<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarterly Period Ended APRIL 30, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from ________________ to __________
Commission File Number 1-8597
THE COOPER COMPANIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2657368
- ----------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
6140 Stoneridge Mall Road, Suite 590, Pleasanton, CA 94588
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 460-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
_____ _____
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Common Stock, $.10 Par Value 13,921,127 Shares
- ---------------------------- ------------------------------
<S> <C>
Class Outstanding at May 31, 1999
</TABLE>
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three
and Six Months Ended April 30, 1999 and 1998 3
Consolidated Condensed Balance Sheets -- April 30, 1999
and October 31, 1998 4
Consolidated Condensed Statements of Cash Flows - Six
Months Ended April 30, 1999 and 1998 5
Consolidated Condensed Statements of Comprehensive
Income - Three and Six Months Ended
April 30, 1999 and 1998 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
Index of Exhibits 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except per share figures)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 41,743 $ 37,450 $ 76,702 $ 66,834
Cost of sales 15,174 13,027 28,590 24,304
-------- ------ ---------- ----------
Gross profit 26,569 24,423 48,112 42,530
Selling, general and administrative expense 15,549 14,544 29,771 26,258
Research and development expense 442 543 903 999
Amortization of intangibles 955 894 1,912 1,612
---------- ---------- ---------- ----------
Operating income from continuing operations 9,623 8,442 15,526 13,661
--------- --------- ---------- ----------
Interest expense 1,762 1,813 3,611 2,922
Other income, net 37 244 71 1,028
----------- ---------- ---------- --------
Income from continuing operations before
income taxes 7,898 6,873 11,986 11,767
Provision for (benefit of) income taxes 2,604 (505) 4,051 (954)
--------- ---------- ---------- ----------
Income from continuing operations 5,294 7,378 7,935 12,721
--------- --------- ---------- ----------
Discontinued operations:
Net income 150 1,105 129 1,755
Gain on disposal 1,691 - 2,970 -
---------------------- ---------- ----------
1,841 1,105 3,099 1,755
--------- --------- ---------- ----------
Net income $ 7,135 $ 8,483 $ 11,034 $ 14,476
========= ========= ========== ==========
Earnings per share:
Basic:
Continuing operations $ 0.38 $ 0.50 $ 0.56 $ 0.86
Discontinued operations 0.13 0.07 0.22 0.12
---------- ---------- ---------- ----------
Earnings per share $ 0.51 $ 0.57 $ 0.78 $ 0.98
========= ========= ========== ==========
Diluted:
Continuing operations $ 0.38 $ 0.48 $ 0.55 $ 0.83
Discontinued operations 0.13 0.07 0.22 0.11
---------- ---------- ---------- ----------
Earnings per share $ 0.51 $ 0.55 $ 0.77 $ 0.94
========= ========= ========== ==========
Number of shares used to compute earnings
per share:
Basic 13,946 14,872 14,191 14,840
======== ======== ======== ========
Diluted 14,071 15,443 14,378 15,398
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,441 $ 7,333
Trade receivables, net 24,663 24,426
Inventories 35,509 30,349
Deferred tax asset 14,710 15,057
Net assets of discontinued operations - 29,206
Other current assets 7,260 9,706
---------- ---------
Total current assets 87,583 116,077
Property, plant and equipment, net 37,202 34,234
Goodwill and other intangibles, net 82,466 84,308
Deferred tax asset 59,630 52,754
Other assets 7,926 8,668
---------- ---------
$ 274,807 $ 296,041
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 9,476 $ 13,005
Current portion of long-term debt 3,170 6,958
Accrued income taxes 13,481 8,987
Other current liabilities 20,054 17,751
---------- ---------
Total current liabilities 46,181 46,701
Long-term debt 57,167 78,677
Other noncurrent liabilities 22,817 25,410
---------- ---------
Total liabilities 126,165 150,788
---------- ---------
Contingencies (see Note 7)
Stockholders' equity:
Common stock, $.10 par value 1,492 1,491
Additional paid-in capital 251,234 251,167
Accumulated other comprehensive loss (1,197) (829)
Accumulated deficit (87,549) (98,583)
Treasury stock at cost (15,338) (7,993)
---------- ---------
Total stockholders' equity 148,642 145,253
---------- ---------
$ 274,807 $ 296,041
========== =========
</TABLE>
See accompanying notes.
