[LOGO]
Contents
Important Events in 2002 3
Financial Highlights 4
Letter to Shareholders 6
Business Review 11
CooperVision 12
CooperSurgical 18
Financial Section 24
Corporate Information 72
About The Company
The Cooper Companies, Inc. is a rapidly growing specialty medical products
company serving the vision care and women's healthcare markets with high quality
products and services.
CooperVision markets a broad range of contact lenses, emphasizing high-growth,
specialty and value-added market segments around the world.
CooperSurgical offers medical devices, diagnostic products and surgical
instruments and accessories used primarily by gynecologists and obstetricians.
[The Cooper Companies Logo]
2002 Annual Report
[PERFORMANCE GRAPH]
Five Year Chart Of Cooper's Share Price Performance
All per share figures in this report reflect the two-for-one stock split
effected the form of a stock dividend on November 22, 2002.
<Table>
3 - The Cooper Companies Inc. 2002
Important Events in 2002
CooperVision
o Revenue grew 38 percent to $244
million.
o Acquired Biocompatibles Eyecare,
Inc., a manufacturer of specialty
contact lenses that contributed $56
million to 2002 revenue.
2002 Financial Summary
o Revenue $315 million, up 34 o Soft contact lens revenue
percent. (excluding miscellaneous revenue
and sales to other manufacturers)
o Operating income $67 million, up reached $232 million, up 10 percent
22 percent on a pro forma basis that includes
Biocompatibles revenue as if Cooper
o Diluted earnings per share owned it for the eight months ended
$1.57, up 29 percent October 31, 2001.
o Settled patent litigation with CIBA
Vision regarding cosmetic contact
lens.
o The Japanese health authorities
notified Rohto Pharmaceutical,
Ltd., CVI's marketing partner in
Japan, that the material from which
CVI manufacturers its disposable
spherical, aspheric, toric and
multifocal contact lenses was
cleared for marketing.
CooperSurgical
2003 Outlook o Grew revenue 22 percent to $71
million.
o Revenue $380 to $400 million
o Acquired the bone densitometry
o Earnings per share $1.98 to business of Norland Medical
$2.03 Systems, Inc., used in the
evaluation of osteoporosis.
o Acquired Ackrad Laboratories, Inc.,
and Sage BioPharma, both suppliers
of products for infertility.
o Completed a significant expansion
of its facilities to support its
growing business.
The Cooper Companies
o Secured a new $225 million credit
facility through KeyBank.
o Effected a two-for-one stock split
in the form of a stock dividend.
o Reduced the Company's effective tax
rate to 25 percent and extended
through 2006 the complete
utilization of its net operating
loss carryforwards.
o Ranked 76th on Forbes Magazine's
list of 200 best small companies
for 2002.
</Table>
4 - The Cooper Companies Inc. 2002
Financial Highlights
Selected Five Year Financial Information
(In thousands except per share data) 2002 2001 2000 1999 1998
- ---------------------------------------- -------- -------- -------- -------- --------
Per Share Information*:
Income from continuing
operations** $ 1.57 $ 1.22 $ 1.01 $ .77 $ .45
-------- -------- -------- -------- --------
Net income as reported 1.57 1.22 1.00 .88 1.30
-------- -------- -------- -------- --------
Dividends 0.048 0.034 0.04 0.02 N/A
-------- -------- -------- -------- --------
Cash flow*** 2.45 2.07 1.75 1.41 .97
-------- -------- -------- -------- --------
Stock price - high 28.95 27.86 19.40 15.94 25.84
-------- -------- -------- -------- --------
Stock price - low 19.17 15.25 12.32 5.88 7.00
-------- -------- -------- -------- --------
Net sales 315,306 234,572 201,217 168,155 148,912
-------- -------- -------- -------- --------
Gross profit 199,493 53,368 133,117 109,146 93,148
-------- -------- -------- -------- --------
Operating income 66,971 54,758 46,869 38,811 29,700
-------- -------- -------- -------- --------
Interest expense 6,874 3,738 4,744 6,330 6,253
-------- -------- -------- -------- --------
Provision for (benefit of)
income taxes 16,294 14,992 12,727 10,711 (34,723)
-------- -------- -------- -------- --------
Working capital 72,229 87,232 47,410 58,565 69,376
-------- -------- -------- -------- --------
Property, plant and
equipment, net 87,944 61,028 47,933 40,319 34,234
-------- -------- -------- -------- --------
Total assets 571,115 396,849 322,565 285,873 296,041
-------- -------- -------- -------- --------
Total debt 163,651 68,802 48,351 61,955 90,247
-------- -------- -------- -------- --------
Stockholders' equity 311,442 256,284 198,438 164,143 145,253
-------- -------- -------- -------- --------
Capital expenditures 23,434 16,757 14,665 10,121 19,573
-------- -------- -------- -------- --------
Depreciation and
amortization 11,369 10,988 8,734 8,440 8,416
-------- -------- -------- -------- --------
* All per share figures in this report reflect the two-for-one stock split
effected in the form of a stock dividend on November 22, 2002. All
references to per share information in this report are to diluted per share
amounts.
** 1998 is pro forma, assuming a 40 percent tax rate.
*** Pretax income from continuing operations plus depreciation and
amortization.
[PHOTO]
"The Cooper Companies had
another strong year,
continuing the consistent
performance it has delivered
annually since 1995."
A. Thomas Bender
Chairman, President and
Chief Executive Officer
6 - The Cooper Companies Inc. 2002
To Our Shareholders
In 2002, The Cooper Companies delivered another year of strong performance to
its shareholders. With sustained organic growth and the acquisition of
Biocompatibles Eyecare, Inc., a specialty contact lens manufacturer, revenue
grew 34 percent, diluted earnings per share rose 29 percent and cash flow per
share increased 18 percent.
Since 1997, Cooper's revenue has grown at a compounded annual rate of 29
percent, its operating income at 28 percent, its earnings per share from
continuing operations at 32 percent and its cash flow per share at 27 percent.
Revenue at CooperVision (CVI), our contact lens business, has grown at a
compounded annual rate of 31 percent, and CVI is now the fastest growing and one
of the world's leading contact lens manufacturers. Over the next three years,
new products and geographic expansion will, we anticipate, generate percentage
revenue growth in the low to mid-teens as growth accelerates in our specialty
lens franchise around the world.
CooperSurgical (CSI), our women's healthcare business, has achieved significant
scale during this period. With revenue growing at a compounded annual rate of 24
percent since 1997 and expected revenue in 2003 approaching $85 million, CSI is
now a major manufacture and marketer of madical device products for the women's
healthcare market and, we believe, the largest supplier of gynecology devices
for the physician's office in the United States.
[TWO PERFORMANCE GRAPHS]
Revenue (in millions) 1998 1999 2000 2001 2002
- --------------------- ----- ----- ----- ----- -----
COOPERVISION (CVI) 120.2 138.1 154.8 176.1 243.9
COOPERSURGICAL (CSI) 28.7 30.1 46.4 58.5 71.4
Operating Income (in millions) 1998 1999 2000 2001 2002
- ------------------------------ ---- ---- ---- ---- ----
COOPERVISION (CVI) 34.6 40.8 47.3 51.4 60.4
COOPERSURGICAL (CSI) 2.1 4.3 6.3 10.1 14.1
7 - The Cooper Companies, Inc. 2002
Other important financial measures also reflect Cooper's consistent performance
over the past five years:
o Cash flow (pretax income from continuing operations plus depreciation and
amortization) per share has grown from $.97 to $2.45.
o Our effective tax rate has declined to 25 percent, and we have extended
through 2006 the complete utilization of our net operating loss
carryforwards.
o One hundred shares of Cooper stock that cost $719 on October 31, 1996 more
than tripled to $2,650 by the end of 2002. During this period, the
Company's market capitalization grew from $168 million to $818 million.
This consistent performance reflects the commitment of Cooper's employees, and
we thank them for their continued dedication and hard work.
Favorable Market Environments
Despite slow economic growth worldwide during the past year, the soft contact
lens market remains attractive, growing at about 7 percent to an estimated $3.1
billion in 2002, and forecast to grow about 7 percent to 8 percent annually over
the near term.
As improving demographics - the "baby echo" generation that began in the late
1990's - bring new patients into the market, growing penetration of specialty
and value-added contact lenses in countries outside the United States adds to
its vitality. Capitalizing on this trend, in February, Cooper acquired
Biocompatibles Eyecare, Inc., a manufacturer of specialty lenses.
We expect that Biocompatibles' Proclear Compatibles lenses will be the basis for
a new generation of improved CVI contact lenses. Made with the omafilcon A
material, which incorporates phosphorylcholine to enhance lens and tissue
compatibility, Proclear Compatibles lenses significantly improve the wearing
experience for many contact lens users.
We plan to expand the distribution of Proclear toric lenses and introduce
Proclear products in aspheric, multifocal and extended wear formats over the
next several years. These new products will complement the existing Proclear
spherical lens line, which can improve comfort for patients who experience
periodic dryness of the eye.
Toric lenses, used to correct astigmatism, a visual defect caused by corneal
irregularity, are the fastest growing segment of the worldwide contact lens
market,
8 - The Cooper Companies, Inc. 2002
with the two-week disposable lens category growing most rapidly. Torics are
CooperVision's leading products, accounting for about 45 percent of its
worldwide soft lens revenue.
CVI's Frequency Aspheric, a value-added product that provides a crisper quality
of vision and improved acuity in low light conditions, has become the worldwide
leader in its market category.
CVI has incorporated aspheric technology into its cosmetic lenses, Frequency
Colors and Frequency Expressions, and now competes effectively in the estimated
$265 million worldwide cosmetic contact lens segment. We were especially pleased
that during the fourth quarter we settled our patent litigation regarding
cosmetic contact lenses with Wesley Jessen Corporation, a division of CIBA
Vision.
Frequency Multifocal, a disposable specialty lens for patients with presbyopia,
has been enthusiastically received in the United States, and we expect to launch
this product in Europe in mid-2003.
In Japan, the world's second largest contact lens market, demand for disposable
specialty soft contact lenses is increasing. More than 80 percent of Japan's
near-sighted patients also have astigmatism, offering CVI, with its broad line
of toric lenses, a solid growth opportunity.
In September, the Japanese Ministry of Health and Welfare notified CVI's
marketing partner in Japan, Rohto Pharmaceutical Company, Ltd., that it had
cleared Rohto to market the material from which CVI manufactures its contact
lenses. We expect that Rohto will begin to market these lenses in Japan in the
first quarter of calendar 2003.
Favorable demographic trends also influence our women's healthcare business.
Many women of the "baby boomer" generation have reached the age when they
require diagnosis and treatment of gynecological disorders, and physicians use
CooperSurgical products in many of these procedures.
During 2002, CSI continued to consolidate the fragmented medical device segment
of the women's healthcare market by completing three acquisitions: Ackrad
Laboratories, Inc. and Sage BioPharma, both of which offer products used in the
treatment of infertility, and the bone densitometry business of Norland Medical
Systems, Inc. whose products help evaluate osteoporosis. To accommodate the
growth of its business, CSI also completed a major expansion of its physical
facilities during the year.
9 - The Cooper Companies, Inc. 2002
[GROUP PHOTO]
In October, Cooper management met with executives of the New York Stock Exchange
and participated in the traditional opening bell ceremony.
10 - The Cooper Companies, Inc. 2002
Corporate Activities
o In May, the Company secured a new $225 million credit facility through
KeyBank to finance the Biocompatibles acquisition and restructure its
existing debt on more favorable terms.
o In November, just after the end of our fiscal year, the board of directors
authorized a two-for-one stock split, effected in the form of a stock
dividend, in order to broaden the ownership base of Cooper common stock.
o Through the continued implementation of our worldwide corporate tax plan,
we reduced the Company's effective tax rate to 25 percent and extended
through 2006 the complete utilization of its net operating loss
carryforwards.
o Forbes Magazine ranked Cooper 76th on its list of the best 200 small
companies for 2002. Included in their evaluation is a board of directors
score of 94, which means that the Company's board of directors has better
corporate governance standards as judged by Institutional Shareholders
Services than more than 94 percent of the companies its size.
Looking Ahead
We expect Cooper's momentum to continue in 2003. We anticipate revenue of about
$380 to $400 million and earnings per share in the range of $1.98 to $2.03. At
CooperVision, we expect recently introduced contact lens products and geographic
expansion in Europe and Japan to drive our incremental growth. At
CooperSurgical, we will continue to pursue our strategy to profitably
consolidate the medical device segment of the women's healthcare market.
Thank you for your continued support.
A. Thomas Bender Allan E. Rubenstein, M. D.
A. Thomas Bender Allan E. Rubenstein, M. D.
Chairman of the Board, Vice Chairman of the Board
President and Chief Executive Officer and Lead Director
January 27, 2003
11 - The Cooper Companies Inc. 2002
Business Review
The Cooper Companies, Inc.
In 2002, The Cooper Companies reported sales of $315 million, a 34 percent
increase over 2001. CVI's revenue grew to $244 million, up 38 percent,
including revenue of $56 million from the contact lens business of
Biocompatibles, plc, acquired in February. CSI revenue grew to $71 million, a 22
percent increase that includes revenue from product lines added through
acquisition during the past 12 months. Earnings per share grew 29 percent to
$1.57. Cash flow per share reached $2.45, up from $2.07 the previous year.
12 - The Cooper Companies Inc. 2002
CooperVision
We estimate that the worldwide soft contact lens market grew about 7 percent in
2002 to about $3.1 billion. In the United States, about 42 percent of the
worldwide market, revenue grew about 7 percent to $1.3 billion, while revenue in
countries outside the United States grew by 6 percent to $1.8 billion.
Japan and the Pacific Rim countries, about $860 million or 27 percent of the
world market, grew about 7 percent. Europe, about $635 million or 20 percent of
the market, grew about 6 percent. In the Middle East and Latin America,
unfavorable political and economic conditions combined to lower market growth.
Longer term, favorable demographics and a continuing shift in practitioner
preferences from low-featured "commodity" lenses to higher value specialty
lenses support a favorable world market outlook.
CooperVision is particularly strong in the specialty lens segment of the market.
This includes toric lenses that correct astigmatism, cosmetic lenses that change
the appearance of the color of the eye, lenses for patients who experience dry
eye, long-term extended wear lenses, and multifocal lenses for presbyopia - the
blurring of near vision that occurs with aging.
These product lines offer more profitable and faster growing opportunities than
the commodity spherical lenses that correct only near - and farsightedness.
Specialty lenses currently account for about a fourth of the worldwide contact
lens market and more than 40 percent of the market in the U.S. Their 16 percent
share of the market outside the U.S. offers CVI, with its broad specialty
product line, an attractive opportunity to expand their acceptance.
Acquisition of Biocompatibles
In February, Cooper completed the acquisition of the world's sixth largest
contact lens manufacturer, Biocompatibles Eye Care, Inc., the contact lens
business of Biocompatibles plc. Biocompatibles added about $56 million to CVI's
2002 revenue, about 70 percent of this outside of North America. Its Proclear
line of products, manufactured with proprietary phosphorylcholine technology
that helps enhance tissue-device compatibility, accounts for about 45 percent of
its revenue. Biocompatibles' Proclear lenses are often indicated for patients
with mild discomfort relating to dryness during lens wear, a condition that
often causes patients to drop out of lens wear.
13 - The Cooper Companies Inc. 2002
Proclear Technology
[PHOTO]
[GRAPHIC]
- --------------------------------------------------------------------------------
Incorporating phosphorylcholine into Proclear lenses creates a biocompatible
layer of synthetic lipids similar to that found in human cell membranes. By
mimicking the eye's natural cell components, the material closely binds water in
and around the lens.
- --------------------------------------------------------------------------------
[GRAPHIC]
- --------------------------------------------------------------------------------
Proclear lenses complement CooperVision's portfolio of specialty contact lenses
that enable practitioners to strengthen patient loyalty by selecting the best
lens for each individual's needs.
- --------------------------------------------------------------------------------
[GRAPHIC]
- --------------------------------------------------------------------------------
Proclear lenses are the only lenses to date to receive FDA clearance for the
claim, "may provide improved comfort for contact lens wearers who
experience mild discomfort or symptoms relating to dryness
during lens wear."
- --------------------------------------------------------------------------------
14 - The Cooper Companies Inc. 2002
PHOSPHORYLCHOLINE TECHNOLOGY
The development of phosphorylcholine technology began in the 1970's with
Professor Dennis Chapman and his colleagues at the Royal Free Hospital in
London, while they researched biocompatibility, the ability of a material to
interface within the body without provoking an adverse biological response. They
examined phosphorylcholine (PC), a substance in the human cell membrane,
identifying it as one of the primary materials responsible for biocompatibility.
When a foreign material enters the body, "rejection" begins immediately, coating
the material with proteins, lipids and other cells. These effects are minimized,
however, when electrically neutral PC, a major component of the outer human cell
membrane, is coated on or incorporated into the foreign material. PC also binds
water tightly around it, making it difficult for other materials to interact
with the PC surface. An electrically neutral surface that resists adhesion and
deposits is very useful for devices like contact lenses that are in constant
contact with body fluids.
[PC TECHNOLOGY LOGO]
- --------------------------------------------------------------------------------
PC AND CONTACT LENSES
PC technology has significantly improved the wearing experience for contact lens
wearers, especially those who experience periodic dryness, particularly at the
end of the day. When PC is incorporated into a soft contact lens material known
as omafilcon A, its affinity for water gives omafilcon A superior water
retention characteristics. This was demonstrated in clinical trials reviewed by
the U.S. Food and Drug Administration and to date, omafilcon A is the only lens
material to receive clearance for the claim: "...may provide improved comfort
for contact lens wearers who experience mild discomfort or symptoms relating to
dryness during lens wear."
