Kodak 2003 Annual Report Download - page 49

Financials
49
and are due 2033 because the contingencies surrounding the conversion
features have not yet lapsed, and because the effect of issuing such
shares would be anti-dilutive as of December 31, 2003.
Stock-Based Compensation The Company accounts for its employee
stock incentive plans under Accounting Principles Board (APB) Opinion No.
25, “Accounting for Stock Issued to Employees,” and the related interpre-
tations under Financial Accounting Standards Board (FASB) Interpretation
No. 44, “Accounting for Certain Transactions Involving Stock Compensa-
tion.” Accordingly, no stock-based employee compensation cost is reflect-
ed in net earnings for the years ended December 31, 2003, 2002 and
2001, as all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant.
The Company has determined the pro forma net earnings (loss) and
net earnings (loss) per share information as if the fair value method of
SFAS No. 123, “Accounting for Stock-Based Compensation,” had been
applied to its stock-based employee compensation. The pro forma infor-
mation is as follows: Year Ended December 31,
(in millions, except per share data) 2003 2002 2001
Net earnings, as reported $ 265 $ 770 $ 76
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net
of related tax effects (16) (105) (79)
Pro forma net earnings (loss) $ 249 $ 665 $ (3)
Earnings (loss) per share:
Basic and diluted—as reported $ .92 $ 2.64 $ .26
Basic and diluted—pro forma $ .87 $ 2.28 $ (.01)
The total stock-based employee compensation amount, net of relat-
ed tax effects, for the year ended December 31, 2002 of $105 million
includes a net of tax expense impact of $50 million representing the grant
of approximately 16 million new options awarded on August 26, 2002 in
relation to the voluntary stock option exchange program. These options
were essentially fully vested at the date of grant.
Additionally, the 2002 total stock-based employee compensation
expense amount of $105 million, net of taxes, includes a net of tax
expense impact of $34 million representing the unamortized compensa-
tion cost of the options that were cancelled in connection with the 2002
voluntary stock option exchange program. See Note 20, “Stock Option and
Compensation Plans.”
The Black-Scholes option pricing model was used with the following
weighted-average assumptions for options issued in each year:
2000 Exchange
Plan Program
2003 2003
Risk-free interest rates 3.6% N/A
Expected option lives 7 years N/A
Expected volatilities 35% N/A
Expected dividend yields 3.89% N/A
2002 2002
Risk-free interest rates 3.8% 2.9%
Expected option lives 7 years 4 years
Expected volatilities 34% 37%
Expected dividend yields 5.76% 5.76%
2001 2001
Risk-free interest rates 4.2% N/A
Expected option lives 6 years N/A
Expected volatilities 34% N/A
Expected dividend yields 4.43% N/A
The weighted-average fair value of options granted in 2003 was
$7.70. The weighted-average fair value of options granted in 2002 was
$8.22 for the 2000 Plan and $5.99 for the voluntary stock option
exchange program. The weighted-average fair value of options granted in
2001 was $8.37.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to compensation expense over the options’ vesting
period (1-3 years).
On February 18, 2004, the Company announced that it will begin
expensing stock options starting January 1, 2005 using the fair value
recognition provisions of SFAS No. 123. The FASB is expected to issue an
exposure draft during 2004 relating to a new accounting standard that will
require the expensing of stock options. This new accounting standard may
become effective on January 1, 2005, in which case the Company will fol-
low the stock option expensing rules of the new standard.
Comprehensive Income SFAS No. 130, “Reporting Comprehensive
Income,” establishes standards for the reporting and display of compre-
hensive income and its components in financial statements. SFAS No. 130
requires that all items required to be recognized under accounting stan-
dards as components of comprehensive income be reported in a financial
statement with the same prominence as other financial statements.
Comprehensive income consists of net earnings, the net unrealized gains
or losses on available-for-sale marketable securities, foreign currency
translation adjustments, minimum pension liability adjustments, and unre-
alized gains and losses on financial instruments qualifying for hedge
accounting, and is presented in the accompanying Consolidated Statement
of Shareholders’ Equity in accordance with SFAS No. 130.
Segment Reporting The Company reports net sales, operating income,
net income, and certain expense, asset and geographical information
about its reportable segments. Reportable segments are components of
the Company for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how