and issuing
preferred stock that was convertible to debt. Polaroid kept its
independence, but by 1989 it was $600 million in debt -- $920 million,
counting the preferred stock. It has rarely been debt-free since.
Analysts say Polaroid should have paid down the debt
using some of the $925 million it received in 1991, when Kodak settled a
patent violation suit. Instead, Polaroid tried to shore up its plunging
stock by buying back shares, and to become more efficient by buying
expensive resource planning software. Both moves pushed it further into a
fiscal hole.
Nor was digital photography a sudden new threat.
''We'd known for 20 years that digital imaging was coming,'' said Carol
Ulrich, a former president of commercial imaging who resigned in 1999
after 30 years with Polaroid.
Ms. Ulrich had suggested a year earlier -- when
Polaroid shares were selling at about $42 -- that the company sell
itself. But Polaroid's board chose a different path: it would slash
costs and sell real estate; farm out manufacturing and bring in
marketing partners; milk older products for cash to finance newer ones.
Polaroid's new instant cameras, like the JoyCam and
the I-Zone, are selling well, but few analysts expect them to attain the
popularity that instant cameras once had. ''Polaroid mistakenly thought
its new cameras were growth businesses, when in fact they have half the
life and half the consumption of the older ones,'' said Robert L.
Renck, who runs the brokerage firm R. L. Renck & Company.
The company does have some promising new
technologies -- notably, a couple of thermal printing processes that
dispense with toners and inks. But these may be arriving too late.
While many other companies are now pegging problems
to the Sept. 11 attacks, Polaroid might have trouble making that case.
Consumers rarely took Polaroid's bulky cameras on vacations, for
example, so canceled trips would have less impact on it than, say, Kodak
or Fuji. And government agencies and private companies, fearful of
terrorism, might have clamored to utilize Polaroid's considerable
expertise in making picture ID's.
Mining that niche, though, has been more beneficial
to a small company, Viisage Technology, which specializes in ID cards.
Its shares soared from less than $2 on Sept. 10 to $9.80 last week
before closing at $6.15 in Nasdaq trading yesterday -- even though
Polaroid's $200 million annual ID business dwarfs Viisage's $26 million.
''Even if the ID business takes off, it'll be too little too late,'' Ms. Huske said.
Investors might not even notice an uptick, said
Ulysses Yannas, an analyst with Buckman, Buckman & Reid. He noted
that Polaroid has been talking about selling the ID unit to raise cash.
''The market knows that Polaroid has valuable
assets,'' Mr. Yannas said, ''but it still thinks the company is kaput.''
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