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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 27, 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)
(812) 934-7000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Common Stock, without par value - 66,368,190 as of April 1, 1999.
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1
HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Income for the Three Months 3
Ended 2/27/99 and 2/28/98
Consolidated Balance Sheets at 4
2/27/99 and 11/28/98
Consolidated Cash Flows for the Three Months 5
Ended 2/27/99 and 2/28/98
Notes to Consolidated Financial Statements 6-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-15
PART II - OTHER INFORMATION
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Income
Three Months Ended
--------------------
02/27/99 02/28/98
-------- --------
(In Millions Except Per Share Data)
Net revenues:
Health Care sales ................................ $ 177 $ 146
Health Care rentals .............................. 93 108
Funeral Services sales ........................... 161 148
Insurance revenues ............................... 85 77
-------- --------
Total revenues ................................... 516 479
Cost of revenues:
Health Care cost of goods sold ................... 102 86
Health Care rental expenses ...................... 61 62
Funeral Services cost of goods sold .............. 83 77
Insurance cost of revenues ....................... 62 57
-------- --------
Total cost of revenues ........................... 308 282
Other operating expenses .................................. 133 125
-------- --------
Operating profit .......................................... 75 72
Interest expense .......................................... (7) (7)
Investment income ......................................... 4 5
Other income (expense), net ............................... (1) (1)
-------- --------
Income before income taxes ................................ 71 69
Income taxes .............................................. 26 26
-------- --------
Net income ................................................ $ 45 $ 43
-------- --------
-------- --------
Basic and diluted earnings
per common share (Note 3) ............................... $ .67 $ .64
-------- --------
-------- --------
Dividends per common share ................................ $ .195 $ .180
-------- --------
-------- --------
Average shares outstanding (thousands) .................... 66,878 67,535
-------- --------
-------- --------
See Notes to Consolidated Financial Statements
3
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS 02/27/99 11/28/98
-------- --------
(In Millions)
Current assets:
Cash and cash equivalents ...................................................... $ 296 $ 297
Trade receivables .............................................................. 405 392
Inventories .................................................................... 117 105
Other .......................................................................... 68 64
------- -------
Total current assets .......................................................... 886 858
Equipment leased to others, net .................................................. 80 81
Property, net .................................................................... 215 221
Other assets:
Intangible assets, net ......................................................... 189 198
Other .......................................................................... 95 89
------- -------
Total other assets ............................................................ 284 287
Insurance assets:
Investments .................................................................... 2,207 2,204
Deferred policy acquisition costs .............................................. 545 536
Deferred income taxes .......................................................... 53 34
Other .......................................................................... 69 59
------- -------
Total insurance assets ........................................................ 2,874 2,833
------- -------
Total assets ..................................................................... $ 4,339 $ 4,280
------- -------
------- -------
LIABILITIES
Current liabilities:
Short-term debt ................................................................ $ 60 $ 60
Current portion of long-term debt .............................................. 1 1
Trade accounts payable ......................................................... 69 69
Other .......................................................................... 225 245
------- -------
Total current liabilities ..................................................... 355 375
Other liabilities:
Long-term debt ................................................................. 303 303
Other long-term liabilities .................................................... 90 86
Deferred income taxes .......................................................... 2 4
------- -------
Total other liabilities ....................................................... 395 393
Insurance liabilities:
Benefit reserves ............................................................... 1,940 1,856
Unearned revenue ............................................................... 683 674
Other .......................................................................... 34 30
------- -------
Total insurance liabilities ................................................... 2,657 2,560
------- -------
