FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-4802
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Becton, Dickinson and Company
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(Exact name of registrant as specified in its charter)
New Jersey 22-0760120
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 Becton Drive, Franklin Lakes, New Jersey 07417-1880
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(Address of principal executive offices)
(Zip Code)
(201) 847-6800
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Shares Outstanding as of April 30, 2001
--------------------- ---------------------------------------
Common stock, par value $1.00 257,586,011
BECTON, DICKINSON AND COMPANY
FORM 10-Q
For the quarterly period ended March 31, 2001
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets........................... 3
Condensed Consolidated Statements of Income..................... 4
Condensed Consolidated Statements of Cash Flows................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................ 23
Item 3. Defaults Upon Senior Securities...................................... 23
Item 4. Submission of Matters to a Vote of Security Holders.................. 23
Item 5. Other Information.................................................... 24
Item 6. Exhibits and Reports on Form 8-K..................................... 24
Signature ..................................................................... 25
2
ITEM 1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Thousands of Dollars
Assets March 31, September 30,
- ------ 2001 2000
-------------------- --------------------
(Unaudited)
Current Assets:
Cash and equivalents $ 79,926 $ 49,196
Short-term investments 3,592 5,561
Trade receivables, net 722,640 751,720
Inventories:
Materials 159,335 156,918
Work in process 119,620 110,843
Finished products 431,572 410,915
-------------------- --------------------
710,527 678,676
Prepaid expenses, deferred taxes and other 201,337 175,524
-------------------- --------------------
Total Current Assets 1,718,022 1,660,677
Property, plant and equipment 3,272,011 3,163,100
Less allowances for depreciation and amortization 1,648,979 1,587,042
-------------------- --------------------
1,623,032 1,576,058
Goodwill, Net 450,750 466,343
Core and Developed Technology, Net 315,447 309,061
Other Intangibles, Net 170,925 172,720
Other 365,035 320,237
--------------------
--------------------
Total Assets $ 4,643,211 $ 4,505,096
==================== ====================
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 617,313 $ 637,735
Payables and accrued expenses 687,936 715,803
-------------------- --------------------
Total Current Liabilities 1,305,249 1,353,538
Long-Term Debt 778,139 779,569
Long-Term Employee Benefit Obligations 337,237 329,497
Deferred Income Taxes and Other 88,963 86,494
Commitments and Contingencies - -
Shareholders' Equity:
Preferred stock 41,840 43,570
Common stock 332,662 332,662
Capital in excess of par value 130,430 75,075
Retained earnings 2,964,832 2,835,908
Unearned ESOP compensation (17,015) (16,155)
Deferred compensation 7,499 6,490
Common shares in treasury - at cost (952,407) (980,163)
Accumulated other comprehensive loss (374,218) (341,389)
-------------------- --------------------
Total Shareholders' Equity 2,133,623 1,955,998
-------------------- --------------------
Total Liabilities and Shareholders' Equity $ 4,643,211 $ 4,505,096
==================== ====================
See notes to condensed consolidated financial statements
3
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Thousands of Dollars, Except Per-share Data
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- --------------- ---------------- ----------------
Revenues $ 961,179 $ 925,132 $ 1,804,436 $ 1,784,296
Cost of products sold 487,615 473,987 936,562 923,938
Selling and administrative 241,912 244,063 477,204 477,901
Research and development 54,497 57,175 107,224 110,918
--------------- --------------- ---------------- ----------------
Total Operating Costs and Expenses 784,024 775,225 1,520,990 1,512,757
--------------- --------------- ---------------- ----------------
Operating Income 177,155 149,907 283,446 271,539
Interest expense, net (15,998) (21,199) (34,562) (42,756)
Other (expense) income, net (5,418) 36,399 (13,379) 38,073
--------------- --------------- ---------------- ----------------
Income Before Income Taxes 155,739 165,107 235,505 266,856
Income tax provision 37,377 45,936 56,521 72,391
--------------- --------------- ---------------- ----------------
Net Income $ 118,362 $ 119,171 $ 178,984 $ 194,465
=============== =============== ================ ================
Earnings Per Share:
Basic $ .46 $ .47 $ .69 $ .77
=============== =============== ================ ================
Diluted $ .44 $ .45 $ .67 $ .74
=============== =============== ================ ================
Dividends Per Common Share $ .095 $ .0925 $ .19 $ .185
=============== =============== ================ ================
See notes to condensed consolidated financial statements
4
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of Dollars
(Unaudited)
Six Months Ended
March 31,
-------------------------------------------------------
2001 2000
-------------------- --------------------
Operating Activities
Net income $ 178,984 $ 194,465
Adjustments to net income to derive net cash
provided by operating activities:
Depreciation and amortization 155,057 141,469
Gains on investments,net (65) (33,159)
Change in working capital (48,591) (24,949)
Other, net 30,594 (10,577)
-------------------- --------------------
Net Cash Provided by Operating Activities 315,979 267,249
-------------------- --------------------
Investing Activities
Capital expenditures (180,090) (165,621)
Acquisitions of businesses, net of cash acquired (30,953) (21,573)
(Purchases) sales of investments, net (2,909) 34,876
Capitalized software (37,625) (28,603)
Other, net (24,321) (15,206)
-------------------- --------------------
Net Cash Used for Investing Activities (275,898) (196,127)
-------------------- --------------------
Financing Activities
Change in short-term debt 80,793 (7,247)
Proceeds from long-term debt 2,388 -
Payments of long-term debt (100,679) (29,941)
Issuance of common stock from treasury 60,720 19,338
Dividends paid (50,116) (47,196)
-------------------- --------------------
Net Cash Used for Financing Activities (6,894) (65,046)
-------------------- --------------------
Effect of exchange rate changes on cash and equivalents (2,457) (944)
-------------------- --------------------
Net increase in cash and equivalents 30,730 5,132
Opening Cash and Equivalents 49,196 59,932
-------------------- --------------------
Closing Cash and Equivalents $ 79,926 $ 65,064
==================== ====================
See notes to condensed consolidated financial statements
5
BECTON, DICKINSON AND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and Share Amounts in Thousands, Except Per-share Data
March 31, 2001
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the opinion of
the management of the Company, include all adjustments which are of a normal
recurring nature, necessary for a fair presentation of financial position and
the results of operations and cash flows for the periods presented. However, the
financial statements do not include all information and footnotes required for a
presentation in accordance with generally accepted accounting principles. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included or
incorporated by reference in the Company's 2000 Annual Report on Form 10-K. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
Note 2 - Inventory Valuation
The Company uses the last-in, first-out ("LIFO") method of determining cost for
substantially all inventories in the United States. An actual valuation of
inventory under the LIFO method will be made only at the end of each fiscal year
based on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations are based on management's estimates of expected year-end inventory
levels and costs. All other inventories are accounted for using the first-in,
first-out ("FIFO") method.
