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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 2001 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-87
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 16-0417150
(State of incorporation) (IRS Employer
Identification No.)
343 STATE STREET, ROCHESTER, NEW YORK 14650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 585-724-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $2.50 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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. X
At December 31, 2001 290,929,701 shares of Common Stock of the registrant
were outstanding. The aggregate market value (based upon the closing
price of these shares on the New York Stock Exchange at February 27, 2002)
of the voting stock held by nonaffiliates was approximately $9.2 billion.
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PART I
ITEM 1. BUSINESS
Eastman Kodak Company (the Company or Kodak) is engaged primarily in
developing, manufacturing and marketing traditional and digital imaging
products, services and solutions for consumers, professionals, healthcare
providers, the entertainment industry and other commercial customers.
Kodak is the leader in helping people take, share, enhance, preserve,
print and enjoy images - for memories, for information, and for
entertainment. The Company is a major participant in "infoimaging" - a
$225 billion industry composed of devices (digital cameras and personal
data assistants (PDAs)), infrastructure (online networks and delivery
systems for images) and services and media (software, film and paper
enabling people to access, analyze and print images). Kodak harnesses its
technology, market reach and a host of industry partnerships to provide
innovative products and services for customers who need the information-
rich content that images contain. A business discussion by reportable
segments follows. Refer to the Management Discussion and Analysis and
Notes to Financial Statements regarding the change in reportable segments.
Kodak's sales, earnings and identifiable assets by reportable segment for
the past three years are shown in Note 21.
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PHOTOGRAPHY SEGMENT
Sales of the Photography segment for 2001, 2000 and 1999 were (in
millions) $9,403, $10,231 and $10,265, respectively.
This segment includes traditional and digital product offerings for
consumers, professional photographers and the entertainment industry.
This segment combines traditional and digital photography and
photographic services in all its forms - consumer, advanced amateur, and
professional. Kodak manufactures and markets various components of
these systems including films (consumer, professional and motion
picture), photographic papers, processing services, photofinishing
equipment, photographic chemicals, cameras (including one-time-use and
digital) and projectors. Kodak has also developed products that bridge
traditional silver halide and digital products. Product and service
offerings include kiosks and scanning systems to digitize and enhance
images, digital media for storing images, and a network for transmitting
images. In addition, other digitization options have been created to
stimulate more pictures in use, adding to the consumption of film and
paper. These products serve amateur photographers, as well as
professional, motion picture and television customers.
On June 4, 2001, the Company completed its acquisition of Ofoto, Inc.
The acquisition of Ofoto will accelerate Kodak's growth in the online
photography market and help drive more rapid adoption of digital and
online services. Ofoto offers digital processing of digital images and
traditional film, top-quality prints, private online image storage,
sharing, editing and creative tools, frames, cards and other
merchandise.
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In November 1999, the Company sold The Image Bank, a wholly-owned
subsidiary which markets and licenses image reproduction rights, to
Getty Images, Inc. In November 1999, the Company sold its Motion
Analysis Systems Division, which manufactures digital cameras and
digital video cameras for the automotive and industrial markets, to
Roper Industries, Inc.
Marketing and Competition. Traditional products and services for the
consumer are sold direct to retailers and through distributors throughout
the world. Some products are also available on the Internet. Price
competition continues to exist in all marketplaces. To mitigate the
impacts of price competition, the Company has been successful in moving
consumers up to higher value MAX and Advantix films. Some digital
substitution has occurred, primarily in the U.S., as a small number of
consumers have begun to use digital cameras. While this substitution to
date has had only a minor impact on the Company's film and paper sales,
and processing services in the U.S., the Company has sought to offset this
by providing its own digital products, digitization services and output
services. The Company also sees the potential for continued significant
growth in the sale of sensitized products outside the U.S., particularly
in emerging markets, where the Company has expanded the number of outlets
for Kodak products. The Company also owns photofinishing laboratories
throughout the world and supplies photographic papers and chemicals to
other entities that provide photofinishing services. The Company's
primary laboratories provide consumers the opportunity to receive film
images in digital form, either through Kodak Picture CD or the Company's
retail online partners.
Consumer digital products including digital cameras, inkjet printers and
inkjet media for consumers in the U.S. are sold direct to retailers or
distributors, while outside the U.S. products are sold primarily to
retailers. Products are also available to customers through the Internet.
Products such as the Company's EasyShare digital camera system are
intended to simplify digital imaging for consumers and thereby increase
the popularity for printing digital photo files. The Company faces
competition from other electronics manufacturers in this market space,
particularly on price and technological advances. Rapid price declines
shortly after product introduction in this environment are common, as
producers are continually introducing new models with enhanced
capabilities, such as improved resolution and/or optical systems.
Traditional and digital professional products and services are sold direct
to professional photographers and laboratories, or through dealers
throughout the world. The Company is experiencing price competition for
its professional films and papers. The commercial professional
photography market space is increasingly being affected by digital
substitution.
4
Throughout the world, almost all entertainment imaging products are sold
direct to studios, to labs on behalf of studios, to independent
filmmakers, or commercial houses for producing advertisements. The
products are sold in a highly competitive environment, characterized by
price competition. As the entertainment industry begins to adopt digital
formats, the Company anticipates that it will face new competitors,
including some of its current customers and other electronics
manufacturers, as it markets its products in the digital space.
Kodak's advertising programs actively promote its photography group
products and services in its various markets, and its principal
trademarks, trade dress and corporate symbol are widely used and
recognized. While current advertising is having a positive business
impact, it is hampered by the economic slowdown and events of September
11th.
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HEALTH IMAGING SEGMENT
Sales of the Health Imaging segment for 2001, 2000 and 1999 were (in
millions) $2,262, $2,220 and $2,159, respectively.
The products of the Health Imaging segment are used to capture, store,
process, print and display images and information in a variety of forms
for customers in the healthcare industry, for both primary and referral
diagnoses.
Products of the Health Imaging segment include traditional analog products
such as medical films, chemicals, and processing equipment, as well as
services for healthcare professionals. In addition, this segment provides
digital medical imaging products, systems and solutions, which are a key
component of sales and earnings growth. These include digital print
films, laser imagers, computed and digital radiography systems, Picture
Archiving and Communications Systems (PACS), and Radiology Information
Systems (RIS). The Health Imaging segment serves healthcare customers for
general radiology products and specialty health markets, including
cardiology, dental, mammography, and oncology imaging.
Marketing and Competition. In the U.S., Canada and Latin America, health
imaging consumables and analog equipment are sold through distributors. A
significant portion of digital equipment and solutions is sold direct to
end users, with the balance sold through other equipment manufacturers and
value added resellers. A significant amount of sales in the U.S. are made
to group purchasing organizations (GPOs), which creates a competitive
pricing environment. In Europe, Japan and Asia, consumables and analog
equipment sales are split between distributors and end users, normally as
part of a media/equipment bundle. All digital equipment and solutions are
sold direct to end users. A majority of the hospitals in Europe are
government funded, which creates an environment where funding is limited
and restricted.
Kodak's health imaging products and services compete with similar products
and services of other small and large companies. Strong competition
exists throughout the world in these markets. Kodak's products are
continually improved to meet the changing needs and preferences of its
healthcare customers.
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5
COMMERCIAL IMAGING SEGMENT
Sales of the Commercial Imaging segment for 2001, 2000 and 1999 were (in
millions) $1,459, $1,417 and $1,479, respectively.
The Commercial Imaging segment encompasses Kodak's expertise in imaging
solutions from image capture, printing, archiving and analysis to custom
imaging solutions for commercial markets, such as banking and insurance,
to state, local and federal government applications. Products include
aerial, industrial and micrographic films, micrographics peripherals,
large-format inkjet printers, high-speed production document scanners,
digital imaging systems for commercial imaging satellites, and electro-
optical systems for land and space borne telescopes and image and data
analysis systems. The Company also provides maintenance and
professional services for Kodak and other manufacturers' products, as
well as providing imaging services to customers.
The segment includes document imaging products, graphics products, wide-
format inkjet products, and products and solutions for government and
commercial customers. Also included are the Company's interests in
NexPress and Kodak Polychrome Graphics (KPG).
NexPress is a joint venture between Kodak and Heidelberger Druckmaschinen
AG (Heidelberg) that was originally formed in 1997 for the purpose of
developing and marketing new digital color printing solutions for the
graphic arts industry. In connection with Kodak's sale of its Office
Imaging business to Heidelberg in 1999, NexPress was expanded by Kodak and
Heidelberg to include the black-and-white electrophotographic business.
As a result, Kodak contributed its toner and developer operations to
NexPress.
KPG is a joint venture between Kodak and Sun Chemical Corporation. This
joint venture is responsible for the photographic plate business, as well
as for marketing Kodak graphic arts film, and proofing materials and
equipment.
The Company generates approximately $200-$250 million of annual revenues
from multi-year U.S. government contracts, which the U.S. government has
the right to terminate for convenience. Historically, terminations have
been rare.
On January 24, 2002, Kodak acquired ENCAD, Inc. and formed ENCAD, Inc. - a
Kodak company. This entity is a wholly-owned subsidiary of Kodak that is
focused on the wide-format inkjet printing industry. The new company is a
complete wide-format inkjet provider with a full set of offerings,
including inkjet printers, inks, media, software, and service.
On February 7, 2001, the Company completed its acquisition of
substantially all of the imaging operations of Bell & Howell Company. The
acquired units provide business customers worldwide with maintenance for
document imaging components, micrographic-related equipment, supplies,
parts and service.
6
In 2000, the Company divested its Eastman Software subsidiary.
Marketing and Competition. The key markets of the Commercial Imaging
segment include commercial businesses such as banking and insurance, all
levels of government entities, as well as printers and publishers. The
Company also has a presence on the Internet.
Throughout the world, document imaging products are sold primarily through
distributors and value added resellers. Some products are sold direct to
customers or leased to customers through third parties. While there is
price competition, the Company has been able to maintain price by adding
more attractive features to its products through technological advances.
The Company has developed a wide range of digital products to meet the
needs of customers who are interested in converting from traditional
analog technology to new enterprise digital workflow solutions.
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ALL OTHER
Sales of the businesses comprising All Other for 2001, 2000 and 1999 were
(in millions) $110, $126, and $186, respectively.
All Other consists primarily of the Kodak Components Group, which
represents an effort by Kodak to diversify into high-growth product areas
that are consistent with the Company's historical strengths in imaging
science. The Kodak Components Group is comprised of the Kodak Display
business, the Imaging Sensor Solutions business and an Optics business.
Products of this Group include organic light emitting diode (OLED)
displays, imaging sensor solutions, and optics and optical systems.
OLED technology, pioneered and patented by Kodak, enables full-color, full-
motion flat-panel displays with a level of brightness and sharpness not
possible with other technologies. Unlike traditional liquid-crystal
displays (LCDs), OLEDs are self-luminous and do not require backlighting.
This eliminates the need for bulky and environmentally undesirable mercury
lamps and yields a thinner, more compact display. Unlike other flat panel
displays, OLEDs have a wide viewing angle (up to 160 degrees), even in
bright light. Their lower power consumption makes them especially well-
suited for portable and mobile devices.
As a result of this combination of features, OLED displays communicate
more information in a more engaging way while adding less weight and
taking up less space. Their application in various portable devices will
reach the market by year-end 2002.
On December 4, 2001, the Company and SANYO Electric Co., Ltd. announced
the formation of a global business venture, the SK Display Corporation, to
manufacture OLED displays for consumer devices such as cameras, PDAs, and
portable entertainment machines. Kodak will hold a 34% ownership interest
and SANYO will hold a 66% interest in the business venture.
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7
RAW MATERIALS
The raw materials used by the Company are many and varied and generally
available. Silver is one of the essential materials used in the
manufacture of films and papers. The Company purchases silver from
numerous suppliers under annual agreements or on a spot basis. Pulp is an
essential material in the manufacture of photographic papers. The Company
has contracts to acquire pulp from several vendors during the next two to
four years. Electronic components are prevalent in the Company's
equipment offerings. The Company has entered into contracts with numerous
vendors to supply these components over the next one to two years.
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SEASONALITY OF BUSINESS
Sales and earnings of the Photography segment are linked to the timing of
vacations, holidays and other leisure activities. They are normally
weakest in the first quarter due to the absence of holidays and fewer
people taking vacations during that time. In addition, the demand for
photofinishing services is the lowest during the first quarter. Sales and
earnings of this segment are normally strongest in the second and third
quarter as demand for the products of this segment is high due to heavy
vacation activity, and events such as weddings and graduations. During
the latter part of the third quarter, demand for the products is high as
dealers prepare for the holiday seasons. Demand for photofinishing
services is also high during this heavy vacation period.
With respect to the Commercial Imaging and Health Imaging segments, the
sales of consumable products, which generate the major portion of the
earnings of these segments, tend to occur uniformly throughout the year.
Sales of the lower margin equipment products in these segments tend to be
highest in the fourth quarter as purchases by commercial and healthcare
customers are linked to their year-end capital budget management process.
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RESEARCH AND DEVELOPMENT
Through the years, Kodak has engaged in extensive and productive efforts
in research and development. Total research and development expenditures
for 2001, 2000 and 1999 were (in millions) $779, $784 and $817,
respectively.
Research and development expenditures for the Company's three reportable
segments and All Other for 2001, 2000 and 1999 were as follows:
(in millions) 2001 2000 1999
Photography $542 $575 $576
Health Imaging 152 138 128
Commercial Imaging 58 61 89
All Other 27 10 24
---- ---- ----
Total $779 $784 $817
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Research and development is headquartered in Rochester, New York. Other
U.S. groups are located in Boston, Massachusetts; Washington, D.C; Dallas,
Texas; Oakdale, Minnesota; Allendale, New Jersey; New Haven, Connecticut;
and Fremont, California. Outside the U.S., groups are located in
Australia, England, France, Japan, China and Canada. These groups work in
close cooperation with manufacturing units and marketing organizations to
develop new products and applications to serve both existing and new
markets.
It has been Kodak's general practice to protect its investment in research
and development and its freedom to use its inventions by obtaining
patents. The ownership of these patents contributes to Kodak's ability to
provide leadership products and to generate revenue from licensing. The
Company holds portfolios of patents in several areas important to its
business, including color negative films, processing and papers; digital
cameras; network photo fulfillment; and organic light-emitting diodes.
Each of these areas is important to existing and emerging business
opportunities that bear directly on the Company's overall business
performance. The Company is beginning to leverage its patent portfolio,
which has started to generate royalty income. Amounts to date have not
been significant, but could be material in the future.
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ENVIRONMENTAL PROTECTION
Kodak is subject to various laws and governmental regulations concerning
environmental matters. Some of the U.S. federal environmental legislation
having an impact on Kodak includes the Toxic Substances Control Act, the
Resource Conservation and Recovery Act (RCRA), the Clean Air Act, and the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (the Superfund law).
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. Kodak continues to engage in a program for
environmental protection and control.
Environmental protection is further discussed in the Management Discussion
and Analysis and Notes to Financial Statements.
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EMPLOYMENT
At the end of 2001, the Company employed 75,100 people, of whom 42,000
were employed in the U.S.
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Financial information by geographic areas for the past three years is
shown in Note 21, Segment Information.
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ITEM 2. PROPERTIES
The Photography segment of Kodak's business in the United States is
centered in Rochester, New York, where photographic goods are
manufactured. Another manufacturing facility near Windsor, Colorado, also
produces sensitized photographic goods. Photography segment products are
also produced in Lenexa, Kansas.
Photography segment manufacturing facilities outside the United States are
located in Australia, Brazil, Canada, China, England, France, India,
Indonesia, Mexico and Russia. Kodak maintains marketing and distribution
facilities in many parts of the world. The Company also owns processing
laboratories in numerous locations worldwide.
Products in the Health Imaging segment are manufactured in the United
States, primarily in Rochester, New York; Windsor, Colorado; Oakdale,
Minnesota; White City, Oregon; and Fremont, California. Manufacturing
facilities outside the United States are located in Brazil, China, France,
Germany, India and Mexico.
Products in the Commercial Imaging segment are manufactured in the United
States, primarily in Rochester, New York. Another manufacturing facility
in White City, Oregon produces Commercial Imaging products. Manufacturing
facilities outside the United States are located in Brazil, Canada, China,
England, Japan and Mexico.
Properties within a country are generally shared by all segments operating
within that country.
Regional distribution centers are located in various places within and
outside of the United States. The Company owns or leases administrative,
manufacturing, marketing and processing facilities in various parts of the
world. The leases are for various periods and are generally renewable.
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Item 3. LEGAL PROCEEDINGS
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company announced that shareholders voted in favor of a proposed stock
option exchange program for its employees at a special meeting of
shareholders held on January 25, 2002.
A total of 236,223,795 of the Company's shares were present or represented
by proxy at the meeting. The proposal was approved, with 212,590,447
shares voting for, 19,408,955 shares voting against, and 4,224,393 shares
abstaining.
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10
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instructions G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Shareholders.
(as of December 31, 2001)
Date First Elected
an to
Executive Present
Name Age Positions Held Officer Office
Michael P. Benard 54 Vice President 1994 1994
Charles S. Brown 51 Senior Vice President 2000 2000
Robert H. Brust 58 Chief Financial Officer
and Executive Vice
President 2000 2000
Daniel A. Carp 53 Chairman of the Board,
and Chief Executive
Officer 1995 2000
Martin M. Coyne, II 52 Executive Vice President 1997 2000
Carl E. Gustin, Jr. 50 Senior Vice President 1995 1995
Carl A. Marchetto 46 Senior Vice President 2001 2001
J. M. McQuade * 46 Senior Vice President 2000 2000
Michael P. Morley 58 Executive Vice President 1994 2000
Candy M. Obourn 51 Senior Vice President 1997 2000
Daniel P. Palumbo 43 Senior Vice President 2000 2000
Eric G. Rodli 46 Senior Vice President 2001 2001
Robert P. Rozek 41 Controller 2001 2001
Patricia F. Russo * 49 President and Chief
Operating Officer 2001 2001
Willy C. Shih 50 Senior Vice President 1997 2000
Eric L. Steenburgh * 60 Executive Vice President
of Operations 1998 2000
James C. Stoffel 55 Senior Vice President 2000 2000
Gary P. Van Graafeiland 55 General Counsel and
Senior Vice President 1992 1992
* Mr. McQuade left the Company in January, 2002 to accept a position with
3M. Ms. Russo left the Company in January, 2002 to accept a position with
Lucent Technologies Inc. Mr. Steenburgh will retire from the Company
effective April 1, 2002.
11
Executive officers are elected annually in February.
All of the executive officers have been employed by Kodak in various
executive and managerial positions for more than five years, except Mr.
Palumbo, who joined the Company on May 19, 1997; Mr. Shih, who joined the
Company on July 7, 1997; Mr. Stoffel, who joined the Company on September
22, 1997; Mr. Steenburgh, who joined the Company on April 13, 1998; Mr.
McQuade, who joined the Company on January 1, 1999; Mr. Brust, who joined
the Company on January 3, 2000; Mr. Rodli, who joined the Company on
January 24, 2000; Patricia Russo, who joined the Company on April 16,
2001; and Mr. Rozek, who joined the Company on May 29, 2001. Prior to
joining Kodak in 1997, Mr. Palumbo served in domestic and European line
management roles at Procter & Gamble. Prior to joining Kodak in 1997, Mr.
Shih was Vice President of Marketing for Technical Computing at Silicon
Graphics Computer Systems, which he joined in 1995. Prior to joining that
company, Mr. Shih held executive positions with DEC, which he joined in
1994, and IBM Corporation. Prior to joining Kodak in 1997, Mr. Stoffel
was Vice President and Chief Engineer at Xerox Corporation. Prior to
joining Kodak in 1998, Mr. Steenburgh held senior management positions at
Xerox Corporation, Ricoh Company, Ltd., Goulds Pumps, and, most recently,
was President of the Industrial Pump Group Worldwide at ITT Fluid
Technology Corporation, a part of ITT Industries. Prior to joining
Kodak in 1999, Mr. McQuade was the General Manager of Imation's medical
imaging systems business. Prior to joining that company, Mr. McQuade held
a number of positions with 3M since 1982. Prior to joining Kodak in 2000,
Mr. Brust was Senior Vice President and Chief Financial Officer with
Unisys Corporation since 1997. Prior to joining that company, Mr. Brust
held a variety of management positions with General Electric since 1965.
Prior to joining Kodak in 2000, Mr. Rodli served as President of Bexel.
He has also had a broad range of senior management positions in the Boston
Consulting Group, Iwerks Entertainment, and the PricewaterhouseCoopers
Management Consulting Group. Prior to joining Kodak in 2001, Patricia
Russo was Chairman of Avaya Inc., which she joined in December 2000.
Avaya is formerly the Business Communications Systems unit of Lucent
Technologies Inc. Prior to Avaya, she had been Executive Vice President
and CEO of the Service Provider Networks Group at Lucent. She also held
numerous management and executive positions throughout Lucent. Prior to
joining that company, Ms. Russo held key management and executive
positions throughout AT&T Corp. Prior to joining Kodak in 2001, Mr. Rozek
was a Partner at PricewaterhouseCoopers LLP where he served as the lead
partner with multi-national clients across a number of industries. Mr.
Rozek did not provide any services to Kodak prior to his employment.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation of
the ability and integrity of any executive officer during the past five
years.
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12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Eastman Kodak Company common stock is principally traded on the New York
Stock Exchange. There are 91,893 shareholders of record of common stock
as of December 31, 2001. See Liquidity and Capital Resources, and Market
Price Data in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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ITEM 6. SELECTED FINANCIAL DATA
Refer to Summary of Operating Data on page 112.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements and notes to
consolidated financial statements contain information that is pertinent
to management's discussion and analysis of financial condition and
results of operations. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent assets and
liabilities. Actual results may differ from these estimates and
assumptions.
The Company believes that the critical accounting policies discussed
below involve additional management judgment due to the sensitivity of
the methods, assumptions and estimates necessary in determining the
related asset, liability, revenue and expense amounts.
13
Kodak recognizes revenue when it is realized or realizable and earned.
For the sale of multiple-element arrangements whereby equipment is
combined with services, including maintenance and training, and other
elements, including software and products, the Company allocates to and
recognizes revenue from the various elements based on verifiable
objective evidence of fair value (if software is incidental to the
transaction) or Kodak-specific objective evidence of fair value if
software is other than incidental to the sales transaction as a whole.
Revisions to these determinants of fair value would affect the timing of
revenue allocated to the various elements in the arrangement and would
impact the results of operations of the Company. For full service
solutions sales, which consist of the sale of equipment and software
which may or may not require significant production, modification or
customization, there are two acceptable methods of accounting: percentage
of completion accounting and completed contract accounting. For certain
of the Company's full service solutions, the completed contract method of
accounting is being followed by the Company. This is due to the
Company's lack of historical experience resulting in the inability to
provide reasonably dependable estimates of the revenues and costs
applicable to the various stages of such contracts as would be necessary
under the percentage of completion methodology. Furthermore, the Company
records estimated reductions to revenue for customer incentive programs
offered including cash discounts, price protection, promotional and
advertising allowances and volume discounts. If market conditions were
to decline, the Company may take actions to expand these customer
offerings which may result in incremental reductions to revenue.
Kodak assesses the carrying value of its identifiable intangible assets,
long-lived assets and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the underlying asset
may not be recoverable. Certain factors which may occur and indicate
that an impairment exists include, but are not limited to: significant
underperformance relative to expected historical or projected future
operating results; significant changes in the manner of the Company's use
of the underlying assets; and significant adverse industry or market
economic trends. In the event that the carrying value of assets are
determined to be unrecoverable, the Company would record an adjustment to
the respective carrying value.
Kodak maintains provisions for uncollectible accounts for estimated
losses resulting from the inability of its customers to remit payments.
If the financial condition of customers were to deteriorate, thereby
resulting in an inability to make payments, additional allowances may be
required.
Kodak provides estimated inventory allowances for excess, slow-moving and
obsolete inventory as well as inventory whose carrying value is in excess
of net realizable value. These reserves are based on current assessments
about future demands, market conditions and related management
initiatives. If market conditions and actual demands are less favorable
than those projected by management, additional inventory write-downs may
be required.
14
Kodak holds minority interests in certain publicly traded and privately
held companies having operations or technology within its strategic area
of focus. The Company's policy is to record an impairment charge on
these investments when they experience declines in value which are
considered to be other-than-temporary. Poor operating results of the
investees or adverse changes in market conditions in the future may cause
losses or an inability of the Company to recover its carrying value in
these underlying investments.
Kodak evaluates the realizability of its deferred tax assets on an
ongoing basis by assessing its valuation allowance and by adjusting the
amount of such allowance, if necessary. In the determination of the
valuation allowance, the Company has considered future taxable income and
the feasibility of tax planning initiatives. Should the Company
determine that it is more likely than not that it will realize certain of
its deferred tax assets in the future, an adjustment would be required to
reduce the existing valuation allowance and increase income. On the
contrary, if the Company determined that it would not be able to realize
its recorded net deferred tax asset, an adjustment to increase the
valuation allowance would be charged to the results of operations in the
period such conclusion was made. In addition, the Company operates
within multiple taxing jurisdictions and is subject to audit in these
jurisdictions. These audits can involve complex issues, which may
require an extended period of time for resolution. Although management
believes that adequate consideration has been made for such issues, there
is the possibility that the ultimate resolution of such issues could have
an adverse effect on the results of operations of the Company.
Management estimates expected product failure rates, material usage and
service costs in the development of its warranty obligations. In the
event that the actual results of these items differ from the estimates,
an adjustment to the warranty obligation would be recorded.
Pension assets and liabilities are determined on an actuarial basis and
are affected by the estimated market-related value of plan assets,
estimates of the expected return on plan assets, discount rates and other
assumptions inherent in these valuations. The Company annually reviews
the assumptions underlying the actuarial calculations and makes changes
to these assumptions, based on current market conditions, as necessary.
Actual changes in the fair market value of plan assets and differences
between the actual return on plan assets and the expected return on plan
assets will affect the amount of pension (income) expense ultimately
recognized. The other postretirement benefits liability is also
determined on an actuarial basis and is affected by assumptions including
the discount rate and expected trends in healthcare costs. Changes in
the discount rate and differences between actual and expected health care
costs will affect the recorded amount of other postretirement benefits
expense.
15
Environmental liabilities are accrued based on estimates of known
environmental remediation exposures. The liabilities include accruals
for sites owned by Kodak, sites formerly owned by Kodak, and other third
party sites where Kodak was designated as a potentially responsible party
(PRP). The amounts accrued for such sites are based on these estimates,
which may be affected by changing determinations of what constitutes an
environmental liability or an acceptable level of remediation. To the
extent that the current work plans are not effective in achieving
targeted results, the proposals to regulatory agencies for desired
methods and outcomes of remediation are not acceptable, or additional
exposures are identified, Kodak's estimate of its environmental
liabilities may change.
SUMMARY
(in millions, except per share data)
2001 Change 2000 Change 1999
Net sales $13,234 -5 % $13,994 - 1% $14,089
Earnings from operations 345 -84 2,214 +11 1,990
Net earnings 76 -95 1,407 + 1 1,392
Basic earnings per share .26 -94 4.62 + 5 4.38
Diluted earnings per share .26 -94 4.59 + 6 4.33
2001
The Company's results for the year included the following:
Charges of $830 million ($583 million after tax) related to the
restructuring programs implemented in the second, third and fourth
quarters and other asset impairments. See further discussion in
Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) and Note 14.
A charge of $41 million ($28 million after tax) for environmental
exposures. See MD&A and Note 10.
A charge of $20 million ($14 million after tax) for the Kmart bankruptcy.
See MD&A and Note 2.
Income tax benefits of $31 million, including a favorable tax settlement
of $11 million and a $20 million benefit representing a decline in the
year-over-year effective tax rate.
Excluding the above items, net earnings were $670 million, or $2.30 per
basic and diluted share.
16
2000
The Company's results for the year included the following:
Charges of approximately $50 million ($33 million after tax) associated
with the sale and exit of one of the Company's equipment manufacturing
facilities. The costs for this effort, which began in 1999, related to
accelerated depreciation of assets still in use prior to the sale of the
facility in the second quarter, and costs for relocation of the
operations.
Excluding the above, net earnings were $1,440 million. Basic earnings
per share were $4.73 and diluted earnings per share were $4.70.
1999
The Company's results for the year included the following:
A restructuring charge of $350 million ($231 million after tax) related
to worldwide manufacturing and photofinishing consolidation and
reductions in selling, general and administrative positions worldwide.
In addition, the Company incurred charges of $11 million ($7 million
after tax) related to accelerated depreciation of assets still in use
during 1999 and sold in 2000, in connection with the exit of one of the
Company's equipment manufacturing facilities.
Charges totaling approximately $103 million ($68 million after tax)
associated with the exits of the Eastman Software business ($51 million)
and Entertainment Imaging's sticker print kiosk product line ($32
million) as well as the write-off of the Company's Calcomp investment
($20 million), which was determined to be unrecoverable.
Gains of approximately $120 million ($79 million after tax) related to
the sale of The Image Bank ($95 million gain) and the Motion Analysis
Systems Division ($25 million gain).
Excluding the above items, net earnings were $1,619 million. Basic
earnings per share were $5.09 and diluted earnings per share were $5.03.
17
DETAILED RESULTS OF OPERATIONS
Net Sales by Reportable Segment and All Other
(in millions)
2001 Change 2000 Change 1999
Photography
Inside the U.S. $ 4,482 -10% $ 4,960 + 4% $ 4,756
Outside the U.S. 4,921 - 7 5,271 - 4 5,509
------- --- ------- --- -------
Total Photography 9,403 - 8 10,231 0 10,265
------- --- ------- --- -------
Health Imaging
Inside the U.S. 1,089 + 2 1,067 + 8 984
Outside the U.S. 1,173 + 2 1,153 - 2 1,175
------- --- ------- --- -------
Total Health Imaging 2,262 + 2 2,220 + 3 2,159
------- --- ------- --- -------
Commercial Imaging
Inside the U.S. 820 +15 715 - 4 741
Outside the U.S. 639 - 9 702 - 5 738
------- --- ------- --- -------
Total Commercial Imaging 1,459 + 3 1,417 - 4 1,479
------- --- ------- --- -------
All Other
Inside the U.S. 68 0 68 -40 113
Outside the U.S. 42 -28 58 -21 73
------- --- ------- --- -------
Total All Other 110 -13 126 -32 186
------- --- ------- --- -------
Total Net Sales $13,234 - 5% $13,994 - 1% $14,089
======= === ======= === =======
Earnings from Operations by Reportable Segment and All Other
(in millions)
Photography $ 787 -45% $ 1,430 -16% $ 1,709
Health Imaging 323 -38 518 + 7 483
Commercial Imaging 165 -29 233 - 9 257
All Other (60) (11) (109)
------- --- ------- --- -------
Total of segments 1,215 -44 2,170 - 7 2,340
Restructuring costs and
credits and asset
impairments (732) 44 (350)
Wolf charge (77) - -
Environmental reserve (41) - -
Kmart charge (20) - -
------- --- ------- --- -------
Consolidated total $ 345 -84% $ 2,214 +11% $ 1,990
======= === ======= === =======
18
Net Earnings by Reportable Segment and All Other
(in millions)
2001 Change 2000 Change 1999
Photography $ 535 -48% $ 1,034 -18% $ 1,261
Health Imaging 221 -38 356 +10 324
Commercial Imaging 80 -11 90 -49 178
All Other (38) (2) (61)
------- --- ------- --- -------
Total of segments 798 -46 1,478 -13 1,702
Restructuring costs and
credits and asset
impairments (735) 44 (350)
Wolf charge (77) - -
Environmental reserve (41) - -
Kmart charge (20) - -
Interest expense (219) (178) (142)
Other corporate items 8 26 22
Income tax effects on
above items and taxes
not allocated to segments 362 37 160
------- --- ------- --- -------
Consolidated total $ 76 -95% $ 1,407 + 1% $ 1,392
======= === ======= === =======
2001 COMPARED WITH 2000
CONSOLIDATED
- ------------
Net worldwide sales were $13,234 million for 2001 as compared with
$13,994 million for 2000, representing a decrease of $760 million, or 5%
as reported, or 3% excluding the negative impact of exchange. Net sales
in the U.S. were $6,459 million for 2001 as compared with $6,810 million
for 2000, representing a decrease of $351 million, or 5%. Net sales
outside the U.S. were $6,775 million for 2001 as compared with $7,184
million for 2000, representing a decrease of $409 million, or 6% as
reported, or 2% excluding the negative impact of exchange. The U.S.
economic condition throughout the year and the events of September 11th
adversely impacted the Company's sales, particularly in the consumer film
product groups within the Photography segment. The total decrease in net
worldwide sales of $760 million, or 5%, was comprised of declines in
Photography sales of $828 million, or 8%, and All Other sales of $16
million, or 13%, partially offset by increases in Health Imaging sales of
$42 million, or 2%, and Commercial Imaging of $42 million or 3%. The
decrease in Photography sales were driven by declines in consumer,
entertainment origination and professional film products, consumer and
professional color paper, photofinishing revenues and consumer and
professional digital cameras.
Sales in emerging markets decreased 4% from 2000 to 2001. The net
decrease in emerging market sales was comprised of decreases in Latin
America, Asia, Greater China, and Asian, African and Middle Eastern
Region (EAMER) Emerging Markets of 5%, 4%, 7% and 7%, respectively,
partially offset by an increase in sales in the Greater Russia market of
17%.
19
Gross profit declined 19% with margins declining 5.7 percentage points
from 40.2% in 2000 to 34.5% in 2001. Excluding special charges to cost
of goods sold in 2001 and 2000 of $156 million and $50 million,
respectively, gross profit margins decreased 4.8 percentage points from
40.5% in 2000 to 35.7% in 2001. The decline in margin was driven
primarily by lower prices across many of the Company's traditional and
digital product groups within the Photography segment, a significant
decline in the margin in the Health Imaging segment, which was caused by
declining prices and mix, and the negative impact of exchange.
Selling, general and administrative expenses (SG&A) increased $113
million, or 4%, in 2001 as compared to 2000. The increase in SG&A
expenses is primarily attributable to charges of $73 million that the
Company recorded in 2001 relating to Kmart's bankruptcy, environmental
issues and the write-off of certain strategic investments that were
impaired.
Research and development (R&D) expenses remained flat, decreasing $5
million from $784 million in 2000 to $779 million in 2001.
Earnings from operations decreased $1,869 million from $2,214 million in
2000 to $345 million in 2001. The decrease in earnings from operations
is partially attributable to charges taken in 2001 totaling $891 million
primarily relating to restructuring and asset impairments, significant
customer bankruptcies and environmental issues. The remaining decrease
in earnings from operations is attributable to the decrease in sales and
gross profit margin percentage for the reasons described above.
Net earnings decreased $1,331 million from $1,407 million in 2000 to $76
million in 2001. The decrease in net earnings is attributable to lower
earnings from operations, as described above, the increase in interest
expense due to higher average borrowings during 2001, and the decrease in
other income (charges) due to lower gains on the sale of investments.
The actual tax rates for the years ended December 31, 2001 and December
31, 2000 were 30% and 34%, respectively. The decline in the Company's
2001 actual tax rate as compared with the 2000 actual tax rate is
primarily attributable to an increase in creditable foreign taxes and
an $11 million tax benefit related to favorable tax settlements reached
in the third quarter, which were partially offset by restructuring costs
recorded in the second, third and fourth quarters, which provided reduced
tax benefits to the Company.
PHOTOGRAPHY
- -----------------
Net worldwide sales for the Photography segment were $9,403 million for
2001 as compared with $10,231 million for 2000, representing a decrease
of $828 million, or 8% as reported, or 6% excluding the negative impact
of exchange. Photography net sales in the U.S. were $4,482 million for
2001 as compared with $4,960 million for 2000, representing a decrease of
$478 million, or 10%. Photography net sales outside the U.S. were $4,921
million for 2001 as compared with $5,271 million for 2000, representing a
decrease of $350 million, or 7% as reported, or 3% excluding the negative
impact of exchange.
