ekform10q2qrt2013.htm

UNITED STATES
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, 2013
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:     585-724-4000
_____________
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 by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.

Yes   [X]             No    [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    [  ]      Accelerated filer    [X]      Non-accelerated filer    [  ]       Smaller reporting company   [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    [   ]            No    [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
Title of each Class
Number of Shares Outstanding at
August 2, 2013
 
Common Stock, $2.50 par value
272,782,187
 
 

 
 

 

                                    Eastman Kodak Company
Form 10-Q
June 30, 2013

Table of Contents


   
 
 
Part I. - Financial Information
  Page
     
Item 1.
Financial Statements
3
 
Consolidated Statement of Operations (Unaudited)
3
 
Consolidated Statement of Comprehensive Income (Loss) (Unaudited)
4
 
Consolidated Statement of Retained Earnings (Unaudited)
5
 
Consolidated Statement of Financial Position (Unaudited)
6
 
Consolidated Statement of Cash Flows (Unaudited)
7
 
Notes to Financial Statements (Unaudited)
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
47
 
Liquidity and Capital Resources
58
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
65
Item 4.
Controls and Procedures
65
     
 
Part II. - Other Information
 
     
Item 1.
Legal Proceedings
63
Item 1A.
Risk Factors
64
Item 6.
Exhibits
65
     
 
Signature
66
 
Index to Exhibits
67
     
     

 
2

 

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

(in millions, except per share data)
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
                    
 
2013
   
2012
   
2013
   
2012
 
                         
Net sales
                       
   Products
  $ 477     $ 586     $ 932     $ 1,149  
   Services
    105       111       210       226  
   Licensing & royalties (Note 10)
    1       2       35       (56 )
Total net sales
  $ 583     $ 699     $ 1,177     $ 1,319  
Cost of sales
                               
   Products
  $ 368     $ 509     $ 729     $ 1,015  
   Services
    82       89       166       190  
Total cost of sales
  $ 450     $ 598     $ 895     $ 1,205  
   Gross profit
  $ 133     $ 101     $ 282     $ 114  
Selling, general and administrative expenses
    115       158       233       324  
Research and development costs
    25       42       50       94  
Restructuring costs and other
    29       4       40       83  
Other operating (income) expenses, net
    (1 )     1       (495 )     -  
(Loss) earnings from continuing operations before interest expense, other income (charges), net, reorganization items, net and income taxes
    (35 )     (104 )     454       (387 )
Interest expense (contractual interest for the three and six months ended June 30, 2013 of $64 and $106, respectively, and for the three and six months ended June 30, 2012 of $52 and $98, respectively)
    47       36       72       67  
Loss on early extinguishment of debt
    -       -       6       7  
Other income (charges), net
    (3 )     (6 )     (10 )     (3 )
Reorganization items, net
    72       160       192       248  
(Loss) earnings from continuing operations before income taxes
    (157 )     (306 )     174       (712 )
Provision (benefit) for income taxes
    51       (9 )     58       (117 )
(Loss) earnings from continuing operations
    (208 )     (297 )     116       (595 )
Loss from discontinued operations, net of income taxes
    (16 )     (2 )     (57 )     (70 )
NET (LOSS) EARNINGS ATTRIBUTABLE TO EASTMAN KODAK COMPANY
  $ (224 )   $ (299 )   $ 59     $ (665 )
Basic and diluted net (loss) earnings per share attributable to Eastman Kodak Company common shareholders:
                               
  Continuing operations
  $ (0.76 )   $ (1.09 )   $ 0.43     $ (2.19 )
  Discontinued operations
    (0.06 )     (0.01 )     (0.21 )     (0.26 )
  Total
  $ (0.82 )   $ (1.10 )   $ 0.22     $ (2.45 )
                                 
Number of common shares used in basic and diluted net (loss) earnings per share
    272.8       271.9       272.7       271.5  
                                 

The accompanying notes are an integral part of these consolidated financial statements.
 

 
3

 

 

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
(in millions)
 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
NET (LOSS) EARNINGS ATTRIBUTABLE TO EASTMAN KODAK COMPANY
  $ (224 )   $ (299 )   $ 59     $ (665 )
Other comprehensive income (loss), net of tax:
                               
Realized and unrealized gains from hedging activity, net of tax of $0 and $1 for the three months ended June 30, 2013 and 2012, respectively, and $0 and $2 for the six months ended June 30, 2013 and 2012, respectively
    -       2       -       4  
Unrealized gain from investment, net of tax of $0 for the three months ended June 30, 2012
    -       (1 )     -       -  
Currency translation adjustments
    (16 )     11       15       (4 )
Pension and other postretirement benefit plan obligation activity, net of tax of $23 and $17 for the three months ended June 30, 2013 and 2012, respectively, and $30 and $32 for the six months ended June 30, 2013 and 2012, respectively
    407       33       448       61  
Total comprehensive income (loss), net of tax
  $ 167     $ (254 )   $ 522     $ (604 )
                                 


The accompanying notes are an integral part of these consolidated financial statements.


 
4

 

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)

(in millions)
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Retained earnings at beginning of period
  $ 2,852     $ 3,645     $ 2,600     $ 4,071  
Net (loss) earnings
    (224 )     (299 )     59       (665 )
Loss from issuance of treasury stock
    -       -       (31 )     (60 )
Retained earnings at end of period
  $ 2,628     $ 3,346     $ 2,628     $ 3,346  
 
                               

 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
 
5

 

 
EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

   
As of
   
As of
 
(in millions)
 
June 30,
   
December 31,
 
                                                                             
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 1,015     $ 1,135  
Receivables, net
    547       633  
Inventories, net
    427       420  
Other current assets
    86       99  
Assets held for sale
    527       556  
 Total current assets
    2,602       2,843  
Property, plant and equipment, net of accumulated depreciation of $3,487 and $3,754, respectively
    526       607  
Goodwill
    56       132  
Deferred income taxes
    431       470  
Other long-term assets
    200       234  
 TOTAL ASSETS
  $ 3,815     $ 4,286  
LIABILITIES AND EQUITY (DEFICIT)
               
Current Liabilities
               
Accounts payable, trade
  $ 334     $ 355  
Short-term borrowings and current portion of long-term debt
    871       699  
Other current liabilities
    532       836  
Liabilities held for sale
    1,650       1,759  
 Total current liabilities
    3,387       3,649  
Long-term debt, net of current portion
    370       740  
Pension and other postretirement liabilities
    431       506  
Other long-term liabilities
    309       360  
Liabilities subject to compromise
    2,471       2,708  
Total Liabilities
    6,968       7,963  
                 
Commitments and Contingencies (Note 11)
               
                 
Equity (Deficit)
               
Common stock, $2.50 par value
    978       978  
Additional paid in capital
    1,104       1,105  
Retained earnings
    2,628       2,600  
Accumulated other comprehensive loss
    (2,153 )     (2,616 )
 
    2,557       2,067  
Less: Treasury stock, at cost
    (5,712 )     (5,746 )
Total Eastman Kodak Company shareholders’ deficit
    (3,155 )     (3,679 )
Noncontrolling interests
    2       2  
  Total deficit
    (3,153 )     (3,677 )
 TOTAL LIABILITIES AND DEFICIT
  $ 3,815     $ 4,286  
                 


The accompanying notes are an integral part of these consolidated financial statements.


 
6

 



EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
   
Six Months Ended
 
   
June 30,
 
(in millions)
 
2013
   
2012
 
             
Cash flows from operating activities:
           
Net earnings (loss)
  $ 59     $ (665 )
Adjustments to reconcile to net cash used in operating activities:
               
Loss from discontinued operations, net of income taxes
    57       70  
Depreciation and amortization
    79       109  
Gain on sales of businesses/assets
    (569 )     (1 )
Loss on early extinguishment of debt
    6       7  
Non-cash restructuring costs, asset impairments and other charges
    81       5  
Non-cash reorganization items, net
    91       205  
Provision for deferred income taxes
    67       17  
Decrease in receivables
    61       113  
Increase in inventories
    (13 )     (16 )
(Decrease) increase in liabilities excluding borrowings
    (325 )     49  
Other items, net
    43       (53 )
Total adjustments
    (422 )     505  
Net cash used in continuing operations
    (363 )     (160 )
Net cash (used in) provided by discontinued operations
    (55 )     8  
Net cash used in operating activities
    (418 )     (152 )
Cash flows from investing activities:
               
Additions to properties
    (17 )     (16 )
Proceeds from sales of businesses/assets
    537       7  
Marketable securities - sales
    18       60  
Marketable securities - purchases
    (17 )     (58 )
     Net cash provided by (used in) continuing operations
    521       (7 )
     Net cash (used in) provided by discontinued operations
    (5 )     9  
Net cash provided by investing activities
    516       2  
Cash flows from financing activities:
               
Proceeds from DIP credit agreements
    450       686  
Repayment of term loans under Original Senior DIP Credit Agreement
    (664 )     (134 )
Repayment of term loans under Junior DIP Credit Agreement
    (4 )     -  
Reorganization items
    -       (40 )
Proceeds from sale and leaseback transaction
    -       41  
Net cash (used in) provided by financing activities
    (218 )     553  
Effect of exchange rate changes on cash
    -       (7 )
Net (decrease) increase in cash and cash equivalents
    (120 )     396  
Cash and cash equivalents, beginning of period
    1,135       861  
Cash and cash equivalents, end of period
  $ 1,015     $ 1,257  


The accompanying notes are an integral part of these consolidated financial statements.
 

 
7

 
 

 
EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (Unaudited)

NOTE 1:  BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

BASIS OF PRESENTATION

The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted in accordance with Rule 10-01 of Regulation S-X.  In the opinion of management, the accompanying unaudited consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position and cash flows of Eastman Kodak Company (“EKC” or the “Company”) and all companies directly or indirectly controlled, either through majority ownership or otherwise, (collectively, “Kodak”).  The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year.  These consolidated financial statements should be read in conjunction with Kodak’s Annual Report on Form 10-K for the year ended December 31, 2012.

On January 19, 2012 (the “Petition Date”), Eastman Kodak Company and its U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Filing”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) case number 12-10202.  The Company’s foreign subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing.  The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.  The Non-Filing Entities continue to operate in the ordinary course of business.

Kodak incurred a net loss for the years ended 2012 and 2011, and had a shareholders’ deficit as of June 30, 2013 and December 31, 2012.  To improve Kodak’s performance and address competitive challenges, Kodak has developed a strategic plan for the ongoing operation of the business.  Successful implementation of Kodak’s plan, however, is subject to numerous risks and uncertainties.  In addition, the competitive industry conditions under which Kodak operates have negatively impacted its financial position, results of operations and cash flows and may continue to do so in the future.  These factors raise substantial doubt about Kodak’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that Kodak will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.  Kodak’s ability to continue as a going concern is contingent upon its ability to comply with the financial and other covenants contained in its debtor-in-possession credit agreements, the Bankruptcy Court’s approval of Kodak’s plan of reorganization and Kodak’s ability to successfully implement the plan, among other factors.  As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty.  While operating as debtors-in-possession under chapter 11, Kodak may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted  in the ordinary course of business (and subject to restrictions contained in the debtor-in-possession credit agreements and the Backstop Commitment Agreement), for amounts other than those reflected in the accompanying consolidated financial statements.  Further, the plan of reorganization could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements.  The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should Kodak be unable to continue as a going concern or as a consequence of the Bankruptcy Filing.  Refer to Note 2, “Bankruptcy Proceedings” for additional information.

Certain amounts for prior periods have been reclassified to conform to the current period classification due to the presentation of discontinued operations, assets held for sale and for a change in the segment measure of profitability.  Refer to Note 19, “Segment Information” and Note 21, “Discontinued Operations” for additional information.
 

 
8

 

 
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  ASU No. 2013-02 requires presentation of reclassification adjustments from each component of Accumulated other comprehensive income either in a single note or parenthetically on the face of the financial statements, for those amounts required to be reclassified into Net income in their entirety in the same reporting period.  For amounts that are not required to be reclassified in their entirety in the same reporting period, cross-reference to other disclosures is required.  The changes to the Accounting Standards Codification (“ASC”) as a result of this update are effective prospectively for interim and annual periods beginning after December 15, 2012 (January 1, 2013 for Kodak).  The adoption of this guidance required changes in presentation only and did not have an impact on Kodak’s Consolidated Financial Statements.
 