Total liabilities ................................................................ 3,407 3,328
------- -------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common stock ................................................................... 4 4
Additional paid-in capital ..................................................... 17 15
Retained earnings .............................................................. 1,252 1,221
Accumulated other comprehensive income (Note 4) ................................ 11 45
Treasury stock ................................................................. (352) (333)
------- -------
Total shareholders' equity .................................................... $ 932 $ 952
------- -------
Total liabilities and
shareholders' equity ............................................................ $ 4,339 $ 4,280
------- -------
------- -------
See Notes to Consolidated Financial Statements
4
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Cash Flows Three Months Ended
------------------
02/27/99 02/28/98
-------- --------
(In Millions)
Operating activities:
Net income .................................. $ 45 $ 43
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization ............. 22 25
Change in noncurrent deferred
income taxes ............................ (2) (6)
Change in net working capital,
excluding cash, current debt and
acquisitions ............................ (48) (58)
Change in insurance items:
Deferred policy acquisition costs ........ (9) (16)
Other insurance items, net ............... 14 21
Other, net ................................ 18 7
----- -----
Net cash provided by operating activities ..... 40 16
----- -----
Investing activities:
Capital expenditures, net ................... (21) (21)
Acquisitions of businesses, net of cash
acquired .................................. (31) (159)
Insurance investments:
Purchases ................................. (268) (154)
Proceeds on maturities .................... 113 32
Proceeds on sales ......................... 176 77
----- -----
Net cash used in investing activities.......... (31) (225)
----- -----
Financing activities:
Additions (reductions) to debt, net ......... -- 101
Payment of cash dividends ................... (13) (12)
Treasury stock acquisitions ................. (21) (42)
Insurance premiums received ................. 106 128
Insurance benefits paid ..................... (81) (78)
----- -----
Net cash (used) provided by financing
activities ................................... (9) 97
----- -----
Effect of exchange rate changes on cash ....... (1) (1)
----- -----
Total cash flows .............................. (1) (113)
Cash and cash equivalents:
At beginning of period ....................... 297 364
----- -----
At end of period ............................. $ 296 $ 251
----- -----
----- -----
See Notes to Consolidated Financial Statements
5
Hillenbrand Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions except per share data)
1. Basis of Presentation
The unaudited, condensed consolidated financial statements appearing in
this quarterly report on Form 10-Q should be read in conjunction with the
financial statements and notes thereto included in the Company's latest
annual report. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
statements herein have been prepared in accordance with the Company's
understanding of the instructions to Form 10-Q. In the opinion of
management, such financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations, and cash flows, for the interim
periods.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. Supplementary Balance Sheet Information
The following information pertains to non-insurance assets and consolidated
shareholders' equity:
02/27/99 11/28/98
-------- --------
Allowance for possible losses and
discounts on trade receivables ...... $ 27 $ 27
Accumulated depreciation of equipment
leased to others and property ....... $ 619 $ 618
Accumulated amortization of intangible
assets .............................. $ 149 $ 150
Capital Stock:
Preferred stock, without par value:
Authorized 1,000,000 shares;
Shares issued ............... None None
Common stock, without par value:
Authorized 199,000,000 shares;
Shares issued ............... 80,323,912 80,323,912
6
3. Earnings per Common Share
Basic earnings per common share were computed by dividing net income by the
average number of common shares outstanding including the effect of
contingently issuable shares awarded under the Company's Senior Executive
Compensation Program. Diluted earnings per common share were computed
consistent with the basic earnings per share calculation including the
effect of dilutive potential common shares. Potential common shares
arising from shares awarded under the Company's various stock-based
compensation plans, including the 1996 Stock Option Plan, did not have a
material dilutive effect on basic and diluted earnings per common share in
the first quarter of 1999 and all prior periods. Cumulative treasury stock
acquired of 15,602,593 shares, less cumulative shares reissued of
1,644,729, have been excluded in determining the average number of shares
outstanding during each period.
Earnings per share is calculated as follows:
Three Months Ended
02/27/99 02/28/98
-------- --------
Net income (in thousands) $ 44,742 $ 42,908
Average shares outstanding 66,877,713 67,535,131
Basic and diluted earnings per
common share $ .67 $ .64
4. Comprehensive Income
As of November 29, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". 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 SFAS No. 130.
