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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, 1997
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. X Yes 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
The aggregate market value of the voting stock of the
Company held by non-affiliates of the Registrant as based upon
the closing National Market System sale price on June 27, 1997
was $690,403,000.
Number of Shares of Common Stock outstanding on June 27, 1997:
24,879,398.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997
Annual Meeting of Shareholders are incorporated by reference in
Part III in this Report on Form 10-K.
PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K filed on behalf of
Mentor Corporation ("Mentor" or the "Company") contains forward-
looking statements that involve risks and uncertainties. These
include statements about the Company's strategies and
expectations about new and existing products, technologies and
opportunities, market and industry segment growth and demand and
acceptance of new and existing products. These also include
statements regarding the regulatory and legal environment in
which the Company operates and its assessment of risks associated
therewith. The Company's actual future results could differ
materially from these statements. Factors that could cause or
contribute to such differences include, but are not limited to,
these factors discussed in Item 1, "Business," Item 3 "Legal
Proceedings," Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in
this report.
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 and
surgically implantable prostheses, principally penile implants
for the treatment of chronic male sexual impotence. 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. During fiscal 1997, Mentor O&O's name was
changed to Mentor Ophthalmics.
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 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 and manufacture medically oriented
materials.
During fiscal 1991, the Company established four
international sales offices to enhance and grow its market
position in these countries. Mentor Medical Systems Canada,
Mentor Medical Systems UK, Ltd., Mentor Deutschland, GmbH, and
Mentor Medical Systems, Pty, Ltd. (Australia) are all
subsidiaries of Mentor Corporation. In fiscal 1996, the Company
established Mentor France S.A. and Mentor Benelux B.V.. In
fiscal 1997, the Company opened two additional sales office
subsidiaries: Mentor Medical Systems Iberica S.L. and Havas
Medical B.V.
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 and development facility
outside of 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. As of April 1, 1996, Mentor
ORC, Inc. was merged into Mentor Ophthalmics.
In 1992 and 1995, respectively, Teknar sold its assets
to Mentor Ophthalmology and Mentor Urology. As a result, Teknar
Corporation was dissolved in April 1996.
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 and skin and tissue expanders.
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 expandable implant
used specifically for breast reconstruction. Mammary prostheses
comprise over 90 % of total plastic surgery product sales.
Saline filled breast implants accounted for approximately 80% of
mammary prostheses sold in fiscal 1997.
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.
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.
In April 1997, the Company began marketing a line of
facial implants. These products are supplied by Implantech, a
private manufacturer of facial implants.
For the past several years, the Company has been
developing a new plastic surgery product for use in liposuction
surgery. Liposuction, or the removal of body fat, is one of the
most popular cosmetic procedures performed today. Current
liposuction uses a metal cannula to sheer the fat. This requires
the physician to exert a large amount of force to facilitate the
procedure. In ultrasonic assisted liposuction, a generator sends
ultrasonic waves through a probe which is inserted under the
skin. The ultrasonic energy emulsifies the fat, which can then
be easily aspirated away.
In March 1997, the FDA conditionally approved the
Company's Investigational Device Exemption to begin human
clinical trials. The Company is currently enrolling patients.
There can be no assurance as to when, if ever, final approval
will be given. The Company expects to be in production of this
product in the summer of 1997, and to begin international sales
at that time.
Urology Products
The Company's Urology products fall into two general
categories of products, impotence and incontinence products.
Impotence Products. The Company's impotence products
include a line of penile implants for the treatment of male
sexual impotence and vacuum erection devices, used as a first
line non-surgical treatment for impotence.
Penile prostheses, which accounted for over 90 % of the
Company's impotence sales in fiscal 1997, 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 versions of hydraulic inflatable
devices and two versions of a malleable prosthesis.
For the past several years, alternative treatment
methods for male impotence have become increasingly popular.
These include injection drug therapy and vacuum erection 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 erection 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.
Incontinence Products. The National Institute of
Health estimates that, due to 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 markets, or has under development, a broad
range of incontinence products, including disposable products
which help people manage their incontinence, and surgical
products which aid in curing the problem.
In the disposable products area, the Company produces
several types of catheters, including intermittent self
catheters, used by women, men and children to manage retentive
incontinence, and male external catheters, including both latex
and hypo-allergenic silicone models. These products are used in
homes, hospitals and extended care facilities.
The Company also markets a variety of other disposable
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.
The Company believes that many people, if given the
choice, would rather cure than manage their incontinence problem.
The Company has focused considerable attention in developing
products for this market. For several years the Company has been
pursuing regulatory approval on a new product, named Urethrin,
which is an injectable implant for the treatment of incontinence.
The FDA is currently requiring the Company to submit additional
clinical data before Urethrin can be approved for marketing. The
Company is in the process of enrolling patients for this study.
There can be no assurance as to when, if ever, final approval
will be given for sales in the United States. The Company has
begun limited sales of Urethrin in the international market.
Bladder neck suspensions and the pubovaginal sling are
increasingly popular surgical procedures for women suffering from
stress incontinence. In both of these procedures, the bladder
neck and urethra are lifted and suspended by a pair of sutures
which run beneath them and are in turn attached to the pubic
bone. In May 1997, the Company began marketing the Cinch bone
anchor system, used to anchor the sutures. The Company is
continuing to research additional products for the surgical
treatment of incontinence.
Ophthalmology Products
For the past several years, the Company has been
focusing its marketing and development efforts on cataract and
glaucoma surgery. Cataract surgery, which involves the removal
of a calcified lens in the eye and the implantation of an
intraocular lens ("IOL"), is the most common surgical procedure
performed in both the United States and the world.
The Company produces a wide range of products related
to cataract surgery, including the diagnostic ultrasound,
disposable products used during the surgery, phacoemulsification
to remove the cataract and IOLs.
In November 1996, the Company introduced its next
generation diagnostic ultrasound, the Advent A/B. The Advent
aids in the diagnosis of the cataract and other disorders of the
eye, and helps determine the prescription strength of the IOL to
implant. The Advent offers many features not found in
combination on existing ophthalmic ultrasound equipment,
including multi-frequency images of the complete eye, a 9"
monitor with split screen, instant multiple diopter calculations
and pan and zoom of both live and frozen images.
Disposable ophthalmic products include coagulators to
control bleeding during surgery. This is accomplished by
equipment which generates radio frequency energy and a hand-held
instrument which delivers it to the surgical site. In October
1996, the Company introduced its new line of Orca diamond knives
and disposable blades. The Company also sells a line of lint
free surgical wipes and sponges, and titanium instruments such as
forceps and needle holders.
In February 1997, the Company began marketing the
Mentor SIStem phacoemulsifier, a totally redesigned and upgraded
version of the Company's first phacoemulsifier. This product
incorporates many advanced features, including a unique fluidics
system for enhanced hydrodynamic control and a closed aspiration
system for instant vacuum control. Unlike competing products,
the fluidics system is external to the equipment, preventing
possible contamination.
In October 1994, the Company acquired the IOL product
line of Optical Radiation Corporation, a subsidiary of Benson
Eyecare. The Company markets two types of IOLs: a fixed, hard
plastic lens, and proprietary foldable lens, the MemoryLensr.
