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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
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
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class March 31, 2003
Common Stock, $2.50 par value 286,487,026
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share data)
Three Months Ended
March 31
------------------
2003 2002
Net sales $ 2,740 $2,706
Cost of goods sold 1,916 1,846
------ ------
Gross profit 824 860
Selling, general and
administrative expenses 566 540
Research and development costs 194 187
Restructuring costs and other 32 -
------ ------
Earnings from continuing
operations before interest,
other charges, and income
taxes 32 133
Interest expense 37 44
Other charges 21 31
------ ------
(Loss) earnings from continuing
operations before income taxes (26) 58
(Benefit) provision for income taxes (23) 17
------ ------
(Loss) earnings from continuing
operations (3) 41
Earnings (loss) from discontinued
operations, net of income tax benefit
of $1 for the three months ended
March 31, 2002 15 (2)
------ ------
NET EARNINGS $ 12 $ 39
====== ======
Basic and diluted net (loss) earnings
per share:
Continuing operations $ (.01) $ .14
Discontinued operations .05 (.01)
------ ------
Total $ .04 $ .13
====== ======
Number of common shares used in
basic (loss) earnings per share 286.3 291.3
Incremental shares from
assumed conversion of options 0.3 0.0
------ ------
Number of common shares used in
diluted (loss) earnings per share 286.6 291.3
====== ======
Cash dividends per share $ 0 $ 0
====== ======
3
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS (Continued)
(in millions)
Three Months Ended
March 31
------------------
2003 2002
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of year $7,611 $7,431
Net earnings 12 39
Loss from issuance of treasury stock (14) (25)
------ ------
Retained Earnings
at end of quarter $7,609 $7,445
====== ======
- ------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
4
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
March 31, Dec. 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 597 $ 569
Receivables, net 2,073 2,234
Inventories, net 1,197 1,062
Deferred income taxes 534 512
Other current assets 164 157
------- -------
Total current assets 4,565 4,534
------- -------
Property, plant and equipment, net 5,336 5,420
Goodwill, net 981 981
Other long-term assets 2,433 2,434
------- -------
TOTAL ASSETS $13,315 $13,369
======= =======
- -----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,179 $ 3,351
Short-term borrowings 1,659 1,442
Accrued income taxes 513 584
------- -------
Total current liabilities 5,351 5,377
OTHER LIABILITIES
Long-term debt, net of current portion 1,045 1,164
Postretirement liabilities 3,406 3,412
Other long-term liabilities 649 639
------- -------
Total liabilities 10,451 10,592
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 849 849
Retained earnings 7,609 7,611
Accumulated other comprehensive loss (709) (771)
Unearned restricted stock (4) -
------- -------
8,723 8,667
Less: Treasury stock at cost 5,859 5,890
------- -------
Total shareholders' equity 2,864 2,777
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,315 $13,369
======= =======
- -----------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
5
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Three Months Ended
March 31
------------------
2003 2002
Cash flows relating to operating activities:
Net earnings $ 12 $ 39
Adjustments to reconcile to
net cash provided by operating activities:
(Gain) loss from discontinued operations (15) 2
Equity in losses from unconsolidated affiliates 23 22
Depreciation and amortization 202 185
Provision for deferred taxes 10 2
Decrease in receivables 155 144
Increase in inventories (116) (52)
Decrease in liabilities excluding borrowings (211) (224)
Other items, net 27 (34)
------ ------
Total adjustments 75 45
------ ------
Net cash provided by continuing
operations 87 84
------ ------
Net cash provided by (used in)
discontinued operations 19 (2)
------ ------
Net cash provided by operating activities 106 82
------ ------
Cash flows relating to investing activities:
Additions to properties (111) (92)
Acquisitions, net of cash acquired (54) (6)
Investments in unconsolidated affiliates (20) (32)
Marketable securities - purchases (19) (31)
Marketable securities - sales 17 17
------ ------
Net cash used in investing activities (187) (144)
------ ------
Cash flows relating to financing activities:
Net increase in borrowings
with original maturity of
90 days or less 264 221
Proceeds from other borrowings 193 289
Repayment of other borrowings (365) (386)
Exercise of employee stock options 12 3
------ ------
Net cash provided by financing activities 104 127
------ ------
Effect of exchange rate changes on cash 5 (2)
------ ------
Net increase in cash and cash
equivalents 28 63
Cash and cash equivalents, beginning of year 569 448
------ ------
Cash and cash equivalents, end of quarter $ 597 $ 511
====== ======
- -----------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
6
Eastman Kodak Company and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The consolidated interim financial statements are unaudited, and
certain information and footnote disclosure related thereto normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
omitted in accordance with Rule 10-01 of Regulation S-X. In the
opinion of management, the accompanying unaudited consolidated
financial statements were prepared following the same policies and
procedures used in the preparation of the audited financial statements
and reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position of
Eastman Kodak Company and its subsidiaries (the Company). The results
of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year. These consolidated financial
statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting
for Asset Retirement Obligations." SFAS No. 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 No. 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 No. 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 adopted SFAS No. 143 effective
January 1, 2003. The adoption of SFAS No. 143 did not have a material
impact on the Company's financial position, results of operations or
cash flows.
7
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 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 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 impacts 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
Company adopted SFAS No. 146 effective January 1, 2003. The Company
primarily accounts for employee termination actions under SFAS No. 112,
which requires recording when such charges are probable and estimable.
As such, the adoption of SFAS No. 146 did not have an impact in the
quarter, as there were no significant one-time severance actions or
other exit costs.
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 disclosure provisions of FIN 45 were effective for financial
statements of interim periods or annual periods ending after December
15, 2002. In addition, the Company adopted the recognition provisions
of FIN 45 effective January 1, 2003 for guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 did not have a
material impact on the Company's financial position, results of
operations or cash flows. See Note 7, "Guarantees."
In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
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 waiting for the EITF to complete its
deliberations on certain implementation provisions to finalize its
evaluation of the effect that the adoption of EITF No. 00-21 will have
on its financial position, results of operations and cash flows.
8
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 (VIEs), 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 VIEs,
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 VIEs created
or acquired after January 31, 2003. For VIEs 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 VIEs that
are deemed significant, even if consolidation is not required. See
Note 5, "Variable Interest Entities" for these disclosures. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its financial position, results of operations and cash
flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period to conform
to the 2003 presentation.
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9
NOTE 2: RECEIVABLES, NET
(in millions) March 31, December 31,
2003 2002
Trade receivables $1,714 $1,896
Miscellaneous receivables 359 338
------ ------
Total (net of allowances of $125 and $137) $2,073 $2,234
====== ======
Of the total trade receivable amounts of $1,714 million and $1,896
million as of March 31, 2003 and December 31, 2002, respectively,
approximately $344 million and $371 million are expected to be settled
through customer deductions in lieu of cash payment. However, because
the legal right of set off does not exist for such deductions, which
represent rebates owed to the customer, these amounts are included in
accounts payable and other current liabilities in the accompanying
Consolidated Statement of Financial Position at each respective balance
sheet date.
- -----------------------------------------------------------------------
NOTE 3: INVENTORIES, NET
(in millions) March 31, December 31,
2003 2002
Finished goods $ 934 $ 831
Work in process 330 322
Raw materials and supplies 308 301
------ ------
1,572 1,454
LIFO reserve (375) (392)
------ ------
Total $1,197 $1,062
====== ======
- -------------------------------------------------------------------------
NOTE 4: INCOME TAXES
The Company's annual effective tax rate was estimated to be 26% and 29%
for the three month periods ended March 31, 2003 and 2002, respectively.
In addition, for the period ended March 31, 2003, discrete period tax
benefits of $37 million were recorded in connection with the following
items, all of which are taxed in jurisdictions with tax rates greater
than the estimated annual effective tax rate: net focused cost reduction
charges of $46 million; a $21 million charge for purchased in-process
research and development costs; and a $12 million charge relating to an
intellectual property settlement. In addition, the discrete period items
also include a tax benefit of $8 million, as described below, relating to
the donation of intellectual property.
During the three months ended March 31, 2003, the Company entered into an
agreement whereby intellectual property in the form of technology patents
was donated to a tax-qualified organization. The net book value of the
intellectual property was not material. Based on an external
determination of fair value, the related technology resulted in a tax
benefit of approximately $8 million, which the Company recorded in the
three months ended March 31, 2003.
- -----------------------------------------------------------------------
10
NOTE 5: VARIABLE INTEREST ENTITIES
As a result of its continuing evaluation of the effect that the
adoption of FIN 46 will have on the Company's financial position,
results of operations and cash flows, the Company believes that it is
reasonably possible that its equity investments in Express Stop
Financing (ESF), NexPress, Phogenix and SK Display, relating to which
Kodak's interests therein were all created or obtained prior to
February 1, 2003, 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 6 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 March 31, 2003
were approximately $498 million, $158 million, $18 million and $7
million, respectively. The Company's estimated maximum exposure to
loss as a result of its continuing involvement with ESF, NexPress,
Phogenix and SK Display are $66 million, $125 million, $42 million and
$110 million, respectively. The maximum exposure to loss represents
the sum of the carrying value of the Company's investment balances as
of March 31, 2003, 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.
The Company has not created or obtained an interest in any variable
interest entities after January 31, 2003.
- -----------------------------------------------------------------------
NOTE 6: COMMITMENTS AND CONTINGENCIES
Environmental
At March 31, 2003, the Company's undiscounted accrued liabilities for
environmental remediation costs amounted to $145 million and 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 March 31, 2003, estimated future investigation
and remediation costs of $66 million are accrued on an undiscounted
basis by the Company and are included in the $145 million reported in
other long-term liabilities.
11
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. At March 31,
2003, estimated future remediation costs of $48 million are accrued on
an undiscounted basis and are included in the $145 million reported in
other long-term liabilities.
The Company has obligations relating to two former manufacturing sites
located outside the United States. 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 reuse. At March 31, 2003, estimated future investigation,
remediation and monitoring costs of $26 million are accrued on an
undiscounted basis and are included in the $145 million reported in
other long-term liabilities.
Additionally, the Company has approximately $5 million accrued on an
undiscounted basis in the $145 million reported in other long-term
liabilities at March 31, 2003 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 many of 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 incurred as part of plant operations
and, therefore, are not included in the environmental accrual at March
31, 2003.
12
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. 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.
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.
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.
13
Other Commitments and Contingencies
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.
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 March 31, 2003. 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 nine months.
Qualex, a wholly owned subsidiary of Kodak, has a 50% ownership
interest in ESF, which is a joint venture partnership between Qualex
and Dana Credit Corporation (DCC), a wholly owned subsidiary of Dana
Corporation. Qualex accounts for its investment in ESF under the
equity method of accounting. ESF provides a long-term financing
solution to Qualex's photofinishing customers in connection with
Qualex's leasing of photofinishing equipment to third parties, as
opposed to Qualex extending long-term credit. As part of the
operations of its photofinishing 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 its filing for bankruptcy on December 24,
2002. Since that time, certain of its affiliates have also filed for
bankruptcy in the various countries in which they are organized.
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
$445 million at March 31, 2003.
14
To mitigate the risk of not being able to fulfill its service
obligations, 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 an entity created to hold intellectual
property and certain other assets conveyed by the Vendor and its
affiliates related to spare parts, and an arrangement to purchase spare
parts from the Vendor or its affiliates. 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 a limited number of parts that
were covered by patents owned by the Vendor and from purchasing such
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.
There is the possibility that the arrangements that the Company entered
into with the Vendor could be challenged as part of the bankruptcy
process. 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 situations where it would be unable to
fulfill its service obligations under the arrangement with ESF.
15
ESF is currently operating under the amended Receivables Purchase
Agreement (RPA), which provides for maximum borrowings up to $370
million. Total outstanding borrowings under the RPA at March 31, 2003
were $295 million. The amended RPA 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. The term of
the ESF partnership agreement between the Company and DCC 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 March 31, 2003, the Company had outstanding letters of credit
totaling $99 million and surety bonds in the amount of $97 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
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, results of operations or cash flows.
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16
NOTE 7: GUARANTEES
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At March 31, 2003, these
guarantees totaled a maximum of $317 million, with outstanding
guaranteed amounts of $148 million. The maximum guarantee amount
includes guarantees of up to: $160 million of debt for Kodak Polychrome
Graphics (KPG), an unconsolidated affiliate in which the Company has a
50% ownership interest ($77 million outstanding); $6 million for other
unconsolidated affiliates and third parties ($6 million outstanding);
and $151 million of customer amounts due to banks in connection with
various banks' financing of customers' purchase of products and
equipment from Kodak ($65 million outstanding). The KPG debt facility
and the related guarantee mature on December 31, 2005, but may be
renewed at KPG's, the joint venture partners' and the bank's discretion.
The guarantees for the other unconsolidated affiliates and 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 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. With respect to the guarantees that
the Company issued in the three months ended March 31, 2003, the Company
assessed the fair value of its obligation to stand ready to perform
under these guarantees by considering the likelihood of occurrence of
the specified triggering events or conditions requiring performance as
well as other assumptions and factors. Through internal analysis and
external valuations, the Company determined that the fair value of the
guarantees was not material to the Company's financial position, results
of operations or cash flows.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $792
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 accompanying Consolidated Statement of
Financial Position, is $600 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
March 31, 2003, the Company has not been required to guarantee any of
SK Display Corporation's outstanding debt.
17
Indemnifications
The Company issues indemnifications in certain instances when it sells
businesses and real estate, and in the ordinary course of business with
its customers, suppliers, service providers and business partners.
Further, the Company indemnifies its directors and officers who are, or
were, serving at Kodak's request in such capacities. Historically,
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. Additionally, the fair value of the
indemnifications that the Company issued during the three months ended
March 31, 2003 was not material to the Company's financial position,
results of operations or cash flows.
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, 2002 to March 31, 2003 was as follows:
(in millions)
Accrued warranty obligations at December 31, 2002 $43
Actual warranty experience during Q1 2003 (12)
Q1 2003 warranty provisions 12
Adjustments for changes in estimates -
--
Accrued warranty obligations at March 31, 2003 $43
===
The Company also offers extended warranty arrangements to its customers
that 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 three months ended March 31,
2003 amounted to $45 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, 2002 $ 103
New extended warranty arrangements in Q1 2003 92
Recognition of extended warranty arrangement
revenue in Q1 2003 (74)
-----
Deferred revenue at March 31, 2003 $ 121
=====
- -----------------------------------------------------------------------
18
NOTE 8: INTELLECTUAL PROPERTY SETTLEMENT
On April 3, 2003, the Company entered into a settlement agreement with
a third party with respect to alleged infringement of certain
technology. The settlement amount of approximately $12 million has
been included in selling, general and administrative expenses in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003.
- --------------------------------------------------------------------------
NOTE 9: RESTRUCTURING COSTS AND OTHER
The Company periodically announces planned restructuring programs
(Programs), which often consist of a number of restructuring
initiatives. These Program announcements provide estimated ranges
relating to the number of positions to be eliminated and the total
restructuring charges to be incurred. The actual charges for
initiatives under a Program are recorded in the period in which the
Company commits to formalized restructuring plans or executes the
specific actions contemplated by the Program and all criteria for
restructuring charge recognition under the applicable accounting
guidance have been met.
