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 September 30, 1995 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 November 10, 1995 was:
Common stock, $.10 par value 24,713,992 shares
<PAGE>
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- September 30, 1995 and March 31,1995.............................3-4
Consolidated Statements of Income -- Three Months
Ended September 30, 1995 and 1994..............................................5
Consolidated Statements of Income -- Six Months
Ended September 30, 1995 and 1994..............................................6
Condensed Consolidated Statements of Cash Flows --
Three Months Ended September 30, 1995 and 1994.................................7
Notes to Condensed Consolidated Financial Statements--
September 30, 1995...........................................................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....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
List of Exhibits
11. Statement Regarding Computation of Per Share Earnings
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 1995 and March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
(dollars in thousands) 1995 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and marketable securities $ 11,931 $ 11,379
Accounts receivable, net 32,034 30,026
Inventories 31,719 29,994
Deferred income taxes 6,311 6,918
Other 2,904 2,741
Total current assets $ 84,899 $ 81,058
Property, plant and equipment,
net of accumulated depreciation 27,334 25,538
Other assets:
Deferred income taxes 1,573 1,400
Patents, licenses, trademarks and bond issue costs
net of accumulated amortization 5,155 6,287
Goodwill, net of accumulated amortization 13,316 13,523
Other assets 864 954
20,908 22,164
Total assets $ 133,141 $ 128,760
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 1995 and March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
(dollars in thousands) 1995 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts Payable $ 5,383 $ 2,996
Accrued compensation 3,606 5,620
Income taxes payable 495 606
Interest payable - 1,145
Dividends payable 624 549
Sales returns 5,965 4,765
Litigation settlement obligation 4,685 5,333
Other accrued liabilities 7,277 5,568
Short-term borrowings and current portion
of long-term debt 735 731
Total current liabilities $ 28,770 $ 27,313
Long-term debt 111 473
Litigation settlement obligation - 5,678
Convertible subordinated debentures - 24,182
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 20,000,000 shares
Issued and outstanding:
24,713,490 shares at September 30, 1995
21,796,776 shares at March 31, 1995 2,471 2,180
Capital in excess of par 37,036 15,031
Cumulative translation adjustment (327) (283)
Retained earnings 65,080 55,276
Shareholders' equity $ 104,260 $ 72,204
Total liabilities and shareholders' equity $ 133,141 $ 128,760
</TABLE>
Note: Prior year shares outstanding and related balances have been restated to
reflect stock split in the form of a 100 percent stock dividend effective
September 27, 1995.
<PAGE>
Mentor Corporation
Consolidated Statements of Income
Three Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share data) 1995 1994
<S> <C> <C>
Net sales $ 42,328 $ 32,687
Costs and expenses:
Cost of sales 14,707 11,262
Selling, general and administrative 15,782 12,754
Research and development 3,078 2,673
$ 33,567 $ 26,689
Operating income 8,761 5,998
Interest expense (213) (807)
Interest income 87 183
Other expense (114) (7)
Income before income taxes $ 8,521 $ 5,367
Income taxes 2,965 1,967
Net income $ 5,556 $ 3,400
Earnings per share:
Primary $ .21 $ .15
Supplemental / Fully diluted $ .21 $ .14
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Consolidated Statements of Income
Six Months Ended September 30, 1995 and 1994
(Unaudited)
(in thousands, except per share data) 1995 1994
<S> <C> <C>
Net sales $ 86,057 $ 67,416
Costs and expenses:
Cost of sales 29,453 23,601
Selling, general and administrative 32,493 26,246
Research and development 6,497 5,073
$ 68,443 $ 54,920
Operating income 17,614 12,496
Interest expense (700) (1,666)
Interest income 187 293
Other expense (166) (6)
Income before income taxes $ 16,935 $ 11,117
Income taxes 5,895 4,027
Net income $ 11,040 $ 7,090
Earnings per share:
Primary $ .44 $ .32
Supplemental / Fully diluted $ .42 $ .31
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 1995 and 1994
(Unaudited)
(in thousands) 1995 1994
<S> <C> <C>
