THE COOPER COMPANIES
ANNUAL REPORT 1997
[COVER ART]
[LOGO]
[GRAPH] [GRAPH] [GRAPH]
REVENUE OPERATING INCOME EARNINGS PER SHARE
($ MILLIONS) ($ MILLIONS) [GRAPH]
CASH FROM OPERATING ACTIVITIES SHARE PRICE MARKET CAPITALIZATION
(MILLIONS)
[GRAPH] [GRAPH]
PERCENTAGE OF REVENUE PERCENT OF TOTAL OPERATING
INCOME OF BUSINESS UNITS
Contents
2 Forward-Looking Statements
3 Fiscal 1997 Financial Highlights
4 1997 Operation in Brief
5 Letter to Shareholders
8 Freqnently Asked Questions
11 Business Operations
33 Financial Section
65 Scientific Advisors to the Company
66 Corporate Information
Financial results for the years ended October 31, Share Price and Market
Capitalization at December 31.
The Cooper Companies, Inc. is a rapidly growing specialty healthcare company.
Each of its three business units serves attractive niche markets with high
quality products and services. CooperVision develops, manufactures and markets a
wide range of contact lenses, concentrating on the toric and other specialty and
premium lens markets. CooperSurgical specializes in women's healthcare. It
develops, manufactures and markets proprietary diagnostic and surgical
instruments, equipment, accessories and devices for the physician's office, the
surgicenter and the hospital. Hospital Group of America owns and operates three
psychiatric hospitals, a residential treatment center and satellite facilities
that provide inpatient, outpatient and other ancillary treatment primary for
children, adolescents and older adults. HGA's management services division
provides behavioral health consultation and contract management service in
behavioral health for acute care hospitals.
FORWARD-LOOKING STATEMENTS IN THIS REPORT
Statements in this report that are not based on historical fact may be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be identified by
the use of forward-looking terminology such as "may", "will", "expect",
"estimate", "anticipate", "continue" or similar terms. Actual results could
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include: major
changes in business conditions and the economy in general, loss of key members
of senior management, any prolonged disruption in the operations of the
Company's manufacturing facilities or hospitals, inroads by new competitors or
technologies, costs to integrate acquisitions, potential foreign exchange
exposure, decisions to invest in research and development and other start-up
projects, dilution to earnings per share associated with acquisitions or stock
issuance, regulatory issues, unexpected changes in reimbursement rates and payor
mix, environmental clean-up costs above those already accrued, litigation and
decisions to divest businesses. Future results are also dependent on each of the
Company's business units meeting specific objectives.
2
Fiscal 1997 Financial Highlights
The Cooper Companies, Inc, and Subsidiaries
% change % change
(Dollars in millions except per share figures) 1997 from 1996 1996 from 1995
- ------------------------------------------------------------------------------------------------------
Revenue
CooperVision $ 64.0 31% $ 48.9 15%
CooperSurgical $ 24.8 44% $ 17.2 34%
Hospital Group of America $ 52.7 23% $ 43.0 3%
Total $141.5 30% $109.1 12%
- ------------------------------------------------------------------------------------------------------
Operating Income
CooperVision $ 23.1 21% $ 19.1 37%
CooperSurgical $ 2.5 49% $ 1.6 n/m
Hospital Group of America $ 6.0 133% $ 2.6 193%
Corporate $ (5.8) n/m $ (6.5) (1%)
Total $ 25.8 53% $ 16.8 110%
Operating income as a % of revenue 18% -- 15% --
- ------------------------------------------------------------------------------------------------------
Earnings
Net income $ 31.4 89% $ 16.6 n/m
As a % of revenue 22% -- 15% --
Per share:
Before items below $ 1.67 62% $ 1.03 n/m
Net tax benefit 2.03 434% .38 n/m
Extraordinary item .08 n/m -- n/m
Discontinued operations (1.38) n/m -- n/m
Net income $ 2.40 70% $ 1.41 n/m
- ------------------------------------------------------------------------------------------------------
Other Financial Information
Depreciation and amortization $ 4.7 20% $ 3.9 5%
Cash flow from operating activities $ 11.7 239% $ 3.5 1%
Cash and cash equivalents $ 18.2 167% $ 6.8 (39%)
Working capital $ 35.0 280% $ 9.2 n/m
Total assets $175.3 70% $102.9 12%
Total liabilities $ 63.8 (27%) $ 87.6 (7%)
Stockholders' equity $111.5 n/m $ 15.3 n/m
Average shares used for EPS calculation 13.1 11% 11.8 2%
- ------------------------------------------------------------------------------------------------------
3
1997 Operations in Brief
Cooper's total revenue increased 30% to $141.5 million: 31% to $64.0 million at
CooperVision, 44% to $24.8 million at CooperSurgical, and 23% to $52.7 million
at Hospital Group of America.
Operating income increased 53% to $25.8 million from $16.8 million.
Earnings per share grew to $2.40 in 1997 from $1.41, including net tax benefits
of $2.03 per share in 1997 and 38 cents per share in 1996. Excluding the tax
benefits and other one-time items, earnings per share were $1.67 in 1997 versus
$1.03 in 1996, an increase of 62%.
Cash flow from operations increased 239% to $11.7 million from $3.5 million
in 1996.
CooperVision (CVI) positioned itself for growth outside the United States with
two initiatives. An agreement with Rohto Pharmaceuticals, Ltd., a leading
Japanese supplier of nonprescription ophthalmic products, gives Rohto exclusive
marketing rights to CVI's line of products when approved by the Japanese
Ministry of Health. The acquisition of Aspect Vision Care Limited of
Southampton, England will immediately expand CVI's product line and establish it
in the European market.
In March, CVI broadened its line of specialty contact lenses by purchasing the
Natural Touch line of cosmetic soft contact lenses, which are sold in the United
States to customers who want to change or enhance the appearance of their
natural eye color.
In April, CooperSurgical (CSI) acquired Marlow Surgical Technologies, Inc., a
provider of minimally invasive surgical products and disposable products for
reproductive medicine. In December, CSI announced, subject to FDA clearance, a
plan to introduce during the first calendar quarter of 1998, the first in a
series of new hardware and software products using digital imaging to improve
the diagnosis and screening of cervical cancer to selected customers in the
United States. This new Cerveillance System will be launched broadly during the
American College of Obstetrics and Gynecology meeting in May 1998.
Hospital Group of America (HGA) formed a psychiatric contract management
services division to provide behavioral health consultation and contract
management service in behavioral health for acute care hospitals. In April, HGA
opened a 50-bed residential treatment center in Kouts, Indiana, extending its
continuum of care.
In July, the Company raised $50.4 million in a public offering of 2.3 million
shares of its common stock underwritten by Deutsche Morgan Grenfel, Inc. and
PaineWebber Incorporated. Proceeds were used to pay down debt. Coupled with the
redemption of $9.3 million of convertible debentures in April, Cooper reduced
its total long-term debt from $48.8 million at the beginning of the fiscal year
to $9.6 million at year's end. On average, 11% more shares of the Company's
common stock were outstanding in 1997 because of the offering.
In September, the Company completed an agreement with KeyBank to provide a $50
million senior secured revolving credit facility to fund acquisitions and for
general corporate purposes.
4
Letter to Shareholders
Dear Fellow Shareholder,
The employees of The Cooper Companies delivered another year of solid
performance in 1997 and, at the outset, we want to recognize this and thank them
for their commitment to the continued growth of our company.
Cooper had a highly productive year in 1997, extending the positive growth
trends of the past four years. We are gratified that the improved results have
been reflected in our share price. At the close of trading on December 31, 1997,
the price per share of The Cooper Companies stock on the New York Stock Exchange
was $40.88, or 20 times its value at the beginning of 1994, when the current
management took charge. That equates to $584 million in incremental value for
equity holders in four years as market capitalization has increased from $20.7
million to $605 million.
In 1997, revenue increased 30% over 1996 to $141.5 million. Operating income
increased 53% year to year to $25.8 million. Earnings per share, including net
tax benefits and other one-time items, were $2.40, versus $1.41 in 1996.
Excluding tax benefits and other one-time items, earnings per share were $1.67
in 1997 versus $1.03 in 1996, a 62% increase.
Cash flow from operations increased to $11.7 million from $3.5 million in
1996.
CooperVision, our specialty contact lens business, achieved record sales,
market share and operating income. Through two global expansion initiatives,
CVI's business development activities positioned it to achieve one of its
long-standing goals: to become the worldwide leader in the toric contact lens
market. To enter the Asian market, CVI signed an exclusive marketing agreement
with Rohto Pharmaceuticals, Inc., a strong partner with a leadership position in
nonprescription ophthalmic and contact lens care products in Japan, the world's
second largest contact lens market. The products will be marketed after approval
by Japanese regulatory authorities. In Europe, CVI acquired Aspect Vision Care
Limited of Southampton, England, a privately held manufacturer of contact lenses
sold primarily in the United Kingdom and other European countries. We expect
that Aspect will add about $45 million to CooperVision's 1998 revenue, which is
expected to approach $125 million.
In North America, CooperVision introduced the new CooperFlex monthly
replacement spherical lens and expanded the range of powers in the Preference
Toric line. Toric lenses to correct astigmatism now account for more than half
of CooperVision's revenue. In March, CVI broadened its line of specialty contact
lenses by
5
purchasing the Natural Touch line of cosmetic soft contact lenses, sold in the
United States to customers who want to change or enhance the appearance of their
natural eye color.
Contact lens companies were active in the U. S. equity market this year. The
new offerings made the sector much more visible to investors, who have responded
favorably to its future promise. The Cooper Companies was among those raising
equity capital in 1997 netting $50.4 million from a follow-on offering of 2.3
million shares that was completed in July. Because of this, shares used to
calculate per share amounts for 1997 increased 11% to 13.1 million.
CooperSurgical continued to grow its share of the women's healthcare medical
device market by acquiring new businesses and technologies and by developing
other new products internally. In April, CSI acquired Marlow Surgical
Technologies, Inc, a privately held manufacturer of minimally invasive surgical
products and disposable products for reproductive medicine. In December, CSI
announced, subject to FDA clearance, plans to launch, in the first quarter of
fiscal 1998, the first product in the Cerveillance System, an innovative system
of hardware and software products that aids in the examination of the cervix
using digital imaging technology. A stream of new products based on this
technology is expected during 1998 and beyond.
Women's healthcare, with its favorable demographics, continues to attract
both large and small manufacturers who are interested in capitalizing on its
potential. We believe that our strategy to participate in consolidating this
attractive but fragmented market is a sound one.
At Hospital Group of America, Hampton Hospital continued to show exceptional
growth in revenue and operating income after settling a dispute with a former
physician management group in December 1995. HGA's outpatient and partial
hospitalization programs showed good progress. During 1997, HGA formed a
psychiatric contract management services division to provide behavioral health
consultation and contract management service in behavioral health for acute care
hospitals. In April, HGA opened a 50-bed residential treatment center in Kouts,
Indiana, The Midwest Center for Youth and Families, extending its continuum of
care. In its targeted geographic markets, HGA's objective is to become the
"provider of choice" to treat children, adolescents, adults and geriatric
patients.
Cooper's balance sheet improved significantly in 1997. Stockholders' equity
grew to $111.5 million at October 31, 1997 from $15.3 million at October 31,
1996. We redeemed $9.3 million of convertible debt and repaid $40.1 million of
our remaining debt using proceeds from the follow-on offering. Subsequently, we
6
established a $50 million revolving line of credit with KeyBank that will allow
us to access funds for growth at more attractive rates than had been available
before our business improved.
Long-term, Cooper's added value will come, we believe, from growing the
earnings and cash generated by the franchises it has established in the medical
device market. We expect CooperVision's rapid growth to continue. Its basic
drivers are proprietary manufacturing technology that will allow it to maintain
its profitable leadership position in the toric lens market, an expanding
business outside of North America, a new product pipeline to meet market needs
and a highly effective marketing, sales and customer service team.
CooperSurgical, with five acquisitions completed since 1991, is now one of the
largest and fastest growing companies serving obstetricians and gynecologists.
Its business is targeted to the most common procedures that these physicians
perform, many of which generate a recurring stream of revenue from disposables.
CooperSurgical will continue to be driven by the acquisition of products and
businesses serving its market and by internal product development programs such
as the new Cerveillance System. Our job is to ensure that these two businesses
fulfill their promise.
To this end, our goals for 1998 are straightforward: continue the strong
growth in revenue and operating income we delivered in 1997 by increasing market
share with existing products, introducing new products and continuing business
development efforts. CooperVision will concentrate on implementing the benefits
of the Aspect Vision acquisition in both Europe and the United States and plans
to launch three new internally developed products. CooperSurgical will continue
its strategy of acquisition and internal product development. HGA will focus on
growing market share in each hospital's geographic region through referral and
ancillary programs, and by expanding its behavioral health consultation and
management services business.
As a result of its follow-on offering, The Cooper Companies became more
visible to investors in 1997. With many new investors and the expectation of
even more to come as a result of this enhanced exposure, we have, in the
material that follows, provided readers with an in-depth review of our
businesses and the markets in which they compete. We have also answered the
questions most commonly asked by prospective investors as we presented the
Company to them during the follow-on offering. We hope you find this information
valuable.
ALLAN E. RUBENSTEIN A. THOMAS BENDER
Allan E. Rubenstein, M.D. A. Thomas Bender
Chairman of the Board President and Chief Executive Officer
January 27, 1997
7
Questions Frequently Asked By Investors During 1997
With Answers From Tom Bender, CEO,
And Bob Weiss, Executive Vice President and CFO
Q. How would you describe Cooper's overall strategy?
Tom Bender: Cooper is a specialty healthcare company currently serving the
vision care, women's healthcare and mental health market segments. We
provide underserved specialty healthcare markets with proprietary products
and services aimed at improving outcomes and reducing healthcare costs.
Q. How do you plan to build your businesses?
Tom: In vision care, we're concentrating on building market share with our
existing contact lens product lines, introducing new products, expanding
geographically and evaluating the acquisition of businesses and product
lines that could complement the widely regarded CooperVision and Aspect
Vision franchises. In women's healthcare, where the market is very
fragmented, we will continue to be a consolidator in the gynecology and
obstetrics segments, acquiring proprietary product lines and
well-differentiated companies, forming alliances and seeking to deliver a
continuing stream of innovative products from our Cerveillance technology.
Q. Would Cooper consider entering other areas of healthcare?
Tom: I think there will be opportunities for Cooper to offer profitable and
well-differentiated products in other carefully chosen healthcare market
segments in the future. In the near-term, however, we will concentrate on
growing our existing businesses.
Q. How do you plan to finance your business development activities?
Bob Weiss: After our 2.3 million share follow-on offering this summer that
raised net proceeds of $50.4 million, we paid down all but about $9.6
million of our debt and put in place a $50 million line of credit
syndicated by KeyBank. Even after the Aspect acquisition, we have
substantial resources to pursue the acquisitions we have in mind for
CooperSurgical and CooperVision. Generally, we prefer a balance of stock,
debt and cash in our acquisition transactions.
Q. How do laser surgical procedures for the eye effect your contact lens
business?
Tom: I continue to think that the early market projections here were
overstated, and we still do not see this procedure having any significant
negative impact on the contact lens market. Some patients who can afford
the unreimbursed cost of about $2,000 per eye will choose surgery for
convenience or occupational need, but many barriers to broad acceptance
still remain, including the high cost, a fear of ocular surgery and
unfavorable economics for many physicians. We believe that there are more
than 20 million former contact lens wearers who might be attracted to this
procedure because it offers them what they once wore contacts for--freedom
from glasses. We also believe that the vast majority of people having
8
the surgery are coming from this pool of former lens wearers, not from the
pool of patients who are satisfied with their lenses. I would like to see
the procedure become more visible with more people asking ophthalmologists
about it. If they did, I believe that many of them would reenter the
contact lens market. Contact lens technology has improved lately, and if
the need for convenience is there, why choose an expensive, sometimes
temporary, surgical procedure?
Q. Are disposable toric lenses introduced by your competitors a threat to your
business?
Tom: In marketing its contact lenses, CooperVision identifies distinct
practitioner and patient market segments, researches the requirements
within each segment and provides a variety of lenses to meet these
differing needs.
We think that there are two distinct practitioner segments in the toric
market. The first is practitioners who recommend quarterly lens replacement
and demand a fully featured, high quality product for these difficult to
fit patients. These practitioners tend to favor our Preference Toric lens.
With more than four times the parameters available from CooperVision than
from the more frequently replaced competitive products and with a higher
quality, deposit resistant material, Preference Toric is a standout in this
category. And with the strong brand loyalty in the toric market due to the
complexity of the fit, we think our base of repeat business from patients
who wear these lenses is well protected.
The second segment is practitioners who choose to fit patients with lenses
that are replaced monthly or even more frequently. This is where the new
disposable torics compete. Up until now, CooperVision has not had product
offerings in this segment, but in the second quarter of fiscal 1998, we
plan to introduce our own toric product to challenge the other new
disposable products. With our strong toric franchise, I'm confident we'll
hold our own.
Q. Last year you said you had no plans to reduce debt with a stock offering.
What changed your mind?
Bob: I think two things did. First, it was attractive to pay down our
existing high interest debt with the funds from the follow-on offering and
replace it with a revolving line of credit at considerably lower rates.
This will significantly reduce our borrowing costs going forward and
provide funds for acquisitions as needed. Second, we believed that the
additional research coverage by our investment bankers would improve the
visibility of our performance to investors, and it appears that, given the
improvement in our share price, this has happened.
Q. Why is your cash flow lower in the first quarter than throughout the rest
of the year?
