1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
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: 716-724-4000
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class June 30, 1998
Common Stock, $2.50 par value 322,778,024
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
(in millions, except per share data)
Second Quarter First Half-Year
1998 1997 1998 1997
REVENUES
Sales $3,541 $3,853 $6,452 $6,986
Earnings from equity
interests and other revenues 159 37 213 106
------ ------ ------ ------
TOTAL REVENUES 3,700 3,890 6,665 7,092
------ ------ ------ ------
COSTS
Cost of goods sold 1,828 2,015 3,413 3,658
Selling, general and
administrative expenses 834 1,021 1,587 1,870
Research and development costs 224 266 447 523
Purchased research and
development - - - 186
Interest expense 40 21 64 43
Other costs 24 9 63 29
------ ------ ------ ------
TOTAL COSTS 2,950 3,332 5,574 6,309
------ ------ ------ ------
Earnings before income taxes 750 558 1,091 783
Provision for income taxes 255 190 371 266
------ ------ ------ ------
NET EARNINGS $ 495 $ 368 $ 720 $ 517
====== ====== ====== ======
Basic earnings per share $ 1.53 $ 1.12 $ 2.23 $ 1.57
====== ====== ====== ======
Diluted earnings per share $ 1.51 $ 1.11 $ 2.20 $ 1.54
====== ====== ====== ======
Earnings used in basic and
diluted earnings per share $ 495 $ 368 $ 720 $ 517
Number of common shares used in
basic earnings per share 323.0 327.4 323.0 329.9
Incremental shares from assumed
conversion of options 4.2 5.2 3.8 5.5
------ ------ ------ ------
Number of common shares used in
diluted earnings per share 327.2 332.6 326.8 335.4
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $5,435 $5,928 $5,350 $5,931
Net earnings 495 368 720 517
Cash dividends declared (143) (144) (285) (291)
Other changes 42 1 44 (4)
------ ------ ------ ------
RETAINED EARNINGS
at end of period $5,829 $6,153 $5,829 $6,153
====== ====== ====== ======
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See Notes to Financial Statements
3
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, except number of shares and per share data)
June 30, Dec. 31,
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 416 $ 728
Marketable securities 130 24
Receivables 2,644 2,271
Inventories 1,488 1,252
Deferred income tax charges 916 958
Other 281 242
------- -------
Total current assets 5,875 5,475
------- -------
PROPERTIES
Land, buildings and equipment at cost 12,924 12,824
Less: Accumulated depreciation 7,457 7,315
------- -------
Net properties 5,467 5,509
------- -------
OTHER ASSETS
Goodwill (net of accumulated amortization
of $509 and $473) 884 548
Long-term receivables and other
noncurrent assets 1,428 1,231
Deferred income tax charges 359 382
------- -------
TOTAL ASSETS $14,013 $13,145
======= =======
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payables $ 3,581 $ 3,832
Short-term borrowings 1,386 611
Taxes - income and other 616 567
Dividends payable 142 143
Deferred income tax credits 18 24
------- -------
Total current liabilities 5,743 5,177
OTHER LIABILITIES
Long-term borrowings 459 585
Postemployment liabilities 3,069 3,075
Other long-term liabilities 1,113 1,083
Deferred income tax credits 66 64
------- -------
Total liabilities 10,450 9,984
SHAREHOLDERS' EQUITY
Common stock at par* 978 978
Additional capital paid in or
transferred from retained earnings 892 914
Retained earnings 5,829 5,350
Accumulated translation adjustment (195) (172)
Minimum pension liability adjustment (37) (37)
------- -------
7,467 7,033
Less: Treasury stock at cost* 3,904 3,872
------- -------
Total shareholders' equity 3,563 3,161
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,013 $13,145
======= =======
* Common stock: $2.50 par value, 950 million shares authorized, 391 million
shares issued at June 30, 1998 and at December 31, 1997. Treasury stock at
cost consists of approximately 69 million shares at June 30, 1998 and 68
million shares at December 31, 1997.
- ---------------------------------------------------------------------------
- -
See Notes to Financial Statements
4
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
First Half-Year
1998 1997
Cash flows from operating activities:
Net earnings $ 720 $ 517
Adjustments to reconcile above earnings to
net cash provided by operating activities,
excluding the effect of initial consolidation
of acquired companies:
Depreciation and amortization 405 390
Purchased research and development - 186
Benefit for deferred taxes (29) (68)
Gain on disposition of businesses (18) -
Gain on sale of equity investments (69) -
Gain on sale and retirement of properties (29) (16)
Increase in receivables (390) (197)
Increase in inventories (253) (193)
Decrease in liabilities excluding borrowings (332) (366)
Other items, net (94) (160)
------ ------
Total adjustments (809) (424)
------ ------
Net cash (used in) provided by
operating activities (89) 93
------ ------
Cash flows from investing activities:
Additions to properties (373) (678)
Disposition of businesses 20 -
Sale of equity investments 76 -
Proceeds from sale of properties
and investments 82 54
Acquisitions, net of cash acquired (240) (316)
Marketable securities - sales 7 10
Marketable securities - purchases (113) -
Cash flows related to sales of non-imaging
health businesses - (65)
------ ------
Net cash used in investing activities (541) (995)
------ ------
Cash flows from financing activities:
Net increase in borrowings
with original maturity of
90 days or less 747 540
Proceeds from other borrowings 578 699
Repayment of other borrowings (661) (865)
Dividends to shareholders (286) (280)
Exercise of employee stock options 45 82
Stock repurchases (101) (659)
------ ------
Net cash provided by (used in)
financing activities 322 (483)
------ ------
Effect of exchange rate changes on cash (4) (21)
------ ------
Net decrease in cash and cash equivalents (312) (1,406)
Cash and cash equivalents, beginning of year 728 1,777
------ ------
Cash and cash equivalents, end of quarter $ 416 $ 371
====== ======
The following transactions are not reflected in the Consolidated
Statement of Cash Flows:
First Half-Year
(in millions) 1998 1997
Liabilities assumed in acquisitions $205 $ 36
Liabilities assumed by purchaser
in sale of properties - 23
- -----------------------------------------------------------------
See Notes to Financial Statements
5
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The financial statements have been prepared by the Company in accordance
with the accounting policies stated in the 1997 Annual Report and should be
read in conjunction with the Notes to Financial Statements appearing
therein. In the opinion of the Company, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation have
been included in the financial statements. The statements are based in
part on estimates and have not been audited by independent accountants.
