0
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
AMENDMENT TO APPLICATION OR REPORT
Filed Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act Of 1934
Eastman Kodak Company
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 2
In response to the Securities and Exchange Commission's periodic review
of our filings under the Securities Exchange Act of 1934, the undersigned
registrant hereby files Amendment No. 2 to amend the following Items with
respect to its Annual Report on Form 10-K for the year ended December 31,
2002:
1) The registrant has replaced the facing page of the Form 10-K
with the current form of Form 10-K to disclose its
accelerated filer status and the information within the Form
10-K that was incorporated by reference;
2) The registrant has amended Item 1, "Business," to: (1)
include the required disclosure with respect to access to
its filings on its website; and (2) disclose the significance
of its digital minilab agreement to the Photography segment;
3) The registrant has amended Item 7, "Management Discussion and
Analysis of Financial Condition and Results of Operations,"
to: (1) exclude the adjusted net earnings non-GAAP
information from the "Summary" disclosure to comply with Item
10 of Regulation S-K and (2) disclose the impacts of the
registrant's acquisition of ENCAD, Inc. on the Commercial
Imaging segment's 2002 net worldwide sales and gross profit
within the "2002 Compared with 2001 Results of Operations -
Continuing Operations" disclosure;
4) The registrant has amended Item 11 to revise the Executive
Compensation Table;
5) The registrant has amended Item 12 to include the information
required by Regulation S-K Item 201(d);
6) The registrant has amended Item 14, "Controls and
Procedures," to revise the language to be in accordance with
the SEC's final adoption rules, "Management Assessment of
Internal Controls."
7) The registrant has amended Item 15, "Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" to: (1) revise
the language in its certifications that are filed pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (the "302 Certifications"), as
now reflected in Exhibits 99.1 and 99.2, to be in accordance
with the SEC's final adopting rules, "Management Assessment
of Internal Controls;" (2) revise the Form reference and date
in its 302 Certifications and in its certifications that are
filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and as
reflected in Exhibits 99.3 and 99.4, as a result of the
amendment of the Form 10-K; (3) revise Exhibit 12, "Statement
Re Computation of Ratio of Earnings to Fixed Charges"; (4)
revise its Form 10-K filing to set forth each of the required
exhibits under a separate header and "EX" document tag in its
electronic filing; and (5) revise the "Index to Exhibits" to
reflect the aforementioned changes for the 302 Certifications
and to remove the page references to the exhibits that have
been given separate headers and "EX" document tags, as
described above.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by
the undersigned, thereunto duly authorized.
Eastman Kodak Company
(Registrant)
Robert P. Rozek
Controller
Date: September 3, 2003
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 2002 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-87
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 16-0417150
(State of incorporation) (IRS Employer
Identification No.)
343 STATE STREET, ROCHESTER, NEW YORK 14650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 585-724-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $2.50 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.
Yes X No
1 CONTINUED
At December 31, 2002 285,933,179 shares of Common Stock of the
registrant were outstanding. The aggregate market value (based upon
the closing price of these shares on the New York Stock Exchange at
March 13, 2003) of the voting stock held by nonaffiliates was
approximately $8.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
PART III OF FORM 10-K
The following information was incorporated by reference from the 2003
Annual Meeting and Proxy Statement:
Item 10(a) - DIRECTORS OF THE REGISTRANT
2
PART I
ITEM 1. BUSINESS
Eastman Kodak Company (the Company or Kodak) is engaged primarily in
developing, manufacturing and marketing traditional and digital imaging
products, services and solutions for consumers, professionals,
healthcare providers, the entertainment industry and other commercial
customers. Kodak is the leader in helping people take, share, enhance,
preserve, print and enjoy images - for memories, for information, and
for entertainment. The Company is a major participant in infoimaging -
a $385 billion industry composed of devices (digital cameras and
personal data assistants (PDAs)), infrastructure (online networks and
delivery systems for images) and services and media (software, film and
paper) enabling people to access, analyze and print images. Kodak
harnesses its technology, market reach and a host of industry
partnerships to provide innovative products and services for customers
who need the information-rich content that images contain.
The Company sells traditional film products in its consumer imaging,
professional and entertainment imaging businesses within the
Photography segment. Digital products are substituting for some of
these products at varying rates. For example, the workflow
improvements offered by digital are having relatively more significant
effects in the professional markets, while digital is having very
little impact in the entertainment markets. The future impact of
digital substitution on these film markets is difficult to predict due
to a number of factors, including the pace of digital technology
adoption, the underlying economic strength or weakness in major world
markets, household film and media usage following a digital camera
purchase and the timing of digital infrastructure installation.
Additionally, digital substitution is happening at a different pace
depending on the geography. For example, the pace of digital
substitution in the consumer film market is more rapid in Japan,
followed by the U.S. and then by Western Europe. For 2002, the Company
believes digital substitution reduced consumer film sales growth by
approximately 3% in the U.S. For 2003, the Company estimates that
digital substitution will reduce consumer film sales growth by 4% to 5%
in the U.S.
A business discussion by reportable segments follows. Kodak's sales,
earnings and identifiable assets by reportable segment for the past
three years are shown in Note 22, "Segment Information."
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3
PHOTOGRAPHY SEGMENT
Sales from continuing operations of the Photography segment for 2002,
2001 and 2000 were (in millions) $9,002, $9,403 and $10,231,
respectively.
This segment includes traditional and digital product offerings for
consumers, professional photographers and the entertainment industry.
This segment combines traditional and digital photography and
photographic services in all its forms - consumer, advanced amateur,
and professional. Kodak manufactures and markets various components of
these systems including films (consumer, professional and motion
picture), photographic papers, processing services, photofinishing
equipment, photographic chemicals, cameras (including one-time-use and
digital) and projectors. Kodak has also developed products that bridge
traditional silver halide and digital products. Product and service
offerings include kiosks and scanning systems to digitize and enhance
images, digital media for storing images, and a network for
transmitting images. In addition, other digitization options have been
created to stimulate more pictures in use, adding to the consumption of
film and paper. These products serve amateur photographers, as well as
professional, motion picture and television customers.
In January 2002, the Company completed its acquisitions of Spector
Photo Group's (Spector's) operations in Austria and Percolor S.A.'s
photofinishing operations in Spain. In December 2001, the Company
completed its acquisitions of Colourcare Limited's wholesale
photofinishing operations in the United Kingdom and Spector's wholesale
photofinishing and distribution operations in France and Germany.
These acquisitions are part of the Company's overall efforts to
consolidate photofinishing operations in Western Europe.
In June 2001, the Company completed its acquisition of Ofoto, Inc. The
acquisition of Ofoto is accelerating Kodak's growth in the online
photography market and helping to drive more rapid adoption of digital
and online services. Ofoto offers digital processing of digital images
and traditional film, top-quality prints, private online image storage,
sharing, editing and creative tools, frames, cards, photo calendars and
other merchandise.
In February 2003, the Company completed the acquisition of Burrell
Colour Labs, Inc. and its affiliates (BCL). BCL is a professional
photo and imaging lab business, primarily serving weddings and portrait
photographers. It is comprised of seven labs located mostly in
Indiana, Kentucky, Washington state and California. As a result of
BCL's exercise of its put option, Kodak purchased BCL, a longtime
business partner. The Company has publicly acknowledged plans to sell
the business to a suitable buyer and rely on BCL's management team to
operate the business during its interim ownership period. Discussions
regarding the sale of BCL to a third party, which Kodak initiated prior
to the purchase agreement, are continuing.
4
Marketing and Competition. The Company's strategies in the consumer
imaging business are to extend the benefits of film and to drive
outputs in all forms. Traditional products and services for the
consumer are sold direct to retailers and through distributors
throughout the world. Price competition continues to exist in all
marketplaces. To mitigate the impacts of price competition, the
Company has been successful in moving consumers up to higher value
films and one-time-use cameras. To be more cost competitive with
respect to one-time-use cameras, the Company is moving a large portion
of its manufacturing to China. In extending the benefits of film and
driving output in all forms, the Company introduced its high definition
film in December 2002. Some digital substitution has occurred,
primarily in the U.S. and Japan, as a number of consumers have begun to
use digital cameras. While this substitution to date has had only an
impact on the Company's film and paper sales, and processing services
in the U.S., the Company has sought to offset this by providing its own
digital products, digitization services and output services. During
2002, the Company introduced its Kodak PerfectTouch branded digital
processing services. This service is expected to further the Company's
strategies of expanding the benefits of film and driving output in all
forms by providing high quality, branded output. The Company is
beginning to realize the potential for significant growth in the sale
of sensitized products outside the U.S., particularly in emerging
markets including Russia, India and China, where the Company has
expanded the number of outlets for Kodak products. The Company also
has photofinishing laboratories throughout the world and supplies
photographic papers and chemicals to other entities that provide
photofinishing services. The Company's primary laboratories provide
consumers the opportunity to receive film images in digital form,
either through Kodak Picture CD or the Company's retail online
partners. The Company has entered into a global supply agreement with
one of the world's leading suppliers of minilabs in order to accelerate
Kodak's participation in the rapidly growing market for digital
minilabs used for on-site photo processing. However, given the volume
of other supply arrangements that the Company enters into in the normal
course of business, the global supply agreement for digital minilabs is
not material in and of itself.
The Company's strategies in its consumer digital business are to drive
image output in all forms and make digital easier. Consumer digital
products including digital cameras and inkjet media for consumers are
sold direct to retailers or distributors. Products are also available
to customers through the Internet. Products such as the Company's
EasyShare digital camera system with the docks are intended to simplify
digital imaging for consumers and thereby increase the popularity for
sharing and printing digital photo files. The Company faces competition
from other electronics manufacturers in this market space, particularly
on price and technological advances. Rapid price declines shortly
after product introduction in this environment are common, as producers
are continually introducing new models with enhanced capabilities, such
as improved resolution and/or optical systems. Ofoto, the Company's
online printing business, continues to demonstrate strong growth and is
expected to begin the establishment of a customer base in selected
overseas markets in 2003.
5
Traditional and digital professional products and services are sold
direct to professional photographers and laboratories, or through
dealers throughout the world. The Company is experiencing price
competition for its professional films and papers. The professional
photography market space is increasingly being affected by digital
substitution. To mitigate the impacts of price competition and digital
substitution, the Company has introduced new products, systems, and
solutions focused on improving the digital workflow for professional
photographers and laboratories. These new innovative solutions range
from digital capture devices (digital cameras and scanners) designed to
improve the image acquisition or digitalization process, software
products designed to enhance and simplify the digital workflow, output
devices (thermal printers and digital silver halide writers) designed
to produce high quality images, and media (thermal and silver halide
media) optimized for digital workflows.
Throughout the world, almost all entertainment imaging products are
sold direct to studios, laboratories, independent filmmakers, or
commercial houses (for producing advertisements). The products are
sold in a highly competitive environment, characterized by price
competition. As the entertainment industry begins to adopt digital
formats, the Company anticipates that it will face new competitors,
including some of its current customers and other electronics
manufacturers.
Kodak's advertising programs actively promote its photography group
products and services in its various markets, and its principal
trademarks, trade dress and corporate symbol are widely used and
recognized. Kodak is frequently noted by trade and business
publications as one of the most recognized and respected brands in the
world.
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HEALTH IMAGING SEGMENT
Sales from continuing operations of the Health Imaging segment for
2002, 2001 and 2000 were (in millions) $2,274, $2,262 and $2,220,
respectively.
Products and services of the Health Imaging segment enable healthcare
customers (e.g., hospitals, imaging centers, etc.) to capture, process,
integrate, archive and display images and information in a variety of
forms. These products and services provide intelligent decision
support through the entire patient pathway from research to detection
to diagnosis to treatment. The Health Imaging segment also provides
products and services that help customers improve workflow and
productivity in their facilities, which in turn helps them enhance the
quality and productivity of healthcare delivery.
6
Products of the Health Imaging segment include traditional analog
medical films, chemicals, and processing equipment. Kodak's history in
traditional analog imaging has made it a leader in this area and has
served as the foundation for building its important digital imaging
business. The segment provides digital medical imaging and information
products, systems and solutions, which are key components of future
sales and earnings growth. These include digital print films, laser
imagers, computed and digital radiography systems, Picture Archiving
and Communications Systems (PACS), and Radiology Information Systems
(RIS). The Health Imaging segment serves the general radiology market
and specialty health markets, including dental, mammography and
oncology. The segment also provides molecular imaging for the
biotechnology research market.
Marketing and Competition. In the U.S., Canada and Latin America,
health imaging consumables and analog equipment are sold through
distributors. A significant portion of digital equipment and solutions
is sold direct to end users, with the balance sold through other
equipment manufacturers (OEMs). In the U.S., group purchasing
organizations (GPOs), which serve as buying agents for individual
hospitals or groups of hospitals, account for a significant portion of
film sales industry-wide. The Health Imaging segment has secured long-
term contracts with virtually all the major GPOs and, thus, has
positioned itself well against competitors. In Europe, consumables and
analog equipment are sold primarily to end users, with a small portion
sold through distributors. In Asia, these products are sold directly
to end users, while sales of these products in Japan are split between
distributors and end users. In all three areas - Europe, Asia and
Japan - consumables and analog equipment are often sold as part of a
media/equipment bundle. Digital equipment and solutions are sold
direct to end users and through OEMs in these three geographic areas.
Hospitals in Europe, which are a mix of private and government-funded
types, employ a highly regimented tender process in acquiring medical
imaging products. This process creates both a 6-to-18 month sales
cycle and a competitive pricing environment. Additionally, the
government-funded hospitals' budgets tend to be limited and restricted.
That is because government reimbursement policies often drive the use
of particular types of equipment and influence the transition from
analog to digital imaging. These policies vary widely among European
countries.
Worldwide, the medical imaging market is crowded with a range of
aggressive competitors. To compete aggressively, Kodak's Health
Imaging segment has developed a full portfolio of value-adding products
and services. Some competitors offer digital solutions similar to
those of Kodak, and other competitors offer similar analog solutions or
a mix of analog and digital. Health Imaging has a wide range of
solutions from analog to digital and everything in between. Moreover,
the segment's portfolio is expanding into new areas, including
information technology, thus enabling the segment to offer solutions
that combine medical images and information, such as patient reports,
into one unified package for medical practitioners. Kodak will
continue to innovate products and services to meet the changing needs
and preferences of the marketplace.
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7
COMMERCIAL IMAGING SEGMENT
Sales from continuing operations of the Commercial Imaging segment for
2002, 2001 and 2000 were (in millions) $1,456, $1,454 and $1,417,
respectively.
The Commercial Imaging segment encompasses Kodak's expertise in imaging
solutions, providing image capture, analysis, printing and archiving.
Markets for the segment include commercial printing, industrial, banking
and insurance, and state, local and federal government applications.
Products include aerial, industrial, graphic and micrographic films,
micrographic peripherals, inkjet printers, high-speed production
document scanners, digital imaging systems for commercial imaging
satellites, and electro-optical systems for land and space borne
telescopes and image and data analysis systems. The Company also
provides maintenance and professional services for Kodak and other
manufacturers' products, as well as providing imaging services to
customers.
The segment includes document imaging products, graphics products,
inkjet products, and products and services for government and commercial
customers. Also included are the Company's interests in NexPress
Solutions LLC (Nexpress) and Kodak Polychrome Graphics LLC (KPG). The
Company's equity in the income or loss of these interests is reflected
in other (charges) income.
The Company generates approximately $250-$300 million of annual revenues
from multi-year U.S. government contracts, which the U.S. government has
the right to terminate for convenience. Historically, terminations have
been rare.
KPG is an unconsolidated joint venture between Kodak and Sun Chemical
Corporation in which Kodak owns a 50% interest. This joint venture is
responsible for the photographic plate business, as well as for
marketing Kodak graphic arts film, and proofing materials and equipment.
NexPress is an unconsolidated joint venture between Kodak and
Heidelberger Druckmaschinen AG (Heidelberg) in which Kodak owns a 50%
interest that was originally formed for the purpose of developing and
marketing new digital color printing solutions. In 1999, NexPress was
expanded by Kodak and Heidelberg to include the black-and-white
electrophotographic business.
In January 2002, Kodak acquired ENCAD, Inc. This entity is a wholly
owned subsidiary of Kodak that is focused on the inkjet printing
industry. The new company provides a full set of offerings, including
inkjet printers, inks, media, software, and service. On December 17,
2002, it was announced that ENCAD, Inc. would become part of the newly
formed components group along with the capture (document scanners) and
Imagelink (microfilm) businesses. The formation of the components group
will build a stronger equipment and consumables business within the
Commercial Imaging segment by consolidating those product lines that
utilize a two tier, indirect sales and distribution channel model.
8
In February 2001, the Company completed its acquisition of substantially
all of the micrographic imaging operations of the Bell & Howell Company.
The acquired units provide business customers worldwide with maintenance
for document imaging components, micrographic-related equipment,
supplies, parts and service.
In 2000, the Company divested its Eastman Software subsidiary.
Marketing and Competition. Throughout the world, document imaging
products are sold primarily through distributors and value added
resellers. The end users of these products include businesses in the
banking and insurance sectors. While there is price competition, the
Company has been able to maintain price by adding more attractive
features to its products through technological advances. The Company
has developed a wide range of digital products to meet the needs of
customers who are interested in converting from traditional analog
technology to new enterprise digital workflow solutions. Maintenance
and professional services for Kodak and other manufacturer's products
are sold either through the product distribution channel or directly to
the end users of equipment. The Company provides imaging services in
Asia which are sold directly to its customers and include both
commercial and government customers. The service business will continue
to expand in the future by offering a wide range of solutions to its
customers and through strategic acquisitions.
Graphic products are sold directly by the Company to KPG. The
conversion to digital printing workflows has negatively affected the
sale of graphic films. As customers convert to digital, the Company is
pursuing alternative strategies to bundle Kodak product sales with KPG
product offerings.
Similar to document imaging products, inkjet products are sold through
a two-tiered distribution channel. Products are also sold through
original equipment manufacturers (OEMs) and global integrators. The
Company remains competitive by focusing on developing new ink and media
formulations, new printer technologies, new software and training
enhancements.
Government services are provided to national and local government agencies,
their prime contractors and other qualified commercial organizations. The
Company has been successful in acquiring recent contracts due to the
Company's integration and program management expertise as well as
specialized imaging solutions not available from its competitors. The
segment's acquisition of Research Systems, Inc. allows the Company to offer
advanced solutions to image analysis.
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9
ALL OTHER
Sales from continuing operations comprising All Other for 2002, 2001 and
2000 were (in millions) $103, $110, and $126, respectively.
All Other consists primarily of the Kodak components group, which
represents an effort by Kodak to diversify into high-growth product
areas that are consistent with the Company's historical strengths in
imaging science. The Kodak components group is comprised of the Kodak
display business, the imaging sensor solutions business and an optics
business. Products of this group include organic light emitting diode
(OLED) displays, imaging sensor solutions, and optics and optical
systems.
OLED technology, pioneered and patented by Kodak, enables full-color,
full-motion flat-panel displays with a level of brightness and sharpness
not possible with other technologies. Unlike traditional liquid-crystal
displays (LCDs), OLEDs are self-luminous and do not require
backlighting. This eliminates the need for bulky and environmentally
undesirable mercury lamps and yields a thinner, more compact display.
Unlike other flat panel displays, OLEDs have a wide viewing angle (up to
160 degrees), even in bright light. Their lower power consumption makes
them especially well suited for portable and mobile devices. As a
result of this combination of features, OLED displays communicate more
information in a more engaging way while adding less weight and taking
up less space.
On December 4, 2001, the Company and SANYO Electric Co., Ltd. announced
the formation of a global business venture, the SK Display Corporation,
to manufacture OLED displays for consumer devices such as cameras, PDAs,
and portable entertainment machines. Kodak holds a 34% ownership
interest and SANYO holds a 66% interest in the business venture.
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RAW MATERIALS
The raw materials used by the Company are many and varied and generally
available. Silver is one of the essential materials used in the
manufacture of films and papers. The Company purchases silver from
numerous suppliers under annual agreements or on a spot basis. Pulp is
an essential material in the manufacture of photographic papers. The
Company has contracts to acquire pulp from several vendors during the
next two to four years. Electronic components are prevalent in the
Company's equipment offerings. The Company has entered into contracts
with numerous vendors to supply these components over the next one to
two years.
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10
SEASONALITY OF BUSINESS
Sales and earnings of the Photography segment are linked to the timing
of vacations, holidays and other leisure activities. They are normally
lowest in the first quarter due to the absence of holidays and fewer
people taking vacations during that time. In addition, the demand for
photofinishing services is the lowest during the first quarter. Sales
and earnings of this segment are normally strongest in the second and
third quarter as demand for the products of this segment is high due to
heavy vacation activity, and events such as weddings and graduations.
During the latter part of the third quarter, demand for the products is
high as dealers prepare for the holiday seasons. Demand for
photofinishing services is also high during this heavy vacation period.
With respect to the Commercial Imaging and Health Imaging segments, the
sales of consumable products, which generate the major portion of the
earnings of these segments, tend to occur uniformly throughout the
year. Sales of the lower margin equipment products in these segments
tend to be highest in the fourth quarter as purchases by commercial and
healthcare customers are linked to their year-end capital budget
management process.
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RESEARCH AND DEVELOPMENT
Through the years, Kodak has engaged in extensive and productive
efforts in research and development.
Research and development expenditures for the Company's three
reportable segments and All Other for 2002, 2001 and 2000 were as
follows:
(in millions) 2002 2001 2000
Photography $513 $542 $575
Health Imaging 152 152 138
Commercial Imaging 63 58 61
All Other 34 27 10
---- ---- ----
Total $762 $779 $784
The downward trend in research and development expenditures in the
Photography segment and upward trend in the other reportable segments
and All Other reflect the shift in strategic focus from traditional
products, such as color negative film and paper and color reversal
films, to digital product areas, such as OLED technology, digital
medical imaging and inkjet printing.
Research and development is headquartered in Rochester, New York.
Other U.S. groups are located in Boston, Massachusetts; Washington,
D.C; Dallas, Texas; Oakdale, Minnesota; Allendale, New Jersey; New
Haven, Connecticut; and Fremont, California. Outside the U.S., groups
are located in Australia, England, France, Japan, China and Canada.
These groups work in close cooperation with manufacturing units and
marketing organizations to develop new products and applications to
serve both existing and new markets.
11
It has been Kodak's general practice to protect its investment in
research and development and its freedom to use its inventions by
obtaining patents. The ownership of these patents contributes to
Kodak's ability to provide leadership products and to generate revenue
from licensing. The Company holds portfolios of patents in several
areas important to its business, including color negative films,
processing and papers; digital cameras; network photo fulfillment; and
organic light-emitting diodes. Each of these areas is important to
existing and emerging business opportunities that bear directly on the
Company's overall business performance. The Company is beginning to
leverage its patent portfolio, which has started to generate royalty
income. Amounts to date have not been significant, but could be
material in the future.
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ENVIRONMENTAL PROTECTION
Kodak is subject to various laws and governmental regulations
concerning environmental matters. Some of the U.S. federal
environmental legislation having an impact on Kodak includes the Toxic
Substances Control Act, the Resource Conservation and Recovery Act
(RCRA), the Clean Air Act, and the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (the
Superfund Law).
It is the Company's policy to carry out its business activities in a
manner consistent with sound health, safety and environmental
management practices, and to comply with applicable health, safety and
environmental laws and regulations. Kodak continues to engage in a
program for environmental protection and control.
Environmental protection is further discussed in the Management
Discussion and Analysis of Financial Condition and Results of
Operations, and Notes to Financial Statements.
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EMPLOYMENT
At the end of 2002, the Company employed approximately 70,000 people,
of whom approximately 39,000 were employed in the U.S.
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AVAILABLE INFORMATION
Eastman Kodak Company makes available free of charge through its
website, at www.Kodak.com/go/arp, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the
Commission.
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Financial information by geographic areas for the past three years is
shown in Note 22, "Segment Information."
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12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements and notes to
consolidated financial statements contain information that is pertinent
to management's discussion and analysis of financial condition and
results of operations. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent assets and
liabilities.
The Company believes that the critical accounting policies and
estimates discussed below involve additional management judgment due to
the sensitivity of the methods and assumptions necessary in determining
the related asset, liability, revenue and expense amounts.
REVENUE RECOGNITION
Kodak recognizes revenue when it is realized or realizable and earned.
For the sale of multiple-element arrangements whereby equipment is
combined with services, including maintenance and training, and other
elements, including software and products, the Company allocates to,
and recognizes revenue from, the various elements based on verifiable
objective evidence of fair value (if software is not included or is
incidental to the transaction) or Kodak-specific objective evidence of
fair value if software is included and is other than incidental to the
sales transaction as a whole. For full service solutions sales, which
consist of the sale of equipment and software which may or may not
require significant production, modification or customization, there
are two acceptable methods of accounting: percentage of completion
accounting and completed contract accounting. For certain of the
Company's full service solutions, the completed contract method of
accounting is being followed by the Company. This is due to
insufficient historical experience resulting in the inability to
provide reasonably dependable estimates of the revenues and costs
applicable to the various stages of such contracts as would be
necessary under the percentage of completion methodology. When the
Company does have sufficient historical experience and the ability to
provide reasonably dependable estimates of the revenues and the costs
applicable to the various stages of these contracts, the Company will
account for these full service solutions under the percentage of
completion methodology.
The Company records reductions to revenue for customer incentive
programs offered including cash and volume discounts, price protection,
promotional, cooperative and other advertising allowances, slotting
fees and coupons. The liability for the incentive programs is recorded
at the time of sale. The Company determines the amount of the
incentives that are based on estimates by using historical experience
and internal and customer data. To the extent actual experience
differs from estimates, additional reductions to revenue could be
recorded. If market conditions were to decline, the Company may take
actions to expand these customer offerings, which may result in
incremental reductions to revenue.
13
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Kodak regularly analyzes its customer accounts and, when it becomes
aware of a specific customer's inability to meet its financial
obligations to the Company, such as in the case of bankruptcy filings
or deterioration in the customer's overall financial condition, records
a specific provision for uncollectible accounts to reduce the related
receivable to the amount that is estimated to be collectible. The
Company also records and maintains a provision for doubtful accounts
for customers based on a variety of factors including the Company's
historical experience, the length of time the receivable has been
outstanding and the financial condition of the customer. If
circumstances related to specific customers were to change, the
Company's estimates with respect to the collectibility of the related
receivables could be further adjusted. However, losses in the
aggregate have not exceeded management's expectations.