4
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
-------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Net cash provided (used) by operating activities $ 5,793 $ (3,774)
---------- ---------
Cash flows from investing activities:
Acquisitions of businesses (71) (33,836)
Disposition of discontinued operations, net 26,460 -
Purchases of property, plant and equipment (5,433) (8,465)
Sale of securities 5,419 -
---------- ---------
Net cash provided (used) by investing activities 26,375 (42,301)
---------- ---------
Cash flows from financing activities -- proceeds from (payment of):
Repayment of long-term debt (33,355) (697)
Long-term debt 8,532 30,517
Purchase of treasury stock (7,345) -
Unimar Notes - (4,155)
Other (2,044) 3,847
---------- ---------
Net cash (used) provided by financing activities (34,212) 29,512
---------- ---------
Effect of exchange rate changes on cash and cash equivalents 152 (239)
Net decrease in cash and cash equivalents (1,892) (16,802)
Cash and cash equivalents - beginning of period 7,333 18,258
---------- ---------
Cash and cash equivalents - end of period $ 5,441 $ 1,456
========== =========
Supplemental disclosure of noncash investing and financing activities:
Acquisitions:
Fair value of assets acquired $ 93,044
Less, liabilities assumed and acquisition costs (29,707)
---------
$ 63,337
=========
Funded by:
Cash payments $ 33,836
Issuance of stock and debt 29,501
---------
$ 63,337
=========
</TABLE>
See accompanying notes.
5
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 7,135 $ 8,483 $11,034 $14,476
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (351) 148 (430) (239)
Stock awards, net 53 98 62 105
-------- -------- ------- -------
(298) 246 (368) (134)
-------- -------- ------- -------
Comprehensive income $ 6,837 $ 8,729 $10,666 $14,342
======== ======== ======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc. (the "Company" or "Cooper"), through its principal
subsidiaries, develops, manufactures and markets healthcare products.
CooperVision ("CVI") markets a range of contact lenses to correct visual
defects, specializing in toric lenses that correct astigmatism ("torics"). Its
leading products are disposable-planned replacement toric and spherical lenses.
CVI also markets conventional toric and spherical lenses and lenses for patients
with more complex vision disorders. CooperSurgical ("CSI") markets diagnostic
products, surgical instruments and accessories to the women's healthcare market.
During interim periods, the Company follows the accounting policies described in
its most recently filed Form 10-K. Readers should refer to this and to the
Company's Annual Report to Stockholders for the fiscal year ended October 31,
1998, when reviewing this Form 10-Q. The results in this report do not
necessarily indicate those expected in subsequent quarters.
The accompanying unaudited consolidated condensed financial statements contain
all adjustments necessary to present fairly the Company's consolidated financial
position as of April 30, 1999 and October 31, 1998 and the consolidated results
of its operations for the three and six months ended April 30, 1999 and 1998 and
its consolidated cash flows for the six months ended April 30, 1999 and 1998.
Adjustments consist only of normal recurring items except for the $1.7 million
reduction to the deferred tax asset valuation allowance recorded in the first
six months of fiscal 1998, based on Management's belief at that time that the
Company's future results would continue to improve. Certain reclassifications
have been applied to the prior periods' financial statements to conform such
statements to the current year's presentation. None of these reclassifications
had any impact on net income.
The Company adopted Statement of Financial Accounting Standards ("FAS") No. 130,
"Reporting Comprehensive Income" at the beginning of fiscal 1999.
The Company adopted FAS No. 131 "Reporting for Segments of a Business
Enterprise" in fiscal 1999. The Company will provide comparative information for
interim periods, as required, beginning in its first quarter of fiscal 2000.
Note 2. Inventories, at the Lower of Average Cost or Market
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
--------- -----------
(In thousands)
<S> <C> <C>
Raw materials $ 9,113 $ 7,038
Work-in-process 3,322 2,964
Finished goods 23,074 20,347
-------- --------
$ 35,509 $ 30,349
======== ========
</TABLE>
7
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 3. Long-Term Debt
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
-------- ---------
(In thousands)
<S> <C> <C>
Promissory notes - Aspect $22,922 $27,563
Midland Bank 17,445 17,444
KeyBank line of credit -- 21,800
Aspect Vision bank loans 6,329 6,754
Promissory note - Wesley-Jessen
Corporation ("W-J") 585 574
County of Monroe Industrial
Development Agency ("COMIDA")
Bond 2,800 2,880
Capitalized leases 10,256 8,620
------- -------
60,337 85,635
Less current installments 3,170 6,958
------- -------
$57,167 $78,677
======= =======
</TABLE>
8
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 4. Earnings Per Share ("EPS")
(In thousands, except per share figures)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income from continuing operations $ 5,294 $ 7,378 $ 7,935 $ 12,721
Discontinued operations 1,841 1,105 3,099 1,755
--------- ---------- --------- ---------
Net income $ 7,135 $ 8,483 $ 11,034 $ 14,476
========= ========== ========= =========
Basic:
Weighted average common shares 13,946 14,872 14,191 14,840
========= ========== ========= =========
Basic earnings per share:
Continuing operations $ 0.38 $ 0.50 $ 0.56 $ 0.86
Discontinued operations 0.13 0.07 0.22 0.12
--------- ---------- --------- ----------
Basic earnings per share $ 0.51 $ 0.57 $ 0.78 $ 0.98
========= ========== ========= =========
Diluted:
Weighted average common shares 13,946 14,872 14,191 14,840
Add dilutive securities:
Warrants 18 61 30 60
Options 107 510 157 498
--------- ---------- --------- ---------
Subtotal 125 571 187 558
--------- ---------- --------- ---------
Denominator for diluted earnings
per share 14,071 15,443 14,378 15,398
========= ========== ========= =========
Diluted earnings per share:
Continuing operations $ 0.38 $ 0.48 $ 0.55 $ 0.83
Discontinued operations 0.13 0.07 0.22 0.11
--------- ---------- --------- ---------
Diluted earnings per share $ 0.51 $ 0.55 $ 0.77 $ 0.94
========= ========== ========= =========
</TABLE>
There were no antidilutive securities in the 1998 periods. In the 1999 periods,
options to purchase 1,299,833 and 1,249,833 shares, respectively, in the three
and six months ended April 30, were excluded from the computation of diluted EPS
because their exercise prices were above the average market price.