The annual statements will be audited by PricewaterhouseCoopers LLP.
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NOTE 2: COMMITMENTS AND CONTINGENCIES
The Company and its subsidiary companies are involved in lawsuits, claims,
investigations and proceedings, including product liability, commercial,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. There are no such matters
pending that the Company and its General Counsel expect to be material in
relation to the Company's business, financial position or results of
operations. Refer to Item 1, Legal Proceedings, on page 19.
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NOTE 3: ACQUISITIONS
On March 12, 1998, the Company acquired 51% of PictureVision Inc.'s stock.
PictureVision, the leading provider of digital imaging network services and
solutions at retail, will operate as a subsidiary of the Company. Kodak
will integrate the products and activities of its Picture Network, which
provides consumers with an Internet-based digital imaging network service,
with PictureVision's digital imaging service, PhotoNet. The acquisition
has been accounted for as a purchase and, accordingly, the results of
operations for the company have been included in the Consolidated Statement
of Earnings from the date of acquisition. The acquisition did not have a
material impact on the results of operations for the three- or six-month
periods ending June 30, 1998.
On March 24, 1998, the Company contributed $308 million to Kodak (China)
Company Limited, a newly formed company operating in China, in exchange for
80% of the outstanding shares of the company. The new company acquired the
manufacturing assets of Xiamen Fuda Photographic Materials Company, Ltd., a
Chinese domestic photographic enterprise. On April 2, 1998, the Company
contributed $32 million to Kodak (Wuxi) Company Limited, a newly formed
company, in exchange for 70% of the outstanding shares of the business.
Kodak (Wuxi) Company Limited acquired part of the manufacturing assets of
Wuxi Aermei Film and Chemical Corporation, a state-owned enterprise. The
acquisitions have been accounted for as purchases and, accordingly, the
results of operations for those companies have been included in the
Consolidated Statement of Earnings from the dates of acquisition. A
substantial portion of the purchase price was allocated to goodwill, which
is being amortized over a ten-year period. The acquisitions did not have a
material impact on the results of operations for the three- or six-month
periods ending June 30, 1998.
6
On August 3, 1998, Kodak and Imation Corp. announced that they have signed
an agreement for Kodak to acquire most of Imation's worldwide medical
imaging business. The business being acquired by Kodak generates
approximately $500 million in revenues annually. Approximately 1,600
Imation employees worldwide will transfer to Kodak. The transaction is
expected to close in the first quarter of 1999 pending approval of the U.S.
and European regulatory authorities.
Under the terms of the agreement, Kodak will pay Imation approximately $520
million in cash at closing and will acquire certain assets and assume
certain liabilities of Imation's medical imaging business, including
Imation's manufacturing facilities in White City, Oregon and Oakdale,
Minn., and all of the outstanding shares of Imation's Cemax-Icon(TM)
subsidiary in Fremont, Calif. Kodak has also agreed to reimburse Imation
for certain contingent amounts payable to the former shareholders of Cemax-
Icon.
Imation will retain its manufacturing facility in Ferrania, Italy, where
the company will manufacture x-ray and wet laser medical imaging film for
Kodak under a supply agreement for a minimum of two years. As part of the
cash payment, and in connection with the Ferrania supply agreement, Kodak
will pay Imation $20 million in cash at closing. The Company will also
make a payment of up to an additional $25 million no later than termination
of the supply agreement. Under a separate supply agreement, Kodak will
supply document imaging products to Imation out of the White City, Oregon
facility.
In addition, upon closing of the acquisition, or if the transaction does
not close due to the failure to receive applicable regulatory approvals,
the civil litigation concerning certain intellectual property disputes
between the companies in the United States and Italy will be settled. At
the same time, the related civil litigation between Kodak and Minnesota
Mining & Manufacturing Co. will also be settled.
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NOTE 4: DIVESTITURES
In June 1998, the Company entered into an agreement to sell all of its
shares of Fox Photo, Inc. to Wolf Camera. The sale is expected to be
completed by the end of the third quarter of 1998 for an amount
approximating the current carrying value of Fox Photo's net assets. Also
in June 1998, the Company sold part of its investment in Gretag Imaging
Group, a Swiss manufacturer of film processing equipment. The proceeds
from the sale were $72 million and resulted in a pre-tax gain of $66
million. In addition, during the second quarter, the Company sold Eastman
Software's Storage Management group and the BIS Document Management System
product and service business in the U.S., Canada and Latin America.
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NOTE 5: COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," as of January 1, 1998. The Company has
determined that at December 31, 1998 it will display comprehensive income
in the Consolidated Statement of Shareholders' Equity. The components of
comprehensive income were as follows:
7
Second Quarter First Half-Year
(in millions) 1998 1997 1998 1997
Net earnings $ 495 $ 368 $ 720 $ 517
Other comprehensive income (loss),
net of tax:
Unrealized holding gains (losses)
arising during the period 42 1 44 (4)
Translation adjustments (10) (31) (23) (136)
----- ----- ----- -----
Total other comprehensive income (loss) $ 32 $ (30) $ 21 $(140)
----- ----- ----- -----
Total comprehensive income $ 527 $ 338 $ 741 $ 377
===== ===== ===== =====
The unrealized holding gains and losses for both the quarter and year to
date include an unrealized pre-tax holding gain of $68 million ($45 million
after-tax) on the Company's remaining equity investment in Gretag. The
other unrealized holding gains and losses are not adjusted for income taxes
because they originate in subsidiaries which have net operating loss
carryforwards subject to a valuation allowance. The translation
adjustments are not currently adjusted for income taxes since they relate
to investments which are permanent in nature.
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NOTE 6: RECLASSIFICATIONS
Network Services business unit.
