Jim Langley, President of Kodak's Commercial Print group, and Homi Shamir, President of Kodak Versamark, addressed a packed press conference at On Demand following the announcement Monday of Kodak's agreement with Heidelberg to acquire Heidelberg's digital business. The announcement came after months of rumors and appears to be a very favorable outcome for Kodak.

Kodak, who was in a 50% joint venture arrangement with Heidelberg in the operation of NexPress LLC, will acquire the remaining 50% of the business, as well as Heidelberg Digital LLC, Heidelberg's digital black & white business, in a deal that involves no upfront cash but is structured with a two-year earn-out plan based on earned revenues. The maximum cash payout to in the first two years is $150 million. The deal includes a five-year earn-out as well, which Langley declined to be specific about, indicating that the company was reluctant to expose its unit sale projections to its competition. The five-year earn-out period is based on the joint development efforts of the two companies during the NexPress LLC joint venture. Langley indicated that there was no distribution arrangement whereby Heidelberg sales personnel would continue to sell the NexPress and Digimaster products. However, he did say that the companies were discussing such a distribution arrangement, commenting that the earn-out structure was an incentive for Heidelberg to contribute to the future success of NexPress and the Heidelberg Digital units.

Kodak also negotiated a one-way non-compete, wherein Heidelberg is restricted from entering the digital production color business for a two-year period. According to Langley, the non-compete only applies to the NexPress class of high performance, heavy duty equipment, indicating that if Kodak chose to go downmarket with the NexPress product, there is no restriction that prevents Heidelberg from competing in that space. Langley stated an intent to broaden the product line, both horizontally and vertically.

Also as part of the arrangement, Kodak will be hiring Heidelberg employees involved in supporting the digital business from a sales and service perspective, including Heidelberg sales professionals who have been responsible for selling the NexPress 2100.

The NexPress 2100 currently has installs in excess of 300 worldwide, and the black & white Digimaster products, also marketed under the Canon and IBM labels, have in excess of 4,000 installs worldwide. Kodak plans to continue the IBM and Canon relationships. Langley indicated that the new subsidiary has not yet been named and the deal is targeted to close about the 1st of May, just prior to drupa, at which time the renaming will be announced and more details regarding Kodak's strategy will be unveiled. The NexPress and Digimaster products will still be featured at the Heidelberg drupa stand in Hall 2, as well as in several other locations throughout the event.

Langley projected that the new business would represent some $0.30 to $0.35 of dilution in 2004, with the business projected to turn positive in early 2007.

Kodak Versamark

Shamir reiterated the Versamark mission to lead the transformation of data driven production printing through the application of personal, relevant messages, indicating that he expected drupa to be a very positive show for this wholly owned subsidiary of Eastman Kodak. Shamir stated that the company already has customer commitments to purchase equipment that will be used in the drupa stand. He also discussed a new configuration that will be shown at drupa, the VX5000, a 1000 fpm inkjet printer which can be integrated with a Muller Martini press, with the press preprinting shells and the VX5000 applying variable data inline. The VX5000 will be front-ended by the new EFI Fiery server developed in collaboration between EFI and Versamark.

Shamir indicated that the integration of the Versamark business into Kodak was proceeding extremely well.

The Challenges Ahead

Kodak is making significant investments in its reentry to the commercial printing market. The company faces tough competition, particularly with the established base and market-leading position already held by its competitor across the river in Rochester NY, Xerox. Critical to the company's success will be its ability to instill trust and confidence in the commercial, quick print and in-plant markets that it is dedicated to staying the course, that it understands the commercial printing business, and that it will be able to develop a portfolio of total solutions that will meet the needs of the market. While the transaction was long expected, initial reaction was mixed. When asked why he thought Kodak would succeed with this initiative when the company's attempts in the past had not fared well, Langley replied, I can't speak to the past since I wasn't involved at the time. What I can say is that I am extremely positive about the future and our ability to be successful.