<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended to
------------- ------------
Commission File Number 1-4085
POLAROID CORPORATION
- --------------------------------------------------------------------------------
(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)
781-386-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 and 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 [ ]
Shares of Common Stock, $1 par value,
outstanding at May 5, 2000: 44,893,237
This document contains 32 pages.
Exhibit Index appears on page 29.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Quarters ended March 28, 1999 and April 2, 2000
<TABLE>
<CAPTION>
POLAROID CORPORATION AND SUBSIDIARY COMPANIES First Quarter
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 2000
- ------------------------------------------------------------------------ ---------------- -----------------
(UNAUDITED)
<S> <C> <C>
NET SALES $379.0 $ 403.4
Cost of goods sold 237.3 224.1
Marketing, research, engineering and administrative expenses 148.6 170.1
---------------- -----------------
TOTAL COSTS 385.9 394.2
PROFIT/(LOSS) FROM OPERATIONS (6.9) 9.2
Other income/(expense) (22.6) 8.6
Interest expense 17.9 19.9
---------------- -----------------
LOSS BEFORE INCOME TAX BENEFIT (47.4) (2.1)
Federal, state and foreign income tax benefit (16.6) (.7)
---------------- -----------------
NET LOSS $ (30.8) $ (1.4)
================ =================
BASIC LOSS PER COMMON SHARE $ (0.70) $ (0.03)
DILUTED LOSS PER COMMON SHARE $ (0.70) $ (0.03)
CASH DIVIDENDS PER COMMON SHARE $0.15 $0.15
Weighted average common shares used for basic loss per common share
calculation (in thousands) 44,066 44,674
Weighted average common shares used for diluted loss per common share
calculation (in thousands) 44,066 44,674
Common shares outstanding at end of period (in thousands) 44,150 44,760
See accompanying notes to condensed consolidated financial statements.
</TABLE>
1
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
POLAROID CORPORATION AND SUBSIDIARY COMPANIES December 31, APRIL 2,
(IN MILLIONS) 1999 2000
- ------------------------------------------------------------------------ ---------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 92.0 $ 64.8
Receivables 489.7 416.0
Inventories:
Raw materials 84.3 84.8
Work-in-process 135.8 143.8
Finished goods 175.5 204.4
---------------- -----------------
Total inventories 395.6 433.0
Prepaid expenses and other current assets 139.6 157.7
---------------- -----------------
TOTAL CURRENT ASSETS 1,116.9 1,071.5
PROPERTY, PLANT AND EQUIPMENT:
Total property, plant and equipment 2,023.0 2,020.4
Less accumulated depreciation 1,423.8 1,444.3
---------------- -----------------
NET PROPERTY, PLANT AND EQUIPMENT 599.2 576.1
DEFERRED TAX ASSETS 243.7 243.8
OTHER ASSETS 80.2 74.2
---------------- -----------------
TOTAL ASSETS $2,040.0 $1,965.6
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 259.4 $ 302.7
Payables and accruals 338.0 276.7
Compensation and benefits 138.1 102.7
Federal, state and foreign income taxes 14.7 21.5
---------------- -----------------
TOTAL CURRENT LIABILITIES 750.2 703.6
LONG-TERM DEBT 573.0 573.1
ACCRUED POSTRETIREMENT BENEFITS 234.8 235.8
OTHER LONG-TERM LIABILITIES 111.5 92.9
COMMON STOCKHOLDERS' EQUITY:
Common stock, $1 par value 75.4 75.4
Additional paid-in capital 395.2 388.8
Retained earnings 1,208.8 1,200.7
Accumulated other comprehensive income (48.9) (56.1)
Less: Treasury stock, at cost 1,259.7 1,248.5
Deferred compensation .3 .1
---------------- -----------------
TOTAL COMMON STOCKHOLDERS' EQUITY 370.5 360.2
---------------- -----------------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $2,040.0 $1,965.6
================ =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Quarters ended March 28, 1999 and April 2, 2000
<TABLE>
<CAPTION>
POLAROID CORPORATION AND SUBSIDIARY COMPANIES First Quarter
(IN MILLIONS) 1999 2000
- ------------------------------------------------------------------------ ---------------- -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(30.8) $(1.4)
Depreciation of property, plant and equipment 23.1 26.3
Gains on the sale of real estate (10.9) (3.1)
Other non-cash items 39.1 3.4
Decrease in receivables 4.9 91.0
Decrease/(increase) in inventories 3.8 (41.9)
Increase in prepaids and other assets (35.4) (18.2)
Decrease in payables and accruals (25.9) (58.4)
Decrease in compensation and benefits (19.4) (52.2)
Increase/(decrease) in federal, state and foreign income taxes
payable (9.1) 6.8
---------------- -----------------
Net cash used by operating activities (60.6) (47.7)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in other assets 14.4 6.1
Additions to property, plant and equipment (46.6) (32.7)
Proceeds from the sale of property, plant and equipment 22.6 11.9
---------------- -----------------
Net cash used by investing activities (9.6) (14.7)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in short-term debt (maturities of 90 days
or less) (31.0) 43.9
Short-term debt (maturities of more than 90 days)
Proceeds 11.2 --
Payments (8.3) --
Proceeds from issuance of long-term debt 268.3 --
Repayment of long-term debt (200.0) --
Cash dividends paid (6.6) (6.7)
---------------- -----------------
Net cash provided by financing activities 33.6 37.2
EFFECT OF EXCHANGE RATE CHANGES ON CASH (.5) (2.0)
---------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (37.1) (27.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 105.0 92.0
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67.9 $ 64.8
================ =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarters Ended March 28, 1999 and April 2, 2000
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Polaroid Corporation and its domestic and foreign subsidiaries, all
of which are either wholly owned or majority owned (collectively, "the
Company"). Intercompany transactions have been eliminated. This is an interim
unaudited report that is subject to year-end audit adjustments. The information
furnished, however, reflects all adjustments (consisting of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
presentation of the results of the interim period. The information included in
the interim financial statements and notes in this Form 10-Q should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report on Form 10-K which was filed with
the Securities and Exchange Commission on March 28, 2000.
Certain prior year information has been reclassified to conform with the current
year presentation.