In July 2012, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (ASC Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment.”  ASU No. 2012-02 amends the impairment test for indefinite-lived intangible assets by allowing companies to first assess the qualitative factors to determine if it is more likely than not that an indefinite-lived intangible asset might be impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.  The changes to the ASC as a result of this update are effective prospectively for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013 for Kodak).  The adoption of this guidance did not impact Kodak’s Consolidated Financial Statements.
 
In December 2011, the FASB issued ASU No. 2011-10, “De-recognition of In-Substance Real Estate – a Scope Clarification,” which amends ASC Topic 360, “Property, Plant and Equipment.”  ASU No. 2011-10 states that when an investor ceases to have a controlling financial interest in an entity that is in-substance real estate as a result of a default on the entity’s nonrecourse debt, the investor should apply the guidance under ASC Subtopic 360-20, Property, Plant and Equipment – Real Estate Sales to determine whether to derecognize the entity’s assets (including real estate) and liabilities (including the nonrecourse debt).  The changes to the ASC as a result of this update are effective prospectively for deconsolidation events occurring during fiscal years, and interim periods within those years, beginning on or after June 15, 2012 (January 1, 2013 for Kodak).  The adoption of this guidance did not impact Kodak’s Consolidated Financial Statements.
 
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (ASC Topic 350) – Testing Goodwill for Impairment.”  ASU No. 2011-08 amends the impairment test for Goodwill by allowing companies to first assess qualitative factors to determine if it is more likely than not that Goodwill might be impaired and whether it is necessary to perform the current two-step goodwill impairment test.  The changes to the ASC as a result of this update were effective prospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for Kodak).  The adoption of this guidance did not impact Kodak’s Consolidated Financial Statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income.”  ASU No. 2011-05 eliminates the option to present the components of Other comprehensive income as part of the statement of equity and requires an entity to present the total of Comprehensive income, the components of Net income, and the components of Other comprehensive income either in a single continuous statement of Comprehensive income or in two separate but consecutive statements.  The changes to the ASC as a result of this update were effective prospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for Kodak).  The adoption of this guidance required changes in presentation only and did not have an impact on Kodak’s Consolidated Financial Statements.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (ASC Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU No. 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization.  The changes to the ASC as a result of this update were effective prospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for Kodak).  The adoption of this guidance did not have a significant impact on Kodak’s Consolidated Financial Statements.



 
9

 


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.  The ASU provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward.  In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets.  The guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2013 (January 1, 2014 for Kodak) and Kodak is currently evaluating the potential impact, if any, of the adoption on Kodak’s Consolidated Financial Statements.

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830) - Parent’s Accounting for the Cumulative Translation Adjustment upon De-recognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”  ASU No. 2013-05 specifies that a Cumulative translation adjustment (CTA) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity.  For sales of an equity method investment that is a foreign entity, a pro-rata portion of CTA attributable to the investment would be recognized in earnings upon sale of the investment.  When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity.  The changes in the ASC are effective prospectively for annual and interim periods beginning after December 15, 2013 (January 1, 2014 for Kodak) and Kodak is currently evaluating the potential impact, if any, of the adoption on Kodak’s Consolidated Financial Statements.

In February 2013, the FASB issued ASU No. 2013-04, “Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date."  ASU No 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:  the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.  The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.  The amendments in this update are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 (January 1, 2014 for Kodak) and Kodak is currently evaluating the potential impact, if any, of the adoption on Kodak’s Consolidated Financial Statements.

NOTE 2:  BANKRUPTCY PROCEEDINGS

The Bankruptcy Filing was intended to permit Kodak to reorganize and bolster liquidity, monetize non-strategic intellectual property, fairly resolve legacy liabilities, and focus on its most valuable business lines.  The Debtors’ goal is to implement a plan of reorganization that meets the standards for confirmation under the Bankruptcy Code.  Confirmation of a plan of reorganization could materially alter the classifications and amounts reported in Kodak’s consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of a confirmation of a plan of reorganization or other arrangement or the effect of any operational changes that may be implemented.

OPERATION AND IMPLICATIONS OF THE BANKRUPTCY FILING

Under Section 362 of the Bankruptcy Code, the filing of voluntary bankruptcy petitions by the Debtors automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over Kodak’s property.  Accordingly, although the Bankruptcy Filing triggered defaults for certain of the Debtors’ debt obligations, creditors are stayed from taking any actions as a result of such defaults.  Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to compromise under a plan of reorganization.  As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty.  The Debtors, operating as debtors-in-possession under the Bankruptcy Code, may, subject to approval of the Bankruptcy Court, or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the debtor-in-possession credit agreements and the Backstop Commitment Agreement), sell or otherwise dispose of assets and liquidate or compromise liabilities for amounts other than those reflected in the consolidated financial statements.  Further, a confirmed plan of reorganization or other arrangement may materially change the amounts and classifications in the Company’s consolidated financial statements.

 
10

 


The Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions.  In general, rejection of an executory contract or unexpired lease is treated as a pre-petition breach of the executory contract or unexpired lease in question and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counter-party or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach.  Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure any existing defaults under such executory contract or unexpired lease.

Subsequent to the Petition Date, the Debtors received approval, but not direction, from the Bankruptcy Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize Kodak’s operations.  These obligations related to certain employee wages, salaries and benefits, certain customer program obligations, and the payment of vendors and other providers in the ordinary course for goods and services received after the Petition Date.  The Debtors have retained, pursuant to Bankruptcy Court approval, legal and financial professionals to advise the Company in connection with the Bankruptcy Filing and certain other professionals to provide services and advice in the ordinary course of business.  From time to time, the Debtors may seek Bankruptcy Court approval to retain additional professionals.

The U.S. Trustee for the Southern District of New York (the “U.S. Trustee”) has appointed an official committee of unsecured creditors (the “UCC”) as well as an official committee of retired employees (“Retiree Committee”).  The UCC, the Retiree Committee and their legal representatives have a right to be heard on all matters affecting the Debtors that come before the Bankruptcy Court.  There can be no assurance that the UCC will support the Debtors’ positions on matters to be presented to the Bankruptcy Court in the future or on the plan of reorganization.

PLAN OF REORGANIZATION

In order for the Debtors to emerge successfully from chapter 11, the Debtors must obtain the Bankruptcy Court’s approval of the plan of reorganization, which will enable the Debtors to emerge from chapter 11 as a reorganized entity operating in the ordinary course of business outside of bankruptcy.  A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations, events and Bankruptcy Court decisions.

Under section 1125 of the Bankruptcy Code, a disclosure statement must be approved by the Bankruptcy Court before the Debtors may solicit acceptance of a proposed plan of reorganization.  To be approved by the Bankruptcy Court, the disclosure statement must contain “adequate information” that would enable a hypothetical investor to make an informed judgment about the plan.  Once the disclosure statement is approved, the Debtors may send the proposed plan of reorganization, the disclosure statement and ballots to all creditors entitled to vote.  On June 26, 2013, the Bankruptcy Court approved the Debtors’ amended disclosure statement and procedures to enable creditors to vote on the Debtors’ amended joint plan of reorganization (“POR”).  On July 5, 2013, the Debtors commenced solicitation of votes on the POR. 
 
The POR organizes the Debtors’ creditor and equity constituencies into groups called classes. For each class, the POR describes (a) the underlying claim or equity interest, (b) the recovery available to the holders of claims or equity interests in that class under the plan, (c) whether the class is impaired under the plan, meaning that each holder will receive less than full value on account of its claim or equity interest or that the rights of each holder under law will be altered in some way (such as receiving stock instead of holding a claim) and (d) the form of consideration (e.g., cash, stock or a combination thereof), if any, that such holders will receive on account of their respective claims or equity interests under the POR.  There can be no assurance that the Debtors will be able to secure approval for the POR from creditors or confirmation from the Bankruptcy Court.  In the event the Debtors do not secure approval or confirmation of the POR, any outstanding debtor-in-possession credit agreement principal and interest could become immediately due and payable.


 
11

 

The POR provides for, among other things,  the following on the emergence date:

·  
Cancellation of the obligations of the Debtors under the Second Lien Notes indentures, unsecured notes indentures, equity interests, or any other instrument evidencing or creating any indebtedness or obligation of, or ownership interest in, the Debtors or giving rise to any claim or equity interest except as otherwise specifically provided for in the POR;
 
·  
The authorization of 500 million shares of common stock under a reorganized certificate of incorporation;
 
·  
The issuance of 40 million shares of common stock, inclusive of shares to be distributed as a part of the Rights Offerings, for distribution to the unsecured creditors and/or Backstop Parties, plus to the extent applicable, the number of shares of common stock necessary to satisfy payment of the backstop commitment fees and the Retiree Committee administrative claim (“Effective Date Share Issuance”);
 
·  
The issuance to the holders of general unsecured and Retiree Committee unsecured claims net-share settled warrants to purchase: (i) at a $14.93 exercise price, a number of shares of common stock equal to 5% of the Effective Date Share Issuance (the “125% Warrants”) and (ii) at a $16.12 exercise price a number of shares of common stock equal to 5% of the Effective Date Share Issuance (the “135% Warrants”);
 
·  
Establishment of a liquidating trust (the “Kodak GUC Trust”) and distribution of the beneficial interests therein to the holders of allowed general unsecured claims and the Retiree Committee unsecured claim, whether their claims are allowed on or after the emergence date; and
 
·  
If the class of holders of Second Lien Notes votes to accept the POR, the settlement of the allowed amount of the Second Lien claims.
 

The following conditions, and others, shall have been satisfied or waived for the POR to be effective:
 
·  
The POR shall have been confirmed by the Bankruptcy Court;
 
·  
The Backstop Commitment Agreement shall be in full force and effect, and the transactions contemplated thereunder shall have been consummated and there shall not be a stay or injunction in effect with respect thereto;
 
·  
The closing of the Emergence Credit Facilities, as defined below, shall have occurred; and
 
·  
The KPP Global Settlement, as defined below, shall have been consummated.

There is a hearing to consider confirmation of the POR scheduled with the Bankruptcy Court on August 20, 2013.

Backstop Commitment Agreement and Rights Offering

On June 26, 2013, the Bankruptcy Court approved a backstop commitment agreement with GSO Capital Partners LP, on behalf of various managed funds, BlueMountain Capital Management, LLC, on behalf of various managed funds, George Karfunkel, United Equities Commodities Company, Momar Corporation and Contrarian Capital Management, LLC, on behalf of Contrarian Funds, LLC (collectively, the “Backstop Parties”), pursuant to which the Backstop Parties, which are creditors of the Debtors, will provide a $406 million commitment to backstop two proposed rights offerings (the “Rights Offerings”) to be conducted in connection with the POR of the Debtors (the “Backstop Commitment Agreement”).
 
In accordance with the POR, the Backstop Commitment Agreement, and the procedures for the conduct of the Rights Offerings (the “Rights Offerings Procedures”), the Company will offer eligible creditors, including the Backstop Parties, up to 34 million shares of common stock for the per share purchase price of $11.94, or an aggregate purchase price of approximately $406 million (the “Rights Offerings Amount”).  In addition to their right to participate in the Rights Offerings in their capacities as creditors of the Company, the Backstop Parties will be entitled to purchase an additional 10 million shares of common stock at a purchase price of $11.94 per share in the Rights Offerings.  Pursuant to the Backstop Commitment Agreement, the Backstop Parties have agreed to purchase all shares of common stock that are not duly subscribed for pursuant to the Rights Offerings.
 
Under the Backstop Commitment Agreement, the Company has agreed to pay the Backstop Parties, on the effective date of the POR, a commitment fee and a consummation fee equal to 4.0% and 1.0% of the Rights Offerings Amount, respectively.  The commitment fee and the consummation fee will be payable, at the Company’s election, in cash, common stock or a combination of cash and common stock.  The Company will also be required to pay the commitment fee in cash upon the occurrence of certain termination events as set forth in the Backstop Commitment Agreement.  The Backstop Parties’ commitments to backstop the Rights Offerings, and the other transactions contemplated by the Backstop Commitment Agreement, are conditioned upon the satisfaction of all conditions to the effectiveness of the POR, and other applicable conditions precedent set forth in the Backstop Commitment Agreement.  The issuance of common stock pursuant to the Rights Offerings and the Backstop Commitment Agreement is conditioned upon, among other things, confirmation of the POR by the Bankruptcy Court, and will occur upon the Company’s emergence from chapter 11.


