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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, 2002 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, 2002 285,933,179 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
March 13, 2003) of the voting stock held by nonaffiliates was
approximately $8.3 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 $385 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.
The Company sells traditional film products in its consumer imaging,
professional and entertainment imaging businesses within the
Photography segment. Digital products are substituting for some of
these products at varying rates. For example, the workflow
improvements offered by digital are having relatively more significant
effects in the professional markets, while digital is having very
little impact in the entertainment markets. The future impact of
digital substitution on these film markets is difficult to predict due
to a number of factors, including the pace of digital technology
adoption, the underlying economic strength or weakness in major world
markets, household film and media usage following a digital camera
purchase and the timing of digital infrastructure installation.
Additionally, digital substitution is happening at a different pace
depending on the geography. For example, the pace of digital
substitution in the consumer film market is more rapid in Japan,
followed by the U.S. and then by Western Europe. For 2002, the Company
believes digital substitution reduced consumer film sales growth by
approximately 3% in the U.S. For 2003, the Company estimates that
digital substitution will reduce consumer film sales growth by 4% to 5%
in the U.S.
A business discussion by reportable segments follows. Kodak's sales,
earnings and identifiable assets by reportable segment for the past
three years are shown in Note 22, "Segment Information."
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PHOTOGRAPHY SEGMENT
Sales from continuing operations of the Photography segment for 2002,
2001 and 2000 were (in millions) $9,002, $9,403 and $10,231,
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.
In January 2002, the Company completed its acquisitions of Spector
Photo Group's (Spector's) operations in Austria and Percolor S.A.'s
photofinishing operations in Spain. In December 2001, the Company
completed its acquisitions of Colourcare Limited's wholesale
photofinishing operations in the United Kingdom and Spector's wholesale
photofinishing and distribution operations in France and Germany.
These acquisitions are part of the Company's overall efforts to
consolidate photofinishing operations in Western Europe.
In June 2001, the Company completed its acquisition of Ofoto, Inc. The
acquisition of Ofoto is accelerating Kodak's growth in the online
photography market and helping to 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, photo calendars and
other merchandise.
In February 2003, the Company completed the acquisition of Burrell
Colour Labs, Inc. and its affiliates (BCL). BCL is a professional
photo and imaging lab business, primarily serving weddings and portrait
photographers. It is comprised of seven labs located mostly in
Indiana, Kentucky, Washington state and California. As a result of
BCL's exercise of its put option, Kodak purchased BCL, a longtime
business partner. The Company has publicly acknowledged plans to sell
the business to a suitable buyer and rely on BCL's management team to
operate the business during its interim ownership period. Discussions
regarding the sale of BCL to a third party, which Kodak initiated prior
to the purchase agreement, are continuing.
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Marketing and Competition. The Company's strategies in the consumer
imaging business are to extend the benefits of film and to drive
outputs in all forms. Traditional products and services for the
consumer are sold direct to retailers and through distributors
throughout the world. 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
films and one-time-use cameras. To be more cost competitive with
respect to one-time-use cameras, the Company is moving a large portion
of its manufacturing to China. In extending the benefits of film and
driving output in all forms, the Company introduced its high definition
film in December 2002. Some digital substitution has occurred,
primarily in the U.S. and Japan, as a number of consumers have begun to
use digital cameras. While this substitution to date has had only an
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. During
2002, the Company introduced its Kodak PerfectTouch branded digital
processing services. This service is expected to further the Company's
strategies of expanding the benefits of film and driving output in all
forms by providing high quality, branded output. The Company is
beginning to realize the potential for significant growth in the sale
of sensitized products outside the U.S., particularly in emerging
markets including Russia, India and China, where the Company has
expanded the number of outlets for Kodak products. The Company also
has 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. The Company has entered into a global supply agreement with
one of the world's leading suppliers of minilabs in order to accelerate
Kodak's participation in the rapidly growing market for digital
minilabs used for on-site photo processing.
The Company's strategies in its consumer digital business are to drive
image output in all forms and make digital easier. Consumer digital
products including digital cameras and inkjet media for consumers are
sold direct to retailers or distributors. Products are also available
to customers through the Internet. Products such as the Company's
EasyShare digital camera system with the docks are intended to simplify
digital imaging for consumers and thereby increase the popularity for
sharing and 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. Ofoto, the Company's
online printing business, continues to demonstrate strong growth and is
expected to begin the establishment of a customer base in selected
overseas markets in 2003.
5
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 professional
photography market space is increasingly being affected by digital
substitution. To mitigate the impacts of price competition and digital
substitution, the Company has introduced new products, systems, and
solutions focused on improving the digital workflow for professional
photographers and laboratories. These new innovative solutions range
from digital capture devices (digital cameras and scanners) designed to
improve the image acquisition or digitalization process, software
products designed to enhance and simplify the digital workflow, output
devices (thermal printers and digital silver halide writers) designed
to produce high quality images, and media (thermal and silver halide
media) optimized for digital workflows.
Throughout the world, almost all entertainment imaging products are
sold direct to studios, laboratories, 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.
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. Kodak is frequently noted by trade and business
publications as one of the most recognized and respected brands in the
world.
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HEALTH IMAGING SEGMENT
Sales from continuing operations of the Health Imaging segment for
2002, 2001 and 2000 were (in millions) $2,274, $2,262 and $2,220,
respectively.
Products and services of the Health Imaging segment enable healthcare
customers (e.g., hospitals, imaging centers, etc.) to capture, process,
integrate, archive and display images and information in a variety of
forms. These products and services provide intelligent decision
support through the entire patient pathway from research to detection
to diagnosis to treatment. The Health Imaging segment also provides
products and services that help customers improve workflow and
productivity in their facilities, which in turn helps them enhance the
quality and productivity of healthcare delivery.
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Products of the Health Imaging segment include traditional analog
medical films, chemicals, and processing equipment. Kodak's history in
traditional analog imaging has made it a leader in this area and has
served as the foundation for building its important digital imaging
business. The segment provides digital medical imaging and information
products, systems and solutions, which are key components of future
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 the general radiology market
and specialty health markets, including dental, mammography and
oncology. The segment also provides molecular imaging for the
biotechnology research market.
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 (OEMs). In the U.S., group purchasing
organizations (GPOs), which serve as buying agents for individual
hospitals or groups of hospitals, account for a significant portion of
film sales industry-wide. The Health Imaging segment has secured long-
term contracts with virtually all the major GPOs and, thus, has
positioned itself well against competitors. In Europe, consumables and
analog equipment are sold primarily to end users, with a small portion
sold through distributors. In Asia, these products are sold directly
to end users, while sales of these products in Japan are split between
distributors and end users. In all three areas - Europe, Asia and
Japan - consumables and analog equipment are often sold as part of a
media/equipment bundle. Digital equipment and solutions are sold
direct to end users and through OEMs in these three geographic areas.
Hospitals in Europe, which are a mix of private and government-funded
types, employ a highly regimented tender process in acquiring medical
imaging products. This process creates both a 6-to-18 month sales
cycle and a competitive pricing environment. Additionally, the
government-funded hospitals' budgets tend to be limited and restricted.
That is because government reimbursement policies often drive the use
of particular types of equipment and influence the transition from
analog to digital imaging. These policies vary widely among European
countries.
Worldwide, the medical imaging market is crowded with a range of
aggressive competitors. To compete aggressively, Kodak's Health
Imaging segment has developed a full portfolio of value-adding products
and services. Some competitors offer digital solutions similar to
those of Kodak, and other competitors offer similar analog solutions or
a mix of analog and digital. Health Imaging has a wide range of
solutions from analog to digital and everything in between. Moreover,
the segment's portfolio is expanding into new areas, including
information technology, thus enabling the segment to offer solutions
that combine medical images and information, such as patient reports,
into one unified package for medical practitioners. Kodak will
continue to innovate products and services to meet the changing needs
and preferences of the marketplace.
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COMMERCIAL IMAGING SEGMENT
Sales from continuing operations of the Commercial Imaging segment for
2002, 2001 and 2000 were (in millions) $1,456, $1,454 and $1,417,
respectively.
The Commercial Imaging segment encompasses Kodak's expertise in imaging
solutions, providing image capture, analysis, printing and archiving.
Markets for the segment include commercial printing, industrial, banking
and insurance, and state, local and federal government applications.
Products include aerial, industrial, graphic and micrographic films,
micrographic peripherals, 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,
inkjet products, and products and services for government and commercial
customers. Also included are the Company's interests in NexPress
Solutions LLC (Nexpress) and Kodak Polychrome Graphics LLC (KPG). The
Company's equity in the income or loss of these interests is reflected
in other (charges) income.
The Company generates approximately $250-$300 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.
KPG is an unconsolidated joint venture between Kodak and Sun Chemical
Corporation in which Kodak owns a 50% interest. This joint venture is
responsible for the photographic plate business, as well as for
marketing Kodak graphic arts film, and proofing materials and equipment.
NexPress is an unconsolidated joint venture between Kodak and
Heidelberger Druckmaschinen AG (Heidelberg) in which Kodak owns a 50%
interest that was originally formed for the purpose of developing and
marketing new digital color printing solutions. In 1999, NexPress was
expanded by Kodak and Heidelberg to include the black-and-white
electrophotographic business.
In January 2002, Kodak acquired ENCAD, Inc. This entity is a wholly
owned subsidiary of Kodak that is focused on the inkjet printing
industry. The new company provides a full set of offerings, including
inkjet printers, inks, media, software, and service. On December 17,
2002, it was announced that ENCAD, Inc. would become part of the newly
formed components group along with the capture (document scanners) and
Imagelink (microfilm) businesses. The formation of the components group
will build a stronger equipment and consumables business within the
Commercial Imaging segment by consolidating those product lines that
utilize a two tier, indirect sales and distribution channel model.
8
In February 2001, the Company completed its acquisition of substantially
all of the micrographic imaging operations of the Bell & Howell Company.
The acquired units provide business customers worldwide with maintenance
for document imaging components, micrographic-related equipment,
supplies, parts and service.
In 2000, the Company divested its Eastman Software subsidiary.
Marketing and Competition. Throughout the world, document imaging
products are sold primarily through distributors and value added
resellers. The end users of these products include businesses in the
banking and insurance sectors. 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. Maintenance
and professional services for Kodak and other manufacturer's products
are sold either through the product distribution channel or directly to
the end users of equipment. The Company provides imaging services in
Asia which are sold directly to its customers and include both
commercial and government customers. The service business will continue
to expand in the future by offering a wide range of solutions to its
customers and through strategic acquisitions.
Graphic products are sold directly by the Company to KPG. The
conversion to digital printing workflows has negatively affected the
sale of graphic films. As customers convert to digital, the Company is
pursuing alternative strategies to bundle Kodak product sales with KPG
product offerings.
Similar to document imaging products, inkjet products are sold through
a two-tiered distribution channel. Products are also sold through
original equipment manufacturers (OEMs) and global integrators. The
Company remains competitive by focusing on developing new ink and media
formulations, new printer technologies, new software and training
enhancements.
Government services are provided to national and local government agencies,
their prime contractors and other qualified commercial organizations. The
Company has been successful in acquiring recent contracts due to the
Company's integration and program management expertise as well as
specialized imaging solutions not available from its competitors. The
segment's acquisition of Research Systems, Inc. allows the Company to offer
advanced solutions to image analysis.
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ALL OTHER
Sales from continuing operations comprising All Other for 2002, 2001 and
2000 were (in millions) $103, $110, and $126, 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.
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 holds a 34% ownership
interest and SANYO holds a 66% interest in the business venture.
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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
lowest 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.
Research and development expenditures for the Company's three
reportable segments and All Other for 2002, 2001 and 2000 were as
follows:
(in millions) 2002 2001 2000
Photography $513 $542 $575
Health Imaging 152 152 138
Commercial Imaging 63 58 61
All Other 34 27 10
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Total $762 $779 $784
The downward trend in research and development expenditures in the
Photography segment and upward trend in the other reportable segments
and All Other reflect the shift in strategic focus from traditional
products, such as color negative film and paper and color reversal
films, to digital product areas, such as OLED technology, digital
medical imaging and inkjet printing.
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.
11
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 of Financial Condition and Results of
Operations, and Notes to Financial Statements.
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EMPLOYMENT
At the end of 2002, the Company employed approximately 70,000 people,
of whom approximately 39,000 were employed in the U.S.
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Financial information by geographic areas for the past three years is
shown in Note 22, "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. Ofoto's operations are
located in Emeryville, California.
12
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. 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
None.
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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, 2002)
Date First Elected
an to
Executive Present
Name Age Positions Held Officer Office
Michael P. Benard 55 Vice President 1994 1994
Robert L. Berman 45 Vice President 2002 2002
Charles S. Brown 52 Senior Vice President 2000 2000
Robert H. Brust 59 Chief Financial Officer
and Executive Vice
President 2000 2000
Daniel A. Carp 54 Chairman of the Board,
Chief Executive Officer,
President and Chief
Operating Officer 1995 2000
Martin M. Coyne, II 53 Executive Vice President 1997 2000
Carl E. Gustin, Jr. 51 Senior Vice President 1995 1995
Daniel I. Kerpelman 44 Senior Vice President 2002 2002
Carl A. Marchetto 47 Senior Vice President 2001 2001
Bernard Masson 55 Senior Vice President 2002 2002
Michael P. Morley 59 Executive Vice President 1994 2000
Daniel P. Palumbo 44 Senior Vice President 2000 2000
Eric G. Rodli 47 Senior Vice President 2001 2001
Robert P. Rozek 42 Controller 2001 2001
Willy C. Shih 51 Senior Vice President 1997 2000
Karen Smith-Pilkington 44 Senior Vice President 2002 2002
James C. Stoffel 56 Senior Vice President 2000 2000
Gary P. Van Graafeiland 56 General Counsel and
Senior Vice President 1992 1992
14
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.
Brust, who joined the Company on January 3, 2000; Mr. Rodli, who joined
the Company on January 24, 2000; Mr. Rozek, who joined the Company on
May 29, 2001; Mr. Kerpelman, who joined the Company on June 1, 2002;
and Mr. Masson, who joined the Company on December 12, 2002. 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, Mr. Rozek was a Partner at
PricewaterhouseCoopers LLP. Mr. Rozek did not provide any services to
Kodak prior to his employment. Prior to joining Kodak in 2002, Mr.
Kerpelman held a variety of management positions with General Electric
since 1988. Prior to joining Kodak in 2002, Mr. Masson held a variety
of management positions at Lexmark since 1995.
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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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 89,988 shareholders of record of common
stock as of December 31, 2002. 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 149.
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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.
The Company believes that the critical accounting policies and
estimates discussed below involve additional management judgment due to
the sensitivity of the methods and assumptions necessary in determining
the related asset, liability, revenue and expense amounts.
REVENUE RECOGNITION
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 not included or is
incidental to the transaction) or Kodak-specific objective evidence of
fair value if software is included and is other than incidental to the
sales transaction as a whole. 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
insufficient 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. When the
Company does have sufficient historical experience and the ability to
provide reasonably dependable estimates of the revenues and the costs
applicable to the various stages of these contracts, the Company will
account for these full service solutions under the percentage of
completion methodology.
The Company records reductions to revenue for customer incentive
programs offered including cash and volume discounts, price protection,
promotional, cooperative and other advertising allowances, slotting
fees and coupons. The liability for the incentive programs is recorded
at the time of sale. The Company determines the amount of the
incentives that are based on estimates by using historical experience
and internal and customer data. To the extent actual experience
differs from estimates, additional reductions to revenue could be
recorded. If market conditions were to decline, the Company may take
actions to expand these customer offerings, which may result in
incremental reductions to revenue.
16
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Kodak regularly analyzes its customer accounts and, when it becomes
aware of a specific customer's inability to meet its financial
obligations to the Company, such as in the case of bankruptcy filings
or deterioration in the customer's overall financial condition, records
a specific provision for uncollectible accounts to reduce the related
receivable to the amount that is estimated to be collectible. The
Company also records and maintains a provision for doubtful accounts
for customers based on a variety of factors including the Company's
historical experience, the length of time the receivable has been
outstanding and the financial condition of the customer. If
circumstances related to specific customers were to change, the
Company's estimates with respect to the collectibility of the related
receivables could be further adjusted. However, losses in the
aggregate have not exceeded management's expectations.
INVENTORIES
Kodak reduces the carrying value of its inventory based on estimates of
what is excess, slow-moving and obsolete, as well as inventory whose
carrying value is in excess of net realizable value. These write-downs
are based on current assessments about future demands, market
conditions and related management initiatives. If, in the future, the
Company determined that market conditions and actual demands are less
favorable than those projected and, therefore, inventory was
overvalued, the Company would be required to further reduce the
carrying value of the inventory and record a charge to earnings at the
time such determination was made. However, if in the future the
Company determined that inventory write-downs were overstated and,
therefore, inventory was undervalued, the Company would recognize the
increase to earnings through higher gross profit at the time the
related undervalued inventory was sold. However, actual results have
not differed materially from management's estimates.
17
VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND PURCHASED
INTANGIBLE ASSETS
The Company reviews the carrying value of its long-lived assets,
including goodwill and purchased intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. The Company assesses the recoverability
of the carrying value of long-lived assets, other than goodwill and
purchased intangible assets with indefinite useful lives, by first
grouping its long-lived assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities (the asset group)
and, secondly, estimating the undiscounted future cash flows that are
directly associated with and expected to arise from the use of and
eventual disposition of such asset group. The Company estimates the
undiscounted cash flows over the remaining useful life of the primary
asset within the asset group. If the carrying value of the asset group
exceeds the estimated undiscounted cash flows, the Company records an
impairment charge to the extent the carrying value of the long-lived
asset exceeds its fair value. The Company determines fair value
through quoted market prices in active markets or, if quoted market
prices are unavailable, through the performance of internal analysis of
discounted cash flows or external appraisals. The undiscounted and
discounted cash flow analyses are based on a number of estimates and
assumptions, including the expected period over which the asset will be
utilized, projected future operating results of the asset group,
discount rate and long-term growth rate.
To assess goodwill for impairment, the Company performs an assessment
of the carrying value of its reporting units on an annual basis or when
events and changes in circumstances occur that would more likely than
not reduce the fair value of the Company's reporting units below their
carrying value. If the carrying value of a reporting unit exceeds its
fair value, the Company would perform the second step in its assessment
process and would record an impairment charge to earnings to the extent
the carrying amount of the reporting unit goodwill exceeds its implied
fair value. The Company estimates the fair value of its reporting
units through internal analysis and external valuations, which utilize
income and market valuation approaches through the application of
capitalized earnings, discounted cash flow and market comparable
methods. These valuation techniques are based on a number of estimates
and assumptions, including the projected future operating results of
the reporting unit, discount rate, long-term growth rate and
appropriate market comparables.
18
The Company's assessments of impairment of long-lived assets, including
goodwill and purchased intangible assets, and its periodic review of
the remaining useful lives of its long-lived assets are an integral
part of Kodak's ongoing strategic review of the business and
operations, and are also performed in conjunction with the Company's
periodic restructuring actions. Therefore, future changes in the
Company's strategy, the ongoing digital substitution, the continuing
shift from overnight photofinishing to onsite processing and other
changes in the operations of the Company could impact the projected
future operating results that are inherent in the Company's estimates
of fair value, resulting in impairments in the future. Additionally,
other changes in the estimates and assumptions, including the discount
rate and expected long-term growth rate, which drive the valuation
techniques employed to estimate the fair value of long-lived assets and
goodwill could change and, therefore, impact the assessments of
impairment in the future.
In performing the annual assessment of goodwill for impairment, the
Company determined that none of the reporting units' carrying values
were close to exceeding their respective fair values. See "Goodwill"
under Note 1, "Significant Accounting Policies."
INVESTMENTS IN EQUITY SECURITIES
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 that 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. The remaining carrying value of
the Company's investments in these equity securities is $29 million at
December 31, 2002.
INCOME TAXES
The Company records a valuation allowance to reduce its net deferred tax
assets to the amount that is more likely than not to be realized. At
December 31, 2002, the Company has deferred tax assets for its net
operating loss and foreign tax credit carryforwards of $16 million and
$99 million, respectively, relating to which the Company has a valuation
allowance of $16 million and $56 million, respectively. The Company has
considered future market growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which the Company
operates and prudent and feasible tax planning strategies in determining
the need for these valuation allowances. If Kodak were to determine
that it would not be able to realize a portion of its net deferred tax
asset in the future for which there is currently no valuation allowance,
an adjustment to the net deferred tax assets would be charged to
earnings in the period such determination was made. Conversely, if the
Company were to make a determination that it is more likely than not
that the deferred tax assets for which there is currently a valuation
allowance would be realized, the related valuation allowance would be
reduced and a benefit to earnings would be recorded.
19
The Company's effective tax rate considers the impact of undistributed
earnings of subsidiary companies outside the U.S. Deferred taxes have
not been provided for the potential remittance of such undistributed
earnings, as it is the Company's policy to permanently reinvest its
retained earnings. However, from time to time and to the extent that
the Company can repatriate overseas earnings on a tax-free basis, the
Company will pay dividends to the U.S. Material changes in the
Company's working capital and long-term investment requirements could
impact the level and source of future remittances and, as a result, the
Company's effective tax rate. See Note 13, "Income Taxes."
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 provision has
been made for such issues, there is the possibility that the ultimate
resolution of such issues could have an adverse effect on the earnings
of the Company. Conversely, if these issues are resolved favorably in
the future, the related provisions would be reduced, thus having a
positive impact on earnings.
WARRANTY OBLIGATIONS
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 AND POSTRETIREMENT BENEFITS
Kodak's defined benefit pension and other postretirement benefit costs
and obligations are dependent on assumptions used by actuaries in
calculating such amounts. These assumptions, which are reviewed
annually by the Company, include the discount rate, long-term expected
rate of return on plan assets, salary growth, healthcare cost trend rate
and other economic and demographic factors. The Company bases the
discount rate assumption for its significant plans on the estimated rate
at which annuity contracts could be purchased to discharge the pension
benefit obligation. In estimating that rate, the Company looks to the
AA-rated corporate long-term bond yield rate in the respective country
as of the last day of the year in the Company's reporting period as a
guide. The long-term expected rate of return on plan assets is based on
a combination of formal asset allocation studies, historical results of
the portfolio and management's expectation as to future returns that are
expected to be realized over the estimated remaining life of the plan
liabilities that will be funded with the plan assets. The salary growth
assumptions are determined based on the Company's long-term actual
experience and future and near-term outlook. The healthcare cost trend
rate assumptions are based on historical cost and payment data, the near-
term outlook and an assessment of the likely long-term trends.
20
The Company evaluates its expected long-term rate of return on plan
asset (EROA) assumption annually for the Kodak Retirement Income Plan
(KRIP). To facilitate this evaluation, every two to three years, or
when market conditions change materially, the Company undertakes a new
asset liability study to reaffirm the current asset allocation and the
related EROA assumption. Wilshire Associates, a consulting firm,
completed a study (the Study) in September 2002, which led to several
asset allocation shifts and a decrease in the EROA from 9.5% for the
year ended December 31, 2002 to 9.0% for the year ended December 31,
2003. This factor, coupled with a decrease in the discount rate of 75
basis points from 7.25% for 2002 to 6.50% for 2003, and the fact that
the transition asset, which provided approximately $56 million of income
in 2002, is fully amortized as of December 31, 2002, is expected to
lower total pension income in the U.S. from $197 million in 2002 to
pension income in the range of $49 million to $59 million in 2003. This
decrease in income will be partially offset by a decrease in pension
expense in the Company's non-U.S. plans in the range of $53 million to
$65 million. Additionally, the Company increased its healthcare cost
trend rate assumption with respect to the Company's most significant
postretirement plan, the U.S. plan, from 9% for 2003, decreasing to 5%
by 2007 (as discussed in the Company's 2001 Annual Report on Form 10-K),
to 12% for 2003, decreasing to 5% by 2010. This increase in the
healthcare cost trend rate assumption, coupled with the decrease in the
discount rate, is expected to increase the cost of this plan from $222
million in 2002 to range of $254 million to $310 million in 2003. All
these factors have been incorporated into the Company's earnings outlook
for 2003.
Actual results that differ from our assumptions are recorded as
unrecognized gains and losses and are amortized to earnings over the
estimated future service period of the plan participants to the extent
such total net recognized gains and losses exceed 10% of the greater of
the plan's projected benefit obligation or the market-related value of
assets. Significant differences in actual experience or significant
changes in future assumptions would affect the Company's pension and
postretirement benefit costs and obligations.
In accordance with the guidance under Statement of Financial Accounting
Standards (SFAS) No. 87, the Company is required to record an additional
minimum pension liability in its Consolidated Statement of Financial
Position that is at least equal to the unfunded accumulated benefit
obligation of its defined benefit pension plans. In the fourth quarter
of 2002, due to the decreasing discount rates and the weak performance
of the global equity markets in 2002, the Company increased its net
additional minimum pension liability by $577 million and recorded a
corresponding charge to accumulated other comprehensive income (a
component of stockholders' equity) of $394 million, net of taxes of $183
million. If discount rates and the global equity markets' performance
continue to decline, the Company may be required to increase its
additional minimum pension liabilities and record further charges to
stockholders' equity in the future. Likewise, if discount rates
increase and the performance of the global equity markets improve, the
Company could be in a position to reduce its minimum pension liability
and reverse the corresponding charges to equity.
21
ENVIRONMENTAL COMMITMENTS
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 are determined using the ASTM Standard E 2137-
01 "Standard Guide for Estimating Monetary Costs and Liabilities for
Environmental Matters." The overall method includes the use of a
probabilistic model that forecasts a range of cost estimates for the
remediation required at individual sites. The Company's estimate
includes equipment and operating costs for remediation and long-term
monitoring of the sites. Such estimates may be affected by changing
determinations of what constitutes an environmental liability or an
acceptable level of remediation. The Company has an ongoing monitoring
and identification process to assess how the activities with respect to
the known exposures are progressing against the accrued cost estimates,
as well as to identify other potential remediation sites that are
presently unknown. 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.
22
DETAILED RESULTS OF OPERATIONS
Net Sales from Continuing Operations by Reportable Segment and All Other
(in millions) 2002 Change 2001 Change 2000
Photography
Inside the U.S. $ 4,034 -10% $ 4,482 -10% $ 4,960
Outside the U.S. 4,968 + 1 4,921 - 7 5,271
------- --- ------- --- -------
Total Photography 9,002 - 4 9,403 - 8 10,231
------- --- ------- --- -------
Health Imaging
Inside the U.S. 1,088 0 1,089 + 2 1,067
Outside the U.S. 1,186 + 1 1,173 + 2 1,153
------- --- ------- --- -------
Total Health Imaging 2,274 + 1 2,262 + 2 2,220
------- --- ------- --- -------
Commercial Imaging
Inside the U.S. 818 0 820 +15 715
Outside the U.S. 638 + 1 634 -10 702
------- --- ------- --- -------
Total Commercial Imaging 1,456 0 1,454 + 3 1,417
------- --- ------- --- -------
All Other
Inside the U.S. 53 -22 68 0 68
Outside the U.S. 50 +19 42 -28 58
------- --- ------- --- -------
Total All Other 103 - 6 110 -13 126
------- --- ------- --- -------
Total Net Sales $12,835 - 3% $13,229 - 5% $13,994
======= === ======= === =======
Earnings (Loss) from Continuing Operations Before Interest, Other
(Charges) Income, and Income Taxes by Reportable Segment and All Other
(in millions)
Photography $ 771 - 2% $ 787 -45% $ 1,430
Health Imaging 431 + 33 323 -38 518
Commercial Imaging 192 + 12 172 -26 233
All Other (28) (60) (11)
------- ---- ------- --- -------
Total of segments 1,366 + 12 1,222 -44 2,170
Venture investment
impairments and other
asset write-offs (32) (12) -
Restructuring (costs)
credits and asset
impairments (114) (720) 44
Wolf charge - (77) -
Environmental reserve - (41) -
Kmart charge - (20) -
------- ---- ------- --- -------
Consolidated total $ 1,220 +247% $ 352 -84% $ 2,214
======= ==== ======= === =======
23
Net Earnings (Loss) From Continuing Operations by Reportable Segment
and All Other
(in millions) 2002 Change 2001 Change 2000
Photography $ 550 + 3% $ 535 -48% $ 1,034
Health Imaging 313 + 42 221 -38 356
Commercial Imaging 83 - 1 84 - 7 90
All Other (23) (38) (2)
----- ---- ----- --- -------
Total of segments 923 + 15 802 -46 1,478
Venture investment
impairments and other
asset write-offs (50) (15) -
Restructuring (costs)
credits and asset
impairments (114) (720) 44
Wolf charge - (77) -
Environmental reserve - (41) -
Kmart charge - (20) -
Interest expense (173) (219) (178)
Other corporate items 14 8 26
Tax benefit - PictureVision
subsidiary closure 45 - -
Tax benefit - Kodak Imagex
Japan 46 - -
Income tax effects on
above items and taxes
not allocated to segments 102 363 37
----- ---- ----- --- -------
Consolidated total $ 793 +879% $ 81 -94% $ 1,407
===== ==== ===== === =======
2002 COMPARED WITH 2001
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
- ------------
Net worldwide sales were $12,835 million for 2002 as compared with
$13,229 million for 2001, representing a decrease of $394 million, or
3% as reported, with no net impact from exchange. Declines in volume
accounted for approximately 1.5 percentage points of the sales
decrease, driven primarily by volume decreases in traditional film and
U.S. photofinishing services. Declines in price/mix reduced sales for
2002 by approximately 1.5 percentage points, driven primarily by
traditional consumer film products and health film and laser imaging
systems.
Net sales in the U.S. were $5,993 million for the current year as
compared with $6,459 million for the prior year, representing a
decrease of $466 million, or 7%. Net sales outside the U.S. were
$6,842 million for the current year as compared with $6,770 million for
the prior year, representing an increase of $72 million, or 1% as
reported, with no impact from exchange.
24
Net sales in the Europe, Asia, Africa, and Middle East Region (EAMER)
for 2002 were $3,491 million as compared with $3,333 million for 2001,
representing an increase of 5% as reported, or 1% excluding the
favorable impact of exchange. Net sales in the Asia Pacific region for
2002 increased slightly from $2,231 million for 2001 to $2,240 million
for 2002, with no impact from exchange. Net sales in the Canada and
Latin America region for 2002 were $1,111 million as compared with
$1,206 million for 2001, representing a decrease of 8% as reported, or
an increase of 6% excluding the negative impact of exchange.
Net sales for Emerging Market countries were $2,425 million for 2002 as
compared with $2,371 million for 2001, representing an increase of $54
million, or 2%. Sales growth in China and Russia of 25% and 20%,
respectively, were the primary drivers of the increase in sales in
Emerging Market countries, partially offset by decreased sales in
Argentina, Brazil and Mexico of 53%, 11% and 6%, respectively. The
sales growth in China resulted from strong business performance for
health and consumer products. The sales growth in Russia is a result
of the expansion of new channel operations for Kodak products and
services and continued success in camera seeding programs. The sales
declines in Argentina, Brazil and Mexico are reflective of the
continued economic weakness currently being experienced by many Latin
American emerging market countries. The emerging market portfolio
accounted for approximately 19% and 35% of the Company's worldwide and
non-U.S. sales, respectively, in 2002.
Gross profit was $4,610 million for 2002 as compared with $4,568
million for 2001, representing an increase of $42 million, or 1%. The
gross profit margin was 35.9% in the current year as compared with
34.5% in the prior year. The increase of 1.4 percentage points was
primarily attributable to manufacturing productivity/cost, which
favorably impacted gross profit margins by approximately 2.7 percentage
points year-over-year due to reduced labor expense, favorable materials
pricing and improved product yields. This increase was also
attributable to costs associated with restructuring and the exit of an
equipment manufacturing facility incurred in 2001 but not in the
current year, which negatively impacted gross profit margins for 2001
by approximately 1.0 percentage point. The positive impacts to gross
profit were partially offset by year-over-year price/mix declines,
which reduced gross profit margins by approximately 2.3 percentage
points. The price/mix decreases were primarily related to declining
prices on consumer film, health laser imaging systems and consumer
color paper, and product shifts primarily in the Photography segment.
Selling, general and administrative expenses (SG&A) were $2,530 million
for 2002 as compared with $2,625 million for 2001, representing a
decrease of $95 million, or 4%. SG&A decreased slightly as a
percentage of sales from 19.8% for the prior year to 19.7% for the
current year. The net decrease in SG&A is primarily attributable to
the cost savings from the employment reductions and other non-severance
related components of the Company's focused cost reductions, offset by
acquisitions in the Photography and Commercial segments and higher
strategic venture investment impairments in 2002 when compared with
2001 of $15 million.
25
Research and development (R&D) costs remained relatively flat at $762
million for 2002 as compared with $779 million for 2001, representing a
decrease of $17 million, or 2%. As a percentage of sales, R&D costs
also remained flat at 5.9% for both the current and prior years.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for 2002 were $1,220 million as compared with
$352 million for 2001, representing an increase of $868 million, or
247%. The primary reason for the increase in earnings from operations
was a decrease in restructuring costs and asset impairments of $586
million. Results for 2002 also benefited from the savings associated
with restructuring programs implemented in 2001. In addition, results
for 2001 included charges of $138 million for the Wolf bankruptcy
charge, environmental reserve and Kmart bankruptcy, and goodwill
amortization charges of $153 million.
Interest expense for 2002 was $173 million as compared with $219
million for 2001, representing a decrease of $46 million, or 21%. The
decrease in interest expense is primarily attributable to lower average
borrowing levels and lower interest rates in 2002 relative to 2001.
Other charges for the current year were a net charge of $101 million as
compared with a net charge of $18 million for the prior year. The
increase in other charges is primarily attributable to increased losses
from the Company's NexPress and SK Display joint ventures as these
business ventures are in the early stages of bringing their offerings
to market, higher non-strategic venture investment impairments, higher
losses related to minority interests and an increase in foreign
exchange losses. This activity was partially offset by a gain
recognized on the sale of assets in the current year.
The Company's effective tax rate from continuing operations decreased
from 30% for 2001 to 16% for 2002. The effective tax rate from
continuing operations of 16% for 2002 is less than the U.S. statutory
rate of 35% primarily due to the charges for the focused cost
reductions and asset impairments being deducted in jurisdictions that
have a higher tax rate than the U.S. federal income tax rate, and also
due to discrete period tax benefits of approximately $99 million
relating to the closure and restructuring of certain of the Company's
business activities and other one-time items, which were partially
offset by the impact of recording a valuation allowance to provide for
certain tax benefits that the Company would be required to forgo in
order to fully realize the benefits of its foreign tax credit
carryforwards.
The effective tax rate from continuing operations of 30% for 2001 is
less than the U.S. statutory rate of 35% primarily because of a tax
benefit from favorable tax settlements in the third quarter of 2001,
which was partially offset by the impact of nondeductible goodwill
amortization in 2001.
26
Excluding the items described above, the Company's effective tax rate
from continuing operations decreased from 31% for 2001 to 27% for 2002.
The lower effective tax from continuing operations in the current year
as compared with the prior year is primarily attributable to the tax
benefits from the elimination of goodwill amortization in 2002 and
further increases in earnings in lower tax rate jurisdictions. The
Company expects its effective tax rate to be approximately 27% in 2003.
Net earnings from continuing operations for 2002 were $793 million, or
$2.72 per basic and diluted share, as compared with net earnings from
continuing operations for 2001 of $81 million, or $.28 per basic and
diluted share, representing an increase of $712 million, or 879%. The
increase in net earnings from continuing operations is primarily
attributable to the reasons outlined above.
Photography
- -----------
Net worldwide sales for the Photography segment were $9,002 million
for 2002 as compared with $9,403 million for 2001, representing a
decrease of $401 million, or 4% as reported, with no net impact from
exchange. Approximately 2.0 percentage points of the decrease was
attributable to declines in volume, driven primarily by volume
decreases in consumer and professional film and photofinishing, and
approximately 2.0 percentage points of the decrease was attributable to
declines in price/mix, driven primarily by consumer film products.
Photography segment net sales in the U.S. were $4,034 million for the
current year as compared with $4,482 million for the prior year,
representing a decrease of $448 million, or 10%. Photography segment
net sales outside the U.S. were $4,968 million for the current year as
compared with $4,921 million for the prior year, representing an
increase of $47 million, or 1% as reported, with no impact from
exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 6% in 2002 as
compared with 2001, reflecting declines due to lower volumes of 2%,
negative price/mix of 3%, and 1% negative impact of exchange. Sales of
the Company's consumer film products within the U.S. decreased 12% in
the current year as compared with the prior year, reflecting declines
due to lower volumes of 7% and negative price/mix of 5%. The lower
film product sales are attributable to a declining industry demand
driven by a weak economy and the impact of digital substitution. Sales
of the Company's consumer film products outside the U.S. remained flat,
with declines related to negative exchange of 1% offsetting increases
related to higher volumes of 1%.
The U.S. film industry volume decreased approximately 3% in 2002 as
compared with 2001 due to continuing economic weakness and the impact
of digital substitution. For the fifth consecutive year, the Company
has met its goal of maintaining full year U.S. consumer film market
share.
27
Net worldwide sales of consumer color paper decreased 3% in 2002 as
compared with 2001, reflecting declines due to volume and exchange of
2% and 1%, respectively. Net sales of consumer color paper in the U.S.
decreased 7% in the current year as compared with the prior year,
reflecting declines from lower volumes of 8%, partially offset by
favorable price/mix of 1%. Net sales of consumer color paper outside
the U.S. decreased 1%, reflecting a 1% decline related to negative
price/mix and a 2% decline related to negative exchange, partially
offset by a 2% increase in volume.
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services (CIS) outside the U.S., decreased 4% in 2002
as compared with 2001, 5% of which was attributable to lower volumes,
partially offset by 1% favorable impact of exchange. In the U.S.,
Qualex's processing volumes (wholesale and on-site) decreased
approximately 14% in 2002 as compared with 2001, which is composed of
decreases in wholesale and on-site processing volumes of 13% and 16%,
respectively. These declines reflect the effects of a continued weak
film industry, the adverse impact of several hundred store closures by
a major U.S. retailer, and the impact of digital substitution. During
the current year, CIS revenues in Europe benefited from the acquisition
of (1) Spector Photo Group's wholesale photofinishing and distribution
operations in France, Germany, and Austria, (2) ColourCare Limited's
wholesale processing and printing operations in the United Kingdom and
(3) Percolor photofinishing operations in Spain. These benefits were
partially offset by weak industry trends for photofinishing in the
second half of the year.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 7.5% for 2002, reflecting an increase
from the 5.3% rate in 2001. The growth was driven by continued
consumer acceptance of Picture CD and Retail.com, the retail industry's
leading e-commerce platform for business-to-business collaboration. In
addition, the number of images scanned in the current year increased
19% as compared with the prior year.
Net sales from the Company's consumer digital products and services,
which include picture maker kiosks/media and consumer digital services
revenue from Picture CD, "You've Got Pictures", and Retail.com,
remained flat in 2002 as compared with 2001. The Company has broadly
enabled the retail industry in the U.S. with its picture maker kiosks
and is focused on bringing to market new kiosk offerings, creating new
kiosk channels, expanding internationally and continuing to increase
the media burn per kiosk. Net worldwide sales of thermal media used in
picture maker kiosks increased 11% in the current year as compared with
the prior year.
Net worldwide sales of consumer digital cameras increased 10% in 2002
as compared with 2001 due to strong consumer acceptance of the
EasyShare digital camera system, despite sensor component shortages
earlier in the year. As a result, consumer digital camera market share
increased modestly in 2002 compared with 2001.
28
Net worldwide sales of inkjet photo paper increased 43% in 2002 as
compared with 2001, primarily due to higher volumes. The double-digit
revenue growth and the maintenance of market share are primarily
attributable to strong underlying market growth, introduction of new
products, continued promotional activity at key accounts and success in
broadening channel distribution.
Net worldwide sales of professional sensitized products, including
color negative, color reversal and commercial black and white films and
sensitized paper, decreased 13% in 2002 as compared with 2001,
reflecting primarily a decline in volume, with no impact from exchange.
Overall sales declines were primarily the result of ongoing digital
substitution and continued economic weakness in markets worldwide.
Net worldwide sales of origination and print film to the entertainment
industry remained flat in 2002 as compared with 2001, with a 1%
favorable impact from exchange offset by a 1% decline attributable to
lower volumes. The decrease in volumes of net worldwide film sales was
primarily attributable to economic factors impacting origination film
for commercials and independent feature films, partially offset by an
increase in print film volumes.