The components of comprehensive income are as follows (in millions):
Three Months Ended
02/27/99 02/28/98
-------- --------
Net income $ 45 $ 43
Net change in unrealized gain (loss)
on available-for-sale securities (37) 7
Foreign currency translation adjustment 3 (5)
---- ----
Comprehensive income $ 11 $ 45
---- ----
---- ----
7
The composition of accumulated other comprehensive income at February 27,
1999 and November 28, 1998 is the cumulative adjustment for unrealized
gains or losses on available-for-sale securities of $15 and $52 million,
respectively, slightly offset by the foreign currency translation
adjustment of $4 and $7 million, respectively.
5. Contingencies
As discussed under Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended November 28, 1998, Hillenbrand Industries, Inc., and
its subsidiary Hill-Rom Company, Inc., are the subject of an antitrust suit
brought by Kinetic Concepts, Inc. (KCI) in the health care equipment
market. The plaintiff seeks 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. There was no
material change in the status of this litigation during the quarter ended
February 27, 1999.
On November 20, 1996, the Company filed a Counterclaim to the above action
against 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 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 was
no material change in the status of this litigation during the quarter
ended February 27, 1999.
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 is
not known.
8
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.
6. Acquisitions
On December 31, 1998, the Company's subsidiary, 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 $3 million which is being amortized on a straight-line
basis over 20 years. Unaudited fiscal 1998 and year-to-date 1999 pro
forma revenue, net income and earnings per share would not have been
materially different from reported amounts.
7. Restructuring Charges and Impairment of Assets
In August 1998, the Board of Directors of the Company approved a plan to
restructure Hill-Rom's direct and support operations in Germany and Austria
to permit the Company to more efficiently meet the needs of its customers
and improve profitability. Under the plan, the Company will reduce fixed
costs and align manufacturing, distribution, sales and administrative
functions with anticipated demand. The alignment will result in the
closure of manufacturing facilities in Germany and Austria and the
relocation of certain manufacturing and business processes to other
European locations.
The restructuring plan necessitated the provision of a $70 million asset
impairment and restructuring charge in 1998. The non-cash component of the
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. The plan also included additional charges for severance and
employee benefit costs of $10 million and other estimated plant closing
costs of $7 million.
9
As of February 27, 1999, manufacturing operations have been discontinued in
Germany. The Austrian manufacturing operations are expected to be
discontinued in the second quarter of 1999. Approximately $7 million in
severance and employee benefit costs and $1 million in other plant closing
costs were incurred in the first quarter of 1999. No adjustments were made
to reserves in the first quarter. The remaining reserve balances as of
February 27, 1999 are as follows:
(In millions)
Inventory $3
Severance and Employee
Benefit Costs $3
Other Plant Closing
Costs $6
The Company expects substantially all employee related costs associated
with the restructuring 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 nine months, but
could take longer.
8. Subsequent Events
On March 30, 1999, Batesville Casket Company, a wholly-owned subsidiary,
announced the planned closing of its Campbellsville, Kentucky casket
manufacturing plant. The closing, which should occur late in the second
quarter of 1999, is expected to result in a second quarter pre-tax charge
of approximately $8 to $11 million. Future Campbellsville production will
be transferred to existing manufacturing facilities located in Batesville,
Indiana and Manchester, Tennessee.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
Consolidated revenues of $516 million increased $37 million, or 8%, compared
to the first quarter of 1998. Health Care sales grew $31 million or 21%
primarily due to increased shipments of the TotalCare(R) bed combined with
increased unit shipments across nearly all business units and inclusion of
MEDAES Holdings, Inc., which was acquired late in the first quarter of 1998,
for a whole quarter. The impact of excluding the effect of Medeco Security
Locks, Inc., which was sold in the third quarter of 1998, and the sales
effect from MEDAES Holdings, Inc., had no material effect on the increase in
Health Care sales. European Health Care sales decreased marginally,
including currency adjustments, due primarily to the discontinuance of
certain products associated with the realignment and restructuring of
European manufacturing operations. Health Care rental revenue decreased $15
million or 14% due mainly to the change in Medicare Part A patient
reimbursement practices in the U.S. long-term care market. The U.S.
long-term care business unit experienced unfavorable changes in product mix
and volume. The acute care, home care and European markets showed growth
over the first quarter of 1998. Funeral Service sales were up $13 million,
or 9%, over 1998 to $161 million. This increase was due to increased unit
volume and market penetration of traditional caskets and cremation products.
