SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 1-4085
POLAROID CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-1734655
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
784 Memorial Drive, Cambridge, Massachusetts 02139
- -------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 386-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, par value $1 per share New York Stock Exchange
Pacific Stock Exchange
11-1/2% Notes due 2006 New York Stock Exchange
Rights to Purchase Series A New York Stock Exchange
Participating Cumulative Preferred Stock Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 15, 1999: $1.0 billion
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Common Stock outstanding as of March 15, 1999: 44,100,466 shares
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Documents incorporated by reference:
Polaroid Corporation Annual Report to Stockholders for 1998--Parts I, II and IV
Polaroid Corporation 1999 Proxy Statement, dated April 9, 1999--Part III
<PAGE>
From time to time Polaroid Corporation, together with its consolidated
subsidiaries (the "Company"), and its representatives may provide information,
whether orally or in writing, including certain statements incorporated by
reference or included in this Form 10-K under "Business" and "Management's
Discussion and Analysis of Operations", which are deemed to be "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995
("Litigation Reform Act"). These forward-looking statements and other
information relating to the Company are based on the beliefs of management as
well as assumptions made by and information currently available to management.
The words "anticipate," believe", "estimate", "except", "intend", "will" and
similar expressions, as they relate to the Company or the Company's management,
including such items discussed in "Factors that may affect future results" set
forth on pages 31 to 34 of the Company's 1998 Annual Report to Stockholders,
which pages are incorporated herein by reference, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Registrant does not intend to update these
forward-looking statements.
In accordance with the provisions of the Litigation Reform Act, the Company is
making investors aware that such "forward-looking" statements, because they
relate to future events, are by their very nature subject to many important
factors which could cause actual results to differ materially from those
contained in the "forward-looking" statements.
PART I
Item 1. Business
General Business
The Company, incorporated in 1937 as a Delaware corporation, generated worldwide
net sales in 1998 of approximately $1.8 billion. The Company is the leading
instant imaging company in the world and is the only United States manufacturer
of traditional silver-halide, or chemical-based, instant cameras and film. The
Company designs, develops, manufactures and markets instant and digital imaging
and related products worldwide including digital peripherals, software and
systems solutions. The Company also designs, develops, manufactures and/or
markets hardware accessories for the instant imaging market; conventional film;
sunglasses; polarizers; and digital media products for the pre-press portion of
the graphics imaging industry. The cornerstone of the Company's strategy is to
increase its revenues and profits by exploiting its leading position in instant
imaging products, widely recognized brand name, global distribution network and
imaging and other technical expertise. To implement this strategy, the Company
plans to become more competitive and better able to introduce new products
quickly by streamlining its operations and improving operating efficiencies.
The Company's digital imaging products and technology, combined with its widely
recognized brand name and imaging and other technical expertise well position
the Company to continue to penetrate selected niches of the growing digital
imaging business. Businesses and governments are increasingly adopting digital
imaging systems and solutions because of the advantages they offer compared to
traditional instant and conventional photography, such as the ability to provide
more accurate images and images which can be manipulated, transmitted rapidly
over long distances electronically and stored as computer files and combined
with text and other codes.
<PAGE>
The Company believes that it will have significant opportunities as customers
adopt hybrid imaging products and solutions. Because digital imaging products
create new and enhanced applications of traditional photography, many customers
are buying digital imaging products to use with their existing instant and
conventional photography equipment. Because the Company offers a variety of
instant chemical-based and digital imaging products and has the technology and
expertise to develop new ones, the Company believes that it is well positioned
to address the imaging needs of its customers for digital and hybrid products
and solutions.
In leveraging its technology base, the Company also markets sunglasses,
polarizers and products for the graphics imaging market. The Company is
commercializing portions of its technology portfolio to develop new imaging
products and applications by considering strategic alliances, licensing of its
patents, joint ventures, distribution agreements, partnerships and sale of
ownership interests. The Company believes that these initiatives will enable it
to better manage the cost and risks of developing its existing technology and to
introduce products to markets and distribution channels to which it would
otherwise have limited access.
The Company plans to improve its operating efficiencies by continuing to reduce
selling, general and administrative expenses, by rationalizing manufacturing
operations and by upgrading its data management systems.
Worldwide Business Operations
The Company, as the leading instant imaging company in the world, manages
certain functions on a worldwide basis while decentralizing its sales and
marketing operations on a regional basis.
The Company manages its research and engineering activities ("Research and
Development") and manufacturing, distribution, logistics and inventory
management activities ("Global Operations") on a worldwide functional basis. The
Company's sales and marketing activities are decentralized into three regions to
facilitate decision making consistent with local market conditions. As a result
of this organizational structure, the Company is managed in five business
segments: the Americas Region, the European Region, the Asia-Pacific Region,
Research and Development and Global Operations.
In addition, the Company has a Corporate category which is not a segment. This
category includes central marketing, corporate general and administrative
functions and worldwide restructuring and other activities. The Company's
treasury function, which is part of the Corporate category, is also managed on a
worldwide basis. This includes capital funding, cash management and foreign
exchange management. As a result, funding of working capital needs of the
segments is managed centrally.
For more information, see the "Financial Liquidity and Capital Resources" and
"Foreign Currency Exchange" sections of the section entitled "Management's
Discussion and Analysis of Operations" on pages 28 to 31, inclusive, of the
Polaroid Corporation Annual Report to Stockholders for 1998 (the "Annual
Report").
For Financial Information about Segments, see note 13, "Business," on page 53 to
54, inclusive, of the Annual Report.
The Company's products are manufactured for worldwide consumption and are
tailored, often changing packaging and cosmetic features, for regional
customers. In addition, since the Company's major competitors are large global
organizations, it competes with them in all regions in which it operates.
2
<PAGE>
Products
The Company designs, develops, manufactures and markets instant and digital
imaging and related products worldwide. The Company's principal products are:
instant and digital cameras; instant film, including over 75 varieties; and,
digital peripherals, software and systems solutions. For the year ended December
31, 1998, the Company's principal products, which are sold across all of the
Company's regional segments, represented approximately 85% of its net sales
while instant cameras and film generated approximately 75% of net sales.
In 1998, the Company introduced more than 25 new products or product line
extensions. These products include:
o the Polaroid Pocket Camera, the world's smallest instant camera and film;
o the Polaroid JoyCam Camera, a low cost version of the Polaroid Captiva camera
and film;
o the Polaroid ColorShot digital photo printer, the fastest digital photo
printer on the market;
o the Polaroid PDC 640 digital camera and the VGA digital camera, each of which
operates with Polaroid PhotoMax Image Maker software; and
o the Polaroid PopShots Single-Use Camera, the first single-use instant camera.
The Company plans to introduce the Polaroid PopShots Single-Use Camera globally
in the first half of 1999. The Company plans to introduce the Polaroid Pocket
Camera and the Polaroid JoyCam camera globally in the second half of 1999.
The Company is also actively pursuing opportunities in certain markets where it
can capitalize on its proven technology base. These markets include sunglasses,
polarizers, and graphics imaging.
Competition
The Company competes in the worldwide imaging market. The niches in which the
Company operates are highly competitive in design, product performance, quality,
service and price. Both conventional silver-halide and digital imaging products
from other manufacturers compete directly with the Company in meeting customers'
and end-users' imaging needs. The Company has competitors worldwide, ranging
from large corporations to smaller and more specialized companies. Although
there are situations where the Company faces competition from local and regional
companies, it typically competes with global organizations in all of its
regions. In the instant imaging market, the Company faces competition from Fuji
Photo Film Co., Ltd. ("Fuji"), which has announced that it will introduce
selected instant imaging products in Japan and Europe. In the digital imaging
market, the Company faces competition from Eastman Kodak Company, Fuji,
Hewlett-Packard Company, Canon U.S.A., Inc., Sony Corporation and others. Many
of the Company's competitors are larger and have greater financial and other
resources. The other markets in which the Company operates are more fragmented
and, thus, it is more difficult to assess the competitive risk that the Company
faces. In general, the effect of competition causes price pressure on the
Company's existing products and shortens the life cycle of products.
3
<PAGE>
Customers
One customer, Wal-Mart Stores, Inc., accounted for approximately 11.9%, 12.5%
and 13.0% of the Company's total net sales in 1996, 1997 and 1998, respectively.
These sales were recorded primarily in the Americas Region. No other customer
accounted for more than 10% of the Company's total net sales during those
periods.
Employees
At December 31, 1996, 1997 and 1998, the Company had 10,046, 10,011 and 9,274
employees, respectively. In addition, at December 31, 1996, 1997 and 1998, the
Company had 743, 500 and 532 non-employee temporary workers, respectively.
Regional Operations
The Company competes in selected markets of the worldwide imaging industry in
each of its geographic segments: the Americas Region, European Region, and Asia
Pacific Region. In each region, the Company has two principal markets for its
traditional chemical-based instant imaging products: the market for instant
cameras and film for personal photography and the market for commercial
applications. While the products in each of the regions are similar, the mix
between the personal photography and commercial applications varies by region
and between countries within the regions.
In order to leverage the marketing of the Company's technology and products, the
Company manages its sales and marketing operations on a regional basis: the
Americas, Europe and Asia-Pacific. This alignment affords each region the
opportunity to develop advertising and promotional programs, organize its
distribution structure, target its communications messages, and tailor its
product portfolio to address the needs of the market place. This strategy
enables the Company to deliver products to customers in a cost-effective manner
and form which affords the greatest chance of commercial success.
Americas Region
Customers
The Americas Region sells its products through mass merchandisers, food, drug,
discount and department stores; specialty photography stores; wholesalers;
original equipment manufacturers; independent agents; and distributors. The ten
largest customers in the Americas Region accounted for approximately 40% of the
Region's net sales in 1996, 1997 and 1998.
Employees
The Americas Region had approximately 1,250, 1,200 and 1,050 employees at
December 31, 1996, 1997 and 1998, respectively. In addition, the Americas Region
had approximately 240, 150 and 110 non-employee temporary workers at December
31, 1996, 1997 and 1998, respectively.
Real Estate
In the Americas Region as of December 31, 1998, the Company occupied
approximately 390,000 square feet of space, of which approximately 20% was owned
by the Company.
4
<PAGE>
European Region
Customers
The European Region sells its products primarily through wholly-owned marketing
subsidiaries in Western Europe and to unaffiliated distributors, generally on an
exclusive basis, in countries outside of Western Europe. No customer in the
European Region accounted for more than 10% of the Company's total net sales in
1996, 1997 or 1998.
Employees
The European Region had approximately 950, 1,000 and 850 employees at December
31, 1996, 1997 and 1998, respectively.
Real Estate
In the European Region as of December 31, 1998, the Company occupied
approximately 260,000 square feet of space, of which approximately 40% was owned
by the Company.
Asia Pacific Region
Customers
The Asia Pacific Region sells its products primarily through wholly-owned
marketing subsidiaries and unaffiliated distributors, generally on an exclusive
basis. No customer in the Asia Pacific Region accounted for more than 10% of the
Company's total net sales in 1996, 1997 or 1998.
Employees
The Asia Pacific Region had approximately 500, 500 and 450 employees at December
31, 1996, 1997 and 1998, respectively.
Real Estate
In the Asia Pacific Region as of December 31, 1998, the Company occupied
approximately 175,000 square feet of space, all of which was leased by the
Company.
Global Operations
The Global Operations segment includes the Company's manufacturing, distribution
logistics and inventory management functions that are managed on a worldwide
basis. Portions of the Company's products other than instant film have been
outsourced to third party manufacturers. It is the Company's strategy to
manufacture in house those products which are proprietary in nature or for which
the Company maintains a core competency. The Company also manages the logistics
function on a worldwide basis. The Company's primary distribution facilities are
located in the United States and the Netherlands. The Company makes product
sourcing decisions on a worldwide basis in an effort to optimize cost and
customer service.
5
<PAGE>
Employees
Global Operations had approximately 5,850, 5,800 and 5,400 employees at December
31, 1996, 1997 and 1998, respectively. In addition, Global Operations had
approximately 320, 250 and 350 non-employee temporary workers at December 31,
1996, 1997 and 1998, respectively.
Real Estate
In Global Operations as of December 31, 1998, the Company occupied approximately
4.6 million square feet of space, of which approximately 80% was owned by the
Company.
Raw Materials and Supplies
The Company uses a variety of raw materials and supplies in the manufacture of
its products, including chemicals, polyester film base, specialty papers and
electronic components. The Company purchases these products from several sources
and manufactures a few raw materials that it uses in low volumes. In the past
several years, these raw materials and supplies have been available in
sufficient quantities and at satisfactory prices to meet the requirements of the
Company's manufacturing operations.
Manufacturing
Global Operations has manufacturing sites located in Waltham, Norwood, and New
Bedford, Massachusetts; Dunbarton, Scotland; Enschede, The Netherlands;
Queretaro, Mexico; and Shanghai, China. Approximately 5,500, 5,400 and 5,000
employees at December 31, 1996, 1997 and 1998, respectively, were involved in
Global Operations manufacturing activities worldwide. The manufacture of instant
film is a vertically integrated process that has two major steps: the production
of photographic materials, principally photographic negatives; and the assembly
of film packs.
The Company makes photographic negatives by purchasing and producing custom
chemicals and coating them on film sheets using its own proprietary technology.
In addition, the Company's instant integral films carry their own battery rather
than placing it in the camera. The Company conducts these processes in the
United States because the production of the necessary chemicals is capital
intensive, the manufacturing process uses the Company's own proprietary
technology and the process of coating film requires clean and controlled
conditions which the Company can better control locally.
The assembly of film packs, by contrast, is highly mechanized. The Company
assembles film packs in the United States, The Netherlands, Scotland and Mexico.
The Company allocates the production of film packs to each of these four sites
to reduce the time to market and the total cost depending on the intended
market.
The Company manufactures cameras using a proprietary plastic lens molding
technology that optimizes product performance and controls the cost of
production. The Company performs the final assembly of cameras for personal
photography at its facilities in Scotland and China or contracts final assembly
to third parties, such as for Polaroid Pocket Cameras sold in Japan.
The Company manufactures digital imaging products that use the Company's
proprietary technology at its facilities in Scotland and the United States. The
Company purchases other digital imaging products from original equipment and
other manufacturers.
6
<PAGE>
The Company believes that the capacity of the Company's manufacturing facilities
is sufficient to meet current demand for its products. All of the Company's
premises are in good repair and its machinery and equipment are maintained in
good operating condition.
Environmental Compliance
The Company's environmental compliance is primarily associated with the Global
Operations and Research and Development segments. Approximately 3% of the
Company's anticipated capital spending in 1999 is expected to be for
environmental compliance projects.
The Company owns and/or operates facilities primarily related to the Global
Operations and Research and Development segments that are subject to certain
federal, state and local laws and regulations relating to environmental
protection, including those governing the investigation and remediation of
contamination resulting from past or present releases of hazardous substances.
Certain of these laws and regulations may impose joint and several liabilities
on the Company for the costs of investigation or remediation of such
contamination, regardless of fault or the legality of original disposal.
The Company, together with other parties, is currently designated a Potentially
Responsible Party ("PRP") by the United States Environmental Protection Agency
(the "EPA") and certain state agencies with respect to the response costs for
environmental remediation at several sites. The Company believes that its
potential liability with respect to any site and with respect to all sites in
the aggregate will not have a materially adverse effect on the financial
condition or operating results of the Company.
Due to a wide range of estimates with regard to response costs at those sites
and various other uncertainties, the Company cannot firmly establish its
ultimate liability concerning those sites. In each case in which the Company is
able to determine the likely exposure, such amount has been included in the
Company's reserve for environmental liabilities. Where a range of comparably
likely exposures exists, the Company has included in its reserve at least the
minimum amount of the range. The Company's aggregate reserve for these
liabilities as of December 31, 1998 was $1.5 million, the majority of which the
Company currently expects to be payable over the next two to three years. The
Company reviews the analysis of the data that supports the adequacy of this
reserve on a quarterly basis. The reserve for such liability does not provide
for associated litigation costs, which, if any, are expected to be
inconsequential in comparison with the amount of the reserve. The Company will
continue to accrue in its reserve appropriate amounts from time to time as
circumstances warrant. This reserve does not take into account potential
recoveries from third parties.
Federal law provides that PRPs may be held jointly and severally liable for
response costs. Based on current estimates of those costs and after
consideration of the potential estimated liabilities of other PRPs with respect
to those sites and their respective estimated levels of financial
responsibility, the Company does not believe its potential liability will be
materially enlarged by the fact that liability is joint and several.
The Company reviews its recurring internal expenditures on environmental
matters, as well as capital expenditures related to environmental compliance, on
a monthly basis, and reviews its third-party expenditures on environmental
matters on a quarterly basis. The Company believes that these expenditures have
not had and will not have a materially adverse effect on the financial condition
or operating results of the Company.
7
<PAGE>
Research and Development
The Research and Development segment is managed centrally and charged with the
mission of creating value through technology with multiple applications. It is
from this technology base that the Company develops and introduces new products
each year.
Research and Development costs were $116.3, $122.8, and $126.6 million in 1996,
1997, and 1998, respectively. In 1999, the Company expects to spend
approximately $100 million in the Research and Development segment.
Research and Development activities have historically played an important role
for the Company. Since 1995, however, the Company has shifted its focus
regarding research, engineering and development toward more selected,
commercially-oriented applications. To meet its goal of developing and
introducing several new products each year, the Company has trained and equipped
its research, engineering and development personnel to adapt its existing
technology to new products and applications. In addition, the Company is seeking
to exploit its intellectual property by licensing patents and by entering joint
development efforts with third parties to reduce its exposure to competitive
forces and new emerging technologies.
Employees
Research and Development had approximately 850, 900 and 660 employees at
December 31, 1996, 1997 and 1998, respectively. In addition, Research and
Development had approximately 100, 80 and 20 non-employee temporary workers at
December 31, 1996, 1997 and 1998, respectively.
Real Estate
In Research and Development as of December 31, 1998, the Company occupied
approximately 600,000 square feet of space, of which approximately 40% was owned
by the Company.
Corporate
The Corporate category, which is not a segment, includes central marketing,
general and administrative activities and certain other corporate activities,
including worldwide restructuring and other. It also includes the Company's
patent, license and trademark activities.
A total of approximately 2,800 employees are expected to be terminated under the
Company's involuntary severance program as part of the December 1997
restructuring (including the extension to it in 1998), of which approximately
half have terminated as of December 31, 1998. Of this total, approximately 13%
will be from the Americas Region; 20% from the European Region; 7% from the Asia
Pacific Region; 46% from Global Operations; 7% from Research and Development,
with the remainder terminating from the Corporate category.
Patents and Trademarks
The Company believes that its patents are important to its business. In 1998,
the Company continued to obtain patents and to pursue efforts to license a
portion of its portfolio of over 1,500 active U.S. patents. In addition, the
Company owns a number of valuable trademarks, including the trademark
"Polaroid," which are important to its business.
8
<PAGE>
Item 2. Properties
The Company's worldwide corporate headquarters is located in Cambridge,
Massachusetts. The Company has manufacturing facilities and marketing and
distribution centers throughout the world. At December 31, 1998, most of the
Company's corporate, research, marketing and administrative offices were located
in Cambridge, Waltham, Norwood and Newton, Massachusetts. The Cambridge
properties have leases that expire between 1999 and 2003, with 63% of them
terminating in 1999. During the first half of 1999, the Company plans to
relocate many of the employees currently located in a leased facility in
Cambridge to a facility in Wayland, Massachusetts, which the Company will lease
for a term of ten years. The Wayland facility replaces property that the Company
sold in Norwood, Massachusetts in 1998 to which the Company had planned to
relocate some of the employees from the Cambridge facility. In addition, in
early 1999 the Company entered into a sale and leaseback transaction for a new
distribution facility in Norton, Massachusetts.
Since 1996, the Company has sold 14 properties for a total of approximately $220
million in net proceeds, benefiting from the high real estate prices in the
Boston area, and reinvested $42 million of those proceeds in existing and newly
leased properties.
At December 31, 1998, over 95% of the Company's property in the United States
was located in eastern Massachusetts. These properties are summarized in the
chart below.
Massachusetts Properties
At December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Location: Owned Leased Total
- --------------------------------------------------------------------------------
(in thousands of square feet)
<S> <C> <C> <C>
Waltham 1,612 45 1,657
Cambridge 90 796 886
Norwood 535 253 788
New Bedford 739 -- 739
Needham -- 466 466
Newton -- 165 165
Bedford -- 125 125
----- ----- -----
Total 2,976 1,850 4,826
===== ===== =====
</TABLE>
The Company also currently maintains a network of three Global Operations
distribution centers in Oakbrook, Illinois, Needham, Massachusetts and Santa
Ana, California. The Company plans to relocate the operations at the Needham
facility to a new facility in Norton, Massachusetts in the first half of 1999.
In addition, the Americas Region has eight regional sales offices in other
locations throughout the United States.
The Company's main properties located outside the United States house the Global
Operations manufacturing facilities and regional marketing subsidiaries and
sales offices. The principal foreign manufacturing facilities are located in
Enschede, The Netherlands; Dunbarton, Scotland; Queretaro, Mexico; and Shanghai
China. The Company owns over 90% of these facilities on a square foot basis.
These facilities also contain some administrative and regional marketing
activities and are summarized in the chart below.
9
<PAGE>
Manufacturing Facilities Outside
the United States
At December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Approximate
Location Space
- --------------------------------------------------------------------------------
(in thousands of square feet)
<S> <C>
The Netherlands 518
Scotland 390
Mexico 255
China 106
-----
Total 1,269
=====
</TABLE>
The European Region marketing subsidiaries and sales offices are located in
England, France, Germany, Italy, Scotland, Spain, Russia and other European
countries. The Asia Pacific Region has marketing subsidiaries and sales offices
in Australia, China, Hong Kong, Japan, Korea and Malaysia. The Americas Region
has marketing subsidiaries and sales offices in Argentina, Brazil, Canada,
Columbia, Mexico, Peru and Puerto Rico.
The capacity of the Company's manufacturing facilities is sufficient to meet
current demand for the Company's products. All of the Company's premises are in
good repair and its machinery and equipment are maintained in good operating
condition.
Item 3. Legal Proceedings
See "Environmental Compliance" under Item 1. Business, above and note 14,
"Contingencies", on page 54 and 55, inclusive, of the Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders
None in the fourth quarter of 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
See the table entitled "Quarterly Financial Data" on page 55 of the Annual
Report.
Item 6. Selected Financial Data
See the table entitled "Ten Year Financial Summary" on pages 56 to 57,
inclusive, of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See the section entitled "Management's Discussion and Analysis of Operations" on
pages 23 to 36, inclusive, of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosure
10
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates and foreign
currency exchange rates relative to its market risk sensitive instruments and
positions as described below. To reduce the risk and costs associated with its
nonfunctional currency operating activities, the Company manages its exposures
to foreign currency exchange rate changes through its operating and financing
activities. In this regard, the Company utilizes nonfunctional foreign
currency-denominated borrowings to reduce the impact of exchange on its
nonfunctional currency net balance sheet exposures. In addition, the Company
utilizes foreign currency call options to protect a portion of its expected
foreign currency-denominated revenues from adverse foreign currency exchange
rate movements. The Company does not utilize financial instruments for trading
or other speculative purposes.
Interest Rate Risks
The Company is exposed to interest rate risk primarily related to its borrowing
activities. The Company borrows U.S. Dollars to fund its working capital and
investment requirements. The Company borrows foreign currencies primarily to
manage its nonfunctional currency net asset exposures. Typically, the Company's
short-term borrowings are in variable rate debt and the Company's long-term
borrowings are in fixed rate debt. The following table summarizes principal
payments, related average interest rates by contractual maturity date and fair
value information as of December 31, 1998 relative to the Company's borrowing
activities:
Principal Payments and Interest Rates by Maturity Dates (in $ millions)
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Due 12/31/98
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
- ----------------
Variable rate (U.S. dollars) $220 -- -- -- -- -- $220 $220
Average interest rate 6.9% 6.9%
Variable rate
(non-U.S. dollars) $112 -- -- -- -- -- $112 $112
Average interest rate 4.0% 4.0%
Long-term debt
- --------------
Fixed rate (U.S. dollars) $200 -- -- $150 $150 $500 $478
Average interest rate 8.0% 6.75% 7.25% 7.4%
</TABLE>
From time to time the Company may use over-the-counter currency exchange swaps
to slightly reduce the interest expense incurred on its foreign
currency-denominated debt. Since these contracts were not material to the
financial position or results of operations of the Company for the year ended
December 31, 1998, an adverse movement in the underlying interest rate
differentials for these contracts of 10% would not have a material impact on the
financial position or results of operations of the Company.
As of the date of this report, the Company also had issued and outstanding $275
million aggregate principal amount of its 11-1/2 % Notes due 2006. For
information about the Company's 11-1/2% Notes due 2006, see note 8, "Long-term
Debt," on pages 48 to 49, inclusive, of the Annual Report.
11
<PAGE>
For more information on the Company's foreign currency-denominated short-term
borrowings and currency exchange swap contracts, see note 3, "Financial
Instruments" on pages 45 and 46, inclusive of the Annual Report.
Foreign Currency Exchange Rate Risk
The Company utilizes foreign currency call options to reduce the impact of
adverse exchange rate movements on a portion of its expected non-functional
currency denominated revenues. These contracts are primarily denominated in
German Marks and Japanese Yen. Assuming a 10% adverse change in the foreign
currency exchange rates relative to these contracts outstanding at December 31,
1998, the estimated change in fair value of these contracts would not be
material to the financial position or results of operations of the Company.
For more information on the Company's foreign currency call options, see note 3,
"Financial Instruments" on pages 45 and 46, inclusive, of the Annual Report.
Item 8. Financial Statements and Supplementary Data
See the section entitled "Independent Auditors' Report" on page 37, the section
entitled "Financial Statements" on pages 38 to 41, inclusive, the section
entitled "Notes to Consolidated Financial Statements" on pages 42 to 55,
inclusive, and the section entitled "Supplementary Financial Information" on
pages 55 to 57, inclusive, of the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
a) Directors - See the section entitled "Election of Directors" on pages 3 to 5,
inclusive, of the Polaroid Corporation 1999 Proxy Statement (the "Proxy
Statement").
b) Executive Officers of the Registrant - Listed below are the executive
officers of the Company as of January 31, 1999. Officers are elected annually
by the Board of Directors. No family relationship exists between any of the
officers.
<TABLE>
<CAPTION>
Name Office Age
<S> <C> <C>
Gary T. DiCamillo Chairman, Chief Executive Officer and Director 48
Judith G. Boynton Executive Vice President and Chief Financial 43
Officer
William J. O'Neill, Jr. Executive Vice President 56
Carole J. Uhrich Executive Vice President 55
Jeremiah Noonan Senior Vice President 39
Thomas M. Lemberg Senior Vice President, General Counsel and 52
Secretary
Joseph G. Parham Senior Vice President 49
</TABLE>
Mr. DiCamillo is Chief Executive Officer and Chairman of the Board of Directors
of the Company and has been a director since 1995. Prior to joining the Company
in 1995, he was employed at Black & Decker Corporation (a global marketer and
manufacturer of products for consumer and commercial applications). From 1993 to
1995, he was Group Vice President of Black & Decker Corporation and President of
its Power Tools and Accessories business. From 1988 to 1993, he was President of
the North America Power Tools business at Black & Decker Corporation.
12
<PAGE>
Ms. Boynton joined the Company in 1998 as Executive Vice President and Chief
Financial Officer. Prior to joining the Company, she was employed as Vice
President and Controller at Amoco Corporation. Prior to becoming Vice President
and Controller, she held various finance management positions within Amoco.
Mr. O'Neill joined the Company in 1969. He has served in various capacities. In
August 1997, Mr. O'Neill was named Executive Vice President and President of
Corporate Business Development. He was elected Corporate Controller in 1980,
Vice President and Controller in 1982, Group Vice President in 1984, Group Vice
President and Chief Financial Officer in 1992, and to his present position in
1997.
Ms. Uhrich was appointed to her present position of Executive Vice President and
Assistant Chief Operating Officer in September 1998. She joined the Company in
1966 and has served in various capacities since then, including Executive Vice
President, Commercial Imaging Group between 1992 and 1996.
Mr. Lemberg joined the Company as Senior Vice President, General Counsel and
Secretary in September 1996. Prior to joining the Company, he served as Vice
President, General Counsel and Secretary at Lotus Development Corporation from
1987 to 1995.
Mr. Parham was appointed to his present position of Senior Vice President, and
President, Polaroid Eyewear, Inc. in January 1999. He joined the Company in 1973
and has served in various capacities within the Company.
c) Compliance With Section 16(a) of the Securities Exchange Act of 1934 - Form 3
and 4 Reporting Obligation
See the section entitled "Compliance with Section 16(a) of the Securities
Exchange Act of 1934 - Form 3 and 4 Reporting Obligation" on page 16 of the
Proxy Statement.
Item 11. Executive Compensation
See the section entitled "Executive Compensation" on pages 9 to 13, inclusive,
of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the section entitled "Beneficial Ownership of Shares" on pages 6 to 7,
inclusive and the section entitled "Election of Directors" on pages 3 to 5,
inclusive, of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
See the section entitled "Election of Directors" on pages 3 to 5, inclusive, of
the Proxy Statement.
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
a) 1. Financial Statements Page No.
<S> <C>
Independent Auditors' Report 37*
Consolidated Statement of Earnings
for the years ended December 31, 1996, 1997 and 1998 38*
Consolidated Balance Sheet as of December 31, 1997 and 1998 39*
Consolidated Statement of Cash Flows
for the years ended December 31, 1996, 1997 and 1998 40*
Consolidated Statement of Changes in Common Stockholders'
Equity for the years ended December 31, 1996, 1997 and 1998 41*
Notes to Consolidated Financial Statements 42-55*
Supplementary Financial Information (Unaudited) 55-57*
a) 2. Financial Statement Schedule
Independent Auditors' Report i
Schedule II - Valuation and Qualifying Accounts ii
</TABLE>
All other schedules are omitted, as they are either not required or not
applicable.
* Page references are to the Annual Report, which pages are incorporated herein
by reference. Except for such pages and other information in the Annual
Report specifically incorporated in this report by reference, the Annual
Report is not to be deemed filed as part of this report.
a) 3. Exhibits
3.1(a) Restated Certificate of Incorporation of Polaroid Corporation as
of August 20, 1973. (The Restated Certificate of Incorporation,
included as Exhibit 3.2(a) to Polaroid Corporation's Form 10-K
for the year ended December 31, 1988, is hereby incorporated
herein by reference.)
3.1(b) Amendments to the Restated Certificate of Incorporation of
Polaroid Corporation as of May 12, 1987. (The Amendments to the
Restated Certificate of Incorporation, included as Exhibit 3.1 to
Polaroid Corporation's Form 10-Q for the quarter ended June 28,
1987, are hereby incorporated herein by reference.)
3.1(c) Amendment to Polaroid Corporation Restated Certificate of
Incorporation as of June 2, 1989. (The Amendment to the Restated
Certificate of Incorporation, included as Exhibit 3.1 to Polaroid
Corporation's Form 10-Q for the quarter ended July 2, 1989, is
hereby incorporated herein by reference.)
3.1(d) Amendment to Polaroid Corporation Restated Certificate of
Incorporation (Certificate of Designation of Series D Cumulative
Convertible Preferred Stock) as of October 31, 1991. (The
Amendment to the Restated Certificate of Incorporation, included
as Exhibit 3.2(e) to Polaroid Corporation's Form 10-K for the
year ended December 31, 1991, is hereby incorporated herein by
reference.)
14
<PAGE>
a) 3. Exhibits (continued)
3.2 By-Laws of Polaroid Corporation amended and restated as of
February 1, 1994. (The By-Laws amended and restated, included as
Exhibit 3.1 to Polaroid Corporation's Form 10-K for the year
ended December 31, 1993, are hereby incorporated herein by
reference.)
4.1 Rights Agreement dated as of September 9, 1986 between Polaroid
Corporation and Morgan Shareholder Services Trust Company, as
Rights Agent. (The Rights Agreement, included as Exhibit 1 to
Polaroid Corporation's Form 8-A as filed on September 15, 1986,
is hereby incorporated herein by reference.)
4.2 First Amendment dated as of August 16, 1988 to Rights Agreement
dated as of September 9, 1986 between Polaroid Corporation and
Morgan Shareholder Services Trust Company, as Rights Agent. (The
First Amendment, included as Exhibit 4 to Polaroid Corporation
Form 8 (Amendment No. 1 to Form 8-A filed on September 15, 1986)
as filed on August 18, 1988, is hereby incorporated herein by
reference.)
4.3 Second Amendment dated as of September 14, 1988 to Rights
Agreement dated as of September 9, 1986 between Polaroid
Corporation and Morgan Shareholder Services Trust Company, as
Rights Agent. (The Second Amendment, included as Exhibit 5 to
Polaroid Corporation's Form 8 (Amendment No. 2 to the Form 8-A
filed on September 15, 1986) as filed on September 15, 1988, is
hereby incorporated herein by reference.)
4.4 Supplemental Rights Agreement and Third Amendment dated as of
January 30, 1989 to Rights Agreement dated as of September 9,
1986 between Polaroid Corporation and Morgan Shareholder Services
Trust Company, as Rights Agent. (The Supplemental Rights
Agreement and Third Amendment, included as Exhibit 6 to Polaroid
Corporation's Form 8 (Amendment No. 3 to the Form 8-A filed on
September 15, 1986) as filed on January 30, 1989, is hereby
incorporated herein by reference.)
