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 JANUARY 31, 1999
( ) 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 13,942,300 Shares
- ---------------------------- --------------------------------
Class Outstanding at February 28, 1999
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three Months
Ended January 31, 1999 and 1998 3
Consolidated Condensed Balance Sheets - January 31, 1999
and October 31, 1998 4
Consolidated Condensed Statements of Cash Flows -Three
Months Ended January 31, 1999 and 1998 5
Consolidated Condensed Statements of Comprehensive Income -
Three Months Ended January 31, 1999 and 1998 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II.OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K 20
Signature 21
Index of Exhibits 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except for earnings per share)
(Unaudited)
Three Months Ended
January 31,
----------------------
1999 1998
-------- ---------
Net sales $ 34,959 $ 29,384
Cost of sales 13,416 11,277
-------- --------
Gross profit 21,543 18,107
Selling, general and administrative expense 14,222 11,714
Research and development expense 461 456
Amortization of intangibles 957 718
-------- --------
Operating income from continuing operations 5,903 5,219
-------- --------
Interest expense 1,849 1,109
Other income, net 34 784
-------- --------
Income from continuing operations before income taxes 4,088 4,894
Provision for (benefit of) income taxes 1,447 (449)
-------- --------
Income from continuing operations 2,641 5,343
Discontinued operations:
Net income (loss) (21) 650
Gain on disposal 1,279 --
-------- --------
1,258 650
-------- --------
Net income $ 3,899 $ 5,993
======== ========
Earnings per share:
Basic:
Continuing operations $ 0.18 $ 0.36
Discontinued operations 0.09 0.04
-------- --------
Earnings per share $ 0.27 $ 0.40
======== ========
Diluted:
Continuing operations $ 0.18 $ 0.35
Discontinued operations 0.09 0.04
-------- --------
Earnings per share $ 0.27 $ 0.39
======== ========
Number of shares used to compute earnings per share:
Basic 14,427 14,808
======== ========
Diluted 14,668 15,354
======== ========
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
January 31, October 31,
1999 1998
-------- ---------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,774 $ 7,333
Trade receivables, net 23,707 24,426
Inventories 34,557 30,349
Deferred tax asset 15,082 15,057
Net assets of discontinued operations 26,524 29,206
Other current assets 4,678 9,706
-------- --------
Total current assets 110,322 116,077
-------- --------
Property, plant and equipment, net 35,438 34,234
Goodwill and other intangibles, net 83,419 84,308
Deferred tax asset 52,292 52,754
Other assets 8,157 8,668
-------- --------
$289,628 $296,041
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 14,452 $ 13,005
Current portion of long-term debt 3,271 6,958
Accrued income taxes 8,805 8,987
Other current liabilities 15,620 17,751
-------- --------
Total current liabilities 42,148 46,701
Long-term debt 77,659 78,677
Other noncurrent liabilities 22,511 25,410
-------- --------
Total liabilities 142,318 150,788
-------- --------
Contingencies (see Note 7)
Stockholders' equity:
Common stock, $.10 par value 1,492 1,491
Additional paid-in capital 251,230 251,167
Accumulated other comprehensive loss (899) (829)
Accumulated deficit (94,684) (98,583)
Less, treasury stock at cost (9,829) (7,993)
-------- --------
Total stockholders' equity 147,310 145,253
-------- --------
$289,628 $296,041
======== ========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
January 31,
---------------------------
1999 1998
---------- ---------
Net cash used by operating activities $ (3,430) $ (7,035)
-------- --------
Cash flows from investing activities:
Sale of securities 5,419 --
Disposition of discontinued operation, net 1,705 --
Purchases of property, plant and equipment (2,186) (2,362)
Acquisitions of assets and businesses (71) (23,476)
-------- --------
Net cash provided (used) by investing activities 4,867 (25,838)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt (6,659) --
Proceeds from long-term debt 2,218 28,729
Payment of Unimar Notes -- (4,155)
Other 1,493 (1,055)
-------- --------
Net cash (used) provided by financing activities (2,948) 23,519
-------- --------
Effect of exchange rate changes on cash and cash equivalents (48) (138)
-------- --------
Net decrease in cash and cash equivalents (1,559) (9,492)
Cash and cash equivalents - beginning of period 7,333 18,249
-------- --------
Cash and cash equivalents - end of period $ 5,774 $ 8,757
======== ========
Supplemental disclosure of noncash investing and financing activities:
Acquisitions:
Fair value of assets acquired $ 81,613
Less, liabilities assumed and acquisition costs (28,636)
--------
$ 52,977
========
Funded by:
Cash payments 23,476
Issuance of stock and debt 29,501
--------
$ 52,977
========
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended
January 31,
-----------------------
1999 1998
---------- ---------
Net income $3,899 $5,993
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (79) (387)
Stock awards, net 9 7
------ ------
(70) (380)
------ ------
Comprehensive income $3,829 $5,613
====== ======
See accompanying notes.