Cash flows from (used by) operating activities $ 7,651 $ (839)
Cash flows from investing activities:
Sale of equipment, intangibles
and other assets 150 257
Purchase of property, equipment,
and intangibles (4,555) (3,021)
Reduction of notes receivable 77 242
$ (4,328) $ (2,522)
Cash flows from financing activities:
Exercise of stock options 1,271 1,268
Repurchase of common shares (2,398)
Dividends paid (1,161) -
Reduction of long-term debt (483) (330)
Net repayment under line
of credit agreement - (1,132)
$ (2,771) $ (194)
Increase (decrease) in cash, cash equivalents,
and marketable securities 552 (3,555)
Cash at beginning of period 11,379 10,329
Cash at end of period $ 11,931 $ 6,774
</TABLE>
See notes to consolidated financial statements
<PAGE>
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 1995
Note A
Inventories at September 30, 1995 and March 31, 1995, consisted of:
September 30 March 31
(In thousands)
Raw Materials $ 9,442 $ 9,294
Work in process 8,626 5,264
Finished goods 13, 651 15,436
$ 31,719 $ 29,994
Note B
Primary earnings per share is computed based on the weighted average number of
Common Stock and Common Stock equivalents outstanding during the period. Common
Stock equivalents represent the dilutive effect of the assumed exercise of
certain outstanding options. The calculation of supplemental and fully diluted
earnings per share assumes the Convertible Subordinated Debentures are converted
into Common Stock at the beginning of the period and interest expense related to
the debentures, net of tax, is added to net income.
Effective September 27, 1995, the Company issued 12,356,856 shares of Common
Stock in connection with a two-for-one stock split. All references in the
financial statements with regard to number of shares of Common Stock and related
dividend and per share amounts have been restated to reflect the stock split.
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 three month period ended September
30, 1995 are not necessarily indicative of the results that may be expected for
the year ended March 31, 1996. 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, 1995.
<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 1996 Fiscal 1995
First Quarter June 30, 1995 July 1, 1994
Second Quarter September 29, 1995 September 30, 1994
Third Quarter December 29, 1995 December 30, 1994
<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 September 30, 1995 increased 30% to $42.3
million, compared to $32.7 million the prior year. Growth was particularly
strong in plastic surgery, up 48% 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 Ended For the Six Months Ended
September 30, September 30,
Percent Percent
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Plastic surgery products $ 20,651 $ 13,965 47.9% $ 43,764 $ 29,369 49.0%
Urology products 13,063 13,221 -1.2% 24,662 26,172 -5.8%
Ophthalmology products 8,614 5,501 56.6% 17,631 11,875 48.5%
$ 42,328 $ 32,687 29.5% $ 86,057 $ 67,416 27.7%
</TABLE>
Cost of Sales
Cost of sales was 34.7% for the three months ended September 30, 1995, compared
to 34.5% for the same period last year. The Company continues to work on a
variety of efficiency enhancements at each of its facilities. This has allowed
the Comany to compensate for the substantially higher prices it now pays on many
of its medical and implant grade materials. These materials are now being
sourced from new vendors following the exit of certain suppliers, such as Dow
Corning and DuPont, from this market.
Selling, General and Administrative Expenses
Selling, general & administrative expenses decreased to 37.3% of sales in the
quarter compared to 39.0% in the previous year. The Company is seeing
productivity improvements in its sales efforts, particularly in the plastic
surgery division.
<PAGE>
Research and Development
Research and development expenses decreased to 7.3% of sales for the second
quarter, compared to 8.2% for the prior year. The Company continues to spend
funds on its premarket approval applications ("PMAAs") for its saline breast
implants, silicone gel filled 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
1996 as it did in fiscal 1995. In addition, the Company is beginning clinical
studies on several new products, specifically its Urethrin product for treating
urinary incontinence. Thus the Company expects to spend more in research &
development as a percent of sales in fiscal 1996 than it did in fiscal 1995.
