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Annual Report 1996


  March 19, 1997


Polaroid Chairman and CEO, Gary DiCamillo

  To our shareholders, customers and friends,

In my  year and a half as chief executive, I have made a point of listening to many Polaroid users, dealers, retailers, employees, investors, suppliers and even competitors on four continents. These candid exchanges have given me a firm fix on our strengths and opportunities.
    On the basis of these conversations, plus hands-on experience with our business, I am even more confident and excited today about Polaroid's prospects for renewal than when I arrived. A look at the progress we made in 1996 helps provide some perspective for my enthusiasm.
    Last year was a turning point for Polaroid - a year of re-establishing a strong foundation for the future. To sum it up, we restructured, we reorganized, and - most important - we achieved our operating profit plan for the year. We focused on shareholder value and sharply improved our Economic Value Added (EVA). EVA, which takes into account the cost of capital when calculating returns, is increasingly being used by Polaroid, as well as other leading corporations, to align business metrics and management compensation more closely with the creation of shareholder value. We believe that by making Polaroid an EVA-focused company we are serving our shareholders and customers more effectively.
    Nineteen ninety-six was a good year for the company. For the full year, Polaroid had operating earnings, excluding one-time costs, of $202 million - more than double the 1995 level of $89 million. Our performance would have been even stronger, had Russian sales remained flat rather than fallen by more than 40 percent from the previous year. The restructuring undertaken in 1996 had a substantial positive impact, improving operating margins and strengthening our balance sheet.
    Worldwide sales rose two percent to $2.28 billion, reversing a three-percent decline in 1995. Sales, without Russia, rose more than five percent in 1996 from the previous year. In the United States, revenues totaled $1.06 billion, up from $1.02 billion the previous year.

    We had impressive financial and marketplace performances last year in a number of international markets, especially Japan, western Europe and South America. Retail sales were up strongly in Japan and western Europe behind new marketing initiatives. We achieved double-digit sales and profit growth in virtually all of our developing markets. Despite the 1996 decline in Russian sales, Russia remains among our largest markets with good prospects for the future. Our brand recognition in Russia is among the highest for any consumer goods item, and we are in the early stages of developing the commercial side of our business there, with the award of the Russian driver's license program and the introduction of Studio Express document photography.
    These results are evidence that our core instant imaging business is healthy and growing. We are confident that further growth can be achieved, as our market-driven initiatives expand and as new products are introduced.

1996 Priorities and Results
Our results are the product of a lot of hard work by many individuals and teams. Let's look more closely at what we set out to accomplish in 1996 and what we achieved:

Priority: Restructure and realign our organization, focusing our resources on the most promising business opportunities and reducing overhead expenditures.

Results: By year end, we met our $100 million operating-cost improvement target. We increased our operating efficiencies by beginning to shift production to newer coating facilities, consolidating older ones, and beginning to centralize our European support operations in Glasgow, Scotland. We focused our resources on those research projects with the greatest market potential. We also scaled back manufacturing of Captiva cameras and terminated work in progress on a printer project.
    Our digital imaging businesses continued to make progress last year, with sales growing about 25 percent and losses reduced by approximately $60 million. We began repositioning these businesses for future growth, aligning with a number of strong new business partners and launching several promising new products. These new businesses are on target for breaking even in 1998 and then achieving acceptable growth and profitability in future years.
    We also made significant strides in improving our balance sheet. We refinanced $300 million of debt, repurchased more than $50 million of equity conversion rights associated with some of that debt and bought back more than $40 million of stock. These steps eliminated a potential source of earnings dilution and enabled us to reduce interest expense with lower-cost borrowings.
    Working capital utilization also improved. By year-end, we reduced inventories by 11 percent to $549 million from $616 million, and we trimmed our accounts receivable by three percent to $535 million from $550 million. Fixed assets declined by $25 million, mainly due to the sale of surplus real estate and equipment write-offs. Last, and perhaps most important, our free cash flow improved by more than $200 million, driven primarily by our earnings improvement and lower working capital requirements. The net result is that today Polaroid is a far healthier company operationally and financially with the human, technical and financial resources to deliver our ambitious plan for growth.

Priority: Begin implementation of our four platforms for growth: 1) revitalize our core consumer business, especially in North America, Japan and western Europe; 2) focus on select commercial markets globally; 3) accelerate our growth in developing markets; and 4) develop and grow new imaging businesses.

