SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended September 30. 1996 Commission File Number 0-7955
Mentor Corporation
(Exact name of registrant as specified in its charter)
Minnesota 41-0950791
(State of Incorporation) I.R.S. Employer Identification Number)
5425 Hollister Avenue, Santa Barbara, California 93111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (805) 681-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding for each of the Issuer's classes of common
stock as of October 31, 1996 was:
Common stock, $.10 par value 24,896,580 shares
<PAGE>
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- September 30, 1996 and March 31,1996 3-4
Consolidated Statements of Income -- Three Months
Ended September 30, 1996 and 1995 5
Consolidated Statements of Income -- Six Months
Ended September 30, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows --
Six Months Ended September 30, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements--
September 30, 1996 8-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-12
Part II. Other Information
Item 1. Legal Proceedings........................................13
Item 2. Changes in Securities....................................13
Item 3. Defaults upon Senior Securities..........................13
Item 4. Submission of Matters to a Vote of Security Holders .....13
Item 5. Other Information........................................13
Item 6. Exhibits and Reports on Form 8-K.........................13
List of Exhibits
11. Statement Regarding Computation of Per Share Earnings
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 1996 and March 31, 1996
(Unaudited)
September 30, March 31,
(dollars in thousands) 1996 1996
ASSETS
Current assets:
<S> <C> <C>
Cash and marketable securities $ 14,199 $ 18,541
Accounts receivable, net 38,819 34,855
Inventories 37,096 35,158
Deferred income taxes 10,148 10,148
Other 3,919 3,143
Total current assets 104,181 101,845
Property, plant and equipment,
net of accumulated depreciation 31,741 29,317
Other assets:
Deferred income taxes -- --
Patents, licenses, trademarks and bond issue costs
net of accumulated amortization 4,706 4,689
Goodwill, net of accumulated amortization 13,097 13,109
Other assets 560 658
18,363 18,456
Total assets $154,285 $149,618
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 1996 and March 31, 1996
(Unaudited)
September 30, March 31,
(dollars in thousands) 1996 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 5,061 $ 5,003
Accrued compensation 5,894 6,153
Income taxes payable 705 428
Interest payable --- 3
Dividends payable 629 628
Sales returns 6,580 6,705
Litigation settlement obligation 115 4,950
Other accrued liabilities 6,221 7,425
Short-term borrowings and current portion
of long-term debt 51 415
Total current liabilities 25,256 31,710
Long-term deferred taxes 1,400 1,355
Long-term debt 30 58
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 20,000,000 shares
Issued and outstanding:
24,896,580 shares at September 30, 1996
24,860,642 shares at March 31, 1996 2,490 2,486
Capital in excess of par 36,647 37,840
Cumulative translation adjustment (282) (445)
Retained earnings 88,744 76,614
Shareholders' equity 127,599 116,495
Total liabilities and shareholders' equity $154,285 $149,618
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Consolidated Statements of Income
Three Months Ended September 30, 1996 and 1995
(Unaudited)
(in thousands, except per share data) 1996 1995
<S> <C> <C>
Net Sales $ 48,156 $ 42,328
Costs and expenses:
Cost of sales 16,066 14,707
Selling, general and administrative 18,458 15,782
Research and development 4,012 3,078
38,536 33,567
Operating income 9,620 8,761
Interest expense (249) (213)
Interest income 261 87
Other expense (64) (114)
Income before income taxes 9,568 8,521
Income taxes 3,282 2,965
Net income 6,286 5,556
Earnings per share:
Primary .24 .21
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Consolidated Statements of Income
Six Months Ended September 30, 1996 and 1995
(Unaudited)
(in thousands, except per share data) 1996 1995
<S> <C> <C>
Net sales $98,544 $86,057
Costs and expenses:
Cost of sales 32,719 29,453
Selling, general and administrative 37,296 32,493
Research and development 8,064 6,497
78,079 68,443
Operating income 20,465 17,614
Interest expense (461) (700)
Interest income 471 187
Other expense (117) (166)
Income before income taxes 20,358 16,935
Income taxes 6,983 5,895
Net income $13,375 $11,040
Earnings per share:
Primary $ .51 $ .44
Supplemental/Fully diluted .51 .42
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 1996 and 1995
(Unaudited)
(in thousands) 1996 1995
<S> <C> <C>
Cash flows from operating activities % 5,450 $7,651
Cash flows from investing activities:
Sale of equipment, intangibles
and other assets 2 150
Purchase of property, equipment,
and intangibles (7,008) (4,555)
Reduction of notes receivable 40 77
(6,966) (4,328)
Cash flows from financing activities:
Exercise of stock options 967 1,271
Dividends paid (1,244) (1,161)
Reduction of long-term debt (392) (483)
Expiration of Puts 104 --
Net repayment under line of credit agreement -- --
Repurchase of common stock (2,261) (2,398)
(2,826) (2,771)
Increase (decrease) in cash, cash equivalents,
and marketable securities (4,342) 552
Cash at beginning of period 18,541 11,379
Cash at end of period $14,199 $11,931
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 1996
Note A
Inventories at September 30, 1996 and March 31, 1996, consisted of:
<CAPTION>
September 30 March 31
(In thousands)
<S> <C> <C>
Raw materials $ 8,952 $ 10,191
Work in process 10,026 9,040
Finished goods 18,118 15,927
$37,096 35,158
</TABLE>
Note B
Primary earnings per share is computed based on the weighted average number of
Common Stock and Common Stock equivalents outstanding during the period. Common
Stock equivalents represent the dilutive effect of the assumed exercise of
certain outstanding options. The calculation of supplemental and fully diluted
earnings per share assumes the Convertible Subordinated Debentures are converted
into Common Stock at the beginning of the period and interest expense related to
the debentures, net of tax, is added to net income. These Debentures were
converted into Common Stock at June 30, 1995.
