-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jqj4Q3f1Nwx7EekLsoChYv3JetXMpvUQHEzjpDPeYNBIlpaNeBqmKGBfzVTbfQbj RHVmHmn4dmC5yh1edSzCGg== /in/edgar/work/0000912057-00-049759/0000912057-00-049759.txt : 20001115 0000912057-00-049759.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049759 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001001 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLAROID CORP CENTRAL INDEX KEY: 0000079326 STANDARD INDUSTRIAL CLASSIFICATION: [3861 ] IRS NUMBER: 041734655 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04085 FILM NUMBER: 765393 BUSINESS ADDRESS: STREET 1: 784 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 7813862000 10-Q 1 a2027635z10-q.txt 10Q 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 October 1, 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 November 3, 2000: 45,186,643 This document contains 39 pages. Exhibit Index appears on page 36. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENT OF EARNINGS Periods ended September 26, 1999 and October 1, 2000
POLAROID CORPORATION AND SUBSIDIARY COMPANIES Third Quarter Nine Months (IN MILLIONS, EXCEPT PER SHARE DATA) 1999 2000 1999 2000 - -------------------------------------------------------------------------------------------------------------------- (UNAUDITED) NET SALES $ 463.0 $ 458.2 $1,328.8 $1,349.4 Cost of goods sold 268.3 246.5 786.5 732.1 Marketing, research, engineering and administrative expenses 182.9 163.2 496.5 508.9 ---------------------------------------------------- TOTAL COSTS 451.2 409.7 1,283.0 1,241.0 PROFIT FROM OPERATIONS 11.8 48.5 45.8 108.4 Other income/(expense) 2.3 1.3 (19.2) 21.5 Interest expense 19.8 21.6 57.0 62.8 ---------------------------------------------------- PROFIT/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT) (5.7) 28.2 (30.4) 67.1 Federal, state and foreign income tax expense/(benefit) (1.9) 9.8 (10.6) 23.5 ---------------------------------------------------- NET EARNINGS/(LOSS) $ (3.8) $ 18.4 $ (19.8) $ 43.6 ==================================================== BASIC EARNINGS/(LOSS) PER COMMON SHARE $ (0.09) $ 0.41 $ (0.45) $ 0.97 DILUTED EARNINGS/(LOSS) PER COMMON SHARE $ (0.09) $ 0.40 $ (0.45) $ 0.96 CASH DIVIDENDS PER COMMON SHARE $0.15 $ 0.15 $ 0.45 $ 0.45 Weighted average common shares used for basic earnings/(loss) per common share calculation (in thousands) 44,382 45,062 44,227 44,882 Weighted average common shares used for diluted earnings/(loss) per common share calculation (in thousands) 44,382 45,933 44,227 45,409 Common shares outstanding at end of period (in thousands) 44,450 45,187 44,450 45,187 See accompanying notes to condensed consolidated financial statements
1 CONDENSED CONSOLIDATED BALANCE SHEET
POLAROID CORPORATION AND SUBSIDIARY COMPANIES December 31, October 1, (IN MILLIONS) 1999 2000 - ----------------------------------------------------------------------------------------------------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 92.0 $ 61.0 Receivables 489.7 441.6 Inventories: Raw materials 84.3 87.8 Work-in-process 135.8 182.7 Finished goods 175.5 223.8 ---------------------------------- Total inventories 395.6 494.3 Prepaid expenses and other current assets 139.6 148.2 ---------------------------------- TOTAL CURRENT ASSETS 1,116.9 1,145.1 PROPERTY, PLANT AND EQUIPMENT: Total property, plant and equipment 2,023.0 1,971.3 Less accumulated depreciation 1,423.8 1,398.0 ---------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 599.2 573.3 DEFERRED TAX ASSETS 243.7 243.7 OTHER ASSETS 80.2 76.2 ---------------------------------- TOTAL ASSETS $2,040.0 $2,038.3 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 259.4 $ 346.3 Payables and accruals 338.0 305.9 Compensation and benefits 138.1 91.1 Federal, state and foreign income taxes 14.7 21.7 ---------------------------------- TOTAL CURRENT LIABILITIES 750.2 765.0 LONG-TERM DEBT 573.0 573.4 ACCRUED POSTRETIREMENT BENEFITS 234.8 233.7 OTHER LONG-TERM LIABILITIES 111.5 82.0 COMMON STOCKHOLDERS' EQUITY: Common stock, $1 par value 75.4 75.4 Additional paid-in capital 395.2 377.6 Retained earnings 1,208.8 1,232.2 Accumulated other comprehensive income (48.9) (69.9) Less: Treasury stock, at cost 1,259.7 1,231.1 Deferred compensation .3 - ---------------------------------- TOTAL COMMON STOCKHOLDERS' EQUITY 370.5 384.2 ---------------------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $2,040.0 $2,038.3 ================================== See accompanying notes to condensed consolidated financial statements.
2 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Nine month period ended September 26, 1999 and October 1, 2000
POLAROID CORPORATION AND SUBSIDIARY COMPANIES Nine Months (IN MILLIONS) 1999 2000 - ----------------------------------------------------------------------------------------------------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net earnings/(loss) $ (19.8) $ 43.6 Depreciation of property, plant and equipment 74.9 82.3 Gain on the sale of real estate (12.0) (12.9) Other non-cash items 78.3 23.3 Decrease in receivables 4.0 34.1 Decrease/(increase) in inventories 38.5 (111.0) Increase in prepaids and other assets (28.7) (11.1) Decrease in payables and accruals (49.0) (25.2) Decrease in compensation and benefits (41.5) (75.5) Increase/(decrease) in federal, state and foreign income taxes payable (24.3) 7.2 ---------------------------------- Net cash provided/(used) by operating activities 20.4 (45.2) CASH FLOWS FROM INVESTING ACTIVITIES Decrease in other assets 25.8 4.2 Additions to property, plant and equipment (131.8) (98.3) Proceeds from the sale of property, plant and equipment 30.3 45.3 ---------------------------------- Net cash used by investing activities (75.7) (48.8) CASH FLOWS FROM FINANCING ACTIVITIES Net increase/(decrease) in short-term debt (maturities of 90 days or less) (29.5) 90.5 Short-term debt (maturities of more than 90 days) Proceeds 41.8 - Payments (24.9) - Proceeds from issuance of long-term debt 268.2 - Repayment of long-term debt (200.0) - Proceeds from issuance of stock incentives .2 .1 Cash dividends paid (19.9) (20.2) ---------------------------------- Net cash provided by financing activities 35.9 70.4 EFFECT OF EXCHANGE RATE CHANGES ON CASH 2.4 (7.4) ---------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (17.0) (31.0) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 105.0 92.0 ---------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 88.0 $ 61.0 ================================== See accompanying notes to condensed consolidated financial statements.
