- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 28, 199827, 1999           COMMISSION FILE NO. 1-6651

                          HILLENBRAND INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

                INDIANA                                    35-1160484
     (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                    Identification No.)

            700 STATE ROUTE 46 EAST
             BATESVILLE, INDIANA                            47006-8835
   (Address of principal executive offices)                 (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (812) 934-7000
           SECURITIES REGISTERED PURSUANT TO SECTION 12(b)12(B) OF THE ACT:

     Title of Each Class               Name of Each Exchange on Which Registered
- --------------------------------     -------------------------------------------------------------------------        -----------------------------------------
COMMON STOCK, WITHOUT PAR VALUE                NEW YORK STOCK EXCHANGE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g)12(G) OF THE ACT: NONE

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d)15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

                 Yes    X               No
                     ----                     ------------               ---------

         INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.

     / /

     STATE THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.

         Common Stock, without par value - $2,128,243,226$1,417,964,063 as of February 12, 199911,
2000 (excluding stock held by persons deemed affiliates).

     INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

         Common Stock, without par value - 66,403,44862,751,733 as of February 12, 1999.11, 2000.

     DOCUMENTS INCORPORATED BY REFERENCE.

         Portions of the 19992000 Proxy Statement furnished to Shareholders - Parts
         I III and IV.III.
         Portions of the 1997 Proxy Statement furnished to Shareholders - Part
         IV.

Portions of the 1994 Proxy Statement furnished to Shareholders - Part IV.

- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------================================================================================

   2
                          HILLENBRAND INDUSTRIES, INC.
                           ANNUAL REPORT ON FORM 10-K
                                NOVEMBER 28, 199827, 1999
                                TABLE OF CONTENTS