The MemoryLens has been available internationally since early
1996. In the United States, the Company submitted a Premarket
Approval Application to the FDA in September 1996, following
completion of its clinical trials. The application is currently
under review by the FDA. There can be no assurance as to when,
if ever, final approval will be given for sales in the United
States.
The Company also markets tonometry products, which
measures the intraocular pressure of the eye, which aids in the
diagnosis of glaucoma.
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,
1997 1996 1995
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
Plastic surgery
products $106,970 53% $89,215 50% $ 62,964 43%
Urology products 59,824 29% 54,127 30% 53,638 37%
Ophthalmology products 36,574 18% 34,474 20% 29,792 20%
$203,368 100% $177,816 100% $146,394 100%
Marketing
The Company employs four specialized domestic 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. In
addition, this allows 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 disposable incontinence products, through an extensive
domestic network of independent hospital supply dealers and
health care distributors, and increasingly through retail
pharmacies.
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 product lines,
principally to Canada and Western Europe. Products are sold to
both independent distributors as well as through the Company's
own foreign direct international sales offices. For the years
ended March 31, 1997, 1996 and 1995, export sales were
$29,437,000, $26,223,000 and $21,243,000, respectively. In
addition, $20,526,000, $14,140,000 and $11,287,000 in sales
respectively, were from the Company's direct international
offices.
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 eight international sales offices in
Canada, the United Kingdom, Germany, France, Benelux, Australia
and Spain. The France and Benelux offices were opened late in
fiscal 1996, while Spain was established in fiscal 1997. 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.
In general, the Company maintains sufficient
inventories of finished goods both domestically and
internationally to support immediate shipment of products upon
receipt of a customer's 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".
During the year ended March 31, 1997, 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 penile implants and cosmetic and
reconstructive surgery products and of disposable catheter
products, based upon independent research studies of market
share.
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.
The Company competes primarily with 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 incontinence products, the Company has been able
to compete successfully against larger companies. The Company,
C.R. Bard, Inc., Hollister, Inc., Sherwood Medical, Baxter
Travenol, Inc., and Coloplast, Inc. are the dominant competitors
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
believes that it will be able to compete against larger
companies. Various competitors include Allergan, Inc., Alcon
Laboratories Inc., a subsidiary of Nestle S.A., Johnson and
Johnson, Storz Instrument Co., a division of American Cyanamid
Co., Pharmacia, Upjohn, Inc. and Chiron Corporation.
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 (premarket 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 incontinence and other ophthalmology products are
in Class I.
In 1991, the Company submitted PMAAs for its silicone
gel filled mammary prostheses to the FDA, pursuant to FDA
regulations issued at that time. In 1992, the FDA's outside
advisory panel on plastic surgery products indicated that
although there was insufficient data to establish with reasonable
certainty that silicone gel implants were safe and effective,
there was a public health need for these types of implants. The
FDA adopted the recommendations of the panel.
The FDA stated it was denying the pending applications
for the use of silicone gel-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, women would be enrolled in clinical studies for
future follow-up. Patients would be required to sign an informed
consent form and physicians will have to certify that saline
implants are not a satisfactory alternative. The Company began
shipments of these products under the terms of this clinical
study during the first quarter of fiscal 1993.
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. The process of obtaining marketing clearance from the
FDA for new products and existing products can be time-consuming
and expensive, and there is no assurance that such clearances
will be granted. 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, which may adversely affect the
Company's ability to commercialize additional products or
additional applications for existing products.
In 1993, the FDA published proposed guidelines for
PMAA's 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 PMAA's
in a timely fashion and has begun to collect the data which will
be necessary for these applications. FDA approval, however,
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. These agencies inspect the
Company and its facilities from time to time to determine whether
the Company is in compliance with various regulations relating to
manufacturing practices, validation, testing, quality control and
product labeling. These regulations depend heavily on
administrative interpretation by the various agencies, and can be
influenced by adverse publicity and political pressure. There
can be no assurance that future interpretations made by the FDA
or other regulatory bodies will not adversely affect the Company.
A determination that the Company is in violation of such
regulations could lead to imposition of various penalties,
including the issuance of warning letters, injunctive relief,
consent decrees, product recalls or product seizures.
In June 1995, Mentor H/S's Texas facility was reviewed
by the FDA. As a result of that review, they received an FD483,
list of observations. These observations dealt primarily with
validation of manufacturing processes and follow-up on product
complaint evaluations. Mentor H/S responded to the FD483 in
August 1995. In February 1996, the FDA issued Mentor H/S a
warning letter, concluding that they had not satisfactorily
addressed the inadequacies noted in the FD483. To address the
warning letter, the FDA required a comprehensive GMP audit by an
outside expert consultant, approved by the FDA, be completed by
July 12, 1996. The President of Mentor H/S was also required to
certify, in a letter to the FDA, that he had reviewed the
consultant's report and has initiated or completed all
corrections called for in the report. For those issues which
were not complete, a time frame for completion was submitted. A
copy of the audit by the consultant was also to be included with
the letter. Both the letter and the report were submitted prior
to July 12, 1996.
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. In other
areas, particularly intraocular lenses, reimbursement rates have
been declining over the last few years. Denial of reimbursement
and/or limitations on the amount third party payors are willing
to pay will, most likely, have a detrimental effect on sales of
the affected products.
Product Development
At March 31, 1997, the Company employed 89 people
engaged in full-time research and development. The Company is
working to develop new or improved products in many of its
principal product lines, including plastic surgery, ophthalmology
and incontinence products.
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 ascertain their needs and concerns and those of
their patients.
During fiscal 1997, 1996 and 1995, the Company spent a
total of $17,449,000, $13,379,000 and $10,295,000 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,
ultrasonic assisted liposuction, disposable catheters and
disposable coagulators.
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 also
been 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 several years, certain suppliers of raw
materials, such as Dow Corning, DuPont and others, announced that
they would 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, incorporated 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, 1997, the Company employed 1403 people
of whom 904 were in manufacturing, 250 in sales and marketing, 89
in research and development and 160 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 (136,000 square feet). The
Company leases additional office manufacturing and warehouse
facilities in Santa Barbara, California (71,000 square feet),
Mounds View, Minnesota(20,000), Irving, Texas (109,000 square
feet), Norwell, Massachusetts (57,000 square feet), Cidra, Puerto
Rico (25,000 square feet) and Leiden, the Netherlands (15,000
square feet). The Company's international sales offices, located
in Australia, Canada, Germany, France, Belgium, United Kingdom
and Spain lease office and warehouse space ranging from 1,000 to
5,500 square feet. All leases have terms ranging from one to
fifteen years, renewable on terms the Company considers
favorable.
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.
Claims related to product liability are a regular and
ongoing aspect of the medical device industry. At any one time,
the Company is subject to claims asserted against it and is
involved in products liability 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.