2. EARNINGS PER SHARE
<TABLE>
<CAPTION>
PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NET LOSS SHARES AMOUNT
- --------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Quarter ended March 28, 1999
Basic loss per share $(30.8) 44.1 $(.70)
================== ================== ===================
Diluted loss per share $(30.8) 44.1 $(.70)
================== ================== ===================
QUARTER ENDED APRIL 2, 2000
BASIC LOSS PER SHARE $(1.4) 44.7 $(.03)
================== ================== ===================
DILUTED LOSS PER SHARE $(1.4) 44.7 $(.03)
================== ================== ===================
</TABLE>
Stock options for shares of common stock totaling 5.7 million at March 28, 1999
and 6.1 million at April 2, 2000, were outstanding but were not included in the
calculations of diluted earnings per share because the effects were
anti-dilutive. In addition, the effect of .3 million performance shares at March
28, 1999 and .4 million at April 2, 2000 were outstanding but were not included
because the effects were anti-dilutive.
4
<PAGE>
3. COMPREHENSIVE INCOME
The Company's total comprehensive loss was as follows:
<TABLE>
<CAPTION>
Quarter ended
(IN MILLIONS) March 28, 1999 APRIL 2, 2000
- ---------------------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Net loss $(30.8) $(1.4)
Other comprehensive income:
Currency translation adjustment (15.0) (6.6)
Unrealized loss on available-for-sale securities, net
of tax (.6) (.6)
---------------------- ---------------------
Total comprehensive loss $(46.4) $(8.6)
====================== =====================
</TABLE>
4. SEGMENTS
The following is a summary of information related to the Company's segments:
<TABLE>
<CAPTION>
Quarter ended
(IN MILLIONS) March 28, 1999 APRIL 2, 2000
- ---------------------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Net sales to customers:
Americas Region $227.1 $239.3
European Region 86.5 86.2
Asia Pacific Region 65.4 77.9
Global Operations -- --
Research and Development -- --
---------------------- ---------------------
Segment net sales to customers 379.0 403.4
Corporate -- --
---------------------- ---------------------
Total net sales to customers $379.0 $403.4
====================== =====================
Profit/(loss) from operations:
Americas Region $58.7 $61.9
European Region 15.8 10.4
Asia Pacific Region 13.8 21.5
Global Operations (44.0) (24.6)
Research and Development (20.7) (20.8)
---------------------- ---------------------
Segment profit from operations 23.6 48.4
Corporate (30.5) (39.2)
---------------------- ---------------------
Total profit/(loss) from operations $ (6.9) $ 9.2
====================== =====================
</TABLE>
5
<PAGE>
5. RESTRUCTURING AND OTHER CHARGES
In 1997, the Company recorded restructuring and other charges of $340 million
which consisted of severance costs, impairment losses on certain long-lived
assets, other asset write-downs and exit costs associated with certain
businesses. Of this amount, approximately $17 million represented inventory
write-downs which were included in cost of goods sold. In 1998, the Company
recorded a $50 million restructuring charge related to an expansion of the
severance component of the 1997 program. These charges (collectively, the
"1997 Program") were allocated to the non-segment Corporate category and were
undertaken as the result of management's assessment of the Company's
infrastructure, to strengthen its competitive cost position, to streamline
operations and to improve profitability by consolidating and selling
manufacturing facilities and reducing corporate overhead. The strategic
objective of the 1997 Program was to reduce the cost of developing,
manufacturing, selling and distributing the Company's products; to change and
improve business processes; to deliver new products more efficiently; to
improve financial performance; and to fundamentally alter how the Company
conducts business globally.
The balance of reserves established for the 1997 Program and related charges are
as follows:
<TABLE>
<CAPTION>
PENSION
(IN MILLIONS) SEVERANCE ENHANCEMENTS EXIT COSTS TOTAL
- ----------------------------------------- --------------- -------------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $142.4 $ -- $ 9.5 $151.9
Restructuring and other 47.4 2.6 -- 50.0
Reclassification of pension
enhancements (2.4) 2.4 -- --
Cash charges (69.2) -- (7.1) (76.3)
Non-cash charges -- (5.0) -- (5.0)
--------------- -------------------- --------------- --------------
Balance at December 31, 1998 118.2 -- 2.4 120.6
Reclassification of pension
enhancements (.7) .7 -- --
Cash charges (68.9) -- (.2) (69.1)
Non-cash charges -- (.7) -- (.7)
--------------- -------------------- --------------- --------------
Balance at December 31, 1999 48.6 -- 2.2 50.8
CASH CHARGES (15.0) -- (.5) (15.5)
--------------- -------------------- --------------- --------------
BALANCE AT APRIL 2, 2000 $33.6 $ -- $ 1.7 $35.3
=============== ==================== =============== ==============
</TABLE>
6
<PAGE>
5. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
Approximately $150 million of the charges recorded in 1997 for the 1997 Program
related to an involuntary severance program under which approximately 1,800
employees were expected to leave the Company. The 1998 extension to this
involuntary severance program added approximately 1,000 additional employees.
Approximately 2,600 of the 2,800 terminations under the 1997 Program had
occurred at April 2, 2000, with the remaining terminations expected to occur by
the end of 2000. Approximately $153.1 million of cash payments related to the
severance component of the 1997 Program had been made at April 2, 2000 with the
remaining severance payments of approximately $33.6 million expected to be
substantially completed by the end of 2000.
Restructuring and Other Charges are discussed in Part I, Item 2 of this filing
on Form 10-Q. Refer to the section "Restructuring and Other Charges" within
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information.
6. DISPOSITIONS
In the first quarter of 2000, the Company sold net assets related to its
technical polarizer and display films business with a book value of
approximately $20 million to the Minnesota Mining and Manufacturing Company. In
connection with the transaction, the Company incurred certain costs associated
with the disposition of the business. The recognition of this sale did not have
a material impact on the Company's results of operations or financial position
for the first quarter of 2000. The Company received the net cash proceeds from
the sale in the second quarter of 2000.
7
<PAGE>
7. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") 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 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. In June 1999,
the FASB issued FAS 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" which
delayed the effective date of FAS 133 by one year to fiscal years beginning
after June 15, 2000. In March 2000, the FASB published a Proposed Statement of
Financial Accounting Standards that would amend FAS 133 for decisions made by
the FASB related to the Derivatives Implementation Group process. The FASB
expects to issue a final standard at the end of the second quarter of 2000. The
Company is currently evaluating the effect of FAS 133 and the proposed
amendments on its results of operations and financial position.
8. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising in the
ordinary course of business. The Company believes that the disposition of these
matters will not have a materially adverse effect on its results of operations
or financial condition. The significant legal developments during the first
quarter of 2000 are described below. All other legal proceedings which could
have a material impact on the Company are discussed in Part II, Item 1 of this
filing on Form 10-Q.
On March 20, 2000, the declaratory judgment action filed by the Company against
the successor to the former trustee of the Polaroid Stock Equity Plan (the
"Plan") and its insurer was settled. This settles the action brought by the
Company to determine its liability under an indemnity provision of the trust
agreement between the Company and the former trustee. The dispute arose after
the former trustee of the Plan settled a long standing action brought against it
by the United States Department of Labor for allegedly breaching its fiduciary
duty when the former trustee voted shares in the Plan during a 1989 self-tender
that resulted from an attempted takeover of the Company. The settlement of this
action did not have a material impact on the Company's results of operations or
financial position.
8
<PAGE>
9. INDEPENDENT AUDITORS' REPORT
The March 28, 1999 and April 2, 2000 condensed consolidated financial statements
included in this filing on Form 10-Q have been reviewed by KPMG LLP, independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report by KPMG LLP commenting upon
their review of the condensed consolidated financial statements appears on the
following page.
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Polaroid Corporation:
We have reviewed the condensed consolidated balance sheet of Polaroid
Corporation and subsidiary companies as of April 2, 2000 and the related
condensed consolidated statements of earnings and cash flows for the three-month
periods ended March 28, 1999 and April 2, 2000. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Polaroid Corporation and subsidiary
companies as of December 31, 1999, and the related consolidated statements of
earnings, cash flows and changes in common stockholders' equity for the year
then ended (not presented herein); and in our report dated January 24, 2000,
except for Note 8 to which the date is February 14, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Boston, Massachusetts
April 18, 2000
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Polaroid Corporation and subsidiary companies ("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 the countries in North and South America. The European Region
includes all the countries of continental Europe, the United Kingdom, Russia,
the middle-eastern countries and the African continent. The Asia Pacific Region
includes Japan, Australia and the Asian continent, excluding Russia. These three
regions consist of sales and marketing operations. Global Operations consists of
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 it does not
consider to be a segment. This category includes central marketing, general and
administrative costs and certain other corporate costs, including worldwide
restructuring and other charges and other credits.
The Company evaluates the performance of its segments based on profit from
operations with consideration of assets employed. In the regional sales and
marketing segments, profit from operations is based on standard product costs
excluding intercompany margins and therefore reflect contribution to worldwide
Company profits from third party sales. Non-standard manufacturing costs along
with new product manufacturing development costs and regional warehousing and
distribution costs are reported as incurred in the Global Operations segment.
Costs related to research, engineering and development are reported as incurred
in the Research and Development segment.
The Company discusses sales and profit from operations in terms of its core
instant business, other core products and non-core businesses. The core instant
business consists of instant cameras and film. Other core products consist of
digital products, unique ID products, conventional 35mm cameras and film,
videotapes, medical imaging products and sunglasses. Non-core businesses have
consisted of graphics which was contributed to a joint venture in 1999 and
polarizer and holography which had been exited by the end of the first quarter
of 2000.
The Company has reclassified certain prior year information to conform with the
current year presentation.
11
<PAGE>
2000 FIRST QUARTER RESULTS
SALES
Worldwide net sales to customers increased 6% to $403 million in the first
quarter of 2000 from $379 million in the first quarter of 1999. The increase was
due to higher sales of instant cameras and film and, to a lesser degree, other
core products. The increase was offset, in part, by lower sales from non-core
businesses that the Company exited in 1999 and the unfavorable impact of foreign
exchange. Included in worldwide sales to customers for the first quarter of 2000
was approximately $75 million related primarily to new instant camera and film
products introduced in the last three years which are priced to appeal to a
broader range of customers and, in general, carry relatively lower average
selling prices. Sales of new products, which include the I-Zone Instant Pocket
Camera and film, Joycam, the PhotoMAX line of digital cameras and the SP-350
retail document photo system, increased by $50 million in the first quarter of
2000 compared with the same period of 1999.
In the first quarter of 2000, on a unit basis, worldwide shipments to customers
of instant cameras increased approximately 90% to 2.3 million units from 1.2
million units for the same period in 1999 while shipments to customers of
instant film increased by approximately 20% compared with the first quarter of
1999.
Sales in the Americas Region increased 5% to $239 million in the first quarter
of 2000 compared with $227 million in the first quarter of 1999. The increase,
which occurred primarily in the United States, was due to higher sales of
instant cameras. An increase in sales of other core products, which consisted of
higher sales of digital products offset, in part, by lower sales of conventional
35mm film and videotapes, also contributed to the increase in the Region's
results for the first quarter of 2000. The increases from instant cameras and
other core products were offset, in part, by lower sales from non-core
businesses that the Company exited in 1999. Instant film sales in the Americas
Region were essentially the same in the first quarter of 2000 compared with the
same period of 1999 as a result of higher unit sales being offset by the impact
of lower average selling prices resulting from changes in product mix in the
first quarter of 2000.
In the Americas Region, on a unit basis, shipments to customers of instant
cameras increased approximately 95% while shipments to customers of instant film
increased by approximately 20% in the first quarter of 2000 compared with the
first quarter of 1999.
Sales in the European Region were essentially unchanged at $86 million in the
first quarter of 2000 compared with $87 million in the first quarter of 1999. In
the first quarter of 2000, the Company had higher sales of instant cameras and,
to a lesser degree, instant film and other core products compared with the same
period in 1999. The increases were offset by the unfavorable impact of foreign
exchange. Sales in the European Region in the first quarter of 1999 were
unfavorably impacted by a decline in channel inventories and lower retail
demand.
12
<PAGE>
In the European Region, on a unit basis, shipments to customers of instant
cameras increased approximately 195% while shipments to customers of instant
film increased by approximately 25% in the first quarter of 2000 compared with
the first quarter of 1999.
Sales in the Asia Pacific Region increased 19% to $78 million in the first
quarter of 2000 compared with $65 million in the first quarter of 1999. The
increase was due to higher sales of instant cameras and film and the favorable
impact of foreign exchange offset, in part, by lower sales of other core
products.
In the Asia Pacific Region, on a unit basis, shipments to customers of instant
cameras increased approximately 45% while shipments to customers of instant film
increased by approximately 25% in the first quarter of 2000 compared with the
first quarter of 1999. Shipments to customers of instant cameras and film in the
first quarter of 1999 included new products which were introduced in Japan
during the second half of 1998.
