Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1995
Commission File No. 0-7955
MENTOR
CORPORATION
Mentor Corporation
5425 Hollister Avenue
Santa Barbara, California 93111
Telephone: 805/681-6000
A Minnesota Corporation I.R.S. Employer Identification No. 41-0950791
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.10 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock of the Company held by
non-affiliates as based upon the closing National Market System sale price on
June 27, 1995 was $292,884,525.
Number of Common Shares outstanding on June 27, 1995: 11,660,745.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 1995 Annual Meeting are
incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS.
General
The Company develops, manufactures and markets a broad range of products
for the medical specialties of plastic and reconstructive surgery, urology and
ophthalmology. Plastic surgery products include surgically implantable
prostheses for cosmetic and reconstructive surgery, principally breast implants
and tissue expanders. Urologic products include: disposable products for the
management of urinary incontinence; surgically implantable prostheses,
principally penile implants for the treatment of chronic male sexual impotence;
and diagnostic ultrasound equipment, used to help diagnose disorders of the
prostate. Ophthalmic products include: intraocular lenses, used for replacement
of a lens following cataract surgery, surgical equipment, primarily coagulators
used to control bleeding during ophthalmic and other microsurgery, and
diagnostic equipment, used to evaluate disorders of the eye.
Since 1989, the Company has incorporated or acquired several companies to
help diversify the Company's interests in the medical industry. In April 1990,
the Company acquired all of the outstanding shares of Mentor O&O, Inc. Despite
the similarity in name, Mentor O&O had not previously been affiliated with the
Company. Mentor O&O develops, manufactures and markets ophthalmic surgical and
diagnostic products. In October 1990, the Company purchased substantially all of
the assets, plus assumption of normal liabilities, of Teknar, Inc., which
supplies diagnostic ultrasound equipment for the specialties of urology and
ophthalmology. Both Mentor O&O and Teknar are 100% owned by Mentor Corporation.
In July 1991, the Company incorporated Mentor H/S, Inc. as a wholly owned
subsidiary and transferred to it all of the product lines and assets of its
existing plastic surgery business. In January 1994, the Company similarly
incorporated Mentor Urology, Inc. as a wholly owned subsidiary and transferred
to it all of the product lines and assets of its existing urologic business. In
January 1990, Mentor Polymer Technologies Company was incorporated to develop,
manufacture and distribute medically oriented materials.
During fiscal 1991, the Company established four international sales
offices to enhance and grow its market position in these countries. The office
in Canada operates as a sales branch of Mentor Corporation. Mentor Medical
Systems UK, Ltd., Mentor Deutschland, GmbH, and Mentor Medical Systems, Pty,
Ltd. (Australia) are all subsidiaries of Mentor Corporation.
In November 1993, the Company established Mentor Medical Systems, B.V. in
Leiden, the Netherlands, to further its expansion into the international
marketplace. This is the Company's manufacturing and research & development
facility outside the United States.
In October 1994, the Company purchased certain assets and assumed certain
related liabilities from Optical Radiation Corporation and ORC Caribe. Such
assets comprised substantially all activities and operations of the intraocular
lens line of business previously conducted by Optical Radiation and ORC Caribe.
The Company established Mentor ORC, Inc. and Mentor Caribe, Inc. for the
acquisition of the assets acquired from Optical Radiation and ORC Caribe.
Principal Products and Markets
The Company strives to utilize its product design and marketing
capabilities, and its close working relationships with health care
professionals, to introduce products that provide superior performance
characteristics in growing markets. Because many of the Company's products
provide greater customer benefits, they generally are sold at premium prices.
However, the cost effectiveness of the Company's product in the overall
treatment of the patient is a primary consideration in new product development.
Following is a description of the Company's principal product lines and the
markets for them.
Plastic Surgery Products
The Company produces an extensive line of implants for cosmetic and
reconstructive surgery, including a line of breast implants, skin and tissue
expanders and facial and dermal implants.
Mammary prostheses may be implanted to achieve breast reconstruction
following total or partial removal (mastectomy) or to enhance breast size and
shape in cosmetic surgery. Breast reconstruction is possible for most patients
undergoing a mastectomy, either at the time of the original surgery or at a
later date.
The Company produces a broad line of mammary prostheses, including: saline
filled implants, silicone gel filled implants and an exclusive product, the
Becker(TM) expandable implant used specifically for breast reconstruction.
Mammary prostheses comprise over 90% of total plastic surgery product sales.
Saline filled breast implants accounted for over 80% of mammary prostheses sold
in fiscal 1995.
By offering a combination of different types of implants in a variety of
different shapes and sizes and surfaces, the physician is able to select the
product most appropriate for the patient.
In conjunction with the settlement of its outstanding product liability
litigation, the Company had agreed to cease marketing silicone gel filled breast
implants within eighteen months after final Federal Court approval. This would
have been approximately April 1995. See Item 3 "Legal Proceedings" for a further
discussion. However, according to the terms of the settlement, if the plaintiffs
enter into a settlement agreement with other manufacturers which allows any
other company to remain in the market to manufacture and sell silicone gel
breast implants, then the Company will be allowed to continue the manufacture
and sale of these products.
It is the Company's understanding that the global settlement agreement
between the plaintiffs and Dow Corning and other manufacturers will allow
companies to remain in the silicone gel breast implant market. As a result the
Company is continuing to sell its silicone gel filled breast implants. The
Company is also currently developing gel-like alternatives to silicone. Ultimate
availability of such a new product in the domestic market will depend upon
approval by the FDA.
The Company offers a patented line of skin and tissue expanders. Tissue
expansion is a technique for growing additional tissue for reconstruction and
skin graft procedures. Some of the major applications of tissue expansion
developed to date include post-mastectomy reconstruction, and the elimination of
disfigurements such as burns, massive scars and facial deformities.
Urology Products
The Company's Urology products fall into three general categories of
products: urologic implants, disposable health care products and urologic
ultrasound.
Urologic Implants and Potency Devices. The Company offers a broad line of
implantable urological products, including a line of penile implants for the
treatment of male sexual impotence; vacuum constriction devices, used as a first
line non-surgical treatment for impotence; and endourological stents and drains.
Penile prostheses, which accounted for over 80 percent of the Company's
urological implant sales in fiscal 1995, are implanted in men who cannot achieve
a natural erection of sufficient rigidity for sexual intercourse. In order to
respond to various physician and patient preferences, the Company manufactures
several types of penile prostheses, including two types of hydraulic inflatable
devices and two versions of a malleable prosthesis.
For several years, alternative treatment methods for male impotence have
become increasingly popular. These include injection therapy and vacuum
constriction devices. These modes of treatment have been used extensively as a
first line of treatment due to their lower cost and less invasive nature. The
Company began marketing a vacuum constriction device in fiscal 1991. The vacuum
system works by creating a vacuum around the penis, causing blood to engorge the
corpora cavernosa, simulating a natural erection. The Company expects that
alternative treatment methods to permanent implants will remain an integral part
of the marketplace in the future.
Endourological stents and drains are used in conjunction with endoscopic
surgical procedures to treat kidney and other urological problems without major
invasive surgery. A major application for stents is associated with electroshock
wave lithotripsy for the non-surgical removal of kidney stones.
For several years the Company has been pursuing approval on a new urology
product, named Urethrin(TM), which is an injectable implant for the treatment of
urinary incontinence. The FDA is currently requiring the Company to submit
additional clinical data before Urethrin can be approved for marketing. The
Company has agreed with the FDA on a protocol for these clinical studies, and
will begin enrolling patients in fiscal 1996. The Company does not expect final
FDA action for at least a year. There can be no assurance as to when, if ever,
final approval will be given.
In addition to the United States market, the Company has submitted
applications for approval of Urethrin to a number of foreign regulatory
agencies. In November 1993, the Canadian Health and Welfare department approved
Urethrin for marketing in Canada. Shipments to Canada, on a limited clinical
basis, began in fiscal 1995. Initial marketing to Canada is expected to begin
early in fiscal 1996.
Health Care Products. The National Institute of Health estimates that, due
to a variety of causes, ten million men, women and children in the United States
suffer from urinary incontinence or retention--the inability to control the flow
of urine. The Company produces several proprietary, special purpose, disposable
external catheters used in homes, hospitals and extended care facilities for the
management of urinary incontinence or retention.
The Company also markets a variety of other disposable health care products
used in the management of urinary incontinence. These include leg bags and urine
collection systems, organic odor eliminators, and moisturizing skin creams and
ointments.
Urologic Ultrasound. Cancer of the prostate is a serious medical problem in
the United States. It is estimated that 10% of the male population over 50 years
of age are at risk to develop both benign and malignant prostate problems. The
Company markets a dedicated transrectal ultrasound system that can be used to
help diagnose and stage cancer of the prostate.
The Company also offers a number of ancillary products, including a seeding
station for ultrasound-guided radioactive seed implantation in the treatment of
prostate cancer, a general use body probe for kidney and bladder imaging and a
biopsy guide, used to take very accurate samples of potential cancerous tissue.
Ophthalmology Products
Mentor O&O, the Company's ophthalmic subsidiary, markets surgical and
diagnostic products.
Surgical products are used mainly in cataract surgery and other
microsurgery of the eye. In October 1994, the Company acquired the intraocular
lens (IOL) product line of Optical Radiation Corporation, a subsidiary of Benson
Eyecare Corporation. Intraocular lenses are used for corrective vision following
cataract removal surgery. Other surgical products include coagulators used to
control bleeding during surgery. This is accomplished by equipment which
generates radio frequency energy and a hand-held disposable instrument which
delivers it to the surgical site. The Company also sells a line of surgical
wipes and sponges.
