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EASTMAN KODAK COMPANY
2005 ANNUAL REPORT
NOTICE OF 2006 ANNUAL MEETING
AND PROXY STATEMENT
IMAGING
TECHNOLOGY
INNOVATION

Table of contents

  • Page 1
    IMAGING TECHNOLOGY EASTMAN KODAK COMPANY 2005 ANNUAL REPORT NOTICE OF 2006 ANNUAL MEETING INNOVATION AND PROXY STATEMENT

  • Page 2
    ...helping people better use meaningful images and information in their life and work. Consumers use Kodak's system of digital and traditional image capture products and services to take, print and share their pictures anytime, anywhere; businesses effectively communicate with customers worldwide using...

  • Page 3
    ... acquisitions program in our Graphic Communications business, setting the stage for that segment to contribute significantly to digital sales and earnings in 2006. We ended the year in an excellent cash position, with $1.7 billion of cash on hand, and we secured access to significant financing...

  • Page 4
    ...business areas. n Digital and Film Imaging Systems Digital Products and Services Some aspects of the consumer imaging business don't change with the technology. People still want simple solutions that will let them take, share and control pictures of their lives. Kodak is committed to providing new...

  • Page 5
    ... broadest range of prepress equipment, workï¬,ow solutions, digital printing and consumables. Kodak's document imaging business also joined GCG in 2005, adding its leading portfolio of document scanners and archiving solutions as well as a large service presence to the mix. To build its organization...

  • Page 6
    ... Systems Group - which will allow us to effectively address differences in how you manage a growing and a declining business. We expect significant digital earnings growth from our more unified Graphic Communications Group, and our Health Group, having addressed some structural issues last year...

  • Page 7
    ... pricing; changes in the Company's debt credit ratings and its ability to access capital markets; the nature and pace of technology evolution, including the traditional-to-digital transformation; continuing customer consolidation and buying power; current and future proposed changes to accounting...

  • Page 8
    ... Commission File Number 1-87 to EASTMAN KODAK COMPANY (Exact name of registrant as specified in its charter) NEW JERSEY (State of incorporation) 343 STATE STREET, ROCHESTER, NEW YORK (Address of principal executive offices) 16-0417150 (IRS Employer Identification No.) 14650 (Zip Code) 585-724...

  • Page 9
    ... items in Part III of this Form 10-K incorporate by reference information from the 2006 Annual Meeting and Proxy Statement: Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 11 - EXECUTIVE COMPENSATION Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND...

  • Page 10
    ... use Kodak's system of digital and traditional image capture products and services to take, print, store and share their pictures anytime, anywhere; businesses effectively communicate with customers worldwide using Kodak solutions for prepress, conventional and digital printing and document imaging...

  • Page 11
    ... processing services, photographic chemicals, and cameras (including one-time-use and digital). Kodak EasyShare Gallery has accelerated Kodak's growth in the online photography market and helped to drive more rapid adoption of digital and online sharing, printing and archiving services. Kodak...

  • Page 12
    ... processing services for retailers. Kodak also supplies photographic papers and chemicals to other entities that provide photofinishing services. The Company's remaining laboratories provide consumers the opportunity to receive film images in traditional formats or digital form, such as a Picture...

  • Page 13
    ...ow systems used by commercial printers around the world. The acquisition of Creo uniquely positions the Company to be the preferred partner for its customers, helping them improve efficiency, expand their offerings and grow their businesses. Marketing and Competition: Throughout the world, graphic...

  • Page 14
    ... in sales of digital products. Sales and earnings of the Graphic Communications Group segment exhibit modestly higher levels in the fourth quarter. This is driven primarily by the sales of continuous inkjet and document scanner products due to seasonal customer demand linked to commercial year-end...

  • Page 15
    ... in several areas important to its business, including color negative films, processing and papers; digital cameras and image sensors; network photo sharing and fulfillment; x-ray films, mammography systems, computed radiography, digital radiography, photothermographic dry printing, medical...

  • Page 16
    ... product development schedule as well as volumes, product mix, customer demand, sales channels, and configuration. The process of developing new products and services is complex and often uncertain due to the frequent introduction of new products that offer improved performance and pricing. Kodak...

  • Page 17
    ...consumer and commercial digital product offerings, however, there can be no assurance that the Company will be successful in anticipating and developing new products, product enhancements or new solutions and services to adequately address changing technologies and customer requirements. In addition...

  • Page 18
    ... by slower sales due to the competitive environment for digital products, and the continuing decline in demand for traditional products, which could also place pressures on Kodak's sales and market share. In the event Kodak is unable to successfully manage these issues in a timely manner, they...

  • Page 19
    ...gross margins and market share. Competition remains intense across all segments in which Kodak competes. In the D&FIS segment (which has been realigned into the Consumer Digital Imaging Group and the Film and Photofinishing Systems Group effective January 1, 2006), price competition has been driven...

  • Page 20
    ... systems, digital and computed radiography systems, laser imaging, mammography and oncology systems, x-ray film systems for general radiography, and dental imaging products. Products in the Graphic Communications Group segment are manufactured in the United States, primarily in Rochester, New...

  • Page 21
    ...digital printing, industrial solutions, prepress consumables and workï¬,ow and prepress equipment. Properties within a country may be shared by all segments operating within that country. Regional distribution centers are located in various places within and outside of the United States. The Company...

  • Page 22
    ... Center, the Company's unit responsible for the development of new photographic films, papers and photochemical products, and manufacturing technologies. In September 1995 he was named Chief Operating Officer, Consumer Imaging and in October of that same year, the Board of Directors elected...

  • Page 23
    .... Brown was named Director, Global Manufacturing and Logistics, effective February 1, 1999. In this position, he provided leadership for Kodak's global operations for film, photographic paper, chemical products and equipment. On April 14, 2000, Eastman Kodak Company's Board of Directors elected Mr...

  • Page 24
    ... devices, large format printing, photofinishing and commercial printing. During his tenure, revenue and earnings at the business grew annually at a double-digit pace. From August 1993 to June 1997, Mr. Langley served as the General Manager of HP's Vancouver Printer Division, a new unit whose sales...

  • Page 25
    ... film, photographic paper, chemical products and equipment, as well as global logistics. In April 2004, he was elected to Senior Vice President of the Company by the Board of Directors. In October 2003, he was named Corporate KOS (Kodak Operating System) Director on a full time basis. Since January...

  • Page 26
    ... SECURITIES Eastman Kodak Company common stock is principally traded on the New York Stock Exchange under the symbol "EK." There are 76,539 shareholders of record of common stock as of January 31, 2006. Market Price Data 2005 Price per share: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High...

  • Page 27
    ...all prior years most of Kodak's inventory in the U.S. was costed using the LIFO method. The new method of accounting for inventory in the U.S. was adopted because the FIFO method will provide for a better matching of revenue and expenses given the rapid technological change in the Company's products...