The Company became involved in a substantial amount of
product liability litigation related to silicone gel filled
breast implants 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. 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, $4.5 million in September 1994, $5.3 million in September
1995, and $5.3 million in September 1996. This completed the
monetary obligations under the Agreement. The November 1993
payment was funded out of insurance reimbursements.
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.
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 , as well as the
ages as of June 27, 1997, are listed below, followed by brief
accounts of their business experience and certain other
information.
Name Age Position
Christopher J. Conway 58 Chairman of the Board, Chief
Executive Officer and Director
Anthony R. Gette 41 President, Chief Operating Officer,
Secretary and Director
Dennis E. Condon 48 President, Mentor H/S, Inc.
Karen H. Edwards 50 Vice President, Regulatory and
Legal Affairs and Quality Assurance
William M. Freeman 58 President, Mentor Ophthalmics, Inc.
Gary E. Mistlin 45 Vice President of Finance/Treasurer
and Chief Financial Officer
Bobby K. Purkait 47 Vice President of Research &
Development
Ramona E. Schwab 36 Vice President of Human Resources
Mr. Conway is a founder of the Company and has served
as its Chief Executive Officer and Chairman of the Board of
Directors since the Company's inception in 1969.
Mr. Gette joined the Company in December 1980 and has
served in various financial and general management capacities
since that time. He became Vice President, Finance in 1983,
Executive Vice President in 1986 and President and Chief
Operating Officer in 1987. He became Secretary in 1986.
Mr. Condon joined the Company in April 1984 and has
served in various sales and marketing capacities until his
promotion to President of the Company's plastic and
reconstructive surgery subsidiary in 1991. He became Vice
President, Sales and Marketing in 1985 and Senior Vice President,
Sales and Marketing and Managing Director of International
Operations in 1990.
Ms. Edwards joined the Company in 1984 and served in
various regulatory, legal and quality assurance capacities since
that time. In 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
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.
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 and has
served in various research & development capacities. He was
promoted to Vice President of Research & Development in 18988
Ms. Schwab joined the Company in March 1996. From 1992
to 1996 she was Director, Human Resources of Sorin Biomedical
Inc., a privately held cardiovascular medical device company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) The Common Stock of the Company is traded on the NASDAQ
National Market under the symbol MNTR. There are approximately
14 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. Quotations for periods before the October 1995 two
for one stock split have been retroactively adjusted.
Year Ended March 31, 1997 High Low
Quarter ended June 30, 1996 27 3/16 20 7/8
Quarter ended September 30, 1996 32 25
Quarter ended December 31, 1996 29 1/2 21 6/16
Quarter ended March 31, 1997 30 21 5/8
Year Ended March 31, 1996 High Low
Quarter ended June 30, 1995 14 10 3/4
Quarter ended September 30, 1995 22 3/4 13 5/8
Quarter ended December 31, 1995 23 17 3/4
Quarter ended March 31, 1996 29 7/8 19 7/8
(b) As of June 27, 1997 there were 1700 holders of record
of the Company's Common Stock.
(c) In fiscal 1997 and fiscal 1996, the Company declared
and paid a quarterly dividend of $0.025 per share of Common
Stock.
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 data)
1997 1996 1995 1994 1993
Statement of Operations
Data:
Net sales $ 203,368 $ 177,816 $ 146,394 $ 123,586 $114,976
Gross profit 135,907 117,550 93,598 81,131 75,165
Operating income (loss) 42,281 37,121 27,043 19,984 (2,341)
Income (loss) before
income taxes 42,446 36,140 24,221 16,844 (4,730)
Net income (loss) $ 27,870 $ 23,819 $ 15,773 $ 11,005 $ (2,830)
Net income (loss) per
share $ 1.06 $ 0.92 $ 0.70 $ 0.51 $ (0.13)
Dividends per common share $ 0.10 $ 0.10 $ 0.075 _ $ 0.08
Average outstanding shares 26,349 25,856 22,374 21,610 21,308
Balance Sheet Data:
Working capital $ 88,171 $ 70,135 $ 53,745 $ 39,721 $ 35,188
Total assets 166,645 149,618 128,760 120,750 109,947
Long-term debt, less
current portion 8 58 24,655 25,386 24,362
Shareholders' equity $ 138,349 $ 116,495 $ 71,114 $ 54,653 $ 43,428
SALES BY PRINCIPAL PRODUCT LINE
Year Ended March 31,
(in thousands) 1997 1996 1995
Amount Percent Amount Percent Amount Percent
Plastic Surgery
Products $106,970 53% $89,215 50% $ 62,964 43%
Urology Products 59,824 29% 54,127 30% 53,638 37%
Ophthalmology
Products 36,574 18% 34,474 20% 29,792 20%
$203,368 100% $177,816 100% $146,394 100%
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 Income as a percentage of net sales
for the periods indicated:
Year Ended March 31,
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of sales 33.2 33.9 36.1
Selling, general and administrative 37.4 37.7 38.4
Research and development 8.6 7.5 7.0
Operating income 20.8 20.9 18.5
Interest income (expense), net .2 (0.4) (1.9)
Other expense (0.1) (0.2) _
Income before income taxes 20.9 20.3 16.6
Income taxes 7.2 6.9 5.8
Net income 13.7% 13.4% 10.8%
RESULTS OF OPERATIONS
Sales
Sales for fiscal 1997 increased from $177.8 million in 1996 to
$203.4 million, an increase of 14%. Growth was particularly
strong in sales of plastic surgery products, up 20% over the
prior year, attributable to both unit growth in the market and
market share gains. Sales of urology products increased 11%, as
improved sales of disposable incontinence products accelerated
growth over prior years. Ophthalmic product sales increased 6%
over last year. Increased international sales of the MemoryLens
foldable intraocular lens were offset by declines in domestic
sales of fixed intraocular lens.
Sales for fiscal 1996 increased 21% to $177.8 million, compared
to $146.4 million the prior year. Plastic surgery product sales
were up 42% over the prior year, attributable to both unit growth
in the market and market share gains. Sales of urology products
were flat with last year. Sales of urologic implants, however,
increased in the second half of the year, due to heightened
public awareness in seeking treatment for impotence. Ophthalmic
product sales increased 16% over the prior year, as increases in
intraocular lens sales offset declining revenues from
discontinued diagnostic equipment. In October 1994, the Company
acquired the intraocular lens (IOL) product line of Optical
Radiation Corporation, a subsidiary of Benson Eyecare
Corporation. This acquisition was included for the full year in
fiscal 1996, while only for six months in fiscal 1995.
The Company's export sales to unaffiliated customers accounted
for 14%, 15%, and 15% of net sales in the fiscal years ended
March 31, 1997, 1996 and 1995, respectively.
Over the three fiscal years ended March 31, 1997, 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 33.2% for fiscal 1997, compared to 33.9% for
the prior year. The Company continues to work on a variety of
efficiency enhancements at each of its facilities. In addition,
the improvement in the cost of sales was aided by a greater
proportion of higher margin products in the sales mix, as well as
the discontinuance of low margin ophthalmic diagnostic products.
