Exhibit 99.1

 

 

, 2008

 

Dear Hillenbrand Industries, Inc. Shareholder:

 

We are pleased to inform you that on          , 2008, the Board of Directors of Hillenbrand Industries, Inc. approved the distribution of all the shares of common stock of Batesville Holdings, Inc., a wholly owned subsidiary of Hillenbrand, to Hillenbrand shareholders. Batesville Holdings is a newly formed holding company for Hillenbrand’s funeral service business, which has operated under the Batesville Casket name.

 

This distribution is to be made pursuant to a plan approved in principle by Hillenbrand’s Board of Directors on May 7, 2007, to separate Hillenbrand’s funeral service business from its medical technology business conducted through its Hill-Rom business unit. Upon completion of the distribution, Hillenbrand shareholders will own 100% of the common stock of Batesville Holdings. Hillenbrand will continue as a publicly traded company with Hill-Rom as its sole operating unit.

 

In connection with the distribution, Hillenbrand plans to change its name to Hill-Rom Holdings, Inc., and Batesville Holdings will change its name to Hillenbrand, Inc. These name changes are being made to continue the long association of the Hillenbrand name with the Batesville Casket business.

 

Hillenbrand’s Board of Directors believes that the separation of Hillenbrand’s funeral service and medical technology businesses will create two focused, mission-driven enterprises that can each better achieve its business objectives and pursue growth opportunities in its respective market and will increase value to Hillenbrand’s shareholders, customers and employees.

 

The distribution of Batesville Holdings common stock will occur after the close of business on          , 2008 by way of a pro rata dividend to Hillenbrand shareholders of record on the record date for the distribution. Each Hillenbrand shareholder will be entitled to receive one share of Batesville Holdings common stock for each share of Hillenbrand common stock held by such shareholder at the close of business on          , 2008, the record date for the distribution. Holders of Hillenbrand common stock who sell their shares of Hillenbrand common stock prior to the record date or who sell their entitlement to receive shares of Batesville Holdings common stock will not receive shares of Batesville Holdings common stock in the distribution. The Batesville Holdings common stock will be issued in book-entry form only, which means that no physical stock certificates will be issued. No fractional shares of Batesville Holdings common stock will be issued. If you would otherwise have been entitled to a fractional share of Batesville Holdings common stock, you will instead receive a check for its cash value.

 

Shareholder approval of the distribution is not required, and you are not required to take any action to receive your Batesville Holdings common stock. The distribution is intended to be tax-free for U.S. federal income tax purposes to Hillenbrand shareholders, except for cash received in lieu of any fractional share.

 

Following the distribution, you will own shares in both Hillenbrand and Batesville Holdings, unless you sell your Hillenbrand common stock or your entitlement to receive shares of Batesville Holdings common stock on or prior to the distribution date. The number of Hillenbrand shares you own will not change as a result of the distribution. Hillenbrand’s common stock will continue to trade on the New York Stock Exchange; however, in connection with Hillenbrand’s name change to Hill-Rom Holdings, Inc., Hillenbrand intends to change its trading symbol from “HB” to “HRC.” Batesville Holdings has applied to have its common stock listed on the New York Stock Exchange under the symbol “HI.”

 

The enclosed information statement, which is being mailed to all holders of Hillenbrand common stock on the record date for the distribution, describes the distribution in detail and contains important information about Batesville Holdings and its business, financial condition and operations. We urge you to read the information statement carefully. For information about Hillenbrand and Hill-Rom, you should read the reports and other information Hillenbrand has filed and will file with the Securities and Exchange Commission.

 

We want to thank you for your continued support of Hillenbrand and we look forward to your future support of Batesville Holdings.

 

Sincerely,

 

 

                    , 2008

 

Dear Future Batesville Holdings, Inc. Shareholder:

 

It is our pleasure to welcome you as a shareholder of our company, Batesville Holdings, Inc. We are excited about our future as a leader in the North American death care industry through the sale of funeral service products, including burial caskets, cremation caskets, containers and urns, selection room display fixturing and other personalization and memorialization products.

 

Upon completion of the distribution of our common stock to shareholders of our parent company, Hillenbrand Industries, Inc., we will be a separate, publicly traded company with $259.1 million in pro forma shareholders’ equity and $647.3 million in pro forma assets, each as of December 31, 2007. For the year ended September 30, 2007, on a pro forma basis we generated revenues of $667.2 million, operating profit of $154.4 million and net income of $97.8 million. For the three months ended December 31, 2007, on a pro forma basis we generated revenues of $162.9 million, operating profit of $38.0 million and net income of $23.9 million.

 

In connection with the distribution, Batesville Holdings will change its name to Hillenbrand, Inc. and Hillenbrand will change its name to Hill-Rom Holdings, Inc. These name changes are being made to continue the long association of the Hillenbrand name with the Batesville Casket business. Batesville Holdings has applied to have its common stock listed on the New York Stock Exchange under the symbol “HI.”

 

We invite you to learn more about Batesville Holdings by reviewing the enclosed information statement. We urge you to read the information statement carefully. We look forward to our future and to your support as a holder of Batesville Holdings common stock.

 

Sincerely,

 

 

Preliminary Information Statement
(Subject to Completion, Dated March 13, 2008)

 

 

Information Statement

Distribution of

Common Stock of

 

BATESVILLE HOLDINGS, INC.

 

By

 

HILLENBRAND INDUSTRIES, INC.

to Hillenbrand Industries, Inc. Shareholders

 

This information statement is being furnished in connection with the distribution by Hillenbrand Industries, Inc. to its shareholders of all of the shares of common stock of Batesville Holdings, Inc. This information statement was first mailed to Hillenbrand shareholders on or about          , 2008.

 

Batesville Holdings is a wholly owned subsidiary of Hillenbrand, newly formed to be a holding company for Hillenbrand’s funeral service business, which has operated under the Batesville Casket name. To implement the distribution, Hillenbrand will distribute all of the shares of Batesville Holdings common stock on a pro rata basis to the holders of Hillenbrand common stock as of the record date. Each of you, as a holder of Hillenbrand common stock, will receive one share of Batesville Holdings common stock for each share of Hillenbrand common stock that you held at the close of business on          , 2008, the record date for the distribution. No fractional shares of Batesville Holdings common stock will be issued. Hillenbrand shareholders who would otherwise have been entitled to fractional shares of Batesville Holdings common stock will instead receive checks for the cash value of the fractional shares. The distribution will be made after the close of business on          , 2008. Immediately after the distribution is completed, Batesville Holdings will be a separate, publicly traded company.

 

In connection with the distribution, Hillenbrand intends to change its name to Hill-Rom Holdings, Inc., and Batesville Holdings intends to change its name to Hillenbrand, Inc. These name changes are being made to continue the long association of the Hillenbrand name with the Batesville Casket business. Please refer to the “Note Regarding the Use of Certain Terms” on page ii for a description of how we refer to these entities in this information statement.

 

No vote of Hillenbrand shareholders is required in connection with this distribution. We are not asking you for a proxy and you are requested not to send us a proxy.

 

Hillenbrand shareholders will not be required to pay any consideration for the shares of Batesville Holdings common stock they receive in the distribution, and they will not be required to surrender or exchange shares of their Hillenbrand common stock or take any other action in connection with the distribution.

 

All of the outstanding shares of Batesville Holdings common stock are currently owned by Hillenbrand. Accordingly, there currently is no public trading market for Batesville Holdings common stock. Following the distribution, Hillenbrand’s common stock will continue to trade on the New York Stock Exchange; however, in connection with Hillenbrand’s name change to Hill-Rom Holdings, Inc., Hillenbrand intends to change its trading symbol from “HB” to “HRC.” Batesville Holdings has applied to have its common stock listed on the New York Stock Exchange under the symbol “HI.” We anticipate that a limited market, commonly known as a “when-issued” trading market, for Batesville Holdings common stock will develop on or shortly before the record date for the distribution and will continue up to and through the distribution date, and we anticipate that “regular-way” trading of Batesville Holdings common stock will begin on the first trading day following the distribution date.

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 5 of this information statement.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of any of the securities of Batesville Holdings, or determined whether this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

The date of this information statement is          , 2008.

 

TABLE OF CONTENTS

 

 

To avoid confusion relating to the name changes that will occur in connection with the distribution, we use the following terms to refer to the entities indicated:

 

“We,” “us,” “our,” “our company” and “New Hillenbrand” refer to Batesville Holdings, Inc., the holding company for the Batesville Casket funeral service business whose shares will be distributed in the distribution and which will change its name to Hillenbrand, Inc. in connection with the distribution.

 

“Original Hillenbrand” refers to Hillenbrand Industries, Inc., the publicly traded holding company for the Batesville Casket funeral service business and the Hill-Rom medical technology business, prior to the distribution.

 

“Hill-Rom Holdings” refers to Hill-Rom Holdings, Inc., which will be the holding company for the medical technology business following the distribution and the change of Original Hillenbrand’s name to Hill-Rom Holdings, Inc.

 

Where appropriate in context, the foregoing terms also include the subsidiaries of these entities.

 

The following diagrams depict the pre- and post-distribution structures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUMMARY

	•	Allows us and Hill-Rom Holdings to focus on our respective industries.  The Original Hillenbrand Board of Directors believes that the separation will allow Hill-Rom Holdings and New Hillenbrand to maintain a sharper focus on their respective core business and growth opportunities, which will allow each separated company to respond more nimbly to the industry in which it operates.
	•	Provides direct access to capital.  Each company will have a capital structure adequate to meet its needs. After the separation, each company’s capital structure is expected to better facilitate acquisitions (including, possibly, acquisitions using its common stock as currency), joint ventures, partnerships and internal expansion, which are important for us to grow our business.
	•	Creates more effective management incentives and improves ability to attract and retain talent.  The separation will permit the use of equity-based incentives, such as options and restricted stock units, for each of the companies with a value that is expected to reflect more closely the efforts and performance of each company’s management. Original Hillenbrand believes such equity-based compensation arrangements should provide enhanced incentives for performance and improve the ability for each company to attract, retain and motivate qualified personnel.
	•	Enables investors to invest directly in our business.  Separating the funeral service business from the medical technology business of Original Hillenbrand is expected to reduce the complexities surrounding investor and research analyst understanding and will provide investors with the opportunity to invest individually in each of the separated companies.

 

Summary Combined Historical and Pro Forma Financial Information

	•	the planned distribution of our common stock to Original Hillenbrand shareholders by Original Hillenbrand (on a one to one distribution ratio) and the related transfer to us from Original Hillenbrand of certain corporate assets and liabilities of Original Hillenbrand,

	•	the procurement of a revolving line of credit for a total of $400 million, of which we intend to draw approximately $250 million to be transferred to Original Hillenbrand as a cash distribution immediately prior to the distribution in order to establish appropriate long-term capital structures for us and Original Hillenbrand,

	•	the inclusion of interest expense to reflect the anticipated borrowings under our new revolving line of credit as of the date of separation, calculated based upon expected interest rates for our then outstanding debt, and
	•	the inclusion of investment income on certain investments that will be transferred to us.

		Three Months Ended December 31,												Fiscal Years Ended September 30,
		Pro Forma				As Reported								Pro Forma				As Reported
		2007				2007				2006				2007				2007				2006				2005
						(Unaudited)								(Unaudited)
		(In millions, except per share amounts)
Income Statement Data:
Net revenues		$	162.9			$	162.9			$	162.2			$	667.2			$	667.2			$	674.6			$	659.4
Cost of goods sold			96.0				96.0				93.4				388.6				388.6				391.9				392.9
Gross profit			66.9				66.9				68.8				278.6				278.6				282.7				266.5
Operating expenses			28.9				27.3				26.7				124.2				117.9				105.3				105.2
Separation costs			—				1.2				—				—				5.1				—				—
Operating profit			38.0				38.4				42.1				154.4				155.6				177.4				161.3
Interest expense			(3.3	)			—				—				(14.4	)			—				—				—
Investment income and other			2.4				(0.4	)			(0.4	)			12.0				1.4				1.4				2.0
Income before income taxes			37.1				38.0				41.7				152.0				157.0				178.8				163.3
Income tax expense			13.2				14.0				15.6				54.2				57.5				65.6				60.5
Net income			23.9			$	24.0			$	26.1			$	97.8			$	99.5			$	113.2			$	102.8
Pro forma net income per share:
Basic		$	.38			$	0.38			$	0.42			$	1.56			$	1.60			$	1.82			$	1.65
Diluted		$	.38			$	0.38			$	0.42			$	1.56			$	1.60			$	1.82			$	1.65
Pro forma shares outstanding:
Basic			62.5				62.3				62.3				62.5				62.3				62.3				62.3
Diluted			62.7				62.3				62.3				62.7				62.3				62.3				62.3
Cash Flow Data:
Cash flows provided by (used in):
Operating activities			N/A			$	22.7			$	29.9				N/A			$	127.3			$	124.6			$	88.9
Investing activities			N/A				(2.2	)			(1.1	)			N/A				(20.1	)			(15.3	)			(13.2	)
Financing activities			N/A				(20.2	)			(26.5	)			N/A				(103.5	)			(107.0	)			(78.3	)
Effect of exchange rate changes on cash			N/A				(0.4	)			(0.l	)			N/A				0.3				0.3				0.1
Total cash flows, net			N/A			$	(0.1	)		$	2.2				N/A			$	4.0			$	2.6			$	(2.5	)

		December 31, 2007
		As Reported				Pro Forma
		(Unaudited)
		(In millions)
Balance Sheet Data:
Total assets		$	322.0			$	647.3
Long-term debt			—				250.0
Other long-term liabilities			26.6				26.6
Total liabilities			138.2				388.2
Parent company/shareholders’ equity			183.8				259.1

 

Our business involves risks. The following information about these risks should be considered carefully together with the other information contained herein.

 

Risks Related to Our Business

 

An adverse outcome in the ongoing antitrust litigation in which we are a defendant could materially adversely affect our results of operations, financial position and liquidity.

 

We are a defendant in several purported antitrust class action lawsuits. See “Business and Properties — Legal Proceedings — Antitrust Litigation.” The plaintiffs in one of these cases have served a report indicating that they are seeking damages ranging from approximately $947 million to approximately $1.46 billion before trebling, and the plaintiffs in the other case have served a report indicating that they are seeking damages of approximately $99.2 million before trebling. If these cases go to trial, the plaintiffs are likely to claim additional alleged damages for the period between their reports and the time of trial. At this point, it is not possible to estimate the amount of any additional alleged damage claims that they may make. In the event a class is certified in any of these cases and the plaintiffs prevail at trial, any damages awarded would be trebled as a matter of law and the plaintiffs may elect to enforce any judgment against any or all of the codefendants, who have no statutory contribution rights against each other. Accordingly, if a class is certified in any of these cases and the plaintiffs prevail at trial, we could be subject to substantial liability. In such event, we may not be able to satisfy any such judgment or to post an appeal bond for the appeal of any such judgment. In that event, we could resort to bankruptcy proceedings. If we are able to satisfy a judgment or post an appeal bond, doing so may significantly impair our financial position and liquidity.

