Annual Report

Item 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data of Hillenbrand Industries, Inc., for fiscal years 1998 through 2001, based on the Company’s previous fiscal year end of the Saturday nearest November 30, and the ten month period ending September 30, 2002, the Company’s new fiscal year end. Also presented are comparable data for the twelve month periods ended September 30, 2001 and 2002.

(a)

The selected financial data presented above includes a number of non-recurring and special charges. Following is a summary of these charges, on a net-of-tax basis, and a reconciliation of net income exclusive of the charges. The amounts are summarized based upon the line items within the Statement of Consolidated Income impacted. Further detail regarding these adjustments in recent periods can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The following discussion and analysis should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included under Item 8 of this Form 10-K.

OVERVIEW

Hillenbrand Industries is organized into three major operating companies serving the health care and funeral services industries. Hill-Rom is a manufacturer of equipment for the health care industry and a provider of associated services for wound and pulmonary care. Batesville Casket and Forethought both serve the funeral services industry. Batesville Casket is a manufacturer of caskets and cremation-related products while Forethought is a provider of funeral planning financial products.

     Over the course of the past two years, Hillenbrand Industries has embarked on a plan to create value for shareholders, customers, suppliers and employees. At the cornerstone of this strategy is the Company’s commitment to create and accelerate shareholder value and growth by identifying and implementing strategies that will help realize the potential of the existing portfolio of businesses and position the Company for future growth, both intrinsically and through acquisitions. The five key elements of the Company’s strategy and its impact on the business are outlined as follows:

	1.		Profitable revenue growth: Profitable revenue growth is critical to the Company’s overall commitment to build shareholder value. Actions taken to achieve this objective include a more strategic approach to new product development, an increased focus on higher margin products and a more profitable product mix. These efforts have resulted in numerous product line extensions, new product platforms, gross margin improvement and a foundation for future revenue growth. The Company is also committed to growth through acquisitions in the health care environment.
	2.		Improved asset management: The Company continually strives to improve its return on assets and capital efficiency. Key components of this effort include business process simplification, asset rationalization and achieving an optimal sales structure. Significant progress has been made in all these areas. In business process simplification, the Company is continuing its efforts to move to a common technology platform with its Enterprise Resource Planning implementations at Hill-Rom and Batesville Casket. In the area of asset rationalization, certain poor performing product lines and businesses have been exited and certain under-performing assets have been divested. In addition, as part of the Company’s continuing realignment efforts, the sales forces within each operating company have been retooled to be more customer-focused.
	3.		Lower cost structure: The Company is committed to increasing shareholder value through the reduction of costs and waste in all areas of its business and the streamlining of processes for higher performance. Product line rationalization has occurred at Hill-Rom resulting in a significant reduction of stock keeping units. Strategic sourcing and supply arrangements with key suppliers have resulted in significant reductions in raw material costs while maintaining quality. Fixed costs also continue to be reduced as a result of work force and other realignment activities.
	4.		Strategic portfolio management: The Company continues to manage its portfolio of operating companies under a unified corporate structure rather than as a group of autonomous companies. Under this approach, each operating company plays a specific role in the fulfillment of the Company’s overall strategy. Batesville Casket and Forethought are responsible for providing earnings and cash flow to fund Corporate growth. Hill-Rom’s role is to provide profitable growth through new product innovation, expansion into new areas and acquisitions in its respective health care businesses.

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5.

Leadership excellence: With the current year addition of key personnel in the areas of finance, legal, corporate development and corporate strategy, the Company’s leadership transformation is nearly complete. This transformation also extended to the Company’s Board of Directors where in 2002 three new members were added to strengthen health care leadership at the Board level. Future endeavors in this area are likely to include the realignment of incentive compensation to be more directly in-line with shareholder measures, the strategic exchange of personnel among operating companies and an increased focus on development and training of executive management.

     The Company’s recent results of operations have been significantly affected by these strategic initiatives and the resulting reductions in cost, improved manufacturing efficiencies, more profitable product mix and enhanced price realization. The charges and expenditures incurred to implement these initiatives partially offset the achieved benefits, but such benefits are expected to continue in future periods. The Company expects further benefits to be achieved as the Company continues to pursue its strategy, with a primary focus on the following elements of the strategy in 2003:

	1.		Accelerating top line growth through new business development: While intrinsic growth is important, the Company recognizes that it will not be able to consistently meet its strategic objectives without the benefit of acquisitions. The Company will continue to pursue a focused approach to acquisitions, looking for companies with profitability and growth potential in the health care environment.
	2.		Product quality, innovation and new product development: The Company is becoming increasingly focused on its product quality and new product development initiatives, increasing funding levels and the speed of research and development and manufacturing cycle times. The ultimate goal of these initiatives is to provide meaningful solutions to customers.
	3.		Streamlining business for higher performance: The Company plans to continue to rationalize and exit poor performing product lines and markets and divest itself of under-performing assets. In addition, implementation efforts related to the Enterprise Resource Planning implementations at Hill-Rom and Batesville Casket will continue, providing a common technology platform aimed at speeding productivity gains and process improvements.
	4.		Reduce risk in Forethought investment portfolio: At Forethought, efforts will continue to reduce exposure to the volatility of the credit markets by reducing exposure to high-yield bonds, lowering limits for investments in individual securities, investing in commercial mortgages and seeking favorable returns within acceptable risk parameters.

     In addition to the effects of the continued execution of overall Corporate strategy, other trends in the Company’s businesses which have impacted and may continue to impact performance are outlined below.

     The health care products industry is a diverse and highly competitive industry. Management believes that the health care businesses in which it participates will continue to grow annually at low single-digit rates. From a positive perspective, patient demand for services is rising as a result of a number of factors, including the aging of America, enlightened consumers and technological advances. These trends are reflected in increasing days of inpatient stays at acute care facilities in the United States, creating pressure for facilities to upgrade and increase efficiency to maintain profitability and meet demand in a period of unfavorable trends in nursing.

     In addition, health care providers are under increased pressure to control costs. As a result, purchasers of health care products and services such as those offered by the Company’s health care businesses increasingly are demanding lower priced products and services that improve the quality and efficiency of patient care and service. Specifically, state and federal

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budget deficits cause increasing pressure to control costs in the Medicare and Medicaid programs. Congressional interest and future prescription drug legislation could also negatively impact reimbursements of products and services presently receiving coverage and reimbursement. Premium increases to health care plans and the rising uninsured population further exacerbate a difficult reimbursement environment for providers. Accordingly, management of the Company believes that, in order for the Company to achieve its goals of faster growth and improved profitability, it will be required to continue to provide innovative, high quality customer solutions on a cost-effective basis. As an example, the Company has experienced strong sales in its TotalCare line in recent periods as a result of continuing to offer new product line extensions with respect to this product. In areas in which the Company has been slower to bring new products and features to market, the Company has been less competitive.