Cost of sales was 33.9% for fiscal 1996, compared to 36.1% for
fiscal 1995. Increased operating efficiencies helped compensate
for the substantially higher prices the Company began paying on
many of its medical and implant grade materials. These materials
are now being sourced from new vendors following the exit of
certain suppliers, such as Dow Corning and DuPont, from this
market. In addition, the Company's new manufacturing plant in
the Netherlands, which incurred startup expenses in the prior
year, was in full production in fiscal 1996.
Selling, General and Administrative
Selling, general and administrative expenses decreased to 37.4%
of sales in fiscal 1997, compared to 37.7% the prior year. A
small increase in sales & marketing expense, due to new product
introductions, was offset by productivity increases in
administrative areas.
Selling, general and administrative expenses decreased to 37.7%
of sales in fiscal 1996, compared to 38.4% in the previous year.
The Company experienced productivity improvements in its sales
efforts, particularly in the plastic surgery division.
Research and Development
Research and development expenses were 8.6% of sales in fiscal
1997, up from 7.5% the prior year. The Company continues to spend
substantial 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. In addition, the Company spent a significant
amount of funds on its ultrasonic assisted liposuction product.
Development dollars were also spent on the Advent A/B ophthalmic
ultrasound and the Mentor SIStem phacoemusifier, introduced in
fiscal 1997. Other major clinical studies underway include
Urethrin, a product for treating urinary incontinence and the
MemoryLens, a foldable IOL.
The Company expects to pursue additional clinical studies and
product development in the coming year, while spending on
existing projects is not expected to decline substantially. Thus
the Company expects to spend more in research and development as
a percent of sales in fiscal 1998 than it did in fiscal 1997.
Research and development expenses were 7.5% of sales in fiscal
1996, compared to 7.0% in fiscal 1995.
Interest and Other Income and Expense
Interest expense was $559 thousand in fiscal 1997, a decrease
from $1.1 million in fiscal 1996. Due to the conversion of the
Convertible Subordinated Debentures in fiscal 1996, there was no
interest expense incurred in 1997, compared to $250 thousand in
fiscal 1996. Included in interest expense in 1997 was $383
thousand in imputed interest on the Litigation Settlement
Obligation, a decrease from $727 thousand the prior year. As the
Obligation was paid in full in fiscal 1997, there will be no
further expense related to this item.
Interest income increased to $812 thousand in 1997 from $440
thousand in fiscal year 1996, resulting from higher cash
balances. Other income and expense includes primarily gains or
losses on disposals of assets, and foreign currency gains or
losses related to the Company's foreign operations.
Interest expense was $1.1 million in fiscal 1996, a decrease from
$3.1 million in fiscal 1995. In the first quarter of fiscal 1996,
the Company called for the redemption of its 6 3/4% Convertible
Subordinated Debentures. As of June 1995, the Debentures had
been either converted into Common Stock or redeemed. Included in
interest expense for the year is $727 thousand in imputed
interest on the Litigation Settlement Obligation, compared to
$1.0 million in the prior year.
Interest income increased from $296 thousand in 1995 to $440
thousand in fiscal 1996, resulting from higher cash balances.
Income Taxes
The effective rate of corporate income taxes was 34% for fiscal
1997 and 1996, compared to 35% for fiscal 1995.
Net Income
Net income per primary share in fiscal 1997 was $1.06, compared
to $0.92 in fiscal 1996. The increase was caused by higher sales
combined with an increase in net interest income.
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, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended March 31, 1997, liquidity needs have
been satisfied principally by cash flow from operations.
At March 31, 1997, working capital was $88.2 million compared to
$70.1 million the previous year. The Company generated $26.4
million of cash from operations during fiscal 1997, compared to
$19.7 million the previous year. Increases in net income,
deferred income taxes and a reduction in growth of accounts
receivable were partially offset by a slower increase in accounts
payable from the prior year.
During fiscal 1997 the Company spent $10.8 million on capital
expenditures and intangibles. The majority of the funds was for
improvements in manufacturing facilities, primarily Texas and
Minneapolis, and equipment and data processing hardware and
software. The Company anticipates investing approximately $12
million in facilities and capital equipment in fiscal 1998.
During fiscal 1997, the Company had available to it $15 million
under a secured line of credit. Borrowings accrue interest at
the prevailing prime rate. The line of credit includes certain
covenants which, among others, limit the dividends the Company
may pay and require the maintenance of certain levels of tangible
net worth and debt service ratios. An annual commitment fee of
.25% is paid on the unused portion of the credit line. There
were no borrowings under the agreement in fiscal 1997, nor any
balance outstanding at March 31, 1997.
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
a payment of $5.3 million during fiscal 1997, completing the
Company's monetary obligations under the agreement.
During fiscal 1996, the Company called for the redemption of its
Convertible Subordinated Debentures, with a redemption date of
June 30, 1995. All but $48 thousand of the $24.2 million balance
at March 31, 1995 was converted into Common Stock at a price of
$8.25. A total of 2,926,000 shares were issued to debenture
holders. Interest accrued on the debentures but not paid as a
result of the conversion ($1.4 million) was credited, net of the
applicable tax effect, directly to shareholders' equity.
In fiscal 1996, the Company announced that its Board of Directors
had authorized the repurchase of up to 500,000 shares of Common
Stock. The shares purchased and retired under this program will
be used to offset stock options previously granted to employees
of the Company under existing stock option plans. During fiscal
1997, the Company repurchased 295,000 shares for an aggregate
consideration of $6.9 million.
The Company's principal source of liquidity at March 31, 1997
consisted of $27.8 million in cash and marketable securities plus
$15.0 million available under the existing line of credit.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained herein, the
matters discussed in this Management's Discussion are forward-
looking statements, the accuracy of which is necessarily subject
to risks and uncertainties. Actual results may differ
significantly from the discussion of such matters in the forward-
looking statements.
Due to the nature of the Company's products and business, the
Company has been and will be involved in various legal actions
arising in the course of business, some of which involve product
liability and intellectual property claims. With respect to
product liability issues, the litigation and regulatory risks
will continue to exist even with respect to those products that
have received or in the future may receive regulatory approval
for commercial sale. It is possible that adverse results arising
from product liability or intellectual property actions, as well
as adverse results arising from regulatory or administrative
proceedings, could negatively affect the Company's future results
of operations.
The Company has been and may be in the future the subject of
negative publicity, which can arise from various sources, ranging
from the news media to legislative and regulatory investigations.
There can be no assurance that such negative publicity will not
result in a material adverse effect on the Company's future
financial position, its results of operations or the market price
of its stock. In addition, significant negative publicity could
result in an increase in product liability claims.