Effective September 27, 1995, the Company issued 12,356,856 shares of Common
Stock in connection with a two-for-one stock split. All references in the
financial statements with regard to number of shares of Common Stock and related
dividend and per share amounts have been restated to reflect the stock split.
Note C
The amounts set forth in the accompanying statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting only of normal
accruals) necessary for a fair statement of the results of operations for the
periods presented. Operating results for the six month period ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ended March 31, 1997. It is suggested that the condensed consolidated
financial statements included herein be read in conjunction with the Company's
annual report on form 10-K for the year ended March 31, 1996.
<PAGE>
Note D
The Company's three quarterly interim reporting periods are each approximately
thirteen week periods ending on the Friday nearest the end of the third calendar
month. The fiscal year end remains March 31. To facilitate ease of presentation,
each interim period is shown as if it ended on the last day of the appropriate
calendar month. The actual dates on which each quarter ended are shown below:
Fiscal 1997 Fiscal 1996
First Quarter June 30, 1996 July 1, 1995
Second Quarter September 29, 1996 September 30, 1995
Third Quarter December 29, 1996 December 30, 1995
<PAGE>
Mentor Corporation
Management's Discussion and Analysis of Results of
Operations and Financial Condition
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.
RESULTS OF OPERATIONS
Sales
Sales for the three months ended September 30, 1996 increased 14% to $48.2
million, compared to $42.3 million the prior year. Growth was particularly
strong in sales of plastic surgery and surgical urology products, continuing
trends of the past several quarters.
<TABLE>
<CAPTION>
Sales by Principal Product Line
For the Three Months Ended For the Six Months Ended
September 30, September 30,
Percent Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C>
Plastic surgery products $25,484 $20,651 23.4% $52,837 $43,764 20.7%
Urology products 14,526 13,063 11.2% 28,711 24,662 16.4%
Ophthalmology products 8,146 8,614 (5.4)% 16,998 17,631 (3.6)%
$48,156 $42,328 13.8% $98,546 $86,057 14.5%
</TABLE>
Cost of Sales
Cost of sales was 33.4% for the three months ended September 30, 1996, compared
to 34.7% for the same period last year. The improvement was aided by a greater
proportion of higher margin product in the sales mix.
<PAGE>
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were 38.3% of sales in the quarter
compared to 37.3% in the previous year. The Company incurred additional
administrative and legal expenses in the quarter to settle certain outstanding
litigation. See Item 1 - Legal Proceedings.
Research and Development
Research and development expenses were 8.3% of sales for the quarter, compared
to 7.3% for the prior year. The Company continues to spend substantial funds on
its premarket approval applications ("PMAAs") for its saline breast implants,
silicone gel filled breast implants, and penile implants. The Company is
committed to a variety of clinical and laboratory studies in connection with
these products. Other major studies underway include Urethrin, a product for
treating urinary incontinence and the Memory Lens, a foldable IOL. The premarket
approval application for the Memory Lens was submitted for filing with the FDA
during the quarter.
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.
Interest and Other Income and Expense
Interest expense increased $36 thousand in the quarter over the prior year.
Included in interest expense last year was $175 thousand for the quarter ($700
thousand for the fiscal year) in imputed interest on the Litigation Settlement
Obligation. In fiscal 1997, this amount was $189 thousand for the quarter ($379
thousand for fiscal 1997). This imputed interest will now cease as the final
payment on the Obligation was made in September 1996.
Interest income increased from $87 thousand last year to $261 thousand this
year, resulting from higher cash balances.
Income Taxes
The effective rate of corporate income taxes was 34.3% for the quarter, compared
to 34.8% in the same period a year ago.
Net Income
Net earnings per primary share increased to $.24 for the three months ended
September 30, 1996, compared to $.21 last year, due to the increased sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's working capital was $79 million compared to
$70 million at March 31, 1996. The Company's working capital needs were provided
from operations.
The Company generated $5 million of cash from operations during the six months
ended September 30, 1996, compared to $8 million the previous year. Increased
Net Income was offset by reductions in current liabilities due to the final
payment on litigation settlement obligation. See discussion below.