     In the funeral services products industry, the burial casket industry appears to be gradually but steadily declining as the result of lower age-adjusted mortality rates and increased cremations. Management expects these trends, which have resulted in small declines in the volume of casket sales for the Company in recent periods, to continue in the near future. Although the Company offers a line of cremation products, these products result in lower revenue and carry lower margins. Partially offsetting these negative trends is a growing demand for enhanced personalization of funeral products. Therefore, based on these trends and factors, the Company’s strategy to improve profitability in the funeral services products industry will require the Company to continue to differentiate its products on the basis of quality, innovation, personalization and customer service while at the same time aggressively acting to control costs through manufacturing efficiencies, strategic sourcing and other cost reduction efforts.

     In the funeral services insurance industry, the recent volatility in the credit markets and the high-profile downgrades of corporate debt, especially the unprecedented volatility in the telecommunications sector, continued to adversely impact the Forethought investment portfolio resulting in significant net capital losses and bond impairments. The declining interest rate environment has also negatively impacted the investment yield on the portfolio, a trend which is likely to continue into 2003 as a result of continuing low interest rates, relatively poor equity performance and competitive pressures limiting decreases in liability crediting rates. On the other hand, the underwriting component of the insurance business continues to perform well in a relatively stable environment which should benefit from the aging population in the United States.

     Hillenbrand’s results for fiscal 2002 reflect the settlement of its longstanding antitrust litigation with KCI and one of its affiliates. Pursuant to the settlement, the Company paid KCI $175 million out of its cash-on-hand and agreed to pay an additional $75 million no earlier than one year after the initial payment, unless KCI becomes bankrupt or undergoes a change of control. See Item 3 - Legal Proceedings. In connection with the settlement, the Company took a litigation charge and established a litigation accrual of $250 million, $158 million net-of-tax, in the fourth quarter of fiscal 2002, subject to an adjustment of the accrual if the second payment of $75 million is not made. After funding the initial settlement payment of $175 million on January 2, 2003, the Company will have a significant remaining cash balance, strong cash flows and $500 million in availability under its credit facilities to fund the execution of its strategic initiatives.

RESULTS OF OPERATIONS

Effective for fiscal year 2002, the Company changed its fiscal year to September 30 from the 52 or 53-week period ending the Saturday nearest November 30 of each year. As a result of this change, the Statements of Consolidated Income, Statements of Consolidated Cash Flows and Statements of Consolidated Shareholders’ Equity presented in this Form 10-K reflect the Ten Months Ended September 30, 2002 and each of the two previous Fiscal Years (Twelve Months) Ended December 1, 2001 and December 2, 2000.

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     As a result of the change in fiscal year ends, for purposes of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the following periods of operations are presented and discussed:

	•		Twelve Months Ended September 30, 2002 compared to Twelve Months Ended September 30, 2001
	•		Ten Months Ended September 30, 2002 compared to Fiscal Year Ended December 1, 2001
	•		Fiscal Year Ended December 1, 2001 compared to Fiscal Year Ended December 2, 2000

     The discussion of results for the Twelve Months Ended September 30, 2002 to the Twelve Months Ended September 30, 2001, which are unaudited for both periods, is presented for comparative purposes only. Management considers this to be a more meaningful presentation of current year operating results than the comparison of the Ten Months Ended September 30, 2002 to the Fiscal Year Ended December 1, 2001. As a result, the explanations related to the comparative results of the Ten Months Ended September 30, 2002 to the Fiscal Year Ended December 31, 2002 are more abbreviated than for the unaudited twelve-month periods. Unless otherwise noted, the factors affecting the results for the Ten Months Ended September 30, 2002 are consistent with those affecting the unaudited results for the twelve months ending on this same date.

     Unless otherwise indicated, references to 2002 or 2001 in the comparative discussions below correspond to the periods set forth in the heading of each section.

     The following table presents comparative operating results for all periods discussed within Management’s Discussion and Analysis:

Twelve Months Ended September 30, 2002 Compared to Twelve Months Ended September 30, 2001

Summary

Consolidated revenues remained relatively stable at $2,147 million in 2002 compared to $2,144 million in 2001. Strong Health Care sales were partially offset by the continuing effects of the prior year exit of certain product lines and the sale of a Health Care subsidiary in the first quarter of 2002. Further offsetting the strong Health Care sales were revenue adjustments for net capital loss and impairment charges recognized by Forethought during the year of approximately $57 million. Revenues were benefited by nearly $19 million as a result of the

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inclusion of an additional month of sales for certain foreign operations as Hill-Rom discontinued consolidating such operations on a one-month lag basis in September 2002 due to the resolution of prior process and system constraints. Excluding the effect of these items, and eliminating the 13th month for certain foreign operations, revenues would have increased $70 million, or 3.3%, over the prior year.

     Operating profit of $16 million was recognized in 2002 compared to $245 million in the prior year. The significant decline in the current year operating profit was attributable to a $250 million litigation charge taken in relation to the KCI antitrust litigation previously described at Item 3 – Legal Proceedings. Absent this charge, operating profit increased $21 million, or 8.6%, to $266 million in 2002 on essentially flat revenues. This improvement related to higher gross profit margins, which increased 210 basis points during the year, resulting from improved product mix, price realization and the benefits of cost reduction and realignment efforts. This improvement in margins was partially offset by higher operating expenses associated primarily with business transformation items described below, legal expenses related primarily to the KCI antitrust litigation and incentive compensation. The inclusion of an additional month of activity for certain foreign operations of Hill-Rom had a minimal impact on 2002 operating income. As a result of the KCI antitrust litigation charge of $250 million, $158 million net-of-tax, net income declined in 2002 to $44 million, or $0.70 on a diluted earnings per share basis, compared to net income of $153 million, or $2.43 on a diluted earnings per share basis, in 2001.