CooperVision markets spherical and toric lenses made from omafilcon A worldwide
under the Proclear Compatibles'TM' brand.
[PROCLEAR TORIC LOGO] [PROCLEAR LOGO]
15 - The Cooper Companies Inc. 2002
CVI's 2002 Soft Lens Revenue Growth
CVI's soft contact lens revenue -- total revenue less sales to other contact
lens manufacturers and other miscellaneous revenue -- grew 10 percent in 2002 on
a pro forma basis that includes Biocompatibles revenue as if Cooper owned it for
the eight months ended October 31, 2001. In contrast, we estimate that the world
market grew about 7 percent.
CVI's soft contact lens revenue in the United States grew 10 percent and 11
percent in markets outside the U.S. We estimate that since 1997, CVI has doubled
its market share, both in the United States and worldwide. CVI now holds about
11 percent of the United States market and about 9 percent of the worldwide
market.
Specialty Contact Lenses
Specialty contact lenses meet the visual correction needs of patients whose
requirements go beyond the correction of near- and farsightedness. We estimate
that products in these categories account for about 26 percent of worldwide
contact lens revenue.
In the United States, we estimate that sales of specialty products exceed $500
million, about 40 percent of the total market. While toric and cosmetic lenses,
the fastest growing segments, account for the majority of revenues in this
category, multifocal, value added lenses -- for patients with dry eye syndrome,
for example -- and long-term extended wear lenses also offer attractive business
opportunities.
In 2002, sales of CVI's toric lenses, its most extensive product line, grew 11
percent and now account for about 45 percent of its total soft lens revenue. We
estimate that the worldwide toric market grew about 10 percent during this
period.
Cosmetic Lenses
Worldwide, the cosmetic lens market segment is growing at about 11 percent
annually with estimated sales of approximately $265 million -- about $165
million in the United States.
CVI's line of disposable cosmetic contact lenses that change or enhance the
appearance of the color of the eye-called Frequency Expressions in the United
States and Frequency Colors in the rest of the world-continued to gain
acceptance during 2002, and the line was expanded to eight lens colors. During
the first quarter of 2003, CVI plans to introduce its Enhancements line --
lenses that accent rather than change the natural color of the eye.
In the fourth quarter, CVI settled its patent litigation suit regarding cosmetic
lenses with Wesley Jessen, a division of CIBA Vision. While the terms of the
settlement are confidential, the agreement allows CooperVision to continue
selling its existing
16 - The Cooper Companies Inc. 2002
cosmetic lens products throughout the world. CIBA Vision has agreed to license
its color contact lens patents to CVI in return for a royalty and a
cross-license of some of CooperVision's cosmetic lens intellectual property
rights.
New Specialty Products
During 2002, CVI continued to expand the distribution in the United States of
Frequency Multifocal, a disposable product for patients with presbyopia, the
blurring of near vision that occurs with aging. Practitioners who have used it
are impressed with its performance.
In November, CVI introduced Frequency Toric XR, the only monthly disposable
planned replacement lens available in the United States for astigmatic patients
requiring complex vision correction.
In the next two years, CVI expects to significantly expand the Proclear
Compatibles product line, effectively launching a new generation of lenses.
These plans include:
o Expanding United States distribution of Proclear Toric lenses, which are in
wide distribution overseas, in January 2003.
o Launching Proclear Aspheric worldwide in the third quarter of 2003.
o Introducing Proclear Multifocal lenses worldwide in 2004.
Other expected new product launches in this period include:
o CVI's line of frequently replaced lenses in Japan in February of 2003
through Rohto Pharmaceutical Co., Ltd., CVI's Japanese marketing partner.
o Frequency Multifocal in markets outside the United States in the third
quarter of fiscal 2003.
o Enhancement Colors, a new line of disposable cosmetic products that
accentuates the natural color of the eye, in February 2003 in the United
States and in markets outside the U.S. later in the year. These products
complement our line of opaque lenses that change the appearance of the
color of the eye.
CVI Growth in Markets Outside the United States
In 2002, CVI's revenue in markets outside the United States grew 11 percent and
now represents about 45 percent of its soft lens sales.
17 - The Cooper Companies Inc. 2002
Europe
CVI's European soft lens revenue grew 21 percent over 2001 due largely to the
sales of toric lenses, which grew 70 percent. CVI estimates that it is now the
third largest contact lens supplier in Europe, with business units in Holland,
Italy, Scandinavia, Spain and the United Kingdom, a subsidiary and an exclusive
distributor in France and an exclusive distributor in Germany.
Japan
CVI's marketing partner in Japan, Rohto Pharmaceutical Company, Ltd., received
clearance from the Japanese Ministry of Health and Welfare in September to
market products made from the methafilcon A polymer. These include CVI's
disposable spherical, aspheric, toric and multifocal contact lenses.
With approximately 10 million contact lens wearers, Japan is the second largest
contact lens market in the world after the United States, and soft lens
popularity continues to grow. CVI estimates that the total market for soft
contact lenses in Japan and the Pacific Rim today is about $860 million,
compared with about $1.3 billion in the United States. The Japanese market,
growing at about 7 percent per year, is currently divided equally between daily
and two week disposable lenses.
The incidence of near-sightedness in Japan is one of the highest in the world.
About 80 percent of the nearsighted population has some degree of astigmatism,
significantly greater than the 50 percent of those in the United States who do.
About half of those with astigmatism are potential candidates for toric lenses.
The Japanese toric segment, currently a smaller percentage of the total market
than it is in the U.S., is expected to grow rapidly as newer generations of
toric lenses are introduced.
Rohto Pharmaceutical Company, Ltd. is a leading manufacturer of contact lens
care products, holding, according to its estimates, a 30 percent share of the
market for non-pharmaceutical ophthalmic products in Japan. Rohto's total
revenue approaches $500 million, most from Pacific Rim countries.
Non-prescription ophthalmic products account for about one-third of its
worldwide revenue. Rohto plans to capitalize on its well-established eyecare and
contact lens care brands and use a combination of professional and consumer
promotion to introduce CVI's contact lens products.
Looking Ahead
CVI's business goals are to continue its revenue growth at one and a half to two
times the rate of the world market and to become the world's largest specialty
contact lens provider by mid decade. In 2003, we expect revenue of about $300
million at CVI.
18 - The Cooper Companies Inc. 2002
CooperSurgical
Historically, many small medical device companies have supplied the women's
healthcare market with a wide range of products through a fragmented
distribution system. Over 75 of these serve the large number and varied types of
women's healthcare providers in the United States today. There are nearly 33,000
obstetricians/gynecologists (Ob/Gyn's) under the age of 65 practicing at 16,100
locations in the United States, as well as 5,250 hospitals with clinics,
outpatient and surgical facilities, plus 370 fertility clinics specializing in
assisted reproductive technologies. While general medical practitioners play an
important role in women's primary healthcare, the Ob/Gyn is the reproductive
health specialist and the primary customer for associated medical devices.
Women's Health Background
Currently, over 90 million women between 15 and 64 years old visit an Ob/Gyn in
the United States at least once each year, with over 70 million visits related
to gynecologic complaints. Some significant features of this market are:
o Two-thirds of patient visits are for annual check-ups, cancer screening,
menstrual disorders, vaginitis (inflammation of vaginal tissue),
osteoporosis and the management of menopause. The rest are for pregnancy
and reproductive management. Consistent with an aging population, visits
for menstrual disorders and menopause are growing.
o Osteoporosis (reduction in bone mass) and incontinence have also become
frequent diagnoses as the female population ages. Their early
identification and treatment will both improve the health of these women
and help reduce costs in the U.S. health care system. According to
government estimates, each of these conditions costs the healthcare system
about $15 billion annually.
o An estimated 4.5 million patients visit physicians for monitoring and
treatment of abnormal Pap smears.
19 - The Cooper Companies Inc. 2002
[GRAPHIC]
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Computer generated view of a human egg at the time of fertilization using
assisted reproductive technology.
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ASSISTED REPRODUCTIVE TECHNOLOGIES
On July 25, 1978, Louise Joy Brown, the world's first successful `test-tube'
baby, was born in Great Britain after 12 years of research in assisted
reproductive technology (ART) by Dr. Patrick Steptoe, a gynecologist at Oldham
General Hospital, and Dr. Robert Edwards, a physiologist at Cambridge
University. Introduced in the United States in 1981, ART has grown rapidly
since, and to date, more than 170,000 babies have resulted.
Infertility affects about 6.1 million women and their partners annually in the
U.S. Conventional techniques including ovulatory drugs and intrauterine
insemination (IUI) treat between 85 to 95 percent of these cases.
Less than 5 percent of infertility cases require in vitro fertilization or other
ART procedures. Physicians use these advanced techniques primarily with women
whose fallopian tubes are blocked or absent, those with severe endometriosis, in
couples where the male has a low sperm count and in some cases of unexplained
infertility.
In 1992, scientists introduced a new technique that offers hope for couples with
male factor: sperm was injected directly into the woman's egg to facilitate
fertilization. This technique, called intracytoplasmic sperm injection or ICSI,
is performed in conjunction with about 40 percent of the in vitro fertilization
procedures. Sage BioPharma, CSI's most recent acquisition, supplies products
used in ICSI procedures.
INFERTILITY TREATMENT OPTIONS
- --------------------------------------------------------------------------------
TREATMENT OPTION INDICATION PROCEDURE
- --------------------------------------------------------------------------------
Intrauterine Sexual dysfunction The injection of prepared
insemination (IUI) Sperm hostility sperm into the uterus by
Abnormal ovulation means of a catheter directed
through the cervix.
- --------------------------------------------------------------------------------
In-vitro Male infertility Eggs are harvested from the
Fertilization (IVF) Tubal disease female after ovulatory
Endometriosis stimulation and combined
Unexplained infertility with sperm in a Petri dish.
Recurrent failure with Once the eggs have been
IUI Age related fertilized, the embryos are
infertility placed into the uterus using
specially designed catheters.
- --------------------------------------------------------------------------------
In-vitro Male infertility Eggs are harvested from the
Fertilization (IVF) Unexplained infertility female after ovulatory
with Intracytoplastic stimulation. Sperm is injected
Sperm Injection into the egg using microma-
(ICSI) nipulation. Once the eggs
have been fertilized, the
embryos are the placed in
the uterus using specially
designed catheters.
- --------------------------------------------------------------------------------
Gamete Endometriosis An unfertilized egg and
Intrafallopian Unexplained infertility sperm are injected into the
Transfer (GIFT) Recurrent failure with fallopian tube usually using
IUI Age related a laparoscopic approach.
infertility Disadvantages include the
inability to assess sperm
quality to assess success
or failure of procedure
whereas the cost is
comparable.
- --------------------------------------------------------------------------------
Zygote Male infertility A fertilized egg is
intrafallopian Endometriosis transferred to the fallopian
transfer (ZIFT) Unexplained infertility tube during a laparoscopic
Recurrent failure with procedure. This procedure has
IUI Age related been proven to offer no
infertility clinical advantage to IVF, and
as a result is decreasing in
usage.
- --------------------------------------------------------------------------------
20 - The Cooper Companies Inc. 2002
CooperSurgical Technologies
[PHOTO]
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Commitment and dedication to reproductive medicine at Sage BioPharma has
enabled many couples' dream of parenthood to come true.
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SAGE
SAGE offers consumable products used by clinical embryologists and physicians in
Assisted Reproductive Technologies, including IVF culture media, andrology
products used in the assessment and improvement of male fertility, embryo
transfer catheters, and retrieval needles used to obtain female eggs for in
vitro fertilization.
The IVF Sequential Advantage Media lines, SAGE's principal products, are the
first clinically proven media designed to optimize the in-vitro environment at
every stage of embryo development. These culture media products improve the
yield of viable embryos for transfer to the mother's womb.
SAGE also provides products to assess and improve male fertility, particularly
products for semen preparation.
CSI will maintain SAGE's market leadership position by actively pursuing new
technologies and products that provide improved treatment options.
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[GRAPHIC]
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Ackrad's H/S Elliptosphere
is used primarily in fertility studies.
- --------------------------------------------------------------------------------
ACKRAD
Ackrad's principal product, which accounts for about 65 percent of its revenue,
is the H/S Elliptosphere Catheter, used in hysterosalpingography (HSG) and
saline contrast hysterosonography (SCHS), the noninvasive assessment of the
female reproductive anatomy. Physicians use it primarily for fertility studies,
and to assess abnormal uterine bleeding and pelvic pain. These tests show an
outline of the uterine cavity and help detect abnormalities that cause
infertility or repeated miscarriages.
- --------------------------------------------------------------------------------
[PHOTO]
- --------------------------------------------------------------------------------
The Excell'TM' uses dual energy x-ray adsorptiometry
technology to help assess fracture risk.
- --------------------------------------------------------------------------------
NORLAND
CSI's Norland product line offers a complete line of bone assessment products.
The McCue CUBA (Contact Ultrasound Bone Analyzer) is a portable, lightweight,
and easy-to-use device to helps assess fracture risk. The APOLLO DXA performs
dual x-ray absorptiometry scans of the heel; which help diagnose osteoporosis.
The Excell is a full featured, compact central DXA system, which estimates bone
mineral density of the spine and femur, measurements that help diagnose and
monitor bone disorders, particularly osteoporosis.
OSTEOPOROSIS
Osteoporosis is characterized by excessive loss of bone mineral and
deterioration of the skeleton over time. It generally occurs in women over the
age of 45. The National Osteoporosis Foundation (NOF) estimates that
osteoporosis affects more than 22 million women in the United States, and if
unchecked, predicts that it will affect more than 30 million women by 2010 as
the population ages. Annual direct medical expenditures for osteoporosis and
associated fractures are $13.8 billion, and are expected to increase to $62
billion by the year 2020.
Until recently, osteoporosis was thought to be an inevitable and untreatable
consequence of aging. The availability of more effective drug therapies and an
increased focus on women's health issues and preventive medical practices have
created a growing awareness among patients and physicians that osteoporosis is,
in many cases, a disease that can be treated.
21 - The Cooper Companies Inc. 2002
CSI Strategy
The small companies serving the women's healthcare market in the United States
have traditionally offered limited product lines for a single procedure or
disease. As these products matured and their growth slowed, many looked to exit
the market.
CSI's strategy has been to identify and acquire selected smaller companies and
product lines that can improve its existing market position or expand into new
clinical areas. Of particular interest are opportunities in infertility and the
healthcare needs of the aging female population.
Cooper's strong cash flow allows CSI to readily compete for these opportunities,
and CSI has added 20 major products or product lines to date while executing
this market consolidation strategy. CSI is now a leader in women's healthcare, a
growing market driven by favorable demographics and advancing technology.
CSI 2002 Performance
During 2002, CSI revenue grew 22 percent to $71.4 million. Internal organic
growth was about 8 percent with the remainder coming from product or product
line acquisitions. CSI now represents 23 percent of Cooper's revenue. Its
operating margin reached 20 percent for the fiscal year, up from 17 percent in
2001.
Medamicus, CSI's first entry into the growing urinary incontinence segment,
performed well in its first full year as a part of the company with its sales
more than doubling.
Acquisitions and New Products
During 2002, CSI acquired three companies:
o In April, the bone densitometry business of Norland Medical Systems, Inc.
adding products used in the evaluation of osteoporosis to the CSI
portfolio.
o In May, Ackrad Laboratories, Inc., a developer and manufacturer of
disposable medical devices used primarily in the assessment of infertility.
22 - The Cooper Companies Inc. 2002
o In October, Sage BioPharma, a manufacturer of products used in assisted
reproductive technology (ART). With just 370 clinics, the infertility
market is convenient to serve, and CSI has strong brand awareness with its
customers here.
CSI also introduced the Guardian Vaginal Retractor, designed to control the
anatomy during vaginal gynecologic procedures. Its unique design meets a
long-standing physician need.
Outlook
With the addition of these product lines, CSI expects revenue in 2003 to range
from $83 million to $86 million with operating margin approaching 25 percent.
Over the next several years, CSI expects to complete one or two acquisitions
annually and achieve high single-digit to low double-digit growth from existing
products.