6
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc. (the "Company" or "Cooper"), through its principal
subsidiaries, develops, manufactures and markets healthcare products.
CooperVision ("CVI") markets a range of contact lenses to correct visual
defects, specializing in lenses that correct astigmatism ("torics"). Its leading
products are disposable-planned replacement toric and spherical lenses. CVI also
markets conventional toric and spherical lenses and lenses for patients with
more complex vision disorders. CooperSurgical ("CSI") markets diagnostic
products, surgical instruments and accessories to the women's healthcare market.
During interim periods, the Company follows the accounting policies described in
its most recently filed Form 10-K. Readers should refer to this and to the
Company's Annual Report to Stockholders for the fiscal year ended October 31,
1998, when reviewing this 10-Q. The results in this report do not necessarily
indicate those expected in subsequent quarters.
The accompanying unaudited consolidated condensed financial statements contain
all adjustments necessary to present fairly the Company's consolidated financial
position as of January 31, 1999 and October 31, 1998 and the consolidated
results of its operations and its consolidated cash flows for the three months
ended January 31, 1999 and 1998. Adjustments consist only of normal recurring
items except for an $800,000 reduction to the deferred tax asset valuation
allowance recorded in the first quarter of 1998, based on Management's belief at
that time that the Company's future results would continue to improve. Certain
reclassifications have been applied to prior years' financial statements to
conform such statements to current year's presentation. None of these
reclassifications had any impact on net income.
The Company adopted Statement of Financial Accounting Standards ("FAS") No. 130,
"Reporting Comprehensive Income" in the first quarter of 1999. Prior period
amounts have been restated to reflect adoption of FAS 130.
The Company adopted FAS No. 131 "Reporting for Segments of a Business
Enterprise" in fiscal 1999. The Company will provide comparative information for
interim periods in the second year of application, as required.
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 2. Inventories, at the Lower of Average Cost or Market
January 31, October 31,
1999 1998
----------- -----------
(In thousands)
Raw materials $ 8,449 $ 7,038
Work-in-process 3,769 2,964
Finished goods 22,339 20,347
------- -------
$34,557 $30,349
======= =======
Note 3. Long-Term Debt
January 31, October 31,
1999 1998
----------- -----------
(In thousands)
Promissory notes - Aspect $23,438 $27,563
Midland Bank 17,445 17,444
KeyBank line of credit 19,800 21,800
Aspect Vision bank loans 6,593 6,754
Promissory note - Wesley-Jessen
Corporation ("W-J") 585 574
County of Monroe Industrial
Development Agency ("COMIDA")
Bond 2,840 2,880
Capitalized leases 10,229 8,620
------- -------
80,930 85,635
Less current installments 3,271 6,958
------- -------
$77,659 $78,677
======= =======
The Company paid off approximately $4 million of Aspect promissory notes in the
first quarter of fiscal 1999 as well as $2 million of the KeyBank line of
credit.
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 4. Earnings Per Share ("EPS")
Three Months Ended
January 31,
-------------------------
1999 1998
------- -------
(In thousands, except for
earnings per share)
Income from continuing operations $ 2,641 $ 5,343
Discontinued operations 1,258 650
------- -------
Net income $ 3,899 $ 5,993
======= =======
Basic:
Weighted average common shares 14,427 14,808
======= =======
Basic earnings per share:
Continuing operations $ 0.18 $ 0.36
Discontinued operations 0.09 0.04
------- -------
Basic earnings per share $ 0.27 $ 0.40
======= =======
Diluted:
Weighted average common shares 14,427 14,808
Add dilutive securities:
Warrants 38 60
Options 203 486
------- -------
Subtotal 241 546
------- -------
Denominator for diluted earnings per share 14,668 15,354
======= =======
Diluted earnings per share:
Continuing operations $ 0.18 $ 0.35
Discontinued operations 0.09 0.04
------- -------
Diluted earnings per share $ 0.27 $ 0.39
======= =======
There were no antidilutive securities in the 1998 period. In the 1999 period,
1,177,500 options to purchase shares were excluded from the computation of
diluted EPS because their exercise prices were greater than the average market
price.
