SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1996
Commission File No. 0-7955
MENTOR
CORPORATION
Mentor Corporation
5425 Hollister Avenue
Santa Barbara, California 93111
Telephone: 805/681-6000
A Minnesota Corporation I.R.S. Employer Identification No. 41-0950791
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.10 per share
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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K |X|
The aggregate market value of the voting stock of the Company held by
non-affiliates of the Registrant as based upon the closing National Market
System sale price on June 27, 1996 was $617,848,348.
Number of Shares of Common Stock outstanding on June 27, 1996: 24,912,692.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1996 Annual
Meeting of Shareholders are incorporated by reference in Part III in this Report
on Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K filed on behalf of Mentor
Corporation ("Mentor" or the "Company") contains forward-looking statements that
involve risks and uncertainties. These include statements about the Company's
strategies and expectations about new and existing products, technologies and
opportunities, market and industry segment growth and demand and acceptance of
new and existing products. These also include statements regarding the
regulatory and legal environment in which the Company operates and its
assessment of risks associated therewith. The Company's actual future results
could differ materially from these statements. Factors that could cause or
contribute to such differences include, but are not limited to, these factors
discussed in Item 1, "Business," Item 3 "Legal Proceedings," Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report.
General
The Company develops, manufactures and markets a broad range
of products for the medical specialties of plastic and reconstructive surgery,
urology and ophthalmology. Plastic surgery products include surgically
implantable prostheses for cosmetic and reconstructive surgery, principally
breast implants and tissue expanders. Urologic products include disposable
products for the management of urinary incontinence and surgically implantable
prostheses, principally penile implants for the treatment of chronic male sexual
impotence. Ophthalmic products include intraocular lenses, used for replacement
of a lens following cataract surgery, surgical equipment, primarily coagulators
used to control bleeding during ophthalmic and other microsurgery, and
diagnostic equipment, used to evaluate disorders of the eye.
Since 1989, the Company has incorporated or acquired several
companies to help diversify the Company's interests in the medical industry. In
April 1990, the Company acquired all of the outstanding shares of Mentor O&O,
Inc. Despite the similarity in name, Mentor O&O had not previously been
affiliated with the Company. Mentor O&O develops, manufactures and markets
ophthalmic surgical and diagnostic products. In October 1990, the Company
purchased substantially all of the assets, plus assumption of normal
liabilities, of Teknar, Inc., which supplies diagnostic ultrasound equipment for
the specialties of urology and ophthalmology. Both Mentor O&O and Teknar are
100% owned by Mentor Corporation. During fiscal 1996, Mentor O&O's name was
changed to Mentor Ophthalmics.
<PAGE>
In July 1991, the Company incorporated Mentor H/S, Inc. as a
wholly owned subsidiary and transferred to it all of the product lines and
assets of its existing plastic surgery business. In January 1994, the Company
incorporated Mentor Urology, Inc. as a wholly owned subsidiary and transferred
to it all of the product lines and assets of its existing urologic business. In
January 1990, Mentor Polymer Technologies Company was incorporated to develop,
manufacture and distribute medically oriented materials.
During fiscal 1991, the Company established four international
sales offices to enhance and grow its market position in these countries. Mentor
Medical Systems Canada, Mentor Medical Systems UK, Ltd., Mentor Deutschland,
GmbH, and Mentor Medical Systems, Pty, Ltd. (Australia) are all subsidiaries of
Mentor Corporation. In fiscal 1996, the Company opened two additional sales
office subsidiaries: Mentor France S.A.
and Mentor Benelux, BV.
In November 1993, the Company established Mentor Medical
Systems, B.V. in Leiden, the Netherlands, to further its expansion into the
international marketplace. This is the Company's manufacturing and research and
development facility outside of the United States.
In October 1994, the Company purchased certain assets and
assumed certain related liabilities from Optical Radiation Corporation and ORC
Caribe. Such assets comprised substantially all activities and operations of the
intraocular lens line of business previously conducted by Optical Radiation and
ORC Caribe. The Company established Mentor ORC, Inc. and Mentor Caribe, Inc. for
the acquisition of the assets acquired from Optical Radiation and ORC Caribe. As
of April 1, 1996, Mentor ORC, Inc. was merged into Mentor Ophthalmics.
Principal Products and Markets
The Company strives to utilize its product design and
marketing capabilities, and its close working relationships with health care
professionals, to introduce products that provide superior performance
characteristics in growing markets. Because many of the Company's products
provide greater customer benefits, they generally are sold at premium prices.
However, the cost effectiveness of the Company's product in the overall
treatment of the patient is a primary consideration in new product development.
Following is a description of the Company's principal product lines and the
markets for them.
Plastic Surgery Products
The Company produces an extensive line of implants for
cosmetic and reconstructive surgery, including a line of breast implants, skin
and tissue expanders and facial and dermal implants.
<PAGE>
Mammary prostheses may be implanted to achieve breast
reconstruction following total or partial removal (mastectomy) or to enhance
breast size and shape in cosmetic surgery. Breast reconstruction is possible for
most patients undergoing a mastectomy, either at the time of the original
surgery or at a later date.
The Company produces a broad line of mammary prostheses,
including saline filled implants, silicone gel filled implants and an exclusive
product, the Becker(TM) expandable implant used specifically for breast
reconstruction. Mammary prostheses comprise over 90 percent of total plastic
surgery product sales. Saline filled breast implants accounted for over 80% of
mammary prostheses sold in fiscal 1996.
By offering a combination of different types of implants in a
variety of different shapes and sizes and surfaces, the physician is able to
select the product most appropriate for the patient.
The Company offers a patented line of skin and tissue
expanders. Tissue expansion is a technique for growing additional tissue for
reconstruction and skin graft procedures. Some of the major applications of
tissue expansion developed to date include post-mastectomy reconstruction, and
the elimination of disfigurements such as burns, massive scars and facial
deformities.
Urology Products
The Company's Urology products fall into two general
categories of products, urologic implants and disposable health care products.
Urologic Implants and Potency Devices. The Company offers a
broad line of implantable urological products, including a line of penile
implants for the treatment of male sexual impotence; vacuum constriction
devices, used as a first line non-surgical treatment for impotence; and
endourological stents and drains.
Penile prostheses, which accounted for over 90 percent of the
Company's urological implant sales in fiscal 1996, are implanted in men who
cannot achieve a natural erection of sufficient rigidity for sexual intercourse.
In order to respond to various physician and patient preferences, the Company
manufactures several types of penile prostheses, including two types of
hydraulic inflatable devices and two versions of a malleable prosthesis.
For the past several years, alternative treatment methods for
male impotence have become increasingly popular. These include injection therapy
and vacuum constriction devices. These modes of treatment have been used
extensively as a first line of treatment due to their lower cost and less
invasive nature. The Company began marketing a vacuum constriction device in
fiscal 1991. The vacuum system works by creating a vacuum around the penis,
causing blood to engorge the corpora cavernosa, simulating a natural erection.
The Company expects that alternative treatment methods to permanent implants
will remain an integral part of the marketplace in the future.
<PAGE>
For several years the Company has been pursuing regulatory
approval on a new urology product, named Urethrin(TM), which is an injectable
implant for the treatment of urinary incontinence. The Food and Drug
Administration (the "FDA") is currently requiring the Company to submit
additional clinical data before Urethrin can be approved for marketing. The
Company began enrolling patients in fiscal 1996. There can be no assurance as to
when, if ever, final approval will be given for sales in the United States. The
Company has begun limited sales of Urethrin in the international market.
Health Care Products. The National Institute of Health
estimates that, due to a variety of causes, ten million men, women and children
in the United States suffer from urinary incontinence or retention--the
inability to control the flow of urine. The Company produces several
proprietary, special purpose, disposable external catheters used in homes,
hospitals and extended care facilities for the management of urinary
incontinence or retention.
The Company also markets a variety of other disposable health
care products used in the management of urinary incontinence. These include leg
bags and urine collection systems, organic odor eliminators, and moisturizing
skin creams and ointments.
Ophthalmology Products
Mentor Ophthalmics markets surgical and diagnostic products,
focusing on cataract and glaucoma surgery.
In October 1994, the Company acquired the intraocular lens
(IOL) product line of Optical Radiation Corporation, a subsidiary of Benson
Eyecare Corporation. Intraocular lenses are used for corrective vision following
cataract removal surgery. Other surgical products include coagulators used to
control bleeding during surgery. This is accomplished by equipment which
generates radio frequency energy and a hand-held disposable instrument which
delivers it to the surgical site. The Company also sells a line of surgical
wipes, sponges, knives and blades.
The Company also sells the Odyssey(TM) phacoemulsification
system, which uses ultrasound to emulsify (dissolve) cataracts. The Odyssey
incorporates several unique design features which make it smaller and less
costly than many competitive products. In addition, the system allows
phacoemulsification and irrigation/aspiration to be done at low flow rates. This
reduces turbulence in the eye and enhances surgeon control during the procedure.
The Company's diagnostic products include tonometry products,
which measure the intraocular pressure of the eye, which aid in the diagnosis of
glaucoma, and ophthalmic ultrasound.
<PAGE>
During fiscal 1995, the Company made a strategic decision to
concentrate its efforts in the ophthalmic surgical market. The Company's
tonometry and ultrasound products are integral to this effort. However, several
of the Company's smaller diagnostic product lines, which dealt more exclusively
with visual testing, did not fit this strategy and have been discontinued. These
include a potential acuity meter, indirect ophthalmoscopes and a brightness
acuity tester. These products accounted for approximately $1.5 million in 1995
and $800 thousand in fiscal 1996.
The Company attempts to produce innovative products that
improve office and surgical productivity. The Company believes it has
established a good working relationship with both ophthalmologists and
optometrists.