23 - The Cooper Companies Inc. 2002
Index to Financial Information
Five Year Financial Highlights 24
Two Year Quarterly Information 26
Quarterly Common Stock Price Range 26
Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
Forward-Looking Statements 38
Independent Auditors' Report 39
Management's Statement Regarding Financial Reporting 40
Consolidated Statements of Income 41
Consolidated Balance Sheets 42
Consolidated Statements of Cash Flows 43
Consolidated Statements of Comprehensive Income 45
Notes to Consolidated Financial Statements 46
24 - The Cooper Companies, Inc. and Subsidiaries
Five Year Financial Highlights
Consolidated Operations
Years Ended October 31,
(In thousands, except per share amounts) 2002 2001 2000 1999 1998
- ---------------------------------------- -------- -------- -------- -------- --------
Net sales $315,306 $234,572 $201,217 $168,155 $148,912
======== ======== ======== ======== ========
Gross profit $199,493 $153,368 $133,117 $109,146 $ 93,148
======== ======== ======== ======== ========
Income from continuing operations before
income taxes $ 65,169 $ 52,128 $ 42,127 $ 32,712 $ 23,087
Provision for (benefit of) income taxes 16,294 14,992 12,727 10,711 (34,723)
-------- -------- -------- -------- --------
Income before items below 48,875 37,136 29,400 22,001 57,810
Discontinued operations -- -- -- 3,099 (17,964)
Cumulative effect of change in
accounting principle -- -- (432) -- --
-------- -------- -------- -------- --------
Net income $ 48,875 $ 37,136 $ 28,968 $ 25,100 $ 39,846
======== ======== ======== ======== ========
Diluted earnings (loss) per share:
Continuing operations $ 1.57 $ 1.22 $ 1.01 $ 0.77 $ 1.89
Discontinued operations -- -- -- 0.11 (0.59)
Cumulative effect of change in
accounting principle -- -- (0.01) -- --
-------- -------- -------- -------- --------
Earnings per share $ 1.57 $ 1.22 $ 1.00 $ 0.88 $ 1.30
======== ======== ======== ======== ========
Average number of shares used to compute
diluted earnings per share 31,189 30,491 29,019 28,625 30,538
Notes:
o On November 5, 2002, our Board of Directors authorized a two-for-one stock
split in the form of a stock dividend payable November 22, 2002 to
stockholders of record on November 14, 2002. As a result, our consolidated
financial statements reflect an increase in the number of outstanding
shares of our common stock and the transfer of 10 cents per share par value
of these additional shares from additional paid-in capital. We have
restated all per share amounts to reflect the effect of the stock split.
o Following our implementation of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," at the beginning of this
year, we no longer amortize goodwill. Goodwill amortization included in
prior years was:
2001 2000 1999 1998
-------- -------- -------- --------
$4,057 $2,996 $2,367 $2,283
25 - The Cooper Companies, Inc. and Subsidiaries
Consolidated Financial Position
October 31,
(In thousands) 2002 2001 2000 1999 1998
- -------------- -------- -------- -------- -------- --------
Current assets $198,910 $155,205 $112,685 $100,461 $116,077*
Property, plant and equipment 87,944 61,028 47,933 40,319 34,234
Goodwill 238,966 131,732 96,905 65,443 68,168
Other intangible assets 14,651 13,890 13,949 15,075 16,140
Other assets 30,644 34,994 51,093 64,575 61,422
-------- -------- -------- -------- --------
$571,115 $396,849 $322,565 $285,873 $296,041
======== ======== ======== ======== ========
Short-term debt $ 36,333 $ 8,249 $ 8,094 $ 4,888 $ 11,570
Other current liabilities 90,348 59,724 57,181 37,008 35,131
Long-term debt 127,318 60,553 40,257 57,067 78,677
Other liabilities 5,674 12,039 18,595 22,767 25,410
-------- -------- -------- -------- --------
Total liabilities 259,673 140,565 124,127 121,730 150,788
Stockholders' equity 311,442 256,284 198,438 164,143 145,253
-------- -------- -------- -------- --------
$571,115 $396,849 $322,565 $285,873 $296,041
======== ======== ======== ======== ========
* Includes net assets of discontinued operations sold in 1999.
26 - The Cooper Companies, Inc. and Subsidiaries
Two Year Quarterly Financial Data
First Second Third Fourth
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter
- ---------------------------------------- ------- ------- ------- -------
2002
Net sales $58,112 $71,910 $90,563 $94,721
======= ======= ======= =======
Gross profit $37,485 $44,164 $55,719 $62,125
======= ======= ======= =======
Income before income taxes $13,250 $13,224 $18,302 $20,393
Provision for income taxes 3,845 3,306 4,941 4,202
------- ------- ------- -------
Net income $ 9,405 $ 9,918 $13,361 $16,191
======= ======= ======= =======
Diluted earnings per share $ 0.30 $ 0.32 $ 0.43 $ 0.52
======= ======= ======= =======
Number of shares used to compute
diluted earnings per share 31,075 31,128 31,210 31,335
======= ======= ======= =======
2001
Net sales $49,976 $57,182 $61,365 $66,049
======= ======= ======= =======
Gross profit $33,186 $37,469 $39,029 $43,684
======= ======= ======= =======
Income before income taxes $ 9,492 $12,680 $13,218 $16,738
Provision for income taxes 3,183 3,970 2,857 4,982
------- ------- ------- -------
Net income $ 6,309 $ 8,710 $10,361 $11,756
======= ======= ======= =======
Diluted earnings per share $ 0.21 $ 0.29 $ 0.34 $ 0.38
======= ======= ======= =======
Number of shares used to compute
diluted earnings per share 29,635 30,248 30,768 31,072
======= ======= ======= =======
Note:
Quarterly goodwill amortization included First Second Third Fourth
in 2001 is: Quarter Quarter Quarter Quarter
- ---------------------------------------- ------- ------- ------- -------
$ 938 $ 911 $ 1,179 $ 1,029
Quarterly Common Stock Price Range
Years Ended October 31, 2002 2001
- ----------------------- --------------- ---------------
Quarter Ended High Low High Low
- ------------- ------ ------ ------ ------
January 31 $25.37 $21.02 $20.75 $15.25
------ ------ ------ ------
April 30 $26.79 $21.19 $25.20 $17.45
------ ------ ------ ------
July 31 $27.55 $19.17 $25.70 $20.45
------ ------ ------ ------
October 31 $28.95 $20.32 $27.86 $20.35
------ ------ ------ ------
At December 31, 2002 and 2001, there were 865 and 1,097 common stockholders of
record respectively.
27 - The Cooper Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Note numbers refer to the "Notes to Consolidated Financial Statements" beginning
on page 46 of this report.
RESULTS OF OPERATIONS
In this section we discuss the results of our operations for fiscal 2002 and
compare them with those for fiscal 2001 and 2000. We discuss our cash flows and
current financial condition under "Capital Resources and Liquidity."
On November 5, 2002, our Board of Directors authorized a two-for-one stock split
in the form of a stock dividend payable November 22, 2002 to stockholders of
record on November 14, 2002. As a result, our consolidated financial statements
reflect an increase in the number of outstanding shares of our common stock and
the transfer of 10 cents per share par value of these additional shares from
additional paid-in capital. We have restated all per share amounts to reflect
the effect of the stock split.
Highlights: Fiscal Year 2002 vs. Fiscal Year 2001
o Net sales up 34% to $315.3 million.
o Gross profit up 30%; gross margin down by 2 percentage points to 63% of net
sales.
o Operating income up 22% to $67 million. Operating margin at 21% of net
sales down by 2 percentage points.
o Effective tax rate down to 25% from 29%.
o Diluted earnings per share up 29% to $1.57 from $1.22.
SELECTED STATISTICAL INFORMATION - PERCENTAGE OF NET SALES AND GROWTH
Percent of Sales
Years Ended October 31, 2002 % Growth 2001 % Growth 2000
- ----------------------------------- ---- -------- ---- -------- ----
Net sales 100% 34% 100% 17% 100%
Cost of sales 37% 43% 35% 19% 34%
--- --- ---
Gross profit 63% 30% 65% 15% 66%
Selling, general and administrative 40% 41% 38% 13% 40%
Research and development 1% 18% 2% 35% 1%
Amortization 1% (71%) 2% 23% 2%
--- --- ---
Operating income 21% 22% 23% 17% 23%
=== === ===
Net Sales
Cooper's two business units, CooperVision ("CVI") and CooperSurgical ("CSI")
generate all its revenue:
o CVI develops, manufactures and markets a broad range of soft contact lenses
for the worldwide vision care market.
o CSI markets medical devices, diagnostic products, surgical instruments and
accessories for the gynecology market.
28 - The Cooper Companies, Inc. and Subsidiaries
Cooper's consolidated revenue grew by 34% in 2002 and 17% in 2001. Net sales for
both CVI and CSI have grown consistently over the three-year period:
Growth
($ in millions) 2002 vs. 2001 2001 vs. 2000
- --------------- ------------- -------------
Business Unit
CVI $67.8 38% $21.3 14%
===== == ===== ==
CSI $13.0 22% $12.1 26%
===== == ===== ==
2002 COMPARED WITH 2001
CVI Revenue
Practitioner and patient preferences in the worldwide contact lens market
continue to shift away from conventional lenses that are designed for annual
replacement to disposable and frequently replaced lenses. Disposable lenses are
designed for either a daily or a two-week replacement cycle; frequently replaced
lenses are replaced after one to three months. We refer to the combination of
disposable and frequently replaced lenses as "DPR" lenses. An additional
transition in the industry involves the shift away from commodity lenses to
value added specialty products, such as toric lenses, cosmetic lenses and
multifocal lenses.
CVI's revenue growth is driven by unit volume rather than by price.
Additionally, our average selling price on a per lens basis is decreasing,
reflecting increased sales of DPR lenses, which are marketed in multiple lens
packages. This is a global industry trend.
Soft Lens Revenue
CVI's worldwide soft contact lens revenue -- all revenue except royalty revenue,
freight reimbursement revenue and miscellaneous items -- grew 44% in fiscal
2002. Revenue from Biocompatibles Eye Care, Inc. ("Biocompatibles"), which we
acquired on February 28, 2002, contributed significantly to the growth.
Excluding Biocompatibles soft lens revenue of $55.9 million, however, total soft
lens revenue still grew 9%, reflecting our continued global market share gains
driven primarily by our specialty products.
Sales in 2001 included $3.6 million of initial stocking sales to Rohto
Pharmaceutical Co., Ltd. ("Rohto"), CVI's marketing partner in Japan. Less than
10% of these sales were repeated in fiscal 2002. Excluding the Rohto stocking
sales in 2001, soft lens revenue (excluding Biocompatibles) increased 11%. Soft
lens revenue includes sales of both spherical lenses and aspheric and specialty
lens products -- toric, cosmetic, multifocal lenses and lenses for patients with
dry eyes:
o Aspheric lenses help improve visual acuity in low light conditions and
correct low levels of astigmatism;
o Toric lenses correct astigmatism;
o Cosmetic lenses are opaque and color enhancing lenses that alter the
natural appearance of the eye;
o Proclear lenses help enhance tissue-device compatibility for patients
experiencing mild discomfort relating to dry eye during lens wear; and
o Multifocal lenses are designed to correct presbyopia, an age-related vision
defect.
29 - The Cooper Companies, Inc. and Subsidiaries
CVI reported revenue includes Biocompatibles beginning in March 2002, when we
acquired it. To present growth in our total lens business, we have adjusted
reported revenue in the following table by adding Biocompatibles revenue for the
eight-months ended October 31, 2001. (This data was derived from the unaudited
ledgers of Biocompatibles for those periods.) Because we adjusted year-to-date
2001 revenue for eight months, our 2002 revenue does not require any adjustments
to be comparable. We think that adjusting the eight-month period is more
meaningful because we did not begin to control Biocompatibles' operations until
we acquired it. Since our acquisition of Biocompatibles, CVI has emphasized the
benefits of Proclear lenses; and in many cases, practitioners are now
recommending Proclear lenses in place of older CVI disposable spherical
products. Adjusted soft lens revenue grew 10% in 2002.
CVI Revenue
($ in millions) 2002 2001 Growth
- --------------- ------ ------ ------
REPORTED:
U.S. $127.8 $105.4 21%
International 103.9 55.9 86%
------ ------
Soft lens revenue 231.7 161.3 44%
Miscellaneous revenue 12.2 14.8 (18%)
------ ------
Total reported $243.9 $176.1 38%
====== ======
Adjustments - To include Biocompatibles revenue for comparable periods:
Eight Months Ended October 31, 2001
(In millions) 2001
- ----------------------------------- ------
U.S. $11.2
International 37.3
-----
Soft lens revenue $48.5
=====
($ in millions) 2002 2001 Growth
- --------------- ------ ------ ------
AS ADJUSTED:
U.S. $127.8 $116.6 10%
International 103.9 93.2 11%
====== ======
Soft lens revenue 231.7 209.8 10%
Miscellaneous revenue 12.2 14.8 (18%)
------ ------
Total as adjusted $243.9 $224.6 9%
====== ======
The 86% growth in reported international soft lens revenue, from $55.9 million
to $103.9 million, was largely due to international sales of Biocompatibles
products of $41.7 million in the eight months for which Biocompatibles' revenue
has been consolidated with our results. Our $3.6 million initial stocking sales
to Rohto in 2001 lowered the adjusted international market percentage growth in
the period to 11% from 16%.
30 - The Cooper Companies, Inc. and Subsidiaries
Reported soft lens revenue in the United States, up 21%, included $14.2 million
of Biocompatibles revenue. On an adjusted basis, U.S. soft lens revenue grew
10%, due primarily to increased sales in toric, cosmetic and other specialty
lenses.
Outlook
We believe that CVI will continue to compete successfully in the worldwide
contact lens market, with its DPR toric line, aspheric products and newer
specialty products including color lenses (including both those that change and
those that accentuate the eye's natural color) and our newly introduced
multifocal lenses. Market demographics are favorable, as the teenaged
population, the age when most contact lens wear begins, is projected to grow
considerably in the United States and European markets over the next two
decades.
CVI New Products and Markets
CVI expects to continue to expand its product lines and broaden its geographic
presence:
o Expanded United States distribution of Proclear Compatibles Toric lenses,
currently in broad distribution overseas, beginning in January 2003.
o Enhancement Colors, a new line of disposable cosmetic products that
accentuates the natural color of the eye, is scheduled for launch in the
United States in February 2003 and in markets outside the U.S. later in the
year. These products complement our line of opaque lenses that change the
appearance of the color of the eyes.
o CVI's line of two-week replacement lenses will be launched in Japan in
February of 2003 through Rohto, CVI's Japanese marketing partner.
o The launch of Frequency Multifocal in markets outside the United States is
scheduled for the third quarter of fiscal 2003.
o A global launch of Proclear Aspheric is expected in the third quarter of
fiscal 2003. Also, the worldwide introduction of Proclear Multifocal lenses
is scheduled for 2004.
CSI Revenue
CSI's revenue grew 22% in fiscal 2002. About 8% of this was generated by
internal or organic growth, with the rest from acquisitions completed in the
last two fiscal years. Women's healthcare products used primarily by
obstetricians and gynecologists account for about 90% of CSI's revenue. The
balance represents sales of medical devices outside of women's healthcare where
CSI does not actively compete. These sales are excluded when calculating CSI's
organic growth. Because CSI's acquisitions have been accounted for as purchases,
results of operations of the acquired companies are included in our consolidated
results beginning on the date of acquisition. Acquisitions completed in fiscal
2002 or late in fiscal 2001 are discussed below. Acquisitions completed in
fiscal 2001 or late in fiscal 2000 are discussed under "2001 Compared with 2000"
in the "CSI Revenue" section.
In May 2002, CSI acquired privately held Ackrad Laboratories, Inc. ("Ackrad"), a
developer and manufacturer of disposable medical devices used primarily to
assess infertility and other gynecologic disorders.
Ackrad's principal product, accounting for about 65 percent of its revenue, is
the H/S Elliptosphere Catheter, used in the noninvasive assessment of the female
reproductive anatomy, primarily for fertility studies, and also to assess
abnormal uterine bleeding and pelvic pain.
31 - The Cooper Companies, Inc. and Subsidiaries
In April 2002, CSI acquired the assets of the bone densitometry business of
Norland Medical Systems ("Norland"). Norland's densitometry products are used in
the evaluation of osteoporosis. CSI had been a distributor of these products
since November 2000. The Norland business offers both peripheral and central
bone density measurement systems.
In October 2002, CSI acquired Sage BioPharma, Inc., ("Sage") a developer and
manufacturer of products used in assisted reproductive therapy.
Demographics
Favorable demographic trends also drive CSI's business. The women of the
"baby-boomer" generation are reaching the age when gynecological procedures are
performed most frequently; and CSI has, through both acquisition and internal
development, built an extensive product line to diagnose and treat these
patients.
Outlook
We anticipate that CSI will continue to consolidate the women's healthcare
market and complete one or two acquisitions each year, with its revenue reaching
an annual run rate of $100 million by the end of 2003, with operating margins
approaching 25%.
2001 COMPARED WITH 2000
CVI Revenue
CVI's worldwide core business, all revenue other than sales to other contact
lens suppliers ("OEM" sales), grew 15% in fiscal 2001:
($ in millions) 2001 % Total 2000 % Total % Growth
- --------------- ------ ------- ------ ------- --------
United States $110.9 63% $100.8 65% 10%
International 62.3 35% 49.6 32% 25%
------ --- ------ ---
Core business 173.2 98% 150.4 97% 15%
OEM 2.9 2% 4.4 3% (34%)
------ --- ------ ---
Total $176.1 100% $154.8 100% 14%
====== === ====== ===
During 2001, the British pound, the Euro and the Canadian dollar all weakened
against the U.S. dollar. In constant currency, our worldwide core business grew
17% and our international core revenue grew 30%. Strong results in Europe, where
revenue increased 32%, drove international growth.
DPR Lenses
Worldwide sales of all DPR lenses, both toric and spherical, accounted for 80%
of CVI's 2001 revenue. Sales of these products grew 16% in the United States and
21% worldwide.
Toric Lenses
Toric lenses are CVI's largest product line, representing about 45% of its
worldwide 2001 revenue. Total sales of toric lenses grew 13% in fiscal 2001. The
largest segment of the toric market is DPR torics, where CVI's revenue increased
23% worldwide.
32 - The Cooper Companies, Inc. and Subsidiaries
New Products
During 2001, CVI introduced three new specialty lens products:
o Frequency Multifocal, a multifocal lens designed for monthly replacement,
which corrects presbyopia, an age-related vision defect.
o Ascend, an aspheric lens designed for monthly replacement for patients with
near and farsightedness. Ascend lenses are prescribed and billed by the
practitioner but shipped directly to the consumer to minimize delivery time
while enhancing practice revenue.
o Frequency 55 Toric XR, designed for monthly replacement by astigmatic
patients with complex vision issues.
OEM Business
After the acquisition of Aspect Vision Care in fiscal 1998, we de-emphasized OEM
sales, concentrating instead on branded products that generate higher margins.
OEM business generated 2% of total CVI revenue in 2001 and declined 34% from the
previous year.
