Five Year Financial Highlights
The Cooper Companies, Inc. and Subsidiaries
Consolidated Operations
Years Ended October 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share figures)
Net operating revenue $109,131 $ 97,090 $ 95,645 $ 92,652 $ 63,279
======== ======== ======== ======== ========
Income (loss) from continuing
operations before extraordinary items $ 16,603 $ 115 $ (4,697) $(34,072) $(16,158)
Loss on sale of discontinued
operations, net of taxes -- -- -- (13,657) (9,300)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items 16,603 115 (4,697) (47,729) (25,458)
Extraordinary items -- -- -- 924 640
-------- -------- -------- -------- --------
Net income (loss) 16,603 115 (4,697) (46,805) (24,818)
Less, preferred stock dividends -- -- 89 320 1,804
-------- -------- -------- -------- --------
Net income (loss) applicable to
common stock $ 16,603 $ 115 $ (4,786) $(47,125) $(26,622)
======== ======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ 1.41 $ .01 $ (.47) $ (3.43) $ (1.96)
Loss on sale of discontinued operations -- -- -- (1.36) (1.01)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items 1.41 .01 (.47) (4.79) (2.97)
Extraordinary items -- -- -- .09 .07
-------- -------- -------- -------- --------
Earnings (loss) per share $ 1.41 $ .01 $ (.47) $ (4.70) $ (2.90)
======== ======== ======== ======== ========
Average number of common shares used
to compute earnings per share 11,761 11,576 10,193 10,035 9,167
======== ======== ======== ======== ========
Consolidated Financial Position
October 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Current assets $ 42,495 $ 41,228 $ 43,505 $ 51,875 $119,282
Property, plant and equipment, net 34,674 34,062 34,787 39,895 39,732
Intangible assets, net 21,468 14,933 15,327 16,285 10,083
Other assets 4,272 1,769 1,439 1,469 3,910
-------- -------- -------- -------- --------
Total assets $102,909 $ 91,992 $ 95,058 $109,524 $173,007
======== ======== ======== ======== ========
Current liabilities $ 33,308 $ 39,613 $ 42,256 $ 51,995 $ 68,119
Long-term debt 47,920 43,490 46,184 48,077 58,591
Other long-term liabilities 6,351 10,638 10,272 9,000 --
-------- -------- -------- -------- --------
Total liabilities 87,579 93,741 98,712 109,072 126,710
-------- -------- -------- -------- --------
Stockholders' equity (deficit) 15,330 (1,749) (3,654) 452 46,297
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $102,909 $ 91,992 $ 95,058 $109,524 $173,007
======== ======== ======== ======== ========
15
Management's Discussion and Analysis of Financial
Condition and Results of Operations
References to Note numbers are references to the "Notes to Consolidated
Financial Statements" of the Company beginning on page 27 of this report. The
following products that appear in this exhibit are protected by trademarks or
service marks that are owned by, licensed to or distributed by The Cooper
Companies, Inc., its subsidiaries or affiliates: Hydrasoft'r', J-Needle'tm', KOH
Colpotomizer System'tm', Preference Toric'tm', Preference'r', Pipelle'r',
RUMI'tm', The RUMI System'tm' and Unimer'r'.
Results of Operations
Comparison of each of the fiscal years in the three-year period ended
October 31, 1996:
Net Sales of Products
The following table summarizes the increases and decreases in net sales of
products of the Company's CooperVision ("CVI") and CooperSurgical ("CSI")
business units over the three-year period. Sales generated by the Company's
CooperVision Pharmaceuticals ("CVP") unit were zero in 1996, $16 thousand in
1995 and $394 thousand in 1994.
- --------------------------------------------------------------------------
Increase (Decrease)
- --------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
(Dollars in thousands)
----------------------------------------------
Business Unit
CVI $6,436 15% $ 4,663 12%
====== == ======= ====
CSI $4,402 34% $ (23) --- %
====== == ======= ====
Consolidated net sales of products grew 20% in 1996 and 8% in 1995.
1996 vs. 1995
Net sales of CVI grew by 15%. The primary contributors to the growth were
increased sales of the Preference spherical and Preference Toric product lines,
which together grew approximately 70%. Sales of toric lenses to correct
astigmatism, CVI's leading product group, grew by 35% year to year and now
account for approximately one-half of its sales. The Company expects this trend
to continue and considers itself to be well positioned to compete successfully
in specialty niches of the contact lens market, particularly with its Preference
line of planned replacement lenses and its line of custom toric lenses. CVI
recently announced plans to double the capacity of its Scottsville, New York,
facility where Preference Toric lenses are manufactured. These increases were
partially offset by anticipated decreases in sales of more mature product lines.
Net sales of CSI increased 34%. Its gynecology product line grew by
approximately 50%, primarily due to sales of Unimar and Blairden products which
were acquired in April 1996 and June 1995, respectively. The effect of increased
sales of gynecology products was partially offset by reduced sales of
nonstrategic or nongynecologic products. CSI's sales mix continued to shift
toward its gynecology product line, which now accounts for approximately 90% of
its sales.
1995 vs. 1994
The primary contributors to CVI's growth in 1995 were increased sales of
the Preference spherical product line and the Hydrasoft toric and Preference
Toric product lines (the latter of which was launched in the fourth quarter of
fiscal 1994). Sales of CVI's toric lenses in the United States grew by
approximately 50% in 1995. Toric and other specialty lenses accounted for
approximately two-thirds of CVI's total sales. The 1995 increases were partially
offset by anticipated decreases in sales of more mature product lines. CVI's
sales mix shifted toward daily wear, planned replacement and other specialty
products and away from extended wear products.
Net sales of CSI products were essentially flat in 1995 as compared to
1994. Nearly 75% of CSI's net sales related to womens' healthcare products, as
the unit continued to direct its sales efforts toward the gynecology market to
take advantage of the lower cost to service a highly focused market niche.
Net Service Revenue
Net service revenue consists of the following:
- --------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
-------------------------------------
Net patient revenue $43,013 $40,643 $42,611
Management fees -- 1,151 2,000
------- ------- -------
$43,013 $41,794 $44,611
======= ======= =======
Net patient revenue by major providers was as follows:
- -----------------------------------------------------------------------------------------
1996 1995 1994
(Dollars in thousands)
Amount % Total Amount % Total Amount % Total
- -----------------------------------------------------------------------------------------
Commercial $ 3,989 9% $ 5,055 13% $ 9,170 21%
Medicare 13,034 30 11,767 29 9,225 22
Medicaid 9,884 23 8,566 21 7,254 17
Blue Cross 3,617 9 4,015 10 4,729 11
HMOs 8,896 21 8,714 21 7,722 18
Other 3,593 8 2,526 6 4,511 11
------- --- ------- --- ------- ---
$43,013 100% $40,643 100% $42,611 100%
======= === ======= === ======= ===
- -----------------------------------------------------------------------------------------
16
Net Patient Revenue
(See Note 1 "Net Service Revenue")
Net patient revenue grew 6% to $43 million in fiscal 1996. In each of the
last three quarters of 1996, following the transition of the physician group at
Hampton Hospital, Hospital Group of America Inc.'s ("HGA") revenue showed
improving growth rates compared with the comparable quarter in 1995. Increased
patient visits to outpatient and day treatment programs have helped offset
pressure on revenue resulting from declining average length of stay. Outpatient
revenue increased to approximately 12% of net patient revenue in 1996 from
approximately 9% in 1995, and approximately 5% in 1994.
Net patient revenue decreased by $2.0 million or 5% in 1995. Revenue has
been pressured by the current industry trend toward increased managed care,
which results in decreased daily rates and declines in average lengths of stay.
Management is endeavoring to mitigate those pressures by increasing the number
of admissions to its hospitals and by providing outpatient and other ancillary
services. In addition, management estimates that the dispute with the Hampton
Medical Group, P.A. ("HMG"), which was settled in 1995 (See Note 4.), reduced
revenue during 1995 at Hampton Hospital by approximately $2 million compared
with 1994.
Management Fees
On May 29, 1992, PSG Management, Inc. ("PSG Management"), a subsidiary of
the Company, entered into a three-year management agreement with Progressions
Health Systems, Inc. ("Progressions"), under which PSG Management managed three
hospitals owned by Progressions, having a total of 220 licensed beds. PSG
Management received a management fee of $166,667 per month under the agreement,
which expired by its terms in May 1995.
Cost of Products Sold
Gross profit (net sales of products less cost of products sold) as a
percentage of net sales of products ("margin") was as follows:
- --------------------------------------------------------------------------------
Margin
1996 1995 1994
------------------------------------
CVI 77% 73% 71%
CSI 51% 52% 48%
Consolidated 70% 68% 65%
- --------------------------------------------------------------------------------
CVI's margin has increased from 1994 through 1996 due to efficiencies
associated with higher production levels, as well as a favorable product mix,
reflecting the growth in sales of toric contact lenses, which have higher
margins. CSI's 1996 margin decreased compared to 1995 due to the acquisition of
Unimar products, which have slightly lower margins as compared to the Company's
previous year's product mix. Cost reductions are underway, which management
anticipates will improve future Unimar product line margins. CSI's 1995 margin
increased compared to 1994 due to a favorable product mix in the United States.
Internationally, a margin increase was primarily due to cost reductions
accomplished within the LEEP product line. Also, 1994 CSI margins were impacted
by a $200 thousand write-down of endoscopy inventory, which reduced margins by
2%.
Cost of Services Provided
Cost of services provided represents all normal operating costs (other than
financing costs and amortization of intangibles) incurred by HGA in generating
net service revenue. The results of subtracting cost of services provided from
net service revenue is an operating profit of $2.8 million or 6% of net service
revenue in 1996, $1.3 million or 3% of net service revenue in 1995 and $3.6
million or 8% of net service revenue in 1994. The 1996 increased percentage of
operating profits as compared to 1995 is attributable to increased revenue, as
described above, while cost of services were about the same as 1995. The
decreased percentage of operating profits in 1995 compared with 1994 was
primarily attributable to lower revenue as described above, partially offset by
lower cost of services.
Research and Development Expense
Research and development expense was $1.2 million or 2% of net sales of
products in 1996 compared to $2.9 million or 5% in 1995 and $4.4 million or 9%
in 1994.