20
Net worldwide sales of consumer film products, which include traditional
35mm film, Advantix film and one-time-use cameras in both the traditional
and APS formats, decreased 7% in 2001 relative to 2000, reflecting a 3%
decline in volume and a 2% decline in both exchange and price/mix. The
composition of consumer film products in 2001 as compared with 2000
reflects a 2% decrease in volumes for Advantix film, a 7% increase in
volume of one-time-use cameras and a 4% decline in volume of traditional
film product lines. Sales of the Company's consumer film products within
the U.S. decreased, reflecting a 5% decline in volume in 2001 as compared
with 2000. Sales of consumer film products outside the U.S. decreased 9%
in 2001 as compared with 2000, reflecting a 2% decrease in volume, a 3%
decline in price/mix and 4% decline due to foreign exchange. During
2001, the Company continued the efforts it began in 1998 to shift
consumers to the differentiated, higher value MAX and Advantix film
product lines. For 2001, sales of the MAX and Advantix product lines as
a percentage of total consumer roll film revenue increased from a level
of 62% in the fourth quarter of 2000 to 68% by the fourth quarter of
2001. The U.S. film industry volume was down slightly in 2001 relative
to 2000; however, the Company maintained full-year U.S. consumer film
market share for the fourth consecutive year. During 2001, the Company
reached its highest worldwide consumer film market share position in the
past nine years. The Company's traditional film business is developing
in new markets, and management believes the business is strong. However,
digital substitution is occurring and the Company continues its
development and application of digital technology in such areas as
wholesale and retail photofinishing. Digital substitution is occurring
more quickly in Japan and more slowly in the U.S., Europe and China.
Net worldwide sales of origination and print film to the entertainment
industry decreased 4% in 2001 as compared with 2000. Origination film
sales decreased 12%, reflecting a 9% decline in volume and a 3% decline
due to the negative impact of exchange. The decrease in origination film
sales was partially offset by an increase in print film of 4%, reflecting
a 9% increase in volume, offset by declines attributable to exchange and
price of 3% and 2%, respectively. After several consecutive years of
growth in origination film sales, this decrease reflects a slight
downward trend beginning in the second half of 2001 due to continued
economic weakness in the U.S., which caused a decrease in television
advertising spend and the resulting decline in the production of
television commercials. Additionally, the events of September 11th
caused a number of motion picture film releases and television show
productions to be delayed or postponed.
Net worldwide sales of professional film products, which include color
negative, color reversal and commercial black-and-white film, decreased
13% in 2001 as compared with 2000. The downward trend in the sale of
professional film products existed throughout 2001 and is the result of
ongoing digital capture substitution and continued economic weakness in a
number of markets worldwide.
21
Net worldwide sales of consumer color paper decreased 11% in 2001 as
compared with 2000, reflecting a 4% decline in both volume and price/mix
and a 3% decline due to exchange. The downward trend in color paper
sales existed throughout 2001 and is due to industry declines resulting
from digital substitution, market trends toward on-site processing where
there is a decreasing trend in double prints, and a reduction in mail-
order processing where Kodak has a strong share position. Effective
January 1, 2001, the Company and Mitsubishi Paper Mills Ltd. formed the
business venture, Diamic Ltd., a consolidated sales subsidiary, which is
expected to improve the Company's color paper market share in Japan. Net
worldwide sales of sensitized professional paper decreased 2% in 2001 as
compared with 2000, reflecting a 4% increase in volume, offset by a 4%
decrease in price and a 2% decline attributable to exchange.
Net worldwide revenues from on-site and overnight photofinishing
equipment, products and services decreased 16% in 2001 as compared with
2000. This downward trend, which existed throughout 2001, is the result
of a significant reduction in the placement of on-site photofinishing
equipment due to the saturation of the U.S. market and the market's
anticipation of the availability of new digital minilabs. During the
fourth quarter of 2001, the Company purchased two wholesale, overnight
photofinishing businesses in Europe. The Company acquired Spector Photo
Group's wholesale photofinishing and distribution activities in France,
Germany and Austria, and ColourCare Limited's wholesale processing and
printing operations in the U.K. The Company believes that these
acquisitions will facilitate its strategy to enhance retail
photofinishing activities, provide access to a broader base of customers,
create new service efficiencies and provide consumers with
technologically advanced digital imaging services.
Net worldwide sales of the Company's consumer digital cameras decreased
3% in 2001 as compared with 2000, reflecting volume growth of 35% offset
by declining prices and a 2% decrease due to negative exchange impact.
The significant volume growth over the 2000 levels was driven by strong
market acceptance of the new EasyShare consumer digital camera system,
competitive pricing initiatives, and a shift in the go-to-market strategy
to mass-market distribution channels. These factors have moved the
Company into the number two consumer market share position in the U.S.,
up from the number three position as of the end of 2000. Net worldwide
sales of professional digital cameras decreased 12% in 2001 as compared
with 2000, primarily attributable to a 20% decline in volume.
Net worldwide sales of the Company's inkjet photo paper increased 55% in
2001 as compared with 2000, reflecting volume growth of 42% and increased
prices. The inkjet photo paper demonstrated double-digit growth year-
over-year throughout 2001, reflecting the Company's increased promotional
activity at key retail accounts, improved merchandising and broader
channel distribution of the entire line of inkjet paper within the
product group. Net worldwide sales of professional thermal paper
remained flat, reflecting an 8% increase in volume offset by declines
attributable to price and negative exchange impact of 7% and 1%,
respectively.
22
The Company continued its strong focus on the consumer imaging digital
products and services, which include the picture maker kiosks and related
media and consumer digital services revenue from picture CD, "You've Got
Pictures" and Retailer.com. Combined revenues from the placement of
picture maker kiosks and the related media decreased 2% in 2001 as
compared with 2000, reflecting a decline in the volume of new kiosk
placements partially offset by a 15% increase in kiosk media volume.
This trend in increased media usage reflects the Company's focus on
creating new sales channels and increasing the media burn per kiosk.
Revenue from consumer digital services increased 15% in 2001 as compared
with 2000. In addition, the Company experienced an increase in digital
penetration in its Qualex wholesale labs. The principal products which
contributed to this increase were Picture CD and Retail.com. The average
digital penetration rate for the number of rolls processed increased each
quarter during 2001 up to a rate of 6.7% in the fourth quarter,
reflecting a 49% increase over the fourth quarter of 2000. In certain
major retail accounts, the digital penetration reached levels of up to
15%.
During the second quarter of 2001, the Company purchased Ofoto, Inc. The
Company believes that Ofoto will solidify the Company's leading position
in online imaging products and services. Since the acquisition, Ofoto
has demonstrated strong order growth, with the average order size
increasing by 31% over the 2000 level. In addition, the Ofoto customer
base reflected growth of approximately 12% per month throughout 2001.
The gross profit margin for the Photography segment was 36.2% in 2001 as
compared with 40.1% in 2000. The 3.9 percentage point decrease in gross
margin for the Photography segment was primarily attributable to
continued lower effective selling prices across virtually all product
groups, including the Company's core products of traditional film, paper,
and digital cameras, unfavorable exchange and flat distribution costs on
a lower sales base.
SG&A expenses remained flat, decreasing 1% in 2001 as compared with 2000.
As a percentage of sales, SG&A increased from 19.3% in 2000 to 20.9% in
2001. SG&A, excluding advertising, increased 4%, representing 14.6% of
sales in 2001 and 12.9% of sales in 2000. R&D expenses decreased 6% in
2001 as compared with 2000. As a percentage of sales, R&D increased
slightly from 5.6% in 2000 to 5.8% in 2001.
Earnings from operations decreased $643 million, or 45%, from $1,430
million in 2000 to $787 million in 2001, reflecting the lower sales and
gross profit levels described above. Net earnings decreased $499
million, or 48%, from $1,034 million in 2000 to $535 million in 2001 due
primarily to lower earnings from operations.
23
HEALTH IMAGING
- ---------------
Net worldwide sales for the Health Imaging segment were $2,262 million
for 2001 as compared with $2,220 million for 2000, representing an
increase of $42 million, or 2% as reported, or a 4% increase excluding
the negative impact of exchange. Net sales in the U.S. were $1,089
million for 2001 as compared with $1,067 million for 2000, representing
an increase of $22 million or 2%, while net sales outside the U.S. were
$1,173 million for 2001 as compared with $1,153 million for 2000,
representing an increase of $20 million, or 2% as reported, or 6%
excluding the negative impact of exchange. Sales in emerging markets
increased slightly, up 4% from 2000 to 2001.
Net sales of digital products, which include laser imagers (DryView
imagers and Wet laser printers), digital media (DryView and Wet laser
media), digital capture equipment (Computed Radiography capture equipment
and Direct Radiography equipment) and Picture Archiving and
Communications Systems (PACS), increased 11% in 2001 as compared with
2000. The increase in digital sales was principally the result of a 184%
increase in digital capture revenues resulting from a 201% increase in
volume, partially offset by declines attributable to price and foreign
exchange. Laser imaging equipment, services and film also contributed to
the increase in digital sales, as sales in these combined categories
increased 3% in 2001 as compared with 2000. The 3% increase in these
product groups was the result of increases in DryView laser imagers and
media of 8% and 33%, respectively, which were partially offset by the
expected decreases in Wet laser printers and media of 8% and 29%,
respectively, in 2001 as compared with 2000. Sales of PACS increased 9%
in 2001 as compared with 2000, reflecting a 16% increase in volume,
partially offset by declines attributable to price and foreign exchange
of 4% and 3%, respectively.
Sales of traditional medical products, which include analog film,
equipment, chemistry and services, decreased 7% in 2001 as compared with
2000. This decline was primarily attributable to a 12% decrease in non-
specialty medical sales. The decrease in these sales was partially
offset by an increase in specialty Mammography and Oncology sales, which
increased 4%, reflecting a 12% increase in volume, offset by declines
attributable to price/mix and foreign exchange of 6% and 2%,
respectively. Additionally, Dental sales increased 3% in 2001 as
compared with 2000, reflecting a 5% increase in volume, which was
partially offset by declines of 1% attributable to both price/mix and
foreign exchange.
The gross profit margin for the Health Imaging segment was 38.4% in 2001
as compared with 46.6% in 2000. The 8.2 percentage point decrease in
gross margin is primarily attributable to selling price declines in 2001,
driven by the continued conversion of customers to lower pricing levels
under the Company's Novation Group Purchasing Organization contracts and
a larger product mix shift from higher margin traditional analog film
toward lower margin digital capture and printing equipment.
Additionally, in 2001 as compared with 2000, the Company incurred higher
service costs due to an increase in volume of new digital capture
equipment and systems placements, compounded by short-term start-up
reliability issues with the new equipment.
24
SG&A expenses increased 4% in 2001 as compared with 2000. As a
percentage of sales, SG&A increased from 15.8% in 2000 to 16.2% in 2001.
R&D expenses increased 10% in 2001 as compared with 2000. As a
percentage of sales, R&D increased from 6.2% in 2000 to 6.7% in 2001.
Earnings from operations decreased $195 million, or 38%, from $518
million in 2000 to $323 million in 2001, which is attributable to the
decrease in the gross profit percentage in 2001 as compared with 2000, as
described above. Net earnings decreased $135 million, or 38%, from $356
million in 2000 to $221 million in 2001 due to lower earnings from
operations as described above.
COMMERCIAL IMAGING
- ------------------
Net worldwide sales for the Commercial Imaging segment were $1,459
million for 2001 as compared with $1,417 million for 2000, representing
an increase of $42 million, or 3% as reported, or 5% excluding the
negative impact of exchange. Net sales in the U.S. were $820 million for
2001 as compared with $715 million for 2000, representing an increase of
$105 million, or 15%. Net sales outside the U.S. were $639 million for
2001 as compared with $702 million for 2000, representing a decrease of
$63 million, or 9% as reported, or 4% excluding the negative impact of
exchange.
Net worldwide sales of document imaging equipment, products and services
increased 8% in 2001 as compared with 2000. The increase in sales was
primarily attributable to an increase in service revenue due to the
acquisition of the Bell and Howell Imaging business in the first quarter
of 2001. With the acquisition of the Bell and Howell Imaging business,
the Company continues to secure new exclusive third-party maintenance
agreements. The increase in revenue was also due to strong demand for
the Company's iNnovation series scanners, specifically the new i800
series high-volume document scanner.
Net worldwide sales of the Company's commercial and government products
and services increased 16% in 2001 as compared with 2000. The increase
in sales was principally due to an increase in revenues from government
products and services under its government contracts.
Net worldwide sales for wide-format inkjet products were a contributor to
the net increase in Commercial Imaging sales as these revenues increased
9% in 2001 as compared with 2000, reflecting year-over-year sales
increases throughout 2001. The Company continues to focus on initiatives
to grow this business as reflected in the worldwide launch of the 5260
wide-format inkjet printer in the fourth quarter of 2001 and the
acquisition of ENCAD, Inc. in January of 2002. Given ENCAD's strong
distribution position in this industry, the acquisition of ENCAD is
expected to provide the Company with a strong channel to the wide-format
inkjet printer market, which Kodak had not previously served.
25
Net worldwide sales of graphic arts products to Kodak Polychrome Graphics
(KPG), an unconsolidated joint venture affiliate in which the Company has
a 50% ownership interest, decreased 15% in 2001 as compared with 2000.
The largest contributor to this decline in sales was graphics film, which
experienced a 20% decrease, reflecting a 19% decrease in volume and small
declines attributable to price/mix and foreign exchange. The decrease in
sales to KPG is attributable to continued technology substitution and
economic weakness. During 2001, KPG continued to implement the
operational improvements it began in 2000, which returned the joint
venture to profitability in the first quarter and throughout 2001. In
the fourth quarter of 2001, KPG completed its acquisition of Imation's
color proofing and software business. The Company believes that
Imation's portfolio of products will complement and expand KPG's
offerings in the marketplace, which should drive sell-through of Kodak's
graphics products. The Company is the exclusive provider of graphic arts
products to KPG.
Net worldwide sales of products to NexPress, an unconsolidated joint
venture affiliate in which the Company has a 50% ownership interest,
decreased in 2001 as compared with 2000, reflecting a 15% decrease in
volume and declines in price/mix. In September 2001, the joint venture
achieved its key milestone in launching the NexPress 2100 printer product
at the Print '01 trade show. There is strong customer demand for the new
printer, which the Company believes should drive increased sell-through
of Kodak's products through the joint venture.
The gross profit margin for the Commercial Imaging segment was 30.7% in
2001 as compared with 33.4% in 2000. The 2.7 percentage point decrease
in gross margin is primarily attributable to lower selling prices in a
number of product groups within the segment.
SG&A expenses increased 19% in 2001 as compared with 2000. As a
percentage of sales, SG&A increased from 12.4% in 2000 to 14.4% in 2001.
R&D expenses decreased 5%. As a percentage of sales, R&D decreased from
4.3% in 2000 to 4.0% in 2001.
Earnings from operations decreased $68 million, or 29%, from $233 million
in 2000 to $165 million in 2001, which is attributable to the decrease in
the gross profit percentage and an increase in SG&A expenses in 2001 as
compared with 2000, as described above. Net earnings decreased $10
million, or 11%, from $90 million in 2000 to $80 million in 2001. Net
earnings include positive earnings from the Company's equity in the
income of KPG.
26
ALL OTHER
- ---------
Net worldwide sales of businesses comprising All Other were $110 million
for 2001 as compared with $126 million for 2000, representing a decrease
of $16 million, or 13% as reported, with no impact from exchange. Net
sales in the U.S. were flat at $68 million for both 2001 and 2000, while
net sales outside the U.S. were $42 million for 2001 as compared with $58
million for 2000, representing a decrease of $16 million, or 28% as
reported, or 30% excluding the impact of exchange.
The decrease in worldwide net sales was primarily attributable to a
decrease in optics revenues of 39% and a decrease in revenues due to the
divestment of the Eastman Software business in 2000. These decreases
were partially offset by a 10% increase in the sale of sensors.
In December 2001, the Company and SANYO announced the formation of a
business venture, SK Display Corporation, to manufacture and sell active
matrix organic light emitting diode (OLED) displays for consumer devices.
Kodak will have a 34% ownership interest in this venture. For 2001,
there were no sales relating to this business. In the future, the Company
will derive revenue through royalty income and sales of raw materials and
finished displays.
Earnings from operations decreased $49 million from a loss of $11 million
in 2000 to a loss of $60 million in 2001. The increase in the loss is
attributable to increased costs incurred for the continued development of
the OLED technology, the establishment of the SK Display business venture
and costs incurred to grow the existing optics and sensor businesses.
2000 COMPARED WITH 1999
CONSOLIDATED
- ------------
Net worldwide sales were $13,994 million for 2000 as compared with
$14,089 million for 1999, representing a decrease of $95 million, or 1%.
Excluding portfolio adjustments and the negative impact of foreign
exchange, which reduced revenue by 2% and 3%, respectively, net worldwide
sales increased 4% as compared with 1999. Net sales in the U.S. were
$6,810 million for 2000 as compared with $6,594 million for 1999,
representing an increase of $216 million, or 3%. Net sales outside the
U.S. were $7,184 million for 2000 as compared with $7,495 million for
1999, representing a decrease of $311 million, or 4% as reported, or an
increase of 2% excluding the negative impact of exchange. Deterioration
in the U.S. economic conditions in the second half of the year adversely
impacted the Company's sales, particularly within the Photography
segment. Net worldwide sales of consumer film products, professional
film products and traditional paper all decreased in 2000 as compared
with 1999. The decreases in these product groups were partially offset
by increases in film sales to the entertainment industry, photofinishing
revenues and consumer digital camera sales.
27
Sales in emerging markets increased 7% in 1999 as compared with 2000.
The increase in emerging market sales is comprised of increases in Latin
America, Asia, EAMER Emerging Markets, Greater Russia and Greater China
of 3%, 9%, 2%, 39% and 10%, respectively.
Gross profit declined 6% with margins declining 2.4 percentage points
from 42.6% in 1999 to 40.2% in 2000. Excluding special charges in both
years, gross profit margins decreased 2.8 percentage points from 43.3% in
1999 to 40.5% in 2000. The decline in margin was driven primarily by
lower prices, increased sales of lower margin products, like one-time-use
cameras and consumer digital cameras, and the negative impact of
exchange. Productivity gains that were recognized earlier in the year
were partially offset during the fourth quarter as the Company reduced
inventories in the face of slowing demand and retailer inventory
reductions.
SG&A expenses decreased 7% from 19.2% of sales in 1999 to 18.0% in 2000.
The reduction in SG&A expenses primarily reflects the success of the
Company's cost-reduction initiatives and portfolio actions.
R&D expenses decreased 4% during the year from 5.8% of sales in 1999 to
5.6% in 2000. This decline primarily reflects the benefit of portfolio
actions, primarily the divestiture of Eastman Software.
Earnings from operations increased 11% or $224 million in 2000.
Adjusting for special charges in both years, earnings from operations
declined $190 million or 8% as increased sales volumes in many of the
Company's businesses and the success of cost-savings initiatives did not
offset lower effective selling prices and adverse currency movements.
Interest expense increased 25% over 1999 reflecting higher average
borrowings and rising interest rates. Other income decreased by $165
million or 63% from 1999 due largely to the inclusion of gains of $120
million from the sale of the Image Bank and Motion Analysis Systems
Division in 1999. Excluding the gains from the sale of these businesses,
other income declined $45 million, primarily reflecting lower equity
earnings from the Company's KPG joint venture.
Net earnings increased $15 million, or 1%, in 2000 as compared with 1999.
Adjusting for special charges and credits in both years, net income
decreased $323 million, or 19%. The decrease in net earnings is
primarily attributable to a decline in the gross profit margin, an
increase in interest expense, and lower equity earnings from KPG.
The effective tax rate for both 2000 and 1999 was 34%.
28
PHOTOGRAPHY
- ----------------
Net worldwide sales for the Photography segment were $10,231 million for
2000 as compared with $10,265 million for 1999, representing a decrease
of $34 million, reflecting flat sales as reported, or a 3% increase
excluding the negative impact of exchange. Photography net sales in the
U.S. were $4,960 million for 2000 as compared with $4,756 million for
1999, representing an increase of $204 million, or 4%. Photography net
sales outside the U.S. were $5,271 million for 2000 as compared with
$5,509 million for 1999, representing a decrease of $238 million, or 4%
as reported, or an increase of 2% excluding the negative impact of
exchange.
Net worldwide sales of the Company's consumer film products, which
include traditional 35mm film, Advantix film and one-time-use cameras in
both the traditional and APS formats, decreased 1% in 2000 as compared
with 1999, reflecting increased volumes in all major categories, offset
by declines attributable to pricing pressures and adverse currency
movements. Sales of the Company's consumer film products within the U.S.
increased 2% in 2000 as compared with 1999, reflecting a 17% volume
increase in one-time-use cameras and a 15% volume increase in Advantix
film, partially offset by a 2% volume decrease in traditional 35mm film.
The Company maintained full-year U.S. consumer film market share for the
third consecutive year. Sales of the Company's consumer film products
outside the U.S. decreased 4% in 2000 as compared with 1999, reflecting
increased volumes which were offset by lower prices and negative currency
movements. During 2000, the Company continued the efforts it began in
1998 to shift consumers to the differentiated, higher value MAX and
Advantix film products. By the fourth quarter of 2000, combined U.S.
sales of MAX and Advantix films represented approximately 62% of total
U.S. consumer roll film revenues, up 6 percentage points as compared with
the year-end 1999 level.
Net worldwide sales of origination and print film to the entertainment
industry increased 4% in 2000 as compared with 1999. Print film sales
increased 10% in 2000 as compared with 1999, reflecting a 20% increase in
volume, offset by declines due to price and exchange of 6% and 4%,
respectively. The increase in print film sales were partially offset by
a decrease in origination film sales, which decreased 1% in 2000 as
compared with 1999, reflecting a 2% increase in volume offset by a 3%
decline due to foreign exchange. The net sales increase in film sales to
the entertainment industry reflects the recovery of the motion picture
film industry from the softness of a year ago.
Net worldwide sales of film products for the professional consumer, which
include color negative, color reversal and black-and-white film,
decreased 10% during 2000 as compared with 1999. The decrease in sales
of professional consumer film reflects a decrease in volume and pricing
pressures in most product groups, partially offset by an increase in
sales volume within the color negative product group. The net downward
trend in the sale of professional film products existed throughout 2000
and is due principally to the ongoing digital capture substitution.
29
Net worldwide sales of the Company's consumer color paper decreased 3% in
2000 as compared with 1999, reflecting lower prices and a negative
foreign exchange impact, which were partially offset by an increase in
volume. Net sales of color paper in the U.S. increased 1%, as 3% volume
increases outweighed the lower prices. Net sales outside the U.S.
decreased 5%, as increased volumes could not offset lower price/mix and
negative exchange movements. Net worldwide sales of sensitized paper for
the professional consumer decreased 10% in 2000 as compared with 1999,
reflecting declines due to volume, price and exchange of 2%, 5% and 3%,
respectively.
Revenues from the Company's on-site and overnight photofinishing
equipment, products and services increased 3% in 2000 as compared with
1999, primarily due to increased placements of minilabs during the year.
Net worldwide sales of the Company's consumer digital cameras increased
26% in 2000 as compared with 1999, reflecting a 72% increase in unit
volumes, offset by declines in both price and exchange. The lower sales
prices reflect the competitiveness in this business. Consumer digital
camera sales in the U.S. increased 17%, while sales outside the U.S.
increased 38%. The increase in sales of digital cameras both inside and
outside the U.S. reflect higher volumes, offset partially by lower
prices. As of the end of 2000, the Company had the number three consumer
market share position in the U.S. The net worldwide sales of digital
cameras for the professional consumer decreased 37% in 2000 as compared
with 1999, reflecting decreases in volume, price and exchange.
The net worldwide sales of the Company's inkjet photo paper increased 34%
in 2000 as compared with 1999, reflecting significant volume increases
over 1999 levels. Worldwide sales of thermal paper for the professional
consumer remained flat, reflecting a decrease of 1% in 2000 as compared
with 1999.
The Company continued its strong focus on the consumer imaging digital
business, which includes the picture maker kiosks/media and consumer
imaging digital products and services revenue from picture CD, "You've
Got Pictures," Print@Kodak and PictureVision. Revenues from the
placement of picture maker kiosks and the related media increased 17% in
2000 as compared with 1999, representing an increase in both equipment
and thermal media sales of 19% and 15%, respectively. This trend in
increased media usage reflects the Company's focus on creating new sales
channels and increasing the media burn per kiosk. As of the end of 2000,
the number of Kodak picture maker kiosk placements was in excess of
29,000, reflecting an increase of 6,000 over the 1999 level. Revenue
from consumer digital services increased 103% in 2000 as compared with
1999. In addition, the Company experienced an increase in digital
penetration in its Qualex wholesale labs. The average digital
penetration rate for the number of rolls processed averaged 4.1% for the
year.
The sales of the Motion Analysis Systems Division and The Image Bank in
1999 contributed to the decrease in revenues in 2000 as compared with
1999. As a result of these business sales, Photography segment sales
decreased $105 million in 2000 as compared with 1999. Other product
groups contributing to the net decrease in worldwide Photography segment
sales include CD Media, which experienced a sales decrease of 44% in 2000
as compared with 1999.
30
The gross profit margin for the Photography segment was 40.1% in 2000 as
compared with 43.8% in 1999. The 3.7 percentage point decrease in gross
margin is primarily attributable to continued lower effective selling
prices across virtually all product groups, including the Company's core
products of traditional film, paper, and digital cameras, unfavorable
product mix and adverse exchange movements.
SG&A expenses decreased 6% in 2000 as compared with 1999, reflecting the
benefits of the Company's cost-reduction efforts and a $12 million charge
recorded in SG&A in 1999 relating to business exits. As a percentage of
sales, SG&A decreased from 20.5% in 1999 to 19.3% in 2000. SG&A,
excluding advertising, decreased 8%, representing 12.9% of sales in 2000
and 13.9% of sales in 1999. R&D remained flat as a percentage of sales
at 5.6%.
Earnings from operations decreased $279 million, or 16%, from $1,709
million in 1999 to $1,430 million in 2000, reflecting the slightly lower
sales and the 3.9 percentage point decrease in the gross profit margin,
offset partially by charges taken in 1999 associated with the exit of the
sticker print kiosk product line, the write-off of the Calcomp investment
and the decrease in SG&A expenses described above. Net earnings
decreased $227 million, or 18%, from $1,261 million in 1999 to $1,034
million in 2000, reflecting lower earnings from operations and $120
million of other income in 1999 relating to the sale of The Image Bank
and the Motion Analysis Systems Division.
HEALTH IMAGING
- --------------
Net worldwide sales for the Health Imaging segment were $2,220 million
for 2000 as compared with $2,159 million for 1999, representing an
increase of $61 million, or 3% as reported, or 6% excluding the negative
impact of exchange. Health Imaging net sales in the U.S. were $1,067
million for 2000 as compared with $984 million for 1999, representing an
increase of $83 million or 8%, while net sales outside the U.S. were
$1,153 million for 2000 as compared with $1,175 million for 1999,
representing a decrease of $22 million, or 2% as reported, or an increase
of 4% excluding the negative impact of exchange. Sales in emerging
markets increased 7% in 2000 as compared with 1999.
Net worldwide sales of digital products (including laser printers,
digital media, digital capture equipment and PACS), increased 11% in 2000
as compared with 1999. The increase in sales of digital products in 2000
as compared with 1999 was driven by a 67% increase in DryView laser
imager placements, a 48% increase in DryView media due to higher volumes,
a 120% increase in digital capture products and a 25% increase in PACS.
The growth in sales from these product groups was partially offset by the
expected decline in wet laser imaging sales.
Sales of the Company's traditional medical products, including analog
film, equipment, chemistry and services, declined 3%. Within the
Company's traditional products, traditional analog film products
(excluding Mammography and Oncology and dental products) decreased 7%,
reflecting flat volumes, unfavorable exchange and anticipated price
declines. Also within the Company's traditional products, Mammography
and Oncology specialty product sales increased 12% in 2000 as compared
with 1999, reflecting higher volumes. Sales of traditional dental
products increased 5% over the same period due to slightly higher volumes
and favorable pricing.
31
The gross profit margin for the Health Imaging segment was relatively
flat at 46.6% in 2000 as compared with 47.1% in 1999.
SG&A expenses decreased 7% in 2000 as compared with 1999. As a
percentage of sales, SG&A decreased from 17.5% in 1999 to 15.8% in 2000,
reflecting the benefits of cost-control initiatives and the continued
successful integration of the Imation business acquired in December 1998.
R&D expenses increased 5% in 2000 as compared with 1999. As a percentage
of sales, R&D increased slightly from 6.1% in 1999 to 6.2% in 2000.
Earnings from operations increased $35 million, or 7%, from $483 million
in 1999 to $518 million in 2000, which is attributable to increased
sales, a consistent gross profit margin percentage year-over-year, and a
decrease in SG&A expenses, which more than offset the increase in R&D
spending. Net earnings increased $32 million, or 10%, from $324 million
in 1999 to $356 million in 2000.
COMMERCIAL IMAGING
- ------------------
Net worldwide sales for the Commercial Imaging segment were $1,417
million for 2000 as compared with $1,479 million for 1999, representing a
decrease of $62 million, or 4% as reported, or 1% excluding the negative
impact of exchange. Net sales in the U.S. were $715 million for 2000 as
compared with $741 million for 1999, representing a decrease of $26
million, or 4%. Net sales outside the U.S. were $702 million for 2000 as
compared with $738 million for 1999, representing a decrease of $36
million, or 5% as reported, or flat sales excluding the negative impact
of exchange.
Net worldwide sales in the Company's digital imaging equipment and
services product groups decreased 5% in 2000 as compared with 1999. The
decrease in sales was primarily attributable to a decrease in revenues in
the traditional equipment and media product groups, reflecting lower
volumes.
Net worldwide sales in the Company's commercial and government product
groups increased 26% in 2000 as compared with 1999. The increase in
sales was principally due to increased revenues under its government
contracts.
Net worldwide sales for wide-format inkjet products increased 63% in 2000
as compared with 1999, as the Company continued its efforts to improve
its position in this market.
Net worldwide sales of graphic arts products to KPG decreased 23% in 2000
as compared with 1999. With decreases in sales of all product groups
sold to KPG, including film, equipment, paper, digital media and
chemicals, the largest contributor to this decline in sales was graphics
film, which decreased 30%. The decrease in sales to KPG is attributable
to KPG's ongoing inventory re-balancing efforts, which is part of an
overall process improvement program within the joint venture. The joint
venture has begun to realize some of the benefits from the capacity
consolidation, workforce reductions, infrastructure realignment, and
other process improvements started earlier in 2000. The Company is the
exclusive provider of graphic arts products to KPG.
32
Net worldwide sales of products to NexPress were flat in 2000 as compared
with 1999, and immaterial to the Company.
The gross profit margin for the Commercial Imaging segment was 33.4% in
2000 as compared with 35.0% in 1999. The 1.6 percentage point decrease
in gross margin is primarily attributable to lower selling prices and
adverse currency movements.
SG&A expenses increased 5% in 2000 as compared with 1999. As a
percentage of sales, SG&A increased from 11.4% in 1999 to 12.4% in 2000.
R&D expenses decreased 31% in 2000 as compared with 1999. As a
percentage of sales, R&D decreased from 5.9% in 1999 to 4.3% in 2000.
Earnings from operations decreased $24 million, or 9%, from $257 million
in 1999 to $233 million in 2000, which is attributable to the slight
decrease in the gross profit margin percentage and an increase in SG&A
expenses in 2000 as compared with 1999, as described above. Net earnings
decreased $88 million, or 49%, from $178 million in 1999 to $90 million
in 2000. The decrease in net earnings is primarily attributable to
lower earnings from operations and the Company's equity in the losses of
KPG and Nexpress.
ALL OTHER
- -------------
Net worldwide sales for All Other were $126 million for 2000 as compared
with $186 million for 1999, representing a decrease of $60 million, or
32% as reported, or 31% excluding the negative impact from exchange. Net
sales in the U.S. were $68 million for 2000 as compared with $113 million
for 1999, representing a decrease of $45 million, or 40%, while net sales
outside the U.S. were $58 million for 2000 as compared with $73 million
for 1999, representing a decrease of $15 million, or 21% as reported, or
18% excluding the negative impact of exchange.
The decrease in worldwide net sales was primarily attributable to a
decrease in revenues due to the divestment of the Eastman Software
business in 2000, the sale of the Company's Office Imaging business in
1999 and a decrease in the sale of semi-finished equipment and products
to third parties, which was partially offset by an increase in optics
revenues.
Earnings from operations increased $98 million from a loss of $109
million in 1999 to a loss of $11 million in 2000. The decrease in the
loss from 1999 to 2000 is primarily attributable to a reduction in
operating losses from the Eastman Software and the Office Imaging
businesses due to the sale of these businesses in 2000 and 1999,
respectively.
33
RESTRUCTURING COSTS AND OTHER
- -----------------------------
The following table summarizes the activity with respect to the
restructuring charges and reversals recorded in 2001, 2000 and 1999 and
the remaining balance in the related restructuring and asset impairment
reserves at December 31, 2001:
(in millions)
Long-term Exit
Severance Inventory Assets Costs
------------------ --------- --------- -----
Number of
Employees Reserve Reserve Reserve Reserve Total
--------- ------- ------- ------- ------- -----
1999 charges 3,400 $ 250 $ - $ 90 $ 10 $ 350
1999 utilization (400) (21) (90) - (111)
------ ------ --- ----- ---- -----
Ending balance at
December 31, 1999 3,000 229 - - 10 239
2000 reversal (500) (44) - - - (44)
2000 utilization (2,500) (185) - - (10) (195)
------ ----- --- ----- ---- -----
Ending balance at
December 31, 2000 - - - - - -
2001 charges 7,200 351 84 215 48 698
2001 reversal (275) (20) - - - (20)
2001 utilization (2,700) (56) (84) (215) (5) (360)
------ ----- --- ----- ---- -----
Ending balance at
December 31, 2001 4,225 $ 275 $ - $ - $ 43 $ 318
====== ===== === ===== ==== =====
2001 Restructuring Programs and Other
- -------------------------------------
During 2001, the Company recorded a total charge for its two separate
restructuring programs, the first of which was implemented in the second
and third quarters of 2001 and the second of which was implemented in
the fourth quarter of 2001, of $698 million, primarily for the
rationalization of the U.S. photofinishing operations, the elimination
of excess manufacturing capacity, the exit of certain operations and
reductions in research and development positions and selling, general
and administrative positions worldwide. The total restructuring amount
of $698 million was comprised of charges for severance, long-term
assets, inventory, and exit costs of $351 million, $215 million, $84
million, and $48 million, respectively. Additionally, during 2001, the
Company recorded asset impairments relating to the Wolf Camera
bankruptcy, its photofinishing operations, relocation costs in
connection with a closed manufacturing site and investments in strategic
and non-strategic ventures (See Note 6) of $77 million, $42 million, $18
million and $15 million, respectively.
34
Approximately $351 million of the charges of $698 million was for
employee severance covering 7,200 worldwide positions. The geographic
breakdown includes approximately 4,300 employees in the U.S. and Canada
and 2,900 throughout the rest of the world. The 7,200 personnel were
associated with the realignment of manufacturing (2,450), service and
photofinishing operations (1,950), R&D (425) and administrative (2,375)
functions in various locations of the Company's worldwide operations.
Approximately 2,700 positions were eliminated by the end of 2001, with
the majority of the remaining positions to be eliminated during the
early part of 2002. In the fourth quarter of 2001, the Company reversed
$20 million of the second quarter severance charge as certain severance
actions, primarily in the European, African and Middle Eastern Region
(EAMER) and Japan, will be completed at a total cost less than
originally estimated. This is the result of a lower actual severance
cost per employee as compared with the original amounts estimated. In
addition, approximately 275 (150 service and photofinishing, 100
administrative and 25 R&D) fewer employees will be separated. The
original severance accrual of $351 million and the $20 million reversal
were included in restructuring costs and other.
The Company included $119 million of the $698 million provision in cost
of goods sold, representing an $84 million inventory write-down
associated with product line discontinuances and $35 million related to
accelerated depreciation on assets presently used in operations which
were disposed of during the latter part of 2001 or will be disposed of
through abandonment within the first three months of 2002.
Also included in restructuring costs and other were write-offs and costs
associated with the Company's exit from non-strategic operations and
investments, consisting of $180 million for the write-off of capital
assets, goodwill and investments, and $48 million for exit costs. The
exit costs consist principally of lease termination expenses, shutdown
costs and vendor penalty payments, which have been accrued on an
undiscounted basis.
Restructuring actions related to the Photography, Health and Commercial
segments amounted to $360 million, $43 million and $21 million,
respectively. The remaining $254 million were for actions associated
with the manufacturing, research and development, and selling and
administrative functions shared across all the segments.
The Company realized savings of approximately $50 million from these
programs in 2001. Total savings in 2002 are estimated to be $450
million from these programs. The net cash cost of these programs will
be recovered by the end of 2002. All actions under these programs will
be completed by the end of 2002.
In 2001, the Company recorded a $77 million charge associated with the
bankruptcy of the Wolf Camera Inc. consumer retail business. This
amount is reflected in restructuring costs and other.