                                                                           
PAGE PART I Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 45PAGE PART I Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 48 PART III Item 10. Directors and Executive Officers of the Registrant 46 Item 11. Executive Compensation 46 Item 12. Security Ownership of Certain Beneficial Owners and Management 46 Item 13. Certain Relationships and Related Transactions 46 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46 SIGNATURES 49
Item 11. Executive Compensation 49 Item 12. Security Ownership of Certain Beneficial Owners and Management 49 Item 13. Certain Relationships and Related Transactions 49 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49 SIGNATURES 53 3 PART I ITEM 1. BUSINESS Hillenbrand Industries, Inc., an Indiana corporation headquartered in Batesville, Indiana, is a diversified, public holding company and the owner of 100% of the capital stock of its three major operating companies.companies serving the funeral services and health care industries. Unless the context otherwise requires, the terms "Hillenbrand" and the "Company" refer to Hillenbrand Industries, Inc., and its consolidated subsidiaries. Hillenbrand is organized into two business segments: the Health Care Groupsubsidiaries, and the Funeral Services Group.terms "Hill-Rom Company", "Batesville Casket Company" and "Forethought Financial Services", and derivations thereof, refer to one or more of the subsidiary companies of Hillenbrand that comprise those businesses. The Company's Health Care Group consists of Hill-Rom Inc.,Company, a manufacturer of equipment for the health care market and provider of wound care and pulmonary/trauma management services. The assets of Medeco Security Locks, Inc. ("Medeco"), a manufacturer of high security locks and access control products for commercial and residential use, were sold to Assa Abloy AB on July 1, 1998. Results for Medeco Security Locks, Inc. are included in the Company's financial statements within the Health Care Group through that date. Thedate and had an immaterial effect on the operating results of this group. Hillenbrand's Funeral Services Group consists of Batesville Casket Company, Inc., a manufacturer of caskets and other products for the funeral industry, and Forethought Financial Services, Inc., a provider of funeral planning financial products. HEALTH CARE Hill-Rom Inc., with its subsidiaries (collectively, "Hill-Rom"),Company is a leading producer of mechanically, electricallyrecognized leader in the worldwide health care community providing sales, rentals, service and hydraulically controlled adjustable hospitalsupport for products including beds, therapy surfaces, stretchers, infant warmers, incubators, radiant warmers, hospital procedural stretchers, hospital patient room furniture, communication systems, surgical columns, medical gas and vacuummanagement systems, modular headwalls, lighting systems and architectural systems specifically designed to meet the needs of medical-surgical, critical care, long-term care, home-care and perinatal providers. It has been in the hospital equipment business since 1929. It has been engaged in the manufacture, rental and service of therapy beds and support surfaces in the wound care, pulmonary/trauma and incontinence management markets since 1985.operating room equipment. The Hill-RomHill-Rom(R) line of electrically, hydraulically and manually adjustable hospital beds includes models which, through sideguard controls, can be raised and lowered, retracted and adjusted to varied orthopedic and therapeutic contours and positions. Hill-Rom also producesmanufactures beds for special departments such as intensive care, emergency, perinatal, recovery rooms, neonatal and labor and delivery rooms. Other Hill-RomHill-Rom(R) products include nurse call systems, sideguard communications, wood-finished bedside cabinets, adjustable-height overbed tables, mattresses and wood upholstered chairs. Its architectural products include customized, prefabricated modules, either wall-mounted or on freestanding columns, enabling medical gases, communications and electrical services to be distributed in patient rooms. RecentlyProducts introduced and acquired productsrecently include the TotalCare(R) bed, Advanta(TM) bed, TransStar(R) stretcher, Procedural Recliner, Isolette(R) infant incubator, Resuscitaire(R) radiant warmer, and MEDAES(R) medical gas and vacuum systems and the AMATECH product line of surgical table accessories and patient positioning devices for the operating room in the acute care market and the Resident(R) and Osprey(TM) LTC bedbeds in the long-term care market. In addition to these new products the Company has continued to expand its line of specialty accessories, to improve both patient comfort and serviceability for the health care provider. Also, the Company continues to focus on furnishing the total health care suite, which includes improved room groupings to enhance the comfort of both the patient and family members. Hill-Rom also remanufactures hospital beds. The remanufacturing process includes disassembly, washing, sanding, painting and reassembly with new components. Hill-RomHill-Rom(R) products are sold directly to acute and long-term health care facilities throughout the United States, Canada and CanadaEurope by Hill-Rom account executives. Most Hill-Rom(R) products sold in the United States are delivered by trucks owned by Hill-Rom. Hill-Rom also operates a Canadian division which distributes Hill-Rom(R) products, principally in Canada. Hill-Rom also sells its domestically produced products through distributorships throughout the world. Hill-Rom operates hospital bed, therapy bed and patient room manufacturing facilities in France. TheirThese products are sold and leased directly to hospitals and nursing homes throughout Europe. -1-1 4 Within the wound care and trauma management market, CLINITRON(R) Air Fluidized Therapy is provided as a therapeutic adjunct in the treatment of advanced pressure sores, flaps, grafts and burns. The CLINITRON(R) unit achieves its support characteristics from the fluid effect created by forcing air up and through medical-grade ceramic microspheres contained in the unit's fluidization chamber. Various CLINITRON(R) products are designed to meet the specific requirements of acute care, long-term care and home-care settings. Recent product introductionsOther products introduced recently utilizing this technology include the Clinitron(R) Rite-Hite(R) Air Fluidized Therapy unit, designed to meet the requirements of long-term care facilities and the Clinitron At-Home(R) unit, which was designed for delivery and use in the home. Hill-Rom's other wound care and pulmonary/trauma management technology, low airloss therapy, consists of a sleep surface with air-filled cushions separated into integrated zones. Air pressure is automatically adjusted whenever the patient changes position. Micro air vents on the cushions allow for the controlled release of air. This technology is applied to either an integrated unit or as an overlay to an existing bed. Recently introduced lowLow airloss products include the Flexicair Eclipse(R) mattress, a portable, rental mattress replacement for the acute care market and the Silkair(R) mattress, a low airloss overlay product for the home care market, and the V-Cue(TM) mattress, a rotational mattress for the pulmonary market. Besides theseIn addition to the above products, the European marketoperations have introduced the Primo mattress, a modestly priced, low airloss product to enhance the product line. In Europe, the Company also rents and sells the Duo mattress, a pressure relieving and alternating pressure mattress. Clinical support for Hill-Rom's wound care and pulmonary/trauma management products is provided by a sales force composed of nurses and physician assistants. Technical support is made available by technicians and service personnel who provide maintenance and technical assistance from Hill-Rom Service Centers. Hill-Rom(R) therapy systems are made available to hospitals, long-term care facilities and homes on a rental basis through more than 150 Service Centers located in the United States, Canada and Western Europe. On December 18, 1997,July 30, 1999 Hill-Rom acquiredpurchased the stockassets of Air-Shields, Inc.,AMATECH Corporation, a manufacturer and supplierdistributor of infant incubatorssurgical table accessories and warmers, and certain other businesses of Vickers PLCpatient positioning devices for $98 million, net of cash acquired, including costs of acquisition. On February 9, 1998, Hill-Rom acquired the stock of MEDAES Holdings, a manufacturer of medical architectural systems, for a cash payment of $62 million including costs of acquisition. On October 19, 1998, Hill-Rom acquired the stock of Fisher-Berkeley Corporation, a manufacturer of nurse call communication products, for a cash payment of $8 million. Hill-Rom generates the predominant share of the Health Care segment's revenues and operating profit. Medeco had an immaterial effect on the operating results of this segment in 1996, 1997 and prior to its disposition in 1998.room. FUNERAL SERVICES Batesville Casket Company Inc. ("Batesville"), an Indiana corporation headquartered in Batesville, Indiana, was founded in 1884 and acquired by the Hillenbrand family in 1906. Batesville manufactures and sells several types of caskets made of steel, copper, bronze, hardwood and hardwood. It also manufactures and sells cloth-covered caskets including caskets and containers for the cremation market. Batesville also markets a line of all wood construction (orthodox) caskets and non-protective steel caskets. In addition, Batesville manufactures and sells a line of urns and other memorialization products used in cremations.for the cremation market. In addition, Batesville markets a line of all-wood construction (orthodox) caskets and non-protective steel caskets. Batesville also owns Applied Retail Systems (ARS), asupplies selection room display fixturing supplier.through its Applied Retail Systems division. All Batesville-produced metal caskets are protective caskets whichthat are electronically welded and resistant to the entry of air, water and gravesite substances through the use of rubber gaskets and a locking bar mechanism. Batesville's Monoseal(R) steel caskets also employ a magnesium alloy bar to cathodically protect the casket from rust and corrosion. The Company believes that this system of Cathodic Protection is featured only on Batesville produced caskets. -2- BatesvilleBatesville(R) hardwood caskets are made from walnut, mahogany, cherry, maple, pine, oak, pecan and poplar. Except for a limited line of hardwood caskets with a protective copper liner, the majority of hardwood caskets are not protective. Batesville's cloth-covered caskets are constructed with a patented process using cellular fiberboard construction. 2 5 The Options by Batesville cremation division offers a complete cremation marketing system for Funeral Services professionals. In addition to a broad line of cremation caskets and urns, the system includes training, merchandising support and marketing support materials. Cremation caskets and containers are manufactured primarily of hardwoods and fiberboard. Options' wide assortment of memorial urns are made from a variety of materials, including cast bronze, cast acrylic, wood, sheet bronze, cloisonne' and marble. Batesville offers several other marketing and merchandising programs to funeral directors for both casket and cremation products. BatesvilleBatesville(R) caskets are marketed by Batesville's direct sales force to licensed funeral directors operating licensed funeral homes throughout the United States, Australia, Canada, Mexico and Puerto Rico. Batesville maintains inventory at 7080 company-operated Customer Service Centers (CSCs) and seven Rapid Deployment Centers (RDC's) in North America. BatesvilleBatesville(R) caskets are delivered in specially equipped vehicles owned by Batesville. Batesville mainly manufactures and distributes products in the U.S. It also has small manufacturing and distribution facilities in Canada and Mexico. Forethought Financial Services Inc. ("Forethought," formerly Forecorp, Inc.), was founded in 1985. It, along with its principal subsidiaries, Forethought Life Insurance Company, Forethought National TrustBank, Forethought Federal Savings Bank, Forethought Investment Management, Inc. and, The Forethought Group, Inc., are headquartered in Batesville, Indiana. These companies and Arkansas National Life Insurance Company serve a network of funeral planning professionals with marketing support for Forethought(R) funeral plans funded by life insurance policies, trust products and other financial vehicles. These specialized funeral planning products are offered through funeral homes. Consumers choose the funeral home, type of service and merchandise they want. The selected funeral home contracts to provide the Funeral Services and merchandise when needed. With funds made available by a Forethought(R) financial product, the funeral home agrees to provideguarantee the planned funeral which will be available as specified. Forethought(R) life insurance policies are offered by over 4,0005,000 independent funeral homes. Forethought Life Insurance Company is licensed in 4849 states, Alberta, Ontario, Manitoba, New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island, Canada,nine Canadian provinces, Puerto Rico and the District of Columbia. On December 31, 1998, Forethought purchased Chrysler Life Insurance Company, on June 4, 1998 and renamed ita wholly owned subsidiary of Forethought Financial Services, Inc., acquired the stock of Arkansas National Life AssuranceInsurance Company. Forethought entered the trust business in 1997 and offers trust products in sixteen states. Its trust products are offered through independent funeral homes and national chains. Forethought received a federal savings bank charter in July 1998. The Company purchased International Funeral Associates (IFA) on September 30, 1998. IFA is a membership-based associationIn November 1999, Forethought National Trust Bank was merged into Forethought Federal Savings Bank, as required with the granting of independent funeral homes that provides its customers with buying services for a wide range of funeral service products, in addition to business resources such as accounts receivables management, pre-need and property/casualty insurance.the savings bank charter. BUSINESS SEGMENT INFORMATION The amounts of netNet revenues, operating profit andsegment profitability, identifiable assets attributable toand other measures of segment reporting for each of the industry segments of the Companyreporting segment are set forth in tables relating to operations by business segment in Note 910 to the Consolidated Financial Statements, which statements are included under Item 8. -3-While the Company serves two predominant industries, as denoted by its Health Care and Funeral Services Groups, for segment reporting purposes each of the Company's three major operating companies constitute a reporting segment. The Company's three reporting segments are defined as Health Care ("Hill-Rom"), Funeral Services Products ("Batesville") and Funeral Services Insurance ("Forethought"). 3 6 RAW MATERIALS HEALTH CARE Principal materials used in Hill-Rom(R) products include carbon steel, aluminum, stainless steel, wood, high-pressure laminates, fabrics, silicone-coated soda-lime glass beads and other materials, substantially all of which are available from several sources. Motors for electrically and hydraulically operated beds and certain other components are purchased from one or more manufacturers. FUNERAL SERVICES Batesville employs carbon and stainless steel, copper and bronze sheet, wood and wood by-products, fabrics, finishing materials, rubber gaskets, zinc and magnesium alloy in the manufacture of its caskets. These materials are available from several sources. COMPETITION HEALTH CARE Hill-Rom believes it is the U.S. market share leader in the sale of electrically and hydraulically operated hospital beds, competing with approximately ten (10) other manufacturers. In Europe, Hill-Rom competes with several other manufacturers and believes that it is a market leader.leader in the products and services it provides. In both the United States and Europe there are other companies which provide low airloss and other methods of patient support and patient relief. FUNERAL SERVICES Batesville believes its dollar volume of sales of finished caskets is the largest in the United States. Batesville competes on the basis of product quality, service to its customers and price, and believes that there are approximately two (2) other companies that also manufacture and/or sell caskets over a wide geographic area. There are, however, throughout the United States many enterprises that manufacture, assemble, or distribute caskets for sale within a limited geographic area. Forethought competes on the basis of service to its customers and products offered. Forethought Life Insurance Company sells its products in competition with other life insurance companies. Forethought Life believes it is the leading provider of insurance-funded pre-arranged funerals in the United States. Forethought National TrustBank andNorth America. Forethought Federal Savings Bank competecompetes with local banks and master trusts offered through industry trade or state funeral director associations. -4-4 7 RESEARCH Each of the Company's operating subsidiaries devotes research efforts to develop and improve its products as well as its manufacturing and production methods. All research and development expenses are Company sponsored. 1997 includes approximately $8 million of research and development expenditures related to a discontinued business. Expenditures in the most recent three fiscal years were as follows:
1998 1997 1996 ---- ---- ---- (millions) New products and processes $26 $40 $31 Improvement of existing products and processes 16 9 11
(millions) 1999 1998 1997 ---- ---- ---- Total research and development expenditures $47 $46 $49 PATENTS AND TRADEMARKS The Company owns a number of patents on its products and manufacturing processes which are of importance to it, but it does not believe that any single patent or related group of patents are of material significance to the business of the Company as a whole. The Company also owns a number of trademarks and service marks relating to its products and product services which are of importance to it, but it does not believe that any single trademark or service mark is of material significance to the business of the Company as a whole. EMPLOYEES As of February 12, 1999,11, 2000, the Company employed approximately 10,40010,800 persons in its operations in North America and Europe. ENVIRONMENTAL PROTECTION Hillenbrand Industries, Inc. is committed to operating all of its businesses in a way that protects the environment. The Company has voluntarily entered into remediation agreements with environmental authorities, and has been issued Notices of Violation alleging violations of certain permit conditions. Accordingly, the Company is in the process of implementing plans of abatement in compliance with agreements and regulations. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. The cost of all plans of abatement and waste-site cleanups in which the Company is currently involved is not expected to exceed $5 million. The Company has provided adequate reserves in its financial statements for these matters. These reserves have been determined without consideration of possible loss recoveries from third parties. Compliance with other current governmental provisions relating to protection of the environment are not expected to materially affect the Company's capital expenditures, earnings or competitive position. RecentFurther changes in environmental law might affect the Company's future operations, capital expenditures and earnings. Theearnings; however, the cost of complying with these provisions, if any, is not known. FOREIGN OPERATIONS AND EXPORT SALES Information about the Company's foreign operations is set forth in tables relating to geographic information in Note 910 to the Consolidated Financial Statements, which statements are included under Item 8. The Company's export revenues constituted less than 10% of consolidated revenues in 19981999 and prior years. -5-5 8 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualify. There are no family relationships between any of the executive officers of the Company. Following are the executive officers of the Company as of November 28, 1998.February 11, 2000. W August Hillenbrand, 58,59, was elected Chief Executive Officer of the Company on December 6, 1999. He had been President and Chief Executive Officer since April 11, 1989 and has been President since October 21, 1981. Prior to thatbeing President he had been a Vice President of the Company since 1972 and has been employed by the Company throughout his business career. Tom E. Brewer, 60,Frederick W. Rockwood, 52, was elected President of the Company on December 6, 1999. He has been employed by the Company since May 16, 1983,1977. Previous positions held within the Company include President and was electedChief Executive Officer of Hillenbrand Funeral Services Group, Inc., President and Chief Executive Officer of Forethought Financial Services, Inc., Senior Vice President of Corporate Planning and Chief Financial Officer on May 23, 1983. He was elected Senior Vice President, Finance on March 16, 1998. He had been employed by the Firestone Tire and Rubber Company for the prior 22 years, where he served asDirector of Corporate Vice President and Treasurer.Strategy. Donald G. Barger, Jr., 55,57, has been employed by the Company since March 16, 1998, and was elected Vice President and Chief Financial Officer on March 16, 1998. Prior to joining the Company, he was Vice President and Chief Financial Officer for Worthington Industries for the previous five years. He also served in various finance positions with the B.F. Goodrich Company and Irwin Management. George E. Brinkmoeller, 62, was elected Vice President, Corporate Services on December 2, 1979, had been Director of Corporate Services since January 1, 1975, and had been Manager of Affiliated Operations since January 1, 1971. Michael L. Buettner, 41,42, has been employed by the Company since January 9, 1995, and was elected Vice President, Corporate Development on January 9, 1995. Prior to joining the Company, he was employed by Bausch & Lomb Incorporated for 10 years in various corporate development and finance roles, most recently as Staff Vice President, Corporate Development. He has also served in various finance and marketing positions with Moog Automotive, Inc. and Carboline Company. Mark R. Lanning, 44, was elected Vice President and Treasurer on April 11, 1995. Prior to that he had been Assistant Treasurer since June 1991. He joined the Company on May 16, 1988, as Manager, Corporate Audit. Prior to joining the Company he served in various capacities with the public accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has been a licensed Certified Public Accountant since 1979. Mark R. Lindenmeyer, M.D., 51,53, was elected Vice President, General Counsel and Secretary of the Company on October 7, 1991. He had been employed by the Company since August 18, 1986, as Litigation Counsel. Prior to joining the Company, Dr. Lindenmeyer served in the U.S. Army as a military trial attorney and judge and was a partner in a Batesville, Indiana law firm. He has been a licensed physician since 1986 and a practicing attorney since 1972. J. Cameron Moss, 42, was elected Vice President, Corporate Planning on January 2, 1996, and has been employed by the Company since January 2, 1996. Prior to joining the Company, he was a senior manager with McKinsey & Company, Inc., in its Cleveland, Ohio and Munich, Germany offices. David L. Robertson, 53,54, has been employed by the Company since March 23, 1998, and was elected Vice President, Administration on December 8, 1999. He previously served as Vice President, Human Resources onfrom March 23, 1998.1998 to December 8, 1999. Prior to joining the Company, he was Senior Vice President, Human Resources for Rubbermaid, Inc. in Wooster, Ohio. From 1982 to 1994 Mr. Robertson served as Vice President, Human Resources for Hillenbrand Industries, Inc.. Robert J. Tennison, 52, has been employed by the Company since February 28, 1996, and was elected Vice President, Continuous Improvement on March 1, 1996. Prior to joining the Company, he was Senior Vice President of Operations for Donnelly Corporation, President of Hennessy Industries and Director of Manufacturing for Sauer-Sundstrand. He began his career with General Motors.Inc. James D. Van De Velde, 52,53, was elected Vice President and Controller on May 13, 1991. He joined the Company on September 1, 1980 as Director, Taxes. Prior to that he was employed by the public accounting firm of Price Waterhouse (now PricewaterhouseCoopers LLP). -6-6 9 ITEM 2. PROPERTIES The principal properties of the Company and its subsidiaries are listed below, and are owned or leased by the Company or its subsidiaries subject to no material encumbrances except for those facilities (*) which were constructed with funds obtained through government sponsored bonds (see Note 56 to the Consolidated Financial Statements). All facilities are suitable for their intended purpose, are being efficiently utilized and are believed to provide adequate capacity to meet demand for the next several years.
LOCATION DESCRIPTION PRIMARY USE --------- -------------------- ----------- ----------- HEALTH CARE: Batesville, IN Manufacturing plant and Manufacture of health care distribution facility equipment Office facilities Administration Charleston, SC Office facility and Administration and assembly plant assembly of therapy units Hatboro, PA Manufacturing plant and Administration and manufacture office facility of infant-care equipment Norcross, GA Office facility and Administration and assembly of assembly plant medical architectural systems Pluvigner, France Manufacturing plant and ManufactureAdministration and manufacture office facility of health care office facility equipment FUNERAL SERVICES: Batesville, IN Manufacturing plants Manufacture of metal caskets Office facilities Administration and Insurance Operations Manchester, TN Manufacturing plants Manufacture of metal caskets Campbellsville, KY Manufacturing plant Manufacture of metal caskets Vicksburg, MS Kiln drying and lumber Drying and dimensioning cutting plant lumber * Batesville, MS Manufacturing plant Manufacture of hardwood caskets Nashua, NH Manufacturing plant Manufacture of hardwood caskets
In addition to the foregoing, the Company leases or owns a number of other manufacturing facilities, warehouse distribution centers, service centers and sales offices throughout the United States, Canada and Western Europe. ITEM 3. LEGAL PROCEEDINGS On August 16, 1995, Kinetic Concepts, Inc., and Medical Retro Design, Inc. (collectively, the "plaintiffs"), filed suit against Hillenbrand Industries, Inc., and its subsidiary Hill-Rom Company, Inc., in the United States District Court for the Western District of Texas, San Antonio Division. The plaintiffs allege violation of various antitrust laws, including illegal bundling of products, predatory pricing, refusal to deal and attempting to monopolize the hospital bed industry. They seek monetary damages totaling in excess of $269 million, trebling of any damages that may be allowed by the court, and injunctions to prevent further alleged unlawful activities. The Company believes that the claims are without merit and is defending itself aggressively against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiffs. -7-7 10 On November 20, 1996, the Company filed a Counterclaim to the above action against Kinetic Concepts, Inc. (KCI) in the U.S. District Court in San Antonio, Texas. The Counterclaim alleges that KCI has attempted to monopolize the therapeutic bed market and to interfere with the Company's and Hill-Rom's business relationships by conducting a campaign of anticompetitive conduct. It further alleges that KCI abused the legal process for its own advantage; interfered with existing Hill-Rom contractual relationships; interfered with Hill-Rom's prospective contractual and business relationships; commercially disparaged the Company and Hill-Rom by uttering and publishing false statements to customers and prospective customers urging them not to do business with the Company and Hill-Rom; and committed libel and slander in statements made both orally and published by KCI that the Company and Hill-Rom were providing illegal discounts. The Company alleges that KCI's intent is to eliminate legal competitive marketplace activity. There is no other pending litigation of a material nature in which the Company or its subsidiaries are involved. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended November 28, 1998.27, 1999. PART II DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS From time to time, the Company makes oral and written statements that may constitute "forward-looking statements" as defined in the PRIVATE SECURITIES LITIGATION REFORM ACT OFPrivate Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and releases. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements relating to the future performance of the Company contained in Management's Discussion and Analysis (under Items 7 and 7A on Form 10-K), and the Notes to Consolidated Financial Statements (under Item 8 on Form 10-K) and other statements made in this Form 10-K and in other filings with the SEC. Specifically, statements in this filing that are not historical facts, including statements accompanied by words such as "the Company believes" or "is expected", are intended to identify forward-looking statements and convey the uncertainty of future events or outcomes. The Company cautions readers that any such forward-looking statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks, and there is no assurance that actual results may not differ materially. Important factors that could cause actual results to differ include but are not limited to: differences in anticipated and actual product introduction dates, the ultimate success of those products in the marketplace, changes in Medicare reimbursement trends, the success of cost control and restructuring efforts, and the integration of acquisitions, among other things. Realization of the Company's objectives and expected performance can also be adversely affected by the outcome of pending litigation and rulings by the Internal Revenue Service on certain tax positions taken by the Company. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -8-8 11 MARKET INFORMATION Hillenbrand Industries' common stock is traded on the New York Stock Exchange under the ticker symbol "HB". The following table reflects the range of high and low selling prices of the Company's common stock by quarter for 1999 and 1998. 1999 1998 and 1997.