Effective January 1, 1998, the Network Services business unit, which
provides services enabling storage, transfer and printing of pictures using
the Internet, has been transferred from the Commercial Imaging segment to
the Consumer Imaging segment, and 1997 amounts have been reclassified to
conform to the 1998 presentation. The sales and losses from operations for
the Network Services business unit were as follows:
Second Quarter First Half-Year
(in millions) 1998 1997 1998 1997
Sales 1 - 1 -
(Loss) from operations (15) (5) (23) (10)
Consumer Imaging segment promotional expenses.
In the Consumer Imaging segment, certain U.S. promotional expenses which
are shown as sales price reductions in 1998 were shown as advertising and
promotion expenses in 1997. The amounts of those expenses in the second
quarter and first half of 1997 were $43 and $62 million, respectively.
When comparing 1998 to 1997, these amounts should be deducted from 1997
sales as well as advertising expense.
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8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except earnings per share)
Second Quarter First Half-Year
1998 1997 Change 1998 1997 Change
Sales $3,541 $3,853 - 8% $6,452 $6,986 - 8%
Net earnings 495 368 +35 720 517 +39
Basic earnings per share 1.53 1.12 +37 2.23 1.57 +42
Diluted earnings per share 1.51 1.11 +36 2.20 1.54 +43
1998
Sales for the first half-year were reduced by the transfer of a portion of
Kodak's graphics business into the Kodak Polychrome Graphics joint venture
as well as the negative impact of the strong dollar. Net earnings
increased, reflecting continuing progress in the Company's cost reduction
program, success in defending U.S. consumer film market share and a gain
from the sale of a portion of the Company's equity interest in Gretag
Imaging Group.
1997
The results for the first half-year included a pre-tax charge of $186
million ($.37 per diluted share) for in-process research and development
(R&D) associated with the acquisition of Wang Laboratories' software unit
on March 17, 1997. Excluding this charge, diluted earnings per share for
the first half-year would have been $1.91.
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Sales by Industry Segment
(in millions)
Second Quarter First Half-Year
1998 1997* Change 1998 1997* Change
Consumer Imaging
Inside the U.S. $ 972 $ 986 - 1% $1,573 $1,611 - 2%
Outside the U.S. 1,033 1,135 - 9 1,843 2,012 - 8
------ ------ --- ------ ------ ---
Total Consumer Imaging 2,005 2,121 - 5 3,416 3,623 - 6
------ ------ --- ------ ------ ---
Commercial Imaging
Inside the U.S. 741 816 - 9 1,451 1,592 - 9
Outside the U.S. 802 923 -13 1,600 1,785 -10
------ ------ --- ------ ------ ---
Total Commercial Imaging 1,543 1,739 -11 3,051 3,377 -10
------ ------ --- ------ ------ ---
Deduct Intersegment Sales (7) (7) (15) (14)
------ ------ --- ------ ------ ---
Total Sales $3,541 $3,853 - 8% $6,452 $6,986 - 8%
====== ====== === ====== ====== ===
* Restated to reflect the transfer of Network Services from the Commercial
Imaging segment to the Consumer Imaging segment (see Note 6).
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9
Earnings from Operations by Industry Segment
(in millions)
Second Quarter First Half-Year
1998 1997* Change 1998 1997* Change
Consumer Imaging $404 $348 +16% $ 498 $ 488 + 2%
Percent of Sales 20.1% 16.4% 14.6% 13.5%
Commercial Imaging $251 $202 +24% $ 507 $ 262 +94%
Percent of Sales 16.3% 11.6% 16.6% 7.8%
---- ---- --- ------ ------ ---
Total Earnings from Operations $655 $550 +19% $1,005 $ 750 +34%
==== ==== === ====== ====== ===
* Restated to reflect the transfer of Network Services from the Commercial
Imaging segment to the Consumer Imaging segment (see Note 6).
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COSTS AND EXPENSES
(in millions)
Second Quarter First Half-Year
1998 1997 Change 1998 1997 Change
Gross profit $1,713 $1,838 - 7% $3,039 $3,328 - 9%
Percent of Sales 48.4% 47.7% 47.1 47.6%
Selling, general and
administrative expenses $ 834 $1,021 -18% $1,587 $1,870 -15%
Percent of Sales 23.6% 26.5% 24.6% 26.8%
Research and development costs $ 224 $ 266 -16% $ 447 $ 523# -15%
Percent of Sales 6.3% 6.9% 6.9% 7.5%
# Excludes $186 million R&D charge associated with the purchase of Wang
Laboratories' software unit.
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1998 COMPARED WITH 1997
Second quarter
Second quarter 1998 sales decreased 8% compared with the second quarter of
1997, in part due to the transfer of a portion of the graphics business to
the Kodak Polychrome Graphics joint venture. Excluding graphics sales from
both years, and after removing from 1997 the reclassified Consumer Imaging
segment promotional expenses (see Note 6), sales decreased 5%, as higher
unit volumes were more than offset by the unfavorable effects of foreign
currency rate changes and lower effective selling prices. Sales in
emerging markets declined 14%, reflecting economic conditions, and sales of
broadly defined digital products declined 5%, primarily reflecting
portfolio changes.
After removing from 1997 the reclassified Consumer Imaging segment
promotional expenses (see Note 6), sales in the Consumer Imaging segment
decreased 4%, as higher unit volumes were more than offset by the
unfavorable effects of foreign currency rate changes and lower effective
selling prices. Sales inside the U.S. increased 3%, as higher unit volumes
were partially offset by lower effective selling prices for certain
products. Sales outside the U.S. decreased 9%, due primarily to the
unfavorable effects of foreign currency rate changes and lower effective
selling prices.
10
After removing from 1997 the reclassified Consumer Imaging segment
promotional expenses (see Note 6), worldwide film sales decreased 2%,
primarily due to the unfavorable effects of foreign currency rate changes.
U.S. film sales increased 3%, as volume gains were largely offset by lower
effective selling prices. Outside the U.S., film sales decreased 7%, as
higher effective unit prices were more than offset by lower unit volumes
and the unfavorable effects of foreign currency rate changes.
Worldwide color paper sales decreased 4%, as higher unit volumes were more
than offset by the unfavorable effects of foreign currency rate changes and
lower effective selling prices. U.S. paper sales increased 3%, as higher
unit volumes were partially offset by lower effective selling prices.