 
12

 

Emergence Credit Facilities
 
On June 26, 2013, the Bankruptcy Court approved Kodak’s entry into commitment and engagement documents in connection with a new exit financing package (the “Emergence Credit Facility”).  The Emergence Credit Facility provides for senior secured term loans of $695 million consisting of $420 million of first lien term loans and $275 million of second lien term loans (the “Term Loans”).  In addition, the Emergence Credit Facility provides for a senior secured asset-based revolving credit facility (the “ABL Credit Facility”) of up to $200 million, subject to the satisfaction of certain conditions.  The ABL Credit Facility would have a maturity of the earlier of five years or 90 days prior to maturity of term loans or other material indebtedness.  The first-lien term loans would have a maturity of six years from the closing date and the second-lien term loans would have a maturity of seven years from the closing date.

Refer to Note 9, “Short-Term Borrowings and Long-Term Debt”.

KPP Global Settlement

Eastman Kodak Company had previously issued (pre-petition) a guarantee to Kodak Limited (the “Subsidiary”) and KPP Trustees Limited (the “Trustee”) of the Kodak Pension Plan in the United Kingdom (the “KPP”).  Under that arrangement, EKC guaranteed to the Subsidiary and the Trustee the ability of the Subsidiary, only to the extent it becomes necessary to do so, to (1) make contributions to the KPP to ensure sufficient assets exist to make plan benefit payments, as they become due, if the KPP otherwise would not have sufficient assets and (2) make contributions to the KPP such that it will achieve fully funded status by the funding valuation for the period ending December 31, 2022.

The Subsidiary agreed to make certain contributions to the KPP as determined by a funding plan agreed to by the Trustee.  Under the terms of this agreement, the Subsidiary is obligated to pay a minimum amount of $50 million to the KPP in each of the years 2011 through 2014, and a minimum amount of $90 million to the KPP in each of the years 2015 through 2022.  The Subsidiary has not paid the annual contributions due for 2012 or 2013 and payment of these amounts could have been demanded at any time.  Future funding beyond 2022 would be required if the KPP is still not fully funded as determined by the funding valuation for the period ending December 31, 2022.  These payment amounts for the years 2015 through 2022 could be lower, and the payment amounts for all years noted could be higher by up to $5 million each year, based on the exchange rate between the U.S. dollar and British pound.  These minimum amounts do not include potential contributions related to tax benefits received by the Subsidiary.

The underfunded position of the KPP of approximately $1.4 billion and $1.5 billion (calculated in accordance with U.S. GAAP) is included in Liabilities held for sale presented in the Consolidated Statement of Financial Position as of June 30, 2013 and December 31, 2012, respectively.  The underfunded obligation relates to a non-debtor entity.  However, the Trustee has asserted an unsecured claim of approximately $2.8 billion under the guarantee.  The Subsidiary has also asserted an unsecured claim under the guarantee for an unliquidated amount.

On April 26, 2013, Eastman Kodak Company, the Trustee, Kodak Limited and certain other Kodak entities entered into a global settlement agreement that resolves all liabilities of the Kodak group with respect to the KPP (the “Global Settlement”).  The Global Settlement involves the following key elements:

·  
The Subsidiary will make a cash payment of at least $120 million which will be applied to reduce Kodak Limited’s pension liabilities to the KPP (the “KL Payments”);
 
·  
The extinguishment of the Subsidiary’s remaining obligations to the KPP in connection with a “regulated apportionment arrangement” (the “RAA”) under English law;
 
·  
The acquisition by the KPP of certain assets, and the assumption by the KPP of certain liabilities, of Kodak’s Personalized Imaging and Document Imaging businesses with at least $445 million settled in cash (the “KPP Purchase”) of which no more than $325 million will come from KPP assets, net of the KL Payments, and up to $35 million of which is subject to repayment to KPP if the businesses do not achieve certain adjusted EBITDA targets through December 31, 2018;
 
·  
The approval by the Pension Regulator of the United Kingdom (the “Regulator”) of a clearance application filed by Kodak and its affiliates stating that, after giving effect to the Global Settlement, it would be unreasonable for the Regulator to issue to any of the applicants a “financial support direction” or “contribution notice” with respect to any remaining funding shortfall that may affect the KPP.  Such approval was granted by the Regulator on April 26, 2013; and
 
·  
A release by Kodak, the Trustee, Kodak Limited and other applicable entities with respect to all other liabilities relating to the KPP.
 

 
 
13

 

 
Each of these primary elements of the Global Settlement will be simultaneously effective upon consummation of the KPP Purchase.  Conditions to the KPP Purchase include, among others: (i) Bankruptcy Court approval (obtained on June 20, 2013), (ii) the absence of a “Material Adverse Effect” as defined in the documentation for the KPP Purchase (unless waived by the Trustee), (iii) substantial consummation of Kodak’s plan of reorganization or the provision by Eastman Kodak Company of adequate assurances of performance under the Agreement in a form reasonably acceptable to the Trustee (unless waived by the  Trustee), (iv) customary conditions precedent for negotiated purchases of going concern businesses by arm’s-length parties and (v) the approval of the RAA by the Regulator.  On May 28, 2013, the Regulator issued its approval of the RAA and the Pension Protection Fund issued its final notice of no objection to the RAA.
 
The consummation of the Global Settlement is contingent upon the substantial consummation of the Debtors’ POR, or the provision by Kodak of adequate assurances of performance under the Agreement in a form reasonably acceptable to the Trustee.
 
DEBTOR-IN-POSSESSION CREDIT FACILITIES

Senior Debtor-in-Possession Credit Facility

In connection with the Bankruptcy Filing, on January 20, 2012, the Company and Kodak Canada Inc. (the “Canadian Borrower” and, together with the Company, the “Borrowers”) entered into a Debtor-in-Possession Credit Agreement, as amended on January 25, 2012, March 5, 2012, April 26, 2012, December 19, 2012, and February 6, 2013 (the “Original Senior DIP Credit Agreement”).  Pursuant to the terms of the Original Senior DIP Credit Agreement, the lenders agreed to lend to the Borrowers an aggregate principal amount of up to $950 million, consisting of up to $250 million super-priority senior secured asset-based revolving credit facilities and an up to $700 million super-priority senior secured term loan facility (collectively, the “Loans”).  On March 22, 2013, the Original Senior DIP Credit Agreement was amended and restated pursuant to an Amendment Agreement dated as of March 13, 2013 (the “Amended and Restated Senior DIP Credit Agreement”).  The Amended and Restated Senior DIP Credit Agreement terminates and all outstanding obligations must be repaid on the earliest to occur of (i) September 30, 2013, (ii) the date of the substantial consummation of certain reorganization plans, or (iii) certain other events, including Events of Default (as defined in the Amended and Restated Senior DIP Credit Agreement) and repayment in full of the obligations pursuant to a mandatory prepayment.
 
Junior Debtor-in-Possession Credit Facility

On March 22, 2013, the Company entered into a Debtor-in-Possession Loan Agreement (the “Junior DIP Credit Agreement”) with an aggregate principal amount of $848 million of term loans.  The term loans consist of first lien term loans in the aggregate principal amount of $473 million (the “New Money Loans”) and junior lien term loans in the aggregate principal amount of $375 million consisting of a dollar-for-dollar “roll-up” (such loans, the “Rolled-Up Loans”)  for a portion of the amounts then outstanding under the Company’s 2019 Senior Secured Notes issued March 15, 2011 and 2018 Senior Secured Notes issued March 5, 2010 (the “Second Lien Notes”).  The Bankruptcy Filing created an event of default under the Second Lien Notes.  Upon entering into the Junior DIP Credit Agreement, the Company repaid, in full, the term loan outstanding under the Amended and Restated Senior DIP Credit Agreement.
 
The Junior DIP Credit Agreement also contains provisions allowing for a conversion of up to $654 million of the Junior DIP Credit Agreement loans upon emergence from chapter 11 into permanent exit financing with a five year term, provided that Kodak meets certain conditions and milestones, including Bankruptcy Court approval of a plan of reorganization by September 15, 2013 with an effective date of no later than September 30, 2013; repayment of at least $200 million of principal amount of New Money Loans; the resolution of all obligations owing in respect of the Kodak Pension Plan of the United Kingdom on terms reasonably satisfactory to the “Required Lead Lenders” (as defined in the Junior DIP Credit Agreement); there shall have been an additional prepayment of loans in an amount equal to 75% of U.S. Liquidity (as defined in the Junior DIP Credit Agreement) above $200 million; and receiving at least $600 million in cash proceeds through the disposition of certain specified assets that are not part of the commercial imaging business, including any combination of the Document Imaging and Personalized Imaging businesses and trademarks and related rights provided that consent of the Required Lead Lenders would be necessary to exclude the assets of the Document Imaging and Personalized Imaging businesses from the disposition.

Refer to Note 9, “Short-Term Borrowings and Long-Term Debt”.

 
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PRE-PETITION CLAIMS

On April 18, 2012, as amended on May 16, 2012 and February 1, 2013, the Debtors filed schedules of assets and liabilities and statements of financial affairs with the Bankruptcy Court.  On May 10, 2012, the Bankruptcy Court entered an order establishing July 17, 2012 as the bar date for potential creditors to file proofs of claims and established the required procedures with respect to filing such claims.  A bar date is the date by which pre-petition claims against the Debtors must be filed if the claimants wish to receive any distribution in the chapter 11 proceedings.

As of July 25, 2013 the Debtors have received approximately 6,200 proofs of claim, a portion of which assert, in part or in whole, un-liquidated claims.  In the aggregate, total liquidated proofs of claim of approximately $22.5 billion have been filed against the Debtors.  New and amended claims may be filed in the future, including claims amended to assign values to claims originally filed with no designated value.  The Debtors are continuing to reconcile such claims to the amounts listed by the Debtors in their schedule of assets and liabilities (as amended).  Differences in liability amounts estimated by the Debtors and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate.  Approximately 1,700 claims totaling approximately $1.2 billion have been expunged or withdrawn and the Debtors have filed additional claim objections with the Bankruptcy Court for approximately 100 claims totaling approximately $90 million in additional reductions.  The Debtors may continue to ask the Bankruptcy Court to disallow claims that the Debtors believe are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons.  In addition, as a result of this process, the Debtors may identify additional liabilities that will need to be recorded or reclassified to Liabilities subject to compromise.  In light of the substantial number of claims filed, the claims resolution process may continue to take considerable time to complete. The resolution of such claims could result in material adjustments to Kodak’s financial statements. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a plan of reorganization.  Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.

Distribution of property pursuant to the POR would be made on an initial distribution date for each claim that is allowed on or prior to emergence from chapter 11.  If the class of holders of Second Lien Notes votes to accept the POR, and the POR is confirmed, such holders would receive distributions on the emergence date.  Reorganized Kodak would, in consultation with the Kodak GUC Trustee identify periodic dates for subsequent distributions.  Distributions for claims that are allowed after emergence from chapter 11 would be made on the first subsequent distribution date after such claims are allowed.  Excess property, initially reserved for disputed claims, would be distributed to holders of allowed general unsecured claims on a pro rata basis.

FINANCIAL REPORTING IN REORGANIZATION

Expenses, gains and losses directly associated with reorganization proceedings are reported as Reorganization items, net in the accompanying Consolidated Statement of Operations.  In addition, Liabilities subject to compromise in the chapter 11 proceedings are distinguished from liabilities of Non-Filing Entities, fully-secured liabilities not expected to be compromised and from post-petition liabilities in the accompanying Consolidated Statement of Financial Position as of June 30, 2013 and December 31, 2012.  Where there is uncertainty about whether a secured claim will be paid or impaired under the chapter 11 proceedings, Kodak has classified the entire amount of the claim as a liability subject to compromise.  The amount of liabilities subject to compromise represents Kodak’s estimate, where an estimate is determinable, of known or potential pre-petition claims to be addressed in connection with the bankruptcy proceedings.  Such liabilities are reported at Kodak’s current estimate, where an estimate is determinable, of the allowed claim amounts, even though the claims may be settled for lesser amounts.  These claims remain subject to future adjustments, which may result from: negotiations; actions of the Bankruptcy Court; disputed claims; rejection of contracts and unexpired leases; the determination as to the value of any collateral securing claims; proofs of claims; or other events.

