Annual Report 1996

11. Benefit Plans

The Company maintains a qualified noncontributory trusteed pension plan covering substantially all domestic employees. The benefits are based on years of service and final average compensation at retirement. The Company's general policy is to fund the domestic pension trust to the extent such contributions would be deductible under the funding standards established under the Internal Revenue Code. Plan assets consist primarily of high quality corporate and U.S. government bonds, asset-backed securities and common stocks.

Employees of Polaroid's manufacturing subsidiaries in the United Kingdom and the Netherlands are covered by trusteed, contributory pension plans. Amounts are funded in accordance with local laws and economic conditions. Employees of most other foreign subsidiaries are covered by insured plans. Related expenses, obligations and assets of these other plans are not material and therefore are not included in the information below.

Components of the Company's net periodic pension cost/(credit) are as follows:

The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheet at December 31:

The assumptions used by the Company which have a significant effect on the amounts reported for pension accounting as of December 31 were as follows:

In 1988, the Company's Board of Directors approved the Polaroid ESOP primarily for the benefit of its domestic employees (see Notes 8 and 9). The number of shares available for allocation to individual accounts in any period is based on principal and interest payments made on the ESOP loan. Amounts charged to expense represent the amount of principal repayment on the ESOP loan less dividends paid on unallocated shares. Amounts charged to expense for this plan were $38.7 million, $34.3 million and $31.2 million in 1996, 1995, and 1994, respectively.

The Company currently provides certain health and life insurance benefits to eligible retired employees. Substantially all domestic employees who retire from the Company, and meet the minimum age and service requirements of 55 and 10 years, respectively, become eligible for these benefits. The plans are currently unfunded and may be modified in accordance with the terms of the plan documents. The Company funds these benefits on a pay-as-you-go basis. Eligible retirees under age 65 are required to contribute to the cost of their health care benefits. Upon reaching age 65, eligible retirees' health care benefit coverage is coordinated with Medicare. In 1995, the Company established an amount it would contribute toward the cost of the retirees' selected medical plan coverage. The Company intends to annually review the amount it contributes toward this coverage and will, at its option, make adjustments to this amount based on several considerations including financial factors, inflation of medical costs and other relevant factors. Eligible retirees are not required to contribute to the cost of their life insurance benefits. Employees of most of the Company's subsidiaries outside of the United States are covered by government programs.

Components of the Company's net periodic postretirement benefit cost are as follows:

The following table sets forth the status of the plan and amounts recognized in the Company's consolidated balance sheet at December 31:

The Accumulated Postretirement Benefit Obligation (APBO) at December 31, 1996 and 1995 was determined using a discount rate of 7.5% and 7.0 %, respectively. The assumed health care cost trend rate used in measuring the APBO at December 31, 1996 and 1995 was 10% and 11%, respectively, declining gradually to an ultimate rate of 6% in 2003. These trend rates reflect the Company's current experience and expectation that future rates will decline. The assumptions used above have a significant effect on the amounts reported. If the health care cost trend rate assumptions were increased by 1% each year, the APBO as of December 31, 1996 and 1995 would increase by approximately $6.7 million and $4.1 million, respectively. The effect of a 1% increase on the aggregate of service and interest cost for 1996 and 1995 would have been an increase of approximately $.8 million and $4.5 million, respectively.

The Company maintains the Polaroid Board of Directors' Retirement Plan (the Directors' Retirement Plan) which is a non-qualified deferred compensation plan under which fully vested (at least five complete years of service on the Board) non-employee members of the Board who retire receive annual lump sum payments equal to the retainer amount they were paid in the last full year prior to retirement. A participant or surviving spouse may receive payments under the Directors' Retirement Plan for the lesser of twenty-five years or the number of years that the person served as a non-employee member of the Board prior to his or her seventy-third birthday.

The estimated present value of future benefits under the Directors' Retirement Plan is accrued annually based on credited service up to the participants' actual retirement dates and is charged to expense. For the years 1996, 1995 and 1994, $.3 million, $.2 million and $.3 million, respectively, was charged to expense for current years' service.

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