Summary of Sales by Principal Product Lines. The following
table shows the net sales attributable to each of the Company's principal
product lines and the percentage contributions of such sales to total net sales
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1995 1994
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Plastic surgery products $89,215 50% $62,964 43% $49,272 40%
Urology products 54,127 30% 53,638 37% 51,199 41%
Ophthalmology products 34,474 20% 29,792 20% 23,115 19%
$177,816 100% $146,394 100% $123,586 100%
</TABLE>
Marketing
The Company employs four specialized domestic direct sales
forces for its cosmetic surgery, urologic implants, health care and
ophthalmology product lines, respectively. Each group provides product
orientation and support and related service to physicians, nurses and other
health care professionals. Reliance upon a direct sales force enables the
Company to maintain active and continuous communication with leading health care
professionals in order to identify emerging growth markets and opportunities for
improved products and product extensions.
The Company also markets certain products, particularly its
health care products, through an extensive domestic network of independent
hospital supply dealers and health care distributors, and increasingly through
retail pharmacies.
The Company promotes its products through journal advertising,
direct mail programs, and participation in, and sponsorship of, medical
conferences and seminars. The Company also participates in support organizations
that provide counseling and education for persons suffering from specific
maladies, and provides patient education materials for some of its products to
physicians for use with their patients.
<PAGE>
The Company exports most of its product lines, principally to
Canada and Western Europe. Products are sold to both independent distributors as
well as through the Company's own foreign direct sales offices. For the years
ended March 31, 1996, 1995 and 1994, export sales were $26,223,000, $21,243,000
and $19,582,000, respectively. In addition, $14,140,000, $11,287,000 and
$9,329,000 in sales respectively, were from the Company's direct international
sales offices.
The Company's domestic sales and foreign sales are
approximately equal in profitability. Other than sales through the Company's
international sales offices, export sales have been made in United States
dollars and currency fluctuations have not constituted significant risks.
The Company has six international sales offices in Canada, the
United Kingdom, Germany, France, Benelux and Australia. The France and Benelux
offices were opened late in fiscal 1996. These offices warehouse product and
sell through a direct sales force in each country. The offices currently sell
primarily cosmetic and reconstructive surgery implants and urology implants.
Sales are made in the local currency of the host country. The Company feels that
a local presence in key countries will better help the Company to capitalize on
the growing international market for medical products.
In general, the Company maintains sufficient inventories of
finished goods both domestically and internationally to support immediate
shipment of products upon receipt of a customer's order. From time to time,
however, a back-order situation may develop due to increased demand for a
product or special circumstances, such as regulatory restrictions. See
"Manufacturing".
During the year ended March 31, 1996, no customer accounted for more
than 10% of the Company's revenues.
Competition
The Company believes it is one of the leading suppliers in the
United States of implantable urology and cosmetic and reconstructive surgery
products and of disposable catheter products, based upon independent research
studies of market share. Many of the Company's products are premium-priced.
The Company currently competes with only one other company in
the inflatable penile market, American Medical Systems, Inc., a subsidiary of
Pfizer, Inc. Several implants compete with the Company's malleable penile
implants. The primary competitive factors are product performance and
reliability, ease of implantation and customer service. The Company believes
that, by providing several types of implants which stress high performance and
reliability, it can successfully respond to various physician and patient
preferences.
<PAGE>
As with the penile implant market, the Company competes with
only one other company in the domestic breast implant market, McGhan Medical
Corporation, a subsidiary of INAMED, Inc. The primary competitive factors
currently are range of style and sizes, product performance and quality,
proprietary design, customer service and in certain instances, price.
By careful design and active marketing of catheters and other
disposable health care products, the Company has been able to compete
successfully against larger companies. The Company, C.R. Bard, Inc., Hollister,
Inc., Sherwood Medical, Baxter Travenol, Inc., and Coloplast, Inc. are the
dominant competitors in the market. As with many of the Company's other product
lines, the Company competes primarily on the basis of design and performance,
and by providing product orientation, support and related service to health care
professionals and consumers.
In the ophthalmic device market, companies compete primarily
on the basis of product quality and technology, service, reliability and price.
By offering unique, proprietary products and a broad range of niche products,
the Company believes that it will be able to compete against larger companies.
Various competitors include Allergan, Inc., Alcon Laboratories Inc., a
subsidiary of Nestle S.A., Johnson and Johnson, Storz Instrument Co., a division
of American Cyanamid Co., Pharmacia, Upjohn, Inc. and Chiron Corporation.
While the Company believes it competes successfully in its
markets, many of its competitors have substantially greater financial,
technological and marketing resources.
Government Regulation
Under the "Medical Device Amendments of 1976" (the "Medical
Device Act"), the FDA has the authority to adopt regulations that: (i) set
standards for medical devices; (ii) require proof of safety and effectiveness
prior to marketing devices which the FDA believes require pre-market clearance;
(iii) require test data approval prior to clinical evaluation of human use; (iv)
permit detailed inspections of device manufacturing facilities; (v) establish
"good manufacturing practices" that must be followed in device manufacture; (vi)
require reporting of product defects to the FDA; and (vii) prohibit device
exports that do not comply with the Medical Device Act unless they comply with
established foreign regulations, do not conflict with foreign laws, and the FDA
and the health agency of the importing country determine export is not contrary
to public health. All of the Company's products are "medical devices intended
for human use" within the meaning of the Medical Device Act and are, therefore,
subject to FDA regulation.
<PAGE>
The Medical Device Act establishes complex procedures for
compliance based upon FDA regulations that designate devices as Class I (general
controls, such as compliance with labeling and record-keeping requirements),
Class II (performance standards in addition to general controls) or Class III
(premarket approval application ("PMAA") before commercial marketing). Class III
devices are the most extensively regulated because the FDA has determined they
are life-supporting, are of substantial importance in preventing impairment of
health, or present a potential unreasonable risk of illness or injury. The
effect of classifying a device into Class III is to require each manufacturer to
submit to the FDA a PMAA that includes information on the safety and
effectiveness of the device. The majority of the Company's plastic surgery and
urology implants, along with intraocular lenses, are in Class III, while most of
its disposable health care and other ophthalmology products are in Class I.
In 1991, the Company submitted PMAAs for its silicone gel
filled mammary prostheses to the FDA, pursuant to FDA regulations issued at that
time. In 1992, the FDA's outside advisory panel on plastic surgery products
indicated that although there was insufficient data to establish with reasonable
certainty that silicone gel implants were safe and effective, there was a public
health need for these types of implants. The FDA adopted the recommendations of
the panel.
The FDA stated it was denying the pending applications for the
use of breast implants for augmentation but would provide for the continued
availability of the implants for reconstruction purposes on the basis of a
public health need. In order to obtain silicone gel filled implants for use in
reconstruction, women would be enrolled in clinical studies for future
follow-up. Patients would be required to sign an informed consent form and
physicians will have to certify that saline implants are not a satisfactory
alternative. The Company began shipments of these products under the terms of
this clinical study during the first quarter of fiscal 1993
To comply with the Medical Device Act, the Company has
incurred, and will continue to incur, substantial costs relating to laboratory
and clinical testing of new products and the preparation and filing of documents
in the formats required by the FDA. From time to time the Company also may
encounter delays in bringing new products to market as a result of being
required by the FDA to conduct and document additional investigations of product
safety and effectiveness. In 1993, the FDA published proposed guidelines for
PMAA's on the Company's hydraulic inflatable penile prostheses and saline filled
breast implants. For saline implants, the FDA has published a schedule which
permits the data required for the PMAA to be submitted in phases, beginning with
preclinical data due in 1995 and ending with final submission of prospective
clinical data in 1998. The Company intends to submit its PMAA's in a timely
fashion and has begun to collect the data which will be necessary for these
applications. FDA approval, however, cannot be assured. Should the Company's
PMAAs be denied, it would have a material adverse effect on the Company's
operations and financial position.
<PAGE>
Medical device laws and regulations similar to those described
above are also in effect in some of the countries to which the Company exports
its products. These range from comprehensive device approval requirements for
some or all of the Company's medical device products to requests for product
data or certifications.
As a manufacturer of medical devices, the Company's
manufacturing processes and facilities are subject to continuing review by the
FDA and various state agencies to insure compliance with good manufacturing
practices. In June 1995, Mentor H/S's Texas facility was reviewed by the FDA. As
a result of that review, they received an FD483, list of observations. These
observations dealt primarily with validation of manufacturing processes and
follow-up on product complaint evaluations. Mentor H/S responded to the FD483 in
August 1995. In February 1996, the FDA issued Mentor H/S a warning letter,
concluding that they had not satisfactorily addressed the inadequacies noted in
the FD483. To address the warning letter, the FDA has required a comprehensive
GMP audit by an outside expert consultant, approved by the FDA, be completed by
July 12, 1996. That audit is currently underway. Mentor H/S must submit a copy
of the audit by July 12, 1996. The President of Mentor H/S must also certify
that he has reviewed the consultant's report and has initiated or completed all
corrections called for in the report. For those issues which are not complete, a
time frame for completion must be submitted. Subsequent certifications of
updated audits must be submitted by July 12, 1997 and 1998. Mentor H/S expects
to submit the certifications in a timely fashion.
In certain states, primarily Texas, the Company is also
subject to regulation by the local Air Pollution Control District and the United
States Environmental Protection Agency as a result of some of the chemicals used
in its manufacturing process.