Outside the U.S., paper sales decreased 8%, as higher unit volumes were
more than offset by the unfavorable effects of foreign currency rate
changes and lower effective selling prices.
Sales in the Commercial Imaging segment decreased 11%, in part due to the
transfer of a portion of the graphics business to the Kodak Polychrome
Graphics joint venture. Excluding the graphics business from both years,
segment sales decreased 6%, due primarily to the unfavorable effects of
foreign currency rate changes and lower effective selling prices. In the
U.S., sales decreased 3%, due to lower effective selling prices and lower
unit volumes. Outside the U.S., sales decreased 9%, due primarily to the
unfavorable effects of foreign currency rate changes and lower effective
selling prices.
Earnings from operations for the Company increased 19%, reflecting
continuing progress in the Company's cost reduction program and success in
defending U.S. consumer film market share. Improved expense management in
manufacturing, SG&A and R&D allowed the Company to compete successfully in
the U.S. market while improving operating margins. Earnings were adversely
affected by the unfavorable effects of foreign currency rate changes and
lower effective selling prices. Losses in the digital products portfolio,
included in both the Commercial Imaging and Consumer Imaging segments, were
$64 million for the quarter compared with $102 million a year ago.
After adjusting 1997 for the reclassified Consumer Imaging segment
promotional expenses (see Note 6), selling, general and administrative
(SG&A) expenses decreased 15%, or from 25.7% of sales to 23.6% of sales.
Excluding advertising expenses, the decrease was 16%, or from 19.6% of
sales to 17.6% of sales. R&D expenses decreased 16%, or from 7.0% of sales
to 6.3% of sales.
Earnings from operations in the Consumer Imaging segment increased 16%,
driven by cost reductions in manufacturing, SG&A and R&D, and higher unit
volumes; however, earnings from operations were adversely affected by the
unfavorable effects of foreign currency rate changes and lower effective
selling prices.
In the Consumer Imaging segment, after adjusting 1997 for the reclassified
Consumer Imaging segment promotional expenses (see Note 6), SG&A expenses
decreased 8%, or from 27.4% of sales to 26.1% of sales. Excluding
advertising expenses, the decrease was 8%, or from 18.1% of sales to 17.3%
of sales. R&D expenses decreased 10%, or from 5.0% of sales to 4.7% of
sales.
11
Earnings from operations in the Commercial Imaging segment increased 24%,
due to cost reductions in manufacturing, SG&A and R&D; however, earnings
from operations were adversely affected by lower effective selling prices
and the unfavorable effects of foreign currency rate changes. Document
Imaging, Health Imaging and Digital & Applied Imaging reported improved
earnings performance.
In the Commercial Imaging segment, SG&A expenses decreased 24%, or from
23.5% of sales to 20.1% of sales. Excluding advertising expenses, the
decrease was 25%, or from 21.3% of sales to 18.0% of sales. R&D expenses
decreased 20%, or from 9.4% of sales to 8.4% of sales.
For the second quarter of 1998, earnings from equity interests and other
revenues increased significantly due to a pre-tax gain of $66 million ($.13
per diluted share) on the sale of a portion of the Company's equity
interest in Gretag Imaging Group, as well as gains from sales of real
estate and the divestiture of some relatively small businesses. Interest
expense was higher due to larger average levels of borrowings. Other costs
increased primarily because of higher foreign exchange losses. The
effective tax rate was 34% in the second quarter of both 1998 and 1997.
Year to date
For the first half of 1998, sales decreased 8% compared with the first half
of 1997, in part due to the transfer of a portion of the graphics business
to the Kodak Polychrome Graphics joint venture. Excluding graphics sales
from both years, and after removing from 1997 the reclassified Consumer
Imaging segment promotional expenses (see Note 6), sales decreased 5%, as
higher unit volumes were more than offset by the unfavorable effects of
foreign currency rate changes and lower effective selling prices.
After removing from 1997 the reclassified Consumer Imaging segment
promotional expenses (see Note 6), sales in the Consumer Imaging segment
decreased 4%, as higher unit volumes were more than offset by the
unfavorable effects of foreign currency rate changes and lower effective
selling prices. Sales inside the U.S. increased 2%, as higher unit volumes
were partially offset by lower effective selling prices for certain
products. Sales outside the U.S. decreased 8%, due to the unfavorable
effects of foreign currency rate changes.
After removing from 1997 the reclassified Consumer Imaging segment
promotional expenses (see Note 6), worldwide film sales decreased 5%, as
higher effective selling prices were more than offset by the unfavorable
effects of foreign currency rate changes and lower unit volumes. U.S. film
sales decreased 4%, due primarily to lower effective selling prices.
Outside the U.S., film sales decreased 6%, as higher effective selling
prices were more than offset by the unfavorable effects of foreign currency
rate changes and lower unit volumes.
12
Worldwide color paper sales decreased 5%, as higher unit volumes were more
than offset by the unfavorable effects of foreign currency rate changes and
lower effective selling prices. U.S. paper sales were level, while outside
the U.S., paper sales decreased 7%, as higher unit volumes were more than
offset by the unfavorable effects of foreign currency rate changes and
lower effective selling prices.
Sales in the Commercial Imaging segment decreased 10%, in part due to the
transfer of a portion of the graphics business to the Kodak Polychrome
Graphics joint venture. Excluding the graphics business from both years,
segment sales decreased 5%, primarily due to the unfavorable effects of
foreign currency rate changes and lower effective selling prices. In the
U.S., sales decreased 5%, due to lower unit volumes and lower effective
selling prices. Outside the U.S., sales decreased 6%, as higher unit
volumes were more than offset by the unfavorable effects of foreign
currency rate changes and lower effective selling prices.
Earnings from operations for the Company increased 34% (or 7%, excluding
from the first half of 1997 a pre-tax charge of $186 million for in-process
R&D associated with the acquisition of Wang Laboratories' software unit),
reflecting continuing progress in the Company's cost reduction program and
success in defending U.S. consumer film market share. Improved expense
management in manufacturing, SG&A and R&D allowed the Company to compete
successfully in the U.S. market while improving operating margins.