3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Nine Months Ended September 26, 1999 and October 1, 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
NET WEIGHTED AVERAGE EARNINGS/ OF NUMBER PER SHARE (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (LOSS) COMMON SHARES AMOUNT - ------------------------------------------ ------------- -------------------- ------------ Quarter ended September 26, 1999 Basic earnings per share $(3.8) 44.4 $(.09) ============= ==================== ============ Diluted earnings per share $(3.8) 44.4 $(.09) ============= ==================== ============ QUARTER ENDED OCTOBER 1, 2000 BASIC EARNINGS PER SHARE $18.4 45.1 $ .41 ============= ==================== ============ DILUTED EARNINGS PER SHARE $18.4 45.9 $ .40 ============= ==================== ============
4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. EARNINGS PER SHARE (CONTINUED)
NET WEIGHTED AVERAGE EARNINGS/ OF NUMBER PER SHARE (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (LOSS) COMMON SHARES AMOUNT - ------------------------------------------ ------------- -------------------- ------------ Nine months ended September 26, 1999 Basic loss per share $(19.8) 44.2 $(.45) ============= ==================== ============ Diluted loss per share $(19.8) 44.2 $(.45) ============= ==================== ============ NINE MONTHS ENDED OCTOBER 1, 2000 BASIC EARNINGS PER SHARE $43.6 44.9 $ .97 ============= ==================== ============ DILUTED EARNINGS PER SHARE $43.6 45.4 $ .96 ============= ==================== ============
The weighted average number of common shares outstanding for diluted earnings per share for the three and nine month periods ended October 1, 2000 included the effect of certain stock awards granted during 2000 for which shares have not been issued. Stock options for shares of the Company's common stock were outstanding but were not included in the calculations of diluted earnings per share because the effects were anti-dilutive. In addition, performance shares were outstanding but not included in the calculations of diluted earnings per share because all of the necessary performance conditions had not been satisfied. The stock options and performance shares not included in the calculation of diluted earnings per share were as follows:
STOCK PERFORMANCE (IN MILLIONS) OPTIONS SHARES - -------------------------------------- ------- ------------ Quarter ended September 26, 1999 6.5 .3 QUARTER ENDED OCTOBER 1, 2000 5.6 .4 Nine months ended September 26, 1999 5.9 .3 NINE MONTHS ENDED OCTOBER 1, 2000 5.8 .4
5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. COMPREHENSIVE INCOME The Company's total comprehensive income/(loss) was as follows:
QUARTER ENDED NINE MONTH PERIOD ENDED SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26, OCTOBER 1, (IN MILLIONS) 1999 2000 1999 2000 - -------------------------------------- ----------------- -------------- ---------------- -------------- Net earnings/(loss) $(3.8) $18.4 $(19.8) $ 43.6 Other comprehensive income: Currency translation adjustment 8.4 (5.5) (12.7) (20.8) Unrealized gain/(loss) on available-for-sale securities, net of tax .2 .3 (.1) (.2) ----------------- -------------- ---------------- -------------- Total comprehensive income/(loss) $ 4.8 $13.2 $(32.6) $ 22.6 ================= ============== ================ ==============
4. SEGMENTS The following is a summary of information related to the Company's segments:
QUARTER ENDED NINE MONTH PERIOD ENDED SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26, OCTOBER 1, (IN MILLIONS) 1999 2000 1999 2000 - -------------------------------------- ----------------- -------------- ---------------- -------------- Net sales to customers: Americas Region $284.8 $303.1 $ 813.1 $ 855.2 European Region 92.6 77.4 286.5 263.3 Asia Pacific Region 85.6 77.7 229.2 230.9 Global Operations -- -- -- -- Research and Development -- -- -- -- ----------------- -------------- ---------------- -------------- Segment net sales to customers 463.0 458.2 1,328.8 1,349.4 Corporate -- -- -- -- ----------------- -------------- ---------------- -------------- Total net sales to customers $463.0 $458.2 $1,328.8 $1,349.4 ================= ============== ================ ==============
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. SEGMENTS (CONTINUED) The following is a summary of information related to the Company's segments:
QUARTER ENDED NINE MONTH PERIOD ENDED SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26, OCTOBER 1, (IN MILLIONS) 1999 2000 1999 2000 - -------------------------------------- ----------------- -------------- ---------------- -------------- Profit/(loss) from operations: Americas Region $ 83.6 $ 92.3 $ 233.3 $ 251.4 European Region 17.7 9.6 56.1 34.8 Asia Pacific Region 21.3 21.9 56.3 63.4 Global Operations (36.2) (14.9) (118.2) (65.2) Research and Development (20.5) (21.3) (64.3) (61.3) ----------------- -------------- ---------------- -------------- Segment profit from operations 65.9 87.6 163.2 223.1 Corporate (54.1) (39.1) (117.4) (114.7) ----------------- -------------- ---------------- -------------- Total profit from operations $ 11.8 $ 48.5 $ 45.8 $ 108.4 ================= ============== ================ ==============
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. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. RESTRUCTURING AND OTHER CHARGES (CONTINUED) The balance of reserves established for the 1997 Program and related charges are as follows:
PENSION (IN MILLIONS) SEVERANCE ENHANCEMENTS EXIT COSTS TOTAL - -------------------------------------------------- --------------- -------------------- -------------- --------------- 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 Cash charges (12.2) -- (.9) (13.1) --------------- -------------------- -------------- --------------- Balance at July 2, 2000 21.4 -- .8 22.2 CASH CHARGES (5.4) -- -- (5.4) --------------- -------------------- -------------- --------------- BALANCE AT OCTOBER 1, 2000 $ 16.0 $ -- $ .8 $ 16.8 =============== ==================== ============== ===============
8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 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 2,700 of the 2,800 terminations under the 1997 Program occurred by October 1, 2000. In addition, approximately $170.7 million of cash payments related to the severance component of the 1997 Program had been made at October 1, 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. 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 June 2000, the FASB issued FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133" ("FAS 138"), which will be adopted concurrently with FAS 133. FAS 138 amends the accounting and reporting standards of FAS 133 for certain derivative instruments and hedging activities and incorporates conclusions reached by the FASB related to the Derivatives Implementation Group process. The Company is currently evaluating the effect of FAS 133 and FAS 138 on its results of operations and financial position. 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. NEW ACCOUNTING STANDARDS (CONTINUED) In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), that expresses the views of the SEC staff regarding the application of generally accepted accounting principles to certain revenue recognition issues. In June 2000, the SEC issued SAB No. 101B, "Second Amendment: Revenue Recognition in Financial Statements," which delayed the effective date of SAB 101 to periods no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company will adopt SAB 101 at the beginning of the fourth quarter of 2000 and does not believe that the adoption will have a material impact on its results of operations or financial position. In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which is effective for periods no later than the fourth quarter of fiscal years beginning after December 15, 1999. This accounting applies to the recognition, measurement and income statement classification of sales incentives offered to customers such as discounts, coupons, rebates and free products or services. The Company will adopt EITF Issue No. 00-14 at the beginning of the fourth quarter of 2000 and does not believe that the adoption will have a material impact on its results of operations or financial position but it will require amounts previously recorded as marketing expenses to be reclassified as a reduction of net sales. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"), which must be applied prospectively to new stock option awards, exchanges of awards in a business combination, modifications to outstanding awards and changes in grantee status that occur on or after July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's results of operations or financial position. In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which is effective for fiscal quarters beginning after June 30, 2000. This accounting applies to the cost of developing a web site and applies to web sites used to promote or advertise products or services, supplant manual processes or services, sell products (including software) or services, or to do a combination of all three. The adoption of EITF Issue No. 00-2 did not have a material effect on the Company's results of operations or financial position. 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 7. 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. Certain legal proceedings to which the Company is a party are discussed in Part II, Item 1 of this filing. 8. INDEPENDENT AUDITORS' REPORT The September 26, 1999 and October 1, 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. 11 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 October 1, 2000 and the related condensed consolidated statements of earnings for the three and nine month periods ended September 26, 1999 and October 1, 2000, and the cash flows for the nine month periods then ended. 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 for 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 October 13, 2000 12 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. Each of these regions consist of sales and marketing operations. Global Operations consists of worldwide activities associated with manufacturing, distribution, logistics, developing manufacturing processes for new products 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, centralized information systems, general and administrative functions and certain other corporate functions. Corporate also includes costs related to worldwide restructuring activities and certain other non-operating items. 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 reflects contribution to worldwide Company profits from third party sales. Non-standard manufacturing costs along with the cost of developing manufacturing processes for new products and regional warehousing and distribution costs are reported as incurred in the Global Operations segment. Costs related to research and engineering activities 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 cameras and other digital products, unique ID products, conventional 35mm cameras and film, videotapes, medical imaging products and sunglasses. Non-core businesses consist of businesses exited by the Company and include 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. 