Note 3 - Comprehensive Income
Comprehensive income for the Company is comprised of the following:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------- -----------------------------------
2001 2000 2001 2000
----------------- ---------------- --------------- ---------------
Net Income $ 118,362 $ 119,171 $ 178,984 $ 194,465
Other Comprehensive Income, Net of
Tax
Foreign currency translation
adjustments (41,738) (39,033) (35,391) (77,718)
Unrealized (loss) gain on
investments, net of
amounts realized (1,850) (1,503) (2,709) 11,565
Unrealized gain on
currency options, net of
amounts realized 3,221 -- 5,271 --
----------------- ---------------- --------------- ---------------
Comprehensive Income $ 77,995 $ 78,635 $ 146,155 $ 128,312
================= ================ =============== ===============
6
On October 1, 2000, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Accordingly, net unrealized gains on currency options
have been included in other comprehensive income for the three and six months
ended March 31, 2001. For additional discussion regarding the adoption of this
Statement, see Note 8 of the Notes to Condensed Consolidated Financial
Statements.
The amount of unrealized gains or losses on investments and currency options in
comprehensive income has been adjusted to reflect the realized gains included in
net income during the three and six months ended March 31, 2001 and 2000.
Note 4 - Earnings per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------- -----------------------------------
2001 2000 2001 2000
-------------- -------------- ---------------- ---------------
Net income $ 118,362 $ 119,171 $ 178,984 $ 194,465
Preferred stock dividends (685) (732) (1,386) (1,478)
-------------- -------------- ---------------- ---------------
Income available to common
shareholders (A) 117,677 118,439 177,598 192,987
Preferred stock dividends -
using "if converted" method 685 732 1,386 1,478
Additional ESOP contribution -
using "if converted" method (156) (165) (322) (339)
-------------- -------------- ---------------- ---------------
Income available to common
shareholders after assumed
conversions (B) $ 118,206 $ 119,006 $ 178,662 $ 194,126
============== ============== ================ ===============
Average common shares
outstanding (C) 257,021 252,055 255,729 251,690
Dilutive stock equivalents from
stock plans 7,612 6,432 7,538 6,407
Shares issuable upon conversion
of preferred stock 4,539 4,889 4,539 4,889
-------------- -------------- ---------------- ---------------
Average common and common
equivalent shares outstanding
- assuming dilution (D) 269,172 263,376 267,806 262,986
============== ============== ================ ===============
Basic earnings per share (A/C) $ .46 $ .47 $ .69 $ .77
============== ============== ================ ===============
Diluted earnings per share (B/D) $ .44 $ .45 $ .67 $ .74
============== ============== ================ ===============
7
Note 5 - Contingencies
The Company is involved, both as a plaintiff and a defendant, in various legal
proceedings and claims which arise in the ordinary course of business, including
product liability and environmental matters. While it is not possible to predict
or determine the outcome of the legal actions brought against the Company, upon
resolution of such matters, the Company may incur charges in excess of presently
established reserves. While such future charges, individually and in the
aggregate, could have a material adverse impact on the Company's net income and
net cash flows in the period in which they are recorded or paid, in the
Company's opinion, the results of these matters, individually and in the
aggregate, are not expected to have a material adverse effect on the Company's
consolidated financial condition. Further discussion of legal proceedings is
included in Part II of this Report on Form 10-Q.
Note 6 - Segment Data
On October 1, 2000, the Company changed the structure of its internal
organization, which caused the composition of its reportable segments to change.
For the six months ending March 31, 2001, decisions about resource allocation
and performance assessment were made separately for the Medical Systems
("Medical") segment, the new Clinical Laboratory Solutions ("Clinical Lab")
segment, and the reorganized Biosciences segment. Prior year information has
been reclassified to conform to current year presentation.
The Company evaluates performance based upon operating income. Segment operating
income represents revenues reduced by product costs and operating expenses.