Effective as of January 19, 2012, Kodak ceased recording interest expense on outstanding pre-petition debt classified as Liabilities subject to compromise.  Contractual interest expense represents amounts due under the contractual terms of outstanding debt, including debt subject to compromise.  Contractual interest expense related to Liabilities subject to compromise of approximately $24 million and $22 million for the periods from January 1, 2013 through June 30, 2013 and January 19, 2012 through June 30, 2012, respectively, has not been recorded, as it is not expected to be an allowed claim under the chapter 11 case.

 
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SECTION 363 ASSET SALES

On February 1, 2013, Kodak entered into a series of agreements related to the monetization of certain of its intellectual property assets, including the sale of its digital imaging patents.  Under these agreements, Kodak received approximately $530 million, a portion of which was paid by twelve licensees that received a license to the digital imaging patent portfolio and other patents owned by Kodak. Another portion was paid by Intellectual Ventures Fund 83 LLC (“Intellectual Ventures”) and Apple, Inc., each of which acquired a portion of the digital imaging patent portfolio, subject to the licenses granted to the twelve new licensees, and previously existing licenses.  In addition, Kodak retained a license to the digital imaging patents for its own use.  In connection with this transaction, the Company entered into a separate agreement with FUJIFILM Corporation (“Fuji”) whereby, among other things, Fuji granted Kodak the right to sub-license certain Fuji Patents to businesses Kodak intends to sell as part of the Company’s emergence efforts.  The Debtors also agreed to allow Fuji a general unsecured pre-petition claim against the Debtors in the amount of $70 million.

EASTMAN BUSINESS PARK SETTLEMENT AGREEMENT

On June 17, 2013 the Company, the New York State Department of Environmental Conservation and the New York State Urban Development Corporation, d/b/a Empire State Development entered into an agreement which, in part, establishes a $49 million environmental trust for Eastman Business Park (the “EBP Settlement Agreement”).  The agreement was subsequently amended on August 6, 2013 (the "Amended and Restated EBP Settlement Agreement").
 
The Amended and Restated EBP Settlement Agreement includes a settlement of Kodak’s historical environmental liabilities at Eastman Business Park (“EBP”) through the establishment of an environmental remediation trust (the “EBP Trust”).  If the Amended and Restated EBP Settlement Agreement is approved by the Bankruptcy Court, and upon the satisfaction or waiver of certain conditions, (i) the EBP Trust will be responsible for investigation and remediation at EBP arising from Kodak’s historical environmental liabilities in existence prior to the effective date of the EBP Settlement, (ii) Kodak will fund the EBP Trust with a $49 million payment and transfer to the EBP Trust Kodak’s interests in personal property, equipment and fixtures used for performing any environmental response actions at EBP, and (iii) in the event the historical liabilities exceed $99 million, Kodak will become liable for 50% of the portion above $99 million.
 
The transaction is subject to the approval of the Bankruptcy Court, and resolution of issues raised by the United States Department of Justice on behalf of the U.S. Environmental Protection Agency, as well as satisfaction of the other conditions precedent to effectiveness set forth in the Amended and Restated EBP Settlement Agreement.

RETIREES’ SETTLEMENT

The Debtors’ estimated allowed claims for pre-petition obligations for the Kodak Excess Retirement Income Plan (the “KERIP”), the Kodak Unfunded Retirement Income Plan (the “KURIP”), the Kodak Company Global Pension Plan for International Employees, and individual letter agreements with certain current and former employees that provided for supplemental non-qualified pension benefits are reported as Liabilities subject to compromise in the accompanying Consolidated Statement of Financial Position.

On April 30, 2013, EKRA Ltd. and certain holders of KERIP/KURIP Claims (together with the Debtors, the “Settlement Parties”) filed a motion (the “Motion”) requesting that the Bankruptcy Court appoint a committee pursuant to section 1102(a)(2) of the Bankruptcy Code, to represent the interests of the holders of the KERIP/KURIP Claims, and asserting that they and certain other holders of the KERIP/KURIP claims disagree with the underlying discount rates and mortality tables used by the Debtors to calculate the KERIP/KURIP Claims.  Subsequent to the filing of the Motion, the Settlement Parties entered into a stipulation (the “Stipulation”) approved by an order of the Bankruptcy Court, which became effective on July 18, 2013, for a total allowed claim of $244 million.  During the three months ended June 30, 2013 a provision for expected allowed claims of approximately $27 million was reflected in Reorganization Items, net in the accompanying Consolidated Statement of Operations related to what was ultimately agreed to in the Stipulation.

 

 
16

 
 

NOTE 3: LIABILITIES SUBJECT TO COMPROMISE

The following table reflects pre-petition liabilities that are subject to compromise:

   
As of
   
As of
 
(in millions)
 
June 30,
   
December 31,
 
   
2013
   
2012
 
             
Accounts payable
  $ 272     $ 275  
Debt
    683       683  
Pension and other postemployment obligations
    189       568  
Settlements
    1,049       946  
Environmental
    103       44  
Other liabilities subject to compromise
    175       192  
Liabilities subject to compromise
  $ 2,471     $ 2,708  
                 


The Bankruptcy Filing constituted an event of default with respect to certain of the Company’s debt instruments.  Refer to Note 9, “Short-Term Borrowings and Long-Term Debt” for additional information.  Settlements relate to allowed claims under agreements reached with various creditors, including
$650 million related to the settlement agreement reached with the Retiree Committee and $244 million related to the non-qualified pension benefit Stipulation agreement.  Refer to Note 14, “Retirement Plans and Other Postretirement Benefits” for additional information regarding the decrease in Pension and other postemployment obligations which is primarily related to the second quarter of 2013 remeasurement of the U.S. noncontributory defined benefit plan, the Kodak Retirement Income Plan.  Other liabilities subject to compromise include accrued liabilities for customer programs, deferred compensation, taxes, and contract and lease rejections.

The amount of Liabilities subject to compromise represents the Debtors’ estimate, where an estimate is determinable, of known or potential pre-petition claims to be addressed in connection with the bankruptcy proceedings.  Such liabilities are reported at the Debtors’ current estimate, where an estimate is determinable, of the allowed claim amount, even though they may settle for lesser amounts.  These claims remain subject to future adjustments, which may result from: negotiations; actions of the Bankruptcy Court; disputed claims; rejection of contracts and unexpired leases; the determination as to the value of any collateral securing claims; proofs of claims; or other events.  Refer to Note 2, "Bankruptcy Proceedings" for additional information.

NOTE 4:  REORGANIZATION ITEMS, NET

A summary of reorganization items, net for the three and six months ended June 30, 2013 and 2012 is presented in the following table:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
                         
Professional fees
  $ 41     $ 45     $ 99     $ 88  
DIP credit agreement financing costs
    -       -       -       45  
Provision for expected allowed claims
    38       115       100       115  
Other
    (7 )     -       (7 )     -  
Reorganization items, net
  $ 72     $ 160     $ 192     $ 248  
                                 

For the three months ended June 30, 2013 and 2012, Kodak made net payments of approximately $58 million and $38 million, respectively for reorganization items.  For the six months ended June 30, 2013 and 2012, Kodak made net payments of approximately $101 million and $83 million, respectively for reorganization items.
 
 
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NOTE 5:  RECEIVABLES, NET
   
As of
 
   
June 30,
   
December 31,
 
 (in millions)                                                        
 
2013
   
2012
 
             
Trade receivables
  $ 458     $ 532  
Miscellaneous receivables
    89       101  
Total (net of allowances of $25 and $35 as of
    June 30, 2013 and December 31, 2012,
    respectively)
  $ 547     $ 633  
 
               

Approximately $59 million and $99 million of the total trade receivable amounts as of June 30, 2013 and December 31, 2012, respectively, will potentially be settled through customer deductions in lieu of cash payments.  Such deductions represent rebates owed to customers and are included in Other current liabilities and Liabilities subject to compromise in the accompanying Consolidated Statement of Financial Position.

NOTE 6:  INVENTORIES, NET
   
As of
 
(in millions)
 
June 30,
   
December 31,
 
   
2013
   
2012
 
 
           
Finished goods
  $ 231     $ 236  
Work in process
    109       87  
Raw materials
    87       97  
           Total
  $ 427     $ 420  

NOTE 7:  GOODWILL

Due to the sale of its digital imaging patents during the first quarter of 2013, Kodak concluded that the carrying value of goodwill for its Intellectual Property reporting unit exceeded the implied fair value of goodwill.  The fair value of the Intellectual Property reporting unit was estimated using an income approach in which the future cash flows, including a terminal value at the end of the projection period, were discounted to present value.  Kodak recorded a pre-tax impairment charge of $77 million that is included in Other operating (income) expenses, net in the Consolidated Statement of Operations.
 
The carrying value of goodwill by reportable segments is as follows:

(in millions)
 
Graphics,
             
   
Entertainment and
   
Digital Printing
       
   
Commercial Films
   
and Enterprise
   
Consolidated
 
   
Segment
   
Segment
   
Total
 
                   
Balance as of December 31, 2012:
  $ 115     $ 17     $ 132  
Impairment
    (77 )     -       (77 )
Currency translation adjustments
    1       -       1  
Balance as of June 30, 2013:
  $ 39     $ 17     $ 56  

 NOTE 8:  OTHER CURRENT LIABILITIES
   
As of
   
As of
 
   
June 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
             
Accrued employment-related liabilities
  $ 202     $ 283  
Accrued customer rebates
    55       82  
Deferred revenue
    60       63  
Accrued interest
    7       107  
Accrued restructuring liabilities
    48       83  
Other
    160       218  
Total
  $ 532     $ 836  
                 

The Other component above consists of other miscellaneous current liabilities that individually were less than 5% of the total current liabilities component within the Consolidated Statement of Financial Position, and therefore, have been aggregated.

 
 
18

 
 
 
NOTE 9:  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Debt and related maturities and interest rates were as follows at June 30, 2013 and December 31, 2012:
             
As of
 
(in millions)
           
June 30, 2013
   
December 31, 2012
 
                       
       
Weighted-Average
             
       
Effective
             
       
Interest
   
Carrying
   
Carrying
 
Country
Type
Maturity
 
Rate
   
Value
   
Value
 
                       
Current portion:
                     
U.S.
Junior DIP Credit Agreement New Money Term Loans
2013
    21.26 %   $ 458     $ -  
U.S.
Junior DIP Credit Agreement Junior Term Loans
2013
    12.68 %     372       -  
U.S.
Original Senior DIP Credit Agreement
2013
    8.63 %     -       659  
Germany
Term note
2013
    6.16 %     40       38  
Brazil
Term note
2013
    19.80 %     1       2  
                  871       699  
Non-current portion:
                           
U.S.
Secured term note
2018
    10.11 %     248       493  
U.S
Secured term note
2019
    10.87 %     122       247  
                  370       740  
Liabilities subject to compromise:
                         
U.S.
Term note
2013
    6.16 %     20       20  
U.S.
Term note
2013
    7.25 %     250       250  
U.S.
Convertible
2017
    12.75 %     400       400  
U.S.
Term note
2018
    9.95 %     3       3  
U.S.
Term note
2021
    9.20 %     10       10  
                  683       683  
                $ 1,924     $ 2,122  

Annual maturities of debt outstanding at June 30, 2013, excluding debt classified as liabilities subject to compromise, were as follows:
   
Carrying
   
Maturity
 
(in millions)
 
Value
   
Value
 
             
2013
  $ 871     $ 885  
2014
    -       -  
2015
    -       -  
2016
    -       -  
2017
               
 2018 and thereafter
    370       375  
Total
  $ 1,241     $ 1,260  

DEBTOR-IN-POSSESSION CREDIT FACILITIES

Senior Debtor-in-Possession Credit Facility

In connection with the Bankruptcy Filing, on January 20, 2012, the Company and Kodak Canada Inc. (the “Canadian Borrower” and, together with the Company, the “Borrowers”) entered into a Debtor-in-Possession Credit Agreement, as amended on January 25, 2012, March 5, 2012, April 26, 2012, December 19, 2012, and February 6, 2013 (the “Original Senior DIP Credit Agreement”), with the U.S. subsidiaries of the Company (the “Subsidiary Guarantors”) and the Canadian Borrower signatory thereto, the lenders signatory thereto (the “Lenders”), Citigroup Global Markets Inc., as sole lead arranger and book-runner, and Citicorp North America, Inc., as syndication agent, administration agent and co-collateral agent.  Pursuant to the terms of the Original Senior DIP Credit Agreement, the Lenders agreed to lend in an aggregate principal amount of up to $950 million, consisting of up to $250 million super-priority senior secured asset-based revolving credit facilities and an up to $700 million super-priority senior secured term loan facility.  On March 22, 2013, the Original Senior DIP Credit Agreement was amended and restated, pursuant to an Amendment Agreement (the “Amendment Agreement”) dated as of March 13, 2013 (the “Amended and Restated Senior DIP Credit Agreement”).