INVENTORIES
Kodak reduces the carrying value of its inventory based on estimates of
what is excess, slow-moving and obsolete, as well as inventory whose
carrying value is in excess of net realizable value. These write-downs
are based on current assessments about future demands, market
conditions and related management initiatives. If, in the future, the
Company determined that market conditions and actual demands are less
favorable than those projected and, therefore, inventory was
overvalued, the Company would be required to further reduce the
carrying value of the inventory and record a charge to earnings at the
time such determination was made. However, if in the future the
Company determined that inventory write-downs were overstated and,
therefore, inventory was undervalued, the Company would recognize the
increase to earnings through higher gross profit at the time the
related undervalued inventory was sold. However, actual results have
not differed materially from management's estimates.
14
VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND PURCHASED
INTANGIBLE ASSETS
The Company reviews the carrying value of its long-lived assets,
including goodwill and purchased intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. The Company assesses the recoverability
of the carrying value of long-lived assets, other than goodwill and
purchased intangible assets with indefinite useful lives, by first
grouping its long-lived assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities (the asset group)
and, secondly, estimating the undiscounted future cash flows that are
directly associated with and expected to arise from the use of and
eventual disposition of such asset group. The Company estimates the
undiscounted cash flows over the remaining useful life of the primary
asset within the asset group. If the carrying value of the asset group
exceeds the estimated undiscounted cash flows, the Company records an
impairment charge to the extent the carrying value of the long-lived
asset exceeds its fair value. The Company determines fair value
through quoted market prices in active markets or, if quoted market
prices are unavailable, through the performance of internal analysis of
discounted cash flows or external appraisals. The undiscounted and
discounted cash flow analyses are based on a number of estimates and
assumptions, including the expected period over which the asset will be
utilized, projected future operating results of the asset group,
discount rate and long-term growth rate.
To assess goodwill for impairment, the Company performs an assessment
of the carrying value of its reporting units on an annual basis or when
events and changes in circumstances occur that would more likely than
not reduce the fair value of the Company's reporting units below their
carrying value. If the carrying value of a reporting unit exceeds its
fair value, the Company would perform the second step in its assessment
process and would record an impairment charge to earnings to the extent
the carrying amount of the reporting unit goodwill exceeds its implied
fair value. The Company estimates the fair value of its reporting
units through internal analysis and external valuations, which utilize
income and market valuation approaches through the application of
capitalized earnings, discounted cash flow and market comparable
methods. These valuation techniques are based on a number of estimates
and assumptions, including the projected future operating results of
the reporting unit, discount rate, long-term growth rate and
appropriate market comparables.
15
The Company's assessments of impairment of long-lived assets, including
goodwill and purchased intangible assets, and its periodic review of
the remaining useful lives of its long-lived assets are an integral
part of Kodak's ongoing strategic review of the business and
operations, and are also performed in conjunction with the Company's
periodic restructuring actions. Therefore, future changes in the
Company's strategy, the ongoing digital substitution, the continuing
shift from overnight photofinishing to onsite processing and other
changes in the operations of the Company could impact the projected
future operating results that are inherent in the Company's estimates
of fair value, resulting in impairments in the future. Additionally,
other changes in the estimates and assumptions, including the discount
rate and expected long-term growth rate, which drive the valuation
techniques employed to estimate the fair value of long-lived assets and
goodwill could change and, therefore, impact the assessments of
impairment in the future.
In performing the annual assessment of goodwill for impairment, the
Company determined that none of the reporting units' carrying values
were close to exceeding their respective fair values. See "Goodwill"
under Note 1, "Significant Accounting Policies."
INVESTMENTS IN EQUITY SECURITIES
Kodak holds minority interests in certain publicly traded and privately
held companies having operations or technology within its strategic
area of focus. The Company's policy is to record an impairment charge
on these investments when they experience declines in value that are
considered to be other-than-temporary. Poor operating results of the
investees or adverse changes in market conditions in the future may
cause losses or an inability of the Company to recover its carrying
value in these underlying investments. The remaining carrying value of
the Company's investments in these equity securities is $29 million at
December 31, 2002.
INCOME TAXES
The Company records a valuation allowance to reduce its net deferred tax
assets to the amount that is more likely than not to be realized. At
December 31, 2002, the Company has deferred tax assets for its net
operating loss and foreign tax credit carryforwards of $16 million and
$99 million, respectively, relating to which the Company has a valuation
allowance of $16 million and $56 million, respectively. The Company has
considered future market growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which the Company
operates and prudent and feasible tax planning strategies in determining
the need for these valuation allowances. If Kodak were to determine
that it would not be able to realize a portion of its net deferred tax
asset in the future for which there is currently no valuation allowance,
an adjustment to the net deferred tax assets would be charged to
earnings in the period such determination was made. Conversely, if the
Company were to make a determination that it is more likely than not
that the deferred tax assets for which there is currently a valuation
allowance would be realized, the related valuation allowance would be
reduced and a benefit to earnings would be recorded.
16
The Company's effective tax rate considers the impact of undistributed
earnings of subsidiary companies outside the U.S. Deferred taxes have
not been provided for the potential remittance of such undistributed
earnings, as it is the Company's policy to permanently reinvest its
retained earnings. However, from time to time and to the extent that
the Company can repatriate overseas earnings on a tax-free basis, the
Company will pay dividends to the U.S. Material changes in the
Company's working capital and long-term investment requirements could
impact the level and source of future remittances and, as a result, the
Company's effective tax rate. See Note 13, "Income Taxes."
The Company operates within multiple taxing jurisdictions and is
subject to audit in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time for
resolution. Although management believes that adequate provision has
been made for such issues, there is the possibility that the ultimate
resolution of such issues could have an adverse effect on the earnings
of the Company. Conversely, if these issues are resolved favorably in
the future, the related provisions would be reduced, thus having a
positive impact on earnings.
WARRANTY OBLIGATIONS
Management estimates expected product failure rates, material usage and
service costs in the development of its warranty obligations. In the
event that the actual results of these items differ from the estimates,
an adjustment to the warranty obligation would be recorded.
PENSION AND POSTRETIREMENT BENEFITS
Kodak's defined benefit pension and other postretirement benefit costs
and obligations are dependent on assumptions used by actuaries in
calculating such amounts. These assumptions, which are reviewed
annually by the Company, include the discount rate, long-term expected
rate of return on plan assets, salary growth, healthcare cost trend rate
and other economic and demographic factors. The Company bases the
discount rate assumption for its significant plans on the estimated rate
at which annuity contracts could be purchased to discharge the pension
benefit obligation. In estimating that rate, the Company looks to the
AA-rated corporate long-term bond yield rate in the respective country
as of the last day of the year in the Company's reporting period as a
guide. The long-term expected rate of return on plan assets is based on
a combination of formal asset allocation studies, historical results of
the portfolio and management's expectation as to future returns that are
expected to be realized over the estimated remaining life of the plan
liabilities that will be funded with the plan assets. The salary growth
assumptions are determined based on the Company's long-term actual
experience and future and near-term outlook. The healthcare cost trend
rate assumptions are based on historical cost and payment data, the near-
term outlook and an assessment of the likely long-term trends.
17
The Company evaluates its expected long-term rate of return on plan
asset (EROA) assumption annually for the Kodak Retirement Income Plan
(KRIP). To facilitate this evaluation, every two to three years, or
when market conditions change materially, the Company undertakes a new
asset liability study to reaffirm the current asset allocation and the
related EROA assumption. Wilshire Associates, a consulting firm,
completed a study (the Study) in September 2002, which led to several
asset allocation shifts and a decrease in the EROA from 9.5% for the
year ended December 31, 2002 to 9.0% for the year ended December 31,
2003. This factor, coupled with a decrease in the discount rate of 75
basis points from 7.25% for 2002 to 6.50% for 2003, and the fact that
the transition asset, which provided approximately $56 million of income
in 2002, is fully amortized as of December 31, 2002, is expected to
lower total pension income in the U.S. from $197 million in 2002 to
pension income in the range of $49 million to $59 million in 2003. This
decrease in income will be partially offset by a decrease in pension
expense in the Company's non-U.S. plans in the range of $53 million to
$65 million. Additionally, the Company increased its healthcare cost
trend rate assumption with respect to the Company's most significant
postretirement plan, the U.S. plan, from 9% for 2003, decreasing to 5%
by 2007 (as discussed in the Company's 2001 Annual Report on Form 10-K),
to 12% for 2003, decreasing to 5% by 2010. This increase in the
healthcare cost trend rate assumption, coupled with the decrease in the
discount rate, is expected to increase the cost of this plan from $222
million in 2002 to range of $254 million to $310 million in 2003. All
these factors have been incorporated into the Company's earnings outlook
for 2003.
Actual results that differ from our assumptions are recorded as
unrecognized gains and losses and are amortized to earnings over the
estimated future service period of the plan participants to the extent
such total net recognized gains and losses exceed 10% of the greater of
the plan's projected benefit obligation or the market-related value of
assets. Significant differences in actual experience or significant
changes in future assumptions would affect the Company's pension and
postretirement benefit costs and obligations.
In accordance with the guidance under Statement of Financial Accounting
Standards (SFAS) No. 87, the Company is required to record an additional
minimum pension liability in its Consolidated Statement of Financial
Position that is at least equal to the unfunded accumulated benefit
obligation of its defined benefit pension plans. In the fourth quarter
of 2002, due to the decreasing discount rates and the weak performance
of the global equity markets in 2002, the Company increased its net
additional minimum pension liability by $577 million and recorded a
corresponding charge to accumulated other comprehensive income (a
component of stockholders' equity) of $394 million, net of taxes of $183
million. If discount rates and the global equity markets' performance
continue to decline, the Company may be required to increase its
additional minimum pension liabilities and record further charges to
stockholders' equity in the future. Likewise, if discount rates
increase and the performance of the global equity markets improve, the
Company could be in a position to reduce its minimum pension liability
and reverse the corresponding charges to equity.
18
ENVIRONMENTAL COMMITMENTS
Environmental liabilities are accrued based on estimates of known
environmental remediation exposures. The liabilities include accruals
for sites owned by Kodak, sites formerly owned by Kodak, and other
third party sites where Kodak was designated as a potentially
responsible party (PRP). The amounts accrued for such sites are based
on these estimates, which are determined using the ASTM Standard E 2137-
01 "Standard Guide for Estimating Monetary Costs and Liabilities for
Environmental Matters." The overall method includes the use of a
probabilistic model that forecasts a range of cost estimates for the
remediation required at individual sites. The Company's estimate
includes equipment and operating costs for remediation and long-term
monitoring of the sites. Such estimates may be affected by changing
determinations of what constitutes an environmental liability or an
acceptable level of remediation. The Company has an ongoing monitoring
and identification process to assess how the activities with respect to
the known exposures are progressing against the accrued cost estimates,
as well as to identify other potential remediation sites that are
presently unknown. To the extent that the current work plans are not
effective in achieving targeted results, the proposals to regulatory
agencies for desired methods and outcomes of remediation are not
acceptable, or additional exposures are identified, Kodak's estimate of
its environmental liabilities may change.
19
DETAILED RESULTS OF OPERATIONS
Net Sales from Continuing Operations by Reportable Segment and All Other
(in millions) 2002 Change 2001 Change 2000
Photography
Inside the U.S. $ 4,034 -10% $ 4,482 -10% $4,960
Outside the U.S. 4,968 + 1 4,921 - 7 5,271
------- --- ------- --- -------
Total Photography 9,002 - 4 9,403 - 8 10,231
------- --- ------- --- -------
Health Imaging
Inside the U.S. 1,088 0 1,089 + 2 1,067
Outside the U.S. 1,186 + 1 1,173 + 2 1,153
------- --- ------- --- -------
Total Health Imaging 2,274 + 1 2,262 + 2 2,220
------- --- ------- --- -------
Commercial Imaging
Inside the U.S. 818 0 820 +15 715
Outside the U.S. 638 + 1 634 -10 702
------- --- ------- --- -------
Total Commercial Imaging 1,456 0 1,454 + 3 1,417
------- --- ------- --- -------
All Other
Inside the U.S. 53 -22 68 0 68
Outside the U.S. 50 +19 42 -28 58
------- --- ------- --- -------
Total All Other 103 - 6 110 -13 126
------- --- ------- --- -------
Total Net Sales $12,835 - 3% $13,229 - 5% $13,994
======= === ======= === =======
Earnings (Loss) from Continuing Operations Before Interest, Other
(Charges) Income, and Income Taxes by Reportable Segment and All Other
(in millions)
Photography $ 771 - 2% $ 787 -45% $ 1,430
Health Imaging 431 + 33 323 -38 518
Commercial Imaging 192 + 12 172 -26 233
All Other (28) (60) (11)
------- ---- ------- --- -------
Total of segments 1,366 + 12 1,222 -44 2,170
Venture investment
impairments and other
asset write-offs (32) (12) -
Restructuring (costs)
credits and asset
impairments (114) (720) 44
Wolf charge - (77) -
Environmental reserve - (41) -
Kmart charge - (20) -
------- ---- ------- --- -------
Consolidated total $ 1,220 +247% $ 352 -84% $ 2,214
======= ==== ======= === =======
20
Net Earnings (Loss) From Continuing Operations by Reportable Segment
and All Other
(in millions) 2002 Change 2001 Change 2000
Photography $ 550 + 3% $ 535 -48% $ 1,034
Health Imaging 313 + 42 221 -38 356
Commercial Imaging 83 - 1 84 - 7 90
All Other (23) (38) (2)
----- ---- ----- --- -------
Total of segments 923 + 15 802 -46 1,478
Venture investment
impairments and other
asset write-offs (50) (15) -
Restructuring (costs)
credits and asset
impairments (114) (720) 44
Wolf charge - (77) -
Environmental reserve - (41) -
Kmart charge - (20) -
Interest expense (173) (219) (178)
Other corporate items 14 8 26
Tax benefit - PictureVision
subsidiary closure 45 - -
Tax benefit - Kodak Imagex
Japan 46 - -
Income tax effects on
above items and taxes
not allocated to segments 102 363 37
----- ---- ----- --- -------
Consolidated total $ 793 +879% $ 81 -94% $ 1,407
===== ==== ===== === =======
2002 COMPARED WITH 2001
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
------------
Net worldwide sales were $12,835 million for 2002 as compared with
$13,229 million for 2001, representing a decrease of $394 million, or
3% as reported, with no net impact from exchange. Declines in volume
accounted for approximately 1.5 percentage points of the sales
decrease, driven primarily by volume decreases in traditional film and
U.S. photofinishing services. Declines in price/mix reduced sales for
2002 by approximately 1.5 percentage points, driven primarily by
traditional consumer film products and health film and laser imaging
systems.
Net sales in the U.S. were $5,993 million for the current year as
compared with $6,459 million for the prior year, representing a
decrease of $466 million, or 7%. Net sales outside the U.S. were
$6,842 million for the current year as compared with $6,770 million for
the prior year, representing an increase of $72 million, or 1% as
reported, with no impact from exchange.
21
Net sales in the Europe, Asia, Africa, and Middle East Region (EAMER)
for 2002 were $3,491 million as compared with $3,333 million for 2001,
representing an increase of 5% as reported, or 1% excluding the
favorable impact of exchange. Net sales in the Asia Pacific region for
2002 increased slightly from $2,231 million for 2001 to $2,240 million
for 2002, with no impact from exchange. Net sales in the Canada and
Latin America region for 2002 were $1,111 million as compared with
$1,206 million for 2001, representing a decrease of 8% as reported, or
an increase of 6% excluding the negative impact of exchange.
Net sales for Emerging Market countries were $2,425 million for 2002 as
compared with $2,371 million for 2001, representing an increase of $54
million, or 2%. Sales growth in China and Russia of 25% and 20%,
respectively, were the primary drivers of the increase in sales in
Emerging Market countries, partially offset by decreased sales in
Argentina, Brazil and Mexico of 53%, 11% and 6%, respectively. The
sales growth in China resulted from strong business performance for
health and consumer products. The sales growth in Russia is a result
of the expansion of new channel operations for Kodak products and
services and continued success in camera seeding programs. The sales
declines in Argentina, Brazil and Mexico are reflective of the
continued economic weakness currently being experienced by many Latin
American emerging market countries. The emerging market portfolio
accounted for approximately 19% and 35% of the Company's worldwide and
non-U.S. sales, respectively, in 2002.
Gross profit was $4,610 million for 2002 as compared with $4,568
million for 2001, representing an increase of $42 million, or 1%. The
gross profit margin was 35.9% in the current year as compared with
34.5% in the prior year. The increase of 1.4 percentage points was
primarily attributable to manufacturing productivity/cost, which
favorably impacted gross profit margins by approximately 2.7 percentage
points year-over-year due to reduced labor expense, favorable materials
pricing and improved product yields. This increase was also
attributable to costs associated with restructuring and the exit of an
equipment manufacturing facility incurred in 2001 but not in the
current year, which negatively impacted gross profit margins for 2001
by approximately 1.0 percentage point. The positive impacts to gross
profit were partially offset by year-over-year price/mix declines,
which reduced gross profit margins by approximately 2.3 percentage
points. The price/mix decreases were primarily related to declining
prices on consumer film, health laser imaging systems and consumer
color paper, and product shifts primarily in the Photography segment.
Selling, general and administrative expenses (SG&A) were $2,530 million
for 2002 as compared with $2,625 million for 2001, representing a
decrease of $95 million, or 4%. SG&A decreased slightly as a
percentage of sales from 19.8% for the prior year to 19.7% for the
current year. The net decrease in SG&A is primarily attributable to
the cost savings from the employment reductions and other non-severance
related components of the Company's focused cost reductions, offset by
acquisitions in the Photography and Commercial segments and higher
strategic venture investment impairments in 2002 when compared with
2001 of $15 million.
22
Research and development (R&D) costs remained relatively flat at $762
million for 2002 as compared with $779 million for 2001, representing a
decrease of $17 million, or 2%. As a percentage of sales, R&D costs
also remained flat at 5.9% for both the current and prior years.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for 2002 were $1,220 million as compared with
$352 million for 2001, representing an increase of $868 million, or
247%. The primary reason for the increase in earnings from operations
was a decrease in restructuring costs and asset impairments of $586
million. Results for 2002 also benefited from the savings associated
with restructuring programs implemented in 2001. In addition, results
for 2001 included charges of $138 million for the Wolf bankruptcy
charge, environmental reserve and Kmart bankruptcy, and goodwill
amortization charges of $153 million.
Interest expense for 2002 was $173 million as compared with $219
million for 2001, representing a decrease of $46 million, or 21%. The
decrease in interest expense is primarily attributable to lower average
borrowing levels and lower interest rates in 2002 relative to 2001.
Other charges for the current year were a net charge of $101 million as
compared with a net charge of $18 million for the prior year. The
increase in other charges is primarily attributable to increased losses
from the Company's NexPress and SK Display joint ventures as these
business ventures are in the early stages of bringing their offerings
to market, higher non-strategic venture investment impairments, higher
losses related to minority interests and an increase in foreign
exchange losses. This activity was partially offset by a gain
recognized on the sale of assets in the current year.
The Company's effective tax rate from continuing operations decreased
from 30% for 2001 to 16% for 2002. The effective tax rate from
continuing operations of 16% for 2002 is less than the U.S. statutory
rate of 35% primarily due to the charges for the focused cost
reductions and asset impairments being deducted in jurisdictions that
have a higher tax rate than the U.S. federal income tax rate, and also
due to discrete period tax benefits of approximately $99 million
relating to the closure and restructuring of certain of the Company's
business activities and other one-time items, which were partially
offset by the impact of recording a valuation allowance to provide for
certain tax benefits that the Company would be required to forgo in
order to fully realize the benefits of its foreign tax credit
carryforwards.
The effective tax rate from continuing operations of 30% for 2001 is
less than the U.S. statutory rate of 35% primarily because of a tax
benefit from favorable tax settlements in the third quarter of 2001,
which was partially offset by the impact of nondeductible goodwill
amortization in 2001.
23
Excluding the items described above, the Company's effective tax rate
from continuing operations decreased from 31% for 2001 to 27% for 2002.
The lower effective tax from continuing operations in the current year
as compared with the prior year is primarily attributable to the tax
benefits from the elimination of goodwill amortization in 2002 and
further increases in earnings in lower tax rate jurisdictions. The
Company expects its effective tax rate to be approximately 27% in 2003.
Net earnings from continuing operations for 2002 were $793 million, or
$2.72 per basic and diluted share, as compared with net earnings from
continuing operations for 2001 of $81 million, or $.28 per basic and
diluted share, representing an increase of $712 million, or 879%. The
increase in net earnings from continuing operations is primarily
attributable to the reasons outlined above.
Photography
-----------
Net worldwide sales for the Photography segment were $9,002 million
for 2002 as compared with $9,403 million for 2001, representing a
decrease of $401 million, or 4% as reported, with no net impact from
exchange. Approximately 2.0 percentage points of the decrease was
attributable to declines in volume, driven primarily by volume
decreases in consumer and professional film and photofinishing, and
approximately 2.0 percentage points of the decrease was attributable to
declines in price/mix, driven primarily by consumer film products.
Photography segment net sales in the U.S. were $4,034 million for the
current year as compared with $4,482 million for the prior year,
representing a decrease of $448 million, or 10%. Photography segment
net sales outside the U.S. were $4,968 million for the current year as
compared with $4,921 million for the prior year, representing an
increase of $47 million, or 1% as reported, with no impact from
exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 6% in 2002 as
compared with 2001, reflecting declines due to lower volumes of 2%,
negative price/mix of 3%, and 1% negative impact of exchange. Sales of
the Company's consumer film products within the U.S. decreased 12% in
the current year as compared with the prior year, reflecting declines
due to lower volumes of 7% and negative price/mix of 5%. The lower
film product sales are attributable to a declining industry demand
driven by a weak economy and the impact of digital substitution. Sales
of the Company's consumer film products outside the U.S. remained flat,
with declines related to negative exchange of 1% offsetting increases
related to higher volumes of 1%.
The U.S. film industry volume decreased approximately 3% in 2002 as
compared with 2001 due to continuing economic weakness and the impact
of digital substitution. For the fifth consecutive year, the Company
has met its goal of maintaining full year U.S. consumer film market
share.
24
Net worldwide sales of consumer color paper decreased 3% in 2002 as
compared with 2001, reflecting declines due to volume and exchange of
2% and 1%, respectively. Net sales of consumer color paper in the U.S.
decreased 7% in the current year as compared with the prior year,
reflecting declines from lower volumes of 8%, partially offset by
favorable price/mix of 1%. Net sales of consumer color paper outside
the U.S. decreased 1%, reflecting a 1% decline related to negative
price/mix and a 2% decline related to negative exchange, partially
offset by a 2% increase in volume.
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services (CIS) outside the U.S., decreased 4% in 2002
as compared with 2001, 5% of which was attributable to lower volumes,
partially offset by 1% favorable impact of exchange. In the U.S.,
Qualex's processing volumes (wholesale and on-site) decreased
approximately 14% in 2002 as compared with 2001, which is composed of
decreases in wholesale and on-site processing volumes of 13% and 16%,
respectively. These declines reflect the effects of a continued weak
film industry, the adverse impact of several hundred store closures by
a major U.S. retailer, and the impact of digital substitution. During
the current year, CIS revenues in Europe benefited from the acquisition
of (1) Spector Photo Group's wholesale photofinishing and distribution
operations in France, Germany, and Austria, (2) ColourCare Limited's
wholesale processing and printing operations in the United Kingdom and
(3) Percolor photofinishing operations in Spain. These benefits were
partially offset by weak industry trends for photofinishing in the
second half of the year.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 7.5% for 2002, reflecting an increase
from the 5.3% rate in 2001. The growth was driven by continued
consumer acceptance of Picture CD and Retail.com, the retail industry's
leading e-commerce platform for business-to-business collaboration. In
addition, the number of images scanned in the current year increased
19% as compared with the prior year.
Net sales from the Company's consumer digital products and services,
which include picture maker kiosks/media and consumer digital services
revenue from Picture CD, "You've Got Pictures", and Retail.com,
remained flat in 2002 as compared with 2001. The Company has broadly
enabled the retail industry in the U.S. with its picture maker kiosks
and is focused on bringing to market new kiosk offerings, creating new
kiosk channels, expanding internationally and continuing to increase
the media burn per kiosk. Net worldwide sales of thermal media used in
picture maker kiosks increased 11% in the current year as compared with
the prior year.
Net worldwide sales of consumer digital cameras increased 10% in 2002
as compared with 2001 due to strong consumer acceptance of the
EasyShare digital camera system, despite sensor component shortages
earlier in the year. As a result, consumer digital camera market share
increased modestly in 2002 compared with 2001.
25
Net worldwide sales of inkjet photo paper increased 43% in 2002 as
compared with 2001, primarily due to higher volumes. The double-digit
revenue growth and the maintenance of market share are primarily
attributable to strong underlying market growth, introduction of new
products, continued promotional activity at key accounts and success in
broadening channel distribution.
Net worldwide sales of professional sensitized products, including
color negative, color reversal and commercial black and white films and
sensitized paper, decreased 13% in 2002 as compared with 2001,
reflecting primarily a decline in volume, with no impact from exchange.
Overall sales declines were primarily the result of ongoing digital
substitution and continued economic weakness in markets worldwide.
Net worldwide sales of origination and print film to the entertainment
industry remained flat in 2002 as compared with 2001, with a 1%
favorable impact from exchange offset by a 1% decline attributable to
lower volumes. The decrease in volumes of net worldwide film sales was
primarily attributable to economic factors impacting origination film
for commercials and independent feature films, partially offset by an
increase in print film volumes.
Gross profit for the Photography segment was $3,219 million for 2002 as
compared with $3,402 million for 2001, representing a decrease of $183
million or 5%. The gross profit margin was 35.8% in the current year
as compared with 36.2% in the prior year. The 0.4 percentage point
decrease was primarily attributable to decreases in price/mix that
impacted gross profit margins by approximately 3.0 percentage points,
partially offset by an increase in productivity/cost improvements that
impacted gross margins by approximately 2.6 percentage points.
SG&A expenses for the Photography segment were $1,935 million for 2002
as compared with $1,963 million for 2001, representing a decrease of
$28 million or 1%. The net decrease in SG&A spending is primarily
attributable to cost reduction activities and expense management,
partially offset by increases in SG&A expense related to CIS
photofinishing acquisitions in Europe. As a percentage of sales, SG&A
expense increased from 20.9% in the prior year to 21.5% in the current
year.
R&D costs for the Photography segment decreased $29 million or 5% from
$542 million in 2001 to $513 million in 2002. As a percentage of
sales, R&D costs decreased slightly from 5.8% in the prior year to 5.7%
in the current year.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Photography segment decreased $16
million, or 2%, from $787 million in 2001 to $771 million in 2002,
reflecting the combined effects of lower sales and a lower gross profit
margin, partially offset by SG&A and R&D cost reductions and the
elimination of goodwill amortization in 2002, which was $110 million in
2001.
