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 JULY 31, 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 14,912,338 Shares
Class Outstanding at August 31, 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 Nine Months Ended July 31, 1998 and 1997 3
Consolidated Condensed Balance Sheets - July 31,
1998 and October 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended July 31, 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 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
Index of Exhibits 26
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 Nine Months Ended
July 31, July 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales of products $ 39,709 $ 24,951 $106,543 $ 62,608
Net service revenue 14,471 13,998 42,239 38,380
-------- -------- -------- --------
Net operating revenue 54,180 38,949 148,782 100,988
-------- -------- -------- --------
Cost of products sold 14,873 8,277 39,177 19,412
Cost of services provided 12,578 12,107 38,422 34,162
Selling, general and administrative expense 13,960 10,173 40,218 27,213
Research and development expense 512 487 1,511 1,225
Amortization of intangibles 977 503 2,679 1,195
-------- -------- -------- --------
Income from operations 11,280 7,402 26,775 17,781
-------- -------- -------- --------
Settlements of disputes, net 200 - 200 -
Interest expense 1,539 1,335 4,547 3,819
Other income (expense), net (237) 94 835 37
-------- -------- -------- --------
Income before income taxes 9,304 6,161 22,863 13,999
(Benefit of) income taxes (870) (1,025) (1,787) (1,870)
-------- -------- -------- --------
Net income $ 10,174 $ 7,186 $ 24,650 $ 15,869
======== ======== ======== ========
Earnings per share:
Basic $ 0.68 $ 0.57 $ 1.66 $ 1.31
======== ======== ======== ========
Diluted $ 0.66 $ 0.55 $ 1.60 $ 1.28
======== ======== ======== ========
Number of shares used to compute
earnings per share:
Basic 14,896 12,645 14,859 12,083
======== ======== ======== ========
Diluted 15,342 13,012 15,378 12,395
======== ======== ======== ========
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
July 31, October 31,
1998 1997
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 10,059 $ 18,249
Trade receivables, net 40,290 27,469
Inventories 30,201 15,096
Other current assets 14,461 7,755
-------- --------
Total current assets 95,011 68,569
-------- --------
Property, plant and equipment, net 62,297 39,523
Goodwill and other intangibles, net 89,531 36,698
Deferred tax asset 26,239 26,182
Other assets 8,537 4,326
-------- --------
$281,615 $175,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 12,656 $ 7,907
Current portion of long-term debt 2,707 438
Accrued income taxes 10,471 9,134
Other current liabilities 16,378 16,138
--------- ---------
Total current liabilities 42,212 33,617
--------- ---------
Long-term debt 76,388 9,125
Other noncurrent liabilities 25,391 21,023
--------- ---------
Total liabilities 143,991 63,765
--------- ---------
Commitments and contingencies (see Note 6)
Stockholders' equity:
Common stock, $.10 par value 1,491 1,480
Additional paid-in capital 251,133 249,213
Accumulated deficit (113,779) (138,429)
Other equity (1,221) (731)
--------- ---------
Total stockholders' equity 137,624 111,533
--------- ---------
$ 281,615 $ 175,298
========= =========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
July 31,
-----------------------------
1998 1997
-------- --------
Net cash provided by operating activities $ 2,510 $ 2,918
-------- --------
Cash flows from investing activities:
Acquisitions of businesses (33,836) (7,145)
Purchases of property, plant and equipment (14,599) (5,807)
Investment in escrow funds -- (2,897)
Other -- (358)
-------- --------
Net cash used by investing activities (48,435) (16,207)
Cash flows from financing activities -- proceeds from (payment of): -------- --------
Long-term debt borrowings 21,040 3,000
Line of credit, net 17,300 --
Capitalized leases, net 4,351 (699)
Long-term debt payments (5,155) (3,035)
Follow-on offering, net -- 50,452
Other 383 25
-------- --------
Net cash provided by financing activities 37,919 49,743
-------- --------
Effect of exchange rate changes on cash and cash equivalents (184) --
Net decrease in cash and cash equivalents (8,190) 36,454
Cash and cash equivalents - beginning of period 18,249 6,837
-------- --------
Cash and cash equivalents - end of period $ 10,059 $ 43,291
======== ========
Supplemental disclosure of noncash investing and financing activities:
Acquisitions:
Fair value of assets acquired $ 93,044 $ 18,574
Less, liabilities assumed and acquisition costs (29,707) (2,222)
-------- --------
$ 63,337 $ 16,352
======== ========
Funded by:
Cash payments $ 33,836 $ 7,190
Issuance of stock and debt 29,501 9,162
-------- --------
$ 63,337 $ 16,352
======== ========
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc. (the "Company"), through its principal subsidiaries,
develops, manufactures and markets healthcare products and services.