Financial information for the Company's segments is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------- --------------------------------------
2001 2000 2001 2000
---------------- ----------------- ----------------- -----------------
Revenues
Medical $ 506,838 $ 489,329 $ 945,272 $ 951,935
Clinical Lab 298,359 293,933 575,312 565,032
Biosciences 155,982 141,870 283,852 267,329
---------------- ----------------- ----------------- -----------------
Total Revenues (A) $ 961,179 $ 925,132 $ 1,804,436 $ 1,784,296
================ ================= ================= =================
Segment Operating Income
Medical $ 118,614 $ 95,487 $ 192,213 $ 190,188
Clinical Lab 58,514 58,782 106,963 101,012
Biosciences 29,079 22,660 42,252 33,049
---------------- ----------------- ----------------- -----------------
Total Segment Operating
Income 206,207 176,929 341,428 324,249
Unallocated Items (B) (50,468) (11,822) (105,923) (57,393)
---------------- ----------------- ----------------- -----------------
Income Before Income Taxes $ 155,739 $ 165,107 $ 235,505 $ 266,856
================ ================= ================= =================
8
March 31, September 30,
2001 2000
---------------- -----------------
Segment Assets
Medical $ 2,321,538 $ 2,289,304
Clinical Lab 1,082,879 1,059,144
Biosciences 818,408 811,081
---------------- -----------------
Total Segment Assets 4,222,825 4,159,529
Corporate and All Other (C) 420,386 345,567
---------------- -----------------
Total Assets $ 4,643,211 $ 4,505,096
================ =================
(A) Intersegment revenues are not material.
(B) Includes interest, net; foreign exchange; and corporate expenses.
(C) Includes cash and investments and corporate assets.
Note 7 - Special Charges
The Company recorded special charges of $57,514, $75,553, and $90,945 in fiscal
years 2000, 1999, and 1998, respectively, as discussed in the 2000 Annual Report
on Form 10-K.
Fiscal Year 2000
The Company developed a worldwide organizational restructuring plan to align its
existing infrastructure with its projected growth programs. This plan included
the elimination of open positions and employee terminations from all businesses,
functional areas and regions for the sole purpose of cost reduction. As a result
of the approval of this plan in September 2000, the Company recorded $33,000 of
exit costs, of which $31,700 related to severance costs. This plan provides for
the termination of approximately 600 employees. As of March 31, 2001,
approximately 470 of the targeted 600 had been severed. The remaining
terminations and related accrued severance are expected to be substantially
completed and paid by the end of fiscal 2001, as originally planned.
Asset impairments relating to this restructuring plan totaled $4,514 and
represented the write-down to fair value less cost to sell of assets held for
sale or disposal in the Medical segment. Also included in special charges in
2000 was $20,000 for estimated litigation defense costs associated with the
Company's latex glove business, which was divested in 1995. Further discussion
of legal proceedings is included in Part II of this Report on Form 10-Q.
A summary of the 2000 special charge accrual activity follows:
Severance Restructuring Other
------------------- ------------------- -----------------
Accrual Balance at
September 30, 2000 $31,700 $1,300 $20,000
Payments (18,000) (100) (4,200)
------------------- ------------------- -----------------
Accrual Balance at
March 31, 2001 $13,700 $1,200 $15,800
=================== =================== =================
9
Fiscal Year 1999
In an effort to better focus its business and improve its future financial
performance, the Company decided in the third quarter of fiscal 1999 to exit
certain product lines and other activities, primarily in the Medical segment.
The product lines were in the area of home healthcare and represented new
products that included self-monitoring devices for blood pressure, ear and
heart. These products did not gain the expected market acceptance and the
Company decided to discontinue these products due to poor performance. Included
in 1999 special charges were exit costs relating to this plan of $21,000. Such
costs included approximately $11,500 for the settlement of contractual
obligations with suppliers, $6,800 for the write-off of prepaid expenses
associated with contractual obligations to purchase laboratory services and
inventory to be manufactured by third parties in the future, and $2,700 of
severance costs. This exit plan, which involved the termination of 61 employees,
was completed and substantially all accrued liabilities were paid within one
year, as anticipated. Also included in 1999 special charges were the write-off
of impaired assets relating to the plan of $25,100. Such write-offs included
$14,800 related to goodwill, $9,000 to licenses and $1,300 to molds, all of
which were written down to zero. These assets were taken out of service
immediately after the write-down occurred and were subsequently scrapped.
The Company also reversed $6,300 of 1998 special charges in 1999 as a result of
the decision not to exit certain activities as had originally been planned.
Also included in special charges in 1999 were costs associated with a voluntary
retirement program offered to 176 employees meeting certain age and service
requirements at selected locations. A total of 133 participants accepted the
program, resulting in a $17,900 charge for special termination benefits, of
which $4,400 related to severance. This program was completed within one year,
as anticipated.
Special charges for 1999 also included $17,853 of other charges. Of this amount,
$8,153 related to the write-down of three equity investments whose decline in
fair value was deemed to be other than temporary. Also included was $7,200
relating to three intangible assets that were deemed impaired. The decision to
exit certain product development ventures and realign the Company's direction in
other areas in the third quarter of fiscal 1999 resulted in the need to review
for impairments. At that time, it was determined that an impairment loss existed
for these assets. The impairment loss, which related primarily to the Medical
segment, represented the excess carrying values over the fair values for these
assets, based on discounted cash flow estimates. This charge also included a
$2,500 settlement payment relating to the exiting of a joint venture agreement
with a pump manufacturer.
10
A summary of the 1999 special charge accrual activity follows:
Severance Restructuring Other
------------------- ------------------- -----------------
1999 Special Charges $7,100 $11,700 $2,500
Payments (3,300) (6,600) (2,500)
------------------- ------------------- -----------------
Accrual Balance at
September 30, 1999 3,800 5,100 -
Payments (2,900) (5,100) -
------------------- ------------------- -----------------
Accrual Balance at
September 30, 2000 900 - -
Payments (900) - -
------------------- ------------------- -----------------
Accrual Balance at
March 31, 2001 $ - $ - $ -
=================== =================== =================
The Company also recorded $26,900 of charges in Cost of products sold in 1999,
to reflect the write-off of inventories and to provide appropriate reserves for
expected future returns relating to the exited product lines.