9
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Income Taxes
Substantially all of the Company's remaining valuation allowance against its net
deferred tax assets was reversed in fiscal 1998 based on Management's belief
that the Company's future results will enable it to utilize the deferred tax
assets recorded on its balance sheet.
As a result, the effective tax rate used to record the provision for income
taxes of $4.1 million for the six months ended April 30, 1999 was approximately
34%. In the second quarter, updated projections indicated that the full year
effective tax rate ("ETR") would be about 34%, down 1 percentage point from the
first quarter's estimate. As a result, the ETR for the three-month period ended
April 30, 1999 was approximately 33%. The net tax benefit in the 1998 three- and
six-month periods of $505,000 and $954,000, respectively, included benefits of
$900,000 and $1.7 million, respectively, from reducing the valuation allowance
against net deferred tax assets.
Note 6. Discontinued Operations
In the fourth quarter of 1998, Cooper declared Hospital Group of America
("HGA"), its psychiatric services business, a discontinued operation and
recorded a charge of $22.3 million reflecting Management's initial estimate of
the ultimate loss to be incurred upon disposition. Prior period financial
statements have been restated.
In January 1999, Cooper completed the sale of a portion of HGA for $5 million in
cash and trade receivables. On April 15, 1999, Cooper sold the remainder of HGA
to Universal Health Services, Inc. ("Universal") for $27 million at closing plus
up to an additional $3 million if certain contingent events occur. Cooper
recorded gains on disposal of $1.3 million in the first quarter and $1.7 million
in the second quarter, reflecting adjustments to the loss estimated in 1998.
HGA's patient revenue was $8.9 million and $14.3 million for the three months
ended and $20.8 million and $27.8 million for the six months ended April 30,
1999 and 1998, respectively. Other current assets at April 30, 1999 include $1.5
million of net HGA receivables, which will be collected by Cooper.
Note 7. Contingencies -- Environmental
In 1997, environmental consultants engaged by the Company identified a contained
area of groundwater contamination consisting of industrial solvents including
trichloroethane (also known as TCA) at one of CVI's sites. In the opinion of
counsel, the solvents were released into the ground before the Company acquired
the business at that site, and the area containing these chemicals is limited.
The New York Department of Environmental Conservation ("DEC") informed the
Company on July 21, 1998 that the site was eligible for the New York Voluntary
10
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Cleanup Program, and on April 6, 1999, the Company and DEC entered into a
voluntary agreement covering the environmental investigation of the site. The
investigation is currently underway and will ultimately result in a
state-approved mediation. The Company has accrued approximately $500,000 for
that purpose. In the opinion of Management, the cost of remediation will not be
material when considering amounts previously accrued.
Note 8. Share Repurchase Program
In September 1998, Cooper's Board of Directors authorized the purchase of up to
one million shares of its common stock. All of these shares have been purchased.
<TABLE>
<CAPTION>
Purchase
Shares Price
------ --------
(In thousands)
<S> <C> <C>
Purchased and paid for in fiscal 1998 486 $ 7,993
Purchased in the first quarter of fiscal 1999, paid
for in the second quarter of fiscal 1999 125 1,836
Purchased and paid for in the second quarter of fiscal 1999 389 5,509
----- -------
1,000 $15,338
===== =======
</TABLE>
Note 9. Generally Accepted Accounting Principles Issued But Not Adopted
In April, 1998, The American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP"). The SOP broadly defines start-up activities and requires that they be
expensed as incurred. It is effective for financial statements for fiscal years
beginning after December 15, 1998. Any deferred start-up activities on the
balance sheet at the adoption of the SOP are to be expensed as a cumulative
effect of a change in accounting principle. Cooper will adopt the SOP as
required in the first quarter of fiscal year 2000 and anticipates that the
impact of such adoption on net income should not exceed approximately $500,000.
The Company's current policy is to defer start-up activities as appropriate and
amortize them over 12 months on a straight-line basis.
Note 10. Authorized Shares of Common Stock
At their March 18, 1999 Annual Meeting, Cooper's shareholders approved an
increase in the number of authorized shares of its common stock to 40 million.