CooperVision ("CVI") markets soft and hard contact lenses to correct astigmatism
and more conventional vision disorders. Its leading products are toric specialty
contact lenses and disposable-planned replacement toric and spherical lenses.
CVI also markets conventional toric and spherical lenses. CooperSurgical ("CSI")
markets diagnostic and surgical instruments and equipment primarily for the
women's healthcare market. Hospital Group of America ("HGA") provides
psychiatric inpatient, outpatient and ancillary services through facilities it
owns and manages 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 should refer to it and to the
Company's Annual Report to Stockholders for the fiscal year ended October 31,
1997, when reviewing this document. The quarterly results in this report do not
necessarily indicate expected results 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 July 31, 1998 and October 31, 1997, the consolidated results of
its operations for the three and nine months ended July 31, 1998 and 1997, and
its consolidated cash flows for the nine months ended July 31, 1998 and 1997.
All normal recurring adjustments have been made and these statements contain no
unusual adjustments except for reductions of the deferred tax asset valuation
allowance of $1 million and $1.3 million for the three-month periods and $2.7
million and $2.1 million for the nine-month periods ended July 31, 1998, and
1997, based on Management's belief that the Company will continue to generate
results that compare favorably to prior years.
Note 2. Inventories
July 31, October 31,
1998 1997
------- -----------
(In thousands)
Raw materials $ 4,731 $ 2,748
Work-in-process 2,684 1,277
Finished goods 22,786 11,071
------- -------
$30,201 $15,096
======= =======
Inventories are stated at the lower of average cost 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
July 31, October 31,
1998 1997
------- -----------
(In thousands)
Aspect promissory notes $27,209 $ -
Midland Bank 17,445 -
KeyBank line of credit ("Revolver") 17,300 -
Aspect bank loans 6,727 -
Promissory note - Wesley-Jessen
Corporation ("W-J") 573 1,517
County of Monroe Industrial Development
Agency ("COMIDA") bond 2,915 2,975
Other 6,926 916
Promissory notes- Unimar - 4,155
------- -------
79,095 9,563
Less current installments 2,707 438
------- -------
$76,388 $ 9,125
======= =======
Aspect Promissory Notes
The Aspect promissory notes, due December 2, 2002, were issued to former
shareholders of Aspect Vision Care Limited and affiliates ("Aspect"), which the
Company acquired in December 1997 (see Note 4). These notes are denominated in
Pounds Sterling (approximately 'L'16.7 million). Interest accrues at 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 Ltd. ("Holdings"), a
wholly owned subsidiary of the Company, and are guaranteed by the Company.
Noteholders may demand immediate repayment if certain events of default occur.
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 facility members. Interest is paid monthly at 0.5% to 2% over the
applicable London Interbank Offered Rate ("LIBOR") depending on certain
financial ratios. The rate may be floating or fixed at the Company's option. In
the third quarter of 1998, LIBOR rates in the United States ranged from 5.6% to
5.7%. The Company pays an annual 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 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 may be required to repay outstanding amounts and
permanently reduce the total commitment amount available under certain
circumstances if the Company obtains additional debt. Some 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 of the loan 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 monthly, 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 at 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 July 31, 1998, was $6.7 million and is secured by
certain assets of Aspect and a $4.2 million letter of credit in favor of
National Westminster Bank ("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 borrowed March 30, 1998, is 0.2625% above Sterling
LIBOR. Sterling LIBOR was 7.58% for the period of the loan. The interest rate on
other NWB loans is 1.5% above the Base Rate. The Base Rate ranged between 7.25%
and 7.5% 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
Accounts and notes payable include 'L'2 million ($3.2 million) in demand
notes for Aspect. The interest rate is 1.5% above the Base Rate.