Gross profit for the Photography segment was $3,219 million for 2002 as
compared with $3,402 million for 2001, representing a decrease of $183
million or 5%. The gross profit margin was 35.8% in the current year
as compared with 36.2% in the prior year. The 0.4 percentage point
decrease was primarily attributable to decreases in price/mix that
impacted gross profit margins by approximately 3.0 percentage points,
partially offset by an increase in productivity/cost improvements that
impacted gross margins by approximately 2.6 percentage points.
SG&A expenses for the Photography segment were $1,935 million for 2002
as compared with $1,963 million for 2001, representing a decrease of
$28 million or 1%. The net decrease in SG&A spending is primarily
attributable to cost reduction activities and expense management,
partially offset by increases in SG&A expense related to CIS
photofinishing acquisitions in Europe. As a percentage of sales, SG&A
expense increased from 20.9% in the prior year to 21.5% in the current
year.
R&D costs for the Photography segment decreased $29 million or 5% from
$542 million in 2001 to $513 million in 2002. As a percentage of
sales, R&D costs decreased slightly from 5.8% in the prior year to 5.7%
in the current year.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Photography segment decreased $16
million, or 2%, from $787 million in 2001 to $771 million in 2002,
reflecting the combined effects of lower sales and a lower gross profit
margin, partially offset by SG&A and R&D cost reductions and the
elimination of goodwill amortization in 2002, which was $110 million in
2001.
29
Health Imaging
- --------------
Net worldwide sales for the Health Imaging segment were $2,274 million
for 2002 as compared with $2,262 million for 2001, representing an
increase of $12 million, or 1% as reported, or an increase of 2%
excluding the negative net impact of exchange. The increase in sales
was attributable to an increase in price/mix and volume of
approximately 0.4 and 1.1 percentage points, respectively, primarily
due to laser imaging systems and equipment services, partially offset
by a decrease from negative exchange of approximately 0.8 percentage
point.
Net sales in the U.S. decreased slightly from $1,089 for the prior year
to $1,088 million for the current year. Net sales outside the U.S.
were $1,186 million for 2002 as compared with $1,173 million for 2001,
representing an increase of $13 million, or 1% as reported, or an
increase of 2% excluding the negative impact of exchange.
Net worldwide sales of digital products, which include laser printers
(DryView imagers and wet laser printers), digital media (DryView and
wet laser media), digital capture equipment (computed radiography
capture equipment and digital radiography equipment), services and
Picture Archiving and Communications Systems (PACS), increased 5% in
2002 as compared with 2001. The increase in digital product sales was
primarily attributable to higher digital media, service, digital
capture and PACS volumes as the market for these products continues to
grow.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 4% in 2002 as compared
with 2001. The decrease in sales was primarily attributable to a net
decline in sales of analog film products. This net decrease was partly
mitigated by an increase in sales of Mammography and Oncology (M&O)
analog film products. Analog film products (excluding M&O) decreased
8% in 2002 as compared with 2001, reflecting declines due to volume,
exchange and price/mix of approximately 5%, 2% and 1%, respectively.
Although analog film volumes declined on a worldwide basis, current
sales levels reflect an increase in traditional film market share. M&O
sales increased 6% in the current year as compared with the prior year,
reflecting higher volumes of approximately 8%, partially offset by
decreases in price/mix and exchange of approximately 1% and 1%,
respectively.
Gross profit for the Health Imaging segment was $930 million for 2002
as compared with $869 million for 2001, representing an increase of $61
million, or 7%. The gross profit margin was 40.9% in 2002 as compared
with 38.4% in 2001. The 2.5 percentage point increase was attributable
to productivity/cost improvements, which increased gross profit margins
by 2.9 percentage points due to favorable media and equipment
manufacturing productivity led by DryView digital media, analog medical
film, laser imaging equipment, and PACS, which were complemented by
lower service costs and improved supply chain management. The positive
effects of productivity/cost on gross profit margins were partially
offset by a decrease in price/mix that impacted margins by
approximately 0.5 percentage point due to declining digital laser media
and analog medical film prices.
30
The Company substantially completed the conversion of customers to the
Novation GPO in 2001 and, therefore, the Company does not anticipate
that this arrangement will have any additional significant potential
impacts on gross profit trends in the future as was experienced in
2001.
SG&A expenses for the Health Imaging segment decreased $20 million, or
5%, from $367 million for 2001 to $347 million for 2002. As a
percentage of sales, SG&A expenses decreased from 16.2% for 2001 to
15.3% for 2002. The decrease in SG&A expenses is primarily a result of
cost reduction activities and expense management.
R&D costs for the Health Imaging segment remained constant at $152
million for 2002 and 2001. As a percentage of sales, R&D costs
remained unchanged at 6.7% for both years.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Health Imaging segment increased $108
million, or 33%, from $323 million for 2001 to $431 million for 2002.
The increase in earnings from operations and the resulting operational
earnings margin are primarily attributable to the combined effects of
improvements in gross profit margins, lower SG&A expense, and the
elimination of goodwill amortization in 2002, which was $28 million in
2001.
Commercial Imaging
- ------------------
Net worldwide sales for the Commercial Imaging segment for 2002
increased slightly from $1,454 million for 2001 to $1,456 million for
2002, representing an increase of $2 million, with no net impact from
exchange. The slight increase in sales was attributable to an increase
in price/mix of approximately 1.0 percentage point, which was almost
entirely offset by declines in volume of approximately 0.9 percentage
point related to graphic arts and micrographic products.
Net sales in the U.S. were $818 million for 2002 as compared with $820
million for 2001, representing a decrease of $2 million. Net sales
outside the U.S. were $638 million in the current year as compared with
$634 million in the prior year, representing an increase of $4 million,
or 1%, with no impact from exchange.
Net worldwide sales of the Company's commercial and government products
and services increased 7% in 2002 as compared with 2001. 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 inkjet products were a contributor to the net
increase in Commercial Imaging sales as these revenues increased 175%
in 2002 as compared with 2001. The increase in sales was attributable
to the acquisition of ENCAD, Inc., which has improved the Company's
channel to the inkjet printer market.
31
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 10% in 2002 as compared
with 2001, primarily reflecting volume declines in graphic arts film.
This reduction resulted largely from digital technology substitution
and the effect of continuing economic weakness in the commercial
printing market. The Company's equity in the earnings of KPG
contributed positive results to other charges during 2002, but was not
material to the Company's results from operations.
Gross profit for the Commercial Imaging segment for 2002 decreased
slightly from $451 million for 2001 to $449 million for 2002. The
gross profit margin was 30.8% for 2002 as compared with 31.0% for 2001.
The gross profit margin remained relatively flat due to declines
related to price/mix, which reduced margins by approximately 1.9
percentage points. These declines were offset by productivity/cost
improvements, which increased margins by approximately 1.9 percentage
points.
SG&A expenses for the Commercial Imaging segment decreased $14 million,
or 7%, from $208 million for 2001 to $194 million for 2002. As a
percentage of sales, SG&A expenses decreased from 14.3% for 2001 to
13.3% for 2002. The primary contributors to the decrease in SG&A
expenses were cost reductions from the prior year restructuring
actions, which had a larger impact on the results of 2002 as compared
with 2001, partially offset by the acquisition of ENCAD, Inc. in 2002,
which increased SG&A by $23 million.
R&D costs for the Commercial Imaging segment increased $5 million, or
9%, from $58 million for 2001 to $63 million for 2002. The increase
was due to the acquisition of ENCAD, Inc. in 2002, which increased R&D
costs by $8 million. As a percentage of sales, R&D costs increased
from 4.0% in 2001 to 4.3% in 2002.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Commercial Imaging segment increased
$20 million, or 12%, from $172 million in 2001 to $192 million in 2002.
The increase in earnings from operations is primarily attributable to
overall expense management and the elimination of goodwill amortization
in 2002, which was $15 million in 2001, partially offset by a lower
gross profit margin.
All Other
- ---------
Net worldwide sales for All Other were $103 million for 2002 as
compared with $110 million for 2001, representing a decrease of $7
million, or 6%. Net sales in the U.S. were $53 million in 2002 as
compared with $68 million for 2001, representing a decrease of $15
million, or 22%. Net sales outside the U.S. were $50 million in the
current year as compared with $42 million in the prior year,
representing an increase of $8 million, or 19%.
32
Loss from continuing operations before interest, other (charges)
income, and income taxes for All Other decreased $32 million from a
loss of $60 million in 2001 to a loss of $28 million in 2002. The
reduction in the loss from operations was primarily attributable to
cost reductions in certain miscellaneous businesses and the benefit of
current year manufacturing productivity.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
In March 2001, the Company acquired Citipix from Groupe Hauts Monts
along with two related subsidiaries involved in mapping services.
Citipix was involved in the aerial photography of large cities in the
United States, scanning of this imagery and hosting the imagery on the
Internet for government, commercial and private sectors. The acquired
companies were formed into Kodak Global Imaging, Inc. (KGII), a wholly
owned subsidiary, which was reported in the commercial and government
products and services business in the Commercial Imaging segment. Due
to a combination of factors, including the collapse of the
telecommunications market, limitations on flying imposed by the events
of September 11th, delays and losses of key contracts and the global
economic downturn, KGII did not achieve the financial results expected
by management during both 2001 and 2002. In November 2002, the Company
approved a plan to dispose of the operations of KGII.
Net sales from KGII for the years ended December 31, 2002 and 2001 were
$6 million and $5 million, respectively. The Company incurred
operational losses before income taxes from KGII for the years ended
December 31, 2002 and 2001 of $13 million and $7 million, respectively.
The Company recognized losses before income taxes in the fourth quarter
of 2002 of approximately $44 million for costs associated with the
disposal of KGII. The disposal costs were comprised of impairment
losses related to the write-down of the carrying value of goodwill,
intangibles and fixed assets to fair value, losses recognized from the
sale of certain assets, and the accrual of various costs related to the
shutdown of KGII, including severance relating to approximately 150
positions.
Also during the fourth quarter of 2002, the Company recognized earnings
before income taxes of $19 million as a result of the favorable outcome
of litigation associated with the 1994 sale of Sterling Winthrop Inc.
The loss from discontinued operations before income taxes for the years
ended December 31, 2002 and 2001 was at an effective tax rate of 38%
and 31%, respectively, resulting in the loss from discontinued
operations, net of incomes taxes in the Consolidated Statement of
Earnings of $23 million and $5 million, respectively.
For additional information, refer to Note 21, "Discontinued
Operations."
33
2001 COMPARED WITH 2000
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
- ------------
Net worldwide sales were $13,229 million for 2001 as compared with
$13,994 million for 2000, representing a decrease of $765 million, or 5%
as reported, or 3% excluding the negative net impact of exchange. The
decrease in net worldwide sales 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 $37 million or 3%. The
decrease in Photography sales was driven by declines in consumer,
entertainment origination and professional film products, consumer and
professional color paper, photofinishing revenues and consumer and
professional digital cameras. 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%. 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.
Net sales outside the U.S. were $6,770 million for 2001 as compared with
$7,184 million for 2000, representing a decrease of $414 million, or 6%
as reported, or 1% excluding the negative impact of exchange. Net sales
in the EAMER region for 2001 were $3,333 million as compared with $3,541
million for 2000, representing a decrease of 6% as reported, or 3%
excluding the negative impact of exchange. Net sales in the Asia
Pacific region for 2001 were $2,231 million as compared with $2,378
million for 2000, representing a decrease of 6% as reported, or a 1%
increase excluding the negative impact of exchange. Net sales in the
Canada and Latin America region for 2001 were $1,206 million as compared
with $1,265 million for 2000, representing a decrease of 5% as reported,
or an increase of 2% excluding the negative impact of exchange.
Net sales for Emerging Market countries were $2,371 million for 2001 as
compared with $2,481 million for 2000, representing a decrease of $110
million, or 4%. The decrease was primarily attributable to sales
declines in Argentina, Brazil, China and Taiwan of 13%, 12%, 4% and 12%,
respectively, which were primarily a result of economic weakness being
experienced by these countries. These sales declines were partially
offset by an increase in sales in Russia of 22%, which was primarily a
result of the success in camera seeding programs. The emerging market
portfolio accounted for approximately 18% and 35% of the Company's
worldwide and non-U.S. sales, respectively, in both 2001 and 2000.
34
Gross profit was $4,568 million in 2001 as compared with $5,619 million
in 2000, representing a decrease of $1,051 million, or 19%. The gross
profit margin declined 5.7 percentage points from 40.2% in 2000 to 34.5%
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. The decrease in margin was
also attributable to an increase in restructuring costs incurred in 2001
as compared with 2000, which negatively impacted gross profit margins by
approximately 0.9 percentage point.
SG&A expenses increased $111 million, or 4%, from $2,514 million in 2000
to $2,625 million in 2001. SG&A expenses increased as a percentage of
sales from 18.0% in 2000 to 19.8% in 2001. 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, which amounted to $12 million.
R&D expenses remained flat, decreasing $5 million from $784 million in
2000 to $779 million in 2001. R&D expenses increased slightly as a
percentage of sales from 5.6% in 2000 to 5.9% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes decreased $1,862 million, or 84%, from $2,214
million in 2000 to $352 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.
Interest expense for 2001 was $219 million as compared with $178
million for 2000, representing an increase of $41 million, or 23%. The
increase in interest expense is primarily attributable to higher
average borrowings in 2001 as compared with 2000. Other charges for
the current year were $18 million as compared with other income of $96
million for the prior year. The decrease in other (charges) income is
primarily attributable to increased losses from the Company's NexPress
and Phogenix joint ventures in 2001 as compared with 2000 as these
business ventures are in the early stages of bringing their offerings
to market, and lower gains recognized from the sale of stock
investments in 2001 as compared with 2000.
The Company's effective tax rate decreased from 34% for the year ended
December 31, 2000 to 30% for the year ended December 31, 2001. The
decline in the Company's 2001 effective tax rate as compared with the
2000 effective 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 of 2001, which
were partially offset by restructuring costs recorded in the second,
third and fourth quarters of 2001, which provided reduced tax benefits
to the Company.
35
Net earnings from continuing operations for 2001 were $81 million, or
$.28 per basic and diluted share, as compared with net earnings from
continuing operations for 2000 of $1,407 million, or $4.62 per basic
share and $4.59 per diluted share, representing a decrease of $1,326
million, or 94%. The decrease in net earnings from continuing
operations is primarily attributable to the reasons outlined above.
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 5% excluding the negative net
impact of exchange. The decrease in Photography sales was driven by
declines in consumer, entertainment origination and professional film
products, consumer and professional color paper, photofinishing revenues
and consumer and professional digital cameras.
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 2% excluding the
negative impact of exchange.
Net worldwide sales of consumer film products, which include 35mm film,
Advantix film and one-time-use cameras, decreased 7% in 2001 relative to
2000, reflecting a 3% decline in both volume and exchange, and a 1%
decline in 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 2% decline in price/mix and 5%
decline due to negative exchange.
During 2001, the Company continued the efforts 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.
36
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 photofinishing sales, including Qualex in the U.S. and CIS
outside the U.S., 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.
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 Retail.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.
The Company experienced an increase in digital penetration in its Qualex
wholesale labs. The principal products that 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% in 2001 as compared with the 2000
level. In addition, the Ofoto customer base reflected growth of
approximately 12% per month throughout 2001.
37
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. 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 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.
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. 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 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.
38
Gross profit for the Photography segment was $3,402 million in 2001 as
compared with $4,099 million in 2000, representing a decrease of $697
million or 17%. 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 for the Photography segment remained relatively flat,
decreasing $10 million, or 1%, from $1,973 million in 2000 to $1,963
million in 2001. 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 for the Photography segment decreased $33 million, or 6%,
from $575 million in 2000 to $542 million in 2001. As a percentage of
sales, R&D increased slightly from 5.6% in 2000 to 5.8% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Photography segment 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.
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 5% increase excluding
the negative net 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%.
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 7% excluding the negative impact of exchange. Sales in
emerging markets increased slightly, up 4% from 2000 to 2001.
39
Net worldwide 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 digital radiography equipment) and 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, due to new product
introductions in 2000 and 2001. In the second and third quarter of
2000, the Company introduced new computer radiography and digital
radiography products. In 2001, the Company's results include sales of
these products for the full year, as well as sales of newer computed
radiography products, which were launched in early 2001. The increase
in revenues was partially offset by declines attributable to price and
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 exchange of 4%
and 3%, respectively.
Net worldwide 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 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
exchange.
Gross profit for the Health Imaging segment was $869 million for 2001 as
compared with $1,034 million for 2000, representing a decrease of $165
million or 16%. 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 was primarily attributable to selling
price declines in 2001, driven by the continued conversion of customers
to lower pricing levels under the Company's Novation GPO 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.
SG&A expenses for the Health Imaging segment increased $16 million, or
4%, from $351 million in 2000 to $367 million in 2001. As a percentage
of sales, SG&A increased from 15.8% in 2000 to 16.2% in 2001.
40
R&D expenses for the Health Imaging segment increased $14 million, or
10%, from $138 million in 2000 to $152 million in 2001. As a percentage
of sales, R&D increased from 6.2% in 2000 to 6.7% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes 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.
COMMERCIAL IMAGING
- ------------------
Net worldwide sales for the Commercial Imaging segment were $1,454
million for 2001 as compared with $1,417 million for 2000, representing
an increase of $37 million, or 3% as reported, or 5% excluding the
negative net 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 $634 million for 2001 as compared with $702
million for 2000, representing a decrease of $68 million, or 10% as
reported, or 5% 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 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 an additional channel to the inkjet printer
market.
41
Net worldwide sales of graphic arts products to KPG 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
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 earnings from continuing
operations include positive earnings from the Company's equity in the
income of KPG.
Net worldwide sales of products to NexPress 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.
Gross profit for the Commercial Imaging segment was $451 million for
2001 compared with $473 million for 2000, representing a decrease of $22
million, or 5%. The gross profit margin for the Commercial Imaging
segment was 31.0% in 2001 as compared with 33.4% in 2000. The 2.4
percentage point decrease in gross margin was primarily attributable to
lower selling prices in a number of product groups within the segment.
SG&A expenses for the Commercial Imaging segment increased $32 million,
or 18%, from $176 million in 2000, to $208 million in 2001. As a
percentage of sales, SG&A increased from 12.4% in 2000 to 14.3% in 2001.
R&D costs for the Commercial Imaging segment decreased $3 million, or
5%, from $61 million in 2000 to $58 million in 2001. As a percentage of
sales, R&D decreased from 4.3% in 2000 to 4.0% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes decreased $61 million, or 26%, from $233
million in 2000 to $172 million in 2001, which was 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.
42
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 net 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 OLED displays for consumer devices. Kodak holds 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.
Loss from continuing operations before interest, other (charges) income,
and income taxes increased $49 million from a loss of $11 million in
2000 to a loss of $60 million in 2001. The increase in the loss was
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.
SUMMARY
(in millions, except per share data)
2002 Change 2001 Change 2000
Net sales from continuing
operations $12,835 - 3% $13,229 - 5% $13,994
Earnings from continuing
operations before interest,
other (charges) income,
and income taxes 1,220 +247 352 -84 2,214
Earnings from continuing
operations 793 +879 81 -94 1,407
Loss from discontinued
operations (23) -360 (5) -
Net earnings 770 +913 76 -95 1,407
Basic earnings (loss) per
share:
Continuing operations 2.72 +871 .28 -94 4.62
Discontinued operations (.08) -300 (.02) -
Total 2.64 +915 .26 -94 4.62
Diluted earnings (loss) per
share:
Continuing operations 2.72 +871 .28 -94 4.59
Discontinued operations (.08) -300 (.02) -
Total 2.64 +915 .26 -94 4.59
43
The Company's results as noted above include certain one-time items,
such as charges associated with focused cost reductions and other
special charges. These one-time items, which are described below,
should be considered to better understand the Company's results of
operations that were generated from normal operational activities.
2002
The Company's results from continuing operations for the year included
the following:
Charges of $114 million ($80 million after tax) related to focused cost
reductions implemented in the third and fourth quarters. See further
discussion in the Restructuring Costs and Other section of Management's
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and Note 14, "Restructuring Costs and Other."
Charges of $50 million ($34 million after tax) related to venture
investment impairments and other asset write-offs incurred in the
second, third and fourth quarters. See MD&A and Note 6, "Investments"
for further discussion of venture investment impairments.
Income tax benefits of $121 million, including a $45 million tax
benefit related to the closure of the PictureVision subsidiary in the
second quarter, a $46 million benefit from the loss realized on the
liquidation of a Japanese photofinishing operations subsidiary in the
third quarter, an $8 million benefit from a fourth quarter property
donation, and a $22 million adjustment to reduce the Company's income
tax provision due to a decrease in the estimated effective tax rate for
the full year.
Excluding the above items, net earnings from continuing operations were
$787 million, or $2.70 per basic and diluted share.
2001
The Company's results from continuing operations for the year included
the following one-time items:
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 MD&A
and Note 14, "Restructuring Costs and Other."
A charge of $41 million ($28 million after tax) for environmental
exposures. See MD&A and Note 10, "Commitments and Contingencies."
A charge of $20 million ($14 million after tax) for the Kmart
bankruptcy. See MD&A and Note 2, "Receivables, Net."
Income tax benefits of $31 million, including a favorable tax settlement
of $11 million and a $20 million benefit relating to the decline in the
year-over-year operational effective tax rate.
Excluding the above items, net earnings from continuing operations were
$675 million, or $2.32 per basic and diluted share.
44
2000
The Company's results from continuing operations for the year included
the following one-time items:
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 from continuing operations were $1,440
million. Basic earnings per share were $4.73 and diluted earnings per
share were $4.70.
RESTRUCTURING COSTS AND OTHER
- -----------------------------
Fourth Quarter, 2002 Restructuring Plan
During the fourth quarter of 2002, the Company announced a number of
focused cost reductions designed to apply manufacturing assets more
effectively in order to provide competitive products to the global
market. Specifically, the operations in Rochester, New York that
assemble one-time-use cameras and the operations in Mexico that perform
sensitizing for graphic arts and x-ray films will be relocated to other
Kodak locations. In addition, as a result of declining photofinishing
volumes, the Company will close certain central photofinishing labs in
the U.S. and EAMER. The Company will also reduce research and
development and selling, general and administrative positions on a
worldwide basis and exit certain non-strategic businesses. The total
restructuring charges recorded in the fourth quarter of 2002 for these
actions were $116 million.
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2002 for continuing operations and the remaining balance in
the related restructuring reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
Q4, 2002 charges l,l50 $ 55 $ 7 $ 37 $ 17 $ 116
Q4, 2002 utilization (250) (2) (7) (37) - (46)
------ ----- ---- ---- ---- -----
Balance at 12/31/02 900 $ 53 $ - $ - $ 17 $ 70
45
The total restructuring charge of $116 million for the fourth quarter
of 2002 was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $55 million, $7 million, $37
million and $17 million, respectively, with $109 million of those
charges reported in restructuring costs (credits) and other in the
accompanying Consolidated Statement of Earnings. The $7 million charge
for inventory write-downs for product discontinuances was reported in
cost of goods sold in the accompanying Consolidated Statement of
Earnings. The severance and exit costs require the outlay of cash,
while the inventory write-downs and long-lived asset impairments
represent non-cash items.
The severance charge related to the termination of 1,150 employees,
including approximately 525 manufacturing and logistics, 300 service
and photofinishing, 175 administrative and 150 research and development
positions. The geographic composition of the employees terminated
included approximately 775 in the United States and Canada and 375
throughout the rest of the world. The charge for the long-lived asset
impairments includes the write-off of $13 million relating to equipment
used in the manufacture of cameras and printers, $13 million for
sensitized manufacturing equipment, $5 million for lab equipment used
in photofinishing and $6 million for other assets that were scrapped or
abandoned immediately. In addition, charges of $9 million related to
accelerated depreciation on long-lived assets accounted for under the
held for use model of SFAS No. 144, was included in cost of goods sold
in the accompanying Consolidated Statement of Earnings. The
accelerated depreciation of $9 million was comprised of $5 million
relating to equipment used in the manufacture of cameras, $2 million
for sensitized manufacturing equipment and $2 million for lab equipment
used in photofinishing that will be used until their abandonment in
2003. The Company will incur accelerated depreciation charges of $16
million, $6 million and $3 million in the first, second and third
quarters, respectively, of 2003 as a result of the actions implemented
in the Fourth Quarter, 2002 Restructuring Plan.
In connection with the charges recorded in the Fourth Quarter, 2002
Restructuring Plan, the Company has 900 positions remaining to be
eliminated as of December 31, 2002. These positions will be eliminated
as the Company completes the closure of photofinishing labs and
completes the planned downsizing of manufacturing and administrative
positions. These positions are expected to be eliminated by the end of
the second quarter of 2003. Severance payments will continue beyond
the second quarter of 2003 since, in many instances, the terminated
employees can elect or are required to receive their severance payments
over an extended period of time. The Company expects the actions
contemplated by the reserve for exit costs to be completed by the end
of the third quarter of 2003. Most exit costs are expected to be paid
during 2003. However, certain costs, such as long-term lease payments,
will be paid over periods after 2003.
These restructuring actions as they relate to the Photography, Health
Imaging and Commercial Imaging segments amounted to $40 million, $2
million and $19 million, respectively. The remaining $55 million were
for actions associated with the manufacturing, research and
development, and administrative functions, which are shared across all
segments.
46
Cost savings resulting from the implementation of all Fourth Quarter,
2002 Restructuring Plan actions are expected to be approximately $90
million to $95 million in 2003 and $205 million to $210 million on an
annual basis thereafter.
In addition to the severance actions included in the $55 million charge
described above, further actions will be required related to the
relocations of the Rochester, New York one-time-use camera assembly
operations and the Mexican sensitizing operations. Upon completion of
the final severance action plans, it is expected that an additional 500
to 700 manufacturing employees will be terminated. The total charge
for these additional severance actions is expected to be approximately
$15 million to $20 million.
As part of the Company's focused cost-reduction efforts, the Company
announced on January 22, 2003 that it intended to incur additional
charges in 2003 to terminate 1,800 to 2,200 employees, in addition to
the employees included in the Fourth Quarter, 2002 Restructuring Plan.
A significant portion of these reductions is related to the
rationalization of the Company's photofinishing operations in the U.S.
and EAMER. The total charges in 2003 are expected to be in the range
of $75 million to $100 million. The savings from these additional
reductions are estimated to be $35 million to $50 million in 2003 and
$65 million to $85 million on an annual basis thereafter.
Third Quarter, 2002 Restructuring Plan
During the third quarter of 2002, the Company consolidated and
reorganized its photofinishing operations in Japan by closing 8
photofinishing laboratories and transferring the remaining 7
laboratories to a joint venture it entered into with an independent
third party. Beginning in the fourth quarter of 2002, the Company
outsourced its photofinishing operations to this joint venture. The
restructuring charge of $20 million relating to the Photography segment
recorded in the third quarter included a charge for termination-related
benefits of approximately $14 million relating to the elimination of
approximately 175 positions, which were not transferred to the joint
venture, and other statutorily required payments. The positions were
eliminated as of September 30, 2002 and the related payments were made
by the end of 2002. The remaining restructuring charge of $6 million
recorded in the third quarter represents the write-down of long-lived
assets held for sale to their fair values based on independent
valuations. An additional $3 million was recorded in the fourth
quarter for the write-down of these long-lived assets held for sale
based on quotes obtained from potential buyers. All charges applicable
to the Third Quarter, 2002 Restructuring Plan were included in the
restructuring costs (credits) and other line in the accompanying
Consolidated Statement of Earnings.
47
Fourth Quarter, 2001 Restructuring Plan
As a result of the decline in the global economic conditions and the
events of September 11th, the Company committed to actions in the fourth
quarter of 2001 (the Fourth Quarter, 2001 Restructuring Plan) to
rationalize worldwide manufacturing capacity, reduce selling, general
and administrative positions on a worldwide basis and exit certain
businesses. The total restructuring charges in connection with these
actions were $329 million.
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2001 and the remaining balance in the related restructuring
reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
2001 charges 4,500 $ 217 $ 7 $ 78 $ 27 $ 329
2001 utilization (1,300) (16) (7) (78) - (101)
------ ----- --- ----- ---- -----
Balance at 12/31/01 3,200 201 - - 27 228
Q1, 2002 utilization (1,725) (32) - - - (32)
------ ----- --- ----- ---- -----
Balance at 3/31/02 1,475 169 - - 27 196
Q2, 2002 utilization (550) (43) - - (10) (53)
------ ----- --- ----- ---- -----
Balance at 6/30/02 925 126 - - 17 143
Q3, 2002 reversal (275) (12) - - - (12)
Q3, 2002 utilization (125) (37) - - - (37)
------ ----- --- ----- ---- -----
Balance at 9/30/02 525 77 - - 17 94
Q4, 2002 utilization (325) (21) - - (4) (25)
------ ----- --- ----- ---- -----
Balance at 12/31/02 200 $ 56 $ - $ - $ 13 $ 69
The total restructuring charge of $329 million for the fourth quarter
of 2001 was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $217 million, $7 million, $78
million and $27 million, respectively, with $308 million of those
charges reported in restructuring costs (credits) and other in the
accompanying Consolidated Statement of Earnings. The balance of the
charge of $21 million, comprised of $7 million for inventory write-
downs relating to the product discontinuances and $14 million relating
to accelerated depreciation on the long-lived assets accounted for
under the held for use model of SFAS No. 121, was reported in cost of
goods sold in the accompanying Consolidated Statement of Earnings. The
severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represented non-
cash items.
48
The severance charge related to the termination of 4,500 employees,
including approximately 1,650 manufacturing, 1,385 administrative,
1,190 service and photofinishing and 275 research and development
positions. The geographic composition of the employees terminated
included approximately 3,190 in the United States and Canada and 1,310
throughout the rest of the world. The charge for the long-lived asset
impairments included the write-off of $22 million relating to
sensitized manufacturing equipment, lab equipment and leasehold
improvements, and other assets that were scrapped or abandoned
immediately and accelerated depreciation of $17 million relating to
sensitized manufacturing equipment, lab equipment and leasehold
improvements, and other assets that were to be used until their
abandonment in the first three months of 2002. The balance of the long-
lived asset impairment charge of $39 million included charges of $30
million relating to the Company's exit of three non-core businesses,
and $9 million for the write-off of long-lived assets in connection
with the reorganization of certain of the Company's digital camera
manufacturing operations.
In the third quarter of 2002, the Company reversed $12 million of the
$217 million in severance charges due primarily to higher rates of
attrition than originally expected, lower utilization of training and
outplacement services by terminated employees than originally expected
and termination actions being completed at an actual cost per employee
that was lower than originally estimated. As a result, approximately
275 fewer people will be terminated, including approximately 200
service and photofinishing, 50 manufacturing and 25 administrative.
Total employee terminations form the Fourth Quarter, 2001 restructuring
actions are now expected to be approximately 4,225.
During the fourth quarter of 2002, the Company recorded $5 million of
credits associated with the Fourth Quarter, 2001 Restructuring Plan in
restructuring costs (credits) and other in the accompanying
Consolidated Statement of Earnings. The credits were the result of
higher proceeds and lower costs associated with the exit from non-core
businesses.
These restructuring actions as they relate to the Photography, Health
Imaging and Commercial Imaging segments amounted to $113 million, $34
million and $30 million, respectively. The remaining $140 million were
for actions associated with the manufacturing, research and development
and administrative functions, which are shared across all segments.
The remaining actions to be taken by the Company in connection with the
Fourth Quarter, 2001 Restructuring Plan relate primarily to severance
and exit costs. The Company has approximately 200 positions remaining
to be eliminated as of December 31, 2002. These positions will be
eliminated as the Company completes the closure of photofinishing labs
in the U.S., and completes the planned downsizing of manufacturing
positions in the U.S. and administrative positions outside the U.S.
These positions are expected to be eliminated by the end of the first
quarter of 2003. A significant portion of the severance had not been
paid as of December 31, 2002 since, in many instances, the terminated
employees could elect or were required to receive their severance
payments over an extended period of time. The Company expects the
actions contemplated by the reserve for exit costs to be completed by
the end of the first quarter of 2003. Most exit costs are expected to
be paid during 2003. However, certain costs, such as long-term lease
payments, will be paid over periods after 2003.
49
Second and Third Quarter, 2001 Restructuring Plan
During the second and third quarters of 2001, as a result of a number
of factors, including the ongoing digital transformation, declining
photofinishing volumes, the discontinuance of certain product lines,
global economic conditions, and the growing presence of business in
certain geographies outside the United States, the Company committed to
a plan to reduce excess manufacturing capacity, primarily with respect
to the production of sensitized goods, to close certain central
photofinishing labs in the U.S. and Japan, to reduce selling, general
and administrative positions on a worldwide basis and to exit certain
businesses. The total restructuring charges in connection with these
actions were $369 million and were recorded in the second and third
quarters of 2001 (the Second and Third Quarter, 2001 Restructuring
Plan).
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the second
and third quarters of 2001 and the remaining balance in the related
restructuring reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
Q2, 2001 charges 2,400 $ 127 $57 $ 112 $ 20 $ 316
Q3, 2001 charges 300 7 20 25 1 53
------ ----- --- ----- ---- -----
Subtotal 2,700 134 77 137 21 369
2001 reversal (275) (20) - - - (20)
2001 utilization (1,400) (40) (77) (137) (5) (259)
------ ----- --- ----- ---- -----
Balance at 12/31/01 1,025 74 - - 16 90
Q1, 2002 utilization (550) (23) - - (2) (25)
------ ----- --- ----- ---- -----
Balance at 3/31/02 475 51 - - 14 65
Q2, 2002 utilization (100) (11) - - (2) (13)
------ ----- --- ----- ---- -----
Balance at 6/30/02 375 40 - - 12 52
Q3, 2002 reversal (225) (14) - - (3) (17)
Q3, 2002 utilization (50) (7) - - - (7)
------ ----- --- ----- ---- -----
Balance at 9/30/02 100 19 - - 9 28
Q4, 2002 utilization (100) (8) - - (4) (12)
------ ----- --- ----- ---- -----
Balance at 12/31/02 0 $ 11 $ - $ - $ 5 $ 16
50
The total restructuring charge of $369 million for the Second and Third
Quarter, 2001 Restructuring Plan was composed of severance, inventory
write-downs, long-lived asset impairments and exit costs of $134
million, $77 million, $137 million and $21 million, respectively, with
$271 million of those charges reported in restructuring costs (credits)
and other in the accompanying Consolidated Statement of Earnings. The
balance of the charge of $98 million, composed of $77 million for
inventory write-downs relating to product discontinuances and $21
million relating to accelerated depreciation on the long-lived assets
accounted for under the held for use model of SFAS No. 121, was reported
in cost of goods sold in the accompanying Consolidated Statement of
Earnings. The severance and exit costs require the outlay of cash,
while the inventory write-downs and long-lived asset impairments
represent non-cash items.
The severance charge related to the termination of 2,700 employees,
including approximately 990 administrative, 800 manufacturing, 760
service and photofinishing and 150 research and development positions.
The geographic composition of the employees terminated included
approximately 1,110 in the United States and Canada and 1,590 throughout
the rest of the world. The charge for the long-lived asset impairments
includes the write-off of $61 million relating to sensitizing
manufacturing equipment, lab equipment and leasehold improvements, and
other assets that were scrapped or abandoned immediately and accelerated
depreciation of $33 million relating to sensitizing manufacturing
equipment, lab equipment and leasehold improvements, and other assets
that were to be used until their abandonment within the first three
months of 2002. The total amount for long-lived asset impairments also
includes a charge of $43 million for the write-off of goodwill relating
to the Company's PictureVision subsidiary, the realization of which was
determined to be impaired as a result of the Company's acquisition of
Ofoto in the second quarter of 2001.
In the fourth quarter of 2001, the Company reversed $20 million of the
$134 million in severance charges as certain termination actions,
primarily those in 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 and 275 fewer employees being terminated, including
approximately 150 in service and photofinishing, 100 in administrative
and 25 in R&D.
In the third quarter of 2002, the Company reversed $14 million of the
original $134 million in severance charges due primarily to higher
rates of attrition than originally expected, lower utilization of
training and outplacement services by terminated employees than
originally expected and termination actions being completed at an
actual cost per employee that was lower than originally estimated. As
a result, approximately 225 fewer employees will be terminated,
including 100 in service and photofinishing, 100 in administrative and
25 in R&D. Also in the third quarter of 2002, the Company reversed $3
million of exit costs as a result of negotiating lower contract
termination payments in connection with business or product line exits.
51
These restructuring actions as they relate to the Photography, Health
Imaging and Commercial Imaging segments amounted to $234 million, $11
million and $8 million, respectively. The remaining $79 million were
for actions associated with the manufacturing, research and development
and administrative functions, which are shared across all segments.
Actions associated with the Second and Third Quarter, 2001
Restructuring Plan have been completed. A net total of 2,200 personnel
were terminated under the Second and Third Quarter, 2001 Restructuring
Plan. A portion of the severance had not been paid as of December 31,
2002 since, in many instances, the terminated employees could elect or
were required to receive their severance payments over an extended
period of time. Most of the remaining exit costs are expected to be
paid during 2003. However, certain exit costs, such as long-term lease
payments, will be paid after 2003.
Cost savings related to the Second and Third Quarter, 2001 Restructuring
Plan and the Fourth Quarter, 2001 Restructuring Plan actions
approximated $450 million.
- -----------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
2002
The Company's cash and cash equivalents increased $121 million during
2002 to $569 million at December 31, 2002. The increase resulted
primarily from $2,204 million of cash flows from operating activities,
partially offset by $758 million of cash flows used in investing
activities and $1,331 million of cash used in financing activities.
The net cash provided by operating activities of $2,204 million for the
year ended December 31, 2002 was partially attributable to (1) net
earnings of $770 million which, when adjusted for depreciation and
amortization, and restructuring costs, asset impairments and other
charges, provided $1,673 million of operating cash, (2) a decrease in
accounts receivable of $263 million, (3) a decrease in inventories of
$88 million, (4) proceeds from the surrender of its company-owned life
insurance policies of $187 million, and (5) an increase in liabilities
excluding borrowings of $29 million, related primarily to severance
payments for restructuring programs. The net cash used in investing
activities of $758 million was utilized primarily for capital
expenditures of $577 million, investments in unconsolidated affiliates
of $123 million, business acquisitions of $72 million, of which $60
million related to the purchase of minority interests in China and
India, and net purchases of marketable securities of $13 million.
These uses of cash were partially offset by proceeds from the sale of
properties of $27 million. The net cash used in financing activities
of $1,331 million was primarily the result of net debt repayments of
$597 million, dividend payments of $525 million and the repurchase of
7.4 million Kodak shares held by KRIP for $260 million. Of the $260
million expended, $205 million was repurchased under the 1999 stock
repurchase program, which is now completed. The balance of the amount
expended of $55 million was repurchased under the 2000 stock repurchase
program.
52
Net working capital, excluding short-term borrowings, decreased to $599
million at December 31, 2002 from $797 million at December 31, 2001.
This decrease is primarily attributable to an increase in accounts
payable and other current liabilities, an increase in accrued income
taxes, lower receivables and lower inventories partially offset by a
higher cash balance.
The Company's primary estimated future uses of cash for 2003 include
the following: dividend payments, debt reductions, acquisitions, and
the potential repurchase of shares of the Company's common stock.
In October 2001, the Company's Board of Directors approved a change in
the dividend policy from quarterly dividend payments to semi-annual
payments, which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
first business day of the preceding month. On April 11, 2002, the
Company's Board of Directors declared a semi-annual cash dividend of
$.90 per share on the outstanding common stock of the Company. This
dividend was paid on July 16, 2002 to shareholders of record at the
close of business on June 3, 2002. On October 10, 2002, the Company's
Board of Director's declared a semi-annual cash dividend of $.90 per
share on the outstanding common stock of the Company. This dividend
was paid to the shareholders of record at the close of business on
December 13, 2002.
Capital additions were $577 million in 2002, with the majority of the
spending supporting new products, manufacturing productivity and
quality improvements, infrastructure improvements and ongoing
environmental and safety initiatives. For the full year 2003, the
Company expects its capital spending, excluding acquisitions and
equipment purchased for lease, to be approximately $600 million.
The cash outflows for severance and exit costs associated with the
restructuring charges recorded in 2002 will be more than offset by the
tax savings associated with the restructuring actions, primarily due to
the tax benefit of $46 million relating to the consolidation of its
photofinishing operations in Japan recorded in the third quarter 2002
restructuring charge. During 2002, the Company expended $220 million
against the related restructuring reserves, primarily for the payment
of severance benefits, which were mostly attributable to the 2001
restructuring actions. The remaining severance-related actions
associated with the total 2001 restructuring charge will be completed
by the end of the first quarter of 2003. Terminated employees could
elect to receive severance payments for up to two years following their
date of termination.
