Kodak 2004 Annual Report Download - page 71

Financials
69
2 0 0 4 ฀ S U M M A R Y ฀ A N N U A L ฀ R E P O R T
฀Qualex,฀a฀wholly฀owned฀subsidiary฀of฀Kodak,฀has฀a฀50%฀ownership฀
interest฀in฀Express฀Stop฀Financing฀(ESF),฀which฀is฀a฀joint฀venture฀partner-
ship฀between฀Qualex฀and฀a฀subsidiary฀of฀Dana฀Credit฀Corporation฀(DCC),฀
a฀wholly฀owned฀subsidiary฀of฀Dana฀Corporation.฀Qualex฀accounts฀for฀its฀
investment฀in฀ESF฀under฀the฀equity฀method฀of฀accounting.฀ESF฀provided฀a฀
long-term฀financing฀solution฀to฀Qualex’s฀photofinishing฀customers฀in฀con-
nection฀with฀Qualex’s฀leasing฀of฀photofinishing฀equipment฀to฀third฀parties,฀
as฀opposed฀to฀Qualex฀extending฀long-term฀credit.฀As฀part฀of฀the฀operations฀
of฀its฀photofinishing฀services,฀Qualex฀sold฀equipment฀under฀a฀sales-type฀
lease฀arrangement฀and฀recorded฀a฀long-term฀receivable.฀These฀long-term฀
receivables฀were฀subsequently฀sold฀to฀ESF฀without฀recourse฀to฀Qualex฀and,฀
therefore,฀these฀receivables฀were฀removed฀from฀Qualex’s฀accounts.฀ESF฀
incurred฀debt฀to฀finance฀the฀purchase฀of฀the฀receivables฀from฀Qualex.฀This฀
debt฀was฀collateralized฀solely฀by฀the฀long-term฀receivables฀purchased฀from฀
Qualex,฀and฀in฀part,฀by฀a฀$40฀million฀guarantee฀from฀DCC.฀This฀guarantee฀
was฀terminated฀on฀December฀17,฀2004฀in฀conjunction฀with฀the฀payment฀in฀
full฀of฀this฀debt฀on฀the฀same฀date฀(see฀below).฀Qualex฀provided฀no฀guaran-
tee฀or฀collateral฀to฀ESF’s฀creditors฀in฀connection฀with฀the฀debt,฀and฀ESF’s฀
debt฀was฀non-recourse฀to฀Qualex.฀Qualex’s฀only฀continued฀involvement฀in฀
connection฀with฀the฀sale฀of฀the฀long-term฀receivables฀is฀the฀servicing฀of฀the฀
related฀equipment฀under฀the฀leases.฀Qualex฀has฀continued฀revenue฀streams฀
in฀connection฀with฀this฀equipment฀through฀future฀sales฀of฀photofinishing฀
consumables,฀including฀paper฀and฀chemicals,฀and฀maintenance.
Although฀the฀lessees’฀requirement฀to฀pay฀ESF฀under฀the฀lease฀agree-
ments฀is฀not฀contingent฀upon฀Qualex’s฀fulfillment฀of฀its฀servicing฀obliga-
tions,฀under฀the฀agreement฀with฀ESF,฀Qualex฀would฀be฀responsible฀for฀any฀
deficiency฀in฀the฀amount฀of฀rent฀not฀paid฀to฀ESF฀as฀a฀result฀of฀any฀lessee’s฀
claim฀regarding฀maintenance฀or฀supply฀services฀not฀provided฀by฀Qualex.฀฀
Such฀lease฀payments฀would฀be฀made฀in฀accordance฀with฀the฀original฀lease฀
terms,฀which฀generally฀extend฀over฀5฀to฀7฀years.฀To฀date,฀the฀Company฀
has฀incurred฀no฀such฀material฀claims,฀and฀Qualex฀does฀not฀anticipate฀any฀
significant฀situations฀where฀it฀would฀be฀unable฀to฀fulfill฀its฀service฀obliga-
tions฀under฀the฀arrangement฀with฀ESF.฀ESF’s฀outstanding฀lease฀receivable฀
amount฀was฀approximately฀$113฀million฀at฀December฀31,฀2004.
