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 December 31. 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.
X Yes
The number of shares outstanding for each of the Issuer's classes of
common stock as of February 7, 1997 was:
Common stock, $.10 par value 24,890,598 shares
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Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- December 31, 1996 and March 31,1996 3-4
Consolidated Statements of Income -- Three Months
Ended December 31, 1996 and 1995 5
Consolidated Statements of Income -- Nine Months
Ended December 31, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements--
December 31, 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
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Mentor Corporation
Condensed Consolidated Statements of Financial
Position December 31, 1996 and March 31, 1996
(Unaudited)
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December 31, March 31,
(dollars in thousands) 1996 1996
ASSETS
Current assets:
Cash and marketable securities $ 20,045 $18,541
Accounts receivable, net 38,021 34,855
Inventories 37,851 35,158
Deferred income taxes 10,333 10,148
Other 4,980 3,143
Total current assets 111,230 101,845
Property, plant and equipment,
net of accumulated depreciation 31,709 29,317
Other assets:
Deferred income taxes _ _
Patents, licenses, trademarks and bond
issue costs net of accumulated
amortization 4,557 4,689
Goodwill, net of accumulated
amortization 12,990 13,109
Other assets 576 658
18,123 18,456
Total assets $161,062 $149,618
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See Notes to Condensed Consolidated Financial Statements
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Mentor Corporation
Condensed Consolidated Statements of Financial Position
December 31, 1996 and March 31, 1996
(Unaudited)
<CAPTION>
December 31, March 31,
(dollars in thousands) 1996 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
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Accounts payable $ 4,664 $5,003
Accrued compensation 6,590 6,153
Income taxes payable -- 428
Interest payable -- 3
Dividends payable 630 628
Sales returns 6,574 6,705
Litigation settlement obligation _ 4,950
Other accrued liabilities 6,907 7,425
Short-term borrowings and current
portion of long-term debt 50 415
Total current liabilities 25,415 31,710
Long-term deferred taxes 1,402 1,355
Long-term debt 17 58
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 20,000,000 shares
Issued and outstanding:
24,887,300 shares at December 31, 1996
24,860,642 shares at March 31, 1996 2,489 2,486
Capital in excess of par 36,839 37,840
Cumulative translation adjustment (323) (445)
Retained earnings 95,223 76,614
Shareholders' equity 134,228 116,495
Total liabilities and shareholders' $ 161,062 $149,618
equity
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See Notes to Condensed Consolidated Financial Statements
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Mentor Corporation
Consolidated Statements of Income
Three Months Ended December 31, 1996 and 1995
(Unaudited)
<CAPTION>
(in thousands, except per share data) 1996 1995
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Net sales $ 50,498 $ 45,004
Costs and expenses:
Cost of sales 16,612 15,237
Selling, general and 18,827 16,697
administrative
Research and development 4,339 3,435
39,778 35,369
Operating income 10,720 9,635
Interest expense (55) (219)
Interest income 158 132
Other expense (63) (126)
Income before income taxes 10,760 9,422
Income taxes 3,658 3,279
Net income $ 7,102 $ 6,143
Earnings per share $ .27 $ .23
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See notes to consolidated financial statements
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Mentor Corporation
Consolidated Statements of Income
Nine Months Ended December 31, 1996 and 1995
(Unaudited)
<CAPTION>
(in thousands, except per share 1996 1995
data)
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Net sales $149,042 $131,061
Costs and expenses:
Cost of sales 49,331 44,690
Selling, general and
administrative 56,123 49,190
Research and development 12,403 9,933
117,857 103,813
Operating income 31,185 27,248
Interest expense (516) (919)
Interest income 629 319
Other expense (180) (291)
Income before income taxes 31,118 26,357
Income taxes
10,641 9,174
Net income $20,477 $17,183
Earnings per share $.78 $.66
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See notes to consolidated financial statements
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<TABLE> Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1996 and 1995
(Unaudited)
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(in thousands 1996 1995
Cash flows from operating
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activities $13,268 $ 7,651
Cash flows from investing
activities:
Sale of equipment, intangibles
and other assets 3 150
Purchase of property, equipment,
and intangibles (8,553) (4,555)
Reduction of notes receivable 56 77
(8,494) (4,328)
Cash flows from financing
activities:
Exercise of stock options 3,612 1,271
Dividends paid (1,866) (1,161)
Reduction of long-term debt (406) (483)
Expiration of Puts 105 _
Repurchase of common stock (4,715) (2,398)
(3,270) (2,771)
Increase (decrease) in cash, cash
equivalents,and marketable
securities 1,504 552
Cash at beginning of period 18,541 11,379
Cash at end of period $20,045 $ 11,931
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See notes to consolidated financial statements
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Mentor Corporation
Notes to Condensed Consolidated Financial Statements
December 31, 1996
Note A
Inventories at December 31, 1996 and March 31, 1996, consisted of:
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December 31 March 31
(In thousands)
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Raw materials $ 8,656 $ 10,191
Work in process 8,243 9,040
Finished goods 20,952 15,927
$ 37,851 $ 35,158
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 nine
month period ended December 31, 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.