53
For 2003, the Company expects to generate $450 million to $650 million
in cash flow after dividends, excluding the impacts on cash from the
purchase and sale of marketable securities, 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. The Company believes
that its cash flow from operations will be sufficient to cover its
working capital needs and the funds required for dividend payments,
debt reduction, acquisitions and the potential repurchase of shares of
the Company's common stock. The Company's cash balances and financing
arrangements will be used to bridge timing differences between
expenditures and cash generated from operations.
On July 12, 2002, the Company completed the renegotiation of its 364-
day committed revolving credit facility (364-Day Facility). The new
$1,000 million facility is $225 million lower than the 2001 facility
due to a reduction in the Company's commercial paper usage and the
establishment of the accounts receivable securitization program. As a
result, the Company now has $2,225 million in committed revolving
credit facilities, which are available to support the Company's
commercial paper program and for general corporate purposes. The
credit facilities are comprised of the new 364-Day Facility at $1,000
million expiring in July 2003 and a 5-year committed facility at $1,225
million expiring in July 2006 (5-Year Facility). If unused, they have
a commitment fee of $3 million per year, at the Company's current
credit rating of BBB+ (Standard & Poor's (S&P)) and Baa1 (Moody's).
Interest on amounts borrowed under these facilities is calculated at
rates based on spreads above certain reference rates and the Company's
credit rating. Due to the credit rating downgrades mentioned below and
the generally tight bank credit market, the borrowing costs under the
new 364-Day Facility have increased by approximately 7 basis points on
an undrawn basis and 40 basis points on a fully drawn basis at the
Company's current credit ratings. The borrowing costs under the 5-Year
Facility have increased by 6.5 basis points on an undrawn basis and 20
basis points on a fully drawn basis. These costs will increase or
decrease based on future changes in the Company's credit rating.
In connection with the renegotiation of the $1,000 million facility,
the covenant under both of the facilities, which previously required
the Company to maintain a certain EBITDA (earnings before interest,
income taxes, depreciation and amortization) to interest ratio, was
changed to a debt to EBITDA 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 was
in compliance with this covenant at December 31, 2002. The Company
does not anticipate that a violation is likely to occur.
54
The Company has other committed and uncommitted lines of credit at
December 31, 2002 totaling $241 million and $1,993 million,
respectively. These lines primarily support borrowing needs of the
Company's subsidiaries, which include term loans, overdraft coverage,
letters of credit and revolving credit lines. Interest rates and other
terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions. Total outstanding
borrowings against these other committed and uncommitted lines of
credit at December 31, 2002 were $143 million and $465 million,
respectively. These outstanding borrowings are reflected in the short-
term bank borrowings and long-term debt balances at December 31, 2002.
At December 31, 2002, the Company had $837 million in commercial paper
outstanding, with a weighted average interest rate of 1.97%. To
provide additional financing flexibility, the Company entered into an
accounts receivable securitization program, which provides for
borrowings up to a maximum of $400 million. At December 31, 2002, the
Company had outstanding borrowings under this program of $74 million.
Based on the outstanding secured borrowings level of $74 million, the
estimated annualized interest rate under this program is 2.13%.
During the second quarter of 2001, the Company increased its medium-
term note program from $1,000 million to $2,200 million for issuance of
debt securities due nine months or more from date of issue. At
December 31, 2002, the Company had debt securities outstanding of $700
million under this medium-term note program, with none of this balance
due within one year. The Company has remaining availability of $1,200
million under its medium-term note program for the issuance of new
notes.
Long-term debt and related maturities and interest rates were as
follows at December 31, 2002 and 2001 (in millions):
Weighted-
Average
Interest
Country Type Maturity Rate 2002 2001
U.S. Term note 2002 6.38% $ - $ 150
U.S. Term note 2003 9.38% 144 144
U.S. Term note 2003 7.36% 110 110
U.S. Medium-term 2005 7.25% 200 200
U.S. Medium-term 2006 6.38% 500 500
U.S. Term note 2008 9.50% 34 34
U.S. Term note 2018 9.95% 3 3
U.S. Term note 2021 9.20% 10 10
China Bank Loans 2002 6.28% - 12
China Bank Loans 2003 5.49% 114 96
China Bank Loans 2004 2.42% - 190
China Bank Loans 2004 5.58% 252 182
China Bank Loans 2005 5.53% 124 133
Japan Bank Loans 2003 2.51% - 42
Qualex Term notes 2003-2005 6.12% 44 -
Chile Bank Loans 2004 2.61% 10 10
Other 6 6
------ ------
$1,551 $1,822
====== ======
55
During the quarter ended March 31, 2002, the Company's credit ratings
for long-term debt were lowered by Moody's and by Fitch to Baa1 and A-,
respectively. However, in connection with its downgrade, Moody's
changed the Company's outlook from negative to stable. Additionally,
Fitch lowered the Company's credit rating on short-term debt to F2. On
April 23, 2002, S&P lowered the Company's credit rating on long-term
debt to BBB+, a level equivalent to the Company's current rating from
Moody's of Baa1. S&P reaffirmed the short-term debt at A2 and
maintained the Company's outlook at stable. These credit rating
downgrade actions were due to lower earnings as a result of the
continued weakened economy, industry factors and other world events.
The reductions in the Company's long-term debt credit ratings have
impacted the credit spread applied to Kodak's U.S. long-term debt
traded in the secondary markets. However, this has not resulted in an
increase in interest expense, as the Company has not issued any
significant new long-term debt during this period. The reduction in
the Company's short-term debt credit ratings has impacted the cost of
short-term borrowings, primarily the cost of issuing commercial paper.
However, this increased cost was more than offset by the lowering of
market rates of interest as a result of actions taken by the Federal
Reserve to stimulate the U.S. economy. As indicated above, the
Company's weighted average commercial paper rate for commercial paper
outstanding at December 31, 2002 was 1.97% as compared with 3.61% at
December 31, 2001. The credit rating downgrades in the first half of
2002 coupled with the downgrades in the fourth quarter of 2001 would
have resulted in an increase in borrowing rates; however, due to lower
average debt levels and lower commercial paper rates, interest expense
for the year ended December 31, 2002 is down relative to the year
ended December 31, 2001. The above credit rating actions are not
expected to have a material impact on the future operations of the
Company. However, if the Company's credit ratings were to be reduced
further, this could potentially affect access to commercial paper
borrowing. While this is not expected to occur, if such an event
did take place the Company could use alternative sources of borrowing
including its accounts receivable securitization program, long-term
capital markets debt, and its revolving credit facilities.
The Company is in compliance with all covenants or other requirements
set forth in its credit agreements and indentures. Further, the
Company does not have any rating downgrade triggers that would
accelerate the maturity dates of its debt, with the exception of the
following: a $110 million note due April 15, 2003 and $44 million in
term notes that will amortize through 2005 that can be accelerated if
the Company's credit rating from S&P or Moody's were to fall below BBB
and BBB-, respectively; and the outstanding borrowings under the
accounts receivable securitization program if the Company's credit
ratings from S&P or Moody's were to fall below BBB- and Baa3,
respectively, and such condition continued for a period of 30 days.
Further downgrades in the Company's credit rating or disruptions in the
capital markets could impact borrowing costs and the nature of its
funding alternatives. However, the Company has access to $2,225
million in committed bank revolving credit facilities to meet
unanticipated funding needs should it be necessary. Borrowing rates
under these credit facilities are based on the Company's credit rating.
56
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At December 31, 2002, these
guarantees totaled a maximum of $345 million, with outstanding
guaranteed amounts of $159 million. The maximum guarantee amount
includes: guarantees of up to $160 million of debt for KPG ($74 million
outstanding) and up to $19 million for other unconsolidated affiliates
and third parties ($17 million outstanding) and guarantees of up to $166
million of customer amounts due to banks in connection with various
banks' financing of customers' purchase of products and equipment from
Kodak ($68 million outstanding). The KPG debt facility and the related
guarantee mature on December 31, 2005, but may be renewed at KPG's,
Kodak's and the bank's discretion. The guarantees for the other third
party debt mature between May 1, 2003 and May 31, 2005 and are not
expected to be renewed. The customer financing agreements and related
guarantees typically have a term of 90 days for product and short-term
equipment financing arrangements, and up to 3 years for long-term
equipment financing arrangements. These guarantees would require
payment from Kodak only in the event of default on payment by the
respective debtor. In some cases, particularly for guarantees related
to equipment financing, the Company has collateral or recourse
provisions to recover and sell the equipment to reduce any losses that
might be incurred in connection with the guarantee. This activity is
not material. Management believes the likelihood is remote that
material payments will be required under these guarantees.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $857
million, and the outstanding debt under those guarantees, which is
recorded within the short-term borrowings and long-term debt, net of
current portion components in the Consolidated Statement of Financial
Position, is $628 million. These guarantees expire in 2003 through 2005
with the majority expiring in 2003.
The Company may provide up to $100 million in loan guarantees to support
funding needs for SK Display Corporation, an unconsolidated affiliate in
which the Company has a 34% ownership interest. As of December 31,
2002, the Company has not been required to guarantee any of the SK
Display Corporation's outstanding debt.
57
In certain instances when Kodak sells businesses either through asset or
stock sales, the Company may retain certain liabilities for known
exposures and provide indemnification to the buyer with respect to
future claims for certain unknown liabilities existing, or arising from
events occurring, prior to the sale date, including liabilities for
taxes, legal matters, environmental exposures, labor contingencies,
product liability, and other obligations. The terms of the
indemnifications vary in duration, from one to two years for certain
types of indemnities, to terms for tax indemnifications that are
generally aligned to the applicable statute of limitations for the
jurisdiction in which the divestiture occurred, and terms for
environmental liabilities that typically do not expire. The maximum
potential future payments that the Company could be required to make
under these indemnifications are either contractually limited to a
specified amount or unlimited. The Company believes that the maximum
potential future payments that the Company could be required to make
under these indemnifications are not determinable at this time, as any
future payments would be dependent on the type and extent of the related
claims, and all available defenses, which are not estimable. However,
costs incurred to settle claims related to these indemnifications have
not been material to the Company's financial position, results of
operations or cash flows.
In certain instances when Kodak sells real estate, the Company will
retain the liabilities for known environmental exposures and provide
indemnification to the other party with respect to future claims for
certain unknown environmental liabilities existing prior to the sale
date. The terms of the indemnifications vary in duration, from a range
of three to ten years for certain indemnities, to terms for other
indemnities that do not expire. The maximum potential future payments
that the Company could be required to make under these indemnifications
are either contractually limited to a specified amount or unlimited.
The Company believes that the maximum potential future payments that the
Company could be required to make under these indemnifications are not
determinable at this time, as any future payments would be dependent on
the type and extent of the related claims, and all relevant defenses to
the claims, which are not estimable. However, costs incurred to settle
claims related to these indemnifications have not been material to the
Company's financial position, results of operations or cash flows.
58
The Company may enter into standard indemnification agreements in the
ordinary course of business with its customers, suppliers, service
providers and business partners. In such instances, the Company usually
indemnifies, holds harmless and agrees to reimburse the indemnified
party for all claims, actions, liabilities, losses and expenses in
connection with any Kodak infringement of third party intellectual
property or proprietary rights, or when applicable, in connection with
any personal injuries or property damage resulting from any Kodak
products sold or Kodak services provided. Additionally, the Company may
from time to time agree to indemnify and hold harmless its providers of
services from all claims, actions, liabilities, losses and expenses
relating to their services to Kodak, except to the extent finally
determined to have resulted from the fault of the provider of services
relating to such services. The level of conduct constituting fault of
the service provider will vary from agreement to agreement and may
include conduct which is defined in terms of negligence, gross
negligence, recklessness, intentional acts, omissions or other culpable
behavior. The term of these indemnification agreements is generally
perpetual. The maximum potential future payments that the Company could
be required to make under the indemnifications are unlimited. The
Company believes that the maximum potential future payments that the
Company could be required to make under these indemnifications are not
determinable at this time, as any future payments would be dependent on
the type and extent of the related claims, and all relevant defenses to
the claims, including statutes of limitation, which are not estimable.
However, costs incurred to settle claims related to these
indemnifications have not been material to the Company's financial
position, results of operations or cash flows.
The Company has by-laws, policies, and agreements under which it
indemnifies its directors and officers from liability for certain events
or occurrences while the directors or officers are, or were, serving at
Kodak's request in such capacities. Furthermore, the Company is
incorporated in the State of New Jersey, which requires corporations to
indemnify their officers and directors under certain circumstances. The
Company has made similar arrangements with respect to the directors and
officers of acquired companies. The term of the indemnification period
is for the director's or officer's lifetime. The maximum potential
amount of future payments that the Company could be required to make
under these indemnifications is unlimited, but would be affected by all
relevant defenses to the claims, including statutes of limitations.
The Company had a commitment under a put option arrangement with Burrell
Colour Lab (BCL), an unaffiliated company, whereby the shareholders of
BCL had the ability to put 100% of the stock to Kodak for total
consideration, including the assumption of debt, of approximately $63.5
million. The option first became exercisable on October 1, 2002 and was
ultimately exercised during the Company's fourth quarter ended December
31, 2002. Accordingly, on February 5, 2003, the Company acquired BCL
for a total purchase price of approximately $63.5 million, which was
composed of approximately $53 million in cash and $10.5 million in
assumed debt. The exercise of the option had no impact on the Company's
fourth quarter earnings.
59
In connection with the Company's investment in China that began in 1998,
certain unaffiliated entities invested in two Kodak consolidated
companies with the opportunity to put their minority interests to Kodak
at any time after the third anniversary, but prior to the tenth
anniversary, of the date on which the companies were established. On
December 31, 2002, an unaffiliated investor in one of Kodak's China
subsidiaries exercised their rights under the put option agreement.
Under the terms of the arrangement, the Company repurchased the
investor's 10% minority interest for approximately $44 million in cash.
The exercise of this put option and the recording of the related
minority interest purchased had no impact on the Company's earnings.
The total exercise price in connection with the remaining put options,
which increases at a rate of 2% per annum, is approximately $60 million
at December 31, 2002. The Company expects that approximately $16
million of the remaining $60 million in total put options will be
exercised and the related cash payments will occur over the next twelve
months.
Due to continuing declines in the equity markets in 2002 as well as the
decline in the discount rate from December 31, 2001 to December 31, 2002,
the Company was required to record a charge to the accumulated other
comprehensive (loss) income component of equity of $394 million, net of
tax benefits of $183 million, for additional minimum pension liabilities
at December 31, 2002. The increase in additional minimum pension
liabilities of $577 million was recorded to the postretirement
liabilities component on the Consolidated Statement of Financial Position
at December 31, 2002. The increase in this component of $684 million
from December 31, 2001 to December 31, 2002 is primarily attributable to
this increase in the additional minimum pension liabilities. The Company
recorded the deferred income tax benefit of $183 million in the other
long-term assets component within the Consolidated Statement of Financial
Position. The net increase in this component of $296 million from
December 31, 2001 to December 31, 2002 is partially attributable to the
recording of these deferred income tax assets and the increase in the
prepaid pension asset. The increase in the prepaid pension asset is
primarily attributable to $197 million of pension income generated from
the U.S. pension plans in 2002.
During the fourth quarter of 2002, the Company funded one of its non-U.S.
defined benefit plans in the amount of approximately $38 million. The
Company does not expect to have significant funding requirements relating
to its defined benefit pension plans in 2003.
60
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 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 (the Vendor) to fulfill its servicing
obligations under the leases. This risk is attributable to the fact
that, throughout 2002, the Vendor was experiencing financial difficulty
which ultimately resulted in certain of its entities in different
countries filing for bankruptcy on December 24, 2002. Although the
lessees' requirement to pay ESF under the lease agreements is not
contingent upon Qualex's fulfillment of its servicing obligations,
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 $473 million at
December 31, 2002.
61
To mitigate the risk of not being able to fulfill its service
obligations in the event the Vendor were to file for bankruptcy, Qualex
built up its inventory of these spare parts during 2002 and began
refurbishing used parts. To further mitigate its exposure, effective
April 3, 2002, Kodak entered into certain agreements with the Vendor
under which the Company paid $19 million for a license relating to the
spare parts intellectual property, an equity interest in the Vendor and
the intellectual property holding company and an arrangement to
purchase spare parts. After entering into these arrangements, the
Company obtained the documentation and specifications of the parts it
sourced solely from the Vendor and a comprehensive supplier list for
the parts the Vendor sourced from other suppliers. However, under
these arrangements, Kodak had a use restriction, which precluded the
Company from manufacturing the parts that the Vendor produced and from
purchasing parts directly from the Vendor's suppliers. This use
restriction would be effective until certain triggering events
occurred, the most significant of which was the filing for bankruptcy
by the Vendor. As indicated above, the Vendor filed for bankruptcy on
December 24, 2002. The arrangements that the Company entered into with
the Vendor are currently being reviewed in the bankruptcy courts, and
there is the possibility that such agreements could be challenged.
However, the Company believes that it has a strong legal position with
respect to the agreements and is taking the necessary steps to obtain
the rights to gain access to the Vendor's tooling to facilitate the
manufacture of the parts previously produced by the Vendor.
Additionally, the Company has begun to source parts directly from the
Vendor's suppliers. Accordingly, the Company does not anticipate any
significant liability arising from the inability to fulfill its service
obligations under the arrangement with ESF.
In December 2001, S&P 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) between ESF and its
banks. 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 S&P 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.
Effective April 15, 2002, ESF cured the Termination Event by executing
an amendment to the RPA. Under the amended RPA, the maximum borrowings
have been lowered to $400 million, and ESF must pay a higher interest
rate on outstanding and future borrowings. Additionally, if there were
certain changes in control with respect to Dana Corporation or DCC, as
defined in the amended RPA, such an occurrence would constitute an
event of default. Absent a waiver from the banks, this event of
default would create a Termination Event under the amended RPA. The
amended RPA arrangement was further amended in July 2002 to extend
through July 2003. Under the amended RPA arrangement, maximum
borrowings were reduced to $370 million. Total outstanding borrowings
under the RPA at December 31, 2002 were $320 million.
62
Dana Corporation's S&P and Moody's long-term debt credit ratings have
remained at the February 22, 2002 levels of BB and Ba3, respectively.
Under the amended RPA, if either of Dana Corporation's long-term debt
ratings were to fall below their current respective ratings, such an
occurrence would create a Termination Event as defined in the RPA.
The amended RPA arrangement extends through July 2003, at which time
the RPA can be extended or terminated. If the RPA were terminated,
Qualex would no longer be able to sell its lease receivables to ESF and
would need to find an alternative financing solution for future sales
of its photofinishing equipment. For the year ended December 31, 2002,
total sales of photofinishing equipment were $3.5 million. 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 timing of the partnership
termination, Qualex plans to utilize the services of Eastman Kodak
Credit Corporation, a wholly owned subsidiary of General Electric
Capital Corporation, as an alternative financing solution for
prospective leasing activity with its customers.
At December 31, 2002, the Company had outstanding letters of credit
totaling $105 million and surety bonds in the amount of $79 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
As of December 31, 2002, the impact that our contractual obligations
are expected to have on our liquidity and cash flow in future periods
is as follows:
(in millions) Total 2003 2004 2005 2006 2007 2008+
Long-term debt
obligations $1,551 $387 $285 $332 $500 $ - $ 47
Operating lease
obligations 355 102 72 56 42 32 51
Purchase
obligations 1,159 265 239 205 116 77 257
------ ---- ---- ---- ---- ---- ----
Total $3,065 $754 $596 $593 $658 $109 $355
====== ==== ==== ==== ==== ==== ====
63
2001
Net cash provided by operating activities in 2001 was $2,206 million,
as net earnings of $76 million, adjusted for depreciation and
amortization, and restructuring costs, asset impairments and other
charges, provided $1,408 million of operating cash. Also contributing
to operating cash was a decrease in receivables of $254 million and a
decrease in inventories of $465 million. This was partially offset by
decreases in liabilities, excluding borrowings, of $111 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 $1,188 million in 2001 was utilized
primarily for capital expenditures of $743 million, investments in
unconsolidated affiliates of $141 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 $797
million from $1,420 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.
Under the $2,000 million 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 $1,800 million of its shares under this
program.
The net cash cost of the restructuring charge recorded in 2001 was
approximately $182 million after tax, which was recovered through cost
savings in less than two years. The severance-related actions
associated with this charge will be completed by the end of the first
quarter of 2003.
64
2000
Net cash provided by operating activities in 2000 was $1,105 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 $280 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 $808 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
$906 million in 2000 was utilized primarily for capital expenditures of
$945 million, investments in unconsolidated affiliates of $123 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 $1,420 million from $777
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 $2,000 million 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 $2,000 million of the
Company's stock over the next 4 years.
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65
OTHER
Cash expenditures for pollution prevention and waste treatment for the
Company's current facilities were as follows:
(in millions) 2002 2001 2000
Recurring costs for pollution
prevention and waste treatment $ 67 $ 68 $ 72
Capital expenditures for pollution
prevention and waste treatment 12 27 36
Site remediation costs 3 2 3
---- ---- ----
Total $ 82 $ 97 $111
==== ==== ====
At December 31, 2002 and 2001, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $148 million
and $162 million, respectively. These amounts are reported in other
long-term liabilities in the accompanying Consolidated Statement of
Financial Position.
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 (RFI) and Corrective Measures Studies (CMS) for
areas at the site. At December 31, 2002, estimated future investigation
and remediation costs of $67 million are accrued on an undiscounted
basis and are included in the $148 million 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, 2002, estimated future
remediation costs of $49 million are accrued on an undiscounted basis
and are included in the $148 million reported in other long-term
liabilities.
The Company has obligations relating to two former manufacturing sites
located outside the United States. Investigations were completed in
the fourth quarter of 2001, which facilitated the completion of cost
estimates for the future remediation and monitoring of these sites.
The Company's obligations with respect to these two sites include an
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 repurchase of the site was completed in the first quarter of 2002.
At December 31, 2002, estimated future investigation, remediation and
monitoring costs of $27 million are accrued on an undiscounted basis
and are included in the $148 million reported in other long-term
liabilities.
66
Additionally, the Company has approximately $5 million accrued on an
undiscounted basis in the $148 million reported in other long-term
liabilities at December 31, 2002 for remediation relating to other
facilities, which are not material to the Company's financial position,
results of operations, cash flows or competitive position.
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for each site. For these known environmental exposures, the
accrual reflects the Company's best estimate of the amount it will
incur under the agreed-upon or proposed work plans. The Company's cost
estimates were determined using the ASTM Standard E 2137-01 "Standard
Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters," and have not been reduced by possible recoveries from third
parties. The overall method includes the use of a probabilistic model
which forecasts a range of cost estimates for the remediation required
at individual sites. The projects are closely monitored and the models
are reviewed as significant events occur or at least once per year.
The Company's estimate includes equipment and operating costs for
remediation and long-term monitoring of the sites. The Company does
not believe it is reasonably possible that the losses for the known
exposures could exceed the current accruals by material amounts.
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. In connection with the Consent Decree, the
Company is subject to a Compliance Schedule, under which the Company
has 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 $27 million over the next six
years. These expenditures are primarily capital in nature and,
therefore, are not included in the environmental accrual at December
31, 2002.
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 such active sites. With respect to each of these sites, the
Company's liability is minimal. 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, results of operations or cash flows.
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.
67
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of 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 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. The Company has an ongoing monitoring and
identification process to assess how the activities, with respect to
the known exposures, are progressing against the accrued cost
estimates, as well as to identify other potential remediation sites
that are presently unknown.
Estimates of the amount and timing of future costs of environmental
remediation requirements are necessarily imprecise because of the
continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology, the identification of
presently unknown remediation sites and the allocation of costs among
the potentially responsible parties. Based upon information presently
available, such future costs are not expected to have a material effect
on the Company's competitive or financial position. However, such
costs could be material to results of operations in a particular future
quarter or year.
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68
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143 "Accounting for Asset Retirement Obligations." SFAS 143 addresses
the financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. SFAS 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset, and
this additional carrying amount is expensed over the life of the asset.
The Company is required to adopt SFAS 143 effective January 1, 2003. The
Company is currently in the process of evaluating the potential impact
that the adoption of the recognition provisions of SFAS 143 will have on
its consolidated financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
the financial accounting and reporting for costs associated with exit
or disposal activities and supercedes the Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
recognition of the liability for costs associated with an exit or
disposal activity when the liability is incurred. Under EITF issue No.
94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 will impact the timing of recognition
and the initial measurement of the amount of liabilities the Company
recognizes in connection with exit or disposal activities initiated
after December 31, 2002, the effective date of SFAS No. 146.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires that a liability be recorded on the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees, including indemnifications, that an entity has
issued and a rollforward of the entity's product warranty liabilities.
The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued or modified after December 31, 2002.
The disclosure provisions of FIN 45 are effective for financial
statements of interim periods or annual periods ending after December
15, 2002. See Note 1 under "Warranty Costs" and Note 10 under "Other
Commitments and Contingencies." The Company is currently in the
process of evaluating the potential impact that the adoption of the
recognition provisions of FIN 45 will have on its consolidated
financial position and results of operations.
69
In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 provides guidance on how to determine when an
arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for
revenue recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate units
of accounting. The guidance in the consensus is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The Company is currently evaluating the effect that the adoption
of EITF Issue No. 00-21 will have on its results of operations and
financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. See "Stock-Based Compensation" within
Note 1, "Significant Accounting Policies" for the additional annual
disclosures made to comply with SFAS No. 148. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. As
the Company does not intend to adopt the provisions of SFAS No. 123,
the Company does not expect the transition provisions of SFAS No. 148
to have a material effect on its results of operations or financial
condition.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements," relating to consolidation of certain entities.
First, FIN 46 will require identification of the Company's
participation in variable interest entities (VIE), which are defined as
entities with a level of invested equity that is not sufficient to fund
future activities to permit them to operate on a stand alone basis, or
whose equity holders lack certain characteristics of a controlling
financial interest. Then, for entities identified as VIE, FIN 46 sets
forth a model to evaluate potential consolidation based on an
assessment of which party to the VIE, if any, bears a majority of the
exposure to its expected losses, or stands to gain from a majority of
its expected returns. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For VIE
created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after
June 15, 2003. FIN 46 also sets forth certain disclosures regarding
interests in VIE that are deemed significant, even if consolidation is
not required. See Note 6, "Investments," for these disclosures. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial condition.
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70
RISK FACTORS
The following cautionary statements address a number of important
factors that could cause the actual future results of the Company to
differ from those expressed or implied in the forward-looking
statements contained in this document. Additionally, because of the
following factors, as well as other variables affecting our operating
results, the Company's past financial performance should not be
considered an indicator of future performance and investors should not
use historical trends to anticipate results or trends in future
periods.
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 in the form of royalties
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.
In the event Kodak were unable to develop and implement e-commerce
strategies that are in alignment 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.
71
Kodak intends to complete various portfolio actions required to
strengthen its digital imaging portfolio, rationalize the
photofinishing operations in the U.S. and EAMER 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 2003, Kodak continues to focus on reduction of inventories,
improvement in receivable performance, reduction in capital
expenditures, and improvement in manufacturing productivity.
Unanticipated delays in the Company's plans to continue inventory
reductions in 2003 could adversely impact Kodak's cash flow 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.
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.
Additionally, delays in the Company's execution of increasing
manufacturing capabilities for certain of its products in some of its
emerging markets, particularly China where it is more cost competitive,
could adversely impact margins.
Unanticipated delays in the Company's plans to continue the
improvement of accounts receivable and to reduce the number of days
sales outstanding 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 continued accounts receivable improvement in 2003.
In addition, if Kodak is not able to maintain flat capital
spending relative to 2002 levels, this factor could adversely impact
the Company's cash flow 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.
72
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'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.
During the remainder of 2002, the currencies in both Argentina and
Brazil experienced significant devaluation due to continuing difficult
economic times. 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 currency exchange rates and
interest rates, which may adversely affect its results of operations
and financial position.
Competition remains intense in the imaging sector in the photography,
commercial and health segments. On the photography side, price
competition has been driven somewhat by consumers' conservative
spending behaviors during times of a weak world economy, international
tensions and the accompanying concern over the possibility of war and
terrorism. Some consumers have moved from 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.
73
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.
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.
74
The Company expects 2003 to be another difficult economic year
compounded by rising political tensions, with a slight improvement in
full year revenues. The Company expects earnings to be flat for the
first quarter of 2003 compared with the same period last year. We do
not expect to see any real upturn in the economy until 2004, 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 2002, as well as implement new focused cost reduction
actions in 2003, to make its operations more cost competitive and
improve margins.
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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 2003 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; general economic
and business conditions; and other risk factors disclosed herein and
from time to time in the Company's filings with the Securities and
Exchange Commission, including but not limited to the items discussed
in "Risk Factors" as set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 of this
report.
Any forward-looking statements in this report should be evaluated in
light of these important risk factors.
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75
MARKET PRICE DATA
2002 2001
Price per
share: High Low High Low
1st Quarter $34.30 $25.58 $46.65 $38.19
2nd Quarter 35.49 28.15 49.95 37.76
3rd Quarter 32.36 26.30 47.38 30.75
4th Quarter 38.48 25.60 36.10 24.40
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SUMMARY OF OPERATING DATA
A summary of operating data for 2002 and for the four years prior is
shown on page 149.
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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.
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.
Using a sensitivity analysis based on estimated fair value of open
forward contracts using available forward rates, if the U.S. dollar had
been 10% weaker at December 31, 2002 and 2001, the fair value of open
forward contracts would have increased $13 million, and decreased $25
million, respectively. Such gains or losses would be substantially
offset by losses or gains from the revaluation or settlement of the
underlying positions hedged.
Using a sensitivity analysis based on estimated fair value of open
forward contracts using available forward prices, if available forward
silver prices had been 10% lower at December 31, 2002 and 2001, the
fair value of open forward contracts would have decreased $4 million
and $11 million, respectively. Such losses in fair value, if realized,
would be offset by lower costs of manufacturing silver-containing
products.
76
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 borrowings 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 sensitivity analysis based on estimated fair value of short-
term and long-term borrowings, if available market interest rates had
been 10% (about 37 basis points) higher at December 31, 2002, the fair
value of short-term and long-term borrowings would have decreased $1
million and $15 million, respectively. Using a sensitivity analysis
based on estimated fair value of short-term and long-term borrowings,
if available market interest rates had been 10% (about 43 basis points)
higher at December 31, 2001, the fair value of short-term and long-term
borrowings would have decreased $1 million and $28 million,
respectively.
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, 2002 was
not significant to the Company.
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77
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 that appear on pages
79 through 148. 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 that 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 & Chief Executive Officer, Chief Financial Officer, and
President & Chief Operating Officer Executive Vice President
March 13, 2003 March 13, 2003
78
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
15(a)(1) and (2) on page 152 of this Annual Report on Form 10-K present
fairly, in all material respects, the financial position of Eastman
Kodak Company and subsidiary companies (the Company) at December 31,
2002 and 2001, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2002, 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.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," and No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," on January 1, 2002.
PricewaterhouseCoopers LLP
Rochester, New York
March 13, 2003
79
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31,
(in millions, except per share
data)
2002 2001 2000
Net sales $12,835 $13,229 $13,994
Cost of goods sold 8,225 8,661 8,375
------- ------- -------
Gross profit 4,610 4,568 5,619
Selling, general and
administrative expenses 2,530 2,625 2,514
Research and development costs 762 779 784
Goodwill amortization - 153 151
Restructuring costs (credits)
and other 98 659 (44)
------- ------- -------
Earnings from continuing
operations before interest,
other (charges) income, and
income taxes 1,220 352 2,214
Interest expense 173 219 178
Other (charges) income (101) (18) 96
------- ------- -------
Earnings from continuing operations
before income taxes 946 115 2,132
Provision for income taxes 153 34 725
------- ------- -------
Earnings from continuing operations $ 793 $ 81 $ 1,407
======= ======= =======
Loss from discontinued operations,
net of income tax benefits of $15,
$2 and $0 for the years ended
December 31, 2002, 2001 and 2000,
respectively $ (23) $ (5) $ -
======= ======= =======
NET EARNINGS $ 770 $ 76 $ 1,407
======= ======= =======
Basic net earnings (loss) per share:
Continuing operations $ 2.72 $ .28 $ 4.62
Discontinued operations (.08) (.02) -
------- ------- -------
Total $ 2.64 $ .26 $ 4.62
====== ======= =======
Diluted net earnings (loss) per
share:
Continuing operations $ 2.72 $ .28 $ 4.59
Discontinued operations (.08) (.02) -
------- ------- -------
Total $ 2.64 $ .26 $ 4.59
======= ======= =======
Number of common shares used in
basic earnings per share 291.5 290.6 304.9
Incremental shares from
assumed conversion of options 0.2 0.4 1.7
------ ------- -------
Number of common shares used in
diluted earnings per share 291.7 291.0 306.6
====== ======= =======
Cash dividends per share $ 1.80 $ 2.21 $ 1.76
====== ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
80
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, except share and per
share data) At December 31,
2002 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 569 $ 448
Receivables, net 2,234 2,337
Inventories, net 1,062 1,071
Deferred income taxes 512 521
Other current assets 157 240
------- -------
Total current assets 4,534 4,617
------- -------
Property, plant and equipment, net 5,420 5,659
Goodwill, net 981 948
Other long-term assets 2,434 2,138
------- -------
TOTAL ASSETS $13,369 $13,362
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,351 $ 3,276
Short-term borrowings 1,442 1,534
Accrued income taxes 584 544
------- -------
Total current liabilities 5,377 5,354
Long-term debt, net of current portion 1,164 1,666
Postretirement liabilities 3,412 2,728
Other long-term liabilities 639 720
------- -------
Total liabilities 10,592 10,468
------- -------
Commitments and Contingencies (Note 10)
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
950,000,000 shares authorized;
391,292,760 shares issued in 2002
and 2001; 285,933,179 and
290,929,701 shares outstanding
in 2002 and 2001 978 978
Additional paid in capital 849 849
Retained earnings 7,611 7,431
Accumulated other comprehensive loss (771) (597)
------- -------
8,667 8,661
Treasury stock, at cost
105,359,581 shares in 2002 and
100,363,059 shares in 2001 5,890 5,767
------- -------
Total shareholders' equity 2,777 2,894
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,369 $13,362
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
81
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 (Loss) Income 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
82
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 (Loss) Income 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
83
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 (Loss) Income Stock Total
Shareholders' Equity December 31, 2001 $978 $ 849 $ 7,431 $(597) $(5,767) $2,894
Net earnings - - 770 - - 770
------
Other comprehensive income (loss):
Unrealized gains on available-for-sale
securities ($11 million pre-tax) - - - 6 - 6
Unrealized loss arising from
hedging activity ($27 million pre-tax) - - - (19) - (19)
Reclassification adjustment for hedging
related losses included in net earnings
($24 million pre-tax) - - - 15 - 15
Currency translation adjustments - - - 218 - 218
Minimum pension liability adjustment
($577 million pre-tax) - - - (394) - (394)
----- ------
Other comprehensive loss - - - (174) - (174)
----- ------
Comprehensive income 596
Cash dividends declared ($1.80 per common
share) - - (525) - - (525)
Treasury stock repurchased (7,354,316
shares) - - - - (260) (260)
Treasury stock issued under employee plans
(2,357,794 shares) - 1 (65) - 137 73
Tax reductions - employee plans - (1) - - - (1)
---- ----- ------- ----- ------- ------
Shareholders' Equity December 31, 2002 $978 $ 849 $ 7,611 $(771) $(5,890) $2,777
==== ===== ======= ===== ======= ======
* 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.
84
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31,
(in millions) 2002 2001 2000
Cash flows from operating activities:
Net earnings $ 770 $ 76 $1,407
Adjustments to reconcile to net cash
provided by operating activities:
Loss from discontinued operations 23 5 -
Equity in losses from unconsolidated
affiliates 105 84 111
Depreciation and amortization 818 917 889
Gain on sales of businesses/assets (24) - (117)
Restructuring costs, asset impairments
and other charges 85 415 -
(Benefit) provision for deferred
income taxes (224) (41) 234
Decrease (increase) in receivables 263 254 (247)
Decrease (increase) in inventories 88 465 (280)
Increase (decrease) in liabilities
excluding borrowings 29 (111) (808)
Other items, net 285 149 (84)
------ ------ -----
Total adjustments 1,448 2,137 (302)
------ ------ ------
Net cash provided by continuing
operations 2,218 2,213 1,105
------ ------ ------
Net cash used for discontinued
operations (14) (7) -
------ ------ ------
Net cash provided by operating
activities 2,204 2,206 1,105
------ ------ ------
Cash flows from investing activities:
Additions to properties (577) (743) (945)
Net proceeds from sales of
businesses/assets 27 - 277
Acquisitions, net of cash acquired (72) (306) (130)
Investments in unconsolidated
affiliates (123) (141) (123)
Marketable securities - sales 88 54 84
Marketable securities - purchases (101) (52) (69)
------ ------ ------
Net cash used in investing
activities (758) (1,188) (906)
------ ------ ------
Cash flows from financing activities:
Net (decrease) increase in
borrowings with original maturities
of 90 days or less (210) (695) 939
Proceeds from other borrowings 759 1,907 1,310
Repayment of other borrowings (1,146) (1,355) (936)
Dividends to shareholders (525) (643) (545)
Exercise of employee stock options 51 22 43
Stock repurchase programs (260) (44) (1,125)
------ ------ ------
Net cash used in
financing activities (1,331) (808) (314)
------ ------ ------
Effect of exchange rate changes on cash 6 (8) (12)
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 121 202 (127)
Cash and cash equivalents, beginning
of year 448 246 373
------ ------ ------
Cash and cash equivalents, end of year $ 569 $ 448 $ 246
====== ====== ======
85
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:
2002 2001 2000
Interest, net of portion capitalized
of $3, $12 and $40 $173 $214 $166
Income taxes 201 120 486
The following transactions are not reflected in the Consolidated
Statement of Cash Flows:
2002 2001 2000
Minimum pension liability adjustment $394 $ 37 $ (1)
Liabilities assumed in acquisitions 30 142 31
Issuance of restricted stock,
net of forfeitures 1 5 2
Issuance of stock related to
an acquisition 25 - -
The accompanying notes are an integral part of these consolidated
financial statements.
86
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 net
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 (charges) income. See
Note 6, "Investments" and Note 12, "Other (Charges) Income."
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.
87
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 Consolidated Statement of Financial Position.
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.
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 $19 million, $9
million, and $13 million in the years 2002, 2001, and 2000,
respectively, and are included in other (charges) income in the
accompanying Consolidated Statement of Earnings.
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.
88
Additionally, the Company guarantees debt and other obligations with
certain unconsolidated affiliates and customers, which could
potentially subject the Company to significant concentrations of credit
risk. However, with the exception of the Company's total debt
guarantees for which there is a concentration with one of Kodak's
unconsolidated affiliate companies, these guarantees relate to numerous
customers in a variety of industries, markets and geographies around
the world. The Company does not believe that material payments will be
required under any of its guarantee arrangements. See Note 10 under
"Other Commitments and Contingencies."
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 classified its investment securities 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).
If the Company determines that such losses are other than temporary,
they will be charged to earnings.
At December 31, 2002, the Company had short-term investments classified
as held-to-maturity of $9 million. These investments were included in
other current assets. In addition, the Company had available-for-sale
equity securities of $24 million, included in other long-term assets at
December 31, 2002.
At December 31, 2001, the Company had short-term investments classified
as held-to-maturity of $3 million, which were included in other current
assets. In addition, the Company had available-for-sale equity
securities of $33 million, included in other long-term assets at
December 31, 2001.
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.
89
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. Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." In
accordance with SFAS No. 142, goodwill is no longer amortized, but is
required to be assessed for impairment at least annually. Under the
transitional guidance of SFAS No. 142, the Company was required to
perform two steps, step one to test for a potential impairment of
goodwill and, if potential losses were identified, step two to measure
the impairment loss. The Company completed step one in its first
quarter ended March 31, 2002, and determined that there were no such
impairments. Accordingly, the performance of step two was not required.
The Company has elected to make September 30 the annual impairment
assessment date for all of its reporting units, and will perform
additional impairment tests when events or changes in circumstances
occur that would more likely than not reduce the fair value of the
reporting unit below its carrying amount. SFAS No. 142 defines a
reporting unit as an operating segment or one level below an operating
segment. If the Company believes the carrying amount of a reporting
unit exceeds its fair value, the Company would record an impairment loss
in earnings to the extent the carrying amount of the reporting unit's
goodwill exceeded the fair value of such goodwill. The Company
estimates the fair value of its reporting units through internal
analysis and external valuations, which utilize income and market
approaches through the application of capitalized earnings, discounted
cash flow and market comparable methods.