1998 1997 ---------------------- ------------------------------------ ---------------- High Low High Low ---- --- ---- --- First Quarter 58 1/8 41 $57 $44 9/16 $39 5/8 $33 7/8 Second Quarter 49 1/8 40 15/16 $64 11/16 $55 11/16 $47 1/2 $37 1/4 Third Quarter 45 5/16 28 7/8 $62 15/16 $52 5/16 $48 5/8 $43 1/2 Fourth Quarter 37 3/8 26 1/8 $61 $48 3/16 $46 9/16 $42 3/16
HOLDERS On February 12, 1999,11, 2000, there were approximately 24,50022,900 shareholders of record. DIVIDENDS The Company has paid cash dividends on its common stock every quarter since its first public offering in 1971, and those dividends have increased each year since 1972. Dividends are paid near the end of February, May, August and November to shareholders of record near the end of January, April, July and October. Cash dividends of $.78 ($.195 per quarter) in 1999 and $.72 ($.18 per quarter) in 1998 and $.66 ($.165 per quarter) in 1997 were paid on each share of common stock outstanding. Cash dividends will be $.78$.80 ($.195.20 per quarter) in 1999.2000. ITEM 6. SELECTED FINANCIAL DATA The following table presents selected consolidated financial data of Hillenbrand Industries, Inc., for fiscal years 19941995 through 1998.1999.
1999 1998 1997 1996 1995 1994 (b) ------ ------- ------- ------- ------- (IN MILLIONS EXCEPT PER SHARE DATA)---- ---- ---- ---- ---- (In millions except per share data) Net revenues $ 2,047 $ 2,001 $ 1,776 $ 1,684 $ 1,625 $ 1,577 Net income (a) $ 124 $ 184 $ 157 $ 140 $ 90 $ 90 Basic and diluted net income per share (a) $ 1.87 $ 2.73 $ 2.28 $ 2.02 $ 1.27 $ 1.26 Total assets $ 4,433 $ 4,280 $ 3,828 $ 3,396 $ 3,070 $ 2,714 Long-term debt $ 302 $ 303 $ 203 $ 204 $ 206 $ 209 Cash dividends per share $ .78 $ .72 $ .66 $ .62 $ .60 $ .57
(a) RESULTS INResults in 1999 reflect unusual charges incurred at all operating companies of $24 million, net-of-tax, ($.36 per share). The charges include costs related to work force reduction activities, facility closure costs, certain asset impairment charges and other items. Results in 1998 INCLUDE INCOME OF $47 MILLION, NET-OF-TAX, ($.70 PER SHARE) RELATIVE TO THE SALE OF MEDECO SECURITY LOCKS, INC. THE COMPANY ALSO RECORDED SEVERAL UNUSUAL CHARGES WHICH TOTAL $42 MILLION, NET-OF-TAX, ($.62 PER SHARE). THE CHARGES INCLUDE THE WRITE-OFF OF GOODWILL, OTHER ASSET IMPAIRMENT CHARGES AND OTHER CLOSING COSTS RELATED TO THE DISCONTINUANCE OF MANUFACTURING OPERATIONS AT HILL-ROM FACILITIES IN GERMANY AND AUSTRIA; TAX BENEFITS RELATED TO THE WRITE-OFF OF THE COMPANY'S INVESTMENTS IN GERMANY AND AUSTRIA; AND PROVISIONS FOR CERTAIN INCOME TAX EXPOSURES. RESULTS IN 1996 REFLECT INCOME OF $8 MILLION ($.12 PER SHARE) RELATIVE TO THE SALE OF BLOCK MEDICAL. RESULTS IN 1995 REFLECT UNUSUAL CHARGES TOTALING $26 MILLION ($.37 PER SHARE) FOR THE WRITE-DOWN OF GOODWILL AND CERTAIN ASSETS OF A MANUFACTURING FACILITY SOLD IN 1996. RESULTS IN 1994 REFLECT AN UNUSUAL CHARGE OF $52 MILLION ($.74 PER SHARE), AFTER INCOME TAXES, FOR SETTLEMENT OF A PATENT INFRINGEMENT SUIT. (b) FISCAL 1994 WAS A 53 WEEK YEAR. -9- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and accompanying notes. Hillenbrand Industries is organized into two business segments. The Health Care Group consists of Hill-Rom. Results for Block Medical, which was sold on July 22, 1996, and Medeco Security Locks which was sold on July 1, 1998, are included in this segment through these respective dates. The Funeral Services Group consists of Batesville Casket Company and Forethought Financial Services (Forethought). RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 SUMMARY Consolidated net revenues of $2,001 million increased $225 million, or 13%, in 1998. Operating profit of $228 million was down 14%. Net income increased 17% to $184 million, and earnings per share increased 20% to $2.73. Third quarter 1998 results reflectinclude income of $47 million, net-of-tax, ($.70 per share) relative to the sale of Medeco Security Locks, Inc. The Company also recorded several unusual charges which totaltotaling $42 million, net-of-tax, ($.62 per share). The charges include the write-off of goodwill, other asset impairment charges and other closing costs related to the discontinuance of manufacturing operations at Hill-Rom facilities in Germany and Austria; tax benefits related to the write-off of the Company's investments in Germany and Austria; and provisions for certain income tax exposures. Excluding these items, operatingResults in 1996 reflect income of $8 million ($.12 per share) relative to the sale of Block Medical. Results in 1995 reflect unusual charges totaling $26 million, net-of-tax, ($.37 per share) for the write-down of goodwill and certain assets of a manufacturing facility sold in 1996. 9 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and accompanying notes. Hillenbrand Industries is organized into two business groups. The Health Care Group, which is considered as one reporting segment, consists of Hill-Rom. Results for Medeco Security Locks, Inc. (Medeco), which was sold on July 1, 1998, were included in this group through this date. Medeco sales included in the Health Care Group were $27 million and $46 million in 1998 and 1997, respectively. Unless otherwise specifically identified, Medeco related activities are excluded from amounts and explanations related to the Health Care Group throughout the Management's Discussion and Analysis of Results of Operations. The Funeral Services Group consists of two reporting segments, Funeral Services Products (Batesville Casket Company - Batesville) and Funeral Services Insurance (Forethought Financial Services - Forethought). RESULTS OF OPERATIONS 1999 COMPARED WITH 1998 SUMMARY Consolidated net revenues of $2,047 million increased $46 million, or 2%, in 1999. Operating profit increased 13%, netdecreased 7% to $211 million. Net income increased 14%of $124 million decreased 33%, and earnings per share increased 16%decreased 32% to $1.87. Excluding the unusual items discussed in the remainder of this paragraph, operating profit decreased 15% and net income decreased 17%. 1999 results reflect unusual charges of $24 million, net-of-tax, ($.36 per share) related to work force reduction activities, facility closure costs, certain asset impairment charges and other items. 1998 results reflect income of $47 million, net-of-tax, ($.70 per share) related to the sale of Medeco. The Company also recorded unusual charges in 1998 totaling $42 million, net-of-tax, ($.62 per share). These charges included the write-off of goodwill, other asset impairment charges and other closing costs related to the discontinuance of manufacturing operations at Hill-Rom facilities in Germany and Austria; tax benefits related to the write-off of the Company's investments in Germany and Austria; and provisions for certain income tax exposures. NET REVENUES Health Care sales of $748$766 million increased $160$45 million, or 6%, due to continued good market acceptance of the TotalCare(R) bed and increased shipments of communications and procedural products in Hill-Rom's U.S. acute care market. Hill-Rom also experienced increased shipments of the Resident(R) LTC bed as it continued to have good market acceptance. North American sales decreased compared to 1998 during the third and fourth quarters of 1999. The Company believes these declines are attributable to some shipment delays and decreased orders by our acute care customers as they respond to uncertainty and cuts in Medicare reimbursements in their operations. European revenues decreased slightly compared to 1998 primarily due to decreased sales in Germany and Austria, which were impacted by the discontinuance of manufacturing in these countries during fiscal 1999. Health Care rental revenue was down $79 million, or 20%. Nearly all of the decrease was in the U.S. long-term care market, which experienced lower rates, product mix and volume as a result of changes in Medicare Part A patient reimbursement practices effective July 1, 1998. U.S. acute care and European rental revenues were slightly above 1998 levels. In the U.S. acute care market, higher volume was offset by lower rates with very little change in product mix. The U.S. home care market experienced lower revenues compared to 1998 as a result of lower reimbursement experience partially offset by higher volume and product mix. Funeral Services sales grew $61 million, or 11%, to $602 million due to increased unit volume across all product lines and an increase in product mix. In 1999, Batesville was able to continue to increase unit volume in a market that is currently flat for casketed deaths. 10 13 Insurance revenues increased $46 million or 15% at Forethought. Earned premium revenue increased approximately $24 million due primarily to increased policies in-force year over year. Investment income grew about $19 million because of the increased size of the investment portfolio. Realized net gains on the sale of investments were approximately $3 million more than in 1998. Policy sales were down nearly 13% in 1999 primarily due to several funeral home consolidators recently acquiring or starting preneed insurance operations in order to supply their customers policies. Since premium revenues are earned over the life of the policyholder, current year sales will primarily affect revenues and earnings in future years. The trust business did not have a significant effect on Forethought's operations in 1999 and prior years. GROSS PROFIT Gross profit on Health Care sales of $314 million decreased $7 million, or 2%. As a percentage of sales, gross profit was approximately 41% in 1999 versus 43% in 1998. The decline in gross profit as a percentage of sales was primarily due to increased warranty costs, product mix, increased provisions for inventory and other items partially offset by increased volume. Continuous improvement initiatives in the United States and Europe helped to partially offset the lower gross profit margin. Gross profit on Health Care rentals was down $74 million, or 46%, to $88 million. In addition, gross profit as a percentage of sales decreased to 27% in 1999 compared to 40% in 1998. This decline reflects the changes in Medicare Part A reimbursement practices affecting the U.S. long-term care market and, to a smaller extent, lower reimbursement experience within the U.S. home care market. A slight increase in gross margin percentage in the acute care market partially offset the impact of these other matters. Funeral Services sales gross profit increased 12%, or $32 million, to $292 million in 1999. As a percentage of sales, Batesville's gross profit increased one percentage point to 49% compared to 48% in 1998. This increase in gross profit percentage reflects the increased unit volume experienced in 1999 combined with successful process improvements and cost controls. Profit before other operating expenses and unusual charges in insurance operations increased $6 million, or 8%, to $82 million in 1999 due to increased profits earned on a larger base of policies in-force, higher investment income (with minimal direct cost) and net gains on the sale of investments. Consistent with prior years, these items were partially offset by an increase in death benefits paid and reserved due to the larger base of policies in-force. OTHER OPERATING EXPENSES These expenses, consisting of selling, marketing, distribution and general administrative costs, increased $3 million, or 1% in 1999. As a percentage of consolidated revenues, these expenses remained essentially unchanged at 26% compared to 1998. This is a result of continued cost control, process improvement throughout the Company and lower incentive compensation. 11 14 OPERATING PROFIT Operating profit in Health Care decreased $23 million, or 29%, to $55 million. This decrease was primarily due to a large decline in rental revenue and a $25 million unusual charge related to work force reduction activities, facility closure costs, certain asset impairment charges and other items. The large decrease in rental revenue was primarily due to changes in Medicare Part A reimbursement practices affecting the U.S. long-term care market. 1998 operating profit at Hill-Rom was negatively impacted by a $70 million charge for the write-off of goodwill, other asset impairment charges and other closing costs related to the discontinuance of manufacturing operations at facilities in Germany and Austria. Excluding these charges in 1999 and 1998, operating profit would have been $80 million in 1999 and $148 million in 1998, or a 46% decrease. Operating profit in the Funeral Services Group of $173 million increased $3 million, or 2%, from 1998. At Batesville, operating profit increased significantly in 1999 as a result of increased shipments and improved product mix. During 1999, Batesville incurred a $9 million unusual charge related to the closure of a manufacturing facility. Excluding this charge, Batesville's operating profit would have increased approximately 15%. At Forethought, higher investment income, increased earned premiums and higher capital gains were more than offset by increased expenses, most of which were related to new business development, and an unusual charge of $3 million related to an impaired asset. Excluding the unusual charge incurred by Forethought, operating profit would have decreased 15%. Excluding the unusual charges incurred by both Batesville and Forethought in 1999, Funeral Services Group operating profit would have increased about 9%. Consolidated operating profit of $211 million decreased $17 million, or 7%. Excluding the unusual charges discussed above and a $1 million unusual charge at the consolidated company level, consolidated operating profit would have been $249 million in 1999 compared to $298 million in 1998, a 16% decrease. OTHER INCOME AND EXPENSE Interest expense was unchanged compared to 1998 as the Company's level of long-term debt was essentially constant. Investment income decreased $3 million primarily due to a lower average balance of cash, cash equivalents and short-term investments throughout 1999. Excluding the gain of $75 million on the sale of Medeco in 1998, other income and expense, net decreased $3 million. INCOME TAXES The effective income tax rate was 36.7% for 1999 and 37.0% for 1998. The 1998 tax rate includes the recognition of a tax benefit associated with the discontinuance of manufacturing operations in Germany and Austria. The decrease in the tax rate for 1999 reflects a reduction in state taxes and lower operating losses in Europe. 12 15 RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 SUMMARY Consolidated net revenues of $2,001 million increased $225 million, or 13%, in 1998. Operating profit of $228 million was down 14%. Net income increased 17% to $184 million, and earnings per share increased 20% to $2.73. Excluding the unusual items discussed in the remainder of this paragraph, operating profit increased 13% and net income increased 14%. 1998 results reflect income of $47 million, net-of-tax, ($.70 per share) relative to the sale of Medeco. The Company also recorded unusual charges totaling $42 million, net-of-tax, ($.62 per share). The charges include the write-off of goodwill, other asset impairment charges and other closing costs related to the discontinuance of manufacturing operations at Hill-Rom facilities in Germany and Austria; tax benefits related to the write-off of the Company's investments in Germany and Austria; and provisions for certain income tax exposures. NET REVENUES Health Care sales of $721 million increased $179 million, or 33%, due to the effect of acquisitions and good market acceptance of the TotalCare(R) bed and increased unit volume of architectural, communications,communication, procedural and maternal/infant care products in Hill-Rom's U.S. acute care market. Shipments of the Resident(R) LTC bed also increased as it continuescontinued to experience good market acceptance. Unit volume and revenues increased slightly in Hill-Rom's European market, partially offset by unfavorable currency adjustments. Excluding the sales effect from the purchasespurchase of Air-Shields, Inc., (Air-Shields) and MEDAES Holdings, Inc. (MEDAES), and the sale of Medeco Security Locks, Inc., Health Care sales increased 11%. Medeco (for which seven months and twelve months of sales are reflected in 1998 and 1997 results) did not contribute significantly to the overall sales of the Health Care Group. Health Care rental revenue grew $25 million, or 7%. In the U.S. long-term care market, rental revenues were down slightly year over year mainly due to the effect of a change in Medicare Part A patient reimbursement practices effective July 1, 1998. Overall, higher volume was offset by lower rates and product mix in the long-term care market. The U.S. home care market experienced slightly higher revenues as unit growth from new and higher end products was partially offset by lower overall rates. In the U.S. acute care market, rental revenues were up year over year due to higher volume from new products which was partially offset by lower rates and product mix. Rental revenues in Europe increased slightly in nearly all markets, but were largely offset by unfavorable currency adjustments. Funeral Services sales decreased $4 million, or 1% due to lower product mix partially offset by increased shipments of hardwood and cremation products. UnitBatesville's unit volume growth was accomplished in a market that is currently flat for casketed deaths. -10- Insurance revenues grew $44 million or 17%. Investment income accounted for approximately $18 million of the increase while earned premium revenue accounted for about $14 million. Investment income grew mainly because of the increased size of the investment portfolio. Earned premium revenue increased mainly due primarily to increased policies in forcein-force year over year. PolicyForethought's policy sales declined nearly 9% in 1998 primarily due to slowed growth as Forethought's entry into targeted jurisdictions is nearly complete and dueseveral funeral home consolidators recently acquiring or starting preneed insurance operations in order to increased competition.supply their customers policies. Since premium revenues are earned over the life of the policyholder, current year sales will primarily affect revenues and earnings in future years. Forethought's trust business did not have a significant revenue impact in 1998.1998 or in prior years. 13 16 GROSS PROFIT Gross profit on Health Care sales increased $54$62 million, or 20%25%, to $320$307 million, due primarily to increased shipments in Hill-Rom's U.S. markets. As a percentage of sales, gross profit declined from 45% in 1997 to 43% in 1998 primarily due to the integration of Air-Shields and MEDAES which have lower margins compared to other Health Care sales products. Shipments of higher value products, continued improvements in direct material, labor and overhead costs, leveraging of fixed manufacturing expenses in the United States and decreased shipments of lower margin European products helped to partially offset the lower gross profit margins of Air-Shields and MEDAES. Gross profit on Health Care rentals of $162 million was up $19 million, or 13%. As a percentage of sales, gross profit improved to 40% in 1998 compared to 38% in 1997. This increase reflects the increased unit volume experienced in all U.S. markets, continued process improvements and cost control. Gross profit on Funeral Services sales of $260 million decreased $4 million, or 2%, in 1998. As a percentage of sales, gross profit remained essentially unchanged at 48%. This comparison reflects the mix change in Funeral Services salesBatesville's year to year sales discussed above. Even with increased unit volume and lower overall pricing, gross profit as a percent of sales remained unchanged due to process improvements and cost controls. Profit before other operating expenses in insurance operations increased $20 million, or 36%, to $76 million, in 1998 due to higher investment income (with minimal corresponding direct cost), profits earned on the larger base of policies in force,in-force, net gains on the sale of investments and continued control of direct administrative expenses. These items were partially offset by an increase in death benefits paid and reserved due to the larger base of policies in force.in-force. OTHER OPERATING EXPENSES These expenses, consisting of selling, marketing, distribution and general administrative costs, increased $59 million, or 12%13% in 1998. As a percentage of consolidated revenues, these expenses remained essentially unchanged at 27%26% in 1997 and 1998. This is a result of continued cost control and process improvement throughout the Company. OPERATING PROFIT Operating profit in the Health Care Group decreased $53$52 million, or 40%, to $81$78 million. This decrease is mainly due to a $70 million charge for the write-off of goodwill, other asset impairment charges and other closing costs related to the discontinuance of manufacturing operations at Hill-Rom facilities in Germany and Austria. Excluding this charge, operating profit would have been $151$148 million in 1998, or a 13%14% increase, due to increased sales of higher value products in the U.S. acute care market and an increase in rental revenues partially offset by higher incentive compensation and commission expenses. Operating profit in the Funeral Services Group of $170 million increased $10 million, or 6%, from 1997. At Batesville, Casket, operating profit decreased slightly in 1998 as increased casket and cremation volume was offset by lower pricing on an unfavorable product mix. Operating expenses remained essentially unchanged. At Forethought, higher investment income, increased capital gains and cost controlcontrols helped to increase operating profit. Consolidated operating profit of $228 million decreased $36 million, or 14%. Excluding the unusual charges discussed above, consolidated operating profit would have been $298 million, a 13% increase. A decrease in corporate expenses in 1998 contributed to the growth in operating profit. -11- OTHER INCOME AND EXPENSE Interest expense increased due to additional long-term debt associated with the addition of $100 million in debentures issued in December 1997. Investment income grew slightly due to a higher earnings rate on investments partially offset by lower levels of cash, cash equivalents and equivalents.short-term investments. Excluding the gain of $75 million on the sale of Medeco, other income and expense, net was unchanged year-to-year.year to year. 14 17 INCOME TAXES The effective income tax rate in 1998 was 37.0% comparedfor 1998 and 39.4% for 1997. The recognition of a tax benefit relating to 39.4% in 1997. Excluding one-time events affecting 1998 financial results, the effective income tax rate was essentially unchanged compared to 1997. 1997 COMPARED WITH 1996 SUMMARY Consolidated net revenues increased $92 million, or 5%, in 1997. Operating profitdiscontinuance of $264 million was up 12%, net income of $157 million was up 12% and earnings per share of $2.28 increased 13%. Excluding the gain on the sale of Block Medical ($8 million or $.12 per share) in the third quarter of 1996, net income and earnings per share increased 19% and 20%, respectively, in 1997. NET REVENUES Health Care sales increased $20 million, or 4%, due to higher shipments of Advance(R) series beds, stretchers, architectural equipment and communications products in Hill-Rom's U.S. acute care market and good market acceptance of the Resident(R) LTC bed in the long-term care market. In Hill-Rom's European markets, lower shipmentsmanufacturing operations in Germany and unfavorable currency adjustments were partially offset by increased shipments in France. The German market continued to be negatively affected by health care reform and general economic conditions. Sales at Medeco were up due to higher shipments of door security products, partially offset by lower demand in route management (primarily pay telephone business). Medeco and Block (for which eight months of sales were reflected in 1996 results) did not contribute significantly to the overall sales of the Health Care Group. Health Care rental revenue grew $5 million, or 1%. In the U.S. long-term care market, increased units in use and higher rates were partially offset by a shift toward greater use of lower cost products. In the U.S. home care market, unit growth and increased rates generated from higher-featured new products were partially offset by lower Medicare reimbursement rates. Acute care rental revenues were down year over year due to cost and competitive pressures and lower product mix, largely offset by increased units in use. Rental revenues in Europe were down due to softness in the German therapy market and unfavorable currency adjustments. Funeral Services sales increased $21 million, or 4%. Unit volume growth of traditional caskets and cremation products in an essentially flat death market was partially offset by lower casket product mix. The effect of price increases was mostly offset by rebates and discounts. Insurance revenues were up $46 million, or 21%. Earned premium revenue increased $22 million due primarily to increased policies in force year over year. Investment income grew $16 million, reflecting a larger investment portfolio, partially offset by marginally lower yields. Policy sales were up over 16% in 1997. Since premium revenues are earned over the life of the policyholder, current year sales will primarily affect revenues and earnings in future years. Realized net gains on the sale of investments were $8 million in 1997 compared with a net of zero in 1996. The trust business did not have a significant effect on Forethought's operations in 1997 and prior years. -12- GROSS PROFIT Gross profit on Health Care sales of $266 million was up $32 million, or 14%, reflecting the increased shipments in Hill-Rom's U.S. markets. As a percentage of sales, gross profit improved from 41% in 1996 to 45% in 1997 due to increased shipments of higher margin products, continued improvements in direct material, labor and overhead costs and leveraging of fixed manufacturing expense in the United States. Decreased shipments of lower margin European products alsoAustria contributed to the overall improvement in margins. Gross profit on Health Care rentals increased $3 million, or 2%, to $143 million and, as a percentage of revenues, was essentially unchanged at 38%. This comparison reflects the issues generating the year-to-year change in rental revenues discussed above. Field service costs continued to improve. Gross profit on Funeral Services sales of $264 million was up $18 million, or 7%, in 1997. As a percentage of sales, it increased from 47% in 1996 to 48% in 1997, reflecting productivity improvements and leveraging of fixed manufacturing costs, partially offset by lower casket product mix. Profit before other operating expenses in insurance operations increased $19 million, or 51%, due to higher investment income (with minimal corresponding direct cost), profits earned on the larger base of policies in force, net gains on the sale of investments and continued control of direct administrative expenses. These items were partially offset by an increase in the crediting rate (the interest rate that Forethought uses to increase the face amount on insurance policies to have the benefit grow). OTHER OPERATING EXPENSES These expenses, consisting of selling, marketing, distribution and general administrative costs, increased $40 million, or 9%, in 1997. As a percentage of consolidated revenues, they grew from 26% in 1996 to 27% in 1997. This growth primarily reflected higher incentive compensation and commissions on improved operating performance and costs associated with product and market development efforts. Continued process improvements and cost control throughout the Company mitigated the effect of these increases. OPERATING PROFIT Operating profit in the Health Care Group increased $23 million, or 21%, in 1997 due to higher shipments and profitability in Hill-Rom's U.S. markets, reduced operating losses in Europe and marginal growth in rental revenue and profits. Operating profit in the Funeral Services Group of $160 million was up $16 million, or 11%, from 1996. At Batesville Casket, growth in sales and gross profit was partially offset by higher incentive compensation expense. Forethought's operating profit growth was driven primarily by higher investment income. Consolidated operating profit of $264 million increased $28 million, or 12%. The growth in the Health Care and Funeral Services Groups was partially offset by higher corporate expenses. OTHER INCOME AND EXPENSE Interest expense was down slightly due to lower debt associated with European operations. Interest income increased due to higher levels of cash and equivalents, partially offset by lower interest earned on other investments. Other income, net, in 1996 included the $3 million pre-tax gain on the sale of Block Medical. INCOME TAXES The effective income tax rate in 1997 declined marginally to 39.4% from 39.9% in 1996. Excluding the tax benefit of $6 million on the book and tax differences in the basis of Block, the effective rate was 42.5% in 1996. The lower rate in 1997 was due primarily to reduced operating losses in Europe. -13- 1998. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Net cash flows from operating activities and selected borrowings represent the Company's primary sources of funds for growth of the business, including capital expenditures and acquisitions. Cash, and cash equivalents and short-term investments (excluding investments of insurance operations) at November 27, 1999 decreased $67$127 million to $297$170 million atcompared to November 28, 1998, mainly due to business acquisitions, the endpurchase of 1998.treasury stock, capital expenditures, repayment of loans totaling $44 million related to the Corporate-Owned Life Insurance program and the payment of cash dividends partially offset by cash generated from operating activities. OPERATING ACTIVITIES Net cash generated by operating activities of $150 million in 1999 decreased $23 million compared to the $173 million generated in 1998 decreased compared1998. Contributing to $246 million in 1997. Higherthe decrease were lower earnings, and an increasea decrease in depreciation, amortization and write-down of goodwill were offset by the gain from the saleintangibles and unfavorable movements in most components of Medeco, due to the sale being a non-operating activity, and adverse changes in working capital. The increasedecrease in depreciation, amortization and write-down of goodwillintangibles is due to the unusual charge of $43 million to write-off the goodwill associated with the discontinuance of manufacturing facilities in Germany and Austria.Austria in 1998 combined with lower actual depreciation and amortization expense in 1999 resulting from the closure of these two facilities and a decrease in the manufacture of new rental units. The adverse changes in working capital are partially due to strong fourth quarter shipments at Hill-RomBatesville and slower collections from Medicare intermediaries and insurance at Hill-Rom which resulted in higher receivables. This also caused consolidated days revenues outstanding to increase to 8486 in 19981999 compared to 8076 in 1997. Hill-Rom believes this trend1998. The increase in other current assets is endemic to the industry and is aggressively managing these accounts. Excluding the effect of acquisitions, current liabilities decreased mainly due to increased deferred taxes and the decrease in accrued expenses relates to lower incentive compensation accruals in 1998.1999. INVESTING ACTIVITIES Net cash used in investing activities increaseddecreased from $339$446 million to $446 million.$287 million in 1999. This increasedecrease is primarily due to fewer acquisitions made in 1998. Forethought's insurance operation1999, lower capital expenditures and favorable effects of investment activities at Forethought. Forethought invests the cash proceeds fromon insurance premiums predominantly in U.S. treasuriesTreasuries and agencies and high-grade corporate bonds with fixed maturities. The Company's objective is to purchase investment securities with maturities that match the expected cash outflows of policy benefit payments. The investment portfolio is periodically realigned to better meet this objective, as reflected in the relatively large amount of sales prior to maturity. Sales prior to maturity in 1999, 1998 and 1997 resulted in net gains with 1996 reflecting essentially a breakeven position. On December 31, 1998, subsequent to the end of fiscal year 1998, Forethought Life Insurance Company acquired the stock of Arkansas National Life Insurance Company for a cash payment of $31 million.gains. 15 18 FINANCING ACTIVITIES The Company's long-term debt-to-equitydebt-to-total capital ratio was 32%26% at year end 1998year-end 1999 compared with 23%24% at year end 1997.year-end 1998. This increase was primarily due to decreases in the Company's issuanceequity resulting from the purchase of $100 milliontreasury stock, a decrease in debentures in December 1997accumulated other comprehensive income and the payment of normal dividends partially offset by the increase in equity during 1998. Payments on short-term debt were relative to European operations.current year earnings. Quarterly cash dividends per share were $.155 in 1996, $.165 in 1997, and $.18 in 1998.1998 and $.195 in 1999. An additional increase to $.195$.20 per quarter was approved by the Board of Directors in January 1999. In 1998, the Company repurchased 1,768,100 shares of its common stock at a cost of $85 million. -14- 2000. INSURANCE ASSETS AND LIABILITIES Insurance assets of $2,833$3,091 million grew 13%9.1% over the past year. Cash and invested assets of $2,204$2,311 million constitute 78%74.8% of the assets. The investments are concentrated in U.S. treasuriesTreasuries and agencies and high-grade corporate bonds. The invested assets are more than adequate to fund the insurance reserves and other liabilities of $1,886$2,132 million. Statutory reserves represent 61%62% of the face value of insurance in force.in-force. Forethought Life Insurance Company declaredmade a $14 million dividend payment in 1998 to Hillenbrand Industries in the fourth quarter of 1998, paid in December 1998, and made $12 million and $11 million dividend payments in 1997 and 1996, respectively.Industries. The statutory capital and surplus as a percent of statutory liabilities of Forethought Life Insurance Company was 11% and 8% at December 31, 1999 and 1998, and 1997.respectively. The non-current deferred tax benefit relative to insurance operations results from differences in recognition of insurance policy revenues and expenses for financial accounting and tax reporting purposes. Financial accounting rules require ratable recognition of insurance product revenues over the lives of the respective policyholder. These revenues are recognized in the year of policy issue for tax purposes. This results in a deferred tax benefit. Insurance policy acquisition expenses must be capitalized and amortized for both financial accounting and tax purposes, although under different methods and amounts. Financial accounting rules require a greater amount to be capitalized and amortized than for tax reporting. This results in a deferred tax cost, which partially offsets the deferred tax benefit. Excluding the tax effect of adjusting the investment portfolio to fair value, the net deferred tax benefit remained essentially unchanged in 1998, compared to a $6 million increase in 1997.1999 and 1998. SHAREHOLDERS' EQUITY Cumulative treasury stock acquired in open market and private transactions increased to 18,322,467 shares in 1999, up from 15,067,167 shares in 1998, up from 13,299,067 shares in 1997. The1998. As of year end the Company currently has Board of Directors' authorization to repurchase up to a total of 19,289,067 shares. Repurchased shares are to be used for general business purposes. From the cumulative shares acquired, 16,05042,956 shares, net of shares converted to cash to pay withholding taxes, were reissued in 19981999 to individuals under the provisions of the Company's various stock-based compensation plans. OTHER ISSUES ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," was issued in June 1997. This standard requires that the Company disclose, either in the income statement or in a separate financial statement, net income as currently reported and other components of comprehensive income. Comprehensive income is defined as the change in shareholders' equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company is required to adopt this standard not later than the first quarter of 1999. Implementation of this standard will not affect the Company's financial position or results of operations. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued in June 1997. This standard defines segments of an enterprise as the components of the company whose operations are reviewed regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. It requires disclosures about products and services, geographic areas and major customers. The Company is required to adopt this standard not later than the issuance of its 1999 annual report. Implementation of this standard will not affect the Company's financial position or results of operations. In February 1998, SFAS No. 132, " Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued. This standard revises current disclosure requirements for employers' pensions and other retiree benefits. The Company is required to adopt this standard not later than the issuance of its 1999 annual report. Implementation of this standard will not affect the Company's financial position or results of operations. -15- The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", in June 1998. This standardStandard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires that all derivatives be recognized on the balance sheet at fair value. Changes in fair values of derivatives will be accounted for based upon their intended use and designation. Since the Company's holdings in such instruments are minimal, adoption of this standardStandard is not expected to have a material effect on the Company's consolidated financial statements. The Company is required to adopt the standardStandard not later than the first quarter of fiscal 2000.2001. 16 19 UNUSUAL CHARGES On November 23, 1999, the Company announced a plan to reduce the future operating cost structure at Hill-Rom, to write-down the value of certain impaired assets and to recognize a liability associated with the estimated cost of a field corrective action for a previously acquired product line. The total estimated cost of these actions necessitated an unusual charge of $29 million in the fourth quarter of 1999, all of which is reflected within the Unusual charges line of the Statement of Consolidated Income. As of year-end, essentially no spending had occurred relative to the $19 million cash component of this charge. Included in the cost-cutting actions announced at Hill-Rom was the reduction of 350 employees, about 5% of its work force, in the United States and Europe and the closure of select manufacturing and sales, service/distribution facilities in the United States and Europe to eliminate redundant operations. With respect to the employee head count reduction, most affected employees will be administrative personnel and the actions will be completed within the next nine months. The facility closures are also expected to occur on a similar timeline, but certain aspects of the closure and disposal activities could take longer. Estimated costs for the work force and facility closure actions are estimated at $8 million and $3 million, respectively. These actions were precipitated by adverse customer reaction to continued changes in Medicare reimbursement practices which have resulted in the postponement or cancellation of capital goods orders by many of Hill-Rom's customers. The unusual charge also includes a total of $10 million relative to asset impairments. This charge included the write-down of a small Hill-Rom investment in a non-core business currently being held for sale and the write-off of goodwill and other strategic investments which were significantly underperforming original expectations or had essentially discontinued operations. Asset impairment charges were determined based upon projected future cash flows, independent appraisals and sales activities, market assessments and management estimates of losses to be incurred upon disposition of the affected assets. The remaining component of the fourth quarter of 1999 unusual charge relates to the estimated $8 million cost of a field corrective action to be taken for a previously acquired product line. The action will involve the replacement of certain key components of the product aimed at enhancing the overall effectiveness and safety of the product. This action is expected to be completed within the next six months, but could take longer depending on the availability of necessary components and other requirements. In March 1999, Batesville announced the planned closing of its Campbellsville, Kentucky casket manufacturing plant. Approximately 200 production and administrative employees were affected. Production of Campbellsville casket units was transferred to existing plants located in Batesville, Indiana and Manchester, Tennessee. The closure of the Campbellsville manufacturing plant necessitated a $9 million unusual charge in the second quarter of 1999. The non-cash component consisted of a $5 million write-down of property, plant and equipment which was determined based upon independent assessments, market appraisals and management estimates of losses to be incurred upon the disposition of the Campbellsville facility and surplus equipment. Property, plant and equipment to be disposed of have an adjusted fair market value of approximately $5 million, not including costs of disposal. Additional charges in the plan included $3 million for severance and employee benefit costs and $1 million of other estimated plant closing costs. This charge was reflected within the Unusual charges line of the Statement of Consolidated Income. As of November 27, 1999, manufacturing operations had been discontinued at the plant and production successfully relocated. Nearly all severance and employee benefit costs and estimated plant closing costs had been incurred, with no adjustments being made to such reserves through year end. The disposition of property, plant and equipment is targeted to be completed within the next six months, but could take longer. 17 20 In August 17, 1998, the Board of Directors of the Company approved a plan to restructure Hill-Rom's direct and support operations in Germany and Austria that willto permit the Company to more efficiently meet the needs of its customers and improve profitability. Market demand has not met expectations and remains far below estimates established atUnder the time the German and Austrian businesses were acquired in 1994. Changes in local market conditions, health care reform and increased competitive pressures have greatly extended the time required for the Company to achieve profitability and significantly reduced management's projections of future cash flows from operations in these countries. Under this plan, the Company will reducereduced its fixed costs and alignaligned manufacturing, distribution, sales and administrative functions with anticipated demand. This alignment will resultThese actions resulted in the closingclosure of manufacturing facilities in Germany and Austria and relocatingthe relocation of certain manufacturing and business processes to other European locations. The Company will continue to serve and support the German and Austrian markets through a direct sales and service organization with products manufactured specifically for these markets by its other operations. Approximately 250 production and administrative employees are affected by this plan. The restructuring plan necessitated the provision of a $73$70 million asset impairment and restructuring charge in the third quarter.1998. The non-cash component of thisthe charge included a $43 million write-off of German subsidiary goodwill, $7 million for the write-down of property, plant and equipment held for sale and $3 million for obsolete inventory resulting from the realignment of operations. Asset impairment charges were determined based upon projected cash flows, independent appraisals and market assessments for goodwill, land and buildings, and management estimates of losses to be incurred upon the disposition of surplus equipment and inventories. Property, plant and equipment to be disposed of have an adjusted fair market value of approximately $4 million, not including costs of disposal, as of November 28, 1998. The restructuring plan also included additional charges for severance and employee benefit costs of $11$10 million and other estimated plant closing costs of $9$7 million. This charge, with the exception of the inventory component which was recorded in cost of goods sold, was reflected within the Unusual charges line of the Statement of Consolidated Income. As of November 27, 1999, manufacturing operations have been discontinued in Germany and Austria. Nearly all of the severance and employee benefit costs and $5 million which includes legal, leasein other plant closing costs were incurred through 1999. During 1999, approximately $2 million of the provision for other plant closing costs was reversed to income within the Unusual charges line of the Statement of Consolidated Income as actual costs were less than originally estimated. The disposition of the plant in Germany is targeted to be completed within the next three months, but could take longer. The disposition of excess and contract termination, warranty, environmental, purchase commitmentdiscontinued inventories and related shutdown costs. None of these individual cost categories are material relative toproduction equipment from the total.German and Austrian facilities is complete, and the facility in Austria was sold in December 1999. In addition to the costs accrued under the plan, additionalabove outlined plans, approximately $2 million of incremental costs related to the closure of an estimated $4 million will be incurred to relocatemanufacturing facilities in Germany, Austria and Campbellsville were incurred. These incremental costs include expenses such as travel, employee relocation and the relocation of certain manufacturing and business processes to other European locations.processes. These costs will bewere expensed as incurred as required by generally accepted accounting principles. As of November 28, 1998, the Germanprinciples and Austrian manufacturing facilities were still in operation, with depreciation expense on assets to be sold reflected for the full fiscal year. In the fourth quarter, changes in the estimates of costs to be incurred under the plan reduced the overall level of the asset impairment and restructuring charge recorded in the third quarter by $3.5 million. With the exception of the write-down in inventory, which is reflected as a component of Health Care cost of goods sold, the remaining charge is classifiedare included within the separate Unusual chargecharges line of the Statement of Consolidated Income. AsIncome as such incremental costs were incurred directly in conjunction with the execution of the endrespective plans. The reserve balances for the above plans included in other current liabilities approximated $21 million and $17 million as of the year less than $1 million of the restructuring related costs had been paid. In DecemberNovember 27, 1999 and November 28, 1998, manufacturing operations were discontinued in Germany. The Austrian manufacturing operations are expected to be discontinued in the second quarter of 1999. Substantially all employee related costs associated with the restructuring are expected to be paid in fiscal 1999. The disposition of property, plant and equipment, along with excess and discontinued inventories, is targeted to be completed within the next twelve months, but could take longer. -16- respectively. ENVIRONMENTAL MATTERS Hillenbrand Industries is committed to operating all of its businesses in a way that protects the environment. The Company has voluntarily entered into remediation agreements with environmental authorities, and has been issued Notices of Violation alleging violations of certain permit conditions. Accordingly, the Company is in the process of implementing plans of abatement in compliance with agreements and regulations. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. The cost of all plans of abatement and waste-site cleanups in which the Company is currently involved is not expected to exceed $5 million. The Company has provided adequate reserves in its financial statements for these matters. These reserves have been determined without consideration of possible loss recoveries from third parties. Compliance with other current governmental provisions relating to protection of the environment are not expected to materially affect the Company's capital expenditures, earnings or competitive position. RecentFurther changes in environmental law might affect the Company's future operations, capital expenditures and earnings. Theearnings; however, the cost of complying with these provisions, if any, is not known. 18 21 FACTORS THAT MAY AFFECT FUTURE RESULTS New legislationLegislative changes phased in beginning July 1, 1998 established Resource Utilization Groups for Medicare Part A patients within long-term care facilities. Reimbursementhave had and will now be on a prospective fee basis as opposedcontinue to the previous cost plus basis. This change will have a dampening effect on the Company's rental revenuesrevenue derived from Medicare patients in the long-term care market. RestructuringCuts in Medicare funding mandated by the Balanced Budget Act of 1997 (BBA) have had and reform incould continue to have an adverse effect on the Company's health care industry, including consolidationsales derived from the acute-care market. The Company has been notified by the Health Care Financing Administration (HCFA) that it may review the coding for some of providers and payers, growththe Company's Home Care rental products. Depending on the outcome of managed care and expansion ofany decision there could be a dampening effect on the Company's future rental revenue derived from Medicare patients in the home care and long-term care markets, continues. Growth in the Company's acute care capital markets has improved dramatically over the past three years and the order pattern entering the first quarter of 1999 remains strong. While continued growth is not a certainty, the Company believes that its innovative products and services designed to improve patient outcomes and reduce total delivery cost, will enable it to maintain its leadership role in this and the other markets it serves.market. The market for casketed deaths is expected to remain flat for the foreseeable future. Batesville Casket has been able to increase its share of this market, as well as the growing cremation market, by providing innovative products and marketing programs for its funeral director customers. While Forethought's growth has slowed as its entry into targeted jurisdictions winds down, it will work to maintain and strengthen its leadership position in the life insurance-based funeral planning market through on-going product enhancements. Its entry into the trust-based funeral planning market is not expected to have a material effect on the Company's financial results for the next several years. YEAR 2000 DATE CONVERSION Many existing computer programs useused only two digits to identify years. These programs were designed without consideration for the effect of the upcoming change in century, and if not corrected, could failhave failed or createcreated erroneous results by or at the year 2000. Essentially all of the Company's information technology basedtechnology-based systems, as well as many non-information technology based systems, arewere potentially affected by the Year 2000 issue. Technology basedIn order to prepare for the Year 2000 issue, the Company implemented the following remediation plan for technology-based systems: 1. Identification of all applications and hardware with potential Year 2000 issues. 2. For each item identified, perform an assessment to determine an appropriate action plan and timetable for remediation of each item. 3. Implementation of the specific action plan. 4. Test each application upon completion. 5. Place the new process into production and conduct systems reside on mainframes, serversintegration testing. The Company successfully implemented the above remediation plan for all affected information technology-based systems and personal computers inother remediation plans related to non-Management Information Systems and to products sold before the U.S. and inturn of the foreign countries wherecentury. Following the arrival of the Year 2000, the Company has operations. Specific systems include accounting, payroll, financial reporting, product development, inventory trackingnot experienced any problems with devices and control, business planning, tax, accounts receivable, accounts payable, purchasing, distribution, and numerous word processing and spreadsheet applications. The Company's financial services business utilizes life insurance, accounting and actuarial systems that are also affected. Non-information technology based systems include equipment and services containing imbedded microprocessors, such as building management systems, manufacturing process control systems, clocks, security systems and products sold raw materials manufactured and/or leased to customers. All of the Company's businesses have relationships with numerous third parties, including material suppliers, utility companies, transportation companies, insurance companies, banks and brokerage firms, that may be affected by the Year 2000 issue. -17- THE COMPANY'S STATE OF READINESS - -------------------------------- Remediation plans have been established for all major systems potentially affected by the Year 2000 issue. The primary phases and current status of the plans for information technology based systems are summarized as follows: 1. IDENTIFICATION OF ALL APPLICATIONS AND HARDWARE WITH POTENTIAL YEAR 2000 ISSUES. To the best of the Company's knowledge, this phase has been completed. 2. FOR EACH ITEM IDENTIFIED, PERFORM AN ASSESSMENT TO DETERMINE AN APPROPRIATE ACTION PLAN AND TIMETABLE FOR REMEDIATION OF EACH ITEM. A PLAN MAY CONSIST OF REPLACEMENT, CODE REMEDIATION, UPGRADE OR ELIMINATION OF THE APPLICATION AND INCLUDES RESOURCE REQUIREMENTS. This phase has been completed with the exception of certain systems in Hill-Rom's recently acquired operations and a small business unit within Hill-Rom, which should be complete in the first quarter of 1999. 3. IMPLEMENTATION OF THE SPECIFIC ACTION PLAN. Specific action plans have been started and should be completed for nearly all known mission-critical systems as of the end of the first quarter of 1999. Action plans for remaining systems should begin by the second quarter of 1999. 4. TEST EACH APPLICATION UPON COMPLETION. Testing is in process or has been completed for all systems for which the remediation plan has been completed. Testing of the remaining systems should be completed by the third quarter of 1999. 