The Amended and Restated Senior DIP Credit Agreement reflected the pay-down in full of all term loans that were outstanding under the Original Senior DIP Credit Agreement as of March 22, 2013, in the amount of $222 million.  Previously, on February 1, 2013, Kodak entered into a series of agreements under which it received approximately $530 million of proceeds, net of withholding taxes, a portion of which was paid by intellectual property licensees and a portion of which was paid by the acquirers of Kodak’s digital imaging patent portfolio.  Approximately $419 million of the proceeds were used to prepay the term loan under the Original Senior DIP Credit Agreement.  The Company paid the remaining outstanding term loan balance, in full, upon entering into the Junior DIP Credit Agreement described below.  Kodak recognized a loss on early extinguishment of debt of the term loan of approximately $6 million in the first quarter of 2013.   The Amended and Restated Senior DIP Credit Agreement also reflected certain other changes to the terms of the Original Senior DIP Credit Agreement, including (i) the extension of the maturity date from July 20, 2013 to September 30, 2013, (ii) the elimination of the Canadian revolving facility, which was not being used by the Company, the removal of the Canadian Borrower from the facility, and the reduction of the aggregate amount of the U.S. revolving credit commitments from $225 million to $200 million, (iii) removal of machinery and equipment from the borrowing base of the revolving facility, and (iv) revision of the existing financial covenants and modification of other covenants to match the terms of the Junior DIP Credit Agreement.
 
The Company and each existing and future direct or indirect U.S. subsidiary of the Company (other than indirect U.S. subsidiaries held through foreign subsidiaries and certain immaterial subsidiaries (if any)) have agreed to provide unconditional guarantees of the obligations of the Borrowers under the Amended and Restated Senior DIP Credit Agreement.  Under the terms of the Amended and Restated Senior DIP Credit Agreement, the Company has the option to have interest on the loans provided thereunder accrue at a base rate or the then applicable LIBOR Rate (subject to certain adjustments), plus a margin of 2.25% for a base rate revolving loan or 3.25% for a LIBOR rate revolving loan.

 
19

 
 
The Company must prepay the Amended and Restated Senior DIP Credit Agreement and cash-collateralize outstanding letters of credit with all net cash proceeds from sales of or casualty events relating to certain types of collateral consisting of accounts or inventory (as defined in the Amended and Restated Senior DIP Credit Agreement).  The Company has issued approximately $128 million of letters of credit under the revolving credit facility as of June 30, 2013.  Under the Amended and Restated Senior DIP Credit Agreement borrowing base calculation, the Company had approximately $21 million available under the revolving credit facility as of June 30, 2013.  Availability is subject to borrowing base availability, reserves and other limitations.

Junior Debtor-in-Possession Credit Facility

On March 22, 2013, the Company and the Subsidiary Guarantors entered into a Debtor-in-Possession Loan Agreement (the “Junior DIP Credit Agreement”) with the lenders signatory thereto (the “Lenders”) and Wilmington Trust, National Association, as agent. Pursuant to the terms of the Junior DIP Credit Agreement, the Lenders provided the Company with term loan facilities in an aggregate principal amount of approximately $848 million consisting of approximately $473 million of new money term loans (the “New Money Loans”), comprised of approximately $455 million original principal and $18 million of additional paid-in-kind of fees, and $375 million of junior term loans (the “Junior Loans”). Upon issuance of the New Money Loans, Kodak received net proceeds of $450 million ($455 million original principal less $5 million stated discount).  The Junior Loans were issued in exchange for the same principal amount of Second Lien Notes pursuant to an offer by the Company to holders of the outstanding Second Lien Notes.  The Bankruptcy Filing created an event of default under the Second Lien Notes.  The maturity date of the loans made under the Junior DIP Credit Agreement is the earliest to occur of (i) September 30, 2013, (ii) the effective date of the Company’s plan of reorganization and (iii) the acceleration of such loans.
  
The New Money Loans bear interest at the rate of LIBOR plus 10.5% per annum, with a LIBOR floor of 100 basis points.  The Junior Loans consist of a tranche in an aggregate principal amount of approximately $127 million bearing interest at a rate of 10.625% per annum and a tranche in an aggregate principal amount of approximately $248 million bearing interest at a rate of 9.75% per annum.  Each existing and future direct or indirect U.S. subsidiary of the Company (other than indirect U.S. subsidiaries held through foreign subsidiaries and certain immaterial subsidiaries (if any)) have agreed to provide unconditional guarantees of the obligations of the Company under the Junior DIP Credit Agreement.  Subject to certain exceptions, obligations under the Junior DIP Credit Agreement are secured by first, second and third priority liens on all the collateral securing obligations under the Company’s Amended and Restated Senior DIP Credit Agreement and 65% of the equity interests of certain material “first-tier” foreign subsidiaries of the Company.  The Junior DIP Credit Agreement, the Amendment Agreement, and the Amended and Restated Senior DIP Credit Agreement were approved by the Bankruptcy Court in orders issued on January 24, 2013 and March 8, 2013.

The Company must prepay the Junior DIP Credit Agreement with 100% of net cash proceeds from casualty events.  For asset sales other than the Specified Sale (as defined below), the Company must make prepayments as follows:  (i) 80% of net cash proceeds up to $20 million and (ii) 100% of net cash proceeds greater than $20 million.  In addition, with respect to the Specified Sale, prepayments are required as follows: (i) 100% of net cash proceeds up to $200 million; (ii) 0% of net cash proceeds in excess of $200 million but less than or equal to $600 million; and (iii) 75% of net cash proceeds in excess of $600 million.

The Company has the ability to convert the Junior DIP Credit Agreement into an up to $654 million exit facility with an additional five-year term provided that Kodak meets certain conditions and milestones, including Bankruptcy Court approval of the plan of reorganization by September 15, 2013, with an effective date no later than September 30, 2013; repayment of at least $200 million of principal amount of New Money Loans; and receipt of at least $600 million in cash proceeds through the disposition of certain specified assets, including any combination of the Document Imaging and Personalized Imaging businesses and trademarks and related rights (the “Specified Sale”) provided that consent of the Required Lead Lenders (as defined in the Junior DIP Credit Agreement) would be necessary to exclude the assets of the Document Imaging and Personalized Imaging businesses from the disposition; the resolution of all obligations owing in respect of the KPP on terms reasonably satisfactory to the Required Lead Lenders; and there shall have been an additional prepayment of loans in an amount equal to 75% of U.S. Liquidity (as defined in the Junior DIP Credit Agreement) above $200 million.

Certain Terms of Senior Debtor-in-Possession Credit Facility and Junior Debtor-in-Possession Credit Facility

The Amended and Restated Senior DIP Credit Agreement and the Junior DIP Credit Agreement limit, among other things, the Company’s and the Subsidiary Guarantors’ ability to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) prepay subordinated indebtedness and make other restricted payments, (v) enter into sale and leaseback transactions and (vi) modify the terms of any organizational documents and certain material contracts of the Company and the Subsidiary Guarantors.  In addition to standard obligations, these agreements provide for specific milestones that the Company must achieve by specific target dates, including: (a) delivering a comprehensive draft of a plan of reorganization and related disclosure statement to the advisors to the Required Lead Lenders by no later than April 8, 2013; (b) filing a plan of reorganization and the disclosure statement with the Bankruptcy Court by no later than April 30, 2013; (c) entry of an order by the Bankruptcy Court, in form and substance reasonably satisfactory to the Required Lead Lenders, approving the disclosure statement, by no later than June 30, 2013; and (d) entry of an order by the Bankruptcy Court, in form and substance reasonably satisfactory to the Required Lead Lenders, approving a plan of reorganization by no later than September 15, 2013.  The first three of these milestones have been met.  Under these agreements, the Company is required to maintain minimum U.S. Liquidity of $100 million and minimum Consolidated Adjusted EBITDA and Commercial Imaging Adjusted EBITDA (as defined in the agreements) at specified levels ranging from approximately $35 million to approximately $171 million and approximately $58 million to approximately $202 million, respectively.  Kodak was in compliance with all covenants under the Amended and Restated Senior DIP Credit Agreement and the Junior DIP Credit Agreement as of June 30, 2013.
 

 
20

 


EMERGENCE CREDIT FACILITIES

On June 26, 2013, the Bankruptcy Court approved Kodak’s entry into commitment and engagement documents in connection with a new exit financing package (the “Emergence Credit Facility”).  The Emergence Credit Facility provides for senior secured term loans of $695 million consisting of $420 million of first lien term loans and $275 million of second lien term loans (the “Term Loans”).  In addition, the Emergence Credit Facility provides for a senior secured asset-based revolving credit facility (the “ABL Credit Facility”) of $200 million, subject to the satisfaction of certain conditions.  The ABL Credit Facility would have a maturity of the earlier of five years or 90 days prior to maturity of the Term Loans or other material indebtedness.  The first-lien term loans would have a maturity of six years from the closing date and the second-lien term loans would have a maturity of seven years from the closing date.

The syndication and allocation of the Term Loans was completed on August 1, 2013 and, subject to certain conditions precedent as defined in each credit agreement, will close and become effective on the Company’s emergence from chapter 11 bankruptcy.  The first lien term loans will bear interest at a rate of LIBOR plus 6.25%, with a 1.00% LIBOR floor , were issued at 98% Original Issue Discount (“OID”) and provide call premiums of 102 and 101 in years one and two, respectively. The second lien term loans will bear interest at a rate of LIBOR plus 9.50%, with a LIBOR floor of 1.25%, were issued at 97.5% OID and provide call protection of no call in year one, and call premiums of 103 and 101 in years two and  three, respectively. As defined in the respective credit agreements, there are customary mandatory prepayment requirements; financial, negative and affirmative covenants, events of default and conditions precedent to the effectiveness of the Term Loans.  These include a minimum U.S. liquidity requirement of $75 million through December 31, 2014 and thereafter Kodak would be required to meet secured net leverage ratios that step down over time.

If the Company does not close on the Term Loans by September 15, 2013 it will be required to pay a ticking fee equal to 50% of the applicable margin over LIBOR, (which is 50% of the 6.25% for the first lien term loans and 9.50% for the second lien term loans as noted above), for each term loan. This ticking fee increases to the full applicable margin over LIBOR starting day 91 through day150 from the allocation date and to the full interest rate (including the LIBOR component and the applicable margin) thereafter.

The syndication and allocation of the $200 million ABL Credit Facility was completed on August 6, 2013 and will close and become effective on the Company’s emergence from chapter 11 bankruptcy, subject to certain conditions precedent as defined in the ABL Credit Facility agreement. The ABL Credit Facility contains a sub-facility of up to $150 million to support the Company’s issuance of letters of credit. The initial interest rate is LIBOR plus 3.00% and may vary between LIBOR plus 2.75% and 3.25% depending on the usage under the facility. The annual undrawn fee is 0.50%. The ABL Credit Facility borrowing base is comprised of 85% of eligible receivables; plus the lesser of 75% of the cost of eligible inventory and 85% of the appraised Net Orderly Liquidation Value (“NOLV”) of eligible inventory; plus the lesser of $25 million and 75% of the appraised NOLV of eligible equipment, which amount will amortize down over the life of the facility. The ABL Credit Facility is subject to a $20 million availability blocker and various other customary reserves. The ABL Credit Facility contains a springing Fixed Charge Coverage Ratio of 1.0 times and cash dominion requirement if excess availability, as defined in the facility agreement, is less than 15%. The ABL Credit Facility contains customary negative and affirmative covenants, mandatory prepayments, events of default and conditions precedent. 
 