In fiscal 1992, the Company introduced the Odyssey(TM) phacoemulsification
system, which uses ultrasound to emulsify (dissolve) cataracts. The Odyssey
incorporates several unique design features which make it smaller and less
costly than most competitive products. This compact system eliminates the need
for an expensive, bulky cart and takes up less space in the operating room. In
addition, the system allows phacoemulsification and irrigation/aspiration to be
done at low flow rates. This greatly reduces turbulence in the eye and enhances
surgeon control during the procedure.
The Company's line of diagnostic products include a variety of equipment
used in routine eye exams and the diagnosis of cataracts and other disorders of
the eye. They include a visual acuity tester, a computerized video system that
can replace and enhance conventional eye chart systems; tonometry products,
which measures the intraocular pressure of the eye, which aids in the diagnosis
of glaucoma, and ophthalmic ultrasound.
During fiscal 1995, the Company made a strategic decision to concentrate
its efforts in the ophthalmic surgical market. The majority of the Company's
diagnostic products, such as the tonometry and ultrasound products, are integral
to this effort. However, several of the Company's smaller diagnostic product
lines, which deal more exclusively with visual testing, do not fit this strategy
and have been discontinued. These include the potential acuity meter, indirect
ophthalmoscopes and a brightness acuity tester. These products accounted for
approximately $1.5 million in sales in fiscal 1995.
In all its products, the Company stresses low-cost and innovation aimed at
improving office and surgical productivity. By offering a wide variety of
products, the Company believes it has established a good working relationship
with both ophthalmologists and optometrists.
Summary of Sales by Principal Product Lines. The following table shows the
net sales attributable to each of the Company's principal product lines and the
percentage contributions of such sales to total net sales for the periods
indicated.
Year Ended March 31,
1995 1994 1993
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
Plastic surgery products $62,964 43% $49,272 40% $45,272 40%
Urology products 53,638 37% 51,199 41% 48,643 42%
Ophthalmology products 29,792 20% 23,115 19% 21,061 18%
$146,394 100% $123,586 100% $114,976 100%
Marketing
The Company employs four specialized domestic direct sales forces for its
cosmetic surgery, urologic implants, health care and ophthalmology product
lines, respectively. Each group provides product orientation and support and
related service to physicians, nurses and other health care professionals.
Reliance upon a direct sales force enables the Company to maintain active and
continuous communication with leading health care professionals in order to
identify emerging growth markets and opportunities for improved products and
product extensions.
The Company also markets certain products, particularly its health care
products, through an extensive domestic network of independent hospital supply
dealers and health care distributors, and increasingly through retail
pharmacies. In addition, the Company utilizes several major domestic health care
equipment dealers to market several of its ophthalmic products.
The Company promotes its products through journal advertising, direct mail
programs, and participation in, and sponsorship of, medical conferences and
seminars. The Company also participates in support organizations that provide
counseling and education for persons suffering from specific maladies, and
provides patient education materials for some of its products to physicians for
use with their patients.
The Company exports most of its products, principally to Canada and Western
Europe. Products are sold to both independent distributors as well as through
the Company's own foreign direct sales offices. For the years ended March 31,
1995, 1994 and 1993, export sales to distributors were $21,243,000, $19,582,000
and $16,652,000, respectively. The Company's domestic sales and foreign sales
are approximately equal in profitability. Other than sales through the Company's
international sales offices, export sales have been made in United States
dollars and currency fluctuations have not constituted significant risks.
The Company has four international sales offices in Canada, the United
Kingdom, Germany and Australia. These offices warehouse product and sell through
a direct sales force in each country. The offices currently sell primarily
cosmetic and reconstructive surgery implants and urology implants. Sales are
made in the local currency of the host country. The Company feels that a local
presence in key countries will better help the Company to capitalize on the
growing international market for medical products. The Company made net sales
from these offices of $11,287,000, $9,329,000 and $9,105,000 during fiscal 1995,
1994 and 1993, respectively. The Company anticipates opening additional direct
sales offices during fiscal 1996 in France and the Netherlands.
In general, the Company maintains sufficient inventories of finished goods
both domestically and internationally to support immediate shipment of products
upon receipt of a customers order. From time to time, however, a back-order
situation may develop due to increased demand for a product or special
circumstances, such as regulatory restrictions. See "Manufacturing" for a
further discussion.
During the year ended March 31, 1995, no customer accounted for more than
10% of the Company's revenues.
Competition
The Company believes it is one of the leading suppliers in the United
States of implantable urology and cosmetic and reconstructive surgery products
and of disposable catheter products, based upon independent research studies of
market share. Many of the Company's products are premium-priced.
The Company currently competes with only one other company in the
inflatable penile market, American Medical Systems, Inc. (a subsidiary of
Pfizer, Inc.). Several implants compete with the Company's malleable penile
implants. The primary competitive factors are product performance and
reliability, ease of implantation and customer service. The Company believes
that, by providing several types of implants which stress high performance and
reliability, it can successfully respond to various physician and patient
preferences.
Similarly to the penile implant market, the Company competes with only one
other company in the domestic breast implant market, McGhan Medical Corporation,
a subsidiary of INAMED, Inc. The primary competitive factors currently are range
of style and sizes, product performance and quality, proprietary design,
customer service and in certain instances, price.
By careful design and active marketing of catheters and other disposable
health care products, the Company has been able to compete successfully against
larger companies. The Company, C.R. Bard, Inc., Hollister, Inc., E.R. Squibb &
Son, Inc., Coloplast, Inc. and Sherwood Medical are the dominant firms in the
market. As with many of the Company's other product lines, the Company competes
primarily on the basis of design and performance, and by providing product
orientation, support and related service to health care professionals and
consumers.
In the ophthalmic device market, companies compete primarily on the basis
of product quality and technology, service, reliability and price. By offering
unique, proprietary products and a broad range of niche products, the Company is
able to compete against larger companies. Various competitors include Allergan,
Inc., Canon, Inc., Nikon Inc., Alcon Laboratories Inc. (a subsidiary of Nestle
S.A.), Johnson and Johnson and Storz Instrument Co. (a division of American
Cyanamid Co.).
While the Company believes it competes successfully in its markets, many of
its competitors have substantially greater financial, technological and
marketing resources.
Government Regulation
Under the "Medical Device Amendments of 1976" (the "Medical Device Act"),
the FDA has the authority to adopt regulations that: (i) set standards for
medical devices; (ii) require proof of safety and effectiveness prior to
marketing devices which the FDA believes require pre-market clearance; (iii)
require test data approval prior to clinical evaluation of human use; (iv)
permit detailed inspections of device manufacturing facilities; (v) establish
"good manufacturing practices" that must be followed in device manufacture; (vi)
require reporting of product defects to the FDA; and (vii) prohibit device
exports that do not comply with the Medical Device Act unless they comply with
established foreign regulations, do not conflict with foreign laws, and the FDA
and the health agency of the importing country determine export is not contrary
to public health. All of the Company's products are "medical devices intended
for human use" within the meaning of the Medical Device Act and are therefore
subject to FDA regulation.
The Medical Device Act establishes complex procedures for compliance based
upon FDA regulations that designate devices as Class I (general controls, such
as compliance with labeling and record keeping requirements), Class II
(performance standards in addition to general controls) or Class III (pre-market
approval application "PMAA" before commercial marketing). Class III devices are
the most extensively regulated because the FDA has determined they are
life-supporting, are of substantial importance in preventing impairment of
health, or present a potential unreasonable risk of illness or injury. The
effect of classifying a device into Class III is to require each manufacturer to
submit to the FDA a PMAA that includes information on the safety and
effectiveness of the device. The majority of the Company's plastic surgery and
urology implants, along with intraocular lenses, are in Class III, while most of
its disposable health care products, ophthalmology products and urological
ultrasound products are in Class I.
In April 1991, the FDA issued a final ruling requiring all manufacturers of
silicone gel filled mammary prostheses to file PMAAs for each specific mammary
prosthesis they intend to market with the FDA within 90 days after the effective
date of the regulation, or cease sale and/or distribution of their products.
PMAAs for any device, such as breast implants, which predates the 1976 Medical
Device Act, are required to be called by the FDA by December 1995. These
applications needed to include a substantial amount of test and statistical
data, including the results of laboratory, animal and clinical investigation and
testing. In July 1991, the Company submitted applications to the FDA relating to
three types of silicone gel filled implants. These included two implants which
are primarily used for cosmetic augmentation and the Becker post-mastectomy
reconstructive device.
In November 1991, the Company presented its applications to the FDA's
outside advisory panel on plastic surgery products. The purpose of this panel
was to make recommendations to the FDA on whether or not the FDA should approve
the applications. The panel concluded that there are insufficient data to
establish with reasonable certainty that silicone gel filled breast implants are
safe and effective. However, the panel voted unanimously that there is a public
health need for these types of implants, recommending that the FDA allow them to
remain on the market while the manufacturers continue to compile additional data
on their safety and effectiveness.
On January 6, 1992, the FDA requested that all United States manufacturers
voluntarily cease manufacturing and marketing these devices and that surgeons
refrain from implanting these products, pending review of additional information
by the advisory panel. The Company complied with this voluntary request. The
information that the FDA was apparently concerned about was the potential
relationship between silicone gel implants and auto immune diseases.
The panel reconvened in February 1992. The panel stated that there has not
been established a cause and effect relationship between silicone gel filled
implants and immune related and connective tissue disorders. The panel believed
that further long term studies were needed to establish with certainty that gel
implants are safe and effective. It recommended that gel implants for cosmetic
augmentation be restricted to limited, controlled clinical studies, while
implants for reconstruction continue to be available to all women who need them.
