SEC Filing - CooperCompanies

- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 COMMISSION FILE NO. 1-8597 ------------------------ THE COOPER COMPANIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 94-2657368 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) 6140 STONERIDGE MALL ROAD, SUITE 590 94588 PLEASANTON, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 510-460-3600 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------- ------------------------ Common Stock, $.10 Par Value, and New York Stock Exchange associated Rights Pacific Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 1997: Common Stock, $.10 Par Value--$589,841,619. Number of shares outstanding of the registrant's common stock, as of December 31, 1997: 14,799,705. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENT PART OF FORM 10-K - --------------------------------------------------------- ----------------- Portions of the Annual Report to Stockholders for the Parts I and II fiscal year ended October 31, 1997 Portions of the Proxy Statement for the Annual Meeting of Part III Stockholders to be held April 2, 1998 - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. INTRODUCTION The Cooper Companies, Inc. ('TCC' or the 'Company'), through its primary subsidiaries, CooperVision, Inc. ('CVI'), CooperSurgical ('CSI'), Inc. and Hospital Group of America, Inc. ('HGA'), develops, manufactures and markets healthcare products, including a range of contact lenses, diagnostic and surgical instruments and equipment, and provides healthcare services through the ownership and operation of psychiatric facilities. TCC is a Delaware corporation, which was organized on March 4, 1980. FORWARD-LOOKING STATEMENTS Statements in this report that are not based on historical fact may be 'forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as 'may,' 'will,' 'expect,' 'estimate,' 'anticipate,' 'continue' or similar terms. Actual results could differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include: major changes in business conditions and the economy in general, loss of key members of senior management, any prolonged disruption in the operations of the Company's manufacturing facilities or hospitals, inroads by new competitors or technologies, cost to integrate acquisitions, potential foreign exchange exposure, decisions to invest in research and development and other start-up projects, dilution to earnings per share associated with acquisitions or stock issuances, regulatory issues, unexpected changes in reimbursement rates and payor mix, environmental clean-up costs above those already accrued, litigation and decisions to divest businesses. Future results are also dependent on each of the Company's business units meeting specific objectives. GENERAL DESCRIPTION AND DEVELOPMENT OF BUSINESSES The information required for these items is contained under the caption 'Business Operations' in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. RESEARCH AND DEVELOPMENT During the fiscal years ended October 31, 1997, 1996 and 1995, expenditures for Company-sponsored research and development were $1.7 million, $1.2 million and $2.9 million, respectively. During fiscal 1997, CooperVision incurred approximately 54% and CooperSurgical incurred approximately 46% of total research and development expenditures. No customer-sponsored research and development has been conducted. The Company employs 15 people in its research and development and manufacturing engineering departments. Outside specialists in lens designs formulation science, polymer chemistry, microbiology and biochemistry support product development and clinical research for CooperVision products. Research and development for CooperSurgical is conducted in-house and by outside surgical specialists, including members of CooperSurgical's surgical advisory board. GOVERNMENT REGULATION Healthcare Products. The U.S. Food and Drug Administration ('FDA') and other federal agencies as well as foreign ministries of health regulate the development, testing, production and marketing of the Company's healthcare products. The Federal Food, Drug and Cosmetic Act and other statutes and regulations govern the testing, manufacturing, labeling, storage, advertising and promotion of such products. Noncompliance with applicable regulations can result in fines, product recall or seizure, suspension of production and criminal prosecution. 1 The Company is currently developing and marketing medical devices, which are subject to different levels of FDA regulation depending upon the classification of the device. Class III devices, such as flexible and extended wear contact lenses, require extensive premarket testing and approval procedures, while Class I and II devices are subject to substantially lower levels of regulation. A multi-step procedure must be completed before a new contact lens can be sold commercially. Data must be compiled on the chemistry and toxicology of the lens, its microbiological profile and the proposed manufacturing process. All data generated must be submitted to the FDA in support of an application for an Investigational Device Exemption. Once granted, clinical trials may be initiated subject to the review and approval of an Institutional Review Board and, where a lens is determined to be a significant risk device, the FDA. When clinical trials are completed, a Premarket Approval Application must be submitted and approved by the FDA before commercialization. The Company, in connection with some of its new surgical products, can submit premarket notification to the FDA under an expedited procedure known as a 510(k) application, which is available for any product that can be demonstrated to be substantially equivalent to a device marketed prior to May 28, 1976. If the new product is not substantially equivalent to a pre-existing device or if the FDA rejected a claim of substantial equivalence, approval to market would require extensive preclinical and clinical testing that would incur additional costs and substantially delay product marketing. FDA and state regulations also require the Company to adhere to applicable 'good manufacturing practices' ('GMP'), which mandate detailed quality assurance and record keeping procedures, and the Company is subject to unscheduled periodic regulatory inspections. The Company believes it is in substantial compliance with GMP regulations. The Company also is subject to foreign regulatory authorities governing human clinical trials and medical device sales that vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product by comparable regulatory authorities of foreign countries must be obtained before products may be marketed in those countries. The approval process varies from country to country, and the time required may be longer or shorter than required for FDA approval. These regulatory procedures require considerable resources and usually result in a substantial time lag between the development of a new product and its marketing. There can be no assurance that all necessary approvals will be obtained, or obtained in a timely manner. Furthermore, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after marketing has begun. Healthcare Services. The healthcare services industry is subject to substantial federal, state and local regulation that controls the use of its properties and reimbursement for services provided. Licensing, certification and other applicable governmental regulations vary from jurisdiction to jurisdiction and are revised periodically. The Company's facilities must comply with the licensing requirements of federal, state and local health agencies and with the requirements of municipal building codes, health codes and local fire department codes. In granting and renewing a facility's license, a state health agency considers, among other things, the condition of the physical buildings and equipment, the qualifications of the administrative personnel and professional staff, the quality of professional and other services and the continuing compliance of the facility with applicable laws and regulations. The states in which the Company operates hospital facilities have certificate of need statutes providing, generally, that before construction of new healthcare facilities, the addition of new beds or the introduction of a new service, a state agency must determine that a need exists for those facilities, beds or services. A certificate of need is generally issued for a specific maximum amount of expenditures or number of beds or types of services to be provided, and the holder is generally required to implement the approved project within a specific time period. Often several applicants compete for a single certificate of need. All of HGA's facilities are certified or approved as providers under one or more of the Medicaid or Medicare programs. In order to receive Medicare reimbursement, each facility must meet the conditions of the United States Department of Health and Human Services relating to the type of facility, its equipment, its personnel and its standards of patient care. 2 The Social Security Act contains a number of provisions designed to ensure that services rendered to Medicare and Medicaid patients are medically necessary and meet professionally recognized standards. Those provisions include a requirement that admissions of Medicare and Medicaid patients to healthcare facilities must be reviewed in a timely manner to determine the medical necessity of the admissions. In addition, the Peer Review Improvement Act of 1982 provides that a healthcare facility may be required by the federal government to reimburse the government for the cost of Medicare-paid services determined by a peer review organization to have been medically unnecessary. Various state and federal laws regulate the relationships between providers of healthcare services and physicians. Among these laws are the Medicare and Medicaid Anti-Fraud and Abuse Amendments (the 'Amendments') to the Social Security Act, which prohibit individuals or entities participating in the Medicare or Medicaid programs from knowingly and willfully offering, paying, soliciting or receiving 'remuneration' (which includes anything of value) in order to induce referrals for items or services reimbursed under those programs. Sanctions for violating the Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from the Medicare and Medicaid programs. In addition, Section 1877 of the Social Security Act was amended, effective January 1, 1995, to significantly broaden the prohibitions against physicians making referrals under Medicare and Medicaid programs to providers with which the physicians have financial arrangements. Many states have adopted, or are considering, similar legislative proposals, some of which (including statutes in effect in New Jersey and Illinois) extend beyond the Medicare and Medicaid programs to all healthcare services. In addition, specific laws exist that regulate certain aspects of HGA's business, such as the commitment of patients to psychiatric hospitals and disclosure of information regarding patients being treated for chemical dependency. Many states have adopted a 'patient's bill of rights' which mandates standards for dealing with issues such as use of the least restrictive treatment, patient confidentiality, patient access to telephones, mail, legal counsel and requiring the patient to be treated with dignity. Patient and Third-Party Payments. HGA receives payment for its psychiatric services either from patients, from their health insurers or through the Medicare, Medicaid and Civilian Health and Medical Program of Uniformed Services ('CHAMPUS') governmental programs. Medicare is a federal program, which entitles persons 65 and over to a lifetime benefit of up to 190 days as an inpatient in an acute psychiatric facility. Persons defined as disabled, regardless of age, also receive this benefit. Medicaid is a joint federal and state program available to persons with limited financial resources. CHAMPUS is a federal program that provides health insurance for active and retired military personnel and their dependents. While other programs may exist or be adopted in different jurisdictions, the following four categories reflect the primary methods by which HGA's facilities receive payment for services: (a) Standard reimbursement, consisting of payment by patients and their health insurers, is based on a facility's schedule of rates and is not subject to negotiation with insurance companies, competitive bidding or governmental limitation. (b) Negotiated rate reimbursement is at prices established in advance by negotiation or competitive bidding for contracts with insurers and other payors such as managed care companies, health maintenance organizations ('HMO'), preferred provider organizations ('PPO') and similar organizations that can provide a reasonable number of referrals. (c) Cost-based reimbursement is predicated on the allowable cost of services, plus, in certain cases, an incentive payment where costs fall below a target rate. It is used by Medicare, Medicaid and certain Blue Cross insurance programs to provide reimbursement. (d) CHAMPUS reimbursement is at either (1) regionally set rates, (2) a national rate adjusted upward periodically on the basis of the Medicare Market Basket Index or (3) a fixed discount rate per day at certain facilities where CHAMPUS contracts with a benefit administration group. The Medicare, Medicaid and CHAMPUS programs are subject to statutory and regulatory changes and interpretations, utilization reviews and governmental funding restrictions, all of which may materially increase or decrease program payments and the cost of providing services, as well as the timing of payments to the facilities. 3 Limits on Reimbursement. Changes in government reimbursement programs have resulted in limitations on increases in, and in some cases in reduced levels of, reimbursement for healthcare services, and additional changes are anticipated. Such changes are likely to result in further limitations on reimbursement levels. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures. Inpatient hospital utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. In addition, efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue. Although the Company cannot predict how these changes will effect its operations as the number of patients covered by managed care payors increases, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have an adverse affect on HGA's business and earnings. Healthcare Reform. In recent years, an increasing number of legislative initiatives have been introduced or proposed in Congress and in state legislatures that would cause major changes in the healthcare system, either nationally or at the state level. Among these proposals are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees and the creation of a government health insurance plan or plans that would cover all citizens. There continue to be efforts at the federal level to introduce various insurance market reforms, expanded fraud and abuse and anti-referral legislation and further reductions in Medicare and Medicaid reimbursement. A broad range of both similar and more comprehensive healthcare reform initiatives is likely to be considered at the state level. It is uncertain which, if any, of these or other proposals will be adopted. The Company cannot predict how these reforms or their proposed enactment will affect its businesses. RAW MATERIALS In general, raw materials required by CooperVision consist of various polymers and packaging materials. Alternative sources of all of these materials are available. Raw materials used by CooperSurgical or its suppliers are generally available from more than one source. However, because some products require specialized manufacturing procedures, CooperSurgical could experience inventory shortages if required to secure an alternative manufacturer on short notice. MARKETING AND DISTRIBUTION Healthcare Products. In the United States and Canada, CooperVision markets its products through its field sales representatives, who call on ophthalmologists, optometrists, opticians and optical chains. In the United States, field sales representatives also call on distributors. CooperSurgical's products are marketed worldwide by a network of sales representatives and distributors, and additionally, in the United States through telemarketing, direct mail advertising and a direct mail catalog. Healthcare Services. HGA's marketing concept aims to position each psychiatric facility as the provider of the highest quality mental health services in its marketplace. HGA employs a combination of general advertising, toll-free 'help lines,' community education programs and facility-based continuing education programs to underscore the facility's value as a mental health resource center. HGA's marketing emphasizes discrete programs for select illnesses or disorders because it believes that marketing with program differentiation will be valuable to a referral source seeking treatment for specific disorders. Referral sources include psychiatrists, other physicians, psychologists, social workers, school guidance counselors, police, courts, clergy, care-provider organizations and former patients. PATENTS, TRADEMARKS AND LICENSING AGREEMENTS TCC owns or licenses a variety of domestic and foreign patents which, in total, are material to its businesses. Unexpired terms of TCC's United States patents range from less than one year to a maximum of seventeen years. 4 As indicated in the Company's 1997 Annual Report to Stockholders, incorporated by reference in this Item 1, the names of certain of TCC's products are protected by trademark registrations in the United States Patent and Trademark Office and, in some instances, in foreign trademark offices as well. Applications are pending for additional trademark registrations. TCC considers these trademarks to be valuable because of their contribution to the market identification of its various products. The Company's policy is to aggressively enforce and defend its patents and other proprietary technology. DEPENDENCE ON CUSTOMERS No material portion of any of TCC's businesses is dependent on any one customer or any one affiliated group of customers. However, Medicaid and Medicare generated approximately 29% and 32% of HGA's fiscal 1997 net patient revenue, respectively. GOVERNMENT CONTRACTS No material portion of TCC's business is subject to renegotiations of profits or termination of contracts or subcontracts at the election of the United States government. COMPETITION Each of TCC's businesses operates in a highly competitive environment. Competition in the healthcare industry revolves around the search for technological and therapeutic innovations in the prevention, diagnosis and treatment of illness or disease. TCC competes primarily on the basis of product quality, program differentiation, technological benefit, service and reliability, as perceived by medical professionals. Healthcare Products. Many companies develop and manufacture contact lenses. CooperVision competes primarily on the basis of product quality, service and reputation among medical professionals and by its participation in specialty niche markets. It sponsors clinical studies to generate information to medically improve its lenses. Major competitors have greater financial resources and larger research and development and sales forces than CooperVision. Furthermore, many of these competitors offer a greater range of contact lenses and a variety of other eyecare products, including lens care products and ophthalmic pharmaceuticals, which may give them a competitive advantage in marketing their lenses to high volume contract accounts. In the surgical segment, competitive factors include technological and scientific advances, product quality, price and effective communication of product information to physicians and hospitals. CooperSurgical believes that it benefits, in part, from the technological advantages of certain of its products and from the ongoing development of new medical procedures, that creates a market for equipment and instruments specifically tailored for these new procedures. CooperSurgical competes by focusing on distinct niche markets and supplying those markets with equipment, instruments and disposable products that are high in quality and that, with respect to certain procedures, enable a medical practitioner to obtain from one source all of the equipment, instruments and disposable products required to perform such procedures. As CooperSurgical develops products for new medical procedures, it offers to train medical professionals to perform them. CooperSurgical competes with a number of manufacturers in each of its niche markets, including larger manufacturers with greater financial and personnel resources who sell a substantially larger number of product lines. Healthcare Services. In most geographic areas where HGA operates, other psychiatric facilities provide services comparable to those offered by HGA. Some of those are owned by governmental organizations, not-for-profit organizations or investor-owned companies that have substantially greater resources than HGA and, in some cases, tax-exempt status. Psychiatric facilities frequently draw patients from areas outside their immediate locale; therefore, HGA's psychiatric facilities compete with both local and distant facilities. HGA's psychiatric facilities also compete with psychiatric units in acute care hospitals. HGA's strategy is to develop high quality programs designed to target specific disorders and to retain a highly qualified professional staff. 5 BACKLOG TCC does not consider backlog to be a material factor in its businesses. SEASONALITY HGA's occupancy rates decline during the summer months when school is not in session and during the year-end holiday season. CVI's contact lens sales in the first fiscal quarter are generally lower than subsequent quarters due to fewer patient visits during the holiday season. COMPLIANCE WITH ENVIRONMENTAL LAWS Federal, state and local provisions that regulate the discharge of materials into the environment, or otherwise relate to the protection of the environment, do not currently have a material effect upon TCC's capital expenditures, earnings or competitive position. WORKING CAPITAL TCC's businesses have not required any material working capital arrangements in the past five years. FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS, GEOGRAPHIC AREAS, FOREIGN OPERATIONS AND EXPORT SALES The information required for this item is included in Note 14 'Business Segment Information' of Notes to Consolidated Financial Statements of the Company included in the Company's 1997 Annual Report which is incorporated herein by reference. EMPLOYEES On October 31, 1997, TCC and its subsidiaries employed approximately 1,400 persons. In addition, licensed physicians, some of whom are not employees, have been admitted to the medical staff of the individual HGA facilities. TCC believes that its relations with its employees are good. 6 ITEM 2. PROPERTIES. The following are TCC's principal facilities as of October 31, 1997:

The Company believes its properties are suitable and adequate for its businesses. ITEM 3. LEGAL PROCEEDINGS. The information required for this item is contained under the caption 'Pending Litigation' in Footnote 11 in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of fiscal 1997 to a vote of the Company's security holders. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required for this item is contained under the caption 'Quarterly Common Stock Price Range' in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA. The information required for this item is contained under the caption 'Five Year Financial Highlights' in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required for this item is contained under the caption 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. ITEM 8. FINANCIAL STATEMENTS. The information required for this item is included under the captions 'Consolidated Balance Sheets,' 'Consolidated Statements of Income,' 'Consolidated Statements of Cash Flows,' 'Notes to Consolidated Financial Statements' and 'Independent Auditors' Report' in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained under the heading 'Election of Directors' and 'Executive Officers of the Company' in the Company's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 2, 1998 (the '1998 Proxy Statement') is incorporated herein by reference with respect to each of the Company's directors and the executive officers who are not also directors of the Company. ITEM 11. EXECUTIVE COMPENSATION. The information contained under the subheadings 'Executive Compensation' and 'Compensation of Directors' of the 'Election of Directors' section of the 1998 Proxy Statement is incorporated herein by reference with respect to the Company's chief executive officer and the four other most highly compensated executive officers of the Company and the directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained under the subheadings 'Securities Held by Management' and 'Principal Securityholders' of the 'Election of Directors' section of the 1998 Proxy Statement is incorporated herein by reference with respect to certain beneficial owners, the directors and management. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item is contained in Note 13 'Relationships and Transactions Between the Company and CooperLife Sciences, Inc.' in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: 1. Description of the Business. The general description of the business and general development are contained in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. 2. Financial Statements of the Company. The Consolidated Financial Statements and the Notes thereto and the Independent Auditors' Report on the foregoing are contained in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference and is included as Exhibit 13 to this Form 10-K. 3. Accountants' Consent and Report on Schedule. 4. Financial Statement Schedule of the Company. SCHEDULE NUMBER DESCRIPTION ------------ ----------- Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 9 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE The Board of Directors THE COOPER COMPANIES, INC. The audits of the consolidated financial statements of The Cooper Companies, Inc. and subsidiaries referred to in our report dated December 10, 1997, which is incorporated herein by reference, included the related financial statement schedule for each of the years in the three-year period ended October 31, 1997 as listed in Item 14 of the Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to incorporation by reference in the Registration Statement Nos. 33-50016, 33-11298, 333-22417, 333-25051 and 333-27639 on Form S-3 and Registration Statement Nos. 333-10997, 33-27938, 33-36325 and 33-36326 on Form S-8 of The Cooper Companies, Inc. of our reports dated December 10, 1997, relating to the consolidated balance sheets of The Cooper Companies, Inc. and subsidiaries as of October 31, 1997 and 1996 and the related consolidated statements of income and cash flows for each of the years in the three-year period ended October 31, 1997, and related schedule, which reports appear in or are incorporated by reference in the October 31, 1997 Annual Report on Form 10-K of The Cooper Companies, Inc. KPMG PEAT MARWICK LLP San Francisco, California January 26, 1998 10 SCHEDULE II THE COOPER COMPANIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED OCTOBER 31, 1997

- ----------- (1) Principally uncollectible accounts written off, net of accounts recovered that were previously written off. 11 3. EXHIBITS.

(b) REPORTS ON FORM 8-K. August 27, 1997 -- Item 5. Other Events. September 3, 1997 -- Item 5. Other Events. September 18, 1997 -- Item 5. Other Events. October 29, 1997 -- Item 5. Other Events. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January , 1998. THE COOPER COMPANIES, INC. By: /s/ A. THOMAS BENDER ................................... A. THOMAS BENDER PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates set forth opposite their respective names.

