-----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, DA1wabA8GjMDv4PhKJFbIZlYljxgsueS2RCHqy2pwXmaOgKqmV18h2xCCeVBfmzN GjPetxNEStzGIPCu9l2i2g== 0001047469-99-019617.txt : 19990513 0001047469-99-019617.hdr.sgml : 19990513 ACCESSION NUMBER: 0001047469-99-019617 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLAROID CORP CENTRAL INDEX KEY: 0000079326 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [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: 99618000 BUSINESS ADDRESS: STREET 1: 784 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 7813862000 10-Q 1 10-Q 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 MARCH 28, 1999 --------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-4085 POLAROID CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-1734655 - ----------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 784 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS 02139 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 386-2000 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------ Shares of Common Stock, $1 par value, outstanding as of May 7, 1999: 44,209,450 shares - -------------------------------------------------------------------------------- This document contains 24 pages. Exhibit index appears on page 23 - -------------------------------------------------------------------------------- POLAROID CORPORATION AND SUBSIDIARY COMPANIES Condensed Consolidated Statement of Earnings Periods ended March 29, 1998 and March 28, 1999 (In millions, except per share data)
(Unaudited) First Quarter 1998 1999 ---- ---- Net sales $390.6 $379.0 - -------------------------------------------------------------------------------------------------------------- Cost of sales 243.8 237.3 Marketing, research, engineering and administrative expenses 159.8 148.6 - -------------------------------------------------------------------------------------------------------------- Total costs 403.6 385.9 - -------------------------------------------------------------------------------------------------------------- Loss from operations (13.0) (6.9) Other expense 1.6 22.6 Interest expense 12.1 17.9 - -------------------------------------------------------------------------------------------------------------- Loss before income taxes (26.7) (47.4) Federal, state and foreign income tax benefit (9.3) (16.6) - -------------------------------------------------------------------------------------------------------------- Net loss ($17.4) ($30.8) - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Basic loss per common share ($0.39) ($0.70) Diluted loss per common share ($0.39) ($0.70) - -------------------------------------------------------------------------------------------------------------- Cash dividends per common share $0.15 $0.15 Weighted average common shares used for basic loss per share calculation (in thousands) 44,475 44,066 Weighted average common shares used for diluted loss per share calculation (in thousands) 44,475 44,066 Common shares outstanding at end of period (in thousands) 44,469 44,150 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
2 POLAROID CORPORATION AND SUBSIDIARY COMPANIES Condensed Consolidated Balance Sheet (In millions)
(Unaudited) December 31, March 28, 1998 1999 ---- ---- Assets - ------------------------------------------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $105.0 $67.9 Receivables 459.6 445.7 Inventories: Raw materials 83.5 89.0 Work-in-process 190.5 171.7 Finished goods 259.3 257.4 - ------------------------------------------------------------------------------------------------------------------ Total inventories 533.3 518.1 Prepaid expenses and other assets 195.5 236.6 - ------------------------------------------------------------------------------------------------------------------ Total current assets 1,293.4 1,268.3 - ------------------------------------------------------------------------------------------------------------------ Property, plant and equipment Gross property, plant and equipment 1,975.9 1,990.3 Less accumulated depreciation 1,409.4 1,418.4 - ------------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 566.5 571.9 - ------------------------------------------------------------------------------------------------------------------ Deferred tax assets 208.2 218.9 - ------------------------------------------------------------------------------------------------------------------ Other assets 129.6 80.2 - ------------------------------------------------------------------------------------------------------------------ Total assets $2,197.7 $2,139.3 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Current liabilities: Short-term debt $331.7 $298.7 Payables and accruals 358.4 328.7 Compensation and benefits 208.5 187.2 Federal, state and foreign income taxes 34.4 39.4 - ------------------------------------------------------------------------------------------------------------------ Total current liabilities 933.0 854.0 - ------------------------------------------------------------------------------------------------------------------ Long-term debt 497.4 572.7 - ------------------------------------------------------------------------------------------------------------------ Accrued postretirement benefits 241.9 241.6 - ------------------------------------------------------------------------------------------------------------------ Other long-term liabilities 135.5 130.6 - ------------------------------------------------------------------------------------------------------------------ Common Stockholders' equity: Common stock, $1 par value 75.4 75.4 Additional paid-in capital 413.4 408.6 Retained earnings 1,226.7 1,189.3 Accumulated other comprehensive income (33.4) (49.0) Less: Treasury stock, at cost 1,291.5 1,283.4 Deferred compensation 0.7 0.5 - ------------------------------------------------------------------------------------------------------------------ Total common stockholders' equity 389.9 340.4 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $2,197.7 $2,139.3 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
3 POLAROID CORPORATION AND SUBSIDIARY COMPANIES Condensed Consolidated Statement of Cash Flows Three Months Ended March 29, 1998 and March 28, 1999 (In millions)
(Unaudited) Cash flows from operating activities 1998 1999 - ---------------------------------------------------------------------------------------------------------------------------- Net loss ($17.4) ($30.8) Depreciation of property, plant and equipment 25.6 23.1 Decrease in receivables 47.6 4.9 (Increase)/decrease in inventories (4.3) 3.8 Increase in prepaids and other assets (10.7) (35.4) Increase/(decrease) in payables and accruals 34.3 (25.9) Decrease in compensation and benefits (12.0) (19.4) Decrease in federal, state and foreign income taxes payable (14.2) (9.1) Gain on sale of real estate -- (10.9) Other non cash items (40.4) 39.1 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided/(used) by operating activities 8.5 (60.6) - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities - ---------------------------------------------------------------------------------------------------------------------------- (Increase)/decrease in other assets (10.9) 14.4 Additions to property, plant and equipment (34.9) (46.6) Proceeds from sale of property, plant and equipment 60.7 22.6 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided/(used) by investing activities 14.9 (9.6) - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities - ---------------------------------------------------------------------------------------------------------------------------- Net decrease in short-term debt (maturities 90 days or less) (41.0) (31.0) Short-term debt having (maturities over 90 days): Proceeds 24.3 11.2 Payments (25.5) (8.3) Proceeds from issuances of long-term debt -- 268.3 Repayments of long-term debt -- (200.0) Cash dividends paid -- (6.6) Proceeds from issuance of shares in connection with stock incentive plan 3.3 -- Purchase of treasury stock (11.4) -- - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided/(used) by financing activities (50.3) 33.6 - ---------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 1.2 (0.5) - ---------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (25.7) (37.1) Cash and cash equivalents at beginning of period 68.0 105.0 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $42.3 $67.9 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
4 POLAROID CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of the Company's domestic and foreign subsidiaries, all of which are either wholly owned or majority owned. Intercompany accounts and transactions are eliminated. This is an interim unaudited report, subject to year end audit and 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. Certain prior year amounts have been reclassified to conform to the current year's presentation. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") that establishes accounting and reporting requirements for derivative instruments and for hedging activities. FAS 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposures to changes in fair value of recognized assets or liabilities or unrecognized firm commitments, a hedge of the exposure to variable cash flows of a forecasted transaction, or a hedge of the foreign currency exposure of a net investment in a foreign operation, unrecognized firm commitments, an available-for-sale security or a foreign-currency denominated forecasted transaction. The accounting for changes in fair value under FAS 133 depends on the intended use of the derivative and the resulting designation. FAS 133 must be adopted for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is currently evaluating the effect of this statement on its reported financial results. 5 EARNINGS PER SHARE RECONCILIATION The reconciliation of the numerators and denominators of the basic and diluted earnings/(loss) per common share computations for the Company's reported net earnings/(loss) is as follows: (in millions except per share amounts)
Per Share Earnings/(Loss) Shares Amount --------------- ------ ------ PERIOD ENDED MARCH 29, 1998 Basic loss per share $ (17.4) 44.5 $(.39) ------- ---- ----- ------- ---- ----- Diluted loss per share $ (17.4) 44.5* $ (.39) ------- ---- ----- ------- ---- ----- PERIOD ENDED MARCH 28, 1999 Basic loss per share $ (30.8) 44.0 $(.70) ------- ---- ----- ------- ---- ----- Diluted loss per share $ (30.8) 44.0* $ (.70) ------- ---- ----- ------- ---- -----
* At March 29, 1998 and March 28, 1999, stock options for shares of common stock totaling 4.2 million and 5.7 million, respectively, were outstanding but were not included in the calculations of diluted earnings/(loss) per share because the effects were anti-dilutive. In addition, the effect of .2 million and .3 million outstanding performance shares at March 29, 1998 and March 28, 1999, respectively, were not included since the effect was anti-dilutive. COMPREHENSIVE INCOME The Company's total comprehensive income/(loss) was as follows: (in millions)
Three Month Period Ended ----------------------------- March 29, 1998 March 28,1999 -------------- ------------- Net loss $ (17.4) $ (30.8) Other comprehensive income: Currency translation adjustment (2.1) (15.0) Reclassification adjustment for realized gains net-of-tax included in net loss -- (.6) ------- ------- Total comprehensive income/(loss) $ (19.5) $ (46.4) ------- ------- ------- -------
SEGMENTS The following is a summary of information related to the Company's segments: (in millions) 6