The decreases in 1996 and 1995 are primarily attributable to the Company's
decision to discontinue development of its calcium channel blocker compound.
This project accounted for 43% and 63% of consolidated research and development
expense in 1995 and 1994, respectively. A 1996 vs. 1995 decrease of $418
thousand in CSI research and development reflected primarily the May 1995
discontinuance of the development of Innerdyne Inc.'s thermal endometrial
ablation technology, begun in 1994, and on which CSI had spent approximately
$600 thousand by mid 1995.
17
The Company currently anticipates that the level of spending on research
and development has stabilized. The Company is focusing on acquiring products
which will be marketable immediately or in the short-term, rather than on
funding longer-term, higher risk research and development projects.
Selling, General and Administrative Expense
The Company's selling, general and administrative expense ("SGA") by
business unit and corporate was as follows:
- --------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
-----------------------------------
CVI $17,281 $15,949 $13,621
CSI 6,243 5,520 6,125
Corporate/Other 6,193 4,357 11,281
------- ------- -------
$29,717 $25,826 $31,027
======= ======= =======
The increase in 1996 vs. 1995 Corporate/Other SGA is primarily due to the
$1.3 million credits reflected in 1995 SGA as noted below. The 61% decrease in
1995 vs. 1994 Corporate/Other SGA reflects the resolution of various legal
matters, a reduction in the level of corporate staffing, a credit of $648
thousand for the recovery of the Company's claim against the Cooper
Laboratories, Inc. Liquidating Trust, representing the recovery of previously
rendered administrative services, the reversal of a $649 thousand receivable
reserve and certain other accruals no longer required and a significant
reduction in the cost of the Company's Directors and Officers insurance.
SGA for CVI increased by 8% and 17% in 1996 vs. 1995 and 1995 vs. 1994,
respectively. The increase in 1996 vs. 1995 relates to increased sales, and the
increase in 1995 vs. 1994 was due primarily to costs associated with the
successful launch of the Preference Toric line of contact lenses and the cost of
programs associated with the launch of additional new products. As a percentage
of sales, CVI's SGA was 35% in 1996, 38% in 1995 and 36% in 1994.
The 1996 increase in CSI SGA resulted primarily from the acquisition of
Unimar. (See Note 2.) The 1995 decrease at CSI reflects savings generated by the
consolidation of CSI facilities with attendant efficiencies.
Costs Associated With Restructuring Operations
(See Note 5.)
In 1995, the Company recorded $1.5 million of restructuring costs to
provide for costs primarily associated with the closure of facilities in the
Company's CVP, CSI and corporate operations and downsizing HGA headquarters.
Amortization of Intangibles
Amortization of intangibles was $1.2 million in 1996, $859 thousand in 1995
and $843 thousand in 1994. In 1996, the Company accelerated $246 thousand of
amortization for a use patent as a result of its decision to discontinue the
development and outlicensing of its calcium channel blocker compound. The
Company stopped funding this project in 1995. The balance of the changes in each
year reflect acquisition activity during the three-year period. (See Note 2.)
Income From Operations
As a result of the variances discussed above, income from operations has
improved by $16.4 million over the three-year period. Income from operations by
business unit and Corporate/Other was as follows:
- --------------------------------------------------------------------------------
October 31,
- --------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
-------------------------------------------
CVI $ 19,065 $ 13,959 $ 11,963
CSI 1,667 (425) (932)
HGA 2,573 878 3,321
Corporate/Other (6,462) (6,404) (13,929)
-------- -------- --------
$ 16,843 $ 8,008 $ 423
======== ======== ========
- --------------------------------------------------------------------------------
Settlement of Disputes, Net (See Note 4.)
In fiscal 1996, the Company recorded a credit to income of $223 thousand
related to the agreement which settled cross claims between HGA and Progressions
related to purchase price adjustments (which were credited to goodwill) and
other disputes. Pursuant to this agreement, HGA received $447 thousand in fiscal
1996 of which $223 thousand has been credited to settlement of disputes.
In 1995, the Company recorded a charge of $5.6 million for the settlement
of the HMG dispute. This charge was partially offset by net credits to income of
$2.0 million, which primarily represented cash received by the Company in
connection with the settlement of other litigation matters.
In 1994, the Company recorded the following items related to settlement of
disputes:
A credit of $850 thousand following receipt of funds by the Company to
settle certain of the Company's claims associated with a real estate
transaction.
A charge of $5.8 million which represented the Company's estimate of costs
required to settle certain disputes and other litigation matters, including
$3.5 million associated with the Company's criminal conviction and the
related SEC enforcement action against the Company.
18
Investment Income (Loss), Net
Investment income (loss), net includes interest income of $250 thousand,
$394 thousand and $377 thousand in 1996, 1995 and 1994, respectively. The
decrease in interest income in 1996 reflects lower investment balances primarily
as a result of the Company's use of cash for the acquisition of Unimar in April
1996. (See Note 2.) Also included in investment income, net for 1994 is a $530
thousand loss on the sale of marketable securities.
Interest Expense
Interest expense was $5.3 million in 1996, $4.7 million in 1995 and $4.5
million in 1994. The increase in interest expense for 1996 over 1995 is
primarily related to the interest on $4,000,000 principal amount of notes issued
in April 1996 in connection with the acquisition of Unimar, bearing interest at
a rate of 12% per annum (See Note 8.) and accreted interest in 1996 related to
the settlement of the HMG dispute. The increase in interest expense in 1995 was
primarily a result of the increased borrowing related to a line of credit,
partially offset by reduced interest expense due to an exchange offer and
consent solicitation which occurred in the first quarter of fiscal 1994.
Provision for (Benefit of) Income Taxes
Details with regard to the Company's provision for (benefit of) income
taxes for each of the years in the three-year period ended October 31, 1996 are
set forth in Note 7. The 1996 provision for federal and state taxes of $275
thousand was offset by a reversal of $615 thousand of tax accruals no longer
required and the recognition of an income tax benefit of $4.1 million from
reducing the valuation allowance against net deferred tax assets. The 1995
provision for state income and franchise taxes of $315 thousand was partially
offset by a reversal of $200 thousand of tax accruals no longer required. The
1994 provision for state income and franchise taxes of $400 thousand was offset
by a reversal of $5.0 million of tax accruals no longer required following the
successful resolution of certain tax issues.
Capital Resources & Liquidity
The financial condition of the Company continued to improve in fiscal 1996
and, in the opinion of management, is now reflective of an effectively competing
commercial enterprise, unhampered by an inordinate level of litigation and other
distractions. In 1996, the Company generated $16.8 million of income from
operations, which was more than twice the amount generated in 1995. In addition,
stockholders' equity improved by $17 million to $15.3 million vs. the deficit of
over $1.7 million that existed at the end of fiscal 1995. As a result of the
Company's improved financial strength and prospects, it was able, effective at
the beginning of fiscal 1997, to decrease by two percentage points the interest
rate on its $11 million HGA debt. The Company was also able to reduce by one
percentage point the interest rate on CVI's $8 million line of credit.
Cash provided by the Company's operating activities rebounded from a
negative $7.8 million in the traditionally lower first quarter to $11.3 million
in the succeeding nine months. As a result, operating cash flow for fiscal 1996,
at $3.5 million, achieved virtually the same level as in 1995. Higher operating
cash flow levels in 1996 were precluded due to approximately $2 million in
increased payments for certain settlements as well as additional investments in
receivables and inventory reflective of growth in sales and ongoing launches of
new products. Operating cash flow was negative $2 million in fiscal 1994.
Cash used by investing activities in 1996 was $6.5 million, driven by $3.2
million in capital expenditures and the acquisition of Unimar, Inc. in April for
$3.9 million in cash and $4 million in 12% notes due in three years. The cash
portion of the acquisition was funded primarily by cash on hand.
Cash used by financing activities in 1996 of $1.3 million reflected
repayment of the HGA Industrial Revenue Bond. (See Note 8.) Financing activities
were virtually neutral in 1995. The cash use of $6.9 million in fiscal 1994
related primarily to payments associated with a debt restructuring completed by
the Company in January 1994.
19
Management believes that the Company is positioned to generate sufficient
operating cash flow to fund its day-to-day needs and expects that operating cash
flow will increase in the future. The Company further expects that operating
cash flow for the first quarter of 1997 will continue to be below the other
three quarters of 1997, but will compare favorably with the negative $7.8
million used in the first quarter of 1996, when the Company paid $3.1 million to
Dr. Pottash. (See Note 4.) The balance of an additional $3.1 million due to HMG
will be paid in two equal installments in the third quarters of fiscal 1997 and
1998. Items which continue to pressure first quarter operating cash flow include
ongoing payments to Medical Engineering Corporation (See Note 11.) and employee
incentive payments made in the first quarter.
The Company expects to spend approximately $7 million for purchases of
property, plant and equipment in fiscal 1997, including approximately $1 million
to be spent by CVI to expand its manufacturing facilities and $1.7 million to be
spent by HGA to construct a residential treatment center in Indiana. The Company
expects to finance the CVI expansion with credit facilities currently being
negotiated, whereas the residential treatment center will be funded by cash on
hand and credit facilities now in place, with a plan to refinance when
construction is completed.
The Company regularly evaluates acquisition opportunities which, if
pursued, it would intend to fund by a combination of cash then on hand,
financing vehicles now in place and, where appropriate, other methods of raising
capital as needed.
Inflation and Changing Prices
Inflation has had little effect on the Company's operations in the last
three years.
Impact of Statements of Financial Accounting
Standards Issued But Not Adopted
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 applies to all transactions in which an entity
acquires goods or services by issuing equity instruments such as common stock,
except for employee stock ownership plans. SFAS No. 123 establishes a new method
of accounting for stock-based compensation arrangements with employees which is
fair value based. The statement encourages (but does not require) employers to
adopt the new method in place of the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Companies may
continue to apply the accounting provisions of APB No. 25 in determining net
income, however, they must apply the disclosure requirements of SFAS No. 123.
