| EASTMAN KODAK CO ITEM 1A RISK FACTORS Set forth below and elsewhere in this report and in other documents that the Company files with the Securities and Exchange Commission are risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward-looking statements contained in this document and other public statements the Company makes |
| Additionally, because of the following risks and uncertainties, as well as other variables affecting our operating results, the Company’s past financial performance should not be considered an indicator of future performance |
| If we do not effectively execute our digital transformation, this could adversely affect our operations, revenue and ability to compete |
| The Company continues with its transformation from a traditional products and services company to a digital products and services company |
| This transformation includes an aggressive restructuring program to reduce its traditional infrastructure to cost-effectively manage the declining traditional business and to reduce its general and administrative costs to the level necessary to compete profitably in the digital markets |
| As a result of the digital transformation, the Company has established three key financial metrics against which it will measure success: digital earnings growth through expanding margins from the Company’s digital businesses, digital revenue growth and cash generation |
| Accordingly, the success of the Company’s transformation is dependent upon the execution of the Company’s transformation initiatives including (1) managing the amount and timing of the cost savings resulting from the restructuring of its traditional infrastructure and the reductions in general and administrative costs, (2) Kodak’s ability to continue its development and sale of digital products and services that deliver competitive margins in each of its segments, (3) the Company’s ability to manage the traditional business for cash generation in a cost-effective manner and (4) Kodak’s ability to successfully integrate its acquisitions, including KPG and Creo |
| If Kodak cannot successfully execute its transformation initiatives, the Company’s ability to compete as a profitable and growing digital company could be negatively affected, which could adversely affect its results of operations and its ability to generate cash |
| If we fail to comply with the covenants contained in our Secured Credit Agreement, including the two financial covenants, our ability to meet our financial obligations could be severely impaired |
| There are affirmative, negative and financial covenants contained in the Company’s Secured Credit Agreement |
| These covenants are typical for a secured credit agreement of this nature |
| The Company’s failure to comply with these covenants could result in a default under the Secured Credit Agreement |
| If an event of default were to occur and is not waived by the lenders, then all outstanding debt, interest and other payments under the Secured Credit Agreement could become immediately due and payable and any unused borrowing availability under the revolving credit facility of the Secured Credit Agreement could be terminated by the lenders |
| The failure of the Company to repay any accelerated debt under the Secured Credit Agreement could result in acceleration of the majority of the Company’s unsecured outstanding debt obligations |
| If we cannot effectively manage transitions of our products and services, this could adversely affect our revenues |
| The industries in which Kodak competes are rapidly changing and becoming increasingly more complex |
| Kodak’s ability to successfully transition its existing products to new offerings requires that Kodak make accurate predictions of the 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 may anticipate demand and perceived market acceptance that differs from the product’s realizable customer demand and revenue stream |
| Further, in the face of intense industry competition, any unanticipated delay in implementing certain product strategies (including digital products, category expansion and digitization) or in the development, production or marketing of a new product could decrease any advantage Kodak may have to be the first or among the first to market and could adversely affect Kodak’s revenues |
| Kodak’s failure to carry out a product rollout in the time frame anticipated and in the quantities appropriate to customer demand, or at all, could adversely affect future demand for Kodak’s products and services and have an adverse effect on its business |
| This risk is exacerbated when a product has a short life cycle or a competitor introduces a new product just before Kodak’s introduction of a similar product |
| PAGE 13 If we cannot effectively anticipate trends and respond to changing customer preferences, this could aversely affect our revenues |
| Due to changes in technology, the market for traditional photography products and services is in decline and, as a result, product development has focused on digital capture devices (digital cameras and scanners) designed to improve the image acquisition or digitalization process, software products designed to enhance and simplify the digital workflow, output devices (thermal printers, digital silver halide writers and commercial printing systems and solutions) designed to produce high quality images, and media (thermal and silver halide) optimized for digital workflows |