Economic Hedges to Manage the Risk of Fluctuations in Foreign Exchange
A portion of the Company's debt is denominated in Pounds Sterling, exposing it
to fluctuations in Pound Sterling exchange rates. The Company has entered into
forward currency contracts that effectively hedge most of this 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 an exclusive license to
distribute the FemExam'r' TestCard'TM' System of diagnostic tests in the women's
healthcare market in the U.S. and Canada. Of the $10 million purchase price, $5
million has been allocated to the equity investment and $5 million to the
exclusive license. The Company is accounting for its investment in Litmus on a
cost basis and is amortizing the license over 17 years. The Company agreed to
make certain annual minimum purchases. This commitment ends when the Company
purchases 20 million units of the products or on the sixth anniversary of the
agreement, whichever occurs first. Under the agreement, if the Company does not
meet the stated minimum purchases, Litmus can cancel the exclusivity.
Aspect Acquisition
In December 1997, the Company, through Holdings, acquired 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. Aspect and Holdings are included in CVI's results.
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
The Company paid approximately $51 million at closing ($20 million in cash,
38,000 shares of the Company's common stock with a value of $1.5 million and $28
million in 8% five-year notes to the selling shareholders) and will pay an
additional amount after approximately three years based on the performance of
Aspect over that period. The minimum amount of the additional payment of
'L'5 million (approximately $8 million at closing) has been discounted at a
rate of 8% and will accrete over approximately three years. The $20 million cash
payment made at acquisition 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 $48.3 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 statements present consolidated condensed
results of operations for the three months ended July 31, 1997, and the nine
months ended July 31, 1998, and 1997, as if Aspect had been acquired at the
beginning of each period. 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.
(In thousands, except per share figures)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -----------------------
1997 1998 1997
Pro Forma Pro Forma Pro Forma
--------- --------- ---------
Net operating revenue $ 48,425 $152,083 $125,846
======== ======== ========
Net income $ 7,138 $ 24,918 $ 16,482
======== ======== ========
Shares outstanding for:
Basic EPS 12,683 14,876 12,121
======== ======== ========
Diluted EPS 13,050 15,395 12,437
======== ======== ========
EPS:
Basic $ 0.56 $ 1.68 $ 1.36
======== ======== ========
Diluted $ 0.55 $ 1.62 $ 1.33
======== ======== ========
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" in the first quarter of 1998. This statement requires
that earnings per share ("EPS") be determined using the weighted average number
of common shares outstanding for Basic EPS, and then outstanding dilutive stock
warrants and stock options are added to determine Diluted EPS. All prior period
EPS amounts have been restated in accordance with SFAS 128.
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
Basic:
Net income $10,174 $ 7,186 $24,650 $15,869
======= ======= ======= =======
Weighted average common shares 14,896 12,645 14,859 12,083
======= ======= ======= =======
Basic earnings per share $ 0.68 $ 0.57 $ 1.66 $ 1.31
======= ======= ======= =======
Diluted:
Weighted average common shares 14,896 12,645 14,859 12,083
Add:
-------
Dilutive warrants 58 61 60 54
Dilutive options 388 306 459 258
------- ------- ------- -------
Effect of dilutive securities 446 367 519 312
------- ------- ------- -------
Diluted weighted average common
shares 15,342 13,012 15,378 12,395
======= ======= ======= =======
Diluted earnings per share $ 0.66 $ 0.55 $ 1.60 $ 1.28
======= ======= ======= =======
In the three and nine months ended July 31, 1998, options to purchase 231,250
and 20,100 shares of common stock, respectively, at $36.90 - $40.38 per share,
were excluded from the computation of diluted earnings per share because they
were antidilutive.
In the nine months ended July 31, 1997, options to purchase 103,333 shares of
common stock at $20 - $21 per share were excluded from the computation of
diluted earnings per share because they were antidilutive.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
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 July 31, 1998, a commitment of 'L'1.1
million remained. The companies entered into a revised supply agreement on
August 31, 1998. The revised agreement has a five-year term and contains no
material purchase commitments.
Royalty Agreement
In connection with the Aspect acquisition (see Note 4), the Company agreed to
pay a royalty of from 5% to 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 the Company'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.