During the fourth quarter of 2002, the Company announced a planned
Program consisting of a number of focused cost reductions designed to
deploy manufacturing assets more effectively in order to provide
competitively-priced products to the global market. In the
announcement, the Company discussed the restructuring initiatives
under its Fourth Quarter, 2002 Restructuring Program that would begin
in the fourth quarter of 2002 and extend into 2003. These initiatives
are expected to affect a total of 1,300 to 1,700 positions worldwide,
including approximately 150 positions in the Company's U.S. research
and development organizations, 500 positions in its U.S. one-time-use
camera assembly operations, 300 positions in its Mexico sensitizing
operations and 550 positions in its global manufacturing and logistics
organization. Specific initiatives included the relocation of the one-
time-use camera assembly operations in Rochester, New York and the
graphic arts and x-ray film sensitizing operations in Mexico to other
Kodak locations. In addition to the initiatives contemplated to
eliminate 1,300 to 1,700 positions, as described above, in the fourth
quarter of 2002, as a result of declining photofinishing volumes, the
Company implemented additional initiatives to close certain central
photofinishing labs in the U.S. and EAMER and to reduce selling,
general and administrative positions on a worldwide basis.
The total restructuring charge for continuing operations recorded in
the fourth quarter of 2002 for these initiatives was $116 million,
which 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. 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.
19
The geographic composition of the 1,150 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. The reduction of 1,150 employees and the
restructuring charge of $116 million are reflected in the Fourth
Quarter, 2002 Restructuring Program table below. These amounts exclude
the fourth quarter termination of 150 employees and the restructuring
charges relating to the shutdown of Kodak Global Imaging, Inc., as
these charges were reflected in the loss from discontinued operations
for the year ended December 31, 2002.
During the first quarter of 2003, the Company recorded an additional
severance charge of $16 million in continuing operations relating to
450 positions that were contemplated under its Fourth Quarter, 2002
Restructuring Program. The reduction of 450 positions and the related
severance charge of $16 million are reflected in the Fourth Quarter,
2002 Restructuring Program table below.
In the early part of the first quarter of 2003, as part of its
continuing focused cost-reduction efforts, the Company announced that
it intended to further reduce employment within a range of 2,300 to
2,900 in 2003, of which 1,800 to 2,200 represented new initiatives
under its First Quarter, 2003 Restructuring Program with the balance
for initiatives remaining under its Fourth Quarter, 2002 Restructuring
Program, as described above. A significant portion of these new
initiatives relate to the rationalization of the Company's
photofinishing operations in the U.S. and Europe. Specifically, as a
result of declining film and photofinishing volumes and in response to
global economic and political conditions, the Company began to
implement initiatives to 1) close certain photofinishing operations in
the U.S. and EAMER, 2) rationalize manufacturing capacity by
eliminating manufacturing positions on a worldwide basis and 3)
eliminate selling, general and administrative positions, particularly
in the Photography segment.
The total restructuring charge for continuing operations recorded in
the first quarter of 2003 relating to the First Quarter, 2003
Restructuring Program was $28 million, which represented severance
charges relating to 425 positions that are being eliminated. The
reduction of 425 positions and the total restructuring charge of $28
million is reflected in the First Quarter, 2003 Restructuring Program
table below.
20
The total severance charge of $44 million recorded in the first quarter
of 2003 relating to the Fourth Quarter, 2002 and the First Quarter,
2003 Restructuring Programs, represents the total termination of 875
employees, including approximately 450 manufacturing and logistics, 250
administrative and 175 photofinishing positions. The geographic
composition of the employees terminated include approximately 425 in
the United States and Canada and 450 throughout the rest of the world.
Severance payments will be paid during the period from 2003 through
2005 since, in many instances, the terminated employees can elect or
are required to receive their severance payments over an extended
period of time.
As a result of initiatives implemented under the Fourth Quarter, 2002
Restructuring Program, the Company recorded $14 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003. The accelerated depreciation relates to long-
lived assets accounted for under the held and used model of SFAS No.
144 and was comprised of $8 million relating to equipment used in the
manufacture of cameras, $5 million for lab equipment used in
photofinishing and $1 million for sensitized manufacturing equipment
that will be used until their abandonment in 2003. The Company will
incur accelerated depreciation charges of $6 million and $3 million in
the second and third quarters, respectively, of 2003 as a result of the
initiatives implemented under the Fourth Quarter, 2002 Restructuring
Program.
With respect to the Fourth Quarter, 2002 Restructuring Program, the
Company anticipates completing the relocation of the U.S. one-time-use
camera assembly operation and Mexico sensitizing operations by the end
of 2003. Such initiatives are expected to result in the elimination of
an additional 200 to 300 positions with anticipated charges in the
range of $5 million to $10 million. The remaining initiatives that the
Company anticipates implementing under the First Quarter, 2003
Restructuring Program comprise approximately 1,300 to 1,700 position
eliminations, asset dispositions and other exit costs. The total
charge for these actions is expected to be in the range of $60 million
to $80 million.
In connection with the charges taken under the First Quarter, 2003 and
Fourth Quarter, 2002 Restructuring Programs, the Company has 775
positions remaining to be eliminated as of March 31, 2003. 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 2003. Severance payments will
continue beyond 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 initiatives
contemplated by the reserve for exit costs to be completed by the end
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.
21
First Quarter, 2003 Restructuring Program
The following table summarizes the activity with respect to the
restructuring charges recorded in connection with the focused cost
reductions that were announced in the first quarter of 2003 and the
remaining balance in the related restructuring reserves at March 31,
2003:
(dollars in millions)
Number of Severance
Employees Reserve Total
--------- -------- -------
Q1, 2003 charges 425 $ 28 $ 28
Q1, 2003 utilization (150) (2) (2)
----- ----- ------
Balance at 3/31/03 275 $ 26 $ 26
===== ===== ======
The $28 million was reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003. The severance costs require the outlay of cash.
Fourth Quarter, 2002 Restructuring Program
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded in connection with
the focused cost reductions that were announced in the fourth quarter
of 2002 and the remaining balance in the related restructuring reserves
at March 31, 2003:
(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
Q1, 2003 charges 450 16 - - - 16
Q1, 2003 utilization (850) (24) - - (2) (26)
------ ----- ---- ---- ---- -----
Balance at 3/31/03 500 $ 45 $ - $ - $ 15 $ 60
====== ===== ==== ==== ==== =====
The charges taken in the first quarter of 2003 for severance of $16
million was reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003. The severance and exit costs require the outlay
of cash, while the inventory write-downs and long-lived asset
impairments represent non-cash items.
22
2001 Restructuring Programs
At December 31, 2002 the Company had remaining severance and exit cost
reserves of $67 million and $18 million, respectively, relating to the
restructuring plans it implemented during 2001. During the first quarter
of 2003, the Company completed the severance actions associated with the
2001 Restructuring Programs and recorded a reversal of $12 million of
reserves through restructuring costs and other in the accompanying
Consolidated Statement of Operations. The completion of the 2001
Restructuring Programs resulted in the elimination of the remaining 200
positions included in the original plans. A total of 6,425 personnel were
terminated under the 2001 Restructuring Programs.
The remaining severance reserve of $34 million as of March 31, 2003 has
not been paid since, in many instances, the terminated employees could
elect or were required to receive their severance payments over an
extended period of time. However, substantially all of these payments
will be made by the end of 2003. Most of the remaining exit cost
reserves of $16 million as of March 31, 2003 are expected to be
utilized during 2003. However, certain costs, such as long-term lease
payments, will be paid over periods after 2003. Cost savings related
to the 2001 restructuring plans approximated $450 million.
- -----------------------------------------------------------------------
NOTE 10: EARNINGS PER SHARE
Options to purchase 24.7 million and 23.9 million shares of common
stock at weighted average per share prices of $60.07 and $61.42 for the
three months ended March 31, 2003 and 2002, respectively, were
outstanding during the periods 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.
- -----------------------------------------------------------------------
NOTE 11: STOCKHOLDERS' EQUITY
$2.50 par value, 950 million shares authorized, 391 million shares
issued at March 31, 2003 and December 31, 2002. Treasury stock at cost
consists of approximately 105 million shares at both March 31, 2003 and
December 31, 2002.
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 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
and earnings per share 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.
23
(in millions, except per share data)
Three Months Ended
March 31
------------------
2003 2002
Net income, as reported $ 12 $ 39
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net
of related tax effects (4) (26)
----- -----
Pro forma net income $ 8 $ 13
===== =====
Earnings per share:
Basic and diluted - as reported $ .04 $ .13
Basic and diluted - pro forma $ .03 $ .04
The total stock-based employee compensation expense amount for the
three months ended March 31, 2002 of $26 million, net of taxes,
includes a net of tax expense impact of $34 million representing the
unamortized compensation cost of the options that were canceled in the
first quarter of 2002 in connection with the 2002 voluntary stock
option exchange program. This charge was partially offset by reversals
of compensation expense related to forfeitures occurring in the three
months ended March 31, 2002, which amounted to $23 million, net of
taxes.
- -----------------------------------------------------------------------
NOTE 12: COMPREHENSIVE INCOME
(in millions)
Three Months Ended
March 31
------------------
2003 2002
Net income $ 12 $ 39
Unrealized gains on
available-for-sale
securities 2 2
Realized and unrealized
(losses) gains from
hedging activity (2) 8
Currency translation
adjustments 61 (32)
---- -----
Total comprehensive income $ 73 $ 17
==== =====
- -----------------------------------------------------------------------
24
NOTE 13: ACQUISITIONS
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 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 million, which was composed of approximately $54
million in cash and $9 million in assumed debt.
During the three months ended March 31, 2003, the Company paid
approximately $21 million for the rights to certain technology. As
this technology is still in the development phase and is not yet ready
for commercialization, it qualified as in-process research and
development. Additionally, management determined that there are no
alternative future uses for this technology. Accordingly, the entire
purchase price was expensed in the quarter as research and development
costs in the accompanying Consolidated Statement of Earnings.
- -----------------------------------------------------------------------
NOTE 14: DISCONTINUED OPERATIONS
During the three month period ended March 31, 2003, the Company
repurchased certain properties that were initially sold in connection
with the 1994 divestiture of Sterling Winthrop Inc., which represented
a portion of the Company's non-imaging health businesses. The
repurchase of these properties will allow the Company to directly
manage the environmental remediation that the Company is required to
perform in connection with those properties, which will result in
better overall cost control (See Note 6, "Commitments and
Contingencies"). In addition, the repurchase eliminated the
uncertainty regarding the recoverability of tax benefits associated
with the indemnification payments that were previously being made to
the purchaser. Accordingly, the Company reversed a tax reserve of
approximately $15 million through earnings from discontinued operations
in the accompanying Consolidated Statement of Earnings, which was
previously established through discontinued operations.
During the three month period ended March 31, 2003, the Company
received cash relating to the favorable outcome of litigation
associated with the 1994 sale of Sterling Winthrop Inc. The related
gain of $19 million was recognized in loss from discontinued operations
in the Consolidated Statement of Earnings for the year ended December
31, 2002. The cash receipt is reflected in the net cash provided by
(used in) discontinued operations component in the accompanying
Consolidated Statement of Cash Flows for the three months ended March
31, 2003.
25
The net loss from discontinued operations of $2 million in the
accompanying Consolidated Statement of Earnings for the three months ended
March 31, 2002 reflects the loss from operations of Kodak Global Imaging,
Inc., a wholly owned subsidiary of Kodak.
- -----------------------------------------------------------------------
NOTE 15: SEGMENT INFORMATION
The Company has three reportable segments: Photography; Health Imaging;
and Commercial Imaging. The balance of the Company's operations, which
individually and in the aggregate do not meet the criteria of a
reportable segment, are reported in All Other.
Segment financial information is shown below.
26
Three Months Ended
March 31
------------------
(in millions) 2003 2002
Net sales from continuing operations:
Photography $1,798 $1,814
Health Imaging 549 521
Commercial Imaging 372 347
All Other 21 24
------ ------
Consolidated total $2,740 $2,706
====== ======
Earnings (loss) from continuing
operations before interest,
other charges, and income taxes:
Photography $ (46) $ 16
Health Imaging 109 76
Commercial Imaging 44 48
All Other (17) (7)
------ ------
Total of segments 90 133
Restructuring costs and other (46) -
Intellectual property settlement (12) -
------ ------
Consolidated total $ 32 $ 133
====== ======
(Loss) earnings from
continuing operations:
Photography $ (35) $ 3
Health Imaging 80 50
Commercial Imaging 20 24
All Other (14) (6)
------ ------
Total of segments 51 71
Restructuring costs and other (46) -
Intellectual property settlement (12) -
Interest expense (37) (44)
Tax benefit - donation
of patents 8 -
Other corporate items 3 2
Income tax effects on
above items and taxes
not allocated to segments 30 12
------ ------
Consolidated total $ (3) $ 41
====== ======
- --------------------------------------------------------------------
27
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except per share data)
Three Months Ended
March 31
--------------------
2003 2002 Change
Net sales $2,740 $2,706 + 1%
Earnings from continuing operations
before interest, other charges,
and income taxes 32 133 - 76
(Loss) earnings from continuing
operations (3) 41 -107
Net earnings 12 39 - 69
Basic and diluted earnings (loss)
per share:
Continuing operations (.01) .14
Discontinued operations .05 (.01)
Total .04 .13 - 69
Net Sales from Continuing Operations by Reportable Segment and All
Other
(in millions)
Three Months Ended
March 31
---------------------
2003 2002 Change
Photography
Inside the U.S. $ 687 $ 799 -14%
Outside the U.S. 1,111 1,015 + 9
------ ------ ---
Total Photography 1,798 1,814 - 1
------ ------ ---
Health Imaging
Inside the U.S. 238 248 - 4
Outside the U.S. 311 273 +14
------ ------ ---
Total Health Imaging 549 521 + 5
------ ------ ---
Commercial Imaging
Inside the U.S. 213 189 +13
Outside the U.S. 159 158 + 1
------ ------ ---
Total Commercial Imaging 372 347 + 7
------ ------ ---
All Other
Inside the U.S. 11 11 0
Outside the U.S. 10 13 -23
------ ------ ---
Total All Other 21 24 -13
------ ------ ---
Consolidated total $2,740 $2,706 + 1%
====== ====== ===
- -----------------------------------------------------------------------
28
Earnings (Loss) from Continuing Operations Before Interest, Other
Charges, and Income Taxes by Reportable Segment and All Other
(in millions)
Three Months Ended
March 31
---------------------
2003 2002 Change
Photography $ (46) $ 16 -388%
Percent of Sales (2.6%) 0.9%
Health Imaging $ 109 $ 76 + 43%
Percent of Sales 19.9% 14.6%
Commercial Imaging $ 44 $ 48 - 8%
Percent of Sales 11.8% 13.8%
All Other $ (17) $ (7) -143%
Percent of Sales (81.0%) (29.2%)
------ ------ ----
Total of segments 90 133 - 32%
3.3% 4.9%
Restructuring costs and other (46) -
Intellectual property settlement (12) -
------ ------ ----
Consolidated total $ 32 $ 133 - 76%
====== ====== ====
- -----------------------------------------------------------------------
(Loss) Earnings From Continuing Operations by Reportable Segment and
All Other
(in millions)
Three Months Ended
March 31
---------------------
2003 2002 Change
Photography $ (35) $ 3
Percent of Sales (1.9%) 0.2%
Health Imaging $ 80 $ 50 + 60%
Percent of Sales 14.6% 9.6%
Commercial Imaging $ 20 $ 24 - 17%
Percent of Sales 5.4% 6.9%
All Other $ (14) $ (6) -133%
Percent of Sales (66.7%) (25.0%)
------ ---- ----
Total of segments $ 51 $ 71 - 28%
Percent of Sales 1.9% 2.6%
Restructuring costs and other (46) -
Intellectual property settlement (12) -
Interest expense (37) (44)
Tax benefit - donation of
patents 8 -
Other corporate items 3 2
Income tax effects on
above items and taxes
not allocated to
segments 30 12
------ ---- ----
Consolidated total $ (3) $ 41 -107%
====== ==== ====
- -----------------------------------------------------------------------
29
COSTS AND EXPENSES
(in millions)
Three Months Ended
March 31
---------------------
2003 2002 Change
Gross profit $ 824 $ 860 -4%
Percent of Sales 30.1% 31.8%
Selling, general and
administrative expenses $ 566 $ 540 +5%
Percent of Sales 20.7% 20.0%
Research and development costs $ 194 $ 187 +4%
Percent of Sales 7.1% 6.9%
- -----------------------------------------------------------------------
2003 COMPARED WITH 2002
First Quarter
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
Consolidated
Net worldwide sales were $2,740 million for the first quarter of 2003
as compared with $2,706 million for the first quarter of 2002,
representing an increase of $34 million, or 1% as reported, or a
decrease of 4% excluding the favorable impact of exchange. The
increase in net sales was primarily due to favorable exchange, which
increased first quarter sales by approximately 5.4 percentage points.