CSI Revenue
CSI revenue grew 26% in fiscal 2001. Internal or organic growth generated about
10% of this growth, with the rest from acquisitions completed in the last two
fiscal years. Acquisitions completed in fiscal 2001 or late in fiscal 2000 are
discussed below.
In August 2001, CSI acquired Medscand Medical AB and Medscand (USA), Inc.,
collectively "Medscand," which develops, manufactures and markets specimen
collection devices used with products that help diagnose cervical cancer.
Medscand revenue in 2000 was about $7 million.
In April 2001, CSI acquired the LuMax System from MedAmicus, Inc. with revenue
of about $4 million in 2000. The LuMax System helps diagnose the cause of female
incontinence, the accidental loss of urine resulting in a medical or hygienic
problem. It uses patented fiber optic transducer technology to measure and
monitor the physiological factors associated with female urinary function.
In October 2000, CSI acquired MedaSonics, Inc., including its line of hand-held
and compact Doppler ultrasound systems used in obstetrics and gynecology as well
as in cardiology and other medical specialties. The Doppler line of products
revenue was about $4 million in 1999.
Cost of Sales/Gross Profit
Gross Profit % of Net Sales 2002 2001 2000
- --------------------------- ---- ---- ----
CVI 67% 69% 70%
-- -- --
CSI 51% 55% 55%
-- -- --
Consolidated 63% 65% 66%
-- -- --
CVI's gross margin decreased 2 percent from fiscal 2001, primarily due to the
acquisition of Biocompatibles in February, whose more mature product line
generates lower margins. Their newer line, featuring phosphorylcholine
technology, is growing and provides margins more in line with CVI's other
specialty products. Going forward, we expect that the continuing shift in
revenue to phosphorylcholine lenses away from the older line, combined with
ongoing manufacturing efficiencies, will result in improved margins.
33 - The Cooper Companies, Inc. and Subsidiaries
For fiscal 2003, we anticipate that CVI's gross margins will remain about the
same as sales in lower-margin international markets expand, including sales to
distributors such as Rohto in Japan, and are offset by increased margins from
improved manufacturing efficiencies at both CVI and Biocompatibles.
Because we manufacture a significant amount of our inventory in England, CVI's
gross margins tend to decrease when the British pound strengthens against the
U.S. dollar and tend to improve when the pound weakens.
CSI's gross margin was 51% of sales in 2002, down from 55% in 2001 and 2000.
During the third quarter of 2002, CSI phased out the Cerveillance colposcopy
system, which captures and stores digital images of the cervix, and recorded a
charge against cost of sales (primarily write down of inventory distribution
rights and prepaid royalties) of about $2 million.
Cerveillance is being phased out because the Leisegang Prism system, with its
superior optics, acquired with the purchase of Leisegang Medical Inc. in 2000,
is known as the world's finest colposcopy equipment and is favored by customers.
CSI's gross margin from recurring activities (excluding the charge described
above) was 54% for fiscal 2002, down from 55% in 2001, primarily because of the
lower margins of certain products acquired while CSI executed its strategy to
consolidate the women's healthcare market.
For fiscal 2003, we expect that CSI gross margins from recurring activities will
not change significantly. We expect that the integration of recent acquisitions,
which will tend to increase margins, will be offset by future acquisitions and
other alliances that may initially tend to reduce margins.
Selling, General and Administrative Expense ("SGA")
(In millions) 2002 2001 2000
- --------------------------------------------------- ------ ----- -----
CVI $ 98.9 $65.1 $56.6
CSI 20.3 18.0 16.0
Headquarters 7.5 6.7 6.7
------ ----- -----
$126.7 $89.8 $79.3
====== ===== =====
Consolidated SGA increased by 41% in 2002 and 13% in 2001. As a percentage of
net sales, consolidated SGA was 40%, 38% and 40% in fiscal 2002, 2001 and 2000,
respectively.
CVI's SGA increased 52% in 2002 and 15% in 2001. The increase in 2002 resulted
primarily from the acquisition of Biocompatibles, including certain additional
costs incurred during the integration period ("integration costs") of about $1.7
million for fiscal 2002. We expect SGA as a percentage of revenue to improve as
Biocompatibles is integrated. In addition, selling, promotion and distribution
costs to introduce new products increased in 2002 and 2001. As a percentage of
net sales, SGA at CVI was 41% in 2002 and 37% in 2001 and 2000.
At CSI, SGA increased 13% in 2002, significantly below the 22% sales growth.
Reported SGA in fiscal 2001 includes about $800,000 of one-time costs for
facility relocation and acquisition integration. Excluding these charges from
2001 SGA, the 2002 increase was 19%, closer to sales growth.
Headquarters' SGA decreased to 2.4% of consolidated revenue from 2.9% in 2001
and 3.3% in 2000. Absent material expenditures resulting from the Sarbanes-Oxley
Act and from potential additional regulations from the Securities and Exchange
Commission, we anticipate that Headquarters' SGA will continue to grow slower
than consolidated revenue.
34 - The Cooper Companies, Inc. and Subsidiaries
Research and Development Expense
Research and development expense was 1% of net sales in fiscal 2002, 2% in
fiscal 2001 and 1% in 2000: $4.3 million in 2002, $3.7 million in 2001 and $2.7
million in 2000.
In 2002, we initiated development projects for new and improved contact lens
products. During the 2003 to 2005 period, CVI plans to invest in two new
research programs: the development of an extended wear contact lens and an
improved contact lens technology. We expect that research and development
expenses will increase by about $1.5 million to $2 million in 2003. Most of our
R&D expense, other than the two new programs, is for clinical and regulatory and
other development activities rather than basic research.
Amortization of Intangibles
Amortization of intangibles was $1.5 million in 2002, $5.2 million in 2001 and
$4.2 million in 2000. Amortization expense decreased in fiscal 2002, primarily
because following our adoption of Statement of Financial Accounting Standards
("SFAS") 142, we no longer amortize goodwill. Goodwill amortization reduced
operating income by $4.1 million in 2001 and $3 million in 2000 (see Note 3).
The increase in 2001 reflects the effect of acquisition activity during the
period.
Operating Income
Operating income grew $20.1 million or 43% between 2000 and 2002:
Years Ended October 31,
(In millions) 2002 2001 2000
- ----------------------------------------------------- ----- ----- -----
CVI $60.4 $51.4 $47.3
CSI 14.1 10.1 6.3
Headquarters (7.5) (6.7) (6.7)
----- ----- -----
$67.0 $54.8 $46.9
----- ----- -----
Percent growth 22% 17%
===== =====
Settlement of Disputes, Net
In 2000, we recorded a charge to income of $653,000 to settle a dispute with a
German distributor, including the write-off of a related investment in a joint
venture.
Other Income, Net
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------------------------------------- ------ ------ -----
Interest income $ 179 $ 443 $ 499
Gain on sale of Quidel stock 1,168 -- --
Gain on Litmus/Quidel transaction 2,075 719 --
Foreign exchange gain (loss) 1,774 34 (256)
Gain on swap contract -- -- 240
Other (124) (88) 172
------ ------ -----
$5,072 $1,108 $ 655
====== ====== =====
35 - The Cooper Companies, Inc. and Subsidiaries
Gain on Sale of Quidel Stock
In fiscal 2002, we sold 592,000 shares of Quidel stock, and realized a gain of
approximately $1.2 million.
Gain on Litmus/Quidel Transaction
In the first quarter of 2001, Quidel Corporation ("Quidel") acquired Litmus
Concepts, Inc. ("Litmus") through an exchange of common stock. Cooper held a
preferred equity position in Litmus, which equated to approximately a 10 percent
ownership. As a result of this transaction, we received 1,138,725 shares of
Quidel's common stock, and at that time, we recorded a gain of $719,000, as the
market value of the Quidel shares received exceeded the carrying value of our
investment in Litmus. In the third quarter of 2002, we received an additional
334,727 shares of Quidel that were held in escrow and recorded a gain of $2.1
million, based on the fair market value of Quidel shares on the day we received
them.
Foreign Exchange
In conjunction with the closing of our acquisition of Biocompatibles and
providing additional capitalization for international operations, we provided
about $21 million in pounds sterling to a U.K. affiliate to settle a short-term
financing. While the loans were outstanding, the pound strengthened against the
dollar, and a net gain of about $1.5 million resulted when the loan was repaid.
$300,000 of additional gains resulted from currency exposures that were acquired
and not hedged. Our policy continues to be to hedge foreign exchange exposure
whenever possible. As such, we do not expect large gains or losses in the
future.
Gain on Swap Contract
In 2000, we repaid the Midland Bank loan and cancelled an interest rate swap,
realizing a gain of $240,000.
Interest Expense
Interest expense was $6.9 million in 2002, $3.7 million in 2001 and $4.7 million
in fiscal 2000. The increase in 2002 interest expense was driven by higher debt
levels needed for acquisitions, partially offset by lower interest rates. The
decrease in 2001 generally reflects lower interest rates and reduced average
debt in 2001.
Provision for Income Taxes
Our effective tax rate ("ETR") - provision for income taxes as a percent of
income before income taxes - for fiscal 2002 was 25%, down from fiscal 2001's
ETR of 29%. The reduction of our ETR resulted from a higher percent of our
income coming from our international operations (including the international
operations of Biocompatibles). Assuming no major acquisitions, we expect our ETR
to remain at 25% in fiscal 2003.
With our anticipated faster growth outside the U.S. and a favorable mix of
products manufactured outside the U.S., Cooper now expects its U.S. net
operating loss carry-forward ("NOLs") in the U.S. to last through 2006.
We implemented a global tax plan in fiscal 1999 to minimize both the taxes
reported in our statement of income and the actual taxes we will have to pay
once we use all the benefits of our NOLs. The global tax plan consisted of a
restructuring of the legal ownership structure for the CooperVision foreign
sales and manufacturing subsidiaries.
36 - The Cooper Companies, Inc. and Susidiaries
The stock of those subsidiaries is now owned by a single foreign holding
company, which centrally directs much of the activities of those subsidiaries.
The foreign holding company has applied for and received the benefits of a
reduced tax rate under a special tax regime available in its country of
domicile. Assuming no other major acquisitions or large stock issuance, we
currently expect that this plan will extend the cash flow benefits of the
existing NOLs through 2006, and that actual cash payments of taxes will average
less than 5% of pretax profits over this period. After 2006, actual cash
payments of taxes are expected to average less than 20% of pretax profits.
CAPITAL RESOURCES & LIQUIDITY
Year 2002 Highlights
o Operating cash flow $55.9 million vs. $25.6 million in 2001.
o Closed four acquisitions and made contractual payments for prior
acquisitions and paid other acquisition costs totaling $136.1 million.
o Expenditures for purchases of property, plant and equipment $23.4 million
vs. $16.8 million in 2001.
o Increased credit facility with KeyBank from $75 million to $225 million,
retaining favorable interest rates.
Comparative Statistics:
October 31,
(Dollars in millions, except per share amounts) 2002 2001
- ----------------------------------------------- ------- --------
Cash and cash equivalents $ 10.3 $ 12.9
Total assets $ 571.1 $ 396.8
Working capital $ 72.2 $ 87.2
Total debt $ 163.7 $ 68.8
Stockholders' equity $ 311.4 $ 256.3
Ratio of debt to equity 0.53:1 0.27:1
Debt as a percentage of total capitalization 34% 21%
Operating Cash Flows
Our major source of liquidity continues to be cash flow from operating
activities. Operating cash flow for fiscal 2002 was $55.9 million vs. $25.6
million in 2001. Cooper continued to improve its receivable collections
following difficulties experienced in late 2001 and early 2002 caused by the
installation of a new enterprise resource planning system at CVI. These problems
resulted in an unusually high level of Days of Sales Outstanding ("DSO's") at
the end of 2001 and the first quarter of 2002. At the end of the current year,
Cooper's DSO's were 71 days, an improvement of 17% from the 86 days reported at
the end of the first quarter. The improved collections resulted in cash outflow
being reduced to $1.4 million this year, vs. $21 million of cash used in fiscal
2001. Looking forward, we expect that DSO's will remain in the high 60's to low
70's range, although continued international expansion could tend to increase
DSO's moderately.
37 - The Cooper Companies, Inc. and Susidiaries
Major uses of cash for operating activities included payments of $4 million on a
previously accrued dispute settlement with Medical Engineering Corporation, $2.6
million to fund entitlements under Cooper's bonus plans in the first quarter and
$8.8 million in interest payments and payments for costs incurred to obtain our
new $225 million credit facility.
Investing Cash Flows
The cash outflow of $155.1 million from investing activities was driven by the
acquisition of Biocompatibles and other businesses totaling $136.1 million and
capital expenditures of $23.4 million. The cash outflow was partially offset by
$4.4 million of cash received from the sale of Quidel shares.
Financing Cash Flows
Financing activities provided $96.3 million of cash, required primarily to fund
acquisitions. Most of this cash was provided by our $225 million line of credit.
Also, $6.1 million was provided by stock option exercises. In addition to debt
repayments of $128.3 million (including net repayments of $4.2 million of
short-term borrowing), we disbursed $1.5 million for dividends on our common
stock.
Risk Management (see Note 7)
We are exposed to changes in foreign currency exchange rates, principally debt
denominated in pounds sterling and from overseas operations denominated in
foreign currencies. We have hedged most of the debt by entering into contracts
to buy sterling forward. We are also exposed to changes in interest rates, as
the interest rate on most of our debt varies with the London Interbank Offered
Rate ("LIBOR").
Outlook
We believe that cash and cash equivalents on hand of $10.3 million plus cash
from operating activities will fund future operations, capital expenditures,
cash dividends and smaller acquisitions. During the year, in order to afford
increased flexibility for larger potential transactions, we expanded our credit
facilities with KeyBank as agent from $75 million to $225 million (see Note 6).
Funds will be used, as required, to fund acquisitions and potentially repay debt
carrying higher interest rates. At October 31, 2002, we had $68.5 million
available under the KeyBank line of credit.
Inflation and Changing Prices
Inflation has not had any appreciable effect on our operations in the last three
years.
New Accounting Pronouncements (See Note 1)
Estimates and Critical Accounting Policies (See Note 1)
38 - The Cooper Companies, Inc. and Susidiaries
Forward-Looking Statements
Some of the information included in this annual report contains "forward-looking
statements" as defined by the Private Securities Litigation Reform Act of 1995.
The forward-looking statements include certain statements pertaining to our
capital resources, performance and results of operations. In addition, all
statements regarding anticipated growth in our revenue, anticipated market
conditions and results of operations are forward-looking statements. To identify
forward-looking statements look for words like "believes," "expects," "may,"
"will," "should," "seeks," "intends," "plans," "estimates" or "anticipates" and
similar words or phrases. Discussions of strategy, plans or intentions often
contain forward-looking statements. These, and all forward-looking statements,
necessarily depend on assumptions, data or methods that may be incorrect or
imprecise.
Events, among others, that could cause actual results and future actions to
differ materially from those described by or contemplated in forward-looking
statements include major changes in business conditions, a major disruption in
the operations of our manufacturing facilities, new competitors or technologies,
significant delays in new product introductions, the impact of an undetected
virus on our computer systems, acquisition integration delays or costs,
increases in interest rates, foreign currency exchange exposure, investments in
research and development and other start-up projects, dilution to earnings per
share from acquisitions or issuing stock, regulatory issues, changes in tax
laws, changes in geographical profit mix effecting tax rates, significant
environmental cleanup costs above those already accrued, litigation costs
including any related settlements or judgments, cost of business divestitures,
the requirement to provide for a significant liability or to write off a
significant asset, changes in accounting principles or estimates, and other
factors described in our Securities and Exchange Commission filings, including
the "Business" section in our Annual Report on Form 10-K for the year ended
October 31, 2002. We caution investors that forward-looking statements reflect
our analysis only on their stated date. We disclaim any intent to update them
except as required by law.
39 - The Cooper Companies, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Stockholders
The Cooper Companies, Inc:
We have audited the accompanying consolidated balance sheets of The Cooper
Companies, Inc. and subsidiaries as of October 31, 2002 and 2001, and the
related consolidated statements of income, comprehensive income and cash flows
for each of the years in the three-year period ended October 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Cooper
Companies, Inc. and subsidiaries as of October 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended October 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
November 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
KPMG LLP
San Francisco, California
December 11, 2002
40 - The Cooper Companies, Inc. and Subsidiaries
Management's Statement Regarding Financial Reporting
We prepared the financial statements in this annual report according to
accounting principles generally accepted in the United States of America, and we
are responsible for them. They include estimates based on our informed judgment.
Our accounting systems include controls to reasonably assure the safeguarding of
Cooper's assets and the production of financial statements that conform to
accounting principles generally accepted in the United States of America. We
supplement these by hiring and retaining qualified personnel and by providing
for appropriate separation of duties. Other financial information in this report
has been derived from the same books and records used to prepare our financial
statements and are subject to the same system of financial controls.
The Board of Directors, through its Audit and Finance Committee of three outside
directors, determines whether we fulfill our responsibilities to prepare
financial statements and maintain financial controls. This committee recommends
to the Board of Directors appointment of the Company's independent certified
public accountants, subject to ratification by the stockholders. It meets
regularly with management and the independent accountants. The independent
accountants have access to the committee without management present to discuss
auditing and financial reporting. Each committee member is familiar with finance
and accounting, and the chair is a financial executive.
KPMG LLP has been the Company's independent certified public accountant since
1980, when the Company incorporated. KPMG provides an objective, independent
review of the fairness of reported operating results and financial position.