14 EXHIBIT INDEX

(b) Reports on Form 8-K. August 27, 1997 -- Item 5. Other Events. September 03, 1997 -- Item 5. Other Events. September 18, 1997 -- Item 5. Other Events. October 29, 1997 -- Item 5. Other Events. STATEMENT OF DIFFERENCES The British pound sterling sign shall be expressed as ....... 'L'

Exhibit 4.1 CERTIFICATE OF ELIMINATION OF THE COOPER COMPANIES, INC. The Cooper Companies, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: that the following resolutions were adopted by the Board of Directors of The Cooper Companies, Inc. at a meeting duly called and held on October 29, 1997: RESOLVED, that the Company will not in the future issue any shares of its Series A Participating Preferred Stock, par value $.10 per share, no shares of which are currently outstanding, pursuant to the Certificate of Designation, Preferences and Rights (the "Series A Certificate of Designation") for the Series A Junior Participating Preferred Stock that was filed on November 12, 1987 with the office of the Secretary of State of the State of Delaware. RESOLVED, that the Company will not in the future issue any shares of its Series B Preferred Stock, par value $.10 per share, and Series C Preferred Stock, par value $.10 per share, no shares of which are currently outstanding, pursuant to the Certificate of Designations, Preferences and Relative Rights, Qualifications, Limitations and Restrictions (the "Series B and C Certificate of Designation" and, together with the Series A Certificate of Designation, the "Certificates of Selection") for the Series B Preferred Stock and Series C Preferred Stock that was filed on June 14, 1993 with the Secretary of State of the State of Delaware. RESOLVED, that Chief Executive Officer, the President, the Chief Financial Officer and the Vice President of Legal Affairs of the Company, each of them acting individually, and each of the Secretary and the Assistant Secretaries of the Company acting in conjunction with any of the foregoing officers of the Company, be, and each of them hereby is, authorized and directed to file a certificate setting forth these resolutions pursuant to Section 151(g) of the General Corporation Law of the State of Delaware so that, pursuant to such Section 151(g), the Certificates of Designation shall be eliminated from the Company's Certificate of Incorporation and the shares previously designated by the Certificates of Designation shall revert to the status of authorized and unissued shares of Preferred Stock of the Company for which powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, if any, shall not have been set forth in the Certificate of Incorporation of the Company or any amendment thereto. RESOLVED FURTHER, that the Chief Executive Officer, the President, the Chief Financial Officer and the Vice President of Legal Affairs of the Company, each of them acting individually, and each of the Secretary and the Assistant Secretaries of the Company acting in conjunction with any of the foregoing officers of the Company, be, and each of them hereby is, authorized, empowered, and directed, on behalf of the Company, to execute and deliver any and all certificates, agreements and other documents, take any and all steps and do any and all things which they may deem necessary or advisable in order to effectuate the purposes of each and all the foregoing resolutions. IN WITNESS WHEREOF, The Cooper Companies, Inc. has caused this certificate to be signed by Robert S. Weiss, its Executive Vice President and Chief Financial Officer, and attested by Carol R. Kaufman, its Secretary, this 30th day of October 1997. THE COOPER COMPANIES, INC. By: /s/ Robert S. Weiss ------------------------------ ATTEST: /s/ Carol R. Kaufman - ------------------------------- Carol R. Kaufman Secretary

Exhibit 10.3 AMENDMENT NO. 2 TO THE COOPER COMPANIES, INC. 1988 LONG TERM INCENTIVE PLAN, AS AMENDED AND RESTATED WHEREAS, the Board of Directors approved and adopted The Cooper Companies, Inc. 1988 Long Term Incentive Plan (the "Plan") effective as of September 15, 1988, and the Plan was amended effective as of April 26, 1990 and February 12, 1991, was amended and restated as of January 16, 1995, and was amended as of September 9, 1996. WHEREAS, as permitted by Section 13 of the Plan, this Amendment No. 2 to the Plan was approved by a resolution of the Board of Directors of the Company on November 12, 1997 effective as of the date thereof, and this Amendment No. 2, together with the Plan (as amended and restated) and the Third Amendment thereto, constitutes the entire Plan as amended to date. NOW, THEREFORE, the Plan is amended as set forth herein. FIRST: The Plan is hereby amended by adding a new Section 18 to the Plan to read in its entirety as follows: Section 18. Certain Stock Options for United Kingdom Employees Stock Options granted under Section 5 which are Non-Qualified Stock Options may be granted subject to the terms and conditions of Schedule A hereto. Such Non-Qualified Stock Options shall be subject to the terms and conditions of the Plan, including Section 5. SECOND: The Plan is hereby amended by adding the following new Schedule A to the end thereof to read in its entirety as follows: Schedule A THE COOPER COMPANIES, INC. 1988 Long Term Incentive Plan Certain Stock Options for United Kingdom Employees (Providing for the grant of Non-Qualified Stock Options which it is intended shall satisfy the requirements of the UK Inland Revenue pursuant to Schedule 9 of the UK Income and Corporation Taxes Act 1988 (the "Taxes Act")). Non-Qualified Stock Options may be granted pursuant to this Schedule A in accordance with such provisions as would be applicable if the provisions of the Cooper Companies, Inc. 1988 Long Term Incentive Plan (the "Plan") relating to Stock Options were here set out in full (provided that such stock options shall not be granted to an individual in conjunction with any other form of Award under the Plan and that Sections 6, 7, 8, 9, 10, and 11 shall not apply to this Schedule A), subject to the following modifications: SECTION A1. Eligibility. Non-Qualified Stock Options may only be granted under this Schedule A to individuals who are directors or employees of the Company and its subsidiaries (and for this purpose a subsidiary shall mean any company of which the Company has control as defined in section 840 of the Taxes Act) and who are not ineligible to participate in accordance with the provisions of paragraph 8 of Schedule 9 to the Taxes Act and, if a director, is required to work in that capacity for the Company ad/or any such subsidiary for at least 25 hours per week, excluding meal breaks. SECTION A2. Stock Subject to the Plan. (a) Non-Qualified Stock Options granted under this Schedule A may only be made and may only be exercised in respect of Stock which satisfies the requirements of paragraphs 10-14 of Schedule 9 to the Taxes Act. (b) Only in the event of any reorganization, consolidation, recapitalization, Stock dividend, Stock split or other variation of the Company's Stock, may an adjustment be made under Section 3 of the Plan to the amount of Stock which is the subject of Non-Qualified Stock Options granted under this Schedule A and the option price payable in respect thereof and then only with the prior approval of the UK Inland Revenue and in such manner as the auditors of the Company confirm in writing to be fair and reasonable. SECTION A3. Stock Options. (a) Non-Qualified Stock Options may only be granted pursuant to this Schedule A at an option price which is not less than 100% of Fair Market Value as of the date of grant provided that if no sale of Stock occurs on the New York Stock Exchange on such date the option price shall not be less than the fair market value of the Stock as determined in accordance with Part VIII of the UK Taxation of Chargeable Gains Act 1992 and agreed on or before that date for the purposes of this Schedule A with the UK Inland Revenue Shares Valuation Division. (b) No Non-Qualified Stock Options may be granted to an employee or director which will result in the aggregate option price for all the Stock comprised in outstanding Non-Qualified Stock Options granted to him under this Schedule A together with the aggregate option price of all Stock comprised in outstanding Non-Qualified Stock Options granted to him under any other stock option scheme established by the Company, or any associated company (as defined in Section 416 of the Taxes Act), approved under Schedule 9 to the Taxes Act (except under any savings-related stock option scheme) exceeding 30,000 UK pounds sterling (converting, for this purpose the option price into pounds sterling using the exchange rate applicable on the date of grant of such option) or such other amount as is for the time being specified as being the appropriate limit for the purposes of paragraph 28(1) of Schedule 9 to the Taxes Act. For the avoidance of doubt, the limit set out in Section 5(j) of the Plan applying to Incentive Stock Options shall not apply to Non-Qualified Stock Options granted under this Schedule A. (c) The conditions attaching to Non-Qualified Stock Options granted under this Schedule A shall be determined at grant and may not be determined following the grant of such option. (d) In the event of the optionee's death a Non-Qualified Stock Option granted pursuant to this Schedule A must be exercised within twelve months of the optionee's death whereupon, to the extent it has not been exercised, such option shall lapse. (e) No Non-Qualified Stock Option granted under this Schedule A may be exercised at any time if the holder of such option is precluded from participating under this Schedule A by paragraph 8 of Schedule 9 to the Taxes Act. (f) Sections 5(k), (l) and for the avoidance of doubt 5(m) and Section 12(iv) of the Plan shall not apply to Non-Qualified Stock Options granted under this Schedule A. Payments for Non-Qualified Stock Options granted under this Schedule A may not be made in the form of Restricted Stock. (g) Within 30 days of the receipt of a written notice (in the form prescribed by the Company) duly signed by the optionee together with their option certificate and the full purchase price of the Stock being acquired pursuant to the exercise of their option the Company shall procure that the optionee acquires the Stock in respect of which the option has been validly exercised by (i) allotting Stock to the optionee; or (ii) procuring the transfer of Stock to the optionee and shall issue a definitive certificate for the Stock acquired pursuant to the exercise of the option. (h) Stock issued pursuant to this Schedule A shall rank pari passu with the issued Stock and the Company shall at all times keep available sufficient Stock to satisfy the exercise of, to the full extent possible, all options granted pursuant to this Schedule A which have neither lapsed nor become fully exercisable. SECTION A4. Amendments and Termination. For the purposes of this Schedule A no amendments to this Schedule A (including any provision of the Plan which is incorporated within this Schedule A) pursuant to Section 13 shall have effect until the approval of the UK Inland Revenue has been obtained in respect thereof. This Section A4. shall not however restrict the general power of the Board of Directors to amend the Plan where the amendment will not apply to this Schedule A. THIRD: Except to the extent hereinabove set forth, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Board of Directors of the Company has caused this Amendment No. 4 to the Plan to be executed by a duly authorized officer of the Company as of the 12th day of November 12, 1997. THE COOPER COMPANIES, INC. By: /s/Carol R. Kaufman -------------------------------------- Title: Vice President of Legal Affairs -----------------------------------

Exhibit 10.11 April 11, 1997 Mr. Mark R. Russell c/o Hospital Group of America, Inc. 1256 Drummers Lane, Suite 107 Wayne, PA 19087 Re: Employment Agreement with Hospital Group of America, Inc. Dear Mark: Reference is made to the Employment Agreement ("Employment Agreement") dated as of May 27, 1992 between you and Hospital Group of America, Inc. ("HGA"), as amended by the letter agreement effective as of June 15, 1993 among you, HGA and PSG Management, Inc. ("PSG") and as further amended by Steven G. Singer's memorandum to you dated November 12, 1993 and by the letter agreements effective as of January 11, 1996 and April 15, 1996 among you, HGA and PSG. HGA and PSG each hereby ratifies and confirms the Employment Agreement in all respects, except that effective as of the date hereof, clause (a) of Section 1 of the Employment Agreement shall be amended to read in its entirety as follows: (a) July 1, 1999, and'. The provisions of Sections 9,10 and 11(c) of the Employment Agreement shall be deemed incorporated in this Agreement as if fully set forth herein. Kindly evidence your agreement with the foregoing amendments to the Employment Agreement by signing in the space provided below for your signature. Very truly yours, HOSPITAL GROUP OF AMERICA, INC. By: /s/ Carol R. Kaufman --------------------------------- PSG MANAGEMENT, INC. By: /s/ Carol R. Kaufman --------------------------------- Agreed to and accepted this 14TH day of April, 1997, to be effective as of the date set forth above. /s/ Mark R. Russell - -------------------------------------- Mark R. Russell

Exhibit 10.15 AMENDMENT NO. 2 TO THE 1996 LONG TERM INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS OF THE COOPER COMPANIES, INC. WHEREAS, The Cooper Companies, Inc. (the "Company") has adopted The 1996 Long Term Incentive Plan for Non-Employee Directors of The Cooper Companies, Inc. (the "Plan"); and WHEREAS, Section 11 of the Plan permits the Board of Directors of the Company to amend the Plan, subject to certain limitations; and WHEREAS, the Board of Directors of the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan is hereby amended as follows: FIRST: The first two paragraphs of Section 7 of the Plan are hereby amended by deleting the number "3,333," wherever it appears, and by inserting the number "5,000" in its stead, and by deleting the number "4,167," wherever it appears, and by inserting the number "6,250" in its stead. SECOND: Paragraph (c) of Section 7 of the Plan is hereby amended by deleting the number "30%," where it appears, and by inserting the number "20%" in its stead. THIRD: The provisions of Paragraphs First and Second hereof shall be effective as of October 29, 1997. FOURTH: Except to the extent herein above set forth, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Board of Directors of the Company has caused this Amendment No. 2 to the Plan to be executed by a duly authorized officer of the Company as of October 29, 1997. THE COOPER COMPANIES, INC. By: /s/ Carol R. Kaufman ------------------------------------- Title: Vice President of Legal Affairs ----------------------------------

Exhibit 11 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Calculation of Earnings Per Share

THE COOPER COMPANIES ANNUAL REPORT 1997 [COVER ART] [LOGO] [GRAPH] [GRAPH] [GRAPH] REVENUE OPERATING INCOME EARNINGS PER SHARE ($ MILLIONS) ($ MILLIONS) [GRAPH] CASH FROM OPERATING ACTIVITIES SHARE PRICE MARKET CAPITALIZATION (MILLIONS) [GRAPH] [GRAPH] PERCENTAGE OF REVENUE PERCENT OF TOTAL OPERATING INCOME OF BUSINESS UNITS Contents 2 Forward-Looking Statements 3 Fiscal 1997 Financial Highlights 4 1997 Operation in Brief 5 Letter to Shareholders 8 Freqnently Asked Questions 11 Business Operations 33 Financial Section 65 Scientific Advisors to the Company 66 Corporate Information Financial results for the years ended October 31, Share Price and Market Capitalization at December 31. The Cooper Companies, Inc. is a rapidly growing specialty healthcare company. Each of its three business units serves attractive niche markets with high quality products and services. CooperVision develops, manufactures and markets a wide range of contact lenses, concentrating on the toric and other specialty and premium lens markets. CooperSurgical specializes in women's healthcare. It develops, manufactures and markets proprietary diagnostic and surgical instruments, equipment, accessories and devices for the physician's office, the surgicenter and the hospital. Hospital Group of America owns and operates three psychiatric hospitals, a residential treatment center and satellite facilities that provide inpatient, outpatient and other ancillary treatment primary for children, adolescents and older adults. HGA's management services division provides behavioral health consultation and contract management service in behavioral health for acute care hospitals. FORWARD-LOOKING STATEMENTS IN THIS REPORT Statements in this report that are not based on historical fact may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as "may", "will", "expect", "estimate", "anticipate", "continue" or similar terms. Actual results could differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include: major changes in business conditions and the economy in general, loss of key members of senior management, any prolonged disruption in the operations of the Company's manufacturing facilities or hospitals, inroads by new competitors or technologies, costs to integrate acquisitions, potential foreign exchange exposure, decisions to invest in research and development and other start-up projects, dilution to earnings per share associated with acquisitions or stock issuance, regulatory issues, unexpected changes in reimbursement rates and payor mix, environmental clean-up costs above those already accrued, litigation and decisions to divest businesses. Future results are also dependent on each of the Company's business units meeting specific objectives. 2 Fiscal 1997 Financial Highlights The Cooper Companies, Inc, and Subsidiaries

3 1997 Operations in Brief Cooper's total revenue increased 30% to $141.5 million: 31% to $64.0 million at CooperVision, 44% to $24.8 million at CooperSurgical, and 23% to $52.7 million at Hospital Group of America. Operating income increased 53% to $25.8 million from $16.8 million. Earnings per share grew to $2.40 in 1997 from $1.41, including net tax benefits of $2.03 per share in 1997 and 38 cents per share in 1996. Excluding the tax benefits and other one-time items, earnings per share were $1.67 in 1997 versus $1.03 in 1996, an increase of 62%. Cash flow from operations increased 239% to $11.7 million from $3.5 million in 1996. CooperVision (CVI) positioned itself for growth outside the United States with two initiatives. An agreement with Rohto Pharmaceuticals, Ltd., a leading Japanese supplier of nonprescription ophthalmic products, gives Rohto exclusive marketing rights to CVI's line of products when approved by the Japanese Ministry of Health. The acquisition of Aspect Vision Care Limited of Southampton, England will immediately expand CVI's product line and establish it in the European market. In March, CVI broadened its line of specialty contact lenses by purchasing the Natural Touch line of cosmetic soft contact lenses, which are sold in the United States to customers who want to change or enhance the appearance of their natural eye color. In April, CooperSurgical (CSI) acquired Marlow Surgical Technologies, Inc., a provider of minimally invasive surgical products and disposable products for reproductive medicine. In December, CSI announced, subject to FDA clearance, a plan to introduce during the first calendar quarter of 1998, the first in a series of new hardware and software products using digital imaging to improve the diagnosis and screening of cervical cancer to selected customers in the United States. This new Cerveillance System will be launched broadly during the American College of Obstetrics and Gynecology meeting in May 1998. Hospital Group of America (HGA) formed a psychiatric contract management services division to provide behavioral health consultation and contract management service in behavioral health for acute care hospitals. In April, HGA opened a 50-bed residential treatment center in Kouts, Indiana, extending its continuum of care. In July, the Company raised $50.4 million in a public offering of 2.3 million shares of its common stock underwritten by Deutsche Morgan Grenfel, Inc. and PaineWebber Incorporated. Proceeds were used to pay down debt. Coupled with the redemption of $9.3 million of convertible debentures in April, Cooper reduced its total long-term debt from $48.8 million at the beginning of the fiscal year to $9.6 million at year's end. On average, 11% more shares of the Company's common stock were outstanding in 1997 because of the offering. In September, the Company completed an agreement with KeyBank to provide a $50 million senior secured revolving credit facility to fund acquisitions and for general corporate purposes. 4 Letter to Shareholders Dear Fellow Shareholder, The employees of The Cooper Companies delivered another year of solid performance in 1997 and, at the outset, we want to recognize this and thank them for their commitment to the continued growth of our company. Cooper had a highly productive year in 1997, extending the positive growth trends of the past four years. We are gratified that the improved results have been reflected in our share price. At the close of trading on December 31, 1997, the price per share of The Cooper Companies stock on the New York Stock Exchange was $40.88, or 20 times its value at the beginning of 1994, when the current management took charge. That equates to $584 million in incremental value for equity holders in four years as market capitalization has increased from $20.7 million to $605 million. In 1997, revenue increased 30% over 1996 to $141.5 million. Operating income increased 53% year to year to $25.8 million. Earnings per share, including net tax benefits and other one-time items, were $2.40, versus $1.41 in 1996. Excluding tax benefits and other one-time items, earnings per share were $1.67 in 1997 versus $1.03 in 1996, a 62% increase. Cash flow from operations increased to $11.7 million from $3.5 million in 1996. CooperVision, our specialty contact lens business, achieved record sales, market share and operating income. Through two global expansion initiatives, CVI's business development activities positioned it to achieve one of its long-standing goals: to become the worldwide leader in the toric contact lens market. To enter the Asian market, CVI signed an exclusive marketing agreement with Rohto Pharmaceuticals, Inc., a strong partner with a leadership position in nonprescription ophthalmic and contact lens care products in Japan, the world's second largest contact lens market. The products will be marketed after approval by Japanese regulatory authorities. In Europe, CVI acquired Aspect Vision Care Limited of Southampton, England, a privately held manufacturer of contact lenses sold primarily in the United Kingdom and other European countries. We expect that Aspect will add about $45 million to CooperVision's 1998 revenue, which is expected to approach $125 million. In North America, CooperVision introduced the new CooperFlex monthly replacement spherical lens and expanded the range of powers in the Preference Toric line. Toric lenses to correct astigmatism now account for more than half of CooperVision's revenue. In March, CVI broadened its line of specialty contact lenses by 5 purchasing the Natural Touch line of cosmetic soft contact lenses, sold in the United States to customers who want to change or enhance the appearance of their natural eye color. Contact lens companies were active in the U. S. equity market this year. The new offerings made the sector much more visible to investors, who have responded favorably to its future promise. The Cooper Companies was among those raising equity capital in 1997 netting $50.4 million from a follow-on offering of 2.3 million shares that was completed in July. Because of this, shares used to calculate per share amounts for 1997 increased 11% to 13.1 million. CooperSurgical continued to grow its share of the women's healthcare medical device market by acquiring new businesses and technologies and by developing other new products internally. In April, CSI acquired Marlow Surgical Technologies, Inc, a privately held manufacturer of minimally invasive surgical products and disposable products for reproductive medicine. In December, CSI announced, subject to FDA clearance, plans to launch, in the first quarter of fiscal 1998, the first product in the Cerveillance System, an innovative system of hardware and software products that aids in the examination of the cervix using digital imaging technology. A stream of new products based on this technology is expected during 1998 and beyond. Women's healthcare, with its favorable demographics, continues to attract both large and small manufacturers who are interested in capitalizing on its potential. We believe that our strategy to participate in consolidating this attractive but fragmented market is a sound one. At Hospital Group of America, Hampton Hospital continued to show exceptional growth in revenue and operating income after settling a dispute with a former physician management group in December 1995. HGA's outpatient and partial hospitalization programs showed good progress. During 1997, HGA formed a psychiatric contract management services division to provide behavioral health consultation and contract management service in behavioral health for acute care hospitals. In April, HGA opened a 50-bed residential treatment center in Kouts, Indiana, The Midwest Center for Youth and Families, extending its continuum of care. In its targeted geographic markets, HGA's objective is to become the "provider of choice" to treat children, adolescents, adults and geriatric patients. Cooper's balance sheet improved significantly in 1997. Stockholders' equity grew to $111.5 million at October 31, 1997 from $15.3 million at October 31, 1996. We redeemed $9.3 million of convertible debt and repaid $40.1 million of our remaining debt using proceeds from the follow-on offering. Subsequently, we 6 established a $50 million revolving line of credit with KeyBank that will allow us to access funds for growth at more attractive rates than had been available before our business improved. Long-term, Cooper's added value will come, we believe, from growing the earnings and cash generated by the franchises it has established in the medical device market. We expect CooperVision's rapid growth to continue. Its basic drivers are proprietary manufacturing technology that will allow it to maintain its profitable leadership position in the toric lens market, an expanding business outside of North America, a new product pipeline to meet market needs and a highly effective marketing, sales and customer service team. CooperSurgical, with five acquisitions completed since 1991, is now one of the largest and fastest growing companies serving obstetricians and gynecologists. Its business is targeted to the most common procedures that these physicians perform, many of which generate a recurring stream of revenue from disposables. CooperSurgical will continue to be driven by the acquisition of products and businesses serving its market and by internal product development programs such as the new Cerveillance System. Our job is to ensure that these two businesses fulfill their promise. To this end, our goals for 1998 are straightforward: continue the strong growth in revenue and operating income we delivered in 1997 by increasing market share with existing products, introducing new products and continuing business development efforts. CooperVision will concentrate on implementing the benefits of the Aspect Vision acquisition in both Europe and the United States and plans to launch three new internally developed products. CooperSurgical will continue its strategy of acquisition and internal product development. HGA will focus on growing market share in each hospital's geographic region through referral and ancillary programs, and by expanding its behavioral health consultation and management services business. As a result of its follow-on offering, The Cooper Companies became more visible to investors in 1997. With many new investors and the expectation of even more to come as a result of this enhanced exposure, we have, in the material that follows, provided readers with an in-depth review of our businesses and the markets in which they compete. We have also answered the questions most commonly asked by prospective investors as we presented the Company to them during the follow-on offering. We hope you find this information valuable. ALLAN E. RUBENSTEIN A. THOMAS BENDER Allan E. Rubenstein, M.D. A. Thomas Bender Chairman of the Board President and Chief Executive Officer January 27, 1997 7 Questions Frequently Asked By Investors During 1997 With Answers From Tom Bender, CEO, And Bob Weiss, Executive Vice President and CFO Q. How would you describe Cooper's overall strategy? Tom Bender: Cooper is a specialty healthcare company currently serving the vision care, women's healthcare and mental health market segments. We provide underserved specialty healthcare markets with proprietary products and services aimed at improving outcomes and reducing healthcare costs. Q. How do you plan to build your businesses? Tom: In vision care, we're concentrating on building market share with our existing contact lens product lines, introducing new products, expanding geographically and evaluating the acquisition of businesses and product lines that could complement the widely regarded CooperVision and Aspect Vision franchises. In women's healthcare, where the market is very fragmented, we will continue to be a consolidator in the gynecology and obstetrics segments, acquiring proprietary product lines and well-differentiated companies, forming alliances and seeking to deliver a continuing stream of innovative products from our Cerveillance technology. Q. Would Cooper consider entering other areas of healthcare? Tom: I think there will be opportunities for Cooper to offer profitable and well-differentiated products in other carefully chosen healthcare market segments in the future. In the near-term, however, we will concentrate on growing our existing businesses. Q. How do you plan to finance your business development activities? Bob Weiss: After our 2.3 million share follow-on offering this summer that raised net proceeds of $50.4 million, we paid down all but about $9.6 million of our debt and put in place a $50 million line of credit syndicated by KeyBank. Even after the Aspect acquisition, we have substantial resources to pursue the acquisitions we have in mind for CooperSurgical and CooperVision. Generally, we prefer a balance of stock, debt and cash in our acquisition transactions. Q. How do laser surgical procedures for the eye effect your contact lens business? Tom: I continue to think that the early market projections here were overstated, and we still do not see this procedure having any significant negative impact on the contact lens market. Some patients who can afford the unreimbursed cost of about $2,000 per eye will choose surgery for convenience or occupational need, but many barriers to broad acceptance still remain, including the high cost, a fear of ocular surgery and unfavorable economics for many physicians. We believe that there are more than 20 million former contact lens wearers who might be attracted to this procedure because it offers them what they once wore contacts for--freedom from glasses. We also believe that the vast majority of people having 8 the surgery are coming from this pool of former lens wearers, not from the pool of patients who are satisfied with their lenses. I would like to see the procedure become more visible with more people asking ophthalmologists about it. If they did, I believe that many of them would reenter the contact lens market. Contact lens technology has improved lately, and if the need for convenience is there, why choose an expensive, sometimes temporary, surgical procedure? Q. Are disposable toric lenses introduced by your competitors a threat to your business? Tom: In marketing its contact lenses, CooperVision identifies distinct practitioner and patient market segments, researches the requirements within each segment and provides a variety of lenses to meet these differing needs. We think that there are two distinct practitioner segments in the toric market. The first is practitioners who recommend quarterly lens replacement and demand a fully featured, high quality product for these difficult to fit patients. These practitioners tend to favor our Preference Toric lens. With more than four times the parameters available from CooperVision than from the more frequently replaced competitive products and with a higher quality, deposit resistant material, Preference Toric is a standout in this category. And with the strong brand loyalty in the toric market due to the complexity of the fit, we think our base of repeat business from patients who wear these lenses is well protected. The second segment is practitioners who choose to fit patients with lenses that are replaced monthly or even more frequently. This is where the new disposable torics compete. Up until now, CooperVision has not had product offerings in this segment, but in the second quarter of fiscal 1998, we plan to introduce our own toric product to challenge the other new disposable products. With our strong toric franchise, I'm confident we'll hold our own. Q. Last year you said you had no plans to reduce debt with a stock offering. What changed your mind? Bob: I think two things did. First, it was attractive to pay down our existing high interest debt with the funds from the follow-on offering and replace it with a revolving line of credit at considerably lower rates. This will significantly reduce our borrowing costs going forward and provide funds for acquisitions as needed. Second, we believed that the additional research coverage by our investment bankers would improve the visibility of our performance to investors, and it appears that, given the improvement in our share price, this has happened. Q. Why is your cash flow lower in the first quarter than throughout the rest of the year? Bob: For several reasons. We make ongoing payments to Bristol Myers in the first quarter for the breast implant settlement agreed to in 1993. We also build our inventory of contact lenses during the seasonally slow first quarter and recapture cash as lenses are sold throughout the year. Finally, we make annual employee incentive payments in the first quarter which have been accrued, and earned, in the prior fiscal year. 9 Q. What would be the impact on your earnings if they were fully taxed? Wouldn't this be a fairer way to value the business going forward? Bob: It's hard to accurately project the impact. In the mid-term, we won't be taxable, for federal purposes, because of our approximately $213 million of NOLs at October 31, 1997. And before we use these, we will build a strategy to maintain the lowest effective tax rate prudently possible. As to the second part of the question, you should assume that we intend to employ the cash savings to grow our core businesses as we did this year through the acquisitions of Marlow for CooperSurgical and Natural Touch and Aspect Vision Care for CooperVision. So the tax benefit gives us a strategic advantage over competitors who must pay taxes. Several securities analysts, however, have developed a pro forma valuation of Cooper by taxing their estimate of projected pretax earnings at 34%, applying a multiple of earnings and then adding the net present value of the NOLs of about $4 to $5 per share to this. Although this is not unreasonable as a valuation exercise, it doesn't reflect how, in practice, we will use our tax benefits to grow the business. In my view, the most appropriate measure of Cooper's performance is income before taxes and significant nonrecurring items, divided by the average number of shares outstanding. Q. What are your plans for your service business, Hospital Group of America? Tom: HGA had strong 1997 results exceeding our expectations, and we believe it will continue to perform well in the future. Right now, HGA is doing a good job of helping us leverage our NOLs. Long-term, however, Cooper plans to focus on growing its two core medical device product businesses, and in the future, we will evaluate HGA from the perspective of overall shareholder value. This does not mean, however, that we will ignore opportunities to add value to HGA's business, particularly through strengthening its market share in its current geographic locations. 10 Business Unit Review CooperVision Business Overview and 1997 Results CooperVision 1997 Revenue $640 Million CooperVision 1997 Operating Income $23.1 Million - ------------------------------------------------- ------------------------------------------------- Percent Increase over 1996 31% Percent Increase over 1996 21% - ------------------------------------------------- ------------------------------------------------- Percent of Cooper Companies' Revenue 45% Percent of CooperVision Revenue 36% - ------------------------------------------------- -------------------------------------------------

