Kodak 2004 Annual Report Download - page 38

Financials
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E A S T M A N฀ K OD A K ฀ C O M PA N Y
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,฀
2004,฀the฀Company฀assessed฀the฀fair฀value฀of฀its฀obligation฀to฀stand฀ready฀
to฀perform฀under฀these฀guarantees฀by฀considering฀the฀likelihood฀of฀occur-
rence฀of฀the฀specified฀triggering฀events฀or฀conditions฀requiring฀performance฀
as฀well฀as฀other฀assumptions฀and฀factors.฀The฀Company฀has฀determined฀
that฀the฀fair฀value฀of฀the฀guarantees฀was฀not฀material฀to฀the฀Company’s฀
financial฀position,฀results฀of฀operations฀or฀cash฀flows.฀฀
The฀Company฀also฀guarantees฀debt฀owed฀to฀banks฀for฀some฀of฀its฀
consolidated฀subsidiaries.฀The฀maximum฀amount฀guaranteed฀is฀$306฀mil-
lion,฀and฀the฀outstanding฀debt฀under฀those฀guarantees,฀which฀is฀recorded฀
within฀the฀short-term฀borrowings฀and฀long-term฀debt,฀net฀of฀current฀portion฀
components฀in฀the฀accompanying฀Consolidated฀Statement฀of฀Financial฀
Position,฀is฀$166฀million.฀These฀guarantees฀expire฀in฀2005฀through฀2006.
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,฀2004,฀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,฀2004฀was฀not฀material฀to฀the฀
Company’s฀financial฀position,฀results฀of฀operations฀or฀cash฀flows.฀
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฀provided฀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฀sold฀equipment฀under฀a฀sales-type฀
lease฀arrangement฀and฀recorded฀a฀long-term฀receivable.฀These฀long-term฀
receivables฀were฀subsequently฀sold฀to฀ESF฀without฀recourse฀to฀Qualex฀and,฀
therefore,฀these฀receivables฀were฀removed฀from฀Qualex’s฀accounts.฀ESF฀
incurred฀debt฀to฀finance฀the฀purchase฀of฀the฀receivables฀from฀Qualex.฀This฀
debt฀was฀collateralized฀solely฀by฀the฀long-term฀receivables฀purchased฀from฀
Qualex฀and,฀in฀part,฀by฀a฀$40฀million฀guarantee฀from฀DCC.฀On฀December฀17,฀
2004,฀all฀outstanding฀debt฀of฀ESF฀was฀paid฀in฀full฀and฀the฀ESF฀guaran-
tee฀was฀terminated.฀Qualex฀provided฀no฀guarantee฀or฀collateral฀to฀ESF’s฀
creditors฀in฀connection฀with฀the฀debt,฀and฀ESF’s฀debt฀was฀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.
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฀obliga-
tions฀under฀the฀arrangement฀with฀ESF.฀ESF’s฀outstanding฀lease฀receivable฀
amount฀was฀approximately฀$113฀million฀at฀December฀31,฀2004.฀฀
Effective฀July฀20,฀2004,฀ESF฀entered฀into฀an฀agreement฀amending฀the฀
Receivables฀Purchase฀Agreement฀(RPA),฀which฀represents฀the฀financing฀
arrangement฀between฀ESF฀and฀its฀banks.฀Under฀the฀amended฀RPA฀agree-
ment,฀maximum฀borrowings฀were฀lowered฀to฀$200฀million.฀On฀December฀
17,฀2004,฀ESF฀terminated฀the฀RPA฀upon฀payment฀in฀full,฀to฀its฀banks,฀of฀
the฀then฀outstanding฀balance฀of฀the฀RPA฀totaling฀$138฀million.฀Pursuant฀
to฀the฀ESF฀partnership฀agreement฀between฀Qualex฀and฀DCC,฀commenc-
ing฀October฀6,฀2003,฀Qualex฀no฀longer฀sells฀its฀lease฀receivables฀to฀ESF.฀฀
Qualex฀currently฀is฀utilizing฀the฀services฀of฀Imaging฀Financial฀Services,฀Inc.,฀
a฀wholly฀owned฀subsidiary฀of฀General฀Electric฀Capital฀Corporation,฀as฀an฀
alternative฀financing฀solution฀for฀prospective฀leasing฀activity฀with฀its฀U.S.฀
customers.
2003
The฀Company’s฀cash฀and฀cash฀equivalents฀increased฀$681฀million฀during฀
2003฀to฀$1,250฀million฀at฀December฀31,฀2003.฀The฀increase฀resulted฀pri-
marily฀from฀$1,645฀million฀of฀cash฀flows฀from฀operating฀activities฀and฀$270฀
million฀of฀cash฀provided฀by฀financing฀activities,฀partially฀offset฀by฀$1,267฀
million฀of฀cash฀flows฀used฀in฀investing฀activities.
฀The฀net฀cash฀provided฀by฀operating฀activities฀of฀$1,645฀million฀for฀
the฀year฀ended฀December฀31,฀2003฀was฀partially฀attributable฀to฀net฀earn-
ings฀of฀$253฀million฀which,฀when฀adjusted฀for฀earnings฀from฀discontinued฀
operations,฀equity฀in฀losses฀from฀unconsolidated฀affiliates,฀gain฀on฀sale฀of฀
assets,฀depreciation฀and฀goodwill฀amortization,฀purchased฀research฀and฀
development,฀benefit฀for฀deferred฀income฀taxes฀and฀restructuring฀costs,฀
asset฀impairments฀and฀other฀charges,฀provided฀$1,233฀million฀of฀operating฀
cash.฀Also฀contributing฀to฀net฀cash฀provided฀by฀operating฀activities฀were฀a฀
decrease฀in฀inventories฀of฀$118฀million,฀an฀increase฀in฀liabilities฀excluding฀
borrowings฀of฀$103฀million,฀the฀cash฀receipt฀of฀$19฀million฀in฀connection฀
with฀the฀Sterling฀Winthrop฀settlement,฀a฀decrease฀in฀accounts฀receivable฀
of฀$15฀million,฀and฀the฀$98฀million฀impact฀from฀the฀change฀in฀other฀items,฀
net.฀The฀net฀cash฀used฀in฀investing฀activities฀of฀$1,267฀million฀was฀utilized฀
primarily฀for฀business฀acquisitions฀of฀$697฀million,฀of฀which฀$59฀million฀
related฀to฀the฀purchase฀of฀minority฀interests฀in฀China฀and฀India,฀capital฀
expenditures฀of฀$497฀million,฀and฀investments฀in฀unconsolidated฀affiliates฀
of฀$89฀million.฀These฀uses฀of฀cash฀were฀partially฀offset฀by฀net฀proceeds฀
from฀the฀sale฀of฀assets฀of฀$24฀million.฀The฀net฀cash฀provided฀by฀financing฀
activities฀of฀$270฀million฀was฀primarily฀the฀result฀of฀the฀net฀increase฀in฀bor-
rowings฀of฀$588฀million฀and฀the฀exercise฀of฀employee฀stock฀options฀of฀$12฀
million,฀which฀were฀partially฀offset฀by฀dividend฀payments฀of฀$330฀million.฀฀