Earnings were adversely affected by the unfavorable effects of foreign
currency rate changes and lower effective selling prices. Losses in the
digital products portfolio, included in both the Commercial Imaging and
Consumer Imaging segments, were $119 million for the first half compared
with $151 million a year ago.
After adjusting 1997 for the reclassified Consumer Imaging segment
promotional expenses (see Note 6), SG&A expenses decreased 12%, or from
26.1% of sales to 24.6% of sales. Excluding advertising expenses, the
decrease was 16%, or from 20.9% of sales to 18.9% of sales. Excluding the
Wang charge, R&D expenses decreased 15%, or from 7.6% of sales to 6.9% of
sales.
Earnings from operations in the Consumer Imaging segment increased 2%,
as cost reductions in manufacturing, SG&A and R&D, and higher unit volumes,
were mostly offset by the unfavorable effects of foreign currency rate
changes and lower effective selling prices.
In the Consumer Imaging segment, after removing from 1997 the reclassified
Consumer Imaging segment promotional expenses (see Note 6), SG&A expenses
decreased 6%, or from 29.0% of sales to 28.5% of sales. Excluding
advertising expenses, the decrease was 9%, or from 20.8% of sales to 19.7%
of sales. R&D expenses decreased 9%, or from 5.8% of sales to 5.5% of
sales.
13
Earnings from operations in the Commercial Imaging segment increased 94%
(or 13%, excluding from the first half of 1997 a pre-tax charge of $186
million for in-process R&D associated with the acquisition of Wang
Laboratories' software unit), as cost reductions in manufacturing, SG&A and
R&D were mostly offset by the unfavorable effects of foreign currency rate
changes and lower effective selling prices. Document Imaging, Digital &
Applied Imaging and Health Imaging reported improved earnings performance.
In the Commercial Imaging segment, SG&A expenses decreased 21%, or from
22.9% of sales to 20.1% of sales. Excluding advertising expenses, the
decrease was 22%, or from 21.0% of sales to 18.0% of sales. Excluding the
Wang charge, R&D expenses decreased 18%, or from 9.4% of sales to 8.5% of
sales.
For the first half of 1998, earnings from equity interests and other
revenues increased significantly due to a pre-tax gain of $66 million ($.13
per diluted share) on the sale of a portion of the Company's equity
interest in Gretag Imaging Group, as well as gains from sales of real
estate and the divestiture of some relatively small businesses. Other
costs increased primarily because of an $18 million (pre-tax) litigation
settlement. The effective tax rate was 34% in the first half of both 1998
and 1997.
From the beginning of the fourth quarter of 1997 through June 30, 1998,
approximately 7,600 employees have left the Company under restructuring
programs. This includes 2,200 employees separated by the end of 1997,
3,400 separated during the first quarter of 1998, and 2,000 separated
during the second quarter of 1998. Kodak employment as of the end of the
second quarter of 1998 is slightly more than 91,000, level with the end of
the first quarter, due to planned seasonal hiring by Qualex and some
additions in China operations.
Since the inception of its cost reduction program, the Company has achieved
net savings of $350 million. This figure does not include the benefit of
divestitures or the effects of changes in exchange rates and is net of
increased investments. Many of the anticipated future headcount reductions
are associated with portfolio actions which will generate a lower rate of
savings.
As described in Note 3, Acquisitions, the Company contributed to two newly
formed companies operating in China. Under terms of agreements announced
on March 23, 1998, the Company plans to invest more than $1 billion in
China over the next several years. The investment will be used to upgrade
technology, improve manufacturing capacity and expand distribution and
marketing capability needed to build and support a strong domestic Chinese
imaging industry.
As described in Note 4, Divestitures, the Company continued to reposition
non-strategic or value-consuming businesses during the quarter. The
Company also announced it will discontinue the manufacture of Kodak Gold
126 film.
14
On April 30, 1998, the Company and Intel Corporation announced a series of
agreements that cover joint development efforts in digital imaging products
and platforms, a broad patent cross-license, upgrading of Kodak's Qualex
photofinishing laboratories with Intel architecture and new scanning
equipment, and collaborative consumer-oriented marketing efforts which
could amount to $150 million (each company spending half) over a three-year
period.
On May 19, 1998, the Company and America Online, Inc. (AOL) announced an
alliance to offer AOL members an exclusive new online service called
"You've Got Pictures!"(sm). The service entails consumers taking pictures
with traditional cameras and film followed by photofinishers developing the
film and then scanning and uploading pictures to AOL via Kodak PhotoNet
online. Using an integrated feature of their AOL account, AOL members can
view their pictures, organize them into an AOL Picture Album and allow
others to access their images.
In 1996, the Company established a formal global program office to assess
the impact of the Year 2000 issue on the software and hardware utilized in
the Company's internal operations and included in its product offerings to
customers. The assessment addresses software applications, systems
software, information technology (IT) infrastructure, embedded
manufacturing control technology, and products and services. The program
has strong executive sponsorship, with frequent updates to senior
management, and has been reviewed by an independent third party.
The project phases include: inventorying affected technology and assessing
impact of the Year 2000 issue; developing solution plans; modification;
testing and certification; implementation; and developing contingency
plans. All components of software and hardware of the Company are
presently in various phases. The Company expects to have mission-critical
IT systems tested and installed by the end of 1998, and manufacturing
control systems Year 2000 compliant by mid-year 1999. The Company also
expects that actively supported products and services, which are presently
in the first five phases, will be compliant by the end of August, 1999.
The product commercialization process has been modified so that it will
produce compliant products.
The Company relies on third-party suppliers for many systems, products and
services including telecommunications and data center support. The Company
will be adversely impacted if these suppliers do not make necessary changes
to their own systems and products successfully and in a timely manner. The
Company has a formalized comprehensive supplier compliance program in
place. As a third-party supplier to other companies, the Company has
posted its own product compliance plan on its Internet web site
(www.kodak.com/go/year2000).
