UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarterly Period Ended APRIL 30, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from _________________ to _________________
Commission File Number 1-8597
THE COOPER COMPANIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2657368
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6140 Stoneridge Mall Road, Suite 590, Pleasanton, CA 94588
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 460-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $.10 Par Value 14,885,278 Shares
- ---------------------------- ---------------------------
Class Outstanding at May 29, 1998
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three
and Six Months Ended April 30, 1998 and 1997 3
Consolidated Condensed Balance Sheets - April 30, 1998
and October 31, 1997 4
Consolidated Condensed Statements of Cash Flows -Six
Months Ended April 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holdings 22
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Index of Exhibits 25
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except per share figures)
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- -----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales of products $ 37,450 $ 20,630 $ 66,834 $ 37,657
Net service revenue 14,314 13,033 27,768 24,382
-------- -------- -------- --------
Net operating revenue 51,764 33,663 94,602 62,039
-------- -------- -------- --------
Cost of products sold 13,027 6,104 24,304 11,135
Cost of services provided 13,127 11,373 25,844 22,055
Selling, general and administrative expense 14,544 9,094 26,258 17,040
Research and development expense 543 414 999 738
Amortization of intangibles 939 404 1,702 692
-------- -------- -------- --------
Income from operations 9,584 6,274 15,495 10,379
-------- -------- -------- --------
Interest expense 1,858 1,255 3,008 2,484
Other income (expense), net 277 (77) 1,072 (57)
-------- -------- -------- --------
Income before income taxes 8,003 4,942 13,559 7,838
(Benefit of) income taxes (480) (431) (917) (845)
-------- -------- -------- --------
Net income $ 8,483 $ 5,373 $ 14,476 $ 8,683
======== ======== ======== ========
Earnings per share:
Basic $ 0.57 $ 0.45 $ 0.98 $ 0.74
========= ======= ======== ========
Diluted $ 0.55 $ 0.44 $ 0.94 $ 0.72
========= ======= ======== ========
Number of shares used to compute
earnings per share:
Basic 14,872 11,924 14,840 11,798
========= ======= ======== ========
Diluted 15,443 12,243 15,398 12,082
========= ======= ======== ========
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
April 30, October 31,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,456 $ 18,249
Trade receivables, net 40,807 27,469
Inventories 28,212 15,096
Other current assets 12,620 7,755
--------- ---------
Total current assets 83,095 68,569
--------- ---------
Property, plant and equipment, net 57,703 39,523
Goodwill and other intangibles, net 90,276 36,698
Deferred tax asset 26,290 26,182
Other assets 9,677 4,326
--------- ---------
$ 267,041 $ 175,298
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 12,980 $ 7,907
Current portion of long-term debt 3,090 438
Accrued income taxes 10,812 9,134
Other current liabilities 18,634 16,138
--------- ---------
Total current liabilities 45,516 33,617
--------- ---------
Long-term debt 68,428 9,125
Other noncurrent liabilities 25,415 21,023
--------- ---------
Total liabilities 139,359 63,765
--------- ---------
Commitments and contingencies (see Note 6)
Stockholders' equity:
Common stock, $.10 par value 1,489 1,480
Additional paid-in capital 251,011 249,213
Accumulated deficit (123,953) (138,429)
Other equity (865) (731)
--------- ---------
Total stockholders' equity 127,682 111,533
--------- ---------
$ 267,041 $ 175,298
========= =========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
April 30,
1998 1997
-------- --------
Net cash provided (used) by operating activities $ (3,774) $ 295
-------- --------
Cash flows from investing activities:
Acquisitions of businesses (33,836) (7,091)
Purchases of property, plant and equipment (8,465) (4,103)
Investment in escrow funds -- (2,898)
Other -- (320)
-------- --------
Net cash used by investing activities (42,301) (14,412)
-------- --------
Cash flows from financing activities -- proceeds from (payment of):
Long-term debt 17,729 7,461
Line of credit, net 9,300 1,332
Aspect debt, net 3,684 --
Capitalized leases, net 2,792 --
Unimar Notes (4,155) --
Other 162 25
-------- --------
Net cash provided by financing activities 29,512 8,818
-------- --------
Effect of exchange rate changes on cash and cash equivalents (239) --
Net decrease in cash and cash equivalents (16,802) (5,299)
Cash and cash equivalents - beginning of period 18,258 6,837
-------- --------
Cash and cash equivalents - end of period $ 1,456 $ 1,538
======== ========
Supplemental disclosure of noncash investing and financing activities:
Acquisitions:
Fair value of assets acquired $ 93,044 $ 18,483
Less, liabilities assumed and acquisition costs (29,707) (2,230)
-------- --------
$ 63,337 $ 16,253
======== ========
Funded by:
Cash payments $ 33,836 $ 7,091
Issuance of stock and debt 29,501 9,162
-------- --------
$ 63,337 $ 16,253
======== ========
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc., and its subsidiaries (the "Company") develop,
manufacture and market 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 by providing outpatient and other ancillary
services, including managing psychiatric units at medical/surgical hospitals.
