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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 30, 1996 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) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
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COMMON STOCK, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 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) 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
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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 VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
Common Stock, without par value - $1,837,747,000 as of February 14, 1997
(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 - 68,796,966 as of February 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the 1997 Proxy Statement furnished to Shareholders - Parts I,
III and IV.
Portions of the 1992 Proxy Statement furnished to Shareholders - Part IV.
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HILLENBRAND INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
NOVEMBER 30, 1996
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Item 8. Financial Statements and Supplementary
Data 19
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers
of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain
Beneficial Owners and Management 41
Item 13. Certain Relationships and Related
Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 41
SIGNATURES 44
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 four major operating companies. 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: Funeral Services and Health Care. The
Funeral Services segment consists of Batesville Casket Company, Inc., a
manufacturer of caskets and other products for the funeral industry, and
Forecorp, Inc., a provider of funeral planning insurance products. The Health
Care segment consists of Hill-Rom, Inc., a manufacturer of equipment for the
health care market and provider of wound care and pulmonary/trauma management
services; and Medeco Security Locks, Inc., a manufacturer of high security locks
and access control products for commercial and residential use. (Medeco does
not directly serve the health care industry but is included in the Health Care
segment due to its relative size.) The assets of Block Medical, Inc., a
provider of home infusion therapy products, were sold to I-Flow Corporation on
July 22, 1996. Results for Block Medical, Inc. are included in the Company's
financial statements through that date.
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
steel, copper, bronze, hardwood and cloth covered caskets, including caskets for
the cremation market. In addition to caskets, Batesville manufactures and sells
a line of urns used in cremations. All Batesville metal caskets are protective
caskets which are electrically welded and made resistant to the entry of air,
water and gravesite substances through the use of rubber gaskets and a locking
bar mechanism.
Batesville Monoseal-Registered Trademark- 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 caskets.
Batesville 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 Hercu-Lite-TM- cloth covered caskets are constructed with a
patent pending process utilizing cellular fiberboard construction.
The cremation line of caskets, containers, urns and memoralization items are
marketed by Batesville under the name of Options-Registered Trademark-. The
caskets and containers are manufactured primarily of hardwoods and fiberboard.
The urns are made from bronze, hardwoods and marble. A line of cast bronze
statuary art pieces used for memorialization are also marketed.
Batesville 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
an inventory of caskets at 70 company-operated Customer Service Centers in North
America. Batesville caskets are delivered in specially equipped vehicles owned
by Batesville.
Batesville has small manufacturing and distribution facilities in Canada and
Mexico.
-1-
Forecorp, Inc., which was founded in 1985, and its principal subsidiaries,
Forethought Life Insurance Company and The Forethought Group, Inc., are
headquartered in Batesville, Indiana. These companies serve the country's
largest network of funeral planning professionals with marketing support for
Forethought-Registered Trademark- funeral plans funded by life insurance
policies. This specialized funeral planning product is offered through
licensed funeral homes. Customers 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 provided by a
life insurance policy from Forethought Life Insurance Company, the
Forethought program offers inflation protection by enabling the funeral home
to guarantee that the planned funeral will be available as specified.
Forethought Life Insurance Company is licensed in forty-two (42) states,
Alberta, Ontario, Manitoba, New Brunswick, Nova Scotia and Prince Edward Island,
Canada, Puerto Rico and the District of Columbia. Forethought Life Insurance
products are available through a network of over 4,000 independent funeral
homes.
Forecorp, Inc. will introduce a trust product in the first half of 1997.
This product is not expected to have an immediate material effect on the
financial statements of the Company.
HEALTH CARE
Hill-Rom, Inc., with its subsidiaries (collectively, "Hill-Rom"), is a
leading producer of mechanically, electrically and hydraulically controlled
adjustable hospital beds, hospital procedural stretchers, hospital patient
room furniture 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, and engaged in the manufacture of therapy beds and support surfaces and
the rental and service of these products in the wound care, pulmonary/trauma
and incontinence management markets since 1985.
The Hill-Rom line of electrically 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 produces beds for special departments such as
intensive care, emergency, recovery rooms and labor and delivery rooms. Other
Hill-Rom 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. Hill-Rom also remanufactures hospital beds. Its process
includes disassembly, washing, sanding, painting and reassembly with new
components.
Hill-Rom products are sold directly to acute and long-term health care
facilities throughout the United States and Canada by Hill-Rom account
executives. Most Hill-Rom 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 products, principally in Canada. Hill-Rom also sells its
domestically produced products through distributorships throughout the world.
Hill-Rom also operates hospital bed, therapy bed and patient room
manufacturing facilities in Germany and France. Their products are sold and
leased directly to hospitals and nursing homes throughout Europe.
Clinical support for Hill-Rom's wound care, pulmonary/trauma and incontinence
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.
Within the wound care market, CLINITRON-Registered Trademark- Air Fluidized
Therapy is provided as a therapeutic adjunct in the treatment of advanced
pressure sores, flaps, grafts and burns. The CLINITRON 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. The CLINITRON product line includes the AT-HOME,
designed for delivery and use in the home, and ELEXIS, with in-bed weighing
and simplified patient egress.
-2-
Hill-Rom also offers low airloss therapy through its EFICA CC-TM- and
FLEXICAIR-Registered Trademark- units. FLEXICAIR low airloss therapy is
provided for pressure sore prevention and wound treatment when ambulation is
a priority or continuous head elevation is desired. The FLEXICAIR unit
regulates air pressure in five zones corresponding to patient body areas. In
the pulmonary/trauma market, the EFICA CC-TM- Dynamic Air Therapy-Registered
Trademark- offers several modes of operation, including continuous lateral
rotation, percussion and vibration, while maintaining optimal low airloss
pressure relief. In 1996, the PULMONEX was introduced as a prevention
product for patients in medical/surgical or intensive care step down units
who are at risk of developing pulmonary complications.
Other wound care products include the ACUCAIR-Registered Trademark-
Continuous Air Flow System , the MAGNUM-Registered Trademark- II bariatric
patient care system and the CLINISERT-Registered Trademark- Pressure Relief
System
Hill-Rom therapy systems are made available to hospitals, long-term care
facilities and the home environment on a rental basis through over 150 Service
Centers located in the United States, Canada and Western Europe.
Medeco Security Locks, Inc. ("Medeco"), founded in 1968, was purchased by
Hillenbrand in 1984. Medeco develops, manufactures and sells a wide variety of
deadbolts, padlocks, switch locks, camlocks, electro-mechanical and other
special purpose locks for the high security market. Medeco's double locking
mechanism provides a higher level of security than is achievable by more common,
single-locking devices. Medeco locks are primarily constructed of brass and
hardened steel and are manufactured in its Salem, Virginia plant.
Medeco also develops, manufactures and sells products for the electronic high
security market. INSITE VLS-TM- replaces the thousands of mechanical keys used
in pay telephone collection. The recently introduced DialGuard-TM- lock system
fills the same role in the automatic teller machine collection market, and the
DuraCam-TM- high security lock serves the gaming industry. The INSITE SITEKEY-
TM- provides the state-of-the-art in electronic door security.
Beginning in the first quarter of 1997, Medeco converted to direct
distribution of its door security products to retail locksmith customers.
Medeco had previously sold through locksmith supply distributors. Medeco
products are also sold domestically and internationally by its sales
organization to original equipment manufacturers and government agencies.
Original equipment applications include vending machines, pay telephones, safe
and lock boxes, computer equipment, coin-operated laundry machines and
communications security devices.
Hill-Rom generates the predominant share of the Health Care segment's
revenues and operating profit. Medeco and Block had an immaterial effect on
the operating results of this segment in 1994, 1995 and 1996.
BUSINESS SEGMENT INFORMATION
The amounts of net revenues, operating profit and identifiable assets
attributable to each of the industry segments of the Company are set forth in
tables relating to operations by business segment in Note 7 to Consolidated
Financial Statements, which statements are included under Item 8.
-3-
RAW MATERIALS
FUNERAL SERVICES
Batesville employs carbon and stainless steel, copper and bronze sheet,
wood, fabrics, finishing materials, rubber gaskets, zinc and magnesium alloy
in the manufacture of its caskets. These materials are available from
several sources.
HEALTH CARE
Principal materials used in Hill-Rom products include 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 operated beds and certain other
components are purchased from one or more manufacturers.
Medeco uses brass, hardened steel, other metals and electronic components,
substantially all of which are available from several sources.
COMPETITION
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.
Forecorp, Inc., competes on the basis of service to its customers and
products offered. Forethought Life sells its products in competition with
local and state trusts for pre-need funeral planning as well as other life
insurance companies. Forethought Life believes it is the leading provider of
insurance funded pre-arranged funerals in the United States.
HEALTH CARE
Hill-Rom believes it is the U.S. market share leader in the sale of
electrically 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. In both the U.S. and
Europe there are other companies which provide low airloss and other methods
of patient support and patient relief.
Medeco competes on the basis of product quality and performance, and
service to its customers. Medeco believes it is the market share leader in
the mechanical high security lock market; however, other lock manufacturers
produce a broader product line and have larger financial resources. Medeco
believes that its patents are important to its business.
-4-
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.
Expenditures in the most recent three fiscal years were as follows:
1996 1995 1994
---- ---- ----
(millions)
New products and processes $31 $28 $26
Improvement of existing products and processes 11 11 9
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 14, 1997, the Company employed approximately 9,800 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 $10 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 also does not materially
affect the Company's capital expenditures, earnings or competitive position.
Recent 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.
FOREIGN OPERATIONS AND EXPORT SALES
Information about the Company's foreign operations is set forth in tables
relating to geographic information in Note 7 to Consolidated Financial
Statements, which statements are included under Item 8.