The Company's products, development activities and manufacturing
processes are subject to extensive and rigorous regulation by the
FDA and by comparable agencies in foreign countries. In the
United States, the FDA regulates the introduction, manufacturing,
labeling and recordkeeping procedures for medical devices. The
process of obtaining marketing clearance from the FDA for new
products and existing products can be time-consuming and
expensive, and there is no assurance that such clearances will be
granted or that FDA review will not involve delays that would
adversely affect the Company's ability to commercialize
additional products or additional applications for existing
products. In addition, certain of the Company's products that
are in the research and development stage may be subject to a
lengthy and expensive pre-market approval ("PMA") process with
the FDA. Product approvals by the FDA can also be withdrawn due
to failure to comply with regulatory standards or the occurrence
of unforeseen problems following initial approval. The FDA could
also limit or prevent the manufacture or distribution of the
Company's products and has the power to require the recall of
such products. FDA regulations depend heavily on administrative
interpretation, and there can be no assurance that future
interpretations made by the FDA or other regulatory bodies will
not adversely affect the Company. The FDA, various state
agencies and foreign regulatory agencies inspect the Company and
its facilities from time to time to determine whether the Company
is in compliance with various regulations relating to
manufacturing practices, validation, testing, quality control and
product labeling. A determination that the Company is in
violation of such regulations could lead to imposition of
penalties, product recalls or product seizures.
Each of the Company's major business segments operates its
manufacturing, warehousing and research and development
activities in a single facility. While the Company has some
limited protection in the form of basic insurance coverage, the
Company's operating results and financial condition would be
materially adversely affected in the event of a fire or similar
catastrophe.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted pursuant to Item
14 of this Annual Report on Form 10-K and incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of the Company is
contained in 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, 1997 and incorporated herein by reference. For
information concerning executive officers, see Item 4A of this
Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in this item is 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, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required in this item is 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, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in this item is 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, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
PAGE
(a)(1) Consolidated Financial Statements
Report of Independent Auditors
Consolidated Statements of Financial Position
as of March 31, 1997 and 1996
Consolidated Statements of Operations for the
Years Ended March 31, 1997, 1996, and 1995
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended March 31, 1997, 1996, and
1995
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules
Schedule VII - Valuation and Qualifying Accounts and
Reserves
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)
(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)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
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(a) Mentor Corporation 1982 Incentive Stock
Option Plan and Agreement - Registration Statement
No. 2-94726(8)(11)
10(b) Mentor Corporation Restated 1987 Non-
Statutory Stock Option Plan and Agreement -
Registration Statement No. 33-25865.(9)(11)
10(c) Mentor Corporation 1991 Stock Option
Plan - Registration Statement No. 33-
48815.(10)(11)
10(d) Stock Option Agreement, dated September
21, 1988, between Mentor Corporation and Anthony
R. Gette.(2)(11)
10(e) Lease Agreement, dated November 9, 1989,
between Mentor Corporation and Skyway Business
Center Joint Venture.(3)
10(f) First Amendment to Lease Agreement,
dated December 1, 1993, between Mentor corporation
and Skyway Business Center Joint Venture. (6)
10(g) Credit Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(h) $15,000,000 Revolving Note, dated May
22, 1995, between Mentor Corporation and Sanwa
Bank California (7)
10(i) Security Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
10(j) Guarantor Security Agreement, dated May
22, 1995, between Mentor Corporation and its
subsidiaries and Sanwa Bank California (7)
10(k) Guaranty Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(l) Contribution Agreement, dated May 22,
1995, between Mentor Corporation and Sanwa Bank
California (7)
10(m) Inter-Company Note, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(n) Lease Agreement, dated July 23, 1990,
between Mentor Corporation and SB Corporate
Center, Ltd.(4)
10(o) Settlement Agreement and Stipulation,
dated May 7, 1993, between Mentor Corporation and
Representative Plaintiffs.(5)
10(p) Employment Agreement, dated August 5,
1994, between Mentor O&O, Inc. and William M.
Freeman. (7)(11)
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of the Company
23 Consent of Independent Auditors
(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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(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 Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1995, File No. 0-
7955.
(8) Incorporated by reference to Registration Statement on Form
S-8, Registration No. 2-94726.
(9) Incorporated by reference to the post effective amendment
No. 1 to Registration Statement on Form S-8, Registration
No. 33-25865.
(10) Incorporated by reference to Registration Statement on Form
S-8, Registration No. 33-48815
(11) Management contract or compensatory plan or arrangement.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mentor Corporation
We have audited the accompanying consolidated statements of
financial position of Mentor Corporation as of March 31, 1997 and
1996, and the related consolidated statements of income, changes
in shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1997. 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, 1997 and
1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
May 7, 1997
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in thousands) March 31,
Assets 1997 1996
Current assets:
Cash and equivalents $ 16,156 $ 7,837
Marketable securities 11,652 10,704
Accounts receivable, net of allowance for doubtful
accounts of $2,403 in 1997 and $2,285 in 1996 37,961 34,855
Inventories 38,205 35,158
Deferred income taxes 6,282 10,148
Other 5,502 3,143
Total current assets 115,758 101,845
Property and equipment, net 31,328 29,317
Intangibles, net 4,616 4,689
Goodwill, net 14,218 13,109
Other assets 725 658
$166,645 $149,618
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 26,819 $ 25,289
Income taxes payable 90 428
Dividends payable 628 628
Litigation settlement obligation _ 4,950
Short-term bank borrowings and current
portion of long-term debt 50 415
Total current liabilities 27,587 31,710
Long-term deferred taxes 701 1,355
Long-term debt 8 58
Shareholders' equity:
Common Stock, $.10 par value: Authorized-
50,000,000 shares; Issued and outstanding --
24,806,748 shares in 1997;
24,860,642 shares in 1996 2,481 2,486
Capital in excess of par value 34,565 37,840
Cumulative translation adjustment (693) (445)
Retained earnings 101,996 76,614
138,349 116,495
$166,645 $149,618
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
(in thousands, except per share data) 1997 1996 1995
Net sales $203,368 $177,816 $146,394
Costs and expenses:
Cost of sales 67,461 60,266 52,796
Selling, general and 76,177 67,050 56,260
administrative
Research and development 17,449 13,379 10,295
161,087 140,695 119,351
Operating income 42,281 37,121 27,043
Interest income 812 440 296
Interest expense (559) (1,092) (3,114)
Other expense (88) (329) (4)
Income before income taxes 42,446 36,140 24,221
Income tax 14,576 12,321 8,448
Net income $ 27,870 $ 23,819 $ 15,773
Net income per share:
Primary $ 1.06 $ .92 $ .70
Fully diluted $ 1.06 $ .90 $ .65
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Common Shares
Common Capital
Stock in
(in thousands) Common $.10 Excess Cumulative
Shares Par of Par Translation Retained
Outstanding Value Value Adjustment Earnings
Balance April 1, 1994 21,380 $2,138 $ 11,720 $ (333) $ 41,128
Exercise of stock options 414 42 2,659 _ _
Income tax benefit arising
from the exercise of stock
options _ _ 134 _ _
Repurchase of common
shares (220) (22) (2,375) _ _