Three Month Period Ended ------------------------------ March 29, 1998 March 28, 1999 -------------- -------------- Net sales to customers: Americas Region $ 211.8 $ 227.1 European Region 113.8 86.5 Asia Pacific Region 65.0 65.4 Global Operations -- -- Research and Development -- -- -------- -------- Subtotal Segments 390.6 379.0 Corporate -- -- -------- -------- Total $ 390.6 $ 379.0 -------- -------- -------- -------- Profit/(loss) from operations: Americas Region $ 51.8 $ 57.9 European Region 14.3 12.8 Asia Pacific Region 15.5 13.8 Global Operations (41.8) (46.7) Research and Development (28.8) (20.7) -------- -------- Subtotal Segments 11.0 17.1 Corporate (24.0) (24.0) -------- -------- Total $ (13.0) $ ( 6.9) -------- -------- -------- --------
RESTRUCTURING CHARGE As part of the restructuring and other charges recognized in the fourth quarter of 1997, the Company recorded a charge of approximately $150.0 million related to an involuntary severance program. In 1998, the Company extended this program and recorded an additional charge of approximately $50.0 million bringing the total charge recorded for the involuntary severance program to approximately $200.0 million. These charges included pension curtailment costs related to this program of $7.5 million and $2.6 million in 1997 and 1998, respectively, that have been reflected as non-cash items in the Company's consolidated statement of cash flows for those years. Under the 1997 severance program, including the extension in 1998, approximately 2,800 employees are expected to leave the Company (approximately 46% from Global Operations, approximately 40% from the regional segments, of which approximately half will be from the European Region, and less than 10% from Research and Development) by the end of 1999. As of March 28, 1999, approximately 1,660 employees had been terminated under this program. Through March 28, 1999, the Company had made approximately $86.0 million of cash payments related to this program. These cash payments are expected to be substantially completed by the end of 2000. LONG-TERM DEBT In a public offering in February 1999, the Company issued 11 1/2 % Notes due 2006 (the "2006 Notes") in an aggregate principal amount of $275.0 million. The 2006 Notes were placed at par value. The net proceeds of $268.1 million from the sale of the 2006 Notes were used primarily for the payment of $200.0 million aggregate principal amount of the Company's 8% Notes that were due March 15, 1999 and for general corporate purposes, including reducing outstanding borrowings under the Amended Credit Agreement and short-term lines of credit. The indenture, pursuant to which the 2006 Notes were issued (the "Indenture"), contains certain covenants that restrict, among other things, the Company and its subsidiaries from making certain restricted payments, including dividends on and the purchase of the Company's common stock and certain other payments; incurring additional debt and issuing preferred stock; creating certain liens; entering into sale and leaseback transactions; entering into certain transactions with affiliates; entering into certain mergers and consolidations or selling all or substantially all of the properties or assets of the Company. 7 OTHER The Company owned approximately 14% of the common stock of SDI Holding Corp. ("SDHI") with a book value of approximately $13.8 million at March 28, 1999. The Company also owned preferred stock, with a book value of approximately $35.0 million at that date, of Sterling Dry Imaging Systems, Inc. ("SDIS") a subsidiary of SDHI. In January 1999, Agfa-Gevaert N.V. agreed to acquire SDHI, excluding SDIS which, under the acquisition agreement, is to be spun off to SDHI's shareholders and not acquired by Agfa-Gevaert N.V. During the first quarter of 1999, the Company recorded a non-cash charge of $35.0 million to establish a reserve for the value of its preferred stock investment in SDIS as circumstances regarding the pending acquisition of SDHI have clarified based on discussions with parties involved in the transaction. SUBSEQUENT EVENT Effective March 31, 1999, the Company entered into an amendment to its $350 million Amended and Restated Credit Agreement dated December 11, 1998 (the "Amended Credit Agreement".) This amendment revised the requirements for the calculation of certain financial ratios required under the Amended Credit Agreement. The amendment also incorporated in the covenants under the Amended Credit Agreement certain covenants from the Company's Indenture which the lenders considered to be more restrictive as was their right under the Amended Credit Agreement. LEGAL PROCEEDINGS Certain legal proceedings to which the Company is a party are discussed in Part II, Item 1 of this filing on Form 10-Q. INDEPENDENT AUDITORS' REPORT The March 29, 1998 and March 28, 1999 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. 8 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 March 28, 1999 and the related condensed consolidated statements of earnings and cash flows for the three-month periods ended March 29, 1998 and March 28, 1999. 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, 1998, 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 20, 1999, except for Note 8 to which the date is February 17, 1999, 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, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Boston, Massachusetts April 14, 1999 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is managed in five primary segments: the Americas Region; the European Region; the Asia Pacific Region; Global Operations; and Research and Development. The Americas Region is comprised of all countries in North and South America. The European Region includes all of the countries of the European continent, the United Kingdom, Russia, the middle-eastern countries and the African continent. The Asia Pacific Region includes Japan, China, Australia and the rest of Asia. Global Operations includes worldwide activities associated with manufacturing, distribution, logistics, new product manufacturing development and inventory management. Research and Development is comprised of corporate research and engineering activities. Additionally, the Company has one category called Corporate, which is not a segment. This category includes central marketing, general and administrative costs and certain other corporate costs, including worldwide restructuring and other charges. The Company evaluates the performance of its segments primarily based on profit/(loss) from operations with a recognition of assets employed. For the regional segments, profit/(loss) from operations is based on standard product costs excluding inter-company margins and therefore reflects a contribution to worldwide Company profits related to segment third party sales. Non-standard manufacturing costs are reported as incurred in the Global Operations segment along with new product manufacturing development costs and regional warehousing and distribution costs. The Research and Development segment is also reported on an as-incurred cost basis. The Company uses quantitative terms to explain changes in sales unit volumes. The table below quantifies the use of these terms: TERM REPRESENTS CHANGE OF low single digits 1 to 4 percent high single digits 5 to 9 percent low double digits 10 to 19 percent mid double digits 20 to 39 percent high double digits 40 to 99 percent FIRST QUARTER RESULTS Sales - ----- Worldwide net sales to customers for the first quarter of 1999 were $379 million, a 3% decrease compared with worldwide net sales of $391 million in the first quarter of 1998. The principal reason for this decrease was lower sales of instant film -- especially the European Region (including Russia). This reduction in revenues was offset in part by higher revenues from the sales of new products. On a unit basis, worldwide shipments of instant cameras, led by new products, totaled 1.2 million in the first quarter of 1999 compared with .9 million in the first quarter of 1998. Worldwide unit shipments to customers of instant film decreased by low single digits in the first quarter of 1999 compared with the first quarter of 1998. Sales in the Americas Region increased 7% to $227 million during the first quarter of 1999 from $212 million in the first quarter of 1998. (These regional totals include sales in the United States of $198 million in 1999 and $181 million in 1998.) The Americas' increase was due to several factors including revenues from products other than those in core instant imaging (including sunglasses), and higher revenues in the core instant imaging products, especially sales of new products and instant film. On a unit basis, shipments to customers of instant cameras increased 13%, while shipments to customers of instant film increased by low single digits in the first quarter of 1999 compared with the same period of 1998. In addition, at the United States retail sales level, the Company estimates that the unit volume of integral film decreased by high single digits, while instant cameras increased by low double digits compared with the first quarter of 1998. 10 Sales in the European Region decreased 24% to $87 million for the first quarter of 1999 compared with $114 million in the same period of 1998. The decrease was primarily due to lower instant film sales. In addition, to a lesser degree, sales were adversely affected by declines in products other than core instant imaging, instant cameras, and digital products. The reduction in instant film sales was due to a decline in channel inventories, a weak economy in Russia and lower retail demand. On a unit basis, shipments to customers of instant cameras decreased 33% while shipments to customers of instant film decreased by mid double digits in the first quarter of 1999 compared with the first quarter of 1998. Sales in the Asia Pacific Region were $65 million in both the first quarter of 1999 and 1998. Sales in 1999 benefitted from revenues from new products in Japan and, to a lesser degree, a weaker U.S. dollar. These favorable factors were largely offset, however, by lower sales of instant film in the region. These lower sales reflect, in part, continued weakness of the developing markets in the region. On a unit basis, including new products, shipments to customers of instant cameras increased over 200% and shipments to customers of instant film increased by low single digits. Profit/(Loss) - ------------- In the first quarter of 1999, the Company incurred an operating loss of $7 million compared with an operating loss of $13 million in the first quarter of 1998. This improvement reflected lower spending (primarily in research and development) and profits from new products, offset in part by higher costs in Global Operations and the impact of lower sales of instant film. Profit from operations in the Americas Region was $58 million in the first quarter of 1999 compared with $52 million in the first quarter of 1998. This increase was largely due to the impact of higher instant film sales. Profit from operations in the European Region was $13 million in the first quarter of 1999 compared with $14 million in the first quarter of 1998. The adverse margin impact of lower instant film sales in the region in the first quarter of 1999 compared with the same quarter in 1998 was largely offset by lower spending. The profit from operations in the Asia Pacific Region declined to $14 million in the first quarter compared with $16 million in the same period in 1998. The increased profit from the sale of new instant camera and film products in the first quarter of 1999 compared with the first quarter of 1998 was more than offset by the impact of lower instant film sales. Global Operations costs were $47 million in the first quarter of 1999 compared with $42 million in the first quarter of 1998. This increase was due to several factors associated with the manufacturing of the Company's products. Research and Development costs were $21 million in the first quarter of 1999 compared with $29 million in the first quarter of 1998. This reduction in cost reflects a streamlining of this segment and a focusing of the Company's research and development efforts. Corporate costs were $24 million in both the first quarter of 1999 and 1998. The net of other income and other expense for the first quarter of 1999 was an expense of $23 million compared with an expense of $2 million in 1998. In 1999, net other expense included a non-cash charge of $35 million and a gain on the sale of excess real estate totaling $11 million. The $35 million charge was recorded by the Company to establish a reserve for the book value of its preferred stock investment in Sterling Dry Imaging Systems, Inc. ("SDIS"). This reserve was established because the circumstances around the pending acquisition of SDIS' parent by Agfa-Gevaert N.V. have clarified based on discussions with parties involved in this transaction. 