Bob: For several reasons. We make ongoing payments to Bristol Myers in the
first quarter for the breast implant settlement agreed to in 1993. We also
build our inventory of contact lenses during the seasonally slow first
quarter and recapture cash as lenses are sold throughout the year. Finally,
we make annual employee incentive payments in the first quarter which have
been accrued, and earned, in the prior fiscal year.
9
Q. What would be the impact on your earnings if they were fully taxed?
Wouldn't this be a fairer way to value the business going forward?
Bob: It's hard to accurately project the impact. In the mid-term, we won't
be taxable, for federal purposes, because of our approximately $213 million
of NOLs at October 31, 1997. And before we use these, we will build a
strategy to maintain the lowest effective tax rate prudently possible.
As to the second part of the question, you should assume that we intend to
employ the cash savings to grow our core businesses as we did this year
through the acquisitions of Marlow for CooperSurgical and Natural Touch and
Aspect Vision Care for CooperVision. So the tax benefit gives us a
strategic advantage over competitors who must pay taxes.
Several securities analysts, however, have developed a pro forma valuation
of Cooper by taxing their estimate of projected pretax earnings at 34%,
applying a multiple of earnings and then adding the net present value of
the NOLs of about $4 to $5 per share to this. Although this is not
unreasonable as a valuation exercise, it doesn't reflect how, in practice,
we will use our tax benefits to grow the business. In my view, the most
appropriate measure of Cooper's performance is income before taxes and
significant nonrecurring items, divided by the average number of shares
outstanding.
Q. What are your plans for your service business, Hospital Group of America?
Tom: HGA had strong 1997 results exceeding our expectations, and we believe
it will continue to perform well in the future. Right now, HGA is doing a
good job of helping us leverage our NOLs. Long-term, however, Cooper plans
to focus on growing its two core medical device product businesses, and in
the future, we will evaluate HGA from the perspective of overall
shareholder value. This does not mean, however, that we will ignore
opportunities to add value to HGA's business, particularly through
strengthening its market share in its current geographic locations.
10
Business Unit Review
CooperVision
Business Overview and 1997 Results
CooperVision 1997 Revenue $640 Million CooperVision 1997 Operating Income $23.1 Million
- ------------------------------------------------- -------------------------------------------------
Percent Increase over 1996 31% Percent Increase over 1996 21%
- ------------------------------------------------- -------------------------------------------------
Percent of Cooper Companies' Revenue 45% Percent of CooperVision Revenue 36%
- ------------------------------------------------- -------------------------------------------------
A Contact Lens Glossary:
Soft Contact Lenses:
Lenses to correct visual defects made with comfortable plastic materials that
fit on the cornea of the eye.
Specialty Lenses:
Correct visual defects such as astigmatism or special ophthalmic disorders. Also
opaque lenses for cosmetic color enhancement. Manufactured by cast molding,
lathing or by FIPS, CooperVision's patented combination of automated lathing and
cast molding.
Toric Contact Lenses:
Correct astigmatism -- blurred vision caused by an irregularity in the shape of
cornea. Manufactured by cast molding, lathing or by FIPS.
Premium Contact Lenses:
Offer value-added features such as deposit resistance or ultra-violet
protection.
Non-Specialty Spherical Contact Lenses:
Correct the most common visual defects. Lack value-added features for more
complicated disorders such as astigmatism. Most manufactured by cast molding,
but some by automated lathing.
Custom Contact Lenses:
Correct severe astigmatism and other special vision needs. Generally
manufactured using automated lathes.
Conventional Contact Lenses:
Designed to be replaced after 12 to 24 months.
Planned Replacement Lenses:
Designed to be replaced after one to three months.
Disposable Contact Lenses:
As defined by the U. S. Food and Drug Administration, lenses that are designed
to be changed as often as daily and up to every two weeks.
11
CooperVision (CVI) develops, manufactures and markets specialty contact
lenses emphasizing the high-growth, high-margin soft toric contact lens segment.
Toric contact lenses provide visual correction for astigmatism--blurred vision
caused by an irregularly shaped cornea. CVI's three toric lens brands accounted
for 52% of its sales during fiscal 1997 and grew 40% over 1996. Preference
Toric, a quarterly planned replacement lens, is now CVI's leading product. Its
sales grew 71% year to year.
In addition to toric lenses, CVI manufactures and markets more than a dozen
specialty and premium soft contact lens brands in the spherical lens category.
These include premium lenses for people who rapidly deposit protein from their
tears on their lenses and a line of "opaque" lenses that change or enhance the
appearance of the wearer's natural eye color. Sales of toric, specialty lenses
and premium lenses together grew 46% in 1997. In the non-specialty spherical
category, CVI markets a range of conventional spherical lenses.
New Product Introductions
In 1997, CVI introduced CooperFlex and additional line extensions to the
highly successful Preference Toric brand. CooperFlex, manufactured by our new
European subsidiary, Aspect Vision Care, is a planned replacement spherical lens
designed for a one-month wearing cycle. Independent clinical studies conducted
in the United Kingdom found that patients preferred this lens to other leading
disposable or frequent replacement lenses. The Preference Toric brand was
expanded to include additional powers. This further solidifies its position as
the toric brand that offers the broadest range of planned replacement toric
lenses. This wide range of corrections increases the chances of a successful
fit. In March, CVI acquired Natural Touch, a line of cosmetic soft contact
lenses sold in the United States to patients who want to change or enhance the
appearance of their natural eye color.
Geographic Expansion
In January 1997, CVI completed an agreement with Rohto Pharmaceuticals,
Inc., a leading manufacturer of contact lens care products and the largest
supplier in Japan of nonprescription ophthalmic products, to market CVI lenses
in Japan and other Pacific Rim countries. CVI expects to market these products
in about two years, following regulatory approval from the Japanese Ministry of
Health. With more than eight million contact lens wearers, Japan has the second
highest number of contact lens wearers in the world, with lens revenue growing
12
more than 15% per year. Although the Japanese market has historically been
dominated by hard contact lenses, soft lenses are increasing in popularity. The
Rohto agreement positions CVI to capitalize on this emerging trend.
In December, The Company completed the acquisition of Aspect Vision Care
Limited of Southampton, England. Aspect Vision is expected to add about $45
million to CVI's 1998 revenue and will be used as a vehicle to market CVI
products to Europe.
Aspect Vision Care Limited
Aspect Vision Care started business in 1973 as Focus Contact Lens
Laboratory, Ltd. manufacturing contact lenses for individual orders using
lathing technology. In 1991, Aspect Vision Care Limited was formed and sold cast
molded lenses manufactured by an associated company. In 1994, Aspect began its
own manufacturing.
Today, Aspect sells low cost, cast molded conventional, disposable and
planned replacement lenses primarily in Europe. Aspect also provides private
label lenses to many European retail optical chains.
According to industry sources, Aspect has a strong franchise in the United
Kingdom, where it leads the industry in unit sales of conventional lenses and is
second in total unit volume. Sales in the U.K. account for approximately
one-half of Aspect's volume. The remaining revenue comes from its Italian
subsidiary and from sales to European distributors and other contact lens
companies. Fifteen direct sales representatives service the U.K. and Italian
markets.
Practitioners have reported that Aspect's lenses offer above average
comfort, a successful initial fit rate and competitive pricing. A 1997 study
comparing eight brands of disposable lenses published in Contact Lens and
Anterior Eye, a publication of the British Contact Lens Association, found that
Aspect's disposable Frequency-55 lens was one of three lens brands that
"achieved relatively high levels of fitting success", 90% for Aspect's product
versus 70% for the lowest of the eight rated brands.
Aspect manufactures its lenses using its patented UltraSYNC technology, a
synchronized molding system that produces a complete finished lens with minimal
manual labor. No polishing, buffing or finishing is required. In 1997, Aspect
won the Queen's Award for Technological Achievement for the development of the
UltraSYNC system, one of only 15 awards presented each year and the first such
award given to a contact lens company. Aspect also received ISO 9001/EN 46001
certification in 1997 allowing its products to be CE marked for sale in European
markets ahead of the June 1998 deadline.
Aspect adds both marketing and manufacturing capabilities to CooperVision.
In marketing, CooperVision gains immediate access to European and other
international markets for its line of specialty contact lenses. In combining
their manufacturing technologies, Aspect Vision and CooperVision will become the
only contact lens company in the world that can produce lenses from the three
major contact lens manufacturing technologies: cast molding, precision lathing
and FIPS, CooperVision's patented combination of lathing and molding. With this
complete range of technologies, CooperVision will be able to offer its customers
a wide range of lenses and wearing cycles to meet the needs of most contact lens
patients. Aspect's proprietary know-how is expected to lead to a second
generation of the FIPS toric manufacturing process that can reduce production
costs, increase production capacity at existing facilities and provide improved
lens comfort using Aspect's patented edge design technology.
Aspect employs about 650 people in the U.K., with about 600 staffing the
manufacturing division in over 85,000 square feet in Hamble, near Southampton.
An additional 60,000 square feet has been acquired for the consolidation of
customer service and distribution and for additional manufacturing.
13
Contact Lens Market Overview
In 1996, worldwide sales of soft contact lenses totaled about $2 billion at
the manufacturers' price level and are expected to grow about 10% annually
through the year 2000, as contact lenses become more popular and as lenses are
replaced more frequently than in the past. North America accounts for about 50%
of the total market.
Sales of soft lenses comprise about 90% of United States contact lens
revenue; hard lenses--primarily those manufactured from rigid gas permeable
materials--represent about 10%. Some markets outside of the United States,
particularly Japan and Germany, fit more hard lenses than the United States,
although soft lenses are gaining greater acceptance.
Most soft lens wearers replace their lenses on one of three schedules:
conventional wear lenses are replaced after 12 to 24 months with periodic
cleaning throughout the life of the lens; planned replacement lenses are
replaced every one to three months; and disposable wear lenses are changed as
often as daily and up to every two weeks, depending on which product the
practitioner prescribes.
Disposable and planned replacement lenses are supplanting conventional
lenses, enhancing revenue per wearer per year throughout the industry. Many
practitioners believe that changing lenses more frequently improves ocular
health and adds more comfort and convenience for the patient.
Another way to view the soft contact lens market is to divide it into the
non-specialty, spherical lens segment and the specialty lens segment.
Non-specialty spherical lenses correct the most common visual defects such as
myopia (nearsightedness) or hyperopia (farsightedness) and do not offer
value-added features for patients with special visual needs. They represent
approximately two-thirds of the United States soft contact lens market and about
80% of the soft lenses sold in the rest of the world. Specialty lenses account
for the remaining one-third of the United States market and about 20% outside
the United States. Specialty lenses include the following:
toric lenses to correct astigmatism
opaque lenses, which alter the appearance of
the eye's natural color
enhancement tint lenses that accent natural [ILLUSTRATION]
eye color
premium lenses that resist protein deposit,
improve visual acuity, or improve comfort
for patients with dry eye syndrome
Although they are a smaller part of the market,
specialty lenses are growing more rapidly than non-specialty lenses and generate
higher gross margins.
14
Soft Toric Contact Lenses
The soft toric contact lens market is a high growth specialty niche that
accounts for approximately 15%, or $170 million, of annual sales in North
America and about $100 million of annual sales in the rest of the world.
Soft Toric Lens Market Model(1)
By Lens Replacement Cycle
Planned Replacement Custom Conventional Total Market
- ----------------------------------------------------------------------------------------------------------------------
Location Size Annual Size Annual Size Annual Size Annual
($'s millions) Growth ($'s millions) Growth ($'s millions) Growth ($'s millions) Growth
- ----------------------------------------------------------------------------------------------------------------------
North 65-70 >50% 35-40 10-15% 55-65 -10% 155-175 20%
America
- ----------------------------------------------------------------------------------------------------------------------
Rest of 10-15 >25% 15-20 10-15% 60-65 >15% 85-95 15%
World
- ----------------------------------------------------------------------------------------------------------------------
TOTAL 75-85 >40% 50-60 10-15% 115-130 2-3% 240-270 18%
- ----------------------------------------------------------------------------------------------------------------------
(1) The Cooper Companies' estimates
The worldwide outlook for soft toric lenses is favorable. Forty-five percent
of the United States population who require vision correction suffer some degree
of astigmatism, but only about 6% currently wear toric lenses. With today's
technologies, soft toric lenses have been developed in a wide range of lens
parameters, and the previously underserved astigmatic patient base can now wear
contact lenses. In addition, many patients, including those with astigmatism,
who "dropped out" of the contact lens market because of the poor performance of
their lenses can reenter the market using these improved products.
Surgical techniques to correct visual defects, including laser treatment,
have also enticed many contact lens dropouts back to their eyecare
practitioner's office for evaluation. When presented with the detailed
risk-reward profile of surgery and the unreimbursed charges, many patients will
choose the new generation of soft toric lenses rather than nonreversible,
expensive laser surgery. Finally, practitioners who specify lenses for their
astigmatic patients increasingly prescribe soft toric lenses as a way to
differentiate their practices.
15
CooperVision Products
In North America, CooperVision concentrates on marketing specialty lenses in
both planned replacement and conventional wearing cycles. CVI is the only
manufacturer to offer eyecare practitioners all three types of toric lenses:
a custom-prescription conventional lens, Hydrasoft Toric
a three-month planned replacement lens, Preference Toric and
a conventional lens, Cooper Toric
With this wide range of lenses, practitioners can fit most astigmatic
patients quickly and effectively with CVI products.
CVI acquired Hydrasoft Toric in 1993. Since then, this brand has retained
its reputation as the easiest to fit and most successful custom toric lens on
the market.
The popular Preference Toric quarterly planned replacement lens was launched
in 1994. Patients with more common astigmatic prescriptions who do not require a
custom prescription lens wear these lenses. Preference Toric is available in
more than three times as many corrective combinations as its leading competitor.
It offers excellent visual acuity, reproducibility and all-day comfort.
The Cooper Toric lens, for conventional wear, is, like many CVI products,
made with a polymer called Tetrafilcon A that resists deposits from protein in
the tears forming on the lenses. These deposits can distort vision and may
inflame the underside of the eyelid.
While CooperVision concentrates on the toric lens market, it also offers
practitioners specialty and conventional spherical lenses. The Preference lens,
introduced in 1991, is a premium planned replacement lens that combines the
benefits of CVI's deposit resistant material with quarterly replacement.
CooperFlex was introduced in 1997 for monthly wear. The recently acquired
Natural Touch line of opaque lenses are spherical lenses for patients who want
to alter the appearance of their natural eye color.
Other spherical brands include Hydrasoft Sphere, Vantage, Permaflex,
Permalens and Cooper Clear. These lenses have varying water contents and degrees
of oxygen permeability to meet specific patient requirements. They are available
in different designs, parameters, diameters, base curves and lens edges,
providing practitioners with a wide clinical choice.
16
Aspect Vision Care Products
Aspect Vision Care's range of branded lenses includes both traditional and
disposable soft lenses available in a number of designs, polymers and convenient
packages. The Aspect line competes in segments that CooperVision currently does
not, giving the combined business more complete coverage of the important
segments of the market.
The Aspect Vision Product Line
SILVER 2 A 38% water content lens designed to provide
better handling, especially in the lower
powers. It is a comfortable daily wear lens
available in both plus and minus powers that
can also mask minor astigmatism.
SILVER 38 THIN A new generation of daily wear lens offering a
single base curve that fits more than 80% of
all myopic (nearsighted) corneas. Provides
optimal balance between wearing comfort and
lens handling, as its thin lens periphery
provides greater comfort than other lenses.
SILVER O7 VH TINT A 38% water content lens with an overall unique
pale blue visibility handling tint. A durable
lens ideal for both near- and farsighted
patients.
FORMULA 55 UV VH TINT A 55% water content lens for frequent
replacement. Incorporates a unique aqua green
visibility tint in addition to a UV blocking
agent.
FREQUENCY 38 DW DISPOSABLES Designed to be worn on a daily basis and
replaced monthly. Offers enhanced patient
comfort, ease of handling and visibility
handling tint. Ideal for the dry eye patient.
Produced in a convenient blister pack.
FREQUENCY 55 DISPOSABLES A 55% water content lens for daily wear and
bi-weekly or monthly replacement. Packaged in
blisters and incorporates the Aspect visibility
handling tint.
FREQUENCY DISPOSABLE UV A 58% water content lens for daily wear and
monthly replacement. Incorporates a UV blocking
agent and a visibility tint. Packaged in
blister packages.
"HINTS OF TINTS" Lenses in a range of soft, subtle colors
designed to enhance the eye color of fashion
conscious patients but also maintain a natural
look. These subtly tinted lenses have a clear
pupil with a tinted iris to enhance the
patient's natural color. Available with the
same parameters as SILVER 2 and also in special
orders for other lenses.
17
Growth Strategy
CooperVision's goals are to lead the global toric soft contact lens market
by building on its established position in the high-margin toric and spherical
specialty lens segments and expanding its market position in the opaque and
premium spherical segments. Where appropriate, CVI will also selectively pursue
the conventional sphere market. The marketing agreement with Rohto and the
acquisition of Aspect Vision have positioned CVI to execute its strategy in
Europe and Asia.
CVI aims to expand its market share through aggressive marketing, product
development and business development, as it enters new toric and spherical lens
market segments and extends the range of prescription powers in its existing
product lines. In 1997, new products developed internally over the past five
years generated 41% of CooperVision's sales, while 34% of sales were products
acquired externally during that time.
Tools for Global Growth
Marketing and Sales Expertise
CVI employs more than 60 commission-based direct sales representatives with
above-average industry experience, to market its products in North America.
Their incentive compensation program creates a high level of dedication and
motivation. Thirty-five customer service representatives and technical
consultants, who average approximately five years of industry experience, handle
approximately 4,000 practitioner calls each day. CVI's Worldwide Website
(http://www.coopervision.com) informs patients and overseas distributors about
its products and services.
