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TABLE OF CONTENTS
TABLE OF CONTENTS 2

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 000-50661

POLAROID HOLDING COMPANY
(Exact name of Registrant as specified in its charter)

1265 Main Street
Waltham, Massachusetts 02451
(Address of principal executive offices and zip code)

(781) 386-2000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share

        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 (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý    NO o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) YES ý    NO o

        As of March 7, 2005, the number of outstanding shares of the Registrant's Common Stock was 34,956,069. The information in this report gives effect to a 10-for-1 stock split that occurred on July 24, 2003.

        In reliance on Rule 12b-21 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Annual Report on Form 10-K does not include financial information of Primary PDC, Inc. for periods prior to January 1, 2002 as required by Form 10-K.

TABLE OF CONTENTS

Forward-Looking Statements

        Some statements in this report may be forward looking in nature, or "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "believe", "expect", "anticipate", "should", "plan", "seek", "goal", "outlook", "target", "intend", "will", "estimate" and "potential" among others. Actual results may differ materially from those projected in or implied by any forward-looking statement as a result of a wide variety of factors, which include, but are not limited to those set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Registrant assumes no obligation to update forward-looking statements whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

Nature of Operations

        Polaroid Holding Company ("Holding"), together with its consolidated subsidiaries (collectively, the "Company"), designs, develops, manufactures and markets instant and digital imaging products and related products. The Company's principal products are instant cameras and instant film, which are marketed worldwide. In addition to its principal products, the Company designs, develops, manufactures and/or markets photographic hardware accessories for the instant photography market. The Company's other products and services consist of eyewear, principally sunglasses, and secure identification systems for commercial applications. The Company also performs contract manufacturing for and licenses its brand and technology to third parties.

        The Company has made a significant investment in instant digital printing applications but has not commercialized any products in that area. There can be no assurance that any of these digital printing applications will be commercialized. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005. As previously disclosed, the Company made a decision in the second quarter of 2004 to terminate the test marketing and development of its instant digital printing kiosk and does not plan to commercialize this product in the future.

        The Company sells its products directly to and through mass merchandisers; food, drug, discount and department stores; photo retail and specialty stores; wholesalers; original equipment manufacturers; independent agents; retail outlets; and distributors.

The Merger

        On January 7, 2005, the Company entered into a merger agreement with Petters Group Worldwide, LLC and its wholly-owned subsidiary, Petters Consumer Brands, LLC (collectively "Petters"). If the merger is completed, the Company will become a wholly-owned subsidiary of Petters Group Worldwide, LLC and each outstanding share of the Company's Common Stock will be converted into the right to receive $12.08 in cash and, under certain circumstances, the right to receive additional cash consideration if the Company sells its instant digital printing assets for consideration in excess of an amount determined pursuant to the merger agreement. One Equity Partners LLC ("OEP"), the private equity firm that owns a majority of the Company's Common Stock, has entered into a voting agreement with Petters to vote its shares during the term of the voting agreement in favor of the adoption of the merger agreement and to exercise its contractual "drag along" rights under the Amended and Restated Securities Holders Agreement to require certain other shareholders, including all of the Company's directors and executive officers, to vote their shares in favor of the merger. The closing of the merger is subject to various conditions.

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        The Company has filed a preliminary proxy statement and will file a definitive proxy statement with the Securities and Exchange Commission ("SEC") to be used to solicit stockholder approval of the proposed merger. The Company's stockholders are urged to read the definitive proxy statement and any other relevant documents filed with the SEC when they become available because they will contain important information.

Background

        Prior to August 2002, the business of the Company was operated by Primary PDC, Inc., formerly known as Polaroid Corporation, and its subsidiaries (collectively "Primary"). In October 2001, Primary PDC, Inc. and twenty of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware. The Company, through certain of its subsidiaries, acquired substantially all of the domestic assets and businesses of Primary and its domestic subsidiaries and the capital stock of its foreign subsidiaries on July 31, 2002 in a sale transaction approved by an order of the U.S. Bankruptcy Court (the "Transaction"). Pursuant to the Transaction, the Company also assumed certain of the liabilities and obligations of Primary. Holding was formed in 2002 as a Delaware corporation for the purpose of completing the Transaction. Holding's principal office is located at 1265 Main Street, Waltham, Massachusetts 02451. The Company maintains a website located at www.polaroid.com. Primary PDC, Inc. continues to exist as a distinct legal entity.

        THE INFORMATION PRESENTED BELOW DOES NOT INCLUDE FINANCIAL INFORMATION ON PRIMARY FOR PERIODS PRIOR TO JANUARY 1, 2002 SINCE AUDITED INFORMATION ON THOSE PERIODS IS NOT AVAILABLE TO THE COMPANY. AS A RESULT, THIS DOCUMENT DOES NOT CONTAIN ALL OF THE FINANCIAL INFORMATION THAT IS REQUIRED BY THE RULES AND REGULATIONS APPLICABLE TO THIS REPORT REGARDING THE BUSINESS OPERATIONS ACQUIRED BY THE COMPANY IN THE TRANSACTION. THE ABSENCE OF FINANCIAL INFORMATION FOR PRIMARY PRIOR TO JANUARY 1, 2002 COULD BE MATERIAL TO INVESTORS. FURTHER, INVESTORS SHOULD NOT ASSUME THAT THE RESULTS OF OPERATIONS FOR THE PERIODS CONTAINED HEREIN BEAR ANY CORRELATION TO THE RESULTS OF OPERATIONS OF PRIMARY FOR PERIODS PRIOR TO 2002.

The July 2002 Transaction

        The total purchase price for the Transaction consisted of cash consideration of $255 million adjusted for approximately $58 million of cash payments made by Primary prior to or at the closing. The Company also recorded liabilities of approximately $224 million related to the Transaction. In addition, at the closing of the Transaction, Holding issued to Primary 10,769,230 shares of the 30,769,230 then outstanding shares of its Common Stock, par value $0.001 per share (the "Common Stock"), and 312,300 shares of the 892,300 then outstanding shares of its Series A 8.0% Cumulative Compounding Preferred Stock, par value $0.001 per share (the "Preferred Stock"). Refer to Note 1 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for more information on the Transaction.

Business Strategy

        The Company's financial success will largely be dependent on its generation of cash flow, primarily from its instant camera and film products, effective management of working capital, as well as managing the decline in the Company's instant camera and film business. The Company has made a significant investment in instant digital printing applications but has not commercialized any products in that area. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a

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change in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005. The market for instant photography cameras and film has been experiencing a significant and steady decline in demand due to competition from digital camera products and media formats. This declining demand continues to have a negative impact on sales of the Company's instant camera and film products and its net earnings. The Company's strategy is to manage the decline in its instant photography business.

        To manage the decline in its instant photography business the Company plans to:

•

continue to reduce costs in manufacturing instant cameras and film to work towards alignment of its cost structure with its revenues;



•

reduce sales, marketing, development and other corporate overhead in line with its revenues;



•

maximize retail shelf space and improve in-store visibility through creative point-of-sale merchandising, co-marketing, and promotional activities;



•

focus on selected commercial applications for which instant imaging remains a strong opportunity, with growth in several emerging markets;



•

focus on ethnic marketing opportunities for consumer applications in the U.S.;



•

rationalize or exit several product lines that do not meet profit objectives;



•

expand its e-commerce capability allowing consumers to purchase products and obtain photo finishing services online.

        The Company seeks to identify and secure business partnerships and alliances to support its products and services, extend its markets, and build upon its research and development initiatives. These efforts include the Company's brand and technology licensing activity.

Principal Products and Technology

Instant Photography

        The Company's instant photography products consist of instant cameras and film in a variety of styles and in large and small formats. Instant cameras and film accounted for approximately 83% of the Company's net sales for the twelve-month period ending December 31, 2004.

        The larger format instant camera and film products consist primarily of:

•

the 600 series of instant cameras and film, including the new One600 series instant cameras;



•

the Spectra or Image1200 series of instant cameras and film;



•

Studio 125i and Type 690 commercial film, color peel-apart instant films that produce quality images for professional and document photography uses;



•

other instant film formats and hardware devices used primarily for commercial applications.

        The instant camera and film products in the smaller instant format are the Company's Polaroid i-Zone products. The larger format products have historically had higher margins than the smaller formats. Sales of the smaller instant format products account for substantially less revenue and gross profit than the larger format products.

Instant Digital Printing

        The Company has made a significant investment in instant digital printing applications but has not commercialized any products in that area. There can be no assurance that any of these digital printing applications will be commercialized. The Company is exploring strategic alternatives for the instant

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digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005. As previously disclosed, the Company made a decision in the second quarter of 2004 to terminate the test marketing and development of its instant digital printing kiosk and does not plan to commercialize this product in the future.

Polaroid Brand Licensing

        The Polaroid brand is recognized and respected worldwide, providing a strong foundation for the Company's licensing strategy based on both enhancing the reputation of the brand and generating income. Brand licensing also offers opportunities to extend the Company's distribution in multiple business markets.

Technology Licensing

        Technology licensing generates revenue from the Company's portfolio of patents. The Company has many proprietary technologies available for licensing.

Other Products

        The Company also designs, manufactures and sells eyewear, principally sunglasses, secure identification systems for commercial applications, and photographic hardware accessories. In addition, the Company performs contract manufacturing for third parties.

Regional Sales and Marketing Operations

        In each sales and marketing region, the Company has two principal markets for its traditional products: consumer photography and commercial photography. While the products are similar worldwide, the mix between consumer and commercial photography varies by region and country. Because of this, the Company develops regional marketing strategies. This permits the Company's management in each region the opportunity to develop advertising and promotional programs, organize its distribution structure, target its communications, and tailor its product portfolio to meet the needs of the regional marketplace. Regional management of the sales and marketing functions enables the Company to deliver products to its customers in a cost-effective manner. The Company has shifted the market structure for many of its sales regions from a direct subsidiary model to a distributor model as a means to drive efficiency and reduce cost. In addition, the company is pursuing an e-commerce strategy in select developed markets to drive efficiency and reduce costs.

Competition

        The Company operates in the worldwide photography market, which is highly competitive in design, product performance, quality, service and price. Instant silver halide, conventional 35mm and digital imaging products manufactured by others compete with the Company's products. The Company has competitors worldwide, including large global corporations, most of which have greater financial resources than the Company. The Company also faces competition from local and regional companies, which may be more specialized than the Company. In the instant photography market, the Company faces direct competition from Fuji Photo Film Co., Ltd. ("Fuji"), which sells instant photography products in Asia, Europe, Canada and the United States. The Company's instant cameras and film products also face competition from Eastman Kodak Company, Hewlett-Packard Company, Canon U.S.A., Inc., Sony Corporation, Epson America, Inc. Olympus Corporation, Hi-Touch Imaging Technologies, Inc. and others.