Common shares used in
business acquisition 122 12 988 _ _
Common shares used in
litigation settlement 100 10 815 _ _
Dividends declared ($.075
per share) _ _ _ _ (1,625)
Foreign currency
translation adjustment _ _ _ 50 _
Net income _ _ _ _ 15,773
Balance March 31, 1995 21,796 $2,180 $13,941 $ (283) $ 55,276
Exercise of stock options 361 36 2,053 _ _
Income tax benefit arising
from the exercise of stock
options _ _ 1,073 _ _
Repurchase of common
shares (222) (22) (3,447) _ _
Shares issued upon _
conversion of Convertible
Subordinated Debentures 2,926 292 24,220 _ _
Dividends declared ($.10
per share) _ _ _ _ (2,481)
Foreign currency
translation adjustment _ _ _ (162) _
Net income _ _ _ _ 23,819
Balance March 31, 1996 24,861 $2,486 $37,840 $ (445) $ 76,614
Exercise of stock options 241 24 1,610 _ _
Income tax benefit arising
from the exercise of stock
options _ _ 2,034 _ _
Repurchase of common
shares (295) (29) (6,919) _ _
Dividends declared ($.10
per share) _ _ _ _ (2,488)
Foreign currency
translation adjustment _ _ _ (248) _
Net income _ _ _ _ 27,870
Balance March 31, 1997 24,807 $2,481 $34,565 $ (693) $101,996
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
(in thousands) 1997 1996 1995
Cash From Operating Activities:
Net income $ 27,870 $23,819 $15,773
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 7,761 7,173 6,798
Deferred income taxes 3,212 (957) 727
Loss on sale of assets 42 79 278
Expenses not requiring the use of cash 383 727 1,821
Litigation settlement obligation (5,333) (5,333) (4,483)
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (3,106) (4,797) (7,514)
(Increase) in inventories and other
current assets (5,406) (5,763) (673)
Increase (decrease) in accounts payable
and accrued liabilities 1,282 4,931 (334)
Increase (decrease) in income taxes
payable (338) (178) 606
Net cash provided by operating
activities 26,367 19,701 12,999
Cash From Investing Activities:
Purchases of property, equipment and
intangibles (10,853) (9,846) (6,912)
Proceeds from sale of property,
equipment and other assets 3 764 1,015
Increase (decrease) in notes receivable (67) 108 183
Purchases of marketable securities (10,348) (15,275) _
Sales of marketable securities 9,400 6,600 2,257
Net cash used for investing
activities (11,865) (17,649) 3,457)
Cash From Financing Activities:
Repurchase of common stock (6,948) (3,469) (2,398)
Proceeds from exercise of stock options 3,668 3,162 2,701
Dividends paid (2,488) (2,402) (1,082)
Reduction in long-term debt (415) (856) (674)
Payments on line of credit agreements _ _ (4,782)
Net cash used for financing
activities (6,183) (3,565) (6,235)
Increase (Decrease) in cash and
equivalents 8,319 (1,513) 3,307
Cash and equivalents at beginning of
year 7,837 9,350 6,043
Cash and equivalents at end of year $ 16,156 $ 7,837 $ 9,350
See 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 Financial Accounting Standards
("SFAS") No. 115. There were no material realized or unrealized
gains or losses nor any material differences between estimated
fair values, based on quoted market prices, and the costs of
securities in the investment portfolio as of March 31, 1997. The
Company's marketable securities consist primarily of municipal
bonds that are of limited credit risk and have contractual
maturities of less than two years.
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. Depreciation is based
on the useful lives of the properties and computed using the
straight-line method. Buildings are depreciated over 30 years,
furniture and equipment over 3 to 10 years and leasehold
improvements over the remaining life of the lease. Significant
improvements and betterments are capitalized while maintenance
and repairs are charged to operations as incurred.
Intangible Assets and Goodwill
Intangible assets consist of values assigned to patents,
licenses, and trademarks. These 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.
Accumulated amortization of intangibles was $10,768,000 at March
31, 1997 and $10,121,000 at March 31, 1996. The excess purchase
cost over fair value of net tangible assets acquired, goodwill,
is amortized on a straight-line basis over 20-40 years.
Accumulated amortization of goodwill was $3,050,000 at March 31,
1997 and $2,605,000 at March 31, 1996. The Company periodically
reviews goodwill to assess recoverability. Impairments would be
recognized in operating results if a permanent diminution in
value were to occur.
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 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 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
share of Common Stock equivalents outstanding are increased. The
subordinated convertible debentures were converted to common
stock during fiscal year 1996. Thereafter, the difference
between primary and fully diluted per share data was not
significant.
Stock Split
On September 13, 1995 the Board of Directors authorized a two
for one stock split in the form of a 100% stock dividend to be
distributed on or about October 13, 1995 to shareholders of
record on September 27, 1995. The Board's action was contingent
on shareholder approval, received at the annual meeting of
shareholders, of an increase in the Company's authorized shares
from 20 million to 50 million. All references in the financial
statements to number of shares, per share amounts and market
prices of the Company's common stock have been retroactively
restated to reflect the increased number of common shares
outstanding.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" was recently issued and encourages
but does not require companies to record compensation expense for
stock options at fair value. The Company has chosen to continue
to account for stock options using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees," and related
interpretations. Accordingly, the Company has provided pro forma
disclosures of the earnings per share as determined under the
provision of SFAS No. 123.
Foreign Sales and Income
Export sales, principally to Canada and Western Europe, were
$29,437,000, $26,223,000, and $21,243,000 in 1997, 1996 and 1995,
respectively. In addition, $20,526,000, $14,140,000, and
$11,287,000 in sales respectively, were from the Company's direct
international sales offices.
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.
Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at March 31, 1997, and the reported amounts of
revenues and expenses during the year then ended. Actual results
could differ from those estimates.
New Accounting Standard
Statement of Financial Accounting Standards No. 128, "Earnings
per Share." (SFAS 128) was issued in February 1997 and must be
adopted by the Company starting with the quarter ending December
31, 1997. Early adoption is not permitted but all prior year
earnings per share data must be restated upon adoption. SFAS 128
simplifies the calculation of earnings per share data by
replacing primary earnings per share with basic earnings per
share which uses weighted average shares outstanding and does
not include any dilutive securities in the denominator of the
calculation. Fully diluted earnings per share is essentially
unchanged. The Company's calculation of pro forma basic earnings
per share would be $1.12 and $.99 per share for fiscal years 1997
and 1996, respectively.
Reclassifications
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) 1997 1996
Raw materials $ 12,477 $ 10,191
Work in process 5,379 9,040
Finished goods 20,349 15,927
$ 38,205 $ 35,158
Note C Property and Equipment
Property and equipment at March 31, consisted of:
(in thousands) 1997 1996
Land $ 231 $ 231
Buildings 3,801 3,798
Leasehold Improvements 11,913 9,084
Furniture, fixtures and equipment 39,007 32,326
Construction in progress 4,339 5,741
59,291 51,180
Less accumulated depreciation
and amortization (27,963) 21,863)
$31,328 $29,317
Note D Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at March 31, consisted
of:
(in thousands) 1997 1996
Trade payables $ 4,443 $ 5,003
Accrued compensation 8,560 6,153
Sales returns 5,791 6,705
Product liability 3,400 2,800
Accrued royalties 1,644 1,360
Other 2,981 3,268
$26,819 $25,289
Note E Long-Term Debt
Long-term debt at March 31 consisted of:
(in thousands) 1997 1996
City of Minneapolis, Minnesota
Industrial
Development Revenue Bonds, $ 58 $ 107
at 7.5% payable through 1998
Term bank loan, at 7.8%, due in
monthly installments through
September 1996 - 366
58 473
Less current portion 50 415
$ 8 $ 58
During fiscal 1996, the Company called for the redemption of its
Convertible Subordinated Debentures, with a redemption date of
June 30, 1995. All but $48,000 of the $24,182,000 balance of
convertible subordinated debentures at March 31, 1995 were
converted into Common Stock at a price of $8.25 per share. A
total of 2,926,000 shares were issued to debenture holders.