During interim periods, the Company follows the accounting policies disclosed in
its most recently filed Form 10-K. Readers are encouraged to refer to this Form
10-K and to the Company's Annual Report to Stockholders each for the fiscal year
ended October 31, 1997, when reviewing this Form 10-Q. The quarterly results in
this report are not necessarily indicative of results to be expected for
subsequent quarters.
The accompanying unaudited consolidated condensed financial statements contain
all adjustments necessary to present fairly the Company's consolidated financial
position as of April 30, 1998 and October 31, 1997, the consolidated results of
its operations for the three and six months ended April 30, 1998 and 1997, and
its consolidated cash flows for the six months ended April 30, 1998 and 1997.
All adjustments are of a normal recurring nature except for $1.7 million and
$830,000 reductions of the deferred tax asset valuation allowance recorded in
the first six months of 1998 and 1997, respectively, based on Management's
belief that the Company will continue to generate results comparing favorably
with those of the prior year.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("FAS 128") in the first quarter of 1998. FAS 128 requires
that earnings per share ("EPS") be determined using the weighted average number
of common shares for Basic EPS, and adding outstanding dilutive stock warrants
and stock options to determine Diluted EPS. All prior period EPS amounts have
been restated to reflect this adoption. (See Note 5.)
Note 2. Inventories
April 30, October 31,
1998 1997
-------- --------
(In thousands)
Raw materials $ 4,409 $ 2,748
Work-in-process 3,138 1,277
Finished goods 20,665 11,071
-------- --------
$28,212 $15,096
======= =======
Inventories are stated at the lower of cost, determined on a first in, first out
or average cost basis, or market.
6
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 3. Long-Term Debt and Other Borrowings
LONG-TERM DEBT
April 30, October 31,
1998 1997
------- -------
(In thousands)
Promissory notes - Aspect $27,839 $ --
Midland Bank 17,445 --
KeyBank Line of Credit ("Revolver") 9,300 --
Aspect Bank Loans 6,954 --
Promissory note - Wesley-Jessen
Corporation ("W-J") 1,548 1,517
County of Monroe Industrial Development
Agency ("COMIDA") Bond 2,935 2,975
Other 5,497 916
Promissory notes- Unimar -- 4,155
------- -------
71,518 9,563
Less current installments 3,090 438
------- -------
$68,428 $ 9,125
======= =======
Promissory Notes - Aspect
The Aspect promissory notes, due December 2, 2002, were issued to former
shareholders of Aspect in conjunction with the December 1997 acquisition of
Aspect Vision Care Limited ("Aspect"). (See Note 4.) These notes are denominated
in Pounds Sterling (approximately (pound)16.7 million). Interest accrues at a
rate of 8% per annum and is payable in cash generally on the last day of each
October. The notes are secured by the shares of Aspect Vision Holdings and are
guaranteed by the Company. Upon the occurrence of certain events of default in
the purchase agreement, the note holders may demand immediate repayment.
Revolver
The Revolver is a $50 million senior secured revolving credit facility maturing
in September 2002, with KeyBank National Association as agent for itself and the
other members of the facility. Interest on borrowings is paid quarterly at rates
ranging from 0.5% to 2% over the applicable London Interbank Offered Rate
("LIBOR") depending on certain financial ratios. Such rate may be floating or
fixed at the Company's option. In the second quarter of 1998, LIBOR rates in the
United States ranged from 5.6% to 5.7%. The Company pays an annual commitment
fee of 0.375% of the unused portion of the Revolver. Amounts outstanding under
Letters of Credit reduce the available credit and the unused line fee.
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Borrowings under the Revolver are secured by a first security interest in all of
the assets of the Company and are guaranteed by the principal operating
subsidiaries of the Company. During the term of the Revolver, the Company may
borrow, repay and re-borrow up to $50 million.
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. Certain prepayments are
subject to penalties.
The Revolver contains various covenants, including maintenance of certain ratios
and transaction limitations requiring approval of the lenders.
Midland Bank
The Aspect acquisition (see Note 4) was partially funded by a 'L'10.5 million
loan from Midland Bank plc, due November 27, 2002. In March 1998, the Company
converted the denomination to U.S. dollars and entered into an interest rate
swap to fix the interest rate at 6.19% per annum. The Midland loan is secured by
a Letter of Credit in its favor from KeyBank National Association. Interest on
the Midland loan is 20 basis points (0.2%) over Sterling LIBOR, adjusted
quarterly, and the Company pays an annual Letter of Credit fee of 1% of the
balance to KeyBank.