5. PLACE THE NEW PROCESS INTO PRODUCTION. Many applications and systems have been put into production. These include servers, personal computers and various software programs. Applications and systems are being put into production once they have been tested. All affected applications and systems should be in production by the third quarter of 1999 with the exception of certain systems in Hill-Rom's European operations which should be placed into production by the fourth quarter of 1999. The Company is in the process of identifying all non-information technology based systems. Appropriate remediation plans are being developed, implemented and tested when each affected system is identified. Identification should be completed by the end of the first quarter of 1999, and plans should be developed and implemented by the end of the third quarter of 1999. The Company is in the process of identifying all products sold or leased to customers which are affected by the Year 2000 issue. Once a Year 2000 affected product is identified, remediation plans are developed, implemented and tested, if deemed appropriate. A product listing is available to customers on the Company's Hill-Rom web page depicting Year 2000 compliance (www.hill-rom.com). Assessment of all affected products should be completed by the end of the first quarter of 1999, and corrective actions, if required, should be completed by the end of the third quarter of 1999. One small subsidiary, Narco Medical Services, Inc., distributes medical devices manufacturedsupplied by third parties. Each supplierThere was no interruption in the Company's ability to build and deliver its products and transact business with its suppliers and customers. The Company has been surveyed to determine its readiness. Customers have been referred to manufacturers forreceived no notifications from customers regarding Year 2000 readiness information. Contingency plans are being developedissues related to addressproducts it has sold. The Company continues to monitor its systems, suppliers and products for any resulting issues. Identification of areas of potential third party risk is nearly complete and, for those areas identified to date, remediation plans are being developed. Identification and assessment should be completed in the first quarter of 1999, and plans should be developed and implemented by the end of the third quarter of 1999. THE COSTS INVOLVED - ------------------unanticipated issues that may not yet have manifested. The total cost to the Company of achieving Year 2000 compliance is not expectedestimated to exceed $7 million and will consist primarily of the utilization of internal resources. Spending to date totalsbe approximately $3.5$9 million. Costs relating to internal systems' Year 2000 compliance are included in the Information Systems budget and are immaterial as a percentage of that budget. All costs related to achieving Year 2000 compliance are based on management's best estimates. There can be no guarantee that actual results will not differ from estimates. -18-19 RISKS AND CONTINGENCY PLAN - -------------------------- The Company is in the process of determining the risks it would face in the event certain aspects of its Year 2000 remediation plan failed. It is also developing contingency plans for all mission-critical processes. Under a "worse case" scenario, the Company's manufacturing operations would be unable to build and deliver product due to internal system failures and/or the inability of vendors to deliver raw materials and components. Alternative suppliers are being identified and inventory levels of certain key components may be temporarily increased. While virtually all internal systems can be replaced with manual systems on a temporary basis, the failure of any mission-critical system will have at least a short-term negative effect on operations. The failure of national and worldwide banking information systems or the loss of essential utilities services due to the Year 2000 issue could result in the inability of many businesses, including the Company, to conduct business. Risk assessment should be completed by the end of the first quarter and contingency plans should be completed in the third quarter.22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including fluctuations in interest rates, mismatches in funding obligations and receipts and variability in currency exchange rates. The Company has established policies, procedures and internal processes governing its management of market risks and the use of financial instruments to manage its exposure to such risks. The Company's insurance operation is subject to fluctuations in interest rates on its investment portfolio and, to a lesser extent, prepayment and equity pricing risks. The investment portfolio is concentrated in high-grade corporate bonds and U.S. agencies and treasuries with predominantly fixed interest rates. The portfolio is managed in accordance with the Company's objective to substantially match investment durations with policy liability durations and within applicable insurance industry regulations. Investments may be liquidated prior to maturity in order to meet the matching objective and manage fluctuations in interest rates and prepayments. They are, accordingly, classified as "available for sale" and are not purchased for trading purposes. The Company uses various techniques, including duration analysis, to assess the sensitivity of the investment portfolio to interest rate fluctuations, prepayment activity, equity price changes and other risks. The insurance operation also performs and reports results for asset adequacy analysis as required by the National Association of Insurance Commissioners. Based on the duration of the investment portfolio at November 28, 1998,27, 1999, and November 29, 1997,28, 1998, a hypothetical 10% increase in weighted average interest rates could reduce the market value of the investment portfolio approximately $77$111 and $76$77 million, respectively, over a twelve-month period. The Company believes its investment policy minimizes the risk of adverse fluctuation in surplus value. In addition, the long-term fixed nature of portfolio assets reduces the effect of short-term interest rate fluctuations on earnings. The Company is subject to variability in foreign currency exchange rates primarily in its European operations. Exposure to this variability is managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. The Company, from time to time, enters into currency exchange agreements to manage its exposure arising from fluctuating exchange rates related to specific transactions. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to the Company's assets, obligations and projected results of operations denominated in foreign currencies. Based on the Company's overall currency rate exposure at November 28, 1998,27, 1999, movements in currency rates would not materially affect the financial position of the Company. -19-20 23
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- KEY FINANCIAL DATA - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994- --------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- % Pretax, preinterest expense, income (EBIT) to revenues 11 16 16 15 12 11% Pretax, preinterest expense, pre-depreciation and amortization expense, income (EBITDA) to revenues (a) 16 23 22 21 20 % Net income to revenues 6 9 9 8 6 6 % Income taxes to pretax income 37 37 39 40 47 38 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- % Long-term debt to totaldebt-to-total capital 26 24 19 21 22 23 % Total debt to totaldebt-to-total capital 31 29 24 28 26 26 Current assets/current liabilities (a)(b) 2.1 2.3 2.3 2.2 2.1 2.2 Working capital turnover (a) 3.5 3.3 3.9 4.2 4.6(b) (c) 7.0 9.1 15.4 13.6 8.6 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- PROFITABILITY - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- % Return on total capital 11 15 14 14 9 10 % Return on average shareholders' equity 13 21 20 19 13 13 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ASSET TURNOVER - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Revenues/inventories (a)(b) 15.0 16.1 19.1 15.3 12.9 13.7 Revenues/receivables (a)(b) 4.1 4.3 4.5 5.1 4.6 4.7 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- STOCK MARKET - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Year-end price/earnings (P/E) 19 21 20 18 25 23 Year-end price/book value 2.8 4.1 3.4 3.3 3.1 3.0 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (a) EXCLUDES INSURANCE OPERATIONS. - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------EBITDA is the sum of operating profit, investment income, other income and expense and depreciation and amortization expense including the write-down of intangibles. The Company's EBITDA, which represents a non-GAAP measure of cash flow, may not be comparable to other companies EBITDA due to differences in the calculation. (b) Excludes insurance operations. (c) Excludes cash. =========================================================================================================================== CONSOLIDATED INCOME STATEMENT COMPARISON - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Fiscal Year Percent Change - ------------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS)--------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1999 1998 1997 19961999/98 1998/97 1997/96 1996/95 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net revenues: Health Care sales $ 766 $ 748 $ 588 $ 5682% 27% 4% 2% Health Care rentals 324 403 378 373(20%) 7% 1% 1% Funeral Services sales 602 541 545 52411% (1%) 4% 2% Insurance revenues 355 309 265 21915% 17% 21% 18% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 2,047 $ 2,001 $ 1,776 $ 1,6842% 13% 5% 4% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Gross profit: Health Care sales $ 314 $ 320 $ 266 $ 234(2%) 20% 14% 12% Health Care rentals 88 162 143 140(46%) 13% 2% 15% Funeral Services sales 292 260 264 24612% (2%) 7% 4% Insurance revenues 92 72 57 28% 26% 27%82 76 56 8% 36% 51% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total gross profit 834 745 677776 818 729 (5%) 12% 10% 10%11% Other operating expenses 540 481 441 12% 9% 8%527 524 465 1% 13% 10% Unusual charges (38) (66) - - N/A N/A N/A - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Operating profit 211 228 264 236(7%) (14%) 12% 32% Other (expense) income, (expense), net (16) 65 (5) (3)N/A N/A (67%) 67% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 195 293 259 233(33%) 13% 11% 37% Income taxes 71 109 102 93(35%) 7% 10% 16% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net income $ 124 $ 184 $ 157 $ 140(33%) 17% 12% 56% - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-20-21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Financial Statements: Report of Independent Accountants 2223 Statements of Consolidated Income for the three years ended November 28, 1998 2327, 1999 24 Consolidated Balance Sheets at November 27, 1999 and November 28, 1998 and November 29, 1997 2425 Statements of Consolidated Cash Flows for the three years ended November 28, 1998 2627, 1999 27 Statements of Consolidated Shareholders' Equity for the three years ended November 27, 1999 28 1998 27 Notes to Consolidated Financial Statements 2829 Financial Statement Schedule for the three years ended November 28, 1998:27, 1999: Schedule II - Valuation and Qualifying Accounts 4851
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. -21-22 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Hillenbrand Industries, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hillenbrand Industries, Inc. and its subsidiaries at November 28, 199827, 1999 and November 29, 1997,28, 1998, and the results of their operations and their cash flows for each of the three years in the period ended November 28, 1998,27, 1999, in conformity with accounting principles generally accepted accounting principles.in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted auditing standardsin the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Indianapolis, Indiana January 11, 1999 -22-2000 23 HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES26 Hillenbrand Industries, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)(Dollars in millions except per share data)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 27, November 28, November 29, November 30, Year Ended 1999 1998 1997 1996- -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- NET REVENUES Health Care sales $ 766 $ 748 $ 588 $ 568 Health Care rentals 324 403 378 373 Funeral Services sales 602 541 545 524 Insurance revenues 355 309 265 219 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total revenues 2,047 2,001 1,776 1,684 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- COST OF REVENUES Health Care cost of goods sold 452 428 322 334 Health Care rental expenses 236 241 235 233 Funeral Services cost of goods sold 310 281 281 278 Insurance cost of revenues 217 193 162273 233 209 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total cost of revenues 1,167 1,031 1,0071,271 1,183 1,047 Other operating expenses 540 481 441527 524 465 Unusual charges (Note 4)5) (38) (66) - - - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- OPERATING PROFIT 211 228 264 236 Other income (expense), net: Interest expense (27) (27) (21) (22) Investment income, net 16 19 18 17 Other (Note 3)4) (5) 73 (2) 2 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 195 293 259 233 Income taxes 71 109 102 93 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 124 $ 184 $ 157 $ 140 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- BASIC AND DILUTED NET INCOME PER COMMON SHARE $ 1.87 $ 2.73 $ 2.28 $ 2.02 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS PER COMMON SHARE $ .78 $ .72 $ .66 $ .62 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 66,295,770 67,577,803 68,796,439 69,474,266 - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -23-See Notes to Consolidated Financial Statements. 24 HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES27 Hillenbrand Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)(Dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 27, November 28, November 29,1999 1998 1997- ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash, and cash equivalents and short-term investments $ 170 $ 297 $ 364 Trade accounts receivable, less allowances of $27$54 in 1999 and $29 in 1998 and $25 in 1997413 392 333 Inventories 113 105 79 Other 86 64 45 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total current assets 782 858 821 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- EQUIPMENT LEASED TO OTHERS 273 288 280 Less accumulated depreciation 204 207 189 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Equipment leased to others, net 69 81 91 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- PROPERTY 632 651624 662 Less accumulated depreciation 411 413426 441 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Property, net 198 221 238 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Intangible assets at amortized cost: Patents and trademarks 19 20 19 Excess of cost over net asset values of acquired companies (Note 2)3) 159 164 96 Other 14 1114 Deferred charges and other assets 101 89 51 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total other assets 293 287 177 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- INSURANCE ASSETS (NOTE 12)13) Investments 2,311 2,204 1,934 Deferred acquisition costs 584 536 473 Deferred income taxes 79 34 43 Other 117 59 51 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total insurance assets 3,091 2,833 2,501 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 4,280 $ 3,828$4,433 $4,280 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-24-25 28
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 27, November 28, November 29,1999 1998 1997- ------------------------------------------------------------------------------------ - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Short-term debt (Notes 56 and 8)9) $ 6052 $ 60 Current portion of long-term debt (Notes 56 and 8) 19) - 1 Trade accounts payable 80 69 71 Income taxes payable (Note 10) 2711) 22 27 Accrued compensation 53 73 63 Other 164 145 137 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 371 375 359 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT (NOTES 56 AND 8)9) 302 303 203 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- OTHER LONG-TERM LIABILITIES (NOTE 6) 86 757) 68 81 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES (NOTES 1 AND 10)11) 3 4 7 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- INSURANCE LIABILITIES (NOTE 12)13) Benefit reserves 2,092 1,856 1,667 Unearned revenue 719 674 605 General liabilities 40 30 26 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total insurance liabilities 2,851 2,560 2,298 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 3,328 2,9423,595 3,323 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 14)15) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (NOTES 67 AND 7)8) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Common stock - without par value: Authorized - 199,000,000 shares Issued - 80,323,912 shares in 19981999 and 19971998 4 4 Additional paid-in capital 15 1424 20 Retained earnings (Note 5)6) 1,293 1,221 1,085 Accumulated unrealized gain on investments 52 34 Foreign currency translation adjustment (7) (3)other comprehensive (loss) income (Note 1) (38) 45 Treasury stock, at cost: 1999 - 16,777,137 shares; 1998 - 13,564,793 shares; 1997shares (445) (333) - 11,812,743 shares (333) (248) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 952 886838 957 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,433 $ 4,280 $ 3,828 - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -25-See Notes to Consolidated Financial Statements. 26 HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES29 Hillenbrand Industries, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED CASH FLOWS (DOLLARS IN MILLIONS)(Dollars in millions)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 27, November 28, November 29, November 30, Year Ended 1999 1998 1997 1996- ------------------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 124 $ 184 $ 157 $ 140 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation, amortization and write-down of goodwillintangibles 98 149 102 99 Change in noncurrent deferred income taxes (2) (3) (12) (6) Gain on sale of business - (75) - (3) Change in working capital excluding cash, current debt, acquisitions and dispositions: Trade accounts receivable (18) (36) (46) 24 Inventories (6) (2) 17 15 Other current assets (21) 2 - (1) Trade accounts payable 10 (12) 21 (21) Accrued expenses and other liabilities (6) (14) 32 5 Change in insurance deferred policy acquisition costs (48) (63) (67) (67) Change in other insurance items, net 50 48 35 40 Other, net (31) (5) 7 15 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 150 173 246 240 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (79) (88) (85) (92) Proceeds on disposal of fixed assets and equipment leased to others 4 10 1 2 Acquisitions of businesses, net of cash acquired (54) (188) - (6) Other investments (4) (11) (4) (3) Proceeds on sale of business - 64 - 15 Insurance investments: Purchases (797) (746) (721) (437) Proceeds on maturities 177 168 112 78 Proceeds on sales 466 345 358 126 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (287) (446) (339) (317) - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Additions to short-term debt 12 39 10 119 Reductions to short-term debt (13) (13) (15) (81) Additions to long-term debt - 101 - - Reductions to long-term debt (1) (1) (2) (3) Payment of cash dividends (52) (48) (45) (43) Treasury stock acquired (113) (85) (13) (51) Insurance premiums received 488 495 514 459 Insurance benefits paid (309) (282) (256) (227) - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 12 206 193 173 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (2) - (2) (1) - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL CASH FLOWS (127) (67) 98 95 CASH, AND CASH EQUIVALENTS AND SHORT TERM INVESTMENTS At beginning of year 297 364 266 171 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- At end of year $ 170 $ 297 $ 364 $ 266 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -26-See Notes to Consolidated Financial Statements. 27 HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES30 Hillenbrand Industries, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DOLLARS IN MILLIONS)(Dollars in millions)
- --------------------------------------------------------------------------------------------------------------------------- NOVEMBER 28, November 29, November 30, Year Ended 1998 1997 1996----------------------------------------------------------------------------------------------------------------------------- Accumulated Other Common Additional Retained Comprehensive Treasury Stock Paid-in-Capital Earnings (Loss) Income Stock Total - ----------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCK BALANCE AT DECEMBER 1, 1996 $ 4 $18 $ 4973 $ 4 - --------------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL Beginning of year 14 14 14 Fair market value over cost on reissuance of treasury shares (1998 - 16,050; 1997 - 15,284; 1996 - 33,996) 131 $(235) $ 791 Comprehensive Income Net income - - Other157 - - 157 Foreign currency translation adjustment - - - (13) - (13) Net change in unrealized gain (loss) on available for sale securities - - - 13 - 13 ----- Total comprehensive income 157 Dividends - - (45) - - (45) Treasury shares acquired (290,395) - - - - --------------------------------------------------------------------------------------------------------------------------- End of year 15 14 14(13) (13) - --------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Beginning of year----------------------------------------------------------------------------------------------------------------------------- BALANCE AT NOVEMBER 29, 1997 4 18 1,085 973 87631 (248) 890 Comprehensive Income Net income - - 184 157 140 Dividends (48) (45) (43) - --------------------------------------------------------------------------------------------------------------------------- End of year 1,221 1,085 973 - --------------------------------------------------------------------------------------------------------------------------- ACCUMULATED UNREALIZED GAIN ON INVESTMENTS Beginning of year 34 21 23184 Foreign currency translation adjustment - - - (4) - (4) Net change in unrealized holding gain (loss) on available for sale securities - - - 18 13 (2) - --------------------------------------------------------------------------------------------------------------------------- End of year 52 34 2118 ----- Total comprehensive income 198 Dividends - --------------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT Beginning of year (3) 10 14 Translation- (48) - - (48) Treasury shares acquired (1,768,100) - - - - (85) (85) Other - 2 - - - 2 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT NOVEMBER 28, 1998 4 20 1,221 45 (333) 957 Comprehensive Income Net income - - 124 - - 124 Foreign currency translation adjustment (4) (13) (4) - --------------------------------------------------------------------------------------------------------------------------- End of year (7) (3) 10 - --------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK Beginning of year (248) (235) (185) Shares- (1) - (1) Net change in unrealized gain (loss) on available for sale securities - - - (82) - (82) ----- Total comprehensive income 41 Dividends - - (52) - - (52) Treasury shares acquired (1998(3,255,300) - 1,768,100; 1997 - 290,395; 1996 - 1,425,100) (85) (13) (51) Shares reissued- (113) (113) Other - 4 - - 1 5 - --------------------------------------------------------------------------------------------------------------------------- End of year (333) (248) (235)----------------------------------------------------------------------------------------------------------------------------- BALANCE AT NOVEMBER 27, 1999 $ 4 $24 $ 1,293 $(38) $(445) $ 838 - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 952 $ 886 $ 787 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -27-See Notes to Consolidated Financial Statements. 28 HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES31 Hillenbrand Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)(Dollars in millions except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies specific to insurance operations are summarized in Note 12.13. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, except for several small subsidiaries which provide ancillary services to the Company and the public. These subsidiaries are not consolidated because of their materiality and are accounted for by the equity method. Their results of operations appear in the income statement, net of income taxes, under the caption "Other income (expense), net." Material intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest November 30. NATURE OF OPERATIONS Hillenbrand Industries is organized into two segmentsgroups - the Health Care Group and the Funeral Services Group. The Health Care Group, which is considered a separate reporting segment, consists of Hill-Rom. Block Medical and Medeco Security Locks, wereInc. was included in this segmentgroup prior to theirits sale in 1996 and 1998 respectively.based upon its relative immateriality. Hill-Rom is a leading manufacturer of patient care products and a leading provider of specialized rental therapy products designed to assist in managing the complications of patient immobility. Its products and services are marketed to acute and long-term health care facilities and home care patients primarily in North America and Europe. The Health Care segment generated 58%53% of Hillenbrand's revenues in 1998.1999. The Funeral Services Group consists of Batesvilletwo reporting segments, Funeral Services Products (Batesville Casket Company - Batesville) and ForethoughtFuneral Services Insurance (Forethought Financial Services (Forethought)- Forethought). Batesville Casket Company is a leading producer of protective metal and hardwood burial caskets, cremation urns and caskets and marketing support services. Its products are marketed to licensed funeral directors operating licensed funeral homes primarily in North America. Batesville generated 27%30% of Hillenbrand's revenues in 1998.1999. Forethought provides funeral homes in 4249 U.S. states, the District of Columbia, Puerto Rico and sixnine Canadian provinces with life insurance policies and marketing support for preneed, inflation-protected funeral planning. It entered the preneed trust market in 1997. Forethought generated 15%17% of Hillenbrand's revenues in 1998.1999. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. 29 32 CASH, AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers investments in marketable securities and other highly liquid instruments with a maturity of three months or less at date of purchase to be cash equivalents. -28- Investments with a maturity at the date of purchase greater than three months or which have no stated maturity are considered short-term investments. All of the Company's short-term investments contain put options or may be freely traded. Cash, cash equivalents and short-term investments at year end consist of the following: - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- Cash and cash equivalents $ 26 $ 86 Short-term investments 144 211 - ------------------------------------------------------------------------------- Total $ 170 $ 297 - ------------------------------------------------------------------------------- INVENTORIES Inventories are valued at the lower of cost or market. Inventory costs are determined by the last-in, first-out (LIFO) method for approximately 56%52% and 71%56% of the Company's inventories at November 27, 1999 and November 28, 1998, and November 29, 1997, respectively. The decline in the percentage of inventories on LIFO is related to the acquisitions completed in the current year (see Note 2). Costs for other inventories have been determined principally by the first-in, first-out (FIFO) method. Inventories at November 28year end consist of the following:
- ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- Finished Products $ 58 $ 44 Work in Process 32 24 Raw Materials 15 11 - ------------------------------------------------------------------------------ Total $ 105 $ 79 - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- Finished products $ 67 $ 58 Work in process 31 32 Raw materials 15 15 - ------------------------------------------------------------------------------- Total $ 113 $ 105 - ------------------------------------------------------------------------------- If the FIFO method of inventory accounting, which approximates current cost, had been used for all inventories, they would have been approximately $9$7 million and $10$9 million higher than reported at November 28, 199827, 1999 and November 29, 1997,28, 1998, respectively. EQUIPMENT LEASED TO OTHERS Equipment leased to others primarily represents therapy rental units, which are recorded at cost and depreciated on a straight-line basis over their estimated economic life. The majority of these units are leased on a day-to-day basis. PROPERTY Property is recorded at cost and depreciated over the estimated useful life of the assets using principally the straight-line method for financial reporting purposes.method. Generally, when property is retired from service or otherwise disposed of, the cost and related amount of depreciation or amortization are eliminated from the asset and reserve accounts, respectively. The difference, if any, between the net asset value and the proceeds is charged or credited to income. The major components of property at the end of 1999 and 1998 were: - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- Land $ 17 $ 18 Buildings and 1997 were:
- ------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------ Land $ 18 $ 22 Buildings and building equipment 142 144 Machinery and equipment 472 485 - ------------------------------------------------------------------------------ Total $ 632 $ 651 - ------------------------------------------------------------------------------