Fiscal Year 1998
In an effort to improve manufacturing efficiencies at certain of its
locations, the Company initiated in 1998 two restructuring plans: the closing
of a surgical blade plant in Hancock, New York and the consolidation of other
production functions in Brazil, Spain, Australia and France. Total charges of
$35,300 were recorded in 1998 relating to these restructuring plans, primarily
in the Medical segment, and consisted of $15,400 relating to severance and other
employee termination costs, $15,400 relating to manufacturing equipment write-
offs and $4,500 relating to remaining lease obligations.
The original anticipated completion date for the Hancock facility closing was
May 2000. The Company had estimated that approximately 200 employees would be
terminated and recorded a $9,900 charge relating to severance and a $2,400
charge relating to other employee termination costs. Severance was originally
estimated based on the severance arrangement communicated to employees in June
1998. The shutdown of the Hancock facility involved the transfer of three major
production lines to new locations. Two of these production moves occurred in
September 1999, as planned. At that time, a total of 50 employees were
terminated and severance was paid and charged against the reserve. The move of
the remaining production line for surgical blades has been delayed due to the
following events:
1. The original plan did not anticipate the need for safety stock to serve the
blade market during the move since the Company planned to use a new blade
grinding technology that would allow for parallel production of blades
during the eventual wind down and phase out of the old technology in
Hancock. Problems arose with this new technology during fiscal 1999, which
resulted in the Company's decision to maintain the existing technology. In
addition, the blade business experienced a surge in demand for surgical
blades around the world, particularly in Europe, between October 1998 and
June 1999. This increased demand
11
seriously hampered the Company's ability to build the required inventory
levels to enable a move by May 2000. As a result, the Hancock closure date
was revised to the latter part of fiscal 2001.
2. During the latter part of fiscal 1999 and early fiscal 2000, the U.S.
healthcare marketplace experienced increased activity in the area of
healthcare worker safety and sharp device injuries. In response to this
significant shift in the marketplace and the enactment of state laws and
the expected enactment of federal law requiring the use of
safety-engineered products, the Company re-prioritized its efforts to
deliver safety surgical blades to the marketplace. This decision resulted
in an extension of the timeline necessary to enable the blade production
move and the closure of the Hancock facility.
The Company now expects the Hancock restructuring plan to be completed and the
related accruals to be substantially paid by December 2002. The severance
estimates have increased as a result of the extension of the Hancock final
closing date. The impact of the estimated increase in severance costs was offset
by savings from certain other factors, including lower actual salary increases,
and lower outplacement fees than were originally anticipated. The remaining 150
employees will be terminated upon closure of the plant.
The Company originally scheduled to complete the consolidation of the other
production facilities within twelve to eighteen months from the date the plans
were finalized. Approximately 150 employees were estimated to be affected by
these consolidations. Exit costs of approximately $23,000 associated with these
activities included $3,100 of severance costs, with the remainder primarily
related to write-offs of manufacturing equipment with a fair value of zero. At
the time, the Company expected to remove all such assets, with the exception of
Brazil and Spain manufacturing assets, from operations by September 1998. The
Company reversed $6,300 of the charges relating to the Brazil and Spain
restructuring plans in fiscal 1999 as a result of the decision not to exit
certain production activities as had originally been planned. The Company also
recorded a catch-up adjustment to cost of sales for depreciation not taken since
the initial write-off of assets relating to these locations. The remaining
consolidation activities in Australia and France were completed as planned, with
a total of approximately 30 employees terminated.
The Company also recorded $37,800 of special charges to recognize impairment
losses on other non-manufacturing assets. Approximately $25,600 of this charge
related to the write-down of goodwill and other assets associated with prior
acquisitions in the area of manual microbiology. The impairment loss was
recorded as a result of the carrying value of these assets exceeding their fair
value, calculated on the basis of discounted estimated future cash flows. The
carrying amount of such goodwill and other intangibles was $24,000. The balance
of the impairment loss of $1,600 was recognized as a write-down of related fixed
assets. Also included in the $37,800 charge was a $4,700 write-down of a
facility held for sale, which was subsequently sold in fiscal 2000 at its
adjusted book value.
The remaining special charges of $17,845 primarily consisted of $12,300 of
estimated litigation defense costs associated with the Company's latex glove
business, which was divested in 1995, as well as a number of miscellaneous asset
write-downs.
12
A summary of the 1998 special charge accrual activity follows:
Severance Restructuring Other
------------------- ------------------- -----------------
1998 Special Charges $13,000 $4,500 $15,100
Payments (500) (50) (2,400)
------------------- ------------------- -----------------
Accrual Balance at
September 30, 1998 12,500 4,450 12,700
Reversals (1,500) - -
Payments (1,700) (300) (6,600)
------------------- ------------------- -----------------
Accrual Balance at
September 30, 1999 9,300 4,150 6,100
Payments (1,900) (2,400) (4,500)
------------------- ------------------- -----------------
Accrual Balance at
September 30, 2000 7,400 1,750 1,600
Payments (200) - (100)
------------------- ------------------- -----------------
Accrual Balance at
March 31, 2001 $7,200 $1,750 $1,500
=================== =================== =================
Other accruals of $15,100 primarily represented the estimated litigation defense
costs, as discussed above.
Note 8 - Financial Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which was required to be adopted in fiscal years beginning after June 15, 2000.
This Statement requires that all derivatives be recorded in the balance sheet at
fair value and that changes in fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company adopted the
provisions of SFAS No. 133 effective October 1, 2000. The cumulative effect of
adoption was not material to the Company's results of operations or financial
condition.
At the end of fiscal 2000, the Company purchased option contracts to hedge a
portion of its anticipated sales from the United States to customers outside of
the United States that are made by local affiliates. These option contracts are
designated as cash flow hedges, as defined by SFAS No. 133, and are effective as
hedges of these revenues.
