**FORM 10-Q**

** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D. C.  20549**

 
| **(Mark  One)**                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |
| ý                                                                                                                                                                        | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                          |   |   |
| **For the quarterly period ended  September 30, 2004**                                                                                                                        |
|                                                                                                                                                                          |   |   |
| **OR**                                                                                                                                                                        |
|                                                                                                                                                                          |   |   |
| o                                                                                                                                                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                          |   |   |
| **For the transition period from              to             ** |
|                                                                                                                                                                          |   |   |
| **Commission File No. 1-31946**                                                                                                                                               |

 

**HOSPIRA, INC.**

 
| **A Delaware corporation** |   |   |   | I.R.S.  Employer Identification |
|----------------------------|--------|--------|--------|---------------------------------|
|                       |   |   |   | No.  **20-0504497**             |

 

**275 N.Field DriveLake Forest, Illinois 60045**

 

Telephone:  **(224)212-2000**

 

Indicate by check mark whether the registrant(l) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of l934 during the preceding l2 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.     Yes  ý.   No o.

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).     Yes  o. No  ý.

 

As of October 31, 2004, Hospira, Inc. hadoutstanding 156,094,985 common shares, par value $0.01 per share.

 

 

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Table of Contents

 

**Hospira,Inc.**

 

**QuarterlyReport on Form 10-Q**

 

**Index**

 
| **Part I – Financial  Information** |                                                                                                |
|------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                               |                                                                                                |
| Item 1.                                  | Financial Statements                                                                                |   |
|                                     |                                                                                                |   |
| ** **                               | Condensed  Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended         |   |
|                                     | September  30, 2004 and September 30, 2003                                                          | 3 |
|                                     |                                                                                                |   |
|                                     | Condensed  Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended               |   |
|                                     | September  30, 2004 and September 30, 2003                                                          | 4 |
|                                     |                                                                                                |   |
| ** **                               | Condensed  Consolidated Balance Sheets (Unaudited) – September 30, 2004 and December 31,  2003 | 5 |
|                                     |                                                                                                |   |
|                                     | Condensed  Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) –        |   |
|                                     | Nine  Months Ended September 30, 2004                                                               | 6 |
|                                     |                                                                                                |   |
|                                     | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                   | 7 |
|                                     |                                                                                                |   |
| Item 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         | 17 |
|                                     |                                                                                                |   |
| Item  3.                                 | Quantitative  and Qualitative Disclosures about Market Risk                                         | 24 |
|                                     |                                                                                                |   |
| Item 4.                                  | Controls and Procedures                                                                             | 24 |
|                                     |                                                                                                |   |
| **Part II – Other Information**     |                                                                                                |
|                                     |                                                                                                |   |
| Item 1.                                  | Legal Proceedings                                                                                   | 25 |
|                                     |                                                                                                |   |
| Item  2.                                 | Changes  in Securities and Use of Proceeds                                                          | 26 |
|                                     |                                                                                                |   |
| Item 6.                                  | Exhibits                                                                                            | 27 |

 

2

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Tableof Contents

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

**Hospira,Inc.**

 

**CondensedConsolidated Statements of Income**

 

**(Unaudited)**

 

***(dollars and shares in thousands, except for per share amounts)***

 
| ** **                                                  | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                                   |       | $                                   | 618,184    |                               | $          | 598,026 |   | $ | 1,810,749 |   | $ | 1,766,924 |   |
| Net sales to Abbott Laboratories                            |       | 37,926                              |       | 51,272                             |       | 133,971 |   | 164,796 |   |
| Total Net Sales                                             |       | 656,110                             |       | 649,298                            |       | 1,944,720 |   | 1,931,720 |   |
|                                                        |       |                                |       |                               |       |   |   |   |   |
| Cost of products sold                                       |       | 462,283                             |       | 469,283                            |       | 1,371,927 |   | 1,403,105 |   |
| Gross Profit                                                |       | 193,827                             |       | 180,015                            |       | 572,793 |   | 528,615 |   |
|                                                        |       |                                |       |                               |       |   |   |   |   |
| Research and development                                    |       | 28,001                              |       | 29,729                             |       | 80,534 |   | 73,027 |   |
| Selling, general and administrative                         |       | 71,899                              |       | 56,933                             |       | 196,340 |   | 167,942 |   |
| Curtailment of post-retirement medical and  dental benefits |       | —                              |       | —                             |       | (64,636 | ) | — |   |
| Income From Operations                                      |       | 93,927                              |       | 93,353                             |       | 360,555 |   | 287,646 |   |
|                                                        |       |                                |       |                               |       |   |   |   |   |
| Interest expense                                            |       | 8,268                               |       | —                             |       | 10,952 |   | — |   |
| Other (income)expense, net                                  |       | (2,538                              | )          | (1,443                             | )          | (1,144 | ) | 1,900 |   |
| Income Before Income Taxes                                  |       | 88,197                              |       | 94,796                             |       | 350,747 |   | 285,746 |   |
|                                                        |       |                                |       |                               |       |   |   |   |   |
| Income tax expense                                          |       | 26,882                              |       | 27,965                             |       | 98,671 |   | 84,295 |   |
| Net Income                                                  |       | $                                   | 61,315     |                               | $          | 66,831 |   | $ | 252,076 |   | $ | 201,451 |   |
|                                                        |       |                                |       |                               |       |   |   |   |   |
| Earnings Per Common Share:                                  |       |                                |       |                               |       |   |   |   |   |
| Basic                                                       |       | $                                   | 0.39       |                               | $          | 0.43 |   | $ | 1.61 |   | $ | 1.29 |   |
| Diluted                                                     |       | $                                   | 0.39       |                               | $          | 0.43 |   | $ | 1.61 |   | $ | 1.29 |   |
|                                                        |       |                                |       |                               |       |   |   |   |   |
| Weighted Average Common Shares Outstanding:                 |       |                                |       |                               |       |   |   |   |   |
| Basic                                                       |       | 156,059                             |       | 156,043                            |       | 156,054 |   | 156,043 |   |
| Diluted                                                     |       | 156,672                             |       | 156,043                            |       | 156,623 |   | 156,043 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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Table of Contents

 

**Hospira,Inc.**

 

**CondensedConsolidated Statements of Cash Flows**

 

**(Unaudited)**

 

***(dollars in thousands)***

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                           | ** ** | **2003** | ** ** |
|                                                                             |       |                               |       |   |   |
| Cash Flow From (Used in) Operating  Activities:                                  |       |                               |       |   |   |
|                                                                             |       |                               |       |   |   |
| Net income                                                                       |       | $                                  | 252,076    |   | $ | 201,451 |   |
| Adjustments to reconcile net income to net cash  from operating activities— |       |                               |       |   |   |
| Depreciation                                                                     |       | 99,867                             |       | 98,491 |   |
| Amortization of intangibles                                                      |       | 3,215                              |       | 3,446 |   |
| Curtailment of post-retirement medical and  dental benefits                      |       | (64,636                            | )          | — |   |
| Trade receivables                                                                |       | (37,079                            | )          | 26,268 |   |
| Inventories                                                                      |       | 694                                |       | (57,172 | ) |
| Prepaid expenses and other assets                                                |       | (7,300                             | )          | (9,012 | ) |
| Trade accounts payable and other  liabilities                                    |       | 85,357                             |       | (52,047 | ) |
| Other, net                                                                       |       | (46,315                            | )          | 32,314 |   |
| Net Cash From Operating Activities                                               |       | 285,879                            |       | 243,739 |   |
|                                                                             |       |                               |       |   |   |
| Cash Flow (Used in) From Investing  Activities:                                  |       |                               |       |   |   |
|                                                                             |       |                               |       |   |   |
| Acquisitions of property and equipment                                           |       | (168,721                           | )          | (128,744 | ) |
| Sale of equity securities                                                        |       | —                             |       | 3,260 |   |
| Net Cash (Used in) Investing Activities                                          |       | (168,721                           | )          | (125,484 | ) |
|                                                                             |       |                               |       |   |   |
| Cash Flow From (Used in) Financing  Activities:                                  |       |                               |       |   |   |
|                                                                             |       |                               |       |   |   |
| Net transactions with Abbott Laboratories                                        |       | 24,209                             |       | (118,151 | ) |
| Pre-distribution dividend to Abbott                                              |       | (700,000                           | )          | — |   |
| Issuance of unsecured senior credit  facility                                    |       | 700,000                            |       | — |   |
| Repayment of unsecured senior credit  facility                                   |       | (700,000                           | )          | — |   |
| Issuance of senior unsecured notes, net of  fees paid                            |       | 693,344                            |       | — |   |
| Proceeds from stock options exercised                                            |       | 486                                |       |   |   |
| Net Cash From (Used in) Financing  Activities                                    |       | 18,039                             |       | (118,151 | ) |
|                                                                             |       |                               |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                    |       | 251                                |       | (104 | ) |
|                                                                             |       |                               |       |   |   |
| Net change in cash and cash equivalents                                          |       | 135,448                            |       | — |   |
| Cash and cash equivalents at beginning of  period                                |       | —                             |       | — |   |
| Cash and cash equivalents at end of period                                       |       | $                                  | 135,448    |   | $ | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

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Table of Contents

 

**Hospira,Inc.**

 

**CondensedConsolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollars in thousands except for share data)***

 
| ** **                                                                                                   | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                                                   | ** ** | **2004**         | ** ** | **2003**        | ** ** |
| **Assets**                                                                                                   |       |             |       |            |       |
| Current Assets:                                                                                              |       |             |       |            |       |
| Cash and cash equivalents                                                                                    |       | $                | 135,448    |            | $          | — |   |
| Trade receivables, less allowances of  $16,837 in 2004 and $16,876 in 2003                                   |       | 336,093          |       | 315,646         |       |
| Inventories:                                                                                                 |       |             |       |            |       |
| Finished products                                                                                            |       | 323,624          |       | 316,109         |       |
| Work in process                                                                                              |       | 87,295           |       | 124,594         |       |
| Materials                                                                                                    |       | 128,926          |       | 168,588         |       |
| Total inventories                                                                                            |       | 539,845          |       | 609,291         |       |
| Prepaid expenses, deferred income taxes and  other receivables                                               |       | 158,249          |       | 150,496         |       |
| Total Current Assets                                                                                         |       | 1,169,635        |       | 1,075,433       |       |
| Property and equipment, at cost                                                                              |       | 2,112,174        |       | 2,009,202       |       |
| Less: accumulated depreciation and  amortization                                                             |       | 1,188,904        |       | 1,153,925       |       |
| Net Property and Equipment                                                                                   |       | 923,270          |       | 855,277         |       |
| Intangible assets, net of amortization                                                                       |       | 2,120            |       | 5,335           |       |
| Goodwill                                                                                                     |       | 80,973           |       | 80,973          |       |
| Deferred income taxes                                                                                        |       | 11,324           |       | 127,296         |       |
| Other assets                                                                                                 |       | 106,911          |       | 105,849         |       |
| Total Assets                                                                                                 |       | $                | 2,294,233  |            | $          | 2,250,163 |   |
| **Liabilities  and Shareholders' Equity**                                                                    | ** ** | ** **       | ** ** | ** **      | ** ** |
| Current Liabilities:                                                                                         |       |             |       |            |       |
| Short-term borrowings                                                                                        |       | $                | —     |            | $          | — |   |
| Trade accounts payable                                                                                       |       | 102,800          |       | 105,613         |       |
| Salaries payable and other accruals                                                                          |       | 319,472          |       | 253,988         |       |
| Due to Abbott, net                                                                                           |       | 117,952          |       | —          |       |
| Total Current Liabilities                                                                                    |       | 540,224          |       | 359,601         |       |
| Due to Abbott, net                                                                                           |       | 64,944           |       | —          |       |
| Long-term debt                                                                                               |       | 698,806          |       | —          |       |
| Post-retirement obligations and other  long-term liabilities                                                 |       | 86,544           |       | 437,098         |       |
| Commitments and Contingencies                                                                                |       |             |       |            |       |
| Shareholders' Equity:                                                                                        |       |             |       |            |       |
| Common stock, par value $0.01 - authorized:  400,000,000 shares;  issued and outstanding: 156,072,261 shares |       | 1,561            |       | —          |       |
| Preferred stock, par value $0.01 -  authorized: 50,000,000 shares;  issued and outstanding: 0 shares         |       | —           |       | —          |       |
| Unearned compensation                                                                                        |       | (202             | )          | —          |       |
| Additional paid-in capital                                                                                   |       | 766,576          |       | —          |       |
| Retained earnings (for the period  subsequent to April 30, 2004)                                             |       | 153,846          |       | —          |       |
| Accumulated other comprehensive (loss)                                                                       |       | (18,066          | )          | (27,479         | )          |
| Net investment in Hospira, Inc. by Abbott  Laboratories                                                      |       | —           |       | 1,480,943       |       |
| Total Shareholders' Equity                                                                                   |       | 903,715          |       | 1,453,464       |       |
| Total Liabilities and Shareholders' Equity                                                                   |       | $                | 2,294,233  |            | $          | 2,250,163 |   |

 

The accompanying notes arean integral part of these condensed consolidated financial statements.