Interest and Other Income and Expense
Interest expense decreased $ 594 thousand in the quarter over the prior year. At
September 30, 1994, the Company had short term borrowings of approximately $4
million, while at both March 31, 1995 and September 30, 1995, there were no
balances outstanding. In addition, the Company called for the redemption of its
6 3/4% Convertible Subordinated Debentures during the first quarter of this
fiscal year. As of September 30, 1995, the debentures had been either converted
into Common Stock or redeemed. Interest income decreased from $183 thousand last
year to $ 87 thousand this year.
Included in interest expense last year was $250 thousand for the quarter ($1.0
million for fiscal 1995) in imputed interest on the Litigation Settlement
Obligation. In fiscal 1996, this amount decreased to $175 thousand for the
quarter ($700 thousand for fiscal 1996).
Income Taxes
The effective rate of corporate income taxes was 34.8% for the quarter, compared
to 36.6% in the same period a year ago. The acquisition of the IOL product line
included a manufacturing facility in Puerto Rico, which under current United
States tax laws receives Section 936 tax incentives.
Net Income
Net income per share increased to $.21 for the three months ended September 30,
1995, compared to $.15 last year, due to the increased sales and lower operating
expenses.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company's working capital was $57 million compared to
$53.7 million at March 31, 1995. The Company's working capital needs were
provided from operations.
The Company generated $ 7.7 million of cash from operations during the six
months ended September 30, 1995, compared to net cash use of ($.8) million the
previous year. Higher net income contributed $4.0 million to the increase. The
increase in working capital this year was $6.6 million less than in the previous
year, primarily due to lower growth in accounts receivable.
The Company anticipates investing approximately $8 million in facilities and
capital equipment in fiscal 1996. The majority of the expenditures will be to
complete the buildout of its manufacturing facilities in Texas and Puerto Rico,
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 made a payment of
$5.3 million in September 1995, bringing the total paid to date to $20.5
million. The Company is obligated to make one more payment of $5.3 million in
Septemebr 1996. This will complete the Company's obligations under the
Agreement.
At the Annual Meeting of Shareholders, held September, 1994, the Company
announced the resumption of a quarterly cash dividend of $.025 per share (after
the effect of the stock split). At the indicated rate of $.10 per year, the
aggregate annual dividend would equal approximately $ 2.4 million.
During the first quarter, the Company called for the redemption of its
Convertible Subordinated debentures, with a redemption date of June 30, 1995. At
March 31, 1995, the outstanding balance was $24.2 million. At the option of the
debenture holder, the debentures could be converted into Common Stock at the
conversion price of $16.50. Any debentures not converted into Common Stock by
the redemption date would be purchased by Mentor at 100 percent of their
principal amount, plus accrued interest. As of September 30, all but $48
thousand of the debentures had been converted into Common Stock. A total of
1,463,000 shares were issued to debenture holders.
Interest accrued on the debentures but not paid as a result of the conversion
($1.4 million) was charged, net of applicable tax benefits, directly to
shareholders' equity. There was no impact to the income statement.
In the first quarter, the Company announced that its Board of Directors had
authorized the repurchase of up to 500,000 shares of Common Stock. The shares
purchased and retired under this program will be used to offset stock options
previously granted to employees of the Company under existing stock option
<PAGE>
plans. During July, 1995, the Company had repurchased 172,000 shares for
consideration of $2.4 million.
During the first quarter, the Company executed a new secured $15 million credit
agreement to replace its existing lines of credit. Borrowings under the
Agreement will accrue interest at the prevailing prime rate. The Agreement
includes certain covenants which, among others, limit the dividends the Company
may pay and require maintenance of certain levels of tangible net worth and debt
service ratios. An annual commitment fee of .25% will be paid on the unused
portion of the $15 million credit line. At September 30, 1995, the Company had
no amounts outstanding under this line.
The Company's principal source of liquidity at September 30, 1995 consisted of $
11.9 million in cash and marketable securities plus $15.0 million available
under its line of credit.