Health Care Cost Containment
The cost of a significant portion of medical care in the
United States is funded by government and private insurance programs, such as
Medicare and corporate health insurance plans. Accordingly, third parties,
rather than patients, frequently pay all or a substantial portion of the costs
of goods and services delivered by health care providers. Except for breast and
facial implants used in cosmetic surgery and augmentation, the Company's medical
products are generally eligible for coverage under many of these third-party
reimbursement programs. The Company believes that eligibility for third-party
reimbursement can be an important factor in the success of medical products,
particularly in situations where there are competing products or treatments that
are also eligible for such reimbursement. Therefore, the Company attempts when
feasible to obtain eligibility of its products for such reimbursement.
<PAGE>
Reimbursement plans, whether through government funded
Medicare or private third party insurers, are developing increasingly
sophisticated methods of controlling health care costs through prospective
reimbursement programs, capitation programs, group buying, redesign of benefits,
requirement of a second opinion prior to major surgery, careful review of bills,
encouragement of healthier lifestyles and exploration of more cost-effective
methods of delivering health care.
These types of programs can potentially limit the amount which
health care providers may be willing to pay for medical products. In the past,
the Company has encountered instances in which reimbursement for some of its
products, particularly its hydraulic inflatable penile prosthesis was denied.
The Company has been successful in the majority of cases to get reimbursement
for these products reinstated. In other areas, particularly intraocular lenses,
reimbursement rates have been declining over the last few years. Denial of
reimbursement and/or limitations on the amount third party payors are willing to
pay will, most likely, have a detrimental effect on sales of the affected
products.
Product Development
At March 31, 1996, the Company employed 84 people engaged in
full-time research and development. The Company is working to develop new or
improved products in many of its principal product lines, including mammary
prostheses, ophthalmology and surgical urology.
The Company believes its future growth will continue to depend
in part upon the introduction of new products that provide superior benefits,
command premium prices and have significant growth potential. The Company works
closely with health care professionals to ascertain their needs and concerns and
those of their patients.
During fiscal 1996, 1995 and 1994, the Company spent a total
of $13,379,000, $10,295,000 and $9,137,000 respectively, for research and
development.
Patents and Licenses
It is the Company's policy to actively seek patent protection
for its products when appropriate. The Company's patents include patents
relating to its penile prostheses, tissue expanders, combination breast implant
and tissue expander, disposable catheters, disposable coagulators, and visual
acuity testers.
<PAGE>
All of the patents relating to products which produce
significant revenues have at least two years remaining until expiration. While
the Company believes its patents are valuable, it has been the Company's
experience that the knowledge, experience and creativity of its product
development and marketing staffs, and trade secret information with respect to
manufacturing processes, materials and product design, have also been important
in maintaining proprietary product lines. As a condition of employment, the
Company requires each of its employees to execute an agreement relating to
confidential information and patent rights.
Product Liability and Warranties
The Company attempts to conduct its product development,
manufacturing, marketing and service and support activities with careful regard
for the consequences to patients. The Company occasionally receives
communications from surgeons or patients with respect to various products
claiming the products are defective and have resulted in injury to the patient.
It is the Company's policy to replace any products claimed to have malfunctioned
within a reasonable time after sale. In the case of the Company's inflatable
penile prostheses, the Company will replace a unit after implantation upon
request of the surgeon for any reason. For the saline filled mammary prosthesis,
the Company will provide a no charge replacement in the event the prosthesis
deflates. The Company provides a limited warranty on certain of its capital
equipment products against defects in workmanship and material. Estimated
warranty costs are provided at the time of sale and periodically adjusted to
reflect actual experience.
Manufacturing
The Company's manufacturing facilities have been designed to
accommodate the specialized requirements for the manufacture of medical devices,
including the FDA's regulations concerning good manufacturing practices, with
segregated shipping and storage areas, production quarantine areas and, where
necessary, clean rooms having separate air filtering systems for sterile
production. The facilities also include recovery and control equipment required
to maintain compliance with applicable environmental laws and regulations.
The Company obtains certain raw materials and components for a
number of its products from single suppliers. In most cases the Company's
sources of supply could be replaced if necessary without undue disruption, but
it is possible that the process of qualifying new materials and/or vendors for
certain raw materials and components could cause a material interruption in
manufacturing or sales. No material interruptions occurred during the last
fiscal year.
<PAGE>
In the last several years, certain suppliers of raw materials,
such as Dow Corning, DuPont and others, announced that they would no longer
supply implant or medical grade materials for products in several markets
related to reproduction, contraception, obstetrics or cosmetic surgery, due to
what they perceive as a product liability risk in excess of the potential
economic benefits of providing these materials. Certain of the Company's
products, principally breast implants and penile implants, incorporated
materials supplied by these companies. Under guidelines established by the FDA,
the Company has been successful in replacing these materials with those being
offered by other companies willing to supply device manufacturers. The prices
the Company pays for many of these replacement materials is substantially higher
than with its previous vendors. These sources of supply are relatively new, and
there can be no assurance that they will be able to supply the Company in the
quantities needed, or that regulatory or other delays will not cause a
disruption in sales of affected products. The Company believes its supply of raw
materials is adequate for the current fiscal year.
Employees
As of March 31, 1996, the Company employed 1,343 people of
whom 881 were in manufacturing, 235 in sales and marketing, 84 in research and
development and 143 in finance and administration. None of the Company's
employees are represented by a union. There has never been a work stoppage due
to labor difficulties, and the Company considers its relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company owns manufacturing, warehouse and office buildings
in Minneapolis, Minnesota (136,000 square feet). The Company leases additional
office manufacturing and warehouse facilities in Santa Barbara, California
(40,000 square feet), Goleta, California (19,000 square feet), Irving, Texas
(109,000 square feet), Norwell, Massachusetts (57,000 square feet) and Leiden,
the Netherlands (6,500 square feet). The Company's international sales offices,
located in Australia, Canada, Germany, France, Belgium and the United Kingdom,
lease office and warehouse space ranging from 1,000 to 5,800 square feet. All
leases have terms ranging from three to nine years, renewable on terms the
Company considers favorable.
The Company believes its facilities are generally suitable and
adequate to accommodate its current operations, and suitable facilities are
readily available to accommodate any future expansion as necessary.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
A. Claims related to product liability are a regular and ongoing aspect
of the medical device industry. At any one time, the Company is subject to
claims asserted against it and is involved in products liability litigation. The
Company has carried product liability insurance on all its products, including
breast implants, subsequent to May 1991 and prior to September 1985. From June,
1992 on, such insurance has excluded silicone gel filled breast implants. This
insurance is subject to certain self-insured retentions and limits of the
policy. From September 1985 through April 1991, the Company was self insured for
the majority of its surgical implant products, but had product liability
insurance on the rest of its products, subject to certain limits, exclusions,
and deductibles which the Company believes to be appropriate.
The Company became involved in a substantial amount of product
liability litigation related to silicone gel filled breast implants in fiscal
1992 and 1993. These cases alleged design and marketing defects, failure to
warn, breach of implied and express warranties, emotional distress and gross
negligence in connection with silicone gel filled breast implants manufactured
by the Company. The complaints sought unspecified damages for medical expenses,
loss of earnings, prejudgment interest and punitive damages.
During fiscal 1994, the Company reached an agreement with the
Federal Multi-District Litigation 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. The agreement, in which the Company denied any
wrongdoing or legal liability, covers all women who have received a silicone gel
or saline filled breast implant manufactured by the Company from March 1984 (the
date at which the Company first entered the business) through June 1, 1993. The
agreement was approved by the federal court, which certified a mandatory class
of persons, who have or may have any existing or future claim, including claims
for injuries not yet known, under any federal or state law, based upon having
received a silicone gel or saline filled breast implant prior to June 1, 1993.
Under the terms of the agreement, the Company made payments of
$2.0 million in May 1993, $8.7 million in November 1993, $4.5 million in
September 1994 and $5.3 million in September 1995. The November 1993 payment was
funded out of insurance reimbursements. A final payment of $5.3 million is due
in September 1996.
B. In 1989, the Company acquired from the Ares-Serono Group a dermal
filler implant product line, related assets and technology. The dermal filler
product is a physiologically compatible material which is injected into the skin
for correcting scars and other skin defects. The technology acquired included,
among other things, a license agreement to certain patents and patent
applications developed by Sheldon Gottlieb, M.D. In addition to the dermal
filler product, the license agreement also included a patent for a purported
wound healing product.
<PAGE>
Dr. Gottlieb alleges that Mentor, along with Serono Laboratories, Inc.
(a subsidiary of Ares-Serono Group), did not use its best efforts to market the
dermal filler product nor the purported wound healing product, in violation of
the license agreement. The case is in arbitration before the American
Arbitration Association in Boston, Massachusetts, Sheldon Gottlieb, M.D. v.
Serono Laboratories, Inc. and Mentor H/S, Inc., AAA Case No. 11-133-0067-95.
Dr. Gottlieb is seeking damages of approximately $16 million.
Management believes that this matter is without merit.
However, arbitration awards and settlements in matters of this type are
difficult to predict, and the ultimate outcome cannot be ascertained at this
time.
C. In addition, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company , as well as the ages as
of June 27, 1996, are listed below, followed by brief accounts of their business
experience and certain other information.
Name Age Position
Christopher J. Conway 57 Chairman of the Board, Chief Executive Officer and
Director
Anthony R. Gette 40 President, Chief Operating Officer, Secretary and
Director
Dennis E. Condon 47 President, Mentor H/S, Inc.
Karen H. Edwards 49 Vice President, Regulatory and Legal Affairs
and Quality Assurance
William M. Freeman 57 President, Mentor Ophthalmics, Inc.
Gary E. Mistlin 44 Vice President of Finance/Treasurer and Chief
Financial Officer
Bobby K. Purkait 46 Vice President of Research & Development
Mr. Conway is a founder of the Company and served as its President, Chief
Executive Officer and Chairman of the Board of Directors from its inception to
April 1987. Mr. Conway currently serves as Chief Executive Officer and
Chairman of the Board of Directors.