26
Health Imaging
--------------
Net worldwide sales for the Health Imaging segment were $2,274 million
for 2002 as compared with $2,262 million for 2001, representing an
increase of $12 million, or 1% as reported, or an increase of 2%
excluding the negative net impact of exchange. The increase in sales
was attributable to an increase in price/mix and volume of
approximately 0.4 and 1.1 percentage points, respectively, primarily
due to laser imaging systems and equipment services, partially offset
by a decrease from negative exchange of approximately 0.8 percentage
point.
Net sales in the U.S. decreased slightly from $1,089 for the prior year
to $1,088 million for the current year. Net sales outside the U.S.
were $1,186 million for 2002 as compared with $1,173 million for 2001,
representing an increase of $13 million, or 1% as reported, or an
increase of 2% excluding the negative impact of exchange.
Net worldwide sales of digital products, which include laser printers
(DryView imagers and wet laser printers), digital media (DryView and
wet laser media), digital capture equipment (computed radiography
capture equipment and digital radiography equipment), services and
Picture Archiving and Communications Systems (PACS), increased 5% in
2002 as compared with 2001. The increase in digital product sales was
primarily attributable to higher digital media, service, digital
capture and PACS volumes as the market for these products continues to
grow.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 4% in 2002 as compared
with 2001. The decrease in sales was primarily attributable to a net
decline in sales of analog film products. This net decrease was partly
mitigated by an increase in sales of Mammography and Oncology (M&O)
analog film products. Analog film products (excluding M&O) decreased
8% in 2002 as compared with 2001, reflecting declines due to volume,
exchange and price/mix of approximately 5%, 2% and 1%, respectively.
Although analog film volumes declined on a worldwide basis, current
sales levels reflect an increase in traditional film market share. M&O
sales increased 6% in the current year as compared with the prior year,
reflecting higher volumes of approximately 8%, partially offset by
decreases in price/mix and exchange of approximately 1% and 1%,
respectively.
Gross profit for the Health Imaging segment was $930 million for 2002
as compared with $869 million for 2001, representing an increase of $61
million, or 7%. The gross profit margin was 40.9% in 2002 as compared
with 38.4% in 2001. The 2.5 percentage point increase was attributable
to productivity/cost improvements, which increased gross profit margins
by 2.9 percentage points due to favorable media and equipment
manufacturing productivity led by DryView digital media, analog medical
film, laser imaging equipment, and PACS, which were complemented by
lower service costs and improved supply chain management. The positive
effects of productivity/cost on gross profit margins were partially
offset by a decrease in price/mix that impacted margins by
approximately 0.5 percentage point due to declining digital laser media
and analog medical film prices.
27
The Company substantially completed the conversion of customers to the
Novation GPO in 2001 and, therefore, the Company does not anticipate
that this arrangement will have any additional significant potential
impacts on gross profit trends in the future as was experienced in
2001.
SG&A expenses for the Health Imaging segment decreased $20 million, or
5%, from $367 million for 2001 to $347 million for 2002. As a
percentage of sales, SG&A expenses decreased from 16.2% for 2001 to
15.3% for 2002. The decrease in SG&A expenses is primarily a result of
cost reduction activities and expense management.
R&D costs for the Health Imaging segment remained constant at $152
million for 2002 and 2001. As a percentage of sales, R&D costs
remained unchanged at 6.7% for both years.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Health Imaging segment increased $108
million, or 33%, from $323 million for 2001 to $431 million for 2002.
The increase in earnings from operations and the resulting operational
earnings margin are primarily attributable to the combined effects of
improvements in gross profit margins, lower SG&A expense, and the
elimination of goodwill amortization in 2002, which was $28 million in
2001.
Commercial Imaging
------------------
Net worldwide sales for the Commercial Imaging segment for 2002
increased slightly from $1,454 million for 2001 to $1,456 million for
2002, representing an increase of $2 million, with no net impact from
exchange. The slight increase in sales was attributable to an increase
in price/mix of approximately 1.0 percentage point, which was almost
entirely offset by declines in volume of approximately 0.9 percentage
point related to graphic arts and micrographic products.
Net sales in the U.S. were $818 million for 2002 as compared with $820
million for 2001, representing a decrease of $2 million. Net sales
outside the U.S. were $638 million in the current year as compared with
$634 million in the prior year, representing an increase of $4 million,
or 1%, with no impact from exchange.
Net worldwide sales of the Company's commercial and government products
and services increased 7% in 2002 as compared with 2001. The increase
in sales was principally due to an increase in revenues from government
products and services under its government contracts.
Net worldwide sales for inkjet products were a contributor to the net
increase in Commercial Imaging sales as these revenues increased 175%
in 2002 as compared with 2001. The increase in sales was attributable
to the 2002 acquisition of ENCAD, Inc., which represented approximately
5% of total net worldwide Commercial Imaging segment sales for 2002 and
virtually all of the 175% increase in sales of inkjet products. The
acquisition of ENCAD has improved the Company's channel to the inkjet
printer market.
28
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics (KPG), an unconsolidated joint venture affiliate in which the
Company has a 50% ownership interest, decreased 10% in 2002 as compared
with 2001, primarily reflecting volume declines in graphic arts film.
This reduction resulted largely from digital technology substitution
and the effect of continuing economic weakness in the commercial
printing market. The Company's equity in the earnings of KPG
contributed positive results to other charges during 2002, but was not
material to the Company's results from operations.
Gross profit for the Commercial Imaging segment for 2002 decreased
slightly from $451 million for 2001 to $449 million for 2002. The
gross profit margin was 30.8% for 2002 as compared with 31.0% for 2001.
The gross profit margin remained relatively flat due to declines
related to price/mix, which reduced margins by approximately 1.9
percentage points. These declines were offset by productivity/cost
improvements, which increased margins by approximately 1.9 percentage
points. ENCAD comprised approximately 3% of the gross profit dollars
for 2002 and contributed to the year-over-year decrease in the gross
profit margin percentage.
SG&A expenses for the Commercial Imaging segment decreased $14 million,
or 7%, from $208 million for 2001 to $194 million for 2002. As a
percentage of sales, SG&A expenses decreased from 14.3% for 2001 to
13.3% for 2002. The primary contributors to the decrease in SG&A
expenses were cost reductions from the prior year restructuring
actions, which had a larger impact on the results of 2002 as compared
with 2001, partially offset by the acquisition of ENCAD, Inc. in 2002,
which increased SG&A by $23 million.
R&D costs for the Commercial Imaging segment increased $5 million, or
9%, from $58 million for 2001 to $63 million for 2002. The increase
was due to the acquisition of ENCAD, Inc. in 2002, which increased R&D
costs by $8 million. As a percentage of sales, R&D costs increased
from 4.0% in 2001 to 4.3% in 2002.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Commercial Imaging segment increased
$20 million, or 12%, from $172 million in 2001 to $192 million in 2002.
The increase in earnings from operations is primarily attributable to
overall expense management and the elimination of goodwill amortization
in 2002, which was $15 million in 2001, partially offset by a lower
gross profit margin.
All Other
---------
Net worldwide sales for All Other were $103 million for 2002 as
compared with $110 million for 2001, representing a decrease of $7
million, or 6%. Net sales in the U.S. were $53 million in 2002 as
compared with $68 million for 2001, representing a decrease of $15
million, or 22%. Net sales outside the U.S. were $50 million in the
current year as compared with $42 million in the prior year,
representing an increase of $8 million, or 19%.
29
Loss from continuing operations before interest, other (charges)
income, and income taxes for All Other decreased $32 million from a
loss of $60 million in 2001 to a loss of $28 million in 2002. The
reduction in the loss from operations was primarily attributable to
cost reductions in certain miscellaneous businesses and the benefit of
current year manufacturing productivity.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
In March 2001, the Company acquired Citipix from Groupe Hauts Monts
along with two related subsidiaries involved in mapping services.
Citipix was involved in the aerial photography of large cities in the
United States, scanning of this imagery and hosting the imagery on the
Internet for government, commercial and private sectors. The acquired
companies were formed into Kodak Global Imaging, Inc. (KGII), a wholly
owned subsidiary, which was reported in the commercial and government
products and services business in the Commercial Imaging segment. Due
to a combination of factors, including the collapse of the
telecommunications market, limitations on flying imposed by the events
of September 11th, delays and losses of key contracts and the global
economic downturn, KGII did not achieve the financial results expected
by management during both 2001 and 2002. In November 2002, the Company
approved a plan to dispose of the operations of KGII.
Net sales from KGII for the years ended December 31, 2002 and 2001 were
$6 million and $5 million, respectively. The Company incurred
operational losses before income taxes from KGII for the years ended
December 31, 2002 and 2001 of $13 million and $7 million, respectively.
The Company recognized losses before income taxes in the fourth quarter
of 2002 of approximately $44 million for costs associated with the
disposal of KGII. The disposal costs were comprised of impairment
losses related to the write-down of the carrying value of goodwill,
intangibles and fixed assets to fair value, losses recognized from the
sale of certain assets, and the accrual of various costs related to the
shutdown of KGII, including severance relating to approximately 150
positions.
Also during the fourth quarter of 2002, the Company recognized earnings
before income taxes of $19 million as a result of the favorable outcome
of litigation associated with the 1994 sale of Sterling Winthrop Inc.
The loss from discontinued operations before income taxes for the years
ended December 31, 2002 and 2001 was at an effective tax rate of 38%
and 31%, respectively, resulting in the loss from discontinued
operations, net of incomes taxes in the Consolidated Statement of
Earnings of $23 million and $5 million, respectively.
For additional information, refer to Note 21, "Discontinued
Operations."
30
2001 COMPARED WITH 2000
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
------------
Net worldwide sales were $13,229 million for 2001 as compared with
$13,994 million for 2000, representing a decrease of $765 million, or 5%
as reported, or 3% excluding the negative net impact of exchange. The
decrease in net worldwide sales was comprised of declines in Photography
sales of $828 million, or 8%, and All Other sales of $16 million, or
13%, partially offset by increases in Health Imaging sales of $42
million, or 2%, and Commercial Imaging of $37 million or 3%. The
decrease in Photography sales was driven by declines in consumer,
entertainment origination and professional film products, consumer and
professional color paper, photofinishing revenues and consumer and
professional digital cameras. Net sales in the U.S. were $6,459 million
for 2001 as compared with $6,810 million for 2000, representing a
decrease of $351 million, or 5%. The U.S. economic condition throughout
the year and the events of September 11th adversely impacted the
Company's sales, particularly in the consumer film product groups within
the Photography segment.
Net sales outside the U.S. were $6,770 million for 2001 as compared with
$7,184 million for 2000, representing a decrease of $414 million, or 6%
as reported, or 1% excluding the negative impact of exchange. Net sales
in the EAMER region for 2001 were $3,333 million as compared with $3,541
million for 2000, representing a decrease of 6% as reported, or 3%
excluding the negative impact of exchange. Net sales in the Asia
Pacific region for 2001 were $2,231 million as compared with $2,378
million for 2000, representing a decrease of 6% as reported, or a 1%
increase excluding the negative impact of exchange. Net sales in the
Canada and Latin America region for 2001 were $1,206 million as compared
with $1,265 million for 2000, representing a decrease of 5% as reported,
or an increase of 2% excluding the negative impact of exchange.
Net sales for Emerging Market countries were $2,371 million for 2001 as
compared with $2,481 million for 2000, representing a decrease of $110
million, or 4%. The decrease was primarily attributable to sales
declines in Argentina, Brazil, China and Taiwan of 13%, 12%, 4% and 12%,
respectively, which were primarily a result of economic weakness being
experienced by these countries. These sales declines were partially
offset by an increase in sales in Russia of 22%, which was primarily a
result of the success in camera seeding programs. The emerging market
portfolio accounted for approximately 18% and 35% of the Company's
worldwide and non-U.S. sales, respectively, in both 2001 and 2000.
31
Gross profit was $4,568 million in 2001 as compared with $5,619 million
in 2000, representing a decrease of $1,051 million, or 19%. The gross
profit margin declined 5.7 percentage points from 40.2% in 2000 to 34.5%
in 2001. The decline in margin was driven primarily by lower prices
across many of the Company's traditional and digital product groups
within the Photography segment, a significant decline in the margin in
the Health Imaging segment, which was caused by declining prices and
mix, and the negative impact of exchange. The decrease in margin was
also attributable to an increase in restructuring costs incurred in 2001
as compared with 2000, which negatively impacted gross profit margins by
approximately 0.9 percentage point.
SG&A expenses increased $111 million, or 4%, from $2,514 million in 2000
to $2,625 million in 2001. SG&A expenses increased as a percentage of
sales from 18.0% in 2000 to 19.8% in 2001. The increase in SG&A
expenses is primarily attributable to charges of $73 million that the
Company recorded in 2001 relating to Kmart's bankruptcy, environmental
issues and the write-off of certain strategic investments that were
impaired, which amounted to $12 million.
R&D expenses remained flat, decreasing $5 million from $784 million in
2000 to $779 million in 2001. R&D expenses increased slightly as a
percentage of sales from 5.6% in 2000 to 5.9% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes decreased $1,862 million, or 84%, from $2,214
million in 2000 to $352 million in 2001. The decrease in earnings from
operations is partially attributable to charges taken in 2001 totaling
$891 million primarily relating to restructuring and asset impairments,
significant customer bankruptcies and environmental issues. The
remaining decrease in earnings from operations is attributable to the
decrease in sales and gross profit margin percentage for the reasons
described above.
Interest expense for 2001 was $219 million as compared with $178
million for 2000, representing an increase of $41 million, or 23%. The
increase in interest expense is primarily attributable to higher
average borrowings in 2001 as compared with 2000. Other charges for
the current year were $18 million as compared with other income of $96
million for the prior year. The decrease in other (charges) income is
primarily attributable to increased losses from the Company's NexPress
and Phogenix joint ventures in 2001 as compared with 2000 as these
business ventures are in the early stages of bringing their offerings
to market, and lower gains recognized from the sale of stock
investments in 2001 as compared with 2000.
The Company's effective tax rate decreased from 34% for the year ended
December 31, 2000 to 30% for the year ended December 31, 2001. The
decline in the Company's 2001 effective tax rate as compared with the
2000 effective tax rate is primarily attributable to an increase in
creditable foreign taxes and an $11 million tax benefit related to
favorable tax settlements reached in the third quarter of 2001, which
were partially offset by restructuring costs recorded in the second,
third and fourth quarters of 2001, which provided reduced tax benefits
to the Company.
32
Net earnings from continuing operations for 2001 were $81 million, or
$.28 per basic and diluted share, as compared with net earnings from
continuing operations for 2000 of $1,407 million, or $4.62 per basic
share and $4.59 per diluted share, representing a decrease of $1,326
million, or 94%. The decrease in net earnings from continuing
operations is primarily attributable to the reasons outlined above.
PHOTOGRAPHY
-----------
Net worldwide sales for the Photography segment were $9,403 million for
2001 as compared with $10,231 million for 2000, representing a decrease
of $828 million, or 8% as reported, or 5% excluding the negative net
impact of exchange. The decrease in Photography sales was driven by
declines in consumer, entertainment origination and professional film
products, consumer and professional color paper, photofinishing revenues
and consumer and professional digital cameras.
Photography net sales in the U.S. were $4,482 million for 2001 as
compared with $4,960 million for 2000, representing a decrease of $478
million, or 10%. Photography net sales outside the U.S. were $4,921
million for 2001 as compared with $5,271 million for 2000, representing
a decrease of $350 million, or 7% as reported, or 2% excluding the
negative impact of exchange.
Net worldwide sales of consumer film products, which include 35mm film,
Advantix film and one-time-use cameras, decreased 7% in 2001 relative to
2000, reflecting a 3% decline in both volume and exchange, and a 1%
decline in price/mix. The composition of consumer film products in 2001
as compared with 2000 reflects a 2% decrease in volumes for Advantix
film, a 7% increase in volume of one-time-use cameras and a 4% decline
in volume of traditional film product lines. Sales of the Company's
consumer film products within the U.S. decreased, reflecting a 5%
decline in volume in 2001 as compared with 2000. Sales of consumer film
products outside the U.S. decreased 9% in 2001 as compared with 2000,
reflecting a 2% decrease in volume, a 2% decline in price/mix and 5%
decline due to negative exchange.
During 2001, the Company continued the efforts to shift consumers to the
differentiated, higher value MAX and Advantix film product lines. For
2001, sales of the MAX and Advantix product lines as a percentage of
total consumer roll film revenue increased from a level of 62% in the
fourth quarter of 2000 to 68% by the fourth quarter of 2001.
The U.S. film industry volume was down slightly in 2001 relative to
2000; however, the Company maintained full-year U.S. consumer film
market share for the fourth consecutive year. During 2001, the Company
reached its highest worldwide consumer film market share position in the
past nine years. The Company's traditional film business is developing
in new markets, and management believes the business is strong.
However, digital substitution is occurring and the Company continues its
development and application of digital technology in such areas as
wholesale and retail photofinishing. Digital substitution is occurring
more quickly in Japan and more slowly in the U.S., Europe and China.
33
Net worldwide sales of consumer color paper decreased 11% in 2001 as
compared with 2000, reflecting a 4% decline in both volume and price/mix
and a 3% decline due to exchange. The downward trend in color paper
sales existed throughout 2001 and is due to industry declines resulting
from digital substitution, market trends toward on-site processing where
there is a decreasing trend in double prints, and a reduction in mail-
order processing where Kodak has a strong share position. Effective
January 1, 2001, the Company and Mitsubishi Paper Mills Ltd. formed the
business venture, Diamic Ltd., a consolidated sales subsidiary, which is
expected to improve the Company's color paper market share in Japan.
Net worldwide photofinishing sales, including Qualex in the U.S. and CIS
outside the U.S., decreased 16% in 2001 as compared with 2000. This
downward trend, which existed throughout 2001, is the result of a
significant reduction in the placement of on-site photofinishing
equipment due to the saturation of the U.S. market and the market's
anticipation of the availability of new digital minilabs. During the
fourth quarter of 2001, the Company purchased two wholesale, overnight
photofinishing businesses in Europe. The Company acquired Spector Photo
Group's wholesale photofinishing and distribution activities in France,
Germany and Austria, and ColourCare Limited's wholesale processing and
printing operations in the U.K. The Company believes that these
acquisitions will facilitate its strategy to enhance retail
photofinishing activities, provide access to a broader base of
customers, create new service efficiencies and provide consumers with
technologically advanced digital imaging services.
The Company continued its strong focus on the consumer imaging digital
products and services, which include the picture maker kiosks and
related media and consumer digital services revenue from picture CD,
"You've Got Pictures" and Retail.com. Combined revenues from the
placement of picture maker kiosks and the related media decreased 2% in
2001 as compared with 2000, reflecting a decline in the volume of new
kiosk placements partially offset by a 15% increase in kiosk media
volume. This trend in increased media usage reflects the Company's
focus on creating new sales channels and increasing the media burn per
kiosk. Revenue from consumer digital services increased 15% in 2001 as
compared with 2000.
The Company experienced an increase in digital penetration in its Qualex
wholesale labs. The principal products that contributed to this
increase were Picture CD and Retail.com. The average digital
penetration rate for the number of rolls processed increased each
quarter during 2001 up to a rate of 6.7% in the fourth quarter,
reflecting a 49% increase over the fourth quarter of 2000. In certain
major retail accounts, the digital penetration reached levels of up to
15%.
During the second quarter of 2001, the Company purchased Ofoto, Inc.
The Company believes that Ofoto will solidify the Company's leading
position in online imaging products and services. Since the
acquisition, Ofoto has demonstrated strong order growth, with the
average order size increasing by 31% in 2001 as compared with the 2000
level. In addition, the Ofoto customer base reflected growth of
approximately 12% per month throughout 2001.
34
Net worldwide sales of the Company's consumer digital cameras decreased
3% in 2001 as compared with 2000, reflecting volume growth of 35% offset
by declining prices and a 2% decrease due to negative exchange. The
significant volume growth over the 2000 levels was driven by strong
market acceptance of the new EasyShare consumer digital camera system,
competitive pricing initiatives, and a shift in the go-to-market
strategy to mass-market distribution channels. These factors have moved
the Company into the number two consumer market share position in the
U.S., up from the number three position as of the end of 2000. Net
worldwide sales of professional digital cameras decreased 12% in 2001 as
compared with 2000, primarily attributable to a 20% decline in volume.
Net worldwide sales of inkjet photo paper increased 55% in 2001 as
compared with 2000, reflecting volume growth of 42% and increased
prices. The inkjet photo paper demonstrated double-digit growth year-
over-year throughout 2001, reflecting the Company's increased
promotional activity at key retail accounts, improved merchandising and
broader channel distribution of the entire line of inkjet paper within
the product group. Net worldwide sales of professional thermal paper
remained flat, reflecting an 8% increase in volume offset by declines
attributable to price and negative exchange impact of 7% and 1%,
respectively.
Net worldwide sales of professional film products, which include color
negative, color reversal and commercial black-and-white film, decreased
13% in 2001 as compared with 2000. The downward trend in the sale of
professional film products existed throughout 2001 and is the result of
ongoing digital capture substitution and continued economic weakness in
a number of markets worldwide. Net worldwide sales of sensitized
professional paper decreased 2% in 2001 as compared with 2000,
reflecting a 4% increase in volume, offset by a 4% decrease in price and
a 2% decline attributable to exchange.
Net worldwide sales of origination and print film to the entertainment
industry decreased 4% in 2001 as compared with 2000. Origination film
sales decreased 12%, reflecting a 9% decline in volume and a 3% decline
due to the negative impact of exchange. The decrease in origination
film sales was partially offset by an increase in print film of 4%,
reflecting a 9% increase in volume, offset by declines attributable to
exchange and price of 3% and 2%, respectively. After several
consecutive years of growth in origination film sales, this decrease
reflects a slight downward trend beginning in the second half of 2001
due to continued economic weakness in the U.S., which caused a decrease
in television advertising spend and the resulting decline in the
production of television commercials. Additionally, the events of
September 11th caused a number of motion picture film releases and
television show productions to be delayed or postponed.
35
Gross profit for the Photography segment was $3,402 million in 2001 as
compared with $4,099 million in 2000, representing a decrease of $697
million or 17%. The gross profit margin for the Photography segment was
36.2% in 2001 as compared with 40.1% in 2000. The 3.9 percentage point
decrease in gross margin for the Photography segment was primarily
attributable to continued lower effective selling prices across
virtually all product groups, including the Company's core products of
traditional film, paper, and digital cameras, unfavorable exchange and
flat distribution costs on a lower sales base.
SG&A expenses for the Photography segment remained relatively flat,
decreasing $10 million, or 1%, from $1,973 million in 2000 to $1,963
million in 2001. As a percentage of sales, SG&A increased from 19.3% in
2000 to 20.9% in 2001. SG&A, excluding advertising, increased 4%,
representing 14.6% of sales in 2001 and 12.9% of sales in 2000.
R&D expenses for the Photography segment decreased $33 million, or 6%,
from $575 million in 2000 to $542 million in 2001. As a percentage of
sales, R&D increased slightly from 5.6% in 2000 to 5.8% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes for the Photography segment decreased $643
million, or 45%, from $1,430 million in 2000 to $787 million in 2001,
reflecting the lower sales and gross profit levels described above.
HEALTH IMAGING
---------------
Net worldwide sales for the Health Imaging segment were $2,262 million
for 2001 as compared with $2,220 million for 2000, representing an
increase of $42 million, or 2% as reported, or a 5% increase excluding
the negative net impact of exchange.
Net sales in the U.S. were $1,089 million for 2001 as compared with
$1,067 million for 2000, representing an increase of $22 million or 2%.
Net sales outside the U.S. were $1,173 million for 2001 as compared with
$1,153 million for 2000, representing an increase of $20 million, or 2%
as reported, or 7% excluding the negative impact of exchange. Sales in
emerging markets increased slightly, up 4% from 2000 to 2001.
36
Net worldwide sales of digital products, which include laser imagers
(DryView imagers and wet laser printers), digital media (DryView and Wet
laser media), digital capture equipment (computed radiography capture
equipment and digital radiography equipment) and PACS, increased 11% in
2001 as compared with 2000. The increase in digital sales was
principally the result of a 184% increase in digital capture revenues
resulting from a 201% increase in volume, due to new product
introductions in 2000 and 2001. In the second and third quarter of
2000, the Company introduced new computer radiography and digital
radiography products. In 2001, the Company's results include sales of
these products for the full year, as well as sales of newer computed
radiography products, which were launched in early 2001. The increase
in revenues was partially offset by declines attributable to price and
exchange. Laser imaging equipment, services and film also contributed
to the increase in digital sales, as sales in these combined categories
increased 3% in 2001 as compared with 2000. The 3% increase in these
product groups was the result of increases in DryView laser imagers and
media of 8% and 33%, respectively, which were partially offset by the
expected decreases in wet laser printers and media of 8% and 29%,
respectively, in 2001 as compared with 2000. Sales of PACS increased 9%
in 2001 as compared with 2000, reflecting a 16% increase in volume,
partially offset by declines attributable to price and exchange of 4%
and 3%, respectively.
Net worldwide sales of traditional medical products, which include
analog film, equipment, chemistry and services, decreased 7% in 2001 as
compared with 2000. This decline was primarily attributable to a 12%
decrease in non-specialty medical sales. The decrease in these sales
was partially offset by an increase in specialty Mammography and
Oncology sales, which increased 4%, reflecting a 12% increase in volume,
offset by declines attributable to price/mix and exchange of 6% and 2%,
respectively. Additionally, Dental sales increased 3% in 2001 as
compared with 2000, reflecting a 5% increase in volume, which was
partially offset by declines of 1% attributable to both price/mix and
exchange.
Gross profit for the Health Imaging segment was $869 million for 2001 as
compared with $1,034 million for 2000, representing a decrease of $165
million or 16%. The gross profit margin for the Health Imaging segment
was 38.4% in 2001 as compared with 46.6% in 2000. The 8.2 percentage
point decrease in gross margin was primarily attributable to selling
price declines in 2001, driven by the continued conversion of customers
to lower pricing levels under the Company's Novation GPO contracts and a
larger product mix shift from higher margin traditional analog film
toward lower margin digital capture and printing equipment.
Additionally, in 2001 as compared with 2000, the Company incurred higher
service costs due to an increase in volume of new digital capture
equipment and systems placements, compounded by short-term start-up
reliability issues with the new equipment.
SG&A expenses for the Health Imaging segment increased $16 million, or
4%, from $351 million in 2000 to $367 million in 2001. As a percentage
of sales, SG&A increased from 15.8% in 2000 to 16.2% in 2001.
