Kodak 2003 Annual Report Download - page 31

Financials
31
The Company guarantees debt and other obligations under agree-
ments with certain affiliated companies and customers. At December 31,
2003, these guarantees totaled a maximum of $363 million, with out-
standing guaranteed amounts of $161 million. The maximum guarantee
amount includes guarantees of up to: $160 million of debt for KPG ($50
million outstanding); $7 million for other unconsolidated affiliates and third
parties ($7 million outstanding); and $196 million of customer amounts
due to banks in connection with various banks’ financing of customers’
purchase of products and equipment from Kodak ($104 million outstand-
ing). The KPG debt facility and the related guarantee mature on December
31, 2005, but may be renewed at KPG’s, the joint ventures partners’ and
the bank’s discretion. The guarantees for the other unconsolidated affili-
ates and third party debt mature between January 2004 and May 2006.
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 5 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. Management believes the likelihood is remote that material
payments will be required under any of the guarantees disclosed above.
With respect to the guarantees that the Company issued in the year ended
December 31, 2003, the Company assessed the fair value of its obligation
to stand ready to perform under these guarantees by considering the like-
lihood of occurrence of the specified triggering events or conditions
requiring performance as well as other assumptions and factors. Through
internal analyses and external valuations, the Company determined that
the fair value of the guarantees was not material to the Company’s finan-
cial position, results of operations or cash flows.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $592 mil-
lion, and the outstanding debt under those guarantees, which is recorded
within the short-term borrowings and long-term debt, net of current por-
tion components in the accompanying Consolidated Statement of Financial
Position, is $423 million. These guarantees expire in 2004 and 2005, with
the majority expiring in 2004.
The Company may provide up to $100 million in loan guarantees to
support funding needs for SK Display Corporation, an unconsolidated affili-
ate in which the Company has a 34% ownership interest. As of December
31, 2003, the Company has not been required to guarantee any of the SK
Display Corporation’s outstanding debt.
The Company issues indemnifications in certain instances when it
sells businesses and real estate, and in the ordinary course of business
with its customers, suppliers, service providers and business partners.
Further, the Company indemnifies its directors and officers who are, or
were, serving at Kodak’s request in such capacities. Historically, costs
incurred to settle claims related to these indemnifications have not been
material to the Company’s financial position, results of operations or cash
flows. Additionally, the fair value of the indemnifications that the Company
issued during the year ended December 31, 2003 was not material to the
Company’s financial position, results of operations or cash flows.
Due to improved performance in the global equity markets in 2003,
partially offset by the decline in the discount rates from December 31,
2002 to December 31, 2003, the Company decreased its additional mini-
mum pension liability by $167 million and recorded a corresponding credit
to the accumulated other comprehensive (loss) income component of
equity of $122 million, net of tax benefits of $45 million. The decrease in
the additional minimum pension liability of $167 million was recorded in
the postretirement liabilities component on the Consolidated Statement of
Financial Position at December 31, 2003. The decrease in this component
of $68 million from December 31, 2002 to December 31, 2003 is primarily
attributable to the decrease in the additional minimum pension liability
and the decrease in the accrued pension benefit liability, partially offset by
the impact of foreign exchange. The Company recorded the reduction in
the deferred income tax asset of $45 million in the other long-term assets
component within the Consolidated Statement of Financial Position. The
net increase in this component of $326 million from December 31, 2002
to December 31, 2003 is partially attributable to the increase in the pre-
paid pension asset, partially offset by the decrease in the deferred income
tax asset. The increase in the prepaid pension asset is primarily attributa-
ble to $47 million of pension income generated from the U.S. pension
plans in 2003 and the impact of foreign exchange.
During the fourth quarter of 2003, the Company funded one of its
non-U.S. defined benefit plans in the amount of approximately $18 million.
The Company does not expect to have significant funding requirements
relating to its defined benefit pension plans in 2004.
Qualex, a wholly owned subsidiary of Kodak, has a 50% ownership
interest in Express Stop Financing (ESF), which is a joint venture partner-
ship between Qualex and a subsidiary of 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 con-
nection 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 and,
therefore, these receivables are removed from Qualex’s books. ESF incurs
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 photo-
finishing consumables, including paper and chemicals, and maintenance.
Although the lessees’ requirement to pay ESF under the lease agree-
ments is not contingent upon Qualex’s fulfillment of its servicing obliga-
tions, 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. To date, the
Company has incurred no such material claims, and Qualex does not
anticipate any significant situations where it would be unable to fulfill its
service obligations under the arrangement with ESF. ESF’s outstanding