Note 11. Subsequent Event - Cash Dividends
On May 20, 1999, Cooper announced that it intends to pay an annual cash dividend
on its common stock of 8 cents per share, payable in quarterly installments of 2
cents per share. The first dividend will be paid on July 5, 1999 to stockholders
of record on June 15, 1999.
11
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Note numbers refer to "Notes to Consolidated Condensed Financial Statements"
beginning on page 7 of this report. The Company and its Management are sometimes
referred to in this discussion as "Cooper" and by use of personal pronouns such
as "we" or "our." We also refer to the reader of this report as "you."
FORWARD-LOOKING STATEMENTS: Some of the information included in this report
contains "forward-looking statements" as defined by the Private Securities
Litigation Reform Act of 1995. The forward-looking statements include certain
statements pertaining to our (including our subsidiaries') capital resources,
performance and results of operations, including all statements regarding
anticipated growth in our sales, revenue and products and anticipated market
conditions and results of operations. Forward-looking statements involve
numerous risks and uncertainties and you should not rely on them as predictions
of future events. The events or circumstances reflected in forward-looking
statements might not occur. You can identify forward-looking statements by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates" or
"anticipates" or the negative of these words and phrases or similar words or
phrases. You can also identify forward-looking statements by discussions of
strategy, plans or intentions. Forward-looking statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
that we may not be able to realize. The following factors, among others, could
cause actual results and future events to differ materially from those set forth
or contemplated in the forward-looking statements: major changes in business
conditions and the economy, loss of key senior management, major disruptions in
the operations of our manufacturing facilities, new competitors or technologies,
significant disruptions caused by the failure of third parties to address the
year 2000 issue or by unforeseen delays in completing our year 2000 compliance
program, acquisition integration costs, foreign currency exchange exposure
including the potential impact of the Euro, investments in research and
development and other start-up projects, dilution to earnings per share from
acquisitions or issuing stock, regulatory issues, significant environmental
clean-up costs above those already accrued, litigation costs, costs of business
divestitures, and items discussed in the reports we file with the Securities
and Exchange Commission, including the section entitled "Business" in our
Annual Report on Form 10-K for the year ended October 31, 1998. We caution you
not to place undue reliance on forward-looking statements, which reflect our
analysis only and speak only as of the date of this report or the dates
indicated in the forward-looking statements.
RESULTS OF OPERATIONS
This section focuses on our income statement and compares our operating results
from continuing operations for the second fiscal quarter and six months of 1999
with those for the same periods of 1998. You will find a discussion of our cash
flows for the same periods, as well as a discussion of our current financial
condition beginning on page 18 in the section headed "Capital Resources and
Liquidity."
12
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
REVENUE: All of Cooper's revenue is generated by our two business units,
CooperVision ("CVI") and CooperSurgical ("CSI"):
CVI markets a broad range of contact lenses primarily in North America
and Europe.
CSI markets diagnostic products, surgical instruments and accessories
to the women's healthcare market primarily in the United States.
Our consolidated revenue grew $4.3 million (11%) and $9.9 million (15%),
respectively, in the second quarter and six-month periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------------------------- ---------------------------------------
1999 1998 % Incr. 1999 1998 % Incr.
------ ------ ------- ------ ------ -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
CVI $ 34.7 $ 30.4 14% $ 62.5 $ 53.3 17%
CSI 7.0 7.0 --% 14.2 13.5 5%
------- ------- ------- -------
$ 41.7 $ 37.4 11% $ 76.7 $ 66.8 15%
======= ======= ======= =======
</TABLE>
CVI's revenue growth was driven principally by our acquisition of Aspect Vision
Care, Ltd. ("Aspect"), a British contact lens manufacturer, and continued growth
in sales of CVI's toric lenses, used to correct astigmatism. Sales of Aspect
products accounted for $13.5 million or 39% and $24.4 million or 39% of CVI's
total revenue in the second quarter and the six-month period vs. $10.4 million
or 34% and $17 million or 32% for the same 1998 periods. The 1998 six-month
period includes only five months of Aspect results. Revenue generated by CVI in
the U.S. grew 13% in the 1999 six-month period, accounting for 61% of CVI's
overall revenue vs. 63% in 1998. Sales of CVI's disposable-planned replacement
toric lenses in the United States grew 34% and 39%, respectively, for the
quarter and six-month period of 1999, and its overall toric sales grew 23% and
25% over the same respective periods. In both cases the growth was well ahead of
market growth reported for the fourth quarter of calendar 1998 and the first
quarter of calendar 1999. Toric lenses continue to drive the growth of the U.S.
contact lens market. The toric lens market segment now accounts for about 18% of
all U.S. contact lens revenue versus 16% in the fourth quarter of 1998. The
toric segment is the largest part of our U.S. business, accounting for 62% of
its revenue in the first half of 1999. Anticipated declines of CVI's more mature
conventional product lines partially offset the sales increases.