Unimar Promissory Notes
In April 1996, the Company acquired Unimar, Inc., issuing promissory notes for
$4 million principal amount, bearing interest of 12% per annum and maturing
April 1999. The notes were repaid in the first quarter of 1998.
Aspect Bank Loans
The balance of the loans at April 30, 1998 was $7 million and is secured with
certain assets of Aspect and a $4.2 million Letter of Credit in favor of NWB
from KeyBank National Association. Loan maturity dates range from February 1,
2000 to September 1, 2006. The interest rate on 'L'2.5 million, acquired
March 30, 1998, is based on 0.2625% above Sterling LIBOR. Sterling LIBOR was
7.58% for the period of the loan. The interest rate on other NWB loans is at
1.5% above the Base Rate, which was 7.25% for the reporting period. Proceeds
were used to repay a loan of 'L'827,000 ($1.4 million), included in acquired
debt, and to fund capital expenditures.
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
OTHER BORROWINGS
Included in Notes Payable is a 'L'2 million overdraft facility with an
outstanding balance of 'L'1.4 million ($2.3 million) at April 30, 1998 that
is due on demand. The interest rate on the overdraft facility is at 1.5% above
the Base Rate.
Anthony Galley, a director of Aspect, has provided short-term funds to Aspect,
and there is a balance of 'L'517,000 at April 30, 1998 with a 9.25% annual
interest rate.
Economic Hedges to Manage the Risk of Fluctuations in Foreign Exchange
A portion of the Company's debt is denominated in Pounds Sterling ("Sterling").
Accordingly, the Company is exposed to fluctuations in Sterling exchange rates.
The Company has entered into forward currency contracts to hedge most of the
Sterling debt.
Note 4. Acquisitions
Litmus Acquisition
In February 1998, the Company purchased, for approximately $10 million in cash,
a 10% equity position in Litmus Concepts Inc. plus exclusive license to
distribute the FemExam'r' TestCard'tm' System of diagnostic tests in the
professional women's healthcare market in the U.S. and Canada. Of the $10
million purchase price, approximately $5 million has been ascribed to the equity
investment and approximately $5 million was ascribed to the exclusive license.
The Company is accounting for its investment in Litmus at cost and is amortizing
the license over 17 years.
The Company agreed to certain annual minimum purchases for the period ending on
the earlier to occur of the Company purchasing 20 million units of the products
as defined in the license agreement or the sixth anniversary of the license
agreement. Under the license agreement, the sole action available to Litmus
should the Company not meet the stated minimum purchases would be to cancel the
exclusivity of the agreement.
Aspect Acquisition
In December 1997, the Company, through its wholly-owned subsidiary Aspect Vision
Holding Ltd. ("Holdings"), acquired Aspect Vision Care Limited and affiliates
("Aspect"), a privately-held manufacturer of high quality contact lenses sold
primarily in the United Kingdom and other European countries. Aspect is an
English company having the Pound Sterling as its functional currency. Holdings'
functional currency is the U.S. dollar. The results of Aspect and Holdings are
included in CooperVision ("CVI").
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
The cost of the acquisition was approximately $51 million at closing ($20
million in cash, $1.5 million for 38,000 shares of the Company's common stock
and $28 million in 8% five-year notes to the selling shareholders) plus an
additional amount after approximately three years based on the performance of
Aspect over that period. The 'L'5 million (approximately $8 million at closing)
minimum amount of the additional payment has been discounted at a rate of 8% and
will accrete over approximately three years. The cash payment was partially
financed under the Company's $50 million Revolver (see "Midland Bank" Note 3)
and cash then on hand. The acquisition has been accounted for as a purchase.
Excess of purchase price over net assets acquired has initially been recorded at
$48.1 million pending completion of a valuation required to finalize the
allocation of the purchase price and is being amortized over 40 years.
The following unaudited pro forma consolidated condensed results of operations
for the three- and six-month periods ended April 30, 1998 and 1997 are presented
as if Aspect had been acquired at the beginning of each period presented. The
unaudited pro forma information is not indicative of either the results of
operations that would have occurred if Aspect had been purchased during the
periods presented or of future results of the combined operations.