4.5 Fourth Amendment dated as of February 21, 1989 to Rights
Agreement dated as of September 9, 1986 between Polaroid
Corporation and Morgan Shareholder Services Trust Company, as
Rights Agent. (The Fourth Amendment, included as Exhibit 7 to
Polaroid Corporation's Form 8 (Amendment No. 4 to the Form 8-A
filed on September 15, 1986) as filed on February 21, 1989, is
hereby incorporated herein by reference.)
4.6 Supplemental Rights Agreement and Fifth Amendment dated as of
October 7, 1991 to the Rights Agreement dated as of September 9,
1986 between Polaroid Corporation and First Chicago Trust Company
(as successor to Morgan Shareholder Services Trust Company), as
Rights Agent. (The Supplemental Rights Agreement and Fifth
Amendment, included as Exhibit 8 to Polaroid Corporation's Form 8
(Amendment No. 5 to the Form 8-A filed on September 15, 1986) as
filed on October 21, 1991, is hereby incorporated herein by
reference.)
4.7 Sixth Amendment (previously designated as the Fifth Amendment)
dated as of March 23, 1993 to the Rights Agreement dated as of
September 9, 1986 between Polaroid Corporation and First Chicago
Trust Company, as Rights Agent. (The Sixth Amendment (previously
designated as the Fifth Amendment), included as Exhibit 9
(previously designated as Exhibit 8) to Polaroid Corporation's
Form 8 (Amendment No. 6 (previously designated as Amendment No.
5) to the Form 8-A filed on September 15,
15
<PAGE>
a) 3. Exhibits (continued)
1986) as filed on July 2, 1993, is hereby incorporated herein by
reference.)
4.8 Amendment dated as of June 30, 1993 to the Fifth Amendment dated
as of March 23, 1993 to the Rights Agreement dated as of
September 9, 1986 between Polaroid Corporation and First Chicago
Trust Company, as Rights Agent. (The Amendment to the Sixth
Amendment, included as Exhibit 10 to Polaroid Corporation's Form
8 (Supplement to Amendment No. 5 and redesignation thereof as
Amendment No. 6 to the Form 8-A filed on September 15, 1986) as
filed on July 2, 1993, is hereby incorporated herein by
reference.)
4.9 Seventh Amendment dated as of July 13, 1998 to the Rights
Agreement Dated as of September 9, 1986 between Polaroid
Corporation and BankBoston, N.A. (as successor to First Chicago
Trust Company), as Rights Agent. (The Seventh Amendment, included
as Exhibit 11 to Polaroid Corporation's Registration Statement on
Form 8-A/A (Amendment No. 7 to Form 8-A filed on September 15,
1986) as filed on July 13, 1998, is hereby incorporated herein by
reference.)
4.10 Indenture dated as of December 15, 1991 between Polaroid
Corporation and The First National Bank of Boston, as Trustee,
including form of Note. (The Indenture, included as Exhibit 4.8
to Polaroid Corporation's Form 10-K for the year ended December
31, 1991, is hereby incorporated herein by reference.)
4.11 Indenture dated as of January 9, 1997 between Polaroid
Corporation and State Street Bank and Trust Company, as Trustee,
including form of Note. (The Indenture, included as Exhibit 4 to
Polaroid Corporation's form 10-Q for the quarter ended March 30,
1997, is hereby incorporated herein by reference.)
4.12 First Supplemental Indenture dated as of February 17, 1999 by and
between Polaroid Corporation and State Street Bank and Trust
Company, as Trustee. (The Supplemental Indenture, included as
Exhibit 4.2 to Polaroid Corporation's Current Report on Form 8-K
filed on February 17, 1999, is hereby incorporated herein by
reference.)
4.13 Form of Global Notes representing the 11-1/2% Notes due 2006.
(The Form of Global Notes representing the 11-1/2% Notes,
included as Exhibit 4.3 to Polaroid Corporation's Current Report
on Form 8-K filed on February 17, 1999, is hereby incorporated
herein by reference.)
10.1(**) $350,000,000 Amended and Restated Credit Agreement dated as of
December 11, 1998 among Polaroid Corporation, Morgan Guaranty
Trust Company of New York, as Agent, and the Banks listed
therein. (The Amended and Restated Credit Agreement, included as
Exhibit 10.1 to Polaroid Corporation's Current Report on Form 8-K
filed on January 21, 1999 is hereby incorporated herein by
reference.)
10.2(**) Polaroid Incentive Plan For Executives, effective January 1,
1998.
10.3(**) Polaroid Executive Equalization Retirement Plan, effective
January 1, 1984, as amended December 21, 1994. (The Plan,
included as Exhibit 10.8 to Polaroid Corporation's Form 10-K for
the year ended December 31, 1994, is hereby incorporated herein
by reference.)
16
<PAGE>
a) 3. Exhibits (continued)
10.4(**) Polaroid Officer's Compensation Exchange Plan, effective January
1, 1994, as amended December 21, 1994. (The Plan, included as
Exhibit 10.9 to Polaroid Corporation's Form 10-K for the year
ended December 31, 1994, is hereby incorporated herein by
reference.)
10.5(**) Polaroid Stock Incentive Plan, effective January 1, 1992, as
amended October 19, 1992. (The Plan, included as Exhibit 10.10 to
Polaroid Corporation's Form 10-K for the year ended December 31,
1992, is hereby incorporated by reference.)
10.6(**) The 1993 Polaroid Stock Incentive Plan, effective March 19, 1997,
as restated and amended March 27, 1997. (The Amendment, included
as Exhibit 10.4 to Polaroid Corporation's Form 10-Q for the
quarter ended March 30, 1997, is hereby incorporated herein by
reference.)
10.7(**) Polaroid Board of Directors Stock Plan, effective January 1,
1997. (The Plan, included as Exhibit 10.2 to Polaroid
Corporation's Form 10-Q for the quarter ended March 30, 1997, is
hereby incorporated herein by reference.)
10.8(**) Polaroid Board of Directors Retirement Plan, effective January 1,
1997 as restated and amended May 12, 1997. (The restated and
amended Plan, included as Exhibit 10.3 to Polaroid Corporation's
Form 10-Q for the quarter ended March 30, 1997, is hereby
incorporated herein by reference.)
10.9(**) Polaroid Non-Qualified Deferred Compensation Trust dated as of
March 31, 1997 between Polaroid Corporation and State Street Bank
and Trust Company (The Trust included as Exhibit 10.6 to Polaroid
Corporation's Form 10-Q for the quarter ended March 30, 1997, is
hereby incorporated herein by reference.)
10.10(**) Executive Deferred Compensation Plan, dated May 12, 1997,
effective January 1, 1997. (The Plan, included as Exhibit 10.5 to
Polaroid Corporation's Form 10-Q for the quarter ended March 30,
1997, is hereby incorporated herein by reference.)
10.11(**) Employment Agreement dated October 20, 1995 between Gary T.
DiCamillo and Polaroid Corporation. (The Agreement, included as
Exhibit 10.1 to Polaroid Corporation's Form 8-K as filed on
January 16, 1996, is hereby incorporated herein by reference.)
10.12(**) Amendment of Employment Agreement dated as of December 21, 1995
between Gary T. DiCamillo and Polaroid Corporation. (The
Amendment, included as Exhibit 10.2 to Polaroid Corporation's
Form 8-K as filed on January 16, 1996, is hereby incorporated
herein by reference.)
10.13(**) Employment Agreement amended and restated as of May 12, 1997
between Polaroid Corporation and Gary T. DiCamillo. (The
Amendment, included as Exhibit 10.9 to Polaroid Corporation's
Form 10-Q for the quarter ended March 30, 1997, is hereby
incorporated herein by reference.)
10.14(**) Employment Agreement dated as of March 19, 1998 between Polaroid
Corporation and Judith G. Boynton. (The Amendment, included as
Exhibit 10.1 to Polaroid Corporation's Form 10-Q for the quarter
ended March 29, 1998, is hereby incorporated herein by
reference.)
17
<PAGE>
a) 3. Exhibits (continued)
10.15(**) Change in Control Severance Agreement dated as of April 3, 1998
between Polaroid Corporation and Judith G. Boynton. (The
Agreement, included as Exhibit 10.2 to Polaroid Corporation's
Form 10-Q for the quarter ended March 29, 1998, is hereby
incorporated herein by reference.)
10.16(**) Employment Agreement dated as of May 12, 1997 between Polaroid
Corporation and Thomas M. Lemberg. (The Agreement, included as
Exhibit 10.8 to Polaroid Corporation's Form 10-Q for the quarter
ended March 30, 1997, is hereby incorporated herein by
reference.)
10.17(**) Change in Control Severance Agreement dated as of April 25, 1997
between Polaroid Corporation and William J. O'Neill, Jr. (The
Agreement, included as Exhibit 10.10 to Polaroid Corporation's
Form 10-Q for the quarter ended March 30, 1997, is hereby
incorporated herein by reference.)
10.18(**) Change in Control Severance Agreement dated as of April 25, 1997
between Polaroid Corporation and Carole J. Uhrich. (The
Agreement, included as Exhibit 10.11 to Polaroid Corporation's
Form 10-Q for the quarter ended March 30, 1997, is hereby
incorporated herein by reference.)
10.19(*)(**) Employment Agreement dated as of June 26, 1996 between Polaroid
Corporation and Jeremiah J. Noonan.
10.20(*)(**) Change in Control Severance Agreement dated as of July 10, 1997
between Polaroid Corporation and Jeremiah J. Noonan.
10.21(**) Promissory Note dated as of April 2, 1998 between Polaroid
Corporation and Joseph G. Parham, Jr. (The Note, included as
Exhibit 10.3 to Polaroid Corporation's Form 10-Q for the quarter
ended March 29, 1998, is hereby incorporated by reference.)
10.22(**) Change in Control Severance Agreement dated as of April 25, 1997
between Polaroid Corporation and Joseph G. Parham. (The
Agreement, included as Exhibit 10.21 to Polaroid Corporation's
Form 10-K for the year ended December 31, 1997, is hereby
incorporated herein by reference.)
10.23(*)(**) Separation and Mutual General Release dated as of December 17,
1998 between Polaroid Corporation and Serafino Posa.
11 Statement of Computation of Earnings Per Share. (The Statement of
Computation of Earnings Per Share is included in Note 1 on page
35 of the Annual Report.)
12(*) Ratio of Earnings to Fixed Charges.
13(*) Annual Report to Stockholders for 1998. (The Annual Report to
Stockholders for 1998, except for the portions thereof which are
specifically incorporated by reference in this report on Form
10-K, is furnished for the information of the Securities and
Exchange Commission and is not to be deemed filed as part of this
report on Form 10-K.)
21(*) Subsidiaries of Polaroid Corporation.
18
<PAGE>
23(*) Consent of KPMG Peat Marwick LLP.
27(*) Financial Data Schedule.
- --------------------
(*) Filed herewith.
(**) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to Form 10-K pursuant to Item 14(c).
Exhibits are not included in copies of this Form 10-K except those copies filed
with the Securities and Exchange Commission. A copy of these exhibits will be
furnished to stockholders upon written request.
b) Reports on Form 8-K
During the fourth quarter of 1998, the Company filed a Current Report
on Form 8-K, dated December 16, 1998, containing a press release
announcing the closing of the Amended Credit Agreement.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POLAROID CORPORATION
(Registrant)
By /s/ GARY T. DICAMILLO
---------------------
Gary T. DiCamillo
Chairman of the Board and Chief Executive Officer
March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ GARY T. DICAMILLO Chairman of the Board, Chief March 30, 1999
- --------------------------- Executive Officer and Director
GARY T. DICAMILLO
/s/ WILLIAM J. O'NEILL, Jr. Executive Vice President March 30, 1999
- ---------------------------
WILLIAM J. O'NEILL, Jr.
/s/ JUDITH G. BOYNTON Executive Vice President March 30, 1999
- --------------------------- and Chief Financial Officer
JUDITH G. BOYNTON
/s/ CARL L. LUEDERS Vice President and Controller March 30, 1999
- ---------------------------
CARL L. LUEDERS
/s/ RALPH E. GOMORY Director March 30, 1999
- ---------------------------
RALPH E. GOMORY
Director
- ---------------------------
FRANK S. JONES
/s/ STEPHEN P. KAUFMAN Director March 30, 1999
- ---------------------------
STEPHEN P. KAUFMAN
/s/ JOHN W. LOOSE Director March 30, 1999
- ---------------------------
JOHN W. LOOSE
Director
- ---------------------------
ALBIN F. MOSCHNER
/s/ RONALD F. OLSEN Director March 30, 1999
- ---------------------------
RONALD F. OLSEN
/s/ RALPH Z. SORENSON Director March 30, 1999
- ---------------------------
RALPH Z. SORENSON
/s/ CAROL F. St. MARK Director March 30, 1999
- ---------------------------
CAROL F. St. MARK
/s/ DELBERT C. STALEY Director March 30, 1999
- ---------------------------
DELBERT C. STALEY
/s/ BERNEE D.L. STROM Director March 30, 1999
- ---------------------------
BERNEE D.L. STROM
/s/ ALFRED M. ZEIEN Director March 30, 1999
- ---------------------------
ALFRED M. ZEIEN
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
POLAROID CORPORATION:
Under the date of January 20, 1999, except for Note 8 to which the date is
February 17, 1999, we reported on the consolidated balance sheet of Polaroid
Corporation and subsidiary companies as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, cash flows, and changes in common
stockholders' equity for each of the years in the three-year period ended
December 31, 1998, as contained in the 1998 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1998. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedule as listed in Item 14(a)2
of this Report. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 20, 1999, except for Note 8 to which the date is February 17, 1999
-2-
<PAGE>
Polaroid Corporation and Subsidiary Companies Schedule II - Valuation and
Qualifying Accounts
Years ended December 31, 1996, 1997 and 1998
(In millions)
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged to Deductions Balance at
Beginning Costs and Other Charged to End of
Description of Period Expenses Accounts Reserves Period
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Doubtful accounts $20.2 $3.9 $ -- $(8.8) $15.3
Cash discounts 7.8 -- 31.9 (30.9) 8.8
======================================================================================================
1997
Doubtful accounts $15.3 $6.2 $ -- $(4.4) $17.1
Cash discounts 8.8 -- 28.3 (28.6) 8.5
======================================================================================================
1998
Doubtful accounts $17.1 $19.3 $ -- $(3.6) $32.8
Cash discounts 8.5 -- 27.5 (26.8) 9.2
======================================================================================================
</TABLE>
-ii-
Exhibit 10.2
POLAROID INCENTIVE PLAN FOR EXECUTIVES
--------------------------------------
POLAROID CORPORATION
Cambridge, Massachusetts
Originally Effective January 1, 1996
As Amended January 1, 1998
<PAGE>
POLAROID INCENTIVE PLAN FOR EXECUTIVES
PURPOSE
The Polaroid Incentive Plan for Executives is established by Polaroid
Corporation to motivate present executives and other key employees whose
judgment, initiative, leadership and continued effort contribute to the success
of the Company and its Subsidiaries and to attract highly competent individuals.
This Plan provides an incentive for officers, executives and other key
employees of the Company and its Subsidiaries to maximize the Company's
operational performance.
ARTICLE I
DEFINITIONS
1.01 Award. Award shall have the meaning as provided in Section 3.01 hereof.
1.02 Board of Directors. Board of Directors shall mean the Board of Directors of
the Company.
1.03 Code. Code shall mean the Internal Revenue Code of 1986 ("Code"), as
amended, and its implementing regulations, unless otherwise specifically
provided herein.
1.04 Committee. Committee shall mean the Committee designated to administer this
Plan pursuant to Article VI hereof.
1.05 Company. Company shall mean Polaroid Corporation, a Delaware corporation.
1.06 Company Contributions. Company Contributions shall mean the aggregate
amount subject to distribution under the Award formula for all
Participants.
1.07 Compensation. Compensation includes and is limited to:
(a) Primary salary or wages;
(b) Amounts elected as or deemed to be cash, property or other taxable
benefits under any plan established by the Company under Code Section
125 as now or hereafter in effect;
(c) Amounts elected as non-taxable benefits under any plan established by
the Company under Code Section 125 as now or hereafter in effect;
(d) Amounts, other than the Company's matched deferral contributions,
elected as or deemed to be payments to the Participant directly in
cash under any cash or deferral arrangement established by the Company
and qualified under Code Section 401(k) as now or hereafter in effect;
-1-
<PAGE>
(e) Amounts, other than the Company's matched deferral contribution,
elected as or deemed to be payments as contributions to a trust under
a profit sharing or stock bonus plan under any cash or deferral
arrangement established by the Company and qualified under Code
Section 401(k) as now or hereafter in effect; and,
(f) Payments made directly or indirectly under the Company's short-term
disability program, as it shall exist from time to time, including
payments made thereunder in lieu of payments by the Company regardless
of their source (provided, however, that the total of all such
payments to a disabled Employee shall not be in excess of the basic
salary or wages that would have been payable to him had he not been
disabled), earned by and paid to a Participant by the Company in a
Plan Year during which he was a Participant.
All compensation or allocations, other than those described in (a) through
(f) above, are excluded from Compensation, such as, but not limited to,
overtime pay, shift premiums, schedule change premiums, special day
premiums, tuition refunds, relocation payments, suggestion or special
awards, commissions, fixed and other bonuses, payments pursuant to any
incentive compensation or profit sharing plan contributions (including the
Company's matched deferral contributions), allocations or benefits pursuant
to any retirement, pension, survivor's benefit, death benefit, long-term
disability, insurance or other plan, severance pay and premiums,
adjustments and allowances on account of foreign service.
1.08 EBIT. EBIT for any Plan Year shall mean the profit from operations as shown
in the Company's financial statements contained in the Company's annual
report to stockholders and adding back expenses for Company contributions
to this Plan or any other bonus or incentive compensation plan (excluding
sales bonus plans).
Notwithstanding the foregoing, any unusual and significant expenses
incurred or unusual and significant revenues received by the Company may be
excluded if approved by the Board of Directors.
1.09 Employee. Employee shall mean any "Full-Time Permanent" employee and any
"Part-Time Permanent" employee of Polaroid, as defined by the Company in a
uniform and non-discriminatory manner.
1.10 EVA. Economic Value Added ("EVA") for any Plan Year shall mean the EBIT
minus charge for Capital employed for the operation of either the
Corporation or the Business Unit, as applicable. For purposes of this
definition Capital is defined as the working capital, such as inventory,
receivables and fixed assets (equipment and buildings) utilized in the
respective Component.
-2-
<PAGE>
1.11 EVA Target. EVA Target shall mean the goal for EVA which the Company hopes
to obtain in the Plan Year. This EVA Target shall be set by the Human
Resources Committee in the first quarter of each Plan Year.
1.12 Human Resources Committee. The Human Resources Committee shall mean the
Human Resources Committee of the Board of Directors.
1.13 Option. Option shall mean the number of shares in an Option granted after
January 1, 1994, under the 1993 Polaroid Stock Incentive Plan.
1.14 Participant. Participant shall mean an Employee selected to participate in
the Plan in accordance with Article II hereof.
1.15 Plan. Plan shall mean this Polaroid Executive Incentive Compensation Plan
as in effect from time to time.
1.16 Plan Year. Plan Year shall mean a calendar year.
1.17 Stock. Stock shall mean common stock, par value $1 per share, issued by the
Company.
1.18 Subsidiary. Subsidiary shall mean any corporation of which more than fifty
percent (50%) of the outstanding shares of voting stock are beneficially
owned directly or indirectly by the Company.
ARTICLE II
ELIGIBILITY
2.01 Eligibility to Participate. Officers of the Company or any Subsidiary,
whether or not directors of the Company, and non-officer Employees or
employees of any Subsidiary who are employed in positions of
administrative, technical, or managerial responsibility shall be eligible
to participate in the Plan.
2.02 Participation. Non-officer Employees or non-officer employees of a
Subsidiary eligible to participate under Section 2.01 shall become
Participants if selected by the Committee. Officers of the Company or any
Subsidiary shall become Participants if selected by the Human Resources
Committee.
2.03 Termination of Participation. Participation in the Plan shall terminate
when a Participant's employment by the Company terminates for any reason or
when
-3-
<PAGE>
his employment status with the Company changes so that he ceases to be
an Employee and has not otherwise been designated as a Participant pursuant
to Section 2.01 hereof.
ARTICLE III
ANNUAL EXECUTIVE BONUS
3.01 Award. An Award under this Plan shall have three components, a Personal
Performance Component, a Corporate Component and a Business Unit Component.
Each Participant who achieves their Personal Performance Component shall
receive an Award equal to the benefit derived under the Corporate Component
and the Business Unit Component. This Award shall be determined given the
Participant's:
(a) percentage of achievement of the individual's Personal Performance
Component;
(b) level or range of participation in the Plan (expressed as a percentage
of the Participant's Compensation); and,
(c) the ratio of the Corporate Component to his Business Unit Component as
established by the Human Resources Committee pursuant to Section 3.04
below.
Participants who are not in a unit with a Business Unit Component shall
receive an Award based on the method as established by the Human Resources
Committee pursuant to Section 3.03 below.
3.02 Actions of the Human Resources Committee. Prior to the end of the first
quarter in a Plan Year, the Human Resources Committee shall establish:
(a) the categories of Participants;
(b) the level or range at which each category of Participants will
participate in this Plan expressed as a percentage of Compensation;
(c) the ratio on which each category of Participant Awards will be based
will be returns from Corporate Component performance versus Business
Unit Component performance as described below;
(d) the method by which Participants who are not in a unit with a Business
Unit Component shall have their Award calculated;
(e) the EVA Target level for the Corporate Component; and,
(f) the maximum and minimum EVA Target which will be paid under the
Corporate Component.
Participants in the 1997 Severance Program shall have their Award fully
determined base on the Corporate Component.
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<PAGE>
3.03 Personal Performance Component. The Personal Performance Component is
expressed as the success an participant has in achieving his performance
goals set for the Participant for the Plan Year.
3.04 Corporate Component. The Corporate Component is expressed as a Corporate
wide EVA Target set by the Committee. Prior to the end of the first quarter
in a Plan Year, the Committee shall establish the EVA Target level, and the
maximum and minimum percentages of the EVA Target.
3.05 Business Unit Component. Each Business Unit Component is expressed as the
EVA Target for the particular unit. Prior to the end of the first quarter
in a Plan Year, the Committee shall establish the EVA Target level for each
Business Unit, and the maximum and minimum percentages of such EVA Target
for each major business unit. There will be no distribution under a
Business Unit Component unless the minimum threshold for each business
unit's EVA Target for the specific unit is reached.
3.06 Extraordinary Distributions. If the minimum percentage for the EVA Target
is not achieved in a Plan Year in either the Corporate Component or the
Participant's Business Unit Component for a classification(s) of
Participants:
(a) (1) The Human Resources Committee, in its sole discretion, may grant
extraordinary distributions to any officer for his significant
individual contribution; and
(2) The Committee, in its sole discretion, may grant extraordinary
distributions to any non-officer for his significant individual
contribution.
(b) The aggregate amount of funds available for all such extraordinary
distributions in a Plan Year shall be determined by the Human
Resources Committee. In no event, shall such aggregate amount exceed
20% of what the Company Contributions would have been had the actual
EVA Target been reached in the Corporate Component.
3.07 Participant Payment. Each Participant who is employed by the Company on the
last day of a Plan Year shall be entitled to an incentive payment under
this Plan if the minimum EVA Target in either the Corporate Component or
the Participant's Business Unit Component for the Plan Year is met.
Participants who transfer between Business Units during the Plan Year will
have their incentive payment pro-rated for the time spent in each Business
Unit. This pro-ration will be calculated by rounding to the
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<PAGE>
nearest quarter the time the Participant spends in each Business Unit
during the Plan Year.
3.08 Terminated Participant's Payments. A Participant who has terminated during
a Plan Year by:
(a) Death;
(b) Retirement;
(c) Layoff;
(d) Long-Term Disability;
(e) Leave of absence (including military leave);
(f) Transfer to a Subsidiary; or,
(g) Any other reason that the Committee, in its sole discretion,
determines to be exceptional cause,
shall be entitled to a proportionate incentive payment based upon the
Compensation paid him or her during the Plan Year up to the date of
cessation of participation. A Participant who terminates during any given
Plan Year for any other reason shall not be entitled to an incentive
payment under this Plan.
3.09 Form of Payment. Each Participant shall be paid in a lump sum cash payment.
3.10 Payments to Beneficiaries. If a Participant dies prior to his receipt of
payments under this Plan, the payment shall be made:
(a) To the deceased Participant's spouse;
(b) If there is no living spouse, to the Participant's children, divided
equally; or,
(c) If there are no children, to the deceased Participant's estate.
3.11 Administration and Procedures. The Committee shall, in its sole discretion,
have the exclusive authority to adopt any such administrative procedures as
may be necessary to ensure ease in administration of the Plan.
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ARTICLE IV
DIVIDEND EQUIVALENT AWARD
4.01 Dividend Equivalent Award Participation. Only Employees and former
Employees who satisfy Section 2.01 or have satisfied Section 2.01 prior to
termination or retirement and who hold Options granted under the 1993
Polaroid Stock Incentive Plan are eligible to participate in this Section.
4.02 Dividend Equivalent Award. A Dividend Equivalent Award shall equal the
number of shares on which each Participant has an Option granted subsequent
to January 1, 1994, but before June 1, 1996, multiplied by $0.15.
Notwithstanding the foregoing, this Award will not be paid on Stock which
is part of an Option that has been exercised, terminated or lapsed. A
Dividend Equivalent Award shall not be paid under this Plan on any option
issued after June 1, 1996.
4.03 Timing of Distributions. The Dividend Equivalent Awards shall be payable at
such time as the dividends are issued to the Company's shareholders of
common stock. Notwithstanding the foregoing, a Dividend Equivalent Award
shall be paid only for the portion of the Option held on the record date
for the issuance of dividends to the Company's shareholders of common
stock. An Award will not be paid on any portion of the Option which has
been exercised, terminated or lapsed.
4.04 Exclusions From Distributions. Notwithstanding anything in this section to
the contrary, dividend equivalents granted under this Article IV may be
suspended on grants previously granted, and an Option Agreement issued
pursuant to an employment, or severance agreement may not include dividend
equivalents pursuant to the terms of the severance or employment.
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ARTICLE V
FINANCING
5.01 Financing. The benefits under this Plan shall be paid out of the general
assets of the Company.
5.02 Unsecured Interest. No Participant shall have any interest whatsoever in
any specific asset of the Company. To the extent that any person acquires a
right to receive payments under this Plan, such right shall be no greater
than the right of any unsecured general creditor of the Company.
ARTICLE VI
ADMINISTRATION
6.01 Administrator. The Plan shall be administered by the Committee designated
by the Chief Executive Officer of the Company and shall consist of not less
than three officers of the Company. Members of the Committee shall not be
entitled to any compensation for services performed in conjunction with the
operation of this Plan.
6.02 Duties of Administrator. The Committee shall:
(a) administer the Plan in accordance with its terms;
(b) have the exclusive discretionary authority to interpret the Plan for
any questions which may arise, including, without limitation,
questions relating to eligibility for or the amount of benefits;
(c) make final judgment on appeals by Employees;
(d) maintain records of its actions; and
(e) engage and consult with counsel, accountants, specialists and other
persons as the Committee deems necessary and desirable.
6.03 Decisions of the Committee
Committee decisions must be approved by a majority of the members and may
be made by either a vote at a meeting, or in writing (without a meeting).
Any member of the Committee who is a Participant under the Plan shall not
vote on any question relating exclusively to himself. The Compensation
Committee shall approve any award, decision, rule, or interpretation which
relates exclusively to any Participant who is a member of the Committee.
Any determination by the Committee or Human Resources Committee shall be
conclusive and binding except as otherwise provided in this Plan or
prohibited by law.
ARTICLE VII
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MISCELLANEOUS PROVISIONS
7.01 Applicable Law. This instrument shall be construed in accordance with and
governed by the laws of the Commonwealth of Massachusetts to the extent not
superseded by the laws of the United States.
7.02 Expenses. The cost of benefit payments from this Plan and the expenses of
administering the Plan shall be borne by the Company.
7.03 Gender and Number. Unless the context clearly requires otherwise, the
masculine pronoun whenever used shall include the feminine and neuter
pronoun, the singular shall include the plural, and vice versa.
7.04 Illegality of a Particular Provision. The illegality of any particular
provision of this document shall not affect the other provisions, and the
document shall be construed in all respects as if such invalid provision
were omitted.
7.05 Indemnification. No member of the Board of Directors or the Committee shall
be liable for any action or determination taken or made in good faith with
respect to this Plan, any Awards granted or any award distributions under
this Plan. Each member of the Board of Directors and the Committee shall be
indemnified by the Company against any losses incurred in such
administration of the Plan, unless his action constitutes serious and
willful misconduct.
7.06 Limitation of Rights. Neither the adoption and maintenance of the Plan nor
anything contained herein shall with respect to any present or former
Participant, or other officer or employee of the Company or any Subsidiary
be deemed to:
(a) limit the right of the Company or any Subsidiary to discharge or
discipline any such person, or otherwise terminate or modify the terms
of his employment, or
(b) create any contract or other right or interest under the Plan or in
any funds from this Plan other than as specifically provided herein.
7.07 Non-Assignability. A Participant's interest under this Plan shall not be
subject at any time or in any manner to alienation, sale, transfer,
assignment, pledge, attachment, garnishment or encumbrance of any kind and
any attempt to deliver, sell, transfer, assign, pledge, attach, garnish or
otherwise encumber such interest shall be void and any interest so
encumbered will terminate
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<PAGE>
7.08 Nontransferability. In no event shall the Company make any payment under
this Plan to any assignee or creditor of a Participant or of a Beneficiary,
except as otherwise required by law. Prior to the time of a payment under
this Plan, a Participant or a Beneficiary shall have no rights by way of
anticipation or otherwise to assign or otherwise dispose of any interest
under this Plan, nor shall rights be assigned or transferred by operation
of law.
7.09 Taxes. The Company shall have the right to deduct from the award
distributions any federal, state or local taxes required by law to be
withheld with respect to such distribution.
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ARTICLE VIII
EFFECTIVE DATE AND RIGHT TO
AMEND, MODIFY OR TERMINATE
8.01 Effective Date. This Plan, originally adopted effective as of January 1,
1986, is hereby amended effective January 1, 1998.
8.02 Right to Amend, Modify or Terminate. The Company reserves the right to
amend, modify or terminate the Plan or payments thereunder at any time by
action of the Board of Directors and does not intend to submit any
amendments or modifications to the Plan to stockholders of the Company for
their approval. However, without the consent of any Participant or his
Beneficiary, if applicable, no such amendment or termination shall reduce
or diminish such person's right to receive any benefit accrued under this
Plan prior to the date of such amendment or termination. Notwithstanding
the foregoing, the Chief Executive Officer of the Company, or his designee
may adopt any amendments to the Plan that do not materially and adversely
affect the benefits to a Participant accrued under the Plan and may adopt
any amendments to the Plan that do not materially affect the cost to the
Company (excluding any amendment that relates exclusively to himself).
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
effective January 1, 1998.
Attest POLAROID CORPORATION
By: /s/ CHERYL A. GOMES By: /s/ JOSEPH G. PARHAM, JR.
-------------------------
JOSEPH G. PARHAM, JR.
Vice President
June 26, 1996
Mr. Jerry Noonan
79 Stone Hedge Drive
Basking Ridge, NJ 07920
Dear Jerry:
We are delighted to be able to offer you a senior executive position with
Polaroid Corporation. This will serve to confirm our agreements and the
arrangements under which you will be joining us.
Your title will be Vice President and General Manager, North America for
Consumer Group, reporting to the Executive Vice President, Consumer Group. Your
salary will be $275,000 per year ($22,917/month) and we expect you will be
joining us on or about August 5, 1996.
BONUS
Immediately upon joining us, you will receive a sign-on bonus of $135,000.
You will be immediately enrolled in the Executive Bonus Plan. This plan pays a
percentage of salary as a bonus opportunity target if the Company achieves its
financial plan. Your bonus opportunity target will be 40% of your earnings based
on 100% attainment of the financial plan. Your bonus for the year 1996, payable
in February 1997, will be no less than $100,000 irrespective of the Company's
financial performance in 1996.
STOCK OPTIONS - HIRING GRANT
You will be granted 56,000 non-dividend paying stock options upon hire, which
will be vested in accordance with the rules governing the Polaroid Stock
Incentive Plan. You will receive an Agreement which sets forth the terms of this
grant shortly after you join the Company.
LONG TERM INCENTIVE PLAN
You will be a participant in our Long Term Incentive Plan (LTIP) which enables
key employees to increase their ownership in the Company. Specifically, you will
have the opportunity to receive a annual stock options and performance share
grants at the Vice President level. These grants should provide an annual
opportunity to earn as much as your proposed base salary.
RETIREMENT PLANS
You are immediately eligible to make 401(k) and voluntary after tax
contributions through our Polaroid Profit Sharing Retirement Plan. You will also
be eligible to participate in the Polaroid Pension Plan (five-year vesting)
which is a Company-paid defined benefit plan.