In April 1992, the FDA announced that it was adopting the recommendations
of the panel. The FDA indicated it was denying the pending applications for the
use of breast implants for augmentation but would provide for the continued
availability of the implants for reconstruction purposes on the basis of a
public health need. In order to obtain silicone gel filled implants for use in
reconstruction, including the Becker device, women will be enrolled in clinical
studies for future follow-up. Patients will be required to sign an informed
consent form and physicians will have to certify that saline implants are not a
satisfactory alternative. The Company resumed shipments of these products under
the terms of this clinical study during the first quarter of fiscal 1993. In May
1992, the FDA granted the Company permission to export silicone gel filled
breast implants to those foreign countries requesting them.
To comply with the Medical Device Act, the Company has incurred, and will
continue to incur, substantial costs relating to laboratory and clinical testing
of new products and the preparation and filing of documents in the formats
required by the FDA. From time to time the Company also may encounter delays in
bringing new products to market as a result of being required by the FDA to
conduct and document additional investigations of product safety and
effectiveness. In 1993, the FDA published proposed guidelines for PMAAs on the
Company's hydraulic inflatable penile prostheses and saline filled breast
implants. For saline implants, the FDA has published a schedule which permits
the data required for the PMAA to be submitted in phases, beginning with
preclinical data due in 1995 and ending with final submission of prospective
clinical data in 1998. The Company intends to submit its PMAAs in a timely
fashion. The Company has begun to collect the data which will be necessary for
these applications. Although the Company believes its data should be sufficient
to satisfy FDA requirements, approval cannot be assured. Should the Company's
PMAAs be denied, it would have a material adverse effect on the Company's
operations and financial position.
Medical device laws and regulations similar to those described above are
also in effect in some of the countries to which the Company exports its
products. These range from comprehensive device approval requirements for some
or all of the Company's medical device products to requests for product data or
certifications.
As a manufacturer of medical devices, the Company's manufacturing processes
and facilities are subject to continuing review by the FDA and various state
agencies to insure compliance with good manufacturing practices. In certain
states, primarily Texas, the Company is also subject to regulation by the local
Air Pollution Control District and the United States Environmental Protection
Agency as a result of some of the chemicals used in its manufacturing process.
Health Care Cost Containment
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare and
corporate health insurance plans. Accordingly, third parties, rather than
patients, frequently pay all or a substantial portion of the costs of goods and
services delivered by health care providers. Except for breast and facial
implants used in cosmetic surgery and augmentation, the Company's medical
products are generally eligible for coverage under many of these third-party
reimbursement programs. The Company believes that eligibility for third-party
reimbursement can be an important factor in the success of medical products,
particularly in situations where there are competing products or treatments that
are also eligible for such reimbursement. Therefore, the Company attempts when
feasible to obtain eligibility of its products for such reimbursement.
Reimbursement plans, whether through government funded Medicare or private
third-party insurers, are developing increasingly sophisticated methods of
controlling health care costs through prospective reimbursement programs,
capitation programs, group buying, redesign of benefits, requirement of a second
opinion prior to major surgery, careful review of bills, encouragement of
healthier lifestyles and exploration of more cost-effective methods of
delivering health care.
These types of programs can potentially limit the amount which health care
providers may be willing to pay for medical products. In the past, the Company
has encountered instances in which reimbursement for some of its products,
particularly its hydraulic inflatable penile prosthesis was denied. The Company
has been successful in the majority of cases to get reimbursement for these
products reinstated. However, there can be no assurance that such instances will
not reoccur in the future. Any such occurrence may have a detrimental effect on
sales of the affected products.
Product Development
At March 31, 1995, the Company employed 81 people engaged in full-time
research and development. The Company expects to introduce new or improved
products during fiscal 1996 in many of its principal product lines, including
mammary prostheses, ophthalmology and health care.
The Company believes its future growth will continue to depend in part upon
the introduction of new products that provide superior benefits, command premium
prices and have significant growth potential. The Company works closely with
health care professionals to ensure new product development is responsive to the
needs and concerns of health care professionals and their patients.
During fiscal 1995, 1994 and 1993, the Company spent a total of
$10,295,000, $9,137,000 and $6,944,000 respectively, for research and
development.
Patents and Licenses
It is the Company's policy to actively seek patent protection for its
products when appropriate. The Company's patents include patents relating to its
penile prostheses, tissue expanders, combination breast implant and tissue
expander, disposable catheters disposable coagulators, and visual acuity
testers.
All of the patents relating to products which produce significant revenues
have at least two years remaining until expiration. While the Company believes
its patents are valuable, it has been the Company's experience that the
knowledge, experience and creativity of its product development and marketing
staffs, and trade secret information with respect to manufacturing processes,
materials and product design, have been at least as important in maintaining
proprietary product lines. As a condition of employment, the Company requires
each of its employees to execute an agreement relating to confidential
information and patent rights.
Product Liability and Warranties
The Company attempts to conduct its product development, manufacturing,
marketing and service and support activities with careful regard for the
consequences to patients. The Company occasionally receives communications from
surgeons or patients with respect to various products claiming the products are
defective and have resulted in injury to the patient. It is the Company's policy
to replace any products claimed to have malfunctioned within a reasonable time
after sale. In the case of the Company's inflatable penile prostheses, the
Company will replace a unit after implantation upon request of the surgeon for
any reason. For the saline filled mammary prosthesis, the Company will provide a
no charge replacement in the event the prosthesis deflates. The Company provides
a limited warranty on certain of its capital equipment products against defects
in workmanship and material. Estimated warranty costs are provided at the time
of sale and periodically adjusted to reflect actual experience.
Manufacturing
The Company's manufacturing facilities have been designed to accommodate
the specialized requirements for the manufacture of medical devices, including
the FDA's regulations concerning good manufacturing practices, with segregated
shipping and storage areas, production quarantine areas and, where necessary,
clean rooms having separate air filtering systems for sterile production. The
facilities also include recovery and control equipment required to maintain
compliance with applicable environmental laws and regulations.
The Company obtains certain raw materials and components for a number of
its products from single suppliers. In most cases the Company's sources of
supply could be replaced if necessary without undue disruption, but it is
possible that the process of qualifying new materials and/or vendors for certain
raw materials and components could cause a material interruption in
manufacturing or sales. No material interruptions occurred during the last
fiscal year.
In the last two years, certain suppliers of raw materials, such as Dow
Corning, DuPont and others, announced that they will no longer supply implant or
medical grade materials for products in several markets related to reproduction,
contraception, obstetrics or cosmetic surgery, due to what they perceive as a
product liability risk in excess of the potential economic benefits of providing
these materials. Certain of the Company's products, principally breast implants
and penile implants, incorporate materials supplied by these companies. Under
guidelines established by the FDA, the Company has been successful in replacing
these materials with those being offered by other companies willing to supply
device manufacturers. The prices the Company pays for many of these replacement
materials is substantially higher than with its previous vendors. These sources
of supply are relatively new, and there can be no assurance that they will be
able to supply the Company in the quantities needed, or that regulatory or other
delays will not cause a disruption in sales of affected products. The Company
believes its supply of raw materials is adequate for the current fiscal year.
Employees
As of March 31, 1995, the Company employed 1,187 people of whom 741 were in
manufacturing, 225 in sales and marketing, 81 in research and development and
140 in finance and administration. None of the Company's employees are
represented by a union. There has never been a work stoppage due to labor
difficulties, and the Company considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES.
The Company owns manufacturing, warehouse and office buildings in
Minneapolis, Minnesota (127,000 square feet). During fiscal 1995, the Company
sold its Stewartville, Minnesota location, which contained 30,000 square feet.
This facility had been closed in 1994 when its operations were consolidated into
the Minneapolis location. A portion of the Minneapolis facility serves as
security for the Company's outstanding industrial revenue bond, which
represented $146,000 of the Company's long-term debt at March 31, 1995.
The Company leases additional office, manufacturing and warehouse
facilities in Santa Barbara, California (40,000 square feet), Goleta, California
(19,000 square feet), Irving, Texas (109,000 square feet), Norwell,
Massachusetts (57,000 square feet) and Leiden, the Netherlands (6,500 square
feet). The Company's international sales offices, located in Australia, Canada,
Germany and the United Kingdom, lease office and warehouse space ranging from
2,000 to 5,800 square feet. All leases have terms ranging from four to ten
years, renewable on terms the Company considers favorable.
During fiscal 1994, the Company transferred its St. Louis operation to the
Company's Minneapolis facility. The lease on the St. Louis facility was
terminated in fiscal 1995. The Company completed the relocation of its Goleta
manufacturing facility to the Texas location during fiscal 1995. The lease on
this 78,000 square foot facility was terminated in 1995. In order to accommodate
certain warehouse needs and expanded office requirements, the Company leased a
19,000 square foot facility in Goleta during fiscal 1995.
The Company believes its facilities are generally suitable and adequate to
accommodate its current operations, and suitable facilities are readily
available to accommodate any future expansion as necessary.
ITEM 3. LEGAL PROCEEDINGS.
A. Claims related to product liability are a regular and ongoing aspect of
the medical device industry. At any one time, the Company has claims involved in
litigation. The Company has carried product liability insurance on all its
products, including breast implants, subsequent to May 1991 and prior to
September 1985. From June 1992 on, such insurance has excluded silicone gel
filled breast implants. This insurance is subject to certain self-insured
retentions and limits of the policy. From September 1985 through April 1991, the
Company was self insured for the majority of its surgical implant products, but
had product liability insurance on the rest of its products, subject to certain
limits, exclusions, and deductibles which the Company believes to be
appropriate.
As a result of the controversy and related media coverage surrounding
silicone gel filled breast implants, the Company became involved in a
substantial amount of product liability litigation in fiscal 1992 and 1993.
These cases alleged design and marketing defects, failure to warn, breach of
implied and express warranties, emotional distress and gross negligence in
connection with silicone gel filled breast implants manufactured by the Company.
The complaints sought unspecified damages for medical expenses, loss of
earnings, prejudgment interest and punitive damages.