The Company also introduced new metal and wood caskets. Funeral Service
insurance revenues increased 10%, or $8 million to $85 million. Earned
premium revenue increased due to increased policies in force year over year,
and higher investment income reflected the larger investment portfolio.
Capital gains were up marginally year over year.
Gross profit on Health Care sales increased to $75 million compared to $60
million in 1998, a 25% increase. As a percentage of sales, Health Care gross
profit was 42.4% compared to 41.1% in the first quarter of 1998. 1998 first
quarter gross profit was affected by start-up costs associated with early
shipments of the TotalCare(R) bed and the inclusion of lower margin
Air-Shields products among other things. Gross profit on rental revenues
decreased $14 million, or 30%, to $32 million and as a percentage of revenues
declined from 42.6% to 34.4% primarily due to the change in Medicare Part A
reimbursement practices as described above. Gross profit on Funeral Services
sales grew $7 million, or 10%, to $78 million. As a percentage of sales it
increased from 48.0% to 48.4% due to increased sales and good cost control.
Funeral Services insurance operating profit of $11 million increased $1 million
or 10% from the first quarter of 1998 due to the revenue factors discussed above
and continued cost control.
11
Other operating expenses (including insurance operations) increased $8 million,
or 6%, to $133 million and as a percentage of revenues were 25.8% versus 26.1%
in the first quarter of 1998. Higher commissions on increased sales volume and
the inclusion of expenses related to acquired companies was somewhat offset by
continued cost control and process improvement throughout the Company.
The consolidated effective income tax rate was 37.0% in the first quarter of
1999 compared to 37.7% in the first quarter of 1998. The decrease is mainly due
to decreased state tax expense.
LIQUIDITY AND CAPITAL RESOURCES
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 (excluding investments
of insurance operations) at February 27, 1999 of $296 million decreased $1
million from November 28, 1998. Net cash generated by operating activities of
$40 million in the first quarter was $24 million more than the first quarter of
1998. Working capital increased $48 million from year-end which is mainly due
to increases in inventory and accounts receivable and a decrease in other
current liabilities. The inventory increase of $12 million relates primarily to
the build-up of inventory to normal levels after a heavy shipping period near
the end of fiscal 1998, and the increase of $13 million in accounts receivable
is primarily due to increased sales volume. The $20 million decrease in other
current liabilities is due to payments made in the first quarter on various
items accrued at year end, including 1998 incentive compensation and other
operating expenses driven by high fourth quarter production and sales levels.
Capital expenditures remained unchanged compared to the first quarter of 1998.
In the first quarter, Forethought Life Insurance Company, a wholly-owned
subsidiary of Forethought Financial Services, Inc., acquired Arkansas National
Life Insurance Company (see Note 6 for more information). Included in the
acquisition of Arkansas National Life Insurance Company were investments of
approximately $80 million and approximately $54 million of benefit reserves.
The activity in Forethought's investment portfolio reflects the objective of
matching proceeds with expected policy benefit payments while maximizing yields
within statutory and management constraints.
In financing activities, treasury stock acquisitions of $21 million consisted of
purchases on the open market. Insurance premiums received were $22 million
below the first quarter of 1998 due to fewer trust rollovers and policy sales.
The decrease in policy sales is due to slowed growth as Forethought's entry into
targeted jurisdictions is nearly complete and due to increased competition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As discussed in the Company's latest annual report, legislative changes phased
in beginning July 1, 1998 will have a dampening effect on the Company's rental
revenue derived from Medicare patients in the long-term care market.