The Company's export revenues constituted less than 10% of consolidated
revenues in 1996 and prior years.
ORDER BACKLOG
Order backlogs are immaterial to the Company and there was no material change
in backlogs during 1996.
-5-
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 February 14, 1997.
W August Hillenbrand, 56, was elected Chief Executive Officer of the
Company on April 11, 1989, and has been President since October 21, 1981.
Prior to that 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, 58, has been employed by the Company since May 16, 1983, and
was elected Senior Vice President and Chief Financial Officer on May 23,
1983. He had been employed by the Firestone Tire and Rubber Company for the
prior 22 years, where he served as Corporate Vice President and Treasurer.
George E. Brinkmoeller, 61, 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, 39, 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 E. Craft, 42, has been employed by the Company since February 26,
1990, and was elected Vice President, Public Affairs on May 1, 1994. Prior
to that he was Director, Public Affairs. Prior to joining the Company, he
was Manager, Public Relations, for Melvin Simon & Associates, Inc., in
Indianapolis, Indiana.
Robert J. Tennison, 50, 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.
Mark R. Lanning, 42, 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). He has been a
licensed Certified Public Accountant since 1979.
Mark R. Lindenmeyer, M.D., 50, 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, 40, 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.
-6-
James G. Thorne, 55, has been employed by the Company since June 14, 1993,
and was elected Vice President, Human Resources on April 5, 1994. Prior to
joining the Company, he was employed by Monsanto Company for 27 years where
he served as Vice President, Human Resources for Fisher Controls
International, Inc.
James D. Van De Velde, 50, 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.
Note: Lonnie M. Smith resigned as Senior Executive Vice President and
from the Board of Directors effective February 14, 1997. His resignation
from the Board was voluntary and did not arise from any conflict with
Company personnel or policies.
-7-
ITEM 2. PROPERTIES
The principal properties of the Company and its subsidiaries are listed
below, and are owned by the Company or its subsidiaries subject to no
material encumbrances except for those facilities (*) which were constructed
with funds obtained through Government Issued Bonds (see Note 4 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 AND OTHER:
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
Kempen, Germany Manufacturing plant and Manufacture of health care
office facilities equipment
Pluvigner, France Manufacturing plant and Manufacture of health care
office facility equipment
Salem, VA Manufacturing plant and Manufacture of mechanical
office facility and electronic locks
FUNERAL SERVICES:
Batesville, IN Manufacturing plants Manufacture of metal caskets
Office facilities Administration
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
warehouse distribution centers, service centers and sales offices throughout
the United States, Canada and 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.
-8-
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 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.
On December 24, 1996, the Company filed a patent infringement action
against KCI in the U.S. District Court in Charleston, South Carolina, for
alleged infringement of its Effica-TM- therapeutic bed by KCI. Hill-Rom is
seeking both monetary damages and injunctive relief in this action.
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 30, 1996.
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 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 Item 7 on Form 10-K), and 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.
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 rage 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,
and the success of cost control and restructuring efforts, 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
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 1996 and
1995.
-9-
1996 1995
------------- -------------
High Low High Low
---- --- ---- ---
First Quarter $34 1/8 $31 7/8 $29 3/4 $27
Second Quarter $40 1/4 $33 1/4 $30 1/8 $27 1/2
Third Quarter $39 $32 $33 1/8 $28 5/8
Fourth Quarter $38 5/8 $32 $33 $27
HOLDERS
On February 14, 1997, there were approximately 24,000 holders of the
Company's common stock.
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 $.62 ($.155 per quarter) in 1996 and $.60 ($.15 per
quarter) in 1995 were paid on each share of common stock outstanding. Cash
dividends will be $.66 ($.165 per quarter) in 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of
Hillenbrand Industries, Inc., for fiscal years 1992 through 1996.
1996 1995 1994 (b) 1993 1992
---- ---- ---- ---- ----
(IN MILLIONS EXCEPT PER SHARE DATA)
Net revenues $ 1,684 $ 1,625 $ 1,577 $ 1,448 $ 1,303
Income from continuing
operations (a) $ 140 $ 90 $ 90 $ 132 $ 111
Income from continuing
operations per share (a) $ 2.02 $ 1.27 $ 1.26 $ 1.86 $ 1.55
Total assets $ 3,396 $ 3,070 $ 2,714 $ 2,291 $ 1,958
Long-term debt $ 204 $ 206 $ 209 $ 108 $ 185
Cash dividends per share $ .62 $ .60 $ .57 $ .45 $ .35
(a) 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 WRITEDOWN 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. RESULTS IN 1993 REFLECT AN
UNUSUAL CHARGE OF $14 MILLION FOR THE WRITEDOWN OF GOODWILL.
(b) FISCAL 1994 WAS A 53 WEEK YEAR.
-10-
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' four major operating companies are organized into two
business segments. The Funeral Services segment consists of Batesville
Casket Company and The Forethought Group. The Health Care segment consists
of Hill-Rom and Medeco Security Locks (included in this segment due to
Medeco's relatively small size). Results for Block Medical, which was sold
on July 22, 1996, are included in the Health Care segment through that date.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
SUMMARY
Consolidated net revenues increased $59 million, or 4%, in 1996. Operating
profit of $236 million was up 32%, net income of $140 million was up 56% and
earnings per share of $2.02 increased 59%.
Third quarter 1996 results reflect income of $8 million, or $.12 per share,
relative to the sale of Block Medical (see Note 3). In the fourth quarter of
1995, the Company recorded charges totaling $26 million, or $.37 per share, to
reduce the carrying value of Block Medical goodwill and certain manufacturing
facilities in Europe held for disposal. Excluding these items, operating profit
increased 15%, net income increased 14% and earnings per share increased 16% in
1996.
NET REVENUES
Health Care sales increased $12 million, or 2%, due to higher unit volume of
Advance series beds and architectural and communications products in Hill-Rom's
U.S. acute care and long-term care markets. Order patterns for acute care
capital goods returned to a more normal pattern following two years of health
care provider restructuring and consolidation. These improvements were
partially offset by lower volume in Europe (France and Germany). Government
cost and price controls and general economic conditions have hampered growth in
Europe. Sales at Medeco were down year over year. Route management (pay
telephone, vending, gaming and automatic teller machines) shipments were
negatively affected by the delay in obtaining contracts with other Bell
operating companies. This was driven in part by passage of the comprehensive
telecommunications act in Congress, which caused most telecommunications
companies to "wait and see" what the economic and technological fallout of the
new law would be. Door security shipments were up due to strong dealer demand
and institutional 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 segment.
Health Care rental revenue grew $5 million, or 1%. In the U.S. long-term
care market, units in use were up on the strength of increased market
penetration and higher average rental rates were generated from the introduction
of new, higher-value products. In the U.S. home care market, unit growth
continued, but at a slower rate due primarily to Medicare's 1996 elimination of
reimbursement for low airloss therapy products used for the prevention of
pressure ulcers. Average rental rates were up marginally. Growth in these two
markets was largely offset by declining rental rates and units in use in the
U.S. acute care market. Rates are being depressed by cost management in the
acute care setting and competitive pressures. Rental units in use have been
negatively affected by increased sales of Hill-Rom beds providing low airloss
therapy. Rental revenues in Europe were unchanged year over year.
Funeral Services sales increased $9 million, or 2%, due to price increases,
growth in traditional casket unit volume and higher sales of Options cremation
products. Unit volume growth was achieved despite an essentially flat market
for casketed deaths in 1996.
-11-
Insurance revenues were up $33 million, or 18%. Interest income accounted
for $12 million of this increase, reflecting a larger investment portfolio,
partially offset by slightly lower yields. The growth in earned premium revenue
was due primarily to increased policies in force year over year. Policy sales
were up over 20% in 1996. Since premium revenues are earned over the life of
the policy holder, this increase will primarily affect revenues and earnings in
future years.
GROSS PROFIT
Gross profit on Health Care sales of $234 million was up $25 million, or 12%,
due primarily to higher shipments in Hill-Rom's U.S. acute care market. As a
percentage of sales, gross profit improved from 38% in 1995 to 41% in 1996.
Increased shipments of higher-value products, improvements in direct material,
labor and overhead costs and leveraging of fixed manufacturing expenses in the
U.S. and decreased sales of lower margin European products were responsible for
this improvement.
Gross profit on Health Care rentals increased $18 million, or 15%, to $140
million and, as a percentage of revenues, improved from 33% to 38%. Increased
therapy unit utilization and the introduction of new, higher-value products in
the long-term care and home care markets, improvements in field service costs
and lower acquisition related expenses were partially offset by higher therapy
unit depreciation and lower utilization and rental rates in the acute care
market.
Gross profit on Funeral Services sales of $246 million was up $9 million, or
4%, in 1996. As a percentage of sales, it increased from 46% in 1995 to 47% in
1996 due to improved material costs and leveraging of fixed manufacturing
expenses, partially offset by increased sales of lower margin caskets.
Insurance gross profit increased $12 million, or 27%, in 1996 due to higher
investment income (with minimal corresponding direct cost), profits earned on
the larger base of policies in force and control of direct administrative
expenses. The crediting rate (the interest rate that Forethought uses to
increase the face amount on insurance policies to have the benefit grow) was
essentially unchanged year over year.
OTHER OPERATING EXPENSES
These expenses, consisting of selling, marketing, distribution and general
administrative costs, increased $7 million, or 2%, in 1996. Excluding unusual
charges of $26 million in 1995, they increased $33 million, or 8%, in 1996. As
a percentage of consolidated revenues, they were up slightly from 25% in 1995
(excluding unusual charges) to 26% in 1996. Higher incentive compensation and
commission expenses associated with improved performance and expenditures on
product and market development were partially offset by process improvements and
cost control throughout the Company.