35
During 2001, the Company recorded a $42 million charge representing the
write-off of certain lease residuals, receivables and capital assets
resulting primarily from technology changes in the transition from
optical to digital photofinishing equipment within the Company's onsite
photofinishing operations. The charges for the lease residuals and
capital assets totaling $19 million have been included in cost of goods
sold. The remaining $23 million has been included in restructuring
costs and other.
1999 Program
- ------------
During the third quarter of 1999, the Company recorded a restructuring
charge of $350 million relating to worldwide manufacturing and
photofinishing consolidation and reductions in selling, general and
administrative positions worldwide. Approximately $250 million of the
$350 million restructuring charge was for severance covering 3,400
worldwide positions. The geographic breakdown included approximately
1,475 employees in the U.S. and Canada and 1,925 throughout the rest of
the world. These reductions were associated with the realignment of
manufacturing (1,500) and service and photofinishing operations (870),
and the consolidation of sales and marketing (460), R&D (70) and
administrative (500) functions in various locations of the Company's
worldwide operations.
In the second quarter of 2000, the Company reversed approximately $44
million of severance-related costs originally recorded as part of this
program. The reversal was the result of two factors which occurred
during the second quarter. First, certain manufacturing operations
originally planned to be outsourced were retained, as cost-beneficial
arrangements for the Company could not be reached. Second, severance
actions in Japan and Europe were completed at a cost less than
originally estimated. Consequently, approximately 500 (450
manufacturing and 50 administrative) fewer employees were separated.
The original $350 million charge in 1999 and the $44 million reversal
are included in restructuring costs and other. Aside from the actions
described above, all other projects included in this program were
effectively completed by December 31, 2000. A total of 2,900 employees
were terminated under this program in 2000 and 1999.
Also included in restructuring costs and other are $90 million for
asset write-downs and $10 million for shutdown costs. These charges are
primarily for vacant buildings to be sold, equipment to be shut down and
other costs related to the Company's sale and exit of its Elmgrove
manufacturing facility.
Restructuring actions related to the Photography, Health and Commercial
segments amounted to $106 million, $11 million and $6 million,
respectively. The remaining $227 million were for actions associated
with the manufacturing, research and development, and selling and
administrative functions shared across all the segments.
The Company realized approximate savings associated with this program of
$90 million in 2000, and an additional $50 million of savings in 2001,
resulting in a total annual run rate savings of $140 million. The net
cash cost of this program was recovered in two years.
36
Other Cost Reductions
- ---------------------
In addition to the charges discussed above, the Company incurred charges
of approximately $18 million, $50 million and $11 million in 2001, 2000
and 1999, respectively, for the accelerated depreciation of certain
assets which remained in use until the Company sold its Elmgrove
manufacturing facility in the second quarter, and related relocation
costs. These charges were included in cost of goods sold. The sale of
this facility did not result in a material gain or loss to the Company.
- -----------------------------------------------------------------------
OUTLOOK
- --------
The Company expects 2002 to be another difficult economic year, with full
year revenues level with 2001 and some earnings improvement in the second
half of 2002. We do not expect to see any real upturn in the economy
until 2003, with a very gradual return to consumer spending habits and
behavior that will positively affect our business growth. The Company
will continue to take actions to minimize the financial impact of this
slowdown. These actions include efforts to better manage production and
inventory levels and reduce capital spending, while at the same time
reducing discretionary spending to further hold down costs. The Company
will also complete the implementation of the restructuring programs
announced in 2001 to make its operations more cost competitive and improve
margins, particularly in its health imaging and consumer digital camera
businesses.
During 2000, the Company completed an ongoing program of real estate
divestitures and portfolio rationalization that contributed to other
income (charges) reaching an annual average of $100 million over the past
three years. Now that this program is largely complete, the other income
(charges) category is expected to run in the negative $50 million to
negative $100 million range annually.
The Company expects its effective tax rate to approximate 29% in 2002.
The lower rate is attributable to favorable tax benefits from the
elimination of goodwill amortization and expected increased earnings from
operations in certain lower-taxed jurisdictions outside the U.S.
From a liquidity and capital resource perspective, the Company expects to
generate $6 billion in cash flow after dividends during the next six
years, with approximately $400 million of this being achieved in 2002.
This will enable the Company to maintain its dividend, pay down debt and
make acquisitions that promote profitable growth. Cash flow is defined as
net cash flows (after dividends), excluding the impacts from debt and
transactions in the Company's own equity, such as stock repurchases and
the proceeds from the exercise of stock options.
37
THE EURO
- --------
The Treaty on European Union provided that an economic and monetary
union (EMU) be established in Europe whereby a single European currency,
the Euro, replaces the currencies of participating member states. The
Euro was introduced on January 1, 1999, at which time the value of
participating member state currencies was irrevocably fixed against the
Euro and the European Currency Unit (ECU) was replaced at the rate of
one Euro to one ECU. For the three-year transitional period ending
December 31, 2001, the national currencies of member states continued to
circulate, but as sub-units of the Euro. New public debt was issued in
Euros and existing debt was redenominated into Euros. At the end of the
transitional period, Euro banknotes and coins were issued, and the
national currencies of the member states will cease to be legal tender
no later than June 30, 2002. The countries that adopted the Euro on
January 1, 1999 were Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain.
Greece was part of the transition. The Company has operations in all of
these countries.
As a result of the Euro conversion, it is possible that selling prices
of the Company's products and services will experience downward
pressure, as current price variations among countries are reduced due to
easy comparability of Euro prices across countries. Prices will tend to
harmonize, although value added taxes and transportation costs will
still justify price differentials. Adoption of the Euro will probably
accelerate existing market and pricing trends including pan-European
buying and general price erosion.
On the other hand, currency exchange and hedging costs will be reduced;
lower prices and pan-European buying will benefit the Company in its
purchasing endeavors; the number of banks and suppliers needed will be
reduced; there will be less variation in payment terms; and it will be
easier for the Company to expand into new marketing channels such as
mail order and Internet marketing.
The Company made changes in areas such as marketing and pricing,
purchasing, contracts, payroll, taxes, cash management and treasury
operations. Under the "no compulsion no prohibition" rules, billing
systems were modified so that the Company is able to show total gross,
value added tax, and net in Euros on national currency invoices. This
enables customers to pay in the new Euro currency if they wish to do so.
Countries that have installed ERP/SAP software in connection with the
Company's enterprise resource planning project are able to invoice and
receive payments in Euros as well as in other currencies. Systems for
pricing, payroll and expense reimbursements continued to use national
currencies until year-end 2001. The functional currencies in the
affected countries were the national currencies until May 2001 (except
Germany and Austria (October 2001)), when they changed to the Euro.
Systems changes for countries not on SAP (Finland and Greece) were
implemented in 2001.
- --------------------------------------------------------------------------
38
LIQUIDITY AND CAPITAL RESOURCES
2001
Net cash provided by operating activities in 2001 was $2,065 million, as
net earnings of $76 million, adjusted for depreciation and amortization,
and restructuring costs, asset impairments and other charges provided
$1,825 million of operating cash. Also contributing to operating cash
was a decrease in receivables of $252 million and a decrease in
inventories of $461 million. This was partially offset by decreases in
liabilities, excluding borrowings, of $529 million related primarily to
severance payments for restructuring programs and reductions in accounts
payable and accrued benefit costs. Net cash used in investing activities
of $1,047 million in 2001 was utilized primarily for capital expenditures
of $743 million and business acquisitions of $306 million. Net cash used
in financing activities of $808 million in 2001 was primarily the result
of stock repurchases and dividend payments as discussed below.
The Company declared cash dividends per share of $.44 in each of the
first three quarters and $.89 in the fourth quarter of 2001. Total cash
dividends of $643 million were paid in 2001. In October 2001, the
Company's Board of Directors approved a change in dividend policy from
quarterly dividend payments to semi-annual dividend payments. Dividends,
when declared, will be paid on the 10th business day of July and December
to shareholders of record on the first business day of the preceding
month. These payment dates serve to better align the dividend
disbursements with the seasonal cash flow pattern of the business, which
is more concentrated in the second half of the year. This action
resulted in the Company making five dividend payments in 2001.
Net working capital, excluding short-term borrowings, decreased to $863
million from $1,482 million at year-end 2000. This decrease is mainly
attributable to lower receivable and inventory balances, as discussed
above.
Capital additions, excluding equipment purchased for lease, were $680
million in 2001, with the majority of the spending supporting new
products, manufacturing productivity and quality improvements,
infrastructure improvements, ongoing environmental and safety
initiatives, and renovations due to relocations associated with
restructuring actions taken in 1999. In 2002, the Company expects to
reduce its capital spending, excluding acquisitions and equipment
purchased for lease, to a range of $550 million to $600 million. Capital
additions by segment are included in Note 21.
Under the $2 billion stock repurchase program announced on April 15,
1999, the Company repurchased $44 million of its shares in 2001. As of
March 2, 2001, the Company suspended the stock repurchase program in a
move designed to accelerate debt reduction and increase financial
flexibility. At the time of the suspension of the program, the Company
had repurchased approximately $1.8 billion of its shares under this
program.
39
The Company anticipates the net cash cost of the restructuring charge
recorded in 2001 to be approximately $182 million after tax, which will
be recovered through cost savings in less than two years. A majority of
the severance-related actions associated with this charge are expected to
be completed in the early part of 2002.
The Company currently expects to fund expenditures for capital
requirements, dividend payments and liquidity needs from cash generated
from operations. Cash balances and financing arrangements will be used
to bridge timing differences between expenditures and cash generated from
operations. The Company has $2.45 billion in revolving credit facilities
established in 2001, which are available to support the Company's
commercial paper program and for general corporate purposes. The credit
agreements are comprised of a 364-day commitment at $1.225 billion
expiring in July 2002 and a 5-year commitment at $1.225 billion expiring
in July 2006. If unused, they have a commitment fee of $3 million per
year, at the Company's current credit rating. Interest on amounts
borrowed under these facilities is calculated at rates based on spreads
above certain reference rates and the Company's credit rating.
At December 31, 2001, the Company had $1.1 billion in commercial paper
outstanding, with a weighted average interest rate of 3.6%. In addition,
the Company had short-term borrowings, excluding the current portion of
long-term debt, of $238 million with a weighted average interest rate of
6.2%.
During the second quarter of 2001, the Company increased its medium-term
note program from $1.0 billion to $2.2 billion for issuance of debt
securities due nine months or more from date of issue. At December 31,
2001, the Company had debt securities outstanding of $850 million under
this medium-term note program, with $150 million of this balance due
within one year. The Company has $1.35 billion available under its
medium-term note program for the issuance of new notes. Total long-term
debt at December 31, 2001, including these amounts was as follows:
Description and Interest Maturity Dates
Rates of 2001 Borrowings of 2001 Borrowings 2001 2000
Notes:
3.74% 2003 $ 10 $ -
6.38% - 8.25% 2002 - 2006 959 473
9.20% - 9.95% 2003 - 2021 191 191
Debentures:
1.11% - 3.16% 2003 - 2004 42 61
Other:
2.42% 2004 190 -
5.94% - 6.66% 2002 - 2010 430 591
------ ------
$1,822 $1,316
====== ======
40
During the fourth quarter of 2001, the Company's credit ratings were
lowered by Standard & Poor's and Moody's to A- and A3 for long-term debt
and A2 and P2 for short-term debt, respectively. These actions were due
to lower earnings as a result of the economic slowdown, industry factors
and other world events. The lower credit ratings caused the Company to
experience slightly higher interest rates, although the relative cost of
borrowing was very low on a comparative basis.
The Company is in compliance with all covenants or other requirements set
forth in its credit agreements or indentures. Further, the Company does
not have any rating downgrade triggers that would accelerate the maturity
dates of its debt, with the exception of a $110 million note due in 2003
that can be accelerated if the Company's rating falls below BBB.
However, further downgrades in the Company's credit rating or disruptions
in the capital markets could adversely impact borrowing costs and the
nature of its funding alternatives. The Company has access to $2.45
billion in bank revolving credit facilities to meet unanticipated funding
needs should it be necessary.
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At December 31, 2001, these
guarantees totaled approximately $277 million. Within the total amount
of $277 million, the Company is guaranteeing debt in the amount of $175
million for Kodak Polychrome Graphics, an unconsolidated affiliate in
which the Company has a 50% ownership interest. The balance of the
amount is principally comprised of other loan guarantees and guarantees
of customer amounts due to banks in connection with various banks'
financing of customers' purchase of equipment and products from Kodak.
These guarantees would require payment from Kodak only in the event of
default on payment by the respective debtor. Management believes the
likelihood is remote that material payments will be required under these
guarantees.
In connection with the formation of the SK Display Corporation with SANYO
Electric Co., Ltd., the Company will contribute approximately $119
million, comprised of $19 million in cash and $100 million in loan
guarantees during 2002 and 2003.
41
Qualex, a wholly-owned subsidiary of Kodak, has a 50% ownership interest
in Express Stop Financing (ESF), which is a joint venture partnership
between Qualex and Dana Credit Corporation (DCC), a wholly-owned
subsidiary of Dana Corporation. Qualex accounts for its investment in
ESF under the equity method of accounting. ESF provides a long-term
financing solution to Qualex's photofinishing customers in connection
with Qualex's leasing of photofinishing equipment to third parties, as
opposed to Qualex extending long-term credit. As part of the operations
of its photofinishing business, Qualex sells equipment under a sales-type
lease arrangement and records a long-term receivable. These long-term
receivables are subsequently sold to ESF without recourse to Qualex. ESF
incurs long-term debt to finance a portion of the purchase of the
receivables from Qualex. This debt is collateralized solely by the long-
term receivables purchased from Qualex and, in part, by a $60 million
guarantee from DCC. Qualex provides no guarantee or collateral to ESF's
creditors in connection with the debt, and ESF's debt is non-recourse to
Qualex. Qualex's only continued involvement in connection with the sale
of the long-term receivables is the servicing of the related equipment
under the leases. Qualex has continued revenue streams in connection
with this equipment through future sales of photofinishing consumables,
including paper and chemicals, and maintenance.
Qualex has risk with respect to the ESF arrangement as it relates to its
continued ability to procure spare parts from the primary photofinishing
equipment vendor to fulfill its servicing obligations under the leases.
The primary photofinishing equipment vendor is currently experiencing
financial difficulty, which raises concern about Qualex's ability to
procure the required service parts. Although the lessees' requirement to
pay ESF under the lease agreements is not contingent upon Qualex's
fulfillment of its servicing obligations under the leases, under the
agreement with ESF, Qualex would be responsible for any deficiency in the
amount of rent not paid to ESF as a result of any lessee's claim
regarding maintenance or supply services not provided by Qualex. Such
lease payments would be made in accordance with the original lease terms,
which generally extend over 5 to 7 years. ESF's outstanding lease
receivable amount was approximately $570 million at December 31, 2001.
To mitigate the risk of not being able to fulfill its service
obligations, Qualex has built up its inventory of these spare parts and
has begun refurbishing used parts. Additionally, Qualex has entered into
spare parts escrow agreements under which bills of materials, parts
drawings, intellectual property and other information necessary to
manufacture the parts were put into escrow arrangements. In the event
that the primary photofinishing equipment vendor were unable to supply
the necessary parts to Qualex, Qualex would gain access to the
information in the escrow arrangements to either manufacture or have
manufactured the parts necessary to fulfill its servicing obligations.
Management is currently negotiating alternatives with the photofinishing
equipment vendor to further mitigate the above risks.
42
In December 2001, Standard & Poor's downgraded the credit ratings of Dana
Corporation to BB for long-term debt and B for short-term debt, which are
below investment grade. This action created a Guarantor Termination
Event under the Receivables Purchase Agreement (RPA) that ESF has with
its banks under the RPA. To cure the Guarantor Termination Event, in
January 2002, ESF posted $60 million of additional collateral in the form
of cash and long-term lease receivables. At that time, if Dana
Corporation were downgraded to below BB by Standard & Poor's or below Ba2
by Moody's, that action would constitute a Termination Event under the
RPA and ESF would be forced to renegotiate its debt arrangements with the
banks. On February 22, 2002, Moody's downgraded Dana Corporation to a
Ba3 credit rating, thus creating a Termination Event.
Under the Termination Event, the banks can require ESF to put up an
additional 6% collateral against the debt (on a debt balance of
approximately $405 million at the time of filing the annual report, the
additional collateral would be approximately $24 million), the interest
rate on the debt could be increased 2 percentage points and Qualex could
be precluded from selling any new receivables to ESF until the
Termination Event has been waived by the banks. ESF does not currently
have the ability to put up the additional collateral and, therefore, ESF
would require additional capital infusions by DCC and Qualex. If DCC
and/or Qualex do not provide the additional capital funding to ESF, the
banks could accelerate the debt and force ESF to liquidate its long-term
lease receivables to service the debt. Management believes that it is
unlikely that the banks would accelerate the debt, and force ESF to sell
the receivables to a third party to generate cash to satisfy the debt,
due to the high-quality nature of the underlying long-term receivable
portfolio. Furthermore, under this scenario, the banks would not have
any recourse against Qualex; rather, the impact on Qualex would be
limited to the need to find an alternative source of financing for future
photofinishing equipment placements. Additionally, under this scenario,
it is not expected that the operations of the customers who are leasing
the equipment under these long-term lease arrangements would be affected
such that Qualex's revenue stream for future sales of photofinishing
consumables would be jeopardized. ESF is beginning negotiations with the
banks to resolve the Termination Event.
The current RPA arrangement expires on July 23, 2002, at which time the
RPA can be extended or terminated. If the RPA is terminated, Qualex will
no longer be able to sell its lease receivables to ESF and will need to
find an alternative financing solution for future sales of its
photofinishing equipment. Under the partnership agreement between Qualex
and DCC, subject to certain conditions, ESF has exclusivity rights to
purchase Qualex's long-term lease receivables. The term of the
partnership agreement continues through October 6, 2003. In light of the
Termination Event referred to above and the timing of the partnership
termination, Qualex is currently considering alternative financing
solutions for prospective leasing activity with its customers.
At December 31, 2001, the Company had outstanding letters of credit
totaling $42 million and surety bonds in the amount of $94 million to
ensure the completion of environmental remediations and payment of
possible casualty and workers' compensation claims. See Note 10 for
other commitments of the Company.
43
2000
Net cash provided by operating activities in 2000 was $982 million, as
net earnings of $1,407 million, adjusted for depreciation and
amortization, provided $2,296 million of operating cash. This was
partially offset by increases in receivables of $247 million, largely due
to the timing of sales late in the fourth quarter; increases in
inventories of $282 million, reflecting lower than expected sales
performance in the second half of the year, particularly for consumer
films, paper and digital cameras; and decreases in liabilities, excluding
borrowings, of $755 million related primarily to severance payments for
restructuring programs and reductions in accounts payable and accrued
benefit costs. Net cash used in investing activities of $783 million in
2000 was utilized primarily for capital expenditures of $945 million and
business acquisitions of $130 million, partially offset by proceeds of
$277 million from sales of businesses and assets. Net cash used in
financing activities of $314 million in 2000 was the result of stock
repurchases and dividend payments, largely funded by net increases in
borrowings of $1,313 million.
Cash dividends per share of $1.76, payable quarterly, were declared in
2000. Total cash dividends of approximately $545 million were paid in
2000.
Net working capital, excluding short-term borrowings and the current
portion of long-term debt, increased to $1,482 million from $838 million
at year-end 1999. This increase is mainly attributable to lower payable
levels and higher receivable and inventory balances, as discussed above.
Capital additions were $945 million in 2000, with the majority of the
spending supporting manufacturing productivity and quality improvements,
new products including e-commerce initiatives, digital photofinishing and
digital cameras, and ongoing environmental and safety initiatives.
Under the $2 billion stock repurchase program announced on April 15,
1999, the Company repurchased 21.6 million shares for $1,099 million in
2000. On December 7, 2000, Kodak's board of directors authorized the
repurchase of up to an additional $2 billion of the Company's stock over
the next 4 years.
1999
Net cash provided by operating activities in 1999 was $1,933 million, as
net earnings of $1,392 million, adjusted for depreciation and
amortization, and restructuring, asset impairments, and other charges
provided $2,763 million of operating cash. This was partially offset by
decreases in liabilities, excluding borrowings, of $478 million relating
primarily to severance payments for restructuring programs, and other
changes in working capital. Net cash used in investing activities of
$685 million in 1999 was utilized primarily for capital expenditures of
$1,127 million, offset by proceeds of $422 million from sales of assets
and businesses. Net cash used in financing activities of $1,327 million
in 1999 was the result of stock repurchases and dividend payments,
partially offset by net increases in borrowings of $89 million.
44
Cash dividends per share of $1.76, payable quarterly, were declared in
1999. Total cash dividends of approximately $563 million were paid in
1999.
Net working capital, excluding short-term borrowings and the current
portion of long-term debt, decreased to $838 million from $939 million at
year-end 1998. This decrease is primarily attributable to lower cash
balances at December 31, 1999.
Capital additions were $1,127 million in 1999, with the majority of the
spending relating to the Company's China manufacturing operations,
productivity improvements and ongoing environmental and safety spending.
Under its stock repurchase programs, the Company repurchased $925 million
of its shares in 1999. During the second quarter of 1999, the Company
completed stock repurchases under its 1996 $2 billion authorization.
That program, initiated in May 1996, resulted in 26.8 million shares
being repurchased. Under the $2 billion program announced on April 15,
1999, the Company repurchased an additional 9.8 million shares for $656
million in 1999. Completion of the $2 billion stock repurchase program
will be funded by available cash reserves and cash from operations.
On April 14, 1999, the Company announced a series of worldwide
environmental goals to provide for greater reductions in emissions, waste
generated, water usage and energy consumption, preservation of natural
resources and improvements to the Company's environmental management
system. These goals will result in spending, primarily capital in
nature, of approximately $100 million over the next five years.
The net cash cost of the restructuring charge recorded in the third
quarter of 1999 was approximately $140 million after tax, which was
recovered through cost savings in less than two years. Severance-related
actions associated with this charge were completed by the end of the
third quarter of 2000. See Note 14.
- -------------------------------------------------------------------------
45
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB or the
Board) issued Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," collectively referred to as the "Standards," which are effective
for the Company as of January 1, 2002, except as noted below. SFAS No.
141 supercedes Accounting Principles Board Opinion (APB) No. 16,
"Business Combinations." The provisions of SFAS No. 141 (1) require that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, (2) provide specific criteria for the
initial recognition and measurement of intangible assets apart from
goodwill, and (3) require that unamortized negative goodwill be written
off immediately as an extraordinary gain instead of being deferred and
amortized. SFAS No. 141 also requires that, upon adoption of SFAS No.
142, the Company reclassify the carrying amounts of certain intangible
assets into or out of goodwill, based on certain criteria. SFAS No. 142
supercedes APB No. 17, "Intangible Assets," and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to
their initial recognition. The provisions of SFAS No. 142 (1) prohibit
the amortization of goodwill and indefinite-lived intangible assets, (2)
require that goodwill and indefinite-lived intangible assets be tested
annually for impairment (and in interim periods if certain events occur
indicating that the carrying value of goodwill and/or indefinite-lived
intangible assets may be impaired), (3) require that reporting units be
identified for the purpose of assessing potential future impairments of
goodwill, and (4) remove the forty-year limitation on the amortization
period of intangible assets that have finite lives.
The Company will adopt the provisions of SFAS No. 142 in its first
quarter ended March 31, 2002. The Company is in the process of preparing
for its adoption of SFAS No. 142 and is making the determinations as to
its reporting units and the amounts of goodwill, intangible assets, other
assets, and liabilities allocated to those reporting units. The Company
will no longer record annual amortization relating to its existing
goodwill ($154 million for 2002, $131 million after tax). The Company is
evaluating the useful lives assigned to its intangible assets and does
not anticipate any material changes to such useful lives.
46
SFAS No. 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step of the goodwill impairment test
is to test for a potential impairment. The second step of the goodwill
impairment test is to measure the amount of the impairment loss. The
Company expects to complete steps one and two of the goodwill impairment
test during the first quarter of 2002. Any impairment loss resulting
from the transitional impairment tests will be reflected as the
cumulative effect of a change in accounting principle in the first
quarter of 2002. The Company does not believe that the results of these
impairment tests will have a material impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets to be held and used, to be disposed of other than by sale
and to be disposed of by sale. Although the Statement retains certain of
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," it supercedes
SFAS No. 121 and APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS No. 144
also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Statement is
effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years,
and will thus be adopted by the Company, as required, on January 1, 2002.
The adoption of SFAS No. 144 is not expected to have a material impact on
the Company's consolidated financial statements.
The Emerging Issues Task Force (EITF) has issued EITF Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products)." The EITF provides guidance with
respect to the statement of earnings classification of and the accounting
for recognition and measurement of consideration given by a vendor to a
customer, which includes sales incentive offers labeled as discounts,
coupons, rebates and free products or services as well as arrangements
labeled as slotting fees, cooperative advertising and buydowns. The
guidance with respect to the appropriate statement of earnings
classification of the consideration given by a vendor to a customer is
effective for annual and interim periods beginning after December 15,
2001. Upon adoption, financial statements for prior periods presented
for comparative purposes should be reclassified to comply with the
requirements under the EITF.
The guidance with respect to the accounting for recognition and
measurement of consideration given by a vendor to a customer is effective
for annual and interim periods beginning after December 15, 2001. The
impact on the statement of earnings resulting from the adoption of the
EITF should be reported as a cumulative effect of a change in accounting
principle or applied prospectively to new sales incentives offered on or
after the effective date. The impact of the guidance under EITF 01-09 on
the Company's financial statements has not yet been determined.
- -------------------------------------------------------------------------
47
OTHER
Cash expenditures for pollution prevention and waste treatment for the
Company's current manufacturing facilities were as follows:
2001 2000 1999
(in millions)
Recurring costs for
pollution prevention and waste
treatment $ 68 $ 72 $ 69
Capital expenditures for pollution
prevention and waste
treatment 27 36 20
Site remediation costs 2 3 5
---- ---- ----
Total $ 97 $111 $ 94
==== ==== ====
At December 31, 2001 and 2000, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $162 million
and $113 million, respectively. These amounts are reported in other
long-term liabilities.
The Company is currently implementing a Corrective Action Program
required by the Resource Conservation and Recovery Act (RCRA) at the
Kodak Park site in Rochester, NY. As part of this Program, the Company
has completed the RCRA Facility Assessment (RFA), a broad-based
environmental investigation of the site. The Company is currently in
the process of completing, and in some cases has completed, RCRA
Facility Investigations (RFIs) and Corrective Measures Studies (CMS) for
areas at the site. At December 31, 2001, estimated future remediation
costs of $70 million are accrued on an undiscounted basis by the Company
and are included in the environmental accruals reported in other long-
term liabilities.
Additionally, the Company has retained certain obligations for
environmental remediation and Superfund matters related to certain sites
associated with the non-imaging health businesses sold in 1994. In
addition, the Company has been identified as a potentially responsible
party (PRP) in connection with the non-imaging health businesses in five
active Superfund sites. At December 31, 2001, estimated future
remediation costs of $51 million are accrued on an undiscounted basis by
the Company and are included in the environmental accruals reported in
other long-term liabilities.
48
The Company recorded a $41 million charge in the fourth quarter of 2001
for additional environmental reserves. This amount has been included in
selling, general and administrative expenses. Approximately $34 million
has been provided for two former manufacturing sites located outside the
United States. Investigations were completed by an external
environmental consultant in the fourth quarter of 2001, which
facilitated the completion of cost estimates for the future remediation
and monitoring of these sites. In addition, the accrual incorporates
the Company's estimate of its cost to repurchase one of the sites and
demolish the buildings in preparation for its possible conversion to a
public park. The establishment of these accruals is consistent with
Kodak's policy to record accruals for environmental remediation
obligations generally no later than the completion of feasibility
studies. The additional $7 million recorded during the fourth quarter
2001 represents the estimated increased costs associated with the site
remediation of the non-imaging health businesses sold in 1994 discussed
above ($4 million) and increases in estimated costs ($3 million)
associated with the remediation of other facilities which are not
material to the Company's financial position, results of operations,
cash flows or competitive position. These aforementioned environmental
accruals have been established on an undiscounted basis.
Cash expenditures for the aforementioned remediation and monitoring
activities are expected to be incurred over the next thirty years for
each site. The accrual reflects the Company's cost estimate of the
amount it will incur under the agreed-upon or proposed work plans. The
Company's cost estimate is based upon existing technology and has not
been reduced by possible recoveries from third parties. The Company's
estimate includes equipment and operating costs for remediation and long-
term monitoring of the sites.
A Consent Decree was signed in 1994 in settlement of a civil complaint
brought by the U.S. Environmental Protection Agency and the U.S.
Department of Justice under which the Company is subject to a Compliance
Schedule by which the Company improved its waste characterization
procedures, upgraded one of its incinerators, and is evaluating and
upgrading its industrial sewer system. The total expenditures required
to complete this program are currently estimated to be approximately $24
million over the next nine years. These expenditures are primarily
capital in nature and, therefore, are not included in the environmental
accrual at December 31, 2001.
The Company is presently designated as a PRP under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended (The Superfund law), or under similar state laws, for
environmental assessment and cleanup costs as the result of the
Company's alleged arrangements for disposal of hazardous substances at
six active Superfund sites. With respect to each of these sites, the
Company's actual or potential allocated share of responsibility is
small. Furthermore, numerous other PRPs have also been designated at
these sites and, although the law imposes joint and several liability on
PRPs, the Company's historical experience demonstrates that these costs
are shared with other PRPs. Settlements and costs paid by the Company
in Superfund matters to date have not been material. Future costs are
also not expected to be material to the Company's financial position or
results of operations.
49
The Clean Air Act Amendments were enacted in 1990. Expenditures to
comply with the Clean Air Act implementing regulations issued to date
have not been material and have been primarily capital in nature. In
addition, future expenditures for existing regulations, which are
primarily capital in nature, are not expected to be material. Many of
the regulations to be promulgated pursuant to this Act have not been
issued.
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of reasonably possible
outcomes. Estimates developed in the early stages of remediation can
vary significantly. A finite estimate of cost does not normally become
fixed and determinable at a specific point in time. Rather, the costs
associated with environmental remediation become estimable over a
continuum of events and activities that help to frame and define a
liability and the Company continually updates its cost estimates. It is
reasonably possible that the Company's recorded estimates of its
liabilities may change and there is no assurance that additional costs
greater than the amounts accrued will not be incurred or that changes in
environmental laws or their interpretation will not require that
additional amounts be spent.
Factors which cause uncertainties for the Company include, but are not
limited to, the effectiveness of the current work plans in achieving
targeted results and proposals of regulatory agencies for desired
methods and outcomes. It is possible that financial position, results
of operations, cash flows or competitive positions could be affected by
the impact of the ultimate resolution of these matters.
- ------------------------------------------------------------------------
RISK FACTORS
The following cautionary statements address a number of important factors
that could cause the actual results to differ from those expressed or
implied in the forward-looking statements contained in this document.
Unanticipated delays in implementing certain product strategies
(including category expansion, digitization, OLED displays and digital
products) would affect Kodak's revenues. The process for each product
strategy is complex. Kodak's ability to successfully transition products
and deploy new products requires that Kodak make accurate predictions of
the product development schedule as well as volumes, product mix, and
customer demand. The Company may anticipate demand and perceived market
acceptance that differs from the products realizable customer demand and
revenue stream. In addition, if the pricing element of each strategy is
not sufficiently competitive with those of current and future competing
products, Kodak may lose market share, adversely affecting the Company's
revenues and prospects.
Kodak's ability to implement its intellectual property licensing
strategies could also affect the Company's revenue and earnings. Kodak
has invested millions of dollars in technologies and needs to protect its
intellectual property. The establishment and enforcement of licensing
agreements provides a revenue stream that protects Kodak's ability to
further innovate and help the marketplace grow. Kodak's failure to
properly manage the development of its intellectual property could
adversely affect the future of these patents and the market opportunities
that could result from the use of this property. Kodak's failure to
manage the costs associated with the pursuit of these licenses could
adversely affect the profitability of these operations.
50
In the event Kodak were unable to align its e-commerce strategies with
the trend toward industry standards and services, the Company's business
could be adversely affected. The availability of software and standards
related to e-commerce strategies is of an emerging nature. Kodak's
ability to successfully align with the industry standards and services
and ensure timely solutions, requires the Company to make accurate
predictions of the future accepted standards and services.
Kodak's completion of planned information systems upgrades, including
SAP, if delayed, could adversely affect its business. As Kodak continues
to expand the planned information services, the Company must continue to
balance the investment of the planned deployment with the need to upgrade
the vendor software. Kodak's failure to successfully upgrade to the
vendor-supported version could result in risks to system availability,
which could adversely affect the business.
Kodak intends to complete various portfolio actions required to
strengthen its digital imaging portfolio, consolidate the photofinishing
operations worldwide and expand its services business. In the event that
Kodak fails to effectively manage the highly profitable portfolio of its
more traditional businesses simultaneously with the integration of these
acquisitions and should Kodak fail to streamline and simplify the
business, Kodak could lose market opportunities that result in an adverse
impact on its revenue.
In 2002, Kodak continues to focus on reduction of inventories,
improvement in receivable performance, reduction in capital expenditures,
and improvement in manufacturing productivity.
Unanticipated delays in continued inventory reduction could
adversely impact Kodak's cash outlook. Planned inventory reductions could
be compromised by slower sales that could result from continued weak
global economic conditions. Purchasers' uncertainty about the extent of
the global economic downturn could result in lower demand for products
and services. The competitive environment and the transition to digital
products and services could also place pressures on Kodak's sales and
market share. In the event Kodak was unable to successfully manage these
issues in a timely manner, they could adversely impact the planned
inventory reductions.
Unanticipated delays in the improvement plan for accounts receivable
could also adversely impact Kodak's cash outlook. A continued weak
economy could slow customer payment patterns. Competitive pressures in
major segments may drive erosion in the financial condition of Kodak's
customers. These same pressures may adversely affect efforts to shorten
customer payment terms. Kodak's ability to manage customer risk while
maintaining competitive share may adversely affect intended accounts
receivable improvement in 2002.
In addition, a delay in Kodak's planned reduction in capital
spending could adversely impact the company's cash outlook. An increase
in capital spending may occur if more projects than planned were found to
generate significant positive returns in the future. Further, if the
Company deems it necessary to spend more on regulatory requirements or
there are unanticipated general maintenance obligations requiring more
capital spending than planned, the additional monies required would
create an adverse impact on Kodak's cash flow.
51
Delays in Kodak's planned improvement in manufacturing productivity could
negatively impact the gross margins of the company. Again a continued
weak economy could result in lower volumes in the factory than planned
which would negatively impact gross margins. Kodak's failure to
successfully manage operational performance factors could delay or
curtail planned improvements in manufacturing productivity. If Kodak is
unable to successfully negotiate raw material costs with its suppliers,
or incurs adverse pricing on certain of its commodity-based raw
materials, reduction in the gross margins could occur.
Kodak's planned improvement in supply chain efficiency, if delayed, could
adversely affect its business by impacting the shipments of certain
products in their desired quantities and in a timely manner. The planned
efficiencies could be compromised if Kodak expands into new markets with
new applications that are not fully understood or if the portfolio
broadens beyond that anticipated when the plans were initiated. The
unforeseen changes in manufacturing capacity could compromise the supply
chain efficiencies.
The risk of doing business in developing markets like China, India,
Brazil, Argentina, Mexico, Russia and other economically volatile areas
could adversely affect Kodak's operations and earnings. Such risks
include the financial instability among customers in these regions, the
political instability and potential conflicts among developing nations
and other non-economic factors such as irregular trade flows that need to
be managed successfully with the help of the local governments. Kodak
has typically experienced longer accounts receivable cycles in emerging
markets, in particular the Latin American markets and the emerging
markets of Europe. Kodak's failure to successfully manage economic,
political and other risks relating to doing business in developing
countries and economically and politically volatile areas could adversely
affect its business.
In early 2002, the United States dollar was eliminated as Argentina's
monetary benchmark, resulting in significant currency devaluation. The
Company engages in hedging programs aimed at limiting in part the impact
of currency fluctuations and does not expect that the devaluation event
in Argentina will result in a future material charge. However, there can
be no guarantee that economic circumstances in Argentina or elsewhere
will not worsen, which could result in future effects on earnings should
such events occur. The Company's failure to successfully manage
economic, political and other risks relating to doing business in
developing countries could adversely affect its business.
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates and
interest rates, which may adversely affect its results of operations and
financial position.
52
Competition remains intense in the imaging sector in the consumer,
commercial and health segments. On the consumer side increased price
competition has been driven somewhat by consumers' conservative spending
behaviors during times of economic weakness. Consumers have passed over
branded products to private label products. On the health and commercial
side, aggressive pricing tactics intensified in the contract negotiations
as competitors were vying for customers and market share domestically.