Results: Our core business showed growth in 1996, especially in Japan and western Europe. Nineteen ninety-six marked the launch in the United States of the first large-scale advertising effort to communicate the advantages of instant photography in more than a decade. These ads, hailed by ad critics and the press for their effectiveness and creativity, reinforce the unique "catalyst" proposition of instant photography: A Polaroid picture not only provides an instant record of an important moment, but also enhances the moment itself by involving people in the imaging experience. Early results show positive consumer awareness and a strong increase in camera sales following the ads' airing.
    In Europe, our "Live for the Moment" campaign, begun in late 1995, helped deliver significant retail sales improvement, while position- ing Polaroid and instant imaging as up-to-date and appealing for younger consumers.
    Japan proved to be a big success story in 1996, with camera sales up nearly 50 percent in response to marketing programs targeted at younger consumers.
    In commercial markets, we focused on growing selected market segments, including large-scale identification systems, photo retailing, business imaging and professional and technical markets. One example: In our fast-growing identification business, we hold the leading market share for digital driver's licenses in the United States. We are leveraging our technical and marketing edge in this domestic market into the burgeoning global market for secure identification systems. Among our notable successes last year were an alien I.D. program in Brazil, a patent-certificate program in Indonesia and auto registration programs in several Chinese cities and provinces.
    During 1996, we adopted a more aggressive expansion strategy in developing markets, tackling 11 high-priority countries simultaneously with very positive double-digit growth results in sales. In these countries, we typically are targeting commercial and government imaging businesses, such as identification and documentation, as our entry points. We also will be reaching consumers with our products in selected countries where economic conditions are promising.
    In our new businesses, we increased our investment in Imagix holographic reflectors which more than double the brightness of liquid crystal displays in products such as pagers, watches and cellular telephones. We also invested in the development of a new polarizing filter and in expanding our production capacity for sunglasses. In the coming year, we will be introducing in several global markets a new line of high-end sunglasses, branded XOOR, successfully launched last year in western Europe. We introduced two new products in our graphics imaging business and developed several new product alliances, enhancing the growth prospects of this promising business segment.

Priority: Attract new talent and refocus the entire organization.

Results: Over the course of the year, we appointed eight new officers and more than 20 other executives and managers to fill key roles at various levels throughout our organization. Each of them brings a results orientation with demonstrated capabilities such as bringing new products to market and growing businesses profitably. Some of these executives are new to the imaging industry and come from such diverse companies as General Electric, Nabisco and Kraft Foods. Others come from high tech and digital companies, enhancing our ability to grow in the exciting digital imaging market. To better acquaint you with some of these individuals as well as other key officers, we have included brief introductions to a few senior officers throughout the business review section.
    During 1996, we also brought the organization closer to our customers by realigning our product development, sales and marketing efforts with users of Polaroid products rather than with technologies or product categories. This market-driven approach places greater emphasis on listening to customers and providing them with imaging solutions that meet their needs.

Priority: Re-energize new product development for faster delivery of more commercially-viable products.

Results: We are well along toward the goal of a 50-percent reduction in the time required to bring product ideas from inception to market. To accomplish this, we created new product development teams within each of our business groups, bringing together key players from marketing, sales, research, engineering and manufacturing. We should see early results beginning in 1997 with several of these products slated for market introduction.
    For example, this spring we will be launching our first consumer software product to help household and small-business users enhance the photographic quality of images on their computer screens with the click of a button. We also will be introducing the next generation of our critically acclaimed PDC-2000, which quickly has established a new price-performance standard among digital cameras. In the United States, we also are introducing our new professional films, Polacolor 679 and 579, which offer the fastest-drying, most richly colored Polaroid peel-apart film ever.
    A significant part of our new product strategy is developing alliances with other companies that are leaders in their markets and possess complementary skills. One example of this new emphasis is the alliance with Sterling Diagnostic Imaging, Inc. Formerly the medical diagnostic imaging division of DuPont, Sterling now provides the sales, marketing, service and hardware manufacturing for Helios Laser Imaging systems. Polaroid is continuing to manufacture Helios film and is developing, as part of its alliance with Sterling, new medical diagnostic imaging products and technologies. Similarly, each of our business groups is seeking out and developing relationships with other companies in a wide variety of areas including technology, licensing, brand leverage, marketing and distribution, and complementary manufacturing and product development.
    Finally, our faster product-development process will enable us to introduce 40 to 50 new products or line extensions annually. The target of our new approach is to derive 20 to 25 percent of Polaroid's sales from new products by the end of 1998.

1997 and Beyond: A Transition to Growth
So where is our new game plan taking Polaroid? Currently, our core photography business accounts for about 90 percent of total sales. As our results demonstrate, this business is solid and profitable. We expect to deliver growth, not only in developing markets, but also in North America, western Europe and Japan. In the years ahead, we expect our other businesses, such as digital products, sunglasses, holography, graphics and others that will surface, to grow rapidly and contribute a greater share of our total sales.
    The renewal of Polaroid is a work-in-progress. I am pleased with our 1996 progress, but we have yet to achieve our true potential. Nineteen ninety-six established a solid foundation for growing Polaroid. In 1997 and beyond, we will make our vision of a growing, reinvigorated Polaroid a reality.
    Through your continuing support we can realize our vast potential in the rapidly changing field of imaging. I am enthusiastic about our future, and I appreciate your confidence in Polaroid.


Gary T. DiCamillo,
Chairman and Chief Executive Officer




Polaroid Corporation Annual Report 1996
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