  • Page 28
    ... operating results of the reporting unit, discount rate, long-term growth rate and appropriate market comparables. The Company's assessments of impairment of long-lived assets, including goodwill and purchased intangible assets, and its periodic review of the remaining useful lives of its long-lived...

  • Page 29
    ... annually for the Kodak Retirement Income Plan (KRIP). To facilitate this review, every three years, or when market conditions change materially, the Company undertakes a new asset and liability study to reaffirm the current asset allocation and the related EROA assumption. In March 2005, a new...

  • Page 30
    ...are presently unknown. Stock-Based Compensation On January 1, 2005, the Company early adopted the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment," as interpreted by Financial Accounting Standards Board (FASB) Staff Positions No. 123R...

  • Page 31
    ... the market value of the underlying common stock on the date of grant. Kodak Operating Model and Reporting Structure As of and for the year ended December 31, 2005, the Company had three reportable segments: Digital & Film Imaging Systems (D&FIS), Health Group, and Graphic Communications Group. The...

  • Page 32
    ... Sales from Continuing Operations by Reportable Segment and All Other (1) (in millions) D&FIS Inside the U.S. Outside the U.S. Total D&FIS Health Group Inside the U.S. Outside the U.S. Total Health Group Graphic Communications Group Inside the U.S. Outside the U.S. Total Graphic Communications Group...

  • Page 33
    ...) D&FIS Health Group Graphic Communications Group All Other Total of segments Strategic asset impairments Impairment of Burrell Companies' net assets Restructuring costs and other Donation to technology enterprise TouchPoint settlement GE settlement Patent infringement claim settlement Prior year...

  • Page 34
    Earnings (Loss) From Continuing Operations by Reportable Segment and All Other (in millions) D&FIS Health Group Graphic Communications Group All Other Total of segments Strategic asset and venture investment impairments Lucky Film impairment Impairment of Burrell Companies' net assets held for sale ...

  • Page 35
    ... of the useful lives of production machinery and equipment as a result of the faster-than-expected decline in the Company's traditional film and paper business. During the third quarter of 2005, the Company revised the useful lives of production machinery and equipment from 3-20 years to 3-5 33

  • Page 36
    ...'s Statement of Operations and included in the Graphic Communications Group segment. These items were partially offset by a net year-over-year increase of $59 million from gains on the sale of properties and capital assets. Income Tax (Benefit) Provision The Company's annual effective tax rate from...

  • Page 37
    ... and diluted share, representing a decrease of $1,536 million. This decrease in earnings from continuing operations is attributable to the reasons described above. Digital & Film Imaging Systems Worldwide Revenues Net worldwide sales for the D&FIS segment were $8,460 million for 2005 as compared...

  • Page 38
    ... 2004 driven by sales of printer docks and associated thermal media. For full year 2005, Kodak's printer dock product held the number-one market share position (on a unit basis) in the United States, Canada, Germany, Australia and the United Kingdom. However, inkjet paper sales in 2005 declined year...

  • Page 39
    ... Product Groups' Revenues Health Group segment digital sales, which include digital products (DryView laser imagers/media and wet laser printers/media), digital capture equipment (computed radiography capture equipment and digital radiography equipment), services, dental systems (practice management...

  • Page 40
    ..., a producer of digital color and black and white printing solutions; Kodak Versamark, a leader in continuous inkjet technology; document scanners; Encad, Inc., a maker of wide-format inkjet printers; and service and support. Digital product sales for the Graphic Communications Group segment were...

  • Page 41
    ...sale of the Company's Remote Sensing Systems business (RSS) in August 2004. Earnings from discontinued operations for 2004 were $475 million or $1.66 per basic and diluted share and were primarily related to the gain on the sale of RSS to ITT in August 2004. Loss from Cumulative Effect of Accounting...

  • Page 42
    ... emerging market sales, partially offset by decreased sales in Hong Kong of 9%. Sales growth in China resulted from strong business performance for Kodak's Health Group, Graphic Communications Group and entertainment imaging products and services in 2004 as compared with 2003, when the Severe Acute...

  • Page 43
    ..., consumer digital cameras, and entertainment print films in the D&FIS segment, analog medical film and digital capture equipment in the Health Group segment, and graphic arts products in the Graphic Communications Group segment. The decline in price/mix was partially offset by favorable exchange...

  • Page 44
    ...digital printing at retail. Net worldwide sales from the home printing solutions SPG, which includes inkjet photo paper and printer docks/media, increased 57% in the current year as compared with the prior year. For inkjet paper, 2004 was marked by increased competition from store brands and the mix...

  • Page 45
    ... The Health Group segment's digital sales, which include laser printers (DryView imagers and wet laser printers), digital media (DryView and wet laser media), digital capture equipment (computed radiography capture equipment and digital radiography equipment), services, dental practice management...

  • Page 46
    ... to develop high quality, on-demand, digital color printing systems) • 100% of the stock of Heidelberg Digital LLC (Hdi), a manufacturer of digital black & white printing systems • 100% of the stock of NexPress GMBH - a R&D center located in Kiel, Germany • Certain sales and service employees...

  • Page 47
    ... 1%. Digital Strategic Product Groups' Revenues The Graphic Communications Group segment's digital product sales, which consist of Kodak Versamark, the NexPress-related entities, Encad, Inc. products and services, and document imaging service and support, were $1,065 million for the current year as...

  • Page 48
    ... position in digital printing plates and digital proofing, coupled with favorable operating expense management and foreign exchange. The Company's equity in the earnings of KPG contributed positive results to other income (charges), net during 2004. All Other Worldwide Revenues Net worldwide sales...

  • Page 49
    ... of fixed assets related to Kodak's historical ownership interest in the NexPress joint venture in connection with the acquisition of the NexPress-related entities incurred in the second and fourth quarters. Charges of $15 million ($10 million after tax) related to purchased in-process R&D incurred...

  • Page 50
    ... a digital products and services company. In connection with this transformation, the Company announced a cost reduction program in January 2004 that would extend through 2006 to achieve the appropriate business model and to significantly reduce its worldwide facilities footprint. In July 2005, the...

  • Page 51
    ... as restructuring costs and other in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005. The severance costs and exit costs require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash...

  • Page 52
    ... sold in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005. Under this Program, on a life-to-date basis as of December 31, 2005, the Company has recorded charges of $1,416 million, which were composed of severance, long-lived asset impairments, exit costs and...

  • Page 53
    ...Consolidated Statement of Operations for the year ended December 31, 2005. The accelerated depreciation relates to long-lived assets accounted for under the held and used model of SFAS No. 144. The year-to-date amount of $391 million relates to $37 million of photofinishing facilities and equipment...

  • Page 54
    ... and KPG operate within the Graphic Communications Group segment. The remaining amount of $46 million was utilized to complete the acquisition of OREX. The acquisition of OREX adds the technology of OREX's small format computed radiography products for use in various health imaging markets. Capital...