The Company anticipates investing approximately $10 million in facilities and
capital equipment in fiscal 1997. The majority of the expenditures will be to
increase capacity at the Company's manufacturing facilities in Texas and
Minneapolis.
During fiscal 1994, the Company finalized its agreement with the Federal
Multi-District Plaintiffs Steering committee, which settled all outstanding
breast implant litigation and claims against the Company. The agreement
established a settlement fund of $25.8 million, to be funded by the Company and
its insurers. Under the terms of the agreement, the Company made one more
payment of $5.3 million in September 1996. This completed the Company's monetary
obligations under the Agreement.
At the Annual Meeting of Shareholders, held September, 1994, the Company
announced the resumption of a quarterly cash dividend of $.025 per share. At the
indicated rate of $.10 per year, the aggregate annual dividend would equal
approximately $2.5 million.
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 the first half of fiscal 1997, the Company repurchased
95,000 shares for consideration of $2.3 million.
The Company's principal source of liquidity at September 30, 1996 consisted of
$14 million in cash and marketable securities plus $15 million available under
its line of credit.
<PAGE>
PART II
Item 1. Legal Proceedings
In regards to the litigation reported in Item 3 of the annual report on
Form 10-K for the fiscal year ended March 31, 1996, the following has occurred:
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.
Dr. Gottlieb had alleged 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. During the second quarter of fiscal 1997, the case was
settled under terms which did not materially affect the financial statements.
Item 2. Changes in Securities
No changes have been made in any registered securities.
Item 3. Defaults Upon Senior Securities
No event constituting a material default has occurred respecting any
senior security of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
a. Annual Meeting of Shareholders, September 12, 1996
b. Approval of Amendments to 1991 Stock Option Plan.
Yes votes: 9,430,617 No votes: 8,351,554
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 Statement regarding computation of Per Share Earnings
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
PRIMARY:
<S> <C> <C> <C> <C>
Primary Earnings $ 6,286 $ 5,556 $13,375 $11,040
Average Shares Outstanding 24,876 24,813 24,862 23,877
Net effect of dilutive stock options
based on the treasury stock method
using average stock market price 1,569 1,705 1,524 1,492
Total Shares for Primary Earnings 26,445 26,518 26,386 25,369
Primary Earnings Per Share $ 0.24 $ 0.21 $ 0.51 $ 0.44
SUPPLEMENTAL AND FULLY DILUTED:
Primary Earnings $ 6,286 $ 5,556 $ 13,375 $ 11,040
Interest and Related Expenses on
6 3/4% debentures eliminated -- -- -- 165
Fully diluted earnings $ 6,286 $ 5,556 $ 13,375 $ 11,205
Average Shares Outstanding 24,876 24,812 24,861 24,662
Net effect of dilutive stock options based on the treasury stock method using
the higher of ending and average
stock market prices 1,589 1,939 1,599 1,916
Additional shares issued in assumed
conversion of 6 3/4% debentures at
16.50 per share -- -- -- 52
Total shares for supplemental/fully
diluted 26,465 26,751 26,460 26,630
Fully Diluted/Supplemental Earnings
Per Share $ 0.24 $ 0.21 $ 0.51 $ 0.42
</TABLE>
Note: In June 1996 the Company's 6 3/4% Sub-ordinated Convertible Debenture was
converted into shares of Common stock. The Supplemental calculation is presented
in lieu of the fully diluted calculation and assumes the conversion took place
at the beginning of the period. This calculation also adds interest expense for
the period, net of tax, back to net income.
Note: The shares outstanding for 1995 have been adjusted to reflect a
two-for-one split of the Company's Common Stock in the form of a 100 percent
stock dividend effective September 27, 1995.
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MENTOR CORPORATION
(Registrant)
DATE: November 1, 1996 BY: /s/ANTHONY R. GETTE
--------------------
Anthony R. Gette
President and
Chief Operating Officer
DATE: November 1, 1996 BY: /s/GARY E. MISTLIN
-------------------
Gary E. Mistlin
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 14,199
<SECURITIES> 0
<RECEIVABLES> 41,372
<ALLOWANCES> 2,553
<INVENTORY> 37,096
<CURRENT-ASSETS> 104,175
<PP&E> 31,741
<DEPRECIATION> 4,013
<TOTAL-ASSETS> 154,279
<CURRENT-LIABILITIES> 25,250
<BONDS> 0
0
0
<COMMON> 2,490
<OTHER-SE> 125,109
<TOTAL-LIABILITY-AND-EQUITY> 154,279
<SALES> 48,156
<TOTAL-REVENUES> 48,156
<CGS> 16,066
<TOTAL-COSTS> 38,536
<OTHER-EXPENSES> 64
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 249
<INCOME-PRETAX> 9,568
<INCOME-TAX> 3,282
<INCOME-CONTINUING> 13,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,286
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