12
RESTRUCTURING CHARGES AND IMPAIRMENT OF ASSETS
In August 1998, the Board of Directors of the Company approved a plan to
restructure Hill-Rom's direct and support operations in Germany and Austria
to permit the Company to more efficiently meet the needs of its customers and
improve profitability. Under the plan, the Company will reduce fixed costs
and align manufacturing, distribution, sales and administrative functions
with anticipated demand. The alignment will result in the closure of
manufacturing facilities in Germany and Austria and the relocation of certain
manufacturing and business processes to other European locations.
The restructuring plan necessitated the provision of a $70 million asset
impairment and restructuring charge in 1998. The non-cash component of the
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. The plan also included additional charges for severance and
employee benefit costs of $10 million and other estimated plant closing costs
of $7 million.
As of February 27, 1999, manufacturing operations have been discontinued in
Germany. The Austrian manufacturing operations are expected to be
discontinued in the second quarter of 1999. Approximately $7 million in
severance and employee benefit costs and $1 million in other plant closing
costs were incurred in the first quarter of 1999. No adjustments were made
to the reserves in the first quarter. The remaining reserve balances as of
February 27, 1999 are as follows:
(In millions)
Inventory $3
Severance and Employee
Benefit Costs $3
Other Plant Closing
Costs $6
The Company expects substantially all employee related costs associated with
the restructuring 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 nine months, but could take longer.
13
YEAR 2000 DATE CONVERSION
Many existing computer programs use 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 fail or create erroneous
results by or at the year 2000. Essentially all of the Company's information
technology based systems, as well as many non-information technology based
systems, are potentially affected by the Year 2000 issue. Technology based
systems reside on mainframes, servers and personal computers in the U.S. and
in the foreign countries where the Company has operations. Specific systems
include accounting, payroll, financial reporting, product development,
inventory tracking 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 embedded microprocessors, such as building management systems,
manufacturing process control systems, clocks, security systems and products
sold 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.
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. To the best of the Company's
knowledge, this phase has been completed.
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 second 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 end
of 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 end of 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.
14
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. To the best of the
Company's knowledge, all affected non-information technology based systems have
been identified, 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 has been completed to
the best of the Company's knowledge, 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 manufactured by third parties. Each supplier has been surveyed to
determine its readiness. Customers have been referred to manufacturers for
Year 2000 readiness information. Contingency plans are being developed to
address any resulting issues.
Identification and assessment of areas of potential third party risk is
nearly complete and, for those areas identified to date, remediation plans
are being developed. Plans should be developed and implemented by the end of
the third quarter of 1999.
THE COSTS INVOLVED
The total cost to the Company of achieving Year 2000 compliance is not
expected to exceed $8 million and will consist primarily of the utilization
of internal resources. Spending to date totals approximately $5 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.
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 is nearly complete, and
contingency plans should be completed in the third quarter.
15
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. These statements are qualified by reference to
"Disclosure Regarding Forward-Looking Statements" in Part II of the Company's
Annual Report on Form 10-K for the fiscal year ended November 28, 1998 which
lists important factors that could cause actual results to differ materially
from those discussed in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 10.1 Hillenbrand Industries, Inc.
Senior Executive Compensation
Program as amended and restated on
January 18, 1999
Exhibit 10.2 Hillenbrand Industries, Inc.
1996 Stock Option Plan as amended
and restated on January 19, 1999
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the first quarter
ended February 27, 1999.
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SIGNATURES
Pursuant to the requirements 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.
DATE: April 5, 1999 BY: /S/ Donald G. Barger, Jr.
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Donald G. Barger, Jr.
Vice President and
Chief Financial Officer
DATE: April 5, 1999 BY: /S/ James D. Van De Velde
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James D. Van De Velde
Vice President and Contoller
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