 

Although we will enter into a judgment sharing agreement with Original Hillenbrand with respect to this litigation, there can be no assurance that Original Hillenbrand will be able to satisfy its potential obligations under this agreement. Moreover, negative covenants contained in the distribution agreement, intended to preserve the credit capacity of each of New Hillenbrand and Original Hillenbrand to perform its obligations under the judgment sharing agreement, impose restrictions on us that, among other matters, may limit our ability to consummate acquisitions or pay dividends. See “Arrangements between Original Hillenbrand and New Hillenbrand — Distribution Agreement” and “— Judgment Sharing Agreement.”

 

In addition to the risks associated with an adverse outcome in this litigation, we continue to incur significant legal costs in the vigorous defense of this litigation and expect these costs to continue for the foreseeable future. We expect these costs to be approximately $12.5 million in fiscal 2008. Under the judgment sharing agreement, we will be responsible for all costs incurred by us and Original Hillenbrand in defense of this litigation.

 

Our business is significantly dependent on several major contracts with large national providers. Our relationships with these customers pose several risks.

 

We have contracts with a number of large, national funeral home customers which comprise a sizeable portion of our overall sales volume. The November 2006 completion of the combination of our largest customer, Service Corporation International (“SCI”), and our second largest customer, Alderwoods Group, Inc. (“Alderwoods”), has brought purchases by both organizations under the same agreement. This agreement does not impose specific purchase requirements on the combined entity. While we anticipate that SCI will continue to buy substantially all its burial products from us for the foreseeable future, there can be no guarantee that it will do so. Any decision by our large national funeral home customers to discontinue purchases from us could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, we have lost, and may continue to lose, some business as the SCI/Alderwoods combined entity continues to divest itself of certain overlapping properties. The losses from divestitures could be significant if a large number of these properties are purchased by funeral homes or other entities that elect not to purchase products from us and we are not able to attract replacement business from the subsequent owners of these properties.

 

Also, while our contracts with large funeral service providers give us important access to many of the largest purchasers of funeral service products, they can obligate us to sell our products at contracted prices for extended periods of time, therefore limiting our ability, in the short-term, to raise prices in response to significant increases in raw material prices or other factors.

Continued fluctuations in mortality rates and increased cremations may adversely affect, as they have in recent years, the volume of our sales of burial caskets.

 

The life expectancy of U.S. citizens has increased steadily since the 1950s and is expected to continue to do so for the foreseeable future. As the population of the United States continues to age, we anticipate the number of deaths in North America will be relatively flat for at least the foreseeable future.

 

Cremations as a percentage of total U.S. deaths have increased steadily since the 1960s, and are also expected to continue to increase for the foreseeable future. Therefore, the number of U.S. cremations is gradually and steadily increasing, resulting in a contraction in the demand for burial caskets, which was a contributing factor to lower burial casket sales volumes for us in each of fiscal years 2005, 2006 and 2007 and the first three months of fiscal 2008.

 

We expect these trends to continue into the foreseeable future and our burial casket volumes will likely continue to be negatively impacted by these market conditions. Finally, the number of deaths can vary over short periods of time and among different geographical areas, due to a variety of other factors, including the timing and severity of seasonal outbreaks of illnesses such as pneumonia and influenza. Such variations could cause our sales of burial caskets to fluctuate from quarter to quarter and year to year.

 

Our business is facing increasing competition from a number of non-traditional sources and caskets manufactured abroad and imported into North America.

 

Non-traditional funeral service providers could present more of a competitive threat to us and our sales channel than is currently anticipated. While some of these have competed against us for many years, large discount retailers such as Costco, casket stores, and internet casket retailers represent more recent competitors. Also, we have learned that several manufacturers located in China are currently manufacturing caskets for sale into the United States. It is not possible to quantify the financial impact that these competitors will have on our business, but these competitors will continue to drive additional pricing and other competitive pressures in an industry that already has approximately double the necessary domestic production capacity. Such competitive actions could have a negative impact on our results of operations.

 

Increased prices for, or unavailability of, raw materials used in our products could adversely affect profitability or revenues. In particular, our results of operations continue to be adversely affected by high prices for steel, red metals, solid wood and fuel.

 

Our profitability is affected by the prices of the raw materials used in the manufacture of our products. These prices may fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel related delivery costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government regulation. Significant increases in the prices of raw materials that cannot be recovered through increases in the prices of our products could adversely affect our results of operations. While there has been less overall cost pressure in 2006 and 2007, we experienced significantly higher prices in fiscal 2004 and 2005 than we had in prior periods for commodities used in the manufacture of our products, including steel, red metals, solid wood and fuel. Although we have historically been able to offset such rising costs with increases in the prices of our products, there can be no assurance that the marketplace will continue to support the higher prices or that such prices will fully offset such commodity price increases in the future. Any further increases in prices resulting from a tightening supply of these or other commodities or fuel could adversely affect our profitability. We generally do not engage in hedging transactions with respect to raw material purchases, but do enter into fixed price supply contracts at times. Our decision not to engage in hedging transactions may result in increased price volatility, with resulting adverse effects on profitability.

 

Our dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw materials used in the manufacture of our products currently are procured only from a single source. If any of these sole-source suppliers were unable to deliver these materials for an extended period of time as a result of financial difficulties, catastrophic events affecting their facilities or other factors, or if we were unable to negotiate acceptable terms for the supply of materials with these sole-source suppliers, our business could suffer. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs.

Extended unavailability of a necessary raw material could cause us to cease manufacturing one or more products for a period of time.

 

We are involved on an ongoing basis in claims, lawsuits and governmental proceedings relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, and other matters.

 

The ultimate outcome of these claims, lawsuits and governmental proceedings cannot be predicted with certainty but could have a material adverse effect on our financial condition, results of operations and cash flow. We are also involved in other possible claims, including product and general liability, workers compensation, auto liability and employment-related matters. While we maintain insurance for certain of these exposures, the policies in place are high-deductible policies resulting in our assuming exposure for a layer of coverage with respect to such claims.

 

A substantial portion of our workforce is unionized, and we could face labor disruptions that would interfere with our operations.

 

Approximately 37% of our employees, as part of our logistics and manufacturing operations in the United States and Canada, work under collective bargaining agreements. Although we have not experienced any significant work stoppages in the past 20 years as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future. Inability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilities could have a material adverse effect on our operations.

 

Risks Relating to the Separation

 

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Original Hillenbrand, and any such benefits may be offset in part by certain negative consequences of the separation.

 

We may not be able to achieve the full strategic and financial benefits that we expect will result from our separation from Original Hillenbrand or such benefits may be delayed or may not occur at all. For example, there can be no assurance that analysts and investors will regard our corporate structure as clearer and simpler than the current Original Hillenbrand corporate structure or place a greater value on our company as a stand-alone company than on our business as a part of Original Hillenbrand. As a result, in the future the aggregate market price of Hill-Rom Holdings common stock and our common stock as separate companies may be less than the market price per share of Original Hillenbrand’s common stock had the separation and distribution not occurred.

 

Because we will be a smaller company than Original Hillenbrand prior to the separation and expect to have credit ratings below Original Hillenbrand’s current credit ratings, we expect to have less borrowing capacity and greater borrowing costs than Original Hillenbrand currently has.

 

We have no operating history as a separate publicly traded company.

 

Prior to the consummation of the distribution, we have operated as part of Original Hillenbrand. Accordingly, we have no direct experience complying with certain of the requirements of the Sarbanes-Oxley Act of 2002 or with the periodic reporting requirements of the Securities Exchange Act of 1934. Additionally, we have not been responsible for performing various corporate functions, including tax administration, treasury administration, investor relations, internal audit and risk management.

 

The historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the following factors:

 

 

 

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as a separate, publicly-traded company, and we may experience increased costs after the separation or as a result of the separation.

 

After the separation, Hill-Rom Holdings will be contractually obligated to provide to us only those services specified in the transition services and shared services agreements and the other agreements we enter into with Original Hillenbrand in preparation for the separation. We may be unable to replace in a timely manner or on comparable terms the services that Original Hillenbrand previously provided to us that are not specified in these agreements. Also, upon the expiration of these agreements, many of the services that are covered in such agreements will be provided internally or by unaffiliated third parties, and we expect that in some instances we may incur higher costs to obtain such services than we incurred under the terms of such agreements. In addition, if Hill-Rom Holdings does not continue to perform effectively the services that are called for under the transition services and shared services agreements and the other agreements, we may not be able to operate our business effectively and our profitability may decline. See “Arrangements between Original Hillenbrand and New Hillenbrand.”

 

Our agreements with Original Hillenbrand may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

 

The agreements related to our separation from Original Hillenbrand, including the distribution agreement, judgment sharing agreement, employee matters agreement, tax sharing agreement, shared services agreements and transitional services agreements, were prepared in the context of our separation from Original Hillenbrand while we were still part of Original Hillenbrand and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of these agreements relate to, among other things, allocation of assets, employees, liabilities, rights, indemnifications and other obligations between Original Hillenbrand and us. See the section entitled “Arrangements between Original Hillenbrand and New Hillenbrand.”

 

Volatility in our investment portfolio or collection risk associated with our notes receivable portfolio could negatively impact earnings.

 

In conjunction with our separation from Original Hillenbrand, ownership in certain investments will be transferred to us. Volatility in that investment portfolio, which Original Hillenbrand carried at a value of $25.9 million at December 31, 2007, could negatively impact earnings. The investment portfolio, which includes private equity limited partnerships among other investments, could be adversely affected by general economic conditions, changes in interest rates, default on debt instruments and other factors, resulting in an adverse impact on our financial condition. This was evident when one significant impairment of a strategic investment resulted in an impairment charge of $8.7 million for Original Hillenbrand in the fourth quarter of fiscal 2005, and two additional impairments resulted in a charge of $2.0 million by Original Hillenbrand in the second quarter of fiscal 2006.

 

Also being transferred to us at the time of separation are certain outstanding long-term notes receivable and equity instruments, which Original Hillenbrand carried at a value of $124.8 million at December 31, 2007. This balance primarily represents the seller financing provided to FFS Holdings, Inc., the entity that purchased Original Hillenbrand’s former Forethought Financial Services, Inc. subsidiary. Should Forethought fail to perform consistent with the original expectations set forth by FFS Holdings, Inc. or underperform to an extent that it cannot meet its financial obligations, or should general economic conditions or other factors result in defaults of our customer

notes, our earnings could be negatively impacted resulting in a material adverse impact on our financial condition and results of operations.

 

The distribution could result in significant tax liability.

 

Original Hillenbrand has received a private letter ruling from the IRS that the distribution will qualify for tax-free treatment under Code Sections 355 and 368(a)(1)(D). The IRS ruling relies on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business. Although Original Hillenbrand believes that all of these representations, assumptions and undertakings were correct, the IRS ruling would not be valid if the representations, assumptions and undertakings were incorrect. Moreover, the IRS private letter ruling does not address all the issues that are relevant to determining whether the distribution will qualify for tax-free treatment, although Original Hillenbrand will receive an opinion of counsel with respect to the legal and tax issues not addressed in the private letter ruling. Notwithstanding the IRS private letter ruling, the IRS could determine that the distribution should be treated as a taxable transaction if it determines that any of the representations, assumptions or undertakings that were included in the request for the private letter ruling were false or had been violated. For more information regarding the private letter ruling, see the section entitled “The Separation — U.S. Federal Income Tax Consequences of the Distribution.”

 

If the distribution fails to qualify for tax-free treatment, Original Hillenbrand would be subject to tax as if it had sold the common stock of our company in a taxable sale for its fair market value and our initial public shareholders would be subject to tax as if they had received a taxable distribution equal to the fair market value of our common stock that was distributed to them. Under the tax sharing agreement between Original Hillenbrand and us, we would generally be required to indemnify Original Hillenbrand against any tax resulting from the distribution to the extent that such tax resulted from (1) an issuance of our equity securities, a redemption of our equity securities or our involvement in other acquisitions of our equity securities, (2) other actions or failures to act by us or (3) any of our representations or undertakings being incorrect or violated. For a more detailed discussion, see the section entitled “Arrangements between Original Hillenbrand and New Hillenbrand — Tax Sharing Agreement.” Our indemnification obligations to Original Hillenbrand and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required to indemnify Original Hillenbrand or such other persons under the circumstances set forth in the tax sharing agreement, we may be subject to substantial liabilities.

 

We might not be able to engage in desirable strategic transactions and equity issuances following the distribution.

 

To preserve the tax-free treatment to Original Hillenbrand and its shareholders of the distribution, under a tax sharing agreement that we will enter into with Original Hillenbrand, for the two year period following the distribution, we may be prohibited, except in specified circumstances, from:

 

 

These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. For more information, see the sections entitled “The Separation — U.S. Federal Income Tax Consequences of the Distribution” and “Arrangements between Original Hillenbrand and New Hillenbrand — Tax Sharing Agreement.”

 

Until the distribution occurs Original Hillenbrand has the sole discretion to change the terms of the separation in ways which may be unfavorable to us.

 

Until the distribution occurs, the Board of Directors of Original Hillenbrand will have the sole and absolute discretion to determine and change the terms of the distribution, including the establishment of the record date and distribution date. These changes could be unfavorable to us. In addition, the Board of Directors of Original Hillenbrand may decide at any time not to proceed with the separation.

Risks Relating to Our Common Stock

 

There is no existing market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely.

 

There is currently no public market for our common stock. It is anticipated that, on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue up and through the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the distribution or be sustained in the future.

 

We cannot predict the prices at which our common stock may trade after the distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

 

 

Stock markets in general have experienced volatility that has often been unrelated to the operating or financial performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

 

Substantial sales of our common stock may occur in connection with this distribution, which could cause our stock price to decline.

 

The shares of our common stock that Original Hillenbrand distributes to its shareholders generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any shareholder to sell our common stock following the separation, it is possible that some Original Hillenbrand shareholders, including possibly some of our largest shareholders, may sell our common stock received in the distribution for reasons such as that our business profile or market capitalization as a separate, publicly traded company does not fit their investment objectives. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock.

Provisions in our articles of incorporation and by-laws and of Indiana law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

 

Our articles of incorporation, by-laws and Indiana law contain provisions that could have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in the best interests of us and our shareholders. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our Board of Directors, they could enable our Board of Directors to hinder or frustrate a transaction that some, or a majority, of our shareholders might believe to be in their best interests. These provisions include, among others:

 

 

Indiana law also imposes some restrictions on mergers and other business combinations between us and any holder of 10% or more of our outstanding common stock, as well as on certain “control share” acquisitions. For more information, see the section entitled “Description of New Hillenbrand Capital Stock — Business Combinations.”

 

We believe these provisions are important for a public company and protect our shareholders from coercive or otherwise potentially unfair takeover tactics by requiring potential acquirors to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of our company and our shareholders.

 

Although we currently anticipate paying dividends, there cannot be any assurance that dividends will be paid.

