SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1994 Commission File Number 0-7955
Mentor Corporation
(Exact name of registrant as specified in its charter)
Minnesota 41-0950791
(State of Incorporation) (I.R.S. Employer Identification Number)
5425 Hollister Avenue, Santa Barbara, California 93111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (805) 681-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 of 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
The number of shares outstanding for each of the Issuer's classes of common
stock as of February 10, 1995 was:
Common stock, $.10 par value 10,883,988 shares
<PAGE>
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- December 31, 1994 and March 31,1994...................3-4
Consolidated Statements of Income -- Three Months
Ended December 31, 1994 and 1993....................................5
Consolidated Statements of Income -- Nine Months
Ended December 31, 1994 and 1993....................................6
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 1994 and 1993........................7
Notes to Condensed Consolidated Financial Statements--
December 31, 1994.................................................8-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition..........................10-13
Part II. Other Information
Item 1. Legal Proceedings..............................................14
Item 2. Changes in Securities..........................................14
Item 3. Defaults upon Senior Securities................................14
Item 4. Submission of Matters to a Vote of Security Holders ...........14
Item 5. Other Information..............................................15
Item 6. Exhibits and Reports on Form 8-K...............................15
List of Exhibits
11. Statement Regarding Computation of Per Share Earnings
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
December 31, 1994 and March 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
ASSETS (In thousands)
<S> <C> <C>
Current Assets:
Cash and marketable securities $ 9,947 $ 10,329
Accounts receivable, net 29,025 22,512
Inventories 31,458 29,074
Prepaid income taxes 492 -
Deferred income taxes 4,063 5,045
Other 2,464 3,148
Total current assets 77,449 70,108
Property, plant and equipment,
net of accumulated depreciation 24,963 24,271
Other Assets:
Deferred income taxes 4,000 4,000
Patents, licenses, trademarks,
and bond issue costs, net of
accumulated amortization 6,145 6,637
Goodwill, net of accumulated
amortization 13,627 13,938
Other assets 977 1,796
24,749 26,371
Total assets $ 127,161 $ 120,750
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
December 31, 1994 and March 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,224 $ 3,558
Accrued compensation 3,820 3,147
Income taxes payable - -
Interest payable 728 1,122
Dividends payable 548 -
Sales returns 4,048 3,625
Litigation settlement obligation 5,333 5,483
Other accrued liabilities 8,007 7,995
Short-term borrowings and current
portion of long-term debt 3,928 5,457
Total current liabilities 29,636 30,387
Convertible subordinated debentures 24,182 24,182
Litigation settlement obligation 5,438 10,324
Long-term debt 700 1,204
Shareholders' equity:
Common shares, $.10 par value:
Authorized--20,000,000 shares
Issued and outstanding:
10,861,013 shares at December 31,
10,690,338 shares at March 31, 1,086 1,069
Capital in excess of par 15,129 12,789
Cumulative translation adjustment (345) (333)
Retained earnings 51,335 41,128
Shareholders' equity 67,205 54,653
Total liabilities and shareholders' equity $ 127,161 $ 120,750
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Consolidated Statements of Income
Three Months Ended December 31, 1994 and 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
(In thousands, except per share data)
<S> <C> <C>
Net Sales $ 38,127 $ 31,183
Costs and expenses:
Cost of sales 13,407 11,098
Selling, general and administrative 14,704 12,704
Research and development 2,621 2,174
30,732 25,976
Operating income 7,395 5,207
Interest expense (733) (836)
Interest income 15 62
Other (expense) income (213) -
Income before income taxes 6,464 4,433
Income taxes 2,266 1,500
Net income $ 4,198 $ 2,933
Earnings per share
Primary $ 0.38 $ 0.27
Fully diluted $ 0.35 $ 0.26
Dividends per share $ 0.05 $ -
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Consolidated Statements of Income
Nine Months Ended December 31, 1994 and 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
(In thousands, except per share data)
<S> <C> <C>
Net Sales $ 105,544 $ 91,541
Costs and expenses:
Cost of sales 37,007 31,473
Selling, general and administrative 40,951 39,350
Research and development 7,694 6,665
85,652 77,488
Operating income 19,892 14,053
Interest expense (2,400) (2,258)
Interest income 308 205
Interest income (219) -
Income before income taxes 17,581 12,000
Income taxes 6,293 4,141
Net income $ 11,288 $ 7,859
Earnings per share
Primary $ 1.03 $ 0.73
Fully diluted $ 0.97 $ 0.71