11 Interest expense was $18 million and $12 million in the first quarter of 1999 and 1998, respectively. The increase in 1999 was primarily due to higher levels of debt and, to a lesser degree, higher interest rates. The effective tax rate was 35% for both the first quarter of 1999 and 1998. The net loss was $31 million in the first quarter of 1999, or $.70 basic loss per common share, compared with a net loss of $17 million, or $.39 basic loss per common share in the first quarter of 1998. Diluted loss per common share was the same as the basic loss per common share in the first quarter of 1999 and 1998. FINANCIAL LIQUIDITY AND CAPITAL RESOURCES At March 28, 1999, the Company's cash and cash equivalents amounted to $68 million, compared to $105 million at December 31, 1998. The primary sources of cash in the first quarter of 1999 were cash flows provided by financing activities and the sale of real estate and other assets. Working capital increased to $414 million at March 28, 1999 from $360 million at December 31, 1998. This net increase was due to several factors including higher prepaid taxes and expenses, lower cash, receivables and inventories, and reductions in short-term debt, payables and other accruals. In the first quarter of 1999, capital spending totaled $47 million and depreciation expense was $23 million. This compares with capital expenditures of $35 million and depreciation expense of $26 million during the first quarter of 1998. The increase in capital spending was primarily related to spending associated with the Company's new enterprise-wide software system. Capital spending in both years was also a combination of other on-going capital programs, spending related to new products, and spending associated with the Company's efforts to consolidate real estate. During the first quarter of 1999, the Company also expended approximately $16 million to make payments relating to the 1997 involuntary severance program portion of the December 1997 restructuring (including the extension of this program in 1998) and $7 million to pay dividends to common stockholders. In the first quarter of 1999, the Company sold certain assets primarily consisting of real estate and other assets, which resulted in cash proceeds of approximately $37 million. The Company has three sources of debt financing: short-term lines of credit; the Amended Credit Agreement (as defined below); and the Company's outstanding 6 3/4% Notes due 2002, 7 1/4% Notes due 2007 and 11 1/2% Notes due 2006 (the "2006 Notes"). At March 28, 1999, the Company had outstanding $299 million in short-term debt. This was comprised of $230 million of borrowings under the Company's Amended Credit Agreement and $69 million borrowed under the Company's short-term lines of credit. In December 1998, the Company entered into an amendment to its existing $350 million Credit Agreement and amended that agreement effective March 31, 1999. The amended agreement (the "Amended Credit Agreement") provides for loans up to $350 million, will expire on December 31, 2001 and will be available on a revolving basis prior to its expiration. In connection with the Amended Credit Agreement, the Company entered into a collateral agreement and certain related documents that granted the lenders under the Amended Credit Agreement a first security interest in certain of the Company's domestic inventories and accounts receivable. This security will be released if the Company's credit rating is BBB- or higher by Standard & Poor's ("S&P") and Baa3 or higher by Moody's Investor's Services, Inc. ("Moody's"). The Amended Credit Agreement restricts, among other things, the Company's ability to do the following: to make certain capital expenditures; to make certain restricted payments; to incur debt in addition to the issuance of the 2006 Notes; to incur certain liens; to make certain investments; to enter into certain sale and leaseback transactions; and to merge, consolidate, sell or transfer all or substantially all of the Company's assets, subject to certain conditions; and to enter into certain transactions with affiliates. Certain of these covenants were made more restrictive by amendment No. 1 to the Amended Credit Agreement by incorporating certain provisions of the covenants in the Indenture (as defined below). The Amended Credit Agreement also requires the Company to maintain financial ratios relating to the maximum level of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) and minimum interest coverage. In addition, the 12 Amended Credit Agreement affords the lenders the right to incorporate covenants given to holders of notes or other securities of the Company which, in their judgement, are more restrictive. These lenders exercised this right to incorporate certain covenants included in the 2006 Notes in the Amended Credit Agreement. The Amended Credit Agreement restricts the Company's ability to pay dividends and repurchase stock. This agreement limits the payment of dividends and repurchase of the Company's common stock to $3.75 million per quarter in excess of the value of ESOP shares issued and proceeds from the exercise of stock options on a cumulative basis. Since the Company issues ESOP shares to all qualified United States employees as part of compensation, this amount is expected to total approximately $14 million per annum. As a result, the Company believes it is unlikely that this limitation will prevent it from continuing the current dividend payment of $.60 per share, per annum. In addition, the indenture, pursuant to which the 2006 Notes were issued (the "Indenture"), also includes restrictions on dividends which the Company considers to be less restrictive than those contained in the Amended Credit Agreement. Funds borrowed under the Amended Credit Agreement bear interest, at the Company's option, at either the prime rate of Morgan Guaranty Trust Company ("Prime") plus a margin; or LIBOR on Euro-dollar loans ("Euro-dollar loans"), plus a margin. The margin ranges from 0.085% to 2.0% for Prime-based loans and from 0.275% to 3.0% for Euro-dollar loans, based on the Company's credit ratings. In addition, the Company will pay the lenders a commitment fee on unused commitments ranging from 0% to 0.025% on an annual basis, depending on the Company's credit rating, and a fee to the administrative agent. At March 28, 1999 the Company and several of its subsidiaries had short-term lines of credit with a number of commercial banks that totaled $125 million in maximum commitments, of which $69 million was outstanding. One of these lines of credit, for a maximum amount of 115 million Deutsche Marks (or approximately $64 million at March 28, 1999), is on a committed basis with Deutsche Bank de Bary N.V.("Deutsche Bank"), the Dutch branch of Deutsche Bank A.G. A total of $21 million was outstanding under this agreement at March 28, 1999. The interest rate on this facility is LIBOR plus 2.0%. This facility, which permits borrowings on terms up to 6 months, may be terminated on three month's notice by either party. In April 1999, Deutsche Bank notified the Company of its intent to terminate the facility. However, the Company and Deutsche Bank are currently discussing keeping the line in place and the Company granting security for the Company and its subsidiaries' obligations. At March 28, 1999, the Company had, in addition to $120 million under the Amended Credit Agreement, available overseas lines of credit totaling approximately $56 million to support international operations. The Company issued in February 1999, in a public offering, the 2006 Notes in an aggregate principal amount of $275 million. The 2006 Notes were placed at par value. The net proceeds of $268 million from the sale of the 2006 Notes were used primarily for the payment of $200 million aggregate principal amount of the Company's 8% Notes that were due March 15, 1999 and for general corporate purposes, including reducing outstanding borrowings under the Amended Credit Agreement and short-term lines of credit. Since the Company refinanced the 8% Notes, the principal amount of these notes at December 31, 1998 was classified as a long-term note payable. The Indenture contains certain covenants that restrict, among other things, the Company and its subsidiaries from making certain restricted payments, including dividends on and the purchase of the Company's common stock and certain other payments; incurring additional debt and issuing preferred stock; creating certain liens; entering into sale and leaseback transactions; entering into certain transactions with affiliates; and entering into certain mergers and consolidations or selling all or substantially all of the properties or assets of the Company. The Company's cost of borrowing is dependent, in part, upon the Company's corporate long-term debt credit ratings. Currently, the Company's long-term debt is rated BB- by S&P, Ba3 by Moody's and BB by Duff & Phelps Credit Ratings Co.'s, ("D&P"). In late 1998, S&P lowered its long-term debt rating from BBB- to BB- with a negative outlook. Also in late 1998, D&P's lowered its long-term debt ratings from BBB to 13 BB. In early 1999, Moody's lowered its long-term debt rating from Baa3 to Ba3 with a negative outlook. In October 1997, the Company's Board of Directors authorized the repurchase of up to five million shares of the Company's common stock over three years. During the first quarter of 1999, the Company did not repurchase any of its common stock. As of March 28, 1999, approximately 2.8 million shares remain to be purchased under the current program. Given the restricted payment covenants included in the Amended Credit Agreement and in the Indenture, it is unlikely that the Company will complete this repurchase plan within the program's three year period. When the Company does repurchase its common stock, it is its policy to repurchase its common stock on the open market, in privately negotiated transactions or otherwise (which may include transactions with Polaroid retirement plans, including the employee stock ownership portion of the Polaroid Retirement Savings Plan). The timing and amounts of future