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 the Quarterly Period September 30, 2000
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)
201 Mentor Drive, Santa Barbara, California 93111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (805) 879-6000
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 November 10, 2000 was:
Common stock, $.10 par value 23,279,806 shares
Mentor Corporation
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial
Position -- September 30, 2000 and March 31, 2000
Consolidated Statements of Income - Three Months
Ended September 30, 2000 and 1999
Consolidated Statements of Income - Six Months
Ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows --
Six Months Ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements--
September 30, 2000
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
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
27 Financial Data Schedule
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 2000 and March 31, 2000
(Unaudited)
Sept 30, March 31,
(dollars in thousands) 2000 2000
ASSETS
Current assets:
Cash and cash equivalents $ 16,006 $ 24,313
Marketable securities 46,327 52,563
Accounts receivable, net 37,890 45,310
Inventories 37,383 34,441
Deferred income taxes 7,552 5,739
Prepaid expenses and other 6,975 6,096
Total current assets 152,133 168,462
Property and equipment, net 34,267 36,522
Intangibles, net 13,721 4,008
Goodwill, net 4,597 4,394
Long-term marketable securities
and investments 10,216 12,848
Other assets 4,323 4,472
67,124 62,244
Total assets $ 219,257 $ 230,706
See Notes to Condensed Consolidated Financial Statements
Mentor Corporation
Condensed Consolidated Statements of Financial Position
September 30, 2000 and March 31, 2000
(Unaudited)
Sept 30, March 31,
(dollars in thousands) 2000 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,699 $ 10,342
Accrued compensation 6,318 8,972
Income taxes payable 910 3,868
Dividends payable 594 608
Sales returns 5,809 6,401
Warranty and related reserves 8,542 6,563
Accrued royalties 1,055 1,600
Other accrued liabilities 7,265 5,967
Total current liabilities 37,192 44,321
Deferred income taxes 3,194 2,743
Shareholders' equity:
Common stock, $.10 par value:
Authorized 50,000,000 shares
Issued and outstanding:
shares at 23,449,708
September 30, 2000
24,208,834 shares at
March 31, 2000 2,345 2,421
Capital in excess of par value - 9,876
Foreign currency translation
Adjustments (3,918) (2,694)
Net unrealized gains on securities 3,417 5,017
Retained earnings 177,027 169,022
178,871 183,642
Total liabilities and shareholders'
Equity $ 219,257 $ 230,706
See Notes to Condensed Consolidated Financial Statements
Mentor Corporation
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands, except per share
data) 2000 1999
Net sales $ 60,349 $ 58,002
Costs and expenses:
Cost of sales 23,257 21,910
Selling, general and
administrative, exclusive of 23,886 23,894
restructuring charge
Research and development 4,914 3,908
Restructuring charge 1,050 -
53,107 49,712
Operating income 7,242 8,290
Interest expense (21) (10)
Interest income 1,109 807
Other income, net 657 (235)
Income from continuing operations
before income taxes 8,987 8,852
Income taxes 2,964 2,839
Income from continuing operations 6,023 6,013
Income from discontinued
operations, net of income taxes - 289
Net income $ 6,023 $ 6,302
Basic earnings per share:
Continuing operations $ .25 $ .25
Discontinued operations - .01
Basic earnings per share $ .25 $ .26
Diluted earnings per share:
Continuing operations $ .25 $ .24
Discontinued operations - .01
Diluted earnings per share $ .25 $ .25
See notes to consolidated financial statements
Mentor Corporation
Consolidated Statements of Income
Six Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands, except per share
data) 2000 1999
Net sales $ 127,134 $ 118,146
Costs and expenses:
Cost of sales 48,208 43,430
Selling, general and
administrative, exclusive of 50,326 48,425
restructuring charge
Research and development 9,186 8,034
Restructuring charge 1,050 -
108,770 99,889
Operating income 18,364 18,257
Interest expense (86) (29)
Interest income 2,238 982
Other income, net 833 (163)
Income from continuing operations
before income taxes 21,349 19,047
Income taxes 6,993 6,059
Income from continuing operations 14,356 12,988
Income from discontinued
operations, net of income taxes - 7,226
Net income $ 14,356 $ 20,214
Basic earnings per share:
Continuing operations $ .60 $ .53
Discontinued operations - .30
Basic earnings per share $ .60 $ .83
Diluted earnings per share:
Continuing operations $ .59 $ .52
Discontinued operations - .29
Diluted earnings per share $ .59 $ .81
See notes to consolidated financial statements
Mentor Corporation
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands) 2000 1999
