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, 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 No
The number of shares outstanding for each of the Issuer's classes
of common stock as of February 13, 1998 was:
Common stock, $.10 par value 24,872,273 shares
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- December 31, 1997 and March 31,1997
Consolidated Statements of Income -- Three Months
Ended December 31, 1997 and 1996
Consolidated Statements of Income -- Nine Months
Ended December 31,1997 and 1996
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements--
December 31, 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
Mentor Corporation
Condensed Consolidated Statements of Financial Position
December 31, 1997 and March 31, 1997
(Unaudited)
December 31, March 31,
(dollars in thousands) 1997 1997
ASSETS
Current assets:
Cash and marketable securities $ 28,404 $ 27,808
Accounts receivable, net 36,106 37,961
Inventories 44,761 38,205
Deferred income taxes 10,211 6,282
Other 4,034 5,502
Total current assets 123,516 115,758
Property, plant and equipment,
net of accumulated depreciation 36,017 31,328
Other assets:
Patents, licenses and trademarks
net of accumulated amortization 3,819 4,616
Goodwill, net of accumulated
amortization 13,776 14,218
Other assets 10,047 725
27,642 19,559
Total assets $187,175 $166,645
See Notes to Condensed Consolidated Financial Statements
Mentor Corporation
Condensed Consolidated Statements of Financial Position
December 31, 1997 and March 31, 1997
(Unaudited)
December 31, March 31,
(dollars in thousands) 1997 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,185 $ 4,443
Accrued compensation 4,553 8,560
Income taxes payable 3,433 90
Dividends payable 631 628
Sales returns 5,330 5,791
Other accrued liabilities 7,375 8,025
Short-term borrowings and current
portion of long-term debt 49 50
Total current liabilities 27,556 27,587
Long-term deferred taxes 1,744 701
Long-term debt _ 8
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 50,000,000 shares
Issued and outstanding:
24,932,998 shares at
December 31,1997
24,806,748 shares at 2,497 2,481
March 31, 1997
Capital in excess of par 37,023 37,565
Other equity 1,442 (693)
Retained earnings 116,913 101,996
157,875 138,349
Total liabilities and shareholders'
equity $ 187,175 $ 166,645
See Notes to Condensed Consolidated Financial Statements
Mentor Corporation
Consolidated Statements of Income
Three Months Ended December 31, 1997 and 1996
(Unaudited)
(in thousands, except per share 1997 1996
data)
Net sales $ 54,076 $ 50,498
Costs and expenses:
Cost of sales 18,985 16,612
Selling, general and
administrative 22,006 18,827
Research and development 4,718 4,339
45,709 39,778
Operating income 8,367 10,720
Interest expense (6) (55)
Interest income 365 158
Other income (expense) 160 (63)
Income before income taxes 8,886 10,760
Income taxes 3,050 3,658
Net income $ 5,836 $ 7,102
Basic earnings per share $ .23 $ .29
Diluted earnings per share $ .22 $ .27
See notes to consolidated financial statements
Mentor Corporation
Consolidated Statements of Income
Nine Months Ended December 31, 1997 and 1996
(Unaudited)
(in thousands, except per share 1997 1996
data)
Net sales $ 158,185 $ 149,042
Costs and expenses:
Cost of sales 57,779 49,331
Selling, general and
administrative 61,477 56,123
Research and development 14,661 12,403
133,917 117,857
Operating income 24,268 31,185
Interest expense (21) (516)
Interest income 1,069 629
Other income (expense) 196 (180)
Income before income taxes 25,512 31,118
Income taxes 8,726 10,641
Net income $ 16,786 $ 20,477
Basic earning per share: $ .67 $ .82
Diluted earning per share: $ .64 $ .77
See notes to consolidated financial statements
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1997 and 1996
(Unaudited)
(in thousands) 1997 1996
Cash flows from operating activities $ 18,972 $ 13,268
Cash flows from investing
activities:
Sale of equipment, intangibles
and other assets 149 3
Purchase of property, equipment,
and intangibles (10,487) (8,553)
Reduction of notes receivable 113 56
Investment in Marketing Partner (7,006) _
$ (17,231) $ (8,494)
Cash flows from financing
activities:
Exercise of stock options 2,101 3,612
Dividends paid (1,864) (1,866)
Reduction of long-term debt (9) (406)
Expiration of puts 146 105
Repurchase of common stock (1,519) (4,715)
1,145 (3,270)
Increase (decrease) in cash, cash
equivalents, and marketable
securities 596 1,504
Cash at beginning of period 27,808 18,541
Cash at end of period $ 28,404 $ 20,045
See notes to consolidated financial statements
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
December 31, 1997
Note A
Inventories at December 31, 1997 and March 31, 1997 consisted of:
December 31 March 31
(In thousands)
Raw materials $ 13,420 $ 12,477
Work in process 7,054 5,379
Finished goods 28,136 20,349
$ 44,761 $ 38,205
Note B
Other assets at December 31, 1997 include the Company's equity
investments in its marketing partners, PerImmune Holdings, Inc. and North
American Scientific, Inc. (NASI). The PerImmune investment is valued at
cost of $7 million. In accordance with Financial Accounting Standards
Board (FASB) statement 115 "Accounting of Certain Equity Investments in
Debt and Equity Securities" the North American Scientific investment is
carried at its fair market value of approximately $3.5 million.