This increase was partially offset by decreases attributable to
price/mix, which reduced first quarter sales by approximately 4.3
percentage points, primarily driven by consumer film and consumer
digital cameras. Volume remained essentially unchanged from the first
quarter of 2002 to the current quarter.
Net sales in the U.S. were $1,149 million for the first quarter of 2003
as compared with $1,247 million for the prior year quarter,
representing a decrease of $98 million, or 8%. Net sales outside the
U.S. were $1,591 million for the current quarter as compared with
$1,459 million for the first quarter of 2002, representing an increase
of $132 million, or 9% as reported, or a decrease of 1% excluding the
favorable impact of exchange.
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East region (EAMER), (2) the
Asia Pacific region and (3) the Canada and Latin America region. Net
sales in the EAMER region were $795 million for the first quarter of
2003 as compared with $716 million for the prior year quarter,
representing an increase of $79 million, or 11% as reported, or a
decrease of 4% excluding the favorable impact of exchange. Net sales
in the Asia Pacific region were $548 million for the current quarter as
compared with $504 million for the prior year quarter, representing an
increase of $44 million, or 9% as reported, or 3% excluding the
favorable impact of exchange. Net sales in the Canada and Latin
America region were $248 million in the current quarter as compared
with $239 million for the first quarter of 2002, representing an
increase of $9 million, or 4% as reported, or 2% excluding the
favorable impact of exchange.
30
The Company's major emerging markets include China, Brazil, India,
Mexico, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging
markets were $578 million for the first quarter of 2003 as compared
with $545 million for the prior year quarter, representing an increase
of $33 million, or 6% as reported, or 4% excluding the favorable impact
of exchange. The emerging market portfolio accounted for approximately
21% of Kodak's worldwide sales and 36% of Kodak's non-U.S. sales in the
quarter. Sales growth in China, Russia and India of 28%, 40% and 14%,
respectively, was partially offset by declines in Brazil and Mexico of
23% and 5%, respectively.
The growth in China resulted from strong business performance for all
Kodak's operations in that region. The increase in sales in Russia is
a result of the expansion of new channel operations for Kodak products
and services and continued success of camera seeding programs. The
declines in Brazil and Mexico are reflective of continued economic
weakness in those emerging market countries.
Gross profit was $824 million for the first quarter of 2003 as compared
with $860 million for the first quarter of 2002, representing a
decrease of $36 million, or 4%. The gross profit margin was 30.1% in
the current quarter as compared with 31.8% in the prior year quarter.
The 1.7 percentage point decrease was primarily attributable to
declines in price/mix, which reduced gross profit margins by
approximately 3.8 percentage points. These declines relate primarily
to consumer film and consumer digital cameras. This decrease was
partially offset by increases related to manufacturing
productivity/cost and exchange, which favorably impacted gross profit
margins by approximately 1.4 percentage points and 0.7 percentage
points, respectively.
Selling, general and administrative expenses (SG&A) were $566 million
for the first quarter of 2003 as compared with $540 million for the
prior year quarter, representing an increase of $26 million, or 5%.
SG&A increased as a percentage of sales from 20.0% for the first
quarter of 2002 to 20.7% for the current quarter. The increase in SG&A
is primarily attributable to a charge of $12 million relating to an
intellectual property settlement and unfavorable exchange of $28
million, partially offset by cost reduction actions.
31
Research and development costs (R&D) were $194 million for the first
quarter of 2003 as compared with $187 million for the first quarter of
2002, representing an increase of $7 million, or 4%. R&D increased as
a percentage of sales from 6.9% for the first quarter of 2002 to 7.1%
for the current quarter. The net increase in R&D is the result of a
$21 million R&D charge relating to the Company's purchase of rights to
certain print technology that is currently in development and not yet
ready for commercialization. This technology qualifies as in-process
R&D and, therefore, was written off in the quarter. This in-process
R&D charge was offset primarily by cost savings realized from position
eliminations associated with the prior year's cost reduction programs.
Earnings from continuing operations before interest, other charges, and
income taxes for the first quarter of 2003 were $32 million as compared
with $133 million for the first quarter of 2002, representing a
decrease of $101 million, or 76%. This decrease is primarily
attributable to (1) the decline in the gross profit margin and
increases in SG&A and R&D, as described above, and (2) net focused cost
reduction charges of $46 million incurred during the first quarter of
2003, with no such costs incurred in the prior year quarter.
Interest expense for the first quarter of 2003 was $37 million as
compared with $44 million for the prior year quarter, representing a
decrease of $7 million, or 16%. The decrease in interest expense is
primarily attributable to lower average borrowing levels and lower
interest rates in the first quarter of 2003 relative to the prior year
quarter.
The other charges component includes principally investment income,
income and losses from equity investments, foreign exchange, and gains
and losses on the sales of assets and investments. Other charges for
the current quarter were $21 million as compared with other charges of
$31 million for the first quarter of 2002. The decrease is primarily
attributable to reduced losses on foreign exchange.
32
The change in the effective tax rate is due to a decrease in the annual
effective tax rate from 29% in the first quarter of 2002 to 26% in the
first quarter of 2003, as well as discrete period items which resulted
in a tax benefit of $37 million in the first quarter of 2003. The
lower annual effective tax rate in 2003 is primarily attributable to
expected increased earnings from operations in certain lower-taxed
jurisdictions outside the U.S., relative to total consolidated
earnings. The discrete period items are attributable to the following
items, all of which are taxed in jurisdictions with tax rates greater
than the annual effective tax rate: net focused cost reduction charges
of $46 million; a $21 million charge for purchased in-process research
and development costs; and a $12 million charge relating to an
intellectual property settlement. In addition, the discrete period
items also include a tax benefit of $8 million relating to the donation
of intellectual property to a tax-qualified organization.
The loss from continuing operations for the first quarter of 2003 was
$3 million, or $.01 per diluted share, as compared with earnings from
continuing operations for the first quarter of 2002 of $41 million, or
$.14 per diluted share, representing a decrease of $44 million. This
decrease in earnings from continuing operations is attributable to the
reasons described above.
Photography
Net worldwide sales for the Photography segment were $1,798 million for
the first quarter of 2003 as compared with $1,814 million for the first
quarter of 2002, representing a decrease of $16 million, or 1% as
reported, or 7% excluding the favorable impact of exchange. The
decrease in net sales was comprised of (1) decreases related to volume,
which reduced first quarter sales by approximately 1.1 percentage
points and (2) declines in price/mix primarily driven by consumer film
and consumer digital cameras, which reduced net sales by approximately
5.5 percentage points. These declines were partially offset by
favorable exchange, which increased net sales by approximately 5.7
percentage points.
Photography segment net sales in the U.S. were $687 million for the
current quarter as compared with $799 million for the first quarter of
2002, representing a decrease of $112 million, or 14%. Photography
segment net sales outside the U.S. were $1,111 million for the first
quarter of 2003 as compared with $1,015 million for the prior year
quarter, representing an increase of $96 million, or 9% as reported, or
a decrease of 1% excluding the favorable impact of exchange.
33
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 9% in the first
quarter of 2003 as compared with the first quarter of 2002, reflecting
decreases due to declines in volume and negative price/mix of
approximately 7% and 8%, respectively, partially offset by favorable
exchange of approximately 5%. Sales of the Company's consumer film
products within the U.S. decreased 24%, reflecting declines in volume
of approximately 16% and negative price/mix of approximately 9%. The
decrease in volume is largely attributable to the decrease in U.S.
consumer film industry volume in the first quarter of 2003, as
described below, which reflects the downward trend in retail sales.
The soft retail sales have resulted in significant inventory levels in
the retail distribution channels during and as of the end of the first
quarter of 2003. The Company believes that these high inventory levels
will continue to impact the Company's sales volume to dealers in the
second quarter of 2003. Consistent with film pricing trends for the
last several consecutive quarters, price/mix declines for U.S. consumer
film products in the first quarter were approximately 4% to 5%. In
addition, price/mix was further impacted by contractual payments to
retailers, which were distributed over lower film volumes during the
quarter. Sales of the Company's consumer film products outside the
U.S. increased 1%, reflecting favorable exchange of approximately 9%,
which was partially offset by declines in volume and negative price/mix
of approximately 3% and 4%, respectively.
U.S. consumer film industry volume decreased 10% in the first quarter
of 2003 as compared with the prior year quarter due to a combination of
continuing economic weakness, the shift of Easter into the second
quarter of 2003, and continued digital substitution impacts. The
Company's blended U.S. consumer film share increased slightly on a
volume basis relative to the first quarter of 2002.
Net worldwide sales of consumer color paper decreased 3% in the first
quarter of 2003 as compared with the first quarter of 2002, reflecting
declines in volume of 6% and negative price/mix of 4%, partially offset
by favorable exchange of 7%. Net sales of consumer color paper in the
U.S. decreased 17%, reflecting volume declines of approximately 14% and
negative price/mix of approximately 4%. Net sales of consumer color
paper outside of the U.S. increased 3%, which was due to favorable
exchange of approximately 10%, partially offset by volume declines and
negative price/mix of approximately 2% and 4%, respectively.
34
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services (CIS) outside the U.S., decreased 14% in the
first quarter of 2003 as compared with the first quarter of 2002,
reflecting lower volumes and price, partially offset by favorable
exchange. In the U.S., Qualex's sales decreased 22%, reflecting the
effects of a continued weak film industry, consumer's shifting
preference to on-site processing, and the adverse impact of several
hundred store closures by a major U.S. retailer. CIS revenues in
Europe benefited from the full-quarter impact of the acquisitions of
(1) Spector Photo Group's wholesale photofinishing and distribution
activities 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.
Net sales from the Company's consumer digital products and services,
which include picture maker kiosks/media and consumer digital services
revenue primarily from Picture CD and Retail.com, increased 3% in the
first quarter of 2003 as compared with the first quarter of 2002,
driven primarily by an increase in sales of kiosks.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs remained flat at approximately 8% for the first
quarter of 2003, essentially unchanged from the previous quarter but
increasing from the 6.9% rate recorded in the first quarter of 2002.
The growth was driven by continued consumer acceptance of Picture CD
and Retail.com.
The Company's Ofoto business almost doubled its sales in the first
quarter of 2003 as compared with the prior year quarter. Ofoto now has
6.5 million members and is consistently achieving a repeat customer
purchase rate of greater than 50%.
Net worldwide sales of consumer digital cameras increased 36% in the
first quarter of 2003 as compared with the prior year quarter,
primarily reflecting strong increases in volume, partially offset by a
decline in price. Sales continue to be driven by strong consumer
acceptance of the EasyShare digital camera system.
In line with normal seasonal trends, Kodak's U.S. consumer digital
camera market share declined modestly during the first quarter of 2003
on a quarter sequential basis. While complete data for first quarter
consumer digital market share is not yet available, all indications are
that Kodak continues to hold one of the top three U.S. market share
positions.
Net worldwide sales of inkjet photo paper increased 51% in the current
quarter as compared with the first quarter of 2002. The Company
maintained its top two market share position in the United States
quarter sequentially. The double-digit revenue growth and the
maintenance of market share are primarily attributable to strong
underlying market growth and Kodak's introduction of a new product line
of small format inkjet papers.
35
Net worldwide sales of professional sensitized films, including color
negative, color reversal and commercial black and white films,
decreased 7% in the first quarter of 2003 as compared with the first
quarter of 2002, reflecting primarily declines in volume. Net
worldwide sales of professional sensitized paper were unchanged in the
first quarter of 2003 as compared with the first quarter of 2002.
Sales declines resulted primarily from the combined impacts of ongoing
digital substitution and continued economic weakness in markets
worldwide. These declines were partially offset by worldwide sales
increases in the current quarter related to digital writers, scanners,
digital systems and solutions, and thermal media and equipment.
Net worldwide sales of origination and print film to the entertainment
industry increased 18% in the first quarter of 2003 as compared with
the prior year quarter, reflecting higher print film volumes due to a
strong industry motion picture release schedule in North America, and
favorable exchange. The new Vision 2 origination film continues to
gain strong customer acceptance.
Gross profit for the Photography segment was $502 million for the first
quarter of 2003 as compared with $550 million for the prior year
quarter, representing a decrease of $48 million or 9%. The gross
profit margin was 27.9% in the current year quarter as compared with
30.3% in the prior year quarter. The 2.4 percentage point decline was
primarily attributable to
declines in price/mix primarily driven by consumer film and consumer
digital cameras, which reduced gross profit margins by approximately
5.1 percentage points. This decrease was partially offset by increases
in manufacturing productivity and exchange, which favorably impacted
gross profit margins by approximately 1.8 percentage points and 0.9
percentage points, respectively.
SG&A expenses for the Photography segment increased $13 million, or 3%,
from $406 million in the first quarter of 2002 to $419 million in the
current quarter, and increased as a percentage of sales from 22.4% to
23.3%. The increase is primarily attributable to unfavorable exchange
of $22 million, partially offset by the impact of cost reduction
actions.
R&D costs for the Photography segment decreased $1 million, or 1%, from
$129 million in the first quarter of 2002 to $128 million in the
current quarter and remained unchanged as a percentage of sales at
7.1%. The decrease in R&D was primarily attributable to cost savings
realized from position eliminations associated with the prior year's
cost reduction programs. This decrease was almost entirely offset by
the $21 million charge associated with the write-off of purchased in-
process R&D as noted above.
Earnings (loss) from continuing operations before interest, other
charges, and income taxes for the Photography segment decreased $62
million, from earnings of $16 million in the first quarter of 2002 to a
loss of $46 million in the first quarter of 2003, primarily as a result
of the factors described above.
36
Health Imaging
Net worldwide sales for the Health Imaging segment were $549 million
for the first quarter of 2003 as compared with $521 million for the
prior year quarter, representing an increase of $28 million, or 5% as
reported, or a decrease of 1% excluding the favorable impact of
exchange. The increase in sales was comprised of (1) an increase in
volume of approximately 1.2 percentage points, driven primarily by
volume increases in digital media, digital capture equipment and
equipment services and (2) an increase from favorable exchange of
approximately 6.1 percentage points, which was partially offset by a
decrease in price/mix of approximately 1.9 percentage points, primarily
driven by digital media and analog medical film.