  • Page 55
    ...2005, the Board of Directors declared a semi-annual cash dividend of $.25 per share payable to shareholders of record at the close of business on November 1, 2005. This dividend was paid on December 14, 2005. The total dividends paid for the year ended December 31, 2005 was $144 million. The Company...

  • Page 56
    ...receivables, inventory, equipment, deposit accounts, investments, intellectual property, including patents, trademarks and copyrights, and the capital stock of the Canadian Borrower's Material Subsidiaries. Interest rates for borrowings under the Secured Credit Agreement are dependent on the Company...

  • Page 57
    ... million or more in any year, except for proceeds used within 12 months for reinvestments in the business of up to $300 million, proceeds from sales of assets used in the Company's non-digital products and services businesses to prepay or repay debt or pay cash restructuring charges within 12 months...

  • Page 58
    .... On November 1, 2005, Moody's assigned an SGL-2 speculative grade liquidity rate to the Company. Moody's ratings reï¬,ect their views regarding Kodak's: (i) execution challenges to achieve digital profitability as its business shifts into highly competitive digital imaging markets, (ii) ongoing...

  • Page 59
    ... product and services business, including requirements to fund investment and restructuring costs, and uncertain prospects for achieving solid digital business profitability. Starting on April 22, 2005 and throughout the year, S&P lowered its credit ratings on Eastman Kodak Company five times...

  • Page 60
    ...25 per share payable to shareholders of record at the close of business on November 1, 2004. This dividend was paid on December 14, 2004. Capital additions were $460 million in the year ended December 31, 2004, with the majority of the spending supporting new products, manufacturing productivity and...

  • Page 61
    ... to December 31, 2005. New Accounting Pronouncements FASB Staff Position No. 143-1 In June 2005, the Financial Accounting Standards Board (FASB) issued Staff Position No. 143-1, "Accounting for Electronic Equipment Waste Obligations" (FSP 143-1). FSP 143-1 addresses the accounting for obligations...

  • Page 62
    ... associated long-lived asset; and (3) accumulated depreciation on the capitalized asset retirement cost. Accordingly, the Company has recognized the following amounts in its Statement of Financial Position at December 31, 2005 and Statement of Operations for the year ended December 31, 2005: (dollar...

  • Page 63
    ... (2) any new awards granted subsequent to the adoption date. Refer to the "Stock-Based Compensation" section under Note 1, "Significant Accounting Policies" for the effect of adoption on the Company's consolidated financial statements. FASB Statement No. 151 In December 2004, the FASB issued SFAS...

  • Page 64
    ... pricing; changes in the Company's debt credit ratings and its ability to access capital markets; the nature and pace of technology evolution, including the traditional-to-digital transformation; continuing customer consolidation and buying power; current and future proposed changes to accounting...

  • Page 65
    ... be offset by lower costs of manufacturing silver-containing products. The Company is exposed to interest rate risk primarily through its borrowing activities and, to a lesser extent, through investments in marketable securities. The Company may utilize borrowings to fund its working capital and...

  • Page 66
    ...accounting for share-based payments on January 1, 2005. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for asset retirement obligations as of December 31, 2005. Internal control over financial reporting Also, we have audited management...

  • Page 67
    ... total assets and 9% and 3%, respectively, of consolidated revenue as of and for the year ended December 31, 2005. In our opinion, management's assessment that Eastman Kodak Company did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in...

  • Page 68
    ... taxes Net (Loss) Earnings Basic and diluted net (loss) earnings per share: Continuing operations Discontinued operations Cumulative effect of accounting change Total Cash dividends per share The accompanying notes are an integral part of these consolidated financial statements. 2005 $ 14,268 10...

  • Page 69
    ... m pa ny Co nsolidate d State me nt of Financial Position At December 31, (in millions, except share and per share data) Assets Current Assets Cash and cash equivalents Receivables, net Inventories, net Deferred income taxes Other current assets Assets of discontinued operations Total current assets...

  • Page 70
    ...15 per common share) Treasury stock issued for stock option exercises (337,940 shares) Unvested stock issuances (309,552 shares) Tax reductions - employee plans Shareholders' Equity December 31, 2003 Common Stock* $ 978 - Additional Paid In Capital $ 849 - Retained Earnings $ 7,611 253 Unvested...

  • Page 71
    ... ($.50 per common share) Treasury stock issued for stock option exercises (105,323 shares) Unvested stock issuances (10,944 shares) Reclassification of stock-based compensation awards under SFAS No. 123R adoption ** Shareholders' Equity December 31, 2004 Common Stock* $ 978 - Additional Paid...

  • Page 72
    ...-based compensation expense Treasury stock issued for stock option exercises (357,345 shares) Unvested stock issuances (169,040 shares) Shareholders' Equity December 31, 2005 Common Stock* $ 978 - Additional Paid In Capital $ 859 - Retained Earnings $ 7,922 (1,362) Unvested Treasury Stock Stock...

  • Page 73
    ... Dividends to shareholders Exercise of employee stock options Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 2005 $ (1,362) (150...

  • Page 74
    ... non-current receivables through increase in deferred royalty revenue from licensee continued 2005 $ 172 110 2004 $ 169 72 $ 2003 137 66 $ 156 681 5 395 311 $ 82 123 - - - $ 122 109 13 - - During the years ended December 31, 2005, 2004 and 2003, the Company completed several acquisitions...

  • Page 75
    ... ACCOUNTING POLICIES Company Operations Eastman Kodak Company (the Company or Kodak) is engaged primarily in developing, manufacturing, and marketing digital and traditional imaging products, services and solutions to consumers, businesses, the graphic communications market, the entertainment...

  • Page 76
    ... of $15 million and $3 million, respectively. These investments were included in other current assets in the accompanying Consolidated Statement of Financial Position. In addition, at December 31, 2005 and 2004, the Company had available-for-sale equity securities of $13 million and $25 million...

  • Page 77
    ... the realignment of the Kodak operating model and change in reporting structure, as described in Note 23, "Segment Information" and effective January 1, 2006, the Company reassessed its goodwill for impairment during the first quarter of 2006, and determined that no reporting units' carrying values...

  • Page 78
    ...the accompanying Consolidated Statement of Operations. Research and Development Costs Research and development (R&D) costs, which include costs in connection with new product development, fundamental and exploratory research, process improvement, product use technology and product accreditation, are...

  • Page 79
    ...U.S. net deferred tax assets, including current year losses and credits, which the Company is unable to realize. Earnings Per Share The Company currently has approximately $575 million in contingent convertible notes (the Convertible Securities) outstanding that were issued in October 2003. Interest...

  • Page 80
    ... price of the common shares for the respective periods. Stock-Based Information On January 1, 2005, the Company early adopted the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment," as interpreted by Financial Accounting Standards Board...

  • Page 81
    .... The Company uses historical data to estimate forfeitures. The Black-Scholes option pricing model was used with the following weighted-average assumptions for options issued in each year: 2005 Weighted-average risk-free interest rate Risk-free interest rates Weighted-average expected option lives...