     Operating results for the first half of 2002 included net capital losses and impairment charges of $32 million, $21 million net-of-tax, within Forethought’s investment portfolio. Of such amount, $22 million, $15 million net-of-tax, related to first quarter losses in the high-yield bond portfolio resulting from a reassessment of such investments in light of significant deterioration in the credit markets. Further, in the third quarter an additional impairment charge of approximately $33 million, $21 million net-of-tax, was recognized by Forethought in response to continued turmoil in the credit markets underlying the high-yield and telecommunications sectors. Also impacting operating results in 2002 was the $250 million, $158 million net-of-tax, KCI antitrust litigation charge previously mentioned and a net unusual charge of $15 million, $10 million net-of-tax . The unusual charge related primarily to continuing streamlining efforts at all Hillenbrand companies and the impairment of a technology asset at Forethought. In addition, a fourth quarter operating expense charge of $5 million was recognized related to the write-off of a separate technology asset with no continuing value at Hill-Rom. Comparable results for 2001 were also negatively impacted by a net unusual charge of $27 million, $18 million net-of-tax, primarily related to the realignment of Hill-Rom’s home care and long-term care businesses and the write-down of certain assets in a non-core product line, along with costs incurred with respect to the retirement of the Company’s former Chief Executive Officer. Excluding the impact of the first and third quarter Forethought impairment charges resulting from the deteriorating credit markets, along with the KCI antitrust litigation charge, the net unusual charges and the fourth quarter technology charge at Hill-Rom outlined above, consolidated operating profit would have approximated $341 million in 2002 compared with $272 million in 2001, an increase of $69 million, or 25.4%.

     In addition to the above items impacting operating earnings, the Company also recognized a favorable patent litigation settlement in Other income within the Statement of Consolidated Income during the fourth quarter of 2002. This settlement essentially offset the impacts of the fourth quarter unusual charge and technology charge at Hill-Rom previously outlined above. Further, during the year the Company recognized the release of approximately $32 million of previously provided tax reserves which were no longer considered necessary based on the resolution of certain domestic and foreign tax matters. Excluding the impact of such items, along with the other items described in the preceding paragraph, net income would have been $214 million in 2002 compared with $171 million in 2001, an increase of approximately 25%.

Net Revenues

Health Care

Health Care sales increased $63 million, or 7.7%, in 2002, to $877 million from $814 million in 2001. Acute care sales continue to be strong, especially with the TotalCare SpO ₂ RT™ and

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Advanta™ bed systems. Also contributing to the sales increase was the inclusion of a 13th month of sales in 2002 for certain foreign operations, with an estimated impact of $17 million on capital sales. During the fourth quarter of 2002 the Company discontinued consolidating such operations on a one-month lag basis. The favorable impacts of foreign currency movements also contributed approximately $6 million to the increase in sales. This favorability in revenue was partially offset by declines in North American sales associated with lower volumes in long-term care, ambulatory and infant care products, along with general declines in European volume levels in select markets, most notably in Germany. Further, the sale of a small Health Care subsidiary in the first quarter of 2002 and the prior year exit of certain long-term care product lines also had a negative impact of sales. Excluding the effects of the subsidiary sale and the exiting of these product lines, and eliminating the 13th month of sales for certain foreign operations, revenue would have increased approximately $73 million, or 9.3%, over the prior year.

     Health Care therapy rental revenue was essentially flat at $328 million in 2002 compared to $327 million in 2001. Improved rate realization was achieved in 2002, primarily within the home care market where the prior year included provisions for uncollectible receivables. With the home care realignment efforts announced in mid-2001, the rental of Group III products under Medicare Part B was essentially discontinued, eliminating the necessity for new receivable provisions and resulting in the release of existing provisions as previously reserved receivables were collected. The additional month of revenues for certain foreign operations also had a favorable impact on rental revenues of approximately $2 million, while currency movements favorably impacted revenue by $1 million. These positive impacts were offset by lower volume, primarily as a result of six fewer days in the 2002 fiscal year as the Company moved from a 4-4-5 calendar to a calendar month end with its transition to a new fiscal year-end of September 30, along with the impacts of the sale of a small subsidiary in the first quarter of 2002. The favorable impacts of the home care realignment efforts outlined above were essentially offset by the subsidiary sale, resulting in minimal net impact on Health Care therapy rental revenues.

Funeral Services

Funeral Service product sales declined $3 million to $621 million in 2002 from $624 million in 2001. Overall, a decline in volume across virtually all product lines was essentially offset by favorable product mix and improved price realization year over year. The decline in volume was attributable to lower death rates and an increase in cremation rates, along with the impact of an additional week of revenues in the first quarter of 2001.

     Insurance revenues, consisting of underwriting and investment revenues, declined 15.3% to $321 million in 2002 from $379 million in the prior year. The decline is primarily attributable to net capital losses and impairment charges in 2002 of $57 million, primarily within the high-yield bond and telecommunication sectors. Excluding the impact of net capital losses and impairments in each year, 2002 revenues would have been relatively flat when compared with 2001. Forethought’s underwriting business continued to perform well, with 2002 earned revenues increasing $14 million, or 7.0%, to $212 million as a result of increasing policies in force and the improved profitability of products sold. Earned revenue consists of revenue from the cost of insurance and amortization of front-end load. Revenue from cost of insurance is assessed based on mortality while front-end load represents the amortization of previously deferred revenue for services rendered following the policy sale. The funeral value of policies sold (amount of insurance put in place to prefund the funeral arrangement) in 2002, however, was down approximately 12% from 2001. This decline was primarily related to the discontinuance of Canadian operations, a reduction in trust rollovers, the timing of which is difficult to predict, and Forethought’s strategic decision to de-emphasize the passive seller market and to focus its energies on the more profitable active seller market. Investment performance during the year was also significantly impacted by the $57 million of net capital losses and impairments recognized during the year, including $23.4 million of impairments related to Enron Corp., WorldCom, Inc., Adelphia Communications and Global Crossing Ltd. Investment income, which was down $12 million to $165 million in 2002, also continued to be negatively impacted by the effects of the impairments, the shift from high-yield bonds to lower yielding investment grade bonds, lower overall interest rates on new investments and lower

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partnership income, primarily related to private equity partnerships. Forethought continues to take steps to mitigate the risk of future impairments by reducing its exposure to high-yield bonds and lowering the limits for investments in individual securities. Volatility in the credit markets, however, represents a continuing risk to future results of operations.

Gross Profit

Health Care

Gross profit for Health Care sales increased to $425 million in 2002 from $381 million in the prior year, an increase of 11.5%. As a percentage of sales, gross profit was 48.5% in 2002 compared to 46.8% in 2001. The increase was due primarily to an overall improvement in product mix, slightly higher product volumes and pricing and operational improvements related to various previously announced cost reduction and realignment efforts. Partially offsetting these favorable impacts on gross profit were higher warranty costs of approximately $11 million, along with other costs associated with the exiting of certain businesses.

     Health Care therapy rental gross profit increased 44.4% from $108 million in 2001 to $156 million in 2002. As a percentage of sales, gross profit was 47.6% of revenues in 2002 compared to 33.0% of revenues in the prior year. The improvement in gross profit margin was attributable to lower field service and home office costs resulting from the sales force restructuring actions of the prior year, along with other cost containment efforts in the Acute Care and European markets. Also contributing to this increase were favorable comparisons to the prior year with respect to uncollectible receivables in the home care market as a result of the exiting of certain home care product lines in the prior year. Unfavorable reserve adjustments were recognized in 2001 with respect to uncollectible receivables while in 2002 certain favorable adjustments were recognized upon the collection of previously reserved receivables. These favorable developments were partially offset by lower units in use compared to 2001.