Net sales in the U.S. were $238 million for the current quarter as
compared with $248 million for the first quarter of 2002, representing
a decrease of $10 million, or 4%. Net sales outside the U.S. were $311
million for the first quarter of 2003 as compared with $273 million for
the prior year quarter, representing an increase of $38 million, or 14%
as reported, or 2% excluding the favorable 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 11% in
the first quarter of 2003 as compared with the prior year quarter. The
increase in digital product sales was primarily attributable to higher
volumes of digital media, digital capture equipment and equipment
services. Service revenues increased due to an increase in digital
equipment service contracts during the current quarter.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 2% in the first quarter of
2003 as compared with the first quarter of 2002 driven primarily by
lower specialty films volumes. Traditional analog film products
(excluding specialty films) increased 2% in the first quarter of 2003
as compared with the prior year quarter due to favorable exchange. In
the quarter, traditional analog film volumes increased slightly, but
were more than offset by unfavorable price/mix.
37
Gross profit for the Health Imaging segment was $229 million for the
first quarter of 2003 as compared with $195 million in the prior year
quarter, representing an increase of $34 million, or 17%. The gross
profit margin was 41.7% in the current quarter as compared with 37.4%
in the first quarter of 2002. The increase in the gross profit margin
of 4.3 percentage points was principally attributable to (1) favorable
cost and manufacturing productivity, which increased gross profit
margins by approximately 4.5 percentage points, primarily due to
favorable media and equipment manufacturing productivity led by DryView
digital media and digital capture equipment, complemented by lower
service costs and improved supply chain management, and (2) favorable
exchange, which contributed approximately 1.3 percentage points to the
gross profit margin. These increases were partially offset by
decreases in price/mix, which negatively impacted gross profit margins
by 1.5 percentage points due to lower prices for digital media, analog
film and laser printers.
SG&A expenses for the Health Imaging segment decreased $1 million, or
1%, from $83 million in the first quarter of 2002 to $82 million for
the current quarter, and decreased as a percentage of sales from 16.0%
to 14.9%. The decrease in SG&A expenses is primarily attributable to
expense management.
First quarter R&D costs increased $3 million, or 8%, from $36 million
to $39 million and increased as a percentage of sales from 6.9% for the
first quarter of 2002 to 7.1% for the current quarter. R&D expenses
increased in the first quarter as the segment increased spending to
drive growth in selected areas of the product portfolio.
Earnings from continuing operations before interest, other charges, and
income taxes for the Health Imaging segment increased $33 million, or
43%, from $76 million for the prior year quarter to $109 million for
the first quarter of 2003 due primarily to the reasons described above.
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $372
million for the first quarter of 2003 as compared with $347 million for
the prior year quarter, representing an increase of $25 million, or 7%
as reported, or an increase of 4% excluding the favorable impact of
exchange. The increase in net sales was primarily comprised of (1)
increases in volume, which contributed approximately 5.8 percentage
points to first quarter sales and (2) an increase of approximately 3.2
percentage points due to favorable exchange, which was partially offset
by price/mix declines of approximately 1.7 percentage points.
38
Net sales in the U.S. were $213 million for the current quarter as
compared with $189 million for the prior year quarter, representing an
increase of $24 million, or 13%. Net sales outside the U.S. were $159
million in the first quarter of 2003 as compared with $158 million for
the prior year quarter, representing an increase of $1 million or 1% as
reported, or a decrease of 6% excluding the favorable impact of
exchange.
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 16% in the current
quarter as compared with the first quarter of 2002, 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 the first quarter of 2003, which were not material
to the Company's results from operations.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, has sold
approximately 225 units through February 2003, with average monthly
page volumes for these units running higher than planned.
Gross profit for the Commercial Imaging segment was $107 million for
the first quarter of 2003 as compared with $109 million in the prior
year quarter, representing a decrease of $2 million, or 2%. The gross
profit margin was 28.8% in the current quarter as compared with 31.4%
in the prior year quarter. The decrease in the gross profit margin of
2.6 percentage points was primarily attributable to (1) declines in
price/mix, which reduced gross profit margins by approximately 1.5
percentage points primarily due to declining contributions from
traditional graphic arts and microfilm products and (2) manufacturing
productivity which negatively impacted gross profit margins by
approximately 1.3 percentage points.
SG&A expenses for the Commercial Imaging segment increased $1 million,
or 2%, from $47 million for the first quarter of 2002 to $48 million
for the current quarter, but decreased as a percentage of sales from
13.5% to 12.9%. The primary contributor to the increase in SG&A
expense was the impact of unfavorable exchange.
First quarter R&D costs for the Commercial Imaging segment remained
essentially unchanged from the prior year quarter at $14 million, but
decreased as a percentage of sales from 4.0% in the prior year quarter
to 3.8% in the first quarter of 2003.
Earnings from continuing operations before interest, other charges, and
income taxes for the Commercial Imaging segment decreased $4 million,
or 8%, from $48 million in the first quarter of 2002 to $44 million in
the first quarter of 2003. This decrease is primarily attributable to
the reasons described above.
39
All Other
Net worldwide sales for All Other were $21 million for the first quarter
of 2003 as compared with $24 million for the first quarter of 2002,
representing a decrease of $3 million, or 13%. Net sales in the U.S.
were unchanged at $11 million in both the current quarter and the first
quarter of 2002. Net sales outside the U.S. were $10 million in the
first quarter of 2003 as compared with $13 million in the prior year
quarter, representing a decrease of $3 million, or 23%.
SK Display Corporation, the OLED manufacturing joint venture between
Kodak and Sanyo, continued production scale-up with the goal of supplying
production quantity OLED screens to the marketplace throughout the
remainder of 2003.
The loss from continuing operations before interest, other charges, and
income taxes for All Other was $17 million in the current quarter as
compared with $7 million in the first quarter of 2002.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations, net of an income tax
benefit of $1 million for the three months ended March 31, 2002, were
$.05 per diluted share for the first quarter of 2003, as compared with
a loss from discontinued operations for the first quarter of 2002 of
$.01 per diluted share. During the quarter, the Company reversed a tax
reserve of $15 million through discontinued operations. The reversal
of the tax reserve was triggered by the Company's repurchase of certain
properties that were initially sold in connection with the 1994
divestiture of Sterling Winthrop Inc., which represented a portion of
the Company's non-imaging health businesses. The repurchase of these
properties will allow the Company to directly manage the environmental
remediation that the Company is required to perform in connection with
those properties, which will result in better overall cost control. In
addition, the repurchase eliminated the uncertainty regarding the
recoverability of tax benefits associated with the indemnification
payments that were previously being made to the purchaser.
NET EARNINGS
Net earnings for the first quarter of 2003 were $12 million, or $.04
per diluted share, as compared with net earnings for the first quarter
of 2002 of $39 million, or $.13 per diluted share, representing a
decrease of $27 million, or 69%. This decrease is primarily
attributable to the reasons outlined above.
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40
RESTRUCTURING
The Company periodically announces planned restructuring programs
(Programs), which often consist of a number of restructuring
initiatives. These Program announcements provide estimated ranges
relating to the number of positions to be eliminated and the total
restructuring charges to be incurred. The actual charges for
initiatives under a Program are recorded in the period in which the
Company commits to formalized restructuring plans or executes the
specific actions contemplated by the Program and all criteria for
restructuring charge recognition under the applicable accounting
guidance have been met.
During the fourth quarter of 2002, the Company announced a planned
Program consisting of a number of focused cost reduction initiatives
designed to deploy manufacturing assets more effectively in order to
provide competitively-priced products to the global market. In the
announcement, the Company discussed the restructuring initiatives
under its Fourth Quarter, 2002 Restructuring Program that would begin
in the fourth quarter of 2002 and extend into 2003. These initiatives
are expected to affect a total of 1,300 to 1,700 positions worldwide,
including approximately 150 positions in the Company's U.S. research
and development organizations, 500 positions in its U.S. one-time-use
camera assembly operations, 300 positions in its Mexico sensitizing
operations and 550 positions in its global manufacturing and logistics
organization. Specific initiatives included the relocation of the one-
time-use camera assembly operations in Rochester, New York and the
graphic arts and x-ray film sensitizing operations in Mexico to other
Kodak locations. In addition to the initiatives contemplated to
eliminate 1,300 to 1,700 positions, as described above, in the fourth
quarter of 2002, as a result of declining photofinishing volumes, the
Company implemented additional initiatives to close certain central
photofinishing labs in the U.S. and EAMER and to reduce selling,
general and administrative positions on a worldwide basis.
The total restructuring charge for continuing operations recorded in
the fourth quarter of 2002 for these initiatives was $116 million,
which 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. 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.
41
The geographic composition of the 1,150 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. The reduction of 1,150 employees and the
restructuring charge of $116 million is reflected in the Fourth
Quarter, 2002 Restructuring Program table below. These amounts exclude
the fourth quarter termination of 150 employees and the restructuring
charges relating to the shutdown of Kodak Global Imaging, Inc., as
these charges were reflected in the loss from discontinued operations
for the year ended December 31, 2002.
During the first quarter of 2003, the Company recorded an additional
severance charge of $16 million in continuing operations relating to
450 positions that were contemplated under its Fourth Quarter, 2002
Restructuring Program. The reduction of 450 positions and the related
severance charge of $16 million is reflected in the Fourth Quarter,
2002 Restructuring Program table below.
In the early part of the first quarter of 2003, as part of its
continuing focused cost-reduction efforts, the Company announced that
it intended to further reduce employment within a range of 2,300 to
2,900 in 2003, of which 1,800 to 2,200 represented new initiatives
under its First Quarter, 2003 Restructuring Program with the balance
for initiatives remaining under its Fourth Quarter, 2002 Restructuring
Program, as described above. A significant portion of these new
initiatives relate to the rationalization of the Company's
photofinishing operations in the U.S. and Europe. Specifically, as a
result of declining film and photofinishing volumes and in response to
global economic and political conditions, the Company began to
implement initiatives to 1) close certain photofinishing operations in
the U.S. and EAMER, 2) rationalize manufacturing capacity by
eliminating manufacturing positions on a worldwide basis and 3)
eliminate selling, general and administrative positions, particularly
in the Photography segment.
The total restructuring charge for continuing operations recorded in
the first quarter of 2003 relating to the First Quarter, 2003
Restructuring Program was $28 million, which represented severance
charges relating to 425 positions that are being eliminated. The
reduction of 425 positions and the total restructuring charge of $28
million is reflected in the First Quarter, 2003 Restructuring Program
table below.
42
The total severance charge of $44 million recorded in the first quarter
of 2003 relating to the Fourth Quarter, 2002 and the First Quarter,
2003 Restructuring Programs, represents the total termination of 875
employees, including approximately 450 manufacturing and logistics, 250
administrative and 175 photofinishing positions. The geographic
composition of the employees terminated include approximately 425 in
the United States and Canada and 450 throughout the rest of the world.
Severance payments will be paid during the period from 2003 through
2005 since, in many instances, the terminated employees can elect or
are required to receive their severance payments over an extended
period of time.
As a result of initiatives implemented under the Fourth Quarter, 2002
Restructuring Program, the Company recorded $14 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003. The accelerated depreciation relates to long-
lived assets accounted for under the held and used model of SFAS No.
144 and was comprised of $8 million relating to equipment used in the
manufacture of cameras, $5 million for lab equipment used in
photofinishing and $1 million for sensitized manufacturing equipment
that will be used until their abandonment in 2003. The Company will
incur accelerated depreciation charges of $6 million and $3 million in
the second and third quarters, respectively, of 2003 as a result of the
initiatives implemented under the Fourth Quarter, 2002 Restructuring
Program.
With respect to the Fourth Quarter, 2002 Restructuring Program, the
Company anticipates completing the relocation of the U.S. one-time-use
camera assembly operations and Mexico sensitizing operations by the end
of 2003. Such initiatives are expected to result in the elimination of
an additional 200 to 300 positions with anticipated charges in the
range of $5 million to $10 million. The remaining initiatives that the
Company anticipates implementing under the First Quarter, 2003
Restructuring Program comprise approximately 1,300 to 1,700 position
eliminations, asset dispositions and other exit costs. The total
charge for these actions is expected to be in the range of $60 million
to $80 million.
In connection with the charges taken under the First Quarter, 2003 and
Fourth Quarter, 2002 Restructuring Programs, the Company has 775
positions remaining to be eliminated as of March 31, 2003. 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 2003. Severance payments will
continue beyond 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 initiatives
contemplated by the reserve for exit costs to be completed by the end
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.
43
First Quarter, 2003 Restructuring Program
The following table summarizes the activity with respect to the
restructuring charges recorded in connection with the focused cost
reductions that were announced in the first quarter of 2003 and the
remaining balance in the related restructuring reserves at March 31,
2003:
(dollars in millions)
Number of Severance
Employees Reserve Total
--------- -------- -------
Q1, 2003 charges 425 $ 28 $ 28
Q1, 2003 utilization (150) (2) (2)
----- ----- ------
Balance at 3/31/03 275 $ 26 $ 26
===== ===== ======
The $28 million was reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003. The severance costs require the outlay of cash.
Fourth Quarter, 2002 Restructuring Program
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded in connection with
the focused cost reductions that were announced in the fourth quarter
of 2002 and the remaining balance in the related restructuring reserves
at March 31, 2003:
(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
Q1, 2003 charges 450 16 - - - 16
Q1, 2003 utilization (850) (24) - - (2) (26)
------ ----- ---- ---- ---- -----
Balance at 3/31/03 500 $ 45 $ - $ - $ 15 $ 60
====== ===== ==== ==== ==== =====
The charges taken in the first quarter of 2003 for severance of $16
million was reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the three months
ended March 31, 2003. The severance and exit costs require the outlay
of cash, while the inventory write-downs and long-lived asset
impairments represent non-cash items.
Cost savings related to the charges recorded in the fourth quarter of
2002 and the first quarter of 2003 for the Fourth Quarter, 2002
Restructuring Program and the First Quarter, 2003 Restructuring Program
are estimated to be $110 million in 2003 and $230 million on an annual
basis.
44
2001 Restructuring Programs
At December 31, 2002 the Company had remaining severance and exit cost
reserves of $67 million and $18 million, respectively, relating to the
restructuring plans it implemented during 2001. During the first
quarter of 2003, the Company completed the severance actions associated
with the 2001 Restructuring Programs and recorded a reversal of $12
million of reserves through restructuring costs and other in the
accompanying Consolidated Statement of Operations. The completion of
the 2001 Restructuring Programs resulted in the elimination of the
remaining 200 positions included in the original plans. A total of
6,425 personnel were terminated under the 2001 Restructuring Programs.
The remaining severance reserve of $34 million as of March 31, 2003 has
not been paid since, in many instances, the terminated employees could
elect or were required to receive their severance payments over an
extended period of time. However, substantially all of these payments
will be made by the end of 2003. Most of the remaining exit cost
reserves of $16 million as of March 31, 2003 are expected to be
utilized during 2003. However, certain costs, such as long-term lease
payments, will be paid over periods after 2003. Cost savings related
to the 2001 restructuring plans approximated $450 million.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $28 million to $597
million at March 31, 2003. The increase resulted primarily from $106
million of net cash provided by operating activities and $104 million
of net cash provided by financing activities, partially offset by $187
million of net cash used in investing activities.