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Customers

        In the United States, the Company sells its products to a variety of customers (refer to "Nature of Operations" section above). Internationally, products are sold to a variety of customers and unaffiliated distributors primarily through a direct sales force.

        Sales to one customer, Wal-Mart Stores, Inc., accounted for approximately 13% and 14% of the Company's worldwide net sales in 2004 and 2003, respectively. Substantially all of the sales to Wal-Mart Stores, Inc. occurred in the Americas Region. No other customer accounted for more than 10% of the Company's total net sales in the years ended December 31, 2004 and 2003.

Manufacturing

        The Company manufactures its instant film and some of its cameras. For certain of its instant cameras, hardware and other products, it uses third-party manufacturers. The Company's products, whether manufactured in-house or by third parties, are shipped primarily from facilities in the United States and the Netherlands. Product sourcing decisions are made on a worldwide basis to optimize cost and customer service.

        The Company has manufacturing sites located in Waltham, Norwood, and New Bedford, Massachusetts; Dumbarton, Scotland; Enschede, the Netherlands; Queretaro, Mexico; and Shanghai, China. The Company believes that the capacity of its manufacturing facilities is sufficient to meet the current demand for its products. The Company performs the final assembly of instant cameras at its facilities in Scotland and China or contracts with third parties who manufacture cameras to the Company's design specifications. Refer to Item 2. Properties below for more information.

        The manufacture of instant film is a vertically integrated process that has two major steps: the production of photographic materials, principally photographic negatives; and the assembly of film packs. The Company makes photographic negatives by purchasing and producing custom chemicals and coating them on the film sheets using proprietary technology. In addition, most of the Company's instant integral films use batteries that it manufactures. The non-assembly processes, located in the United States, are capital intensive. By contrast, the assembly of film packs is highly mechanized and occurs in The Netherlands, Scotland and Mexico, as well as the United States. The Company continues to explore opportunities to outsource certain of its manufacturing operations and to eliminate underutilized capacity by consolidating its manufacturing facilities.

Research and Development

        The Company conducts research and development ("R&D") to create value through the development of proprietary technology platforms with broad product applicability. During 2004, most of the Company's research and development resources were dedicated to instant digital printing solutions and services. The balance was largely related to new instant camera designs. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in the instant digital printing area after the second quarter of 2005.

Raw Materials, Supplies and Contract Manufacturing

        The Company uses a variety of raw materials and supplies in the manufacture of its products, including chemicals, polyester film base, specialty papers and electronic components. It purchases these products from third-party suppliers, except for a few self-manufactured raw materials used in low volumes. The Company believes these raw materials and supplies will continue to be available in sufficient quantities to meet the current demand for its products. The Company is dependent on some

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sole source suppliers for certain finished goods and components, some of which are critical to the manufacture of instant film.

Employees

        As of December 31, 2004, the Company had approximately 2,850 employees. Approximately two-thirds of the Company's employees are in manufacturing operations.

Environmental Compliance

        The Company's environmental compliance is primarily associated with its manufacturing and logistics, and research and development operations. The Company is subject to various laws and governmental regulations concerning environmental matters. Some of the U.S. federal environmental legislation having an impact on the Company's manufacturing operations includes the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Clean Air Act, Clean Water Act, and the Comprehensive Environmental Response, Compensation, and Liability Act. It is the Company's policy to carry out its business activities in a manner consistent with sound health, safety and environmental management practices, and to comply with applicable health, safety and environmental laws and regulations. The Company continues to engage in a program for environmental protection and control.

Business Segments

        The Company's reportable business segments are: the Americas Region; the International Region; Global Manufacturing; and R&D. It also has an All Other segment that includes: the eyewear business; the commercial secure identification systems business; brand and technology licensing operations; and contract manufacturing. The Americas Region consists of sales, marketing and distribution operations in the United States of America and other countries in North and South America. The International Region consists of sales, marketing and distribution operations outside the Americas Region. Global Manufacturing consists of worldwide activities associated with manufacturing, procurement, developing manufacturing processes for new products, and inventory management. R&D consists of the Company's research and development activities.

        The Company has one category called Corporate, which is not classified as a segment. This category includes: central marketing; centralized information systems; general and administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The Corporate category also includes costs related to restructuring activities, certain incentive compensation costs and certain other non-operating items. For more information regarding the net sales, profit/(loss) from operations and total assets of each of the business segments and net sales and long-lived assets by geographic area, refer to Note 15 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

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Item 2. Properties

        The Company's worldwide headquarters are located in Waltham, Massachusetts. The Company has manufacturing facilities and marketing and distribution centers throughout the world. The following is a summary of real estate owned and leased by the Company and the business segments to which such real estate relates as of December 31, 2004:

        The Company currently maintains distribution centers located in Norton, Massachusetts and in Enschede, the Netherlands. In the Americas Region, the Company also has two regional sales offices in the United States, as well as offices in Mexico and Canada. The International Region has marketing subsidiaries and sales offices located in the United Kingdom, France, Germany, Italy, Switzerland, and certain other European countries. It also has marketing subsidiaries and offices located in China, Hong Kong, and Japan.

        At December 31, 2004, based on square footage, approximately 99% of the properties owned or leased by the Company in the United States were located in Massachusetts. The following table gives the approximate size of each property located in Massachusetts and whether the space is owned or leased:

        The Company's United States manufacturing occurs in properties owned or leased by the Company in Waltham, Norwood and New Bedford, Massachusetts. Most of the Company's central or corporate marketing, research and administrative offices are located in Waltham, Massachusetts. In addition to the properties owned by the Company in Waltham and New Bedford, the Company also has leased properties in Waltham, Norwood, and Norton with leases that expire between 2005 and 2014. All of the Company's owned properties are subject to mortgages in favor of the lenders under the Company's Credit Agreement.

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        The Company's main properties located outside the United States house manufacturing facilities, regional marketing subsidiaries and sales offices. The principal non-U.S. manufacturing facilities are located in Enschede, the Netherlands; Dumbarton, Scotland; Queretaro, Mexico; and Shanghai, China. These facilities also contain some administrative and regional marketing activities. The following table gives the approximate size of each property located outside of the United States and whether the space is owned or leased:

        Reducing costs is a continuing objective of the Company in 2005. The Company expects to continue to consolidate underutilized facilities, sell certain facilities as market conditions permit and replace certain space through leasing rather than acquisitions, subject to the restrictions contained in the Company's Credit Agreement. For more information on the Company's Credit Agreement, refer to "Financial Liquidity and Capital Resources" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 to the consolidated financial statement in Item 8. Financial Statements and Supplementary Data.

Item 3. Legal Proceedings

        The Company is involved in legal proceedings and claims arising in the normal course of business.

        On July 7, 2003, five former employees of Primary filed a complaint against Primary, the Company and OEP in the United States District Court for the District of Massachusetts on behalf of a purported class of over 100 individuals. In response, Primary invoked the automatic stay provision of the Bankruptcy Code, and the Company and OEP both moved to transfer the case to the District of Delaware (the site of Primary's bankruptcy proceedings) or, alternatively, to dismiss the complaint. The Company and OEP also filed an adversary complaint in the bankruptcy court seeking a declaration that the complaint is barred by the 2002 order of the court which approved the sale of the assets of Primary to the Company. In November 2003, the plaintiffs filed an amended complaint dismissing OEP and Primary, abandoning five of six counts against the Company, and continuing their action against the Company on the one remaining count and adding an individual defendant. In response, the Company renewed its motions to dismiss or to transfer the case to the District of Delaware. In addition, the Company filed a new adversary complaint with the bankruptcy court, seeking a declaration that the amended complaint, like the original complaint, is barred by the sale order. That matter remains pending before the bankruptcy court. In September 2004, the plaintiffs filed a second amended complaint, that dropped the class allegations and added a second count against the individual defendant. In October 2004, the Company renewed its motions to transfer the case to the District of Delaware or, alternatively, to dismiss the complaint. Those motions remain pending before the court. In the second amended complaint, the plaintiffs claim that the Company conspired with Primary to wrongfully interfere with plantiffs' right to receive paid-for medical coverage that Primary had allegedly promised them, in alleged violation of the Employee Retirement Income Security Act ("ERISA"). The plaintiffs seek an injunction ordering the Company to assume Primary's alleged obligations to them and

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to pay them damages stemming from the alleged ERISA violations. The amount of alleged damages claimed is not specified. While there can be no assurance of the outcome of this litigation, the Company does not believe that the disposition of these matters will have a material adverse effect on its results of operations or financial condition.

        On December 1, 2003, Primary filed a motion (the "Estate Costs Motion") in the U.S. Bankruptcy Court for the District of Delaware (the "U.S. Bankruptcy Court") seeking to compel the Company to satisfy its purported obligation under the asset purchase agreement between the Company and Primary to pay $7.0 million of estate costs to Primary. On December 9, 2003, the Company filed an objection to the relief requested in the Estate Costs Motion on the basis that the conditions giving rise to the Company's alleged obligations under the asset purchase agreement to provide $7.0 million were not satisfied. By orders entered on December 29, 2003 and on December 31, 2003 (collectively the "Estate Cost Orders"), the U.S. Bankruptcy Court granted the Estate Costs Motion, and directed the Company to fund the $7.0 million in estate costs. The Company filed a notice on February 6, 2004 appealing the U.S. Bankruptcy Court's approval of the Estate Costs Motion (the "Appeal"). In connection with the Appeal, the Company was required to post a $7.5 million bond and provide cash collateral equal to that amount. The Company posted this bond in January 2004. The Company had accrued $7.0 million for its potential liability for the estate costs as of December 31, 2003. The cash payment by the Company to collateralize the bond in January 2004 was recorded in other current assets. In December, 2004, the Company and Primary entered into a mutually acceptable settlement of this and other disputes, including those related to Primary's ability to put shares to the Company under certain circumstances. That settlement was approved by the Bankruptcy Court on January 10, 2005. Under the terms of the settlement agreement, $5.5 million of the cash collateral, as well as other consideration, was paid to Primary in January 2005 with the balance of the cash collateral, and certain other consideration, including the relinquishment of Primary's right to sell shares of the Company's Common Stock back to the Company under certain circumstances, being received by the Company.