<PAGE>
Mr. Gette joined the Company in December 1980 as its Corporate
Controller and has served in various executive capacities since that time. He
became Vice President, Finance in September 1983, Executive Vice President in
September 1986 and President and Chief Operating Officer in April 1987. He
became Secretary in March 1986.
Mr. Condon joined the Company in April 1984 as its Director of
Sales and Marketing for plastic and general surgery products. He was promoted to
President, Mentor H/S, Inc. in July 1991. Prior to that he was Senior Vice
President, Plastic Surgery Sales and Marketing and Managing Director of
International Operations from April 1990 and Vice President, Sales and Marketing
for the Surgical Products Division from April 1985 until April 1990.
Ms. Edwards joined the Company in April 1984 as Risk Manager
and has served in various regulatory affairs and quality assurance capacities.
In April 1992, she was promoted to Vice President of Regulatory and Legal
Affairs and Quality Assurance. She had been Vice President of Regulatory Affairs
and Quality Assurance since August 1987.
Mr. Freeman joined the Company in August, 1994. From 1989 to
1994 he was Vice President & General Manager of Alcon Instrumentation Technology
Center, a subsidiary of Alcon/Nestle, a major ophthalmic company. From 1987 to
1989, he was Division President of Cooper Surgical, a subsidiary of
Coopervision, a leading supplier of ophthalmic equipment and devices.
Mr. Mistlin joined the Company in November 1987, as Director
of Finance/Treasurer, and was promoted to Vice President of Finance/Treasurer
in April 1989.
Mr. Purkait joined the Company in February 1986, as Product
Development Manager and has served in various research & development capacities.
In August 1988 he was promoted to Vice President of Research & Development.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol MNTR. There are approximately 12 market makers for the
Company's stock. The following table shows the range of high and low closing
sale prices reported on the NASDAQ National Market. Quotations represent prices
between dealers, and do not reflect retail mark-ups, mark-downs or commissions.
Quotations for periods before the October 1996 two for one stock split have been
retroactively adjusted.
<TABLE>
<CAPTION>
Year Ended March 31, 1996 High Low
<S> <C> <C>
Quarter ended June 30, 1995 14 10 3/4
Quarter ended September 30, 1995 22 3/4 13 5/8
Quarter ended December 31, 1995 23 17 3/4
Quarter ended March 31, 1996 29 7/8 19 7/8
Year Ended March 31, 1995
Quarter ended June 30, 1994 7 3/4 6 1/2
Quarter ended September 30, 1994 8 1/2 7 3/8
Quarter ended December 31, 1994 9 3/8 8
Quarter ended March 31, 1995 14 8 1/2
</TABLE>
(b) As of June 27, there were 1700 holders of record of the Company's
Common Stock.
(c) In fiscal 1996, the Company declared and paid a quarterly dividend of $0.025
per share of Common Stock, and in fiscal 1995, the Company declared and paid a
quarterly dividend of $0.025 per share of Common Stock during the last three
quarters of such fiscal year.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data
of the Company and should be read in conjunction with the related Consolidated
Financial Statements of the Company and accompanying Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Year Ended March 31,
(in thousands, except per share data)
1996 1995 1994 1993 1992
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $177,816 $146,394 $123,586 $114,976 $89,422
Gross profit 117,550 93,598 81,131 75,165 53,815
Operating income (loss) 37,121 27,043 (2,341) 19,984 8,851
Income (loss) before income taxes 36,140 24,221 16,844 (4,730) 6,706
Net income (loss) $23,819 $15,773 $11,005 $(2,830) $4,510
Net income (loss) per share $.92 $.70 $.51 $(.13) $.21
Dividends per common share $.10 $.075 -- $.08 $ .08
Average outstanding shares 25,856 22,374 21,610 21,308 21,578
Balance Sheet Data:
Working capital $70,135 $53,745 $39,721 $35,188 $28,758
Total assets 149,618 128,760 120,750 109,947 90,324
Long-term debt, less current portion 58 24,655 25,386 24,362 24,399
Shareholders' equity $116,495 $71,114 $54,653 $43,428 $47,728
</TABLE>
SALES BY PRINCIPAL PRODUCT LINE
<TABLE>
<CAPTION>
Year Ended March 31,
(in thousands) 1996 1995 1994
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Plastic Surgery Products $89,215 50% $62,964 43% $49,272 40%
Urology Products 54,127 30% 53,638 37% 51,199 41%
Ophthalmology Products 34,474 20% 29,792 20% 23,115 19%
$177,816 100% $146,394 100% $123,586 100%
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following table sets forth various items from the
Consolidated Statements of Operations as a percentage of net sales for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1995 1994
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 33.9 36.1 34.4
Selling, general and administrative 37.7 38.4 42.1
Research and development 7.5 7.0 7.4
Operating income 20.9 18.5 16.1
Interest income (expense), net (0.4) (1.9) (2.5)
Other expense (0.2) -- --
Income before income taxes 20.3 16.6 13.6
Income taxes 6.9 5.8 4.7
Net income 13.4% 10.8% 8.9%
</TABLE>
RESULTS OF OPERATIONS
Sales
Sales for fiscal 1996 increased from $146.4 million in 1995 to $177.8 million,
an increase of 21%. Growth was particularly strong in sales of plastic surgery
products, up 42% over the prior year, attributable to both unit growth in the
market and market share gains. Sales of urology products were flat with last
year. Sales of urology implants, however, increased in the second half of the
year, due to heightened public awareness in seeking treatment for impotence.
Ophthalmic product sales increased 16% over last year, as increases in
intraocular lens sales offset declining revenues from discontinued diagnostic
equipment. In October 1994, the Company acquired the intraocular lens (IOL)
product line of Optical Radiation Corporation, a subsidiary of Benson Eyecare
Corporation. This acquisition was included for the full year in fiscal 1996,
while only for six months in fiscal 1995.
Sales for fiscal 1995 increased 18% to $146.4 million, compared to $123.6
million the prior year. Growth was a result of strong increases in sales of
plastic surgery products and growth in sales of ophthalmology products. The
Company experienced increased unit demand for plastic surgery products. Growth
in sales of ophthalmology products was primarily a result of the acquisition in
October, 1994 of the IOL product line of Optical Radiation Corporation.
The Company's export sales to unaffiliated customers accounted for 15%, 15%, and
16% of net sales in the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
<PAGE>
Over the three fiscal years ended March 31, 1996, sales increases have been
primarily the result of increased unit sales and a shift to higher priced
products. General selling price increases have not been significant in recent
years.
Cost Of Sales
Cost of sales was 33.9% for fiscal 1996, compared to 36.1% for the prior year.
The Company continues to work on a variety of efficiency enhancements at each of
its facilities. This has allowed the Company 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. In
addition, the improvement in the cost of sales was aided by a greater proportion
of higher margin product in the sales mix.
Cost of sales was 36.1% for fiscal 1995, compared to 34.4% for fiscal 1994. The
Company's cost of sales for its plastic surgery products was reduced from prior
years as a result of the closure of the Company's California manufacturing
facility in July 1994. This reduction was offset by startup expenses in the
Company's new manufacturing plant in the Netherlands. This plant began to ship
product during the fourth quarter of fiscal 1995.
Selling, General and Administrative
Selling, general and administrative expenses decreased to 37.7% of sales in
fiscal 1996, compared to 38.4% the prior year. The Company experienced
productivity improvements in its sales efforts, particularly in the plastic
surgery division.
Selling, general and administrative expenses decreased to 38.4% of sales in
fiscal 1995, compared to 42.1% in the previous year. During fiscal 1994, the
Company was in the process of consolidating and closing three facilities in
Santa Barbara, California, St. Louis, Missouri and Stewartville, Minnesota into
other existing operations. Included in the fiscal 1994 results were
approximately $3 million 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 were 7.5% of sales in fiscal 1996, up from
7.0% the prior year. The Company continues to spend substantial 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. Other major studies underway include Urethrin, a product for treating
urinary incontinence and the Memory Lens, a foldable IOL.
The Company expects to pursue a number of additional clinical studies in the
coming year, for products such as ultrasonic assisted liposuction and an
alternate filler breast implant. Thus the Company expects to spend more in
research and development as a percent of sales in fiscal 1997 than it did in
fiscal 1996.
<PAGE>
Research and development expenses were 7.0% of sales in fiscal 1995, compared to
7.4% in fiscal 1994.
Interest and Other Income and Expense
Interest expense was $1.1 million in fiscal 1996, a decrease from $3.1 million
in fiscal 1995. In the first quarter of fiscal 1996, the Company called for the
redemption of its 6 3/4% Convertible Subordinated Debentures. As of June 1995,
the Debentures had been either converted into Common Stock or redeemed. Included
in interest expense for the year is $727 thousand in imputed interest on the
Litigation Settlement Obligation. In fiscal 1997, this will be reduced to $379
thousand, which will be incurred only in the first half of the year.
Interest income increased from $296 thousand in 1995 to $440 thousand in fiscal
year 1996, resulting from higher cash balances. Other income and expense
includes primarily gains or losses on disposals of assets, and foreign currency
gains or losses related to the Company's foreign operations.
Interest expense decreased $273 thousand in fiscal 1995 from the prior year, due
primarily to lower balances on the Company's line of credit. Included in
interest expense for fiscal 1995 is $1.0 million in imputed interest on
the Litigation Settlement Obligation. Interest income increased from
$247 thousand in 1994 to $296 thousand in 1995, resulting from higher
cash balances.