Recently, the Company entered the Voluntary Cleanup Program administered by the
New York State Department of Environmental Conservation ("DEC"), to address the
contamination. In so doing the Company has denied that it is a responsible party
and has made a claim against the former owner. The Company and DEC are currently
negotiating an oversight document which provides that the Company will further
investigate and remediate the contamination, and DEC will issue a "no further
action" letter upon completion of the investigation and remediation. The Company
has accrued $510,000 for that purpose. In the opinion of Management, the cost of
remediation will not be material when considering amounts previously accrued.
Russo Securities
On February 11, 1998, Russo Securities, Inc., Ferdinand Russo, Patrick Russo and
Richard Russo (the "Plaintiffs") filed an action against the Company which was
subsequently removed by the Company to the United States District Court for the
Eastern District of New York. 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. On August 7, 1998,
the Company entered into a settlement agreement with the Plaintiffs pursuant to
which the parties resolved the matter and exchanged general releases. The
Company paid the Plaintiffs $400,000 in connection with the settlement which was
charged to settlement of disputes in the quarter ended July 31, 1998. On August
21, 1998, the action was dismissed with prejudice by the Court.
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
BEI Settlement
In October 1993, the Company filed suit against BEI Medical Systems, Inc.
("BEI"), its former CEO and other related parties seeking relief and damages for
various alleged forms of unlawful competitive conduct, including breach of an
exclusive supply contract, unfair competition, breach of duty of loyalty and
good faith. In February 1998 the parties began settlement negotiations, which
ultimately resulted in a Settlement Agreement and a Mutual General Release being
completed on August 11, 1998. Under the terms of the Settlement Agreement, the
Company has received an initial settlement payment of $500,000, and all claims
in the litigation have been released and dismissed with prejudice. BEI also
agreed to pay a maximum of $100,000 in royalties on worldwide net sales of a
device for endometrial ablation.
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 incurred by the Company upon the final adjudication of this matter will
not materially affect the Company's financial position or results of operations.
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Note 7. Impact of Statements of Financial Accounting Standards Issued But Not
Yet Adopted
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
132 "Employers' Disclosures About Pensions and Other Postretirement Benefits,"
SFAS 132 is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Restatement of disclosures for earlier
periods presented is generally required. The Statement revises disclosures about
pension and other postretirement benefit plans but does not alter the
measurement or recognition of those plans. The Company will adopt SFAS 132 as
required in the footnotes to its fiscal 1999 financial statements. Because SFAS
132 is a disclosure only Statement, Management believes adoption will have no
impact on the Company's financial position, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all quarters of
fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, and hedging activities. In
accordance with SFAS 133, an entity is required to recognize all derivatives as
either assets or liabilities on its balance sheet and measure those instruments
at fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met, in which case gains and losses on the hedging instrument can offset related
results on the hedged item in the income statement. The Company will adopt SFAS
133 in the first quarter of fiscal 2000. The Company has historically limited
its derivative transactions to hedges that will meet the criteria required by
SFAS 133. Management, therefore, anticipates that the adoption of SFAS 133 will
not have a material impact on its consolidated financial statements.
Note 8. Subsequent Event - Stock Buyback
On September 3, 1998, the Company announced that its Board of Directors had
authorized the purchase of up to one million shares of its common stock in open
market or privately negotiated transactions. The shares will be purchased from
time to time as market conditions warrant, using funds then on hand or via
additional debt financing.
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 Nine Months Ended July 31, 1998, Compared with Three and Nine Months
Ended July 31, 1997.
NET SALES OF PRODUCTS: Net sales of products increased by $14.8 million, or 59%,
in the three-month period and $43.9 million, or 70%, in the nine-month period.
(Dollars in 000's)
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------------------- -------------------------------
1998 1997 % Incr. 1998 1997 % Incr.
---------- ------- ------- -------- -------- -------
CVI* $32,502 $17,815 82% $ 85,792 $44,922 91%
CSI** 7,207 7,136 1% 20,751 17,686 17%
------- ------- -------- -------
$39,709 $24,951 59% $106,543 $62,608 70%
======= ======= ======== =======
* CVI = CooperVision - the Company's contact lens business.