        On January 10, 2005, Leonard Shapiro filed a purported class action complaint in the Court of Chancery of the State of Delaware, New Castle County, on behalf of the stockholders unaffiliated with the defendants, against Jacques A. Nasser, Joseph E. Antonini, Charles F. Auster, Paolo Cantarella, William J. Cosgrove, Lee M. Gardner, James W. Koven, Rick A. Lazio, Joseph G. Michels, Stanley P. Roth, J. Michael Pocock and the Company. The complaint alleges, among other things, that the Company's directors violated their fiduciary duties by approving the merger agreement with Petters without engaging in arm's length negotiations. The complaint seeks, among other things, to enjoin the defendants from completing the merger or, in the event the merger is completed, to rescind the merger and to award compensatory damages. On January 18, 2005, the plaintiff filed an amended complaint in which the only substantive change was to add One Equity Partners as a defendant. The amended complaint was served on the Company on February 28, 2005. The Company believes that the allegations in the complaint and the amended complaint are without merit and intends to vigorously defend against this action.

        The Company owns facilities that are subject to certain federal, state and local laws and regulations relating to environmental protection, including those governing the investigation and remediation of contamination resulting from releases of hazardous substances. Certain of these laws and regulations may impose joint and several liabilities on the Company for the costs of investigation or remediation of such contamination, regardless of fault or the legality of the disposal.

Item 4. Submission of Matters to a Vote of Security Holders

        None.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        As of December 31, 2004, Holding's Common Stock was publicly traded on the National Association of Securities Dealers ("NASD") OTC Bulletin Board, and Holding had five hundred and eighteen (518) holders of record of its Common Stock. Holding has never paid a cash dividend on its Common Stock. The Company's Credit Agreement prohibits the declaration and payment of dividends on the Common Stock. As of December 31, 2004, the Company's Preferred Stock had been redeemed.

        Information regarding repurchases by the Company of its Common Stock and Series A Preferred Stock during 2004 follows:

Common Stock

(1)

Represents repurchases made pursuant to exercise by the Company of its right under the Amended and Restated Securities Holders Agreement to repurchase non-vested restricted shares of Common Stock held by employees who left the Company.

(2)

Represents repurchases made from certain executives of a portion an award in March 2004 to cover a portion of the executives' withholding income tax obligation on the award.

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Series A 8% Cumulative Compounding Preferred Stock

(1)

On April 14, 2004, Holding redeemed 223,075 of the 446,150 outstanding shares of its Series A Preferred Stock. The redemption price equaled the liquidation preference of $100.00 per share of Series A Preferred Stock. Prior to the redemption, Holding paid all accrued and unpaid dividends on the outstanding shares of its Series A Preferred Stock.

(2)

On December 10, 2004, Holding announced that it would redeem all of the remaining outstanding shares of its Series A Preferred Stock on December 27, 2004. The redemption price equaled the liquidation preference of $101.69 per share of Series A Preferred Stock, including unpaid dividends from April 15, 2004 through June 30, 2004. Prior to the redemption, Holding paid all accrued and unpaid dividends from July 1, 2004 through December 27, 2004 to holders of its Series A Preferred Stock.

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MARKET PRICE AND DIVIDEND DATA

        The following table sets forth, on a quarterly basis, the highest and lowest sale price on the OTC Bulletin Board for the Company's Common Stock for the period from May 14, 2004 to December 31, 2004. The Company's Common Stock began trading on the OTC Bulletin Board on May 14, 2004.

        The Company has never paid a cash dividend on its Common Stock. The Company's Credit Agreement prohibits the declaration and payment of dividends on the Company's Common Stock. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the Company's Credit Agreement.

Item 6. Selected Financial Data

        The information below is derived from the audited financial statements of the Company for 2004 and 2003 and the period from Inception (refer to Note 1 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data) to December 31, 2002, and of Primary for the period from January 1 to July 31, 2002.

        THE INFORMATION PRESENTED BELOW DOES NOT INCLUDE FINANCIAL INFORMATION ON PRIMARY FOR PERIODS PRIOR TO JANUARY 1, 2002 SINCE AUDITED INFORMATION ON THOSE PERIODS IS NOT AVAILABLE TO THE COMPANY. AS A RESULT, THIS DOCUMENT DOES NOT CONTAIN ALL OF THE FINANCIAL INFORMATION THAT IS REQUIRED BY THE RULES AND REGULATIONS APPLICABLE TO THIS REPORT REGARDING THE BUSINESS OPERATIONS ACQUIRED BY THE COMPANY IN THE TRANSACTION. THE ABSENCE OF FINANCIAL INFORMATION FOR PRIMARY PRIOR TO JANUARY 1, 2002 COULD BE MATERIAL TO INVESTORS. FURTHER, INVESTORS SHOULD NOT ASSUME THAT THE RESULTS OF OPERATIONS FOR THE PERIODS CONTAINED HEREIN BEAR ANY CORRELATION TO THE RESULTS OF OPERATIONS OF PRIMARY FOR PERIODS PRIOR TO 2002.

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Selected Financial Data
(in millions, except share and per share data)

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business

        The Company designs, develops, manufactures and markets instant and digital imaging products and related products. The Company's principal products are instant cameras and instant film, which are marketed worldwide. In addition to its principal products, the Company designs, develops, manufactures and/or markets photographic hardware accessories for the instant photography market. The Company's other products and services consist of eyewear, principally sunglasses, and secure identification systems for commercial applications. The Company also performs contract manufacturing for and licenses its brand and technology to third parties. The Company has made a significant investment in instant digital printing but has not commercialized any products in this area. There can be no assurance that any of these digital printing applications will be commercialized. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005.

Background

        The following sections should be read in conjunction with the information on the Company in Item 1. Business; Item 6. Selected Financial Data; and the information on the Company and Primary in Item 8. Financial Statements and Supplementary Data.

Reorganization Proceedings Under Chapter 11 Of The Bankruptcy Code Prior To The July 2002 Transaction

        On October 12, 2001, Primary PDC, Inc. and twenty of its subsidiaries incorporated in the United States (collectively the "Debtors") filed voluntary petitions for relief (the "Filing") under Chapter 11 of the Bankruptcy Code, in the U.S. Bankruptcy Court. The subsidiaries of Primary PDC, Inc. incorporated outside of the United States were not included in the Filing. Prior to the Transaction, the Debtors continued to manage their properties and operate their business as "debtors-in-possession" under the jurisdiction of the U.S. Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code. Under the rules of the SEC, Primary is deemed to be the predecessor of the Company for financial reporting purposes.

        The Company was formed in March 2002 for the purpose of acquiring substantially all of the assets of the Debtors, including the stock of the foreign subsidiaries of Primary PDC, Inc. that were not part of the Filing. On July 31, 2002, the Company purchased substantially all of the assets of the Debtors and the capital stock of the foreign subsidiaries of Primary PDC, Inc. in a Section 363 asset sale that was approved by the U.S. Bankruptcy Court. For more information regarding the Transaction, refer to Item 1. Business and Note 1 of the consolidated financial statements contained in Item 8.

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Financial Statements and Supplementary Data. Following the Transaction, Primary remained a separate legal entity.

Comparability of Financial Results

        The discussion of the results of operations below is significantly affected by the recent history of the Company and Primary. The Company commenced operations as of the date of the Transaction. As a result of actions taken during the period following the Filing and leading up to and as a result of the Transaction, the financial results of the Company and Primary are not comparable. The key events that affect the comparability of results are the following, in chronological order:

•

Filing and Chapter 11 process: Primary incurred significant costs, including professional fees of $13 million in the period from January 1 to July 31, 2002, related to the Filing and the Chapter 11 process.



•

Asset Impairment: Effective for the second quarter of 2002, Primary recognized a non-cash asset impairment charge of $330 million in its reorganization loss. This charge was based on a determination by Primary that the carrying value of its long-lived assets exceeded their estimated fair value based on the expected proceeds and the probability of the sale of those assets.



•

The Transaction: On July 31, 2002, the Company purchased substantially all of the domestic assets and businesses of Primary PDC, Inc. and its domestic subsidiaries and the capital stock of the foreign subsidiaries of Primary PDC, Inc. The Company recorded the Transaction using purchase accounting consistent with Financial Accounting Standards Board Statement No. 141, Business Combinations. Refer to Item 8. Financial Statements and Supplementary Data, for more information on the Company's accounting for the Transaction. Several elements of the Transaction that significantly reduce the comparability of financial data between the Company and Primary are as follows:



•

Primary retained the following significant liabilities, among others:



•

Pre-petition debt of approximately $800 million; and



•

Substantially all of the remaining pre-petition liabilities subject to compromise of approximately $400 million.



•

In applying purchase accounting, the Company could not allocate any fair value to the fixed assets, other than those held for sale, and certain other non-current assets acquired in the Transaction. Therefore, this valuation resulted in no depreciation expense associated with those assets for the Company for periods after July 31, 2002. Primary recorded the following for depreciation for the seven month period ended July 31, 2002 (in millions):

•

Initial value of purchased inventory: The Company valued the inventory acquired in the Transaction at fair value, resulting in an increase of approximately $7 million in the carrying value of this inventory compared to the historical cost of Primary. As of December 31, 2002, substantially all of the affected inventory had been sold, and the Company's inventory on that date was recorded on a historical cost basis.

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Overview of 2004 Results

        The Company earns its revenues and profits primarily from the sale of instant film and cameras to consumers and businesses. The market for instant photography has been experiencing a significant and steady decline in demand due to competition from digital camera products and media formats. The Company's financial success will largely be dependent on its generation of cash flow, primarily from its instant camera and film products, effective management of working capital, as well as managing the decline in the Company's instant camera and film business. The Company's net sales in 2004 were $656 million, which includes a favorable impact from foreign exchange of approximately $18 million compared to 2003. In 2004, the Company incurred $15 million of restructuring expenses and its manufacturing costs and sales and marketing expenses included a total of approximately $21 million of unfavorable foreign exchange compared to 2003. Profit from operations in 2004 was $31 million.

        The Company's income tax benefit in 2004 was $34 million, primarily due to the use of foreign tax credits in the U.S., including a projected foreign tax credit carryback, generated as a result of dividends paid from certain of the Company's foreign subsidiaries, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax reserves as a result of the resolution of certain foreign tax issues offset, in part, by an increase in valuation allowances related to certain deferred tax assets. The Company's net earnings in 2004 were $62 million, or $1.72 per common share on a diluted basis. During 2004, the Company's net cash provided by operating activities was approximately $9 million. In 2004, the Company paid $2.6 million of dividends on its Preferred Stock, and redeemed all of its outstanding Preferred Stock for $44.6 million. At December 31, 2004, the Company had cash and cash equivalents of approximately $114 million and no outstanding debt.

