Kodak 2003 Annual Report Download - page 72

Financials
72
NOTE 21: ACQUISITIONS
2003
The Company had a commitment under a put option arrangement with the
Burrell Companies, unaffiliated entities, whereby the shareholders of those
Burrell Companies had the ability to put 100% of the stock to Kodak for a
fixed price plus the assumption of debt. The option first became exercis-
able on October 1, 2002 and was ultimately exercised during the
Company’s fourth quarter ended December 31, 2002. Accordingly, on
February 5, 2003, the Company acquired the Burrell Companies for a total
purchase price of approximately $63 million, which was composed of
approximately $54 million in cash and $9 million in assumed debt. As the
Company did not want to operate the business, they immediately entered
into negotiations to sell the operations. As negotiations proceeded, the
Company determined that the consideration expected in connection with
the sale would not be sufficient to recover the carrying value of the
assets. Accordingly, the Company recorded an impairment charge of $9
million in the second quarter of 2003. This charge is reflected in the sell-
ing, general and administrative component within the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003. The Company ultimately closed on the sale of the Burrell Companies
on October 6, 2003. The difference between the sale proceeds and the
carrying value of the net assets in the Burrell Companies upon disposition
was not material.
During the first quarter, the Company paid approximately $21 million
for the rights to certain technology. As this technology was still in the
development phase and not yet ready for commercialization, it qualified as
in-process research and development. Additionally, management deter-
mined that there are no alternative future uses for this technology beyond
its initial intended application. Accordingly, the entire purchase price was
expensed in the year ended December 31, 2003 as research and develop-
ment costs in the accompanying Consolidated Statement of Earnings.
During the second quarter, the Company purchased Applied Science
Fiction’s proprietary rapid film processing technology and other assets for
approximately $32 million in cash. Of the $32 million in purchase price,
approximately $16 million represented goodwill. The balance of the pur-
chase price of approximately $16 million was allocated to the acquired
intangible assets, consisting of developed technologies, which have useful
lives ranging from two to six years.
On October 7, 2003, Kodak acquired all of the outstanding shares of
PracticeWorks, Inc. (PracticeWorks), a leading provider of dental practice
management software (DPMS) and digital radiographic imaging systems,
for approximately $475 million in cash, inclusive of transaction costs.
Accordingly, Kodak also became the 100% owner of Paris-based sub-
sidiary, Trophy Radiologie, S.A., a developer and manufacturer of dental
digital radiography equipment, which PracticeWorks acquired in December
2002. This acquisition will enable Kodak’s Health Imaging business to offer
its customers a full spectrum of dental imaging products and services
from traditional film to digital radiography and photography. Earnings from
continuing operations for 2003 include the results of PracticeWorks from
the date of acquisition.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of acquisition. The allo-
cation of the purchase price presented below is subject to refinement.
(in millions) At October 7, 2003
Current assets $ 52
Intangible assets (including in-process R&D) 179
Other non-current assets (including PP&E) 53
Goodwill 350
Total assets acquired $ 634
Current liabilities $ 71
Long-term debt 23
Other non-current liabilities 65
Total liabilities assumed $ 159
Net assets acquired $ 475
Of the $179 million of acquired intangible assets, $10 million was
assigned to research and development assets that were written off at the
date of acquisition. This amount was determined by identifying research
and development projects that had not yet reached technological feasibili-
ty and for which no alternative future uses exist. As of the acquisition
date, there were two projects that met these criteria. The value of the
projects identified to be in progress was determined by estimating the
future cash flows from the projects once commercialized, less costs to
complete development, and discounting these net cash flows back to their
present value. The discount rate used for these projects was 14%. The
charges for the write-off were included as research and development
costs in the Company’s Consolidated Statement of Earnings for the year
ended December 31, 2003.
The remaining $169 million of intangible assets have useful lives
ranging from three to eighteen years. The intangible assets that make up
that amount include customer relationships of $123 million (eighteen-year
weighted-average useful life), developed technology of $44 million (seven-
year weighted-average useful life), and other assets of $2 million (three-
year weighted-average useful life). The $350 million of goodwill will be
assigned to the Health Imaging segment and is not expected to be
deductible for tax purposes.
The unaudited pro forma combined historical results, as if
PracticeWorks had been acquired at the beginning of 2003 and 2002,
respectively, are estimated to be:
(in millions, except per share data) 2003 2002
Net sales $ 13,447 $ 12,922
Earnings from continuing operations $ 232 $ 766
Basic and diluted earnings per share
from continuing operations $.81 $ 2.63
The pro forma results include amortization of the intangible assets
presented above and interest expense on debt assumed to finance the
purchase. The interest expense was calculated based on the assumption
that approximately $450 million of the purchase price was financed
through debt with an annual interest rate of approximately 5%. The pro
forma results exclude the write-off of research and development assets
that were acquired from the acquisition. The number of common shares
used in basic earnings per share for 2003 and 2002 were 286.5 million
and 291.5 million, respectively. The number of common shares used in
diluted earnings per share for 2003 and 2002 were 286.6 million and
291.7 million, respectively. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had