 

5

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Table of Contents

 

**Hospira,Inc.**

 

**CondensedConsolidated Statement of Changes in Shareholders’ Equity**

 

**(Unaudited)**

 

***(dollars and shares in thousands)***

 
| ** **                                                           | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** | ** **     | ** ** | **Net**           | ** ** | ** **       | ** ** | ** **      | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|------------------|------------|-----------------|------------|------------|------------|
| ** **                                                           | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **     | ** ** | **Investment in** | ** ** | ** **       | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | ** **       | ** ** | ** **        | ** ** | **Other**         | ** ** | **Additional** | ** ** | **Hospira, Inc.** | ** ** | ** **       | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Comprehensive** | ** ** | **Paid-in**       | ** ** | **by Abbott**  | ** ** | **Unearned**      | ** ** | **Retained**     | ** ** | ** **      | ** ** |
| ** **                                                           | ** ** | **Shares**       | ** ** | **Amount**        | ** ** | **Income (Loss)** | ** ** | **Capital**    | ** ** | **Laboratories**  | ** ** | **Compensation** | ** ** | **Earnings***   | ** ** | **Total**  | ** ** |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Balances at  January 1, 2004                                         |       | —           |       | $                 | —     |              | $          | (27,479        | )          | $                 | —     |             | $          |  1,480,943 |       | $          | —     |   | $ | — |   | $ | 1,453,464 |   |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Net Income                                                           |       | —           |       | —            |       | —            |       | —         |       | 98,230            |       | —           |       | 153,846         |       | 252,076    |       |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Other  comprehensive loss                                            |       | —           |       | —            |       | (39,062           | )          | —         |       | —            |       | —           |       | —          |       | (39,062    | )          |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Net transactions  with Abbott                                        |       | —           |       | —            |       | 48,475            |       | —         |       | (116,974          | )          | —           |       | —          |       | (68,499    | )          |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Pre-distribution  dividend to Abbott                                 |       | —           |       | —            |       | —            |       | —         |       | (700,000          | )          | —           |       | —          |       | (700,000   | )          |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Elimination of  reporting lag for international operations           |       | —           |       | —            |       | —            |       | —         |       | 5,041             |       | —           |       | —          |       | 5,041      |       |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Issuance of  common stock in connection with the distribution        |       | 156,043          |       | 1,560             |       | —            |       | 765,680        |       | (767,240          | )          | —           |       | —          |       | —     |       |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Changes in  shareholders' equity related to incentive stock programs |       | 29               |       | 1                 |       | —            |       | 896            |       | —            |       | (202             | )          | —          |       | 695        |       |
|                                                                 |       |             |       |              |       |              |       |           |       |              |       |             |       |            |       |       |       |
| Balances at  September 30, 2004                                      |       | 156,072          |       | $                 | 1,561      |              | $          | (18,066        | )          | $                 | 766,576    |             | $          | —          |       | $          | (202       | ) | $ | 153,846 |   | $ | 903,715 |   |

 

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* For the period subsequentto April 30, 2004.

 

The accompanying notes arean integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

**Hospira,Inc.**

** **

**Notes to Condensed ConsolidatedFinancial Statements**

** **

**September30, 2004**

** **

**(Unaudited)**

 

**Note 1 –Background and Basis of Presentation**

 

These condensed consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”) and, therefore, do not include allinformation and footnote disclosures normally included in audited financialstatements. However, in the opinion of management, all adjustments, consisting onlyof normal recurring adjustments, unless otherwise noted herein, necessary topresent fairly the results of operations, financial position and cash flowshave been made. These statements should be read in conjunction with thecombined financial statements and notes thereto for the year endedDecember 31, 2003, included in Hospira’s information statement included asan exhibit to Hospira’s registration statement on Form 10, which the SECdeclared effective on April 13, 2004. The results of operations for any interim period are not necessarilyindicative of the results of operations to be expected for the full year.

 

Hospira was incorporated in Delaware asa wholly owned subsidiary of Abbott Laboratories (“Abbott”) on September 16,2003, as part of a previously announced plan by Abbott to create a separatecompany relating to the manufacture and sale of hospital products, includingspecialty injectable pharmaceuticals, medication delivery systems andinjectable pharmaceutical contract manufacturing.  Most of what was then Abbott’s HospitalProducts segment and a portion of Abbott’s International segment weretransferred to Hospira as part of its spin-off from Abbott.

 

On April 30, 2004 (the “spin-off date”),Abbott transferred the assets and liabilities comprising the hospital productsbusiness to Hospira, except as noted below, and consummated the spin-off ofHospira by distributing all of the shares of Hospira’s common stock to Abbottshareholders in the form of a dividend of one share of Hospira’s common stock,and the associated preferred stock purchase right, for every ten Abbott commonshares.  Abbott received a ruling fromthe Internal Revenue Service (“IRS”) that the transfer of the hospital productsbusiness to Hospira and the subsequent distribution of all of the common stockof Hospira to Abbott shareholders qualified as a tax-free distribution for U.S.federal income tax purposes, except with respect to the distribution of cash inlieu of fractional shares.

 

Inconnection with the spin-off, Hospira and Abbott entered into a series ofagreements, such as a separation and distribution agreement, a transitionservices agreement, an employee benefit agreement, a tax sharing agreement andother related agreements, which govern the ongoing relationship between the twocompanies.

 

While thelegal transfer of certain operations and assets (net of liabilities) outsidethe United States will occur over a two year period after the spin-off date,these operations and assets are used in the conduct of Hospira’s internationalbusiness and Hospira is subject to the risks and entitled to the benefitsgenerated by the operations and assets. Hospira is dependent on Abbott’sinternational infrastructure for up to two years following the spin-off date.

 

Prior tothe spin-off, certain operations outside the United States had been included inthe consolidated financial statements on the basis of fiscal years endingNovember 30 in order to facilitate timely consolidation. This one monthreporting lag was eliminated as of April 30, 2004, as it was no longer requiredto achieve a timely consolidation. The April 2004 net income from theseinternational operations of approximately $5 million was recorded as anadjustment to Net Investment in Hospira, Inc. by Abbott Laboratories in April2004.

 

The accompanying unaudited interimcondensed consolidated financial statements reflect Hospira’s operations as aseparate, stand-alone entity subsequent to April 30, 2004, combined with thehistorical operations of Hospira when it operated as part of Abbott prior tobecoming a separate, stand-alone entity. For the period prior to April 30,2004, during which Hospira operated as part of Abbott, Abbott provided Hospirawith various services, including finance, legal, internal audit, public affairs,human resources and other services. The historical financial statements includeexpense allocations related to these services and Hospira considers theseallocations to be reasonable reflections of the utilization of servicesprovided. Intercompany accounts with Abbott have been combined with investedcapital and reported in the consolidated financial statements as Net Investmentin Hospira, Inc. by Abbott Laboratories for periods prior to April 30, 2004.

 

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The financial information in thesefinancial statements does not include all the expenses that would have beenincurred had Hospira been a separate, stand-alone entity and does not reflectHospira’s results of operations, financial position and cash flows had Hospirabeen a stand-alone entity prior to April 30, 2004. Because a direct ownershiprelationship did not exist among all the various units comprising Hospira, NetInvestment in Hospira, Inc. by Abbott Laboratories is shown in lieu ofshareholders’ equity in the consolidated financial statements prior to April30, 2004.

 

**Note 2 – Income Tax Expense**

 

Taxes onincome reflect the estimated annual effective rates, excluding the effect ofsignificant unusual items, primarily curtailment of post-retirement medical anddental benefits, and are determined on a separate-return basis through April30, 2004, at which time Hospira became a separate stand-alone taxpayer. Duringthe third quarter, Hospira increased its annual effective tax rate, excludingthe effect of significant unusual items, from 24% to 26% due to an increase inexpected earnings in the U.S., which has a higher tax rate than foreignjurisdictions. The effective tax rates are less than the statutory U.S. federalincome tax rate principally due to the benefit of tax exemptions, of varyingdurations, in several taxing jurisdictions. Abbott has retained responsibilityfor all tax liabilities prior to the spin-off date.

 

**Note 3 - Earnings per Share**

 

Basicearnings per share are computed by dividing net income by the number ofweighted average common shares outstanding during the reporting period.  Diluted earnings per share are calculated togive effect to all potentially dilutive common shares that were outstandingduring the reporting period.  For periodsprior to April 30, 2004, basic and diluted earnings per share are computedusing the number of shares of Hospira common stock outstanding on April 30,2004, the date on which the Hospira common stock was distributed to theshareholders of Abbott.  On the spin-offdate, outstanding Abbott awards for non-retirement eligible Hospira employeeswere cancelled and replaced by new awards for Hospira common stock.  The new awards maintained both thepre-conversion aggregate intrinsic value of each award and the ratio of theexercise price per share to the market value per share.  Abbott awards granted to Hospira employeeswho were retirement eligible on the spin-off date remain options to purchaseAbbott stock and have no impact on Hospira share dilution.  The following table shows the effect of stockoptions on the weighted average number of shares outstanding used in calculatingdiluted earnings per share:

 

*(shares in thousands)*

 
| ** **                                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average common shares outstanding           |       | 156,059                              |       | 156,043                             |       | 156,054 |   | 156,043 |   |
| Assumed exercise of stock options                    |       | 613                                  |       | —                              |       | 569 |   | — |   |
| Weighted average dilutive common shares  outstanding |       | 156,672                              |       | 156,043                             |       | 156,623 |   | 156,043 |   |

 

For thethree and nine months ended September 30, 2004, there were outstanding optionsto purchase approximately 5.0 million shares of Hospira stock, for which theexercise price of the options exceeded the average stock price.  Accordingly, these options are excluded fromthe diluted earnings per share calculation for these periods.