Amounts ($000)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- ---------------------------
1998 1997 1998 1997
Pro Forma Pro Forma Pro Forma Pro Forma
--------- --------- ---------- ---------
Net operating revenue $51,764 $41,809 $97,903 $77,421
======= ======= ======= =======
Net income $ 8,483 $ 5,398 $14,744 $ 9,344
======= ======= ======= =======
Shares outstanding for:
Basic EPS 14,872 11,962 14,857 11,836
======= ======= ======= =======
Diluted EPS 15,443 12,300 15,415 12,130
======= ======= ======= =======
EPS:
Basic $ 0.57 $ 0.45 $ 0.99 $ 0.79
======= ======= ======= =======
Diluted $ 0.55 $ 0.44 $ 0.96 $ 0.77
======= ======= ======= =======
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Earnings Per Share
Three Months Ended Six Months Ended
April 30, April 30,
1998 1997 1998 1997
------- ------- ------- -------
Basic:
Net income $ 8,483 $ 5,373 $14,476 $ 8,683
======= ======= ======= =======
Weighted average common shares 14,872 11,924 14,840 11,798
======= ======= ======= =======
Basic earnings per share $ 0.57 $ 0.45 $ 0.98 $ 0.74
======= ======= ======= =======
Diluted:
Weighted average common shares 14,872 11,924 14,840 11,798
Add:
Dilutive warrants 61 55 60 49
Dilutive options 510 264 498 235
------- ------- ------- -------
Effect of dilutive securities 571 319 558 284
------- ------- ------- -------
Diluted weighted average common
shares 15,443 12,243 15,398 12,082
======= ======= ======= =======
Diluted earnings per share $ 0.55 $ 0.44 $ 0.94 $ 0.72
======= ======= ======= =======
There were no antidilutive securities in either of the 1998 periods.
In the three and six months ended April 30, 1997, the following antidilutive
securities were excluded from the computation of diluted earnings per share:
Options to purchase 103,333 shares of common stock at $20 - $21
per share.
Outstanding 10 5/8% Convertible Subordinated Reset Debentures, which if
converted would have resulted in an additional 619,333 shares of common
stock.
Note 6. Commitments, Contingencies and Pending Litigation
Pilkington Supply Agreement
Under the terms of a supply agreement, the Company had agreed to purchase, by
December 31, 1997, from Pilkington plc, contact lenses with an aggregate cost
of approximately 'L'4.1 million. As of April 30, 1998, a commitment of
'L'1.2 million remained.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
The companies are currently completing amendments to the supply agreement under
an extension of the deadline to June 30, 1998. Management expects that the newly
amended agreement, when formalized, will not contain any minimum purchase
commitments.
Royalty Agreement
In connection with the Aspect acquisition (see Note 4), the Company acquired the
obligation to pay a royalty that ranges from 5% to a maximum of 7 1/2% on
certain Aspect-manufactured products, with a minimum royalty for five years of
'L'1 million a year.
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 before the Company acquired the business
at that site, and the area containing these chemicals is limited. The Company
intends to enter the state's remediation program and accrued $350,000 for that
purpose in 1997. In 1998, the Company accrued an additional $160,000, based on
updated estimates. In the opinion of Management, the cost of remediation will
not be material when considering amounts previously accrued.
Pending Litigation
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 entered an order finding the
Company liable for an undetermined amount of money damages. Because the order
addressed liability only and did not include any damage finding, the order was
not final and is not appealable until such time as damages were calculated by a
jury and a final appealable judgment is entered. 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 filed a post-trial motion seeking a new
trial on the amount of damages. At the appropriate time, the Company intends to
vigorously pursue an appeal on the liability findings and the jury verdict.
Until the matter is finally concluded at the District Court level, the Company
is not able to pursue any of 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
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
incurred by the Company upon the final adjudication of this matter will not
materially affect the Company's financial position or results of operations.
Russo Securities
On February 11, 1998, Russo Securities, Inc., Ferdinand Russo, Patrick Russo and
Richard Russo (the "Plaintiffs") filed suit against the Company in New York
State Supreme Court, County of Richmond, seeking compensatory damages in excess
of $9.8 million plus interest and punitive damages in excess of $10 million and
a declaration releasing Russo Securities of its obligation to pay the amount it
owes the Company for a $400,000 subordinated loan the Company made to Russo in
early 1991 (the "Note"). The complaint purported to state claims for fraud,
fraudulent conduct causing injury to business and reputation, and breach of
contract, based on events surrounding the decision not to reset the interest
rate on certain of the Company's debentures in June of 1991. As reported in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995,
the Company settled a Securities and Exchange Commission ("SEC") lawsuit against
the Company in December 1994 concerning the debenture reset issue.
Plaintiffs allege that Gary Singer, the Company's former co-chairman, made
certain misrepresentations to the Plaintiffs concerning the debenture reset
issue on which the Plaintiffs allegedly relied when issuing a valuation letter.
The complaint alleges that the SEC subsequently investigated this matter and --
as a result of purportedly wrongful conduct by the Company, including alleged
misrepresentations of Gary Singer in 1991 and 1992 -- initiated a civil suit and
disciplinary proceedings against Russo Securities alleging that it had aided and
abetted the Company's alleged fraudulent scheme to avoid the interest rate reset
and caused the Company's fraud. The Plaintiffs claim that the Company is liable
for the alleged damages caused by the SEC proceedings against the Plaintiffs,
including, among other things, harm associated with coronary ailments allegedly
suffered by all three of the individual Plaintiffs as a result of the SEC
proceedings, as well as income allegedly lost and fees and expenses allegedly
incurred by the Plaintiffs in connection with the SEC proceedings. The breach of
contract claim asserted by the Plaintiffs against the Company seeks $330,000 in
unreimbursed fees and expenses plus interest based on a purported promise by
Gary Singer that the Company would pay fees and expenses incurred by Russo
Securities in connection with the SEC investigation.