** CSI = CooperSurgical - the Company's women's healthcare business.
Net sales of CVI products increased primarily due to the acquisition of Aspect
Vision Care and affiliates ("Aspect"). (See Note 4.) Aspect net sales accounted
for 56% and 55% of the growth, and represented approximately 30% of CVI sales,
for the three and nine months ended July 31, 1998. CVI sales growth was also a
result of sales of the Preference Toric'TM' product line, which grew by
approximately 63% in the three-month period and 72% in the nine-month period.
Sales of toric lenses to correct astigmatism, CVI's leading product group, grew
41% in the three-month period and 42% in the nine-month period and accounted for
39% and 38% of CVI's sales for the three and nine months ended July 31, 1998. In
March 1997, the Company acquired Natural Touch'r', a line of opaque, cosmetic
contact lenses that contributed $1.2 million in the three-month period and $4.0
million in the nine-month period of sales. These increases were partially offset
by anticipated declines in sales of mature product lines.
In February, CVI introduced the Frequency 55'TM' disposable-planned replacement
spherical lens in the United States. The worldwide market for disposable-planned
replacement spherical lenses represents about 60% of the total worldwide contact
lens market.
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
In May 1998, CVI introduced two new toric products: Hydrasoft'r' Toric Options,
a custom planned replacement toric lens for astigmatic patients with complex
corrections, and Frequency 55'TM' Toric, a planned replacement lens designed for
two-week or monthly replacement. Frequency 55'TM' Toric will compete directly
with the current leading product in the low-priced segment of the
disposable-planned replacement toric market.
At CSI, net sales increased by 1% in the three-month period and 17% in the
nine-month period. The nine-month increase was principally due to sales of
Marlow Surgical Technologies, Inc. ("Marlow") products acquired in April 1997
and Hyskon'r' products, a hysteroscopy fluid used by gynecologists in certain
surgical procedures acquired in December 1997.
In May 1998, CSI introduced three new product lines:
The FemExam'r' pH and Amines TestCard'TM', the first of four novel, patented
diagnostic tests comprising the FemExam'r' TestCard'TM' 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 subjective,
costly and inconvenient to perform. CSI anticipates that over the next three
to five years, these tests could add between $30 million and $50 million in
incremental revenue.
The Cerveillance'TM' 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'TM' 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. CSI expects that revenue from this product will approach
$10 million in the next three years.
The CooperSurgical Infrared Coagulator'TM' that offers a non-traumatic,
nonsurgical noninvasive procedure to treat genital lesions in the office.
This low-cost single use technique coagulates tissue without carbonization,
providing the surgeon with a smoke free environment that reduces the
possibility of contamination.
These three products were introduced in May 1998 at the meeting of the American
College of Obstetricians and Gynecologists. Since then, the Cerveillance'TM'
Scope and the CooperSurgical Infrared Coagulator'TM' have, due to manufacturing
start-up delays, accumulated a backlog of approximately $500,000. The sales
force will have demonstration units for both products in September 1998.
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
NET SERVICE REVENUE: Hospital Group of America's ("HGA") net service revenue of
$14.5 million and $42.2 million increased by 3% and 10% for the three- and
nine-month periods, primarily as a result of the addition of the Midwest Center
for Youth and Families, a residential treatment center, in April 1997, an
increase in inpatient days at Hampton Hospital and additional revenue from HGA's
Management Services Division.
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 Nine Months Ended
July 31, July 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
CVI 64 73 65 76
CSI 55 52 55 52
Consolidated 63 67 63 69
The decrease in CVI's margin for the three and nine months ended July 31, 1998,
was due to the acquisition of Aspect, whose products have lower margins, and
increased sales of lower margin Natural Touch'r' products acquired 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 61% in the third quarter
and 65% for the nine-month period.
CSI's margin improved primarily due to reduced manufacturing costs of 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 includes 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 $1.9 million, or 13%, and
$1.9 million, or 14%, of net service revenue in the three months ended July 31,
1998, and 1997. The comparable nine-month results were $3.8 million, or 9%, and
$4.2 million, or 11%. 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 ("TEFRA") and start-up costs associated with the Midwest 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 Nine Months Ended
July 31, July 31,
---------------------------- -------------------------------
1998 1997 % Incr. 1998 1997 % Incr.