Net cash provided by continuing
operating activities $ 12,544 $ 13,511
Net cash provided by discontinued
operating activities - (1,163)
Net cash provided by operating
activities 12,544 12,348
Cash from Investing Activities:
Purchases of property, equipment,
and intangibles (3,060) (6,012)
Purchases and sales of marketable
securities, net 7,500 (12,383)
Other, net 149 (21)
Net cash provided by (used for)
continuing investing activities 4,589 (18,416)
Net cash provided by discontinued
Investing activities - 38,377
Net cash provided by
Investing activities 4,589 19,961
Cash from Financing Activities:
Proceeds from exercise of stock
Options 937 3,253
Dividends paid (1,203) (1,223)
Borrowings under line of credit
Agreement 6,000 -
Repayments under line of credit
Agreement (6,000) (4,000)
Repurchase of common stock (25,174) (5,686)
Net cash used for financing activities (25,440) (7,656)
Increase (decrease) in cash and cash
Equivalents (8,307) 24,653
Cash and cash equivalents at beginning
of period 24,313 19,533
Cash and cash equivalents at end of
Period $ 16,006 $ 44,186
See notes to consolidated financial statements
Mentor Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 2000
Note A - Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S-
X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three-month and six-month periods ended
September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended March 31, 2001.
The balance sheet at March 31, 2000 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 2000.
Note B - Inventories
Inventories at September 30, 2000 and March 31, 2000 consisted
of:
(in thousands) Sept 30, March 31,
Raw materials $ 6,169 $ 5,880
Work in process 6,358 7,068
Finished goods 24,856 21,493
$ 37,383 $ 34,441
Note C - Long-Term Marketable Securities
The Company's long-term marketable securities and investments
include the Company's equity investments in its manufacturing
partners, Intracel Corporation and North American Scientific,
Inc. (NASI) and shares of Paradigm Medical Industries, Inc.
(Paradigm) received in connection with the sale of assets of
discontinued operations. Intracel Corporation is developing a
new potential treatment for bladder cancer. The Intracel
Corporation investment is carried at $3 million adjusted cost as
quoted market prices are not available. Also included is a
equity interest in NASI, the Company's manufacturing partner
under an exclusive agreement for the distribution of
brachytherapy seeds for the treatment of prostate cancer, and an
equity interest in Paradigm. These investments are recorded at
fair market value of $7,216,000, (cost of $1,956,000) and
$9,840,000 (cost of $2,122,000) based upon quoted stock market
prices at September 30, 2000 and March 31, 2000, respectively.
The unrealized gain of $3,417,000 and $5,017,000, net of taxes of
$1,843,000 and $2,701,000, at September 30, and March 31, 2000,
respectively, is reported as a separate component of
shareholders' equity. The Company has sold a portion of its NASI
securities and realized a gain of $641,000 for the quarter ended
September 30, and $1,098,000 for the six months ended September
30, 2000. The gain was reflected in other income, net.
Note D - Comprehensive Income
The components of comprehensive income are listed below:
Three Months Ended Six Months Ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
Net income $ 6,023 $ 6,302 $14,356 $ 20,214
Foreign currency
translation adjustment (728) (489) (1,224) (239)
Unrealized gains (losses)
on investment activities 514 (135) (1,600) 534
Comprehensive income $ 5,809 $ 6,656 $11,532 $ 20,509
Note E - Business Segment Information
The Company's operations are principally managed on a functional
basis and reported on a product or geographic basis. As a result
there are four reportable segments: Aesthetic and General
Surgery, Surgical Urology, Clinical and Consumer Healthcare
products, and International.
The Aesthetic and General Surgery products segment consists
primarily of breast implants, tissue expanders and the Company's
Contour Genesis Ultrasonic equipment product line along with
equipment and disposables for traditional liposuction. The
Surgical Urology segment includes penile implants, surgical
incontinence products and brachytherapy seeds for the treatment
of prostate cancer. The Clinical and Consumer Healthcare segment
includes catheters and other products for the management of
urinary incontinence and retention. The International segment
includes the operations of the Company's wholly owned
international sales offices, which cover most of the Company's
implantable product lines, and a small European manufacturing and
distribution facility. Segment revenues include domestic sales,
sales to independent foreign distributors and sales to the
Company's direct international sales offices.