On March 5, 1998, the Company removed the case to the United States District
Court for the Eastern District of New York. Thereafter, the Company moved to
dismiss the Plaintiff's complaint on the pleadings for failure to state a claim
based on, among other things, the statute of limitations. Plaintiff subsequently
moved to amend the complaint. On March 17, 1998, the court denied the Company's
motion to dismiss the complaint (which does not preclude the Company from
raising any defense including the statute of limitations in future filings), on
the condition that the Plaintiffs voluntarily withdraw their request for a
declaration seeking release from Russo's obligation under the Note, as such
claim is arbitrable before the New York Stock Exchange. On May 6, 1998, the
Plaintiffs served an amended complaint withdrawing this claim. The Company filed
an answer denying all material allegations made by the Plaintiffs in the amended
complaint.
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
The Company believes that the claims raised by the Plaintiffs are without merit,
and the Company intends to vigorously defend the suit.
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
References to Note numbers below are references to the Notes to Consolidated
Condensed Financial Statements located in Item 1.
RESULTS OF OPERATIONS
Three and Six Months Ended April 30, 1998 Compared with Three and Six Months
Ended April 30, 1997.
NET SALES OF PRODUCTS: Net sales of products increased by $16.8 million, or 82%,
and $29.2 million, or 77%, for the respective three- and six-month periods.
(Dollars in 000's)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------------------------- ------------------------------------------------
1998 1997 % Incr. 1998 1997 % Incr.
------- ------- ------- ------ ------ -------
CVI* $30,422 $14,875 105% $53,290 $27,107 97%
CSI** 7,028 5,755 22% 13,544 10,550 28%
------- ------- ------- -------
$37,450 $20,630 82% $66,834 $37,657 77%
======= ======= ======= =======
* CVI = CooperVision - the Company's specialty contact lens business.
** CSI = CooperSurgical - the Company's women's healthcare business.
Net sales of CVI products increased primarily as a result of the acquisition of
Aspect Vision Care ("Aspect"). (See Note 4.) Net sales from Aspect accounted for
59% and 55% of the growth, and represented approximately 28% of CVI sales, for
the three and six months ended April 30, 1998. Increased sales of the
Preference'r' spherical and the Preference Toric'tm' product lines, which
together grew by approximately 74% and 66% over the comparable three- and
six-month periods, also contributed to CVI sales growth. Sales of toric lenses
to correct astigmatism, CVI's leading product group, grew 49% and 43% over the
comparable three- and six-month periods and accounted for 37% and 38% of CVI's
sales for the three and six months ended April 30, 1998. In March 1997, the
Company acquired Natural Touch'r', a line of opaque, cosmetic contact lenses
that contributed $1.7 million and $2.8 million of sales in the three and six
months ending April 30, 1998. Sales of Natural Touch'r' in the second quarter of
1997 were $0.7 million. These increases were partially offset by anticipated
decreases in sales of more mature product lines.
In February, CVI introduced its Frequency 55 disposable-planned replacement
sphere in the United States. In North America, disposable-planned replacement
spherical lenses make up the largest contact lens market segment. In May 1998,
CVI introduced two new toric products: Hydrasoft Toric Options, a custom planned
replacement toric lens for astigmatic patients who
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
have complex correction requirements, and Frequency 55 Toric, a planned
replacement lens designed for replacement at two-week or monthly intervals.
Frequency 55 Toric is positioned to compete directly with the leading product in
the lower priced segment of the toric market.
At CSI, net sales increased by 22% and 28% over the comparable three- and
six-month periods, primarily due to sales of Marlow products acquired in April
1997 and Hyskon products acquired in December 1997.
In May 1998, CSI introduced two new product lines:
The Cerveillance Scope, the first in a planned series of products using
digital imaging and proprietary software to provide enhanced visualization
and documentation in examinations of the cervix. The Cerveillance Scope is a
fully integrated compact colposcope, an optical device used to examine the
vagina and the cervix. It improves image capture, enhancement and analysis
allowing measurement of lesion size and documentation of cervical changes
over time.
The FemExam'r' pH and Amines TestCard'tm', the first of four patented
diagnostic tests comprising the FemExam Vaginal Fluid TestCard System that
CSI recently licensed. These tests, designed for use primarily in the
physician's office, rapidly and economically screen and diagnose common
vaginal infections such as bacterial vaginosis, yeast and trichomonasis.