  • Page 82
    ... associated long-lived asset; and (3) accumulated depreciation on the capitalized asset retirement cost. Accordingly, the Company has recognized the following amounts in its Statement of Financial Position at December 31, 2005 and Statement of Operations for the year ended December 31, 2005: (dollar...

  • Page 83
    ...$ Reconciliations for the years ended December 31, 2004 and December 31, 2003 are not shown due to immateriality. FASB Statement No. 123R In December 2004, the FASB issued Statement No. 123R, "Share-Based Payment," a revision to SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123R...

  • Page 84
    ... adoption date. Refer to the "Stock-Based Compensation" section under Note 1 above for the effect of adoption on the Company's consolidated financial statements. FASB Statement No. 151 In December 2004, the FASB issued SFAS No. 151, "Inventory Costs" that amends the guidance in Accounting Research...

  • Page 85
    ...all prior years most of Kodak's inventory in the U.S. was costed using the LIFO method. The new method of accounting for inventory in the U.S. was adopted because the FIFO method will provide for a better matching of revenue and expenses given the rapid technological change in the Company's products...

  • Page 86
    ... million for the purchase of OREX in the Health Group segment. The gross carrying amount and accumulated amortization by major intangible asset category for 2005 and 2004 were as follows: As of December 31, 2005 (in millions) Technology-based Customer-related Other Total Gross Carrying Amount $ 481...

  • Page 87
    ...ficance test requiring the inclusion of the separate investee financial statements. Through April 1, 2005, the Company held a 50% interest in Kodak Polychrome Graphics (KPG). This joint venture between the Company and Sun Chemical Corporation was accounted for using the equity method of accounting...

  • Page 88
    ... and a subsidiary of Dana Credit Corporation, was dissolved. During the first quarter of 2005, the Company received a distribution from the joint venture liquidating its investment balance. There was no material impact on the Company's financial position, results of operations or cash ï¬,ows from...

  • Page 89
    ... Statement of Financial Position at December 31, 2005. Accounts Receivable Securitization Program The Company's $200 million Accounts Receivable Securitization Program was terminated on October 18, 2005 when the Company closed on $2.7 billion of Secured Credit Facilities under the new Secured Credit...

  • Page 90
    ...variable interest rate. Annual maturities (in millions) of long-term debt outstanding at December 31, 2005 are as follows: $706 in 2006, $8 in 2007, $274 in 2008, $35 in 2009, $36 in 2010 and $2,411 in 2011 and beyond. Secured Credit Facilities On October 18, 2005 the Company closed on $2.7 billion...

  • Page 91
    ... million or more in any year, except for proceeds used within 12 months for reinvestments in the business of up to $300 million, proceeds from sales of assets used in the Company's non-digital products and services businesses to prepay or repay debt or pay cash restructuring charges within 12 months...

  • Page 92
    ... certain payments made by the Company in connection with tender offers and exchange offers. The holders may convert their Convertible Securities, in whole or in part, into shares of the Company's common stock under any of the following circumstances: (1) during any calendar quarter, if the price of...

  • Page 93
    ... in the accompanying Consolidated Statement of Financial Position. The Company is currently implementing a Corrective Action Program required by the Resource Conservation and Recovery Act (RCRA) at the Kodak Park site in Rochester, NY. As part of this program, the Company has completed the RCRA...

  • Page 94
    ... could be material to results of operations in a particular future quarter or year. Additionally, as of December 31, 2005, the Company has recorded approximately $66 million of asset retirement obligations in its Consolidated Statement of Financial Position, primarily related to asbestos removal...

  • Page 95
    ... with several companies, which provide Kodak with products and services to be used in its normal operations. These agreements are related to supplies, production and administrative services, as well as marketing and advertising. The terms of these agreements cover the next two to sixteen years. The...

  • Page 96
    ... Company issued during the year ended December 31, 2005 was not material to the Company's financial position, results of operations or cash ï¬,ows. Warranty Costs The Company has warranty obligations in connection with the sale of its equipment. The original warranty period for equipment products...

  • Page 97
    ...nancial position. The Company manages such exposures, in part, with derivative financial instruments. The fair value of these derivative contracts is reported in other current assets or accounts payable and other current liabilities in the accompanying Consolidated Statement of Financial Position...

  • Page 98
    ... sales of capital assets Interest on past-due receivables and finance revenue on sales Minority interest Non-strategic venture investment impairments Sun Microsystems settlement Legal settlement Asset impairment Lucky Film impairment Other Total 2005 $ 25 (31) 12 74 4 (4) - - - (25) (19) 8 44 2004...

  • Page 99
    ... based upon some recent changes that occurred in the quarter: • In July 2005, management announced plans to significantly accelerate its restructuring efforts and to significantly reduce the assets supporting its traditional business by the end of 2007. This global plan includes accelerating the...

  • Page 100
    ...certain net operating loss and capital loss carryforwards relating to which management believes it is not more likely than not that the assets will be realized. Tax Settlements, Including Interest During 2005, the Company reached a settlement with the Internal Revenue Service covering tax years 1993...

  • Page 101
    ...between the years 2006 and 2025. Utilization of these net operating losses may be subject to limitations in the event of significant changes in stock ownership of the Company. The Company also has $447 million of unused foreign tax credits at December 31, 2005, with various expiration dates through...

  • Page 102
    ... a digital products and services company. In connection with this transformation, the Company announced a cost reduction program in January 2004 that would extend through 2006 to achieve the appropriate business model and to significantly reduce its worldwide facilities footprint. In July 2005, the...

  • Page 103
    ... Consolidated Statement of Operations for the year ended December 31, 2005. The severance costs and exit costs require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items. 2004-2007 Restructuring Program The Company...

  • Page 104
    ... sold in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005. Under this Program, on a life-to-date basis as of December 31, 2005, the Company has recorded charges of $1,416 million, which were composed of severance, long-lived asset impairments, exit costs and...

  • Page 105
    ...Consolidated Statement of Operations for the year ended December 31, 2005. The accelerated depreciation relates to long-lived assets accounted for under the held and used model of SFAS No. 144. The year-to-date amount of $391 million relates to $37 million of photofinishing facilities and equipment...

  • Page 106
    ... Balance Plus plan credits employees' accounts with an amount equal to 4% of their pay, plus interest based on the 30-year treasury bond rate. In addition, for employees participating in this plan and the Company's defined contribution plan, the Savings and Investment Plan (SIP), the Company will...

  • Page 107
    ... Statement of Financial Position for all major funded and unfunded U.S. and Non-U.S. defined benefit plans are as follows: 2005 2004 (in millions) U.S. Non-U.S. U.S. Non-U.S. Prepaid pension cost Accrued benefit liability Additional minimum pension liability Intangible asset Accumulated...

  • Page 108
    ... value of plan assets Pension expense (income) for all defined benefit plans included: 2005 (in millions) Service cost Interest cost Expected return on plan assets Amortization of: Transition obligation (asset) Prior service cost Actuarial loss Pension (income) expense before special termination...