OPERATING PROFIT
Operating profit in the Health Care segment, excluding unusual charges in 1995,
increased $23 million, or 26%, to $111 million in 1996. Increased sales of
higher-value products in the U.S. acute care capital market, improved therapy
unit utilization and reduced manufacturing and acquisition costs were partially
offset by higher incentive compensation and commission expenses.
Operating profit in the Funeral Services segment of $144 million was up $10
million, or 7%, from 1995. At Batesville Casket, operating profit was
essentially flat year over year as increased casket and cremation unit volume
and improved material and manufacturing cost performance were offset by
increased sales of lower-margin caskets and higher product and market
development expenses. At Forethought, higher gross profit and control of fixed
administrative expenses combined to generate a 71% increase in operating profit.
Excluding the unusual charges in 1995, consolidated operating profit of $236
million increased $31 million, or 15%, in 1996. The increases in the operating
segments were partially offset by higher incentive compensation and legal
expenses at corporate.
OTHER INCOME AND EXPENSE
Interest expense increased $2 million, or 10%, due to increased debt associated
with Hill-Rom's European operations. Investment income was up $2 million, or
13%, due primarily to higher average levels of interest earning assets.
-12-
INCOME TAXES
The effective income tax rate in 1996 was 40% compared with 47% in 1995.
Excluding the tax benefit of approximately $6 million on the book and tax
differences in the basis of Block Medical recorded in 1996 and the $26 million
nondeductible unusual charge in 1995, the effective rate was 42% in 1996 and 41%
in 1995.
1995 COMPARED WITH 1994
SUMMARY
Consolidated net revenues increased $48 million, or 3%, in 1995. Fiscal year
1994 contained 53 weeks of business compared with 52 in 1995. Adjusting for the
extra week in 1994, revenues increased approximately $78 million, or 5%.
Operating profit of $179 million was up 15% and net income of $90 million was
essentially equal to 1994.
In the fourth quarter of 1995, the Company recorded charges totaling $26
million (with no income tax benefit) to reduce the carrying value of goodwill
relative to the acquisition of Block Medical and certain manufacturing
facilities in Europe being held for disposal. Excluding these unusual charges
and the $85 million ($52 million after income taxes) charge for settlement of a
patent infringement suit in 1994, operating profit declined $36 million, or 15%,
and net income was down $26 million, or 18%.
NET REVENUES
Health Care sales declined $35 million, or 6%, due primarily to lower unit
volume in Hill-Rom's U.S. acute care bed and architectural products markets.
These declines were partially offset by growth in Europe (including the effect
of the acquisition of Arnold in the first quarter of 1994), favorable foreign
currency fluctuations and increased remanufactured equipment shipments in the
U.S. At Block Medical, portable-disposable infusion pump volume was up and
ambulatory-electronic pump shipments were down. Sales growth at Medeco was
driven by new product introductions in route management channels. Door security
business was flat year over year. Block and Medeco did not contribute
significantly to the overall sales of the Health Care segment.
Health Care rentals grew $35 million, or 11%. Increased units in use in the
home care and long-term care markets were partially offset by shifts to lower-
priced products in all markets and lower usage in the acute care market.
Revenues in Europe were favorably affected by foreign currency fluctuations.
Funeral Services sales increased $16 million, or 3%, due to traditional
casket unit volume growth, higher sales of cremation products, price increases
and acquisitions.
Insurance revenues were up $32 million, or 21%. Interest income accounted
for $19 million of this increase, reflecting a larger investment portfolio and
higher yields. The growth in earned premium revenue was due primarily to
increased policies in force year over year. Policy sales were down in 1995 due
primarily to commission and product changes designed to enhance Forethought's
overall long-term profitability. Since premium revenues are recognized, or
earned, over the life of the policy holder, this decrease did not have a
significant effect on current year revenue.
GROSS PROFIT
Gross profit on Health Care sales of $209 million was down $45 million, or 18%,
due primarily to lower U.S. acute care bed and architectural products volume.
As a percentage of sales, gross profit declined from 43% to 38%, reflecting the
impact of lower U.S. acute care volume on the fixed manufacturing expense base
and increased sales of lower-margin remanufactured equipment and European
products. These items were partially offset by sales growth at Medeco, reduced
losses at Block and improved manufacturing efficiencies in all U.S. operations.
Gross profit on Health Care rentals increased $9 million, or 8%, to $122
million and, as a percentage of revenues, declined from 34% to 33%. Increased
units in use in the home care and long-term care markets was partially offset by
the shift in all markets to products with lower daily rates.
-13-
Gross profit on Funeral Services sales of $237 million was up $6 million, or
3%. As a percentage of sales, it was unchanged at 46%.
Insurance gross profit increased $5 million, or 13%, in 1995. Higher
investment income (with minimal corresponding direct cost) was largely offset by
an increase in the crediting rate on policies in force, which was undertaken for
competitive reasons.
OTHER OPERATING EXPENSES
These expenses, consisting of selling, marketing, distribution and general
administrative costs, declined $48 million, or 10%, in 1995. Excluding unusual
charges of $26 million in 1995 and $85 million in 1994, they increased $11
million, or 3%. As a percentage of consolidated revenues, they were unchanged
at 25%. In the Health Care segment, increases associated with European
operations and new product development in the U.S. were mostly offset by the
avoidance of costs incurred in 1994 relative to the integration of Hill-Rom and
SSI and lower incentive compensation expense. Expenses in the Funeral Services
segment were virtually unchanged year over year.
Unusual charges in 1995 included the $6 million writedown of certain assets
of a manufacturing facility in Europe to be disposed of and the $20 million
writedown of Block Medical goodwill. Changes in market conditions, the
performance of certain products and increased competitive pressures resulted in
a significant reduction in management's expectations regarding Block's future
cash flows.
OPERATING PROFIT
Operating profit in the Health Care segment, excluding unusual charges, declined
$43 million, or 33%, to $88 million in 1995. Lower U.S. acute care sales, a
shift to lower-priced rental products, and expenses associated with European
operations and new product development were partially offset by growth in the
home care and long-term care rental markets and the avoidance of integration
expenses.
Operating profit in the Funeral Services segment of $134 million was up $11
million, or 9%, from 1994. Growth in casket unit volume, cremation products,
investment income, earned insurance premium revenues and improved operating
efficiencies were partially offset by the increase in the crediting rate on
insurance policies in force.
OTHER INCOME AND EXPENSE
Interest expense declined $3 million, or 13%, due to the full-year impact of
the retirement of a $75 million promissory note in May of 1994, which was
partially offset by the issuance of $100 million of debentures in February of
1994. Interest expense relative to European operations was favorably affected
by lower rates. Investment income was up $2 million due to higher yields,
partially offset by a lower average level of interest earning assets.
INCOME TAXES
The effective income tax rate in 1995 was 47%. Excluding the $26 million
unusual charge (consisting of the writedown of goodwill and other assets
being held for disposal), which is not tax deductible, the effective rate was
41% in 1995 compared with 38% in 1994. This increase reflected higher
operating losses in Europe, resulting in foreign loss carryforwards for which
there is no associated income tax benefit recognized in the current year.
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 (excluding the
investments of insurance operations) grew from $171 million at the end of 1995
to $266 million at the end of 1996.
-14-
OPERATING ACTIVITIES
Net cash flows from operating activities of $239 million were up significantly
compared with 1995. Higher net income and lower accounts receivable and
inventory were partially offset by lower accounts payable.
The $24 million decline in accounts receivable and improvement in days sales
outstanding from 80 to 72 in 1996, were due primarily to lower shipments in
Hill-Rom's European operations. In addition, Hill-Rom continues to make good
progress in the management of third party collections and Batesville Casket has
improved its accounts receivable management. In 1995, accounts receivable
increased $13 million due to higher sales in Europe. Inventories declined $15
million in 1996 due to strong U.S. acute care shipments and lower production
levels in Europe. The $6 million increase in 1995 reflected a greater number of
field sales evaluation units at Hill-Rom. Accounts payable declined $21 million
in 1996 and increased $18 million in 1995 due primarily to fourth quarter
production levels at Hill-Rom. Accrued expenses increased in 1995 due to higher
income taxes payable reflecting the increase in taxable income.
INVESTING ACTIVITIES
Cash outflows from investing activities increased from $302 million in 1995 to
$317 million in 1996.
Capital expenditures of $92 million compares with $103 million in 1995, as
therapy rental unit production declined from $48 million in 1995 to $41
million in 1996.
Acquisitions in 1996 consisted of two small companies each by Hill-Rom and
Batesville Casket. Acquisitions in 1995 included the remaining interest in a
subsidiary of Arnold by Hill-Rom and two regional casket distributors by
Batesville Casket.
The Company received $15 million in cash and $2 million in stock from the
sale of Block Medical in July 1996.
Forethought invests the cash proceeds on insurance premiums predominantly in
U.S. treasuries 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 1996, 1995 and 1994 resulted in net
gains.
FINANCING ACTIVITIES
The Company's long-term debt-to-equity ratio was 26% at year end 1996 compared
with 28% at year end 1995. This decline was due primarily to higher equity.
Increases in short-term debt in 1996 and 1995 were to fund European operations
and restructuring. The Company has $100 million of registered debentures
available for issuance which, when combined with additional debt capacity,
existing cash and other working capital, affords the company considerable
flexibility in the funding of internal and external growth.
Quarterly cash dividends per share were $.1425 in 1994, $.15 in 1995 and
$.155 in 1996. An additional increase to $.165 per quarter was approved in
January 1997.