13 2000 THIRD QUARTER RESULTS SALES Worldwide net sales to customers decreased 1% to $458 million in the third quarter of 2000 compared with $463 million in the third quarter of 1999. The decrease was due to lower sales of other core products excluding digital cameras, the absence of sales from non-core businesses that the Company exited and, to a lesser degree, the unfavorable impact of foreign exchange. The decreases were offset, in part, by higher sales of instant and digital cameras and, to a lesser degree, higher sales of instant film. Worldwide net sales to customers for the third quarter of 2000 included approximately $100 million related primarily to new instant cameras and film, digital cameras and other commercial imaging products introduced in the last three years. These new products include the I-Zone Instant Pocket Camera and film, the JoyCam Instant Camera and film, the PhotoMAX line of digital cameras and the SP-350 retail document photo system. New instant camera and film products are priced to appeal to a broader range of customers and, in general, carry lower average selling prices than the traditional camera and film products. In the third quarter of 2000, on a unit basis, worldwide shipments to customers of instant cameras increased approximately 41% to 3.2 million units from 2.3 million units for the same period in 1999 while unit shipments to customers of instant film increased by approximately 10% compared with the third quarter of 1999. In addition, worldwide shipments to customers of digital cameras, most of which occurred in the United States, increased to approximately .3 million units in the third quarter of 2000, an increase of approximately four-fold over the same period of 1999. Sales in the Americas Region increased 6% to $303 million in the third quarter of 2000 compared with $285 million in the third quarter of 1999. The increase was due to higher sales of instant film, instant cameras and digital cameras sold in the Unites States. The increases were offset, in part, by lower sales of other core products excluding digital cameras and the absence of sales from non-core businesses that the Company exited. The increases in sales of instant cameras and film in the Region were impacted by changes in the product mix of new and traditional formats as higher unit sales were offset, in part, by the impact of the lower average selling prices of the newer products. In the Americas Region, on a unit basis, shipments to customers of instant cameras increased approximately 106% while unit shipments to customers of instant film increased by approximately 15% in the third quarter of 2000 compared with the third quarter of 1999. 14 Sales in the European Region decreased 16% to $77 million in the third quarter of 2000 compared with $92 million in the third quarter of 1999. The decrease was due to the unfavorable impact of foreign exchange, lower sales of instant film and, to a lesser degree, the absence of sales from non-core businesses that the Company exited. The decreases were offset, in part, by higher sales of instant cameras. Instant camera and film sales in the Region were impacted by changes in the product mix of new and traditional formats as higher unit sales were offset by the impact of the lower average selling prices of the newer products. In the European Region, on a unit basis, shipments to customers of instant cameras increased approximately 98% while unit shipments to customers of instant film increased by approximately 3% in the third quarter of 2000 compared with the third quarter of 1999. Sales in the Asia Pacific Region decreased 9% to $78 million in the third quarter of 2000 compared with $86 million in the third quarter of 1999. The decrease was due to lower sales of instant cameras and film offset, in part, by the favorable impact of foreign exchange. The decrease in sales of instant cameras was due primarily to a product transition in Japan from the original Xiao and JoyCam cameras to the next generation of I-Zone and JoyCam cameras and, to a lesser degree, changes in the product mix of instant cameras sold. The Company began the product transition in the second quarter, but the bulk of the transition occurred in the third quarter of 2000. Instant film sales in the Region decreased due to changes in the product mix of new and traditional film formats as higher unit sales were more than offset by the impact of the lower average selling prices of the newer film products. In the Asia Pacific Region, on a unit basis, shipments to customers of instant cameras decreased approximately 37% while unit shipments to customers of instant film increased by approximately 2% in the third quarter of 2000 compared with the third quarter of 1999. PROFIT/(LOSS) FROM OPERATIONS Worldwide profit from operations in the third quarter of 2000 was $49 million compared with a profit from operations of $12 million in the third quarter of 1999. The increase was due to the absence of a $40 million charge related to the Company's graphics arts business that was recorded in the third quarter of 1999. To a lesser degree, lower manufacturing costs, including savings from restructuring and other efficiencies, also contributed to the increase in profit from operations. The increases were offset, in part, by higher corporate costs related to centralized information systems and central marketing, higher costs related to promotional activities, the impact of changes in product mix on instant film and the impact of lower sales of other core products excluding digital cameras. 15 In the third quarter of 1999, the Company agreed to contribute the net assets of its graphic arts business to a joint venture in exchange for a redeemable preferred equity interest and an equity interest of less than 20% in the joint venture. In connection with the transaction, the Company recorded an impairment loss of $17 million based on its evaluation of the estimated fair value of its investment in the joint venture. In addition, the Company recorded $16 million of charges to increase reserves primarily related to trade accounts receivables and inventories, $4 million for liabilities associated with the disposition of the business and $3 million of severance costs associated with employees that were terminated as a result of the agreement. Of the total $40 million, the Company recorded approximately $25 million in cost of goods sold and the remainder in marketing and administrative expenses. On a segment basis, the Company allocated $5 million to the Americas Region, $3 million to the European Region, $11 million to Global Operations and $21 million to the non-segment Corporate category. Profit from operations in the Americas Region was $92 million in the third quarter of 2000 compared with $84 million in the third quarter of 1999. The increase was due to both higher unit sales and improved margins on sales of instant film and, to a lesser degree, the absence of the charge related to the graphic arts business described above and the impact of higher sales of instant cameras. The increases were offset, in part, by the impact of lower sales of other core products excluding digital cameras and higher costs related to promotional activities. Profit from operations in the European Region was $10 million in the third quarter of 2000 compared with $18 million in the third quarter of 1999. The decrease was due to the unfavorable impact of foreign exchange and, to a lesser degree, the impact of changes in product mix on instant film and an increase in planned spending on advertising and promotional activities supporting new products. The decreases were offset, in part, by the absence of the charge related to the graphic arts business described above. Profit from operations in the Asia Pacific Region was essentially unchanged at $22 million in the third quarter of 2000 compared with $21 million for the same period of 1999. In the third quarter of 2000, profit from operations included the favorable impact of foreign exchange offset by the impact of changes in product mix on instant film. Global Operations costs were $15 million in the third quarter of 2000 compared with $36 million in the third quarter of 1999. The decrease was due to the absence of the charge related to the graphic arts business described above and continued cost savings and manufacturing efficiencies. These reductions were a significant component of the Company's improvement in gross margin as a percentage of net sales which increased to 46% in the third quarter of 2000 compared with 42% for the same period of 1999. 16 Research and Development costs were $21 million in both the third quarter of 2000 and the third quarter of 1999. In the third quarter of 2000, the Company increased spending on research and engineering activities related to its instant and digital imaging products. The increase was offset by the absence of costs for research and engineering activities associated with non-core businesses that the Company exited. Corporate costs were $39 million in the third quarter of 2000 compared with $54 million in the third quarter of 1999. The decrease was due to the absence of the charge related to the graphic arts business described above offset, in part, by higher expenses, including depreciation, for centralized information systems and a planned increase in spending for central marketing activities primarily in support of the Company's new products. The net of other income and expense was income of $1 million in the third quarter of 2000 compared with income of $2 million in the same period of 1999. Interest expense increased to $22 million in the third quarter of 2000 compared with $20 million for the same period in 1999. The increase was due to a higher average interest rate on the amounts of debt outstanding and, to a lesser degree, higher average amounts of debt outstanding during the third quarter of 2000. Income tax expense in the third quarter of 2000 was $10 million or 35% of reported profit before income taxes compared with an income tax benefit of $2 million or 35% of the reported loss before income taxes in the third quarter of 1999. In the third quarter of 2000, the Company recorded net earnings of $18 million, or $.41 basic earnings per common share compared with a net loss of $4 million, or $.09 basic loss per common share in the third quarter of 1999. Diluted earnings/loss per common share was $.40 diluted earnings per common share in the third quarter of 2000 compared with $.09 diluted loss per common share in the third quarter of 1999. 2000 NINE MONTH RESULTS SALES Worldwide net sales to customers increased 2% to $1,349 million in the first nine months of 2000 compared with $1,329 million in the first nine months of 1999. The increase was due to higher sales of instant and digital cameras. The increases were offset by the absence of sales from non-core businesses that the Company exited, lower sales of other core products excluding digital cameras and, to a lesser degree, the unfavorable impact of foreign exchange. Worldwide sales of instant film were essentially the same in the first nine months of 2000 compared with the same period of 1999. 