CSI's second quarter revenue was flat compared with 1998's second quarter.
Year-to-date revenue is up 5% primarily from sales of (1) three new products
introduced in the second half of 1998, (2) continued growth of Hyskon, a fluid
used in certain minimally invasive surgical procedures, and (3) products for in
vitro fertilization and certain other gynecological procedures.
13
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CSI has established more than 20 clinical studies for the FemExam Test Card
System to further establish the benefits of a rapid, objective diagnostic and
screening test for bacterial vaginosis, one of the most common reasons women
visit their doctor. In addition, CSI continues its work to create and maximize
third party reimbursement levels for FemExam and formally demonstrate its cost
effectiveness.
COST OF SALES/GROSS PROFIT: Gross profit as a percentage of sales ("margin") was
as follows:
<TABLE>
<CAPTION>
Margin % Margin %
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CVI 65 67 64 66
CSI 56 55 56 54
Consolidated 64 65 63 64
</TABLE>
CVI's margin continues to improve from the atypically low 60% reported in the
fourth quarter of 1998, when it spent about $1.7 million to improve efficiency,
rationalize manufacturing, expand capacity and fill back orders. The 65% margin
reported in the second quarter of 1999 is two percentage points higher than the
first quarter of 1999. Gross profit of $22.6 million was 10% above 1998's second
quarter. Gross profit improvement in the quarter reflects cost reduction
projects begun last year at Aspect. In addition, capacity constraints have been
eliminated, customer service levels have improved and staffing levels are
returning to normal. Now that the integration of Aspect into CVI is virtually
complete, we believe that continued cost reductions will result in improving
margins during the second half of fiscal 1999, aside from any major changes in
product mix.
CSI's margins continue to improve, primarily reflecting continued manufacturing
efficiencies associated with Marlow and Unimar products. Unless we make a large
acquisition of lower-margin products, we anticipate that recently launched and
future proprietary products will, after an initial start-up period, drive
continued margin improvement at CSI.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSE:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------------------- ----------------------------------------
1999 1998 % Incr. 1999 1998 % Incr.
------- -------- ------- -------- -------- -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
CVI $ 11.6 $ 10.2 13% $ 22.2 $ 18.3 22%
CSI 2.4 2.4 (1%) 4.9 4.6 6%
HQ/Other 1.5 1.9 (17%) 2.7 3.4 (20%)
------- ------- ------- -------
$ 15.5 $ 14.5 7% $ 29.8 $ 26.3 13%
======= ======= ======= =======
</TABLE>
14
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
SG&A expense for the three- and six-month periods has increased 7% and 13%,
largely as a result of: (1) the acquisition of Aspect in December 1997, (2)
higher selling, promotion and distribution costs at CVI's domestic locations
associated with new product launches for both the three- and six-month periods
and (3) CSI expenses related primarily to the Marlow acquisition and new
products, which contributed to CSI's 5% revenue increase for the six-month
period.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSE: We expect that the current level of
R&D spending will remain at a low percentage of sales because we are focusing on
acquiring products that will not require a large expenditure of time or money
prior to their launch.
OPERATING INCOME FROM CONTINUING OPERATIONS: Operating income from continuing
operations improved by $1.2 million or 14% and $1.8 million or 14% for the
three- and six-month periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
-------------------------------- --------------------------------
1999 1998 Incr. 1999 1998 Incr.
------ ------ ----- ------ ------ -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
CVI $10.3 $ 9.5 $ 0.8 $16.5 $15.5 $ 1.0
CSI 0.9 0.8 0.1 1.7 1.6 0.1
Headquarters (1.6) (1.9) 0.3 (2.7) (3.4) 0.7
----- ------ ------ ----- ----- ------
$ 9.6 $ 8.4 $ 1.2 $15.5 $13.7 $ 1.8
===== ====== ====== ===== ===== ======
</TABLE>
INTEREST EXPENSE: Interest expense increased by 24% in the six-month period
primarily reflecting debt we incurred to fund the acquisition of Aspect, our
investment in Litmus Concepts, Inc. and our recently completed stock repurchase
program. In September 1998, our Board of Directors authorized us to purchase up
to one million of our common shares. We have now completed the purchase at an
average price of $15.34 per share. About half of the shares were purchased in
each of fiscal 1998 and fiscal 1999.
OTHER INCOME, NET: 1998's six-month period includes a foreign exchange gain of
about $850,000 associated with weakness in the Pound Sterling that occurred
before we implemented our hedging program. With that program now in place, we do
not expect this or future years to have foreign exchange gains or losses of this
magnitude. In the first six months of fiscal 1999, we incurred a foreign
exchange loss of $274,000.