Dividends per share $ 0.10 $ -
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1994 and 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
Cash flows from operating activities $ 8,467 $ 7,549
Cash flows from investing activities:
Sale of equipment and intangibles 984 71
Purchase of property, equipment,
and intangibles (4,541) (6,337)
Reduction of notes receivable 277 205
(3,280) (6,061)
Acquisition of assets:
Working capital, other than cash (4,000) -
Property and equipment, net (772) -
Stock issued 1,000 -
Net cash used to acquire assets (3,772) -
Cash flows from financing activities:
Exercise of stock options 1,660 8
Dividends paid (539) (427)
Reduction of long-term debt (1,083) (176)
Net repayment under line
of credit agreement (1,532) (250)
Repurchase of common stock (303) -
(1,797) (845)
Increase (decrease) in cash,
cash equivalents, and marketable
securities (382) 643
Cash at beginning of period 10,329 8,241
Cash at end of period $ 9,947 $ 8,884
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
December 31, 1994
Note A
Inventories at December 31, 1994 and March 31, 1994, consisted of:
<TABLE>
<CAPTION>
December 31 March 31
(in thousands)
<S> <C> <C>
Raw Materials $ 10,380 $ 8,047
Work In Process 4,042 5,564
Finished Goods 17,036 15,463
Total $ 31,458 $ 29,074
</TABLE>
Note B
Primary income per share is computed based on the weighted average number of
Common Stock and Common Stock equivalents outstanding during the year. Common
Stock equivalents represent the dilutive effect of the assumed exercise of
certain outstanding options. The calculation of fully diluted income per
share assumes the Convertible Subordinated Debentures were converted into
Common Stock at the beginning of the year. If the result of these assumed
conversions is dilutive, the interest requirements of the debentures are
reduced while the average shares of Common Stock equivalents outstanding are
increased.
Note C
The amounts set forth in the accompanying statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting only of normal
accruals) necessary for a fair statement of the results of operations for the
periods presented. Operating results for the nine month period ended
December 31, 1994 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1995. It is suggested that the condensed
consolidated financial statements included herein be read in conjunction with
the Company's annual report on form 10-K for the year ended March 31, 1994.
<PAGE>
Note D
The Company's three quarterly interim reporting periods are each approximately
thirteen week periods ending on the Friday nearest the end of the third
calendar month. The fiscal year end remains March 31. To facilitate ease of
presentation, each interim period is shown as if it ended on the last day of
the appropriate calendar month. The actual dates on which each quarter ended
are shown below:
Fiscal 1995 Fiscal 1994
First Quarter July 1, 1994 July 2, 1993
Second Quarter September 30, 1994 October 1, 1993
Third Quarter December 30, 1994 December 31, 1993
<PAGE>
Mentor Corporation
Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Sales
Sales for the three months ended December 31, 1994 increased 22% to $38.1
million, compared to $31.2 million the prior year. Growth was particularly
strong in sales of plastic surgery products, up 30% over the prior year. In
October 1994, the Company acquired the intraocular lens (IOL) product line of
Optical Radiation Corporation, a subsidiary of Benson Eyecare Corporation.
This acquisition accounted for the large increase in ophthalmology sales in
the quarter.
<TABLE>
<CAPTION>
Sales by Principal Product Line
For the three Months For the Nine Months
Ended December 31, Ended December 31,
Percent Percent
1994 1993 Change 1994 1993 Change
<S> <C> <C> <C> <C> <C> <C>
Plastic Surgery Products $ 15,603 $ 12,002 30.0% $ 44,974 $ 35,772 25.7%
Urology Products 13,025 12,822 1.6% 39,196 38,152 2.7%
Ophthalmology Products 9,499 6,359 49.4% 21,374 17,617 21.3%
$ 38,127 $ 31,183 22.3% $105,544 $ 91,541 15.3%
</TABLE>
Cost of Sales
Cost of sales was 35.2% for the three months ended December 31, 1994, compared
to 35.6% for the same period last year. The Company has completed its
transition of its California manufacturing operation to its Texas facility. The
California plant was closed in July 1994. The Company has substantially
completed its validation of new materials for its products. During the last two
years, certain suppliers of raw materials, such as Dow Corning and DuPont,
announced they will no longer supply implant or medical grade materials for
products in several industries, including cosmetic surgery. Certain of the
Company's products, principally breast implants and penile implants,
incorporate materials supplied by these companies. Under guidelines established
by the FDA, the Company has been successful in replacing the majority of these
materials. The prices the Company pays for many of these replacement materials
is substantially higher than with its previous vendors.