In 1996, the Company repurchased 1,425,100 shares of its common stock at a
cost of $51 million, which compares with purchases of $23 million in 1995 and
$20 million in 1994.
-15-
INSURANCE ASSETS AND LIABILITIES
Insurance assets of $2,157 million grew 17% over the past year. Cash and
invested assets of $1,663 million constitute 77% of the assets. The investments
are concentrated in U.S. treasuries and agencies and high-grade corporate bonds.
The invested assets are more than adequate to fund the insurance reserves and
other liabilities of $1,470 million. Statutory reserves represent 62% of the
face value of insurance in force. Forethought Life Insurance Company declared
an $11 million dividend to Hillenbrand Industries in the fourth quarter of 1996,
paid in December 1996, and made a $10 million dividend payment in the fourth
quarter of 1995. The statutory capital and surplus as a percent of statutory
liabilities of the life insurance subsidiary of Forethought was 8.3% at December
31, 1996, down from 8.5% on December 31, 1995. This drop reflects the dividend
payment discussed above. The long-term 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 policy holder. These revenues are
recognized in the year of policy issue for tax purposes. This results in a
deferred future tax benefit. Insurance policy acquisition expenses must be
capitalized and amortized for both financial accounting and tax purposes.
Financial accounting rules require a greater amount to be capitalized and
amortized than for tax reporting. This results in a deferred future tax cost,
which partially offsets the deferred future tax benefit. Excluding the tax
effect of adjusting the investment portfolio to fair value, the net deferred
future tax benefit increased $4 million in 1996, compared to a $9 million
increase in 1995 and 1994.
SHAREHOLDERS' EQUITY
Cumulative treasury stock acquired in open market transactions increased to
13,008,672 shares in 1996, up from 11,583,572 shares in 1995. The Company
currently has Board of Directors' authorization to repurchase up to a total of
14,000,000 shares. Repurchased shares are to be used for general business
purposes. From the cumulative shares acquired, 33,996 shares, net of shares
converted to cash to pay withholding taxes, were reissued in 1996 to individuals
under the provisions of the Company's various stock compensation plans.
Under the restricted stock plan approved by the shareholders of the Company
on April 14, 1987, 324,600 shares have been awarded; 268,132 shares have been
distributed and/or deferred; and 56,468 shares have been forfeited to date. No
additional awards are contemplated at this time.
Under the performance compensation plan approved by the shareholders of the
Company on April 7, 1992, 386,096 shares were earned in 1993 based on each
subsidiary's and the Company's performance in 1992 and 1993.
OTHER ISSUES
ACCOUNTING STANDARDS
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in October
1995, and is effective for fiscal years beginning after December 15,1995 (not
later than fiscal year 1997 for the Company). The new standard encourages
companies to adopt a fair value based method of accounting for employee stock-
based compensation plans, but allows companies to continue to account for those
plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock
Issued to Employees." The Company will adopt this standard in 1997 and has not
decided whether it will adopt the fair value based method or, alternatively, the
pro-forma disclosure requirements of the new standard.
-16-
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 $10 million. The
Company has provided adequate reserves in its financial statements for these
matters. Recent 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.
INFLATION
Inflation and changing prices had a negligible effect on results of operations
in 1996, 1995 and 1994. Improvements in manufacturing and administrative
efficiencies continue to minimize the effect of price increases.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Restructuring in the health care industry will continue for the foreseeable
future. Reform measures to date have included consolidation of health care
providers and payers, growth in managed care and rapid expansion of the home
care and long-term care markets. Development of more cost effective ways of
delivering successful patient outcomes will continue to be a major focus of
providers in all markets. While acute care capital order patterns have improved
during the past eighteen months, uninterrupted growth in demand over the long
term is not a certainty. Medicare's 1996 elimination of reimbursement for low
airloss therapy products used for the prevention of pressure ulcers will
continue to hamper growth in the home care market. The Company believes that
its investments in innovative products and services designed to improve patient
outcomes and reduce total delivery cost provide a solid basis on which to
compete effectively in all of these markets. Operating losses in Europe will
continue through at least 1997. Restructuring efforts, including plant
modernization and consolidation, process improvements and product innovation,
are continuing.
Although the market for casketed deaths has been essentially flat over the
past several years, Batesville Casket has been able to achieve growth through
product and service innovation. Its successful entry into the rapidly growing
cremation market was also due largely to customer acceptance of the innovative
product offerings.
Forethought's revenue growth has slowed over the past four years as entry
into targeted states and other jurisdictions winds down. The product and
commission changes implemented in 1995, which had a short term negative impact
on policy sales volume, have enhanced the profitability of the policies sold
since the change. Policy sales rebounded in 1996. Trust products to be
introduced by Forethought in 1997 are not expected to have an immediate material
effect on the financial statements of the Company or its insurance subsidiary
but will enhance future value.
The Company's investments in operations in Canada and Mexico are minimal.
Although losses in Europe have had a significant impact on results of
operations, exchange rate fluctuations are not material to its financial
statements.
-17-
- --------------------------------------------------------------------------------
KEY FINANCIAL DATA (a)
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
INCOME STATEMENT
- --------------------------------------------------------------------------------
% Pretax, preinterest expense,
income to revenues 15 12 11 17 15
% Net income to revenues 8 6 6 10 9
% Income taxes to pretax income 40 47 38 40 38
- --------------------------------------------------------------------------------
BALANCE SHEET
- --------------------------------------------------------------------------------
% Long-term debt to total capital 21 22 23 14 25
% Total debt to total capital 28 26 26 26 32
Current assets/current
liabilities (b) 2.2 2.1 2.2 1.9 2.0
Working capital turnover (b) 3.9 4.2 4.6 4.7 5.1
- --------------------------------------------------------------------------------
PROFITABILITY
- --------------------------------------------------------------------------------
% Return on total capital 14 9 10 20 16
% Return on average shareholders'
equity 19 13 13 25 23
- --------------------------------------------------------------------------------
ASSET TURNOVER
- --------------------------------------------------------------------------------
Revenues/inventories (b) 15.3 12.9 13.7 14.7 14.1
Revenues/receivables (b) 5.1 4.6 4.7 5.2 5.3
- --------------------------------------------------------------------------------
STOCK MARKET
- --------------------------------------------------------------------------------
Year-end price/earnings (P/E) 18.3 25.4 23.2 20.4 25.5
Year-end price/book value 3.3 3.1 3.0 4.6 5.4
- --------------------------------------------------------------------------------
(a) RESTATED, WHERE APPLICABLE, TO EXCLUDE THE RESULTS OF THE DISCONTINUED
OPERATION.
(b) EXCLUDES INSURANCE OPERATIONS.
- --------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENT COMPARISON
- --------------------------------------------------------------------------------
Fiscal Year Percent Change
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1996 1995 1994 1996/95 1995/94 1994/93
- --------------------------------------------------------------------------------
Net revenues:
- --------------------------------------------------------------------------------
Health Care sales $ 568 $ 556 $ 591 2% (6%) 3%
Health Care rentals 373 368 333 1% 11% 10%
Funeral Services 524 515 499 2% 3% 9%
Insurance 219 186 154 18% 21% 33%
- --------------------------------------------------------------------------------
Total revenues $1,684 $1,625 $1,577 4% 3% 9%
- --------------------------------------------------------------------------------
Gross profit:
Health Care sales $ 234 $ 209 $ 254 12% (18%) (6%)
Health Care rentals 140 122 113 15% 8% 11%
Funeral Services 246 237 231 4% 3% 9%
Insurance 57 45 40 27% 13% 5%
- --------------------------------------------------------------------------------
Total gross profit 677 613 638 10% (4%) 3%
Other operating expenses 441 408 397 8% 3% 6%
Unusual charges - 26 85 N/A N/A N/A
- --------------------------------------------------------------------------------
Operating profit 236 179 156 32% 15% (33%)
Other expense, net (3) (9) (11) (67%) (18%) -
- --------------------------------------------------------------------------------
Income before income taxes 233 170 145 37% 17% (34%)
Income taxes 93 80 55 16% 45% (38%)
- --------------------------------------------------------------------------------
Net income $ 140 $ 90 $ 90 56% - (38%)
- --------------------------------------------------------------------------------
-18-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Financial Statements:
Report of Independent Accountants 20
Statements of Consolidated Income for the three years ended
November 30, 1996 21
Consolidated Balance Sheets at November 30, 1996 and December 2, 1995 22
Statements of Consolidated Cash Flows for the three years ended
November 30, 1996 24
Statements of Consolidated Shareholders' Equity for the three years ended
November 30, 1996 25
Notes to Consolidated Financial Statements 26
Financial Statement Schedules for the three years ended November 30, 1996:
Schedule II- Valuation and Qualifying Accounts 43
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
-19-
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 30,
1996 and December 2, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended November 30, 1996, in
conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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.