 

**Note**** ****4 – Litigation**

 

Hospira’sproduct liability claim exposures are evaluated each reporting period.Hospira’s reserves, which are immaterial at September 30, 2004, are the bestestimate of loss, as defined by Statement of Financial Accounting Standards(SFAS) No. 5, “Accounting for Contingencies.”

 

Abbott isinvolved in various claims and legal proceedings, including product liabilityclaims and proceedings related to Hospira’s business, for which Hospira isrequired to indemnify Abbott.

 

Various state and federal agencies, includingthe U.S. Department of Justice and various state attorneys general, areinvestigating a number of pharmaceutical companies, including Abbott, forallegedly engaging in improper marketing and pricing practices with respect tocertain Medicare and Medicaid reimbursable products, including practicesrelating to average wholesale price (“AWP”).

These are civil investigations that areseeking to identify the practices and determine whether those practicesviolated any laws, including federal and state false claims acts, orconstituted fraud in connection with the Medicare and/or Medicaid reimbursementpaid to third parties.  In addition,Abbott is a defendant in a number of purported class actions on behalf ofindividuals or entities, including 

 

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health care insurers and other third-partypayors, that allege generally that Abbott and numerous other pharmaceuticalcompanies reported false or misleading pricing information in connection withfederal, state and private reimbursement for certain drugs.  Many of the products involved in theseinvestigations and lawsuits are Hospira products.  Hospira is cooperating with the authoritiesin these investigations. There may be additional investigations or lawsuits, oradditional claims in the existing investigations or lawsuits, initiated withrespect to these matters in the future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira has been added as a defendant in one AWP proceeding, *The State of Texas ex rel. Ven-A-Care of the FloridaKeys, Inc. v. Abbott Laboratories Inc., Hospira, Inc., B. Braun Medical Inc.and Baxter Healthcare Corporation,*Case No. GV401286, pending in theDistrict Court of Travis County, Texas. The lawsuit alleges generally that the defendants made falserepresentations of prices and costs for drugs directly and indirectly to theTexas Medicaid Program.  Abbott willindemnify Hospira for liabilities associated with pending or future AWPinvestigations and lawsuits only to the extent that they are of the same natureas the lawsuits and investigations that existed against Abbott as of thespin-off date and relate to the sale of Hospira products prior to thespin-off.  Hospira will assume any otherlosses that may result from these investigations and lawsuits.  These investigations and lawsuits couldresult in changes to Hospira’s business practices or pricing policies, civil orcriminal monetary damages, penalties or fines, imprisonment and/or exclusion ofHospira products from participation in federal and state healthcare programs,including Medicare, Medicaid and Veterans’ Administration health programs, anyof which, because of its obligation to indemnify Abbott or because Hospira maybe named as a defendant, could have a material adverse effect on its business,profitability and financial condition.

 

On November 8, 2004, Hospirareceived notification from Berlex, initiating an arbitration proceeding underHospira’s distribution contract with Berlex. Under the Hospira/Berlex contract,Hospira distributes Berlex’s imaging agents. Berlex has the option under the contract to initiate a “wind-down” ofthe contract prior to its expiration at the end of 2005. The dispute to beresolved by arbitration pertains to the effective date of Berlex’s initiationof the wind-down. No date has been set for the arbitration.

 

Hospira has been named as adefendant in a lawsuit brought by three employees alleging generally that thespin-off of Hospira from Abbott Laboratories adversely affected employeebenefits in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”).The lawsuit was filed on November 8, 2004 in the United States District Court forthe Northern District of Illinois, and is captioned: *Myla Nauman, Jane Roller and Michael Loughery v. Abbott Laboratoriesand Hospira, Inc*. The lawsuit seeks class action certification onbehalf of “All employees of Abbott who were participants and beneficiaries ofthe Abbott Benefit Plans whose employment with Abbott was terminated betweenAugust 22, 2003 and April 30, 2004, as a result of the spin-off announced byAbbott on August 22, 2003.” Hospira denies all material allegations assertedagainst it in the complaint.

 

Basedupon information that is currently available, management believes that thelikelihood of a material loss to Hospira is remote. In accordance with SFASNo. 5, no loss reserves have been recorded for these exposures.  Additional legal proceedings may occur thatmay result in a change in the estimated reserves recorded by Hospira. It is notfeasible to predict the outcome of such proceedings with certainty and therecan be no assurance that their ultimate disposition will not have a materialadverse effect on Hospira’s financial position, cash flows, or results ofoperations.

 

**Note 5 - Intangible Assets**

 

The grossamount of intangible assets, primarily product rights, was $25 million at bothSeptember 30, 2004 and December 31, 2003, and accumulated amortization was $23million and $20 million, respectively. Estimated annual amortization forintangible assets is $4 million for 2004 and $1 million for 2005. Intangibleassets are amortized on a straight-line basis over five to nine years (average5.7 years).

 

**Note 6 - Post-RetirementBenefits**

 

Retirement plans consist of defined benefit(“pension”), defined contribution, and post-retirement medical and dentalplans.   The pension and post-retirementmedical and dental plans cover certain U.S. employees as well as employees atvarious international locations.  Inconnection with the spin-off, Hospira and Abbott entered into an EmployeeBenefits Agreement, which provided that Abbott retain liabilities for pensionbenefits for U.S. non-union and international employees who were retired as ofthe spin-off date and liabilities for post-retirement medical and dentalbenefits for U.S. non-union employees who were retired or eligible to retire asof the spin-off date.

 

***Benefit Plan Changes***

 

As a result of its evaluation of its benefit programs,Hospira announced a series of benefit plan changes in the second quarter of2004.  These changes include theenhancement of the 401(k) defined contribution plan, the freezing of the U.S.non-union pension plan and the discontinuation of the U.S. non-unionpost-retirement medical and dental plan. The discontinuation of the U.S.non-union post-retirement medical and dental plan was effective May 1,2004.  Effective December 31, 2004, theU.S. non-union pension plan will be frozen. Eligible employees covered by the plan will continue to earn benefitsbased on pay and years of service through December 31, 2004 and will beentitled to all benefits earned when they retire.  Beginning January 1, 2005, all U.S. non-unionemployees will be eligible to receive an additional company-matchingcontribution to the 401(k) plan and employees that are age 40 and above, as ofDecember 31, 2004, will be eligible to receive an additional annualcompany-matching contribution for five years beginning in 2005.

 

***Net Pension andMedical and Dental Benefit Cost***

 

Net cost recognized for the three and nine monthsended September 30 for the major pension plans and post-retirement medical anddental benefit plans, is as follows:

 

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*(dollars in millions)*

* *
| ** **                                                | ** ** | **Pension Plans**                    | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                                | ** ** | **2004**                             | ** ** | **2003 (2)** | ** ** | **2004 (1)** | ** ** | **2003 (2)** | ** ** |
| * *                                                  | * *   | * *                             | * *   | * * |   | * * | * * | * * | * * |
| Service cost — benefits earned during  the year |       | $                                    | 3.9        |   | $ | 8.2 |   | $ | 18.6 |   | $ | 24.6 |   |
| Interest cost on projected benefit  obligations           |       | 5.2                                  |       | 10.8 |   | 24.4 |   | 32.4 |   |
| Expected return on plans’ assets                     |       | (7.0                                 | )          | (13.9 | ) | (28.6 | ) | (41.8 | ) |
| Net amortization                                          |       | 0.2                                  |       | — |   | 2.9 |   | 0.1 |   |
| Curtailment of benefits (3)                               |       | —                               |       | — |   | 1.5 |   | — |   |
|                                                      |       |                                 |       |   |   |   |   |   |   |
| Net pension cost                                          |       | $                                    | 2.3        |   | $ | 5.1 |   | $ | 18.8 |   | $ | 15.3 |   |
|                                                           |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

Notes

(1)          Thenet pension cost for nine months ended September 30, 2004 includes costs of $9.7million allocated from Abbott through the spin-off date for all Hospiraemployees, including U.S. non-union employees who were retired as of thespin-off date.  Subsequent to thespin-off, Abbott retained net pension costs for U.S. non-union employees whowere retired as of the spin-off date.

(2)          Thenet pension cost for the three and nine months ended September 30, 2003includes costs allocated from Abbott for all Hospira employees, including U.S.employees who were retired as of the spin-off date.

(3)          Thecurtailment charge represents previously unrecognized losses and prior servicecosts for which recognition is accelerated due to the freezing of the pensionplan.

 

*(dollars in millions)*

* *
| ** **                                                | ** ** | **Medical and Dental Plans**         | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended  September 30** | ** ** | **Nine months Ended  September 30** | ** ** |
| ** **                                                | ** ** | **2004 (4)**                         | ** ** | **2003 (2)** | ** ** | **2004 (1)(4)** | ** ** | **2003 (2)** | ** ** |
| * *                                                  | * *   | * *                             | * *   | * * | * * | * * | * * | * * | * * |
| Service cost — benefits earned during  the year |       | $                                    | 0.5        |   | $ | 2.4 |   | $ | 6.4 |   | $ | 8.5 |   |
| Interest cost on projected benefit  obligations           |       | 1.0                                  |       | 5.6 |   | 8.8 |   | 15.3 |   |
| Net amortization                                          |       | 0.8                                  |       | 0.4 |   | 2.0 |   | 1.3 |   |
| Curtailment of benefits (3)                               |       | —                               |       | — |   | (64.6 | ) | — |   |
|                                                      |       |                                 |       |   |   |   |   |   |   |
| Net medical and dental cost                               |       | $                                    | 2.3        |   | $ | 8.4 |   | $ | (47.4 | ) | $ | 25.1 |   |
|                                                           |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

Notes

(1)          Thenet medical and dental cost for nine months ended September 30, 2004 includescosts of $14.4 million allocated from Abbott for periods prior to the spin-offdate for all U.S. Hospira employees, including employees who were retired orretirement eligible as of the spin-off date. Subsequent to the spin-off, Abbottretained post-retirement medical and dental costs for Hospira U.S. non-unionemployees who were retired or eligible to retire as of the spin-off date.

(2)          Thenet medical and dental cost for the three and nine months ended September 30,2003 includes costs allocated from Abbott for all U.S. Hospira employees,including employees who were retired or eligible to retire as of the spin-offdate.

(3)          Thecurtailment gain results from the discontinuation of benefits for U.S.non-union employees that were not retired or eligible to retire as of thespin-off date.

(4)          InMay 2004, the Financial Accounting Standards Board issued Staff Position FASNo. 106-2, “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003,” which providesguidance to employers who determine the prescription drug benefits availableunder their plan are actuarially equivalent to Medicare Part D and thereforequalify for a subsidy.  As a result ofthe adoption of this new standard by Hospira in the second quarter, theprojected benefit obligation related to benefits attributed to past servicesfor the U.S. union plan was reduced by approximately $5.3 million, and the netcost recognized for the nine months ended September 30, 2004 was reduced by approximately$.4 million.

 

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Hospira’semployees also participated through the spin-off date in the Abbott StockRetirement Plan that is Abbott’s principal defined contribution plan, andthereafter in the Hospira 401(k) Retirement Savings Plan.  Hospira’s contributions to these definedcontribution plans for the three months ended September 30, 2004 and 2003 were $5.8million and $4.9 million, respectively. For the nine months ended September 30,2004 and 2003, contributions were $15.3 million and $14.1 million,respectively.