The net cash provided by operating activities of $106 million was
partially attributable to net earnings of $12 million, which, when
adjusted for the earnings from discontinued operations, equity in
losses from unconsolidated affiliates, depreciation and amortization
and provision for deferred taxes, provided $232 million of operating
cash. Also contributing to operating cash was a decrease in
receivables of $155 million, the cash receipt of $19 million in
connection with the Sterling Winthrop Inc. settlement and other items,
net of $27 million, which were partially offset by an increase in
inventories of $116 million and a decrease in liabilities excluding
borrowings of $211 million. The net cash used in investing activities
of $187 million was utilized primarily for capital expenditures of $111
million, business acquisitions of $54 million and investments in
unconsolidated affiliates of $20 million. The net cash provided by
financing activities of $104 million was primarily the result of a net
increase in borrowings of $92 million.
Net working capital, excluding short-term borrowings, increased to $873
million from $599 million at year-end 2002. This increase is mainly
attributable to a higher inventory balance, lower accounts payable and
other current liabilities balance, and a lower accrued income taxes
balance, partially offset by a lower receivables balance.
45
The Company has a dividend policy whereby it makes 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 15, 2003, the Company's Board of
Directors declared a semi-annual cash dividend of $0.90 per share on
the outstanding common stock of the Company. This dividend will be
payable on July 16, 2003 to shareholders of record at the close of
business on June 2, 2003.
Capital additions were $111 million in the first quarter of 2003, 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. Based
on the year-to-date experience, the capital spending is in line with
the full-year plan.
The Company believes that its cash flow from operations will be
sufficient to cover its working capital needs and the funds required
for potential future debt reduction, dividend payments, acquisitions
and the 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.
The Company 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 $1,000 million 364-day committed
revolving credit facility (364-Day Facility) 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 364-Day Facility have increased
by approximately 7 basis points over the prior year quarter 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 5 basis points over the prior year quarter
on an undrawn basis and 17.5 basis points on a fully drawn basis.
These costs will increase or decrease based on future changes in the
Company's credit rating.
Under the 364-Day Facility and 5-Year Facility, there is a financial
covenant, which requires the Company to maintain a certain 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 March 31, 2003. The Company does not anticipate that a
violation is likely to occur.
46
The Company has other committed and uncommitted lines of credit at
March 31, 2003 totaling $245 million and $1,867 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 March
31, 2003 were $151 million and $468 million, respectively. These
outstanding borrowings are reflected in the short-term bank borrowings
and long-term debt balances at March 31, 2003.
At March 31, 2003, the Company had $1,096 million in commercial paper
outstanding, with a weighted average interest rate of 1.48%. To
provide additional financing flexibility, the Company has an accounts
receivable securitization program, which provides for borrowings up to
a maximum of $250 million. At March 31, 2003, the Company had
outstanding borrowings under this program of $43 million. The
estimated annualized interest rate under this program is 2.60%.
The Company has a medium-term note program of $2,200 million for
issuance of debt securities due nine months or more from date of issue.
At March 31, 2003, 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.
47
During the three months 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 March 31, 2003 was 1.48% as compared with 2.82% at March
31, 2002. 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 three months ended March 31, 2003 is down relative to the three
months ended March 31, 2002. On April 15, 2003, S&P revised its
outlook on Kodak to negative from stable and affirmed its BBB+
corporate credit rating. The action is attributable to S&P's focus on
unfunded pension and other postretirement benefit obligations. 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.
48
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: $40 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 Baa2, 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.
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At March 31, 2003, these
guarantees totaled a maximum of $317 million, with outstanding
guaranteed amounts of $148 million. The maximum guarantee amount
includes guarantees of up to: $160 million of debt for KPG ($77 million
outstanding); $6 million for other unconsolidated affiliates and third
parties ($6 million outstanding); and $151 million of customer amounts
due to banks in connection with various banks' financing of customers'
purchase of products and equipment from Kodak ($65 million outstanding).
The KPG debt facility and the related guarantee mature on December 31,
2005, but may be renewed at KPG's, the joint venture partners' and the
bank's discretion. The guarantees for the other unconsolidated
affiliates and 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. With respect
to the guarantees that the Company issued in the three months ended
March 31, 2003, the Company assessed the fair value of its obligation to
stand ready to perform under these guarantees by considering the
likelihood of occurrence of the specified triggering events or
conditions requiring performance as well as other assumptions and
factors. Through internal analysis and external valuations, the Company
determined that the fair value of the guarantees was not material to the
Company's financial position, results of operations or cash flows.
49
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $792
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 accompanying Consolidated Statement of
Financial Position, is $600 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 March 31, 2003,
the Company has not been required to guarantee any of the SK Display
Corporation's outstanding debt.
The Company issues indemnifications in certain instances when it sells
businesses and real estate, and in the ordinary course of business with
its customers, suppliers, service providers and business partners.
Further, the Company indemnifies its directors and officers who are, or
were, serving at Kodak's request in such capacities. Historically,
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. Additionally, the fair value of the
indemnifications that the Company issued during the three months ended
March 31, 2003 was not material to the Company's financial position,
results of operations or cash flows.
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.
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 March 31, 2003. 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 nine months.
50
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 its filing for bankruptcy on December 24,
2002. Since that time, certain of its affiliates have also filed for
bankruptcy in the various countries in which they are organized.
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
$445 million at March 31, 2003.
51
To mitigate the risk of not being able to fulfill its service
obligations, 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 an entity created to hold intellectual
property and certain other assets conveyed by the Vendor and its
affiliates related to spare parts, and an arrangement to purchase spare
parts from the Vendor or its affiliates. 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 a limited number of parts that
were covered by patents owned by the Vendor and from purchasing such
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.
There is the possibility that the arrangement that the Company entered
into with the Vendor could be challenged as part of the bankruptcy
process. 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 situations where it would be unable to
fulfill its service obligations under the arrangement with ESF.
ESF is currently operating under the amended Receivables Purchase
Agreement (RPA), which provides for maximum borrowings up to $370
million. Total outstanding borrowings under the RPA at March 31, 2003
were $295 million. The amended RPA 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. The term of
the ESF partnership agreement between the Company and DCC 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 March 31, 2003, the Company had outstanding letters of credit
totaling $99 million and surety bonds in the amount of $97 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
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52
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting
for Asset Retirement Obligations." SFAS No. 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 No. 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 No. 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 adopted SFAS No. 143 effective January 1, 2003. The adoption
of SFAS No. 143 did not have a material impact on the Company's
financial position, results of operations or cash flows.
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 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 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 impacts 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
Company adopted SFAS No. 146 effective January 1, 2003. The Company
primarily accounts for employee termination actions under SFAS No. 112,
which requires recording when such charges are probable and estimable.
As such, the adoption of SFAS No. 146 did not have an impact in the
quarter, as there were no significant one-time severance actions or
other exit costs.
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 disclosure provisions of FIN 45 were effective for financial
statements of interim periods or annual periods ending after December
15, 2002. In addition, the Company adopted the recognition provisions
of FIN 45 effective January 1, 2003 for guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 did not have a
material impact on the Company's financial position, results of
operations or cash flows. See Note 7, "Guarantees."
53
In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
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 waiting for the EITF to complete its
deliberations on certain implementation provisions to finalize its
evaluation of the effect that the adoption of EITF No. 00-21 will have
on its financial position, results of operations and cash flows.
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 (VIEs), 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 VIEs, 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 VIEs created or
acquired after January 31, 2003. For VIEs 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 VIEs that
are deemed significant, even if consolidation is not required. See
Note 5, "Variable Interest Entities" for these disclosures. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its financial position, results of operations and cash
flows.
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54
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the United States Private
Securities Litigation Reform Act of 1995. For example, references to
the Company's revenue and cash flow expectations for 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.
Any forward-looking statements in this report should be evaluated in
light of these important risk factors.
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55
Item 3. 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.
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 March 31, 2003 and 2002, the fair value of open
forward contracts would have increased $7 million, and decreased $17
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 March 31, 2003 and 2002, the fair
value of open forward contracts would have decreased $9 million and $7
million, respectively. Such losses in fair value, if realized, would
be offset by lower costs of manufacturing silver-containing products.
The Company is exposed to interest rate risk primarily through its
borrowing activities and, to a lesser extent, through investments in
marketable securities. The Company utilizes U.S. dollar denominated
and foreign currency denominated borrowings to fund its working capital
and investment needs. The majority of short-term and long-term
borrowings are in fixed-rate instruments. There is inherent roll-over
risk for 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.
56
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 32 basis points) higher at March 31, 2003, the fair
value of short-term and long-term borrowings would have decreased $1
million and $12 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 41 basis points)
higher at March 31, 2002, the fair value of short-term and long-term
borrowings would have decreased $1 million and $22 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 March 31, 2003 was
not significant to the Company.
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Item 4. 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
quarterly 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.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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57
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and financial statement schedules required as part of this
report are listed in the index appearing on page 58.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed for the three
months ended March 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
Date April 24, 2003
Robert P. Rozek
Controller
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58
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
Number Page
(10) 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.)
Amendment dated April 2, 2003. 59
(10) Z. Antonio M. Perez Agreement dated March 3, 2003. 60
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 88
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 90
(99.3) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 92
(99.4) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 93
59
Exhibit (10) O.
April 2, 2003 Amendment
to
EASTMAN KODAK COMPANY 1997 STOCK OPTION PLAN
The Eastman Kodak Company 1997 Stock Option Plan is amended to replace
Sections 1.2 and 6.1 in their entirety so as to read as follows:
1.2 Term
The Plan shall become effective on February 13, 1997. Awards
shall not be granted pursuant to the Plan after December 31, 2003.
6.1 Available Shares.
The maximum number of shares of Common Stock, $2.50 par value per
share, of Kodak which shall be available for grant of Awards under
the Plan during its term shall not exceed 3,380,000. (Such
amount shall be subject to adjustment as provided in Section 6.2.)
Any shares of Common Stock related to Awards which terminate by
expiration, forfeiture, cancellation or otherwise without the
issuance of such shares, are settled in cash in lieu of Common
Stock, or are exchanged with the Committee's permission for Awards
not involving Common Stock, shall not be available again for grant
under the Plan. The shares of Common Stock available for issuance
under the Plan shall be treasury shares.
60
Exhibit (10) Z.
March 3, 2003
Antonio M. Perez
(Address intentionally
Omitted)
Dear Antonio:
We are delighted to extend you an offer to join Eastman Kodak Company
("Kodak") as its President and Chief Operating Officer. We are
confident that your professional talent will be a tremendous asset to
our company and we are enthusiastic about welcoming you as a member of
our top management team. We look forward to you playing a crucial
leadership role, working with others throughout the company to realize
our potential.
This letter agreement outlines the role, compensation and benefits of
your offer of employment with Kodak. Due to the strategic importance
of your role, we are pleased to offer you a comprehensive package with
the following elements.
1. Position
Your position will be President and Chief Operating Officer, Eastman
Kodak Company. You will report directly to Daniel A. Carp, Chairman
and Chief Executive Officer, Eastman Kodak Company.
As President and Chief Operating Officer, your responsibilities and
duties will be commensurate with the titles of these positions and
include those duties and responsibilities normally performed by the
President and Chief Operating Officer of a large publicly-held
corporation operating worldwide. You will also perform such other
duties and responsibilities that are consistent with the positions of
President and Chief Operating Officer as the Chief Executive Officer or
the Board may direct. The Board or Chief Executive Officer may also
modify your duties and responsibilities from time to time with your
consent.
2. Location
You will be located at the Company's headquarters in Rochester, New
York.
3. Permanent Residence
As a result of your location in Rochester, NY, it is understood you
will establish your permanent residence in the Rochester area.
4. Employment Date
You will commence your employment with Kodak as soon as possible, but
not later than April 3, 2003.
5. Base Salary
Your base salary will be at the rate of $900,000 per year. Your base
salary will be reviewed no less frequently than annually for increase
in the discretion of the Executive Compensation and Development
Committee of the Board. Once increased, your base salary will not be
decreased below the increased amount.
6. Executive Compensation for Excellence and Leadership
You will be eligible to participate in Kodak's short-term variable pay
plan for its management level employees, Executive Compensation for
Excellence and Leadership ("EXCEL"). Your initial annual target award
under EXCEL will be 100% of your base salary, making your total
targeted annual compensation $1,800,000. Your actual award for a year
will vary based on Company performance, unit performance, your job
performance, and such other criteria selected by the Executive
Compensation and Development Committee. For 2003, any award you
receive will be pro-rated based on your length of service during 2003.
7. Signing Incentive-Stock Option Award
To encourage you to join Kodak, you will receive as an incentive bonus
a one-time grant of 500,000 options to acquire Kodak common stock. The
options will be issued to you under the terms of the Eastman Kodak
Company 1997 Stock Option Plan. The options will be granted to you on
the first day of your employment. The options will have a term of 10
years and an exercise price equal to the mean between the high and low
at which Kodak common stock trades on the New York Stock Exchange on
the date they are granted. One half of the options, i.e., 250,000
options, will vest on the second anniversary of the date of grant, the
remaining 250,000 options will vest on the third anniversary of the
date of grant.
If your employment terminates during the one-year period following the
date the options are granted, you will forfeit the options unless your
termination is due to death, Disability or for a Permitted Reason, as
defined below. Thereafter, so long as the options remain unvested,
they will be subject to forfeiture in the event of your termination of
employment for any reason other than for death or for Disability or an
Approved Reason, as those terms are defined below.
For purposes of this stock option incentive bonus, if Kodak terminates
your employment without Cause, as defined below, or if you terminate
your employment for Good Reason, as defined below, your termination
will be for both a Permitted Reason and an Approved Reason.
Consequently, in such event you will not forfeit by virtue of your
termination any of the stock options granted to you prior to your
termination of employment.
The specific terms, conditions and restrictions of your stock option
grant, which will be consistent with those described in this letter
agreement, will be contained in an award notice delivered to you
shortly after the commencement of your employment.
8. Signing Incentive-Restricted Stock Award
As a further inducement to join Kodak, you will receive as a signing
incentive, a one-time grant of 100,000 shares of restricted Kodak
Common Stock. The restricted shares will be issued to you under the
terms of the 2000 Omnibus Long-Term Compensation Plan (the "Omnibus
Plan"). The restrictions on 50,000 shares will lapse on the third
anniversary of the date of the commencement of your employment. The
restriction on the remaining 50,000 shares will lapse on the fifth
anniversary of the date of the commencement of your employment.
For so long as these shares remain restricted, they will be subject to
forfeiture in the event of your termination of employment for any
reason other than for death, Disability, termination by Kodak without
Cause or termination by you for Good Reason. In the event of your
death, all of the restrictions on the shares will immediately lapse on
the date of your death and the shares will be paid to your estate. If
your employment is terminated by Kodak without Cause or terminates due
to Disability or Good Reason, you will receive a pro rata portion of
the restricted shares based on your service with Kodak until your
termination of employment. The remaining restricted shares will be
immediately forfeited.
The specific terms, conditions and restrictions of your restricted
stock grant, which will be consistent with those described in this
letter agreement, will be contained in an award notice delivered to you
shortly after the commencement of your employment.
9. Stock Option Program
You will be eligible to participate in our Management Stock Option
Program under the Omnibus Plan. Grants are typically made annually
under this program. Your annual target award under the program will be
100,000 options. Individual awards under the program are, however,
wholly within the discretion of the Executive Compensation and
Development Committee. Presently, the Executive Compensation and
Development Committee grants awards under the program based primarily
on the results of Kodak's leadership assessment and succession planning
process. The first grant that you will be eligible for under the
program is the grant for 2003 tentatively scheduled for the fall of
that year.
