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, 1998
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 February 12, 1999 was:
Common stock, $.10 par value 24,255,455 shares
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position - December 31, 1998 and March 31, 1998
Consolidated Statements of Income - Three Months
Ended December 31, 1998 and 1997
Consolidated Statements of Income - Nine Months
Ended December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended December 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
December 31, 1998
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, 1998 and March 31, 1998
(Unaudited)
December 31, March 31,
(dollars in thousands) 1998 1998
ASSETS
Current assets:
Cash and marketable securities $ 13,769 $ 27,937
Accounts receivable, net 43,450 40,209
Inventories 53,275 44,632
Deferred income taxes 6,619 6,619
Other 11,236 8,144
Total current assets 128,349 127,541
Property, plant and equipment,
net of accumulated depreciation 43,728 39,423
Other assets:
Patents, licenses and trademarks
net of accumulated amortization 4,354 5,530
Goodwill, net of accumulated
amortization 15,966 13,619
Long term marketable securities
and investment 9,747 14,806
Other assets - 454
30,067 34,409
Total assets $ 202,144 $ 201,373
See notes to condensed consolidated financial statements
Mentor Corporation
Condensed Consolidated Statements of Financial Position
December 31, 1998 and March 31, 1998
(Unaudited)
December 31, March 31,
(dollars in thousands) 1998 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,746 $ 6,903
Accrued compensation 5,586 8,742
Income taxes payable 1,610 1,325
Dividends payable 614 634
Interest payable 62 -
Sales returns 5,088 5,961
Self-insured retention 3,526 3,580
Accrued royalties 1,517 1,598
Restructuring reserve 13,810 -
Other accrued liabilities 4,928 3,841
Short-term borrowings and current
portion of long-term debt 5,506 50
Total current liabilities 47,993 32,634
Long-term deferred taxes 2,046 4,054
Shareholders' equity:
Common shares, $.10 par value:
Authorized-- 50,000,000 shares
Issued and outstanding:
24,254,460 shares at
December 31,1998
25,020,690 shares at
March 31, 1998 2,425 2,502
Capital in excess of par 19,795 35,189
Cummulative transalation
adjustment (889) (1,404)
Unrealized gains on investments 1,400 5,000
Retained earnings 129,374 123,398
152,105 164,685
Total liabilities and shareholders'
equity $ 202,144 $ 201,373
See notes to condensed consolidated financial statements
Mentor Corporation
Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997
(Unaudited)
(in thousands, except per share
data) 1998 1997
Net sales $ 62,498 $ 54,076
Costs and expenses:
Cost of sales 33,087 18,985
Selling, general and
administrative 25,972 22,006
Research and development 4,295 4,718
Restructuring Charge 7,000 -
70,354 45,709
Operating income (loss) (7,856) 8,367
Interest expense (156) (6)
Interest income 253 365
Other income (expense) 112 160
Income (loss) before income taxes (7,647) 8,886
Income taxes (benefit) (2,449) 3,050
Net income (loss) $ (5,198) $ 5,836
Basic earnings per share $ (.21) $ .23
Diluted earnings per share $ (.21) $ .22
See notes to consolidated financial statements
Mentor Corporation
Consolidated Statements of Income
Nine Months Ended December 31, 1998 and 1997
(Unaudited)
(in thousands, except per share
data) 1998 1997
Net sales $ 176,241 $ 158,185
Costs and expenses:
Cost of sales 74,101 57,779
Selling, general and
administrative 71,310 61,477
Research and development 12,226 14,661
Restructuring charge 7,000 -
164,637 133,917
Operating income 11,604 24,268
Interest expense (182) (21)
Interest income 928 1,069
Other income (expense) (103) 196
Income before income taxes 12,247 25,512
Income taxes 4,034 8,726
Net income $ 8,213 $ 16,786
Basic earnings per share $ .33 $ .67
Diluted earnings per share $ .32 $ .64
See notes to consolidated financial statements
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1998 and 1997
(Unaudited)
(in thousands) 1998 1997
Cash flows from operating activities $ 14,846 $ 18,972
Cash flows from investing
activities:
Sale of equipment, intangibles and
other assets - 149
Purchase of property, equipment,
and intangibles (14,813) (10,487)
Reduction of notes receivable - 113
Investment in marketing partner - (7,006)
(14,813) (17,231)
Cash flows from financing
activities:
Exercise of stock options 2,508 2,101
Dividends paid (1,792) (1,864)
Reduction of long-term debt - (9)
Expiration of puts - 146
Borrowings under line of credit
agreements 5,100 -
Repurchase of common stock (20,017) (1,519)
(14,201) (1,145)
Increase (decrease) in cash, cash
Equivalents, and marketable
securities (14,168) 596
Cash at beginning of period 27,937 27,808
Cash at end of period $ 13,769 $ 28,404
See notes to consolidated financial statements
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
December 31, 1998
Note A
Inventories at December 31, 1998 and March 31, 1998 consisted of:
December 31 March 31
(In thousands)
Raw materials $ 15,400 $ 12,900
Work in process 9,410 6,682
Finished goods 28,465 25,050
$ 53,275 $ 44,632
Note B
Other assets at December 31, 1998 include the Company's equity
investments in its marketing partners, Intracel Corporation and
North American Scientific, Inc. (NASI). The Intracel Corporation
investment is valued at cost of $6 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 $3.4 million.
Unrealized gains, net of the related tax effect, are accounted
for as a separate component of shareholders' 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 Company has adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and display of an
alternative income measurement and its components (revenue,
expenses, gains and losses) in a full set of general purpose
financial statements. The total comprehensive income for the
nine months ended December 31, 1998 is $5.1 million, compared
with $18.9 million for the same period a year ago. Total
comprehensive income includes net earnings, net unrealized
currency gains and losses on translation and net unrealized gains
and losses on securities.
Note E
In December 1998, Mentor implemented a restructuring plan as part
of a strategic initiative to improve the profitability and
competitiveness of its Ophthalmic products business, by reducing
manufacturing costs and concentrating on those products and
markets capable of sustained, long-term profitable growth. The
successful introduction of the MemoryLens foldable IOL will allow
this business to focus on a narrower, more profitable line of
products for cataract surgery. The planned restructuring
includes a reduction of workforce, anticipated plant
consolidation costs of $800 thousand, a write down of $3.3
million for production assets to be disposed of, and a write down
of approximately $1 million of intangibles related to products to
be discontinued. Mentor incurred $200 thousand related to the
restructuring in the third quarter and accrued $6.8 million in
costs to be incurred over the next 12 months. Approximately $1.9
million of this amount is cash severance payments related to the
workforce reduction of 150 positions. Concurrent with the
restructuring, Mentor recorded a $9 million dollar special charge
for inventory, primarily related to the discontinuance of certain
Ophthalmic products and intraocular lens models. The
restructuring and special charges totaled $16 million in the
quarter, of which $9 million related to inventory was charged to
cost of goods sold.
Note F
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 months period ended
December 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1999. 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, 1998.
Note G
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 1999 Fiscal 1998
First Quarter June 26, 1998 June 30, 1997
Second Quarter September 25, 1998 September 26, 1997
Third Quarter January 1, 1999 January 2, 1998
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" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. All
forward-looking statements involve risks and uncertainties.
Although the Company believes its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurances that actual
results will not materially differ from expected results.
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, 1998. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak
only as of the date on which they are made. The Company assumes
no obligation to publicly release any revisions to such forward-
looking statements to reflect changes in events or circumstances
after such dates.
RESULTS OF OPERATIONS
Sales
Sales for the three months ended December 31, 1998 increased 16%
to $62.5 million, compared to $54.1 million the prior year.