15
Costs of software and hardware remediation were $13 million in 1997, and
are estimated to be $24 million, $10 million and $6 million in 1998, 1999
and 2000, respectively. These costs, almost entirely for software, are not
incremental, as some normal development and maintenance work has been
postponed. Furthermore, some non-compliant systems will be eliminated as
the Company installs Year 2000 compliant ERP/SAP software in connection
with its enterprise resource planning project. Total costs of product
modification are estimated to be approximately $20 million. This amount
was accrued in 1997.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. Nevertheless, since it is
not possible to anticipate all possible future outcomes, especially when
third parties are involved, there could be circumstances in which the
Company would be unable to take customer orders, manufacture and ship
products, invoice customers or collect payments. The Company could be
subject to litigation for product failure, for example, equipment shutdown
or failure to properly date business or medical records. The amount of
potential liability and lost revenue has not been estimated.
The Company has contingency plans for some mission-critical applications
and is working on plans for others. For example, plans for the U.S.
payroll system have been in place since January, 1998, while plans for
sensitized goods manufacturing will be completed by year-end 1998.
Contingency plans involve, among other actions, manual workarounds,
increased inventories and extra staffing.
OTHER
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," replacing SFAS
No. 14 and its amendments. This standard requires enterprises to report
certain information about their operating segments in a complete set of
financial statements to shareholders; to report certain enterprise-wide
information about products and services, activities in different geographic
areas, and reliance on major customers; and to disclose certain segment
information in their interim financial statements. The basis for
determining an enterprise's operating segments is the manner in which
financial information is used internally by the enterprise's chief
operating decision maker. The Company will adopt this Statement in its
financial statements for the year ending December 31, 1998. The Company
has not yet determined how the "management approach" will impact existing
segment disclosures, if at all.
16
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that an
entity recognize all derivatives as either assets or liabilities and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. This Statement must be
adopted by the Company in the year 2000, but may be adopted in any earlier
fiscal quarter, and is not to be applied retroactively. If the Company had
adopted SFAS No. 133 as of July 1, 1998, the impact would not have been
material to its results of operations or financial position. The Company
has not yet determined when it will adopt this Statement.
- -----------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1998, the Company repurchased $101 million
of shares under the $2 billion repurchase program initiated in 1996,
bringing to $1.6 billion the total cost of treasury shares purchased under
that program. The Company expects to complete the program early in 1999.
As described in Note 3, Acquisitions, the Company will pay $520 million in
cash to acquire most of Imation Corp.'s worldwide medical imaging business.
This cash will be obtained from internal operations and, if needed, from
the capital markets. The Company expects the cost of the acquisition to
have no significant impact on its debt-to-capital ratio.
Net cash used in operating activities for the first half of 1998 was $89
million, as net earnings of $720 million, which included non-cash expenses
for depreciation and amortization of $405 million, were offset by a $390
million increase in receivables, decreases in liabilities (excluding
borrowings) of $332 million and a $253 million increase in inventories.
Net cash used in investing activities of $541 million for the first half of
1998 was due primarily to additions to properties of $373 million,
acquisitions (net of cash acquired) of $240 million and purchases of
marketable securities of $113 million. Net cash provided by financing
activities of $322 million for the first half of 1998 was primarily due to
net increases in borrowings of $664 million, offset by $286 million of
dividend payments and $101 million of stock repurchases.
During the second quarter of 1998, a cash dividend of $143 million (44
cents per share) was declared on the Company's common stock, versus $144
million (44 cents per share) a year ago. Total cash dividends declared for
the year-to-date periods of 1998 and 1997 amounted to $285 million (88
cents per share) and $291 million (88 cents per share), respectively.
Cash, cash equivalents and marketable securities were $546 million at the
end of the second quarter, compared with $752 million at year-end 1997.
Net working capital at the end of the quarter was $132 million, compared
with $298 million at year-end 1997. Both decreases are primarily
attributable to the Company's investments in China and restructuring
payments.
17
Capital additions for the second quarter of 1998 were $220 million compared
with $369 million for the second quarter of 1997. For the first half of
1998, capital additions were $373 million versus $678 million a year ago.
- -----------------------------------------------------------------------------
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 Private Securities
Litigation Reform Act of 1995. Forward-looking statements in this 10-Q
relate to the Company's Year 2000 compliance efforts, including
expectations about compliance timetables and costs.
Actual results may differ from those expressed or implied in forward-
looking statements. With respect to any forward-looking statements
contained in this report, the Company believes that its results are subject
to a number of risk factors, including: the ability of the Company to
identify and address successfully Year 2000 issues in a timely manner, and
at costs that are reasonably in line with projections; and the ability of
the Company's vendors to identify and address successfully their own Year
2000 issues in a timely manner.
Any forward-looking statements in this report should be evaluated in light
of these important risk factors.
- -----------------------------------------------------------------------------
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing activities,
is exposed to changes in foreign currency exchange rates, commodity prices
and interest rates which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs
associated with such activities, the Company manages exposures to changes
in commodity prices, interest rates and foreign currency exchange rates
through its regular operating and financing activities.
Foreign currency forward contracts are used to hedge certain firm
commitments and the currency risk inherent in the deposit-taking and
lending activities of the Company's International Treasury Center. Option
and forward contracts are used to mitigate the Company's risk to
fluctuating commodity prices. The Company's exposure to changes in
interest rates results from its investing and borrowing activities used to
meet its liquidity needs. Long-term debt is generally used to finance long-
term investments, while short-term debt is used to meet working capital
requirements. Derivative instruments are not presently used to adjust the
Company's interest rate risk profile. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does
it utilize leveraged financial instruments.
18
The majority of foreign currency forward contracts are denominated in
Australian, British, French, German, Irish and Spanish currencies. The
magnitude and nature of such hedging activities are explained further in
Note 11, Financial Instruments, in the Company's 1997 Annual Report on Form
10-K. If foreign currency exchange rates of currencies sold increased
10%, the Company would incur a $104 million loss on foreign currency
forward contracts outstanding at June 30, 1998. Such losses would be
substantially offset by gains from the revaluation or settlement of the
underlying positions hedged.