PROVISION FOR INCOME TAXES: In the fourth quarter of fiscal 1998, we recorded a
large tax benefit, reflecting the remaining anticipated value of our $184
million of net operating loss carryforwards ("NOL"). As a result, in fiscal
1999, we are reporting our provision for income
15
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
taxes as if we were a taxpayer with no NOLs, based on our estimate of the
effective tax rate ("ETR") for the full fiscal year. In the second quarter,
updated projections indicated that our full year ETR would be about 34%, down
one percentage point from the first quarter's estimate. As a result, our ETR for
the three-month period ended April 30, 1999 was approximately 33%.
We are currently developing a global tax plan to minimize both the taxes
reported in our income statement and the actual taxes we will have to pay once
the benefits of our NOLs are fully utilized. Based on a preliminary assessment,
we expect to reduce our effective tax rate to approximately 30% over the next
several years. By executing this tax plan, the cash flow benefits of the NOLs
should be extended through 2003, assuming no acquisitions or stock issuance. We
expect that actual payments for taxes will be about 10% of pretax profits
throughout this period.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS: In the fourth quarter of fiscal
1998, we declared Hospital Group of America, Inc. ("HGA"), our psychiatric
services business, a discontinued operation and recorded a charge of $22.3
million reflecting our initial estimate of the ultimate loss we would incur upon
disposition.
In January 1999, we completed the sale of a portion of HGA for $5 million in
cash and trade receivables. On April 15, 1999, we sold the remainder of HGA to
Universal Health Services, Inc. for $27 million at closing plus up to $3 million
if certain contingent events occur. We recorded gains on the disposals of $1.3
million in the first quarter and $1.7 million in the second quarter, reflecting
adjustments to the loss estimated in 1998.
EARNINGS PER SHARE: In fiscal 1998, we accounted for the remaining tax benefits
expected from using our NOLs. As a result, future income statements will provide
for income taxes rather than reflect tax benefits. Earnings per share as
reported follow. See Note 4. for calculations of these amounts:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
-------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Continuing operations $ 0.38 $ 0.50 $ 0.56 $ 0.86
Discontinued operations 0.13 0.07 0.22 0.12
--------- -------- -------- ---------
Earnings per share $ 0.51 $ 0.57 $ 0.78 $ 0.98
========= ======== ======== =========
Diluted:
Continuing operations $ 0.38 $ 0.48 $ 0.55 $ 0.83
Discontinued operations 0.13 0.07 0.22 0.11
--------- -------- -------- ---------
Earnings per share $ 0.51 $ 0.55 $ 0.77 $ 0.94
========= ======== ======== =========
</TABLE>
16
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
To present earnings per share on a consistent basis, the 1998 per share amounts
that follow have been tax effected on a pro forma basis. Diluted earnings per
share from continuing operations for 1999's second quarter increased 41% to 38
cents from the comparable fully taxed pro forma 27 cents for the same period in
1998. The comparable six-month figures were 55 cents and 46 cents, an increase
of 20%. The results for 1998 reflect a 40% ETR on income from continuing
operations before income taxes to arrive at pro forma net income.
17
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CAPITAL RESOURCES & LIQUIDITY
While we continue to grow our business, we are also strengthening our balance
sheet. Our ratio of debt to equity has decreased from 0.6:1 at the end of fiscal
1998 to 0.4:1 at April 30, 1999. Debt now represents about 30% of our total
capitalization, down from 38% at October 31, 1998.
In fiscal 1998 and in the first half of 1999, we invested in the expansion of
both Aspect and our domestic manufacturing capacity, and we invested
significantly in sales and marketing costs to launch new products. We expect
that our sales will continue to grow and that the rate of our build of new
product inventory will level out and then decrease. We also anticipate a reduced
level of investment in manufacturing capacity in the second half of fiscal 1999.
OPERATING CASH FLOWS: We generated $9.2 million in cash from operating
activities in the second quarter, to bring our six-month figure to $5.8 million
after using $3.4 million in our first quarter. Cash provided by operating
activities in the six-month period hurdled cash disbursements of $3.8 million
related to settlements of disputes, approximately $900,000 to fund fiscal 1998
entitlements under the Company's bonus plans, $4.1 million in interest payments
and $5.2 million to increase inventory levels. In the 1998 period, the Company
spent over $3 million of one-time payments for costs associated with Aspect,
shortly after the acquisition, and a tax payment of $3 million was made by
Aspect for its tax liability on pre-acquisition operations. Other major uses of
cash in the 1998 period included payments of $2.4 million related to settlements
of disputes, approximately $2 million to fund fiscal 1997 entitlements under the
Company's annual bonus plans and $4.7 million to build inventories.
INVESTING CASH FLOWS: Investing activities provided cash of $26.4 million in the
six-month period ended April 30, 1999. An option contract that expired in
December 1998 provided $5.4 million in cash but did not have any material impact
on net income. We also realized approximately $26.5 million, net of costs, in
cash from the sale of HGA. The cash provided by investing activities was net of
expenditures of $5.4 million for the purchase of property, plant and equipment.