For the years ended December 31, 2001 and 2000, goodwill amortization was
charged to earnings on a straight-line basis over the period estimated to
be benefited, generally ten years. See Note 5, "Goodwill and Other
Intangible Assets."
90
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. At the time revenue is
recognized, the Company also records reductions to revenue for customer
incentive programs offered including cash and volume discounts, price
protection, promotional, cooperative and other advertising allowances,
slotting fees and coupons.
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 included
and 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 that 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.
91
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 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.
The Company's sales of tangible products are 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.
WARRANTY COSTS
The Company has warranty obligations in connection with the sale of its
equipment. The original warranty period for equipment products is
generally one year. The costs incurred to provide for these warranty
obligations are estimated and recorded as an accrued liability at the
time of sale. The Company estimates its warranty cost at the point of
sale for a given product based on historical failure rates and related
costs to repair. The change in the Company's accrued warranty
obligations from December 31, 2001 to December 31, 2002 was as follows:
(in millions)
Accrued warranty obligations at December 31, 2001 $50
Actual warranty experience during 2002 (47)
2002 warranty provisions 48
Adjustments for changes in estimates (8)
--
Accrued warranty obligations at December 31, 2002 $43
===
92
The Company also offers extended warranty arrangements to its
customers, which are generally one year but may range from three months
to three years after the original warranty period. The Company
provides both repair services and routine maintenance services under
these arrangements. The Company has not separated the extended
warranty revenues and costs from the routine maintenance service
revenues and costs, as it is not practicable to do so. Costs incurred
under these extended warranty arrangements for the year ended December
31, 2002 amounted to $179 million. The change in the Company's
deferred revenue balance in relation to these extended warranty
arrangements was as follows:
(in millions)
Deferred revenue at December 31, 2001 $ 91
New extended warranty arrangements in 2002 330
Recognition of extended warranty arrangement
revenue in 2002 (318)
-----
Deferred revenue at December 31, 2002 $ 103
=====
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
$632 million, $634 million and $701 million in 2002, 2001 and 2000,
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, "Accounting for Shipping and Handling Fees and
Costs."
93
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Under the guidance of SFAS No. 144, the Company's current
policy is substantially unchanged from its previous policy. The
Company reviews the carrying value of its long-lived assets, other than
goodwill and purchased intangible assets with indefinite useful lives,
for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. The Company assesses
the recoverability of the carrying value of long-lived assets by first
grouping its long-lived assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities (the asset group)
and, secondly, estimating the undiscounted future cash flows that are
directly associated with and that are expected to arise from the use of
and eventual disposition of such asset group. The Company estimates
the undiscounted cash flows over the remaining useful life of the
primary asset within the asset group. If the carrying value of the
asset group exceeds the estimated undiscounted cash flows, the Company
records an impairment charge to the extent the carrying value of the
long-lived asset exceeds its fair value. The Company determines fair
value through quoted market prices in active markets or, if quoted
market prices are unavailable, through the performance of internal
analysis of discounted cash flows or external appraisals.
In connection with its assessment of recoverability of its long-lived
assets and its ongoing strategic review of the business and its
operations, the Company continually reviews the remaining useful lives
of its long-lived assets. If this review indicates that the remaining
useful life of the long-lived asset has been reduced, the Company will
adjust the depreciation on that asset to facilitate full cost recovery
over its revised estimated remaining useful life.
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 foreign currency
forward contracts are not designated as accounting hedges and all
changes in fair value are recognized in earnings in the period of
change.
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.
94
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. Costs that are capital in
nature and that provide future benefits are capitalized. 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 accruing for these remediation liabilities is
generally no later than the completion of feasibility studies.
The Company has an ongoing monitoring and identification process to
assess how the activities, with respect to the known exposures, are
progressing against the accrued cost estimates, as well as to identify
other potential remediation sites that are presently unknown.
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 that 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.
95
Options to purchase 26.8 million and 43.7 million shares of common
stock at weighted-average per share prices of $58.83 and $61.30 for the
years ended December 31, 2002 and 2001, 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 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 accompanying 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 stock-based employee compensation cost is reflected in net income
from continuing operations as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of
grant. In accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the following table
illustrates the effect on net income from continuing operations and
earnings per share from continuing operations as if the Company had
applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
96
(in millions, except per share data)
Year Ended December 31,
2002 2001 2000
Net income from continuing
operations, as reported $ 793 $ 81 $1,407
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net
of related tax effects (105) (79) (61)
----- ------ ------
Pro forma net income from
continuing operations $ 688 $ 2 $1,346
===== ====== ======
Earnings per share from
continuing operations
Basic - as reported $ 2.72 $ .28 $ 4.62
Basic - pro forma $ 2.36 $ .01 $ 4.41
Diluted - as reported $ 2.72 $ .28 $ 4.59
Diluted - pro forma $ 2.36 $ .01 $ 4.41
The 2002 total stock-based employee compensation expense amount of $105
million, net of taxes, includes a net of tax expense impact of $34
million representing the unamortized compensation cost of the options
that were cancelled in connection with the 2002 voluntary stock option
exchange program. See Note 19, "Stock Option and Compensation Plans."
SEGMENT REPORTING
The Company reports net sales, operating income, net income, certain
expense, asset and geographical information about its operating
segments. Public companies report information about their business
activities, which meets 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 and All Other. See Note 22, "Segment Information" for a
discussion of the change in the Company's operating structure in 2001.
97
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS 143 addresses the financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
SFAS 143 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. SFAS 143 requires that
the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is
added to the carrying amount of the associated asset, and this
additional carrying amount is expensed over the life of the asset. The
Company is required to adopt SFAS 143 effective January 1, 2003. The
Company is currently in the process of evaluating the potential impact
that the adoption of the recognition provisions of SFAS 143 will have
on its consolidated financial position and results of operations.
Effective January 1, 2002, the Company adopted the provisions of 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 adoption of EITF Issue No.
01-09 did not have a material impact on the Company's Consolidated
Statement of Earnings.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
the financial accounting and reporting for costs associated with exit
or disposal activities and supercedes the EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires recognition of the liability
for costs associated with an exit or disposal activity when the
liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of the Company's commitment to an exit plan.
SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. Accordingly, SFAS No. 146 will
impact the timing of recognition and the initial measurement of the
amount of liabilities the Company recognizes in connection with exit or
disposal activities initiated after December 31, 2002, the effective
date of SFAS No. 146.
98
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires that a liability be recorded in the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees, including indemnifications, that an entity has
issued and a rollforward of the entity's product warranty liabilities.
The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued or modified after December 31, 2002.
The disclosure provisions of FIN 45 are effective for financial
statements of interim periods or annual periods ending after December
15, 2002. See Note 1 under "Warranty Costs" and Note 10, "Commitments
and Contingencies." The Company is currently in the process of
evaluating the potential impact that the adoption of the recognition
provisions of FIN 45 will have on its consolidated financial position
and results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus on
EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how
to determine when an arrangement that involves multiple revenue-
generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this
division is required, how the arrangement consideration should be
allocated among the separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of EITF Issue No. 00-21 will
have on its results of operations and financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. See "Stock-Based Compensation" within
Note 1, "Significant Accounting Policies" for the additional annual
disclosures made to comply with SFAS No. 148. As the Company does not
intend to adopt the provisions of SFAS No. 123, the Company does not
expect SFAS No. 148 to have a material effect on its results of
operations or financial condition.
99
In January 2003, the FASB issued Interpretaion No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements," relating to consolidation of certain entities.
First, FIN 46 will require identification of the Company's
participation in variable interest entities (VIE), which are defined as
entities with a level of invested equity that is not sufficient to fund
future activities to permit them to operate on a stand alone basis, or
whose equity holders lack certain characteristics of a controlling
financial interest. Then, for entities identified as VIE, FIN 46 sets
forth a model to evaluate potential consolidation based on an
assessment of which party to the VIE, if any, bears a majority of the
exposure to its expected losses, or stands to gain from a majority of
its expected returns. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For VIE
created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after
June 15, 2003. FIN 46 also sets forth certain disclosures regarding
interests in VIE that are deemed significant, even if consolidation is
not required. See Note 6, "Investments," for these disclosures. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial condition.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior periods to
conform to the 2002 presentation.
- -----------------------------------------------------------------------
NOTE 2: RECEIVABLES, NET
(in millions) 2002 2001
Trade receivables $1,896 $1,966
Miscellaneous receivables 338 371
------ ------
Total (net of allowances of $137 and $109) $2,234 $2,337
====== ======
In the fourth quarter of 2001, the Company recorded a charge of
approximately $20 million to provide for the potential uncollectible
amounts due from Kmart, which 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 in the accompanying Consolidated Statement of
Earnings in 2001 and in the total allowance of $137 million and $109
million at December 31, 2002 and 2001, respectively.
Of the total trade receivable amounts of $1,896 million and $1,966
million as of December 31, 2002 and 2001, respectively, approximately
$371 million and $329 million, respectively, are expected to be settled
through customer deductions in lieu of cash payments. Such deductions
represent rebates owed to the customer and are included in accounts
payable and other current liabilities in the accompanying Consolidated
Statement of Financial Position at each respective balance sheet date.
- -----------------------------------------------------------------------
100
NOTE 3: INVENTORIES, NET
(in millions) 2002 2001
At FIFO or average cost (approximates
current cost)
Finished goods $ 831 $ 851
Work in process 322 318
Raw materials and supplies 301 346
------ ------
1,454 1,515
LIFO reserve (392) (444)
------ ------
Total $1,062 $1,071
====== ======
Inventories valued on the LIFO method are approximately 47% and 48% of
total inventories in 2002 and 2001, 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 $31 million and $14 million in 2002 and 2001,
respectively.
The Company reduces the carrying value of inventories to a lower of
cost or market basis for those items that are potentially excess,
obsolete or slow-moving based on management's analysis of inventory
levels and future sales forecasts. The Company also reduces the
carrying value of inventories whose net book value is in excess of
market. Aggregate reductions in the carrying value with respect to
inventories that were still on hand at December 31, 2002 and 2001, and
that were deemed to be excess, obsolete, slow-moving or that had a
carrying value in excess of market, were $65 million and $99 million,
respectively.
- -----------------------------------------------------------------------
NOTE 4: PROPERTY, PLANT AND EQUIPMENT, NET
(in millions) 2002 2001
Land $ 123 $ 127
Buildings and building improvements 2,658 2,602
Machinery and equipment 10,182 9,884
Construction in progress 325 369
------- -------
13,288 12,982
Accumulated depreciation (7,868) (7,323)
------- -------
Net properties $ 5,420 $ 5,659
======= =======
Depreciation expense was $818 million, $765 million and $738 million
for the years 2002, 2001 and 2000, respectively, of which approximately
$19 million, $52 million and $33 million, respectively, represented
accelerated depreciation in connection with restructuring actions.
- -----------------------------------------------------------------------
101
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," under which goodwill
is no longer amortized, but is required to be assessed for impairment
at least annually. Goodwill, net was $981 million and $948 million at
December 31, 2002 and 2001, respectively. Accumulated amortization
amounted to $920 million at December 31, 2001. The changes in the
carrying amount of goodwill by reportable segment for 2002 and 2001
were as follows:
Commer- Consol-
Photo- Health cial idated
(in millions) graphy Imaging Imaging Total
Balance at
December 31, 2000 $ 719 $ 197 $ 31 $ 947
Goodwill related to
acquisitions 105 - 94 199
Goodwill impairment (43) - - (43)
Amortization of goodwill (110) (28) (15) (153)
Finalization of purchase
accounting 2 1 1 4
Currency translation
adjustments (4) (1) (1) (6)
Balance at
December 31, 2001 669 169 110 948
Goodwill related to
acquisitions 19 1 6 26
Goodwill written off
related to disposals - - (17) (17)
Finalization of purchase
accounting (1) 4 3 6
Currency translation
adjustments 15 2 1 18
----- ----- ----- -----
Balance at
December 31, 2002 $ 702 $ 176 $ 103 $ 981
===== ===== ===== =====
The aggregate amount of goodwill acquired during 2001 of $199 million
was attributable to $40 million for the purchase of Ofoto, Inc. within
the Photography segment, $77 million relating to the purchase of Bell &
Howell Company within the Commercial Imaging segment and $82 million
related to additional acquisitions within the Photography and Commercial
Imaging segments that are all individually immaterial. The goodwill
impairment charge of $43 million related to the Company's PictureVision
subsidiary within the Photography segment, which was determined to be
impaired as a result of the Company's acquisition of Ofoto.
The aggregate amount of goodwill acquired during 2002 of $26 million was
attributable to acquisitions that are all individually immaterial. The
goodwill written off related to disposals during 2002 of $17 million was
attributable to the disposal of Kodak Global Imaging, Inc. within the
Commercial Imaging segment. The $17 million charge to earnings relating
to the write-off of this goodwill is included in the loss from
discontinued operations, net of income taxes of $23 million in the
Consolidated Statement of Earnings. See Note 21, "Discontinued
Operations."
102
Earnings and earnings per share from continuing operations for the years
ended December 31, 2001 and 2000, as adjusted for the exclusion of
goodwill amortization expense, were as follows (in millions, except per
share amounts):
Year Ended Impact of
December 31, 2001 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Exp.
----------- ----------- ------------
Earnings from continuing
operations before income
taxes (as originally
reported) $ 115 $ 115 $ -
Adjustment for the
exclusion of goodwill
amortization - 153 153
----- ----- ----
Earnings from continuing
operations before income
taxes 115 268 153
Provision for income
taxes 34 58 24
----- ----- ----
Earnings from continuing
operations $ 81 $ 210 $ 129
===== ===== ====
Basic and diluted
earnings per share from
continuing operations $ .28 $ .72 $ .44
===== ===== ====
Year Ended Impact of
December 31, 2000 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Exp.
----------- ----------- ------------
Earnings from continuing
operations before income
taxes (as originally
reported) $ 2,132 $ 2,132 $ -
Adjustment for the
exclusion of goodwill
amortization - 151 151
----- ----- ----
Earnings from continuing
operations before income
taxes 2,132 2,283 151
Provision for income
taxes 725 744 19
----- ----- ----
Earnings from continuing
operations $ 1,407 $ 1,539 $ 132
===== ===== ====
Basic earnings per share
from continuing operations $ 4.62 $ 5.05 $. 43
===== ===== ====
Diluted earnings per share
from continuing operations $ 4.59 $ 5.02 $ .43
===== ===== ====
All other intangible assets subject to amortization are not material to
the Consolidated Statement of Financial Position.
- -----------------------------------------------------------------------
103
NOTE 6: INVESTMENTS
Equity Method -
At December 31, 2002, 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, 2002 and 2001, the Company's equity investment in these
unconsolidated affiliates was $382 million and $360 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 (charges) income in the accompanying
Consolidated Statement of Earnings. See Note 12, "Other (Charges)
Income." These investments do not meet the Regulation S-X significance
test requiring the inclusion of the separate investee financial
statements.
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 $9
million, $83 million and $397 million in 2002, 2001 and 2000,
respectively. See Note 10, "Commitments and Contingencies."
The Company sells graphics film and other products to its equity
affiliate, KPG. Sales to KPG for the years ended December 31, 2002,
2001 and 2000 amounted to $315 million, $350 million and $419 million,
respectively. These sales 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, 2002 and 2001, amounts due from
KPG relating to these sales were $31 million and $40 million,
respectively, and are reported in receivables, net in the accompanying
Consolidated Statement of Financial Position. Additionally, the Company
has guaranteed certain debt obligations of KPG up to $160 million, which
is included in the total guarantees amount of $345 million at December
31, 2002, as discussed in Note 10, "Commitments and Contingencies."
The Company also sells chemical 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 equity method investees.
104
As a result of its continuing evaluation of the effect that the adoption
of FIN 46 will have on the Company's results of operations and financial
condition, the Company believes that it is reasonably possible that ESF,
NexPress, Phogenix and SK Display will qualify as variable interest
entities. ESF is an operating entity formed to provide 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 (See Note 10 under "Other
Commitments and Contingencies"). NexPress, Phogenix and SK Display are
each operating entities that were formed to develop, manufacture and
commercialize specific imaging products and equipment for sale to
customers. Total assets for ESF, NexPress, Phogenix and SK Display as
of December 31, 2002 were approximately $520 million, $171 million, $25
million and $6 million, respectively. The Company's estimated maximum
exposures to loss as a result of its continuing involvement with ESF,
NexPress, Phogenix and SK Display are $63 million, $148 million, $42
million and $110 million, respectively. The maximum exposures to loss
represent the sum of the carrying value of the Company's investment
balances as of December 31, 2002, the estimated amounts that Kodak
intends to or is committed to fund in the future for each of these
potential variable interest entities and the maximum amount of debt
guarantees under which the Company could potentially be required to
perform.
Cost Method -
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. These investments are
accounted for under the cost method.
The Company recorded total charges for the years ended December 31, 2002
and 2001 of $45 million and $15 million, respectively, for other than
temporary impairments relating to certain of its strategic and non-
strategic venture investments, which were accounted for under the cost
method. The strategic venture investment impairment charges for the
years ended December 31, 2002 and 2001 of $27 million and $12 million,
respectively, were recorded in selling, general and administrative
expenses in the accompanying Consolidated Statement of Earnings. The
non-strategic venture investment impairment charges for the years ended
December 31, 2002 and 2001 of $18 million and $3 million, respectively,
were recorded in other (charges) income in the accompanying Consolidated
Statement of Earnings.
The charges were taken in the respective periods in which the available
evidence, including subsequent financing rounds, independent valuations,
and other factors indicated that the underlying investments were
impaired on an other than temporary basis.
The remaining carrying value of the Company's investments accounted for
under the cost method at December 31, 2002 and 2001 of $29 million and
$51 million, respectively, is included in other long-term assets in the
accompanying Consolidated Statement of Financial Position.
- ------------------------------------------------------------------------
105
NOTE 7: ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
(in millions) 2002 2001
Accounts payable, trade $ 720 $ 674
Accrued advertising and promotional
expenses 574 568
Accrued employment-related liabilities 968 749
Accrued restructuring liabilities 197 318
Other 892 967
------ ------
Total payables $3,351 $3,276
====== ======
The other component above consists of other miscellaneous current
liabilities that, 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, 2002 and 2001 were
as follows:
(in millions) 2002 2001
Commercial paper $ 837 $1,140
Current portion of long-term debt 387 156
Short-term bank borrowings 218 238
------ ------
Total short-term borrowings $1,442 $1,534
====== ======
The weighted average interest rates for commercial paper outstanding
during 2002 and 2001 were 2.0% and 3.6%, respectively. The weighted
average interest rates for short-term bank borrowings outstanding during
2002 and 2001 were 3.8% and 6.2%, respectively.
LINES OF CREDIT
The Company has $2,225 million in committed revolving credit facilities
(the EKC Credit Facility) renegotiated in 2002, which are available to
support the Company's commercial paper program and for general corporate
purposes. The EKC Credit Facility is comprised of a 364-day committed
facility at $1,000 million expiring in July 2003 and a 5-year committed
facility at $1,225 million 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 of BBB+ (Standard & Poor's) and Baa1 (Moody's). There were
no amounts outstanding under these arrangements at December 31, 2002. The
EKC Credit Facility includes a covenant that requires the Company to
maintain a certain debt to EBITDA (earnings before interest, income taxes,
depreciation and amortization) 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 was in
compliance with this covenant at December 31, 2002. The Company does not
anticipate that a violation is likely to occur.
106
The Company has other committed and uncommitted lines of credit at
December 31, 2002 totaling $241 million and $1,993 million,
respectively. These lines primarily support borrowing needs of the
Company's subsidiaries, including term loans, overdraft coverage,
letters of credit and revolving credit lines. Interest rates and other
terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions. Total outstanding
borrowings against these other committed and uncommitted lines of
credit at December 31, 2002 were $143 million and $465 million,
respectively. These outstanding borrowings are reflected in the short-
term bank borrowings and long-term debt balances at December 31, 2002.
Accounts Receivable Securitization Program
In March 2002, the Company entered into an accounts receivable
securitization program (the Program), which provides the Company with
borrowings up to a maximum of $400 million. Under the Program, the
Company sells certain of its domestic trade accounts receivable without
recourse to EK Funding LLC, a Kodak wholly owned, consolidated,
bankruptcy-remote, limited purpose, limited liability corporation
(EKFC). Kodak continues to service, administer and collect the
receivables. A bank, acting as the Program agent, purchases undivided
percentage ownership interests in those receivables on behalf of the
conduit purchasers, who have a first priority security interest in the
related receivables pool. The receivables pool at December 31, 2002,
representing the outstanding balance of the gross accounts receivable
sold to EKFC, totaled approximately $634 million. As the Company has
the right at any time during the Program to repurchase all of the then
outstanding purchased interests for a purchase price equal to the
outstanding principal plus accrued fees, the receivables remain on the
Company's Consolidated Statement of Financial Position, and the
proceeds from the sale of undivided interests are recorded as secured
borrowings.
As the Program is renewable annually subject to the bank's approval,
the secured borrowings under the Program are included in short-term
borrowings. The Company expects the Program to be renewed upon its
expiration in March 2003 at a minimum borrowing level of $250 million.
At December 31, 2002, the Company had outstanding secured borrowings
under the Program of $74 million.
The cost of the secured borrowings under the Program is comprised of
yield, liquidity, conduit, Program and Program agent fees. The yield
fee is subject to a floating rate, based on the average of the
conduits' commercial paper rates. The total charge for these fees is
recorded in interest expense. Based on the outstanding secured
borrowings level of $74 million and the average of the conduits'
commercial paper rates at December 31, 2002, the estimated annualized
borrowing cost rate is 2.13%. Interest expense for the year ended
December 31, 2002 was not material.
The Program agreement contains a number of customary covenants and
termination events. Upon the occurrence of a termination event, all
secured borrowings under the Program shall be immediately due and
payable. The Company was in compliance with all such covenants at
December 31, 2002.
107
LONG-TERM DEBT
Long-term debt and related maturities and interest rates were as
follows at December 31, 2002 and 2001 (in millions):
Weighted-
Average
Interest
Country Type Maturity Rate 2002 2001
U.S. Term note 2002 6.38% $ - $ 150
U.S. Term note 2003 9.38% 144 144
U.S. Term note 2003 7.36% 110 110
U.S. Medium-term 2005 7.25% 200 200
U.S. Medium-term 2006 6.38% 500 500
U.S. Term note 2008 9.50% 34 34
U.S. Term note 2018 9.95% 3 3
U.S. Term note 2021 9.20% 10 10
China Bank Loans 2002 6.28% - 12
China Bank Loans 2003 5.49% 114 96
China Bank Loans 2004 2.42% - 190
China Bank Loans 2004 5.58% 252 182
China Bank Loans 2005 5.53% 124 133
Japan Bank Loans 2003 2.51% - 42
Qualex Term notes 2003-2005 6.12% 44 -
Chile Bank Loans 2004 2.61% 10 10
Other 6 6
------ ------
1,551 1,822
Current portion of long-term debt (387) (156)
------ ------
Long-term debt, net of current portion $1,164 $1,666
====== ======
Annual maturities (in millions) of long-term debt outstanding at
December 31, 2002 are as follows: 2003: $387; 2004: $285; 2005: $332;
2006: $500; 2007: $0; 2008 and beyond: $47.
During the second quarter of 2001, the Company increased its medium-
term note program from $1,000 million to $2,200 million for issuance of
debt securities due nine months or more from date of issue. At
December 31, 2002, the Company had debt securities outstanding of $700
million under this medium-term note program, with none of this balance
due within one year. The Company has remaining availability of $1,200
million under its medium-term note program for the issuance of new
notes.
- -----------------------------------------------------------------------
NOTE 9: OTHER LONG-TERM LIABILITIES
(in millions) 2002 2001
Deferred compensation $ 160 $ 164
Minority interest in Kodak companies 70 84
Environmental liabilities 148 162
Deferred income taxes 52 81
Other 209 229
------ ------
Total $ 639 $ 720
====== ======
The other component above consists of other miscellaneous long-term
liabilities that, individually, are less than 5% of the total
liabilities component in the accompanying Consolidated Statement of
Financial Position, and therefore, have been aggregated in accordance
with Regulation S-X.
- -----------------------------------------------------------------------
108
NOTE 10: COMMITMENTS AND CONTINGENCIES
Environmental
Cash expenditures for pollution prevention and waste treatment for the
Company's current facilities were as follows:
(in millions) 2002 2001 2000
Recurring costs for
pollution prevention and waste
treatment $ 67 $ 68 $ 72
Capital expenditures for pollution
prevention and waste
treatment 12 27 36
Site remediation costs 3 2 3
---- ---- ----
Total $ 82 $ 97 $111
==== ==== ====
At December 31, 2002 and 2001, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $148
million and $162 million, respectively. These amounts are reported in
the other long-term liabilities in the accompanying Consolidated
Statement of Financial Position.
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 (RFI) and Corrective Measures Studies (CMS) for
areas at the site. At December 31, 2002, estimated future
investigation and remediation costs of $67 million are accrued on an
undiscounted basis by the Company and are included in the $148 million
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, 2002,
estimated future remediation costs of $49 million are accrued on an
undiscounted basis and are included in the $148 million reported in
other long-term liabilities.
The Company has obligations relating to two former manufacturing sites
located outside the United States. Investigations were completed in
the fourth quarter of 2001, which facilitated the completion of cost
estimates for the future remediation and monitoring of these sites.
The Company's obligations with respect to these two sites include an
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 repurchase of the site was completed in the first quarter of 2002.
At December 31, 2002, estimated future investigation, remediation and
monitoring costs of $27 million are accrued on an undiscounted basis
and are included in the $148 million reported in other long-term
liabilities.
109
Additionally, the Company has approximately $5 million accrued on an
undiscounted basis in the $148 million reported in other long-term
liabilities at December 31, 2002 for remediation relating to other
facilities, which are not material to the Company's financial position,
results of operations, cash flows or competitive position.
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for each site. For these known environmental exposures, the
accrual reflects the Company's best estimate of the amount it will
incur under the agreed-upon or proposed work plans. The Company's cost
estimates were determined using the ASTM Standard E 2137-01 "Standard
Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters," and have not been reduced by possible recoveries from third
parties. The overall method includes the use of a probabilistic model
which forecasts a range of cost estimates for the remediation required
at individual sites. The projects are closely monitored and the models
are reviewed as significant events occur or at least once per year.
The Company's estimate includes equipment and operating costs for
remediation and long-term monitoring of the sites. The Company does
not believe it is reasonably possible that the losses for the known
exposures could exceed the current accruals by material amounts.
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. In connection with the Consent Decree, the
Company is subject to a Compliance Schedule, under which the Company
has 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 $27 million over the next six
years. These expenditures are primarily capital in nature and,
therefore, are not included in the environmental accrual at December
31, 2002.
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 such active sites. With respect to each of these sites, the
Company's liability is minimal. 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, results of operations or cash flows.
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.
110
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of 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 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. The Company has an ongoing monitoring and
identification process to assess how the activities, with respect to
the known exposures, are progressing against the accrued cost
estimates, as well as to identify other potential remediation sites
that are presently unknown.
Estimates of the amount and timing of future costs of environmental
remediation requirements are necessarily imprecise because of the
continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology, the identification of
presently unknown remediation sites and the allocation of costs among
the potentially responsible parties. Based upon information presently
available, such future costs are not expected to have a material effect
on the Company's competitive or financial position. However, such
costs could be material to results of operations in a particular future
quarter or year.
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
$265 million in 2003, $239 million in 2004, $205 million in 2005, $116
million in 2006, $77 million in 2007 and $257 million in 2008 and
thereafter.
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At December 31, 2002, these
guarantees totaled a maximum of $345 million, with outstanding
guaranteed amounts of $159 million. The maximum guarantee amount
includes: guarantees of up to $160 million of debt for Kodak Polychrome
Graphics, an unconsolidated affiliate in which the Company has a 50%
ownership interest ($74 million outstanding) and up to $19 million for
other third parties ($17 million outstanding) and guarantees of up to
$166 million of customer amounts due to banks in connection with various
banks' financing of customers' purchase of product and equipment from
Kodak ($68 million outstanding). The KPG debt facility and the related
guarantee mature on December 31, 2005, but may be renewed at the bank's
discretion. The guarantees for the other consolidated affiliates and
third party debt mature between May 1, 2003 and May 31, 2005 and are not
expected to me renewed. The customer financing agreements and related
guarantees typically have a term of 90 days for product and short-term
equipment financing arrangements, and up to 3 years for long-term
equipment financing arrangements.
111
These guarantees would require payment from Kodak only in the event of
default on payment by the respective debtor. In some cases,
particularly with guarantees related to equipment financing, the Company
has collateral or recourse provisions to recover and sell the equipment
to reduce any losses that might be incurred in connection with the
guarantee. This activity is not material. Management believes the
likelihood is remote that material payments will be required under these
guarantees.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $857
million, and the outstanding debt under those guarantees, which is
recorded within the short-term borrowings and long-term debt, net of
current portion components in the Consolidated Statement of Financial
Position, is $628 million. These guarantees expire in 2003 through 2005
with the majority expiring in 2003.
The Company may provide up to $100 million in loan guarantees to
support funding needs for SK Display Corporation, an unconsolidated
affiliate in which the Company has a 34% ownership interest. As of
December 31, 2002, the Company has not been required to guarantee any
of SK Display Corporation's outstanding debt.
In certain instances when Kodak sells businesses either through asset
or stock sales, the Company may retain certain liabilities for known
exposures and provide indemnification to the buyer with respect to
future claims for certain unknown liabilities existing, or arising from
events occurring, prior to the sale date, including liabilities for
taxes, legal matters, environmental exposures, labor contingencies,
product liability, and other obligations. The terms of the
indemnifications vary in duration, from one to two years for certain
types of indemnities, to terms for tax indemnifications that are
generally aligned to the applicable statute of limitations for the
jurisdiction in which the divestiture occurred, and terms for
environmental liabilities that typically do not expire. The maximum
potential future payments that the Company could be required to make
under these indemnifications are either contractually limited to a
specified amount or unlimited. The Company believes that the maximum
potential future payments that the Company could be required to make
under these indemnifications are not determinable at this time, as any
future payments would be dependent on the type and extent of the
related claims, and all available defenses, which are not estimable.
However, costs incurred to settle claims related to these
indemnifications have not been material to the Company's financial
position, results of operations or cash flows.
112
In certain instances when Kodak sells real estate, the Company will
retain the liabilities for known environmental exposures and provide
indemnification to the other party with respect to future claims for
certain unknown environmental liabilities existing prior to the sale
date. The terms of the indemnifications vary in duration, from a range
of three to ten years for certain indemnities, to terms for other
indemnities that do not expire. The maximum potential future payments
that the Company could be required to make under these indemnifications
are either contractually limited to a specified amount or unlimited.
The Company believes that the maximum potential future payments that
the Company could be required to make under these indemnifications are
not determinable at this time, as any future payments would be
dependent on the type and extent of the related claims, and all
relevant defenses to the claims, which are not estimable. However,
costs incurred to settle claims related to these indemnifications have
not been material to the Company's financial position, results of
operations or cash flows.
The Company may enter into standard indemnification agreements in the
ordinary course of business with its customers, suppliers, service
providers and business partners. In such instances, the Company
usually indemnifies, holds harmless and agrees to reimburse the
indemnified party for all claims, actions, liabilities, losses and
expenses in connection with any Kodak infringement of third party
intellectual property or proprietary rights, or when applicable, in
connection with any personal injuries or property damage resulting from
any Kodak products sold or Kodak services provided. Additionally, the
Company may from time to time agree to indemnify and hold harmless its
providers of services from all claims, actions, liabilities, losses and
expenses relating to their services to Kodak, except to the extent
finally determined to have resulted from the fault of the provider of
services relating to such services. The level of conduct constituting
fault of the service provider will vary from agreement to agreement and
may include conduct which is defined in terms of negligence, gross
negligence, recklessness, intentional acts, omissions or other culpable
behavior. The term of these indemnification agreements is generally
perpetual. The maximum potential future payments that the Company
could be required to make under the indemnifications are unlimited. The
Company believes that the maximum potential future payments that the
Company could be required to make under these indemnifications are not
determinable at this time, as any future payments would be dependent on
the type and extent of the related claims, and all relevant defenses to
the claims, including statutes of limitation, which are not estimable.
However, costs incurred to settle claims related to these
indemnifications have not been material to the Company's financial
position, results of operations or cash flows.
113
The Company has by-laws, policies, and agreements under which it
indemnifies its directors and officers from liability for certain
events or occurrences while the directors or officers are, or were,
serving at Kodak's request in such capacities. Furthermore, the Company
is incorporated in the State of New Jersey, which requires corporations
to indemnify their officers and directors under certain circumstances.
The Company has made similar arrangements with respect to the directors
and officers of acquired companies. The term of the indemnification
period is for the director's or officer's lifetime. The maximum
potential amount of future payments that the Company could be required
to make under these indemnifications is unlimited, but would be
affected by all relevant defenses to the claims, including statutes of
limitations.
The Company had a commitment under a put option arrangement with
Burrell Colour Lab (BCL), an unaffiliated company, whereby the
shareholders of BCL had the ability to put 100% of the stock to Kodak
for total consideration, including the assumption of debt, of
approximately $63.5 million. The option first became exercisable on
October 1, 2002 and was ultimately exercised during the Company's
fourth quarter ended December 31, 2002. Accordingly, on February 5,
2003, the Company acquired BCL for a total purchase price of
approximately $63.5 million, which was composed of approximately $53
million in cash and $10.5 million of assumed debt. The exercise of the
option had no impact on the Company's fourth quarter earnings.
In connection with the Company's investment in China that began in
1998, certain unaffiliated entities invested in two Kodak consolidated
companies with the opportunity to put their minority interests to Kodak
at any time after the third anniversary, but prior to the tenth
anniversary, of the date on which the two companies were established.
On December 31, 2002, an unaffiliated investor in one of Kodak's China
subsidiaries exercised their rights under the put option agreement.
Under the terms of the arrangement, the Company repurchased the
investor's 10% minority interest for approximately $44 million in cash.
The exercise of this put option and the recording of the related
minority interest purchased had no impact on the Company's earnings.
The total exercise price in connection with the remaining put options,
which increases at a rate of 2% per annum, is approximately $60 million
at December 31, 2002. The Company expects that approximately $16
million of the remaining $60 million in total put options will be
exercised and the related cash payments will occur over the next twelve
months.
114
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 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 (the Vendor) to fulfill its servicing
obligations under the leases. This risk is attributable to the fact
that, throughout 2002, the Vendor was experiencing financial difficulty
which ultimately resulted in certain of its entities in different
countries filing for bankruptcy on December 24, 2002. Although the
lessees' requirement to pay ESF under the lease agreements is not
contingent upon Qualex's fulfillment of its servicing obligations,
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 $473 million at
December 31, 2002.
115
To mitigate the risk of not being able to fulfill its service
obligations in the event the Vendor were to file for bankruptcy, Qualex
built up its inventory of these spare parts during 2002 and began
refurbishing used parts. To further mitigate its exposure, effective
April 3, 2002, Kodak entered into certain agreements with the Vendor
under which the Company paid $19 million for a license relating to the
spare parts intellectual property, an equity interest in the Vendor and
the intellectual property holding company and an arrangement to purchase
spare parts. After entering into these arrangements, the Company
obtained the documentation and specifications of the parts that the
Vendor produced and from purchasing parts it sourced solely from the
Vendor and a comprehensive supplier list for the parts the Vendor
sourced from other suppliers. However, under these arrangements, Kodak
had a use restriction, which precluded the Company from manufacturing
the parts directly from the Vendor's suppliers. This use restriction
would be effective until certain triggering events occurred, the most
significant of which was the filing for bankruptcy by the Vendor. As
indicated above, the Vendor filed for bankruptcy on December 24, 2002.
The arrangements that the Company entered into with the Vendor are
currently being reviewed in the bankruptcy courts, and there is the
possibility that such agreements could be challenged. However, the
Company believes that it has a strong legal position with respect to the
agreements and is taking the necessary steps to obtain the rights to
gain access to the Vendor's tooling to facilitate the manufacture of the
parts previously produced by the Vendor. Additionally, the Company has
begun to source parts directly from the Vendor's suppliers.
Accordingly, the Company does not anticipate any significant liability
arising from the inability to fulfill its service obligations under the
arrangement with ESF.
In December 2001, Standard & Poor's (S&P) 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)
between ESF and its banks. 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 S&P 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.
Effective April 15, 2002, ESF cured the Termination Event by executing
an amendment to the RPA. Under the amended RPA, the maximum borrowings
were lowered to $400 million, and ESF must pay a higher interest rate
on outstanding and future borrowings. Additionally, if there were
certain changes in control with respect to Dana Corporation or DCC, as
defined in the amended RPA, such an occurrence would constitute an
event of default. Absent a waiver from the banks, this event of
default would create a Termination Event under the RPA. The amended
RPA arrangement was further amended in July 2002 to extend through July
2003. Under the amended RPA arrangement, maximum borrowings were
reduced to $370 million. Total outstanding borrowings under the RPA at
December 31, 2002 were $320 million.
116
Dana Corporation's S&P and Moody's long-term debt credit ratings have
remained at the February 22, 2002 levels of BB and Ba3, respectively.
Under the amended RPA, if either of Dana Corporation's long-term debt
ratings were to fall below their current respective ratings, such an
occurrence would create a Termination Event as defined in the RPA.
The amended RPA arrangement extends through July 2003, at which time
the RPA can be extended or terminated. If the RPA were terminated,
Qualex would no longer be able to sell its lease receivables to ESF and
would need to find an alternative financing solution for future sales
of its photofinishing equipment. For the year ended December 31, 2002,
total sales of photofinishing equipment were $3.5 million. 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 timing of the partnership
termination, Qualex plans to utilize the services of Eastman Kodak
Credit Corporation, a wholly owned subsidiary of General Electric
Capital Corporation, as an alternative financing solution for
prospective leasing activity with its customers.
At December 31, 2002, the Company had outstanding letters of credit
totaling $105 million and surety bonds in the amount of $79 million
primarily 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 $158 million
in 2002, $126 million in 2001 and $155 million in 2000. 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 $102 million in 2003, $72 million
in 2004, $56 million in 2005, $42 million in 2006, $32 million in 2007
and $51 million in 2008 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.
- -----------------------------------------------------------------------
117
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, 2002 and 2001:
(in millions) 2002 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
Marketable securities:
Current $ 9 $ 9 $ 3 $ 3
Long-term 25 26 34 34
Long-term debt (1,164) (1,225) (1,666) (1,664)
Foreign currency forwards 2 2 1 1
Silver forwards 2 2 1 1
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 contracts is reported in other current assets
or accounts payable and other current liabilities in the accompanying
Consolidated Statement of Financial Position.
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 $150 million of
floating-rate debt to fixed-rate debt. The Company does not utilize
financial instruments for trading or other speculative purposes.
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, 2002, the Company had cash flow hedges for the euro and
the Australian dollar, with maturity dates ranging from January 2003 to
August 2003.
118
At December 31, 2002, the fair value of all open foreign currency
forward contracts hedging foreign currency denominated intercompany
sales was an unrealized loss of $4 million (pre-tax), recorded in
accumulated other comprehensive (loss) income in the accompanying
Consolidated Statement of Shareholders' Equity. If this amount were to
be realized, all of it would be reclassified into cost of goods sold
during the next twelve months. Additionally, realized losses of $1
million (pre-tax), related to closed foreign currency contracts hedging
foreign currency denominated intercompany sales, have been deferred in
accumulated other comprehensive (loss) income. These losses will be
reclassified into cost of goods sold as the inventory transferred in
connection with the intercompany sales is sold to third parties, all
within the next twelve months. During 2002, a pre-tax loss of $20
million was reclassified from accumulated other comprehensive (loss)
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 (charges) income). The majority of the contracts held
by the Company are denominated in euros, British pounds, Australian
dollars, Japanese yen, and Chinese renminbi. At December 31, 2002, the
fair value of these open contracts was an unrealized gain of $7 million
(pre-tax).
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, 2001,
and 2002. At December 31, 2002, the Company had open forward contracts
with maturity dates ranging from January 2003 to May 2003.