 

Currently, we anticipate initially paying a quarterly dividend of $0.1825 per share beginning with the third quarter of fiscal 2008, which amount, together with the quarterly dividend expected to be paid by Hill-Rom Holdings after the separation, is intended to result in a combined dividend at the same level as the dividend paid by Original Hillenbrand prior to the separation. However, there can be no assurance that we will have sufficient surplus under Indiana law to be able to pay any dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, capital expenditures or increases in reserves. The declaration and payment of dividends by us will be subject to the sole discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with certain of our debt obligations or other contractual restrictions, legal requirements and other factors deemed relevant by our Board of Directors. If we do not pay dividends, the price of our common stock that you receive in the distribution must appreciate for you to receive a gain on your investment in New Hillenbrand. This appreciation may not occur.

 

Certain statements in this information statement constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding our future plans, objectives, beliefs, expectations, representations and projections. We have tried, whenever possible, to identify these forward-looking statements by using words such as, but not limited to, “intend,” “anticipate,” “believe,” “plan,” “encourage,” “expect,” “may,” “goal,” “become,” “pursue,” “estimate,” “strategy,” “will,” “should,” “projection,” “forecast,” “continue,” “accelerate,” “promise,” “increase,” “higher,” “lower,” “reduce,” “improve,” “expand,” “progress,” “potential” or the negative of those terms or other variations of them or comparable terminology. The absence of such terms, however, does not mean that the statement is not forward-looking.

 

It is important to note that forward looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward looking statements. Factors that could cause actual results to differ from forward looking statements include but are not limited to the factors discussed under the heading “Risk Factors” in this information statement. We assume no obligation to update or revise any forward looking statements.

 

General

 

On May 7, 2007, the Board of Directors of Original Hillenbrand approved in principle a plan to separate its funeral service and medical technology businesses into separate, publicly traded companies.

 

In furtherance of this plan, on          , 2008, the Original Hillenbrand Board of Directors approved the distribution of all of the shares of our common stock held by Original Hillenbrand to holders of Original Hillenbrand common stock. The distribution of the shares of our common stock will take place after the close of business on          , 2008. On the distribution date, each holder of Original Hillenbrand common stock will receive one share of our common stock for each share of Original Hillenbrand common stock held at the close of business on the record date, as described below.

 

You will not be required to make any payment, surrender or exchange your shares of Original Hillenbrand common stock or take any other action to receive your shares of our common stock.

 

The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions, including final approval of the Original Hillenbrand Board of Directors. We cannot provide any assurances that the distribution will be completed or approved by the Original Hillenbrand Board of Directors. For a more detailed description of these conditions, see the section entitled “— Conditions to the Distribution.”

 

We are a direct, wholly owned subsidiary of Original Hillenbrand recently formed to be a holding company for Original Hillenbrand’s funeral service business, which has operated under the Batesville Casket name. Following the distribution of our shares of common stock to Original Hillenbrand’s shareholders, Original Hillenbrand will continue as a publicly traded company under the name Hill-Rom Holdings, Inc. with the Hill-Rom medical technology business as its sole operating unit.

 

The Number of Shares You Will Receive

 

For each share of Original Hillenbrand common stock that you owned at the close of business on          , 2008, the record date, you will receive one share of our common stock on the distribution date.

 

Fractional shares of our common stock will not be issued as part of the distribution nor will any be credited to book entry accounts. Instead, the distribution agent, Computershare Investors Services, will, as soon as practicable after the distribution date, aggregate into whole shares the fractional shares of our common stock that Original Hillenbrand shareholders would otherwise have been entitled to receive. The distribution agent will sell these whole shares in the open market at prevailing market prices and distribute the aggregate sale proceeds, net of applicable expenses including brokerage fees, ratably to shareholders who would otherwise have been entitled to receive fractional shares. The amount of this payment will depend on the prices at which the aggregated fractional shares are sold by the distribution agent. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient shareholder. For an explanation of the U.S.  federal income tax consequences of the distribution, including the receipt of cash in lieu of fractional shares, please see “— U.S.  Federal Income Tax Consequences of the Distribution.” Because the distribution ratio will be one share of New Hillenbrand common stock for each share of Original Hillenbrand common stock outstanding, we expect that the payment of cash in lieu of fractional shares will apply only to certain shareholders that hold shares of Original Hillenbrand common stock through the BYDS Buy Direct Stock Program maintained by Computershare Investors Services, Original Hillenbrand’s transfer agent.

 

When and How You Will Receive the Distributed Shares

 

Original Hillenbrand will distribute the shares of our common stock after the close of business on          , 2008, the distribution date. Computershare Investors Services will serve as transfer agent and registrar for our common stock and as settlement and distribution agent in connection with the distribution.

 

If you own Original Hillenbrand common stock as of the close of business on the record date, the shares of New Hillenbrand common stock that you are entitled to receive in the distribution will be issued electronically, as soon as practicable after the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct

registration in book-entry form. Registration in book-entry form refers to a method of recording stock ownership when no physical share certificates are issued to shareholders, as is the case in this distribution. No physical stock certificates of New Hillenbrand will be issued in the distribution.

 

If you sell shares of Original Hillenbrand common stock in the “regular-way” market on or prior to the distribution date, you will be selling your right to receive shares of our common stock in the distribution. For more information see the section entitled “— Trading Between the Record Date and Distribution Date.”

 

Commencing promptly after the distribution date, if you hold physical stock certificates that represent your shares of Original Hillenbrand common stock, or if you hold your shares in book-entry form, and you are the registered holder of such shares, the settlement and distribution agent will mail to you an account statement that indicates the number of shares of our common stock that have been registered in book-entry form in your name. If you have any questions concerning the mechanics of having shares of our common stock registered in book-entry form, we encourage you to contact Computershare Investors Services at the address and telephone number set forth on page ix of this information statement. After you receive your book-entry account statement, you may request that we issue you physical stock certificates by following the directions on your account statement.

 

Most Original Hillenbrand shareholders hold their shares of Original Hillenbrand common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank’s or brokerage firm’s books. If you hold your Original Hillenbrand common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of our common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares of our common stock held in “street name,” we encourage you to contact your bank or brokerage firm.

 

Results of the Separation

 

After our separation from Original Hillenbrand, we will be a separate, publicly traded company. Immediately following the distribution, we expect to have approximately 19,000 shareholders of record, based on the number of registered shareholders of Hillenbrand common stock on February 25, 2008, and approximately 62.3 million shares of our common stock outstanding. The actual number of shares to be distributed will be determined on the record date and will reflect any changes in the number of shares of Original Hillenbrand common stock between February 25, 2008 and the record date for the distribution.

 

Before or concurrently with the separation, we will enter into a distribution agreement and several other agreements with Original Hillenbrand to effect the separation and provide a framework for our relationships with Hill-Rom Holdings after the separation. These agreements will govern the relationship between us and Hill-Rom Holdings subsequent to the completion of the separation and provide for the allocation of assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Original Hillenbrand. For a more detailed description of these agreements, see the section entitled “Arrangements between Original Hillenbrand and New Hillenbrand.”

 

The distribution will not affect the number of outstanding shares of Original Hillenbrand common stock or any rights of Original Hillenbrand shareholders at the time of the distribution.

 

U.S. Federal Income Tax Consequences of the Distribution

 

The following is a summary of the material U.S. federal income tax consequences relating to the distribution by Original Hillenbrand. This summary is based on the Code, the Treasury regulations promulgated thereunder, and interpretations of the Code and the Treasury regulations by the courts and the IRS, in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. This summary does not discuss all the tax considerations that may be relevant to Original Hillenbrand shareholders in light of their particular circumstances, nor does it address the consequences to Original Hillenbrand shareholders subject to special treatment under the U.S. federal income tax laws (such as non-U.S. persons, insurance companies, dealers or brokers in securities or currencies, tax-exempt organizations, financial institutions, mutual funds, pass-through entities and investors in

such entities, holders who hold their shares as a hedge or as part of a hedging, straddle, conversion, synthetic security, integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or holders who acquired their shares upon the exercise of employee stock options or otherwise as compensation). In addition, this summary does not address the U.S. federal income tax consequences to those Original Hillenbrand shareholders who do not hold their Original Hillenbrand common stock as a capital asset. Finally, this summary does not address any state, local or foreign tax consequences. ORIGINAL HILLENBRAND SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM.

 

Original Hillenbrand has received a private letter ruling from the IRS to the effect that the distribution will qualify as a tax-free distribution for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. As a tax-free distribution: (i) no gain or loss will be recognized by (and no amount will be included in the income of) Original Hillenbrand shareholders upon their receipt of shares of New Hillenbrand common stock in the distribution; (ii) any cash received in lieu of fractional share interests in New Hillenbrand will give rise to gain or loss equal to the difference between the amount of cash received and the tax basis allocable to the fractional share interests (determined as described below), and such gain or loss will be capital gain or loss if the Original Hillenbrand common stock on which the distribution is made is held as a capital asset on the date of the distribution; (iii) the aggregate basis in the Hill-Rom Holdings common stock and the New Hillenbrand common stock in the hands of each Original Hillenbrand common shareholder after the distribution will equal the aggregate basis in Original Hillenbrand common stock held by the shareholder immediately before the distribution, allocated between the Hill-Rom Holdings common stock and the New Hillenbrand common stock in proportion to the relative fair market value of each on the date of the distribution; and (iv) the holding period of the New Hillenbrand common stock received by each Original Hillenbrand shareholder will include the holding period at the time of the distribution for the Original Hillenbrand common stock on which the distribution is made, provided that the Original Hillenbrand common stock is held as a capital asset on the date of the distribution.

 

Although the private letter ruling from the IRS generally will be binding on the IRS, if the factual representations or assumptions made in the letter ruling request were untrue or incomplete in any material respect, neither we nor Hill-Rom Holdings will be able to rely on the ruling. Original Hillenbrand believes that all such representations and assumptions were true and complete. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Code. Rather, the ruling will be based upon representations by Original Hillenbrand that these conditions have been satisfied, and any inaccuracy in such representations could invalidate the ruling. Original Hillenbrand will receive an opinion of Bracewell & Giuliani LLP, counsel to Original Hillenbrand, that addresses the material matters on which the IRS does not rule as a matter of policy. In particular, the tax opinion will opine (i) that there are valid non-tax business purposes under Section 355 for the distribution to occur, (ii) that the distribution is not being used by Original Hillenbrand as a means, referred to as a “device” under Section 355, to distribute earnings and profits of Original Hillenbrand to the shareholders of Original Hillenbrand, and (iii) that the distribution is not part of a plan or arrangement under Section 355(e) to allow for the acquisition by persons (other than the shareholders of Original Hillenbrand who will be receiving shares of New Hillenbrand common stock in the distribution) of 50% or more of the stock of either Original Hillenbrand or New Hillenbrand within two years after the date of the distribution. The opinion of counsel also will be based upon certain assumptions and representations by Original Hillenbrand as to factual matters.

 

Notwithstanding receipt by Original Hillenbrand of the IRS ruling and the opinion of counsel, in the event there was a material misstatement or omission in the representations or assumptions made in the letter ruling request, the IRS could assert that the distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, our initial public shareholders and Hill-Rom Holdings could be subject to significant U.S. federal income tax liability. In general, Hill-Rom Holdings would be subject to tax as if it had sold the common stock of our company in a taxable sale for its fair market value and our initial public shareholders would be subject to tax as if they had received a taxable distribution equal to the fair market value of our common stock that was distributed to them. In addition, even if the distribution were to otherwise qualify under Section 355 of the Code, it may be taxable to Hill-Rom Holdings (but not to shareholders) under Section 355(e) of the Code, if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to

which one or more persons acquire directly or indirectly stock representing a 50% or greater interest in Hill-Rom Holdings or us. For this purpose, any acquisitions of Original Hillenbrand/Hill-Rom Holdings stock or of our common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although we or Hill-Rom Holdings may be able to rebut that presumption.

 

In connection with the distribution, we and Original Hillenbrand will enter into a tax sharing agreement pursuant to which we will agree to be responsible for certain liabilities and obligations following the distribution. In general, under the terms of the tax sharing agreement, in the event the distribution were to fail to qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code (including as a result of Section 355(e) of the Code) and if such failure was not the result of actions taken after the distribution by Hill-Rom Holdings or us, we and Hill-Rom Holdings would share the responsibility for any taxes imposed on Hill-Rom Holdings as a result thereof. We will be responsible for taxes based on a fraction, the numerator of which shall be the price of our stock based on the five trading days after the distribution date and the denominator of which is the sum of the price of our stock and the price of Hill-Rom Holdings stock on the five trading days following the distribution. If such failure was the result of actions taken after the distribution by Hill-Rom Holdings or us, the party responsible for such failure would be responsible for all taxes imposed on Hill-Rom Holdings to the extent that such taxes result from such actions. For a more detailed discussion, see the section entitled “Arrangements between Original Hillenbrand and New Hillenbrand — Tax Sharing Agreement.” Our indemnification obligations to Hill-Rom Holdings and its subsidiaries, officers and directors are not limited in amount or subject to any cap. If we are required to indemnify Hill-Rom Holdings and its subsidiaries and their respective officers and directors under the circumstances set forth in the tax sharing agreement, we may be subject to substantial liabilities.

 

U.S. Treasury regulations require each shareholder that receives stock in a spin-off, such as the distribution, to attach to the shareholder’s U.S. federal income tax return for the year in which the spin-off occurs a detailed statement setting forth certain information relating to the tax-free nature of the spin-off. Shortly after the distribution, Hill-Rom Holdings will provide shareholders who receive New Hillenbrand shares in the distribution with the information necessary to comply with that requirement.

 

THE FOREGOING IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW. THE FOREGOING DOES NOT PURPORT TO ADDRESS ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF SHAREHOLDERS. EACH ORIGINAL HILLENBRAND SHAREHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.

 

AS REQUIRED BY U.S. TREASURY REGULATIONS, YOU SHOULD BE AWARE THAT THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SENDER TO BE USED, AND IT CANNOT BE USED, BY ANY RECIPIENT FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE RECIPIENT UNDER U.S. FEDERAL TAX LAWS. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THIS INFORMATION STATEMENT. ANY RECIPIENT SHOULD SEEK ADVICE BASED ON THE RECIPIENT’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

 

Market for Common Stock

 

There is currently no public market for our common stock. A condition to the distribution is the listing on the NYSE of our common stock. Original Hillenbrand’s common stock will continue to trade on the New York Stock Exchange; however, in connection with Original Hillenbrand’s name change to Hill-Rom Holdings, Inc., Original Hillenbrand intends to change its trading symbol from “HB” to “HRC.” We expect that this change in trading

symbol will take effect on the first trading day following the distribution date. We have applied to have our common stock listed on the New York Stock Exchange under the symbol “HI.”

 

Trading Between the Record Date and Distribution Date

 

Beginning on or shortly before the record date and continuing up to and through the distribution date, we expect that there will be two markets in Original Hillenbrand common stock: a “regular-way” market and an “ex-distribution” market. Shares of Original Hillenbrand common stock that trade on the regular way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you sell shares of Original Hillenbrand common stock in the “regular-way” market on or before the distribution date, you will be selling your right to receive shares of New Hillenbrand common stock in the distribution. If you own shares of Original Hillenbrand common stock at the close of business on the record date and sell those shares on the “ex-distribution” market on or before the distribution date, you will still receive the shares of our common stock that you would be entitled to receive pursuant to your ownership of the shares of Original Hillenbrand common stock on the record date.