The investing uses of $42.3 million of cash in the 1998 period primarily related
to the purchase of Aspect for approximately $21.2 million; the purchase of the
Hyskon product line for $2.2 million; the purchase, for $10 million, of a 10%
equity position in Litmus Concepts Inc. plus an exclusive license to distribute
the FemExam TestCard System; and investments in property, plant and equipment of
$8.5 million. We expect that our capital expenditures in fiscal 1999 will be
below the amount we spent in 1998.
FINANCING CASH FLOWS: The $34.2 million of financing cash flows used in the
first half of fiscal 1999 primarily related to the net repayment of $21.8
million on the KeyBank line of credit, the repayment of a $4 million Aspect
promissory note and the repayment of short-term debt of $2.1 million. We also
completed the treasury stock purchase authorized by our Board of Directors by
purchasing 514,000 shares of common stock for $7.3 million in the first half of
1999. These payments were partially offset by net additional long-term borrowing
on capital leases of $1.9 million. In the first half of fiscal 1998, the Company
obtained $33.7 million of cash from
18
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
financing activities including a $9.3 million draw down on the KeyBank line of
credit, the Midland Bank loan of $17.7 million, an increase in capitalized
leases of $2.8 million and $4 million of additional debt for Aspect. We repaid
$4.2 million of principal amounts of promissory notes in the first quarter of
fiscal 1998.
CASH FLOW PER SHARE: Cash flow per share from continuing operations was 70 cents
for the second quarter, up 25% from 56 cents in the second quarter of 1998, and
$1.09 per share for the first half of fiscal 1999, up from 97 cents in the first
half of 1998. We define cash flow for this purpose as pretax income from
continuing operations plus depreciation and amortization.
OUTLOOK: We believe cash flow from continuing operations will be sufficient to
fund ongoing operations and to pay cash dividends (see Note 11). Additional
financing may be needed to fund additional acquisitions. At April 30, 1999, we
had $25.4 million available under the KeyBank line of credit, and we anticipate
that additional financing would be available when and if required.
RISK MANAGEMENT: We are exposed to risks caused by changes in foreign exchange,
principally Pound Sterling denominated debt and from operations in foreign
currencies. We have hedged most of this risk by entering into contracts to buy
Sterling forward. We are also exposed to risks associated with changes in
interest rates, as the interest rate on certain of our debt varies with the
London Interbank Offered Rate. We have protected ourselves against most of this
risk by entering into agreements to swap most of our variable rate debt for
fixed rate debt.
Proceeds from the sale of HGA were used to pay down debt carrying an average
interest rate of approximately 7%. Total debt was reduced to $63 million at
April 30, 1999 from $90.3 million at October 31, 1998:
<TABLE>
<CAPTION>
April 30, 1999 October 31, 1998
-------------- ----------------
<S> <C> <C>
Short term $ 5.8 $11.6
Long term 57.2 78.7
------ ------
Total $63.0 $90.3
===== =====
</TABLE>
On an annualized basis the debt reduction would result in a decrease in interest
expense of approximately $1.9 million, assuming we did not raise debt for other
purposes.
YEAR 2000: The year 2000 ("Y2K") problem exists today because programmers who
developed computer systems and applications over the past few decades used two
digit date codes to designate the year. This creates a problem in the year 2000
in that many systems will recognize "00" as the year 1900 rather than 2000 and,
if not fixed, may abort or produce erroneous data once the year 2000 arrives.
19
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
We have completed an in-depth review of the financial and operational systems at
each of our business units and have implemented a Y2K compliance program to
confirm that all critical business systems, software and equipment that consider
and process date-related information will continue to function properly after
December 31, 1999. Final testing of critical systems has begun and is expected
to be complete by July 31, 1999. We anticipate that our Y2K project will be
substantially completed by September 30, 1999.
We initiated compliance programs in 1995 to modify our proprietary software, and
many of the required changes have been completed. Recently purchased software
requires only minimal modification, and we are endeavoring to ensure that any
new software purchased will be Y2K compliant. We intend to use both internal and
external resources to reprogram, or replace, and test our software for Y2K
modifications.
We have assigned a key employee at each of our major operations to be
responsible for Y2K compliance. We have also appointed a Y2K Compliance Officer
who reports to the Board of Directors on program status.
We have experienced significant growth in the past three years and are beginning
implementation of a broad-based Enterprise Resource Planning ("ERP") system
throughout major CVI operations in the U.S. and the U.K. The new ERP system will
be Y2K compliant. In any event, as part of our contingency plan, CVI will take
all necessary and reasonable steps to ensure that all of its existing systems
are Y2K compliant prior to the conversion to the new system. In addition, at
Aspect Vision plans are in place to build additional contact lens inventory
prior to 2000 to assure uninterrupted flow of products to customers.
We have or are currently working to ensure Y2K compliance of all business
systems and do not anticipate material Y2K problems. We also have or are
currently communicating with vendors to determine their Y2K compliance and to
date are not aware of third party Y2K issues that could materially affect
operations.