Changes in the effective portion of the fair value of these option contracts are
included in other comprehensive income until the hedged sales transactions,
described above, are recognized in earnings. Once the hedged transaction occurs,
the unrealized gain or loss on the option is reclassified from accumulated other
comprehensive income to revenues. The ineffective portion of an option's change
in fair value is immediately recognized in earnings. The Company recorded gains
of $2,043 for the quarter and $4,129 for the six months representing the
realized hedge gain, which is reclassified from other comprehensive income to
revenues once the hedged transaction occurs. The Company also recorded other
expense of $2,218 for the quarter and $8,121 for the six months for the
ineffective portion of the change in fair value of the options.
13
All outstanding currency options that were designated as cash flow hedges as of
March 31, 2001 will mature by the end of fiscal 2001. Included in other
comprehensive income for the six months is an unrealized gain of $5,271, net of
tax and amounts realized, for options outstanding as of March 31, 2001.
The Company continues to hedge certain intercompany receivables and payables by
entering into forward exchange contracts and currency options. Gains or losses
on these contracts are largely offset by the gains or losses on the underlying
hedged items. As under prior accounting standards, these forward exchange
contracts do not qualify for hedge accounting under SFAS No. 133.
In the second quarter of fiscal 2001, the Company entered into an interest rate
swap agreement, with an effective date of January 15, 2001, on its $100,000 in
outstanding 8.7% Debentures, due January 15, 2025. Under this agreement, the
Company will pay interest at a variable rate in exchange for fixed rate
payments, effectively transforming the Debentures to floating rate obligations.
This swap is designated as a perfectly effective fair value hedge, as defined by
SFAS No. 133. Changes in the fair value of the interest rate swap perfectly
offset changes in the fair value of the fixed rate debt due to changes in market
interest rates. As such, there was no ineffective portion to the hedge
recognized in earnings during the period.
During the quarter, the Company began entering into forward exchange contracts
to hedge a portion of its net investments in Singapore and Japan. These forward
contracts, which mature within 90 days, are designated and effective as net
investment hedges, as defined by SFAS No. 133. Changes in the fair value of the
forward exchange contracts offset translation gains or losses on the hedged
portion of these net investments. In the current quarter, a gain of $7,262 was
recorded to foreign currency translation adjustments in other comprehensive
income for the change in the fair value of the contracts. A gain of $863 was
recognized in other expense during the period for the ineffective portion of the
change in fair value of the forward contracts.
As discussed above, the Company hedges substantially all transactional foreign
exchange exposures through the use of forward contracts and currency options,
and in an effort to manage interest rate exposures, the Company strives to
achieve an acceptable balance between fixed and floating rate debt.
The Company is exposed to credit loss in the event of nonperformance by
financial institutions with which it conducts business. The Company minimizes
exposure to such risk, however, by dealing only with major international banks
and financial institutions.
Further discussion of market risk is included in Item 3 of Part I of this Report
on Form 10-Q.
Note 9 - Acquisitions
On January 10, 2001, the Company completed its acquisition of Gentest
Corporation, a privately-held company serving the life sciences market in the
areas of drug metabolism and toxicology
14
testing of pharmaceutical candidates. The purchase price was approximately
$29,000 in cash, subject to certain post-closing adjustments.
The Company records acquisitions under the purchase method of accounting and,
therefore, purchase prices are allocated to assets acquired and liabilities
assumed based on estimated fair values. The results of operations for acquired
companies are included in the consolidated results of the Company from their
respective acquisition dates.
In certain instances, the Company may record charges for purchased in-process
research and development in connection with acquired companies. These charges
represent the fair value of certain acquired research and development projects
that were determined to have not reached technological feasibility and do not
have alternative future uses. The Company recorded such in-process research and
development charges in fiscal years 1999 and 1998. For the acquisition of
Clontech Laboratories, Inc. in fiscal 1999, the $32,000 charge for purchased
in-process research and development represented the value of several projects
relating to gene chip technology, gene expression and gene cloning and reporter
tools. For the acquisition of the Medical Devices Division of The BOC Group in
fiscal 1998, the $30,000 charge represented the value of several projects
relating to new medical catheters and other devices. These charges represented
the fair value for all such projects based on discounted net cash flows. These
cash flows were based on management's estimates of future revenues and expected
profitability of each product/technology. The rate used to discount these
projected cash flows accounts for both the time value of money, as well as the
risks of realization of the cash flows. No such charges for purchased in-process
research and development were recorded in fiscal 2000 or in the first six months
of fiscal 2001.
Note 10 - Adoption of New Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB provides the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
required to adopt the provisions of this SAB no later than its fourth quarter of
fiscal 2001. The Company is continuing to quantify the issues identified as a
result of the additional guidance issued by the SEC in October 2000. The Company
expects to record a cumulative effect adjustment upon adoption, primarily
related to the installation of instruments in the Biosciences segment. The
Company does not expect the adoption of this SAB to be material to its results
of operations or financial condition for the fiscal year ending September 30,
2001.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Second quarter revenues of $961 million represented a four percent increase from
the same period a year ago. Revenues for the six months were $1.804 billion, a
one percent increase over a year ago. Revenue growth was unfavorably affected by
foreign currency translation, related primarily to the Euro and Japanese Yen,
which reduced revenues by an estimated $31 million and $77 million for the three
and six month periods, respectively. International revenues grew approximately
nine percent and seven percent for the three and six months, respectively, after
excluding the unfavorable impact of foreign currency translation.