Income Taxes
The effective rate of corporate income taxes was 34% for fiscal 1996, compared
to 35% for both fiscal 1995 and 1994.
Net Income
Net income per primary share in fiscal 1996 was $0.92, compared to $0.70 in
fiscal 1995. The increase was caused by higher sales combined with a shift
towards higher margin implantable sales in the sales mix. The percentage
increase in earnings per share was less than that of net income due to the
increased number of shares outstanding in fiscal 1996, which resulted from the
2.9 million, (1.46 million pre-stock split) shares issued upon conversion of the
convertible subordinated debentures.
Inflation
The Company does not believe inflation has had a material impact on the
Company's operations over the three year period ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended March 31, 1996, liquidity needs have been satisfied
principally by cash flow from operations and the drawdown on available lines of
credit.
<PAGE>
At March 31, 1996, working capital was $70.1 million compared to $53.7 million
the previous year. The Company generated $19.7 million of cash from operations
during fiscal 1996, compared to $13.0 million the previous year. An increase in
net income of $8.0 million was partially offset by increases in non cash related
working capital.
During fiscal 1996 the Company spent $9.8 million on capital expenditures,
primarily improvements in manufacturing facilities and equipment and data
processing hardware and software. Of this amount, approximately $4.2 million was
for the buildout of its manufacturing facilities in Texas and Puerto Rico. The
Company anticipates investing approximately $10 million in facilities and
capital equipment in fiscal 1997.
During fiscal 1996, 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. This agreement
includes certain covenants which, among others, limit the dividends the Company
may pay and require the 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. There were no borrowings under the
agreement in fiscal 1996, nor any balance outstanding at March 31, 1996.
During fiscal 1994, the Company finalized its agreement with the Federal
Multi-District Litigation 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 during fiscal 1996, bringing the total paid to date to
$20.5 million. The Company is obligated to make one more payment of $5.3 million
in September 1996. This will complete the Company's monetary obligations under
the agreement.
At the 1994 Annual Meeting of Shareholders the Company announced the resumption
of its quarterly cash dividends. At the indicated rate of $.10 per year, the
aggregate annual dividend would equal approximately $2.5 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 agreement.
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 $8.25 ($16.50 pre-stock split). 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. All but $48 thousand
of the debentures were converted into Common Stock. A total of 2,926,000
(1,463,000 pre-stock split) shares were issued to debenture holders. Interest
accrued on the debentures but not paid as a result of the conversion ($1.4
million) was credited, net of the applicable tax effect, directly to
shareholders' equity.
<PAGE>
In the first quarter of fiscal 1996, 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 plans. During fiscal 1996, the Company repurchased 222,000 shares for an
aggregate consideration of $3.5 million.
The Company's principal source of liquidity at March 31, 1996 consisted of $18.5
million in cash and marketable securities plus $15.0 million available under the
existing line of credit.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this Management's Discussion are forward-looking statements, the accuracy of
which is necessarily subject to risks and uncertainties. Actual results may
differ significantly from the discussion of such matters in the forward-looking
statements.
Due to the nature of the Company's products and business, the Company has been
and will be involved in various legal actions arising in the course of business,
some of which involve product liability and intellectual property claims. With
respect to product liability issues, the litigation and regulatory risks will
continue to exist even with respect to those products that have received or in
the future may receive regulatory approval for commercial sale. It is possible
that adverse results arising from product liability or intellectual property
actions, as well as adverse results arising from regulatory or administrative
proceedings, could negatively affect the Company's future results of operations.
The Company has been and may be in the future the subject of negative publicity,
which can arise from various sources, ranging from the news media to legislative
and regulatory investigations. There can be no assurance that such negative
publicity will not result in a material adverse effect on the Company's future
financial position, its results of operations or the market price of its stock.
In addition, significant negative publicity could result in an increase in
product liability claims.
The Company's products, development activities and manufacturing processes are
subject to extensive and rigorous regulation by the FDA and by comparable
agencies in foreign countries. In the United States, the FDA regulates the
introduction, manufacturing, labeling and recordkeeping procedures for medical
devices. The process of obtaining marketing clearance from the FDA for new
products and existing products can be time-consuming and expensive, and there is
no assurance that such clearances will be granted or that FDA review will not
involve delays that would adversely affect the Company's ability to
commercialize additional products or additional applications for existing
products. In addition, certain of the Company's products that are in the
research and development stage may be subject to a lengthy and expensive
pre-market approval ("PMA") process with the FDA. Product approvals by the FDA
can also be withdrawn due to failure to comply with regulatory standards or the
<PAGE>
occurrence of unforeseen problems following initial approval. The FDA could also
limit or prevent the manufacture or distribution of the Company's products and
has the power to require the recall of such products. FDA regulations depend
heavily on administrative interpretation, and there can be no assurance that
future interpretations made by the FDA or other regulatory bodies will not
adversely affect the Company. The FDA, various state agencies and foreign
regulatory agencies inspect the Company and its facilities from time to time to
determine whether the Company is in compliance with various regulations relating
to manufacturing practices, validation, testing, quality control and product
labeling. A determination that the Company is in violation of such regulations
could lead to imposition of penalties, product recalls or product seizures.
Each of the Company's major business segments operates its manufacturing,
warehousing and research and development activities in a single facility. While
the Company has some limited protection in the form of basic insurance coverage,
the Company's operating results and financial condition would be materially
adversely affected in the event of a fire or similar catastrophe.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted pursuant to Item 14 of
this Annual Report on Form 10-K and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of the Company is
contained in portions of the Proxy Statement for Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission within 120 days of the
close of the fiscal year ended March 31, 1996 and incorporated herein by
reference. For information concerning executive officers, see Item 4A of this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in this item is incorporated herein
by reference to portions of the Proxy Statement for Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended March 31, 1996.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in this item is incorporated herein
by reference to portions of the Proxy Statement for Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended March 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in this item is incorporated herein
by reference to portions of the Proxy Statement for Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended March 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
PAGE
(a)(1) Consolidated Financial Statements
Report of Independent Auditors 30
Consolidated Statements of Financial Position
as of March 31, 1996 and 1995 31
Consolidated Statements of Income for the
Years Ended March 31, 1996, 1995, and 1994 32
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended March 31, 1996, 1995,
and 1994 33
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1996, 1995 and 1994 34
Notes to Consolidated Financial Statements 35
(a)(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
and Reserves 44
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the consolidated
financial statements or notes thereto.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (continued)
(a)(3) List of exhibits:
3(a) Composite Restated Articles of Incorporation of the Company. (1)
3(b) Composite Restated Bylaws of the Company.(2)
4 Mentor Corporation to Bankers Trust Company, Trustee,
Indenture, dated as of July 22, 1987;
U.S. $30,000,000, 6 3/4% Convertible Subordinated Debentures,
Due 2002. (1)
Copies of constituent instruments defining rights of holders
of other long-term debt of the registrant and subsidiaries are not filed
herewith, pursuant to paragraph 4(iii)(A) of Item 601 of Regulation S-K, because
the total amount of securities authorized under any such instrument does not
exceed 10% of the total assets of the registrant and subsidiaries on a
consolidated basis. The registrant hereby agrees that it will, upon request by
the Securities and Exchange Commission, furnish to the Commission a copy of each
such instrument.
(a)(3) List of exhibits (continued):
10(a) Mentor Corporation 1982 Incentive Stock Option Plan
and Agreement - Registration Statement No. 2-94726(8)(11)
10(b) Mentor Corporation Restated 1987 Non-Statutory Stock Option
Plan and Agreement - Registration Statement
No.33-25865.(9)(11)
10(c) Mentor Corporation 1991 Stock Option Plan - Registration
Statement No. 33-48815.(10)(11)
10(d) Stock Option Agreement, dated September 21, 1988, between
Mentor Corporation and Anthony R. Gette.(2)(11)
10(e) Lease Agreement, dated November 9, 1989, between Mentor
Corporation and Skyway Business Center Joint Venture.(3)
10(f) First Amendment to Lease Agreement, dated December 1, 1993,
between Mentor corporation and Skyway Business Center Joint
Venture. (6)
10(g) Credit Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California (7)
10(h) $15,000,000 Revolving Note, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California (7)
10(i) Security Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California (7)
10(j) Guarantor Security Agreement, dated May 22, 1995, between
Mentor Corporation and its subsidiaries and Sanwa Bank
California (7)
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
10(k) Guaranty Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California (7)
10(l) Contribution Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California (7)
10(m) Inter-Company Note, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California (7)
10(n) Lease Agreement, dated July 23, 1990, between Mentor
Corporation and SB Corporate Center, Ltd.(4)
10(o) Settlement Agreement and Stipulation, dated May 7, 1993,
between Mentor Corporation and Representative Plaintiffs.(5)
(a)(3) List of exhibits (continued):
10(p) Employment Agreement, dated March 15, 1993, between Mentor
Corporation and Spencer M. Vawter. (6)(11)
10(q) Employment Agreement, dated August 5, 1994, between Mentor
O&O, Inc. and William M. Freeman. (7)(11)
11 Statement Regarding Computation of Per Share Earnings 45
21 Subsidiaries of the Company 46
23 Consent of Independent Auditors 47
(b) Reports on Form 8-K:
None.
(1) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1988, File No. 0-7955.
(2) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1989, File No. 0-7955
(3) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1990, File No. 0-7955.
(4) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1991, File No. 0-7955.
(5) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1993, File No. 0-7955.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(6) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1994, File No. 0-7955.
(7) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended March 31, 1995, File No. 0-7955.
(8) Incorporated by reference to Registration Statement on Form S-8,
Registration No. 2-94726.
(9) Incorporated by reference to the post effective amendment No. 1 to
Registration Statement on Form S-8, Registration No. 33-25865.