Funeral Services

Funeral Services gross profit increased 4.3% from $322 million, or 51.6% of revenue, in 2001 to $336 million, or 54.1% of revenue, in 2002. This increase was due to favorable price realization (net revenues after discounts), improved product mix, continued efficiencies in manufacturing and production costs and savings on purchased materials related to strategic sourcing efforts. These benefits were partially offset by lower volumes across essentially all products lines, along with certain inventory provisions related to excess, obsolete and discontinued product lines. Gross profit percentages are exclusive of distribution costs of $84 million, or approximately 13.5% of 2002 revenues, essentially flat with 2001. Such costs are included in Other operating expenses for all periods.

     Profit before other operating expenses and unusual charges in insurance operations decreased approximately $60 million resulting in a loss of $3 million in 2002 compared to a profit of $57 million in 2001. This decrease was due primarily to higher net capital losses and impairments and lower investment income of $57 million and $12 million, respectively. Improvements in the underwriting business and efforts by Forethought to reduce its fixed cost structure partially offset these negative developments.

Other Operating Expenses

Other operating expenses, including insurance operations, increased 6.2% to $633 million in 2002 compared to $596 million in 2001. These expenses increased as a percentage of sales from 27.8% to 29.5%. Excluding the impact of the $57 million of net capital losses and impairments recognized by Forethought during 2002, the operating expense percentage would have been 28.7%. Other operating expenses consist of selling, marketing, distribution and general administrative costs. The increase in operating expenses is primarily attributable to increased business transformation costs, legal expenses and higher incentive compensation. Business transformation includes information technology infrastructure costs as the Company moves to a single technology platform, as well as costs associated with new product

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development and quality initiatives. The increased legal expenses are associated primarily with the KCI antitrust litigation, which has been settled. Higher incentive compensation relates to improved overall performance related to target performance established at the beginning of the year. These increases in operating expenses were partially offset by decreased goodwill amortization of approximately $7 million resulting from the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142. “Goodwill and Other Intangible Assets” on December 2, 2001 and cost savings associated with previously announced streamlining and realignment efforts.

Operating Profit

Health Care

Health Care incurred an operating loss of $70 million in 2002 compared to an operating profit of $125 million in 2001. The current year operating loss was attributable to the $250 million KCI antitrust litigation charge previously mentioned. Absent this charge, Health Care operating profit increased $55 million, or 44.0%, to $180 million in 2002 compared to $125 million in 2001 and as a percentage of sales, would have been 14.9% compared to 10.9% in the prior year. This increase was largely the result of increased gross profits for both Health Care sales and Health Care therapy rentals of $44 million and $48 million, respectively. Health Care sales gross profit increased primarily as a result of improved product mix, accompanied by slightly higher volumes, better pricing and operational efficiencies related to previously announced cost reduction and realignment efforts. These improvements in gross profit were partially offset by increased warranty costs and other costs associated with the exiting of certain businesses. Health Care therapy rental gross profit increased primarily as a result of lower field service and home office costs resulting from prior restructuring actions, along with favorable comparisons to the prior year with respect to uncollectible receivables in the home care market as a result of the exiting of certain home care product lines in the prior year. The improvements in gross profit were partially offset by an increase in operating expenses of $55 million, primarily related to increased business transformation costs, legal expenses, incentive compensation and higher selling costs related to the increased revenues.

     Health Care operating results in 2002 included the $250 million KCI antitrust litigation charge and net unusual charge activity of essentially zero, compared to a prior year unusual charge of $18 million. During 2002 a realignment action in Germany was essentially offset by the reversal of prior unusual charge provisions in excess of actual requirements. In 2001, the $18 million unusual charge related primarily to the streamlining and realignment of Hill-Rom’s home care and long-term care businesses and the write-down of certain assets in a non-core product line, partially offset by small gains on the sale of facilities idled under prior unusual charges and the reversal of prior unusual charge provisions in excess of actual requirements. Excluding the effect of the KCI antitrust litigation charge and net unusual charges, operating profit would have been $180 million in 2002 compared to $142 million in 2001, a 26.8% increase.

Funeral Services

Batesville Casket operating profit increased 5.8% as a result of favorable price realization, improved product mix, continued efficiencies in manufacturing and production costs and savings on purchased materials related to strategic sourcing efforts, partially offset by lower unit volumes. Operating expenses remained essentially flat as increased business transformation and incentive compensation costs were nearly offset by lower sales and marketing costs. In 2002 and 2001 Batesville Casket incurred unusual charges of $4 million and $1 million, respectively. The 2002 charge relates to the closure of a wood casket manufacturing plant in Canada and an employee reduction action in the United States. The 2001 action related to the relocation of a small operation to another company site and an employee reduction action in the United States. Excluding the effect of unusual charges, Batesville Casket operating profit would have increased 7.5%.

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     At Forethought, operating profit decreased approximately $65 million, nearly 240%, due primarily to higher net capital losses and impairments and lower investment income of $57 million and $12 million, respectively. In addition, Forethought incurred $10 million of unusual charges in 2002 and $1 million in 2001 relating to the realignment of certain operations and the write-down of certain technology assets. Improvements in the underwriting business and efforts by Forethought to reduce its fixed cost structure provided a partial offset to these negative developments. Excluding the effects of unusual charges and net capital losses and impairments in each year, Forethought’s operating profit would have increased 2.4% in 2002 compared to 2001.

Other Income and Expense

Interest expense declined $7 million to $18 million in 2002 compared to $25 million in 2001. This decrease was primarily related to the impact of interest rate swaps that converted $150 million of long term debt from fixed to variable interest rates entered in the fourth quarter of 2001. The average variable interest rate on debt covered by the swaps at September 30, 2002 was 4.0%. Investment income of $12 million declined from $19 million in 2001, despite higher average invested amounts, as a result of the lower interest rate environment. Other expenses were essentially flat year over year, with the favorable impact of a litigation settlement being essentially offset by losses incurred on the disposition of fixed assets and other investment write-downs.

Income Taxes

An income tax benefit of $35 million was recognized in 2002 compared to tax expense of $83 million in 2001. The tax benefit in 2002 resulted from the low level of income recognized in 2002, resulting from the $250 million KCI antitrust litigation charge, and the release of approximately $32 million of previously provided tax reserves. These reserves were released as a result of the resolution of certain domestic and foreign tax matters and improved operating results at certain foreign operations which rendered existing valuation allowances no longer necessary. Excluding the impact of the KCI antitrust litigation charge and the release of these reserves, the effective tax rate in 2002 would have been 34.2% compared to 35.3% in 2001. This decrease in rate resulted from continuing benefits of recent tax initiatives undertaken by the Company. Additional opportunities are being evaluated to further reduce the effective tax rate.