The Company has used silver option and forward contracts to minimize its
exposure to increases in silver price in 1998. As of June 30, 1998, the
Company had hedged almost all of its planned silver requirements for 1998,
and had open forward contracts. Based on broker-quoted termination values,
if the price of silver decreased 10% from $5.36 per troy ounce at June 30,
1998, the fair value of silver forward contracts would be reduced by $16
million. Such losses in fair value, if realized, would be offset by lower
costs of silver-containing products manufactured during 1998.
The Company is exposed to interest rate risk primarily through its
borrowing activities and less so through investments in marketable
securities. The Company utilizes U.S. dollar-denominated commercial paper
and borrowings as well as foreign currency-denominated borrowings to fund
its working capital and investment needs. The majority of short- and long-
term borrowings and marketable securities are in fixed-rate instruments.
There is inherent roll-over risk for borrowings and marketable securities
as they mature and are renewed at current market rates. The extent of this
risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements. Using a yield-
to-maturity analysis, if interest rates increased 10% (about 55 basis
points) with the June 30, 1998 level of debt and marketable securities,
there would be decreases in fair value of marketable securities, short-term
and long-term borrowings of $1 million, $1 million and $8 million,
respectively.
- -----------------------------------------------------------------------------
19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 1987, the Company was sued in federal district court in San
Francisco by a number of independent service organizations who alleged
violations of Sections 1 and 2 of the Sherman Act and of various state
statutes in the sale by the Company of repair parts for its copier and
micrographics equipment (Image Technical Service, Inc. et al v. Eastman
Kodak Company, "ITS"). The complaint sought unspecified compensatory and
punitive damages. Trial began on June 19, 1995 and concluded on September
18, 1995 with a jury verdict for plaintiffs of $23,948,300 ($71,844,900
after trebling). The Company appealed the jury's verdict, and on August
26, 1997 the 9th Circuit Court of Appeals rendered its decision affirming
in part, reversing in part, and reversing and remanding on the issue of
used equipment damages. The court affirmed the jury's liability rulings,
but reduced damages (after trebling) from $71,844,900 to $35,818,200, and
narrowed the scope of the injunction under which the Company is required to
make parts available. On April 27, 1998, the Supreme Court denied the
Company's petition for Supreme Court review, effectively concluding all
aspects of the case except plaintiffs' used equipment claim. The Company
took a third quarter 1997 pre-tax charge of $46,000,000.
Two cases that raise essentially the same antitrust issues as ITS are
pending in federal district court in San Francisco: Nationwide, et al v.
Eastman Kodak Company, filed March 10, 1995,and A-1 Copy Center, et al v.
Eastman Kodak Company, filed December 13, 1993. A-1 is a consolidated
class action. The complaints in both cases seek unspecified compensatory
and punitive damages. The Company is defending these matters vigorously.
A fourth repair parts case, Broward Microfilm, Inc. v. Eastman Kodak
Company, a purported national class action which was filed February 27,
1996 in federal district court in Miami, was dismissed without prejudice on
May 13, 1998.
On July 7, 1998, the Company received a proposed administrative Consent
Order seeking unspecified penalties and a compliance schedule from the New
York State Department of Environmental Conservation, to address alleged
violations of the Environmental Conservation Law and regulations at the
Company's Kodak Park manufacturing complex in Rochester, New York. The
violations alleged are primarily comprised of air, water, and hazardous
substance releases and incidents, largely accidental, that have been
reported by the Company to the Agency over the past five years. The
Company has been advised that the penalty sought by the Agency is in the
$750,000 to $1,000,000 range.
The entire matter is subject to negotiation, which can be expected to
result in an administrative settlement that will include a penalty and a
compliance schedule for implementation of maintenance, upgrade, and
reporting activities.
20
The Company has been designated as a potentially responsible party ("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
approximately nineteen active and twenty-five inactive Superfund sites.
With respect to each of these sites, the Company's actual or potential
allocated share of responsibility is small. Furthermore, numerous other
PRPs have similarly been designated at these sites and, although the law
imposes joint and several liability on PRPs, as a practical matter, 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 not
expected to be material to the Company's financial position or results of
operations.
21
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Shareholders of Eastman Kodak Company was held
on May 13.
A total of 265,423,194 of the Company's shares were present or represented
by proxy at the meeting. This represented more than 82% of the Company's
shares outstanding.
The individuals named below were elected to three-year terms as Class II
Directors:
Name Votes Received Votes Withheld
Alice F. Emerson 261,485,783 3,937,411
Harry L. Kavetas 261,636,284 3,786,910
Paul H. O'Neill 261,640,788 3,782,406
Laura D'Andrea Tyson 261,267,501 4,155,693
The individuals named below were elected to a one-year term as Class III
Directors:
Name Votes Received Votes Withheld
Daniel A. Carp 261,577,218 3,845,976
Durk I. Jager 261,526,436 3,896,758
The individual named below was elected to a two-year term as Class I
Director:
Name Votes Received Votes Withheld
Delano E. Lewis 261,345,956 4,077,238
Richard S. Braddock, Richard A. Zimmerman, Martha Layne Collins, George M.
C. Fisher, Paul E. Gray and John J. Phelan, Jr. all continue as directors
of the Company.
The election of PricewaterhouseCoopers LLP as independent accountants was
ratified, with 263,863,584 shares voting for, 714,992 shares voting
against, and 844,618 shares abstaining.
The management proposal to amend the Wage Dividend Plan was approved, with
256,332,031 shares voting for, 6,704,249 shares voting against, 2,386,912
shares abstaining, and 2 non-votes.
The management proposal to amend the Management Variable Compensation Plan
was approved, with 254,697,423 shares voting for, 7,903,642 shares voting
against, 2,822,127 shares abstaining, and 2 non-votes.
The shareholder proposal concerning the request for an executive
compensation review was defeated, with 20,795,142 shares voting for,
186,493,541 shares voting against, 7,966,719 shares abstaining, and
50,167,792 non-votes.
22
The shareholder proposal concerning annual election of directors received a
majority of the votes cast, with 126,903,259 shares voting for, 50,829,459
shares voting against, 37,522,679 shares abstaining, and 50,167,797 non-
votes. Although this shareholder proposal received a majority of the votes
cast, implementation of annual election of directors requires an amendment
to the Company's Certificate of Incorporation, which requires a favorable
vote of 80% of all shares outstanding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and financial statement schedules required as part of this
report are listed in the index appearing on page 24.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed for the quarter
ended June 30, 1998.