PROFIT/(LOSS) FROM OPERATIONS
Worldwide profit from operations in the first quarter of 2000 was $9 million
compared with a loss from operations of $7 million in the first quarter of 1999.
The increase was due to lower manufacturing costs (including savings from
restructuring and other efficiencies), the impact of higher sales of instant
cameras and, to a lesser degree, the impact of higher sales of instant film. The
increases were offset, in part, by higher spending on advertising and
promotional activities and centralized information systems.
Profit from operations in the Americas Region was $62 million in the first
quarter of 2000 compared with $59 million in the first quarter of 1999. The
increase, which occurred primarily in the United States, was due to the impact
of higher unit sales of instant film and cameras. The increases from instant
film and cameras were offset, in part, by the mix of instant film sold and
higher spending on advertising and promotional activities.
Profit from operations in the European Region was $10 million in the first
quarter of 2000 compared with $16 million in the first quarter of 1999. The
decrease was due to the unfavorable impact of foreign exchange and, to a lesser
degree, higher spending on advertising and promotional activities. The decreases
were offset, in part, by the impact of higher sales of instant cameras and film.
Profit from operations in the Asia Pacific Region was $22 million in the first
quarter of 2000 compared with $14 million in the first quarter of 1999. The
increase was due to the impact of higher sales of instant cameras and film and
the favorable impact of foreign exchange.
13
<PAGE>
Global Operations costs were $25 million in the first quarter of 2000 compared
with $44 million in the first quarter of 1999. The decrease was due to
manufacturing efficiencies and the timing of certain manufacturing costs. This
reduction was a significant component of the Company's improvement in gross
margin as a percentage of net sales which increased to 44% for the first quarter
of 2000 compared with 37% for the same period in 1999.
Research and Development costs were $21 million in both the first quarter of
2000 and 1999.
Corporate costs were $39 million in the first quarter of 2000 compared with $31
million in the first quarter of 1999. The increase was due to higher expenses,
including depreciation, for centralized information systems and increased
central marketing activities.
The net of other income and expense was income of $9 million in the first
quarter of 2000 compared with expense of $23 million in the same period of 1999.
Other income in the first quarter of 2000 primarily related to gains from
investments and the sale of real estate. In the first quarter of 1999, other
expense included a non-cash charge of $35 million to write-off the carrying
value of the Company's preferred stock investment in Sterling Dry Imaging
Systems, Inc. offset, in part, by $11 million of gains from the sale of real
estate.
Interest expense increased to $20 million in the first quarter of 2000 compared
with $18 million for the same period in 1999. The increase was due to higher
interest rates on outstanding debt.
Income tax benefit in the first quarter of 2000 was $1 million, or 35% of a
reported loss before income taxes of $2 million. In the first quarter of 1999,
the Company recorded a tax benefit of $17 million or 35% of a reported loss
before income taxes of $47 million.
In the first quarter of 2000, the Company recorded net loss of $1 million, or
$.03 basic loss per common share compared with a net loss of $31 million, or
$.70 basic loss per common share in the first quarter of 1999. Diluted loss per
common share was the same as basic loss per common share in the first quarter of
2000 and 1999.
14
<PAGE>
RESTRUCTURING AND OTHER CHARGES
In 1997, the Company recorded restructuring and other charges of $340 million
which consisted of severance costs, impairment losses on certain long-lived
assets, other asset write-downs and exit costs associated with certain
businesses. Of this amount, approximately $17 million represented inventory
write-downs which were included in cost of goods sold. In 1998, the Company
recorded a $50 million restructuring charge related to an expansion of the
severance component of the 1997 program. These charges (collectively, the "1997
Program") were allocated to the non-segment Corporate category and were
undertaken as the result of management's assessment of the Company's
infrastructure, to strengthen its competitive cost position, to streamline
operations and to improve profitability by consolidating and selling
manufacturing facilities and reducing corporate overhead. The strategic
objective of the 1997 Program was to reduce the cost of developing,
manufacturing, selling and distributing the Company's products; to change and
improve business processes; to deliver new products more efficiently; to improve
financial performance; and to fundamentally alter how the Company conducts
business globally.
Approximately $150 million of the charges recorded in 1997 for the 1997 Program
related to an involuntary severance program under which approximately 1,800
employees (consisting of sales and marketing employees in the regional segments:
Americas - 16%; Europe - 24%; Asia Pacific - 9%; primarily manufacturing
employees in Global Operations - 36%; research and engineering employees in
Research and Development - 5%; and administrative employees in the non-segment
Corporate category - 10%) were expected to leave the Company. The 1998 extension
to this involuntary severance program added approximately 1,000 additional
employees (consisting of sales and marketing employees in the regional segments:
Americas - 7%; Europe - 14%; Asia Pacific - 3%; primarily manufacturing
employees in Global Operations - 65%; research and engineering employees in
Research and Development - 10%; and administrative employees in the non-segment
Corporate category - 1%). Approximately 2,600 of the 2,800 terminations had
occurred at April 2, 2000, with the remaining terminations expected to occur by
the end of 2000. Approximately $153 million of cash payments related to the
severance component of the 1997 Program had been made at April 2, 2000 with the
remaining severance payments of approximately $34 million expected to be
substantially completed by the end of 2000. Of the total amount provided for
severance, approximately $10 million related to pension curtailment costs and $5
million related to pension enhancement costs incurred primarily for certain
non-U.S. employees expected to be terminated under this program.
In the Americas, European and Asia Pacific segments, the major impact of the
1997 Program consists of reducing the number of employees associated with sales
and marketing activities. The impact of the 1997 Program in the European segment
also consists of consolidating back office activities in a centralized location.
15
<PAGE>
The impact of the 1997 Program in Global Operations consists of reducing the
number of direct and indirect employees located at manufacturing facilities in
both the United States and Europe that are associated with the manufacture of
instant film and, to a lesser degree, instant hardware, along with employees
required to procure goods and services and distribute finished products. The
1997 Program in Global Operations also included employees at the Company's
chemical manufacturing facility in Freetown, Massachusetts that the Company sold
in February 1998.
The impact of the 1997 Program in Research and Development segment consists of
reducing the number of employees associated with research, engineering and
development activities in the United States and to focus the Company's research
and development activities on its core imaging business.
The 1997 Program affects the non-segment Corporate category by reducing the
number of employees in the United States that support functions such as central
marketing, finance, legal, information management, administration, human
resources and facilities support.