17 Worldwide net sales to customers for the first nine months of 2000 included approximately $280 million related primarily to new instant cameras and film, digital cameras and other commercial imaging products introduced in the last three years. These new products include the I-Zone Instant Pocket Camera and film, the JoyCam Instant Camera and film, the PhotoMAX line of digital cameras and the SP-350 retail document photo system. New instant camera and film products are priced to appeal to a broader range of customers and, in general, carry lower average selling prices than the traditional camera and film products. In the first nine months of 2000, on a unit basis, worldwide shipments to customers of instant cameras increased approximately 60% to 8.3 million units from 5.2 million units for the same period in 1999 while unit shipments to customers of instant film increased by approximately 11% compared with the first nine months of 1999. In addition, worldwide shipments to customers of digital cameras, most of which occurred in the United States, increased to approximately .7 million units in the first nine months of 2000, an increase of approximately six-fold over the same period of 1999. Sales in the Americas Region increased 5% to $855 million in the first nine months of 2000 compared with $813 million in the first nine months of 1999. The increase was due to higher sales of instant and digital cameras and, to a lesser degree, instant film. The increases were offset by the absence of sales from non-core businesses that the Company exited and lower sales of other core products excluding digital cameras. Instant camera and film sales were impacted by changes in the product mix of new and traditional formats as higher unit sales were offset by the impact of the lower average selling prices of the newer products. In the Americas Region, on a unit basis, shipments to customers of instant cameras increased approximately 117% while unit shipments to customers of instant film increased by approximately 13% in the first nine months of 2000 compared with first nine months of 1999. Sales in the European Region decreased 8% to $263 million in the first nine months of 2000 compared with $287 million in the first nine months of 1999. The decrease was due to the unfavorable impact of foreign exchange, and to lesser a degree, the absence of sales from non-core businesses that the Company exited and lower sales of instant film. The decreases were offset, in part, by higher sales of instant cameras. Instant camera and film sales in the Region were impacted by changes in the product mix of new and traditional formats as higher unit sales were more than offset by the impact of the lower average selling prices of the newer film products. In the European Region, on a unit basis, shipments to customers of instant cameras increased approximately 137% while unit shipments to customers of instant film increased by approximately 8% in the first nine months of 2000 compared with the first nine months of 1999. 18 Sales in the Asia Pacific Region increased 1% to $231 million in the first nine months of 2000 compared with $229 million in the first nine months of 1999. The increase was due to the favorable impact of foreign exchange and, to a lesser degree, higher sales of instant film. The increases were offset, in part, by the absence of sales from non-core businesses that the Company exited and lower sales of instant cameras. The decrease in sales of instant cameras was due to a change in the product mix of new and traditional cameras sold in the Region and the product transition in Japan described above. Instant film sales in the Region were also impacted by changes in the product mix of new and traditional film formats as higher unit sales were offset by the impact of the lower selling prices of the newer film products. In the Asia Pacific Region, on a unit basis, shipments to customers of instant cameras decreased approximately 17% while unit shipments to customers of instant film increased by approximately 10% in the first nine months of 2000 compared with the first nine months of 1999. PROFIT/(LOSS) FROM OPERATIONS Worldwide profit from operations in the first nine months of 2000 was $108 million compared with a profit from operations of $46 million in the first nine months of 1999. The increase was due to lower manufacturing costs, including savings from restructuring and other efficiencies, the absence of the $40 million charge related to the graphics arts business described above and, to a lesser degree, the impact of higher sales of instant cameras. The increases were offset, in part, by a planned increase in spending on advertising and promotional activities primarily in support of new products and higher corporate costs related to centralized information systems and central marketing activities. Profit from operations in the Americas Region was $251 million in the first nine months of 2000 compared with $233 million in the first nine months of 1999. The increase was due to both higher unit sales and improved margins on sales of instant film and, to a lesser degree, the impact of higher sales of instant cameras and the absence of losses incurred by non-core businesses that the Company exited. The increases were offset, in part, by a planned increase in spending on advertising and promotional activities supporting new products. Profit from operations in the European Region was $35 million in the first nine months of 2000 compared with $56 million in the first nine months of 1999. The decrease was due to the unfavorable impact of foreign exchange and an increase in planned spending on advertising and promotional activities supporting new products. The decreases were offset, in part, by the impact of higher sales of instant cameras. Profit from operations in the Asia Pacific Region was $63 million in the first nine months of 2000 compared with $56 million in the first nine months of 1999. The increase was due primarily to the favorable impact of foreign exchange. 19 Global Operations costs were $65 million in the first nine months of 2000 compared with $118 million in the first nine months of 1999. The decrease was due to continued cost savings and manufacturing efficiencies and the absence of the charge related to the graphic arts business described above. These reductions were a significant component of the Company's improvement in gross margin as a percentage of net sales which increased to 46% in the first nine months of 2000 compared with 41% for the same period of 1999. Research and Development costs were $61 million in the first nine months of 2000 compared with $64 million in the first nine months of 1999. The decrease was due to the absence of costs for research and engineering activities associated with non-core businesses that the Company exited offset, in part, by increased spending on research and engineering activities related to its instant and digital imaging products. Corporate costs were $115 million in the first nine months of 2000 compared with $117 million in the first nine months of 1999. The decrease was due to the absence of the charge related to the graphic arts business described above offset, in part, by higher expenses, including depreciation, for centralized information systems and a planned increase in spending for central marketing activities primarily in support of the Company's new products. The net of other income and expense was income of $22 million in the first nine months of 2000 compared with expense of $19 million in the same period of 1999. Other income in the nine months of 2000 included $13 million of gains on the sale of real estate and, to a lesser degree, gains on the sale of investments. In the first nine months 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 approximately $12 million of gains on the sale of real estate. Interest expense increased to $63 million in the first nine months of 2000 compared with $57 million for the same period in 1999. The increase was due to a higher average interest rate on the amounts of debt outstanding during the first nine months of 2000. The average amounts of debt outstanding during the first nine months of 2000 was essentially the same as the average amounts of debt outstanding for the same period of 1999. Income tax expense in the first nine months of 2000 was $24 million or 35% of reported profit before income taxes compared with an income tax benefit of $11 million or 35% of the reported loss before income taxes in the first nine months of 1999. In the first nine months of 2000, the Company recorded net earnings of $44 million, or $.97 basic earnings per common share compared with a net loss of $20 million, or $.45 basic loss per common share in the third quarter of 1999. Diluted earnings/loss per common share was $.96 diluted earnings per common share in the third quarter of 2000 compared with $.45 diluted loss per common share in the third quarter of 1999. 20 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 2,700 of the 2,800 terminations under the 1997 Program occurred by October 1, 2000, with most of the terminations expected to occur by the end of 2000. Approximately $171 million of cash payments related to the severance component of the 1997 Program had been made at October 1, 2000 with the remaining severance payments of approximately $16 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. 21 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 the Research and Development segment consists of reducing the number of employees associated with research and engineering 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. 22 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 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. 23 FINANCIAL LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $61 million at October 1, 2000 and $92 million at December 31, 1999. Net cash used by operating activities in the first nine months of 2000 was $45 million. Net earnings, adjusted for non-cash items (i.e., depreciation, gains on the sale of real estate and other non-cash items), provided $136 million to cash flow from operating activities and a decrease in receivables provided an additional $34 million. The increases, however, were more than offset by an increase in inventories of $111 million and a decrease in payables and accruals and liabilities for compensation and benefits of $100 million. The increase in inventories was the result of lower than anticipated shipments in the third quarter of 2000 combined with a planned build-up of inventories, particularly digital cameras, in anticipation of the fourth quarter holiday season. The decrease in payables and accruals and liabilities for compensation and benefits included $33 million of severance payments made under the 1997 Program and changes in the timing of payments for various operating expenses. Net cash used by investing activities was $49 million for the first nine months of 2000 and consisted primarily of $98 million of additions to property, plant and equipment offset, in part, by $45 million of proceeds related primarily to the sale of real estate and the Company's technical polarizer and display film business. Net cash provided by financing activities was $70 million for the first nine months of 2000 and related to an increase in short-term debt of $91 million offset, in part, by $20 million of dividend payments to stockholders. Working capital, defined as current assets less current liabilities, was $380 million at October 1, 2000 compared with $367 million at December 31, 1999. The increase in working capital is the result of the increase in inventory and the decrease in payables and accruals and liabilities for compensation and benefits described above. The increases in working capital were offset, in part, by an increase in short-term debt and decreases in receivables and cash and cash equivalents which were also noted above. In the first nine months of 2000, capital spending totaled $98 million compared with $132 million in the nine months of 1999. The decrease in capital spending was the result of lower spending on the Company's enterprise-wide software system, new products (consistent with the Company's new product launch schedule) and capital improvements related to the consolidation of the Company's real estate holdings. The decreases were offset, in part, by higher spending on the Company's Internet initiatives and its identification systems business. The Company expects total capital spending to be $140 million in 2000. 