Interest accrued on the debentures but not paid as a result of
the conversion, approximately $1,400,000, was credited, net of
applicable tax effects, directly to shareholders' equity.
At March 31, 1997, the Company had a line of credit agreement for
up to $15 million. 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. A
commitment fee of .25% will be paid on the unused portion of the
$15 million credit line. At March 31, 1997, the Company had no
amounts outstanding under its line of credit.
Note F 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 1997, 1996 and 1995 was as
follows:
Options Outstanding
Average
Number of Price per
Shares Share
Balance April 1, 1994 2,380,646 $ 6.32
Granted 620,000 7.06
Exercised (414,750) 6.51
Canceled or terminated (136,750) 6.36
Balance March 31, 1995 2,449,146 $ 6.47
Granted 503,100 12.37
Exercised (287,216) 5.90
Canceled or terminated (115,800) 8.17
Balance March 31, 1996 2,549,230 $ 7.62
Granted 402,800 23.18
Exercised (244,350) 7.06
Canceled or terminated (41,400) 11.86
Balance March 31, 1997 2,666,280 $ 9.91
At March 31, 1997 and 1996 there were 2,839,000 shares and
200,400 shares available for grant under the 1991 Plan. In
August 1996 the shareholders approved an increase to the total
number of authorized shares reserved under the Company's 1991
plan from 2,000,000 to 5,000,000 shares. 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 100,000 shares of Common
Stock, at $5.375 per share. During fiscal 1996, the officer
exercised 73,334 shares of this option. At March 31, 1997, there
were options for 26,666 shares of Stock outstanding and
exercisable under this option. This option expires in September
1998.
Stock option grants are set at the closing price of the Company's
Common Stock on the date of grant and the related number of
shares granted are fixed at that point in time. Therefore under
the principles of APB Opinion No. 25 , the Company does not
recognize compensation expense associated with the grant of stock
options. SFAS No. 123, "Accounting for Stock-based
Compensation," requires the use of an option valuation model to
provide supplemental information regarding options granted after
fiscal 1995. Pro forma information regarding net income and
earnings per share shown below was determined as if the Company
had accounted for its employee stock options under the Fair Value
method of that statement.
The weighted average fair values of $12.59 for 1997 stock option
grants and $5.95 for 1996 stock option grants were estimated at
the date of grant using the Black-Scholes option valuation model
and the following actuarial assumptions:
1997 1996
Risk-free interest rate 6.7% 6.5%
Expected Life 6.5 6.5 years
Expected volatility .482 .473
Expected dividend 0.4% 0.9%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's
employee stock options have characteristics significantly
different from those of traded options such as vesting
restrictions and extremely limited transferability. In addition,
the assumptions used in option valuation models (see above) are
highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these
subjective input assumptions can materially effect the fair value
estimate, in management's opinion, the existing models do not
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of
the options is amortized over the option's vesting period. The
pro forma effect on net income for 1997 and 1996 is not
representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants prior to 1996. Pro forma
information in future years will reflect the amortization of a
larger number of stock options granted in several succeeding
years. The Company's pro forma information is as follows (in
thousands, except per share information):
Years ended March 31, 1997 1996
Net income: As reported $ 27,870 $ 23,819
Net income: Pro forma $ 26,700 $ 23,434
Earnings per share: As reported $ 1.06 $ .92
Earnings per share: Pro forma $ 1.02 $ .91
Information regarding stock options outstanding as of March 31,
1997 is as follows:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Price Range Shares Life Price Shares Price
Under $10.00 1,818,884 4.3 years $ 6.44 1,534,484 $ 6.41
$10.00 to $20.00 418,100 8.1 years $ 11.53 103,800 $ 11.49
$20.00 to $30.00 429,300 9.1 years $ 23.26 8,375 $ 24.21
Note G Income Taxes
Year Ended March 31,
(in thousands) 1997 1996 1995
Current:
Federal, including U.S. possession $ 10,225 $11,866 $ 7,175
State 1,138 930 546
11,363 12,796 7 ,721
Deferred:
Federal, including U.S. possession 2,817 (466) 676
State 396 (9) 51
3,213 (475) 727
$ 14,576 $12,321 $ 8,448
The reconciliation of the federal statutory rate to the Company's
effective rate is as follows:
Year Ended March 31,
1997 1996 1995
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting
from:
State tax, net of federal
tax benefit 2.0 1.7 1.9
Non-taxable interest and
dividends (0.4) (0.3) (0.2)
Research and development
credit (1.3) (0.4) (1.8)
Foreign Sales Corporation (1.2) (1.2) (1.3)
Foreign operations (0.6) (1.7) 0.2
Non-deductible goodwill 0.4 0.5 0.8
Other 0.4 0.5 0.3
34.3% 34.1% 34.9%
Significant components of the Company's deferred tax liabilities
and assets are as follows:
Year Ended March 31,
(in thousands) 1997 1996 1995
Deferred tax liabilities:
Tax over book depreciation $ 701 $ 1,355 $ 1,279
701 1,355 1,279
Deferred tax assets:
Book reserves not
deductible for tax 4,391 4,300 3,536
Uniform capitalization 914 744 676
Litigation settlement
obligation _ 2,423 4,166
Profit on sales to foreign
subsidiaries 977 2,681 1,219
6,282 10,148 9,597
$ 5,581 $ 8,793 $ 8,318
Note H Supplemental Information
Supplemental schedule of cash flow Year Ended March 31,
information:
(in thousands) 1997 1996 1995
Interest paid $ 1,549 $ 1,229 $ 2,760
Income taxes paid $10,013 $12,646 $ 6,937
Supplemental schedule on non-cash flow investing
and financing activities:
Common shares issued to acquire
equipment and intangibles _ _ $ 1,000
Common shares issued upon conversion
of subordinated convertible debentures _ $24,134 _
Note I 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
$2,720,000, $2,490,000 and $2,147,000 for fiscal 1997, 1996 and
1995, respectively.
Future minimum lease payments under lease arrangements at March
31, 1997 are as follows:
(in thousands)
1998 $ 2,899
1999 2,476
2000 2,176
2001 2,103
2002 1,879
thereafter 8,060
Total $ 19,593
Note J 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. The Company
purchased $1,958,000, $525,000, and $0 of product from Rochester
in 1997, 1996 and 1995 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 K Litigation
Claims related to product liability are a regular and ongoing
aspect of the medical device industry. At any one time, the
Company is subject to claims against it and is 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. The
Company does maintain a reserve ($3,400,000 and $2,800,000 at
March 31, 1997 and 1996, respectively) in an amount it believes
to be reasonably sufficient to cover the cost of anticipated
product liability claims.