Additionally, in January, 1997. Polaroid Corporation will place $55,000 in your
account in our Non-Qualified Deferred Compensation Plan. This plan allows
executives and officers to defer part of their Annual compensation at
competitive, guaranteed interest rates until retirement or a specific date.
<PAGE>
You will be given the opportunity to decide on the length of your deferral
option but it must be at least five years. If you were to terminate for any
reason from Polaroid Corporation, you would immediately receive a full
distribution of benefits from this plan.
RELOCATION
Expenses in connection with your relocation from New Jersey to Massachusetts
will be reimbursed in accordance with the Home Equity Relocation Plan.
Attachment (A) is a summary of the relocation benefits you will receive under
this plan. Additionally, you will be reimbursed for any non-refundable, prepaid
private school tuition payments incurred because of your relocation.
VACATION AND BENEFITS
You will be entitled to four weeks vacation each year starting in 1996. Of
course, you will participate in all other health, medical, dental, life and
disability benefit programs and receive employment perquisites on a basis
consistent with other Polaroid executives.
Please complete the enclosed Health History Questionnaire and return it to the
Polaroid Medical Department, 565 Technology Square-6, Cambridge, MA 02139 at
your earliest convenience. Please call the Medical Department at (617) 386-9000
to arrange your physical examination.
TERMINATION OF EMPLOYMENT
If your employment is terminated at your initiative within sixty (60) months of
your hiring date due to a reassignment by Polaroid to a position of
significantly lesser responsibility, relocation outside of the Boston
metropolitan area without your consent, or the resignation of Gary DiCamillo,
you will receive a lump sum severance payment of twenty-four (24) months pay and
all stock options granted to such date will be fully vested. This severance
payment will be based upon your monthly base pay rate on the date of your
termination. Additionally, the Company will provide medical, dental and life
insurance coverage for two years at current employee group rates.
Notwithstanding the foregoing, if your employment is terminated for cause, you
will not be entitled to receive such severance and all options shall be
immediately forfeited.
TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL
As soon as you become employed with the Company, you will be a participant in
the Polaroid Extended Severance Plan. As a Participant in this Plan, if your
employment is terminated after a "Change in Control" under the terms or
conditions set forth in the Plan, you will be eligible to receive an "Extended
Severance Payment," which is no less than twenty-four months compensation and
two years medical, dental and life insurance coverage to employee group rates.
The terms used in this paragraph are defined in the Plan. I have enclosed a copy
of the Plan document. Please note the following in the Plan Document (A) Part
1.09 defines compensation and, in particular, Section H says Annual Bonus,
assuming (100%) of corporate performance objectives were met, is part of
compensation (B) Part 5.02 defines welfare benefits and says a participant
receives two years medical, dental and life insurance at group rates and (C)
Part 5.03, last sentence, says this employment contract which guarantees you
twenty-four months of "compensation" supersedes provisions of the plan.
Immediately following a "Change in Control" all stock options granted to such
date shall become fully vested. I have enclosed the Polaroid Stock Incentive
Plan, which on page 17 has the "Change in Control" provisions.
<PAGE>
Notwithstanding the foregoing, in the event that your termination of employment
after "Change in Control" and the aggregate of all payments and benefits you
receive under all other plans and programs of the Company (the "Aggregate
Payment") is determined to constitute a Parachute Payment, as defined in Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the
benefits paid under this Agreement shall be reduced to the maximum amount (if
any) that can be so provided without any portion of the Aggregate Payment being
subjected to any excise tax imposed by Section 4999 of the Code ("Excise Tax").
The determination of whether the Aggregate Payment constitutes a Parachute
Payment and, if so, the amount to be paid shall be made by the regular
independent auditor of the Company. (Sorry for the "legalese", but these are the
tax rules.)
CONFIDENTIALITY AGREEMENT
Your agreement is contingent upon your signing our standard confidentiality and
patent assignment agreement, a copy of which was mailed to you previously.
If these terms are acceptable to you, please sign and date the duplicate copy of
this letter, and return it to me.
Jerry, we are all extremely impressed with you personally and professionally. I
feel confident that you will be a valuable addition to Polaroid Corporation, and
look forward to having you continue your strong career path as Vice President
and General Manager, North America.
Sincerely,
/s/ GARY T. DICAMILLO
-----------------
GARY T. DICAMILLO
Chairman and
Chief Executive Officer
I accept the terms and conditions as outlined in this letter.
/s/ JERRY NOONAN June 2, 1996
------------ ------------
JERRY NOONAN Date
CHANGE IN CONTROL SEVERANCE AGREEMENT
AGREEMENT made as of July 10, 1997 between Polaroid
Corporation ("Polaroid" or "Company") and Jeremiah J. Noonan (the "Executive").
Executive is a skilled and dedicated employee who has
important management responsibilities and talents which benefit Polaroid.
Polaroid believes that its best interests will be served if Executive is
encouraged to remain with Polaroid. Polaroid has determined that Executive's
ability to perform Executive's responsibilities and utilize Executive's talents
for the benefit of Polaroid, and Polaroid's ability to retain Executive as an
employee, will be significantly enhanced if Executive is provided with fair and
reasonable protection from the risks of a change in ownership or control of
Polaroid. Accordingly, Polaroid and Executive agree as follows:
1. Defined Terms.
(a) "Annual Bonus" shall mean the Executive's annual bonus paid pursuant
to the Company's annual bonus plan in effect at the time (currently
the Polaroid Incentive Plan for Executives). Unless otherwise
specifically provided, the Annual Bonus shall be calculated assuming
the Corporate target is reached and no additional factors are
considered to decrease the Executive's award under the Plan.
(b) "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, is the Beneficial Owner
of 20% or more of the Stock then outstanding, but does not include any
Subsidiary of the Company, any employee benefit plan of the Company or
of any of its Subsidiaries or any Person holding Stock for or pursuant
to the terms of any such employee benefit plan.
(c) "Affiliate" and "Associate" when used with reference to any Person,
shall have the meaning given to such terms in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.
(d) "Base Salary" shall mean the annual rate of base salary (disregarding
any reduction in such rate that constitutes Constructive Termination)
as increased by the Board from time to time.
(e) "Beneficial Owner" shall be a Person deemed to "beneficially own," any
securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly; or
(ii) which such Person or any of such Person's Affiliates or
Associates has:
<PAGE>
(A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (written or
oral), or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the Beneficial
Owner of, or to beneficially own, securities tendered
pursuant to a tender or exchange offer made by or on behalf
of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for
purchase or exchange thereunder; or
(B) the right to vote pursuant to any agreement, arrangement
or understanding (written or oral); provided however, that
a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, any security if the agreement,
arrangement or understanding (written or oral) to vote such
security (1) arises solely from a revocable proxy given to
such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the
applicable rules and regulations under the Exchange Act,
and (2) is not also then reportable on Schedule 13D (or any
comparable or successor report) under the Exchange Act; or,
(C) which are beneficially owned, directly or indirectly, by
any Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (written or oral), for the purpose of
acquiring, holding, voting (except pursuant to a revocable
proxy as described above) or disposing of any securities of
the Company.
(f) "Board" shall mean the Board of Directors of the Company.
(g) "Bonus" means the amount payable to the Executive under any plan, or
agreement offered by Polaroid.
(h) "Cause" means either of the following:
(i) Executive's willful malfeasance having a material adverse
effect on Polaroid; or
(ii) Executive's conviction of a felony;
provided, that any action or refusal by Executive shall not
constitute Cause if, in good faith, Executive believed such
action or refusal to be in, or not opposed to, the best
interests of Polaroid, or if Executive shall be entitled,
under applicable law
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or under an applicable Polaroid Certificate of Incorporation or
the Polaroid By-Laws, as they may be amended or restated from
time to time, to be indemnified with respect to such action or
refusal.
(i) "Change in Control" shall mean:
(i) the date on which a change in control of the Company occurs of
a nature that would be required to be reported (assuming that
the Company's Stock was registered under the Exchange Act) in
response to an item (currently item 6(e)) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act or an item
(currently Item l(a)) of Form 8-K under the Exchange Act;
(ii) the date on which there is an Acquiring Person and a change in
the composition of the Board of the Company within two years
after the Share Acquisition Date such that the individuals who
constitute the Board prior to the Share Acquisition Date shall
cease for any reason to constitute at least a majority of the
Board;
(iii) any day on or after the Share Acquisition Date when directly
or indirectly, any of the transactions specified in the
following clauses occurs:
(A) the Company shall consolidate with, or merge with and into,
any other Person;
(B) any Person shall merge with and into the Company; or
(C) the Company shall sell, lease, exchange or otherwise
transfer or dispose of (or one or more of its Subsidiaries
shall sell, lease, exchange or otherwise transfer or
dispose of), in one or more transactions, the major part of
the assets of the Company and its Subsidiaries (taken as a
whole) to any other Person or Persons;
(iv) the date when a Person (other than the Company, any Subsidiary
of the Company, any employee benefit plan of the Company or any
of its Subsidiaries or any Person holding Stock for or pursuant
to the terms of any such employee benefit plan) alone or
together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 30% or more of the Stock then
outstanding;
(v) the date on which the stockholders of the Company approve a
merger or consolidation of the Company with any other
corporation other than:
(A) a merger or consolidation which would result in voting
securities of the Company outstanding
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<PAGE>
immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting
securities of the surviving or parent entity) 50% or more
of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding
immediately after such merger or consolidation, or
(B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person acquires 50% or more of the combined voting
power of the Company's then outstanding securities; or
(vi) the date stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (or any transaction having a similar effect).
(j) "Code" means the Internal Revenue Code of 1986, as amended.
(k) "Confidential Information" means non-public information relating to
the business plans, marketing plans, customers or employees of
Polaroid other than information the disclosure of which cannot
reasonably be expected to adversely affect the business of Polaroid.
(l) "Constructive Termination" shall occur when the Executive voluntarily
terminates his employment with the Company or retires after the
occurrence of one or more of the following events on or after the
Change in Control:
(i) a reduction in Base Salary from the amount of Base Salary on
the day immediately preceding the Change in Control;
(ii) the elimination of or reduction of any benefit under any
bonus, incentive or other employee benefit plan in effect on
the day immediately preceding the Change in Control, without an
economically equivalent replacement, if Executive was a
participant or member of such plan on the day immediately
preceding the Change in Control;
(iii) the discontinuation of or any reduction in Executive's
participation or membership in any bonus, incentive or other
benefit plan in which Executive was a participant or member on
the day immediately preceding the Change in Control, without an
economically equivalent replacement;
(iv) the reassignment of Executive without Executive's consent from
Executive's regular shift or regular duties
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<PAGE>
as they existed on the day immediately preceding the Change in
Control;
(v) the reassignment of Executive without Executive's consent to
a location more than thirty (30) miles from Executive's regular
workplace on the day immediately preceding the Change in
Control;
(vi) the reduction in Executive's job title or level in effect on
the day immediately preceding the Change in Control;
(vii) the provision of significantly less favorable working
conditions than those provided on the day immediately preceding
the Change in Control; or
(viii) a significant diminution in duties or responsibilities or the
reassignment of Executive to duties which represent a position
of lesser responsibility than Executive's duties as they
existed on the day immediately preceding the Change in Control.
(m) "Disability" shall mean the Executive's disability within the meaning
of the Polaroid Long Term Disability Plan.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as in
effect on the date in question.
(o) "Person" shall mean an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other
entity.
(p) "Share Acquisition Date" shall mean the first date any Person shall
become an Acquiring Person.
(q) "Stock" shall mean the outstanding shares of Common Stock of the
Company and, for purposes of the Change in Control provision, any
other shares of capital stock of the Company into which the Common
Stock shall be reclassified or changed.
(r) "Subsidiary" of the Company shall mean any corporation of which the
Company owns, directly or indirectly, more than 50% of the Voting
Stock.
(s) "Terminated" shall mean:
(i) termination by Polaroid without Cause at any time within the
two (2) years following a Change in Control;
(ii) Executive's termination due to a Constructive Termination at
any time within the two (2) years following a Change in
Control; or
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<PAGE>
(iii) termination within three (3) months prior to a Change of
Control at the request of any individual or entity acquiring
ownership and control of Polaroid. If Executive's employment
with Polaroid is terminated prior to a Change in Control at the
request of Acquiring Person, this Agreement shall become
effective upon the subsequent occurrence of a Change in Control
involving such Acquiring Person. In such situation the
Executive's Termination Date shall be deemed to have occurred
immediately following the Change in Control, and therefore
Executive shall be entitled to the benefits provided in this
Agreement.
(t) "Termination Date" shall mean the date on which Executive is
terminated.
(u) "Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
2. Effective Date; Term. This Agreement shall be effective immediately
prior to a Change in Control (the "Effective Date") and shall remain in
effect for two (2) years following such Change in Control, and such
additional time as may be necessary to give effect to the terms of the
Agreement.
3. Change in Control Benefits. If Executive's employment with Polaroid is
Terminated, Executive shall be entitled to the following benefits:
(a) Severance Benefits. Within ten (10) business days after the
Termination Date, Polaroid shall pay Executive a lump sum amount, in
cash, equal to the greater of the severance benefit Executive would
otherwise be entitled to receive under the Extended Severance Plan or:
(i) two (2) times the sum of:
(A) Executive's Base Salary; and
(B) Executive's Annual Bonus; and
(ii) Executive's Annual Bonus multiplied by a fraction, the
numerator of which shall equal the number of days Executive was
employed by Polaroid in the calendar year in which the
Termination Date occurs and the denominator of which shall
equal 365.
(b) Continued Welfare Benefits. Until the second anniversary of the
Termination Date, Executive shall be entitled to participate in the
Company's medical, dental, and life insurance plans, at the highest
level provided to Executive during the period beginning immediately
prior to the Change in Control and ending on the Termination Date and
at no greater cost than the cost Executive was paying immediately
prior to Change in Control; provided,
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however, that if Executive becomes employed by a new employer,
Executive's coverage under the applicable Polaroid plans shall
continue, but Executive's coverage thereunder shall be
secondary to (i.e., reduced by) any benefits provided under
like plans of such new employer.
(c) Payment of Accrued But Unpaid Amounts. Within ten (10) business days
after the Termination Date, Polaroid shall pay Executive:
(i) earned but unpaid compensation, including, without limitation,
any unpaid portion of Executive's Bonus accrued with respect to
the full calendar year ended prior to the Termination Date; and
(ii) all compensation previously deferred by Executive on a
non-qualified basis but not yet paid.
(d) Retiree-Medical Benefits. If Executive is or would become fifty-five
(55) or older and Executive's age and service equal sixty-five (65)
and Executive has at least five (5) years of service with the Company
within two (2) years of Change in Control, Executive is eligible for
retiree medical benefits (as such are determined immediately prior to
Change in Control). Executive is eligible to commence receiving such
retiree medical benefits based on the terms and conditions of the
applicable plans in effect immediately prior to the Change in Control.
(e) Supplemental Retirement and Profit Sharing Benefits.
(i) On the Termination Date, Executive shall become vested in the
benefits provided under Polaroid's non-qualified defined
benefit pension plans or any successor plans (the "Supplemental
Plans").
(ii) Within ten (10) business days after the Termination Date,
Polaroid shall pay Executive a lump sum cash amount equal to
the present value of Executive's accrued benefit under the
Supplemental Plans. For purposes of computing the lump sum
present value of Executive's accrued benefit under the
Supplemental Plans,
(A) Polaroid shall credit Executive with two (2) years of plan
participation and service and two (2) years of age for all
purposes (including additional accruals and eligibility for
early retirement) over Executive's actual years and
fractional years of plan participation and service and age
credited to Executive on the Termination Date; and
(B) Polaroid shall apply the present value (and any other
actuarial adjustments required by this Agreement) using the
applicable actuarial assumptions set forth in the Pension
Plan. In
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determining Executive's benefits under this paragraph (e
(B), the terms of the Supplemental Plans as in effect
immediately prior to the Change in Control, except
as expressly modified in this paragraph (e), shall govern.
(f) Effect on Existing Plans. All Change in Control provisions applicable
to Executive and contained in any plan, program, agreement or
arrangement maintained as of the date this Agreement is signed
(including, but not limited to, any stock option, restricted stock or
pension plan) shall remain in effect through the date of a Change in
Control, and for such period thereafter as is necessary to carry out
such provisions and provide the benefits payable thereunder, and may
not be altered in a manner which adversely affects Executive without
Executive's prior written approval. This means that all awards of
options, performance shares or such other awards as may be granted
shall upon Change in Control be fully vested consistent with the terms
of these Agreements. Notwithstanding the foregoing, no benefits shall
be paid to Executive, however, under the Polaroid Extended Severance
Plan or any other severance plan maintained generally for the
employees of Polaroid if Executive is eligible to receive severance
benefits under this Agreement.
(g) Outplacement Counseling. Outplacement services will be provided
consistent with Polaroid's outplacement practices in effect prior to
the Change in Control.
4. Mitigation. Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking
other employment or otherwise, and compensation earned from such
employment or otherwise shall not reduce the amounts otherwise payable
under this Agreement. No amounts payable under this Agreement shall be
subject to reduction or offset in respect of any claims which Polaroid
(or any other person or entity) may have against Executive unless
specifically referenced herein.
5. Gross-up.
(a) In the event it shall be determined that any payment, benefit or
distribution (or combination thereof) by Polaroid, or one or more
trusts established by Polaroid for the benefit of its employees, to or
for the benefit of Executive (whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement, or
otherwise) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, hereinafter collectively
referred to as the "Excise Tax"), Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such
that after payment by Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including, without
limitation, any income taxes (and any interest and penalties
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imposed with respect thereto) and the Excise Tax imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 5(c), all determinations required
to be made under this Section 5, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be
made by a nationally recognized certified public accounting firm as
may be designated by Executive (the "Accounting Firm") which shall
provide detailed supporting calculations both to Polaroid and
Executive within fifteen (15) business days of the receipt of notice
from Executive that there has been a Payment, or such earlier time as
is requested by Polaroid. In the event that the Accounting Firm is
serving as accountant or auditor for an individual, entity or group
effecting the change in ownership or effective control (within the
meaning of Section 280G of the Code), Executive shall appoint another
nationally recognized accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Polaroid. Any Gross-Up
Payment, as determined pursuant to this Section 5, shall be paid by
Polaroid to Executive within five (5) business days after the receipt
of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, it shall so
indicate to Executive in writing. Any determination by the Accounting
Firm shall be binding upon Polaroid and Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by
Polaroid should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that Polaroid
exhausts its remedies pursuant to Section 5(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that
has occurred and any such Underpayment shall be promptly paid by
Polaroid to or for the benefit of Executive.
(c) The Executive shall notify the Company in writing of any written claim
by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten (10)
business days after the Executive is informed in writing of such claim
and shall apprise the Company of the nature of such claim and the date
on which such claim is requested to be paid (but the Executive's
failure to comply with this notice obligation shall not eliminate his
rights under this Section except to the extent Polaroid's defense
against the imposition of the Excise Tax is actually prejudiced by any
such failure). The Executive shall not pay such claim prior to the
expiration of the thirty (30) day period following the date on which
he gives such notice to the Company (or such shorter period ending on
the date
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that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of
such period that it desires to contest such claim, the Executive
shall:
(i) give Polaroid any information reasonably requested by Polaroid
relating to such claim;
(ii) take such action in connection with contesting such claim as
Polaroid shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected
by Polaroid;
(iii) cooperate with Polaroid in good faith in order to effectively
contest such claim; and
(iv) permit Polaroid to participate in any proceedings relating to
such claim;
provided, however, that Polaroid shall bear and pay directly
all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall
indemnify and hold Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 5(c),
Polaroid shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or
forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect
of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and Executive
agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Polaroid
shall determine; provided, however, that if Polaroid directs
Executive to pay such claim and sue for a refund, Polaroid
shall advance the amount of such payment to Executive, on an
interest-free basis, and shall indemnify and hold Executive
harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and
provided, further, that if Executive is required to extend
the statute of limitations to enable Polaroid to contest such
claim, Executive may limit this extension solely to such
contested amount. Polaroid's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and Executive shall be entitled to
settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing
authority.
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(d) If, after the receipt by Executive of an amount advanced by Polaroid
pursuant to Section 5(c), Executive receives any refund with respect
to such claim, Executive shall (subject to Polaroid's complying with
the requirements of Section 5(c)) promptly pay to Polaroid the amount
of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by Executive of
an amount advanced by Polaroid pursuant to Section 5(c), a
determination is made that Executive shall not be entitled to any
refund with respect to such claim and Polaroid does not notify
Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination,
then such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
6. Termination for Cause. Nothing in this Agreement shall be construed to
prevent Polaroid from terminating Executive's employment for Cause. If
Executive is terminated for Cause, Polaroid shall have no obligation to
make any payments under this Agreement, except for payments that may
otherwise be payable under then existing employee benefit plans,
programs and arrangements of Polaroid.
7. Indemnification; Director's and Officer's Liability Insurance.
Executive shall, after the Termination Date, retain all rights to
indemnification under applicable law or under Polaroid Certificate of
Incorporation or the Polaroid By-Laws, as they may be amended or
restated from time to time. In addition, Polaroid shall maintain
Director's and Officer's liability insurance on behalf of Executive at
the better of the level in effect immediately prior to the Change in
Control or the Executive's Termination Date, for the two (2) year
period following the Termination Date, and throughout the period of any
applicable statute of limitations.
8. Confidentiality. Without the prior written consent of the Company,
except to the extent required by an order of a court having competent
jurisdiction or under subpoena from an appropriate government agency, the
Executive shall comply with the Confidentiality Agreement he executed when
hired, and shall not disclose any trade secrets, customer lists, drawings,
designs, information regarding product development, marketing plans, sales
plans, manufacturing plans, management organization information (including
data and other information relating to members of the Board and
management), operating policies or manuals, business plans, financial
records or other financial, commercial, business or technical information
relating to the Company or any of its subsidiaries or information
designated as confidential or proprietary that the Company or any of its
Subsidiaries may receive belonging to suppliers, customers or others who do
business with the Company or any of its subsidiaries (collectively,
"Confidential Information") to any third person unless such Confidential
Information has been previously disclosed to the public by the Company or
is in the public domain (other than by reason of Executive's breach of this
Section 8).
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9. Disputes. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Boston,
Massachusetts or, at the option of Executive, in the county where Executive
then resides, in accordance with the Rules of the American Arbitration
Association then in effect. Judgment may be entered on an arbitrator's
award relating to this Agreement in any court having jurisdiction.
10. Costs of Proceedings. Polaroid shall pay all costs and expenses, including
attorneys' fees and disbursements, at least monthly, of Executive in
connection with any legal proceeding (including arbitration), whether or
not instituted by Polaroid or Executive, relating to the interpretation or
enforcement of any provision of this Agreement, except that if Executive
instituted the proceeding and the judge, arbitrator or other individual
presiding over the proceeding affirmatively finds that Executive instituted
the proceeding in bad faith, Executive shall pay all costs and expenses,
including attorneys' fees and disbursements, of Executive. Polaroid shall
pay pre-judgment interest on any money judgment obtained by Executive as a
result of such a proceeding, calculated at the prime rate of The Chase
Manhattan Bank (or its successors), as in effect from time to time, from
the date that payment should have been made to Executive under this
Agreement.
11. Assignment. Except as otherwise provided herein, this Agreement shall
be binding upon, inure to the benefit of and be enforceable by Polaroid and
Executive and their respective heirs, legal representatives, successors and
assigns. If Polaroid shall be merged into or consolidated with another
entity, the provisions of this Agreement shall be binding upon and inure to
the benefit of the entity surviving such merger or resulting from such
consolidation. Polaroid will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of Polaroid, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that
Polaroid would be required to perform it if no such succession had taken
place. The provisions of this Section 11 shall continue to apply to each
subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
12. Payments in Event of Death. Should the Executive become eligible to
receive payments and benefits under this Agreement and die prior to receipt
of all such payments and benefits, the residual payments shall be made to
the beneficiaries identified on the Executive's beneficiary form for the
Executive Deferral Compensation Plan. Any residual family medical and
dental benefits which the Executive was receiving on the Executive's date
of death shall continue to the family members the Executive had covered in
such medical and dental plans on such date.
13. Withholding. Polaroid may, to the extent required by law, withhold
applicable federal, state and local income and other taxes from any
payments due to Executive hereunder.
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14. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts applicable to
contracts made and to be performed therein.
15. Entire Agreement. This Agreement supersedes the terms and conditions
set forth in the section of your letter of June 26, 1996 captioned
"Termination of Employment Following a Change in Control" and constitutes
the entire agreement between the parties except as expressly provided
herein. This Agreement may be changed only by a written agreement executed
by Polaroid and Executive. All other terms and conditions of your June 26,
1996 agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the 10th day of July, 1997.
POLAROID CORPORATION
By /s/ GARY T. DICAMILLO
-----------------
GARY T. DICAMILLO
/s/ JEREMIAH J. NOONAN
- ----------------------
JEREMIAH J. NOONAN
Executive
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Exhibit 10.23
SEPARATION AGREEMENT AND MUTUAL GENERAL RELEASE
BETWEEN
SERAFINO POSA
AND
POLAROID CORPORATION
This Separation Agreement and Mutual General Release (the "Agreement")
is made and entered into as of December 17, 1998, by and between SERAFINO POSA
(the "Officer") and POLAROID CORPORATION (the "Company").
RECITALS
A. The Company employs the Officer as an Executive Vice President.
B. The Officer and the Company have mutually agreed to terminate the
employment relationship.
C. The Officer and the Company desire to specify the terms of the Officer's
separation from the Company and to resolve fully and finally any and all
claims, disputes, or disagreements that the Officer and the Company may
have against each other.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
1. Resignation. Upon mutual agreement, the Officer's employment with the
Company will terminate on or before January 15, 1999 (the "Separation
Date").
2. Annual Bonus Payment. The Officer will receive his 1998 bonus from the
Polaroid Incentive Plan for Executives if a bonus is paid to active
employees, at the rate paid to other similarly situated executives. This
payment would be made at the time the bonus is paid for active employees.
3. Severance Payment.
a. The Company shall pay the Officer a Severance Amount equal to two (2)
times his annual base pay of $340,000, which shall begin on the day
following the Officer's Separation Date and continue for a period of
twenty-four (24) months thereafter.
<PAGE>
b. The Severance Amount shall be paid in a stream of payments based on
the Officer's monthly base rate of pay in accordance with the
Company's regular biweekly payroll schedule beginning shortly after
his Separation Date.
c. The Officer shall receive his previously accrued unused vacation pay
as soon as practicable after his Separation Date; and,
d. Notwithstanding the foregoing, no payment shall be due for at least
one (1) week after the execution of this Agreement by both parties.
4. Outplacement Counseling. Outplacement services through a contractor of the
Officer's choice at a rate to be negotiated and agreed upon by Polaroid
will be reimbursed by the Company until December 31, 1999, or until the
Officer finds Employment, whichever occurs sooner.
5. Miscellaneous Adjustments. The Company shall have the right to deduct from
all cash payments referred to in this Agreement all amounts required by
applicable law to be withheld and to apply any such payments to pay any
amounts which the Officer may owe as of his Separation Date (including, but
not limited to, items such as company store and corporate credit card
obligations, garnishments or liens).
6. Options. All options awarded on or before May 1, 1998, which have been
granted to the Officer, shall fully vest upon the Officer's Separation
Date. Consistent with a Supplemental Option Agreement which shall be
executed herewith and govern the terms of this acceleration, the Officer
shall have three (3) years from his Separation Date, or ten (10) years from
the date an Option was originally granted, whichever is shorter, within
which to exercise his Options (attached as Exhibit A).
7. Performance Shares. A pro-rata portion of the Officer's Performance Awards
which have been awarded will remain viable and will be awarded at the time
such awards are made to active employees similarly situated. For this
purpose, the pro-rata portion shall be based on the period the Officer was
an employee during the performance period of each award divided by the
total period of the Performance Award. These Performance Award
distributions, as adjusted for the pro-rata period, shall be based on the
Company's actual performance during the performance period for such award
(two (2) and three (3) year periods respectively). No future performance
awards shall be granted after the date of this Agreement.
8. Medical and Dental Benefits. The Company shall continue to provide the
Officer the subsidized medical and dental insurance that is currently being
provided to the Officer from the Officer's Separation Date for a period of
twenty four (24) months or until the Officer becomes eligible for
substantially similar insurance from another employer, whichever occurs
first.
These benefits will be provided under the Consolidated Omnibus Budget
Reconciliation Act of 1986 (COBRA) at the same cost active employees
similarly situated pay for such benefits. However, the Officer will only be
entitled to the subsidized benefit for the twenty-four (24) months
following his Separation Date, or until he becomes eligible for
substantially similar insurance from another employer, whichever occurs
first. If either of these events occurs, the Company's obligation to
provide subsidized medical and dental insurance under this paragraph
ceases. The Officer shall be provided the right to continue COBRA by paying
the full unsubsidized premium for the benefits, plus two percent (2%) for
any remaining COBRA period (the COBRA period is normally eighteen (18)
months from a separation date).
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9. Financial Planning. In addition to the payments set forth above, and upon
proper documentation that the expense has been incurred, the Company agrees
to reimburse the Officer the amount of $5,000 for financial planning
expenses that he incurs if such expenses are submitted for work performed
prior to December 31, 1999.
10. Officer's General Release. In exchange for the severance benefits just
described, except as otherwise provided below, which the Officer
acknowledges are in excess of what would otherwise have been due him, the
Officer agrees to and hereby does release all claims the Officer may have
against the Company, the Company's employee benefit plans (including any
trusts, or insurance contracts forming part of any such plans), and its
directors, trustees, officers, shareholders, employees, agents,
administrators, successors and assigns, including, but not limited to, any
claims arising out of or in connection with the Officer's employment by the
Company or the termination of the Officer's employment. This release
includes a waiver of any claims that the Officer may have under the Age
Discrimination in Employment Act of 1967, as amended (29 U.S.C. [Section]
621), except for any claims under that Act which may arise after the
Effective Date of this Agreement.
This release includes (but is not limited to) any pending grievances or
claims internal or otherwise and any claims which might be brought under or
on the basis of:
o any employment relations law;
o any state, federal or local law, regulation or executive order
prohibiting discrimination on account of age, race, color, sex, sexual
orientation, national origin, religion, handicap or veteran status,
including, without limitation, the Age Discrimination in Employment
Act of 1967, as amended (29 U.S.C. [Section] 621);
o common law, including, without limitation, claims arising from any
contract or tort law;
o any public policy, law or equity claims for expenses, attorneys' fees,
or other monetary or equitable relief; and
o any other claim arising out of the Officer's employment with the
Company or termination of the Officer's employment with the Company,
from his first date of employment to the Effective Date of this
Agreement.
This release will not preclude claims arising from workers compensation
laws, for vested accrued benefits under the Polaroid Pension Plan or the
Polaroid Retirement Savings Plan as determined by the plan administrators
of such Plans.
This Agreement is an important and binding legal document, and the Company
therefore encourages the Officer to consider its terms carefully and to
seek the advice of an attorney before the Officer signs it.
By signing this Agreement, the Officer acknowledges that he has been given
a period of at least twenty-one (21) days to consider the terms of this
Agreement. If the Officer chooses to sign this Agreement before the end of
the twenty-one (21) day period that the Company has set, he expressly
waives any right to the balance of that period.
11. General Covenants.
a. The Officer shall not commit any act, or in any way assist others to
commit any action, intended to injure the Company nor shall the
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<PAGE>
Officer divulge (except as required by law) any confidential
information or make available to any others any documents, files, or
other papers concerning the Company, or its financial affairs.
b. The Officer, on behalf of himself and his spouse, attorneys acting on
his behalf, agents, and representatives, agrees not to engage in any
public criticism regarding his employment or the business affairs of
Polaroid, nor to make any negative, detrimental, or derogatory
comments concerning the Company or its parents, partners, owners, and
affiliates, and their owners, stockholders, directors, officers,
employees, partners, trusts, agents, attorneys, and representatives,
past and present; the Company agrees to make no public criticism
regarding the Officer or his employment with the Company.
c. The Officer shall not disclose the terms of this Agreement unless
required to do so by law; provided, however, that the terms of this
Agreement may be disclosed in confidence to the following: to the
Officer's immediate family, attorneys, and tax or financial
consultants. Before disclosing the terms of this Agreement to anyone
as permitted under this paragraph, the Officer shall first obtain an
agreement from the person receiving the information that he or she
will not disclose the terms of the Agreement to any other person. The
unauthorized disclosure of the terms of this Agreement by any person
shall constitute a violation of this paragraph by the party who
initially disclosed the terms of this Agreement.
12. Mutual Agreement. The parties understand and agree that nothing contained
in this Agreement shall constitute or be construed in any way as an
admission of any liability whatsoever by either the Officer or the Company.