Companies that adopt the fair value based method of SFAS No. 123 would typically
incur a higher compensation cost for fixed stock option plans and a different
compensation cost for contingent or variable stock option plans. The recognition
provisions and disclosure requirements of SFAS No. 123 are effective for fiscal
years beginning after December 15, 1995. The Company will adopt the disclosure
requirements in its 1997 fiscal year. Such adoption will have no impact on
reported results.
20
Management's
Statement
The financial statements and other financial information in this report are
management's responsibility and were prepared according to generally accepted
accounting principles. They include amounts based on management's informed
estimates and judgments. Other financial information in this report is
consistent with that in the financial statements.
The Company's accounting systems include controls to reasonably assure that
assets are safeguarded and financial statements conform to generally accepted
accounting principles. These systems are supplemented by selecting and training
qualified personnel and by an organizational structure that provides for
appropriate separation of duties.
The Board of Directors, through its Audit and Finance Committee of three
outside directors, is responsible to determine that management fulfills its
responsibilities regarding preparation of financial statements and maintenance
of financial control over operations. The Audit and Finance Committee recommends
to the Board of Directors appointment of the Company's independent certified
public accountants subject to ratification by the stockholders. It meets
regularly with management and the independent accountants. The independent
accountants have complete access to the Audit and Finance Committee, without
management present, to discuss auditing and financial reporting.
KPMG Peat Marwick LLP ("KPMG") has been the Company's independent certified
public accountants since 1980 when the Company incorporated. KPMG provides an
objective, independent review of management's discharge of its responsibilities
relating to the fair presentation of the consolidated financial statements.
Their report follows.
/s/ A. Thomas Bender /s/ Robert S. Weiss
----------------------- ---------------------------
A. Thomas Bender Robert S. Weiss
President and Executive Vice President
Chief Executive Officer and Chief Financial Officer
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, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended October 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Cooper
Companies, Inc. and subsidiaries as of October 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three-year
period ended October 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
-------------------------
San Francisco, California
December 9, 1996
21
Consolidated Statements of Operations
The Cooper Companies, Inc. and Subsidiaries
Years Ended October 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
(In thousands, except per share figures)
- -------------------------------------------------------------------------------------------------------------
Net sales of products $ 66,118 $ 55,296 $ 51,034
Net service revenue 43,013 41,794 44,611
--------- --------- ---------
Net operating revenue 109,131 97,090 95,645
--------- --------- ---------
Cost of products sold 19,911 17,549 17,906
Cost of services provided 40,235 40,454 41,039
Research and development expense 1,176 2,914 4,407
Selling, general and administrative expense 29,717 25,826 31,027
Amortization of intangibles 1,249 859 843
Costs associated with restructuring operations -- 1,480 --
--------- --------- ---------
Income from operations 16,843 8,008 423
--------- --------- ---------
Provision for (benefit of) settlements of disputes (223) 3,532 4,950
Investment income (loss), net 281 444 (153)
Other income, net 80 51 256
Interest expense 5,312 4,741 4,533
Debt restructuring costs -- -- 340
--------- --------- ---------
Income (loss) before income taxes 12,115 230 (9,297)
Provision for (benefit of) income taxes (4,488) 115 (4,600)
--------- --------- ---------
Net income (loss) 16,603 115 (4,697)
Less preferred stock dividends -- -- 89
--------- --------- ---------
Net income (loss) applicable to common stock $ 16,603 $ 115 $ (4,786)
========= ========= =========
Earnings (loss) per share $ 1.41 $ .01 $ (.47)
========= ========= =========
Average number of common shares
used to compute earnings per share 11,761 11,576 10,193
========= ========= =========
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
Consolidated Balance Sheets
The Cooper Companies, Inc. and Subsidiaries
Assets
- -----------------------------------------------------------------------------------------
October 31,
- -----------------------------------------------------------------------------------------
1996 1995
(In thousands)
- -----------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 6,837 $ 11,207
Trade and patient accounts receivable, less allowances
of $1,969,000 in 1996, $2,241,000 in 1995 21,650 17,717
Inventories 10,363 9,570
Deferred tax asset 953 --
Prepaid expenses and other current assets 2,692 2,734
-------- --------
Total current assets 42,495 41,228
-------- --------
Property, plant and equipment at cost 49,306 46,597
Less accumulated depreciation and amortization 14,632 12,535
-------- --------
34,674 34,062
-------- --------
Goodwill and other intangibles, net 21,468 14,933
Deferred tax asset 3,195 --
Other assets 1,077 1,769
-------- --------
$102,909 $ 91,992
======== ========
Liabilities and Stockholders' Equity (Deficit)
- ----------------------------------------------------------------------------------------------------
October 31,
- ----------------------------------------------------------------------------------------------------
1996 1995
(In thousands)
- ----------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt $ 844 $ 2,288
Borrowings under line of credit -- 1,025
Accounts payable 9,206 5,730
Employee compensation, benefits and severance 6,418 6,978
Other accrued liabilities 7,303 13,596
Accrued income taxes 9,537 9,996
--------- ---------
Total current liabilities 33,308 39,613
--------- ---------
Long-term debt 47,920 43,490
Other noncurrent liabilities 6,351 10,638
--------- ---------
Total liabilities 87,579 93,741
--------- ---------
Commitments and Contingencies (See Note 11)
Stockholders' equity (deficit):
Preferred stock, $.10 par value, shares authorized: 1,000,000;
zero shares issued or outstanding -- --
Common stock, $.10 par value, shares
authorized: 20,000,000; issued and outstanding: 11,670,898
and 11,576,482 at October 31, 1996 and 1995, respectively 1,167 1,158
Additional paid-in capital 184,300 183,840
Translation adjustments (326) (333)
Accumulated deficit (169,811) (186,414)
--------- ---------
Total stockholders' equity (deficit) 15,330 (1,749)
--------- ---------
$ 102,909 $ 91,992
========= =========
See accompanying notes to consolidated financial statements.
23
Consolidated Statements of Stockholders' Equity (Deficit)
The Cooper Companies, Inc. and Subsidiaries
Years Ended October 31, 1996, 1995 and 1994
Series B Additional
Preferred Common Paid-In
Stock Stock Capital
- ------------------------------------------------------------------------------------------------------------
Par Par
Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------
(In thousands)
- ------------------------------------------------------------------------------------------------------------
Balance October 31, 1993 345 $-- 10,043 $1,004 $181,819
---- --- ------ ------ --------
Net loss -- -- -- -- --
Aggregate translation adjustment -- -- -- -- --
Restricted stock amortization
and share issuance, forfeiture
and lifting of restrictions -- -- 99 10 436
Exercise of stock options -- -- 1 -- 2
Dividend requirements on
Series-B Preferred Stock -- -- -- -- --
Conversion of Series B
Preferred to Common (345) -- 1,150 115 (115)
---- --- ------ ------ --------
Balance October 31, 1994 -- $-- 11,293 $1,129 $182,142
---- --- ------ ------ --------
Net income -- -- -- -- --
Aggregate translation adjustment -- -- -- -- --
Restricted stock amortization
and share issuance, forfeiture
and lifting of restrictions -- -- 176 18 1,526
Exercise of stock options -- -- 5 1 9
Exercise of warrants and
warrant valuation -- -- 102 10 163
---- --- ------ ------ --------
Balance October 31, 1995 -- $-- 11,576 $1,158 $183,840
---- --- ------ ------ --------
Net income -- -- -- -- --
Aggregate translation adjustment -- -- -- -- --
Restricted stock amortization
and share issuance, forfeiture
and lifting of restrictions -- -- 7 1 46
Exercise of stock options -- -- 22 2 117
Exercise of warrants and
warrant valuation -- -- 66 6 297
---- --- ------ ------ --------
Balance October 31, 1996 -- $-- 11,671 $1,167 $184,300
==== === ====== ====== ========
Unamortized
Restricted
Translation Accumulated Stock Award
Adjustments Deficit Compensation Total
- -------------------------------------------------------------------------------------------------------
(In thousands)
- -------------------------------------------------------------------------------------------------------
Balance October 31, 1993 $(223) $(181,743) $(405) $ 452
----- --------- ----- -------
Net loss -- (4,697) -- (4,697)
Aggregate translation adjustment (173) -- -- (173)
Restricted stock amortization
and share issuance, forfeiture
and lifting of restrictions -- -- 405 851
Exercise of stock options -- -- -- 2
Dividend requirements on
Series-B Preferred Stock -- (89) -- (89)
Conversion of Series B
Preferred to Common -- -- -- --
----- --------- ----- -------
Balance October 31, 1994 $(396) $(186,529) $ -- $(3,654)
----- --------- ----- -------
Net income -- 115 -- 115
Aggregate translation adjustment 63 -- -- 63
Restricted stock amortization
and share issuance, forfeiture
and lifting of restrictions -- -- -- 1,544
Exercise of stock options -- -- -- 10
Exercise of warrants and
warrant valuation -- -- -- 173
----- --------- ----- -------
Balance October 31, 1995 $(333) $(186,414) $ -- $(1,749)
----- --------- ----- -------
Net income -- 16,603 -- 16,603
Aggregate translation adjustment 7 -- -- 7
Restricted stock amortization
and share issuance, forfeiture
and lifting of restrictions -- -- -- 47
Exercise of stock options -- -- -- 119
Exercise of warrants and
warrant valuation -- -- -- 303
----- --------- ----- -------
Balance October 31, 1996 $(326) $(169,811) $ -- $15,330
===== ========= ===== =======
See accompanying notes to consolidated financial statements.