  • Page 109
    ...nal asset transfer, a one-time settlement charge of $54 million was recognized during the fourth quarter in discontinued operations. See Note 22, "Discontinued Operations." The Japanese Welfare Pension Insurance Law (JWPIL) was amended in June 2001 to permit employers with Employees' Pension Funds...

  • Page 110
    ... 4.38% to 9.0% for 2005. Every three years or when market conditions have changed materially, the Company will undertake new asset and liability modeling studies for each of its larger pension plans. The asset allocations and expected return on plan assets are individually set to provide for bene...

  • Page 111
    ..., those under the Cash Balance Plus portion of the KRIP plan would be required to pay the full cost of their benefits under the plan. The Company's subsidiaries in the United Kingdom and Canada offer similar healthcare benefits. The measurement date used to determine the net benefit obligation...

  • Page 112
    ...2004 10.00% 5.00% 2010 Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage point change in assumed healthcare cost trend rates would have the following effects: 1% increase Effect on total service and interest cost Effect...

  • Page 113
    ... open market using option exercise price cash proceeds; and awards that otherwise do not result in the issuance of shares. The 2005 Plan is substantially similar to and is intended to replace the 2000 Plan, which expired on January 18, 2005. Stock options are generally non-qualified and are issued...

  • Page 114
    ... 1995 Plan provide for, but are not limited to, grants of unvested stock and performance awards. Compensation expense recognized in 2005 for these awards, based on their fair value, was not material. Further information relating to options is as follows: Weighted-Average Exercise Price Per Share $48...

  • Page 115
    ... of prepress and workï¬,ow systems used by commercial printers around the world. The acquisition of Creo uniquely positions the Company to be the preferred partner for its customers, helping them improve efficiency, expand their offerings and grow their businesses. The Company paid $954 million...

  • Page 116
    ...were included as research and development costs in the Company's Consolidated Statement of Operations for the year ended December 31, 2005. The remaining $256 million of intangible assets, which relate to developed technology, trademarks and customer relationships, have useful lives ranging from six...

  • Page 117
    ... included as research and development costs in the Company's Consolidated Statement of Operations for the year ended December 31, 2005. The remaining $143 million of intangible assets, which relate to developed technology, trademarks and customer relationships, have useful lives ranging from three...

  • Page 118
    ... for the years ended December 31, 2005 and 2004: (in millions, except per share data) Net sales (Loss) earnings from continuing operations Basic net (loss) earnings per share from continuing operations Diluted net (loss) earnings per share from continuing operations Number of common shares used in...

  • Page 119
    ... 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...

  • Page 120
    ... were included as research and development costs in the Company's Consolidated Statement of Operations for the year ended December 31, 2004. The remaining $86 million of intangible assets, which relate to developed technology, customer relationships, and trade names, have useful lives ranging from...

  • Page 121
    ... 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 Operations for the year ended December 31, 2003. The remaining $169 million of intangible assets have useful lives ranging from...

  • Page 122
    ... earnings from discontinued operations for the year ended December 31, 2005. 2004 On August 13, 2004, the Company completed the sale of the assets and business of the Remote Sensing Systems operation, including the stock of Kodak's wholly owned subsidiary, Research Systems, Inc. (collectively known...

  • Page 123
    ...SEGMENT INFORMATION Current Segment Reporting Structure As of and for the year ended December 31, 2005, the Company had three reportable segments aligned based on aggregation of similar products and services: Digital & Film Imaging Systems (D&FIS); Health Group; and Graphic Communications Group. The...

  • Page 124
    ... (decreased) increased segment earnings (losses) from continuing operations before interest, other income (charges) net, and income taxes as follows: (in millions) Digital & Film Imaging Systems Health Group Graphic Communications Group All Other Consolidated impact 2004 $ (27) 17 1 9 $ - 2003...

  • Page 125
    ... restated to conform to the current period segment reporting structure. (in millions) Net sales from continuing operations: Digital & Film Imaging Systems Health Group Graphic Communications Group All Other Consolidated total Earnings (losses) from continuing operations before interest, other income...

  • Page 126
    ... operations: Digital & Film Imaging Systems Health Group Graphic Communications Group All Other Total of segments Strategic asset and venture investment impairments Impairment of Burrell Companies' net assets Lucky Film impairment Restructuring costs and other Asset impairment Property sales...

  • Page 127
    ...Cash and marketable securities Deferred income tax assets Assets of discontinued operations Other corporate assets/(reserves) Consolidated total assets Intangible asset amortization expense from continuing operations: Digital & Film Imaging Systems Health Group Graphic Communications Group All Other...

  • Page 128
    ...to external customers attributed to (1) : The United States Europe, Middle East and Africa Asia Pacific Canada and Latin America Foreign countries total Consolidated total (1) Sales are reported in the geographic area in which they originate. 2005 $ 6,156 $ 4,148 2,554 1,410 $ 8,112 $ 14,268 2004...

  • Page 129
    New Kodak Operating Model and Change in Reporting Structure As of and for the year ended December 31, 2005, the Company reported financial information for three reportable segments (Digital & Film Imaging Systems, Health Group, and Graphic Communications Group) and All Other. However, in September ...

  • Page 130
    NOTE 24: QUARTERLY SALES AND EARNINGS DATA - UNAUDITED (in millions, except per share data) 2005 Net sales from continuing operations Gross profit from continuing operations (1) Loss from continuing operations Earnings from discontinued operations (11) Cumulative effect of accounting change (13) ...

  • Page 131
    ... quarter ended December 31, 2005, the Company recorded approximately $25 million, net of tax, related to changes in estimate with respect to certain of its employee benefit and compensation accruals. These changes in estimates negatively impacted the results for the fourth quarter by $.09 per share...

  • Page 132
    ... of accounting change Total Cash dividends declared and paid - on common shares - per common share Common shares outstanding at year end Shareholders at year end Statement of Financial Position Data Working capital Property, plant and equipment, net Total assets Short-term borrowings and current...

  • Page 133
    ...tax benefit relating to the closure of the Company's PictureVision subsidiary, the consolidation of the Company's photofinishing operations in Japan, asset write-offs and a change in the corporate tax rate. These items improved net earnings by $7 million. (5) Includes $672 million of restructuring...

  • Page 134
    ... management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Internal control over financial reporting...

  • Page 135
    ... be able to demonstrate operating effectiveness over a period of time that is sufficient to support its conclusion. In reviewing the results from this testing, management has concluded that the internal controls over the accounting for pension and other postretirement benefit plans have been signi...

  • Page 136
    ... as of December 31, 2005. Remediation Efforts on the Internal Controls Surrounding the Accounting for Income Taxes During the year ended December 31, 2005 the Company has made significant progress in executing the remediation plans that were established to address the material weakness in its...

  • Page 137
    ... in the Proxy Statement: "Board Structure and Corporate Governance - Director Compensation," "Compensation of Named Executive Officers," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values...