| Kodak’s success depends in part on its ability to develop and introduce new products and services in a timely manner that keep pace with technological developments and that are accepted in the market |
| The Company continues to introduce new 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, if the Company is unable to anticipate and develop improvements to its current technology, to adapt its products to changing customer preferences or requirements or to continue to produce high quality products in a timely and cost-effective manner in order to compete with products offered by its competitors, this could adversely affect the revenues of the Company |
| If we cannot adequately protect our intellectual property, our business could be harmed |
| Kodak has made substantial investments in technologies and has filed patent applications and obtained patents to protect its intellectual property rights as well as the interests of Kodak licensees |
| The execution and enforcement of licensing agreements protects the Company’s intellectual property rights and provides a revenue stream in the form of royalties that enables Kodak to further innovate and provide the marketplace with new products and services |
| There is no assurance that such measures will be adequate to protect the Company’s intellectual property |
| Our revenue, earnings and expenses may suffer if we cannot continue to implement our intellectual property licensing strategies |
| Kodak’s ability to execute its intellectual property licensing strategies could also affect the Company’s revenue and earnings |
| Kodak’s failure to develop and properly manage new intellectual property could adversely affect market positions and business opportunities |
| Furthermore, Kodak’s failure to manage the costs associated with intellectual property generation, licensing and litigation could adversely affect the profitability of Kodak’s operations |
| Our revenue, earnings and expenses may suffer if we cannot continue to license or enforce our intellectual property rights |
| Kodak relies upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with its employees, customers, suppliers and other parties, to establish, maintain and enforce its intellectual property rights |
| Any of Kodak’s direct or indirect intellectual property rights could, however, be challenged, invalidated or circumvented, or such intellectual property rights may not be sufficient to permit the Company to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly product redesign efforts, discontinuance of certain product offerings or other competitive harm |
| Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States |
| Therefore, in certain jurisdictions, Kodak may be unable to protect its proprietary technology adequately against unauthorized third party copying or use, which could adversely affect its competitive position |
| Also, because of the rapid pace of technological change in the information technology industry, much of our business and many of our products rely on key technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such parties may demand cross-licenses |
| PAGE 14 Our revenue, earnings and expenses may suffer if third parties assert that we violate their intellectual property rights |
| Third parties may claim that Kodak or customers indemnified by Kodak are infringing upon their intellectual property rights |
| In recent years, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from large companies like Kodak |
| Even if Kodak believes that the claims are without merit, the claims can be time-consuming and costly to defend and distract management’s attention and resources |
| Claims of intellectual property infringement also might require Kodak to redesign affected products, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting Kodak from marketing or selling certain of its products |
| Even if Kodak has an agreement to indemnify it against such costs, the indemnifying party may be unable to uphold its contractual agreement to Kodak |
| If we cannot or do not license the infringed technology at all or on reasonable terms or substitute similar technology from another source, our revenue and earnings could suffer |
| If we are not successful in transitioning certain financial processes and administrative functions to a global shared services model and outsourcing some of their work to third parties, our business performance, cost savings and cash flow could be adversely impacted |
| The Company continues to migrate various administrative and financial processes, such as general accounting, accounts payable, credit and collections, call centers and human resources processes to a global shared services model to more effectively manage its costs |
| Delays in the migration to the global shared services model and to third party vendors could adversely impact the Company’s ability to meet its cost reduction goals |
| Also, if third party vendors do not perform to Kodak’s standards, such as a delay in collection of customer receipts, the Company’s cash flow could be negatively impacted |
| Our inability to develop and implement e-commerce strategies that align with industry standards, could adversely affect our business |
| In the event Kodak were unable to develop and implement e-commerce strategies that are in alignment with the trend toward industry standards and services, the Company’s business could be adversely affected |
| The availability of software and standards related to e-commerce strategies is of an emerging nature |