A. Thomas Bender Robert S. Weiss
A. Thomas Bender Robert S. Weiss
Chairman of the Board, Executive Vice President
President and Chief Executive Officer and Chief Financial Officer
41 - The Cooper Companies, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended October 31,
(In thousands, except per share amounts) 2002 2001 2000
-------- -------- --------
Net sales $315,306 $234,572 $201,217
Cost of sales 115,813 81,204 68,100
-------- -------- --------
Gross profit 199,493 153,368 133,117
Selling, general and administrative expense 126,730 89,770 79,324
Research and development expense 4,315 3,658 2,711
Amortization of intangibles 1,477 5,182 4,213
-------- -------- --------
Operating income 66,971 54,758 46,869
Other income, net 5,072 1,108 655
Interest expense 6,874 3,738 4,744
Settlement of disputes, net -- -- (653)
-------- -------- --------
Income before income taxes and cumulative effect of change
in accounting principle 65,169 52,128 42,127
Provision for income taxes 16,294 14,992 12,727
-------- -------- --------
Income before cumulative effect of change in accounting
principle 48,875 37,136 29,400
Cumulative effect of change in accounting principle, net of
tax benefit of $218 -- -- (432)
-------- -------- --------
Net income $ 48,875 $ 37,136 $ 28,968
======== ======== ========
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $ 1.60 $ 1.25 $ 1.04
Cumulative effect of change in accounting principle -- -- (0.02)
-------- -------- --------
Basic earnings per share $ 1.60 $ 1.25 $ 1.02
======== ======== ========
Diluted earnings per share:
Income before cumulative effect of change in accounting
principle $ 1.57 $ 1.22 $ 1.01
Cumulative effect of change in accounting principle -- -- (0.01)
-------- -------- --------
Diluted earnings per share $ 1.57 $ 1.22 $ 1.00
======== ======== ========
Number of shares used to compute earnings per share:
Basic 30,558 29,673 28,376
======== ======== ========
Diluted 31,189 30,491 29,019
======== ======== ========
See accompanying notes to consolidated financial statements.
42 - The Cooper Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
October 31,
(In thousands) 2002 2001
- -------------- -------- --------
Assets
Current assets:
Cash and cash equivalents $ 10,255 $ 12,928
Accounts receivable, less allowances of $3,883 in 2002 and
$1,966 in 2001 74,545 55,318
Inventories 76,279 51,153
Deferred tax assets 17,781 17,308
Marketable securities 2,750 7,982
Prepaid expenses and other current assets 17,300 10,516
-------- --------
Total current assets 198,910 155,205
-------- --------
Property, plant and equipment, at cost 150,785 85,322
Less accumulated depreciation and amortization 62,841 24,294
-------- --------
87,944 61,028
-------- --------
Goodwill 238,966 131,732
Other intangibles 14,651 13,890
Deferred tax assets 26,806 31,246
Other assets 3,838 3,748
-------- --------
$571,115 $396,849
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt $ 36,333 $ 8,249
Accounts payable 15,212 11,149
Employee compensation and benefits 13,415 6,609
Accrued acquisition costs 24,773 16,378
Accrued income taxes 12,261 7,688
Other accrued liabilities 24,687 17,900
-------- --------
Total current liabilities 126,681 67,973
-------- --------
Long-term debt 127,318 60,553
Other liabilities 5,674 12,039
-------- --------
Total liabilities 259,673 140,565
-------- --------
Commitments and contingencies (see Note 11)
Stockholders' equity:
Preferred stock, 10 cents par value, shares authorized:
1,000; zero shares issued or outstanding
Common stock, 10 cents par value, shares authorized: -- --
40,000; issued: 31,525 and 31,095 at October 31, 2002
and 2001, respectively 3,153 3,110
Additional paid-in capital 285,619 276,937
Accumulated other comprehensive loss (4,396) (3,305)
Unearned compensation (78) (145)
Retained earnings (deficit) 37,236 (10,112)
Treasury stock at cost: 658 and 665 shares at October 31,
2002 and 2001, respectively (10,092) (10,201)
-------- --------
Stockholders' equity 311,442 256,284
-------- --------
$571,115 $396,849
======== ========
See accompanying notes to consolidated financial statements.
43 - The Cooper Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------- --------- -------- --------
Cash flows from operating activities:
Net income $ 48,875 $ 37,136 $ 28,968
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes 11,736 12,895 10,894
Depreciation expense 9,892 5,806 4,521
Provision for doubtful accounts 944 251 426
Amortization expense 1,477 5,182 4,213
Change in operating assets and liabilities excluding effects
from acquisitions:
Receivables (1,377) (20,982) (4,314)
Inventories (8,111) (11,581) (2,150)
Other assets (10,128) (1,721) (471)
Accounts payable (1,377) 2,499 1,339
Accrued liabilities 3,821 (566) 3,644
Income taxes payable 4,195 200 (3,042)
Other long-term liabilities (4,000) (3,500) (3,000)
--------- -------- --------
Cash provided by operating activities 55,947 25,619 41,028
--------- -------- --------
Cash flows from investing activities:
Acquisitions of assets and businesses (136,138) (48,217) (24,444)
Purchases of property, plant and equipment (23,434) (16,757) (14,665)
Sale of marketable securities 4,382 -- --
Disposition costs paid -- (234) (1,455)
Other 97 -- --
--------- -------- --------
Cash used by investing activities (155,093) (65,208) (40,564)
--------- -------- --------
See accompanying notes to consolidated financial statements.
44 - The Cooper Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Concluded
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------- --------- -------- --------
Cash flows from financing activities:
Proceeds from long-term line of credit $ 219,978 $ 32,839 $ 23,658
Repayment of long-term line of credit (117,326) (11,000) (16,500)
Principal payments on long-term obligations (6,686) (2,082) (19,881)
Net borrowings (repayments) under short-term agreements (4,239) 355 3,566
Exercise of stock options 6,125 18,912 3,078
Dividends on common stock (1,527) (1,038) (1,134)
--------- -------- --------
Cash provided (used) by financing activities 96,325 37,986 (7,213)
--------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 148 (77) 435
Net decrease in cash and cash equivalents (2,673) (1,680) (6,314)
Cash and cash equivalents at beginning of year 12,928 14,608 20,922
--------- -------- --------
Cash and cash equivalents at end of year $ 10,255 $ 12,928 $ 14,608
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amounts capitalized) $ 8,787 $ 3,179 $ 4,130
========= ======== ========
Income taxes $ 1,311 $ 1,534 $ 4,480
========= ======== ========
Supplemental disclosure of noncash investing and financing
activities:
Issuance of stock for acquisitions 109 302 6,192
See accompanying notes to consolidated financial statements.
45 - The Cooper Companies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------- ------- ------- -------
Net income $48,875 $37,136 $28,968
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 2,135 (194) (2,963)
Change in value of derivative instruments 516 (741) --
Additional minimum pension liability (1,081) -- --
Unrealized gain on marketable securities:
Gain (loss) arising during period (1,918) 1,188 --
Reclassification adjustment (743) -- --
------- ------- -------
Unrealized gain (loss) on marketable securities (2,661) 1,188 --
------- ------- -------
Other comprehensive income (loss), net of tax (1,091) 253 (2,963)
------- ------- -------
Comprehensive income $47,784 $37,389 $26,005
======= ======= =======
Analysis of changes in accumulated other comprehensive loss:
Unrealized
Foreign Change in Gain
Currency Value of (loss) on Minimum
Translation Derivative Marketable Pension
Adjustment Instruments Securities Liability Total
----------- ----------- ---------- --------- -------
Balance October 31, 1999 $ (595) $ -- $ -- $ -- $ (595)
2000 activity (2,963) -- -- -- (2,963)
------- ----- ------- ------- -------
Balance October 31, 2000 (3,558) -- -- -- (3,558)
2001 activity (194) (741) 1,188 -- 253
------- ----- ------- ------- -------
Balance October 31, 2001 (3,752) (741) 1,188 -- (3,305)
2002 activity 2,135 516 (2,661) (1,081) (1,091)
------- ----- ------- ------- -------
Balance October 31, 2002 $(1,617) $(225) $(1,473) $(1,081) $(4,396)
======= ===== ======= ======= =======
See accompanying notes to consolidated financial statements.
46 - The Cooper Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
General
The Cooper Companies, Inc. ("Cooper" or "we" and similar pronouns), through its
two business units, develops, manufactures and markets healthcare products.
CooperVision ("CVI") markets a range of specialty contact lenses to correct
visual defects, including toric lenses to correct astigmatism, cosmetic lenses
to change or enhance the appearance of the eyes' natural color, multifocal
lenses designed to correct presbyopia, an age-related vision defect, and lenses
for patients with dry eyes. Its leading products are disposable and planned
replacement toric and spherical lenses. CooperSurgical ("CSI") markets medical
devices, diagnostic products and surgical instruments and accessories used
primarily by gynecologists and obstetricians.
Estimates and Critical Accounting Policies
Estimates and judgments made by management are an integral part of financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). Actual results may be different from
estimated amounts included in our financial statements. We believe that the
following critical accounting policies address the significant estimates
required of management when preparing our consolidated financial statements in
accordance with GAAP:
o Revenue recognition - In general, we recognize revenue upon shipment of our
products, when risk of ownership transfers to our customers. We record,
based on historical statistics, appropriate provisions for shipments to
customers who have the right of return.
o Adequacy of allowance for doubtful accounts - In accordance with GAAP, our
reported balance of accounts receivable, net of the allowance for doubtful
accounts, represents our estimate of the amount that will be realized in
cash. We review the adequacy of our allowance for doubtful accounts on an
ongoing basis, using historical payment trends and the age of the
receivables, complemented by individual knowledge of our customers. If and
when our analyses indicate, we increase or decrease our allowance
accordingly.
o Net realizable value of inventory - GAAP states that inventories be stated
at the lower of cost or market. On an ongoing basis, we review the carrying
value of our inventories, measuring number of months on hand and other
indications of salability and reduce the value of inventory if there are
indications that the carrying value is greater than market.
o Valuation of goodwill - We evaluate our goodwill balances and test them for
impairment in accordance with the provisions of Statements of Financial
Accounting Standards 141, "Business Combinations," and No. 142, "Goodwill
and Other Intangible Assets" (see Note 3).
o Income taxes - As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves estimating
our current tax exposures in each jurisdiction including the impact, if
any, of additional taxes resulting from tax examinations as well as making
judgments regarding the recoverability of deferred tax assets. To the
extent recovery of deferred tax assets is not likely based on our
estimation of future taxable income in each jurisdiction, a valuation
allowance is established. Tax exposures can involve complex issues and may
require an extended period to resolve. To determine the quarterly tax rate,
we are required to estimate full-year income and the related income tax
expense in each jurisdiction. The estimated effective tax rate is adjusted
for the tax related to significant unusual items. Changes in the geographic
mix or estimated level of annual pre-tax income can affect the overall
effective tax rate.
47 - The Cooper Companies, Inc. and Subsidiaries
Consolidation
The financial statements in this report include the accounts of all of Cooper's
consolidated entities. Intercompany transactions and balances are eliminated in
consolidation.
Foreign Currency Translation
Most of our operations outside of the United States have their reporting
currency as their functional currency. We translate these assets and liabilities
into U.S. dollars at year-end exchange rates. We translate income and expense
accounts at weighted average rates for each year. We record gains and losses
from the translation of financial statements in foreign currencies into U.S.
dollars in other comprehensive income. We record gains and losses from changes
in exchange rates on transactions denominated in currencies other than each
reporting location's functional currency in net income for each period. Net
foreign exchange gain (loss) included in the determination of net income for the
years ended October 31, 2002, 2001 and 2000 was $1.8 million, $34,000 and
($256,000), respectively.
Derivatives
We use derivatives to reduce market risks associated with changes in foreign
exchange and interest rates. We do not use derivatives for trading or
speculative purposes. We believe that the counter party with whom we enter into
forward exchange contracts and interest rate swap agreements is financially
sound and that the credit risk of these contracts is negligible.
Cash and Cash Equivalents
Cash and cash equivalents include commercial paper and other short-term income
producing securities with maturity dates of three months or less. These
investments are readily convertible to cash and are carried at cost, which
approximates market value.
Inventories, at the Lower of Average Cost or Market
October 31,
(In thousands) 2002 2001
- -------------- ------- -------
Raw materials $13,176 $ 9,889
Work-in-process 14,067 8,491
Finished goods 49,036 32,773
------- -------
$76,279 $51,153
======= =======
Property, Plant and Equipment, at Cost
October 31,
(In thousands) 2002 2001
- -------------- -------- -------
Land and improvements $ 1,545 $ 1,348
Buildings and improvements 26,418 13,441
Machinery and equipment 122,822 70,533
-------- -------
$150,785 $85,322
======== =======
We compute depreciation using the straight-line method in amounts sufficient to
write off depreciable assets over their estimated useful lives. We amortize
leasehold improvements over their estimated useful lives or the period of the
related lease, whichever is shorter. We depreciate buildings over 35 to 40 years
and machinery and equipment over 3 to 15 years.
48 - The Cooper Companies, Inc. and Subsidiaries
We expense costs for maintenance and repairs and capitalize major replacements,
renewals and betterments. We eliminate the cost and accumulated depreciation of
depreciable assets retired or otherwise disposed of from the asset and
accumulated depreciation accounts and reflect any gains or losses in operations
for the period.
Earnings Per Share ("EPS")
We determine basic EPS by using the weighted average number of shares
outstanding and then add outstanding dilutive stock options to determine diluted
EPS (see Note 4). On November 5, 2002, our Board of Directors authorized a
two-for-one stock split effected in the form of a stock dividend payable
November 22, 2002 to stockholders of record on November 14, 2002. As a result,
our consolidated financial statements reflect an increase in the number of
outstanding shares of our common stock and the transfer of 10 cents per share
par value of these additional shares from additional paid-in capital. We have
restated per share amounts to reflect the effect of the stock split.
Stock-Based Compensation
We account for stock-based compensation in accordance with Statement of
Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and reporting
standards for stock-based compensation, including employee stock option plans.
As allowed by SFAS 123, we continue to measure compensation expense under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations (see Note 9).
New Accounting Pronouncements
We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), on November 1, 2001. In accordance with
the requirements of SFAS 142, during the six months ended April 30, 2002, we:
o Evaluated the balance of goodwill and other intangible assets recorded on
our consolidated balance sheet as of October 31, 2001. Apart from goodwill,
no reclassifications were required to conform to the new criteria for
recognition.
o Reassessed the useful lives and residual values of all acquired intangible
assets. No amortization period adjustments were required, and we had no
intangible assets (other than goodwill) with indefinite useful lives.
o Determined that the reporting units to be used to test for goodwill
impairment in accordance with SFAS 142 were CVI and CSI.
o Determined that the fair value of each reporting unit exceeded its carrying
value. Accordingly, none of our goodwill was impaired, as of the date of
adoption of SFAS 142.
We performed our first annual evaluation of our goodwill effective May 1, 2002,
determining that the fair value of each reporting unit continued to exceed its
carrying value.
49 - The Cooper Companies, Inc. and Subsidiaries
Pro Forma Earnings Per Share ("EPS"):
In accordance with SFAS 142, we no longer amortize goodwill. Actual information
for fiscal 2002 and pro forma EPS for fiscal 2001 and 2000 are presented below:
Years Ended October 31,
(In thousands, except for earnings per share) 2002 2001 2000
- --------------------------------------------- ------- ------- -------
Net income $48,875 $37,136 $28,968
Add back goodwill amortization* -- 2,962 2,151
------- ------- -------
Pro forma net income $48,875 $40,098 $31,119
======= ======= =======
Pro forma earnings per share:
Basic $ 1.60 $ 1.35 $ 1.10
======= ======= =======
Diluted $ 1.57 $ 1.32 $ 1.07
======= ======= =======
Number of shares used to compute earnings per share:
Basic 30,568 29,673 28,376
======= ======= =======
Diluted 31,189 30,491 29,019
======= ======= =======
* Net of tax, assuming an effective tax rate of 27% for 2001 and 28.2% for
2000.
Note 2. Acquisitions
All acquisitions disclosed here have been accounted for as purchases.
Accordingly, results of operations for acquired companies are included in our
consolidated results of operations from the date of acquisition. All of these
acquisitions were made to further the business objectives of both CVI and CSI:
CVI: To continue to grow revenue at one and one-half to two times the rate of
the world market and to become the world's largest specialty contact lens
provider by mid-decade.
CSI: To identify and acquire selected smaller companies and product lines that
can improve its existing market position in women's healthcare or offer
opportunities in new clinical areas.
Acquisition of Biocompatibles
On February 28, 2002, Cooper acquired the contact lens business of
Biocompatibles International plc. ("Biocompatibles"), comprised of its wholly
owned subsidiaries Hydron Limited ("Hydron"), Biocompatibles Eye Care Inc. ("BE
Inc.") and Biocompatibles Canada Inc. ("BE Canada"). Under an International
Share Sale Agreement (the "Sale Agreement") dated January 15, 2002, among
Biocompatibles, Cooper and Cooper's wholly owned subsidiary Aspect Vision
Holdings Limited ("AVH"), Biocompatibles sold all of the outstanding shares of
Hydron to AVH and all of the outstanding shares of BE Inc. and BE Canada to
Cooper.
Biocompatibles had worldwide revenue in calendar 2001 of about $70 million,
about 70% outside of North America. Biocompatibles products are manufactured in
Norfolk, Virginia; Farnborough, United Kingdom; Adelaide, Australia and Madrid,
Spain.