10. Performance Stock Program
You will be eligible to participate in the Performance Stock Program,
Kodak's long-term compensation plan for its senior management. Upon
your employment, you will be named a participant in the program's three
pending performance cycles. Awards earned under the program are paid
in the form of restricted shares of Kodak common stock. The
restrictions, which lapse at age 60, require continuous employment and
noncompetition and prohibit the transferability of awards. Newly
eligible participants are eligible for pro rata awards under the
program's pending performance cycles based on their service during the
cycle. Your target award for a full performance cycle under the
program will be 15,000 shares of restricted Kodak common stock.
63
You will also be eligible to participate in the program's EIP subplan
for the 2002-2004 cycle. The purposes of this one-time subplan are to:
(1) reduce the losses of certain of the company's strategic product
groups by yearend 2003; and (2) to improve year over year cash flow by
yearend 2003. In this regard, certain target and threshold performance
goals have been established under the EIP subplan based on these two
metrics for the two-year period commencing January 1, 2002 and ending
December 31, 2003. Under the EIP subplan, your target award, which if
earned would pay out shortly after yearend 2003, will be 55,607 shares
of Kodak common stock. Any award earned under the EIP subplan will be:
(1) pro-rated based on your length of service during the two-year
cycle; and (2) subtracted from any award you may otherwise receive
under the 2002-2004 performance cycle of the Performance Stock Program.
11. Cash Balance Plan
Upon your employment, you will be eligible for the cash balance
benefit provided under the Kodak Retirement Income Plan ("KRIP"). This
program is Kodak's retirement plan for all employees hired on or after
March 1, 1999. The enclosed brochure describes this program in more
detail.
12. Enhanced Pension Benefit
A. In General. In addition to the retirement benefits you are
eligible for under the cash balance benefit of KRIP, you will
be eligible for an enhanced pension benefit. Assuming you
satisfy the conditions of Section 12(B) below and subject to
the offset provisions contained in Section 12(D) below, Kodak
will provide you a retirement income benefit based on the
following assumptions: (1) that you were eligible to
participate in Kodak's retirement plans by virtue of being
employed by Kodak after December 31, 1995, but prior to March
1, 1999; (2) that you have completed 8 years of service; and
(3) that you have attained age 65 (so that there is no
actuarial reduction for early commencement of this benefit);
provided, however, that expressed in the form of a single
life annuity, this enhanced pension benefit will provide you
a retirement income benefit of at least $21,000 per month.
The names of the specific retirement plans that you will be
treated as participating in by virtue of being treated as
employed after December 31, 1995, but prior to March 1, 1999,
are KRIP, the Kodak Unfunded Retirement Plan ("KURIP") and
the Kodak Excess Retirement Income Plan ("KERIP"). These
three plans insofar as they apply to employees employed by
Kodak after December 31, 1995, but prior to March 1, 1999,
will be collectively referred to as the "Retirement Plan."
As explained in Section 12(B) below, the 8 years of service
that you will be treated as receiving under the Retirement
Plan will not be credited to you unless and until you
complete 3 years of actual service with the Company. Any
service credited to you under the Retirement Plan will only
apply for purposes of establishing under the Retirement Plan:
(i) the total amount of your "Vesting Service"; and (ii) the
total amount of your "Accrued Service" used to calculate your
retirement income benefit. The crediting of service applies
solely for these two purposes and is not intended to enhance
any other Kodak benefit or compensation.
64
B. Continuous Employment. In order to receive the enhanced
retirement benefit described above, you must remain
continuously employed with Kodak during the 3 year period
commencing on the date of your employment. Except as
provided in Section 12(C) below, if your employment
terminates for any reason, whether voluntarily or
involuntarily, prior to the third anniversary of your
employment with Kodak, you will not be entitled to receive
any of the enhanced retirement benefits described above.
C. Termination Without Cause or Termination due to Death,
Disability or Good Reason After the First Anniversary of
Employment. Notwithstanding Section 12(B) above, if after
the first anniversary of the date of the commencement of your
employment, Kodak terminates your employment without Cause or
your employment terminates due to death, Disability or Good
Reason, you will receive a pro rata portion of the enhanced
pension benefit. If your termination of employment occurs
after the first anniversary of the commencement of employment
but prior to the second anniversary of the date of the
commencement of your employment, the amount of your enhanced
pension will be determined based on the following
assumptions, rather than the assumptions described in Section
12(A) above: (1) that you were eligible to participate in
Kodak's retirement plans by virtue of being employed by Kodak
after December 31, 1995, but prior to March 1, 1999; (2) that
you have completed 5 years of service; and (3) that you have
attained age 65; provided, however, that expressed in the
form of a single life annuity, the amount of the pro rata
portion of the enhanced pension enhanced pension benefit will
be at least $13,125 per month.
If, instead, your termination of employment occurs after the
second anniversary of the commencement of employment but
prior to the third anniversary of the date of the
commencement of your employment, the amount of your enhanced
pension will be determined based on the following
assumptions, rather than the assumptions described in Section
12(A) above: (1) that you were eligible to participate in
Kodak's retirement plans by virtue of being employed by Kodak
after December 31, 1995, but prior to March 1, 1999; (2) that
you have attained age 65; and (3) that you have completed
that number of years of service determined by multiplying 8
by the following fraction:
(A)
---
36
65
For purposes of this fraction, "A" will be the total number
of your completed full months of service with Kodak prior to
your termination of employment; provided, however, that
expressed in the form of a single life annuity, the amount of
the pro rata portion of the enhanced pension benefit will be
at least that monthly amount determined from the following
equation:
(A) x $21,000
---
36
For purposes of this equation, "A" will be the total number
of your completed full months of service with Kodak prior to
your termination of employment
In the case of your death, the service credited to you under
this Section 12(C) will be used solely for purposes of
determining the survivor benefit which your survivor may be
eligible for under the Retirement Plan (but not the post-
retirement survivor income benefit which is provided under
our life insurance plans for a specified grandfathered
population).
D. Offset. The amount of the retirement income benefit or
survivor benefit, if any, provided under this Section 12 will
be offset by: (1) the retirement benefits payable to you
under the cash balance benefit of KRIP and any supplemental
and successor plan(s) thereto , including but not limited to
KERIP and KURIP, and (2) any company matching contribution
made to your account under the Eastman Kodak Employees'
Savings and Investment Plan ("SIP") or any supplement or
successor plan(s) thereto, including but not limited to KERIP
and KURIP.
For purposes of determining the amount of any offset under
this Section 12(D), the amount of the retirement benefits
payable to you under Cash Balance Plus and any supplemental
and successor plan(s) thereto will be calculated pursuant to
the same actuarial assumptions that are used to calculate the
retirement income benefit that you will be treated as
receiving under the Retirement Plan, assuming the same
frequency of payment, form of benefit and commencement date
of payment as such retirement income benefit, but based on
your actual years of service and actual age and reduced for
any actuarial reductions for any early commencement of
benefits.
E. Payment. The amount of the enhanced retirement benefit, if
any, payable to you under this Section 12 will: (i) be paid
in the form of a monthly annuity commencing on the first day
of a month selected by you on or after the date of your
termination of employment; (ii) be paid out of Kodak's
general assets, not under KRIP; (iii) not be funded in any
manner; (iv) be included in your gross income as ordinary
income, subject to all income and payroll tax withholding
required to be made under all applicable laws; and (v) not be
grossed up or be given any other special tax treatment by
Kodak.
66
F. Employee Benefit Plan. To the extent the terms of this
enhanced retirement benefit constitute an "employee benefit
plan" under Section 3(3) of the Employee Retirement Income
Security Act of 1974 ("ERISA"), the Vice President, Eastman
Kodak Company and Director, Human Resources will be the plan
administrator of the plan. The plan administrator will have
total and exclusive responsibility to control, operate,
manage and administer the plan in accordance with its terms
and all the authority that may be necessary or helpful to
enable him/her to discharge his/her responsibilities with
respect to the plan. Without limiting the generality of the
preceding sentence, the plan administrator shall have the
exclusive right to: interpret the plan, decide all questions
concerning eligibility for and the amount of benefits payable
under the plan, construe any ambiguous provision of the plan,
correct any default, supply any omission, reconcile any
inconsistency, and decide all questions arising in the
administration, interpretation and application of the plan.
The plan administrator will have full discretionary authority
in all matters related to the discharge of his/her
responsibilities and the exercise of his/her authority under
the plan, including, without limitation, his/her construction
of the terms of the plan and his/her determination of
eligibility for benefits under the plan. It is the intent of
the plan, as well as both parties hereto, that the decisions
of the plan administrator and his/her action with respect to
the plan shall be final and binding upon all persons having
or claiming to have any right or interest in or under the
plan and that no such decision or actions shall be modified
upon judicial review unless such decision or action is proven
to be arbitrary or capricious.
Notwithstanding the foregoing paragraph of this Section
12(F), the plan administrator will not determine the
resolution of disputes concerning whether your termination of
employment is for Cause or Good Reason, but rather such
disputes will be arbitrated in accordance with the terms of
Section 23 below.
67
13. Supplemental Enhanced Pension Benefit
A. In General. After you have completed at least 3 years of
service, you will be eligible for the supplemental enhanced
pension benefit described in this Section 13 in lieu of, and
not in addition to, the enhanced pension benefit described in
Section 12. Assuming you satisfy the conditions of Section
13(B) below and subject to the offset provisions contained in
Section 13(D) below, Kodak will provide you, a retirement
income benefit based on the following assumptions: (1) that
you were eligible to participate in the Retirement Plan by
virtue of being employed by Kodak after December 31, 1995,
but prior to March 1, 1999; and (2) that you have completed
25 years of service; provided, however, that expressed in the
form of a single life annuity, the amount of the supplemental
enhanced pension benefit will be at least $21,000 per month.
Expressed in the form of a single life annuity and based on
your initial base salary and target EXCEL bonus and assuming
a 5% increase in base salary, this supplemental enhanced
pension benefit would provide you a retirement income benefit
of approximately $84,000 per month.
As explained in Section 13(B) below, the 25 years of service
that you will be treated as receiving under the Retirement
Plan will not be credited to you unless and until you
complete 9 years of actual service with the Company. Any
service credited to you under the Retirement Plan will only
apply for purposes of establishing under the Retirement Plan:
(i) the total amount of your "Vesting Service"; and (ii) the
total amount of your "Accrued Service" used to calculate your
retirement income benefit. The crediting of service applies
solely for these two purposes and is not intended to enhance
any other Kodak benefit or compensation.
68
B. Continuous Employment. In order to receive the full
supplemental enhanced retirement benefit described above, you
must remain continuously employed with Kodak during the 9
year period commencing on the date of your employment. If,
after the third anniversary of the date of your commencement
of employment but prior to the ninth anniversary of the date
of your commencement of employment, your employment is
terminated by Kodak without Cause or you terminate your
employment due to death, Disability or Good Reason, you will
only receive the pro-rated supplemental enhanced retirement
benefit described in Section 13(C) below. Alternatively, if,
after the third anniversary of the date of your commencement
of employment but prior to the ninth anniversary of the date
of your commencement of employment, your employment is
terminated for any other reason, including if Kodak
terminates your employment for Cause or you terminate your
employment other than for death, Disability or Good Reason,
you will only be entitled to a supplemental retirement
benefit based on the following assumptions, rather than those
set forth in Section 13(A) above: (1) that you were eligible
to participate in Kodak's retirement plans by virtue of being
employed by Kodak after December 31, 1995, but prior to March
1, 1999; (2) that you have completed 8 years of service; and
(3) that you have attained age 65 (so that there is no
actuarial reduction for early commencement of this benefit).
For purposes of clarification of the immediately preceding
sentence, in performing such calculation "Average
Participating Compensation," as defined in the Retirement
Plan, will not be determined merely from the "Participating
Compensation," as defined in the Retirement Plan, during
first three years of your employment.
C. Termination Without Cause or Termination due to Death,
Disability or Good Reason. Notwithstanding Section 13(B)
above, if, after you have completed 3 years of service, Kodak
terminates your employment without Cause or your employment
terminates due to death, Disability or Good Reason, you will
receive a pro rata portion of the supplemental enhanced
pension benefit described in Section 13(A) above. In such an
event, the amount of your supplemental enhanced pension
benefit will be determined based on the following assumptions,
rather than the assumptions described in Section 13(A) above:
(1) that you were eligible to participate in Kodak's
retirement plans by virtue of being employed by Kodak after
December 31, 1995, but prior to March 1, 1999; (2) that you
have attained age 65; and (3) that you have completed that
amount of service with the Company determined by adding
together 8 years of service plus the total number of your full
months of service with the Company during the period beginning
on the third anniversary of the date of your commencement of
employment and ending on the date of your termination of
employment; provided, however, that expressed in the form of
a single life annuity, the amount of the pro rata portion of
the supplemental enhanced pension benefit will not be less
than $21,000 per month.
69
In the case of your death, this service will be used solely
for purposes of determining the survivor benefit which your
survivor may be eligible for under the Retirement Plan (but
not the post-retirement survivor income benefit which is
provided under our life insurance plans for a specified
grandfathered population).
D. Offset. The amount of the retirement income benefit or
survivor benefit, if any, provided under this Section 13 will
be offset by: (1) the retirement benefits payable to you
under the cash balance benefit of KRIP and any supplemental
and successor plan(s) thereto, including but not limited to
KERIP and KURIP, and (2) any company matching contribution
made to your account under the Eastman Kodak Employees'
Savings and Investment Plan ("SIP") or any supplement or
successor plan(s) thereto, including but not limited to KERIP
and KURIP.
For purposes of determining the amount of any offset under
this Section 13(D), the amount of the retirement benefits
payable to you under Cash Balance Plus and any supplemental
and successor plan(s) thereto will be calculated pursuant to
the same actuarial assumptions that are used to calculate the
retirement income benefit that you will be treated as
receiving under the Retirement Plan, assuming the same
frequency of payment, form of benefit and commencement date
of payment as such retirement income benefit, but based on
your actual years of service and actual age and reduced for
any actuarial reductions for any early commencement of
benefits.
E. Payment. The amount of the supplemental enhanced retirement
benefit, if any, payable to you under this Section 13 will:
(i) be paid in the form of a monthly annuity commencing on
the first day of a month selected by you on or after the date
of your termination of employment; (ii) be paid out of
Kodak's general assets, not under KRIP; (iii) not be funded
in any manner; (iv) be included in your gross income as
ordinary income, subject to all income and payroll tax
withholding required to be made under all applicable laws;
and (v) not be grossed up or be given any other special tax
treatment by Kodak.
70
F. Employee Benefit Plan. To the extent the terms of this
supplemental enhanced retirement benefit constitute an
"employee benefit plan" under Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), the Vice
President, Eastman Kodak Company and Director, Human
Resources will be the plan administrator of the plan. The
plan administrator will have total and exclusive
responsibility to control, operate, manage and administer
the plan in accordance with its terms and all the authority
that may be necessary or helpful to enable him/her to
discharge his/her responsibilities with respect to the plan.
Without limiting the generality of the preceding sentence,
the plan administrator shall have the exclusive right to:
interpret the plan, decide all questions concerning
eligibility for and the amount of benefits payable under the
plan, construe any ambiguous provision of the plan, correct
any default, supply any omission, reconcile any
inconsistency, and decide all questions arising in the
administration, interpretation and application of the plan.
The plan administrator will have full discretionary
authority in all matters related to the discharge of his/her
responsibilities and the exercise of his/her authority under
the plan, including, without limitation, his/her
construction of the terms of the plan and his/her
determination of eligibility for benefits under the plan.