purchases under this program depend upon many factors, including market conditions, and the Company's business and financial condition and are limited by the terms of the Amended Credit Agreement and the Indenture. The Company owned approximately 14% of the common stock of SDI Holding Corp. ("SDHI") with a book value of approximately $14 million at March 28, 1999. The Company also owned preferred stock, with a book value of approximately $35 million at that date, of SDIS, a subsidiary of SDHI. In January 1999, Agfa-Gevaert N.V. agreed to acquire SDHI, excluding SDIS which, under the acquisition agreement, is to be spun off to SDHI's shareholders and not acquired by Agfa-Gevaert N.V. During the first quarter of 1999, the Company recorded a non-cash charge of $35 million to establish a reserve for the value of its preferred stock investment in SDIS as circumstances regarding the pending acquisition of SDHI have clarified based on discussions with parties involved in the transaction. If this transaction occurs, the Company expects to receive cash for at least the book value of its investment in SDHI. The Company believes that the availability of funds under the Amended Credit Agreement, funds generated from operations and additional debt capacity will be adequate for at least the next twelve months to meet working capital needs, to fund spending for growth and maintenance of existing operations and to make payments associated with the December 1997 restructuring (including the extension to the involuntary severance program in 1998). FOREIGN CURRENCY EXCHANGE The Company generates a substantial portion of its revenues in international markets, which subjects its operations to the exposure of currency exchange fluctuations. The impact of currency fluctuations can be positive or negative in any given period. The Company's ability to counteract currency exchange movement is primarily dependent on pricing in local markets. To minimize the adverse impact of currency fluctuations on net monetary assets denominated in currencies other than the relevant functional currency ("nonfunctional currencies"), the Company engages in nonfunctional currency-denominated borrowings. The Company determines the aggregate amount of such borrowings based on forecasts of each entity's nonfunctional currency-denominated net monetary asset position and the relative strength of the functional currencies compared to the nonfunctional currencies. These borrowings create nonfunctional currency-denominated liabilities that hedge the Company's nonfunctional currency-denominated net monetary assets. Upon receipt of the borrowed nonfunctional currency-denominated funds, the Company converts those funds to the functional currency at the spot exchange rate. Exchange gains and losses on the nonfunctional currency-denominated borrowings are recognized in earnings as incurred. At March 28, 1999, the amount of the Company's outstanding short-term debt incurred for hedging purposes was $69 million. From time to time, the Company may use over-the-counter currency exchange swaps to reduce the interest expense incurred through the borrowings described above and to replace the hedge created by those borrowings. When a currency exchange swap is used to replace a hedge, the currency received by the Company in the spot market component of the currency exchange swap is used to close out the borrowings and, simultaneously, the hedge is re-instituted through a forward contract (not exceeding 14 six months). The net interest value of the currency exchange swap contract is amortized to earnings over the life of the contract. Exchange gains or losses on the foreign currency obligation component of the forward contract are recognized in earnings as incurred in each accounting period. The Company does not enter into currency exchange swaps for trading purposes. At March 28, 1999, the aggregate notional value of the Company's outstanding short-term foreign exchange swap contracts was $50 million. Since the Company has limited flexibility to increase prices in local currency to offset the adverse impact of foreign exchange, the Company may also purchase foreign currency call options. The term of these call options typically does not exceed 18 months. The Company's purchase of call options allows it to protect a portion of its expected foreign currency-denominated revenues from adverse foreign currency exchange movement. The Company typically does not buy call options, which can be exercised prior to the expiration date, nor does it typically write options or purchase call options for trading purposes. The Company amortizes premiums over the term of the option and defers any gains for its call options activity until the option exercise date. At March 28, 1999, option contracts with a notional value of $185 million were outstanding. The Company maintains a Monetary Control Center (the "MCC"), which operates under written policies and procedures defining day-to-day operating guidelines, including exposure limits, to contract for the foreign currency denominated borrowings, foreign exchange swaps and call options described above. The MCC is subject to random independent audits and reports to a supervisory committee comprised of members of the Company's management. The MCC publishes regular reports to the Company's management detailing the foreign currency activities. IMPACT OF INFLATION Inflation continues to be a factor in many countries in which the Company does business. The Company's pricing strategy has offset to a considerable degree inflation and normal cost increases. The overall inflationary impact on earnings has been immaterial. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) that establishes accounting and reporting requirements for derivative instruments and for hedging activities. FAS 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposures to changes in fair value of recognized assets or liabilities or unrecognized firm commitments, a hedge of the exposure to variable cash flows of a forecasted transaction, or a hedge of the foreign currency exposure of a net investment in a foreign operation, unrecognized firm commitments, an available for sale security or a foreign-currency denominated forecasted transaction. The accounting for changes in fair value under FAS 133 depends on the intended use of the derivative and the resulting designation. FAS 133 must be adopted for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is currently evaluating the effect of this statement on its reported financial results. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies (the "legacy currencies") and one common currency (the "Euro"). The participating countries had to adopt the Euro as their common legal currency on that date. The Euro is now traded on currency exchanges and may be used in 15 business transactions. On January 1, 2002, new Euro-denominated bills and coins will be issued by participating countries. The legacy currencies will be withdrawn from circulation as legal tender effective January 1, 2002. During the period from January 1, 1999 and June 30, 2002, parties may use either the Euro or a participating country's legacy currency as legal tender. In 1998, the Company formed an Economic and Monetary Union Steering Committee and Project Team (the "EMU Committee"). The EMU Committee has analyzed the impact of the Euro conversion on the Company in a number of areas, including the Company's information systems, product pricing, finance and banking resources, foreign exchange management, contracts and accounting and tax departments. While the Company is in the process of making certain adjustments to its business and operations to accommodate the Euro conversion, the EMU Committee believes, based on information available at the time and numerous assumptions, that this process of Euro conversion will not have a material adverse impact on the Company's financial position and results of operations. YEAR 2000 DATE CONVERSION The Year 2000 problem is the result of computer programs and embedded chips being written with two instead of four digits to define the applicable year. As a result, computer programs and embedded chips that use date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If the Company, or third parties with whom the Company has a material relationship, do not correct a material Year 2000 problem, the result could be an interruption in, or a failure of, certain normal business activities. To prepare for the year 2000, the Company formed a Year 2000 Steering Committee (the "Year 2000 Committee") and dedicated officers to identify the major areas of the Company that will be affected by the Year 2000 problem and to manage a three-step process of (i) assessing Year 2000 compliance, (ii) analyzing possible solutions and implementing remedial programs and (iii) testing such programs for each major area. To manage the process of becoming Year 2000 compliant across its major areas, the Year 2000 Committee has taken the following steps: it has established, and periodically evaluates and updates, a master schedule for each major area (ranked by the priority of its tasks), has retained a number of consultants to assist the Company's verification and validation processes, has licensed several software applications and is preparing contingency plans in the event that the Company or third parties fail to or are unable to make their systems Year 2000 compliant in a timely fashion. In addition, the Company is in the process of installing a new enterprise-wide software system for most domestic and foreign locations. This new software will primarily facilitate the Company's effort to operate more efficiently and will also benefit the Company in becoming Year 2000 compliant. What follows is a summary of the six major areas identified by the Year 2000 Committee and the status of the three-step process for each. The first major area comprises the business information systems that support the collection, processing and management of the Company's many internal data and recording needs, including those regarding order entry and billing, accounts receivable, accounts payable, product, customer and employee information, general ledger entries and related accounting functions, among others (collectively "Business Applications"). The Year 2000 Committee has completed the assessment phase for the Business Applications area. As of March 28, 1999, the Company had remediated, tested and placed into production approximately 66% of the Business Applications. The remaining implementation of the new enterprise-wide software system will replace approximately an additional 14% of the Business Applications. The Year 2000 Committee is forecasting, based on current information, completion of the entire Business Applications area by early in the third quarter of 1999. The second major area is the Company's extensive computer hardware and software systems, including hardware platforms, telecommunications equipment and scientific and engineering applications and the networking of these systems throughout the Company's factories and offices (collectively, "IT Infrastructure"). The Year 2000 Committee has completed the assessment phase of the IT Infrastructure area and by March 28, 1999, it had remediated, tested and placed into production approximately 16 75% of the IT Infrastructure area. The Company expects that the remaining portions will be completed by mid-year 1999. The third major area is the embedded chips and related systems that enable the Company to manufacture products and