23
SIGNATURES
Pursuant to the requirements 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)
Date August 10, 1998
E. Mark Rajkowski
Controller
24
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit Page No.
(10) F. Eastman Kodak Company 1985 Stock Option Plan, as
amended effective April 16, 1998.
(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 March 31, 1997, Exhibit 10.) 25
(10) G. Eastman Kodak Company 1990 Omnibus Long-Term Compensation
Plan, as amended effective April 16, 1998.
(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 March 31, 1997, Exhibit 10.) 26
(10) H. Eastman Kodak Company Management Variable Compensation
Plan, as amended effective May 13, 1998.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997, and the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998, Exhibit 10.) 27
(10) I. Eastman Kodak Company 1995 Omnibus Long-Term Compensation
Plan, as amended effective April 16, 1998.
(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, and the Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998, Exhibit 10.) 29
(10) O. Eastman Kodak Company 1997 Stock Option Plan, as amended
effective May 1, 1998.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997, Exhibit 10.) 30
(27) Financial Data Schedule - Submitted with the EDGAR
filing as a second document to this Form 10-Q.
25
Exhibit (10) F.
EASTMAN KODAK COMPANY 1985 STOCK OPTION PLAN
Section 7(a)(v)(B)(1) is amended in its entirety, effective April 16, 1998,
to read as follows:
Permissible Transferors. The only Participants permitted to transfer
their nonqualified stock options are those Participants who, on the
date of the transfer of their nonqualified stock option, are either
in wage grade 56 or above, or the equivalent thereof, or a corporate
officer of the Company.
26
Exhibit (10) G.
EASTMAN KODAK COMPANY 1990 OMNIBUS LONG-TERM COMPENSATION PLAN
Section 17(b)(1) is amended in its entirety, effective April 16, 1998,
to read as follows:
Permissible Transferors. The only Participants permitted to transfer
their nonqualified stock options are those Participants who, on the
date of the transfer of their nonqualified stock option, are either
in wage grade 56 or above, or the equivalent thereof, or a corporate
officer of the Company.
27
Exhibit (10) H.
MANAGEMENT VARIABLE COMPENSATION PLAN
Section 2.28 is amended in its entirety to read as follows:
"Performance Criteria" means the stated business criterion or criteria
upon which the Performance Goals for a Performance Period are based as
required pursuant to Proposed Treasury Regulation Section 1.162-
27(e)(4)(iii). For purposes of the Plan, RONA and Economic Profit/EVA
shall be the Performance Criteria. Either or both of these criterion
shall be used to establish the Performance Goals.
Section 2.30 is amended to delete the term "Performance Criterion" and
insert in its place the term "Performance Criteria."
Article 2, entitled "Definitions," is amended to add the following
definitions and the existing sections of Article 2 are renumbered to
accommodate these changes:
"Economic Profit" means, for a Performance Period, the Net Operating
Profit After Tax that remains after subtracting the Capital Charge
for such Performance Period. Economic Profit may be expressed as
follows: Economic Profit = Net Operating Profit After Tax - Capital
Charge. Economic Profit may be either positive or negative.
"Economic Value Added or EVA" means Economic Profit for the current
year minus Economic Profit for the immediately prior year.
"Capital Charge" means, for a Performance Period, the amount obtained
by multiplying the Cost of Capital for the Performance Period by the
Operating Net Assets for the Performance Period.
"Cost of Capital" means, for a Performance Period, the estimated
weighted average of the Company's cost of equity and cost of debt
for the Performance Period as determined by the Committee in its sole
and absolute discretion. The Committee will determine the Cost of
Capital for a Performance Period within the first 90 days of the
Performance Period.
28
"Operating Net Assets" means, for a Performance Period, the net
investment used in the operations of the Company. Operating Net Assets
is calculated from the Company's audited consolidated financial
statements as being total assets minus non-interest-bearing liabilities
adjusted for LIFO inventories, postemployment benefits other than
pensions (OPEB) and Wang in-process R&D.
"Net Operating Profit After Tax" means, for a Performance Period, the
after-tax operating earnings of the Company for the Performance Period
adjusted for interest expense and Wang in-process R&D.
29
Exhibit (10) I.
EASTMAN KODAK COMPANY 1995 OMNIBUS LONG-TERM COMPENSATION PLAN
Section 19.1(b)(1) is amended in its entirety, effective April 16, 1998,
to read as follows:
Permissible Transferors. The only Participants permitted to transfer
their nonqualified stock options are those Participants who, on the
date of the transfer of their nonqualified stock option, are either
in wage grade 56 or above, or the equivalent thereof, or a corporate
officer of Kodak.
30
Exhibit (10) O.
EASTMAN KODAK COMPANY 1997 STOCK OPTION PLAN
Section 1.2, entitled "Term," is amended in its entirety, effective
December 31, 1997, to read as follows:
The Plan shall become effective February 13, 1997. Awards shall not
be granted pursuant to the Plan after December 31, 1998.
Section 6.1, entitled "Available Shares," is amended in its entirety,
effective May 1, 1998, to read as follows:
The maximum number of shares of Common Stock, $2.50 par value per
share, of Kodak which shall be available for grant of Awards under
the Plan during its term shall not exceed 2,255,000. (Such amount
shall be subject to adjustment as provided in Section 6.2.) Any shares
of Common Stock related to Awards which terminate by expiration,
forfeiture, cancellation, or otherwise without the issuance of such
shares, are settled in cash in lieu of Common Stock, or are exchanged
with the Committee's permission for Awards not involving Common Stock,
shall not be available again for grant under the Plan. The shares of
Common Stock available for issuance under the Plan shall be treasury
shares.
5
0000031235
EASTMAN KODAK COMPANY
1,000,000
U.S. DOLLARS
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
1.0
416
130
2644
119
1488
5875
12924
7457
14013
5743
459
0
0
978
2585
14013
6452
6665
3413
3413
2097
0
64
1091
371
720
0
0
0
720
2.23
2.20