| Kodak’s ability to successfully align with the industry standards and services and ensure timely solutions requires the Company to make accurate predictions of the future accepted standards and services |
| System integration issues could adversely affect our revenues and earnings |
| Kodak’s completion of planned information systems upgrades, including SAP, if delayed, could adversely affect its business |
| As Kodak continues to expand the planned information services, the Company must continue to balance the investment of the planned deployment with the need to upgrade the vendor software |
| Kodak’s failure to successfully upgrade to the vendor-supported version could result in risks to system availability, which could adversely affect the business |
| Our inability to effectively manage our acquisitions, divestitures and other portfolio actions could adversely impact our revenues and earnings |
| Kodak has recently completed two large business acquisitions in its Graphic Communications Group segment in order to strengthen and diversify its portfolio of businesses, while establishing itself as a leader in the graphic communications market |
| At the same time, Kodak is accelerating the current restructuring of its traditional manufacturing infrastructure |
| In the event that Kodak fails to effectively manage the continuing decline of its more traditional businesses while simultaneously integrating these acquisitions, it could fail to obtain the expected synergies and favorable impact of these acquisitions |
| Such a failure could cause Kodak to lose market opportunities and experience a resulting adverse impact on its revenues and earnings |
| PAGE 15 Economic trends in our major markets could adversely affect net sales |
| Economic downturns and declines in consumption in Kodak’s major markets may affect the levels of both commercial and consumer sales |
| Purchases of Kodak’s consumer products are to a significant extent discretionary |
| Accordingly, weakening economic conditions or outlook could result in a decline in the level of consumption and could adversely affect Kodak’s results of operations |
| If we do not timely implement our planned inventory reductions, this could adversely affect our cash flow |
| Unanticipated delays in the Company’s plans to continue inventory reductions in 2006 could adversely impact Kodak’s cash flow outlook |
| Planned inventory reductions could be compromised 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 could adversely impact the planned inventory reductions |
| Delays in our plans to improve manufacturing productivity and control cost of operations could negatively impact our gross margins |
| Kodak’s failure to successfully manage operational performance factors could delay or curtail planned improvements in manufacturing productivity |
| Delays in Kodak’s plans to improve manufacturing productivity and control costs of operations, including its ongoing restructuring actions to significantly reduce its traditional manufacturing infrastructure, could negatively impact the gross margins of the Company |
| Furthermore, if Kodak is unable to successfully negotiate raw material costs with its suppliers, or incurs adverse pricing on certain of its commodity-based raw materials, reduction in the gross margins could occur |
| We depend on third party suppliers and, therefore, our revenue and gross margins could suffer if we fail to manage supplier issues properly |
| Kodak’s operations depend on its ability to anticipate the needs for components, products and services and Kodak’s suppliers’ ability to deliver sufficient quantities of quality components, products and services at reasonable prices in time for Kodak to meet its schedules |
| Given the wide variety of products, services and systems that Kodak offers, the large number of suppliers and contract manufacturers that are dispersed across the globe, and the long lead times that are required to manufacture, assemble and deliver certain components and products, problems could arise in planning production and managing inventory levels that could seriously harm Kodak |
| Other supplier problems that Kodak could face include component shortages, excess supply and risks related to terms of its contracts with suppliers |
| If our planned improvements in supply chain efficiency are delayed, this could adversely affect our revenues and earnings |
| As the Company continues with its transformation from a traditional products and services company to a digital products and services company, Kodak’s planned improvement in supply chain efficiency, if delayed, could adversely affect its business by preventing shipments of certain products to be made in their desired quantities and in a timely and cost-effective manner |
| The planned efficiencies could be compromised if Kodak expands into new markets with new applications that are not fully understood or if the portfolio broadens beyond that anticipated when the plans were initiated |
| Any unforeseen changes in manufacturing capacity could also compromise the supply chain efficiencies |
| PAGE 16 The competitive pressures we face could harm our revenue, 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 somewhat by consumers’ conservative spending behaviors during times of a weak world economy, international tensions and the accompanying concern over war and terrorism |
| In the Health Group and Graphic Communications Group segments, aggressive pricing tactics intensified in the contract negotiations as competitors were vying for customers and market share domestically |