As noted above the Company expects to close on these Emergence Credit Facility Term Loans upon emergence from chapter 11 and therefore would not need to convert the Junior DIP Credit Agreement notes into the exit facility notes provided for under the Junior DIP Credit Agreement.
 

 
21

 


SENIOR SECURED NOTES DUE 2019

On March 15, 2011, the Company issued $250 million of aggregate principal amount of 10.625% senior secured notes due March 15, 2019 (“2019 Senior Secured Notes”).  Terms of the notes require interest at an annual rate of 10.625% of the principal amount at issuance, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2011.

Upon issuance of the 2019 Senior Secured Notes, the Company received proceeds of approximately $247 million ($250 million aggregate principal less $3 million stated discount).  The proceeds were used to repurchase $50 million of the 7.25% senior notes due 2013 with the remaining amount being used for other general corporate purposes.

In connection with the issuance of the 2019 Senior Secured Notes, the Company and the Subsidiary Guarantors entered into an indenture, dated as of March 15, 2011, with Bank of New York Mellon as trustee and second lien collateral agent (“Indenture”).  Wilmington Trust, National Association replaced and succeeded Bank of New York Mellon as Trustee and second-lien collateral agent on January 26, 2012.

The 2019 Senior Secured Notes are fully and unconditionally guaranteed (“Guarantees”) on a senior secured basis by each of the Company’s existing and future direct or indirect 100% owned domestic subsidiaries, subject to certain exceptions.  The 2019 Senior Secured Notes and Guarantees are secured by second-priority liens, subject to permitted liens, on substantially all of the Company’s domestic assets and substantially all of the domestic assets of the Subsidiary Guarantors pursuant to a supplement, dated March 15, 2011, to the security agreement, dated March 5, 2010, entered into with Bank of New York Mellon as second lien collateral agent.  The carrying value of the assets pledged as collateral as of June 30, 2013 was approximately $730 million.

The 2019 Senior Secured Notes are the Company’s senior secured obligations and rank senior in right of payment to any future subordinated indebtedness; rank equally in right of payment with all of the Company’s existing and future senior indebtedness; are effectively senior in right of payment to the Company’s existing and future unsecured indebtedness, are effectively subordinated in right of payment to indebtedness under the Company’s Amended and Restated Senior DIP Credit Agreement, to the extent of the collateral securing such indebtedness on a first- or second-priority basis, and are effectively subordinated in right of payment to indebtedness under the Junior DIP Credit Agreement to the extent of the collateral securing such indebtedness on a first- or second-priority basis; and effectively are subordinated in right of payment to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries.

The Bankruptcy Filing constituted an event of default under the 2019 Senior Secured Notes.  The creditors are, however, stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code.  See Junior DIP Credit Facility and Second Lien Note Holders Agreement for discussion of the conversion of $375 million of Second Lien Notes into Junior Loans under the Junior DIP Credit Facility.

SENIOR SECURED NOTES DUE 2018

On March 5, 2010, the Company issued $500 million of aggregate principal amount of 9.75% senior secured notes due March 1, 2018 (the “2018 Senior Secured Notes”).  Terms of the Notes require interest at an annual rate of 9.75% of the principal amount at issuance, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2010.

Upon issuance of the 2018 Senior Secured Notes, the Company received net proceeds of approximately $490 million ($500 million aggregate principal less $10 million stated discount).  The proceeds were used to repurchase all of the Senior Secured Notes due 2017 and to fund the tender of $200 million of the 7.25% Senior Notes due 2013.

In connection with the 2018 Senior Secured Notes, the Company and the Subsidiary Guarantors entered into an indenture, dated as of March 5, 2010, with Bank of New York Mellon as trustee and collateral agent (the “Indenture”).  Wilmington Trust, National Association replaced and succeeded Bank of New York Mellon as Trustee and second-lien collateral agent on January 26, 2012.

 
22

 

The 2018 Senior Secured Notes are fully and unconditionally guaranteed (the “Guarantees”) on a senior secured basis by each of the Company’s existing and future direct or indirect 100% owned domestic subsidiaries, subject to certain exceptions.  The 2018 Senior Secured Notes and Guarantees are secured by second-priority liens, subject to permitted liens, on substantially all of the Company’s domestic assets and substantially all of the domestic assets of the Subsidiary Guarantors pursuant to a security agreement entered into with Bank of New York Mellon as second lien collateral agent on March 5, 2010.  The carrying value of the assets pledged as collateral as of June 30, 2013 was approximately $730 million.

The 2018 Senior Secured Notes are the Company’s senior secured obligations and rank senior in right of payment to any future subordinated indebtedness; rank equally in right of payment with all of the Company’s existing and future senior indebtedness; are effectively senior in right of payment to the Company’s existing and future unsecured indebtedness, are effectively subordinated in right of payment to indebtedness under the Company’s Amended and Restated Senior DIP Credit Agreement, to the extent of the collateral securing such indebtedness on a first- or second-priority basis, and are effectively subordinated in right of payment to indebtedness under the Junior DIP Credit Agreement to the extent of the collateral securing such indebtedness on a first- or second-priority basis; and effectively are subordinated in right of payment to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries.

The Bankruptcy Filing constituted an event of default under the 2018 Senior Secured Notes.  The creditors are, however, stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code.  See Junior DIP Credit Facility and Second Lien Note Holders Agreement for discussion of the conversion of $375 million of Second Lien Notes into Junior Loans under the Junior DIP Credit Agreement.

SECOND LIEN NOTE HOLDERS AGREEMENT

On February 14, 2012, the Company reached an adequate protection agreement with a group representing at least 50.1% of the Second Lien Note Holders which was reflected in the final Original Senior DIP Credit Agreement order (the “Final DIP Order”).  The Company agreed, among other things, to provide all Second Lien Note Holders with a portion of the proceeds received from certain sales and settlements in respect of the Company’s digital imaging patent portfolio subject to the following waterfall and the Company’s right to retain a percentage of certain proceeds under the  Original Senior DIP Credit Agreement: first, to repay any outstanding obligations under the Original Senior DIP Credit Agreement, including cash collateralizing letters of credit (unless certain parties otherwise agree); second, to pay 50% of accrued second lien interest at the non-default rate; third, to retain $250 million; fourth, to repay the remaining accrued and unpaid second lien interest at the non-default rate; fifth, any remaining proceeds after conditions one through four up to $2,250 million to be split 60% to the Company and 40% to repay outstanding second lien debt at par; and sixth, the Company agreed that any proceeds above $2,250 million will be split 50% to the Company and 50% to Second Lien Note Holders until second lien debt is fully paid.  The Company also agreed to pay current interest to Second Lien Note Holders upon the receipt of $250 million noted above.  Subject to the satisfaction of certain conditions, the Company also agreed to pay reasonable fees of certain advisors to the Second Lien Note Holders.  On February 1, 2013, the Company received approximately $530 million in net proceeds from the sale and other settlements related to the digital imaging patent portfolio and therefore no payments were made to the Second Lien Note Holders.

In connection with the Junior DIP Credit Agreement, holders of the Company’s Second Lien Notes are entitled to receive accrued non-default interest on the Second Lien Notes.  Second Lien Notes outstanding after the Bankruptcy Court approval of the Junior DIP Credit Agreement are entitled to receive as additional adequate protection (i) replacement liens on Junior DIP collateral that are junior to the liens securing the Amended and Restated Senior DIP Credit Agreement and the Junior DIP Credit Agreement, (ii) guarantees from all entities that guarantee the Amended and Restated Senior DIP Credit Agreement and the Junior DIP Credit Agreement that are subordinate to the Guarantee in respect of the Amended and Restated Senior DIP Credit Agreement and the Junior DIP Credit Agreement, and (iii) administrative claims as provided for in section 507(b) of the Bankruptcy Code, junior to the super-priority administrative expense claims that would be granted to the Lenders under the Junior DIP Credit Agreement and Amended and Restated Senior DIP Credit Agreement (in each case of clauses (i), (ii) and (iii), to the extent of any diminution of the value of the applicable pre-petition collateral from and after January 19, 2012).  The Second Lien Notes are considered fully-secured and have not been reported as Liabilities subject to compromise.

DEBT SUBJECT TO COMPROMISE

The Bankruptcy Filing constituted an event of default with respect to certain of the Debtors’ unsecured debt obligations.  As a result of the Bankruptcy Filing, the principal and interest due under these debt instruments was deemed immediately due and payable.  However, the creditors are stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code.


 
23

 

 

NOTE 10:  INCOME TAXES

Kodak’s income tax provision (benefit) and effective tax rate were as follows:

(dollar amounts in millions)
 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
(Loss) earnings from continuing operations before income taxes
  $ (157 )   $ (306 )   $ 174     $ (712 )
Effective tax rate
    (32.5 )%     2.9 %     33.3 %     16.4 %
Provision (benefit) for income taxes
  $ 51     $ (9 )   $ 58     $ (117 )
(Benefit) provision for income taxes @ 35%
    (55 )     (107 )     61       (249 )
Difference between tax at effective vs. statutory rate
  $ 106     $ 98     $ (3 )   $ 132  


For the three months ended June 30, 2013, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a provision associated with withholding taxes on foreign dividends paid, (3) a benefit associated with foreign withholding taxes on undistributed earnings, and (4) a provision associated with the establishment of a deferred tax asset valuation allowance outside the U.S.
 
During the three months ended June 30, 2013, the Company determined that it is more likely than not that a portion of the deferred tax assets outside the U.S. would not be realized and accordingly, recorded a tax provision of $45 million associated with the establishment of a valuation allowance on those deferred tax assets.

For the six months ended June 30, 2013, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a provision associated with withholding taxes on the sale of intellectual property, (3) a benefit associated with the tax impact of the goodwill impairment recognized during the quarter (4) a provision associated with withholding taxes on foreign dividends paid, (5) a benefit associated with foreign withholding taxes on undistributed earnings, (6) a provision associated with the establishment of a deferred tax asset valuation allowance outside the U.S., and (7) changes in audit reserves.
 
For the three months ended June 30, 2012, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) tax accounting impacts related to items reported in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position, and (3) a provision associated with foreign withholding taxes on undistributed earnings.
 

 
24

 

 
In March 2011, Kodak filed a Request for Competent Authority Assistance with the United States Internal Revenue Service (“IRS”).  The request related to a potential double taxation issue with respect to certain patent licensing royalty payments received by Kodak in 2012 and 2011.  In the six months ended June 30, 2012, Kodak received notification that the IRS had reached agreement with the Korean National Tax Service (“NTS”) with regards to Kodak’s March 2011 request.  As a result of the agreement reached by the IRS and NTS, Kodak was due a partial refund of Korean withholding taxes in the amount of $123 million.  Kodak had previously agreed with the licensees that made the royalty payments that any refunds of the related Korean withholding taxes would be shared equally between Kodak and the licensees.  The licensees’ share ($61 million) of the Korean withholding tax refund has therefore been reported as a licensing revenue reduction in Licensing & royalties in the Consolidated Statement of Operations.

For the six months ended June 30, 2012, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a benefit as a result of the Company reaching a settlement of the competent authority claim noted above, (3) tax accounting impacts related to items reported in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position, and (4) a provision associated with the establishment of a deferred tax asset valuation allowance outside the U.S., (5) a provision associated with foreign withholding taxes on undistributed earnings and (6) changes in audit reserves.

During the six months ended June 30, 2012, the Company determined that it is more likely than not that a portion of the deferred tax assets outside the U.S. would not be realized and accordingly, recorded a tax provision of $16 million associated with the establishment of a valuation allowance on those deferred tax assets.

NOTE 11:  COMMITMENTS AND CONTINGENCIES

Environmental

Kodak’s undiscounted accrued liabilities for future environmental investigation, remediation, and monitoring costs are composed of the following items:
   
As of
 
(in millions)
 
June 30,
   
December 31,
 
   
2013
   
2012
 
             
Eastman Business Park site, Rochester, NY
  $ 49     $ 49  
Other current operating sites
    16       9  
Sites associated with former operations
    20       17  
Sites associated with the non-imaging health businesses sold in 1994
    40       41  
           Total
  $ 125     $ 116  
                 

These amounts are reported in Other long-term liabilities and Liabilities subject to compromise in the accompanying Consolidated Statement of Financial Position.