In Europe, Aspect Vision Care employs seven sales representatives in the
United Kingdom and eight in Italy. Optical distributors sell Aspect products
throughout the rest of Europe. Aspect Vision can be found on the Internet at
http://www.aspect-vision.co.uk.
18
Strong Customer Loyalty
Specialty contact lenses command high brand loyalty from practitioners, who
resist switching once a particular brand is prescribed and successfully fit,
creating an "annuity stream" of replacement lenses. CVI benefits from this brand
loyalty, particularly in the toric lens market, where patients are often
difficult to fit. Eyecare practitioners demand quality products to ensure their
patients' optimum ocular health and vision, and CVI generates brand loyalty with
its reputation for premium quality products.
Responsive Customer Service
In the United States, CVI's order entry system links its New York and
California customer service centers to ensure efficient order processing and to
provide a backup system to maintain a high level of continuous service. In 1997,
both locations upgraded their telephone equipment to the latest automated
technology. Aspect Vision's customer service center in the United Kingdom
supports all its customers worldwide.
Advanced Manufacturing Technology and Lens Design
Historically, toric contact lenses were difficult to fit because early
generation lenses could not be kept properly positioned on the eye. Today,
CooperVision and Aspect Vision produce lenses with outstanding stability and
reproducibility, capitalizing on more than two decades of experience with toric
lens design and manufacturing technology.
In the United States, CVI uses two manufacturing technologies. The first, a
proprietary technology called FIPS, combines low-cost cast molding and precision
lathing to produce a wide range of low-cost lens prescriptions. Lenses made with
the patented FIPS manufacturing technology using deposit resistant Tetrafilcon A
material are extremely difficult to duplicate, given CVI's extensive knowledge
and experience. Using FIPS, CVI can manufacture over 13,000 planned replacement
toric corrections-more than three times as many as its competition who use
molding to manufacture their toric lenses. With this wide range of parameters,
practitioners can more easily find just the right combination of power, axis and
cylinder to precisely and comfortably fit their patients.
19
The second technology, automated lathing, generates CVI's line of custom
toric lenses. This process can produce more than 13 million different lens
prescriptions for difficult to fit patients.
Aspect Vision's patented UltraSync manufacturing process adds a third
manufacturing technology: cast molding. CVI is now the only contact lens
manufacturer in the world who can produce lenses with all of the most common
fabrication methods. With molding, CVI can now, in appropriate market segments
throughout the world, market low cost spherical lenses.
In fiscal 1997, CVI produced about five million lenses in facilities
totaling 73,600 square feet. Aspect Vision manufactures in an approximately
85,000 square feet facility in Hamble, near Southampton, England, and has
acquired another 60,000 square feet to consolidate customer service and
distribution and for additional manufacturing. CVI expects that cost
efficiencies will result from rationalizing the two organizations' manufacturing
facilities.
CooperVision's largest facility, located in Scottsville, New York, currently
manufactures soft toric and spherical lenses. Because of increasing demand for
its planned replacement toric lenses, CooperVision has more than doubled its
Scottsville capacity since 1995. CooperVision's Huntington Beach, California,
facility produces custom soft toric and spherical lenses from a material known
as Methafilcon B, using a precision lathing technology. Rigid gas permeable
lenses are made in its Markham, Ontario facility.
CVI manufactures under the U. S. Food and Drug Administration's Current Good
Manufacturing Practices and expects to achieve ISO 9001 certification and CE
Mark approval which will be mandatory for all products shipped into the European
community in June 1998. Aspect, which also manufacturers under the FDA
guidelines, received ISO 9001/EN 4601 certification in 1997, allowing its
products to be CE marked.
20
Cooper Surgical
Business Overview and 1997 Results
CooperSurgical 1997 Revenue $24.8 Million CooperSurgical 1997 Operating Income $2.5 Million
- ------------------------------------------------- -------------------------------------------------
Percent Increase over 1996 44% Percent Increase over 1996 49%
- ------------------------------------------------- -------------------------------------------------
Percent of Cooper Companies' Revenue 18% Percent of CooperSurgical Revenue 10%
- ------------------------------------------------- -------------------------------------------------
CooperSurgical (CSI), established in 1990, develops, manufactures and
distributes diagnostic and surgical instruments, equipment, accessories and
devices for the rapidly growing obstetrics and gynecologic segments of the
worldwide women's healthcare Increasingly, women consider gynecologists their
primary care provider, as U. S. government policy emphasizes women's healthcare,
and managed care organizations liberalize reimbursement for gynecological
diagnostic and therapeutic procedures. CSI is capitalizing on the expanding role
of obstetricians and gynecologists (OB/GYNs) through its product development and
acquisition efforts and through alliances with companies that are developing new
technologies for this growing market segment. Since 1990, CSI has completed five
acquisitions.
21
CooperSurgical Acquisitions Since 1990
ACQUISITION PRODUCT LINE
- --------------------------------------------------------------------------------
FRIGITRONICS, INC. Colposcopes
Cryosurgery Equipment
- --------------------------------------------------------------------------------
EURO-MED, INC. Biopsy Instruments
Gynecology Instruments
Instrument Cleaning Systems
- --------------------------------------------------------------------------------
RUMI Uterine Manipulator with Disposable Tip for
Laproscopic Surgery
Koh Colpotomizer Accessories for Laproscopic
Hysterectomy
- --------------------------------------------------------------------------------
UNIMAR, INC Pipelle Disposable Endometrial Biopsy Device
Kronner Manipujector Disposable Uterine Manipulator
Cervex-Brush Disposable Cervical Pap Smear Sampling
Device
- --------------------------------------------------------------------------------
MARLOW SURGICAL Disposable Intrauterine Catheters and Products to
TECHNOLOGIES, INC. Treat Infertility
Nu-Tip Laparoscopic Instruments with Disposable Tips
Disposable Balloon Cannula
VerreScope Micro Laparoscopy System
- --------------------------------------------------------------------------------
Market Overview
Women's healthcare has become a central focus of health policy in the United
States, and OB/GYNs are expanding their role in providing a continuum of care to
women. As a result, obstetric and gynecologic training programs increasingly
emphasize programs and practice designed to meet their patients' needs from
adolescence to senior years. Each year, there are about 60 million office visits
to the over 35,000 obstetricians and gynecologists in the United States. These
physicians assist in approximately four and a half million births and perform
over two million surgical procedures. They diagnose and treat conditions such as
pelvic pain, infertility, sexually transmitted diseases, abnormal uterine
bleeding, cancer of the female reproductive system and its precursors and
menopause related conditions such as osteoporosis. It is a large and growing
market.
Recent emphasis on preventive care for women has expanded reimbursement by
managed care organizations, which now cover screening services such as Pap
Smears, annual gynecologic exams, mammogram and osteoporosis evaluations. In
addition, both governmental and private organizations are targeting new
resources toward women's healthcare.
22
A large number of medical device companies serve the women's healthcare
market. Many are small with narrow product lines and lack the resources
necessary to expand their market presence and effectively introduce new
technologies. This fragmented industry is now consolidating. CSI is aggressively
participating, identifying opportunities to leverage its sales and marketing
strengths and raise gross margins of the products it acquires by improving
manufacturing productivity.
CooperSurgical Products
CSI markets products for in-office diagnostic and surgical procedures,
reproductive medicine and operative gynecologic procedures, including those
performed using a minimally invasive approach, in both the hospital and
outpatient setting. Approximately two-thirds of CSI's sales during fiscal 1997
were disposable or semi-disposable products that tend to generate a recurring
revenue stream.
Products for Office Practice
Colposcopy. Colposcopy is used to diagnose ailments of the vaginal canal and
cervix. Virtually all gynecologists and many primary care physicians perform
this procedure in the office rather than the hospital or the surgicenter. CSI
offers a full line of colposcopy systems in a variety of configurations. CSI's
overhead zoom colposcope systems currently account for the majority of CSI's
sales of colposcopy systems to gynecologists' offices because they are easy to
use and particularly well suited for use in conjunction with the LEEP procedure
that is described below.
CSI has announced plans to introduce the first in a series of products in
its new Cerveillance System. This system is designed to improve the accuracy of
colposcopic screening and diagnosis of cancer of the cervix and its precursors.
Cervical cancer is the second most common cancer in women, with 500,000 cases
reported yearly throughout the world. The new system features digital imaging
hardware and software components that will be introduced over the next several
years.
23
Loop Electrosurgical Excision Procedure ("LEEP"). The LEEP treatment
procedure is used in the physician's office-a lower cost setting than the
hospital-in conjunction with colposcopy to both diagnose and treat cervical
disease. The LEEP procedure is an easily learned, cost-effective treatment
alternative that provides biopsy samples for histological analysis to evaluate
treatment success. LEEP has become the preferred modality for precancerous
cervical lesions.
CSI has developed a complete line of products to surround the LEEP
procedure. These include the hardware--the LEEP System 1000 electrosurgical
generator and CooperSurgical Smoke Evacuation System 6080--as well as the
supporting nonconductive autoclavable instrumentation and ancillary disposable
products that are used in each case. CSI has recently improved the
instrumentation by introducing the Prima Series specula made from a polymer that
resists the staining and surface degradation commonly found with standard coated
instruments supplied by competitors. Ancillary disposable products such as the
single use sterile LEEP Electrodes and LEEP Redikit generate revenue for CSI on
each procedure performed.
Hysteroscopy. Diagnostic hysteroscopy, one of the first minimally invasive
procedures performed, is used to visualize and obtain samples from the uterine
cavity to diagnose uterine disorders such as abnormal bleeding. Operative
hysteroscopy allows the physician to perform various therapeutic procedures
under direct visualization.
Historically, both diagnostic and therapeutic uterine procedures were
performed in the hospital, but newer technology has resulted in a shift to more
cost-effective venues: operative procedures in outpatient facilities and
diagnostic procedures in physicians' offices. This lowers procedure costs and
improves the quality of care. In 1998, some in-office hysteroscopy procedures
will become eligible for third party reimbursement making it more attractive for
physicians to adopt diagnostic hysteroscopy as an in office procedure. CSI's
diagnostic hysteroscopy systems, including the Hysteroscopy Series 4000 and
accessories, provide state-of-the-art viewing and tissue sampling.
24
The CooperSurgical Cerveillance System
Innovative Technology Tracks Disease Progress, Simplifying Diagnosis and
Improving Accuracy and Cost-Effectiveness
BACKGROUND
Cervical cancer is the second most common cancer affecting women with
500,000 cases reported yearly throughout the world. In 1996, its worldwide
prevalence was estimated at 2.6 million. Five times that many women show
signs of its precursors. The American Cancer Society estimates that 15,700
new cases are diagnosed each year in the United States, resulting in
approximately 4,900 deaths.
Since the 1950's, the U. S. mortality rate for cervical cancer has
declined by 70% primarily due to mass screening efforts with the Papanicolaou
Smear (Pap Smear). Recent changes in Pap Smear grading and medical liability
fears from missed diagnoses have doubled the number of ASCUS (Atypical
Squamous Cell of Undetermined Significance) results to approximately 10% of
all Pap Smears from the expected 5% in a normal population distribution.
When a Pap Smear suggests the presence of a high or low-grade lesion,
physicians tend to schedule a more definitive examination immediately, as
they must consider that the ASCUS Smears carry a 10%-40% underlying risk of a
precancerous condition. The cost to the U. S. healthcare system to follow-up
ASCUS results has been estimated at up to $5.5 billion annually. One study
showed that over 50% of cases could avoid biopsy by serially monitoring the
cervix to identify naturally regressing lesions. Follow-up alternatives today
include a series of repeated Pap Smears or an examination called colposcopy,
where a colposcope -- a specialized low-powered stereo microscope -- is used
to illuminate and magnify the cervical and vaginal tissue to identify or rule
out pathology. The physician carefully examines the tissue looking for very
subtle changes in color, texture and blood vessel patterns that indicate an
abnormality. Suspicious sites are biopsied and reviewed histologically.
Colposcopy, however, has limitations. It can be difficult to distinguish
the subtle changes that occur between normal cervical tissue and cancer, and
the exam is time consuming and costly when compared to the Pap Smear.
Colposcopy, like Pap Smears, is associated with legal risk if the physician
misses a diagnosis. Recent advances in 35 millimeter photography and video
imaging have improved colposcopic documentation somewhat, but current image
capture technology is limited, particularly image storage and retrieval for
subsequent evaluation, quantitative assessment and patient education.
THE NEW COOPERSURGICAL CERVEILLANCE SYSTEM
The new CooperSurgical Cerveillance System, a family of hardware and
software products designed to improve colposcopy and cervical cancer
screening, will be introduced over the next several years. Many features in
the new system are patented. The first product in the new system, the
Cerveillance Scope, expected to be introduced in the first calendar quarter
of 1998, uses state-of-the-art digital technology for cervical visualization
and documentation. It redefines image capture, enhancement and analysis
allowing measurement of lesion size and documentation of cervical changes. It
is the first device to combine digital imaging technology and proprietary
software in a fully integrated compact colposcope -- an optical instrument
used to examine the vagina and cervix -- the lower and narrow end of the
uterus.
In addition to the Cerveillance Scope, the Cerveillance System is expected
to eventually include:
a hand held computer imaging device to be used in cervical screening
a networking computer that stores patient records and analyzes digital
images using wireless transmission technology, providing a gateway for
telemedicine
a disposable kit to assist with identification and quantification of
cervical lesions
a series of software modules that will provide additional patient
management and diagnostic capabilities.
These important advances are possible as The Cerveillance System uses
digital capture technology to convert images of the genital tract to a record
that, through CSI's proprietary software, can be stored, manipulated,
enhanced, analyzed and transmitted electronically.
CSI plans future software products, including reference standard packages,
to simplify the diagnostic procedure and improve its accuracy. These software
upgrades will be designed to be added to the system without the expense of a
new colposcope.
25
Gynecologic Screening and Diagnostic Devices
CSI offers a broad line of products for office diagnosis and treatment.
Many incorporate patented designs or proprietary manufacturing techniques
including:
The Euro-Med Classic Series Biopsy Instruments sample tissue suspected to
be cancerous in the lower genital tract. CSI manufactures these high
quality instruments in Tuttlingen, Germany, renown for world class
manufacturing of hand held surgical instruments.
Physicians biopsy the intrauterine cavity with the Pipelle Endometrial
Suction Curette, clinically; the most reliable and consistent device of its
type which CSI markets under a long-term supply agreement.
The Cervex-Brush Cervical Cell Sampler is used to collect ecto- and
endocervical cells for Pap smears. Its patented design allows physicians to
collect cervical cells with reduced bleeding and patient discomfort.
CSI also provides a range of specialty instruments used daily by the OB/GYN
including the recently introduced Comfort View line of products used with obese
patients. The products in this line -- the Snowman specula and the Tru-View
lateral wall retractor -- solve clinical problems unique to this patient
population.
Products for Operative Gynecology
Minimally invasive procedures for complex gynecologic disorders will become
more prevalent as healthcare cost containment increases and less traumatic
treatment alternatives are developed. CSI offers both capital and disposable
product lines to support this trend.
These include:
The RUMI uterine manipulator, a patented system for controlling and
positioning the uterus during laparoscopic surgery. Its advanced design
provides the gynecologist with substantially improved pelvic visualization,
access and traction during laparoscopic surgery.
The KOH Colpotomizer facilitates visualization of anatomical landmarks
enabling the surgeon to perform a laparoscopic hysterectomy with greater
confidence and accuracy. As the number of hysterectomies performed using a
minimally invasive approach increases, CSI is well positioned to maximize
its market potential with this system.
The Kronner Manipujector for uterine manipulation in routine laparoscopic
procedures. This device commands approximately 50% of the disposable
uterine manipulator market.
The patented Nu-Tip instruments for laparoscopic surgery, which combine the
convenience of disposables with the cost savings and performance of
reusables to deliver a consistent standard of care.
26
The VerreScope system, an improved micro-laparoscopic instrumentation and
visualization system for either the hospital operating room or the office
surgical suite, was introduced in late 1997. It delivers more procedural
versatility than many existing competitive systems.
The patented disposable Balloon Cannula access device which improves
operative control and reduces patient trauma in laparoscopic procedures.
In 1997, CSI executed its strategy to surround the most commonly performed
procedures in obstetrics and gynecology with advanced products by expanding its
product offerings in hysterectomy and sterilization, the two procedures most
frequently performed by the OB/GYN. Through a distribution agreement, CSI now
markets the Zeppelin Hysterectomy Clamps and Scissors, long recognized by
gynecologic surgeons as the premier product for the abdominal surgical approach,
and also launched the Cater Tubal Assistant, an internally developed product for
post partum tubal ligation.
Products for Reproductive Medicine
CSI entered the reproductive medicine market in 1996 by acquiring Unimar, a
leading supplier of specialized disposable medical devices for gynecology. These
include the Unimar Aspirette, for aspiration of endocervical content, the HUI
Mini-Flex, which facilitates radiographic examination of the uterus, and the
Pipelle, for endometrial assessment.
In April 1997, CSI acquired marketing and distribution rights in the United
States to the Wallace Women's Healthcare line of disposable products for
advanced techniques in reproductive medicine. Part of the Marlow acquisition,
this line significantly enhances CSI's presence in reproductive medicine.
Products include the prestigious line of Wallace intrauterine catheters, widely
recognized by physicians specializing in infertility as delivering higher rates
of pregnancy than comparable competitive products.