Ten Months Ended September 30, 2002 Compared to Fiscal Year (Twelve Months) Ended December 1, 2001

Summary

Consolidated revenues for the ten months ended September 30, 2002 totaled $1,757 million compared to $2,107 million for the fiscal year ended December 1, 2001. Giving consideration to the different time periods, overall revenues were relatively flat as strong Health Care sales were essentially offset by the continuing effects of the prior year exit of certain product lines and the sale of a Health Care subsidiary in October 2001. Revenues also benefited by nearly $19 million as a result of the inclusion of an additional month of sales for certain foreign operations as Hill-Rom discontinued consolidating such operations on a one-month lag basis in September 2002.

     An operating loss of $32 million was recognized for the ten months ended September 30, 2002, compared to an operating profit of $236 million, or 11.2% of revenues, in fiscal 2001. The 2002 operating loss was attributable to the $250 million KCI antitrust litigation charge previously discussed. Absent this charge, operating profit as a percentage of revenues would have been 12.4% of revenues. The improvement in operating profit as a percentage of revenues over 2001 related to higher gross profit margins, which increased 200 basis points, resulting from improved product mix, price realization and the benefits of cost reduction and realignment efforts. This improvement in margins was essentially offset by higher operating expenses associated primarily with business transformation items, legal expenses and incentive

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compensation. The inclusion of an additional month of activity for certain foreign operations of Hill-Rom had a minimal impact on 2002 operating income. A net loss of $10 million was experienced in 2002 compared to net income of $170 million in 2001. The decline in net income is related to the KCI antitrust litigation charge of $250 million, $158 million net-of-tax, along with the 2002 period only including ten months.

     Operating results for the ten months ended September 30, 2002 included net capital losses and impairment charges of $27 million compared to $30 million in 2001. Operating results in 2002 also included the $250 million KCI antitrust litigation charge and a net unusual charge of $4 million. The net unusual charge was associated primarily with a realignment action by Hill-Rom in Germany and the closure of a wood casket manufacturing plant in Canada and other employee reduction actions in the United States by Batesville Casket. This charge was partially offset by the reversal of prior unusual charge provisions in excess of actual requirements at Hill-Rom. Operating results in 2002 were also negatively impacted by a $5 million operating expense charge related to the write-off of a separate technology asset with no continuing value at Hill-Rom. Results for 2001 were negatively impacted by a net unusual charge of $32 million, primarily related to the realignment of Hill-Rom’s home care and long-term care businesses and the write-down of certain underperforming assets at Hill-Rom and Forethought, along with costs incurred in connection with the discontinuance of Forethought operations in Canada.

     In addition to the above items impacting operating earnings, the Company also recognized a favorable patent litigation settlement in Other income within the Statement of Consolidated Income in September 2002. This settlement essentially offset the impacts of the unusual charge and technology asset write-off outlined above. Further, during 2002 and 2001 the Company recognized the release of approximately $6 million and $26 million, respectively, of previously provided tax reserves associated with the resolution of certain domestic and foreign tax matters and the release of valuation allowances no longer considered necessary as a result of improved operating results at certain foreign operations.

Net Revenues

Health Care

Health Care sales for the ten months ended September 30, 2002 were $689 million compared to $809 million for fiscal 2001. Acute care revenues were strong, especially with the TotalCare SpO ₂ RT™ and Advanta™ bed systems. Also contributing to the strong sales was the inclusion of an extra month of sales in 2002 for certain foreign operations, with an estimated impact of $17 million on capital sales, and the favorable impacts of foreign currency movements. This favorability in revenue was partially offset by declines in North American specialty products and general declines in European volume levels in select markets, as previously discussed. The sale of a small Health Care subsidiary and the prior year exit of certain long-term care product lines also had a negative impact on sales.

     Health Care therapy rental revenue was $268 million for the ten months ended September 30, 2002 compared to $339 million in fiscal 2001. Rental revenues in 2002 represent a slight shortfall to 2001 levels, resulting primarily from the sale of a small subsidiary and the prior year exit of certain home care product lines. Generally lower units in use, including the effect of discontinued product lines, and lower rate realization for most product lines put added pressure on rental revenues. The extra month of sales for certain foreign operations and favorable currency movements previously mentioned provided partial offsets to these negative developments.

Funeral Services

Funeral Service product sales for the ten months ended September 30, 2002 were $510 million compared to $613 million in fiscal 2001. Overall, excluding the impact of different time periods, volume declines across virtually all product lines were essentially offset by favorable product mix and improved price realization over the prior year. The decline in volume is attributable primarily to lower death rates and an increase in cremation rates.

     Insurance revenues, consisting of underwriting and investment revenues, were $290 million for the ten months ended September 30, 2002 compared to $346 million in fiscal 2001.

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Revenues in each period were both negatively impacted by net capital losses and impairment charges, $27 million in 2002 and $30 million in 2001. Forethought’s underwriting business continued to perform well as a result of increasing policies in force and the improved profitability of products sold. The funeral value of policies sold, however, was down from 2001 levels as a result of the discontinuance of Canadian operations, a reduction in trust rollovers and Forethought’s strategic decision to de-emphasize the passive seller market. Investment performance was adversely impacted by the net capital losses and impairments recognized in each period. Investment income was also negatively impacted by the factors cited earlier. Forethought continues to take steps to mitigate the risk of future impairments, but volatility in the credit markets represents a continuing risk to future results of operations.

Gross Profit

Health Care

Gross profit for Health Care sales increased to 47.9% of revenues for the ten months ended September 30, 2002 compared to 46.6% in fiscal 2001. The increase in gross profit percentage was due primarily to an overall improvement in product mix, slightly higher product volumes and pricing and operational improvements related to cost reduction and realignment efforts. Partially offsetting these favorable impacts on gross profit were higher warranty costs, along with other costs associated with the exiting of certain businesses.

     Health Care therapy rental gross profit increased to 47.4% of revenues for the ten months ended September 30, 2002 compared to 38.6% in fiscal 2001. The improvement in gross profit percentage was attributable to lower field service and home office costs resulting from the sales force restructuring actions of the prior year, along with other cost containment efforts in the Acute Care and European markets.

Funeral Services

Funeral Services gross profit increased to 53.9% of revenues for the ten months ended September 30, 2002 compared to 52.0% in fiscal 2001. This increase is due to favorable price realization, improved product mix, continued efficiencies in manufacturing and production costs and savings on purchased materials resulting from strategic sourcing efforts. These benefits were partially offset by lower volumes across essentially all product lines, along with certain inventory provisions. Gross profit percentages are exclusive of distribution costs of 13.8% of revenues which are included in Other operating expenses for all periods.