24 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 October 1, 2000, the Company had $346 million outstanding in short-term debt. The amounts outstanding were comprised of $335 million under the Amended Credit Agreement and $11 million under uncommitted short-term lines of credit. There were no amounts outstanding under the U.K. Credit Agreement at the end of the third quarter of 2000. 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 provides the lenders the right to incorporate covenants given to the holders of notes or other securities of the Company which, in the lenders judgment, 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 collectively 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 8.6% at October 1, 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 Fitch IBCA, Duff & Phelps ("Fitch") and Ba2 by Moody's. The Company's long-term debt is rated BB-by S&P, BB by Fitch and Ba3 by Moody's. In October 2000, S&P placed the Company's credit rating and long-term debt rating on CreditWatch with negative implications. 25 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 $64 million at October 1, 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 through the first nine months 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. In addition to its short-term debt, the Company had $573 million outstanding in long-term debt at October 1, 2000. The amounts outstanding were comprised of $149 million of 2002 Notes, $149 million of 2007 Notes and $275 million of 2006 Notes. 26 The indenture, pursuant to which the 2006 Notes were issued, contains certain covenants that restrict, among other things, the Company's ability to do the following: make certain restricted payments, including dividends on and the purchase of the Company's common stock; incur additional debt and issue preferred stock; incur certain liens; enter into sale leaseback transactions; enter into certain transactions with affiliates; and enter into certain mergers and consolidations or sell all or substantially all of the properties or assets of the Company. In the first quarter of 2000, the Company filed a shelf registration statement with the Securities and Exchange Commission (SEC) to expand the type and increase the amount of securities it may offer up to $500 million. The types of securities that the Company could 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 is subject to limitations imposed by the Amended Credit Agreement, the U.K Credit Agreement and the 2006 Notes. The Company continually evaluates its financing arrangements to ensure that it has sufficient borrowing capacity at appropriate rates and terms. The Company believes that the availability of funds under the Amended Credit Agreement, the U.K. Credit Agreement, short-term lines of credit and funds generated from operations will be adequate to meet working capital needs, fund spending for growth and maintenance of existing operations and make severance payments associated with the 1997 Program for at least the next twelve months. 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 its day-to-day operating guidelines. In addition, 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. Exposure limits for nonfunctional currency denominated borrowings and forward exchange contracts are outlined in the MCC's policies and procedures. Currency option purchases require approval from the Company's senior management. 27 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 $11 million at October 1, 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 and the Company does not enter into forward exchange contracts for trading purposes. At October 1, 2000, the aggregate notional value of the Company's outstanding forward exchange contracts was $171 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 October 1, 2000 expire in the first quarter of 2001. The Company does not write options or purchase options for trading purposes. The notional value of the Company's outstanding option contracts, all of which were denominated in Japanese yen, was $70 million at October 1, 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 inflation and normal cost increases to a considerable degree. The overall inflationary impact on the Company's earnings has not been material. 28 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 June 2000, the FASB issued FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133" ("FAS 138"), which will be adopted concurrently with FAS 133. FAS 138 amends the accounting and reporting standards of FAS 133 for certain derivative instruments and hedging activities and incorporates conclusions reached by the FASB related to the Derivatives Implementation Group process. The Company is currently evaluating the effect of FAS 133 and FAS 138 on its results of operations and financial position. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), that expresses the views of the SEC staff regarding the application of generally accepted accounting principles to certain revenue recognition issues. In June 2000, the SEC issued SAB No. 101B, "Second Amendment: Revenue Recognition in Financial Statements," which delayed the effective date of SAB 101 to periods no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company will adopt SAB 101 at the beginning of the fourth quarter of 2000 and does not believe that the adoption will have a material impact on its results of operations or financial position. 29 In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which is effective for periods no later than the fourth quarter of fiscal years beginning after December 15, 1999. This accounting applies to the recognition, measurement and income statement classification of sales incentives offered to customers such as discounts, coupons, rebates and free products or services. The Company will adopt EITF Issue No. 00-14 at the beginning of the fourth quarter of 2000 and does not believe that the adoption will have a material impact on its results of operations or financial position but it will require amounts previously recorded as marketing expenses to be reclassified as a reduction of net sales. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation an Interpretation of APB Opinion No. 25" ("FIN 44"), which must be applied prospectively to new stock option awards, exchanges of awards in a business combination, modifications to outstanding awards and changes in grantee status that occur on or after July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's results of operations or financial position. In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which is effective for fiscal quarters beginning after June 30, 2000. This accounting applies to the cost of developing a web site and applies to web sites used to promote or advertise products or services, supplant manual processes or services, sell products (including software) or services, or to do a combination of all three. The adoption of EITF Issue No. 00-2 did not have a material effect on the Company's results of operations or 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. 30 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 results of its operations or financial position. OUTLOOK The following is an overview of the Company's outlook for the future and contains forward-looking statements. Actual results are dependent on a number of factors that described under "Factors That May Affect Future Results." As a result, actual results could differ materially from those outlined below. The revenues reported by the Company in the fourth quarter of 2000 could be impacted by a mix shift to its new film formats from its traditional film formats, retailers reducing inventories in anticipation of a slow holiday season and the decline of the euro. In an effort to counteract a portion of these risks, the Company will skew more of its fourth quarter advertising and promotion toward traditional camera and film formats and work closely with distributors and retailers to avoid out-of-stocks while respecting shifts to more conservative stocking policies. The Company will continue to pursue its strategy of revitalizing its core imaging business and linking its instant technology to the digital future. Over the next several years, the Company expects its strategy could result in net revenue growth based on a nominal growth rate for its core instant camera and film products and a growth rate of 30 to 40% for its digital products. Currently, digital products represent less than 10% of the Company's total sales but could, over the next several years, grow to represent more than 15% of total sales. The Company also expects that its strategy, and the related sales growth, could translate into growth of operating profits over the next several years. Currently, the Company's digital products carry lower profit margins relative to its instant imaging products, but in the longer term, new digital printing solutions will include media components that carry higher margins than digital hardware. 31 FACTORS THAT MAY AFFECT FUTURE RESULTS Some statements in this report, including those under "Outlook" above, 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: - to market its core imaging products which requires, among other things; - introducing a number of new products each year; - expanding certain profitable businesses; - increasing revenues while managing the mix of new and traditional products and retail buying patterns; and - continuing to reduce costs through operating efficiencies, including savings from restructuring; - to 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; - to develop and implement its digital imaging strategy which requires, among other things: - applying the Company's technology and expertise in instant imaging to the developing market for digital imaging products; - marketing of successful new digital imaging products; - successfully developing partnerships and alliances with other companies in the digital imaging market; and - accurately anticipating and responding to trends in the rapidly changing digital imaging market; - to compete successfully 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; - to avoid periods of net losses 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; 32 - to 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; - 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 the failure of which could result in an event of default; - 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; - to retain its top customers at essentially their current purchasing levels; - to sell and market its products worldwide particularly in light of the major risks associated with worldwide operations such as various local laws and customs; - to manage fluctuation of foreign exchange rates, particularly the Japanese yen and euro; - to further reduce its cycle time in bringing new products to market; - to 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; - to develop and continue to protect ownership of, and license as appropriate, valuable intellectual property rights; - 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; 33 - 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. 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 representing 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. In addition to the above, 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. 34 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 October 1, 2000 was $1.4 million and the Company currently estimates that the majority of the reserve 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. 35 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 Employment Agreement dated August 18, 2000 between Polaroid Corporation and Judith G. Boynton. 12 Ratio of Earnings to Fixed Charges. 15 Letter re Unaudited Interim Financial Information. 27 Financial Data Schedule.