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13. Non-Competition and Confidentiality.
a. Non-Competition. During the period in which the Officer is employed by
the Company or any of its subsidiaries and for a period of twenty-four
(24) months following the Separation Date, the Officer shall not
engage in any activity or become associated with any entity or
venture, whether as a principal, partner, employee, consultant,
shareholder (other than as a holder of not in excess of one percent
(1%) of the outstanding voting shares of any publicly traded company)
or otherwise, that is in competition in any geographic area with the
business of the Company. The intent of this Section is not to prevent
the Officer from working, but to protect the Company and give the
Company the opportunity to evaluate situations in certain potentially
sensitive areas. Accordingly, the foregoing limitation on the
Officer's activities shall not apply to the extent the Company
consents to such activities.
b. Confidentiality. Without the prior written consent of the Company,
except to the extent required by an order of a court having competent
jurisdiction or under subpoena from an appropriate government agency,
the Officer shall comply with the Confidentiality Agreement the
Officer executed when hired and shall not disclose any trade secrets,
customer lists, drawings, designs, information regarding product
development, marketing plans, sales plans, manufacturing plans,
management organization information (including data and other
information relating to members of the Board and management),
operating policies or manuals, business plans, financial records or
other financial, commercial, business or technical information
relating to the Company or any of its subsidiaries or information
designated as confidential or proprietary that the Company or any of
its subsidiaries may receive belonging to suppliers, customers or
others, who do business with the Company or any of its subsidiaries
(collectively, "Confidential Information") to any third person unless
such Confidential Information has been previously disclosed to the
public by the Company or is in the public domain (other than by reason
of the Officer's breach of this Section 13).
c. Company Property. Promptly following the Officer's Separation Date,
the Officer shall return to the Company all property of the Company,
and all copies thereof in the Officer's possession or under his
control.
d. Non-Solicitation of Employees. During the period in which the Officer
is employed by the Company and any of its Subsidiaries and for a
period of twenty-four (24) months following the Officer's Separation
Date, the Officer shall not directly or indirectly induce any employee
of the Company or any of its subsidiaries to terminate employment with
such entity, and shall not directly or indirectly, either individually
or as owner, agent, employee, consultant or otherwise, employ or offer
employment to any person who is employed by the Company or a
subsidiary.
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<PAGE>
e. Non-Solicitation of Customers. During the period in which the Officer
is employed by the Company or any of its subsidiaries and for a period
of twenty-four (24) months following the Officer's Separation Date, he
shall not solicit customers of the Company for any venture or business
opportunity, which could directly or indirectly be considered in
competition with the Company's business, as reasonably determined by
the Company in its sole discretion.
f. Injunctive Relief with Respect to Covenants. The Officer acknowledges
and agrees that his covenants and obligations with respect to
non-competition, non-solicitation, confidentiality and Company
property relate to special, unique and extraordinary matters,
including his own skills, and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable
injury for which adequate remedies are not available at law.
Therefore, in the event of a breach or threatened breach, the Officer
agrees that the Company shall be entitled to an injunction,
restraining order, or such other equitable relief (without the
requirement to post bond) restraining the Officer from committing any
violation of the covenants and obligations contained in this
Agreement. These injunctive remedies are cumulative and are in
addition to any other rights and remedies the Company may have at law
or in equity.
The Officer agrees that restraints imposed upon him pursuant to this
section are necessary for the reasonable and proper protection of the
Company and its subsidiaries and affiliates and that each and every
one of the restraints is reasonable in respect to subject matter,
length of time and geographic area. The parties further agree that, in
the event that any provision of this Agreement shall be determined by
any court of competent jurisdiction to be unenforceable by reason of
its being extended over too great a time, too large a geographic area
or too great a range of activities, such provision shall be deemed to
be modified to permit its enforcement to the maximum extent permitted
by law.
The Officer agrees and convenants that he will not assert any claim in
any forum of any type (whether by complaint, counterclaim, cross-claim
or otherwise) or before any tribunal pursuant in which he seeks to
have declared unenforceable, in whole or in part, any of the
restraints imposed upon him by this section or to limit their
enforceability in any way. The Officer further agrees that, should he
file any such claim: (a) he will reimburse the Company for its
reasonable costs and attorneys fees should the Company succeed in
enforcing any such restraint in whole or in part; and (b) he will
repay to the Company any severance paid him under this Agreement
should the Company fail to enforce any such covenant in its entirety.
-6 of 8 pages-
<PAGE>
Notwithstanding the foregoing, the immediately preceding paragraph
shall not apply when (a) the Officer has obtained written consent from
the appropriate Company designee that a certain job or venture is not
in violation of the Section 13, or (b) if an Arbitrator concludes that
the activity that the Officer has undertaken does not violate the
terms of this Section 13 as it exists when signed.
14. Entire Agreement. This Agreement represents the sole and entire agreement
between the parties and supersedes all prior agreements, negotiations, and
discussions between the parties with respect to the Officer's employment
and termination of employment with the Company and any and all other
subject matters covered by this Agreement. Any amendment to this Agreement
must be in writing signed by the parties or their duly authorized
representatives and must state the intention of the parties to amend this
Agreement.
15. Binding Terms. This Agreement shall be binding upon the Officer and his
spouse, heirs, administrators, representatives, executors, successors, and
assigns and shall inure to the benefit of the Company and its parents,
partners, owners, and affiliates, and their owners, stockholders,
directors, officers, employees, partners, trusts, agents, attorneys,
representatives, successors, and assigns. Each provision of this Agreement
shall continue according to its terms. If no term is stated, then such
provision shall remain in effect indefinitely.
16. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts. In the
event that any part of this Agreement is found to be void or unenforceable,
all other provisions of the Agreement shall remain in full force and
effect.
17. Disputes. Subject to Section 13(f), all claims, disputes, questions, or
controversies arising out of or relating to this Agreement, including
without limitation the construction or application of any of the terms,
provisions, or conditions of this Agreement, shall, on written request of
either party served upon the other, be submitted to final and binding
arbitration. Such arbitration shall be compelled and enforced by any court
of competent jurisdiction and shall be conducted according to the Model
Employment Arbitration Procedures of the American Arbitration Association
("AAA"), except as otherwise provided herein. The arbitration shall be
conducted before AAA or such other arbitration service as the parties may,
by mutual agreement, select. The arbitrator shall be appointed by agreement
of the parties hereto or, if no agreement can be reached, by AAA pursuant
to its rules. Judgment on the award that the arbitrator renders may be
entered in any court having jurisdiction over the parties. The arbitration
shall be conducted in Boston, Massachusetts.
18. Representation and Voluntary Execution.
a. The Officer represents and acknowledges that he has been advised in
writing to consult an attorney, that he has had an adequate
opportunity to consult and discuss all aspects of this Agreement with
an attorney and that he has carefully read and fully understands all
of its provisions.
b. The Officer represents and acknowledges that he has had an adequate
opportunity to make whatever investigation he or his counsel may deem
necessary or desirable in connection with the subject matters of this
Agreement.
-7 of 8 pages-
<PAGE>
c. The Officer represents and acknowledges that his decision to enter
into this Agreement has been made voluntarily, knowingly, and without
coercion of any kind.
19. Execution. This Agreement may be executed in one or more counterparts, each
of which shall be an original but all of which, together, shall be deemed
to constitute a single document.
If the terms of this Agreement are acceptable to the Officer, please sign
and return it as soon as possible. The Officer may revoke this Agreement at any
time during the seven (7) day period immediately following the date of his
signing. If he does not revoke this Agreement, then on the eighth (8th) day
following the date of his signing (that eighth day being the "Effective Date" of
this Agreement), this Agreement shall take effect as a legally binding agreement
between the Officer and the Company.
IN WITNESS WHEREOF, the parties hereto have each executed this Agreement as
of the date first above written.
SERAFINO POSA POLAROID CORPORATION
/s/ SERAFINO POSA By: /s/ JOSEPH G. PARHAM, JR.
- -------------------- ---------------------------
Name: JOSEPH G. PARHAM, Jr.
Title: Senior Vice President, Human Resources
-8 of 8 pages-
<PAGE>
ATTACHMENT A
POLAROID STOCK INCENTIVE PLAN
SUPPLEMENT TO THE STOCK INCENTIVE AGREEMENT(S)
This Supplemental Agreement is evidence the modifications to the Stock
Incentive Agreement(s) under the original Stock Incentive Plan and the 1993
Polaroid Stock Incentive Plan entered into between SERAFINO POSA and POLAROID
CORPORATION. The following provisions supersede corresponding provisions of the
Stock Incentive Agreement(s) under the original Stock Incentive Plan and the
1993 Stock Incentive Plan. Provisions of the original option agreement(s), which
are not specifically modified here, remain in full force and effect.
IF YOUR EMPLOYMENT TERMINATES:
Notwithstanding anything to the contrary in the Plan or Agreement,
because your employment with Polaroid or one of its subsidiaries is being
terminated, all options awarded on or before May 1, 1998 under the above
referenced Plans shall become fully vested upon your Separation Date. In
addition, you will have three (3) years from the date of your termination
or ten (10) years from the date of the original grant, whichever is
earlier, in which to exercise all options.
If, however, for any reason your employment is not terminated under your
Severance Agreement and Mutual General Release, this Supplemental Agreement
shall become null and void and the provision captioned "If YOUR EMPLOYMENT
TERMINATES" in your original option agreement(s) shall control.
POLAROID CORPORATION
By: /s/ JOSEPH G. PARHAM, JR.
---------------------
Officer
By signing below, you acknowledge that nothing in this Supplement, original
Agreement(s), or the Plan(s) confers upon you any rights to continued employment
or limits the right of Polaroid or its subsidiaries to modify the terms of your
employment.
I understand and agree to comply with the terms of this Supplement, the
original Agreement(s), and the Plans.
January 29, 1999 /s/ SERAFINO POSA
- ---------------- -----------------
Date Serafino Posa
Signature
EXHIBIT 12
POLAROID CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions Except Ratios)
<TABLE>
<CAPTION>
For the Twelve Months
Ended December 31
-------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings/(loss):
Earnings/(loss)before income
tax expense/benefit per
consolidated statement of
earnings $160.7 $(201.4) $ 31.2 $(191.9) $(38.9)
Add:
Interest expense 46.6 52.1 47.4 47.8 57.6
Portion of rent expense
representative of an
interest factor 10.3 11.7 9.3 10.7 10.5
------ ------- ------ ------- ------
Adjusted earnings/(loss)
before income tax
expense/benefit $217.6 $(137.6) $ 87.9 $(133.4) $ 29.2
====== ======== ====== ======== ======
Fixed charges:
Interest expense $ 46.6 $ 52.1 $ 47.4 $ 47.8 57.6
Portion of rent expense
representative of an
interest factor 10.3 11.7 9.3 10.7 10.5
Capitalized interest 9.7 4.8 5.1 2.6 2.2
------ ------- ------ ------- -------
Total fixed charges $ 66.6 $ 68.6 $ 61.8 $ 61.1 $ 70.3
====== ======= ====== ======= =======
Ratio of earnings to fixed
charges 3.3 N/A(a) 1.4(b) N/A(c) .4(d)
===== ======== ======== ======== =========
</TABLE>
- --------------------------
(a) Earnings were insufficient to cover fixed charges by $206.2 million after
giving effect to the pre-tax expense for restructuring and other charges of
$247.0 million. Excluding the pre-tax restructuring and other charges, the
ratio of earnings to fixed charges was 1.6.
(b) In 1996, the Company recorded a pre-tax expense for restructuring and other
special charges of $150.0 million ($7.0 million of which was recorded in
cost of goods sold). Excluding the pre-tax restructuring and other special
charges, the ratio of earnings to fixed charges was 3.8.
(c) Earnings were insufficient to cover fixed charges by $194.5 million after
giving effect to the pre-tax expense for restructuring and other charges of
$340.0 million ($16.5 million of which was recorded in cost of goods sold).
Excluding the pre-tax restructuring and other charges, the ratio of
earnings to fixed charges was 3.4.
(d) Earnings were insufficient to cover fixed charges by $41.1 million after
giving effect to the pre-tax expense for restructuring of $50.0 million.
Excluding the pre-tax restructuring, the ratio of earnings to fixed charges
was 1.1.
iii
Exhibit 13
Financial Review: Polaroid Corporation and Subsidiary Companies and Subsidiary
23 Management's Discussion and Analysis of Operations
37 Independent Auditors' Report
37 Management's Report
Financial Statements:
38 Consolidated Statement of Earnings
39 Consolidated Balance Sheet
40 Consolidated Statement of Cash Flows
41 Consolidated Statement of Changes in Common Stockholders' Equity
Notes to Consolidated Financial Statements:
42 1. Summary of Significant Accounting Policies
44 2. Supplemental Information
45 3. Financial Instruments
46 4. Income Taxes
47 5. Inventories
47 6. Short-term Debt
48 7. Payables and Accruals
48 8. Long-term Debt
49 9. Common Stockholders' Equity
49 10. Incentive Compensation and Stock Incentive Plans
51 11. Benefit Plans
53 12. Rental Expense and Lease Commitments
53 13. Business
54 14. Contingencies
55 15. Subsequent Events
55 16. Supplementary Financial Information
Supplementary Financial Information:
55 Quarterly Financial Data
56 Ten-Year Financial Summary
<PAGE>
Management's Discussion and Analysis of Operations
General
The Company is managed in five primary segments: the Americas Region; the
European Region; the Asia Pacific Region; Global Operations; and Research and
Development. The Americas Region is comprised of all countries in North and
South America. The European Region includes all of the countries of the European
continent, the United Kingdom, Russia, the middle eastern countries and the
African continent. The Asia Pacific Region includes Japan, China, Australia and
the rest of Asia. Global Operations includes worldwide activities associated
with manufacturing, distribution, logistics, new product manufacturing
development and inventory management. Research and Development is comprised of
corporate research and engineering activities.
Additionally, the Company has one category called Corporate, which is not a
segment. This category includes central marketing, general and administrative
costs and certain other corporate costs, including worldwide restructuring and
other charges.
The Company evaluates the performance of its segments primarily based on
profit/(loss) from operations with a recognition of assets employed. For the
regional segments, profit/(loss) from operations is based on standard product
costs excluding inter-company margins and therefore reflects a contribution to
worldwide Company profits related to segment third party sales. Non-standard
manufacturing costs are reported as incurred in the Global Operations segment
along with new product manufacturing development costs and regional warehousing
and distribution costs. The Research and Development segment is also reported on
an as-incurred cost basis.
The Company uses quantitative terms to explain changes in sales unit volumes.
The table below quantifies the use of these terms:
<TABLE>
<CAPTION>
Term Represents change of
- ---- --------------------
<S> <C>
low single digits 1 to 4 percent
high single digits 5 to 9 percent
low double digits 10 to 19 percent
mid double digits 20 to 39 percent
high double digits 40 to 99 percent
</TABLE>
1998 Worldwide Results Compared with 1997
Sales
Worldwide net sales to customers of Polaroid Corporation and its subsidiaries
decreased 14% to $1.8 billion in 1998 from $2.1 billion in 1997. This decrease
was primarily due to lower sales of instant film across all regions of the
world. On a unit basis, worldwide shipments to customers of instant film
decreased by mid double digits while shipments to customers of instant cameras
decreased 8% in 1998 compared with 1997.
Sales in the Americas Region decreased 8% to $1,134 million in 1998 compared
with $1,233 million in 1997. This decrease was primarily due to lower sales of
instant film, mostly in the United States. On a unit basis, shipments to
customers of instant film decreased by low double digits while shipments to
customers of instant cameras decreased 10% in 1998 compared with 1997. The
primary factor contributing to the lower sales of instant film was the Company's
decision, made in conjunction with its major dealers, to reduce inventories at
the dealer level (the "channel inventory reduction"). However, lower retail
sales of instant film also contributed to the shortfall. At the United States
retail level, in 1998, the Company estimates that the unit volume of integral
film declined by low single digits while instant cameras increased by
approximately 4% compared with 1997.
<PAGE>
Sales in the European Region decreased 22% to $452 million in 1998 from $583
million in 1997. The decrease was primarily due to lower sales of instant film,
nearly half of which occurred in Russia, where the Company ceased shipments
during the third quarter of 1998 because of the collapse of that country's
economy. The Company's shipments of instant film were also adversely affected by
a decline in sales at the retail level and the Company's decision to reduce
inventories primarily in export distribution channels. On a unit basis,
shipments to customers of instant film decreased by mid double digits while
shipments to customers of instant cameras decreased 23% in 1998 when compared
with 1997.
Sales in the Asia Pacific Region decreased 21% to $260 million in 1998 from $330
million in 1997. The decrease was primarily due to lower sales
Management's Discussion and Analysis of Operations (continued)
of instant film. The largest decrease of instant film occurred in emerging
markets due, in part, to a deterioration in economic conditions. The decline was
also partially attributable to the adverse impact of a stronger U.S. dollar and,
to a lesser degree, lower sales of traditional instant cameras. These adverse
factors were offset in part by sales of new products in Japan. On a unit basis,
shipments to customers of instant cameras increased 18% while shipments to
customers of instant film decreased by low double digits in 1998 versus 1997.
Profit/(Loss)
In 1998, the Company incurred a loss from operations of $49 million compared
with a loss from operations of $159 million in 1997. Excluding restructuring and
other charges of $50 million in 1998 and $340 million in 1997, other asset
write-offs of approximately $53 million in 1998 and approximately $20 million in
1997 for above normal inventory write-offs (both of which were unrelated to
restructuring), the profit from operations would have been $54 million in 1998
and $201 million in 1997. The adjusted profit from operations for 1998 was down
versus 1997 primarily due to lower sales of instant film.
Profit from operations in the Americas Region was $307 million in 1998 compared
with $369 million in 1997. This decrease was principally due to lower sales of
instant film, primarily in the United States and, to a lesser degree, asset
write-offs and sales declines in the Region's emerging markets. These adverse
factors were offset in part by a reduction in sales and marketing spending.
Profit from operations in the European Region was $35 million in 1998 compared
with $107 million in 1997. The decrease was primarily due to the Company's
decision to cease shipments to Russia in the third quarter of 1998 and the
write-down of approximately $30 million of assets related to Russia. In
addition, profit from operations decreased due to lower sales of instant film
and the Company's decision to reduce inventories primarily in export
distribution channels. These adverse factors were offset in part by a reduction
in sales and marketing spending.
Profit from operations in the Asia Pacific Region totaled $57 million in 1998
compared with $75 million in 1997. This decrease was due to lower sales of
instant film, primarily in the Region's emerging markets and, to a lesser
degree, a stronger U.S. dollar. These adverse factors were offset in part by a
reduction in sales and marketing spending and, to a lesser degree, gross margin
on new products sold in Japan.
Global Operations costs were $177 million in 1998 compared with $148 million in
1997. This increase was primarily due to unfavorable film manufacturing
variances caused by reduced production volumes and start-up costs for new
products, offset in part by lower manufacturing spending, including savings from
restructuring, and lower inventory write-offs.
<PAGE>
Research and Development costs were $127 million in 1998 compared with $123
million in 1997. This increase was due to spending related to new products.
Corporate costs were $143 million in 1998 compared with $440 million in 1997.
Excluding restructuring and other charges of $50 million in 1998 and $340
million in 1997, Corporate costs would have been $93 million in 1998 compared
with $100 million in 1997. This decrease in adjusted costs was primarily due to
a reduction in corporate overhead spending which benefited from restructuring
actions.
In December 1997, the Company announced a broad-based program to streamline
worldwide operations and enhance earnings by consolidating and selling
manufacturing facilities and reducing its corporate overhead structure. The
total pre-tax expenses recorded in the fourth quarter of 1997 for restructuring
and other charges related to this program were $340 million. Of this amount,
approximately $17 million represented inventory write-downs that were included
in cost of goods sold. In December 1998, the Company announced an expansion of
its 1997 involuntary severance program to further streamline operations and
improve profitability. The pre-tax expense for this expansion was $50 million
and was recorded in the fourth quarter of 1998.
In 1997, restructuring and other charges included approximately $150 million
related to an involuntary severance program which, when combined with the $50
million restructuring charge in 1998 for the extension to this program, brought
the total charges recorded for this involuntary severance program to $200
million. Included in these amounts were pension curtailment costs of $7 million
and $3 million in 1997 and 1998, respectively, which have been reflected as
non-cash items in the Company's consolidated statement of cash flows. Under the
1997 involuntary severance program, including the extension in 1998,
approximately 2,800 employees are expected to leave the Company (approximately
46% from Global Operations, approximately 40% from the regional segments, of
which approximately half was from the European Region, and less than 10% from
Research and Development) by the end of 1999. Approximately half of these
terminations had occurred as of December 31, 1998. Cash severance payments of
approximately $70 million related to this program, including the extension
discussed above, had been made as of December 31, 1998. These cash payments are
expected to be substantially completed by the end of 2000.
The remainder of the restructuring and other charges in 1997 of $190 million
primarily related to the write-down of assets. Approximately $106 million of
this amount was related to the write-down of the Company's underutilized New
Bedford coating facility to an independently determined fair value of
approximately $18 million. The Company is pursuing several strategic options for
future use of this facility, including an outright sale. In addition,
approximately $22 million was related to the write-off of battery assembly
equipment that was not required to support the Company's anticipated production
requirements. The restructuring and other charges also included approximately
$26 million related to the Company's underutilized chemical manufacturing
facility in Freetown, Massachusetts that the Company sold in February 1998.
Under the terms of the agreement to sell this facility, the Company entered into
a long-term supply agreement with International Specialties Products, Inc. to
purchase certain specialty chemicals used to manufacture the Company's instant
film. The remainder of these write-downs was primarily related to other assets,
which were no longer required and will ultimately be disposed of, and inventory
write-downs related to restructured operations.
Other income was $68 million in 1998 compared with $15 million in 1997. In 1998,
other income included $68 million in gains from the sale of real estate. In
1997, other income included a $16 million gain primarily attributable to the
change in the Company's method of applying Financial Accounting Standards Board
Statement No. 52, "Foreign Currency Translation" ("FAS 52") for translating the
financial results of most of its foreign subsidiaries from dollar functional to
local currency functional. Also in 1997, other income included a combination of
a gain on a real estate sale of $19 million, offset by a donation of $19 million
to endow charitable giving.
<PAGE>
Interest expense increased to $58 million in 1998 compared with $48 million in
1997. The increase was primarily due to higher obligations.
Income tax expense for the full year 1998 was $12 million on a reported loss
before income taxes of $39 million. A tax benefit on the net operating loss
generated in the United States was reflected at the 35% U.S. statutory tax rate.
However, an overall tax charge for the year was reported as a result of the
Company achieving earned taxable income in certain foreign jurisdictions, and
taxable losses and special charges in other countries for which no or little tax
benefits were provided, such as in the case of losses and asset write-downs
associated with Russia. The reported tax benefit for 1997 of $65 million was
based upon a worldwide effective tax rate of 34%.
Including restructuring and other charges totaling $50 million in 1998 and $340
million in 1997, the Company recorded a net loss of $51 million, or $1.15 basic
loss per common share, in 1998 compared with a net loss of $127 million, or
$2.81 basic loss per common share, in 1997. Diluted loss per common share was
the same as the basic loss per common share in 1998 and 1997.
1998 Fourth Quarter Results
Sales
Worldwide net sales to customers for the fourth quarter of 1998 were $542
million, an 11% percent decrease compared with worldwide net sales of $608
million in the fourth quarter of 1997. The principal reason for this decrease
was lower sales of instant film across all regions of the world. On a unit
basis, worldwide shipments to customers of instant cameras increased 5% while
shipments to customers of instant film decreased by low double digits in 1998
compared with 1997.
Sales in the Americas Region decreased 8% to $344 million for the fourth quarter
of 1998 compared with $372 million in the same period 1997. This decrease was
primarily due to lower sales of instant film in the United States. On a unit
basis, shipments to customers of instant cameras increased 13%, while shipments
to customers of instant film decreased by low double digits in 1998 compared
with 1997. The primary factor affecting the lower sales of instant film was the
channel inventory reductions cited earlier. In addition, at the United States
retail level in 1998, the Company estimates that the unit volume of integral
film decreased by high single digits in the 1998 fourth quarter compared with
the fourth quarter of 1997, while instant cameras increased approximately 8% in
the fourth quarter compared with 1997. Also, sales of new products partially
offset the impact of lower sales of instant film in the fourth quarter of 1998
versus the same period in 1997.
Sales in the European Region decreased 21% to $128 million for the fourth
quarter of 1998 compared with $163 million in the same period of 1997. This
decrease was primarily due to lower sales of instant film. The largest share of
this reduction occurred in Russia, where the Company ceased shipments during the
third quarter of 1998. The decline was also partly due to declines in sales in
the Region's other emerging markets. On a unit basis, shipments to customers of
instant cameras decreased 33% while shipments to customers of instant film
decreased by mid double digits in 1998 as compared with 1997.
Sales in the Asia Pacific Region decreased 4% to $70 million for the fourth
quarter of 1998 compared with $73 million in the fourth quarter last year. This
decline was due to lower sales of products other than
Management's Discussion and Analysis of Operations (continued)
instant cameras and film and the adverse impact of foreign exchange. These
factors were largely offset by the sale of new products in Japan and higher
volumes achieved in the Region's emerging markets. Due to new product sales,
unit sales to customers of instant
<PAGE>
cameras increased 36%. On a unit basis, sales to customers of instant film
increased by mid double digits due to a combination of higher sales in emerging
markets and new product sales in Japan.
Profit/(Loss)
In the fourth quarter of 1998, the Company incurred an operating loss of $82
million compared with an operating loss of $294 million in the fourth quarter of
1997. Excluding restructuring and other charges of $50 million in 1998 and $340
million in 1997, other asset write-offs of $43 million in 1998 and $20 million
in 1997 for above normal inventory write-offs (both of which were unrelated to
restructuring), the profit from operations in the fourth quarter would have been
$11 million in 1998 and $66 million in 1997. This decrease was primarily due to
lower sales of instant film.
Profit from operations in the Americas Region was $80 million in the fourth
quarter of 1998 compared with $100 million in the fourth quarter of 1997. This
decline was primarily due to lower sales of instant film in the United States.
To a lesser degree, the decline also reflected asset write-downs in the United
States, sales declines in the Region's emerging markets and increased sales and
marketing spending.
The loss from operations in the European Region was $1 million in the fourth
quarter of 1998 compared with an operating profit of $29 million in the fourth
quarter of 1997. This decrease was primarily due to the write-off of assets
related to Russia and, to a lesser degree, lower sales of instant film in Russia
and other European markets. These adverse factors were offset in part by
decreased sales and marketing spending.
Profit from operations in the Asia Pacific Region totaled $9 million in the
fourth quarter of 1998 compared with $14 million in the fourth quarter of 1997.
This decrease was primarily due to lower sales of products other than instant
film and the adverse impact of a stronger U.S. dollar.
Global Operations costs were $60 million in the fourth quarter of 1998 compared
with $43 million in the fourth quarter of 1997. This increase was primarily due
to unfavorable film manufacturing variances caused by reduced production volumes
and start-up costs for new products, offset in part by lower manufacturing
spending, including savings from restructuring, and lower asset write-offs.
Research and Development costs were $33 million in the fourth quarter of 1998
compared with $32 million in the fourth quarter of 1997.
Corporate costs were $77 million in the fourth quarter of 1998 compared to
$362 million in the fourth quarter of 1997. Excluding restructuring and other
charges of $50 million in 1998 and $340 million in 1997, Corporate costs would
have been $27 million in the fourth quarter of 1998 compared with $22 million in
the fourth quarter of 1997 reflecting increased overhead spending.
Other income was $23 million in the fourth quarter of 1998 compared with an
expense of $2 million for the same period in 1997. In 1998, other income
included $24 million in gains from the sale of real estate.
Interest expense increased to $17 million in the fourth quarter of 1998 compared
with $13 million for the same period of 1997. The increase was primarily due to
higher obligations.
In the fourth quarter of 1998, a tax benefit of $1 million was recognized
against a loss before income taxes of $77 million while in the fourth quarter of
1997 a tax benefit of $106 million was recognized against a loss before income
taxes of $309 million. In 1998, the amount of tax benefit recognized was limited
due to recognition of losses in certain foreign jurisdictions for which no or
little tax benefit could be recognized. The worldwide effective tax rate for the
fourth quarter of 1997 was 34%.
<PAGE>
Including restructuring and other charges totaling $50 million in the fourth
quarter of 1998 and $340 million for the same period in 1997, the Company
recorded a net loss in the fourth quarter of 1998 of $76 million, or $1.72 basic
loss per common share, compared with a net loss of $203 million or $4.51 basic
loss per common share, for the fourth quarter of 1997. Diluted loss per common
share was the same as the basic loss per common share in the fourth quarter of
1998 and 1997.
1997 Worldwide Results Compared with 1996
(The management discussion below has been revised to comply with the adoption of
Financial Accounting Standards Board Statement No. 131, "Disclosure about
Segments of an Enterprise and Related Information.")
Sales
Worldwide net sales to customers decreased to $2.1 billion in 1997 compared with
$2.3 billion in 1996, primarily because of the strengthening of the U.S. dollar
and lower sales in Russia and China. On a unit basis, worldwide shipments to
customers of instant film decreased by high single digits in 1997 compared with
1996 while worldwide shipments to customers of instant cameras were
approximately the same in 1997 as compared with 1996.
Sales in the Americas Region were $1,233 million in 1997 and $1,227 million in
1996. On a unit basis, shipments to customers of instant cameras increased 10%
while shipments to customers of instant film were approximately the same in 1997
compared to 1996.
Sales in the European Region decreased by 13% from $668 million in 1996 to $583
million in 1997. The decrease was primarily due to the strengthening of the U.S.
dollar and, to a lesser degree, lower sales of instant film and instant cameras,
primarily in Russia. On a unit basis, shipments to customers of instant cameras
decreased 23% while shipments to customers of instant film decreased by high
single digits in 1997 as compared with 1996.
Sales in the Asia Pacific Region decreased by 13% from $380 million in 1996 to
$330 million in 1997. This decline was primarily due to lower sales of instant
film, mostly in China and a stronger U.S. dollar. On a unit basis, shipments to
customers of instant cameras increased 23% while shipments to customers of
instant film decreased by low double digits in 1997 as compared with 1996.
<PAGE>
Profit/(Loss)
In 1997, the Company incurred a loss from operations of $159 million compared
with a profit from operations of $52 million in 1996. Excluding restructuring
and other special charges of $340 million in 1997 and $150 million in 1996, and
the above normal inventory write-offs in 1997 of approximately $20 million
(which were unrelated to restructuring), profit from operations would have been
$201 million in 1997 and $202 million in 1996.
Profit from operations in the Americas Region was $369 million in 1997 compared
with $344 million in 1996. This increase was primarily due to reductions in
digital losses and savings from restructuring offset, in part, by lower
licensing income.
Profit from operations in the European Region was $107 million in 1997 compared
with $152 million in 1996. This decrease was primarily due to a stronger U.S.
dollar and, to a lesser degree, lower sales of instant film, mainly in Russia.
Profit from operations in the Asia Pacific Region was $75 million in 1997
compared with $81 million in 1996. This decrease was primarily due to the
adverse impact of a stronger U.S. dollar and lower sales of instant film, mainly
in China.
Global Operations costs were $148 million in 1997 compared with $162 million in
1996. The decrease was primarily due to lower manufacturing costs, including
savings from restructuring.
Research and Development costs were $123 million in 1997 compared with $116
million in 1996. The increase was primarily due to higher spending on new
products.
Corporate costs were $440 million in 1997 compared with $247 million in 1996.
Excluding restructuring and other special charges of $340 million in 1997 and
$150 million in 1996, corporate costs would have been $100 million in 1997 and
$97 million in 1996. The adjusted increase was primarily due to an increase in
corporate overhead spending.
In December 1997, the Company announced a broad-based program to streamline
operations and enhance earnings by consolidating and selling manufacturing
facilities and reducing its corporate overhead structure. The total pre-tax
expenses recorded in the fourth quarter of 1997 for restructuring and other
charges related to this program were $340 million. Of this amount, approximately
$17 million represented inventory write-downs, which were included in cost of
goods sold.
The 1997 restructuring and other charges included approximately $150 million
related to an involuntary severance program under which approximately 1,800
employees were expected to leave the Company (approximately 40% from Global
Operations, approximately 50% from the regional segments, of which approximately
half was from the European Region, and approximately 5% from Research and
Development) over approximately 18 months. Most of the cash severance payments
related to this program were expected to be paid by the end of 1999. No cash
payments were made under the program in 1997.
The remainder of the restructuring and other charges in 1997 of $190 million
primarily related to the write-down of assets. Approximately $106 million of
this amount was related to the write-down of the Company's underutilized New
Bedford coating facility to an independently determined fair value of
approximately $18 million. The Company is considering several strategic options
for future use of this facility, including an outright sale. In addition,
approximately $22 million was for the write-off of battery assembly equipment,
which is not required to support the Company's anticipated production
requirements. The restructuring and other charges also included approximately
$26 million related to the Company's underutilized chemical manufacturing
facility in Freetown, Massachusetts that the Company sold in February 1998.
Under the terms of the agreement to sell this facility, the Company entered into
a long-term supply agreement with the purchaser, International Specialties
Products, Inc., to purchase certain specialty chemicals used
<PAGE>
Management's Discussion and Analysis of Operations (continued)
to manufacture the Company's instant film. The remainder of these write-downs
related primarily to other assets, which were no longer required and will
ultimately be disposed of and inventory write-downs related to restructured
operations.
In 1996, restructuring and other special charges totaled $150 million with $7
million of this amount recorded in cost of goods sold.