They are designed to replace current testing practices that are difficult,
costly and inconvenient to perform.
NET SERVICE REVENUE: Hospital Group of America's ("HGA") net service revenue of
$14.3 million and $27.8 million increased by 10% and 14% for the three- and
six-month periods, primarily as a result of the addition of the Mid-West Center
in April 1997, the increase in inpatient days at Hampton Hospital and additional
revenue from HGA's new Management Services Division.
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
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:
Margin % Margin %
Three Months Ended Six Months Ended
April 30, April 30,
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
CVI 67 77 66 77
CSI 55 53 54 53
Consolidated 65 70 64 70
The decrease in CVI's margin for the three and six months ended April 30, 1998
was due to the acquisition of Aspect, whose products have lower margins and
increased sales of lower margin Natural Touch'r' products purchased in March
1997. Margins on CVI's toric and other specialty lines of contact lenses have
maintained their strong levels. Despite the anticipated margin decrease,
dramatic sales growth drove CVI's gross profit up by 79% in the second quarter
and 68% for the six-month period.
Margin improved at CSI primarily due to cost reduction programs associated with
Unimar'r' and Marlow products. Management anticipates that margins at CSI will
continue to improve as recently introduced and future proprietary products will
command higher margins.
COST OF SERVICES PROVIDED: Cost of services provided represents all normal
operating costs (other than financing costs and amortization of intangibles)
incurred by HGA in generating net service revenue. The result of subtracting
cost of services provided from net service revenue is $1.2 million, or 8%, and
$1.7 million, or 13%, of net service revenue in the three months ended April 30,
1998 and 1997. The comparable six-month results were $1.9 million, or 7%, and
$2.3 million, or 10%. The increase in cost of services provided as a percentage
of service revenue resulted primarily from the impact of government mandated
Medicare rate reductions under the Tax Equity and Financial Responsibilities Act
of 1982 ("TERFA") and certain startup costs associated with the Mid-West Center
and Management Services Division. Management is responding to TEFRA changes by
increasing the efficiency of medical service integration during psychiatric
hospitalization.
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSE:
(Dollars in 000's)
Three Months Ended Six Months Ended
April 30, April 30,
--------------------------------- -----------------------------------
1998 1997 % Incr. 1998 1997 % Incr.
-------- -------- ------- ------- ------- -------
CVI $10,252 $ 5,533 85% $18,258 $10,315 77%
CSI 2,420 2,172 11% 4,591 3,970 16%
HQ/Other 1,872 1,389 35% 3,409 2,755 24%
------- ------- ------- -------
$14,544 $ 9,094 60% $26,258 $17,040 54%
======= ======== ======== ========
SG&A expense for the three- and six-month periods has increased 60% and 54%,
largely as a result of: (1) the acquisition of Aspect in December 1997, (2)
higher selling, promotion and distribution costs at CVI, which contributed to
sales increases of 46% and 42% (excluding Aspect) for the three- and six-month
periods, respectively and (3) CSI expenses related primarily to the Marlow
acquisition, which contributed to CSI's 22% and 28% revenue increases for the
three- and six-month periods.
INCOME FROM OPERATIONS: Primarily as a result of the variances discussed above,
income from operations improved by $3.3 million, or 53%, and $5.1 million, or
49%, for the three- and six-month periods. Income (loss) from operations for
each business unit and corporate was:
(Dollars in 000's)
Three Months Ended Six Months Ended
April 30, April 30,
------------------------------------ ------------------------------------
Incr. Incr.
1998 1997 (Decr.) 1998 1997 (Decr.)
-------- -------- -------- -------- -------- --------
CVI $ 9,485 $ 5,565 $ 3,920 $ 15,465 $ 9,995 $ 5,470
CSI 829 483 346 1,605 902 703
HGA 1,142 1,615 (473) 1,834 2,237 (403)
HQ/Other (1,872) (1,389) (483) (3,409) (2,755) (654)
-------- -------- -------- -------- -------- --------
$ 9,584 $ 6,274 $ 3,310 $ 15,495 $ 10,379 $ 5,116
======== ======== ======== ======== ======== ========
INTEREST EXPENSE: Interest expense increased by $603,000 and $524,000 for the
three- and six-month periods ended April 30, 1998 over the comparable 1997
periods, primarily due to the acquisition of Aspect which directly added $1.4
million and $2.1 million, for the respective periods. Additional borrowings by
the Company to support this and other acquisitions added $378,000 and $541,000
of interest expense for the three- and six-month periods. These increases were
partially offset by reductions in interest expense associated with the
redemption of the Company's 10 5/8% Convertible Subordinated Reset Debentures in
April 1997, the redemption of its 10% Senior Subordinated Secured Notes in
September 1997 and repayments of other debt in August and September 1997.