During fiscal 1994, the Company reached an agreement with the Federal
Multi-District Litigation Plaintiffs Steering Committee which settled all
outstanding breast implant litigation and claims against the Company. The
agreement established a settlement fund of $25.8 million, to be funded by the
Company and its insurers. The agreement, in which the Company denied any
wrongdoing or legal liability, covers all women who have received a silicone gel
or saline filled breast implant manufactured by the Company from March 1984 (the
date at which the Company first entered the business) through June 1, 1993.
Under the terms of the agreement, the Company made payments of $2.0 million in
May 1993, $8.7 million in November 1993 and $4.5 million in September 1994. The
November payment was funded out of insurance reimbursements. Additional payments
of $5.3 million are due in September 1995 and 1996.
The agreement was approved by the Federal Court, which certified a
mandatory class of persons, who have or may have any existing or future claim,
including claims for injuries not yet known, under any federal or state law,
based upon having received a silicone gel or saline filled breast implant prior
to June 1, 1993.
B. On April 22, 1991, a class action lawsuit was filed by a shareholder of
the Company against the Company and its Chairman, in the United States District
Court for the Central District of California. That action, Oded Weiss v. Mentor
Corp. & Christopher J. Conway, USDC No. 91 2163 RJK, essentially alleges that
the Company and its Chairman made untrue statements of material fact or failed
to disclose material facts concerning the Company's Urethrin product, all in
violation of federal securities laws. The plaintiff seeks, on his behalf and on
behalf of the class, which includes all purchasers of Company stock from January
9, 1991 through April 14, 1991,(both dates inclusive), general damages and
unspecified "extraordinary equitable and/or injunctive relief", as well as
costs, attorneys' fees and pre- and post-judgment interest. In January 1992, a
court order was filed dismissing without prejudice the actions against
Christopher J. Conway. Mentor Corporation remained a defendant in this action.
On September 30, 1994, the Company reached an agreement to settle this
lawsuit. Under the agreement, in which the Company denied any wrongdoing or
legal liability, the Company gave the plaintiffs $1 million in cash and issued
them 50,000 shares of Common Stock. The Agreement was approved by the Court in
March 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
None.
ITEM 4A.EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
Name Age Position
Christopher J. Conway 56 Chairman of the Board, Chief Executive
Officer and Director
Anthony R. Gette 39 President, Chief Operating Officer,
Secretary and Director
Dennis E. Condon 46 President, Mentor H/S, Inc.
Karen H. Edwards 48 Vice President, Regulatory and Legal
Affairs and Quality Assurance
William M. Freeman 56 President, Mentor O&O, Inc.
Gary E. Mistlin 43 Vice President of Finance/Treasurer and
Chief Financial Officer
Bobby K. Purkait 45 Vice President of Research & Development
Spencer M. Vawter 58 President, Mentor Urology, Inc.
Mr. Conway is a founder of the Company and served as its President, Chief
Executive Officer and Chairman of the Board of Directors from its inception to
April 1987. Mr. Conway currently serves as Chief Executive Officer and Chairman
of the Board of Directors.
Mr. Gette joined the Company in December 1980 as its Corporate Controller
and has served in various executive capacities since that time. He became Vice
President, Finance in September 1983, Executive Vice President in September 1986
and President and Chief Operating Officer in April 1987. He became Secretary in
March 1986.
Mr. Condon joined the Company in April 1984 as its Director of Sales and
Marketing for plastic and general surgery products. He was promoted to
President, Mentor H/S, Inc. in July 1991. Prior to that he was Senior Vice
President, Plastic Surgery Sales and Marketing and Managing Director of
International Operations from April 1990 and Vice President, Sales and Marketing
for the Surgical Products Division from April 1985 until April 1990.
Ms. Edwards joined the Company in April 1984 as Risk Manager and has served
in various regulatory affairs and quality assurance capacities. In April 1992,
she was promoted to Vice President of Regulatory and Legal Affairs and Quality
Assurance. She had been Vice President of Regulatory Affairs and Quality
Assurance since August 1987.
Mr. Freeman joined the Company in August 1994. From 1989 to 1994 he was
Vice President & General Manager of Alcon Instrumentation Technology Center, a
subsidiary of Alcon/Nestle, a major ophthalmic company. From 1987 to 1989, he
was Division President of Cooper Surgical, a subsidiary of Coopervision, a
leading supplier of ophthalmic equipment and devices.
Mr. Mistlin joined the Company in November 1987, as Director of
Finance/Treasurer, and was promoted to Vice President of Finance/Treasurer in
April 1989.
Mr. Purkait joined the Company in February 1986, as Product Development
Manager and has served in various research & development capacities. In August
1988 he was promoted to Vice President of Research & Development.
Mr. Vawter joined the Company in March 1993. From 1989 to 1993 he was Chief
Executive Officer and President of Avalon Technology Corporation, a diagnostic
equipment company. From 1988 to 1989 he was President of Labsonics,
Incorporated, an ultrasound diagnostic company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol MNTR. There are approximately 20 market makers for the
Company's stock. The following table shows the range of high and low closing
sale prices reported on the NASDAQ National Market. Quotations represent prices
between dealers, and do not reflect retail mark-ups, mark-downs or commissions.
Year ended March 31, 1995 High Low
Quarter ended June 30, 1994 15 1/2 13
Quarter ended September 30, 1994 17 1/8 14 3/4
Quarter ended December 31, 1994 18 3/4 16
Quarter ended March 31, 1995 28 17
Year ended March 31, 1994
Quarter ended June 30, 1993 12 1/2 9 1/4
Quarter ended September 30, 1993 14 10 1/2
Quarter ended December 31, 1993 14 3/4 12
Quarter ended March 31, 1994 17 3/8 13 1/2
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data of the
Company and should be read in conjunction with the related Consolidated
Financial Statements of the Company and accompanying Notes to Consolidated
Financial Statements.
Year Ended March 31,
(in thousands, except per share 1995 1994 1993 1992 1991
data)
Statement of Operations Data:
Net sales $ 146,394 $123,586 $ 114,976 $ 89,422 $ 73,793
Gross profit 93,598 81,131 75,165 53,815 45,340
Operating income (loss) 27,043 19,984 (2,341) 8,851 11,039
Income (loss) before income taxes 24,221 16,844 (4,730) 6,706 8,881
Net income (loss) $ 15,773 $ 11,005 $ (2,830) $ 4,510 $ 5,920
Net income (loss) per share $ 1.41 $ 1.02 $ (0.27) $ 0.42 $ 0.54
Dividends per common share $ 0.15 - $ 0.16 $ 0.16 $ 0.16
Average outstanding shares 11,187 10,805 10,654 10,789 10,934
Balance Sheet Data:
Working capital $ 53,745 $ 39,721 $ 35,188 $ 28,758 $ 28,267
Total assets 128,760 120,750 109,947 90,324 84,515
Long-term debt, less current 24,655 25,386 24,362 24,399 25,955
portion
Shareholders' equity $ 71,114 $ 54,653 $ 43,428 $ 47,728 $ 43,939
SALES BY PRINCIPAL PRODUCT LINE
Year Ended March 31,
1995 1994 1993
(in thousands)
Amount Percent Amount Percent Amount Percent
Plastic Surgery Products $ 62,964 43% $ 49,272 40% $ 45,272 40%
Urology Products 53,638 37% 51,199 41% 48,643 42%
Ophthalmology Products 29,792 20% 23,115 19% 21,061 18%
$ 146,394 100% $ 123,586 100% $ 114,976 100%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following table sets forth various items from the Consolidated Statements of
Operations as a percentage of net sales for the periods indicated:
Year Ended March 31,
1995 1994 1993
Net sales 100.0% 100.0% 100.0%
Cost of sales 36.1 34.4 34.6
Selling, general and administrative 38.4 42.1 43.1
Research and development 7.0 7.4 6.0
Special litigation charge - - 18.3
Operating income (loss) 18.5 16.1 (2.0)
Interest income (expense), net (1.7) (2.5) (1.8)
Other expense (0.2) - (0.3)
Income (loss) before income taxes 16.6 13.6 (4.1)
Income taxes 5.8 4.7 (1.6)
Net income (loss) 10.8% 8.9% (2.5)%
RESULTS OF OPERATIONS
Sales
Sales for fiscal 1995 increased 18% to $146.4 million, compared to $123.6
million the prior year. Growth was a result of strong increases in sales of
plastic surgery products and growth in sales of ophthalmology products. The
Company experienced increased unit demand for plastic surgery products. Growth
in sales of ophthalmology products was primarily a result of the acquisition in
October 1994 of the intraocular lens (IOL) product line of Optical Radiation
Corporation.
In conjunction with the settlement of its outstanding product liability
litigation (See Note H to the Consolidated Financial Statements, "Litigation"),
the Company had agreed under certain circumstances to cease marketing silicone
gel filled breast implants approximately in April 1995. However, according to
the terms of the settlement, if the plaintiffs enter into a settlement agreement
with other manufacturers which allows any other company to remain in the market
to manufacture and sell silicone gel breast implants, then the Company will also
be allowed to continue the manufacture and sale of these products.
It is the Company's understanding that the global settlement between the
plaintiffs and Dow Corning and other manufacturers allows those companies to
remain in the silicone gel breast implant market. As a result, the Company
believes it can continue to sell silicone gel filled breast implants (subject to
clinical trial protocols and other FDA restrictions).
Sales for fiscal 1994 were $123.6 million, an increase of 7% over the prior
year. Sales increased in each of the Company's basic markets. International
sales was the best performing area, increasing 12% for the year. Particularly
strong were export sales to unaffiliated distributors, which were up 18%.
Plastic surgery sales showed an overall increase of 9% for the year. Sales of
saline breast implants, however, increased almost 40% over the prior year's
levels, offset by a decline in silicone gel products.