A Contact Lens Glossary: Soft Contact Lenses: Lenses to correct visual defects made with comfortable plastic materials that fit on the cornea of the eye. Specialty Lenses: Correct visual defects such as astigmatism or special ophthalmic disorders. Also opaque lenses for cosmetic color enhancement. Manufactured by cast molding, lathing or by FIPS, CooperVision's patented combination of automated lathing and cast molding. Toric Contact Lenses: Correct astigmatism -- blurred vision caused by an irregularity in the shape of cornea. Manufactured by cast molding, lathing or by FIPS. Premium Contact Lenses: Offer value-added features such as deposit resistance or ultra-violet protection. Non-Specialty Spherical Contact Lenses: Correct the most common visual defects. Lack value-added features for more complicated disorders such as astigmatism. Most manufactured by cast molding, but some by automated lathing. Custom Contact Lenses: Correct severe astigmatism and other special vision needs. Generally manufactured using automated lathes. Conventional Contact Lenses: Designed to be replaced after 12 to 24 months. Planned Replacement Lenses: Designed to be replaced after one to three months. Disposable Contact Lenses: As defined by the U. S. Food and Drug Administration, lenses that are designed to be changed as often as daily and up to every two weeks. 11 CooperVision (CVI) develops, manufactures and markets specialty contact lenses emphasizing the high-growth, high-margin soft toric contact lens segment. Toric contact lenses provide visual correction for astigmatism--blurred vision caused by an irregularly shaped cornea. CVI's three toric lens brands accounted for 52% of its sales during fiscal 1997 and grew 40% over 1996. Preference Toric, a quarterly planned replacement lens, is now CVI's leading product. Its sales grew 71% year to year. In addition to toric lenses, CVI manufactures and markets more than a dozen specialty and premium soft contact lens brands in the spherical lens category. These include premium lenses for people who rapidly deposit protein from their tears on their lenses and a line of "opaque" lenses that change or enhance the appearance of the wearer's natural eye color. Sales of toric, specialty lenses and premium lenses together grew 46% in 1997. In the non-specialty spherical category, CVI markets a range of conventional spherical lenses. New Product Introductions In 1997, CVI introduced CooperFlex and additional line extensions to the highly successful Preference Toric brand. CooperFlex, manufactured by our new European subsidiary, Aspect Vision Care, is a planned replacement spherical lens designed for a one-month wearing cycle. Independent clinical studies conducted in the United Kingdom found that patients preferred this lens to other leading disposable or frequent replacement lenses. The Preference Toric brand was expanded to include additional powers. This further solidifies its position as the toric brand that offers the broadest range of planned replacement toric lenses. This wide range of corrections increases the chances of a successful fit. In March, CVI acquired Natural Touch, a line of cosmetic soft contact lenses sold in the United States to patients who want to change or enhance the appearance of their natural eye color. Geographic Expansion In January 1997, CVI completed an agreement with Rohto Pharmaceuticals, Inc., a leading manufacturer of contact lens care products and the largest supplier in Japan of nonprescription ophthalmic products, to market CVI lenses in Japan and other Pacific Rim countries. CVI expects to market these products in about two years, following regulatory approval from the Japanese Ministry of Health. With more than eight million contact lens wearers, Japan has the second highest number of contact lens wearers in the world, with lens revenue growing 12 more than 15% per year. Although the Japanese market has historically been dominated by hard contact lenses, soft lenses are increasing in popularity. The Rohto agreement positions CVI to capitalize on this emerging trend. In December, The Company completed the acquisition of Aspect Vision Care Limited of Southampton, England. Aspect Vision is expected to add about $45 million to CVI's 1998 revenue and will be used as a vehicle to market CVI products to Europe. Aspect Vision Care Limited Aspect Vision Care started business in 1973 as Focus Contact Lens Laboratory, Ltd. manufacturing contact lenses for individual orders using lathing technology. In 1991, Aspect Vision Care Limited was formed and sold cast molded lenses manufactured by an associated company. In 1994, Aspect began its own manufacturing. Today, Aspect sells low cost, cast molded conventional, disposable and planned replacement lenses primarily in Europe. Aspect also provides private label lenses to many European retail optical chains. According to industry sources, Aspect has a strong franchise in the United Kingdom, where it leads the industry in unit sales of conventional lenses and is second in total unit volume. Sales in the U.K. account for approximately one-half of Aspect's volume. The remaining revenue comes from its Italian subsidiary and from sales to European distributors and other contact lens companies. Fifteen direct sales representatives service the U.K. and Italian markets. Practitioners have reported that Aspect's lenses offer above average comfort, a successful initial fit rate and competitive pricing. A 1997 study comparing eight brands of disposable lenses published in Contact Lens and Anterior Eye, a publication of the British Contact Lens Association, found that Aspect's disposable Frequency-55 lens was one of three lens brands that "achieved relatively high levels of fitting success", 90% for Aspect's product versus 70% for the lowest of the eight rated brands. Aspect manufactures its lenses using its patented UltraSYNC technology, a synchronized molding system that produces a complete finished lens with minimal manual labor. No polishing, buffing or finishing is required. In 1997, Aspect won the Queen's Award for Technological Achievement for the development of the UltraSYNC system, one of only 15 awards presented each year and the first such award given to a contact lens company. Aspect also received ISO 9001/EN 46001 certification in 1997 allowing its products to be CE marked for sale in European markets ahead of the June 1998 deadline. Aspect adds both marketing and manufacturing capabilities to CooperVision. In marketing, CooperVision gains immediate access to European and other international markets for its line of specialty contact lenses. In combining their manufacturing technologies, Aspect Vision and CooperVision will become the only contact lens company in the world that can produce lenses from the three major contact lens manufacturing technologies: cast molding, precision lathing and FIPS, CooperVision's patented combination of lathing and molding. With this complete range of technologies, CooperVision will be able to offer its customers a wide range of lenses and wearing cycles to meet the needs of most contact lens patients. Aspect's proprietary know-how is expected to lead to a second generation of the FIPS toric manufacturing process that can reduce production costs, increase production capacity at existing facilities and provide improved lens comfort using Aspect's patented edge design technology. Aspect employs about 650 people in the U.K., with about 600 staffing the manufacturing division in over 85,000 square feet in Hamble, near Southampton. An additional 60,000 square feet has been acquired for the consolidation of customer service and distribution and for additional manufacturing. 13 Contact Lens Market Overview In 1996, worldwide sales of soft contact lenses totaled about $2 billion at the manufacturers' price level and are expected to grow about 10% annually through the year 2000, as contact lenses become more popular and as lenses are replaced more frequently than in the past. North America accounts for about 50% of the total market. Sales of soft lenses comprise about 90% of United States contact lens revenue; hard lenses--primarily those manufactured from rigid gas permeable materials--represent about 10%. Some markets outside of the United States, particularly Japan and Germany, fit more hard lenses than the United States, although soft lenses are gaining greater acceptance. Most soft lens wearers replace their lenses on one of three schedules: conventional wear lenses are replaced after 12 to 24 months with periodic cleaning throughout the life of the lens; planned replacement lenses are replaced every one to three months; and disposable wear lenses are changed as often as daily and up to every two weeks, depending on which product the practitioner prescribes. Disposable and planned replacement lenses are supplanting conventional lenses, enhancing revenue per wearer per year throughout the industry. Many practitioners believe that changing lenses more frequently improves ocular health and adds more comfort and convenience for the patient. Another way to view the soft contact lens market is to divide it into the non-specialty, spherical lens segment and the specialty lens segment. Non-specialty spherical lenses correct the most common visual defects such as myopia (nearsightedness) or hyperopia (farsightedness) and do not offer value-added features for patients with special visual needs. They represent approximately two-thirds of the United States soft contact lens market and about 80% of the soft lenses sold in the rest of the world. Specialty lenses account for the remaining one-third of the United States market and about 20% outside the United States. Specialty lenses include the following: toric lenses to correct astigmatism opaque lenses, which alter the appearance of the eye's natural color enhancement tint lenses that accent natural [ILLUSTRATION] eye color premium lenses that resist protein deposit, improve visual acuity, or improve comfort for patients with dry eye syndrome Although they are a smaller part of the market, specialty lenses are growing more rapidly than non-specialty lenses and generate higher gross margins. 14 Soft Toric Contact Lenses The soft toric contact lens market is a high growth specialty niche that accounts for approximately 15%, or $170 million, of annual sales in North America and about $100 million of annual sales in the rest of the world. Soft Toric Lens Market Model(1) By Lens Replacement Cycle
Planned Replacement Custom Conventional Total Market - ---------------------------------------------------------------------------------------------------------------------- Location Size Annual Size Annual Size Annual Size Annual ($'s millions) Growth ($'s millions) Growth ($'s millions) Growth ($'s millions) Growth - ---------------------------------------------------------------------------------------------------------------------- North 65-70 >50% 35-40 10-15% 55-65 -10% 155-175 20% America - ---------------------------------------------------------------------------------------------------------------------- Rest of 10-15 >25% 15-20 10-15% 60-65 >15% 85-95 15% World - ---------------------------------------------------------------------------------------------------------------------- TOTAL 75-85 >40% 50-60 10-15% 115-130 2-3% 240-270 18% - ---------------------------------------------------------------------------------------------------------------------- (1) The Cooper Companies' estimates The worldwide outlook for soft toric lenses is favorable. Forty-five percent of the United States population who require vision correction suffer some degree of astigmatism, but only about 6% currently wear toric lenses. With today's technologies, soft toric lenses have been developed in a wide range of lens parameters, and the previously underserved astigmatic patient base can now wear contact lenses. In addition, many patients, including those with astigmatism, who "dropped out" of the contact lens market because of the poor performance of their lenses can reenter the market using these improved products. Surgical techniques to correct visual defects, including laser treatment, have also enticed many contact lens dropouts back to their eyecare practitioner's office for evaluation. When presented with the detailed risk-reward profile of surgery and the unreimbursed charges, many patients will choose the new generation of soft toric lenses rather than nonreversible, expensive laser surgery. Finally, practitioners who specify lenses for their astigmatic patients increasingly prescribe soft toric lenses as a way to differentiate their practices. 15 CooperVision Products In North America, CooperVision concentrates on marketing specialty lenses in both planned replacement and conventional wearing cycles. CVI is the only manufacturer to offer eyecare practitioners all three types of toric lenses: a custom-prescription conventional lens, Hydrasoft Toric a three-month planned replacement lens, Preference Toric and a conventional lens, Cooper Toric With this wide range of lenses, practitioners can fit most astigmatic patients quickly and effectively with CVI products. CVI acquired Hydrasoft Toric in 1993. Since then, this brand has retained its reputation as the easiest to fit and most successful custom toric lens on the market. The popular Preference Toric quarterly planned replacement lens was launched in 1994. Patients with more common astigmatic prescriptions who do not require a custom prescription lens wear these lenses. Preference Toric is available in more than three times as many corrective combinations as its leading competitor. It offers excellent visual acuity, reproducibility and all-day comfort. The Cooper Toric lens, for conventional wear, is, like many CVI products, made with a polymer called Tetrafilcon A that resists deposits from protein in the tears forming on the lenses. These deposits can distort vision and may inflame the underside of the eyelid. While CooperVision concentrates on the toric lens market, it also offers practitioners specialty and conventional spherical lenses. The Preference lens, introduced in 1991, is a premium planned replacement lens that combines the benefits of CVI's deposit resistant material with quarterly replacement. CooperFlex was introduced in 1997 for monthly wear. The recently acquired Natural Touch line of opaque lenses are spherical lenses for patients who want to alter the appearance of their natural eye color. Other spherical brands include Hydrasoft Sphere, Vantage, Permaflex, Permalens and Cooper Clear. These lenses have varying water contents and degrees of oxygen permeability to meet specific patient requirements. They are available in different designs, parameters, diameters, base curves and lens edges, providing practitioners with a wide clinical choice. 16 Aspect Vision Care Products Aspect Vision Care's range of branded lenses includes both traditional and disposable soft lenses available in a number of designs, polymers and convenient packages. The Aspect line competes in segments that CooperVision currently does not, giving the combined business more complete coverage of the important segments of the market. The Aspect Vision Product Line SILVER 2 A 38% water content lens designed to provide better handling, especially in the lower powers. It is a comfortable daily wear lens available in both plus and minus powers that can also mask minor astigmatism. SILVER 38 THIN A new generation of daily wear lens offering a single base curve that fits more than 80% of all myopic (nearsighted) corneas. Provides optimal balance between wearing comfort and lens handling, as its thin lens periphery provides greater comfort than other lenses. SILVER O7 VH TINT A 38% water content lens with an overall unique pale blue visibility handling tint. A durable lens ideal for both near- and farsighted patients. FORMULA 55 UV VH TINT A 55% water content lens for frequent replacement. Incorporates a unique aqua green visibility tint in addition to a UV blocking agent. FREQUENCY 38 DW DISPOSABLES Designed to be worn on a daily basis and replaced monthly. Offers enhanced patient comfort, ease of handling and visibility handling tint. Ideal for the dry eye patient. Produced in a convenient blister pack. FREQUENCY 55 DISPOSABLES A 55% water content lens for daily wear and bi-weekly or monthly replacement. Packaged in blisters and incorporates the Aspect visibility handling tint. FREQUENCY DISPOSABLE UV A 58% water content lens for daily wear and monthly replacement. Incorporates a UV blocking agent and a visibility tint. Packaged in blister packages. "HINTS OF TINTS" Lenses in a range of soft, subtle colors designed to enhance the eye color of fashion conscious patients but also maintain a natural look. These subtly tinted lenses have a clear pupil with a tinted iris to enhance the patient's natural color. Available with the same parameters as SILVER 2 and also in special orders for other lenses. 17 Growth Strategy CooperVision's goals are to lead the global toric soft contact lens market by building on its established position in the high-margin toric and spherical specialty lens segments and expanding its market position in the opaque and premium spherical segments. Where appropriate, CVI will also selectively pursue the conventional sphere market. The marketing agreement with Rohto and the acquisition of Aspect Vision have positioned CVI to execute its strategy in Europe and Asia. CVI aims to expand its market share through aggressive marketing, product development and business development, as it enters new toric and spherical lens market segments and extends the range of prescription powers in its existing product lines. In 1997, new products developed internally over the past five years generated 41% of CooperVision's sales, while 34% of sales were products acquired externally during that time. Tools for Global Growth Marketing and Sales Expertise CVI employs more than 60 commission-based direct sales representatives with above-average industry experience, to market its products in North America. Their incentive compensation program creates a high level of dedication and motivation. Thirty-five customer service representatives and technical consultants, who average approximately five years of industry experience, handle approximately 4,000 practitioner calls each day. CVI's Worldwide Website (http://www.coopervision.com) informs patients and overseas distributors about its products and services. In Europe, Aspect Vision Care employs seven sales representatives in the United Kingdom and eight in Italy. Optical distributors sell Aspect products throughout the rest of Europe. Aspect Vision can be found on the Internet at http://www.aspect-vision.co.uk. 18 Strong Customer Loyalty Specialty contact lenses command high brand loyalty from practitioners, who resist switching once a particular brand is prescribed and successfully fit, creating an "annuity stream" of replacement lenses. CVI benefits from this brand loyalty, particularly in the toric lens market, where patients are often difficult to fit. Eyecare practitioners demand quality products to ensure their patients' optimum ocular health and vision, and CVI generates brand loyalty with its reputation for premium quality products. Responsive Customer Service In the United States, CVI's order entry system links its New York and California customer service centers to ensure efficient order processing and to provide a backup system to maintain a high level of continuous service. In 1997, both locations upgraded their telephone equipment to the latest automated technology. Aspect Vision's customer service center in the United Kingdom supports all its customers worldwide. Advanced Manufacturing Technology and Lens Design Historically, toric contact lenses were difficult to fit because early generation lenses could not be kept properly positioned on the eye. Today, CooperVision and Aspect Vision produce lenses with outstanding stability and reproducibility, capitalizing on more than two decades of experience with toric lens design and manufacturing technology. In the United States, CVI uses two manufacturing technologies. The first, a proprietary technology called FIPS, combines low-cost cast molding and precision lathing to produce a wide range of low-cost lens prescriptions. Lenses made with the patented FIPS manufacturing technology using deposit resistant Tetrafilcon A material are extremely difficult to duplicate, given CVI's extensive knowledge and experience. Using FIPS, CVI can manufacture over 13,000 planned replacement toric corrections-more than three times as many as its competition who use molding to manufacture their toric lenses. With this wide range of parameters, practitioners can more easily find just the right combination of power, axis and cylinder to precisely and comfortably fit their patients. 19 The second technology, automated lathing, generates CVI's line of custom toric lenses. This process can produce more than 13 million different lens prescriptions for difficult to fit patients. Aspect Vision's patented UltraSync manufacturing process adds a third manufacturing technology: cast molding. CVI is now the only contact lens manufacturer in the world who can produce lenses with all of the most common fabrication methods. With molding, CVI can now, in appropriate market segments throughout the world, market low cost spherical lenses. In fiscal 1997, CVI produced about five million lenses in facilities totaling 73,600 square feet. Aspect Vision manufactures in an approximately 85,000 square feet facility in Hamble, near Southampton, England, and has acquired another 60,000 square feet to consolidate customer service and distribution and for additional manufacturing. CVI expects that cost efficiencies will result from rationalizing the two organizations' manufacturing facilities. CooperVision's largest facility, located in Scottsville, New York, currently manufactures soft toric and spherical lenses. Because of increasing demand for its planned replacement toric lenses, CooperVision has more than doubled its Scottsville capacity since 1995. CooperVision's Huntington Beach, California, facility produces custom soft toric and spherical lenses from a material known as Methafilcon B, using a precision lathing technology. Rigid gas permeable lenses are made in its Markham, Ontario facility. CVI manufactures under the U. S. Food and Drug Administration's Current Good Manufacturing Practices and expects to achieve ISO 9001 certification and CE Mark approval which will be mandatory for all products shipped into the European community in June 1998. Aspect, which also manufacturers under the FDA guidelines, received ISO 9001/EN 4601 certification in 1997, allowing its products to be CE marked. 20 Cooper Surgical Business Overview and 1997 Results
CooperSurgical 1997 Revenue $24.8 Million CooperSurgical 1997 Operating Income $2.5 Million - ------------------------------------------------- ------------------------------------------------- Percent Increase over 1996 44% Percent Increase over 1996 49% - ------------------------------------------------- ------------------------------------------------- Percent of Cooper Companies' Revenue 18% Percent of CooperSurgical Revenue 10% - ------------------------------------------------- -------------------------------------------------