track and control certain inventory (collectively, "Shop Floor"). The Year 2000 Committee has completed the assessment phase of the Shop Floor systems and as of March 28, 1999, had completed approximately 20% of the Shop Floor remediation. The Year 2000 Committee's remediation efforts are complicated by the high degree to which Shop Floor applications are customized for the Company's manufacturing systems and the need to accommodate ongoing production schedules. Based on current information, the Year 2000 Committee believes that the remediation and testing phases of the Shop Floor area will be completed in the third quarter of 1999. The fourth major area is the Company's physical plant, including the security, heating and ventilation of factories and other buildings (collectively, "Facilities"). The Year 2000 Committee has completed the assessment phase of the Facilities area and as of March 28, 1999, had certified 78% of this area as compliant. In addition remediation is currently underway in 14% of the Facilities area. Based on current information, the Year 2000 Committee expects that remediation and testing of the Facilities area will be completed in the third quarter of 1999. The fifth major area relates to the Company's products. The majority of the Company's traditional instant camera and film products are not vulnerable to the Year 2000 problem. The Committee is continuing its assessment to determine any other product vulnerability and to evaluate the possible upgrading of certain products in a cost-effective manner. The Company has initiated remediation and testing for certain of these products. Since October 1, 1998, the Company has been shipping only Year 2000 compliant products to its customers. Based on current information, the Year 2000 Committee expects to complete all phases related to the Company's products in the third quarter of 1999. The sixth major area is the Company's material relationships and transactions with third parties, including the ability of suppliers to provide materials and services to the Company and the ability of customers to order and pay for products from the Company (collectively, "Third Parties"). The Year 2000 Committee is in the assessment phase of the Third Parties area. The Company has identified the most critical of the Company's Third Parties relationships, is communicating with these companies to address their state of readiness, is identifying potential alternative vendors and has retained a consultant to assist its efforts. Based on current information, the Year 2000 Committee is forecasting the completion of all phases of the Third Parties area, including the possible replacement of existing vendors, by the end of the third quarter of 1999. The Year 2000 Committee is developing contingency plans to address the most reasonably likely worst case scenario resulting from Year 2000 problems. But, because the Company has not yet completed all phases of the Year 2000 project, it has not been able to formulate these plans in their entirety or to forecast the total cost of contingency plans for each of the six major areas. The Year 2000 Committee expects to complete contingency plans during the first half of 1999. The Year 2000 Committee has forecasted that the total cost of completing its Year 2000 project to be approximately $20 million to $25 million. The total projected amount of $20 million to $25 million includes internal staff costs associated with the Year 2000 project but does not include the estimated costs of the Company's new enterprise-wide software system or a forecast of the total cost for contingency plans for each of the six major areas. The Company has spent approximately $10 million of the projected total as of March 28, 1999. The Company expects to fund the cost of the Year 2000 project from general corporate funds. The failure of the Company or the failure of its material third party vendors and customers to make their systems Year 2000 compliant could have a material adverse impact on the results of operations and financial condition of the Company. While recognizing the risks involved, the Company believes that the steps that the Year 2000 Committee has taken and is expected to take will significantly reduce the Company's exposure to the Year 2000 problem. The Year 2000 problem has, however, certain inherent risks that are difficult to measure, including the Company's ability to test all material remediated systems in a timely fashion and the 17 readiness of third party vendors and customers. There can be no assurance that the Company will foresee all Year 2000 problems or remediate them on a timely basis. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Management's Discussion and Analysis may be forward looking in nature, or "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company desires to take advantage of the "safe harbor" provisions of the Act. The Company therefore cautions shareholders and investors that actual results may differ materially from those projected in or implied by any forward-looking statement as the result of a wide variety of factors, which include but are not limited to those set forth below. Many of the important factors below have been discussed in prior filings by the Company with the Securities and Exchange Commission. Ability to implement business strategy - -------------------------------------- The Company has implemented a business strategy to revitalize its instant imaging business which calls for, among other steps, the introduction of between 20 and 25 new products each year, the expansion of certain profitable businesses, and the continued reduction of costs and the improvement of operating efficiencies from its restructurings. As part of this strategy, the Company is promoting new uses of, and new markets for, its products and technology and is targeting new demographic segments, such as children, teens and young adults, through product innovations and marketing campaigns. There can be no assurance that the Company will be able to effectively implement this strategy. If this strategy is not successful the Company's business and results of operations could be negatively impacted. Similarly, a decline in retail demand could have a material adverse effect on the Company's business and financial results. Net losses - ---------- The Company experienced net losses for four of the last five fiscal years. These losses have been primarily due to the cost of restructurings, dealers' reduction in their inventories of the Company's products and the deterioration of economic conditions in the emerging markets in which the Company operates. If the Company continues to experience net losses, it may be required to find additional sources of financing to fund operating deficits, implement its business strategy and meet anticipated capital expenditures, research and development costs and financing commitments. There can be no assurance that if the Company needs to obtain such financing, that it will find it on acceptable terms or that it would be permitted under the Indenture or the Amended Credit Agreement. Developing digital imaging products market - ------------------------------------------ The Company's ability to effectively compete in the digital imaging market is dependent on its ability to develop new digital imaging products, including digital hardware with chemical-based media, in a profitable and timely manner and to market them effectively. In many instances, the Company will enhance its ability to succeed by developing meaningful strategic business relationships with other companies. The market for digital imaging products is, however, highly competitive in price, quality and product performance. Because it is a relatively new market, with high research and development and other costs, it is also currently a low margin business. Many of the Company's competitors have greater financial and other resources and have more experience serving the demands of these markets. Accordingly, there can be no assurance that the Company will succeed in the digital imaging business. In addition, markets for digital imaging products are increasing rapidly and over time may erode either the growth or the absolute size of the Company's instant photography business. Failure to market new products - ------------------------------ 18 The Company's plan to increase profits relies on the development of new products and their speedy introduction into the market. Future operating results may be negatively affected if the Company is unable to promptly design, develop, manufacture and market innovative imaging products that receive customer acceptance. In addition, because some of the Company's new products will replace or compete with existing products, its operating results could be adversely affected even if the Company is successful in developing and introducing new products. Substantial level of debt - ------------------------- The Company has a significant amount of debt. The Company's high level of debt could have important consequences to investors and stockholders. For example, it could: - - make it more difficult to satisfy its debt and other obligations; - - increase the Company's vulnerability to general adverse economic and industry conditions; - - limit the Company's ability to fund future working capital needs, capital expenditures, acquisitions, research and development costs and other general corporate requirements; - - require the Company to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing the availability of the Company's cash flow to fund working capital needs, capital expenditures and acquisitions, research and development efforts and other general corporate purposes; - - limit the Company's flexibility in planning for, or reacting to, changes in its business and the industry in which it operates; - - place the Company at a competitive disadvantage compared to its competitors that are less leveraged; and - - limit its ability to borrow additional funds. Restrictions imposed by the company's debt and financial flexibility - -------------------------------------------------------------------- The Company has financial and other restrictive covenants in the Company's debt instruments including restrictions in the event of a change in control. Failure to comply with these covenants could result in an event of default under the Amended Credit Agreement, the Indenture, and certain of the agreements governing short-term debt. If such default is not cured or waived it could have a material adverse effect on the Company. The Company's ability to make payments on and to refinance its debt, to execute its business strategy, to make capital expenditures and to fund research and development costs will depend on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, exchange rate fluctuation and other factors, including retail demand and dealer inventory practices, that are beyond the Company's control. It is also subject to the Company's success in implementing its strategies. There can be no assurance that the Company will generate sufficient cash flow or that future borrowings will be available to the Company under the Amended Credit Agreement or short-term lines of credit in an amount sufficient to enable the Company to repay its debt and to fund other liquidity needs. Failue to reduce cycle time - --------------------------- The Company has already reduced and is committed to further reducing its cycle time in bringing new products to market. There is no guarantee that the Company will succeed in this endeavor. Shorter