        Declining demand for the Company's instant camera and film products is expected to continue and to continue to have a negative impact on the Company's net sales. The rate of decline of the Company's net sales of instant cameras and film may increase or decrease in the future. During 2004, the Company was unable to reduce its costs in line with the decline in its instant camera and film sales, and as a result the Company's gross margin declined significantly. The Company will continue to be challenged to reduce its fixed as well as variable costs in the future to keep them in line with reduced net sales. A failure to reduce these costs in line with the reductions in its net sales will result in continued declines in the Company's profit from operations and net earnings.

        In the fourth quarter of 2004, the Company had net sales of $160 million, a loss from operations of $14 million and a gross margin of 34%. The Company's gross margin for the first nine months of 2004 was 47%. The loss from operations and the reduction in gross margin in the fourth quarter of 2004 were primarily due to the impact of lower net sales, primarily of instant film, the mix of products sold, higher manufacturing costs, primarily related to reduced instant film production, and a quality problem in the manufacturing operation that supports the Company's eyewear business. In the fourth quarter of 2004, the Company had an income tax benefit of $25 million primarily due to the use of foreign tax credits in the U.S., including a foreign tax credit carryback, generated as a result of dividends paid from certain of the Company's foreign subsidiaries, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax reserves as a result of the resolution of certain foreign tax issues offset, in part, by an increase in valuation allowances related to certain deferred tax assets.

General

        The Company's reportable business segments are: the Americas Region; the International Region; Global Manufacturing; and R&D. The Company also has an All Other segment that includes: the eyewear business; the commercial secure identification systems business; brand and technology licensing operations; and contract manufacturing. The Americas Region consists of sales, marketing and distribution operations in the United States of America and other countries in North and South

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America. The International Region consists of sales, marketing and distribution operations outside the Americas Region. Global Manufacturing includes worldwide activities associated with manufacturing, procurement, developing manufacturing processes for new products and inventory management. R&D consists of the Company's research and development activities.

        The Company has one category called Corporate, which is not classified as a business segment. This category includes: central marketing; centralized information systems; general and administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The Corporate category also includes costs related to restructuring activities, certain incentive compensation costs and certain non-operating items. For more information regarding the Company's business segments, refer to Note 15 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

        The Company's senior management evaluates the performance of the business segments based on each segment's impact on profit from operations and its asset management. In the regional sales and marketing segments, profit from operations is based on standard product costs excluding intercompany margins and therefore reflects contribution to worldwide Company profits from third-party sales. Non-standard manufacturing costs along with the costs of procurement, inventory management and developing manufacturing processes for new products are reported as costs in profit from operations in the Global Manufacturing segment. For the R&D segment, research and development costs are expensed as incurred in profit from operations.

        The Americas and International Regions are responsible for managing accounts receivable and for charges associated with reserves for slow moving and obsolete finished goods inventory. The Company manages and reports worldwide inventories, excluding the slow moving and obsolete finished goods inventories, centrally in Global Manufacturing.

Critical Accounting Estimates

        The methods, estimates and judgments the Company uses in applying its accounting policies have a significant impact on the results it reports in its financial statements. Some of the Company's accounting policies require it to make subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company's most critical accounting estimates include: revenue recognition, which impacts gross margin; allowance for doubtful accounts, which impacts profit from operations; valuation of inventory, which impacts gross margin; and recognition and measurement of current and deferred income tax assets and liabilities, which impacts the Company's income tax provision; as well as stock-based compensation; pension benefits; and restructuring charges. Below, the Company discusses these policies further, as well as the estimates and judgments involved.

Revenue Recognition:

        The Company recognizes net sales when all of the following criteria have been met: evidence of an arrangement with the customer exists; the product has been shipped and title has passed to the customer; the sales price to the customer has been fixed or is determinable; and collectability of the sales price is reasonably assured. Provisions for estimated sales returns and allowances are made at the time the products are sold. To arrive at net sales, the Company records reductions to net sales for the cost of programs offered to customers that include cash and volume discounts and cooperative and other advertising allowances. The Company recognizes the liability for these programs at the time the related sales are recorded. The Company determines the cost of these programs based on the terms of the programs, estimates using its historical experience and internal and customer data. The Company adjusts net sales for the cost of price protection programs associated with customer inventories, as well as for the cost of promotional allowances and other fees and coupons, at the time it can reasonably

17

estimate this cost. To the extent actual experience differs from the estimates, adjustments to net sales could be recognized, which could have an impact on the Company's net sales and net earnings.

Allowance for Doubtful Accounts:

        The Company's allowance for doubtful accounts is reviewed on a regular basis and is based on a variety of factors including: individual account risk profiles, which consider customer credit ratings and financial condition reviews; a review of individual accounts receivable aging; and new information that becomes available on specific customers, economic trends and changes in customer payment terms. If circumstances related to specific customers were to change, the Company's estimates of the collectability of its accounts receivable could be adjusted, which would have an impact on the Company's net earnings.

Inventory:

        The Company's policy for valuation of inventory, including the determination of obsolete or excess inventory and lower of cost or market reserves, requires it to estimate the future demand for its products within specific time horizons, generally one year or less. The estimates of future demand that the Company uses in the valuation of inventory are the basis for the Company's short-term manufacturing and procurement plans. If the demand forecast for specific products is greater than actual demand and the Company fails to reduce its manufacturing output and procurement accordingly, the Company could be required to record additional inventory reserves, which would have a negative impact on the Company's net earnings.

Income Taxes:

        In determining its provision for income taxes for financial statement purposes, the Company must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of its revenue and expense.

        The Company must assess the likelihood that it will be able to recover its deferred tax assets. Unless the recovery is more likely than not, the Company must increase its provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that it estimates may not ultimately be recoverable. Should there be a change in the Company's ability to recover the remainder of its deferred tax assets, its tax provision would decrease or increase in the period of the change, which would have a positive or negative impact on the Company's net earnings.

        In addition, the calculation of the Company's income tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company records liabilities for potential tax audit issues in the United States of America ("U.S.") and other tax jurisdictions based on the Company's estimate of the amount of these potential additional taxes and when they will be due. If the payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period when the Company determined the liabilities are no longer necessary. If the Company's estimate of these tax liabilities proves to be less than the ultimate assessment, a further charge to tax expense would result, which would have a negative impact on the Company's net earnings.

Stock-Based Compensation:

        The Company has sold shares of restricted Common Stock and granted options to purchase shares of restricted Common Stock to certain of its directors and executives. The purchase price of the restricted Common Stock sold was nominal and the exercise price of the options granted was equal to

18

the estimated fair value of the underlying restricted shares of Common Stock on the date of grant. To record and disclose the cost of these sales and grants for financial reporting, the Company must make estimates and judgments to arrive at the estimated fair value of its restricted Common Stock, including consideration of the trading price of the Company's Common Stock and the impact that transfer restrictions have on fair value. Estimates of fair value are inherently subjective. If the Company were to make a different determination of the fair value of its restricted Common Stock, the amount of its deferred compensation and its stock-based compensation expense would be different, which could have a positive or negative impact on the Company's net earnings.

Pension Benefit Costs:

        The calculation of the Company's defined pension benefit costs and obligations are dependent on the assumptions used by its actuaries. These assumptions, which are reviewed by the Company annually, include discount rates, salary growth rates, expected long-term return on plan assets, and other factors. The significant factors utilized by the Company's actuaries are discussed in further detail in Note 13 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for the year ended December 31, 2004. To the extent actual experience differs from the Company's assumptions, the differences are recorded as unrecognized gains and losses, which are amortized to net earnings over the estimated future service period of plan participants, if the cumulative amount of the unamortized gains or losses exceeds 10% of the greater of the plan's projected benefit obligation or market-related value of plan assets. Significant differences in actual experience to assumptions or significant changes in future assumptions would affect the Company's pension benefit obligations and costs, which could have a positive or negative impact on the Company's net earnings.

Restructuring Charges:

        The Company has implemented a number of restructuring programs in an effort to reduce its costs in line with the continuing decline in its instant camera and film business. These programs consist of involuntary severance programs and certain exit costs primarily related to the liquidation of certain non-U.S. marketing subsidiaries. The Company records severance-related expenses in accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Costs" or Statement No. 112, "Employer's Accounting for Post-Employment Benefits." Non-employee-related exit and disposal costs, primarily costs to consolidate or close facilities, are accounted for under the provisions of FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The Company estimates its liabilities for these programs, which are approved by the Company's management, by obtaining detailed estimates of costs for these programs, including the estimated costs of employee severance and related benefits, contract termination payments for leases, distributor arrangements and other contractual obligations, and any other qualifying exit costs related to the exit plan. These estimated costs are grouped by specific programs and are monitored on a monthly basis. These cost estimates require assumptions about the programs that could change over time. Estimates are evaluated periodically to determine if a change is required. If the Company were to change its estimates for these charges, the change could have a positive or negative impact on the Company's profit from operations and net earnings.

Results of Operations

        The following table presents selected financial information regarding the Company's results of operations for the years ended December 31, 2004 and December 31, 2003 and the five-month period ended December 31, 2002; Primary's results of operations for the seven-month period ended July 31, 2002; and the combined results of operations for the year ended December 31, 2002 for the Company and Primary. This table is presented for use in the discussion of operating results below. Due to the

19

factors described in the "Comparability of Financial Results" section above, however, the Company does not believe certain information of Primary is comparable to the Company's information nor does it believe that the combined results for 2002 are necessarily indicative of the Company's operating results on an annual basis.

        The information on the results of operations is as follows (in millions, except for percentages):

Consolidated Worldwide Results for years ended December 31, 2004 and 2003

        The Company's consolidated net sales and gross margin for 2004 compared to 2003 were as follows (dollars in millions):

        In 2004 compared to 2003, the Company's consolidated net sales decreased by $97 million, or approximately 13%, primarily related to lower net sales of instant film and, to a lesser degree, instant cameras. The net sales in 2004 included the favorable impact of approximately $18 million of foreign exchange when compared to 2003. The net sales in 2004 also included a favorable impact of approximately $3 million from the resolution of a post audit claim by a major customer and the favorable impact of approximately $9 million related to lower net costs for marketing programs compared to 2003. Excluding the favorable impact of foreign exchange, the post audit claim resolution

20

and the lower net costs for marketing programs related to instant camera and film products, the Company's net sales of instant cameras and film declined by approximately 20% in 2004 compared to 2003. Net sales of instant cameras and film in 2004 continued to be negatively impacted by competition from digital camera products and media formats.