Note 5. Income Taxes
Substantially all of the Company's remaining valuation allowance against its net
deferred tax assets was reversed in fiscal 1998 based on Management's belief
that the Company's future results will enable it to utilize the deferred tax
assets recorded on its balance sheet.
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
As a result, the effective tax rate used to record the provision for income
taxes of $1.4 million for the three months ended January 31, 1999 was
approximately 35%. The net tax benefit in the 1998 period of $449,000 included a
benefit of $800,000 from reducing the valuation allowance against net deferred
tax assets.
Note 6. Discontinued Operations
In the fourth quarter of 1998, Cooper declared Hospital Group of America
("HGA"), its psychiatric services business, a discontinued operation and
recorded a charge of $22.3 million reflecting Management's initial estimate of
the ultimate loss to be incurred upon disposition. Prior period financial
statements have been restated.
In January 1999, Cooper completed the sale of a portion of HGA, for $5 million
in cash and trade receivables. First quarter 1999 results include a credit of
$1.3 million, reflecting an adjustment to the estimated loss on the sale of the
HGA facility sold in January. The Company is currently negotiating a definitive
agreement to sell the remainder of HGA to Universal Health Services, Inc.
("Universal") for $27 million at closing plus up to an additional $3 million if
certain contingent events occur. Cooper expects to close this transaction by the
end of its fiscal second quarter, although certain regulatory and other
approvals are pending. In late February, the Illinois Health Services Planning
Board approved the transfer of HGA's Hartgrove Hospital to Universal.
HGA's patient revenue was $12 million and $13.5 million for the three months
ended January 31, 1999 and 1998, respectively. Net assets of discontinued
operations at January 31, 1999 consisted primarily of patient receivables and
property, plant and equipment, net of accounts payable and accrued liabilities,
including a $15.8 million reserve for estimated future losses on the
disposition.
Note 7. Contingencies -- Environmental
In 1997, environmental consultants engaged by the Company identified a contained
area of groundwater contamination consisting of industrial solvents including
trichloroethane (also known as 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 New York Department of Environmental Conservation ("DEC") informed the
Company on July 21, 1998 that the site was eligible for the New York Voluntary
Cleanup Program. Recently, the Company and DEC agreed on a required order and
scope of work that involves additional investigation and which will ultimately
result in a state-approved remediation. The Company has accrued approximately
$500,000 for that purpose. In the opinion of Management, the cost of remediation
will not be material when considering amounts previously accrued.
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Note 8. Share Repurchase Program
In September 1998, Cooper's Board of Directors authorized the purchase of up to
one million shares of its common stock, all of which have been purchased to
date:
Purchase
Shares Price
------- --------
(In thousands)
Purchased and paid for in fiscal 1998 486 $ 7,993
Purchased in the first quarter of 1999, paid for in
the second quarter of 1999 125 1,836
Purchased and paid for in the second quarter of 1999 389 5,509
------- -------
1,000 $15,338
======= =======
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Note numbers refer to "Notes to Consolidated Condensed Financial Statements"
beginning on page 7 of this report. The Company and its Management are sometimes
referred to in this discussion as "Cooper" and by use of personal pronouns such
as "we" or "our." We also refer to the reader of this report as "you."
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
Cooper'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 Cooper's manufacturing facilities, new competitors or technologies,
significant disruptions caused by the failure of third parties to address the
Year 2000 issue or by unforeseen delays in completing Cooper's Year 2000
compliance program, acquisition integration costs, foreign currency exchange
exposure including the potential impact of the Euro, investments in research and
development and other start-up projects, dilution to earnings per share from
acquisitions or issuing stock, regulatory issues, significant environmental
clean-up costs above those already accrued, litigation costs, costs of business
divestitures, significant delay or failure to complete the sale of Hospital
Group of America ("HGA"), 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, 1998.