 

Further, beginning on or shortly before the record date and continuing up to and through the distribution date, we expect that there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our common stock that will be distributed to Original Hillenbrand shareholders on the distribution date. If you owned shares of Original Hillenbrand common stock at the close of business on the record date, you would be entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of our common stock, without trading the shares of Original Hillenbrand common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when issued” trading with respect to our common stock will end and “regular-way” trading will begin.

 

Conditions to the Distribution

 

We expect that the distribution will occur after the close of business on          , 2008, the distribution date, provided that the following conditions, among others, shall have been satisfied or, if permissible under the distribution agreement, waived by Original Hillenbrand:

 

 

The fulfillment of the foregoing conditions does not create any obligation on Original Hillenbrand’s part to effect the distribution, and the Original Hillenbrand Board of Directors has reserved the right, in its sole discretion, to waive any or all of the above conditions, and to amend, modify or abandon the distribution and related transactions at any time prior to the time distribution occurs. Original Hillenbrand has the right not to complete the distribution if, at any time, the Original Hillenbrand Board of Directors determines, in its sole discretion, that the distribution is not in the best interests of Original Hillenbrand or its shareholders or that market conditions or other circumstances are such that it is not advisable to separate the funeral service business from Original Hillenbrand.

Background of and Reasons for the Separation

 

Following the appointment of Peter H. Soderberg as President and Chief Executive Officer of Original Hillenbrand in March 2006, Original Hillenbrand embarked on a thorough strategic assessment and planning process for both its medical technology business and its funeral service business in order to develop a plan to enhance long-term shareholder value. This process included a consideration of the appropriate enterprise and capital structures to align these elements with and support the strategic plan. The Board of Directors evaluated, with the input of its financial advisors, a range of enterprise and capital structure alternatives for Original Hillenbrand. These alternatives included the continuation of Original Hillenbrand’s current operating structure, the sale of one or both of its business units, returning cash to shareholders through an increase in balance sheet leverage and the spin-off of or split off of one of its business units. Following this assessment and evaluation, in October 2006, Original Hillenbrand announced new three-year strategic plans for both business units, and the Board of Directors concluded that separating the two business units into two publicly traded companies merited further, more detailed consideration as a means to position the two operating units to achieve their strategic goals.

 

From October 2006 to May 2007, the Original Hillenbrand Board of Directors, with input from its advisors, considered the merits and mechanics of a separation of the medical technology and funeral service business units, including whether the achievement of the strategic plans for the business units would be aided by a separation of the business units. This review culminated in the Board’s May 7, 2007 approval in principle of a plan to separate Original Hillenbrand’s funeral service and medical technology businesses. Among the factors the Board considered were:

 

 

 

The Board also considered the risks described under “Risk Factors — Risks Relating to the Separation.”

 

Based upon this detailed review, including consideration of both the positive and negative aspects of the foregoing factors, the Original Hillenbrand Board of Directors concluded that there was a strong business case to support the separation of the two operating companies. Original Hillenbrand believes that the separation of the funeral service business is the best way to unlock the full value of Original Hillenbrand’s businesses and will provide each of Hill-Rom Holdings and us with certain opportunities and benefits. The following are some of the opportunities and benefits that the Original Hillenbrand Board of Directors considered, among others, in approving the separation:

 

 

Neither we nor Original Hillenbrand can assure you that, following the separation, any of these benefits will be realized to the extent anticipated or at all.

 

In view of the wide variety of factors considered in connection with the evaluation of the separation and the complexity of these matters, the Original Hillenbrand Board of Directors did not find it useful to, and did not

attempt to, quantify, rank or otherwise assign relative weights to the factors considered. The individual members of the Original Hillenbrand Board of Directors likely may have given different weights to different factors.

 

With regard to the allocation of assets, employees, liabilities and rights and related indemnifications between Original Hillenbrand and New Hillenbrand in the distribution, in general, assets, employees, liabilities and rights associated with the medical technology business will be retained by Original Hillenbrand and those associated with the funeral service business will be retained by New Hillenbrand. Certain investments, assets, liabilities and related obligations currently held by Original Hillenbrand at the parent company level will be transferred to New Hillenbrand prior to the distribution. These items are unrelated to the medical technology and funeral services businesses, and it was determined that they should be transferred to New Hillenbrand for tax purposes, including supporting that the distribution will qualify as tax free, and to provide each company with the desired capital structure upon completion of the distribution. Additionally, certain assets used by both businesses, including certain aircraft and corporate conference facilities, will be jointly owned by Original Hillenbrand and New Hillenbrand.

 

With regard to the allocation of potential liability under antitrust litigation matters as provided in the judgment sharing agreement that we will enter into with Original Hillenbrand (see “Arrangements between Original Hillenbrand and New Hillenbrand — Judgment Sharing Agreement”), the Board of Directors of Original Hillenbrand, based on the recommendation of the management teams of Original Hillenbrand and New Hillenbrand, adopted a symmetrical approach under which each company will be responsible for any potential liability in an amount up to its “maximum funding proceeds” (as defined in the judgment sharing agreement). Both we and Original Hillenbrand are defendants in the antitrust litigation, but because the litigation relates to alleged conduct of the funeral service business and not the medical technology business, the judgment sharing agreement provides that we are initially responsible for any potential liability up to the amount of our “maximum funding proceeds” (less a set aside for required operating cash) before Original Hillenbrand is responsible for any portion of such liability.

 

Separation Costs

 

Original Hillenbrand expects to incur pre-tax separation costs of approximately $40 million to $45 million, of which a portion is being allocated to us. A majority of these separation costs are expected to be paid in cash, with a portion being non-deductible for income tax purposes. In addition to these separation costs, Original Hillenbrand and New Hillenbrand expect to incur an incremental combined charge related to the modification or acceleration of equity-based awards, subject to final approval by the Original Hillenbrand Board of Directors, in the range of $16 million to $19 million, with $7 million to $8 million attributable to New Hillenbrand. The estimates are dependent upon the fair value of our common stock and could change depending on actual fair value at the time of modification. For additional information on the proposed modification or acceleration of equity-based awards, see the section entitled “Executive Compensation — Compensation Discussion and Analysis — Equitable Adjustments to Outstanding Equity-Based Awards.”

 

Interests of Certain Persons in the Separation

 

Except as set forth below, none of our directors or executive officers will receive any benefits or remuneration not received by shareholders in connection with the separation and distribution.

 

Under a supplemental benefits agreement entered into in March 2006 between Original Hillenbrand and Kenneth A. Camp, our President and Chief Executive Officer, Mr. Camp will be credited with additional service under a Supplemental Executive Retirement Plan as a result of the distribution. The present value of the benefit associated with the additional service with which Mr. Camp will be credited was $546,628 as of September 30, 2007, calculated on the same basis and using the same assumptions as the present value of accumulated benefits shown in the Pension Benefits at September 30, 2007 table under “Executive Compensation — Compensation of Named Executive Officers.” For a description of this agreement, see “Executive Compensation — Compensation Discussion and Analysis — Elements of Executive Compensation — Retirement, Change in Control Agreements and Severance — Supplemental Executive Retirement Plan.”

 

In connection with the distribution, we expect that, subject to approval by the Original Hillenbrand Board of Directors, equitable adjustments will be made to outstanding stock option and deferred stock share awards that currently relate to Original Hillenbrand common stock, including stock option and deferred stock share awards held

by our directors and executive officers, to the extent necessary to maintain the equivalent value of such awards upon the distribution. Specifically, outstanding options to purchase Original Hillenbrand common stock held by our executive officers and directors (other than directors who will serve as directors of both Original Hillenbrand and New Hillenbrand) will be replaced with options to purchase New Hillenbrand common stock, with the number of shares issuable on exercise and the exercise price being adjusted so that the New Hillenbrand stock options have the same value as the replaced Original Hillenbrand stock options, based on the market prices of Original Hillenbrand common stock and New Hillenbrand common stock on the date of the distribution. Original Hillenbrand stock options held by former directors of Original Hillenbrand and by our directors who will serve as directors of both Original Hillenbrand and New Hillenbrand will be adjusted such that these directors will hold options to purchase the same number of shares of both Original Hillenbrand common stock and New Hillenbrand common stock, with the current exercise price being allocated between the Original Hillenbrand stock options and the New Hillenbrand stock options proportionally based on the market prices of Original Hillenbrand common stock and New Hillenbrand common stock on the date of the distribution.

 

Deferred stock shares of Original Hillenbrand held by our executive officers and directors (other than those held by directors who will serve as directors of both Original Hillenbrand and New Hillenbrand and those with respect to which an election has been made to defer payment) will be replaced by a number of deferred stock shares or unrestricted shares of common stock of New Hillenbrand such that the New Hillenbrand deferred stock shares or shares of common stock will have the same value as the replaced Original Hillenbrand deferred stock shares, based on the market prices of Original Hillenbrand common stock and New Hillenbrand common stock on the date of the distribution. All Original Hillenbrand deferred stock shares granted prior to December 2007 (other than performance based deferred stock shares) and held by persons who will be our employees following the distribution, including our executive officers, will vest in their entirety by their terms upon completion of the distribution and be replaced by unrestricted shares of New Hillenbrand common stock. Deferred stock shares of Original Hillenbrand (1) held by former directors of Original Hillenbrand and by our directors who will be directors of both Original Hillenbrand and New Hillenbrand and (2) with respect to which an election has been made to defer payment will be adjusted such that these directors and other holders will hold the same number of deferred stock shares in each of Original Hillenbrand and New Hillenbrand. Certain performance based deferred stock awards currently held by Mr. Camp will be replaced with performance based deferred stock awards of New Hillenbrand, with an adjustment in the number of shares subject to the awards intended to preserve the same value as the replaced Original Hillenbrand awards, based on the market prices of Original Hillenbrand common stock and New Hillenbrand common stock on the date of the distribution.

 

The following table sets forth, for each of our Named Executive Officers and directors and for our executive officers and directors as a group:

 

 

 

 

 

 

 

 

In connection with the modification or acceleration of outstanding Original Hillenbrand equity-based awards, Original Hillenbrand and New Hillenbrand expect to incur incremental combined charges in the range of $16 million to $19 million, with $7 million to $8 million attributable to New Hillenbrand. The estimates are dependent upon the fair value of our common stock and could change depending on the actual fair value at the time of modification.

 

In addition to the modification of outstanding Original Hillenbrand equity-based awards described above, immediately following the distribution we expect to grant new equity-based awards to Mr. Camp in recognition of his increased responsibilities as chief executive officer of a stand-alone, publicly traded company. These awards will comprise stock options with a value of $1.3 million on the date of the grant and deferred stock shares with a value of $154,000 on the date of the grant. The number of stock options, exercise price of the stock options and number of deferred stock shares will be determined at the time of the grant based on the market price of our common stock and, in the case of the stock options, the fair market value of the stock options on the date of the grant. The stock options will vest in one-third increments on the first, second and third anniversaries of the date of grant. The deferred stock shares will vest 20%, 25%, 25% and 30%, respectively, on the second, third, fourth and fifth anniversaries of the date of grant.

 

For information regarding outstanding Original Hillenbrand equity-based awards held by our named executive officers and directors, see “Executive Compensation — Compensation of Named Executive Officers — Outstanding Equity Awards of September 30, 2007” and “Security Ownership of Certain Beneficial Owners and Management.” For additional information regarding the expected treatment of outstanding Original Hillenbrand equity-based awards in the distribution, see “Executive Compensation — Compensation Discussion and Analysis — Equitable Adjustments to Outstanding Equity-Based Awards.”

 

Reason for Furnishing this Information Statement

 

This information statement is being furnished solely to provide information to Original Hillenbrand shareholders who are entitled to receive shares of our common stock in the distribution. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or securities of Original Hillenbrand. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Original Hillenbrand nor we undertake any obligation to update such information.

 

Prior to the distribution, we will enter into the distribution agreement as well as a number of other agreements with Original Hillenbrand for the purpose of accomplishing the separation from Original Hillenbrand of our business described in this information statement, which we sometimes refer to as the separation, and the distribution of our common stock to Original Hillenbrand shareholders. These agreements will govern the relationship between Hill-Rom Holdings and us subsequent to the distribution and provide for the allocation of the assets, employees, investments and property of Original Hillenbrand as well as of investments, property and employee benefits, tax and other liabilities and obligations attributable to periods prior to the distribution. In addition to the distribution agreement, these agreements include:

 

 

In addition, we will enter into leases and subleases with Original Hillenbrand for locations that we will share after the distribution. Subleases for space in commercially leased locations will have varying terms generally matching the terms of the underlying leases, which we expect to approximate fair market value. Also, we will enter into agreements providing for the joint ownership by Hill-Rom Holdings and us of certain assets, including certain aircraft and corporate conference facilities used by both companies. We also expect to enter into a limited, mutual right of first offer or right of first refusal agreement with Original Hillenbrand with respect to various real estate and improvements thereon owned by us or Original Hillenbrand in the Batesville, Indiana area.

 

The distribution agreement, judgment sharing agreement, employee matters agreement and tax sharing agreement have each been filed as exhibits to the registration statement of which this information statement is a part, and the summary of each of these agreements sets forth those terms we believe to be material. These summaries are qualified in their entirety by reference to the full text of the agreements.

 

Distribution Agreement

 

The distribution agreement will set forth the agreements between Original Hillenbrand and us with respect to the principal corporate transactions required to effect the separation and the distribution of our shares to Original Hillenbrand shareholders, the allocation of certain corporate assets and liabilities of Original Hillenbrand and us, and other agreements governing the relationship between Original Hillenbrand and us.

 

The Distribution

 

The distribution agreement will provide that, subject to the terms and conditions contained in the agreement, Original Hillenbrand will effect the distribution after the close of business on the distribution date, which we expect will be  , 2008. Nevertheless, Original Hillenbrand has reserved the sole and absolute discretion to determine whether to proceed with the distribution, the timing of the distribution and to alter any and all terms of the distribution until it has been completed. In addition, the distribution is subject to the satisfaction or waiver by Original Hillenbrand, in its sole discretion, of a number of conditions. See “The Separation — Conditions to the Distribution.”

 

Releases and Indemnification

 

The distribution agreement will provide that New Hillenbrand and its subsidiaries will release and discharge Original Hillenbrand and its subsidiaries from all liabilities to New Hillenbrand and its subsidiaries of any sort, including in connection with the transactions contemplated by the distribution agreement, except as expressly set forth in the agreement. Original Hillenbrand and its subsidiaries (other than New Hillenbrand and its subsidiaries) will release and discharge New Hillenbrand and its subsidiaries from all liabilities to Original Hillenbrand and its

subsidiaries of any sort, including in connection with the transactions contemplated by the distribution agreement, except as expressly set forth in the agreement. The releases will not release any party from, among other matters, liabilities assumed by or allocated to the party pursuant to the distribution agreement or the other agreements entered into in connection with the separation or from the indemnification and contribution obligations under the distribution agreement or such other agreements.