        The Company had a gross margin of $288 million or 44% in 2004 compared to a gross margin of $374 million or 50% in 2003. The decrease in gross margin of 6 percentage points was primarily the result of: the impact of lower net sales, primarily of instant film, which decreased gross margin by approximately 4 percentage points; higher manufacturing costs, including the net impact of foreign exchange, which decreased gross margin by approximately 3 percentage points; and higher costs related to a quality problem in the Company's manufacturing operation that produces lenses for the eyewear business, which decreased gross margin by approximately 1 percentage point. These decreases were offset, in part, by the net favorable impact of foreign exchange, which increased gross margin by approximately 1 percentage point, and the favorable impact of the post audit claim resolution and the lower net costs for marketing programs which increased gross margin by approximately 1 percentage point.

        The Company's selling, general and administrative ("SG&A") expenses were approximately $199 million and $240 million for 2004 and 2003, respectively. The Company's SG&A expenses are its marketing, research, engineering and administrative expenses, excluding R&D segment expenses of $43 million in 2004 and $38 million in 2003 discussed below. The decrease of $41 million or approximately 17% in SG&A expenses in 2004 compared to 2003 reflects a reduction of approximately $41 million in regional sales and marketing expenses to approximately $102 million in 2004 from approximately $143 million in 2003, due to lower advertising expenses, the favorable impact of restructuring programs and approximately $2 million from the closeout of certain 2003 and 2002 promotional programs. The decrease in SG&A expenses in 2004 compared to 2003 also reflects approximately $12 million of lower costs in the non-segment Corporate category for employee incentive compensation to approximately $8 million in 2004 from approximately $20 million in 2003. The $8 million for employee incentive compensation in 2004 included approximately $4 million of non-cash costs related to stock-based compensation awards and approximately $4 million related to employee cash incentive compensation that was approved in the fourth quarter 2004. The approximately $20 million for employee incentive compensation in 2003 primarily related to provisions for the Company's employee cash incentive compensation program. In 2004, the Company sold certain held for sale property located in Germany and other property located in the United Kingdom for aggregate net cash proceeds of approximately $6 million. The Company recorded the gain on these sales of approximately $3 million in general and administrative expenses in the non-segment Corporate category.

        The decreases in SG&A expenses in 2004 compared to 2003 were offset, in part, by planned increases of approximately $4 million in certain marketing expenses related to new products as well as approximately $7 million of increases mainly in certain infrastructure costs, including increases in the non-segment Corporate category in the cost of corporate governance and costs related to the proposed merger with Petters. The increases in SG&A expenses also included approximately $4 million from the unfavorable impact of foreign exchange on sales and marketing expenses in 2004. The majority of the Company's SG&A expenses were recorded in the Americas Region and International Region segments with the remainder recorded primarily in the non-segment Corporate category.

        In 2004 and 2003, the Company recorded restructuring charges of approximately $15 million and approximately $5 million, respectively, in the non-segment Corporate category. The charges in 2004 primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's manufacturing, sales and marketing and non-segment Corporate category administrative operations. Under these programs, a total of approximately 525 employees were expected to leave the Company by early 2005. The cash payments under these programs, some of which are being paid as a

21

stream of payments, are expected to be substantially completed by the end of 2005. The restructuring charges in 2003 primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's sales and marketing, non-U.S. manufacturing and non-segment Corporate category administrative operations. Under these programs, a total of approximately 135 employees left the Company by early 2004. The cash payments under the 2003 programs were substantially completed by the end of the second quarter of 2004. The Company expects the pre-tax savings from the restructuring charges recorded in 2004 to be approximately $30 million on an annualized basis, a portion of which has been realized in 2004. Refer to Note 4 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for more information on the Company's restructuring programs.

        The gross margin and expenses discussed above resulted in profit from operations of $31 million 2004 compared to a profit from operations of $91 million in 2003.

        The net of other income and expense in 2004 was less than one million compared to $4 million of net other income in 2003. The net of other income and expense in 2004 primarily related to: foreign currency transaction losses of approximately $7 million and a charge related to periods prior to 2004 which was determined not to be material of approximately $1 million related to defined benefit pension plans of certain non-U.S. marketing subsidiaries; offset, in part, by a gain of approximately $2 million related to a settlement agreement reached with Primary regarding the obligation of the Company to reimburse Primary for certain estate costs incurred by Primary, which had been previously recorded as a liability by the Company; a gain of approximately $2 million related to the sale of the Company's equity interest in a private company; approximately $2 million of interest income and approximately $1 million related to the return of pension plan assets of a subsidiary that had been liquidated. The net of other income and expense in 2003 was income of approximately $4 million that consisted primarily of approximately $3 million of distributions from a real estate joint venture that had been developing property in Cambridge, Massachusetts, and approximately $2 million of interest income offset, in part, by net foreign exchange losses of approximately $1 million. The foreign exchange net loss in 2003 was made up of net foreign exchange transaction losses of approximately $8 million and the recognition of a net foreign translation gain of approximately $7 million previously recorded in stockholders' equity that resulted from the liquidation of certain non-U.S. subsidiaries.

        The Company's income tax benefit was $34 million on reported earnings before income taxes of $28 million in 2004 compared to an income tax expense of $23 million, on reported earnings before income taxes of $92 million in 2003. The decrease in the Company's income taxes in 2004 compared to 2003 was primarily related to the use of foreign tax credits in the U.S., including a projected foreign tax credit carryback, generated as a result of dividends paid from certain of the Company's foreign subsidiaries, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax reserves as a result of the resolution of certain foreign tax issues offset, in part, by an increase in valuation allowances related to certain deferred tax assets. The factors contributing to the magnitude of the Company's tax benefits in 2004 are not expected to be repeated in future periods.

        In 2004 the Company's net earnings were $62 million compared to net earnings of $71 million in 2003. Basic and diluted earnings per common share based on earnings available to common stockholders were $1.85 and $1.72, respectively, in 2004, and $2.07 and $2.03, respectively, for basic and diluted earnings per common share based on earnings available to common stockholders in 2003. Net earnings in 2003 include an extraordinary gain of $2 million which related to adjustments required under purchase accounting for the fair values of certain liabilities assumed by the Company in its asset purchase from Primary on July 31, 2002.

        In 2004, the Company recorded a charge of $17.5 million in accumulated other comprehensive income in stockholders' equity related to a non-U.S. pension plan with certain benefit obligations in excess of the fair value of plan assets.

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        The following is a summary of the net sales and profit from operations by business segment (in millions):

        The profit from operations information presented above for the Company and Primary are not comparable due to the factors as described in the "Comparability of Financial Results" section above.

Americas Region

        Net sales and profit from operations for the Americas Region for 2004 and 2003, were as follows (in millions):

        Net sales in the Americas Region decreased by $78 million, or approximately 18%, in 2004 compared to 2003, primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. The net sales in the region in 2004 include the favorable impact of approximately $3 million related to the resolution of a post audit claim by a major customer and a favorable impact of approximately $6 million of lower net costs for marketing programs in 2004 compared to the same period in 2003. Excluding the favorable impact of the post audit claim resolution and the lower net costs for marketing programs, net sales in the Americas Region declined by approximately $87 million, or approximately 21%, in 2004 compared to 2003. Competition from digital camera products and media formats continued to negatively impact the Company's net sales in 2004.

        Profit from operations in the Americas Region declined by $29 million to $123 million in 2004 compared to profit from operations of $152 million in 2003. The profit from operations in 2004

23

includes approximately $3 million related to the favorable impact of the post audit claim resolution and the favorable impact of approximately $6 million related to the lower net costs for marketing programs compared to 2003 offset, in part, by approximately $2 million from the unfavorable impact of foreign exchange on standard cost of sales compared to 2003. Excluding the favorable impact of the post audit claim resolution and the lower net costs for marketing programs, profit from operations in the Americas Region in 2004 compared to 2003 declined by $36 million. This decrease was primarily due to the impact of lower net sales in 2004, offset, in part, by lower selling and administrative expenses, primarily related to lower advertising costs and savings from restructuring.

International Region

        Net sales and profit from operations for the International Region for 2004 and 2003 were as follows (in millions):

        Net sales in the International Region declined by $21 million, or approximately 8%, to $229 million in 2004 from $250 million in 2003. The net sales in the International Region in 2004 included approximately $15 million from the favorable impact of foreign exchange and $3 million related to lower net costs for marketing programs in 2004 compared to 2003. Excluding the favorable impact of foreign exchange and the lower net costs for marketing programs, net sales in the International Region declined by approximately $39 million, or approximately 16%, in 2004 compared to 2003, primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. Net sales in the International Region in 2004 continue to be negatively impacted by competition from digital camera products and media formats.

        Profit from operations in the International Region was $65 million in 2004 compared to $62 million in 2003. The increase of $3 million included approximately $9 million from the net favorable impact of foreign exchange, approximately $3 million related to lower net costs for marketing programs compared to 2003 and approximately $2 million related to the closeout of certain prior year promotional programs. Excluding the impact of foreign exchange, lower net costs for marketing programs and the closeout of promotional programs, profit from operations in the International Region declined by approximately $11 million in 2004 compared to 2003, primarily due to the impact of the lower net sales in 2004 compared to 2003 offset, in part, by the favorable impact of lower selling and administrative expenses in 2004, primarily due to lower advertising costs and savings from restructuring.

Global Manufacturing

        The manufacturing costs in the Global Manufacturing segment consist of non-standard costs, including variances from standard costs, procurement costs, inventory management costs, and development costs for manufacturing processes ("manufacturing non-standard costs"). Manufacturing non-standard costs were $44 million in 2004 compared to $16 million in 2003. The increase of $28 million in manufacturing non-standard costs in 2004 compared to 2003 was a result of the following: approximately $8 million of inventory write-offs of certain raw and in-process material that was no longer required and approximately $9 million of other unfavorable manufacturing non-standard costs, primarily related to reductions in the Company's production volumes; approximately $6 million of costs related to a quality problem in the Company's manufacturing operation that produces lenses for the eyewear business; approximately $3 million of vendor termination costs and fixed asset write-offs in 2004 related to the Company's decision to terminate the manufacturing development and test marketing of its instant digital printing kiosks; and approximately $2 million of unfavorable foreign exchange variances in 2004.