Effective฀July฀20,฀2004,฀ESF฀entered฀into฀an฀agreement฀amending฀the฀
Receivables฀Purchase฀Agreement฀(RPA),฀which฀represents฀the฀financing฀
arrangement฀between฀ESF฀and฀its฀banks.฀Under฀the฀amended฀RPA฀agree-
ment,฀maximum฀borrowings฀were฀lowered฀to฀$200฀million.฀On฀December฀
17,฀2004,฀ESF฀terminated฀the฀RPA฀upon฀payment฀in฀full,฀to฀its฀banks,฀of฀
the฀then฀outstanding฀balance฀of฀the฀RPA฀totaling฀$138฀million.฀Pursuant฀
to฀the฀ESF฀partnership฀agreement฀between฀Qualex฀and฀DCC,฀commenc-
ing฀October฀6,฀2003,฀Qualex฀no฀longer฀sells฀its฀lease฀receivables฀to฀ESF.฀฀
Qualex฀currently฀is฀utilizing฀the฀services฀of฀Imaging฀Financial฀Services,฀
Inc.,฀a฀wholly฀owned฀subsidiary฀of฀General฀Electric฀Capital฀Corporation,฀as฀
its฀primary฀financing฀solution฀for฀prospective฀leasing฀activity฀with฀its฀U.S.฀
customers.
The฀Company฀performed฀an฀analysis฀of฀ESF฀in฀order฀to฀determine฀
whether฀the฀provisions฀of฀FASB฀Interpretation฀No.฀46(R)฀“Consolidation฀of฀
Variable฀Interest฀Entities฀an฀interpretation฀of฀ARB฀No.฀51”฀(FIN฀46(R))฀were฀
applicable฀to฀ESF,฀requiring฀consolidation.฀Based฀on฀the฀analysis฀performed,฀
it฀was฀determined฀that฀ESF฀does฀not฀qualify฀as฀a฀variable฀interest฀entity฀
under฀FIN฀46(R)฀and,฀therefore,฀consolidation฀is฀not฀required.
At฀December฀31,฀2004,฀the฀Company฀had฀outstanding฀letters฀of฀
credit฀totaling฀$110฀million฀and฀surety฀bonds฀in฀the฀amount฀of฀$117฀million฀
primarily฀to฀ensure฀the฀completion฀of฀environmental฀remediations฀and฀pay-
ment฀of฀possible฀casualty฀and฀workers’฀compensation฀claims.฀In฀February฀
of฀2005,฀the฀Company฀issued฀$31฀million฀in฀letters฀of฀credit฀in฀support฀of฀
Workers’฀Compensation฀liabilities.
Rental฀expense,฀net฀of฀minor฀sublease฀income,฀amounted฀to฀$161฀
million฀in฀2004,฀and฀$157฀million฀in฀each฀of฀the฀years฀2003฀and฀2002.฀The฀
approximate฀amounts฀of฀noncancelable฀lease฀commitments฀with฀terms฀of฀
more฀than฀one฀year,฀principally฀for฀the฀rental฀of฀real฀property,฀reduced฀by฀
minor฀sublease฀income,฀are฀$128฀million฀in฀2005,฀$97฀million฀in฀2006,฀$79฀
million฀in฀2007,฀$61฀million฀in฀2008,฀$46฀million฀in฀2009฀and฀$104฀million฀
in฀2010฀and฀thereafter.
฀In฀December฀2003,฀the฀Company฀sold฀a฀property฀in฀France฀for฀ap-
proximately฀$65฀million,฀net฀of฀direct฀selling฀costs,฀and฀then฀leased฀back฀a฀
portion฀of฀this฀property฀for฀a฀nine-year฀term.฀In฀accordance฀with฀SFAS฀No.฀
98,฀“Accounting฀for฀Leases,”฀the฀entire฀gain฀on฀the฀property฀sale฀of฀approx-
imately฀$57฀million฀was฀deferred฀and฀no฀gain฀was฀recognizable฀upon฀the฀
closing฀of฀the฀sale฀as฀the฀Company’s฀continuing฀involvement฀in฀the฀property฀
is฀deemed฀to฀be฀significant.฀As฀a฀result,฀the฀Company฀is฀accounting฀for฀the฀
transaction฀as฀a฀financing.฀Future฀minimum฀lease฀payments฀under฀this฀non-
cancelable฀lease฀commitment฀amounts฀noted฀above฀include฀approximately฀
$5฀million฀per฀year฀for฀2005฀through฀2009,฀and฀approximately฀$15฀million฀
for฀2010฀and฀thereafter,฀in฀relation฀to฀this฀transaction.