In addition to severance, the asset impairment portion of the 1997 Program
amounted to approximately $163 million. Of the $163 million, approximately $106
million 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 New Bedford coating facility was designed and specially built to
manufacture large volumes of high quality media for the Company's graphics and
medical diagnostic imaging businesses. However, growth of these businesses did
not materialize as planned and as a result, the Company continues to pursue
several strategic options for the future use of this facility, including
outright sale. Approximately $22 million of the asset impairment related to the
write-off of battery assembly equipment that was not required to support
anticipated production requirements. This equipment was initially constructed in
anticipation of significant growth in instant film sales in the emerging markets
of Russia and Asia. During 1997, it became clear that these volume assumptions
were no longer valid based on weakness in demand and an unfavorable outlook in
those emerging markets. In 1997, the Company abandoned this special-purpose
equipment in place because it believed that it had no future use or salvage
value and sale to a third party was not likely.
16
<PAGE>
The $163 million also included a loss of approximately $22 million on the sale
of the Company's underutilized chemical manufacturing facility in Freetown,
Massachusetts. The Freetown facility was used to manufacture certain chemical
components of the Company's instant film. Because of competitive changes in the
specialty chemical industry and the fact that the Company's expectation of
future sales of instant film in certain emerging markets did not materialize,
the Company sought the outright sale of the Freetown facility. The write-down of
the Freetown facility was based on the terms of a purchase and sale agreement
and the terms of a long-term supply agreement under which the Company agreed to
purchase certain chemicals used to manufacture its instant film. The Company
entered both the purchase and sale agreement and the long-term supply agreement
in the fourth quarter of 1997. The sale of the Freetown facility was completed
in the first quarter of 1998. Additionally, the asset impairment portion of the
1997 Program included approximately $13 million related to other fixed assets
which were not individually material. The write-down of these fixed assets
occurred because the assets were no longer required in its U.S. manufacturing
operations due primarily to the consolidation of certain manufacturing
operations. The assets related to the asset impairment portion of the 1997
Program were primarily located in Global Operations. The Company also recorded
approximately $4 million for exit costs and, to a lesser degree, severance
liabilities related to the sale of the Freetown facility.
In addition to the severance and asset write-downs, the balance of the 1997
Program consisted of approximately $17 million of inventory write-downs and
approximately $6 million of exit costs. The inventory write-downs consisted of
reserves for chemical inventories made obsolete by the sale of the Freetown
facility, lower of cost or market provisions on inventories of a first
generation digital camera and, to lesser degree, inventory reserves related to
the Company's decision to exit a portion of its holography business. The exit
costs related primarily to lease and contract terminations and other costs
directly related to restructuring.
Under the 1997 Program, the Company realized benefits of approximately $115
million through the end of 1999 and expects to further benefit by approximately
$25 million in 2000 bringing the estimated total benefit from the 1997 Program
to $140 million on an annualized basis after the benefits are fully realized.
17
<PAGE>
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $65 million at April 2, 2000 and
$92 million at December 31, 1999. Net cash used by operating activities in the
first quarter of 2000 was $48 million. The net loss, adjusted for non-cash items
(depreciation, gains from the sale of real estate and other non-cash items)
resulted in $25 million of cash from operating activities. A decrease in
receivables resulting from the seasonality of the Company's sales and its
efforts to strengthen its balance sheet by reducing days sales outstanding
provided an additional $91 million from operating activities. The receivable
balance at the end of the first quarter of 2000 included a receivable from the
sale of the Company's technical polarizer and display film business. The Company
collected this receivable early in the second quarter of 2000. The cash provided
by the net loss adjusted for non-cash items and decreased receivables was more
than offset by $111 million used to reduce payables, accruals and liabilities
for benefits (including $15 million of severance payments under the 1997
Program) and $42 million related to an increase in inventories. The decrease in
payables, accruals and liabilities for benefits was due primarily to timing and
the payment of these liabilities. The increase in inventories was consistent
with the seasonality of the Company's business.
Net cash used by investing activities was $15 million and consisted primarily of
$33 million of additions to property, plant and equipment offset, in part, by
$12 million of proceeds related primarily to the sale of real estate. The
increase in cash from financing activities of $37 million was due to an increase
in short-term debt of $44 million offset, in part, by $7 million of dividend
payments.
Working capital (defined as current assets less current liabilities) was
essentially unchanged at $368 million at April 2, 2000 compared with $367
million at December 31, 1999. Movements in working capital during the quarter
included increases from the change in inventories and payables, accruals and
liabilities for benefits offset by the changes in receivables and short-term
debt described above.
In the first quarter of 2000, capital spending totaled $33 million compared with
$47 million in the first quarter of 1999. The decrease in capital spending was
the result of lower spending on new products (consistent with the Company's new
product launch schedule), the Company's enterprise-wide software system and
capital improvements related to the consolidation of the Company's real estate
holdings. Capital expenditures in 2000 are expected to be approximately $150
million.
18
<PAGE>
The Company has financed its operations with the following sources of debt: the
Amended Credit Agreement (defined below); the U.K. Credit Agreement (defined
below); short-term lines of credit; and the Company's outstanding 6 3/4% Notes
due 2002 (the "2002 Notes"), 7 1/4% Notes due 2007 (the "2007 Notes") and
11 1/2% Notes due 2006 (the "2006 Notes").
At April 2, 2000, the Company had $303 million outstanding in short-term debt.
The amounts outstanding were comprised of $285 million under the Amended Credit
Agreement and $18 million under uncommitted short-term lines of credit. At April
2, 2000, there were no amounts outstanding under the U.K. Credit Agreement.
In December 1998, the Company entered into a credit agreement for a maximum
commitment of $350 million on a revolving basis through December 31, 2001. The
credit agreement provided the lenders the right to incorporate covenants given
to the holders of notes or other securities of the Company which, in the lenders
judgement are more restrictive. The lenders exercised their rights to
incorporate certain covenants of the 2006 Notes in Amendment No. 1 dated March
31, 1999, to the credit agreement (hereinafter referred to as 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 plus a margin. The margins
range 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 rating. In addition, the Company
pays 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. The weighted average interest rate on amounts
outstanding under the Amended Credit Agreement was 8.3% for the quarter ended
April 2, 2000.