Urology products increased 32% compared to a year ago. Adding to
urology product sales were two new products that were introduced
in the last year: brachytherapy seeds for the treatment of
prostate cancer, and the Suspend sling for treating female
urinary incontinence. Both product lines showed good growth from
the immediately preceding quarter. Penile implant sales, while
still below last year, also showed strong sequential growth for
the second quarter in a row. These sales had been affected in
the first fiscal quarter by the introduction of a new impotence
drug, Viagra. The combination of ease of use, plus a major
advertising campaign from Pfizer, generated an unprecedented
amount of interest in this new product. The Company believes
that this interest in treating impotence bodes well for the long
term prospects of penile implant sales, as Viagra will not work
on all patients. However, we may continue to see weakness in
penile implant sales for the next few quarters. The Company line
of disposable products for managing urinary incontinence also did
well in the quarter, increasing 20% over the prior year.
Ophthalmic product sales increased 26%, and were at a record
level. Continued success of the MemoryLens, a foldable
intraocular lens, along with improved sales of diagnostic
products, helped offset further declines in fixed intraocular
lenses. The MemoryLens was approved for sale in the United
States in December 1997.
Plastic surgery sales were about even with the prior year.
Backorder issues earlier in the year have caused the Company to
lose some market share. The Company believes that it now has
adequate inventory levels, and has initiated certain marketing
programs to help regain growth momentum.
Sales by Principal Product Line
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
Percent Percent
1998 1997 Change 1998 1997 Change
Plastic and
general surgery $28,455 $ 27,887 2% $ 88,927 $ 83,620 6%
Urology 23,200 17,572 32% 58,525 49,190 19%
Ophthalmology 10,843 8,617 26% 28,789 25,375 13%
$62,498 $ 54,076 16% $176,241 $158,185 11%
Cost of Sales
Cost of sales, excluding the $9.0 million special charge (see
Note E to the Financial Statements), was 38.5% for the three
months ended December 31, 1998 compared to 35.1% for the same
period last year. The increase in the cost of sales in the
quarter was primarily related to the higher percentage of OEM
products, such as brachytherapy seeds, in the sales mix. In
addition, the Company continues to incur a substantial amount of
expense related to the ongoing re-validation efforts at the Texas
plant.
As explained in Note E to the Financial Statements, also included
in Cost of Sales is a special charge of $9.0 for inventory
reserves, primarily related to the discontinuance of certain
Ophthalmic products and intraocular lens models.
In 1996, the Food and Drug Administration (FDA) issued the Texas
facility a warning letter, citing several inadequacies in the
Company's adherence to FDA Good Manufacturing Practices (GMP).
The FDA was specifically concerned with the method by which the
Company had performed its initial validation of the manufacturing
processes in the Texas facility. The Company agreed to re-
validate the facility, as well as correct the other items in the
warning letter, and in July, 1996, submitted to the FDA a
schedule for completion of these items. In August 1997, the FDA
returned to the Texas facility to perform a comprehensive GMP
compliance audit, which included reviewing the Company's progress
in completing the remaining items contained in the 1996 warning
letter. While the Company had completed a substantial amount of
items, the re-validation effort had not been completed within the
time frame outlined in the July 1996 schedule.
In May 1998, the Company entered into a voluntary consent decree
with the FDA in relation to the Texas facility. The agreement
requires, under a schedule agreed to by the Company and the FDA,
the completion of the re-validations of certain of the Company's
manufacturing processes, strengthening of its continuous quality
improvement program, and an independent audit on overall GMP
compliance.
More specifically, the consent decree calls for the Company to
hire outside expert consultants to assist in strengthening the
Company's compliance program and related processes. By July 5,
1998 the consultant was required to conduct a comprehensive GMP
audit of the Texas facility and submit a detailed written report
to Mentor management and the FDA on its findings. In that
report, which was submitted on time, the consultant stated that,
except for the outstanding re-validations, there were no
significant areas of GMP non-compliance. Under the terms of the
consent decree, the consultant is required to conduct an
inspection and to issue a report annually. The next report is
due in May 1999. The Company expects that this report will be
completed by the end of March.
