SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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 August 12, 1996 was:
Common stock, $.10 par value 24,861,592 shares
<PAGE>
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- June 30, 1996 and March 31,1996............ 3-4
Consolidated Statements of Income -- Three Months
Ended June 30, 1996 and 1995........................... 5
Condensed Consolidated Statements of Cash Flows --
Three Months Ended June 30, 1996 and 1995.............. 6
Notes to Condensed Consolidated Financial Statements--
June 30, 1996.......................................... 7-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition............ 9-11
Part II. Other Information
Item 1. Legal Proceedings................................... 12
Item 2. Changes in Securities............................... 12
Item 3. Defaults upon Senior Securities..................... 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information................................... 12
Item 6. Exhibits and Reports on Form 8-K.................... 12
List of Exhibits
11. Statement Regarding Computation of Per Share Earnings
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<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
June 30, 1996 and March 31, 1996
(Unaudited)
June 30, March 31,
(dollars in thousands) 1996 1996
ASSETS
Current assets:
<S> <C> <C>
Cash and marketable securities $20,352 $18,541
Accounts receivable, net 36,387 34,855
Inventories 36,051 35,158
Deferred income taxes 10,148 10,148
Other 2,455 3,143
Total current assets 105,393 101,845
Property, plant and equipment,
net of accumulated depreciation 31,441 29,317
Other assets:
Deferred income taxes -- --
Patents, licenses, trademarks and bond issue costs
net of accumulated amortization 4,404 4,689
Goodwill, net of accumulated amortization
13,205 13,109
Other assets 631 658
18,240 18,456
Total assets $155,074 $149,618
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
June 30, 1996 and March 31, 1996
(Unaudited)
June 30, March 31,
(dollars in thousands) 1996 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $5,257 $5,003
Accrued compensation 4,509 6,153
Income taxes payable 3,707 428
Interest payable -- 3
Dividends payable 629 628
Sales returns 6,574 6,705
Litigation settlement obligation 5,139 4,950
Other accrued liabilities 6,544 7,425
Short-term borrowings and current portion
of long-term debt 235 415
Total current liabilities 32,594 31,710
Long-term deferred taxes 1,370 1,355
Long-term debt 43 58
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 20,000,000 shares Issued and outstanding:
24,838,892 shares at June 30, 1996
24,860,642 shares at March 31, 1996 2,484 2,486
Capital in excess of par 36,557 37,840
Cumulative translation adjustment (1,056) (445)
Retained earnings 83,082 76,614
Shareholders' equity 121,067 116,495
Total liabilities and shareholders' equity $155,074 $149,618
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<TABLE>
<CAPTION>
Mentor Corporation
Consolidated Statements of Income
Three Months Ended June 30, 1996 and 1995
(Unaudited)
(in thousands, except per share data) 1996 1995
<S> <C> <C>
Net sales $50,388 $43,729
Costs and expenses:
Cost of sales 16,653 14,746
Selling, general and administrative 18,838 16,711
Research and development 4,052 3,420
39,543 34,877
Operating income 10,845 8,852
Interest expense (212) (465)
Interest income 210 72
Other expense (53) (45)
Income before income taxes 10,790 8,414
Income taxes 3,701 2,930
Net income $7,089 $5,484
Earnings per share:
Primary $.27 $.23
Supplemental / Fully diluted $.27 $.22
</TABLE>
See notes to consolidated financial statements
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<TABLE>
<CAPTION>
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 1996 and 1995
(Unaudited)
(in thousands) 1996 1995
<S> <C> <C>
Cash flows from operating activities $7,839 $8,556
Cash flows from investing activities:
Sale of equipment, intangibles
and other assets 2 147
Purchase of property, equipment,
and intangibles (3,911) (2,093)
Reduction of notes receivable (17) 24
(3,926) (1,922)
Cash flows from financing activities:
Exercise of stock options 401 282
Dividends paid (622) (542)
Reduction of long-term debt (195) (177)
Net repayment under line
of credit agreement -- --
Repurchase of common stock (1,686) --
(2,102) (437)
Increase (decrease) in cash, cash equivalents,
and marketable securities 1,811 6,197
Cash at beginning of period 18,541 11,379
Cash at end of period $20,352 $17,576
</TABLE>
See notes to consolidated financial statements
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<TABLE>
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
June 30, 1996
Note A
Inventories at June 30, 1996 and March 31, 1996, consisted of:
<CAPTION>
June 30 March 31
(In thousands)
<S> <C> <C>
Raw materials $8,935 $10,191
Work in process 10,155 9,040
Finished goods 16,961 15,927
$36,051 $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.