<PAGE>
Selling, General and Administrative Expenses
Selling, general & administrative expenses decreased to 38.6% of sales in the
quarter compared to 40.7% in the previous year. During fiscal 1994, the Company
was in the process of consolidating three of its facilities into other existing
operations. Included in the third quarter last year was approximately $500
thousand in costs associated with the consolidation. This amount includes
expenses related to employee relocation, new employee hiring and training, and
severance. These costs were completed in fiscal 1994.
Research and Development
Research and development expenses was 6.9% of sales for the third quarter,
compared to 7.0% for the prior year.
The Company continues to spend funds on its premarket approval applications
("PMAAs") for its silicone gel filled breast implants, saline breast implants
and penile implants. The Company is committed to a variety of clinical and
laboratory studies in connection with these products.
The Company expects to spend the same amount of money on these PMAAs in fiscal
1995 as it did in fiscal 1994. The increase in the quarter is a result of the
timing of the expenses to collect the data necessary for the applications this
year as compared to last year.
Interest and Other Income and Expense
Interest expense decreased $103 thousand in the quarter over the prior year,
due primarily to lower balances on the Company's line of credit. Interest
income decreased from $62 thousand last year to $15 thousand this year,
resulting from lower cash balances.
In the third quarter, the Company sold its manufacturing facility in Stewart-
ville, Minnesota. The Company received net proceeds of approximately $600
thousand. This transaction resulted in a book loss of approximately $200
thousand.
Income Taxes
The effective rate of corporate income taxes was 35.1% for the quarter,
compared to 33.8% in the same period a year ago. Start up expenses for the
Company's Netherlands' operations, which are not fully tax benefited, were the
main reason for the increase.
Net Income
Net income per share increased to $.38 for the three months ended December 31,
1994, compared to $.27 last year, due to the increased sales and lower oper-
ating expenses ratios.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company's working capital was $47.8 million compared
to $39.7 million at March 31, 1994. The Company's working capital needs were
provided from operations.
The Company generated $8.5 million of cash from operations during the nine
months ended December 31, 1994, compared to $7.5 million the previous year. Net
income increased $3.4 million compared to the prior year. The net change in
receivables was an increase of $2.6 million, while the net change in
inventories was a decrease of 4.7 million. The Litigation Settlement Obligation
decreased by $4.5 million this year, as opposed to an increase of $1.7 million
in the previous year.
Of the total increase in receivables and inventory for the current fiscal year,
$2.7 million and $2.9 million, respectively, related to the acquisition of the
IOL product line from Optical Radiation.
The Company anticipates investing approximately $5 million in facilities and
capital equipment in fiscal 1995. The majority of the expenditures will be to
complete the buildout of its manufacturing facilities in Texas and Minneapolis,
and for data processing equipment and software.
During fiscal 1994, the Company finalized its agreement with the Federal Multi-
District Plaintiffs Steering committee, which settled all outstanding breast
implant litigation and claims against the Company. The agreement established a
settlement fund of $25.8 million, to be funded by the Company and its insurers.
Under the terms of the agreement, the Company paid $4.5 million in September,
1994, which brings the total paid to date to $15.2 million. The Company is
obligated to make two more payments of $5.3 million each in September 1995 and
1996.
Following a successful patent infringement lawsuit against Coloplast AS in the
United Kingdom, the Company received payment of damages in the amount of $3.4
million during July 1994. Approximately one half of the proceeds were paid to
the Company's UK distributor, DePuy International, which joined with the
Company in the legal action against Coloplast. The patent relates to the
Company's disposable self-adhering catheter for managing urinary incontinence
in males. In addition to the cash payment, the court ordered Coloplast to cease
marketing infringing products in the United Kingdom.
Since 1991, the Company has been a defendant in a shareholder class action. See
Legal Proceedings for further detail. In September 1994, the Company agreed to
settle this lawsuit, subject to approval by the Federal Court. The terms of the
settlement call for a cash payment of $1.0 million plus 50,000 shares of Mentor
Common Stock, for a total value of approximately $1.8 million. The $1 million
payment was made in the second quarter.
The net effect of these two previous items was immaterial to the financial
statements.