Selected financial information for the Company's reportable
segments for the quarter ended September 30, 2000 and 1999
follows:
Three Months Ended Six Months Ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
Revenues
Aesthetic and General
Surgery $ 30,747 $ 28,663 $ 66,649 $ 62,816
Surgical Urology 13,369 12,533 27,021 23,006
Clinical and Consumer
Healthcare 11,120 12,190 22,876 21,993
International 9,450 8,901 20,881 19,751
Total reportable
segments 64,686 62,287 137,427 127,566
Elimination of inter-
segment revenues (4,337) (4,285) (10,293) (9,420)
Total consolidated
revenues $ 60,349 $ 58,002 $127,134 $118,146
Three Months Ended Six Months Ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
Operating profit (loss)
from continuing
operations
Aesthetic and General
Surgery $ 6,553 $ 6,145 $ 15,446 $ 17,473
Surgical Urology 1,941 1,964 3,492 2,563
Clinical and Consumer
Healthcare 1,672 2,623 3,770 3,827
International 1,094 1,502 3,252 3,449
Total reportable
segments 11,260 12,234 25,960 27,312
Corporate operating loss (4,018) (3,944) (7,596) (9,055)
Interest expense (21) (10) (86) (29)
Interest income 1,109 807 2,238 982
Other income 657 (235) 833 (163)
Income from continuing
operations before
taxes $ 8,987 $ 8,852 $ 21,349 $ 19,047
September 30, March 31,
(in thousands) 2000 2000
Identifiable assets
Aesthetic and General Surgery $ 61,060 $ 56,583
Surgical Urology 24,442 23,429
Clinical and Consumer Healthcare 22,760 26,714
International 25,094 24,627
Total reportable segments 133,356 131,353
Corporate and other 85,901 99,353
Consolidated assets $ 219,257 $ 230,706
Note F - Discontinued Operations
In May 1999, the Company announced that its Board of Directors
had decided to divest the ophthalmology business, which accounted
for approximately 16% of sales in fiscal 1999. Consistent with
the plan to dispose of its ophthalmic business segment, the net
assets and operations of the ophthalmic segment of the business,
comprised of the intraocular lens products and ophthalmic
equipment lines, have been classified as discontinued operations.
A summary of the results of operations for discontinued
operations for the three-month and six-month periods ended
September 30, 1999 follows:
Three Months Six Months
Ended Ended
September 30, September 30,
(in thousands) 1999 1999
Revenues $ 4,883 $ 13,962
Income before income taxes 536 1,102
Income tax expense 247 1,350
Net (loss) from discontinued
operations 289 (248)
Gain from disposal, net
of taxes of $3,826 - 7,474
Net income from discontinued
operations $ 289 $ 7,226
During the quarter ended June 30, 1999, the Company completed the
sale of the assets of the intraocular lens business, for cash
consideration of $38.4 million. As disclosed in the Company's
annual report on Form 10-K for March 31, 2000, the remaining
assets related to the ophthalmic business segment were disposed
of in the quarter ending December 31, 1999.
At September 30, 2000 and March 31, 2000, remaining assets and
liabilities related to discontinued operations were not
significant.
Note G - Earnings per Share
A reconciliation of weighted average shares outstanding, used to
calculate basic earnings per share, to weighted average shares
outstanding assuming dilution, used to calculate diluted earnings
per share, follows:
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
Average outstanding shares:
Basic 23,646 24,414 23,790 24,468
Shares issuable through
options 576 753 618 639
Average common shares
outstanding: Diluted 24,222 25,167 24,408 25,107
Shares issuable through options are determined using the treasury
stock method.
Note H - Interim Reporting
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 for each quarter end are shown
below:
Fiscal 2001 Fiscal 2000
First Quarter June 30, 2000 July 2, 1999
Second Quarter September 29, 2000 October 1, 1999
Third Quarter December 29, 2000 December 31, 1999
Note I - Effects of Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" or SAB 101. SAB 101 summarizes certain of
the SEC Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The
Company is currently evaluating the potential impact, if any,
that this SAB will have on its revenue recognition policies.