Continued economic weakness could also adversely impact Kodak's revenues
and growth rate. Failure to successfully manage the consumers' return to
branded products if and when the economic conditions improve could
adversely impact Kodak's revenue and growth rate. If the pricing and
programs are not sufficiently competitive with those offered by Kodak's
current and future competitors, Kodak may lose market share, adversely
affecting its revenue and gross margins.
The Company's strategy to balance the consumer shift from analog to
digital, and the nature and pace of technology substitution could impact
Kodak's revenues, earnings and growth rate. Competition remains intense
in the digital industry with a large number of competitors vying for
customers and market share domestically and internationally. Kodak
intends to continue new program introductions and competitive pricing to
drive demands in the marketplace. The process of developing new products
and services is complex and often uncertain due to the frequent
introduction of new products that offer improved performance and pricing.
Kodak's ability to successfully transition products and deploy new
products requires that Kodak make accurate predictions of the product
development schedule as well as volumes, product mix, customer demand and
configuration. Kodak may anticipate demand and perceived market
acceptance that differs from the product's realizable customer demand and
revenue stream. Further, in the face of intense industry competition,
any delay in the development, production or marketing of a new product
could decrease any advantage Kodak may have to be the first or among the
first to market. Kodak's failure to carry out a product rollout in the
time frame anticipated and in the quantities appropriate to customer
demand could adversely affect the future demand for its products and
services and have an adverse effect on its business.
The impact of continuing customer consolidation and buying power could
have an adverse impact on Kodak's revenue, gross margins, and earnings.
In the competitive consumer retail environment there is a movement from
small individually owned retailers to larger and commonly known mass
merchants. In the commercial environment, there is a continuing
consolidation of various group purchasing organizations. The resellers
and distributors may elect to use suppliers other than Kodak. Kodak's
challenge is to successfully negotiate contracts that provide the most
favorable conditions to the company in the face of price and program
aggressive competitors.
53
The terrorist attacks that took place in the United States on September
11, 2001 were unprecedented events that have created many economic and
political uncertainties, some of which may materially harm the Company's
business and revenues. The disruption of the Company's business as a
result of the terrorist attacks of September 11, 2001 on the United
States, including transportation and supply chain disruptions and
deferrals of customer purchasing decisions, had an immediate adverse
impact on its business. The long-term effects of the September 11, 2001
attacks on the Company's business and revenues are unknown. The
potential for future terrorist attacks, the national and international
responses to terrorist attacks, and other acts of war or hostility have
created many economic and political uncertainties, which could adversely
affect the Company's business and revenues in the short- or long-term in
ways that cannot presently be predicted.
Continued weak global economic conditions could adversely impact the
Company's revenues and growth rate. Continued softness in the Company's
markets and purchasers' uncertainty about the extent of the global
economic downturn could result in lower demand for products and services.
While worsening economic conditions have had a negative impact on results
of operations, revenues, gross margins and earnings could further
deteriorate as a result of economic conditions. Furthermore, there can
be no assurances as to the timing of an economic upturn.
- -------------------------------------------------------------------------
54
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the United States Private
Securities Litigation Reform Act of 1995. For example, references to the
Company's revenue and cash flow expectations for 2002 are forward-looking
statements.
Actual results may differ from those expressed or implied in forward-
looking statements. The forward-looking statements contained in this
report are subject to a number of risk factors, including the successful:
implementation of product strategies (including category expansion,
digitization, OLED, and digital products); implementation of intellectual
property licensing strategies; development and implementation of e-
commerce strategies; completion of information systems upgrades,
including SAP; completion of various portfolio actions; reduction of
inventories; improvement in manufacturing productivity; improvement in
receivables performance; reduction in capital expenditures; improvement
in supply chain efficiency; development of the Company's business in
emerging markets like China, India, Brazil, Mexico, and Russia. The
forward-looking statements contained in this report are subject to the
following additional risk factors: inherent unpredictability of currency
fluctuations and raw material costs; competitive actions, including
pricing; the nature and pace of technology substitution, including the
analog-to-digital shift; continuing customer consolidation and buying
power; impact of September 11th; general economic and business
conditions, including the timing of a business upturn; and other factors
disclosed previously and from time to time in the Company's filings with
the Securities and Exchange Commission.
Any forward-looking statements in this report should be evaluated in
light of these important risk factors.
- -------------------------------------------------------------------------
MARKET PRICE DATA
2001 2000
Price per
share: High Low High Low
1st Qtr. $46.65 $38.19 $67.50 $53.31
2nd Qtr. 49.95 37.76 63.63 53.19
3rd Qtr. 47.38 30.75 65.69 39.75
4th Qtr. 36.10 24.40 48.50 35.31
- --------------------------------------------------------------------------
SUMMARY OF OPERATING DATA
A summary of operating data for 2001 and for the four years prior is shown
on page 112.
- --------------------------------------------------------------------------
55
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates,
commodity prices, and interest rates, which may adversely affect its
results of operations and financial position. In seeking to minimize the
risks and/or costs associated with such activities, the Company may enter
into derivative contracts. See also Note 11.
Foreign currency forward contracts are used to hedge existing foreign
currency denominated assets and liabilities, especially those of the
Company's International Treasury Center, as well as forecasted foreign
currency denominated intercompany sales. Silver forward contracts are
used to mitigate the Company's risk to fluctuating silver prices. The
Company's exposure to changes in interest rates results from its
investing and borrowing activities used to meet its liquidity needs.
Long-term debt is generally used to finance long-term investments, while
short-term debt is used to meet working capital requirements. An
interest rate swap agreement was used to convert some floating-rate debt
to fixed-rate debt. The Company does not utilize financial instruments
for trading or other speculative purposes.
A sensitivity analysis indicates that if foreign currency exchange rates
at December 31, 2001 and 2000 increased 10%, the Company would incur
losses of $25 million and $88 million on foreign currency forward
contracts outstanding at December 31, 2001 and 2000, respectively. Such
losses would be substantially offset by gains from the revaluation or
settlement of the underlying positions hedged.
A sensitivity analysis indicates that, based on broker-quoted termination
values, if the price of silver decreased 10% from spot rates at December
31, 2001 and 2000, the fair value of silver forward contracts would be
reduced by $11 million and $27 million, respectively. Such losses in
fair value, if realized, would be offset by lower costs of manufacturing
silver-containing products.
The Company is exposed to interest rate risk primarily through its
borrowing activities and, to a lesser extent, through investments in
marketable securities. The Company utilizes U.S. dollar denominated and
foreign currency denominated borrowings to fund its working capital and
investment needs. The majority of short-term and long-term borrowings
are in fixed-rate instruments. There is inherent roll-over risk for debt
and marketable securities as they mature and are renewed at current
market rates. The extent of this risk is not predictable because of the
variability of future interest rates and business financing requirements.
Using a yield-to-maturity analysis, if December 31, 2001 interest rates
increased 10% (about 43 basis points) with the current period's level of
debt, there would be decreases in fair value of short-term and long-term
borrowings of $1 million and $28 million, respectively. If December 31,
2000 interest rates increased 10% (about 62 basis points) with the
December 31, 2000 level of debt, there would be decreases in fair value
of short-term and long-term borrowings of $2 million and $20 million,
respectively.
56
The Company's financial instrument counterparties are high-quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk by
requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit
exposure amounts. The maximum credit exposure at December 31, 2001 was
not significant to the Company.
- -------------------------------------------------------------------------
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the
consolidated financial statements and related notes which appear on
pages 59 through 111. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America, and include certain amounts that are based on
management's best estimates and judgments.
The Company's accounting systems include extensive internal controls
designed to provide reasonable assurance of the reliability of its
financial records and the proper safeguarding and use of its assets.
Such controls are based on established policies and procedures, are
implemented by trained, skilled personnel with an appropriate
segregation of duties, and are monitored through a comprehensive
internal audit program. The Company's policies and procedures prescribe
that the Company and all employees are to maintain the highest ethical
standards and that its business practices throughout the world are to be
conducted in a manner which is above reproach.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, who were
responsible for conducting their audits in accordance with auditing
standards generally accepted in the United States of America. Their
resulting report is shown below.
The Board of Directors exercises its responsibility for these
financial statements through its Audit Committee, which consists
entirely of non-management Board members. The independent accountants
and internal auditors have full and free access to the Audit Committee.
The Audit Committee meets periodically with the independent accountants
and the Director of Corporate Auditing, both privately and with
management present, to discuss accounting, auditing and financial
reporting matters.
Daniel A. Carp Robert H. Brust
Chairman, and Chief Financial Officer, and
Chief Executive Officer Executive Vice President
January 23, 2002 January 23, 2002
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eastman Kodak Company
In our opinion, the accompanying consolidated financial statements and
financial statement schedule listed in the index appearing under Item
14(a)(1) and (2) on page 115 of this Annual Report on Form 10-K present
fairly, in all material respects, the financial position of Eastman Kodak
Company and subsidiary companies (Kodak) at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Rochester, New York
January 23, 2002
59
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31,
(in millions, except per share
data)
2001 2000 1999
Net sales $13,234 $13,994 $14,089
Cost of goods sold 8,670 8,375 8,086
------- ------- -------
Gross profit 4,564 5,619 6,003
Selling, general and
administrative expenses 2,627 2,514 2,701
Research and development costs 779 784 817
Goodwill amortization 154 151 145
Restructuring costs (credits)
and other 659 (44) 350
------- ------- -------
Earnings from operations 345 2,214 1,990
Interest expense 219 178 142
Other income (charges) (18) 96 261
------- ------- -------
Earnings before income taxes 108 2,132 2,109
Provision for income taxes 32 725 717
------ ------- -------
NET EARNINGS $ 76 $ 1,407 $ 1,392
====== ======= =======
Basic earnings per share $ .26 $ 4.62 $ 4.38
====== ======= =======
Diluted earnings per share $ .26 $ 4.59 $ 4.33
====== ======= =======
Earnings used in basic and diluted
earnings per share $ 76 $ 1,407 $ 1,392
Number of common shares used in
basic earnings per share 290.6 304.9 318.0
Incremental shares from
assumed conversion of options 0.4 1.7 3.5
------ ------- -------
Number of common shares used in
diluted earnings per share 291.0 306.6 321.5
====== ======= =======
Cash dividends per share $ 2.21 $ 1.76 $ 1.76
====== ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
60
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, except share and per
share data) At December 31,
2001 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 448 $ 246
Receivables, net 2,337 2,653
Inventories, net 1,137 1,718
Deferred income taxes 521 575
Other current assets 240 299
------- -------
Total current assets 4,683 5,491
------- -------
Property, plant and equipment, net 5,659 5,919
Goodwill, net 948 947
Other long-term assets 2,072 1,855
------- -------
TOTAL ASSETS $13,362 $14,212
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,276 $ 3,403
Short-term borrowings 1,378 2,058
Current portion of long-term debt 156 148
Accrued income taxes 544 606
------- -------
Total current liabilities 5,354 6,215
Long-term debt, net of current portion 1,666 1,166
Postemployment liabilities 2,728 2,722
Other long-term liabilities 720 681
------- -------
Total liabilities 10,468 10,784
------- -------
Commitments and Contingencies (Note 10)
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
950,000,000 shares authorized;
391,292,760 shares issued in 2001
and 2000; 290,929,701 and
290,484,266 shares outstanding
in 2001 and 2000 978 978
Additional paid in capital 849 871
Retained earnings 7,431 7,869
Accumulated other comprehensive loss (597) (482)
------- -------
8,661 9,236
Treasury stock, at cost
100,363,059 shares in 2001 and
100,808,494 shares in 2000 5,767 5,808
------- -------
Total shareholders' equity 2,894 3,428
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,362 $14,212
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
61
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in millions, except share and per share data)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Stock* Capital Earnings Income (Loss) Stock Total
Shareholders' Equity December 31, 1998 $978 $ 902 $ 6,163 $(111) $(3,944) $3,988
Net earnings - - 1,392 - - 1,392
------
Other comprehensive income (loss):
Unrealized gains on available-for-sale
securities ($115 million pre-tax) - - - 83 - 83
Reclassification adjustment for gains
on available-for-sale securities
included in net earnings
($20 million pre-tax) - - - (13) - (13)
Currency translation adjustments - - - (118) - (118)
Minimum pension liability adjustment
($26 million pre-tax) - - - 14 - 14
----- ------
Other comprehensive loss - - - (34) - (34)
----- ------
Comprehensive income - - - - - 1,358
Cash dividends declared ($1.76 per common
share) - - (560) - - (560)
Treasury stock repurchased (13,482,648
shares) - - - - (925) (925)
Treasury stock issued under employee plans
(1,105,220 shares) - (24) - - 64 40
Tax reductions - employee plans - 11 - - - 11
---- ----- ------- ----- ------- ------
Shareholders' Equity December 31, 1999 $978 $ 889 $ 6,995 $(145) $(4,805) $3,912
62
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Cont'd.
(in millions, except share and per share data)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Stock* Capital Earnings Income (Loss) Stock Total
Shareholders' Equity December 31, 1999 $978 $ 889 $ 6,995 $(145) $(4,805) $3,912
Net earnings - - 1,407 - - 1,407
------
Other comprehensive income (loss):
Unrealized losses on available-for-sale
securities ($77 million pre-tax) - - - (48) - (48)
Reclassification adjustment for gains
on available-for-sale securities
included in net earnings
($94 million pre-tax) - - - (58) - (58)
Unrealized loss arising from
hedging activity ($55 million pre-tax) - - - (34) - (34)
Reclassification adjustment for hedging
related gains included in net earnings
($6 million pre-tax) - - - (4) - (4)
Currency translation adjustments - - - (194) - (194)
Minimum pension liability adjustment
($2 million pre-tax) - - - 1 - 1
----- ------
Other comprehensive loss - - - (337) - (337)
----- ------
Comprehensive income - - - - - 1,070
Cash dividends declared ($1.76 per common
share) - - (533) - - (533)
Treasury stock repurchased (21,575,536
shares) - - - - (1,099) (1,099)
Treasury stock issued under employee plans
(1,638,872 shares) - (33) - - 96 63
Tax reductions - employee plans - 15 - - - 15
---- ----- ------- ----- ------- ------
Shareholders' Equity December 31, 2000 $978 $ 871 $ 7,869 $(482) $(5,808) $3,428
63
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Cont'd.
(in millions, except share and per share data)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Stock* Capital Earnings Income (Loss) Stock Total
Shareholders' Equity December 31, 2000 $978 $ 871 $ 7,869 $(482) $(5,808) $3,428
Net earnings - - 76 - - 76
------
Other comprehensive income (loss):
Unrealized losses on available-for-sale
securities ($34 million pre-tax) - - - (21) - (21)
Reclassification adjustment for gains
on available-for-sale securities
included in net earnings
($13 million pre-tax) - - - 8 - 8
Unrealized gain arising from
hedging activity ($6 million pre-tax) - - - 4 - 4
Reclassification adjustment for hedging
related losses included in net earnings
($48 million pre-tax) - - - 29 - 29
Currency translation adjustments - - - (98) - (98)
Minimum pension liability adjustment
($60 million pre-tax) - - - (37) - (37)
----- ------
Other comprehensive loss - - - (115) - (115)
----- ------
Comprehensive loss - - - - - (39)
Cash dividends declared ($2.21 per common
share) - - (514) - - (514)
Treasury stock repurchased (947,670 shares) - - - - (41) (41)
Treasury stock issued under employee plans
(1,393,105 shares) - (25) - - 82 57
Tax reductions - employee plans - 3 - - - 3
---- ----- ------- ----- ------- ------
Shareholders' Equity December 31, 2001 $978 $ 849 $ 7,431 $(597) $(5,767) $2,894
==== ===== ======= ===== ======= ======
* There are 100 million shares of $10 par value preferred stock authorized,
none of which have been issued.
The accompanying notes are an integral part of these consolidated financial
statements.
64
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31,
(in millions) 2001 2000 1999
Cash flows from operating activities:
Net earnings $ 76 $1,407 $1,392
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 919 889 918
Gain on sales of businesses/assets - (117) (162)
Restructuring costs, asset impairments
and other charges 830 - 453
(Benefit) provision for deferred
income taxes (44) 235 247
Decrease (increase) in receivables 252 (247) (121)
Decrease (increase) in inventories 461 (282) (201)
Decrease in liabilities
excluding borrowings (529) (755) (478)
Other items, net 100 (148) (115)
------ ------ -----
Total adjustments 1,989 (425) 541
------ ------ ------
Net cash provided by operating
activities 2,065 982 1,933
------ ------ ------
Cash flows from investing activities:
Additions to properties (743) (945) (1,127)
Net proceeds from sales of
businesses/assets - 277 422
Acquisitions, net of cash acquired (306) (130) (3)
Marketable securities - sales 54 84 127
Marketable securities - purchases (52) (69) (104)
------ ------ ------
Net cash used in investing
activities (1,047) (783) (685)
------ ------ ------
Cash flows from financing activities:
Net (decrease) increase in
borrowings with original maturities
of 90 days or less (695) 939 (136)
Proceeds from other borrowings 1,907 1,310 1,343
Repayment of other borrowings (1,355) (936) (1,118)
Dividends to shareholders (643) (545) (563)
Exercise of employee stock options 22 43 44
Stock repurchase programs (44) (1,125) (897)
------ ------ ------
Net cash used in
financing activities (808) (314) (1,327)
------ ------ ------
Effect of exchange rate changes on cash (8) (12) (5)
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 202 (127) (84)
Cash and cash equivalents, beginning
of year 246 373 457
------ ------ ------
Cash and cash equivalents, end of year $ 448 $ 246 $ 373
====== ====== ======
65
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(in millions)
Cash paid for interest and income taxes was:
2001 2000 1999
Interest, net of portion capitalized
of $12, $40 and $36 $214 $166 $120
Income taxes 120 486 445
The following transactions are not reflected in the Consolidated Statement
of Cash Flows:
2001 2000 1999
Contribution of assets to Kodak
Polychrome Graphics joint venture $ - $ - $ 13
Minimum pension liability adjustment 37 (1) (14)
Liabilities assumed in acquisitions 142 31 -
The accompanying notes are an integral part of these consolidated
financial statements.
66
Eastman Kodak Company and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
COMPANY OPERATIONS
Eastman Kodak Company (the Company or Kodak) is engaged primarily in
developing, manufacturing, and marketing traditional and digital imaging
products, services and solutions to consumers, the entertainment
industry, professionals, healthcare providers and other customers. The
Company's products are manufactured in a number of countries in North and
South America, Europe, Australia and Asia. The Company's products are
marketed and sold in many countries throughout the world.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Kodak and
its majority owned subsidiary companies. Intercompany transactions are
eliminated and net earnings are reduced by the portion of the earnings of
subsidiaries applicable to minority interests. The equity method of
accounting is used for joint ventures and investments in associated
companies over which Kodak has significant influence, but does not have
effective control. Significant influence is generally deemed to exist
when the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, voting rights and
the impact of commercial arrangements, are considered in determining
whether the equity method of accounting is appropriate. The cost method
of accounting is used for investments in which Kodak has less than a 20%
ownership interest, and the Company does not have the ability to exercise
significant influence. These investments are carried at cost and are
adjusted only for other-than-temporary declines in fair value. The
carrying value of these investments is reported in other long-term
assets. The Company's equity in the net income and losses of these
investments is reported in other income (charges). See Note 6 and Note
12.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at year end and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
67
FOREIGN CURRENCY
For most subsidiaries and branches outside the U.S., the local currency
is the functional currency. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation," the financial statements of these subsidiaries and branches
are translated into U.S. dollars as follows: assets and liabilities at
year-end exchange rates; income, expenses and cash flows at average
exchange rates; and shareholders' equity at historical exchange rates.
For those subsidiaries for which the local currency is the functional
currency, the resulting translation adjustment is recorded as a component
of accumulated other comprehensive income in the accompanying balance
sheet. Translation adjustments are not tax-effected since they relate to
investments which are permanent in nature.
For certain other subsidiaries and branches, operations are conducted
primarily in U.S. dollars, which is therefore the functional currency.
Monetary assets and liabilities, and the related revenue, expense, gain
and loss accounts, of these foreign subsidiaries and branches are
remeasured at year-end exchange rates. Non-monetary assets and
liabilities, and the related revenue, expense, gain and loss accounts,
are remeasured at historical rates.
The Company has operations in Argentina. Prior to December 31, 2001, the
Argentine peso had been pegged to the U.S. dollar at an exchange rate of
1 to 1. In late December 2001, although the official exchange rate
between the peso and the dollar remained at 1 to 1, exchange houses
started exchanging at a rate of 1.4 pesos to the dollar in anticipation
that the government would announce a devaluation of the peso. The
exchange houses were then closed and, at year-end 2001, there was no
exchangeability between the peso and the dollar. The exchangeability
between the peso and the dollar was first re-established on January 11,
2002, and the day's closing rate for buying U.S. dollars was
approximately 1.7 Argentine pesos to the dollar. The situation relating
to the devaluation in Argentina did not have a material impact on the
Company's Consolidated Statement of Financial Position or Consolidated
Statement of Earnings as of and for the year ended December 31, 2001.
Foreign exchange gains and losses arising from transactions denominated
in a currency other than the functional currency of the entity involved
are included in income. The effects of foreign currency transactions,
including related hedging activities, were losses of $9 million, $13
million, and $2 million in the years 2001, 2000, and 1999, respectively,
and are included in other income (charges).
68
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, receivables, foreign currency forward contracts, commodity
forward contracts and interest rate swap arrangements. The Company
places its cash and cash equivalents with high-quality financial
institutions and limits the amount of credit exposure to any one
institution. With respect to receivables, such receivables arise from
sales to numerous customers in a variety of industries, markets, and
geographies around the world. Receivables arising from these sales are
generally not collateralized. The Company performs ongoing credit
evaluations of its customers' financial conditions and no single customer
accounts for greater than 10% of the sales of the Company. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. With respect to
the foreign currency forward contracts, commodity forward contracts and
interest rate swap arrangements, the counterparties to these contracts
are major financial institutions. The Company has never experienced non-
performance by any of its counterparties.
CASH EQUIVALENTS
All highly liquid investments with a remaining maturity of three months
or less at date of purchase are considered to be cash equivalents.
MARKETABLE SECURITIES AND NONCURRENT INVESTMENTS
The Company has evaluated its investment policies consistent with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which requires that investment securities be classified as
either held-to-maturity, available-for-sale or trading. The Company's
debt and equity investment securities are classified as held-to-maturity
and available-for-sale, respectively. Held-to-maturity investments are
carried at amortized cost and available-for-sale securities are carried
at fair value, with the unrealized gains and losses reported in
Shareholders' Equity under the caption Accumulated Other Comprehensive
Income (Loss).
At December 31, 2001, the Company had short-term investments classified
as held-to-maturity of $3 million. These investments were included in
other current assets. In addition, the Company had long-term marketable
securities and other investments classified as held-to-maturity and
available-for-sale equity securities of $1 million and $33 million,
respectively, which were included in other long-term assets at December
31, 2001.
At December 31, 2000, the Company had short-term investments classified
as held-to-maturity of $5 million, which were included in other current
assets. In addition, the Company had long-term marketable securities and
other investments classified as held-to-maturity and available-for-sale
equity securities of $5 million and $49 million, respectively, which were
included in other long-term assets at December 31, 2000.
69
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of most
inventories in the U.S. is determined by the "last-in, first-out" (LIFO)
method. The cost of all of the Company's remaining inventories in and
outside the U.S. is determined by the "first-in, first-out" (FIFO) or
average cost method, which approximates current cost. The Company
provides inventory reserves for excess, obsolete or slow-moving inventory
based on changes in customer demand, technology developments or other
economic factors.
PROPERTIES
Properties are recorded at cost, net of accumulated depreciation. The
Company principally calculates depreciation expense using the straight-
line method over the assets' estimated useful lives, which are as
follows:
Years
Buildings and building improvements 10-40
Machinery and equipment 3-20
Maintenance and repairs are charged to expense as incurred. Upon sale or
other disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount, less
proceeds from disposal, is charged or credited to income.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired and, for the three-year period ended December 31,
2001, goodwill was charged to earnings on a straight-line basis over the
period estimated to be benefited, generally ten years. See Note 5.
Effective January 1, 2002, the Company will be accounting for goodwill
under SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142 the Company will no longer amortize its goodwill which, as of
December 31, 2001, had a net balance of $948 million. Under SFAS No.
142, the Company's goodwill will be subject to an impairment test, at
least annually, and therefore, will only be charged to operations to the
extent it has been determined to be impaired. See the Recently Issued
Accounting Standards within Note 1.
REVENUE
The Company's revenue transactions include sales of the following:
products; equipment; services; equipment bundled with products and/or
services; and integrated solutions. The Company recognizes revenue when
realized or realizable and earned, which is when the following criteria
are met: persuasive evidence of an arrangement exists; delivery has
occurred; the sales price is fixed and determinable; and collectibility
is reasonably assured. At the time revenue is recognized, the Company
provides for the estimated costs of warranties and reduces revenue for
estimated returns.
70
For product sales, the recognition criteria are generally met when title
and risk of loss have transferred from the Company to the buyer, which
may be upon shipment or upon delivery to the customer sites, based on
contract terms or legal requirements in foreign jurisdictions. Service
revenues are recognized as such services are rendered.
For equipment sales, the recognition criteria are generally met when the
equipment is delivered and installed at the customer site. In instances
in which the agreement with the customer contains a customer acceptance
clause, revenue is deferred until customer acceptance is obtained,
provided the customer acceptance clause is considered to be substantive.
For certain agreements, the Company does not consider these customer
acceptance clauses to be substantive because the Company can and does
replicate the customer acceptance test environment and performs the
agreed upon product testing prior to shipment. In these instances,
revenue is recognized upon installation of the equipment.
The sale of equipment combined with services, including maintenance,
and/or other elements, including products and software, represent
multiple element arrangements. The Company allocates revenue to the
various elements based on verifiable objective evidence of fair value (if
software is not included or is incidental to the transaction) or Kodak-
specific objective evidence of fair value if software is other than
incidental to the sales transaction as a whole. Revenue allocated to an
individual element is recognized when all other revenue recognition
criteria are met for that element.
Revenue from the sale of integrated solutions, which includes
transactions which require significant production, modification or
customization of software, is recognized in accordance with contract
accounting. Under contract accounting, revenue should be recognized
utilizing either the percentage-of-completion or completed-contract
method. The Company currently utilizes the completed-contract method for
all solution sales as sufficient history does not currently exist to
allow the Company to accurately estimate total costs to complete these
transactions. Revenue from other long-term contracts, primarily
government contracts, is generally recognized using the percentage-of-
completion method.
The Company may offer customer financing to assist customers in their
acquisition of Kodak's products, primarily in the area of on-site
photofinishing equipment. At the time a financing transaction is
consummated, which qualifies as a sales-type lease, the Company records
the total lease receivable net of unearned income and the estimated
residual value of the equipment. Unearned income is recognized as
finance income using the interest method over the term of the lease.
Leases not qualifying as a sales-type leases are accounted for as
operating leases. The underlying equipment is depreciated on a straight-
line basis over the assets' estimated useful life.
Net sales reflects reductions in gross revenues attributable to cash
discounts, promotional and advertising allowances and volume discounts
the Company offers in connection with certain of its sales transactions.
71
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." This guidance summarizes the SEC staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. Upon its adoption effective January 1, 2000,
SAB No. 101 did not have a material impact on the Company's results of
operations.
The Company's sales of tangible products is the only class of revenues
that exceeds 10% of total consolidated net sales. All other sales
classes are individually less than 10%, and therefore, have been combined
with the sales of tangible products on the same line in accordance with
Regulation S-X.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which include costs in connection with
new product development, fundamental and exploratory research, process
improvement, product use technology and product accreditation are charged
to operations in the period in which they are incurred.
ADVERTISING
Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. Advertising expenses amounted to
$634 million, $701 million and $717 million in 2001, 2000 and 1999,
respectively.
SHIPPING AND HANDLING COSTS
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in net sales and cost of goods sold,
respectively, in accordance with Emerging Issues Task Force (EITF) Issue
No. 00-10, "Acounting for Shipping and Handling Fees and Costs." Prior
to January 1, 2001, costs incurred for shipping and handling and other
distribution costs were reported in selling, general and administrative
expenses. The shipping and handling and other distribution costs for
2000 and 1999 of $482 million and $480 million, respectively, have been
reclassified from selling, general and administrative expenses to cost of
goods sold to conform with the 2001 presentation of these amounts.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of its long-lived assets,
including goodwill and other intangible assets, whenever events or
changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. The Company assesses recoverability of the
carrying value of the asset by grouping assets at the lowest level for
which there are identifiable cash flows that are largely independent of
the cash flows of other groups of assets. The Company then estimates the
undiscounted future cash flows expected to result from the asset
grouping, including the proceeds from its eventual disposal. An
impairment loss would be recognized when the estimated undiscounted
future cash flows expected to result from the use of the asset and its
eventual disposal are less than its carrying amount. In such instances,
the carrying value of long-lived assets is reduced to the estimated fair
value, as determined using an appraisal or discounted cash flow, as
appropriate.
72
Effective January 1, 2002, the Company will assess recoverability of its
long-lived assets, other than goodwill, under the guidance of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
See the Recently Issued Accounting Standards within Note 1.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," on January 1, 2000. All derivative instruments
are recognized as either assets or liabilities and are measured at fair
value. Certain derivatives are designated and accounted for as hedges.
The Company does not use derivatives for trading or other speculative
purposes.
The Company has cash flow hedges to manage foreign currency exchange
risk, commodity price risk, and interest rate risk related to forecasted
transactions. The Company also uses foreign currency forward contracts
to offset currency-related changes in foreign currency denominated assets
and liabilities; these are marked to market through earnings.
The fair value of foreign currency forward contracts designated as hedges
of forecasted foreign currency denominated intercompany sales is reported
in other current assets and/or current liabilities, and is recorded in
other comprehensive income. When the related inventory is sold to third
parties, the hedge gains or losses as of the date of the intercompany
sale are transferred from other comprehensive income to cost of goods
sold.
The fair value of silver forward contracts designated as hedges of
forecasted worldwide silver purchases is reported in other current assets
and/or current liabilities, and is recorded in other comprehensive
income. When the silver-containing products are sold to third parties,
the hedge gains or losses as of the date of the purchase of raw silver
are transferred from other comprehensive income to cost of goods sold.
The fair value of the interest rate swap designated as a hedge of
forecasted floating-rate interest payments is reported in current
liabilities, and is recorded in other comprehensive income. As interest
expense is accrued, an amount equal to the difference between the fixed
and floating-rate interest payments is transferred from other
comprehensive income to interest expense.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate. Expenditures that relate to an existing
condition caused by past operations and that do not provide future
benefits, are expensed as incurred. Liabilities are recorded when
environmental assessments are made or the requirement for remedial
efforts is probable, and the costs can be reasonably estimated. The
timing of these accruals is generally no later than the completion of
feasibility studies.
73
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The asset and liability approach
underlying SFAS No. 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of the
Company's assets and liabilities. Management provides valuation
allowances against the net deferred tax asset for amounts which are not
considered more likely than not to be realized.
EARNINGS PER SHARE
Basic earnings-per-share computations are based on the weighted-average
number of shares of common stock outstanding during the year. Diluted
earnings-per-share calculations reflect the assumed exercise and
conversion of employee stock options that have an exercise price that is
below the average market price of the common shares for the respective
periods.
Options to purchase 43.7 million and 32.3 million shares of common stock
at weighted-average per share prices of $61.30 and $61.98 for the years
ended December 31, 2001 and 2000, respectively, were outstanding during
the years presented but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than
the average market price of the common shares for the respective periods.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components in
financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement with the same
prominence as other financial statements. Comprehensive income consists
of net earnings, the net unrealized gains or losses on available-for-sale
marketable securities, foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains and losses on
financial instruments qualifying for hedge accounting and is presented in
the Consolidated Statement of Shareholders' Equity in accordance with
SFAS No. 130.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock incentive plans under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" and the related interpretations under Financial
Accounting Standards Board (FASB) Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." Accordingly, no
compensation cost is recognized for stock-based compensation unless the
quoted market price of the stock at the grant date is in excess of the
price the employee must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows, but does
not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue using the intrinsic method prescribed in APB No. 25 as described
above. The Company has adopted the disclosure-only provisions of SFAS
No. 123. See Note 18.
74
SEGMENT REPORTING
The Company reports net sales, operating income, net income, certain
expense, asset and geographical information about its operating segments
in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires public
companies to report information about their business activities, which
meet the criteria of a reportable segment. Reportable segments are
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company has three reportable segments. See Note 21 for a discussion
of the change in the Company's operating structure in 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," collectively
referred to as the "Standards," which are effective for the Company as of
January 1, 2002, except as noted below. SFAS No. 141 supercedes APB No.
16, "Business Combinations." The provisions of SFAS No. 141 (1) require
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) provide specific criteria
for the initial recognition and measurement of intangible assets apart
from goodwill, and (3) require that unamortized negative goodwill be
written off immediately as an extraordinary gain instead of being
deferred and amortized. SFAS No. 141 also requires that, upon adoption
of SFAS No. 142, the Company reclassify the carrying amounts of certain
intangible assets into or out of goodwill, based on certain criteria.
SFAS No. 142 supercedes APB No. 17, "Intangible Assets," and is effective
for fiscal years beginning after December 15, 2001. SFAS No. 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of SFAS No. 142
(1) prohibit the amortization of goodwill and indefinite-lived intangible
assets, (2) require that goodwill and indefinite-lived intangible assets
be tested annually for impairment (and in interim periods if certain
events occur indicating that the carrying value of goodwill and/or
indefinite-lived intangible assets may be impaired), (3) require that
reporting units be identified for the purpose of assessing potential
future impairments of goodwill, and (4) remove the forty-year limitation
on the amortization period of intangible assets that have finite lives.
The Company will adopt the provisions of SFAS No. 142 in its first
quarter ended March 31, 2002. The Company is in the process of preparing
for its adoption of SFAS No. 142 and is making the determinations as to
its reporting units and the amounts of goodwill, intangible assets, other
assets, and liabilities allocated to those reporting units. The Company
is evaluating the useful lives assigned to its intangible assets and does
not anticipate any material changes to such useful lives.
75
SFAS No. 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step of the goodwill impairment test
is to test for a potential impairment. The second step of the goodwill
impairment test is to measure the amount of the impairment loss. The
Company expects to complete steps one and two of the goodwill impairment
test during the first quarter of 2002. The Company does not believe that
the results of these impairment test steps will have a material impact on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets to be held and used, to be disposed of other than by sale
and to be disposed of by sale. Although the Statement retains certain of
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," it supercedes
SFAS No. 121 and APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS No. 144
also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Statement is
effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years,
and will thus be adopted by the Company, as required, on January 1, 2002.
The adoption of SFAS No. 144 is not expected to have a material impact on
the Company's consolidated financial statements.
The EITF has issued EITF Issue No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)." The EITF provides guidance with respect to the statement of
earnings classification of and the accounting for recognition and
measurement of consideration given by a vendor to a customer, which
includes sales incentive offers labeled as discounts, coupons, rebates
and free products or services as well as arrangements labeled as slotting
fees, cooperative advertising and buydowns. The guidance with respect to
the appropriate statement of earnings classification of the consideration
given by a vendor to a customer is effective for annual and interim
periods beginning after December 15, 2001. Upon adoption, financial
statements for prior periods presented for comparative purposes should
be reclassified to comply with the requirements under the EITF.
The guidance with respect to the accounting for recognition and
measurement of consideration given by a vendor to a customer is effective
for annual and interim periods beginning after December 15, 2001. The
impact on the statement of earnings resulting from the adoption of the
EITF should be reported as a cumulative effect of a change in accounting
principle or applied prospectively to new sales incentives offered on or
after the effective date. The impact of the guidance under EITF 01-09 on
the Company's consolidated financial statements has not yet been
determined.
76
RECLASSIFICATIONS
Certain reclassifications of prior financial information and related
footnote amounts have been made to conform with the 2001 presentation.
- -------------------------------------------------------------------------
NOTE 2: RECEIVABLES, NET
(in millions)
2001 2000
Trade receivables $1,966 $2,245
Miscellaneous receivables 371 408
------ ------
Total (net of allowances of $109 and $89) $2,337 $2,653
====== ======
In the fourth quarter of 2001, the Company recorded a charge of $20
million to provide for the potential uncollectible amounts due from
Kmart, who filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code in January 2002. The amount of $20 million
is included in selling, general and administrative expenses and in the
total allowance of $109 million at December 31, 2001.