 

Except as otherwise provided in the distribution agreement, we will agree to indemnify, defend and hold harmless Original Hillenbrand and each of its subsidiaries, other than us, from and against all losses relating to, arising out of or resulting from:

 

 

Except as otherwise provided in the distribution agreement, Original Hillenbrand will agree to indemnify, defend and hold harmless New Hillenbrand and its subsidiaries from and against all liabilities relating to, arising out of or resulting from:

 

 

The distribution agreement also will establish procedures with respect to claims subject to indemnification and related matters.

 

Restrictive Covenants

 

In order to preserve the credit capacity of each of New Hillenbrand and Original Hillenbrand to perform its obligations under the judgment sharing agreement described below under “— Judgment Sharing Agreement,” the distribution agreement will impose certain restrictive covenants on New Hillenbrand and Original Hillenbrand.

Specifically, the distribution agreement will provide that, until the occurrence of an Agreed Termination Event (as described below), New Hillenbrand and its subsidiaries will not:

 

 

 

As used in the distribution agreement, “Agreed Termination Event” means the first to occur of (1) the full and complete satisfaction of a trial court judgment in the last pending antitrust litigation matter described under “Business and Properties — Legal Proceedings — Antitrust Litigation” (including any similar future litigation matter that is asserted against both us and Original Hillenbrand prior to the completion of the distribution and any other matter that is consolidated with any such existing or future matter) or the suspension of the execution of such judgment by the posting of a supersede as bond or (2) the settlement or voluntary dismissal of such last pending matter as to us and Original Hillenbrand. These restrictive covenants will terminate in the event that either Original Hillenbrand’s or New Hillenbrand’s funding obligations under the judgment sharing agreement terminate in accordance with the terms of that agreement. The distribution agreement will impose similar restrictions on Original Hillenbrand and its subsidiaries, except that the definition of core business will be appropriate for Original Hillenbrand and the debt to EBITDA ratio described in the last bullet point will be set to equate initially to a higher limitation on incurrence of indebtedness.

 

Dispute Resolution

 

The distribution agreement will contain provisions that govern, except as otherwise provided in any other agreement, the resolution of disputes, controversies or claims that may arise between us and Original Hillenbrand related to the separation or distribution. These provisions will contemplate that efforts will be made to resolve disputes, controversies and claims by escalation of the matter to senior management or other mutually agreed representatives of us and Original Hillenbrand. If such efforts are not successful, either we or Original Hillenbrand may submit the dispute, controversy or claim to binding arbitration, subject to the provisions of the agreement.

 

Insurance

 

The distribution agreement will provide for the allocation among the parties of benefits under existing insurance policies for occurrences prior to the separation and sets forth procedures for the administration of insured claims. In addition, the agreement will allocate among the parties the right to proceeds and the obligation to incur deductibles under certain insurance policies.

Further Assurances

 

In addition to the actions specifically provided for in the distribution agreement, except as otherwise set forth therein or in any other agreement, both we and Original Hillenbrand agree to use commercially reasonable efforts, prior to, on and after the distribution date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by the distribution agreement and the other agreements.

 

Judgment Sharing Agreement

 

Because we, Original Hillenbrand and the other co-defendants in the antitrust litigation matters described under “Business and Properties — Legal Proceedings — Antitrust Litigation” are jointly and severally liable for any damages assessed at trial with no statutory contribution rights among the defendants, we and Original Hillenbrand will enter into a judgment sharing agreement to allocate any potential liability under these cases, any similar case brought against both us and Original Hillenbrand prior to the completion of the distribution and any other case that is consolidated with any such existing or future case.

 

Under the judgment sharing agreement, the aggregate amount that we and Original Hillenbrand will be required to pay or post in cash (1) to satisfy in its entirety any claim (including upon settlement) once the action has been finally judicially determined or (2) to post a bond, in the event we or Original Hillenbrand elect to do so, to stay the execution of any adverse judgment pending its final determination, will be funded in the following order of priority:

 

 

 

 

 

Neither we nor Original Hillenbrand will be required to raise or provide funds if the total amount of funds available to both us and Original Hillenbrand would not be sufficient to cover a judgment or settlement amount or the cost of the appeal bond. The funding obligations of each company also are subject to a limitation relating to that company’s continued solvency.

 

The judgment sharing agreement will provide that if the foregoing allocation is held to be unenforceable, we and Original Hillenbrand will be required to contribute to satisfy any funding obligation based upon a mutually satisfactory agreement as to our and Original Hillenbrand’s relative culpability (if any) or, failing such an agreement, pursuant to arbitration under the arbitration provisions contained in the judgment sharing agreement.

 

The judgment sharing agreement will provide that we are responsible for bearing all fees and costs incurred in the defense of the antitrust litigation matters on behalf of ourselves and Original Hillenbrand. The distribution agreement contains provisions governing the joint defense of the antitrust litigation and other claims.

 

In the event that we or Original Hillenbrand is dismissed as a defendant in the antitrust litigation matters (except where the dismissal results from a settlement agreement other than a settlement not including both us and Original Hillenbrand) or is found upon conclusion of trial not to be liable for payment of any damages to the plaintiffs, any funding obligations under the judgment sharing agreement of the party so dismissed or found not liable will terminate once such dismissal or finding of no liability is finally judicially determined.

Employee Matters Agreement

 

We will enter into an employee matters agreement with Original Hillenbrand prior to the distribution that will govern our compensation and employee benefit obligations with respect to our directors and our current and former employees, along with the assumption of liabilities for certain former Original Hillenbrand directors and employees and former employees of other non-medical technology businesses. The employee matters agreement will allocate liabilities and responsibilities relating to employee compensation and benefits plans and programs and other related matters in connection with the distribution including, without limitation, the treatment of outstanding Original Hillenbrand equity-based awards, certain outstanding annual and long-term incentive awards, existing deferred compensation obligations and certain retirement, post-retirement and welfare benefit obligations. In connection with the distribution, we initially expect to adopt, for the benefit of our employees and directors, a variety of compensation and employee benefits plans that are generally comparable in the aggregate to those provided by Original Hillenbrand immediately prior to the distribution. Once we establish our own compensation and benefits plans, we reserve the right to amend, modify or terminate each such plan in accordance with the terms of that plan. With certain possible exceptions, the employee matters agreement will provide that as of the close of the distribution, our employees and directors will generally cease to be active participants in, and we will generally cease to be a participating employer in, the benefit plans and programs maintained by Original Hillenbrand. As of such time, our employees and directors will generally become eligible to participate in all of our applicable plans. In general, we will credit each of our employees with his or her service with Original Hillenbrand prior to the distribution for all purposes under plans maintained by us, to the extent the corresponding Original Hillenbrand plans give credit for such service and such crediting does not result in a duplication of benefits.

 

The employee matters agreement will provide that as of the distribution date, except as specifically provided therein, we generally will assume, retain and be liable for all wages, salaries, welfare, incentive compensation and employee-related obligations and liabilities for our directors and all current and former employees of our business, along with those for certain former Original Hillenbrand directors and corporate employees and former employees of other non-medical technology businesses. The distribution agreement provides that if neither we nor Original Hillenbrand is entitled to receive a full deduction for state and federal income tax purposes for any liabilities discharged by us with respect to these Original Hillenbrand directors and former employees, we will reassign those liabilities back to Original Hillenbrand and pay Original Hillenbrand an amount equal to the then carrying value of these liabilities on our books and records, net of taxes at an assumed tax rate of 36.25%, subject to adjustment at the time of such reassignment in the event of future changes in the federal income tax rate. Additionally, we and Original Hillenbrand will agree that with the assumption of liabilities for these Original Hillenbrand directors and former employees, we are entitled to the tax benefit from the satisfaction of such liabilities, and if it is determined that we are not entitled to this tax benefit, Original Hillenbrand will reimburse us for the tax benefit. This tax benefit will be determined based on the cash benefit to us as if such deduction were taken and allowed on our filed tax returns, including any amended tax returns.

 

The employee matters agreement will also provide for the transfer of assets and liabilities relating to the pre-distribution participation of employees and directors for which we have assumed responsibility in various Original Hillenbrand retirement, postretirement, welfare, incentive compensation and employee benefit plans from such plans to the applicable plans we adopt for the benefit of our employees and directors. The employee matters agreement will provide that we and Original Hillenbrand may arrange with current service providers with respect to Original Hillenbrand’s employee benefit plans to continue such services on a shared basis for a period of time following the distribution and that we will reimburse Original Hillenbrand for our share of the cost of such shared services.

 

Tax Sharing Agreement

 

In conjunction with our separation from Original Hillenbrand, we will enter into a tax sharing agreement with Original Hillenbrand that generally will govern Original Hillenbrand’s and our respective rights, responsibilities and obligations after the distribution with respect to taxes, including ordinary course of business taxes and the preparation and filing of tax returns and the handling of tax audits. Included in the taxes to be addressed will be taxes, if any, incurred as a result of any failure of the distribution to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Sections 355 and 368(a)(1)(D) of the Code (including as a result of

Section 355(e) of the Code). Under the tax sharing agreement, we expect that, with certain exceptions, we generally will be responsible for the payment of all income and non-income taxes attributable to our operations, and the operations of our direct and indirect subsidiaries, whether or not such tax liability is reflected on a consolidated or combined tax return filed by Original Hillenbrand. Other than the reimbursement or sharing of external and internal costs incurred as a result of and related to tax audits, no fees will be paid by either party to the other party under the tax sharing agreement.

 

Notwithstanding the foregoing, we expect that, under the tax sharing agreement, we also generally will be responsible for any taxes imposed on Original Hillenbrand that arise from the failure of the distribution to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Sections 355 and 368(a)(1)(D) of the Code, to the extent that such failure to qualify is attributable to actions, events or transactions relating to our stock, assets or business, or a breach of the relevant representations or covenants made by us in the tax sharing agreement. In addition, we generally will be responsible for a portion of any taxes that arise from the failure of the distribution to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Sections 355 and 368(a)(1)(D) of the Code, if such failure is for any reason for which neither we nor Original Hillenbrand is responsible. We will be responsible for taxes based on a fraction, the numerator of which shall be the price of our stock based on the five trading days after the distribution date and the denominator of which is the sum of the price of our stock and the price of Hill-Rom Holdings stock on the five trading days following the distribution. The tax sharing agreement also is expected to impose restrictions on our and Original Hillenbrand’s ability to engage in certain actions following our separation from Original Hillenbrand and to set forth the respective obligations among us and Original Hillenbrand with respect to the filing of tax returns, the administration of tax contests, assistance and cooperation and other matters.

 

Shared Services and Transitional Services Agreements

 

We will enter into shared services agreements and transitional services agreements with Original Hillenbrand in connection with the separation. The shared services agreements will address services that may be provided for an extended period of time, while the transitional services agreements will cover services that are intended to be provided for a limited period of time while the recipient of the services makes other arrangements for these services.

 

Under the shared services agreements, we, on the one hand, and Hill-Rom Holdings, on the other hand, will agree to provide certain services to each other following the separation for an initial term of two years, with automatic two-year extensions if commercially viable alternatives for the services are not available, except as noted below. After the initial two-year term, either party may terminate an agreement by notice to the other party, and the recipient of the services must terminate after notice if commercially viable alternatives for the services are available. For purposes of the foregoing, the determination of whether commercially viable alternatives are available is in the discretion of the recipient of the services. These services include aviation services related to the airfield that Hill-Rom Holdings will own and operate and certain aircraft that Hill-Rom Holdings and we will jointly own and operate following the separation, as well as certain ground transportation and fleet maintenance services. In addition, due to the interrelated nature of certain facilities that will be owned by Hill-Rom Holdings and us, we will enter into agreements requiring us and Hill-Rom Holdings to maintain our respective parts of such facilities, including, for example, maintaining fire protection systems for the facilities. In general, the recipient of services will be billed for the services at the fair value of the services, except that we will be billed at cost for aviation services provided to us by Hill-Rom Holdings, and we and Hill-Rom Holdings will be independently responsible for our respective obligations to maintain our portions of the interrelated facilities. Hill-Rom Holdings will continue to provide aviation services related to the airfield to us for as long as we continue to own an interest in certain aircraft. Ground transportation services could continue as long as Hill-Rom Holdings and we continue to jointly own corporate conference facilities used by both companies. Obligations under the agreements relating to the maintenance of interrelated facilities could continue for so long as required for the proper maintenance, operation and use of such facilities or until such interrelated facilities are segregated.

 

Under the transitional services agreements, Hill-Rom Holdings will provide certain services to us for a specified period following the separation. The services to be provided may include services regarding certain financial reporting and other public company staffing needs, legal services, including labor and employment and litigation support, human resources services, medical services and certain information technology services. We will

generally be billed at cost for these services, including information technology services provided through a third party under a contract to which Original Hillenbrand is a party. The transitional services agreements will generally provide that the services will continue for a period of up to two years following the separation, subject to earlier termination by the recipient of the services and to extension if the parties agree.

 

A goal of the separation is that current Original Hillenbrand shareholders initially receive combined quarterly cash dividends from Hill-Rom Holdings and us equal to the $0.285 per share quarterly dividend currently paid by Original Hillenbrand. Accordingly, following the distribution and beginning with the third quarter of fiscal 2008, we expect initially to pay a quarterly dividend of $0.1825 per share, and Hill-Rom Holdings expects initially to pay a quarterly dividend of $0.1025 per share. The declaration and payment of dividends by us or Hill-Rom Holdings will be subject to the sole discretion of our and Hill-Rom Holdings’ respective boards of directors and will depend upon many factors, including financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors deemed relevant by the respective boards of directors. In addition, our and Original Hillenbrand’s ability to pay dividends will be limited by covenants contained in the distribution agreement. Specifically, until the occurrence of an Agreed Termination Event (as defined in the distribution agreement), we are prohibited from paying regular quarterly cash dividends in excess of the quarterly dividend we initially expect to pay following the distribution and from incurring indebtedness to finance the payment of any extraordinary cash dividend. See “Arrangements between Original Hillenbrand and New Hillenbrand — Distribution Agreement — Restrictive Covenants.” We expect that our new credit facility will permit us to pay dividends on our common stock provided that no event of default under the credit agreement would exist after giving effect to the dividend. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources — Other Liquidity Matters.”

 

The following table sets forth our combined capitalization as of December 31, 2007 on a historical and pro forma basis to give effect to the separation and distribution and the transactions related to the separation and distribution. This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Combined Financial Statements” and corresponding notes included elsewhere in this information statement. For an explanation of the pro forma adjustments made to our historical Combined Financial Statements for the separation and distribution and the transactions related to the separation and distribution to derive the pro forma capitalization described below, see “Unaudited Pro Forma Combined Financial Statements.”

 

 

 

 

The pro forma long-term debt of approximately $250 million reflects borrowings that we intend to make under a new senior unsecured credit facility to be negotiated for New Hillenbrand prior to the separation. The proceeds of these borrowings will be used to make a $250 million cash distribution to Original Hillenbrand immediately prior to the distribution.