CooperSurgical (CSI), established in 1990, develops, manufactures and distributes diagnostic and surgical instruments, equipment, accessories and devices for the rapidly growing obstetrics and gynecologic segments of the worldwide women's healthcare Increasingly, women consider gynecologists their primary care provider, as U. S. government policy emphasizes women's healthcare, and managed care organizations liberalize reimbursement for gynecological diagnostic and therapeutic procedures. CSI is capitalizing on the expanding role of obstetricians and gynecologists (OB/GYNs) through its product development and acquisition efforts and through alliances with companies that are developing new technologies for this growing market segment. Since 1990, CSI has completed five acquisitions. 21 CooperSurgical Acquisitions Since 1990 ACQUISITION PRODUCT LINE - -------------------------------------------------------------------------------- FRIGITRONICS, INC. Colposcopes Cryosurgery Equipment - -------------------------------------------------------------------------------- EURO-MED, INC. Biopsy Instruments Gynecology Instruments Instrument Cleaning Systems - -------------------------------------------------------------------------------- RUMI Uterine Manipulator with Disposable Tip for Laproscopic Surgery Koh Colpotomizer Accessories for Laproscopic Hysterectomy - -------------------------------------------------------------------------------- UNIMAR, INC Pipelle Disposable Endometrial Biopsy Device Kronner Manipujector Disposable Uterine Manipulator Cervex-Brush Disposable Cervical Pap Smear Sampling Device - -------------------------------------------------------------------------------- MARLOW SURGICAL Disposable Intrauterine Catheters and Products to TECHNOLOGIES, INC. Treat Infertility Nu-Tip Laparoscopic Instruments with Disposable Tips Disposable Balloon Cannula VerreScope Micro Laparoscopy System - -------------------------------------------------------------------------------- Market Overview Women's healthcare has become a central focus of health policy in the United States, and OB/GYNs are expanding their role in providing a continuum of care to women. As a result, obstetric and gynecologic training programs increasingly emphasize programs and practice designed to meet their patients' needs from adolescence to senior years. Each year, there are about 60 million office visits to the over 35,000 obstetricians and gynecologists in the United States. These physicians assist in approximately four and a half million births and perform over two million surgical procedures. They diagnose and treat conditions such as pelvic pain, infertility, sexually transmitted diseases, abnormal uterine bleeding, cancer of the female reproductive system and its precursors and menopause related conditions such as osteoporosis. It is a large and growing market. Recent emphasis on preventive care for women has expanded reimbursement by managed care organizations, which now cover screening services such as Pap Smears, annual gynecologic exams, mammogram and osteoporosis evaluations. In addition, both governmental and private organizations are targeting new resources toward women's healthcare. 22 A large number of medical device companies serve the women's healthcare market. Many are small with narrow product lines and lack the resources necessary to expand their market presence and effectively introduce new technologies. This fragmented industry is now consolidating. CSI is aggressively participating, identifying opportunities to leverage its sales and marketing strengths and raise gross margins of the products it acquires by improving manufacturing productivity. CooperSurgical Products CSI markets products for in-office diagnostic and surgical procedures, reproductive medicine and operative gynecologic procedures, including those performed using a minimally invasive approach, in both the hospital and outpatient setting. Approximately two-thirds of CSI's sales during fiscal 1997 were disposable or semi-disposable products that tend to generate a recurring revenue stream. Products for Office Practice Colposcopy. Colposcopy is used to diagnose ailments of the vaginal canal and cervix. Virtually all gynecologists and many primary care physicians perform this procedure in the office rather than the hospital or the surgicenter. CSI offers a full line of colposcopy systems in a variety of configurations. CSI's overhead zoom colposcope systems currently account for the majority of CSI's sales of colposcopy systems to gynecologists' offices because they are easy to use and particularly well suited for use in conjunction with the LEEP procedure that is described below. CSI has announced plans to introduce the first in a series of products in its new Cerveillance System. This system is designed to improve the accuracy of colposcopic screening and diagnosis of cancer of the cervix and its precursors. Cervical cancer is the second most common cancer in women, with 500,000 cases reported yearly throughout the world. The new system features digital imaging hardware and software components that will be introduced over the next several years. 23 Loop Electrosurgical Excision Procedure ("LEEP"). The LEEP treatment procedure is used in the physician's office-a lower cost setting than the hospital-in conjunction with colposcopy to both diagnose and treat cervical disease. The LEEP procedure is an easily learned, cost-effective treatment alternative that provides biopsy samples for histological analysis to evaluate treatment success. LEEP has become the preferred modality for precancerous cervical lesions. CSI has developed a complete line of products to surround the LEEP procedure. These include the hardware--the LEEP System 1000 electrosurgical generator and CooperSurgical Smoke Evacuation System 6080--as well as the supporting nonconductive autoclavable instrumentation and ancillary disposable products that are used in each case. CSI has recently improved the instrumentation by introducing the Prima Series specula made from a polymer that resists the staining and surface degradation commonly found with standard coated instruments supplied by competitors. Ancillary disposable products such as the single use sterile LEEP Electrodes and LEEP Redikit generate revenue for CSI on each procedure performed. Hysteroscopy. Diagnostic hysteroscopy, one of the first minimally invasive procedures performed, is used to visualize and obtain samples from the uterine cavity to diagnose uterine disorders such as abnormal bleeding. Operative hysteroscopy allows the physician to perform various therapeutic procedures under direct visualization. Historically, both diagnostic and therapeutic uterine procedures were performed in the hospital, but newer technology has resulted in a shift to more cost-effective venues: operative procedures in outpatient facilities and diagnostic procedures in physicians' offices. This lowers procedure costs and improves the quality of care. In 1998, some in-office hysteroscopy procedures will become eligible for third party reimbursement making it more attractive for physicians to adopt diagnostic hysteroscopy as an in office procedure. CSI's diagnostic hysteroscopy systems, including the Hysteroscopy Series 4000 and accessories, provide state-of-the-art viewing and tissue sampling. 24 The CooperSurgical Cerveillance System Innovative Technology Tracks Disease Progress, Simplifying Diagnosis and Improving Accuracy and Cost-Effectiveness BACKGROUND Cervical cancer is the second most common cancer affecting women with 500,000 cases reported yearly throughout the world. In 1996, its worldwide prevalence was estimated at 2.6 million. Five times that many women show signs of its precursors. The American Cancer Society estimates that 15,700 new cases are diagnosed each year in the United States, resulting in approximately 4,900 deaths. Since the 1950's, the U. S. mortality rate for cervical cancer has declined by 70% primarily due to mass screening efforts with the Papanicolaou Smear (Pap Smear). Recent changes in Pap Smear grading and medical liability fears from missed diagnoses have doubled the number of ASCUS (Atypical Squamous Cell of Undetermined Significance) results to approximately 10% of all Pap Smears from the expected 5% in a normal population distribution. When a Pap Smear suggests the presence of a high or low-grade lesion, physicians tend to schedule a more definitive examination immediately, as they must consider that the ASCUS Smears carry a 10%-40% underlying risk of a precancerous condition. The cost to the U. S. healthcare system to follow-up ASCUS results has been estimated at up to $5.5 billion annually. One study showed that over 50% of cases could avoid biopsy by serially monitoring the cervix to identify naturally regressing lesions. Follow-up alternatives today include a series of repeated Pap Smears or an examination called colposcopy, where a colposcope -- a specialized low-powered stereo microscope -- is used to illuminate and magnify the cervical and vaginal tissue to identify or rule out pathology. The physician carefully examines the tissue looking for very subtle changes in color, texture and blood vessel patterns that indicate an abnormality. Suspicious sites are biopsied and reviewed histologically. Colposcopy, however, has limitations. It can be difficult to distinguish the subtle changes that occur between normal cervical tissue and cancer, and the exam is time consuming and costly when compared to the Pap Smear. Colposcopy, like Pap Smears, is associated with legal risk if the physician misses a diagnosis. Recent advances in 35 millimeter photography and video imaging have improved colposcopic documentation somewhat, but current image capture technology is limited, particularly image storage and retrieval for subsequent evaluation, quantitative assessment and patient education. THE NEW COOPERSURGICAL CERVEILLANCE SYSTEM The new CooperSurgical Cerveillance System, a family of hardware and software products designed to improve colposcopy and cervical cancer screening, will be introduced over the next several years. Many features in the new system are patented. The first product in the new system, the Cerveillance Scope, expected to be introduced in the first calendar quarter of 1998, uses state-of-the-art digital technology for cervical visualization and documentation. It redefines image capture, enhancement and analysis allowing measurement of lesion size and documentation of cervical changes. It is the first device to combine digital imaging technology and proprietary software in a fully integrated compact colposcope -- an optical instrument used to examine the vagina and cervix -- the lower and narrow end of the uterus. In addition to the Cerveillance Scope, the Cerveillance System is expected to eventually include: a hand held computer imaging device to be used in cervical screening a networking computer that stores patient records and analyzes digital images using wireless transmission technology, providing a gateway for telemedicine a disposable kit to assist with identification and quantification of cervical lesions a series of software modules that will provide additional patient management and diagnostic capabilities. These important advances are possible as The Cerveillance System uses digital capture technology to convert images of the genital tract to a record that, through CSI's proprietary software, can be stored, manipulated, enhanced, analyzed and transmitted electronically. CSI plans future software products, including reference standard packages, to simplify the diagnostic procedure and improve its accuracy. These software upgrades will be designed to be added to the system without the expense of a new colposcope. 25 Gynecologic Screening and Diagnostic Devices CSI offers a broad line of products for office diagnosis and treatment. Many incorporate patented designs or proprietary manufacturing techniques including: The Euro-Med Classic Series Biopsy Instruments sample tissue suspected to be cancerous in the lower genital tract. CSI manufactures these high quality instruments in Tuttlingen, Germany, renown for world class manufacturing of hand held surgical instruments. Physicians biopsy the intrauterine cavity with the Pipelle Endometrial Suction Curette, clinically; the most reliable and consistent device of its type which CSI markets under a long-term supply agreement. The Cervex-Brush Cervical Cell Sampler is used to collect ecto- and endocervical cells for Pap smears. Its patented design allows physicians to collect cervical cells with reduced bleeding and patient discomfort. CSI also provides a range of specialty instruments used daily by the OB/GYN including the recently introduced Comfort View line of products used with obese patients. The products in this line -- the Snowman specula and the Tru-View lateral wall retractor -- solve clinical problems unique to this patient population. Products for Operative Gynecology Minimally invasive procedures for complex gynecologic disorders will become more prevalent as healthcare cost containment increases and less traumatic treatment alternatives are developed. CSI offers both capital and disposable product lines to support this trend. These include: The RUMI uterine manipulator, a patented system for controlling and positioning the uterus during laparoscopic surgery. Its advanced design provides the gynecologist with substantially improved pelvic visualization, access and traction during laparoscopic surgery. The KOH Colpotomizer facilitates visualization of anatomical landmarks enabling the surgeon to perform a laparoscopic hysterectomy with greater confidence and accuracy. As the number of hysterectomies performed using a minimally invasive approach increases, CSI is well positioned to maximize its market potential with this system. The Kronner Manipujector for uterine manipulation in routine laparoscopic procedures. This device commands approximately 50% of the disposable uterine manipulator market. The patented Nu-Tip instruments for laparoscopic surgery, which combine the convenience of disposables with the cost savings and performance of reusables to deliver a consistent standard of care. 26 The VerreScope system, an improved micro-laparoscopic instrumentation and visualization system for either the hospital operating room or the office surgical suite, was introduced in late 1997. It delivers more procedural versatility than many existing competitive systems. The patented disposable Balloon Cannula access device which improves operative control and reduces patient trauma in laparoscopic procedures. In 1997, CSI executed its strategy to surround the most commonly performed procedures in obstetrics and gynecology with advanced products by expanding its product offerings in hysterectomy and sterilization, the two procedures most frequently performed by the OB/GYN. Through a distribution agreement, CSI now markets the Zeppelin Hysterectomy Clamps and Scissors, long recognized by gynecologic surgeons as the premier product for the abdominal surgical approach, and also launched the Cater Tubal Assistant, an internally developed product for post partum tubal ligation. Products for Reproductive Medicine CSI entered the reproductive medicine market in 1996 by acquiring Unimar, a leading supplier of specialized disposable medical devices for gynecology. These include the Unimar Aspirette, for aspiration of endocervical content, the HUI Mini-Flex, which facilitates radiographic examination of the uterus, and the Pipelle, for endometrial assessment. In April 1997, CSI acquired marketing and distribution rights in the United States to the Wallace Women's Healthcare line of disposable products for advanced techniques in reproductive medicine. Part of the Marlow acquisition, this line significantly enhances CSI's presence in reproductive medicine. Products include the prestigious line of Wallace intrauterine catheters, widely recognized by physicians specializing in infertility as delivering higher rates of pregnancy than comparable competitive products. 27 Growth Strategy CSI plans to build a diverse selection of products for women's healthcare through a balanced program of acquisition and internal product development. By combining companies and product lines, CSI will capitalize on its existing marketing, manufacturing and distribution capabilities to further leverage its well-established customer relationships. CSI expects to expand its current position in the reproductive medicine market and is considering product opportunities in obstetrics, urinary incontinence and osteoporosis screening. The new Cerveillance System is expected to expand CSI's presence in the diagnosis of cervical disease. Marketing and Sales CSI employs 46 sales representatives, mail-order catalogs, targeted direct mail and a network of international distributors, to gain widespread access to the OB/GYN market. CSI's marketing programs target a single medical specialty, and their representatives develop a broad understanding of gynecology and obstetrics and build knowledge-based personal relationships with their customers. Approximately 45,000 CSI direct mail catalogs reach physicians, surgery centers and hospital operating room staffs three to four times each year. Physicians can purchase established product lines through the catalog, while the sales force concentrates on explaining the benefits of CSI's newer, more technically advanced products, enabling CSI to expand its share of each customer's business and optimize their point of sale contact. Manufacturing CSI manufactures and distributes its products in Shelton, Connecticut. ISO 9001/EN 46001 certification and CE Mark approval for its products is expected in 1998. CSI's manufacturing capability is a strategic advantage, allowing it to decrease the cost of the products it acquires through efficiencies of integration. For example, the cost to manufacture products acquired from Unimar and Marlow has been significantly reduced through efficiencies generated by CSI. 28 Hospital Group of America Business Overview and 1997 Results HGA 1997 Revenue $52.7 Million HGA 1997 Operating Income $6.0 Million - ------------------------------------------------- ------------------------------------------------- Percent Increase over 1996 23% Percent Increase over 1996 133% - ------------------------------------------------- ------------------------------------------------- Percent of Cooper Companies' Revenue 37% Percent of HGA Revenue 11% - ------------------------------------------------- -------------------------------------------------