27
Growth Strategy
CSI plans to build a diverse selection of products for women's healthcare
through a balanced program of acquisition and internal product development. By
combining companies and product lines, CSI will capitalize on its existing
marketing, manufacturing and distribution capabilities to further leverage its
well-established customer relationships. CSI expects to expand its current
position in the reproductive medicine market and is considering product
opportunities in obstetrics, urinary incontinence and osteoporosis screening.
The new Cerveillance System is expected to expand CSI's presence in the
diagnosis of cervical disease.
Marketing and Sales
CSI employs 46 sales representatives, mail-order catalogs, targeted direct
mail and a network of international distributors, to gain widespread access to
the OB/GYN market. CSI's marketing programs target a single medical specialty,
and their representatives develop a broad understanding of gynecology and
obstetrics and build knowledge-based personal relationships with their
customers.
Approximately 45,000 CSI direct mail catalogs reach physicians, surgery
centers and hospital operating room staffs three to four times each year.
Physicians can purchase established product lines through the catalog, while the
sales force concentrates on explaining the benefits of CSI's newer, more
technically advanced products, enabling CSI to expand its share of each
customer's business and optimize their point of sale contact.
Manufacturing
CSI manufactures and distributes its products in Shelton, Connecticut. ISO
9001/EN 46001 certification and CE Mark approval for its products is expected in
1998. CSI's manufacturing capability is a strategic advantage, allowing it to
decrease the cost of the products it acquires through efficiencies of
integration. For example, the cost to manufacture products acquired from Unimar
and Marlow has been significantly reduced through efficiencies generated by CSI.
28
Hospital Group of America
Business Overview and 1997 Results
HGA 1997 Revenue $52.7 Million HGA 1997 Operating Income $6.0 Million
- ------------------------------------------------- -------------------------------------------------
Percent Increase over 1996 23% Percent Increase over 1996 133%
- ------------------------------------------------- -------------------------------------------------
Percent of Cooper Companies' Revenue 37% Percent of HGA Revenue 11%
- ------------------------------------------------- -------------------------------------------------
Hospital Group of America (HGA) offers abroad continuum of psychiatric care
to patients through inpatient, outpatient, partial, educational and residential
treatment programs. It owns and operates three psychiatric hospitals: Hartgrove
Hospital in Chicago, Illinois (119 beds), Hampton Hospital in Rancocas, New
Jersey (100 beds) and MeadowWood Hospital in New Castle, Delaware (50 beds) and
a residential treatment center for adolescents in Kouts, Indiana, The Midwest
Center for Youth and Families (50 beds). The Midwest Center was opened in April
1997 to support Hartgrove Hospital and surrounding communities. HGA also owns
and operates 17 outpatient and day treatment centers and provides educational
and other ancillary services to support its hospitals.
29
The hospitals offer intensive and structured treatment predominantly for
children and adolescents who suffer from a variety of mental illnesses, chemical
dependencies combined with mental illness, and geriatric patients with
behavioral disorders generally involving dementia. Services include
comprehensive psychiatric and chemical dependency evaluations, inpatient and
outpatient treatment and partial hospitalization. The Midwest Center provides
care to patients who have been unresponsive to outpatient treatment, partial
hospitalization or in-home treatment and to those with a history of multiple
hospitalizations.
In 1997, HGA formed its psychiatric contract management service division.
This business provides behavioral health consultation and contract management
service in behavioral health for acute care hospitals. In addition to managing
inpatient units, the division facilitates partial and outpatient programs. The
consultation services include advice and assistance in preparing for regulatory
surveys, marketing and referral source development, professional services
including recruiting of psychiatrists and other key personnel, clinical program
management structure, accounts receivable management, management care contract
negotiation and data processing services. The division now has agreements with
eight psychiatric inpatient or day treatment programs.
The Joint Commission of Accreditation of Healthcare Organizations ("JCAHO"),
a national organization that periodically reviews a facility's staff, programs,
physical plant, policies and procedures, has given each of HGA's hospitals and
its residential treatment center its highest level of accreditation.
Over the past three years, HGA's performance has improved. Operating trends
show rising inpatient admissions, a decline in length of stay and an increase in
outpatient visits. Operating margins now exceed 10%, well above the industry
norm.
Hospital Group of America Three Year Trend in Key Operating Statistics
1997 1996 1995
- --------------------------------------------------------------------------------
Acute Admissions 6,326 5,353 4,782
- --------------------------------------------------------------------------------
Residential Admissions 54 0 0
- --------------------------------------------------------------------------------
Total 6,380 5,353 4,782
- --------------------------------------------------------------------------------
Combined Length of Stay (days) 11.5 11.9 13.6
- --------------------------------------------------------------------------------
Acute Average Daily Census 187 175 171
- --------------------------------------------------------------------------------
Residential Average Daily Census* 24 0 0
- --------------------------------------------------------------------------------
Total 212 175 171
- --------------------------------------------------------------------------------
Outpatient Average Daily Visits 288 172 106
- --------------------------------------------------------------------------------
*Opened in April 1997.
30
Market Overview
Recent data indicate that approximately 10% of total U. S. healthcare
resources are spent to treat psychiatric disorders. With third party payor
cost-containment pressures, providers have adjusted traditional methods of
psychiatric hospitalization. While the overwhelming majority of treatment is
still conducted through psychiatric hospitals, day treatment and outpatient
programs are expanding, growing nationally from 10% of total admissions in 1992
to 28% in 1995, the latest year for which data is available.
Facilities
Hartgrove Hospital
Hartgrove Hospital is licensed for 119 short-term acute psychiatric beds. It
has a fully integrated day treatment and outpatient program in addition to its
inpatient beds. It primarily treats children and adolescents. Hartgrove is a
leading provider of psychiatric services in the State of Illinois and is among
the largest in the Chicago metropolitan area, providing service to abused,
traumatized and disadvantaged children and adolescents and to complex
neuropsychiatric clients. It also provides multilingual family and group therapy
and extended psychosocial and counseling services to neighborhood mental health
agencies, schools, the correctional system and individual practitioners.
Hartgrove's staff includes specially trained personnel able to competently treat
the very acute patient. The Midwest Center for Youth and Families is close to
the Hartgrove service area and is part of its continuum of care.
Hampton Hospital
Hampton Hospital is licensed for 100 short-term acute psychiatric beds. It
has ambulatory programs offering services to older adults, the general adult
population and adolescents. Hampton is a regional leader in providing
psychiatric services to clients with both primary psychiatric disorders and
concomitant difficulties with substance abuse. As the only private psychiatric
hospital in Burlington and Camden Counties, New Jersey, its primary service
market, Hampton is also a regional leader in the treatment of patients with
geriatric disorders, including those in nursing homes.
31
These programs are complemented by day programs and inpatient care and
staffed by certified geropsychiatrists, licensed clinical nurse practitioners
and social workers. Full-time psychiatrists certified in adult psychiatry and
addictionology, supported by certified drug and alcohol counselors, staff a dual
diagnosis service.
MeadowWood Hospital
MeadowWood Hospital; in New Castle, Delaware is licensed for 50 short-term
acute psychiatric beds. It treats children, adolescents, adults and geriatric
patients. MeadowWood has developed a service delivery system to successfully
treat traumatized and abused children and adolescents. It also provides a day
treatment program for children and adolescents. Certified geropsychiatrists and
adjunct personnel support its full service geriatric care. Its service
capabilities extend throughout the region, with treatment locations in southern
and central Delaware.
Growth Strategy
HGA strives to be the preferred provider in the selected markets in which it
operates. It plans to:
Continue to deliver quality short-term inpatient acute care primarily to
children, adolescents and specialty geriatric clients at facilities it owns
or manages.
Provide select services for longer term residential care for adolescents
and adults.
Establish additional day treatment and outpatient sites and programs to
further develop a fully integrated continuum of behavioral healthcare
services.
Retain its position as a leading cost-efficient provider attracting managed
care and other payor referrals.
Enter into additional management contracts to provide behavioral health
services to acute care hospitals.
32
Financial Section Contents
34 Five Year Financial Highlights
35 Two Year Quarterly Information
35 Quarterly Common Stock Price Range
36 Management's Discussion and Analysis of
Financial Condition and Results of Operations
40 Management's Statement Regarding Financial Reporting
41 Independent Auditors Report
42 Consolidated Statements of Income
43 Consolidated Balance Sheets
44 Consolidated Statements of Cash Flows
46 Notes to Consolidated Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Five Year Financial Highlights
Consolidated Operations
Years Ended October 31,
(In thousands, except per share figures) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Net operating revenue $ 141,473 $ 109,131 $ 97,090 $ 95,645 $ 92,652
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 21,784 $ 12,115 $ 230 $ (9,297) $ (33,655)
- ---------------------------------------------------------------------------------------------------------------------
(Benefit of) provision for income taxes (26,606) (4,488) 115 (4,600) 417
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary items 48,390 16,603 115 (4,697) (34,072)
- ---------------------------------------------------------------------------------------------------------------------
Loss on sale of discontinued operations,
net of taxes (18,000) -- -- -- (13,657)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items 30,390 16,603 115 (4,697) (47,729)
- ---------------------------------------------------------------------------------------------------------------------
Extraordinary items 992 -- -- -- 924
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) 31,382 16,603 115 (4,697) (46,805)
- ---------------------------------------------------------------------------------------------------------------------
Less, preferred stock dividends -- -- -- 89 320
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 31,382 $ 16,603 $ 115 $ (4,786) $ (47,125)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
- ---------------------------------------------------------------------------------------------------------------------
Continuing operations $ 3.70 $ 1.41 $ 0.01 $ (0.47) $ (3.43)
- ---------------------------------------------------------------------------------------------------------------------
Discontinued operations (1.38) -- -- -- (1.36)
- ---------------------------------------------------------------------------------------------------------------------
Extraordinary items 0.08 -- -- -- .09
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ 2.40 $ 1.41 $ 0.01 $ (0.47) $ (4.70)
- ---------------------------------------------------------------------------------------------------------------------
Average number of shares used to
compute earnings per share 13,071 11,761 11,576 10,193 10,035
- ---------------------------------------------------------------------------------------------------------------------
Memo earnings per share data:
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 1.67 $ 1.03 $ 0.02 $ (0.91) $ (3.35)
- ---------------------------------------------------------------------------------------------------------------------
Consolidated Financial Position
Years Ended October 31,
(In thousands, except per share figures) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
Current assets $ 68,569 $ 42,495 $ 41,228 $ 43,505 $ 51,875
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 39,523 34,674 34,062 34,787 39,895
- --------------------------------------------------------------------------------------------------------------
Intangible assets, net 36,698 21,468 14,933 15,327 16,285
- --------------------------------------------------------------------------------------------------------------
Other assets 30,508 4,272 1,769 1,439 1,469
- --------------------------------------------------------------------------------------------------------------
Total assets $175,298 $102,909 $ 91,992 $ 95,058 $109,524
- --------------------------------------------------------------------------------------------------------------
Current liabilities* $ 33,617 $ 33,308 $ 39,613 $ 42,256 $ 51,995
- --------------------------------------------------------------------------------------------------------------
Long-term debt 9,125 47,920 43,490 46,184 48,077
- --------------------------------------------------------------------------------------------------------------
Other long-term liabilities 21,023 6,351 10,638 10,272 9,000
- --------------------------------------------------------------------------------------------------------------
Total liabilities 63,765 87,579 93,741 98,712 109,072
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit) 111,533 15,330 (1,749) (3,654) 452
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $175,298 $102,909 $ 91,992 $ 95,058 $109,524
- --------------------------------------------------------------------------------------------------------------
* Includes current installments of long-term debt
34
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Two Year Quarterly Financial Data
First Second Third Fourth
(In thousands, except per share figures) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
1997
Net operating revenue $ 28,376 $ 33,663 $ 38,949 $ 40,485
- ---------------------------------------------------------------------------------------------
Gross profit 12,663 16,186 18,565 20,196
- ---------------------------------------------------------------------------------------------
Income before tax 2,896 4,942 6,161 7,785
- ---------------------------------------------------------------------------------------------
Benefit of income taxes** (414) (431) (1,025) (24,736)
- ---------------------------------------------------------------------------------------------
Income from continuing operations 3,310 5,373 7,186 32,521
- ---------------------------------------------------------------------------------------------
Discontinued operations -- -- -- (18,000)
- ---------------------------------------------------------------------------------------------
Extraordinary items -- -- -- 992
- ---------------------------------------------------------------------------------------------
Net income $ 3,310 $ 5,373 $ 7,186 $ 15,513
- ---------------------------------------------------------------------------------------------
Earnings per share:
Continuing operations $ 0.28 $ 0.44 $ 0.55 $ 2.14
- ---------------------------------------------------------------------------------------------
Discontinued operations -- -- -- (1.19)
- ---------------------------------------------------------------------------------------------
Extraordinary items -- -- -- 0.07
- ---------------------------------------------------------------------------------------------
Earnings per share* $ 0.28 $ 0.44 $ 0.55 $ 1.02
- ---------------------------------------------------------------------------------------------
Number of shares used to compute
earnings per share 11,880 12,229 12,981 15,169
- ---------------------------------------------------------------------------------------------
Memo earnings per share data:
- ---------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 0.24 $ 0.40 $ 0.47 $ 0.51
- ---------------------------------------------------------------------------------------------
1996
Net operating revenue $ 22,249 $ 26,775 $ 28,871 $ 31,236
- ---------------------------------------------------------------------------------------------
Gross profit 8,962 12,180 13,337 14,506
- ---------------------------------------------------------------------------------------------
Income before tax 677 2,940 4,073 4,425
- ---------------------------------------------------------------------------------------------
(Benefit of) provision for income taxes 25 131 (596) (4,048)
- ---------------------------------------------------------------------------------------------
Income from continuing operations 652 2,809 4,669 8,473
- ---------------------------------------------------------------------------------------------
Net income $ 652 $ 2,809 $ 4,669 $ 8,473
- ---------------------------------------------------------------------------------------------
Earnings per share* $ 0.06 $ 0.24 $ 0.40 $ 0.72
- ---------------------------------------------------------------------------------------------
Number of shares used to compute
earnings per share 11,707 11,724 11,793 11,820
- ---------------------------------------------------------------------------------------------
Memo earnings per share data:
- ---------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 0.06 $ 0.25 $ 0.35 $ 0.37
- ---------------------------------------------------------------------------------------------
* The sum of earnings per share for the four quarters is different from the
full year amount as a result of computing the quarterly and full year amounts
on the weighted average number of common shares outstanding in the respective
periods.
** Includes a tax benefit of $25 million for the reduction of the valuation
allowances against the deferred tax assets in the fourth quarter.
Common Stock Price Range
Year Ended October 31,
1997 1996
- -------------------------------------------------------------------------------------------
Quarter Ended High Low High Low
- -------------------------------------------------------------------------------------------
January 31 18 3/4 14 8 5 5/8
- -------------------------------------------------------------------------------------------
April 30 22 1/2 16 1/8 11 1/8 6 3/8
- -------------------------------------------------------------------------------------------
July 31 30 18 13 1/8 9 5/8
- -------------------------------------------------------------------------------------------
October 31 41 1/8 28 15 1/8 10 3/4
- -------------------------------------------------------------------------------------------
The Company's common stock is traded on the New York Stock Exchange and the
Pacific Exchange. At December 31, 1997 and 1996 there were 2,613 and 2,845
common stockholders of record respectively. No dividends were paid on the
Company's common stock in 1997 or 1996 and the Company does not currently
anticipate paying cash dividends in the future.
35
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
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 46 of this report.
Results of Operations
Comparison of each of the fiscal years in the three-year period ended
October 31, 1997:
Net Sales of Products
Net sales of products of the Company's CooperVision ("CVI") and CooperSurgical
("CSI") business units over the three-year period increased as follows:
(In thousands) 1997 vs. 1996 1996 vs. 1995
- -----------------------------------------------------------------------------
Business Unit
CVI $15,121 31% $6,436 15%
- -----------------------------------------------------------------------------
CSI $ 7,536 44% $4,402 34%
- -----------------------------------------------------------------------------
Consolidated net sales of products grew 34% in 1997 and 20% in 1996.
1997 vs. 1996
CVI's net sales grew 31% due primarily to increased sales of toric lenses to
correct astigmatism, CVI's leading product group, which grew by 40% and now
account for more than 50% of its sales. Sales of the Preference spherical
product lines increased 22%, and two new products, Natural Touch, a line of
opaque, cosmetic lenses acquired in March 1997, and Encore, a line of planned
replacement lenses, increased net sales 6%. The Company believes it is 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. The acquisition of Aspect Vision Care in
December 1997 is expected to add approximately $45 million to CVI's 1998
revenue.
Net sales of CSI increased 44%. Gynecology products grew approximately 56%,
primarily due to sales of Marlow Surgical Technologies, acquired in April 1997,
and Unimar products, acquired in April 1996. The increased sales of gynecology
products were partially offset by anticipated reduced sales of nonstrategic or
non-gynecologic products.
1996 vs. 1995
Net sales of CVI grew by 15% due primarily to 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%. These increases were partially offset by anticipated declines 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 non-gynecologic products.