Medical Systems ("Medical") revenues increased four percent for the quarter, or
seven percent after excluding the estimated unfavorable impact of foreign
currency translation. Clinical Laboratory Solutions ("Clinical Lab") revenues
increased two percent for the quarter, or five percent after excluding the
estimated unfavorable impact of foreign currency translation. Both segments
benefited from strong sales of advanced protection devices. U.S. sales of
safety-engineered products for the quarter were $58 million for Medical and $38
million for Clinical Lab. Biosciences revenues grew 10 percent, with all product
groups within this segment contributing to this growth. After excluding the
estimated unfavorable impact of foreign currency translation, Biosciences
revenues grew 14 percent.
Segment Revenues Three Months Ended March 31, Six Months Ended March 31,
---------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
================================================================================================================
Medical
United States $ 251 $ 232 8 $ 453 $ 439 3
International 256 257 (1) 492 513 (4)
- ----------------------------------------------------------------------------------------------------------------
Total $ 507 $ 489 4 $ 945 $ 952 (1)
================================================================================================================
Clinical Lab
United States $ 176 $ 172 2 $ 335 $ 321 5
International 123 122 1 240 244 (2)
- ----------------------------------------------------------------------------------------------------------------
Total $ 298 $ 294 2 $ 575 $ 565 2
================================================================================================================
Biosciences
United States $ 84 $ 77 9 $ 153 $ 149 3
International 72 65 12 130 119 10
- ----------------------------------------------------------------------------------------------------------------
Total $ 156 $ 142 10 $ 284 $ 267 6
================================================================================================================
Total Revenues
United States $ 511 $ 482 6 $ 942 $ 908 4
International 451 443 2 863 876 (2)
- ----------------------------------------------------------------------------------------------------------------
Total $ 961 $ 925 4 $ 1,804 $ 1,784 1
================================================================================================================
Refer to Note 6 in Notes to Condensed Consolidated Financial Statements for
additional
16
segment data. Changes in segment operating income were primarily driven by
fluctuations in revenue, as discussed above. Prior year Medical segment
operating income included $13 million of costs associated with a voluntary
product recall announced in February 2000. Excluding these costs, Medical
segment operating income grew 9% for the quarter, primarily due to revenue
growth. Biosciences segment income was also favorably impacted by increased
sales of products from recent acquisitions, which have higher overall gross
profit margins, as compared to products sold in the same period in the prior
year. Clinical Lab segment operating income was adversely affected by a decrease
in sales of flu products, which have high gross profit margins, compared with a
year ago.
Gross profit margin was 49.3% for the quarter and 48.1% for the six months.
Excluding the voluntary product recall costs discussed above, the prior year's
gross profit margin would have been 50.2% for the quarter and 49.0% for the six
months. This decline reflects a decrease in sales of flu products, which have
higher margins, as discussed above, and, to a lesser extent, start-up costs
associated with new products. Reported gross profit margin in the prior year was
48.8% and 48.2% for the quarter and six months, respectively.
Selling and administrative expense was 25.2% of revenues for the quarter and
26.4% of revenues for the six months, compared with the prior year's ratios of
26.4% and 26.8%, respectively. Selling and administrative expenditures for the
quarter and year to date were about the same as last year, as incremental
spending offset favorable foreign currency translation and savings associated
with the fiscal 2000 workforce reduction program. Investment in research and
development was 5.7% of revenues for the quarter and 5.9% of revenues for the
six months, compared with 6.2% for the prior year's quarter and six months. The
decline in research and development spending reflects lower ongoing development
costs as a result of the recent introduction of the BD Phoenix(TM) and BD
ProbeTec(TM) products.
Operating margin was 18.4% for the quarter and 15.7% for the six months,
compared with 16.2% and 15.2 % for the prior year, respectively. Excluding the
product recall costs, the prior year's operating margin for the quarter and six
months would have been 17.6% and 16.0%, respectively. The increase in operating
margin for the quarter reflects the decrease in operating expenses discussed
above. Net interest expense declined $5 million for the quarter and $8 million
for the six months compared with the prior year, primarily due to lower debt
levels and lower short-term interest rates.
Other expense, net was $5 million for the quarter and $13 million for the six
months. Included in Other expense, net were net foreign exchange losses of $3
million and $11 million for the quarter and six months, respectively, which
include hedging expenses. See Note 8 of the Notes to Condensed Consolidated
Financial Statements for further discussion. Other income, net in the prior year
was $36 million for the quarter and $38 million for the six months, which
included a $33 million gain on the sale of an investment.
The income tax rate was 24% for the quarter and six months. The prior year's
rate of 27.8% and 27.1% for the quarter and six months, respectively, reflected
the higher rate on the gain on the sale of an investment. We expect our tax rate
for the full year to be about 24%.
17
Net income and diluted earnings per share for the current quarter were $118
million and 44 cents, respectively, compared with $119 million and 45 cents in
the prior year. Excluding the gain on the sale of an investment and the
unfavorable impact of the product recall discussed earlier, prior year's
earnings per share would have been 42 cents. Net income and diluted earnings per
share for the six months were $179 million and 67 cents, respectively, compared
with $194 million and 74 cents for the same period in fiscal 2000.
Financial Condition
During the first six months of fiscal 2001, cash provided by operating
activities increased to $316 million compared to $267 million during the first
six months of last year. Capital expenditures during the first six months were
$180 million, compared with last year's amount of $166 million. We expect
capital spending for fiscal 2001 to be about the same as last year's amount of
$376 million.
As of March 31, 2001, total debt of $1.4 billion represented 38.9% of total
capital (shareholders' equity, net non-current deferred income tax liabilities,
and debt), down from 45.1% a year ago. Because of our strong credit rating, we
believe we have the capacity to arrange any additional borrowings which might be
required in the ordinary course of business.
Prior Year Special Charges
We recorded special charges of $58 million, $76 million, and $91 million in
fiscal years 2000, 1999, and 1998, respectively, as described in Note 7 of the
Notes to Condensed Consolidated Financial Statements.