PRICE WATERHOUSE LLP
Indianapolis, Indiana
January 13, 1997
-20-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOVEMBER 30, December 2, December 3,
Year Ended 1996 1995 1994 (53 weeks)
- --------------------------------------------------------------------------------
NET REVENUES
Health Care sales $ 568 $ 556 $ 591
Health Care rentals 373 368 333
Funeral Services 524 515 499
Insurance 219 186 154
- --------------------------------------------------------------------------------
Total revenues 1,684 1,625 1,577
- --------------------------------------------------------------------------------
COST OF REVENUES
Health Care cost of goods sold 334 347 337
Health Care rental expenses 233 246 220
Funeral Services 278 278 268
Insurance 162 141 114
- --------------------------------------------------------------------------------
Total cost of revenues 1,007 1,012 939
Other operating expenses 441 408 397
Unusual charges - 26 85
- --------------------------------------------------------------------------------
OPERATING PROFIT 236 179 156
Other income (expense), net:
Interest expense (22) (20) (23)
Investment income, net 17 15 13
Other 2 (4) (1)
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 233 170 145
Income taxes 93 80 55
- --------------------------------------------------------------------------------
NET INCOME $ 140 $ 90 $ 90
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 2.02 $ 1.27 $ 1.26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .62 $ .60 $ .57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 69,474,266 70,757,868 71,278,213
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-21-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
NOVEMBER 30, December 2,
1996 1995
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 266 $ 171
Trade accounts receivable, less
allowances of $19 in 1996 and
$20 in 1995 287 313
Inventories 96 112
Other current assets 45 44
- --------------------------------------------------------------------------------
Total current assets 694 640
- --------------------------------------------------------------------------------
EQUIPMENT LEASED TO OTHERS 278 261
Less accumulated depreciation 185 170
- --------------------------------------------------------------------------------
Equipment leased to others, net 93 91
- --------------------------------------------------------------------------------
PROPERTY 656 650
Less accumulated depreciation 403 374
- --------------------------------------------------------------------------------
Property, net 253 276
- --------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets at amortized cost:
Patents and trademarks 24 29
Excess of cost over net asset values
of acquired companies 112 126
Other 13 8
Deferred charges and other assets 50 49
- --------------------------------------------------------------------------------
Total other assets 199 212
- --------------------------------------------------------------------------------
INSURANCE ASSETS (NOTE 10)
Investments 1,663 1,432
Deferred acquisition costs 406 339
Deferred income taxes 44 40
Other 44 40
- --------------------------------------------------------------------------------
Total Insurance Assets 2,157 1,851
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 3,396 $ 3,070
- --------------------------------------------------------------------------------
-22-
- --------------------------------------------------------------------------------
NOVEMBER 30, December 2,
1996 1995
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt (Note 4) $ 74 $ 40
Current portion of long-term debt
(Note 4) 1 2
Trade accounts payable 50 71
Income taxes payable (Note 8) 21 13
Accrued compensation 58 62
Other liabilities (Note 12) 116 113
- --------------------------------------------------------------------------------
Total current liabilities 320 301
- --------------------------------------------------------------------------------
LONG-TERM DEBT (NOTE 4) 204 206
- --------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES
(NOTES 5 AND 12) 74 79
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES (NOTES 1 AND 8) 13 15
- --------------------------------------------------------------------------------
INSURANCE LIABILITIES (NOTE 10)
Benefit reserves 1,449 1,253
Unearned revenues 528 455
General liabilities 21 15
- --------------------------------------------------------------------------------
Total Insurance Liabilities 1,998 1,723
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 2,609 2,324
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTE 5)
- --------------------------------------------------------------------------------
Common stock - without par value:
Authorized - 199,000,000 shares
Issued - 80,323,912 shares in
1996 and 1995 4 4
Additional paid-in capital 14 14
Retained earnings (Note 4) 973 876
Accumulated unrealized gain on investments 21 23
Foreign currency translation adjustment 10 14
Treasury stock, at cost: 1996 - 11,537,632
shares; 1995 - 10,146,528 shares (235) (185)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 787 746
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,396 $3,070
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-23-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
NOVEMBER 30, December 2, December 3,
Year Ended 1996 1995 1994 (53 weeks)
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 140 $ 90 $ 90
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation, amortization and
writedown of goodwill 99 127 97
Change in noncurrent deferred income
taxes (6) (13) (11)
Gain on sale of business (3) - -
Change in working capital excluding
cash, current debt, acquisitions
and dispositions:
Trade accounts receivable 24 (13) (37)
Inventories 15 (6) (1)
Other current assets (1) (1) (2)
Trade accounts payable (21) 18 1
Accrued expenses and other liabilities 5 7 (27)
Change in insurance deferred policy
acquisition costs (67) (58) (63)
Change in other insurance items, net 40 34 18
Other, net 14 (6) (3)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 239 179 62
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (92) (103) (100)
Proceeds on disposal of fixed assets
and equipment leased to others 2 2 2
Acquisitions of businesses, net of
cash acquired (6) (4) (40)
Other investments (3) - (16)
Proceeds on sale of business 15 - -
Insurance investments:
Purchases (437) (552) (527)
Proceeds on maturities 78 65 211
Proceeds on sales prior to maturity 126 290 64
- --------------------------------------------------------------------------------
Net cash used in investing activities (317) (302) (406)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to short-term debt 119 23 4
Reductions to short-term debt (81) (8) (2)
Additions to long-term debt - - 100
Reductions to long-term debt (3) (2) (77)
Payment of cash dividends (43) (43) (41)
Treasury stock acquired (51) (23) (20)
Insurance premiums received 459 428 459
Insurance benefits paid (227) (201) (169)
- --------------------------------------------------------------------------------
Net cash provided by financing
activities 173 174 254
- --------------------------------------------------------------------------------
TOTAL CASH FLOWS 95 51 (90)
CASH AND CASH EQUIVALENTS
At beginning of year 171 120 210
- --------------------------------------------------------------------------------
At end of year $ 266 $ 171 $ 120
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-24-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
NOVEMBER 30, December 2, December 3,
Year Ended 1996 1995 1994 (53 weeks)
- --------------------------------------------------------------------------------
COMMON STOCK $ 4 $ 4 $ 4
- --------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Beginning of year 14 12 4
Fair market value over cost on
reissuance of treasury shares
(1996 - 33,996; 1995 - 14,537;
1994 - 270,626) - - 8
Other - 2 -
- --------------------------------------------------------------------------------
End of year 14 14 12
- --------------------------------------------------------------------------------
RETAINED EARNINGS
Beginning of year 876 829 780
Net income 140 90 90
Dividends (43) (43) (41)
- --------------------------------------------------------------------------------
End of year 973 876 829
- --------------------------------------------------------------------------------
ACCUMULATED UNREALIZED GAIN ON INVESTMENTS
Beginning of year 23 - -
Net unrealized holding gain (loss) (2) 23 -
- --------------------------------------------------------------------------------
End of year 21 23 -
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Beginning of year 14 10 (2)
Translation adjustment (4) 4 12
- --------------------------------------------------------------------------------
End of year 10 14 10
- --------------------------------------------------------------------------------
TREASURY STOCK
Beginning of year (185) (162) (147)
Shares acquired (1996 - 1,425, 100;
1995 - 760,000;
1994 - 610,300) (51) (23) (20)
Shares reissued 1 - 5
- --------------------------------------------------------------------------------
End of year (235) (185) (162)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 787 $ 746 $ 693
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-25-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies specific to insurance operations are summarized in Note 10.
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.
ACCOUNTING STANDARDS
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in October
1995, and is effective for fiscal years beginning after December 15,1995 (not
later than fiscal year 1997 for the Company). The new standard encourages
companies to adopt a fair value based method of accounting for employee stock-
based compensation plans, but allows companies to continue to account for those
plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock
Issued to Employees." The Company will adopt this standard in 1997 and has not
decided whether it will adopt the fair value based method or, alternatively, the
pro-forma disclosure requirements of the new standard.
NATURE OF OPERATIONS
Hillenbrand Industries is organized into two segments - Health Care and
Funeral Services. The Health Care segment consists of Hill-Rom Company,
Medeco Security Locks (included in this segment for reporting purposes only)
and Block Medical (sold in the third quarter of 1996). Hill-Rom generates
the predominant share of this segment's revenue and operating profit and is a
leading manufacturer of patient care products and 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 56%
of Hillenbrand's revenues in 1996. The Funeral Services segment consists of
Batesville Casket Company and The Forethought Group. Batesville Casket
Company is a leading producer of protective metal and hardwood burial caskets
and cremation urns, caskets and marketing support services. Its products are
marketed to licensed funeral directors operating licensed funeral homes
primarily in North America. Batesville generated 31% of Hillenbrand's
revenues in 1996. The Forethought Group provides funeral homes in 42 U.S.
states, the District of Columbia, Puerto Rico and Canada with life insurance
policies and marketing support for pre-need, inflation-protected funeral
planning. Forethought generated 13% of Hillenbrand's revenues in 1996.
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. Refer to Notes 8 and 12 for
discussion of certain significant estimates.
-26-
CASH AND CASH EQUIVALENTS
The Company considers investments in marketable securities and other highly
liquid instruments with a maturity of three months or less to be cash
equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. The last-in, first-out
(LIFO) method was used for determining the cost of approximately 71% of total
inventories at November 30, 1996, 65% at December 2, 1995 and 62% at December
3, 1994. The cost for the remaining portion of the inventories was determined
using the first-in, first-out (FIFO) method. The LIFO reserve, which
approximates the excess of the current cost of inventories over the stated LIFO
values, increased from $9 million at year-end 1994 to $12 million at year-end
1995 and declined to $11 million at year-end 1996.
EQUIPMENT LEASED TO OTHERS
Equipment leased to others represents therapy rental units, which are recorded
at cost and depreciated on a straight-line basis over their estimated economic
life. 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. 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 1996 and 1995 were:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Land $ 25 $ 28
Buildings and building equipment 146 145
Machinery and equipment 485 477
- --------------------------------------------------------------------------------
Total $ 656 $ 650
- --------------------------------------------------------------------------------
INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangible assets are stated at cost and are amortized on a straight-line basis
over periods ranging from 3 to 40 years. The Company reviews goodwill 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 is less than its carrying
value, an impairment loss is recognized. The amount of the impairment loss is
determined by comparing the discounted expected future cash flows (including
terminal value) with the carrying value. Goodwill related to Block Medical was
written down $20 million in the fourth quarter of 1995. Changes in market
conditions, the performance of certain products and increased competitive
pressures resulted in a significant reduction in management's expectations
regarding Block's future cash flows.