Cash expenditures for the aforementioned investigation, remediation and monitoring activities are expected to be incurred over the next thirty years for most of the sites.  For these known environmental liabilities, the accrual reflects Kodak’s best estimate of the amount it will incur under the agreed-upon or proposed work plans.  Kodak’s cost estimates were determined using the ASTM Standard E 2137-06, "Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters," and have not been reduced by possible recoveries from third parties.  The overall method includes the use of a probabilistic model which forecasts a range of cost estimates and a single most probable cost estimate for the remediation required at individual sites.  For the purposes of establishing company-level environmental reserves, the single most probable cost estimate for each site is used.  All projects are closely monitored and the models are reviewed as significant events occur or at least once per year.  Kodak’s estimate includes investigations, equipment and operating costs for remediation and long-term monitoring of the sites.  Accrued liabilities of Debtor entities related to sites subject to the bankruptcy proceedings have been classified as liabilities subject to compromise.  Liabilities subject to compromise are reported at Kodak’s current estimate, where an estimate is determinable, of the allowed claim amount.

 
25

 


On June 17, 2013 the Company, the New York State Department of Environmental Conservation and the New York State Urban Development Corporation, d/b/a Empire State Development entered into an agreement, which, in part establishes a $49 million environmental trust for Eastman Business Park (the “EBP Settlement Agreement”).  The agreement was subsequently amended on August 6, 2013 (the "Amended and Restated EBP Settlement Agreement"). 
 
The Amended and Restated EBP Settlement Agreement includes a settlement of Kodak’s historical environmental liabilities at Eastman Business Park ("EBP") through the establishment of an environmental remediation trust (the “EBP Trust”).  If the EBP Amended and Restated Settlement Agreement is approved by the Bankruptcy Court, and upon the satisfaction or waiver of certain conditions, (i) the EBP Trust will be responsible for investigation and remediation at EBP arising from Kodak’s historical environmental liabilities in existence prior to the effective date of the EBP Settlement, (ii) Kodak will fund the EBP Trust with a $49 million payment and transfer to the EBP Trust Kodak’s interests in personal property, equipment and fixtures used for performing any environmental response actions at EBP, and (iii) in the event the historical liabilities exceed $99 million, Kodak will become liable for 50% of the portion above $99 million.  As of June 30, 2013, approximately $23 million was already held in a separate trust to support those environmental liabilities related to EBP.  The transaction is subject to the approval of the Bankruptcy Court, and resolution of issues raised by the United States Department of Justice on behalf of the U.S. Environmental Protection Agency as well as satisfaction of the other conditions precedent to effectiveness set forth in the EBP Settlement Agreement.

Kodak is presently 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 Kodak’s alleged arrangements for disposal of hazardous substances at eight Superfund sites.  In connection with the Bankruptcy Filing, the Debtors have provided withdrawal notifications or entered into settlement negotiations with involved regulatory agencies.
 
In addition, the Company provided an indemnity as part of the 1994 sale of Sterling Corporation (now “STWB”) which covered a number of environmental sites including the Lower Passaic River Study Area (“LPRSA”) portion of the Diamond Alkali Superfund Site. STWB, now owned by Bayer Corporation, is Potentially Responsible Party (“PRP”) at the site based on alleged releases from facilities formerly owned by subsidiaries of Sterling, a former Hilton Davis site in Newark and a Lehn & Fink facility in Bloomfield, New Jersey.  On February 10, 2004, the Company (through its subsidiary NPEC) joined the Cooperating Parties Group (“CPG”) and entered into a 122(h) Agreement under CERCLA on June 22, 2004, and a Consent Order with the EPA on May 8, 2007.   On February 29, 2012, the Company notified the EPA, STWB, Bayer, and the CPG that under the bankruptcy proceeding, it has elected to discontinue funding and participation in the remedial investigation being implemented by the CPG pursuant to the EPA Order.  STWB and its parent, Bayer, have filed proofs of claim against the Debtors in the chapter 11 cases.
 
Estimates of the amount and timing of future costs of environmental remediation requirements are by their nature imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the PRPs.  Based on information presently available, Kodak does not believe it is reasonably possible that losses for known exposures could exceed current accruals by material amounts, although costs could be material to a particular quarter or year.

Other Commitments and Contingencies

As of June 30, 2013, the Company had outstanding letters of credit of $128 million issued under the Amended and Restated Senior DIP Credit Agreement, as well as bank guarantees and letters of credit of $11 million, surety bonds in the amount of $25 million, and cash and investments in trust of $33 million, primarily to ensure the payment of possible casualty and workers’ compensation claims, environmental liabilities at EBP as noted above, legal contingencies, rental payments, and to support various customs, tax and trade activities.  The restricted cash and investment in trust amounts are recorded within Other long-term assets in the Consolidated Statement of Financial Position.

Kodak’s Brazilian operations are involved in governmental assessments of indirect and other taxes in various stages of litigation, primarily related to federal and state value-added taxes.  Kodak is disputing these matters and intends to vigorously defend its position.  Based on the opinion of legal counsel and current reserves already recorded for those matters deemed probable of loss, management does not believe that the ultimate resolution of these matters will materially impact Kodak’s results of operations or financial position.  Kodak routinely assesses all these matters as to the probability of ultimately incurring a liability in its Brazilian operations and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.  As of June 30, 2013, the unreserved portion of these contingencies, inclusive of any related interest and penalties, for which there was at least a reasonable possibility that a loss may be incurred, amounted to approximately $62 million.
 
Kodak is involved in various lawsuits, claims, investigations and proceedings, including commercial, customs, employment, environmental, and health and safety matters, which are being handled and defended in the ordinary course of business.  Kodak is also subject to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of Kodak’s products.  These matters are in various stages of investigation and litigation, and are being vigorously defended.  Much of the pending litigation against the Debtors has been stayed as a result of the Bankruptcy Filing and will be subject to resolution in accordance with the Bankruptcy Code and the orders of the Bankruptcy Court.  Although Kodak does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition or results of operations, litigation is inherently unpredictable.  Therefore, judgments could be rendered or settlements entered, that could adversely affect Kodak’s operating results or cash flows in a particular period.  Kodak routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
 

 
26

 

NOTE 12:  GUARANTEES

Kodak guarantees debt and other obligations of certain customers.  The debt and other obligations are primarily due to banks and leasing companies in connection with financing of customers’ purchases of equipment and product from Kodak.  At June 30, 2013, the maximum potential amount of future payments (undiscounted) that Kodak could be required to make under these customer-related guarantees was $34 million.  At June 30, 2013, the carrying amount of any liability related to these customer guarantees was not material.

The customer financing agreements and related guarantees, which mature on varying dates through 2018, typically have a term of 90 days for product and short-term equipment financing arrangements, and up to five 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, Kodak has collateral or recourse provisions to recover and sell the equipment to reduce any losses that might be incurred in connection with the guarantees.  However, any proceeds received from the liquidation of these assets would not cover the maximum potential loss under these guarantees.

EKC also guarantees potential indebtedness to banks and other third parties for some of its consolidated subsidiaries.  The maximum amount guaranteed is $96 million, and the outstanding amount for those guarantees is $80 million with $40 million recorded within the Short-term borrowings and current portion of long-term debt, and Long-term debt, net of current portion in the accompanying Consolidated Statement of Financial Position.  The remaining $40 million of outstanding guarantees represent parent guarantees providing assurance to third parties that the Company’s subsidiaries will fulfill their future performance or financial obligations under various contracts, which do not necessarily have corresponding liabilities reported in Kodak’s financial statements.  These guarantees expire in 2013 through 2019.

Pursuant to the terms of the Company's Amended and Restated Senior DIP Credit Agreement and Junior DIP Credit Agreement, obligations of the Borrowers to the Lenders, as well as secured agreements under the Amended and Restated Senior DIP Credit Agreement, are guaranteed by the Company and the Company’s U.S. subsidiaries and included in the above amounts.  Secured agreements under the Amended and Restated Senior DIP Credit Agreement for the Debtors totaled $20 million as of June 30, 2013.

Warranty Costs

Kodak has warranty obligations in connection with the sale of its products and equipment.  The original warranty period is generally one year or less.  The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale.  Kodak estimates its warranty cost at the point of sale for a given product based on historical failure rates and related costs to repair.

The change in Kodak's accrued warranty obligations balance, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:
 
(in millions)

Accrued warranty obligations as of December 31, 2012
  $ 29  
Actual warranty experience during 2013
    (19 )
2013 warranty provisions
    10  
Accrued warranty obligations as of June 30, 2013
  $ 20  


Kodak also offers its customers extended warranty arrangements that are generally one year, but may range from three months to three years after the original warranty period.  Kodak provides repair services and routine maintenance under these arrangements.  Kodak has not separated the extended warranty revenues and costs from the routine maintenance service revenues and costs, as it is not practicable to do so.  Therefore, these revenues and costs have been aggregated in the discussion that follows.  Costs incurred under these arrangements for the six months ended June 30, 2013 amounted to $79 million.  The change in Kodak's deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2012 to June 30, 2013, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:

(in millions)

Deferred revenue on extended warranties as of December 31, 2012
  $ 38  
New extended warranty and maintenance arrangements in 2013
    89  
Recognition of extended warranty and maintenance arrangement revenue in 2013
    (89 )
Deferred revenue on extended warranties as of June 30, 2013
  $ 38  
 

 
 
27

 

 
NOTE 13:  RESTRUCTURING LIABILITIES

Charges for restructuring activities are recorded in the period in which Kodak commits to a formalized restructuring plan, or executes the specific actions contemplated by the plan, and all criteria for liability recognition under the applicable accounting guidance have been met.  Restructuring actions taken in the first six months of 2013 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability.  Year to date actions included traditional product manufacturing capacity reductions in the U.S. and the U.K., the continued wind down of the consumer inkjet printer business, a workforce reduction in France, and various targeted reductions in service, sales, and other administrative functions.

Restructuring Reserve Activity

The activity in the accrued balances and the non-cash charges and credits incurred in relation to restructuring activities for the three and six months ended June 30, 2013 were as follows:

               
Long-lived Asset
             
         
Exit
   
Impairments and
             
   
Severance
   
Costs
   
Inventory
   
Accelerated
       
(in millions)
 
Reserve
   
Reserve
   
Write-downs
   
Depreciation
   
Total
 
                               
Balance as of December 31, 2012
  $ 38     $ 45     $ -     $ -       83  
                                         
Q1 2013 charges - continuing operations
    9       1       2       1       13  
Q1 2013 charges - discontinued operations
    1       -       -       -       1  
Q1 2013 utilization/cash payments
    (20 )     (18 )     (2 )     (1 )     (41 )
Q1 2013 other adjustments & reclasses  (1)
    -       (6 )     -       -       (6 )
Balance as of March 31, 2013
  $ 28     $ 22     $ -     $ -     $ 50  
                                         
                                         
Q2 2013 charges - continuing operations
  $ 28     $ 1     $ 1     $ 3     $ 33  
Q2 2013 charges - discontinued operations
    1       -       -       -       1  
Q2 2013 utilization/cash payments
    (18 )     (9 )     (1 )     (3 )     (31 )
Q2 2013 other adjustments & reclasses  (2)
    (5 )     -       -       -       (5 )
Balance as of June 30, 2013
  $ 34     $ 14     $ -     $ -     $ 48  

(1)  
The $(6) million includes $(5) million for amounts reclassified as Liabilities subject to compromise, and $(1) million of foreign currency translation adjustments.
 
(2)  
The $(5) million represents severance-related charges for pension plan curtailments, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.

For the three months ended June 30, 2013, the $34 million of charges include $3 million for accelerated depreciation and $1 million for inventory write-downs, which were reported in Cost of sales, and $1 million which was reported as Discontinued operations in the accompanying Consolidated Statement of Operations.  The remaining costs incurred of $29 million were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations for the three months ended June 30, 2013.  The severance and exit costs reserves require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items.

The second quarter 2013 severance costs related to the elimination of approximately 325 positions, including approximately 200 manufacturing/service positions, 100 administrative positions, and 25 research and development positions.  The geographic composition of these positions includes approximately 200 in the United States and Canada, and 125 throughout the rest of the world.

