Kodak 2004 Annual Report Download - page 89

Financials
87
2004 SUMMARY ANNUAL REPORT
NOTE 21: ACQUISITIONS
2004
National Semiconductor Corporation On September 7, 2004, the
Company completed the purchase of the imaging business of National
Semiconductor Corporation, which develops and manufactures compli-
mentary metal oxide semiconductor image sensor (CIS) devices. The
Company paid approximately $10 million cash at closing, which included all
transaction related costs. Under the terms of the acquisition, the Company
acquired certain assets, including intellectual property and equipment, and
hired approximately 50 employees that previously supported the imaging
business. This acquisition added resources and technologies that will fur-
ther strengthen the Company’s ability to design next generation CIS devices
that promise to deliver improved image quality with complex on-chip image
processing circuitry.
Based on the Company’s purchase price allocation, approximately $6
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 technologi-
cal feasibility and for which no alternative future uses exist. The value of
the projects identifi ed to be in progress was determined by estimating the
future cash fl ows from the projects once commercialized, less costs to
complete development and discounting these net cash fl ows back to their
present value. The discount rate used for these three research and devel-
opment projects was 15%. 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, 2004.
In addition, approximately $2 million of the purchase price was
included in other long-term assets, as technology-based intangible assets
in the Company’s Consolidate Statement of Financial Position at December
31, 2004. The remaining purchase price was allocated among other current
assets, property, plant, and equipment, and goodwill in the Company’s
Consolidated Statement of Financial Position at December 31, 2004.
NexPress-Related Entities On May 1, 2004, the Company completed
the purchase of Heidelberger Druckmaschinen AG’s (Heidelberg) 50
percent interest in NexPress Solutions LLC, a 50/50 joint venture of Kodak
and Heidelberg that makes high-end, on-demand digital color printing
systems, and the equity of Heidelberg Digital LLC, a leading maker of digital
black-and-white variable-data printing systems. Kodak also announced
the acquisition of NexPress GmbH, a German subsidiary of Heidelberg that
provides engineering and development support, and certain inventory, as-
sets, and employees of Heidelberg’s regional operations or market centers.
There was no consideration paid to Heidelberg at closing. Under the terms
of the acquisition, Kodak and Heidelberg agreed to use a performance-
based earn-out formula whereby Kodak will make periodic payments to
Heidelberg over a two-year period, if certain sales goals are met. If all sales
goals are met during the two calendar years ending December 31, 2005,
the Company will pay a maximum of $150 million in cash. During the fi rst
calendar year, no amounts were paid. Additional payments may also be
made relating to the incremental sales of certain products in excess of a
stated minimum number of units sold during a fi ve-year period following
the closing of the transaction. This acquisition advances the Company’s
strategy of diversifying its business portfolio, and accelerates its participa-
tion in the digital commercial printing industry.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The preliminary
purchase price allocation is as follows:
At May 1, 2004 (in millions)
Current assets $ 95
Intangible assets (including in-process R&D) 9
Other non-current assets (including PP&E) 37
Total assets acquired $ 141
Current liabilities $ 55
Other non-current liabilities 6
Deferred taxes 30
Total liabilities assumed $ 91
Net assets acquired $ 50
The excess of fair value of acquired net assets over cost of $50
million represents negative goodwill and was recorded as a component
of other long-term liabilities in the Company’s Consolidated Statement of
Financial Position.
As of the acquisition date, management began to assess and formu-
late plans to restructure the NexPress-related entities. As of December 31,
2004, management had completed its assessment and approved actions
on some of the plans. Accordingly, the Company recorded a related liability
of $7 million. This liability is included in the current liabilities amount
reported above and represents restructuring charges related to the entities
and net assets acquired. As of December 31, 2004, management had not
approved all plans and actions to be taken and, therefore the Company
was not committed to specifi c actions. Accordingly, the amount related
to future actions is not estimable and has not been recorded. However,
once management approves and commits the Company to the plans, the
accounting for the restructuring charges will be refl ected in the purchase
accounting as a reduction of negative goodwill to the extent the actions
relate to the entities and the net assets acquired. To the extent such actions
relate to the Company’s historical ownership in the NexPress Solutions LLC
joint venture, the restructuring charges will be refl ected in the Company’s
Consolidated Statement of Earnings. This amount was $1.1 million as of
December 31, 2004.
China Lucky Film Co. Ltd. On October 22, 2003, the Company an-
nounced that it signed a twenty-year agreement with China Lucky Film
Corp. On February 10, 2004, the Chinese government approved the
Company’s acquisition of 20 percent of Lucky Film Co. Ltd. (Lucky Film),
the largest maker of photographic fi lm in China, in exchange for total con-
sideration of approximately $167 million. The total consideration of $167
million was composed of $90 million in cash, $40 million in additional net
cash to build and upgrade manufacturing assets, $30 million of contributed
assets consisting of a building and equipment, and $7 million for technical
support and training that the Company will provide to Lucky Film. Under
the twenty-year agreement, Lucky Film will pay Kodak a royalty fee for the
use of certain of the Company’s technologies as well as dividends on the
Lucky Film shares that Kodak will acquire. In addition, Kodak has obtained
a twenty-year manufacturing exclusivity arrangement with Lucky Film as
well as access to Lucky Film’s distribution network.