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R&D

        R&D segment expenses were $43 million in 2004 compared to $38 million in 2003. The increase of $5 million primarily related to increases in spending related to the Company's instant digital printing activities in 2004. Approximately 82% of the Company's total research and development expenses in 2004 were related to the Company's instant digital printing activities with the balance primarily related to the Company's instant photographic activities. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in its instant digital printing activities after the second quarter of 2005.

All Other

        Net sales in the All Other segment increased by $2 million, or approximately 3%, to $82 million in 2004 compared to $80 million in 2003. The increase was primarily related to an increase in net sales of the Company's licensing operations of approximately $5 million and in the net sales of its eyewear business of approximately $3 million, primarily related to the favorable impact of foreign exchange. These increases were offset, in part, by a reduction in net sales from the Company's third party contract manufacturing and commercial ID operations in 2004 compared to 2003.

        Profit from operations in the All Other segment increased by $4 million to $23 million in 2004 compared to $19 million in 2003. The increase in profit from operations in 2004 primarily reflects the impact of the increase in licensing and eyewear net sales. These increases were offset, in part, by the impact of the decrease in the net sales related to third party contract manufacturing and commercial ID operations.

Consolidated Worldwide Results for years ended December 31, 2003 and 2002

        The Company's consolidated net sales and gross margin for 2003 compared to the combined results of the Company and Primary for 2002 were as follows (dollars in millions):

        In 2003 compared to the combined 2002, the Company's consolidated net sales decreased by $55 million or approximately 7%, primarily as a result of lower net sales of instant film and, to a lesser degree, instant cameras. These decreases were offset, in part, by approximately $27 million from the favorable impact of foreign exchange and increases of approximately $14 million in net sales in the Company's contract manufacturing operations and, to a lesser degree, licensing. Excluding the favorable impact of foreign exchange, the Company's net sales of instant film and cameras declined by approximately 13% in 2003 compared to the combined 2002. The net sales of instant film and cameras in 2003 continue to be negatively impacted by competition from digital camera products and media formats.

        The gross margins for 2003 and the combined 2002 are not comparable due to certain factors as described in the "Comparability of Financial Results" section above. The Company had a gross margin of 50% in 2003 compared to a gross margin of 38% in the combined 2002. The increase of approximately 12% was primarily the result of: lower manufacturing costs in 2003 due to the Company's efforts to consolidate its underutilized manufacturing facilities which represented approximately 8 percentage points of this change; the favorable margin impact from the mix of higher margin products sold in 2003 compared to the combined 2002, including the impact of depreciation

25

related to the Transaction, which represented approximately 3 percentage points of this change; and the favorable impact of foreign exchange, which represented approximately 1 percentage point of this change.

        The Company's SG&A expenses were $240 million in 2003 and $271 million in the combined 2002. The Company's SG&A expenses are its marketing, research, engineering and administrative expenses, excluding R&D segment expenses of $38 million in 2003 and $35 million in the combined 2002 as discussed below. These SG&A expenses are not comparable due to certain of the factors as described in the "Comparability of Financial Results" section above. The decrease of $31 million or approximately 11% in SG&A expenses in 2003 compared to the combined 2002 primarily reflects a reduction of approximately $41 million in regional sales and marketing expenses to approximately $134 million in 2003 from approximately $175 million in the combined 2002 and a decrease of approximately $7 million in the non-segment Corporate category expenses in 2003 compared to the combined 2002. These decreases were primarily due to the favorable impact of restructuring programs described below and essentially no depreciation expense, primarily in the non-segment Corporate category. Due to the impact on the acquired assets of the Company's purchase accounting related to the Transaction, essentially no depreciation expense was recorded in 2003. These reductions were offset, in part, by approximately $9 million of unfavorable foreign exchange in 2003, an increase of approximately $8 million in 2003 related to employee incentive compensation, which is considered a non-segment Corporate category administrative expense. The majority of the SG&A expenses were recorded in the Americas and International Region segments with the remainder recorded primarily in the non-segment Corporate category.

        In 2003, restructuring and other charges decreased to $5 million from $17 million in the combined 2002. The charges in 2003 were recorded in the non-segment Corporate category and primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's sales and marketing, non-U.S. manufacturing and Corporate administrative operations. Under these programs, approximately 135 employees left the Company by early 2004. The cash payments under this program were substantially completed by the end of the second quarter of 2004.

        In the combined 2002, restructuring and other charges were $17 million consisting of $12 million recorded by Primary and $5 million recorded by the Company. These charges were recorded in the non-segment Corporate category. The $5 million charge recorded by the Company in the five month period ended December 31, 2002, primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's sales and marketing and non-U.S. manufacturing operations. Approximately 120 employees left the Company under these programs. In the period from January 1 to July 31, 2002, Primary recorded a charge of approximately $8 million, primarily related to an involuntary severance program designed to reduce overhead costs and realign its resources. Under this program, approximately 225 sales and marketing employees left Primary, mostly from the International Region. This charge was offset, in part, by a reversal by Primary of approximately $4 million of previously recorded involuntary severance charges.

        In addition, the restructuring and other charges recorded by Primary in the period from January 1 to July 31, 2002, included approximately $4 million for an impairment charge related to certain marketing operations that were exited, approximately $3 million of costs related to internal use software that was no longer required to support certain marketing activities, and approximately $1 million of fixed asset write-offs and exit costs primarily related to a number of non-US activities that were exited. The exit costs were substantially paid by Primary as of July 31, 2002.

        The restructuring programs implemented by the Company favorably affected the Company's cost and expense levels in 2003. Refer to Note 4 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for more information on the restructuring programs of the Company and Primary.

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        In the second quarter of 2002, based on the available information relative to the anticipated sale of substantially all of the assets and businesses of its domestic subsidiaries and the capital stock of its foreign subsidiaries in the Transaction, Primary recorded an impairment charge of $330 million in its reorganization loss to write off the carrying value of its property, plant and equipment. In July 2002, Primary recorded a loss on the Transaction of $213 million. This loss was recorded in Primary's reorganization loss. Effective July 31, 2002, the Pension Benefit Guaranty Corporation ("PBGC") assumed the U.S. pension plan of Primary and as a result, Primary recorded a charge of $184 million related to a minimum pension liability cost that had been previously recorded in accumulated other comprehensive income, a component of stockholders' equity. In the seven-month period ended July 31, 2002, Primary recorded a cost of $42 million related to prepetition claims that were expected to be allowed by the U.S. Bankruptcy Court. Both the charge of $184 million related to the U.S. pension plan and the $42 million related to prepetition claims costs were recorded in Primary's reorganization loss.

        Profit from operations in 2003 and the combined 2002 are not comparable due to certain factors described in the "Comparability of Financial Results" section above. The gross margin and expenses discussed above resulted in profit from operations of $91 million in 2003 compared to a loss from operations of $19 million in the combined 2002.

        The net of other income and expense in 2003 was income of approximately $4 million that consisted primarily of approximately $3 million of distributions from a real estate joint venture that had been developing property in Cambridge, Massachusetts, and approximately $2 million of interest income offset, in part, by net foreign exchange losses of approximately $1 million. The foreign exchange net loss in 2003 was made up of net foreign exchange transaction losses of approximately $8 million and the recognition of a net foreign translation gain of approximately $7 million previously recorded in stockholders' equity that resulted from the liquidation of certain non-U.S. subsidiaries. Other expense in the combined 2002 was $3 million and primarily related to foreign exchange transaction losses offset, in part, by approximately $4 million of distributions from a real estate joint venture that had been developing property in Cambridge, Massachusetts and approximately $2 million of interest income. In the combined 2002, Primary recorded a $771 million reorganization loss, primarily related to the asset impairment loss of $330 million, the loss on the Transaction of $213 million, the charge of $184 million related to the assumption of Primary's U.S. pension plan by the PBGC, pre-petition claims costs of $42 million, professional fees and expenses of $13 million incurred in connection with the Filing and the Chapter 11 process, $10 million in gains on asset sales and $1 million of interest income.

        Income tax expense was $23 million or approximately 25% on reported earnings before income taxes of $92 million in 2003, compared to an income tax expense of $20 million on a reported loss before income taxes of $797 million in the combined 2002. The Company's income tax expense in the five month period ended December 31, 2002 was approximately $7 million, or approximately 31% on reported earnings before income taxes of approximately $22 million. The Company's income tax expense in 2003 was lower as a percentage of pre-tax earnings primarily due to the use of tax benefits from certain of the Company's foreign operations. The income tax expense of $13 million for Primary in the period from January 1 to July 31, 2002, primarily represented the income tax expense of certain of its foreign operations. Primary did not record any income tax benefits associated with the significant losses it incurred during the period from January 1 to July 31, 2002 because it determined it was more likely than not that those benefits would not be realized.

        In 2003, the Company's net earnings were $71 million and basic and diluted earnings per common share based on net earnings available to common stockholders were $2.07 and $2.03, respectively. The Company's net earnings in 2003 include an extraordinary gain of approximately $2 million related to adjustments required under purchase accounting of the fair values of certain held for sale assets and liabilities acquired in the Transaction. Excluding the extraordinary gain, the Company's basic and diluted earnings per common share in 2003 were $1.99 and $1.95, respectively.

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        In the five month period ended December 31, 2002, the Company recorded an extraordinary gain of $123 million related to the Transaction. Refer to the section titled "Transaction" in Item 1. Business and in Note 1 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for more information concerning the Company's asset purchase from Primary PDC, Inc. and its domestic subsidiaries. The Company's net earnings in the five month period ended December 31, 2002, including the impact of the extraordinary gain, were $138 million and its basic and diluted earnings per common share based on net earnings available to common stockholders were $4.38. Excluding the extraordinary gain, the Company's basic and diluted earnings per common share in the five month period ended December 31, 2002 were $0.40. The net loss of Primary was $832 million in the seven month period ended July 31, 2002. The earnings per share information for the combined 2002 is not meaningful due to the differences in capital structure between the Company and Primary, the factors described in the "Comparability of Financial Results" section above, and the reorganization loss recorded by Primary.

Americas Region

        The net sales and profit from operations for the Americas Region in 2003 and the combined 2002, were as follows (in millions):

        Net sales in the Americas Region decreased by $31 million or approximately 7% in 2003 compared to the combined 2002, primarily due to lower net sales of instant film offset, in part, by increased sales of instant cameras. Competition from digital camera products and media formats continued to negatively impact the Company's net sales of instant film in the Americas Region in 2003.