Certain assets relative to the acquisition of Arnold in 1994 that were being
held for disposal, were written down $6 million in the fourth quarter of 1995 to
their estimated fair value less cost of disposition. These assets were sold in
1996.
Accumulated amortization of intangible assets was $145 million and $164
million as of November 30, 1996, and December 2, 1995, respectively.
-27-
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. 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
Earnings per common share are computed by dividing net income by the average
number of shares outstanding during each year, including restricted shares
issued to employees. Common equivalent shares arising from shares awarded
under the Senior Executive Compensation Program, which was initiated in
fiscal year 1978, have been excluded from the computation because of their
insignificant dilutive effect.
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.
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 5.5%, respectively, for 1996, 7.5%
and 5.5%, respectively, for 1995, and 8.0% and 6.0%, respectively, for 1994.
The expected long-term rate of return on assets was 8.0% for 1996, 1995 and
1994.
-28-
Net pension expense includes the following components:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Service expense-benefits earned during the year $ 7 $ 6 $ 5
Interest expense on projected benefit obligation 8 7 7
Actual loss (return) on plan assets (7) (12) 7
Net amortization and deferral (1) 4 (13)
- --------------------------------------------------------------------------------
Net pension expense $ 7 $ 5 $ 6
- --------------------------------------------------------------------------------
The funded status of the plans is shown in the table below:
- -------------------------------------------------------------------------------------------
NOVEMBER 30, DECEMBER 2,
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $79 in 1996 and $69 in 1995 ($84) ($74)
- -------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date ($122) ($110)
Plan assets at fair value, primarily U.S. Government
obligations, corporate bonds and notes, and common
stock issued by the Company. The value of this common
stock at date of acquisition by the plans was $3
and the current market value was $17 in 1996 and
$15 in 1995. 110 99
- -------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (12) (11)
Unrecognized net gain from past experience different
from that assumed (14) (16)
Unrecognized prior service cost 2 3
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)
- -------------------------------------------------------------------------------------------
In addition to the above plans, the Company assumed the unfunded liabilities
of a defined benefit plan in the acquisition of Arnold in 1994. The unfunded
accumulated benefit obligation of this plan, included in accrued expenses, was
$13 million on November 30, 1996, $14 million on December 2, 1995, and $13
million on December 3, 1994. Pension expense was approximately $1 million in
1996, 1995, and 1994.
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 1996 and 1995 and $7 million in 1994.
-29-
INCOME TAXES
The Company and its eligible subsidiaries file a consolidated income tax
return. 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 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 transactions are included in results of operations and are not
material.
2. ACQUISITIONS
In 1996, the Company's subsidiaries, Batesville Casket and Hill-Rom, each
acquired two small companies. The combined purchase price was $6 million.
Batesville Casket, purchased two regional casket distributors in 1995 and
Hill-Rom purchased the remaining minority interest in a subsidiary of Arnold,
which was initially acquired in 1994. The total purchase price for these
businesses in 1995 was $4 million.
In addition to the acquisition of Arnold by Hill-Rom, Batesville Casket
acquired Industrias Arga, S.A. de C.V., a Mexican casket manufacturer and
distributor, and a U.S. casket distributor, in 1994. The combined purchase
price of these companies (the predominant share of which related to Arnold)
consisted of cash in the amount of $40 million and the assumption of net
liabilities of $6 million. The resulting goodwill of $46 million is being
amortized on a straight-line basis, primarily over 40 years.
3. DISPOSITION
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 which will be realized from book and tax differences
in the basis of the business.
4. FINANCING AGREEMENTS
The Company's various financing agreements contain no provisions or conditions
relating to dividend payments, working capital and additional indebtedness.
-30-
Long-term debt consists of the following:
- -------------------------------------------------------------------------------------------
NOVEMBER 30, DECEMBER 2,
1996 1995
- -------------------------------------------------------------------------------------------
Unsecured 8 1/2% debentures due on December 1, 2011 $ 100 100
Unsecured 7% debentures due on February 15, 2024 100 100
Government sponsored bond with an interest rate of 5.0%
and maturities to 2008 2 2
Other 3 6
- -------------------------------------------------------------------------------------------
Total 205 208
Less current portion 1 2
- -------------------------------------------------------------------------------------------
Total long-term debt $ 204 $ 206
- -------------------------------------------------------------------------------------------
The scheduled payments on the long-term debt as of November 30, 1996 total
less than $1 million in each of the years 1997 through 2001.
Short-term debt consists of various lines of credit maintained for foreign
subsidiaries. The weighted average interest rate on all short-term
borrowings outstanding as of November 30, 1996, and December 2, 1995, was 4%
and 6%, respectively.
At November 30, 1996, the Company had uncommitted credit lines totaling
$159 million available for its operations. These agreements have no
commitment fees, compensating balance requirements or fixed expiration dates.
5. SHAREHOLDERS' EQUITY
One million shares of preferred stock, without par value, have been
authorized and none have been issued.
At November 30, 1996, the Company has three stock-based compensation plans;
the Senior Executive Compensation Program, the Performance Compensation Plan,
and the Restricted Stock Plan, which are described below. All shares issued
under these plans 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 1,115,730 shares
of common stock of the Company remain reserved for issuance under the
program. Total tentative performance shares payable through November 30,
1996, were 147,642. In addition, the Senior Executive Compensation Program
provides for participants to defer payment of long-term performance share and
other compensation earned in prior years. A total of 177,149 deferred shares
are payable as of November 30, 1996.
On April 7, 1992, the shareholders of the Company approved the adoption of
the Performance Compensation Plan whereby key employees will be awarded
tentative performance shares based upon achievement of performance targets.
A total of 1,293,820 shares of common stock remain reserved for issuance
under this plan as of November 30, 1996. In 1993, 386,096 shares were earned
based on the Company's performance. A total of 4,886 deferred shares are
payable as of November 30, 1996 under this plan. The plan will terminate on
November 30, 2001.
On April 14, 1987, the shareholders of the Company approved the adoption
of a restricted stock plan whereby key employees may be granted restricted
shares of the Company's stock. The restrictions lapse after six years; or
earlier if certain financial goals are exceeded. 2,000,000 shares of common
stock were designated for this plan. Remaining authorized restricted shares
may be awarded up to April 15, 1997, and the vesting periods begin when the
shares are awarded. 324,600 shares have been awarded, 268,132 shares have
been distributed and/or deferred, and 56,468 shares have been forfeited as of
November 30 1996. No additional awards are contemplated at this time.
-31-
Members of the Board of Directors may elect to defer fees earned as
reinvested in common stock of the Company. A total of 8,134 deferred shares
are payable as of November 30, 1996, under this program.
The Board of Directors has authorized the repurchase, from time to time, of
up to 14,000,000 shares of the Company's stock in the open market. The
purchased shares will be used for general corporate purposes. As of November
30, 1996, a total of 13,008,672 shares had been purchased at market trading
prices, of which 11,537,632 shares remain in treasury.
6. 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 10) for which it is practicable to estimate that value:
The carrying amounts of cash and cash equivalents, 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 30, 1996
- --------------------------------------------------------------------------------
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
Short-term debt $ 74 $ 74
Long-term debt $ 205 $ 221
- --------------------------------------------------------------------------------
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 30, 1996 and
December 2, 1995.
7. SEGMENT INFORMATION
INDUSTRY INFORMATION
The Health Care segment consists of Hill-Rom and Block Medical (sold in the
third quarter of 1996). Results for Medeco Security Locks are included in
this segment due to its relative size. Hill-Rom produces and sells electric
hospital beds, patient room furniture and patient handling equipment designed
to meet the needs of acute 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. Medeco produces and sells high-security mechanical locks and
lock cylinders and electronic security systems for commercial, residential
and government applications.
-32-
The Funeral Services segment consists of Batesville Casket Company and
Forecorp. 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. Forecorp's subsidiaries, Forethought Life Insurance Company and The
Forethought Group, Inc., provide funeral planning professionals with
marketing support for Forethought-Registered Trademark- funeral plans funded
by life insurance policies. Note 10 contains additional information
regarding insurance operations.
Product transfers between industry segments are not material
Financial information regarding the Company's industry segments is presented
below:
- ----------------------------------------------------------------------------------------------
NOVEMBER 30, DECEMBER 2, DECEMBER 3,
Year Ended 1996 1995 1994 (53 weeks)
- ----------------------------------------------------------------------------------------------
Net revenues:
Health Care $ 941 $ 924 $ 924
Funeral Services 743 701 653
- ----------------------------------------------------------------------------------------------
Consolidated $ 1,684 $ 1,625 $ 1,577
- ----------------------------------------------------------------------------------------------
Operating profit:
Health Care (a) (b) (c) $ 111 $ 62 $ 46
Funeral Services 144 134 123
Corporate and other (19) (17) (13)
- ----------------------------------------------------------------------------------------------
Consolidated 236 179 156
Interest expense (22) (20) (23)
Investment income 17 15 13
Other income (expense), net (d) 2 (4) (1)
- ----------------------------------------------------------------------------------------------
Income before income taxes $ 233 $ 170 $ 145
- ----------------------------------------------------------------------------------------------
Identifiable assets:
Health Care (a) (b) $ 647 $ 713 $ 701
Funeral Services 2,421 2,120 1,826
Corporate and other 328 237 187
- ----------------------------------------------------------------------------------------------
Consolidated $ 3,396 $ 3,070 $ 2,714
- ----------------------------------------------------------------------------------------------
Capital expenditures:
Health Care $ 69 $ 77 $ 75
Funeral Services 21 24 23
Corporate and other 2 2 2
- ----------------------------------------------------------------------------------------------
Consolidated $ 92 $ 103 $ 100
- ----------------------------------------------------------------------------------------------
Depreciation and amortization:
Health Care (a) $ 72 $ 100 $ 69
Funeral Services 24 24 24
Corporate and other 3 3 4
- ----------------------------------------------------------------------------------------------
Consolidated $ 99 $ 127 $ 97
- ----------------------------------------------------------------------------------------------
(a) REFLECTS CHARGES OF $20 MILLION IN 1995 FOR THE WRITEDOWN OF BLOCK
MEDICAL GOODWILL.