In connection with the Amended Credit Agreement, the Company entered into a
collateral agreement and certain related documents that granted the lenders a
first security interest in certain of the Company's domestic inventories and
trade accounts receivable. Under the collateral agreement, the security will be
released if the Company's credit rating is BBB- or higher by Standard and Poor's
("S&P") and Baa3 or higher by Moody's Investor's Services, Inc. ("Moody's").
Currently, the Company's credit ratings are BB by S&P and Duff & Phelps Credit
Ratings Co. ("Duff & Phelps") and Ba2 by Moody's. In addition, the Company's
long-term debt is rated BB- by S&P, BB by Duff & Phelps and Ba3 by Moody's. In
the first quarter of 2000, S&P and Moody's upgraded their outlook from negative
to stable.
19
<PAGE>
In August 1999, the Company's wholly-owned subsidiary, Polaroid (U.K.) Limited
("Polaroid U.K."), as borrower, and the Company, as guarantor, entered into a
new loan agreement for a maximum commitment of 72.5 million euros (approximately
$69 million at April 2, 2000) (the "U.K. Credit Agreement") that is scheduled to
mature on December 31, 2001. Several of the Company's foreign subsidiaries
granted the lenders under this facility a security interest in certain foreign
inventories and receivables. Borrowings under the U.K. Credit Agreement bear a
margin of approximately 25 basis points higher than that paid under the Amended
Credit Agreement.
The Amended Credit Agreement and the U.K. Credit Agreement require the Company
to maintain financial ratios related to the maximum level of debt to earnings
before interest, taxes, depreciation, and amortization and minimum interest
coverage. In addition to financial ratios, the Amended Credit Agreement and the
U.K. Credit Agreement restrict, among other things, the Company's ability to do
the following: make certain capital expenditures; make certain payments; incur
debt in addition to the 2006 Notes; incur certain liens; make certain
investments; enter into certain sale leaseback transactions; merge, consolidate,
sell or transfer all or substantially all of the Company's assets subject to
certain financial conditions; and to enter into certain transactions with
affiliates. The Company met all of the requirements of the Amended Credit
Agreement and the U.K. Credit Agreement in the first quarter of 2000, and based
on information currently available, believes it is likely to meet the
requirements for the balance of 2000.
The Amended Credit Agreement and the U.K. Credit Agreement also restrict the
Company's ability to pay dividends and repurchase stock. The agreements limit
the payment of dividends and repurchase of Company stock to: $3.75 million
per quarter on an aggregate basis since December 31, 1998 plus; up to an
additional $3.75 million in the current quarter from the exercise of stock
options and the lesser of 6% of the Company's domestic payroll or the fair
value of the shares of the Company's stock issued to employee stock ownership
plans plus; the aggregate proceeds from the exercise of stock options and the
lesser of 6% of the Company's domestic payroll or the fair value of the
shares of the Company's stock issued to employee stock ownership plans,
without limitation, for all prior quarters since December 31, 1998. Based on
information currently available, the Company believes that this provision
will not prevent it from continuing the current dividend payment of $.60 per
share per annum.
The indenture, pursuant to which the 2006 Notes were issued, 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; incurring certain liens; entering into sale
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.
20
<PAGE>
At April 2, 2000, the Company had $573 million outstanding in long-term debt.
The amounts outstanding were comprised of $149 million under the 2002 Notes,
$149 million under the 2007 Notes and $275 million under the 2006 Notes.
The Company filed a shelf registration statement with the Securities and
Exchange in the first quarter of 2000 to expand the type and increase the amount
of securities it may offer up to $500 million. The types of securities that the
Company can issue under the shelf registration are debt securities, preferred
stock, depositary shares, common stock, preferred stock rights, stock purchase
contracts, stock purchase units, warrants and warrant units. The Company's
ability to issue securities under the shelf registration statement are subject
to limitations imposed by the Amended Credit Agreement, the U.K Credit Agreement
and the 2006 Notes.
The Company believes that the availability of funds under the Amended Credit
Agreement, the U.K. Credit Agreement, short-term lines of credit, funds
generated from operations and its additional borrowing capacity will be adequate
for at least the next twelve months to meet working capital needs, fund spending
for growth and maintenance of existing operations and make severance payments
associated with the 1997 Program.
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 exchange rate movement can be positive or
negative in any given period. The Company's ability to counteract currency
exchange rate movement is primarily dependent on pricing in local markets and,
to a lesser degree, in the short-term, on hedging through nonfunctional currency
denominated borrowings, forward exchange contracts and the purchase of currency
options.
The Company maintains a Monetary Control Center (the "MCC") which operates under
written policies and procedures that define the day-to-day operating guidelines,
including exposure limits to contract for nonfunctional currency denominated
borrowings, currency exchange swaps, forward exchange contracts and currency
options. The MCC is subject to random independent audits and reports to a
supervisory committee comprised of members of the Company's senior management.
The MCC publishes regular reports to the supervisory committee detailing foreign
currency activities.
21
<PAGE>
To minimize the 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 with 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 nonfunctional currency denominated borrowings are recognized
in earnings as incurred. The amount of the Company's outstanding short-term debt
incurred for hedging purposes was $18 million at April 2, 2000.
Alternatively, the Company may use forward exchange contracts to minimize the
impact of currency fluctuations on its net monetary assets denominated in
nonfunctional currencies. The term of these contracts typically does not exceed
six months. The Company does not enter into forward exchange contracts for
trading purposes. At April 2, 2000, the aggregate notional value of the
Company's outstanding forward exchange contracts was $99 million.
The Company has limited flexibility to increase prices in local currencies and
offset the adverse impact of foreign exchange. As a result, the Company
purchases U.S. dollar call/foreign currency put options which allows it to
protect a portion of its expected foreign currency denominated revenues from
adverse currency exchange movement. The term of purchased options typically does
not exceed 18 months, and all of the option contracts outstanding at April 2,
2000 expire in 2000. The Company does not write options or purchase options for
trading purposes. The notional value of the Company's outstanding option
contracts, which were denominated in Japanese yen and, to a lesser degree, in
euros was $106 million at April 2, 2000.
IMPACT OF INFLATION
Inflation continues to be a factor in many countries in which the Company does
business. The Company's pricing strategy and continuing efficiency improvements
have offset to a considerable degree inflation and normal cost increases. The
overall inflationary impact on the Company's earnings has not been material.