(10) Incorporated by reference to Registration Statement on Form S-8,
Registration No. 33-48815.
(11) Management contract or compensatory plan or arrangement.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mentor Corporation
We have audited the accompanying consolidated statements of financial position
of Mentor Corporation as of March 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mentor Corporation
at March 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended March 31, 1996,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
May 8, 1996
<PAGE>
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(dollars in thousands) March 31,
Assets 1996 1995
<S> <C> <C>
Current assets:
Cash and equivalents $7,837 $9,350
Marketable securities 10,704 2,029
Accounts receivable, net of allowance for doubtful
accounts of $2,285 in 1996 and $1,363 in 1995 34,855 30,026
Inventories 35,158 29,994
Deferred income taxes 10,148 6,918
Other 3,143 2,741
Total current assets 101,845 81,058
Property and equipment, net 29,317 25,538
Deferred income taxes -- 1,400
Intangibles, net 4,689 6,287
Goodwill, net 13,109 13,523
Other assets 658 954
$149,618 $128,760
Liabilities and shareholders' equity Current liabilities:
Accounts payable and accrued liabilities $25,289 $20,094
Income taxes payable 428 606
Dividends payable 628 549
Litigation settlement obligation 4,950 5,333
Short-term bank borrowings and current
portion of long-term debt 415 731
Total current liabilities 31,710 27,313
Long-term deferred taxes 1,355 --
Long-term debt 58 473
Litigation settlement obligation -- 5,678
Convertible subordinated debentures -- 24,182
Shareholders' equity:
Common Stock, $.10 par value: Authorized- 50,000,000 shares;
Issued and outstanding -- 24,860,642 shares in 1996; 21,796,776
shares in 1995 2,486 2,180
Capital in excess of par value 37,840 13,941
Cumulative translation adjustment (445) (283)
Retained earnings 76,614 55,276
116,495 71,114
$149,618 $128,760
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended March 31,
(in thousands, except per share data)
1996 1995 1994
<S> <C> <C> <C>
Net sales $177,816 $146,394 $123,586
Costs and expenses:
Cost of sales 60,266 52,796 42,455
Selling, general and administrative 67,050 56,260 52,010
Research and development 13,379 10,295 9,137
140,695 119,351 103,602
Operating income 37,121 27,043 19,984
Interest income 440 296 247
Interest expense (1,092) (3,114) (3,387)
Other expense (329) (4) --
Income before income taxes 36,140 24,221 16,844
Income tax 12,321 8,448 5,839
Net income $23,819 $15,773 $11,005
Net income per share:
Primary $.92 $.70 $.51
Fully diluted $.90 $.65 $.49
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares
Common Shares Common Capital in Cumulative
Outstanding Stock $.10 Excess of Translation Retained
(in thousands) Par Value Par Value Adjustment Earnings
<S> <C> <C> <C> <C> <C>
Balance April 1, 1993 10,676 $1,068 $12,628 $(391) $30,123
Exercise of stock options 14 1 161 -- --
Foreign currency translation adjustment -- -- -- 58 --
Net income -- -- -- -- 11,005
Balance March 31, 1994 10,690 $1,069 $12,789 $(333) $41,128
Exercise of stock options 207 21 2,680 -- --
Dividends declared ($.075 per share) -- -- -- -- (1,625)
Repurchase of common shares (110) (11) (2,386) -- --
Income tax benefit arising from
the exercise of stock options -- -- 134 -- --
Common shares used in business
acquisition 61 6 994 -- --
Common shares used in litigation
settlement 50 5 820 -- --
Foreign currency translation adjustment -- -- -- 50 --
Net income -- -- -- -- 15,773
Balance March 31, 1995 10,898 $1,090 $15,031 $(283) $55,276
Exercise of stock options 361 36 2,053 -- --
Repurchase of common shares (222) (22) (3,447) -- --
Income tax benefit arising from
the exercise of stock options -- -- 1,073 -- --
Shares issued upon conversion of
Convertible Subordinated Debentures 1,463 146 24,366 -- --
Shares issued pursuant to stock split 12,361 1,236 (1,236) -- --
Dividends declared ($.10 per share) -- -- -- -- (2,481)
Foreign currency translation adjustment -- -- -- (162) --
Net income -- -- -- -- 23,819
Balance March 31, 1996 24,861 $2,486 $37,840 $(445) $76,614
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
(in thousands) 1996 1995 1994
Cash From Operating Activities:
<S> <C> <C> <C>
Net income $23,819 $15,773 $11,005
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 7,173 6,798 6,165
Deferred income taxes (957) 727 (296)
Loss on sale of assets 79 278 33
Expenses not requiring the use of cash 727 1,821 996
Litigation settlement obligation (5,333) (4,483) 671
Changes in operating assets and liabilities:
(Increase) in accounts receivable (4,797) (7,514) (1,150)
(Increase) in inventories and other current assets (5,763) (673) (5,106)
Increase (Decrease) in accounts payable and accrued expenses 4,318 (102) 151
Increase (Decrease) in income taxes payable (178) 606 --
Increase (Decrease) in other accrued liabilities 613 (232) --
Net cash provided by operating activities 19,701 12,999 12,469
Cash From Investing Activities:
Purchase of property, equipment and intangibles (9,846) (6,912) (8,933)
Proceeds from sale of property, equipment and other assets 764 1,015 94
Reduction in notes receivable 108 183 208
Purchases of marketable securities (15,275) -- (1,253)
Sales of marketable securities 6,600 2,257 --
Net cash used for investing activities (17,649) (3,457) (9,884)
Cash From Financing Activities:
Repurchase of common stock (3,469) (2,398) --
Proceeds from exercise of stock options 3,162 2,701 162
Dividends paid (2,402) (1,082) (427)
Reduction in long-term debt (856) (674) (336)
Borrowings under line of credit agreements -- -- 2,950
Payments on line of credit agreements -- (4,782) (4,099)
Net cash used for financing activities (3,565) (6,235) (1,750)
Increase (Decrease) in cash and equivalents (1,513) 3,307 835
Cash and equivalents at beginning of year 9,350 6,043 5,208
Cash and equivalents at end of year $7,837 $9,350 $6,043
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Note A Summary Of Significant Accounting Policies
History and Business Activity
Mentor Corporation was incorporated in April 1969. The Company is engaged in one
industry segment - the development, manufacture and marketing of specialized
medical products. The Company's products are sold to hospitals, physicians and
through various health care dealers, wholesalers, and retail outlets.
Principles of Consolidation
The consolidated financial statements include the accounts of Mentor Corporation
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Marketable Securities
The Company considers its marketable securities available-for-sale as defined in
Statement Financial Accounting Standards ("SFAS") No. 115. There were no
material realized or unrealized gains or losses nor any material differences
between estimated fair values and costs of securities in the investment
portfolio as of March 31, 1996.
Accounts Receivable and Credit Risk
The Company grants credit terms in the normal course of business to its
customers, primarily hospitals, doctors and distributors. As part of its ongoing
control procedures, the Company monitors the credit worthiness of its customers.
Bad debts have been minimal. The Company does not normally require collateral or
other security to support credit sales.
Revenue Recognition
Sales and related cost of sales are recognized primarily upon the shipment of
products. The Company allows credit for products returned within its policy
terms. Such returns are estimated and an allowance provided at the time of sale.
The Company provides a warranty on certain of its capital equipment products
against defects in workmanship and material. Estimated warranty costs are
provided at the time of sale and periodically adjusted to reflect actual
experience.
Inventories
Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost and includes interest on funds
borrowed to finance construction. Capitalized interest was $20,000 in 1996.
Depreciation is based on the useful lives of the properties and computed using
the straight-line method. Significant improvements and betterments are
capitalized while maintenance and repairs are charged to operations as incurred.
<PAGE>
Intangible Assets and Goodwill
Intangible asset consist of values assigned to patents, licenses, trademarks and
bond issuance costs. These are stated at cost less accumulated amortization and
are amortized over their economic life ranging from 3 to 20 years using the
straight-line method. Accumulated amortization of intangibles was $10,121,000 at
March 31, 1996 and $9,127,000 at March 31, 1995. The excess purchase cost over
fair value of net tangible assets acquired, goodwill, is amortized on a
straight-line basis over 20-40 years. Accumulated amortization of goodwill was
$2,605,000 at March 31, 1996 and $2,190,000 at March 31, 1995. The Company
periodically reviews goodwill to assess recoverability. Impairments would be
recognized in operating results if a permanent diminution in value were to
occur.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are
provided on the temporary differences between income for financial statement and
tax purposes.
Per Share Data
Primary income per share is computed based on the weighted average number of
Common Stock and Common Stock equivalents outstanding during each 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 share of Common Stock equivalents outstanding are increased. The
subordinated convertible debentures were converted to common stock during fiscal
year 1996. Thereafter, the difference between primary and fully diluted per
share data was not significant.
Stock Split
On September 13, 1995 the Board of Directors authorized a two for one stock
split in the form of a 100% stock dividend to be distributed on or about October
13, 1995 to shareholders of record on September 27, 1995. The Board's action was
contingent on shareholder approval, received at the annual meeting of
shareholders, of an increase in the Company's authorized shares from 20 million
to 50 million. All references in the financial statements to number of shares,
per share amounts and market prices of the Company's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding.
Stock Options
In October 1995, the FASB issues Statement No. 123, "Accounting for Stock-Based
Compensation". The Company will adopt the new pronouncement in fiscal year 1996
and has yet to decide whether it will record compensation cost or provide pro
forma disclosure.