24
Consolidated Statements of Cash Flows
The Cooper Companies, Inc. and Subsidiaries
Years Ended October 31,
- -----------------------------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 16,603 $ 115 $ (4,786)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Deferred income taxes (4,148) -- --
Depreciation expense 2,629 2,704 2,870
Provision for doubtful accounts 1,849 2,300 2,431
Amortization expenses:
Intangible assets 1,249 992 975
Debt discount (526) (443) (499)
Stock compensation expense 46 -- 853
Net (gain) loss from:
Sales of assets and businesses -- -- (214)
Investments -- -- 530
Debt restructuring costs -- -- 340
Change in operating assets and liabilities excluding
effects from acquisitions and sales of assets and
businesses:
Receivables (4,998) (1,918) (5,373)
Inventories (445) 2,126 3,291
Other assets 266 275 405
Accounts payable 166 (1,050) 2,311
Accrued liabilities (4,488) (2,000) (925)
Income taxes payable (459) (109) (4,732)
Other long-term liabilities (4,287) 429 524
-------- -------- --------
Net cash provided (used) by operating activities 3,457 3,421 (1,999)
-------- -------- --------
Cash flows from investing activities:
Sales of assets and businesses 532 173 2,720
Cash received from Progressions for purchase
price adjustment 224 421 --
Purchases of assets and businesses (4,080) (821) --
Purchases of property, plant and equipment (3,182) (2,185) (938)
Sales of temporary investments -- -- 7,302
-------- -------- --------
Net cash provided (used) by investing activities $ (6,506) $ (2,412) $ 9,084
-------- -------- --------
See accompanying notes to consolidated financial statements.
25
Consolidated Statements of Cash Flows-Concluded
The Cooper Companies, Inc. and Subsidiaries
Years Ended October 31,
- ------------------------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments associated with the Exchange
Offer and Consent Solicitation including debt
restructuring costs $ -- $ -- $ (5,416)
Proceeds from (repayment of) line of credit, net (1,025) 1,025 --
Proceeds from long-term note 1,320 -- --
Net payments of notes payable and current
long-term debt (1,808) (1,270) (1,462)
Proceeds from exercise of warrants and options 192 123 --
-------- -------- --------
Net cash used by financing activities (1,321) (122) (6,878)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,370) 887 207
Cash and cash equivalents at beginning of year 11,207 10,320 10,113
-------- -------- --------
Cash and cash equivalents at end of year $ 6,837 $ 11,207 $ 10,320
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amounts capitalized) $ 4,880 $ 4,755 $ 4,791
======== ======== ========
Dividends on preferred stock $ -- $ -- $ 89
======== ======== ========
Income taxes $ 119 $ 224 $ 132
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
In April 1996, the Company purchased certain assets and assumed certain
liabilities of Unimar, Inc., by paying $3.9 million in cash and issuing $4
million of notes. (See Note 2.)
- --------------------------------------------------------------------------------
Acquisition of Unimar, Inc.
Fair value of assets acquired $ 9,661
Less cash acquired (404)
Less cash paid (3,880)
-------
Liabilities assumed, notes issued
and acquisition costs accrued $ 5,377
=======
- --------------------------------------------------------------------------------
In January 1994, the Company completed an exchange offer and consent
solicitation by issuing $22,000,000 of 10% Senior Subordinated Secured Notes due
2003 and paid approximately $4,350,000 in cash (exclusive of transaction costs)
in exchange for approximately $30,000,000 of 10 5/8% Convertible Subordinated
Reset Debentures due 2005. (See Note 8.)
See accompanying notes to consolidated financial statements.
26
Notes to Consolidated Financial Statements
The Cooper Companies, Inc. and Subsidiaries
NOTE 1.
Summary of Significant Accounting Policies
General
The Cooper Companies, Inc., (together with its subsidiaries, the "Company")
develops, manufactures and markets healthcare products, including a range of
hard and soft daily, flexible and extended wear contact lenses, and diagnostic
and surgical instruments. The Company also provides healthcare services through
the ownership of psychiatric facilities, and through May 1995, the management of
three other such facilities. Intercompany transactions and accounts are
eliminated in consolidation.
Foreign Currency Translation
Assets and liabilities of the Company's operations located outside the
United States (primarily Canada) are translated at prevailing year-end rates of
exchange. Related income and expense accounts are translated at weighted average
rates for each year. Gains and losses resulting from the translation of
financial statements in foreign currencies into U. S. dollars are recorded in
the equity section of the consolidated balance sheets. Gains and losses
resulting from the impact of changes in exchange rates on transactions
denominated in foreign currencies are included in the determination of net
income or loss for each period. Foreign exchange gains (losses) included in the
Company's consolidated statement of operations for each of the years ended
October 31, 1996, 1995 and 1994 were ($13,000), ($130,000) and $53,000,
respectively.
Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during each of the
reporting periods. Actual results could differ from those estimates.
Net Service Revenue
Net service revenue consists primarily of net patient revenue, which is
based on the Hospital Group of America, Inc. ("HGA") hospitals' established
billing rates less allowances and discounts for contractual programs. Payments
under these programs are based on either predetermined rates or the cost of
services. Settlements for retrospectively determined rates are estimated in the
period the related services are rendered and are adjusted in future periods as
final settlements are determined. Management believes that adequate provision
has been made for adjustments that may result from the final determination of
amounts earned under these programs. In 1996 and 1995, the Company received and
recognized revenue of approximately $2,000,000 and $2,400,000, respectively,
associated with prior year cost report settlements. Approximately 53%, 50% and
39%, respectively, of 1996, 1995 and 1994 net service revenue is from
participation by hospitals in Medicare and Medicaid programs.
The Company provides care to indigent patients who meet certain criteria
under its charity care policy without charge or at amounts less than its
established rates. Because the Company does not pursue collection of amounts
determined to qualify as charity care, they are not reported as revenue. The
Company maintains records to identify and monitor the level of charity care it
provides. These records include the amount of charges foregone for services and
supplies furnished under its charity care policy. Charges at the Company's
established rates foregone for charity care provided by the Company amounted to
$2,275,000, $2,142,000 and $2,498,000 for fiscal 1996, 1995 and 1994,
respectively. Hampton Hospital is required by its Certificate of Need to incur
not less than 10% of total patient days as free care.
With respect to net service revenue, receivables from government programs
represent the only concentrated group of potential credit risk to the Company.
Management does not believe that there are any credit risks associated with
these governmental agencies. Negotiated and private receivables consist of
receivables from various payors, including individuals involved in diverse
activities, subject to differing economic conditions, and do not represent any
concentrated credit risks to the Company. Furthermore, management continually
monitors and, where indicated, adjusts the allowances associated with these
receivables.
27
Net Sales of Products
Net sales of products consist of sales generated by the Company's
CooperVision ("CVI") and CooperSurgical ("CSI") businesses. The Company
recognizes revenue net of appropriate provisions for returns when risk of
ownership has transferred to the buyer.
With respect to net sales of products, management believes trade
receivables do not include any concentrated groups of credit risk.
Cash and Cash Equivalents
Cash and cash equivalents include commercial paper and other short-term
income producing securities with a maturity date at purchase of three months or
less. These investments are readily convertible to cash and are carried at cost
which approximates market.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out or average cost basis, or market.
The components of inventories are as follows:
- --------------------------------------------------------------------------------
October 31,
- --------------------------------------------------------------------------------
1996 1995
(In thousands)
-------------------------------------
Raw materials $ 2,318 $ 2,212
Work-in-process 1,028 1,114
Finished goods 7,017 6,244
------- -------
$10,363 $ 9,570
======= =======
- --------------------------------------------------------------------------------
Property, Plant and Equipment at Cost
- --------------------------------------------------------------------------------
October 31,
- --------------------------------------------------------------------------------
1996 1995
(In thousands)
-------------------------------------
Land and
improvements $ 1,360 $ 1,360
Buildings and
improvements 35,191 34,005
Machinery and
equipment 12,755 11,232
------- -------
$49,306 $46,597
======= =======
- --------------------------------------------------------------------------------
Depreciation is computed on the straight-line method in amounts sufficient
to write-off depreciable assets over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the period of the related lease. Building depreciation is based on estimated
useful lives of 35 to 40 years, and all machinery and equipment are depreciated
over 5 to 10 years.
Expenditures for maintenance and repairs are expensed; major replacements,
renewals and betterments are capitalized. The cost and accumulated depreciation
of depreciable assets retired or otherwise disposed of are eliminated from the
asset and accumulated depreciation accounts, and any gains or losses are
reflected in operations for the period.
Amortization of Intangibles
Amortization is provided for on all intangible assets (primarily goodwill,
which represents the excess of purchase price over fair value of net assets
acquired) on a straight-line basis over periods of up to 30 years. Accumulated
amortization at October 31, 1996 and 1995 was $4,447,000 and $3,909,000,
respectively. The Company assesses the recoverability of goodwill and other
long-lived assets by determining whether the amortization of the related balance
over its remaining life can be recovered through reasonably expected
undiscounted future cash flows. Management evaluates the amortization periods of
intangibles to determine whether later events and circumstances warrant revised
estimates of useful lives.
Earnings (Loss) Per Share
Earnings (loss) per share is determined by using the weighted average
number of common shares and common share equivalents (stock warrants and stock
options) outstanding during each year (except where antidilutive). Fully diluted
earnings (loss) per share is not materially different from primary earnings
(loss) per share.
28
Note 2.
Acquisitions
In April 1996, the Company acquired the stock of Unimar, Inc., a leading
provider of specialized disposable medical devices for gynecology, for
$8,000,000 in cash and notes. Sales of Unimar products of $3,600,000 were
included in the Company's results for fiscal 1996. Goodwill from the purchase
has been recorded in the amount of $7,800,000, which is being amortized over 20
years. As part of the acquisition, the Company granted a warrant to purchase
83,333 shares of the Company's common stock for $11.375 per share. The warrant
is valued at $231,000. The exercise period of the warrant is from April 11, 1999
to June 10, 1999. The number of shares and the exercise price per share are
subject to adjustment as provided in the warrant.
In June 1995, CSI acquired from Blairden Precision Instruments the exclusive
worldwide rights to The RUMI System uterine manipulator injector and related
products for $1,000,000. No goodwill arose from the recording of this
acquisition.
Note 3.
Stockholders Rights Plan
In October 1987, the Board of Directors of the Company declared a dividend
distribution of one right for each outstanding share of the Company's common
stock (a "Right"). Following the effectiveness of the one-for-three reverse
stock split in September 1995, the number of Rights per share increased from one
to three. Each Right entitles the holder to initially purchase from the Company
a fraction of a share of participating preferred stock at an exercise price of
$60.00, subject to adjustment. The Rights are exercisable only if a person or
group acquires (an "Acquiring Person"), or generally obtains the right to
acquire beneficial ownership of 20% or more of the Company's common stock, or
commences a tender or exchange offer which would result in such person or group
beneficially owning 30% or more of the Company's common stock. Once the Rights
are exercisable, then under certain circumstances, including certain
acquisitions of beneficial ownership of 30% or more of the Company's outstanding
common stock and certain mergers or other business combinations, each holder of
a Right, other than an Acquiring Person, will have the right to receive, upon
exercise, shares of common stock of the Company, or of the acquiring company in
such merger or other business combination or asset sale, having a value equal to
two times the exercise price of the Right.