Net Service Revenue
Net service revenue consists of the following:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Net patient revenue $ 52,704 $ 43,013 $ 40,643
- -----------------------------------------------------------------------------
Management fees
from former owners -- -- 1,151
- -----------------------------------------------------------------------------
$ 52,704 $ 43,013 $ 41,794
- -----------------------------------------------------------------------------
Net patient revenue by major providers was as follows:
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Amount % Total Amount % Total Amount % Total
- ------------------------------------------------------------------------------
Commercial Ins. $ 2,656 5% $ 3,989 9% $ 5,055 13%
- ------------------------------------------------------------------------------
Medicare 16,897 32 13,034 30 11,767 29
- ------------------------------------------------------------------------------
Medicaid 15,330 29 9,884 23 8,566 21
- ------------------------------------------------------------------------------
Blue Cross 3,619 7 3,617 9 4,015 10
- ------------------------------------------------------------------------------
HMOs 9,697 18 8,896 21 8,714 21
- -----------------------------------------------------------------------------
Other 4,505 9 3,593 8 2,526 6
- -----------------------------------------------------------------------------
$52,704 100% $43,013 100% $ 40,643 100%
- -----------------------------------------------------------------------------
Net Patient Revenue
(See Note 1 "Net Service Revenue")
In fiscal 1997, net patient revenue grew 23% to $52.7 million. The successful
transition of the physician group begun in fiscal 1996 contributed to the 50%
revenue improvement at Hampton Hospital. In 1997, Hospital Group of America
("HGA") opened the Mid-West Center for Youth and Families, a 50-bed residential
treatment facility in Kouts, Indiana, which added $1.3 million in revenue and
established a management services division which contracts to manage behavioral
health programs. Hartgrove Hospital revenue grew $1.4 million primarily due to
an increase in Medicaid reimbursement.
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,
36
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
HGA's revenue showed improving growth rates compared with the comparable quarter
in 1995. Increased patient visits to outpatient and day treatment programs
helped offset pressure on revenue resulting from declining average lengths of
stay.
Outpatient revenue was approximately 11%, 12% and 9% of net patient revenue
in 1997, 1996 and 1995, respectively.
Management Fees
The $1.2 million revenue in 1995 reflects management fees received from the
former owner of HGA under an agreement beginning May 29, 1992 and expiring by
its terms in May of 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
1997 1996 1995
- -------------------------------------------------------------------------------
CVI 76% 77% 73%
- -------------------------------------------------------------------------------
CSI 52% 51% 52%
- -------------------------------------------------------------------------------
Consolidated 69% 70% 68%
- -------------------------------------------------------------------------------
The decrease in CVI's margin in 1997 compared to 1996 is due primarily to a
write-off of approximately $300,000 of inventory related to an unsuccessful
attempt to enter the over-the-counter ophthalmic pharmaceutical market in Canada
and increased sales of lower margin Natural Touch products, purchased in March
1997. CVI's margin increased from 1995 through 1996 due to efficiencies from
higher production levels and increased 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 than the
Company's previous year's product mix. In 1997, cost reductions improved Unimar
product line margins.
COST OF SERVICES PROVIDED
Cost of services provided includes all normal operating costs (other than
financing costs and amortization of intangibles) incurred by HGA in generating
net service revenue. Theresults of subtracting cost of services provided from
net service revenue is an operating profit of $6.2 million or 12% of net service
revenue in 1997, $2.8 million or 6% of net service revenue in 1996 and $1.3
million or 3% of net service revenue in 1995. The increased percentage of
operating profits from 1995 through 1997 reflects the combination of the revenue
increases as discussed above and the implementation of cost control programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The Company's selling, general and administrative expense ("SGA") was:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
CVI $23,756 $17,281 $15,949
- -----------------------------------------------------------------------------
CSI 8,813 6,243 5,520
- -----------------------------------------------------------------------------
Corporate/Other 5,768 6,193 4,357
- -----------------------------------------------------------------------------
$38,337 $29,717 $25,826
- -----------------------------------------------------------------------------
The decrease in 1997 vs. 1996 Corporate/Other SGA is primarily due to ongoing
savings from reduced insurance costs and the 1995 restructuring (see "Costs
Associated with Restructuring Operations" below).
The increase in 1996 vs. 1995 Corporate/Other SGA is primarily due to credits
reflected in 1995 SGA of $648,000 for the recovery of the Company's claim
against the Cooper Laboratories, Inc. Liquidating Trust, representing the
recovery of previously rendered administrative services and the reversal of a
$649,000 receivable reserve and certain other accruals no longer required.
SGA for CVI increased by 37% and 8% in 1997 vs. 1996 and 1996 vs. 1995,
respectively. The increase in 1997 vs. 1996 resulted largely as a result of
higher selling, promotion and distribution costs that contributed to a 31%
increase in net sales of products, and an accrual of $350,000 to address a
potential environmental cleanup at one of its locations (see Note 11). The 1996
vs. 1995 increase relates to a 15% revenue growth in that period. As a
percentage of sales, CVI's SGA was 37% in 1997, 35% in 1996 and 38% in 1995.
The 1997 and 1996 increases in CSI SGA resulted primarily from the
acquisition of Marlow Surgical Technologies and Unimar in 1997 and 1996,
respectively (see Note 2).
Research and Development Expense
Research and development expense was $1.7 million or 2% of net sales of products
in 1997, $1.2 million or 2% in 1996 and $2.9 million or 5% in 1995.
As a percent to sales, research and development expense remained flat for
fiscal 1997 as compared to 1996. The decrease in 1996 vs. 1995 is primarily
attributable to the Company's decision to discontinue development of its calcium
channel blocker compound. This project accounted for 43% of consolidated
research and development expense in 1995. Also, a 1996 vs. 1995 decrease of
$418,000 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
$600,000 by mid-1995.
37
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
The Company currently anticipates that the level of spending on research and
development, as a percent to sales, has stabilized. In general, the Company is
focusing on acquiring products that will be marketable immediately or in the
short-term, rather than on funding longer-term, higher risk research and
development projects.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $1.7 million in 1997, $1.2 million in 1996 and
$859,000 in 1995. In 1996, the Company accelerated $246,000 of amortization for
a use patent as a result of its decision to discontinue the development and
out-licensing of its calcium channel blocker compound. The Company stopped
funding this project in 1995. The balance of the changes in each year reflects
acquisition activity during the three-year period (see Note 2).
COSTS ASSOCIATED WITH RESTRUCTURING OPERATIONS
(See Note 4)
In 1995, the Company recorded $1.5 million of restructuring costs to provide for
costs primarily associated with closing facilities in CVP, CSI and corporate
operations and reducing the staff at HGA headquarters.
Income From Operations
As a result of the activities discussed above, income from operations improved
by $17.8 million in 1997 vs. 1995. Income from operations by business unit and
Corporate/ Other was as follows:
October 31,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
CVI $23,101 $19,065 $13,959
CSI 2,476 1,667 (425)
HGA 5,986 2,573 878
Corporate/Other (5,774) (6,462) (6,404)
- -------------------------------------------------------------------------------
$25,789 $16,843 $ 8,008
- -------------------------------------------------------------------------------
Percent Growth 53% 110%
- -------------------------------------------------------------------------------
PROVISION FOR (BENEFIT OF) SETTLEMENT OF DISPUTES, NET
(See Note 3)
In fiscal 1996, the Company recorded a credit to income of $223,000 related to
the agreement which settled cross claims between HGA and its former owner
related to purchase price adjustments (which were credited to goodwill) and
other disputes. Under this agreement, HGA received $447,000 in fiscal 1996,
$223,000 of which has been credited to settlement of disputes.
In 1995, the Company recorded a charge of $5.6 million for the settlement of
a dispute with the former medical staff at HGA's Hampton Hospital. 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.
INVESTMENT INCOME, NET
Investment income, net includes interest income of $361,000, $250,000 and
$394,000 in 1997, 1996 and 1995, respectively. Interest income increased in 1997
because of higher investment balances primarily from cash received from the
Company's follow-on offering, net of the paydown of debt. Interest income
decreased in 1996 because of lower investment balances primarily due to the
Company's use of cash to acquire Unimar in April 1996.
INTEREST EXPENSE
Interest expense was $4.2 million in 1997, $5.3 million in 1996 and $4.7 million
in 1995. The decrease in interest expense for 1997 vs. 1996 is primarily related
to the redemption of the Company's 10 5/8% Convertible Subordinated Reset
Debentures in April 1997 and its 10% Senior Subordinated Secured Notes in
September 1997. The increase in interest expense in 1996 over 1995 is primarily
related to interest on the $4 million 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 6).
PROVISION FOR (BENEFIT OF) INCOME TAXES
Details of the Company's provision for (benefit of) income taxes for each of the
years in the three-year period ended October 31, 1997 are set forth in Note 5.
The 1997 provision for federal and state taxes of $674,000 was offset by a
reversal of $215,000 of tax accruals no longer required and the recognition of
an income tax benefit of $27.1 million from reducing the valuation allowance
against net deferred tax assets. The 1996 provision for federal and state taxes
of $275,000 was offset by a reversal of $615,000 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 $315,000 was partially offset
by a reversal of $200,000 of tax accruals no longer required.
38
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
LOSS FROM SALE OF DISCONTINUED OPERATIONS
The $18 million charge to discontinued operations related to a settlement made
in 1993 with Medical Engineering Corporation (see Note 11).
EXTRAORDINARY ITEMS, NET
In 1997, the Company recorded a net extraordinary gain of $1.0 million on the
early extinguishment of a portion of its long-term debt (see Note 6).
CAPITAL RESOURCES & LIQUIDITY
In 1997, solid operating results and strategic financing transactions combined
to increase dramatically the strength of the Company's balance sheet.
Cash provided by operating activities increased 239% to $11.7 million in 1997
from $3.5 million in 1996, due to a 53% increase in income from operations and
decreased interest expense.
Cash used by investing activities in 1997 was $17.5 million, driven
primarily by $7.7 million in capital expenditures (including approximately $1.9
million for the expansion of CooperVision's manufacturing facility in
Scottsville, New York, approximately $1.7 million for the construction of HGA's
residential treatment center in Kouts, Indiana, opened in April, 1997) and total
disbursements of approximately $7.1 million for the acquisitions of Marlow
Surgical Technologies, Inc. and the Natural Touch line of opaque contact lenses
from Wesley-Jessen (see Note 2 for a discussion of these acquisitions). The
Company expects to spend approximately $13 million for capital expenditures in
1998, including approximately $7 million to fund the expansion of manufacturing
facilities at Aspect Vision Limited, a European contact lens manufacturer that
the Company acquired in December 1997 (see Note 15).
Cash provided by financing activities was $17.1 million in 1997 compared with
a use of $1.3 million in 1996. In April, 1997, the Company called for redemption
and the Debenture holders converted substantially all $9.3 million of the
Company's 10 5/8% Convertible Subordinated Reset Debentures due 2005 to stock.
In the third quarter, the Company raised net cash of $50.4 million, after
deducting all appropriate transaction costs including underwriters fees, in a
offering of 2.3 million shares of its common stock. Proceeds from this offering
were used to repay approximately $40.1 million of debt, including the September
1, 1997 redemption of all $21.9 million principal amount of its 10% Senior
Subordinated Secured Notes. At October 31, 1997, through these redemptions and
other repayments, the Company's debt was reduced to $9.6 million from $48.8
million at October 31, 1996. In the fourth quarter of 1997, the Company
completed a $50 million secured revolving credit facility with a term of five
years, and borrowings having interest rates ranging from 0.5% to 2.0% over the
London Interbank Offered Rates depending on certain financial ratios. The
Company intends to use this debt financing to fund acquisitions and for general
corporate purposes. In November 1997, the Company borrowed 'L'10.5 million,
at an interest rate of 7.91% (current rate based on London LIBOR) under this
facility to fund a portion of the Company's acquisition of Aspect Vision
Limited.
Consolidated stockholders' equity at the end of fiscal 1997, at $111.5
million, was more than seven times higher than the 1996 balance of $15.3
million. The ratio of stockholders' equity to debt improved to approximately 12
to 1 from 0.3 to 1. The Company had $18.2 million in cash and cash equivalents
at the end of fiscal 1997 vs. $6.8 million at October 31, 1996.
With an attractively priced revolving credit facility in place and operations
that are anticipated to provide sufficient cash to fund general corporate
purposes, Management believes the Company is well positioned to continue
expanding its specialty healthcare businesses through internal growth
complemented by strategic acquisitions.
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
See Footnote 1. "Summary of Significant Accounting Policies" on page 46 of this
report.
39
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
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 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 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 the fairness of reported operating results and
financial position.
A. THOMAS BENDER ROBERT S. WEISS
A. Thomas Bender Robert S. Weiss
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
40
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Independent Auditors' Report
The Board of Directors and Stockholders
The Cooper Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The Cooper
Companies, Inc. and subsidiaries as of October 31, 1997 and 1996 and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended October 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended October 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
December 10, 1997
41
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended October 31,
(In thousands, except per share figures) 1997 1996 1995
- -------------------------------------------------------------------------------
Net sales of products $ 88,769 $ 66,118 $55,296
- -------------------------------------------------------------------------------
Net service revenue 52,704 43,013 41,794
- -------------------------------------------------------------------------------
Net operating revenue 141,473 109,131 97,090
- -------------------------------------------------------------------------------
Cost of products sold 27,325 19,911 17,549
- -------------------------------------------------------------------------------
Cost of services provided 46,538 40,235 40,454
- -------------------------------------------------------------------------------
Selling, general and administrative expense 38,337 29,717 25,826
- -------------------------------------------------------------------------------
Research and development expense 1,739 1,176 2,914
- -------------------------------------------------------------------------------
Amortization of intangibles 1,745 1,249 859
- -------------------------------------------------------------------------------
Costs associated with restructuring
operations -- -- 1,480
- -------------------------------------------------------------------------------
Income from operations 25,789 16,843 8,008
- -------------------------------------------------------------------------------
Provision for (benefit of) settlements
of disputes -- (223) 3,532
- -------------------------------------------------------------------------------
Investment income, net 361 281 444
- -------------------------------------------------------------------------------
Other (loss) income, net (152) 80 51
- -------------------------------------------------------------------------------
Interest expense (4,214) (5,312) (4,741)
- -------------------------------------------------------------------------------
Income from continuing operations before
income taxes 21,784 12,115 230
- -------------------------------------------------------------------------------
(Benefit of) provision for income taxes (26,606) (4,488) 115
- -------------------------------------------------------------------------------
Income from continuing operations before
extraordinary items 48,390 16,603 115
- -------------------------------------------------------------------------------
Loss from sale of discontinued operations (18,000) -- --
- -------------------------------------------------------------------------------
Income before extraordinary items 30,390 16,603 115
- -------------------------------------------------------------------------------
Extraordinary items, net 992 -- --
- -------------------------------------------------------------------------------
Net income $ 31,382 $ 16,603 $ 115
- -------------------------------------------------------------------------------
Earnings per share:
- -------------------------------------------------------------------------------
Continuing operations before extraordinary
Items $ 3.70 $ 1.41 $ 0.01
- -------------------------------------------------------------------------------
Discontinued operations (1.38) -- --
- -------------------------------------------------------------------------------
Extraordinary items, net 0.08 -- --
- -------------------------------------------------------------------------------
Earnings per share $ 2.40 $ 1.41 $ 0.01
- -------------------------------------------------------------------------------
Number of shares used to compute
earnings per share 13,071 11,761 11,576
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31,
1997 1996
- ----------------------------------------------------------------------------------------------
Assets (In thousands)
Current assets:
Cash and cash equivalents $ 18,249 $ 6,837
- ----------------------------------------------------------------------------------------------
Trade and patient accounts receivable, less allowances
of $2,346,000 in 1997 and $1,969,000 in 1996 27,469 21,650
- ----------------------------------------------------------------------------------------------
Inventories 15,096 10,363
- ----------------------------------------------------------------------------------------------
Deferred tax asset 5,031 953
- ----------------------------------------------------------------------------------------------
Prepaid expenses and other current assets 2,724 2,692
- ----------------------------------------------------------------------------------------------
Total current assets 68,569 42,495
- ----------------------------------------------------------------------------------------------
Property, plant and equipment at cost 56,578 49,306
- ----------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization 17,055 14,632
- ----------------------------------------------------------------------------------------------
39,523 34,674
- ----------------------------------------------------------------------------------------------
Goodwill and other intangibles, net 36,698 21,468
- ----------------------------------------------------------------------------------------------
Deferred tax asset 26,182 3,195
- ----------------------------------------------------------------------------------------------
Other assets 4,326 1,077
- ----------------------------------------------------------------------------------------------
$175,298 $102,909
- ----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 438 $ 844
- ----------------------------------------------------------------------------------------------
Accounts payable 7,907 4,574
- ----------------------------------------------------------------------------------------------
Employee compensation and benefits 6,203 6,418
- ----------------------------------------------------------------------------------------------
Other accrued liabilities 9,935 11,935
- ----------------------------------------------------------------------------------------------
Accrued income taxes 9,134 9,537
- ----------------------------------------------------------------------------------------------
Total current liabilities 33,617 33,308
- ----------------------------------------------------------------------------------------------
Long-term debt 9,125 47,920
- ----------------------------------------------------------------------------------------------
Other noncurrent liabilities 21,023 6,351
- ----------------------------------------------------------------------------------------------
Total liabilities 63,765 87,579
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies (see Note 11)
Stockholders' equity
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: 14,797,996 and
11,670,898 at October 31, 1997 and 1996, respectively 1,480 1,167
- ----------------------------------------------------------------------------------------------
Additional paid-in capital 249,213 184,300
- ----------------------------------------------------------------------------------------------
Other equity (731) (326)
- ----------------------------------------------------------------------------------------------
Accumulated deficit (138,429) (169,811)
- ----------------------------------------------------------------------------------------------
Stockholders' equity 111,533 15,330
- ----------------------------------------------------------------------------------------------
$175,298 $102,909
- --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended October 31,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 31,382 $ 16,603 $ 115
- ------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (27,065) (4,148) --
- ------------------------------------------------------------------------------------------------
Depreciation expense 2,922 2,629 2,704
- ------------------------------------------------------------------------------------------------
Provision for doubtful accounts 2,336 1,849 2,300
- ------------------------------------------------------------------------------------------------
Amortization expenses:
Intangible assets 1,745 1,249 992
- ------------------------------------------------------------------------------------------------
Debt discount (400) (526) (443)
- ------------------------------------------------------------------------------------------------
Stock compensation expense 107 46 --
- ------------------------------------------------------------------------------------------------
Loss from sale of discontinued operations 18,000 -- --
- ------------------------------------------------------------------------------------------------
Extraordinary items (992) -- --
- ------------------------------------------------------------------------------------------------
Change in operating assets and liabilities
excluding effects from acquisitions:
Receivables (7,521) (4,998) (1,918)
- ------------------------------------------------------------------------------------------------
Inventories (3,855) (445) 2,126
- ------------------------------------------------------------------------------------------------
Other assets (356) 266 275
- ------------------------------------------------------------------------------------------------
Accounts payable 2,916 166 (1,050)
- ------------------------------------------------------------------------------------------------
Accrued liabilities (4,021) (4,488) (2,000)
- ------------------------------------------------------------------------------------------------
Income taxes payable (423) (459) (109)
- ------------------------------------------------------------------------------------------------
Other long-term liabilities (3,044) (4,287) 429
- ------------------------------------------------------------------------------------------------
Cash provided by operating activities 11,731 3,457 3,421
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of assets and businesses (7,145) (4,080) (821)
- ------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (7,735) (3,182) (2,185)
- ------------------------------------------------------------------------------------------------
Investment in escrow fund (2,216) -- --
- ------------------------------------------------------------------------------------------------
Other (357) 756 594
- ------------------------------------------------------------------------------------------------
Cash used by investing activities (17,453) (6,506) (2,412)
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows--Concluded
Year Ended October 31,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ----------------------------------------------------------------------------------------------
Proceeds from follow-on offering, net $ 50,388 $ -- $ --
- ----------------------------------------------------------------------------------------------
Early retirement of debt (35,740)
- ----------------------------------------------------------------------------------------------
Deferred debt acquisition costs (744)
- ----------------------------------------------------------------------------------------------
Proceeds from (repayment of) line of credit, net -- (1,025) 1,025
- ----------------------------------------------------------------------------------------------
Proceeds from industrial development note 3,000 -- --
- ----------------------------------------------------------------------------------------------
Proceeds from long-term note -- 1,320 --
- ----------------------------------------------------------------------------------------------
Net payments of other notes payable and current
long-term debt (112) (1,808) (1,270)
- ----------------------------------------------------------------------------------------------
Other 342 192 123
- ----------------------------------------------------------------------------------------------
Cash provided (used) by financing activities 17,134 (1,321) (122)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 11,412 (4,370) 887
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 6,837 11,207 10,320
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $18,249 $ 6,837 $11,207
- ----------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amounts capitalized) $ 4,783 $ 4,880 $ 4,755
- ----------------------------------------------------------------------------------------------
Income taxes $ 742 $ 119 $ 224
- ----------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and
financing activities:
Acquisitions (see Note 2):
Fair value of assets acquired $18,574 $ 9,661
- -------------------------------------------------------------------------------
Less:
Cash acquired (45) (404)
- -------------------------------------------------------------------------------
Cash paid (7,145) (4,080)
- -------------------------------------------------------------------------------
Company stock issued (4,662) --
- -------------------------------------------------------------------------------
Notes issued (4,500) (4,000)
- -------------------------------------------------------------------------------
Liabilities assumed and acquisition costs accrued $ 2,222 $ 1,177
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
45
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
daily, flexible and extended wear contact lenses, and diagnostic and surgical
instruments and equipment. The Company also provides healthcare services through
the ownership of psychiatric facilities, and through May 1995, the management of
three other such facilities. Intercompany transactions and accounts are
eliminated in consolidation. Certain reclassifications have been applied to
prior years' financial statements to conform such statements to the current
year's presentation. None of these reclassifications had any impact on results
of operations.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's operations located outside the United
States 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 currencies other than
the reporting locations functional currency are included in the determination
of net income or loss for each period. Net foreign exchange losses included in
the Company's consolidated statements of income for each of the years ended
October 31, 1997, 1996 and 1995 were $142,000, $13,000 and $130,000,
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 the 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 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. In the opinion of Management, trade receivables resulting from
sales of products are free of concentrated credit risk.