        Profit from operations for the Americas Region in 2003 and the combined 2002 are not comparable due to certain of the factors as described in the "Comparability of Financial Results" section above. Profit from operations in the Americas Region increased by $15 million or approximately 11% in 2003 compared to the combined 2002. The increase in profit from operations in 2003 related to lower selling and administrative expenses, primarily due to savings from restructuring and, to a lesser degree, lower advertising expenses, and essentially no depreciation expense on the acquired assets due to impact of the Company's purchase accounting related to the Transaction. This decrease was offset, in part, by the impact of the lower net sales in 2003 compared to the combined 2002 and approximately $2 million from the unfavorable impact of foreign exchange on standard cost of sales.

International Region

        The net sales and profit from operations for the International Region for 2003 and the combined 2002 were as follows (in millions):

        Net sales in the International Region decreased by $40 million or approximately 14% in 2003 compared to the combined 2002. The decrease primarily related to lower net sales of instant film and, to a lesser degree, instant cameras offset, in part, by approximately $22 million from the net favorable impact of foreign exchange. Excluding the favorable impact of foreign exchange, net sales in the International Region decreased approximately $62 million or approximately 21% in 2003 compared to

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the combined 2002. The Company's net sales of instant film and cameras in the International Region in 2003 continued to be negatively impacted by competition from digital camera products and media formats.

        Profit from operations for the International Region in 2003 and the combined 2002 are not comparable due to certain of the factors described in the "Comparability of Financial Results" section above. Profit from operations in the International Region increased $20 million or approximately 48% in 2003 compared to the combined 2002. The increase in profit from operations in 2003 primarily reflects the favorable impact of foreign exchange, lower selling and administrative expenses in 2003 due to the impact of the Company's restructuring programs, and, to a lesser degree, essentially no depreciation expense on the acquired assets due to impact of the Company's purchase accounting related to the Transaction. These increases in operating profit in 2003 were offset, in part, by the impact of the lower net sales in 2003 compared to the combined 2002 and higher advertising expenses in 2003.

Global Manufacturing

        Manufacturing non-standard costs in the Global Manufacturing segment decreased by $56 million or approximately 78% to $16 million in 2003 compared to $72 million in the combined 2002. The manufacturing non-standard costs in 2003 and the combined 2002 are not comparable due to certain factors described in the "Comparability of Financial Results" section above. The decrease in these costs in 2003 primarily reflects the Company's efforts to reduce its underutilized manufacturing capacity through the consolidation of certain facilities and, to a lesser degree, the impact of inventory write-offs of obsolete material and products in the combined 2002 that did not occur in 2003, and certain planned reductions in film manufacturing development costs in 2003. These decreases were offset, in part, by the unfavorable impact of approximately $5 million of foreign exchange.

R&D

        R&D segment expenses increased by $3 million or approximately 9% to $38 million in 2003 from $35 million in the combined 2002. R&D expenses in 2003 and the combined 2002 are not comparable due to certain of the factors described in the "Comparability of Financial Results" section above. The increase in R&D expenses in 2003 primarily related to planned increases in the Company's instant digital printing research and development activities. Approximately three-quarters of the total research and development expenses in 2003 and the combined 2002 were related to instant digital printing activities, with the balance primarily related to core instant photographic activities, mainly for new instant camera designs in 2003.

All Other

        Net sales in the All Other segment increased by $16 million or approximately 25% to $80 million in 2003 compared to $64 million in the combined 2002. This increase was primarily related to an increase in revenues from certain third party contract manufacturing operations and, to a lesser degree, increased licensing revenues in 2003.

        Profit from operations in the All Other segment increased $9 million to $19 million in 2003 compared to $10 million in the combined 2002. Profit from operations in the All Other segment in 2003 and the combined 2002 is not comparable due to certain of the factors described in the "Comparability of Financial Results" section above. The increase in profit from operations in 2003 primarily reflects the margin impact of the increased revenues in the Company's third party contract manufacturing and licensing operations.

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Consolidated Worldwide Results for Fourth Quarter of 2004 Compared to Fourth Quarter of 2003

        The following table presents selected financial information regarding the Company's results of operations for the three month periods ended December 2004 and 2003. This table is presented for use in the discussion of operating results below. The information on the results for these periods are as follows (in millions, except for percentages):

        The Company's consolidated net sales and gross margin for the fourth quarter of 2004 compared to the fourth quarter of 2003 were as follows (dollars in millions):

        In the fourth quarter of 2004 compared to the same period of 2003, the Company's consolidated net sales decreased by $28 million or approximately 15%, primarily related to lower net sales of instant film and, to a lesser degree, instant cameras offset, in part, by approximately $3 million from the favorable impact of foreign exchange and approximately $5 million from an increase in the net sales of the All Other segment and other products. Excluding the favorable impact of foreign exchange, the Company's net sales of instant film and cameras decreased by approximately 21% in the fourth quarter of 2004 compared to the same period of 2003. The net sales of instant film and cameras in the fourth quarter of 2004 were negatively impacted by competition from digital camera products and media formats.

        The Company had a gross margin of $55 million or 34% in the fourth quarter of 2004 compared to a gross margin of $90 million or 48% in the fourth quarter of 2003. The decrease in gross margin of 14 percentage points was primarily due to the impact of lower net sales, primarily of instant film, and mix which decreased gross margin by approximately 7 percentage points. The decrease in net sales resulted in lower production volumes. This in turn resulted in an increase in manufacturing costs due to certain costs which were not reduced in line with the lower production volumes which decreased margin by approximately 6 percentage points. The decrease in gross margin also included the impact of

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costs in the fourth quarter of 2004 related to a quality problem in manufacturing operations that support the Company's eyewear business, which decreased gross margin by approximately 2 percentage points. The decreases in gross margin were offset, in part, by the favorable impact of foreign exchange on net sales in the fourth quarter of 2004, which increased gross margin by approximately 1 percentage point.

        The Company's SG&A expenses were $50 million and $64 million, for the fourth quarter of 2004 and 2003, respectively. The Company's SG&A expenses are its marketing, research, engineering and administrative expenses, excluding the R&D segment expenses of $13 million in the fourth quarter of 2004 and $12 million in the fourth quarter of 2003, discussed below. The decrease of $14 million or approximately 22% in SG&A expenses in the fourth quarter of 2004 compared to the same period in 2003 reflects a reduction of approximately $14 million in regional sales and marketing expenses to approximately $22 million in the fourth quarter of 2004 from approximately $36 million in the same period in 2003. This decrease was primarily due to lower advertising expenses and the favorable impact of restructuring programs. The decrease in SG&A expenses in the fourth quarter of 2004 compared to the same period in 2003 also reflects a net decrease of costs in the non-segment Corporate category, including approximately $5 million primarily related to savings from restructurings and efforts to consolidate operations, approximately $1 million for lower employee cash incentive compensation and approximately $1 million from a gain on the sale of property located in the United Kingdom. The decreases in SG&A were offset, in part, by approximately $6 million of cost increases in the non-segment Corporate category, including increases in the cost of corporate governance and costs related to the proposed merger with Petters, along with approximately $1 million from the unfavorable impact of foreign exchange on sales and marketing expenses. The majority of the Company's SG&A expenses were recorded in the Americas and International Region segments with the remainder recorded primarily in the non-segment Corporate category.

        In the fourth quarter of 2004, the Company recorded restructuring charges of approximately $6 million compared to restructuring charges of $3 million in the same period in 2003. The charges in the fourth quarter of 2004 related to involuntary severance programs intended to downsize and consolidate the Company's manufacturing operations, sales and marketing, and non-segment Corporate category administrative operations. The charges in the fourth quarter of 2003 primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's sales and marketing, non-U.S. manufacturing and non-segment Corporate category administrative operations. A total of approximately 235 employees were expected to leave the Company under the fourth quarter 2004 programs by early 2005. The Company expects to make most of the cash payments related to the fourth quarter 2004 restructuring charges, some of which are paid as a stream of payments, by the end of 2005. Refer to Note 4 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for more information on the Company's restructuring programs.

        The gross margin and expenses discussed above resulted in a loss from operations of $14 million in the fourth quarter of 2004 compared to a profit from operations of $11 million in the fourth quarter of 2003.

        The net of other income and expense in the fourth quarter of 2004 was an expense of $2 million primarily related to approximately $5 million of foreign exchange transaction losses and a charge related to periods prior to 2004 which was determined not to be material of approximately $1 million related to defined benefit pension plans of certain non-U.S. marketing subsidiaries offset, in part, by a gain of approximately $2 million related to a settlement agreement reached with Primary regarding the obligation of the Company to reimburse Primary for certain estate costs incurred by Primary and the related return of cash collateral to the Company provided to cover such costs, which had been previously recorded as a liability by the Company, approximately $1 million of interest income and approximately $1 million related to the return of pension plan assets of a subsidiary that had been liquidated. The net of other income and expense was an expense of $4 million in the fourth quarter of

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2003 primarily related to foreign exchange transaction losses offset, in part, by a distribution from a real estate joint venture that was developing property located in Cambridge Massachusetts.

        In the fourth quarter of 2004, the Company revised its estimate of its income taxes for 2004 primarily due to lower than expected earnings in 2004, a foreign tax credit carryback, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax reserves as a result of the resolution of certain foreign tax issues offset, in part, by an increase in valuation allowances related to certain deferred tax assets. As a result, the Company recorded an income tax benefit of $25 million on a reported loss before income taxes of $17 million in the fourth quarter of 2004 compared to an income tax expense of $1 million, on reported earnings before income taxes of $6 million in the fourth quarter of 2003. The factors contributing to the magnitude of the Company's tax benefits in 2004 are not expected to be repeated in future periods.

        In the fourth quarter of 2004 the Company's net earnings were $8 million compared to net earnings of $5 million in the fourth quarter of 2003. Basic and diluted earnings per common share based on earnings available to common stockholders were $0.24 and $0.22, respectively, in the fourth quarter of 2004, compared to $0.11 and $0.10, respectively, for basic and diluted earnings per common share based on earnings available to common stockholders in the fourth quarter of 2003.

        The following is a summary of the Company's net sales and profit from operations by business segment, and for the non-segment Corporate category, for the periods indicated (in millions):

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Americas Region

        Net sales and profit from operations for the Americas Region for the fourth quarter of 2004 and 2003, were as follows (in millions):

        Net sales in the Americas Region decreased by $18 million, or approximately 17%, in the fourth quarter of 2004 compared to the same period in 2003, primarily related to lower net sales of instant film and, to a lesser degree, instant cameras. Competition from digital camera products and media formats negatively impacted the Company's net sales in the Americas Region in the fourth quarter of 2004.