Hospital Group of America (HGA) offers abroad continuum of psychiatric care to patients through inpatient, outpatient, partial, educational and residential treatment programs. It owns and operates three psychiatric hospitals: Hartgrove Hospital in Chicago, Illinois (119 beds), Hampton Hospital in Rancocas, New Jersey (100 beds) and MeadowWood Hospital in New Castle, Delaware (50 beds) and a residential treatment center for adolescents in Kouts, Indiana, The Midwest Center for Youth and Families (50 beds). The Midwest Center was opened in April 1997 to support Hartgrove Hospital and surrounding communities. HGA also owns and operates 17 outpatient and day treatment centers and provides educational and other ancillary services to support its hospitals. 29 The hospitals offer intensive and structured treatment predominantly for children and adolescents who suffer from a variety of mental illnesses, chemical dependencies combined with mental illness, and geriatric patients with behavioral disorders generally involving dementia. Services include comprehensive psychiatric and chemical dependency evaluations, inpatient and outpatient treatment and partial hospitalization. The Midwest Center provides care to patients who have been unresponsive to outpatient treatment, partial hospitalization or in-home treatment and to those with a history of multiple hospitalizations. In 1997, HGA formed its psychiatric contract management service division. This business provides behavioral health consultation and contract management service in behavioral health for acute care hospitals. In addition to managing inpatient units, the division facilitates partial and outpatient programs. The consultation services include advice and assistance in preparing for regulatory surveys, marketing and referral source development, professional services including recruiting of psychiatrists and other key personnel, clinical program management structure, accounts receivable management, management care contract negotiation and data processing services. The division now has agreements with eight psychiatric inpatient or day treatment programs. The Joint Commission of Accreditation of Healthcare Organizations ("JCAHO"), a national organization that periodically reviews a facility's staff, programs, physical plant, policies and procedures, has given each of HGA's hospitals and its residential treatment center its highest level of accreditation. Over the past three years, HGA's performance has improved. Operating trends show rising inpatient admissions, a decline in length of stay and an increase in outpatient visits. Operating margins now exceed 10%, well above the industry norm. Hospital Group of America Three Year Trend in Key Operating Statistics 1997 1996 1995 - -------------------------------------------------------------------------------- Acute Admissions 6,326 5,353 4,782 - -------------------------------------------------------------------------------- Residential Admissions 54 0 0 - -------------------------------------------------------------------------------- Total 6,380 5,353 4,782 - -------------------------------------------------------------------------------- Combined Length of Stay (days) 11.5 11.9 13.6 - -------------------------------------------------------------------------------- Acute Average Daily Census 187 175 171 - -------------------------------------------------------------------------------- Residential Average Daily Census* 24 0 0 - -------------------------------------------------------------------------------- Total 212 175 171 - -------------------------------------------------------------------------------- Outpatient Average Daily Visits 288 172 106 - -------------------------------------------------------------------------------- *Opened in April 1997. 30 Market Overview Recent data indicate that approximately 10% of total U. S. healthcare resources are spent to treat psychiatric disorders. With third party payor cost-containment pressures, providers have adjusted traditional methods of psychiatric hospitalization. While the overwhelming majority of treatment is still conducted through psychiatric hospitals, day treatment and outpatient programs are expanding, growing nationally from 10% of total admissions in 1992 to 28% in 1995, the latest year for which data is available. Facilities Hartgrove Hospital Hartgrove Hospital is licensed for 119 short-term acute psychiatric beds. It has a fully integrated day treatment and outpatient program in addition to its inpatient beds. It primarily treats children and adolescents. Hartgrove is a leading provider of psychiatric services in the State of Illinois and is among the largest in the Chicago metropolitan area, providing service to abused, traumatized and disadvantaged children and adolescents and to complex neuropsychiatric clients. It also provides multilingual family and group therapy and extended psychosocial and counseling services to neighborhood mental health agencies, schools, the correctional system and individual practitioners. Hartgrove's staff includes specially trained personnel able to competently treat the very acute patient. The Midwest Center for Youth and Families is close to the Hartgrove service area and is part of its continuum of care. Hampton Hospital Hampton Hospital is licensed for 100 short-term acute psychiatric beds. It has ambulatory programs offering services to older adults, the general adult population and adolescents. Hampton is a regional leader in providing psychiatric services to clients with both primary psychiatric disorders and concomitant difficulties with substance abuse. As the only private psychiatric hospital in Burlington and Camden Counties, New Jersey, its primary service market, Hampton is also a regional leader in the treatment of patients with geriatric disorders, including those in nursing homes. 31 These programs are complemented by day programs and inpatient care and staffed by certified geropsychiatrists, licensed clinical nurse practitioners and social workers. Full-time psychiatrists certified in adult psychiatry and addictionology, supported by certified drug and alcohol counselors, staff a dual diagnosis service. MeadowWood Hospital MeadowWood Hospital; in New Castle, Delaware is licensed for 50 short-term acute psychiatric beds. It treats children, adolescents, adults and geriatric patients. MeadowWood has developed a service delivery system to successfully treat traumatized and abused children and adolescents. It also provides a day treatment program for children and adolescents. Certified geropsychiatrists and adjunct personnel support its full service geriatric care. Its service capabilities extend throughout the region, with treatment locations in southern and central Delaware. Growth Strategy HGA strives to be the preferred provider in the selected markets in which it operates. It plans to: Continue to deliver quality short-term inpatient acute care primarily to children, adolescents and specialty geriatric clients at facilities it owns or manages. Provide select services for longer term residential care for adolescents and adults. Establish additional day treatment and outpatient sites and programs to further develop a fully integrated continuum of behavioral healthcare services. Retain its position as a leading cost-efficient provider attracting managed care and other payor referrals. Enter into additional management contracts to provide behavioral health services to acute care hospitals. 32 Financial Section Contents 34 Five Year Financial Highlights 35 Two Year Quarterly Information 35 Quarterly Common Stock Price Range 36 Management's Discussion and Analysis of Financial Condition and Results of Operations 40 Management's Statement Regarding Financial Reporting 41 Independent Auditors Report 42 Consolidated Statements of Income 43 Consolidated Balance Sheets 44 Consolidated Statements of Cash Flows 46 Notes to Consolidated Financial Statements THE COOPER COMPANIES, INC. AND SUBSIDIARIES Five Year Financial Highlights Consolidated Operations
Years Ended October 31, (In thousands, except per share figures) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Net operating revenue $ 141,473 $ 109,131 $ 97,090 $ 95,645 $ 92,652 - --------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes $ 21,784 $ 12,115 $ 230 $ (9,297) $ (33,655) - --------------------------------------------------------------------------------------------------------------------- (Benefit of) provision for income taxes (26,606) (4,488) 115 (4,600) 417 - --------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before extraordinary items 48,390 16,603 115 (4,697) (34,072) - --------------------------------------------------------------------------------------------------------------------- Loss on sale of discontinued operations, net of taxes (18,000) -- -- -- (13,657) - --------------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary items 30,390 16,603 115 (4,697) (47,729) - --------------------------------------------------------------------------------------------------------------------- Extraordinary items 992 -- -- -- 924 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) 31,382 16,603 115 (4,697) (46,805) - --------------------------------------------------------------------------------------------------------------------- Less, preferred stock dividends -- -- -- 89 320 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ 31,382 $ 16,603 $ 115 $ (4,786) $ (47,125) - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share: - --------------------------------------------------------------------------------------------------------------------- Continuing operations $ 3.70 $ 1.41 $ 0.01 $ (0.47) $ (3.43) - --------------------------------------------------------------------------------------------------------------------- Discontinued operations (1.38) -- -- -- (1.36) - --------------------------------------------------------------------------------------------------------------------- Extraordinary items 0.08 -- -- -- .09 - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share $ 2.40 $ 1.41 $ 0.01 $ (0.47) $ (4.70) - --------------------------------------------------------------------------------------------------------------------- Average number of shares used to compute earnings per share 13,071 11,761 11,576 10,193 10,035 - --------------------------------------------------------------------------------------------------------------------- Memo earnings per share data: - --------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes $ 1.67 $ 1.03 $ 0.02 $ (0.91) $ (3.35) - ---------------------------------------------------------------------------------------------------------------------
Consolidated Financial Position
Years Ended October 31, (In thousands, except per share figures) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Current assets $ 68,569 $ 42,495 $ 41,228 $ 43,505 $ 51,875 - -------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 39,523 34,674 34,062 34,787 39,895 - -------------------------------------------------------------------------------------------------------------- Intangible assets, net 36,698 21,468 14,933 15,327 16,285 - -------------------------------------------------------------------------------------------------------------- Other assets 30,508 4,272 1,769 1,439 1,469 - -------------------------------------------------------------------------------------------------------------- Total assets $175,298 $102,909 $ 91,992 $ 95,058 $109,524 - -------------------------------------------------------------------------------------------------------------- Current liabilities* $ 33,617 $ 33,308 $ 39,613 $ 42,256 $ 51,995 - -------------------------------------------------------------------------------------------------------------- Long-term debt 9,125 47,920 43,490 46,184 48,077 - -------------------------------------------------------------------------------------------------------------- Other long-term liabilities 21,023 6,351 10,638 10,272 9,000 - -------------------------------------------------------------------------------------------------------------- Total liabilities 63,765 87,579 93,741 98,712 109,072 - -------------------------------------------------------------------------------------------------------------- Stockholders' equity (deficit) 111,533 15,330 (1,749) (3,654) 452 - -------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $175,298 $102,909 $ 91,992 $ 95,058 $109,524 - --------------------------------------------------------------------------------------------------------------
* Includes current installments of long-term debt 34 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Two Year Quarterly Financial Data
First Second Third Fourth (In thousands, except per share figures) Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------- 1997 Net operating revenue $ 28,376 $ 33,663 $ 38,949 $ 40,485 - --------------------------------------------------------------------------------------------- Gross profit 12,663 16,186 18,565 20,196 - --------------------------------------------------------------------------------------------- Income before tax 2,896 4,942 6,161 7,785 - --------------------------------------------------------------------------------------------- Benefit of income taxes** (414) (431) (1,025) (24,736) - --------------------------------------------------------------------------------------------- Income from continuing operations 3,310 5,373 7,186 32,521 - --------------------------------------------------------------------------------------------- Discontinued operations -- -- -- (18,000) - --------------------------------------------------------------------------------------------- Extraordinary items -- -- -- 992 - --------------------------------------------------------------------------------------------- Net income $ 3,310 $ 5,373 $ 7,186 $ 15,513 - --------------------------------------------------------------------------------------------- Earnings per share: Continuing operations $ 0.28 $ 0.44 $ 0.55 $ 2.14 - --------------------------------------------------------------------------------------------- Discontinued operations -- -- -- (1.19) - --------------------------------------------------------------------------------------------- Extraordinary items -- -- -- 0.07 - --------------------------------------------------------------------------------------------- Earnings per share* $ 0.28 $ 0.44 $ 0.55 $ 1.02 - --------------------------------------------------------------------------------------------- Number of shares used to compute earnings per share 11,880 12,229 12,981 15,169 - --------------------------------------------------------------------------------------------- Memo earnings per share data: - --------------------------------------------------------------------------------------------- Income from continuing operations before income taxes $ 0.24 $ 0.40 $ 0.47 $ 0.51 - --------------------------------------------------------------------------------------------- 1996 Net operating revenue $ 22,249 $ 26,775 $ 28,871 $ 31,236 - --------------------------------------------------------------------------------------------- Gross profit 8,962 12,180 13,337 14,506 - --------------------------------------------------------------------------------------------- Income before tax 677 2,940 4,073 4,425 - --------------------------------------------------------------------------------------------- (Benefit of) provision for income taxes 25 131 (596) (4,048) - --------------------------------------------------------------------------------------------- Income from continuing operations 652 2,809 4,669 8,473 - --------------------------------------------------------------------------------------------- Net income $ 652 $ 2,809 $ 4,669 $ 8,473 - --------------------------------------------------------------------------------------------- Earnings per share* $ 0.06 $ 0.24 $ 0.40 $ 0.72 - --------------------------------------------------------------------------------------------- Number of shares used to compute earnings per share 11,707 11,724 11,793 11,820 - --------------------------------------------------------------------------------------------- Memo earnings per share data: - --------------------------------------------------------------------------------------------- Income from continuing operations before income taxes $ 0.06 $ 0.25 $ 0.35 $ 0.37 - ---------------------------------------------------------------------------------------------
* The sum of earnings per share for the four quarters is different from the full year amount as a result of computing the quarterly and full year amounts on the weighted average number of common shares outstanding in the respective periods. ** Includes a tax benefit of $25 million for the reduction of the valuation allowances against the deferred tax assets in the fourth quarter. Common Stock Price Range
Year Ended October 31, 1997 1996 - ------------------------------------------------------------------------------------------- Quarter Ended High Low High Low - ------------------------------------------------------------------------------------------- January 31 18 3/4 14 8 5 5/8 - ------------------------------------------------------------------------------------------- April 30 22 1/2 16 1/8 11 1/8 6 3/8 - ------------------------------------------------------------------------------------------- July 31 30 18 13 1/8 9 5/8 - ------------------------------------------------------------------------------------------- October 31 41 1/8 28 15 1/8 10 3/4 - -------------------------------------------------------------------------------------------
The Company's common stock is traded on the New York Stock Exchange and the Pacific Exchange. At December 31, 1997 and 1996 there were 2,613 and 2,845 common stockholders of record respectively. No dividends were paid on the Company's common stock in 1997 or 1996 and the Company does not currently anticipate paying cash dividends in the future. 35 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations References to Note numbers are references to the "Notes to Consolidated Financial Statements" of the Company beginning on page 46 of this report. Results of Operations Comparison of each of the fiscal years in the three-year period ended October 31, 1997: Net Sales of Products Net sales of products of the Company's CooperVision ("CVI") and CooperSurgical ("CSI") business units over the three-year period increased as follows:
(In thousands) 1997 vs. 1996 1996 vs. 1995 - ----------------------------------------------------------------------------- Business Unit CVI $15,121 31% $6,436 15% - ----------------------------------------------------------------------------- CSI $ 7,536 44% $4,402 34% - -----------------------------------------------------------------------------
Consolidated net sales of products grew 34% in 1997 and 20% in 1996. 1997 vs. 1996 CVI's net sales grew 31% due primarily to increased sales of toric lenses to correct astigmatism, CVI's leading product group, which grew by 40% and now account for more than 50% of its sales. Sales of the Preference spherical product lines increased 22%, and two new products, Natural Touch, a line of opaque, cosmetic lenses acquired in March 1997, and Encore, a line of planned replacement lenses, increased net sales 6%. The Company believes it is well positioned to compete successfully in specialty niches of the contact lens market, particularly with its Preference line of planned replacement lenses and its line of custom toric lenses. The acquisition of Aspect Vision Care in December 1997 is expected to add approximately $45 million to CVI's 1998 revenue. Net sales of CSI increased 44%. Gynecology products grew approximately 56%, primarily due to sales of Marlow Surgical Technologies, acquired in April 1997, and Unimar products, acquired in April 1996. The increased sales of gynecology products were partially offset by anticipated reduced sales of nonstrategic or non-gynecologic products. 1996 vs. 1995 Net sales of CVI grew by 15% due primarily to sales of the Preference spherical and Preference Toric product lines, which together grew approximately 70%. Sales of toric lenses to correct astigmatism, CVI's leading product group, grew by 35%. These increases were partially offset by anticipated declines in sales of more mature product lines. Net sales of CSI increased 34%. Its gynecology product line grew by approximately 50%, primarily due to sales of Unimar and Blairden products, which were acquired in April 1996 and June 1995, respectively. The effect of increased sales of gynecology products was partially offset by reduced sales of nonstrategic or non-gynecologic products. Net Service Revenue Net service revenue consists of the following:
(In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- Net patient revenue $ 52,704 $ 43,013 $ 40,643 - ----------------------------------------------------------------------------- Management fees from former owners -- -- 1,151 - ----------------------------------------------------------------------------- $ 52,704 $ 43,013 $ 41,794 - -----------------------------------------------------------------------------
Net patient revenue by major providers was as follows:
(Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------ Amount % Total Amount % Total Amount % Total - ------------------------------------------------------------------------------ Commercial Ins. $ 2,656 5% $ 3,989 9% $ 5,055 13% - ------------------------------------------------------------------------------ Medicare 16,897 32 13,034 30 11,767 29 - ------------------------------------------------------------------------------ Medicaid 15,330 29 9,884 23 8,566 21 - ------------------------------------------------------------------------------ Blue Cross 3,619 7 3,617 9 4,015 10 - ------------------------------------------------------------------------------ HMOs 9,697 18 8,896 21 8,714 21 - ----------------------------------------------------------------------------- Other 4,505 9 3,593 8 2,526 6 - ----------------------------------------------------------------------------- $52,704 100% $43,013 100% $ 40,643 100% - -----------------------------------------------------------------------------
Net Patient Revenue (See Note 1 "Net Service Revenue") In fiscal 1997, net patient revenue grew 23% to $52.7 million. The successful transition of the physician group begun in fiscal 1996 contributed to the 50% revenue improvement at Hampton Hospital. In 1997, Hospital Group of America ("HGA") opened the Mid-West Center for Youth and Families, a 50-bed residential treatment facility in Kouts, Indiana, which added $1.3 million in revenue and established a management services division which contracts to manage behavioral health programs. Hartgrove Hospital revenue grew $1.4 million primarily due to an increase in Medicaid reimbursement. Net patient revenue grew 6% to $43 million in fiscal 1996. In each of the last three quarters of 1996, following the transition of the physician group at Hampton Hospital, 36 THE COOPER COMPANIES, INC. AND SUBSIDIARIES HGA's revenue showed improving growth rates compared with the comparable quarter in 1995. Increased patient visits to outpatient and day treatment programs helped offset pressure on revenue resulting from declining average lengths of stay. Outpatient revenue was approximately 11%, 12% and 9% of net patient revenue in 1997, 1996 and 1995, respectively. Management Fees The $1.2 million revenue in 1995 reflects management fees received from the former owner of HGA under an agreement beginning May 29, 1992 and expiring by its terms in May of 1995. COST OF PRODUCTS SOLD Gross profit (net sales of products less cost of products sold) as a percentage of net sales of products ("margin") was as follows:
Margin 1997 1996 1995 - ------------------------------------------------------------------------------- CVI 76% 77% 73% - ------------------------------------------------------------------------------- CSI 52% 51% 52% - ------------------------------------------------------------------------------- Consolidated 69% 70% 68% - -------------------------------------------------------------------------------
The decrease in CVI's margin in 1997 compared to 1996 is due primarily to a write-off of approximately $300,000 of inventory related to an unsuccessful attempt to enter the over-the-counter ophthalmic pharmaceutical market in Canada and increased sales of lower margin Natural Touch products, purchased in March 1997. CVI's margin increased from 1995 through 1996 due to efficiencies from higher production levels and increased sales of toric contact lenses, which have higher margins. CSI's 1996 margin decreased compared to 1995 due to the acquisition of Unimar products, which have slightly lower margins than the Company's previous year's product mix. In 1997, cost reductions improved Unimar product line margins. COST OF SERVICES PROVIDED Cost of services provided includes all normal operating costs (other than financing costs and amortization of intangibles) incurred by HGA in generating net service revenue. Theresults of subtracting cost of services provided from net service revenue is an operating profit of $6.2 million or 12% of net service revenue in 1997, $2.8 million or 6% of net service revenue in 1996 and $1.3 million or 3% of net service revenue in 1995. The increased percentage of operating profits from 1995 through 1997 reflects the combination of the revenue increases as discussed above and the implementation of cost control programs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE The Company's selling, general and administrative expense ("SGA") was:
(In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------- CVI $23,756 $17,281 $15,949 - ----------------------------------------------------------------------------- CSI 8,813 6,243 5,520 - ----------------------------------------------------------------------------- Corporate/Other 5,768 6,193 4,357 - ----------------------------------------------------------------------------- $38,337 $29,717 $25,826 - -----------------------------------------------------------------------------
The decrease in 1997 vs. 1996 Corporate/Other SGA is primarily due to ongoing savings from reduced insurance costs and the 1995 restructuring (see "Costs Associated with Restructuring Operations" below). The increase in 1996 vs. 1995 Corporate/Other SGA is primarily due to credits reflected in 1995 SGA of $648,000 for the recovery of the Company's claim against the Cooper Laboratories, Inc. Liquidating Trust, representing the recovery of previously rendered administrative services and the reversal of a $649,000 receivable reserve and certain other accruals no longer required. SGA for CVI increased by 37% and 8% in 1997 vs. 1996 and 1996 vs. 1995, respectively. The increase in 1997 vs. 1996 resulted largely as a result of higher selling, promotion and distribution costs that contributed to a 31% increase in net sales of products, and an accrual of $350,000 to address a potential environmental cleanup at one of its locations (see Note 11). The 1996 vs. 1995 increase relates to a 15% revenue growth in that period. As a percentage of sales, CVI's SGA was 37% in 1997, 35% in 1996 and 38% in 1995. The 1997 and 1996 increases in CSI SGA resulted primarily from the acquisition of Marlow Surgical Technologies and Unimar in 1997 and 1996, respectively (see Note 2). Research and Development Expense Research and development expense was $1.7 million or 2% of net sales of products in 1997, $1.2 million or 2% in 1996 and $2.9 million or 5% in 1995. As a percent to sales, research and development expense remained flat for fiscal 1997 as compared to 1996. The decrease in 1996 vs. 1995 is primarily attributable to the Company's decision to discontinue development of its calcium channel blocker compound. This project accounted for 43% of consolidated research and development expense in 1995. Also, a 1996 vs. 1995 decrease of $418,000 in CSI research and development reflected primarily the May 1995 discontinuance of the development of Innerdyne Inc.'s thermal endometrial ablation technology, begun in 1994, and on which CSI had spent approximately $600,000 by mid-1995. 37 THE COOPER COMPANIES, INC. AND SUBSIDIARIES The Company currently anticipates that the level of spending on research and development, as a percent to sales, has stabilized. In general, the Company is focusing on acquiring products that will be marketable immediately or in the short-term, rather than on funding longer-term, higher risk research and development projects. AMORTIZATION OF INTANGIBLES Amortization of intangibles was $1.7 million in 1997, $1.2 million in 1996 and $859,000 in 1995. In 1996, the Company accelerated $246,000 of amortization for a use patent as a result of its decision to discontinue the development and out-licensing of its calcium channel blocker compound. The Company stopped funding this project in 1995. The balance of the changes in each year reflects acquisition activity during the three-year period (see Note 2). COSTS ASSOCIATED WITH RESTRUCTURING OPERATIONS (See Note 4) In 1995, the Company recorded $1.5 million of restructuring costs to provide for costs primarily associated with closing facilities in CVP, CSI and corporate operations and reducing the staff at HGA headquarters. Income From Operations As a result of the activities discussed above, income from operations improved by $17.8 million in 1997 vs. 1995. Income from operations by business unit and Corporate/ Other was as follows:
October 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- CVI $23,101 $19,065 $13,959 CSI 2,476 1,667 (425) HGA 5,986 2,573 878 Corporate/Other (5,774) (6,462) (6,404) - ------------------------------------------------------------------------------- $25,789 $16,843 $ 8,008 - ------------------------------------------------------------------------------- Percent Growth 53% 110% - -------------------------------------------------------------------------------