37
R&D expenses for the Health Imaging segment increased $14 million, or
10%, from $138 million in 2000 to $152 million in 2001. As a percentage
of sales, R&D increased from 6.2% in 2000 to 6.7% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes decreased $195 million, or 38%, from $518
million in 2000 to $323 million in 2001, which is attributable to the
decrease in the gross profit percentage in 2001 as compared with 2000,
as described above.
COMMERCIAL IMAGING
------------------
Net worldwide sales for the Commercial Imaging segment were $1,454
million for 2001 as compared with $1,417 million for 2000, representing
an increase of $37 million, or 3% as reported, or 5% excluding the
negative net impact of exchange.
Net sales in the U.S. were $820 million for 2001 as compared with $715
million for 2000, representing an increase of $105 million, or 15%. Net
sales outside the U.S. were $634 million for 2001 as compared with $702
million for 2000, representing a decrease of $68 million, or 10% as
reported, or 5% excluding the negative impact of exchange.
Net worldwide sales of document imaging equipment, products and services
increased 8% in 2001 as compared with 2000. The increase in sales was
primarily attributable to an increase in service revenue due to the
acquisition of the Bell and Howell Imaging business in the first quarter
of 2001. With the acquisition of the Bell and Howell Imaging business,
the Company continues to secure new exclusive third-party maintenance
agreements. The increase in revenue was also due to strong demand for
the Company's iNnovation series scanners, specifically the new i800
series high-volume document scanner.
Net worldwide sales of the Company's commercial and government products
and services increased 16% in 2001 as compared with 2000. The increase
in sales was principally due to an increase in revenues from government
products and services under its government contracts.
Net worldwide sales for wide-format inkjet products were a contributor
to the net increase in Commercial Imaging sales as these revenues
increased 9% in 2001 as compared with 2000, reflecting year-over-year
sales increases throughout 2001. The Company continues to focus on
initiatives to grow this business as reflected in the acquisition of
ENCAD, Inc. in January of 2002. Given ENCAD's strong distribution
position in this industry, the acquisition of ENCAD is expected to
provide the Company with an additional channel to the inkjet printer
market.
38
Net worldwide sales of graphic arts products to KPG decreased 15% in
2001 as compared with 2000. The largest contributor to this decline in
sales was graphics film, which experienced a 20% decrease, reflecting a
19% decrease in volume and small declines attributable to price/mix and
exchange. The decrease in sales to KPG is attributable to continued
technology substitution and economic weakness. During 2001, KPG
continued to implement the operational improvements it began in 2000,
which returned the joint venture to profitability in the first quarter
and throughout 2001. In the fourth quarter of 2001, KPG completed its
acquisition of Imation's color proofing and software business. The
Company believes that Imation's portfolio of products will complement
and expand KPG's offerings in the marketplace, which should drive sell-
through of Kodak's graphics products. The Company is the exclusive
provider of graphic arts products to KPG. Net earnings from continuing
operations include positive earnings from the Company's equity in the
income of KPG.
Net worldwide sales of products to NexPress decreased in 2001 as
compared with 2000, reflecting a 15% decrease in volume and declines in
price/mix. In September 2001, the joint venture achieved its key
milestone in launching the NexPress 2100 printer product at the Print
'01 trade show. There is strong customer demand for the new printer,
which the Company believes should drive increased sell-through of
Kodak's products through the joint venture.
Gross profit for the Commercial Imaging segment was $451 million for
2001 compared with $473 million for 2000, representing a decrease of $22
million, or 5%. The gross profit margin for the Commercial Imaging
segment was 31.0% in 2001 as compared with 33.4% in 2000. The 2.4
percentage point decrease in gross margin was primarily attributable to
lower selling prices in a number of product groups within the segment.
SG&A expenses for the Commercial Imaging segment increased $32 million,
or 18%, from $176 million in 2000, to $208 million in 2001. As a
percentage of sales, SG&A increased from 12.4% in 2000 to 14.3% in 2001.
R&D costs for the Commercial Imaging segment decreased $3 million, or
5%, from $61 million in 2000 to $58 million in 2001. As a percentage of
sales, R&D decreased from 4.3% in 2000 to 4.0% in 2001.
Earnings from continuing operations before interest, other (charges)
income, and income taxes decreased $61 million, or 26%, from $233
million in 2000 to $172 million in 2001, which was attributable to the
decrease in the gross profit percentage and an increase in SG&A expenses
in 2001 as compared with 2000, as described above.
39
ALL OTHER
---------
Net worldwide sales of businesses comprising All Other were $110 million
for 2001 as compared with $126 million for 2000, representing a decrease
of $16 million, or 13% as reported, with no impact from exchange. Net
sales in the U.S. were flat at $68 million for both 2001 and 2000, while
net sales outside the U.S. were $42 million for 2001 as compared with
$58 million for 2000, representing a decrease of $16 million, or 28% as
reported, or 30% excluding the net impact of exchange.
The decrease in worldwide net sales was primarily attributable to a
decrease in optics revenues of 39% and a decrease in revenues due to the
divestment of the Eastman Software business in 2000. These decreases
were partially offset by a 10% increase in the sale of sensors.
In December 2001, the Company and SANYO announced the formation of a
business venture, SK Display Corporation, to manufacture and sell active
matrix OLED displays for consumer devices. Kodak holds a 34% ownership
interest in this venture. For 2001, there were no sales relating to
this business. In the future, the Company will derive revenue through
royalty income and sales of raw materials and finished displays.
Loss from continuing operations before interest, other (charges) income,
and income taxes increased $49 million from a loss of $11 million in
2000 to a loss of $60 million in 2001. The increase in the loss was
attributable to increased costs incurred for the continued development
of the OLED technology, the establishment of the SK Display business
venture and costs incurred to grow the existing optics and sensor
businesses.
SUMMARY
(in millions, except per share data)
2002 Change 2001 Change 2000
Net sales from continuing
operations $12,835 - 3% $13,229 - 5% $13,994
Earnings from continuing
operations before interest,
other (charges) income,
and income taxes 1,220 +247 352 -84 2,214
Earnings from continuing
operations 793 +879 81 -94 1,407
Loss from discontinued
operations (23) -360 (5) -
Net earnings 770 +913 76 -95 1,407
Basic earnings (loss) per
share:
Continuing operations 2.72 +871 .28 -94 4.62
Discontinued operations (.08) -300 (.02) -
Total 2.64 +915 .26 -94 4.62
Diluted earnings (loss) per
share:
Continuing operations 2.72 +871 .28 -94 4.59
Discontinued operations (.08) -300 (.02) -
Total 2.64 +915 .26 -94 4.59
40
The Company's results as noted above include certain one-time items,
such as charges associated with focused cost reductions and other
special charges. These one-time items, which are described below,
should be considered to better understand the Company's results of
operations that were generated from normal operational activities.
2002
The Company's results from continuing operations for the year included
the following:
Charges of $114 million ($80 million after tax) related to focused cost
reductions implemented in the third and fourth quarters. See further
discussion in the Restructuring Costs and Other section of Management's
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and Note 14, "Restructuring Costs and Other."
Charges of $50 million ($34 million after tax) related to venture
investment impairments and other asset write-offs incurred in the
second, third and fourth quarters. See MD&A and Note 6, "Investments"
for further discussion of venture investment impairments.
Income tax benefits of $121 million, including a $45 million tax
benefit related to the closure of the PictureVision subsidiary in the
second quarter, a $46 million benefit from the loss realized on the
liquidation of a Japanese photofinishing operations subsidiary in the
third quarter, an $8 million benefit from a fourth quarter property
donation, and a $22 million adjustment to reduce the Company's income
tax provision due to a decrease in the estimated effective tax rate for
the full year.
2001
The Company's results from continuing operations for the year included
the following one-time items:
Charges of $830 million ($583 million after tax) related to the
restructuring programs implemented in the second, third and fourth
quarters and other asset impairments. See further discussion in MD&A
and Note 14, "Restructuring Costs and Other."
A charge of $41 million ($28 million after tax) for environmental
exposures. See MD&A and Note 10, "Commitments and Contingencies."
A charge of $20 million ($14 million after tax) for the Kmart
bankruptcy. See MD&A and Note 2, "Receivables, Net."
Income tax benefits of $31 million, including a favorable tax settlement
of $11 million and a $20 million benefit relating to the decline in the
year-over-year operational effective tax rate.
41
2000
The Company's results from continuing operations for the year included
the following one-time items:
Charges of approximately $50 million ($33 million after tax) associated
with the sale and exit of one of the Company's equipment manufacturing
facilities. The costs for this effort, which began in 1999, related to
accelerated depreciation of assets still in use prior to the sale of the
facility in the second quarter, and costs for relocation of the
operations.
RESTRUCTURING COSTS AND OTHER
-----------------------------
Fourth Quarter, 2002 Restructuring Plan
During the fourth quarter of 2002, the Company announced a number of
focused cost reductions designed to apply manufacturing assets more
effectively in order to provide competitive products to the global
market. Specifically, the operations in Rochester, New York that
assemble one-time-use cameras and the operations in Mexico that perform
sensitizing for graphic arts and x-ray films will be relocated to other
Kodak locations. In addition, as a result of declining photofinishing
volumes, the Company will close certain central photofinishing labs in
the U.S. and EAMER. The Company will also reduce research and
development and selling, general and administrative positions on a
worldwide basis and exit certain non-strategic businesses. The total
restructuring charges recorded in the fourth quarter of 2002 for these
actions were $116 million.
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2002 for continuing operations and the remaining balance in
the related restructuring reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
Q4, 2002 charges l,l50 $ 55 $ 7 $ 37 $ 17 $ 116
Q4, 2002 utilization (250) (2) (7) (37) - (46)
------ ----- ---- ---- ---- -----
Balance at 12/31/02 900 $ 53 $ - $ - $ 17 $ 70
42
The total restructuring charge of $116 million for the fourth quarter
of 2002 was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $55 million, $7 million, $37
million and $17 million, respectively, with $109 million of those
charges reported in restructuring costs (credits) and other in the
accompanying Consolidated Statement of Earnings. The $7 million charge
for inventory write-downs for product discontinuances was reported in
cost of goods sold in the accompanying Consolidated Statement of
Earnings. The severance and exit costs require the outlay of cash,
while the inventory write-downs and long-lived asset impairments
represent non-cash items.
The severance charge related to the termination of 1,150 employees,
including approximately 525 manufacturing and logistics, 300 service
and photofinishing, 175 administrative and 150 research and development
positions. The geographic composition of the employees terminated
included approximately 775 in the United States and Canada and 375
throughout the rest of the world. The charge for the long-lived asset
impairments includes the write-off of $13 million relating to equipment
used in the manufacture of cameras and printers, $13 million for
sensitized manufacturing equipment, $5 million for lab equipment used
in photofinishing and $6 million for other assets that were scrapped or
abandoned immediately. In addition, charges of $9 million related to
accelerated depreciation on long-lived assets accounted for under the
held for use model of SFAS No. 144, was included in cost of goods sold
in the accompanying Consolidated Statement of Earnings. The
accelerated depreciation of $9 million was comprised of $5 million
relating to equipment used in the manufacture of cameras, $2 million
for sensitized manufacturing equipment and $2 million for lab equipment
used in photofinishing that will be used until their abandonment in
2003. The Company will incur accelerated depreciation charges of $16
million, $6 million and $3 million in the first, second and third
quarters, respectively, of 2003 as a result of the actions implemented
in the Fourth Quarter, 2002 Restructuring Plan.
In connection with the charges recorded in the Fourth Quarter, 2002
Restructuring Plan, the Company has 900 positions remaining to be
eliminated as of December 31, 2002. These positions will be eliminated
as the Company completes the closure of photofinishing labs and
completes the planned downsizing of manufacturing and administrative
positions. These positions are expected to be eliminated by the end of
the second quarter of 2003. Severance payments will continue beyond
the second quarter of 2003 since, in many instances, the terminated
employees can elect or are required to receive their severance payments
over an extended period of time. The Company expects the actions
contemplated by the reserve for exit costs to be completed by the end
of the third quarter of 2003. Most exit costs are expected to be paid
during 2003. However, certain costs, such as long-term lease payments,
will be paid over periods after 2003.
These restructuring actions as they relate to the Photography, Health
Imaging and Commercial Imaging segments amounted to $40 million, $2
million and $19 million, respectively. The remaining $55 million were
for actions associated with the manufacturing, research and
development, and administrative functions, which are shared across all
segments.
43
Cost savings resulting from the implementation of all Fourth Quarter,
2002 Restructuring Plan actions are expected to be approximately $90
million to $95 million in 2003 and $205 million to $210 million on an
annual basis thereafter.
In addition to the severance actions included in the $55 million charge
described above, further actions will be required related to the
relocations of the Rochester, New York one-time-use camera assembly
operations and the Mexican sensitizing operations. Upon completion of
the final severance action plans, it is expected that an additional 500
to 700 manufacturing employees will be terminated. The total charge
for these additional severance actions is expected to be approximately
$15 million to $20 million.
As part of the Company's focused cost-reduction efforts, the Company
announced on January 22, 2003 that it intended to incur additional
charges in 2003 to terminate 1,800 to 2,200 employees, in addition to
the employees included in the Fourth Quarter, 2002 Restructuring Plan.
A significant portion of these reductions is related to the
rationalization of the Company's photofinishing operations in the U.S.
and EAMER. The total charges in 2003 are expected to be in the range
of $75 million to $100 million. The savings from these additional
reductions are estimated to be $35 million to $50 million in 2003 and
$65 million to $85 million on an annual basis thereafter.
Third Quarter, 2002 Restructuring Plan
During the third quarter of 2002, the Company consolidated and
reorganized its photofinishing operations in Japan by closing 8
photofinishing laboratories and transferring the remaining 7
laboratories to a joint venture it entered into with an independent
third party. Beginning in the fourth quarter of 2002, the Company
outsourced its photofinishing operations to this joint venture. The
restructuring charge of $20 million relating to the Photography segment
recorded in the third quarter included a charge for termination-related
benefits of approximately $14 million relating to the elimination of
approximately 175 positions, which were not transferred to the joint
venture, and other statutorily required payments. The positions were
eliminated as of September 30, 2002 and the related payments were made
by the end of 2002. The remaining restructuring charge of $6 million
recorded in the third quarter represents the write-down of long-lived
assets held for sale to their fair values based on independent
valuations. An additional $3 million was recorded in the fourth
quarter for the write-down of these long-lived assets held for sale
based on quotes obtained from potential buyers. All charges applicable
to the Third Quarter, 2002 Restructuring Plan were included in the
restructuring costs (credits) and other line in the accompanying
Consolidated Statement of Earnings.
44
Fourth Quarter, 2001 Restructuring Plan
As a result of the decline in the global economic conditions and the
events of September 11th, the Company committed to actions in the fourth
quarter of 2001 (the Fourth Quarter, 2001 Restructuring Plan) to
rationalize worldwide manufacturing capacity, reduce selling, general
and administrative positions on a worldwide basis and exit certain
businesses. The total restructuring charges in connection with these
actions were $329 million.
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2001 and the remaining balance in the related restructuring
reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
2001 charges 4,500 $ 217 $ 7 $ 78 $ 27 $ 329
2001 utilization (1,300) (16) (7) (78) - (101)
------ ----- --- ----- ---- -----
Balance at 12/31/01 3,200 201 - - 27 228
Q1, 2002 utilization (1,725) (32) - - - (32)
------ ----- --- ----- ---- -----
Balance at 3/31/02 1,475 169 - - 27 196
Q2, 2002 utilization (550) (43) - - (10) (53)
------ ----- --- ----- ---- -----
Balance at 6/30/02 925 126 - - 17 143
Q3, 2002 reversal (275) (12) - - - (12)
Q3, 2002 utilization (125) (37) - - - (37)
------ ----- --- ----- ---- -----
Balance at 9/30/02 525 77 - - 17 94
Q4, 2002 utilization (325) (21) - - (4) (25)
------ ----- --- ----- ---- -----
Balance at 12/31/02 200 $ 56 $ - $ - $ 13 $ 69
The total restructuring charge of $329 million for the fourth quarter
of 2001 was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $217 million, $7 million, $78
million and $27 million, respectively, with $308 million of those
charges reported in restructuring costs (credits) and other in the
accompanying Consolidated Statement of Earnings. The balance of the
charge of $21 million, comprised of $7 million for inventory write-
downs relating to the product discontinuances and $14 million relating
to accelerated depreciation on the long-lived assets accounted for
under the held for use model of SFAS No. 121, was reported in cost of
goods sold in the accompanying Consolidated Statement of Earnings. The
severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represented non-
cash items.
45
The severance charge related to the termination of 4,500 employees,
including approximately 1,650 manufacturing, 1,385 administrative,
1,190 service and photofinishing and 275 research and development
positions. The geographic composition of the employees terminated
included approximately 3,190 in the United States and Canada and 1,310
throughout the rest of the world. The charge for the long-lived asset
impairments included the write-off of $22 million relating to
sensitized manufacturing equipment, lab equipment and leasehold
improvements, and other assets that were scrapped or abandoned
immediately and accelerated depreciation of $17 million relating to
sensitized manufacturing equipment, lab equipment and leasehold
improvements, and other assets that were to be used until their
abandonment in the first three months of 2002. The balance of the long-
lived asset impairment charge of $39 million included charges of $30
million relating to the Company's exit of three non-core businesses,
and $9 million for the write-off of long-lived assets in connection
with the reorganization of certain of the Company's digital camera
manufacturing operations.
In the third quarter of 2002, the Company reversed $12 million of the
$217 million in severance charges due primarily to higher rates of
attrition than originally expected, lower utilization of training and
outplacement services by terminated employees than originally expected
and termination actions being completed at an actual cost per employee
that was lower than originally estimated. As a result, approximately
275 fewer people will be terminated, including approximately 200
service and photofinishing, 50 manufacturing and 25 administrative.
Total employee terminations from the Fourth Quarter, 2001 restructuring
actions are now expected to be approximately 4,225.
During the fourth quarter of 2002, the Company recorded $5 million of
credits associated with the Fourth Quarter, 2001 Restructuring Plan in
restructuring costs (credits) and other in the accompanying
Consolidated Statement of Earnings. The credits were the result of
higher proceeds and lower costs associated with the exit from non-core
businesses.
These restructuring actions as they relate to the Photography, Health
Imaging and Commercial Imaging segments amounted to $113 million, $34
million and $30 million, respectively. The remaining $140 million were
for actions associated with the manufacturing, research and development
and administrative functions, which are shared across all segments.
The remaining actions to be taken by the Company in connection with the
Fourth Quarter, 2001 Restructuring Plan relate primarily to severance
and exit costs. The Company has approximately 200 positions remaining
to be eliminated as of December 31, 2002. These positions will be
eliminated as the Company completes the closure of photofinishing labs
in the U.S., and completes the planned downsizing of manufacturing
positions in the U.S. and administrative positions outside the U.S.
These positions are expected to be eliminated by the end of the first
quarter of 2003. A significant portion of the severance had not been
paid as of December 31, 2002 since, in many instances, the terminated
employees could elect or were required to receive their severance
payments over an extended period of time. The Company expects the
actions contemplated by the reserve for exit costs to be completed by
the end of the first quarter of 2003. Most exit costs are expected to
be paid during 2003. However, certain costs, such as long-term lease
payments, will be paid over periods after 2003.
46
Second and Third Quarter, 2001 Restructuring Plan
During the second and third quarters of 2001, as a result of a number
of factors, including the ongoing digital transformation, declining
photofinishing volumes, the discontinuance of certain product lines,
global economic conditions, and the growing presence of business in
certain geographies outside the United States, the Company committed to
a plan to reduce excess manufacturing capacity, primarily with respect
to the production of sensitized goods, to close certain central
photofinishing labs in the U.S. and Japan, to reduce selling, general
and administrative positions on a worldwide basis and to exit certain
businesses. The total restructuring charges in connection with these
actions were $369 million and were recorded in the second and third
quarters of 2001 (the Second and Third Quarter, 2001 Restructuring
Plan).
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the second
and third quarters of 2001 and the remaining balance in the related
restructuring reserves at December 31, 2002:
(dollars in millions)
Long-lived
Asset Exit
Number of Severance Inventory Impair- Costs
Employees Reserve Write-downs ments Reserve Total
--------- ------- ------- ------- ------- -----
Q2, 2001 charges 2,400 $ 127 $57 $ 112 $ 20 $ 316
Q3, 2001 charges 300 7 20 25 1 53
------ ----- --- ----- ---- -----
Subtotal 2,700 134 77 137 21 369
2001 reversal (275) (20) - - - (20)
2001 utilization (1,400) (40) (77) (137) (5) (259)
------ ----- --- ----- ---- -----
Balance at 12/31/01 1,025 74 - - 16 90
Q1, 2002 utilization (550) (23) - - (2) (25)
------ ----- --- ----- ---- -----
Balance at 3/31/02 475 51 - - 14 65
Q2, 2002 utilization (100) (11) - - (2) (13)
------ ----- --- ----- ---- -----
Balance at 6/30/02 375 40 - - 12 52
Q3, 2002 reversal (225) (14) - - (3) (17)
Q3, 2002 utilization (50) (7) - - - (7)
------ ----- --- ----- ---- -----
Balance at 9/30/02 100 19 - - 9 28
Q4, 2002 utilization (100) (8) - - (4) (12)
------ ----- --- ----- ---- -----
Balance at 12/31/02 0 $ 11 $ - $ - $ 5 $ 16
47
The total restructuring charge of $369 million for the Second and Third
Quarter, 2001 Restructuring Plan was composed of severance, inventory
write-downs, long-lived asset impairments and exit costs of $134
million, $77 million, $137 million and $21 million, respectively, with
$271 million of those charges reported in restructuring costs (credits)
and other in the accompanying Consolidated Statement of Earnings. The
balance of the charge of $98 million, composed of $77 million for
inventory write-downs relating to product discontinuances and $21
million relating to accelerated depreciation on the long-lived assets
accounted for under the held for use model of SFAS No. 121, was reported
in cost of goods sold in the accompanying Consolidated Statement of
Earnings. The severance and exit costs require the outlay of cash,
while the inventory write-downs and long-lived asset impairments
represent non-cash items.
The severance charge related to the termination of 2,700 employees,
including approximately 990 administrative, 800 manufacturing, 760
service and photofinishing and 150 research and development positions.
The geographic composition of the employees terminated included
approximately 1,110 in the United States and Canada and 1,590 throughout
the rest of the world. The charge for the long-lived asset impairments
includes the write-off of $61 million relating to sensitizing
manufacturing equipment, lab equipment and leasehold improvements, and
other assets that were scrapped or abandoned immediately and accelerated
depreciation of $33 million relating to sensitizing manufacturing
equipment, lab equipment and leasehold improvements, and other assets
that were to be used until their abandonment within the first three
months of 2002. The total amount for long-lived asset impairments also
includes a charge of $43 million for the write-off of goodwill relating
to the Company's PictureVision subsidiary, the realization of which was
determined to be impaired as a result of the Company's acquisition of
Ofoto in the second quarter of 2001.
In the fourth quarter of 2001, the Company reversed $20 million of the
$134 million in severance charges as certain termination actions,
primarily those in EAMER and Japan, will be completed at a total cost
less than originally estimated. This is the result of a lower actual
severance cost per employee as compared with the original amounts
estimated and 275 fewer employees being terminated, including
approximately 150 in service and photofinishing, 100 in administrative
and 25 in R&D.
In the third quarter of 2002, the Company reversed $14 million of the
original $134 million in severance charges due primarily to higher
rates of attrition than originally expected, lower utilization of
training and outplacement services by terminated employees than
originally expected and termination actions being completed at an
actual cost per employee that was lower than originally estimated. As
a result, approximately 225 fewer employees will be terminated,
including 100 in service and photofinishing, 100 in administrative and
25 in R&D. Also in the third quarter of 2002, the Company reversed $3
million of exit costs as a result of negotiating lower contract
termination payments in connection with business or product line exits.
48
These restructuring actions as they relate to the Photography, Health
Imaging and Commercial Imaging segments amounted to $234 million, $11
million and $8 million, respectively. The remaining $79 million were
for actions associated with the manufacturing, research and development
and administrative functions, which are shared across all segments.
Actions associated with the Second and Third Quarter, 2001
Restructuring Plan have been completed. A net total of 2,200 personnel
were terminated under the Second and Third Quarter, 2001 Restructuring
Plan. A portion of the severance had not been paid as of December 31,
2002 since, in many instances, the terminated employees could elect or
were required to receive their severance payments over an extended
period of time. Most of the remaining exit costs are expected to be
paid during 2003. However, certain exit costs, such as long-term lease
payments, will be paid after 2003.
Cost savings related to the Second and Third Quarter, 2001 Restructuring
Plan and the Fourth Quarter, 2001 Restructuring Plan actions
approximated $450 million.
-----------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
2002
The Company's cash and cash equivalents increased $121 million during
2002 to $569 million at December 31, 2002. The increase resulted
primarily from $2,204 million of cash flows from operating activities,
partially offset by $758 million of cash flows used in investing
activities and $1,331 million of cash used in financing activities.
The net cash provided by operating activities of $2,204 million for the
year ended December 31, 2002 was partially attributable to (1) net
earnings of $770 million which, when adjusted for depreciation and
amortization, and restructuring costs, asset impairments and other
charges, provided $1,673 million of operating cash, (2) a decrease in
accounts receivable of $263 million, (3) a decrease in inventories of
$88 million, (4) proceeds from the surrender of its company-owned life
insurance policies of $187 million, and (5) an increase in liabilities
excluding borrowings of $29 million, related primarily to severance
payments for restructuring programs. The net cash used in investing
activities of $758 million was utilized primarily for capital
expenditures of $577 million, investments in unconsolidated affiliates
of $123 million, business acquisitions of $72 million, of which $60
million related to the purchase of minority interests in China and
India, and net purchases of marketable securities of $13 million.
These uses of cash were partially offset by proceeds from the sale of
properties of $27 million. The net cash used in financing activities
of $1,331 million was primarily the result of net debt repayments of
$597 million, dividend payments of $525 million and the repurchase of
7.4 million Kodak shares held by KRIP for $260 million. Of the $260
million expended, $205 million was repurchased under the 1999 stock
repurchase program, which is now completed. The balance of the amount
expended of $55 million was repurchased under the 2000 stock repurchase
program.
49
Net working capital, excluding short-term borrowings, decreased to $599
million at December 31, 2002 from $797 million at December 31, 2001.
This decrease is primarily attributable to an increase in accounts
payable and other current liabilities, an increase in accrued income
taxes, lower receivables and lower inventories partially offset by a
higher cash balance.