Other income was $15 million in 1997 compared with $27 million in 1996. In 1997,
other income included a $16 million gain primarily attributable to the change in
the Company's method of applying FAS 52 as discussed under "1998 Worldwide
Results Compared with 1997" above. In 1997, other income also included a gain on
a real estate sale of $19 million offset by a donation valued at $19 million to
endow charitable giving. Other income in 1996 included a $23 million gain on the
sale of real estate.
Interest expense increased to $48 million in 1997 compared with $47 million in
1996.
For the full year 1997, the effective tax rate was 34%, compared with 52% for
1996. The decrease in the effective tax rate was primarily a result of the
change in the Company's method of applying FAS 52 and the change in its
operational structure.
In 1996, the Company recorded an extraordinary loss of $56.1 million (net of a
tax benefit of $1.5 million) related to the retirement of an issue of the
Company's convertible debentures.
Including restructuring and other special charges, totaling $340 million in 1997
and $150 million in 1996, the Company recorded a net loss of $127 million, or
$2.81 basic loss per common share, in 1997 compared with a net loss of $41
million, or $.90 basic loss per common share, in 1996. Diluted loss per common
share was the same as the basic loss per common share in 1997 and 1996.
Financial Liquidity and Capital Resources
At December 31, 1998, the Company's cash and cash equivalents amounted to $105
million compared with $68 million at December 31, 1997. The primary sources of
cash in 1998 were provided by proceeds from the sale of real estate and fixed
assets, financing activities and cash flows from operating activities. Working
capital decreased to $360 million at December 31, 1998 from $573 million at
December 31, 1997. This decrease was primarily a result of lower receivables
together with higher short-term debt, trade payables and other liabilities.
For 1998, capital spending was $191 million and depreciation expense was $91
million. This compares with capital expenditures of $134 million and
depreciation expense of $112 million in 1997. The decrease in depreciation
expense in 1998 was due in large part to the write-down or disposal of over $100
million of fixed assets in the fourth quarter of 1997 and, to a lesser degree,
disposals related to the sale of real estate in 1998. Capital spending in both
years was a combination of on-going capital programs and spending related to new
products. In 1998, capital spending also included the costs of outfitting
facilities associated with the Company's consolidation of real estate and the
installation of a new enterprise-wide software system. The new software system
is primarily intended to streamline the Company's administrative processes and
will also benefit the Company in achieving Year 2000 compliance. Capital
expenditures in 1999 are expected to be approximately $170 million, of which
approximately $70 million will be used for the maintenance of the Company's
property, plant and equipment.
<PAGE>
In addition to funding capital expenditures and working capital requirements
during 1998, the Company also expended approximately $70 million to make
payments relating to the 1997 involuntary severance program portion of the
December 1997 restructuring (including the extension of this program in 1998),
$46 million to repurchase the Company's common stock, $27 million to pay
dividends to common stockholders and $19 million to make two acquisitions in the
digital imaging industry.
In 1998, the Company sold certain assets primarily consisting of real estate,
which resulted in cash proceeds of $96 million. In addition, as part of the
Company's December 1997 restructuring, the Company also sold its underutilized
chemical manufacturing facility in Freetown, Massachusetts for $55 million.
In 1997, the Company paid $57 million to repurchase the Company's common stock
and made cash payments of $42 million under the 1995 severance program, which
was substantially completed in 1997. Also in 1997, the Company expended
approximately $30 million to purchase additional equity investments as part of
the Helios transaction and to purchase foreign distributors and paid $27 million
in dividends to common stockholders.
The Company has three sources of debt financing: short-term lines of credit; the
Amended Credit Agreement (as defined below); and the Company's outstanding 6
3/4% Notes due 2002, 7 1/4% Notes due 2007 and 11 1/2% Notes due 2006 (the "2006
Notes").
At December 31, 1998, the Company had outstanding $332 million in short-term
debt. This was comprised of $220 million of borrowings under the Company's
Amended Credit Agreement (as defined below) and $112 million borrowed under the
Company's lines of credit.
In December 1998, the Company entered into an amendment to its existing $350
million Credit Agreement (the "Credit Agreement"). The amended agreement (the
"Amended Credit Agreement") provides for loans up to $350 million, will expire
on December 31, 2001 and will be available on a revolving basis prior to its
expiration. In connection with the Amended Credit Agreement, the Company entered
into a collateral agreement and certain related documents that granted the
lenders under the Amended Credit Agreement a first security interest in certain
of the Company's domestic inventories and accounts receivable. This security
will be released if the Company's credit rating is BBB- or higher by Standard &
Poor's ("S&P") and Baa3 or higher by Moody's Investor's Services, Inc.
("Moody's").
The Amended Credit Agreement restricts, among other things, the Company's
ability to do the following: to make certain capital expenditures; to make
certain restricted payments; to incur debt in addition to the issuance of the
2006 Notes; to incur certain liens; to make certain investments; to enter into
certain sale and leaseback transactions; and to merge, consolidate, sell or
transfer all or substantially all of the Company's assets, subject to certain
conditions.
The Amended Credit Agreement also requires the Company to maintain financial
ratios relating to the maximum level of debt to EBITDA (earnings before
interest, taxes, depreciation and amortization) and minimum interest coverage.
In addition, the Amended Credit Agreement affords the lenders the right to
incorporate covenants given to holders of notes or other securities which, in
their judgement, are more restrictive. These lenders are evaluating the
covenants contained in the indenture pursuant to which the 2006 Notes are
issued (the "Indenture") to decide whether to exercise this option.
The Amended Credit Agreement restricts the Company's ability to pay dividends
and repurchase stock. This agreement limits the payment of dividends and
repurchase of the Company's common stock to $3.75 million per quarter in excess
of the value of ESOP shares issued and proceeds from the exercise of stock
options on a cumulative basis. Since the Company issues ESOP shares to all
qualified United States employees as part of compensation, this amount is
expected to total approximately $14 million per annum. As a result, the Company
believes it is unlikely that this limitation will prevent it from continuing the
current dividend payment of $.60 per share, per annum. In addition, the
<PAGE>
Indenture also includes restrictions on dividends which the Company considers to
be less restrictive than those contained in the Amended Credit Agreement.
Funds borrowed under the Amended Credit Agreement bear interest, at the
Company's option, at either the prime rate of Morgan Guaranty Trust Company
("Prime") plus a margin; or LIBOR on euro-dollar loans ("Euro-dollar loans")
plus a margin. The margin ranges from 0.085% to 2.0% for Prime-based loans and
from 0.275% to 3.0% for Euro-dollar loans, based on the Company's credit
ratings. In addition, the Company will pay the lenders a commitment fee on
unused commitments ranging from 0% to 0.025% on an annual basis, depending on
the Company's credit rating, and a fee to the administrative agent.
At December 31, 1998, the Company and several of its subsidiaries had short-term
lines of credit with a number of commercial banks that totaled $170 million in
maximum commitments, of which $112 million was outstanding. One of these lines
of credit, for a maximum amount of 115 million Deutsche Marks (or approximately
$70 million at December 31, 1998), is on a committed basis with Deutsche Bank de
Bary N.V., the Dutch affiliate of Deutsche Bank A.G. A total of $41 million was
outstanding under this agreement at December 31, 1998. On January 1, 1999, the
interest rate on this facility increased from LIBOR plus 0.25% to LIBOR plus
2.0%. This facility, which permits borrowings on terms up to 6 months, may be
terminated on three month's notice by either party.
At December 31, 1998, the Company had, in addition to $130 million under the
Amended Credit Agreement, available lines of credit totaling $25 million and $34
million to support U.S. and international operations, respectively.
As of December 31, 1997, the Company had $242 million outstanding in short-term
debt. This consisted of $91 million borrowed under lines of credit in the U.S.
and $151 million borrowed from international lenders under lines of credit.
There were no borrowings under the $350 million Credit Agreement at December 31,
1997. In addition to capacity under the Credit Agreement at December 31, 1997,
the Company also had available lines of credit of $99 million and $104 million
to support U.S. and international operations, respectively.
In November 1998, the Company filed an additional shelf registration with the
Securities and Exchange Commission to issue, together with a previously filed
shelf registration, up to an aggregate principal amount of $500 million of debt
securities.
Management's Discussion and Analysis of Operations (continued)
In February 1999, the Company issued the 2006 Notes in an aggregate principal
amount of $275 million. The 2006 Notes were placed at par value. The net
proceeds of $268 million from the sale of the 2006 Notes were used primarily for
the payment of $200 million aggregate principal amount of the Company's 8% Notes
that were due March 15, 1999 and for general corporate purposes, including
reducing outstanding borrowings under the Amended Credit Agreement and
short-term lines of credit. Since the Company refinanced the 8% Notes, the
principal amount of these notes at December 31, 1998 was classified as a
long-term note payable. The Indenture contains certain covenants that restrict,
among other things, the Company and its subsidiaries from making certain
restricted payments, including dividends on and the purchase of the Company's
common stock and certain other payments; incurring additional debt and issuing
preferred stock; creating certain liens; entering into sale and leaseback
transactions; entering into certain transactions with affiliates; and entering
into certain mergers and consolidations or selling all or substantially all of
the properties or assets of the Company.
The Company's cost of borrowing is dependent, in part, upon the Company's
corporate and long-term debt credit ratings. Currently, the Company's long-term
debt is rated BB- by S&P, Ba3 by Moody's and BB by Duff & Phelps Credit Ratings
Co.'s, ("D&P"). In 1998, S&P and D&P both lowered their credit ratings. S&P
lowered its long-term debt rating from BBB- to BB- with a negative outlook.
D&P's long-term debt ratings declined from BBB to
<PAGE>
BB. In early 1999, Moody's lowered its long-term debt rating from Baa3 to Ba3
with a negative outlook.
In October 1997, the Company's Board of Directors authorized the repurchase of
up to five million shares of the Company's common stock over three years. In
1998, the Company repurchased approximately 1.2 million shares of its common
stock at a cost of $46 million. In 1997, approximately 1.3 million shares were
repurchased at a cost of $57 million. At December 31, 1998, approximately 2.8
million shares remain to be purchased under the current program. Given the
restricted payment covenants included in the Amended Credit Agreement and in the
Indenture, it is unlikely that the Company will complete this repurchase plan
within the program's three year period. When the Company does repurchase its
common stock, it is its policy to repurchase its common stock on the open
market, in privately negotiated transactions or otherwise (which may include
transactions with Polaroid retirement plans, including the employee stock
ownership portion of the Polaroid Retirement Savings Plan). The timing and
amounts of future purchases under this program depend upon many factors,
including market conditions, and the Company's business and financial condition
and are limited by the terms of the Amended Credit Agreement and the Indenture.
The Company owns approximately 14% of the common stock of SDI Holding Corp.
("SDHI") with a book value of approximately $14 million at December 31, 1998.
The Company also owns preferred stock, with a book value of approximately $35
million at that date, of Sterling Dry Imaging Systems, Inc., a subsidiary of
SDHI ("SDIS"). In January 1999, Agfa-Gevaert N.V. agreed to acquire SDHI,
excluding SDIS which, under the acquisition agreement, is to be spun off to
SDHI's shareholders and not acquired by Agfa-Gevaert N.V. The Company is
currently reviewing its position relative to this transaction. However,
sufficient information is not available for the Company to fully assess the
probable effect of this transaction on the value of its preferred stock in SDIS.
The Company believes that the availability of funds under the Amended Credit
Agreement, the sale of its 2006 Notes, generated from operations and additional
debt capacity will be adequate for at least the next twelve months to meet
working capital needs, to fund spending for growth and maintenance of existing
operations and to make payments associated with the December 1997 restructuring
(including the extension to the involuntary severance program in 1998).
Foreign Currency Exchange
The Company generates a substantial portion of its revenues in international
markets, which subjects its operations to the exposure of currency exchange
fluctuations. The impact of currency fluctuations can be positive or negative in
any given period. The Company's ability to counteract currency exchange movement
is primarily dependent on pricing in local markets.
Effective January 1, 1997, the Company determined that the local currency is the
functional currency for most of its subsidiaries outside of the U.S. The U.S.
dollar will continue to be the functional currency for subsidiaries in highly
inflationary economies.
To minimize the adverse impact of currency fluctuations on net monetary assets
denominated in currencies other than the relevant functional currency
("nonfunctional currencies"), the Company engages in nonfunctional
currency-denominated borrowings. The Company determines the aggregate amount of
such borrowings based on forecasts of each entity's nonfunctional
currency-denominated net monetary asset position and the relative strength of
the functional currencies compared to the nonfunctional currencies. These
borrowings create nonfunctional currency-denominated liabilities that hedge the
Company's
<PAGE>
nonfunctional currency-denominated net monetary assets. Upon receipt of the
borrowed nonfunctional currency-denominated funds, the Company converts those
funds to the functional currency at the spot exchange rate. Exchange gains and
losses on the nonfunctional currency-denominated borrowings are recognized in
earnings as incurred. At December 31, 1997 and 1998, the amounts of the
Company's outstanding short-term debt incurred for hedging purposes was $150
million and $107 million, respectively.
From time to time, the Company may use over-the-counter currency exchange swaps
to reduce the interest expense incurred through the borrowings described above
and to replace the hedge created by those borrowings. When a currency exchange
swap is used to replace a hedge, the currency received by the Company in the
spot market component of the currency exchange swap is used to close out the
borrowings and, simultaneously, the hedge is reinstituted through a forward
contract (not exceeding six months). The net interest value of the currency
exchange swap contract is amortized to earnings over the life of the contract.
Exchange gains or losses on the foreign currency obligation component of the
forward contract are recognized in earnings as incurred in each accounting
period. The Company does not enter into currency exchange swaps for trading
purposes. At December 31, 1997 and 1998, the aggregate notional value of the
Company's short-term foreign exchange swap contracts was $21 million and $50
million, respectively.
<PAGE>
Since the Company has limited flexibility to increase prices in local currency
to offset the adverse impact of foreign exchange, the Company may also purchase
foreign currency call options. The term of these call options typically does not
exceed 18 months. The Company's purchase of call options allows it to protect a
portion of its expected foreign currency-denominated revenues from adverse
foreign currency exchange movement. The Company typically does not buy call
options, which can be exercised prior to the expiration date, nor does it
typically write options or purchase call options for trading purposes. The
Company amortizes premiums over the term of the option and defers any gains for
its call options activity until the option exercise date. At December 31, 1997
and 1998, option contracts with a notional value of $268 million and $240
million were outstanding, respectively.
The Company maintains a Monetary Control Center (the "MCC"), which operates
under written policies and procedures defining day-to-day operating guidelines,
including exposure limits, to contract for the foreign currency denominated
borrowings, foreign exchange swaps and call options described above. The MCC is
subject to random independent audits and reports to a supervisory committee
comprised of members of the Company's management. The MCC publishes regular
reports to the Company's management detailing the foreign currency activities.
Impact of Inflation
Inflation continues to be a factor in many countries in which the Company does
business. The Company's pricing strategy has offset to a considerable degree
inflation and normal cost increases. The overall inflationary impact on earnings
has been immaterial.
Factors That May Affect Future Results
Certain statements in this Management's Discussion and Analysis may be forward
looking in nature, or "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995 (the "Act"). The Company desires to
take advantage of the "safe harbor" provisions of the Act. The Company therefore
cautions shareholders and investors that actual results may differ materially
from those projected in or implied by any forward-looking statement as the
result of a wide variety of factors, which include but are not limited to those
set forth below. Many of the important factors below have been discussed in
prior filings by the Company with the Securities and Exchange Commission.
Ability to Implement Business Strategy
The Company has implemented a business strategy to revitalize its instant
imaging business which calls for, among other steps, the introduction of between
20 and 25 new products each year, the expansion of certain profitable
businesses, and the continued reduction of costs and the improvement of
operating efficiencies from its restructurings. As part of this strategy, the
Company is promoting new uses of, and new markets for, this technology and is
targeting new demographic segments, such as children, teens and young adults,
through product innovations and marketing campaigns. There can be no assurance
that the Company will be able to effectively implement this strategy and retail
demand could be impacted. If this strategy is not successful, the Company's
business and results of operations could be negatively impacted. Similarly, a
decline in retail demand could have a material adverse effect on the Company's
business and financial results.
Net losses
The Company experienced net losses for four of the last five fiscal years. These
losses have been primarily due to the cost of restructurings, dealers' reduction
in their inventories of the Company's products and the deterioration of economic
conditions in the emerging markets in which the Company operates. If the Company
continues to experience net losses, it may be required to find additional
sources of financing to fund operating
<PAGE>
Management's Discussion and Analysis of Operations (continued)
deficits, implement its business strategy and meet anticipated capital
expenditures, research and development costs and financing commitments. There
can be no assurance that if the Company needs to obtain such financing that it
will find it on acceptable terms or that it would be permitted under the
Indenture or the Amended Credit Agreement.
Developing Digital Imaging Products Market
The Company's ability to effectively compete in the digital imaging market is
dependent on its ability to develop new digital imaging products, including
digital hardware with chemical-based media, in a profitable and timely manner
and to market them effectively. In many instances, the Company will enhance its
ability to succeed by developing meaningful strategic business relationships
with other companies. The market for digital imaging products is, however,
highly competitive in price, quality and product performance. Because it is a
relatively new market, with high research and development and other costs, it is
also currently a low margin business. Many of the Company's competitors have
greater financial and other resources and have more experience serving the
demands of these markets. Accordingly, there can be no assurance that the
Company will succeed in the digital imaging business. In addition, markets for
digital imaging products are increasing rapidly and over time may erode either
the growth or the absolute size of the Company's instant photography business.
Failure to Market New Products
The Company's plan to increase profits relies on the development of new products
and their speedy introduction into the market. Future operating results may be
negatively affected if the Company is unable to promptly design, develop,
manufacture and market innovative imaging products that receive customer
acceptance. In addition, because some of the Company's new products will replace
or compete with existing products, its operating results could be adversely
affected even if the Company is successful in developing and introducing new
products.
<PAGE>
Substantial Level of Debt
- -----------
The Company has a significant amount of debt. The Company's high level of debt
could have important consequences to investors and stockholders. For example, it
could:
o make it more difficult to satisfy its debt and other obligations;
o increase the Company's vulnerability to general adverse economic and
industry conditions;
o limit the Company's ability to fund future working capital needs, capital
expenditures, acquisitions, research and development costs and other general
corporate requirements;
o require the Company to dedicate a substantial portion of its cash flow from
operations to payments on its debt, thereby reducing the availability of the
Company's cash flow to fund working capital needs, capital expenditures and
acquisitions, research and development efforts and other general corporate
purposes;
o limit the Company's flexibility in planning for, or reacting to, changes in
its business and the industry in which it operates;
o place the Company at a competitive disadvantage compared to its competitors
that are less leveraged; and
o limit its ability to borrow additional funds.
Restrictions Imposed by the Company's Debt and Financial Flexibility
The Company has financial and other restrictive covenants in the Company's debt
instruments including restrictions in the event of a change in control. Failure
to comply with these covenants could result in an event of default under the
Amended Credit Agreement, the Indenture, and certain of the agreements governing
short-term debt. If such default is not cured or waived it could have a material
adverse effect on the Company.
The Company's ability to make payments on and to refinance its debt, to execute
its business strategy, to make capital expenditures and to fund research and
development costs will depend on its ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory, exchange rate fluctuation and other
factors, including retail demand and dealer inventory practices, that are beyond
the Company's control. It is also subject to the Company's success in
implementing its strategies. There can be no assurance that the Company will
generate sufficient cash flow or that future borrowings will be available to the
Company under the Amended Credit Agreement or short-term lines of credit in an
amount sufficient to enable the Company to repay its debt and to fund other
liquidity needs.
Failure to Reduce Cycle Time
The Company has already reduced and is committed to further reducing its cycle
time in bringing new products to market. There is no guarantee that the Company
will succeed in this endeavor. Shorter cycle times present a challenge for the
effective management of the transition from existing products to new products
and could negatively impact the Company's future operating results.
Highly Competitive Markets
The timing and introduction of new products by the Company's competitors could
have a material negative impact upon the Company's introduction of new or
enhanced products. The Company has competitors worldwide, ranging from large
corporations to smaller and more specialized companies. In the instant imaging
market, the Company faces competition from Fuji Photo Film Co., Ltd. ("Fuji"),
which has announced that it will introduce selected new competitive products in
Japan and Europe. In the digital imaging market, the Company faces competition
from Eastman Kodak Company, Fuji, Hewlett-Packard Company, Canon U.S.A., Inc.,
Sony Corporation and others. Many of the Company's competitors are larger
<PAGE>
and have greater financial and other resources. There can be no assurance that
the Company will be able to compete successfully and its failure to do so could
have a material adverse effect on its business and financial results.
Customer Concentration
For the year ended December 31, 1998, the Company's ten largest customers
accounted for approximately 25% of its net sales, and one customer, Wal-Mart
Stores, Inc. ("Wal-Mart"), accounted for 13% of its net sales. If Wal-Mart or
several of the Company's top customers were to stop purchasing the Company's
products or significantly change their purchasing practices, there would be a
material adverse effect on the Company's business and financial results.
Troubled Emerging Markets
The Company continues to believe that the emerging markets in all Regions in
which it operates may offer attractive opportunities in the future. These
markets are, however, considerably less stable than more established markets and
continue to be troubled. For the foreseeable future, the Company does not
anticipate that it will generate revenues in material amounts from Russia or
certain other emerging markets. In Asia, the currency crisis and instability of
the financial system have continued to negatively affect the Company's net
sales. Accordingly, there can be no assurance that it will be able to increase
its revenues from the emerging markets in which it operates.
Foreign Exchange Rate Fluctuations
The Company sells and markets its products worldwide. A major risk associated
with such worldwide operations is the fluctuation of foreign exchange rates,
particularly the Japanese Yen and German Mark. Although the Company engages in
some foreign exchange hedging, fluctuations in foreign currencies could have a
material adverse effect on the business and financial results of the Company.
Raw Materials and Supplies
The Company is affected by the price and availability of several raw materials
and supplies, such as chemicals, polyester, film base, specialty paper and
electronic components that the Company uses to manufacture its products. The
Company therefore could be adversely affected by its inability to obtain these
raw materials and supplies on favorable terms, and, in particular, by an
increase in the costs of such raw materials and supplies if the Company is
unable to pass along such price increases to its customers.
<PAGE>
Loss of Patents and Trademarks
The Company obtains patents where feasible to protect its investment in research
and development. The ownership of patents contributes to the Company's ability
to use its inventions and at the same time may provide significant patent
license revenue. In addition, the Company owns a number of valuable trademarks,
including the trademark "Polaroid", which are important to its business. The
loss of certain significant patents or trademarks would have a material adverse
effect on the Company's business and financial results.
Potential Exposure to Environmental Liabilities
The Company's business and facilities are subject to a number of federal, state
and local laws and regulations, which govern, among other things, the discharge
of hazardous materials into the air and water as well as the handling, storage
and disposal of such materials.
Under certain environmental laws, a current or previous owner or operator of
land may be liable for the costs of investigation, removal or remediation of
hazardous materials at that property. These laws typically impose liability
whether or not the owner or operator of the land knew of, or was responsible
for, the presence of the hazardous materials or for the disposal or treatment of
hazardous materials. The owner or operator may also be liable for the costs of
investigation, removal or remediation of such substances at the disposal or
treatment site, regardless of whether the affected site is owned or operated by
that party.
Because the Company owns and operates a number of facilities and because it
arranges for the disposal of hazardous materials at many disposal sites, the
Company expects to incur costs for investigation, removal and remediation, as
well as capital costs associated with compliance with these laws. In addition,
changes in environmental laws or unexpected investigations and clean-up costs
could have a material adverse effect on the Company's business and financial
condition.
Management's Discussion and Analysis of Operations (continued)
Dependence on Key Personnel
The Company's success depends upon the continued contributions of a number of
key senior managers and the loss of the services provided by them could have a
material adverse effect on the Company. In particular, the loss of the services
provided by Gary DiCamillo, the Chairman and Chief Executive Officer, as well as
certain other senior managers, could have a material adverse effect upon the
Company's business and development. If that were to occur, there is no assurance
that the Company would be able to locate such qualified personnel or employ them
on acceptable terms or on a timely basis.
In addition, the Company's continued growth depends in part on its continuing
ability to attract and retain qualified senior managers who can implement the
Company's business strategy. There can be no assurance that the Company will be
able to attract and retain such senior managers.
<PAGE>
Impact of the Year 2000 Problem
The failure of the Company and its material third party vendors and suppliers to
make their systems Year 2000 compliant could have a material adverse impact on
the results of operations and financial condition of the Company. While
recognizing the risks involved, the Company believes that the steps that the
Year 2000 Committee has taken and is expected to take will significantly reduce
the Company's exposure to the Year 2000 problem. The Year 2000 problem has,
however, certain inherent risks that are difficult to measure, including the
Company's ability to test all material systems in a timely fashion and the
readiness of third party vendors and suppliers. There can be no assurance that
the Company will foresee all Year 2000 problems or correct them on a timely
basis.
Other Matters
The Company, together with other parties, is currently designated a Potentially
Responsible Party ("PRP") by the United States Environmental Protection Agency
(the "EPA") and certain state agencies with respect to the response costs for
environmental remediation at several sites. In each case in which the Company is
able to determine the likely exposure, such amount has been included in the
Company's reserve. Where a range of comparably likely exposures exists, the
Company has included in its reserve at least the minimum amount of the range.
The Company's aggregate reserve for these liabilities was $2 million as of
December 31, 1997 and 1998, respectively. The Company currently estimates that
the majority of the $2 million reserved for environmental liabilities at
December 31, 1998 will be payable over the next two to three years.
<PAGE>
New Accounting Standards
In June 1998, the FASB issued Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (FAS 133) that establishes
accounting and reporting requirements for derivative instruments and for hedging
activities. FAS 133 requires companies to recognize all derivatives as either
assets or liabilities in the statement of financial position at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge of the exposures to changes in fair value of recognized assets or
liabilities or unrecognized firm commitments, a hedge of the exposure to
variable cash flows of a forecasted transaction, or a hedge of the foreign
currency exposure of a net investment in a foreign operation, unrecognized firm
commitments, an available for sale security or a foreign-currency denominated
forecasted transaction. The accounting for changes in fair value under FAS 133
depends on the intended use of the derivative and the resulting designation. FAS
133 must be adopted for all fiscal quarters of fiscal years beginning after June
15, 1999. The Company is currently evaluating the effect of this statement on
its reported financial results.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
(the "legacy currencies") and one common currency (the "euro"). The
participating countries had to adopt the euro as their common legal currency on
that date (the " Euro Conversion"). The euro is now traded on currency exchanges
and may be used in business transactions. On January 1, 2002, new
euro-denominated bills and coins will be issued by participating countries. The
legacy currencies will be withdrawn from circulation as legal tender effective
January 1, 2002. During the period from January 1, 1999 and June 30, 2002,
parties may use either the euro or a participating country's legacy currency as
legal tender.
In 1998, the Company formed an Economic and Monetary Union Steering Committee
and Project Team (the "EMU Committee"). The EMU Committee has analyzed the
impact of the euro conversion on the Company in a number of areas, including the
Company's information systems, product pricing, finance and banking resources,
foreign exchange management, contracts and accounting and tax departments. While
the Company is in the process of making certain adjustments to its business and
operations to accommodate the euro conversion, the EMU Committee believes, based
on information available at the time and numerous assumptions, that the euro
conversion will not have a material adverse impact on the Company's financial
position and results of operations.
Year 2000 Date Conversion
The Year 2000 problem is the result of computer programs and embedded chips
being written with two instead of four digits to define the applicable year. As
a result, computer programs and embedded chips that use date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. If
the Company, or third parties with whom the Company has a material relationship,
do not correct a material Year 2000 problem, the result could be an interruption
in, or a failure of, certain normal business activities.
To prepare for the year 2000, the Company formed a Year 2000 Steering Committee
(the "Year 2000 Committee") and dedicated officers to identify the major areas
of the Company that will be affected by the Year 2000 problem and to manage a
three-step process of (i) assessing Year 2000 compliance, (ii) analyzing
possible solutions and implementing remedial programs and (iii) testing such
programs for each major area. To manage the process of becoming Year 2000
compliant across its major areas, the Year 2000 Committee has taken the
following steps: it has established, and periodically evaluates and updates, a
master schedule for each major area (ranked by the priority of its tasks), has
retained a number of consultants to assist the Company's verification and
validation
<PAGE>
processes, has licensed several software applications and is preparing
contingency plans in the event that the Company or third parties fail to or are
unable to make their systems Year 2000 compliant in a timely fashion. In
addition, the Company is in the process of installing a new enterprise-wide
software system for most domestic and foreign locations. This new software will
primarily facilitate the Company's effort to operate more efficiently and will
also benefit the Company in becoming Year 2000 compliant. What follows is a
summary of the six major areas identified by the Year 2000 Committee and the
status of the three-step process for each.
The first major area comprises the business information systems that support the
collection, processing and management of the Company's many internal data and
recording needs, including those regarding order entry and billing, accounts
receivable, accounts payable, product, customer and employee information,
general ledger entries and related accounting functions, among others
(collectively "Business Applications"). The Year 2000 Committee has completed
the assessment phase for the Business Applications area. As of December 31,
1998, the Company had remediated, tested and placed into production 45% of the
Business Applications. The new enterprise-wide software system will replace an
additional 25% of the Business Applications. The Year 2000 Committee is
forecasting, based on current information, completion of the entire Business
Applications area by mid-year 1999.
The second major area is the Company's extensive computer hardware and software
systems, including hardware platforms, telecommunications equipment and
scientific and engineering applications and the networking of these systems
throughout the Company's factories and offices (collectively, "IT
Infrastructure"). The Year 2000 Committee has completed the assessment phase of
the IT Infrastructure area and by December 31, 1998, it had remediated, tested
and placed into production approximately 60% of the IT Infrastructure area. The
Company expects that the remaining portions will be completed by mid-year 1999.
The third major area is the embedded chips and related systems that enable the
Company to manufacture products and track and control certain inventory
(collectively, "Shop Floor"). The Year 2000 Committee has completed the
assessment of approximately 87% of the Company's manufacturing and warehousing
locations and has retained a consulting firm with extensive knowledge in
embedded systems and process controls to assist in the assessment phase. The
Year 2000 Committee's remediation efforts are complicated by the high degree to
which Shop Floor applications are customized for the Company's manufacturing
systems and the need to accommodate ongoing production schedules. Based on
current information, the Year 2000 Committee believes that the remediation and
testing phases of the Shop Floor area will be completed in the third quarter of
1999.
The fourth major area is the Company's physical plant, including the security,
heating and ventilation of factories and other buildings (collectively,
"Facilities"). The Year 2000 Committee is completing the assessment phase of the
Facilities area and has initiated the remediation phase in several domestic
locations. Based on current information, the Year 2000 Committee expects that
remediation and testing of the Facilities area will be completed in the third
quarter of 1999.
The fifth major area relates to the Company's products. The majority of the
Company's traditional instant camera and film products are not vulnerable to the
Year 2000 problem. The Committee is continuing its assessment to determine any
other product vulnerability and to evaluate the possible upgrading of certain
products in a cost-effective manner. The Company has initiated remediation and
testing for certain of these products. Since October 1, 1998, the Company has
been shipping only Year 2000 compliant products to its customers. Based
Management's Discussion and Analysis of Operations (continued)
on current information, the Year 2000 Committee expects to complete all phases
related to the Company's products by mid-year 1999.
<PAGE>
The sixth major area is the Company's material relationships and transactions
with third parties, including the ability of suppliers to provide materials and
services to the Company and the ability of customers to order and pay for
products from the Company (collectively, "Third Parties"). The Year 2000
Committee is in the assessment phase of the Third Parties area. The Company has
identified the most critical of the Company's Third Parties relationships, is
communicating with these companies to address their state of readiness, is
identifying potential alternative vendors and has retained a consultant to
assist its efforts. Based on current information, the Year 2000 Committee is
forecasting the completion of all phases of the Third Parties area, including
the possible replacement of existing vendors, by the end of the third quarter of
1999.
The Year 2000 Committee is developing contingency plans to address the most
reasonably likely worst case scenario resulting from Year 2000 problems. But,
because the Company has not completed certain phases of the Year 2000 project,
it has not been able to formulate these plans in their entirety or to forecast
the total cost of contingency plans for each of the six major areas. The Year
2000 Committee expects to complete contingency plans during the first half of
1999.
The Year 2000 Committee has forecasted that the total cost of completing its
Year 2000 project to be approximately $20 million to $25 million. The total
projected amount of $20 million to $25 million includes internal staff costs
associated with the Year 2000 project but does not include the estimated costs
of the Company's new enterprise-wide software system or a forecast of the total
cost for contingency plans for each of the six major areas. The Company has
spent approximately $7 million of the projected total as of December 31, 1998.
The Company expects to fund the cost of the Year 2000 project from general
corporate funds.