The Rights expire on October 29, 1997 and may generally be redeemed by the
Company at a price of five cents per Right, at any time until the close of
business on the tenth day following a public announcement that an Acquiring
Person has acquired, or generally obtained the right to acquire, beneficial
ownership of 20% or more of the Company's common stock. After the redemption
period has expired, the Company's right of redemption may be reinstated if an
Acquiring Person reduces his beneficial ownership to 10% or less of the
outstanding shares of common stock in a transaction or series of transactions
not involving the Company.
In June 1993, the Board of Directors amended the Rights Agreement, so that
Cooper Life Sciences, Inc. ("CLS") and its affiliates and associates would not
be Acquiring Persons thereunder as a result of CLS's beneficial ownership of
more than 20% of the outstanding common stock of the Company by reason of its
ownership of Series B Preferred Stock or common stock issued upon conversion
thereof. In January 1995, the Rights Agreement was further amended to provide
that any person who becomes the beneficial owner of 10% or more, but not more
than 30%, of the outstanding common stock of CLS, would not be an Acquiring
Person, provided that such person is not otherwise, and does not thereafter
become, the beneficial owner of more than 1% of the Company's outstanding common
stock. (See "Agreements With CLS" in Note 12.)
Note 4.
Settlement of Disputes, Net
In 1996 and 1995, the Company recorded the following items related to
settlement of disputes:
HGA and Progressions Health Systems, Inc. ("Progressions") agreed to settle
certain purchase price adjustments (credited to goodwill) and other
disputes in return for a series of payments to be made to HGA. Pursuant to
this agreement, HGA received $853,000 of which $421,000 was credited to
settlement of disputes in 1995 and $447,000 of which $223,000 was similarly
credited in 1996.
Under a 1985 agreement (the "HMG Agreement"), Hampton Medical Group
("HMG"), which is owned by Dr. A. L. C. Pottash, contracted to provide
clinical and clinical administrative services at Hampton Psychiatric
Institute ("Hampton Hospital"), the primary facility operated by Hospital
Group of New Jersey, Inc. ("HGNJ"), a subsidiary of the Company's
psychiatric hospital holding company, HGA. Subsequently, HGNJ delivered
notices to HMG asserting that HMG had defaulted under the HMG Agreement
based upon billing practices by HMG that HGNJ believed to be fraudulent.
29
The Company recorded a charge of $5,551,000 for the settlement of disputes
with HMG and Dr. Pottash. Pursuant to the settlement, (i) the parties
released each other from, among other things, claims underlying related
arbitration, (ii) HGA purchased HMG's interest in the HMG Agreeme on
December 31, 1995, and (iii) HGNJ agreed to make certain payments to Dr.
Pottash in respect of claims he had asserted. While only HMG and Dr.
Pottash are parties to the settlement with HGA, HGNJ and the Company, the
Company has not been notified of any claims by other third party payors or
others relating to billing or other practices at Hampton Hospital. The
settlement with HMG and Dr. Pottash resulted in a one-time charge with a
present value of $5,551,000 to fourth quarter fiscal 1995 earnings. That
charge reflects amounts paid to Dr. Pottash in December 1995 of $3,100,000
included in other current liabilities at October 31, 1995, as well as two
payments scheduled to be made to HMG in May 1997 and 1998, each in the
amount of $1,537,500.
1995 charges were partially offset by the receipt of a $915,000 refund for
directors and officers insurance and a disgorgement of $648,000 from a
former officer of the Company.
In 1994, the Company recorded the following items related to settlement of
disputes:
A credit of $850,000 following receipt of funds by the Company to settle
certain claims made by the Company associated with a real estate
transaction.
A charge of $5,800,000, which represented the Company's estimate of costs
required to settle certain disputes and other litigation matters including
$3,450,000 associated with the criminal conviction and related SEC
enforcement action, summarized below.
In January 1994, the Company was found guilty on six counts of mail fraud
and one count of wire fraud based upon the conduct of a former Co-Chairman but
was acquitted of charges of conspiracy and aiding and abetting violations of the
Investment Advisers Act. The Company was senten and was ordered to make
restitution of $1,310,166 which was paid in 1994. In addition, the Company was
ordered to pay a noninterest bearing fine over three years in the amount of
$1,831,568. Payments of $350,000 each were made in 1995 and 1996 with an
additional payment of $1,131,568 payable on July 15, 1997. Also the Company
settled in December 1994 a related SEC action under which the Company agreed to
the disgorgement of $1,621,474 and the payment of a civil penalty of $1,150,000.
A significant portion of the amounts imposed by the SEC were offset by
disgorgement and fines in the related criminal action.
Note 5.
Costs Associated with Restructuring Operations
In the fourth quarter of 1995, the Company recorded $1,480,000 to provide
for costs primarily associated with the closure of facilities, with attendant
reductions in personnel, in the Company's CooperVision Pharmaceutical, Inc.
("CVP"), CSI and corporate operations and downsizing HGA headquarters.
Approximately 85% of this provision related to severance benefits accrued for 16
employees, substantially all of which was paid by October 1996. The balance
primarily reflected provisions for unproductive assets.
Note 6.
Financial Instruments
The fair values of the Company's financial instruments, including cash and
cash equivalents, trade receivables, lines of credit, accounts payable, and
accrued liabilities, approximated their carrying values as of October 31, 1996
because of the short maturity of these instruments.
The carrying amounts and fair values of the Company's 10% Notes and 10 5/8%
Debentures follow:
- --------------------------------------------------------------------------------
October 31, 1996
Carrying Fair
Amount Value
(In thousands)
---------------------------------------
10 5/8% Convertible
Subordinated Reset
Debentures Due 2005 $ 9,220 $10,591
10% Senior Subordinated
Secured Notes Due 2003 24,285 21,065
- --------------------------------------------------------------------------------
The fair values of the 10% Notes and 10 5/8% Debentures, which are not
regularly traded, are based on applicable quoted market prices.
The fair value of the Company's other long-term debt approximated the
carrying value at October 31, 1996, as the debt was refinanced or entered into
within the current fiscal year.
30
Note 7.
Income Taxes
The income tax provision (benefit) in the consolidated statements of
operations consists of:
Years Ended October 31,
- --------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
- --------------------------------------------------------------------------------
Current
Federal $ 146 $ -- $ --
State (486) 115 (4,600)
------- ------- -------
(340) 115 (4,600)
------- ------- -------
Deferred
Federal (4,148) -- --
State -- -- --
------- ------- -------
(4,148) -- --
------- ------- -------
$(4,488) $ 115 $(4,600)
======= ======= =======
- --------------------------------------------------------------------------------
A reconciliation of the provision for (benefit of) income taxes included in the
Company's consolidated statements of operations and the amount computed by
applying the federal income tax rate to income (loss) before income taxes
follows:
Years Ended October 31,
- --------------------------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
- --------------------------------------------------------------------------------------------------
Computed expected provision for (benefit of) taxes $ 4,119 $ 78 $(3,161)
Increase (decrease) in taxes resulting from:
Income outside the United States subject to
different tax rates 132 132 (65)
Amortization of intangibles 256 185 185
State taxes, net of federal income tax benefit 70 76 264
Reversal of prior years' estimated tax liabilities
no longer required (615) (200) (5,000)
Amortization of restricted stock compensation -- -- (31)
Net operating losses for which no tax benefit
was recognized -- -- 3,293
Interest expense related to original issue discount (116) (100) (100)
Utilization of net operating loss carryforwards
for which no tax benefit had been previously
recognized (4,406) -- --
Change in valuation allowance (4,148) -- --
Other, net 220 (56) 15
------- ------- -------
Actual provision for (benefit of) income taxes $(4,488) $ 115 $(4,600)
======= ======= =======
31
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
October 31,
- -----------------------------------------------------------------------------------------------
1996 1995
(In thousands)
- -----------------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally due to allowances for
doubtful accounts $ 1,030 $ 1,138
Inventories, principally due to obsolescence reserves 830 871
Investments, principally due to unrealized losses and
other reserves 73 73
Accrued liabilities, principally due to litigation reserves
and compensation accruals 2,507 4,868
Deferred income, principally due to the debenture exchange 1,066 1,258
Net operating loss carryforwards 79,681 81,871
Capital loss carryforwards 2,523 2,428
Tax credit carryforwards 2,705 2,560
Other 596 490
-------- --------
Total gross deferred tax assets 91,011 95,557
Less valuation allowance (80,304) (88,755)
-------- --------
Deferred tax assets 10,707 6,802
-------- --------
Deferred tax liabilities:
Plant and equipment, principally due to purchase accounting
requirements (6,461) (6,507)
Other, principally due to differences in accounting methods
for financial and tax purposes (98) (295)
-------- --------
Deferred tax liabilities (6,559) (6,802)
-------- --------
Net deferred tax assets $ 4,148 $ --
======== ========
- -----------------------------------------------------------------------------------------------
The net change in the total valuation allowance for the years ended October
31, 1996, 1995 and 1994 was a decrease of $8,451,000, an increase of $1,580,000
and an increase of $2,327,000, respectively. In the fourth quarter of 1996, the
Company recognized an income tax benefit of $4,148,000 from reducing the
valuation allowance based primarily on the significant improvements in the
Company's 1996 operating results.