 

***Changes in BenefitObligations as of Spin-off Date***

 

As required underthe Employee Benefits Agreement between Hospira and Abbott, the projected andaccumulated benefit obligations and corresponding unrecognized actuariallosses, unrecognized prior service cost and unrecognized transition obligationwere re-measured as of the spin-off date. The allocation of the benefit obligations was based on the employeesretained by Abbott and Hospira on the spin-off date as discussed above.  The weighted average actuarial assumptionsused for the April 30, 2004 re-measurements remained consistent with those asof December 31, 2003, except for the discount rate, which was increased from6.0% to 6.25%

 

Summarizedinformation about the changes in benefit obligations and plan assets related tothe spin-off, for Hospira’s U.S. and international plans as of the spin-offdate is as follows:

 

*(dollarsin millions)*

 
| ** **                                                                 | ** ** | **Pension  Plans** | ** ** | **Medical and Dental Plans** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------|------------|------------------------------|------------|
|                                                                       |       |               |       |                         |       |
| Amounts retained by Abbott:                                                |       |               |       |                         |       |
|                                                                       |       |               |       |                         |       |
| Projected benefit obligation retained by  Abbott                           |       | $                  | 464.5      |                         | $          | 265.0 |   |
|                                                                       |       |               |       |                         |       |
| Assets retained by Abbott Trusts                                           |       | (445.1             | )          | —                       |       |
|                                                                       |       |               |       |                         |       |
| Unrecognized actuarial losses and prior  service costs retained by Abbott  |       | (150.3             | )          | (57.6                        | )          |
|                                                                       |       |               |       |                         |       |
| Net (prepaid) accrued balance retained by  Abbott                          |       | $                  | (130.9     | )                            | $          | 207.4 |   |
|                                                                       |       |               |       |                         |       |
| Amounts retained by Hospira:                                               |       |               |       |                         |       |
| Projected benefit obligation retained by  Hospira                          |       | $                  | 426.2      | (1)                          | $          | 116.5 | (2) |
|                                                                       |       |               |       |                         |       |
| Assets retained by Hospira Trusts                                          |       | (263.3             | )          | —                       |       |
|                                                                       |       |               |       |                         |       |
| Unrecognized actuarial losses and prior  service costs retained by Hospira |       | (145.1             | )(1)       | (30.9                        | )(2)       |
| Net accrued balance retained by Hospira                                    |       | $                  | 17.8       |                         | $          | 85.6 |   |
|                                                                            |            |                    |            |                              |            |  |  |  |

 

----

(1)          Dueto benefit plan changes, the pension plans’ projected benefit obligation andunrecognized actuarial losses and prior service costs were subsequently reducedby $95.5 and $97.1 million, respectively.

(2)          Dueto benefit plan changes, the medical and dental plans’ projected benefitobligation and unrecognized actuarial losses and prior service costs weresubsequently reduced by $84.3 and $19.7 million, respectively.  The net impact is $64.6 million related to theU.S. non-union post-retirement medical and dental plans, which was recognizedas a curtailment gain as noted above. The remaining net accrued balance relatesto Hospira’s union medical and dental plan.

 

As a result ofAbbott’s retention of the benefit obligations for the retirees as of thespin-off date, Hospira’s additional minimum pension liability was reduced by$76.8 million to $41.0 million.  Therelated accumulated other comprehensive loss was reduced by $47.3 million, with$23.2 million retained by Hospira, net of taxes. As of September 30, 2004,included in post-retirement and other long-term liabilities on the condensedconsolidated balance sheet are post-retirement and minimum pension relatedliabilities of $33.9 million and $41.1 million, respectively.

 

***Changes in PlanAssets and Cash Funding as of Spin-off Date***

 

Plan assets forthe primary U.S. pension plan of $215.1 million were transferred to theAbbott/Hospira Transitional Annuity Retirement Trust ( “Trust”) from the Abbottpension trust in the third quarter. The amount of the transfer was determinedin accordance with the assumptions dictated in ERISA section 4044 and theEmployee Benefits Agreement.

 

In accordance withthe Employee Benefits Agreement, Abbott was required to make a payment toHospira in an amount that caused the accumulated benefit obligation fundedratio of the Hospira plan to be equivalent to that of the Abbott plan as of thespin-off date. 

 

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Hospira receivedsuch payment, in the amount of $45 million, and contributed the entire amountto the Trust in the third quarter. Hospira funds its domestic pension plansaccording to IRS funding limitations. Hospira does not expect to contribute anyadditional amounts to its main U.S. pension plan in 2004.

 

**Note7 – Debt**

 

The following debtwas incurred either as a result of or since the spin-off from Abbott.  Hospira did not have debt prior to April 28,2004.

 

***$700 Million Short-term Senior Unsecured Credit Facility***

 

On April 28, 2004,Abbott and Hospira entered into a $700 million, short-term senior unsecuredcredit facility (“Senior Facility”). The borrowing bore interest at a rate ofLIBOR plus .875% and was repayable on or before April 27, 2005. The proceeds ofthe Senior Facility borrowing were retained by Abbott.  On the spin-off date, Abbott was relieved ofall obligations under the Senior Facility and Hospira became solely responsiblefor repayment of the principal and for payment of interest and fees on thisdebt.  On June 15, 2004, all amountsunder the Senior Facility were repaid with proceeds from the senior unsecurednotes, together with cash on hand.

 

***$375 Million Unsecured Revolving Credit Facility***

 

On April 30, 2004,Hospira entered into an unsecured revolving credit facility of $375 million(“Revolver”) that is available for working capital and other requirements.  The Revolver allows Hospira to borrow funds onan unsecured basis at variable interest rates as short-term cash needsdictate.  Borrowings under the Revolverinitially bear interest at LIBOR plus .575%, plus a utilization fee of .125% ifborrowings under the Revolver exceed $125 million.  Interest and the annual facility fee underthe Revolver are subject to increase or decrease if there is a change inHospira’s credit rating (currently BBB by Standard & Poor’s).  The maximum interest rate is LIBOR plus1.25%. The commitment is subject to an annual facility fee, initially .175%with a maximum fee of .375%, and expires in April 2009.  As of September 30, 2004, Hospira had noamounts outstanding under the Revolver.

 

***$700 Million Senior Unsecured Notes***

 

On June 15, 2004,Hospira completed an underwritten offering of a consolidated $700 millionaggregate principal amount consisting of $300 million five-year seniorunsecured notes at a price of 99.947 percent of par value and $400 millionten-year senior unsecured notes at a price of 99.731 percent of par value.  The $300 million five-year notes bearinterest at a rate of 4.95 percent per annum and mature on June 15, 2009 andthe $400 million ten-year notes bear interest at a rate of 5.90 percent perannum and mature on June 15, 2014.  The proceedsfrom this offering, together with cash on hand, were used to repay all amountsoutstanding under the Senior Facility. Subsequently, Hospira filed a registration statement with the SEC, whichwas declared effective on July 22, 2004. The exchange of unregistered for registered notes was completed onAugust 26, 2004.

 

The Revolver andSenior Unsecured Notes contain, among other provisions, covenants with whichHospira must comply while the underlying notes are outstanding. Such covenantsinclude obligations not to allow liens on properties or assets, merge orconsolidate with any other corporation, or sell or lease all or substantiallyall of Hospira’s assets, as well as compliance with certain financialcovenants, including interest coverage ratio, leverage ratio and minimumconsolidated net worth. As of September 30, 2004, Hospira was in compliancewith all such covenants.

 

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Hospira’s debt asof September 30, 2004 consists of the following (dollars in millions):

 
| ** **                                        | ** ** | **September 30,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2004**          | ** ** |
| Short-term borrowings:                            |       |              |       |
| $375 million unsecured revolving credit  facility |       | $                 | —     |   |
|                                              |       |              |       |
| Total short-term borrowings                       |       | —            |       |
|                                              |       |              |       |
| Long-term debt:                                   |       |              |       |
| Senior unsecured notes due 2009                   |       | 300               |       |
| Senior unsecured notes due 2014                   |       | 400               |       |
|                                              |       |              |       |
| Total long-term debt                              |       | 700               |       |
|                                              |       |              |       |
| Unamortized debt discount                         |       | (1                | )          |
|                                              |       |              |       |
| Long-term debt                                    |       | 699               |       |
|                                              |       |              |       |
| Total debt                                        |       | $                 | 699        |   |

 

**Note 8 - Comprehensive Income, net oftax**

 

*(dollars in millions)*

 
| ** **                                                 | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                       |       |                                |       |                               |       |   |   |   |   |
| Foreign currency translation gains (losses)                |       | $                                   | 1.5        |                               | $          | (17.3 | ) | $ | (37.9 | ) | $ | 18.0 |   |
| Minimum pension liability adjustment                       |       | —                              |       | —                             |       | 47.3 |   | — |   |
| Unrealized (losses) gains on marketable  equity securities |       | (0.7                                | )          | 0.7                                |       | — |   | 3.6 |   |
| Other comprehensive income                                 |       | 0.8                                 |       | (16.6                              | )          | 9.4 |   | 21.6 |   |
| Less effect of spin-off from Abbott                        |       | —                              |       | —                             |       | (48.5 | ) | — |   |
| Adjusted Other comprehensive (loss) income                 |       | 0.8                                 |       | (16.6                              | )          | (39.1 | ) | 21.6 |   |
| Net Income                                                 |       | 61.3                                |       | 66.8                               |       | 252.1 |   | 201.5 |   |
| Comprehensive Income                                       |       | $                                   | 62.1       |                               | $          | 50.2 |   | $ | 213.0 |   | $ | 223.1 |   |

 

 
| ** **                                                   | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
|                                                         |       |                   |       |                  |       |
| Cumulative foreign currency translation  gains               |       | $                      | 3.0        |                  | $          | 40.9 |   |
| Cumulative minimum pension liability  adjustments            |       | (23.2                  | )          | (70.5                 | )          |
| Cumulative unrealized gains on marketable  equity securities |       | 2.1                    |       | 2.1                   |       |
| Accumulated Other Comprehensive (Loss)                       |       | $                      | (18.1      | )                     | $          | (27.5 | ) |

 

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**Note 9 - Segment Information**

 

Hospira’sprincipal business is the development, manufacture and sale of a broad line ofhospital products including specialty injectable pharmaceuticals and medicationdelivery systems, and the provision of injectable pharmaceutical contractmanufacturing services. Hospira has two reportable segments: U.S. andInternational.

 

Hospira’sunderlying accounting records are maintained on a legal entity basis forgovernment and public reporting requirements. Segment disclosures are on aperformance basis consistent with internal management reporting. Certainimmaterial reclassifications have been made to the basis of presentation toreflect changes in internal management reporting. Intersegment transfers ofinventory are recorded at standard cost and are not a measure of segment incomefrom operations. The costs of some corporate functions are sold to segments atpredetermined rates that approximate cost. Remaining costs, if any, are notallocated.  The following segmentinformation has been prepared in accordance with the internal accountingpolicies of Hospira, as described above.