The Company's export sales to unaffiliated customers accounted for 15%, 16%
and 14% of net sales in the fiscal years ended March 31, 1995, 1994 and 1993,
respectively.
Over the three fiscal years ended March 31, 1995, sales increases have been
primarily the result of increased unit sales and a shift to higher priced
products. General selling price increases have not been significant in recent
years.
Cost Of Sales
Cost of sales was 36.1% for fiscal 1995, compared to 34.4% for the prior
year. The Company's cost of sales for its plastic surgery products was reduced
from prior years as a result of the closure of the Company's California
manufacturing facility in July 1994. This reduction was offset by startup
expenses in the Company's new manufacturing plant in the Netherlands. This plant
began to ship product during the fourth quarter of fiscal 1995.
Cost of sales was 34.4% for fiscal 1994, compared to 34.6% for fiscal 1993.
During fiscal 1994, the Company was operating two manufacturing facilities for
its plastic surgery products, during the process of transferring manufacturing
from California to Texas. This generated additional factory expense which was
not incurred in fiscal 1993. This higher level of spending continued until the
California plant closed in July 1994.
Certain suppliers of raw materials, such as Dow Corning, DuPont and others,
have announced that they will no longer supply implant or medical grade
materials for products in several markets due to what they perceive as a product
liability risk in excess of the potential economic benefits of providing these
materials. Certain of the Company's products, principally breast implants and
penile implants, incorporate materials produced by these companies. Under
guidelines established by the FDA, the Company has been successful in replacing
these materials with those being offered by other companies willing to supply
implantable device manufacturers. The prices the Company pays for many of these
replacement materials is substantially higher than with its previous vendors.
These sources of supply are relatively new, and there can be no assurances that
they will be able to supply the Company in the quantities needed. The Company
believes its supply of raw materials is adequate for the current fiscal year.
Selling, General and Administrative
Selling, general and administrative expenses decreased to 38.4% of sales in
fiscal 1995, compared to 42.1% in the previous year. During fiscal 1994, the
Company was in the process of consolidating and closing three facilities in
Santa Barbara, California, St. Louis, Missouri and Stewartville, Minnesota into
other existing operations. Included in the fiscal 1994 results was approximately
$3 million in costs associated with the consolidation. This amount includes
expenses related to employee relocation, new employee hiring and training, and
severance. These costs were completed in fiscal 1994.
Selling, general and administrative expenses were 42.0% of sales for fiscal
1994, compared to 43.1% in the previous year. Substantially reduced legal and
administrative fees in relation to breast implant litigation were the main
reason for the decline. This decline was partially offset by approximately $3
million in costs related to the consolidation and closing of three facilities.
Research and Development
Research and development expenses were 7.0% of sales in fiscal 1995,
compared to 7.4% in fiscal 1994. The Company continues to spend funds on its
premarket approval applications ("PMAAs") for its silicone gel filled breast
implants, saline breast implants and penile implants. The Company is committed
to a variety of clinical and laboratory studies in connection with these
products. The Company expects to spend the same amount of money on these PMAAs
in fiscal 1996 as it did in fiscal 1995. In addition, the Company is beginning
clinical studies on several new products, specifically its Urethrin product for
treating urinary incontinence. Thus the Company expects to spend more in
research and development as a percent of sales in fiscal 1996 than it did in
fiscal 1995. Research & development expenses increased to 7.4% of sales for
fiscal 1994, compared to 6.0% for the prior year. In early 1993, the FDA
published proposed guidelines for PMAAs on the Company's saline filled breast
implants and penile implants. During the year, the Company began to incur
increased expenses to collect the data necessary for these applications,
including both human clinical studies and laboratory testing. In addition, the
Company continued to spend funds on its existing PMAAs on its silicone gel
filled breast implants.
Interest and Other Income and Expense
Interest expense decreased $273 thousand in fiscal 1995 from the prior
year, due primarily to lower balances on the Company's line of credit. Included
in interest expense for the year is $1.0 million in imputed interest on the
Litigation Settlement Obligation. In fiscal 1996, this amount will be reduced to
$700 thousand. Interest income increased from $247 thousand last year to $568
thousand this year, resulting from higher cash balances. Included in interest
income this year is $272 thousand related to foreign currency gains on the
Company's foreign operations.
In the third quarter of fiscal 1995, the Company sold its manufacturing
facility in Stewartville, Minnesota. The Company received net proceeds of
approximately $600 thousand. This transaction resulted in a book loss of
approximately $200 thousand.
In May 1995, subsequent to the end of the fiscal year, the Company called
for redemption of its convertible debentures. The Redemption Date is June 30,
1995. At March 31, 1995, the outstanding balance was $24.2 million. At the
option of the debenture holders, the debentures may be converted into Common
Stock at the conversion price of $16.50. This redemption will lower interest
expense in fiscal 1996 by $1.3 million.
Interest expense increased $882 thousand in fiscal 1994 over 1993. Lower
interest on bank borrowings was offset by $1.0 million in imputed interest
charges on the Litigation Settlement Obligation. Interest income decreased $176
thousand from the prior year, due to lower cash balances and interest rates
during the year.
Income Taxes
The effective rate of corporate income taxes was an expense of 35% for both
fiscal 1995 and 1994, compared to a benefit of 40% in fiscal 1993. In fiscal
1993, the Company's effective benefit exceeded the U.S. federal statutory rate
due primarily to the preferential tax treatment of certain of the Company's
foreign sales.
Net Income
Net income per primary share in fiscal 1995 was $1.41, compared to $1.02 in
fiscal 1994. The increase was caused by the higher sales combined with a lower
percentage growth in operating expenses.
Primary earnings per share will be affected in fiscal 1996 by the Company's
call for redemption of its convertible debentures. Assuming all of the
debentures are converted into Common Stock, an additional 1.5 million shares
will be outstanding. Net of the benefit of lower interest expense, this will
cause an approximate 8% dilution in primary earnings per share.
Inflation
The Company does not believe inflation has had a material impact on the
Company's operations over the three year period ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended March 31, 1995, liquidity needs have been
satisfied principally by cash flow from operations and the drawdown on available
lines of credit.
At March 31, 1995, working capital was $53.7 million compared to $39.7
million the previous year. The Company generated $13.0 million of cash from
operations during fiscal 1995, compared to $12.5 million the previous year. Net
income increased $4.8 million compared to the prior year. Of the total increase
in receivables and inventory for the current fiscal year, $2.8 million and $2.4
million, respectively, related to the acquisition of the IOL product line from
Optical Radiation Corporation.
During fiscal 1995 the Company spent $6.9 million on capital expenditures,
primarily improvements in manufacturing facilities and equipment and data
processing hardware and software. Of this amount, approximately $4.2 million was
for the buildout of its manufacturing facilities in Texas and Minneapolis. The
Company anticipates investing approximately $8 million in facilities and capital
equipment in fiscal 1996.
During fiscal 1995, the Company had up to $13 million available to it under
two lines of credit. The first is a secured $8 million revolving line of credit,
which allows for borrowings up to approximately 70% of domestic accounts
receivable. The second was an unsecured line for $5 million. Borrowings under
this line may only be used for the Company's Mentor O&O subsidiary. The maximum
amount borrowed under these lines of credit was $5.1 million in fiscal 1995. At
March 31, 1995, the Company had no borrowings outstanding under its lines of
credit. Subsequent to the fiscal year end, the Company executed a new secured
$15 million Credit Agreement with another bank. This Agreement will replace the
other two lines of credit.
During fiscal 1994, the Company finalized its agreement with the Federal
Multi-District Litigation Plaintiffs Steering Committee, which settled all
outstanding breast implant litigation and claims against the Company. The
agreement established a settlement fund of $25.8 million, to be funded by the
Company and its insurers. Under the terms of the agreement, the Company made
payments of $2 million in May 1993, $8.7 million in November 1993 and $4.5
million in September 1994. The second payment was funded out of insurance
reimbursements. Additional payments of $5.3 million are due in September 1995
and 1996.
Following a successful patent infringement lawsuit against Coloplast AS in
the United Kingdom, the Company received payment of damages in the amount of
$3.4 million during July 1994. Approximately one half of the proceeds were paid
to the Company's UK distributor, DePuy International, which joined with the
Company in the legal action against Coloplast. The patent relates to the
Company's disposable self-adhering catheter for managing urinary incontinence in
males. In addition to the cash payment, the court ordered Coloplast to cease
marketing infringing products in the United Kingdom.
Since 1991, the Company has been a defendant in a shareholder class action.
See Legal Proceedings for further detail. In September 1994, the Company agreed
to settle this lawsuit, subject to approval by the Federal Court. The Company
paid $1 million in the second quarter and issued 50,000 shares of Mentor Common
Stock in the fourth quarter under the terms of the settlement.
The net effect of these two previous items was not material to the
consolidated financial statements.
In October 1994, the Company acquired the intraocular lens (IOL) operations
of Optical Radiation Corporation, a subsidiary of Benson Eyecare Corporation.
The purchase was made in exchange for $3 million in cash, the issuance of
approximately 61,000 shares of Common Stock and the assumption of certain
specified obligations.
At the Annual Meeting of Shareholders, held September 7, 1994, the Company
announced the resumption of its quarterly cash dividends. At the indicated rate
of $.20 per year, the aggregate annual dividend would equal approximately $2.2
million. In June 1993, the Company's Board of Directors had suspended dividends
on the Company's Common Stock in order to meet the Company's payment obligations
under the breast implant settlement agreement.