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
OTHER INCOME, NET: Other income, net increased by $354,000 for the three-month
period ended April 30, 1998 over the comparable 1997 period. Interest income
increased $91,000 on higher average cash balances resulting from the Company's
financing activities in the second half of 1997. In addition, gain/loss on
foreign exchange moved from a loss of $85,000 in last year's second quarter to a
gain of $182,000 in the comparable period this year. The six-month increases in
interest income and foreign exchange were $200,000 and $907,000, respectively.
The improvement in foreign exchange was principally due to the effect of a
weakening in the Pounds Sterling exchange rate against the U.S. dollar. As a
result, the U.S. dollar amount of Sterling denominated liabilities on the
Company's books was reduced prior to such liabilities being hedged.
PROVISION FOR INCOME TAXES: The provision for federal, state and foreign taxes
of $783,000 and $200,000 for the first six months of fiscal 1998 and 1997, was
offset by the recognition of an additional benefit of $1.7 million and $830,000
for the first six months of fiscal 1998 and 1997, by reducing the valuation
allowance against net deferred tax assets, based on Management's belief that the
Company's future results will continue to compare favorably with those of the
prior year.
19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CAPITAL RESOURCES & LIQUIDITY
In the first half of fiscal 1998, the Company grew significantly, primarily
through the acquisition of Aspect Vision Care ("Aspect"). Aspect revenue is
meeting expectations, with year-over-year growth of more than 30% since the
Company acquired it. The acquisition provides distribution channels for
CooperVision products in European markets and an additional range of products
for CooperVision to market in North America. The acquisition also enabled the
Company to enter the biweekly and monthly lens replacement market, the largest
segment of the U.S. contact lens market.
OPERATING CASH FLOWS: The $4 million cash used by operating activities was
significantly impacted by the Aspect acquisition. Over $3 million of one-time
payments were made by Aspect shortly after the acquisition, and a tax payment of
$3 million was made by Aspect in the second quarter for its tax liability on
pre-acquisition operations.
The Company historically experiences negative operating cash flow in the first
quarter, and positive operating cash flow thereafter. Operating cash for the
first quarter was negative $7 million. In the second quarter the Company
provided cash of $3 million, net of the Aspect tax payment noted above.
For the six-month period, major uses of cash by operations were for: (1) $4.1
million of taxes (includes Aspect payment), (2) $4.7 million for inventories,
including a buildup of approximately $2.1 million required for products launched
toward the end of the second quarter or to be launched in the third quarter, (3)
$2.4 million related to settlements of disputes and (4) $2.0 million to fund
fiscal 1997 entitlements under the Company's annual bonus plans, partially
offset by cash provided by operations.
INVESTING CASH FLOWS: Primary uses of cash for investing activities of $42.3
million for the six months ended April 30, 1998 included the purchase of Aspect
for approximately $21.2 million; the purchase of the Hyskon'r' product line, a
hysteroscopy fluid used by gynecologists in certain surgical procedures, for
$2.2 million; the purchase, for $10 million, of a 10% equity position in Litmus
Concepts Inc. plus an exclusive license to distribute the FemExam'r'
TestCard'tm' System of diagnostic tests in the professional women's healthcare
market in the U.S. and Canada; and capital expenditures of $8.5 million. The
principal uses of cash in the 1997 period included capital expenditures of $4.1
million and $3 million for the acquisition of the Natural Touch'r' line of
opaque contact lenses, $4.1 million for the acquisition of Marlow Surgical
Technologies, Inc, and an investment of $2.9 million in escrow funds restricted
to expansion of CooperVision's Scottsville, New York, facility.
FINANCING CASH FLOWS: In the first six months of fiscal 1998, the Company
obtained cash of $33.7 million from financing activities. The financing
activities primarily related to a $9.3 million draw down on the KeyBank line of
credit, the Midland Bank loan of $17.7 million, an increase in capitalized
leases of $2.8 million and Aspect obtaining $4 million of additional debt.
20
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
Proceeds were used to fund investing activities, as discussed above; in
addition, the Company repaid the Unimar Promissory Notes in the amount of $4.2
million.
Management believes cash flow from operations will be sufficient to fund ongoing
operations except that additional financings may be required to fund plant
expansions in Europe and other acquisitions if completed.
YEAR 2000: The Company has assessed its financial and operational systems and
estimates that the total cost of the Year 2000 program will not in the aggregate
be material. The Company will continue to modify and/or replace those systems
which may be impacted by the arrival of the year 2000.