50 - The Cooper Companies, Inc. and Subsidiaries
The aggregate consideration paid for the shares and to repay outstanding
indebtedness of the acquired business was 'L'70 million (about $99 million)
plus transaction costs. In the purchase price allocation, $81.5 million has been
ascribed to goodwill, which is not being amortized, and other intangible assets
of $1.1 million being amortized over 8 years. The purchase price allocation also
included $27.7 million of working capital, $23.3 million of accrued acquisition
costs and $11.7 million of property, plant and equipment. Cooper paid 'L'24
million (about $34 million) in cash at closing, from its line of credit, and
together with AVH issued promissory notes of 'L'44 million (about $62.2
million) to Biocompatibles, maturing on November 15, 2002 and bearing interest
at 5% per annum. The notes could be prepaid at any time at the option of Cooper
and AVH without penalty. We negotiated an expanded bank credit facility which
was completed May 1, 2002, and used part of the proceeds to repay the notes on
May 2, 2002.
The following unaudited pro forma consolidated condensed results of operations
for years ended October 31, 2002 and 2001 are presented as if Biocompatibles 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 Biocompatibles had been purchased during the periods presented
or of future results of the combined operations. Pro forma net income does not
include goodwill amortization expense in any period. We used a 27% effective tax
rate for all periods.
Years Ended October 31, 2002 2001
(In thousands, except for earnings per share) Pro Forma Pro Forma
- --------------------------------------------- --------- ---------
Net operating revenue $339,947 $305,194
======== ========
Net income $ 49,764 $ 35,089
======== ========
EPS:
Basic $ 1.63 $ 1.18
======== ========
Diluted $ 1.60 $ 1.15
======== ========
Shares outstanding for:
Basic 30,568 29,673
======== ========
Diluted 31,189 30,491
======== ========
Acquisition of Ackrad Laboratories
On May 21, 2002, CSI acquired privately held Ackrad Laboratories, Inc.,
("Ackrad") a developer and manufacturer of disposable medical devices used
primarily in the assessment of infertility and other gynecologic disorders.
We paid $12 million at closing for Ackrad. The Ackrad results have been included
in our financial statements from the date of acquisition. The purchase price
allocation ascribed $11.5 million to goodwill, $1.6 million to working capital
(including accrued acquisition costs of $2.4 million), $442,000 to net property,
plant and equipment and $847,000 to deferred tax assets.
Ackrad's principal product, which accounts for about 65 percent of its revenue,
is the H/S Elliptosphere Catheter, used in hysterosalpingography and saline
contrast hysterosonography, the noninvasive assessment of the female
reproductive anatomy. It is used primarily for fertility studies, and also to
assess abnormal uterine bleeding and pelvic pain.
51 - The Cooper Companies, Inc. and Subsidiaries
Acquisition of Norland Medical Systems
On April 15, 2002, CSI acquired the assets of the bone densitometry business of
Norland Medical Systems ("Norland"). Norland's densitometry products, which are
used in the evaluation of osteoporosis, had sales of $8.5 million (unaudited) in
its 2001 fiscal year. CSI plans to maintain operations at the Norland's Fort
Atkinson, Wisconsin, facility and will continue to use the Norland brand name.
CSI had been a distributor of these products since November 2000.
The Norland business offers both peripheral and central bone density measurement
systems.
Cooper paid $3.5 million at closing, net of $1.5 million held back against
representations and warranties, which expire January 31, 2004, and may pay
additional amounts not to exceed a maximum purchase price of $12 million based
on performance over three years. The initial purchase price allocation ascribed
$6.4 million to goodwill, $2.2 million to working capital (including accrued
acquisition costs of $1.6 million), $200,000 to net property, plant and
equipment and $600,000 to deferred tax assets.
Acquisition of Medscand Medical
On August 27, 2001, CSI purchased Medscand Medical AB, a Swedish corporation,
and Medscand (USA), Inc., an affiliated company (collectively, "Medscand").
Medscand develops, manufactures and markets specimen collection products that
are used to help physicians diagnose cervical disease.
Cooper paid $12 million for Medscand. In the purchase price allocation, $10.4
million was ascribed to goodwill, which is not being amortized, with other
intangible assets of $450,000 being amortized over 5-7 years. The purchase price
allocation included working capital of $1.5 million, plant, property and
equipment of $0.5 million and net acquisition accrual of $0.8 million.
Medscand markets its products to clinicians, clinics, hospitals, laboratories
and test manufacturers throughout the world. About 85 percent of Medscand's
revenue is generated in the United States. Its products are used in the top 25
cancer centers in the United States.
Acquisition of CL Tinters Oy
On May 29, 2001, Cooper's CVI unit completed the acquisition of privately held
CL-Tinters Oy ("CLT"), a leading manufacturer of cosmetic contact lenses, who
also applies the color tints to CVI's aspheric cosmetic contact lenses. The
total acquisition cost was about $27 million, including $14 million cash paid at
closing, future payments and other costs associated with the acquisition. The
purchase price allocation was established at $1 million for patents, and $23.2
million for goodwill and was being amortized over 40 years through the end of
fiscal 2001. The purchase price allocation included working capital of $1.6
million; property, plant and equipment of $2 million and $0.8 million of other
acquisition costs.
Acquisition of LuMax Product Line from MedAmicus
On April 25, 2001, CSI completed the purchase of the LuMax System from
MedAmicus, Inc. Cooper paid approximately $4 million in cash at closing, with
$700,000 due at a later date, for the LuMax System. Of the $4.7 million purchase
price, $3.6 million has been ascribed to goodwill and was being amortized over
20 years through the end of fiscal 2001.
Gynecologists purchase over 80 percent of LuMax Systems, with revenue split
about equally between monitors and disposable catheters.
52 - The Cooper Companies, Inc. and Subsidiaries
Acquisition of MedaSonics
On October 18, 2000, CSI acquired MedaSonics, Inc., including its line of
handheld and compact Doppler ultrasound systems used in obstetrics and
gynecology as well as in cardiology and other medical specialties.
We paid cash of $500,000 and issued 162,290 shares of our common stock, having a
market value of $5.6 million at the closing. An additional 19,721 shares were
paid subsequent to closing, and 7,117 shares were issued on the second
anniversary date of the acquisition.
Goodwill has been recorded at $5.4 million and was being amortized over 20 years
through the end of fiscal 2001.
Acquisition of Leisegang
On January 31, 2000, we acquired a group of women's healthcare products (the
"Leisegang Business") from NetOptix Corporation for approximately $10 million in
cash at closing, plus in May 2000, an additional $250,000. Before the
acquisition, the Leisegang Business had annual revenue (unaudited) of more than
$11 million from operations in the U.S., Germany and Canada.
The Leisegang Business consists of diagnostic and surgical instruments including
colposcopes, instruments to perform loop electrosurgical excision procedures,
hand-held gynecological instruments, disposable specula and cryosurgical
systems. Many of these products are disposable, including the Sani-Spec line of
plastic specula, its largest product group.
Goodwill has been recorded at $5.4 million and was being amortized over 20
years, through the end of fiscal 2001.
Acquisition of BEI
On December 8, 1999, we acquired a group of women's healthcare products from BEI
Medical Systems Company, Inc., including uterine manipulators and other products
for the gynecological surgery market, for approximately $10.3 million in cash.
Most of these products are disposable. Physicians use them in both their offices
and in hospitals.
Goodwill has been recorded at $8.4 million and was being amortized over 20 years
through the end of fiscal 2001.
Accrued Acquisition Costs
In conjunction with recording acquisitions, we accrue for the estimated costs of
severance, legal, consulting, due diligence, plant/office closure and deferred
acquisition payments. The chart below shows the balance at October 31, 2001 and
activity recorded in 2002.
53 - The Cooper Companies, Inc. and Subsidiaries
Balance Balance
Description 10/31/2001 Additions Payments Other 10/31/2002
- ----------- ---------- --------- -------- ----- ----------
Severance $ 200 $12,305 $ (3,540) $ -- $ 8,965
Legal & consulting 6,787 5,443 (8,748) 60 3,542
Plant shutdown 180 9,268 (1,641) -- 7,807
Hold back due 9,148 3,008 (6,323) -- 5,833
Other 63 1,156 (1,161) 68 126
------- ------- -------- ---- -------
Total $16,378 $31,180 $(21,413) $128 $26,273
======= ======= ======== ==== =======
Note 3. Intangible Assets
(In thousands) As of October 31, 2002 As of October 31, 2001
- -------------- ----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Other intangible assets:
Trademarks $ 578 $ 144 $ 578 $ 118
Patents 13,811 4,382 12,711 3,586
License and distribution rights 5,554 1,509 5,204 1,045
Other 778 35 150 5
------- ------ ------- ------
$20,721 $6,070 $18,643 $4,754
======= ====== ======= ======
Estimated annual amortization expense is about $1.8 million for each of the
years in the five-year period ending October 31, 2007.
(In thousands)
- --------------
Goodwill:
Balance as of November 1, 2001 $131,732
Net additions through October 31, 2002 104,480
Other adjustments* 2,754
--------
$238,966
========
* Primarily translation differences in goodwill denominated in foreign
currency.
54 - The Cooper Companies, Inc. and Subsidiaries
Note 4. Earnings Per Share
Years Ended October 31,
(In thousands, except per share amounts) 2002 2001 2000
- ---------------------------------------- ------- ------- -------
Income from continuing operations $48,875 $37,136 $29,400
Cumulative effect of change in accounting principle,
net of taxes of $218 -- -- (432)
======= ======= =======
Net income $48,875 $37,136 $28,968
======= ======= =======
Basic:
Weighted average common shares 30,568 29,673 28,376
======= ======= =======
Basic earnings per common share:
Continuing operations $ 1.60 $ 1.25 $ 1.04
Cumulative effect of change in accounting principle -- -- (0.02)
------- ------- -------
Basic earnings per share: $ 1.60 $ 1.25 $ 1.02
======= ======= =======
Diluted:
Weighted average common shares 30,568 29,673 28,376
Effect of dilutive stock options 621 818 643
------- ------- -------
Diluted weighted average common shares 31,189 30,491 29,019
======= ======= =======
Diluted earnings per share:
Continuing operations $ 1.57 $ 1.22 $ 1.01
Cumulative effect of change in accounting principle -- -- (0.01)
------- ------- -------
Diluted earnings per share: $ 1.57 $ 1.22 $ 1.00
======= ======= =======
We excluded the following options to purchase Cooper's common stock from the
computation of diluted EPS because their exercise prices were above the average
market price.
October 31, 2002 2001 2000
- ----------- ------------- ------------- ----------
Number of shares excluded 1,633,500 859,000 1,978,500
============= ============= ==========
Range of exercise prices $24.40-$31.11 $25.18-$31.11 $17-$31.11
============= ============= ==========
55 - The Cooper Companies, Inc. and Subsidiaries
Note 5. Income Taxes
The components of income from continuing operations before income taxes and
extraordinary items and the income tax provision (benefit) related to income
from all operations in the consolidated statements of income consists of:
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------- ------- ------- -------
Income from continuing operations before income taxes and
extraordinary items:
United States $33,512 $38,485 $35,844
Outside the United States 31,657 13,643 6,283
------- ------- -------
$65,169 $52,128 $42,127
======= ======= =======
Income tax provision (benefit) related to income from all
operations:
From continuing operations $16,294 $14,992 $12,727
From cumulative effect of a change in accounting principle -- -- (218)
From discontinued operations -- -- --
======= ======= =======
$16,294 $14,992 $12,509
======= ======= =======
The income tax provision (benefit) related to income from continuing operations
in the consolidated statements of income consists of:
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------- ------- ------- -------
Current
Federal $ -- $ 918 $ 1,508
State 990 (205) (2,474)
Foreign 3,568 1,384 2,799
------- ------- -------
4,558 2,097 1,833
------- ------- -------
Deferred
Federal 11,736 11,283 9,532
State -- 1,612 1,362
Foreign -- -- --
------- ------- -------
11,736 12,895 10,894
------- ------- -------
$16,294 $14,992 $12,727
======= ======= =======
56 - The Cooper Companies, Inc. and Subsidiaries
We reconcile the provision for income taxes attributable to income from
continuing operations and the amount computed by applying the statutory federal
income tax rate of 35% to income from continuing operations before income taxes
as follows:
Years Ended October 31,
(In thousands) 2002 2001 2000
- ----------------------- ------- ------- -------
Computed expected provision for taxes from
continuing operations $22,809 $18,245 $14,744
Increase (decrease) in taxes resulting from:
Income outside the United States subject to different tax rates (7,512) (2,626) (534)
Amortization of intangibles -- 412 426
Foreign source income subject to US tax 513 -- --
State taxes, net of federal income tax benefit 644 588 1,271
Reversal of prior years' estimated state tax liabilities
no longer required -- (1,026) (2,330)
Change in valuation allowance -- (948) (655)
Other, net (160) 347 (195)
------- ------- -------
Actual provision for income taxes $16,294 $14,992 $12,727
======= ======= =======
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are:
October 31,
(In thousands) 2002 2001
- -------------- ------- -------
Deferred tax assets:
Accounts receivable, principally due to allowances for
doubtful accounts $ 943 $ 478
Inventories 2,374 2,154
Litigation settlements 2,625 4,025
Accrued liabilities, reserves and compensation accruals 6,217 5,346
Unrealized loss on marketable securities 793 --
Net operating loss carryforwards 34,406 38,042
Capital loss carryforwards 2,617 2,617
Tax credit carryforwards 2,284 3,110
------- -------
Total gross deferred tax assets 52,259 55,772
Less valuation allowance (4,795) (5,540)
------- -------
Deferred tax assets 47,464 50,232
------- -------
Deferred tax liabilities:
Goodwill book/tax difference in net book value (919) --
Plant and equipment (1,958) (1,038)
Unrealized gain on marketable securities -- (640)
------- -------
Total gross deferred tax liabilities (2,877) (1,678)
------- -------
Net deferred tax assets $44,587 $48,554
======= =======
57 - The Cooper Companies, Inc. and Subsidiaries
Cooper has provided a valuation allowance on those deferred tax assets that it
believes will not more likely than not be realized. The net decrease in the
total valuation allowance for the years ended October 31, 2002, 2001 and 2000
was $745,000, $948,000 and $1.5 million, respectively.
The Company has not provided federal income tax on approximately $56.7 million
of undistributed earnings of its foreign subsidiaries since the Company intends
to rein- vest this amount outside the U.S. indefinitely.
At October 31, 2002, Cooper had net operating loss and tax credit carryforwards
for federal tax purposes that expire as follows:
Net Operating
Year of Expiration Losses Tax Credits
- ------------------ ------------- -----------
(In thousands)
2002 $ 1,066 $ 29
------- ------
2003 1,187 330
------- ------
2004 83 --
------- ------
2005 47 --
------- ------
2006 14,540 --
------- ------
2007 22,058 --
------- ------
2008 49,535 --
------- ------
2009 6,553 --
------- ------
2010 1,318 --
------- ------
2018 823 --
------- ------
2019 1,092 --
------- ------
Indefinite life -- 1,925
------- ------
$98,302 $2,284
======= ======
Note 6. Debt
October 31,
(In thousands) 2002 2001
- -------------- -------- --------
Short-term:
Notes payable to banks $ 2,519 $ 6,312
Current portion of long-term debt 33,814 1,937
-------- --------
$ 36,333 $ 8,249
======== ========
Long-term:
Aspect promissory notes $ 22,291 $ 20,714
KeyBank line of credit 132,310 28,955
County of Monroe Industrial
Development Agency ("COMIDA") Bond 1,899 2,175
Capitalized leases 4,471 5,338
Aspect bank loans -- 5,019
Other 161 289
-------- --------
161,132 62,490
Less current portion 33,814 1,937
-------- --------
$127,318 $ 60,553
======== ========
58 - The Cooper Companies, Inc. and Subsidiaries
Our long-term debt matures as follows over the next five years:
(In thousands) Long-Term Debt
- -------------- --------------
2003 $33,814
-------
2004 $21,000
-------
2005 $77,369
-------
2006 $19,105
-------
2007 $ 9,575
-------
KeyBank Line of Credit
On May 1, 2002, Cooper obtained a $225 million syndicated bank credit facility.
The facility consists of a $75 million five-year term loan with an interest only
payment in the first year then fully amortized in the next four years, and a
$150 million three- year revolving credit facility. KeyBank is the agent for the
eleven-bank syndication.
At closing, Cooper paid off $62 million under its existing line of credit and
'L'44 million ($62.2 million) in notes owed to Biocompatibles International
plc as a result of Cooper's purchase of Biocompatibles Eye Care, Inc., completed
on February 28, 2002. $21 million of the revolving credit facility was reserved
to retire loans due in December 2002 to note holders of Aspect Vision Care,
Ltd., a contact lens business that the Company purchased in December 1997
("Promissory notes - Aspect"). This restriction was removed when we repaid the
Aspect Note Holders in December 2002. Cooper plans to use the facility for
general corporate purposes, capital expenditures and acquisitions.
Interest rates under the new facility are based on the London Interbank Offered
Rate ("LIBOR") plus additional basis points determined by Cooper's ratio of debt
to its earnings before interest, taxes, depreciation and amortization (EBITDA.)
These range from 125 to 225 basis points for the term loan and from 100 to 200
basis points for the revolver. As of October 31, 2002 and January 1, 2003, the
additional basis points were 200 and 175, respectively, on the term loan and 175
and 150, respectively, on the revolver. At the Company's option, it can choose
to pay a base rate that is within a range above the prime rate.
The credit agreement:
o Limits Cooper's debt to a maximum of 50% of its total capitalization, which
is defined as the sum of total debt plus stockholders' equity.
o Limits cash dividends on our common stock to $1.25 million per fiscal
quarter.
o Requires that the ratio of EBITDA to fixed charges (as defined in the
agreement) to be at least 1.3 to 1.
o Requires that the ratio of total debt to pro forma EBITDA (as defined) be
no higher than 2.75 to 1 through January 30, 2003 and 2.5 to 1 thereafter.