At December 31, 2002, the fair value of open silver forward contracts
was an unrealized gain of $2 million (pre-tax), recorded in accumulated
other comprehensive (loss) income. If this amount were to be realized,
all of it would be reclassified into cost of goods sold during the next
twelve months. Additionally, realized losses of less than $1 million
(pre-tax), related to closed silver contracts, have been deferred in
accumulated other comprehensive (loss) income. These gains will be
reclassified into cost of goods sold as silver-containing products are
sold, all within the next twelve months. During 2002, a realized loss
of $3 million (pre-tax) was recorded in cost of goods sold. 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 converted interest
expense on that debt to a fixed annual rate of 4.06%. During 2002, $2
million was charged to interest expense related to the swap. There was
no hedge ineffectiveness.
119
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, 2002 was
not significant to the Company.
SFAS No. 133 TRANSITION ADJUSTMENT
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 forward contracts used to hedge existing foreign currency
denominated assets and liabilities, especially those of the
International Treasury Center, are marked to market through earnings at
the same time that the exposed assets and liabilities are remeasured
through earnings (both in other charges) and are not given hedge
accounting treatment. When the Company early-adopted SFAS No. 133 on
January 1, 2000, it recorded a loss of $1 million in earnings to adjust
the pre-SFAS No. 133 book value of the forward contracts to their
market value of $4 million (liability).
Additionally, upon adoption of SFAS No. 133, the existing forward
contracts used to hedge forecasted silver purchases were designated as
cash flow hedges and the Company recorded a gain of $3 million (pre-
tax) in accumulated other comprehensive (loss) income to adjust the pre-
SFAS No. 133 book value of the forward contracts to their market value
of $3 million (asset). These transition adjustments were not displayed
in separate captions as cumulative effects of a change in accounting
principle due to their immateriality.
The Company has a 50 percent ownership interest in KPG, a joint venture
accounted for under the equity method. The Company's proportionate
share of KPG's other comprehensive income is therefore included in its
presentation of other comprehensive income displayed in the
Consolidated Statement of Shareholders' Equity.
120
KPG 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, primarily
those denominated in euros and Japanese yen. At December 31, 2002, KPG
had open forward contracts with maturity dates ranging from January
2003 to December 2003. At December 31, 2002, Kodak's share of the fair
value of all open foreign currency forward contracts hedging foreign
currency denominated intercompany sales was an unrealized loss of $5
million (pre-tax), recorded in accumulated other comprehensive (loss)
income. If this amount were to be realized, all of it would be
reclassified into KPG's cost of goods sold during the next twelve
months. Additionally, realized losses of less than $1 million (pre-
tax), related to closed foreign currency contracts hedging foreign
currency denominated intercompany sales, have been deferred in
accumulated other comprehensive (loss) income. These losses will be
reclassified into KPG's cost of goods sold as the inventory transferred
in connection with the intercompany sales is sold to third parties, all
within the next twelve months. During 2002, a pre-tax gain of $4
million (Kodak's share) was reclassified from accumulated other
comprehensive (loss) income to KPG's cost of goods sold. Hedge
ineffectiveness was insignificant.
KPG has entered into aluminum forward contracts that are designated as
cash flow hedges of price risk related to forecasted aluminum
purchases. The fair value of open contracts at December 31, 2002, and
the losses reclassified into KPG's cost of goods sold during 2002, were
negligible. Hedge ineffectiveness was insignificant.
KPG has an interest rate swap agreement, maturing in August 2003,
designated as a cash flow hedge of floating-rate interest payments. At
December 31, 2002, Kodak's share of its fair value was a $1 million
loss (pre-tax), recorded in accumulated other comprehensive (loss)
income, and reducing Kodak's investment in KPG. If realized, all of
this amount would be reclassified into KPG's interest expense during
the next twelve months. During 2002, a pre-tax loss of $2 million
(Kodak's share) was reclassified from accumulated other comprehensive
(loss) income to KPG's interest expense. Hedge ineffectiveness was
insignificant.
KPG has an interest rate swap agreement, maturing in May 2005,
designated as a cash flow hedge of variable rental payments. At
December 31, 2002, Kodak's share of its fair value was a $1 million
loss (pre-tax), recorded in accumulated other comprehensive (loss)
income, and reducing Kodak's investment in KPG. If realized, half of
this amount would be reclassified into KPG's rental expense during the
next twelve months. During 2002, a pre-tax loss of $1 million (Kodak's
share) was reclassified from accumulated other comprehensive (loss)
income to KPG's rental expense. There was no hedge ineffectiveness.
- --------------------------------------------------------------------------
121
NOTE 12: OTHER (CHARGES) INCOME
(in millions) 2002 2001 2000
Investment income $ 20 $ 15 $ 36
Loss on foreign exchange transactions (19) (9) (13)
Equity in losses of unconsolidated
affiliates (106) (79) (110)
Gain on sales of investments - 18 127
Gain on sales of capital assets 24 3 51
Loss on sales of subsidiaries - - (9)
Interest on past-due receivables 6 10 14
Minority interest (17) 11 (11)
Non-strategic venture investment
impairments (18) (3) -
Other 9 16 11
----- ---- -----
Total $(101) $(18) $ 96
===== ==== =====
- --------------------------------------------------------------------------
NOTE 13: INCOME TAXES
The components of earnings from continuing operations before income
taxes and the related provision for U.S. and other income taxes were as
follows:
(in millions) 2002 2001 2000
Earnings (loss) before income
taxes
U.S. $ 217 $ (266) $1,294
Outside the U.S. 729 381 838
------ ------ ------
Total $ 946 $ 115 $2,132
====== ====== ======
U.S. income taxes
Current provision (benefit) $ 56 $ (65) $ 145
Deferred (benefit) provision (31) (67) 225
Income taxes outside the U.S.
Current provision 101 177 268
Deferred provision (benefit) 22 (5) 37
State and other income taxes
Current provision 12 3 35
Deferred (benefit) provision (7) (9) 15
------ ------ ------
Total $ 153 $ 34 $ 725
====== ====== ======
The net losses from discontinued operations for 2002 and 2001 were $23
million and $5 million, respectively, which included tax benefits of $15
million and $2 million, respectively. There were no discontinued
operations in 2000.
122
The differences between income taxes computed using the U.S. federal
income tax rate and the provision for income taxes for continuing
operations were as follows:
(in millions) 2002 2001 2000
Amount computed using the statutory
rate $331 $ 40 $746
Increase (reduction) in taxes
resulting from:
State and other income taxes,
net of federal 3 (4) 33
Goodwill amortization - 45 40
Export sales and manufacturing
credits (23) (19) (48)
Operations outside the U.S. (96) (10) (70)
Valuation allowance 56 (18) (9)
Business closures, restructuring
and land donation (99) - -
Tax settlement - (11) -
Other, net (19) 11 33
---- ---- ----
Provision for income taxes $153 $ 34 $725
==== ==== ====
During the second quarter of 2002, the Company recorded a tax benefit
of $45 million relating to the closure of its PictureVision subsidiary.
The decision to close the subsidiary was preceded by unsuccessful
attempts to sell the subsidiary. As a result of these activities, the
Company made the formal decision in the second quarter of 2002 to close
the subsidiary, as a determination was made that the business was
worthless for tax purposes. Accordingly, the Company recorded a $45
million tax benefit in the second quarter of 2002 based on the
Company's remaining tax basis in the PictureVision stock.
During the third quarter of 2002, the Company recorded a tax benefit of
$46 million relating to the consolidation of its photofinishing
operations in Japan and the loss realized from the liquidation of a
subsidiary as part of this consolidation. The Company expects this
loss to be utilized during the next five years to reduce taxable income
from operations in Japan.
During the fourth quarter of 2002, the Company recorded an adjustment
of $22 million to reduce its income tax provision due to a decrease in
the estimated effective tax rate for the full year. The decrease in
the effective tax rate was attributable to an increase in earnings in
lower tax rate jurisdictions relative to original estimates.
Additionally, in the fourth quarter of 2002, the Company recorded a tax
benefit of $8 million relating to a land donation.
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 of 2001 the Company recorded an
adjustment of $20 million to reduce its income tax provision due to a
decrease in the estimated effective tax rate for the full year. The
decrease in the effective tax rate was primarily attributable to an
increase in earnings in lower tax rate jurisdictions relative to
original estimates, and an increase in creditable foreign tax credits
as compared to estimates.
123
The significant components of deferred tax assets and liabilities were
as follows:
(in millions) 2002 2001
Deferred tax assets
Pension and postretirement
obligations $ 988 $ 867
Restructuring programs 144 122
Foreign tax credit 99 34
Employee deferred compensation 187 120
Inventories 75 81
Tax loss carryforwards 16 56
Other 558 723
------ ------
Total deferred tax assets 2,067 2,003
------ ------
Deferred tax liabilities
Depreciation 700 551
Leasing 156 188
Other 341 596
------ ------
Total deferred tax liabilities 1,197 1,335
------ ------
Valuation allowance 72 56
------ ------
Net deferred tax assets $ 798 $ 612
====== ======
Deferred tax assets (liabilities) are reported in the following
components within the Consolidated Statement of Financial Position:
(in millions) 2002 2001
Deferred income taxes (current) $ 512 $ 521
Other long-term assets 421 201
Accrued income taxes (83) (29)
Other long-term liabilities (52) (81)
------ -----
Net deferred tax assets $ 798 $ 612
====== =====
The valuation allowance as of December 31, 2002 of $72 million is
primarily attributable to both foreign tax credits and certain net
operating loss carryforwards outside the U.S. The valuation allowance
as of December 31, 2001 was primarily attributable to certain net
operating loss carryforwards outside the U.S. The Company estimates
that approximately $99 million of unused foreign tax credits will be
available after the filing of the 2002 U.S. consolidated income tax
return, with various expiration dates through 2007. However, based on
projections of future taxable income, the Company would be able to
utilize the credits only if it were to forgo other tax benefits.
Accordingly, a valuation allowance of $56 million was recorded in 2002
as management believes it is more likely than not that the Company will
be unable to realize these other tax benefits.
124
During 2002, the Company reduced the valuation allowance that had been
provided for as of December 31, 2001 by $40 million. The $40 million
decrease includes $34 million relating to net operating loss
carryforwards in non-U.S. jurisdictions that expired in 2002. The
balance of the reduction of $6 million relates to net operation loss
carryforwards for certain of its subsidiaries in Japan for which
management now believes that it is more likely than not that the
Company will generate sufficient taxable income to realize these
benefits. Most of the remaining net operating loss carryforwards
subject to a valuation allowance are subject to a five-year expiration
period.
The Company is currently utilizing net operating loss carryforwards to
offset taxable income from its operations in China that have become
profitable. The Company has been granted a tax holiday in China that
becomes effective once the net operating loss carryforwards have been
fully utilized. When the tax holiday becomes effective, the Company's
tax rate in China will be zero percent for the first two years. For
the following three years, the Company's tax rate will be 50% of the
normal tax rate for the jurisdiction in which Kodak operates, which is
currently 15%. Thereafter, the Company's tax rate will be 15%.
Retained earnings of subsidiary companies outside the U.S. were
approximately $1,817 million and $1,491 million at December 31, 2002 and
2001, respectively. Deferred taxes have not been provided on such
undistributed earnings, as it is the Company's policy to permanently
reinvest its retained earnings, and it is not practicable to determine
the deferred tax liability on such undistributed earnings in the event
they were to be remitted. However, the Company periodically repatriates
a portion of these earnings to the extent that it can do so tax-free.
- -------------------------------------------------------------------------
NOTE 14: RESTRUCTURING COSTS AND OTHER
Fourth Quarter, 2002 Restructuring Plan
During the fourth quarter of 2002, the Company announced a number of
focused cost reductions designed to apply manufacturing assets more
effectively in order to provide competitive products to the global
market. Specifically, the operations in Rochester, New York that
assemble one-time-use cameras and the operations in Mexico that perform
sensitizing for graphic arts and x-ray films will be relocated to other
Kodak locations. In addition, as a result of declining photofinishing
volumes, the Company will close certain central photofinishing labs in
the U.S. and EAMER. The Company will also reduce research and
development and selling, general and administrative positions on a
worldwide basis and exit certain non-strategic businesses. The total
restructuring charges recorded in the fourth quarter of 2002 for these
actions were $116 million.
125
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2002 for continuing operations and the remaining balance in
the related restructuring reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
Q4, 2002 charges l,l50 $ 55 $ 7 $ 37 $ 17 $ 116
Q4, 2002 utilization (250) (2) (7) (37) - (46)
------ ----- ---- ---- ---- -----
Balance at 12/31/02 900 $ 53 $ - $ - $ 17 $ 70
The total restructuring charge of $116 million for continuing
operations for the fourth quarter of 2002 was composed of severance,
inventory write-downs, long-lived asset impairments and exit costs of
$55 million, $7 million, $37 million and $17 million, respectively,
with $109 million of those charges reported in restructuring costs
(credits) and other in the accompanying Consolidated Statement of
Earnings. The $7 million charge for inventory write-downs for product
discontinuances was reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings. The severance and exit costs
require the outlay of cash, while the inventory write-downs and long-
lived asset impairments represent non-cash items.
The severance charge related to the termination of 1,150 employees,
including approximately 525 manufacturing and logistics, 300 service
and photofinishing, 175 administrative and 150 research and development
positions. The geographic composition of the employees terminated
included approximately 775 in the United States and Canada and 375
throughout the rest of the world. The charge for the long-lived asset
impairments includes the write-off of $13 million relating to equipment
used in the manufacture of cameras and printers, $13 million for
sensitized manufacturing equipment, $5 million for lab equipment used
in photofinishing and $6 million for other assets that were scrapped or
abandoned immediately. In addition, charges of $9 million related to
accelerated depreciation on long-lived assets accounted for under the
held for use model of SFAS No. 144, was included in cost of goods sold
in the accompanying Consolidated Statement of Earnings. The
accelerated depreciation of $9 million was comprised of $5 million
relating to equipment used in the manufacture of cameras, $2 million
for sensitized manufacturing equipment and $2 million for lab equipment
used in photofinishing that will be used until their abandonment in
2003. The Company will incur accelerated depreciation charges of $16
million, $6 million and $3 million in the first, second and third
quarters, respectively, of 2003 as a result of the actions implemented
in the Fourth Quarter, 2002 Restructuring Plan.
126
In connection with the charges recorded in the Fourth Quarter, 2002
Restructuring Plan, the Company has 900 positions remaining to be
eliminated as of December 31, 2002. These positions will be eliminated
as the Company completes the closure of photofinishing labs and
completes the planned downsizing of manufacturing and administrative
positions. These positions are expected to be eliminated by the end of
the second quarter of 2003. Severance payments will continue beyond
the second quarter of 2003 since, in many instances, the terminated
employees can elect or are required to receive their severance payments
over an extended period of time. The Company expects the actions
contemplated by the reserve for exit costs to be completed by the end
of the third quarter of 2003. Most exit costs are expected to be paid
during 2003. However, certain costs, such as long-term lease payments,
will be paid over periods after 2003.
In addition to the severance actions included in the $55 million charge
described above, further actions will be required related to the
relocations of the Rochester, New York one-time-use camera assembly
operations and the Mexican sensitizing operations. Upon completion of
the final severance action plans, it is expected that an additional 500
to 700 manufacturing employees will be terminated. The total charge
for these additional severance actions is expected to be approximately
$15 million to $20 million.
As part of the Company's focused cost-reduction efforts, the Company
announced on January 22, 2003 that it intended to incur additional
charges in 2003 to terminate 1,800 to 2,200 employees, in addition to
the employees included in the Fourth Quarter, 2002 Restructuring Plan.
A significant portion of these reductions is related to the
rationalization of the Company's photofinishing operations in the U.S.
and EAMER. The total charges in 2003 are expected to be in the range
of $75 million to $100 million.
Third Quarter, 2002 Restructuring Plan
During the third quarter of 2002, the Company consolidated and
reorganized its photofinishing operations in Japan by closing 8
photofinishing laboratories and transferring the remaining 7
laboratories to a joint venture it entered into with an independent
third party. Beginning in the fourth quarter of 2002, the Company
outsourced its photofinishing operations to this joint venture. The
restructuring charge of $20 million relating to the Photography segment
recorded in the third quarter included a charge for termination-related
benefits of approximately $14 million relating to the elimination of
approximately 175 positions, which were not transferred to the joint
venture, and other statutorily required payments. The positions were
eliminated as of September 30, 2002 and the related payments were made
by the end of 2002. The remaining restructuring charge of $6 million
recorded in the third quarter represents the write-down of long-lived
assets held for sale to their fair values based on independent
valuations. An additional $3 million was recorded in the fourth
quarter for the write-down of these long-lived assets held for sale
based on quotes obtained from potential buyers. All charges applicable
to the Third Quarter, 2002 Restructuring Plan were included in the
restructuring costs (credits) and other line in the accompanying
Consolidated Statement of Earnings.
127
Fourth Quarter, 2001 Restructuring Plan
As a result of the decline in the global economic conditions and the
events of September 11th, the Company committed to actions in the fourth
quarter of 2001 (the Fourth Quarter, 2001 Restructuring Plan) to
rationalize worldwide manufacturing capacity, reduce selling, general
and administrative positions on a worldwide basis and exit certain
businesses. The total restructuring charges in connection with these
actions were $329 million.
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2001 and the remaining balance in the related restructuring
reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
2001 charges 4,500 $ 217 $ 7 $ 78 $ 27 $ 329
2001 utilization (1,300) (16) (7) (78) - (101)
------ ----- --- ----- ---- -----
Balance at 12/31/01 3,200 201 - - 27 228
Q1, 2002 utilization (1,725) (32) - - - (32)
------ ----- --- ----- ---- -----
Balance at 3/31/02 1,475 169 - - 27 196
Q2, 2002 utilization (550) (43) - - (10) (53)
------ ----- --- ----- ---- -----
Balance at 6/30/02 925 126 - - 17 143
Q3, 2002 reversal (275) (12) - - - (12)
Q3, 2002 utilization (125) (37) - - - (37)
------ ----- --- ----- ---- -----
Balance at 9/30/02 525 77 - - 17 94
Q4, 2002 utilization (325) (21) - - (4) (25)
------ ----- --- ----- ---- -----
Balance at 12/31/02 200 $ 56 $ - $ - $ 13 $ 69
The total restructuring charge of $329 million for the fourth quarter
of 2001 was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $217 million, $7 million, $78
million and $27 million, respectively, with $308 million of those
charges reported in restructuring costs (credits) and other in the
accompanying Consolidated Statement of Earnings. The balance of the
charge of $21 million, comprised of $7 million for inventory write-
downs relating to the product discontinuances and $14 million relating
to accelerated depreciation on the long-lived assets accounted for
under the held for use model of SFAS No. 121, was reported in cost of
goods sold in the accompanying Consolidated Statement of Earnings. The
severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represented non-
cash items.
128
The severance charge related to the termination of 4,500 employees,
including approximately 1,650 manufacturing, 1,385 administrative,
1,190 service and photofinishing and 275 research and development
positions. The geographic composition of the employees terminated
included approximately 3,190 in the United States and Canada and 1,310
throughout the rest of the world. The charge for the long-lived asset
impairments included the write-off of $22 million relating to
sensitized manufacturing equipment, lab equipment and leasehold
improvements, and other assets that were scrapped or abandoned
immediately and accelerated depreciation of $17 million relating to
sensitized manufacturing equipment, lab equipment and leasehold
improvements, and other assets that were to be used until their
abandonment in the first three months of 2002. The balance of the long-
lived asset impairment charge of $39 million included charges of $30
million relating to the Company's exit of three non-core businesses,
and $9 million for the write-off of long-lived assets in connection
with the reorganization of certain of the Company's digital camera
manufacturing operations.
In the third quarter of 2002, the Company reversed $12 million of the
$217 million in severance charges due primarily to higher rates of
attrition than originally expected, lower utilization of training and
outplacement services by terminated employees than originally expected
and termination actions being completed at an actual cost per employee
that was lower than originally estimated. As a result, approximately
275 fewer people will be terminated, including approximately 200
service and photofinishing, 50 manufacturing and 25 administrative.
Total employee terminations from the Fourth Quarter 2001, restructuring
actions are now expected to be approximately 4,225.
During the fourth quarter of 2002, the Company recorded $5 million of
credits associated with the Fourth Quarter, 2001 Restructuring Plan in
restructuring costs (credits) and other in the accompanying
Consolidated Statement of Earnings. The credits were the result of
higher proceeds and lower costs associated with the exit from non-core
businesses.
The remaining actions to be taken by the Company in connection with the
Fourth Quarter, 2001 Restructuring Plan relate primarily to severance
and exit costs. The Company has approximately 200 positions remaining
to be eliminated as of December 31, 2002. These positions will be
eliminated as the Company completes the closure of photofinishing labs
in the U.S., and completes the planned downsizing of manufacturing
positions in the U.S. and administrative positions outside the U.S.
These positions are expected to be eliminated by the end of the first
quarter of 2003. A significant portion of the severance had not been
paid as of December 31, 2002 since, in many instances, the terminated
employees could elect or were required to receive their severance
payments over an extended period of time. The Company expects the
actions contemplated by the reserve for exit costs to be completed by
the end of the first quarter of 2003. Most exit costs are expected to
be paid during 2003. However, certain costs, such as long-term lease
payments, will be paid over periods after 2003.
129
Second and Third Quarter, 2001 Restructuring Plan
During the second and third quarters of 2001, as a result of a number of
factors, including the ongoing digital transformation, declining
photofinishing volumes, the discontinuance of certain product lines,
global economic conditions, and the growing presence of business in
certain geographies outside the United States, the Company committed to
a plan to reduce excess manufacturing capacity, primarily with respect
to the production of sensitized goods, to close certain central
photofinishing labs in the U.S. and Japan, to reduce selling, general
and administrative positions on a worldwide basis and to exit certain
businesses. The total restructuring charges in connection with these
actions were $369 million and were recorded in the second and third
quarters of 2001 (the Second and Third Quarter, 2001 Restructuring
Plan).
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the second
and third quarters of 2001 and the remaining balance in the related
restructuring reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
Q2, 2001 charges 2,400 $ 127 $57 $ 112 $ 20 $ 316
Q3, 2001 charges 300 7 20 25 1 53
------ ----- --- ----- ---- -----
Subtotal 2,700 134 77 137 21 369
2001 reversal (275) (20) - - - (20)
2001 utilization (1,400) (40) (77) (137) (5) (259)
------ ----- --- ----- ---- -----
Balance at 12/31/01 1,025 74 - - 16 90
Q1, 2002 utilization (550) (23) - - (2) (25)
------ ----- --- ----- ---- -----
Balance at 3/31/02 475 51 - - 14 65
Q2, 2002 utilization (100) (11) - - (2) (13)
------ ----- --- ----- ---- -----
Balance at 6/30/02 375 40 - - 12 52
Q3, 2002 reversal (225) (14) - - (3) (17)
Q3, 2002 utilization (50) (7) - - - (7)
------ ----- --- ----- ---- -----
Balance at 9/30/02 100 19 - - 9 28
Q4, 2002 utilization (100) (8) - - (4) (12)
------ ----- --- ----- ---- -----
Balance at 12/31/02 0 $ 11 $ - $ - $ 5 $ 16
The total restructuring charge of $369 million for the Second and Third
Quarter, 2001 Restructuring Plan was composed of severance, inventory
write-downs, long-lived asset impairments and exit costs of $134
million, $77 million, $137 million and $21 million, respectively, with
$271 million of those charges reported in restructuring costs (credits)
and other in the accompanying Consolidated Statement of Earnings. The
balance of the charge of $98 million, composed of $77 million for
inventory write-downs relating to the product discontinuances and $21
million relating to accelerated depreciation on the long-lived assets
accounted for under the held for use model of SFAS No. 121, was reported
in cost of goods sold in the accompanying Consolidated Statement of
Earnings. The severance and exit costs require the outlay of cash,
while the inventory write-downs and long-lived asset impairments
represent non-cash items.
130
The severance charge related to the termination of 2,700 employees,
including approximately 990 administrative, 800 manufacturing, 760
service and photofinishing and 150 research and development positions.
The geographic composition of the employees terminated included
approximately 1,110 in the United States and Canada and 1,590 throughout
the rest of the world. The charge for the long-lived asset impairments
includes the write-off of $61 million relating to sensitizing
manufacturing equipment, lab equipment and leasehold improvements, and
other assets that were scrapped or abandoned immediately and accelerated
depreciation of $33 million relating to sensitizing manufacturing
equipment, lab equipment and leasehold improvements, and other assets
that were to be used until their abandonment within the first three
months of 2002. The total amount for long-lived asset impairments also
includes a charge of $43 million for the write-off of goodwill relating
to the Company's PictureVision subsidiary, the realization of which was
determined to be impaired as a result of the Company's acquisition of
Ofoto in the second quarter of 2001.
In the fourth quarter of 2001, the Company reversed $20 million of the
$134 million in severance charges as certain termination actions,
primarily those in 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 and 275 fewer employees being terminated, including
approximately 150 in service and photofinishing, 100 in administrative
and 25 in R&D.
In the third quarter of 2002, the Company reversed $14 million of the
original $134 million in severance charges due primarily to higher
rates of attrition than originally expected, lower utilization of
training and outplacement services by terminated employees than
originally expected and termination actions being completed at an
actual cost per employee that was lower than originally estimated. As
a result, approximately 225 fewer employees were terminated, including
100 in service and photofinishing, 100 in administrative and 25 in R&D.
Also in the third quarter of 2002, the Company reversed $3 million of
exit costs as a result of negotiating lower contract termination
payments in connection with business or product line exits.
Actions associated with the Second and Third Quarter, 2001
Restructuring Plan has been completed. A total of 2,200 personnel were
terminated under the Second and Third Quarter, 2001 Restructuring Plan.
A portion of the severance had not been paid as of December 31, 2002
since, in many instances, the terminated employees could elect or were
required to receive their severance payments over an extended period of
time. Most of the remaining exit costs are expected to be paid during
2003. However, certain exit costs, such as long-term lease payments,
will be paid after 2003.
- -----------------------------------------------------------------------
131
NOTE 15: OTHER ASSET IMPAIRMENTS
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 (credits) and other in the
accompanying Consolidated Statement of Earnings.
Also in 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 were recorded in cost of goods
sold in the accompanying Consolidated Statement of Earnings. The
remaining $23 million was recorded in restructuring costs (credits) and
other in the accompanying Consolidated Statement of Earnings.
- -----------------------------------------------------------------------
NOTE 16: 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. At December 31, 2001, Kodak common stock
represented approximately 3.4% of trust assets. In December 2002, in
connection with Wilshire Associates' recommendation that KRIP eliminate
its investments in specialty sector U.S. equities, the Company purchased
the 7.4 million shares of Kodak common stock held by KRIP for $260
million.
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 $14 million, $15 million and $11 million for
2002, 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.
132
The Company also sponsors unfunded plans for certain U.S. employees,
primarily executives. The benefits of these plans 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.
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.
The net pension amounts recognized on the Consolidated Statement of
Financial Position at December 31, 2002 and 2001 for all major funded
and unfunded U.S. and Non-U.S. defined benefit plans are as follows:
(in millions) 2002 2001
Non- Non-
U.S. U.S. U.S. U.S.
Change in Benefit Obligation
Projected benefit obligation
at January 1 $ 5,939 $2,099 $ 5,798 $2,126
New plans 25 13 - -
Service cost 106 33 102 41
Interest cost 421 131 426 120
Participant contributions - 9 - 6
Plan amendment 3 (46) - -
Benefit payments (713) (141) (577) (134)
Actuarial loss 432 227 190 22
Curtailments - - - 8
Currency adjustments - 269 - (89)
------- ------ ------- ------
Projected benefit obligation
at December 31 $ 6,213 $2,594 $ 5,939 $2,100
======= ====== ======= ======
Change in Plan Assets
Fair value of plan assets
at January 1 $ 6,372 $1,731 $ 7,345 $2,011
New plans 33 13 - -
Actual return on plan assets 75 (106) (420) (102)
Employer contributions 23 105 24 36
Participant contributions - 10 - 6
Benefit payments (713) (141) (577) (134)
Currency adjustments - 193 - (81)
Other - - - (2)
------- ------ ------- ------
Fair value of plan assets
at December 31 $ 5,790 $1,805 $ 6,372 $1,734
======= ====== ======= ======
Funded Status at December 31 $ (423) $ (789) $ 433 $ (366)
Unamortized:
Transition liability (asset) 2 (7) (53) (8)
Net loss (gain) 975 899 (47) 386
Prior service cost (gain) 8 (21) 6 10
------- ------ ------- ------
Net amount recognized at
December 31 $ 562 $ 82 $ 339 $ 22
======= ====== ======= ======
133
Amounts recognized in the Statement of Financial Position for major
plans are as follows:
(in millions) 2002 2001
Non- Non-
U.S. U.S. U.S. U.S.
Prepaid pension cost $ 712 $ 260 $ 482 $ 60
Accrued benefit liability (150) (178) (143) (38)
Additional minimum pension
liability (78) (706) (57) (44)
Intangible asset 5 112 10 1
Accumulated other comprehensive
income 73 594 47 43
------- ------ ------- ------
Net amount recognized at
December 31 $ 562 $ 82 $ 339 $ 22
======= ====== ======= ======
The prepaid pension cost asset amounts for the U.S. and Non-U.S. at
December 31, 2002 and 2001 are included in other long-term assets. The
accrued benefit liability and additional minimum pension liability
amounts (net of the intangible asset amounts) for the U.S. and Non-U.S.
at December 31, 2002 and 2001 are included in postretirement
liabilities. The accumulated other comprehensive income amounts for the
U.S. and Non-U.S. at December 31, 2002 and 2001 are included as a
component of shareholders' equity, net of taxes.
Pension expense (income) for all plans included:
(in millions) 2002 2001 2000
Non- Non- Non-
U.S. U.S. U.S. U.S. U.S. U.S.
Service cost $ 106 $ 33 $ 102 $ 41 $ 94 $ 42
Interest cost 421 131 426 120 425 114
Expected return on plan
assets (677) (165) (599) (159) (576) (157)
Amortization of:
Transition asset (54) (3) (57) (3) (57) (10)
Prior service cost 1 (21) 1 (15) 2 8
Actuarial (gain) loss 3 39 2 4 2 3
----- ----- ----- ----- ----- -----
(200) 14 (125) (12) (110) -
Special termination benefits - 27 - 13 - -
Settlements - - - - 6 1
----- ----- ----- ----- ----- -----
Net pension (income) expense (200) 41 (125) 1 (104) 1
Other plans including
unfunded plans 3 49 16 66 9 63
----- ----- ----- ----- ----- -----
Total net pension (income)
expense $(197) $ 90 $(109) $ 67 $ (95) $ 64
===== ===== ===== ===== ===== =====
The weighted assumptions used to compute pension amounts for major
plans were as follows:
2002 2001
Non- Non-
U.S. U.S. U.S. U.S.
Discount rate 6.50% 5.40% 7.25% 5.90%
Salary increase rate 4.25% 3.30% 4.25% 3.10%
Long-term rate of return on
plan assets 9.50% 8.30% 9.50% 8.60%
- --------------------------------------------------------------------------
134
NOTE 17: 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. Additionally, these benefits are funded from the
general assets of the Company as they are incurred. The Company's
subsidiaries in the United Kingdom and Canada offer similar healthcare
benefits.
Changes in the Company's benefit obligation and funded status are as
follows:
(in millions) 2002 2001
Net benefit obligation at beginning
of year $ 3,110 $ 2,659
Service cost 16 15
Interest cost 213 199
Plan participants' contributions 4 3
Plan amendments 31 -
Actuarial loss 549 453
Benefit payments (239) (216)
Currency adjustments 3 (3)
------- -------
Net benefit obligation at end of year $ 3,687 $ 3,110
======= =======
Funded status at end of year $(3,687) $(3,110)
Unamortized net actuarial loss 1,600 1,109
Unamortized prior service cost (360) (451)
------- -------
Net amount recognized and recorded
at end of year $(2,447) $(2,452)
======= =======
The U.S. plan represents approximately 98% of the total other
postretirement net benefit obligation and, therefore, the weighted-
average assumptions used to compute the other postretirement benefit
amounts approximate the U.S. assumptions, which were as follows:
2002 2001
Discount rate 6.50% 7.25%
Salary increase rate 4.25% 4.25%
Healthcare cost trend (a) 12.00% 10.00%
(a) decreasing to 5.00% by 2010
(in millions) 2002 2001 2000
Components of net postretirement
benefit cost
Service cost $ 16 $ 15 $ 14
Interest cost 213 199 172
Amortization of:
Prior service cost (60) (60) (67)
Actuarial loss 58 39 17
------ ------ ------
227 193 136
Curtailments - - (6)
------ ------ ------
Total net postretirement benefit cost $ 227 $ 193 $ 130
====== ====== ======
135
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 $ 1 $ (7)
Effect on postretirement benefit
obligation 29 (114)
- --------------------------------------------------------------------------
NOTE 18: ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income at
December 31, 2002, 2001 and 2000 were as follows:
(in millions) 2002 2001 2000
Accumulated unrealized holding
(losses) gains related to
available-for-sale securities $ - $ (6) $ 7
Accumulated unrealized losses
related to hedging activity (9) (5) (38)
Accumulated translation
adjustments (306) (524) (425)
Accumulated minimum pension
liability adjustments (456) (62) (26)
----- ----- -----
Total $(771) $(597) $(482)
- -------------------------------------------------------------------------
NOTE 19: 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.
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 2000 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 increase in the
Company's stock market price from the grant date to the exercise date.
At December 31, 2002, 39,581 freestanding SARs were outstanding at
option prices ranging from $29.31 to $62.44.
136
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 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, 2002, 325,659 freestanding SARs were outstanding at option
prices ranging from $31.30 to $90.63.
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, 2002, 69,656 freestanding SARs were
outstanding at option prices ranging from $30.25 to $44.50.
In January 2002, the Company's shareholders voted in favor of a
voluntary stock option exchange program for its employees. Under the
program, employees were given the opportunity, if they so chose, to
cancel outstanding stock options previously granted to them at exercise
prices ranging from $26.90 to $92.31, in exchange for new options to be
granted on or shortly after August 26, 2002, over six months and one day
from February 22, 2002, the date the old options were canceled. The
number of shares subject to the new options was determined by applying
an exchange ratio in the range of 1:1 to 1:3 (i.e., one new option share
for every three canceled option shares) based on the exercise price of
the canceled option. As a result of the exchange program, approximately
23.7 million old options were canceled on February 22, 2002, with
approximately 16 million new options granted on, or shortly after,
August 26, 2002. The exchange program did not result in variable
accounting, as it was designed to comply with FASB Interpretation No. 44
(FIN 44), "Accounting for Certain Transactions Involving Stock-Based
Compensation." Also, the new options had an exercise price equal to the
fair market value of the Company's common stock on the new grant date,
so no compensation expense was recorded as a result of the exchange
program.
137
Further information relating to options is as follows:
(Amounts in thousands, except per share amounts)
Weighted-
Average
Exercise
Shares Range of Price Price
Under Option Per Share Per Share
Outstanding on December 31, 1999 37,033 $30.25 - $92.31 $62.12
Granted 12,533 $37.25 - $65.63 $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 - $48.34 $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
Granted 20,155 $26.30 - $38.04 $32.72
Exercised 1,581 $26.90 - $37.74 $32.05
Terminated, Canceled or
Surrendered 26,752 $26.90 - $92.31 $54.58
------
Outstanding on December 31, 2002 42,277 $25.92 - $92.31 $48.52
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
Exercisable on December 31, 2002 31,813 $25.92 - $92.31 $52.49
The table above excludes approximately 68,000 options granted by the
Company in 2001 at an exercise price of $.05-$21.91 as part of an
acquisition. At December 31, 2002, 37,969 stock options were
outstanding in relation to this acquisition.
The Company's total options outstanding of 42,277,000 have been granted
under equity compensation plans that have been approved by security
holders and that which have not been approved by security holders as
follows:
(Amounts in thousands,
except per share amounts)
Weighted-
Average Number of
Options Exercise Price Options available
Outstanding of Options for Future Grants
at December 31, Outstanding at as of
2002 December 31, 2002 December 31, 2002
Equity compensation
plans approved by
security holders
approved plans 31,356 $46.17 7,813
Equity compensation
plans not approved
by security holders 10,921 55.27 5,124
------ ------ -----
Total 42,277 $48.52 12,937
138
The Company's equity compensation plans approved by security holders
include the 2000 Plan, the 1995 Plan and the 1990 Plan. The Company's
equity compensation plans not approved by security holders include the
Eastman Kodak Company 1997 Stock Option Plan and the Kodak Stock Option
Plan. The 5,124,000 of options available for grant as of December 31,
2002 under equity compensation plans not approved by security holders
all relate to the Kodak Stock Option Plan; however, in accordance with
an amendment that is effective January 1, 2003, no options will be
granted in the future under this plan.
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:
Exchange 2000
Program Plan
--------- ----
2002 2002
Risk-free interest rates 2.9% 3.8%
Expected option lives 4 years 7 years
Expected volatilities 37% 34%
Expected dividend yields 5.76% 5.76%
2001 2001
Risk-free interest rates N/A 4.2%
Expected option lives N/A 6 years
Expected volatilities N/A 34%
Expected dividend yields N/A 4.43%
2000 2000
Risk-free interest rates N/A 6.2%
Expected option lives N/A 7 years
Expected volatilities N/A 29%
Expected dividend yields N/A 3.19%
The weighted-average fair value of options granted in 2002 was $5.99 for
the exchange program and $8.22 for the 2000 Plan. The exchange program
generally had no effect on the vesting term or life of the old options
exchanged as these provisions were carried forward with the new options.
However, the vesting term and option life were recast to the original
period amounts for approximately 0.6 million of the 16.0 million new
options granted through the exchange program. The weighted-average
assumptions related to the 2000 Plan were applied to the 0.6 million of
recast exchange options because its underlying characteristics were
similar to new options granted under the 2000 Plan. The weighted-
average fair value of options granted was $8.37 and $16.79 for 2001 and
2000, respectively.
139
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period (1-3
years). See Note 1 under "Stock-Based Compensation" for the disclosure
of the Company's pro forma information.
The following table summarizes information about stock options at December
31, 2002:
(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 20,097 7.54 $32.37 11,029 $31.38
$40 - $55 6,510 2.95 $46.99 5,921 $47.14
$55 - $70 8,655 5.13 $62.71 8,030 $62.92
$70 - $85 4,712 4.05 $73.30 4,530 $73.32
Over $85 2,303 4.16 $90.02 2,303 $90.02
------ ------
42,277 31,813
====== ======
- --------------------------------------------------------------------------
NOTE 20: ACQUISITIONS, JOINT VENTURES AND BUSINESS VENTURES
2002
On January 24, 2002, the Company completed the acquisition of 100% of
the voting common stock of ENCAD, Inc., (ENCAD) for a total purchase
price of approximately $25 million. The purchase price was paid almost
entirely in Kodak common stock. The purchase price in excess of the
fair value of the net assets acquired of approximately $6 million has
been allocated to goodwill. On December 17, 2002, it was announced that
ENCAD will become part of the newly formed components group along with
the document scanner and microfilm businesses. The formation of the
components group will build a stronger equipment and consumables
business within the Commercial Imaging segment by consolidating those
product lines that utilize a two tier, indirect sales and distribution
channel. Earnings from continuing operations for 2002 include the
results of ENCAD from the date of acquisition.
140
On September 11, 2002, the Company initiated an offer to acquire all of
the outstanding minority equity interests in Kodak India Ltd., (Kodak
India) a majority owned subsidiary of the Company. The voluntary offer
to the minority equity interest holders of Kodak India was for the
acquisition of approximately 2.8 million shares representing the full
25.24% minority ownership in the subsidiary. In the fourth quarter of
2002, the Company purchased the 2.1 million shares that had been
tendered to date for approximately $16 million in cash. Due to the
timing of this acquisition, the purchase price allocation was not
complete as of December 31, 2002. Accordingly, the purchase price in
excess of the fair value of the net assets acquired of approximately $8
million has been recorded in other long-term assets. The purchase price
allocation will be completed in the first quarter of 2003 at which time
the excess purchase price will be allocated to goodwill and other
identifiable intangible assets. In December 2002, the Company made an
offer to purchase the remaining 6.04% outstanding minority interest in
Kodak India for approximately $4.9 million. Kodak India operated in
each of the Company's reportable segments and is engaged in the
manufacture, trading and marketing of cameras, films, photo chemicals
and other imaging products.
On December 31, 2002, an unaffiliated investor in one of Kodak's China
subsidiaries exercised its rights under a put option arrangement, which
required Kodak to repurchase a 10% outstanding minority equity interest
in this subsidiary for approximately $44 million in cash. Due to the
timing of this acquisition, the purchase price allocation was not
complete as of December 31, 2002. Accordingly, the purchase price in
excess of the fair value of the net assets acquired of approximately $18
million has been recorded in other long-term assets. The purchase price
allocation will be completed in the first quarter of 2003 at which time
the excess purchase price will be allocated to goodwill and other
identifiable intangible assets.