FORWARD-LOOKING STATEMENTS: Statements in this report that are not based on
historical fact may be "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. They include words like "may", "will",
"expect", "estimate", "anticipate", "continue" or similar terms and reflect the
Company's current analysis of existing trends. Actual results could differ
materially from those indicated due to: major changes in business conditions and
the economy, loss of key senior management, major disruptions in the operations
of the Company's manufacturing facilities or hospitals, new competitors or
technologies, significant disruptions caused by the failure of third parties to
address the Year 2000 issue, acquisition integration costs, foreign currency
exchange exposure, investments in research and development and other start-up
projects including new product launches, dilution to earnings per share from
stock issuance or acquisitions, regulatory issues, changes in reimbursement
rates and payor mix, environmental clean-up costs more than those already
accrued, litigation costs, costs of business divestitures, and items listed in
the section entitled "Business" in the Company's Annual Report on Form 10-K for
the year ended October 31, 1997.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Information required by this item is incorporated herein by reference to
"Pending Litigation" under Note 6 of Notes to Consolidated Condensed Financial
Statements in Part I, Item 1 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Stockholders was held on April 2, 1998.
Each of eight individuals nominated to serve as directors of the Company was
elected to office:
Votes
Director Votes For Withheld
-------- --------- --------
A. Thomas Bender 13,309,137 642,569
Michael H. Kalkstein 13,313,042 638,664
Moses Marx 13,312,891 638,815
Donald Press 13,312,761 638,945
Steven Rosenberg 13,313,042 638,664
Allan E. Rubenstein, M.D. 13,313,042 638,664
Robert S. Weiss 13,311,163 640,543
Stanley Zinberg, M.D. 13,312,974 638,732
Stockholders were asked to approve the 1998 Long-Term Incentive Plan. A total of
9,445,295 shares were voted in favor of the proposal, 1,580,173 shares were
voted against it and 51,326 shares abstained.
Stockholders were also asked to ratify the appointment of KPMG Peat Marwick LLP
as independent certified public accountants for the Company for the fiscal year
ending October 31, 1998. A total of 13,899,481 shares were voted in favor of the
ratification, 35,433 shares were voted against it and 16,792 shares abstained.
22
PART II - OTHER INFORMATION, CONCLUDED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
11* Calculation of Earnings Per Share.
27 Financial Data Schedule for the six months ended
April 30, 1998.
27 Restated Financial Data Schedule for the six
months ended April 30, 1997.
(b) The Company filed the following reports on Form 8-K during the period
from February 1, 1998 to April 30, 1998.
Date of Report Item Reported
-------------- -------------
February 13, 1998 Item 7. Financial Statements and Exhibits.
(a) Financial statements.
(1) Audited Financial Statements for Contact Lens
Technologies Limited for the year ended 31 March
1997.
(2) Audited Financial Statements for New Focus Health
Care Limited for the Year ended 31 March 1997.
(3) Audited Financial Statements for Contact Lens
Technologies Limited for the period 1 April 1997
to 31 October 1997.
(4) Audited Financial Statements for New Focus Health
Care Limited for the period 1 April 1997 to 31
October 1997.
(5) Unaudited Financial Statements for Contact Lens
Technologies Limited for the period 1 April 1996
to 31 October 1996.
(6) Unaudited Financial Statements for New Focus
Health Care Limited for the period 1 April 1996 to
31 October 1996.
(b) Pro forma financial information.
(1) Unaudited pro forma financial information for The
Cooper Companies, Inc. for the year ended October
31, 1997.
February 25, 1998 Item 5. Other Events.
February 27, 1998 Item 5. Other Events.
* The information called for in this exhibit is provided in Footnote 5 to the
Consolidated Condensed Financial Statements in this report.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Cooper Companies, Inc.
__________________________
(Registrant)
Date: June 11, 1998 /s/ Robert S. Weiss
_________________________________________
Executive Vice President, Treasurer and Chief
Financial Officer
24
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
-----------------
Exhibit No. Page No.
- ----------- --------
11* Calculation of Earnings Per Share.
27 Financial Data Schedule.
27 Restated Financial Data Schedule.
* The information called for in this exhibit is provided in Footnote 5 to the
Consolidated Condensed Financial Statements in this report.
25
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................ 'tm'
The registered trademark symbol shall be expressed as................. 'r'
The British pound sterling sign shall be expressed as................. 'L'
5
1,000
6-MOS
OCT-31-1998
NOV-01-1997
APR-30-1998
1,456
0
43,779
2,972
28,212
83,095
79,447
21,744
267,041
45,516
68,428
1,489
0
0
126,193
267,041
66,834
94,602
24,304
50,148
0
0
3,008
13,559
(917)
14,476
0
0
0
14,476
.98
.94
5
1,000
6-MOS
OCT-31-1997
NOV-01-1996
APR-30-1997
1,538
0
29,031
2,586
13,700
45,878
53,341
15,836
129,182
41,384
45,592
1,244
0
0
36,757
129,182
37,657
62,039
11,135
33,190
0
0
2,484
7,838
(845)
8,683
0
0
0
8,683
.74
.72