- --------------------------------------------------------------------------
NOTE 3: INVENTORIES, NET
(in millions) 2001 2000
At FIFO or average cost (approximates
current cost)
Finished goods $ 851 $1,155
Work in process 318 423
Raw materials and supplies 412 589
------ ------
1,581 2,167
LIFO reserve (444) (449)
------ ------
Total $1,137 $1,718
====== ======
Inventories valued on the LIFO method are approximately 48% and 47% of
total inventories in 2001 and 2000, respectively. During 2001, inventory
usage resulted in liquidations of LIFO inventory quantities. In the
aggregate, these inventories were carried at the lower costs prevailing
in prior years as compared with the cost of current purchases. The
effect of these LIFO liquidations was to reduce cost of goods sold by $14
million in 2001. No LIFO layer liquidations occurred in 2000 or 1999.
The Company provides for potentially excess, obsolete or slow-moving
inventory based on management's analysis of inventory levels and future
sales forecasts. The Company also provides for inventories whose cost is
in excess of market. At December 31, 2001 and 2000, aggregate excess,
obsolete, slow- moving and lower of cost or market reserves were $99
million and $96 million, respectively.
- -------------------------------------------------------------------------
77
NOTE 4: PROPERTY, PLANT AND EQUIPMENT, NET
(in millions) 2001 2000
Land $ 127 $ 141
Buildings and building improvements 2,602 2,285
Machinery and equipment 9,884 9,585
Construction in progress 369 952
------- -------
12,982 12,963
Accumulated depreciation (7,323) (7,044)
------- -------
Net properties $ 5,659 $ 5,919
======= =======
Depreciation expense was $765 million, $738 million and $773 million for
the years 2001, 2000, and 1999, respectively.
- --------------------------------------------------------------------------
NOTE 5: GOODWILL, NET
(in millions) 2001 2000
Goodwill $1,868 $1,724
Accumulated amortization 920 777
------ ------
Goodwill, net $ 948 $ 947
====== ======
During 2001, the Company purchased Ofoto, Inc. and substantially all of
the imaging service operations of the Bell & Howell Company. The Company
recorded goodwill in connection with these two acquisitions of $37 million
and $70 million, respectively. The additional net increase in goodwill
results from additional acquisitions, which are all individually
immaterial. See Note 19.
- --------------------------------------------------------------------------
NOTE 6: INVESTMENTS
At December 31, 2001, the Company's significant equity method investees
and the Company's approximate ownership interest in each investee were as
follows:
Kodak Polychrome Graphics (KPG) 50%
NexPress Solutions LLC 50%
Phogenix Imaging LLC 50%
Matsushita-Ultra Technologies
Battery Corporation 30%
Express Stop Financing (ESF) 50%
SK Display Corporation 34%
At December 31, 2001 and 2000, the Company's equity investment in these
unconsolidated affiliates was $360 million and $317 million,
respectively, and is reported within other long-term assets. The Company
records its equity in the income or losses of these investees and reports
such amounts in other income (charges). See Note 12. These investments
do not meet the Regulation S-X significance test requiring the inclusion
of the separate investee financial statements.
78
The Company also has certain investments with less than a 20% ownership
interest in various private companies whereby the Company does not have
the ability to exercise significant influence. Such investments are
accounted for under the cost method. At December 31, 2001 and 2000, the
carrying value of these investments aggregated $51 million and $55
million, respectively, and is reported in other long-term assets. During
2001, the Company recorded an asset impairment charge of $15 million on
certain strategic and non-strategic investments which exhibited other-
than-temporary declines in their fair value. See Note 14.
Kodak sells certain of its long-term lease receivables relating to the
sale of photofinishing equipment to ESF without recourse to the Company.
Sales of long-term lease receivables to ESF were approximately $83
million, $153 million and $397 million in 2001, 2000 and 1999,
respectively. See Note 10.
The Company sells graphics film and other products to its equity
affiliate, KPG. Sales to KPG for the years ended December 31, 2001, 2000
and 1999 amounted to $350 million, $419 million and $540 million,
respectively, and cost of goods sold on these sales amounted to $258
million, $290 million and $359 million for the years ended December 31,
2001, 2000 and 1999, respectively. These sales and cost of goods sold
amounts are reported in the Consolidated Statement of Earnings. The
Company eliminates profits on these sales, to the extent the inventory
has not been sold through to third parties, on the basis of its 50%
interest. At December 31, 2001 and 2000, amounts due from KPG on such
sales were $40 million and $52 million, respectively, and are reported in
receivables, net. Additionally, the Company has guaranteed certain debt
obligations of KPG up to $175 million which is included in the total
guarantees amount of $277 million at December 31, 2001, as discussed in
Note 10.
The Company also sells toner products to its 50% owned equity affiliate,
NexPress. However, these sales transactions are not material to the
Company's results of operations or financial position.
Kodak has no other material activities with its investees.
- -------------------------------------------------------------------------
79
NOTE 7: ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
(in millions) 2001 2000
Accounts payable, trade $ 674 $ 817
Accrued advertising and promotional
expenses 568 578
Accrued employment-related liabilities 749 780
Accrued restructuring liabilities 318 -
Dividends payable - 128
Other 967 1,100
------ ------
Total payables $3,276 $3,403
====== ======
The Other component above consists of other miscellaneous current
liabilities which, individually, are less than 5% of the Total current
liabilities component within the Consolidated Statement of Financial
Position, and therefore, have been aggregated in accordance with
Regulation S-X.
- -------------------------------------------------------------------------
NOTE 8: SHORT-TERM BORROWINGS AND LONG-TERM DEBT
SHORT-TERM BORROWINGS
The Company's short-term borrowings at December 31, 2001 and 2000 were as
follows:
(in millions) 2001 2000
Commercial paper $1,140 $1,809
Current portion of long-term debt 156 148
Short-term bank borrowings 238 249
------ ------
Total short-term borrowings $1,534 $2,206
====== ======
The weighted average interest rates for commercial paper outstanding
during 2001 and 2000 were 3.6% and 6.6%, respectively. The weighted
average interest rates for short-term borrowings outstanding during 2001
and 2000 were 6.2% and 5.4%, respectively.
The Company has $2.45 billion in revolving credit facilities established
in 2001, which are available to support the Company's commercial paper
program and for general corporate purposes. The credit agreements are
comprised of a 364-day commitment at $1.225 billion expiring in July 2002
and a 5-year commitment at $1.225 billion expiring in July 2006. If
unused, they have a commitment fee of $3 million per year, at the
Company's current credit rating. Interest on amounts borrowed under these
facilities is calculated at rates based on the Company's credit rating and
spreads above certain reference rates. There were no amounts outstanding
under these arrangements or the prior year arrangement at December 31,
2001 and 2000, respectively. The facility includes a covenant which
requires the Company to maintain a certain EBITDA (earnings before
interest, income taxes, depreciation and amortization) to iterest ratio.
In the event of violation of the covenant, the facility would not be
available for borrowing until the covenant provisions were waived, amended
or satisfied. The Company does not anticipate that a violation is likely
to occur.
80
LONG-TERM DEBT
(in millions)
Description and Interest Maturity Dates
Rates of 2001 Borrowings of 2001 Borrowings 2001 2000
Notes:
3.74% 2003 $ 10 $ -
6.38% - 8.25% 2002 - 2006 959 473
9.20% - 9.95% 2003 - 2021 191 191
Debentures:
1.11% - 3.16% 2003 - 2004 42 61
Other:
2.42% 2004 190 -
5.94% - 6.66% 2002 - 2010 430 591
------ ------
1,822 1,316
Current portion of long-term debt (156) (150)
------ ------
Long-term debt, net of current portion $1,666 $1,166
====== ======
Annual maturities (in millions) of long-term debt outstanding at December
31, 2001 are as follows: 2002: $13; 2003: $394; 2004: $379; 2005: $333;
2006: $500; 2007 and beyond: $47.
During the second quarter of 2001, the Company issued Medium-Term Notes
consisting of floating-rate notes in the amount of $150 million maturing
on September 16, 2002 and 6.375% fixed notes in the amount of $500 million
maturing on June 15, 2006. The proceeds from this offering were used to
pay down a portion of the Company's outstanding commercial paper.
The Company has a shelf registration statement for medium-term notes of
which $1.35 billion remains available for issuance.
- --------------------------------------------------------------------------
NOTE 9: OTHER LONG-TERM LIABILITIES
(in millions) 2001 2000
Deferred compensation $ 164 $ 166
Minority interest in Kodak companies 84 93
Environmental liabilities 162 113
Deferred income taxes 81 61
Other 229 248
------ ------
Total $ 720 $ 681
====== ======
The Other component above consists of other miscellaneous long-term
liabilities which, individually, are less than 5% of the Total liabilities
component in the Consolidated Statement of Financial Position, and
therefore, have been aggregated in accordance with Regulation S-X.
- --------------------------------------------------------------------------
81
NOTE 10: COMMITMENTS AND CONTINGENCIES
Environmental
Cash expenditures for pollution prevention and waste treatment for the
Company's current manufacturing facilities were as follows:
2001 2000 1999
(in millions)
Recurring costs for
pollution prevention and waste
treatment $ 68 $ 72 $ 69
Capital expenditures for pollution
prevention and waste
treatment 27 36 20
Site remediation costs 2 3 5
---- ---- ----
Total $ 97 $111 $ 94
==== ==== ====
At December 31, 2001 and 2000, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $162 million
and $113 million, respectively. These amounts are reported in the other
long-term liabilities.
The Company is currently implementing a Corrective Action Program
required by the Resource Conservation and Recovery Act (RCRA) at the
Kodak Park site in Rochester, NY. As part of this Program, the Company
has completed the RCRA Facility Assessment (RFA), a broad-based
environmental investigation of the site. The Company is currently in the
process of completing, and in some cases has completed, RCRA Facility
Investigations (RFIs) and Corrective Measures Studies (CMS) for areas at
the site. At December 31, 2001, estimated future remediation costs of
$70 million are accrued on an undiscounted basis by the Company and are
included in the environmental accruals reported in the other long-term
liabilities.
Additionally, the Company has retained certain obligations for
environmental remediation and Superfund matters related to certain sites
associated with the non-imaging health businesses sold in 1994. In
addition, the Company has been identified as a potentially responsible
party (PRP) in connection with the non-imaging health businesses in five
active Superfund sites. At December 31, 2001, estimated future
remediation costs of $51 million are accrued on an undiscounted basis by
the Company and are included in the environmental accruals reported in
the other long-term liabilities.
82
The Company recorded a $41 million charge in the fourth quarter of 2001
for additional environmental reserves. This amount has been included in
selling, general and administrative expenses. Approximately $34 million
has been provided for two former manufacturing sites located outside the
United States. Investigations were completed by an external
environmental consultant in the fourth quarter of 2001, which facilitated
the completion of cost estimates for the future remediation and
monitoring of these sites. In addition, the accrual incorporates the
Company's estimate of its cost to repurchase one of the sites and
demolish the buildings in preparation for its possible conversion to a
public park. The establishment of these accruals is consistent with
Kodak's policy to record accruals for environmental remediation
obligations generally no later than the completion of feasibility
studies. The additional $7 million recorded during the fourth quarter of
2001 represents the estimated increased costs associated with the site
remediation of the non-imaging health businesses sold in 1994 discussed
above ($4 million) and increases in estimated costs ($3 million)
associated with the remediation of other facilities which are not
material to the Company's financial position, results of operations, cash
flows or competitive position. These aforementioned environmental
accruals have been established on an undiscounted basis.
Cash expenditures for the aforementioned remediation and monitoring
activities are expected to be incurred over the next thirty years for
each site. The accrual reflects the Company's cost estimate of the
amount it will incur under the agreed-upon or proposed work plans. The
Company's cost estimate is based upon existing technology and has not
been reduced by possible recoveries from third parties. The Company's
estimate includes equipment and operating costs for remediation and long-
term monitoring of the sites.
A Consent Decree was signed in 1994 in settlement of a civil complaint
brought by the U.S. Environmental Protection Agency and the U.S.
Department of Justice under which the Company is subject to a Compliance
Schedule by which the Company improved its waste characterization
procedures, upgraded one of its incinerators, and is evaluating and
upgrading its industrial sewer system. The total expenditures required
to complete this program are currently estimated to be approximately $24
million over the next nine years. These expenditures are primarily
capital in nature and, therefore, are not included in the environmental
accrual at December 31, 2001.
The Company is presently designated as a PRP under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended (The Superfund law), or under similar state laws, for
environmental assessment and cleanup costs as the result of the Company's
alleged arrangements for disposal of hazardous substances at six active
Superfund sites. With respect to each of these sites, the Company's
actual or potential allocated share of responsibility is small.
Furthermore, numerous other PRPs have also been designated at these
sites, and although the law imposes joint and several liability on PRPs,
the Company's historical experience demonstrates that these costs are
shared with other PRPs. Settlements and costs paid by the Company in
Superfund matters to date have not been material. Future costs are also
not expected to be material to the Company's financial position or
results of operations.
83
The Clean Air Act Amendments were enacted in 1990. Expenditures to
comply with the Clean Air Act implementing regulations issued to date
have not been material and have been primarily capital in nature. In
addition, future expenditures for existing regulations, which are
primarily capital in nature, are not expected to be material. Many of
the regulations to be promulgated pursuant to this Act have not been
issued.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible
outcomes. Estimates developed in the early stages of remediation can
vary significantly. A finite estimate of cost does not normally become
fixed and determinable at a specific point in time. Rather, the costs
associated with environmental remediation become estimable over a
continuum of events and activities that help to frame and define a
liability and the Company continually updates its cost estimates. It is
reasonably possible that the Company's recorded estimates of its
liabilities may change and there is no assurance that additional costs
greater than the amounts accrued will not be incurred or that changes in
environmental laws or their interpretation will not require that
additional amounts be spent.
Factors which cause uncertainties for the Company include, but are not
limited to, the effectiveness of the current work plans in achieving
targeted results and proposals of regulatory agencies for desired methods
and outcomes. It is possible that financial position, results of
operations, cash flows or competitive positions could be affected by the
impact of the ultimate resolution of these matters.
Other Commitments and Contingencies
The Company has entered into agreements with several companies which
provide Kodak with products and services to be used in its normal
operations. The minimum payments for these agreements are approximately
$221 million in 2002, $191 million in 2003, $165 million in 2004, $137
million in 2005, $82 million in 2006 and $246 million in 2007 and
thereafter.
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At December 31, 2001, these
guarantees totaled approximately $277 million. Within the total amount of
$277 million, the Company is guaranteeing debt in the amount of $175
million for Kodak Polychrome Graphics, an unconsolidated affiliate in which
the Company has a 50% ownership interest. The balance of the amount is
principally comprised of other loan guarantees and guarantees of customer
amounts due to banks in connection with various banks' financing of
customers' purchase of equipment and products from Kodak. These guarantees
would require payment from Kodak only in the event of default on payment by
the respective debtor. Management believes the likelihood is remote that
material payments will be required under these guarantees.
84
Qualex, a wholly-owned subsidiary of Kodak, has a 50% ownership interest in
ESF, which is a joint venture partnership between Qualex and Dana Credit
Corporation (DCC), a wholly-owned subsidiary of Dana Corporation. Qualex
accounts for its investment in ESF under the equity method of accounting.
ESF provides a long-term financing solution to Qualex's photofinishing
customers in connection with Qualex's leasing of photofinishing equipment
to third parties, as opposed to Qualex extending long-term credit. As part
of the operations of its photofinishing services, Qualex sells equipment
under a sales-type lease arrangement and records a long-term receivable.
These long-term receivables are subsequently sold to ESF without recourse
to Qualex. ESF incurs long-term debt to finance the purchase of the
receivables from Qualex. This debt is collateralized solely by the long-
term receivables purchased from Qualex, and in part, by a $60 million
guarantee from DCC. Qualex provides no guarantee or collateral to ESF's
creditors in connection with the debt, and ESF's debt is non-recourse to
Qualex. Qualex's only continued involvement in connection with the sale of
the long-term receivables is the servicing of the related equipment under
the leases. Qualex has continued revenue streams in connection with this
equipment through future sales of photofinishing consumables, including
paper and chemicals, and maintenance.
Qualex has risk with respect to the ESF arrangement as it relates to its
continued ability to procure spare parts from the primary photofinishing
equipment vendor to fulfill its servicing obligations under the leases.
The primary photofinishing equipment vendor is currently experiencing
financial difficulty, which raises concern about Qualex's ability to
procure the required service parts. Although the lessees' requirement to
pay ESF under the lease agreements is not contingent upon Qualex's
fulfillment of its servicing obligations under the leases, under the
agreement with ESF, Qualex would be responsible for any deficiency in the
amount of rent not paid to ESF as a result of any lessee's claim regarding
maintenance or supply services not provided by Qualex. Such lease payments
would be made in accordance with the original lease terms, which generally
extend over 5 to 7 years. ESF's outstanding lease receivable amount was
approximately $570 million at December 31, 2001. To mitigate the risk of
not being able to fulfill its service obligations, Qualex has built up its
inventory of these spare parts and has begun refurbishing used parts.
Additionally, Qualex has entered into spare parts escrow agreements under
which bills of materials, parts drawings, intellectual property and other
information necessary to manufacture the parts were put into escrow
arrangements. In the event that the primary photofinishing equipment
vendor were unable to supply the necessary parts to Qualex, Qualex would
gain access to the information in the escrow arrangements to either
manufacture or have manufactured the parts necessary to fulfill its
servicing obligations. Management is currently negotiating alternatives
with the photofinishing equipment vendor to further mitigate the above
risks.
In December 2001, Standard & Poor's downgraded the credit ratings of Dana
Corporation to BB for long-term debt and B for short-term debt, which are
below investment grade. This action created a Guarantor Termination Event
under the Receivables Purchase Agreement (RPA) that ESF has with its banks
under the RPA. To cure the Guarantor Termination Event, in January 2002,
ESF posted $60 million of additional collateral in the form of cash and
long-term lease receivables. At that time, if Dana Corporation were
downgraded to below BB by Standard & Poor's or below Ba2 by Moody's, that
action would constitute a Termination Event under the RPA and ESF would be
forced to renegotiate its debt arrangements with the banks. On February
22, 2002, Moody's downgraded Dana Corporation to a Ba3 credit rating, thus
creating a Termination Event.
85
Under the Termination Event, the banks can require ESF to put up an
additional 6% collateral against the debt (on a debt balance of
approximately $405 million at the time of filing the annual report, the
additional collateral would be approximately $24 million), the interest
rate on the debt could be increased 2 percentage points and Qualex could be
precluded from selling any new receivables to ESF until the Termination
Event has been waived by the banks. ESF does not currently have the
ability to put up the additional collateral, and therefore, ESF would
require additional capital infusions by DCC and Qualex. If DCC and/or
Qualex do not provide the additional capital funding to ESF, the banks
could accelerate the debt and force ESF to liquidate its long-term lease
receivables to service the debt. Management believes that it is unlikely
that the banks would accelerate the debt, and force ESF to sell the
receivables to a third party to generate cash to satisfy the debt, due to
the high-quality nature of the underlying long-term receivable portfolio.
Furthermore, under this scenario, the banks would not have any recourse
against Qualex; rather, the impact on Qualex would be limited to the need
to find an alternative source of financing for future photofinishing
equipment placements. Additionally, under this scenario, it is not
expected that the operations of the customers who are leasing the equipment
under these long-term lease arrangements would be affected such that
Qualex's revenue stream for future sales of photofinishing consumables
would be jeopardized. ESF is beginning negotiations with the banks to
resolve the Termination Event.
The current RPA arrangement expires on July 23, 2002, at which time the RPA
can be extended or terminated. If the RPA is terminated, Qualex will no
longer be able to sell its lease receivables to ESF and will need to find
an alternative financing solution for future sales of its photofinishing
equipment. Under the partnership agreement between Qualex and DCC, subject
to certain conditions, ESF has exclusivity rights to purchase Qualex's long-
term lease receivables. The term of the partnership agreement continues
through October 6, 2003. In light of the Termination Event referred to
above and the timing of the partnership termination, Qualex is currently
considering alternative financing solutions for prospective leasing
activity with its customers.
At December 31, 2001, the Company had outstanding letters of credit
totaling $42 million and surety bonds in the amount of $94 million to
ensure the completion of environmental remediations and payment of
possible casualty and workers' compensation claims.
Rental expense, net of minor sublease income, amounted to $126 million in
2001, $155 million in 2000 and $142 million in 1999. The approximate
amounts of noncancelable lease commitments with terms of more than one
year, principally for the rental of real property, reduced by minor
sublease income, are $106 million in 2002, $85 million in 2003, $70
million in 2004, $36 million in 2005, $25 million in 2006 and $45 million
in 2007 and thereafter.
The Company and its subsidiary companies are involved in lawsuits, claims,
investigations and proceedings, including product liability, commercial,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. There are no such matters
pending that the Company and its General Counsel expect to be material in
relation to the Company's business, financial position or results of
operations.
- --------------------------------------------------------------------------
86
NOTE 11: FINANCIAL INSTRUMENTS
The following table presents the carrying amounts of the assets
(liabilities) and the estimated fair values of financial instruments at
December 31, 2001 and 2000:
2001 2000
(in millions)
Carrying Fair Carrying Fair
Amount Value Amount Value
Marketable securities:
Current $ 3 $ 3 $ 5 $ 5
Long-term 34 34 54 53
Other investments - - 2 2
Long-term debt (1,666) (1,664) (1,166) (1,184)
Foreign currency forwards 1 1 (44) (44)
Silver forwards 1 1 (17) (17)
Interest rate swap (2) (2) - -
Marketable securities and other investments are valued at quoted market
prices. The fair values of long-term borrowings are determined by
reference to quoted market prices or by obtaining quotes from dealers.
The fair values for the remaining financial instruments in the above
table are based on dealer quotes and reflect the estimated amounts the
Company would pay or receive to terminate the contracts. The carrying
values of cash and cash equivalents, receivables, short-term borrowings
and payables approximate their fair values.
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates,
commodity prices, and interest rates which may adversely affect its
results of operations and financial position. The Company manages such
exposures, in part, with derivative financial instruments. The fair
value of these derivative instruments is reported in other current
assets or accounts payable and other current liabilities.
Foreign currency forward contracts are used to hedge existing foreign
currency denominated assets and liabilities, especially those of the
Company's International Treasury Center, as well as forecasted foreign
currency denominated intercompany sales. Silver forward contracts are
used to mitigate the Company's risk to fluctuating silver prices. The
Company's exposure to changes in interest rates results from its
investing and borrowing activities used to meet its liquidity needs.
Long-term debt is generally used to finance long-term investments, while
short-term debt is used to meet working capital requirements. An
interest rate swap agreement was used to convert some floating-rate debt
to fixed-rate debt. The Company does not utilize financial instruments
for trading or other speculative purposes.
87
On January 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires
that an entity recognize all derivatives as either assets or liabilities
and measure those instruments at fair value. If certain conditions are
met, a derivative may be designated as a hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation.
The transition adjustment was a loss of $1 million recorded in other
income (charges) for marking foreign exchange forward contracts to fair
value, and an unrealized gain of $3 million recorded in other
comprehensive income for marking silver forward contracts to fair value.
These items were not displayed in separate captions as cumulative
effects of a change in accounting principle, due to their immateriality.
The fair value of the contracts is reported in other current assets or
in other current liabilities.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to
forecasted foreign currency denominated intercompany sales. At December
31, 2001, the Company had cash flow hedges for the Euro, the Canadian
dollar, the Australian dollar, and the Korean won, with maturity dates
ranging from January 2002 to July 2002.
At December 31, 2001, the fair value of all open foreign currency
forward contracts was an unrealized gain of $1 million, recorded in
other comprehensive income. Additionally, realized losses of less than
$1 million, related to closed foreign currency contracts, have been
deferred in other comprehensive income. If all amounts deferred to
other comprehensive income related to these contracts were to be
realized, less than $1 million of gains would be reclassified into cost
of goods sold over the next twelve months as the inventory transferred
in connection with the intercompany sales is sold to third parties.
During 2001, a loss of $13 million was reclassified from other
comprehensive income to cost of goods sold. Hedge ineffectiveness was
insignificant.
The Company does not apply hedge accounting to the foreign currency
forward contracts used to offset currency-related changes in the fair
value of foreign currency denominated assets and liabilities. These
contracts are marked to market through earnings at the same time that
the exposed assets and liabilities are remeasured through earnings (both
in other income). The majority of the contracts held by the Company are
denominated in Euros, Australian dollars, British pounds, Canadian
dollars, and Chinese renminbi.
The Company has entered into silver forward contracts that are
designated as cash flow hedges of price risk related to forecasted
worldwide silver purchases. The Company used silver forward contracts
to minimize its exposure to increases in silver prices in 2000 and 2001.
At December 31, 2001, the Company had open forward contracts with
maturity dates ranging from January 2002 to June 2002.
88
At December 31, 2001, the fair value of open silver forward contracts
was an unrealized gain of $1 million, recorded in other comprehensive
income. If this amount were to be realized, all of it would be
reclassified into cost of goods sold during the next twelve months.
During 2001, a realized loss of $35 million was recorded in cost of
goods sold. At December 31, 2001, realized losses of $7 million,
related to closed silver contracts, were recorded in other comprehensive
income. These losses will be reclassified into cost of goods sold as
silver-containing products are sold, all within the next twelve months.
Hedge ineffectiveness was insignificant.
In July 2001, the Company entered into an interest rate swap agreement
designated as a cash flow hedge of the LIBOR-based floating-rate
interest payments on $150 million of debt issued June 26, 2001 and
maturing September 16, 2002. The swap effectively converts interest
expense on that debt to a fixed annual rate of 4.06%.
At December 31, 2001, the fair value of the swap was a loss of $2
million, recorded in other comprehensive income. If this amount were to
be realized, all of this loss would be reclassified into interest
expense within the next twelve months. During 2001, less than $1
million was charged to interest expense related to the swap. There was
no hedge ineffectiveness.
The Company's financial instrument counterparties are high-quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk
by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit
exposure amounts. The maximum credit exposure at December 31, 2000 was
not significant to the Company.
- ------------------------------------------------------------------------
NOTE 12: OTHER INCOME (CHARGES)
(in millions) 2001 2000 1999
Investment income $ 15 $ 36 $ 37
Loss on foreign exchange transactions (9) (13) (2)
Equity in income (losses) of
unconsolidated affiliates (79) (110) (11)
Gain on sales of investments 18 127 41
Gain on sales of capital assets 3 51 28
(Loss) gain on sales of subsidiaries - (9) 120
Interest on past-due receivables 10 14 15
Minority interest 11 (11) 30
Other 13 11 3
----- ---- -----
Total $ (18) $ 96 $ 261
===== ==== =====
- --------------------------------------------------------------------------
89
NOTE 13: INCOME TAXES
The components of earnings before income taxes and the related provision
for U.S. and other income taxes were as follows:
(in millions) 2001 2000 1999
Earnings (loss) before income
taxes
U.S. $ (266) $1,294 $1,398
Outside the U.S. 374 838 711
------ ------ ------
Total $ 108 $2,132 $2,109
====== ====== ======
U.S. income taxes
Current (benefit) provision $ (65) $ 145 $ 185
Deferred (benefit) provision (69) 225 215
Income taxes outside the U.S.
Current provision 177 268 225
Deferred (benefit) provision (5) 37 23
State and other income taxes
Current provision 3 35 60
Deferred (benefit) provision (9) 15 9
------ ------ ------
Total $ 32 $ 725 $ 717
====== ====== ======
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows:
(in millions) 2001 2000 1999
Amount computed using the statutory
rate $ 38 $746 $738
Increase (reduction) in taxes
resulting from:
State and other income taxes,
net of federal (4) 33 45
Goodwill amortization 45 40 36
Export sales and manufacturing
credits (19) (48) (45)
Operations outside the U.S. (10) (70) (41)
Valuation allowance (18) (9) 5
Tax settlement (11) - -
Other, net 11 33 (21)
---- ---- ----
Provision for income taxes $ 32 $725 $717
==== ==== ====
90
During the third quarter of 2001, the Company reached a favorable tax
settlement, which resulted in a tax benefit of $11 million. In addition,
during the fourth quarter the Company recorded a $20 million tax benefit
due to a reduction in the estimated effective tax rate for the full year.
The reduction in the estimated effective tax rate was primarily
attributable to a shift in actual earnings versus estimates toward lower
tax rate jurisdictions, and an increase in creditable foreign tax credits
as compared to estimates.
The significant components of deferred tax assets and liabilities were as
follows:
(in millions) 2001 2000
Deferred tax assets
Postemployment obligations $ 867 $ 916
Restructuring programs 122 -
Employee deferred compensation 120 116
Inventories 99 139
Tax loss carryforwards 56 103
Other 739 768
------ ------
Total deferred tax assets 2,003 2,042
------ ------
Deferred tax liabilities
Depreciation 612 555
Leasing 188 225
Other 535 591
------ ------
Total deferred tax liabilities 1,335 1,371
------ ------
Valuation allowance 56 103
------ ------
Net deferred tax assets $ 612 $ 568
====== ======
Deferred income tax assets (liabilities) are reported in the following
components within the Consolidated Statement of Financial Position:
(in millions) 2001 2000
Deferred income tax charges (current) $ 521 $ 575
Other long-term assets 201 88
Accrued income taxes (29) (34)
Other long-term liabilities (81) (61)
------ -----
Net deferred income tax assets $ 612 $ 568
====== =====
The valuation allowance is primarily attributable to certain net
operating loss carryforwards outside the U.S. The primary reason for the
decline in the valuation allowance from 2000 to 2001 was attributable to
utilization of tax loss carryforwards by certain units outside the U.S.
A majority of the net operating loss carryforwards are subject to a five-
year expiration period. Management believes that it is more likely than
not that it will generate taxable income in certain jurisdictions
sufficient to realize the remaining tax benefit associated with the
future deductible temporary differences identified above. This belief is
based upon a review of all available evidence, including historical
operating results and projections of future taxable income.
91
Retained earnings of subsidiary companies outside the U.S. were
approximately $1,491 million and $1,574 million at December 31, 2001 and
2000, respectively. Retained earnings at December 31, 2001 are
considered to be reinvested indefinitely. It is not practicable to
determine the deferred tax liability for temporary differences related to
these retained earnings.
- -------------------------------------------------------------------------
NOTE 14: RESTRUCTURING COSTS AND OTHER
The following table summarizes the activity with respect to the
restructuring charges and reversals recorded in 2001, 2000 and 1999 and
the remaining balance in the related restructuring and asset impairment
reserves at December 31, 2001:
(in millions)
Long-term Exit
Severance Inventory Assets Costs
------------------- --------- --------- -----
Number of
Employees Reserve Reserve Reserve Reserve Total
--------- ------- ------- ------- ------- -----
1999 charges 3,400 $ 250 $ - $ 90 $ 10 $ 350
1999 utilization (400) (21) - (90) - (111)
------ ------ --- ----- ----- -----
Ending balance at
December 31, 1999 3,000 229 - - 10 239
2000 reversal (500) (44) - - - (44)
2000 utilization (2,500) (185) - - (10) (195)
------ ----- --- ----- ----- -----
Ending balance at
December 31, 2000 - - - - - -
2001 charges 7,200 351 84 215 48 698
2001 reversal (275) (20) - - - (20)
2001 utilization (2,700) (56) (84) (215) (5) (360)
------ ----- --- ----- ----- -----
Ending balance at
December 31, 2001 4,225 $ 275 $ - $ - $ 43 $ 318
====== ===== === ===== ===== =====
92
2001 Restructuring Programs and Other
- -------------------------------------
During 2001, the Company recorded a total charge for its two separate
restructuring programs, the first of which was implemented in the
second and third quarters of 2001 and the second of which was
implemented in the fourth quarter of 2001, of $698 million, primarily
for the rationalization of the U.S. photofinishing operations, the
elimination of excess manufacturing capacity, the exit of certain
operations and reductions in research and development positions and
selling, general and administrative positions worldwide. The total
restructuring amount of $698 million was comprised of charges for
severance, long-term assets, inventory, and exit costs of $351 million,
$215 million, $84 million and $48 million, respectively. Additionally,
during 2001, the Company recorded asset impairments relating to the
Wolf Camera bankruptcy, its photofinishing operations, relocation costs
in connection with a closed manufacturing site and investments in
strategic and non-strategic ventures of $77 million, $42 million, $18
million and $15 million, respectively.
Approximately $351 million of the charges of $698 million was for
employee severance covering 7,200 worldwide positions. The geographic
breakdown includes approximately 4,300 employees in the U.S. and Canada
and 2,900 throughout the rest of the world. The 7,200 personnel were
associated with the realignment of manufacturing (2,450), service and
photofinishing operations (1,950), R&D (425) and administrative (2,375)
functions in various locations of the Company's worldwide operations.
Approximately 2,700 positions were eliminated by the end of 2001, with
the majority of the remaining positions to be eliminated during the
early part of 2002. In the fourth quarter of 2001, the Company
reversed $20 million of the second quarter severance charge as certain
severance actions, primarily in the European, African and Middle
Eastern Region (EAMER) and Japan, will be completed at a total cost
less than originally estimated. This is the result of a lower actual
severance cost per employee as compared with the original amounts
estimated. In addition, approximately 275 (150 service and
photofinishing, 100 administrative and 25 R&D) fewer employees will be
separated. The original severance accrual of $351 million and the $20
million reversal were included in restructuring costs and other.
The Company included $119 million of the $698 million provision in cost
of goods sold, representing an $84 million inventory write-down
associated with product line discontinuances and $35 million related to
accelerated depreciation on assets presently used in operations which
were disposed of during the latter part of 2001 or will be disposed of
through abandonment within the first three months of 2002.
Also included in restructuring costs and other were write-offs and
costs associated with the Company's exit from non-strategic operations
and investments, consisting of $180 million for the write-off of
capital assets, goodwill and investments, and $48 million for exit
costs. The exit costs consist principally of lease termination
expenses, shutdown costs and vendor penalty payments, which have been
accrued on an undiscounted basis.
93
In 2001, the Company recorded a $77 million charge associated with the
bankruptcy of the Wolf Camera Inc. consumer retail business. This
amount is reflected in restructuring costs and other.
During 2001, the Company recorded a $42 million charge representing the
write-off of certain lease residuals, receivables and capital assets
resulting primarily from technology changes in the transition from
optical to digital photofinishing equipment within the Company's onsite
photofinishing operations. The charges for the lease residuals and
capital assets totaling $19 million have been included in cost of goods
sold. The remaining $23 million has been included in restructuring
costs and other.
1999 Program
- ------------
During the third quarter of 1999, the Company recorded a restructuring
charge of $350 million relating to worldwide manufacturing and
photofinishing consolidation and reductions in selling, general and
administrative positions worldwide. Approximately $250 million of the
$350 million restructuring charge was for severance covering 3,400
worldwide positions. The geographic breakdown included approximately
1,475 employees in the U.S. and Canada and 1,925 throughout the rest of
the world. These reductions were associated with the realignment of
manufacturing (1,500) and service and photofinishing operations (870),
and the consolidation of sales and marketing (460), R&D (70) and
administrative (500) functions in various locations of the Company's
worldwide operations.
In the second quarter of 2000, the Company reversed approximately $44
million of severance-related costs originally recorded as part of this
program. The reversal was the result of two factors which occurred
during the second quarter. First, certain manufacturing operations
originally planned to be outsourced were retained, as cost-beneficial
arrangements for the Company could not be reached. Second, severance
actions in Japan and Europe were completed at a cost less than
originally estimated. Consequently, approximately 500 (450
manufacturing and 50 administrative) fewer employees were separated.
The original $350 million charge in 1999 and the $44 million reversal
are included in the restructuring cost and other. Aside from the
actions described above, all other projects included in this program
were effectively completed by December 31, 2000. A total of 2,900
employees were terminated under this program in 2000 and 1999.
Also included in restructuring costs and other are $90 million for
asset write-downs and $10 million for shutdown costs. These charges
are primarily for vacant buildings to be sold, equipment to be shut
down and other costs related to the Company's sale and exit of its
Elmgrove manufacturing facility.
94
Other Cost Reductions
- ---------------------
In addition to the charges discussed above, the Company incurred
charges of approximately $11 million in 1999 and $50 million during
2000 for the accelerated depreciation of certain assets which remained
in use until the Company sold its Elmgrove manufacturing facility in
the second quarter, and related relocation costs. These charges were
included in cost of goods sold. The sale of this facility did not
result in a material gain or loss to the Company.
- -----------------------------------------------------------------------
95
NOTE 15: RETIREMENT PLANS
Substantially all U.S. employees are covered by a noncontributory plan,
the Kodak Retirement Income Plan (KRIP), which is funded by Company
contributions to an irrevocable trust fund. The funding policy for KRIP
is to contribute amounts sufficient to meet minimum funding requirements
as determined by employee benefit and tax laws plus additional amounts
the Company determines to be appropriate. Generally, benefits are based
on a formula recognizing length of service and final average earnings.