 

*(dollars in millions)*

 
| ** **                 | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                 | ** ** | **Net Sales**                       | ** ** | **Income from Operations**         | ** ** | **Net Sales** | ** ** | **Income from Operations** | ** ** |
| ** **                 | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004 (1)** | ** ** | **2003** | ** ** |
|                       |       |                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                       |       | $                                   | 557        |                               | $          | 553 |   | $ | 89 |   | $ | 83 |   | $ | 1,633 |   | $ | 1,639 |   | $ | 327 |   | $ | 253 |   |
|                       |       |                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| International              |       | 99                                  |       | 96                                 |       | $ | 22 |   | 20 |   | 312 |   | 293 |   | 74 |   | 63 |   |
| Total reportable segments  |       | $                                   | 656        |                               | $          | 649 |   | 111 |   | 103 |   | $ | 1,945 |   | $ | 1,932 |   | 401 |   | 316 |   |
| Corporate functions        |       |                                |       |                               |       | (17 | ) | (9 | ) |   |   |   |   | (41 | ) | (28 | ) |
| Income from operations     |       |                                |       |                               |       | 94 |   | 94 |   |   |   |   |   | 360 |   | 288 |   |
| Other                      |       |                                |       |                               |       | (6 | ) | 1 |   |   |   |   |   | (10 | ) | (2 | ) |
| Income before income taxes |       |                                |       |                               |       | $ | 88 |   | $ | 95 |   |   |   |   |   | $ | 350 |   | $ | 286 |   |

 

----

(1) 2004 U.S.Income from operations includes curtailment benefit of $65 million.

 

**Note 10 – Incentive Stock Programs**

 

Certain employees of Abbott who becameHospira employees following the spin-off held stock option awards granted underAbbott incentive stock programs.  Foremployees who were retirement eligible at the spin-off date, these awardsremain options to purchase Abbott stock and all terms of the options remain thesame.  For those employees who were notretirement eligible at the spin-off date, the awards were cancelled andreplaced by new awards (“converted options”) for Hospira common stock at thetime of the spin-off.  Approximately 7.5million options were issued as replacements for the cancelled Abbott awards.The converted options maintain both the pre-conversion aggregate intrinsicvalue of each award and the ratio of the exercise price per share to the marketvalue per share.  All other terms of theconverted options remain the same.

 

In May 2004, Hospira awarded a Founders Grantof 8.4 million options to substantially all employees in the United States andcertain international employees, at the fair market value at the time ofgrant.  These options generally vest insix months and have a five-year term for all employees except for those grantedto corporate officers, which vest over three years and have a ten-year term.

 

Hospira measures compensation cost using theintrinsic value-based method of accounting for stock options. In accordancewith this intrinsic value method, no compensation expense is recognized forHospira’s stock option plans. If the fair value method of accounting was usedfor the Abbott options, converted Hospira options, and Hospira Foundersoptions, net income and earnings per share (EPS) in the periods during 2004 and2003 would have been as follows:

 

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*(dollars in millions)*

 
| ** **                                                               | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Income, as reported                                                  |       | $                                    | 61.3       |                                | $          | 66.8 |   | $ | 252.1 |   | $ | 201.5 |   |
| Hospira stock-based compensation, net of  tax (1)                        |       | 17.2                                 |       | —                              |       | 29.2 |   | — |   |
| Pro-forma net income including Hospira  stock-based compensation expense |       | 44.1                                 |       | 66.8                                |       | 222.9 |   | 201.5 |   |
| Abbott stock-based compensation, net of tax  (2)                         |       | —                               |       | 5.4                                 |       | 7.1 |   | 16.3 |   |
| Pro-forma net income including all  stock-based compensation expense     |       | $                                    | 44.1       |                                | $          | 61.4 |   | $ | 215.8 |   | $ | 185.2 |   |
|                                                                     |       |                                 |       |                                |       |   |   |   |   |
| Basic EPS, as reported                                                   |       | $                                    | 0.39       |                                | $          | 0.43 |   | $ | 1.61 |   | $ | 1.29 |   |
| Basic EPS, pro forma                                                     |       | $                                    | 0.28       |                                | $          | 0.39 |   | $ | 1.38 |   | $ | 1.18 |   |
| Diluted EPS, as reported                                                 |       | $                                    | 0.39       |                                | $          | 0.43 |   | $ | 1.61 |   | $ | 1.29 |   |
| Diluted EPS, pro forma                                                   |       | $                                    | 0.28       |                                | $          | 0.39 |   | $ | 1.38 |   | $ | 1.18 |   |
|                                                                          |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Notes

(1)          For the three and nine months ended September 30, 2004, the Hospira proforma stock-based compensation expense, determined using the fair value methodfor stock-based awards, net of tax, includes $14.5 million and $24.5 million,respectively, for the Founders options, granted in May 2004, as well as $2.7million and $4.7 million for the converted options.

(2)          For periods prior to the spin-off, these amounts reflect the Abbottstock-based compensation for Hospira employees, whether or not those awardswere cancelled and replaced by Hospira awards at the time of the spin-off. Forperiods subsequent to the spin-off, Abbott awards for Hospira employees whowere not retirement eligible were converted to Hospira options, and only thecorresponding unvested portion of such awards impacts pro forma income.

 

The weighted average fair value for theHospira options granted in the three and nine months ended September 30, 2004was $6.91 and $6.61, respectively. The weighted average fair value for theAbbott options granted in the nine months ended September 30, 2004 was $11.79,and in the three and nine months ended September 30, 2003 was $8.73. The fairvalue was estimated using the Black-Scholes option-pricing model based on theweighted average market price at the grant date and the weighted averageassumptions specific to the underlying options. The historical Abbottassumptions relate to Abbott stock and are therefore based on Abbott’svaluation assumptions. The assumptions utilized for option grants during theperiods presented are as follows:

 
| ** **                                                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Hospira Stock Options Black-Scholes  assumptions (weighted average): |       |                                 |       |                                |       |   |   |   |   |
| Volatility                                                           |       | 32.0                                 | %          | N/A                                 |       | 32.0 | % | N/A |   |
| Expected Life (years)                                                |       | 2.5                                  |       | N/A                                 |       | 2.9 |   | N/A |   |
| Risk-free interest rate                                              |       | 2.75                                 | %          | N/A                                 |       | 2.9 | % | N/A |   |
| Dividend yield                                                       |       | 0.0                                  | %          | N/A                                 |       | 0.0 | % | N/A |   |
|                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Abbott Stock Options Black-Scholes  assumptions (weighted average):  |       |                                 |       |                                |       |   |   |   |   |
| Volatility                                                           |       | N/A                                  |       | 32                                  | %          | 32 | % | 32 | % |
| Expected Life (years)                                                |       | N/A                                  |       | 5.4                                 |       | 5.4 |   | 5.4 |   |
| Risk-free interest rate                                              |       | N/A                                  |       | 2.7                                 | %          | 2.9 | % | 2.7 | % |
| Dividend yield                                                       |       | N/A                                  |       | 2.8                                 | %          | 2.2 | % | 2.8 | % |

 

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**Note 11 –Relationship with Abbott**

 

Hospira operated as part of Abbott prior tothe spin-off date, during which time Abbott provided various services toHospira, which included, for example, administration of treasury, payroll andbenefits, accounts payable, public and investor relations, internal audit,telecommunications, computing services, corporate income tax and selected legalservices. The cost of these services was allocated to Hospira utilizing variousallocation methods including relative sales, headcount, square footage andnumber of transactions. Management believes that the methods used to allocateexpenses to Hospira were reasonable. In connection with the spin-off, Hospiraand Abbott entered into agreements pursuant to which Hospira and Abbott willprovide to the other, on an interim, transitional basis, various services,including, for example, internal audit, treasury administration, employeebenefits administration, information technology systems, distribution andquality assurance services. The agreed-upon charges for such services aregenerally intended to allow the servicing party to recover all out-of-pocketcosts plus a mark up.  The servicesgenerally commenced on the spin-off date and will terminate no later than24 months following the spin-off date. The receiving party may terminatethe agreement related to such services upon prior written notice. The net costof these various services to Hospira was approximately $4 million and $10million for the three and nine months ended September 30, 2004, respectively.Prior year amounts of $6 million and $18 million for the three and nine monthsended September 30, 2003, respectively, include only those costs that wereallocated to Hospira as a part of Abbott, including the costs related to leasesnoted below.

 

In addition, Hospira leases floor space incertain Abbott facilities. The terms of the leases range from two to ten years,unless terminated earlier by Hospira, and include additional services providedby Abbott. These additional services are integral to the facilities andprimarily include manufacturing support functions, quality assurance andinformation technology systems.  The costfor the leases and additional services for the three and nine months endedSeptember 30, 2004 was approximately $8 million and $22 million, respectively.

 

BothHospira and Abbott have provided and will continue to provide manufacturingservices to the other. Prior to the spin-off date, under Abbott’s and Hospira’sinternal reporting practices, these services were provided at cost to thepurchasing entity and Hospira’s sales to Abbott included the value of the bulkmaterial. Subsequent to the spin-off date, for manufacturing services providedto Abbott, Hospira records as revenue its costs plus a third-partymanufacturing profit and, for certain products, Hospira receives the bulkmaterial from Abbott and the mark up is on the value-added portion only.  Inventory that Hospira purchases from Abbottis at Abbott’s cost plus a third-party manufacturing profit. Sales to Abbottamounted to approximately $38 million and $134 million for the three and ninemonths ended September 30, 2004, respectively, and $51 million and $165 millionfor the three and nine months ended September 30, 2003, respectively. Productpurchases from Abbott were approximately $15 million and $55 million for thethree and nine months ended September 30, 2004, respectively, and $18 millionand $60 million for the three and nine months ended September 30, 2003,respectively.

 

Hospirais obligated to purchase certain international operations and assets, andassume the corresponding liabilities, from Abbott over a two-year period afterthe spin-off date as Hospira establishes its business infrastructure outsidethe United States and obtains regulatory approval for the transfer of themarketing authorizations for Hospira products to local Hospira affiliates orthird party distributors. The purchase price will be equal to the net bookvalue of those assets and liabilities at the time of such purchase.Accordingly, the net book value will be affected by normal operations, exchangerates and other business factors. Hospira pays Abbott interest on a portion ofthis purchase price at local prevailing short-term rates in connection withHospira’s use of these assets during that period. As of September 30, 2004, thenet book value of those assets and liabilities was approximately$262 million, of which $65 million is recorded as long-term. The net bookvalue is primarily comprised of accounts receivable of $105 million, inventoryof $92 million, equipment of $62 million and other, net of $3 million. Eachamount has been included in the corresponding balance sheet line item. Theamount due to Abbott for the net book value of assets and liabilities is offsetby $78 million of items that are due from Abbott related to the internationalbusiness. These items include amounts due for operating profits and inventorypurchases of Hospira products to support the international business.

 

Allcharges between Hospira and Abbott are included in Due to Abbott, Net on thebalance sheet.

 

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**Item2.  Management’s Discussion And Analysis Of FinancialCondition And Results Of Operations**

 

**Overview**

 

Hospirais a global specialty pharmaceutical and medication delivery company that isfocused on products that improve the safety and efficacy of patient care in theacute care setting.  Hospira is a globalleader in the development, manufacture and marketing of specialty injectablepharmaceuticals and medication delivery systems that deliver drugs andintravenous (I.V.) fluids. Hospira is also a leading provider of contractmanufacturing services to pharmaceutical and biotechnology companies forformulation development, filling and finishing of injectable pharmaceuticals.  Hospira’s broad portfolio of products is usedby hospitals, alternate site clinics, home healthcare providers and long-termcare facilities.

 

**Spin-off from Abbott Laboratories**

 

In August 2003, Abbott announced a plan to create aseparate publicly traded company consisting of its existing core hospitalproducts business.  On April 30, 2004,Abbott consummated the spin-off by paying a special dividend distribution ofall of the outstanding shares of common stock of Hospira, Inc. For every tenAbbott common shares held, Abbott shareholders received one share of Hospiracommon stock.  All of the shares ofHospira’s common stock were distributed to Abbott shareholders in a tax-freespin-off on a pro-rata basis. Abbott received a ruling from the Internal RevenueService that the spin-off qualified as a tax-free distribution forU.S. federal income tax purposes, except with respect to the spin-off of cashin lieu of fractional shares.