However, based on preliminary evaluations, the Company does not
believe that this SAB will result in any material change to its
revenue recognition policies. SAB 101 will become effective for
the fourth quarter ending March 31, 2001.
Note J - Acquisition of Intangible assets
Certain technologies related to the manufacture of mammary
prostheses were developed under a 1983 agreement with a limited
partnership whereby the limited partners contributed money
towards the development of the technology in exchange for
payments based upon a percentage of future sales of the products
utilizing the technology.
During the first quarter ended June 30, 2000 the Company
exercised its option under the Agreement of Purchase and Sale
between Mentor Corporation and the Partnership, as amended, to
make a lump sum payment to the Limited Partners in lieu of all
future payments and rights. The Limited Partners could elect to
be paid in cash, Company's common stock, or a combination. This
transaction was completed in the second quarter ended September
30, 2000. The limited partners elected to be paid $1.0 million
in cash and 434 thousand shares of the Company's common stock
which were issued under rule 144 and transfer is restricted. The
shares were valued at the fair market value on the date of
issuance, of approximately $9 million. Accordingly the purchased
partnership rights were recorded as $10.1 million, cost, as an
intangible asset and will be amortized over their estimated
economic life.
Note K -Restructuring charge
In September 2000, Mentor initiated a restructuring plan as part
of a strategic initiative to streamline operations and improve
the efficiency of the Company. Early in October, staff
reductions at the Corporate headquarters were announced and costs
were estimated to total $1.8 million. The plan was later
expanded to include employee reductions at the two manufacturing
plants. The total plan includes a reduction in workforce of
approximately 70 employees and changes in internal organization
structure. Employees effected by the restructuring will be
provided with a severance package, outplacement counseling and
extended benefits totaling approximately $2.4 million. The
Company recorded $1.050 million of the restructuring charge in
the quarter ended September 30, 2000 and expects to record the
remainder in the quarter ending December 31, 2000. Approximately
$1.9 million of the total amount was paid early in the third
quarter.
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 contain certain
forward-looking statements that involve risk and uncertainty.
Such forward-looking statements are characterized by future or
conditional verbs and include statements regarding new and
existing products, technologies and opportunities, market and
industry segment growth and demand and acceptance of new and
existing products. Such statements are only predictions and our
actual results may differ materially from those anticipated in
these forward-looking statements. Factors that may cause such
differences include, but are not limited to, increased
competition, changes in product demand, changes in market
acceptance, new product development, obtaining FDA approval of
new and existing products, changes in government regulation,
supply of raw materials, changes in reimbursement practices,
adverse results of litigation and other risks identified in this
Form 10-Q or in other documents filed by the Company with the
Securities and Exchange Commission. Specific attention should be
directed to the sections entitled "Government Regulation",
"Product Liability", and "Factors that May Effect Future Results
of Operations" in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000. The Company assumes no
obligation to update forward-looking statements as circumstances
change.
In May 1999, the Company announced that its Board of Directors
decided to divest the ophthalmology business, which accounted for
approximately 16% of sales in fiscal 1999. The Company completed
the sale of the assets of the intraocular lens portion of the
ophthalmology business in the quarter ended June 30, 1999. In
the quarter ended December 31, 1999, the Company completed the
sale of the remaining assets of the Ophthalmology business,
primarily the equipment product lines. Accordingly, the Company
accounts for the ophthalmic business as a "Discontinued
Operations" in accordance with Generally Accepted Accounting
Principles. Accordingly, results of operations of the ophthalmic
business are reported, on a net basis, as a single line on the
financials. All prior period amounts in this Form 10-Q have been
presented to exclude operating the results of the ophthalmic
business as discontinued operations.
RESULTS OF OPERATIONS
Sales
Sales for the three months ended September 30, 2000 increased 4%
to $60 million, compared to $58 million for the prior year.
Strong sales in key growth products were offset by weaknesses in
other product lines. World-wide, our breast implant sales
increased by 11% over the same quarter last year. At the same
time, sales of body contouring (liposuction) products declined by
13% for the quarter, resulting in overall sales of $35.4 million
for aesthetic and general surgery products, an increase of 9%
over second quarter last year.
Sales of surgical urology products totaled $13.6 million for the
quarter, up 6% over last year. Sales of our Suspend sling
implant for incontinence increased by over 40%, brachytherapy
product sales grew by 6%, and penile implant sales were unchanged
from a year ago.