Foreign Sales
Export sales, principally to Canada and Western Europe, were $26,223,000,
$21,243,000, and $19,582,000 in 1996, 1995 and 1994, respectively. In addition,
$14,140,000, $11,287,000, and $9,329,000 in sales respectively, were from the
Company's direct international sales offices.
<PAGE>
Foreign Currency Translation
The financial statements of the Company's non-U.S. subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation." Net assets of certain non-U.S.
subsidiaries whose "functional" currencies are other than the U.S. Dollar are
translated at current rates of exchange. Income and expense items are translated
at the average exchange rate for the year. The resulting translation adjustments
are recorded directly into a separate component of shareholders' equity. Net
assets and the results of operations of the Company's foreign entities were not
significant on a consolidated basis.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at March 31, 1996, and the reported amounts of
revenues and expenses during the year then ended. Actual results could differ
from those estimates.
Reclassification
Certain reclassifications of previously reported amounts have been made to
conform to current year's presentation.
Note B Inventories
Inventories at March 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
<S> <C> <C>
Raw materials $10,191 $9,294
Work in process 9,040 5,264
Finished goods 15,927 15,436
$35,158 $29,994
</TABLE>
Note C Property and Equipment
Property and equipment at March 31, consisted of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $231 $231
Buildings 3,798 3,798
Leasehold Improvements 9,084 8,706
Furniture, fixtures and equipment 32,326 29,060
Construction in progres 5,741 1,701
51,180 43,496
Less accumulated depreciation
and amortization (21,863) (17,958)
$29,317 $25,538
</TABLE>
<PAGE>
Note D Accrued Liabilities
Accounts payable and accrued liabilities at March 31, consisted of:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
<S> <C> <C>
Trade payables $5,003 $2,996
Accrued compensation 6,153 5,620
Interest payable 3 1,145
Sales returns 6,705 4,765
Product liability 2,800 2,000
Accrued royalties 1,360 1,210
Other 3,265 2,358
$25,289 $20,094
</TABLE>
Note E Long-Term Debt
Long-term debt at March 31 consisted of:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
<S> <C> <C>
Convertible Subordinated debentures, at 6.75%
converted in 1996 $-- $24,182
Term bank loan, at 7.8%, due in monthly
installments through September 1996 366 1,058
City of Minneapolis, Minnesota Industrial
Development Revenue Bonds, at 7.5% payable
through 1998 107 146
473 25,386
Less current portion
415 731
$58 $24,655
</TABLE>
During fiscal 1996, the Company called for the redemption of the Convertible
Subordinated Debentures, with a redemption date of June 30, 1995. At the option
of the debenture holder, the debentures were convertible into shares of Common
Stock at a price of $8.25. Any debentures not converted into Common Stock by the
redemption date would be purchased by the Company at 100 percent of their
principal amount, plus accrued interest. All but $48,000 of the $24,182,000
balance of convertible subordinated debentures at March 31, 1995 were 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,
approximately $1,400,000, was credited, net of applicable tax effects, directly
to shareholders equity.
The aggregate maturities of outstanding long-term debt during the next five
fiscal years are as follows:
1997-$415,000; 1998-$50,000; 1999-$8,333; and none thereafter.
<PAGE>
At March 31, 1996, the Company had a line of credit agreement for up to $15
million. Borrowings under the Credit Agreement will accrue interest at the
prevailing prime rate. The Credit 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. A commitment fee
of .25% will be paid on the unused portion of the $15 million credit line. At
March 31, 1996, the Company had no amounts outstanding under its line of credit.
During 1994, the Company completed the construction of certain production
equipment in the Minneapolis facility. A portion of the construction cost was
funded under a $2 million interim equipment financing agreement. Upon completion
of the equipment in 1994, the $2 million advance was converted into a 3 year
fully amortized term loan at 7.8% interest. The loan is secured by the
production equipment.
Note F Stock Options
The Company has granted options to key employees and non-employee directors
under a qualified 1991 Plan, a non-qualified 1987 Plan, and a qualified 1982
Plan. Options granted under all plans are exercisable in four equal cumulative
installments beginning one year from the date of grant. Options issued under the
1991 and 1987 Plans expire in ten years, while options under the 1982 Plan
expire in five years. Options issued under the plans are granted at the fair
market value on the date of grant. Activity in the stock option plans during
fiscal 1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
Options Outstanding
Shares
Total Exercisable Price per Share
<S> <C> <C> <C> <C>
Balance April 1, 1993 2,106,096 1,053,600 $ 4.00 to $ 10.07
Granted 356,800 -- 5.57 to 6.88
Exercisable -- 446,410 5.25 to 10.07
Exercised (28,500) (28,500) 4.00 to 7.57
Cancelled or terminated (53,750) (25,750) 5.25 to 8.25
Balance March 31, 1994 2,380,646 1,445,760 $ 4.00 to $ 10.07
Granted 620,000 -- 6.75 to 11.94
Exercisable -- 395,286 5.25 to 10.07
Exercised (414,750) (414,750) 4.00 to 10.07
Cancelled or terminated (136,750) (21,050) 5.25 to 8.25
Balance March 31, 1995 2,449,146 1,405,246 $ 4.00 to $ 11.94
Granted 503,100 -- 11.50 to 27.50
Exercisable -- 367,050 5.25 to 11.94
Exercised (287,216) (287,216) 4.00 to 8.31
Cancelled or terminated (115,800) -- 5.25 to 11.94
Balance March 31, 1996 2,549,230 1,485,080 $ 4.00 to $ 27.50
</TABLE>
<PAGE>
At March 31, 1996 there were 200,400 shares available for grant under the 1991
Plan. There are no additional shares available for grant under either the 1987
or 1982 Plans.
During fiscal 1989, the Company granted an officer a non-qualified stock option
to purchase 100,000 shares of Common Stock, at $5.375 per share. During fiscal
1996, the officer exercised 73,334 shares of this option. At March 31, 1996,
there were options for 26,666 shares of Stock outstanding and exercisable under
this option. This option expires in September 1998.
<PAGE>
Note G Income Taxes
<TABLE>
<CAPTION>
Year Ended March 31,
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $11,536 $6,644 $5,392
State 930 546 743
Foreign 330 531 --
12,796 7,721 6,135
Deferred:
Federal (466) 676 (302)
State (9) 51 6
(475) 727 (296)
$12,321 $8,448 $5,839
</TABLE>
The reconciliation of the federal statutory rate to the Company's effective rate
is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1995 1994
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State tax, net of federal tax benefit 1.7 1.9 3.1
Non-taxable interest and dividends (0.3) (0.2) (0.3)
Research and development credit (0.4) (1.8) (2.2)
Foreign Sales Corporation (1.2) (1.3) (1.7)
Foreign operations (1.7) 0.2 3.1
Non-deductible goodwill 0.5 0.8 1.1
Other 0.5 0.3 (3.4)
34.1% 34.9% 34.7%
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $1,355 $1,279 $1,288
Other -- -- 52
1,355 1,279 1,340
Deferred tax assets:
Book reserves not deductible for tax 4,300 3,536 3,543
Uniform capitalization 744 676 571
Litigation settlement obligation 2,423 4,166 5,871
Profit on sales to foreign subsidiaries 2,681 1,219 400
10,148 9,597 10,385
$8,793 $8,318 $9,045
</TABLE>
<PAGE>
Note H Supplemental Information
<TABLE>
<CAPTION>
Supplemental schedule of cash flow information: Year Ended March 31,
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Interest paid $ 1,229 $ 2,760 $ 2,225
Income taxes paid $ 12,646 $ 6,937 $ 7,013
Supplemental schedule on non-cash flow investing
and financing activities:
Common shares issued to acquire equipment and intangibles -- $ 1,000 --
Common shares issued upon conversion of subordinated
convertible debentures $ 24,134 -- --
</TABLE>
Note I Commitments
The Company leases certain facilities under operating leases with unexpired
terms ranging from one to twelve years. Most leases contain renewal options.
Rental expense for these leases was $2,489,576, $2,147,000 and $2,736,000 for
fiscal 1996, 1995 and 1994, respectively.
Future minimum lease payments under lease arrangements at March 31, 1996 are as
follows:
(in thousands)
1997 $ 2,394
1998 2,086
1999 1,840
2000 1,728
2001 1,628
thereafter 9,099
Total $ 18,775
Note J Related Party Transactions
In April 1991, the Company entered into an agreement with Rochester Medical
Corporation (Rochester). Under the terms of the agreement, the Company received
an exclusive license to market and distribute certain external catheter products
developed by Rochester, in exchange for a payment of $500,000. The Company
purchased $525,000, $0, and $1,645,000 of product from Rochester in 1996, 1995
and 1994 respectively.
Several officers/founders of Rochester, a public company, are siblings of the
Chairman of Mentor Corporation. The Chairman derived no financial or other
benefit from transactions between the Company and Rochester.
<PAGE>
Note K Litigation
A. Claims related to product liability are a regular and ongoing aspect
of the medical device industry. At any one time, the Company is subject to
claims against it and is involved in litigation. The Company has carried product
liability insurance on all its products, including breast implants, subsequent
to May 1991 and prior to September 1985. From June 1992 on, such insurance has
excluded silicone gel filled breast implants. This insurance is subject to
certain self-insured retentions and limits of the policy. From September 1985
through April 1991, the Company was self insured for the majority of its
surgical implant products, but had product liability insurance on the rest of
its products, subject to certain limits, exclusions and deductibles which the
Company believes to be appropriate. The Company does maintain a reserve
($2,800,000 and $2,000,000 at March 31, 1996 and 1995, respectively) in an
amount it believes to be reasonably sufficient to cover the cost of anticipated
product liability claims.