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
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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 December 31, 1996 increased 12% to
$50.5 million, compared to $45 million the prior year. Growth was
particularly strong in sales of plastic surgery products, continuing
trends of the past several quarters.
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Sales by Principal Product Line
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
Percent Percent
1996 1995 Change 1996 1995 Change
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Plastic surgery products $25,319 $20,816 21.6% $ 78,108 $ 64,580 20.9%
Urology products 15,508 14,672 5.7% 44,220 39,334 12.4%
Ophthalmology products 9,671 9,516 1.6% 26,714 27,147 (1.6)%
$50,498 $45,004 12.2% $149,042 $131,061 13.7%
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Cost of Sales
Cost of sales was 32.9% for the three months ended December 31, 1996,
compared to 33.9% for the same period last year. The improvement was
aided by a greater proportion of higher margin product in the sales
mix.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were 37.3% of sales in
the quarter compared to 37.1% in the previous year.
Research and Development
Research and development expenses were 8.6% of sales for the quarter,
compared to 7.6% 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 decreased $164 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 $0
thousand for the quarter ($379 thousand for fiscal 1997). The imputed
interest ceased upon the final payment on the Obligation, which was
made in September 1996.
Interest income increased from $132 thousand last year to $158 thousand
this year, resulting from higher cash balances.
Income Taxes
The effective rate of corporate income taxes was 34.0% 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 December 31, 1996, compared to $.23 last year, due to the
increased sales.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's working capital was $84 million
compared to $70 million at March 31, 1996. The Company's working
capital needs were provided from operations.
The Company generated $13.3 million of cash from operations during the
nine months ended December 31, 1996, compared to $11.7 million the
previous year. Increased Net Income was offset by reductions in
current liabilities, primarily related to payment of income taxes.
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
nine months of fiscal 1997, the Company repurchased 195,000 shares for
consideration of $4.7 million.
The Company's principal source of liquidity at December 31, 1996
consisted of $20 million in cash and marketable securities plus $15
million available under its line of credit.
PART II
Item 1. Legal Proceedings
In the ordinary course of its business, the Company experiences
various types of claims which sometimes result in litigation or other
legal proceedings. The Company does not anticipate that any of these
proceedings will have any material adverse effect on the Company.
Item 2. Changes in Securities
No changes have been made in any registered securities.
Item 3. Defaults Upon Senior Securities
No event constituting a material default has occurred respecting
any senior security of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 Statement regarding computation of Per Share
Earnings 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: February 10, 1997 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: February 10, 1997 BY: /s/GARY E.MISTLIN
Gary E. Mistlin
Chief Financial Officer
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EXHIBIT 11
MENTOR CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
PRIMARY:
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Primary Earnings $ 7,102 $ 6,143 $ 20,477 $17,183
Average Shares Outstanding 24,855 24,746 24,860 24,172
Net effect of dilutive stock
options - based on the
treasury stock method using
average stock market price 1,459 1,981 1,501 1,682
Total Shares for Primary
Earnings 26,314 26,727 26,361 25,854
Primary Earnings Per Share $ 0.27 $ 0.23 $ .78 $ .66
SUPPLEMENTAL AND FULLY DILUTED:
Primary Earnings $ 7,102 $ 6,143 $20,477 $17,183
Interest and Related Expenses
on 6 3/4% debentures eliminated - - - 160
Fully diluted earnings $ 7,102 $ 6,143 $20,477 $ 17,343
Average Shares Outstanding 24,855 24,746 24,860 24,172
Net effect of dilutive stock
options - based on the
treasury stock method using
the higher of ending and
average stock market prices 1,568 1,981 1,611 1,682
Additional shares issued in
assumed conversion of 6 3/4%
debentures at 16.50 per share - - - 250
Total shares for supplemental/
fully diluted 26,423 26,727 26,471 26,104
Fully Diluted/Supplemental $ .27 $ .23 $ .77 $ .66
Earnings Per Share
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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 ofthe 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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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