In May 1995, subsequent to the end of the fiscal year, the Company called
for redemption of its convertible debentures. The Redemption Date is June 30,
1995. At March 31, 1995, the outstanding balance was $24.2 million. At the
option of the debenture holders, the debentures may be converted into Common
Stock at the conversion price of $16.50. During April 1995, $8.0 million was
converted, leaving a balance of $16.2 million. The Company will be obligated to
redeem any remaining bonds not converted on June 30, 1995 at 100% of the
principal amount, plus accrued interest. No interest payment will be due to
those holders who choose to convert their debentures into Common Stock.
The Company's principal source of liquidity at March 31, 1995 consisted of
$11.4 million in cash and marketable securities plus $12.3 million available
under the existing lines of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended March 31, 1995.
For information concerning executive officers, see Item 4A of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended March 31, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended March 31, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended March 31, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
PAGE
(a)(1) Consolidated Financial Statements
Report of Independent Auditors 32
Consolidated Statements of Financial Position
as of March 31, 1995 and 1994 33
Consolidated Statements of Operations for the
Years Ended March 31, 1995, 1994, and 1993 35
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended March 31, 1995, 1994, and 1993 36
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1995, 1994 and 1993 37
Notes to Consolidated Financial Statements 38
(a)(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves 47
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the consolidated
financial statements or notes thereto.
(a)(3) List of exhibits:
3(a) Composite Restated Articles of Incorporation of the Company. (1)
3(b) Composite Restated Bylaws of the Company.(2)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
(a)(3) List of exhibits (continued):
4 Mentor Corporation to Bankers Trust Company, Trustee, Indenture,
dated as of July 22, 1987; U.S. $30,000,000, 6 3/4% Convertible
Subordinated Debentures, Due 2002. (1)
Copies of constituent instruments defining rights of holders of other long-
term debt of the registrant and subsidiaries are not filed herewith, pursuant to
paragraph 4(iii)(A) of Item 601 of Regulation S-K, because the total amount of
securities authorized under any such instrument does not exceed 10% of the total
assets of the registrant and subsidiaries on a consolidated basis. The
registrant hereby agrees that it will, upon request by the Securities and
Exchange Commission, furnish to the Commission a copy of each such instrument.
10.1 Mentor Corporation 1982 Incentive Stock Option Plan and Agreement-
Registration Statement No. 2-94726.(7)(10)
10.2 Mentor Corporation Restated 1987 Non-Statutory Stock Option Plan
and Agreement - Registration Statement No.33-25865.(8)(10)
10.3 Mentor Corporation 1991 Stock Option Plan - Registration Statement
No. 33-48815.(9)(10)
10.4 Stock Option Agreement, dated September 21, 1988, between Mentor
Corporation and Anthony R. Gette.(2)(10)
10.5 Lease Agreement, dated November 9, 1989, between Mentor
Corporation and Skyway Business Center Joint Venture.(3)
10.6 First Amendment to Lease Agreement, dated December 1, 1993,
between Mentor Corporation and Skyway Business Center Joint
Venture.(6)
10.7 Revolving Credit Agreement, dated January 29, 1993, between Mentor
Corporation and Norwest Bank Minnesota, National Association.(5)
10.8 $8,000,000 Mentor Revolving Note, dated January 29, 1993, between
Mentor Corporation and Norwest Bank Minnesota, National
Association.(5)
10.9 Security Agreement, dated January 29, 1993, between Mentor
Corporation and Norwest Bank Minnesota, National Association.(5)
10.10 Security Instrument Collateral Bank Account Agreement, dated
January 29, 1993, between Mentor Corporation and Norwest Bank
Minnesota, National Association.(5)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
(a)(3) List of exhibits (continued):
10.11 Corporate Guaranty, dated January 29, 1993, between Mentor
Corporation and Norwest Bank Minnesota, National Association.(5)
10.12 Schedule of related banking documents, dated January 29, 1993,
between Mentor Corporation and its subsidiaries and Norwest Bank
Minnesota, National Association.(5)
10.13 Amendment No. 1 to Loan Documents, dated June 29, 1993, between
Mentor Corporation and its subsidiaries and Norwest Bank Minnesota,
National Association.(6)
10.14 Credit Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 52
10.15 $15,000,000 Revolving Note, dated May 22, 1995, between
Mentor Corporation and Sanwa Bank California. 83
10.16 Security Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 85
10.17 Guarantor Security Agreement, dated May 22, 1995, between
Mentor Corporation and its subsidiaries and Sanwa Bank
California. 97
10.18 Continuing Guaranty Agreement, dated May 22, 1995, between
Mentor Corporation and Sanwa Bank California. 117
10.19 Contribution Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 109
10.20 Inter-Company Note, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 115
10.21 Lease Agreement, dated July 23, 1990, between Mentor Corporation
and SB Corporate Center, Ltd.(4)
10.22 Settlement Agreement and Stipulation, dated May 7, 1993, between
Mentor Corporation and Representative Plaintiffs.(5)
10.23 Employment Agreement, dated March 15, 1993, between Mentor
Corporation and Spencer M. Vawter. (6)(10)
10.24 Employment Agreement, dated August 5, 1994, between
Mentor O&O, Inc. and William M. Freeman. (10) 123
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
(a)(3) List of exhibits (continued):
11 Statement Regarding Computation of Per Share Earnings. 48
22 Subsidiaries of the Company. 49
23 Consent of Independent Auditors. 50
(b) Reports on Form 8-K:
None
(1) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1988, File No. 0-7955.
(2) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1989, File No. 0-7955.
(3) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1990, File No. 0-7955.
(4) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1991, File No. 0-7955.
(5) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1993, File No. 0-7955.
(6) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1994, File No. 0-7955.
(7) Incorporated by reference to Registration Statement on Form S-8,
Registration No. 2-94726.
(8) Incorporated by reference to the post effective amendment No. 1 to
Registration Statement on Form S-8, Registration No. 33-25865.
(9) Incorporated by reference to Registration Statement on Form S-8,
Registration No. 33-48815.
(10)Management contract or compensatory plan or arrangement.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders of Mentor Corporation
We have audited the accompanying consolidated statements of financial
position of Mentor Corporation as of March 31, 1995 and 1994, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mentor
Corporation at March 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
May 8, 1995
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, March 31,
(dollars in thousands) 1995 1994
Assets
Current assets:
Cash and equivalents $ 9,350 $ 6,043
Marketable securities 2,029 4,286
Accounts receivable, net of allowance for doubtful
accounts of $1,363 in 1995 and $993 in 1994 30,026 22,512
Inventories 29,994 29,074
Deferred income taxes 6,918 5,045
Other 2,741 3,148
Total current assets 81,058 70,108
Property and equipment:
Buildings and land 12,735 12,040
Equipment 30,761 29,157
43,496 41,197
Less accumulated depreciation (17,958) (16,926)
25,538 24,271
Other assets:
Deferred income taxes 1,400 4,000
Patents, licenses, trademarks and bond issuance
costs, net of accumulated amortization of 6,287 7,148
$9,127 in 1995 and $8,275 in 1994
Goodwill, net of accumulated amortization of 13,523 13,938
$2,190 in 1995 and $1,786 in 1994
Other assets 954 1,285
22,164 26,371
$ 128,760 $ 120,750
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(CONTINUED)
March 31, March 31,
(dollars in thousands) 1995 1994
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,996 $ 3,558
Accrued compensation 5,620 3,147
Income taxes payable 606 -
Interest payable 1,145 1,122
Dividends payable 549 -
Sales returns 4,765 3,625
Litigation settlement obligation 5,333 5,483
Other accrued liabilities 5,568 7,995
Short-term bank borrowings and current
portion of long-term debt 731 5,457
Total current liabilities 27,313 30,387
Long-term debt 473 1,204
Litigation settlement obligation 5,678 10,324
Convertible subordinated debentures 24,182 24,182
Shareholders' equity:
Common Stock, $.10 par value: Authorized-
20,000,000 shares; Issued and outstanding -- 1,090 1,069
10,898,388 shares in 1995;
10,690,338 shares in 1994
Capital in excess of par value 15,031 12,789
Cumulative translation adjustment (283) (333)
Retained earnings 55,276 41,128
Total shareholders' equity 71,114 54,653
$ 128,760 $ 120,750
See notes to consolidated financial statements
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
(in thousands, except per share data) 1995 1994 1993
Net sales $ 146,394 $ 123,586 $ 114,976
Costs and expenses:
Cost of sales 52,796 42,455 39,811
Selling, general and administrative 56,260 52,010 49,562
Research and development 10,295 9,137 6,944
Special litigation charge - - 21,000
119,351 103,602 117,317
Operating income (loss) 27,043 19,984 (2,341)
Interest income 568 247 423
Interest expense (3,114) (3,387) (2,505)
Other expense (276) - (307)
Income (loss) before income taxes 24,221 16,844 (4,730)
Income tax (benefit) expense 8,448 5,839 (1,900)
Net income (loss) $ 15,773 $ 11,005 $ (2,830)
Net income (loss) per share:
Primary $ 1.41 $ 1.02 $ (0.27)
Fully diluted $ 1.30 $ 0.98 $ (0.27)
See notes to consolidated financial statements
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Number of Capital in Cumulative
Common Shares Par Excess of Translation Retained
(in thousands) Outstanding Value Par Value Adjustment Earnings
Balance April 1, 1992 10,640 $1,064 $ 12,241 $ (236) $ 34,659
Exercise of stock options 36 4 317 - -
Dividends declared ($.16 per share) - - - - (1,706)
Foreign currency translation adjustment - - - (155) -
Income tax benefit arising from
the exercise of stock options - - 70 - -
Net loss - - - - (2,830)
Balance March 31, 1993 10,676 $1,068 $ 12,628 $ (391) $ 30,123
Exercise of stock options 14 1 161 - -
Foreign currency translation adjustment - - - 58 -
Net income - - - - 11,005
Balance March 31, 1994 10,690 $1,069 $ 12,789 $ (333) $ 41,128
Exercise of stock options 207 21 2,680 - -
Dividends declared ($.15 per share) - - - - (1,625)
Repurchase of common shares (110) (11) (2,386) - -
Income tax benefit arising from
the exercise of stock options - - 134 - -
Common shares used in business
acquisition 61 6 994 - -
Common shares used in litigation
settlement 50 5 820 - -
Foreign currency translation adjustment - - - 50 -