On฀March฀8,฀2004,฀the฀Company฀filed฀a฀complaint฀against฀Sony฀
Corporation฀in฀federal฀district฀court฀in฀Rochester,฀New฀York,฀for฀digital฀
camera฀patent฀infringement.฀Several฀weeks฀later,฀on฀March฀31,฀2004,฀
Sony฀sued฀the฀Company฀for฀digital฀camera฀patent฀infringement฀in฀federal฀
district฀court฀in฀Newark,฀New฀Jersey.฀Sony฀subsequently฀filed฀a฀second฀
lawsuit฀against฀the฀Company฀in฀Newark,฀New฀Jersey,฀alleging฀infringement฀
of฀a฀variety฀of฀other฀Sony฀patents.฀The฀Company฀filed฀a฀counterclaim฀in฀
the฀New฀Jersey฀action,฀asserting฀infringement฀by฀Sony฀of฀the฀Company’s฀
kiosk฀patents.฀฀The฀Company฀successfully฀moved฀to฀transfer฀Sony’s฀New฀
Jersey฀digital฀camera฀patent฀infringement฀case฀to฀Rochester,฀New฀York,฀
and฀the฀two฀digital฀camera฀patent฀infringement฀cases฀are฀now฀consolidated฀
for฀purposes฀of฀discovery.฀Based฀on฀the฀current฀discovery฀schedule,฀the฀
Company฀expects฀that฀claims฀construction฀hearings฀in฀the฀digital฀camera฀
cases฀will฀take฀place฀in฀2006.฀Both฀the฀Company฀and฀Sony฀Corporation฀
seek฀unspecified฀damages฀and฀other฀relief.฀Although฀this฀lawsuit฀may฀result฀
in฀the฀Company’s฀recovery฀of฀damages,฀the฀amount฀of฀the฀damages,฀if฀
any,฀cannot฀be฀quantified฀at฀this฀time.฀Accordingly,฀the฀Company฀has฀not฀
recognized฀any฀gain฀in฀the฀financial฀statements฀as฀of฀December฀31,฀2004,฀
in฀connection฀with฀this฀matter.
On฀October฀7,฀2004,฀the฀Company฀and฀Sun฀Microsystems฀Inc.฀reached฀
a฀tentative฀agreement฀to฀settle฀a฀lawsuit฀filed฀by฀Kodak฀on฀February฀11,฀
2002฀in฀Federal฀District฀Court,฀Western฀District฀of฀New฀York,฀for฀infringe-
ment฀of฀three฀Kodak฀patents฀covering฀a฀software฀architecture฀used฀in฀Sun’s฀
Java฀product.฀The฀settlement฀followed฀an฀October฀1,฀2004฀verdict฀in฀which฀
a฀federal฀court฀jury฀found฀that฀the฀Kodak฀patents฀in฀issue฀were฀valid,฀that฀
Sun฀infringed฀the฀patents,฀and฀that฀Sun’s฀affirmative฀defense฀was฀without฀
merit.
On฀October฀12,฀2004,฀a฀final฀settlement฀agreement฀was฀signed.฀฀
Pursuant฀to฀the฀terms฀of฀the฀settlement฀agreement,฀Sun฀paid฀Kodak฀$92฀
million฀in฀cash฀on฀October฀12,฀2004.
Kodak฀provided฀to฀Sun฀a฀non-exclusive฀license฀under฀the฀Kodak฀
patents฀at฀issue.฀In฀addition,฀Kodak฀licensed฀to฀Sun฀certain฀other฀Kodak฀