We will continue to devote adequate resources to address Y2K issues. We cannot,
however, assure that systems and products do not contain undetected Y2K
problems, that we will not experience operating difficulties as a result of Y2K
issues or that new systems will be implemented in time to avoid the probability
of Y2K problems. Further, we cannot assure that our assessment of suppliers and
vendors will be accurate or that all suppliers and vendors will provide
sufficient information to enable us to make such assessment.
We have developed contingency plans to identify and mitigate potential Y2K
problems and assess their impact on operations. These plans are designed to
protect our assets, continue safe operations and allow any interrupted
operations to resume in a timely fashion. However, contingency planning for Y2K
issues is complicated by possible multiple and simultaneous incidents, which
could significantly delay our efforts to respond and resume normal business.
Such incidents may be outside our control, if, for example, third parties
providing goods and/or services critical to our operations do not successfully
address their own material Y2K problems.
20
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
Based on our Y2K assessment, we anticipate that the cost to upgrade or replace
our programs, systems and equipment will not materially affect our financial
position. We currently estimate that expenditures of approximately $500,000,
including capital, will be required for us to be Y2K compliant. Approximately
$245,000 has been expended to date.
TRADEMARKS: The following trademarks italicized in this report are owned by,
licensed to or distributed by The Cooper Companies, Inc., its subsidiaries or
affiliates: FemExam'r' TestCard System'TM', Hyskon'r', Marlow'TM' and Unimar'r'.
21
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See Capital Resources and Liquidity under "Risk Management" in Item 2 of this
report for a discussion of debt paid down in the second quarter of 1999.
22
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Stockholders was held on March 18, 1999.
Each of eight individuals nominated to serve as directors of the Company was
elected:
<TABLE>
<CAPTION>
Director Shares For Shares Against
-------- ---------- --------------
<S> <C> <C>
A. Thomas Bender 13,149,895 422,749
Michael H. Kalkstein 13,150,490 422,154
Moses Marx 13,148,811 423,833
Donald Press 13,150,657 421,987
Steven Rosenberg 13,150,677 421,967
Allan E. Rubenstein, M.D. 13,150,236 422,408
Robert S. Weiss 13,148,696 423,948
Stanley Zinberg, M.D. 13,149,826 422,818
</TABLE>
Stockholders approved an increase in the numbers of authorized shares of common
stock to 40,000,000. A total of 12,470,962 shares were voted in favor of the
ratification, 1,073,501 shares were voted against it and 28,171 shares
abstained.
Stockholders ratified the appointment of KPMG LLP as Cooper's independent
certified public accountants for the fiscal year ending October 31, 1999. A
total of 13,495,365 shares were voted in favor of the ratification, 57,333
shares were voted against it and 19,946 shares abstained.
23
<PAGE>
PART II - OTHER INFORMATION, CONCLUDED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11* Calculation of Earnings Per Share.
27 Financial Data Schedule for the six months ended April 30, 1999.
</TABLE>
* The information called for in this exhibit is provided in Footnote 4 to the
Consolidated Condensed Financial Statements in this report.
(b) The Company filed the following reports on Form 8-K during the period
February 1, 1999 to April 30, 1999.
<TABLE>
<CAPTION>
Date of Report Item Reported
-------------- -------------
<S> <C>
February 23, 1999 Item 5. Other Events.
March 11, 1999 Item 5. Other Events.
April 15, 1999 Item 2. Acquisition or Disposition of Assets.
</TABLE>
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Cooper Companies, Inc.
______________________________________________
(Registrant)
Date: June 11, 1999 /s/ Robert S.Weiss
______________________________________________
Executive Vice President, Treasurer and Chief
Financial Officer
25
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ---------- --------
<S> <C> <C>
11* Calculation of Earnings Per Share.
27 Financial Data Schedule.
</TABLE>
* The information called for in this exhibit is provided in Footnote 4 to the
Consolidated Condensed Financial Statements in this report.
26
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as.................................'TM'
The registered trademark symbol shall be expressed as.......................'r'
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 5,441
<SECURITIES> 0
<RECEIVABLES> 25,861
<ALLOWANCES> 1,198
<INVENTORY> 35,509
<CURRENT-ASSETS> 87,583
<PP&E> 49,823
<DEPRECIATION> 12,621
<TOTAL-ASSETS> 274,807
<CURRENT-LIABILITIES> 46,181
<BONDS> 57,167
<COMMON> 1,492
0
0
<OTHER-SE> 147,150
<TOTAL-LIABILITY-AND-EQUITY> 274,807
<SALES> 76,702
<TOTAL-REVENUES> 76,702
<CGS> 28,590
<TOTAL-COSTS> 28,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,611
<INCOME-PRETAX> 11,986
<INCOME-TAX> 4,051
<INCOME-CONTINUING> 7,935
<DISCONTINUED> 3,099
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,034
<EPS-BASIC> .78
<EPS-DILUTED> .77