The clinical and consumer healthcare product line, consisting of
urological catheters and other disposables, sales totaled $11.3
million, a decline of 11% compared to second quarter last year.
The decline in sales from prior year levels was anticipated as
prior year sales were unusually high due to stocking orders in
advance of an announced price increase. Healthcare sales for the
six-month year-to-date are about even with last year, and sales
for the fiscal year are expected to show a slight gain.
For the Six months ended September 30, 2000 sales increased 8%
from $118 million to $127 million. Surgical Urology product
revenue increased 16% primarily due to strong growth in
brachytherapy seeds and Suspend Sling. Aesthetic and General
surgery products increased 7% reflecting 8% growth in mammary
implant revenues and a 10% decrease in body contouring revenues.
Clinical and Consumer Healthcare sales were flat with the
previous year.
Sales by Principal Product Line
For the Three Months Ended For the Six Months Ended
September 30, September 30,
Percent Percent
2000 1999 Change 2000 1999 Change
Aesthetic &
General Surgery
Products $35,402 $ 32,421 9% $76,228 $71,177 7%
Surgical Urology
Products 13,600 12,810 6% 27,555 23,735 16%
Clinical &
Consumer
Healthcare
Products 11,347 12,771 (11)% 23,351 23,234 1%
$60,349 $ 58,002 4% $127,134 $118,146 8%
Cost of Sales
Cost of sales as a percent of net sales for the quarter and six-
month period ended September 30, 2000 were 38.5% and 37.9%,
respectively compared to 37.8% and 36.8% for the same periods a
year ago. The Company's product mix has changed somewhat in
recent years. A greater percentage of total sales are
represented by two products (brachytherapy seeds and the Suspendr
Sling) which are distributed under alliance agreements. These
products generate gross margins of approximately 50%, which is
lower than the margin generated by products manufactured and
distributed by the Company. In addition, gross margins have been
negatively impacted by the strength of the dollar in our European
markets.
Selling, General and Administrative Expenses
Selling, general and administrative expenses exclusive of a
second quarter restructuring charge were 39.6% of sales in the
quarter compared to 41.2% in the previous year. For the six
months ended September 30, 2000 selling, general and
administrative expenses decreased from 41% of sales to 39.6%.
The decrease reflects lower spending on the Company's direct-to-
consumer advertising campaign partially offset by increases in
general and administrative expenses, primarily related to an
increase in product liability reserves and information technology
costs.
The Company announced a reduction in corporate staff at its
headquarters in Santa Barbara as part of a restructuring move to
streamline operations and improve efficiency. Employees affected
by the restructuring were provided with a severance package,
outplacement counseling and extended benefits to help with the
transition. This program will result in a restructuring charge
of approximately $2.4 million of which $1 million was recorded in
the second quarter and $1.4 million will be recorded in the third
quarter.
Research and Development
Research and development expenses as a percent of net sales for
the quarter and six-month period ended September 30, 2000 were
8.1% and 7.2%, respectively compared to 6.7% and 6.8% for the
same periods a year ago. The increase is attributable to the
spending on the Company's clinical studies related to silicon gel
mammary implants. In May 2000, the Company received FDA approval
for saline-filled breast implants and in July received similar
regulatory clearance on our inflatable penile implants. Although
the Company has successfully completed these PMAA submissions,
the amount of spending on research and development is not
expected to decrease as the focus of research and development
efforts will shift towards new product development. In addition,
the Company is committed to a variety of clinical and laboratory
studies in connection with its ultrasonic liposuction equipment,
gel-filled mammary implants and other products.
The Company has an investment in Intracel Corporation, its
manufacturing partner for a potential bladder cancer treatment.
The Intracel agreement required the Company to pay $1 million per
year for three years to defray the costs of the clinical trials
for the product. That agreement has been modified to increase
Mentor's commitment by $1 million. The Company has previously
paid $2 million to Intracel for the clinical trials, and will pay
the remaining $2 million in quarterly payments of $250 thousand
which began on July 1, 2000.
Interest and Other Income and Expense
Interest expense was $21 thousand in the quarter compared to $10
thousand in the same quarter of the previous year. During the
quarter ended June 30, the Company borrowed under its line of
credit to fund its stock repurchase program. The borrowings were
repaid during the same quarter.