The Company became involved in a substantial amount of product
liability litigation related to silicone gel filled breast implants in fiscal
1992 and 1993. These cases alleged design and marketing defects, failure to
warn, breach of implied and express warranties, emotional distress and gross
negligence in connection with silicone gel filled breast implants manufactured
by the Company. The complaints sought unspecified damages for medical expenses,
loss of earnings, prejudgment interest and punitive damages.
During fiscal 1994, the Company reached an 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. The agreement, in which the Company denies any
wrongdoing or legal liability, covers all women who have received a silicone gel
or saline filled breast implant manufactured by the Company from March 1984 (the
date at which the Company first entered the business) through June 1, 1993. The
agreement was approved by the Federal Court, which certified a mandatory class
of persons, who have or may have any existing or future claim, including claims
for injuries not yet known, under any federal or state law, based upon having
received a silicone gel or saline filled breast implant prior to June 1, 1993.
Under the terms of the agreement, the Company made payments of
$2.0 million in May 1993, $8.7 million in November 1993, $4.5 million in
September 1994 and $5.3 million in September 1995. The second payment was funded
out of insurance reimbursements. A final payment of $5.3 million is due in
September 1996. These payments were expensed by the Company in fiscal 1993.
B. In 1989, the Company acquired from the Ares-Serono Group a dermal
filler implant product line, related assets and technology. The dermal filler
product is a physiologically compatible material which is injected into the skin
for correcting scars and other skin defects. The technology acquired included,
among other things, a license agreement to certain patents and patent
applications developed by Sheldon Gottlieb, M.D. In addition to the dermal
filler product, the license agreement also included a patent for a purported
wound healing product.
<PAGE>
Dr. Gottlieb alleges that Mentor, along with Serono Laboratories,
Inc. (a subsidiary of Ares-Serono Group), did not use its best efforts to market
the dermal filler product nor the purported wound healing product, in violation
of the license agreement. The case is in arbitration before the American
Arbitration Association in Boston, Massachusetts, Sheldon Gottlieb, M.D. v.
Serono Laboratories, Inc. and Mentor H/S, Inc., AAA Case No. 11-133-0067-95.
Dr. Gottlieb is seeking damages of approximately $16 million.
Management believes that this matter is without merit. However,
arbitration awards and settlements in matters of this type are difficult to
predict, and the ultimate outcome cannot be ascertained at this time.
C. In addition, 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.
Note L Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
(In thousands, except per share data) Quarter
Year Ended March 31, 1996 First Second Third Fourth
<S> <C> <C> <C> <C>
Net sales $43,729 $42,328 $45,004 $46,755
Gross profit 28,983 27,621 29,767 31,179
Net income 5,484 5,556 6,143 6,636
Net income per share:
Primary $.23 $.21 $.23 $.25
Fully diluted $.22 $.21 $.23 $.25
Year Ended March 31, 1995
Net sales $34,729 $32,687 $38,127 $40,851
Gross profit 22,390 21,425 24,720 25,063
Net income 3,690 3,400 4,197 4,486
Net income per share:
Primary $.17 $.16 $.19 $.20
Fully diluted $.16 $.15 $.18 $.18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MENTOR CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
COL. A COL. B COL. C COL. D COL. E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C> <C>
Year Ended March 31, 1996 Deducted from
asset accounts:
Allowance for doubtful accounts $1,363 $1,242 $ -- $320 (1) $2,285
Liability Reserves:
Product liability $2,000 $1,527 $ -- $727 (2) $2,800
Accrued sales returns and
allowances $ 4,765 1,963 $ -- 23 (3) 6,705
$6,765 $3,490 $ -- $750 $9,505
Year Ended March 31, 1995 Deducted
from asset accounts:
Allowance for doubtful accounts $993 $674 $ 282 $586 (1) $1,363
Liability Reserves:
Product liability $1,200 $1,242 $ -- $442 (2) $2,000
Accrued sales returns and
allowances 3,625 1,145 $ -- 5 (3) $4,765
$4,825 2,387 $ -- $447 $6,765
Year Ended March 31, 1994 Deducted
from asset accounts:
Allowance for doubtful accounts $904 $315 $ -- $226 (1) $993
Liability Reserves:
Product liability $1,000 $672 $ -- $472 (2) $1,200
Accrued sales returns and allowances 3,033 625 $ -- 33 (3) 3,625
$4,033 $1,297 $ -- $505 $4,825
</TABLE>
(1) Uncollected accounts written off, net of
recoveries.
(2) Product liability claims paid.
(3) Sales rebates.
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
STATEMENT REGARDING THE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Year Ended March 31,
1996 1995 (1) 1994 (1)
PRIMARY:
<S> <C> <C> <C>
Primary Earnings $ 23,819 $ 15,773 $ 11,005
Average Shares Outstanding 24,163 21,640 21,356
Net Effect of Dilutive Stock Options--Based on the
Treasury Stock Method using Average Stock Market
Price 1,693 734 254
Total Shares for Primary Earnings 25,856 22,374 21,610
Primary Earnings Per Share $ .92 $ .70 $ .51
FULLY DILUTED:
Primary Earnings $ 23,819 $ 15,773 $ 11,005
Interest and Related Expenses on 6 3/4% Debentures
Eliminated, Net of Tax 168 1,116 1,116
Fully Diluted Earnings $ 23,987 $ 16,889 $ 12,121
Average Shares Outstanding 24,163 21,640 21,356
Net Effect of Dilutive Stock Options--Based on the
Treasury Stock Method using the Higher of Ending
and Average Stock Market Prices 1,885 1,386 328
Additional Shares Issued in Assumed Conversion of
6 3/4% Debentures at $8.25 Per Share, Converted
during 1996 556 2,932 2,932
Total Shares for Fully Diluted Earnings 26,604 25,958 24,616
Fully Diluted Earnings Per Share $ .90 $ .65 $ .49
</TABLE>
(1) In September 1995 the Board of Director s approved a 2 for 1 stock
split in the form of a stock dividend. All prior year share and per
share amounts have been retroactively restated to reflect the
additional shares outstanding.
<PAGE>
EXHIBIT 21
LIST OF
SUBSIDIARIES OF MENTOR CORPORATION
1. Mentor H/S, Inc.
2. Mentor Urology, Inc.
3. Mentor Ophthalmics, Inc. (Formerly Mentor O&O, Inc.)
4. Mentor Caribe, Inc.
5. Mentor ORC, Inc. (Dissolved 4/1/96)
6. Mentor Polymer Technologies Company
7. Teknar Corporation (Dissolved 4/1/96)
8. Mentor International Sales Corporation
9. Mentor International Holdings Alpha, Inc.
10. Mentor International Holdings Beta, Inc.
11. Mentor International Holdings Camda, Inc.
12. Mentor International Holdings Delta, inc.
13. Mentor Medical Systems, Pty. Ltd (Australia)
14. Mentor Medical Systems, UK, Ltd.
15. Mentor Medical Systems, B.V.
16. Mentor Deutschland GmbH
17. Mentor France S.A.
18. Mentor Medical Systems, Canada
19. MDI, Ltd.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Our audits included the financial statement schedule listed in Item 14(a). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference in the (1) Registration Statement
Number 2-94726 on Form S-8 dated December 26, 1984, (2) Registration Statement
Number 33-25865 on Form S-8 dated December 22, 1988, (3) Registration Statement
Number 33-48815 on Form S-8 dated June 24, 1992, and (4) Registration Statement
Number 33-58761 on Form S-3 dated May 22, 1995 of our report dated May 8, 1996
with respect to the consolidated financial statements and schedule of Mentor
Corporation included in the Annual Report on Form 10-K for the year ended March
31, 1996.
ERNST & YOUNG LLP
Los Angeles, California
June 24, 1996
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Mentor Corporation has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
MENTOR CORPORATION
/s/CHRISTOPHER J. CONWAY
Christopher J. Conway, Chairman
DATE: June 27, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the registrant, and in the capacities and on the dates indicated:
/s/CHRISTOPHER J. CONWAY Chairman, Chief June 27, 1996
Christopher J. Conway Executive Officer
and Director (Principal
Executive Officer)
/s/ANTHONY R. GETTE President and Secretary June 27, 1996
Anthony R. Gette and Director
/s/GARY E. MISTLIN Vice President of Finance/ June 27, 1996
Gary E. Mistlin Treasurer
(Principal Financial and
Accounting Officer)
/s/WALTER W. FASTER Director June 27, 1996
Walter W. Faster
/s/EUGENE G. GLOVER Director June 27, 1996
Eugene G. Glover
/s/MICHAEL NAKONECHNY Director June 27, 1996
Michael Nakonechny
/s/BYRON G. SHAFFER Director June 27, 1996
Byron G. Shaffer
/s/DR. RICHARD W. YOUNG Director June 27, 1996
Dr. Richard W. Young
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 7,837
<SECURITIES> 10,704
<RECEIVABLES> 37,140
<ALLOWANCES> 2,285
<INVENTORY> 35,158
<CURRENT-ASSETS> 101,845
<PP&E> 51,180
<DEPRECIATION> 21,863
<TOTAL-ASSETS> 149,618
<CURRENT-LIABILITIES> 31,710
<BONDS> 0
0
0
<COMMON> 2,486
<OTHER-SE> 114,009
<TOTAL-LIABILITY-AND-EQUITY> 149,618
<SALES> 177,816
<TOTAL-REVENUES> 177,816
<CGS> 60,266
<TOTAL-COSTS> 127,316
<OTHER-EXPENSES> 329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,092
<INCOME-PRETAX> 36,140
<INCOME-TAX> 12,321
<INCOME-CONTINUING> 23,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,819
<EPS-PRIMARY> .92
<EPS-DILUTED> .90
</TABLE>