building equipment 148 152 Machinery and equipment 459 492 - ------------------------------------------------------------------------------- Total $ 624 $ 662 - ------------------------------------------------------------------------------- 30 33 INTANGIBLE AND OTHER NON-CURRENT ASSETS Intangible assets are stated at cost and amortized on a straight-line basis over periods ranging from 3 to 40 years. The Company reviews goodwillintangible and other non-current assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the undiscounted expected future cash flows from use of the asset are less than the carrying value, an impairment loss is recognized. The amount of the impairment loss is determined by comparing the discounted expected future cash flows with the carrying value. Goodwill related to Hill-Rom's German subsidiary was written off in the third quarter of 1998 resulting in aIntangible write-offs approximated $3 million and $43 million charge.in 1999 and 1998, respectively. See Note 45 for additional information. Accumulated amortization of intangible assets was $150$156 million and $156$150 million as of November 27, 1999 and November 28, 1998, and November 29, 1997, respectively. -29- ENVIRONMENTAL LIABILITIES Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. A reserve is established when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These reserves are determined without consideration of possible loss recoveries from third parties. More specifically, each quarter, financial management, in consultation with its environmental engineer, estimates the range of liability based on current interpretation of environmental laws and regulations. For each site in which a Company unit is involved, a determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan and the periods in which the Company will make payments toward the remediation plan. The Company does not make an estimate of general or specific inflation for environmental matters since the number of sites is small, the magnitude of costs to execute remediation plans are not significant and the estimated time frames to remediate sites are not believed to be lengthy. Specific costs included in environmental expense are site assessment, development of a remediation plan, clean-up costs, post-remediation expenditures, monitoring, fines, penalties and legal fees. The reserve represents the expected undiscounted future cash outflows. Expenditures that relate to current operations are charged to expense. REVENUE RECOGNITION Sales are recognized upon shipment of products to customers. Rental revenues are recognized when services are rendered. COST OF REVENUES Health Care and Funeral Services cost of goods sold consist primarily of purchased material costs, fixed manufacturing expense, and variable direct labor and overhead costs. Health Care rental expenses are those costs associated directly with rental revenue, including depreciation and service of the Company's therapy rental units, service center facility and personnel costs, and regional sales expenses. EARNINGS PER COMMON SHARE The Company adopted SFASStatement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in the first quarter of 1998. SFAS No. 128 requires disclosure of basic and diluted earnings per share in place of primary and fully diluted earnings per share as required by APB No. 15.share. Basic earnings per share is calculated based upon the weighted-average number of outstanding common shares for the period.period, plus the effect of deferred vested shares. Diluted earnings per share is calculated based upon weighted-average number of outstanding common shares, plusconsistent with the basic earnings per share calculation including the effect of dilutive potential common shares. For all years presented, anti-dilutive stock options.options were excluded in the calculation of dilutive earnings per share. 31 34 COMPREHENSIVE INCOME The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in the first quarter of 1999. The adoption of this Standard did not affect the Company's financial position or results of operations. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Due to this change, certain balance sheet reclassifications have been made in order for previously reported amounts to conform to the SFAS No. 130 presentation. The composition of accumulated other comprehensive (loss) income at November 27, 1999 and November 28, 1998 is the cumulative adjustment for unrealized losses or gains on available-for-sale securities, mainly relating to the insurance portfolio, of ($30) and $52 million, respectively, and the foreign currency translation adjustment of ($8) and ($7) million, respectively. STOCK-BASED COMPENSATION The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" in October 1995. SFAS No. 123Compensation," encourages companies to adopt a fair valuefair-value approach to valuing stock-based compensation that would require compensation cost to be recognized based on the fair value of the stock-based instrument granted.compensation. The Company has elected, as permitted by the standard,Standard, to continue to follow its intrinsic value basedvalue-based method of accounting for its stock-based compensation plans consistent with the provisions of APB No. 25. Under the intrinsic method, compensation cost for stock-based compensation is measured as the excess, if any, of the quoted market price of the instrument at the measurement date over the exercise price. The Company has provided the pro forma disclosure provisions ofassociated with SFAS No. 123 in Note 6. -30-7. INCOME TAXES The Company and its eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign operations file income tax returns in a number of jurisdictions. Deferred income taxes are computed in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations are primarily translated into U.S. dollars at year-end rates of exchange and the income statements are translated at the average rates of exchange prevailing during the year. Adjustments resulting from translation of the financial statements of foreign operations into U.S. dollars are excluded from the determination of net income, but included as a component of comprehensive income. Foreign currency gains and losses resulting from foreign currency transactions are included in results of operations and are not material. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year's presentation. ACCOUNTING STANDARDS The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires that all derivatives be recognized on the balance sheet at fair value. Changes in fair values of derivatives will be accounted for based upon their intended use and designation. Since the Company's holdings in such instruments are minimal, adoption of this Standard is not expected to have a material effect on the Company's consolidated financial statements. The Company is required to adopt the Standard not later than the first quarter of fiscal 2001. 32 35 2. RETIREMENT PLANS The Company and its subsidiaries have several defined benefit retirement plans covering the majority of employees, including certain employees in foreign countries. The Company contributes funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period. The benefits for these plans are based primarily on years of service and the employee's level of compensation during specific periods of employment. Effective November 27, 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Standard revised disclosure requirements for employers' pensions and other retiree benefits as presented below. Implementation of this Standard did not affect the Company's financial position or results of operations. The components of net pension expense in the United States are as follows: - ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Service cost $ 11 $ 8 $ 8 Interest cost 11 10 9 Expected return on plan assets (11) (10) (10) - ------------------------------------------------------------------------------- Net pension expense $ 11 $ 8 $ 7 - ------------------------------------------------------------------------------- The change in benefit obligation, change in plan assets, funded status and amounts recognized in the consolidated balance sheets at November 27, 1999 and November 28, 1998 for the Company's domestic defined benefit retirement plans were as follows:
NOVEMBER 27, November 28, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $161 $135 Service expense-benefits earned during thecost 11 8 Interest cost 11 10 Amendments - 1 Actuarial (gain)/loss (18) 11 Benefits paid (4) (4) -------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 8 $ 8 $ 7 Interest expense on projected benefit obligation 10 9 8161 161 -------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 144 124 Actual (loss)/return on plan assets (16) (10) (7) Net amortization and deferral 6 - (1) - ------------------------------------------------------------------------------------------------------------------- Net pension expense $(9) 16 Employer contributions 9 8 $ 7 $ 7 - -------------------------------------------------------------------------------------------------------------------
The funded status of plans in the United States is shown in the table below:
- ------------------------------------------------------------------------------------------------------------------- NOVEMBER 28, November 29, 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Actuarial presentBenefits paid (4) (4) -------------------------------------------------------------------------------------------- Fair value of benefit obligations: Accumulated benefit obligation, including vested benefits of $98 in 1998 and $85 in 1997 $ (104) $ (91) - ------------------------------------------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date $ (161) $ (135) Planplan assets at fair value, primarily U.S. Government obligations, corporate bonds and notes, and common stock issued by the Company. The valueend of this common stock at date of acquisition by the plans was $3 and the current market value was $26 in 1998 and $20 in 1997.year 140 144 124 - ------------------------------------------------------------------------------------------------------------------- Plan assets less than projected benefit obligation-------------------------------------------------------------------------------------------- Funded status (21) (17) (11) Unrecognized net actuarial gain from past experience different from that assumed (10) (15)(8) (11) Unrecognized prior service cost 2 3 2 Unrecognized net asset at year-end being recognized over 14 to 22 years from the initial compliance date of December 1, 1985 (1) (1) - ------------------------------------------------------------------------------------------------------------------- Unfunded accrued expenses included in liabilities $ (25) $ (25) - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Accrued benefit cost $(27) $(25) --------------------------------------------------------------------------------------------
-31- The weighted-average assumptions used in accounting for the domestic pension plans are as follows:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Discount rate used to determine the projected benefit obligation 7.25% 7.5% 7.5% Rate of increase in future compensation levels used to determine the projected benefit obligation 5.5% 5.5% 5.5% Expected long-term rate of return on assets used to determine net periodic pension cost 8.0% 8.0% 8.0% - -----------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Discount rate 7.75% 7.25% 7.5% Expected rate of return on plan assets 8.0% 8.0% 8.0% Rate of compensation increase 5.5% 5.5% 5.5% - ------------------------------------------------------------------------------- 33 36 All of the Company's domestic pension plans had projected benefit obligations in excess of plan assets as of November 27, 1999 and November 28, 1998. In addition to the above plans, the Company assumed the unfunded liabilities of a defined benefit plan in thea German acquisition of Arnold in 1994. The unfunded accumulated benefit obligation of this plan, included in accrued expenses, was $10 million on November 27, 1999 and $11 million on November 28, 1998 and November 29, 1997 and $13 million on November 30, 1996.1998. Pension expense was negligible in 1999 and 1998 and was $1 million in 1997 and 1996.1997. The Company also sponsors several defined contribution plans covering certain of its employees. Employer contributions are made to these plans based on a percentage of employee compensation. The cost of these defined contribution plans was $5 million in 1999, $6 million in 1998 and $5 million in 1997 and 1996. INCOME TAXES The Company and its eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign operations file income tax returns in a number of jurisdictions. Deferred income taxes are computed in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the income tax amounts. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations are primarily translated into U.S. dollars at year-end rates of exchange and the income statements are translated at the average rates of exchange prevailing during the year. Adjustments resulting from translation of the financial statements of foreign operations into U.S. dollars are excluded from the determination of net income and included as a separate caption in shareholders' equity. Foreign currency gains and losses resulting from foreign currency transactions are included in results of operations and are not material. ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," was issued in June 1997. This standard requires that the Company disclose, either in the income statement or in a separate financial statement, net income as currently reported and other components of comprehensive income. Comprehensive income is defined as the change in shareholders' equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company is required to adopt this standard not later than the first quarter of 1999. Implementation of this standard will not affect the Company's financial position or results of operations. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued in June 1997. This standard defines segments of an enterprise as the components of the company whose operations are reviewed regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. It requires disclosures about products and services, geographic areas and major customers. The Company is required to adopt this standard not later than the issuance of its 1999 annual report. Implementation of this standard will not affect the Company's financial position or results of operations. -32- In February 1998, SFAS No. 132, " Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued. This standard revises current disclosure requirements for employers' pensions and other retiree benefits. The Company is required to adopt this standard not later than the issuance of its 1999 annual report. Implementation of this standard will not affect the Company's financial position or results of operations. The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", in June 1998. This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires that all derivatives be recognized on the balance sheet at fair value. Changes in fair values of derivatives will be accounted for based upon their intended use and designation. Since the Company's holdings in such instruments are minimal, adoption of this standard is not expected to have a material effect on the financial statements. The Company is required to adopt the standard not later than the first quarter of fiscal 2000. 2.3. ACQUISITIONS On December 18, 1997,July 30, 1999, Hill-Rom, acquireda wholly owned subsidiary, purchased the stockassets of Air-Shields, Inc.,AMATECH Corporation, a manufacturer and supplierdistributor of infant incubatorssurgical table accessories and warmers, and certain other businesses of Vickers PLCpatient positioning devices for $98 million, net of cash acquired and including costs of acquisition, and the assumption of certain liabilities totaling $29 million. This acquisition has been accountedoperating room, for as a purchase, and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was approximately $68 million and has been recorded as goodwill which is being amortized on a straight-line basis over 20 years. Hill-Rom is continuing to negotiate the final purchase price for this acquisition with the seller, which when resolved, is expected to result in a reduction of goodwill. On February 9, 1998, Hill-Rom acquired the stock of MEDAES Holdings, Inc., a manufacturer of medical architectural systems for $62$28 million, including costs of acquisition and the assumption of certain liabilities totaling $17approximately $1 million. If the purchased entity achieves certain financial milestones by the end of January 2003, the Company could make additional payments. This acquisition washas been accounted for as a purchase, and the results of operations have been included in the consolidated financial statements since the dateacquisition date. The excess of the purchase price over the fair value of net assets acquired, based on the Company's preliminary purchase price allocation, was approximately $23 million which is being amortized on a straight-line basis over 20 years. On December 31, 1998, Forethought Life Insurance Company, a wholly owned subsidiary of Forethought Financial Services, Inc., acquired the stock of Arkansas National Life Insurance Company for approximately $31 million, including costs of acquisition. This acquisition has been accounted for as a purchase, and the results of operations of the acquired business have been included in the consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of net assets acquired was approximately $51$3 million and has been recorded as goodwill which is being amortized on a straight-line basis over 20 years. On June 4, 1998, Forethought Financial Services purchased Chrysler Life Insurance Company for approximately $14 million, including costs of acquisition. This acquisition has been accounted for as a purchase, and the results of operations of the acquired business have been included in the consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of net assets acquired, which were primarily state insurance licenses, was approximately $4 million which is being amortized on a straight-line basis over 40 years. On February 9, 1998, Hill-Rom acquired the stock of MEDAES Holdings, Inc., a manufacturer of medical architectural systems for $62 million, including costs of acquisition, and the assumption of certain liabilities totaling $16 million. This acquisition was accounted for as a purchase, and the results of operations have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was approximately $50 million which is being amortized on a straight-line basis over 20 years. On December 18, 1997, Hill-Rom acquired the stock of Air-Shields, Inc., a manufacturer and supplier of infant incubators and warmers, and certain other businesses of Vickers PLC for $93 million, net of cash acquired and including costs of acquisition, and the assumption of certain liabilities totaling $22 million. This acquisition has been accounted for as a purchase, and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was approximately $53 million which is being amortized on a straight-line basis over 20 years. In the second quarter of 1999, the final purchase price for this acquisition was negotiated, resulting in a $5 million reduction in the excess of the purchase price over the fair value of net assets acquired. 34 37 Hill-Rom, Batesville Casket and the Company each acquired one small company during 1998 in addition to those outlined above. The combined purchase price of these companies was approximately $14 million, net of cash acquired. Assuming the two fiscal 1999 acquisitions had occurred November 30, 1997, and all fiscal 1998 acquisitions had occurred December 1, 1996, unaudited fiscal 1997 pro forma consolidated net revenue would have increased by approximately $150 million, and net income and earnings per share would have decreased by less than 5%. Unaudited fiscal 1998 and 1999 pro forma revenue, net income and earnings per share would not have been materially different from reported amounts. Such unaudited consolidated pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place on those dates, nor is it indicative of the results that may occur in the future. In 1996, the Company's subsidiaries, Batesville Casket and Hill-Rom, each acquired two small companies. The combined purchase price was $6 million. Acquisitions occurring subsequent to November 28, 1998 are discussed in Note 15. 3.4. DISPOSITION On July 1, 1998, the Company sold its high security and access control business, Medeco Security Locks, Incorporated, to Assa Abloy AB. The Company recorded an after taxafter-tax gain of approximately -33- $47 million in the third quarter. Results for Medeco were included in the Health Care Group through the date of disposition and did not have a material effect on the results of that group or the Company's consolidated earnings, cash flows and financial position. The gain on the sale of Medeco is classified within the Other line under Other income (expense), net in the Statement of Consolidated Income. On July 22, 1996, the Company sold the assets of Block Medical for cash and stock totaling $17 million. The Company recorded a gain on the sale of $3 million ($2 million after income taxes) and a related income tax benefit of approximately $6 million realized from book and tax differences in the basis of the business. 4.5. UNUSUAL CHARGES On November 23, 1999, the Company announced a plan to reduce the future operating cost structure at Hill-Rom, to write-down the value of certain impaired assets and to recognize a liability associated with the estimated cost of a field corrective action for a previously acquired product line. The total estimated cost of these actions necessitated an unusual charge of $29 million in the fourth quarter of 1999, all of which is reflected within the Unusual charges line of the Statement of Consolidated Income. As of year-end, essentially no spending had occurred relative to the $19 million cash component of this charge. Included in the cost-cutting actions announced at Hill-Rom was the reduction of 350 employees, about 5% of its work force, in the United States and Europe and the closure of select manufacturing and sales, service/distribution facilities in the United States and Europe to eliminate redundant operations. With respect to the employee head count reduction, most affected employees will be administrative personnel and the actions will be completed within the next nine months. The facility closures are also expected to occur on a similar timeline, but certain aspects of the closure and disposal activities could take longer. Estimated costs for the work force and facility closure actions are estimated at $8 million and $3 million, respectively. These actions were precipitated by adverse customer reaction to continued changes in Medicare reimbursement practices which have resulted in the postponement or cancellation of capital goods orders by many of Hill-Rom's customers. The unusual charge also includes a total of $10 million relative to asset impairments. This charge included the write-down of a small Hill-Rom investment in a non-core business currently being held for sale and the write-off of goodwill and other strategic investments which were significantly underperforming original expectations or had essentially discontinued operations. Asset impairment charges were determined based upon projected future cash flows, independent appraisals and sales activities, market assessments and management estimates of losses to be incurred upon disposition of the affected assets. The remaining component of the fourth quarter of 1999 unusual charge relates to the estimated $8 million cost of a field corrective action to be taken for a previously acquired product line. The action will involve the replacement of certain key components of the product aimed at enhancing the overall effectiveness and safety of the product. This action is expected to be completed within the next six months, but could take longer depending on the availability of necessary components and other requirements. 35 38 In March 1999, Batesville announced the planned closing of its Campbellsville, Kentucky casket manufacturing plant. Approximately 200 production and administrative employees were affected. Production of Campbellsville casket units was transferred to existing plants located in Batesville, Indiana and Manchester, Tennessee. The closure of the Campbellsville manufacturing plant necessitated a $9 million unusual charge in the second quarter of 1999. The non-cash component consisted of a $5 million write-down of property, plant and equipment which was determined based upon independent assessments, market appraisals and management estimates of losses to be incurred upon the disposition of the Campbellsville facility and surplus equipment. Property, plant and equipment to be disposed of have an adjusted fair market value of approximately $5 million, not including costs of disposal. Additional charges in the plan included $3 million for severance and employee benefit costs and $1 million of other estimated plant closing costs. This charge was reflected within the Unusual charges line of the Statement of Consolidated Income. As of November 27, 1999, manufacturing operations had been discontinued at the plant and production successfully relocated. Nearly all severance and employee benefit costs and estimated plant closing costs had been incurred, with no adjustments being made to such reserves through year end. The disposition of property, plant and equipment is targeted to be completed within the next six months, but could take longer. In August 17, 1998, the Board of Directors of the Company approved a plan to restructure Hill-Rom's direct and support operations in Germany and Austria that willto permit the Company to more efficiently meet the needs of its customers and improve profitability. Market demand has not met expectations and remains far below estimates established atUnder the time the German and Austrian businesses were acquired in 1994. Changes in local market conditions, health care reform and increased competitive pressures have greatly extended the time required for the Company to achieve profitability and significantly reduced management's projections of future cash flows from operations in these countries. Under this plan, the Company will reducereduced its fixed costs and alignaligned manufacturing, distribution, sales and administrative functions with anticipated demand. This alignment will resultThese actions resulted in the closingclosure of manufacturing facilities in Germany and Austria and relocatingthe relocation of certain manufacturing and business processes to other European locations. The Company will continue to serve and support the German and Austrian markets through a direct sales and service organization with products manufactured specifically for these markets by its other operations. Approximately 250 production and administrative employees are affected by this plan. The restructuring plan necessitated the provision of a $73$70 million asset impairment and restructuring charge in the third quarter.1998. The non-cash component of thisthe charge included a $43 million write-off of German subsidiary goodwill, $7 million for the write-down of property, plant and equipment held for sale and $3 million for obsolete inventory resulting from the realignment of operations. Asset impairment charges were determined based upon projected cash flows, independent appraisals and market assessments for goodwill, land and buildings, and management estimates of losses to be incurred upon the disposition of surplus equipment and inventories. Property, plant and equipment to be disposed of have an adjusted fair market value of approximately $4 million, not including costs of disposal, as of November 28, 1998. The restructuring plan also included additional charges for severance and employee benefit costs of $11$10 million and other estimated plant closing costs of $9$7 million. This charge, with the exception of the inventory component which was recorded in cost of goods sold, was reflected within the Unusual charges line of the Statement of Consolidated Income. As of November 27, 1999, manufacturing operations have been discontinued in Germany and Austria. Nearly all of the severance and employee benefit costs and $5 million which includes legal, leasein other plant closing costs were incurred through 1999. During 1999, approximately $2 million of the provision for other plant closing costs was reversed to income within the Unusual charges line of the Statement of Consolidated Income as actual costs were less than originally estimated. The disposition of the plant in Germany is targeted to be completed within the next three months, but could take longer. The disposition of excess and contract termination, warranty, environmental, purchase commitmentdiscontinued inventories and related shutdown costs. None of these individual cost categories are material relative toproduction equipment from the total.German and Austrian facilities is complete, and the facility in Austria was sold in December 1999. In addition to the costs accrued under the plan, additionalabove outlined plans, approximately $2 million of incremental costs related to the closure of an estimated $4 million will be incurred to relocatemanufacturing facilities in Germany, Austria and Campbellsville were incurred. These incremental costs include expenses such as travel, employee relocation and the relocation of certain manufacturing and business processes to other European locations.processes. These costs will bewere expensed as incurred as required by generally accepted accounting principles. As of November 28, 1998, the Germanprinciples and Austrian manufacturing facilities were still in operation, with depreciation expense on assets to be sold reflected for the full fiscal year. In the fourth quarter, changes in the estimates of costs to be incurred under the plan reduced the overall level of the asset impairment and restructuring charge recorded in the third quarter by $3.5 million. With the exception of the write-down in inventory, which is reflected as a component of Health Care cost of goods sold, the remaining charge is classifiedare included within the separate Unusual chargecharges line of the Statement of Consolidated Income. AsIncome as such incremental costs were incurred directly in conjunction with the execution of the endrespective plans. The reserve balances for the above plans included in other current liabilities approximated $21 million and $17 million as of the year less than $1 million of the restructuring related costs had been paid. In DecemberNovember 27, 1999 and November 28, 1998, manufacturing operations were discontinued in Germany. The Austrian manufacturing operations are expected to be discontinued in the second quarter of 1999. Substantially all employee related costs associated with the restructuring are expected to be paid in fiscal 1999. The disposition of property, plant and equipment, along with excess and discontinued inventories, is targeted to be completed within the next twelve months, but could take longer. -34-respectively. 36 5.39 6. FINANCING AGREEMENTS The Company's various financing agreements contain no restrictive provisions or conditions relating to dividend payments, working capital or additional indebtedness. Long-term debt consists of the following:
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 27, November 28, November 29,1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Unsecured 8 1/2% debentures due on December 1, 2011 $ 100 $ 100$100 $100 Unsecured 7% debentures due on February 15, 2024 100 100 Unsecured 6 3/4% debentures due on December 15, 2027 100 - Government sponsored100 Government-sponsored bond with an interest rate of 5.0% and maturities to 2008 2 2 Other 2- 2 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total 302 304 204 Less current portion 1- 1 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total long-term debt $ 303 $ 203$302 $303 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Scheduled payments on long-term debt as of November 28, 199827, 1999 total less than $1 million in each of the years 19992000 through 2003.2004. Short-term debt consists of borrowings under various lines of credit maintained for foreign subsidiaries. The weighted average interest rate on all short-term borrowings outstanding as of November 28, 199827, 1999 and November 29, 199728, 1998 was approximately 4.0%. At November 28, 1998,27, 1999, the Company had uncommitted credit lines totaling $93$88 million available for its operations. These agreements have no commitment fees, compensating balance requirements or fixed expiration dates. 6.7. STOCK-BASED COMPENSATION At November 28, 1998,27, 1999, the Company has threefour active stock-based compensation plans;programs; the Senior Executive Compensation Program, the Performance Compensation Plan, and the 1996 Stock Option Plan and the Hillenbrand Industries Stock Award Program which are described below. These three plansprograms are administered by the Compensation Committee of the Board of Directors. All shares issued under these plansprograms are valued at market trading prices. The Company's Senior Executive Compensation Program, initiated in fiscal year 1978, provides long-term performance share compensation, which contemplates annual payments of common stock of the Company to participants contingent on their continued employment and upon achievement of pre-established financial objectives of the Company over succeeding three-year periods. A total of 1,097,2051,044,425 shares of common stock of the Company remain reserved for issuance under the program. Total tentative performance shares payable through November 28, 1998,27, 1999, were 360,132.155,961. In addition, the Senior Executive Compensation Program mandates and or provides for participants to defer payment of long-term performance shares earned in prior years. A total of 183,900239,777 shares are deferred of which 177,741210,381 are vested and payable as of November 28, 1998.27, 1999. The fair value of common stock granted under this program was $57.94, $44.56 and $36.88 per share in 1999, 1998 and 1997, respectively. Under the Performance Compensation Plan, key employees are awarded tentative performance shares based upon achievement of performance targets. A total of 1,290,0281,288,897 shares of common stock remain reserved for issuance under this plan as of November 28, 1998. In 1993, 386,09627, 1999. No shares were earned based on the Company's performance. A total of 1,125 deferred shares are payable as of November 28, 1998have been awarded under this plan. Theplan since 1993. This plan will terminate on November 30, 2001. -35-37 40 Under the 1996 Stock Option Plan, key employees and directors are granted the opportunity to acquire the Company's common stock. Under the terms of the plan, options may be either incentive or non-qualified. Stock appreciation rights may be awarded in conjunction with either an incentive stock option or non-qualified stock option. The exercise price per share shall be the average fair market price of the common stock on the date of the grant. Options granted to employees vest one-third on each of the first three anniversaries of the date of grant. Options granted to directors vest entirely on the first anniversary of the date of grant. All options have a maximum term of ten years. Three million shares of common stock have been reserved for issuance under this plan and options were initially granted in 1997. As of November 28, 199827, 1999 there were 2,253,6631,553,913 shares of common stock available for future grants. The fair value for each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The weighted average fair value of options granted was $12.31, $14.19 and $13.22 per share in 1999, 1998 and 1997, respectively. The following weighted average assumptions were used:
1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.23% 5.63% 6.83% Dividend yield 1.68% 1.49% 1.44% Volatility factor .2319 .1926 .1903 Weighted average expected life 5.98 YEARS 5.98 years 5.97 years
The following table summarizes the transactions of the Company's stock option plan:
1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average NUMBER OF EXERCISE Number of Exercise Number of Exercise SHARES PRICE Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Unexercised options outstanding - beginning of year 734,998 $50.0418 283,500 $44.3125 N/A N/A Options granted 777,750 $44.2329 499,000 $52.9793 290,500 $44.3125 Options exercised (500) $44.3125 (10,339) $44.3125 N/A N/A Options cancelled (36,163) $47.4575canceled (77,000) $50.9848 (37,163) $47.3729 (7,000) $44.3125 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Unexercised options outstanding - end of year 735,998 $50.03401,435,248 $46.8454 734,998 $50.0418 283,500 $44.3125 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Exercisable options - end of year 96,535355,566 $49.1576 94,867 $44.3125 None N/A - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at November 28, 1998:27, 1999:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- $44.3125$29.9688 - $44.3125 251,498 8.36 $44.3125 96,535$29.9688 265,750 9.74 $29.9688 0 $ - $41.7813 - $46.4375 280,998 7.64 $44.5521 170,360 $44.3125 $52.1563 - $52.1563 430,500 9.14834,500 8.64 $52.1563 0 $ -155,205 $52.1563 $57.0938 - $57.0938 20,000 9.66 $57.0938 0 $ - $59.1250 - $59.2188 16,000 9.31 $59.1719 0 $ -36,000 8.51 $58.0174 12,001 $58.0174 $63.2500 - $63.2500 18,000 9.368.36 $63.2500 0 $18,000 $63.2500 - - --------------------------------------------------------------------------------------------------------------------- $44.3125------------------------------------------------------------------------------------------------------------ $29.9688 - $63.2500 735,998 8.90 $50.0340 96,535 $44.31251,435,248 8.64 $46.8454 355,566 $49.1576 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-36-38 41 On October 5, 1999, key employees were awarded 45,000 shares of the Company's common stock with a fair value of $27.75 per share under the Hillenbrand Industries Stock Award Program. The stock awards are contingent upon those employees continued employment until October 5, 2002. Dividends accrued to-date of 253 additional shares are also contingent upon continued employment until October 5, 2002. Under thea prior restricted stock plan, key employees were granted restricted shares of the Company's stock. As of November 28, 199827, 1999 there were 17,37110,205 shares which remain deferred under this program. No awards were made in fiscal 19981999 and the plan has been terminated. The amount charged to expense for all stock-based compensation plans was $4 million, $8 million and $4 million in 1999, 1998 and $2 million in 1998, 1997, and 1996, respectively. The pro forma effect on net income for all stock-based compensation plans if accounted for under SFAS No. 123 is $9 million additional compensation expense or $.09 per share in 1999 and less than $1 million of additional compensation expense in 1998 1997, and 1996,1997, respectively. Members of the Board of Directors may elect to defer fees earned and invest them in common stock of the Company. A total of 10,06411,410 deferred shares are payable as of November 28, 199827, 1999 under this program. 7.8. SHAREHOLDERS' EQUITY One million shares of preferred stock, without par value, have been authorized and none have been issued. TheAs of November 27, 1999, the Board of Directors hashad authorized the repurchase, from time to time, of up to 19,289,067 shares of the Company's stock in the open market.stock. The purchased shares will be used for general corporate purposes. As of November 28, 1998,27, 1999, a total of 15,067,16718,322,467 shares had been purchased at market trading prices, of which 13,564,79316,777,137 shares remain in treasury. On December 1, 1997, the Company purchased 990,000 shares of its common stock from a trust established by a founder of the Company to facilitate the payment of the trust's federal and state taxes upon the death of the founder's widow. The purchase, totaling $42 million, was a private transaction at a discount from market determined by an investment bank to be fair to the Company. 8.9. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments (other than Insurance investments which are described in Note 12)13) for which it is practicable to estimate that value: The carrying amounts of cash, and cash equivalents and short-term investments, trade accounts receivable, other current assets, trade accounts payable, and accrued expenses approximate fair value because of the short maturity of those instruments. The fair value of the Company's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair values of the Company's debt instruments are as follows:
- ---------------------------------------------------------------------------- NOVEMBER 28, 1998 - ---------------------------------------------------------------------------- Carrying Fair Amount Value - ---------------------------------------------------------------------------- Short-term debt $ 60 $ 60 Long-term debt $ 304 $ 340 - ----------------------------------------------------------------------------
- ------------------------------------------------------------------------------- NOVEMBER 27, 1999 - ------------------------------------------------------------------------------- Carrying Fair Amount Value - ------------------------------------------------------------------------------- Short-term debt $ 52 $ 52 Long-term debt $ 302 $ 294 - ------------------------------------------------------------------------------- The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined foreign currency risks. The Company occasionally enters into foreign currency forward contracts to hedge exposure to adverse exchange risk related to certain assets and obligations denominated in foreign currencies. The gains or losses arising from these contracts offset foreign exchange gains or losses on the underlying assets or liabilities and are recognized as offsetting adjustments to the carrying amounts. The Company had no material derivative financial instruments on November 28, 199827, 1999 and November 29, 1997. -37-28, 1998. 39 9.42 10. SEGMENT INFORMATION INDUSTRY INFORMATIONREPORTING Effective November 27, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes previously issued segment reporting disclosure rules and requires reporting of segment information that is consistent with the way in which management operates and views the Company. The adoption of SFAS No. 131 did not affect the Company's financial position or results of operations. The segment disclosures for prior years have been restated to conform with the presentation adopted for the current year. The Company is organized into two groups - the Health Care Group and the Funeral Services Group. The Health Care Group, which is considered a separate reporting segment, consists of Hill-Rom. Block Medical and Medeco Security Locks were in this segment prior to their sale in 1996 and 1998, respectively. Hill-Rom produces, sells and sells electricrents mechanically, electrically and hydraulically adjustable hospital beds, infant incubators and warmers, hospital procedural stretchers, hospital patient room furniture, patient handling equipmentmedical gas and medicalvacuum systems, architectural systems and wound care and trauma management products designed to meet the needs of acutemedical-surgical, critical care, long-term care, home care and perinatal providers. It also provides rental therapy units to health care facilities and the home care market for wound therapy, the management of pulmonary complications associated with critically ill patients and incontinence management. The Funeral Services Group consists of two reporting segments, Funeral Services Products (Batesville Casket Company - Batesville) and Funeral Services Insurance (Forethought Financial Services - Forethought). Batesville Casket Company and Forethought Financial Services. Batesville manufactures and sells a variety of metal and hardwood caskets and a line of urns and caskets used in cremation. Batesville's products are sold to licensed funeral directors operating licensed funeral homes. Forethought Financial Services'Services and its subsidiaries Forethought Life Insurance Company, Forethought National TrustBank, Forethought Federal Savings Bank, Forethought Life Assurance Company and The Forethought Group, Inc., provide funeral planning professionals with marketing support for Forethought(R) funeral plans funded by life insurance policies and trust products. Note 12 contains additional information regarding financial services. Product transfers between industryCorporate manages areas that affect all segments such as taxes, interest income and expense, debt, legal, treasury, continuous improvement and business development. Nearly all interest expense, investment income and other income and expense amounts relate to activities undertaken at Corporate to benefit the Company as a whole. In analyzing segment performance, the Company's management reviews income before income taxes, unusual items, and capital charges and segment income (income before income taxes and unusual items). The capital charge is an estimate of the cost of capital a segment would incur if not a part of Hillenbrand Industries, and the resulting segment income is used as a measure of segment profitability. Based on criteria established in SFAS No. 131, the Company's reporting segments are Health Care, Funeral Services Products and Funeral Services Insurance. Corporate, while not material.a segment, is presented separately to aid in the reconciliation of segment information to that reported in the Consolidated Financial Statements. 40 43 Financial information regarding the Company's industryreportable segments is presented below:
- --------------------------------------------------------------------------------------------------- NOVEMBER 28, November 29, November 30, Year Ended 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Net revenues:-------------------------------------------------------------------------------------------------------------- Corporate Health Care $ 1,151 $ 966 $ 941 Funeral Services 850 810 743 - --------------------------------------------------------------------------------------------------- Consolidated $ 2,001 $ 1,776 $ 1,684 - --------------------------------------------------------------------------------------------------- Operating profit: Health Care (a) $ 81 $ 134 $ 111 Funeral Services 170 160 144 Corporate and other (23) (30) (19) - --------------------------------------------------------------------------------------------------- Consolidated 228 264 236 Interest expense (27) (21) (22) Investment income 19 18 17 Other income (expense), net (b) (c) 73 (2) 2 - --------------------------------------------------------------------------------------------------- Income before income taxes $ 293 $ 259 $ 233 - --------------------------------------------------------------------------------------------------- Identifiable assets: Health Care $ 801 $ 679 $ 647 Funeral Services 3,087 2,750 2,421 Corporate and other 392 399 328 - --------------------------------------------------------------------------------------------------- Consolidated $ 4,280 $ 3,828 $ 3,396 - --------------------------------------------------------------------------------------------------- Capital expenditures: Health Care $ 53 $ 68 $ 69 Funeral Services 29 15 21 Corporate and other 6 2 2 - --------------------------------------------------------------------------------------------------- Consolidated $ 88 $ 85 $ 92 - --------------------------------------------------------------------------------------------------- Depreciation and amortization: Health Care $ 125 $ 76 $ 72 Funeral Services 22 23 24 Corporate and other 2 3 3 - --------------------------------------------------------------------------------------------------- Consolidated $ 149 $ 102 $ 99 - ---------------------------------------------------------------------------------------------------
(a) REFLECTS A $70 MILLION CHARGE IN 1998 FOR THE WRITE-OFF OF GOODWILL, OTHER ASSET IMPAIRMENT CHARGES AND OTHER CLOSING COSTS RELATED TO THE DISCONTINUANCE OF MANUFACTURING OPERATIONS AT HILL-ROM FACILITIES IN GERMANY AND AUSTRIA. (b) REFLECTS A GAIN OF $75 MILLION IN 1998 ON THE SALE OF MEDECO SECURITY LOCKS. (c) REFLECTS A GAIN OF $3 MILLION IN 1996 ON THE SALE OF BLOCK MEDICAL. -38- GEOGRAPHIC INFORMATION Sales between geographic areas are at transfer prices which approximate market value.
- --------------------------------------------------------------------------------------------------------------------------- United Other Corporate States Europe (a) International and Other Eliminations---------------- Care Products Insurance Other (a) Expense Consolidated - -------------------------------------------------------------------------------------------------------------- 1999 - -------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- 1998: Net revenues: To unaffiliated customersrevenues $ 1,7581,090 $ 178602 $ 65355 $ - $ - $ 2,001 Transfers to other geographic areas 36 - - - (36) - - ---------------------------------------------------------------------------------------------------------------------------- Total net revenues2,047 Income before income taxes, unusual items and capital charges $ 1,79483 $ 178142 $ 65 $ - $ (36) $ 2,001 - ---------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) $ 322 $ (79) $ 8 $ (23) $ - $ 228 - ---------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 3,779 $ 211 $ 41 $ 392 $ (143) $ 4,280 - ---------------------------------------------------------------------------------------------------------------------------- 1997: Net revenues: To unaffiliated customers $ 1,560 $ 157 $ 59 $ - $ - $ 1,776 Transfers to other geographic areas 37 - - - (37) - - ---------------------------------------------------------------------------------------------------------------------------- Total net revenues $ 1,597 $ 157 $ 5945 $ - $ (37) $ 1,776233 Capital charges (47) (17) - ---------------------------------------------------------------------------------------------------------------------------- Operating profit (loss)- 64 - ------------------------------------------------------------------------ Segment income $ 30536 $ (14)125 $ 45 $ - $ 27 $ 233 Unusual items (b) $ (25) $ (9) $ (3) $ - $ (1) 38 ------- Income before income taxes $ 195 Assets $ 794 $ 245 $ 3,028 $ - $ 366 $ 4,433 Capital expenditures $ 62 $ 9 $ 6 $ - $ 2 $ 79 Depreciation and amortization (c) $ 73 $ 18 $ 5 $ - $ 2 $ 98 - -------------------------------------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------------------------------------- Net revenues $ 1,124 $ 541 $ 309 $ 27 $ - $ 2,001 Income before income taxes, unusual items and capital charges $ 156 $ 124 $ 52 $ 3 $ (30)(47) $ 288 Capital charges (43) (17) - (1) 61 - ------------------------------------------------------------------------ Segment income $ 264113 $ 107 $ 52 $ 2 $ 14 $ 288 Unusual items (d) (e) $ (70) $ -- $ -- $ 75 $ -- 5 ------- Income before income taxes $ 293 Assets $ 801 $ 254 $ 2,833 $ -- $ 392 $ 4,280 Capital expenditures $ 53 $ 20 $ 9 $ -- $ 6 $ 88 Depreciation and amortization (f) $ 124 $ 21 $ 1 $ 1 $ 2 $ 149 - ---------------------------------------------------------------------------------------------------------------------------- Identifiable assets-------------------------------------------------------------------------------------------------------------- 1997 - -------------------------------------------------------------------------------------------------------------- Net revenues $ 3,261920 $ 298545 $ 30265 $ 46 $ -- $ 1,776 Income before income taxes and capital charges $ 143 $ 131 $ 36 $ 4 $ (55) $ 259 Capital charges (39) (18) -- (1) 58 -- ------------------------------------------------------------------------ Segment income $ 104 $ 113 $ 36 $ 3 $ 3 $ 259 Assets $ 658 $ 249 $ 2,501 $ 21 $ 399 $ (160)3,828 Capital expenditures $ 3,828 - ---------------------------------------------------------------------------------------------------------------------------- 1996: Net revenues: To unaffiliated customers66 $ 1,44714 $ 188 $ 49 $ - $ - $ 1,684 Transfers to other geographic areas 37 - - - (37) - - ---------------------------------------------------------------------------------------------------------------------------- Total net revenues $ 1,484 $ 188 $ 49 $ - $ (37) $ 1,684 - ---------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) $ 284 $ (31)1 $ 2 $ (19)2 $ 85 Depreciation and amortization $ 74 $ 22 $ 1 $ 2 $ 3 $ 102 - $ 236 - ---------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 2,869 $ 355 $ 24 $ 328 $ (180) $ 3,396 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(a) REFLECTS AAll Other consists of Medeco Security Locks, Inc., which was sold in July 1998. (b) Health Care reflects a $25 million charge for work force reduction activities, facility closure costs, certain asset impairment charges and other items. Funeral Services Products reflects a $9 million charge for the closure of a manufacturing facility. Funeral Services Insurance and Corporate and Other Expense reflect certain asset impairment charges. (c) Funeral Services Insurance reflects a $3 million write-off of goodwill related to an asset impairment. (d) Health Care reflects a $70 MILLION CHARGE INmillion charge for the write-off of goodwill, other asset impairment charges and other closing costs related to the discontinuance of manufacturing operations at facilities in Germany and Austria. (e) Other reflects a gain of $75 million on the sale of Medeco Security Locks, Inc. (f) Health Care reflects a $43 million write-off of goodwill related to the discontinuance of manufacturing operations at Hill-Rom facilities in Germany. 41 44 GEOGRAPHIC INFORMATION Most of the Company's operations outside the United States are in Europe and consist of the manufacturing, selling and renting of Health Care products. Geographic data for net revenues and long-lived assets (which consist mainly of property, plant, equipment and intangibles) were as follows: - -------------------------------------------------------------------------------- 1999 1998 FOR THE WRITE-OFF OF GOODWILL, OTHER ASSET IMPAIRMENT CHARGES AND OTHER CLOSING COSTS RELATED TO THE DISCONTINUANCE OF MANUFACTURING OPERATIONS AT HILL-ROM FACILITIES IN GERMANY AND AUSTRIA. 10.1997 - -------------------------------------------------------------------------------- Net revenues to unaffiliated customers: (a) United States $1,816 $1,758 $1,560 Foreign 231 243 216 - -------------------------------------------------------------------------------- Total revenues $2,047 $2,001 $1,776 - -------------------------------------------------------------------------------- Long-lived assets: United States $ 391 $ 417 $ 314 Foreign 68 83 141 - -------------------------------------------------------------------------------- Total long-lived assets $ 459 $ 500 $ 455 - -------------------------------------------------------------------------------- (a) Net revenues are attributed to geographic areas based on the location of the operation making the sale. 11. INCOME TAXES Income taxes are computed in accordance with SFAS No. 109. The significant components of income (loss) before income taxes and the consolidated income tax provision are as follows:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes: Domestic $ 370 $ 272 $ 267 Foreign (77) (13) (34) - ------------------------------------------------------------------------------------------------------------------- Total $ 293 $ 259 $ 233 - -------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------- Income (loss) before income taxes: Domestic $ 201 $ 370 $ 272 Foreign (6) (77) (13) - ----------------------------------------------------------------------------- Total $ 195 $ 293 $ 259 - ----------------------------------------------------------------------------- Provision for income taxes: Current provision: Federal $ 79 $ 90 $ 99 State 11 19 13 Foreign 3 4 3 - ----------------------------------------------------------------------------- Total current provision 93 113 115 - ----------------------------------------------------------------------------- Deferred provision: Federal (20) (4) (11) State (5) -- -- Foreign 3 -- (2) - ----------------------------------------------------------------------------- Total deferred provision (22) (4) (13) - ----------------------------------------------------------------------------- Provision for income taxes: Current items: Federal $ 90 $ 99 $ 85 State 19 13 13 Foreign 4 3 1 - ------------------------------------------------------------------------------------------------------------------- Total current items 113 115 99 - ------------------------------------------------------------------------------------------------------------------- Deferred items: Federal (4) (11) (6) State - - - Foreign - (2) - - ------------------------------------------------------------------------------------------------------------------- Total deferred items (4) (13) (6) - ------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 109 $ 102 $ 93 - -------------------------------------------------------------------------------------------------------------------
-39- The differences between the amounts recorded for income taxes $ 71 $ 109 $ 102 - ----------------------------------------------------------------------------- Differences between the provision for income taxes reported for financial statementreporting purposes and that computed based upon the amounts computed by applyingapplication of the statutory U.S. Federal statutory tax rate to reported income before income taxes are explainedis as follows:
- ----------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- % OF % of % of PRETAX Pretax Pretax AMOUNT INCOME Amount Income Amount Income - -----------------------------------------------------------------------------------------------------------------------42 45 - -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- % OF % of % of PRETAX Pretax Pretax AMOUNT INCOME Amount Income Amount Income - -------------------------------------------------------------------------------- Federal income tax (a) $103 35.0 $ 90 35.0 $81 35.0 State income tax (b) 12 4.1 9 3.5 9 3.8 Foreign income tax (c) 30 10.3 6 2.3 12 5.1 Adjustment of estimated income tax accruals 19 6.5 - - - - Utilization of foreign net operating losses (47) (16.1) - - - - Sale of Block Medical - - - - (6) (2.6) Other, net (8) (2.8) (3) (1.4) (3) (1.4) - ----------------------------------------------------------------------------------------------------------------------- Provision for income taxes $109 37.0 $102 39.4 $93 39.9 - -----------------------------------------------------------------------------------------------------------------------
(a) AT STATUTORY RATE.$ 68 35.0 $ 103 35.0 $ 90 35.0 State income tax (b) NET OF FEDERAL BENEFIT.4 2.1 12 4.1 9 3.5 Foreign income tax (c) FEDERAL TAX RATE DIFFERENTIAL.8 4.2 30 10.3 6 2.3 Adjustment of estimated income tax accruals 9 4.6 19 6.5 -- -- Utilization of foreign net operating losses (9) (4.6) (47) (16.1) -- -- Other, net (9) (4.6) (8) (2.8) (3) (1.4) - -------------------------------------------------------------------------------- Provision for income taxes $ 71 36.7 $ 109 37.0 $ 102 39.4 - -------------------------------------------------------------------------------- (a) At statutory rate. (b) Net of Federal benefit. (c) Federal tax rate differential. With the 1998 announcement of the discontinuance of manufacturing operations in Germany and Austria, the Company recognized tax benefits for the majority of operating losses available in such countries, approximating $47 million. During 1999, with the substantial completion of those restructuring activities and the resolution of other related matters, an additional $9 million of tax benefit was recognized. The tax effect of temporary differences that give rise to significant portions of the deferred tax balance sheet accounts wereare as follows:
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 27, 1999 November 28, 1998 November 29, 1997 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- NON-INSURANCE INSURANCE Non-insurance Insurance - -------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Current: Inventories $ 36 $ - $ 23 $ - Employee benefit accruals 3 - 3 - Self insurance accruals 109 - 10 - Litigation accruals 2 - 32 - Other, net 48 5 20 5 7 4 Long-term: Employee benefit accruals 24 1 23 1 21Amortization - 1 - - Unrealized loss on investments - 17 - - Deferred policy revenues - 236251 - 212236 Foreign loss carryforwards 9and other tax attributes 11 - 67 - Foreign acquisition reserves - - 29 - Other, net 11 - 9 - 7 - - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total assets 114 275 79 242 122 217 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Current: Inventories 2 - 2 - Other, net 23 - 2 - Long-term: Depreciation 3433 3 34 -3 Amortization 2 - -2 - Unrealized gain on investments - 28 - 18- 28 Benefit reserves - 1214 - 1112 Deferred acquisition costs - 175 - 160 - 140 Foreign asset step up - -Other, net 1 4 - Other, net - 5 1 5 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total liabilities 41 196 40 208 43 174 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Less valuation allowance for foreign loss carryforwardsand other tax attributes (11) - (9) - (65) - - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net asset $ 62 $ 79 $ 30 $ 34 $ 14 $ 43 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-40-43 Foreign46 As of November 27, 1999, the Company has available foreign loss carryforwards approximated $161 million at November 29, 1997, the majority of which related to operations in Germany, Austria and France. With the announced discontinuance of manufacturing operations in Germany and Austria during 1998, the Company was able to recognize aother tax benefitattributes of approximately $47$11 million on a tax-effected basis. The loss carryforwards are subject to varying carryforward periods. Realization of deferred tax assets for substantially allthe operating loss carryforwards and other tax attributes is dependent upon the generation of sufficient taxable income within the carryback and carryforward periods available in each of the German and Austrian operating losses. In regards to the Company's remainingrespective foreign operations, unutilized loss carryforwards of approximately $25 million exist as of November 28, 1998.tax jurisdictions. There is not currently sufficient positive evidence as required by SFAS No. 109 to support financial statement recognition of the tax benefit associated with these operating losses.benefits available in the Company's foreign operations. Accordingly, a full valuation allowance of $9$11 million has been recorded.recorded relative to these available tax benefits. It is reasonably possible that sufficient positive evidence may be generated in the near term at one or more of the Company's operating results could improve in the future thereby allowingforeign operations to allow recognition of certain of the available tax benefits associatedbenefits. In conjunction with a routine audit by the operating losses. Certain expensesInternal Revenue Service (IRS) of the Company's 1990-1995 federal income tax returns, the IRS has disallowed significant portions of the deductions associated with the Company's corporate-owned life insurance program have been questioned by the Internal Revenue Service (IRS). At the end of 1997, the Company and the IRS had pending with the IRS' national office a request for technical advice with respect to the tax benefits of this(COLI) program. During 1998, an unfavorable response to the request for technical advice was received. The Company continues to believe all tax benefits relative to this program were taken in full compliance with existing and prior year tax law. However, itlaws. During 1999 the Company made a deposit against the IRS' assessed liability for COLI to preclude the continuing assessment of interest charges. The Company is likely thatcurrently undergoing a routine audit cycle by the IRS will disallow some portion ofrelative to the 1996 to 1998 tax benefits associated with this program.years. The Company does not believe that the ultimate outcome of tax positions taken by the Company includingduring this period, or those related to the corporate-owned life insuranceCOLI program, will have a materialmaterially adverse effect on its financial condition, results of operations or cash flows. 11.12. SUPPLEMENTARY INFORMATION The following amounts were (charged) or credited to income in the year indicated:
- ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Rental expense $ (21) $ (21) $ (16) $ (16) Research and development costs $ (42) $ (49) $ (42) Investment income, net (a) $ 19 $ 18 $ 17 - ------------------------------------------------------------------------------
(a) EXCLUDES INSURANCE OPERATIONS.$ (47) $ (46) $ (49) Investment income, net (b) $ 16 $ 19 $ 18 - -------------------------------------------------------------------------------- (a) Approximately $8 million of research and development costs in 1997 relate to a discontinued business. (b) Excludes insurance operations. The table below indicates the minimum annual rental commitments (excluding renewable periods) aggregating $37$51 million, used for warehousesmanufacturing facilities, warehouse distribution centers, service centers and office space,sales offices, under noncancellablenoncancelable operating leases.
- ------------------------------------------------------------------------------ 1999 $ 14 2000 $ 10 2001 $ 6 2002 $ 4 2003 $ 2 2004 and beyond $ 1 - ------------------------------------------------------------------------------
-41- - -------------------------------------------------------------------------------- 2000 $ 17 2001 $ 12 2002 $ 8 2003 $ 6 2004 $ 3 2005 and beyond $ 5 - -------------------------------------------------------------------------------- The table below provides supplemental information to the statementsStatements of consolidated cashConsolidated Cash flows.
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996- --------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Cash paid for: Income taxes $ 106 $ 113 $ 109 Interest $ 92 Interest27 $ 24 $ 23 $ 16 Non-cash investing and financing activities: Liabilities assumed from/incurred for the acquisition of businesses $ 471 $ -39 $ 1- Treasury stock issued under stock compensation plans $ -2 $ -1 $ 1- Accrued treasury stock acquisition $ - $ - $ 13 $ - - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
12.44 47 13. FINANCIAL SERVICES Forethought Financial Services, through its subsidiaries, Forethought Life Insurance Company, Forethought National TrustBank, Forethought Federal Savings Bank, Forethought Life Assurance Company, Arkansas National Life Insurance Company and The Forethought Group, Inc., serves funeral planning professionals with life insurance policies, trust products and marketing support for Forethought(R) funeral planning. Forethought entered the preneed trust market in 1997. This business did not materially affect the financial results of Forethought or Hillenbrand Industries in 1998.1999 or in prior years. In November 1999, Forethought National TrustBank was merged into Forethought Federal Savings Bank, as required with the granting of the savings bank charter. The life insurance policies sold by Forethought Life Insurance Company are limited to certain long-duration whole-life policies, and, as such, are accounted for under SFAS No. 97. The benefits under these policies increase based on management's discretion and external inflationary indices and management's discretion.indices. Premiums received are allocated to benefit reserves and unearned revenue. Unearned revenues are recognized over the actuarially determined life of the contract. Policy acquisition costs, consisting of commissions, policy issue expense and premium taxes, are deferred and amortized consistently with unearned revenues. Liabilities equal to policyholder account balances and amounts assessed against these balances for future insurance charges are established on the insurance contracts issued by Forethought Life Insurance Company. Investments are predominantly U.S. treasuriesTreasuries and agencies and high-grade corporate bonds with fixed maturities and are carried on the balance sheet at fair value. The Company's objective is to purchase investment securities with maturities that match the expected cash outflows of policy benefit payments. The investment portfolio is constantly monitored to insure assets match the expected payment of the liabilities. Securities are also sold in other carefully constrained circumstances such as concern about the credit quality of the issuer. Otherwise, it is management's intent that these investments be held to maturity. Cash (unrestricted as to use) is held for future investment. In accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CompanySecurities", Forethought has classified theits investments in debt and equity securities of its insurance subsidiary as "available for sale" and reported them at fair value on the balance sheet. Unrealized gains and losses are charged or credited to a separate component ofaccumulated other comprehensive (loss)/income in shareholders' equity and the insurance deferred tax assetassets are adjusted for the income tax effect.effect of such unrealized gains and losses. The fair value of each security is based on the market value provided by brokers/dealers.dealers or estimates made by management in situations where no quoted price is available. The amortized cost and fair value of investment securities available for sale at November 27, 1999 were as follows:
- --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 846 $ 5 $ 41 $ 810 Corporate securities 1,329 2 24 1,307 Mutual funds 24 9 - 33 Preferred stocks 20 5 1 24 - --------------------------------------------------------------------------------------------------------------------------- Total (a) $ 2,219 $ 21 $ 66 $ 2,174 - ---------------------------------------------------------------------------------------------------------------------------
45 48 The amortized cost and fair value of investment securities available for sale at November 28, 1998 were as follows:
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 639 $ 17 $ 5 $ 651 Corporate securities 1,274 69 13 1,330 Mutual funds 37 13 - 50 Preferred stocks 3 - - 3 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total (a) $ 1,953 $ 99 $ 18 $ 2,034 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-42- (a) Does not include the amortized cost of other investments carried on the balance sheet in the amount of $137 million at November 27, 1999, and $170 million at November 28, 1998, the carrying value of which approximates fair value. The amortized cost and fair value of investment securities available for sale at November 29, 1997 were as follows:
- ------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 645 $ 11 $ 6 $ 650 Corporate securities 1,129 40 5 1,164 Mutual funds 40 13 - 53 Preferred stocks 4 - - 4 - ------------------------------------------------------------------------------------------------------------------- Total (a) $ 1,818 $ 64 $ 11 $ 1,871 - -------------------------------------------------------------------------------------------------------------------
(a) DOES NOT INCLUDE THE AMORTIZED COST OF OTHER INVESTMENTS CARRIED ON THE BALANCE SHEET IN THE AMOUNT OF $170 MILLION AT NOVEMBER 28, 1998, AND $63 MILLION AT NOVEMBER 29, 1997, THE CARRYING VALUE OF WHICH APPROXIMATES FAIR VALUE. The amortized cost and fair value of investment securities available for sale at November 28, 1998,27, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------------------------------------------- Amortized Fair Cost Value - ------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 38 $ 38 Due after 1 year through 5 years 234 241 Due after 5 years through 10 years 303 310 Due after 10 years 726 770 Mortgage-backed securities 612 622 Mutual funds 37 50 Preferred stocks 3 3 - ------------------------------------------------------------------------------------------------------------------- Total $ 1,953 $ 2,034 - -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Amortized Fair Cost Value - -------------------------------------------------------------------------------- Due in one year or less $ 49 $ 49 Due after 1 year through 5 years 230 226 Due after 5 years through 10 years 382 374 Due after 10 years 928 904 Mortgage-backed securities 586 564 Mutual funds 24 33 Preferred stocks 20 24 - -------------------------------------------------------------------------------- Total $ 2,219 $ 2,174 - -------------------------------------------------------------------------------- The cost used to compute realized gains and losses is determined by specific identification. Proceeds and realized gains and losses from the sale of investment securities available for sale were as follows:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Proceeds $ 345 $ 358 $ 126 Realized gross gains $ 24 $ 12 $ 1 Realized gross losses $ 4 $ 4 $ 1 - -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Proceeds $ 466 $ 345 $ 358 Realized gross gains $ 26 $ 24 $ 12 Realized gross losses $ 3 $ 4 $ 4 - -------------------------------------------------------------------------------- Summarized financial information of insurance operations included in the statementStatement of consolidated incomeConsolidated Income is as follows:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Investment income $ 138 $ 120 $ 104 Earned premium revenue 151 137 115 Net gain on sale of investments 20 8 - - ------------------------------------------------------------------------------------------------------------------- Total net revenues 309 265 219 Benefits paid 71 63 56 Credited interest 123 111 97 Deferred acquisition costs amortized 39 35 29 Other operating expenses 23 21 13 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 53 $ 35 $ 24 - -------------------------------------------------------------------------------------------------------------------
-43-- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Investment income $ 156 $ 138 $ 120 Earned premium revenue 176 151 137 Net gain on sale of investments 23 20 8 - -------------------------------------------------------------------------------- Total net revenues 355 309 265 Benefits paid 81 71 63 Credited interest 145 123 111 Deferred acquisition costs amortized 47 39 35 Unusual charges 3 - - Other operating expenses 37 23 21 - -------------------------------------------------------------------------------- Income before income taxes $ 42 $ 53 $ 35 - -------------------------------------------------------------------------------- 46 49 Statutory data at December 31 includes:
- ------------------------------------------------------------------------------------------------------------------- 1998 (unaudited) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Net income $ 35 $ 32 $ 29 Capital and surplus $ 153 $ 144 $ 129 - -------------------------------------------------------------------------------------------------------------------
13.- -------------------------------------------------------------------------------- 1999 (unaudited) 1998 1997 - -------------------------------------------------------------------------------- Net income $ 38 $ 35 $ 32 Capital and surplus $ 234 $ 153 $ 144 - -------------------------------------------------------------------------------- 14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------------ TOTAL 1998 QUARTER ENDED 2/28/98 5/30/98 8/29/98 11/28/98 YEAR - ------------------------------------------------------------------------------------------------------------------ Net revenues $479 $508 $483 $531 $2,001 Gross profit 197 212 193 232 834- -------------------------------------------------------------------------------- TOTAL 1999 Quarter Ended 2/27/99 5/29/99 8/28/99 11/27/99 YEAR - -------------------------------------------------------------------------------- Net revenues $ 516 $ 524 $ 481 $ 526 $2,047 Gross profit 204 204 175 193 776 Net income 45 35 23 21 124 Basic and diluted net income per common share .67 .53 .35 .32 1.87 - -------------------------------------------------------------------------------- Total 1998 Quarter Ended 2/28/98 5/30/98 8/29/98 11/28/98 Year - -------------------------------------------------------------------------------- Net revenues $ 479 $ 508 $ 483 $ 531 $2,001 Gross profit 193 208 189 228 818 Net income 43 45 42 54 184 Basic and diluted net income per common share .64 .66 .63 .80 2.73
- ------------------------------------------------------------------------------------------------------------------ Total 1997 Quarter Ended 3/01/97 5/31/97 8/30/97 11/29/97 Year - ------------------------------------------------------------------------------------------------------------------ Net revenues $446 $426 $429 $475 $1,776 Gross profit 184 177 179 205 745 Net income 39 37 35 46 157 Basic and diluted net income per common share .56 .54 .51 .67 2.28
14.15. CONTINGENCIES On August 16, 1995, Kinetic Concepts, Inc., and Medical Retro Design, Inc. (collectively, the "plaintiffs"), filed suit against Hillenbrand Industries, Inc., and its subsidiary Hill-Rom Company, Inc., in the United States District Court for the Western District of Texas, San Antonio Division. The plaintiffs allege violation of various antitrust laws, including illegal bundling of products, predatory pricing, refusal to deal and attempting to monopolize the hospital bed industry. They seek monetary damages totaling in excess of $269 million, trebling of any damages that may be allowed by the court, and injunctions to prevent further alleged unlawful activities. The Company believes that the claims are without merit and is aggressively defending itself against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiffs. On November 20, 1996, the Company filed a Counterclaim to the above action against Kinetic Concepts, Inc. (KCI) in the U.S. District Court in San Antonio, Texas. The Counterclaim alleges, among other things, that KCI has attempted to monopolize the therapeutic bed market, interfere with the Company's and Hill-Rom's business relationships by conducting a campaign of anticompetitive conduct, and abused the legal process for its own advantage. -44- The Company has voluntarily entered into remediation agreements with environmental authorities, and has been issued Notices of Violation alleging violations of certain permit conditions. Accordingly, the Company is in the process of implementing plans of abatement in compliance with agreements and regulations. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. The cost of all plans of abatement and waste-site cleanups in which the Company is currently involved is not expected to exceed $5 million. The Company has provided adequate reserves in its financial statements for these matters. These reserves have been determined without consideration of possible loss recoveries from third parties. Changes in environmental law might affect the Company's future operations, capital expenditures and earnings. The cost of complying with these provisions, if any, is not known. 47 50 The Company is subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. Management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. 15.16. SUBSEQUENT EVENTSEVENT On December 31, 1998, Forethought Life Insurance Company, a wholly-owned subsidiaryJanuary 18, 2000, the Company's Board of Forethought Financial Services, Inc., acquiredDirectors authorized the stockpurchase on the open market and in privately negotiated transactions, of Arkansas National Life Insurance Company for a cash paymentup to an additional 5,000,000 shares of $31 million.its common stock. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with the independent accountants. -45-48 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to executive officers is included in this report as the last section of Item 1 under the caption "Executive Officers of the Registrant." Information relating to the directors will appear in the section entitled "Election of Directors" in the definitive Proxy Statement to be dated March 5, 1999,3, 2000, and to be filed with the Commission relating to the Company's 19992000 Annual Meeting of Shareholders, which section is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" in the definitive Proxy Statement to be dated March 5, 1999,3, 2000, and to be filed with the Commission relating to the Company's 19992000 Annual Meeting of Shareholders, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Election of Directors" in the definitive Proxy Statement to be dated March 5, 1999,3, 2000, and to be filed with the Commission relating to the Company's 19992000 Annual Meeting of Shareholders, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections entitled "About the Board of Directors" and "Compensation Committee Interlocks and Insider Participation" in the definitive Proxy Statement to be dated March 5, 1999,3, 2000, and to be filed with the Commission relating to the Company's 19992000 Annual Meeting of Shareholders, are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents have been filed as a part of this report or, where noted, incorporated by reference: (1) Financial Statements The financial statements of the Company and its consolidated subsidiaries listed on the indexIndex to Consolidated Financial Statements on page 21.22. (2) Financial Statement Schedules The financial statement schedule filed in response to Item 8 and Item 14(d) of Form 10-K is listed on the indexIndex to Consolidated Financial Statements on page 21. -46-22. 49 52 (3) Exhibits The following exhibits have been filed as part of this report in response to Item 14(c) of Form 10-K: 3.1 Form of Restated Certificate of Incorporation of the Registrant (Incorporated herein by reference to Exhibit 3 filed with Form 10-K for the year ended November 28, 1992) 3.2 Form of Amended Bylaws of the Registrant (Incorporated herein by reference to Exhibit 3 filed with Form 10-K for the year ended November 30, 1996) The following management contracts or compensatory plans or arrangements are required to be filed as exhibits to this form pursuant to Item 14 (c) of this report: 10.1 Hillenbrand Industries, Inc. Senior Executive Compensation Program (Incorporated herein by reference to Exhibit 10 filed with Form 10-K for the year ended December 3, 1994)1994 and as amended and filed with Form 10-Q for the quarter ended February 27, 1999) 10.2 Hillenbrand Industries, Inc. 1996 Stock Option Plan (Incorporated herein by reference to the definitive Proxy Statement dated February 28, 1997, and filed with the Commission relative to the Company's 1997 Annual Meeting of Shareholders)Shareholders and as amended and filed with Form 10-Q for the quarter ended February 27, 1999) 10.3 Hillenbrand Industries, Inc. Split Dollar Life Insurance Plan (Incorporated herein by reference10.4 Form of Stock Award granted to the definitive Proxy Statement dated March 5, 1999, and to be filed with the Commission relative to the Company's 1999 Annual Meeting of Shareholders)certain executive officers. Other Exhibits 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants (b) There were no reports on Form 8-K filed during the quarter ended November 28, 1998. -47-27, 1999. 50 53 SCHEDULE II HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED NOVEMBER 27, 1999, NOVEMBER 28, 1998 AND NOVEMBER 29, 1997 AND NOVEMBER 30, 1996 (DOLLARS IN MILLIONS)
ADDITIONS ------------------------------ BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND OTHER NET OF AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (a) RECOVERIES (b) OF PERIOD - ---------------------------------------------------------------------- --------- -------- ------------ ------------------------ --------- Reserves deducted from assets to which they apply: Allowance for possible losses and discounts - accounts receivable: Year Ended: November 27, 1999 $ 29 $ 10 $ 27 $ 12 $ 54 ========== ========== ========= ========== ========== November 28, 1998 $ 25 $ 1 $ 13 $ 1210 $ 27 ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- -----------29 ========== ========== ========= ========== ========== November 29, 1997 $ 19 $ 1 $ 8 $ 3 $ 25 ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- November 30, 1996 $ 20 $ 1 $ - $ 2 $ 19 ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- -----------========== ========== ========= ========== ==========
(a) REDUCTION OF GROSS REVENUES FOR CASH DISCOUNTS AND OTHER ADJUSTMENTS IN DETERMINING NET REVENUE. ALSO INCLUDES THE EFFECT OF ACQUISITION OF BUSINESSES. (b) INCLUDES THE SALE OF BLOCK MEDICAL OPERATION IN 1996.Reduction of gross revenues for cash discounts and other adjustments in determining net revenue. Also includes the effect of acquisition of businesses. 51 54
ADDITIONS ------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND OTHER NET OF AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECOVERIES OF PERIOD - ---------------------------------- --------- -------- -------------------------------------------- ------------ ------------ ----------- ------------ ---------- --------- Allowances for unusual charges: Year Ended: November 27, 1999 Inventory $ 3 $ - $ - $ 3 $ - Severance and Employee Benefit Costs $ 10 $ 11 $ - $ 12 $ 9 Other Plant Closing Costs $ 7 $ 4 $ - $ 7 $ 4 Field Corrective Action $ - $ 8 $ - $ - $ 8 ---------- ---------- --------- ---------- ---------- $ 20 $ 23 $ - $ 22 $ 21 ========== ========== ========= ========== ========== November 28, 1998 Inventory $ - $ 3 $ - $ - $ 3 Severance and Employee Benefit Costs $ - $ 11 $ - $ 1 $ 10 Other Plant Closing Costs $ - $ 9 $ - $ 2 $ 7 ----------- ----------- ---------- ----------- --------------------- --------- ---------- --------- $ - $ 23 $ - $ 3 $ 20 ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- -----------========== ========== ========= ========== =========
-48-52 55 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HILLENBRAND INDUSTRIES, INC. By: /S//s/ W August Hillenbrand --------------------------------------------------------------------------- W August Hillenbrand Chief Executive Officer Dated: January 18, 1999 President and Chief Executive Officer2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /S/ Daniel A. Hillenbrand /S/ Leonard Granoff - ----------------------------------------------- --------------------------- Daniel A. Hillenbrand Leonard Granoff Chairman of the Board Director /S/ Donald G. Barger /S/ John C. Hancock - ----------------------------------------------- --------------------------- Donald G. Barger John C. Hancock Vice President and Chief Financial Officer Director /S/ James D. Van De Velde /S/ W August Hillenbrand - ------------------------------------------------ ---------------------------- James D. Van De Velde W August Hillenbrand Vice President and Controller Director /S/ Lawrence R. Burtschy /S/ George M. Hillenbrand II - ------------------------------------------------ ---------------------------- Lawrence R. Burtschy George M. Hillenbrand II Director Director /S/ Peter F. Coffaro /S/ John A. Hillenbrand II - ------------------------------------------------ ---------------------------- Peter F. Coffaro John A. Hillenbrand II Director Director /S/ Edward S. Davis /S/ Ray J. Hillenbrand - ------------------------------------------------ ----------------------------
/s/ Daniel A. Hillenbrand /s/ Leonard Granoff - ---------------------------------------------------------- ---------------------------------------------------------- Daniel A. Hillenbrand Leonard Granoff Chairman of the Board Director /s/ Donald G. Barger, Jr. /s/ John C. Hancock - ---------------------------------------------------------- ---------------------------------------------------------- Donald G. Barger, Jr. John C. Hancock Vice President and Chief Financial Officer Director /s/ James D. Van De Velde /s/ W August Hillenbrand - ---------------------------------------------------------- ---------------------------------------------------------- James D. Van De Velde W August Hillenbrand Vice President and Controller Director /s/ Lawrence R. Burtschy /s/ George M. Hillenbrand II - ---------------------------------------------------------- ---------------------------------------------------------- Lawrence R. Burtschy George M. Hillenbrand II Director Director /s/ Peter F. Coffaro /s/ John A. Hillenbrand II - ---------------------------------------------------------- ---------------------------------------------------------- Peter F. Coffaro John A. Hillenbrand II Director Director /s/ Edward S. Davis /s/ Ray J. Hillenbrand - ---------------------------------------------------------- ---------------------------------------------------------- Edward S. Davis Ray J. Hillenbrand Director Director /s/ Frederick W. Rockwood ---------------------------------------------------------- Frederick W. Rockwood Director
Dated: January 18, 1999 -49-2000 53 56 HILLENBRAND INDUSTRIES, INC. INDEX TO EXHIBITS 3.1 Form of Restated Certificate of Incorporation of the Registrant (Incorporated herein by reference to Exhibit 3 filed with Form 10-K for the year ended November 28, 1992) 3.2 Form of Amended Bylaws of the Registrant (Incorporated herein by reference to Exhibit 3 filed with Form 10-K for the year ended November 30, 1996) 10.1 Hillenbrand Industries, Inc. Senior Executive Compensation Program (Incorporated herein by reference to Exhibit 10 filed with Form 10-K for the year ended December 3, 1994)1994 and as amended and filed with Form 10-Q for the quarter ended February 27, 1999.) 10.2 Hillenbrand Industries, Inc. 1996 Stock Option Plan (Incorporated herein by reference to the definitive Proxy Statement dated February 28, 1997, and filed with the Commission relative to the Company's 1997 Annual Meeting of Shareholders)Shareholders and as amended and filed with Form 10-Q for the quarter ended February 27, 1999.) 10.3 Hillenbrand Industries, Inc. Split Dollar Life Insurance Plan (Incorporated herein by reference10.4 Form of Stock Award granted to the definitive Proxy Statement dated March 5, 1999, and to be filed with the Commission relative to the Company's 1999 Annual Meeting of Shareholders)certain executive officers. 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule -50- 54