b) REPORTS ON FORM 8-K The Company did not file a Current Report on Form 8-K in the third quarter of 2000. 36 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 37 EX-10.1 2 a2027635zex-10_1.txt EXHIBIT 10.1 EMPLOYMENT AGREEMENT AGREEMENT, by and between Polaroid Corporation, a Delaware corporation, together with its successors and assigns permitted under this Agreement (the "Company"), and Judith G. Boynton (the "Executive") originally entered into March 31, 1998, is hereby amended and restated this 18th day of August 2000 and will be effective April 13, 2000. W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment (this "Agreement") and the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement; and WHEREAS, the Executive is a skilled and dedicated employee who has important management responsibilities and talents which benefit the Company, the Company believes that its best interests will be served if the Executive is encouraged to remain with the Company. The Company has determined that the Executive's ability to perform the Executive's responsibilities and utilize the Executive's talents for the benefit of the Company, and the Company's ability to retain the Executive as an employee, will be significantly enhanced if the Executive is provided with fair and reasonable protection from the risks of a change in ownership or control of the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. DEFINITIONS. (a) "ACQUIRING PERSON" shall mean any Person who or which, together with all Affiliates and Associates of such Person, is the Beneficial Owner of twenty percent (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 any of its Subsidiaries or any Person holding Stock for or pursuant to the terms of any such employee benefit plan. (b) "AFFILIATE" and "ASSOCIATE" when used with reference to any Person, shall have the meaning given to such terms Page 1 of 24 in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (c) "ANNUAL BONUS" shall mean a bonus amount payable under the Company's executive annual bonus plan (currently the Polaroid Incentive Plan for Executives). Unless otherwise specifically provided, this annual bonus shall be calculated assuming the Company target has been achieved and that there are no factors that reduce the ultimate distribution. (d) "BASE SALARY" shall mean the annual rate of base salary (disregarding any reduction in such rate that constitutes Constructive Termination) as provided for in Section 4 below, as increased by the Board from time to time. (e) "BENEFICIAL OWNER" shall be a Person deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; or (ii) which such Person or any of such Person's Affiliates or Associates has: (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 Page 2 of 24 oral) to vote such security (i) 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 (ii) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or, (c) which are beneficially owned, directly or indirectly, by any Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (written or oral), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in Section l(e)(ii)(B) of this Agreement) or disposing of any securities of the Company. (f) "BOARD" shall mean the Board of Directors of the Company. (g) "CAUSE" means either of the following: (i) Executive's willful malfeasance having a material adverse effect on the Company; 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 the Company, or if Executive shall be entitled, under applicable law or under an applicable Certificate of Incorporation or By-Laws of the Company, as they may be amended or restated from time to time, to be indemnified with respect to such action or refusal. (h) "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 Page 3 of 24 (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 (2) years after the Share Acquisition Date such that the individuals who constitute the Board prior to the Share Acquisition Date shall cease for any reason to constitute at least a majority of the Board; (iii) any day on or after the Share Acquisition Date when, directly or indirectly, any of the transactions specified in the following clauses occurs: (A) the Company shall consolidate with, or merge with and into, any other Person; (B) any Person shall merge with and into the Company; or (C) the Company shall sell, lease, exchange or otherwise transfer or dispose of (or one or more of its Subsidiaries shall sell, lease, exchange or otherwise transfer or dispose of), in one or more transactions, the major part of the assets of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons; (iv) the date when a Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any of its Subsidiaries or any Person holding Stock for or pursuant to the terms of any such employee benefit plan) alone or together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of thirty percent (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 Page 4 of 24 remaining outstanding or by being converted into voting securities of the surviving or parent entity) fifty percent (50%) or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation; or, (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (vi) the 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). (i) "CODE" means the Internal Revenue Code of 1986, as amended. (j) "CONFIDENTIAL INFORMATION" means nonpublic information relating to the business plans, marketing plans, customers or employees of the Company other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company. (k) "CONSTRUCTIVE TERMINATION" shall occur when the Executive voluntarily terminates her employment with the Company or retires after the occurrence of one or more of the following events: (i) unless effected with the Executive's consent, a reduction in the Executive's Base Salary or the discontinuation of or any reduction in the Executive's participation or membership in any bonus, incentive or other benefit plan in which the Executive was a participant or member, without an economically equivalent replacement; (ii) the reassignment of the Executive without her consent to a location more than thirty (30) miles from her regular workplace; Page 5 of 24 (iii) the reduction in the Executive's job title or level as Executive Vice President Business Development and Chief Financial Officer, with equivalent responsibilities; (iv) a change in the Executive's reporting relationship to anyone other than the Chief Executive Officer; or (v) the provision of significantly less favorable working conditions. (l) "DISABILITY" shall mean the Executive's disability within the meaning of the Polaroid Long Term Disability Plan. (m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as in effect on the date in question. (n) "PERSON" shall mean an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity. (o) "SEVERANCE PERIOD" shall mean the period of twenty-four (24) months following such termination. (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 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 fifty percent (50%) of the Voting Stock. (s) "SUPPLEMENTAL PLANS" shall mean any and all Company non-qualified benefit plans including, but not limited to, any supplemental retirement plan. (t) "TERM OF EMPLOYMENT" shall mean the period specified in Section 2 below. (u) "TERMINATED" shall mean: (i) termination by Polaroid without Cause at any time within the two (2) years following a Change in Control; Page 6 of 24 (ii) Executive's termination due to a Constructive Termination at any time within the two (2) years following a Change in Control; (iii) termination within three (3) months prior to a Change in 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; or (iv) voluntary termination within three (3) months after a Change of Control if the current Chief Executive Officer is no longer in that position. (v) "TRADING DAY" is any day on which the Stock is traded on the New York Stock Exchange. (w) "TERMINATION DATE" shall mean the date of the Executive's termination of employment from the Company. (x) "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. TERM OF EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby agrees to continue her employment for the longer of (i) three (3) years ending April 13, 2003, or (ii) two (2) years from the departure of the current Chief Executive Officer, subject to earlier termination as provided below. 3. POSITION, DUTIES AND RESPONSIBILITIES. (a) TERM. The Executive shall be employed as Executive Vice President Business Development and Chief Financial Officer of the Company. The Executive, in carrying out her duties under this Agreement, shall report to the Chief Executive Officer. Page 7 of 24 (b) OTHER POSITIONS. Anything herein to the contrary notwithstanding, nothing shall preclude the Executive from: (i) serving, subject to approval of the Board, on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations; (ii) engaging in charitable activities and community affairs; and, (iii) managing her personal investments and affairs, provided that such activities do not interfere with the proper performance of her duties and responsibilities in the Company. 4. BASE SALARY. The Executive shall be paid an annualized Base Salary of at least $450,000, payable in accordance with the regular payroll practices of the Company. The Base Salary shall be reviewed periodically by the Board. 5. ANNUAL BONUS. The Executive shall participate in the Company's annual bonus plan using the targets and performance factors set forth in the Company's annual bonus plan, with an annual target award opportunity of at least fifty-five percent (55%) of Base Salary. 6. EMPLOYEE BENEFIT PROGRAMS. During the Term of Employment, the Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior level executives, as such plans or programs may be in effect from time to time, including, without limitation, long term incentive plan(s), pension, savings and other retirement plans or programs, medical, dental, hospitalization, short-term and long-term disability and life insurance. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall replace the Executive's participation in The Polaroid Extended Severance Plan. 7. SUPPLEMENTAL PENSION. In addition to the Executive's pension benefits set forth in the Company's employee pension plans(including the opening account balance of $350,000 referenced in the Executive's March 31, 1998 agreement), the Company shall: (a) provide a retirement crediting rate equal to three (3) years of credited benefit accrual for each year of credited benefit accrual earned, for a period of up to Page 8 of 24 seven (7) years from the Executive's original date of hire; and (b) as of the date of this Agreement, vest all time-constricted retirement benefits under any Company retirement vehicle, including but not limited to pension, retirement savings, elective deferred and all other supplemental executive retirement plans ("SERPS"). 8. REIMBURSEMENT OF BUSINESS AND OTHER EXPENSES. The Executive is authorized to incur reasonable expenses in carrying out her duties and responsibilities under this Agreement and the Company shall promptly reimburse her for all business expenses incurred in connection with carrying out the business of the Company, subject to documentation in accordance with the Company's policy. 9. VACATION. The Executive is entitled to at least four (4) weeks of vacation annually, which will be administered in accordance with the Company's vacation policy. 10. OWNERSHIP GUIDELINES. The Executive is expected to accumulate and hold three (3) times her annual Base Salary in Polaroid Common Stock within five (5) years of her original date of hire. Common Stock acquired through the Company's executive stock ownership plan and other benefit and incentive plans will be counted toward meeting that goal. The Board shall determine a valuation of Company stock from time to time and it shall be applied to all officers. 