 

We expect that we would have had, on a pro forma basis, approximately 62 million shares of common stock outstanding as of December 31, 2007 based on each holder of Original Hillenbrand common stock receiving a dividend of one share of our common stock for each share of Original Hillenbrand common stock, there being approximately 62 million shares of Original Hillenbrand common stock outstanding on that date, excluding treasury shares and assuming no exercise of outstanding options.

 

Our ability to issue additional stock is constrained because such an issuance of additional stock may cause the distribution to be taxable to Original Hillenbrand under Section 355(e) of the Internal Revenue Code, and under the tax sharing agreement we would be required to indemnify Original Hillenbrand against that tax. See “The Separation — U.S. Federal Income Tax Consequences of the Distribution” and “Arrangements between Original Hillenbrand and New Hillenbrand — Tax Sharing Agreement” for a more detailed discussion of Section 355(e) and our tax sharing agreement with Original Hillenbrand.

 

The following table sets forth our selected financial information derived from our (i) unaudited Combined Financial Statements as of September 30, 2004 and 2003 and for the year ended September 30, 2003, which are not included in this information statement; (ii) audited Combined Financial Statements as of September 30, 2005 and for the year ended September 30, 2004, which are not included in this information statement; (iii) unaudited Combined Financial Statements as of December 31, 2007 and for the three months ended December 31, 2007 and 2006, which are included elsewhere in this information statement; and (iv) audited Combined Financial Statements as of September 30, 2007 and 2006 and for the years ended September 30, 2007, 2006 and 2005, which are included elsewhere in this information statement.

 

The historical financial information presented may not be indicative of the results of operations or financial position that would have been obtained if we had been an independent company during the periods shown or of our future performance as an independent company.

 

The selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Combined Financial Statements and the notes thereto included elsewhere in this information statement.

 

 

 

The unaudited pro forma combined financial statements set forth below consist of unaudited pro forma combined statements of income for the fiscal year ended September 30, 2007 and for the three months ended December 31, 2007 and an unaudited pro forma combined balance sheet as of December 31, 2007. The unaudited pro forma combined financial statements should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Combined Financial Statements and the notes thereto included elsewhere in this information statement.

 

The unaudited pro forma combined statements of income and balance sheet included in this information statement have been derived from the audited Combined Financial Statements included elsewhere in this information statement for the fiscal year ended September 30, 2007 and from the unaudited Combined Financial Statements included elsewhere in this information statement as of and for the three months ended December 31, 2007, and do not purport to represent what our results of operations and financial position actually would have been had the separation and distribution occurred on the dates indicated, or to project our results of operations or financial position for any future period or as of any future date. Original Hillenbrand did not account for New Hillenbrand as, and New Hillenbrand was not operated as, a separate, independent company for the periods presented.

 

The pro forma combined statements of income give effect to the separation and distribution and related transactions as if they occurred as of October 1, 2006. The pro forma combined balance sheet gives effect to the separation and distribution and related transactions as if they occurred as of December 31, 2007. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable; however, such adjustments are subject to change based upon the finalization of the terms of the separation and the underlying separation agreements.

 

In addition, the unaudited pro forma combined financial statements set forth below have been adjusted to give effect to the following planned transactions:

 

 

 

 

The historical Combined Financial Statements of New Hillenbrand include allocations of expenses from Original Hillenbrand. These costs may not be representative of our future costs to be incurred as a separate public company. The unaudited pro forma combined statements of income also reflect certain incremental cost increases that we will experience as a stand-alone public entity. For example, Original Hillenbrand currently provides many corporate functions on our behalf. As an independent, publicly traded company, our total costs related to functions such as tax, accounting, legal, internal audit, human resources, risk management, shared information technology systems, procurement and other statutory functions, including a board of directors, are expected to increase from the costs for such shared functions that were historically allocated to us from Original Hillenbrand. The annualized incremental costs associated with replacing and/or establishing these functions are currently estimated to be approximately $5 million in fiscal 2008. This estimate includes the incremental costs we expect to incur or be allocated under the distribution agreement, employee matters agreement, tax sharing agreement, and shared services and transitional services agreements described under “Arrangements between Original Hillenbrand and New Hillenbrand.”

 

Additionally, while annual investment income of $10 million to $12 million from limited partnership investments that will be transferred to us has been reported by Original Hillenbrand during recent years, such

incremental income has been excluded from the following unaudited pro forma combined statements of income due to its inherent volatility.

 

Based upon available cash on hand at the time of the distribution, it is intended that both New Hillenbrand and Original Hillenbrand will have minimum cash balances equivalent to their estimated normal operating cash needs. Should excess cash be available, it will be split among New Hillenbrand and Original Hillenbrand after taking into consideration certain funding requirements of Original Hillenbrand, the funding status of benefit plans and other factors.

Unaudited Pro Forma Combined Statement of Income

 

Fiscal Year Ended September 30, 2007

 

 

See Notes to Unaudited Pro Forma Combined Financial Statements

Unaudited Pro Forma Combined Statement of Income
Three Months Ended December 31, 2007

 

Unaudited Pro Forma Combined Balance Sheet
As of December 31, 2007

 

Notes to Unaudited Pro Forma Combined Financial Statements

 

 

 

 

 

 

 

 

 

 

 

General

 

New Hillenbrand is an Indiana corporation recently formed to be a holding company for Original Hillenbrand’s funeral service business. Our principal executive offices are located at One Batesville Boulevard, Batesville, Indiana 47006, and our telephone number at that address is (812) 934-7500. We maintain an Internet site at http://www.batesville.com. Our website and the information contained on that site, or accessible through that site, are not incorporated into this information statement.

 

We are a leader in the North American death care industry through the manufacture, distribution and sale of funeral service products to licensed funeral directors who operate licensed funeral homes. Our products consist primarily of burial and cremation caskets, but also include containers and urns, selection room display fixturing for funeral homes and other personalization and memorialization products and services, including creating and hosting websites for funeral homes.

 

Products and Services

 

We manufacture and sell gasketed caskets made of carbon steel, stainless steel, copper and bronze. We also produce and market non-gasketed steel, hardwood and veneer hardwood caskets. In addition, we manufacture and sell cloth-covered caskets, all wood construction (orthodox) caskets and a line of urns, containers and other memorialization products used in cremations. We also supply selection room display fixturing through our System Solutions by Batesville^® group.

 

Most Batesville brand metal caskets are gasketed caskets that are electronically welded to help resist the entrance of outside elements through the use of rubber gaskets and a locking bar mechanism. Our premium steel caskets also employ an alloy bar to help protect the casket cathodically from rust and corrosion. We believe that this system of cathodic protection is a feature found only on Batesville produced caskets.

 

Our solid and veneer hardwood caskets are made from mahogany, cherry, walnut, maple, pine, oak, pecan and poplar. Our veneer caskets are manufactured using a proprietary process for veneering that allows for rounded corners and a furniture-grade finished appearance. We also provide select lines of Marsellus^® premium caskets to our funeral home customers.

 

Our Options by Batesville^® cremation line offers a complete cremation marketing system for funeral service professionals. In addition to a broad line of cremation caskets, containers and urns, the system includes training, merchandising support and marketing support materials. Cremation caskets and containers are manufactured primarily of hardwoods and fiberboard. Our wide assortment of memorial urns are made from a variety of materials, including cast bronze, cast acrylic, wood, sheet bronze, cloisonné and marble.

 

We offer several other marketing and merchandising programs to funeral professionals for both casket and cremation products. Batesville caskets are marketed by our direct sales force to licensed funeral professionals operating licensed funeral establishments (or, in the absence of state licensing requirements, to full service funeral establishments offering both funeral goods and funeral services in conformance with state law) throughout the United States, Puerto Rico, Canada, Mexico, the United Kingdom, Australia and South Africa. A significant portion of our sales are made to large national funeral service providers under contracts we have entered into with these customers.

 

We maintain inventory at 88 company-operated Customer Service Centers (CSCs) and six Rapid Deployment Centers (RDCs) in North America. Batesville^® caskets are generally delivered in specially equipped vehicles owned by us.

 

We mainly manufacture and distribute products in the United States. We also have two manufacturing facilities in Mexico and distribution facilities in Canada, Mexico, the United Kingdom, Puerto Rico, South Africa and Australia.

 

Competition

 

We are a recognized North American industry leader in the sale of funeral service products. We compete on the basis of product quality, personalization, price, and delivery and customer service. Major competitors that

manufacture and/or sell funeral service products over a wide geographic area include Aurora Casket Company and The York Group, Inc., a subsidiary of Matthews International Corporation (“Matthews”).

 

Throughout the United States, many other enterprises manufacture, assemble, and/or distribute funeral service products for sale, often focusing on particular regions or geographic areas. Additionally, we are facing increasing competition from a number of non-traditional sources, including casket manufacturers located abroad.

 

Regulatory Matters

 

We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to environmental and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials used in or derived from our manufacturing processes. We are committed to operating all of our businesses in a manner that protects the environment. In the past, we have voluntarily entered into remediation agreements with various environmental authorities to address onsite and offsite environmental impacts. From time to time we provide for reserves in our financial statements for environmental matters. We believe we have appropriately satisfied the financial responsibilities for all currently known offsite issues. Based on the nature and volume of materials involved regarding onsite impacts, we do not expect the cost to us of the onsite remediation activities in which we are currently involved to exceed $1 million. Future events or changes in existing laws and regulations or their interpretation may require us to make additional expenditures in the future. The cost or need for any such additional expenditures is not known.

 

Raw Materials

 

We use carbon and stainless steel, copper and bronze sheet, wood, fabrics, finishing materials, rubber gaskets, zinc and magnesium alloy in the manufacture of our caskets.

 

When prices fluctuate for raw materials used in our products, based on a number of factors beyond our control, such fluctuations affect our profitability. We generally do not engage in hedging transactions with respect to raw material purchases, but do enter into fixed price supply contracts at times. Additionally, although most of the raw materials used in our products are generally available from several sources, certain of these raw materials currently are procured only from a single source.

 

Beginning in fiscal 2005, the rising prices of certain raw materials, including red metals (i.e., copper and bronze), fuel and petroleum based products in particular, and fuel related delivery costs, had a direct and material negative effect on our profitability. We have acted and have plans and actions in place to mitigate the impact of rising raw material and fuel prices, including continuous improvement initiatives, various sourcing actions, the completed consolidation of our United States wood manufacturing operations into a single facility, the continued and expanded roll-out of our veneer products from our Mexican manufacturing operations with overall lower material cost composition and annual product price adjustments as contractually allowed. However, there can be no assurance that we will be able to anticipate and react quickly to all changing raw material prices in the future.

 

Some of our sales are made pursuant to supply agreements with our customers, and historically, we have instituted annual price increases to help offset the impact of inflation and other rising cost factors. While there are certain limitations in some of our agreements, their provisions generally allow us to raise prices to offset some, but not necessarily all, raw material cost inflation.

 

Distribution

 

We have extensive distribution capabilities that serve our customers’ increasing delivery expectations. Our high-velocity, hub and spoke distribution system, consisting of six Rapid Deployment Centers and 88 Customer Service Centers in North America, serves a majority of our customers each day and is critical to the rapid delivery requirements of funeral directors nationwide.

 

Patents and Trademarks

 

We own a number of patents on our products and manufacturing processes that are of importance, but we do not believe any single patent or related group of patents is of material significance to our business as a whole.

We also own a number of trademarks and service marks relating to our products and product services which are of importance to us, but, except for the mark “Batesville^®,” we do not believe any single trademark or service mark is of material significance to our business as a whole.

 

Our ability to compete effectively depends, to an extent, on our ability to maintain the proprietary nature of our intellectual property. However, we may not be sufficiently protected by our various patents, trademarks and service marks. Additionally, certain of our existing patents, trademarks or service marks may be challenged, invalidated, cancelled, narrowed or circumvented. Beyond that, we may not receive the pending or contemplated patents, trademarks or service marks for which we have applied or filed.

 

In the past, certain of our products have been copied and sold by others. We vigorously seek to enforce our intellectual property rights. However, we cannot ensure that the copying and sale of our products by others would not materially adversely affect the sale of our products.

 

Employees

 

As of December 31, 2007, we employed approximately 3,380 persons in our operations. Approximately 1,200 of these individuals, as part of our logistics and manufacturing operations in the United States and Canada, work under collective bargaining agreements. In the United States and Canada, the collective bargaining agreements have expiration dates ranging from May 2008 to February 2011.

 

Although we have not experienced any significant work stoppages in the past 20 years as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future. Inability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilities could have a material adverse effect on our operations. However, we have no reason to suspect that we will have significant difficulties in negotiating new collective bargaining agreements to replace those that will expire in the future and we will continue to prepare contingency plans as part of routine preparation for negotiations in order to minimize the impact of any potential work stoppages.

 

Foreign Operations and Export Sales

 

Information about our foreign operations is set forth in tables relating to geographic information in Note 11 to our Combined Financial Statements included elsewhere in this information statement.

 

Our export revenues constituted less than 10 percent of combined revenues in fiscal 2007 and prior years.

 

Our foreign operations are subject to risks inherent in doing business in foreign countries. Risks associated with operating internationally include political, social and economic instability, increased operating costs, expropriation and complex and changing government regulations, all of which are beyond our control. Further, to the extent we receive revenue from U.S. export sales in currencies other than U.S. dollars, the value of assets and income could be, and have in the past been, adversely affected by fluctuations in the value of local currencies.

 

Properties

 

The principal properties used in our operations are listed below, and, except for our leased facility in Chihuahua, Mexico, are owned by us subject to no material encumbrances. 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.

 

In addition to the foregoing, we lease or own a number of warehouse distribution centers, service centers and sales offices throughout North America, the United Kingdom, Mexico, Australia and South Africa.

 

Legal Proceedings

 

Antitrust Litigation

 

We, along with Original Hillenbrand, have been named in several purported antitrust class action lawsuits described below. We will enter into a judgment sharing agreement with Original Hillenbrand to allocate responsibility for funding any potential adverse final judgments or appeal bonds related to these matters, any similar matter asserted against both us and Original Hillenbrand prior to the completion of the distribution and any other matter that is consolidated with any such existing or future matter. See “Arrangements between Original Hillenbrand and New Hillenbrand — Judgment Sharing Agreement.”

 

On May 2, 2005, a non-profit entity called Funeral Consumers Alliance, Inc. (“FCA”) and several individual consumers filed a purported class action antitrust lawsuit (“FCA Action”) against three national funeral home businesses, SCI, Alderwoods and Stewart Enterprises, Inc. (“Stewart”) together with Original Hillenbrand and us, in the United States District Court for the Northern District of California. This lawsuit alleged a conspiracy to suppress competition in an alleged market for the sale of caskets through a group boycott of so-called “independent casket discounters,” that is, third-party casket sellers unaffiliated with licensed funeral homes; a campaign of disparagement against these independent casket discounters; and concerted efforts to restrict casket price competition and to coordinate and fix casket pricing, all in violation of federal antitrust law and California’s Unfair Competition Law. The lawsuit claimed, among other things, that our maintenance and enforcement of, and alleged modifications to, our long-standing policy of selling caskets only to licensed funeral homes were the product of a conspiracy among us, the other defendants and others to exclude “independent casket discounters” and that this alleged conspiracy, combined with other alleged matters, suppressed competition in the alleged market for caskets and led consumers to pay higher than competitive prices for caskets. The FCA Action alleged that two of our competitors, York Group, Inc. and Aurora Casket Company, are co-conspirators but did not name them as defendants. The FCA Action also alleged that SCI, Alderwoods, Stewart and other unnamed co-conspirators conspired to monopolize the alleged market for the sale of caskets in the United States.