For the 2000 restructuring plan, the annual savings from the reduction
in salaries and wages expense are estimated to be $30 million. These savings
are anticipated to offset incremental costs beginning in 2001 relating to
programs, such as advanced protection technologies, blood glucose monitoring,
molecular oncology, and our implementation of SAP, known as Genesis.
The annual savings of $6 million for the 1999 restructuring plan
primarily related to a reduction in salaries and wages expense resulting
from the voluntary retirement program. As anticipated, these benefits, beginning
in 2000, offset incremental costs relating to Genesis.
For the 1998 restructuring plan, the estimated annual benefits of $4 million
related to tax savings and reduced manufacturing costs associated with the move
of the surgical blade plant in Hancock to Puerto Rico are expected to be
realized following the closure of the Hancock facility. Beginning in 1999, we
realized a reduction in amortization expense of $5 million, resulting from the
write-down of certain assets, which offset the incremental costs associated with
Genesis. See Note 7 of the Notes to Condensed Consolidated Financial Statements
for further discussion.
18
Cautionary Statement Pursuant to Private Securities Litigation Reform Act of
1995 -- "Safe Harbor" for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of Becton, Dickinson
and Company ("BD"). BD and its representatives may from time to time make
certain forward-looking statements in publicly-released materials, both written
and oral, including statements contained in this report and filings with the
Securities and Exchange Commission and in our other reports to shareowners.
Forward-looking statements may be identified by the use of words like "plan,"
"expect," "believe," "intend," "will," "anticipate," "estimate" and other words
of similar meaning in conjunction with, among other things, discussions of
future operations and financial performance, as well as our strategy for growth,
product development, regulatory approvals, market position and expenditures. All
statements which address operating performance or events or developments that we
expect or anticipate will occur in the future -- including statements relating
to volume growth, sales and earnings per share growth and statements expressing
views about future operating results -- are forward-looking statements within
the meaning of the Act.
Forward-looking statements are based on current expectations of future events.
The forward-looking statements are and will be based on management's then
current views and assumptions regarding future events and operating performance,
and speak only as of their dates. Investors should realize that if underlying
assumptions prove inaccurate or unknown risks or uncertainties materialize,
actual results could vary materially from our expectations and projections.
Investors are therefore cautioned not to place undue reliance on any
forward-looking statements. Furthermore, we undertake no obligation to update or
revise any forward-looking statements whether as a result of new information,
future events and developments or otherwise.
The following are some important factors that could cause our actual results to
differ from our expectations in any forward-looking statements:
o Regional, national and foreign economic factors, including inflation and
fluctuations in interest rates and foreign currency exchange rates and the
potential effect of such fluctuations on revenues, expenses and resulting
margins.
o Competitive product and pricing pressures and our ability to gain or
maintain market share in the global market as a result of actions by
competitors, including technological advances achieved and patents attained
by competitors as patents on our products expire. While we believe our
opportunities for sustained, profitable growth are considerable, actions of
competitors could impact our earnings, share of sales and volume growth.
o Changes in domestic and foreign healthcare resulting in pricing pressures,
including the continued consolidation among healthcare providers, trends
toward managed care and healthcare cost containment and government laws and
regulations relating to sales and promotion, reimbursement and pricing
generally.
o Fluctuations in the cost and availability of raw materials and the ability
to maintain favorable supplier arrangements and relationships.
o Government laws and regulations affecting domestic and foreign operations,
including those relating to trade, monetary and fiscal policies, taxation,
environmental matters, price controls, licensing and regulatory approval of
new products.
o Difficulties inherent in product development, including the potential
inability to successfully continue technological innovation, complete
clinical trials, obtain regulatory approvals in the United States and
abroad, or gain and maintain market approval of products, and the
possibility of encountering infringement claims by competitors with respect
to patent or other intellectual property rights, all of which can preclude
or delay commercialization of a product.
o Significant litigation adverse to BD, including product liability claims,
patent infringement claims, and antitrust claims, as well as other risks
and uncertainties detailed from time to time in our Securities and Exchange
Commission filings.
o Our ability to achieve earnings forecasts, which are generated based on
projected volumes and sales of many product types, some of which are more
profitable than others. There can be no assurance that we will achieve the
projected level or mix of product sales.
o Product efficacy or safety concerns resulting in product recalls,
regulatory action on the part of the Federal Drug Administration (or
foreign counterparts) or declining sales.
o Economic and political conditions in international markets, including civil
unrest, governmental changes and restrictions on the ability to transfer
capital across borders.
19
o Our ability to penetrate developing and emerging markets, which also
depends on economic and political conditions, and how well we are able to
acquire or form strategic business alliances with local companies and make
necessary infrastructure enhancements to production facilities,
distribution networks, sales equipment and technology.
o The impact of business combinations, including acquisitions and
divestitures, both internally for BD and externally in the healthcare
industry.
o Issuance of new or revised accounting standards by the American Institute
of Certified Public Accountants, the Financial Accounting Standards Board
or the Securities and Exchange Commission.