Assets in the fund are held for the sole benefit of participating
employees and retirees. The assets of the trust fund are comprised of
corporate equity and debt securities, U.S. government securities,
partnership and joint venture investments, interests in pooled funds, and
various types of interest rate, foreign currency and equity market
financial instruments. Kodak common stock represents approximately 3.4%
of trust assets.
On March 25, 1999, the Company amended this plan to include a separate
cash balance formula for all U.S. employees hired after February 1999.
All U.S. employees hired prior to that date were granted the option to
choose the KRIP plan or the Cash Balance Plus plan. Written elections
were made by employees in 1999, and were effective January 1, 2000. The
Cash Balance Plus plan credits employees' accounts with an amount equal
to 4% of their pay, plus interest based on the 30-year treasury bond
rate. In addition, for employees participating in this plan and the
Company's defined contribution plan, the Savings and Investment Plan
(SIP), the Company will match SIP contributions for an amount up to 3% of
pay, for employee contributions of up to 5% of pay. Company
contributions to SIP were $15 million and $11 million for 2001 and 2000,
respectively. As a result of employee elections to the Cash Balance Plus
plan, the reductions in future pension expense will be almost entirely
offset by the cost of matching employee contributions to SIP. The impact
of the Cash Balance Plus plan is shown as a plan amendment.
Most subsidiaries and branches operating outside the U.S. have retirement
plans covering substantially all employees. Contributions by the Company
for these plans are typically deposited under government or other
fiduciary-type arrangements. Retirement benefits are generally based on
contractual agreements that provide for benefit formulas using years of
service and/or compensation prior to retirement. The actuarial
assumptions used for these plans reflect the diverse economic
environments within the various countries in which the Company operates.
96
Changes in the Company's benefit obligation, plan assets and funded
status for major plans are as follows:
(in millions) 2001 2000
Non- Non-
U.S. U.S. U.S. U.S.
Change in Benefit Obligation
Projected benefit obligation
at January 1 $ 5,530 $1,805 $ 5,798 $1,905
Service cost 94 33 89 35
Interest cost 406 101 408 114
Participant contributions - 6 - 12
Plan amendment - - (67) (3)
Benefit payments (555) (106) (578) (111)
Actuarial loss (gain) 182 21 (115) 12
Settlements - (3) - (13)
Curtailments - - (5) -
Currency adjustments - (75) - (120)
------- ------ ------- ------
Projected benefit obligation
at December 31 $ 5,657 $1,782 $ 5,530 $1,831
======= ====== ======= ======
Change in Plan Assets
Fair value of plan assets
at January 1 $ 7,290 $1,880 $ 7,340 $1,917
Actual return on plan assets (418) (115) 528 187
Employer contributions - 33 - 38
Participant contributions - 6 - 12
Benefit payments (555) (106) (578) (111)
Settlements - (3) - (13)
Currency adjustments - (75) - (126)
Other - 5 - 1
------- ------ ------- ------
Fair value of plan assets
at December 31 $ 6,317 $1,625 $ 7,290 $1,905
======= ====== ======= ======
Funded Status at December 31 $ 660 $ (157) $ 1,760 $ 74
Unamortized:
Transition asset (56) (22) (115) (33)
Net (gain) loss (125) 338 (1,323) 65
Prior service cost 3 5 3 12
------- ------ ------- ------
Net amount recognized at
December 31 $ 482 $ 164 $ 325 $ 118
======= ====== ======= ======
97
Amounts recognized in the Statement of Financial Position for major plans
are as follows:
(in millions) 2001 2000
Non- Non-
U.S. U.S. U.S. U.S.
Prepaid pension cost $ 482 $ 180 $ 325 $ 139
Accrued benefit liability - (16) - (21)
------- ------ ------- ------
Net amount recognized at
December 31 $ 482 $ 164 $ 325 $ 118
======= ====== ======= ======
The prepaid pension cost asset amounts for the U.S. and Non-U.S. for 2001
of $482 million and $180 million, respectively, and $325 million and $139
million, respectively, for 2000 are included in other long-term assets.
Pension expense (income) for all plans included:
(in millions) 2001 2000 1999
Non- Non- Non-
U.S. U.S. U.S. U.S. U.S. U.S.
Service cost $ 94 $ 33 $ 89 $ 36 $ 107 $ 34
Interest cost 406 101 408 114 426 111
Expected return on plan
assets (599) (149) (572) (157) (537) (137)
Amortization of:
Transition asset (59) (9) (59) (10) (59) (10)
Prior service cost 1 7 1 8 10 8
Actuarial loss - 1 - 3 2 10
----- ----- ----- ----- ----- -----
(157) (16) (133) (6) (51) 16
Curtailments - - (3) - (1) -
Settlements - 1 - 1 - -
----- ----- ----- ----- ----- -----
Net pension (income) expense (157) (15) (136) (5) (52) 16
Other plans including
unfunded plans 48 82 41 69 33 51
----- ----- ----- ----- ----- -----
Total net pension (income)
expense $(109) $ 67 $ (95) $ 64 $ (19) $ 67
===== ===== ===== ===== ===== =====
There was no curtailment gain or loss recognized as a result of the 2001
restructuring programs. The Company recorded a $3 million curtailment
gain in 2000 and a $9 million curtailment loss in 1999 as a result of the
reduction in employees from the 1997 restructuring program.
Additionally, the Company recorded a $10 million curtailment gain in 1999
as a result of the sale of the Office Imaging operations.
98
The weighted assumptions used to compute pension amounts for major plans
were as follows:
2001 2000
Non- Non-
U.S. U.S. U.S. U.S.
Discount rate 7.25% 5.90% 7.50% 6.00%
Salary increase rate 4.30% 3.10% 4.30% 3.10%
Long-term rate of return on
plan assets 9.50% 8.50% 9.50% 8.70%
The Company also sponsors an unfunded plan for certain U.S. employees,
primarily executives. The benefits of this plan are obtained by applying
KRIP provisions to all compensation, including amounts being deferred,
and without regard to the legislated qualified plan maximums, reduced by
benefits under KRIP. At December 31, 2001 and 2000, the projected
benefit obligations of this plan amounted to $200 million and $187
million, respectively. The Company has accrued in postemployment
liabilities its unfunded accumulated benefit obligation (ABO) of $183
million and $171 million as of December 31, 2001 and 2000, respectively.
Pension expense recorded in 2001, 2000 and 1999 related to this plan was
$18 million, $34 million and $21 million, respectively.
- -------------------------------------------------------------------------
99
NOTE 16: OTHER POSTRETIREMENT BENEFITS
The Company provides healthcare, dental and life insurance benefits to
U.S. eligible retirees and eligible survivors of retirees. In general,
these benefits are provided to U.S. retirees that are covered by the
Company's KRIP plan. These benefits are funded from the general assets
of the Company as they are incurred. Certain non-U.S. subsidiaries offer
healthcare benefits; however, the cost of such benefits is not material
to the Company.
Changes in the Company's benefit obligation and funded status are as
follows:
(in millions) 2001 2000
Net benefit obligation at beginning
of year $ 2,602 $ 2,307
Service cost 14 12
Interest cost 195 169
Plan participants' contributions 2 3
Plan amendments - 62
Actuarial loss 446 229
Curtailments - 1
Benefit payments (213) (181)
------- -------
Net benefit obligation at end of year $ 3,046 $ 2,602
======= =======
Funded status at end of year $(3,046) $(2,602)
Unamortized net loss 1,106 700
Unamortized plan amendments (450) (510)
------- -------
Net amount recognized and recorded
at end of year $(2,390) $(2,412)
======= =======
The weighted-average assumptions used to compute other postretirement
benefit amounts were as follows:
2001 2000
Discount rate 7.25% 7.50%
Salary increase rate 4.30% 4.30%
Healthcare cost trend (a) 10.00% 8.00%
(a) decreasing to 5.00% by 2007
(in millions) 2001 2000 1999
Components of net postretirement
benefit cost
Service cost $ 14 $ 12 $ 13
Interest cost 195 169 152
Amortization of:
Prior service cost (60) (67) (68)
Actuarial loss 40 18 8
------ ------ ------
189 132 105
Curtailments - (6) (90)
------ ------ ------
Total net postretirement benefit cost $ 189 $ 126 $ 15
====== ====== ======
100
There were no curtailment gains or losses recognized as a result of the
2001 restructuring programs. The Company recorded curtailment gains of
$6 million and $71 million in 2000 and 1999, respectively, as a result of
the reduction in employees from the 1997 restructuring program.
Additionally, the Company recorded curtailment gains in 1999 of $15
million as a result of the sale of the Office Imaging operations, and $4
million related to the establishment of the NexPress joint venture.
The Company will no longer fund healthcare and dental benefits for
employees who elected to participate in the Company's Cash Balance Plus
plan, effective January 1, 2000. This change is not expected to have a
material impact on the Company's future postretirement benefit cost.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one percentage point change
in assumed healthcare cost trend rates would have the following effects:
1% 1%
increase decrease
Effect on total service and interest
cost components $ 7 $ (3)
Effect on postretirement benefit
obligation 102 (58)
- -------------------------------------------------------------------------
NOTE 17: ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income at
December 31, 2001, 2000 and 1999 were as follows:
(in millions) 2001 2000 1999
Accumulated unrealized holding
(losses) gains related to
available-for-sale securities $ (6) $ 7 $ 113
Accumulated unrealized losses
related to hedging activity (5) (38) -
Accumulated translation
adjustments (524) (425) (231)
Accumulated minimum pension
liability adjustments (62) (26) (27)
----- ----- -----
Total $(597) $(482) $(145)
101
NOTE 18: STOCK OPTION AND COMPENSATION PLANS
The Company's stock incentive plans consist of the 2000 Omnibus Long-Term
Compensation Plan (the 2000 Plan), the 1995 Omnibus Long-Term
Compensation Plan (the 1995 Plan), and the 1990 Omnibus Long-Term
Compensation Plan (the 1990 Plan). The Plans are administered by the
Executive Compensation and Development Committee of the Board of
Directors.
Under the 2000 Plan, 22 million shares of the Company's common stock may
be granted to a variety of employees between January 1, 2000 and December
31, 2004. The 2000 Plan is substantially similar to, and is intended to
replace, the 1995 Plan, which expired on December 31, 1999.
Under the 1995 Plan, 22 million shares of the Company's common stock were
eligible for grant to a variety of employees between February 1, 1995 and
December 31, 1999. Option prices are not less than 100% of the per share
fair market value on the date of grant, and the options generally expire
ten years from the date of grant, but may expire sooner if the optionee's
employment terminates. The 1995 Plan also provides for Stock
Appreciation Rights (SARs) to be granted, either in tandem with options
or freestanding. SARs allow optionees to receive payment equal to the
difference between the Company's stock market price on grant date and
exercise date. At December 31, 2001, 226,515 freestanding SARs were
outstanding at option prices ranging from $56.31 to $71.81.
Under the 1990 Plan, 22 million shares of the Company's common stock were
eligible for grant to key employees between February 1, 1990 and January
31, 1995. Option prices could not be less than 50% of the per share fair
market value on the date of grant; however, no options below fair market
value were granted. The options generally expire ten years from the date
of grant, but may expire sooner if the optionee's employment terminates.
The 1990 Plan also provided that options with dividend equivalents,
tandem SARs and freestanding SARs could be granted. At December 31,
2001, 98,046 freestanding SARs were outstanding at option prices ranging
from $32.50 to $44.50.
In January 2002, the Company's shareholders voted in favor of a proposed
stock option exchange program for its employees. The voluntary program
offers employees a one-time opportunity to exchange stock options they
currently hold for new options. The new options are expected to be
granted on or about August 26, 2002. The new options will have a grant
price equal to the fair market value of Kodak common stock on the new
grant date. The number of new options employees will ultimately receive
has been determined, prior to the inception of the exchange program,
based on the fair value of the existing options, as determined using the
Black-Scholes option pricing model. In most cases, employees will
receive fewer options in exchange for their current options. The
exchange generally applies to all outstanding options held by employees,
including two all-employee grants made in 1998 and 2000. The exchange
program is not expected to result in the recording of any compensation
expense.
102
Further information relating to options is as follows:
(Amounts in thousands, except per share amounts)
Weighted
Shares Average
Under Range of Price Exercise Price
Option Per Share Per Share
Outstanding on December 31, 1998 34,331 $30.25 - $92.31 $61.04
Granted 4,276 $60.13 - $79.63 $65.17
Exercised 1,101 $30.25 - $74.31 $39.73
Terminated, Canceled or
Surrendered 473 $31.45 - $92.31 $63.80
------
Outstanding on December 31, 1999 37,033 $30.25 - $92.31 $62.12
Granted 12,533 $37.25 - $69.53 $54.38
Exercised 1,326 $30.25 - $58.63 $32.64
Terminated, Canceled or
Surrendered 3,394 $31.45 - $90.50 $62.22
------
Outstanding on December 31, 2000 44,846 $32.50 - $92.31 $60.87
Granted 8,575 $26.90 - $74.31 $36.49
Exercised 615 $32.50 - $43.18 $35.91
Terminated, Canceled or
Surrendered 2,351 $32.50 - $90.75 $50.33
------
Outstanding on December 31, 2001 50,455 $25.92 - $92.31 $57.53
Exercisable on December 31, 1999 19,913 $30.25 - $92.31 $57.08
Exercisable on December 31, 2000 28,783 $32.50 - $92.31 $62.13
Exercisable on December 31, 2001 31,571 $26.90 - $92.31 $63.54
The table above excludes approximately 68,000 options granted by the
Company at an exercise price of $.05-$21.91 as part of an acquisition.
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock
option plans. Under APB No. 25, the Company does not recognize
compensation expense upon the issuance of its stock options because the
option terms are fixed and the exercise price equals the market price of
the underlying stock on the grant date. The Company has determined the
pro forma information as if the Company had accounted for stock options
granted under the fair value method of SFAS No. 123. The Black-Scholes
option pricing model was used with the following weighted-average
assumptions for options issued in each year:
2001 2000 1999
Risk-free interest rates 4.2% 6.2% 5.1%
Expected option lives 6 years 7 years 7 years
Expected volatilities 34% 29% 28%
Expected dividend yields 4.43% 3.19% 2.76%
The weighted-average fair value of options granted was $8.37, $16.79 and
$18.77 for 2001, 2000 and 1999, respectively.
103
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period (2-3
years). The Company's pro forma information follows:
Year Ended December 31,
(in millions, except per share data) 2001 2000 1999
Net earnings
As reported $ 76 $1,407 $1,392
Pro forma (3) 1,346 1,263
Basic earnings per share
As reported $ .26 $ 4.62 $ 4.38
Pro forma (.01) 4.41 3.97
Diluted earnings per share
As reported $ .26 $ 4.59 $ 4.33
Pro forma (.01) 4.41 3.96
The following table summarizes information about stock options at December
31, 2001:
(Number of options in thousands)
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Range of Weighted-
Exercise Average Weighted- Weighted-
Prices Remaining Average Average
At Less Contractual Exercise Exercise
Least Than Options Life Price Options Price
$25 - $40 6,175 7.98 $32.08 1,351 $33.81
$40 - $55 14,356 6.26 $47.87 4,999 $45.31
$55 - $70 20,060 6.55 $62.52 15,711 $63.44
$70 - $85 7,512 5.16 $73.42 7,158 $73.40
Over $85 2,352 5.17 $90.01 2,352 $90.01
------ ------
50,455 31,571
====== ======
- --------------------------------------------------------------------------
NOTE 19: ACQUISITIONS, JOINT VENTURES AND BUSINESS VENTURES
2001
On December 4, 2001, the Company and SANYO Electric Co., Ltd. announced
the formation of a global business venture, the SK Display Corporation,
to manufacture organic light emitting diode (OLED) displays for consumer
devices such as cameras, personal data assistants (PDAs), and portable
entertainment machines. Kodak will hold a 34% stake in the business
venture and will contribute approximately $19 million in cash and $100
million in loan guarantees during 2002 and 2003. SANYO will hold a 66%
stake in the business venture and will contribute approximately $36
million in cash and $195 million in loan guarantees during the same
periods.
On June 4, 2001, the Company completed its acquisition of Ofoto, Inc.
The purchase price of this stock acquisition was approximately $58
million in cash. The acquisition was accounted for as a purchase with
$10 million allocated to tangible net assets, $37 million allocated to
goodwill and $11 million allocated to other intangible assets. The
acquisition of Ofoto will accelerate Kodak's growth in the online
photography market and help drive more rapid adoption of digital and
online services. Ofoto offers digital processing of digital images and
traditional film, top-quality prints, private online image storage,
sharing, editing and creative tools, frames, cards and other merchandise.
104
On February 7, 2001, the Company completed its acquisition of
substantially all of the imaging services operations of Bell & Howell
Company. The purchase price of this stock and asset acquisition was $141
million in cash, including acquisition and other costs of $6 million.
The acquisition was accounted for as a purchase with $15 million
allocated to tangible net assets, $70 million allocated to goodwill, and
$56 million allocated to other intangible assets, primarily customer
contracts. The acquired units provide customers worldwide with
maintenance for document imaging components, micrographic-related
equipment, supplies, parts and service.
During 2001, the Company also completed additional acquisitions, none of
which are individually material to the Company's financial position,
results of operations or cash flows, which had an aggregate purchase
price of approximately $122 million in cash and stock.
2000
During the second quarter, the Company acquired the remaining ownership
interest in PictureVision, Inc. for cash and assumed liabilities with a
total transaction value of approximately $90 million. In relation to
this acquisition, the Company's second quarter results included $10
million in charges for acquired in-process R&D and approximately $15
million for other acquisition-related charges. The Company used
independent professional appraisal consultants to assess and allocate
values to the in-process R&D.
During 2000, the Company also completed additional acquisitions, none of
which are individually material to the Company's financial position,
results of operations or cash flows, which had an aggregate purchase
price of approximately $79 million in cash.
1999
In connection with the sale of the Company's digital printer, copier-
duplicator, and roller assembly operations primarily associated with the
Office Imaging operations (See Note 20), the Company and Heidelberger
Druckmaschinen AG (Heidelberg) also announced an agreement to expand
their joint venture company, NexPress, to include the black-and-white
electrophotographic operations. The Company contributed R&D resources to
NexPress, as well as its toner and developer operations in Rochester and
Kirkby, England. This transaction did not have a material effect on the
Company's results of operations or financial position in 1999. Kodak and
Heidelberg established the NexPress joint venture in September 1997 for
the purpose of developing and marketing new digital color printing
solutions for the graphic arts industry. In connection with these
arrangements, the Company serves as a supplier both to Heidelberg and
NexPress for consumables such as photoconductors and raw materials for
toner/developer manufacturing.
105
During 1999, the Company also completed additional acquisitions, none of
which are individually material to the Company's financial position,
results of operations or cash flows, which had an aggregate purchase
price of approximately $3 million in cash.
- -------------------------------------------------------------------------
NOTE 20: SALES OF ASSETS AND DIVESTITURES
1999
In April 1999, the Company sold its digital printer, copier-duplicator,
and roller assembly operations primarily associated with its Office
Imaging operations, which included its operations in Rochester, NY,
Muehlhausen, Germany and Tijuana, Mexico to Heidelberg for approximately
$80 million. The transaction did not have a material effect on the
Company's results of operations or financial position.
In November 1999, the Company sold The Image Bank, a wholly-owned
subsidiary which markets and licenses image reproduction rights, to
Getty Images, Inc. for $183 million in cash. As a result of this
transaction, the Company recorded a gain of $95 million in other income
(charges).
In November 1999, the Company sold its Motion Analysis Systems Division,
which manufactures digital cameras and digital video cameras for the
automotive and industrial markets, to Roper Industries, Inc. for
approximately $50 million in cash. As a result of this transaction, the
Company recorded a gain of $25 million in other income (charges).
- ------------------------------------------------------------------------
106
NOTE 21: SEGMENT INFORMATION
Beginning in the fourth quarter of 2001, the Company changed its
operating structure, which was previously comprised of seven business
units, to be centered around strategic product groups. The strategic
product groups from existing businesses and geographies have been
integrated into segments that share common technology, manufacturing and
product platforms and customer sets. In accordance with the change in
the operating structure, certain of the Company's product groups were
realigned to reflect how senior management now reviews the business,
makes investing and resource allocation decisions and assesses operating
performance. The realignment of certain of the Company's strategic
product groups resulted in changes to the composition of the reportable
segments.
As a result of the change in composition of the reportable segments, the
accompanying 1999 and 2000 segment information has been presented in
accordance with the new structure and to conform to the 2001
presentation. The Company has three reportable segments: Photography;
Health Imaging; and Commercial Imaging.
The Photography segment derives revenues from consumer film products,
sales of origination and print film to the entertainment industry, sales
of professional film products, traditional and inkjet photo paper,
chemicals, traditional and digital cameras, photoprocessing equipment
and services, and digitization services, including online services. The
Health Imaging segment derives revenues from the sale of digital
products, including laser imagers, media, computed and direct
radiography equipment and picture archiving and communications systems,
as well as traditional medical products, including analog film,
equipment, chemistry, services and specialty products for the
mammography, oncology and dental fields. The Commercial Imaging segment
derives revenues from microfilm equipment and media, printers, scanners,
other business equipment, media sold to commercial and government
customers, and from graphics film products sold to the Kodak Polychrome
Graphics joint venture. The All Other group derives revenues from the
sale of organic light emitting diode (OLED) displays, imaging sensor
solutions and optical products to other manufacturers.
Transactions between segments, which are immaterial, are made on a basis
intended to reflect the market value of the products, recognizing
prevailing market prices and distributor discounts. Differences between
the reportable segments' operating results and net assets, and the
Company's consolidated financial statements relate primarily to items
held at the corporate level, and to other items excluded from segment
operating measurements.
Segment financial information is shown below.
107
(in millions) 2001 2000 1999
Net sales:
Photography $ 9,403 $10,231 $10,265
Health Imaging 2,262 2,220 2,159
Commercial Imaging 1,459 1,417 1,479
All Other 110 126 186
------- ------- -------
Consolidated total $13,234 $13,994 $14,089
======= ======= =======
Earnings from operations:
Photography $ 787 $ 1,430 $ 1,709
Health Imaging 323 518 483
Commercial Imaging 165 233 257
All Other (60) (11) (109)
------- ------- -------
Total of segments 1,215 2,170 2,340
Restructuring costs and credits
and asset impairments (732) 44 (350)
Wolf charge (77) - -
Environmental reserve (41) - -
Kmart charge (20) - -
------- ------- -------
Consolidated total $ 345 $ 2,214 $ 1,990
======= ======= =======
Net earnings:
Photography $ 535 $ 1,034 $ 1,261
Health Imaging 221 356 324
Commercial Imaging 80 90 178
All Other (38) (2) (61)
------- ------- -------
Total of segments 798 1,478 1,702
Restructuring costs and credits
and asset impairments (735) 44 (350)
Wolf charge (77) - -
Environmental reserve (41) - -
Kmart charge (20) - -
Interest expense (219) (178) (142)
Other corporate items 8 26 22
Income tax effects on above items
and taxes not allocated to segments 362 37 160
------- ------- -------
Consolidated total $ 76 $ 1,407 $ 1,392
======= ======= =======
Operating net assets:
Photography $ 6,288 $ 7,100 $ 6,875
Health Imaging 1,426 1,491 1,229
Commercial Imaging 1,085 1,045 963
All Other (219) (92) (123)
------- ------- -------
Total of segments 8,580 9,544 8,944
LIFO inventory reserve (444) (449) (465)
Cash and marketable securities 451 251 393
Dividends payable - (128) (139)
Net deferred income tax
(liabilities) and assets 97 (4) 191
Noncurrent other postemployment
liabilities (2,180) (2,209) (2,289)
Other corporate net assets (410) (205) (624)
------- ------- -------
Consolidated net assets (1) $ 6,094 $ 6,800 $ 6,011
======= ======= =======
108
(1) Consolidated net assets are derived from the Consolidated Statement
of Financial Position, as follows:
(in millions) 2001 2000 1999
Total assets $13,362 $14,212 $14,370
Total liabilities 10,468 10,784 10,458
Less: Short-term borrowings and
current portion of long-term debt (1,534) (2,206) (1,163)
Less: Long-term debt, net of
current portion (1,666) (1,166) (936)
------- ------- -------
Non-interest-bearing liabilities 7,268 7,412 8,359
------- ------- -------
Consolidated net assets $ 6,094 $ 6,800 $ 6,011
======= ======= =======
Depreciation expense:
Photography $ 599 $ 557 $ 592
Health Imaging 96 92 82
Commercial Imaging 69 80 76
All Other 1 9 23
------- ------- -------
Consolidated total $ 765 $ 738 $ 773
======= ======= =======
Goodwill amortization expense:
Photography $ 110 $ 120 $ 113
Health Imaging 28 27 24
Commercial Imaging 16 3 4
All Other 0 1 4
------- ------- -------
Consolidated total $ 154 $ 151 $ 145
======= ======= =======
Capital additions:
Photography $ 555 $ 721 $ 938
Health Imaging 128 120 92
Commercial Imaging 56 98 84
All Other 4 6 13
------- ------- -------
Consolidated total $ 743 $ 945 $ 1,127
======= ======= =======
109
Net sales to external customers attributed to (2):
The United States $ 6,419 $ 6,800 $ 6,714
Europe, Middle East and Africa 3,275 3,464 3,734
Asia Pacific 2,215 2,349 2,267
Canada and Latin America 1,325 1,381 1,374
------- ------- -------
Consolidated total $13,234 $13,994 $14,089
======= ======= =======
(2) Sales are reported in the geographic area in which they originate.
Long-lived assets located in:
The United States $ 3,738 $ 3,913 $ 3,904
Europe, Middle East and Africa 672 647 715
Asia Pacific 977 1,056 1,024
Canada and Latin America 272 303 304
------- ------- -------
Consolidated total $ 5,659 $ 5,919 $ 5,947
======= ======= =======
110
NOTE 22: QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
(in millions, except per share data)
2001
Net sales $3,359 $3,308 $3,592 $2,975
Gross profit 1,027 1,132 1,338 1,067
Net (loss) earnings (206)(4) 96(3) 36(1)(2) 150(1)
Basic (loss) earnings per
share (6) (.71) .33 .12 .52
Diluted (loss) earnings per
share (6) (.71) .33 .12 .52
2000
Net sales $3,560 $3,590 $3,749 $3,095
Gross profit 1,244 1,516 1,626 1,261
Net earnings 194(5) 418(5) 506(5) 289(5)
Basic earnings per share (6) .66 1.37 1.63 .93
Diluted earnings per share (6) .66 1.36 1.62 .93
- --------------------------------------------------------------------------
(1) Includes relocation charges (included in cost of goods sold) related
to the sale and exit of a manufacturing facility of $10 million and $8
million, which reduced net earnings by $7 million and $5 million in the
first and second quarters, respectively.
(2) Includes $316 million ($57 million included in cost of goods sold and
$259 million included in restructuring costs and other) of
restructuring costs, which reduced net earnings by $232 million; and
$77 million (included in restructuring costs and other) for the Wolf
bankruptcy charge, which reduced net earnings by $52 million.
(3) Includes $53 million ($41 million included in cost of goods sold and
$12 million included in restructuring costs and other) of restructuring
costs, which reduced net earnings by $41 million; $42 million ($23
million included in restructuring costs and other and $19 million
included in cost of goods sold) for a charge related to asset
impairments associated with certain of the Company's photofinishing
operations, which reduced net earnings by $26 million; and an $11
million (included in provision for income taxes) tax benefit related to
favorable tax settlements reached during the quarter.
(4) Includes $309 million ($21 million included in cost of goods sold and
$288 million included in restructuring costs and other) of
restructuring costs, which reduced net earnings by $210 million; $15
million ($12 million included in selling, general and administrative
expenses and $3 million included in other income (charges)) for asset
impairments related to venture investments, which reduced net earnings
by $10 million; a $41 million (included in selling, general and
administrative expenses) charge for environmental reserves, which
reduced net earnings by $28 million; a $20 million (included in
selling, general and administrative expenses) Kmart bankruptcy charge,
which reduced net earnings by $14 million, and a $20 million (included
in provision for income taxes) tax benefit related to a decline in the
year-over-year effective tax rate.
111
(5) Includes accelerated depreciation and relocation charges (included in
cost of goods sold) related to the sale and exit of a manufacturing
facility of $11 million, $12 million, $18 million, and $9 million,
which reduced net earnings by $7 million, $8 million, $12 million, and
$6 million in the first, second, third and fourth quarters,
respectively.
(6) Each quarter is calculated as a discrete period and the sum of the
four quarters may not equal the full year amount.
112
SUMMARY OF OPERATING DATA
Eastman Kodak Company and Subsidiary Companies
(Dollar amounts and shares in millions, except per share data)
2001 2000 1999 1998 1997
Net sales $13,234 $13,994 $14,089 $13,406 $14,538
Earnings from operations 345 2,214 1,990 1,888 130
Net earnings 76(1) 1,407(2) 1,392(3) 1,390(4) 5(6)
EARNINGS AND DIVIDENDS
Net earnings
- % of sales 0.6% 10.1% 9.9% 10.4% 0.0%
- % return on average
shareholders' equity 2.4% 38.3% 35.2% 38.9% 0.1%
Basic earnings per share .26 4.62 4.38 4.30 .01
Diluted earnings per share .26 4.59 4.33 4.24 .01
Cash dividends paid
- on common shares 643 545 563 569 567
- per common share 2.21 1.76 1.76 1.76 1.76
Common shares outstanding at
year end 290.9 290.5 310.4 322.8 323.1
Shareholders at year end 91,893 113,308 131,719 129,495 135,132
STATEMENT OF FINANCIAL
POSITION DATA
Operational working
capital (8) $ 863 $ 1,482 $ 838 $ 939 $ 909
Working capital (671) (724) (325) (579) 298
Property, plant and
equipment, net 5,659 5,919 5,947 5,914 5,509
Total assets 13,362 14,212 14,370 14,733 13,145
Short-term borrowings
and current portion of
long-term debt 1,534 2,206 1,163 1,518 611
Long-term debt, net of
current portion 1,666 1,166 936 504 585
Total shareholders' equity 2,894 3,428 3,912 3,988 3,161
SUPPLEMENTAL INFORMATION
Sales - Photography $9,403 $10,231 $10,265 $10,063 $10,620
- Health Imaging 2,262 2,220 2,159 1,526 1,532
- Commercial Imaging 1,459 1,417 1,479 1,296 1,740
- All Other 110 126 187 521 646
Research and development
costs 779 784 817 922(5) 1,230(7)
Depreciation 765 738 773 737 748
Taxes (excludes payroll,
sales and excise taxes) 154 933 806 809 164
Wages, salaries and employee
benefits 3,824 3,726 3,962 4,306 4,985
Employees at year end
- in the U.S. 42,000 43,200 43,300 46,300 54,800
- worldwide 75,100 78,400 80,650 86,200 97,500
(see footnotes on next page)
113
SUMMARY OF OPERATING DATA
Eastman Kodak Company and Subsidiary Companies
(footnotes for previous page)
(1)Includes $678 million of restructuring charges; $42 million for a charge
related to asset impairments associated with certain of the Company's
photofinishing operations; $15 million for asset impairments related to
venture investments; $41 million for a charge for environmental reserves;
$77 million for the Wolf bankruptcy; a $20 million charge for the Kmart
bankruptcy; $18 million of relocation charges related to the sale and exit
of a manufacturing facility; an $11 million tax benefit related to a
favorable tax settlement; and a $20 million tax benefit representing a
decline in the year-over-year effective tax rate. These items reduced net
earnings by $594 million.
(2)Includes accelerated depreciation and relocation charges related to the
sale and exit of a manufacturing facility of $50 million, which reduced net
earnings by $33 million.
(3)Includes $350 million of restructuring charges, and an additional $11
million of charges related to this restructuring program; $103 million of
charges associated with business exits; a gain of $95 million on the sale
of The Image Bank; and a gain of $25 million on the sale of the Motion
Analysis Systems Division. These items reduced net earnings by $227
million.
(4)Includes $35 million of litigation charges; $132 million of Office
Imaging charges; $45 million primarily for a write-off of in-process R&D
associated with the Imation acquisition; a gain of $87 million on the sale
of NanoSystems; and a gain of $66 million on the sale of part of the
Company's investment in Gretag. These items reduced net earnings by $39
million.
(5)Includes a $42 million charge for the write-off of in-process R&D
associated with the Imation acquisition.
(6)Includes $1,455 million of restructuring costs, asset impairments and
other charges; $186 million for a write-off of in-process R&D associated
with the Wang acquisition; and a $46 million litigation charge. These
items reduced net earnings by $1,143 million.
(7)Includes a $186 million charge for the write-off of in-process R&D
associated with the Wang acquisition.
(8)Excludes short-term borrowings and current portion of long-term debt.
114
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10(a), 11 AND 12. DIRECTORS OF THE REGISTRANT
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Responses to the above items, as contained in the Notice of 2002 Annual
Meeting and Proxy Statement, which will be filed within 120 days of the
Company's fiscal year end, are hereby incorporated by reference in this
Annual Report on Form 10-K.
ITEM 10(b). EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers list is contained in PART I under the caption
"Executive Officers of the Registrant" on page 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None to report.
115
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
(a)1. Consolidated financial statements:
Report of independent accountants 58
Consolidated statement of earnings 59
Consolidated statement of financial position 60
Consolidated statement of shareholders' equity 61-63
Consolidated statement of cash flows 64-65
Notes to financial statements 66-111
2. Financial statement schedules:
II - Valuation and qualifying accounts 117
All other schedules have been omitted because they are not
applicable or the information required is shown in the
financial statements or notes thereto.
3. Additional data required to be furnished:
Exhibits required as part of this report are listed in the
index appearing on pages 118 through 123. The management
contracts and compensatory plans and arrangements required
to be filed as exhibits to this form pursuant to Item 14I
of this report are listed on pages 119 through 122, Exhibit
Numbers (10)B - (10)X.
(b) Report on Form 8-K.
No reports on Form 8-K were filed or required to be filed during
the quarter ended December 31, 2001.
116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
By: By:
Daniel A. Carp, Chairman, Robert H. Brust, Chief Financial
President and Chief Officer and Executive Vice
Executive Officer President
Robert P. Rozek
Controller
Date: March 20, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Richard S. Braddock, Director Durk I. Jager, Director
William W. Bradley, Director Debra L. Lee, Director
Daniel A. Carp, Director Delano E. Lewis, Director
Martha Layne Collins, Director Hector de J. Ruiz, Director
Timothy M. Donahue, Director Laura D'Andrea Tyson, Director
Alice F. Emerson, Director Richard A. Zimmerman, Director
Paul E. Gray, Director
Date: March 20, 2002
117
Schedule II
Eastman Kodak Company and Subsidiary Companies
Valuation and Qualifying Accounts
(in millions)
Balance at Additions Deductions Balance
Beginning Charged to Amounts at End of
of Period Earnings Written Off Period
Year ended December 31, 2001
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $ 62 $ 95 $65 $ 92
Reserve for loss on
returns and allowances 27 12 22 17
---- ---- --- ----
TOTAL $ 89 $107 $87 $109
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 8 $ 46 $ 3 $ 51
==== ==== === ====
Year ended December 31, 2000
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $104 $ 38 $80 $ 62
Reserve for loss on
returns and allowances 32 8 13 27
---- ---- --- ----
TOTAL $136 $ 46 $93 $ 89
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 7 $ 4 $ 3 $ 8
==== ==== === ====
Year ended December 31, 1999
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $142 $ 32 $70 $104
Reserve for loss on
returns and allowances 27 27 22 32
---- ---- --- ----
TOTAL $169 $ 59 $92 $136
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 10 $ (2) $ 1 $ 7
==== ==== === ====
118
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits
Exhibit
Number
(3) A. Certificate of Incorporation.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 25, 1988, Exhibit 3.)
B. By-laws, as amended through April 24, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2001, Exhibit 3.)
(4) A. Indenture dated as of January 1, 1988 between Eastman
Kodak Company as issuer of (i) 9 3/8% Notes Due 2003,
(ii) 9.95% Debentures Due 2018, (iii) 9 1/2% Notes Due 2008,
(iv) 9.20% Debentures Due 2021, and (v) 7.25% Notes Due 2005,
and The Bank of New York as Trustee.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 25, 1988, Exhibit 4.)
B. First Supplemental Indenture dated as of September 6, 1991
and Second Supplemental Indenture dated as of September 20,
1991, each between Eastman Kodak Company and The Bank of New
York as Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, Exhibit 4.)
C. Third Supplemental Indenture dated as of January 26, 1993,
between Eastman Kodak Company and The Bank of New York as
Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, Exhibit 4.)
D. Fourth Supplemental Indenture dated as of March 1, 1993,
between Eastman Kodak Company and The Bank of New York as
Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, Exhibit 4.)