Subsequently recognized tax benefits relating to the valuation allowance as
of October 31, 1996 will be allocated as follows to:
- --------------------------------------------------------------------------------
(In thousands)
----------------------------------
Consolidated statement
of operations $78,604
Goodwill and other
intangible assets 1,700
-------
$80,304
=======
- --------------------------------------------------------------------------------
32
At October 31, 1996 the Company had capital loss, net operating loss, and tax
credit carryforwards for federal tax purposes expiring as follows:
Year of Capital Operating Tax
Expiration Losses Losses Credits
(In thousands)
- --------------------------------------------------------------------------------
1998 $ 5,925 $ -- $ --
1999 1,216 147 867
2000 280 56 1,132
2001 -- 70,473 202
2002 -- 27,326 29
2003 -- 1,378 330
2004 -- 22,241 --
2005 -- 11,006 --
2006 -- 22,265 --
2007 -- 22,058 --
2008 -- 49,535 --
2009 -- 6,553 --
2010 -- 1,318 --
Indefinite life -- -- 145
-------- -------- --------
$ 7,421 $234,356 $ 2,705
======== ======== ========
- --------------------------------------------------------------------------------
Note 8.
Long-Term Debt
Long-term debt consists of the following:
October 31,
- ---------------------------------------------------------------------------------------
1996 1995
(In thousands)
- ---------------------------------------------------------------------------------------
10% Senior Subordinated Secured Notes due 2003 ("Notes") $24,285 $24,816
10 5/8% Convertible Subordinated Reset Debentures due
2005 ("Debentures") 9,220 9,215
12% promissory notes ("Promissory Notes") due April 11, 1999 4,000 --
Bank term loan ("HGA Term Loan") 10,675 9,889
Industrial Revenue Bonds ("HGA IRB") -- 1,458
Capitalized leases, interest rates from 8% to 13% maturing 1999 584 400
------- -------
48,764 45,778
Less current installments 844 2,288
------- -------
$47,920 $43,490
======= =======
- ---------------------------------------------------------------------------------------
33
Aggregate annual maturities for each of the five years subsequent to
October 31, 1996 are as follows:
- --------------------------------------------------------------------------------
(In thousands)
----------------
1997 $ 844
1998 $ 1,013
1999 $ 4,728
2000 $ 667
2001 $ 8,007
- --------------------------------------------------------------------------------
The aggregate principal amount of $21,943,000 of Notes matures on June 1,
2003 and interest is payable quarterly. The Notes are redeemable solely at the
option of the Company, in whole or in part, at any time, at a redemption price
of 100% of principal plus accrued and unpaid interest to the redemption date.
The Company is not required to effect any mandatory redemptions or make any
sinking fund payments with respect to the Notes, except in connection with
certain sales or other dispositions of, or certain financings secured by, the
collateral securing the Notes. Pursuant to a pledge agreement dated as of
January 6, 1994, between the Company and the trustee for the holders of the
Notes, the Company has pledged a first priority security interest in all of its
rights, title and interest in stock of its subsidiaries HGA and CSI, all
additional shares of stock of, or other equity interests in HGA and CSI from
time to time acquired by the Company, all intercompany indebtedness of HGA and
CSI from time to time held by the Company, except as set forth in the indenture
governing the Notes, and the proceeds received from the sale or disposition of
any or all of the foregoing. In accordance with a debt restructuring completed
in January 1994, which was accounted for as a troubled debt restructuring, the
Company recorded a deferred premium of $4,005,000. The Company is recognizing
the benefit of the deferred premium as a reduction to the effective interest
rate on the Notes over the remaining life of the Notes. The effective interest
rate which includes the impact of the amortization of the deferred premium is
6.69%. As of October 31, 1996, the amount of the unamortized deferred premium
was $2,342,000.
The aggregate principal amount of $9,290,000 of Debentures matures March 1,
2005. Interest at 10 5/8% per annum is paid semi-annually. The Debenture holders
may convert Debentures into shares of the Company's common stock at $15.00 per
share, subject to adjustments under certain conditions to prevent dilution to
the holders. The difference between the carrying amount and the principal amount
of the Company's Debentures represents unamortized discount which is being
charged to expense over the life of the issue. The effective interest rate is
10.77%. As of October 31, 1996, the amount of unamortized discount was
approximately $70,000.
The Debentures and the Notes each contain various covenants, including
limitations on investments, incurrence and ranking of indebtedness, payment of
cash dividends, acquisition of the Company's common stock and transactions with
affiliates.
HGA Debt
Substantially all of the property and equipment and accounts receivable of
HGA collateralize its outstanding debt. The HGA Term Loan was renegotiated on
September 17, 1996. Terms of the amended agreement reduced the interest rate to
two and one-half percentage points above the bank's prime rate and extended the
loan maturity to August 1, 2001. Additionally, because HGA achieved targeted
operating results, the interest rate was further reduced effective November 1,
1996 to a rate of two percentage points (2%) above the bank's prime rate,
subject to a minimum of nine percent (9%). The rate in effect at October 31,
1996 and 1995 was 10.75% and 12.75%, respectively. Interest and principal
payments on the HGA Term Loan are due monthly through August 2001. The HGA Term
Loan contains covenants including the maintenance by HGA of certain ratios and
levels of net worth (as defined), capital expenditures, interest and debt
payments, as well as restrictions on payment of cash dividends. The HGA IRB
carried interest at 85% of prime. The HGA IRB holders elected their right to
accelerate all payments of outstanding principal at December 31, 1995. The
outstanding balance of the HGA IRB totaling $1,320,000 at December 31, 1995 was
paid, and the amount was rolled into the HGA Term Loan.
Loan and Security Agreement
In September 1994, CVI entered into a Loan and Security Agreement ("Line of
Credit") with a commercial lender providing for revolving advances of up to
$8,000,000, which was amended on April 18, 1996. On October 31, 1996 there were
no amounts outstanding. Advances under the Line of Credit bear interest at one
and one-half percentage points above the highest most recently announced prime
rate of the three financial institutions of national repute named in the
agreement, with a floor of 8.5% per annum. The rate in effect at October 31,
1996 was 9.75% per annum. The weighted average interest rate for 1995 was
11.38%. CVI agreed to the payment of various fees and minimum annual interest of
$115,000. The amount of advances allowed under the agreement is capped at the
lesser of $8,000,000, or a percentage of CVI's levels of eligible receivables
and inventory as defined in the agreement (approximately $7,000,000 in total
line availability at October 31, 1996) and is collateralized by virtually all of
the assets of CVI.
34
The Line of Credit provides that CVI (provided that no Event of Default, as
defined, has occurred and is continuing) may make loans, advances, investments,
capital contributions and distributions to the Company, and pay management fees
to the Company, so long as the total amount of all such amounts does not cause
Tangible Net Worth (as defined in the Line of Credit) to be less than
$3,000,000. At October 31, 1996, CVI had Tangible Net Worth of $12,534,000, of
which $9,534,000 was unrestricted under the terms of the Loan and Security
Agreement.
The Line of Credit contains various covenants, including the maintenance of
certain ratios and levels of net worth (as defined), limitations on capital
expenditures and incurrence of indebtedness as well as limitations regarding
change in control and transactions with affiliates.
In connection with the Line of Credit, the Company guaranteed all of the
obligations under the HGA Term Loan and CVI's obligations under the Line of
Credit, and the Company pledged all of the outstanding stock of CVI as
collateral for the HGA Term Loan guaranty.
In October 1996, CVI obtained a lease line of credit providing for
borrowings of up to $500,000 from a commercial leasing company. Proceeds under
the lease line are to be used to finance the purchase of equipment from the
leasing company. The interest rate on each lease will be determined by the
lender. At October 31, 1996, the Company had not drawn on the lease line.
Promissory Notes
In April 1996, Cooper Healthcare Group, Inc. (a subsidiary of the Company)
acquired Unimar, Inc. (See Note 2.) and issued Promissory Notes for $4,000,000
principal amount, bearing an interest rate of 12% per annum, maturing April
1999. Interest is paid annually. The Promissory Notes are collatera lized by a
security interest in the shares of the common stock of Unimar, Inc., and payment
is guaranteed by the Company.
Note 9.
Employee Stock Plans
1988 Long-Term Incentive Plan ("LTIP")
The LTIP is a vehicle for the Company to attract, retain and motivate its
key employees and consultants, who are directly linked to the profitability of
the Company and to increasing stockholder value.
The LTIP authorizes a committee consisting of three or more individuals not
eligible to participate in the LTIP or the Company's Board of Directors, to
grant to eligible individuals during a period of ten years from September 15,
1988, stock options, stock appreciation rights, restricted stock, def erred
stock, stock purchase rights, phantom stock units and long-term performance
awards for up to 2,125,570 shares of common stock, subject to adjustment for
future stock splits, stock dividends, expirations, forfeitures and similar
events. Options generally vest based on the Company's stock price, however, in
some cases, both stock price and time are used as criteria. In July 1996, two
officers of the Company were granted special options totaling 280,000 shares.
These shares will vest in four tranches upon the achievement of specific prices
of the Company's common stock within prescribed periods. As of October 31, 1996,
502,727 shares remained available under the LTIP for future grants. Restricted
shares of zero, 176,196 and 99,259 were granted under the plan in fiscal 1996,
1995 and 1994, respectively. Restricted shares with restrictions in place were
16,529, 91,659 and 54,444 on October 31, 1996, 1995 and 1994, respectively.
1996 Long-Term Incentive Plan for Non-Employee
Directors ("1996 NEDRSP")
In March 1996, the Company's stockholders approved a proposal to reduce the
annual cash stipend paid to Non-Employee Directors and to award grants of
restricted stock and options which are to be awarded annually at the start of
each fiscal year. Specifically, each Non-Employee Director will be awa rded the
right to purchase restricted stock worth $7,500 for $0.10 per share (or $9,375
in the case of the Chairman of the Board who is a Non-Employee Director) by
January 15 of the year following the date the grant was made. Grants of
restricted stock that are not exercised by such date will expi re. The
restrictions on the restricted stock will lapse on the earlier to occur of the
stock reaching certain target values or by the fifth anniversary of the date of
grant. In addition, each Non-Employee Director was granted an option to purchase
5,000 shares of the Company's common stock in fis cal 1996 and will be granted
3,333 shares in each subsequent fiscal year (or, in the case of the Chairman of
the Board who is a Non-Employee Director, 6,250 shares in fiscal 1996 and 4,167
shares in each subsequent fiscal year) through fiscal 2000. A total of 215,000
shares of the Company's authori zed but unissued common stock have been reserved
for issuance under the plan. As of October 31, 1996, 176,357 shares remained
available under the 1996 NEDRSP for future grants. Restricted shares of 7,393
were granted under the 1996 NEDRSP in fiscal 1996, and there were no shares with
restrictions in place outstanding October 31, 1996.