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 1997, 1996 and 1995, the Company received and
recognized revenue of approximately $2.4 million, $2 million and $2.4 million,
respectively, associated with prior year cost report settlements. Approximately
61%, 53% and 50%, respectively, of 1997, 1996 and 1995 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
$3.7 million, $2.3 million and $2.1 million for fiscal 1997, 1996 and 1995,
respectively. Hampton Hospital is required by its Certificate of Need to incur
not less than 10% of total patient days as free care.
46
Receivables from government programs represent the only concentrated group of
potential credit risk to the Company. Management believes that there are no
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.
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
October 31,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Raw materials $ 2,748 $ 2,318
- -------------------------------------------------------------------------------
Work-in-process 1,277 1,028
- -------------------------------------------------------------------------------
Finished goods 11,071 7,017
- -------------------------------------------------------------------------------
$15,096 $10,363
- -------------------------------------------------------------------------------
Inventories are stated at the lower of cost, determined on a first in, first out
or average cost basis, or market.
PROPERTY, PLANT AND EQUIPMENT AT COST
October 31,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Land and improvements $ 1,331 $ 1,360
- -------------------------------------------------------------------------------
Buildings and improvements 39,370 35,191
- -------------------------------------------------------------------------------
Machinery and equipment 15,877 12,755
- -------------------------------------------------------------------------------
$56,578 $49,306
- -------------------------------------------------------------------------------
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 estimated useful life or the
period of the related lease. Building depreciation is based on estimated useful
lives of 35 to 40 years. Machinery and equipment is depreciated over 5 to 15
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, 1997 and 1996 was $6.2 million and $4.4 million,
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 PER SHARE
Earnings 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
per share is not materially different from primary earnings per share.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
effective November 1, 1996. This statement establishes financial accounting and
reporting standards for stock-based compensation, including employee stock
option plans. As allowed by SFAS No. 123, the Company continues to measure
compensation expense under the provisions of APB No. 25, Accounting For Stock
Issued to Employees, and related interpretations.
Statements of Financial Accounting Standards Issued But Not Adopted
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
will be effective for financial statements for periods ending after December 15,
1997, including interim periods, and established standards for computing and
presenting earnings per share. Earlier application is not permitted. Beginning
with its unaudited consolidated condensed financial statements for the first
quarter of fiscal 1998, the Company will make
47
the required disclosures of basic and diluted earnings per share. All prior
period earnings per share data will be restated by the Company upon adoption of
SFAS 128. The Company expects that basic earnings per share amounts to be
reported under SFAS 128 will be somewhat higher than the amounts historically
reported, due to the removal of common stock equivalents from the calculation of
average shares and that diluted earnings per share will not differ materially
from historically reported figures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") which will be effective for financial statements for fiscal years
beginning after December 15, 1997, and establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Earlier application is permitted. The Company will
make the required reporting of comprehensive income beginning with its
consolidated financial statements for the fiscal year ending October 31, 1999.
Upon adoption, reclassification of comparative financial statements for prior
periods to reflect application of the provisions of SFAS 130 is required. The
Company does not expect that the adoption of this statement will have any impact
on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131") which will be effective for
financial statements for periods beginning after December 15, 1997, and
establishes standards for disclosures about segments of an enterprise. Earlier
application is encouraged. The Company will make the required disclosures under
SFAS 131 beginning with its consolidated financial statements for the year
ending October 31, 1999, including the restatement of earlier years'
disclosures.
Note 2.
Acquisitions
Natural Touch Acquisition
In March 1997, the Company acquired the United States rights to Natural Touch, a
line of opaque, cosmetic contact lenses, from Wesley-Jessen Corporation ("W-J")
for $7.5 million ($3 million in cash and a $4.5 million promissory note, $3
million of which was repaid on July 31, 1997) plus an ongoing royalty ranging
from 3% to 8% per annum on sales of Natural Touch products other than those
supplied by W-J. The Company recorded intangible assets of $8 million for the
patents, trademarks and distribution rights, which will be amortized over 7 to
15 years.
Presently, a subsidiary of W-J manufactures and supplies the Company with the
products for the Natural Touch line. A divestiture order issued by the Federal
Trade Commission (the "FTC") in connection with the acquisition of the Natural
Touch line requires that the Company either develop on its own the manufacturing
capabilities to produce the Natural Touch line or find a suitable third-party
manufacturer to produce it. The FTC could require the Company to divest itself
of the Natural Touch line if the Company has not either developed manufacturing
capabilities that meet United States Food and Drug Administration ("FDA")
approval or found a suitable third-party manufacturer meeting FDA approval
within 18 months from the closing date. This deadline may be extended by an
additional 24 months.
Marlow Acquisition
In April 1997, the Company acquired Marlow Surgical Technologies, Inc.,
("Marlow"), a gynecology products company, for approximately $3.2 million in
cash, liquidation of $900,000 of Marlow debt and 144,800 shares of the Company's
common stock valued at $2.9 million at closing. As part of the acquisition, the
Company agreed to issue an additional $500,000 of its common stock (valued as of
the closing) on the third anniversary of the closing, subject to reduction by
the amount of any obligations of the seller to indemnify the Company in
connection with the acquisition. Also, the Company has guaranteed that the total
value of the shares of its common stock issued or to be issued in the
acquisition (valued at $3.4 million in total at closing) will appreciate by $1.3
million by the third anniversary of the acquisition. This guarantee has been
included in the purchase price, with a corresponding credit to additional paid
in capital. The acquisition has been accounted for as a purchase, and $8.4
million has been ascribed to goodwill, which is being amortized over 20 years.
Unimar Acquisition
In April 1996, the Company acquired Unimar, Inc., a leading provider of
specialized disposable medical devices for gynecology, for $8 million in cash
and notes. Goodwill from the purchase has been recorded in the amount of $7.8
million, 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 is common
stock for $11.375 per share. The warrant is valued at $231,000. The exercise
48
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.
Note 3.
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. Under 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 at the time.
The Company recorded a charge of $5.6 million 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 Agreement 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 $5.6 million to fourth quarter fiscal 1995 earnings. That charge reflects
amounts paid to Dr. Pottash in December 1995 of $3.1 million, as well as two
payments of $1.5 million each, one of which was paid in May 1997 and the
final payment of which is due in May 1998.
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.
Note 4.
Costs Associated With Restructuring Operations
In the fourth quarter of 1995, the Company recorded a charge of $1.5 million 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 5.
Income Taxes
The income tax provision (benefit) related to income from continuing operations
in the consolidated statements of income consists of:
Years Ended October 31,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Current
- -------------------------------------------------------------------------------
Federal $ 438 $ 146 $ --
- -------------------------------------------------------------------------------
State 21 (486) 115
- -------------------------------------------------------------------------------
459 (340) 115
- -------------------------------------------------------------------------------
Deferred Federal (27,065) (4,148) --
- -------------------------------------------------------------------------------
$(26,606) $(4,488) $115
- -------------------------------------------------------------------------------
49
A reconciliation of the provision for (benefit of) income taxes attributable to
income from continuing operations and the amount computed by applying the
federal income tax rate to income from continuing operations before income taxes
follows:
Years Ended October 31,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Computed expected provision for taxes
from continuing operations $ 7,407 $ 4,119 $ 78
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in taxes resulting from:
Income outside the United States subject to different
tax rates 193 132 132
- ------------------------------------------------------------------------------------------------------------
Amortization of intangibles 394 256 185
- ------------------------------------------------------------------------------------------------------------
State taxes, net of federal income tax benefit 229 70 76
- ------------------------------------------------------------------------------------------------------------
Reversal of prior years' estimated state tax liabilities
no longer required (215) (615) (200)
- ------------------------------------------------------------------------------------------------------------
Utilization of net operating loss carryforwards (7,102) (4,406) --
- ------------------------------------------------------------------------------------------------------------
Change in beginning-of-year valuation allowance (27,065) (4,148) --
- ------------------------------------------------------------------------------------------------------------
Other, net (447) 104 (156)
- ------------------------------------------------------------------------------------------------------------
Actual provision for (benefit of) income taxes $(26,606) $ (4,488) $115
- ------------------------------------------------------------------------------------------------------------
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,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally due to allowances for
doubtful accounts $ 1,216 $ 1,030
- --------------------------------------------------------------------------------------------
Inventories, principally due to obsolescence reserves 988 830
- --------------------------------------------------------------------------------------------
Accrued liabilities, principally due to
litigation settlements and reserves, and
compensation accruals 8,906 2,507
- --------------------------------------------------------------------------------------------
Deferred income, due to the debenture
exchange -- 937
- --------------------------------------------------------------------------------------------
Net operating loss carryforwards 72,579 79,681
- --------------------------------------------------------------------------------------------
Capital loss carryforwards 2,523 2,523
- --------------------------------------------------------------------------------------------
Tax credit carryforwards 3,123 2,705
- --------------------------------------------------------------------------------------------
Other 907 798
- --------------------------------------------------------------------------------------------
Total gross deferred tax assets 90,242 91,011
- --------------------------------------------------------------------------------------------
Less valuation allowance (52,517) (80,304)
- --------------------------------------------------------------------------------------------
Deferred tax assets 37,725 10,707
- --------------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, principally due to purchase
accounting requirements (6,512) (6,461)
- --------------------------------------------------------------------------------------------
Other -- (98)
- --------------------------------------------------------------------------------------------
Deferred tax liabilities (6,512) (6,559)
- --------------------------------------------------------------------------------------------
Net deferred tax assets $31,213 $ 4,148
- --------------------------------------------------------------------------------------------
50
The net change in the total valuation allowance for the years ended October 31,
1997, 1996 and 1995 was a decrease of $27.8 million, a decrease of $8.5 million
and an increase of $1.6 million, respectively. In 1997 and 1996, the Company
recognized an income tax benefit of $27.1 million and $4.1 million ($25 million
and $4.1 million in the fourth quarters of fiscal 1997 and 1996, respectively)
from reducing the valuation allowance based primarily on the continued
improvement in the Company's operating results and prospects. The recognition of
the net deferred tax asset is based upon the expected utilization of net
operating loss carryforwards that the Company believes will more likely than not
be realized.
Subsequently recognized tax benefits relating to the valuation allowance as
of October 31, 1997 will be allocated as follows to:
(In thousands)
Consolidated statements of income $48,754
- -------------------------------------------------------------------------------
Goodwill and other intangible assets 3,454
- -------------------------------------------------------------------------------
Additional paid-in capital for stock options 309
- -------------------------------------------------------------------------------
$52,517
- -------------------------------------------------------------------------------
At October 31, 1997 the Company had capital loss, net operating loss, and tax
credit carryforwards for federal tax purposes expiring as follows: (In
thousands)
Year of Capital Operating Tax
Expiration Losses Losses Credits
- -------------------------------------------------------------------------------
1998 $5,925 $ -- $ --
- -------------------------------------------------------------------------------
1999 1,216 147 867
- -------------------------------------------------------------------------------
2000 280 -- 1,132
- -------------------------------------------------------------------------------
2001 -- 49,642 202
- -------------------------------------------------------------------------------
2002 -- 27,326 29
- -------------------------------------------------------------------------------
2003 -- 1,378 330
- -------------------------------------------------------------------------------
2004 -- 22,241 418
- -------------------------------------------------------------------------------
2005 -- 11,006 --
- -------------------------------------------------------------------------------
2006 -- 22,265 --
- -------------------------------------------------------------------------------
2007 -- 22,058 --
- -------------------------------------------------------------------------------
2008 -- 49,535 --
- -------------------------------------------------------------------------------
2009 -- 6,553 --
- -------------------------------------------------------------------------------
2010 -- 1,318 --
- -------------------------------------------------------------------------------
Indefinite life -- -- 145
- -------------------------------------------------------------------------------
$7,421 $213,469 $3,123
- -------------------------------------------------------------------------------
51
Note 6.
Long-term debt consists of the following:
October 31,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
12% promissory notes ("Promissory Notes") due April 11, 1999 $ 4,155 $ 4,000
- ------------------------------------------------------------------------------------------------
County of Monroe Industrial Development Agency ("COMIDA") Bond 2,975 --
- ------------------------------------------------------------------------------------------------
Wesley-Jessen Corporation ("W-J") promissory note 1,517 --
- ------------------------------------------------------------------------------------------------
Capitalized leases, interest rates from 8% to 13% maturing 1998 to 2003 916 584
- ------------------------------------------------------------------------------------------------
10% Senior Subordinated Secured Notes due 2003 ("10% Notes") -- 24,285
- ------------------------------------------------------------------------------------------------
Bank term loan ("HGA Term Loan") -- 10,675
- ------------------------------------------------------------------------------------------------
10 5/8% Convertible Subordinated Reset
Debentures due 2005 ("10 5/8% Debentures") -- 9,220
- ------------------------------------------------------------------------------------------------
9,563 48,764
- ------------------------------------------------------------------------------------------------
Less current installments 438 844
- ------------------------------------------------------------------------------------------------
$ 9,125 $ 47,920
- ------------------------------------------------------------------------------------------------
Aggregate annual maturities for each of the five years subsequent to October 31,
1997 are as follows:
(In thousands)
1998 $ 438
- -------------------------------------------------
1999 $4,547
- -------------------------------------------------
2000 $ 390
- -------------------------------------------------
2001 $1,867
- -------------------------------------------------
2002 $ 312
- -------------------------------------------------
10% NOTES
On September 1, 1997, the Company redeemed all $21.9 million principal amount of
its 10% Notes at 100% of principal value plus unpaid interest. Upon the early
extinguishment of this debt, an extraordinary gain was recorded as a result of
the write-off of the deferred premium (see "Extraordinary Gain, Net" below). The
effective interest rate was 6.7% at October 31, 1996.
