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 June 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 August 11, 1995 was:
Common stock, $.10 par value 12,323,076 shares
<PAGE>
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- June 30, 1995 and March 31,1995....................3-4
Consolidated Statements of Income -- Three Months
Ended June 30, 1995 and 1994.....................................5
Condensed Consolidated Statements of Cash Flows --
Three Months Ended June 30, 1995 and 1994........................6
Notes to Condensed Consolidated Financial Statements--
June 30, 1995..................................................7-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.............................9-12
Part II. Other Information
Item 1. Legal Proceedings..................................................13
Item 2. Changes in Securities..............................................13
Item 3. Defaults upon Senior Securities....................................13
Item 4. Submission of Matters to a Vote of Security Holders ...............13
Item 5. Other Information..................................................13
Item 6. Exhibits and Reports on Form 8-K...................................13
List of Exhibits
11. Statement Regarding Computation of Per Share Earnings
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<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
June 30, 1995 and March 31, 1995
(Unaudited)
June 30, March 31,
(dollars in thousands) 1995 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and marketable securities $ 17,576 $ 11,379
Accounts receivable, net 32,907 30,026
Inventories 30,272 29,994
Deferred income taxes 6,436 6,918
Other 2,035 2,741
Total current assets $ 89,226 $ 81,058
Property, plant and equipment,
net of accumulated depreciation 26,302 25,538
Other assets:
Deferred income taxes 1,714 1,400
Patents, licenses, trademarks and bond issue costs
net of accumulated amortization 5,471 6,287
Goodwill, net of accumulated amortization 13,420 13,523
Other assets 927 954
21,532 22,164
Total assets $ 137,060 $ 128,760
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
June 30, 1995 and March 31, 1995
(Unaudited)
June 30, March 31,
(dollars in thousands) 1995 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts Payable $ 3,940 $ 2,996
Accrued compensation 4,205 5,620
Income taxes payable 3,744 606
Interest payable - 1,145
Dividends payable 625 549
Sales returns 5,965 4,765
Litigation settlement obligation 5,333 5,333
Other accrued liabilities 5,906 5,568
Short-term borrowings and current portion
of long-term debt 733 731
Total current liabilities $ 30,451 $ 27,313
Long-term debt 295 473
Litigation settlement obligation 5,852 5,678
Convertible subordinated debentures - 24,182
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 20,000,000 shares
Issued and outstanding:
12,366,121 shares at June 30, 1995
10,898,388 shares at March 31, 1995 1,237 1,090
Capital in excess of par 39,343 15,031
Cumulative translation adjustment (260) (283)
Retained earnings 60,142 55,276
Shareholders' equity $ 100,462 $ 71,114
Total liabilities and shareholders' equity $ 137,060 $ 128,760
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<TABLE>
<CAPTION>
Mentor Corporation
Consolidated Statements of Income
Three Months Ended June 30, 1995 and 1994
(Unaudited)
(in thousands, except per share data) 1995 1994
<S> <C> <C>
Net sales $ 43,729 $ 34,729
Costs and expenses:
Cost of sales 14,746 12,339
Selling, general and administrative 16,711 13,491
Research and development 3,420 2,400
$ 34,877 $ 28,230
Operating income 8,852 6,499
Interest expense (465) (859)
Interest income 72 110
Other expense (45) -
Income before income taxes $ 8,414 $ 5,750
Income taxes 2,930 2,060
Net income $ 5,484 $ 3,690
Earnings per share:
Primary $ .45 $ .34
Supplemental / Fully diluted $ .43 $ .32
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 1995 and 1994
(Unaudited)
(in thousands) 1995 1994
<S> <C> <C>
Cash flows from operating activities $ 8,556 $ 3,600
Cash flows from investing activities:
Sale of equipment, intangibles
and other assets 147 1
Purchase of property, equipment,
and intangibles (2,093) (1,457)
Reduction of notes receivable 24 237
$ (1,922) $ (1,219)
Cash flows from financing activities:
Exercise of stock options 282 339
Dividends paid (542) -
Reduction of long-term debt (177) (163)
Net repayment under line
of credit agreement - 550
$ (437) $ (374)
Increase (decrease) in cash, cash equivalents,
and marketable securities 6,197 2,007
Cash at beginning of period 11,379 10,329
Cash at end of period $ 17,576 $ 12,336
</TABLE>
See notes to consolidated financial statements
<PAGE>
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
June 30, 1995
Note A
Inventories at June 30, 1995 and March 31, 1995, consisted of:
<TABLE>
<CAPTION>
June 30 March 31
(In thousands)
<S> <C> <C>
Raw Materials $ 10,731 $ 9,294
Work in process 12,489 5,264
Finished goods 7,052 15,436
$ 30,272 $ 29,994
</TABLE>
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.
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 June 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 June 30, 1995 increased 26% to $43.7 million,
compared to $34.7 million the prior year. Growth was particularly strong in
sales of plastic surgery products, up 50% 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.
Sales by Principal Product Line
For the Three Months Ended
June 30,
Percent
1995 1994 Change
Plastic surgery products $ 23,112 $ 15,404 50.0%
Urology products 11,598 12,951 -10.4%
Ophthalmology products 9,019 6,374 41.5%
$ 43,729 $ 34,729 25.9%
Cost of Sales
Cost of sales was 33.7% for the three months ended June 30, 1995, compared to
35.5% for the same period last year. Increased efficiencies at the Company's
Texas facility accounted for most of the increase. In addition, the Company's
manufacturing plant in the Netherlands is now in full production. It had been in
a start up mode prior to this quarter.