Net income - - - - 15,773
Balance March 31, 1995 10,898 $1,090 $ 15,031 $ (283) $ 55,276
See notes to consolidated financial statements
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
(in thousands) 1995 1994 1993
Cash from operating activities:
Net income (loss) $ 15,773 $ 11,005 $ (2,830)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 6,798 6,165 5,595
Deferred income taxes 727 (296) (7,993)
Loss on sale of assets 278 33 92
Expenses not requiring the use of cash 1,821 996 -
Litigation settlement obligation (4,483) 671 17,550
Changes in operating assets and liabilities:
Increase in accounts receivable (7,514) (1,150) (5,416)
Increase in inventories and other current assets (673) (5,106) (3,880)
(Decrease) increase in accounts payable and accrued expenses (102) 151 5,280
Increase in income taxes payable 606 - -
Decrease in other accrued liabilities (232) - -
Net cash provided by operating activities 12,999 12,469 8,398
Cash from investing activities:
Purchase of property, equipment and intangibles (6,912) (8,933) (7,295)
Proceeds from sale of property, equipment and other assets 1,015 94 166
Reduction in notes receivable 183 208 810
Purchase of marketable securities - (1,253) (1,073)
Sale of marketable securities 2,257 - -
Net cash used for investing activities (3,457) (9,884) (7,392)
Cash from financing activities:
Repurchase of common stock (2,398) - -
Exercise of stock options 2,701 162 391
Dividends paid (1,082) (427) (1,704)
Reduction in long-term debt (674) (336) (41)
Borrowings under line of credit agreements - 2,950 12,982
Payments on line of credit agreements (4,782) (4,099) (11,550)
Net cash (used for) provided by financing activities (6,235) (1,750) 78
Increase in cash and equivalents 3,307 835 1,084
Cash and equivalents at beginning of year 6,043 5,208 4,124
Cash and equivalents at end of year $ 9,350 $ 6,043 $ 5,208
Supplemental schedule of cash flow information:
Interest paid $ 2,760 $ 2,225 $ 2,347
Income taxes paid $ 6,937 $ 7,013 $ 5,599
Supplemental schedule on non-cash flow investing & financing activities:
Common shares issued to acquire equipment and intangibles $ 1,000 - -
See notes to consolidated financial statements
MENTOR CORPORATION
Notes to Consolidated Financial Statements
Note A Summary of Significant Accounting Policies
History and Business Activity
Mentor Corporation was incorporated in April 1969. The Company is engaged in one
industry segment - the development, manufacture and marketing of specialized
medical products. The Company's products are sold to hospitals, physicians and
through various health care dealers, wholesalers, and retail outlets.
Principles of Consolidation
The consolidated financial statements include the accounts of Mentor Corporation
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Marketable Securities
The Company considers its marketable securities available-for-sale as defined in
Statement of Financial Accounting Standards ("SFAS") No. 115. There were no
material realized or unrealized gains or losses nor any material differences
between estimated fair values and costs of securities in the investment
portfolio as of March 31, 1995.
Accounts Receivable and Credit Risk
The Company grants credit terms in the normal course of business to its
customers, primarily hospitals, doctors and distributors. As part of its ongoing
control procedures, the Company monitors the credit worthiness of its customers.
Bad debts have been minimal. The Company does not normally require collateral or
other security to support credit sales.
Revenue Recognition
Sales and related cost of sales are recognized primarily upon the shipment of
products. The Company allows credit for products returned within its policy
terms. Such returns are estimated and an allowance provided at the time of sale.
The Company provides a warranty on certain of its capital equipment products
against defects in workmanship and material. Estimated warranty costs are
provided at the time of sale and periodically adjusted to reflect actual
experience.
Inventories
Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost and includes interest on funds
borrowed to finance construction. Capitalized interest was $54,000 in 1995.
Depreciation is based on the useful lives of the properties and computed using
the straight-line method. Significant improvements and betterments are
capitalized while maintenance and repairs are charged to operations as incurred.
Intangible Assets
Patents, licenses and trademarks are stated at cost less accumulated
amortization and are amortized over their economic life ranging from 3 to 20
years using the straight-line method. Goodwill is amortized over 20-40 years.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are
provided on the temporary differences between income for financial statement and
tax purposes.
Per Share Data
Primary income (loss) per share is computed based on the weighted average number
of Common Stock and Common Stock equivalents outstanding during each year.
Common Stock equivalents represent the dilutive effect of the assumed exercise
of certain outstanding options. The calculation of fully diluted income (loss)
per share assumes the convertible subordinated debentures were converted into
Common Stock at the beginning of the year. If the result of these assumed
conversions is dilutive, the interest requirements of the debentures are reduced
while the average number of Common Stock equivalents outstanding are increased.
Foreign Sales
Export sales, principally to Canada and Western Europe, were $21,243,000;
$19,582,000; and $16,652,000 in 1995, 1994 and 1993, respectively. In addition,
$11,287,000; $9,329,000; and $9,105,000 in sales respectively, were from the
Company's direct international sales offices established during 1991.
Foreign Currency Translation
The financial statements of the Company's non-U.S. subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation". Net assets of certain non-U.S.
subsidiaries whose "functional" currencies are other than the U.S. dollar are
translated at current rates of exchange. Income and expense items are translated
at the average exchange rate for the year. The resulting translation adjustments
are recorded directly into a separate component of shareholders' equity. Net
assets and the results of operations of the Company's foreign entities were not
significant on a consolidated basis.
Reclassification
Certain reclassifications of previously reported amounts have been made to
conform to current year's presentation.
Note B Inventories
Inventories at March 31 consisted of:
(in thousands) 1995 1994
Raw materials $ 9,294 $ 8,047
Work in process 5,264 5,564
Finished goods 15,436 15,463
$ 29,994 $ 29,074
Note C Long-term Debt
Long-term debt at March 31 consisted of:
(in thousands) 1995 1994
Convertible subordinated debentures, at 6.75%,
due 2002 $ 24,182 $ 24,182
Term bank loan, at 7.8%, due in monthly installments
through September 1996 1,058 1,698
City of Minneapolis, Minnesota, Industrial Development
Revenue Bonds at 7.5%, payable through 1998 146 180
25,386 26,060
Less current portion 731 674
$ 24,655 $ 25,386
The 6.75% convertible subordinated debenture may be converted into shares
of Common Stock at a price of $16.50 at any time prior to maturity. They are
redeemable by the Company at 100% of face value. The Company has reserved
1,466,000 shares of Common Stock for issuance under the terms of the convertible
subordinated debentures. During April 1995, $8.0 million of the convertible
debentures were converted into 487,000 shares of Common Stock. On May 12, 1995
the Company called for the redemption of the remaining $16.2 million outstanding
of the 6 3/4% convertible debentures. The redemption date is June 30, 1995.
Assuming all of the remaining debentures are converted into common shares, an
additional 979,000 common shares will be issued.
The aggregate maturities of outstanding long-term debt during the next five
fiscal years are as follows:
1996-$731,000;
1997-$415,000;
1998-$50,000;
1999-$8,000; and none thereafter.
At March 31, 1995, the Company had agreements for up to $13 million under two
credit lines, one for $8 million and one for $5 million. Borrowings under the $5
million agreement accrue interest at the prevailing prime rate, while borrowings
under the $8 million agreement accrue interest at the prevailing prime rate plus
one and one-half percent. At March 31, 1995, the Company had no amounts
outstanding under either of its available lines of credit. The Company had $12.3
million available under its credit arrangements.
Subsequent to the fiscal year end, the Company executed a new secured $15
million Credit Agreement with another bank. This Agreement will replace the
other two lines of credit. Borrowings under the Credit Agreement will accrue
interest at the prevailing prime rate. The Credit Agreement includes certain
covenants, which, among others, limit the dividends the Company may pay and
require maintenance of certain levels of tangible net worth and debt service
ratios. An annual commitment fee of .25% will be paid on the unused portion of
the $15 million credit line.
During 1994, the Company completed the construction of certain production
equipment in the Minneapolis facility. A portion of the construction cost was
funded under a $2 million interim equipment financing agreement. Upon completion
of the equipment in 1994, the $2 million advance was converted into a 3 year
fully amortized term loan at 7.8% interest. The loan is secured by the
production equipment.
Note D Stock Options
The Company has granted options to key employees and non-employee directors
under a qualified 1991 Plan, a non-qualified 1987 Plan, and a qualified 1982
Plan. Options granted under all plans are exercisable in four equal cumulative
installments beginning one year from the date of grant. Options issued under the
1991 and 1987 Plans expire in ten years, while options under the 1982 Plan
expire in five years. Options issued under the plans are granted at the fair
market value on the date of grant. Activity in the stock option plans during
fiscal 1995, 1994 and 1993 was as follows:
Options Outstanding
Shares
Total Exercisable Price per Share
Balance April 1, 1992 922,473 374,225 $ 8.00 to $ 20.13
Granted 218,000 - 10.50 to 15.50
Exercisable - 209,625 10.13 to 20.13
Exercised (35,425) (35,425) 8.00 to 12.50
Cancelled or terminated (52,000) (21,625) 11.75 to 20.13
Balance March 31, 1993 1,053,048 526,800 $ 8.00 to $ 20.13
Granted 178,400 - 11.13 to 13.75
Exercisable - 223,205 10.50 to 20.13
Exercised (14,250) (14,250) 8.00 to 15.13
Cancelled or terminated (26,875) (12,875) 10.50 to 16.50
Balance March 31, 1994 1,190,323 722,880 $ 8.00 to $ 20.13
Granted 310,000 - 13.50 to 23.88
Exercisable - 197,643 10.50 to 20.13
Exercised (207,375) (207,375) 8.00 to 20.13
Cancelled or terminated (68,375) (10,525) 10.50 to 16.50
Balance March 31, 1995 1,224,573 702,623 $ 8.00 to $ 23.88
At March 31, 1995 there were 293,850 shares available for grant under the 1991
Plan. There are no additional shares available for grant under either the 1987
or 1982 Plans.