During 2002, the Company completed a number of additional acquisitions
with an aggregate purchase price of approximately $14 million, which
were individually immaterial to the Company's financial position,
results of operations or cash flows.
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 has a 34% interest in the business
venture and will contribute approximately $16 million in cash in 2003
and is committed to contribute $100 million in loan guarantees.
However, the Company was not required to make these loan guarantees as
of December 31, 2002. SANYO holds a 66% interest in the business
venture and is committed to contribute approximately $36 million in cash
and $195 million in loan guarantees.
141
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.
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 with an
aggregate purchase price of approximately $122 million in cash and
stock, none of which were individually material to the Company's
financial position, results of operations or cash flows.
2000
During the second quarter of 2000, 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, 2000
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 with an
aggregate purchase price of approximately $79 million in cash, none of
which were individually material to the Company's financial position,
results of operations or cash flows.
- ------------------------------------------------------------------------
142
NOTE 21: DISCONTINUED OPERATIONS
In March 2001, the Company acquired Citipix from Groupe Hauts Monts
along with two related subsidiaries involved in mapping services.
Citipix was involved in the aerial photography of large cities in the
United States, scanning of this imagery and hosting the imagery on the
Internet for government, commercial and private sectors. The acquired
companies were formed into Kodak Global Imaging, Inc. (KGII), a wholly
owned subsidiary, which was reported in the commercial and government
products and services business in the Commercial Imaging segment. Due
to a combination of factors, including the collapse of the
telecommunications market, limitations on flying imposed by the events
of September 11th, delays and losses of key contracts and the global
economic downturn, KGII did not achieve the financial results expected
by management during both 2001 and 2002. In November 2002, the Company
approved a plan to dispose of the operations of KGII. The disposal plan
consisted of the shutdown of the Citipix business in December 2002 and
the sale of the remaining mapping business and imagery assets of the
Citipix business.
The Company incurred charges of approximately $44 million in the fourth
quarter of 2002 in relation to the disposal of KGII. The Company
recognized an impairment loss of approximately $25 million resulting
from the write-down of the carrying value of goodwill, intangibles and
fixed assets to fair value. A loss of approximately $9 million was
recognized on the sale of the mapping business and imagery assets of
Citipix in December 2002. The Company also recognized a charge of
approximately $10 million to accrue various costs associated with the
shutdown of KGII, such as severance costs related to the termination of
150 employees, lease cancellation costs, and claims owed under the
original purchase agreement to the former owners of the mapping
business. In addition to these disposal costs, the Company incurred
losses from operations for the years ended December 31, 2002 and 2001
amounting to $13 million and $7 million, respectively. The KGII
operational losses and loss from the disposal of KGII were recorded in
loss from discontinued operations in the Consolidated Statement of
Earnings for the years ended December 31, 2002 and 2001.
During the fourth quarter of 2002, the Company recognized income of $19
million related to the favorable outcome of litigation associated with
the 1994 sale of Sterling Winthrop Inc. The gain recognized on the
favorable settlement was recorded in loss from discontinued operations
in the Consolidated Statement of Earnings for the year ended December
31, 2002. In January 2003, the Company received the cash related to
this settlement.
At December 31, 2002 and 2001, total assets related to the discontinued
operations of KGII and Sterling Winthrop Inc. amounted to $28 million
and $39 million, respectively, and were reported in the Company's
Consolidated Statement of Financial Position. Of the total assets
related to discontinued operations at December 31, 2002 and 2001,
receivables, net amounted to $27 million and $3 million, goodwill, net
was $0 and $16 million, and other long-term assets was $0 and $17
million. The remaining asset amounts were immaterial. At December 31,
2002 and 2001, total liabilities related to discontinued operations of
$12 million and $4 million, respectively, were included in the Company's
Consolidated Statement of Financial Position. These liabilities were
primarily related to the accrual of various costs associated with the
KGII shutdown as noted above.
143
Net sales resulting from discontinued operations for the years ended
December 31, 2002 and 2001 amounted to $6 million and $5 million,
respectively. The loss from discontinued operations before income tax
benefits for the years ended December 31, 2002 and 2001 of $38 million
and $7 million, respectively, was taxed at an effective tax rate of 38%
and 31%, respectively, resulting in the loss from discontinued
operations, net of income tax benefits, in the Consolidated Statement of
Earnings of $23 million and $5 million, respectively.
- --------------------------------------------------------------------------
NOTE 22: 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 2000 segment information has been presented in accordance
with the new structure and to conform to the 2002 and 2001 presentation.
The Company has three reportable segments, including Photography, Health
Imaging and Commercial Imaging, and All Other.
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 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.
144
(in millions) 2002 2001 2000
Net sales from continuing operations:
Photography $ 9,002 $ 9,403 $10,231
Health Imaging 2,274 2,262 2,220
Commercial Imaging 1,456 1,454 1,417
All Other 103 110 126
------- ------- -------
Consolidated total $12,835 $13,229 $13,994
======= ======= =======
Earnings from continuing operations
before interest, other (charges)
income, and income taxes:
Photography $ 771 $ 787 $ 1,430
Health Imaging 431 323 518
Commercial Imaging 192 172 233
All Other (28) (60) (11)
------- ------- -------
Total of segments 1,366 1,222 2,170
Venture investment impairments
and other asset write-offs (32) (12) -
Restructuring costs and credits
and asset impairments (114) (720) 44
Wolf charge - (77) -
Environmental reserve - (41) -
Kmart charge - (20) -
------- ------- -------
Consolidated total $ 1,220 $ 352 $ 2,214
======= ======= =======
Net earnings from continuing
operations:
Photography $ 550 $ 535 $ 1,034
Health Imaging 313 221 356
Commercial Imaging 83 84 90
All Other (23) (38) (2)
------- ------- -------
Total of segments 923 802 1,478
Venture investment impairments
and other asset write-offs (50) (15) -
Restructuring costs and credits
and asset impairments (114) (720) 44
Wolf charge - (77) -
Environmental reserve - (41) -
Kmart charge - (20) -
Interest expense (173) (219) (178)
Other corporate items 14 8 26
Tax benefit - PictureVision
subsidiary closure 45 - -
Tax benefit - Kodak Imagex Japan 46 - -
Income tax effects on above items
and taxes not allocated to segments 102 363 37
------- ------- -------
Consolidated total $ 793 $ 81 $ 1,407
======= ======= =======
145
(in millions) 2002 2001 2000
Operating net assets:
Photography $ 5,394 $ 6,288 $ 7,100
Health Imaging 1,123 1,426 1,491
Commercial Imaging 918 1,085 1,045
All Other (138) (219) (92)
------- ------- -------
Total of segments 7,297 8,580 9,544
LIFO inventory reserve (392) (444) (449)
Cash and marketable securities 577 451 251
Dividends payable - - (128)
Net deferred income tax
(liabilities) and assets 297 97 (4)
Noncurrent other postretirement
liabilities (2,147) (2,180) (2,209)
Other corporate net assets (249) (410) (205)
------- ------- -------
Consolidated net assets (1) $ 5,383 $ 6,094 $ 6,800
======= ======= =======
(1) Consolidated net assets are derived from the Consolidated Statement
of Financial Position, as follows:
Total assets $13,369 $13,362 $14,212
Total liabilities 10,592 10,468 10,784
Less: Short-term borrowings and
current portion of long-term debt (1,442) (1,534) (2,206)
Less: Long-term debt, net of
current portion (1,164) (1,666) (1,166)
------- ------- -------
Non-interest-bearing liabilities 7,986 7,268 7,412
------- ------- -------
Consolidated net assets $ 5,383 $ 6,094 $ 6,800
======= ======= =======
Depreciation expense from continuing
operations:
Photography $ 634 $ 599 $ 557
Health Imaging 107 96 92
Commercial Imaging 74 69 80
All Other 3 1 9
------- ------- -------
Consolidated total $ 818 $ 765 $ 738
======= ======= =======
Goodwill amortization expense from
continuing operations:
Photography $ - $ 110 $ 120
Health Imaging - 28 27
Commercial Imaging - 15 3
All Other - - 1
------- ------- -------
Consolidated total $ - $ 153 $ 151
======= ======= =======
Capital additions from continuing
operations:
Photography $ 408 $ 555 $ 721
Health Imaging 81 128 120
Commercial Imaging 83 56 98
All Other 5 4 6
------- ------- -------
Consolidated total $ 577 $ 743 $ 945
======= ======= =======
146
(in millions) 2002 2001 2000
Net sales to external customers attributed to (2):
The United States $ 6,008 $ 6,419 $ 6,800
Europe, Middle East and Africa 3,363 3,275 3,464
Asia Pacific 2,242 2,215 2,349
Canada and Latin America 1,222 1,320 1,381
------- ------- -------
Consolidated total $12,835 $13,229 $13,994
======= ======= =======
(2) Sales are reported in the geographic area in which they originate.
Property, plant and equipment, net located in:
The United States $ 3,501 $ 3,738 $ 3,913
Europe, Middle East and Africa 769 672 647
Asia Pacific 943 977 1,056
Canada and Latin America 207 272 303
------- ------- -------
Consolidated total $ 5,420 $ 5,659 $ 5,919
======= ======= =======
147
NOTE 23: QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
(in millions, except per share data)
2002
Net sales from continuing
operations $3,441 $3,352 $3,336 $2,706
Gross profit from continuing
operations 1,206 1,290 1,254 860
Earnings from continuing
operations 130 (3) 336 (2) 286 (1) 41
Loss from discontinued
operations (4) (17) (2) (2) (2)
Net earnings 113 334 284 39
Basic and diluted net earnings
per share (9):
Continuing operations .45 1.16 .98 .14
Discontinued operations (.06) (.01) (.01) (.01)
Total .39 1.15 .97 .13
2001
Net sales from continuing
operations $3,358 $3,305 $3,591 $2,975
Gross profit from continuing
operations 1,028 1,134 1,339 1,067
Earnings (loss) from continuing
operations (204)(8) 97 (7) 38 (5)(6) 150
(5)
Loss from discontinued
operations (4) (2) (1) (2) -
Net earnings (206) 96 36 150
Basic and diluted net earnings
per share (9):
Continuing operations (.70) .33 .13 .52
Discontinued operations (.01) - (.01) -
Total (.71) .33 .12 .52
- --------------------------------------------------------------------------
(1) Includes $13 million ($10 million included in SG&A and $3 million
included in other charges) for a charge related to asset impairments,
which reduced net earnings by $9 million; and a $45 million (included
in provision for income taxes) tax benefit related to the closure of
the Company's PictureVision subsidiary.
(2) Includes $29 million (included in restructuring costs (credits) and
other) reversal of restructuring charges related to costs originally
recorded as part of the Company's 2001 restructuring programs, which
increased net earnings by $18 million; $20 million (included in
restructuring costs (credits) and other) of restructuring costs,
which reduced net earnings by $20 million; $21 million ($13 million
included in SG&A and $8 million included in other charges) for a
charge related to asset impairments, which reduced net earnings by
$13 million; and a $46 million (included in provision for income
taxes) tax benefit related to the consolidation of its photofinishing
operations in Japan.
(3) Includes $123 million ($16 million included in cost of goods sold
and $107 million included in restructuring costs (credits) and other)
of restructuring charges, which reduced net earnings by $78 million;
$16 million ($9 million included in SG&A and $7 million included in
other charges) for a charge related to asset impairments and other
asset write-offs, which reduced net earnings by $12 million; and a
$30 million (included in provision for income taxes) tax benefit
related to changes in the corporate tax rate and asset write-offs.
(4) Refer to Note 21, "Discontinued Operations" for a discussion
regarding loss from discontinued operations.
148
(5) 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. First quarter also
includes amortization expense on goodwill of $42 million, which
reduced net earnings by $36 million.
(6) Includes $316 million ($57 million included in cost of goods sold
and $259 million included in restructuring costs (credits) and other)
of restructuring costs, which reduced net earnings by $232 million;
$77 million (included in restructuring costs (credits) and other) for
the Wolf bankruptcy charge, which reduced net earnings by $52
million; and $37 million of amortization expense on goodwill, which
reduced net earnings by $31 million.
(7) Includes $53 million ($41 million included in cost of goods sold and
$12 million included in restructuring costs (credits) and other) of
restructuring costs, which reduced net earnings by $41 million; $42
million ($23 million included in restructuring costs (credits) 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;
$37 million of amortization expense on goodwill, which reduced net
earnings by $31 million; and an $11 million (included in provision
for income taxes) tax benefit related to favorable tax settlements
reached during the quarter.
(8) Includes $309 million ($21 million included in cost of goods sold
and $288 million included in restructuring costs (credits) and other)
of restructuring costs, which reduced net earnings by $210 million;
$15 million ($12 million included in SG&A and $3 million included in
other (charges) income) for asset impairments related to venture
investments, which reduced net earnings by $10 million; a $41 million
(included in SG&A) charge for environmental reserves, which reduced
net earnings by $28 million; a $20 million (included in SG&A) Kmart
bankruptcy charge, which reduced net earnings by $14 million, $37
million of amortization expense on goodwill, which reduced net
earnings by $31 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.
(9) Each quarter is calculated as a discrete period and the sum of the
four quarters may not equal the full year amount.
149
SUMMARY OF OPERATING DATA
Eastman Kodak Company and Subsidiary Companies
(Dollar amounts and shares in millions, except per share data)
2002 2001 2000 1999 1998
Net sales from continuing
operations $12,835 $13,229 $13,994 $14,089 $13,406
Earnings from continuing
operations before interest,
other (charges) income,
and income taxes 1,220 352 2,214 1,990 1,888
Earnings (loss) from:
Continuing operations 793(1) 81(2) 1,407(3) 1,392(4) 1,390(5)
Discontinued operations (23)(6) (5)(6) - - -
NET EARNINGS 770 76 1,407 1,392 1,390
EARNINGS AND DIVIDENDS
Net earnings
- % of sales 6.0% 0.6% 10.1% 9.9% 10.4%
- % return on average
shareholders' equity 27.2% 2.4% 38.3% 35.2% 38.9%
Basic earnings (loss) per
share:
Continuing operations 2.72 .28 4.62 4.38 4.30
Discontinued operations (.08) (.02) - - -
Total 2.64 .26 4.62 4.38 4.30
Diluted earnings (loss) per
share:
Continuing operations 2.72 .28 4.59 4.33 4.24
Discontinued operations (.08) (.02) - - -
Total 2.64 .26 4.59 4.33 4.24
Cash dividends paid
- on common shares 525 643 545 563 569
- per common share 1.80 2.21 1.76 1.76 1.76
Common shares outstanding at
year end 285.9 290.9 290.5 310.4 322.8
Shareholders at year end 89,988 91,893 113,308 131,719 129,495
STATEMENT OF FINANCIAL
POSITION DATA
Operational working
capital (8) $ 599 $ 797 $ 1,420 $ 777 $ 874
Working capital (843) (737) (786) (385) (643)
Property, plant and
equipment, net 5,420 5,659 5,919 5,947 5,914
Total assets 13,369 13,362 14,212 14,370 14,733
Short-term borrowings
and current portion of
long-term debt 1,442 1,534 2,206 1,163 1,518
Long-term debt, net of
current portion 1,164 1,666 1,166 936 504
Total shareholders' equity 2,777 2,894 3,428 3,912 3,988
SUPPLEMENTAL INFORMATION
Net sales from continuing
operations - Photography $9,002 $ 9,403 $10,231 $10,265 $10,063
- Health Imaging 2,274 2,262 2,220 2,159 1,526
- Commercial
Imaging 1,456 1,454 1,417 1,479 1,296
- All Other 103 110 126 186 521
Research and development
costs 762 779 784 817 922(7)
Depreciation 818 765 738 773 737
Taxes (excludes payroll,
sales and excise taxes) 288 154 933 806 809
Wages, salaries and employee
benefits 3,991 3,824 3,726 3,962 4,306
Employees at year end
- in the U.S. 39,000 42,000 43,200 43,300 46,300
- worldwide 70,000 75,100 78,400 80,650 86,200
(see footnotes on next page)
150
SUMMARY OF OPERATING DATA
Eastman Kodak Company and Subsidiary Companies
(footnotes for previous page)
(1) Includes $143 million of restructuring charges; $29 million
reversal of restructuring charges; $50 million for a charge related
to asset impairments and other asset write-offs; and a $121 million
tax benefit relating to the closure of the Company's PictureVision
subsidiary, the consolidation of the Company's photofinishing
operations in Japan, asset write-offs and a change in the corporate
tax rate. These items improved net earnings by $7 million.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) Refer to Note 21, "Discontinued Operations" for a discussion
regarding loss from discontinued operations.
(7) Includes a $42 million charge for the write-off of in-process R&D
associated with the Imation acquisition.
(8) Excludes short-term borrowings and current portion of long-term
debt.
151
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 2003 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 13.
- --------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None to report.
- --------------------------------------------------------------------------
ITEM 14. Controls and Procedures
In accordance with the Securities Exchange Act Rules 13a-15 and 15d-15,
the Company's management, under the supervision of the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days of the filing date of this
annual report. Based on that evaluation, the Company concluded that
the design and operation of its disclosure controls and procedures were
effective. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of such evaluation.
152
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
(a) 1. Consolidated financial statements:
Report of independent accountants 78
Consolidated statement of earnings 79
Consolidated statement of financial position 80
Consolidated statement of shareholders' equity 81-83
Consolidated statement of cash flows 84-85
Notes to financial statements 86-148
2. Financial statement schedules:
II - Valuation and qualifying accounts 154
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 159 through 164.
(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, 2002.
153
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 Robert H. Brust
Chairman & Chief Executive Officer, Chief Financial Officer, and
President & Chief Operating Officer Executive Vice President
Robert P. Rozek
Controller
Date: March 14, 2003
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 Paul H. O'Neill, Director
Timothy M. Donahue, Director Hector de J. Ruiz, Director
William H. Hernandez, Director Laura D'Andrea Tyson, Director
Date: March 14, 2003
154
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, 2002
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $ 92 $ 92 $80 $104
Reserve for loss on
returns and allowances 17 17 1 33
---- ---- --- ----
TOTAL $109 $109 $81 $137
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 51 $ 13 $11 $ 53
==== ==== === ====
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
==== ==== === ====
155
CERTIFICATIONS
I, Daniel A. Carp, certify that:
1. I have reviewed this annual report on Form 10-K of Eastman Kodak
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
156
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Daniel A. Carp
Chief Executive Officer
157
I, Robert H. Brust, certify that:
1. I have reviewed this annual report on Form 10-K of Eastman Kodak
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
158
Date: March 14, 2003
/s/ Robert H. Brust
Chief Financial Officer
159
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.
160
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
(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, the Quarterly Report on Form
10-Q for the quarterly period ended September 30,
1999, the Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, and the Annual Report on Form
10-K for the fiscal year ended December 31, 2001,
Exhibit 10.)
161
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
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, the
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999, the Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, and the Annual
Report on Form 10-K for the fiscal year ended December 31,
2001, Exhibit 10.)
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, Exhibit 10.)
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 and the Annual Report on Form 10-K
for the fiscal year ended December 31, 2001, Exhibit 10.)
M. Martin M. Coyne Agreement dated November 9, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
162
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number Page
N. Kodak Stock Option Plan, as amended and restated August
26, 2002. 165
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.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Letter, dated December 28, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Q. Eastman Kodak Company 2001 Short-Term Variable
Pay to Named Executive Officers.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2002, Exhibit 10.)
163
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number Page
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, the Annual Report
on Form 10-K for the fiscal year ended December 31, 1999,
and the Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, Exhibit 10.)
S. Executive Compensation for Excellence and Leadership
Plan, (formerly known as the 2000 Management Variable
Compensation Plan), as amended and restated effective
as of January 1, 2002.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2002, Exhibit 10.)
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.)
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.)
V. Michael P. Morley Agreement dated March 13, 2001. 229
Amendment, dated February 19, 2003, to Agreement dated
March 13, 2001. 236
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.)
164
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
Page
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.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.).
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. 239
(21) Subsidiaries of Eastman Kodak Company. 240
(23) Consent of Independent Accountants. 244
(99) Eastman Kodak Employees' Savings and Investment Plan Annual
Report on Form 11-K for the fiscal year ended December 30, 2002
(to be filed by amendment).
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 242
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 243
165
Exhibit (10) N.
KODAK STOCK OPTION PLAN
Article Page
1. Purpose and Term of Plan 167
2. Definitions 167
3. Eligibility 174
4. Plan Administration 174
5. Awards 176
6. Shares Subject to Plan 176
7. Stock Options 177
8. SARs 179
9. Termination of Employment for Awards Granted
Prior to March 13, 2000 182
9A. Termination of Employment for Awards Granted
On or After March 13, 2000 184
10. Non-U.S. Employees 186
11. Change In Ownership 188
12. Change In Control 189
13. Miscellaneous 190
14. Stock Option Recognition Program 193
2002, Eastman Kodak Company
Amended and Restated effective August 26, 2002
166
KODAK STOCK OPTION PLAN
Exhibits Page
A. Australian Addendum 196
B. Hong Kong Addendum 199
C. 1998 French Subplan 200
D. Austria Addendum 205
E. Egypt Addendum 206
F. Russia Addendum 207
G. China Addendum 208
H. Italy Addendum 209
I. India Addendum 210
J. Australian Addendum for March 13, 2000 Grant 211
K. Italy Addendum 214
L. Rules of the Eastman Kodak Company Kodak Stock
Option Plan for French Employees For Grants
On or After August 26, 2002 215
M. Australian Addendum for Grants on or After
August 26, 2002 220
N. EASTMAN KODAK COMPANY,KODAK STOCK OPTION PLAN
(as amended on January 25, 2002) UNITED KINGDOM
SUB-PLAN(GLOBAL AWARDS) 225
167
ARTICLE 1 -- PURPOSE AND TERM OF PLAN
1.1 Purpose
The purposes of the Kodak Stock Option Plan are (i) to promote the
interests of the Company and Kodak's shareholders by retaining quality
Employees, (ii) to give substantially all Employees a stake in the
Company's growth and success by focusing them on the performance of
Kodak stock and thereby linking them worldwide, and (iii) to create a
culture of ownership and excellence among all Employees worldwide.
1.2 Term
The Plan shall become effective on March 13, 1998. Awards shall not be
granted pursuant to the Plan after March 12, 2003.
ARTICLE 2 -- DEFINITIONS
In any necessary construction of a provision of this Plan, the
masculine gender may include the feminine, and the singular may include
the plural, and vice versa. This Plan should be construed in a manner
consistent with the intent of Kodak to establish a nonqualified stock
option plan subject to fixed accounting treatment.
2.1 Affiliate
"Affiliate" means any entity in which Kodak owns, directly or through
one or more intermediaries, more than 50% of the equity interest.
2.2 Award
"Award" means a grant of an Option or SAR made in accordance with the
terms, conditions, restrictions and limitations of the Plan and those
that the Committee may establish by the Award Notice or otherwise.
2.3 Award Notice
"Award Notice" means a notice, certificate, agreement or other document
setting out the terms, conditions, restrictions and limitations of the
Award (in addition to those provided under this Plan) as determined by
the Committee in its discretion.
2.4 Board
"Board" means the Board of Directors of Kodak.
168
2.5 Cause
"Cause" shall mean:
i. a Participant's continued failure, for a period of at least 15
calendar days following a warning, to perform the
Participant's duties in a manner deemed satisfactory by the
Participant's supervisor, business unit president or
functional equivalent, in the exercise of their sole
discretion; or
ii. the Participant's failure to follow a lawful written directive
of Kodak's Chief Executive Officer, the Participant's
supervisor or any other person to whom the Participant has a
reporting relationship in any capacity; or
iii. the Participant's willful violation of any material rule,
regulation, or policy that may be established from time to
time for the conduct of the business of the Participant's
employer; or
iv. the Participant's unlawful possession, use or sale of narcotics
or other controlled substances, or, performing job duties
while illegally used controlled substances are present in the
Participant's system; or
v. any act of omission or commission by the Participant in the
scope of his or her employment (a) which results in the
assessment of a civil or criminal penalty against the
Participant or the Company, or (b) which in the reasonable
judgment of the Participant's 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. the Participant's 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, the Participant's supervisor or any
other person in the Company to whom the Participant has a
reporting relationship in any capacity; or
viii.the Participant's breach of the Eastman Kodak Company
Employees' Agreement or the Kodak Business Conduct Guide, or
the equivalent thereof that is established by the
Participant's employer.
169
A Participant's voluntary termination of employment in anticipation of
termination for Cause shall be considered a termination of the
Participant for Cause. A Participant who is eligible for Retirement at
the time he or she is terminated for Cause will be considered to have
terminated his or her employment for Cause.
2.6 Change In Control
"Change in Control" means the occurrence of any one of the following
events:
(a) individuals who, on December 9, 1999, constitute the Board (the
"Incumbent Directors") cease for any reason to constitute at
least a majority of the Board, provided that any person
becoming a director subsequent to December 9, 1999, whose
election or nomination for election was approved by a vote of
at least two-thirds of the Incumbent Directors then on the
Board (either by a specific vote or by approval of the proxy
statement of Kodak in which such person is named as a nominee
for director, without written objection to such nomination)
shall be an Incumbent Director; provided, however, that no
individual initially elected or nominated as a director of
Kodak as a result of an actual or threatened election contest
(as described in Rule 14a-11 under the Act) ("Election
Contest") or any other actual or threatened solicitation of
proxies or consents by or on behalf of any "person" (as such
term is defined in Section 3(a)(9) of the Act) other than the
Board ("Proxy Contest"), including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy
Contest, shall be deemed to be an Incumbent Director;
(b) any person is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of
securities of Kodak representing 25% or more of the combined
voting power of Kodak's then outstanding securities eligible
to vote for the election of the Board (the "Kodak Voting
Securities"); provided, however, that the event described in
this paragraph (b) shall not be deemed to be a Change in
Control by virtue of any of the following acquisitions: (1)by
Kodak or any subsidiary, (2) by any employee benefit plan (or
related trust) sponsored or maintained by Kodak or any
subsidiary, or (3) by any underwriter temporarily holding
securities pursuant to an offering of such securities;
170
(c) the consummation of a merger, consolidation, statutory share
exchange or similar form of corporate transaction involving
Kodak or any of its subsidiaries that requires the approval
of Kodak's shareholders, whether for such transaction or the
issuance of securities in the transaction (a
"Reorganization"), or sale or other disposition of all or
substantially all of Kodak's assets to an entity that is not
an affiliate of Kodak (a "Sale"), unless immediately
following such Reorganization or Sale: (1) more than 60% of
the total voting power of (x) the corporation resulting from
such Reorganization or Sale (the "Surviving Company"), or (y)
if applicable, the ultimate parent corporation that directly
or indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving
Company (the "Parent Company"), is represented by Kodak
Voting Securities that were outstanding immediately prior to
such Reorganization or Sale (or, if applicable, is
represented by shares into which such Kodak Voting Securities
were converted pursuant to such Reorganization or Sale), and
such voting power among the holders thereof is in
substantially the same proportion as the voting power of such
Kodak Voting Securities among the holders thereof immediately
prior to the Reorganization or Sale, (2) no person (other
than any employee benefit plan (or related trust) sponsored
or maintained by the Surviving Company or the Parent
Company), is or becomes the beneficial owner, directly or
indirectly, of 25% or more of the total voting power of the
outstanding voting securities eligible to elect directors of
the Parent Company (or, if there is no Parent Company, the
Surviving Company) and (3) at least a majority of the members
of the board of directors of the Parent Company (or, if there
is no Parent Company, the Surviving Company) following the
consummation of the Reorganization or Sale were Incumbent
Directors at the time of the Board's approval of the
execution of the initial agreement providing for such
Reorganization or Sale (any Reorganization or Sale which
satisfies all of the criteria specified in (1), (2) and (3)
above shall be deemed to be a "Non-Qualifying Transaction");
or
(d) the shareholders of Kodak approve a plan of complete
liquidation or dissolution of Kodak.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any person acquires beneficial ownership of
more than 25% of Kodak Voting Securities as a result of the acquisition
of Kodak Voting Securities by Kodak which reduces the number of Kodak
Voting Securities outstanding; provided that if after such acquisition
by Kodak such person becomes the beneficial owner of additional Kodak
Voting Securities that increases the percentage of outstanding Kodak
Voting Securities beneficially owned by such person, a Change in
Control shall then occur.
171
2.7 Change In Control Price
"Change In Control Price" means the highest closing price per share
paid for the purchase of Common Stock on the New York Stock Exchange
during the ninety (90) day period ending on the date the Change In
Control occurs.
2.8 Change In Ownership
"Change In Ownership" means a Change In Control that results directly
or indirectly in Kodak's Common Stock ceasing to be actively traded on
the New York Stock Exchange.
2.9 CEO
"CEO" means the Chief Executive Officer of Kodak.
2.10 Code
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, including regulations thereunder and successor provisions and
regulations thereto.
2.11 Committee
"Committee" means the Executive Compensation and Development Committee
of the Board, or such other Board committee as may be designated by the
Board to administer the Plan.
2.12 Common Stock
"Common Stock" means common stock, $2.50 par value per share, of Kodak.
2.13 Company
"Company" means Kodak and its Affiliates.
2.14 Disability
"Disability" means a disability under the terms of the long-term
disability plan maintained by the Participant's employer, or in the
absence of such a plan, the Kodak Long-Term Disability Plan.
172
2.15 Employee
"Employee" means any regular full or part-time employee of Kodak or any
Affiliate; provided, however, (i) any employee of Kodak or any
Affiliate in wage grade 48 or above or the equivalent thereof is not an
"Employee"; (ii) individuals classified by Kodak as conditional
employees, on-call employees, contract employees, limited service
employees, provisional employees, periodic employees, leased employees,
or special program employees, such as summer workers, interns, co-ops
and visiting scientists are not "Employees"; (iii) individuals treated
by an Affiliate as the equivalent of any of the following Kodak
classifications are not "Employees": conditional employees, on-call
employees, contract employees, limited service employees, provisional
employees, periodic employees, leased employees, or special program
employees, such as summer workers, interns, co-ops and visiting
scientists; (iv) individuals who are not otherwise described in
Sections 2.15(ii) or (iii) but who are independent contractors or
intermittent or temporary workers or employees of Kodak or an Affiliate
are not "Employees"; (v) the Committee may determine that certain
employees or all employees of a particular Affiliate are not
"Employees"; and (vi) certain individuals employed by the Peoples
Republic of China or Vietnam who are providing services to the Company
and who would, but for the laws of such country, otherwise be
classified by the Company as an Employee are "Employees."
2.16 Exchange Act
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, including rules thereunder and successor provisions
and rules thereto.
2.17 Fair Market Value
"Fair Market Value" on any date, shall mean the average of the high and
low at which the Common Stock trades on the New York Stock Exchange on
such day, or if such day is not a Trading Day, on the immediately
preceding Trading Day.
2.18 Grant Date
"Grant Date" means the one or more date(s) selected by the Committee
upon which an Award is granted to a Participant pursuant to this Plan.
The Grant Date may vary among Participants as determined by the
Committee.
2.19 In-The-Money
"In-The-Money" means the amount as of a particular date by which the
Fair Market Value of the Common Stock on such date exceeds an Award's
option price or exercise price, as the case may be, time the number of
shares of Common Stock underlying the Award.
173
2.20 Kodak
"Kodak" means Eastman Kodak Company.
2.21 Layoff
"Layoff" means, in the case of an Employee employed by Kodak, a layoff
as defined in Section 4.01 of the Termination Allowance Plan ("TAP")
which qualifies the Employee for termination allowance benefits under
TAP. In the case of an Employee employed by an Affiliate, the
Employee's involuntary termination of employment will qualify as a
Layoff if: (1) the Employee's termination results from a slack work
situation caused by completion of, or changes to, production schedules,
consolidation of work functions, or downsizing; and (2) the Employee
satisfies such other requirements or conditions that may be established
by the Committee at any time and from time to time in order for the
termination of employment of an Employee of an Affiliate to qualify as
a Layoff.
2.22 Option
"Option" means an option to purchase shares of the Common Stock as
described in Article 7 of the Plan.
2.23 Participant
"Participant" means an Employee to whom an Award has been granted by
the Committee under the Plan, and for whom such Award remains
outstanding, unforfeited and unexercised under the Plan.
2.24 Permitted Reason
"Permitted Reason" means a termination of employment by a Participant
which the CEO, in his or her sole and absolute discretion, determines
to be for a Permitted Reason.
2.25 Plan
"Plan" means the Kodak Stock Option Plan, as set forth in the document,
and as it may be amended from time to time.
2.26 Retirement
"Retirement" means in the case of a Participant employed by Kodak,
attainment of age 55 with 10 or more years of service, age 65, or an
age and years of service combination of at least 75 on or prior to
December 31, 1995. In the case of Participant employed by an
Affiliate, "Retirement" means early or normal retirement under the
terms of the Affiliate's retirement plan or in the absence thereof,
termination at age 60 or later. A Participant must, however,
voluntarily terminate his or her employment in order for his or her
termination of employment to be for "Retirement." Notwithstanding, a
Participant whose termination of employment qualifies as a Retirement,
except that his or her termination of employment is due to a Layoff,
will solely for purposes of Section 9A.3 be treated as terminating
employment for Retirement.
174
2.27 SARs
"SARs" mean an Award granted under Article 8 in the form of stock
appreciation rights. SARs entitle the Participant to receive a payment
equal to the appreciation in market value of a stated number of shares
of Common Stock from the exercise price to the market value of the
Common Stock on the date of exercise.
2.28 Trading Day
"Trading Day" means a day on which the Common Stock is available for
purchase on the New York Stock Exchange.
ARTICLE 3 -- ELIGIBILITY
3.1 In General
Subject to the terms of the Plan, any Employee is eligible to receive
an Award under the Plan; provided, however, the Employee is employed by
the Company on the Grant Date of such Award or such other date
specified by the Committee.
3.2 No Right to an Award
No Employee shall have at any time the right (i) to be selected as a
Participant; (ii) to be entitled to an Award; and (iii) having been
selected for an Award, to receive any additional Awards.
ARTICLE 4 -- PLAN ADMINISTRATION
4.1 Responsibility
The Committee shall administer the Plan. The Committee shall have
total and exclusive responsibility to control, operate, manage and
administer the Plan in accordance with its terms.
175
4.2 Authority of the Committee
The Committee shall have all the authority that may be necessary or
helpful to enable it to discharge its responsibilities with respect to
the Plan. Without limiting the generality of the preceding sentence,
the Committee shall have the exclusive right to: (a) select the
Participants and determine the type of Awards to be made to
Participants, the shares subject to Awards and the terms, conditions,
restrictions and limitations of the Awards; (b) interpret and
administer the Plan; (c) decide all questions concerning eligibility
for and the amount of Awards payable under the Plan; (d) construe any
ambiguous provision of the Plan; (e) correct any default; (f) supply
any omission; (g) reconcile any inconsistency; (h) issue administrative
guidelines as an aid to administer the Plan and make changes in such
guidelines as it from time to time deems proper; (i) make regulations
for carrying out the Plan and make changes in such regulations as it
from time to time deems proper; (j) adopt subplans applicable to
Participants in specified jurisdictions outside the United States; (k),
to the extent permitted under the Plan, grant waivers of Plan terms,
conditions, restrictions, and limitations; (l) accelerate the vesting,
exercise, or payment of an Award when such action or actions would be
in the best interest of the Company; (m) determine the terms and
provisions of any agreements entered into hereunder; (n) take any and
all other action it deems necessary or advisable for the proper
operation or administration of the Plan; (o) make all other
determinations it deems necessary or advisable for the administration
of the Plan, including factual determinations; and (p) establish one or
more subplans pursuant to Article 14.
4.3 Discretionary Authority
The Committee shall have full discretionary authority in all matters
related to the discharge of its responsibilities and the exercise of
its authority under the Plan including, without limitation, its
construction of the terms of the Plan and its determination of
eligibility for participation and Awards under the Plan. It is the
intent of the Plan that the decisions of the Committee, including
making factual determinations, and its actions with respect to the Plan
be final, binding and conclusive upon all persons having or claiming to
have any right or interest in or under the Plan.
4.4 Action by the Committee
The Committee may act only by a majority of its members. Any
determination of the Committee may be made, without a meeting, by a
writing or writings signed by all of the members of the Committee.
4.5 Delegation of Authority
The Committee may delegate some or all of its responsibilities and
powers under the Plan to any one or more of its members and may
delegate all or any part of its responsibilities and powers to any
person or persons selected by it. The Committee may revoke any such
delegation at any time.
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ARTICLE 5 -- AWARDS
5.1 In General
Awards may, at the Committee's sole discretion, be granted in the form
of Options pursuant to Article 7 or SARs pursuant to Article 8. The
Committee shall determine, as of the Grant Date (or Dates, if more than
one grant is made), the Award to be granted to each Participant. The
Committee may make such determination based on such factors as the
Committee deems appropriate in its discretion.
The Awards shall be subject to the terms, conditions, restrictions and
limitations of the Plan and such additional or modified terms,
conditions, restrictions and limitations as the Committee may
determine, which terms, conditions, restrictions and limitations shall
be set forth in the Award Notice. Awards need not contain similar or
uniform terms as among Participants.
5.2 Award Notices
An Award Notice issued by the Committee shall evidence each Award.
ARTICLE 6 -- SHARES SUBJECT TO PLAN
6.1 Available Shares
The maximum number of shares of Common Stock, $2.50 par value per
share, of Kodak that is available for grant of Awards under the Plan
during its term is 16,600,000. (Such amount shall be subject to
adjustment as provided in Section 6.2). The shares of Common Stock
issued under the Plan may come from authorized and unissued shares,
treasury shares, or shares purchased in the open market. Shares of
Common Stock subject to an Award that expires unexercised, that is
forfeited, terminated or canceled, in whole or in part, shall
thereafter again be available for grant under the Plan, except as
otherwise provided by the Committee.
6.2 Adjustment to Shares
If the number of outstanding shares of Common Stock shall, at any time,
be increased or decreased or changed or converted into cash or other
property as a result of (a) any subdivision or consolidation of shares,
stock dividend, stock split, recapitalization, reclassification or
similar capital adjustment or (b) any combination, exchange of shares
or similar event arising from Kodak's participation in any corporate
merger, consolidation, or similar transaction in which Kodak is the
surviving entity and is not substantially or completely liquidated, the
Committee may adjust Awards to preserve the benefits or potential
benefits of the Awards. Action by the Committee may include adjustment
of: (i) the number and kind of shares which may be delivered under the
Plan; (ii) the number and kind of shares subject to outstanding Awards;
and (iii) any other adjustment the Committee determines to be
equitable.
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ARTICLE 7 -- STOCK OPTIONS
7.1 In General
The Committee may grant awards under the Plan to Employees in the form
of Options. These Options shall be non-qualified stock options (i.e.,
stock options which are not incentive stock options).
7.2 Option Price
The option price per share of the Common Stock subject to an Option
shall be the Fair Market Value per share of Common Stock on the
Option's Grant Date.
7.3 Option Term
An Option shall expire on the tenth anniversary of its Grant Date,
unless sooner forfeited in accordance with the terms and conditions of
the Plan or the Award Notice.
7.4 Vesting
Subject to Section 9.4(b) below, an Option shall become vested on the
second anniversary of its Grant Date. Prior to vesting, an Option may
not be exercised.
7.5 Exercise
The Committee shall establish procedures governing the exercise of
Options, which may include procedures restricting the frequency of
exercise or requiring exercise of the entire Award. In general, subject
to such specific provisions, and except as otherwise provided in the
Award Notice, the following provisions will apply upon the exercise of
an Option:
(a) Notice of Exercise. The Participant shall submit an Option
exercise request to the broker or recordkeeper designated by
the Committee specifying the Option and number of shares
being exercised. The Committee may prescribe electronic,
voice or other means of submission of such request.
(b) Completion of Necessary Forms. As a condition precedent to
exercising an Option, the Participant shall be required to
complete and execute such forms as may be designated by the
Committee.
(c) Manner of Exercise. A Participant can exercise his or her
Options by any of the following methods:
(I)Payment of Option Price in Cash. A Participant may
exercise his or her Options via a regular Option
exercise whereby the Participant on or prior to the time
of exercise delivers the full option price in cash to
the broker or recordkeeper designated by the Committee.
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(II)Payment of Option Price in Common Stock. A Participant
may exercise his or her Options via a regular Option
exercise whereby the Participant on or prior to the time
of exercise delivers the full option price in shares of
Common Stock to the broker or recordkeeper designated by
the Committee. Any share of Common Stock delivered in
payment of the option price shall be valued based on the
opening price of the Common Stock on the New York Stock
Exchange on the date of exercise; provided, however, if
the exercise date is not a Trading Day, then the opening
price on the immediately preceding Trading Day shall be
used. This form of exercise is only available for
Participants within the United States.