The failure of the Company or the failure of its material third party vendors
and customers to make their systems Year 2000 compliant could have a material
adverse impact on the results of operations and financial condition of the
Company. While recognizing the risks involved, the Company believes that the
steps that the Year 2000 Committee has taken and is expected to take will
significantly reduce the Company's exposure to the Year 2000 problem. The Year
2000 problem has, however, certain inherent risks that are difficult to measure,
including the Company's ability to test all material remediated systems in a
timely fashion and the readiness of third party vendors and customers. There can
be no assurance that the Company will foresee all Year 2000 problems or
remediate them on a timely basis.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Polaroid Corporation:
We have audited the accompanying consolidated balance sheet of Polaroid
Corporation and subsidiary companies as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, cash flows and changes in common
stockholders' equity for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Polaroid Corporation
and subsidiary companies at December 31, 1998 and 1997, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
January 20, 1999, except for Note 8 to which the date is February 17, 1999
<PAGE>
Management's Report
Financial Reporting and Controls
The financial statements presented in this report were prepared in accordance
with generally accepted accounting principles. The Company maintains a number of
measures to assure the accuracy of its financial information. To that end, a
system of internal accounting controls and procedures has been developed to
provide reasonable assurance that assets are safeguarded and that transactions
are recorded and reported properly. The Company also maintains financial
policies and procedures, and a program of internal audits, management reviews
and careful selection and training of qualified personnel.
The majority of the Audit Committee is composed of outside directors. As such,
it is in a position to provide additional, independent reviews of the adequacy
of internal controls and the quality of financial reporting.
/s/ Gary T. DiCamillo
Chairman and
Chief Executive Officer
/s/ Judith G. Boynton
Executive Vice President and Chief Financial Officer
<PAGE>
Financial Statements
Consolidated Statement of Earnings
Polaroid Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
Years ended December 31,
(In millions, except per share data) 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,275.2 $2,146.4 $1,845.9
Cost of goods sold 1,283.8 1,229.8 1,108.4
Marketing, research, engineering
and administrative expenses (Note 2) 796.6 752.2 736.5
Restructuring and other (Note 2) 110.0 323.5 50.0
Special charges (Note 2) 33.0 -- --
--------- ---------- ---------
Total costs 2,223.4 2,305.5 1,894.9
--------- ---------- ---------
Profit/(loss) from operations 51.8 (159.1) (49.0)
--------- ---------- ---------
Other income:
Interest income 5.1 3.7 2.9
Other 21.7 11.3 64.8
--------- ---------- ---------
Total other income 26.8 15.0 67.7
Interest expense 47.4 47.8 57.6
--------- ---------- ---------
Earnings/(loss) before income tax
expense/(benefit) 31.2 (191.9) (38.9)
Federal, state and foreign income tax
expense/(benefit) (Note 4) 16.2 (65.2) 12.1
--------- ---------- ---------
Earnings/(loss) before extraordinary item 15.0 (126.7) (51.0)
Extraordinary item (Note 8) (56.1) -- --
--------- ---------- ---------
Net loss $ (41.1) $ (126.7) $ (51.0)
========== ========= =========
Basic earnings/(loss) per common share: (Note 1)
Earnings/(loss) before extraordinary item $ .33 $(2.81) $(1.15)
Extraordinary item (1.23) -- --
--------- ---------- ---------
Net loss $ (.90) $(2.81) $(1.15)
Diluted earnings/(loss) per common share: (Note 1)
Earnings/(loss) before extraordinary item $ .33 $(2.81) $(1.15)
Extraordinary item (1.23) -- --
--------- ---------- ---------
Net loss $ (.90) $(2.81) $(1.15)
Cash dividends per common share $ .60 $ .60 $ .60
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Balance Sheet
Polaroid Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
December 31,
(In millions) 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 68.0 $ 105.0
Receivables, less allowances
of $25.6 in 1997 and $42.0 in 1998 (Note 6) 545.1 459.6
Inventories (Notes 5 and 6) 506.1 533.3
Prepaid expenses and other assets (Note 4) 233.1 195.5
-------- --------
Total current assets 1,352.3 1,293.4
-------- --------
Property, plant and equipment
Land 25.0 29.4
Buildings 344.5 351.4
Machinery and equipment 1,460.0 1,450.5
Construction in process 106.8 144.6
-------- --------
Total property, plant and equipment 1,936.3 1,975.9
Less accumulated depreciation 1,423.8 1,409.4
-------- --------
Net property, plant and equipment 512.5 566.5
Prepaid taxes - non-current (Note 4) 175.6 208.2
Other assets 92.3 129.6
-------- --------
Total assets $2,132.7 $2,197.7
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Liabilities and stockholders' equity 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Short-term debt (Note 6) $ 241.6 $ 331.7
Payables and accruals (Note 7) 272.5 358.4
Compensation and benefits (Notes 10 and 11) 232.5 208.5
Federal, state and foreign income taxes (Note 4) 32.9 34.4
-------- --------
Total current liabilities 779.5 933.0
-------- --------
Long-term debt (Note 8) 496.6 497.4
Accrued postretirement benefits (Note 11) 246.5 241.9
Other long-term liabilities 125.7 135.5
-------- --------
Total liabilities 1,648.3 1,807.8
-------- --------
Preferred stock, Series A and Series D, $1 par value,
authorized 20,000,000 shares; all shares unissued -- --
--------- --------
Common stockholders' equity (Note 9)
Common stock, $1 par value,
authorized 150,000,000 shares (75,427,550 shares
issued in 1997 and 1998) 75.4 75.4
Additional paid-in capital 425.2 413.4
Retained earnings 1,304.1 1,226.7
Accumulated other comprehensive income (39.8) (33.4)
Less: Treasury stock, at cost (30,891,250 shares in 1997
and 31,437,933 shares in 1998) 1,279.4 1,291.5
Deferred compensation 1.1 .7
-------- --------
Total common stockholders' equity 484.4 389.9
-------- --------
Total liabilities and stockholders' equity $2,132.7 $2,197.7
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Cash Flows
Polaroid Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
Years ended December 31,
(In millions) 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (41.1) $ (126.7) $ (51.0)
Extraordinary item 56.1 -- --
Depreciation of property, plant
and equipment 118.3 111.5 90.7
(Increase)/decrease in receivables 4.1 (36.2) 79.0
(Increase)/decrease in inventories 82.2 9.8 (28.4)
(Increase)/decrease in prepaids and
other assets (26.7) (75.6) 39.0
Increase/(decrease) in payables
and accruals 42.1 (28.6) 25.3
Increase/(decrease)in compensation
and benefits (25.4) 68.9 (21.0)
Increase/(decrease)in federal, state and
foreign income taxes payable 7.9 (4.3) (29.9)
Gain on sale of real estate (23.2) (19.5) (68.2)
Contribution of real estate -- 19.1 --
Other non-cash items 118.1 203.7 62.2
------- -------- -------
Net cash provided by operating activities 312.4 122.1 97.7
------- -------- -------
Cash flows from investing activities
Increase in other assets (37.7) (31.5) (25.4)
Additions to property, plant and equipment (121.8) (134.3) (191.1)
Proceeds from sale of fixed assets 35.4 7.7 150.5
Acquisitions, net of cash acquired -- -- (18.8)
------- -------- -------
Net cash used by investing activities (124.1) (158.1) (84.8)
------- -------- -------
Cash flows from financing activities
Net increase/(decrease) in short-term debt
(maturities 90 days or less) (31.0) 138.4 131.2
Short-term debt (maturities over 90 days):
Proceeds 64.5 44.8 73.0
Payments (62.0) (63.7) (117.2)
Proceeds from issuance of long-term debt -- 296.6 --
Repayments of long-term debt (39.5) (327.8) --
Cash dividends paid (27.3) (27.1) (26.5)
Purchases of treasury stock (43.6) (57.4) (45.5)
Extinguishment of debt (56.1) -- --
Proceeds from issuance of shares
in connection with stock incentive plan 9.6 31.7 6.0
------- -------- -------
Net cash provided/(used) by financing activities (185.4) 35.5 21.0
------- -------- -------
Effect of exchange rate changes on cash (3.4) (4.3) 3.1
------- -------- -------
Net increase/(decrease) in cash and
cash equivalents (.5) (4.8) 37.0
Cash and cash equivalents at beginning of year 73.3 72.8 68.0
------- -------- -------
Cash and cash equivalents at end of year $ 72.8 $ 68.0 $ 105.0
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Changes in Common Stockholders' Equity
Polaroid Corporation and Subsidiary Companies
Years ended December 31, 1996, 1997 and 1998
(In millions except number of shares)
<TABLE>
<CAPTION>
Total
Additional common
Common Common paid-in Retained Treasury Deferred stockholders'
1996 shares stock capital earnings stock compensation equity
- ---- ------ ----- ------- -------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period 45,532,826 $ 75.4 $ 401.9 $ 1,525.8 $ (1,205.4) $ (80.0) $ 717.7
Comprehensive income:
Net earnings/(loss) (41.1) (41.1)
--------
Total comprehensive
income/(loss)
(41.1)
Stock options
exercised - tax benefit 1.4 1.4
Issuance of shares
in connection with
compensation and stock 344,129 6.1 4.2 (.3) 10.0
incentive plans (Note 10)
Dividends declared
-common stock (27.3) (27.3)
ESOP dividend tax
benefit received on .4 .4
unallocated shares
Repurchase of
shares (1,057,565) (43.6) (43.6)
Stock options - 1993(Note 10) 1.0 1.0
Loan repayments from ESOP trust 39.7 39.7
---------- ------ ------- --------- ----------- --------- -------
Balance at end
of period 44,819,390 $ 75.4 $ 409.4 $ 1,457.8 $ (1,244.8) $ (39.6) $ 658.2
========== ====== ======= ========= =========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Changes in Common Stockholders' Equity
Polaroid Corporation and Subsidiary Companies
Years ended December 31, 1996, 1997 and 1998
(In millions except number of shares)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common Common paid-in Retained comprehensive Treasury
1997 shares stock capital earnings income stock
- ---- ------ ----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period 44,819,390 $ 75.4 $ 409.4 $ 1,457.8 -- $ (1,244.8)
Comprehensive income:
Net earnings/(loss) (126.7)
Other comprehensive income:
Foreign currency translation
adjustments (Note 1) (39.8)
Total comprehensive
income/(loss)
Stock options
exercised - tax benefit 6.6
Issuance of shares
in connection with
compensation and stock
incentive plans (Note 10) 983,510 9.2 22.8
Dividends declared
-common stock (27.1)
ESOP dividend tax
benefit received on .1
unallocated shares
Repurchase of shares (1,266,600) (57.4)
Stock options - 1993(Note 10)
Loan repayments from ESOP trust ----------- ------ ------- --------- -------- -----------
Balance at end
of period 44,536,300 $ 75.4 $ 425.2 $ 1,304.1 $ (39.8) $ (1,279.4)
========== ====== ======= ========= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
common
Deferred stockholders'
compensation equity
----------- ------
<S> <C> <C>
Balance at beginning $ (39.6) $ 658.2
of period
Comprehensive income: (126.7)
Net earnings/(loss)
Other comprehensive income:
Foreign currency translation
adjustments (Note 1) (39.8)
-------
Total comprehensive (166.5)
income/(loss)
Stock options 6.6
exercised - tax benefit
Issuance of shares
in connection with
compensation and stock .3 32.3
incentive plans (Note 10)
Dividends declared (27.1)
-common stock
ESOP dividend tax .1
benefit received on
unallocated shares (57.4)
Repurchase of shares .5 .5
Stock options - 1993(Note 10) 37.7 37.7
Loan repayments from ESOP trust ------- -------
Balance at end $ (1.1) $ 484.4
of period ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Changes in Common Stockholders' Equity
Polaroid Corporation and Subsidiary Companies
Years ended December 31, 1996, 1997 and 1998
(In millions except number of shares)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common Common paid-in Retained comprehensive Treasury
1998 shares stock capital earnings income stock
- ---- ------ ----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period 44,536,300 $ 75.4 $ 425.2 $ 1,304.1 $ (39.8) $ (1,279.4)
Comprehensive income:
Net earnings/(loss) (51.0)
Other comprehensive
income:
Unrealized gain/(loss)on
available-for-sale
securities (net of tax
of $1.0) 1.4
Foreign currency translation
adjustments (Note 1) 5.0
Total comprehensive
income/(loss)
Stock options
exercised - tax benefit .9
Issuance of shares
in connection with
compensation and stock 192,197 (4.1) 9.7
incentive plans (Note 10)
Dividends declared
-common stock (26.4)
Repurchase of shares (1,213,600) (45.5)
Common stock issued
to ESOP (Notes 9 and 11) 474,720 (8.6) 23.7
---------- ------ ------- --------- ------- -----------
Balance at end
of period 43,989,617 $ 75.4 $ 413.4 $ 1,226.7 $ (33.4) $ (1,291.5)
========== ====== ======= ========= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
common
Deferred stockholders'
compensation equity
----------- ------
<S> <C> <C>
Balance at beginning
of period $ (1.1) $ 484.4
Comprehensive income:
Net earnings/(loss) (51.0)
Other comprehensive
income:
Unrealized gain/(loss)on
available-for-sale
securities (net of tax
of $1.0) 1.4
Foreign currency translation
adjustments (Note 1) 5.0
-------
Total comprehensive
income/(loss) (44.6)
Stock options
exercised - tax benefit .9
Issuance of shares
in connection with
compensation and stock .4 6.0
incentive plans (Note 10)
Dividends declared
-common stock (26.4)
Repurchase of shares (45.5)
Common stock issued
to ESOP (Notes 9 and 11) 15.1
------- -------
Balance at end
of period $ (.7) $ 389.9
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
Polaroid Corporation and Subsidiary Companies
1. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company's
domestic and foreign subsidiaries, all of which are either wholly owned or
majority owned. Intercompany accounts and transactions are eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents:
The Company considers all highly liquid debt instruments with maturities of
three months or less when purchased to be cash equivalents.
Investments:
The Company classifies its investments at the time of purchase as one of the
following: trading, held-to-maturity, or available-for-sale. Trading securities,
which are expected to be sold in the near term, are recorded at fair value with
gains or losses recorded in earnings. Held-to-maturity securities for which the
Company has the ability and intent to hold until maturity are recorded at cost,
adjusted for the amortization of premiums and discounts which approximates
market value. All other investments not classified as trading or
held-to-maturity are classified as available-for-sale. At December 31, 1998, the
Company's long-term investments, consisting of investments in debt and equity
securities, have been reclassified primarily as available-for-sale from
held-to-maturity and, accordingly, have been recorded at fair value. Unrealized
gains and losses net of the related tax effect on available-for-sale securities
are reported as a separate component of shareholders' equity until realized. The
estimated market values of investments are based on quoted market prices as of
the end of the reporting period.
Derivatives:
Gains on the Company's purchase of call options, if any, related to qualifying
hedges of anticipated transactions are deferred and are recognized in income
when the hedged transaction occurs.
Inventories:
Inventories are valued on a first-in, first-out basis at the lower of cost or
market value. Market value is determined by replacement cost or net realizable
value.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Income Taxes:
Amounts in the financial statements related to income taxes are calculated using
the principles of Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" ("FAS 109"). Under FAS 109, prepaid and deferred
taxes reflect the impact of temporary differences between the amounts of assets
and liabilities recognized for financial reporting purposes and the amounts
recognized for tax purposes as well as tax credit carryforwards and loss
carryforwards. These deferred taxes are measured by applying currently enacted
tax rates. A valuation allowance reduces deferred tax assets when it is "more
likely than not" that some portion or all of the deferred tax assets will not be
recognized.
Provision for U.S. income taxes on the undistributed earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested.
Property, Plant and Equipment:
In the fourth quarter of 1997 retroactive to January 1, 1997, the Company
changed its method of depreciation for financial reporting for the cost of
buildings, machinery and equipment acquired on or after January 1, 1997 from
primarily an accelerated method to the straight-line method. Prior to 1997, the
cost of buildings, machinery and equipment was depreciated, primarily by
accelerated depreciation methods over the estimated useful lives of those assets
for both financial reporting and income tax purposes. The Company continues to
use primarily accelerated depreciation methods for income tax purposes. The
Company believes that the straight-line method more appropriately measures the
economic benefits received from these assets and since the straight-line method
is the predominant method used in the industry in which it operates, this change
increases the comparability of the Company's results with those of its
competitors. The impact of this change was not material to either the Company's
statement of earnings or balance sheet for 1997. Since this change was not
material, the Company's previously reported financial results for interim
quarters for 1997 were not restated. For financial reporting, the estimated
useful lives of the Company's assets were as follows: buildings, 20 - 40 years:
machinery and equipment, 3 - 15 years.
Other Long-term Liabilities:
For the Company, other long-term liabilities includes amounts that are not
expected to be settled within the next twelve months. Those amounts include
pension, postemployment benefits and other non-current liabilities.
Foreign Currency Translation:
Effective January 1, 1997, the Company determined that the local currency is the
functional currency for most of its subsidiaries outside the U.S. Assets and
liabilities denominated in foreign functional currencies are translated at the
exchange rate as of the balance sheet date. Translation adjustments are recorded
as a separate component of shareholders' equity. Revenues, costs and expenses
denominated in foreign functional currencies are translated at the weighted
average exchange rate for the period. The U.S. dollar will continue to be the
functional currency for subsidiaries in highly inflationary economies. This
change did not have a material impact on the Company's balance sheet as of
January 1, 1997.
Prior to 1997, the Company's foreign operations were measured by reflecting
financial results of those operations as if they had taken place within a U.S.
dollar based economic environment. For those years, inventory, property, plant
and equipment, cost of goods sold
<PAGE>
and depreciation were remeasured from foreign currencies to U.S. dollars at
historical exchange rates. All other accounts were translated at current
exchange rates. Gains and losses resulting from those remeasurements were
included in income.
Patents and Trademarks:
Patents and trademarks are valued at $1.
Product Warranty:
Estimated product warranty costs are accrued at the time the products are sold.
Advertising Costs:
The Company expenses the cost of advertising in the year incurred.
Earnings Per Common Share:
Basic earnings/(loss) per common share are computed by dividing net
earnings/(loss) available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings/(loss) per common
share reflect the maximum dilution that would have resulted from the exercise of
stock options and in 1996, from the convertible debentures (see Note 8). Diluted
earnings/(loss) per common share are computed by dividing net earnings/(loss) by
the weighted average number of common shares and all dilutive securities.
EPS Reconciliation
The reconciliation of the numerators and denominators of the basic and diluted
earnings/(loss) per common share computations for the Company's reported net
earnings/(loss) is as follows: (in millions except per share amounts)
<TABLE>
<CAPTION>
Per
Earnings/ Share
(Loss) Shares Amount
------ ------ ------
<S> <C> <C> <C>
1996
- ----
Basic earnings/(loss) per share:
- --------------------------------
Earnings before extraordinary item $ 15.0 45.4 $ 0.33
Extraordinary item $ (56.1) 45.4 $(1.23)
-------- -------
Net loss $ (41.1) 45.4 $ (.90)
======== ==== =======
Diluted earnings/(loss) per share:
- ---------------------------------
Earnings before extraordinary item $ 15.0 45.4* $ 0.33
Extraordinary item $(56.1) 45.4* $(1.23)
------- -------
Net loss $(41.1) 45.4* $ (.90)
======= ===== =======
1997
- ----
Basic loss per share $ (126.7) 45.1 $(2.81)
========= ==== =======
Diluted loss per share $ (126.7) 45.1* $(2.81)
========= ===== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998
- ----
Basic loss per share $ (51.0) 44.2 $(1.15)
======== ==== =======
Diluted loss per share $ (51.0) 44.2* $(1.15)
======== ===== =======
</TABLE>
* For 1996, 1997 and 1998, stock options for shares of common stock totaling
4.1 million, 3.9 million and 5.8 million, respectively, were outstanding
but were not included in the calculations of diluted earnings per share
because the effect was anti-dilutive. In addition, the effect of the
outstanding 8% Convertible Debentures of 4.3 million shares for 1996 and
the effect of .1 million and .2 million outstanding performance shares for
1997 and 1998, respectively, were not included since the effects were
anti-dilutive.
New Accounting Standards:
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 "Reporting Comprehensive Income" ("FAS 130") which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. For the Company, comprehensive
income includes net earnings/(loss), unrealized gains and losses on
available-for-sale securities and unrealized gains and losses from foreign
currency translation. Prior periods presented for comparative purposes have been
formatted to comply with the requirements of FAS 130.
Effective January 1, 1998, the Company adopted American Institute of Certified
Public Accountants' Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") which
establishes guidelines for the accounting for the costs of all computer software
developed or obtained for internal use. SOP 98-1 must be applied on a
prospective basis as of the adoption date. Under SOP 98-1, certain payroll and
related costs for Company employees working on the application of development
stage projects as defined in the SOP for internal use computer software must be
capitalized and amortized over the expected useful life of the software.
Previously, the Company had expensed these costs as incurred. At adoption, SOP
98-1 did not have a material impact on the Company's results of operations or
financial position.
Effective for 1998, the Company adopted Financial Accounting Standards Board
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131") that requires companies to determine reportable
segments based on available information used by the Company's chief operating
decision maker to allocate resources to the segments and measure segment
performance. Certain disclosures for segments are similar to those required
under previous standards. However, certain new information and quarterly
disclosures are required. In addition, new entity-wide disclosures are required
about products and services and the countries in which material assets are
located and that report material revenues. Prior period information presented
has been restated to comply with FAS 131.
Effective January 1, 1998, the Company adopted Financial Accounting Standard
Board Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("FAS 132"). The implementation of FAS 132 revises
certain footnote disclosure requirements and adds certain new disclosures
related to pension and other retiree benefit plans. However, it does not change
the measurement or recognition requirements for those plans.
In June 1998, the Financial Accounting Standard Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") that establishes accounting and
reporting requirements for derivative instruments and for hedging activities.
FAS 133 requires companies to recognize all derivatives as either assets or
liabilities in the statement of financial
<PAGE>
position at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposures to changes in fair value of
recognized assets or liabilities or unrecognized firm commitments, a hedge of
the exposure to variable cash flows of a forecasted transaction, or a hedge of
the foreign currency exposure of a net investment in a foreign operation,
unrecognized firm commitments, an available-for-sale security or a
foreign-currency denominated forecasted transaction. The accounting for changes
in fair value under FAS 133 depends on the intended use of the derivative and
the resulting designation. FAS 133 must be adopted for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is currently evaluating
the effect of this statement on its reported financial results.
Reclassification:
Certain prior year information has been reclassified to conform with current
year presentation of data.
Notes to Consolidated Financial Statements, continued
2. Supplemental Information
Research, Engineering and Development Costs:
<TABLE>
<CAPTION>
(In millions) 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research, engineering and development costs $116.3 $122.8 $126.6
Advertising Costs:
(In millions) 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------
Advertising costs $134.6 $127.9 $113.0
</TABLE>
At December 31, 1997 and 1998, the amounts of advertising costs reported as
prepaid expenses on the consolidated balance sheet were $4.8 and $2.0 million,
respectively.
Interest Capitalization:
The Company has capitalized interest costs relating to certain qualifying
assets. In 1996, 1997 and 1998, the amounts of interest costs capitalized were
$5.1 million, $2.6 million and $2.2 million, respectively.
Cash Flow Information:
Cash payments for interest and income taxes were:
<TABLE>
<CAPTION>
(In millions) 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $52.0 $46.7 $56.5
Income taxes 7.3 22.2 12.9
</TABLE>
In 1996, other non-cash items included $44.6 million related to enhanced pension
benefits provided under the Company's early retirement programs, offered in the
fourth quarter of
<PAGE>
1995 and the first quarter of 1996, respectively, that are being funded from the
Company's pension plans. In 1996, the Company also recorded as other non-cash
items $25.8 million for fixed asset and inventory write-offs associated with the
sale of the Company's Helios diagnostic equipment line and the cancellation of a
printer project.
In 1997, other non-cash items included $177.8 million of fixed asset and
inventory write-downs and $7.5 million of pension curtailment costs, all of
which were related to the Company's plan to streamline worldwide operations
which was announced in December 1997. Also in 1997, the Company recorded a
non-cash item of $19.7 million primarily for inventory write-offs for products
that were not included in the restructuring.
In 1998, the Company recorded non-cash items of $15.1 million for the issuance
of shares relating to the Retirement Savings Plan and $46.9 million for the
write-off of assets not related to restructuring.
Acquisitions:
In 1998, the Company acquired two companies in the digital imaging industry, NBS
Imaging Systems, Inc. and Appraisers Choice, Inc., for a total purchase price of
$18.8 million.
Restructuring Charges and Other:
In 1996, the first quarter pre-tax restructuring and other charge of $110.0
million represented the balance of severance and pension enhancement costs and
inventory write-downs related to the December 1995 restructuring program. In the
first quarter of 1996, the pre-tax cost related to the severance program was
approximately $55.4 million. Additionally, approximately $44.6 million
represented enhanced retirement benefits provided under the early retirement
program which are being funded from the Company's pension plans. Total cash
severance payments related to the December 1995 restructuring program, which
included the charges recorded in the first quarter of 1996, were substantially
completed as of December 31, 1997.
In December 1997, the Company announced a broad-based program to streamline
worldwide operations and enhance earnings by consolidating and selling
manufacturing facilities and reducing its corporate overhead structure. The
total pre-tax expenses recorded in the fourth quarter of 1997 for restructuring
and other charges related to this program were $340.0 million. Of this amount,
approximately $16.5 million represented inventory write-downs which were
included in cost of goods sold. In December 1998, the Company announced an
expansion of its 1997 involuntary severance program to further streamline
operations and improve profitability. The pre-tax expense for this expansion of
the 1997 program recorded in the fourth quarter of 1998 was $50.0 million.
In 1997, restructuring and other charges included approximately $150.0 million
related to an involuntary severance program which, when combined with the $50.0
million restructuring charge in 1998 for the extension to this program, brought
the total charge recorded for the involuntary severance program to $200.0
million. Included in these amounts were pension curtailment costs of $7.5
million and $2.6 million in 1997 and 1998, respectively, that have been
reflected as non-cash items in the Company's consolidated statement of cash
flows. Under the 1997 involuntary severance program, including the extension in
1998, approximately 2,800 employees are expected to leave the Company
(approximately 46% from Global Operations, approximately 40% from the regional
segments, of which approximately half was from the European Region, and less
than 10% from Research and Development). Approximately half of these
terminations had occurred as of December 31, 1998, with the remainder to be
completed by the end of 1999. Cash severance payments of approximately $70.0
million related to this program, including the extension, had been made as of
December 31, 1998. These cash payments are expected to be substantially
completed by the end of the year 2000.
<PAGE>
The remainder of the $190.0 million restructuring and other charges in 1997
primarily related to the write-down of assets. Approximately $106.0 million of
this amount was related to the write-down of the Company's underutilized New
Bedford coating facility to an independently determined fair value of
approximately $18.0 million. The Company is pursuing several strategic options
for future use of this facility, including an outright sale. In addition,
approximately $22.0 million was related to the write-off of battery assembly
equipment which was not required to support the Company's anticipated production
requirements. The restructuring and other charges also included approximately
$26.0 million related to the Company's underutilized chemical manufacturing
facility in Freetown, Massachusetts that the Company sold in February 1998.
Under the terms of the agreement to sell this facility, the Company entered into
a long-term supply agreement with International Specialties Products, Inc. to
purchase certain specialty chemicals used to manufacture the Company's instant
film. The remainder of these write-downs related primarily to other assets which
were no longer required and will ultimately be disposed of and inventory
write-downs related to restructured operations.
Special Charges:
In 1996, the Company recorded a $40.0 million pre-tax cost which included $25.0
million related to costs associated with the sale of the Company's Helios
medical diagnostic imaging equipment line and $15.0 million for the write-down
of parts and capital equipment under development for a canceled printer project
and other costs. Inventory write-offs of $7.0 million related to these matters
were recorded in cost of goods sold, and $33.0 million was reported as special
charges. The $33.0 million of special charges reflects write-offs of fixed
assets, severance and other costs. In connection with the Helios sale, the
Company acquired a minority interest in the buyer and its parent company (see
Note 15).
3. Financial Instruments
Foreign Exchange Risk Management:
The Company generates a substantial portion of its revenues in international
markets, which subjects its operations to the exposure of currency exchange
fluctuations. The impact of currency fluctuations can be positive or negative in
any given period. The Company's ability to counteract currency exchange movement
is primarily dependent on pricing.
To minimize the adverse impact of currency fluctuations on net monetary assets
denominated in currencies other than the relevant functional currency
("nonfunctional currencies"), the Company engages in nonfunctional
currency-denominated borrowings (see Note 6). The Company determines the
aggregate amount of such borrowings based on forecasts of each entity's
nonfunctional currency-denominated net monetary asset position and the relative
strength of the functional currencies compared to the nonfunctional currencies.
These borrowings create nonfunctional currency-denominated liabilities that
hedge the Company's nonfunctional currency-denominated net monetary assets. Upon
receipt of the borrowed nonfunctional currency-denominated funds, the Company
converts those funds to the functional currency at the spot exchange rate.
Exchange gains and losses on the non-functional currency-denominated borrowings
are recognized in earnings as incurred. At December 31, 1997 and 1998, the
amount of the Company's outstanding short-term debt incurred for hedging
purposes were $149.9 million and $106.6 million, respectively.
From time to time, the Company may use over-the-counter currency exchange swaps
to reduce the interest expense incurred through the borrowings described above
and to replace the hedge created by those borrowings. When a currency exchange
swap is used to replace a
<PAGE>
hedge, the currency received by the Company in the spot market component of the
currency exchange swap is used to close out the borrowings, and, simultaneously,
the hedge is reinstituted through a forward contract (not exceeding six months).
The net interest value of the currency exchange swap contract is amortized to
earnings over the life of the contract. Exchange gains or losses on the foreign
currency obligation component of the forward contract are recognized in earnings
as incurred in each accounting period. The Company does not enter into currency
exchange swaps for trading purposes. At December 31, 1997 and 1998, the
aggregate notional value of the Company's short-term foreign exchange swap
contracts was $20.8 million and $49.8 million, respectively.
Since the Company has limited flexibility to increase prices in local currency
to offset the adverse impact of foreign exchange, the Company may also purchase
foreign currency call options. The term of these call options typically does not
exceed 18 months. The Company's purchase of call options allows it to protect a
portion of its expected foreign currency-denominated revenues from adverse
foreign currency exchange movement. The Company typically does not buy call
options which can be exercised prior to the expiration date, nor does it
typically write options or purchase call options for trading purposes. The
Company amortizes premiums over the term of the option and defers any gains for
its call options activity until the option exercise date. At December 31, 1997
and 1998, option contracts with a notional value of $268.2 and $239.9 million
were outstanding, respectively.
Fair Value:
The carrying amounts of cash, cash equivalents, trade receivables, short-term
debt and trade payables approximate fair value because of the short maturity of
these financial instruments. Other assets include investments in non-marketable
private companies and publicly traded companies. Investments in private
companies are carried at the lower of cost or net realizable value. The
estimated aggregate fair market value of these investments approximated the
carrying amount as of December 31, 1997 and 1998. Investments in publicly traded
companies are reported at fair value with related unrealized gains and losses
reported net of tax in accumulated other comprehensive income, a component of
stockholders' equity. As of December 31, 1997, the carrying amount and fair
value of the Company's long-term debt was $496.6 and $499.9, respectively. As of
December 31, 1998, the carrying amount and fair value of the Company's long-term
debt was $497.4 million and $477.5 million, respectively.
The estimated fair value of the Company's call options and foreign exchange
swaps generally reflects the estimated amounts the Company would receive or pay
to terminate the contracts at the reporting dates, thereby taking into account
the current unrealized gains or losses on open contracts. At December 31, 1997
and 1998, the aggregate notional value of the Company's short-term foreign
exchange swap contracts was $20.8 million and $49.8 million, respectively. The
net carrying value and fair value of these contracts at December 31, 1997 and
1998 were not material to the financial position of the Company. At December 31,
1997 and 1998, option contracts with a notional value of $268.2 and $239.9
million were outstanding, respectively. At December 31, 1997 and 1998, the
estimated fair value of these call option contracts was $7.3 million and $1.2
million, respectively.
Dealer quotes are available for the Company's call options and foreign exchange
swaps. The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect estimates.
<PAGE>
Concentration of Credit Risk:
The Company places its temporary cash investments in highly rated financial
instruments and financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. In addition, the Company's
investment policy limits its exposure to concentrations of credit risk.
The Company would be exposed to credit risk if a counterparty to a call option
contract or the forward component of a foreign exchange
Notes to Consolidated Financial Statements, continued
swap contract were to fail to meet its contractual obligation, in which case the
Company would be required to replace the contract at the market rate. The
Company believes that the risk of financial loss due to the inability of
counterparties to meet their obligation is remote and that any such loss would
not be material to the results of operations of the Company. The Company
minimizes its risk exposure from foreign exchange swaps and purchased call
options by limiting counterparties to carefully selected major financial
institutions.
The Company markets a substantial portion of its products to customers in the
retail industry, a market in which a number of companies are highly leveraged.
The Company continually evaluates the credit risk of these customers and
believes that its allowances for doubtful accounts relative to its customer
receivables are adequate.