RESULTS OF OPERATIONS
This section focuses on our income statement and compares our operating results
for the first fiscal quarter of 1999 with those for the same quarter of 1998.
You will find a discussion of our cash flows for the same periods, as well as a
discussion of our current financial condition beginning on page 16 in the
section headed "Capital Resources and Liquidity."
REVENUE: All of our revenue is generated by our two business units, CooperVision
("CVI") and CooperSurgical ("CSI"):
CVI markets a broad range of contact lenses primarily in North America and
Europe.
CSI markets diagnostic products, surgical instruments and accessories to
the women's healthcare market primarily in the United States.
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Cooper's consolidated revenue grew 19% to $35 million:
Three Months Ended
January 31,
----------------------- %
1999 1998 Increase
------ ------ --------
(In millions)
CVI $27.8 $22.9 21%
CSI 7.2 6.5 10%
----- -----
$35.0 $29.4 19%
===== =====
CVI revenue growth was driven principally by Cooper's December 1997 acquisition
of Aspect Vision Care, Ltd. ("Aspect"), a British contact lens manufacturer, and
continued growth of CVI's toric lenses, used to correct astigmatism. Sales of
Aspect products accounted for $8.9 million or 32% of CVI's total revenue in the
1999 quarter and $6.1 million or 27% in the two months of 1998's first quarter
for which we consolidated its results. Revenue generated by CVI domestic grew
13% and accounted for 60% of CVI's overall revenue in the first quarter of 1999
and 64% in 1998. Softness in sales of planned replacement spherical lenses in
the United States slowed growth, partially due to capacity constraints
experienced early in the quarter which have now been overcome. Sales of CVI's
disposable-planned replacement toric lenses in the United States grew 46%, and
its overall toric sales grew 27%, in both cases well ahead of market growth
reported for the fourth quarter of calendar 1998. The toric segment is the
largest of our U.S. business, accounting for 63% of its revenue in the first
quarter of 1999. The increases cited above were partially offset by anticipated
declines in sales levels generated by CVI's more mature product lines.
The 10% revenue increase at CSI primarily reflects sales of three new products
introduced in the second half of 1998, the continued growth in sales of Hyskon,
a fluid used by gynecologists in certain minimally invasive surgical procedures,
and sales of products acquired in April 1997 for in vitro fertilization and
certain other gynecological procedures. During the quarter, CSI focused on
extending the initial marketing efforts of its major new products, the
Cerveillance digital colposcope, the first colposcope with a built-in digital
camera and proprietary image software, and the CooperSurgical InfraRed
Coagulator, a new in-office surgical device that offers a safe, cost-effective
method of performing surgery. Demonstration units of both products were
delivered to CSI's sales force during the first quarter. We expect that these
new sales tools, coupled with improved product availability, will help stimulate
demand and accelerate growth during 1999.
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CSI also established numerous clinical studies for the FemExam Test Card System
to further establish the benefits of a rapid, objective diagnostic and screening
test for bacterial vaginosis, one of the most common reasons women visit their
doctor. In addition, CSI continues its work to create and maximize third party
reimbursement levels for FemExam, and formally demonstrate its cost
effectiveness.
COST OF SALES/GROSS PROFIT: Gross profit as a percentage of sales ("margin") was
as follows:
First Quarter Margin
-----------------------
1999 1998
---- ----
CVI 63% 64%
CSI 55% 53%
Consolidated 62% 62%
CVI's margin improved from the atypically low 60% it reported in the fourth
quarter of 1998, when it incurred about $1.7 million in costs to improve
efficiency, rationalize manufacturing, expand capacity constraints and fill back
orders. The 63% margin reported in the first quarter of 1999 was within one
percentage point of 1998's first quarter margin, which included only two months
of lower-margin sales of Aspect products. Gross profit of $17.6 million was 20%
above 1998's first quarter. Gross profit improvement in the quarter reflects the
cost reduction projects begun last year at Aspect. In addition, CVI eliminated
capacity constraints, improved customer service and began to normalize staffing
levels, all of which were critical to the successful integration of Aspect. We
think, given that the Aspect integration is now virtually complete and that
further cost reductions will be implemented over the course of 1999, that CVI's
margins can continue to improve.
CSI's margins continue to improve, primarily reflecting continued manufacturing
efficiencies associated with Marlow and Unimar products. Unless we make a large
acquisition of lower-margin products, we anticipate that recently launched and
future proprietary products will, after an initial start-up period, drive
continued margin improvement at CSI.
