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, 1997
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 was:
Common stock, $.10 par value 24,967,498 shares
<PAGE>
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- September 30, 1997 and March 31,1997
Consolidated Statements of Income -- Three Months
Ended September 30, 1997 and 1996
Consolidated Statements of Income -- Six Months
Ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows --
Six Months Ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements--
September 30, 1997
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
11. Statement Regarding Computation of Per Share Earnings
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 1997 and March 31, 1997
(Unaudited)
Sept 30, March 31,
(dollars in thousands) 1997 1997
ASSETS
Current assets:
Cash and marketable securities $ 33,555 $ 27,808
Accounts receivable, net 35,469 37,961
Inventories 40,021 38,205
Deferred income taxes 10,333 6,282
Other 3,235 5,502
Total current assets 122,613 115,758
Property, plant and equipment,
net of accumulated depreciation 33,944 31,328
Other assets:
Patents, licenses and, trademarks and
bond issue costs net of accumulated
amortization 4,049 4,616
Goodwill, net of accumulated
amortization 13,887 14,218
Other assets 2,600 725
20,536 19,559
Total assets $177,093 $166,645
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 1997 and March 31, 1997
(Unaudited)
September 30, March 31,
(dollars in thousands) 1997 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,566 4,443
Accrued compensation 5,991 8,560
Income taxes payable 2,033 90
Dividends payable 630 628
Sales returns 5,323 5,791
Other accrued liabilities 8,498 8,025
Short-term borrowings and current
portion of long-term debt 49 50
Total current liabilities 28,090 27,587
Long-term deferred taxes 1,189 701
Long-term debt - 8
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 50,000,000 shares
Issued and outstanding:
24,932,998 shares at Sept 30, 1997
24,806,748 shares at March 31, 1997 2,491 2,481
Capital in excess of par 34,733 37,565
Cumulative translation adjustment (1,110) (693)
Retained earnings 111,700 101,996
Shareholders' equity 147,814 138,349
Total liabilities and shareholders'
equity $177,093 $166,645
See Notes to Condensed Consolidated Financial Statements
<PAGE>
Mentor Corporation
Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996
(Unaudited)
(in thousands, except per share 1997 1996
data)
Net sales $ 48,818 $ 48,156
Costs and expenses:
Cost of sales 20,519 16,066
Selling, general and
administrative 19,163 18,458
Research and development 4,833 4,012
$ 44,515 38,536
Operating income 4,303 9,620
Interest expense (4) (249)
Interest income 380 261
Other income (expense) 106 (64)
Income before income taxes $ 4,785 9,568
Income taxes 1,638 3,282
Net income $ 3,147 $ 6,286
Earnings per share: $ .12 $ .24
See notes to consolidated financial statements
<PAGE>
Mentor Corporation
Consolidated Statements of Income
Six Months Ended September 30, 1997 and 1996
(Unaudited)
(in thousands, except per share 1997 1996
data)
Net sales $ 104,109 $ 98,544
Costs and expenses:
Cost of sales 38,794 32,719
Selling, general and
administrative 39,472 37,296
Research and development 9,942 8,064
88,208 78,079
Operating income 15,901 20,465
Interest expense (15) (461)
Interest income 704 471
Other income (expense) 36 (117)
Income before income taxes 16,626 20,358
Income taxes 5,676 6,983
Net income $ 10,950 $ 13,375
Earnings per share: $ .42 $ .51
See notes to consolidated financial statements
<PAGE>
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 1997 and 1996
(Unaudited)
(in thousands) 1997 1996
Cash flows from operating activities $ 15,306 $ 5,450
Cash flows from investing
activities:
Sale of equipment, intangibles
and other assets 27 2
Purchase of property, equipment,
and intangibles (6,580) (7,008)
Reduction of notes receivable 74 40
Investment in Marketing Partner (2,006) -
$ (8,485) $ (6,966)
Cash flows from financing
activities:
Exercise of stock options 1,155 967
Dividends paid (1,243) (1,244)
Reduction of long-term debt (9) (392)
Expiration of Puts - 104
Repurchase of common stock (977) (2,261)
(1,074) (2,826)
Increase (decrease) in cash, cash
equivalents, and marketable
securities 5,747 (4,342)
Cash at beginning of period 27,808 18,541
Cash at end of period $ 33,555 $ 14,199
See notes to consolidated financial statements
<PAGE>
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 1997
Note A
Inventories at September 30, 1997 and March 31, 1997 consisted of:
September 30 March 31
(In thousands)
Raw materials $ 13,028 $ 12,477
Work in process 4,694 5,379
Finished goods 22,299 20,349
$ 40,021 $ 38,205
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.
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, 1997 are not necessarily indicative of
the results that may be expected for the year ended March 31, 1998. 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, 1997.
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, 1997 June 30, 1996
Second Quarter September 26, 1997 September 29, 1996
Third Quarter January 2, 1998 December 29, 1996
<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. Potential risks and
uncertainties include, without limitation, those mentioned in this report
and, in particular, the factors described under "Factors That May Affect
Future Results of Operations" in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997.
RESULTS OF OPERATIONS
Sales
Sales for the three months ended September 30, 1997 increased 1% to $48.8
million, compared to $48.2 million the prior year. Growth was
particularly strong in sales of urology products, increasing 17% compared
to a year ago. Plastic surgery products declined 10% and
Opthalmic sales were about the same as last year. During the
quarter, the Company benefited by $965 thousand in initial shipments of
Contour GenesisTM tissue removal system.
Plastic surgery sales were affected by a small fire at the Company's
Texas facility, which occurred on August 27th. The fire caused the
shutdown of certain production departments for the month of September. A
further discussion of the fire is included in Cost of Sales.