cycle times present a challenge for the effective management of the transition from existing products to new products and could negatively impact the Company's future operating results. Highly competitive markets - -------------------------- 19 The timing and introduction of new products by the Company's competitors could have a material negative impact upon the Company's introduction of new or enhanced products. The Company has competitors worldwide, ranging from large corporations to smaller and more specialized companies. In the instant imaging market, the Company faces competition from Fuji Photo Film Co., Ltd. ("Fuji"), which has introduced selected new competitive products in Japan and Europe. In the digital imaging market, the Company faces competition from Eastman Kodak Company, Fuji, Hewlett-Packard Company, Canon U.S.A., Inc., Sony Corporation and others. Many of the Company's competitors are larger and have greater financial and other resources. There can be no assurance that the Company will be able to compete successfully and its failure to do so could have a material adverse effect on its business and financial results. Customer concentration - ---------------------- One customer, Wal-Mart Stores Inc., comprises over 10% of the Company's sales. Sales to Wal-Mart totaled 11.9%, 12.5% and 13.0% of the Company's total annual net sales in 1996, 1997 and 1998 respectively. There has been no major change in the importance of this customer during the first quarter of 1999. Emerging markets - ---------------- The Company continues to believe that the emerging markets in all regions in which it operates may offer attractive opportunities in the future. These markets are, however, considerably less stable than more established markets and continue to be troubled. For the foreseeable future, the Company does not anticipate that it will generate revenues in material amounts from Russia or certain other emerging markets. In Asia, the currency crisis and instability of the financial system have continued to negatively affect the Company's net sales. Accordingly, there can be no assurance that it will be able to increase its revenues from the emerging markets in which it operates. Foreign exchange rate fluctuations - ---------------------------------- The Company sells and markets its products worldwide. A major risk associated with such worldwide operations is the fluctuation of foreign exchange rates, particularly the Japanese Yen and German Mark. Although the Company engages in some foreign exchange hedging, fluctuations in foreign currencies could have a material adverse effect on the business and financial results of the Company. Raw materials and supplies - -------------------------- The Company is affected by the price and availability of several raw materials and supplies, such as chemicals, polyester film base, specialty paper and electronic components that the Company uses to manufacture its products. The Company therefore could be adversely affected by its inability to obtain these raw materials and supplies on favorable terms, and, in particular, by an increase in the costs of such raw materials and supplies if the Company is unable to pass along such price increases to its customers. Loss of patents and trademarks - ------------------------------ The Company obtains patents where feasible to protect its investment in research and development. The ownership of patents contributes to the Company's ability to use its inventions and at the same time may provide significant patent license revenue. In addition, the Company owns a number of valuable trademarks, including the trademark "Polaroid", which are important to its business. The loss of certain significant patents or trademarks would have a material adverse effect on the Company's business and financial results. Potential exposure to environmental liabilities - ----------------------------------------------- The Company's business and facilities are subject to a number of federal, state and local laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of such materials. Under certain environmental laws, a current or previous owner or operator of land may be liable for the costs of investigation, removal or remediation of hazardous materials at that property. These laws typically impose 20 liability whether or not the owner or operator of the land knew of, or was responsible for, the presence of the hazardous materials or for the disposal or treatment of hazardous materials. The owner or operator may also be liable for the costs of investigation, removal or remediation of such substances at the disposal or treatment site, regardless of whether the affected site is owned or operated by that party. Because the Company owns and operates a number of facilities and because it arranges for the disposal of hazardous materials at many disposal sites, the Company expects to incur costs for investigation, removal and remediation, as well as capital costs associated with compliance with these laws. In addition, changes in environmental laws or unexpected investigations and clean-up costs could have a material adverse effect on the Company's business and financial condition. Dependence on key personnel - --------------------------- The Company's success depends upon the continued contributions of a number of key senior managers and the loss of the services provided by them could have a material adverse effect on the Company. In particular, the loss of the services provided by Gary DiCamillo, the Chairman and Chief Executive Officer, as well as certain other senior managers, could have a material adverse effect upon the Company's business and development. If that were to occur, there is no assurance that the Company would be able to locate such qualified personnel or employ them on acceptable terms or on a timely basis. In addition, the Company's continued growth depends in part on its continuing ability to attract and retain qualified senior managers who can implement the Company's business strategy. There can be no assurance that the Company will be able to attract and retain such senior managers. Impact of the year 2000 problem - ------------------------------- The failure of the Company and its material third party vendors and suppliers to make their systems Year 2000 compliant could have a material adverse impact on the results of operations and financial condition of the Company. While recognizing the risks involved, the Company believes that the steps that the Year 2000 Committee has taken and is expected to take will significantly reduce the Company's exposure to the Year 2000 problem. The Year 2000 problem has, however, certain inherent risks that are difficult to measure, including the Company's ability to test all material systems in a timely fashion and the readiness of third party vendors and suppliers. There can be no assurance that the Company will foresee all Year 2000 problems or correct them on a timely basis. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 these sites and various other uncertainties, the Company cannot firmly establish its ultimate liability concerning these sites. In each case in which the Company is able to determine its likely exposure, such amount has been included in the Company's reserve for environmental liabilities. The Company's aggregate reserve for these liabilities as of March 28, 1999 was $2 million. The Company currently estimates that the majority of the $2 million amount reserved for environmental liabilities on March 28, 1999 will be payable over the next two to three years. The Company's analysis of data which underlies its establishment of this reserve is undertaken on a quarterly basis. The Company will continue to accrue in its reserve such amounts as management believes appropriate from time to time as circumstances warrant. The Company is involved in various other legal proceedings and claims arising in the ordinary course of business. Management believes that the disposition of these matters will not have a materially adverse effect on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the first quarter of 1999. ITEM 5. OTHER INFORMATION Not applicable. 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: ( 3) Amendment to the Restated Certificate of Incorporation of Polaroid Corporation as of May 14, 1985. (10) Amendment No. 1 to the $350,000,000 Amended and Restated Credit Agreement (the $350,000,000 Amended and Restated Credit Agreement was previously filed in a Current Report on Form 8-K dated January 21, 1999). (12) Ratio of Earnings to Fixed Charges. (15) Letter from KPMG LLP re: unaudited interim financial information. (27) Financial Data Schedule. (b) Reports on Form 8-K: During the first quarter of 1999, the Company filed: * a Current Report on Form 8-K dated January 21, 1999 (the Company filed its $350,000,000 Amended and Restated Credit Agreement entered into December 11, 1998 and its press release which announced the 1998 fourth quarter and full year results); * a Current Report on Form 8-K dated January 28, 1999 (the Company filed as an exhibit its Statement of Computation of Ratio of Earnings to Fixed Charges for the nine months ended September 28, 1997); and, * a Current Report on Form 8-K dated February 18, 1999 (the Company reported and filed documents relating to its completion of its underwriting offering of $275 million aggregate principal amount of its 11 1/2% Notes due 2006 covered by its Shelf Registration Statements on Form S-3 (File Nos. 333-0791 and 333-67647). 23 SIGNATURES Pursuant to the requirements 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) May 12, 1999 Judith G. Boynton ----------------------------------- Judith G. Boynton Executive Vice President and Chief Financial Officer 24 EX-3 2 EXHIBIT 3 Exhibit 3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF POLAROID CORPORATION It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Polaroid Corporation 2. The restated certificate of incorporation of the corporation is hereby amended as follows: (a) By striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article: "FOURTH: (a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is 80,000,000 consisting of (1) 20,000,000 shares of Preferred Stock, par value $1.00 per share ("Preferred Stock") , and (2) 60,000,000 shares of Common Stock, par value $1.00 per share ("Common Stock"). (b) The Board of Directors of the Corporation is hereby expressly authorized, by resolution or resolutions, to provide, out of the unissued shares of Preferred Stock, for series of Preferred Stock. Before any share of any such series is issued, the Board of Directors shall fix, and hereby is expressly empowered to fix, by resolution of resolutions, the following provisions of the shares thereof: (i) the designation of such series, the number of shares to constitute such series and the stated value thereof if different from the par value thereof; (ii) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law and, if so, the terms of such voting rights, which may be general or limited; (iii) the dividends, if any, payable on such series, whether any such dividends shall be cumulative and, if so, from what dates, the conditions and dates upon which such dividends shall be payable the preference or relation which such dividends shall bear to the dividends payable on any shares of 2 stock of any other class or any other series of this class; (iv) whether the shares of such series shall be subject to redemption at the election of the Corporation or the holders of such series and, if so, the times, prices and other conditions of such redemption; (v) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation; (vi) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; (vii) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of this class or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions for conversion or exchange; (viii) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of other distributions on, or upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of this class; (ix) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of this class or of any other class; and (x) any other powers, preferences and relative, participating, optional and other special rights of such series, and any qualifications, limitations and restrictions thereof. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series of Preferred Stock at any time outstanding. All shares of any one series of Preferred Stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative." 3 (b) By striking out subdivision (8) of paragraph (c) of Article NINTH thereof and substituting in lieu of said subdivision the following new subdivision: "(8) When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called for that purpose, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in, and/or other securities of, any other corporation or corporations, as the Board of Directors shall deem expedient and for the best interests of the Corporation." (c) By adding to the restated certificate of incorporation the following new Articles THIRTEENTH and FOURTEENTH immediately following Article TWELFTH thereof and redesignating the present Article THIRTEENTH thereof as Article FIFTEENTH: "THIRTEENTH: Subject to the rights of the holders of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation or of any other securities of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. "FOURTEENTH: Unless otherwise expressly provided by the board of Directors in the terms of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation of the Corporation, stockholders of the Corporation shall not be entitled to any preemptive right to subscribe to the issuance of, or purchase, any shares of capital stock of the Corporation of any class or series, including any Common Stock or Preferred Stock of the Corporation, or any security convertible into any shares of capital stock of the Corporation of any class or series." 3. The amendments of the restated certificate of incorporation herein certified have been duly adopted in accordance with the provisions of Section 228 and 242 of the General Corporation Law of the State of Delaware. Signed and attested to as of May 14, 1985. /S/ I.M. BOOTH --------------- President Attest: /S/ RICHARD F. DELIMA - -------------------------- Secretary EX-10 3 EXHIBIT 10 Exhibit 10 [EXECUTION COPY] AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT dated as of March 31, 1999 to the Amended and Restated Credit Agreement dated as of December 11, 1998 (the "Credit Agreement") among POLAROID CORPORATION (the "Company"), the LENDERS party thereto (the "Lenders"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent and Collateral Agent (the "Agent"), and BANKBOSTON, N.A., a Co-Agent. W I T N E S S E T H : WHEREAS, pursuant to Section 5.21 of the Credit Agreement, the parties hereto desire to amend the Credit Agreement to include certain covenants granted to the holders of the Company's Bonds (as defined below) and to make certain other changes relating to the Company's Sterling Dry Imaging Investments (as defined below); NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. DEFINED TERMS; REFERENCES. Unless otherwise specifically defined herein, each term used herein which is (i) defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement and (ii) defined in both the Credit Agreement and the Supplemental Indenture has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. SECTION 2. AMENDMENTS TO DEFINITIONS. (a) Section 1.01 of the Credit Agreement is amended by inserting, in their appropriate alphabetical position, the following definitions: "Affiliate Transaction" has the meaning set forth in Section 5.23. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "Bonds" means the 11 1/2% Notes due 2006 issued by the Company in an aggregate principal amount of $275,000,000. "Supplemental Indenture" means the First Supplemental Indenture dated as of February 17, 1999 by and between the Company and State Street Bank and Trust Company, as Trustee, and relating to the issuance and sale of the Bonds, as in effect on the date hereof, which is supplemental to the Indenture dated as of January 9, 1997 by and between the Company and State Street Bank and Trust Company, as Trustee. "Sterling Dry Imaging Investments" means the equity interests owned by the Company consisting of (i) 14% of the common stock of SDI Holding Corp. and (ii) 100% of the preferred stock of Sterling Dry Imaging Systems, Inc., a subsidiary of SDI Holding Corp. (b) Section 1.01 of the Credit Agreement is amended by inserting at the end thereof the following: "The following terms, as used herein, have the meanings set forth in the Supplemental Indenture as in effect on the date hereof: Capital Stock Disqualified Stock Equity Interests Fixed Charge Coverage Ratio (and, for purposes of this definition only, all related definitions contained therein) Stated Maturity" SECTION 3. DEFINITION OF RESTRICTED PAYMENT. The definition of "Restricted Payment" in Section 1.01 of the Credit Agreement is amended by adding "and (iii) any payment on or with respect to or any purchase, redemption, defeasance, acquisition or retirement for value of any Permitted Subordinated Debt, except the scheduled payment of interest or principal at the Stated Maturity thereof" immediately after clause (ii) therein and replacing the "or" immediately before "(ii)" with a comma. 2 SECTION 4. DEFINITION OF CORPORATE RATING. The definition of "Long- Term Debt Rating" is amended to be named "Corporate Rating" and to read as follows: "Corporate Rating" means at any time (i) with respect to Moody's, its senior implied rating of the Company at such time or, if Moody's does not maintain a senior implied rating of the Company at such time, the rating assigned by Moody's at such time to senior unsecured long-term debt securities of the Company without third-party credit enhancement and (ii) with respect to S&P, its corporate credit rating of the Company at such time or, if S&P does not maintain a corporate credit rating of the Company at such time, the rating assigned by S&P at such time to the senior unsecured long-term debt securities of the Company without third-party credit enhancement." SECTION 5. AMENDMENT TO RESTRICTED PAYMENTS. Section 5.10 of the Credit Agreement is amended by adding "(other than Restricted Payments described in clause (iii) of the definition thereof)" immediately after the words "make any Restricted Payment" in subsection (b) thereof and by adding the following new subsection (c) thereto: "(c) Neither the Company nor any Subsidiary will declare or make any Restricted Payment after December 31, 1998 unless no Default has occurred and is continuing or would result after giving effect thereto." SECTION 6. LIMITATION ON INTERCOMPANY DEBT. Clause (a)(ii) of Section 5.11 of the Credit Agreement is amended to read as follows: "(ii) Debt owing to the Company or to a Subsidiary; PROVIDED that Debt owing by the Company to a Subsidiary that is not a Subsidiary Guarantor shall be permitted by this clause (ii) only to the extent that such Debt is expressly subordinated to the prior payment in full in cash of the principal of and interest (including Post-Petition Interest) on the Loans and all other obligations of the Company under the Financing Documents on terms and conditions reasonably satisfactory to the Required Lenders;" SECTION 7. TRANSACTIONS WITH AFFILIATES. Article 5 of the Credit Agreement is amended to add an additional Section to read as follows: "SECTION 5.23. TRANSACTION WITH AFFILIATES. The Company shall not, and shall not permit any Subsidiary, to make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement understanding, loan, advance or 3 Guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person; and (ii) the Company delivers to the Administrative Agent: (A) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration of less than $10,000,000, a certificate of the Company's chief executive officer or chief financial officer certifying that such Affiliate Transaction complies with this Section 5.23, (B) with respect to any Affiliate Transaction or series of related Affiliate Transaction involving aggregate consideration equal to or in excess of $10,000,000 and less than $50,000,000, a certificate of the Company's chief executive officer or chief financial officer, approved by the Company's Board of Directors, certifying that such Affiliate Transaction complies with this Section 5.23 and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and (C) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $50,000,000, an opinion as to the fairness to the Lenders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items shall not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph: (i) any employment agreement entered into by the Company or any of its Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Subsidiary, as the case may be; (ii) transactions between or among the Company and/or its Subsidiaries; (iii) any sale or other issuance of Equity Interests (other than Disqualified Stock) of the Company; (iv) payment of reasonable fees and compensation and indemnity on behalf of officers, directors, employees and consultants of the Company or any Subsidiary of the Company who are not otherwise Affiliates of the Company or the Subsidiary, as the case may be; (v) Restricted Payments that are permitted by Section 5.10; (vi) reasonable payments, advances or loans to employees or consultants for moving, entertainment and travel expenses and similar expenditures in the ordinary course of business; and (vii) transactions with joint ventures or alliances in the ordinary course of business and otherwise in compliance with the provisions of this Agreement on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party." 4 SECTION 8. RESTRICTIONS ON PAYMENTS BY SUBSIDIARIES. Article 5 of the Credit Agreement is amended to add an additional Section to read as follows: "SECTION 5.24. RESTRICTIONS ON PAYMENTS BY SUBSIDIARIES. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary to: (a) pay dividends or make any other distributions on its capital stock to the Company or any of its Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any debt owed to the Company or any of its Subsidiaries; (b) make any loans or advances to the Company or any of its Subsidiaries; or (c) transfer any of its properties or assets to the Company or any of its Subsidiaries; PROVIDED that the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of (i) Debt outstanding on the date hereof and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, PROVIDED that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in such outstanding Debt; (ii) the Supplemental Indenture; (iii) applicable law; (iv) any instrument governing Debt or Capital Stock of a Person acquired by the Company or any of its Subsidiaries as in effect at the time of such acquisition (except to the extent such Debt was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, PROVIDED that, in the case of Debt, such Debt was permitted to be incurred pursuant to Section 5.11; (v) customary non-assignment provisions in leases entered into in the ordinary course of business; (vi) capital leases, mortgage financings or purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (c) of the preceding paragraph; (vii) any agreement for the sale or other disposition of a Subsidiary that restricts distributions by that Subsidiary Guarantor pending its sale or other disposition; (viii) Debt incurred to refund, replace or refinance other 5 Debt incurred in compliance with this Agreement, PROVIDED that the restrictions contained in the agreements governing such Debt are no more restrictive, taken as a whole, than those contained in the agreements governing Debt being refinanced; (ix) Liens securing Debt that limit the right of the debtor to dispose of the assets subject to such Lien; (x) provisions with respect to the distribution or disposition of assets or property in joint venture agreements, asset sale agreements, stock sale agreements and other similar agreements entered into in the ordinary course of business; (xi) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; and (xii) Debt under the Financing Documents." SECTION 9. SALE-LEASEBACK TRANSACTIONS. Section 5.14 of the Credit Agreement is amended by adding "(b)" immediately before the first sentence and by inserting the following Section 5.14(a) immediately prior to Section 5.14(b): "(a) The Company will not, and will not permit any of its Subsidiaries to, enter into any sale and leaseback transaction; PROVIDED that the Company or any Subsidiary may enter into a sale and leaseback transaction if: (i) The Company, or that Subsidiary, as applicable, could have incurred Debt in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under (A) the Fixed Charge Coverage Ratio test in the first paragraph of Section 15(c) of the Supplemental Indenture or (B) Section 15(c)(xii) of the Supplemental Indenture, PROVIDED that, in the case of this clause (B), the aggregate amount of Attributable Debt relating to all such sale and leaseback transactions shall not exceed $50,000,000 at any one time outstanding; (ii) the gross cash proceeds of that sale and leaseback transaction are at least equal to the fair market value of the property that is the subject of the sale and leaseback transaction; and (iii) the transfer of assets in that sale and leaseback transaction is permitted by this Agreement, and the Company or such Subsidiary applies the proceeds of such transaction in compliance with Section 2.17 of this Agreement." SECTION 10. ADDITIONAL EVENTS OF DEFAULT. Section 6.01(b) is amended to add after the reference to Section 5.20 thereof, ", or in Section 5.23 or 5.24". 6 SECTION 11. CALCULATION OF INTEREST COVERAGE RATIO, DEBT TO EBITDA RATIO. The Lenders hereby agree that for purposes of calculating compliance with the covenants contained in Section 5.07 and 5.08(a) of the Credit Agreement, Consolidated Net Income for any period shall be calculated on a PRO-FORMA basis excluding any non-cash charges of up to $40,000,000, in the aggregate, taken after December 31, 1998 and before December 31, 1999, for losses incurred by the Company with respect to the sale or other disposition of its equity interests in the Sterling Dry Imaging Investments or any write-down in the carrying value thereof. SECTION 12. AMENDMENT OF PRICING SCHEDULE. The Pricing Schedule is amended to replace "Long-Term Debt Ratings" in the second paragraph thereof with the words "Corporate Ratings". SECTION 13. REPRESENTATIONS OF BORROWER. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment Effective Date and (ii) no Default will have occurred and be continuing on such date. SECTION 14. CONSENT BY GUARANTORS. By its signature below, each Guarantor hereby consents to this Amendment, and acknowledges that this Amendment shall not alter, release, discharge or otherwise affect any of its obligations under the Credit Agreement or any Financing Document (as defined in the Credit Agreement), and hereby ratifies and confirms all of the Financing Documents (as so defined) to which it is a party. SECTION 15. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 16. COUNTERPARTS. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 17. EFFECTIVENESS. This Amendment shall become effective as of the date hereof on the date when the following conditions are met (the "Amendment Effective Date"): (a) the Agent shall have received from each of the Borrower, each Guarantor and the Required Lenders a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Agent) that such party has signed a counterpart hereof; and 7 (b) the Agent shall have received an amendment fee for the account of each Lender that has evidenced its agreement hereto as provided in clause (a) by 5:00 p.m. (New York City time) on the later of (i) April 2, 1999 and (ii) the date the Agent issues a notice to the Lenders saying that the Required Lenders have so evidenced their agreement hereto, in an amount equal to 0.05% of such Lender's Commitment. 8 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. POLAROID CORPORATION By: ------------------------------------- Name: Title: 784 Memorial Drive Cambridge, Massachusetts 02139 Attention: Treasurer Facsimile number: INNER CITY, INC. By: ------------------------------------- Name: Title: POLAROID ASIA PACIFIC LIMITED By: ------------------------------------- Name: Title: POLAROID CARIBBEAN CORPORATION By: ------------------------------------- Name: Title: POLAROID DIGITAL SOLUTIONS, INC. By: ------------------------------------- Name: Title: POLAROID EYEWEAR, INC. By: ------------------------------------- Name: Title: POLAROID ID SYSTEMS, INC. By: ------------------------------------- Name: Title: POLAROID MALAYSIA LIMITED By: ------------------------------------- Name: Title: PRD CAPITAL INC. By: ------------------------------------- Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ------------------------------------- Name: Title: ABN AMRO BANK N.V. By: ------------------------------------- Name: Title: By: ------------------------------------- Name: Title: BANKBOSTON, N.A. By: ------------------------------------- Name: Title: TRANSAMERICA BUSINESS CREDIT CORPORATION By: ------------------------------------- Name: Title: FOOTHILL CAPITAL (L.A.) By: ------------------------------------- Name: Title: DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: ------------------------------------- Name: Title: By: ------------------------------------- Name: Title: THE FIRST NATIONAL BANK OF CHICAGO By: ------------------------------------- Name: Title: SENIOR DEBT PORTFOLIO By: Boston Management and Research, as Investment Advisor By: ------------------------------------- Name: Title: THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH By: ------------------------------------- Name: Title: WACHOVIA BANK, N.A. By: ------------------------------------- Name: Title: FLEET NATIONAL BANK By: ------------------------------------- Name: Title: MELLON BANK, N.A. By: ------------------------------------- Name: Title: TEXTRON FINANCIAL CORPORATION By: ------------------------------------- Name: Title: PNC BANK, NATIONAL ASSOCIATION By: ------------------------------------- Name: Title: KZH STERLING LLC By: ------------------------------------- Name: Title: (NY) 27009/480/AMEND/amend1.wp MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: ------------------------------------- Name: Title: 60 Wall Street New York, New York 10260-0060 Attention: Loan Department Telex number: 177615 MGT UT Facsimile number: 212-648-5014 BANKBOSTON, N.A., as Co-Agent By: ------------------------------------- Name: Title: 100 Federal Street Mail Stop: 01-10-01 Boston, MA 02110 Attention: Grace A. Barnett Telex number: 4996527 Facsimile number: 617-434-0601 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ------------------------------------- Name: Title: c/o J.P. Morgan Services Inc. 500 Stanton Christiana Road Newark, Delaware 19713-2107 Attention: Jeannie Mattson Facsimile number: (302) 634-1852 EX-12 4 EXHIBIT 12 EXHIBIT 12 POLAROID CORPORATION AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In Millions Except Ratios)
Three Months Year Ended December Ended --------------------------------------------------------- March 28 1994 1995 1996 1997 1998 1999 --------- -------- -------- -------- -------- -------- - - Earnings/(loss): Earnings/(loss)before income tax expense/benefit per consolidated statement of earnings $160.7 $(201.4) $ 31.2 $(191.9) $(38.9) $ (47.4) Add: Interest expense 46.6 52.1 47.4 47.8 57.6 17.9 Portion of rent expense representative of an interest factor 10.3 11.7 9.3 10.7 10.5 2.6 ------ ------- ------ ------- ------ ------ Adjusted earnings/(loss) before income tax expense/benefit $217.6 $(137.6) $ 87.9 $(133.4) $ 29.2 $ (26.9) ------ ------- ------ ------- -------- ------- ------ ------- ------ ------- -------- ------- Fixed charges: Interest expense $ 46.6 $ 52.1 $ 47.4 $ 47.8 $ 57.6 $ 17.9 Portion of rent expense representative of an interest factor 10.3 11.7 9.3 10.7 10.5 2.6 Capitalized interest 9.7 4.8 5.1 2.6 2.2 0.6 ------ ------- ------ ------- -------- ------- Total fixed charges $ 66.6 $ 68.6 $ 61.8 $ 61.1 $ 70.3 $ 21.1 ------ ------- ------ ------- -------- ------- ------ ------- ------ ------- -------- ------- Ratio of earnings to fixed charges 3.3 N/A(a) 1.4(b) N/A(c) .4(d) N/A(e) ------ ------- ------ ------- -------- ------- ------ ------- ------ ------- -------- -------
- -------------------------- (a) Earnings were insufficient to cover fixed charges by $206.2 million after giving effect to the pre-tax expense for restructuring and other charges of $247.0 million. Excluding the pre-tax restructuring and other charges, the ratio of earnings to fixed charges was 1.6. (b) In 1996, the Company recorded a pre-tax expense for restructuring and other special charges of $150.0 million ($7.0 million of which was recorded in cost of goods sold). Excluding the pre-tax restructuring and other special charges, the ratio of earnings to fixed charges was 3.8. (c) Earnings were insufficient to cover fixed charges by $194.5 million after giving effect to the pre-tax expense for restructuring and other charges of $340.0 million ($16.5 million of which was recorded in cost of goods sold). Excluding the pre-tax restructuring and other charges, the ratio of earnings to fixed charges was 3.4. (d) Earnings were insufficient to cover fixed charges by $41.1 million after giving effect to the pre-tax expense for restructuring of $50.0 million. Excluding the pre-tax restructuring, the ratio of earnings to fixed charges was 1.1. (e) Earnings were insufficient to cover fixed charges by $48.0 million. EX-15 5 EXHIBIT 15 EXHIBIT 15 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. 333-0791 on Form S-3, No. 333-32279 on Form S-8, No. 333-32281 on Form S-8, No. 333-32283 on Form S-8, No. 333-32285 on Form S-8, and No. 333-67647 on Form S-3 of Polaroid Corporation. With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated April 14, 1999, 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, KPMG LLP Boston, Massachusetts May 12, 1999 EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM POLAROID CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED MARCH 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-28-1999 67,900 0 487,000 (41,300) 518,100 1,268,300 1,990,300 (1,418,400) 2,139,300 854,000 572,700 0 0 75,400 265,000 2,139,300 379,000 379,000 237,300 385,900 22,600 1,000 17,900 (47,400) (16,600) (30,800) 0 0 0 (30,800) (0.70) (0.70)
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