11. TERMINATION DUE TO DISABILITY OR DEATH. In the event the Executive's employment is terminated due to her Disability or death, she, or her estate or her beneficiaries, as the case may be, shall be entitled to: (a) SALARY. Base Salary through the date of termination; (b) ANNUAL BONUS. Pro-rata portion of the Annual Bonus for the year in which the Executive's Disability or death occurs (Annual Bonus is to be paid as soon as practicable or consistent with the Executive's election under the Elective Deferred Compensation Plan); and, (c) OTHER BENEFITS. Other benefits or entitlements in accordance with applicable plans and programs of the Company. Page 9 of 24 12. TERMINATION BY THE COMPANY FOR CAUSE. In the event the Company terminates the Executive's employment for Cause, she shall be entitled to: (a) SALARY. Base Salary through the date of the termination of her employment for Cause; (b) ANNUAL BONUS. Other benefits or entitlements, if any, in accordance with applicable plans or programs of the Company; however, notwithstanding the foregoing, the Executive shall not be entitled to any bonus (annual or long term) for the year in which her termination occurs. 13. A CONSTRUCTIVE TERMINATION OR A TERMINATION WITHOUT CAUSE. If prior to Change in Control, the Executive's employment is terminated without Cause, other than due to Disability or death, or in the event there is a Constructive Termination, the Executive, upon the execution of a full and complete release, shall be entitled to: (a) SALARY. Base Salary through the date of termination of the Executive's employment; (b) SEVERANCE PAYMENT. Base Salary, at the annualized rate in effect on the date of termination of the Executive's employment, in a stream of payments in accordance with the Company's regular payroll schedule beginning on the regular payroll distribution date next succeeding her Separation Date, for the Severance Period; (c) ANNUAL BONUS. Annual Bonus payments for the period from the beginning of the year in which the termination occurs through the end of the Severance Period based on the actual performance of the Company (i.e., Company target) without regard to any other factors that could reduce the ultimate distribution; any such payment for a period of less than a full year shall be pro-rated by the number of days for which payment is made; (d) RESTRICTED STOCK AND OPTIONS. Full vesting of all restricted stock, phantom restricted stock, and stock options and phantom stock options (collectively "Options") with the exercise period being the lesser of three (3) years from the Executive's Termination Date or the exercise period stated in the Executive's applicable Option or Supplemental Option Agreements, subject to the terms of the agreements governing such Options; Page 10 of 24 (e) PERFORMANCE SHARES. A distribution of a pro-rata portion of Performance Awards granted to the Executive prior to her Termination Date will be made when distributions from similar awards are made to active employees. The Performance Award distributions, as adjusted for the pro-rata period, shall be based on the Company's actual performance during the performance period for such award. Determination of award distributions shall be on the same basis as applied to senior officers employed by the Company at the time such awards are delivered. (f) INSURANCE. Medical, dental and executive life insurance benefits (collectively "Insurance Benefits") at the same rate as active employees similarly situated for a period equal to the lesser of twenty-four (24) months following the Executive's Termination Date or until the Executive is eligible to receive comparable Insurance Benefits through another employer (this benefit shall run coterminous with COBRA rights); (g) DISABILITY COVERAGE. Short- and long-term disability coverage that is reasonably comparable to the coverage provided to the Executive on her Termination Date and which can be purchased on the open market shall be for a period equal to the lesser of twenty-four (24) months following the Executive's Termination Date or until the Executive is eligible to receive comparable benefits through another employer; (h) OUTPLACEMENT COUNSELING. Outplacement services will be provided consistent with the Company's outplacement practices in effect prior to the Change in Control; (i) SUPPLEMENTAL RETIREMENT AND PROFIT SHARING BENEFITS. (i) On the Termination Date, the Executive shall become vested in the benefits provided under the Company's Supplemental Plans. (ii) Within ten (10) business days after the Termination Date, the Company shall pay the Executive a lump sum cash amount equal to the present value of the Executive's accrued benefit under the Supplemental Plans. (j) OTHER BENEFITS. Other benefits or entitlements in accordance with applicable plans and programs of the Company; and, Page 11 of 24 (k) SURVIVOR BENEFITS. Should the Executive become eligible to receive payments and benefits under this Section and die prior to receipt of all such payments and benefits, the residual payments shall be made to the Executive's beneficiary(ies). 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. 14. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL. Notwithstanding anything in this Agreement to the contrary, if the Executive's employment is Terminated, the Executive shall be entitled to the following benefits: (a) SEVERANCE BENEFITS. Within ten (10) business days after the Termination Date, the Company shall pay the Executive a lump sum amount, in cash, equal to: (i) two (2) times the sum of: (A) the Executive's Base Salary; and (B) the Executive's Annual Bonus; and (ii) the Executive's Annual Bonus multiplied by a fraction, the numerator of which shall equal the number of days the Executive was employed by the Company in the calendar year in which the Termination Date occurs and the denominator of which shall equal three hundred sixty five (365). (b) INSURANCE. Until the second (2nd) anniversary of the Termination Date, the Executive shall be entitled to participate in the Company's medical, dental, and executive life insurance benefits, at the highest level provided to the 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 the Executive was paying immediately prior to Change in Control; provided, however, that if the Executive becomes employed by a new employer, the Executive's coverage under the applicable Company plans shall continue, but the Executive's coverage thereunder shall be secondary to (i.e., reduced by) any benefits provided under like plans of such new employer. (c) DISABILITY COVERAGE. Short- and long-term disability coverage that is reasonably comparable to the coverage provided to the Executive on her Termination Date and Page 12 of 24 which can be purchased on the open market shall be for a period equal to the lesser of twenty-four (24) months following the Executive's Termination Date or until the Executive is eligible to receive comparable benefits through another employer; (d) PAYMENT OF ACCRUED BUT UNPAID AMOUNTS. Within ten (10) business days after the Termination Date, the Company shall pay the Executive: (i) Earned, but unpaid compensation, including, without limitation, any unpaid portion of the bonus accrued with respect to the full calendar year ended prior to the Termination Date; and, (ii) all compensation previously deferred by the Executive on a non-qualified basis but not yet paid. (e) RETIREE-MEDICAL BENEFITS. If within two (2) years after Change in Control, the Executive would be at least fifty-five (55) with the Executive's age and service equal to sixty-five (65) and the Executive would have at least five (5) years of service with the Company, the Executive shall be eligible for retiree medical benefits (as such are determined immediately prior to Change in Control). If eligible, the Executive shall commence receiving such retiree medical benefits based on the terms and conditions of the applicable plans in effect immediately prior to the Change in Control. (f) SUPPLEMENTAL RETIREMENT AND PROFIT SHARING BENEFITS. (i) On the Termination Date, the Executive shall become vested in the benefits provided under the Company's Supplemental Plans. (ii) Within ten (10) business days after the Termination Date, the Company shall pay the Executive a lump sum cash amount equal to the present value of the Executive's accrued benefit under the Supplemental Plans. (A) For purposes of computing the Executive's accrued benefit under the Supplemental Plans in addition to the supplemental benefit provided pursuant to Section 7 above; the Company shall credit the Executive with two (2) years of plan participation and service and two (2) Page 13 of 24 years of age for all purposes (including additional accruals and eligibility for early retirement) over the Executive's actual years and fractional years of plan participation and service and age credited to the Executive on the Termination Date; and, (B) The Company shall apply the present value (and any other actuarial adjustment required by this Agreement) using the applicable actuarial assumptions set forth in the Polaroid Pension Plan. In determining the Executive's benefits under this subsection 14(f), the terms of the Supplemental Plans as in effect immediately prior to the Change in Control shall govern, except as expressly modified in this subsection 14(f). This benefit shall be provided pursuant to the Supplemental Retirement Benefit Plan. (g) OUTPLACEMENT COUNSELING. Outplacement services will be provided consistent with the Company's outplacement practices in effect prior to the Change in Control. (h) RESTRICTED STOCK AND OPTIONS. Full vesting of all restricted stock, phantom restricted stock, and stock options and phantom stock options (collectively "Options") with the exercise period being the lesser of three (3) years from the Executive's Termination Date or of the exercise period stated in the Executive's applicable Option or Supplemental Option Agreements, subject to the terms of the agreements governing such Options. (i) PERFORMANCE SHARES. Full payout of Performance Shares issued under the 1993 Stock Incentive Plan, or any successor plan, assuming the Company's objectives were achieved at target. (j) COSTS OF PROCEEDINGS. The Company shall pay all of the Executive's costs and expenses, including attorneys' fees and disbursements, at least monthly, in connection with any legal proceeding (including arbitration), whether or not instituted by the Company or the Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if the Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that the Executive Page 14 of 24 instituted the proceeding in bad faith, the Executive shall pay her own costs and expenses, including attorneys' fees and disbursements. The Company shall pay pre-judgment interest on any money judgment obtained by the 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 the Executive under this Section. 15. INDEMNIFICATION; DIRECTOR'S AND OFFICER'S LIABILITY INSURANCE. The Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the Company's Certificate of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of the Executive, at the better of the level in effect immediately prior to the Change in Control or the Executive's Termination Date, for the three (3) year period following the Termination Date, and throughout the period of any applicable statute of limitations. 16. EFFECT ON EXISTING PLANS. All Change in Control provisions applicable to the Executive and contained in any plan, program, agreement or arrangement maintained as of the date this Agreement is signed (including, but not limited to, any stock option, restricted stock or pension plan) shall remain in effect through the date of a Change in Control, and for such period thereafter as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects the Executive without the 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 these terms. Notwithstanding the foregoing, no benefits shall be paid to the Executive, however, under the Polaroid Extended Severance Plan or any other severance plan maintained generally for the employees of the Company if the Executive is eligible to receive severance benefits under this Agreement. 