 

While thelegal transfer of certain operations and assets (net of liabilities) outsidethe United States will occur after the spin-off date, these operations andassets are used in the conduct of Hospira’s international business and Hospirais subject to the risks and entitled to the benefits generated by theoperations and assets. Hospira is dependent on Abbott’s internationalinfrastructure for up to two years after the spin-off date.

 

**2004 Third Quarter Events**

 

•                  Launchedin the United States the generic drug fluconazole on the day of patentexpiration, capturing an estimated initial share of more than 40 percent of thefluconazole injectable market.

 

•                  Addedfour new drug compounds to our generic injectables pipeline, scheduled forlaunch in 2007 and beyond.

 

•                  Received510k clearances for two medication management systems products, thereby pavingthe way for testing and eventual rollout. The products—the wireless, networkedversion of Hospira MedNetTM for Plum A+® and Hospira MedNet softwarefor our patient-controlled analgesia pumps—are scheduled for launch in thefirst quarter of 2005.

 

•                  Successfullyrelocated Hospira’s customer service organization and a distribution center tosouthern Wisconsin, thereby reducing operating costs.

 

•                  Announcedplans to introduce 40 new non-DEHP administration sets to our product line,increasing the company’s non-DEHP product portfolio by 50 percent from just twoyears ago.

 

•                  Addeda new board member.  William L. Weiss,chairman emeritus of Ameritech Corporation, was elected to the company’s boardof directors. The addition of Mr. Weiss expands Hospira’s board to eightdirectors, of whom seven are independent.

 

During the fourth quarter of 2004, Hospira receivednotification from Berlex that it was exercising the “wind-down” clause in itsagreement with Hospira to distribute Berlex’s imaging agents. This low-margindistribution contract, which expires at the end of 2005, contains a provisionthat enables Berlex to begin shifting distribution of its products from Hospirato another party prior to the expiration of the contract. The partiesdisagree as to when the wind-down period commenced. Berlex has initiatedthe alternative dispute resolution provision of the contract to resolve thisdisagreement.

 

Based upon Hospira’s interpretation of the contract,Hospira projects that its sales of these products will decline fromapproximately $200 million in 2004 to approximately $60 million to $70 millionin 2005. In addition, operating profits in 2005 related to these reduced salesare expected to be negatively affected by approximately $8 million to $9million.

 

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**Results of operations for the three months ended September30, 2004 compared to September 30, 2003**

 

*Net Sales*

 

Net salesincreased 1.0 percent in the third quarter of 2004 compared to the thirdquarter of 2003.  Of this increase, salesto third parties represented 3.1%, driven by volume/product mix of 4.5% andexchange of 0.5%, offset by price of (0.7%) and a gain on sale of paclitaxelproduct rights in 2003 of (1.2%).  Salesto Abbott had an unfavorable impact of (2.1%) on overall sales growth driven bythe exclusion of the bulk drug cost for certain products post-spin anddecreased demand.

 

Acomparison of product line sales is as follows:

 
| ** **                                        | ** ** | **Three Month Period Ended September 30** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| **(dollars in millions)**                         | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **Percent  Change vs.  Prior Year*** | ** ** |
| U.S. —                                       |       |                                      |       |   |   |   |   |
| Specialty Injectable Pharmaceuticals              |       | $                                         | 235        |   | $ | 216 |   | 8.6 |   |
| Medication Delivery Systems                       |       | 187                                       |       | 185 |   | 0.8 |   |
| Injectable Pharmaceutical Contract  Manufacturing |       | 46                                        |       | 38 |   | 22.9 |   |
| Sales to Abbott Laboratories                      |       | 24                                        |       | 43 | ** ** | (42.9 | ) |
| Other                                             |       | 65                                        |       | 71 |   | (9.0 | ) |
| Total U.S.                                        |       | 557                                       |       | 553 |   | 0.7 |   |
|                                              |       |                                      |       |   |   |   |   |
| International—                               |       |                                      |       |   |   |   |   |
| Sales to Third Parties                            |       | 85                                        |       | 88 |   | (2.6 | ) |
| Sales to Abbott Laboratories                      |       | 14                                        |       | 8 |   | 60.7 |   |
| Total International Sales                         |       | 99                                        |       | 96 |   | 2.9 |   |
| Consolidated Net Sales                            |       | $                                         | 656        |   | $ | 649 |   | 1.0 |   |

 

----

* Percentchange computed based on unrounded numbers

 

The sales increase in Specialty InjectablePharmaceuticals was primarily due to new products (fluconazole anddeferoxamine), a significant government order, and increased sales of Berleximaging agents, partially offset by a decline in Corlopam due to genericcompetition.  The sales increase in Medication Delivery Systems is driven by increasedsales in our medication management products, partially offset by flat sales forour infusion therapy products.  Thegrowth in medication management was driven by increased placements of Hospira’snewer technology PlumA+®, Gemstar® and Lifecare PCA®3 pumps**. **The sales increasein Injectable Pharmaceutical Contract Manufacturing is due to the impact of thesales ramp up related to supply agreements signed in 2003, as well as growth indemand for several existing supply agreements. The decrease in U.S. Sales to Abbott is primarily due to the exclusionof the cost of the bulk drug subsequent to the spin-off for certain productsmanufactured for Abbott, while 2003 included the cost of these bulk drugs.  This reflects the post spin-off manufacturingarrangement between Hospira and Abbott under which Abbott transfers the bulkdrug to Hospira for processing and Hospira’s sales include only the value-addedportion plus a markup for these products. In addition, reduced demand by Abbottfor several of its products contributed to the decline in sales. Thesereductions were partially offset by the markup on product sold to Abbott afterthe spin-off.  The decline in Other U.S.sales is primarily due to 2003 reflecting the gain on the sale of paclitaxelproduct rights and a decline in critical care products, partially offset by increasedsales to non-hospital healthcare customers. International Sales to Third Parties declined due to reduced emphasis ona low margin product and lower sales in critical care, partially offset byfavorable foreign exchange rates.****InternationalSales to Abbott in 2004 increased primarily due to volume related to anadditional product manufactured for Abbott subsequent to the spin-off, coupledwith the impact of the markup on products sold to Abbott after the spin-off.

 

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*Gross Profit*

 

Grossprofit increased approximately $13.8 million, or 7.7%, for the quarter endedSeptember 30, 2004, compared with the same period in 2003. Gross profit marginincreased to 29.5% for the third quarter of 2004, from 27.7% for the thirdquarter of 2003.

Theincreased margin is primarily the result of volume/product mix improvement of1.4%, and the markup on sales to Abbott in 2004, resulting in a margin increaseof 1.8%, compared to 2003 when sales were recorded at cost. These increaseswere partially offset by slightly lower prices of (0.5%) and a gain on sale ofpaclitaxel product rights in 2003 of (0.9%).

 

*Research and Development*

 

Researchand development expenses decreased approximately $1.7 million, or 5.8%, for thequarter ended September 30, 2004, compared with the same period in 2003. Thedecrease was due to reduced employee benefit costs as a result of the changesin benefit plans in 2004 along with spending in 2003 for external contractedservices for specific compliance projects, offset with increased spending fornew product development primarily related to our medication managementsystems.  Research and developmentexpenses decreased to 4.3% of net sales for the quarter ended September 30,2004, compared with 4.6% of net sales for the same period in 2003.

 

*Selling, General and Administrative*

 

Selling,general and administrative expenses increased approximately $15.0 million, or26.3%, for the quarter ended September 30, 2004, compared with the same periodin 2003. The increase was primarily due to additional costs related to becominga separate stand-alone company.  Thesecosts include the establishment of corporate functions, legal and otherprofessional services, insurance, information technology and costs relating toestablishing business infrastructure outside the United States. The increase incosts was partially offset by reduced employee benefit costs as a result of thechanges in benefit plans. Selling, general and administrative expensesincreased to 11.0% of net sales for the quarter ended September 30, 2004,compared with 8.8% of net sales for the same period in 2003.

 

*Interest and Other Expense (Income), Net*

 

Interestand other expenses, net increased approximately $7.2 million for the quarterended September 30, 2004, compared with the same period in 2003. The increasewas primarily due to interest relating to short-term borrowings and theissuance of the senior unsecured notes, which were issued to repay the seniorunsecured credit facility that Hospira incurred in 2004 as part of thespin-off.

 

*Income Tax Expense*

 

Theeffective tax rate was 30.5% for the quarter ended September 30, 2004 comparedto 29.5% for the same period in 2003. Hospira estimates its 2004 annualeffective tax rate to be 26%, excluding the effect of significant unusualitems.  The effective tax rates are lessthan the statutory U.S. federal income tax rate principally due to the benefitof tax exemptions, of varying durations, in several taxing jurisdictions.  The effective tax rate in the third quarterof 2004 was higher than the rate in the same period in 2003 as a result of achange in the original estimated 2004 annual effective tax rate from 24% to26%. This change is due to higher than expected earnings in the U. S., whichhas a higher tax rate than foreign jurisdictions.

 

**Results of operations for the ninemonths ended September 30, 2004 compared to September 30, 2003**

 

*Net Sales*

 

Net sales increased 0.7 percent in the ninemonths ended September 30, 2004 compared to the nine months ended September 30,2003.  Of this increase, sales to thirdparties represented 2.3%, driven by volume/product mix of 2.6% and exchange of0.9%; offset by price of (0.8%) and a gain on sale of paclitaxel product rightsin 2003 of (0.4%). Sales to Abbott had an unfavorable impact of (1.6%) onoverall sales growth driven by the exclusion of the bulk drug cost for certainproducts post-spin and decreased demand.