(III)Broker-Assisted Exercise. Options may be exercised by
way of the Plan's broker-assisted stock option exercise
program, if such a program is implemented by the
Committee for use by the Plan's Participants. Should
such a program be implemented, the Committee may, at any
time and from time to time, implement guidelines
governing the use of the program, expand or restrict
eligibility for the program, amend the provision of the
Plan relating to such program, or provide that Options
may no longer be exercised by way of the program, for
any reason or for no reason. If a Participant exercises
an Option by way of such a program, the broker
designated by the Committee will sell the applicable
number of shares as soon as practical following receipt
of such request. The broker will then remit the Option
Price and the amount of any applicable withholding taxes
to Kodak, and will remit any remaining proceeds to the
Participant after withholding the broker's commission.
Under the terms of such program, the amount of any taxes
required to be withheld upon exercise of any options
under the program shall be paid in cash directly to the
Company.
7.6 Rights as a Shareholder
A Participant shall not have any of the rights of a shareholder with
respect to the shares of Common Stock covered by an Option until the
Participant becomes the record holder of such shares as determined by
the records of Kodak's transfer agent.
7.7 Additional Terms and Conditions
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
cancel of a higher-priced stock option(s) that was previously granted
to such Participant.
The Committee may, by way of the Award Notice, establish such other
terms, conditions, restrictions and/or limitations, if any, of any
Option Award, provided they are not inconsistent with the Plan.
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ARTICLE 8 -- SARs
8.1 In General
The Committee may grant awards under the Plan to Employees in the form
of SARs. These SARs shall be freestanding stock appreciation rights
(i.e., stock appreciation rights which are not tandem SARs).
8.2 Exercise Price
The exercise price per share of the Common Stock subject to an SAR
shall be the Fair Market Value per share of Common Stock on the SAR's
Grant Date.
8.3 SAR Term
An SAR shall expire on the tenth anniversary of its Grant Date, unless
sooner forfeited in accordance with the terms and conditions of the
Plan or the Award Notice.
8.4 Vesting
Subject to Section 9.4(b) below, an SAR shall become vested on the
second anniversary of its Grant Date. Prior to vesting, an SAR may not
be exercised.
8.5 Exercise
The Committee shall establish procedures governing the exercise of
SARs, which may include procedures restricting the frequency of
exercise or requiring exercise of the entire Award. In general, subject
to such specific provisions, and except as otherwise provided in the
Award Notice, the following provisions will apply upon the exercise of
an SAR:
(a) Notice of Exercise. The Participant shall submit an SAR
exercise request to the broker or recordkeeper designated by
the Committee specifying the SAR and number of shares being
exercised. The Committee may prescribe electronic, voice or
other means of submission of such request.
(b) Completion of Necessary Forms. As a condition precedent to
exercising an SAR, the Participant shall be required to
complete and execute such forms as may be designated by the
Committee.
(c) Payment of Freestanding SARs. Upon exercise, SARs may be
settled in cash, Common Stock, or a combination of cash and
Common Stock. Unless otherwise specified in its Award
Notice, an SAR will be settled in cash only.
8.6 Additional Terms and Conditions
The Committee may, by way of the Award Notice, determine such other
terms, conditions, restrictions and/or limitations, if any, of any SAR,
provided they are not inconsistent with the Plan.
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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.
181
(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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ARTICLE 9 -- Termination of Employment for Awards Granted Prior to
March 13, 2000
9.1 In General
Except as otherwise provided in the Award Notice, the terms and
conditions of this Article 9 will apply to all Awards granted prior to
March 13, 2000.
9.2 Termination Prior to First Anniversary of Grant Date
(a) In General. The provisions of this Section 9.2 shall apply
insofar as a Participant's employment is terminated for any
reason, whether voluntarily or involuntarily, prior to the
first anniversary of the date of his or her Award's Grant
Date. In such event, if the Participant's employment
terminates for any reason other than a Permitted Reason, due
to death or a Layoff, the Participant shall, effective upon
the date of his or her termination of employment, forfeit the
Award granted to him or her under the Plan.
(b) Permitted Reason. In the event a Participant's employment
terminates for a Permitted Reason, the Participant's Award
shall, unless sooner forfeited in accordance with another
provision of this Plan or the Award Notice, expire at its
scheduled expiration date.
(c) Death. If a Participant's employment terminates due to
death, unless the provisions of Section 9.4 below apply, the
Participant's Award shall be immediately forfeited upon the
date of the Participant's death.
(d) Layoff. In the event of a Participant's termination of
employment due to a Layoff, unless the provisions of Section
9.5 below apply, the Participant's Award shall be immediately
forfeited upon the date of the Participant's termination of
employment.
9.3 Termination On or After First Anniversary of Grant Date
(a) In General. The provisions of this Section 9.3 shall apply
insofar as a Participant's employment is terminated for any
reason, whether voluntarily or involuntarily, on or after the
first anniversary of the date of his or her Award's Grant
Date. In such event, except as specifically set forth below
in this Section 9.3, the Participant's Award shall expire at
its scheduled expiration date, unless sooner forfeited in
accordance with another provision of this Plan or the Award
Notice.
183
(b) Voluntary Termination. If a Participant voluntarily terminates
his or her employment prior to the date the Participant's
Award vests, the Participant shall forfeit his or her Award
immediately upon the date of the Participant's termination of
employment. A Participant who is eligible for Retirement on
the date of his or her voluntary termination of employment
will not, however, be considered to have voluntarily
terminated his or her employment for purposes of this Section
9.3(b).
(c) Cause. If a Participant's employment is terminated for
Cause, the Participant shall forfeit his or her Award
immediately upon the date of the Participant's termination of
employment.
(d) Death. If a Participant's employment terminates due to death,
unless the provisions of Section 9.4 below apply, the
Participant shall forfeit his or her Award immediately upon
the date of the Participant's death.
9.4 Death
(a) In General. If a Participant dies while holding an Award under
the Plan and the Award on the date of the Participant's death
is In-The-Money (based on the Fair Market Value of the Common
Stock on the date of the Participant's death) by at least
$50.00, then the provisions of this Section 9.4 will apply.
(b) Vesting. If the Participant's death occurs prior to being
fully vested in his or her Award, the unvested portion of the
Award shall immediately vest on the date of the Participant's
death.
(c) Cash Out. The Participant's Award shall be cashed out
effective on the date of the Participant's death. That is,
the difference between the Fair Market Value of the Common
Stock on the date of the Participant's death less the option
price or exercise price, as the case may be, of the
Participant's Award times the number of shares of Common
Stock then remaining under the Award will be paid to the
Participant's estate as soon as administratively practicable
following the date of the Participant's death. Upon payment
of such amount to the Participant's estate, the Participant's
Award shall be canceled and neither the Participant's estate,
nor the Participant's heirs or assigns, shall have any
further interest in the Award.
184
9.5Layoff
(a) In General. If a Participant's employment terminates due to
Layoff prior to the first anniversary of the Grant Date of
his or her Award and the Participant's Award on the date of
his or her termination of employment is In-The-Money (based
on the Fair Market Value of the Common Stock on the date of
the Participant's termination of employment) by at least
$50.00, then the provisions of this Section 9.5 will apply.
(b) Vesting. Effective as of the date of the Participant's
termination of employment, the Participant's Award shall be
100% vested.
(c) Cash Out. The Participant's Award shall be cashed out
effective on the date of the Participant's termination of
employment. That is, the difference between the Fair Market
Value of the Common Stock on the date of the Participant's
termination of employment less the option price or exercise
price, as the case may be, of the Participant's Award times
the number of shares of Common Stock then remaining under the
Award will be paid to the Participant as soon as
administratively practicable following the date of the
Participant's termination of employment. Upon payment of
such amount to the Participant, the Participant's Award shall
be canceled and neither the Participant, nor the
Participant's estate, heirs or assigns, shall have any
further interest in the Award.
ARTICLE 9A -- Termination of Employment for Awards Granted On or
After March 13, 2000
9A.1 In General
Except as otherwise provided in the Award Notice, the terms and
conditions of this Article 9A will apply to all Awards granted on or
after March 13, 2000.
9A.2 Termination Prior to Vesting
(a) In General. The provisions of this Section 9A.2 will apply
insofar as a Participant's employment is terminated for any
reason, whether voluntarily or involuntarily, prior to the
date the Participant's Award vests. In such event, if the
Participant's employment terminates for any reason other than
due to death, the Participant will, effective upon the date
of his or her termination of employment, forfeit the Award
granted to him or her under the Plan.
(b) Death. If a Participant's employment terminates due to death,
unless the provisions of Section 9A.4 below apply, the
Participant's Award will be immediately forfeited upon the
date of the Participant's death.
185
9A.3 Termination After Vesting
(a) In General. The provisions of this Section 9A.3 will apply
insofar as a Participant's employment is terminated for any
reason, whether voluntarily or involuntarily, on or after the
date the Participant's Award vests. In such event, except as
specifically set forth below in this Section 9A.3, the
Participant's Award will expire on the sixtieth (60th) day
following the date of the Participant's termination of
employment.
(b) Retirement. In the event a Participant's employment terminates
due to Retirement, the Participant's Award will, unless
sooner forfeited in accordance with another provision of this
Plan or the Award Notice, expire at its scheduled expiration
date.
(c) Disability. In the event a Participant's employment terminates
due to Disability, the Participant's Award will, unless
sooner forfeited in accordance with another provision of this
Plan or the Award Notice, expire at its scheduled expiration
date.
(d) Cause. If a Participant's employment is terminated for Cause,
the Participant will forfeit his or her Award immediately
upon the date of the Participant's termination of employment.
(e) Death. If a Participant's employment terminates due to death,
unless the provisions of Section 9A.4 below apply, the
Participant will forfeit his or her Award immediately upon
the date of the Participant's death.
9A.4 Death
(a) In General. If a Participant dies while holding an Award under
the Plan and the Award on the date of the Participant's death
is In-The-Money (based on the Fair Market Value of the Common
Stock on the date of the Participant's death) by at least
$50.00, then the provisions of this Section 9.4A will apply.
(b) Cash Out. The Participant's Award will be cashed out effective
on the date of the Participant's death. That is, the
difference between the Fair Market Value of the Common Stock
on the date of the Participant's death less the option price
or exercise price, as the case may be, of the Participant's
Award times the number of shares of Common Stock then
remaining under the Award will be paid to the Participant's
estate as soon as administratively practicable following the
date of the Participant's death. Upon payment of such amount
to the Participant's estate, the Participant's Award shall be
canceled and neither the Participant's estate, nor the
Participant's heirs or assigns, shall have any further
interest in the Award.
186
ARTICLE 10 -- NON-U.S. EMPLOYEES
10.1 Applicability
This Article 10 shall apply to each Employee who is not based in the
United States and to any other Employee determined by the Committee.
10.2 Schedule of Countries where Awards are Feasible
The Committee shall determine, in its sole discretion, whether it is
feasible under local law, custom and practice to grant Awards under the
Plan to Employees described in Section 10.1 on the Grant Date (or
Dates, if more than one grant is made). The Committee shall approve a
schedule specifying by country whether an Option or SAR is to be
granted under this Section. The schedule may differentiate among
classes of Employees (including international assignees) and locations
within a country.
10.3 Terms of Option and SAR
If the Committee has determined on the schedule described in Section
10.2 that it is feasible to grant an Option or SAR at a particular
location, each Employee at such location shall be granted an Option or
SAR, as applicable, on the Grant Date. Each such Option shall be
granted under and shall be subject to the terms in Article 7, except
for such modifications or additional terms and conditions as the
Committee deems appropriate under Section 10.4, and as set forth in the
Award Notice. Each such SAR shall be subject to Article 8 and may
contain such additional terms as set forth in the Award Certificate,
except for such modifications or additional terms and conditions as the
Committee deems appropriate under Section 10.4, and as set forth in the
Award Notice.
187
10.4 Special Terms
In order to facilitate the making of any Award under this Article 10,
the Committee may provide for such modifications and additional terms
and conditions ("special terms") in Awards to Participants who are
employed by the Company outside the United States (or who are foreign
nationals temporarily within the United States) as the Committee may
consider necessary or appropriate to accommodate differences in local
law, policy or custom or to facilitate administration of the Plan. The
special terms may provide that the grant of an Award is subject to (a)
applicable governmental or regulatory approval or other compliance with
local legal requirements and/or (b) the execution by the Participant of
a written instrument in the form specified by the Committee, and that
in the event such conditions are not satisfied, the grant shall be
void. The special terms may also provide that an Award shall become
exercisable if an 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 Plan as it may consider necessary or
appropriate for purposes of implementing any special terms, without
thereby affecting the terms of the Plan as in effect for any other
purpose.
10.5 Currency Effects
Unless otherwise specifically determined by the Committee, all Awards
and payments pursuant to such Awards shall be determined in U.S.
currency. The Committee shall determine, in its discretion, whether
and to the extent any payments made pursuant to an Award shall be made
in local currency, as opposed to U.S. dollars. In the event payments
are made in local currency, the Committee may determine, in its
discretion and without liability to any Participant, the method and
rate of converting the payment into local currency.
10.6 Modifications to Awards
The Committee shall have the right at any time and from time to time
and without prior notice to modify outstanding Awards to comply with or
satisfy local laws and regulations or to avoid costly governmental
filings. By means of illustration but not limitation, the Committee
may restrict the method of exercise of an Award to avoid securities
laws or exchange control filings, laws or regulations.
10.7 No Acquired Rights
No Employee in any country shall have any right to receive an Award,
except as expressly provided for under the Plan. All Awards made at
any time are subject to the prior approval of the Committee.
188
ARTICLE 11 -- CHANGE IN OWNERSHIP
11.1 Background
Notwithstanding any provision contained in the Plan, the provisions of
this Article 11 shall control over any contrary provision. Upon a
Change In Ownership: (i) the terms of this Article 11 shall immediately
become operative, without further action or consent by any person or
entity; (ii) all terms, conditions, restrictions, and limitations in
effect on any unexercised, unvested, unearned and/or unpaid Award, or
any other outstanding Award, shall immediately lapse as of the date of
such event; (iii) no other terms, conditions, restrictions and/or
limitations shall be imposed upon any Awards on or after such date, and
in no circumstance shall an Award be forfeited on or after such date;
and (iv) all unexercised, unvested, unearned, and/or unpaid Awards or
any other outstanding Awards shall immediately and automatically become
one hundred percent (100%) vested.
11.2 Valuation of Awards
Upon a Change In Ownership, all outstanding Options and shall be valued
and cashed out on the basis of the Change In Control Price.
11.3 Payment of Awards
Upon a Change In Ownership, any Participant, whether or not he or she
is still employed by the Company, shall be paid, in a single lump-sum
cash payment, as soon as practicable but in no event later than 90 days
after the Change In Ownership, all of his or her Options and SARs.
That is, the difference between the Change In Control Price of the
Common Stock less the option price or exercise price, as applicable, of
the Participant's Award times the number of shares of Common Stock then
remaining under such Award will be paid to the Participant in the form
of a single lump-sum cash payment.
11.4 Miscellaneous
Upon a Change In Ownership, except as provided in the second paragraph
of Section 13.7, no action, including, but not by way of limitation,
the amendment, suspension, or termination of the Plan, shall be taken
which would adversely affect the rights of any Participant or the
operation of the Plan with respect to any Award to which the
Participant may have become entitled hereunder on or prior to the date
of such action or as a result of such Change In Ownership.
189
11.5 Payments and Continuation of Awards
Unless otherwise determined by the Committee, upon a Change in
Ownership pursuant to which (i) Common Stock is exchanged solely for
common stock of the Surviving Company or the Parent Company (as defined
in Section 2.6), as applicable, which is actively traded on the New
York Stock Exchange and (ii) such Surviving Company or Parent Company,
as applicable, assumes all outstanding Awards pursuant to the terms
hereof, then: (A) the provisions of Sections 11.2 and 11.3 shall not
apply to any Award, and (B) Section 12.3 shall not apply to the extent
that it requires a cash payment with respect to any Award. For the
purposes of this Section 11.5, an Award shall be considered assumed
only if, for every share of Common Stock subject thereto immediately
prior to the Change in Control, the Participant has the right,
following the Change in Control, to acquire the consideration received
in the Change in Control transaction by holders of shares of Common
Stock and the Surviving Company or the Parent Company, as applicable,
agree to honor, fulfill and discharge the Awards in accordance with the
terms of this Plan.
ARTICLE 12 -- CHANGE IN CONTROL
12.1 Background
Notwithstanding any provision contained in the Plan, the provisions of
this Article 12 shall control over any contrary provision. All
Participants shall be eligible for the treatment afforded by this
Article 12 if their employment terminates within two years following a
Change In Control, unless the termination is due to (i) death, (ii)
Disability, (iii) Cause, (iv) resignation other than (A) resignation
from a declined reassignment to a job that is not reasonably equivalent
in responsibility or compensation (as defined in Kodak's Termination
Allowance Plan), or that is not in the same geographic area (as defined
in Kodak's Termination Allowance Plan), or (B) resignation within 30
days following a reduction in base pay, or (v) Retirement.
12.2 Vesting and Lapse of Restrictions
If a Participant is eligible for treatment under this Article 12, (i)
all of the terms, conditions, restrictions, and limitations in effect
on any of his or her unexercised, unvested, unearned, and/or unpaid
Awards shall immediately lapse as of the date of his or her termination
of employment; (ii) no other terms, conditions, restrictions and/or
limitations shall be imposed upon any of his or her Awards on or after
such date, and in no event shall any of his or her Awards be forfeited
on or after such date; and (iii) all of his or her unexercised,
unvested, unearned and/or unpaid Awards shall automatically become one
hundred percent (100%) vested immediately upon his or her termination
of employment.
190
12.3 Valuation of Awards
If a Participant is eligible for treatment under this Article 12, his
or her Awards shall be valued and cashed out in accordance with the
provisions of Sections 11.2 and 11.3. The Participant shall be paid,
in a single lump-sum cash payment, as soon as practicable but in no
event later than 90 days after the date of his or her termination of
employment, the amount due him or her under Section 11.3.
12.4 Miscellaneous
Upon a Change In Control, no action, including, but not by way of
limitation, the amendment, suspension or termination of the Plan, shall
be taken which would adversely affect the rights of any Participant or
the operation of the Plan with respect to any Award to which the
Participant may have become entitled hereunder on or prior to the date
of the Change In Control or to which he or she may become entitled as a
result of such Change In Control.
ARTICLE 13 -- MISCELLANEOUS
13.1 Noncompetition
Unless a Participant's Award Notice provides otherwise, a Participant
shall forfeit all unexercised, unearned, and/or unpaid Awards,
including, but not by way of limitation, Awards earned but not yet
paid, if, (i) in the opinion of the Committee, the Participant, without
the prior written consent of an authorized corporate officer of Kodak,
engages directly or indirectly in any manner or capacity as principal,
agent, partner, officer, director, stockholder, employee, or otherwise,
in any business or activity competitive with the business conducted by
the Company; (ii) at any time discloses to any person or any entity any
trade secrets, methods, processes or the proprietary or confidential
information of the Company, except as such disclosure or use may be
required in connection with the Participant's work as an employee of
the Company; or (iii) the Participant performs any act or engages in
any activity which in the opinion of Kodak's CEO, in the exercise of
his or her sole and absolute discretion, is inimical to the best
interests of the Company. For purposes of this Section 13.1, a
Participant shall not be deemed a stockholder if the Participant's
record and beneficial ownership amount to not more than 1% of the
outstanding capital stock of any company subject to the periodic and
other reporting requirements of the Exchange Act.
13.2 Nonassignability
No amount payable or other right under the Plan shall be subject in any
manner to alienation, sale, transfer, assignment, bankruptcy, pledge,
attachment, charge or encumbrance of any kind nor in any manner be
subject to the debts or liabilities of any person and any attempt to so
alienate or subject any such amount, whether presently or thereafter
payable, or any such right shall be void.
191
13.3 Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law (whether
federal, state, local or foreign) to be withheld with respect to such
payment or may require the Participant to pay to it such tax prior to
and as a condition of the making of such payment. In accordance with
any applicable administrative guidelines it establishes, the Committee
may allow a Participant to pay the amount of taxes required by law to
be withheld from an Award by withholding from any payment of Common
Stock due as a result of such Award, or by permitting the Participant
to deliver to Kodak, shares of Common Stock having a value, as
determined by the Committee, equal to the amount of such required
withholding taxes.
13.4 Amendments to Awards
The Committee may at any time unilaterally amend any unexercised,
unearned, or unpaid Award, including, but not by way of limitation,
Awards earned but not yet paid, to the extent it deems appropriate;
provided, however, that any such amendment which, in the opinion of the
Committee, is adverse to the Participant shall require the
Participant's consent.
13.5 Regulatory Approvals and Listings
Notwithstanding anything contained in this Plan to the contrary, Kodak
shall have no obligation to issue or deliver certificates of Common
Stock evidencing any Award resulting in the payment of Common Stock
prior to (i) the obtaining of any approval from any governmental agency
which Kodak shall, in its sole discretion, determine to be necessary or
advisable, (ii) the admission of such shares to listing on the stock
exchange on which the Common Stock may be listed, and (iii) the
completion of any registration or other qualification of said shares
under any state or Federal law or ruling of any governmental body which
Kodak shall, in its sole discretion, determine to be necessary or
advisable, and unless Kodak shall be satisfied based on the advice of
its counsel that such issuance or delivery will in compliance with all
applicable laws, rules or regulations.
13.6 No Right to Continued Employment or Grants
No person shall have any claim or right to be granted an Award, and the
grant of an Award shall not be construed as giving a Participant the
right to continue in the employ of Kodak or its Affiliates. Further,
Kodak and its Affiliates expressly reserve the right at any time to
dismiss a Participant without any liability, or any claim under the
Plan, except as provided herein or in any agreement entered into
hereunder.
192
13.7 Amendment/Termination
The Committee may suspend or terminate the Plan at any time for any
reason with or without prior notice. In addition, the Committee may at
any time and from time to time, with or without prior notice, amend the
Plan in any manner.
Notwithstanding anything herein to the contrary, if any provision of
this Plan would, in the opinion of the Committee, cause any business
combination approved by the Board to be ineligible for pooling-of-
interests accounting treatment, the Committee may amend such provision
in a manner to make such treatment available.
13.8 Governing Law
The Plan shall be governed by and construed in accordance with the laws
of the State of New York, except as superseded by applicable federal
law.
13.9 No Right, Title, or Interest in Company Assets
No Participant shall have any rights as a shareholder as a result of
participation in the Plan until the Participant becomes the record
holder of shares of Common Stock as determined by the records of
Kodak's transfer agent. To the extent any person acquires a right to
receive payments from Kodak or an Affiliate under the Plan, such rights
shall be no greater than the rights of an unsecured creditor of Kodak
or the Affiliate and the Participant shall not have any rights in or
against any specific assets of Kodak or the Affiliate. All of the
Awards granted under the Plan shall be nfounded.
13.10 No Guarantee of Tax Consequences
No person connected with the Plan in any capacity, including, but not
limited to, Kodak and its Affiliates and their directors, officers,
agents and employees makes any representation, commitment, or guarantee
that any tax treatment, including, but not limited to, federal, state,
local or foreign income, estate or gift tax treatment, will be
applicable with respect to amounts paid to or for the benefit of a
Participant under the Plan, or that such tax treatment will apply to or
be available to a Participant on account of participation in the Plan.
193
13.11 Other Benefits
All Awards and payments under the Plan shall constitute extraordinary
items of compensation and shall not affect the level of benefits
provided to or received by any Participant (or the Participant's estate
or beneficiaries) as part of any employee benefit plan of Kodak or any
an Affiliate. As such, neither the Award grants nor any payments
arising under this Plan shall constitute part of an Employee's
employment contract with Kodak or an Affiliate, and accordingly, this
Plan may be terminated at any time in the sole and exclusive discretion
of the Committee without giving rise to liability on the part of Kodak
or an Affiliate for severance payments. The Plan shall not be
construed to affect in any way a Participant's rights and obligations
under any other plan maintained by Kodak or an Affiliate on behalf of
employees. Furthermore, the granting of Awards under the terms of the
Plan does not constitute an element of the Participant's regular or
base compensation and shall not be considered in the determination of
severance benefits paid as a result of a Participant's separation from
service, or any other statutory benefit based on regular compensation
to which the employee may be entitled.
13.12 Entire Plan
This document is a complete statement of the Plan. As of its effective
date this document supersedes all prior plans, representations and
proposals, written or oral, relating to its subject matter. The
Company shall not be bound by or liable to any person for any
representation, promise or inducement made by any Employee or agent of
it which is not embodied in this document, in any authorized sub-plans,
appendices or supplements to or amendments, restatements, or
alternative versions of the Plan, or in the Award Notice.
ARTICLE 14 -- STOCK OPTION RECOGNITION PROGRAM
14.1 Purpose
The Committee may create one or more subplans to the Plan (hereinafter
a "Subplan") pursuant to which the CEO of Eastman Kodak Company and the
Director, Human Resources and Vice President, Eastman Kodak Company may
from time to time grant awards to (1) motivate and retain an Employee;
or (2) recognize and reward an Employee due to his or her outstanding
individual achievement contributing to the success of the Company, as
opposed to ongoing day to day performance. These one or more Subplans
will be referred to as the "Stock Option Recognition Program."
14.2 Awards
Awards granted under a Subplan will be subject to the terms and
conditions of this Article 14 and, to the extent not inconsistent with
the terms of this Article, the remaining terms and conditions of the
Plan and, to the extent not inconsistent with the terms and conditions
of the Plan, the terms and conditions of the Subplan.
194
14.3 Stock Options
(a) In General. The Committee may grant awards under a Subplan to
Employees in the form of non-qualified stock options (i.e.,
stock options which are not incentive stock options). Any
such stock option will be granted pursuant to the terms and
conditions set forth in this Section 14.3.
(b) Option Price. The option price per share of the Common Stock
subject to a stock option will be the Fair Market Value per
share of Common Stock on the stock option's Grant Date.
(c) Option Term. A stock option will expire on the tenth
anniversary of its Grant Date, unless sooner forfeited in
accordance with the terms and conditions of the Plan or the
Award Notice.
(d) Vesting. A stock option will vest pursuant to the terms and
conditions set forth in the Subplan under which the stock
option is granted. Prior to vesting, a stock option may not
be exercised.
(e) Exercise. The Committee will establish procedures governing
the exercise of stock options, which may include procedures
restricting the frequency of exercise or requiring exercise
of the entire award. In general, subject to such specific
provisions, and except as otherwise provided in the Award
Notice, the provisions set forth in Section 7.5 will apply
upon the exercise of a stock option.
(f) Termination of Employment. The terms and conditions that will
apply to a Participant's stock option upon the Participant's
termination of employment will be set forth in the Subplan
under which the stock option is granted.
(g) Rights as a Shareholder. A Participant will not have any of
the rights of a shareholder with respect to the shares of
Common Stock covered by a stock option until the Participant
becomes the record holder of such shares as determined by the
records of Kodak's transfer agent.
(h) Additional Terms and Conditions. The Committee may, by way of
the Subplan, establish such other terms, conditions,
restrictions and/or limitations, if any, of any Award of
stock options, provided they are not inconsistent with the
Plan.
195
14.4 SARs
(a) In General. The Committee may grant awards under a Subplan to
Employees in the form of SARs. Any such SAR will be granted
pursuant to the terms and conditions set forth in this
Section 14.4.
(b) Exercise Price. The exercise price per share of the Common
Stock subject to a SAR will be the Fair Market Value per
share of Common Stock on the SAR's Grant Date.
(c) Option Term. A SAR will expire on the tenth anniversary of its
Grant Date, unless sooner forfeited in accordance with the
terms and conditions of the Plan or the Award Notice.
(d) Vesting. A SAR will vest pursuant to the terms and conditions
set forth in the Subplan under which the SAR is granted.
Prior to vesting, a SAR may not be exercised.
(e) Exercise. The Committee will establish procedures governing
the exercise of SARs, which may include procedures
restricting the frequency of exercise or requiring exercise
of the entire award. In general, subject to such specific
provisions, and except as otherwise provided in the Award
Notice, the provisions set forth in Section 8.5 will apply
upon the exercise of a SAR.
(f) Termination of Employment. The terms and conditions that will
apply to a Participant's SAR upon the Participant's
termination of employment will be set forth in the Subplan
under which the SAR is granted.
(g) Additional Terms and Conditions. The Committee may, by way of
the Subplan, establish such other terms, conditions,
restrictions and/or limitations, if any, of any SAR, provided
they are not inconsistent with the Plan.
196
Exhibit A
Australian Addendum
Eastman Kodak Company
Kodak Stock Option Plan
Purpose
This Addendum (the "Australian Addendum") to Kodak Stock Option Plan is
hereby adopted to set forth certain rules which, together with the
provisions of the U.S. Plan which are not modified hereby, shall govern
the operation of the Plan with respect to Australian-resident employees
of the Company. The Plan is intended to comply with the provisions of
the Corporations Law, ASC Policy Statement 49 and Class Order 94/1289
issued pursuant to that Policy Statement.
Definitions
Except as set forth below, capitalized terms used herein shall have the
meaning ascribed to them in the U.S. Plan. In the event of any
conflict between these provisions and the U.S. Plan, these provisions
shall prevail.
For the purposes of this Australian Addendum:
"ASC" means the Australian Securities Commission;
"Australian Offerees" means all persons to whom an offer or invitation
of shares of common stock in Kodak is made in Australia under the Plan;
"Company" means Kodak or its duly authorized subsidiary;
"Kodak" means Eastman Kodak Company;
"Plan" means collectively the U.S. Plan and the Australian Addendum;
and
"U.S. Plan" means the Kodak Stock Option Plan.
Form of Awards
Only shares of common stock and options to acquire shares of common
stock shall be awarded to Australian-resident employees under the Plan.
Purchase Price
For the purposes of calculating the market price of shares of common
stock in Australian dollars, the Australian/U.S. exchange rate which
shall be used shall be the US dollar sell rate published by Australian
and New Zealand Banking Corporation on the preceding business day.
197
Restriction on Capital Raising: 5% limit
In the case of any offer or invitation of unissued shares of common
stock (whether or not made contemporaneously with or as a consequence
of an offer or grant of options), the number of shares of common stock
that are the subject of the offer or invitation to Australian residents
when aggregated with:
the number of shares of common stock in the same class which would be
issued to Australian residents were each outstanding offer or
invitation or option to acquire unissued shares of common stock, being
an offer or invitation made or option acquired pursuant to an employee
share scheme extended only to employees (including directors) of Kodak
and its associated bodies corporate, to be accepted or exercised (as
the case may be); and
the number of shares of common stock in the same class issued to
Australian residents during the previous five years pursuant to the
employee share scheme or any other employee share scheme extended only
to employees (including directors) of Kodak and its associated bodies
corporate;
(disregarding any offer or invitation made, or option acquired or
shares of common stock issued following the making of an offer or
invitation, to a person situated at the time of receipt of the
offer or invitation outside Australia or by way of excluded offer
or invitation) must not exceed five percent of the total number of
issued shares of common stock in that class of shares of Kodak
stock as at the time of the offer or invitation.
198
Australian Offer Document
The offer document issued to Australian Offerees in relation to the
Plan must contain or be accompanied by the following:
a summary or a copy of the Plan;
if a summary of the Plan, an undertaking that during the period in
which shares may be issued the Company will, within a reasonable period
of an eligible employee so requesting, provide the employee without
charge with a copy of the Plan; and
an undertaking, and an explanation of the way in which, the Company
will during any offering period, within a reasonable period of an
eligible employee so requesting, make available to the employee the
Australian dollar equivalent of the current market price of shares in
the same class as the shares of common stock offered under the Plan.
Lodgment of Offer Document with the ASC
No later than seven days after offers are made to Australian
Offerees, the offer document and copies of all accompanying
documents provided to employees shall be provided to the ASC.
199
Exhibit B
HONG KONG
ADDENDUM TO THE KODAK STOCK OPTION PLAN
Notwithstanding any terms or conditions contained in Articles 9 or 9A
to the contrary, the following rules will apply to all Non-U.S.
Employees in Hong Kong:
- No acceleration of vesting shall occur upon termination of employment
(including, without limitation, death, disability or retirement), with
respect to employees working in Hong Kong at the time of the grant or
upon termination of employment; and
- If a Participant is permitted to retain his or her Award following
termination of employment, the Participant must exercise his Award within
30 days of the date of his or her termination of employment. Any Award
which is not exercised by a Participant on the thirtieth (30th) day
following the date of the Participant's termination of employment will be
forfeited.
200
Exhibit C
1998 FRENCH SUB-PLAN
1. Introduction
The Executive Compensation and Development Committee of the Board
of Directors (the "Committee") of Eastman Kodak Company ("the
Company") has established the Kodak stock Option Plan ("the U.S.
Plan") for the benefit of certain employees of the Company, its
parent and subsidiary companies, including its French
subsidiaries: Agence Arnoult Features SA, Colis Systems S.A.,
Colorvit S.A.R.L., Eastman Software SA, Kodak Industrie, Kodak
Images Services S.A., Kodak S.A., Kodak-Pathe, Kodak-Pathe S.A.,
Laboratoires & Services Kodak S.A., SCL Fonciere-Paris-Province,
SAS Villiot-Marne and The Image Bank France S.A. (collectively
referred to as the "Subsidiaries"). The Company holds directly
and indirectly the following percentages of capital:
Agence Arnoult Features S.A. 99.76%
Colorvit, S.A.R.L.100%
Colis Systems S.A.100%
Eastman Software SA 98.01%
Kodak Industrie98.01%
Kodak Images Services S.A.100%
Kodak S.A. 99.00%
Kodak-Pathe98.01%
Kodak-Pathe S.A.99.00%
Laboratoires & Services Kodak S.A.100%
SCL Fonciere-Paris-Province99.97%
SAS Villiot-Marne100%
The Image Bank France S.A.99.01%
Article 4.2 and 10.4 of the U.S. Plan specifically authorize the
Committee to establish rules applicable to options granted under the
U.S. Plan (including those in France) as the Committee deems
advisable. The Committee therefore, intends to establish a sub-plan
of the U.S. Plan for the purpose of granting options designed to
qualify for the favorable treatment in France, applicable to options
granted under Section L 208-1 up to L 208-8-2 of the Law n/66-537 of
July 24, 1966, to employees who are resident in France for French tax
purposes. The terms of the U.S. Plan, as adopted on March 13, 1998,
and as modified by the following provisions shall constitute the 1998
French Sub-Plan ("the French Plan"). Under the French Plan, the
eligible employees will be granted only stock options. In no case
will they be granted substitute awards, e.g., stock bonuses,
restricted stock appreciation rights or other similar awards.
201
2. Definitions
Terms used in the French Plan shall have the same meanings set forth in
the U.S. Plan.
In addition, the term "Option" shall have the following meaning:
a)Purchase stock options, that are rights to acquire shares
repurchased by the Company prior to the grant of said options,
or
b)Subscription stock options, that are rights to subscribe newly
issued shares.
The term "Grant Date" shall be the date on which the Committee
both (a) designates the Optionee and
(b) specifies the terms and conditions of the Option including the
number of shares and Option price.
The term "Vesting Date" shall mean the fifth anniversary of the
Grant Date.
3. Eligibility
Any individual who is a salaried employee or corporate executive of one
of the Subsidiaries shall be eligible to receive options under the
French Plan provided that he or she also satisfies the eligibility
conditions of Article 3 of the U.S. Plan. Options may not be
issued under the French Plan to employees or corporate executives
of one of the Subsidiaries owning more than ten percent (10%) of
the Company's capital shares or to individuals other than
employees and corporate executives of the Subsidiaries. Options
may not be issued to managers of the Subsidiaries, other than the
chairman of the Board ("President Directeur General"), the General
Manager ("Directeur General") or the Directorate Member ("Membre
du Directoire"), unless they are employed by one of the
Subsidiaries.
202
4. Conditions of the Option/Option Price
Notwithstanding any provision in the U.S. Plan to the contrary, the
conditions of the Options (option price, number of underlying
shares and vesting period) will not be modified after the grant
date, except as provided under Section 6 of the French Plan. In
this respect, Options will not be repriced, re-granted, nor will
the time at which Options may be exercised be accelerated.
The option price per share of common stock payable pursuant to
options issued hereunder shall be fixed by the Committee on the
date the option is granted, but in no event shall the option price
per share be less than the greater of:
a) with respect to purchase options over the common stock, the
higher of either 95% of the average quotation price of such
common stock during the 20 days of quotation immediately
preceding the grant date or 95% of the average purchase price
paid for such common stock by the Company;
b) with respect to subscription options over the common stock, 95%
of the average quotation price of such common stock during
the 20 days of quotation immediately preceding the grant
date; and
c) the minimum option exercise price permitted under the U.S. Plan.
5. Exercise of an Option
a)Vesting Date
The option shall become vested after the fifth anniversary of
the Grant Date.
b)Payment of Option Price
Upon exercise of an option, the full option price will have
to be paid either by check or credit transfer.
c)Formalities
The shares acquired upon exercise of an Option will be
recorded in an account in the name of the shareholder with
[the Company or a stockbroker]----------.
203
6. Adjustments to the Option price or to the Number of Underlying Shares
In compliance with French law, the Option price shall not be
modified during the Options duration.
However, adjustments to the option price or number of shares
subject to an option issued hereunder may be made by the Committee
at its own discretion in the event of certain capitalization
changes described under Article 6.2 of the U.S. Plan, provided
that they result in the following transactions referred to under
Section L 208-5 of the Law n/66-537 of July 24, 1996:
a)an increase of corporate capital by cash contribution;
b)an issuance of convertible or exchangeable bonds;
c)a capitalization of retained earnings by payment in cash or
shares; and
d)a reduction of corporate capital by offset against losses.
7. Death
In the event of the death of a French Optionee, said individual's
heirs may exercise the option within six months following the
death, but any Option which remains unexercised shall expire six
months following the date of the Optionee's death.
8. Administration
The French Plan, including time of Granting Options, will be
administered in accordance with Article 4 of the U.S. Plan.
9. Interpretation
It is intended that options granted under the French Plan shall
qualify for the favorable treatment applicable to stock options
granted under Sections L 208-1 up to L 208-8-2 of the Law n/66-537
of July 24, 1966, and in accordance with the relevant provisions
set forth by French tax law and the French tax administration.
The terms of the French Plan shall be interpreted accordingly and
in accordance with the relevant provisions set forth by French tax
and social security laws, as well as the French tax and social
security regulations.
10. Governing Law
Except as required by French tax and social security laws and
regulations, the U.S. Plan shall be governed and construed in
accordance with the laws of the State of New York.
11. Employment Rights
The adoption of the French Plan shall not confer upon the
optionees any employment rights. Besides the stock options
granted under the French Plan is not part of their employment
contract.
204
12. Adoption
The French Plan was adopted by a unanimous Written Consent, dated
March 23, 1998, of the Committee duly appointed by the Board of
Directors.
205
Exhibit D
AUSTRIA
ADDENDUM TO THE KODAK STOCK OPTION PLAN
The shares of Common Stock issued under the Plan to Non-U.S. Employees
in Austria will be newly issued shares.
206
Exhibit E
EGYPT
ADDENDUM TO THE KODAK STOCK OPTION PLAN
The shares of Common Stock issued under the Plan to Non-U.S. Employees
in Egypt will be newly issued shares.
207
Exhibit F
RUSSIA
ADDENDUM TO THE KODAK STOCK OPTION PLAN
Notwithstanding any terms or conditions contained in Articles 9 or 9A
to the contrary, any Participant who is a Non-U.S. Employee in Russia
must exercise all of his or her Awards on or prior to the date of his
or her termination of employment. Any Award that is not exercised by a
Participant on or prior to the date of the Participant's termination of
employment will be forfeited.
208
Exhibit G
CHINA
ADDENDUM TO THE KODAK STOCK OPTION PLAN
Notwithstanding any terms or conditions contained in Articles 9 or 9A
to the contrary, if a Participant who is a Non-U.S. Employee in China
is permitted to retain his or her Awards following the Participant's
termination of employment, the Participant must exercise all the Awards
within 30 days of the date of Participant's termination of employment.
Any Award which is not exercised by a Participant on the thirtieth
(30th) day following the date of the Participant's termination of
employment will be forfeited.
209
Exhibit H
ITALY
ADDENDUM TO THE KODAK STOCK OPTION PLAN
With regard to all Awards granted to Non-U.S. Employees in Italy prior
to March 13, 2000, the shares of Common Stock issued under the Plan
will be newly issued shares.