1990 Non-Employee Directors Restricted Stock Plan
("1990 NEDRSP")
Under the terms of the 1990 NEDRSP, a total of 33,333 shares of common
stock were authorized and reserved for issuance. A total of 18,333 shares of
restricted stock with restrictions removed were awarded under this plan. Upon
approval by the Company's stockholders of the 1996 NEDRSP, the 1990 NED RSP
terminated.
35
Transactions involving the granting of options of the Company's common stock in
connection with the LTIP and the 1996 NEDRSP are summarized below.
Number of Shares
- -----------------------------------------------------------------------------------------------------------------------------------
LTIP 1996 NEDRSP
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at October 31, 1993 178,075 --
Options granted 136,667 --
Options exercised at $1.68 per share (1,073) --
Options forfeited (48,113) --
------- ------
Outstanding at October 31, 1994 265,556 --
Options granted 131,121 --
Options exercised at $1.68 to $2.07 per share (5,153) --
Options forfeited (62,683) --
------- ------
Outstanding at October 31, 1995 328,841 --
Options granted 441,111 31,250
Options exercised at $1.68 to $7.68 per share (15,505) (6,250)
Options forfeited (39,785) --
------- ------
Outstanding at October 31, 1996 (219,164 and 25,000
shares exercisable, respectively) 714,662 25,000
======= ======
- ------------------------------------------------------------------------------------------------------------------------------------
Options issued and outstanding at October 31, 1996 have option prices
ranging from $1.68 to $34.00 per share.
The excess of market value over $.10 per share of LTIP, 1990 NEDRSP and
1996 NEDRSP restricted shares on respective dates of grant is initially recorded
as unamortized restricted stock award compensation, a separate component of
stockholders' equity and charged to operations as earned. Restricted shares and
other stock compensation charged against income from operations for the years
ended October 31, 1996, 1995 and 1994 was $46,000, zero and $55,000,
respectively.
Old Stock Option Plans
On October 31, 1996, there were 7,483 shares outstanding with option prices
ranging from $48.39 - $59.25 per share under old stock option plans.
Note 10.
Employee Benefits
The Company's Retirement Income Plan
The Company's Retirement Income Plan (the "Plan") covers substantially all
full-time United States employees of CVI and the Company's corporate
headquarters. The Company's contributions are designed to fund normal cost on a
current basis and to fund over thirty years the estimated prior service cost of
benefit improvements (fifteen years for annual gains and losses). The unit
credit actuarial cost method is used to determine the annual cost. The Company
pays the entire cost of the Plan and funds such costs as they accrue. Virtually
all of the assets of the Plan are comprised of participations in equity and
fixed income funds. The measurement date for assumptions used in developing the
projected benefit obligation was changed to August 31 during fiscal 1996.
Net periodic pension cost of the Plan was as follows:
- --------------------------------------------------------------------------------
Years Ended October 31,
- --------------------------------------------------------------------------------
1996 1995 1994
(In thousands)
- --------------------------------------------------------------------------------
Service cost $ 256 $ 188 $ 173
Interest cost 598 521 479
Actual return on
assets (1,047) (982) (531)
Net amortization
and deferral 488 491 2
------- ------- -------
Net periodic
pension cost $ 295 $ 218 $ 123
======= ======= =======
- --------------------------------------------------------------------------------
36
The actuarial present value of benefit obligations and funded status for the
Plan was as follows:
October 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Vested benefit obligation $ 7,049 $ 7,250
Non-vested benefit obligation 24 77
------- -------
Accumulated benefit obligation 7,073 7,327
Projected compensation increases 887 825
------- -------
Projected benefit obligation 7,960 8,152
Fair value of plan assets 7,204 6,545
------- -------
Projected benefit obligation in excess of assets 756 1,607
Add (Deduct):
Unrecognized net gain (loss) 538 (386)
Contributions made 8/31/96 to 10/31/96 (335) ---
Prior service cost remaining to be amortized, including
unrecognized net asset (382) (439)
------- -------
Pension liability recognized $ 577 $ 782
======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
Assumptions used in developing the projected benefit obligation were as
follows:
- --------------------------------------------------------------------------------
August 31, October 31,
-----------------------------------
1996 1995
Discount rate on
plan liabilities 8.0% 7.5%
Long-range rate of
return on plan assets 9.0% 9.0%
Salary increase rate 6.0% 6.0%
- --------------------------------------------------------------------------------
The Company's 401(k) Savings Plan
The Company's 401(k) Savings Plan provides for the deferral of compensation
as described in the Internal Revenue Code and is available to substantially all
full-time United States employees of the Company. Employees who participate in
the 401(k) Plan may elect to have from 2% to 10% (1% to 16%, beginning October
1, 1996 for employees whose salary is less than $66,000 annually) of their
pre-tax salary or wages, (but not more than $5,000 for employees whose salary is
more than $66,000 annually) for the calendar year ended December 31, 1996,
deferred and contributed to the trust established under the Plan. The Company's
contribution on account of participating employees, net of forfeiture credits,
was $102,000, $95,000 and $80,000 for the years ended October 31, 1996, 1995 and
1994, respectively.
The Company's Incentive Payment Plan
The Company's Incentive Payment Plan is available to officers and other key
executives. Participants may, in certain years, receive bonuses based
on performance. Total payments earned for the years ended October 31, 1996,
1995 and 1994, were approximately $1,753,000, $1,504,000 and $1,296,000,
respectively.
The Company's Turn Around Incentive Plan
The Turn Around Incentive Plan ("TIP") was adopted in 1993 to recognize the
special efforts of certain individuals in guiding the Company through certain
difficulties that existed at that time related to the Company's then capital
structure and its former ownership of companies that manufactured and
distributed breast implants. All provisions of the TIP have been met, and all
required payments have been made to participants as follows:
In May 1994 participants received an aggregate payment of approximately
$247,000 cash and approximately 99,000 shares of restricted stock from which all
restrictions were removed in May 1996.
In August 1995 participants received an aggregate payment of approximately
$476,000 cash and approximately 97,000 shares of restricted stock. Restrictions
from one-half of these shares were removed in August 1996, and the restrictions
on the balance of the shares will be removed in August 1997.
37
Note 11.
Commitments, Contingencies and Pending Litigation
Total minimum annual rental obligations (net of sublease revenue of
approximately $173,000 per year through March 2000) under noncancelable
operating leases (substantially all real property or equipment) in force at
October 31, 1996 are payable in subsequent years as follows:
- --------------------------------------------------------------------------------
(In thousands)
--------------
1997 $1,473
1998 1,051
1999 808
2000 766
2001 597
2002 and thereafter 913
---- ------
$5,608
======
- --------------------------------------------------------------------------------
Aggregate rental expense for both cancelable and noncancelable contracts
amounted to $2,508,000, $2,354,000 and $2,438,000 in 1996, 1995 and 1994,
respectively.
An agreement was reached in September 1993 with Medical Engineering
Corporation ("MEC"), a subsidiary of Bristol-Myers Squibb Company, which limited
the Company's contingent liabilities associated with breast implant litigation
involving a former division of the Company (the "MEC Agreement"). The remaining
liability recorded for payments to be made to MEC under the MEC Agreement become
due as follows:
- --------------------------------------------------------------------------------
December 31, (In thousands)
- --------------------------------------------------------------------------------
1996 $1,750
1997 2,000
1998 2,500
------
$6,250
======
- --------------------------------------------------------------------------------
Additional payments to be made to MEC beginning December 31, 1999 are
contingent upon the Company's earning net income before taxes in each fiscal
year beginning with fiscal 1999, and are, therefore, not recorded in the
Company's financial statements. Such payments are limited to the smaller of 50%
of the Company's net income before taxes in each such fiscal year on a
noncumulative basis or the amounts shown below:
- --------------------------------------------------------------------------------
December 31, (In thousands)
- --------------------------------------------------------------------------------
1999 $3,000
2000 $3,500
2001 $4,000
2002 $4,500
2003 $3,000
- --------------------------------------------------------------------------------
Under the terms of a supply agreement most recently modified in 1993, the
Company agreed to purchase by December 31, 1997, certain contact lenses from
Pilkington plc, with an aggregate cost of approximately 'L'4,063,000. Lenses
with an aggregate value of approximately 'L'520,000, 'L'477,000 and 'L'400,000
were purchased under the terms of the supply agreement in fiscal 1996, 1995 and
1994, respectively. As of December 31, 1996, there remained a commitment of
approximately 'L'2,354,000.
Payments amounting to $3,100,000 were made related to a settlement with HMG
(See Note 4.) in December 1995. Two additional payments which are accreting
imputed interest are scheduled to be made to HMG in May 1997 and 1998, each in
the amount of $1,537,500. The October 31, 1996 classifications and carrying
values are $1,399,000 in accounts payable and $1,331,000 in other noncurrent
liabilities. These amounts were charged against net income in fiscal 1995.
Warrants
The Company issued a warrant to Foothill Capital Corporation ("Foothill")
to purchase 26,666 shares of the Company's common stock at $5.625 per share in
connection with the loan and security agreement among Foothill, CVI, and
CooperVision Canada. (See Note 8 "Loan and Security Agreement.") The warrant
becomes exercisable on September 21, 1997 and expires on May 26, 1999. Both the
number of shares under the warrant and the exercise price per share are
adjustable under certain circumstances to avoid dilution.
38
The Company granted a warrant to purchase 83,333 shares of the Company's
common stock at $11.375 per share, as part of the acquisition of Unimar, Inc.
(See Note 2.) The exercise period of the warrant is from April 11, 1999 to June
10, 1999. The number of shares and the exercise price per share ar e subject to
adjustment as provided in the warrant.
Pending Litigation
The Company is a defendant in a number of legal actions relating to its
past or present businesses in which plaintiffs are seeking damages. In the
opinion of Management, after consultation with counsel, the ultimate disposition
of those actions will not materially affect the Company's financial position or
results of operations.