(b) REFLECTS A $6 MILLION CHARGE IN 1995 FOR THE WRITEDOWN OF CERTAIN ASSETS
OF A MANUFACTURING FACILITY SOLD IN 1996.
(c) REFLECTS AN $85 MILLION CHARGE IN 1994 FOR SETTLEMENT OF A PATENT
INFRINGEMENT SUIT.
(d) REFLECTS A GAIN OF $3 MILLION IN 1996 ON THE SALE OF BLOCK MEDICAL.
-33-
GEOGRAPHIC INFORMATION
Sales between geographic area are at transfer prices, which are equivalent to
market value.
- -------------------------------------------------------------------------------------------------------------------------
United Other Corporate
States (a) Europe (b) International and Other Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------
1996:
Net revenues:
To unaffiliated customers $ 1,447 $ 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) $ 2 $ (19) $ - $ 236
- -------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 2,869 $ 355 $ 24 $ 328 $ (180) $ 3,396
- -------------------------------------------------------------------------------------------------------------------------
1995:
Net revenues:
To unaffiliated customers $ 1,355 $ 221 $ 49 $ - $ - $ 1,625
Transfers to other geographic areas 37 - - - (37) -
- -------------------------------------------------------------------------------------------------------------------------
Total net revenues $ 1,392 $ 221 $ 49 $ - $ (37) $ 1,625
- -------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $ 225 $ (30) $ - $ (17) $ 1 $ 179
- -------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 2,575 $ 377 $ 24 $ 237 $ (143) $ 3,070
- -------------------------------------------------------------------------------------------------------------------------
1994 (53 weeks):
Net revenues:
To unaffiliated customers $ 1,350 $ 176 $ 51 $ - $ - $ 1,577
Transfers to other geographic areas 39 - - - (39) -
- -------------------------------------------------------------------------------------------------------------------------
Total net revenues $ 1,389 $ 176 $ 51 $ - $ (39) $ 1,577
- -------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $ 181 $ (9) $ (4) $ (13) $ 1 $ 156
- -------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 2,364 $ 215 $ 25 $ 187 $ (77) $ 2,714
- -------------------------------------------------------------------------------------------------------------------------
(a) REFLECTS UNUSUAL CHARGES OF $20 MILLION IN 1995 FOR THE WRITEDOWN OF BLOCK
MEDICAL GOODWILL AND $85 MILLION IN 1994 FOR SETTLEMENT OF A PATENT
INFRINGEMENT SUIT.
(b) REFLECTS AN UNUSUAL CHARGE OF $6 MILLION IN 1995 FOR THE WRITEDOWN OF
CERTAIN ASSETS OF A MANUFACTURING FACILITY SOLD IN 1996.
8. INCOME TAXES
Income taxes are computed in accordance with SFAS No. 109. The significant
components of the income tax provision (benefit) are as follows:
- -------------------------------------------------------------------------------------------
1996 1995 1994 (53 weeks)
- -------------------------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $ 267 $ 207 $ 163
Foreign (34) (37) (18)
- -------------------------------------------------------------------------------------------
Total $ 233 $ 170 $ 145
- -------------------------------------------------------------------------------------------
Provision for income taxes:
Current items:
Federal $ 85 $ 83 $ 58
State 13 12 8
Foreign 1 (1) (1)
- -------------------------------------------------------------------------------------------
Total current items 99 94 65
- -------------------------------------------------------------------------------------------
Deferred items:
Federal (6) (11) (10)
State - (2) -
Foreign - (1) -
- -------------------------------------------------------------------------------------------
Total deferred items (6) (14) (10)
- -------------------------------------------------------------------------------------------
Provision for income taxes $ 93 $ 80 $ 55
- -------------------------------------------------------------------------------------------
-34-
The fiscal year differences between the amounts recorded for income taxes
for financial statement purposes and the amounts computed by applying the
Federal statutory tax rate to income before taxes are explained as follows:
- -------------------------------------------------------------------------------------------
1996 1995 1994 (53 weeks)
- -------------------------------------------------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
- -------------------------------------------------------------------------------------------
Federal income
tax (a) $81 35.0 $59 35.0 $51 35.0
State income
tax (b) 9 3.8 7 4.0 5 3.5
Foreign income
tax (c) 12 5.1 11 6.5 5 3.6
Goodwill write-down (a) - - 7 4.1 - -
Sale of Block Medical (a) (6) (2.6) - - - -
Other, net (3) (1.4) (4) (2.5) (6) (4.2)
- -------------------------------------------------------------------------------------------
Provision for
income taxes $93 39.9 $80 47.1 $55 37.9
- -------------------------------------------------------------------------------------------
(a) AT STATUTORY RATE.
(b) NET OF FEDERAL BENEFIT.
(c) FEDERAL TAX RATE DIFFERENTIAL.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax balance sheet accounts were as follows:
- ----------------------------------------------------------------------------------------------
NOVEMBER 30, 1996 DECEMBER 2, 1995
- ----------------------------------------------------------------------------------------------
NON-INSURANCE INSURANCE NON-INSURANCE INSURANCE
- ----------------------------------------------------------------------------------------------
Deferred tax assets:
Current:
Inventories $ 4 $ - $ 4 $ -
Employee benefit accruals 3 - 4 -
Self insurance accruals 10 - 9 -
Litigation accruals 1 - 1 -
Other, net 7 3 7 2
Long-term:
Employee benefit accruals 18 - 17 1
Deferred policy revenues - 185 - 159
Foreign loss carryforwards 66 - 55 -
Foreign acquisition reserves 4 - 10 -
Other, net 6 - 5 -
- ----------------------------------------------------------------------------------------------
Total assets 119 188 112 162
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Current:
Inventories 2 - 2 -
Other, net 2 - 2 -
Long-term:
Depreciation 35 - 35 -
Amortization 2 - 2 -
Unrealized gain on investments - 12 - 13
Benefit reserves - 9 - 8
Deferred acquisition costs - 119 - 98
Foreign asset step up 4 - 5 -
Foreign investment writedown 16 - 17 -
Other, net - 4 - 3
- ----------------------------------------------------------------------------------------------
Total liabilities 61 144 63 122
- ----------------------------------------------------------------------------------------------
Less valuation allowance for
foreign loss carryforwards (50) - (43) -
- ----------------------------------------------------------------------------------------------
Net asset $ 8 $ 44 $ 6 $ 40
- ----------------------------------------------------------------------------------------------
-35-
Remaining unutilized foreign loss carryforwards were approximately $162
million and $136 million on November 30, 1996, and December 2, 1995,
respectively. There is not currently sufficient positive evidence as
required by SFAS No. 109 to substantiate recognition of net deferred tax
assets in the financial statements for those foreign subsidiaries in net
operating loss carryforward positions. Accordingly, a valuation allowance of
$50 million has been recorded. It is reasonably possible that sufficient
positive evidence could be generated in the near term at one or more of these
foreign subsidiaries to support a reduction in the valuation allowance and a
resulting recognition of net deferred tax assets. Included in the deferred
tax valuation allowance is $7 million related to acquired German loss
carryforward benefits and German acquisition purchase price allocation. The
future reversal of this portion of the valuation allowance will not be
recognized as an adjustment in the income statement.
Income tax benefits recorded in years 1990 through 1996 relative to certain
expenses associated with the Company's corporate-owned life insurance program
have been reviewed by the Internal Revenue Service (IRS). At the date of
this report, the Company and the IRS are requesting technical advice from the
IRS' national office. The Company strongly believes such benefits were
recorded in full compliance with existing and prior tax law. However, it is
reasonably possible that the IRS may, in the near term, disallow the
deductibility of some of these expenses. The Company believes that the
ultimate amount of tax deductions disallowed, if any, will not have a
material adverse effect on financial condition or cash flows.
9. SUPPLEMENTARY INFORMATION
The following amounts were (charged) or credited to income in the year
indicated:
- --------------------------------------------------------------------------------
1996 1995 1994 (53 weeks)
- --------------------------------------------------------------------------------
Rental expense ($16) ($17) ($20)
Research and
development costs ($42) ($39) ($35)
Investment income, net (a) $17 $15 $13
- --------------------------------------------------------------------------------
(a) EXCLUDES INSURANCE OPERATIONS.
The table below indicates the minimum annual rental commitments (excluding
renewable periods) aggregating $45 million, primarily for warehouses, under
noncancellable operating leases.
- --------------------------------------------------------------------------------
1997 $ 14
1998 $ 10
1999 $ 7
2000 $ 5
2001 $ 3
2002 and beyond $ 6
- --------------------------------------------------------------------------------
-36-
The table below provides supplemental information to the statement of
consolidated cash flows.
