-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N66lZjanvegLQ/S0mkOeaAjvuYUSm6ZMkpy6y7qvl+XkCdWZmYWsQPm1DvFnnNcH ENGbuS2k2V86pJ9pGpsXcw== 0000064892-98-000002.txt : 19980218 0000064892-98-000002.hdr.sgml : 19980218 ACCESSION NUMBER: 0000064892-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR CORP /MN/ CENTRAL INDEX KEY: 0000064892 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 410950791 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07955 FILM NUMBER: 98543050 BUSINESS ADDRESS: STREET 1: 5425 HOLLISTER AVENUE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8056816000 MAIL ADDRESS: STREET 1: 5425 HOLLISTER AVENUE CITY: SANTA BARBARA STATE: CA ZIP: 93111 10-Q 1 PERIOD ENDING DEC 31, 1997 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 -----END PRIVACY-ENHANCED MESSAGE-----