     Profit before other operating expenses and unusual charges in insurance operations as a percentage of revenues declined to 5.5% for the ten months ended September 30, 2002 from 7.8% for fiscal 2001. The performance in each period was heavily influenced by net capital losses and impairments of $27 million and $30 million, respectively. Improvements in the underwriting business and efforts by Forethought to reduce its fixed cost structure in 2002 provided a partial offset, but could not fully offset the negative effects of the net capital losses and impairments and overall investment performance.

Other Operating Expenses

Other operating expenses, including insurance operations, increased to 29.9% of revenues for the ten months ended September 30, 2002 compared to 27.8% in fiscal 2001. Other operating expenses consist of selling, marketing, distribution and general administrative costs. The increase in operating expenses as a percentage of revenues is consistent with the explanation previously provided in the comparison of twelve month results for September 30, 2002 and 2001.

Operating (Loss) Profit

Health Care

Health Care incurred an operating loss in 2002 as a result of the $250 million KCI antitrust litigation charge previously mentioned. Absent this charge, Health Care operating profit as a

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percentage of revenues decreased to 12.4% for the ten months ended September 30, 2002 compared to 12.8% in fiscal 2001. This decrease is largely the result of increased gross profit margins for both Health Care sales and Health Care therapy rentals being more than offset by higher operating expenses as a percentage of revenues, as previously discussed.

     Health Care operating results for the ten months ended September 30, 2002 included the $250 million KCI antitrust litigation charge and a net unusual charge of $2 million compared to a fiscal 2001 net unusual charge of $19 million. During 2002 a small realignment action in Germany was partially offset by the reversal of prior unusual charge provisions in excess of actual requirements. In 2001, the $19 million unusual charge related primarily to the streamlining and realignment of Hill-Rom’s home care and long-term care businesses and the write-down of certain assets in a non-core product line, partially offset by the reversal of prior unusual charge provisions in excess of actual requirements.

Funeral Services

Batesville Casket operating profit as a percentage of revenue improved 220 basis points in 2002 compared to 2001 as a result of increased gross profit margins and relatively flat operating expenses. Operating expenses remained essentially flat as increased business transformation and incentive compensation costs were nearly offset by lower sales and marketing costs. In 2002 and 2001 Batesville Casket incurred unusual charges of $3 million and $2 million, respectively.

     At Forethought, operating profit as a percentage of revenue improved slightly in 2002, but was still negative. Improvements in the underwriting business and reduced operating expenses were not sufficient to fully offset the negative effects of the net capital losses and disappointing investment performance. In addition, Forethought incurred $10 million of unusual charges in fiscal 2001 relating to the realignment of certain operations and the write-down of certain technology assets.

Other Income and Expense

Interest expense declined in 2002 compared to fiscal 2001 as a result of the interest rate swaps put in place in the third quarter of 2001. Investment income also declined in 2002 compared to 2001, despite higher average invested amounts, as a result of the lower overall interest rate environment. The favorable impact of a litigation settlement, partially offset by losses incurred on the disposition of fixed assets and other investment write-downs resulted in net Other income in 2002 compared to net expense in fiscal 2001. The variation in Other income (expense) relates primarily to the impact of the litigation settlement.

Income Taxes

The effective income tax rate for the ten months ended September 30, 2002 was 70.5% compared to 23.6% in 2001. Income taxes in both periods have been favorably impacted by the release of previously provided tax reserves associated with the resolution of certain domestic and foreign tax matters and the release of valuation allowances no longer considered necessary as a result of improved operating results at certain foreign operations. The release of these reserves benefited income taxes by $6 million in 2002 and $26 million in 2001. Excluding the impact of the KCI antitrust litigation charge and the release of these reserves, the effective tax rate in 2002 would have been 34.0% compared to 35.0% in 2001.

Fiscal Year Ended December 1, 2001 Compared to Fiscal Year Ended December 2, 2000

Summary

Consolidated net revenues of $2,107 million in 2001 increased 0.5%, or $11 million, over 2000. Approximately $15 million of fiscal 2000’s revenue can be attributed to the 53rd week in that fiscal year. Fiscal 2001 was a 52-week year. Operating profit in 2001 decreased $8 million, or 3.3%, to $236 million compared to the year 2000. Net income in 2001 of $170 million was up

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10.4%, or $16 million, compared to $154 million in 2000 and earnings per share increased 10.7% to $2.70 on a diluted basis.

     Excluding certain matters discussed below, operating profit in 2001 rose 18.2% and net income increased 17.5%. 2001 results include net unusual charges of $21 million, net-of-tax, related to the realignment of certain operations; the write-down of certain underperforming assets; the reversal of certain prior unusual charge provisions; and other items. Also included in the full year 2001 results were net capital losses in the Company’s insurance operations of $19 million, net-of-tax, arising from realized gains and losses on disposition of securities and bond impairment charges. Of that amount, bond impairments and realized losses of $16 million, net-of-tax, were recorded in the fourth quarter when the Company assessed its high-yield bond portfolio in light of significant deterioration in the credit markets. Results for the year also include the reversal of $26 million of previously provided tax reserves for potential disallowances and valuation allowances no longer considered necessary. Overall, the net 2001 items mentioned above, including high-yield bond impairments and realized losses, decreased net income by $11 million. 2000 results included net unusual charges of $2 million, net-of-tax, related to the retirement of the Company’s former Chief Executive Officer; gains from the disposition of facilities idled as part of prior unusual charges; the reversal of certain accruals provided for in prior unusual charges; and other items.

Net Revenues

Health Care

Health Care sales in 2001 increased $9 million, or 1.1%, to $809 million. Excluding $8 million of negative currency impact primarily due to conversion of the Euro to U.S. dollars, Health Care sales would have increased approximately 2.1%. The Company experienced increased shipments to its North American acute care customers partially offset by decreased shipments to long-term care and U.S. export markets and to European customers. The Company experienced increased shipments of its TotalCare® beds, Advance® beds, Advanta™ beds, Century CC® beds and TranStar® stretchers to its North American acute care customers. Shipments to long-term care customers decreased primarily due to reduced product offerings resulting from realignment efforts in the first quarter of 2001. Europe sales increases in the United Kingdom, Italy and Austria were more than offset by decreases in France, Germany and the Netherlands. Excluding the impact of negative currency fluctuations of $8 million, European sales were up approximately 4.7% compared to 2000.