- -------------------------------------------------------------------------------
1996 1995 1994 (53 weeks)
- -------------------------------------------------------------------------------
Cash paid for:
Income taxes $ 92 $ 90 $ 85
Interest $ 16 $ 20 $ 26
Non-cash investing and
financing activities:
Liabilities assumed from/incurred
for the acquisition of businesses $ 1 $ 5 $ 50
Treasury stock issued under
stock compensation plans $ 1 $ - $ 13
- -------------------------------------------------------------------------------
10. INSURANCE OPERATIONS
Forecorp, Inc., through its two subsidiaries, Forethought Life Insurance
Company and The Forethought Group, Inc., serves funeral planning
professionals with life insurance policies and marketing support for
Forethought-Registered Trademark-funeral planning, a "pre-need" insurance
program. The life insurance policies are limited to long-duration,
whole-life policies, and, as such, are accounted for under SFAS No. 97. The
benefits under these policies increase based on external inflationary
indices. Premiums received are recorded as an increase to benefit reserves
or as unearned revenue. Unearned revenues are recognized over the actuarial
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 policy holder
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. treasuries 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 periodically realigned to better meet
this objective. 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 Company has classified the
investments in debt and equity securities of its insurance subsidiary as
"available for sale" and reported them at fair value on the balance sheet
with unrealized gains and losses charged or credited to a separate component
of shareholders' equity and the insurance deferred tax asset adjusted for the
income tax effect. The fair value of each security is based on the market
value provided by brokers/dealers.
The amortized cost and fair value of investment securities available for
sale at November 30, 1996 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 $ 553 $ 8 $ 9 $ 552
Corporate securities 991 27 2 1,016
Mutual funds 56 9 - 65
- -------------------------------------------------------------------------------
Total (a) $1,600 $ 44 $ 11 $1,633
- -------------------------------------------------------------------------------
-37-
The amortized cost and fair value of investment securities available for sale
at December 2, 1995 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 $ 500 $ 9 $ 6 $ 503
Corporate securities 873 34 2 905
Mutual funds - - - -
- -------------------------------------------------------------------------------
Total (a) $1,373 $ 43 $ 8 $1,408
- -------------------------------------------------------------------------------
(a) DOES NOT INCLUDE THE AMORTIZED COST OF OTHER INVESTMENTS CARRIED ON THE
BALANCE SHEET IN THE AMOUNT OF $30 MILLION AT NOVEMBER 30, 1996, AND $24
MILLION AT DECEMBER 2, 1995, THE CARRYING VALUE OF WHICH APPROXIMATES FAIR
VALUE.
The amortized cost and fair value of investment securities available for sale
at November 30, 1996, 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 $ 49 $ 49
Due after 1 year through 5 years 303 309
Due after 5 years through 10 years 249 252
Due after ten years 494 510
Mortgage-backed securities 449 448
Mutual funds 56 65
- -------------------------------------------------------------------------------
Total $1,600 $ 1,633
- -------------------------------------------------------------------------------
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:
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Proceeds $ 126 $ 290 $ 64
Realized gross gains $ 1 $ 5 $ 1
Realized gross losses $ 1 $ 4 $ 1
- -------------------------------------------------------------------------------
Summarized financial information of insurance operations included in the
statement of consolidated income is as follows:
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Investment income $ 104 $ 92 $ 73
Earned premium revenue 115 93 81
Net gain on sale of investments - 1 -
- -------------------------------------------------------------------------------
Total net revenues 219 186 154
Benefits paid 56 48 42
Credited interest 97 86 70
Deferred acquisition costs amortized 29 24 20
Other operating expenses 13 14 13
- -------------------------------------------------------------------------------
Income before income taxes $ 24 $ 14 $ 9
- -------------------------------------------------------------------------------
-38-
Statutory data at December 31 includes:
- -------------------------------------------------------------------------------
1996 (unaudited) 1995 1994
- -------------------------------------------------------------------------------
Net income $ 29 $ 22 $ 28
Capital and surplus $ 129 $ 115 $ 104
- -------------------------------------------------------------------------------
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
TOTAL
1996 QUARTER ENDED 3/02/96 6/01/96 8/31/96 11/30/96 YEAR
- -------------------------------------------------------------------------------
Net revenues $ 434 $ 424 $ 404 $ 422 $1,684
Gross profit 170 169 163 175 677
Net income (a) 33 34 34 39 140
Net income per common share (a) .48 .48 .50 .56 2.02
- -------------------------------------------------------------------------------
Total
1995 QUARTER ENDED 3/04/95 6/03/95 9/02/95 12/02/95 Year
- -------------------------------------------------------------------------------
Net revenues $ 396 $ 405 $ 399 $ 425 $1,625
Gross profit 152 153 147 161 613
Net income (b) 27 28 26 9 90
Net income per common share (b) .39 .39 .37 .12 1.27
- -------------------------------------------------------------------------------
(a) REFLECTS INCOME OF $8 MILLION, OR $.12 PER SHARE, RELATIVE TO THE SALE OF
BLOCK MEDICAL IN THE THIRD QUARTER.
(b) REFLECTS THE WRITEDOWN OF BLOCK MEDICAL GOODWILL AND CERTAIN ASSETS OF A
MANUFACTURING FACILITY SOLD IN 1996 TOTALING $26 MILLION, OR $.37 PER SHARE,
IN THE FOURTH QUARTER.
12. 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.
-39-
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 $10 million. The Company has provided
adequate reserves in its financial statements for these matters. 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.
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.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the independent accountants.
-40-
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 February
28, 1997, and to be filed with the Commission relating to the Company's 1997
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 dated February 28, 1997, and to be filed with the Commission relating
to the Company's 1997 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 February 28, 1997, and to be filed with the Commission relating to
the Company's 1997 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 February 28, 1997, and to be filed with the Commission
relating to the Company's 1997 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 index to Consolidated Financial Statements
on page 19.
(2) Financial Statement Schedules
The financial statement schedules filed in response to Item 8 and Item
14(d) of Form 10-K are listed on the index to Consolidated Financial
Statements on page 19.
-41-
(3) Exhibits
The following exhibits have been filed as part of this report in
response to Item 14(c) of Form 10-K.
3(i) 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(ii) Form of Amended Bylaws of the Registrant
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)
10.2 Hillenbrand Industries, Inc. Performance Compensation Plan
(Incorporated herein by reference to the definitive Proxy
Statement dated February 28, 1992, and filed with the Commission
relative to the Company's 1992 Annual Meeting of Shareholders)
10.3 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)
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule -- 9 months, 1996
27.3 Restated Financial Data Schedule -- 6 months, 1996
27.4 Restated Financial Data Schedule -- 3 months, 1996
27.5 Restated Financial Data Schedule -- 12 months, 1995
27.6 Restated Financial Data Schedule -- 3 months, 1995
27.7 Restated Financial Data Schedule -- 6 months, 1995
27.8 Restated Financial Data Schedule -- 9 months, 1995
27.9 Restated Financial Data Schedule -- 12 months, 1994
(b) There were no reports on Form 8-K filed during the quarter ended November
30, 1996.
-42-
SCHEDULE II
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED NOVEMBER 30, 1996, DECEMBER 2, 1995 AND DECEMBER 3, 1994
(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 30, 1996 $ 20 $ 1 $ - $ 2 $ 19
------ ------ ------ ------ ------
------ ------ ------ ------ ------
December 2, 1995 $ 14 $ 4 $ 5 $ 3 $ 20
------ ------ ------ ------ ------
------ ------ ------ ------ ------
December 3, 1994 $ 11 $ 3 $ 3 $ 3 $ 14
------ ------ ------ ------ ------
------ ------ ------ ------ ------
(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.
-43-
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/W August Hillenbrand
------------------------
W August Hillenbrand
Dated: January 20, 1997 Chief Executive Officer
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/John C. Hancock
- --------------------------- ---------------------------
Daniel A. Hillenbrand John C. Hancock
Chairman of the Board Director
/s/Tom E. Brewer /s/W August Hillenbrand
- --------------------------- ---------------------------
Tom E. Brewer W August Hillenbrand
Chief Financial Officer Director
/s/James D. Van De Velde /s/George M. Hillenbrand II
- --------------------------- ---------------------------
James D. Van De Velde George M. Hillenbrand II
Controller Director
/s/Lawrence R. Burtschy /s/John A. Hillenbrand II
- --------------------------- ---------------------------
Lawrence R. Burtschy John A. Hillenbrand II
Director Director
/s/Peter F. Coffaro /s/Ray J. Hillenbrand
- --------------------------- ---------------------------
Peter F. Coffaro Ray J. Hillenbrand
Director Director
/s/Edward S. Davis /s/Lonnie M. Smith
- --------------------------- ---------------------------
Edward S. Davis Lonnie M. Smith
Director Director
/s/Leonard Granoff
- ---------------------------
Leonard Granoff
Director
Dated: January 20, 1997
-44-
HILLENBRAND INDUSTRIES, INC.
INDEX TO EXHIBITS
3 (i) 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 (ii) Form of Amended Bylaws of the Registrant
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)
10.2 Hillenbrand Industries, Inc. Performance Compensation
Plan (Incorporated herein by reference to the
definitive Proxy Statement dated February 28, 1992, and
filed with the Commission relative to the Company's
1992 Annual Meeting of Shareholders)
10.3 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)
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule -- 9 months, 1996
27.3 Restated Financial Data Schedule -- 6 months, 1996
27.4 Restated Financial Data Schedule -- 3 months, 1996
27.5 Restated Financial Data Schedule -- 12 months, 1995
27.6 Restated Financial Data Schedule -- 3 months, 1995
27.7 Restated Financial Data Schedule -- 6 months, 1995
27.8 Restated Financial Data Schedule -- 9 months, 1995
27.9 Restated Financial Data Schedule -- 12 months, 1994
-45-