The Company's primary estimated future uses of cash for 2003 include
the following: dividend payments, debt reductions, acquisitions, and
the potential repurchase of shares of the Company's common stock.
In October 2001, the Company's Board of Directors approved a change in
the dividend policy from quarterly dividend payments to semi-annual
payments, which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
first business day of the preceding month. On April 11, 2002, the
Company's Board of Directors declared a semi-annual cash dividend of
$.90 per share on the outstanding common stock of the Company. This
dividend was paid on July 16, 2002 to shareholders of record at the
close of business on June 3, 2002. On October 10, 2002, the Company's
Board of Director's declared a semi-annual cash dividend of $.90 per
share on the outstanding common stock of the Company. This dividend
was paid to the shareholders of record at the close of business on
December 13, 2002.
Capital additions were $577 million in 2002, with the majority of the
spending supporting new products, manufacturing productivity and
quality improvements, infrastructure improvements and ongoing
environmental and safety initiatives. For the full year 2003, the
Company expects its capital spending, excluding acquisitions and
equipment purchased for lease, to be approximately $600 million.
The cash outflows for severance and exit costs associated with the
restructuring charges recorded in 2002 will be more than offset by the
tax savings associated with the restructuring actions, primarily due to
the tax benefit of $46 million relating to the consolidation of its
photofinishing operations in Japan recorded in the third quarter 2002
restructuring charge. During 2002, the Company expended $220 million
against the related restructuring reserves, primarily for the payment
of severance benefits, which were mostly attributable to the 2001
restructuring actions. The remaining severance-related actions
associated with the total 2001 restructuring charge will be completed
by the end of the first quarter of 2003. Terminated employees could
elect to receive severance payments for up to two years following their
date of termination.
50
For 2003, the Company expects to generate $450 million to $650 million
in cash flow after dividends, excluding the impacts on cash from the
purchase and sale of marketable securities, the impacts from debt and
transactions in the Company's own equity, such as stock repurchases and
the proceeds from the exercise of stock options. The Company believes
that its cash flow from operations will be sufficient to cover its
working capital needs and the funds required for dividend payments,
debt reduction, acquisitions and the potential repurchase of shares of
the Company's common stock. The Company's cash balances and financing
arrangements will be used to bridge timing differences between
expenditures and cash generated from operations.
On July 12, 2002, the Company completed the renegotiation of its 364-
day committed revolving credit facility (364-Day Facility). The new
$1,000 million facility is $225 million lower than the 2001 facility
due to a reduction in the Company's commercial paper usage and the
establishment of the accounts receivable securitization program. As a
result, the Company now has $2,225 million in committed revolving
credit facilities, which are available to support the Company's
commercial paper program and for general corporate purposes. The
credit facilities are comprised of the new 364-Day Facility at $1,000
million expiring in July 2003 and a 5-year committed facility at $1,225
million expiring in July 2006 (5-Year Facility). If unused, they have
a commitment fee of $3 million per year, at the Company's current
credit rating of BBB+ (Standard & Poor's (S&P)) and Baa1 (Moody's).
Interest on amounts borrowed under these facilities is calculated at
rates based on spreads above certain reference rates and the Company's
credit rating. Due to the credit rating downgrades mentioned below and
the generally tight bank credit market, the borrowing costs under the
new 364-Day Facility have increased by approximately 7 basis points on
an undrawn basis and 40 basis points on a fully drawn basis at the
Company's current credit ratings. The borrowing costs under the 5-Year
Facility have increased by 6.5 basis points on an undrawn basis and 20
basis points on a fully drawn basis. These costs will increase or
decrease based on future changes in the Company's credit rating.
In connection with the renegotiation of the $1,000 million facility,
the covenant under both of the facilities, which previously required
the Company to maintain a certain EBITDA (earnings before interest,
income taxes, depreciation and amortization) to interest ratio, was
changed to a debt to EBITDA ratio. In the event of violation of the
covenant, the facility would not be available for borrowing until the
covenant provisions were waived, amended or satisfied. The Company was
in compliance with this covenant at December 31, 2002. The Company
does not anticipate that a violation is likely to occur.
51
The Company has other committed and uncommitted lines of credit at
December 31, 2002 totaling $241 million and $1,993 million,
respectively. These lines primarily support borrowing needs of the
Company's subsidiaries, which include term loans, overdraft coverage,
letters of credit and revolving credit lines. Interest rates and other
terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions. Total outstanding
borrowings against these other committed and uncommitted lines of
credit at December 31, 2002 were $143 million and $465 million,
respectively. These outstanding borrowings are reflected in the short-
term bank borrowings and long-term debt balances at December 31, 2002.
At December 31, 2002, the Company had $837 million in commercial paper
outstanding, with a weighted average interest rate of 1.97%. To
provide additional financing flexibility, the Company entered into an
accounts receivable securitization program, which provides for
borrowings up to a maximum of $400 million. At December 31, 2002, the
Company had outstanding borrowings under this program of $74 million.
Based on the outstanding secured borrowings level of $74 million, the
estimated annualized interest rate under this program is 2.13%.
During the second quarter of 2001, the Company increased its medium-
term note program from $1,000 million to $2,200 million for issuance of
debt securities due nine months or more from date of issue. At
December 31, 2002, the Company had debt securities outstanding of $700
million under this medium-term note program, with none of this balance
due within one year. The Company has remaining availability of $1,200
million under its medium-term note program for the issuance of new
notes.
Long-term debt and related maturities and interest rates were as
follows at December 31, 2002 and 2001 (in millions):
Weighted-
Average
Interest
Country Type Maturity Rate 2002 2001
U.S. Term note 2002 6.38% $ - $ 150
U.S. Term note 2003 9.38% 144 144
U.S. Term note 2003 7.36% 110 110
U.S. Medium-term 2005 7.25% 200 200
U.S. Medium-term 2006 6.38% 500 500
U.S. Term note 2008 9.50% 34 34
U.S. Term note 2018 9.95% 3 3
U.S. Term note 2021 9.20% 10 10
China Bank Loans 2002 6.28% - 12
China Bank Loans 2003 5.49% 114 96
China Bank Loans 2004 2.42% - 190
China Bank Loans 2004 5.58% 252 182
China Bank Loans 2005 5.53% 124 133
Japan Bank Loans 2003 2.51% - 42
Qualex Term notes 2003-2005 6.12% 44 -
Chile Bank Loans 2004 2.61% 10 10
Other 6 6
------ ------
$1,551 $1,822
====== ======
52
During the quarter ended March 31, 2002, the Company's credit ratings
for long-term debt were lowered by Moody's and by Fitch to Baa1 and A-,
respectively. However, in connection with its downgrade, Moody's
changed the Company's outlook from negative to stable. Additionally,
Fitch lowered the Company's credit rating on short-term debt to F2. On
April 23, 2002, S&P lowered the Company's credit rating on long-term
debt to BBB+, a level equivalent to the Company's current rating from
Moody's of Baa1. S&P reaffirmed the short-term debt at A2 and
maintained the Company's outlook at stable. These credit rating
downgrade actions were due to lower earnings as a result of the
continued weakened economy, industry factors and other world events.
The reductions in the Company's long-term debt credit ratings have
impacted the credit spread applied to Kodak's U.S. long-term debt
traded in the secondary markets. However, this has not resulted in an
increase in interest expense, as the Company has not issued any
significant new long-term debt during this period. The reduction in
the Company's short-term debt credit ratings has impacted the cost of
short-term borrowings, primarily the cost of issuing commercial paper.
However, this increased cost was more than offset by the lowering of
market rates of interest as a result of actions taken by the Federal
Reserve to stimulate the U.S. economy. As indicated above, the
Company's weighted average commercial paper rate for commercial paper
outstanding at December 31, 2002 was 1.97% as compared with 3.61% at
December 31, 2001. The credit rating downgrades in the first half of
2002 coupled with the
downgrades in the fourth quarter of 2001 would have resulted in an
increase in borrowing rates; however, due to lower average debt levels
and lower commercial paper rates, interest expense for the year ended
December 31, 2002 is down relative to the year ended December 31, 2001.
The above credit rating actions are not expected to have a material
impact on the future operations of the Company. However, if the
Company's credit ratings were to be reduced further, this could
potentially affect access to commercial paper borrowing. While this is
not expected to occur, if such an event did take place the Company
could use alternative sources of borrowing including its accounts
receivable securitization program, long-term capital markets debt, and
its revolving credit facilities.
The Company is in compliance with all covenants or other requirements
set forth in its credit agreements and indentures. Further, the
Company does not have any rating downgrade triggers that would
accelerate the maturity dates of its debt, with the exception of the
following: a $110 million note due April 15, 2003 and $44 million in
term notes that will amortize through 2005 that can be accelerated if
the Company's credit rating from S&P or Moody's were to fall below BBB
and BBB-, respectively; and the outstanding borrowings under the
accounts receivable securitization program if the Company's credit
ratings from S&P or Moody's were to fall below BBB- and Baa3,
respectively, and such condition continued for a period of 30 days.
Further downgrades in the Company's credit rating or disruptions in the
capital markets could impact borrowing costs and the nature of its
funding alternatives. However, the Company has access to $2,225
million in committed bank revolving credit facilities to meet
unanticipated funding needs should it be necessary. Borrowing rates
under these credit facilities are based on the Company's credit rating.
53
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At December 31, 2002, these
guarantees totaled a maximum of $345 million, with outstanding
guaranteed amounts of $159 million. The maximum guarantee amount
includes: guarantees of up to $160 million of debt for KPG ($74 million
outstanding) and up to $19 million for other unconsolidated affiliates
and third parties ($17 million outstanding) and guarantees of up to $166
million of customer amounts due to banks in connection with various
banks' financing of customers' purchase of products and equipment from
Kodak ($68 million outstanding). The KPG debt facility and the related
guarantee mature on December 31, 2005, but may be renewed at KPG's,
Kodak's and the bank's discretion. The guarantees for the other third
party debt mature between May 1, 2003 and May 31, 2005 and are not
expected to be renewed. The customer financing agreements and related
guarantees typically have a term of 90 days for product and short-term
equipment financing arrangements, and up to 3 years for long-term
equipment financing arrangements. These guarantees would require
payment from Kodak only in the event of default on payment by the
respective debtor. In some cases, particularly for guarantees related
to equipment financing, the Company has collateral or recourse
provisions to recover and sell the equipment to reduce any losses that
might be incurred in connection with the guarantee. This activity is
not material. Management believes the likelihood is remote that
material payments will be required under these guarantees.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $857
million, and the outstanding debt under those guarantees, which is
recorded within the short-term borrowings and long-term debt, net of
current portion components in the Consolidated Statement of Financial
Position, is $628 million. These guarantees expire in 2003 through 2005
with the majority expiring in 2003.
The Company may provide up to $100 million in loan guarantees to support
funding needs for SK Display Corporation, an unconsolidated affiliate in
which the Company has a 34% ownership interest. As of December 31,
2002, the Company has not been required to guarantee any of the SK
Display Corporation's outstanding debt.
54
In certain instances when Kodak sells businesses either through asset or
stock sales, the Company may retain certain liabilities for known
exposures and provide indemnification to the buyer with respect to
future claims for certain unknown liabilities existing, or arising from
events occurring, prior to the sale date, including liabilities for
taxes, legal matters, environmental exposures, labor contingencies,
product liability, and other obligations. The terms of the
indemnifications vary in duration, from one to two years for certain
types of indemnities, to terms for tax indemnifications that are
generally aligned to the applicable statute of limitations for the
jurisdiction in which the divestiture occurred, and terms for
environmental liabilities that typically do not expire. The maximum
potential future payments that the Company could be required to make
under these indemnifications are either contractually limited to a
specified amount or unlimited. The Company believes that the maximum
potential future payments that the Company could be required to make
under these indemnifications are not determinable at this time, as any
future payments would be dependent on the type and extent of the related
claims, and all available defenses, which are not estimable. However,
costs incurred to settle claims related to these indemnifications have
not been material to the Company's financial position, results of
operations or cash flows.
In certain instances when Kodak sells real estate, the Company will
retain the liabilities for known environmental exposures and provide
indemnification to the other party with respect to future claims for
certain unknown environmental liabilities existing prior to the sale
date. The terms of the indemnifications vary in duration, from a range
of three to ten years for certain indemnities, to terms for other
indemnities that do not expire. The maximum potential future payments
that the Company could be required to make under these indemnifications
are either contractually limited to a specified amount or unlimited.
The Company believes that the maximum potential future payments that the
Company could be required to make under these indemnifications are not
determinable at this time, as any future payments would be dependent on
the type and extent of the related claims, and all relevant defenses to
the claims, which are not estimable. However, costs incurred to settle
claims related to these indemnifications have not been material to the
Company's financial position, results of operations or cash flows.
55
The Company may enter into standard indemnification agreements in the
ordinary course of business with its customers, suppliers, service
providers and business partners. In such instances, the Company usually
indemnifies, holds harmless and agrees to reimburse the indemnified
party for all claims, actions, liabilities, losses and expenses in
connection with any Kodak infringement of third party intellectual
property or proprietary rights, or when applicable, in connection with
any personal injuries or property damage resulting from any Kodak
products sold or Kodak services provided. Additionally, the Company may
from time to time agree to indemnify and hold harmless its providers of
services from all claims, actions, liabilities, losses and expenses
relating to their services to Kodak, except to the extent finally
determined to have resulted from the fault of the provider of services
relating to such services. The level of conduct constituting fault of
the service provider will vary from agreement to agreement and may
include conduct which is defined in terms of negligence, gross
negligence, recklessness, intentional acts, omissions or other culpable
behavior. The term of these indemnification agreements is generally
perpetual. The maximum potential future payments that the Company could
be required to make under the indemnifications are unlimited. The
Company believes that the maximum potential future payments that the
Company could be required to make under these indemnifications are not
determinable at this time, as any future payments would be dependent on
the type and extent of the related claims, and all relevant defenses to
the claims, including statutes of limitation, which are not estimable.
However, costs incurred to settle claims related to these
indemnifications have not been material to the Company's financial
position, results of operations or cash flows.
The Company has by-laws, policies, and agreements under which it
indemnifies its directors and officers from liability for certain events
or occurrences while the directors or officers are, or were, serving at
Kodak's request in such capacities. Furthermore, the Company is
incorporated in the State of New Jersey, which requires corporations to
indemnify their officers and directors under certain circumstances. The
Company has made similar arrangements with respect to the directors and
officers of acquired companies. The term of the indemnification period
is for the director's or officer's lifetime. The maximum potential
amount of future payments that the Company could be required to make
under these indemnifications is unlimited, but would be affected by all
relevant defenses to the claims, including statutes of limitations.
The Company had a commitment under a put option arrangement with Burrell
Colour Lab (BCL), an unaffiliated company, whereby the shareholders of
BCL had the ability to put 100% of the stock to Kodak for total
consideration, including the assumption of debt, of approximately $63.5
million. The option first became exercisable on October 1, 2002 and was
ultimately exercised during the Company's fourth quarter ended December
31, 2002. Accordingly, on February 5, 2003, the Company acquired BCL
for a total purchase price of approximately $63.5 million, which was
composed of approximately $53 million in cash and $10.5 million in
assumed debt. The exercise of the option had no impact on the Company's
fourth quarter earnings.
56
In connection with the Company's investment in China that began in 1998,
certain unaffiliated entities invested in two Kodak consolidated
companies with the opportunity to put their minority interests to Kodak
at any time after the third anniversary, but prior to the tenth
anniversary, of the date on which the companies were established. On
December 31, 2002, an unaffiliated investor in one of Kodak's China
subsidiaries exercised their rights under the put option agreement.
Under the terms of the arrangement, the Company repurchased the
investor's 10% minority interest for approximately $44 million in cash.
The exercise of this put option and the recording of the related
minority interest purchased had no impact on the Company's earnings.
The total exercise price in connection with the remaining put options,
which increases at a rate of 2% per annum, is approximately $60 million
at December 31, 2002. The Company expects that approximately $16
million of the remaining $60 million in total put options will be
exercised and the related cash payments will occur over the next twelve
months.
Due to continuing declines in the equity markets in 2002 as well as the
decline in the discount rate from December 31, 2001 to December 31, 2002,
the Company was required to record a charge to the accumulated other
comprehensive (loss) income component of equity of $394 million, net of
tax benefits of $183 million, for additional minimum pension liabilities
at December 31, 2002. The increase in additional minimum pension
liabilities of $577 million was recorded to the postretirement
liabilities component on the Consolidated Statement of Financial Position
at December 31, 2002. The increase in this component of $684 million
from December 31, 2001 to December 31, 2002 is primarily attributable to
this increase in the additional minimum pension liabilities. The Company
recorded the deferred income tax benefit of $183 million in the other
long-term assets component within the Consolidated Statement of Financial
Position. The net increase in this component of $296 million from
December 31, 2001 to December 31, 2002 is partially attributable to the
recording of these deferred income tax assets and the increase in the
prepaid pension asset. The increase in the prepaid pension asset is
primarily attributable to $197 million of pension income generated from
the U.S. pension plans in 2002.
During the fourth quarter of 2002, the Company funded one of its non-U.S.
defined benefit plans in the amount of approximately $38 million. The
Company does not expect to have significant funding requirements relating
to its defined benefit pension plans in 2003.
57
Qualex, a wholly owned subsidiary of Kodak, has a 50% ownership
interest in Express Stop Financing (ESF), which is a joint venture
partnership between Qualex and Dana Credit Corporation (DCC), a wholly
owned subsidiary of Dana Corporation. Qualex accounts for its
investment in ESF under the equity method of accounting. ESF provides
a long-term financing solution to Qualex's photofinishing customers in
connection with Qualex's leasing of photofinishing equipment to third
parties, as opposed to Qualex extending long-term credit. As part of
the operations of its photofinishing business, Qualex sells equipment
under a sales-type lease arrangement and records a long-term
receivable. These long-term receivables are subsequently sold to ESF
without recourse to Qualex. ESF incurs long-term debt to finance the
purchase of the receivables from Qualex. This debt is collateralized
solely by the long-term receivables purchased from Qualex and, in part,
by a $60 million guarantee from DCC. Qualex provides no guarantee or
collateral to ESF's creditors in connection with the debt, and ESF's
debt is non-recourse to Qualex. Qualex's only continued involvement in
connection with the sale of the long-term receivables is the servicing
of the related equipment under the leases. Qualex has continued
revenue streams in connection with this equipment through future sales
of photofinishing consumables, including paper and chemicals, and
maintenance.
Qualex has risk with respect to the ESF arrangement as it relates to
its continued ability to procure spare parts from the primary
photofinishing equipment vendor (the Vendor) to fulfill its servicing
obligations under the leases. This risk is attributable to the fact
that, throughout 2002, the Vendor was experiencing financial difficulty
which ultimately resulted in certain of its entities in different
countries filing for bankruptcy on December 24, 2002. Although the
lessees' requirement to pay ESF under the lease agreements is not
contingent upon Qualex's fulfillment of its servicing obligations,
under the agreement with ESF, Qualex would be responsible for any
deficiency in the amount of rent not paid to ESF as a result of any
lessee's claim regarding maintenance or supply services not provided by
Qualex. Such lease payments would be made in accordance with the
original lease terms, which generally extend over 5 to 7 years. ESF's
outstanding lease receivable amount was approximately $473 million at
December 31, 2002.
58
To mitigate the risk of not being able to fulfill its service
obligations in the event the Vendor were to file for bankruptcy, Qualex
built up its inventory of these spare parts during 2002 and began
refurbishing used parts. To further mitigate its exposure, effective
April 3, 2002, Kodak entered into certain agreements with the Vendor
under which the Company paid $19 million for a license relating to the
spare parts intellectual property, an equity interest in the Vendor and
the intellectual property holding company and an arrangement to
purchase spare parts. After entering into these arrangements, the
Company obtained the documentation and specifications of the parts it
sourced solely from the Vendor and a comprehensive supplier list for
the parts the Vendor sourced from other suppliers. However, under
these arrangements, Kodak had a use restriction, which precluded the
Company from manufacturing the parts that the Vendor produced and from
purchasing parts directly from the Vendor's suppliers. This use
restriction would be effective until certain triggering events
occurred, the most significant of which was the filing for bankruptcy
by the Vendor. As indicated above, the Vendor filed for bankruptcy on
December 24, 2002. The arrangements that the Company entered into with
the Vendor are currently being reviewed in the bankruptcy courts, and
there is the possibility that such agreements could be challenged.
However, the Company believes that it has a strong legal position with
respect to the agreements and is taking the necessary steps to obtain
the rights to gain access to the Vendor's tooling to facilitate the
manufacture of the parts previously produced by the Vendor.
Additionally, the Company has begun to source parts directly from the
Vendor's suppliers. Accordingly, the Company does not anticipate any
significant liability arising from the inability to fulfill its service
obligations under the arrangement with ESF.
In December 2001, S&P downgraded the credit ratings of Dana Corporation
to BB for long-term debt and B for short-term debt, which are below
investment grade. This action created a Guarantor Termination Event
under the Receivables Purchase Agreement (RPA) between ESF and its
banks. To cure the Guarantor Termination Event, in January 2002, ESF
posted $60 million of additional collateral in the form of cash and
long-term lease receivables. At that time, if Dana Corporation were
downgraded to below BB by S&P or below Ba2 by Moody's, that action
would constitute a Termination Event under the RPA and ESF would be
forced to renegotiate its debt arrangements with the banks. On
February 22, 2002, Moody's downgraded Dana Corporation to a Ba3 credit
rating, thus creating a Termination Event.
Effective April 15, 2002, ESF cured the Termination Event by executing
an amendment to the RPA. Under the amended RPA, the maximum borrowings
have been lowered to $400 million, and ESF must pay a higher interest
rate on outstanding and future borrowings. Additionally, if there were
certain changes in control with respect to Dana Corporation or DCC, as
defined in the amended RPA, such an occurrence would constitute an
event of default. Absent a waiver from the banks, this event of
default would create a Termination Event under the amended RPA. The
amended RPA arrangement was further amended in July 2002 to extend
through July 2003. Under the amended RPA arrangement, maximum
borrowings were reduced to $370 million. Total outstanding borrowings
under the RPA at December 31, 2002 were $320 million.
59
Dana Corporation's S&P and Moody's long-term debt credit ratings have
remained at the February 22, 2002 levels of BB and Ba3, respectively.
Under the amended RPA, if either of Dana Corporation's long-term debt
ratings were to fall below their current respective ratings, such an
occurrence would create a Termination Event as defined in the RPA.
The amended RPA arrangement extends through July 2003, at which time
the RPA can be extended or terminated. If the RPA were terminated,
Qualex would no longer be able to sell its lease receivables to ESF and
would need to find an alternative financing solution for future sales
of its photofinishing equipment. For the year ended December 31, 2002,
total sales of photofinishing equipment were $3.5 million. Under the
partnership agreement between Qualex and DCC, subject to certain
conditions, ESF has exclusivity rights to purchase Qualex's long-term
lease receivables. The term of the partnership agreement continues
through October 6, 2003. In light of the timing of the partnership
termination, Qualex plans to utilize the services of Eastman Kodak
Credit Corporation, a wholly owned subsidiary of General Electric
Capital Corporation, as an alternative financing solution for
prospective leasing activity with its customers.
At December 31, 2002, the Company had outstanding letters of credit
totaling $105 million and surety bonds in the amount of $79 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
As of December 31, 2002, the impact that our contractual obligations
are expected to have on our liquidity and cash flow in future periods
is as follows:
(in millions) Total 2003 2004 2005 2006 2007 2008+
Long-term debt
obligations $1,551 $387 $285 $332 $500 $ - $ 47
Operating lease
obligations 355 102 72 56 42 32 51
Purchase
obligations 1,159 265 239 205 116 77 257
------ ---- ---- ---- ---- ---- ----
Total $3,065 $754 $596 $593 $658 $109 $355
====== ==== ==== ==== ==== ==== ====
60
2001
Net cash provided by operating activities in 2001 was $2,206 million,
as net earnings of $76 million, adjusted for depreciation and
amortization, and restructuring costs, asset impairments and other
charges, provided $1,408 million of operating cash. Also contributing
to operating cash was a decrease in receivables of $254 million and a
decrease in inventories of $465 million. This was partially offset by
decreases in liabilities, excluding borrowings, of $111 million related
primarily to severance payments for restructuring programs and
reductions in accounts payable and accrued benefit costs. Net cash
used in investing activities of $1,188 million in 2001 was utilized
primarily for capital expenditures of $743 million, investments in
unconsolidated affiliates of $141 million, and business acquisitions of
$306 million. Net cash used in financing activities of $808 million in
2001 was primarily the result of stock repurchases and dividend
payments as discussed below.
The Company declared cash dividends per share of $.44 in each of the
first three quarters and $.89 in the fourth quarter of 2001. Total
cash dividends of $643 million were paid in 2001. In October 2001, the
Company's Board of Directors approved a change in dividend policy from
quarterly dividend payments to semi-annual dividend payments.
Dividends, when declared, will be paid on the 10th business day of July
and December to shareholders of record on the first business day of the
preceding month. These payment dates serve to better align the
dividend disbursements with the seasonal cash flow pattern of the
business, which is more concentrated in the second half of the year.
This action resulted in the Company making five dividend payments in
2001.
Net working capital, excluding short-term borrowings, decreased to $797
million from $1,420 million at year-end 2000. This decrease is mainly
attributable to lower receivable and inventory balances, as discussed
above.
Capital additions, excluding equipment purchased for lease, were $680
million in 2001, with the majority of the spending supporting new
products, manufacturing productivity and quality improvements,
infrastructure improvements, ongoing environmental and safety
initiatives, and renovations due to relocations associated with
restructuring actions taken in 1999.
Under the $2,000 million stock repurchase program announced on April
15, 1999, the Company repurchased $44 million of its shares in 2001.
As of March 2, 2001, the Company suspended the stock repurchase program
in a move designed to accelerate debt reduction and increase financial
flexibility. At the time of the suspension of the program, the Company
had repurchased approximately $1,800 million of its shares under this
program.
The net cash cost of the restructuring charge recorded in 2001 was
approximately $182 million after tax, which was recovered through cost
savings in less than two years. The severance-related actions
associated with this charge will be completed by the end of the first
quarter of 2003.
61
2000
Net cash provided by operating activities in 2000 was $1,105 million,
as net earnings of $1,407 million, adjusted for depreciation and
amortization, provided $2,296 million of operating cash. This was
partially offset by increases in receivables of $247 million, largely
due to the timing of sales late in the fourth quarter; increases in
inventories of $280 million, reflecting lower than expected sales
performance in the second half of the year, particularly for consumer
films, paper and digital cameras; and decreases in liabilities,
excluding borrowings, of $808 million related primarily to severance
payments for restructuring programs and reductions in accounts payable
and accrued benefit costs. Net cash used in investing activities of
$906 million in 2000 was utilized primarily for capital expenditures of
$945 million, investments in unconsolidated affiliates of $123 million,
and business acquisitions of $130 million, partially offset by proceeds
of $277 million from sales of businesses and assets. Net cash used in
financing activities of $314 million in 2000 was the result of stock
repurchases and dividend payments, largely funded by net increases in
borrowings of $1,313 million.