     Health Care therapy rental revenues of $339 million increased 8.7%, or $27 million, over 2000 due to improvements in acute care and home care partially offset by declines in long-term care and Europe. Acute care therapy rental revenue increased 8.4% compared to 2000 driven by increased rates and units in use partially offset by unfavorable product mix. Improvements in the home care market resulted from the realignment efforts announced in the first quarter of this year and favorable rate realization compared to the prior year which included provisions for uncollectible Medicare receivables. The U.S. long-term care market experienced decreased revenue due to declines in units in use and rate partially offset by favorable product mix. Excluding the impact of negative currency fluctuations of $2 million, European therapy rental revenues declined 5.0%.

Funeral Services

Funeral Services products sales of $613 million were $4 million, or 0.6%, below 2000 primarily due to the 53rd week in the prior year. The Company estimates that Funeral Services sales would have increased approximately 1% in 2001 when excluding the extra week of sales in 2000. Overall, Funeral Services products experienced increased price realization and improved product mix offset by decreased volume.

     Insurance revenues of $346 million declined $21 million, or 5.7%, compared to $367 million in 2000. Revenues were negatively affected by $53 million of bond impairments, primarily in the high-yield bond portfolio. The Company was able to partially offset these impairments with $23 million of net capital gains resulting in a net capital loss of $30 million for the year.

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Excluding capital gains and losses in both 2001 and 2000, revenues would have increased approximately 2.1%. Earned revenue rose due to increased policies in-force year over year. Investment income declined approximately $3 million due primarily to the weakness in the Company’s bond portfolio, the movement of investments out of the high-yield bond portfolio into lower yielding investments, and lower interest rates on new investments. 2001 policy sales declined approximately 8% compared to 2000 as Forethought de-emphasized low-margin segments in order to provide additional focus on the more profitable active seller market. Since revenues are earned over the life of the policyholder, current year sales will primarily affect revenues and earnings in future years. The trust business did not have a significant effect on Forethought’s operations in 2001 or in prior years.

Gross Profit

Health Care

Gross profit on Health Care sales of $377 million increased $9 million, or 2.4%, and as a percentage of sales was 46.6% in 2001 compared to 46.0% in 2000. The increase in gross profit and gross profit as a percentage of sales was due to increased volume and favorable product mix combined with favorable factory performance, partially offset by increased warranty costs.

     Health Care therapy rental gross profit increased $45 million, or 52.3%, to $131 million compared to $86 million in 2000. As a percentage of revenue, gross profit was 38.6% compared to 27.6% in 2000 due to favorable rate realization compared to the prior year, which included provisions for uncollectible Medicare receivables, increased volume and organizational streamlining efforts announced in the first quarter of this year, partially offset by unfavorable mix.

Funeral Services

Gross profit on Funeral Services sales of $319 million was up $14 million, or 4.6%, despite a decrease in revenues of $4 million for 2001. As a percentage of sales, gross profit was 52.0% versus 49.4% in the prior year due to improved mix, increased price realization and continued improvement in manufacturing and production efficiencies.

     Profit before other operating expenses and unusual charges in insurance operations declined $40 million, or 59.7%, to $27 million primarily due to $53 million of bond impairments mentioned earlier, a decrease in investment income and an increase in death benefits paid and reserved due to the larger base of policies in-force.

Other Operating Expenses

Other operating expenses of $586 million, consisting of selling, marketing, distribution and general administrative costs, increased $7 million, or 1.2% in 2001. As a percentage of consolidated revenues, these expenses were 27.8% in 2001 compared to 27.6% in 2000. The slight dollar increase was due to additional investments in business development and process transformation activities partially offset by reduced costs resulting from current and prior year realignment and streamlining efforts.

Operating Profit

Health Care

Operating profit in Health Care increased $30 million, or 25.9%, to $146 million compared to $116 million in 2000. This increase was largely due to an increase in Health Care therapy rental gross profit of $45 million, resulting from increased revenue and an increase in gross profit as a percentage of revenue. The improvement in Health Care therapy rental gross profit was due to favorable rate realization compared to the prior year, which included provisions for uncollectible Medicare receivables, increased volume and organizational streamlining efforts

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announced in February 2001, partially offset by unfavorable mix. Health Care sales gross profit increased $9 million due to increased volume, better product mix and favorable factory performance, partially offset by increased warranty costs. Health Care operating profit was negatively impacted by a net unusual charge of $19 million in 2001 related to the streamlining of certain operations; the write-down of certain underperforming assets; offset in part by the reversal of certain prior unusual charge provisions. In 2000, $5 million of income was classified as unusual resulting from unanticipated gains on the sale of facilities idled as part of prior unusual charges and a reversal of accruals provided in previous realignment actions. Excluding unusual charges in 2001 and 2000, operating profit would have been $165 million in 2001 and $111 million in 2000, a 48.6% increase.

Funeral Services

Batesville Casket operating profit improved approximately 3.1% as a result of improved product mix, favorable price realization and improved operating efficiencies, partially offset by decreased volume. In 2001, Batesville Casket incurred a $2 million unusual charge related to the relocation of a small operation to another company site and an employee reduction action in the United States. Excluding this unusual charge, Batesville Casket’s operating profit would have increased approximately 4.6%.

     At Forethought, $53 million of bond impairments were partially offset by $23 million of net capital gains, increased earned revenues and decreased operating expenses. In addition, Forethought incurred $10 million of unusual charges in 2001 and $1 million in 2000 relating to the realignment of certain operations and the write-down of certain underperforming assets. Overall, Forethought’s operating profit declined by 127.3%. Excluding unusual charges and high-yield bond impairments and realized losses recorded in the fourth quarter of 2001 as discussed earlier of $24 million, Forethought’s operating profit would have decreased 22.5%.

Other Income and Expense

Interest expense of $23 million declined $4 million compared to 2000 due to the repayment of $52 million of short-term debt in the fourth quarter of 2000. In addition, the Company completed a series of interest rate swaps in the third quarter of 2001, swapping $150 million of the Company’s long-term debt from fixed interest rates to variable interest rates lowering interest expense by $1 million for the year. Investment income decreased $9 million in 2001 to $15 million due to lower interest rates in the current year and a gain recognized on the sale of an investment in 2000. Other expense, net, increased by $4 million due to a gain on the sale of a facility in 2000 combined with losses on the sale of certain fixed assets in 2001.