The Company was named as a nominal defendant in a stockholder derivative
action entitled Harry Lewis and Gary Goldberg v. Gary A. Singer, Steven G.
Singer, Arthur C. Bass, Joseph C. Feghali, Warren J. Keegan, Robert S. Holcombe
and Robert S. Weiss, which was filed on May 27, 1992 in the Court of Ch ancery,
State of Delaware, New Castle County. Lewis and Goldberg subsequently amended
their complaint, and the Delaware Chancery Court consolidated the amended
complaint with a similar complaint filed by another plaintiff as In re The
Cooper Companies, Inc. Litigation, Consolidated C.A. 12584. The Lewis and
Goldberg amended complaint was designated as the operative complaint (the
"Derivative Complaint").
The Derivative Complaint alleges that certain directors of the Company and
Gary A. Singer, as Co-Chairman of the Board of Directors, caused or allowed the
Company to be a party to a "trading scheme" to "frontrun" high yield bond
purchases by the Keystone Custodian Fund, Inc., a group of mutual fund s. The
Derivative Complaint also alleges that the defendants violated their fiduciary
duties to the Company by not vigorously investigating certain allegations of
securities fraud. The Derivative Complaint requests that the Court order the
defendants (other than the Company) to pay damages and ex penses to the Company
and certain of the defendants to disgorge their profits to the Company.
The parties have been engaged in negotiations and had agreed upon the terms
of a settlement. Although the proposed settlement was submitted to the Court for
approval following notice to the Company's stockholders and a hearing,
Plaintiffs have decided not to proceed with the settlement in its present form,
and the parties have reopened settlement discussions. There can be no assurance
that the current discussions will ultimately end the litigation. The individual
defendants have advised the Company that they believe they have meritorious
defenses to the lawsuit and that, in the event the case proceeds to trial, they
intend to defend vigorously against the allegations in the Derivative Complaint.
The Company was also named as a nominal defendant in a stockholder
derivative action entitled Bruce D. Sturman v. Gary A. Singer, Steven G. Singer,
Brad C. Singer, Dorothy Singer as the Executrix of the Estate of Martin Singer,
Karen Sue Singer, Norma Singer Brandes, Normel Construction Corp., Bran des &
Singer, and Romulus Holdings, Inc., which was filed on June 6, 1995 in the Court
of Chancery of the State of Delaware, New Castle County. The complaint is
similar to a derivative complaint filed by Mr. Sturman in the Supreme Court of
the State of New York on May 26, 1992, which was dismissed under New York Civil
Practice Rule 327(a) on August 17, 1993. The dismissal of the New York case was
affirmed by the Appellate Division on March 28, 1995. The allegations in the
Delaware complaint filed by Mr. Sturman relate to substantially the same facts
and events at issue in In re The Cooper C ompanies, Inc. Litigation described
above, and similar relief is sought. The parties had agreed that Mr. Sturman's
Delaware action would be consolidated into and tentatively settled with In re
The Cooper Companies, Inc. Litigation.
Note 12.
Relationships and Transactions between the
Company and CLS
Agreements with CLS
On June 14, 1993, the Company entered into a Settlement Agreement with CLS
(the "Settlement Agreement") in order to resolve all then pending disputes with
CLS and to avoid a costly and disruptive proxy fight, while continuing to
maintain a Board of Directors, the majority of whose members are indep endent.
Pursuant to the Settlement Agreement, among other things, the Company agreed to
nominate and use its reasonable best efforts to cause, and CLS agreed to vote
all shares of Common Stock of the Company owned by it in favor of, the election
of a Board of Directors of the Company consisting of eight members, five of whom
were designated by the Company (of which a majority would not be employees of
the Company or employees, affiliates or significant stockholders of CLS), and
three by CLS. Such agreements were to terminate on June 14, 1995, subject to
earlier termination or extension und er certain circumstances, and were later
extended to, and expired on, October 31, 1996. Following such termination and
through June 12, 2022, pursuant to the Settlement Agreement, CLS continues to
have the right that it had pursuant to a 1992 settlement agreement with the
Company to designate two directors of the Company, so long as CLS continues to
own at least 800,000 shares of Common Stock, or one director, so long as it
continues to own at least 333,333 shares of Common Stock.
39
Pursuant to this provision, Donald Press and Steven Rosenberg continue to
serve as directors designated by CLS. In addition, the Board of Directors, other
than the CLS designees, determined to continue Moses Marx as a non CLS
designated director of the Company.
Prior to September 1994, CLS had an investment in the Company's Series B
Preferred Stock having an aggregate liquidation preference of $3,450,000 and a
par value of $.10 per share (the "1993 Exchange Agreement"). Such shares, and
any shares of Series B Preferred Stock issued as dividends, were convertible
into one share of common stock of the Company for each $3.00 of liquidation
preference, subject to customary antidilution adjustments.
The Company also had the right to compel conversion of Series B Preferred
Stock at any time after the market price of the common stock on its principal
trading market averaged at least $4.125 for 90 consecutive calendar days and
closed at not less than $4.125 on at least 80% of the trading days during such
period. On September 26, 1994, the Company's common stock met the above
requirements, and the Series B Preferred Stock was converted into 1,150,000
shares of the Company's common stock.
Other
CLS was formerly an 89.5% owned subsidiary of the Company's former parent,
Cooper Laboratories, Inc.
As of December 31, 1996, CLS owned 1,963,233 shares (or approximately
16.83%) of common stock of the Company.
Two members of the Company's Board of Directors are also directors and/or
officers of CLS. Moses Marx is a Director of CLS (and is the controlling
stockholder of CLS). Steven Rosenberg is serving as Acting President, Vice
President and Chief Financial Officer of CLS and he is also a Director of CLS.
In addition to shares purchased on the open market, Mr. Marx owns 3,037 shares
and Mr. Rosenberg owns 3,371 shares of the Company's common stock, obtained
through the NEDRSP. (See Note 9.)
Note 13.
Business Segment Information
The Company's operations are attributable to three business segments:
HGA, which provides healthcare services for inpatient and outpatient
treatment and partial hospitalization programs through the ownership
and operation of certain psychiatric facilities, and through May 1995
also managed three other such facilities,
CVI, which develops, manufactures and markets a range of contact
lenses, and
CSI, which develops, manufactures and distributes diagnostic and
surgical equipment instruments and disposables, primarily for
gynecology.
Total net revenue by business segment represents service and sales revenue
as reported in the Company's consolidated statements of operations. Operating
income (loss) is total net revenue less cost of products sold (or services
provided, in the case of HGA revenue), research and development expenses,
selling, general and administrative expenses, costs of restructuring and
amortization of intangible assets. Corporate operating loss is principally
corporate headquarters expense. Investment income, net, settlement of disputes,
net, debt restructuring costs, gain on sales of assets and businesses, net,
other income (expense), net, and interest expense were not allocated to
individual business.
Identifiable assets are those assets used in continuing operations
(exclusive of cash and cash equivalents). Corporate assets include cash and cash
equivalents and temporary investments.
40
Notes to Consolidated Financial Statements
------------------------------------------
The Cooper Companies, Inc. and Subsidiaries
Information by business segment for each of the years in the three year period
ended October 31, 1996 follows:
- ------------------------------------------------------------------------------------------------------------------------------------
HGA CVI CSI Corporate & Consolidated
Eliminations
- ------------------------------------------------------------------------------------------------------------------------------------
1996 (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue from non affiliates $ 43,013 $ 48,892 $ 17,226 $ --- $ 109,131
========= ========= ========= ========= =========
Operating income (loss) $ 2,573 $ 19,065 $ 1,667 $ (6,462) $ 16,843
========= ========= ========= =========
Investment income, net 281
Settlement of disputes, net 223
Other income (expense), net 80
Interest expense (5,312)
----------
Income before income taxes $ 12,115
=========
Identifiable assets $ 49,051 $ 23,756 $ 18,089 $ 12,013 $ 102,909
========= ========= ========= ========= =========
Depreciation Expense $ 1,511 $ 800 $ 236 $ 82 $ 2,629
========= ========= ========= ========= =========
Amortization Expense $ 205 $ 314 $ 461 $ 269 $ 1,249
========= ========= ========= ========= =========
Capital Expenditures $ 1,431 $ 1,293 $ 404 $ 54 $ 3,182
========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue from non affiliates $ 41,794 $ 42,456 $ 12,824 $ 16 $ 97,090
========= ========= ========= ========= =========
Operating income (loss) $ 878 $ 13,959 $ (425) $ (6,404) $ 8,008
========= ========= ========= =========
Investment income, net 444
Settlement of disputes, net (3,532)
Other income (expense), net 51
Interest expense (4,741)
---------
Income before income taxes $ 230
=========
Identifiable assets $ 48,086 $ 21,965 $ 8,953 $ 12,988 $ 91,992
========= ========= ========= ========= =========
Depreciation Expense $ 1,443 $ 863 $ 288 $ 110 $ 2,704
========= ========= ========= ========= =========
Amortization Expense $ 205 $ 448 $ 317 $ 22 $ 992
========= ========= ========= ========= =========
Capital Expenditures $ 335 $ 1,449 $ 267 $ 134 $ 2,185
========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue from non affiliates $ 44,611 $ 37,793 $ 12,847 $ 394 $ 95,645
========= ========= ========= ========= =========
Operating income (loss) $ 3,321 $ 11,963 $ (932) $ (13,929) $ 423
========= ========= ========= =========
Investment income (loss), net (153)
Settlement of disputes, net (4,950)
Debt restructuring costs (340)
Gain on sale of assets and
businesses, net 214
Other income (expense), net 42
Interest expense (4,533)
---------
Loss before income taxes $ (9,297)
=========
Identifiable assets $ 50,522 $ 22,814 $ 9,289 $ 12,433 $ 95,058
========= ========= ========= ========= =========
Depreciation expense $ 1,387 $ 1,025 $ 339 $ 119 $ 2,870
========= ========= ========= ========= =========
Amortization expense $ 205 $ 448 $ 302 $ 22 $ 977
========= ========= ========= ========= =========
Capital expenditures $ 338 $ 524 $ 58 $ 18 $ 938
========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
41