  • Page 138
    ...nancial statements: Report of independent registered public accounting firm Consolidated statement of operations Consolidated statement of financial position Consolidated statement of shareholders' equity Consolidated statement of cash ï¬,ows Notes to financial statements 2. Financial statement...

  • Page 139
    ...Robert H. Brust Chief Financial Officer, and Executive Vice President /s/ Richard G. Brown, Jr. Richard G. Brown, Jr. Chief Accounting Officer, and Corporate Controller Date: March 2, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 140
    ...) Year ended December 31, 2005 Deducted in the Statement of Financial Position: From Current Receivables: Reserve for doubtful accounts Reserve for loss on returns and allowances Total From Long-Term Receivables and Other Noncurrent Assets: Reserve for doubtful accounts From Deferred Tax Assets...

  • Page 141
    ... Company Current Report on Form 8-K for the date October 10, 2003 as filed on October 10, 2003, Exhibit 4.) J. K. Secured Credit Agreement, dated as of October 18, 2005, among Eastman Kodak Company and Kodak Graphic Communications Canada Company, the banks named therein, Citigroup Global Markets...

  • Page 142
    ...Eastman Kodak Company Non-Employee Director Annual Compensation Plan, effective June 1, 2004. (Incorporated by reference to the Eastman Kodak Company Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, Exhibit 10.) E. 1982 Eastman Kodak Company Executive Deferred Compensation...

  • Page 143
    ...-Term Variable Pay to Named Executive Officers. (Incorporated by reference to the Eastman Kodak Company Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002, Exhibit 10.) R. Eastman Kodak Company 2000 Omnibus Long-Term Compensation Plan, as amended effective January 1, 2004...

  • Page 144
    ... Eastman Kodak Company Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, Exhibit 10 Z.) Letter dated May 10, 2005, from the Chair, Executive Compensation and Development Committee, to Antonio M. Perez. (Incorporated by reference to the Eastman Kodak Company Current Report...

  • Page 145
    ...99.1) Audited combined financial statements of Kodak Polychrome Graphics as of December 31, 2004 and 2003 and for the three years in the period ended December 31, 2004. (Incorporated by reference to the Eastman Kodak Company Current Report on Form 8-K/A, for the date April 1, 2005 as filed on July...

  • Page 146
    ... is considered a reasonable approximation of the interest factor. * Earnings for the year ended December 31, 2005 were inadequate to cover fixed charges. The coverage deficiency was $755 million. ** Earnings for the year ended December 31, 2004 were inadequate to cover fixed charges. The coverage...

  • Page 147
    ... Eastman Kodak Company Cinesite, Inc. Laser-Pacific Media Corporation FPC, Inc. PracticeWorks, Inc. Qualex Inc. Qualex Canada Photofinishing Inc. Eastman Gelatine Corporation ENCAD, Inc. NexPress Solutions, Inc. OREX Computed Radiography U.S., Inc. Kodak Versamark, Inc. Pakon, Inc. Kodak Imaging...

  • Page 148
    ... Kodak Information Systems Kodak Digital Product Center, Japan Ltd. Kodak Japan Industries Ltd. Kodak (China) Limited Kodak Electronic Products (Shanghai) Company Limited Kodak (China) Company Limited Kodak (Wuxi) Company Limited Kodak (Xiamen) Company Limited Kodak (Shanghai) International Trading...

  • Page 149
    ...), of Eastman Kodak Company of our report dated March 1, 2006 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which...

  • Page 150
    ... certify that: 1. 2. I have reviewed this annual report on Form 10-K of Eastman Kodak Company; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which...

  • Page 151
    ..., as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case...

  • Page 152
    ... with the Annual Report of Eastman Kodak Company (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Antonio M. Perez, Chairman, and Chief Executive Officer of the Company, certify, pursuant...

  • Page 153
    ...In connection with the Annual Report of Eastman Kodak Company (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert H. Brust, Chief Financial Officer of the Company, certify, pursuant to...

  • Page 154
    (This page intentionally left blank.) 152

  • Page 155
    NOTICE OF 2006 ANNUAL MEETING AND PROXY STATEMENT Date of Notice March 27, 2006 EASTMAN KODAK COMPANY 343 STATE STREET ROCHESTER, NEW YORK 14650

  • Page 156
    ...I - Corporate Governance Guidelines Exhibit II - Audit and Non-Audit Services Pre-Approval Policy ANNUAL MEETING INFORMATION 61 2006 Annual Meeting Directions and Parking Information BENEFICIAL OWNERSHIP 22 23 Beneficial Security Ownership of More Than 5% of the Company's Common Stock Beneficial...

  • Page 157
    ... the close of business on March 13, 2006, you are entitled to vote at the Annual Meeting. If you have any questions about the Annual Meeting, please contact: Coordinator, Shareholder Services, Eastman Kodak Company, 343 State Street, Rochester, NY 14650-0205, (585) 724-5492. The Annual Meeting will...

  • Page 158
    ...to you by Kodak. As the shareholder of record, you have the right to grant your voting proxy directly to Kodak or a third party, or to vote in person at the Annual Meeting. Kodak has enclosed or sent a proxy card for you to use. Beneficial Owner. If your shares are held in a brokerage account or by...

  • Page 159
    ...vote your Kodak shares, the records of the Company must show that you held your shares as of the close of business on March 13, 2006, the record date for the Annual Meeting. Each share of common stock is entitled to one vote. Can I change my vote or revoke my proxy? Yes. If you are a shareholder of...

  • Page 160
    ...Savings and Investment Plan and the Kodak Employees' Stock Ownership Plan. The trustees and custodians of these plans will vote your shares in each plan as you direct. You have one vote for each share of Kodak common stock you own on the record date with respect to all business at the Annual Meeting...

  • Page 161
    ... be accessed at www.kodak.com/go/governance. For purposes of summarizing this procedure, we have assumed: 1) the date of the upcoming annual meeting is within 30 days of the date of the annual meeting for the previous year; and 2) if the size of the Board is to be increased, that both the name of...

  • Page 162
    ....kodak.com/go/governance You may request printed copies of any of these documents by contacting: Coordinator, Shareholder Services Eastman Kodak Company 343 State Street Rochester, NY 14650-0205 (585) 724-5492 The address of our principal executive office is: Eastman Kodak Company 343 State Street...

  • Page 163
    ... the delivery of disclosure documents to shareholders sharing the same address. This rule benefits both you and Kodak. It reduces the volume of duplicate information received at your household and helps Kodak reduce expenses. Kodak expects to follow this rule any time it distributes annual reports...

  • Page 164
    ...18. The number of directors is set by the Board and is currently 12. Mr. Perez is the only director who is an employee of the Company. We are in the process of declassifying our Board. • Class I directors standing for election at the 2006 Annual Meeting will be elected for two-year terms ending in...

  • Page 165
    ...compensation should be tied closely to the actual attainment of pre-set performance goals. We are concerned that this may not be happening at Kodak. In March 2005 the Company announced that financial statements for the quarters and full year of 2003, as well as for the first three quarters of 2004...