Interest income for the three months ended September 30, 2000
increased to $1.1 million from $807 thousand for the comparable
period in the previous year. The increase is a result of higher
cash balances from operations and $21 million in proceeds from
the sale of the remaining assets of the ophthalmic business,
reported as discontinued operations, received after the second
quarter in the previous year. Further, the Company increased its
use of fully taxable investments, which have a higher coupon rate
and has also benefited from higher prevailing interest rates.
Other income and expense, primarily includes realized gains on
sales of marketable securities recorded as long-term marketable
securities available for sale, gains or losses on disposals of
assets, and foreign currency gains or losses related to the
Company's foreign operations. The Company recorded a gain on the
sale of long-term marketable securities of $641,000 thousand for
the three months ended September 30 and $1,098,000 for six months
ended September 30, 2000. Foreign currency translation and
transaction losses in the quarter were offset by gains of the
disposal of assets.
Income Taxes
The effective rate of corporate income taxes for the year is
approximately 32.8%, as compared to 31.8% in the same period a
year ago. The increase in the effective rate is primarily
related to utilization of research and development credits.
Income from Continuing Operations
Income from continuing operations for the second quarter of
fiscal 2001 was unchanged from the prior year at $6.0 million.
Income from continuing operations for the six-month period ended
September 30, 2000 was $14.4 million compared to $13.0 million
for the comparable period the prior year. The operating income
of fiscal 2001 is net of the restructuring charge of $1,050,000
described above. Diluted earnings per share from continuing
operations were $0.25 for the quarter compared to $0.24 for the
comparable period last year, an increase of 4%. Although the
increase in diluted earnings per share from continuing operations
is consistent with the increase in sales, the restructuring
charge offset improvements in operating trends and other
efficiencies as well as the effect of fewer shares outstanding as
a result of the share buyback program.
Discontinued Operations
In May 1999, the Company announced that its Board of Directors
decided to divest the ophthalmology business, which accounted for
approximately 16% of sales in fiscal 1999. The Company completed
the sale of the assets of the intraocular lens portion of the
ophthalmology business in the quarter ended June 30, 1999.
Accordingly, the Company accounts for the ophthalmic business as
a "Discontinued Operations" in accordance with Generally Accepted
Accounting Principles.
At March 31, 2000 the Company had completed its divestiture and
discontinued operations, accordingly there were no significant
remaining assets or liabilities related to the Ophthalmic
division. For the quarter ended September 30, 1999 the Company
had a loss on discontinued operations of $289 thousand, net of
tax. Also, during the quarter ended June 30, 1999, the Company
completed the sale of the assets of the intraocular lens
business, recording a gain of $7.5 million, net of tax. The
results of discontinued operations for the quarter ended
September 30, 1999 included a $0.01 per share income for the
quarter. There were no discontinued operations during the
quarter ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's working capital was $115
million compared to $124 million at March 31, 2000. The
Company's working capital needs were provided from operations.
The Company generated $12.5 million of cash from continuing
operations during the six months ended September 30, 2000,
compared to $12.4 million the previous year.
The Company anticipates investing approximately $6 million in
facilities and capital equipment in fiscal 2001. The majority of
the expenditures will be for facility upgrades at the Company's
facilities in The Netherlands and Texas, as well as for enhancing
the Company's information technology capabilities.
The Company has a line of credit for $25 million. In order to
temporarily fund stock repurchases in fiscal 2001, the Company
borrowed and repaid $6 million on its line of credit during the
quarter ended June 30, 2000.
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 May 1999, the Board increased the
repurchase authorization by 4 million shares to 4.6 million
shares. The Company intends to continue the share repurchase
program in fiscal 2001, and repurchased 1,320 thousand shares for
$25.2 million during the first two quarters, and an additional
173 thousand shares for $2.9 million early in the third quarter.
As of September 30, 2000 authorization to repurchase 2.5 million
shares was remaining.
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
$2.4 million.
Certain technologies related to the manufacture of mammary
prostheses were developed under a 1983 agreement with a limited
partnership whereby the limited partners contributed money
towards the development of the technology in exchange for
payments based upon a percentage of future sales of the products
utilizing the technology. The Company paid approximately $2
million in such payments to the partnership for last year. The
Company was the general partner for this partnership. The
agreement included an option to purchase the technology and
thereby terminate the partnership.