17. 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 Page 15 of 24 which Polaroid (or any other Person or entity) may have against Executive unless specifically referenced herein. 18. GROSS-UP. (a) In the event it shall be determined that any payment, benefit or distribution (or combination thereof) by the Company, or one or more trusts established by the Company for the benefit of its employees, to or for the benefit of the 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 incurred by the 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"), the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the 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, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 18(c), all determinations required to be made under this Section 18, 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 the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. 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), the 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 Page 16 of 24 Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 18, shall be paid by the Company to the 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 the Executive, it shall so indicate to the Executive in writing. Any determination by the Accounting Firm shall be binding upon the Company and the 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 the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 18(c) and the 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 the Company to or for the Executive's benefit. (c) The Executive shall notify the Company in writing of any written claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (but the Executive's failure to comply with this notice obligation shall not eliminate her rights under this Section except to the extent of the Company'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 she 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 the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably Page 17 of 24 request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and, (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company 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 the 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 18(c), the Company 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 the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the 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 the Company shall reasonably determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the 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 the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be Page 18 of 24 limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the 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 Executive receives an amount advanced by the Company pursuant to Section 18(c), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 18(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the Executive receives an amount advanced by the Company pursuant to Section 18(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the 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. 19. TERMINATION FOR CAUSE. Nothing in this Agreement shall be construed to prevent the Company from terminating the Executive's employment for Cause. If the Executive is terminated for Cause, only Section 12 shall apply. 20. DISPUTES. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts 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. 21. NONCOMPETITION AND CONFIDENTIALITY. (a) NONCOMPETITION. During the period in which the Executive is employed by the Company or any of its Subsidiaries and during any Severance Period, as provided pursuant to Section 13 "A Constructive Termination or a Termination without Cause", above, but in no event for a period of less than twelve (12) months following a termination of her employment, the Executive shall not engage in any activity directly or indirectly with Eastman Kodak Company, or Fuji, whether as a principal, partner, employee, consultant, shareholder (other than as a holder of not in excess of Page 19 of 24 one percent (1%) of the outstanding voting shares of any publicly traded company) or otherwise. (b) CONFIDENTIALITY. Without the prior written consent of the Company, except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency, the Executive shall comply with the Confidentiality Agreement she executed at the time she was 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 21(b)). (c) COMPANY PROPERTY. Promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under her control. (d) NONSOLICITATION OF EMPLOYEES. During the period in which the Executive is employed by the Company or any of its Subsidiaries, and for a period of twenty-four (24) months following the Executive's Termination Date resulting from a termination as provided in Section 13 "A Constructive Termination or a Termination without Cause", the Executive shall not, directly or indirectly, induce any employee of the Company or any of its Subsidiaries to terminate employment with such entity, and shall not, directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ or offer employment to any Person who is employed by the Company or a Subsidiary thereof. (e) NONDISPARAGEMENT. During the period in which the Executive is employed by the Company or any of its Page 20 of 24 Subsidiaries, and for a period of two (2) years following the Executive's Termination Date, the Executive shall not commit any act, or in any way assist others to commit any action, intended to injure the Company, nor shall the Executive engage in any public criticism regarding her employment or the business affairs of the Company, nor to make any negative, detrimental, or derogatory comments concerning the Company or its directors, officers, or individuals known to the Executive to be employees, past and present; the Company and its officers and directors agree to make no criticism regarding the Executive or her employment with the Company. (f) INJUNCTIVE RELIEF WITH RESPECT TO COVENANTS. Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to noncompetition, nonsolicitation, confidentiality and Company property relate to special, unique and extraordinary matters, including her own skills, and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 21. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. (g) PROVISIONS SURVIVING BEYOND TERMINATION DATE. The obligations of the Executive set forth above shall not extend beyond her Termination Date where such date follows a Change in Control. 22. EFFECT OF AGREEMENT ON OTHER BENEFITS. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict the Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 23. ASSIGNMENT. Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and the Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of Page 21 of 24 the entity surviving such merger or resulting from such consolidation. The Company 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 the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this Agreement shall continue to apply to each subsequent employer hereunder in the event of any subsequent merger, consolidation or transfer of assets of such subsequent employer. 24. REPRESENTATION. The Company represents and warrants that it is fully authorized and empowered to enter into this Agreement and each of the parties represents and warrants that the performance of the obligations of such party under this Agreement will not violate any agreement between that party and any other Person, firm or organization. 25. ENTIRE AGREEMENT. This Agreement, with the plans and grant agreements referenced herein, contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 26. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. 27. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 28. SURVIVORSHIP. The respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment to the extent necessary to the intended preservation of such rights and obligations. Page 22 of 24 29. BENEFICIARIES/REFERENCES. The Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of her incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to her beneficiary, estate or other legal representative. Absent any written notice the beneficiary shall be the Executive's estate. 30. GOVERNING LAW. This Agreement shall be governed by, construed, and interpreted in accordance with the laws of Massachusetts without reference to principles of conflict of laws. 31. NOTICES. Any notice given to a Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: Polaroid Corporation 784 Memorial Drive Cambridge, MA 02139 Attention: Vice President, Human Resources If to the Executive: Judith G. Boynton 202 Commonwealth Avenue Apartment 4 Boston, MA 02116 32. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 33. COUNTERPARTS. This Agreement may be executed in two (2) or more counterparts. 34. WITHHOLDING. The Company may, to the extent required by law, withhold applicable federal, state and local income and other taxes from any payments due to the Executive hereunder. Page 23 of 24 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. POLAROID CORPORATION By: /s/ GARY T. DICAMILLO -------------------------------- Name: Gary T. DiCamillo Title: Chairman and Chief Executive Officer /s/ JUDITH G. BOYNTON - --------------------------------------- Judith G. Boynton Page 24 of 24 EX-12 3 a2027635zex-12.txt EXHIBIT 12 EXHIBIT 12 - RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1995, 1996, 1997, 1998 and 1999 and nine months ended October 1, 2000 (IN MILLIONS, EXCEPT RATIOS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, OCTOBER 1, 1995 1996 1997 1998 1999 2000 ------------ ----------- ----------- ------------ ----------- ------------ Earnings/(loss): Earnings/(loss) before income tax expense/(benefit) per consolidated statement of earnings $(201.4) $31.2 $(191.9) $(38.9) $ 13.4 $ 67.1 Add: Interest expense 52.1 47.4 47.8 57.6 77.4 62.8 Portion of rent representative of an interest factor 11.7 9.3 10.7 10.5 10.2 7.6 ------------ ----------- ----------- ------------ ----------- ------------ Adjusted earnings/(loss) before income tax benefit/ (expense) $(137.6) $87.9 $(133.4) $ 29.2 $101.0 $137.5 ============ =========== =========== ============ =========== ============ Fixed charges: Interest expense $52.1 $47.4 $ 47.8 $ 57.6 $ 77.4 $ 62.8 Portion of rent representative of an interest factor 11.7 9.3 10.7 10.5 10.2 7.6 Capitalized interest 4.8 5.1 2.6 2.2 3.0 1.7 ------------ ----------- ----------- ------------ ----------- ------------ Total fixed charges $68.6 $61.8 $ 61.1 $ 70.3 $ 90.6 $ 72.1 ============ =========== =========== ============ =========== ============ Ratio of earnings to fixed charges N/A(a) 1.4(b) N/A(c) .4(d) 1.1 1.9 ============ =========== =========== ============ =========== =============
(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. EX-15 4 a2027635zex-15.txt EXHIBIT 15 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 October 13, 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 November 13, 2000 EX-27 5 a2027635zex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM POLAROID CORPORATION'S FORM 10-Q FOR THE NINE MONTHS ENDED OCTOBER 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 OCT-01-2000 61,000 0 466,800 (25,200) 494,300 1,145,100 1,971,300 1,398,000 2,038,300 765,000 573,400 0 0 75,400 308,800 2,038,300 1,349,400 1,349,400 732,100 1,241,000 0 3,500 62,800 67,100 23,500 43,600 0 0 0 43,600 0.97 0.96
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