------- ------- ------- ------- ------- -------
CVI $ 9,366 $ 6,271 49% $27,624 $16,586 67%
CSI 3,020 2,333 29% 7,611 6,303 21%
HQ/Other 1,574 1,569 -% 4,983 4,324 15%
------- ------- ------- -------
$13,960 $10,173 37% $40,218 $27,213 48%
======= ======= ======= =======
SG&A expense for the three- and nine-month periods increased 37% and 48%,
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 26% and 36% (excluding Aspect) for the three- and nine-month
periods, respectively, and (3) CSI expenses in the three-month period related
primarily to the introduction of three new products. The nine-month increase in
CSI includes expenses related to the Marlow acquisition, which contributed to
CSI's 17% revenue increases for the nine-month period.
INCOME FROM OPERATIONS: Income from operations improved 52% and
51% for the three- and nine-month periods:
(Dollars in 000's)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------- ----------------------------------
Incr. Incr.
1998 1997 (Decr.) 1998 1997 (Decr.)
-------- -------- -------- -------- -------- --------
CVI $10,739 $6,235 $4,504 $26,204 $16,230 $9,974
CSI 267 890 (623) 1,872 1,792 80
HGA 1,848 1,846 2 3,682 4,083 (401)
HQ/Other (1,574) (1,569) (5) (4,983) (4,324) (659)
------- ------ ------ ------- ------- ------
$11,280 $7,402 $3,878 $26,775 $17,781 $8,994
======= ====== ====== ======= ======= ======
Interest Expense: Interest expense increased by $204,000 and $728,000 for the
three- and nine-month periods, primarily due to higher debt associated with the
acquisition of Aspect, which added $1.0 million and $3.2 million, in the
respective periods.
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
To support Aspect and other acquisitions, the Company borrowed funds, which
added $404,000 and $930,000 of interest expense for the three- and nine-month
periods. These increases were partially offset by lower 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.
OTHER INCOME, NET: Other income, net decreased by $331,000 for the three-month
period ended July 31, 1998, over the comparable 1997 period primarily due to
foreign exchange losses as a result of the weakening in the Pound Sterling and
Canadian dollar vs. the U.S. dollar. The nine-month increases in interest income
and foreign exchange were $232,000 and $565,000, respectively. The improvement
in foreign exchange for the nine-month period was principally due to the
weakened Pound Sterling exchange rate against the U.S. dollar. As a result, the
U.S. dollar amount of Pound Sterling denominated liabilities on the Company's
books was reduced prior to such liabilities being hedged.
PROVISION FOR INCOME TAXES: The provisions for federal, state and foreign taxes
of $913,000 and $445,000 for the first nine months of fiscal 1998 and 1997, were
offset by the recognition of tax benefits of $2.7 million and $2.1 million for
the first nine months of fiscal 1998 and 1997, respectively, 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 nine months of fiscal 1998, the Company grew significantly,
primarily through the acquisition of Aspect. 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 $2.5 million cash provided 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
approximately $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's
operations provided cash of $3 million, net of the Aspect tax payment noted
above, and in the third quarter it provided cash of $6.3 million.
For the nine-month period, major uses of cash by operations included: (1) $4.5
million of taxes (including Aspect payment), (2) $6.7 million for inventories,
including a buildup of approximately $3.4 million required for new product
launches, (3) $3.9 million related to settlements of disputes and (4) $2.0
million to fund fiscal 1997 entitlements under the Company's annual bonus plans.
INVESTING CASH FLOWS: Primary uses of cash for investing activities of $48.4
million for the nine months ended July 31, 1998, included the purchase of Aspect
for approximately $21.2 million; the purchase of the Hyskon'r' product line 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 women's healthcare market in the
U.S. and Canada and capital expenditures of approximately $12.5 million to
increase CVI's manufacturing capacity for disposable-planned replacement lenses.