<PAGE>
In October 1994, the Company acquired the intraocular lens (IOL) operations of
Optical Radiation Corporation, a subsidiary of Benson Eyecare Corporation. The
purchase was made in exchange for $3 million in cash, the issuance of approx-
imately 61,000 shares of Common Stock and the assumption of certain specified
obligations.
At the Annual Meeting of Shareholders, held September 7, 1994, the Company
announced the resumption of its quarterly cash dividends. A $.05 per share
dividend was declared for both the second and third fiscal quarters this year.
At the indicated rate of $.20 per year, the aggregate annual dividend would
equal approximately $2.2 million. In June 1993, the Company's Board of
Directors suspended dividends on the Company's Common Stock in order to meet
the Company's payment obligations under the breast implant settlement agree-
ment.
A portion of the Company's liquidity stems from the availability of funds under
the Company's two bank lines of credit. At December 31, 1994, the Company had
$3.3 million outstanding under these lines.
The Company's principal source of liquidity at December 31, 1994 consisted of
$9.9 million in cash and marketable securities plus $8.0 million available
under existing lines of credit.
<PAGE>
PART II
Item 1. Legal Proceedings
In regards to the litigation reported in Item 3 of the annual report on Form
10-K for the fiscal year ended March 31, 1994:
A. Shareholder Class Action.
In April 1991, a class action lawsuit was filed by a shareholder of the Company
against the Company and its Chairman. That action, Oded Weiss v. Mentor Corp. &
Christopher J. Conway, essentially alleges that the Company and its Chairman
made untrue statements of material fact or failed to disclose material facts
concerning the Company's Urethrin product, all in violation of federal
securities laws. The plaintiff seeks, on his behalf and on behalf of the class,
which includes all purchasers of Company stock from January 9, 1991 through
April 14, 1991, (both dates inclusive), general damages and unspecified "extra-
ordinary equitable and/or injunctive relief", as well as costs, attorney's fees
and pre- and post-judgment interest. In January 1992, a court order was filed
dismissing without prejudice the actions against defendant Christopher J.
Conway. Mentor Corporation remained a defendant in this action.
On September 30, 1994, the Company reported that an agreement had been reached
to settle this lawsuit. Under the agreement, in which the Company denied any
wrongdoing or legal liability, and which is subject to approval by the Federal
Court, the Company will give the plaintiffs $1 million in cash and 50,000
shares of Common Stock.
Item 2. Changes in Securities
No changes have been made in any registered securities.
Item 3. Defaults Upon Senior Securities
No event constituting a material default has occurred respecting any
senior security of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 Statement regarding computation of Per Share Earnings
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the under-
signed thereunto duly authorized.
MENTOR CORPORATION
(Registrant)
DATE: February 10, 1995 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: February 10, 1995 BY: /s/GARY E. MISTLIN
Gary E. Mistlin
Chief Financial Officer
<TABLE>
EXHIBIT 11
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1994 1993 1994 1993
<S>
PRIMARY
<C> <C> <C> <C>
PRIMARY EARNINGS $4,198 $2,933 $11,288 $7,859
AVERAGE SHARES OUTSTANDING 10,854 10,677 10,772 10,676
NET EFFECT OF DILUTIVE STOCK
OPTIONS--BASED ON THE TREASURY
STOCK METHOD USING AVERAGE STOCK
MARKET PRICE 272 158 220 86
TOTAL SHARES FOR PRIMARY EARNINGS 11,126 10,835 10,992 10,762
PRIMARY EARNINGS PER SHARE $0.38 $0.27 $1.03 $0.73
FULLY DILUTED:
PRIMARY EARNINGS $4,198 $2,933 $11,288 $7,859
INTEREST ON 6 3/4%
DEBENTURES ELIMINATED 279 279 837 837
FULLY DILUTED EARNINGS $4,477 $3,212 $12,125 $8,696
AVERAGE SHARES OUTSTANDING 10,854 10,677 10,772 10,676
NET EFFECT OF DILUTIVE STOCK
OPTIONS--BASED ON THE TREASURY STOCK
METHOD USING THE HIGHER OF ENDING
AND AVERAGE STOCK PRICES MARKET
PRICES 301 158 308 138
ADDITIONAL SHARES ISSUED IN ASSUMED
CONVERSION OF 6 3/4% DEBENTURES AT
$16.50 PER SHARE 1,466 1,466 1,466 1,466
TOTAL SHARES FOR FULLY DILUTED 12,621 12,301 12,546 12,280
FULLY DILUTED EARNINGS PER SHARE $0.35 $0.26 $0.97 $0.71
</TABLE>