At October 31, 2002, Cooper's debt was 34% of total capitalization, its ratio of
EBITDA to fixed charges (as defined) was 2.0 to 1 and its ratio of debt to pro
forma EBITDA was 1.88 to 1.
The $3 million cost of acquiring the new credit facility is carried in other
assets and amortized to interest expense over its life.
59 - The Cooper Companies, Inc. and Subsidiaries
At October 31, 2002, we had $68.5 million available under the KeyBank line of
credit.
(In millions)
- --------------
Amount of line $ 225.0
-------
Reserved for Aspect promissory notes* (21.0)
-------
Outstanding loans** (135.5)
-------
Available $ 68.5
-------
* Revolver funds were used to repay and restriction removed in December 2002.
** Includes $3.2 million in letters of credit backing other debt.
Aspect Promissory Notes
In 1997, we acquired Aspect Vision Care Ltd., and issued 'L'14.2 million of
promissory notes to the selling stockholders. The promissory notes bear interest
of 8% and were repaid December 2, 2002.
Aspect Bank Loans
These loans were paid off in the third quarter 2002 using our new line of
credit. The interest rates ranged between 4% and 4.6% for the period the loans
were outstanding.
Capitalized Leases
The obligation under capitalized leases at October 31, 2002, was $4.5 million.
The leases primarily relate to manufacturing equipment in the U.S. and the
United Kingdom and are secured by those assets. They carry interest rates from
7% to 9% and mature between 2002 and 2007.
COMIDA Bond
The COMIDA bond is a $3 million Industrial Revenue Bond ("IRB") to finance the
cost of plant expansion, building improvements and the purchase of equipment
related to CVI's Scottsville, New York, facility. The interest rate has been
effectively fixed at 4.88% through a rate swap transaction (see Note 7).
Principal is repaid quarterly, from July 1997 to October 2012. The IRB is
secured by substantially all of CVI's rights to the facility.
KeyBank issued a letter of credit to support certain obligations under the
COMIDA bond. CVI is obligated to repay KeyBank for draws under and expenses
incurred in connection with the letter of credit, under a reimbursement
agreement, which Cooper guarantees. The agreement contains customary provisions
and covenants, including certain required ratios and levels of net worth. CVI
and COMIDA have granted a mortgage lien on the building and real estate located
in Scottsville and a first lien security interest on the equipment purchased
under the bond proceeds to KeyBank to secure payment under the reimbursement
agreement.
Note 7. Financial Instruments
The fair values of our financial instruments, including cash and cash
equivalents, trade receivables, lines of credit and accounts payable,
approximated their carrying values as of October 31, 2002 and 2001 because of
the short maturity of these instruments. We believe that there are no
significant concentrations of credit risk in trade receivables.
60 - The Cooper Companies, Inc. and Subsidiaries
Marketable securities represent the fair value of Quidel Corporation common
stock available for sale at each year-end. We received the Quidel shares as a
result of a transaction involving Litmus Concepts, Inc., in the first quarter of
2001 and 334,727 shares in the third quarter 2002. We have sold shares of Quidel
stock from time to time.
The fair value of our other long-term debt approximated the carrying value at
October 31, 2002 and 2001 because we believe that we could obtain similar
financing with similar terms.
Derivatives
Foreign Exchange Instruments
Cooper enters into forward exchange contracts to hedge the currency exposure of
liabilities and firm commitments denominated in foreign currencies. As of
October 31, 2002, we had outstanding forward exchange contracts of $24.2 million
to purchase 'L'14.4 million, which were purchased in November 2002. We
obtained the fair value of the forward exchange contracts through KeyBank's
foreign exchange department. The fair value indicated that termination of the
forward exchange contracts at October 31, 2002 would have resulted in a loss of
$1.8 million. A liability has been accrued for this amount primarily in other
liabilities. As these contracts qualify as effective hedges, changes in fair
value during 2002 of $371,000 have been recorded as a component of other
comprehensive income ("OCI").
We also enter into forward exchange contracts to minimize the net currency
exposure of intercompany liabilities and commitments denominated in foreign
currencies. We record gains and losses on these forward contracts in our
results, and they offset the gains and losses from the remeasurement of our
intercompany accounts. At October 31, 2002, we had outstanding forward exchange
contracts against our intercompany accounts of $4.6 million to sell $7.4 million
Canadian dollars. We obtained the fair value of the forward exchange contracts
through KeyBank's Foreign Exchange department. The fair value indicated that
termination of these forward exchange contracts at October 31, 2002 would have
resulted in a loss of $30,000. As these contracts qualify as effective hedges,
the changes in fair value during 2002 of $54,000 have been recorded as a
component of OCI.
Interest Rate and Other Derivative Instruments
On a selective basis, Cooper enters into interest rate swap agreements to reduce
the potential negative impact of increases in interest rates on our outstanding
variable-rate debt under the National Westminster Bank and the IRB. We recognize
in our results of operations over the life of the contract, as interest expense,
the amortization of contract premiums incurred from buying interest rate swaps.
We record net payments or receipts resulting from these agreements as
adjustments to interest expense. The effect of interest rate instruments on our
results of operations in fiscal years ended October 31, 2002, 2001 and 2000 was
not significant. As of October 31, 2002, we had interest rate swap agreements
with notional amounts totaling $1.9 million that matures on January 1, 2012 and
'L'2.5 million that matures on April 1, 2003.
We obtained the fair value of the swap agreements through KeyBank's derivative
department. The fair value indicated that termination of the swap agreements at
October 31, 2002 would have resulted in a $232,000 loss. A liability for this
amount has been accrued in other noncurrent liabilities. As these swap
agreements qualify as effective hedges, changes in fair value during 2002 of
$91,000 have been recorded as a component of OCI.
61 - The Cooper Companies, Inc. and Subsidiaries
Note 8. Stockholders' Equity
Common Shares Retained
---------------------- Common Paid-In Earnings Treasury
(In thousands) Outstanding Treasury Stock Capital (Deficit) Stock
- -------------------------------- ----------- -------- ------ -------- --------- --------
Balance at October 31, 1999 14,058 917 $1,497 $251,345 $(74,044) $(14,060)
Effect of 100% stock dividend 14,059 -- 1,406 (1,406) -- --
------ ---- ------ -------- -------- --------
Balance at October 31, 1999 28,117 917 2,903 $249,939 $(74,044) $(14,060)
Exercise of stock options 427 (1) 44 3,018 -- 16
Treasury stock used for
acquisitions 373 (187) 19 3,307 -- 2,866
Restricted stock/stock
option amortization and
share issuance 4 -- -- 283 -- --
Dividends on common stock -- -- -- -- (1,134) --
Net income -- -- -- -- 28,968 --
------ ---- ------ -------- -------- --------
Balance at October 31, 2000 28,921 729 2,966 256,547 (46,210) (11,178)
Exercise of stock options 1,467 (44) 138 18,099 -- 675
Treasury stock used for
acquisitions 42 (20) 6 (38) -- 302
Restricted stock/stock option
amortization and share
issuance -- -- -- 251 -- --
Tax benefit from exercise of
stock options -- -- -- 2,078 -- --
Dividends on common stock -- -- -- -- (1,038) --
Net income -- -- -- -- 37,136 --
------ ---- ------ -------- -------- --------
Balance at October 31, 2001 30,430 665 3,110 276,937 (10,112) (10,201)
Exercise of stock options 421 -- 42 6,086 -- --
Treasury stock used for
acquisitions 14 (7) 1 (1) -- 109
Restricted stock/stock option
amortization and share
issuance 2 -- -- 47 -- --
Tax benefit from exercise of
stock options -- -- -- 2,553 -- --
Dividends on common stock -- -- -- -- (1,527) --
Other -- -- -- (3) -- --
Net income -- -- -- -- 48,875 --
------ ---- ------ -------- -------- --------
Balance at October 31, 2002 30,867 658 $3,153 $285,619 $ 37,236 $(10,092)
====== === ====== ======== ======== ========
62 - The Cooper Companies, Inc. and Subsidiaries
Cash Dividends
On an adjusted per share basis, Cooper paid quarterly dividends of 1 cent per
share beginning July 5, 1999 through January 5, 2001. In the first quarter of
fiscal 2001, Cooper increased its dividend and paid semiannual dividends of 2.5
cents per share beginning July 5, 2001. In November 2002, Cooper's Board of
Directors increased our annual dividend rate from 5 cents per share to 6 cents
per share, see Note 13, Subsequent Events, regarding cash dividend declared.
Treasury Stock
Purchase
(In thousands) Shares Price
- -------------- ------ --------
Balance at October 31, 1999 917 14,060
Reissued in fiscal 2000(3) (188) (2,882)
Reissued in fiscal 2001(2) (64) (977)
Reissued in fiscal 2002(1) (7) (109)
----- --------
658 $10,092
===== ========
(1) Issued 7,117 treasury shares related to the MedaSonics acquisition.
Treasury stock was credited for $109,000 and charged to the acquisition accrual
upon issuance of the treasury stock.
(2) Cooper issued 63,721 shares of treasury stock:
1) 19,721 treasury shares related to the MedaSonics acquisition.
2) 44,000 treasury shares upon the exercise of stock options.
Treasury stock was credited for $977,000 for the average cost of the treasury
stock, and $32,000 was charged to additional paid in capital.
(3) Cooper issued 187,876 shares of treasury stock:
1) 24,586 treasury shares related to a prior acquisition.
2) 162,290 treasury shares related to the MedaSonics acquisition.
3) 1,000 treasury shares upon the exercise of stock options.
Treasury stock was credited for $2.9 million for the average cost of the
treasury stock, crediting $3.3 million to additional paid in capital, receiving
$14,000 in cash, and charging $2.5 million to intangibles for the acquisition.
Stockholders' Rights Plan
Under our stockholder rights plan, each outstanding share of our common stock
carries one-half of one preferred share purchase right (a "Right"). The Rights
will become exercisable only under certain circumstances involving acquisition
of beneficial ownership of 20% or more of the our common stock by a person or
group (an "Acquiring Person") without the prior consent of Cooper's Board of
Directors. If a person or group becomes an Acquiring Person, each Right would
then entitle the holder (other than an Acquiring Person) to purchase, for the
then purchase price of the Right (currently $145, subject to adjustment), shares
of Cooper's common stock, or shares of common stock of any person into which we
are thereafter merged or to which 50% or more of our assets or earning power is
sold, with a market value of twice the purchase price. The Rights will expire in
October 2007 unless earlier exercised or redeemed. The Board of Directors may
redeem the Rights for $.01 per Right prior to any person or group becoming an
Acquiring Person.
63 - The Cooper Companies, Inc. and Subsidiaries
Note 9. Employee Stock Plans
At October 31, 2002, Cooper had two stock-based compensation plans:
2001 Long-Term Incentive Plans ("2001 LTIP")
We designed the 2001 LTIP to increase Cooper's stockholder value by attracting,
retaining and motivating key employees and consultants who directly influence
our profitability. Stockholders approved the 2001 LTIP in March 2001.
The 2001 LTIP authorized either a committee of three or more individuals not
eligible to participate in the 2001 LTIP or Cooper's Board of Directors to grant
to eligible individuals during a three-year period, stock options, stock
appreciation rights, restricted stock, deferred stock, stock purchase rights,
phantom stock units and long-term performance awards for up to 1 million shares
of common stock, subject to adjustment for future stock splits, stock dividends,
expirations, forfeitures and similar events. Options generally vest based on
Cooper's stock price, however, in some cases, both stock price and time are the
criteria. As of October 31, 2002, 101,000 shares remained available under the
2001 LTIP for future grants. No restricted shares have been granted under the
2001 LTIP. Approximately 6 million shares of restricted stock and stock options
were granted under a predecessor plan.
1996 Long-Term Incentive Plan for Non-Employee Directors ("1996 NEDRSP")
The 1996 NEDRSP provides for annual grants of restricted stock and options to
non-employee directors on November 15 of each fiscal year. Specifically, each
non-employee director will be awarded the right to purchase restricted stock
worth $7,500 (or $9,375 in the case of a Vice Chairman and Lead Director of the
Board who is a non-employee director) for $0.10 per share by January 15 of the
year following the date of the grant. Grants of restricted stock not exercised
by then will expire. The restrictions on the restricted stock will lapse when
the stock reaches certain target values or by the fifth anniversary of the date
of grants. Each non-employee director will also be awarded options to purchase
common stock. In addition, each non-employee director was granted an option to
purchase 30,000 shares of Cooper's common stock in fiscal 2002 and 2001 (or, in
the case of the Vice Chairman and Lead Director of the Board who was a
non-employee director, 32,500 shares). In fiscal 2000, each non-employee
director was granted an option to purchase 20,000 shares (or, in the case of the
Vice Chairman and Lead Director of the Board who was a non-employee director,
22,500 shares). 1,320,000 shares of Cooper's common stock had been reserved for
this, of which 800,000 shares are held in the treasury. As of October 31, 2002,
622,330 shares remained available under the 1996 NEDRSP for future grants.
Restricted shares of 1,924, 2,688 and 3,550 were granted under the 1996 NEDRSP
in fiscal 2002, 2001 and 2000, respectively. There were 182,500 restricted
shares with restrictions in place outstanding at October 31, 2002. The
weighted-average fair value of restricted stock issued in fiscal 2002 was $24.38
per share on grant-date. The 1996 NEDRSP was amended October 24, 2001,
increasing the shares available for the plan from 520,000 shares to 1,320,000
and extending the expiration date to November 16, 2005. The amendment also
increased the options to be granted to each non-employee director from 20,000
shares to 30,000 shares (or, in the case of a non-employee Vice Chairman and
Lead Director of the Board, from 22,500 to 32,500).
64 - The Cooper Companies, Inc. and Subsidiaries
Common stock activity under these plans was:
2002 2001 2000
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Years Ended October 31, Options Price Options Price Options Price
- ------------------------------- --------- -------- ---------- -------- --------- --------
Outstanding at beginning
of year 2,871,942 $19.11 3,683,664 $15.79 3,593,556 $14.70
Granted 938,500 25.60 679,500 23.66 591,500 16.56
Exercised (420,666) 14.58 (1,467,222) 12.89 (427,392) 7.20
Forfeited (11,000) 24.72 (24,000) 19.51 (74,000) 18.24
--------- ------ ---------- ------ --------- ------
Outstanding at end of year 3,378,776 $21.46 2,871,942 $19.11 3,683,664 $15.79
========= ====== ========= ====== ========= ======
Options exercisable at year end 1,588,944 $17.10 1,792,610 $15.92 2,444,664 $13.17
========= ====== ========= ====== ========= ======
Weighted average fair value
of options granted during
the year $10.56 $ 8.62 $ 6.45
====== ====== ======
The options outstanding at October 31, 2002 for the stock option plans are:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Exercise Prices at 10/31/02 Life Price at 10/31/02 Price
- --------------- ----------- ----------- -------- ----------- --------
$ 2.96- 7.25 61,332 3.63 $ 5.70 61,332 $ 5.70
$10.50-15.35 422,444 6.08 13.00 420,444 12.99
$17.00-20.19 937,500 6.23 17.76 844,500 17.69
$21.60-22.44 306,000 7.45 21.95 92,668 21.85
$23.66-26.75 1,515,500 9.04 25.77 170,000 25.92
$31.11 136,000 5.90 31.11 -- --
--------- ---- ------ --------- ------
$ 2.96-31.11 3,378,776 7.52 $21.46 1,588,944 $17.10
========= ==== ====== ========= ======
65 - The Copper Companies, Inc. and Subsidiaries
The excess of market value over $.10 per share of restricted shares on
respective dates of grant is initially recorded as unearned compensation and
charged to operations as earned. Restricted shares and other stock compensation
charged against operating income for the years ended October 31, 2002, 2001 and
2000 was $114,000, $235,000 and $154,000, respectively.
Pro Forma Information
As permitted by SFAS 123, Cooper applies APB Opinion No. 25 and related
interpretations to account for its plans for stock options issued to employees.
Accordingly, no compensation cost has been recognized for its employee stock
option plans, as options are granted with exercise prices equal to or greater
than 100% of the market value of the shares at the grant date. Had compensation
cost for our stock-based compensation plans been determined under the fair value
method included in SFAS 123, our net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts) 2002 2001 2000
- ---------------------------------------- ------- ------- -------
Net income As reported $48,875 $37,136 $28,968
Pro forma $44,992 $35,367 $27,694
------- ------- -------
------- ------- -------
Basic earnings per share As reported $ 1.60 $ 1.25 $ 1.02
Pro forma $ 1.47 $ 1.19 $ 0.98
------- ------- -------
------- ------- -------
Diluted earnings per share As reported $ 1.57 $ 1.22 $ 1.00
Pro forma $ 1.47 $ 1.18 $ 0.97
------- ------- -------
------- ------- -------
Effective tax rate used to determine pro forma net income 25% 30% 33%
------- ------- -------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 2002, 2001 and 2000: dividend yield:
0.417%, 0.229% and 0.249%; expected volatility: 55%, 45% and 45%; expected
option lives of 3.5 years for all three years and risk-free interest rates of
3.0%, 3.6% and 5.9%, respectively.
Note 10. Employee Benefits
Cooper's Retirement Income Plan
Cooper's Retirement Income Plan (the "Plan") covers substantially all full-time
United States employees. Cooper's contributions are designed to fund normal cost
on a current basis and to fund over 30 years the estimated prior service cost of
benefit improvements (15 years for annual gains and losses). The unit credit
actuarial cost method is used to determine the annual cost. Cooper pays the
entire cost of the Plan and funds such costs as they accrue. Virtually all of
the assets of the Plan are comprised of participation in equity and fixed income
funds.
The following table sets forth the Plan's benefit obligations, fair value of the
Plan assets, the funded status of the Plan at October 31 and net periodic
pension costs for the three-year period ended October 31, 2002.