The foregoing list sets forth many, but not all, of the factors that could
impact our ability to achieve results described in any forward-looking
statements. Investors should understand that it is not possible to predict or
identify all such factors and should not consider this list to be a complete
statement of all potential risks and uncertainties.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company hedges substantially all transactional foreign exchange exposures
through the use of forward contracts and currency options, and in an effort to
manage interest rate exposures, the Company strives to achieve an acceptable
balance between fixed and floating rate debt. The Company also faces currency
exposure that arises from translating the results of its worldwide operations to
the U.S. dollar at exchange rates that have fluctuated from the beginning of the
period. The Company began to purchase option contracts at the end of 2000 to
partially protect against adverse foreign exchange rate movements. The Company's
2000 Annual Report on Form 10-K includes sensitivity analysis disclosures that
express the potential loss in future earnings, fair values, or cash flows from
market risk sensitive instruments resulting from hypothetical changes in
relevant market rates over a selected period of time. For foreign currency
derivative instruments, market risk is determined by calculating the impact on
fair value of an assumed one-time change in foreign exchange rates relative to
the U.S. dollar. Fair values were estimated based on market prices, where
available, or dealer quotes. The reduction in fair value of the Company's
purchased option contracts is limited to the options' fair value. For interest
rate derivative instruments, market risk is determined by calculating the impact
to fair value of an assumed one-time change in interest rates across all
maturities. Fair values were estimated based on market prices, where available,
or dealer quotes. A change in interest rates on short-term debt is assumed to
impact earnings and cash flow but not fair value because of the short maturities
of these instruments. A change in interest rates on long term debt is assumed to
impact fair value but not earnings or cash flow because the interest rates are
fixed.
There have been no material changes in information reported since the fiscal
year ended September 30, 2000.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved, both as a plaintiff and a defendant, in various legal
proceedings which arise in the ordinary course of business, including
product liability and environmental matters.
A more complete description of legal proceedings has been set forth in
our 2000 annual report on Form 10-K (the "10-K"), as updated in our
Form 10-Q for the quarter ended December 31, 2000. For the quarter
ended March 31, 2001, the following changes have occurred.
Latex Cases
We have now received a total of 457 claims to date, relating to
alleged reactions caused by exposure to latex resulting from the use,
over time, of latex gloves. The facts and circumstances of new claims
filed since the 10-K are similar to those previously filed and we are
of the same opinion as stated in the 10-K.
Braun Litigation
On January 30, 2001, the parties to the patent infringement litigation
under the caption Becton Dickinson and Company et al. vs. B. Braun
Medical Inc., (Case No. 2:99-CV-00987J, United States District Court
for the District of Utah), entered into an agreement suspending the
litigation. Accordingly, the case was dismissed without prejudice at
the request of the parties on February 2, 2001. Under the terms of our
agreement, neither we nor Braun may refile the litigation until after
May 15, 2001 under any circumstances, and during the period from May
16, 2001 to September 30, 2001, only under certain circumstances.
Either of us may refile after September 30, 2001.
RTI Litigation
On January 29, 2001, a lawsuit was filed under the caption Retractable
Technologies, Inc. vs. Becton Dickinson and Company, et al. (Case No.
CA5010V036, United States District Court for the Eastern District of
Texas). The allegations of the lawsuit, with the exception of new
causes of action under federal antitrust laws, are substantially
similar to the allegations set forth in Retractable Technologies, Inc.
vs. Becton Dickinson and Company et al. (Case No. 5333*J6198, Brazoria
County District Court), which was withdrawn by the plaintiff on
February 5, 2001.
Critikon Litigation
On January 23, 2001, the parties to the patent infringement litigation
under the caption Critikon Inc. vs. Becton Dickinson Vascular Access,
Inc. (Civ. 93-108 (JJF) United States District Court for the District
of Delaware) entered into a definitive agreement to settle the matter.
Under the terms of the agreement, we made an initial payment of
$3,000,000 to the plaintiff, and on March 29, 2001 we paid $2,000,000,
22
plus interest, to finalize the settlement. Following this payment, the
lawsuit was dismissed.
Summary
While it is not possible to predict or determine the outcome of the
above or other legal actions brought against BD, upon resolution of
such matters, we may incur charges in excess of presently established
reserves. While such future charges, individually and in the
aggregate, could have a material adverse impact on our net income and
net cash flows in the period in which they are recorded or paid, in
our opinion, the results of the above matters, individually and in the
aggregate, are not expected to have a material adverse effect on the
Company's consolidated financial condition.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
a.) Our Annual Meeting of Shareholders was held on February 13, 2001.
c.)i.) A management proposal for the election of four directors for
the terms indicated below was voted upon as follows:
Votes Votes
Nominee Term For Withheld
------------------------------------ -------------- ------------------- ------------------
Gerald M. Edelman 1 Year 215,718,678 3,144,397
Henry P. Becton, Jr. 3 Years 215,934,201 2,928,874
James F. Orr 3 Years 215,801,290 3,061,785
Margaretha af Ugglas 3 Years 215,746,373 3,116,702
ii.) A management proposal to approve the selection of Ernst &
Young, LLP as independent auditors for the fiscal year
ending September 30, 2001 was voted upon. 208,628,210 shares
were voted for the proposal, 9,384,735 shares were voted
against, and 850,130 shares abstained.
iii.) A shareholder proposal requesting the Board of Directors
take the necessary steps to provide for cumulative voting in
the election of directors was voted upon. 78,655,787 shares
were voted for the proposal, 105,126,158 shares were voted
against and 11,094,191 shares abstained.
23
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
None.
b) Reports on Form 8-K
During the three-month period ended March 31, 2001, we filed three
Current Reports on Form 8-K:
(i) Under Item 5 - Other Events, we announced our results for
the quarter ended December 31, 2000 in a report dated
January 17, 2001.
(ii) Under Item 9 - Regulation FD Disclosure, we furnished
supplemental financial information for the fiscal year ended
September 30, 2000 in a report dated January 23, 2001.
(iii) Under Item 9 - Regulation FD Disclosure, we furnished
supplemental financial information for the fiscal year ended
September 30, 2000 and for the quarter ended December 31,
2000 in a report dated February 1, 2001.
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Becton, Dickinson and Company
-----------------------------
(Registrant)
Date May 15, 2001
-------------
/s/ John R. Considine
------------------------------------------------
John R. Considine
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25