Eastman Kodak Company and certain subsidiaries are parties to
instruments defining the rights of holders of long-term debt
that was not registered under the Securities Act of 1933.
Eastman Kodak Company has undertaken to furnish a copy of these
instruments to the Securities and Exchange Commission upon
request.
119
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number Page
(10) B. Eastman Kodak Company Insurance Plan for Directors.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 29, 1985, Exhibit 10.)
C. Eastman Kodak Company Deferred Compensation Plan for
Directors, as amended February 11, 2000.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999, and the Eastman Kodak Company Annual
Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
E. 1982 Eastman Kodak Company Executive Deferred Compensation
Plan, as amended effective December 9, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999, and the
Eastman Kodak Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, Exhibit 10.)
G. Eastman Kodak Company 1990 Omnibus Long-term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997, the
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, and the Quarterly Report on Form
10-Q for the quarterly period ended September 30,
1999, and the Eastman Kodak Company Annual Report on
Form 10-K for the fiscal year ended December 31, 1999,
Exhibit 10.) 124
120
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number Page
I. Eastman Kodak Company 1995 Omnibus Long-Term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, the Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998,
the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998, and
the Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999, and the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.) 127
J. Kodak Executive Financial Counseling Program.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, Exhibit 10.)
K. Personal Umbrella Liability Insurance Coverage.
Eastman Kodak Company provides $5,000,000 personal umbrella
liability insurance coverage to its directors and
approximately 160 key executives. The coverage, which is
insured through The Mayflower Insurance Company, Ltd.,
supplements participants' personal coverage. The Company
pays the cost of this insurance. Income is imputed to
participants.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
L. Kodak Executive Health Management Plan, as amended
effective January 1, 1995.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
M. Martin M. Coyne Agreement dated November 9, 2001. 130
121
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number Page
O. Eastman Kodak Company 1997 Stock Option Plan, as amended,
effective as of March 13, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001, Exhibit 10.)
P. Eric Steenburgh Agreement dated March 12, 1998.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, Exhibit 10.)
Notice of Award of Restricted Stock Units dated
February 11, 2000 under the 2000 Omnibus Long-Term
Compensation Plan.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, Exhibit 10.)
Amendment, dated December 1, 2001. 138
Letter, dated December 28, 2001. 150
R. Eastman Kodak Company 2000 Omnibus Long-Term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999, and the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, and the Eastman
Kodak Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.) 152
S. Eastman Kodak Company 2000 Management Variable Compensation
Plan, as amended effective as of May 9, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999, Exhibit 10.) 155
T. Eastman Kodak Company Executive Protection Plan, effective
July 25, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2001, Exhibit 10.)
122
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number Page
U. Eastman Kodak Company Estate Enhancement Plan, as adopted
effective March 6, 2000.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
W. Daniel A. Carp Agreement dated November 22, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
$1,000,000 Promissory Note dated March 2, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, Exhibit 10.)
X. Robert H. Brust Agreement dated December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
Amendment, dated February 8, 2001, to Agreement dated
December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, Exhibit 10.)
Amendment, dated November 12, 2001, to Agreement dated
December 20, 1999. 156
Y. Patricia F. Russo Agreement dated April 1, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, Exhibit 10.)
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges. 165
(21) Subsidiaries of Eastman Kodak Company. 166
(23) Consent of Independent Accountants. 168
123
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
(99) Eastman Kodak Employees' Savings and Investment Plan Annual
Report on Form 11-K for the fiscal year ended December 30, 2001
(to be filed by amendment).
124
Exhibit (10) G.
Amendment to Eastman Kodak Company 1990 Omnibus Long-Term
Compensation Plan
This amendment amends the Eastman Kodak Company 1990 Omnibus Long-Term
Compensation Plan, effective as of November 12, 2001.
Section 6 of the Plan entitled "Term" is amended in its entirety to
read as follows:
The Plan shall become effective as of February 1, 1990, subject to
its approval by the Company's shareholders at the 1990 annual
meeting. No awards shall be exercisable or payable before approval
of the Plan has been obtained from the Company's shareholders.
Except as is required to implement the Stock Option Exchange
Program, Awards will not be granted pursuant to the Plan after
January 31, 1995.
The Plan is amended to add the following as new Section 8(f):
(f) Stock Option Exchange Program
(i) In General. As soon as reasonably possible following January
25, 2002, the Company will be permitted to implement the Stock
Option Exchange Program. Under this program, Eligible
Employees will be offered a one-time opportunity to elect to
cancel all of their current stock options in exchange for the
grant of new stock options, with such new options to be
granted no less than six months and one day following the date
the current options are cancelled, at a price equal to 100% of
the fair market value of the Common Stock, as determined by
the Committee, on such date of grant. The Exchange Ratio(s)
for the program will be chosen by the Committee using as its
basis the Black-Scholes stock option valuation model. All of
the new stock options will have the same vesting terms as the
surrendered options they replace. Each new option will have a
term equal to the remaining term of the surrendered option it
replaces. All of the other terms and conditions of the new
options will be identical to the surrendered stock options
they replace. The top six most senior executive officers of
the Company will not be eligible to participate in the
program. The program will be structured so that the Company
avoids incurring financial accounting charges.
125
(ii) Administration. The Committee will have total and exclusive
responsibility to control, operate, manage and administer the
Stock Option Exchange Program in accordance with its terms and
all the authority that may be necessary or helpful to enable
it to discharge its responsibilities with respect to the
program. Without limiting the generality of the preceding
sentence, the Committee will have the exclusive right to:
interpret the program, decide all questions concerning
eligibility for and the amount of Awards payable under the
program, construe any ambiguous provision of the program,
correct any default, supply any omission, reconcile any
inconsistency, and decide all questions arising in the
administration, interpretation and application of the program.
The Committee will have full discretionary authority in all
matters related to the discharge of its responsibilities and
the exercise of its authority under the program, including,
without limitation, its construction of the terms of the
program and its determination of eligibility for the program.
It is the intent of the program that the decisions of the
Committee and its actions with respect to the program will be
final and binding upon all persons having or claiming to have
any right or interest in or under the program.
(iii)Foreign Jurisdictions. In order to facilitate participation
in the Stock Option Exchange Program by those Eligible Employees
who are employed by the Company outside the United States (or
who are foreign nationals temporarily within the United States),
the Committee may provide for such modifications and
additional terms and conditions ("special terms") to the
program as the Committee may consider necessary or appropriate
to accommodate differences in local law, policy or custom, or
to facilitate administration of the program. The special
terms may provide that the grant of an Award is subject to (1)
applicable governmental or regulatory approval or other
compliance with local legal requirements and/or (2) execution
by the Eligible Employee of a written instrument in the form
specified by the Committee, and that in the event such
conditions are not satisfied, the grant will be void. The
special terms may also provide that an Award will become
exercisable or redeemable, as the case may be, if an Eligible
Employee's employment with the Company ends as a result of
workforce reduction, realignment or similar measure and the
Committee may designate a person or persons to make such
determination for a location. The Committee may adopt or
approve sub-plans, appendices or supplements to, or
amendments, restatements, or alternative versions of, the
program as it may consider necessary or appropriate for
purposes of implementing any special terms, without thereby
affecting the terms of the program.
(iv) Stock Appreciation Rights. All SARs granted under the Plan
will be eligible for the Stock Option Exchange Program on
essentially the same terms and conditions as those that will
apply to stock options granted under the Plan.
126
(v) Definitions. Any defined term used in this section which is
not defined elsewhere in the Plan will have that meaning
given to it by the Committee in its sole and absolute
discretion.
127
Exhibit (10) I.
Amendment to Eastman Kodak Company 1995 Omnibus Long-Term
Compensation Plan
This amendment amends the Eastman Kodak Company 1995 Omnibus Long-Term
Compensation Plan, effective as of November 12, 2001.
Section 1.2 of the Plan entitled "Term" is amended in its entirety to
read as follows:
The Plan shall become effective as of February 1, 1995, subject to
its approval by Kodak's shareholders at the 1995 Annual Meeting of
the Shareholders. No Awards shall be exercisable or payable before
approval of the Plan has been obtained from Kodak's shareholders.
Awards shall not be granted pursuant to the Plan after December 31,
1999; except that the Committee may grant Awards after such date in
recognition of performance for Performance Cycles commencing prior
to such date and except as may be required under the terms of the
Stock Option Exchange Program.
Section 6.1 of the Plan entitled "Available Shares" is amended to add
the following after the second sentence of such section:
Notwithstanding the preceding, any shares of Common Stock related
to Awards that are cancelled pursuant to the terms of the Stock
Option Exchange Program will be available for grant under the terms
of such program.
The last sentence of Section 8.2 of the Plan entitled "Terms and
Conditions of Stock Options" is amended in its entirety to read as
follows:
Except as set forth in Section 8.7, stock options shall not be
repriced, i.e., there shall be no grant of a stock option(s) to a
Participant in exchange for a Participant's agreement to
cancellation of a higher-priced stock option(s) that was previously
granted to such Participant.
128
The Plan is amended to add the following as new Section 8.7:
8.7 Stock Option Exchange Program
(a) In General. As soon as reasonably possible following January
25, 2002, the Company will be permitted to implement the Stock
Option Exchange Program. Under this program, Eligible
Employees will be offered a one-time opportunity to elect to
cancel all of their current stock options in exchange for the
grant of new stock options, with such new options to be
granted no less than six months and one day following the date
the current options are cancelled, at a price equal to 100% of
the fair market value of the Common Stock, as determined by
the Committee, on such date of grant. The Exchange Ratio(s)
for the program will be chosen by the Committee using as its
basis the Black-Scholes stock option valuation model. All of
the new stock options will have the same vesting terms as the
surrendered options they replace. Each new option will have a
term equal to the remaining term of the surrendered option it
replaces. All of the other terms and conditions of the new
options will be identical to the surrendered stock options
they replace. The top six most senior executive officers of
the Company will not be eligible to participate in the
program. The program will be structured so that the Company
avoids incurring financial accounting charges.
(b) Administration. The Committee will have total and exclusive
responsibility to control, operate, manage and administer the
Stock Option Exchange Program in accordance with its terms and
all the authority that may be necessary or helpful to enable
it to discharge its responsibilities with respect to the
program. Without limiting the generality of the preceding
sentence, the Committee will have the exclusive right to:
interpret the program, decide all questions concerning
eligibility for and the amount of Awards payable under the
program, construe any ambiguous provision of the program,
correct any default, supply any omission, reconcile any
inconsistency, and decide all questions arising in the
administration, interpretation and application of the program.
The Committee will have full discretionary authority in all
matters related to the discharge of its responsibilities and
the exercise of its authority under the program, including,
without limitation, its construction of the terms of the
program and its determination of eligibility for the program.
It is the intent of the program that the decisions of the
Committee and its actions with respect to the program will be
final and binding upon all persons having or claiming to have
any right or interest in or under the program.
129
(c) Foreign Jurisdictions. In order to facilitate participation in
the Stock Option Exchange Program by those Eligible Employees
who are employed by the Company outside the United States (or
who are foreign nationals temporarily within the United
States), the Committee may provide for such modifications and
additional terms and conditions ("special terms") to the
program as the Committee may consider necessary or appropriate
to accommodate differences in local law, policy or custom, or
to facilitate administration of the program. The special
terms may provide that the grant of an Award is subject to (1)
applicable governmental or regulatory approval or other
compliance with local legal requirements and/or (2) execution
by the Eligible Employee of a written instrument in the form
specified by the Committee, and that in the event such
conditions are not satisfied, the grant will be void. The
special terms may also provide that an Award will become
exercisable or redeemable, as the case may be, if an Eligible
Employee's employment with the Company ends as a result of
workforce reduction, realignment or similar measure and the
Committee may designate a person or persons to make such
determination for a location. The Committee may adopt or
approve sub-plans, appendices or supplements to, or
amendments, restatements, or alternative versions of, the
program as it may consider necessary or appropriate for
purposes of implementing any special terms, without thereby
affecting the terms of the program.
(d) Stock Appreciation Rights. All SARs granted under the Plan will
be eligible for the Stock Option Exchange Program on
essentially the same terms and conditions as those that will
apply to stock options granted under the Plan.
(e) Definitions. Any defined term used in this section which is
not defined elsewhere in the Plan will have that meaning given
to it by the Committee in its sole and absolute discretion.
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Exhibit (10) M.
November 9, 2001
Martin M. Coyne
(address intentionally
omitted)
Re: Retention
Dear Marty:
Your contributions and professional talents continue to be a great asset
to Kodak. In this regard, I am pleased to inform you of your eligibility
for a special retention package to encourage you to remain employed with
Kodak until at least your 55th birthday on February 7, 2004. This letter
describes the features of this package. Once signed by both parties, the
letter will constitute an agreement between Eastman Kodak Company
("Kodak") and you. For purposes of this letter agreement, the term
"Company" will refer to Kodak and all of its subsidiaries and affiliates.
1. Retention
In consideration for remaining employed with Kodak through February 7,
2004, Kodak agrees to provide you a special retention package. Under
this package, Kodak will, subject to your satisfaction of the terms of
this letter agreement, increase your annual target award under the EXCEL
program, enhance your retirement income benefit, award you an additional
50,000 stock options under the management grant scheduled for November
16, 2001 and provide you a special severance benefit. The remaining
sections of this letter agreement detail the terms and conditions of this
retention package.
2. EXCEL
Effective January 1, 2002, your new target annual award under the
Executive Compensation for Excellence and Leadership Program ("EXCEL")
will be increased from 72% to 85% of your annual base salary. Thus, your
new total target annual compensation will be $1,295,000.
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3. Enhanced Retirement Income Benefit
A. In General. Kodak agrees to enhance the retirement benefits you
may become entitled to under the Kodak Retirement Income Plan
("KRIP"), the Kodak Unfunded Retirement Income Plan ("KURIP"),
and the Kodak Excess Retirement Income Plan ("KERIP").
Assuming you satisfy the conditions of Section 3(B) below and
subject to the offset provisions contained in Section 3(D)
below, Kodak agrees to calculate your retirement income benefit
under KRIP, KURIP and KERIP: (1) in accordance with the terms
of KRIP, KURIP and KERIP as in effect on the date of this
letter; and (2) based on an additional 8 years of deemed
service. This crediting of deemed service will apply for
purposes of establishing: (i) the total amount of your "Vesting
Service" under KRIP, KURIP and KERIP; (ii) the total amount of
"Accrued Service" used to calculate your KRIP, KURIP and KERIP
retirement benefits and rights to those benefits; and (iii)
your "Total Service" for purposes of determining the
applicability of any early retirement reduction factor
contained in KRIP, KURIP and KERIP. This crediting of 8
additional years of service applies solely for these purposes
and is not intended to enhance any other Kodak benefit or
compensation to which you may become entitled, including, but
not limited to, any survivor income benefit that may become
payable under KRIP or any other company plan as a result of
your death. The 8 years of deemed "Accrued Service" credited
to you under this section will be treated as post-1995 Accrued
Service and, therefore, will not be taken into account for
purposes of calculating your pre-1996 Accrued Benefit under
Section 5.02(a)(3) of KRIP.
B. Continuous Employment. In order to receive the enhanced
retirement income benefit described in Section 3(A) above, you
must remain continuously employed by Kodak until your 55th
birthday on February 7, 2004. Thus, except as provided in
Section 3(C) below, if your employment terminates for any
reason, whether voluntarily or involuntarily, prior to your
55th birthday, you will not be entitled to receive the enhanced
retirement income benefit described in Section 3(A) above.
C. Termination For Other Than Cause or Disability. Notwithstanding
Sections 3(A) and 3(B) above to the contrary, if prior to your
55th birthday on February 7, 2004, Kodak terminates your
employment for other than "Cause" or "Disability," as those
terms are defined below, or if you terminate your employment
for "Good Reason," as defined below, you will remain eligible
for the enhanced retirement income benefit described in Section
3(A) above.
D. Offset. The amount of the retirement income benefit, if any,
provided to you under this Section 3 will be offset by the
retirement income benefit payable to you under the terms of
KRIP, KURIP and KERIP, and any successor plan(s) thereto.
132
E. Payment. The amount of the enhanced retirement benefit, if any,
payable to you under this Section 3 will: (i) be paid in such
form(s) as Kodak, in its discretion, determines; (ii) be paid
out of Kodak's general assets, not under KRIP; (iii) not be
funded in any manner; (iv) be included in your gross income as
ordinary income, subject to all income and payroll tax
withholding required to be made under all applicable laws; and
(v) not be grossed up or be given any other special tax
treatment by Kodak.
F. Employee Benefit Plan. To the extent the terms of this enhanced
retirement benefit constitute an "employee benefit plan" under
Section 3(3) of the Employee Retirement Income Security Act of
1974 ("ERISA"), the Senior Vice President, Eastman Kodak
Company and Director, Human Resources shall be the plan
administrator of the plan. The plan administrator shall have
total and exclusive responsibility to control, operate, manage
and administer the plan in accordance with its terms and all
the authority that may be necessary or helpful to enable
him/her to discharge his/her responsibilities with respect to
the plan. Without limiting the generality of the preceding
sentence, the plan administrator shall have the exclusive right
to: interpret the plan, decide all questions concerning
eligibility for and the amount of benefits payable under the
plan, construe any ambiguous provision of the plan, correct any
default, supply any omission, reconcile any inconsistency, and
decide all questions arising in the administration,
interpretation and application of the plan. The plan
administrator shall have full discretionary authority in all
matters related to the discharge of his/her responsibilities
and the exercise of his/her authority under the plan,
including, without limitation, his/her construction of the
terms of the plan and his/her determination of eligibility for
benefits under the plan. It is the intent of the plan, as well
as both parties hereto, that the decisions of the plan
administrator and his/her action with respect to the plan shall
be final and binding upon all persons having or claiming to
have any right or interest in or under the plan and that no
such decision or actions shall be modified upon judicial review
unless such decision or action is proven to be arbitrary or
capricious.
G. Cause. For purposes of this Section 3, "Cause" shall mean:
i. your continuous failure for a period of at least 30 calendar
days following delivery to you of a written notification
from Kodak's Chief Executive Officer or President to bring
the usual, customary and reasonable functions of your
position to a satisfactory level; or
ii. your failure to follow a lawful written directive of the
Chief Executive Officer or President; or
133
iii. your willful violation of any material rule, regulation, or
policy that may be established from time to time for the
conduct of Kodak's business; or
iv. your unlawful possession, use or sale of narcotics or other
controlled substances, or performing job duties while
illegally used controlled substances are present in your
system; or
v. any act of omission or commission by you in the scope of your
employment (a) which results in the assessment of a civil
or criminal penalty against you or Kodak, or (b) which in
the reasonable judgment of your supervisor could result in
a material violation of any foreign or U.S. federal, state
or local law or regulation having the force of law; or
vi. your conviction of or plea of guilty or no contest to any
crime involving moral turpitude; or
vii. any misrepresentation of a material fact to, or concealment
of a material fact from, your supervisor or any other
person in Kodak to whom you have a reporting relationship
in any capacity; or
viii.your breach of the Eastman Kodak Company Employees'
Agreement or the Kodak Business Conduct Guide.
H. Disability. For purposes of this letter agreement, "Disability"
shall mean disability as defined under the terms of the Kodak
Long-Term Disability Plan.
I. Good Reason. "Good Reason" means your voluntary termination of
employment within thirty (30) days of an involuntary reduction
in your total annual compensation (i.e., base salary and target
EXCEL award) by more than ten percent (10%).
J. Definitions. Any defined term used in this Section 3, other than
those specifically defined herein, will have the same meaning
for purposes of this document as that ascribed to it under
KRIP.
4. November 16, 2001 Stock Option Award
As an additional inducement to incent you to remain employed until your
55th birthday, Kodak will increase by 50,000 options the amount of your
stock option award under the management stock option grant scheduled for
November 16, 2001. These 50,000 stock options will be granted to you
under the terms of the 2000 Omnibus Long-Term Compensation Plan, vest in
three consecutive equal annual installments on the first three
anniversaries of the date of grant and have a term of ten years. The
options will have an exercise price equal to the mean between the high
and low at which Eastman Kodak common stock trades on the New York Stock
Exchange on November 16, 2001.
134
The specific terms, conditions and restrictions of this stock option
grant will be contained in an award notice delivered to you shortly after
your execution of this letter agreement.
5. Severance Benefit
A. In General. Under the retention package, you will be eligible for
a special severance benefit. If prior to your 55th birthday,
Kodak terminates your employment for reasons other than
"Cause," or "Disability," as those terms are defined above,
Kodak will, subject to your satisfaction of the terms of this
letter agreement, provide you the severance benefit described
in this Section 5.
This severance benefit will be paid to you in lieu of any other
severance benefit, payment or allowance that you would
otherwise be eligible for, except any benefits payable to you
under Kodak's Termination Allowance Plan ("TAP") or any
successor plan thereto. To the extent, however, you are
eligible for a termination allowance benefit under TAP (or any
successor plan), the severance benefit payable to you under
this Section 5 will be reduced by the amount of such
termination allowance benefit.
In no event will any of the severance benefit be "benefits
bearing." In other words, the amount of the severance benefit
will not be taken into account, or considered for any reason,
for purposes of determining any company provided benefits or
compensation to which you may become eligible.
B. Severance Allowance. Kodak will pay you a severance allowance
equal to two (2) times your then "total target annual
compensation." For this purpose, "total target annual
compensation" means your then annual base salary plus your then
target annual award under EXCEL. This severance allowance will
be paid in equal consecutive bi-monthly payments over the two
(2) year period commencing on the date of your termination of
employment. Kodak will withhold from the severance allowance
all income, payroll and employment taxes required by applicable
law or regulation to be withheld.
C. Continuation of Existing Health and Dental Coverages. Your
existing elections under the Kodak Medical Assistance Plan
("Kmed") and the Kodak Dental Assistance Plan ("Kdent") will be
continued, and fully paid by Kodak, until last day of the
fourth month immediately following the month of your
termination of employment.
D. Retraining Allowance. You will be eligible for a retraining
allowance benefit of up to $5,000. This benefit will be
provided to you in the same manner, and on the same terms and
conditions, as if you were a "Former Employee" eligible to
receive a retraining allowance pursuant to Article 7 of TAP.
All retraining allowance benefits will be subject to all
income, payroll and employment tax withholdings required by
applicable law or regulation to be withheld.
135
E. Outplacement Services. You will also be eligible for outplacement
services. This benefit will be provided to you in the same
manner, and on the same terms and conditions, as if you were
eligible for "Outplacement Services" pursuant to Article 8 of
TAP.
F. Approved and Permitted Reason. Your termination of employment
will be for a Permitted Reason for purposes of any stock
options and restricted stock held by you at the time of your
termination of employment. In addition, Kodak management will
recommend to the Executive Compensation and Development
Committee that your termination of employment be an Approved
Reason for purpose of any stock options, restricted stock and
awards under the Performance Stock Program that are held by you
at the time of your termination of employment.
G. Agreement, Waiver and Release. In order to receive the severance
benefit under this Section 5, you must execute immediately
prior to your termination of employment a waiver, general
release and covenant not to sue in favor of Kodak (the
"Agreement, Waiver and Release"), in a form satisfactory to the
Senior Vice President, Eastman Kodak Company and Director,
Human Resources.
H. Forfeiture. In the event that you violate any provision of this
letter agreement, the Agreement, Waiver and Release or your
Eastman Kodak Company Employees' Agreement, in addition to, and
not in lieu of, any other remedies that Kodak may pursue
against you, you will immediately forfeit any severance benefit
payable to you under this Section 5 and, if already paid, you
will immediately repay all amounts previously paid to you
pursuant this section.
6. Non-Solicitation of Employees or Customers
In partial consideration for the retention package under this letter
agreement, you agree that during the two (2) year period immediately
following your termination of employment, regardless of the reason for
your termination, you will not directly or indirectly recruit, solicit or
otherwise induce or attempt to induce any of Kodak's employees or
independent contractors to terminate their employment or contractual
relationship with the Company or work for you or any other entity in any
capacity, or solicit or attempt to solicit the business or patronage or
any of the Company's actual or prospective clients, customers, or
accounts with respect to any technologies, services, products, trade
secrets, or other matters in which the Company is active.
136
7. Injunctive Relief
You acknowledge by accepting the retention benefits under this letter
agreement that any breach or threatened breach by you of any term of
Section 6 cannot be remedied solely by the recovery of damages or the
withholding of benefits and Kodak will therefore be entitled to an
injunction against such breach or threatened breach without posting any
bond or other security. Nothing herein, however, will prohibit Kodak
from pursuing, in connection with an injunction or otherwise, any other
remedies available at law or equity for such breach or threatened breach,
including the recovery of damages.
8. Miscellaneous
A. Confidentiality. You agree to keep the content and existence of
this letter agreement confidential except that you may review
it with your financial advisor, attorney or spouse/partner and
with me or my designee. Upon such a disclosure, however, you
agree to advise the recipient of the confidential nature of
this letter agreement and the facts giving rise to it as well
as the recipient's obligations to maintain the confidentiality
of this letter agreement and the facts giving rise to it.
B. Unenforceability. If any portion of this letter agreement is
deemed to be void or unenforceable by a court of competent
jurisdiction, the remaining portions will remain in full force
and effect to the maximum extent allowed by law. The parties
intend and desire that each portion of this letter agreement be
given the maximum possible effect allowed by law.
C. Headings. The heading of the several sections of this letter
agreement have been prepared for convenience and reference only
and shall not control, affect the meaning, or be taken as the
interpretation of any provision of this letter agreement.
D. Applicable Law. This letter agreement, and its interpretation and
application, will be governed and controlled by the laws of the
State of New York, applicable as though to a contract made in
New York by residents of New York and wholly to be performed in
New York without giving effect to principles of conflicts of
laws.
E. Amendment. This letter agreement may not be changed, modified, or
amended, except in a writing signed by both you and Kodak that
expressly acknowledges that it is changing, modifying or
amending this letter agreement.
F. At Will. Please also keep in mind that, regardless of any
provision contained in this letter to the contrary, your
employment at Kodak is "at will". That is, you will be free to
terminate your employment at any time, for any reason, and
Kodak is free to do the same.
* * *
137
Your signature below means that:
1. You have had ample opportunity to discuss the terms and conditions
of this letter agreement with advisors of your choice from
among those types listed in Section 8(A) above, and as a result
fully understand its terms and conditions; and
2. You accept the terms and conditions set forth in this letter
agreement; and
3. This letter agreement supersedes and replaces any and all
agreements or understandings whether written or oral that you
may have with Kodak, or any subsidiaries or affiliates,
concerning the subject matter hereof.
If you find the foregoing acceptable, please sign your name on the
signature line provided below and return the original signed copy of this
letter directly to my attention within five (5) days of your receipt of
this letter agreement. Thank you and best wishes towards your continuing
successes at Kodak.
Very truly yours,
Michael P. Morley
I agree to the terms and conditions of this letter agreement.
Signed:
Martin M. Coyne
Dated:
138
Exhibit (10) P.
December 1, 2001
Eric L. Steenburgh
(address intentionally
deleted)
Re:Termination of Employment
Dear Eric:
This letter agreement addresses the terms and conditions of your
termination of employment from Eastman Kodak Company ("Kodak"). As you
are aware, your offer letter with Kodak dated March 12, 1998 (the "Offer
Letter") already stipulates some terms and conditions of your
termination of employment. In particular, your Offer letter describes
the severance and retirement benefits you are eligible for upon your
termination of employment. Subject to your satisfaction of the terms
and conditions of this letter agreement, Kodak is amenable to the
following additional and amended terms and conditions of your
termination of employment.
Once signed by both parties, this letter will constitute an agreement
between Kodak and you. For purposes of this letter, the term "Company"
will collectively refer to Kodak and all its subsidiaries and
affiliates.
1. Termination Date
As we have previously discussed, it is hereby agreed that your
employment by Kodak will terminate on April 1, 2002 (the "Termination
Date").
2. Responsibilities
During the remainder of your employment by Kodak, you will continue to
perform you present duties and responsibilities until they are
transitioned to your successor(s).
3. Health Care
Your existing elections under the Kodak Medical Assistance Plan ("Kmed")
and the Kodak Dental Assistance Plan ("Kdent") will be continued, and
fully paid by Kodak, until last day of the fourth month immediately
following the month of your termination of employment. Upon conclusion
of this four-month period, you will be able to continue your health and
dental coverages for a limited period of time by electing COBRA
continuation coverage. For more details regarding how to elect COBRA
continuation coverage, please see "You and Kodak." Following the
expiration of your COBRA coverage, you will have the ability under both
state and federal law to convert to a direct bill plan. Attachment 1 to
this letter agreement describes Blue Cross Blue Shield of the Rochester
Area's existing selection of direct bill plans.
139
4. Management Variable Compensation Plan
Assuming awards are paid under the Management Variable Compensation Plan
("MVCP") for the 2001 performance year, you will continue to be eligible
for such an award pursuant to the terms of the plan. Any award earned
will be paid in 2002 at the same time the other participants of the plan
receive their awards. You will not be eligible for an award under the
plan for the 2002 performance period.
5. Performance Stock Program
Kodak management will recommend to the Executive Compensation and
Development Committee of the Board of Directors of Kodak (the
"Compensation Committee") that your termination be treated as for an
"Approved Reason" for purposes of the 2000-2002 and 2001-2003
Performance Cycles of the 2000 Omnibus Long-Term Compensation Plan (the
"2000 Omnibus Plan"). Thus, you will remain eligible to receive an
award for each of these performance cycles. Any award earned by you
will be paid in the form of Common Stock free of any restrictions on the
cycle's respective Award Payment Date. To the extent the Compensation
Committee grants awards under the performance cycle, your award will be
pro-rated based upon your length of service during the cycle.
As required under the terms of your Offer Letter, Kodak management will
also recommend to the Compensation Committee that your termination of
employment be treated as an Approved Reason for purposes of your awards
under the Performance Stock Program for the 1996-1998 and 1997-1999
Performance Cycles.
6. Stock Options
Given your impending termination of employment, you were not awarded any
stock options under the November 16, 2001 grant under the management
stock option program.
Kodak management will, however, recommend to the Compensation Committee
that your termination of employment be treated as an Approved Reason for
purposes of any Kodak stock options held by you at the time of your
termination of employment. Absent this treatment, your unvested stock
options would be immediately forfeited upon your Termination Date and
you would have only 60 days in which to exercise your vested stock
options. Assuming the Compensation Committee agrees with Kodak's
recommendation, you will not forfeit any Kodak stock options by virtue
of your termination of employment. Please note, however, that your
options will still be subject to forfeiture should you engage in any of
the conduct proscribed in Article 14 of the 2000 Omnibus Plan.
140
7. Other Awards
Kodak management will also recommend to the Compensation Committee that
your termination of employment be treated as an Approved Reason for
purposes of the grant of restricted stock units you received on January
16, 2001. In addition, as required under the terms of your Offer
Letter, Kodak management will recommend to the Compensation Committee
that your termination of employment be treated as an Approved Reason for
purposes of the restricted stock award you received as a hiring bonus
under the terms of the Offer Letter.
8. Release
As a condition of receiving the severance benefits described in your
Offer Letter, you are required to sign an agreement, waiver and release.
This document is annexed to this letter agreement as Addendum A. In the
event you either fail to sign or, once signed, make an effective
revocation of Addendum A, you will not be entitled to any severance
benefits, nor any of the other benefits described in this letter
agreement.
9. Employees' Agreement
During your employment by Kodak, you signed an "Eastman Kodak Company
Employee's Agreement" in which you affirmed your obligation not to
disclose Company trade secret, confidential or proprietary information.
Further, you agreed not to engage in work or activities on behalf of a
competitor of the Company's in the field in which you were employed by
Kodak for a period following termination of your employment by Kodak
equal to the total number of months you were employed by Kodak, but in
no event more than twenty four (24) months. By signing this letter
agreement, you reaffirm the Employee's Agreement and agree that it is in
full force and effect, without amendment or modification.
10. Cooperation
In partial consideration for the benefits provided under this letter
agreement, you agree to cooperate fully with Kodak from now to the date
of your termination of employment and thereafter during the two (2) year
period following your termination on all matters relating to your
employment and termination of employment, the transition of your duties
and responsibilities to your successor(s), and the conduct of Kodak's
business. You further agree during such periods to cooperate fully with
Kodak regarding, and conduct all of your actions, statements and
communications in a manner consistent with, the announcement by Kodak of
your termination of employment.
141
11. Nondisparagement
In partial consideration for the benefits provided under this letter
agreement, you also agree that during the period commencing on the date
of this letter and ending on the second anniversary of the Termination
Date, you will not in any way disparage, make any statement, or take any
action which is adverse, inimical or otherwise detrimental to the
interests of Kodak or its subsidiaries or affiliates or their respective
current or former officers, directors, and employees or cause any of
such persons embarrassment or humiliation or otherwise cause or
contribute to such persons being held in disrepute by the public or
Kodak's or its subsidiaries' or affiliates' shareholders, clients,
customers, employees or competitors.
12. Non-Solicitation of Employees or Customers
In partial consideration for the benefits under this letter agreement,
you agree that during the period commencing on the date of this letter
and ending on the second anniversary of the Termination Date, you will
not directly or indirectly recruit, solicit or otherwise induce or
attempt to induce any of the Company's employees or independent
contractors to terminate their employment or contractual relationship
with the Company or work for you or any other entity in any capacity, or
solicit or attempt to solicit the business or patronage of any of the
Company's actual or prospective clients, customers, or accounts with
respect to any technologies, services, products, trade secrets, or other
matters in which the Company is active.
13. Injunctive Relief
You acknowledge by accepting the benefits under this letter agreement
that any breach or threatened breach by you of any term of Sections 10,
11 or 12 cannot be remedied solely by the recovery of damages or the
withholding of benefits and Kodak will therefore be entitled to an
injunction against such breach or threatened breach without posting any
bond or other security. Nothing herein, however, will prohibit Kodak
from pursuing, in connection with an injunction or otherwise, any other
remedies available at law or equity for such breach or threatened
breach, including the recovery of damages.
14. Remaining Terms of Offer Letter
All of the remaining terms of the Offer Letter, to the extent they are
not inconsistent with the terms of this letter agreement, will remain in
full force and effect, without amendment or modification.
15. Miscellaneous
A. Confidentiality. You agree to keep the content and existence of
this letter confidential except that you may review it with
your attorney, financial advisor or spouse. Prior to any such
disclosure, you agree to advise these individuals of the
confidential nature of this letter agreement and the facts
giving rise to it as well as their obligations to maintain the
confidentiality of this letter agreement and the facts giving
rise to it.
142
B. Unenforceability. If any portion of this letter agreement is
deemed to be void or unenforceable by a court of competent
jurisdiction, the remaining portions will remain in full force
and effect to the maximum extent allowed by law. The parties
intend and desire that each portion of this letter agreement
be given the maximum possible effect allowed by law.
C. Headings. The heading of the several sections of this letter
agreement have been prepared for convenience and reference
only and will not control, affect the meaning, or be taken as
the interpretation of any provision of this letter agreement.
D. Applicable Law. This letter agreement, and its interpretation
and application, will be governed and controlled by the laws
of the State of New York, applicable as though to a contract
made in New York by residents of New York and wholly to be
performed in New York without giving effect to principles of
conflicts of laws. Disputes arising under this letter
agreement will be adjudicated within the exclusive
jurisdiction of a state or federal court located in Monroe
County, New York. Neither party waives any right it may have
to remove such an action to the United States Federal District
Court located in Monroe County, New York.
E. Amendment. This letter agreement may not be changed, modified,
or amended, except in a writing signed by both you and Kodak
which expressly acknowledges that it is changing, modifying or
amending this letter agreement.
F. Forfeiture. In the event that you violate any provision of this
letter agreement, including Addendum "A", or your Eastman
Kodak Company Employee's Agreement, in addition to, and not in
lieu of, any other remedies that Kodak may pursue against you,
no severance benefits or any other payments or benefits will
be made to you hereunder and you agree to immediately repay
all monies previously paid to you pursuant to this letter
agreement. In such event all other provisions of this letter
agreement will remain in full force and effect as though the
breach had not occurred.
Your signature below means that:
1. You have had ample opportunity to discuss the terms and
conditions of this letter agreement with an attorney and/or
financial advisor of your choice and as a result fully
understand its terms and conditions; and
2. You accept the terms and conditions set forth in this letter
agreement; and
143
3. This letter agreement, including in particular its reference
regarding the continuing effectiveness of the Eastman Kodak
Company Employee's Agreement, supersedes and replaces any and
all agreements or understandings whether written or oral that
you may have with Kodak, concerning your termination of
employment and any special or other separation, termination,
or compensation arrangement.
If you agree to the foregoing, please sign and date this letter
agreement in the spaces provided below. Once signed and dated, please
return this letter agreement directly to my attention.
Very truly yours,
Michael P. Morley
I accept the terms and conditions of this letter agreement.