| If the Company is unable to obtain pricing or programs sufficiently competitive with current and future competitors, Kodak may lose market share, adversely affecting its revenue and gross margins |
| If we fail to manage distribution of our products and services properly, our revenue, gross margins and earnings could be adversely impacted |
| The impact of continuing customer consolidation and buying power could have an adverse impact on Kodak’s revenue, gross margins, and earnings |
| In the competitive consumer retail environment, there is a movement from small individually owned retailers to larger and commonly known mass merchants |
| In the health market, there is a continuing consolidation of various group purchasing organizations |
| In the commercial graphic communications market, the Company’s products are sold primarily through a variety of direct and indirect channels |
| These resellers and distributors may elect to use suppliers other than Kodak |
| Kodak’s challenge is to successfully negotiate contracts that provide the most favorable conditions to the Company in the face of price and aggressive competitors |
| Economic uncertainty in developing markets could adversely affect our revenue and earnings |
| Kodak conducts business in developing markets with economies that tend to be more volatile than those in the United States and Western Europe |
| The risk of doing business in developing markets like China, India, Brazil, Argentina, Mexico, Russia and other economically volatile areas could adversely affect Kodak’s operations and earnings |
| Such risks include the financial instability among customers in these regions, political instability and potential conflicts among developing nations and other non-economic factors such as irregular trade flows that need to be managed successfully with the help of the local governments |
| Kodak’s failure to successfully manage economic, political and other risks relating to doing business in developing countries and economically and politically volatile areas could adversely affect its business |
| Because we sell our products and services worldwide, we are subject to changes in currency exchange rates and interest rates that may adversely impact our operations and financial position |
| Kodak, as a result of its global operating and financing activities, is exposed to changes in currency exchange rates and interest rates, which may adversely affect its results of operations and financial position |
| Exchange rates and interest rates in certain markets in which the Company does business tend to be more volatile than those in the United States and Western Europe |
| There can be no guarantees that the economic situation in developing markets or elsewhere will not worsen, which could result in future effects on earnings should such events occur |
| Management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2005 due to a material weakness in internal controls surrounding our accounting for income taxes |
| If we fail to remediate this material weakness or any material weaknesses we may discover in the future, we may not be able to provide reasonable assurance regarding the reliability of our financial statements |
| Effective internal control over financial reporting is necessary for the Company to provide reasonable assurance with respect to our financial reports |
| If the Company cannot provide reasonable assurance with respect to its financial reports, its business, brand and operating results could be harmed |
| As disclosed in the Company’s 2004 Annual Report on Form 10-K, and in its Quarterly Reports on Form 10-Q for each of the first three quarters of 2005, management’s assessment of the Company’s internal controls over financial reporting identified material weaknesses in the Company’s internal controls surrounding the accounting for income taxes and in its internal PAGE 17 controls surrounding the accounting for pension and other postretirement benefit plans |
| In addition, in the Company’s Quarterly Report on Form 10-Q for the three and nine-month periods ended September 30, 2005, the Company also reported a material weakness in its internal controls surrounding the preparation and review of spreadsheets that include new or changed formulas |
| 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 weaknesses identified above |
| This resulted in material improvements in the Company’s internal control over financial reporting, including the successful remediation of the material weaknesses in internal controls surrounding its accounting for pension and other postretirement benefits and spreadsheet controls as of December 31, 2005 |
| Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud |
| Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements |
| If we cannot protect our reputation due to product quality and liability issues, our business could be harmed |
| Kodak products are becoming increasingly sophisticated and complicated to design and build as rapid advancements in technologies occur |
| Although Kodak has established internal procedures to minimize risks that may arise from product quality and liability issues, there can be no assurance that Kodak will be able to eliminate or mitigate occurrences of these issues and associated damages |
| Kodak may incur expenses in connection with, for example, product recalls, service and lawsuits, and Kodak’s brand image and reputation as a producer of high-quality products could suffer |