Further, the Company was required to establish stronger
procedures for continuous corrective action programs. The
consultant was to report to management and to the FDA as to
whether such a program had been instituted. On July 14, 1998 the
expert consultant reported to management and to the FDA that such
a program had been designed and was being implemented by the
Company.
The Company and FDA agreed to time frames under which the Company
is to complete its re-validations of its manufacturing processes;
specifically by November 2, 1998 for saline-filled devices and by
December 31, 1998 for gel-filled devices. The Company completed
its validation of saline-filled devices by November 2 and gel-
filled devices on December 22.
The outside expert consultant reviewed such validations and
reported to management and to the FDA that all validation
projects have been completed for all seven RTV (saline filled)
and one HTV (gel filled) product families in accordance with
established milestones and within the timeframes established by
the consent decree. Further the consultant stated in his RTV
report, in summary, it is my opinion that the PQ (process
qualification) and PPQ (product process qualification) and their
execution is consistent with Mentor Texas internal operating
procedures, industry practice and FDA requirements. Validation
results met all acceptance criteria set forth in the protocols.
In the HTV report, the consultant stated that, "all major
equipment qualifications, process qualifications and product
performance qualifications have been properly designed and
executed to ensure that manufactured product will conform to pre-
established procedures. It is my opinion that Mentor has fully
and successfully completed all necessary HTV validations as
required by the consent decree."
The Company believes that it will meet the remaining milestones
as set forth in the consent decree, although there can be no
absolute assurance that it can do so. In addition, although the
expert consultants have expressed their opinion as to the
satisfactory completion of certain consent decree requirements,
FDA inspectors, during some future audit, may disagree with the
conclusions of these experts. Should the Company fail to comply
with the conditions of the consent decree, under its terms the
FDA is allowed to order the Company to stop manufacturing or
distributing the breast implants, order a recall or take other
corrective actions. The Company may also be subject to penalties
of $10,000 per day until the task is completed.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 41.6% of sales
in the quarter compared to 40.7% in the previous year. The
increase relates primarily to the Company's efforts in launching
its new products, including the MemoryLens, brachytherapy seeds
and the Suspend sling. The Company is increasing its marketing
and sales staff to accommodate these new products.
Research and Development
Research and development expenses were 6.9% of sales for the
quarter, compared to 8.7% for the prior year. For the past
several years, the Company has spent 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. The
reduction in research & development spending resulted from the
completion of several of the studies. The Company expects to
complete the work on its saline filled breast implant PMAAs and
submit the data to the FDA during calendar 1999. Other major
studies underway include an alternate filler breast implant and
extending the use of the Contour Genesis to include liposuction.
Restructuring and Special Charges
In December 1998, Mentor implemented a restructuring plan as part
of a strategic initiative to improve the profitability and
competitiveness of its Ophthalmic products business, by reducing
manufacturing costs and concentrating on those products and
markets capable of sustained, long-term profitable growth. The
successful introduction of the MemoryLens foldable IOL will allow
this business to focus on a narrower, more profitable line of
products for cataract surgery. The planned restructuring
includes a reduction of workforce, anticipated plant
consolidation costs of $800 thousand, a write down of $3.3
million for production assets to be disposed of, and a write down
of approximately $1 million of intangibles related to products to
be discontinued. Mentor incurred $200 thousand related to the
restructuring in the third quarter and accrued $6.8 million in
costs to be incurred over the next 12 months. Approximately $1.9
million of this amount is cash severance payments related to the
workforce reduction of 150 positions. Concurrent with the
restructuring, Mentor recorded a $9 million dollar special charge
for inventory, primarily related to the discontinuance of certain
Ophthalmic products and intraocular lens models. The
restructuring and special charges totaled $16 million in the
quarter, of which $9 million related to inventory was charged to
cost of goods sold.