Cash dividends per share of $1.76, payable quarterly, were declared in
2000. Total cash dividends of approximately $545 million were paid in
2000.
Net working capital, excluding short-term borrowings and the current
portion of long-term debt, increased to $1,420 million from $777
million at year-end 1999. This increase is mainly attributable to
lower payable levels and higher receivable and inventory balances, as
discussed above.
Capital additions were $945 million in 2000, with the majority of the
spending supporting manufacturing productivity and quality
improvements, new products including e-commerce initiatives, digital
photofinishing and digital cameras, and ongoing environmental and
safety initiatives.
Under the $2,000 million stock repurchase program announced on April
15, 1999, the Company repurchased 21.6 million shares for $1,099
million in 2000. On December 7, 2000, Kodak's Board of Directors
authorized the repurchase of up to an additional $2,000 million of the
Company's stock over the next 4 years.
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62
OTHER
Cash expenditures for pollution prevention and waste treatment for the
Company's current facilities were as follows:
(in millions) 2002 2001 2000
Recurring costs for pollution
prevention and waste treatment $ 67 $ 68 $ 72
Capital expenditures for pollution
prevention and waste treatment 12 27 36
Site remediation costs 3 2 3
---- ---- ----
Total $ 82 $ 97 $111
==== ==== ====
At December 31, 2002 and 2001, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $148 million
and $162 million, respectively. These amounts are reported in other
long-term liabilities in the accompanying Consolidated Statement of
Financial Position.
The Company is currently implementing a Corrective Action Program
required by the Resource Conservation and Recovery Act (RCRA) at the
Kodak Park site in Rochester, NY. As part of this program, the Company
has completed the RCRA Facility Assessment (RFA), a broad-based
environmental investigation of the site. The Company is currently in
the process of completing, and in some cases has completed, RCRA
Facility Investigations (RFI) and Corrective Measures Studies (CMS) for
areas at the site. At December 31, 2002, estimated future investigation
and remediation costs of $67 million are accrued on an undiscounted
basis and are included in the $148 million reported in other long-term
liabilities.
Additionally, the Company has retained certain obligations for
environmental remediation and Superfund matters related to certain sites
associated with the non-imaging health businesses sold in 1994. In
addition, the Company has been identified as a potentially responsible
party (PRP) in connection with the non-imaging health businesses in five
active Superfund sites. At December 31, 2002, estimated future
remediation costs of $49 million are accrued on an undiscounted basis
and are included in the $148 million reported in other long-term
liabilities.
The Company has obligations relating to two former manufacturing sites
located outside the United States. Investigations were completed in
the fourth quarter of 2001, which facilitated the completion of cost
estimates for the future remediation and monitoring of these sites.
The Company's obligations with respect to these two sites include an
estimate of its cost to repurchase one of the sites and demolish the
buildings in preparation for its possible conversion to a public park.
The repurchase of the site was completed in the first quarter of 2002.
At December 31, 2002, estimated future investigation, remediation and
monitoring costs of $27 million are accrued on an undiscounted basis
and are included in the $148 million reported in other long-term
liabilities.
63
Additionally, the Company has approximately $5 million accrued on an
undiscounted basis in the $148 million reported in other long-term
liabilities at December 31, 2002 for remediation relating to other
facilities, which are not material to the Company's financial position,
results of operations, cash flows or competitive position.
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for each site. For these known environmental exposures, the
accrual reflects the Company's best estimate of the amount it will
incur under the agreed-upon or proposed work plans. The Company's cost
estimates were determined using the ASTM Standard E 2137-01 "Standard
Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters," and have not been reduced by possible recoveries from third
parties. The overall method includes the use of a probabilistic model
which forecasts a range of cost estimates for the remediation required
at individual sites. The projects are closely monitored and the models
are reviewed as significant events occur or at least once per year.
The Company's estimate includes equipment and operating costs for
remediation and long-term monitoring of the sites. The Company does
not believe it is reasonably possible that the losses for the known
exposures could exceed the current accruals by material amounts.
A Consent Decree was signed in 1994 in settlement of a civil complaint
brought by the U.S. Environmental Protection Agency and the U.S.
Department of Justice. In connection with the Consent Decree, the
Company is subject to a Compliance Schedule, under which the Company
has improved its waste characterization procedures, upgraded one of its
incinerators, and is evaluating and upgrading its industrial sewer
system. The total expenditures required to complete this program are
currently estimated to be approximately $27 million over the next six
years. These expenditures are primarily capital in nature and,
therefore, are not included in the environmental accrual at December
31, 2002.
The Company is presently designated as a PRP under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended (the Superfund Law), or under similar state laws, for
environmental assessment and cleanup costs as the result of the
Company's alleged arrangements for disposal of hazardous substances at
six such active sites. With respect to each of these sites, the
Company's liability is minimal. Furthermore, numerous other PRPs have
also been designated at these sites and, although the law imposes joint
and several liability on PRPs, the Company's historical experience
demonstrates that these costs are shared with other PRPs. Settlements
and costs paid by the Company in Superfund matters to date have not
been material. Future costs are also not expected to be material to
the Company's financial position, results of operations or cash flows.
The Clean Air Act Amendments were enacted in 1990. Expenditures to
comply with the Clean Air Act implementing regulations issued to date
have not been material and have been primarily capital in nature. In
addition, future expenditures for existing regulations, which are
primarily capital in nature, are not expected to be material. Many of
the regulations to be promulgated pursuant to this Act have not been
issued.
64
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of outcomes. Estimates
developed in the early stages of remediation can vary significantly. A
finite estimate of cost does not normally become fixed and determinable
at a specific time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities
that help to frame and define a liability, and the Company continually
updates its cost estimates. The Company has an ongoing monitoring and
identification process to assess how the activities, with respect to
the known exposures, are progressing against the accrued cost
estimates, as well as to identify other potential remediation sites
that are presently unknown.
Estimates of the amount and timing of future costs of environmental
remediation requirements are necessarily imprecise because of the
continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology, the identification of
presently unknown remediation sites and the allocation of costs among
the potentially responsible parties. Based upon information presently
available, such future costs are not expected to have a material effect
on the Company's competitive or financial position. However, such
costs could be material to results of operations in a particular future
quarter or year.
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65
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS 143
addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets.
SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset, and
this additional carrying amount is expensed over the life of the asset.
The Company is required to adopt SFAS 143 effective January 1, 2003. The
Company is currently in the process of evaluating the potential impact
that the adoption of the recognition provisions of SFAS 143 will have on
its consolidated financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
the financial accounting and reporting for costs associated with exit
or disposal activities and supercedes the Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
recognition of the liability for costs associated with an exit or
disposal activity when the liability is incurred. Under EITF issue No.
94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 will impact the timing of recognition
and the initial measurement of the amount of liabilities the Company
recognizes in connection with exit or disposal activities initiated
after December 31, 2002, the effective date of SFAS No. 146.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires that a liability be recorded on the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees, including indemnifications, that an entity has
issued and a rollforward of the entity's product warranty liabilities.
The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued or modified after December 31, 2002.
The disclosure provisions of FIN 45 are effective for financial
statements of interim periods or annual periods ending after December
15, 2002. See Note 1 under "Warranty Costs" and Note 10 under "Other
Commitments and Contingencies." The Company is currently in the
process of evaluating the potential impact that the adoption of the
recognition provisions of FIN 45 will have on its consolidated
financial position and results of operations.
66
In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 provides guidance on how to determine when an
arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for
revenue recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate units
of accounting. The guidance in the consensus is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The Company is currently evaluating the effect that the adoption
of EITF Issue No. 00-21 will have on its results of operations and
financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. See "Stock-Based Compensation" within
Note 1, "Significant Accounting Policies" for the additional annual
disclosures made to comply with SFAS No. 148. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. As
the Company does not intend to adopt the provisions of SFAS No. 123,
the Company does not expect the transition provisions of SFAS No. 148
to have a material effect on its results of operations or financial
condition.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements," relating to consolidation of certain entities.
First, FIN 46 will require identification of the Company's
participation in variable interest entities (VIE), which are defined as
entities with a level of invested equity that is not sufficient to fund
future activities to permit them to operate on a stand alone basis, or
whose equity holders lack certain characteristics of a controlling
financial interest. Then, for entities identified as VIE, FIN 46 sets
forth a model to evaluate potential consolidation based on an
assessment of which party to the VIE, if any, bears a majority of the
exposure to its expected losses, or stands to gain from a majority of
its expected returns. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For VIE
created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after
June 15, 2003. FIN 46 also sets forth certain disclosures regarding
interests in VIE that are deemed significant, even if consolidation is
not required. See Note 6, "Investments," for these disclosures. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial condition.
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67
RISK FACTORS
The following cautionary statements address a number of important
factors that could cause the actual future results of the Company to
differ from those expressed or implied in the forward-looking
statements contained in this document. Additionally, because of the
following factors, as well as other variables affecting our operating
results, the Company's past financial performance should not be
considered an indicator of future performance and investors should not
use historical trends to anticipate results or trends in future
periods.
Unanticipated delays in implementing certain product strategies
(including category expansion, digitization, OLED displays and digital
products) would affect Kodak's revenues. The process for each product
strategy is complex. Kodak's ability to successfully transition
products and deploy new products requires that Kodak make accurate
predictions of the product development schedule as well as volumes,
product mix, and customer demand. The Company may anticipate demand
and perceived market acceptance that differs from the products
realizable customer demand and revenue stream. In addition, if the
pricing element of each strategy is not sufficiently competitive with
those of current and future competing products, Kodak may lose market
share, adversely affecting the Company's revenues and prospects.
Kodak's ability to implement its intellectual property licensing
strategies could also affect the Company's revenue and earnings. Kodak
has invested millions of dollars in technologies and needs to protect
its intellectual property. The establishment and enforcement of
licensing agreements provides a revenue stream in the form of royalties
that protects Kodak's ability to further innovate and help the
marketplace grow. Kodak's failure to properly manage the development
of its intellectual property could adversely affect the future of these
patents and the market opportunities that could result from the use of
this property. Kodak's failure to manage the costs associated with the
pursuit of these licenses could adversely affect the profitability of
these operations.
In the event Kodak were unable to develop and implement e-commerce
strategies that are in alignment with the trend toward industry
standards and services, the Company's business could be adversely
affected. The availability of software and standards related to e-
commerce strategies is of an emerging nature. Kodak's ability to
successfully align with the industry standards and services and ensure
timely solutions, requires the Company to make accurate predictions of
the future accepted standards and services.
Kodak's completion of planned information systems upgrades, including
SAP, if delayed, could adversely affect its business. As Kodak
continues to expand the planned information services, the Company must
continue to balance the investment of the planned deployment with the
need to upgrade the vendor software. Kodak's failure to successfully
upgrade to the vendor-supported version could result in risks to system
availability, which could adversely affect the business.
68
Kodak intends to complete various portfolio actions required to
strengthen its digital imaging portfolio, rationalize the
photofinishing operations in the U.S. and EAMER and expand its services
business. In the event that Kodak fails to effectively manage the
highly profitable portfolio of its more traditional businesses
simultaneously with the integration of these acquisitions, and should
Kodak fail to streamline and simplify the business, Kodak could lose
market opportunities that result in an adverse impact on its revenue.
In 2003, Kodak continues to focus on reduction of inventories,
improvement in receivable performance, reduction in capital
expenditures, and improvement in manufacturing productivity.
Unanticipated delays in the Company's plans to continue inventory
reductions in 2003 could adversely impact Kodak's cash flow outlook.
Planned inventory reductions could be compromised by slower sales that
could result from continued weak global economic conditions.
Purchasers' uncertainty about the extent of the global economic
downturn could result in lower demand for products and services. The
competitive environment and the transition to digital products and
services could also place pressures on Kodak's sales and market share.
In the event Kodak was unable to successfully manage these issues in a
timely manner, they could adversely impact the planned inventory
reductions.
Delays in Kodak's planned improvement in manufacturing productivity
could negatively impact the gross margins of the Company. Again, a
continued weak economy could result in lower volumes in the factory
than planned, which would negatively impact gross margins. Kodak's
failure to successfully manage operational performance factors could
delay or curtail planned improvements in manufacturing productivity.
If Kodak is unable to successfully negotiate raw material costs with
its suppliers, or incurs adverse pricing on certain of its commodity-
based raw materials, reduction in the gross margins could occur.
Additionally, delays in the Company's execution of increasing
manufacturing capabilities for certain of its products in some of its
emerging markets, particularly China where it is more cost competitive,
could adversely impact margins.
Unanticipated delays in the Company's plans to continue the
improvement of accounts receivable and to reduce the number of days
sales outstanding could also adversely impact Kodak's cash outlook. A
continued weak economy could slow customer payment patterns.
Competitive pressures in major segments may drive erosion in the
financial condition of Kodak's customers. These same pressures may
adversely affect efforts to shorten customer payment terms. Kodak's
ability to manage customer risk while maintaining competitive share may
adversely affect continued accounts receivable improvement in 2003.
In addition, if Kodak is not able to maintain flat capital
spending relative to 2002 levels, this factor could adversely impact
the Company's cash flow outlook. An increase in capital spending may
occur if more projects than planned were found to generate significant
positive returns in the future. Further, if the Company deems it
necessary to spend more on regulatory requirements or there are
unanticipated general maintenance obligations requiring more capital
spending than planned, the additional monies required would create an
adverse impact on Kodak's cash flow.
69
Kodak's planned improvement in supply chain efficiency, if delayed,
could adversely affect its business by impacting the shipments of
certain products in their desired quantities and in a timely manner.
The planned efficiencies could be compromised if Kodak expands into new
markets with new applications that are not fully understood or if the
portfolio broadens beyond that anticipated when the plans were
initiated. The unforeseen changes in manufacturing capacity could
compromise the supply chain efficiencies.
The risk of doing business in developing markets like China, India,
Brazil, Argentina, Mexico, Russia and other economically volatile areas
could adversely affect Kodak's operations and earnings. Such risks
include the financial instability among customers in these regions, the
political instability and potential conflicts among developing nations
and other non-economic factors such as irregular trade flows that need
to be managed successfully with the help of the local governments.
Kodak's failure to successfully manage economic, political and other
risks relating to doing business in developing countries and
economically and politically volatile areas could adversely affect its
business.
In early 2002, the United States dollar was eliminated as Argentina's
monetary benchmark, resulting in significant currency devaluation.
During the remainder of 2002, the currencies in both Argentina and
Brazil experienced significant devaluation due to continuing difficult
economic times. There can be no guarantee that economic circumstances
in Argentina or elsewhere will not worsen, which could result in future
effects on earnings should such events occur. The Company's failure to
successfully manage economic, political and other risks relating to
doing business in developing countries could adversely affect its
business.
The Company, as a result of its global operating and financing
activities, is exposed to changes in currency exchange rates and
interest rates, which may adversely affect its results of operations
and financial position.
Competition remains intense in the imaging sector in the photography,
commercial and health segments. On the photography side, price
competition has been driven somewhat by consumers' conservative
spending behaviors during times of a weak world economy, international
tensions and the accompanying concern over the possibility of war and
terrorism. Some consumers have moved from branded products to private
label products. On the health and commercial side, aggressive pricing
tactics intensified in the contract negotiations as competitors were
vying for customers and market share domestically. Continued economic
weakness could also adversely impact Kodak's revenues and growth rate.
Failure to successfully manage the consumers' return to branded
products if and when the economic conditions improve could adversely
impact Kodak's revenue and growth rate. If the pricing and programs
are not sufficiently competitive with those offered by Kodak's current
and future competitors, Kodak may lose market share, adversely
affecting its revenue and gross margins.
70
The Company's strategy to balance the consumer shift from analog to
digital, and the nature and pace of technology substitution could
impact Kodak's revenues, earnings and growth rate. Competition remains
intense in the digital industry with a large number of competitors
vying for customers and market share domestically and internationally.
Kodak intends to continue new program introductions and competitive
pricing to drive demands in the marketplace. The process of developing
new products and services is complex and often uncertain due to the
frequent introduction of new products that offer improved performance
and pricing. Kodak's ability to successfully transition products and
deploy new products requires that Kodak make accurate predictions of
the product development schedule as well as volumes, product mix,
customer demand and configuration. Kodak may anticipate demand and
perceived market acceptance that differs from the product's realizable
customer demand and revenue stream. Further, in the face of intense
industry competition, any delay in the development, production or
marketing of a new product could decrease any advantage Kodak may have
to be the first or among the first to market. Kodak's failure to carry
out a product rollout in the time frame anticipated and in the
quantities appropriate to customer demand could adversely affect the
future demand for its products and services and have an adverse effect
on its business.
The impact of continuing customer consolidation and buying power could
have an adverse impact on Kodak's revenue, gross margins, and earnings.
In the competitive consumer retail environment there is a movement from
small individually owned retailers to larger and commonly known mass
merchants. In the commercial environment, there is a continuing
consolidation of various group purchasing organizations. The resellers
and distributors may elect to use suppliers other than Kodak. Kodak's
challenge is to successfully negotiate contracts that provide the most
favorable conditions to the Company in the face of price and program
aggressive competitors.
Continued weak global economic conditions could adversely impact the
Company's revenues and growth rate. Continued softness in the
Company's markets and purchasers' uncertainty about the extent of the
global economic downturn could result in lower demand for products and
services. While worsening economic conditions have had a negative
impact on results of operations, revenues, gross margins and earnings
could further deteriorate as a result of economic conditions.
Furthermore, there can be no assurances as to the timing of an economic
upturn.
71
The Company expects 2003 to be another difficult economic year
compounded by rising political tensions, with a slight improvement in
full year revenues. The Company expects earnings to be flat for the
first quarter of 2003 compared with the same period last year. We do
not expect to see any real upturn in the economy until 2004, with a
very gradual return to consumer spending habits and behavior that will
positively affect our business growth. The Company will continue to
take actions to minimize the financial impact of this slowdown. These
actions include efforts to better manage production and inventory
levels and reduce capital spending, while at the same time reducing
discretionary spending to further hold down costs. The Company will
also complete the implementation of the restructuring programs
announced in 2002, as well as implement new focused cost reduction
actions in 2003, to make its operations more cost competitive and
improve margins.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the United States Private
Securities Litigation Reform Act of 1995. For example, references to
the Company's revenue and cash flow expectations for 2003 are forward-
looking statements.
Actual results may differ from those expressed or implied in forward-
looking statements. The forward-looking statements contained in this
report are subject to a number of risk factors, including the
successful: implementation of product strategies (including category
expansion, digitization, OLED, and digital products); implementation of
intellectual property licensing strategies; development and
implementation of e-commerce strategies; completion of information
systems upgrades, including SAP; completion of various portfolio
actions; reduction of inventories; improvement in manufacturing
productivity; improvement in receivables performance; reduction in
capital expenditures; improvement in supply chain efficiency;
development of the Company's business in emerging markets like China,
India, Brazil, Mexico, and Russia. The forward-looking statements
contained in this report are subject to the following additional risk
factors: inherent unpredictability of currency fluctuations and raw
material costs; competitive actions, including pricing; the nature and
pace of technology substitution, including the analog-to-digital shift;
continuing customer consolidation and buying power; general economic
and business conditions; and other risk factors disclosed herein and
from time to time in the Company's filings with the Securities and
Exchange Commission, including but not limited to the items discussed
in "Risk Factors" as set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 of this
report.
Any forward-looking statements in this report should be evaluated in
light of these important risk factors.
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72
MARKET PRICE DATA
2002 2001
Price per
share: High Low High Low
1st Quarter $34.30 $25.58 $46.65 $38.19
2nd Quarter 35.49 28.15 49.95 37.76
3rd Quarter 32.36 26.30 47.38 30.75
4th Quarter 38.48 25.60 36.10 24.40
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SUMMARY OF OPERATING DATA
A summary of operating data for 2002 and for the four years prior is
shown on page 149 of the Company's Form 10-K for the year ended
December 31, 2002 as originally filed on March 14, 2003.
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73
PART III
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Annual Payments
Non-employee directors receive:
- $65,000 as a retainer, at least half of which must be taken in
stock or deferred into stock units;
- 2,000 stock options; and
- reimbursement of out-of-pocket expenses for the meetings they
attend.
The employee director receives no additional compensation for serving
on the Board.
A change in the timing of the annual stock option grant to the non-
employee directors was approved by the Board of Directors in October
2002. In order for it to coincide with the Company's annual
management stock option grant, this grant will now be made in the
fourth quarter, rather than the first quarter, of each year. As a
result of this change, two grants were made in 2002; one in January
2002 and the other in November 2002. The next stock option grant to
the Company's non-employee directors will be awarded in the fourth
quarter of 2003.
Mr. Braddock will receive a retainer of $100,000 per year for his
services as presiding director in addition to his annual retainer as
a director.
Deferred Compensation
Non-employee directors may defer some or all of their compensation
into a phantom Kodak stock account or into a phantom interest-bearing
account. Four current directors deferred compensation in 2002. In the
event of a change in control, the amounts in the phantom accounts
will generally be paid in a single cash payment.
Life Insurance
The Company provides $100,000 of group term life insurance to each
non-employee director. This decreases to $50,000 at retirement or age
65, whichever occurs later.
Charitable Award Program
This program, which was closed to new participants effective January
1, 1997, provides for a contribution by the Company of up to
$1,000,000 following a director's death to a maximum of four
charitable institutions recommended by the director. The individual
directors derive no financial benefits from this program. It is
funded by self-insurance and joint life insurance policies purchased
by the Company. Mr. Braddock and Gov. Collins continue to participate
in the program.
74
Compensation of Named Executive Officers
The individuals named in the following
table are the Company's Chief Executive
Officer and the four other named
executive officers under Section
229.402(a)(3)of Volume 17 of the Code of
Federal Regulations during 2002. The
figures shown include both amounts paid
and amounts deferred.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Other Securities
Name and Annual Restricted Underlying LTIP All Other
Principal Compen- Stock Options/ Payouts Compen-
Position Year Salary Bonus(a) sation(b) Awards(c) SARs(d) (e) sation(f)
-------------------------------------------------------------------------------------------------------------
D. A. Carp 2002 $1,030,769 $2,327,325 $26,030 $4,249,010 175,000 $ - $ -
Chairman & CEO 2001 1,000,000 507,500 25,695 2,968,751 410,000 - -
2000 1,000,000 598,500 -- -- 100,000 - -
-------------------------------------------------------------------------------------------------------------
R. H. Brust 2002 635,828 669,240 -- 424,162 42,000 - 487,768
Exec. V. P. & CFO 2001 585,003 151,200 -- 430,414 78,000 - 827,923
2000 492,764 225,720 -- 467,542 228,000 - 1,269
-------------------------------------------------------------------------------------------------------------
M. M. Coyne 2002 719,692 889,746 20,953 291,332 36,000 - -
Exec. V. P. 2001 667,984 176,400 -- 553,447 95,000 - -
2000 449,449 400,075 -- 409,375 146,000 - -
-------------------------------------------------------------------------------------------------------------
M. P. Morley 2002 491,154 864,800 -- 368,669 35,000 - -
Exec. V. P. & CAO 2001 466,095 136,000 -- 430,414 42,000 - -
2000 393,186 184,680 -- -- 73,000 - -
-------------------------------------------------------------------------------------------------------------
D. P. Palumbo 2002 514,154 517,195 -- 365,915 169,443 - 32,055
Sr. V. P. 2001 490,384 132,680 -- 461,070 36,400 - 30,547
2000 353,346 154,465 -- 310,000 120,000 - 50,048
-------------------------------------------------------------------------------------------------------------
75
(a) This column shows Executive Compensation for Excellence and
Leadership Plan (EXCEL), and its predecessor, Management
Variable Compensation Plan, awards for services performed,
not paid, in each year indicated. For M. P. Morley for 2002,
the amount also includes a retention bonus of $370,000 paid
under his March 13, 2001 retention agreement.
(b) Where no amount is shown, the value of personal benefits provided
was less than the minimum amount required to be reported. For D. A.
Carp, the amounts shown in this column represent tax payments made
by the Company relating to his use of Company transportation. The
Company requires D. A. Carp to use Company transportation for
security reasons. For M. M. Coyne, the amount shown in this column
represents tax payments made by the Company relating to his use of
Company transportation and other Company paid travel expenses.
(c) The awards shown represent grants of restricted stock or restricted
stock units valued as of the date of grant. Dividends are paid on
the restricted shares and restricted units as and when dividends are
paid on Kodak common stock. The restrictions on the awards granted
under the Executive Incentive Program lapse on December 31, 2003.
D. A. Carp - For 2002, 100,000 shares granted as a retention based
award, valued on December 2, 2002 at $36.73 per share and 18,611
shares awarded under the Executive Incentive Program, valued on
February 18, 2003 at $30.95 per share. For 2001, 20,000 shares
granted in recognition of his election as Chairman, valued on
January 12, 2001, at $40.875 per share and 52,630 shares granted in
substitution of, and not in addition to, the stock option grants the
named executives would otherwise have received in January 2001 under
the management stock option program, valued on January 16, 2001,
at $40.875 per share.
R. H. Brust - For 2002, 5,000 shares granted as a retention based
award, valued on December 2, 2002 at $36.73 per share and 7,771
shares awarded under the Executive Incentive Program, valued on
February 18, 2003 at $30.95 per share. For 2001, 10,530 shares
granted in substitution of, and not in addition to, the stock
option grants the named executives would otherwise have received
in January 2001 under the management stock option program, valued
on January 16, 2001, at $40.875 per share. For 2000, 11,625 shares
granted as a signing bonus valued on January 3, 2000, at $40.2187
per share.
M. M. Coyne - For 2002, 9,413 shares awarded under the Executive
Incentive Program, valued on February 18, 2003 at $30.95 per share.
For 2001, 13,540 shares granted in substitution of, and not in
addition to, the stock option grants the named executives would
otherwise have received in January 2001 under the management stock
option program, valued on January 16, 2001, at $40.875 per share.
For 2000, 10,000 shares granted in recognition of his appointment
as Group Executive of the Photography Group, valued on October 2,
2000 at $40.9375.
76
M. P. Morley - For 2002, 5,000 shares granted as a retention based
award, valued on December 2, 2002 at $36.73 per share and 5,978
shares awarded under the Executive Incentive Program, valued on
February 18, 2003 at $30.95 per share. For 2001, 10,530 shares
granted in substitution of, and not in addition to, the stock
option grants the named executives would otherwise have received
in January 2001 under the management stock option program, valued
on January 16, 2001, at $40.875 per share.