66 - The Cooper Companies, Inc. and Subsidiaries
(In thousands) 2002 2001 2000
- -------------- ------- ------- -------
Change in benefit obligation prior year
September 1 to August 31
Projected benefit obligation at beginning of year $13,608 $12,330 $11,281
Service cost 855 757 664
Interest cost 996 911 830
Benefits paid (548) (509) (445)
Actuarial loss 559 119 --
------- ------- -------
Projected benefit obligation at end of period $15,470 $13,608 $12,330
======= ======= =======
Change in plan assets prior year
September 1 to October 31
Fair value of plan assets at beginning of year $10,925 $10,899 $ 9,045
Actual return on plan assets (830) (187) 1,413
Employer contributions 346 722 886
Benefits paid (548) (509) (445)
------- ------- -------
Fair value of plan assets at end of year $ 9,893 $10,925 $10,899
======= ======= =======
Funded status $(5,577) $(2,683) $(1,431)
Unrecognized transition amount 260 286 311
Unrecognized prior service cost 368 398 428
Unrecognized net (gain)/loss 3,003 653 (653)
------- ------- -------
Accrued pension liability August 31 (1,946) (1,346) (1,345)
Contributions between September 1 and October 31 157 -- --
------- ------- -------
Accrued benefit cost October 31 $(1,789) $(1,346) $(1,345)
======= ======= =======
Reconciliation of accrued pension liability
Accrued cost at November 1 $(1,346) $(1,345) $(1,534)
Net periodic pension cost for year (946) (723) (697)
Contributions made during year 503 722 886
------- ------- -------
Accrued cost at October 31 $(1,789) $(1,346) $(1,345)
======= ======= =======
Actuarial assumptions
Discount rate 7.25% 7.5% 7.5%
Expected return on assets 9.0% 9.0% 9.0%
Average compensation increase 4.0% 4.0% 4.0%
Cost of living 3.5% 3.5% 3.5%
Net periodic pension costs
Service cost $ 855 $ 757 $ 664
Interest cost 996 911 830
Asset return 830 187 (1,413)
Amortization
Net transition obligations 26 25 25
Prior service cost 30 30 30
Gain/(loss) (1,791) (1,187) 561
------- ------- -------
Net periodic pension cost total $ 946 $ 723 $ 697
======= ======= =======
The measurement date for all periods presented in the above table is August 31.
67 - The Copper Companies, Inc. and Subsidiaries
Cooper's 401(k) Savings Plan
Cooper's 401(k) Savings Plan provides for the deferral of compensation as
described in the Internal Revenue Code and is available to substantially all
full-time United States employees of Cooper. Employees who participate in the
401(k) Plan may elect to have from 1% to 50% of their pre-tax salary or wages
deferred and contributed to the trust established under the Plan. Cooper's
contribution on account of participating employees, net of forfeiture credits,
was $623,000, $576,000 and $427,000 for the years ended October 31, 2002, 2001
and 2000, respectively.
Cooper's Incentive Payment Plan
Cooper's Incentive Payment Plan is available to officers and other key
employees. Participants may, in certain years, receive bonuses based on
performance. Total bonuses earned for the years ended October 31, 2002, 2001 and
2000, were approximately $2.6 million, $1.8 million and $1.7 million,
respectively.
Note 11. Commitments and Contingencies
Lease Commitments
Total minimum annual rental obligations (net of sublease revenue of
approximately $195,000 per year through March 2005) under noncancelable
operating leases (substantially all real property or equipment) in force at
October 31, 2002 are payable in subsequent years as follows:
(In thousands)
- --------------
2003 $ 7,442
-------
2004 6,093
-------
2005 4,607
-------
2006 3,011
-------
2007 2,788
-------
2008 and thereafter 17,487
-------
$41,428
=======
Aggregate rental expense for both cancelable and noncancelable contracts
amounted to $7.4 million, $4.6 million and $5.2 million in 2002, 2001 and 2000,
respectively.
MEC
In 1993, we reached agreement with Medical Engineering Corporation ("MEC"), a
subsidiary of Bristol-Myers Squibb Company, which limited our contingent
liabilities associated with breast implant litigation involving a former
division of ours (the "MEC Agreement"). The remaining liability recorded for
payments to be made to MEC under the MEC Agreement is due as follows:
December 31,
(In thousands)
- --------------
2002 $4,500
2003 3,000
------
$7,500
======
68 - The Cooper Companies, Inc., and Subsidiaries
All payments are contingent upon our earning net income before taxes in the
fiscal year ending on the October 31 before the December 31 dates. The liability
was recorded in Cooper's financial statements in fiscal 1997 as loss from sale
of discontinued operations, as Management concluded that the maximum payments
would be likely. They are reflected on the balance sheet in "Other Accrued
Liabilities" for the amount due on December 31, 2002 and in "Other Liabilities"
for the amount due December 31, 2003.
Pending Litigation
On April 25, 2001, Dioptics Medical Products, Inc. filed a lawsuit against The
Cooper Companies, Inc., CooperVision, Inc. and A. Thomas Bender in the United
States District Court Northern District of California, Case No. C01-20356-JW.
This lawsuit alleges that CooperVision's CV Encore family of contact lenses
infringes Dioptics' ENCORE trademark registration for sunglasses. Dioptics
alleges causes of action for trademark infringement, dilution and unfair
competition, and seeks damages and injunctive relief. On September 30, 2002, the
parties filed cross-motions for summary judgment. The Court partially granted
CooperVision's motion and held that Dioptics' dilution claim fails as a matter
of law because its ENCORE mark is not famous. The Court denied the parties'
motions with respect to the trademark infringement and unfair competition causes
of action, and set the matter for trial commencing June 10, 2003. The Company
believes that it does not infringe any valid and protectable trademark held by
Dioptics, and will vigorously defend the action.
Cooper had been engaged in patent litigation in the United States, the United
Kingdom and France with CIBA Vision, a division of Novartis, alleging that CVI's
Frequency Colors and Expressions opaque contact lenses infringe certain patents
of CIBA Vision.
In October 2002, we reached a settlement of all pending patent infringement
litigation with CIBA Vision and its subsidiary Wesley Jessen. CIBA Vision has
agreed to license for the term of the patent its color contact lens patents to
CooperVision in return for a royalty and a cross-license of some of
CooperVision's intellectual property rights related to cosmetic contact lenses.
The terms of the settlement allow CooperVision to continue selling its existing
cosmetic lens products throughout the world.
Patent License Agreement
On February 13, 2002, we renegotiated the terms of a license agreement between
CVI and certain former stockholders of Aspect. The renegotiated agreement calls
for a fixed license fee of 'L'21.4 million (about $31 million) including
interest, due in quarterly installments, which escalate 5% annually, over an
eight-year term. Previously, payments were based on levels of revenue.
69 - The Cooper Companies, Inc., and Subsidiaries
Note 12. Business Segment Information
Cooper is organized by product line for management reporting with operating
income, as presented in our financial reports, as the primary measure of segment
profitability. No costs from corporate functions are allocated to the segments'
operating income. Items below operating income are not considered when measuring
the profitability of a segment. The accounting policies used to generate segment
results are the same as our overall accounting policies.
Two business segments comprise Cooper's operations:
o CVI, which develops, manufactures and markets a broad range of contact
lenses for the world wide vision care market, and
o CSI, which markets medical devices, diagnostic products, surgical
instruments and accessories for the gynecology market.
Total net sales include sales to customers as reported in our consolidated
statements of income and sales between geographic areas that are priced at terms
that allow for a reasonable profit for the seller. Operating income (loss) is
total net sales less cost of sales, research and development expenses, selling,
general and administrative expenses and amortization of intangible assets.
Corporate operating loss is principally corporate headquarters expense.
Investment income, net; settlement of disputes, net; other income (expense), net
and interest expense were not allocated to individual segments. Our business
segments do not rely on any one major customer.
Identifiable assets are those used in continuing operations except cash and cash
equivalents, which are included as corporate assets.
70 - The Cooper Companies, Inc., and Subsidiaries
Information by business segment for each of the years in the three-year period:
(in thousands)
2002 CVI CSI Eliminations Consolidated
- ---- -------- -------- ------------ ------------
Net sales from non-affiliates $243,877 $ 71,429 $ -- $315,306
======== ======== ======= ========
Operating income (loss) $ 60,404 $ 14,050 $(7,483) $ 66,971
======== ======== =======
Investment income, net 179
Other income, net 4,893
Interest expense (6,874)
--------
Income before income taxes $ 65,169
========
Identifiable assets $401,421 $111,998 $57,696 $571,115
======== ======== ======= ========
Depreciation expense $ 8,580 $ 1,262 $ 50 $ 9,892
======== ======== ======= ========
Amortization expense $ 905 $ 572 $ -- $ 1,477
======== ======== ======= ========
Capital expenditures $ 19,405 $ 3,969 $ 60 $ 23,434
======== ======== ======= ========
2001
- ----
Net sales from non-affiliates $176,118 $ 58,454 $ -- $234,572
======== ======== ======= ========
Operating income (loss) $ 51,372 $ 10,122 $(6,736) $ 54,758
======== ======== =======
Investment income, net 443
Other income, net 665
Interest expense (3,738)
--------
Income before income taxes $ 52,128
========
Identifiable assets $246,563 $ 87,056 $63,230 $396,849
======== ======== ======= ========
Depreciation expense $ 5,022 $ 735 $ 49 $ 5,806
======== ======== ======= ========
Amortization expense $ 2,726 $ 2,456 $ -- $ 5,182
======== ======== ======= ========
Capital expenditures $ 14,773 $ 1,943 $ 41 $ 16,757
======== ======== ======= ========
2000
- ----
Net sales from non-affiliates $154,775 $ 46,442 $ -- $201,217
======== ======== ======= ========
Operating income (loss) $ 47,287 $ 6,277 $(6,695) $ 46,869
======== ======== =======
Investment income, net 499
Settlement of disputes, net (653)
Other income, net 156
Interest expense (4,744)
--------
Income before income taxes $ 42,127
========
Identifiable assets $180,433 $ 66,428 $75,704 $322,565
======== ======== ======= ========
Depreciation expense $ 3,849 $ 608 $ 64 $ 4,521
======== ======== ======= ========
Amortization expense $ 2,155 $ 2,058 $ -- $ 4,213
======== ======== ======= ========
Capital expenditures $ 14,089 $ 554 $ 22 $ 14,665
======== ======== ======= ========
71 - The Cooper Companies, Inc. and Subsidiaries
Information by geographical area by country of domicile for each of the years in
the three-year period ended October 31, 2001 follows: (In thousands)
Other,
United Eliminations
2002 States Europe Canada & Corporate Consolidated
- ---- -------- -------- ------- ------------ ------------
Sales to unaffiliated customers $199,918 $ 90,277 $17,873 $ 7,238 $315,306
Sales between geographic areas 3,551 68,764 -- (72,315) --
-------- -------- ------- -------- --------
Net sales $203,469 $159,041 $17,873 $(65,077) $315,306
======== ======== ======= ======== ========
Operating income $ 35,321 $ 8,413 $ 1,369 $ 21,868 $ 66,971
======== ======== ======= ======== ========
Identifiable assets $272,249 $218,264 $ 9,790 $ 70,812 $571,115
======== ======== ======= ======== ========
2001
- ----
Sales to unaffiliated customers $173,551 $ 41,740 $15,710 $ 3,571 $234,572
Sales between geographic areas 354 36,196 -- (36,550) --
-------- -------- ------- -------- --------
Net sales $173,905 $ 77,936 $15,710 $(32,979) $234,572
======== ======== ======= ======== ========
Operating income $ 41,271 $ (41) $ 838 $ 12,690 $ 54,758
======== ======== ======= ======== ========
Identifiable assets $169,738 $149,914 $ 9,010 $ 68,187 $396,849
======== ======== ======= ======== ========
2000
- ----
Sales to unaffiliated customers $149,316 $ 36,048 $15,772 $ 81 $201,217
Sales between geographic areas 163 30,058 -- (30,221) --
-------- -------- ------- -------- --------
Net sales $149,479 $ 66,106 $15,772 $(30,140) $201,217
======== ======== ======= ======== ========
Operating income $ 38,915 $ 57 $ 930 $ 6,967 $ 46,869
======== ======== ======= ======== ========
Identifiable assets $127,414 $111,474 $ 6,389 $ 77,288 $322,565
======== ======== ======= ======== ========
Note 13. Subsequent Events
Stock Dividend
In November 2002, our Board of Directors declared a two-for-one stock split
effected in the form of a stock dividend payable November 22, 2002 to
stockholders of record on November 14, 2002. All per share amounts in this
report reflect the stock split.
Cash Dividend Declared
On December 5, 2002, Cooper declared a semi-annual dividend of 3 cents per
split-adjusted share, payable on January 6, 2003 to stockholders of record on
December 16, 2002.
Acquisition Payment
In December 2002, Cooper made the final payment to the Aspect Note Holders of
about $23 million, which released the $21 million previously reserved under our
KeyBank Revolver credit agreement
Corporate Information
Board of Directors Executive Officers Investor Information
A. THOMAS BENDER A. THOMAS BENDER To access without charge
Chairman Chairman of the Board, our current share price,
President and Chief Executive President, Chief Executive recent news releases and
Officer Officer and President annual report on
CooperVision, Inc. Securities and Exchange
Commission Form 10-K
without exhibits, call
1-800-334-1986 at any
ALLAN E. RUBENSTEIN, M.D. time or visit us on the
Vice Chairman and Lead ROBERT S. WEISS World Wide Web at
Director Chairman of the Executive Vice President www.coopercos.com.
Board University and Chief Financial
HeartScan Officer
MICHAEL H. KALKSTEIN DAVID ACOSTA
Partner Treasurer Investor Relations Contact
Oppenheimer, Wolff &
Donnelly, LLP
B. NORRIS BATTIN B. NORRIS BATTIN
MOSES MARX Vice President Vice President
General Partner Investor Relations and Investor Relations and
United Equities Communications Communications
21062 Bake Parkway/ Suite 200
DONALD PRESS GREGORY A. FRYLING Lake Forest / CA 92630
Executive Vice President Chief Operating Officer Voice: (949) 597-4700
Broadway Management Co., Inc. CooperVision, Inc. Fax: (949) 597-3688
E-mail: ir@coopercompanies.com
CAROL R. KAUFMAN
STEVEN ROSENBERG Vice President of Legal
President, Chief Executive Affairs, Secretary
Officer and Chief Financial and Chief Administrative
Officer Officer
Berkshire Bancorp Inc. Annual Meeting
NICHOLAS J. PICHOTTA The Cooper Companies will hold
ROBERT S. WEISS President and Chief its Annual Stockholders' Meeting on
Executive Vice President Executive Officer Tuesday, March 25, 2003 at the
and Chief Financial Officer CooperSurgical, Inc. New York Marriott East Side,
New York, NY at 10:00 A.M.
PAUL REMMELL
Chief Operating Officer
STANLEY ZINBERG, M.D. CooperSurgical, Inc.
Vice President Practice Transfer Agent
Activities STEPHEN C. WHITEFORD
American College of Vice President and American Stock Transfer &
Obstetricians Corporate Controller Trust Company
and Gynecologists 40 Wall Street
New York / NY 10005
(800) 937-5449
Committees of the Board Principal Subsidiaries
Audit and Finance Committee COOPERVISION, INC.
STEVEN ROSENBERG 21062 Bake Parkway / Suite Trademarks
(Chairman) 200
MICHAEL H. KALKSTEIN Lake Forest / CA 92630 The Cooper Companies, Inc.,
STANLEY ZINBERG, M.D. Voice: (949)597-8130 its subsidiaries or affiliates
Fax: (949)597-0663 own, license or distribute the
www.coopervision.com following trademarks, which
are italicized in this report:
Organization and Apollo'r', Ascend'r',
Compensation Committee COOPERSURGICAL, INC. Cerveillance'r', Enhancement
MICHAEL H. KALKSTEIN 95 Corporate Drive Colors'TM', Excell'TM',
(Chairman) Trumbull / CT 06611 Frequency 55'r', Frequency
DONALD PRESS Voice: (203)601-5200 Aspheric'TM', Frequency
ALLAN E. RUBENSTEIN, M.D. Fax: (203)601-1008 Colors'TM', Frequency
www.coopersurgical.com Expressions'TM', Frequency
Multifocal'TM', Frequency
Nominating Committee Toric XR'TM', Guardian Vaginal
ALLAN E. RUBENSTEIN, M.D. Retractor'TM', LuMax'r' System,
(Chairman) Norland'r', Proclear'r',
MOSES MARX Proclear Compatibles'r', Sage
STANLEY ZINBERG, M.D. Corporate Offices BioPharma'TM' and Sani-Spec'r'
Corporate Governance Committee THE COOPER COMPANIES, INC. PC Technology is licensed from
DONALD PRESS 21062 Bake Parkway / Suite Biocompatibles UK Limited.
(Chairman) 200
ALLAN E. RUBENSTEIN, M.D. Lake Forest / CA 92630
STEVEN ROSENBERG Voice: (949)597-4700 Independent Auditors
or toll free (888)
822-2660
Fax: (949)597-0662 KPMG LLP
THE COOPER COMPANIES, INC.
6140 Stoneridge Mall Road Stock Exchange Listing
/ Suite 590
Pleasanton / CA 94588 The New York Stock Exchange
Voice: (925)460-3600 Ticker Symbol "COO"
Fax: (925)460-3648
www.coopercos.com
The Cooper Companies, Inc.
21062 Bake Parkway / Suite 200
Lake Forest / California 92630
Voice: 949.597.4700 / Fax: 949.597.0662
www.coopercos.com
The Cooper Companies, Inc. o 2002 Annual Report