Interest and Other Income and Expense
Net interest income decreased from $359 thousand last year to
$209 thousand this year, resulting from lower cash balances and
borrowings under the line of credit.
Income Taxes
The effective rate of corporate income taxes was 32.0% for the
quarter, compared to 34.3% in the same period a year ago. The
decrease results from higher expected income from the Company's
tax-advantaged facility in Puerto Rico, which makes the
MemoryLens.
Net Income (loss)
Diluted loss per share was $.21 for the three months ended
December 31, 1998, compared to earnings of $.23 the prior year.
The after tax earnings effect of the restructuring and special
charges of $16 million were approximately $0.45.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's working capital was $80.4
million compared to $94.9 million at March 31, 1998. The
Company's working capital needs were provided from operations and
borrowings under its line of credit.
The Company generated $14.8 million of cash from operations
during the three months ended December 31, 1998, compared to
$15.4 million the previous year. The net loss in the current
period was offset by the reserve for the restructuring charge.
The Company anticipates investing approximately $15 million in
facilities and capital equipment in fiscal 1999. The majority of
the expenditures will be for facility upgrades at the Company's
manufacturing facilities in Texas and Minneapolis, as well as for
enhancing the Company's information technology capabilities.
During the third quarter, the Company acquired a privately-held
manufacturer of specialty urological products, for cash
consideration of approximately $3.5 million.
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 an ongoing stock
repurchase program. The objectives of the program, among other
items, are to offset the issuance of stock options, provide
liquidity to the market and to reduce the overall number of
shares outstanding. Repurchases are subject to market conditions
and cash availability. In July 1998, the Board increased the
repurchase authorization by 1 million shares, to a total of 1.8
million, and instructed the Company to increase its share
repurchases. As a result, during the second quarter of fiscal
1999 the Company repurchased 1.1 million shares for consideration
of $19.9 million.
During the second quarter of this year, the Company renegotiated
its bank line of credit to increase the maximum borrowing amount
from $15 million to $25 million. It also lowered the annual
commitment fee from .25% to .125% on the unused portion of the
line. As a result of the increased stock repurchase program, the
Company has $5.1 million outstanding under the line of credit as
of December 31, 1998.
The Company's principal source of liquidity at December 31, 1998
consisted of $14 million in cash and marketable securities plus
$19.9 million available under its line of credit.
IMPACT OF YEAR 2000
General Description of the Year 2000 Issue and the Nature and
Effects of the Year 2000 on Information Technology (IT) and Non-
IT Systems
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or
hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it will
be required to modify or replace portions of its distribution,
finance and manufacturing software and certain hardware so that
those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or
replacements of certain existing software and hardware, the Year
2000 Issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed in a timely
manner, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following key phases: inventory, assessment and remediation. The
Company has categorized its systems into several areas: core
systems (i.e. distribution, finance and manufacturing systems),
ancillary support systems to those core systems, embedded
systems, products, and third party vendors.
Inventory and Assessment
The Company has completed its inventory and assessment of its
domestic core systems, indicating most of the core systems would
be adversely affected. The Company has completed the inventory of
its international sales office systems, and expects to complete
the assessment of those systems by February 28, 1999. While the
assessment is not yet done, the Company does expect that most of
the systems would be adversely affected. The Company expects to
complete the inventory and assessment of its other areas (other
than its products) by February 28, 1999. The Company has
completed its inventory and assessment of its product lines and
has determined that most of the products it has sold and will
continue to sell do not require remediation to be Year 2000
compliant. Accordingly, the Company does not believe that the
Year 2000 presents a material exposure as it relates to the
Company's products.