 

After the FCA Action was filed, several more purported class action lawsuits on behalf of consumers were filed based on essentially the same factual allegations and alleging violations of federal antitrust law and/or related state law claims. It is not unusual to have multiple copycat class action suits filed after an initial filing, and it is possible that additional suits based on the same or similar allegations could be brought against Original Hillenbrand and us.

 

We, Original Hillenbrand and the other defendants filed motions to dismiss the FCA Action and a motion to transfer to a more convenient forum. In response, the court in California permitted the plaintiffs to replead the complaint and later granted defendants’ motion to transfer the action to the United States District Court for the Southern District of Texas (Houston, Texas) (“Court”).

 

On October 12, 2005, the FCA plaintiffs filed an amended complaint consolidating all but one of the other purported consumer class actions in the Court. The amended FCA complaint contains substantially the same basic allegations as the original FCA complaint. The only other then remaining purported consumer class action, Fancher v. SCI et al., was subsequently dismissed voluntarily by the plaintiff after the defendants filed a motion to dismiss. On October 26, 2006, a new purported class action was filed by the estates of Dale Van Coley and Joye Katherine Coley, Candace D. Robinson, Personal Representative, consumer plaintiffs, against us and Original Hillenbrand in the Western District of Oklahoma alleging violation of the antitrust laws in fourteen states based on allegations that we engaged in conduct designed to foreclose competition and gain a monopoly position in the market. This lawsuit was largely based on similar factual allegations to the FCA Action. We and Original Hillenbrand had this case transferred to the Southern District of Texas in order to coordinate this action with the FCA Action and filed a motion to dismiss this action. On September 17, 2007, the Court granted our and Original Hillenbrand’s motion to dismiss and ordered the action dismissed with prejudice.

 

The FCA plaintiffs are seeking certification of a class that includes all United States consumers who purchased our caskets from any of the funeral home co-defendants at any time during the fullest period permitted by the

applicable statute of limitations. On October 18, 2006, the Court denied our, Original Hillenbrand’s and the other defendants’ November 2005 motions to dismiss the amended FCA complaint.

 

In addition to the consumer lawsuits discussed above, on July 8, 2005 Pioneer Valley Casket Co. (“Pioneer Valley”), an alleged casket store and Internet retailer, also filed a purported class action lawsuit (“Pioneer Valley Action”) against us, Original Hillenbrand, SCI, Alderwoods, and Stewart in the Northern District of California on behalf of the class of “independent casket distributors,” alleging violations of state and federal antitrust law and state unfair and deceptive practices laws based on essentially the same factual allegations as in the consumer cases. Pioneer Valley claimed that it and other independent casket distributors were injured by the defendants’ alleged conspiracy to boycott and suppress competition in the alleged market for caskets, and by an alleged conspiracy among SCI, Alderwoods, Stewart and other unnamed co-conspirators to monopolize the alleged market for caskets.

 

Plaintiff Pioneer Valley seeks certification of a class of all independent casket distributors in the United States who are or were in business at any time from July 8, 2001 to the present. Excluded from this class are independent casket distributors that: (1) are affiliated in any way with any funeral home; (2) manufacture caskets; or (3) are defendants or their directors, officers, agents, employees, parents, subsidiaries or affiliates.

 

The Pioneer Valley complaint was also transferred to the Southern District of Texas but was not combined with the FCA Action, although the scheduling orders for both cases are identical. On October 21, 2005, Pioneer Valley filed an amended complaint adding three new plaintiffs, each of whom purports to be a current or former “independent casket distributor.” Like Pioneer Valley’s original complaint, the amended complaint alleges violations of federal antitrust laws, but it has dropped the causes of actions for alleged price fixing, conspiracy to monopolize, and violations of state antitrust law and state unfair and deceptive practices laws. On October 25, 2006, the district court denied Original Hillenbrand’s and our December 2005 motions to dismiss the amended Pioneer Valley complaint.

 

Class certification hearings in the FCA Action and the Pioneer Valley Action were held in early December 2006. Post-hearing briefing on the plaintiffs’ class certification motions in both cases was completed in March 2007, though briefing on certain supplemental evidence related to class certification in the FCA Action also occurred in September 2007 and October 2007. The Court has not yet ruled on the motions for class certification. On August 27, 2007, the Court suspended all pending deadlines in both cases, including the previously set February 2008 trial date. The Court reset a docket call in both the FCA and Pioneer Valley Actions for May 5, 2008. A docket call is typically a status conference with the Court to set a trial date. It is anticipated that new deadlines, including a trial date, will not be set until sometime after the Court has ruled on the motions for class certification.

 

Plaintiffs in the FCA and Pioneer Valley Actions generally seek monetary damages, trebling of any such damages that may be awarded, recovery of attorneys’ fees and costs, and injunctive relief. The plaintiffs in the FCA Action served a report indicating that they are seeking damages ranging from approximately $947 million to approximately $1.46 billion before trebling. Additionally, the Pioneer Valley plaintiffs served a report indicating that they are seeking damages of approximately $99.2 million before trebling. Because we continue to adhere to our long-standing policy of selling our caskets only to licensed funeral homes, a policy that we continue to believe is appropriate and lawful, if the case goes to trial the plaintiffs are likely to claim additional alleged damages for the period between their reports and the time of trial. At this point, it is not possible to estimate the amount of any additional alleged damage claims that they may make. We and our co-defendants are vigorously contesting both liability and the plaintiffs’ damages theories.

 

If a class were certified in any of the antitrust cases filed against Original Hillenbrand and us and if the plaintiffs in any such case were to prevail at trial, any damages awarded to the plaintiffs, which would be trebled as a matter of law, could have a significant material adverse effect on our results of operations, financial condition and/or liquidity. In antitrust actions such as the FCA and Pioneer Valley Actions the plaintiffs may elect to enforce any judgment against any or all of the co-defendants, who have no statutory contribution rights against each other.

 

We believe that we and Original Hillenbrand have committed no wrongdoing as alleged by the plaintiffs and that we have meritorious defenses to class certification and to plaintiffs’ underlying allegations and damage theories. In accordance with applicable accounting standards, neither Original Hillenbrand nor we have established a loss reserve for any of these cases.

After the FCA Action was filed, in the summer and fall of 2005, we were served with Civil Investigative Demands (“CIDs”) by the Attorney General of Maryland and certain other state attorneys general who have begun an investigation of possible anticompetitive practices in the death care industry relating to a range of funeral service and products, including caskets. We have been informed that approximately 26 state attorneys general offices are participating in the joint investigation, although more could join. We cooperated with the attorneys general, and to date, no claims have been filed against us.

 

Other Pending Litigation Matter

 

On August 17, 2007, a lawsuit styled Vertie Staples v. Batesville Casket Company, Inc. was filed against us in the United States District Court for the Eastern District of Arkansas. The case is a putative class action on behalf of the plaintiff and all others in Arkansas who purchased a Monoseal^® casket manufactured by us from a licensed funeral home located in Arkansas from January 1, 1989 to the present. The plaintiff claims that Monoseal^® caskets were marketed as completely resistant to the entrance of air and water when they allegedly were not. The plaintiff asserts causes of action under the Arkansas Deceptive Trade Practices Act and for fraud, constructive fraud and breach of express and implied warranties. On January 9, 2008, the plaintiff filed an amended complaint that added another putative class plaintiff, restated the pending claims, and added a claim for unjust enrichment. In order to establish federal jurisdiction over the claims under the Class Action Fairness Act, the plaintiff alleges that the amount in controversy exceeds $5,000,000.

 

This action is in the very early stages of litigation and as such, we are not yet able to assess the potential outcome of this matter. There is a trial date of November 3, 2008. We believe the claims are without merit and will vigorously defend the case. It is not unusual to have multiple copycat suits filed after an initial filing, and it is possible that additional suits based on the same or similar allegations could be brought against us.

 

General

 

We are subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, employee related matters, antitrust, safety, health, taxes, environmental and other matters. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. It is possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We are also involved in other possible claims, including product and general liability, workers compensation, auto liability and employment related matters. These have deductibles and self-insured retentions ranging from $150 thousand to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period. For the self-insured exposures, outside insurance companies and third-party claims administrators establish individual claim reserves and an independent outside actuary provides estimates of ultimate projected losses, including incurred but not reported claims. These independent third-party estimates are used to record reserves for all projected deductible and self-insured retention exposures.

 

Claim reserves for employment related matters are established based upon advice from internal and external counsel and historical settlement information for claims and related fees when such amounts are considered probable of payment.

 

New Hillenbrand will be a holding company for Original Hillenbrand’s funeral service business, which has operated under the Batesville Casket name and group of subsidiaries that are being separated from Original Hillenbrand’s medical technology business. We are a leader in the North American death care industry through the manufacture, distribution, and sale of funeral service products to licensed funeral directors who operate licensed funeral homes. Our products consist primarily of burial and cremation caskets, but also include containers and urns, selection room display fixturing for funeral homes, and other personalization and memorialization products and services, including the creation and hosting of websites for funeral homes.

 

Batesville Casket today operates relatively autonomously within the operating company structure of Original Hillenbrand. Accordingly, our primary business operations are not expected to change significantly from the current operating environment as a result of the separation. However, there are certain shared assets and functions among the Original Hillenbrand business units, including shared corporate and business services, as well as shared capital resource allocations. As a result, we will be required to divide or co-own certain assets and engage in certain business support and governance activities upon our separation from Original Hillenbrand. Additionally, the separation will result in changes to our capital structure.

 

The combined financial statements included elsewhere in this information statement do not include all expenses that would have been incurred had the funeral service business of Original Hillenbrand been a separate, stand-alone entity and do not reflect the funeral service business of Original Hillenbrand’s results of operations, financial position and cash flows had the funeral service business of Original Hillenbrand been a stand-alone company during the periods presented. This Management’s Discussion and Analysis should be read together with the unaudited pro forma combined financial statements, as well as the Combined Financial Statements of the funeral service business of Original Hillenbrand and the notes thereto included elsewhere in this information statement.

 

Death Care Industry Trends

 

The death of a family member or loved one causes most people to seek the services of a state (or a Canadian province) licensed funeral director to provide specific services regarding handling and preparing the deceased. Most consumers have only limited familiarity with funeral-related products and usually expect funeral directors to provide information on product and service alternatives. Although caskets and urns can be purchased from a variety of sources, including directly from internet sellers and casket stores, the overwhelming majority of those who arrange a funeral purchase directly from the funeral home as a matter of choice and convenience.

 

Demographics and Consumer Preferences.  For the past several decades the total number of deaths in the U.S. and Canada (where most of our products are sold) has been relatively flat. During the same period the rate of cremation selection has been slowly but steadily increasing to the point where cremations as a percentage of total deaths now represent approximately one third in the United States and one half in Canada. These combined factors have yielded a slow but steady decline in the total number of casketed deaths in North America. The current trends are expected to continue for the foreseeable future until the post-WWII spike in births may cause an increase in deaths. While the primary driver of market size is population and age, the actual number of deaths (and, therefore, the actual number of caskets sold) is affected by a variety of additional factors, including improving health care and the varying timing and severity of seasonal pneumonia and influenza outbreaks. The unpredictability of these factors can cause periodic fluctuations in industry demand patterns and revenue generated in any given fiscal period. While it is difficult to predict precisely the number of deaths on a month-to-month or even a year-to-year basis, we anticipate that the number of deaths in North America will be relatively flat and the cremation rate will continue to gradually increase, resulting in a steady decline in the demand for burial caskets for the foreseeable future.

 

Along with the declining number of casketed deaths, the casket industry has experienced a long-term gradual decline in the average price (normally referred to as product mix) of burial caskets sold, a trend that has also affected us. One of the factors which has affected mix is the pricing practice of many funeral homes, which places most of the margin expectation on the sale of products instead of the services provided. We have observed a recent change in the pricing practices of many funeral homes wherein they are recovering margin on their services and reducing the

mark- up of products, primarily caskets. Additionally, more consumers are expecting higher levels of personalization, both in products and services. Our response to this changing consumer preference is described below.

 

Competition.  Competition in the casket industry is based on product quality, features and personalization, price, and customer and delivery service. We compete in the sale of burial and cremation containers with several national casket manufacturers/distributors, a larger number of regional manufacturers/distributors, and more than 100 independent casket distributors, most of whom serve fairly narrow geographic segments. Recently, the industry has seen a few new foreign manufacturers, mostly from China, who import caskets into the U.S. and Canada. Additionally, some others such as Costco, local casket stores, and internet sellers sell caskets directly to consumers, although we estimate that total sales among this latter group are a small portion of annual burial casket volume.

 

The effect of gradually declining casket demand has also resulted in economic pressures on casket manufacturers and distributors as they seek to maintain volume by increasing market share. The industry has approximately double the necessary domestic production capacity which further increases these pressures. Additionally, the costs of delivery have increased as well with higher fuel prices resulting in increased per unit costs. Established manufacturers and distributors have responded to these competitive pressures by increasing discounts.

 

Over the past decade, funeral homes have sought to minimize their inventory costs by shifting the inventory burden to their suppliers. Today, many funeral homes do not maintain any casket inventory and expect their casket suppliers to provide same day or next day delivery to satisfy their funeral requirements. Our high velocity, “hub and spoke” distribution system enables us to meet these customer expectations with lower inventory investment per dollar of sales. This system enables us to deliver the majority of our volume, including uniquely personalized caskets, within 24 hours of receiving the customer’s order. In 2007 we delivered the “right casket at the right time” 99.3% of the time. We believe this highly effective distribution system is aligned with the increasing time demands of families and the inventory reduction expectations of our customers. We also believe this represents an important competitive advantage, although some competitors are able to offer comparable delivery capability in certain geographic areas.

 

Industry Consolidation.  The underlying industry trends are leading to consolidations, acquisitions, and partnerships among casket manufacturers and distributors. In the past few years, two of the larger casket manufacturers have merged and several independent distributors have been acquired. In the past two years we acquired two smaller regional distributors. We continue to be interested in the possibility of acquiring high-quality distributors and will remain selective in this process.

 

The demographic and economic pressures that are driving consolidation among casket manufacturers and distributors are also driving some consolidation among funeral homes. In the fourth calendar quarter of 2006 our largest customer acquired our second largest customer. We have retained essentially all of the combined business after the acquisition with the exception of some of the individual firms that were divested to meet regulatory requirements. On a smaller scale we have also seen an increased number of regional funeral home operators expanding through selected acquisitions. Earlier in 2007 we established a dedicated sales team to focus on this regional consolidator customer segment, and we will continue to invest to meet the needs of this growing customer group.