It is the intent of the plan, as well as both parties
hereto, that the decisions of the plan administrator and
his/her action with respect to the plan shall be final and
binding upon all persons having or claiming to have any
right or interest in or under the plan and that no such
decision or actions shall be modified upon judicial review
unless such decision or action is proven to be arbitrary or
capricious.
Notwithstanding the foregoing paragraph of this Section
13(F), the plan administrator will not determine the
resolution of disputes concerning whether your termination
of employment is for Cause or Good Reason, but rather such
disputes will be arbitrated in accordance with the terms of
Section 23 below.
14. Termination of Employment.
A. Termination Due to Death. In the event your employment
terminates due to your death, your estate or your
beneficiaries, as the case may be, will receive:
I. base salary through the date of death;
II. a pro rata annual target award under EXCEL for the year
in which your death occurs, based on service performed
for such year, payable in a single installment on the
normal payment date for awards earned for the year;
III. any earned, but unpaid, EXCEL award for the year
immediately prior to the year in which your death
occurs;
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IV. any restricted stock award outstanding at the time of
your death, including the award under Section 8,
whereupon the award will become fully vested and any
forfeiture provisions set forth in the award's
restricted stock agreement will immediately lapse;
V. any outstanding stock option award at the time of your
death will become fully vested and your estate or, in
the event of an assignment of your stock option award,
your transferee will have the right to exercise any
such award for the remainder of the full original ten
year term of the option;
VI. a pro rata award under the Performance Stock Program
for each cycle during which your death occurs, based
on performance and your service during such cycle,
payable in a single installment on the normal payment
date for awards earned for the cycle; provided,
however, in the case of your death in 2003, you will
receive a pro-rated award under the EIP subplan based
on your service during 2003 in lieu of any other award
for the 2002-2004 performance cycle;
VII. any outstanding award under the Performance Stock
Program at the time of your death, and any forfeiture
provisions under the program applicable to such awards
will immediately lapse;
VIII.services under Kodak's financial counseling program for
the two year period immediately following the date of
your death;
IX. continuation of existing health and dental coverage for
you and your eligible dependents for up to 18 months,
provided your qualified beneficiary timely elects
COBRA continuation coverage and pays the required
COBRA premiums;
X. a survivor benefit under the terms of Section 12 or 13
as the case may be; and
XI. other or additional benefits in accordance with
applicable plans and programs of the Company.
72
B. Termination Due to Disability. In the event your employment
terminates due to Disability, you will receive:
I. base salary through the date of your termination of
employment;
II. those benefits to which you are entitled under the
Kodak Long-Term Disability Plan;
III. a pro rata annual target award under EXCEL for the year
in which your termination occurs, based on service
performed during such year until your date of
termination, payable in a single installment on the
normal payment date for awards earned for the year;
IV. any earned, but unpaid, EXCEL award for the year
immediately prior to the year in which your termination
occurs;
V. any restricted stock award, other than the restricted
stock award described in Section 8 above, outstanding
for at least one year at the time of your termination,
and the forfeiture provisions applicable to the award
will immediately lapse;
VI. a pro rata portion of the restricted stock award
described in Section 8 which will be determined in
accordance with the terms of Section 8;
VII. any stock option award, other than the stock option
award described in Section 7, outstanding for at least
one year at the time of your termination of employment
and, if the award is unvested at the time of your
termination, it will continue to vest per its terms as
if you continued your employment through each vesting
date and, once vested, you will have the right to
exercise the award for the remainder of its ten year
term unless they are forfeited sooner pursuant to their
terms relating to inimical conduct or breach of
Employee's Agreement;
VIII. the stock
options granted under Section 7 above and, if any of
the options are unvested at the time of your
termination, they will continue to vest per their terms
as if you continued your employment through each
vesting date and, once vested, you will have the right
to exercise the options for the remainder of their ten
year term;
73
IX. a pro rata award under the Performance Stock Program
for each cycle during which your termination occurs,
based on performance and your service during such cycle
until your date of termination, payable in a single
installment on the normal payment date for awards
earned for the cycle; provided, however, in the case of
your termination of employment in 2003, you will
receive a pro-rated award under the EIP subplan based
on your service during 2003 in lieu of any other award
for the 2002-2004 performance cycle;
X. any outstanding award under the Performance Stock
Program at the time of your termination, any forfeiture
provisions under the program applicable to such award
will immediately lapse;
XI. services under Kodak's financial counseling program for
the two year period immediately following the date of
your termination of employment;
XII. continuation of existing health and dental coverage for
you and your eligible dependents for up to the maximum
applicable COBRA period, provided you timely elect COBRA
continuation coverage and pay the required COBRA
premiums;
XIII.an enhanced retirement income benefit under the terms of
Section 12 or 13 as the case may be; and
XIV. other or additional benefits in accordance with
applicable plans and programs of the Company.
C. Termination by the Company for Cause. In the event Kodak
terminates your employment for Cause, you will receive:
I. base salary through the date of your termination of
employment;
I. any earned, but unpaid, EXCEL award for the year
immediately prior to the year in which your termination
occurs;
II. any award earned (but not yet paid) pursuant to the
terms of the Performance Stock Program, but you will
forfeit any award subject to any restriction at the time
of your termination;
III. payment for any reimbursed business expenses in
accordance with Kodak's expense reimbursement policy;
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IV. any enhanced pension benefit you may be entitled to
under the terms of Section 12 or 13 above;
V. sixty days in which to exercise any vested stock option
held by you on the date of your termination of
employment unless such stock option is forfeited by its
terms as a result of the circumstances resulting in your
termination for Cause;
VI. the vested portion, as of the date of your termination
of employment, of the restricted stock award granted to
you under Section 8; the unvested portion of such
restricted shares, as of the date of your termination of
employment, will be immediately forfeited as of such
date; and
VII. other or additional benefits in accordance with
applicable plans or programs of the Company.
D. Termination Without Cause. In the event your employment is
terminated by Kodak without Cause, you will receive:
I. base salary through the date of your termination of
employment;
II. a severance allowance equal to two (2) times the sum of
your then-current annual base salary plus your then-
current target annual incentive award under EXCEL,
payable in equal consecutive bi-monthly payments over
the two (2) year period commencing on the date of your
termination of employment;
III. a pro rata annual target award under EXCEL for the year
in which your termination occurs, based on service
performed for such year, payable in a single installment
on the normal payment date for awards earned for the
year;
IV. any earned, but unpaid, EXCEL award for the year
immediately prior to the year in which your termination
occurs;
V. any restricted stock award, other than the restricted
stock award described in Section 8 above, outstanding
at the time of your termination, and the forfeiture
provisions applicable to such award will immediately
lapse;
VI. a pro rata portion of the restricted stock award
described in Section 8 which will be determined in
accordance with the terms of Section 8;
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VII. any stock option award, other than the stock option
award described in Section 7, outstanding at the time of
your termination of employment and, if the award is
unvested at the time of your termination, it will
continue to vest per its terms as if you continued your
employment through each vesting date and, once vested,
you will have the right to exercise the award for the
remainder of its ten year term unless they are forfeited
sooner pursuant to their terms relating to inimical
conduct or breach of Employee's Agreement;
VIII. the stock options granted under Section 7 above
and, if any of the options are unvested at the time of
your termination, they will continue to vest per their
terms as if you continued your employment through each
vesting date and, once vested, you will have the right
to exercise the options for the remainder of their ten
year term;
IX. a pro rata award under the Performance Stock Program for
each cycle during which your termination occurs, based
on performance and your service during such cycle,
payable in a single installment on the normal payment
date for awards earned for the cycle; provided, however,
in the case of your termination of employment in 2003,
you will receive a pro-rated award under the EIP subplan
based on your service during 2003 in lieu of any other
award for the 2002-2004 performance cycle;
X. any outstanding award under the Performance Stock
Program at the time of your termination, any forfeiture
provisions under the program applicable to such award
will immediately lapse;
XI. an enhanced retirement income benefit under the terms of
Section 12 or 13 as the case may be; and
XII. continuation, at Kodak's expense, of your then existing
elections under Kodak's health and dental plans for the
four month period immediately following the month in
which you terminate your employment;
XIII. following the expiration of the 4 months of company
paid health and dental coverage, continuation of
existing health and dental coverage for you and your
eligible dependents for up 14 months, provided you
timely elect COBRA continuation coverage and pay the
required COBRA premiums;
XIV. outplacement services in the same manner, and on the
same terms and conditions, as if you were eligible for
"Outplacement Services" pursuant to Article 8 of Kodak's
Termination Allowance Plan;
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XV. services under Kodak's financial counseling program for
the two year period immediately following the date of
your termination of employment; and
XVI. other or additional benefits in accordance with
applicable plans and programs of the Company.
E. Good Reason. In the event you terminate your employment for
"Good Reason," you will receive:
I. base salary through the date of your termination of
employment;
II. a severance allowance equal to two (2) times the sum of
your then-current annual base salary plus your then-
current target annual incentive award under EXCEL,
payable in equal consecutive bi-monthly payments over
the two (2) year period commencing on the date of your
termination of employment;
III. a pro rata annual target award under EXCEL for the year
in which your termination occurs, based on service
performed for such year, payable in a single installment
on the normal payment date for awards earned for the
year;
IV. any earned, but unpaid, EXCEL award for the year
immediately prior to the year in which your termination
occurs;
V. any restricted stock award, other than the restricted
stock award described in Section 8 above, outstanding at
the time of your termination, and the forfeiture
provisions applicable to such award will immediately
lapse;
VI. a pro rata portion of the restricted stock award
described in Section 8 which will be determined in
accordance with the terms of Section 8;
VII. any stock option award, other than the stock option
award described in Section 7, outstanding at the time of
your termination of employment and, if the award is
unvested at the time of your termination, it will
continue to vest per its terms as if you continued your
employment through each vesting date and, once vested,
you will have the right to exercise the award for the
remainder of its ten year term unless they are forfeited
sooner pursuant to their terms relating to inimical
conduct or breach of Employee's Agreement;
VIII. the stock options granted under Section 7 above
and, if any of the options are unvested at the time of
your termination, they will continue to vest per their
terms as if you continued your employment through each
vesting date and, once vested, you will have the right
to exercise the options for the remainder of their ten
year term;
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IX. a pro rata award under the Performance Stock Program for
each cycle during which your termination occurs, based
on performance and your service during such cycle,
payable in a single installment on the normal payment
date for awards earned for the cycle; provided, however,
in the case of your termination of employment in 2003,
you will receive a pro-rated award under the EIP subplan
based on your service during 2003 in lieu of any other
award for the 2002-2004 performance cycle;
X. any outstanding award under the Performance Stock
Program at the time of your termination, any forfeiture
provisions under the program applicable to such award
will immediately lapse;
XI. an enhanced retirement income benefit under the terms of
Section 12 or 13 as the case may be; and
XII. continuation, at Kodak's expense, of your then existing
elections under Kodak's health and dental plans for you
and your eligible dependents for the four month period
immediately following the month in which you terminate
your employment;
XIII.following the expiration of the 4 months of company
paid health and dental coverage, continuation of
existing health and dental coverage for up 14 months,
provided you timely elect COBRA continuation coverage
and pay the required COBRA premiums;
XIV. outplacement services in the same manner, and on the
same terms and conditions, as if you were eligible for
"Outplacement Services" pursuant to Article 8 of Kodak's
Termination Allowance Plan;
XV. services under Kodak's financial counseling program for
the two year period immediately following the date of
your termination of employment; and
XVI. other or additional benefits in accordance with
applicable plans and programs of the Company.
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F. Voluntary Termination. In the event you voluntarily
terminate your employment, you will receive:
I. base salary through the date of your termination of
employment;
II. any earned, but unpaid, EXCEL award for the year
immediately prior to the year in which your termination
occurs;
III. any award earned (but not yet paid) pursuant to the
terms of the Performance Stock Program, but you will
forfeit any award subject to any restriction at the time
of your termination;
IV. payment for any reimbursed business expenses in
accordance with Kodak's expense reimbursement policy;
V. any enhanced pension benefit you may be entitled to
under the terms of Section 12 or 13 above;
VI. if your voluntary termination of employment occurs prior
to the third anniversary of the commencement of your
employment, sixty days in which to exercise any vested
stock option granted to you under Section 7 and held by
you on the date of your termination of employment (the
unvested portion of such stock option award, as of the
date of your termination of employment, will be
immediately forfeited as of such date);
VII. if your voluntary termination of employment occurs on or
after the third anniversary of the commencement of your
employment, the stock option award granted to you under
Section 7 and you will have the right to exercise these
stock options for the remainder of their ten year term;
VIII.sixty days in which to exercise any other vested
stock option held by you on the date of your termination
of employment;
IX. the vested portion, as of the date of your termination
of employment, of the restricted stock award granted to
you under Section 8 (the unvested portion of such
restricted shares, as of the date of your termination of
employment, will be immediately forfeited as of such
date); and;
X. other or additional benefits in accordance with
applicable plans or programs of the Company.
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G. Exclusivity of Severance Allowance. The severance allowance
payable to you under this Section 14 will be paid to you in
lieu of any other severance benefit, payment or allowance
that you would otherwise be eligible for, except any benefits
payable to you under any Kodak severance plan. To the
extent, however, you are eligible for a benefit under a Kodak
severance plan, the severance allowance payable to you under
this Section 14 will be reduced by the amount of such
severance benefit.
H. Release. As a condition of your entitlement to any of the
rights, benefits and payments provided in this Section 14,
you will be required to execute immediately prior to your
termination of employment and honor a general release of
claims and covenant not to sue in a form substantially
similar to that attached to this letter agreement as Addendum
A, which may be amended or supplemented from time to time by
written agreement of the parties.
I. Termination at Will. Notwithstanding anything herein to the
contrary, your employment by Kodak is terminable at will with
or without Cause; provided, however, that a termination of
your employment will be governed in accordance with the terms
of this Section 14. Thus, you will be free to terminate your
employment at any time, for any reason, and Kodak is free to
do the same.
J. Benefits Bearing. None of the benefits or payments payable
under this Section 14 are "benefits bearing." That is,
they will not be taken into account, nor considered for
any reason, for purposes of determining any company
provided benefits or compensation to which you are or may
become eligible.
K. No Mitigation/No Offset. You will not be required to seek
other employment or otherwise mitigate the value of any
severance benefits payable under this letter agreement, nor
will any such benefits be reduced by any earnings or
benefits that you may receive from any other source.
Except as expressly provided in this letter agreement or
Addendum A, the severance allowance payable under this
letter agreement will not be subject to setoff,
counterclaim, recoupment, defense or other right which
Kodak may have against you or others.
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L. Conditional Nature of Severance Payments.
I. Noncompetition. You acknowledge that the nature of the
Company's business is such that if you were to become
employed by, or substantially involved in, the business
of a Competitor during the period immediately after
termination of your employment equal to the total number
of months during which you were employed by Kodak,
whether continuously or not, but not for less than six
(6) months nor more than twenty-four (24) months after
such termination, it would be very difficult for you not
to rely on or use the Company's trade secrets and
confidential information. Consequently, you agree that
you will not during such period directly or indirectly
engage in (whether as an employee, consultant, agent,
proprietor, principal, partner, stockholder, corporate
officer, director or otherwise), nor have any material
ownership interest in or participate in the financing,
operation, management or control of a Competitor
II. Forfeiture. To avoid the inevitable disclosure of the
Company's trade secrets and confidential information,
you agree and acknowledge that your right to receive the
severance payments and benefits set forth in Sections
14(D)(II), (D)(V), (D)(XII), (D)(XIV), and (D)(XV) and
Sections 14(E)(II), (E)(V), (E)(XII), (E)(XIV), and
(E)(XV), hereinafter collectively referred to as the
"Severance Benefits," (to the extent you are otherwise
entitled to such Severance Benefits) will be conditioned
upon your compliance with the terms of Section 14(L)(I).
