Kodak 2002 Annual Report Download - page 57

Financials
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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 of assumed debt. The exercise of the option
had no impact on the Company’s fourth quarter earnings.
In connection with the Company’s investment in China that
began in 1998, certain unaffiliated entities invested in two Kodak
consolidated companies with the opportunity to put their minority
interests to Kodak at any time after the third anniversary, but
prior to the tenth anniversary, of the date on which the two
companies were established. On December 31, 2002, an
unaffiliated investor in one of Kodak’s China subsidiaries exercised
their rights under the put option agreement. Under the terms of
the arrangement, the Company repurchased the investor’s 10%
minority interest for approximately $44 million in cash. The
exercise of this put option and the recording of the related
minority interest purchased had no impact on the Company’s
earnings. The total exercise price in connection with the
remaining put options, which increases at a rate of 2% per
annum, is approximately $60 million at December 31, 2002. The
Company expects that approximately $16 million of the remaining
$60 million in total put options will be exercised and the related
cash payments will occur over the next twelve months.
Qualex, a wholly owned subsidiary of Kodak, has a 50%
ownership interest in Express Stop Financing (ESF), which is a
joint venture partnership between Qualex and Dana Credit
Corporation (DCC), a wholly owned subsidiary of Dana
Corporation. Qualex accounts for its investment in ESF under the
equity method of accounting. ESF provides a long-term financing
solution to Qualex’s photofinishing customers in connection with
Qualex’s leasing of photofinishing equipment to third parties, as
opposed to Qualex extending long-term credit. As part of the
operations of its photofinishing services, Qualex sells equipment
under a sales-type lease arrangement and records a long-term
receivable. These long-term receivables are subsequently sold to
ESF without recourse to Qualex. ESF incurs long-term debt to
finance the purchase of the receivables from Qualex. This debt is
collateralized solely by the long-term receivables purchased from
Qualex, and in part, by a $60 million guarantee from DCC.
Qualex provides no guarantee or collateral to ESF’s creditors in
connection with the debt, and ESF’s debt is non-recourse to
Qualex. Qualex’s only continued involvement in connection with
the sale of the long-term receivables is the servicing of the
related equipment under the leases. Qualex has continued
revenue streams in connection with this equipment through future
sales of photofinishing consumables, including paper and
chemicals, and maintenance.
Qualex has risk with respect to the ESF arrangement as it
relates to its continued ability to procure spare parts from the
primary photofinishing equipment vendor (the Vendor) to fulfill its
servicing obligations under the leases. This risk is attributable to
the fact that, throughout 2002, the Vendor was experiencing
financial difficulty which ultimately resulted in certain of its
entities in different countries filing for bankruptcy on December
24, 2002. Although the lessees’ requirement to pay ESF under
the lease agreements is not contingent upon Qualex’s fulfillment
of its servicing obligations, under the agreement with ESF, Qualex
would be responsible for any deficiency in the amount of rent not
paid to ESF as a result of any lessee’s claim regarding
maintenance or supply services not provided by Qualex. Such
lease payments would be made in accordance with the original