Income Taxes

The effective income tax rate was 23.6% in 2001. Excluding the reversal of $26 million of tax reserves previously provided for potential disallowances and valuation allowances no longer considered necessary, the effective income tax rate would have been 35% compared to 36.1% in 2000. The decrease in the effective tax rate was primarily due to tax planning initiatives undertaken by the Company.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flows from operating activities and selected borrowings have represented the Company’s primary sources of funds for growth of the business, including capital expenditures and acquisitions. The Company has not used any off-balance sheet arrangements, other than routine operating leases. Its financing agreements contain no restrictive provisions or conditions relating to dividend payments, working capital or additional unsecured indebtedness (except to the extent that a dividend payment or incurrence of additional unsecured indebtedness would result in a default under the Company’s financing agreements), but there are limitations with respect to secured indebtedness. The Company’s debt agreements also contain no credit rating triggers with the exception of one of the debt interest rate swaps which would not have a material financial impact on the Company. Credit rating changes can, however, impact the cost of borrowings under the Company’s financing

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agreements. Cash, cash equivalents and short-term investments (excluding investments in insurance operations) at September 30, 2002 increased $12 million to $296 million from $284 million at December 1, 2001.

Operating Activities

For the ten months ended September 30, 2002, net cash provided by operating activities totaled $328 million compared to $445 million for the fiscal year ended December 1, 2001. The decrease in operating cash flow is heavily influenced by the shorter time period in 2002. Lower depreciation and amortization expense and a shift in the current tax liability position were the primary contributors to the remaining decrease in operating cash flow. The recognition of the KCI antitrust litigation charge of $158 million net-of-tax, which resulted in a net loss for the ten months ended September 30, 2002, had no impact on operating cash flows as such amount is fully accrued at September 30, 2002.

     Depreciation, amortization and the write-down of intangibles decreased to $71 million in 2002 from $100 million in 2001. Excluding the impacts of intangible write-downs in each year, $5 million and $13 million, respectively, the adjusted depreciation and amortization amounts would approximate $66 million and $87 million, respectively. The remainder of this decline relates to the 2002 period including only ten months, along with the lack of goodwill amortization following adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” effective December 2, 2001. Goodwill amortization approximated $8 million in fiscal 2001.

     With respect to working capital, accounts receivable trended favorably in the 2002 period, primarily as a result of lower revenues in September 2002 compared to November 2001. A reduction in days revenues outstanding from 71 days in 2001 to 67 days as of September 30, 2002 also contributed to this improvement. Inventories remained unchanged during the year, while better management of accounts payable had a positive impact on cash flow. Offsetting the favorability in accounts receivable and accounts payable were movements in other current assets and accrued expenses, both of which were primarily impacted by the shift in income taxes from a payable position at the end of fiscal 2001 to a receivable position at September 30, 2002.

Investing Activities

Net cash used in investing activities for the ten months ended September 30, 2002 totaled $302 million compared to $337 million for the fiscal year ended December 1, 2001. As with operating cash flows, the decrease relates primarily to the comparison of a ten-month to a twelve-month period. Investing cash flows in 2002 were also negatively impacted by increased capital expenditures, primarily related to the Company’s continuing efforts to move to a single technology platform, along with lower proceeds on the sale of property and equipment and the sale of a business in the prior year.

     Forethought invests the cash proceeds on insurance premiums predominantly in U.S. Treasuries and agencies and investment grade and high-yield corporate bonds with fixed maturities. The Company’s objective is to purchase securities with maturities that match the expected cash outflows of insurance policy benefit payments. The investment portfolio is periodically realigned to better meet this objective. Also contributing to the high level of sales in the recent periods has been Forethought’s continuing efforts to mitigate the risk of future impairments by reducing its exposure to high-yield bonds and lowering the limits for investments in individual securities, which have required further portfolio realignment.

Financing Activities

Net cash used in financing activities totaled $15 million for the ten months ended September 30, 2002 compared to net cash provided by financing activities of $43 million for the fiscal year ended December 1, 2001. The use of cash in financing activities in 2002 compared to cash provided in 2001 relates entirely to increased repurchases of the Company’s common stock during the period. During the ten months ended September 30, 2002 the Company

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repurchased $62 million of common stock compared to $17 million in fiscal 2001. All other components of financing activities remained relatively unchanged on a comparative basis.

     Quarterly cash dividends per share were $0.23 in 2002, $0.21 in 2001 and $0.20 in 2000. With the Company’s change in fiscal year end to September 30 beginning in 2002, the Company’s Board of Directors approved a one-month dividend of $0.0767 per share which was paid in March 2002.

     The Company’s long-term debt-to-capital ratio was 24.4% at September 30, 2002 compared to 22.9% at December 1, 2001. This increase was primarily due to recognition of the KCI antitrust litigation charge and its negative impact on shareholders’ equity. Excluding the impact of the KCI antitrust litigation charge and the interest rate swaps on the valuation of debt, the debt-to-capital ratio at September 30, 2002 would be 20.6%.

     On August 2, 2002 the Company entered into two new unsecured credit facilities totaling $500 million (the “Credit Facilities”) to be used to finance acquisitions and for working capital, capital expenditures and other corporate purposes. The Credit Facilities, which are with a syndicate of banks led by Bank of America, N.A. and Citicorp USA, Inc. (as Administrative Agent and Syndication Agent, respectively) consist of a $250 million 364-day senior revolving credit facility and a $250 million three-year senior revolving credit facility. Borrowings under the Credit Facilities bear interest at variable rates, as defined. The availability of borrowings under the Credit Facilities is subject to the Company’s ability at the time of borrowing to meet certain specified conditions. These conditions include a maximum debt to capital ratio, absence of default under the facilities and continued accuracy of certain representations and warranties contained in the Credit Facilities. As of September 30, 2002, the Company was in compliance with all conditions set forth under the Credit Facilities, however, borrowings would have been limited to approximately $330 million as amounts in excess of this limit would trigger non-compliance with the maximum debt to capital ratio.

     Effective November 2002, the Company obtained amendments to the Credit Facilities to increase the maximum debt to capital ratio from 45% to 65% if the calculation of the ratio includes any Material Decree, generally defined as any judgment, order, decree or jury verdict with respect to litigation in excess of $150 million. The maximum debt to capital ratio increased to 65% as a result of the jury verdict in the KCI antitrust litigation and subsequent order by the United States District Court for the Western District of Texas, San Antonio Division dismissing and approving the settlement of the litigation described earlier. The amendments also increase the letter of credit sub limit under the facilities from $35 million to $250 million. Upon completion of the amendments, the Company will have complete access to the $500 million of borrowing capacity available under the Credit Facilities.

Other Liquidity Matters

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     The Company believes that cash on hand and generated from operations and amounts available under its Credit Facilities, as amended, along with amounts available from the capital markets, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. The Company's cash balance, after payment of the antitrust settlement in early January, is approximately $100 million.

     The Company intends to pursue acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. The Company expects to fund future acquisitions primarily with cash on hand and cash flow from operations and borrowings, including the unborrowed portion of the Credit Facilities or new debt issuances, but may also issue additional equity or debt in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to the Company.

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