4. Income Taxes
An analysis of income tax expense/(benefit) follows:
(In millions)
<TABLE>
<CAPTION>
1996 Current Deferred Total
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ 2.8 $ (19.2) $ (16.4)
State .4 .8 1.2
Foreign 25.7 5.7 31.4
------- ------- -------
Total $ 28.9 $ (12.7) $ 16.2
======= ======= =======
1997 Current Deferred Total
- --------------------------------------------------------------------------
Federal $ 6.8 $ (72.0) $(65.2)
State .3 (3.2) (2.9)
Foreign -- 2.9 2.9
------- ------- -------
Total $ 7.1 $ (72.3) $(65.2)
======= ======= ========
1998 Current Deferred Total
- --------------------------------------------------------------------------
Federal $ 0.9 $ (0.3) $ .6
State 0.5 - .5
Foreign 16.6 (5.6) 11.0
------- ------- -------
Total $ 18.0 $ (5.9) $ 12.1
======= ======= ========
</TABLE>
Prepaid income taxes and deferred income taxes result from future tax benefits
and expenses related to the difference between the tax basis of assets and
liabilities and the amounts reported in the financial statements. These
differences predominately relate to U.S. operations. Carryforwards and tax
overpayments are also included in prepaid income taxes. The net of deferred
income tax assets and deferred income tax liabilities reflected on the
consolidated balance sheet was a net asset of $325.6 million and $330.0 million
as of December 31, 1997 and 1998, respectively. Significant components of those
amounts shown on the balance sheet as of December 31 were as follows:
<PAGE>
<TABLE>
<CAPTION>
(In Millions) 1997 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Property, plant and equipment
and trademarks $ 16.5 $ (2.8)
Inventory 43.4 34.8
Compensation and benefits 96.4 85.6
Postretirement and postemployment
benefits 114.7 113.4
Loss and credit carryforwards 79.8 139.0
All other 14.7 3.3
-------- --------
Subtotal 365.5 373.3
Valuation allowance (27.4) (30.3)
-------- --------
Total deferred tax assets $ 338.1 $ 343.0
-------- --------
Deferred tax liabilities:
Property, plant and equipment
and trademarks $ 5.7 $ 7.2
Inventory 3.3 3.5
Compensation and benefits 2.9 2.7
All other .6 (0.4)
-------- ---------
Total deferred tax liability 12.5 13.0
-------- --------
Net deferred tax asset $ 325.6 $ 330.0
======== ========
</TABLE>
As of December 31, 1997, valuation allowances of $27.4 million existed for
prepaid taxes related to foreign tax credits and to capital losses; however, all
capital losses were utilized in 1998. Valuation allowances of $30.3 million were
established as of December 31, 1998 for the prepaid taxes primarily related to
foreign tax credits. Foreign tax credits may be used to offset the U.S. income
taxes due on income earned from foreign sources. However, the credit is limited
by the total income included on the U.S. income tax return as well as the ratio
of foreign source income to total income. Excess foreign tax credits may be
carried back two years and forward five years. As of December 31, 1998, the
Company did not believe it was more likely than not that it would generate a
sufficient level and proper mix of taxable income within the appropriate period
to utilize all the foreign tax credits.
Management believes that it will obtain the full benefit of other deferred tax
assets on the basis of its evaluation of the Company's anticipated profitability
over the period of years that the temporary differences are expected to become
tax deductions. It believes that sufficient book and taxable income will be
generated to realize the benefit of these tax assets. This assessment of
profitability takes into account the Company's present and anticipated split of
domestic and international earnings and the fact that the temporary differences
related to postretirement and other postemployment benefits are deductible over
a period of 30 to 40 years.
Management considered that as of December 31, 1998, the Company has a net
operating loss carryforward of $263.1 million. $37.8 million of the net
operating loss in the U.S. expires in 2010; $45.5 million expires in 2011; $61.8
million expires in 2012 and, due to recent tax law change which extends the
carryforward period of net operating loss to 20 years, the $118.0 million of net
operating loss generated in 1998 will expire in 2018. The Company also has a
foreign tax credit carryforward of $28.4 million (against which, there is a full
valuation allowance) and an alternative minimum tax credit carryforward of $6.3
million as of December 31, 1998. $17.0 million of the foreign tax credit expires
in 2000; $3.1 million expires in 2001; $4.4 million expires in 2002; and $3.9
million expires in 2003. The alternative minimum tax credit does not expire.
Management does believe it will earn sufficient U.S. income to utilize the net
operating losses within the carryforward period. Nevertheless, there can be no
assurance that the Company will
<PAGE>
generate any specific level of continuing earnings or where these earnings will
be generated.
For alternative minimum tax purposes, the Company had an alternative minimum tax
net operating loss of $149.6 million at the end of 1998. $19.7 million will
expire in 2011; $35.2 million will expire in 2012; and $94.7 million will expire
in 2018. In addition, the Company had an alternative minimum tax foreign tax
credit carryforward at the end of 1998 of $36.5 million. $6.6 million expires in
1999; $18.5 million expires in 2000; $3.1 million expires in 2001; $4.4 million
expires in 2002; and $3.9 million expires in 2003.
An analysis of earnings/(loss) before income tax expense/(benefit) and
extraordinary loss follows:
<TABLE>
<CAPTION>
(In millions) 1996 1997 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (3.7) $(189.9) $ (33.6)
Foreign 34.9 (2.0) (5.3)
------- -------- --------
Total $ 31.2 $(191.9) $ (38.9)
======= ======== =========
</TABLE>
A reconciliation of differences between income tax/(benefit) computed at the
statutory U.S. federal income tax rate (35% for all years presented) and the
Company's reported income tax expense/(benefit), in millions, follows:
<TABLE>
<CAPTION>
1996 1997 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense/(benefit) at U.S.
statutory rate $ 10.9 $ (67.2) $ (13.6)
State taxes 1.0 (3.2) 1.5
Benefit plan deductions (1.0) (1.0) .1
Loss carryforwards (.9) (1.5) (4.0)
Nondeductible expenses/Nontaxable income .8 (3.9) 1.0
Valuation allowance change (1.7) 5.9 2.9
Tax effect resulting from
foreign activities 6.8 2.8 23.6
Other .3 2.9 .6
------ ------ -------
Reported income tax expense/(benefit) $ 16.2 $ (65.2) $ 12.1
====== ======== =======
</TABLE>
Undistributed earnings of foreign subsidiaries held for reinvestment in overseas
operations amounted to $450.7 million at December 31, 1998. Additional U.S.
income taxes may be due upon remittance of those earnings (net of foreign tax
reductions because of the distribution), but it is impractical to determine the
amount of any such additional taxes. If all those earnings were distributed as
dividends, foreign withholding taxes of approximately $23.7 million would be
payable.
5. Inventories
The classification of inventories at December 31 follows:
<TABLE>
<CAPTION>
(In millions) 1997 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 91.0 $ 83.5
Work-in-process 192.4 190.5
Finished goods 222.7 259.3
----- -----
Total $ 506.1 $ 533.3
======= -------
</TABLE>
<PAGE>
6. Short-term Debt
At December 31, 1998, the Company had $331.7 million outstanding in short-term
debt. This was comprised of $220.0 million of borrowings under the Company's
Amended Credit Agreement (as defined below) and $111.7 million borrowed from the
Company's lines of credit.
In December 1998, the Company entered into an amendment to its existing $350.0
million Credit Agreement (the "Credit Agreement"). The amended agreement (the
"Amended Credit Agreement") provides for loans up to $350.0 million, will expire
on December 31, 2001 and will be available on a revolving basis prior to its
expiration. In connection with the Amended Credit Agreement, the Company entered
into a collateral agreement and certain related documents that granted the
lenders under the Amended Credit Agreement a first security interest in certain
of the Company's domestic inventories and accounts receivable. This security
will be released if the Company's credit rating is BBB- or higher by Standard &
Poor's ("S&P") and Baa3 or higher by Moody's Investor's Services, Inc.
("Moody's").
The Amended Credit Agreement restricts, among other things, the Company's
ability to do the following: to make certain capital expenditures; to make
certain restricted payments; to incur debt in addition to the issuance of the
Company's notes issued in February 1999; to incur certain liens; to make certain
investments; to enter into certain sale/leaseback transactions; and to merge,
consolidate, sell or transfer all or substantially all of the Company's assets,
subject to certain conditions.
The Amended Credit Agreement also requires the Company to maintain financial
ratios relating to the maximum level of debt to EBITDA (earnings before
interest, taxes, depreciation, and amortization) and minimum interest coverage.
In addition, the Amended Credit Agreement affords the lenders the right to
incorporate covenants given to holders of notes or other securities which, in
their judgement, are more restrictive. These lenders are evaluating the
covenants contained in the indenture pursuant to which the Company's 11 1/2
Notes due 2006 (the "2006 Notes") were issued (the "Indenture") to decide
whether to exercise this option.
The Amended Credit Agreement restricts the Company's ability to pay dividends
and repurchase stock. This agreement limits the payment of dividends and
repurchase of the Company's common stock to $3.75 million per quarter in excess
of the value of ESOP shares issued and proceeds from the exercise of stock
options on a cumulative basis. Since the Company issues ESOP shares to all
qualified United States employees as part of compensation, this amount is
expected to total approximately $14 million per annum. As a result, the Company
believes it is unlikely that this limitation will prevent it from continuing the
current dividend payment of $.60 per share, per annum. In addition, the
Indenture also included restrictions on dividends which the Company considers to
be less restrictive than those contained in the Amended Credit Agreement.
Funds borrowed under the Amended Credit Agreement will bear interest, at the
Company's option, at either the prime rate of Morgan Guaranty Trust Company
("Prime") plus a margin; or LIBOR on euro-dollar loans ("Euro-dollar loans"),
plus a margin. The margin ranges from 0.085% to 2.0% for Prime-based loans and
from 0.275% to 3.0% for Euro-dollar loans, based on the Company's credit
ratings. In addition, the Company will pay the lenders a commitment fee on
unused commitments ranging from 0% to 0.25% on an annual basis, depending on the
Company's credit rating, and a fee to the administrative agent. The weighted
average interest rate on the Company's Amended Credit Agreement was 6.9% at
December 31, 1998. There
Notes to Consolidated Financial Statements, continued
<PAGE>
were no borrowings under the Company's Credit Agreement at December 31, 1997.
At December 31, 1998, the Company and several of its subsidiaries had short-term
lines of credit with a number of commercial banks that totaled $170.4 million in
maximum commitments, of which $111.7 million was outstanding with a weighted
average rate of 4.0% per annum. One of these lines of credit, for a maximum
amount of 115 million Deutsche Marks (or approximately $70.0 million at December
31, 1998), is on a committed basis with Deutsche Bank de Bary N.V., the Dutch
affiliate of Deutsche Bank A.G. A total of $41.3 million was outstanding under
this agreement at December 31, 1998. On January 1, 1999, the interest rate on
this facility increased from LIBOR plus 0.25% to LIBOR plus 2.0%. This facility,
which permits borrowings on terms up to 6 months, may be terminated on three
month's notice by either party.
At December 31, 1998, the Company had, in addition to $130.0 million under the
Amended Credit Agreement, available lines of credit totaling $25.0 million and
$33.7 million to support U.S. and international operations, respectively.
As of December 31, 1997, the Company had $241.6 million outstanding in
short-term debt with a weighted average interest rate of 5.6% per annum. This
consisted of $91.1 million borrowed under lines of credit in the U.S. and $150.5
million borrowed from international lenders under lines of credit. In addition
to capacity under the Credit Agreement at December 31, 1997, the Company also
had available lines of credit of $98.9 million and $103.9 million to support
U.S. and international operations, respectively.
Interest expense on U.S. short-term borrowings was $1.5 million in 1997 and $8.9
million in 1998. The weighted average interest rates on these borrowings were
5.8% and 6.6% in 1997 and 1998, respectively. Interest expense on international
short-term borrowings was $8.4 million in both 1997 and 1998. The weighted
average interest rates on these borrowings ranged between 4.7% and 5.5% in 1997
and between 4.6% and 5.2% in 1998.
<PAGE>
7. Payables and Accruals
The following items are included in payables and accruals at December 31:
<TABLE>
<CAPTION>
(In millions) 1997 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 138.1 $ 184.8
Reserve for marketing programs 44.8 36.6
Other accrued expenses and
current liabilities 89.6 137.0
-------- --------
Total $ 272.5 $ 358.4
======== ========
</TABLE>
8. Long-term Debt
Principal amounts of long-term debt outstanding as of December 31 are as
follows:
<TABLE>
<CAPTION>
(In millions)
1997 Total
- -------------------------------------------------
<S> <C>
6 3/4% Notes $ 148.7
7 1/4% Notes 148.2
8% Notes 199.7
-----
Total $ 496.6
========
1998 Total
- -------------------------------------------------
6 3/4% Notes $ 149.0
7 1/4% Notes 148.4
8% Notes 200.0
-----
Total $ 497.4
========
</TABLE>
In 1991, the Company issued $140.0 million of 8% Subordinated Convertible
Debentures due 2001 (the "Debentures") as partial consideration for the
repurchase of its convertible preferred stock and warrants originally issued in
1989. The Debentures carried an annual interest rate of 8% and were convertible
to common stock at approximately $32.50 per share. The Debentures were also
subordinated in right of payment to all existing debt of the Company.
Subsequently, the holders of the Debentures created a trust under which they
retained conversion rights to convert the Debentures into approximately 4.3
million shares of common stock of the Company, but sold to institutional
investors the right to principal and interest payments on the Debentures.
In June 1996, the Company purchased the conversion rights for $53.8 million and
redeemed $.5 million of principal of the $140 million Debentures. As the holder
of the conversion rights, the Company could have retired the Debentures at any
time on or before September 30, 1998. If the Debentures had not been redeemed by
the Company by September 30, 1998, the conversion rights would have reverted to
the holders of the Debentures. The purchase of the conversion rights was
determined to be a substantive modification of the terms of the Debentures and
was accounted for as an extinguishment of debt and the issuance of new debt. The
cost of the conversion rights and the amount of the fair value of the new debt
over the carrying value of the extinguished debt was recorded as an
extraordinary loss of $54.5 million, (net of a tax benefit of $.4 million).
In December 1996, the Company gave irrevocable notice that it was repurchasing
the remaining $139.5 million of principal of the Debentures. The closing date of
this
<PAGE>
transaction was January 22, 1997. As a result of issuing the irrevocable
notice, the Company recorded an extraordinary loss of $1.6 million (net of a tax
benefit of $1.1 million) in the fourth quarter of 1996 due to the early
extinguishment of debt.
The $200 million 8% Notes due March 15, 1999 (the "8% Notes") were issued with a
discount and were not redeemable prior to maturity.
On January 14, 1997, the Company issued $300.0 million in debt securities
consisting of $150 million 7 1/4% Notes due January 15, 2007 (the "2007 Notes")
and $150 million 6 3/4% Notes due January 15, 2002 (the "2002 Notes") to
refinance existing debt. The 2007 Notes were placed with a discount, at a price
of 99.43% of par with a yield of 7.33%. The 2002 Notes were placed with a
discount, at a price of 99.53% of par with a yield of 6.86%. The net proceeds
from the sale of the Notes were used primarily for the payment of $150.0 million
principal amount of the Company's 7 1/4% Notes due January 15, 1997 and to
exercise the Company's right to the repurchase of the remaining principal amount
of its $139.5 million 8% Subordinated Convertible Debentures due 2001. The
balance of the net proceeds were used for general corporate purposes.
In November 1998, the Company filed an additional shelf registration with the
Securities and Exchange Commission to issue, together with a previously filed
shelf registration statement, up to an aggregate principal amount of $500.0
million of debt securities.
In February 1999, the Company issued the 2006 Notes in an aggregate principal
amount of $275.0 million. The 2006 Notes were placed at par value. The net
proceeds of $268.1 million from the sale of the 2006 Notes were used primarily
for the payment of $200.0 million aggregate principal amount of the Company's 8%
Notes that were due March 15, 1999 and for general corporate purposes, including
reducing outstanding borrowings under the Amended Credit Agreement and
short-term lines of credit. Since the Company refinanced the 8% Notes, the
principal amount of these notes at December 31, 1998 was classified as a
long-term note payable. The Indenture contains certain covenants that restrict,
among other things, the Company and its subsidiaries from making certain
restricted payments, including dividends on and the purchase of the Company's
common stock and certain other payments; incurring additional debt and issuing
preferred stock; creating certain liens; entering into sale and leaseback
transactions; entering into certain transactions with affiliates; entering into
certain mergers and consolidations or selling all or substantially all of the
properties or assets of the Company.
Including the impact of the issuance of the 2006 Notes, which occurred in
February 1999, the aggregate scheduled repayments on the Company's long-term
debt as of December 31, 1998 was as follows:
<TABLE>
<S> <C>
1999 - $ 0
2000 - $ 0
2001 - $ 0
2002 - $ 150.0 million
2003 - $ 0
2004 and thereafter - $ 350.0 million
</TABLE>
46
<PAGE>
9. Common Stockholders' Equity
During 1996, the Company repurchased 1.1 million shares of common stock for
$43.6 million. During 1997, 1.3 million shares were repurchased for $57.4
million and during 1998, 1.2 million shares were repurchased for $45.5 million.
On October 21, 1997, the Company's Board of Directors authorized the repurchase
of up to 5 million shares of the Company's common stock over three years. As of
December 31, 1998, approximately 2.8 million shares remain to be purchased under
the current program. Given the restricted payment covenants included in the
Amended Credit Agreement and in the Indenture, it is unlikely that the Company
will complete this repurchase plan in the programs three year time frame. When
the Company does repurchase its common stock, it is its policy to repurchase its
common stock on the open market, in privately negotiated transactions or
otherwise (which may include transactions with Polaroid retirement plans,
including the employee stock ownership portion of the Polaroid Retirement
Savings Plan). The timing and amounts of any future purchases under this program
depend upon many factors, including market conditions, and the Company's
business and financial condition and are limited by the terms of the Amended
Credit Agreement (see Note 6) and the Indenture(see Note 8).
In 1998, the Company contributed .5 million shares of common stock valued at
$15.1 million to the Company's Retirement Savings Plan to be held in the ESOP
fund (see Note 11). The number of shares held by the Company's Retirement
Savings Plan in the ESOP Fund on December 31, 1997 and 1998 were 7.1 million and
6.8 million, respectively, all of which were allocated to participants.
Dividends paid on unallocated ESOP shares of $1.0 million in 1996 and $.1
million in 1997 were used to repay the Company's ESOP loan. The remaining
dividends for allocated shares held by the ESOP Trust were paid to ESOP
participants. Deferred compensation included $1.1 million and $.7 million at
December 31, 1997 and 1998, respectively, related to the 1993 Polaroid Stock
Incentive Plan (See Note 10).
10. Incentive Compensation and Stock Incentive Plans
The Company maintains annual incentive plans covering substantially all domestic
employees and employees of manufacturing subsidiaries in The United Kingdom and
The Netherlands. Amounts charged to operations for these annual cash incentive
plans were $25.8 million in 1996, $2.2 million in 1997 and $5.0 million in 1998.
As of December 31, 1998, the Company had a stock incentive plan which provided
fixed stock-based compensation awards as described below. Effective January 1,
1996 the Company adopted Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"). Under FAS 123, the
Company has elected not to adopt the new accounting method and will continue to
account for its stock-based compensation under the existing provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no compensation expense has
been recognized.
In 1990, the Company adopted its original Polaroid Stock Incentive Plan (the
"1990 Plan") under which officers and other key employees could be granted stock
options (either non-qualified or incentive), stock appreciation rights and
restricted stock as incentives to increase revenues and profits. Up to 3,000,000
shares of the Company's common stock have been authorized for use under the 1990
Plan. Only stock option awards were made under the 1990 Plan.
In May 1993, the Company adopted the 1993 Polaroid Stock Incentive Plan (the
"1993 Plan") under which officers and other key employees may be granted awards
in the form of stock options (either non-qualified or incentive), stock
appreciation rights, restricted stock, and any other form determined by the
Board of Directors to be consistent with the 1993
<PAGE>
Plan, as incentives to increase revenues and profits. A total of 3,000,000
shares of the Company's common stock were authorized for use under the 1993 Plan
plus any unused shares from the 1990 Plan. In March 1997, the Company amended
the 1993 Plan and authorized an additional 3,500,000 shares to be used under the
plan. As a result, a maximum of 6,500,000 shares of the Company's common stock
have been authorized for use under the 1993 Plan, plus any shares that become
available under the 1990 Plan. The number of common shares reserved for granting
of future awards for
Notes to Consolidated Financial Statements, continued
officers and key employees was 482,966, 3,224,105 and 1,119,699 at December 31,
1996, 1997 and 1998, respectively.
The options which have been awarded under the 1990 Plan and the 1993 Plan
typically vest proportionately over approximately a four year period and are
exercisable for approximately a ten year period from the date of grant, if the
holder remains in the employ of the Company. In general, if the option holder's
employment terminates for reasons other than a change of control, death or
retirement, no further vesting can occur. When an option holder's employment
terminates for any reason other than retirement, death or disability, all vested
options must be exercised within three months from the termination date or
approximately ten years from the date of the grant, whichever is earlier.
The Human Resource Committee of the Company's Board of Directors, composed of
non-employee members of the Board, administers the 1990 Plan and the 1993 Plan
and, as such, can determine the vesting period, performance factors or other
restrictions for an award. The Committee may waive or amend conditions of the
option grant, such as accelerating vesting terms during an early retirement or
severance program.
In 1990, the Company adopted the Polaroid Board of Directors' Stock Option Plan
(the "Directors' Plan"), which granted each non-employee director an option to
purchase 3,000 shares of the Company's common stock. For a new non-employee
director, the date of the grant is the date the director joins the Board. In
1996, the shareholders approved an amendment to the Directors' Plan to award
each non-employee director as of July 15, 1995 a one-time grant of an option to
purchase 2,000 shares of the Company's common stock at $42.63 per share. Vesting
of these option grants will conform with the terms outlined in the Directors'
Plan.
In May 1997, the Company, with shareholder approval, adopted the Board of
Directors' Stock Plan under which non-employee directors may be awarded stock
options, stock appreciation rights, restricted stock and any other form of
award. Under this plan, the number of shares that may be awarded may not exceed
300,000 plus the number of shares available for grant remaining from the
Directors' Plan. Under the Board of Directors' Stock Plan, directors who were
under 68 years of age on December 31, 1996 will be granted 1,500 stock options
annually (see Note 11). In addition, the authorized shares under the Board of
Directors' Stock Plan are being used to provide a portion of the non-employee
directors' annual retainer fee in the Company's common stock.
Under the Directors' Plan and the Board of Directors' Stock Plan, option awards
are exercisable for a ten year period from the date of grant if the director
remains on the Board. Any vesting ceases when an individual terminates as a
director, and a former director must exercise his or her vested options within
three years from the date of termination or ten years from the date of grant,
whichever is earlier. Up to 400,000 shares of the Company's authorized common
stock may be issued under the Directors' Plan and the Board of Directors Stock
Plan. As of December 31, 1998, a cumulative total of 100,500 options have been
granted at prices ranging from $33.13 to $52.00 under the Directors' Plan and
the Board of Directors Stock Plan.
<PAGE>
A summary of the Company's fixed stock option awards as of December 31, 1996,
1997 and 1998 and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
Number of Options Weighted-average
Fixed Options (in thousands) Exercise Price
- ------------- -------------- --------------
<S> <C> <C>
Outstanding at
December 31, 1995 3,863 $32.85
1996 Activity:
Granted 642 $44.57
Exercised (329) $29.34
Forfeited (51) $41.14
-----
Outstanding at
December 31, 1996 4,125 $34.85
1997 Activity:
Granted 812 $43.17
Exercised (981) $32.33
Forfeited (44) $39.01
-----
Outstanding at
December 31, 1997 3,912 $37.16
1998 Activity:
Granted 2,159 $32.92
Exercised (190) $30.52
Forfeited (114) $39.38
-----
Outstanding at
December 31, 1998 5,767 $35.74
=====
</TABLE>
Options exercisable at December 31:
<TABLE>
<CAPTION>
Number of Options Weighted-average
(in thousands) Exercise Price
----------------- ---------------
<S> <C> <C>
1996 2,524 $32.46
1997 2,247 $33.96
1998 2,760 $35.87
Weighted-average fair value of options
granted during the year:
1996 $16.06
1997 $13.19
1998 $ 9.14
</TABLE>
<PAGE>
Options Outstanding December 31, 1998:
<TABLE>
<CAPTION>
Weighted-average
Number of Remaining Weighted-average
Range of Options Contractual Life Exercise
Exercise Prices (in thousands) (years) Price
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$24 to $28 1,569 7.7 $24.75
$31 to $35 1,290 4.1 $32.59
$36 to $43 1,856 8.0 $41.90
$44 to $60 1,052 5.4 $45.14
-----
$24 to $60 5,767 6.6 $35.74
=====
</TABLE>
Options exercisable at December 31, 1998
<TABLE>
<CAPTION>
Number of Weighted-average
Range of Options Exercise
Exercise Prices (in thousands) Price
- --------------- -------------- -----------------
<S> <C> <C>
$24 to $28 427 $24.90
$31 to $35 1,184 $32.46
$36 to $43 501 $41.91
$44 to $60 648 $44.67
-----
$24 to $60 2,760 $35.87
=====
</TABLE>
If compensation cost for the Company's fixed stock option awards had been
determined based on fair value at grant date for awards under the plans
consistent with FAS 123, the Company's net loss and basic loss per common share
would have been increased to the pro forma amounts as follows:
<TABLE>
<CAPTION>
(In millions, except per share data) 1996 1997 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $(41.1) $(126.7) $ (51.0)
Pro forma (46.3) (133.2) (59.0)
Basic loss per share:
As reported (.90) (2.81) (1.15)
Pro forma (1.02) (2.95) (1.33)
</TABLE>
Diluted loss per common share for 1996, 1997 and 1998 was the same as the basic
loss per common share.
The effect of applying FAS 123 as shown in the above pro forma disclosures is
not representative of the pro forma effect on net earnings in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
The fair value of each option grant was estimated on the grant date using the
Black-Scholes Option-Pricing Model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.4% 1.4% 1.9%
Expected volatility 21.0% 22.4% 25.6%
Risk free interest rate 6.3% 6.6% 4.9%
Expected option life 5.5 years 5.5 years 5.5 years
</TABLE>
<PAGE>
Dividend equivalent payments on outstanding stock options of $2.1 million, $1.6
million and $1.3 million were made in 1996, 1997 and 1998, respectively.
Approximately 80% of the options granted in 1996 were issued with dividend
equivalents. No options were granted in 1997 or 1998 with dividend equivalents.
Under the 1993 Plan, the Company awarded 25,000 shares of restricted stock at
$46.50 per share in 1995 and 15,000 shares of restricted stock at $45.88 per
share in 1996. The 1995 restricted shares vest proportionately each year over a
five year period. The 1996 restricted shares vest if the Company achieves
certain financial objectives within a five year period. The value of the
restricted stock issued was recorded as deferred compensation and is being
amortized to compensation expense ratably over a five year period from the award
date.
11. Benefit Plans
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits" ("FAS 132"), which revises certain footnote disclosures
and requires certain new disclosures related to pensions and other retiree
benefit plans. All prior period information presented has been restated in
accordance with the requirements of FAS 132.
The Company maintains a qualified noncontributory trusteed pension plan covering
substantially all domestic employees. Through 1997, the benefits were based on
years of service and final average compensation at retirement. Effective January
1, 1998, the Company adopted a pension plan change for most of its domestic
employees. The revised plan bases retirement benefits on an account balance that
accumulates over the employee's working career. For certain employees, a ten
year transition period from the previous pension formula to the new formula will
apply. This plan change necessitated certain changes in plan assumptions
including the rate of changes in salary increases. The effect of this plan
change was reflected in the funded status of the Company's plans as of December
31, 1997. In general, the Company's policy is to fund the domestic pension trust
to the extent such contributions would be deductible under the funding standards
established under the Internal Revenue Code. Plan assets consist primarily of
high quality corporate and U.S. government bonds, asset-backed securities,
publicly traded common stocks and investments in private equity and real estate.
Employees of the Company's manufacturing subsidiaries in The United Kingdom and
The Netherlands are covered by trusteed, contributory pension plans. Amounts are
funded in accordance with local laws and economic conditions. Employees of most
other foreign subsidiaries are covered by insured plans. Related expenses,
obligations and assets of these other plans are not material and therefore are
not included in the information below.
<PAGE>
Components of the Company's net periodic pension cost/(credit) are as follows:
<TABLE>
<CAPTION>
(In millions) 1996 1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 25.7 $ 23.8 $ 26.3
Interest cost 74.1 78.5 83.3
Expected return on assets (91.4) (96.0) (102.0)
Amortization of:
Unrecognized transition asset (11.1) (11.1) (11.1)
Unrecognized prior service cost 2.1 2.0 3.4
Unrecognized (gain)/loss (0.1) (0.4) (0.9)
Curtailment cost -- 7.5 2.6
------ ----- ------
Net periodic pension cost/(credit) $ (.7) $ 4.3 $ 1.6
====== ===== =====
</TABLE>
The following tables set forth the plans' reconciliations of projected benefit
obligations, plan assets, funded status and amounts recognized in the Company's
consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
(In millions) 1997 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year $ 1,085.9 $ 1,233.5
Service cost 23.8 26.3
Interest cost 78.5 83.3
Plan participants' contributions .3 .4
Plan amendments 22.6 .3
Curtailment cost 6.0 2.2
Special termination benefits -- 5.5
Actuarial (gain)/loss 89.4 76.3
Foreign currency exchange rate change (11.9) 7.7
Benefits paid (61.1) (95.6)
--------- ---------
Projected benefit obligation at end of year $ 1,233.5 $ 1,339.9
========= =========
</TABLE>
<TABLE>
<CAPTION>
(In millions) 1997 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year $ 1,160.5 $ 1,350.5
Actual return on plan assets 266.4 276.0
Employer contributions 1.0 .9
Plan participants' contributions .3 .4
Foreign currency exchange rate change (16.6) 12.4
Benefits paid (61.1) (95.6)
--------- ---------
Fair value of plan assets at end of year $ 1,350.5 $ 1,544.6
========= =========
</TABLE>
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
(In millions) 1997 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets in excess of projected benefit
obligation $ 117.0 $ 204.7
Unrecognized:
Transition assets (48.5) (37.9)
Prior service cost 35.8 30.4
(Gain)/loss (177.5) (275.9)
-------- --------
Accrued liability at end of year $ (73.2) $ (78.7)
======== ========
</TABLE>
<PAGE>
The assumptions used by the Company which have a significant effect on the
amounts reported for pension accounting as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.1% 6.7%
Weighted average rate of increase
in compensation levels 5.0% 3.9% 3.8%
Expected long-term rate of return on assets 8.9% 9.3% 9.3%
</TABLE>
In 1988, the Company's Board of Directors approved the Polaroid ESOP primarily
for the benefit of its domestic employees (see Note 9). Prior to 1998, the
number of shares available for allocation to individual accounts in any period
was based on principal and interest payments made on the Company's ESOP loan
which was repaid in 1997. Amounts charged to expense in 1996 and 1997 which
represented the amount of principal repayment on the ESOP loan less dividends
paid on unallocated shares, were $38.7 million and $37.6 million in 1996 and
1997, respectively. In 1997, the ESOP was merged into the Company's Retirement
Savings Plan. Effective January 1, 1998, the Company established the Polaroid
Retirement Savings Plan under which an amount equal to 5% of eligible domestic
employees' pay is contributed in common stock to the Retirement Savings Plan.
The amount charged to expense for this contribution in 1998 was $15.1 million.
Also in 1998, the Company began contributing an amount equal to 3% of eligible
domestic employees' pay in cash to the Retirement Savings Plan. The amount
charged to expense for these cash contributions was $9.1 million in 1998.
The Company currently provides certain health and life insurance benefits to
eligible retired employees. Substantially all domestic employees who retire from
the Company, and meet the minimum age and service requirements of 55 and 10
years, respectively, become eligible for these benefits. The plans are currently
unfunded and may be modified in accordance with the terms of the plan documents.
The Company funds these benefits on a pay-as-you-go basis. Eligible retirees
under age 65 are required to contribute to the cost of their health care
benefits. Upon reaching age 65, eligible retirees' health care benefit coverage
is coordinated with Medicare. In 1995, the Company established an amount it
would contribute toward the cost of the retirees' selected medical plan
coverage. The Company intends to annually review the amount it contributes
toward this coverage and will, at its option, make adjustments to this amount
based on several considerations including financial factors, inflation of
medical costs and other relevant factors. Eligible retirees are not required to
contribute to the cost of their life insurance benefits. Employees of most of
the Company's subsidiaries outside of the United States are covered by
government programs.
Components of the Company's net periodic postretirement benefit cost are as
follows:
<TABLE>
<CAPTION>
(In millions) 1996 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 6.4 $ 6.3 $ 6.6
Interest cost 14.8 15.7 16.8
Expected return on assets -- -- --
Amortization of unrecognized prior service cost (11.0) (10.7) (10.6)
Curtailment gain -- -- (1.3)
------ ------ ------
Net periodic postretirement benefit
Cost $ 10.2 $ 11.3 $ 11.5
====== ====== ======
</TABLE>
53
<PAGE>
The following tables set forth the plan's reconciliations of accumulated
postretirement benefit obligation, plan assets, the funded status of the plan
and amounts recognized in the Company's consolidated balance sheet at December
31:
<TABLE>
<CAPTION>
In millions) 1997 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
at beginning of year $ 210.1 $ 264.1
Service cost 6.3 6.6
Interest cost 15.7 16.8
Plan participants' contributions 2.4 1.6
Plan amendments .3 --
Special termination benefits .8 --
Actuarial (gain)/loss 45.4 (6.1)
Benefits paid (16.9) (17.6)
------- -------
Accumulated postretirement benefit
obligation at end of year $ 264.1 $ 265.4
======= =======
(In millions) 1997 1998
- ------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 14.5 16.0
Plan participants' contributions 2.4 1.6
Benefits paid (16.9) (17.6)
------- -------
Fair value of plan assets at end of year $ -- $ --
======= =======
(In millions) 1997 1998
- ------------------------------------------------------------------------------------------
Plan obligations in excess of plan assets $(264.1) $ (265.4)
Unrecognized:
Prior service cost (28.8) (16.9)
(Gain)/loss 29.0 22.9
------- -------
Accrued liability at end of year $(263.9) $ (259.4)
======= =======
</TABLE>
The Accumulated Postretirement Benefit Obligation ("APBO") at December 31, 1997
and 1998 was determined using a discount rate of 7.0% and 6.75%, respectively.