210
Exhibit I
INDIA
ADDENDUM TO THE KODAK STOCK OPTION PLAN
Notwithstanding any terms or conditions contained in Articles 9 or 9A
to the contrary, any Participant who is a Non-U.S. Employee in Russia
must exercise all of his or her Awards on or prior to the date of his
or her termination of employment. Any Award that is not exercised by a
Participant on or prior to the date of the Participant's termination of
employment will be forfeited.
211
Exhibit J
Australian Addendum for March 13, 2000 Grant
to Kodak Stock Option Plan
Purpose
This Addendum (the "Australian Addendum") to Eastman Kodak Company's
Stock Option Plan ("Plan") is hereby adopted to set forth certain rules
which, together with the provisions of the U.S. Plan which are not
modified hereby, shall govern the operation of the Plan with respect to
Australian-resident employees of Kodak. The Plan is intended to comply
with the provisions of the Corporations Law, ASIC Policy Statement 49
and Class Order 00/220 issued pursuant to that Policy Statement.
Definitions
Except as set forth below, apitalized terms used herein shall have the
meaning ascribed to them in the U.S. Plan. In the event of any
conflict between these provisions and the U.S. Plan, these provisions
shall prevail.
For the purposes of this Australian Addendum:
"ASIC" means the Australian Securities and Investments Commission;
"Australian Subsidiary" means the subsidiaries listed on the attached
schedule;
"Company" means Eastman Kodak Company;
"Kodak" means Eastman Kodak Company;
"Plan" means collectively the U.S. Plan and the Australian Addendum;
and
"U.S. Plan" means the Kodak Stock Option Plan.
Form of Awards
Only shares of Common Stock and Options to acquire shares of Common
Stock shall be awarded to Australian-resident employees under the Plan.
Employees
The offer under the Plan must be extended only to offerees who at the
time of the offer are full or part-time employees or directors of an
Australian Subsidiary.
No contribution plan or trust
The offer under the Plan must not involve a contribution plan or any
offer, issue or sale being made through a trust.
212
The offer
The offer must be in writing ("Offer Document") and must include a copy
of the rules of the Plan.
Option Price
The Offer Document must specify the Australian dollar equivalent of the
Option Exercise Price were the Option Exercise Price formula applied at
the date of the offer. For the purposes of calculating the market price
of shares of Common Stock in Australian dollars, the Australian/U.S.
exchange rate which shall be used shall be the US dollar sell rate
published by the Australian and New Zealand Banking Corporation on the
preceding business day.
Australian dollar equivalent
During the offer period the Company must, within a reasonable time of
an offeree so requesting, provide an offeree with the Australian dollar
equivalent of the market price of the Company's Common Stock at the
time of the request and the Australian dollar equivalent of the Option
Exercise Price at the time of the request.
Loan or financial assistance
If the Company offers an offeree any loan or other financial assistance
for the purpose of acquiring shares to which the offer relates, the
Offer Document must disclose the conditions, obligations and risks
associated with such loan or financial assistance.
Restriction on Capital Raising: 5% limit
The number of shares available under the Plan in Australia, together
with all shares under all other employee share plans during the
previous 5 years in Australia (excluding shares issued which did not
need disclosure to investors under section 708 of the Corporations Law
or by way of an "excluded offer" (as defined in the Corporations Law
before 13 March 2000)), does not exceed more than 5% of the total
shares in the Company at the time of the offer.
Lodgment of Offer Document with the ASIC
No later that seven days after offers are made to Australian offerees,
the offer document and copies of all accompanying documents provided to
employees shall be provided to the ASIC.
Compliance with undertakings
The Company or an Australian Subsidiary must comply with any
undertaking required to be made in the Offer Document, such as the
undertaking to provide pricing information on request.
213
Schedule of Australian Subsidiaries
Kodak (Australasia) Pty. Ltd.ACN 004 057 621
Klikk Pty. Ltd.ACN 009 178 250
HPAL LimitedACN 087 783 060
214
Exhibit K
ITALY
ADDENDUM TO THE KODAK STOCK OPTION PLAN
The only form of exercise available to Non-U.S. Employees in Italy is
cashless exercise for cash.
215
Exhibit L
Rules of the Eastman Kodak Company
Kodak Stock Option Plan
for French Employees For Grants
On or After August 26, 2002
1. Introduction.
(a)The Board of Directors of Eastman Kodak Company (the "Company")
has established the Kodak Stock Option Plan (the "U.S. Plan") for the
purpose of promoting the interests of the Company and its shareholders
by retaining quality employees, giving substantially all employees a
stake in the Company's growth and success by focusing them on the
performance of Company's stock and thereby linking them worldwide, and
creating a culture of ownership and excellence among all employees
worldwide.
(b)Section 4.2 of the U.S. Plan specifically authorizes the
Executive Compensation and Development Committee of the Board of
Directors (the "Committee") to adopt subplans applicable to
participants in specified jurisdictions outside the United States. The
Committee has determined that it is advisable to establish a sub-plan
for the purposes of permitting such options to qualify for favorable
local tax and social security treatment in France. The Committee,
therefore, intends to establish a sub-plan of the U.S. Plan, for the
purpose of granting options which qualify for the favorable treatment
in France applicable to options granted under the Sections L 225-177 to
L 225-186 of the French Commercial Code, as amended, to qualifying
employees who are resident in France for French tax purposes. The
terms of the U.S. Plan, as set forth in Exhibit A hereto, subject to
the modifications in the following rules, constitute the Kodak Stock
Option Plan for French Employees dated August 26, 2002 (the "French
Plan"). Under the French Plan, the qualifying employees will be
granted only stock options.
(c)In the event of an inconsistency between the U.S. Plan and the
French Plan, the provisions of the French Plan shall govern.
2. Definitions. Terms used in the French Plan shall have the same
meanings as set forth in the U.S. Plan unless otherwise specified
below. In addition,
(a)the term "Option" shall have the following meaning:
(i)purchase stock options (rights to acquire shares of common
stock of the Company repurchased by the Company prior to the
vesting of the options); and
(ii)subscription stock options (rights to subscribe newly
issued shares of common stock of the Company);
216
(b)the term "Grant Date" shall be the date on which the Committee
both:
(i)designates the Optionee; and
(ii)specifies the terms and conditions of the Option
including
the number of shares and the method for determining the option
price;
(c)the term "Optionee" is defined as a person granted Options
pursuant to the French Plan;
(d)the term "Closed Period" shall mean the specific periods as set
forth by Section L 225-177 of the French Commercial Code, as amended,
during which French qualifying options cannot be granted;
(e)the term "Effective Grant Date" shall mean the date on which
the Option is effectively granted (i.e., the date on which the
condition precedent of the expiration of a Closed Period applicable to
the Option, if any, is satisfied). Such condition precedent shall be
satisfied when the Board, Committee or other authorized corporate body
shall determine that the granting of Options is no longer prevented
under a Closed Period. If the Grant Date does not occur within a
Closed Period, the "Effective Grant Date" shall be the same day as the
"Grant Date;" and
(f)the term "Disability" is defined in accordance with categories
2 and 3 under Section L 341-4 of the French Social Security Code.
3. Entitlement to Participate.
(a)Any individual who is a salaried employee or a corporate
executive of a French subsidiary or affiliate of the Company
("Subsidiary") shall be eligible to receive Options under the French
Plan provided that he or she also satisfies the eligibility conditions
of Section 3 of the U.S. Plan.
(b)Options may not be issued under the French Plan to employees
owning more than ten percent (10%) of the Company's capital shares or
to individuals not employed by a Subsidiary.
(c)Options may not be issued to directors of a Subsidiary, other
than the managing directors (President du Conseil d'Administration,
Directeur General, Directeur General Delegue, Membre du Directoire,
Gerant de Societes par actions) unless the director has an employment
contract with the Subsidiary, as defined by French law.
217
4. Conditions of the Option/Option Price.
(a)Notwithstanding any provision in the U.S. Plan to the contrary,
the terms and conditions of the Options (option price, number of
underlying shares and vesting period) will not be modified after the
Effective Grant Date, except as provided under Sections 5(c), 5(f), 6,
7 and 8 of the French Plan, or as otherwise in keeping with French law.
In this respect, Options will not be repriced, re-granted nor will the
time at which Options may be exercised be accelerated, except as
provided under Sections 5(c), 5(f), 7 and 8 below.
(b)The method for determining the option price per share of common
stock of the Company payable pursuant to Options issued hereunder shall
be fixed by the Committee on the Grant Date. The option price will be
the higher of:
(i)with respect to purchase Options over the common stock of
the Company, the higher of either 80% of the average quotation
price of such common stock during the 20 days of quotation
immediately preceding the Effective Grant Date or 80% of the
average purchase price paid for such common stock by the Company;
(ii)with respect to subscription Options over the common
stock of the Company, 80% of the average quotation price of such
common stock during the 20 days of quotation immediately preceding
the Effective Grant Date; and
(iii)100% of the fair market value of a share of common stock
of the Company on the Grant Date.
5. Exercise of an Option.
(a)Notwithstanding Section 7.5(c) of the U.S. Plan to the
contrary, upon exercise of an Option, payment of the full option price
and any required withholding tax or social insurance charges shall be
paid either by check or credit transfer exclusive of any other method
of payment. The Optionee may also give irrevocable instructions to a
stockbroker to properly deliver the option price to the Company.
(b)Optionees may not exercise any Options prior to the fourth
anniversary of the Effective Grant Date, or if shorter, the period
specified for favorable tax treatment and exemption from social
insurance charges pursuant to French law. In the case of termination
of employment due to death or termination of employment due to
Disability, this period does not have to be met to receive favorable
tax treatment and exemption from social insurance charges (see 5(c) and
(d) below).
(c)If an Optionee incurs a termination of employment by reason of
death, the unvested portion of any outstanding Option held by such
Optionee shall thereafter be immediately vested and exercisable in full
under the conditions set forth by Section 7 of the French Plan.
218
(d)If an Optionee incurs a termination of employment by reason of
Disability, any Option held by such Optionee shall thereafter become
fully vested and exercisable upon such termination. If the Optionee's
Disability otherwise meets the definition of disability found in
Section 91-ter of Exhibit II to the French Tax Code and as construed by
the French Tax Circulars and subject to the fulfillment of related
conditions, any Option held by such Optionee will benefit from the
favorable tax treatment for qualified options.
(e)In the event of death prior to the expiration of the Option
period following termination of employment, vested Options generally
may be exercised only during the six-month period following the
Optionee's death.
(f)In the event of a reorganization of the Company within the
meaning of Section 8 of the French Plan, the Committee may, in its
discretion, authorize the immediate vesting and exercise of Options
before the date on which any such reorganization becomes effective.
6. Changes in Capitalization. In compliance with French law, the
option price shall not be modified during the Option's duration.
Adjustments to the option price or number of shares subject to an
Option issued hereunder shall be made to preclude the dilution or
enlargement of benefits under such Option only in the case of one or
more of the following transactions by the Company:
(a)an issuance of new shares for cash consideration reserved to the
Company's existing shareholders;
(b)an issuance of convertible or exchangeable bonds reserved to the
Company's existing shareholders;
(c)a capitalization of retained earnings, profits or issuance premiums;
(d)a distribution of reserves by payment in cash or shares;
(e)a cancellation of shares in order to absorb losses; and
(f)a repurchase of shares at a price higher than the stock quotation price
in the open market.
However, even upon occurrence of one or more of these events, no
adjustment as to the kind of securities to be granted to Optionees
shall be made, i.e., under the French Plan only common shares of the
Company shall be granted that are neither convertible nor exchangeable
into other securities or into cash.
219
7. Death. If an Optionee incurs a Termination of Employment by
reason of death, any Options held by such Optionee may thereafter (for
the six-month period following the death) be exercised in full by the
Optionee's designated beneficiary or, if none, the legal representative
of the estate or by the legatee of the Option under the Optionee's last
will. Any Option which remains unexercised shall expire six months
following the date of the Optionee's death.
8. Reorganization. In the event that a significant decrease in the
value of Options granted to Optionees occurs or is likely to occur as a
result of a Change of Control of the Company, or a liquidation,
reorganization, merger, consolidation or amalgamation with another
company in which the Company is not the surviving company, the
Committee may, in its discretion, authorize the immediate vesting and
exercise of Options before the date on which any such Change of
Control, liquidation, reorganization, merger, consolidation, or
amalgamation becomes effective. If this occurs and the Optionee sells
the Company shares acquired through exercise of Options on or after the
fourth anniversary of the Effective Grant Date, the Options may not
receive favorable tax treatment and exemption from social insurance
charges pursuant to French law.
9. Terms of Stock Options. Options granted pursuant to the French
Plan will expire not later than nine and one-half years after the
Effective Grant Date.
10. Non-transferability of Options. Notwithstanding any provision in
the U.S. Plan to the contrary and except in the case of death, Options
cannot be transferred to any third party and Options are only
exercisable by the Optionee during the lifetime of the Optionee, except
upon death of the Optionee under the circumstances described in Section
7 above.
11. Interpretation. It is intended that Options granted under the
French Plan shall qualify for the favorable tax treatment and exemption
from social insurance charges applicable to stock options granted under
Sections L 225-177 to L 225-186 of the French Commercial Code, as
amended, and in accordance with the relevant provisions set forth by
French tax law and the French tax administration. The terms of the
French Plan shall be interpreted accordingly and in accordance with the
relevant provisions set forth by French tax and social insurance laws,
as well as the French tax and social security administrations.
12. Employment Rights. The adoption of this French Plan shall not
confer upon the Optionees, or any employees of the Subsidiary, any
employment rights and shall not be construed as a part of any
employment contracts that the Subsidiary has with its employees.
13. Amendments. Subject to the terms of the U.S. Plan, the Committee
reserves the right to amend or terminate the French Plan at any time.
14. Adoption. The French Plan was adopted on August 26, 2002.
220
Exhibit M
Australian Addendum
For Grants On or After August 26, 2002
1. Purpose
This Addendum (the "Australian Addendum") to Eastman Kodak
Company's Stock Option Plan ("Plan") is hereby adopted to set
forth certain rules which, together with the provisions of the
U.S. Plan which are not modified hereby, shall govern the
operation of the Plan with respect to Australian-resident
employees of Kodak. The Plan is intended to comply with the
provisions of the Corporations Act 2001, ASIC Policy Statement 49
and Class Order 00/220 issued pursuant to that Policy Statement
(as amended by ASIC Class Order 01/152).
2. Definitions
Except as set forth below, apitalized terms used herein shall have
the meaning ascribed to them in the U.S. Plan. In the event of
any conflict between these provisions and the U.S. Plan, these
provisions shall prevail.
For the purposes of this Australian Addendum:
"ASIC" means the Australian Securities and Investments Commission;
"Australian Subsidiary" means the subsidiaries listed on the
attached schedule;
"Company" means Eastman Kodak Company;
"Kodak" means Eastman Kodak Company;
"Plan" means collectively the U.S. Plan and the Australian
Addendum; and
"U.S. Plan" means the Kodak Stock Option Plan.
3. Form of Awards
Only shares of common stock and options to acquire shares of
common stock shall be awarded to Australian-resident employees
under the Plan.
4. Employees
The offer under the Plan must be extended only to offerees who at
the time of the offer are full or part-time employees or directors
of an Australian Subsidiary.
221
5. No contribution plan or trust
The offer under the Plan must not involve a contribution plan or
any offer, issue or sale being made through a trust.
6. The offer
The offer document issued to Australian Offerees in relation to
the Plan must contain or be accompanied by the following:
(a) a summary or a copy of the Plan;
(b) if a summary of the Plan, an undertaking that during the period
in which shares may be issued the Company will, within a
reasonable period of an eligible employee so requesting,
provide the employee without charge with a copy of the Plan;
(c) the Australian dollar or Australian dollar equivalent of the
Purchase Price of the common stock were the Purchase Price
formula applied as at the date of the offer or invitation;
(d) an undertaking, and an explanation of the way in which, the
Company will during any offering period, within a reasonable
period of an eligible employee so requesting, make available
to the employee: (i) the Australian dollar equivalent of the
current market price of shares in the same class as the
shares of common stock offered under the Plan; and (ii) the
information referred to in Paragraph (c) above updated to
that date. The current market price of a share of common
stock shall be taken as the price published by the principal
exchange on which the share is quoted as the final price for
the previous day on which the share was traded on the stock
market of that exchange; and
(e) For the purposes of paragraphs (c) and (d) above, the
Australian dollar equivalent of a price will be calculated by
reference to the U.S. dollar sell rate published by an
Australian bank on the preceding business day.
7. Option Price
The Offer Document must specify the Australian dollar equivalent
of the Option Exercise Price were the Option Exercise Price
formula applied at the date of the offer. For the purposes of
calculating the market price of shares of common stock in
Australian dollars, the Australian/U.S. exchange rate which shall
be used shall be the US dollar sell rate published by an
Australian Bank on the preceding business day.
222
8. Australian dollar equivalent
During the offer period the Company must, within a reasonable time
of an offeree so requesting, provide an offeree with the
Australian dollar equivalent of the market price of the Company's
Common Stock at the time of the request and the Australian dollar
equivalent of the Option Exercise Price at the time of the
request.
9. Loan or financial assistance
If the Company offers an offeree any loan or other financial
assistance for the purpose of acquiring shares to which the offer
relates, the Offer Document must disclose the conditions,
obligations and risks associated with such loan or financial
assistance.
10. Restriction on Capital Raising: 5% limit
In the case of an offer or invitation of unissued shares of common
stock or options for issue, the number of shares of common stock
subject to the offer or to be received on exercise of an option
when aggregated with the further number of shares calculated as
below must not exceed 5% of the total number of issued shares in
that class of Kodak as at the time of the offer.
In calculating the number of shares, the following must be
counted:
(a) the number of shares of common stock in the same class which would be
issued were each outstanding offer or invitation or option to acquire
unissued shares of common stock, being an offer or invitation made or
option acquired pursuant to an employee share scheme extended only to
employees (including directors) of Kodak and its associated bodies
corporate, to be accepted or exercised (as the case may be); and
(b) the number of shares of common stock in the same class issued
during the previous five years pursuant to the employee share
scheme or any other employee share scheme extended only to
employees (including directors) of Kodak and its associated
bodies corporate;
In calculating the number of shares for the purposes of this
clause 10, disregard any offer made, or option acquired or share
issued by way or as a result of:
(a) an offer to a person situated at the time of receipt of the offer
outside Australia; or
(b) an offer that was an excluded offer or invitation within the meaning
of the Corporations Law as it stood prior to 13 March 2000;
or
(c) an offer that did not need disclosure to investors because of section
708 of the Corporations Act.
223
11. Lodgment of Offer Document with the ASIC
No later than seven days after offers are made to Australian
offerees, the offer document and copies of all accompanying
documents provided to employees shall be provided to the ASIC.
12. Compliance with undertakings
The Company or an Australian Subsidiary must comply with any
undertaking required to be made in the Offer Document, such as the
undertaking to provide pricing information on request.
224
Schedule of Australian Subsidiaries
Kodak (Australasia) Pty. Ltd.ACN 004 057 621
Klikk Pty. Ltd.ACN 009 178 250
HPAL LimitedACN 087 783 060
225
Exhibit N
EASTMAN KODAK COMPANY
KODAK STOCK OPTION PLAN
(as amended on January 25, 2002)
UNITED KINGDOM SUB-PLAN
(GLOBAL AWARDS)
Pursuant to the authority granted to the Executive Compensation and
Development Committee ("Committee") of the Board of Directors of the
Eastman Kodak Company ("Kodak") under Article 4.2 of the Kodak Stock
Option Plan ("Plan"), the Committee has adopted these United Kingdom
Sub-Plan Rules ("Rules") for the purpose of granting stock options to
Employees of the participating companies, as defined in paragraph 2).
Unless the context requires otherwise, all terms used in these Rules
have the same meaning as in the Plan. Except to the extent modified by
these Rules, the provisions of the Plan shall apply. The Plan and these
Rules taken together shall comprise the share option scheme for United
Kingdom employees ("Scheme"). References in these Rules to "Schedule 9"
means Schedule 9 to the Income and Corporation Taxes Act of 1988 ("ICTA
l988").
l) Stock to be issued pursuant to the exercise of options
granted under this Scheme, shall be common stock of
Kodak and is part of the ordinary share capital of Kodak, as
defined in Section 832(1) ICTA 1988. The common stock of Kodak is
quoted on a recognized stock exchange as defined in
Section 841(1) ICTA l988.
2) The companies participating in this Scheme, are Kodak
and companies presently controlled by Kodak within the
meaning of Section 840 ICTA l988 and no others. Kodak
and any company which is now or may hereafter become so
controlled by Kodak shall be a participating company
upon notification to the Board of Inland Revenue.
3) The stock to be acquired upon the exercise of a stock
option will:
(a) be fully paid up:
(b) not be redeemable; and
(c) not be subject to any restrictions, other than
restrictions which attach to all shares of stock
of the same class.
226
4) Options may be granted under this Scheme only to
Employees. For the purposes of this Scheme "Employee"
shall mean any employee (other than one who is a director)
of Kodak or a participating company (as defined in paragraph 2),
or any full-time director of Kodak or a participating company
who is required to devote not less than 25 hours per week
(exclusive of meal breaks) to his office or employment and
Article 3.1 of the Plan shall be construed accordingly.
5) No option will be granted to an Employee under this
Scheme, or where an option has previously been granted,
no option shall be exercised by an optionee under this
Scheme, if at that time he has, or if at any time
within the preceding twelve months has had, a material
interest in a close company within the meaning of
Chapter I of Part XI of ICTA l988, as described in
Paragraph 8 of Schedule 9.
6) Kodak is the grantor of the share options defined in
Paragraph 1(1) of Schedule 9.
7) Any option granted to any Employee under the Scheme
shall be limited and take effect so that the aggregate
market value (determined at the time prescribed by
paragraph 28(3) of Schedule 9) of the shares which
such optionee may acquire through the exercise of
options granted under this Scheme or under any other
scheme not being a savings related Share Option Scheme
approved under Schedule 9 and established by Kodak
or any associated company (as defined in Section 4l6
ICTA l988), excluding exercised options, shall not
exceed or further exceed o30,000 or such other limit
as may be permitted from time to time by paragraph 28(1)
of Schedule 9 or, if less, the limit contained in Article
6.1 of the Plan ("market value" shall have the same meaning
as fair market value as defined in Paragraph 14 of the Scheme).
8) For the purposes of construing the Plan in the context
of this Scheme,
(i) all references to Stock Appreciation Rights (SARs)
shall be omitted and, accordingly, Article 8 of
the Plan shall not be part of this Scheme;
(ii) all references to additional terms, conditions,
restrictions, limitations, modifications or
amendments as described in Articles 2.3, 5.1, 7.7,
10.4, 10.6 or 13.4 of the Plan ("variations"),
shall not be part of this Scheme except that the
Committee may establish such variations provided
that such variations are subject to the prior
approval of the Board of Inland Revenue; and
227
(iii) all references to the effect of Change in
Ownership and Change in Control (both as defined
in the Plan) on stock options shall not be part
of this Scheme and, accordingly, Articles 11 and
12 of the Plan shall not be part of this Scheme.
9) An option shall not be transferable or assignable and any
provisions to the contrary in the Plan shall not be part
of this Scheme.
10) Upon exercise of an option under this Scheme, payment
shall be made in full with cash (directly or under any
broker-assisted programme which may be available on
exercise). The other form of payment identified in
Article 7.5 (C)(ii) of the Plan shall not apply.
11) An option will not be subject to the provisions of this
Scheme unless the Committee specifies in the Award Notice
that the option is granted subject to the provisions of this
Scheme.
12) Notwithstanding Article 13.7 of the Plan, no amendment to
these Rules will be implemented or have effect prior to the
approval of such amendment by the Board of Inland Revenue.
13) Any alteration or amendment to the Plan will not be
deemed to affect the Scheme until or unless it has been
approved by the Board of Inland Revenue. In the event
such approval is sought, Kodak will provide details of
the alteration or amendment to the Inland Revenue
without delay.
14) For purposes of the Scheme the exercise price of options
granted under this Scheme shall not be less than the fair
market value of Kodak common stock on the date of grant of
the option. The fair market value shall have the meaning as
ascribed in Article 2.17 of the Plan converted to sterling at
a rate agreed with the Board of Inland Revenue.
15) Certificates for shares issued pursuant to the exercise
of options granted under this Scheme shall be issued
within 30 days of such exercise.
16) Adjustments made in accordance with Article 6.2 of the
Plan will only be applied to options granted under this
Scheme if they are permitted adjustments under
Paragraph 29 of Schedule 9 and such adjustments are also
subject to prior approval by the Board of Inland Revenue.
228
17) For the purposes of construing Article 9 of the Plan,
the following shall apply to the Scheme:-
(a) Termination prior to the second anniversary of grant;
Effective from the optionee's termination of employment all
such options will be forfeited regardless of the reason for
such termination.
(b) Termination on or after the second anniversary of grant;
Effective from the optionee's termination of employment for Cause
(as defined in Article 2.5 of the Plan) all such options will be
forfeited. In other cases:-
(i) where such termination is due to Disability or
Retirement (as defined in Articles 2.14 and 2.26 of the
Plan) such options shall remain exercisable on the original
terms of grant unless forfeited sooner in accordance with
another provision of the Plan.
(ii) where such termination is voluntary or is due to Layoff
(as defined in Article 2.21 of the Plan), due to the
divestment of the employing company, part of company or
business, or due to any other reason such options shall
remain exercisable until the sixtieth day (60) following
such termination and, to the extent not exercised,
shall be forfeited on such sixtieth day unless forfeited
sooner in accordance with another provision of the Plan.
(c) The Cash Out provisions contained in Articles 9.4 and 9.5 of
the Plan shall not apply to this Scheme.
(d) For the avoidance of doubt, outstanding options will be
forfeited on the date of the optionee's death.
18) Employees will have no rights to compensation or damages in
consequence of the termination of employment with Kodak or any
participating company for any reason, and whether or not in breach
of contract, insofar as related to rights under the Scheme and an
individual who participates therein shall waive all and any such
rights insofar as those rights arise or may arise from any such
cessation of employment including any entitlement to exercise any
Option under the Scheme or from any diminution in value of such
rights or entitlement to exercise any such Option.
229
Exhibit (10) V.
March 13, 2001
Michael P. Morley
(Address Intentionally
Omitted)
Re:Retention
Dear Mike:
Your contributions and professional talents continue to be a great asset
to Eastman Kodak Company ("Kodak"). In this regard, I am pleased to
inform you of your eligibility for a special retention package to
encourage you to delay your retirement and remain employed with Kodak
until at least December 31, 2002. This letter describes the features of
this package. Once signed by both parties, the 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. Outline of Retention Package
In consideration for delaying your retirement and remaining employed
with Kodak through at least December 31, 2002, 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,
interest rate protect your lump-sum retirement income benefit, pay you a
retention benefit, grant you permitted and approved reason with regards
for your equity awards, and provide you a special severance benefit in
the event you are terminated without cause prior to December 31, 2002.
The remaining sections of this letter agreement detail the terms and
conditions of this retention package.
2. Discount Rate Protection
A. In General. In consideration for extending your employment until
at least December 31, 2002, Kodak will pay you, subject to
your satisfaction of all of the requirements of this letter
agreement, the benefit described in this Section 2. For
purposes of this letter agreement, the term "Retirement Date"
means the date you retire under the terms of the Kodak
Retirement Income Plan ("KRIP") which will be no earlier than
January 1, 2003 and no later than June 1, 2003.
B. Preconditions.
(i)That portion of the benefit described in Section 2(C)(i)
below will only apply to that amount of your retirement
income benefit under KRIP that you elect to receive in
the form of a lump sum and file a valid spousal consent
per Section 7.03(d) of KRIP.
(ii)That portion of the benefit described in Section 2(C)(ii)
below will only apply to that amount of your retirement
income benefit under the Kodak Unfunded Retirement Income
Plan ("KURIP") and Kodak Excess Retirement Income Plan
("KERIP") that you elect to receive in the form of a lump
sum.
230
C. Description of Benefits.
(i)KRIP. Kodak agrees to pay you the excess, if any, of:
(a) your retirement income benefit paid in the form of a
lump sum calculated as of January 1, 2003 pursuant
to the terms of KRIP as then in effect, except that
the discount rate used for purposes of this
calculation will be the discount rate that would
have been used to calculate such benefit if you had
retired effective as of March 1, 2002, minus
(b) your retirement income benefit paid in the form of a
lump sum calculated as of the Retirement Date
pursuant to the terms of KRIP as then in effect.
(ii)KURIP and KERIP. Kodak agrees to pay you the excess, if
any, of:
(a) your retirement income benefit paid in the form a lump
sum calculated as of January 1, 2003 pursuant to the
terms of KURIP and KERIP as then in effect, except
that the discount rate used for purposes of this
calculation will be the discount rate that would
have been used to calculate such benefits if you had
retired effective as of March 1, 2002, minus
(b) your retirement income benefit paid in the form a lump
sum calculated as of the Retirement Date pursuant to
the terms of KURIP and KERIP as then in effect.
D. Form and Time of Payment. The amount of the benefit, if any,
payable to you pursuant to this Section 2 will: (i) be paid in
the form of a lump sum payment; (ii) be paid out of Kodak's
general assets, not under KRIP; (iii) not be funded in any
manner; and (iv) be included in your gross income as ordinary
income, subject to all income, payroll and employment tax
withholdings required to be made under all applicable federal,
state and local law or regulation.
With respect to that portion of the benefit, if any,
attributable to Section 2(C)(i), to the extent you are subject
to Federal or state income or payroll taxes thereon, Kodak
will "gross up" the amount of such portion of the benefit at
the applicable supplemental tax rate. That portion of the
benefits, if any, attributable to Section 2(C)(ii) will not be
grossed up for tax purposes.
3. Retention Benefit
A. In General. Subject to your satisfaction of all of the terms of
this letter agreement, Kodak agrees to provide you a retention
benefit in the amount of $370,000 (the "Retention Benefit").
231
B. Time of Payment. The Retention Benefit will be paid in two
installments. The first installment in the amount of $20,000
will be paid as soon as administratively practicable following
your execution of this letter agreement. The balance of the
Retention Benefit, i.e., $350,000, will be paid on or as soon
as administratively practicable following January 1, 2003. In
the event, however, prior to January 1, 2003, you either die
or your employment is terminated without Cause, as defined
below, the Retention Benefit will be paid as soon as
administratively practicable following the date of your
termination of employment. The Retention Benefit will be paid
subject to withholding for all applicable federal, state and
local income and payroll taxes.
C. Benefits Bearing. The Retention Benefit will be "benefits
bearing." In other words, such amount will be taken into
account and considered for purposes of determining any
employer-provided benefits or compensation to which you are or
may hereinafter become eligible.
4. Approved and Permitted Reason
Subject to your satisfaction of all of the terms of this letter
agreement, Kodak agrees to recommend to the Executive Compensation and
Development Committee of the Board of Directors that your termination of
employment be for a Permitted Reason and an Approved Reason for purposes
of any Kodak stock options, restricted stock and restricted stock units
held by you on the date of your termination of employment and for
purposes of any award paid, or to be paid, to you under the Performance
Stock Program. Thus, upon approval of such recommendation by the
Executive Compensation and Development Committee, you will not forfeit
any Kodak stock options, restricted stock or restricted stock units held
by you on the date of your termination of employment or any award paid,
or to be paid, to you under the Performance Stock Program.
5. Continuous Employment
A. In General. In order to receive the benefits described in
Sections 2, 3 and 4 above, you must remain continuously
employed by Kodak until December 31, 2002. Thus, except as
provided in Section 5(B) below, if your employment terminates
for any reason, whether voluntarily or involuntarily, prior to
December 31, 2002, you will not be entitled to receive any of
the benefits described in Sections 2, 3 or 4.
B. Termination For Other Than Cause or Death. Notwithstanding
Section 5(A) above to the contrary, if prior to December 31,
2002, Kodak terminates your employment for other than "Cause,"
as defined below, you will remain eligible for benefits
described in Sections 2, 3 and 4. Notwithstanding Section
5(A) above to the contrary, if prior to December 31, 2002,
your employment is terminated due to your death, you will
remain eligible for benefits described in Sections 3 and 4.
232
C. Cause. For purposes of this letter agreement, "Cause" will mean:
i. your willful and continuous failure for a period of at least
90 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 willful and continuous failure to follow a lawful
written material directive of the Chief Executive Officer
or President; or
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.
6. Severance Allowance
A. In General. If prior to December 31, 2002, Kodak terminates your
employment for reasons other than Cause, Kodak will, subject
to your satisfaction of the terms of this letter agreement,
provide you the severance allowance described in this Section
6 in addition to the other benefits you will be entitled to
under the terms of this letter agreement.
233
B. Amount. Kodak will pay you a severance allowance equal to one
(1) times your then "total target annual compensation" less the
total amount of base salary paid to you during 2002 prior to
your termination of employment. 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
one (1) 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. Offset. The severance allowance payable to you under this
Section 6 will be reduced by the amount of any other
termination, severance or separation pay, benefit or allowance
paid to you by the Company as a result of your termination of
employment.
D. Not Benefits Bearing. In no event will any of the severance
allowance be "benefits bearing." In other words, the amount
of the severance allowance 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.
E. Agreement, Waiver and Release. In order to receive the severance
allowance under this Section 6, 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 Vice President, Eastman Kodak Company and Director, Human
Resources.
F. 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 immediate forfeit any severance allowance payable
to you under this Section 6 and, if already paid, you will
immediately repay all amounts previously paid to you pursuant
this section.
G. EXCEL. If prior to December 31, 2002, Kodak terminates your
employment for reasons other than Cause, you will remain
eligible for an award under the EXCEL plan for 2002 based on
your service during 2002. Any award payable to you will,
however, be reduced by an amount equal to your target annual
award under EXCEL for 2002 and paid to you at the same time
the plan's other participants receive their awards for 2002.
7. 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.
234
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. 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 are free to
terminate your employment at any time, for any reason, and
Kodak is free to do the same.
***
235
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 9(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.
Very truly yours,
Daniel A. Carp
DAC:llh
I agree to the terms and conditions of this letter agreement.
Signed: /s/ Michael P. Morley
Dated:
236
February 19, 2003
Michael P. Morley
(Address
Intentionally Omitted)
Re: Amendment to March 13, 2001 Letter Agreement
Dear Mike:
By way of a letter agreement dated March 31, 2001 (the "March 31, 2001
Letter Agreement"), Eastman Kodak Company ("Kodak") entered into a
retention agreement with you. The purpose of this letter, which will
become an agreement once both you and Kodak sign it, is to amend the
March 31, 2001 Letter Agreement in one respect.
1. Discount Rate Protection
Section 2, entitled "Restricted Stock," of the March 31, 2001 Letter
Agreement is amended in its entirety to read as follows:
2. Discount Rate Protection
A. In General. In consideration for extending your employment
until at least December 31, 2002, Kodak will pay you, subject
to your satisfaction of all of the requirements of this
letter agreement, the benefit described in this Section 2.
For purposes of this letter agreement, the term "Retirement
Date" means the date you retire under the terms of the Kodak
Retirement Income Plan ("KRIP") which will be no earlier than
January 1, 2003 and no later than January 1, 2004.
B. Preconditions.
(i) That portion of the benefit described in Section 2(C)(i)
below will only apply to that amount of your retirement
income benefit under KRIP that you elect to receive in
the form of a lump sum and file a valid spousal consent
per Section 7.03(d) of KRIP.
(ii) That portion of the benefit described in Section 2(C)(ii)
below will only apply to that amount of your retirement
income benefit under the Kodak Unfunded Retirement
Income Plan ("KURIP") and Kodak Excess Retirement Income
Plan ("KERIP") that you elect to receive in the form of
a lump sum.
237
C. Description of Benefits.
(i) KRIP. Kodak agrees to pay you the excess, if any, of:
(a) your retirement income benefit paid in the form of a
lump sum calculated as of the Retirement Date
pursuant to the terms of KRIP as then in effect,
except that the discount rate used for purposes of
this calculation will be the discount rate that
would have been used to calculate such benefit if
you had retired effective as of January 1, 2003,
minus
(b) your retirement income benefit paid in the form of a
lump sum calculated as of the Retirement Date
pursuant to the terms of KRIP as then in effect.
(ii) KURIP and KERIP. Kodak agrees to pay you the excess, if
any, of:
(a) your retirement income benefit paid in the form a
lump sum calculated as of the Retirement Date
pursuant to the terms of KURIP and KERIP as then in
effect, except that the discount rate used for
purposes of this calculation will be the discount
rate that would have been used to calculate such
benefits if you had retired effective as of January
1, 2003, minus
(b) your retirement income benefit paid in the form a
lump sum calculated as of the Retirement Date
pursuant to the terms of KURIP and KERIP as then in
effect.
D. Form and Time of Payment. The amount of the benefit, if any,
payable to you pursuant to this Section 2 will: (i) be paid
in the form of a lump sum payment; (ii) be paid out of
Kodak's general assets, not under KRIP; (iii) not be funded
in any manner; and (iv) be included in your gross income as
ordinary income, subject to all income, payroll and
employment tax withholdings required to be made under all
applicable federal, state and local law or regulation.
With respect to that portion of the benefit, if any,
attributable to Section 2(C)(i), to the extent you are
subject to Federal or state income or payroll taxes thereon,
Kodak will "gross up" the amount of such portion of the
benefit at the applicable supplemental tax rate. That
portion of the benefits, if any, attributable to Section
2(C)(ii) will not be grossed up for tax purposes.
238
2. Remaining Terms of March 31, 2001 Letter Agreement
All of the remaining terms of the March 31, 2001 Letter Agreement, 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.
***
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.
You agree to keep the content and existence of this letter agreement
confidential except that you may review it with your financial advisor,
attorney and/or spouse. 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.
This letter, 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.
Your signature below means that you accept the terms and conditions set
forth in this letter agreement.
Very truly yours,
Robert L. Berman
Director, Human Resources
and Vice President
Eastman Kodak Company
RLB:llh
I accept the terms and conditions of this letter agreement.
Signed: /s/ Michael P. Morley
Dated:
239
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
2002 2001 2000 1999 1998
Earnings from continuing
operations before
provision for income
taxes $ 946 $ 115 $2,132 $2,109 $2,106
Add:
Interest expense 173 219 178 142 110
Share of interest expense
of 50% owned companies 10 14 16 8 7
Interest component of
rental expense (1) 53 42 52 47 50
Amortization of
capitalized interest 28 28 28 24 24
------ ------ ------ ------ ------
Earnings as adjusted $1,210 $ 418 $2,406 $2,330 $2,297
====== ====== ====== ====== ======
Fixed charges
Interest expense 173 219 178 142 110
Share of interest expense
of 50% owned companies 10 14 16 8 7
Interest component of
rental expense (1) 53 42 52 47 50
Capitalized interest 3 12 40 36 41
------ ------ ------ ------ ------
Total fixed charges $ 239 $ 287 $ 286 $ 233 $ 208
====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 5.1x (2) 1.5x(3) 8.4x 10.0x(4) 11.0x
(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 5.5x before deducting restructuring program charges of
$114 million.
(3) The ratio is 3.8x before deducting restructuring program charges of
$678 million.
(4) The ratio is 11.5x before deducting restructuring program charges of
$350 million.
240
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
Eastman Gelatine Corporation Massachusetts
Research Systems, Inc. Colorado
ENCAD, Inc. Delaware
Pakon, Inc. Indiana
Ofoto, Inc. Delaware
CustomerFirst Service & Support, Inc. Delaware
Lumisys Incorporated 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
241
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 (Hong Kong) 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
K.K. Kodak Information Systems Japan
Kodak Japan Industries Ltd. Japan
Kodak (China) Limited Hong Kong
Kodak Electronic Products (Shanghai) Co., Ltd. China
Kodak (China) Co. Ltd. China
Kodak (WUXI) Co. Ltd. China
Kodak Xiamen Ltd. China
Kodak (China) Investment Company Limited China
Kodak Shanghai International Trading China
Kodak Shanghai Da Hai Camera Co., Ltd. China
Note: Subsidiary Company names are indented under the name of the parent
company.
242
Exhibit (99.1)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Eastman Kodak Company (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Daniel A. Carp, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Daniel A. Carp
Daniel A. Carp
Chief Executive Officer
March 14, 2003
243
Exhibit (99.2)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Eastman Kodak Company (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert H. Brust, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Robert H. Brust
Robert H. Brust
Chief Financial Officer
March 14, 2003
244
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 March 13, 2003, 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 14, 2003