  • Page 166
    The 2003 and 2004 restatements referenced in the shareholder proposal were largely the result of tax accounting errors. These restatements had no effect on the performance targets that were the basis of senior executive bonuses paid during these periods. (The proponent's reference to net income for ...

  • Page 167
    ... governance listing standards. A copy of these restated Corporate Governance Guidelines is attached as Exhibit I to this Proxy Statement and published on our website at www.kodak.com/go/governance. BUSINESS CONDUCT GUIDE AND DIRECTORS' CODE OF CONDUCT All of our employees, including the CEO...

  • Page 168
    ...SERVE A TWO-YEAR TERM EXPIRING AT THE 2008 ANNUAL MEETING (CLASS I DIRECTORS) MARTHA LAYNE COLLINS Director since May 1988 Governor Collins, 69, is Chairman and CEO of the Kentucky World Trade Center. Governor Collins is Executive Scholar in Residence at Georgetown College, a position she assumed in...

  • Page 169
    ... CEO of HP's Inkjet Imaging Business. In his career, Mr. Perez held a variety of positions in research and development, sales, manufacturing, marketing and management both in Europe and the United States. Just prior to joining Kodak, Mr. Perez served as an independent consultant for large investment...

  • Page 170
    ... financial service company's three core businesses. Mr. Braddock graduated from Dartmouth College with a degree in history, and received his MBA degree from the Harvard School of Business Administration. He is a director of Cadbury Schweppes, Marriott International, Inc. and MidOcean Partners, and...

  • Page 171
    ... and equal employment opportunity. A detailed list of the Committee's functions is included in its charter, which can be accessed at www.kodak.com/go/governance. In the past year, the Corporate Responsibility and Governance Committee: • recommended to the Board a 2005 Board business plan and...

  • Page 172
    ... executive development. A detailed list of the Committee's functions is included in its charter, which can be accessed at www.kodak.com/go/governance. In the past year, the Executive Compensation and Development Committee: • oversaw the implementation of the Company's succession plan for its CEO...

  • Page 173
    ... between meetings of the Board. The Executive Committee did not meet in 2005. The Committee's Charter can be accessed at www.kodak.com/go/governance. COMMITTEE MEMBERSHIP Corporate Responsibility and Governance Committee Executive Compensation and Development Committee Director Name Richard...

  • Page 174
    ... next annual meeting of shareholders (or a statement to the effect that no material interest is known to such shareholder). Our Board may change the process by which shareholders may recommend director candidates to the Governance Committee. Please refer to the Company's website at www.kodak.com/go...

  • Page 175
    ... I. The Governance Committee generally uses the services of a third-party executive search firm when identifying and evaluating possible nominees for director. Board Business Plan Last year the Board adopted a formal process for annually establishing and prioritizing its goals. The end product of...

  • Page 176
    ... (currently, this amount is $200,000). Deferred Compensation Non-employee directors may defer some or all of their annual retainer and restricted stock award into a deferred compensation plan. The plan has two investment options, an interest-bearing account that pays interest at the prime rate and...

  • Page 177
    ... S. Braddock, the amount includes $1,200 in incremental costs to the Company related to personal use of the Company aircraft, $2,345 for a company sponsored event, $728 for Company equipment, $618 for Company offered entertainment, $623 for personal liability insurance, $196 for travel/accident and...

  • Page 178
    ... of its common stock: Number of Common Shares Beneficially Owned 71,485,351 Percentage of Company's Common Shares Beneficially Owned 24.89% (1) Shareholder's Name and Address Legg Mason Capital Management, Inc. Legg Mason Funds Management, Inc. Legg Mason Focus Capital, Inc. LLM LLC 100 Light St...

  • Page 179
    ...table reports beneficial ownership of the Company's common stock in accordance with Rule 13d-3 under the Securities Exchange Act. This means all Company securities over which the directors, nominees and executive officers directly or indirectly have, or share voting or investment power, are listed...

  • Page 180
    ... 11,500 3,050,521 (c) Each individual executive officer and director listed above beneficially owned less than 1% of the outstanding shares of the Company's common stock. As a group, these executive officers and directors owned 1.26% of the outstanding shares of the Company's common stock. 24

  • Page 181
    ... they were in 2004. A. M. Perez's salary increased during 2005 as a result of his promotion to CEO effective June 1, 2005. (b) Bonus This column shows Executive Compensation for Excellence and Leadership Plan (EXCEL) awards for services performed, not paid, in each year indicated. For A. M. Perez...

  • Page 182
    ... restricted stock unit grants for 2003-2005: Name A. M. Perez Year 2005 2003 2005 2003 Number of Shares Granted 60,000 100,000 50,000 27,000 (1) 15,000 (2) Award Program Promotion Award Signing Bonus Retention Award Retention Award Signing Bonus Value $26.57 30.97 20.93 26.32 20.93 Valuation Date...

  • Page 183
    ... stock unit awards made under the 2004-2005 performance cycle of the Leadership Stock Program under the 2000 Omnibus Long-Term Compensation Plan. The value of these awards was computed at $26.00, the closing price of the Company's common stock on February 21, 2006 (since the date of the award...

  • Page 184
    ... economic or market changes, extreme currency exchange effects and management of significant workforce issues. The CEO allocates the corporate funding pool among the Company's business units. Each business unit has its own targets for operational performance for the year. Senior management of each...

  • Page 185
    ... was determined using the Black-Scholes model of option valuation in a manner consistent with the requirements of Statement of Financial Accounting Standards No. 123-R (revised 2004), "Share-Based Payment," using the following assumptions: May 12, 2005 Grant Risk-Free Interest Rate Expected Option...

  • Page 186
    ... Price of Outstanding Options, Warrants and Rights (b) $44.52 9,993,848 55.69 0 36,582,773 $47.57 10,811,144 (1) The Company's equity compensation plans approved by security holders include the 2005 Omnibus Long-Term Compensation Plan, the 2000 Omnibus Long-Term Compensation Plan, the Eastman...

  • Page 187
    ... a term of 10 years. LONG-TERM INCENTIVE PLAN Leadership Stock Program Effective January 1, 2004, the Compensation Committee allocated performance stock units for the first time under the Leadership Stock Program to the Company's executives, including the named executive officers. The Leadership...

  • Page 188
    ... Company's annual variable compensation plan of 100% of his base salary. As a hiring bonus on April 2, 2003, Mr. Perez received a grant of stock options for 500,000 shares and 100,000 shares of restricted stock. The offer letter also provides Mr. Perez with a severance allowance equal to two times...

  • Page 189
    ...the Company terminates Mr. Brust's employment without cause prior to January 3, 2007, he will: 1) receive severance pay equal to two times his base salary plus target annual bonus; 2) receive the supplemental retirement benefit described on page 37, calculated based on 14 years of deemed service in...