The assumed health care cost trend rate used in measuring the APBO at December
31, 1997 and 1998 was 9% and 8%, respectively, declining gradually to an
ultimate rate of 6% in 2003. These trend rates reflect the Company's current
experience and expectation that future rates will decline. The assumptions used
above have an effect on the amounts reported. If the health care cost trend rate
assumptions were increased by 1% each year, the APBO as of December 31, 1997 and
1998 would increase by approximately $4.5 million and $3.5 million,
respectively. The effect of a 1% increase on the aggregate of service and
interest cost for 1996, 1997 and 1998 would have been an increase of
approximately $.8 million, $.4 million and $.4 million, respectively.
The Company has a Board of Directors' Retirement Plan (the "Directors'
Retirement Plan") which is a non-qualified deferred compensation plan under
which fully vested (at least five complete years of service on the Board)
non-employee members of the Board who retire receive annual lump sum payments
equal to the retainer amount they were paid in the last
<PAGE>
full year prior to retirement. A participant or surviving spouse may receive
payments under The Directors' Retirement Plan for the lesser of twenty-five
years or the number of years that the person served as a non-employee member of
the Board prior to his or her seventy-third birthday. This plan is available to
retired directors and directors who were 68 years of age as of December 31,
1996. Directors who were not 68 years of age as of December 31, 1996 will
receive no future accrual under this plan (see Note 10).
The estimated present value of future benefits under the Directors' Retirement
Plan is accrued annually based on credited service up to the participants'
actual retirement dates and is charged to expense. For the years 1996, 1997 and
1998, $.3 million, $.8 million and $.2 million, respectively, was charged to
expense for the Directors' Retirement Plan.
12. Rental Expense and Lease Commitments
Minimum annual rental commitments at December 31, 1998, under noncancelable
leases, principally for real estate, are payable as follows:
<TABLE>
<CAPTION>
(In millions)
- ----------------------------------------------------------
<S> <C>
1999 $ 20.6
2000 13.8
2001 11.5
2002 10.8
2003 8.2
2004 and thereafter 50.8
-------
Total minimum lease payments $ 115.7
=======
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $1.4
million due in the future under noncancelable subleases.
Many of the leases contain renewal options and some contain escalation clauses
which require payments of additional rent to the extent of increases in the
related operating costs.
Rental and lease expenses consisted of the following:
<TABLE>
<CAPTION>
(In millions) 1996 1997 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 25.8 $ 27.4 $ 24.7
Contingent rentals 2.0 4.6 6.7
------ ------ ------
Total $ 27.8 $ 32.0 $ 31.4
====== ====== ======
</TABLE>
Sublease income amounted to $1.1 million in both 1996 and 1997 and $1.7 in 1998.
13. Business
Nature of Operations
The Company designs, develops, manufactures, and markets instant and digital
imaging and related products worldwide including digital peripherals, software
and system solutions. The Company's principal products are: instant and digital
cameras; instant film; and
<PAGE>
digital peripherals, software and systems solutions. In addition, the Company
designs, develops, manufactures and/or markets hardware accessories for the
instant imaging market; conventional film; sunglasses; polarizers; and digital
media products for the pre-press portion of the graphics imaging industry.
The Company sells its products directly to and through mass merchandisers; food,
drug, discount and department stores; specialty stores; wholesalers; original
equipment manufacturers; independent agents; retail outlets; and distributors.
Segments of Business
Effective for 1998, the Company adopted Financial Accounting Standards Board
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company is managed in five primary segments: the Americas
Region; the European Region; the Asia Pacific Region; Global Operations; and
Research and Development. The Global Operations segment includes worldwide
non-standard cost related activities associated with manufacturing,
distribution, logistics, new product manufacturing development and inventory
management. The Company's segments are individually managed by senior executives
who are directly responsible for the segment's marketing, operational or
technical strategies employed. The segments have separate financial results that
are reviewed by the Company's chief operating decision-maker. The Company's
principal products are sold across all regional segments
Regional segment assets consist primarily of accounts receivable and fixed
assets related to sales and administrative activities. Global Operations assets
consist primarily of worldwide inventories and worldwide fixed assets related to
manufacturing and distribution facilities. Research and Development assets
consist primarily of fixed assets related to research and engineering
activities. The Company evaluates performance of the segments primarily based on
profit/(loss) from operations with a recognition of assets employed.
The Corporate category, which is not a segment, includes central marketing,
general and administrative costs, and certain other corporate costs, including
worldwide restructuring and other special charges. Corporate assets include cash
and cash equivalents, prepaid expenses, corporate fixed assets and other assets.
The accounting policies of the Company's segments are the same as those
described in the Company's Summary of Significant Accounting Policies (see Note
1). For management reporting purposes, segment results are not reported on a
legal entity basis. Regional segment product cost of sales have been adjusted to
reflect worldwide standard costs excluding intercompany margins and excluding
non-standard manufacturing costs and other regional warehousing and distribution
costs that are reported in Global Operations. Therefore, regional segment
profit/(loss) from operations reflects a contribution to worldwide Company
profits related to segment third party sales.
<PAGE>
Notes to Consolidated Financial Statements, continued
The following is a summary of information related to the Company's segments:
Segment Information
<TABLE>
<CAPTION>
Years ended December 31,
(In millions) 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------
Net sales to customers
<S> <C> <C> <C>
Americas Region $ 1,227.1 $ 1,232.8 $ 1,133.8
European Region 668.3 583.3 451.8
Asia Pacific Region 379.8 330.3 260.3
Global Operations -- -- --
Research and Development -- -- --
--------- --------- ---------
Subtotal Segments 2,275.2 2,146.4 1,845.9
Corporate -- -- --
--------- --------- ---------
Total $ 2,275.2 $ 2,146.4 $ 1,845.9
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------
Profit/(loss) from operations
Americas Region $ 344.1 $ 369.1 $ 306.5
European Region (1) 152.1 107.4 34.5
Asia Pacific Region 81.1 74.9 57.1
Global Operations (162.0) (148.2) (177.2)
Research and Development (116.3) (122.8) (126.6)
--------- --------- ---------
Subtotal Segments 299.0 280.4 94.3
Corporate (2) (247.2) (439.5) (143.3)
--------- --------- ---------
Total $ 51.8 $ (159.1) $ (49.0)
========= ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Americas Region $ 267.0 $ 282.3 $ 253.6
European Region 201.7 221.5 187.4
Asia Pacific Region 84.7 74.4 62.7
Global Operations 1,056.0 871.6 924.8
Research and Development 45.2 44.5 36.4
--------- --------- ---------
Subtotal Segments 1,654.6 1,494.3 1,464.9
Corporate 547.0 638.4 732.8
--------- --------- ---------
Total $ 2,201.6 $ 2,132.7 $ 2,197.7
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
(In millions) 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization
Americas Region $ 1.9 $ 2.5 $ 4.7
European Region 2.4 2.9 4.7
Asia Pacific Region 2.4 2.2 2.0
Global Operations 87.4 79.7 59.0
Research and Development 11.0 9.6 8.0
-------- -------- --------
Subtotal Segments 105.1 96.9 78.4
Corporate 13.3 15.1 15.0
-------- -------- --------
Total $ 118.4 $ 112.0 $ 93.4
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets
Americas Region $ 4.7 $ 6.3 $ 11.3
European Region 6.1 11.2 7.3
Asia Pacific Region .8 1.2 3.1
Global Operations 91.7 94.9 98.5
Research and Development 4.7 5.7 3.0
-------- -------- --------
Subtotal Segments 108.0 119.3 123.2
Corporate 13.8 15.0 67.9
-------- ------- --------
Total $ 121.8 $ 134.3 $ 191.1
======== ======= ========
</TABLE>
(1) In 1998, profit/(loss) from operations for the European Region included
approximately $30.0 million for the write-off of assets in Russia.
(2) Profit/(loss) from operations for Corporate includes worldwide
restructuring and other special charges of $150.0 million, $340.0 million
and $50.0 million in 1996, 1997 and 1998, respectively.
Geographic Information
<TABLE>
<CAPTION>
Years ended December 31,
(In millions) 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales to customers (1)
United States $ 1,060.3 $ 1,063.0 $ 992.3
Other foreign countries 1,214.9 1,083.4 853.6
--------- --------- --------
Total $ 2,275.2 $ 2,146.4 $1,845.9
========= ========= ========
- ------------------------------------------------------------------------------------------------------------------------------
Long-lived assets
United States $ 570.2 $ 409.6 $ 450.5
Other foreign countries 96.0 102.9 116.0
--------- --------- --------
Total $ 666.2 $ 512.5 $ 566.5
========= ========= ========
</TABLE>
(1) Net sales are attributable to countries based on location of the Company
entity recording the sale which generally is the same as the location of
the customer.
<PAGE>
The Company's principal products, which are sold across all regions of the
Company, are: instant film; instant and digital cameras; and digital
peripherals, software and systems solutions. For the years ended December 31,
1996, 1997 and 1998, these principal products represented approximately 85% of
the Company's net sales, while instant cameras and film represented
approximately 75% of the Company's net sales.
During 1996, 1997 and 1998 sales to one customer, Wal-Mart Stores, Inc.,
amounted to 11.9%, 12.5% and 13.0%, respectively, of the Company's total net
sales. These sales were recorded primarily in the Americas Region.
14. Contingencies
The Company owns and operates facilities that are subject to certain federal,
state and local laws and regulations relating to environmental protection,
including those governing the investigation and remediation of contamination
resulting from past or present releases of hazardous substances. Certain of
these laws and regulations may impose joint and several liability on the Company
for the costs of investigation or remediation of such contamination, regardless
of fault or the legality of original disposal.
The Company, together with other parties, is currently designated a Potentially
Responsible Party ("PRP") by the United States Environmental Protection Agency
(the "EPA") and certain state agencies with respect to the response costs for
environmental remediation at several sites. The Company believes that its
potential liability with respect to any site and with respect to all sites in
the aggregate will not have a materially adverse effect on the financial
condition or operating results of the Company.
Due to a wide range of estimates with regard to response costs at those sites
and various other uncertainties, the Company cannot firmly establish its
ultimate liability concerning those sites. In each case in which the Company is
able to determine the likely exposure, such amount has been included in the
Company's reserve for environmental liabilities. Where a range of comparably
likely exposures exists, the Company has included in its reserve at least the
minimum amount of the range. The Company's aggregate reserve for these
liabilities as of December 31, 1997 and 1998 was $2.0 million and $1.5 million
respectively. The Company currently estimates that the majority of $1.5 million
reserved for environmental liabilities at December 31, 1998 will be payable over
the next two to three years. The Company reviews the analysis of the data that
supports the adequacy of this reserve on a quarterly basis. The reserve for such
liability does not provide for associated litigation costs, which, if any, are
expected to be inconsequential in comparison with the amount of the reserve. The
Company will continue to accrue in its reserve appropriate amounts from time to
time as circumstances warrant. This reserve does not take into account potential
recoveries from third parties.
Federal law provides that PRPs may be held jointly and severally liable for
response costs. Based on current estimates of those costs and after
consideration of the potential estimated liabilities of other PRPs with respect
to those sites and their respective estimated levels of financial
responsibility, the Company does not believe its potential liability will be
materially enlarged by the fact that liability is joint and several.
The Company reviews its recurring internal expenditures on environmental
matters, as well as capital expenditures related to environmental compliance, on
a monthly basis, and reviews its third-party expenditures on environmental
matters on a quarterly basis.
<PAGE>
The Company believes that these expenditures have not had and will not have a
materially adverse effect on the financial condition or operating results of the
Company.
In addition, the Company is involved in various other legal proceedings and
claims arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a materially adverse effect on the
financial condition or results of operations of the Company.
15. Subsequent Events
The Company owns approximately 14% of the common stock of SDI Holding Corp.
("SDHI") with a book value of approximately $14.0 million at December 31, 1998.
The Company also owns preferred stock, with a book value of approximately $35.0
million at that date, of Sterling Dry Imaging Systems, Inc., a subsidiary of
SDHI ("SDIS"). In January 1999, Agfa-Gevaert N.V. agreed to acquire SDHI,
excluding SDIS which, under the acquisition agreement, is to be spun off to
SDHI's shareholders and not acquired by Agfa-Gevaert N.V. The Company is
currently reviewing its position relative to this transaction. However,
sufficient information is not available for the Company to fully assess the
probable effect of this transaction on the value of its preferred stock in SDIS.
16. Supplementary Financial Information
The section on pages 55-57 entitled Supplementary Financial Information has not
been audited by the Company's independent auditors. Those auditors have,
however, made a limited review of the 1997 and 1998 quarterly data on page 55 in
accordance with standards established by the American Institute of Certified
Public Accountants and that information is incorporated herein by reference.
Since the Company's independent auditors did not audit the Company's quarterly
data for either year, they express no opinion on such data.
<PAGE>
Quarterly Financial Data (Unaudited)
Polaroid Corporation and Subsidiary Companies
(In millions, except per share and stock price data)
<TABLE>
<CAPTION>
1997 First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $457.5 $564.9 $516.4 $ 607.6 $2,146.4
Restructuring and other -- -- -- 323.5 323.5
Profit/(loss) from operations 19.2 64.2 51.0 (293.5) (159.1)
Net earnings/(loss) 15.8 34.6 25.7 (202.8) (126.7)
Basic earnings/(loss)
per common share .35 .77 .57 (4.51) (2.81)
Diluted earnings/(loss) per
common share .35 .76 .55 (4.51) (2.81)
Cash dividends per common share
.15 .15 .15 .15 .60
Stock prices*
High 46.38 53.38 60.25 52.50 60.25
Low 39.75 37.25 49.81 41.94 37.25
- --------------------------------------------------------------------------------------------------------------------------------
1998 First Second Third Fourth Year
Net Sales $390.6 $464.7 $448.8 $541.8 $1,845.9
Restructuring -- - - 50.0 50.0
Profit/(loss) from operations (13.0) 4.8 41.6 (82.4) (49.0)
Net earnings/(loss) (17.4) 12.1 29.8 (75.5) (51.0)
Basic earnings/(loss) per
common share (.39) .27 .68 (1.72) (1.15)
Diluted earnings/(loss) per
common share (.39) .27 .68 (1.72) (1.15)
Cash dividends per common
share .15 .15 .15 .15 .60
Stock prices*
High 49.94 45.89 38.25 27.75 49.94
Low 41.06 35.81 25.00 17.88 17.88
</TABLE>
Stockholders of record as of January 29, 1999...........9,289
* Recorded on the New York Stock Exchange Composite.
<PAGE>
Ten Year Financial Summary (Unaudited)
Polaroid Corporation and Subsidiary Companies
Years ended December 31
(Dollars amounts in millions, except per share data)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Earnings
Net sales 1,904.7 1,971.7 2,070.6 2,152.3 2,244.9
Cost of goods sold 966.0 1,011.8 1,082.5 1,178.0 1,296.5
Marketing, research,
engineering and
administrative expenses 634.5 675.6 741.5 760.5 763.0
Restructuring and other 40.5 -- -- -- 44.0
Special charges -- -- -- -- --
-------- -------- -------- -------- --------
Total costs 1,641.0 1,687.4 1,824.0 1,938.5 2,103.5
-------- -------- -------- -------- --------
Profit/(loss) from operations 263.7 284.3 246.6 213.8 141.4
-------- -------- -------- -------- --------
Litigation settlement,
net of employee incentives -- -- 871.6 -- --
Other income 35.1 15.0 23.4 7.8 8.2
Interest expense 86.2 81.3 58.4 58.5 47.9
-------- -------- -------- -------- --------
Earnings/(loss) before income
tax expense/(benefit) 212.6 218.0 1,083.2 163.1 101.7
Federal, state and foreign
income tax expense/(benefit) 67.6 67.0 399.5 64.1 33.8
-------- -------- -------- -------- --------
Earnings/(loss) before
extraordinary item and
cumulative effect of changes
in accounting principle $ 145.0 $ 151.0 $ 683.7 $ 99.0 $ 67.9
======== ======== ======== ======== ========
Net earnings/(loss) $ 145.0 $ 151.0 $ 683.7 $ 99.0 $ (51.3)
======== ======== ======== ======== ========
Basic earnings/(loss) per
common share before
extraordinary item and
cumulative effect of changes
in accounting principles $ l.96 $ 2.20 $ 13.07 $ 2.08 $ 1.45
Basic earnings/(loss)
per common share $ l.96 $ 2.20 $ 13.07 $ 2.08 $ (1.10)
Diluted earnings/(loss) per
common share before
extraordinary item and
cumulative effect of changes
in accounting principles $ l.96 $ 2.20 $ 10.88 $ 2.03 $ 1.45
Diluted earnings/(loss) per
common share $ l.96 $ 2.20 $ 10.88 $ 2.03 (1.10)
Cash dividends per
common share $ .60 $ .60 $ .60 $ .60 $ .60
Common shares outstanding
at end of year (in thousands) 52,110 50,070 48,919 46,668 46,806
</TABLE>
<PAGE>
*1993 is shown prior to the cumulative effects of FAS 106, 109 and 112.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Earnings
Total net sales 2,312.5 2,236.9 2,275.2 2,146.4 1,845.9
Cost of goods sold 1,324.2 1,298.6 1,283.8 1,229.8 1,108.4
Marketing, research,
engineering, and
administrative expenses 788.0 849.1 796.6 752.2 736.5
Restructuring and other -- 247.0 110.0 323.5 50.0
Special charges -- -- 33.0 -- --
-------- -------- -------- -------- -------
Total costs 2,112.2 2,394.7 2,223.4 2,305.5 1,894.9
-------- -------- -------- ------- -------
Profit/(loss) from operations 200.3 (157.8) 51.8 (159.1) (49.0)
-------- -------- -------- -------- -------
Litigation settlement,
net of employee incentives -- -- -- --
Other income 7.0 8.5 26.8 15.0 67.7
Interest expense 46.6 52.1 47.4 47.8 57.6
-------- -------- -------- -------- -------
Earnings/(loss) before income
tax expense/(benefit) 160.7 (201.4) 31.2 (191.9) (38.9)
Federal, state and foreign
income tax expense/(benefit) 43.5 (61.2) 16.2 (65.2) 12.1
-------- -------- -------- -------- -------
Earnings/(loss) before extraordinary item and
cumulative effect of changes in accounting
principle $ 117.2 $ (140.2) $ 15.0 $(126.7) $ (51.0)
======== ======== ======== ======== ========
Net earnings/(loss) $ 117.2 $ (140.2) $ (41.1) $(126.7) $ (51.0)
======== ======== ======== ======== ========
Basic earnings/(loss) per
common share before
extraordinary item and
cumulative effect of changes
in accounting principles $ 2.52 $ (3.09) $ .33 $ (2.81) $ (1.15)
Basic earnings/(loss)
per common share $ 2.52 $ (3.09) $ (.90) $ (2.81) $ (1.15)
Diluted earnings/(loss) per
common share before
extraordinary item and
cumulative effect of changes
in accounting principles $ 2.43 $ (3.09) $ .33 $ (2.81) $ (1.15)
Diluted earnings/(loss) per
common share $ 2.43 $ (3.09) $ (.90) $ (2.81) $ (1.15)
Cash dividends per
common share $ .60 $ .60 $ .60 $ .60 $ .60
Common shares outstanding
at end of year (in thousands) 45,998 45,533 44,819 44,536 43,990
</TABLE>
<PAGE>
Ten Year Financial Summary (Unaudited)
Polaroid Corporation and Subsidiary Companies
Years ended December 31
(Dollar amounts in millions, except per share data)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Balance
Sheet Information
Working capital $ 635.2 $ 600.7 $ 684.7 $ 778.5 $ 826.7
Net property, plant
and equipment 430.9 461.0 549.4 657.3 718.2
Total assets 1,776.7 1,701.3 1,889.3 2,008.1 2,212.3
Long-term debt 602.2 513.8 471.8 637.4 602.3
Redeemable preferred stock
equity 321.9 348.6 -- -- -
Common stockholders'
equity 148.8 207.7 772.9 808.9 767.3
Other Statistical Data
Additions to property,
plant and equipment $ 94.5 $ 120.9 $ 175.8 $ 201.5 $ 165.6
Depreciation $ 87.4 $ 87.2 $ 85.5 $ 89.1 $ 100.3
Payroll and benefits $ 546.7 $ 587.6 $ 690.6 $ 670.2 $ 699.2
Number of employees,
end of year 11,441 11,768 12,003 12,359 12,048
Return on average common
stockholders' equity* 33.5% 63.3% 148.6% 12.7% 9.3%
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------
Selected Balance
Sheet Information
Working capital $ 879.7 $ 730.3 $ 623.3 $ 572.8 $ 360.4
Net property, plant
and equipment 747.3 691.0 666.2 512.5 566.5
Total assets 2,316.7 2,261.8 2,201.6 2,132.7 2,197.7
Long-term debt 566.0 526.7 489.9 496.6 497.4
Redeemable preferred stock
equity -- -- -- -- -
Common stockholders'
equity 864.4 717.7 658.2 484.4 389.9
Other Statistical Data
Additions to property,
plant and equipment $ 146.7 $ 167.9 $ 121.8 $ 134.3 $ 191.1
Depreciation $ 118.2 $ 132.7 $ 118.3 $ 111.5 $ 90.7
Payroll and benefits $ 720.6 $ 709.3 $ 641.2 $ 608.6 $ 567.9
Number of employees,
end of year 12,104 11,662 10,046 10,011 9,274
Return on average common
stockholders' equity* 14.7% (17.8)% (6.2)% (19.7)% (11.4)%
</TABLE>
Directors
<PAGE>
Gary T. DiCamillo(1)
Chairman and Chief Executive Officer
Ralph E. Gomory(1),(2),(3),(6)
President,
Alfred P. Sloan Foundation
Frank S. Jones(2),(4),(6),(7)
Ford Professor of Urban Affairs
Emeritus, Massachusetts Institute of Technology
Stephen P. Kaufman(3),(5),(6)
Chairman, President and Chief Executive Officer,
Arrow Electronics
John W. Loose(3),(4),(6)
President,
Corning Communications, Corning Inc.
Albin F. Moschner(1),(3),(4),(6)
President and Chief Executive Officer,
Millecom Corporation
Ronald F. Olsen(2)
Technical Specialist
Polaroid Corporation
Dr. Ralph Z. Sorenson(4),(5),(6)
Professor Emeritus,
University of Colorado
<PAGE>
Delbert C. Staley(1),(2),(4),(6),(7)
Retired Chairman and
Chief Executive Officer,
Nynex Corporation
Carole F. St. Mark(2),(5),(6)
President, Growth Management LLC
Bernee D.L. Strom(3),(4),(6)
President and Chief Operating Officer
InfoSpace.com, Inc.
Alfred M. Zeien(1),(4),(5),(6)
Chairman and Chief Executive Officer,
The Gillette Company
(1)Member, Executive Committee (Gary T. DiCamillo, Chairman)
(2)Member, Audit Committee (Ralph E. Gomory, Chairman)
(3)Member, Finance Committee (Albin F. Moschner, Chairman)
(4)Member, Human Resources Committee (Delbert C. Staley, Chairman)
(5)Member, Committee on Directors (Alfred M. Zeien, Chairman)
(6)Member, Committee of Outside Directors
(7)Will not be standing for re-election to the Board of Directors at the
company's 1999 annual meeting
<PAGE>
Officers
Gary T. DiCamillo
Chairman and
Chief Executive Officer
Judith G. Boynton
Executive Vice President and Chief Financial Officer
William J. O'Neill, Jr.
Executive Vice President
Carole J. Uhrich
Executive Vice President
Thomas M. Lemberg
Senior Vice President, General Counsel and Secretary
Joseph G. Parham, Jr.
Senior Vice President and President, Polaroid Eyewear, Inc.
Jeremiah J. Noonan
Senior Vice President
James R. Barron
Vice President
Benjamin Byrd III
Vice President
F. Richard Cottrell
Vice President and Senior Engineering and Research Fellow
Neal D. Goldman
Vice President
Harvey M. Greenberg
Vice President
Fawwaz N. Habbal
Vice President and Senior Engineering and Research Fellow
Clifford P. Hall
Vice President
John Jenkins
Vice President
Paul E. Lambert
Vice President
Sandra B. Lawrence
Vice President
<PAGE>
Samuel H. Liggero
Vice President and Program Fellow
Carl L. Lueders
Vice President and Controller
Tadaaki Masuda
Vice President and Chairman, Nippon Polaroid K.K.
<PAGE>
Robert S. Murray
Vice President
Ralph M. Norwood
Vice President and Treasurer
Norman Perrault
Vice President
Brian Poggi
Vice President
Leonard Polizzotto
Vice President
Ian Shiers
Vice President
All the photographs of corporate officers
on this page were made with Polaroid
Black+White film.
<PAGE>
Stockholder Information
Annual Meeting
The Annual Meeting of Polaroid Corporation stockholders will be held on Tuesday,
May 11, 1999 at 3:00 p.m. at the American Academy of Arts and Sciences, entrance
at 200 Beacon Street, Somerville, Massachusetts.
Executive Office
784 Memorial Drive
Cambridge, Massachusetts 02139
(781) 386-2000
Investor Relations
784 Memorial Drive
Cambridge, Massachusetts 02139
(781) 386-6589
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, Massachusetts 02110
Transfer Agent and Registrar for Common Stock
First National Bank of Boston
C/O Boston EquiServe
Shareholder Services
Mail Stop: 45-02-64
P.O. Box 644
Boston, MA 02102-0644
(781) 575-3170 or 1-800-730-4001
<PAGE>
Stock Exchange Listings for Common Stock
New York Stock Exchange
Pacific Stock Exchange
Annual Report on Form 10-K
A copy of Polaroid's Annual Report on Form 10-K to the Securities and Exchange
Commission may be obtained without charge by calling the Investor Relations
Department of Boston EquiServe, at (781) 575-3170 or 1-800-730-4001.
Dividend Reinvestment Plan
A Dividend Reinvestment Plan is available to stockholders of Polaroid
Corporation. For information or an authorization card write to: Boston
EquiServe, Polaroid Dividend Reinvestment Plan, Mail Stop: 45-02-09, P.O. Box
644, Boston, MA 02102-0644. All correspondence should refer to Polaroid
Corporation.
Internet Address
http://www.polaroid.com
Copy&Fax, DisplayCase, JoyCam, NotePad, OneStep, PDC, Polaroid, Polaroid
ColorShot, Polaroid DirectPhoto, Polaroid DryJet, Polaroid I-Zone (and Design),
Polaroid Macro, Polaroid Make A Memory, Polaroid PhotoMAX, Polaroid PhotoMAXINE,
PolaSecure, Polaview, ProPalette, Spectra, and Studio Polaroid are trademarks of
Polaroid Corporation. Looney Tunes, characters, names and all related indicia
are trademarks of Warner Bros. BARBIE is a trademark owned by and used under
license from Mattel, Inc. (C)1999 Mattel, Inc. All rights reserved. All other
product names may be the property of their respective owners.
The cover for this annual report was proofed on a Polaroid PolaProof digital
halftone proofing system.
This annual report is printed on paper containing 10 percent post-consumer
waste.
About Polaroid
Polaroid is the worldwide leader in instant imaging. The company designs,
develops, manufactures and markets instant and digital imaging and related
products worldwide. Polaroid's principal products are instant and digital
cameras, instant film and digital peripherals, software and systems solutions.
Additional products include hardware accessories for the instant imaging market;
conventional film; sunglasses; polarizers; and digital media products for the
pre-press portion of the graphics imaging industry.
Exhibit 21
Subsidiaries
Polaroid Corporation
Year ended December 31, 1998
<TABLE>
<CAPTION>
Place of
Name of Subsidiary or Entity Incorporation or
Establishment
- ------------------------------------------------------------------------------
<S> <C>
DEK Processes of LA Inc. Louisiana
Polaroid A.G. Switzerland
Polaroid A/S Denmark
Polaroid Asia Pacific International Inc. Delaware
Polaroid Asia Pacific Limited Delaware
Polaroid Industry China Limited China
Polaroid of Shanghai Limited China
Polaroid Aktiebolag Sweden
Polaroid Australia Pty. Limited Australia
Polaroid do Brasil Ltda. Brazil
Polaroid Canada Inc. Canada
Polaroid Caribbean Corporation Delaware
Polaroid del Peru S.A. Peru
Polaroid de Argentina S.A. Argentina
Polaroid Contracting CV Bermuda
Polaroid Espana, S.A. Spain
Polaroid Eyewear Inc. Delaware
Polaroid Eyewear A.G. (Switzerland) Switzerland
Polaroid Eyewear Espana S.A. Spain
Polaroid Eyewear (France) EURL France
Polaroid Eyewear (Sweden) AB Sweden
Polaroid Eyewear GmbH (Austria) Austria
Polaroid Eyewear (Nederlands) B.V. Netherlands
Polaroid Eyewear UK Limited (Owned by PolCorp) United Kingdom
Polaroid Far East Limited Hong Kong
Polaroid Foreign Sales B.V. Netherlands
Polaroid Foundation, Inc. Delaware
Polaroid Gesellschaft mit beschrankter Haftung Germany
Polaroid Gesellschaft m.b.H. Austria
Polaroid India Private Limited India
Polaroid ID Systems Inc. Delaware
Polaroid International B.V. Netherlands
Darfilm Ticaret ve Sanayi A.S. Turkey
Polaroid (Belgium) N.V. Belgium
Polaroid (Europa) B.V. Netherlands
Polaroid (France) S.A. France
Polaroid Graphics Imaging B.V. Netherlands
Polaroid (Italia) S.p.A. Italy
Polaroid Nederland B.V. Netherlands
-iv-
<PAGE>
Polaroid Trading B.V. Netherlands
Polaroid Polska Sp. zo.o. Poland
Photographic Supplies S.R.C. Czech Republic
Photographic Supplies Kereskedelmi Kft. Hungary
Svetozor Russia
Polaroid Eyewear (Italia) S.r.l. Italy
Nippon Polaroid Kabushiki Kaisha Japan
Polaroid Malaysia Limited Delaware
Polaroid de Mexico S.A. de C.V. Mexico
Polaroid (Norge) A/S Norway
Polaroid Oy Finland
Polaroid Singapore Private Limited Singapore
Polaroid (U.K.) Limited United Kingdom
Inner City, Inc. Delaware
PMC, Inc. Massachusetts
PRD Capital Inc. Delaware
PRD Investment Inc. Delaware
PRD Management Limited Bermuda
PRD Services Limited Bermuda
PRD Overseas Limited Bermuda
Sub Debt Partners Corp. Delaware
Troon, Inc. Delaware
Polaroid Digital Solutions, Inc. Delaware
</TABLE>
Subsidiaries of subsidiary companies are indented and listed below the
respective companies through which they are controlled.
-v-
Exhibit 23
Independent Auditors' Consent
The Board of Directors
Polaroid Corporation:
We consent to incorporation by reference in the registration statements No.
33-36384 on Form S-8, No. 33-44661 on Form S-3, No.33-51173 on Form S-8, No.
333-0791 on Form S-3, No.333-32279 on Form S-8, No. 333-32281 on Form S-8, No.
333-32283 on Form S-8, No. 333-32285 on Form S-8, and No. 333-67647 on Form S-3
of Polaroid Corporation of our reports dated January 20, 1999, except for Note 8
to which the date is February 17, 1999, relating to the consolidated balance
sheet of Polaroid Corporation and subsidiary companies as of December 31, 1998
and 1997, and the related consolidated statements of earnings, cash flows, and
changes in common stockholders' equity, and the related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
which reports appear in the December 31, 1998, annual report on Form 10-K of
Polaroid Corporation.
/s/ KPMG PEAT MARWICK LLP
Boston Massachusetts
March 30, 1999
-vi-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Securities and Exchange Commission Form 10-K for the year ended
December 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000079326
<NAME> POLAROID CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 105,000
<SECURITIES> 0
<RECEIVABLES> 501,600
<ALLOWANCES> (42,000)
<INVENTORY> 533,300
<CURRENT-ASSETS> 1,293,400
<PP&E> 1,975,900
<DEPRECIATION> (1,409,400)
<TOTAL-ASSETS> 2,197,700
<CURRENT-LIABILITIES> 933,000
<BONDS> 497,400
0
0
<COMMON> 75,400
<OTHER-SE> 314,500
<TOTAL-LIABILITY-AND-EQUITY> 2,197,700
<SALES> 1,845,900
<TOTAL-REVENUES> 1,845,900
<CGS> 1,108,400
<TOTAL-COSTS> 1,894,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 19,300
<INTEREST-EXPENSE> 57,600
<INCOME-PRETAX> (38,900)
<INCOME-TAX> 12,100
<INCOME-CONTINUING> (51,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,000)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