Sales by Principal Product Line
For the Three Months For the Six Months Ended
Ended September 30,
September 30,
Percent Percent
1997 1996 Change 1997 1996 Change
Plastic surgery
products $22,969 $25,602 (10.3)% $ 54,769 $52,836 4%
General surgery 965 - N/A 965 - N/A
Urology products 16,856 14,451 16.6% 31,618 28,710 10%
Ophthalmology
products 8,028 8,103 (1)% 16,757 16,998 (1)%
$48,818 $48,156 1.4% $104,109 $98,544 6.0%
Cost of Sales
Cost of sales was 42.0% for three months ended September 30, 1997
compared to 33.4% for the same period last year. The increase in cost of
sales during the quarter was primarily related to the Company's
previously reported fire at the Texas manufacturing facility.
The fire broke out in a pilot study area and was quickly extinguished.
There were no injuries or structural damage, but several production areas
were affected and some work in process inventory lost due to sprinkler
and smoke damage. Many of the production departments were shut down for
the month of September, either for cleanup and repair or due to lack of
production from the fire affected departments.
The facility was repaired and commenced production in early October. The
high level of cost of sales in the quarter was primarily caused by the
write-off of lost inventory, unabsorbed overhead due to a lack of
production, combined with the lower sales.
The Company anticipates filing a business interruption insurance claim in
the second half of the year to recover these losses. However, there can
be no assurance that any proceeds will be forthcoming or that the
insurance will fully compensate for the losses incurred.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were 39.3% of sales in the
quarter compared to 38.3% in the previous year. The increase relates
primarily to the lower sales in the plastic surgery product line, rather
than a significant increase in underlying expenses.
Research and Development
Research and development expenses were 9.9% of sales for the second
quarter, compared to 8.3% 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, an ultrasonic general surgery device and an alternate
filler breast implant.
Interest and Other Income and Expense
Interest expense decreased $245 thousand in the quarter from the prior
year. In the prior year, interest expense included imputed interest on the
Litigation Settlement Obligation. This amount was $189 thousand for the
quarter ($379 thousand for fiscal 1997). This imputed interest ceased
following the final payment on the Obligation in September 1996.
Interest income increased from $261 thousand last year to $380 thousand
this year, resulting from higher cash balances.
Income Taxes
The effective rate of corporate income taxes was 34.2% for the quarter,
compared to 34.3% in the same period a year ago.
Net Income
Net earnings per primary share decreased to $.12 for the three months
ended September 30, 1997, compared to $.24 last year, due to the
relatively flat sales, increased selling, general and administrative
expenses, increased research and development expenses, increases in
cost of goods sold related to the previously announced fire in the
Texas manufacturing facility.
The Company expects to incur some additional unabsorbed overhead and loss
of sales in the third fiscal quarter as a result of the fire in Texas.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's working capital was $95 million
compared to $88 million at March 31, 1997. The Company's working capital
needs were provided from operations.
The Company generated $15 million of cash from operations during the six
months ended September 30, 1997, compared to $5 million the previous
year. Lower net income in the current period was offset by reduced
accounts receivables. In addition, last year's cash flow included the
final payment of the Litigation Settlement Obligation, for $5.3 million.
The Company anticipates investing approximately $12 million in facilities
and capital equipment in fiscal 1998. The majority of the expenditures
will be to increase capacity at the Company's manufacturing facilities in
Puerto Rico, Texas and Minneapolis.
During the first quarter of fiscal 1998, the Company entered into two new
product alliances. As part of the agreement with North American
Scientific, the Company took a $1 million equity position, and will be
investing an additional $2 million upon completion of certain milestones
by North American. Similarly, the Company has taken a $1 million equity
position in PerImmunne, its marketing partner for a new bladder cancer
test.
For the last several years, the Company has paid 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.
The Company's Board of Directors has authorized the repurchase of up to
1,000,000 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 1998, the Company repurchased 69,500 shares for
consideration of $1.5 million.
The Company's principal source of liquidity at September 30, 1997
consisted of $33.5 million in cash and marketable securities plus $15
million available under its line of credit.
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, 1997, 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
a. Annual Meeting of Shareholders, September 25, 1997
b. Approval of Amendments to 1991 Stock Option Plan.
Yes votes: 13,883,963 No votes: 7,399,499
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 Statement regarding computation of Per Share Earnings
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MENTOR CORPORATION
(Registrant)
DATE: November 12, 1997 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: November 12, 1997 BY: /s/GARY E.MISTLIN
Gary E. Mistlin
Chief Financial Officer
<PAGE>
EXHIBIT 11
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
PRIMARY:
Primary Earnings $ 3,147 $ 6,286 $ 10,950 $ 13,375
Average Shares Outstanding
24,883 24,876 24,833 24,862
Net effect of dilutive stock
options - based on the
treasury stock method using
average stock market price 1,585 1,569 1,466 1,524
Total Shares for Primary
Earnings 26,468 26,445 26,299 26,386
Primary Earnings Per Share $ 0.12 $ 0.24 $ 0.42 $ 0.51
FULLY DILUTED:
Primary Earnings $ 3,147 $ 6,286 $10,950 $13,375
Fully diluted earnings $ 3,147 $ 6,286 $10,950 $13,375
Average Shares Outstanding 24,883 24,876 24,833 24,861
Net effect of dilutive stock
options - based on the
treasury stock method using
the higher of ending and
average stock market prices 1,597 1,589 1,598 1,599
Total shares for
Fully Diluted 26,480 26,465 26,431 26,460
Fully Diluted Earnings
Per Share $ 0.12 $ 0.24 $ 0.41 $ 0.51
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<RECEIVABLES> 38,169
<ALLOWANCES> (2,700)
<INVENTORY> 40,021
<CURRENT-ASSETS> 122,613
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