        Profit from operations in the Americas Region for the fourth quarter of 2004 was $29 million compared to profit from operations of $37 million in the same period of 2003. The decline in profit from operations in the Americas Region of $8 million was primarily due to the impact of lower net sales. This decrease was offset, in part, by lower selling and administrative expenses, primarily related to lower advertising costs and savings from restructuring in the fourth quarter of 2004.

International Region

        Net sales and profit from operations for the International Region for the fourth quarter of 2004 and 2003 were as follows (in millions):

        Net sales in the International Region decreased by $12 million, or approximately 19%, to $52 million in the fourth quarter of 2004 from $64 million in the same period of 2003, primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. The net sales in the International Region in the fourth quarter of 2004 included approximately $3 million related to the favorable impact of foreign exchange. Excluding the favorable impact of foreign exchange, net sales in the International Region declined by approximately $15 million, or approximately 23%, in the fourth quarter of 2004 compared to the same period in 2003. Net sales in the International Region in the fourth quarter of 2004 were negatively impacted by competition from digital camera products and media formats.

        Profit from operations in the International Region was $14 million in the fourth quarter of 2004 compared to $17 million in the same period in 2003. Profit from operations in the fourth quarter of 2004 included the net favorable impact of approximately $1 million of foreign exchange. Excluding the net favorable impact of foreign exchange, profit from operations in the International Region declined by approximately $4 million in the fourth quarter of 2004 compared to the same period in 2003. This decrease reflects the impact of lower net sales in the International Region in the fourth quarter of 2004 compared to the same period in 2003 offset, in part, by the favorable impact of lower selling and administrative expenses in the fourth quarter of 2004, primarily due to lower advertising costs and, to a lesser degree, savings from restructuring.

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Global Manufacturing

        Manufacturing non-standard costs were approximately $19 million in the fourth quarter of 2004 compared to $7 million in the fourth quarter of 2003. The increase of $12 million in manufacturing non-standard costs in the fourth quarter of 2004 compared to the same period in 2003 included approximately $5 million of inventory write-offs of certain raw and in-process material that was no longer required and an increase of approximately $3 million of other manufacturing non-standard costs, primarily related to reductions in the Company's production volumes. The increase also consists of approximately $5 million of costs related to a quality problem in the Company's manufacturing operation that produces lenses for the eyewear business. These increases were offset, in part, by the favorable impact of approximately $1 million of lower development costs related to the Company's decision to terminate the development of its instant digital printing kiosks.

R&D

        R&D segment expenses were $13 million in the fourth quarter of 2004 compared to $12 million in the same period in 2003. The increase of $1 million primarily related to an increase in spending related to the Company's instant digital printing activities in the fourth quarter of 2004. Approximately 86% of the Company's total research and development expenses in the fourth quarter of 2004 was related to the Company's instant digital printing activities with the balance primarily related to the Company's instant photographic activities. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in its instant digital printing activities after the second quarter of 2005.

All Other

        Net sales in the All Other segment were approximately $21 million in the fourth quarter of 2004 compared to $19 million in the fourth quarter of 2003. The increase of $2 million in net sales primarily related to an increase of approximately $5 million in the net sales of the Company's third party contract manufacturing and licensing operations offset, in part, by a decrease of approximately $3 million in the net sales of the Company's eyewear business, primarily related to a lens quality problem.

        Profit from operations in the All Other segment was $4 million in the fourth quarter of 2004 compared to $5 million in the same period in 2003. The decrease of $1 million in the fourth quarter of 2004 compared to the same period in 2003 reflected a reduction in profit from operations in the Company's eyewear business, primarily related to lower net sales offset, in part, by an increase in profit from operations from the net sales related to the Company's licensing operations.

Financial Liquidity and Capital Resources

        The Company's principal source of capital is provided by its cash flow from operating activities, which may be supplemented by borrowing under the Company's revolving line of credit as discussed below. However, the revolving line of credit has not been used by the Company to date. A summary of the Company's cash flows in 2004 is as follows (in millions):

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        The Company's cash and cash equivalents were $114 million at December 31, 2004, a decrease of $53 million from $167 million at December 31, 2003. In 2004, net cash provided by the Company's operating activities was $9 million. Net earnings in 2004, adjusted for non-cash items (such as depreciation, deferred taxes and other non-cash items) contributed approximately $65 million to cash flow from operating activities. A decrease in receivables, inventories, and prepaid and other assets in 2004 increased cash flows from operating activities by $41 million. A decrease in accounts payables and accruals, compensation and benefits payable, and income taxes payable decreased cash flows from operating activities by approximately $97 million in 2004. The decrease in compensation and benefits payable in 2004 includes the impact of cash payments of approximately $20 million related to incentive compensation liabilities recorded in 2003.

        Net cash used by the Company for investing activities in 2004 was $18 million, primarily related to capital spending of approximately $29 million offset, in part, by a decrease in other assets of approximately $5 million and approximately $6 million of proceeds from the sale of held for sale property located in Germany and other property located in the United Kingdom. In 2004, capital spending related to: the acquisition of land adjacent to the Company's headquarters in Waltham, Massachusetts; facilities and equipment upgrades in Global Manufacturing; and new products. The decrease in other assets in 2004 of approximately $6 million primarily related to the use of deposits related to the pre-tax proceeds from the sale of certain of the Company's held for sale assets in 2003 that were used to acquire land adjacent to the Company's headquarters in Waltham, Massachusetts.

        The Company expects its capital spending in 2005 to be in the range of $15 to $20 million, primarily related to spending in support of new products, facilities and equipment upgrades in Global Manufacturing, and Corporate property enhancements and information technology.

        The net cash used by the Company's financing activities in 2004 was $48 million. Approximately $47 million of this use was related to the redemption of the outstanding shares of the Company's Preferred Stock and the payment of dividends on the outstanding shares of this stock immediately prior to the redemptions. Cash used by financing activities also reflects the repurchase of approximately $1 million of restricted Common Stock from certain executives and a director in connection with a purchase by those individuals of shares of the Company's restricted Common Stock in the first quarter of 2004. The Company utilized the purchase price it would otherwise have paid for the repurchase to pay a portion of the estimated income tax liability of those individuals on the restricted Common Stock they purchased in the first quarter of 2004.

        The Company's working capital was $240 million at December 31, 2004 compared to $242 million at December 31, 2003.

        As of July 29, 2002, the Company entered into a three year, $100 million credit facility and accompanying security documents with a group of lenders (the "Credit Agreement"). The Credit Agreement is secured by, among other things, a first priority security interest in substantially all of the Company's assets in the United States and most of the assets of the Company's non-U.S. subsidiaries that are designated as borrowers or guarantors under the Credit Agreement. The Credit Agreement expires by its terms in July 2005. The Company is considering a number of alternatives for replacing the Credit Agreement, including the negotiation of an extension of the Credit Agreement with the existing group of lenders. There can be no assurance that the Company will be able to extend or replace this credit facility.

        The Credit Agreement provides for a three year $80 million revolving credit line, of which $50 million is available to be borrowed by the Company's U.S. operations and $30 million is available to be borrowed by the Company's non-U.S. subsidiaries that are designated as borrowers under the Credit Agreement. Under the revolving credit line in the Credit Agreement, the Company's borrowing availability is tied to a percentage of eligible domestic and foreign inventory and accounts receivable. Approximately $27 million was available to the Company under the revolving line of credit at

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December 31, 2004. The Credit Agreement also includes provisions for letters of credit in lieu of borrowings under the revolving credit line. In addition, the Credit Agreement contains provisions for borrowings between the Company's subsidiaries that are designated as borrowers or guarantors. The Credit Agreement originally provided for a $20 million term loan. In 2003, the Company repaid the term loan and this portion of the Credit Agreement is not available for future borrowings. There were no borrowings by the Company under the revolving line of credit in 2004, 2003 or 2002.

        The Credit Agreement contains certain restrictive covenants. Refer to Note 8 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data for more information on the restrictive covenants in the Credit Agreement. In 2003, the Credit Agreement was amended to provide a $100 million discretionary basket for certain items otherwise restricted such as preferred stock redemptions and dividends, asset acquisitions, additional instant digital printing spending and other investments, as long as certain of the Company's financial covenants are satisfied. In the fourth quarter of 2003, the Company paid approximately $10 million of dividends on its Preferred Stock and redeemed 50% of the then outstanding shares of its Preferred Stock for approximately $44 million. In April 2004, the Company paid a further dividend of $1.3 million on its Preferred Stock (representing all accrued and unpaid dividends on its Preferred Stock as of that date) and redeemed 50% of the then outstanding Preferred Stock for $22.3 million. In 2004, the Company also used approximately $13 million of the discretionary basket for additional instant digital printing research and development spending. As a result, approximately $9 million remained from the $100 million discretionary basket at December 31, 2004.

        In September 2004, the Company entered into an amendment to the Credit Agreement. This amendment provided for a reduction in the minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant levels (calculated as of the end of each fiscal quarter on a rolling four quarter basis) for the third and fourth fiscal quarters of 2004 and the first fiscal quarter of 2005 to $38.0 million, $12.5 million and $2.5 million, respectively. The EBITDA covenant level for the second fiscal quarter 2005, which is the final period tested, was unchanged by this amendment and remained at $53.0 million. In addition, the amendment removed the ability of the Company to redeem shares of its outstanding Preferred Stock and to pay dividends or make other distributions to any of its shareholders without approval of the lenders under the Credit Agreement. In connection with this amendment, the Company paid the lenders under the Credit Agreement a fee of $0.2 million.

        In December 2004, the Company entered into an additional amendment to the Credit Agreement. This amendment permitted, among other things, the Company to redeem its Preferred Stock (see Note 10) and pay a dividend on the Preferred Stock. Subsequently, in December 2004, the Company paid a dividend of approximately $1.3 million on its Preferred Stock and redeemed the remaining outstanding shares of its Preferred Stock for approximately $22.3 million. This amendment limited the Company's net use of cash up to $85 million through the expiration of the Credit Agreement in July 2005. In addition, the amendment permitted the Company to invest in various money funds administered by the Company's lenders and utilize certain overdraft arrangements with the lenders under the Credit Agreement.

        The Company's obligations for non-cancelable operating leases and other purchase obligations as of December 31, 2004 were as follows (in millions):