10 5/8% DEBENTURES
The Company called for redemption on April 9, 1997 (the "Redemption Date") all
$9.3 million of its 10 5/8% Debentures at 100% of principal value, plus unpaid
interest through the Redemption Date. On the Redemption Date, holders of 47
Debentures received cash totaling an aggregate redemption price of $47,000 plus
$527 of interest. Holders of $9.2 million of Debentures converted all of their
Debentures into shares of the Company's common stock at $15.00 per share. On
conversion, the Company issued a total of 616,187 shares of common stock, plus
$253 of cash in lieu of fractional shares. The holders who converted forfeited
the right to receive any interest on such Debentures after March 1, 1997. No
gain or loss was recorded by the Company.
52
HGA TERM LOAN
The HGA Term Loan, due August 1, 2001, with a balance at July 31, 1997 of $10.2
million was paid off on August 1, 1997. As a result of the early extinguishment
of debt, an extraordinary loss, related to prepayment penalties and the write
off of deferred debt acquisition costs, was recorded (see "Extraordinary Gain,
Net" below). The interest rate in effect at October 31, 1996 was 10.75%.
LOAN AND SECURITY AGREEMENT ("LINE OF CREDIT")
On September 11, 1997, CVI canceled the five-year $8 million Line of Credit
agreement with a commercial lender, which was entered into in September 1994.
As a result of the early extinguishment of debt, an extraordinary loss, related
to prepayment penalties and the write off of deferred debt acquisition costs,
was recorded (see "Extraordinary Gain, Net" below).
EXTRAORDINARY GAIN, NET
The Company used proceeds from its follow-on stock offering to extinguish debt.
As a result of the early extinguishments of debt in the fourth quarter of 1997,
discussed above, a net extraordinary gain was recorded as follows:
(In thousands)
10% Notes $1,942
- --------------------------------------------------------------------------------
HGA Term Loan (469)
- --------------------------------------------------------------------------------
Line of Credit (461)
- --------------------------------------------------------------------------------
Income Taxes (20)
- --------------------------------------------------------------------------------
$ 992
- --------------------------------------------------------------------------------
PROMISSORY NOTES
Unimar
In April 1996, Cooper Healthcare Group, Inc. (a subsidiary of the Company)
acquired Unimar, Inc. (see Note 2) and issued Promissory Notes for $4 million
principal amount, bearing an interest rate of 12% per annum, maturing April 11,
1999. Interest is paid annually, and one-third of the interest (4%) is payable
by way of an increase in the Promissory Notes. In 1997, $155,000 of interest
increased the carrying value of the Promissory Notes. The Promissory Notes are
collateralized by a security interest in the shares of the common stock of
Unimar, Inc., and payment is guaranteed by the Company.
W-J
The W-J promissory note was issued for $4.5 million, due March 17, 2001, in
conjunction with the acquisition of Natural Touch (see Note 2). On July 31,
1997, the Company repaid $3 million of the principal and associated unpaid
interest, less $17,000 of interest which was paid in kind. Interest on the W-J
promissory note is payable semi-annually and accrues at a rate of 12% per annum,
of which 8% per annum is payable in cash and 4% per annum is payable in kind.
COMIDA Bond
The COMIDA bond is a $3 million Industrial Revenue Bond ("IRB") obtained to
finance the cost of plant expansion, building improvements and the purchase of
equipment related to CVI's Scottsville, New York, facility. Currently, interest
on the IRB is adjusted weekly. The interest rate in effect on October 31, 1997
was 3.85% per annum. Interest rates have ranged from 3.45% to 4.85% per annum
since the bond was issued. Principal repayments are made quarterly, beginning
July 1997 and ending October 2012. At October 31, 1997, unutilized proceeds of
$2.2 million from the IRB, which must be used for the aforementioned project,
are carried in other assets. The IRB is secured by substantially all of CVI's
rights to the facility.
A letter of credit was issued by KeyBank National Association ("KeyBank") to
support certain obligations under the COMIDA bond. CVI is obligated to repay
KeyBank for draws under and expenses incurred in connection with the letter of
credit, pursuant to the terms of a reimbursement agreement, which is guaranteed
by the Company. The reimbursement agreement contains customary provisions and
covenants, including the maintenance of certain ratios and levels of net worth.
CVI and COMIDA have granted a mortgage lien on the building and real estate
located in Scottsville and a first lien security interest on the equipment
purchased under the bond proceeds to KeyBank to secure payment under the
reimbursement agreement.
53
KEYBANK LINE OF CREDIT
The Company completed a $50 million senior secured revolving credit facility
with KeyBank National Association on September 15, 1997. The facility matures
September 11, 2002, with borrowings having interest rates ranging from 0.5% to
2.0% over the London Interbank Offered Rates (LIBOR) depending on certain
financial ratios, and the interest rate may be floating or fixed at the
Company's option. The Company pays an annual commitment fee of 0.375% of the
unused portion of the revolving credit facility. Interest is paid quarterly.
KeyBank syndicated a portion of the facility to other lenders and will act
as agent for the lenders.
Terms include first security interest in all of the assets of the Company.
During the term of the facility, the Company may borrow, repay and re-borrow up
to the $50 million subject to voluntary reductions. The live of credit is
guaranteed by the subsidiaries of the Company.
Mandatory prepayments will be required to repay outstanding amounts and
permanently reduce the total commitment amount available under certain
circumstances when the Company obtains additional debt or equity.
The KeyBank Line of Credit contains various covenants, including maintenance
of certain ratios and transaction limitations requiring approval of the lenders.
Certain prepayments are subject to penalties.
NOTE 7.
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, 1997 and
1996 because of the short maturity of these instruments.
Both the Company's 10% Notes and 10 5/8% Debentures were extinguished in
fiscal 1997. At October 31, 1996, the carrying amounts and fair values,
respectively, were as follows: 10% Notes $24.3 million and $21.1 million;
10 5/8% Debentures $9.2 million and $10.6 million.
The debt associated with the acquisitions of Unimar and Natural Touch was
$4.2 million and $1.5 million, respectively, at October 31, 1997. This debt is
not traded on any market, and the amounts due are pursuant to a contract. The
carrying amounts on the balance sheet approximate Management's estimate of the
fair value.
The fair value of the Company's other long-term debt approximated the
carrying value at October 31, 1997 and 1996, as the debt was refinanced or
entered into within the respective fiscal year.
54
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Note 8.
Stockholders' Equity
Common Common Paid-in Accumulated
Shares Stock Capital Deficit
(In thousands)
- ----------------------------------------------------------------------------------------------
Balance at October 31, 1994 11,293 $ 1,129 $182,142 $(186,529)
Exercise of stock options 5 1 9 --
- ----------------------------------------------------------------------------------------------
Exercise of warrants and warrant valuation 102 10 163 --
- ----------------------------------------------------------------------------------------------
Restricted stock amortization and share issuance 176 18 1,526 --
- ----------------------------------------------------------------------------------------------
Net income -- -- -- 115
- ----------------------------------------------------------------------------------------------
Balance at October 31, 1995 11,576 1,158 183,840 (186,414)
- ----------------------------------------------------------------------------------------------
Exercise of stock options 22 2 117 --
- ----------------------------------------------------------------------------------------------
Exercise of warrants and warrant valuation 66 6 297 --
- ----------------------------------------------------------------------------------------------
Restricted stock amortization and share issuance 7 1 46 --
- ----------------------------------------------------------------------------------------------
Net income -- -- -- 16,603
- ----------------------------------------------------------------------------------------------
Balance at October 31, 1996 11,671 1,167 184,300 (169,811)
- ----------------------------------------------------------------------------------------------
Exercise of stock options 36 4 260 --
- ----------------------------------------------------------------------------------------------
Exercise of warrants 27 3 147 --
- ----------------------------------------------------------------------------------------------
Restricted stock amortization and share issuance 3 -- 483 --
- ----------------------------------------------------------------------------------------------
Stock issued for acquisition (see Note 2) 145 14 4,648 --
- ----------------------------------------------------------------------------------------------
Stock issued for 10 5/8% debenture redemption
(see Note 6) 616 62 9,217 --
- ----------------------------------------------------------------------------------------------
Follow-on offering (see Note 12) 2,300 230 50,158 --
- ----------------------------------------------------------------------------------------------
Net income -- -- -- 31,382
- ----------------------------------------------------------------------------------------------
Balance at October 31, 1997 14,798 $ 1,480 $249,213 $(138,429)
- ----------------------------------------------------------------------------------------------
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 6 "Loan and Security Agreement"). The warrant was
exercised on October 20, 1997.
In October 1997, the Company adopted a stockholders' rights plan on
substantially the same terms originally adopted by the Company in October 1987
and in connection therewith declared a dividend distribution of one Preferred
Share Purchase Right for each outstanding share of the Company's common stock (a
"Right"). The plan becomes operative in certain events involving a person or
group ("Acquiring Person") acquiring 20% or more of the Company's common stock
or announcing a tender offer for 20% or more of the common stock, without the
approval of the Board of Directors, subject to limited exceptions.
Upon the occurrence of such an event, each Right, unless redeemed by the
Board, entitles its holder to purchase at an exercise price or $145; an amount
of shares of newly created Series A Junior Participating Preferred Stock of the
Company. Also, each Right will entitle each holder (excluding the Acquiring
Person's) to purchase, at the Right's then-current exercise price, a number of
shares of the Company having a market value at that time of twice the Right's
exercise price. The Rights expire in October 2007 and may generally be redeemed
by the Board of Directors at $0.01 per Right at any time before, or within 10
days after, a person has acquired 20% or more of the Company's outstanding
common stock.
At October 31, 1997, 1996 and 1995, the Company's cumulative foreign
currency translation adjustments and deferred compensation reported in other
equity were ($731,000), ($326,000) and ($333,000), respectively.
55
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Note 9.
Employee Stock Plans
At October 31, 1997 the Company has three stock-based compensation plans, which
are described below:
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 either 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,
deferred 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 authorized special options totaling
280,000 shares. Issuance of these shares resulted in $431,000 of deferred
compensation, which will be recognized over the two-year vesting period. These
shares were granted in 1997 and will vest 24 months from grant date. As of
October 31, 1997, 299,935 shares remained available under the LTIP for future
grants. Restricted shares of zero, zero and 176,196 were granted under the plan
in fiscal 1997, 1996 and 1995, respectively. Restricted shares with restrictions
in place were zero, 16,529 and 91,659 on October 31, 1997, 1996 and 1995,
respectively.
The LTIP will expire September 14, 1998. On December 15, 1997, the Company's
Board of Directors approved the 1998 Long-Term Incentive Plan, subject to the
approval of such plan by the stockholders of the Company at its Annual Meeting
scheduled for April 2, 1998.
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 awarded 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 expire. 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
shares of the Company's common stock in fiscal 1997 and will be granted 5,000
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 each subsequent fiscal
year) through fiscal 2000. A total of 215,000 shares of the Company's authorized
but unissued common stock have been reserved for issuance under the plan. As of
October 31, 1997, 149,802 shares remained available under the 1996 NEDRSP for
future grants. Restricted shares of 3,501, 7,393, and zero were granted under
the 1996 NEDRSP in fiscal 1997, 1996 and 1995, respectively, and there were no
restricted shares with restrictions in place outstanding at October 31, 1997.
56
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
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 NEDRSP
terminated.
Transactions involving the granting of options of the Company's common
stock in connection with these stock option plans are summarized below.
1997 1996 1995
-------------------- -------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Years Ended October 31, Options Price Options Price Options Price
- ---------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 459,662 $ 8.90 328,841 $ 5.77 265,556 $ 5.02
- ---------------------------------------------------------------------------------------------------
Granted 514,165 27.69 192,361 12.77 131,121 6.85
- ----------------------------------------------------------------------------------------------------
Exercised (36,454) 7.25 (21,755) 5.59 (5,153) 1.93
- ----------------------------------------------------------------------------------------------------
Forfeited (7,809) 5.78 (39,785) 3.55 (62,683) 5.16
- ----------------------------------------------------------------------------------------------------
Outstanding at end
of year 929,564 $ 19.39 459,662 $ 8.90 328,841 $ 5.77
- ----------------------------------------------------------------------------------------------------
Options exercisable at
year end 449,564 $ 9.71 244,164 $ 6.15 78,650 $ 4.46
- ----------------------------------------------------------------------------------------------------
Weighted-avg. fair value
of options granted
during the year $ 12.32 $ 5.30 N/A
- ----------------------------------------------------------------------------------------------------
The following is a summary of options outstanding at October 31, 1997 for
the stock option plans:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Exercise Prices at 10/31/97 Life Price at 10/31/97 Price
- --------------------------------------------------------------------------------------------
$ 1.68 21,205 1.58 $ 1.68 21,205 $ 1.68
- --------------------------------------------------------------------------------------------
$ 3.18 33,334 6.42 3.18 33,334 3.18
- --------------------------------------------------------------------------------------------
$ 5.82-7.88 203,449 7.56 7.01 203,449 7.01
- --------------------------------------------------------------------------------------------
$ 8.75 11,111 8.42 8.75 11,111 8.75
- --------------------------------------------------------------------------------------------
$ 14.31-21.00 320,465 8.87 16.54 180,465 14.96
- --------------------------------------------------------------------------------------------
$ 26.00-35.09 340,000 9.45 32.52 -- --
- --------------------------------------------------------------------------------------------
$ 1.68-35.09 929,564 8.54 $ 19.39 449,564 $ 9.71
- --------------------------------------------------------------------------------------------
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, 1997, 1996 and 1995 was $107,000, $46,000 and zero
respectively.
57
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Pro forma Information
As permitted by FASB Statement No. 123 ("SFAS 123"), the Company applies APB
Opinion No. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost for the Company's stock-based compensation plans
been determined under the fair value method included in SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
(In thousands, except per share amounts) 1997 1996
- ----------------------------------------------------------------------------------------
Net Income As reported $31,382 $16,603
- -----------------------------------------------------------------------------------------
Pro forma $29,704 $16,487
- -----------------------------------------------------------------------------------------
Earnings per share As reported $ 2.40 $ 1.41
- -----------------------------------------------------------------------------------------
Pro forma $ 2.29 $ 1.41
- -----------------------------------------------------------------------------------------
The above pro forma amounts include compensation expense for options granted
since November 1, 1995, and may not be representative of that to be expected in
future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996: zero dividend yield; expected
volatility of 48 percent; expected option lives of 3.5 years for both years and
risk-free interest rates of 6.5 percent and 5.9 percent, respectively.
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 participation 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,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Service cost $ 236 $ 256 $ 188
- ----------------------------------------------------------------------
Interest cost 622 598 521
- ----------------------------------------------------------------------
Actual return on assets (1,446) (1,047) (982)
- ----------------------------------------------------------------------
Net amortization
and deferral 786 488 491
- ----------------------------------------------------------------------
Net periodic pension
cost $ 198 $ 295 $ 218
- ----------------------------------------------------------------------
The actuarial present value of benefit obligations and funded status for the
Plan was as follows:
October 31,
(In thousands) 1997 1996
- ----------------------------------------------------------------------
Vested benefit obligation $8,120 $7,049
- ----------------------------------------------------------------------
Non-vested benefit obligation 18 24
- ----------------------------------------------------------------------
Accumulated benefit obligation 8,138 7,073
- ----------------------------------------------------------------------
Projected compensation increases 819 887
- ----------------------------------------------------------------------
Projected benefit obligation 8,957 7,960
- ----------------------------------------------------------------------
Fair value of plan assets 9,012 7,204
- ----------------------------------------------------------------------
Projected benefit obligation in
- ----------------------------------------------------------------------
excess of (less than)assets (55) 756
- ----------------------------------------------------------------------
Add (deduct):
- ----------------------------------------------------------------------
Unrecognized net gain 1,076 538
- ----------------------------------------------------------------------
Contributions made 8/31/97
to 10/31/97 and 8/31/96 to
10/31/96 -- (335)
- ----------------------------------------------------------------------
Prior service cost remaining to be
- ----------------------------------------------------------------------
amortized, including unrecognized
net asset (358) (382)
- ----------------------------------------------------------------------
Pension liability recognized $ 663 577
- ----------------------------------------------------------------------
Assumptions used in developing the projected benefit obligation were as follows:
August 31,
1997 1996
- ----------------------------------------------------------------------
Discount rate on plan liabilities 7.5% 8.0%
- ----------------------------------------------------------------------
Long-range rate of return on
plan assets 9.0% 9.0%
- ----------------------------------------------------------------------
Salary increase rate 4.0% 6.0%
- ----------------------------------------------------------------------
58
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
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 1% to 16% (2% to 10%, prior to October 1,
1996) 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 $218,000, $102,000 and $95,000 for the years ended October 31,
1997, 1996 and 1995, 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, 1997, 1996
and 1995, were approximately $1.8 million, $1.8 million and $1.5 million,
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 were removed in August 1997.
Note 11.