SELLING, GENERAL AND ADMINISTRATIVE ("SGA") EXPENSE:
Three Months Ended
January 31,
------------------------------------------
1999 1998
----------------- --------------------
($ in millions) % Increase
% Rev. % Rev. (Decrease)
------ ------ ----------
CVI $10.6 38% $ 8.0 35% 32%
CSI 2.4 34% 2.2 33% 13%
Headquarters 1.2 N/A 1.5 N/A (24%)
----- -----
$14.2 41% $11.7 40% 21%
===== =====
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
At 17% of sales, consolidated SGA was essentially flat vs. 1998's first quarter.
The majority of the $2.5 million increase occurred at CVI, as reduced legal
expenses at headquarters offset a more moderate increase in sales and marketing
expenses at CSI. CVI's SGA increase reflects aggressive spending to launch new
products and three months of expenses at Aspect vs. two months in 1998's first
quarter.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSE: We expect that the current level of
R&D spending will remain at a low percentage of sales because we are focusing on
acquiring products that will not require a large expenditure of time or money
prior to their launch.
OPERATING INCOME FROM CONTINUING OPERATIONS: The SGA expenditures at CVI largely
offset the $3.4 million increase in gross profit, resulting in a 13% increase in
operating income from continuing operations:
Three Months Ended
January 31,
---------------------------------------
1999 1998
---------------- -----------------
($ in millions) %
% Rev. % Rev. Increase
CVI $ 6.2 22% $ 6.0 26% 4%
CSI 0.9 12% 0.8 12% 9%
Headquarters (1.2) N/A (1.6) N/A 24%
----- -----
$ 5.9 17% $ 5.2 18% 13%
===== =====
INTEREST EXPENSE: Interest expense increased 67%, primarily reflecting debt used
to fund the acquisition of Aspect, the acquisition of licenses from and an
investment in Litmus Concepts, Inc. and our recently completed stock repurchase
program. In September 1998, our Board of Directors authorized us to purchase up
to one million of our shares. We have now completed the purchase of the one
million shares at an average price of $15.34 per share. About half of the share
purchases were made in each of fiscal 1998 and fiscal 1999.
OTHER INCOME, NET: 1998's first quarter includes a foreign exchange gain of
about $600,000 associated with weakness in the Pound Sterling that occurred
before we implemented an effective hedging program. With that program now in
place, we do not expect this or future years to have foreign exchange gains or
losses of this magnitude. In the first quarter of 1999, we incurred a foreign
exchange loss of $140,000.
PROVISION FOR INCOME TAXES: In the fourth quarter of fiscal 1998, Cooper
recorded a large tax benefit, reflecting the remaining anticipated value of its
$184 million of net operating loss carryforwards ("NOLs"). As a result,
beginning with the first quarter of 1999, we are reporting our provision for
income taxes as if we were a taxpayer with no NOLs. Cooper is currently
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
developing a global tax plan to minimize both the taxes reported in its income
statement and the cash taxes paid once the benefits of our NOLs are fully
utilized. Based on a preliminary assessment, we expect to reduce our effective
tax rate to approximately 30% over the next several years compared with the 35%
used in the first quarter of 1999. By executing this tax plan, the cash flow
benefits of the NOLs should extend, perhaps through 2003, assuming no
acquisitions or stock issuances. We expect that cash payments for taxes will be
about 10% of pretax profits throughout this period.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS: In the fourth quarter of 1998,
Cooper declared HGA, its psychiatric services business, a discontinued operation
and recorded a charge of $22.3 million reflecting its initial estimate of the
ultimate loss to be incurred upon disposition.
In January 1999, Cooper completed the sale of a portion of HGA, for $5 million
in cash and trade receivables. First quarter 1999 results include a credit of
$1.3 million, reflecting an adjustment to the estimated loss on the sale of the
HGA facility sold in January. We are currently negotiating a definitive
agreement to sell the remainder of HGA to Universal Health Services, Inc.
("Universal") for $27 million at closing plus up to an additional $3 million if
certain contingent events occur. We expect to close this transaction by the end
of our second fiscal quarter, although certain regulatory and other approvals
are pending. In late February, the Illinois Health Services Planning Board
approved the transfer of HGA's Hartgrove Hospital to Universal.