Status of Progress in Becoming Year 2000 Compliant
For its domestic core system exposures related to its
distribution, finance and manufacturing software, the Company has
completed all required remediation. For other domestic core
systems, such as desktop computers, networks and off-the shelf
application software, the Company is 75% complete on the
remediation phase and expects to complete upgrades and/or
replacement no later than October 31, 1999.
The remediation of embedded systems is significantly more
difficult than the remediation of the core systems. The
inventory and assessment of embedded systems is 75% complete, and
will be finished by March 31, 1999. The Company has begun any
necessary remediation on those systems it has found which require
it.
Nature and Level of Importance of Third Parties and their
Exposure to the Year 2000
Other than payroll and its banking relationships, the Company has
no other significant direct interfaces with third party vendors.
The Company is in the process of working with key third party
vendors to ensure that the Company's systems that interface
directly with third party vendors are Year 2000 compliant by
December 31, 1999. The Company understands that key vendors are
in the process of making their systems Year 2000 compliant. Each
vendor queried by the Company believed that its system would be
Year 2000 compliant by the end of 1999.
The Company is beginning to query its significant suppliers and
subcontractors that do not share information systems with the
Company (external agents). To date, the Company is not aware of
any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, or capital
resources. The Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Costs
The total cost to the Company of the Year 2000 project is
estimated at $4.0 million and is being funded through operating
cash flows. To date, the Company has incurred costs of
approximately $1.8 million. This amount includes upgrading its
desktop systems and office software to the latest release, which
the Company would do in the normal course of business. The
majority of these costs relate to new hardware and software and
are being capitalized.
Risks
Management of the company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. The
Company has not yet completed all necessary phases of the Year
2000 program. In the event that the Company does not complete
any additional phases, the Company would be constrained in taking
customer orders, and might be unable to manufacture and ship
certain products, or invoice customers. In addition, disruptions
in the economy generally resulting from Year 2000 issues could
also materially adversely affect the Company.
Contingency Plans
The Company currently has no contingency plans in place in the
event it does not complete all phases of the Year 2000 program.
The Company plans to evaluate the status of completion in March
1999 and determine whether such a plan is necessary.
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,
1998, 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
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 16, 1999 BY: /s/ANTHONY R. GETTE
Anthony R. Gette
President and
Chief Operating Officer
DATE: February 16, 1999 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,
1998 1997 1998 1997
Numerator:
Net income $(5,198) $ 5,836 $ 8,213 $ 16,786
Numerator for basic
earnings per share -
income available to
common stockholders (5,198) 5,836 8,213 16,786
Numerator for diluted
earnings per share -
income available to
common stockholder
after assumed
conversions $(5,198) $ 5,836 $ 8,213 $ 16,786
Denominator:
Denominator for basic
earnings per share -
weighted-average
shares 24,195 24,961 24,618 24,877
Effect of dilutive
securities:
Employee stock options 720 1,553 911 1,471
Denominator for diluted
earnings per share -
adjusted weighted-
average shares and
assumed conversions 24,915 26,514 25,529 26,348
Basic earnings per share $ (.21) $ .23 $ .33 $ .67
Diluted earnings per share $ (.21) $ .22 $ .32 $ .64
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<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1998
<CASH> 11651
<SECURITIES> 2118
<RECEIVABLES> 46754
<ALLOWANCES> 3304
<INVENTORY> 53275
<CURRENT-ASSETS> 128349
<PP&E> 43728
<DEPRECIATION> 8476
<TOTAL-ASSETS> 202144
<CURRENT-LIABILITIES> 47993
<BONDS> 0
0
0
<COMMON> 24254
<OTHER-SE> 1400
<TOTAL-LIABILITY-AND-EQUITY> 202144
<SALES> 62498
<TOTAL-REVENUES> 62498
<CGS> 33087
<TOTAL-COSTS> 70354
<OTHER-EXPENSES> 37267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 7647
<INCOME-TAX> 2449
<INCOME-CONTINUING> 5198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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