PROVISION FOR (BENEFIT OF) SETTLEMENT OF DISPUTES, NET (See Note 3) In fiscal 1996, the Company recorded a credit to income of $223,000 related to the agreement which settled cross claims between HGA and its former owner related to purchase price adjustments (which were credited to goodwill) and other disputes. Under this agreement, HGA received $447,000 in fiscal 1996, $223,000 of which has been credited to settlement of disputes. In 1995, the Company recorded a charge of $5.6 million for the settlement of a dispute with the former medical staff at HGA's Hampton Hospital. This charge was partially offset by net credits to income of $2.0 million, which primarily represented cash received by the Company in connection with the settlement of other litigation. INVESTMENT INCOME, NET Investment income, net includes interest income of $361,000, $250,000 and $394,000 in 1997, 1996 and 1995, respectively. Interest income increased in 1997 because of higher investment balances primarily from cash received from the Company's follow-on offering, net of the paydown of debt. Interest income decreased in 1996 because of lower investment balances primarily due to the Company's use of cash to acquire Unimar in April 1996. INTEREST EXPENSE Interest expense was $4.2 million in 1997, $5.3 million in 1996 and $4.7 million in 1995. The decrease in interest expense for 1997 vs. 1996 is primarily related to the redemption of the Company's 10 5/8% Convertible Subordinated Reset Debentures in April 1997 and its 10% Senior Subordinated Secured Notes in September 1997. The increase in interest expense in 1996 over 1995 is primarily related to interest on the $4 million principal amount of notes issued in April 1996 in connection with the acquisition of Unimar, bearing interest at a rate of 12% per annum (see Note 6). PROVISION FOR (BENEFIT OF) INCOME TAXES Details of the Company's provision for (benefit of) income taxes for each of the years in the three-year period ended October 31, 1997 are set forth in Note 5. The 1997 provision for federal and state taxes of $674,000 was offset by a reversal of $215,000 of tax accruals no longer required and the recognition of an income tax benefit of $27.1 million from reducing the valuation allowance against net deferred tax assets. The 1996 provision for federal and state taxes of $275,000 was offset by a reversal of $615,000 of tax accruals no longer required and the recognition of an income tax benefit of $4.1 million from reducing the valuation allowance against net deferred tax assets. The 1995 provision for state income and franchise taxes of $315,000 was partially offset by a reversal of $200,000 of tax accruals no longer required. 38 THE COOPER COMPANIES, INC. AND SUBSIDIARIES LOSS FROM SALE OF DISCONTINUED OPERATIONS The $18 million charge to discontinued operations related to a settlement made in 1993 with Medical Engineering Corporation (see Note 11). EXTRAORDINARY ITEMS, NET In 1997, the Company recorded a net extraordinary gain of $1.0 million on the early extinguishment of a portion of its long-term debt (see Note 6). CAPITAL RESOURCES & LIQUIDITY In 1997, solid operating results and strategic financing transactions combined to increase dramatically the strength of the Company's balance sheet. Cash provided by operating activities increased 239% to $11.7 million in 1997 from $3.5 million in 1996, due to a 53% increase in income from operations and decreased interest expense. Cash used by investing activities in 1997 was $17.5 million, driven primarily by $7.7 million in capital expenditures (including approximately $1.9 million for the expansion of CooperVision's manufacturing facility in Scottsville, New York, approximately $1.7 million for the construction of HGA's residential treatment center in Kouts, Indiana, opened in April, 1997) and total disbursements of approximately $7.1 million for the acquisitions of Marlow Surgical Technologies, Inc. and the Natural Touch line of opaque contact lenses from Wesley-Jessen (see Note 2 for a discussion of these acquisitions). The Company expects to spend approximately $13 million for capital expenditures in 1998, including approximately $7 million to fund the expansion of manufacturing facilities at Aspect Vision Limited, a European contact lens manufacturer that the Company acquired in December 1997 (see Note 15). Cash provided by financing activities was $17.1 million in 1997 compared with a use of $1.3 million in 1996. In April, 1997, the Company called for redemption and the Debenture holders converted substantially all $9.3 million of the Company's 10 5/8% Convertible Subordinated Reset Debentures due 2005 to stock. In the third quarter, the Company raised net cash of $50.4 million, after deducting all appropriate transaction costs including underwriters fees, in a offering of 2.3 million shares of its common stock. Proceeds from this offering were used to repay approximately $40.1 million of debt, including the September 1, 1997 redemption of all $21.9 million principal amount of its 10% Senior Subordinated Secured Notes. At October 31, 1997, through these redemptions and other repayments, the Company's debt was reduced to $9.6 million from $48.8 million at October 31, 1996. In the fourth quarter of 1997, the Company completed a $50 million secured revolving credit facility with a term of five years, and borrowings having interest rates ranging from 0.5% to 2.0% over the London Interbank Offered Rates depending on certain financial ratios. The Company intends to use this debt financing to fund acquisitions and for general corporate purposes. In November 1997, the Company borrowed 'L'10.5 million, at an interest rate of 7.91% (current rate based on London LIBOR) under this facility to fund a portion of the Company's acquisition of Aspect Vision Limited. Consolidated stockholders' equity at the end of fiscal 1997, at $111.5 million, was more than seven times higher than the 1996 balance of $15.3 million. The ratio of stockholders' equity to debt improved to approximately 12 to 1 from 0.3 to 1. The Company had $18.2 million in cash and cash equivalents at the end of fiscal 1997 vs. $6.8 million at October 31, 1996. With an attractively priced revolving credit facility in place and operations that are anticipated to provide sufficient cash to fund general corporate purposes, Management believes the Company is well positioned to continue expanding its specialty healthcare businesses through internal growth complemented by strategic acquisitions. INFLATION AND CHANGING PRICES Inflation has had little effect on the Company's operations in the last three years. IMPACT OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ISSUED BUT NOT ADOPTED See Footnote 1. "Summary of Significant Accounting Policies" on page 46 of this report. 39 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Management's Statement The financial statements and other financial information in this report are Management's responsibility and were prepared according to generally accepted accounting principles. They include amounts based on Management's informed estimates and judgments. Other financial information in this report is consistent with that in the financial statements. The Company's accounting systems include controls to reasonably assure that assets are safeguarded and financial statements conform to generally accepted accounting principles. These systems are supplemented by selecting and training qualified personnel and by an organizational structure that provides appropriate separation of duties. The Board of Directors, through its Audit and Finance Committee of three outside directors, is responsible to determine that Management fulfills its responsibilities regarding preparation of financial statements and maintenance of financial control over operations. The Audit and Finance Committee recommends to the Board of Directors appointment of the Company's independent certified public accountants subject to ratification by the stockholders. It meets regularly with Management and the independent accountants. The independent accountants have access to the Audit and Finance Committee without Management present, to discuss auditing and financial reporting. KPMG Peat Marwick LLP ("KPMG") has been the Company's independent certified public accountants since 1980 when the Company incorporated. KPMG provides an objective, independent review of the fairness of reported operating results and financial position. A. THOMAS BENDER ROBERT S. WEISS A. Thomas Bender Robert S. Weiss President and Chief Executive Officer Executive Vice President and Chief Financial Officer 40 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Independent Auditors' Report The Board of Directors and Stockholders The Cooper Companies, Inc.: We have audited the accompanying consolidated balance sheets of The Cooper Companies, Inc. and subsidiaries as of October 31, 1997 and 1996 and the related consolidated statements of income and cash flows for each of the years in the three-year period ended October 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Cooper Companies, Inc. and subsidiaries as of October 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Francisco, California December 10, 1997 41 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Years Ended October 31, (In thousands, except per share figures) 1997 1996 1995 - ------------------------------------------------------------------------------- Net sales of products $ 88,769 $ 66,118 $55,296 - ------------------------------------------------------------------------------- Net service revenue 52,704 43,013 41,794 - ------------------------------------------------------------------------------- Net operating revenue 141,473 109,131 97,090 - ------------------------------------------------------------------------------- Cost of products sold 27,325 19,911 17,549 - ------------------------------------------------------------------------------- Cost of services provided 46,538 40,235 40,454 - ------------------------------------------------------------------------------- Selling, general and administrative expense 38,337 29,717 25,826 - ------------------------------------------------------------------------------- Research and development expense 1,739 1,176 2,914 - ------------------------------------------------------------------------------- Amortization of intangibles 1,745 1,249 859 - ------------------------------------------------------------------------------- Costs associated with restructuring operations -- -- 1,480 - ------------------------------------------------------------------------------- Income from operations 25,789 16,843 8,008 - ------------------------------------------------------------------------------- Provision for (benefit of) settlements of disputes -- (223) 3,532 - ------------------------------------------------------------------------------- Investment income, net 361 281 444 - ------------------------------------------------------------------------------- Other (loss) income, net (152) 80 51 - ------------------------------------------------------------------------------- Interest expense (4,214) (5,312) (4,741) - ------------------------------------------------------------------------------- Income from continuing operations before income taxes 21,784 12,115 230 - ------------------------------------------------------------------------------- (Benefit of) provision for income taxes (26,606) (4,488) 115 - ------------------------------------------------------------------------------- Income from continuing operations before extraordinary items 48,390 16,603 115 - ------------------------------------------------------------------------------- Loss from sale of discontinued operations (18,000) -- -- - ------------------------------------------------------------------------------- Income before extraordinary items 30,390 16,603 115 - ------------------------------------------------------------------------------- Extraordinary items, net 992 -- -- - ------------------------------------------------------------------------------- Net income $ 31,382 $ 16,603 $ 115 - ------------------------------------------------------------------------------- Earnings per share: - ------------------------------------------------------------------------------- Continuing operations before extraordinary Items $ 3.70 $ 1.41 $ 0.01 - ------------------------------------------------------------------------------- Discontinued operations (1.38) -- -- - ------------------------------------------------------------------------------- Extraordinary items, net 0.08 -- -- - ------------------------------------------------------------------------------- Earnings per share $ 2.40 $ 1.41 $ 0.01 - ------------------------------------------------------------------------------- Number of shares used to compute earnings per share 13,071 11,761 11,576 - ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 42 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets
October 31, 1997 1996 - ---------------------------------------------------------------------------------------------- Assets (In thousands) Current assets: Cash and cash equivalents $ 18,249 $ 6,837 - ---------------------------------------------------------------------------------------------- Trade and patient accounts receivable, less allowances of $2,346,000 in 1997 and $1,969,000 in 1996 27,469 21,650 - ---------------------------------------------------------------------------------------------- Inventories 15,096 10,363 - ---------------------------------------------------------------------------------------------- Deferred tax asset 5,031 953 - ---------------------------------------------------------------------------------------------- Prepaid expenses and other current assets 2,724 2,692 - ---------------------------------------------------------------------------------------------- Total current assets 68,569 42,495 - ---------------------------------------------------------------------------------------------- Property, plant and equipment at cost 56,578 49,306 - ---------------------------------------------------------------------------------------------- Less accumulated depreciation and amortization 17,055 14,632 - ---------------------------------------------------------------------------------------------- 39,523 34,674 - ---------------------------------------------------------------------------------------------- Goodwill and other intangibles, net 36,698 21,468 - ---------------------------------------------------------------------------------------------- Deferred tax asset 26,182 3,195 - ---------------------------------------------------------------------------------------------- Other assets 4,326 1,077 - ---------------------------------------------------------------------------------------------- $175,298 $102,909 - ---------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 438 $ 844 - ---------------------------------------------------------------------------------------------- Accounts payable 7,907 4,574 - ---------------------------------------------------------------------------------------------- Employee compensation and benefits 6,203 6,418 - ---------------------------------------------------------------------------------------------- Other accrued liabilities 9,935 11,935 - ---------------------------------------------------------------------------------------------- Accrued income taxes 9,134 9,537 - ---------------------------------------------------------------------------------------------- Total current liabilities 33,617 33,308 - ---------------------------------------------------------------------------------------------- Long-term debt 9,125 47,920 - ---------------------------------------------------------------------------------------------- Other noncurrent liabilities 21,023 6,351 - ---------------------------------------------------------------------------------------------- Total liabilities 63,765 87,579 - ---------------------------------------------------------------------------------------------- Commitments and Contingencies (see Note 11) Stockholders' equity Preferred stock, $.10 par value, shares authorized: 1,000,000: zero shares issued or outstanding -- -- - ---------------------------------------------------------------------------------------------- Common stock, $.10 par value, shares authorized: 20,000,000: issued and outstanding: 14,797,996 and 11,670,898 at October 31, 1997 and 1996, respectively 1,480 1,167 - ---------------------------------------------------------------------------------------------- Additional paid-in capital 249,213 184,300 - ---------------------------------------------------------------------------------------------- Other equity (731) (326) - ---------------------------------------------------------------------------------------------- Accumulated deficit (138,429) (169,811) - ---------------------------------------------------------------------------------------------- Stockholders' equity 111,533 15,330 - ---------------------------------------------------------------------------------------------- $175,298 $102,909 - --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 43 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Year Ended October 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 31,382 $ 16,603 $ 115 - ------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (27,065) (4,148) -- - ------------------------------------------------------------------------------------------------ Depreciation expense 2,922 2,629 2,704 - ------------------------------------------------------------------------------------------------ Provision for doubtful accounts 2,336 1,849 2,300 - ------------------------------------------------------------------------------------------------ Amortization expenses: Intangible assets 1,745 1,249 992 - ------------------------------------------------------------------------------------------------ Debt discount (400) (526) (443) - ------------------------------------------------------------------------------------------------ Stock compensation expense 107 46 -- - ------------------------------------------------------------------------------------------------ Loss from sale of discontinued operations 18,000 -- -- - ------------------------------------------------------------------------------------------------ Extraordinary items (992) -- -- - ------------------------------------------------------------------------------------------------ Change in operating assets and liabilities excluding effects from acquisitions: Receivables (7,521) (4,998) (1,918) - ------------------------------------------------------------------------------------------------ Inventories (3,855) (445) 2,126 - ------------------------------------------------------------------------------------------------ Other assets (356) 266 275 - ------------------------------------------------------------------------------------------------ Accounts payable 2,916 166 (1,050) - ------------------------------------------------------------------------------------------------ Accrued liabilities (4,021) (4,488) (2,000) - ------------------------------------------------------------------------------------------------ Income taxes payable (423) (459) (109) - ------------------------------------------------------------------------------------------------ Other long-term liabilities (3,044) (4,287) 429 - ------------------------------------------------------------------------------------------------ Cash provided by operating activities 11,731 3,457 3,421 - ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of assets and businesses (7,145) (4,080) (821) - ------------------------------------------------------------------------------------------------ Purchases of property, plant and equipment (7,735) (3,182) (2,185) - ------------------------------------------------------------------------------------------------ Investment in escrow fund (2,216) -- -- - ------------------------------------------------------------------------------------------------ Other (357) 756 594 - ------------------------------------------------------------------------------------------------ Cash used by investing activities (17,453) (6,506) (2,412) - ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 44 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows--Concluded
Year Ended October 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Cash flows from financing activities: - ---------------------------------------------------------------------------------------------- Proceeds from follow-on offering, net $ 50,388 $ -- $ -- - ---------------------------------------------------------------------------------------------- Early retirement of debt (35,740) - ---------------------------------------------------------------------------------------------- Deferred debt acquisition costs (744) - ---------------------------------------------------------------------------------------------- Proceeds from (repayment of) line of credit, net -- (1,025) 1,025 - ---------------------------------------------------------------------------------------------- Proceeds from industrial development note 3,000 -- -- - ---------------------------------------------------------------------------------------------- Proceeds from long-term note -- 1,320 -- - ---------------------------------------------------------------------------------------------- Net payments of other notes payable and current long-term debt (112) (1,808) (1,270) - ---------------------------------------------------------------------------------------------- Other 342 192 123 - ---------------------------------------------------------------------------------------------- Cash provided (used) by financing activities 17,134 (1,321) (122) - ---------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 11,412 (4,370) 887 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 6,837 11,207 10,320 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $18,249 $ 6,837 $11,207 - ---------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid for: Interest (net of amounts capitalized) $ 4,783 $ 4,880 $ 4,755 - ---------------------------------------------------------------------------------------------- Income taxes $ 742 $ 119 $ 224 - ----------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities: Acquisitions (see Note 2): Fair value of assets acquired $18,574 $ 9,661 - ------------------------------------------------------------------------------- Less: Cash acquired (45) (404) - ------------------------------------------------------------------------------- Cash paid (7,145) (4,080) - ------------------------------------------------------------------------------- Company stock issued (4,662) -- - ------------------------------------------------------------------------------- Notes issued (4,500) (4,000) - ------------------------------------------------------------------------------- Liabilities assumed and acquisition costs accrued $ 2,222 $ 1,177 - ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 45 Note 1. Summary of Significant Accounting Policies GENERAL The Cooper Companies, Inc., (together with its subsidiaries, the "Company") develops, manufactures and markets healthcare products, including a range of daily, flexible and extended wear contact lenses, and diagnostic and surgical instruments and equipment. The Company also provides healthcare services through the ownership of psychiatric facilities, and through May 1995, the management of three other such facilities. Intercompany transactions and accounts are eliminated in consolidation. Certain reclassifications have been applied to prior years' financial statements to conform such statements to the current year's presentation. None of these reclassifications had any impact on results of operations. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's operations located outside the United States are translated at prevailing year-end rates of exchange. Related income and expense accounts are translated at weighted average rates for each year. Gains and losses resulting from the translation of financial statements in foreign currencies into U. S. dollars are recorded in the equity section of the consolidated balance sheets. Gains and losses resulting from the impact of changes in exchange rates on transactions denominated in currencies other than the reporting locations functional currency are included in the determination of net income or loss for each period. Net foreign exchange losses included in the Company's consolidated statements of income for each of the years ended October 31, 1997, 1996 and 1995 were $142,000, $13,000 and $130,000, respectively. ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during each of the reporting periods. Actual results could differ from those estimates. NET SALES OF PRODUCTS Net sales of products consist of sales generated by the Company's CooperVision ("CVI") and CooperSurgical ("CSI") businesses. The Company recognizes revenue net of appropriate provisions for returns when risk of ownership has transferred to the buyer. In the opinion of Management, trade receivables resulting from sales of products are free of concentrated credit risk. NET SERVICE REVENUE Net service revenue consists primarily of net patient revenue, which is based on the Hospital Group of America, Inc. ("HGA") hospitals' established billing rates less allowances and discounts for contractual programs. Payments under these programs are based on either predetermined rates or the cost of services. Settlements for retrospectively determined rates are estimated in the period the related services are rendered and are adjusted in future periods as final settlements are determined. Management believes that adequate provision has been made for adjustments that may result from the final determination of amounts earned under these programs. In 1997, 1996 and 1995, the Company received and recognized revenue of approximately $2.4 million, $2 million and $2.4 million, respectively, associated with prior year cost report settlements. Approximately 61%, 53% and 50%, respectively, of 1997, 1996 and 1995 net service revenue is from participation by hospitals in Medicare and Medicaid programs. The Company provides care to indigent patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. The Company maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone for services and supplies furnished under its charity care policy. Charges at the Company's established rates foregone for charity care provided by the Company amounted to $3.7 million, $2.3 million and $2.1 million for fiscal 1997, 1996 and 1995, respectively. Hampton Hospital is required by its Certificate of Need to incur not less than 10% of total patient days as free care. 46 Receivables from government programs represent the only concentrated group of potential credit risk to the Company. Management believes that there are no credit risks associated with these governmental agencies. Negotiated and private receivables consist of receivables from various payors, including individuals involved in diverse activities, subject to differing economic conditions, and do not represent any concentrated credit risks to the Company. Furthermore, Management continually monitors and, where indicated, adjusts the allowances associated with these receivables. CASH AND CASH EQUIVALENTS Cash and cash equivalents include commercial paper and other short-term income producing securities with a maturity date at purchase of three months or less. These investments are readily convertible to cash and are carried at cost which approximates market. INVENTORIES October 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Raw materials $ 2,748 $ 2,318 - ------------------------------------------------------------------------------- Work-in-process 1,277 1,028 - ------------------------------------------------------------------------------- Finished goods 11,071 7,017 - ------------------------------------------------------------------------------- $15,096 $10,363 - ------------------------------------------------------------------------------- Inventories are stated at the lower of cost, determined on a first in, first out or average cost basis, or market. PROPERTY, PLANT AND EQUIPMENT AT COST October 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Land and improvements $ 1,331 $ 1,360 - ------------------------------------------------------------------------------- Buildings and improvements 39,370 35,191 - ------------------------------------------------------------------------------- Machinery and equipment 15,877 12,755 - ------------------------------------------------------------------------------- $56,578 $49,306 - ------------------------------------------------------------------------------- Depreciation is computed on the straight-line method in amounts sufficient to write off depreciable assets over their estimated useful lives. Leasehold improvements are amortized over the shorter of estimated useful life or the period of the related lease. Building depreciation is based on estimated useful lives of 35 to 40 years. Machinery and equipment is depreciated over 5 to 15 years. Expenditures for maintenance and repairs are expensed; major replacements, renewals and betterments are capitalized. The cost and accumulated depreciation of depreciable assets retired or otherwise disposed of are eliminated from the asset and accumulated depreciation accounts, and any gains or losses are reflected in operations for the period. AMORTIZATION OF INTANGIBLES Amortization is provided for on all intangible assets (primarily goodwill, which represents the excess of purchase price over fair value of net assets acquired) on a straight-line basis over periods of up to 30 years. Accumulated amortization at October 31, 1997 and 1996 was $6.2 million and $4.4 million, respectively. The Company assesses the recoverability of goodwill and other long-lived assets by determining whether the amortization of the related balance over its remaining life can be recovered through reasonably expected undiscounted future cash flows. Management evaluates the amortization periods of intangibles to determine whether later events and circumstances warrant revised estimates of useful lives. EARNINGS PER SHARE Earnings per share is determined by using the weighted average number of common shares and common share equivalents (stock warrants and stock options) outstanding during each year (except where antidilutive). Fully diluted earnings per share is not materially different from primary earnings per share. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, effective November 1, 1996. This statement establishes financial accounting and reporting standards for stock-based compensation, including employee stock option plans. As allowed by SFAS No. 123, the Company continues to measure compensation expense under the provisions of APB No. 25, Accounting For Stock Issued to Employees, and related interpretations. Statements of Financial Accounting Standards Issued But Not Adopted In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which will be effective for financial statements for periods ending after December 15, 1997, including interim periods, and established standards for computing and presenting earnings per share. Earlier application is not permitted. Beginning with its unaudited consolidated condensed financial statements for the first quarter of fiscal 1998, the Company will make 47 the required disclosures of basic and diluted earnings per share. All prior period earnings per share data will be restated by the Company upon adoption of SFAS 128. The Company expects that basic earnings per share amounts to be reported under SFAS 128 will be somewhat higher than the amounts historically reported, due to the removal of common stock equivalents from the calculation of average shares and that diluted earnings per share will not differ materially from historically reported figures. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") which will be effective for financial statements for fiscal years beginning after December 15, 1997, and establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Earlier application is permitted. The Company will make the required reporting of comprehensive income beginning with its consolidated financial statements for the fiscal year ending October 31, 1999. Upon adoption, reclassification of comparative financial statements for prior periods to reflect application of the provisions of SFAS 130 is required. The Company does not expect that the adoption of this statement will have any impact on its financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131") which will be effective for financial statements for periods beginning after December 15, 1997, and establishes standards for disclosures about segments of an enterprise. Earlier application is encouraged. The Company will make the required disclosures under SFAS 131 beginning with its consolidated financial statements for the year ending October 31, 1999, including the restatement of earlier years' disclosures. Note 2. Acquisitions Natural Touch Acquisition In March 1997, the Company acquired the United States rights to Natural Touch, a line of opaque, cosmetic contact lenses, from Wesley-Jessen Corporation ("W-J") for $7.5 million ($3 million in cash and a $4.5 million promissory note, $3 million of which was repaid on July 31, 1997) plus an ongoing royalty ranging from 3% to 8% per annum on sales of Natural Touch products other than those supplied by W-J. The Company recorded intangible assets of $8 million for the patents, trademarks and distribution rights, which will be amortized over 7 to 15 years. Presently, a subsidiary of W-J manufactures and supplies the Company with the products for the Natural Touch line. A divestiture order issued by the Federal Trade Commission (the "FTC") in connection with the acquisition of the Natural Touch line requires that the Company either develop on its own the manufacturing capabilities to produce the Natural Touch line or find a suitable third-party manufacturer to produce it. The FTC could require the Company to divest itself of the Natural Touch line if the Company has not either developed manufacturing capabilities that meet United States Food and Drug Administration ("FDA") approval or found a suitable third-party manufacturer meeting FDA approval within 18 months from the closing date. This deadline may be extended by an additional 24 months. Marlow Acquisition In April 1997, the Company acquired Marlow Surgical Technologies, Inc., ("Marlow"), a gynecology products company, for approximately $3.2 million in cash, liquidation of $900,000 of Marlow debt and 144,800 shares of the Company's common stock valued at $2.9 million at closing. As part of the acquisition, the Company agreed to issue an additional $500,000 of its common stock (valued as of the closing) on the third anniversary of the closing, subject to reduction by the amount of any obligations of the seller to indemnify the Company in connection with the acquisition. Also, the Company has guaranteed that the total value of the shares of its common stock issued or to be issued in the acquisition (valued at $3.4 million in total at closing) will appreciate by $1.3 million by the third anniversary of the acquisition. This guarantee has been included in the purchase price, with a corresponding credit to additional paid in capital. The acquisition has been accounted for as a purchase, and $8.4 million has been ascribed to goodwill, which is being amortized over 20 years. Unimar Acquisition In April 1996, the Company acquired Unimar, Inc., a leading provider of specialized disposable medical devices for gynecology, for $8 million in cash and notes. Goodwill from the purchase has been recorded in the amount of $7.8 million, which is being amortized over 20 years. As part of the acquisition, the Company granted a warrant to purchase 83,333 shares of the Company is common stock for $11.375 per share. The warrant is valued at $231,000. The exercise 48 period of the warrant is from April 11, 1999 to June 10, 1999. The number of shares and the exercise price per share are subject to adjustment as provided in the warrant. Note 3. Settlement of Disputes, Net In 1996 and 1995, the Company recorded the following items related to settlement of disputes: HGA and Progressions Health Systems, Inc. ("Progressions") agreed to settle certain purchase price adjustments (credited to goodwill) and other disputes in return for a series of payments to be made to HGA. Under this agreement, HGA received $853,000 of which $421,000 was credited to settlement of disputes in 1995 and $447,000 of which $223,000 was similarly credited in 1996. Under a 1985 agreement (the "HMG Agreement"), Hampton Medical Group ("HMG"), which is owned by Dr. A. L. C. Pottash, contracted to provide clinical and clinical administrative services at Hampton Psychiatric Institute ("Hampton Hospital"), the primary facility operated by Hospital Group of New Jersey, Inc. ("HGNJ"), a subsidiary of the Company's psychiatric hospital holding company, HGA. Subsequently, HGNJ delivered notices to HMG asserting that HMG had defaulted under the HMG Agreement based upon billing practices by HMG that HGNJ believed to be fraudulent at the time. The Company recorded a charge of $5.6 million for the settlement of disputes with HMG and Dr. Pottash. Pursuant to the settlement, (i) the parties released each other from, among other things, claims underlying related arbitration, (ii) HGA purchased HMG's interest in the HMG Agreement on December 31, 1995, and (iii) HGNJ agreed to make certain payments to Dr. Pottash in respect of claims he had asserted. While only HMG and Dr. Pottash are parties to the settlement with HGA, HGNJ and the Company, the Company has not been notified of any claims by other third party payors or others relating to billing or other practices at Hampton Hospital. The settlement with HMG and Dr. Pottash resulted in a one-time charge with a present value of $5.6 million to fourth quarter fiscal 1995 earnings. That charge reflects amounts paid to Dr. Pottash in December 1995 of $3.1 million, as well as two payments of $1.5 million each, one of which was paid in May 1997 and the final payment of which is due in May 1998. 1995 charges were partially offset by the receipt of a $915,000 refund for directors and officers insurance and a disgorgement of $648,000 from a former officer of the Company. Note 4. Costs Associated With Restructuring Operations In the fourth quarter of 1995, the Company recorded a charge of $1.5 million to provide for costs primarily associated with the closure of facilities, with attendant reductions in personnel, in the Company's CooperVision Pharmaceutical, Inc. ("CVP"), CSI and corporate operations and downsizing HGA headquarters. Approximately 85% of this provision related to severance benefits accrued for 16 employees, substantially all of which was paid by October 1996. The balance primarily reflected provisions for unproductive assets. Note 5. Income Taxes The income tax provision (benefit) related to income from continuing operations in the consolidated statements of income consists of: Years Ended October 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Current - ------------------------------------------------------------------------------- Federal $ 438 $ 146 $ -- - ------------------------------------------------------------------------------- State 21 (486) 115 - ------------------------------------------------------------------------------- 459 (340) 115 - ------------------------------------------------------------------------------- Deferred Federal (27,065) (4,148) -- - ------------------------------------------------------------------------------- $(26,606) $(4,488) $115 - ------------------------------------------------------------------------------- 49 A reconciliation of the provision for (benefit of) income taxes attributable to income from continuing operations and the amount computed by applying the federal income tax rate to income from continuing operations before income taxes follows:
Years Ended October 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Computed expected provision for taxes from continuing operations $ 7,407 $ 4,119 $ 78 - ------------------------------------------------------------------------------------------------------------ Increase (decrease) in taxes resulting from: Income outside the United States subject to different tax rates 193 132 132 - ------------------------------------------------------------------------------------------------------------ Amortization of intangibles 394 256 185 - ------------------------------------------------------------------------------------------------------------ State taxes, net of federal income tax benefit 229 70 76 - ------------------------------------------------------------------------------------------------------------ Reversal of prior years' estimated state tax liabilities no longer required (215) (615) (200) - ------------------------------------------------------------------------------------------------------------ Utilization of net operating loss carryforwards (7,102) (4,406) -- - ------------------------------------------------------------------------------------------------------------ Change in beginning-of-year valuation allowance (27,065) (4,148) -- - ------------------------------------------------------------------------------------------------------------ Other, net (447) 104 (156) - ------------------------------------------------------------------------------------------------------------ Actual provision for (benefit of) income taxes $(26,606) $ (4,488) $115 - ------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
October 31, (In thousands) 1997 1996 - -------------------------------------------------------------------------------------------- Deferred tax assets: Accounts receivable, principally due to allowances for doubtful accounts $ 1,216 $ 1,030 - -------------------------------------------------------------------------------------------- Inventories, principally due to obsolescence reserves 988 830 - -------------------------------------------------------------------------------------------- Accrued liabilities, principally due to litigation settlements and reserves, and compensation accruals 8,906 2,507 - -------------------------------------------------------------------------------------------- Deferred income, due to the debenture exchange -- 937 - -------------------------------------------------------------------------------------------- Net operating loss carryforwards 72,579 79,681 - -------------------------------------------------------------------------------------------- Capital loss carryforwards 2,523 2,523 - -------------------------------------------------------------------------------------------- Tax credit carryforwards 3,123 2,705 - -------------------------------------------------------------------------------------------- Other 907 798 - -------------------------------------------------------------------------------------------- Total gross deferred tax assets 90,242 91,011 - -------------------------------------------------------------------------------------------- Less valuation allowance (52,517) (80,304) - -------------------------------------------------------------------------------------------- Deferred tax assets 37,725 10,707 - -------------------------------------------------------------------------------------------- Deferred tax liabilities: Plant and equipment, principally due to purchase accounting requirements (6,512) (6,461) - -------------------------------------------------------------------------------------------- Other -- (98) - -------------------------------------------------------------------------------------------- Deferred tax liabilities (6,512) (6,559) - -------------------------------------------------------------------------------------------- Net deferred tax assets $31,213 $ 4,148 - --------------------------------------------------------------------------------------------
50 The net change in the total valuation allowance for the years ended October 31, 1997, 1996 and 1995 was a decrease of $27.8 million, a decrease of $8.5 million and an increase of $1.6 million, respectively. In 1997 and 1996, the Company recognized an income tax benefit of $27.1 million and $4.1 million ($25 million and $4.1 million in the fourth quarters of fiscal 1997 and 1996, respectively) from reducing the valuation allowance based primarily on the continued improvement in the Company's operating results and prospects. The recognition of the net deferred tax asset is based upon the expected utilization of net operating loss carryforwards that the Company believes will more likely than not be realized. Subsequently recognized tax benefits relating to the valuation allowance as of October 31, 1997 will be allocated as follows to: (In thousands) Consolidated statements of income $48,754 - ------------------------------------------------------------------------------- Goodwill and other intangible assets 3,454 - ------------------------------------------------------------------------------- Additional paid-in capital for stock options 309 - ------------------------------------------------------------------------------- $52,517 - ------------------------------------------------------------------------------- At October 31, 1997 the Company had capital loss, net operating loss, and tax credit carryforwards for federal tax purposes expiring as follows: (In thousands) Year of Capital Operating Tax Expiration Losses Losses Credits - ------------------------------------------------------------------------------- 1998 $5,925 $ -- $ -- - ------------------------------------------------------------------------------- 1999 1,216 147 867 - ------------------------------------------------------------------------------- 2000 280 -- 1,132 - ------------------------------------------------------------------------------- 2001 -- 49,642 202 - ------------------------------------------------------------------------------- 2002 -- 27,326 29 - ------------------------------------------------------------------------------- 2003 -- 1,378 330 - ------------------------------------------------------------------------------- 2004 -- 22,241 418 - ------------------------------------------------------------------------------- 2005 -- 11,006 -- - ------------------------------------------------------------------------------- 2006 -- 22,265 -- - ------------------------------------------------------------------------------- 2007 -- 22,058 -- - ------------------------------------------------------------------------------- 2008 -- 49,535 -- - ------------------------------------------------------------------------------- 2009 -- 6,553 -- - ------------------------------------------------------------------------------- 2010 -- 1,318 -- - ------------------------------------------------------------------------------- Indefinite life -- -- 145 - ------------------------------------------------------------------------------- $7,421 $213,469 $3,123 - ------------------------------------------------------------------------------- 51 Note 6. Long-term debt consists of the following:
October 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------ 12% promissory notes ("Promissory Notes") due April 11, 1999 $ 4,155 $ 4,000 - ------------------------------------------------------------------------------------------------ County of Monroe Industrial Development Agency ("COMIDA") Bond 2,975 -- - ------------------------------------------------------------------------------------------------ Wesley-Jessen Corporation ("W-J") promissory note 1,517 -- - ------------------------------------------------------------------------------------------------ Capitalized leases, interest rates from 8% to 13% maturing 1998 to 2003 916 584 - ------------------------------------------------------------------------------------------------ 10% Senior Subordinated Secured Notes due 2003 ("10% Notes") -- 24,285 - ------------------------------------------------------------------------------------------------ Bank term loan ("HGA Term Loan") -- 10,675 - ------------------------------------------------------------------------------------------------ 10 5/8% Convertible Subordinated Reset Debentures due 2005 ("10 5/8% Debentures") -- 9,220 - ------------------------------------------------------------------------------------------------ 9,563 48,764 - ------------------------------------------------------------------------------------------------ Less current installments 438 844 - ------------------------------------------------------------------------------------------------ $ 9,125 $ 47,920 - ------------------------------------------------------------------------------------------------
Aggregate annual maturities for each of the five years subsequent to October 31, 1997 are as follows: (In thousands) 1998 $ 438 - ------------------------------------------------- 1999 $4,547 - ------------------------------------------------- 2000 $ 390 - ------------------------------------------------- 2001 $1,867 - ------------------------------------------------- 2002 $ 312 - ------------------------------------------------- 10% NOTES On September 1, 1997, the Company redeemed all $21.9 million principal amount of its 10% Notes at 100% of principal value plus unpaid interest. Upon the early extinguishment of this debt, an extraordinary gain was recorded as a result of the write-off of the deferred premium (see "Extraordinary Gain, Net" below). The effective interest rate was 6.7% at October 31, 1996. 10 5/8% DEBENTURES The Company called for redemption on April 9, 1997 (the "Redemption Date") all $9.3 million of its 10 5/8% Debentures at 100% of principal value, plus unpaid interest through the Redemption Date. On the Redemption Date, holders of 47 Debentures received cash totaling an aggregate redemption price of $47,000 plus $527 of interest. Holders of $9.2 million of Debentures converted all of their Debentures into shares of the Company's common stock at $15.00 per share. On conversion, the Company issued a total of 616,187 shares of common stock, plus $253 of cash in lieu of fractional shares. The holders who converted forfeited the right to receive any interest on such Debentures after March 1, 1997. No gain or loss was recorded by the Company. 52 HGA TERM LOAN The HGA Term Loan, due August 1, 2001, with a balance at July 31, 1997 of $10.2 million was paid off on August 1, 1997. As a result of the early extinguishment of debt, an extraordinary loss, related to prepayment penalties and the write off of deferred debt acquisition costs, was recorded (see "Extraordinary Gain, Net" below). The interest rate in effect at October 31, 1996 was 10.75%. LOAN AND SECURITY AGREEMENT ("LINE OF CREDIT") On September 11, 1997, CVI canceled the five-year $8 million Line of Credit agreement with a commercial lender, which was entered into in September 1994. As a result of the early extinguishment of debt, an extraordinary loss, related to prepayment penalties and the write off of deferred debt acquisition costs, was recorded (see "Extraordinary Gain, Net" below). EXTRAORDINARY GAIN, NET The Company used proceeds from its follow-on stock offering to extinguish debt. As a result of the early extinguishments of debt in the fourth quarter of 1997, discussed above, a net extraordinary gain was recorded as follows: (In thousands) 10% Notes $1,942 - -------------------------------------------------------------------------------- HGA Term Loan (469) - -------------------------------------------------------------------------------- Line of Credit (461) - -------------------------------------------------------------------------------- Income Taxes (20) - -------------------------------------------------------------------------------- $ 992 - -------------------------------------------------------------------------------- PROMISSORY NOTES Unimar In April 1996, Cooper Healthcare Group, Inc. (a subsidiary of the Company) acquired Unimar, Inc. (see Note 2) and issued Promissory Notes for $4 million principal amount, bearing an interest rate of 12% per annum, maturing April 11, 1999. Interest is paid annually, and one-third of the interest (4%) is payable by way of an increase in the Promissory Notes. In 1997, $155,000 of interest increased the carrying value of the Promissory Notes. The Promissory Notes are collateralized by a security interest in the shares of the common stock of Unimar, Inc., and payment is guaranteed by the Company. W-J The W-J promissory note was issued for $4.5 million, due March 17, 2001, in conjunction with the acquisition of Natural Touch (see Note 2). On July 31, 1997, the Company repaid $3 million of the principal and associated unpaid interest, less $17,000 of interest which was paid in kind. Interest on the W-J promissory note is payable semi-annually and accrues at a rate of 12% per annum, of which 8% per annum is payable in cash and 4% per annum is payable in kind. COMIDA Bond The COMIDA bond is a $3 million Industrial Revenue Bond ("IRB") obtained to finance the cost of plant expansion, building improvements and the purchase of equipment related to CVI's Scottsville, New York, facility. Currently, interest on the IRB is adjusted weekly. The interest rate in effect on October 31, 1997 was 3.85% per annum. Interest rates have ranged from 3.45% to 4.85% per annum since the bond was issued. Principal repayments are made quarterly, beginning July 1997 and ending October 2012. At October 31, 1997, unutilized proceeds of $2.2 million from the IRB, which must be used for the aforementioned project, are carried in other assets. The IRB is secured by substantially all of CVI's rights to the facility. A letter of credit was issued by KeyBank National Association ("KeyBank") to support certain obligations under the COMIDA bond. CVI is obligated to repay KeyBank for draws under and expenses incurred in connection with the letter of credit, pursuant to the terms of a reimbursement agreement, which is guaranteed by the Company. The reimbursement agreement contains customary provisions and covenants, including the maintenance of certain ratios and levels of net worth. CVI and COMIDA have granted a mortgage lien on the building and real estate located in Scottsville and a first lien security interest on the equipment purchased under the bond proceeds to KeyBank to secure payment under the reimbursement agreement. 53 KEYBANK LINE OF CREDIT The Company completed a $50 million senior secured revolving credit facility with KeyBank National Association on September 15, 1997. The facility matures September 11, 2002, with borrowings having interest rates ranging from 0.5% to 2.0% over the London Interbank Offered Rates (LIBOR) depending on certain financial ratios, and the interest rate may be floating or fixed at the Company's option. The Company pays an annual commitment fee of 0.375% of the unused portion of the revolving credit facility. Interest is paid quarterly. KeyBank syndicated a portion of the facility to other lenders and will act as agent for the lenders. Terms include first security interest in all of the assets of the Company. During the term of the facility, the Company may borrow, repay and re-borrow up to the $50 million subject to voluntary reductions. The live of credit is guaranteed by the subsidiaries of the Company. Mandatory prepayments will be required to repay outstanding amounts and permanently reduce the total commitment amount available under certain circumstances when the Company obtains additional debt or equity. The KeyBank Line of Credit contains various covenants, including maintenance of certain ratios and transaction limitations requiring approval of the lenders. Certain prepayments are subject to penalties. NOTE 7. Financial Instruments The fair values of the Company's financial instruments, including cash and cash equivalents, trade receivables, lines of credit, accounts payable, and accrued liabilities, approximated their carrying values as of October 31, 1997 and 1996 because of the short maturity of these instruments. Both the Company's 10% Notes and 10 5/8% Debentures were extinguished in fiscal 1997. At October 31, 1996, the carrying amounts and fair values, respectively, were as follows: 10% Notes $24.3 million and $21.1 million; 10 5/8% Debentures $9.2 million and $10.6 million. The debt associated with the acquisitions of Unimar and Natural Touch was $4.2 million and $1.5 million, respectively, at October 31, 1997. This debt is not traded on any market, and the amounts due are pursuant to a contract. The carrying amounts on the balance sheet approximate Management's estimate of the fair value. The fair value of the Company's other long-term debt approximated the carrying value at October 31, 1997 and 1996, as the debt was refinanced or entered into within the respective fiscal year. 54 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Note 8. Stockholders' Equity
Common Common Paid-in Accumulated Shares Stock Capital Deficit (In thousands) - ---------------------------------------------------------------------------------------------- Balance at October 31, 1994 11,293 $ 1,129 $182,142 $(186,529) Exercise of stock options 5 1 9 -- - ---------------------------------------------------------------------------------------------- Exercise of warrants and warrant valuation 102 10 163 -- - ---------------------------------------------------------------------------------------------- Restricted stock amortization and share issuance 176 18 1,526 -- - ---------------------------------------------------------------------------------------------- Net income -- -- -- 115 - ---------------------------------------------------------------------------------------------- Balance at October 31, 1995 11,576 1,158 183,840 (186,414) - ---------------------------------------------------------------------------------------------- Exercise of stock options 22 2 117 -- - ---------------------------------------------------------------------------------------------- Exercise of warrants and warrant valuation 66 6 297 -- - ---------------------------------------------------------------------------------------------- Restricted stock amortization and share issuance 7 1 46 -- - ---------------------------------------------------------------------------------------------- Net income -- -- -- 16,603 - ---------------------------------------------------------------------------------------------- Balance at October 31, 1996 11,671 1,167 184,300 (169,811) - ---------------------------------------------------------------------------------------------- Exercise of stock options 36 4 260 -- - ---------------------------------------------------------------------------------------------- Exercise of warrants 27 3 147 -- - ---------------------------------------------------------------------------------------------- Restricted stock amortization and share issuance 3 -- 483 -- - ---------------------------------------------------------------------------------------------- Stock issued for acquisition (see Note 2) 145 14 4,648 -- - ---------------------------------------------------------------------------------------------- Stock issued for 10 5/8% debenture redemption (see Note 6) 616 62 9,217 -- - ---------------------------------------------------------------------------------------------- Follow-on offering (see Note 12) 2,300 230 50,158 -- - ---------------------------------------------------------------------------------------------- Net income -- -- -- 31,382 - ---------------------------------------------------------------------------------------------- Balance at October 31, 1997 14,798 $ 1,480 $249,213 $(138,429) - ----------------------------------------------------------------------------------------------
The Company issued a warrant to Foothill Capital Corporation ("Foothill") to purchase 26,666 shares of the Company's common stock at $5.625 per share in connection with the loan and security agreement among Foothill, CVI, and CooperVision Canada (see Note 6 "Loan and Security Agreement"). The warrant was exercised on October 20, 1997. In October 1997, the Company adopted a stockholders' rights plan on substantially the same terms originally adopted by the Company in October 1987 and in connection therewith declared a dividend distribution of one Preferred Share Purchase Right for each outstanding share of the Company's common stock (a "Right"). The plan becomes operative in certain events involving a person or group ("Acquiring Person") acquiring 20% or more of the Company's common stock or announcing a tender offer for 20% or more of the common stock, without the approval of the Board of Directors, subject to limited exceptions. Upon the occurrence of such an event, each Right, unless redeemed by the Board, entitles its holder to purchase at an exercise price or $145; an amount of shares of newly created Series A Junior Participating Preferred Stock of the Company. Also, each Right will entitle each holder (excluding the Acquiring Person's) to purchase, at the Right's then-current exercise price, a number of shares of the Company having a market value at that time of twice the Right's exercise price. The Rights expire in October 2007 and may generally be redeemed by the Board of Directors at $0.01 per Right at any time before, or within 10 days after, a person has acquired 20% or more of the Company's outstanding common stock. At October 31, 1997, 1996 and 1995, the Company's cumulative foreign currency translation adjustments and deferred compensation reported in other equity were ($731,000), ($326,000) and ($333,000), respectively. 55 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Note 9. Employee Stock Plans At October 31, 1997 the Company has three stock-based compensation plans, which are described below: 1988 Long-Term Incentive Plan ("LTIP") The LTIP is a vehicle for the Company to attract, retain and motivate its key employees and consultants, who are directly linked to the profitability of the Company and to increasing stockholder value. The LTIP authorizes either a committee consisting of three or more individuals not eligible to participate in the LTIP or the Company's Board of Directors to grant to eligible individuals during a period of ten years from September 15, 1988, stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights, phantom stock units and long-term performance awards for up to 2,125,570 shares of common stock, subject to adjustment for future stock splits, stock dividends, expirations, forfeitures and similar events. Options generally vest based on the Company's stock price, however, in some cases, both stock price and time are used as criteria. In July 1996, two officers of the Company were authorized special options totaling 280,000 shares. Issuance of these shares resulted in $431,000 of deferred compensation, which will be recognized over the two-year vesting period. These shares were granted in 1997 and will vest 24 months from grant date. As of October 31, 1997, 299,935 shares remained available under the LTIP for future grants. Restricted shares of zero, zero and 176,196 were granted under the plan in fiscal 1997, 1996 and 1995, respectively. Restricted shares with restrictions in place were zero, 16,529 and 91,659 on October 31, 1997, 1996 and 1995, respectively. The LTIP will expire September 14, 1998. On December 15, 1997, the Company's Board of Directors approved the 1998 Long-Term Incentive Plan, subject to the approval of such plan by the stockholders of the Company at its Annual Meeting scheduled for April 2, 1998. 1996 Long-Term Incentive Plan for Non-Employee Directors ("1996 NEDRSP") In March 1996, the Company's stockholders approved a proposal to reduce the annual cash stipend paid to Non-Employee Directors and to award grants of restricted stock and options which are to be awarded annually at the start of each fiscal year. Specifically, each Non-Employee Director will be awarded the right to purchase restricted stock worth $7,500 for $0.10 per share (or $9,375 in the case of the Chairman of the Board who is a Non-Employee Director) by January 15 of the year following the date the grant was made. Grants of restricted stock that are not exercised by such date will expire. The restrictions on the restricted stock will lapse on the earlier to occur of the stock reaching certain target values or by the fifth anniversary of the date of grant. In addition, each Non-Employee Director was granted an option to purchase shares of the Company's common stock in fiscal 1997 and will be granted 5,000 shares in each subsequent fiscal year (or, in the case of the Chairman of the Board who is a Non-Employee Director, 6,250 shares in each subsequent fiscal year) through fiscal 2000. A total of 215,000 shares of the Company's authorized but unissued common stock have been reserved for issuance under the plan. As of October 31, 1997, 149,802 shares remained available under the 1996 NEDRSP for future grants. Restricted shares of 3,501, 7,393, and zero were granted under the 1996 NEDRSP in fiscal 1997, 1996 and 1995, respectively, and there were no restricted shares with restrictions in place outstanding at October 31, 1997. 56 THE COOPER COMPANIES, INC. AND SUBSIDIARIES 1990 Non-Employee Directors Restricted Stock Plan ("1990 NEDRSP") Under the terms of the 1990 NEDRSP, a total of 33,333 shares of common stock were authorized and reserved for issuance. A total of 18,333 shares of restricted stock with restrictions removed were awarded under this plan. Upon approval by the Company's stockholders of the 1996 NEDRSP, the 1990 NEDRSP terminated. Transactions involving the granting of options of the Company's common stock in connection with these stock option plans are summarized below.
1997 1996 1995 -------------------- -------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Years Ended October 31, Options Price Options Price Options Price - --------------------------------------------------------------------------------------------------- Outstanding at beginning of year 459,662 $ 8.90 328,841 $ 5.77 265,556 $ 5.02 - --------------------------------------------------------------------------------------------------- Granted 514,165 27.69 192,361 12.77 131,121 6.85 - ---------------------------------------------------------------------------------------------------- Exercised (36,454) 7.25 (21,755) 5.59 (5,153) 1.93 - ---------------------------------------------------------------------------------------------------- Forfeited (7,809) 5.78 (39,785) 3.55 (62,683) 5.16 - ---------------------------------------------------------------------------------------------------- Outstanding at end of year 929,564 $ 19.39 459,662 $ 8.90 328,841 $ 5.77 - ---------------------------------------------------------------------------------------------------- Options exercisable at year end 449,564 $ 9.71 244,164 $ 6.15 78,650 $ 4.46 - ---------------------------------------------------------------------------------------------------- Weighted-avg. fair value of options granted during the year $ 12.32 $ 5.30 N/A - ----------------------------------------------------------------------------------------------------
The following is a summary of options outstanding at October 31, 1997 for the stock option plans:
Options Outstanding Options Exercisable ------------------------------------ ---------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding Contractual Exercise Outstanding Exercise Exercise Prices at 10/31/97 Life Price at 10/31/97 Price - -------------------------------------------------------------------------------------------- $ 1.68 21,205 1.58 $ 1.68 21,205 $ 1.68 - -------------------------------------------------------------------------------------------- $ 3.18 33,334 6.42 3.18 33,334 3.18 - -------------------------------------------------------------------------------------------- $ 5.82-7.88 203,449 7.56 7.01 203,449 7.01 - -------------------------------------------------------------------------------------------- $ 8.75 11,111 8.42 8.75 11,111 8.75 - -------------------------------------------------------------------------------------------- $ 14.31-21.00 320,465 8.87 16.54 180,465 14.96 - -------------------------------------------------------------------------------------------- $ 26.00-35.09 340,000 9.45 32.52 -- -- - -------------------------------------------------------------------------------------------- $ 1.68-35.09 929,564 8.54 $ 19.39 449,564 $ 9.71 - --------------------------------------------------------------------------------------------
The excess of market value over $.10 per share of LTIP, 1990 NEDRSP and 1996 NEDRSP restricted shares on respective dates of grant is initially recorded as unamortized restricted stock award compensation, a separate component of stockholders' equity, and charged to operations as earned. Restricted shares and other stock compensation charged against income from operations for the years ended October 31, 1997, 1996 and 1995 was $107,000, $46,000 and zero respectively. 57 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Pro forma Information As permitted by FASB Statement No. 123 ("SFAS 123"), the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined under the fair value method included in SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts) 1997 1996 - ---------------------------------------------------------------------------------------- Net Income As reported $31,382 $16,603 - ----------------------------------------------------------------------------------------- Pro forma $29,704 $16,487 - ----------------------------------------------------------------------------------------- Earnings per share As reported $ 2.40 $ 1.41 - ----------------------------------------------------------------------------------------- Pro forma $ 2.29 $ 1.41 - -----------------------------------------------------------------------------------------