 

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Acomparison of product line sales is as follows:

 
| *** ***                         | ** ** | **Nine Month Period Ended September 30** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| **(dollars in millions)**            | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **Percent  Change vs.  Prior Year*** | ** ** |
| U.S. —                          |       |                                     |       |   |   |   |   |
| Specialty Injectable Pharmaceuticals |       | $                                        | 661        |   | $ | 642 |   | 3.0 |   |
| Medication Delivery Systems          |       | 566                                      |       | 546 |   | 3.6 |   |
| Injectable Pharmaceutical Contract   |       |                                     |       |   |   |   |   |
| Manufacturing                        |       | 130                                      |       | 118 |   | 10.0 |   |
| Sales to Abbott Laboratories         |       | 95                                       |       | 137 | ** ** | (30.7 | ) |
| Other                                |       | 181                                      |       | 196 |   | (7.3 | ) |
| Total U.S.                           |       | 1,633                                    |       | 1,639 |   | (0.3 | ) |
|                                 |       |                                     |       |   |   |   |   |
| International—                  |       |                                     |       |   |   |   |   |
| Sales to Third Parties               |       | 273                                      |       | 265 |   | 2.8 |   |
| Sales to Abbott Laboratories         |       | 39                                       |       | 28 |   | 39.9 |   |
| Total International Sales            |       | 312                                      |       | 293 |   | 6.3 |   |
| Consolidated Net Sales               |       | $                                        | 1,945      |   | $ | 1,932 |   | 0.7 |   |

 

----

* Percentchange computed based on unrounded numbers

 

The sales increase in Specialty InjectablePharmaceuticals was primarily due to increased sales of Berlex imaging agents,new products (fluconazole and deferoxamine), a significant government order,and increased sales of Precedex; partially offset by a decline in Corlopam dueto generic competition.  The salesincrease in Medication Delivery Systems is driven by growth in both medicationmanagement and infusion therapy products. The growth in medication management was due to increased placements ofHospira’s newer technology PlumA+®, Gemstar® and Lifecare PCA®3 pumps.  The increase in infusion therapy productsales was driven by higher volumes, partially offset by price.** **The salesincrease in Injectable Pharmaceutical Contract Manufacturing is primarily dueto the impact of the sales ramp up related to supply agreements signed in 2003,as well as growth in demand for several existing supply agreements. Thedecrease in U.S. Sales to Abbott is primarily due to the exclusion of the costof the bulk drug subsequent to the spin-off for certain products manufacturedfor Abbott, while 2003 included the cost of these bulk drugs.  This reflects the post spin-off manufacturingarrangement between Hospira and Abbott under which Abbott transfers the bulkdrug to Hospira for processing and Hospira’s sales include only the value-addedportion plus a markup for these products. In addition, reduced demand by Abbott for several of its productscontributed to the decline in sales. These reductions were partiallyoffset by the markup on product sold to Abbott after the spin-off. The declinein Other U.S. sales is primarily due to 2003 reflecting the gain on the sale ofpaclitaxel product rights as well as the related loss of paclitaxel salesresulting from the divestiture of the related product rights; a decline incritical care products, and the wind-down of the home infusion product line in2003; partially offset by increased sales to non-hospital healthcare customersand 2003 being negatively impacted by a product recall.  InternationalSales to Third Parties increased due to favorable foreign exchange rates,partially offset by reduced emphasis on a low margin product and lower sales incritical care. International Sales to Abbott in 2004 increased primarilydue to volume related to an additional product manufactured for Abbottsubsequent to the spin-off, coupled with the impact of the markup on productssold to Abbott after the spin-off.

 

*Gross Profit*

 

Grossprofit increased approximately $44.2 million, or 8.4%, for the nine monthsended September 30, 2004, compared with the same period in 2003. Gross profitmargin increased to 29.5% for the first nine months of 2004, from 27.4% for thefirst nine months of 2003. The increased margin is primarily the result ofvolume/product mix improvement of 0.9%, the impact in 2003 of a product recallof 0.6% and the markup on sales to Abbott in 2004 resulting in a marginincrease of 1.1%, compared to 2003 when sales were recorded at cost. Theseincreases were offset by slightly lower prices of (0.7%) and a gain on sale ofpaclitaxel product rights in 2003 of (0.3%).

 

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*Research and Development*

 

Research and development expenses increasedapproximately $7.5 million, or 10.3%, for the nine months ended September 30,2004, compared with the same period in 2003. The increase was due to spendingassociated with new product development primarily related to our medicationmanagement systems and generic pharmaceutical development in 2004, offset byreduced employee benefit costs as a result of the changes in benefit plans in2004 and spending in 2003 for external contracted services for specificcompliance projects. Research and development expenses increased to 4.1% of netsales for the nine months ended September 30, 2004, compared with 3.8% of netsales for the same period in 2003.

 

*Selling, General and Administrative*

 

Selling, general and administrative expenses increasedapproximately $28.4 million, or 16.9%, for the nine months ended September 30,2004, compared with the same period in 2003. The increase was primarily due toadditional costs related to becoming a separate stand-alone company.  These costs include the establishment ofcorporate functions, legal and other professional services, insurance,information technology and costs relating to establishing businessinfrastructure outside the United States. The increase in costs was partiallyoffset by reduced employee benefit costs as a result of the changes in benefitplans. Selling, general and administrative expenses increased to 10.1% of netsales for the nine months ended September 30, 2004, compared with 8.7% of netsales for the same period in 2003.

 

*Curtailment of Post-retirement Medical and Dental Benefits*

 

In thesecond quarter of 2004, Hospira evaluated its retirement benefit programs andannounced a series of benefit plan changes, which included the discontinuationof the U.S. non-union post-retirement medical and dental plan. The effect ofthe discontinuation of the post-retirement medical and dental plan was anon-cash pre-tax benefit of $64.6 million.

 

*Interest and Other Expense (Income), Net*

 

Interest and other expenses, net increasedapproximately $7.9 million for the nine months ended September 30, 2004,compared with the same period in 2003. The increase was primarily due tointerest relating to short-term borrowings and the senior unsecured notes,which were issued to repay the senior unsecured credit facility that Hospiraincurred in 2004 as part of the spin-off, offset by losses in 2003 on an equityinvestment retained by Abbott.

 

*Income Tax Expense*

 

Theeffective tax rate for the nine months ended September 30, 2004 was 28.1%,compared to 29.5% for the same period in 2003. The effective tax rates are less than the statutory U.S. federal incometax rate principally due to the benefit of tax exemptions, of varyingdurations, in several taxing jurisdictions. Hospira estimates its 2004 annual effective tax rate to be 26%,excluding the effect of significant unusual items. The effective tax rate for thenine months ended September 30, 2004 includes the impact of a significantunusual item, the curtailment of the post-retirement medical and dental plannoted above.  Excluding the effect of thecurtailment, the effective rate for the first nine months of 2004 was lowerthan the rate in the same period in 2003 primarily due to a greater portion ofincome derived from operations in jurisdictions with tax exemptions.

 

**Costs toOperate as an Independent Company**

 

As part of becoming an independent company, Hospirawill incur additional non-recurring transitional expenses to establishcorporate headquarters, international infrastructure and independent computersystems. These costs are estimated to total approximately $100 million ofpretax expense over the 24-month period subsequent to the spin-off from Abbott.As of September 30, 2004, Hospira has incurred approximately $14.9 million ofthese costs.

 

**Liquidity and Capital Resources atSeptember 30, 2004 compared with December 31, 2003**

 

Prior to the spin-off, Hospira, as part ofAbbott, did not hold cash, and the related transactions with Abbott werereflected in the condensed consolidated statement of cash flows in thefinancing section as “Net transactions with Abbott Laboratories.”  Subsequent to the spin-off, Hospira retainscash and cash equivalents, which primarily include demand deposits with banksor other financial institutions.

 

Net Cash From Operating Activities, whichcontinues to be Hospira’s primary source of funds to finance operating needsand capital expenditures, was $286 million for the nine-month period endedSeptember 30, 2004. The cash inflow from working capital is due primarily toincreases in accrued liabilities related to accrued interest, and to variousrebate, benefit and insurance programs, offset by increases in receivables. Thechange in Other, net in operating cash flow primarily included cash inflow fromtax provisions net of

 

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cash payments, and cash outflow fromcontributions to post-retirement plans, net of provisions.

 

Net Cash Used in Investing Activities of $169million included payments for upgrading and expanding manufacturing and administrativesupport facilities, information technology systems and for equipment placedwith customers.

 

Net Cash Provided by Financing Activities of$18 million consisted primarily of net transactions with Abbott previous to andrelated to the spin-off, receipt of the pension payment from Abbott in thethird quarter related to the employee benefit agreement requirements at thespin-off date, and the issuance and payment of short-term and long-term debt,net of discount and financing fees. Operational transactions with Abbott after the spin-off are included inoperating cash flows.

 

At September 30, 2004, Hospira’s workingcapital was approximately $629 million, compared to working capital ofapproximately $716 million at December 31, 2003.  The decrease in working capital in 2004 wasmainly due to the current portion of “Due to Abbott, Net,” which is primarilyrelated to the liability for the international net assets to be purchased fromAbbott, increases in accrued liabilities, and decreases in inventory, offset byan increase in cash and cash equivalents, trade receivables, and currentdeferred income taxes.   The increase incash is due primarily to five months of cash flow from operations beingretained by Hospira that prior to the spin-off would have been remitted toAbbott.

 

Hospira expects annual Net Cash FromOperating Activities for 2004 to be between $300 and $350 million.  Annual capital expenditures for 2004 areexpected to be approximately $250 million, including transition-relatedcapital expenditures, such as the construction of a new research anddevelopment facility and building an information technology infrastructure.

 

Hospira believes that current cash and cashequivalents, cash generated from operations, and funds available from ourrevolving credit facility will be sufficient to finance our operations,including product development, transition costs, international net assetacquisitions, and capital expenditures.

 

On June 15, 2004, Hospira completed anunderwritten offering of a consolidated $700 million aggregate principal amountconsisting of $300 million five-year senior unsecured notes and $400 millionten-year senior unsecured notes.  The$300 million five-year notes bear interest at a rate of 4.95 percent per annumand mature on June 15, 2009 and the $400 million ten-year notes bear interestat a rate of 5.90 percent per annum and mature on June 15, 2014.  The proceeds from this offering, togetherwith cash on hand, were used to repay all amounts outstanding under the $700million, short-term senior unsecured credit facility (“Senior Facility”).  Subsequently, Hospira filed a registrationstatement with the SEC, which was declared effective on July 22, 2004.  The exchange of unregistered for registerednotes was completed on August 26, 2004.

 

On April 28, 2004, Abbott and Hospira enteredinto the Senior Facility.  The proceedsof the Senior Facility were retained by Abbott. On the spin-off date, Abbott was relieved of all obligations under theSenior Facility and Hospira became solely responsible for repayment of theprincipal and for payment of interest and fees on this debt.  On June 15, 2004, all amounts under theSenior Facility were repaid with proceeds from the senior unsecured notes,together with cash on hand.

 

Hospira’s credit facility, entered into onApril 30, 2004, consists of an unsecured revolving credit facility of $375million (“Revolver”) that is available for working capital and otherrequirements.  The Revolver allowsHospira to borrow funds on an unsecured basis at variable interest rates asshort-term cash needs dictate.  Borrowingsunder the Revolver initially bear interest at LIBOR plus .575%, plus autilization fee of .125% if borrowings under the Revolver exceed $125million.  Interest and the annualfacility fee under the Revolver are subject to increase or decrease if there isa change in Hospira’s credit rating (currently BBB by Standard &Poor’s).  The maximum interest rate isLIBOR plus 1.25%. The commitment is subject to an annual facility fee,initially .175% with a maximum fee of .375%, and expires in April 2009.   As of September 30, 2004, Hospira had noamounts outstanding under the Revolver.

 

The Revolver andSenior Unsecured Notes contain, among other provisions, covenants with whichHospira must comply while the underlying notes are outstanding. Such covenantsinclude obligations not to allow liens on properties or assets, merge orconsolidate with any other corporation, or sell or lease all or substantiallyall of Hospira’s assets, as well as compliance with certain financialcovenants, including interest coverage ratio, leverage ratio and minimumconsolidated net worth. As of September 30, 2004, Hospira was in compliancewith all such covenants.

 

Hospira is obligated to purchase certaininternational operations and assets, and assume the corresponding liabilities,from Abbott over a two-year period after the spin-off date as Hospiraestablishes its business infrastructure outside the United States and obtainsregulatory approval for the transfer of the marketing authorizations forHospira products to local Hospira affiliates or third party distributors. Thepurchase price will be equal to the net book value of those assets andliabilities at the time of such purchase. Accordingly, the net book value willbe affected by normal operations, exchange rates and other business factors.Hospira pays Abbott interest on a portion of this purchase price at localprevailing short-term rates in connection with Hospira’s use of these assetsduring that period. Hospira expects to fund these net asset purchases fromoperating cash flow. As of September 30, 2004, the net book value of thoseassets and liabilities was approximately $262 million. The amount owed forthe net book value of assets and liabilities is offset by $78 million of itemsthat are due from Abbott related to the international business. These itemsinclude amounts due for operating profits and inventory purchases of Hospiraproducts to support the international business. 