The principal uses of cash in the 1997 period included capital expenditures of
$5.8 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 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 nine months of fiscal 1998, the Company
obtained cash of $37.9 million from financing activities. The financing
activities primarily related to a $17.3 million draw down on the KeyBank line of
credit, the Midland Bank loan of $17.4 million, a net increase in capitalized
leases of $4.4 million and Aspect obtaining $3.6 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, Continued
Proceeds were used to fund investing activities discussed above. In addition,
the Company repaid the Unimar Promissory Notes in the amount of $4.2 million and
$1 million on the Wesley-Jessen Promissory Note.
Management believes that cash flow from operations will be sufficient to fund
ongoing operations except that additional financings may be required to fund
further plant expansions in Europe, purchase of the Company's common stock and
other acquisitions of businesses, if completed. At July 31, 1998, the Company
had $9.6 million available under the Revolver, and Management anticipates that
additional financing could be raised when and if required.
Year 2000: The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define a specific year. If not corrected, a
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions to various activities and
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has assessed in detail the financial and operational systems at each
of its businesses and is well along in the implementation of its Year 2000
compliance program, which is on track to be substantially completed by mid-1999,
with minimal projects targeted for completion by September 1999. The Company
initiated compliance programs over two years ago to address modifications of the
proprietary software used in its operations, and many of these modifications
will be completed by the end of the current fiscal year. In addition, a
significant portion of the software used in the Company's operations was
purchased relatively recently and requires only minor modification. The Company
is also evaluating system upgrades and replacements as a result of the Company's
significant revenue growth and expects any new software that is purchased to be
Year 2000 compliant. The Company intends to use both internal and external
resources to reprogram, or replace, and test its software for Year 2000
modifications.
The Company is in the process of contacting its vendors, service providers and
contract manufacturers to obtain assurances that they will be Year 2000
compliant and to assess the extent to which the Company may be vulnerable to
third parties' failure to remediate their own Year 2000 problems. The Company is
not presently aware of any Year 2000 issues that have been encountered by any
such third party that could materially affect the Company's operations.
Notwithstanding the foregoing, there can be no assurance that the Company will
not experience operating difficulties as a result of the Year 2000 issues,
either arising out of internal operations or caused by third party service
providers, which individually or collectively could have an adverse effect on
business operations or require the Company to incur unanticipated costs to
remedy any problems.
The total costs to date of completing the Year 2000 investigation and any
modifications have not been material, and the Company estimates that the total
cost to complete the program will not be material.
21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
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, the Year 2000 issue as discussed above, acquisition integration
costs, foreign currency exchange exposure, investments in research and
development and other start-up projects, dilution to earnings per share from
stock issuance or acquisitions, regulatory issues, changes in reimbursement
rates and payor mix, significant environmental clean-up costs more than those
already accrued, litigation costs, losses and/or costs of business divestitures,
and items listed in the Company's SEC reports, including the section entitled
"Business" in its Annual Report on Form 10-K for the year ended October 31,
1997.
22
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.
23
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 nine months ended July 31, 1998.
27 Restated Financial Data Schedule for the nine months ended July 31, 1997.
* The information called for in this exhibit is provided in Footnote 5 to the
Consolidated Condensed Financial Statements in this report.
(b) The Company filed the following reports on Form 8-K during the period from
May 1, 1998, to July 31, 1998.
Date of Report Item Reported
-------------- -------------
May 27, 1998 Item 5. Other Events.
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Cooper Companies, Inc.
---------------------------------------
(Registrant)
Date: September 4, 1998 /s/ Robert S. Weiss
---------------------------------------
Executive Vice President, Treasurer
and Chief Financial Officer
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 shal be expressed as...................'L'
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.
26
5
1,000
9-MOS
OCT-31-1998
NOV-01-1997
JUL-31-1998
10,059
0
43,432
3,142
30,201
95,011
84,497
22,200
281,615
42,212
76,388
1,491
0
0
136,133
281,615
106,543
148,782
39,177
77,599
0
0
4,547
22,863
(1,787)
24,650
0
0
0
24,650
1.66
1.60
5
1,000
9-MOS
OCT-31-1997
NOV-01-1996
JUL-31-1997
43,291
0
29,922
2,593
13,871
89,116
54,938
16,451
173,657
66,274
8,841
1,475
0
0
94,222
173,657
62,608
100,988
19,412
53,574
0
0
3,819
13,999
(1,870)
15,869
0
0
0
15,869
1.31
1.28