During fiscal 1989, the Company granted an officer a non-qualified stock option
to purchase 50,000 shares of Common Stock, at $10.75 per share. At March 31,
1995, there were options for 50,000 shares of Stock outstanding and exercisable
under this option. This option expires in September 1998.
Note E Income Taxes
Year Ended March 31,
(in thousands) 1995 1994 1993
Current:
Federal $ 6,644 $ 5,392 $ 5,317
State 546 743 776
Foreign 531 - -
7,721 6,135 6,093
Deferred:
Federal 676 (302) (7,239)
State 51 6 (754)
727 (296) (7,993)
$ 8,448 $ 5,839 $ (1,900)
The reconciliation of the federal statutory rate to the Company's effective rate
is as follows:
Year Ended March 31,
1995 1994 1993
Federal statutory rate 35.0% 35.0% (34.0)%
Increase (decrease) resulting from:
State tax, net of federal tax benefit 1.9 3.1 2.3
Non-taxable interest and dividends (0.2) (0.3) (1.2)
Research and development credit (1.8) (2.2) (1.3)
Foreign Sales Corporation (1.3) (1.7) (6.2)
Foreign losses without benefits 0.2 3.1 -
Benefit of tax law changes - (3.0) -
Non-deductible goodwill 0.8 1.1 4.2
Charitable contributions of inventory - (0.2) (1.9)
Other 0.3 (0.2) (2.1)
34.9% 34.7% (40.2)%
Significant components of the Company's deferred tax liabilities and assets are
as follows:
March 31,
(in thousands) 1995 1994 1993
Deferred tax liabilities:
Tax over book depreciation $ 1,279 $ 1,288 $ 1,100
Installment sale for tax purposes - 47 91
Other - 5 11
Total deferred tax liabilities 1,279 1,340 1,202
Deferred tax assets:
Book reserves not deductible for tax 3,536 3,543 1,874
Uniform capitalization 676 571 752
Litigation settlement obligation 4,166 5,871 6,965
Profit on sales to foreign subsidiaries 1,219 400 360
Total deferred tax assets 9,597 10,385 9,951
Net deferred tax assets $ 8,318 $ 9,045 $ 8,749
Note F Commitments
The Company leases certain facilities under operating leases with unexpired
terms ranging from one to twelve years. Most leases contain renewal options.
Rental expense for these leases was $2,147,000, $2,736,000 and $2,537,000 for
fiscal 1995, 1994 and 1993, respectively.
Future minimum lease payments under lease arrangements at March 31, 1995 are as
follows:
(in thousands)
1996 $ 2,134
1997 1,701
1998 1,530
1999 1,493
2000 1,280
Thereafter 3,145
Total $ 11,283
Note G Related Party Transactions
In April 1991, the Company entered into an agreement with Rochester Medical
Corporation (Rochester). Under the terms of the agreement, the Company received
an exclusive license to market and distribute certain external catheter products
developed by Rochester, in exchange for a payment of $500,000. No purchases of
product were made in 1995. The Company purchased $1,645,000 and $328,000 of
product from Rochester in 1994 and 1993 respectively.
Several officers/founders of Rochester, a public company, are siblings of the
Chairman of Mentor Corporation. The Chairman derived no financial or other
benefit from transactions between the Company and Rochester.
Note H Litigation
Claims related to product liability are a regular and ongoing aspect of the
medical device industry. At any one time, the Company has claims involved in
litigation. The Company has carried product liability insurance on all its
products, including breast implants, subsequent to May 1991 and prior to
September 1985. From June 1992 on, such insurance has excluded silicone gel
filled breast implants. This insurance is subject to certain self-insured
retentions and limits of the policy. From September 1985 through April 1991, the
Company was self-insured for the majority of its surgical implant products, but
had product liability insurance on the rest of its products, subject to certain
limits, exclusions and deductibles which the Company believes to be appropriate.
With the exception of its silicone breast implant products, which are covered by
the settlement agreement, the Company does maintain a reserve ($2,000,000 and
$1,200,000 at March 31, 1995 and 1994, respectively) in an amount it believes to
be reasonably sufficient to cover the cost of anticipated product liability
claims.
As a result of the controversy and related media coverage surrounding silicone
gel filled breast implants, the Company became involved in a substantial amount
of product liability litigation in fiscal 1992 and 1993. These cases alleged
design and marketing defects, failure to warn, breach of implied and express
warranties, emotional distress and gross negligence in connection with silicone
gel filled breast implants manufactured by the Company. The complaints sought
unspecified damages for medical expenses, loss of earnings, prejudgment interest
and punitive damages.
During fiscal 1994, the Company reached an agreement with the Federal Multi-
District Plaintiffs Steering Committee which settled all outstanding breast
implant litigation and claims against the Company. The agreement established a
settlement fund of $25.8 million, which will be funded by the Company and its
insurers. The agreement, in which the Company denies any wrongdoing or legal
liability, covers all women who have received a silicone gel or saline filled
breast implant manufactured by the Company from March 1984 (the date at which
the Company first entered the business) through June 1, 1993. The agreement was
approved by the Federal Court, which certified a mandatory class of persons, who
have or may have any existing or future claim, including claims for injuries not
yet known, under any federal or state law, based upon having received a silicone
gel or saline filled breast implant prior to June 1, 1993.
Under the terms of the agreement, the Company made payments of $2.0 million in
May 1993, $8.7 million in November 1993, and $4.5 million in September 1994. The
second payment was funded out of insurance reimbursements. Additional payments
of $5.3 million are due in both September 1995 and 1996.
As a result of the settlement agreement, the Company recorded a pretax charge of
$21,000,000 in the fourth quarter of fiscal 1993. This charge included the
present value of the settlement payments, net of estimated insurance
reimbursement, certain expenses related to the agreement, plus an accrual for
future expenses to conclude the terms of the agreement.
In April 1991, a class action lawsuit was filed by a shareholder of the Company
against the Company and its Chairman. That action, Oded Weiss v. Mentor Corp. &
Christopher J. Conway, essentially alleged that the Company and its Chairman
made untrue statements of material fact or failed to disclose material facts
concerning the Company's Urethrin product, all in violation of federal
securities laws. The plaintiffs sought, on his behalf and on behalf of the
class, which included all purchasers of Company stock from January 9, 1991
through April 14, 1991, (both dates inclusive), general damages and unspecified
"extraordinary equitable and/or injunctive relief", as well as costs, attorneys'
fees and pre- and post-judgment interest. In January 1992, a court order was
filed dismissing without prejudice the actions against defendant Christopher J.
Conway.
In September 1994, the Company reached an agreement to settle this lawsuit.
Under the agreement, in which the Company denied any wrongdoing or legal
liability, the Company paid the plaintiffs $1 million in cash and 50,000 shares
of Common Stock. The settlement was approved by the Federal Court in March 1995.
In addition, in the ordinary course of its business the Company experiences
various types of claims which sometimes result in litigation or other legal
proceedings. The Company does not anticipate that any of these proceedings will
have any material adverse effect on the Company.
Note I Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations:
Quarter
(in thousands, except per share data) First Second Third Fourth
Year Ended March 31, 1995
Net sales $ 34,729 $ 32,687 $ 38,127 $ 40,851
Gross profit 22,390 21,425 24,720 25,063
Net income 3,690 3,400 4,197 4,486
Net income per share:
Primary $ 0.34 $ 0.31 $ 0.38 $ 0.39
Fully diluted $ 0.32 $ 0.29 $ 0.35 $ 0.36
Year Ended March 31, 1994
Net sales $ 31,028 $ 29,329 $ 31,183 $ 32,046
Gross profit 20,829 19,154 20,085 21,063
Net income 2,340 2,586 2,933 3,146
Net income per share:
Primary $ 0.22 $ 0.24 $ 0.27 $ 0.29
Fully diluted $ 0.22 $ 0.23 $ 0.26 $ 0.28
MENTOR CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
COL A COL. B COL. C COL. D COL. E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
Year Ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 993 $ 674 $ 282 $ 586 (1) $ 1,363
Liability Reserves:
Product liability $ 1,200 $ 1,242 $ - $ 442 (2) $ 2,000
Accrued sales returns and allowances 3,625 1,145 - 5 (3) 4,765
$ 4,825 $ 2,387 $ - $ 447 $ 6,765
Year Ended March 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts $ 904 $ 315 $ - $ 226 (1) $ 993
Liability Reserves:
Product liability $ 1,000 $ 672 $ - $ 472 (2) $ 1,200
Accrued sales returns and allowances 3,033 625 - 33 (3) 3,625
$ 4,033 $ 1,297 $ - $ 505 $ 4,825
Year Ended March 31, 1993
Deducted from asset accounts:
Allowance for doubtful accounts $ 426 $ 685 $ - $ 207 (1) $ 904
Liability Reserves:
Product liability $ 1,000 $ 4,323 $ - $ 4,323 (2) $ 1,000
Accrued sales returns and allowances 904 2,405 - 276 (3) 3,033
$ 1,904 $ 6,728 $ - $ 4,599 $ 4,033
(1) Uncollected accounts written off, net of recoveries.
(2) Product liability claims paid.
(3) Sales rebates.