 

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**Contractual Obligations**

 

Hospirahas no material exposures to off-balance sheet arrangements, no special purposeentities, and no activities that include non-exchange-traded contractsaccounted for at fair value.

 

Thefollowing table summarizes Hospira’s estimated contractual obligations as ofSeptember 30, 2004 (dollars in millions):

 
| ** **                                                                     | ** ** | **Payment Due by Period** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                     | ** ** | **Total**                 | ** ** | **2004** | ** ** | **2005-2006** | ** ** | **2007-2008** | ** ** | **2009 and  Thereafter** | ** ** |
| Short-term borrowings                                                          |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt                                                                 |       | 700.0                     |       | — |   | — |   | — |   | 700.0 |   |
| Lease obligations                                                              |       | 160.4                     |       | 5.7 |   | 37.9 |   | 30.3 |   | 86.5 |   |
| Purchase commitments (1)                                                       |       | 230.9                     |       | 166.6 |   | 64.1 |   | 0.2 |   | — |   |
| Other long-term liabilities reflected on  the consolidated balance sheet (2)   |       | 11.7                      |       | — |   | 11.7 |   | — |   | — |   |
| Amounts due to Abbott for acquisition of certain  international net assets (3) |       | 262.2                     |       | 157.8 |   | 104.4 |   | — |   | — |   |
| Total                                                                          |       | $                         | 1,365.2    |   | $ | 330.1 |   | $ | 218.1 |   | $ | 30.5 |   | $ | 786.5 |   |

 

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(1)                                  Purchasecommitments consist primarily of inventory purchases made in the normal courseof business to meet operational requirements.

(2)                                  Excludesapproximately $74.8 million of other long-term liabilities related primarily topost-retirement benefit plans.

(3)                                  Theamount due to Abbott for the acquisition of certain international net assetsexcludes an offsetting amount of $78 million for items that are due from Abbottrelated to the international business. These include amounts due for operatingprofits and inventory purchases of Hospira products to support theinternational business.

 

**Legislative Issues**

 

Hospira’s primary markets are highly competitive andsubject to substantial government regulation. Hospira expects debate tocontinue at both the federal and state levels over the availability, method ofdelivery, reporting requirements and payment for health care products andservices. If additional legislation is enacted, it could have the effect ofreducing prices, or reducing the rate of price increases, for medical productsand services. International operations are also subject to a significant degreeof government regulation. It is not possible to predict the extent to whichHospira or the health care industry in general might be adversely affected bythese factors in the future. 

 

**Emerging Industry Trends**

 

Certain drug wholesalers have announced theirintentions to implement a fee-for-service model for the distribution ofpharmaceutical products in 2005. Hospira is evaluating the potential impact ofthis possible change in the drug wholesale business model.

 

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**Private Securities Litigation ReformAct of 1995 — A Caution Concerning Forward-Looking Statements**

 

Under the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995, Hospira cautions investors that anyforward-looking statements or projections made by Hospira, including those madein this document, are subject to risks and uncertainties that may cause actualresults to differ materially from those projected. In some cases, thesestatements can be identified by use of forward-looking words such as “may,” “will,”“should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,”“project,” “intend,” “could,” or similar expressions. In particular, statementsregarding Hospira’s plans, strategies, prospects and expectations regardingHospira’s business as an independent public company are forward-lookingstatements. Please be aware that these statements and any other forward-lookingstatements in this document only reflect Hospira’s expectations and are notguarantees of performance. These statements involve risks, uncertainties andassumptions. Many of these risks, uncertainties and assumptions are beyondHospira’s control, and may cause actual results and performance to differmaterially from Hospira’s expectations.

 

Economic,competitive, governmental, technological and other factors that may affectHospira’s operations are discussed in the information statement included as anexhibit in Hospira’s registration statement on Form 10, which the Securitiesand Exchange Commission declared effective on April 13, 2004. Accordingly,undue reliance should not be placed on the forward-looking statements containedin this document. These forward-looking statements speak only as of the date onwhich the statements were made. Hospira undertakes no obligation to update or revisepublicly any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**Item3.  Quantitative And QualitativeDisclosures About Market Risk**

 

Therehave been no material changes to the information provided in the informationstatement included as an exhibit in Hospira’s registration statement on Form10, which the Securities and Exchange Commission declared effective on April13, 2004.

 

**Item4.    Controls and Procedures**

 

(a)          *Evaluation of disclosure controlsand procedures. *The Chief Executive Officer, ChristopherB. Begley, and Chief Financial Officer, Terrence C. Kearney, evaluated theeffectiveness of Hospira’s disclosure controls and procedures as of the end ofthe period covered by this report, and concluded that Hospira’s disclosurecontrols and procedures were effective to ensure that information Hospira isrequired to disclose in its filings with the Securities and Exchange Commissionunder the Securities Exchange Act of 1934 is recorded, processed, summarized andreported, within the time periods specified in the Commission’s rules andforms, and to ensure that information required to be disclosed by Hospira inthe reports that it files under the Exchange Act is accumulated andcommunicated to Hospira’s management, including its principal executive officerand principal financial officer, as appropriate to allow timely decisionsregarding required disclosure.

 

(b)   *Changes in internalcontrols. *During Hospira'smost recent fiscal quarter, there was no change in Hospira's internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, Hospira's internal control over financial reporting.

* *

 

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.****                          ****Legal Proceedings**

 

Various state and federal agencies, includingthe U.S. Department of Justice and various state attorneys general, areinvestigating a number of pharmaceutical companies, including Abbott, forallegedly engaging in improper marketing and pricing practices with respect tocertain Medicare and Medicaid reimbursable products, including practicesrelating to average wholesale price (“AWP”). These are civil investigations that are seeking to identify thepractices and determine whether those practices violated any laws, includingfederal and state false claims acts, or constituted fraud in connection withthe Medicare and/or Medicaid reimbursement paid to third parties.  In addition, Abbott is a defendant in anumber of purported class actions on behalf of individuals or entities,including health care insurers and other third-party payors, that allegegenerally that Abbott and numerous other pharmaceutical companies reportedfalse or misleading pricing information in connection with federal, state andprivate reimbursement for certain drugs. Many of the products involved in these investigations and lawsuits areHospira products.  Hospira is cooperatingwith the authorities in these investigations**.**There may be additional investigations or lawsuits, or additionalclaims in the existing investigations or lawsuits, initiated with respect tothese matters in the future.  Hospiracannot be certain that it will not be named as a subject or defendant in theseinvestigations or lawsuits.  Hospira hasbeen added as a defendant in one AWP proceeding, *The State of Texas ex rel. Ven-A-Care of the Florida Keys, Inc. v.Abbott Laboratories Inc., Hospira, Inc., B. Braun Medical Inc. and BaxterHealthcare Corporation,*Case No. GV401286, pending in the DistrictCourt of Travis County, Texas.  Thelawsuit alleges generally that the defendants made false representations ofprices and costs for drugs directly and indirectly to the Texas MedicaidProgram.  Abbott will indemnify Hospirafor liabilities associated with pending or future AWP investigations andlawsuits only to the extent that they are of the same nature as the lawsuitsand investigations that existed against Abbott as of the spin-off date andrelate to the sale of Hospira products prior to the spin-off.  Hospira will assume any other losses that mayresult from these investigations and lawsuits. These investigations and lawsuits could result in changes to Hospira’sbusiness practices or pricing policies, civil or criminal monetary damages,penalties or fines, imprisonment and/or exclusion of Hospira products fromparticipation in federal and state healthcare programs, including Medicare,Medicaid and Veterans’ Administration health programs, any of which, because ofits obligation to indemnify Abbott or because Hospira may be named as adefendant, could have a material adverse effect on its business, profitabilityand financial condition.

 

On November 8, 2004, Hospirareceived notification from Berlex, initiating an arbitration proceeding underHospira’s distribution contract with Berlex. Under the Hospira/Berlex contract,Hospira distributes Berlex’s imaging agents. Berlex has the option under the contract to initiate a “wind-down” ofthe contract prior to its expiration at the end of 2005. The dispute to beresolved by arbitration pertains to the effective date of Berlex’s initiationof the wind-down. No date has been set for the arbitration.

 

Hospira has been named as adefendant in a lawsuit brought by three employees alleging generally that thespin-off of Hospira from Abbott Laboratories adversely affected employeebenefits in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”).The lawsuit was filed on November 8, 2004 in the United States District Courtfor the Northern District of Illinois, and is captioned: *Myla Nauman, Jane Roller and Michael Loughery v.Abbott Laboratories and Hospira, Inc*. The lawsuit seeks class actioncertification on behalf of “All employees of Abbott who were participants andbeneficiaries of the Abbott Benefit Plans whose employment with Abbott wasterminated between August 22, 2003 and April 30, 2004, as a result of thespin-off announced by Abbott on August 22, 2003.” Hospira denies all materialallegations asserted against it in the complaint.

 

Additionallegal proceedings may occur that may result in a change in the estimatedreserves recorded by Hospira. It is not feasible to predict the outcome of suchproceedings with certainty and there can be no assurance that their ultimatedisposition will not have a material adverse effect on Hospira’s financialposition, cash flows, or results of operations.

 

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**Item 2.    Changes in Securities and Use of Proceeds**

 

(c)          Issuer Purchases of Equity Securities

 

The attached table gives information on amonthly basis regarding purchases made by Hospira of its common stock.

 
| **Period**                     | ** ** | **Total Number of  Shares Purchased  (1)(2)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares that  May Yet be Purchased  Under the Plans or  Programs** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| July 1-July 31, 2004           |       | 199                                           |       | 28.54                              |       | —                                                                                     |       | —                                                                                                                |       |
| August 1-August 31, 2004       |       | —                                        |       | —                             |       | —                                                                                     |       | —                                                                                                                |       |
| September 1-September 30, 2004 |       | 9,599                                         |       | 29.64                              |       | —                                                                                     |       | —                                                                                                                |       |
| Total                          |       | 9,798                                         |       | 29.62                              |       |                                                                                       |       |                                                                                                                  |       |

 

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(1)          These shares represent the shares deemed surrendered to Hospira to paythe exercise price and satisfy tax withholding obligations in connection withthe exercise of employee stock options.

 

(2)          There was no activity for the period January 2004 through June 2004.

 

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**Item6.    Exhibits**

 

(a)           Exhibits

 
| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                    |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1             |   | Hospira,  Inc. Non-Employee Directors’ Fee Plan.                                                                                              |
|             |   |                                                                                                                                               |
| 12               |   | Computation  of Ratio of Earnings to Fixed Charges.                                                                                                |
|             |   |                                                                                                                                               |
| 31.1             |   | Certificate  of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                |
|             |   |                                                                                                                                               |
| 31.2             |   | Certificate  of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                |
|             |   |                                                                                                                                               |
| 32.1             |   | Certificate  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|             |   |                                                                                                                                               |
| 32.2             |   | Certificate  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

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SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                          | HOSPIRA, INC. |
|-------------------------------|---------------|
|                          |          |   |
|                          |          |   |
|                          | By:           |   | /s/  Terrence C. Kearney |
|                          |          |   | Terrence C. Kearney, |
|                          |          |   | Senior Vice President,  Finance and Chief Financial  Officer |
|                          |          |   |
|                          |          |   |
| Date:  November 10, 2004 |          |   |

 

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