The above pro forma amounts include compensation expense for options granted since November 1, 1995, and may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996: zero dividend yield; expected volatility of 48 percent; expected option lives of 3.5 years for both years and risk-free interest rates of 6.5 percent and 5.9 percent, respectively. Note 10. Employee Benefits THE COMPANY'S RETIREMENT INCOME PLAN The Company's Retirement Income Plan (the "Plan") covers substantially all full-time United States employees of CVI and the Company's corporate headquarters. The Company's contributions are designed to fund normal cost on a current basis and to fund over thirty years the estimated prior service cost of benefit improvements (fifteen years for annual gains and losses). The unit credit actuarial cost method is used to determine the annual cost. The Company pays the entire cost of the Plan and funds such costs as they accrue. Virtually all of the assets of the Plan are comprised of participation in equity and fixed income funds. The measurement date for assumptions used in developing the projected benefit obligation was changed to August 31 during fiscal 1996. Net periodic pension cost of the Plan was as follows: Years Ended October 31, (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------- Service cost $ 236 $ 256 $ 188 - ---------------------------------------------------------------------- Interest cost 622 598 521 - ---------------------------------------------------------------------- Actual return on assets (1,446) (1,047) (982) - ---------------------------------------------------------------------- Net amortization and deferral 786 488 491 - ---------------------------------------------------------------------- Net periodic pension cost $ 198 $ 295 $ 218 - ---------------------------------------------------------------------- The actuarial present value of benefit obligations and funded status for the Plan was as follows: October 31, (In thousands) 1997 1996 - ---------------------------------------------------------------------- Vested benefit obligation $8,120 $7,049 - ---------------------------------------------------------------------- Non-vested benefit obligation 18 24 - ---------------------------------------------------------------------- Accumulated benefit obligation 8,138 7,073 - ---------------------------------------------------------------------- Projected compensation increases 819 887 - ---------------------------------------------------------------------- Projected benefit obligation 8,957 7,960 - ---------------------------------------------------------------------- Fair value of plan assets 9,012 7,204 - ---------------------------------------------------------------------- Projected benefit obligation in - ---------------------------------------------------------------------- excess of (less than)assets (55) 756 - ---------------------------------------------------------------------- Add (deduct): - ---------------------------------------------------------------------- Unrecognized net gain 1,076 538 - ---------------------------------------------------------------------- Contributions made 8/31/97 to 10/31/97 and 8/31/96 to 10/31/96 -- (335) - ---------------------------------------------------------------------- Prior service cost remaining to be - ---------------------------------------------------------------------- amortized, including unrecognized net asset (358) (382) - ---------------------------------------------------------------------- Pension liability recognized $ 663 577 - ---------------------------------------------------------------------- Assumptions used in developing the projected benefit obligation were as follows: August 31, 1997 1996 - ---------------------------------------------------------------------- Discount rate on plan liabilities 7.5% 8.0% - ---------------------------------------------------------------------- Long-range rate of return on plan assets 9.0% 9.0% - ---------------------------------------------------------------------- Salary increase rate 4.0% 6.0% - ---------------------------------------------------------------------- 58 THE COOPER COMPANIES, INC. AND SUBSIDIARIES THE COMPANY'S 401(k) SAVINGS PLAN The Company's 401(k) Savings Plan provides for the deferral of compensation as described in the Internal Revenue Code and is available to substantially all full-time United States employees of the Company. Employees who participate in the 401(k) Plan may elect to have from 1% to 16% (2% to 10%, prior to October 1, 1996) of their pre-tax salary or wages, (but not more than $5,000 for employees whose salary is more than $66,000 annually for the calendar year ended December 31, 1996), deferred and contributed to the trust established under the Plan. The Company's contribution on account of participating employees, net of forfeiture credits, was $218,000, $102,000 and $95,000 for the years ended October 31, 1997, 1996 and 1995, respectively. THE COMPANY'S INCENTIVE PAYMENT PLAN The Company's Incentive Payment Plan is available to officers and other key executives. Participants may, in certain years, receive bonuses based on performance. Total payments earned for the years ended October 31, 1997, 1996 and 1995, were approximately $1.8 million, $1.8 million and $1.5 million, respectively. THE COMPANY'S TURN AROUND INCENTIVE PLAN The Turn Around Incentive Plan ("TIP") was adopted in 1993 to recognize the special efforts of certain individuals in guiding the Company through certain difficulties that existed at that time related to the Company's then capital structure and its former ownership of companies that manufactured and distributed breast implants. All provisions of the TIP have been met, and all required payments have been made to participants as follows: In May 1994 participants received an aggregate payment of approximately $247,000 cash and approximately 99,000 shares of restricted stock from which all restrictions were removed in May 1996. In August 1995 participants received an aggregate payment of approximately $476,000 cash and approximately 97,000 shares of restricted stock. Restrictions from one-half of these shares were removed in August 1996, and the restrictions on the balance of the shares were removed in August 1997. Note 11. Commitments, Contingencies and Pending Litigation Total minimum annual rental obligations (net of sublease revenue of approximately $453,000 per year through March 2000) under noncancelable operating leases (substantially all real property or equipment) in force at October 31, 1997 are payable in subsequent years as follows: (In thousands) - ------------------------------------------------ 1998 $2,582 - ------------------------------------------------ 1999 2,046 - ------------------------------------------------ 2000 1,553 - ------------------------------------------------ 2001 925 - ------------------------------------------------ 2002 588 - ------------------------------------------------ 2003 and thereafter 682 - ------------------------------------------------ $8,376 - ------------------------------------------------ Aggregate rental expense for both cancelable and noncancelable contracts amounted to $3 million, $2.5 million and $2.4 million in 1997, 1996 and 1995, respectively. An agreement was reached in September 1993 with Medical Engineering Corporation ("MEC"), a subsidiary of Bristol-Myers Squibb Company, which limited the Company's contingent liabilities associated with breast implant litigation involving a former division of the Company (the "MEC Agreement"). The remaining liability recorded for payments to be made to MEC under the MEC Agreement become due as follows: December 31, Recorded in 1993 Recorded in 1997 (In thousands) - ------------------------------------------------ 1997 $2,000 $ -- - ------------------------------------------------ 1998 2,500 -- - ------------------------------------------------ 1999 -- 3,000 - ------------------------------------------------ 2000 -- 3,500 - ------------------------------------------------ 2001 -- 4,000 - ------------------------------------------------ 2002 -- 4,500 - ------------------------------------------------ 2003 -- 3,000 - ------------------------------------------------ $4,500 $18,000 - ------------------------------------------------ Payments of $18 million to be made to MEC beginning December 31, 1999 are contingent upon the Company's earning net income before taxes in each fiscal year beginning 59 THE COOPER COMPANIES, INC. AND SUBSIDIARIES with fiscal 1999, and were recorded in the Company's financial statements in the fourth quarter of fiscal 1997 as loss from sale of discontinued operations, and are reflected on the balance sheet in "Other noncurrent liabilities," as Management concluded that it was probable that the payments would be required. Such payments are limited to the smaller of 50% of the Company's net income before taxes in each such fiscal year on a noncumulative basis or the amounts shown above. Under the terms of a supply agreement most recently modified in 1993, the Company agreed to purchase, by December 31, 1997, certain contact lenses from Pilkington plc (W-J), with an aggregate cost of approximately 'L'4.1 million. As of December 31, 1997, a commitment of 'L'1.5 million remained. The companies are currently completing another amendment to this agreement under an extension of one month to the December 31, 1997 deadline. Management expects that, the newly amended agreement, when formalized, will not contain any minimum purchase commitments. Environmental In 1997, environmental consultants engaged by the Company identified a contained groundwater contamination consisting of industrial solvents including trichloroethane (TCA) at one of CVI's sites. In the opinion of counsel, the solvents were released into the ground prior to the Company acquiring the business at that site, and the area containing these chemicals is limited. The Company intends to enter the state's remediation program and has accrued $350,000 for that purpose in 1997. In the opinion of Management, the cost of remediation will not be material when considering amounts previously accrued. Pending Litigation The Company is a defendant in a number of legal actions relating to its past or present businesses in which plaintiffs are seeking damages. In the opinion of Management, after consultation with counsel, the ultimate disposition of those actions will not materially affect the Company's financial position or results of operations. The Company was named as a nominal defendant in a stockholder derivative action entitled Harry Lewis and Gary Goldberg v. Gary A. Singer, Steven G. Singer, Arthur C. Bass, Joseph C. Feghali, Warren J. Keegan, Robert S. Holcombe and Robert S. Weiss, which was filed on May 27, 1992 in the Court of Chancery, State of Delaware, New Castle County. Lewis and Goldberg subsequently amended their complaint, and the Delaware Chancery Court consolidated the amended complaint with a similar complaint filed by another plaintiff (the "Lewis and Goldberg Actions"). The amended complaint in the Lewis and Goldberg Actions alleged that certain directors of the Company and Gary Singer, as the former Co-Chairman of the Board of Directors, caused or allowed the Company to be a party to a "trading scheme" to "frontrun" high yield bond purchases by the Keystone Custodian Fund, Inc., a group of mutual funds. The amended complaint also alleged that the defendants violated their fiduciary duties to the Company by not vigorously investigating certain allegations of securities fraud. The amended complaint requested that the Court order the defendants (other than the Company) to pay damages and expenses to the Company and certain of the defendants to disgorge their profits from the "trading scheme" to the Company. The Company was also named as a nominal defendant in a stockholder derivative action entitled Bruce D. Sturman v. Gary A. Singer, Steven G. Singer, Brad C. Singer, Dorothy Singer as the Executrix of the Estate of Martin Singer, Karen Sue Singer, Norma Singer Brandes, Normel Construction Corp, Brandes & Singer and Romulus Holdings Inc., which was filed on June 6, 1995 in the Court of Chancery of the State of Delaware, New Castle County (the "Sturman Action"). The complaint in the Sturman Action was similar to a derivative complaint filed by Mr. Sturman in the Supreme Court of the State of New York on May 26, 1992. The New York complaint was dismissed by the New York Supreme Court on August 17, 1993, and that dismissal was affirmed by the New York Appellate Division on March 28, 1995. The allegations of the complaint in the Sturman Action involved substantially the same facts and events at issue in the Lewis and Goldberg Actions described above, and similar relief was sought. On February 4, 1997, the plaintiffs in the Lewis and Goldberg and Sturman Actions moved for partial summary judgment against Gary Singer based upon his earlier criminal conviction in connection with the "trading scheme." No further action was taken to prosecute that motion pending action on plaintiffs' June 27, 1997 motion to consolidate the two Delaware actions and to file a further amended complaint. On December 19, 1997, the Court of Chancery entered an Order consolidating the Sturman Action with the Lewis and Goldberg Actions under the caption In Re: The Cooper Companies, Inc. Shareholders Derivative Litigation, 60 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated C.A. No. 12584, and directing that the shareholder plaintiffs file a consolidated and amended derivative complaint. On December 22, 1997, plaintiffs filed their consolidated and amended complaint (the "Consolidated Complaint"). The Consolidated Complaint is brought by the shareholder plaintiffs on behalf of the Company as a nominal defendant and names as defendants against whom relief is sought: Gary Singer, Steven Singer, Brad Singer, Dorothy Singer, as executrix of the estate of Martin Singer, Karen Sue Singer, Norma Singer Brandes, Normel Corporation, Brandes & Singer and Romulus Holdings, Inc. The former director defendants in the Lewis and Goldberg Actions, Arthur C. Bass, Joseph C. Feghali, Warren J. Keegan, Robert S. Holcombe and Robert S. Weiss, were dropped as defendants in the derivative actions upon the filing of the Consolidated Complaint. The Consolidated Complaint makes substantive allegations similar to those previously made in the complaints in the Lewis and Goldberg and Sturman Actions and seeks to recover on behalf of the Company profits allegedly made by the defendants and their affiliates in connection with the "trading scheme" described above and damages from the defendants for harm caused to the Company by the "trading scheme." The Company intends to file an answer to the Consolidated Complaint acknowledging that the derivative claims are made on its behalf and claiming an interest in the proceeds, if any, from any recovery obtained by the shareholder plaintiffs. GT Labs On October 1, 1992, GT Laboratories, Inc. filed a complaint against the Company in the United States District Court for the Northern District of Illinois. The Complaint alleged that the Company had breached a supply contract entered into effective January 1, 1990 by failing to purchase the requisite number of contact lens blanks, commonly referred to as buttons, used in the manufacture of rigid gas permeable contact lenses. The Company denied that it had breached the contract and asserted that the contract could be terminated if the requisite number of buttons were not purchased, but that no further relief could be obtained. GT Laboratories moved for summary judgment on its right to obtain money damages for breach of contract. On September 13, 1993, the Court granted GT Laboratories' Motion For Summary Judgment, and a nonfinal, non-appealable order finding the Company liable for an undetermined amount of money damages was entered. Because the order addressed liability only and did not include any damage finding, the order was not final and was not appealable until such time as damages were calculated by a jury. In January 1998, a jury trial was held in the United States District Court for the Northern District of Illinois to determine the amount of damages. The jury fixed the amount of damages at $1.7 million. The Company intends to file post-trial motions seeking a new trial on the amount of damages and intends to vigorously pursue an appeal on the liability findings and any damages award once the matter is concluded in the District Court. Until the matter is finally concluded at the District Court level, the Company is not able to pursue its rights in the Appellate Court. In the opinion of Management, it is more likely than not that the ultimate liability, if any, to be incurred by the Company upon the final adjudication of this matter will not materially affect the Company's financial position or results of operations. Note 12. Common Stock Offering On July 23, 1997, the Company filed a prospectus supplement with the Securities and Exchange Commission for the sale of 2 million shares of the Company's common stock at the offering price of $23.50 per share. The Company sold 2.3 million shares of common stock (including 300,000 shares for over allotment). The proceeds from the offering of $50.4 million, net of underwriters discount and transaction costs of $3.7 million, were primarily used to repay outstanding indebtedness. The following presents supplementary earnings per share information assuming the offering and the repayment of $38.6 million of debt on the first day of fiscal 1997: Year Ended October 31, 1997 - ------------------------------------------------ Supplemental earnings per share: Continuing operations $ 3.60 - ------------------------------------------------ Discontinued operations (1.27) - ------------------------------------------------ Extraordinary item (1) .10 - ------------------------------------------------ Earnings per share $ 2.43 - ------------------------------------------------ Number of shares used to compute earnings per share (in thousands): - ------------------------------------------------ Historical, excluding effect of the follow-on offering 12,441 - ------------------------------------------------ Shares, the proceeds of which are assumed to be used to repay outstanding indebtedness 1,763 - ------------------------------------------------ Total 14,204 - ------------------------------------------------ 61 THE COOPER COMPANIES, INC. AND SUBSIDIARIES (1) Represents the per share amount related to a net extraordinary gain, net of taxes and prepayment penalties, of $1.4 million for the year ended October 31, 1997, related to the assumed extinguishment of debt, as if such extinguishment had occurred on the first day of the period presented. Note 13. Relationships and Transactions Between the Company and CooperLife Sciences, Inc. ("CLS") On June 14, 1993, the Company entered into a settlement agreement with CLS (the "Settlement Agreement") in order to resolve all then pending disputes with CLS and to avoid a costly and disruptive proxy fight, while continuing to maintain a Board of Directors, the majority of whose members are independent. Such agreements were to terminate on June 14, 1995, subject to earlier termination or extension under certain circumstances, and were later extended to, and expired on, October 31, 1996. Following such termination, CLS continued to have the right pursuant to a 1992 settlement agreement with the Company to designate two members of the Company's Board of Directors, so long as CLS continued to own at least 800,000 shares of common stock, or one director, so long as it continued to own at least 333,333 shares of common stock. On October 29, 1997, the Company and CLS agreed to terminate this one remaining agreement between the parties. During 1997, the Company borrowed and repaid loans totaling $5 million provided by CLS. Such loans carried interest at 8.5% per annum. CLS was formerly an 89.5% owned subsidiary of the Company's former parent, Cooper Laboratories, Inc. As of January 23, 1998, CLS owned 4,133 shares of the common stock of the Company. Two members of the Company's Board of Directors are also directors and/or officers of CLS. Moses Marx is a Director of CLS (and is the controlling stockholder of CLS). Steven Rosenberg is serving as President and Chief Financial Officer of CLS, and he is also a Director of CLS. Note 14. Business Segment Information The Company's operations are attributable to three business segments: HGA, which provides healthcare services for inpatient and outpatient treatment and partial hospitalization programs through the ownership and operation of certain psychiatric facilities, and through May 1995 also managed three other such facilities, CVI, which develops, manufactures and markets a range of contact lenses, and CSI, which develops, manufactures and distributes diagnostic and surgical equipment and instruments primarily for obstetrics and gynecology. Total net revenue by business segment represents service and sales revenue as reported in the Company's consolidated statements of income. Operating income (loss) is total net revenue less cost of products sold (or services provided, in the case of HGA revenue), research and development expenses, selling, general and administrative expenses, costs of restructuring and amortization of intangible assets. Corporate operating loss is principally corporate headquarters expense. Investment income, net, settlement of disputes, net, debt restructuring costs, gain on sales of assets and businesses, net, other income (expense), net, and interest expense were not allocated to individual businesses. Identifiable assets are those assets used in continuing operations (exclusive of cash and cash equivalents). Corporate assets include cash and cash equivalents. 62 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--Continued Information by business segment for each of the years in the three-year period ended October 31, 1997 follows:
Corporate & (In thousands) HGA CVI CSI Eliminations Consolidated - ------------------------------------------------------------------------------------------------ 1997 Net revenue from non-affiliates $ 52,704 $ 64,007 $ 24,762 $ -- $141,473 - ------------------------------------------------------------------------------------------------ Operating income (loss) $ 5,986 $ 23,101 $ 2,476 $(5,774) $ 25,789 - ------------------------------------------------------------------------------------------------ Investment income, net 361 Other income (expense), net (152) Interest expense (4,214) - ------------------------------------------------------------------------------------------------ Income before income taxes $ 21,784 - ------------------------------------------------------------------------------------------------ Identifiable assets $ 51,516 $ 43,380 $ 29,543 $ 50,859 $175,298 - ------------------------------------------------------------------------------------------------ Depreciation expense $ 1,691 $ 803 $ 349 $ 79 $ 2,922 - ------------------------------------------------------------------------------------------------ Amortization expense $ 180 $ 674 $ 891 $ -- $ 1,745 - ------------------------------------------------------------------------------------------------ Capital expenditures $ 3,603 $ 3,551 $ 507 $ 74 $ 7,735 - ------------------------------------------------------------------------------------------------ 1996 Net revenue from non-affiliates $ 43,013 $ 48,892 $ 17,226 $ -- $109,131 - ------------------------------------------------------------------------------------------------ Operating income (loss) $ 2,573 $ 19,065 $ 1,667 $(6,462) $ 16,843 - ------------------------------------------------------------------------------------------------ Investment income, net 281 Settlement of disputes, net 223 Other income (expense), net 80 Interest expense (5,312) - ------------------------------------------------------------------------------------------------ Income before income taxes $ 12,115 - ------------------------------------------------------------------------------------------------ Identifiable assets $ 49,051 $ 23,756 $ 18,089 $ 12,013 $102,909 - ------------------------------------------------------------------------------------------------ Depreciation expense $ 1,511 $ 800 $ 236 $ 82 $ 2,629 - ------------------------------------------------------------------------------------------------ Amortization expense $ 205 $ 314 $ 461 $ 269 $ 1,249 - ------------------------------------------------------------------------------------------------ Capital expenditures $ 1,431 $ 1,293 $ 404 $ 54 $ 3,182 - ------------------------------------------------------------------------------------------------ 1995 Net revenue from non-affiliates $ 41,794 $ 42,456 $ 12,824 $ 16 $97,090 - ------------------------------------------------------------------------------------------------ Operating income (loss) $ 878 $ 13,959 $ (425) $ (6,404) $ 8,008 - ------------------------------------------------------------------------------------------------ Investment income, net 444 Settlement of disputes, net (3,532) Other income (expense), net 51 Interest expense (4,741) - ------------------------------------------------------------------------------------------------ Income before income taxes $230 - ------------------------------------------------------------------------------------------------ Identifiable assets $ 48,086 $ 21,965 $ 8,953 $ 12,988 $ 91,992 - ------------------------------------------------------------------------------------------------ Depreciation expense $ 1,443 $ 863 $ 288 $ 110 $ 2,704 - ------------------------------------------------------------------------------------------------ Amortization expense $ 205 $ 448 $ 317 $ 22 $ 992 - ------------------------------------------------------------------------------------------------ Capital expenditures $ 335 $ 1,449 $ 267 $ 134 $ 2,185 - ------------------------------------------------------------------------------------------------
63 THE COOPER COMPANIES, INC. AND SUBSIDIARIES Note 15. Subsequent Events (Unaudited) In December 1997, the Company acquired Aspect Vision Care Limited, a privately-held manufacturer of high quality contact lenses sold primarily in the United Kingdom and other European countries. The Company paid approximately 'L'30 million, or $51.0 million at the date of the closing in cash ('L'12 million) and 8% five-year notes ('L'18 million), and will pay an additional amount after approximately 3 years based on performance of Aspect Vision Care Limited over that period. The minimum amount of the additional payment will acrete to 'L'5 million after approximately 3 years, and there is no maximum limit. The cash payment was partially financed under the Company's $50 million revolving credit agreement and cash then on hand. The acquisition will be accounted for under the purchase method. Aspect will operate under its current name and management as a part of CooperVision, Inc., the Company's contact lens business. 64 THE COOPER COMPANIES, INC. AND SUBSIDIARIES SCIENTIFIC ADVISORS TO THE COMPANY Eye Care - --------- Keith Ames, OD, FAAO Family Vision Center Chillicothe, OH Kenneth Daniels, OD Pennsylvania College of Optometry Philadelphia, PA Susan Gromacki, OD, MS The New England Eye Institute Boston, MA Mark Andre, FCLSA Casey Eye Institute Portland, OR Jeffrey Dougal OD, FAAO Placentia, CA Gray Sass, OD Marietta, GA Patrick Caroline, COT, FAAO Pacific University College of Optometry Forest Grove, OR Burt W. Dubow, OD, FAAO Minnesota Vision Group Waite Park, MN Joseph Studebaker, OD, FAAO Englewood, OH Walter Choate, OD, FAAO Madison, TN S. Barry Eiden, OD, FAAO Deerfield, IL Loretta Szczotka, OD University Hospitals of Cleveland Cleveland, OH Robert Davis, OD, FAAO Chicago, IL Christopher Snyder, OD, FAAO University of Alabama Birmingham, AL Cheryl L. Vincent, OD, FAAO East Lansing, MI Women's Health - ---------------- James C. Caillouette, M.D., FACOG, FACS President, The Pacific Coast Obstetrical and Gynecological Society Clinical Professor Obstetrics and Gynecology University of Southern California. School of Medicine Charles H. Koh, M.D. Associate Clinical Professor of Obstetrics and Gynecology Medical College of Wisconsin Co-Director, Reproductive Specialty Center, Milwaukee Institute for Minimally Invasive Surgery Elijah Carter, DVM, M.D. Chairman, Department of Obstetrics and Gynecology Summit Medical Center Oakland, CA John L. Marlow, M.D. Director Continuing Medical Education, Columbia Hospital for Women Clinical Professor, George Washington University Associate Clinical Professor, Georgetown University Carl R. Della Badia, DO, FACOG, DFACOOG Chief of Obstetrics, Methodist Hospital, Philadelphia, PA Clinical Associate Professor of Obstetrics and Gynecology, Jefferson Medical College Clinical Assistant Professor of Obstetrics and Gynecology, University of Medicine and Dentistry of New Jersey, School of Osteopathic Medicine 65 CORPORATE INFORMATION
Board of Directors: Nominating Committee Corporate Offices: Transfer Agent Allan E. Rubenstein, M.D. Allan E. Rubenstein, M.D. The Cooper Companies,Inc. American Stock Transfer President WorldCare (Chairman) 10 Faraday & Trust Company Imaging, Inc. Michael H. Kalkstein Irvine, CA 92618-1850 40 Wall Street Chairman Moses Marx Voice:(714)-597-4700 or New York, NY 10005 toll free, 1-(888)-822-2660 A. Thomas Bender Officers: Fax:(714)597-0662 Cerfified Public Accountants: President and Chief Executive KPMG Peat Marwick LLP Officer A. Thomas Bender The Cooper Companies, Inc. President and Chief Executive 6140 Stoneridge Mall Rd. Stock Exchange Listing Michael H. Kalkstein Officer and Suite 590 The New York Stock Exchange Partner President, CooperVision, Inc. Pleasanton, CA 94588 The Pacific Exchange Graham & James Voice:(510)460-3600 Ticker Symbol "COO" Robert S. Weiss Fax:(510)460-3649 Moses Marx Executive Vice President, Trademarks General Partner Treasurer and Publications and United Equities Chief Financial Officer Information: All products appearing in italics are trademarks or Donald Press Gregory A. Fryling Corporate information, service marks that are owned Executive Vice President Vice President Corporate including the current share by, licensed to or distributed Broadway Management Co., Inc. Development price, recent news releases by The Cooper Companies, Inc., and the Company's annual its subsidiaries or Steven Rosenberg Carol R. Kaufman report on Form 10-K without affiliates. The following Vice President and Chief Vice President of Legal Affairs exhibits, is available free trademarks appear in this Financial Officer, Secretary and Chief of charge through the report. Cooper Life Sciences, Inc. Administrative Officer Company's interactive stockholder communication system. Call 1-800-334-1986, Robert S. Weiss Nicholas J. Pichotta seven days a week, 24 hours Aspirette, Cerveillance Executive Vice President President, CooperSurgical Inc. a day. Visit The Cooper System, Cervex-Brush, Comfort Treasurer and Companies, Inc. on the View, Cooper Clear, Cooper Chief Financial Officer Mark R. Russell Worldwide Web at Toric, CooperFlex, President Hospital Group http://www.coopercos.com. CooperSurgical Smoke Stanley Zinberg, M.D. of America Evacuation System 6080 Director of Practice Activities Euro-Med Classic Series, FIPS, American College of Obstetrics Stephen C. Whiteford Investor Relations Formula 55 UV VHT, Frequency, and Gynecology Vice President and Contact Hints of Tints, HUI, Controller Mini-Flex, Hydrasoft Toric, Committees of the Board: B. Norris Battin Hysteroscopy Series 4000, Koh Principal Subsidiaries: 10 Faraday Colpotomizer, Kronner Audit and Finance Irvine, CA 92618-1850 Manipujector, LEEP Redikit, Committee CooperVision, Inc. Voice:(714)597-4700 LEEP System 1000, Natural Steven Rosenberg (Chairman) 10 Faraday Fax:(714)597-0662 Touch, Nu-Tip, Permaflex, Donald Press Irvine, CA 92618-1850 Permalens, Pipelle, Stanley Zinberg, M.D. Voice:(714)597-8130 Annual Meeting Preference, Preference Toric, Fax:(714)597-0662 Prima Series, RUMI, Silver, Compensation Committee The annual meeting of Silver 07, Silver 07 VH Tint, CooperSurgical Inc. stockholders of The Cooper Snowman, Tru-View, UltraSYNC, Michael H. Kalkstein 15 Forest Parkway Companies, Inc. will be Unimar, Vantage, VerreScope, (Chairman) Shelton, CT 06484 held on April 2, 1998 at the Zeppelin. Donald Press Voice:(203)929-6321 Marriott East Hotel, New Allan E. Rubenstein, M.D. Fax:(203)925-0135 York, NY at 10:00 A.M. Management Committee Hospital Group of America, Inc. Allan E. Rubenstein, M.D. 1265 Drummers Lane, Suite 107 (Chairman) Wayne, PA 19087 Donald Press Voice:(610)687-5151 Fax:(610)687-3842
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Exhibit 21 SUBSIDIARIES OF THE COOPER COMPANIES, INC. A DELAWARE CORPORATION JURISDICTION OF NAME INCORPORATION - ------------------------------------------------------------------------ The Cooper Healthcare Group, Inc. Delaware Unimar, Inc. California CooperVision Pharmaceuticals, Inc. Delaware The Cooper Real Estate Group, Inc. Delaware CooperSurgical Acquisition Corp. Delaware CooperVision, Inc. New York CooperVision, Inc. Canada Marlow Surgical Acquisition (dormant) Delaware CooperVision GB Finance, Inc. (dormant) Delaware CooperVision GB Services, Inc. (dormant) Delaware Lasertek, Inc. (dormant) Texas Hospital Group of America, Inc. Delaware HGA Management Services, Inc. Delaware Hospital Group of Delaware, Inc. Delaware Hospital Group of Illinois, Inc. Illinois Hospital Group of Louisiana, Inc. Louisiana Residential Centers of Indiana, Inc. Delaware Hospital Group of New Jersey, Inc. New Jersey Hampton Learning Center, Inc. New Jersey HGNJ, Inc. New Jersey Arlington Center for Recovery, L.L.C. Illinois MeadowWood Health Services, L.L.C. Delaware CooperSurgical, Inc. Delaware CooperSurgical, Inc. Canada HBH Medizintechnik GmbH Germany NOTE: Except for CooperSurgical and its 52% owned subsidiary, HBH Medizintechnik GmbH, each subsidiary is wholly-owned either by The Cooper Companies, Inc. or by the wholly-owned subsidiary under which it is indented in the list above. In the case of CooperSurgical, Inc., 99.8% of the company is owned by The Cooper Companies, Inc. and the remaining .2% is owned by members of CooperSurgical's Medical Advisory Board.

5 1,000 12-MOS OCT-31-1997 NOV-01-1996 OCT-31-1997 48,249 0 29,815 2,346 15,096 68,569 56,578 17,055 175,298 33,617 8,552 1,480 0 0 110,053 175,298 88,769 141,473 27,325 73,863 0 0 4,214 21,784 (26,606) 48,390 (18,000) 992 0 31,382 2.40 2.39