Commitments, Contingencies and Pending Litigation
Total minimum annual rental obligations (net of sublease revenue of
approximately $453,000 per year through March 2000) under noncancelable
operating leases (substantially all real property or equipment) in force at
October 31, 1997 are payable in subsequent years as follows:
(In thousands)
- ------------------------------------------------
1998 $2,582
- ------------------------------------------------
1999 2,046
- ------------------------------------------------
2000 1,553
- ------------------------------------------------
2001 925
- ------------------------------------------------
2002 588
- ------------------------------------------------
2003 and thereafter 682
- ------------------------------------------------
$8,376
- ------------------------------------------------
Aggregate rental expense for both cancelable and noncancelable contracts
amounted to $3 million, $2.5 million and $2.4 million in 1997, 1996 and 1995,
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, Recorded in 1993 Recorded in 1997
(In thousands)
- ------------------------------------------------
1997 $2,000 $ --
- ------------------------------------------------
1998 2,500 --
- ------------------------------------------------
1999 -- 3,000
- ------------------------------------------------
2000 -- 3,500
- ------------------------------------------------
2001 -- 4,000
- ------------------------------------------------
2002 -- 4,500
- ------------------------------------------------
2003 -- 3,000
- ------------------------------------------------
$4,500 $18,000
- ------------------------------------------------
Payments of $18 million 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
59
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
with fiscal 1999, and were recorded in the Company's financial statements in the
fourth quarter of fiscal 1997 as loss from sale of discontinued operations, and
are reflected on the balance sheet in "Other noncurrent liabilities," as
Management concluded that it was probable that the payments would be required.
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 above.
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 (W-J), with an aggregate cost of approximately 'L'4.1
million. As of December 31, 1997, a commitment of 'L'1.5 million remained.
The companies are currently completing another amendment to this agreement
under an extension of one month to the December 31, 1997 deadline. Management
expects that, the newly amended agreement, when formalized, will not contain any
minimum purchase commitments.
Environmental
In 1997, environmental consultants engaged by the Company identified a contained
groundwater contamination consisting of industrial solvents including
trichloroethane (TCA) at one of CVI's sites. In the opinion of counsel, the
solvents were released into the ground prior to the Company acquiring the
business at that site, and the area containing these chemicals is limited. The
Company intends to enter the state's remediation program and has accrued
$350,000 for that purpose in 1997. In the opinion of Management, the cost of
remediation will not be material when considering amounts previously accrued.
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 Chancery,
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 (the "Lewis and
Goldberg Actions").
The amended complaint in the Lewis and Goldberg Actions alleged that certain
directors of the Company and Gary Singer, as the former 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 funds. The amended complaint also alleged that the defendants
violated their fiduciary duties to the Company by not vigorously investigating
certain allegations of securities fraud. The amended complaint requested that
the Court order the defendants (other than the Company) to pay damages and
expenses to the Company and certain of the defendants to disgorge their profits
from the "trading scheme" to the Company.
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, Brandes & 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 "Sturman Action"). The
complaint in the Sturman Action was similar to a derivative complaint filed by
Mr. Sturman in the Supreme Court of the State of New York on May 26, 1992. The
New York complaint was dismissed by the New York Supreme Court on August 17,
1993, and that dismissal was affirmed by the New York Appellate Division on
March 28, 1995. The allegations of the complaint in the Sturman Action involved
substantially the same facts and events at issue in the Lewis and Goldberg
Actions described above, and similar relief was sought.
On February 4, 1997, the plaintiffs in the Lewis and Goldberg and Sturman
Actions moved for partial summary judgment against Gary Singer based upon his
earlier criminal conviction in connection with the "trading scheme." No further
action was taken to prosecute that motion pending action on plaintiffs' June 27,
1997 motion to consolidate the two Delaware actions and to file a further
amended complaint.
On December 19, 1997, the Court of Chancery entered an Order consolidating
the Sturman Action with the Lewis and Goldberg Actions under the caption In Re:
The Cooper Companies, Inc. Shareholders Derivative Litigation,
60
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated C.A. No. 12584, and directing that the shareholder plaintiffs file
a consolidated and amended derivative complaint. On December 22, 1997,
plaintiffs filed their consolidated and amended complaint (the "Consolidated
Complaint"). The Consolidated Complaint is brought by the shareholder plaintiffs
on behalf of the Company as a nominal defendant and names as defendants against
whom relief is sought: Gary Singer, Steven Singer, Brad Singer, Dorothy Singer,
as executrix of the estate of Martin Singer, Karen Sue Singer, Norma Singer
Brandes, Normel Corporation, Brandes & Singer and Romulus Holdings, Inc. The
former director defendants in the Lewis and Goldberg Actions, Arthur C. Bass,
Joseph C. Feghali, Warren J. Keegan, Robert S. Holcombe and Robert S. Weiss,
were dropped as defendants in the derivative actions upon the filing of the
Consolidated Complaint.
The Consolidated Complaint makes substantive allegations similar to those
previously made in the complaints in the Lewis and Goldberg and Sturman Actions
and seeks to recover on behalf of the Company profits allegedly made by the
defendants and their affiliates in connection with the "trading scheme"
described above and damages from the defendants for harm caused to the Company
by the "trading scheme." The Company intends to file an answer to the
Consolidated Complaint acknowledging that the derivative claims are made on its
behalf and claiming an interest in the proceeds, if any, from any recovery
obtained by the shareholder plaintiffs.
GT Labs
On October 1, 1992, GT Laboratories, Inc. filed a complaint against the Company
in the United States District Court for the Northern District of Illinois. The
Complaint alleged that the Company had breached a supply contract entered into
effective January 1, 1990 by failing to purchase the requisite number of contact
lens blanks, commonly referred to as buttons, used in the manufacture of rigid
gas permeable contact lenses. The Company denied that it had breached the
contract and asserted that the contract could be terminated if the requisite
number of buttons were not purchased, but that no further relief could be
obtained. GT Laboratories moved for summary judgment on its right to obtain
money damages for breach of contract. On September 13, 1993, the Court granted
GT Laboratories' Motion For Summary Judgment, and a nonfinal, non-appealable
order finding the Company liable for an undetermined amount of money damages was
entered. Because the order addressed liability only and did not include any
damage finding, the order was not final and was not appealable until such time
as damages were calculated by a jury. In January 1998, a jury trial was held in
the United States District Court for the Northern District of Illinois to
determine the amount of damages. The jury fixed the amount of damages at $1.7
million. The Company intends to file post-trial motions seeking a new trial on
the amount of damages and intends to vigorously pursue an appeal on the
liability findings and any damages award once the matter is concluded in the
District Court. Until the matter is finally concluded at the District Court
level, the Company is not able to pursue its rights in the Appellate Court. In
the opinion of Management, it is more likely than not that the ultimate
liability, if any, to be incurred by the Company upon the final adjudication of
this matter will not materially affect the Company's financial position or
results of operations.
Note 12.
Common Stock Offering
On July 23, 1997, the Company filed a prospectus supplement with the Securities
and Exchange Commission for the sale of 2 million shares of the Company's common
stock at the offering price of $23.50 per share. The Company sold 2.3 million
shares of common stock (including 300,000 shares for over allotment). The
proceeds from the offering of $50.4 million, net of underwriters discount and
transaction costs of $3.7 million, were primarily used to repay outstanding
indebtedness.
The following presents supplementary earnings per share information assuming
the offering and the repayment of $38.6 million of debt on the first day of
fiscal 1997:
Year Ended October 31, 1997
- ------------------------------------------------
Supplemental earnings per share:
Continuing operations $ 3.60
- ------------------------------------------------
Discontinued operations (1.27)
- ------------------------------------------------
Extraordinary item (1) .10
- ------------------------------------------------
Earnings per share $ 2.43
- ------------------------------------------------
Number of shares used to compute
earnings per share (in thousands):
- ------------------------------------------------
Historical, excluding effect of the
follow-on offering 12,441
- ------------------------------------------------
Shares, the proceeds of which
are assumed to be used to repay
outstanding indebtedness 1,763
- ------------------------------------------------
Total 14,204
- ------------------------------------------------
61
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
(1) Represents the per share amount related to a net extraordinary gain,
net of taxes and prepayment penalties, of $1.4 million for the year ended
October 31, 1997, related to the assumed extinguishment of debt, as if such
extinguishment had occurred on the first day of the period presented.
Note 13.
Relationships and Transactions Between the Company and CooperLife Sciences, Inc.
("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 independent.
Such agreements were to terminate on June 14, 1995, subject to earlier
termination or extension under certain circumstances, and were later extended
to, and expired on, October 31, 1996. Following such termination, CLS continued
to have the right pursuant to a 1992 settlement agreement with the Company to
designate two members of the Company's Board of Directors, so long as CLS
continued to own at least 800,000 shares of common stock, or one director, so
long as it continued to own at least 333,333 shares of common stock. On October
29, 1997, the Company and CLS agreed to terminate this one remaining agreement
between the parties.
During 1997, the Company borrowed and repaid loans totaling $5 million
provided by CLS. Such loans carried interest at 8.5% per annum. CLS was formerly
an 89.5% owned subsidiary of the Company's former parent, Cooper Laboratories,
Inc.
As of January 23, 1998, CLS owned 4,133 shares of the 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 President and Chief
Financial Officer of CLS, and he is also a Director of CLS.
Note 14.
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 and instruments primarily for obstetrics and gynecology.
Total net revenue by business segment represents service and sales revenue as
reported in the Company's consolidated statements of income. 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
businesses.
Identifiable assets are those assets used in continuing operations (exclusive
of cash and cash equivalents). Corporate assets include cash and cash
equivalents.
62
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
Information by business segment for each of the years in the three-year
period ended October 31, 1997 follows:
Corporate &
(In thousands) HGA CVI CSI Eliminations Consolidated
- ------------------------------------------------------------------------------------------------
1997
Net revenue from non-affiliates $ 52,704 $ 64,007 $ 24,762 $ -- $141,473
- ------------------------------------------------------------------------------------------------
Operating income (loss) $ 5,986 $ 23,101 $ 2,476 $(5,774) $ 25,789
- ------------------------------------------------------------------------------------------------
Investment income, net 361
Other income (expense), net (152)
Interest expense (4,214)
- ------------------------------------------------------------------------------------------------
Income before income taxes $ 21,784
- ------------------------------------------------------------------------------------------------
Identifiable assets $ 51,516 $ 43,380 $ 29,543 $ 50,859 $175,298
- ------------------------------------------------------------------------------------------------
Depreciation expense $ 1,691 $ 803 $ 349 $ 79 $ 2,922
- ------------------------------------------------------------------------------------------------
Amortization expense $ 180 $ 674 $ 891 $ -- $ 1,745
- ------------------------------------------------------------------------------------------------
Capital expenditures $ 3,603 $ 3,551 $ 507 $ 74 $ 7,735
- ------------------------------------------------------------------------------------------------
1996
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
- ------------------------------------------------------------------------------------------------
63
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Note 15.
Subsequent Events (Unaudited)
In December 1997, the Company acquired Aspect Vision Care Limited, a
privately-held manufacturer of high quality contact lenses sold primarily in the
United Kingdom and other European countries.
The Company paid approximately 'L'30 million, or $51.0 million at the
date of the closing in cash ('L'12 million) and 8% five-year notes
('L'18 million), and will pay an additional amount after approximately 3
years based on performance of Aspect Vision Care Limited over that period. The
minimum amount of the additional payment will acrete to 'L'5 million after
approximately 3 years, and there is no maximum limit. The cash payment was
partially financed under the Company's $50 million revolving credit agreement
and cash then on hand. The acquisition will be accounted for under the purchase
method. Aspect will operate under its current name and management as a part of
CooperVision, Inc., the Company's contact lens business.
64
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
SCIENTIFIC ADVISORS TO THE COMPANY
Eye Care
- ---------
Keith Ames, OD, FAAO
Family Vision Center
Chillicothe, OH
Kenneth Daniels, OD
Pennsylvania College of Optometry
Philadelphia, PA
Susan Gromacki, OD, MS
The New England Eye Institute
Boston, MA
Mark Andre, FCLSA
Casey Eye Institute
Portland, OR
Jeffrey Dougal OD, FAAO
Placentia, CA
Gray Sass, OD
Marietta, GA
Patrick Caroline, COT, FAAO
Pacific University College of Optometry
Forest Grove, OR
Burt W. Dubow, OD, FAAO
Minnesota Vision Group
Waite Park, MN
Joseph Studebaker,
OD, FAAO
Englewood, OH
Walter Choate, OD, FAAO
Madison, TN
S. Barry Eiden, OD, FAAO
Deerfield, IL
Loretta Szczotka, OD
University Hospitals of Cleveland
Cleveland, OH
Robert Davis, OD, FAAO
Chicago, IL
Christopher Snyder, OD, FAAO
University of Alabama
Birmingham, AL
Cheryl L. Vincent, OD, FAAO
East Lansing, MI
Women's Health
- ----------------
James C. Caillouette, M.D., FACOG, FACS
President,
The Pacific Coast Obstetrical and Gynecological Society
Clinical Professor Obstetrics and Gynecology
University of Southern California. School of Medicine
Charles H. Koh, M.D.
Associate Clinical Professor of Obstetrics and Gynecology
Medical College of Wisconsin
Co-Director,
Reproductive Specialty Center,
Milwaukee Institute for Minimally Invasive Surgery
Elijah Carter, DVM, M.D.
Chairman,
Department of Obstetrics and Gynecology
Summit Medical Center
Oakland, CA
John L. Marlow, M.D.
Director Continuing Medical Education,
Columbia Hospital for Women
Clinical Professor,
George Washington University
Associate Clinical Professor,
Georgetown University
Carl R. Della Badia, DO, FACOG, DFACOOG
Chief of Obstetrics,
Methodist Hospital, Philadelphia, PA
Clinical Associate Professor of Obstetrics and Gynecology,
Jefferson Medical College
Clinical Assistant Professor of Obstetrics and Gynecology,
University of Medicine and Dentistry of New Jersey,
School of Osteopathic Medicine
65
CORPORATE INFORMATION
Board of Directors: Nominating Committee Corporate Offices: Transfer Agent
Allan E. Rubenstein, M.D. Allan E. Rubenstein, M.D. The Cooper Companies,Inc. American Stock Transfer
President WorldCare (Chairman) 10 Faraday & Trust Company
Imaging, Inc. Michael H. Kalkstein Irvine, CA 92618-1850 40 Wall Street
Chairman Moses Marx Voice:(714)-597-4700 or New York, NY 10005
toll free, 1-(888)-822-2660
A. Thomas Bender Officers: Fax:(714)597-0662 Cerfified Public Accountants:
President and Chief Executive KPMG Peat Marwick LLP
Officer A. Thomas Bender The Cooper Companies, Inc.
President and Chief Executive 6140 Stoneridge Mall Rd. Stock Exchange Listing
Michael H. Kalkstein Officer and Suite 590 The New York Stock Exchange
Partner President, CooperVision, Inc. Pleasanton, CA 94588 The Pacific Exchange
Graham & James Voice:(510)460-3600 Ticker Symbol "COO"
Robert S. Weiss Fax:(510)460-3649
Moses Marx Executive Vice President, Trademarks
General Partner Treasurer and Publications and
United Equities Chief Financial Officer Information: All products appearing in
italics are trademarks or
Donald Press Gregory A. Fryling Corporate information, service marks that are owned
Executive Vice President Vice President Corporate including the current share by, licensed to or distributed
Broadway Management Co., Inc. Development price, recent news releases by The Cooper Companies, Inc.,
and the Company's annual its subsidiaries or
Steven Rosenberg Carol R. Kaufman report on Form 10-K without affiliates. The following
Vice President and Chief Vice President of Legal Affairs exhibits, is available free trademarks appear in this
Financial Officer, Secretary and Chief of charge through the report.
Cooper Life Sciences, Inc. Administrative Officer Company's interactive
stockholder communication
system. Call 1-800-334-1986,
Robert S. Weiss Nicholas J. Pichotta seven days a week, 24 hours Aspirette, Cerveillance
Executive Vice President President, CooperSurgical Inc. a day. Visit The Cooper System, Cervex-Brush, Comfort
Treasurer and Companies, Inc. on the View, Cooper Clear, Cooper
Chief Financial Officer Mark R. Russell Worldwide Web at Toric, CooperFlex,
President Hospital Group http://www.coopercos.com. CooperSurgical Smoke
Stanley Zinberg, M.D. of America Evacuation System 6080
Director of Practice Activities Euro-Med Classic Series, FIPS,
American College of Obstetrics Stephen C. Whiteford Investor Relations Formula 55 UV VHT, Frequency,
and Gynecology Vice President and Contact Hints of Tints, HUI,
Controller Mini-Flex, Hydrasoft Toric,
Committees of the Board: B. Norris Battin Hysteroscopy Series 4000, Koh
Principal Subsidiaries: 10 Faraday Colpotomizer, Kronner
Audit and Finance Irvine, CA 92618-1850 Manipujector, LEEP Redikit,
Committee CooperVision, Inc. Voice:(714)597-4700 LEEP System 1000, Natural
Steven Rosenberg (Chairman) 10 Faraday Fax:(714)597-0662 Touch, Nu-Tip, Permaflex,
Donald Press Irvine, CA 92618-1850 Permalens, Pipelle,
Stanley Zinberg, M.D. Voice:(714)597-8130 Annual Meeting Preference, Preference Toric,
Fax:(714)597-0662 Prima Series, RUMI, Silver,
Compensation Committee The annual meeting of Silver 07, Silver 07 VH Tint,
CooperSurgical Inc. stockholders of The Cooper Snowman, Tru-View, UltraSYNC,
Michael H. Kalkstein 15 Forest Parkway Companies, Inc. will be Unimar, Vantage, VerreScope,
(Chairman) Shelton, CT 06484 held on April 2, 1998 at the Zeppelin.
Donald Press Voice:(203)929-6321 Marriott East Hotel, New
Allan E. Rubenstein, M.D. Fax:(203)925-0135 York, NY at 10:00 A.M.
Management Committee Hospital Group of
America, Inc.
Allan E. Rubenstein, M.D. 1265 Drummers Lane, Suite 107
(Chairman) Wayne, PA 19087
Donald Press Voice:(610)687-5151
Fax:(610)687-3842
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THE COOPER COMPANIES, INC.
10 Faraday, Irvine, California 92618-1850
Voice:(714) 597-4700 Fax: (714) 597-0662 www.coopercos.com