22
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") 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 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. In June 1999,
the FASB issued FAS 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" which
delayed the effective date of FAS 133 by one year to fiscal years beginning
after June 15, 2000. In March 2000, the FASB published a Proposed Statement of
Financial Accounting Standards that would amend FAS 133 for decisions made by
the FASB related to the Derivatives Implementation Group process. The FASB
expects to issue a final standard at the end of the second quarter of 2000. The
Company is currently evaluating the effect of FAS 133 and the proposed
amendments on its results of operations and financial position.
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 adopted the euro as their common currency on January 1,
1999. 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 the participating countries. The legacy currencies will then be
withdrawn and will cease to be legal tender effective June 30, 2002. During the
period from January 1, 1999 to 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
its operations to accommodate the euro conversion, the EMU Committee believes,
based on information available at this time and on several assumptions, that the
euro conversion process will not have a material adverse impact on the Company's
financial position or the results of its operations.
23
<PAGE>
YEAR 2000 DATE CONVERSION
The Year 2000 problem is the result of computer programs and embedded chips
being written with two digits rather than four to define the applicable year. At
the end of 1999, the Company had completed its Year 2000 readiness plan and any
required remediation. As a result, the Company was well prepared for the
transition to the Year 2000 and did not experience any significant Year 2000
problems at the actual date rollover. Through the end of the first quarter of
2000, the Company had not experienced any major Year 2000 problems and has
experienced only a few minor Year 2000 issues. The Company will continue to
monitor its systems and applications with respect to the Year 2000, but has no
reason to expect any such issues. Through April 2, 2000, the Company has spent
approximately $22 million related to the Year 2000 project and does not expect
any further costs related to its Year 2000 project to be material.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Some statements in this report may be forward looking in nature, or
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the "Act"). These statements may be identified by the use of
forward-looking words or phrases such as "expect", "anticipate", "plan",
"outlook", "intend", "will", "estimate" and "potential" among others. The
Company desires to take advantage of the "safe harbor" provisions of the Act.
Many of the important factors below have been discussed in prior filings by the
Company with the Securities and Exchange Commission. 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 a result
of a wide variety of factors which include, but are not limited to the Company's
ability:
o to revitalize the core imaging business which requires, among other
things;
o introducing a number of new product each year;
o expanding certain profitable businesses; and
o continuing to reduce costs through operating efficiencies,
including savings from restructuring;
o to successfully penetrate new demographic markets such as children,
teens and young adults for its products and new technologies through
product innovations, marketing campaigns and expanded distribution;
24
<PAGE>
o to successfully develop and implement its digital imaging strategy
which requires, among other things:
o applying the Company's technology and expertise in instant
imaging to the developing market for digital imaging products;
o marketing of successful new digital imaging products;
o successfully developing partnerships and alliances with other
companies in the digital imaging market; and
o accurately anticipating and responding to trends in the rapidly
changing digital imaging market;
o to successfully compete in the instant imaging market against larger
and stronger competitors like Fuji Photo Film Co., Ltd. ("Fuji"), and
in the digital imaging market against competitors like Eastman Kodak
Company, Fuji, Hewlett-Packard Company, Cannon U.S.A., Inc. and Sony
Corporation;
o to successfully avoid periods of net losses similar to those
experienced in the past which could require the Company to find
additional sources of financing to fund operations, implement its
business strategy, meet anticipated capital expenditures, research and
development costs and financing commitments;
o to successfully manage or reduce its debt which would reduce the
Company's vulnerability to general adverse economic conditions;
increase its ability to compete with competitors that are less
leveraged; increase its ability to fund future working capital needs,
capital expenditures, acquisitions, research and development costs and
other general corporate requirements; and increase its flexibility to
react to changes in the businesses and industry in which it operates;
o to comply with the covenants in the Amended Credit Agreement, the U.K.
Credit Agreement, the indenture governing the 2006 Notes and certain of
the agreements governing short-term lines of credit that could result
in an event of default;
o to generate sufficient cash in order 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;
o to retain its top customers at essentially their current purchasing
levels;
o to successfully sell and market its products worldwide particularly in
light of the major risks associated with worldwide operations such as
fluctuation of foreign exchange rates, particularly the Japanese yen
and euro;
25
<PAGE>
o to successfully further reduce its cycle time in bringing new products
to market;
o to successfully retain certain sole source suppliers, or find timely
alternatives, for raw materials, supplies and finished goods necessary
for the manufacture and sale of its products, including chemicals,
polyester film base, specialty paper and certain components;
o to successfully develop and continue to protect ownership of, and
license as appropriate, valuable intellectual property rights;
o to comply with the large number of federal, state and local
environmental laws and regulations that 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; and;
o to retain a number of key senior managers and to be able 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 successful in accomplishing
its objectives and meeting the challenges summarized above. If the Company is
not successful, the Company's business and results of operations could be
negatively impacted.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is currently involved in several lawsuits, the unfavorable
disposition of which could have a material adverse effect on the financial
condition or operating results of the Company.
In April 1999, a tribunal of the International Chamber of Commerce's
International Court of Arbitration entered a ruling against the Company's
wholly-owned subsidiary Polaroid Far East Limited, in an arbitration proceeding
brought by Columbia Enterprises for breach of two distributor agreements
regarding the distribution of photographic equipment in the Philippines in 1996.
The proceeding has entered the damages phase, but the Company cannot predict the
likely amount of the award.
26
<PAGE>
A consolidated suit has been filed in United States District Court for the
District of Massachusetts against the Company and certain of its officers by
individuals claiming to have purchased stock in the Company and purporting to
represent a class of its shareholders in actions alleging violations of federal
securities law regarding public disclosure of information about the Company's
business during a time between April 16, 1997 and August 28, 1998. The Company
believes that these suits are without merit and intends to defend them
vigorously.
On March 20, 2000, the declaratory judgment action filed by the Company against
the successor to the former trustee of the Polaroid Stock Equity Plan (the
"Plan") and its insurer was settled. This settles the action brought by the
Company to determine its liability under an indemnity provision of the trust
agreement between the Company and the former trustee. The dispute arose after
the former trustee of the Plan settled a long standing action brought against it
by the United States Department of Labor for allegedly breaching its fiduciary
duty when the former trustee voted shares in the Plan during a 1989 self-tender
that resulted from an attempted takeover of the Company. The settlement of this
action did not have a material impact on the Company's results of operations or
financial position.
In June 1999, the Company received a Notice of Service of Process in a patent
infringement action filed against it and many others by the Lemelson Medical,
Education and Research Foundation alleging that a broad range of the Company's
manufacturing equipment and products infringe a number of patents. The Company
believes that the suit is without merit and intends to defend it vigorously.