Signed:
Eric L. Steenburgh
Dated:
144
ADDENDUM A
AGREEMENT, WAIVER AND RELEASE
NOTICE:YOU ARE ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING
THIS AGREEMENT.
This Agreement, Waiver and Release (the "Agreement") is a contract
between the undersigned employee ("you") who is terminating employment on
the 1st day of April, 2002 and your employer, the Eastman Kodak Company
("Kodak").
1. Benefits
In consideration for signing this Agreement, you will receive the
benefits ("Severance Benefits") described in the letter agreements
between yourself and Kodak dated March 12, 1998 and December 1, 2001, to
which this Agreement is attached as Addendum A.
2. Release
In consideration for the Severance Benefits, you hereby release and
discharge Eastman Kodak Company (Kodak), its parent corporations,
subsidiaries, affiliates, successors and assigns and their respective
directors, officers, employees and agents (hereinafter collectively
referred to as the "Releasees"), both individually and in their official
capacity, from all claims, actions and causes of action of any kind,
which you, or your agents, executors, heirs, or assigns ever had, now
have, or may have, whether known or unknown, as a result of your
employment by or termination of employment from Kodak. This Agreement
includes, but is not limited to, the following: any action or cause of
action asserted or which could have been asserted under the Age
Discrimination In Employment Act of 1967, Title VII of the Civil Rights
Act of 1964, the New York Human Rights Law, the New York Labor Law, the
Employee Retirement Income Security Act, the Americans with Disabilities
Act, the Fair Labor Standards Act, the National Labor Relations Act or
the Equal Pay Act, all as amended; claims for wrongful discharge, unjust
dismissal, or constructive discharge; claims for breach of any alleged
oral, written or implied contract of employment; claims for salary,
severance payments, bonuses or other compensation of any kind; claims for
benefits; claims for libel, slander, defamation and attorneys' fees; and
any other claims under federal, state or local statute, law, rule or
regulation.
BY SIGNING THIS AGREEMENT, YOU GIVE UP ANY RIGHT YOU MAY HAVE TO BRING A
LAWSUIT OR RECEIVE A RECOVERY ON ANY CLAIM AGAINST KODAK AND THOSE
ASSOCIATED WITH KODAK BASED ON ANY ACTIONS, FAILURES TO ACT, STATEMENTS,
OR EVENTS OCCURRING PRIOR TO THE DATE OF THIS AGREEMENT, INCLUDING CLAIMS
THAT IN ANY WAY ARISE FROM OR RELATE TO YOUR EMPLOYMENT WITH KODAK OR THE
TERMINATION OF THAT EMPLOYMENT.
3. Release Exclusions
Excluded from the scope of this Release are claims for the compensation
and benefits described on Exhibit "A," a copy of which is annexed hereto
and made a part hereof.
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4. Termination Date
You hereby acknowledge that you will terminate from Kodak on April 1,
2002.
5. No Future Lawsuits
In addition to any and all other obligations you may have under the terms
of this Agreement, you also separately and independently covenant and
agree that you will not sue Releasees upon any of the claims that you
have released in Section 2 of this Agreement. You further agree not to
assist any other person or entity in bringing any lawsuit against Kodak
in any state or federal court unless such restriction is prohibited by
law.
6. Cooperation
You understand that, Kodak may need your continued cooperation and
involvement with various pieces of litigation and other legal matters
which are pending at the time of your termination of employment or which
may arise thereafter. In further consideration of the Severance
Benefits, you agree, at Kodak's request from time to time, to cooperate
with Kodak in its efforts to defend and/or pursue any such litigation or
other legal matters. You will provide this assistance to Kodak at no
additional remuneration beyond the Severance Benefits. When performing
these services at Kodak's request, except where prohibited by law, Kodak
will reimburse you for reasonable travel and lodging expenses that you
incur upon submission of documentation acceptable to Kodak. By way of
illustration and not by way of limitation, the types of services that may
be requested of you under this Section 6 include: attending strategy
sessions, attending preparations for trial, appearing at depositions,
executing affidavits and testifying at trials.
7. Return of Kodak Property
Whether or not you sign this Agreement, you, as a terminating employee,
are reminded that prior to your termination of employment you must return
to Kodak, (i) all documents, and other tangible items, and any copies,
that are in your possession or control and which contain confidential
information in written, magnetic or other form and shall have not given
such documents, items, or copies to anyone other than another Kodak
employee; and (ii) all other Kodak property within your possession
including, but not limited to, office keys, identification badges or
passes, Kodak credit cards, automobiles, and computer equipment and
software. You understand and acknowledge your continuing obligation
regarding the disclosure of confidential, proprietary and trade secret
information which you have obtained during your employment with Kodak.
146
8. Eastman Kodak Company Employees' Agreement
Whether or not you sign this Agreement, you, as a terminating employee,
are reminded that the Eastman Kodak Company Employees' Agreement (the
"Employees' Agreement") entered into between Kodak and yourself remains
in full force and effect after termination of your employment. Under the
Employees' Agreement, you reaffirmed your obligation not to disclose
Kodak trade secrets, confidential or proprietary information. Also,
under the terms of the Employee's Agreement, you agreed not to engage in
work or activities on behalf of a competitor of Kodak's in the field in
which you were employed by Kodak for a period following termination of
your employment equal to the total number of months you were employed by
Kodak, but in no event more than twenty four (24) months.
9. Breach
You agree that if a legal proceeding finds you violate any part of this
Agreement or the Employees' Agreement described in Section 8 above, you
will be responsible for all costs incurred by Kodak that flow from that
violation, including Kodak's legal fees and other costs associated with
any legal action that arises from that violation. You also agree that if
you violate any part of this Agreement or the Employees' Agreement, you
will not be entitled to the Severance Benefits.
You further agree that any breach or threatened breach by you of this
Agreement cannot be remedied solely by the recovery of damages and Kodak
shall therefore be entitled to any injunction against such breach or
threatened breach without posting any bond or other security. Nothing
herein, however, shall be construed as prohibiting Kodak from pursuing,
in connection with an injunction or otherwise, any other remedies
available at law or equity for such breach or threatened breach,
including the recovery of damages.
10. Period of Review and Other Considerations
a. Date of Receipt. You acknowledge that you received this Agreement on
or prior to December 15, 2001.
b. Attorney Consultation. You acknowledge that you have had the
opportunity to consult with an attorney of your choice concerning
this Agreement.
c. Period of Review. You acknowledge that you have been given at least
21 days in which to consider signing this Agreement. You understand
that in the event you execute this Agreement within less than 21
days of the date of its delivery to you, you acknowledge that such
decision was entirely voluntary and that you have had the
opportunity to consider this Agreement for the entire 21 day period.
147
d. Entire Agreement. This Agreement, including in particular its
reference regarding the continuing effectiveness of the Employees'
Agreement, the letter agreement to which this Agreement is attached
and the attached Exhibit "A" set forth the entire agreement between
Kodak and yourself and supersede and render null and void any and
all prior or contemporaneous oral or written understandings,
statements, representations or promises regarding the subject
matter(s) hereof. This Agreement does not, however, supersede the
letter agreement to which this Agreement is attached and the
Employees' Agreement which remain in full force and effect.
e. Governing Law. This Agreement shall be construed and governed by the
laws of the State of New York without giving effect to principles of
conflicts of laws. If any provision of this Agreement including,
but not limited to, the waiver of claims under any particular
statute, should be deemed unenforceable, the remaining provisions
shall, to the extent possible, be carried into effect, taking into
account the general purpose and spirit of this Agreement.
f. Revocation of Agreement. You understand that you have the right to
revoke this Agreement within 7 days of your signing it, and that
this Agreement shall not become effective or enforceable until this
7 day period has expired. To revoke this Agreement, you agree to
notify in writing: Chief Administrative Officer, Executive Vice
President, Eastman Kodak Company, 343 State Street, Rochester, NY
14650. Unless so revoked, this Agreement will be effective at 5:00
p.m. on such seventh day. You agree that if you exercise your right
to revoke this Agreement within 7 days, your termination of
employment will nevertheless occur, you will not be entitled to the
Severance Benefits, and you will immediately return to Kodak any
consideration you have already received.
YOU HAVE CAREFULLY READ AND FULLY UNDERSTAND ALL THE PROVISIONS OF THIS
AGREEMENT, AND YOU ARE ENTERING INTO THIS AGREEMENT VOLUNTARILY. YOU
ACKNOWLEDGE THAT THE CONSIDERATION YOU ARE RECEIVING IN EXCHANGE FOR
EXECUTING THIS AGREEMENT IS GREATER THAN THAT WHICH YOU WOULD BE ENTITLED
TO IN THE ABSENCE OF THIS AGREEMENT. YOU HAVE NOT RELIED UPON ANY
REPRESENTATION OR STATEMENT, WRITTEN OR ORAL, NOT SET FORTH IN THIS
AGREEMENT.
148
WITNESS MY SIGNATURE, THIS DAY OF , 2002.
Eric L. Steenburgh
Sworn to before me this
day of , 2002.
Notary Public
WITNESS MY SIGNATURE, THIS DAY OF , 2002.
Employer Representative Signature
Sworn to before me this
day of , 2002.
Notary Public
149
Exhibit "A"
1. Claims for benefits to which you may be eligible under the terms of the
following benefit plans, as such plans may be amended from time to time:
Kodak Retirement Income Plan, Kodak Unfunded Retirement Income Plan, Kodak
Excess Retirement Income Plan or Eastman Kodak Employees' Savings and
Investment Plan.
2. Claims for expenses incurred by you or your covered family members
prior to your termination of employment under the Kodak Medical
Assistance Plan or the Kodak Dental Plan.
3. Claims for accrued, but unpaid and unused, benefits under the Vacation
Plan.
4. Any claims that may arise after the date this Agreement is executed
unrelated to your employment or the termination of your employment.
5. Claims for any amounts or awards due you under the Eastman Kodak
Company 1982 Executive Deferred Compensation Plan.
6. Claims for benefits and compensation owing to you under the letter
agreements between you and Kodak dated March 12, 1998 and December
1, 2001.
150
December 28, 2001
Eric L. Steenburgh
(Address intentionally
omitted)
Re: Termination of Employment
Dear Eric:
Per your request, I have enclosed a copy of your December 1, 2001 letter
agreement with Kodak and its attached agreement, waiver and release.
Please note that your signature on the agreement, waiver and release
still needs to be executed before a notary. We can take care of this
detail upon your return from Florida in February.
When we last met, you asked me to confirm several additional matters
concerning your termination of employment from Kodak. Specifically, you
inquired about your life insurance coverage, your participation in
Kodak's financial planning program and your ability to keep your Kodak
personal computer. Each of these matters is discussed below.
1. Life Insurance
As you are aware, you are ineligible for retiree life insurance coverage
because you are neither age 55 with 10 or more years of service or age
65. Given this, Kodak agrees to reimburse you for the cost of
maintaining life insurance coverage under Klife Plus Optional of up to
one times your present total target annual compensation until you reach
age 70. To receive this benefit, you must properly elect to continue
your Klife Plus Optional coverage through MetLife.
The reimbursements of the costs of maintaining this coverage will be
treated as taxable income to you and reported accordingly. Kodak will
withhold from the reimbursements all income and payroll taxes required to
be withheld under applicable federal, state and local law.
2. Financial Planning
As you have requested, you will remain eligible to participate in Kodak's
financial counseling program, at Kodak's expense, for the two-year period
immediately following your termination of employment. This same coverage
is normally provided to a senior executive who retires from the company.
The cost to maintain this coverage will be treated as taxable income to
you and reported accordingly.
151
3. Personal Computer
It is understood that you presently have a company owned personal
computer at your residence that you use for business purposes. Given its
age, we understand that this computer is by present standards somewhat
outdated. In light of this, you may retain this computer upon your
termination of employment. Please be advised, however, the current value
of the computer will be treated as taxable income to you and reported
accordingly.
* * *
Eric, I believe the foregoing responds to the issues you have raised
concerning your termination of employment. Should you have any further
questions, please contact me.
Very truly yours,
Michael P. Morley
152
Exhibit (10) R.
Amendment to 2000 Omnibus Long-Term Compensation Plan
This amendment amends the 2000 Omnibus Long-Term Compensation Plan,
effective as of November 12, 2001.
The last sentence of Section 8.2 of the Plan entitled "Terms and
Conditions of Stock Options" is amended in its entirety to read as
follows:
Except as set forth in Section 8.7, stock options shall not be
repriced, i.e., there shall be no grant of a stock option(s) to a
Participant in exchange for a Participant's agreement to
cancellation of a higher-priced stock option(s) that was previously
granted to such Participant.
The Plan is amended to add the following as new Section 8.7:
8.7 Stock Option Exchange Program
(a) In General. As soon as reasonably possible following January
25, 2002, the Company will be permitted to implement the Stock
Option Exchange Program. Under this program, Eligible
Employees will be offered a one-time opportunity to elect to
cancel all of their current stock options in exchange for the
grant of new stock options, with such new options to be
granted no less than six months and one day following the date
the current options are cancelled, at a price equal to 100% of
the fair market value of the Common Stock, as determined by
the Committee, on such date of grant. The Exchange Ratio(s)
for the program will be chosen by the Committee using as its
basis the Black-Scholes stock option valuation model. All of
the new stock options will have the same vesting terms as the
surrendered options they replace. Each new option will have a
term equal to the remaining term of the surrendered option it
replaces. All of the other terms and conditions of the new
options will be identical to the surrendered stock options
they replace. The top six most senior executive officers of
the Company will not be eligible to participate in the
program. The program will be structured so that the Company
avoids incurring financial accounting charges.
153
(b) Administration. The Committee will have total and exclusive
responsibility to control, operate, manage and administer the
Stock Option Exchange Program in accordance with its terms and
all the authority that may be necessary or helpful to enable
it to discharge its responsibilities with respect to the
program. Without limiting the generality of the preceding
sentence, the Committee will have the exclusive right to:
interpret the program, decide all questions concerning
eligibility for and the amount of Awards payable under the
program, construe any ambiguous provision of the program,
correct any default, supply any omission, reconcile any
inconsistency, and decide all questions arising in the
administration, interpretation and application of the program.
The Committee will have full discretionary authority in all
matters related to the discharge of its responsibilities and
the exercise of its authority under the program, including,
without limitation, its construction of the terms of the
program and its determination of eligibility for the program.
It is the intent of the program that the decisions of the
Committee and its actions with respect to the program will be
final and binding upon all persons having or claiming to have
any right or interest in or under the program.
(c) Foreign Jurisdictions. In order to facilitate participation in
the Stock Option Exchange Program by those Eligible Employees
who are employed by the Company outside the United States (or
who are foreign nationals temporarily within the United
States), the Committee may provide for such modifications and
additional terms and conditions ("special terms") to the
program as the Committee may consider necessary or appropriate
to accommodate differences in local law, policy or custom, or
to facilitate administration of the program. The special
terms may provide that the grant of an Award is subject to (1)
applicable governmental or regulatory approval or other
compliance with local legal requirements and/or (2) execution
by the Eligible Employee of a written instrument in the form
specified by the Committee, and that in the event such
conditions are not satisfied, the grant will be void. The
special terms may also provide that an Award will become
exercisable or redeemable, as the case may be, if an Eligible
Employee's employment with the Company ends as a result of
workforce reduction, realignment or similar measure and the
Committee may designate a person or persons to make such
determination for a location. The Committee may adopt or
approve sub-plans, appendices or supplements to, or
amendments, restatements, or alternative versions of, the
program as it may consider necessary or appropriate for
purposes of implementing any special terms, without thereby
affecting the terms of the program.
(d) Stock Appreciation Rights. All SARs granted under the Plan will
be eligible for the Stock Option Exchange Program on
essentially the same terms and conditions as those that will
apply to stock options granted under the Plan.
154
(e) Definitions. Any defined term used in this section which is
not defined elsewhere in the Plan will have that meaning
given to it by the Committee in its sole and absolute
discretion.
155
Exhibit (10) S.
AMENDMENT TO 2000 MANAGEMENT VARIABLE COMPENSATION PLAN
This amendment amends the 2000 Management Variable Compensation Plan,
effective as of May 9, 2001.
Section 2.30 entitled "Performance Criteria" of the 2000 Management
Variable Compensation Plan is amended in its entirety to read as follows:
2.30 Performance Criteria
"Performance Criteria" means the stated business criterion or criteria upon
which the Performance Goals for a Performance Period are based as required
pursuant to Proposed Treasury Regulation Section 1.162-27(e)(4)(iii). The
Performance Criteria that will be used to establish such Performance
Goal(s) will be based on or derived from one or more of the following as
designated by the Committee on a company specific basis, business unit
basis or in comparison with peer group performance: Economic Profit/EVA,
return on net assets ("RONA"), return on shareholders' equity, return on
assets, return on capital, return on sales, shareholder return, total
shareholder return, profit margin, earnings per share, net earnings,
operating earnings, earnings before interest and taxes, Common Stock price
per share, cash flow, cost reduction, revenue, revenue growth, sales or
market share.
156
Exhibit (10) X.
November 12, 2001
Robert H. Brust
(address intentionally
omitted)
Re:Retention
Dear Bob:
The purpose of this letter agreement is to amend in several respects
your December 20, 1999 offer letter with Eastman Kodak Company
("Kodak") in an effort to encourage you to remain employed until at
least January 3, 2007. For purposes of this letter agreement, your
December 20, 1999 offer letter as amended on February 8, 2001 will be
referred to as your "Offer Letter." Once signed by both parties, this
letter will constitute an agreement between Kodak and you. For
purposes of this letter agreement, the term "Company" will refer to
Kodak and all of its subsidiaries and affiliates.
1. Retention
To incent you to remain employed with Kodak through January 3, 2007, Kodak
agrees to make several changes to your Offer Letter. In particular, Kodak
will, subject to your satisfaction of the terms and conditions of this
letter agreement, amend your Offer Letter to modify the repayment schedule
of the loan made under Section 10, enhance the retirement income benefit
provided under Section 11, and increase the severance benefit under Section
12. As an additional incentive to encourage you to remain employed until
January 3, 2007, Kodak will, subject to your satisfaction of the terms and
conditions of this letter agreement, award you an additional 50,000 stock
options under the management grant scheduled for November 16, 2001. The
remaining sections of this letter agreement detail the terms and conditions
of these incentives.
2. Loan
Subject to your satisfaction of the terms and conditions of this letter
agreement, Section 10 of the Offer Letter is amended in its entirety to
read as follows:
157
10. Loan
We understand that as a result of accepting employment with Kodak,
you will forfeit 75,000 restricted shares of your current
employer's common stock. If this occurs, Kodak will upon the
commencement of your employment loan you $3,000,000. At the time
of such loan, you will deliver to Kodak a seven-year recourse note
in the form of Exhibit A. The loan will accrue interest at the
Applicable Federal Rate provided by the Internal Revenue Service
in the most recent announcement preceding such loan. The loan
principal and all accrued interest will be forgiven on each of the
first seven anniversaries of the date of such loan in accordance
with the table set forth below. You will not, however, be
entitled to forgiveness on any such anniversary date if you
voluntarily terminate your employment or are terminated for
"Cause," as defined below, on or prior to such anniversary date.
Aniversary Amount forgiven
1st $600,000
2nd $300,000
3rd $300,000
4th $400,000
5th $400,000
6th $500,000
7th $500,000
3. Pension Benefits
Subject to your satisfaction of the terms and conditions of this letter
agreement and assuming you remain employed with Kodak through January
3, 2005, Section 11(D) of the Offer Letter will be amended in its
entirety to read as follows:
D. Offset. The amount of the retirement benefit, if any, provided
to you under this Section 11 will be offset by the retirement
benefits that you accrue under the Kodak Retirement Income
Plan and the Kodak Unfunded Retirement Income Plan. The
calculation of this offset will be performed at the end of
this 5 year period. For purposes of this calculation, the
present lump sum value of the life annuity provided to you
under this Section 11 will be determined using a discount
rate equal to the then most recent 20 year Treasury Bill rate
and your then life expectancy determined under the GAM 83
table.
158
4. Enhanced Retirement Income Benefit
A. In General. Should you remain employed with Kodak until January
3, 2007, Section 11 of your Offer Letter will, subject to
your satisfaction of the terms and conditions of this letter
agreement, be deleted in its entirety and replaced by the
terms of this Section 4. Similarly, should Kodak after
January 3, 2005, but prior to January 3, 2007, involuntarily
terminate your employment for other than "Cause" or
"Disability," as those terms are defined in the Offer Letter,
Section 11 of your Offer Letter will, notwithstanding Section
3 above to the contrary, be deleted in its entirety and
replaced by the terms of this Section 4; provided, however,
you satisfy all of the terms and conditions of this letter
agreement.
B. Benefit. Kodak will provide you a retirement income benefit (1)
as if you were eligible to participate in Kodak's retirement
plans by virtue of being employed by Kodak after December 31,
1995, but prior to March 1, 1999, and (2) based on 18 years
of deemed service. The names of the specific retirement
plans that you will be treated as participating in by virtue
of being treated as employed after December 31, 1995, but
prior to March 1, 1999, are the Kodak Retirement Income Plan
("KRIP"), the Kodak Unfunded Retirement Plan ("KURIP") and
the Kodak Excess Retirement Income Plan ("KERIP"). These
three plans insofar as they apply to employees employed by
Kodak after March 31, 1995, but prior to March 1, 1999, will
be collectively referred to as the "Retirement Plan."
As explained in Section 4(C) below, the 18 years of deemed
service that you will be treated as receiving under the
Retirement Plan will not be credited to you unless and until
you complete 7 years of actual service under the Retirement
Plan. Thus, upon completion of these 7 years of service, you
will have 25 years of service in total. Thereafter, you will
continue to earn additional service credit under the
Retirement Plan based on your actual service with Kodak. Any
service credited to you under the Retirement Plan (whether
actual or deemed) will only apply for purposes of
establishing under the Retirement Plan: (i) the total amount
of your "Vesting Service"; (ii) the total amount of your
"Accrued Service" used to calculate your retirement income
benefit; and (iii) your "Total Service" for purposes of
determining the applicability of any early retirement
reduction factor. The crediting of service applies solely
for these purposes and is not intended to enhance any other
Kodak benefit or compensation.
159
C. Continuous Employment. In order to receive the enhanced
retirement income benefit described in Section 4(B) above,
you must remain continuously employed by Kodak until January
3, 2007. Thus, except as provided in Section 4(D) below, if
your employment terminates for any reason, whether
voluntarily or involuntarily, prior to your January 3, 2007,
you will not be entitled to receive the enhanced retirement
income benefit described in this Section 4.
D. Termination For Other Than Cause or Disability. Notwithstanding
Sections 4(C) above to the contrary, if after January 3,
2005, but prior to January 3, 2007, Kodak terminates your
employment for other than "Cause" or "Disability," as those
terms are defined in the Offer Letter, you will remain
eligible for the enhanced retirement income benefit described
in this Section 4. In such event, your enhanced retirement
income benefit under Section 4(B) above will be calculated
based on your actual years of service prior to your
termination of employment plus 18 years of deemed service.
E. Offset. The amount of the retirement income benefit, if any,
provided to you under this Section 4 will be offset by the
retirement income benefit payable to you under the terms of
KRIP, KURIP and KERIP, and any successor plan(s) thereto.
F. Payment. The amount of the enhanced retirement benefit, if any,
payable to you under this Section 4 will: (i) be paid in such
form(s) as Kodak, in its discretion, determines; (ii) be paid
out of Kodak's general assets, not under KRIP; (iii) not be
funded in any manner; (iv) be included in your gross income
as ordinary income, subject to all income and payroll tax
withholding required to be made under all applicable laws;
and (v) not be grossed up or be given any other special tax
treatment by Kodak.
160
G. Employee Benefit Plan. To the extent the terms of this enhanced
retirement benefit constitute an "employee benefit plan"
under Section 3(3) of the Employee Retirement Income Security
Act of 1974 ("ERISA"), the Senior Vice President, Eastman
Kodak Company and Director, Human Resources shall be the plan
administrator of the plan. The plan administrator shall have
total and exclusive responsibility to control, operate,
manage and administer the plan in accordance with its terms
and all the authority that may be necessary or helpful to
enable him/her to discharge his/her responsibilities with
respect to the plan. Without limiting the generality of the
preceding sentence, the plan administrator shall have the
exclusive right to: interpret the plan, decide all questions
concerning eligibility for and the amount of benefits payable
under the plan, construe any ambiguous provision of the plan,
correct any default, supply any omission, reconcile any
inconsistency, and decide all questions arising in the
administration, interpretation and application of the plan.
The plan administrator shall have full discretionary
authority in all matters related to the discharge of his/her
responsibilities and the exercise of his/her authority under
the plan, including, without limitation, his/her construction
of the terms of the plan and his/her determination of
eligibility for benefits under the plan. It is the intent of
the plan, as well as both parties hereto, that the decisions
of the plan administrator and his/her action with respect to
the plan shall be final and binding upon all persons having
or claiming to have any right or interest in or under the
plan and that no such decision or actions shall be modified
upon judicial review unless such decision or action is proven
to be arbitrary or capricious.
5. Severance Allowance
Subject to your satisfaction of the terms and conditions of this letter
agreement, Section 12 of the Offer Letter is amended in its entirety to
read as follows:
12. Severance Allowance
A. In General. If prior to the seventh anniversary of the date of
your employment by Kodak, your employment is terminated by
Kodak for reasons other than "Cause" or "Disability," as
those terms are defined above, Kodak will pay you, subject to
your satisfaction of the terms of this Section 12, a
severance allowance equal to two (2) times your then-current
annual base salary plus your then-current target annual
incentive award under MVCP, or any successor plan thereto.
The severance allowance will be paid in equal consecutive bi-
monthly payments over the two (2) year period commencing on
the date of your termination of employment.
161
This severance allowance shall be paid to you in lieu of any
other severance benefit, payment or allowance that you would
otherwise be eligible for, except any benefits payable to you
under any Kodak severance plan. To the extent, however, you
are eligible for a benefit under a Kodak severance plan, the
benefits payable to you under this Section 12 will be reduced
by the amount of such severance benefit. In no event shall
any of this severance allowance be "benefits bearing." Kodak
will withhold from this severance allowance all income,
payroll and employment taxes required by applicable law or
regulation to be withheld.
In the event you breach any of the terms of the Eastman Kodak
Company Employees' Agreement described in Section 21 below or
the Agreement, Waiver and Release described in Section 12(B)
below, in addition to and not in lieu of, any other remedies
that Kodak may pursue against you, no further severance
allowance payments will be made to your pursuant to this
section and you agree to immediately repay to Kodak all
moneys previously paid to you pursuant to this section.
B. Agreement, Waiver and Release. In order to receive the
severance allowance described in Section 12(A) above, you
must execute immediately prior to your termination of
employment a waiver, general release and covenant not to sue
in favor of the Company (the "Agreement, Waiver and
Release"), in a form satisfactory to the Senior Vice
President, Eastman Kodak Company and Director, Human
Resources.
6. November 16, 2001 Stock Option Award
As an additional inducement to incent you to remain employed until
January 3, 2007, Kodak will increase by 50,000 options the amount of
your stock option award under the management stock option grant
scheduled for November 16, 2001. These 50,000 stock options will be
granted to you under the terms of the 2000 Omnibus Long-Term
Compensation Plan, vest in three consecutive equal annual installments
on the first three anniversaries of the date of grant and have a term
of ten years. The options will have an exercise price equal to the
mean between the high and low at which Eastman Kodak common stock
trades on the New York Stock Exchange on November 16, 2001.
The specific terms, conditions and restrictions of this stock option
grant will be contained in an award notice delivered to you shortly
after your execution of this letter agreement.
162
7. Non-Solicitation of Employees or Customers
In partial consideration for the incentives under this letter
agreement, you agree that during the two (2) year period immediately
following your termination of employment, regardless of the reason for
your termination, you will not directly or indirectly recruit, solicit
or otherwise induce or attempt to induce any of the Company's employees
or independent contractors to terminate their employment or contractual
relationship with the Company or work for you or any other entity in
any capacity, or solicit or attempt to solicit the business or
patronage or any of the Company's actual or prospective clients,
customers, or accounts with respect to any technologies, services,
products, trade secrets, or other matters in which the Company is
active.
8. Injunctive Relief
You acknowledge by accepting the retention benefits under this letter
agreement that any breach or threatened breach by you of any term of
Section 7 cannot be remedied solely by the recovery of damages or the
withholding of benefits and Kodak will therefore be entitled to an
injunction against such breach or threatened breach without posting any
bond or other security. Nothing herein, however, will prohibit Kodak
from pursuing, in connection with an injunction or otherwise, any other
remedies available at law or equity for such breach or threatened
breach, including the recovery of damages.
9. Remaining Terms of Offer Letter
All of the remaining terms of the Offer Letter, to the extent they are
consistent with the terms of this letter agreement, will remain in full
force and effect, without amendment or modification.
10. Miscellaneous
A. Confidentiality. You agree to keep the content and existence of
this letter agreement confidential except that you may review
it with your financial advisor, attorney or spouse/partner
and with me or my designee. Upon such a disclosure, however,
you agree to advise the recipient of the confidential nature
of this letter agreement and the facts giving rise to it as
well as the recipient's obligations to maintain the
confidentiality of this letter agreement and the facts giving
rise to it.
B. Unenforceability. If any portion of this letter agreement is
deemed to be void or unenforceable by a court of competent
jurisdiction, the remaining portions will remain in full
force and effect to the maximum extent allowed by law. The
parties intend and desire that each portion of this letter
agreement be given the maximum possible effect allowed by
law.
C. Headings. The heading of the several sections of this letter
agreement have been prepared for convenience and reference
only and shall not control, affect the meaning, or be taken
as the interpretation of any provision of this letter
agreement.
163
D. Applicable Law. This letter agreement, and its interpretation
and application, will be governed and controlled by the laws
of the State of New York, applicable as though to a contract
made in New York by residents of New York and wholly to be
performed in New York without giving effect to principles of
conflicts of laws.
E. Amendment. This letter agreement may not be changed, modified,
or amended, except in a writing signed by both you and Kodak
that expressly acknowledges that it is changing, modifying or
amending this letter agreement.
F. At Will. Please also keep in mind that, regardless of any
provision contained in this letter to the contrary, your
employment at Kodak is "at will". That is, you will be free
to terminate your employment at any time, for any reason, and
Kodak is free to do the same.
* * *
Your signature below means that:
1. You have had ample opportunity to discuss the terms and
conditions of this letter agreement with advisors of your
choice from among those types listed in Section 10(A) above,
and as a result fully understand its terms and conditions;
and
2. You accept the terms and conditions set forth in this letter
agreement; and
3. You agree that this letter agreement supersedes and replaces any
and all agreements or understandings whether written or oral
that you may have with Kodak concerning the subject matter
hereof; except, however, this letter does not in any way
supersede or replace your Eastman Kodak Company Employee's
Agreement.
If you find the foregoing acceptable, please sign your name on the
signature line provided below and return the original signed copy of
this letter directly to my attention prior to November 16, 2001. Thank
you and best wishes towards your continuing successes at Kodak.
Very truly yours,
Michael P. Morley
164
I agree to the terms and conditions of this letter agreement.
Signed:
Robert H. Brust
Dated:
165
Exhibit (12)
Eastman Kodak Company and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
(in millions, except for ratios)
Year Ended December 31
2001 2000 1999 1998 1997
Earnings
before provision for
income taxes $ 108 $2,132 $2,109 $2,106 $ 53
Add:
Interest expense 219 178 142 110 98
Share of interest expense
of 50% owned companies 14 16 8 7 5
Interest component of
rental expense (1) 42 52 47 50 61
Amortization of
capitalized interest 28 28 24 24 23
------ ------ ------ ------ ----
Earnings as adjusted $ 411 $2,406 $2,330 $2,297 $240
====== ====== ====== ====== ====
Fixed charges
Interest expense 219 178 142 110 98
Share of interest expense
of 50% owned companies 14 16 8 7 5
Interest component of
rental expense (1) 42 52 47 50 61
Capitalized interest 12 40 36 41 33
------ ------ ------ ------ ----
Total fixed charges $ 287 $ 286 $ 233 $ 208 $197
====== ====== ====== ====== ====
Ratio of earnings to
fixed charges 1.4x(2) 8.4x 10.0x(3) 11.0x 1.2x(4)
(1) Interest component of rental expense is estimated to equal 1/3 of
such expense, which is considered a reasonable approximation of the
interest factor.
(2) The ratio is 3.8x before deducting restructuring program charges of
$678 million.
(3) The ratio is 11.5x before deducting restructuring program charges of
$350million.
(4) The ratio is 8.6x before deducting restructuring program charges of
$1,455 million.
166
Exhibit (21)
Subsidiaries of Eastman Kodak Company
Organized
Companies Consolidated Under Laws of
Eastman Kodak Company New Jersey
Eastman Kodak International
Sales Corporation Barbados
Cinesite, Inc. Delaware
FPC Inc. California
Qualex Inc. Delaware
Qualex Canada Photofinishing Inc. Canada
PictureVision Inc. Delaware
Eastman Gelatine Corporation Massachusetts
Research Systems, Inc. Colorado
ProShots, Inc. Delaware
Pakon, Inc. Indiana
Ofoto, Inc. Delaware
CustomerFirst Service & Support, Inc. Delaware
Lumisys Incorporated Delaware
Kodak Global Imaging, Inc. Delaware
Eastman Canada Inc. Canada
Kodak Canada Inc. Canada
Kodak Argentina S.A.I.C. Argentina
Kodak Chilena S.A.F. Chile
Kodak Americas Miami Export Operations (KAMEO) Delaware
Kodak Panama, Ltd. New York
Kodak Americas, Ltd. New York
Kodak Venezuela, S.A. Venezuela
Kodak (Near East), Inc. New York
Kodak (Singapore) Pte. Limited Singapore
Kodak Philippines, Ltd. New York
Kodak Limited England
Cinesite (Europe) Limited England
Kodak India Limited India
Kodak International Finance Ltd. England
Kodak Polska Sp.zo.o Poland
Kodak AO Russia
Kodak Ireland Limited Ireland
Kodak-Pathe SA France
Kodak A.G. Germany
E. K. Holdings, B.V. Netherlands
Kodak Brasileira C.I.L. Brazil
Kodak Nederland B.V. Netherlands
Kodak Korea Limited South Korea
Kodak Far East Purchasing, Inc. New York
Kodak New Zealand Limited New Zealand
Kodak (Australasia) Pty. Ltd. Australia
Kodak (South Africa) (Proprietary) Ltd. South Africa
Kodak (Kenya) Limited Kenya
Kodak (Egypt) S.A.E. Egypt
Kodak (Malaysia) S.B. Malaysia
Kodak Taiwan Limited Taiwan
167
Exhibit (21)
(Continued)
Organized
Companies Consolidated Under Laws of
Eastman Kodak Company
Eastman Kodak International Capital
Company, Inc. Delaware
Kodak de Mexico S.A. de C.V. Mexico
Kodak Export de Mexico, S. de R.L. de C.V. Mexico
Kodak Mexicana S.A. de C.V. Mexico
N.V. Kodak S.A. Belgium
Kodak a.s. Denmark
Kodak Norge A/S Norway
Kodak SA Switzerland
Kodak (Far East) Limited Hong Kong
Kodak (Thailand) Limited Thailand
Kodak G.m.b.H. Austria
Kodak Kft. Hungary
Kodak Oy Finland
Kodak S.p.A. Italy
Kodak Portuguesa Limited New York
Kodak S.A. Spain
Kodak AB Sweden
Eastman Kodak S.A. Switzerland
Kodak Japan Ltd. Japan
Kodak Imagex K.K. Japan
K.K. Kodak Information Systems Japan
Kodak Japan Industries Ltd. Japan
Kodak (China) Limited Hong Kong
Kodak Electronic Products (Shanghai) Co., Ltd. China
BASO Precision Optics, Ltd. Taiwan
K.H. Optical Company Limited Hong Kong
Kodak Photographic Equipment (Shanghai) Co., Ltd. China
Kodak (China) Co. Ltd. China
Kodak (WUXI) Co. Ltd. China
Kodak Xiamen Ltd. China
Note: Subsidiary Company names are indented under the name of the parent
company.
168
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 33-
48258, No. 33-49285, No. 33-64453, and No. 333-31759), Form S-4 (No. 33-
48891 and No. 333-74572), and S-8 (No. 33-5803, No. 33-35214, No. 33-
56499, No. 33-65033, No. 33-65035, No. 333-57729, No. 333-57659, No. 333-
57663, No. 333-57665, No. 333-23371, No. 333-43526, and No. 333-43524),
of Eastman Kodak Company of our report dated January 23, 2002, relating
to the financial statements and financial statement schedule, which
appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Rochester, New York
March 20, 2002