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CAPITAL RESOURCES & LIQUIDITY
The Company continues to grow. The acquisition of Aspect Vision Care ("Aspect")
has afforded Cooper many opportunities to expand into other markets and gain
market share.
In fiscal 1998 and in the first quarter of 1999, we invested in the expansion of
both Aspect and our domestic manufacturing capacity, and we invested
significantly in sales and marketing costs to launch new products. We expect
that our sales will continue to grow and that our build of new product inventory
will level out and then decrease. We also anticipate a reduced level of
investment in manufacturing capacity throughout the remainder of fiscal 1999.
OPERATING CASH FLOWS: The Company typically experiences a net cash outflow from
operating activities in the first quarter. Major uses of cash in the current
period were payments of $3.8 million related to settlements of disputes,
approximately $900,000 to fund fiscal 1998 entitlements under the Company's
bonus plans, $2.8 million in interest payments and $4.2 million to increase
inventory levels in anticipation of new product launches. In the first quarter
of fiscal 1998, the Company spent over $3 million of one-time payments for costs
associated with Aspect, shortly after the acquisition. Other major uses of cash
in the first fiscal quarter of 1998 included payments of $2.4 million related to
settlements of disputes, approximately $2 million to fund fiscal 1997
entitlements under the Company's annual bonus plans and $2.7 million to build
inventories.
INVESTING CASH FLOWS: Investing activities provided $4.9 million. An option
contract, which expired in December 1998, provided $5.4 million in cash. This
transaction did not result in any material gain or loss on the Company's
financial statements. The Company also realized approximately $1.7 million, net
of costs, in cash from the sale of MeadowWood Hospital. The cash provided by
investing activities was partially offset by cash expenditures of $2.2 million
for the purchase of property, plant and equipment. The investing uses of $25.8
million of cash in the first quarter of fiscal 1998 primarily related to the
purchase of Aspect for approximately $21.2 million and investments in property,
plant and equipment of $2.4 million.
FINANCING CASH FLOWS: The $2.9 million of financing cash flows used in the first
quarter of fiscal 1999 primarily related to the repayment of $2 million on the
KeyBank line of credit and $4 million on an Aspect promissory note. These
payments were partially offset by additional long-term borrowing on capital
leases of $1.7 million, net and short-term funds of $1.4 million borrowed by
Aspect. In the first quarter of fiscal 1998, the Company obtained $23.5 million
of cash from financing activities. The financing activities primarily related to
an $11 million draw down on the KeyBank line of credit and the Midland Bank loan
of $17.7 million. Cooper repaid $4.2 million of principal amounts of promissory
notes in the first quarter of fiscal 1998.
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
OUTLOOK: We expect to sell the balance of HGA to Universal by the end of the
second fiscal quarter. Proceeds of about $27 million cash may be used to repay
debt, acquire additional shares of our stock or make other investments,
including acquisitions, that may be attractive at that time.
We believe cash flow from continuing operations will be sufficient to fund
ongoing operations. Additional financing may be obtained to fund additional
purchases of the Company's common stock and acquisitions, if completed. At
January 31, the Company had $5.6 million available under the KeyBank line of
credit. We anticipate that additional financing would be available when and if
required.
RISK MANAGEMENT: Cooper is exposed to risks caused by changes in foreign
exchange, principally Pound Sterling denominated debt and from operations in
foreign currencies. We have hedged most of this risk by entering into contracts
to buy Sterling forward. Cooper is also exposed to risks associated with changes
in interest rates, as the interest rate on certain of its debt varies with the
London Interbank Offered Rate. We have protected ourselves against most of this
risk by entering into agreements to swap most of our variable rate debt for
fixed rate debt.
YEAR 2000: The Year 2000 ("Y2K") problem exists today because programmers who
developed computer systems and applications over the past few decades used two
digit date codes to designate the year. This creates a problem in the year 2000
in that many systems will recognize "00" as the year 1900 not the year 2000.
Those systems that are not fixed may abort or produce erroneous data once the
year 2000 arrives.
Cooper has completed an in-depth review of the financial and operational systems
at each of its business units and is implementing a Y2K compliance program,
which is expected to be substantially completed by mid-1999. It is taking all
reasonable steps to confirm that all of its critical business systems, software
and equipment that consider and process date-related information will continue
to function properly after December 31, 1999.