The Company became involved in a substantial amount of product
liability litigation related to silicone gel filled breast
implants 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, to 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 a series of
payments, $2.0 million in May 1993, $8.7 million in November
1993, $4.5 million in September 1994, $5.3 million in September
1995 and $5.3 million in September 1996. These payments
completed the Company's monetary obligation under the agreement
and were expensed by the Company in fiscal 1993.
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 L Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of
operations:
(In thousands, except per Quarter
share data)
Year Ended March 31, 1997 First Second Third Fourth
Net sales $ 50,388 $ 48,155 $ 50,498 $ 54,327
Gross profit 33,735 32,089 33,886 36,197
Net income 7,089 6,285 7,102 7,394
Earnings per share: $ .27 $ .24 $ .27 $ .28
Year Ended March 31, 1996
Net sales $ 43,729 $ 42,328 $ 45,004 $ 46,755
Gross profit 28,983 27,621 29,767 31,179
Net income 5,484 5,556 6,143 6,636
Earnings per share: $ .23 $ .21 $ .23 $ .25
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 Charged
at to Costs Charged Balance
Beginning and to Other at End of
Description of Period Expenses Accounts Deductions Period
Year Ended March 31, 1997
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 2,285 $ 1,544 $ _ $ 1,425 $ 2,404
Liability Reserves:
Product liability $ 2,800 $ 2,624 $ _ $ 2,024 $ 3,400
Accrued sales
returns and allowances 6,705 93 _ 1,007 5,791
$ 9,505 $ 2,717 $ _ $ 3,031 $ 9,191
Year Ended March 31, 1996
Deducted from asset
accounts:
Allowance for $ 1,363 $ 1,242 $ _ $ 320 $ 2,285
doubtful accounts
Liability Reserves:
Product liability $ 2,000 $ 1,527 $ _ $ 727 $ 2,800
Accrued sales
returns and allowances 4,765 1,963 $ _ 23 6,705
$ 6,765 $ 3,490 $ _ $ 750 $ 9,505
Year Ended March 31, 1995
Deducted from asset
accounts:
Allowance for $ 993 $ 674 $ 282 $ 586 $ 1,363
doubtful accounts
Liability Reserves:
Product liability $ 1,200 $ 1,242 $ _ $ 442 $ 2,000
Accrued sales
returns and allowances 3,625 1,145 $ _ 5 4,765
$ 4,825 $ 2,387 $ _ $ 447 $ 6,765
(1) Uncollected accounts written off, net of recoveries.
(2) Product liability claims paid.
(3) Sales rebates.
EXHIBIT 11
STATEMENT REGARDING THE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except for per share amounts)
1997 1996 1995
PRIMARY:
Primary Earnings $ 27,870 $ 23,819 $ 15,773
Average Shares Outstanding $ 24,863 24,163 21,640
Net Effect of Dilutive Stock
Options--Based on the
Treasury Stock Method using
Average Stock Market Price $ 1,486 1,693 734
Total Shares for Primary $ 26,349 25,856 22,374
Earnings
Primary Earnings Per Share $ 1.06 $ .92 $ .70
FULLY DILUTED:
Primary Earnings $ 27,870 $ 23,819 $ 15,773
Interest and Related
Expenses on 6_% Debentures
Eliminated, Net of Tax _ 168 1,116
Fully Diluted Earnings $ 27,870 $ 23,987 $ 16,889
Average Shares Outstanding $ 24,863 24,163 21,640
Net Effect of Dilutive Stock
Options--Based on the
Treasury Stock Method using
the Higher of Ending and
Average Stock Market Prices $ 1,487 1,885 1,386
Additional Shares Issued in
Assumed Conversion of 6_%
Debentures at $8.25 Per
Share, Converted during 1996 _ 556 2,932
Total Shares for Fully
Diluted Earnings 26,350 26,604 25,958
Fully Diluted Earnings Per
Share $ 1.06 $ .90 $ .65
(1) In September 1995 the Board of Director s approved a 2 for 1 stock split in
the form of a stock dividend. All prior year share and per share amounts
have been retroactively restated to reflect the additional shares
outstanding.
EXHIBIT 21
LIST OF
SUBSIDIARIES OF MENTOR CORPORATION
1. Mentor H/S, Inc.
2. Mentor Urology, Inc.
3. Mentor Ophthalmics, Inc. (Formerly Mentor O&O, Inc.)
4. Mentor Caribe, Inc.
5. Mentor ORC, Inc. (Dissolved 4/1/96)
6. Mentor Polymer Technologies Company
7. Teknar Corporation (Dissolved 4/1/96)
8. Mentor International Sales Corporation
9. Mentor International Holdings Alpha, Inc.
10. Mentor International Holdings Beta, Inc.
11. Mentor International Holdings Camda, Inc.
12. Mentor International Holdings Delta, inc.
13. Mentor Medical Systems, Pty. Ltd (Australia)
14. Mentor Medical Systems, UK, Ltd.
15. Mentor Medical Systems, B.V.
16. Mentor Deutschland GmbH
17. Mentor France S.A.
18. Mentor Medical Systems, Canada
19. MDI, Ltd.
20. Mentor Medical Systems Iberica, Spain
21. Havas Medical, B.V.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Our audits included the financial statement schedule listed in Item 14(a). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference in the (1) Registration Statement
Number 2-94726 on Form S-8 dated December 26, 1984, (2) Registration Statement
Number 33-25865 on Form S-8 dated December 22, 1988, (3) Registration Statement
Number 33-48815 on Form S-8 dated June 24, 1992, and (4) Registration Statement
Number 33-58761 on Form S-3 dated May 22, 1995 of our report dated May 7, 1997
with respect to the consolidated financial statements and schedule of Mentor
Corporation included in the Annual Report on Form 10-K for the year ended March
31, 1997.
ERNST & YOUNG LLP
Los Angeles, California
June 24, 1997
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Mentor Corporation has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MENTOR CORPORATION
/s/CHRISTOPHER J. CONWAY
Christopher J. Conway, Chairman
DATE: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant, and in the capacities and on the dates indicated:
/s/CHRISTOPHER J. CONWAY Chairman, Chief June 27, 1997
Christopher J. Conway Executive Officer
and Director (Principal
Executive Officer)
/s/ANTHONY R. GETTE President and Secretary June 27, 1997
Anthony R. Gette and Director
/s/GARY E. MISTLIN Vice President of Finance/ June 27, 1997
Gary E. Mistlin Treasurer
(Principal Financial and
Accounting Officer)
/s/WALTER W. FASTER Director June 27, 1997
Walter W. Faster
/s/EUGENE G. GLOVER Director June 27, 1997
Eugene G. Glover
/s/MICHAEL NAKONECHNY Director June 27, 1997
Michael Nakonechny
/s/BYRON G. SHAFFER Director June 27, 1997
Byron G. Shaffer
/s/DR. RICHARD W. YOUNG Director June 27, 1997
Dr. Richard W. Young