<PAGE>
PART II
Item 1. Legal Proceedings
In the ordinary course of its business, the Company experiences various types of
claims which sometimes result in litigation or other legal proceedings. The
Company does not anticipate that any of these proceedings will have any material
adverse effect on the Company.
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
a. Annual meeting of Shareholders, September 13, 1995
b. Approval to amend Company's Articles of Incorporation to increase the
number of authorized shares of Common Stock from 20,000,000 to 50,000,000
Yes votes: 7,227,084 No votes: 1,963,636
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 Statement regarding computation of Per Share Earnings
<TABLE>
<CAPTION>
EXHIBIT 11
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
PRIMARY:
<S> <C> <C> <C> <C>
PRIMARY EARNINGS $ 5,556 $ 3,400 $ 11,040 $ 7,090
AVERAGE SHARES OUTSTANDING 26,518 22,004 25,369 21,846
NET EFFECT OF DILUTIVE STOCK OPTIONS-- BASED
ON THE TREASURY STOCK METHOD USING
AVERAGE STOCK MARKET PRICE 853 242 746 192
TOTAL SHARES FOR PRIMARY EARNINGS 13,259 11,002 13,103 10,923
PRIMARY EARNINGS PER SHARE $ .21 $ .15 $ .44 $ .32
SUPPLEMENTAL AND FULLY DILUTED:
PRIMARY EARNINGS $ 5,556 $ 3,400 $ 11,040 $ 7,090
INTEREST AND RELATED EXPENSES ON 6 3/4%
DEBENTURES ELIMINATED 165 279 250 558
FULLY DILUTED EARNINGS $ 5,712 $ 3,679 $ 11,290 $ 7,648
AVERAGE SHARES OUTSTANDING 26,751 25,038 26,630 24,982
NET EFFECT OF DILUTIVE STOCK OPTIONS--BASED
ON THE TREASURY STOCK METHOD USING THE
HIGHER OF ENDING AND AVERAGE STOCK MARKET PRICES 969 293 958 294
ADDITIONAL SHARES ISSUED IN ASSUMED CONVERSION
OF 6 3/4% DEBENTURES AT 16.50 PER SHARE - 1,466 - 1,466
TOTAL SHARES FOR SUPPLEMENTAL/FULLY DILUTED 27,720 26,797 27,588 26,742
SUPPLEMENTAL/FULLY DILUTED EARNINGS PER SHARE $ .21 $ .14 $ .42 $ .31
</TABLE>
Note: In June 1995 the Company's 6 3/4% Sub-ordinated Convertible Debenture was
converted into shares of Common stock. The Supplemental calculation is presented
in lieu of the fully diluted calculation for six months ended September 30, 1995
and assumes the conversion took place at the beginning of the period. This
calculation also adds interest expense for the period, net of tax, back to net
income.
Note: The shares outstanding have been adjusted to reflect a two-for-one split
of the Company's Common Stock in the form of a 100 percent stock dividend
effective September 27, 1995.
<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
undersigned thereunto duly authorized.
MENTOR CORPORATION
(Registrant)
DATE: November 13, 1995 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: November 13, 1995 BY: /s/GARY E. MISTLIN
Gary E. Mistlin
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 11,391
<SECURITIES> 0
<RECEIVABLES> 33,713
<ALLOWANCES> 1,679
<INVENTORY> 31,719
<CURRENT-ASSETS> 84,899
<PP&E> 29,929
<DEPRECIATION> 2,595
<TOTAL-ASSETS> 133,141
<CURRENT-LIABILITIES> 28,770
<BONDS> 0
<COMMON> 2,471
0
0
<OTHER-SE> 101,789
<TOTAL-LIABILITY-AND-EQUITY> 133,141
<SALES> 42,328
<TOTAL-REVENUES> 42,328
<CGS> 14,707
<TOTAL-COSTS> 18,860
<OTHER-EXPENSES> 27
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> 8,521
<INCOME-TAX> 2,965
<INCOME-CONTINUING> 5,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,556
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