D. P. Palumbo - For 2002, 5,000 shares granted as a retention based
award, valued on December 2, 2002 at $36.73 per share and 5,889
shares awarded under the Executive Incentive Program, valued on
February 18, 2003 at $30.95 per share. For 2001, 11,280 shares
granted in substitution of, and not in addition to, the stock
option grants the named executives would otherwise have received
in January 2001 under the management stock option program, valued
on January 16, 2001, at $40.875 per share. For 2000, 5,000 shares
granted in recognition of his appointment as President, Consumer
Imaging, valued on September 11, 2000, at $62.00 per share.
The total number and value of restricted stock held as of December
31, 2002 for each named individual (valued at $35.04 per share)
were: D. A. Carp - 208,706 shares - $7,313,058 (includes 25,000
shares awarded in 2002, but granted on 01/01/03); R. H. Brust -
27,155 shares - $951,511; M. M. Coyne - 25,180 shares - $742,147;
M. P. Morley - 35,857 shares - $1,256,429; D. P. Palumbo - 18,780
shares - $658,051.
(d) On August 26, 2002, D. P. Palumbo received stock options to purchase
133,043 shares under the Stock Option Exchange Program. The
remaining amounts for 2002 represent grants made in the fourth
quarter of 2002 under the management stock option program. For
D. A. Carp for 2001, the amount includes a grant of stock options
to purchase 160,000 shares in recognition of his election as Chairman.
(e) No awards were paid for the periods 2000-2002, 1999-2001, and 1998-
2000 under the Performance Stock Program.
(f) For R. H. Brust for 2002, the amount represents $446,400 of
principal and interest forgiven in connection with the loan from
the Company as described on page 95 of the Proxy and $41,639 as
the Company contribution to the cash balance feature of the Kodak
Retirement Income Plan; for 2001 the amount represents $786,300 of
principal and interest forgiven in connection with the loan and
$41,623 as the Company contribution to the cash balance feature.
For D. P. Palumbo the amounts represent Company contributions to the
cash balance feature of the Kodak Retirement income Plan in the
years indicated.
77
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------------------------------------------------------------
Number of Percentage
Securities of Total
Underlying Options/SARs
Options/ Granted to Exercise or Grant Date
SARs Employees Base Price Expiration Present
Name Granted in Fiscal Year Per Share Date Value(c)
-------------------------------------------------------------------------------------------
D. A. Carp 175,000(a) .00868 $36.66 11/21/12 $1,438,500
-------------------------------------------------------------------------------------------
R. H. Brust 42,000(a) .00208 36.66 11/21/12 345,240
-------------------------------------------------------------------------------------------
M. M. Coyne 36,000(a) .00179 36.66 11/21/12 295,920
-------------------------------------------------------------------------------------------
M. P. Morley 35,000(a) .00174 36.66 11/21/12 287,700
-------------------------------------------------------------------------------------------
D. P. Palumbo 36,400(a) .00181 36.66 11/21/12 299,208
133,043(b) .00660 31.30 5/18/07-11/15/11 796,928
-------------------------------------------------------------------------------------------
78
(a) These options were granted in November 2002 under the management
stock option program. Termination of employment, for other than
death or a permitted reason, prior to the first anniversary of
the grant date results in forfeiture of the options. Thereafter,
termination of employment prior to vesting results in forfeiture
of the options unless the termination is due to retirement, death,
disability or an approved reason. Vesting accelerates upon death.
One third of the options vest on each of the first three
anniversaries of the date of grant.
(b) These options were granted to D. P. Palumbo on August 26, 2002,
under the Stock Option Exchange Program; they expire on the
following dates: 733 on May 18, 2007; 2,500 on February 11, 2008;
69 on March 12, 2008; 4,700 on April 1, 2008; 390 on March 11, 2009;
8,251 on March 31, 2009; 13,333 on February 29, 2010; 66,667 on
October 1, 2010, and 36,400 on November 15, 2011.
(c) The present value of these options was determined using the Black-
Scholes model of option valuation in a manner consistent with the
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." For the options granted in
November 2002 under the management stock option program, the
following weighted-average assumptions were used: risk-free interest
rate - 3.8%, expected option life - 7 years, expected volatility -
34%, and expected dividend yield -5.76%. For the options granted
under the Stock Option Exchange Program, the following weighted-
average assumptions were used: risk-free interest rate - 2.9%,
expected option life - 4 years, expected volatility - 37%, and
expected dividend yield - 5.76%.
79
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
----------------------------------------------------------------------------------------
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/ SARs
Options/SARs at Fiscal
at Fiscal Year-End*
Number Year-End Value
Of Shares ---------------------------------------------
Acquired on Value Exercis- Unexer- Exercis- Unexer-
Name Exercise Realized able cisable able cisable
----------------------------------------------------------------------------------------
D. A. Carp 7,638 $15,757 891,086 528,590 $477,023 $954,046
----------------------------------------------------------------------------------------
R. H. Brust - - 184,622 163,378 148,831 298,109
----------------------------------------------------------------------------------------
M. M. Coyne 2,630 6,188 231,473 161,389 181,269 362,538
----------------------------------------------------------------------------------------
M. P. Morley - - 259,671 95,696 80,140 160,520
----------------------------------------------------------------------------------------
D. P. Palumbo - - 70,977 98,466 265,454 232,127
----------------------------------------------------------------------------------------
* Based on the closing price on the New York Stock Exchange -
Composite Transactions of the Company's common stock on
December 31, 2002, of $35.04 per share.
80
TEN-YEAR OPTION/SAR REPRICINGS
The table below lists certain information regarding our executive
officers that elected to participate in our Stock Option Exchange
Program, which you approved at a Special Meeting on January 25, 2002.
Even though our Stock Option Exchange Program was not a "repricing"
under GAAP, we are, nevertheless, required to provide this information.
Under the Program, all of our employees, excluding our then six most
senior executive officers, were given a one-time opportunity to exchange
all of their then current options for proportionately fewer options at a
new exercise price. The only named executive officer eligible to
participate in the Program was Mr. Palumbo. He was not one of our six
most senior executive officers at the time the Program was offered. More
information about the Program can be found on page 113 in the Report of
the Executive Compensation and Development Committee.
81
Number of Length of
Securities Market Price Exercise Original
Underlying of Stock at Price at Option Term
Options/SARs Time of Time of New Remaining at
Repriced or Repricing or Repricing or Exercise Date of
Amended Amendment Amendment Price Repricing or
Name Date (#)(a) ($) ($)(b) ($) Amendment (c)
--------------------------------------------------------------------------------------------------------
M. P. Benard 8/26/02 56,068 $31.30 $54.12 $31.30 69 months
Vice President
R. L. Berman 8/26/02 49,923 $31.30 $45.93 $31.30 92 months
Vice President
C. S. Brown, Jr. 8/26/02 120,489 $31.30 $51.08 $31.30 75 months
Senior Vice
President
C. E. Gustin, Jr. 8/26/02 125,197 $31.30 $55.38 $31.30 66 months
Senior Vice
President
C. A. Marchetto 8/26/02 58,701 $31.30 $45.10 $31.30 96 months
Senior Vice
President
D. P. Palumbo 8/26/02 133,043 $31.30 $44.29 $31.30 100 months
Senior Vice
President
E. G. Rodli 8/26/02 60,501 $31.30 $40.48 $31.30 103 months
Senior Vice
President
R. P. Rozek 8/26/02 21,967 $31.30 $35.07 $31.30 109 months
Controller
W. C. Shih 8/26/02 104,700 $31.30 $51.21 $31.30 89 months
Senior Vice
President
K. A. Smith-
Pilkington 8/26/02 48,867 $31.30 $48.36 $31.30 90 months
Senior Vice
President
J. C. Stoffel 8/26/02 82,581 $31.30 $49.36 $31.30 89 months
Senior Vice
President
G. P. Van
Graafeiland 8/26/02 114,226 $31.30 $52.73 $31.30 66 month
Senior Vice
President
82
(a) The amounts shown are the aggregate numbers of shares underlying
the options granted to the executive officers under the Stock
Option Exchange Program.
(b) The amounts shown are the weighted averages of the exercise
prices at the time of the exchange of the options granted to
the executive officers under the Stock Option Exchange Program.
(c) The amounts shown are the weighted average number of months
remaining in the option terms of the options granted to the
executive officers under the Stock Option Exchange Program.
83
Report of the Executive Compensation and Development Committee
ROLE OF THE COMMITTEE
The Executive Compensation and Development Committee, as of December 31,
2002, was made up of four independent members of the Board of Directors.
The Committee members are neither employees nor former employees of the
Company. The principal
functions of the Committee include:
- periodically reviewing and approving the Company's
executive compensation strategy and principles to ensure
that they are aligned with the Company's business strategy
and objectives, shareholder interests, desired behaviors and
corporate culture;
- periodically reviewing the Company's executive compensation
plans to ensure that they are consistent with the Company's
executive compensation strategy and principles;
- reviewing and approving the adoption of, and changes to, the
Company's executive compensation and its equity-based
Compensation plans;
- overseeing the administration of the Company's executive
compensation plans;
- annually reviewing and approving the goals and objectives
relevant to the compensation of the CEO, evaluating the CEO's
performance in light of these goals and objectives, and
setting the CEO's individual elements of total compensation
based on this evaluation;
- overseeing the compensation of the Company's executive
officers;
- reviewing the process and plans for the assessment and
selection of candidates for the positions of CEO and
President; and
- periodically reviewing the Company's executive staffing plan
for meeting present and future leadership needs.
To help it perform its functions, the Committee makes use of Company
resources and periodically uses the services of outside compensation
consultants. In the past, the Company alone has retained the services of
such consultants. In order to play a more significant role in the
selection and engagement of these consultants, the Committee recently
revised its policy concerning the use of outside compensation
consultants. As a result of this change, the Committee will
retain the services of outside consultants to assist in the fulfilling
of its responsibilities.
84
EXECUTIVE COMPENSATION PHILOSOPHY
The goal of the Company's executive compensation program is to attract,
retain and motivate world-class executive talent to achieve the
Company's short- and long-term business goals. Towards this end, the
Company's executive compensation strategy leverages all elements of
market competitive total compensation to drive profitable growth and
superior long-term shareholder value consistent with the Company's
values. Plan design and performance-based differentiation are designed
to drive extraordinary rewards for outstanding performance.
Consistent with this strategy, the following principles provide a
framework for the Company's executive compensation program:
- total target compensation for executives should be market
competitive. Market competitive is defined as the 50th
percentile with differences where warranted;
- the mix of total compensation elements will reflect
competitive market requirements and strategic business needs;
- a significant portion of each executive's compensation should
be at risk, the degree of which will positively correlate to
the level of the executive's responsibility;
- compensation is linked to both qualitative and behavioral
expectations, and key operational and strategic metrics;
- interests of executives are linked with the Company's owners
through stock ownership; and
- executive compensation will be differentiated on the
following bases:
- base salaries - on relative responsibility,
- short-term variable elements - on performance, and
- long-term variable elements - on performance and
potential.
85
EXECUTIVE COMPENSATION PRACTICES
Each year, the Company participates in surveys conducted by external
consultants. The companies included in these surveys are those the
Company competes with for executive talent. Most, but not all, of these
companies are included in the Dow Jones Industrial Index shown in the
Performance Graph on page 100. Starting in 2002, the Company also began
measuring the competitiveness of its executive compensation program
against a comparison group of approximately 15 other leading companies,
referred to in this Report as the "Peer Group." The following criteria
was used to select the Peer Group: market capitalization, revenue,
consumer/commercial/hi-tech mix, mix of high growth and steady growth
companies, similar industry and data availability. The data received
from the Peer Group is size adjusted so proper comparisons may be drawn.
Based on the survey data and Peer Group results and consistent with the
Company's executive compensation principles, the target compensation of
the Company's senior executives is set at market competitive levels.
In the summer of 2002, the Committee conducted an in depth analysis of
the compensation it pays to its executive officers. With the assistance
of the Company and an independent compensation consultant, the market
competitiveness of each of the three components of executive
compensation paid to its executive officers, i.e., base salary, target
short-term variable pay and long-term incentives, was evaluated. The
results of this study reveal that the base salary and target short-term
variable pay paid to the Company's executive officers is market
competitive. With regard to the long-term incentive compensation paid to
the Company's executive officers, the study found that this component
was also market competitive due in significant part to the adoption of
the Executive Incentive Program described later in this Report and
awards of restricted stock to selected executive officers.
COMPONENTS OF EXECUTIVE COMPENSATION PROGRAM
The three components of the Company's executive compensation program
are:
- base salary,
- short-term variable pay, and
- long-term incentives.
Base Salary
Base salary is the only fixed portion of an executive's compensation.
Each executive's base salary is reviewed annually based on the
executive's relative responsibility.
86
Short-Term Variable Pay
Effective January 1, 2002, Kodak implemented EXCEL (Executive
Compensation for Excellence and Leadership), a new executive assessment
and short-term variable pay plan for its executives. Three key
principles underlie EXCEL: alignment, simplicity and discretion.
Alignment to Company objectives is achieved through the two performance
metrics used to fund the plan: revenue growth and economic profit. The
inclusion of revenue growth as a performance metric emphasizes the
Company's need for sustained profitable growth. The use of economic
profit stresses the continuing need for earnings growth and balance
sheet management. Simplicity is accomplished through ease of plan
administration. Under EXCEL, each participant has 3-4 key performance
goals. Discretion, the third key principle, may be used to adjust the
size of the plan's funding pool, modify the funding pool's allocation to
the Company's units, and determine the performance and rewards of the
plan's participants.
Participants in EXCEL are assigned target awards for the year based on a
percentage of their base salaries as of the end of that year. This
percentage is determined by the participant's wage grade. For 2002,
target awards ranged from 25% of base salary, to 155% of base salary for
the CEO.
Each year the Compensation Committee establishes a performance matrix
for the year based on the plan's two performance metrics of revenue
growth and economic profit. This matrix determines the percentage of the
plan's target corporate funding pool that will be earned for the year
based on the Company's actual performance against these two metrics. The
target corporate funding pool is the aggregate of all participants'
target awards for the year. Under the performance matrix, the corporate
funding pool will fund at 100% if target performance for each
performance metric is met.
The Compensation Committee may use its discretion to adjust (upward or
downward) the amount of the corporate funding pool for any year.
Examples of situations where the Compensation Committee may choose to
exercise this discretion include unanticipated economic or market
changes, extreme currency exchange effects, management of significant
workforce issues, significant changes in investable cash flow, inventory
turns, receivables, or capital expenditures, or dramatic shifts in
customer satisfaction.
The CEO allocates the corporate funding pool among the Company's units.
Each business unit has its own targets for revenue growth and economic
profit for the year. Actual performance against these targets accounts
for 75% of the business unit's allocation. The remaining 25% is
determined based on overall Company performance for the year measured
against the Company's revenue growth and economic profit targets.
Within each staff, regional, functional, and business unit, local senior
management allocates the unit's funds to its participants based on each
participant's individual performance.
87
In 2002, Kodak substantially beat its performance target for economic
profit. In terms of revenue, Kodak exceeded its threshold performance
goal and came close to achieving its performance target in 2002. As a
result of these strong results, EXCEL's corporate funding pool funded at
a level sufficient to pay out at a 143% of target level under the
performance matrix established for the year.
In fixing the corporate funding pool for the year, the Committee noted
that this performance was accomplished despite continuing difficult
industry and global economic conditions. The Committee also took into
account management's performance in maintaining worldwide film market
share, exceeding its 2002 operating cash flow plan by $658 million,
satisfying its target inventory and receivables goals for 2002, and
effectively managing other discretionary parts of the business. Against
these positive results, the Committee also considered management's
inability to satisfy its target customer satisfaction goals for the
year.
After looking at these extraordinary results, the Committee increased
the size of the award pool by 12% so that larger allocations could be
made to the Company's units where appropriate. None of the named
executive officers, with the exception of Mr. Palumbo, benefited from
this adjustment. The Summary Compensation Table on page 74 lists for
2002 the awards to the named executive officers.
Long-Term Incentives
Long-term compensation is delivered through stock options, the
Performance Stock Program and restricted stock.
The Company maintains a management stock option program. Stock options
encourage the Company's executives to act as owners, which helps to
further align their interests with the interests of the Company's
shareholders. The Committee generally grants stock options once per year
under this program. The options are priced at 100% of the fair market
value of the Company's stock on the day of grant. The Company bases
target grant ranges on the median survey values of the companies it
surveys. Grants to individual executives are then adjusted based in
large part on the executive's performance potential. Management
recommends the size of the stock option awards to the executive officers
which are then reviewed and approved by the Committee.
The Performance Stock Program places a portion of the Company's top
executives' long-term compensation at risk. The program measures
performance over a three-year period based on the Company's total
shareholder return relative to those companies within the Standard &
Poor's 500 Composite Price Index. A description of the program, as well
as the threshold, target and maximum awards for the named executive
officers appears on page 101. Based on the Company's performance over
the three-year performance cycle ending in 2002, no awards were paid for
this cycle.
88
To incent the accomplishment of several, specific Company-wide
objectives, the Committee approved a one-time, performance-based, long-
term award program, i.e., the Executive Incentive Program, under the
2002-2004 cycle of the Performance Stock Program. A description of the
Executive Incentive Program appears on page 100. The program contains an
interim award opportunity to encourage its participants to achieve the
program's goals before year-end 2003. Under this feature, each
participant was eligible to receive an interim award equal to 30% of
their target award if two pre-established performance goals were
achieved by year-end 2002. Since both of these goals were achieved, each
program participant received an interim award in the form of restricted
shares or units of the Company's common stock, the restrictions on which
lapse on December 31, 2003. The interim awards paid to the named
executive officers are listed under the column entitled "Restricted
Stock Awards" in the Summary Compensation Table on page 74.
>From time to time, the Company grants restricted stock awards to
selected executives. These awards are generally made to either (1)
induce the recipients to remain with or to become employed by the
Company; or (2) recognize exceptional performance.
SHARE OWNERSHIP PROGRAM
The interests of the Company's executives should be inseparable from
those of its shareholders. The Company aims to link these interests by
encouraging stock ownership on the part of its executives.
One program designed to meet this objective is the Company's share
ownership program. Under this program, each senior executive is required
to own stock of the Company worth a multiple of their base salary. These
multiples range from one times base salary to four times base salary for
the CEO.
Today, the program applies to approximately 20 senior executives, all of
whom have either satisfied or are on track to satisfy the requirements.
STOCK OPTION EXCHANGE PROGRAM
On November 12, 2001, the Board of Directors approved the Stock Option
Exchange Program. The Company's shareholders subsequently approved the
plan amendments necessary to implement this program at their Special
Meeting on January 25, 2002. Under this program, all of the Company's
employees, excluding its six then most senior executive officers, were
given a one-time opportunity to exchange all of their current options
for a proportionately fewer options at a new exercise price.
89
The exchange ratio for the program, i.e., how many current options an
employee had to surrender in order to receive one new option, was based
on the Black-Scholes option valuation model. Using this model, the value
of each option was determined both before and after the exchange. For
purposes of determining current value, the Company used 90% of an
option's current Black-Scholes value. These values were then compared to
determine an appropriate exchange ratio based on the current option's
existing exercise price. While some options were exchanged on a one-for-
one basis, in the vast majority of cases, an employee exchanged two or
three existing options for a single new one.
The exercise price of the new options was $31.30, the mean between the
high and low trading price at which the Company's common stock traded on
August 26, 2002, the date the new options were granted. All of the new
options had the same vesting terms as the surrendered options they
replaced. Each new option also had a term equal to the remaining term of
the option it replaced. The other terms and conditions of the new
options were generally identical to the surrendered options they
replaced.
The only named executive officer eligible to participate in the program
was Mr. Palumbo. He was not one of the Company's six most senior
executive officers at the time the program was offered. The table on
page 99, entitled "Ten-Year Option/SAR Repricing," describes the number
of options Mr. Palumbo, as well as all of the other executive officers
who elected to participate in the program, received as a result of the
exchange.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee determined Mr. Carp's compensation for 2002 in line with
the executive compensation philosophy and practices described above in
this Report. Mr. Carp's compensation for 2002 is described below:
Base Salary
The Committee increased Mr. Carp's base salary to $1,100,000 effective
May 5, 2003. Consistent with the Company's executive compensation
policy, the Committee established Mr. Carp's new base salary based on
his relative responsibility. Mr. Carp's new base salary is market
competitive when viewed in comparison to the survey data and Peer Group
data mentioned earlier in this Report. To preserve the Company's
deductibility of all of Mr. Carp's base salary for U.S. income tax
purposes, payment of $100,000 of his base salary will not be made until
after his retirement from the Company.
90
Short-Term Variable Pay
Mr. Carp's short term variable pay, like that of all the Company's other
executives, is payable based upon the successful attainment of specific
financial goals established by the Committee at the start of each year
under its short-term variable pay plan, EXCEL. For 2002, these financial
goals were based on revenue growth and economic profit. As reported
earlier, the Company significantly exceeded its economic profit goal for
the year and nearly achieved its revenue goal. Based on these strong
results, the plan's performance matrix provided for funding at a level
sufficient to pay out at 143% of target. The Committee also considered
Mr. Carp's performance against his key EXCEL
performance goals. The Committee noted Mr. Carp's strong performance
against his diversity and leadership excellence goals, generally good
results with regard to his strategy and development execution goals, and
inability to fully achieve his customer satisfaction goals. Based on
these results, the Committee fixed Mr. Carp's 2002 award at level equal
to what was generated by the performance matrix under EXCEL. The amount
of the award is listed in the Summary Compensation Table on page 74.
Stock Options
Effective November 22, 2002, the Committee granted a stock option award
to Mr. Carp of 175,000 shares. These options were granted under the same
terms and conditions as awards made to all executives generally under
the Company's management stock option program. Mr. Carp's award was
approved by the Committee based on its review of benchmark data and
assessment of the contributions Mr. Carp has made, and continues to
make, to the Company.
Performance Stock Program
Based on the Company's financial performance over the three-year period
ending in 2002, Mr. Carp did not receive an award for the 2000-2002
performance cycle. As reported previously, Mr. Carp did receive an
interim award under the Executive Incentive Plan, a special program
established under the 2002-2004 performance cycle. The interim award
earned by Mr. Carp is listed under the column entitled "Restricted Stock
Awards" in the Summary Compensation Table on page 74.
Restricted Stock Unit Award
In November 2002, the Company approved a retention-based award to Mr.
Carp consisting of restricted stock units corresponding to 100,000
shares of common stock. Effective December 2, 2002, 75,000 of these
units were awarded; the remaining 25,000 units were awarded effective
January 1, 2003. All of the units vest on the third anniversary of the
date of grant, but payment for the units may not be received before the
fourth anniversary of the date of grant. The award is listed in the
Summary Compensation Table on page 74 under the column entitled
"Restricted Stock Awards."
91
COMPANY POLICY ON QUALIFYING COMPENSATION
Under Section 162(m) of the Internal Revenue Code, the Company may not
deduct certain forms of compensation in excess of $1,000,000 paid to any
of the named executive officers that are employed by the Company at year-
end. The Committee believes that it is generally in the Company's best
interests to have compensation be deductible under Section 162(m). The
Committee also feels, however, that there may be circumstances in which
the Company's interests are best served by maintaining flexibility
regardless of whether compensation is fully deductible under Section
162(m).
Richard S. Braddock, Chair
Timothy M. Donahue
Durk I. Jager
Hector de J. Ruiz
LONG-TERM INCENTIVE PLAN
Each February the Executive Compensation and Development Committee
approves a three-year performance cycle under the Performance Stock
Program. Participation in the program is limited to selected senior
executives. The program's performance goal is total shareholder
return equal to at least that earned by a company at the 50th
percentile in terms of total shareholder return within the Standard &
Poor's 500 Composite Stock Price Index.
After the close of a cycle, the Committee calculates the percentage
earned of each participant's target award. No awards are paid unless
the performance goal is achieved. Fifty percent of the target award
is earned if the performance goal is achieved. One hundred percent is
earned if total shareholder return for the cycle equals that of a
company at the 60th percentile within the Standard & Poor's 500
Composite Stock Price Index.
The Committee has the discretion to reduce or eliminate the award
earned by any participant based upon any criteria it deems
appropriate. Awards are paid in the form of restricted stock, which
restrictions lapse at age 60. The table below shows the threshold
(i.e., attainment of the performance goal), target and maximum number
of shares for the named executive officers for each cycle. No awards
were earned for the 2000-2002 performance cycle as shown in the "LTIP
Payouts" column of the Summary Compensation Table on page 74.
The Executive Compensation and Development Committee approved a
performance-based, long-term award program, i.e., the Executive
Incentive Program, under the 2002-2004 cycle of the Performance Stock
Program. The purposes of this one-time program are to increase by
year-end 2003 investable cash flow and the financial performance of
certain strategic product groups. In this regard, certain target and
threshold performance goals were established by the Committee based
on these two metrics for the two-year period commencing January 1,
2002, and ending December 31, 2003.
Awards under the Executive Incentive Program will be coordinated with
awards received under the 2002-2004 performance cycle of the
Performance Stock Program. As a result, any award earned by a
participant under the 2002-2004 performance cycle of the Performance
Stock Program will be reduced by the amount of any award earned by
the participant under the Executive Incentive Program.
92
Participation in the Executive Incentive Program is limited to 18
selected key executive officers, including the five named executive
officers. Each participant's target award under the program is 75% of
the participant's total target annual compensation (annual base
salary plus target EXCEL award) expressed in the form of shares of
common stock based on a March 8, 2002, stock price of $32.37 per
share. Any awards earned under the program will be paid in the form
of the Company's common stock.
In order to encourage strong performance against the program's two
metrics in 2002, participants were given the opportunity to earn a
portion of their target award after the first year of the program's
two-year performance cycle. Payment of this interim award was based
on achieving certain pre-established interim goals by year-end 2002.
Each participant was eligible for an interim award equal to 30% of
his or her target award under the program. The interim awards were
payable in the form of restricted shares of the Company's common
stock, the restrictions on which lapse at year-end 2003. In
determining a participant's award for the entire two-year cycle,
any interim award earned by a participant will be subtracted from
the award the participant would otherwise receive under the program.
As explained in the Report of the Executive Compensation and
Development Committee on page 112, both of the program's interim
goals were achieved by year-end 2002. As a result, each program
participant received an interim award. The interim awards paid to the
named executive officers are included in the amounts shown under the
column entitled "Restricted Stock Awards" in the Summary Compensation
Table on page 74.