Cooper initiated compliance programs in 1995 to modify its proprietary software,
and many of the required changes have been completed. Software that was recently
purchased requires minimal modification, and we will ensure that any new
software purchased will be Y2K compliant. We intend to use both internal and
external resources to reprogram, or replace, and test our software for Y2K
modifications.
Cooper has identified a person at each of its major operations who is
responsible for Y2K compliance and has also appointed a Y2K Compliance Officer
for the corporation. The Compliance Officer reports to the Board of Directors on
program status.
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
Cooper has experienced significant growth in the past three years and is
planning to begin implementation of a broad-based Enterprise Resource Planning
("ERP") system throughout its major CVI operations in the U.S. and the U.K. in
1999. The new ERP system will be Y2K compliant. In any event, as part of its
contingency plan, CVI will assure that all of its existing systems are Y2K
compliant prior to the conversion to the new system. In addition, at Aspect
Vision, its recently acquired contact lens business in the U.K., plans are in
place to build additional contact lens inventory prior to the millennium to
assure there is no disruption in the flow of products to its customers.
Cooper has or is currently ensuring Y2K compliance of all business systems and
does not anticipate Y2K problems with these. It also has or is currently
communicating with vendors to determine their Y2K compliance and is not aware of
third party Y2K issues that could materially affect its operations.
Cooper will continue to devote adequate resources to address its Y2K issues. It
cannot, however, assure that its systems and products do not contain undetected
Y2K problems, that it will not experience operating difficulties as a result of
Y2K issues or that its new systems will be implemented in time to avoid the
probability of Y2K problems. Further, it cannot assure that its assessment of
suppliers and vendors will be accurate.
Cooper has developed contingency plans to identify and mitigate potential Y2K
problems and assess their impact on its operations. These plans will be designed
to protect its assets, continue safe operations and allow any interrupted
operations to resume in a timely fashion. We have developed contingency plans to
respond to equipment failures, emergencies and business interruptions. However,
contingency planning for Y2K issues is complicated by possible multiple and
simultaneous incidents, which could significantly delay efforts to respond and
resume normal business. Such incidents may be outside of our control, for
example if third parties providing goods and/or services critical to Cooper's
operations do not successfully address their own material Y2K problems.
Based on our Y2K assessment, we anticipate that the cost of upgrading or
replacing Cooper's programs, systems and equipment will not materially affect
its financial position. The total expenditures, including capital, required to
be Y2K compliant are currently estimated at $500,000. Approximately $200,000 has
been expended to date.
TRADEMARKS: The following trademarks italicized in this report are owned by,
licensed to or distributed by The Cooper Companies, Inc., its subsidiaries or
affiliates: Cerveillance'TM', CooperSurgical InfraRed Coagulator'TM', FemExam'r'
TestCard System'TM', Hyskon'r', Marlow'TM' and Unimar'r'.
19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
11* Calculation of Earnings Per Share.
27 Financial Data Schedule.
* The information called for in this exhibit is provided in Footnote 4 to
the Consolidated Condensed Financial Statements in this report.
(b) The Company filed the following reports on Form 8-K during the period
from November 1, 1998 to January 31, 1999.
Date of Report Item Reported
-------------- -------------
November 18, 1998 Item 5. Other Events
December 14, 1998 Item 5. Other Events
January 11, 1999 Item 5. Other Events
January 27, 1999 Item 5. Other Events
20
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: March 11, 1999 /s/ Robert S. Weiss
---------------------------------------------
Executive Vice President, Treasurer and Chief
Financial Officer
21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
Exhibit Page No.
- ------- --------
11* Calculation of Earnings Per Share.
27 Financial Data Schedule.
* The information called for in this exhibit is provided in Footnote 4 to
the Consolidated Condensed Financial Statements in this report.
22
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as.................................'TM'
The registered trademark symbol shall be expressed as.......................'r'
5
1,000
3-MOS
OCT-31-1999
NOV-01-1998
JAN-31-1999
5,774
0
24,982
1,275
34,557
110,322
47,169
11,731
289,628
42,148
77,659
1,492
0
0
145,818
289,628
34,959
34,959
13,416
13,416
(34)
0
1,849
4,088
1,447
2,641
1,258
0
0
3,899
.27
.27