 

Costs of Raw Material and Energy.  The primary raw materials used in our products include steel, wood, and red metals (i.e., copper and bronze). Although the key materials have fluctuated in price from time-to-time, current economic conditions are such that we expect all casket manufacturers to continue to be affected by increased costs of raw materials over the next few years. Higher fuel costs in the past few years have resulted in fuel surcharges on many raw materials and services, along with an unfavorable impact on manufacturing and distribution costs.

 

We believe that we are affected by raw material and energy cost increases to a lesser degree than many of our competitors because of the scale and scope of our operations. Additionally, our wide use of Continuous Improvement has enabled us to reduce waste in many areas of our business. We intend to continue to use this powerful tool of Continuous Improvement, practices which are based on the Toyota Production System, to better serve our customers and to maintain and increase margins.

Strategy and Results

 

We believe that we have a number of capabilities that yield significant competitive advantage. Among them are:

 

 

By building on these core competencies we seek to grow organic revenue and operating income by an average of 3% to 4% annually over the fiscal 2008-2009 time frame. We plan to invest selectively to maintain and further develop our current leadership position with funeral directors while exploring new opportunities in less penetrated areas. Our strategy remains centered on growing our business of selling Batesville branded burial caskets and cremation products direct to funeral homes while investing in opportunities to sell private label caskets and parts to manufacturers and distributors, a new channel of distribution for us. Finally, we intend to pursue strategic acquisitions in and closely adjacent to our casket and cremation businesses in which we can capitalize on our core competencies and utilize our scope and scale. Important elements of this strategy, and our results to-date, include the following.

 

Grow our sales to our funeral home customers.  We seek to profitably grow revenue by selling products to licensed funeral homes through a combination of growth in volume, improved mix of products sold and strategic acquisitions within the funeral services industry.

 

Grow our burial casket revenue.

 

 

Improve the mix of burial caskets.

 

 

Grow our Options by Batesville^tm Cremation product sales

 

 

Grow sales in the independent distributor channel.  In 2006 we launched the NorthStar^tm private label program. Under the NorthStar program, we manufacture private label caskets and casket parts, which do not include Batesville proprietary features, for other manufacturers and distributors, a channel of distribution we had not served in the past.

 

Sales of Private Label Caskets

 

 

Continued pursuit of strategic acquisitions within the casket industry.  Our recent efforts with respect to this initiative include the following:

 

 

Recent Factors Impacting our Business

 

Customer consolidation — In October 2006 we signed a new, non-exclusive supply agreement with Service Corporation International, our largest customer and the largest provider of funeral services in North America. The agreement covers our casket product line through fiscal 2008, with an option to extend for two additional one-year periods. Although SCI is currently purchasing essentially all of their casket requirements from us, the agreement does not impose specific purchase requirements on SCI. While we anticipate that SCI will continue to buy substantially all its burial and cremation container products from us for the foreseeable future, there can be no guarantee that SCI will do so. In November 2006 SCI acquired our second largest customer, Alderwoods. As a result of this acquisition, the purchase of our products by both organizations was brought under the same agreement. Although we have lost some business as this new combined entity continues to divest itself of certain overlapping properties, we have been able to offset most of the financial impact of these divestitures by supplying many of the owners of these newly divested properties.

Acquisition activity — In July 2007, we announced the termination of negotiations related to the possible acquisition of Yorktowne. Our intentions to acquire Yorktowne were previously announced in the fall of 2005, but our efforts were delayed because of certain legal impediments, which expired on April 15, 2007. Effective at that time, a supply agreement between Yorktowne and us was put into place and we began to update the due diligence process. Ultimately, we were unable to reach acceptable terms with Yorktowne with respect to an acquisition and Matthews subsequently announced that its casket division, York Caskets, had purchased certain assets of Yorktowne. Termination of our negotiations with Yorktowne resulted in the recognition of a $2.8 million charge in fiscal 2007 for previously deferred costs related to the planned acquisition. Shortly before the transfer of its assets to York, Yorktowne ceased purchasing funeral products from us under the supply agreement. We filed suit against Yorktowne and York in Federal Court for the Southern District of Ohio asserting our rights under the supply agreement and recorded a $4.3 million charge during fiscal 2007, primarily related to amounts due from Yorktowne under the supply agreement. We subsequently settled this suit, together with suits pending against us that York had filed in conjunction with our 2005 attempt to purchase Yorktowne. The settlement of these matters had no material impact on our financial statements. None of these developments preclude us from seeking business from Yorktowne’s customers.

 

Legal proceedings — We are a defendant, along with Original Hillenbrand and several other companies in the death care industry, in two purported antitrust class action lawsuits in which the plaintiffs have alleged substantial damages, prior to trebling. In addition to the risks associated with an adverse outcome in this litigation, we continue to incur significant legal costs in the defense of this litigation and expect these costs to continue for the foreseeable future. Under the proposed judgment sharing agreement with Original Hillenbrand, we will be responsible for all costs incurred by us and Original Hillenbrand in defense of this litigation. All fees and costs incurred in defense of the antitrust litigation matters are included in our historical combined financial statements. To date, we have incurred approximately $16.9 million in legal and related costs associated with this matter, of which $1.0 million and $7.8 million were incurred in the three months ended December 31, 2007 and the fiscal year ended September 30, 2007, respectively.

 

See “Risk Factors — Risks related to Our Business”, “Arrangements between Original Hillenbrand and New Hillenbrand — Distribution Agreement” and “— Judgment Sharing Agreement.”

 

Results of Operations

 

Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006 (unaudited)

 

The following table presents comparative operating results for the periods discussed within this section of Management’s Discussion and Analysis:

 

 

Our revenues in the first quarter of 2008 were essentially flat increasing $0.7 million or 0.4 percent over the prior year comparable period. Revenues were favorably impacted by improved net price realization of $5.6 million as a result of our annual price increase. A relatively flat number of deaths in North America along with the slow, steady

increase in cremation selection continue to negatively impact the burial market. Strong preceding quarter sales due to customers buying ahead of our price increase also reduced demand for caskets. As a result, lower sales volumes, primarily related to burial caskets, reduced revenues for the quarter by $4.3 million. While our merchandising initiative is positively impacting our mix of products sold, the overall mix impact on revenue was unfavorable for the quarter by $1.9 million. Further, our expansion in the lower-end metal product offerings has resulted in volume growth, but has also negatively impacted mix. Our revenues during the first quarter of 2008 reflected a positive impact of $1.3 million resulting from the impact of foreign exchange rates over the prior year comparable period.

 

Cost of goods sold of $96.0 million increased $2.6 million over the prior year comparable period. Distribution expenses were $2.1 million higher compared to the prior year comparable period resulting from inflation on personnel and benefit expenses of $0.8 million, higher fuel costs of $0.7 million, and other cost increases of $0.6 million. Material and conversion costs decreased $1.7 million related to a 3.0 percent reduction in burial units sold during the quarter as compared to the prior year comparable period. This decrease was partially offset by aggregate increased costs of $1.3 million related primarily to inflation on commodities (red metals, carbon steel and textiles), personnel and benefits costs, and higher pension expenses. Fixed manufacturing costs were essentially flat as lower benefit expenses of $0.6 million offset inflationary increases from personnel and other costs. In the prior year comparative period, we also recognized $0.5 million in gains from asset sales.

 

Operating expenses increased $0.6 million over the prior year comparable period. We experienced increased expenses of $1.5 million, primarily related to personnel and benefits costs. Legal expenses related to the ongoing antitrust litigation decreased $1.2 million, offset by a $0.3 million increase in other legal fees.

 

In addition to the operating expenses discussed above, results reflect an allocation of $1.2 million of separation related expenses from Original Hillenbrand, primarily legal and professional fees, in preparing for the pending separation of Batesville Casket.

 

Net income was reduced $2.1 million as our lower operating profit was partially offset by the incremental reduction in our income tax expense of $1.6 million. The effective rate of our income tax provision was 36.8% compared to 37.5% in the prior year comparable period.

 

Fiscal Year Combined Results of Operations

 

The following table presents comparative operating results for the fiscal years discussed within this section of Management’s Discussion and Analysis:

 

 

Fiscal Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30, 2006

 

For the year ended September 30, 2007, our revenues were down slightly compared to the same period in the prior year, declining by 1.1 percent, or $7.4 million. The lower volume of burial caskets sold was the primary driver, negatively impacting revenues by $20.7 million. Market conditions continue to be a challenge as rising cremations reduce the amount of burial caskets sold on a relatively flat number of estimated deaths in North America. A lower

mix of burial caskets sold resulted in an $8.0 million reduction in revenues for the year. While this mix trend has been consistent for several years, recent product launches in under penetrated areas have focused on lower price points with high eye-appeal, low feature content offerings, contributing to the unfavorable mix. However, our merchandising efforts have helped to partially offset this trend, driving increased customer satisfaction in addition to sales of higher value products. The Batesville brand continues to generate year over year price realization improvement, contributing an additional $21.5 million to revenues in fiscal 2007.

 

Cost of goods sold of $388.6 million decreased $3.3 million compared to the same period in 2006. Material and conversion cost reductions totaled $8.2 million, with $6.2 million of the difference related to the 1.9 percent reduction in burial units sold during the year. Additional drivers of the lower costs included a local sourcing initiative at our Chihuahua, Mexico facility, yield improvement initiatives at our Vicksburg, Mississippi rough mill, and lower pension, bonus, and utility rates compared to the prior year. Various process improvements within the plants have generated productivity improvements that more than offset compensation inflation for the year. Fixed manufacturing costs were lower by $1.4 million driven primarily by savings of $2.7 million from the plant consolidation completed in the prior year, offset by higher benefit costs of $0.8 million and general cost increases of $0.5 million. Distribution expenses were $1.8 million higher than prior year resulting primarily from increased costs of $0.6 million realized in connection with a distributor acquisition during the year, while depreciation and personnel costs also increased. In the prior year, we also recognized $1.9 million in increased gains from asset sales (including our Nashua facility) as well as a $0.9 million insurance settlement, all as components of cost of goods sold.

 

Operating expenses increased $12.6 million compared to 2006, including $8.7 million in costs associated with the Yorktowne acquisition attempt and related supply agreement. In conjunction with our strategic initiatives, $3.8 million of spending occurred which was targeted at generating revenue growth and focused primarily on sales force expansion and support of our merchandising initiative. Increased costs associated with healthcare, pension, equity based awards totaled $2.8 million and were more than offset by the $3.0 million reduction in incentive compensation earned for the fiscal year. Likewise, increased recruiting expenses and additional bad debt expenses also impacted our year over year spending but were partially countered by savings within our information technology group as a result of insourcing certain functions.

 

In addition to the operating expenses discussed above, we were allocated $5.1 million of expenses from Original Hillenbrand, primarily legal and professional fees, in preparing for the pending separation of Batesville Casket.

 

Net income was reduced $13.7 million as our lower operating profit was offset by the incremental reduction in our income tax expense of $8.1 million. The effective rate of our income tax provision was 36.6%, compared to 36.7% in the prior year.

 

Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005

 

For the year ended September 30, 2006, our revenues rose when compared to the same period in the prior year, increasing by 2.3 percent, or $15.2 million. We realized improved pricing on our burial product lines of $25.1 million which helped to offset other revenue pressures. Lower volumes in our burial casket product line reduced revenues by $9.0 million as the impact of cremation continued to occur. During the second quarter of fiscal 2006, we began a phased geographic launch of the new Gemini^tm product line, a high eye appeal, low feature content non-gasketed steel product. While this product introduction was well received in the marketplace, the added volume contributed to a lower product mix sold during the year, a primary driver to the $7.3 million unfavorable mix impact on revenues. Sales of our private label caskets and casket parts from our NorthStar product line added $4.1 million of revenue growth as we continue to expand into this channel of independent manufacturers and distributors.

 

Cost of goods sold totaling $391.9 was down slightly from the prior year. Overall burial units sold (including both core products as well as NorthStar private label units) were down less than 1%. Total material and conversion costs were down $1.8 million. We experienced lower costs in carbon steel and wood prices (two of our largest commodity spends), although inflationary pressures continued with plastics, chemicals, zinc and red metals. Our solid wood plant consolidation progressed as scheduled, contributing additional costs as a result of material yield issues and production inefficiencies, not unusual for a consolidation of this size. Utility rates continued to be higher in 2006 as our overall spending in this area increased year over year. Fixed manufacturing costs decreased nearly $3.0 million from the prior year driven mostly by the closure of our New Hampshire solid wood plant as well as the gain recognized from the sale of that facility. We also recorded a $1.0 million gain on the insurance recovery of costs incurred due to a fire at our

Vicksburg rough mill. Distribution expenses increased in fiscal 2006 by $3.8 million, driven by higher fuel costs, increased compensation and benefits and investments in certain geographies related to initiatives to improve service.

 

Operating expenses were substantially flat in fiscal 2006 compared to the prior year. Legal expenses increased by $6.3 million driven by the outstanding antitrust litigation that is ongoing. Incentive compensation cost also increased by $7.1 million as a payout was earned during 2006 which had not occurred in 2005. Offsetting these items were lower pension and post retirement benefit costs of $2.5 million, favorable variable sales compensation and marketing expenses of $2.2 million, and reduced allocated corporate costs and information technology expenses totaling $4.1 million combined. In addition, improved operating expenses were realized as 2005 included a $2.3 million special charge related to a manufacturing facility closure and an organizational rightsizing.

 

Net income improved $10.4 million as the additional operating profit was offset by the incremental tax expense of $5.1 million. The effective rate of our income tax provision was 36.7%, compared to 37.0% in the prior year.

 

Special Charges

 

In the third fiscal quarter of 2005, we announced plans to close our Nashua, New Hampshire plant and consolidated our solid wood casket production into our Batesville, Mississippi plant. The consolidation of the two plants resulted in a special charge, reported as a component of Operating expenses in the third quarter of fiscal 2005, of $1.5 million. Additionally, other pre-tax costs of $2.3 million, including certain severance and other termination benefits, as well as costs related to accelerated depreciation expense, the transfer of equipment, training of employees and other costs, were realized through the completion of the consolidation of the plants in the second quarter of fiscal 2006 as a component of costs of goods sold. All cash charges associated with this action have since been paid.

 

Liquidity and Capital Resources

 

Our financial resources have historically been provided by Original Hillenbrand, which has historically managed cash on a centralized basis. Accordingly, cash receipts associated with our business have been transferred to Original Hillenbrand on a daily basis, and Original Hillenbrand has funded our cash disbursements. These net cash transfers are reflected in parent company investment in our Combined Financial Statements.

 

Net cash flows from operating activities have represented our primary sources of funds for growth of our business, including capital expenditures and acquisitions.

 

 

 

 

Operating Activities

 

Operating cash flows for the three month period ended December 31, 2007, were $22.7 million, which was $7.2 million lower than the prior year comparable period. This decrease resulted from lower operating profits, as well as an increase in accounts receivable and prepaid expenses.

 

Operating cash flows for the year ended September 30, 2007 were $127.3 million, which was $2.7 million higher than the prior fiscal year. Although our net income decreased in fiscal 2007 from the prior year, the effect of this was more than offset by improved collection of accounts receivable and reduced payments related to deferred compensation compared to prior year.