93
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------------------
Estimated Future Payouts Under
Performance Non-Stock Price-Based Plans
Or Other ------------------------------------------------
Number of Period Until
Shares, Units Maturation Threshold Target Maximum
Name or Other Rights or Payout # of Shares # of Shares # of Shares(b)
--------------------------------------------------------------------------------------------------
D. A. Carp N/A 2000-2002 10,000 20,000 30,000
2001-2003 10,000 20,000 30,000
2002-2004 10,000 20,000 [62,037] 30,000
--------------------------------------------------------------------------------------------------
R. H. Brust N/A 2000-2002 2,625 5,250 7,875
2001-2003 2,625 5,250 7,875
2002-2004 2,625 5,250 [25,904] 7,875
--------------------------------------------------------------------------------------------------
M. M. Coyne N/A 2000-2002 1,813 3,625 5,438
2001-2003 3,400 6,800 10,200
2002-2004 3,400 6,800 [31,376] 10,200
--------------------------------------------------------------------------------------------------
M. P. Morley N/A 2000-2002 1,813 3,625 5,438
2001-2003 2,625 5,250 7,875
2002-2004 2,625 5,250 [19,926] 7,875
--------------------------------------------------------------------------------------------------
D. P. Palumbo N/A 2000-2002 N/A(a) N/A(a) N/A(a)
2001-2003 1,988 3,975 5,963
2002-2004 1,988 3,975 [19,631] 5,963
--------------------------------------------------------------------------------------------------
(a) D. P. Palumbo did not participate in the 2000-2002 performance
cycle of the Performance Stock Program.
(b) The shares in brackets are the named executive officers' target
awards under the Executive Incentive Program.
94
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
DANIEL A. CARP
Effective December 10, 1999, the Company entered into a letter
agreement with Mr. Carp providing for his employment as President and
Chief Executive Officer. The letter agreement provides for a base
salary of $1,000,000, subject to annual adjustment, and a target
annual bonus of 105% of his base salary. Mr. Carp's compensation will
be reviewed annually by the Executive Compensation and Development
Committee. The Executive Compensation and Development Committee
approved an increase of Mr. Carp's annual base salary to $1,100,000
effective May 5, 2003. Mr Carp's target award under the Company's
variable pay plan will remain at 155% of his base salary.
If the Company terminates Mr. Carp's employment without cause, Mr.
Carp will be permitted to retain his stock options and restricted
stock. He will also receive severance pay equal to three times his
base salary plus target annual bonus and prorated awards under the
Company's bonus plans. The letter agreement also provides that for
pension purposes, Mr. Carp will be treated as if he were age 55, if
he is less than age 55 at the time of his termination, or age 60, if
he is age 55 or older but less than age 60, at the time of his
termination of employment.
In the event of Mr. Carp's disability, he will receive the same
severance pay as he would receive upon termination without cause;
except it will be reduced by the present value of any Company-
provided disability benefits he receives. The letter agreement also
states that upon Mr. Carp's disability, he will be permitted to
retain all of his stock options.
ROBERT H. BRUST
The Company employed Mr. Brust under an offer letter dated December
20, 1999, that was amended on November 12, 2001. In addition to the
information provided herein and in the Proxy Statement, the amended
offer letter provides Mr. Brust a special severance benefit. If,
during the first seven years of Mr. Brust's employment, the Company
terminates his employment without cause, he will receive severance
pay equal to two times his base salary plus target annual bonus.
After completing five years of service with the Company, Mr. Brust
will be allowed to keep his stock options upon his termination of
employment for other than cause.
MARTIN M. COYNE
Effective November 15, 2001, the Company entered into a retention
agreement with Mr. Coyne. In addition to the information provided
herein and in the Proxy Statement, the letter agreement provides Mr.
Coyne a special severance benefit equal to two times his total target
annual compensation if he is terminated without cause prior to
February 7, 2004. In such event, the letter agreement also requires
the Company to recommend to the Executive Compensation and
Development Committee that Mr. Coyne be permitted to retain his stock
options, restricted stock and awards under the Performance Stock
Program. The letter agreement sets Mr. Coyne's target award under the
Company's variable pay plan at 85% of his annual base salary.
95
MICHAEL P. MORLEY
Effective March 13, 2001, the Company entered into a retention
agreement with Mr. Morley to encourage him to delay his retirement
until at least January 1, 2003. This letter agreement was
subsequently amended on December 12, 2002. In addition to the
information provided herein and in the Proxy Statement, the letter
agreement provided Mr. Morley a retention benefit of $370,000 if he
remained employed through December 31, 2002. Twenty thousand dollars
of this amount was paid in March 2002, the balance was paid in
January 2003. The letter agreement also made Mr. Morley eligible for
a severance allowance equal to one times his total target annual
compensation, less the amount of any base salary paid to him in 2002,
if he was terminated without cause prior to December 31, 2002. The
letter agreement required the Company to recommend to the Executive
Compensation and Development Committee that Mr. Morley be permitted,
upon his termination of employment, to retain his stock options,
restricted stock, restricted stock units and awards under the
Performance Stock Program.
CHANGE IN CONTROL ARRANGEMENTS
The Company maintains a change in control program to provide
severance pay and continuation of certain welfare benefits for
virtually all U.S. employees. A "change in control" is generally
defined under the program as:
- the incumbent directors cease to constitute a majority of
the Board, unless the election of the new directors was
approved by at least two-thirds of the incumbent directors
then on the Board;
- the acquisition of 25% or more of the combined voting power
of the Company's then outstanding securities;
- a merger, consolidation, statutory share exchange or similar
form of corporate transaction involving the Company or any
of its subsidiaries that requires the approval of the
Company's shareholders; or
- a vote by the shareholders to completely liquidate or
dissolve the Company.
The purpose of the program is to assure the continued employment and
dedication of all employees without distraction from the possibility
of a change in control. The program provides for severance payments
and continuation of certain welfare benefits to eligible employees
whose employment is terminated, either voluntarily with "good cause"
or involuntarily, during the two-year period following a change in
control. The amount of the severance pay and length of benefit
continuation is based on the employee's position. The named executive
officers would be eligible for severance pay equal to three times
their total target annual compensation. In addition, the named
executive officers would be eligible to participate in the Company's
medical, dental, disability and life insurance plans until the first
anniversary of the date of their termination of employment. The
Company's change in control program also requires, subject to certain
limitations, tax gross-up payments to all employees to mitigate any
excise tax imposed upon the employee under the Internal Revenue Code.
96
Another component of the program provides enhanced benefits under the
Company's retirement plan. Any participant whose employment is
terminated, for a reason other than death, disability, cause or
voluntary resignation, within five years of a change in control is
given credit for up to five additional years of service. In addition,
where the participant is age 50 or over on the date of the change in
control, up to five additional years of age is given for the
following plan purposes:
- to determine eligibility for early and normal retirement;
- to determine eligibility for a vested right; and
- to calculate the amount of retirement benefit.
The actual number of years of service and years of age that is given
to such a participant decreases proportionately depending upon the
number of years that elapse between the date of a change in control
and the date of the participant's termination of employment. If the
plan is terminated within five years after a change in control, the
benefit for each participant will be calculated as indicated above.
In the event of a change in control which causes the Company's stock
to cease active trading on the New York Stock Exchange, the Company's
compensation plans will generally be affected as follows:
- under the Executive Deferred Compensation Plan, each
participant will be paid the amount in his or her account;
- under EXCEL, each participant will be paid a pro rata target
award for the year in which the change in control occurs;
- under the Performance Stock Program, each participant will
be awarded a pro rata target award for each pending
performance cycle and all awards will be cashed out based
on the change in control price;
- under the Company's stock option plans, all outstanding
options will vest in full and be cashed out based on the
difference between the change in control price and the
option's exercise price; and
- under the Company's restricted stock programs, all of the
restrictions on the stock will lapse and the stock will be
cashed out based on the change in control price.
RETIREMENT PLAN
The Company funds a tax-qualified defined benefit pension plan for
virtually all U.S. employees. Effective January 1, 2000, the Company
amended the plan to include a cash balance feature. All of the named
executive officers, with the exception of Mr. Brust and Mr. Palumbo,
participate in the non-cash balance portion of the plan. The cash
balance feature covers all new employees hired after March 31, 1999,
including Mr. Brust, and all other employees who elected to
participate, including Mr. Palumbo.
97
Retirement income benefits are based upon an employee's average
participating compensation (APC). The plan defines APC as one third
of the sum of the employee's participating compensation for the
highest consecutive 39 periods of earnings over the 10 years ending
immediately prior to retirement or termination of employment.
Participating compensation, in the case of the named executive
officers, is base salary and EXCEL awards, including allowances in
lieu of salary for authorized periods of absence, such as illness,
vacation or holidays.
For an employee with up to 35 years of accrued service, the annual
normal retirement income benefit is calculated by multiplying the
employee's years of accrued service by the sum of (a) 1.3% of APC,
plus (b) 0.3% of APC in excess of the average Social Security wage
base. For an employee with more than 35 years of accrued service, the
resulting amount is increased by 1% for each year in excess of 35
years.
The retirement income benefit is not subject to any deductions for
Social Security benefits or other offsets. The normal form of benefit
is an annuity, but a lump sum payment is available in limited
situations.
98
PENSION PLAN TABLE
ANNUAL RETIREMENT INCOME BENEFIT
STRAIGHT LIFE ANNUITY BEGINNING AT AGE 65
------------------------------------------------------------------------------------------------
Years of Service
------------------------------------------------------------------------------
Remuneration 3 20 25 30 35 40
------------------------------------------------------------------------------------------------
$ 500,000 $24,000 $160,000 $200,000 $240,000 $ 280,000 $ 294,000
------------------------------------------------------------------------------------------------
750,000 36,000 240,000 300,000 360,000 420,000 441,000
------------------------------------------------------------------------------------------------
1,000,000 48,000 320,000 400,000 480,000 560,000 588,000
------------------------------------------------------------------------------------------------
1,250,000 60,000 400,000 500,000 600,000 700,000 735,000
------------------------------------------------------------------------------------------------
1,500,000 72,000 480,000 600,000 720,000 840,000 877,000
------------------------------------------------------------------------------------------------
1,750,000 84,000 560,000 700,000 840,000 980,000 1,029,000
------------------------------------------------------------------------------------------------
2,000,000 96,000 640,000 800,000 960,000 1,120,000 1,176,000
------------------------------------------------------------------------------------------------
NOTE: For purposes of this table, Remuneration means APC. To the
extent that an employee's annual retirement income benefit exceeds
the amount payable from the Company's funded plan, it is paid from
one or more unfunded supplementary plans.
99
The following table shows the years of service credited as of
December 31, 2002, to each of the named executive officers. This
table also shows the amount of each named executive officer's APC at
the end of 2002. Mr. Brust and Mr. Palumbo, who participated in the
cash balance feature in 2002, are not listed.
Retirement Plan
-------------------------------------------------------------------
Name Years of Service Average Participating
Compensation
-------------------------------------------------------------------
D. A. Carp 32 $1,711,871
-------------------------------------------------------------------
M. M. Coyne 20(a) 916,032
-------------------------------------------------------------------
M. P. Morley 38(b) 647,702
-------------------------------------------------------------------
(a) If Mr. Coyne remains employed until February 7, 2004, he will be
credited with eight extra years of service for purposes of
calculating his retirement benefit.
(b) Under Mr. Morley's retention agreement, if he elects upon his
retirement to take a lump sum distribution of his retirement
benefit, the amount of his benefit will be calculated using a
discount rate no less favorable than the discount rate used under
the Company's pension plan to calculate the retirement benefits
of participants who retired effective January 1, 2003.
Cash Balance Feature
Under the cash balance feature of the Company's pension plan, the
Company establishes an account for each participating employee. Every
month the employee works, the Company credits the employee's account
with an amount equal to four percent of the employee's monthly pay.
In addition, the ongoing balance of the employee's account earns
interest at the 30-year Treasury bond rate. To the extent federal
laws place limitations on the amount of pay that may be taken into
account under the plan, four percent of the excess pay is credited to
an account established for the employee in an unfunded supplementary
plan. If a participating employee leaves the Company and is vested
(five or more years of service), the employee's account balance will
be distributed to the employee in the form of a lump sum or monthly
annuity. Participating employees whose account balance exceeds
$5,000, also have the choice of leaving their account balances
in the plan to continue to earn interest.
In addition to the benefits described above, Mr. Brust is covered
under a special supplemental pension arrangement established under
his amended offer letter. This arrangement provides Mr. Brust a
single life annuity of $12,500 per month upon his retirement if he
remains employed with the Company for at least five years. If Mr.
Brust remains employed until January 3, 2007, he will, in lieu of
receiving the $12,500 per month annuity, be treated as if eligible
for the non-cash balance portion of the plan. For this purpose, Mr.
Brust will be credited with 18 years of extra service in addition to
his actual service. In either case, Mr. Brust's supplemental benefit
will be offset by his cash balance benefit.
100
Performance Graph -- Shareholder Return
The following graph compares the performance of the Company's common
stock with the performance of the Standard & Poor's 500 Composite Stock
Price Index and the Dow Jones Industrial Index, by measuring the
changes in common stock prices from December 31, 1997, plus assumed
reinvested dividends.
[THE FOLLOWING WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
EK S&P 500 DJIA
12/31/97 $100.0 $100.0 $100.0
12/31/98 $121.8 $128.3 $118.0
12/31/99 $115.0 $155.1 $149.9
12/31/00 $71.4 $141.1 $142.8
12/31/01 $56.6 $124.4 $135.0
12/31/2002 $70.9 $97.1 $115.0
The graph assumes that $100 was invested on December 31, 1997, in each
of the Company's common stock, the Standard & Poor's 500 Composite
Stock Price Index and the Dow Jones Industrial Index, and that all
dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective market
capitalizations, measured at the beginning of each relevant time
period.
------------------------------------------------------------------------
101
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As required by Item 201(d) of Regulation S-K, the Company's total
options outstanding of 42,277,000 have been granted under equity
compensation plans that have been approved by security holders and that
which have not been approved by security holders as follows:
(Amounts in thousands,
except per share amounts)
Weighted-
Average Number of
Options Exercise Price Options Available
Outstanding of Options for Future Grants
at December 31, Outstanding at as of
2002 December 31, 2002 December 31, 2002
Equity compensation
plans approved by
security holders
approved plans 31,356 $46.17 7,813
Equity compensation
plans not approved
by security holders 10,921 55.27 5,124
------ ------ -----
Total 42,277 $48.52 12,937
The Company's equity compensation plans approved by security holders
include the 2000 Plan, the 1995 Plan and the 1990 Plan. The Company's
equity compensation plans not approved by security holders include the
Eastman Kodak Company 1997 Stock Option Plan and the Kodak Stock Option
Plan. The 5,124,000 of options available for grant as of December 31,
2002 under equity compensation plans not approved by security holders
all relate to the Kodak Stock Option Plan; however, in accordance with
an amendment that is effective January 1, 2003, no options will be
granted in the future under this plan.
102
Beneficial Security Ownership
of Directors, Nominees and Executive Officers
-------------------------------------------------------------------
Directors, Nominees Number of Common Shares
and Executive Officers Owned on January 2,2003
-------------------------------------------------------------------
Richard S. Braddock 26,893 (a)(b)
-------------------------------------------------------------------
William W. Bradley 6,120 (a)(b)
-------------------------------------------------------------------
Robert H. Brust 216,994 (a)(b)
-------------------------------------------------------------------
Daniel A. Carp 1,126,870 (a)(b)
-------------------------------------------------------------------
Martha Layne Collins 18,889 (a)(b)
-------------------------------------------------------------------
Martin M. Coyne 259,439 (a)(b)
-------------------------------------------------------------------
Timothy M. Donahue 8,292 (a)(b)
-------------------------------------------------------------------
William H. Hernandez(d) 2,055 (a)
-------------------------------------------------------------------
Durk I. Jager 18,171 (a)(b)
-------------------------------------------------------------------
Debra L. Lee 11,180 (b)
-------------------------------------------------------------------
Delano E. Lewis 6,236 (a)(b)
-------------------------------------------------------------------
Michael P. Morley 305,023 (a)(b)
-------------------------------------------------------------------
Paul H. O'Neill(d) 2,090 (a)
-------------------------------------------------------------------
Daniel P. Palumbo 92,587 (a)(b)
-------------------------------------------------------------------
Hector de J. Ruiz 8,697 (b)
-------------------------------------------------------------------
Laura D'Andrea Tyson 10,235 (a)(b)
-------------------------------------------------------------------
All Directors, Nominees and
Executive Officers as a
Group (27), including the above 2,930,227 (a)(b)(c)
-------------------------------------------------------------------
(a) Includes the following Kodak common stock equivalents, which are
held in deferred compensation plans: R. S. Braddock - 6,006; W.
W. Bradley - 458; R. H. Brust - 11,673; D. A. Carp - 193,803;
M. L. Collins - 9,689; M. M. Coyne - 15,010; T. M. Donahue -
2,292; W. H. Hernandez - 555; D. I. Jager - 9,171; D. E. Lewis
- 2,036; M. P. Morley - 42,016; P. H. O'Neill - 1,090; D. P.
Palumbo - 12,505; L. D. Tyson - 1,315; and all directors,
nominees and executive officers as a group - 400,125.
103
(b) Includes the following number of shares which may be acquired by
exercise of stock options: R. S. Braddock - 6,000; W. W. Bradley
- 4,000; R. H. Brust - 184,622; D. A. Carp - 891,086; M. L.
Collins - 6,000; M. M. Coyne - 231,473; T. M. Donahue - 4,000;
D. I. Jager - 6,000; D. L. Lee - 6,000; D. E. Lewis - 4,000;
M. P. Morley - 259,671; D. P. Palumbo -70,977; H. de J. Ruiz
- 4,000; L. D. Tyson - 6,000; and all directors, nominees and
executive officers as a group - 2,284,195.
(c) The total number of shares beneficially owned by all directors,
nominees and executive officers as a group is less than 1% of
the Company's outstanding shares.
(d) Messrs. O'Neill and Hernandez joined the Company's Board of
Directors in February 2003, and they are included here for
informational purposes only. Their shareholdings, shown here as
of March 14, 2003, are not included in the totals shown above
and in these footnotes for all directors, nominees and executive
officers as a group.
The above table reports beneficial ownership in accordance with Rule
13d-3 under the Securities Exchange Act of 1934. This means all
Company securities over which the directors, nominees and executive
officers directly or indirectly have or share voting or investment
power are listed as beneficially owned. The figures above include
shares held for the account of the above persons in the Eastman Kodak
Shares Program and the Kodak Employees' Stock Ownership Plan, and the
interests of the above persons in the Kodak Stock Fund of the Eastman
Kodak Employees' Savings and Investment Plan, stated in terms of
Kodak shares.
-----------------------------------------------------------------------
ITEM 14. Controls and Procedures
In accordance with the Securities Exchange Act Rules 13a-15 and 15d-15,
the Company's management, under the supervision of the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this
annual report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of
the Company's disclosure controls and procedures were effective. There
have been no significant changes in internal controls over financial
reporting or in other factors that could significantly affect internal
controls over financial reporting subsequent to the date of such
evaluation.
104
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
(a) 1. Consolidated financial statements (the page number
references for the information listed under Item 15
(a) 1. relate to the Company's Form 10-K for the year
ended December 31, 2002 as originally filed on
March 14, 2003):
Report of independent accountants 78
Consolidated statement of earnings 79
Consolidated statement of financial position 80
Consolidated statement of shareholders' equity 81-83
Consolidated statement of cash flows 84-85
Notes to financial statements 86-148
2. Financial statement schedules:
II - Valuation and qualifying accounts 106
All other schedules have been omitted because they are not
applicable or the information required is shown in the
financial statements or notes thereto.
3. Additional data required to be furnished:
Exhibits required as part of this report are listed in the
index appearing on pages 107 through 112.
(b) Report on Form 8-K.
No reports on Form 8-K were filed or required to be filed during
the quarter ended December 31, 2002.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
By: By:
Daniel A. Carp Robert H. Brust
Chairman & Chief Executive Officer, Chief Financial Officer, and
President & Chief Operating Officer Executive Vice President
Robert P. Rozek
Controller
Date: March 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Richard S. Braddock, Director Durk I. Jager, Director
William W. Bradley, Director Debra L. Lee, Director
Daniel A. Carp, Director Delano E. Lewis, Director
Martha Layne Collins, Director Paul H. O'Neill, Director
Timothy M. Donahue, Director Hector de J. Ruiz, Director
William H. Hernandez, Director Laura D'Andrea Tyson, Director
Date: March 14, 2003
106
Schedule II
Eastman Kodak Company and Subsidiary Companies
Valuation and Qualifying Accounts
(in millions)
Balance at Additions Deductions Balance
Beginning Charged to Amounts at End of
of Period Earnings Written Off Period
Year ended December 31, 2002
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $ 92 $ 92 $80 $104
Reserve for loss on
returns and allowances 17 17 1 33
---- ---- --- ----
TOTAL $109 $109 $81 $137
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 51 $ 13 $11 $ 53
==== ==== === ====
Year ended December 31, 2001
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $ 62 $ 95 $65 $ 92
Reserve for loss on
returns and allowances 27 12 22 17
---- ---- --- ----
TOTAL $ 89 $107 $87 $109
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 8 $ 46 $ 3 $ 51
==== ==== === ====
Year ended December 31, 2000
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $104 $ 38 $80 $ 62
Reserve for loss on
returns and allowances 32 8 13 27
---- ---- --- ----
TOTAL $136 $ 46 $93 $ 89
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 7 $ 4 $ 3 $ 8
==== ==== === ====
107
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits
Exhibit
Number
(3) A. Certificate of Incorporation.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 25, 1988, Exhibit 3.)
B. By-laws, as amended through April 24, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2001, Exhibit 3.)
(4) A. Indenture dated as of January 1, 1988 between Eastman
Kodak Company as issuer of (i) 9 3/8% Notes Due 2003,
(ii) 9.95% Debentures Due 2018, (iii) 9 1/2% Notes Due 2008,
(iv) 9.20% Debentures Due 2021, and (v) 7.25% Notes Due 2005,
and The Bank of New York as Trustee.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 25, 1988, Exhibit 4.)
B. First Supplemental Indenture dated as of September 6, 1991
and Second Supplemental Indenture dated as of September 20,
1991, each between Eastman Kodak Company and The Bank of New
York as Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, Exhibit 4.)
C. Third Supplemental Indenture dated as of January 26, 1993,
between Eastman Kodak Company and The Bank of New York as
Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, Exhibit 4.)
D. Fourth Supplemental Indenture dated as of March 1, 1993,
between Eastman Kodak Company and The Bank of New York as
Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, Exhibit 4.)
Eastman Kodak Company and certain subsidiaries are parties to
instruments defining the rights of holders of long-term debt
that was not registered under the Securities Act of 1933.
Eastman Kodak Company has undertaken to furnish a copy of these
instruments to the Securities and Exchange Commission upon
request.
108
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
(10) B. Eastman Kodak Company Insurance Plan for Directors.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 29, 1985, Exhibit 10.)
C. Eastman Kodak Company Deferred Compensation Plan for
Directors, as amended February 11, 2000.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999, and the Eastman Kodak Company Annual
Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
E. 1982 Eastman Kodak Company Executive Deferred Compensation
Plan, as amended effective December 9, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999, and the
Eastman Kodak Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, Exhibit 10.)
G. Eastman Kodak Company 1990 Omnibus Long-term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997, the
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, the Quarterly Report on Form
10-Q for the quarterly period ended September 30,
1999, the Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, and the Annual Report on Form
10-K for the fiscal year ended December 31, 2001,
Exhibit 10.)
109
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
I. Eastman Kodak Company 1995 Omnibus Long-Term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, the Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998,
the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998, the
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999, the Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, and the Annual
Report on Form 10-K for the fiscal year ended December 31,
2001, Exhibit 10.)
J. Kodak Executive Financial Counseling Program.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, Exhibit 10.)
K. Personal Umbrella Liability Insurance Coverage.
Eastman Kodak Company provides $5,000,000 personal umbrella
liability insurance coverage to its directors and
approximately 160 key executives. The coverage, which is
insured through The Mayflower Insurance Company, Ltd.,
supplements participants' personal coverage. The Company
pays the cost of this insurance. Income is imputed to
participants.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, Exhibit 10.)
L. Kodak Executive Health Management Plan, as amended
effective January 1, 1995.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and the Annual Report on Form 10-K
for the fiscal year ended December 31, 2001, Exhibit 10.)
M. Martin M. Coyne Agreement dated November 9, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
110
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
N. Kodak Stock Option Plan, as amended and restated August
26, 2002.
O. Eastman Kodak Company 1997 Stock Option Plan, as amended,
effective as of March 13, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001, Exhibit 10.)
P. Eric Steenburgh Agreement dated March 12, 1998.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, Exhibit 10.)
Notice of Award of Restricted Stock Units dated
February 11, 2000 under the 2000 Omnibus Long-Term
Compensation Plan.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, Exhibit 10.)
Amendment, dated December 1, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Letter, dated December 28, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Q. Eastman Kodak Company 2001 Short-Term Variable
Pay to Named Executive Officers.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2002, Exhibit 10.)
111
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
R. Eastman Kodak Company 2000 Omnibus Long-Term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999, and the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, the Annual Report
on Form 10-K for the fiscal year ended December 31, 1999,
and the Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, Exhibit 10.)
S. Executive Compensation for Excellence and Leadership
Plan, (formerly known as the 2000 Management Variable
Compensation Plan), as amended and restated effective
as of January 1, 2002.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2002, Exhibit 10.)
T. Eastman Kodak Company Executive Protection Plan, effective
July 25, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2001, Exhibit 10.)
U. Eastman Kodak Company Estate Enhancement Plan, as adopted
effective March 6, 2000.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
V. Michael P. Morley Agreement dated March 13, 2001.
Amendment, dated February 19, 2003, to Agreement dated
March 13, 2001.
W. Daniel A. Carp Agreement dated November 22, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
$1,000,000 Promissory Note dated March 2, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, Exhibit 10.)
112
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits (continued)
Exhibit
Number
X. Robert H. Brust Agreement dated December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
Amendment, dated February 8, 2001, to Agreement dated
December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, Exhibit 10.)
Amendment, dated November 12, 2001, to Agreement dated
December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.).
Y. Patricia F. Russo Agreement dated April 1, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, Exhibit 10.)
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of Eastman Kodak Company.
(23) Consent of Independent Accountants.
(99) Eastman Kodak Employees' Savings and Investment Plan Annual
Report on Form 11-K for the fiscal year ended December 30, 2002
( filed by Amendment No. 1 to the 2002 Form 10-K on
June 27, 2003).
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(99.3) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99.4) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.