Selling, General and Administrative Expenses
Selling, general & administrative expenses decreased to 38.2% of sales in the
quarter compared to 38.8% 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 were 7.8% of sales for the first quarter,
compared to 6.9% 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 $394 thousand in the quarter over the prior year. At
June 30, 1994, the Company had short term borrowings of approximately $5
million, while at both March 31, 1995 and June 30, 1995, there were no balances
outstanding. In addition, the Company called for the redemption of its 63/4%
Convertible Subordinated Debentures during the quarter. As of June 30, 1995, the
debentures had been either converted into Common Stock or redeemed. Interest
income decreased from $110 thousand last year to $72 thousand this year.
Included in interest expense last year was $250 thousand for the quarter ($1.0
million for the fiscal year) 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 35.8% 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 earnings per primary share increased to $.45 for the three months ended June
30, 1995, compared to $.34 last year, due to the increased sales and lower
operating expenses ratios.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company's working capital was $ 58.8 million compared to
$53.7 million at March 31, 1995. The Company's working capital needs were
provided from operations.
The Company generated $ 8.6 million of cash from operations during the three
months ended June 30, 1995, compared to $ 3.6 million the previous year. Net
income increased $1.8 million compared to the prior year. The net change in
current liabilities was an additional source of cash of $4.6 million compared to
last year.
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 is required to make
two more payments of $5.3 million each in September 1995 and 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 $.05 per share. At the
indicated rate of $.20 per year, the aggregate annual dividend would equal
approximately $2.5 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 June 30, all but $73 thousand of
the debentures had been converted into Common Stock. A total of 1,461,000 shares
were issued to debenture holders.
Interest accrued on the debentures but not paid as a result of the conversion
($1.4 million as of June 30, 1995) 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 250,000 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
plans. During July, 1995, after the end of the first quarter, the Company had
repurchased 86,000 shares for consideration of $2.4 million.
<PAGE>
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 June 30, 1995, the Company had no
amounts outstanding under this line.
The Company's principal source of liquidity at June 30, 1995 consisted of $ 17.6
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
None
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
undersigned thereunto duly authorized.
MENTOR CORPORATION
(Registrant)
DATE: August 11, 1995 BY:
Anthony R. Gette
President and
Chief Operating Officer
DATE: August 11, 1995 BY:
Gary E. Mistlin
Chief Financial Officer
<TABLE>
<CAPTION>
EXHIBIT 11
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER
SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30,
1995 1994
PRIMARY:
<S> <C> <C>
PRIMARY EARNINGS $5,484 $3,690
AVERAGE SHARES OUTSTANDING 11,480 10,701
NET EFFECT OF DILUTIVE STOCK
OPTIONS--BASED ON THE TREASURY
STOCK METHOD USING AVERAGE STOCK
MARKET PRICE 575 148
TOTAL SHARES FOR PRIMARY EARNINGS 12,055 10,849
PRIMARY EARNINGS PER SHARE $0.45 $0.34
SUPPLEMENTAL AND FULLY DILUTED:
PRIMARY EARNINGS $5,484 $3,690
INTEREST AND RELATED EXPENSES
ON 6 3/4% DEBENTURES ELIMINATED 165 279
FULLY DILUTED EARNINGS $5,649 $3,969
AVERAGE SHARES OUTSTANDING 12,327 10,701
NET EFFECT OF DILUTIVE STOCK
OPTIONS--BASED ON THE TREASURY STOCK
METHOD USING THE HIGHER OF ENDING
AND AVERAGE STOCK PRICES MARKET
PRICES 702 189
ADDITIONAL SHARES ISSUED IN ASSUMED
CONVERSION OF 6 3/4% DEBENTURES AT
$16.50 PER SHARE 26 1,466
TOTAL SHARES FOR SUPPLEMENTAL/ FULLY
DILUTED 13,055 12,356
SUPPLEMENTAL/FULLY DILUTED
EARNINGS PER SHARE $0.43 $0.32
</TABLE>
Note: In June 1995 the Company's 6 3/4% Subordinated Converitible Debenture was
converted into shares of Common stock. The Supplemental calculation is presented
in lieu of the fully diluted calculation and assumes the conversion took place
at the beginning of the period. This calculation also adds interest expense net
of tax for the period back to net income.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 17,576
<SECURITIES> 0
<RECEIVABLES> 34,296
<ALLOWANCES> 1,389
<INVENTORY> 30,272
<CURRENT-ASSETS> 89,226
<PP&E> 45,074
<DEPRECIATION> 18,772
<TOTAL-ASSETS> 137,060
<CURRENT-LIABILITIES> 30,451
<BONDS> 0
<COMMON> 1,237
0
0
<OTHER-SE> 99,225
<TOTAL-LIABILITY-AND-EQUITY> 137,060
<SALES> 43,729
<TOTAL-REVENUES> 43,729
<CGS> 14,746
<TOTAL-COSTS> 34,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465
<INCOME-PRETAX> 8,414
<INCOME-TAX> 2,930
<INCOME-CONTINUING> 5,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,484
<EPS-PRIMARY> .45
<EPS-DILUTED> .43
</TABLE>