The charges of $34 million recorded in the second quarter of 2013 included $16 million applicable to the Graphics, Entertainment and Commercial Films Segment and $17 million that was applicable to manufacturing, research and development, and administrative functions, which are shared across all segments.  The remaining $1 million was applicable to discontinued operations.

For the six months ended June 30, 2013, the $48 million of charges include $4 million for accelerated depreciation and $2 million for inventory write-downs, which were reported in Cost of sales, and $2 million which was reported as Discontinued operations in the accompanying Consolidated Statement of Operations.  The remaining costs incurred of $40 million were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations for the six months ended June 30, 2013.  The severance and exit costs reserves require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items.

 
28

 


The severance costs for the six months ended June 30, 2013 related to the elimination of approximately 550 positions, including approximately 350 manufacturing/service positions, 175 administrative positions, and 25 research and development positions.  The geographic composition of these positions includes approximately 300 in the United States and Canada, and 250 throughout the rest of the world.

The charges of $48 million for the six months ended June 30, 2013 included $5 million applicable to the Digital Printing and Enterprise Segment, $21 million applicable to the Graphics, Entertainment and Commercial Films Segment, and $20 million that was applicable to manufacturing, research and development, and administrative functions, which are shared across all segments.  The remaining $2 million was applicable to discontinued operations.
 
 
As a result of these initiatives, the majority of the severance will be paid during periods through the end of 2013.  However, in some instances, the employees whose positions were eliminated can elect or are required to receive their payments over an extended period of time.  In addition, certain exit costs, such as long-term lease payments, will be paid over periods throughout 2013 and beyond.


 
29

 

NOTE 14:  RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS

Components of the net periodic benefit cost for all major funded and unfunded U.S. and Non-U.S. defined benefit plans for the three and six months ended June 30, 2013 and 2012 are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
                                                 
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
 
Major defined benefit plans:
                                               
  Service cost
  $ 8     $ 3     $ 12     $ 2     $ 16     $ 5     $ 24     $ 6  
  Interest cost
    43       35       50       39       86       71       104       78  
  Expected return on plan assets
    (86 )     (40 )     (98 )     (40 )     (173 )     (80 )     (195 )     (84 )
  Amortization of:
                                                               
     Recognized prior service cost
    -       -       -       -       -       1       -       1  
     Recognized net actuarial loss
    50       21       44       16       99       42       87       33  
Pension expense before special termination benefits, curtailments, and settlements
    15       19       8       17       28       39       20       34  
  Special termination benefits
    -       -       2       -       -       -       56       -  
  Curtailment loss
    1       13       -       -       1       13       -       -  
  Settlement loss
    -       -       -       1       -       -       -       1  
Net pension expense
    16       32       10       18       29       52       76       35  
Other plans including unfunded
  plans
    -       2       -       2       -       8       -       6  
Total net pension expense
  $ 16     $ 34     $ 10     $ 20     $ 29     $ 60     $ 76     $ 41  
                                                                 
 
The Pension expense before special termination benefits, curtailments, and settlements reported above for the three and six months ended June 30, 2013 includes $14 million and $29 million, respectively, which was reported as Discontinued operations.  The Pension expense before special termination benefits, curtailments, and settlements reported above for the three and six months ended June 30, 2012 includes $15 million and $30 million, respectively, which was reported as Discontinued operations.

For the three and six months ended June 30, 2012, the $2 million and $56 million, respectively, of special termination benefits charges were incurred as a result of Kodak’s restructuring actions.  These charges have been included in Restructuring costs and other in the Consolidated Statement of Operations.  For the three and six months ended June 30, 2013, $5 million of curtailment losses were incurred as a result of Kodak’s restructuring actions, and have been included in Restructuring costs and other in the Consolidated Statement of Operations.  The remaining curtailment losses of $9 million
were incurred as a result of the planned divestiture of certain assets and liabilities of Kodak’s Personalized Imaging and Document Imaging businesses to the KPP, and have been included in Discontinued operations in the Consolidated Statement of Operations.

 
30

 

Kodak made contributions (funded plans) or paid benefits (unfunded plans) totaling approximately $19 million relating to its major U.S. and non-U.S. defined benefit pension plans for the six months ended June 30, 2013.  The Company forecasts its contribution (funded plans) and benefit payment (unfunded plans) requirements for its major U.S. and non-U.S. defined benefit pension plans for the balance of 2013 to be approximately $18 million, exclusive of any payments to be determined through the Bankruptcy Proceedings for the U.S. non-qualified pension plans, as well as any payments to be made to the KPP as a part of the Global Settlement agreement reached with the Trustee of the KPP.

Postretirement benefit costs for the Company's U.S. and Canada postretirement benefit plans, which represent the Company's major postretirement plans, include:
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
                         
Service cost
  $ -     $ -     $ -     $ -  
Interest cost
    1       13       2       26  
Amortization of:
                               
   Prior service credit
    (29 )     (19 )     (57 )     (38 )
   Recognized net actuarial loss
    2       7       3       15  
Total net postretirement benefit (income) expense
  $ (26 )   $ 1     $ (52 )   $ 3  


Kodak paid benefits, net of participant contributions, totaling approximately $2 million relating to its U.S. and Canada postretirement benefit plans for the six months ended June 30, 2013.  Kodak expects to pay benefits, net of participant contributions, of approximately $6 million for these postretirement plans for the remainder of 2013.

The change in net postretirement benefit expense from the six months ended June 30, 2012 to the six months ended June 30, 2013 is primarily the result of modification, in 2012, of benefits provided by the U.S. postretirement benefit plan.

Curtailment events in the second quarter of 2013 resulted in the required remeasurement of certain of the plans’ obligations during the quarter, which decreased the retirement and other postretirement benefit plan obligation by $372 million.

NOTE 15:  OTHER OPERATING (INCOME) EXPENSES, NET

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
                         
(Income) expenses:
                       
Gain on sale of digital imaging patent portfolio
  $ -       -       (535 )     -  
Goodwill impairment (1)
    -       -       77       -  
Gain on sale of property in Mexico (2)
    -       -       (34 )     -  
Other
    (1 )     1       (3 )     -  
   Total
  $ (1 )   $ 1     $ (495 )   $ -  


(1) Refer to Note 7, “Goodwill,” in the Notes to Financial Statements.

(2)  In March 2012, Kodak sold a property in Mexico for approximately $41 million and leased back the property for a one-year term.  The pre-tax gain on the property sale of approximately $34 million was deferred and no gain was recognizable upon the closing of the sale as Kodak had continuing involvement in the property for the remainder of the lease term.  The deferred pre-tax gain was reported in Other current liabilities in the Consolidated Statement of Financial Position as of December 31, 2012.
 

 
 
31

 


NOTE 16:  EARNINGS PER SHARE

Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the year.  Weighted-average basic and diluted shares outstanding for the three and six months ended June 30, 2013 were 272.8 million and 272.7 million, respectively.

As a result of the net loss from continuing operations presented for the three months ended June 30, 2013, Kodak calculated diluted earnings per share using weighted-average basic shares outstanding for that period, as utilizing diluted shares would be anti-dilutive to loss per share.
 
If Kodak had reported earnings from continuing operations for the quarter ended June 30, 2013, no additional shares of Kodak’s common stock from unvested share-based awards would have been included in the computation of diluted earnings per share since they were all anti-dilutive.  Potential shares of Kodak’s common stock related to the assumed conversion of (1) approximately 7.6 million outstanding employee stock options, (2) approximately 40.0 million outstanding detachable warrants to purchase common shares, and (3) approximately $400 million of convertible senior notes due 2017 were excluded from the computation of diluted earnings per share, as these securities were anti-dilutive.

Kodak reported earnings from continuing operations for the six months ended June 30, 2013.  However, no additional shares of Kodak’s common stock from unvested share-based awards would have been included in the computation of diluted earnings per share since they were all anti-dilutive.  Potential shares of Kodak’s common stock related to the assumed conversion of (1) approximately 7.6 million outstanding employee stock options, (2) approximately 40.0 million outstanding detachable warrants to purchase common shares, and (3) approximately $400 million of convertible senior notes due 2017 were excluded from the computation of diluted earnings per share, as these securities were anti-dilutive.

Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the year.  Weighted-average basic and diluted shares outstanding for the three and six months ended June 30, 2012 were 271.9 million and 271.5 million, respectively.

As a result of the net loss from continuing operations presented for the three and six months ended June 30, 2012, Kodak calculated diluted earnings per share using weighted-average basic shares outstanding for that period, as utilizing diluted shares would be anti-dilutive to loss per share.

If Kodak had reported earnings from continuing operations for the three and six months ended June 30, 2012, no additional shares of Kodak’s common stock from unvested share-based awards would have been included in the computation of diluted earnings per share since they were all anti-dilutive.  Potential shares of Kodak’s common stock related to the assumed conversion of (1) approximately 11.5 million outstanding employee stock options, (2) approximately 40.0 million outstanding detachable warrants to purchase common shares, and (3) approximately $400 million of convertible senior notes due 2017 would still have been excluded from the computation of diluted earnings per share, as these securities were anti-dilutive.

NOTE 17:  SHAREHOLDERS' EQUITY

Kodak has 950 million shares of authorized common stock with a par value of $2.50 per share, of which 391 million shares had been issued as of June 30, 2013 and December 31, 2012.  Treasury stock at cost consisted of approximately 118 million and 119 million shares as of June 30, 2013 and December 31, 2012, respectively.


 
32

 

NOTE 18:  ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The changes in Accumulated other comprehensive (loss) income by component, net of tax, were as follows:

(in millions)
 
Three Months Ended June 30, 2013
       
                               
   
Unrealized Gains (Losses) Related to Available-for-Sale Securities
   
Unrealized Gains (Losses) from Hedging Activity
   
Currency Translation Adjustments
   
Pension and Other Postretirement Benefit Plan Obligation Changes
   
Total
 
Beginning balance
  $ 1     $ (2 )   $ 349     $ (2,892 )   $ (2,544 )
Other comprehensive income before reclassifications
    -       -       (16 )     361       345  
Amounts reclassified from accumulated other comprehensive income
    -       -       -       46       46  
Net current-period other comprehensive income
    -       -       (16 )     407       391  
Ending balance
  $ 1     $ (2 )   $ 333     $ (2,485 )   $ (2,153 )

(in millions)
 
Six Months Ended June 30, 2013
       
                               
   
Unrealized Gains (Losses) Related to Available-for-Sale Securities
   
Unrealized Gains (Losses) from Hedging Activity
   
Currency Translation Adjustments
   
Pension and Other Postretirement Benefit Plan Obligation Changes
   
Total
 
Beginning balance
  $ 1     $ (2 )   $ 318     $ (2,933 )   $ (2,616 )
Other comprehensive income before reclassifications
    -       -       15       362       377  
Amounts reclassified from accumulated other comprehensive income
    -       -       -       86       86  
Net current-period other comprehensive income
    -       -       15       448       463  
Ending balance
  $ 1     $ (2 )   $ 333     $ (2,485 )   $ (2,153 )

The following amounts were reclassified out of Accumulated other comprehensive income:

(in millions)
 
Three Months Ended
     
   
June 30, 2013
     
           
Details about Accumulated other comprehensive income components:
 
Amount Reclassified from Accumulated Other Comprehensive Income
   
Affected Line Item in the Consolidated Statement of Operations
           
Pension and other postretirement benefit obligation changes:
         
Amortization of prior-service credit
  $ (29 )
(a)
 
Amortization of actuarial losses
    73  
(a)
 
Recognition of losses due to settlements and curtailments
    14  
(a)
 
      58    
Total before tax
    $ (12 )  
Tax expense
Reclassifications for the period
  $ 46    
Net of tax


(in millions)
 
Six Months Ended
     
   
June 30, 2013
     
           
Details about Accumulated other comprehensive income components:
 
Amount Reclassified from Accumulated Other Comprehensive Income
   
Affected Line Item in the Consolidated Statement of Operations
Pension and other postretirement benefit obligation changes:
         
Amortization of prior-service credit
  $ (56 )
(a)
 
Amortization of actuarial losses
    144  
(a)
 
Recognition of losses due to settlements and curtailments
    17  
(a)
 
      105    
Total before tax
    $