In addition, the Company is involved in various other legal proceedings and
claims arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a materially adverse effect on the
results of operations or financial condition of the Company.
ENVIRONMENTAL COMPLIANCE
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.
27
<PAGE>
The Company, together with other parties, is currently designated a Potentially
Responsible Party ("PRP") by the United States Environmental Protection Agency
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 April 2, 2000 was $1.4 million. The Company currently
estimates that the majority of $1.4 million reserved for environmental
liabilities 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. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Not applicable.
b) Not applicable.
c) Not applicable.
d) Not applicable.
28
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
Exhibit No. Description
----------- -----------
10.1 Change in Control and Severance Agreement dated as
of March 9, 2000, between Polaroid Corporation and
Sandra B. Lawrence.
12 Ratio of Earnings to Fixed Charges.
15 Letter re Unaudited Interim Financial Information.
27 Financial Data Schedule.
B) REPORTS ON FORM 8-K
During the first quarter of 2000, the Company filed the following:
o a Current Report on Form 8-K dated January 4, 2000, (the Company
filed a press release announcing the appointment of two new
members of its Board of Directors); and
o a Current Report on Form 8-K dated January 26, 2000, (the Company
filed a press release announcing the 1999 fourth quarter and full
year results and the outlook for 2000).
29
<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/ JUDITH G. BOYNTON
----------------------
Judith G. Boynton
Executive Vice President, Business Development
and Chief Financial Officer
30
<PAGE>
Exhibit 10.1
CHANGE IN CONTROL SEVERANCE AGREEMENT
AGREEMENT made as of March 9, 2000 between Polaroid Corporation
("Polaroid" or "Company") and SANDRA B. LAWRENCE (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.
<PAGE>
(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:
(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
-2-
<PAGE>
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 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;
-3-
<PAGE>
(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 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
-4-
<PAGE>
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;
-5-
<PAGE>
(iv) the reassignment of Executive without Executive's consent from
Executive's regular shift or regular duties 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.
-6-
<PAGE>
(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
(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:
-7-
<PAGE>
(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,
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
-8-
<PAGE>
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 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
-9-
<PAGE>
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 imposed
with respect thereto) and the Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up
-10-
<PAGE>
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
-11-
<PAGE>
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 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
-12-
<PAGE>
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.
(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.
-13-
<PAGE>
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).
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
-14-
<PAGE>
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.
-15-
<PAGE>
14. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of
-16-
<PAGE>
Massachusetts applicable to contracts made and to be performed therein.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties and, except as expressly provided herein, supersedes all other
prior agreements concerning the effect of a Change in Control on the
relationship between Polaroid and Executive. This Agreement may be changed
only by a written agreement executed by Polaroid and Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement on the 9th
day of March 2000.
POLAROID CORPORATION
By /s/ GARY T. DICAMILLO
--------------------------------
Gary T. DiCamillo
/s/ SANDRA B. LAWRENCE
- --------------------------------
Sandra B. Lawrence
Executive
-17-
<PAGE>
EXHIBIT 12 - RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years ended December 31, 1995, 1996, 1997, 1998 and 1999 and quarter ended April 2, 2000
(IN MILLIONS, EXCEPT RATIOS)
QUARTER
ENDED
YEAR ENDED DECEMBER 31, APRIL 2,
1995 1996 1997 1998 1999 2000
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Earnings/(loss):
Earnings/(loss) before income tax
expense/(benefit) per consolidated
statement of earnings $(201.4) $31.2 $(191.9) $(38.9) $ 13.4 $ (2.1)
Add:
Interest expense 52.1 47.4 47.8 57.6 77.4 19.9
Portion of rent representative of an
interest factor 11.7 9.3 10.7 10.5 10.2 2.6
------------ ----------- ----------- ------------ ----------- -----------
Adjusted earnings/(loss) before income
tax benefit/ (expense) $(137.6) $87.9 $(133.4) $ 29.2 $101.0 $20.4
============ =========== =========== ============ =========== ===========
Fixed charges:
Interest expense $ 52.1 $47.4 $ 47.8 $ 57.6 $77.4 $19.9
Portion of rent representative of an
interest factor 11.7 9.3 10.7 10.5 10.2 2.6
Capitalized interest 4.8 5.1 2.6 2.2 3.0 .6
------------ ----------- ----------- ------------ ----------- -----------
Total fixed charges $ 68.6 $61.8 $ 61.1 $ 70.3 $90.6 $23.1
============ =========== =========== ============ =========== ===========
Ratio of earnings to fixed charges N/A(a) 1.4(b) N/A(c) .4(d) 1.1 .9
============ =========== =========== ============ =========== ===========
</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 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 and other charges of
$50.0 million. Excluding the pre-tax restructuring and other charges, the
ratio of earnings to fixed charges was 1.1.
31
<PAGE>
EXHIBIT 15 - LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
The Board of Directors
Polaroid Corporation
Ladies and Gentlemen:
Re: Registration Statements No. 33-36384 on Form S-8, No. 33-44661 on Form
S-3, No. 33-51173 on Form S-8, No. 333-32283 on Form S-8, No. 333-32285
on Form S-8, No. 333-67647 on Form S-3 and No. 333-96051 on Form S-3 of
Polaroid Corporation
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 18, 2000, related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933 ("the Act"), such
report is not considered part of a registration statement prepared or certified
by an accountant or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG LLP
Boston, Massachusetts
May 16, 2000
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM POLAROID
CORPORATION'S FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 2, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> APR-02-2000
<CASH> 64,800
<SECURITIES> 0
<RECEIVABLES> 440,100
<ALLOWANCES> (24,100)
<INVENTORY> 433,000
<CURRENT-ASSETS> 1,071,500
<PP&E> 2,020,400
<DEPRECIATION> 1,444,300
<TOTAL-ASSETS> 1,965,600
<CURRENT-LIABILITIES> 703,600
<BONDS> 573,100
0
0
<COMMON> 75,400
<OTHER-SE> 284,800
<TOTAL-LIABILITY-AND-EQUITY> 1,965,600
<SALES> 403,400
<TOTAL-REVENUES> 403,400
<CGS> 224,100
<TOTAL-COSTS> 394,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,597
<INTEREST-EXPENSE> 19,900
<INCOME-PRETAX> (2,100)
<INCOME-TAX> (700)
<INCOME-CONTINUING> (1,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,400)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