Upon any breach of Section 14(L)(I), all Severance
Benefits will immediately cease and any Severance
Benefits already paid will be immediately repaid by you
to the Company. You also agree that in the event the
provisions of Section 14(L)(I) are ever determined to be
unenforceable under applicable law, all Severance
Benefits will immediately cease and any Severance
Benefits already paid will be immediately repaid by you
to the Company should you fail to continue to comply
with requirements of Section 14(L)(I). The requirements
under Section 14(L)(I) are in addition to, and not in
lieu of, your obligations under the Eastman Kodak
Company Employee's Agreement.
15. Vacation
You will be entitled to 6 weeks vacation per calendar year. For the
current year, your vacation will be pro-rated on a daily basis.
16. Benefits
You will be immediately eligible to participate in Kodak's Flexible
Benefits Plan, which includes health and dental coverage, long-term
disability coverage, group life insurance and eligibility for long-term
care insurance.
You will also be able to participate in Kodak's Short-Term Disability
Plan. You will be eligible for up to 52 weeks of benefits under the
terms of such plan. This is based upon a special credit of having 15
years of deemed service for purposes of the plan. Under the plan,
participants receiving benefits remain Kodak employees and, as such,
are eligible for the same benefits as other Kodak employees.
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Our executives also qualify for company-paid coverage of $5 million of
personal umbrella liability insurance ("PULI").
In addition, you will be eligible to participate in the 1982 Eastman
Kodak Company Executive Deferred Compensation Plan ("EDCP"). This is a
non-qualified/unfunded plan in which you may elect to defer a portion
of your base salary and MVCP award.
Immediately upon your employment, you will also be eligible to
participate in the Eastman Kodak Employees' Savings and Investment Plan
("SIP"). You will be eligible to make rollover deferrals to SIP from
other qualified plans within two years from the date of your hire.
Our executives are provided with individual financial counseling
services through one of three companies. You may, in lieu thereof,
choose to continue using your current financial counselor for such
services and we will reimburse you for the cost of these services;
subject, however, to a maximum reimbursement of $6,000 per year. You
will be immediately eligible for this benefit. You are also eligible
to participate in the Kodak Executive Health Management Plan.
You will be eligible to participate in any of Kodak's executive fringe
benefits in accordance with the terms and conditions of such
arrangements as are in effect from time to time for Kodak's senior-
level executives.
You will be eligible to participate in the Eastman Kodak Company
Executive Protection Plan. You will be treated under the plan as a
Tier 1 employee.
17. Share Ownership Program
Kodak firmly believes that the interests of its executives must be
consistent with those of its shareholders. One program designed to
meet this objective is Kodak's share ownership program. Under this
program, all senior executives are required to own common stock of
Kodak equal to a set multiple of his or her base salary. The multiple
that you are expected to own is 3 times your base salary. This amount
must be achieved by the fifth anniversary of the date of your
commencement of employment by Kodak.
18. Relocation
You will be eligible to participate in Kodak's Enhanced New Hire
Relocation Program (the "Relocation Program"). We have previously
provided you a summary of the program's benefits. To the extent you
are required to include any of the Relocation Program's benefits in
your gross income for federal, state or local income or payroll tax
purposes, Kodak will provide you with tax gross-up payments so that
after taxes are incurred on any benefits under the Relocation Program
you will be kept whole.
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To assist you in finding a permanent residence in the Rochester, New
York area, Kodak will reimburse you for your temporary housing
expenses. More specifically, for up to a 6 month period commencing on
your start date, Kodak agrees to reimburse you for your temporary
housing expenses up to a maximum dollar amount of $3,000 per month.
These expenses must be incurred for temporary housing in the Rochester,
New York area. Proper documentation of these expenses will be required
in accordance with the terms of Kodak's relocation program. To the
extent you are required to include any of these expense reimbursement
in your gross income for federal, state or local income or payroll tax
purposes, Kodak will provide you with tax gross-up payments so that
after taxes are incurred on any such expense reimbursement you will be
kept whole. The amount of any such "gross-up" will not be included in
the calculation of the $3,000 per month limit.
19. Confidential Information
It is important that the relationship between you and Kodak be
established at the outset so as to enable you to properly safeguard
confidential information that you may have acquired from your previous
employer(s). "Confidential Information" is defined as information
proprietary to a previous employer which is generally secret, and which
you learned while employed with that employer.
By accepting this conditional offer, you represent to Kodak that your
obligations regarding the Confidential Information will not impede your
ability to perform the duties and responsibilities required by virtue
of the positions offered to you under this letter agreement. You
further represent that the performance of these duties and
responsibilities will not violate any agreement between you and any
other person, firm, entity or organization or violate any Federal,
state or local law, executive order or regulation.
During your employment with Kodak, we would expect that you will keep
in mind the Confidential Information and inform us if you believe that
any duties or responsibilities to which you are assigned will involve
its use or disclosure. I am available at any time to discuss questions
that might arise in this regard. All such discussions you may have
with me or anyone at Kodak in this regard should refer to the
Confidential Information only in general terms so as to avoid
disclosure of the information you believe to be confidential.
20. No Conflicts of Interest
By signing this letter, you represent that as of the commencement of
your employment you will not be subject to any restrictions,
particularly, but without limitation, in connection with any previous
employment, which at such time or thereafter will prevent you from
performing your obligations under this letter or will materially and
adversely affect (or may in the future, so far as you can reasonably
foresee, materially affect) your rights to participate in the affairs
of Kodak.
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21. Employment Preconditions
This conditional offer of employment is subject to the following
conditions and may be withdrawn by Kodak due to your inability to
satisfy any one or more of these conditions. By signing this letter,
you agree and acknowledge that Kodak may perform the activities
contemplated below in order to verify the stated conditions.
A. Physical Exam and Drug Test. You are required to complete a
physical examination and drug screen before this offer
becomes final. This will be at Kodak's expense. This offer
is contingent upon a negative drug screen urinalysis test
result. Kodak's Medical Director will contact you directly
concerning the details of your physical exam and drug test.
B. INS. All employers are now required by Federal law to verify
identity and authorization to work for all prospective
employees. Enclosed is an Immigration and Naturalization
Service I-9 form that outlines the details of these
requirements. Inability to comply with these requirements
will cause rescission of this conditional offer.
C. Check of Past Employment, Education, Credit History, etc.
Kodak will conduct a check of your past employment,
education, credit history and criminal convictions records.
This offer is contingent upon such check being acceptable to
Kodak. Informed Directions International of 110 15th Street
NE, Canton, Ohio 44714, has been engaged by Kodak to conduct
this check. Enclosed is a disclosure letter required by
Federal Law concerning our request to obtain a copy of your
credit report. You will also find enclosed a consent form
authorizing Kodak to obtain such credit report. Please sign
and date the consent form and enclose it along with this
letter.
22. Employee's Agreement
Attached is a copy of the Kodak Employees' Agreement, which you must
sign and return to me upon your acceptance of this letter agreement.
23. Resolution of Disputes
Any controversy or claim arising out of or relating to this letter
agreement, or the breach, termination or validity hereof will be
submitted to binding arbitration before a sole arbitrator in Rochester,
New York administered by the American Arbitration Association in
accordance with its rules. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16, and judgment upon the
award rendered may be entered by any court having jurisdiction thereof.
All costs and expenses of any arbitration (including the fees and
expenses reasonably incurred by you) will be borne by Kodak unless your
claim is determined by the arbitrator to be either frivolous or in bad
faith.
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You and Kodak will not arbitrate any dispute relating to Sections 12,
13 or 14(L) or your breach of your Eastman Kodak Company Employee's
Agreement or the Release attached as Addendum A, but shall institute
any judicial proceedings in a court of competent jurisdiction with
respect to such a dispute or claim. Disputes with respect to any such
provision will be adjudicated within the exclusive jurisdiction of a
state or federal court located in Monroe County, New York. Neither
party waives any right it may have to remove such an action to the
United States Federal District Court located in Monroe County, New
York.
24. Outside Activities
Except as may otherwise be agreed in writing by the Chief Executive
Officer and you, you are expected to devote all of your business time
to the affairs of Kodak. You may, however, engage in charitable, civic
and community activities and manage your personal affairs and personal
passive investments, provided, however, such conduct does not
materially interfere with your Kodak duties and responsibilities. You
may also serve on the boards of directors or advisory committees of
other corporations with the prior approval of the Board of Directors or
Chief Executive Officer provided such activities do not (1) materially
interfere with your Kodak duties and responsibilities; or (2) conflict
with the Company's businesses or strategies.
25. Definitions
The following definitions will apply to this letter agreement:
A. Approved Reason. Approved Reason is a term used in all of
Kodak's stock option grants and means a reason for
terminating employment with Kodak which, in the opinion of
the Executive Compensation and Development Committee of the
Board of Directors, is in the best interests of Kodak.
B. Cause. Cause means:
I. your Willful and continued failure or refusal for a
period of at least 60 days following delivery to you of
a written notification from the Chief Executive Officer
or Board to attempt to perform the usual, customary or
reasonable functions of your positions other than due to
a disability or approved leave; or
II. your gross negligence or Willful misconduct in the
performance of your duties or obligations to Kodak that
is, or is likely to be or is intended to be, materially
detrimental to the Company; or
III. your conviction of any felony (other than a felony
predicated on your vicarious liability or involving a
traffic violation) or crime involving moral turpitude;
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
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V. your material breach of this letter agreement which, if
correctable, remains uncorrected for 20 days after
written notice to you by Kodak of the breach; or
VI. your material breach of a requirement of the Kodak
Business Conduct Guide which requirement has
consistently resulted in the termination of employment
by employees who have committed similar breaches and
which, if correctable, remains uncorrected for 20 days
after written notice to you by Kodak of the breach; or
VII. your breach of your Employee's Agreement.
C. Company. "Company" means Kodak and all of its subsidiaries and
affiliates.
D. Competitor. A "Competitor" means any of the five (5)
organizations designated by the Board of Directors in good
faith as direct competitors to the Company. Such designation
shall be in a writing delivered to you within thirty (30)
days after the commencement of employment (the "Prohibited
List"). The Prohibited List may be changed by the Board of
Directors from time to time if, in the Board's good faith
judgment, changes in the Company's or a competitor's business
warrant substitution of one direct competitor for another on
the Prohibited List (but there may never be more than five
(5) entities listed). Such changes to the Prohibited List
will be communicated by written notice to you, such notice to
be effective only if your commencement of rendering services
for such entity is ninety (90) or more days after the giving
of such notice.
E. Disability. "Disability" means meeting the definition of
disability under the terms of the Kodak Long-Term Disability
Plan and receiving benefits under such plan.
F. Good Reason. "Good Reason" means the occurrence or failure
to cause the occurrence, as the case may be, without your
express written consent, of any of the following
circumstances:
I. any adverse change in your titles; or
II. a material diminution of your duties, responsibilities
or authority; or
III. your assignment of duties or responsibilities which are
materially inconsistent with your then position(s) which
if correctable, remain uncorrected for 20 days following
written notice to Kodak by you of the assignment (your
nonperformance of those duties or responsibilities you
consider materially inconsistent solely during such 20
day notice period will not be considered a breach of
this letter agreement); or
86
VI. any material breach by Kodak of any material provision
of this letter agreement that is not cured within 20
days of written notice by you to Kodak's General Counsel
specifying the nature of the material breach; or
V. failure of any successor to Kodak (whether direct or
indirect and whether by merger, acquisition,
consolidation, or otherwise) to assume in a writing
delivered to you upon the assignee becoming such, the
obligations of Kodak hereunder.
G. Permitted Reason. "Permitted Reason" is a term used in all
of Kodak's stock option grants and means a reason for
terminating employment that is approved by the Chief
Executive Officer.
H. Willful. "Willful" means any act done or omitted to be done
not in good faith and without reasonable belief that such
action or omission was in the best interest of Kodak.
26. Withholding
All amounts paid by Kodak under this letter agreement will be subject
to reduction in order to comply with applicable Federal, state and
local tax withholding requirements.
27. Successors
This letter agreement is personal to you and, without the prior written
consent of the Board, will not be assignable by you otherwise than by
will or the laws of descent and distribution. This letter agreement
will inure to the benefit of and be enforceable by your legal
representatives.
This letter agreement is assignable by Kodak to any successor to all or
substantially all of the business and/or assets of Kodak (whether
direct or indirect, by purchase, merger, consolidation or otherwise).
Kodak will require any successor to assume and agree to perform this
letter agreement in the same manner and to the same extent that Kodak
would have been required to perform it if no such succession had taken
place. This letter agreement will inure to the benefit of and be
binding upon Kodak and any such successor or assigns.
28. Indemnification
During your employment and thereafter for the period during which you
may be subject to potential liability for any claim, action or
proceeding (whether civil or criminal) as a result of your service as
an officer of Kodak or in any capacity at the request of Kodak, Kodak
agrees to (1) indemnify and hold you harmless to the extent permitted
under the terms of its Certificate of Incorporation and Bylaws as such
document are amended from time to time; and (2) continue to cover you
under its directors and officers insurance at the same level then
maintained by Kodak for its officers and directors.
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29. Miscellaneous
By accepting this conditional offer of employment, you agree and
acknowledge that this letter contains the entire understanding between
Kodak and yourself with respect to your employment and supersedes all
previous written or oral negotiations, commitments, and agreements with
respect to such subject matter.
You agree to keep the content and existence of this letter, and all of
the facts concerning its negotiation and implementation, confidential
until it is filed by Kodak with the Securities and Exchange Commission.
You may, however, review it with your financial advisor, attorney
and/or spouse and with my designee or me.
If any portion of this letter 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 be given the
maximum possible effect by law.
This letter agreement, the Eastman Kodak Company Employee's Agreement
and the Release attached as Addendum A, and their 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.
* * *
Please respond to this conditional offer of employment prior to March
15, 2003. If you find the conditional offer acceptable, please
acknowledge this by signing your name on the signature line provided
and returning the signed original of this letter agreement, along with
the executed copy of the enclosed Employees' Agreement and the consent
form authorizing Kodak to obtain your credit report, directly to me.
Please feel free to contact me at (716) 724-4573 if you have any
questions.
Sincerely,
Michael P. Morley
MPM:llh
Enclosures
cc: Daniel A. Carp
I accept the terms and conditions of this letter agreement.
Signature Date
Social Security No. Birthdate
88
Exhibit (99.1)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel A. Carp, certify that:
1. I have reviewed this quarterly report on Form 10-Q;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
89
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 quarterly 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: April 24, 2003
/s/ Daniel A. Carp
Chief Executive Officer
90
Exhibit (99.2)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert H. Brust, certify that:
1. I have reviewed this quarterly report on Form 10-Q;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
91
6. The registrant's other certifying officers and I have indicated in
this quarterly 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: April 24, 2003
/s/ Robert H. Brust
Chief Financial Officer
92
Exhibit (99.3)
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 Quarterly Report of Eastman Kodak Company (the
"Company") on Form 10-Q for the three month period ended March 31, 2003
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
April 24, 2003
93
Exhibit (99.4)
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 Quarterly Report of Eastman Kodak Company (the
"Company") on Form 10-Q for the three month period ended March 31, 2003
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
April 24, 2003