Effective September 27, 1995, the Company issued 12,356,856 shares of Common
Stock in connection with a two-for-one stock split. All references in the
financial statements with regard to number of shares of Common Stock and related
dividend and per share amounts have been restated to reflect the stock split.
Note C
The amounts set forth in the accompanying statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting only of normal
accruals) necessary for a fair statement of the results of operations for the
periods presented. Operating results for the three month period ended June 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 June 30, 1996 increased 15% to $50.4 million,
compared to $43.7 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
June 30,
Percent
1996 1995 Change
<S> <C> <C> <C>
Plastic surgery products $27,187 $23,112 17.6%
Urology products 14,261 11,598 23.0%
Ophthalmology products 8,940 9,019 (1.0)%
$50,388 $43,729 15.2%
</TABLE>
Cost of Sales
Cost of sales was 33.0% for the three months ended June 30, 1996, compared to
33.7% 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 decreased to 37.3% of sales in the
quarter compared to 38.2% in the previous year. The Company is seeing
productivity improvements in several of its administrative areas.
Research and Development
Research and development expenses were 8.0% of sales for the first quarter,
compared to 7.8% 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 intraocular.
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 decreased $253 thousand in the quarter over the prior year.
During the first quarter of fiscal 1996, the Company's Convertible Subordinated
Debentures were converted into Common Stock. The reduction in interest expense
reflects the result of this conversion.
Interest income increased from $72 thousand last year to $210 thousand this
year, resulting from higher cash balances.
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). The imputed interest will cease following the final
payment on the Obligation in September 1996.
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 $.27 for the three months ended June
30, 1996, compared to $.23 last year, due to the increased sales and lower
operating expenses ratios.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's working capital was $73 million compared to $70
million at March 31, 1996. The Company's working capital needs were provided
from operations.
The Company generated $7.8 million of cash from operations during the three
months ended June 30, 1996, compared to $8.6 million the previous year.
Increased net income was offset by reductions in current liabilities.
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 is required 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 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 quarter of fiscal 1997, the Company repurchased
75,000 shares for consideration of $1.7 million.
The Company's principal source of liquidity at June 30, 1996 consisted of $20
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, there have been no material
changes.
Item 2. Changes in Securities
No changes have been made in any registered securities.
Item 3. Defaults Upon Senior Securities
No event constituting a material default has occurred respecting any
senior security of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 Statement regarding computation of Per Share Earnings
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30,
1996 1995
PRIMARY:
<S> <C> <C>
Primary Earnings $7,089 $5,484
Average Shares Outstanding 24,847 22,960
Net effect of dilutive stock options - based on the treasury
stock method using average stock market price 1,454 1,150
Total Shares for Primary Earnings 26,301 24,110
Primary Earnings Per Share $0.27 $0.23
SUPPLEMENTAL AND FULLY DILUTED:
Primary Earnings $7,089 $5,484
Interest and Related Expenses on 6 3/4% debentures eliminated -- 165
Fuly diluted earnings $7,089 $5,649
Average Shares Outstanding 24,847 24,654
Net effect of dilutive stock options - based on the treasury stock method using
the higher of ending and average
stock market prices 1,529 1,404
Additional shares issued in assumed conversion of 6 3/4% debentures at
16.50 per share -- 52
Total shares for supplemental/fully diluted 26,376 26,110
Fully Diluted Supplemental Earnings Per Share $0.27 $0.22
</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: August 13, 1996 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: August 13, 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> JUN-30-1996
<CASH> 20,352
<SECURITIES> 0
<RECEIVABLES> 38,797
<ALLOWANCES> 2,410
<INVENTORY> 36,051
<CURRENT-ASSETS> 105,393
<PP&E> 31,441
<DEPRECIATION> 1,873
<TOTAL-ASSETS> 155,074
<CURRENT-LIABILITIES> 32,594
<BONDS> 0
0
0
<COMMON> 2,484
<OTHER-SE> 118,583
<TOTAL-LIABILITY-AND-EQUITY> 155,074
<SALES> 50,388
<TOTAL-REVENUES> 50,388
<CGS> 16,653
<TOTAL-COSTS> 39,543
<OTHER-EXPENSES> 53
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212
<INCOME-PRETAX> 10,790
<INCOME-TAX> 3,701
<INCOME-CONTINUING> 7,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,089
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