Unrealized gains, net of the related tax effect, are accounted for as a
component of Other equity.
Note C
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". Statement
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all
periods have been restated to conform to Statement 128 requirements.
Note D
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
months period ended December 31, 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 E
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 1998 Fiscal 1997
First Quarter June 30, 1997 June 30, 1996
Second Quarter September 26, 1997 September 29, 1996
Third Quarter January 2, 1998 December 29, 1996
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 December 31, 1997 increased 7% to $54.0
million, compared to $50.5 million the prior year. Growth was
particularly strong in sales of urology products, increasing 13% compared
to a year ago. Both disposable products for the management of urinary
incontinence and penile implants aided in the increase. Plastic surgery
products were flat compared to a year ago, while Ophthalmic products
declined 11%. Ophthalmology sales should benefit in the future from
sales of the MemoryLens, which received FDA approval on December 23,
1997. In addition, during the quarter the Company benefited by $2.8
million in shipments of the 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 in September and October. A
further discussion of the fire is included in Cost of Sales.
Sales by Principal Product Line
For the Three Months For the Nine Months
Ended Ended
December 31, December 31,
Percent Percent
1997 1996 Change 1997 1996 Change
Plastic surgery $25,135 $25,319 (1)% $ 79,903 $ 78,108 2%
General surgery 2,752 _ N/A 3,717 _ N/A
Urology 17,572 15,508 13% 49,190 44,220 11%
Ophthalmology 8,617 9,671 (11)% 25,375 26,714 (5)%
$54,076 $50,498 7% $158,185 $149,042 6%
Cost of Sales
Cost of sales was 35.1% for three months ended December 31, 1997 compared
to 32.9% for the same period last year.
The increase was related to costs associated with restoring full
manufacturing capacity at the Company's Texas manufacturing facility
following the previously reported fire, and the cost of other process
improvements. The facility has been repaired and commenced production
during October. The process improvement measures are ongoing.
The Company anticipates filing a business interruption insurance claim
before the end of the fiscal 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 40.7% of sales in the
quarter compared to 37.3% in the previous year. The increase relates
primarily to the Company's efforts in launching two new products, the
Contour Genesis and the MemoryLens. During the quarter, there were two
major trade shows where these products were shown.
Research and Development
Research and development expenses were 8.7% of sales for the third
quarter, compared to 8.6% 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 an alternate filler breast implant.
Interest and Other Income and Expense
Interest expense decreased $49 thousand in the quarter from the prior
year. Interest income increased from $158 thousand last year to $365
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 34.0% in the same period a year ago.
Net Income
Diluted earnings per share decreased to $.22 for the three months ended
December 31, 1997, compared to $.27 last year, due to the increased
selling, general and administrative expenses, and increases in cost of
goods sold.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's working capital was $96 million
compared to $88 million at March 31, 1997. The Company's working capital
needs were provided from operations.
The Company generated $19 million of cash from operations during the nine
months ended December 31, 1997, compared to $15 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 $5.0 million.
The Company anticipates investing approximately $14 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 for bracytherapy seeds for the treatment of prostate cancer,
the Company took a $1 million equity position. Similarly, the Company
has taken a $1 million equity position in PerImmunne, its marketing
partner for a new bladder cancer test. In the third quarter, the Company
made an additional investment of $5 million in PerImmunne in exchange for
the rights to a potential bladder cancer treatment. In addition to the
$5 million investment, the Company is obligated to provide $1 million per
year for three years to help defray the cost of Phase III clinical trials
for the bladder treatment product. The Company will also pay an
additional $3 million as certain milestones are achieved.
For the last several years, the Company has paid 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 nine months of fiscal 1998, the Company repurchased 69,500 shares
for consideration of $1.5 million.
The Company's principal source of liquidity at December 31, 1997
consisted of $28 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
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 13, 1998 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: February 13, 1998 BY: /s/GARY E. MISTLIN
Gary E. Mistlin
Chief Financial Officer
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,
1997 1996 1997 1996
Numerator:
Net income $ 5,836 $ 7,102 $ 16,786 $ 20,477
Numerator for basic
earnings per share -
income available to
common stockholders 5,836 7,102 16,786 20,477
Numerator for diluted
earnings per share -
income available to
common stockholder
after assumed
conversions $ 5,836 $ 7,102 $ 16,786 $ 20,477
Denominator:
Denominator for basic
earnings per share -
weighted-average
shares 24,961 24,855 24,877 24,860
Effect of dilutive
securities:
Employee stock options 1,553 1,458 1,471 1,502
Denominator for diluted
earnings per share -
adjusted weighted-
average shares and
assumed conversions 26,514 26,313 26,347 26,362
Basic earnings per share $ .23 $ .29 $ .67 $ .82
Diluted earnings per share $ .22 $ .27 $ .64 $ .77