  • Page 190
    ... stock; 2) received severance pay equal to three times his base salary plus target annual bonus; 3) received prorated awards for the pending periods under the Company's bonus plans; and 4) been treated for pension purposes as if he were age 60. In the event of Mr. Carp's disability while employed...

  • Page 191
    ...-year period following a change in control. The amount of the severance pay and length of benefit continuation is based on the employee's position. The named executive officers would be eligible for severance pay equal to three times their total target annual compensation. In addition, the named...

  • Page 192
    ... The plan defines APC as one-third of the sum of the employee's participating compensation for the highest consecutive 39 periods of earnings over the 10 years ending immediately prior to retirement or termination of employment. Participating compensation, in the case of a named executive officer...

  • Page 193
    ... pension plan and, therefore, will not receive any benefits under the plan. The retirement benefits in the table are: 1) calculated using the named executive officer's account balance on December 31, 2005; and 2) based on the assumptions that each named executive officer will remain an employee...

  • Page 194
    ... account accrues interest at 5% per year; a discount rate of 5%; and life expectancy using the 1994 Group Annuity Reserving Table for males and females projected to 2002 at scale AA. Mr. Brust has, however, announced his intention to retire from the Company effective February 1, 2007, approximately...

  • Page 195
    ...statements and of its internal control over financial reporting in accordance with standards of the Public Company Accounting Oversight Board (United States) and for issuing a report of the results. As outlined in its charter, the Committee is responsible for overseeing these processes. During 2005...

  • Page 196
    ... composed of five directors, each of whom meets the definition of "independence" set forth in the NYSE's corporate governance listing standards. During 2005, the Committee met seven times and routinely reported its activities to the full Board. In addition, senior management met with the Committee...

  • Page 197
    ... such areas as director compensation, corporate governance and executive compensation. Board Business Plan Based on the Committee's assistance, the Board last year established for the first time an annual board business plan. The business plan is the end product of a formal process developed by the...

  • Page 198
    ... internal and external experts on topical issues relating to the responsibilities of directors of public companies and corporate governance matters. The Committee believes an effective director education program provides a board a better understanding of its company's strategies and business model...

  • Page 199
    ... the CEO's performance in light of these goals and objectives and setting the CEO's individual elements of total compensation based on this evaluation; • overseeing the compensation of the Company's named executive officers and other executive officers; • reviewing the process and plans for...

  • Page 200
    ... by the Company as part of a multi-year plan to close the competitive deficit in long-term incentive compensation for its senior executives, including one-time stock option grants to certain key members of the Company's senior management team who have played major roles in the Company's digital...

  • Page 201
    ... Table on page 25 lists the awards for 2005 to the named executive officers. Long-Term Incentives Beginning in 2004, long-term compensation is provided to the Company's executives principally in the form of performance stock units under the Leadership Stock Program. Awards under this program are...

  • Page 202
    ... program originally was set by the Committee as operational earnings per share, in light of the Company's announcement in July 2005 that it will no longer report operational earnings per share and that digital earnings growth is one of the three key metrics by which the Company is being managed, the...

  • Page 203
    ... to CEO. Effective June 1, 2005, the Committee granted a stock option award to Mr. Carp of 91,667 shares under a program to reward key executives for their role in the Company's digital transformation. The options were priced at 100% of the fair market value of the Company's common stock on the date...

  • Page 204
    ..., effective June 1, 2005, the Committee granted Mr. Perez 60,000 shares of restricted stock in connection with his promotion to CEO. Performance Stock Program Based on the Company's financial performance over the three-year period ending in 2005, neither Mr. Perez nor Mr. Carp received an award for...

  • Page 205
    ... - SHAREHOLDER RETURN The following graph compares the performance of the Company's common stock with the performance of the Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial Index by measuring the changes in common stock prices from December 31, 2000, plus reinvested...

  • Page 206
    ... securities to file reports of ownership and changes in ownership with the SEC. We are required to disclose any failure of these executive officers, directors and 10% stockholders to file these reports by the required deadlines. Based solely on our review of the copies of these forms received...

  • Page 207
    ...including employees, customers, suppliers, government officials and the public at large. Board Responsibilities In addition to its general oversight of management, the Board (either directly or through its committees) also performs a number of specific functions including: • Maximize Shareholder...

  • Page 208
    ... are expected to report changes in their employment or their business or professional affiliations or responsibilities, including retirement, to both the Chairman of the Board and the Chair of the Corporate Responsibility and Governance Committee. A director will tender a resignation when there is...

  • Page 209
    ... Planning The Board will review the Company's long-term strategic plan during at least one Board meeting each year specifically devoted to this purpose. Executive Sessions The non-management directors will regularly meet in executive session, without management, at least four times per year...

  • Page 210
    ... Board, the CEO will present to the Executive Compensation and Development Committee an annual report on succession planning for all senior officers of the Company with an assessment of senior officers and their potential to succeed the CEO and other senior management positions. The CEO, together...

  • Page 211
    ...: if a director of the Company is an executive officer or an employee, or whose immediate family member is an executive officer of another company that makes payments to, or receives payments from, the Company for property or services in an amount which, in any single fiscal year, does not...

  • Page 212
    ... business and operations, strategic plans and goals, financial statements, and key policies and practices, including corporate governance matters. APPENDIX C: DIRECTOR QUALIFICATION STANDARDS In addition to any other factors described in the Company's Corporate Governance Guidelines, the Board...

  • Page 213
    ... In selecting directors, the Board should generally seek active and former CEOs, CFOs, international operating executives, presidents of large and complex divisions of publicly held companies, and leaders of major complex organizations, including scientific, accounting, government, educational and...

  • Page 214
    ... Directors must protect the Company's assets and ensure their efficient use. Directors must not use Company time, employees, supplies, equipment, buildings or other assets for personal benefit, unless the use is approved in advance by the Chair of the Audit Committee or is part of a compensation...

  • Page 215
    ... or affiliates of the Company and services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. III. AUDIT-RELATED SERVICES Audit-related services are assurance and related...

  • Page 216
    ... related to the accounting records or financial statements of the audit client Financial information systems design and implementation Appraisal or valuation services, fairness opinions or contribution-in-kind reports Actuarial services Internal audit outsourcing services Management functions Human...

  • Page 217
    ... 2006 ANNUAL MEETING DIRECTIONS AND PARKING INFORMATION The Learning Center at Miami Valley Research Park 1900 Founders Drive Dayton, OH DIRECTIONS FROM THE AIRPORT Go Northwest toward Terminal Drive. Turn slight right onto Terminal Drive. Terminal Drive becomes Dayton International Airport Access...

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    ...,* Graphic Solutions & Services Diane F. McCue General Manager, Paper & Output Systems, Film and Photofinishing Systems Group Paul A. Walrath Director, Worldwide Operations, Film & Photofinishing Systems Group Patrick D. King General Manager, Home Printing and Kiosks, Consumer Digital Imaging...

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    Eastman Kodak Company 343 State Street Rochester, NY 14650 www.kodak.com www.kodakgallery.com