The Company exercised its option to make a lump sum payment to
the Limited Partners in lieu of all future payments and rights
according to the Agreement of Purchase and Sale between Mentor
Corporation and the Partnership, as amended. The Limited
Partners could elect to be paid in cash, Company's stock, or a
combination. This transaction was completed in the second
quarter ended September 30, 2000. The limited partners elected
to be paid $1.0 million in cash and 434 thousand shares of the
Company's common stock. The stock transfer of which is
restricted by rule 144, valued at the fair market value on the
date of issuance, of approximately $9 million. The decrease in
payments to the partners will be offset by the increased
amortization of the new intangible asset and the additional
common shares outstanding, thus having a neutral effect on
earnings per share.
The Company's principal source of liquidity at September 30, 2000
consisted of $62 million in cash and marketable securities plus
$25 million available under its line of credit. The Company
believes that funds generated from operations, its cash and
marketable securities and funds available under its line of
credit will be adequate to meet its working capital and capital
expenditure requirements through fiscal 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material changes in the Company's exposure to
market risk as reported in Item 7A in the annual report on Form
10-K for the fiscal year ended March 31, 2000.
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,
2000, there have been no material changes.
Item 2. Changes in Securities
During the quarter the Company issued 434,424 shares of
restricted common stock, $.10 par value under rule 144. The
shares were valued at fair market value on the date of issuance,
August 15, 2000, at $21 per share for a total of $9,123,000. The
shares were issued, along with $1 million in cash, in exchange
for all rights and in lieu of all future payments due to a
limited partnership established in 1983 that contributed money
towards the development of certain mammary prosthesis technology.
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
At the Company's 2000 Annual Meeting of Shareholders
held on September 19, 2000, the following proposals were
presented:
(1) A proposal to elect a Board of Directors of the
Company to serve until the next annual meeting, or until their
successors are elected, as follows:
Name of Director Votes For Votes Withheld
Christopher J. Conway 20,581,770 953,138
Anthony R. Gette 20,863,470 671,438
Eugene G. Glover 20,863,190 671,718
Walter W. Faster 20,863,570 671,338
Michael Nakonechny 20,583,670 951,238
Dr. Richard W. Young 20,863,590 671,318
Ronald J. Rossi 20,863,670 671,238
(2) A proposal to approve the Company's 2000 Long-Term Incentive
Plan.
The vote on proposal number 2 to approve the Company's
Long-term Incentive plan was discussed and the meeting was then
adjourned to be reconvened on October 19 at 10:00 a.m. in Santa
Barbara, California to allow the board to collect and consider
input from shareholders concerning the proposed Long-term
Incentive Plan. At the reconvened meeting there were 13,153,458
(including 2,161,942 proxies given to management) votes for the
proposal and 8,315,840 against. Prior to the reconvened
meeting, the Company determined after considering input from the
shareholders, that the number of shares authorized under the
plan would be reduced from 7,500,000 to 3,000,000 shares and
that the plan terms would not allow option repricing. In light
of the changes made to the plan, the Board intends to submit the
amended plan for shareholder vote at the next Annual
shareholder's meeting.
(3) A proposal to ratify the appointment of Ernst &
Young LLP to act as independent auditors of the Company for the
fiscal year ending March 31, 2001. The proposal received
21,460,573 votes for, and 39,481 against ratification. There
were 33,854 abstentions and no broker non-votes.
Item 5. Other Information
The Securities and Exchange Commission informed the
Company that it is investigating, under a formal order of
investigation, the events relating to the March 23, 2000 USA
Today article entitled "Breast Implant manufacturer under
investigation by the FDA," which was authored by Rita Rubin, and
the March 23, 2000 press release issued by Mentor responding to
that article, and possibly other matters. The Company is
cooperating fully with the SEC's investigation. An investigation
does not indicate that the SEC or its staff has concluded that
violations of law have occurred.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three
months ended September 30, 2000.
Pursuant to the requirements 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 10, 2000 BY: /s/CHRISTOPHER CONWAY
Christopher J. Conway
President and
Chief Executive Officer
DATE: November 10, 2000 BY: /s/ADEL MICHAEL
Adel Michael
Senior Vice President
Chief Financial Officer
